THE CONCEPT OF ELASTICITY

•Sellers are naturally expected to hope for more

demand for their products.
•Their real objective, however, is higher
revenues.
•They find it necessary, therefore, to make some
decisions to improve demand for their products.
•Improving demand is not a simple thing to
handle, however.
•This is so because not all efforts will produce
the expected results.
•The seller must first reckon with demand
elasticity before he is supposed to make an
intelligent decision.
•The buyer, ever anxious in getting the best
value for his money, also in the same
predicament as the seller.
WHAT IS ELASTICITY?
•Changes in price (or other factors) may or
may not affect the demand or supply of any
good or service.
•Decision making for either buyer or seller
will be more meaningful if there is a way to
know the extent to which demand and
supply are affected by changes in some
determinants.
•The effect is attributed to elasticity.
•Elasticity is the measure of the sensitivity
or responsiveness of quantity demanded or
quantity supplied to changes in prices (or
other factors).
ELASTICITY OF DEMAND
•Demand elasticity “indicates the
extent to which changes in price (or
other factors) cause changes in the
quantity demanded.
•Demand elasticity may be classified as
follows:

1.Priceelasticity of demand
2.Income elasticity of demand
3.Cross elasticity of demand
PRICE ELASTICITY OF
DEMAND
•PRICE ELASTICITY is used to determine the
responsiveness of demand to changes in the
price of the commodity. It may be calculated
with the use of the formula below:

EP = Percentage change in quantity

demanded
percentage change in price
= QD2 – QD1 / QD1
P2-P1 / P1
•Where EP = price elasticity of demand
QD2 = new quantity demanded
QD1 = original quantity demanded
P2 = the new price
P1 = the original price
Price Elasticity of Demand
Classified
1. Elastic Demand – type of demand where
the quantity that will be bought is
affected greatly by changes in the price.
2. Inelastic demand – refers to the demand
where a percentage change in price
creates a lesser change in quantity
demanded.
3. Unitary demand - a change in price
creates an equal change in quantity
Sample Problem

What is the demand elasticity given the

following:
1.Original quantity demanded = 10,000 kg
2.Original price = P5.00 per kilo
3.New quantity demanded = 16,000 kg
4.New price = P 4.00 per kilo
Sample Problem

What is the demand elasticity given the

following:
1.Original quantity demanded = 10,000 kg
2.Original price = P5.00 per kilo
3.New quantity demanded = 11,000 kg
4.New price = P 4.00 per kilo
Sample Problem

What is the demand elasticity given the

following:
1.Original quantity demanded = 10,000 kg
2.Original price = P5.00 per kilo
3.New quantity demanded = 12,000 kg
4.New price = P 4.00 per kilo
IMPLICATIONS OF PRICE
ELASTICITY OF DEMAND
•Determining demand elasticity serves a
certain purpose.
•When elasticity is known, it can guide the
seller in making decisions about the price.
•At this point, a certain rule may be derived
as follows:
•“If the price elasticity of demand is greater
than 1, the price should be lowered; if less
than 1, the price should be increased.”
INCOME ELASTICITY OF
DEMAND
•The demand for a product or service is
affected not only by its price but also by
other factors like consumer income.
•To measure the effect of consumer income
on demand, the elasticity concept may be
used.
•INCOME ELASTICITY of demand refers to
the determination of the responsiveness of
demand to a change in consumer income.
•It may be calculated by using the formula as
follows:
Ey = Percentage change in quantity
demanded
percentage change in income
= QD2 – QD1 / QD1
Y2-Y1 / Y1
•Where Ey = income elasticity of demand
Y2 = new income
Y1 = original income
•When elasticity is greater than 1, demand is
said to be income elastic; when less than 1,
it is income inelastic; and when equal to 1, it
is unitary elastic.
CROSS ELASTICITY OF
DEMAND
•The demand for a certain good may be
affected also by a change in the price of
another good.
•From the economic standpoint, it is very
useful for a person to know this relationship
between goods.
•The responsiveness of the quality
demanded of a particular good to changes in
the price of another good is referred to as
cross elasticity of demand.
•It is measured by computing for the
percentage change in the quantity
demanded of the first good and dividing it
by percentage change in the price of the
second good.
Ec = QA2 – QA1 / QA1
PB2-PB1 / PB1
•Where EC = cross elasticity of demand
QA2 = new demand for product A
QA1 = original demand for product
A
PB2 = the new price of product B
PB1 = the original price of product
B
•If cross elasticity is positive, the goods are
substitutes.
•If cross elasticity is negative, the goods are
complements.
Determinants of Demand
Elasticity
1. The price of the good in relation to the
consumer’s budget.
2. The availability of substitutes
3. The type of good
4. The time under consideration
ELASTICITY OF SUPPLY
•Elasticityof supply refers to the responsiveness
of the sellers to a change in price.
•This may be determined by computing for the
percentage change in the quantity supplied of a
good divided by the percentage change in the
price.
Es = percentage change in quantity supplied
percentage rise in price
=QS2 – QS1 / QS1
P2-P1 / P1
•Where ES = price elasticity of supply
QS2 = new quantity supplied
QS1 = original quantity supplied
P2 = the new price
P1 = the original price
Classification of Supply
Elasticity
1. Elastic supply is where quantity supplied
is affected greatly by changes in the
price.
2. Inelastic supply – the quantity supplied is
not affected greatly by changes in the
price.
3. Unitary elastic supply
Determinants of Supply
Elasticity
1. The feasibility and cost of storage
2. The ability of producers to respond to
price changes
3. Time