ELASTICITY OF SUPPLY

AND DEMAND

REPORTER; GROUP 3
Overview
Based on the law of demand, buyers are willing and able to purchase more goods and
services at lower prices than at higher prices. This is a natural reaction or an
inclination of buyers. However, the degree of responsiveness varies greatly. Such
varying reactions of consumers can be measured by price elasticity of demand.
In the case of producers or sellers, they also have their reactions to price changes.
Clearly, they tend to sell more goods and services when prices are higher. Their
reactions also vary depending on their ability to produce at a given time. Such varying
reactions of producers can be measured by price elasticities of supply.
Specific Objectives
At the end of the lesson, the students will be able to:
1. Define elasticity;
2. Identify the different kinds of elasticity; and
3. Explain and cite examples of the different types of
elasticity.
Other Concepts of Elasticity
1. Elasticity - It is a measure used in response to changes in the determinants
of demand and supply.
2. Price elasticity - A measure used in determining the percentage change in quantity
against the percentage change in price.
3. Income elasticity - The percentage change in quantity compared to the percentage
change in income.
4. Cross elasticity - The percentage change in quantity of one good compared to the
percentage change in the price of related goods.
Price Elasticity of Demand
Price elasticity of demand refers to the degree of reaction or response of the buyers
to changes in price of goods and services. Buyers tend to reduce their purchases as
price increases and tend to increase their purchases as price falls. These are logical
reactions to price changes. However, such reactions vary in accordance with the
nature of the products and the particular needs of the buyers. For example, if a
product is very important to the consumers, they will buy such product despite the
big increase in its price. However, there are products in which just a slight increase in
their prices, many consumers reluctantly buy such products. They can live even
without it.
To get an idea of the nature of elasticity, consider this example.

1. The price of rice of P16.00 per kilogram at retail, leads to daily total sales among all markets
in a given region of 100,000 kilos. The price then rises to P16.50 per kilo which leads to sales of
97,000 kilos, or a reduction in amount of 3,000. What is the response of quantity sold to the
change in the price

Interpretation of Elasticity

To derive the price elasticity of demand, we use the formula:

ep = Percentage change in quantity demanded

Percentage change in price
Where: Percentage change in quantity demanded = Q2-Q1
Q1
Percentage change in price = P2-P1
P1
Therefore: Q2-Q1
ep = Q1
P2-P1
P1
Types of Elasticity
There are five types of price elasticity or types of reactions of buyers to price changes
of goods and services:
1. Elastic – Demand may be elastic when a percentage change in price Demand may
leads to a proportionately greater percentage change in quantity demanded. This
means that a one percent change in price calls for more than one percent change in
quantity demanded. The elasticity coefficient is more than 1.

2. Inelastic - Demand is described as inelastic when a percentage change in price

results in a proportionately iesser change in price evokes less than one percent change
in quantity demanded, it is inelastic. The coefficient of elasticity is less than 1.

3. Unitary - Demand is unitary when a percentage change in price leads to a

proportionately equal percentage change in quantity demanded. The coefficient of
elasticity is equal to 1.

4. Perfectly Elastic - At a given price, percentage change in quantity demanded can

change infinitely.

5. Perfectly Inelastic - A percentage change in price creates no change in quantity

demanded. There is no change in the quantity of demand. The coefficient is zero.
 P1

P2

Q1 Q2 Q1 Q2
A) Elastic B) Inelastic
P

P1 D

P2 D

Q1 Q2 D) Perfectly E) Perfectly Inelastic

C) Elastic
Unitary

Demand Curves and their Elasticity

Price Elasticity of Supply
The elasticity of supply is also the response of quantity offered for sale for every change
in price. Like the consumers, the suppliers also respond to price
changes.

It is computed with the formula as:

ep = Percentage change in quantity supplied
Percentage change in price

Qs2-Qs1
es = Qs1
P2-P1
P1
 P P

P2
P2

P1 P1
S

A. Fixed supply; zero Q1 Q2

elasticity B. Inelastic
Supply

P2

P1

Q1 Q2 Q1 Q2
D. Infinitely
C. Elastic Elastic
Supply

Types of Supply Curves

.

Effect of Elasticities on Market Equilibrium

In the course of shifts of the supply and demand curves, the elasticities of supply
and demand may also change respectively.
Hereunder are some useful principles recorded for several situations:
1. For demand, the more elastic the new demand is, the less will be the sold.
increase in price, and the greater will be the expansion of quantity
2. On the other hand, the less elastic the new demand is, the steeper the rise in
price and the less the increase in quantity sold.
3. For supply, the less elastic supply is, the higher the increase in price and the
smaller the quantity increase will be, while the more elastic supply is, the less will be
the increase in price and the greater the
increase in quantity sold.
 P S

Pb
Pb
Pc
Pa Pc
Pa

Qa Qb Qc Qa Qb Qc
A. More elastic new B. Less elastic new
demand; More elastic demand; Less elastic
new supply. new supply.

In case A, the original price determined by the intersection of supply (S) and
demand (D) at A is Pa. Quantity is Qa. In the relevant range, a more elastic demand
curve (D1) is shown. Assuming that there is no change in supply, the new price is Pb and
the quantity is Qb. There is an increase in price but if the same situation is related to
case B, it is seen that the increase in price is not as much as in B. With the shift also of
supply into a more elastic one (S1) in case A, the [price in relation to Pa is relatively less.
Comparing the results with case B shows a steeper character in price increases and less
increase in quantity sold.
Income Elasticity
The coefficient of income elasticity measures a product's percentage change in quantity
as a ratio of the percentage change in income which caused the change in quantity.

The formula of income elasticity is:

ey = Percentage change in quantity

Percentage change in income

Q2-Q1
ey = Q1
Y2 - Y1
Y1
Cross Elasticity
The coefficient of cross elasticity of demand relates a percentage
change in quantity demanded of Good A in response to a percentage
change in the price of Good B. Thus:

ec = Percentage change in QD of Good A

Percentage change in price of Good B

Q2A-Q1A
ec = Q1A
P2B-P1B
P1B

Where: QA = Quantity demanded of Good A

PB = Price of Good B
What is ec = 0.4? This means that for every one percent (1%) increase in the price of Good
B, there is an increase in the QD of Good A by 0.4 percent.
Goods A and B may be related in two ways: as substitutes and as complements. If the
coefficient of cross elasticity is positive, Goods A and B are substitutes. An increase in the
price of Good B will cause consumers to purchase more of Good A, the substitute good, thus
causing the quantity of Good A to
increase.
On the other hand, if cross elasticity is negative, Goods A and B are complements and are
used together. If the price of Good B increases, the demand for B and A decreases.
Elasticity is a measure of how much the quantity demanded of a service/ good changes in
relation to its price, income or supply.
Thank you for listening