Elasticity of Supply

and Demand
Applied Economics
Objectives:
1. Define elasticity;
2. Identify the different kinds of
elasticity; and
3. Explain and cite examples of
the different types of
elasticity.
 ASSIGNMENT
Identify the different factors affecting prices in the
market. Write down your answers on the columns
under each heading:

International National Local

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 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.
Important Terms
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
Refers to the degree of
reaction or response of the
buyers to changes in price of
goods and services.
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.
Formula for Price Elasticity of
Demand
 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 j 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 lesser change in price evokes less
than one percent change in quantity demanded, it
is inelastic. The coefficient of elasticity is less than
1.
 Types of Elasticity
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.
 Demand Curves
and their Elasticity

A. Unitary
B. Elastic
C. Inelastic
D. Perfectly
Inelastic
E. Perfectly Elastic
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.
NOTE: The coefficient of price elasticity of supply is
positive unlike the price elasticity of demand. This
is so because of the direct proportionality of price
and quantity supplied.
Formula for Price Elasticity of
Supply
Supply Curves and their Elasticity

A. Fixed Supply; Zero

Elasticity

B. Inelastic Supply

C. Elastic Supply

D. Infinitely Elastic
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.
 Effect of Elasticities on
Market Equilibrium
Hereunder are some useful principles recorded for several situations:
● For demand, the more elastic the new demand is, the less will be
the increase in price, and the greater will be the expansion of
quantity sold.
● 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.
● 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.
Elasticities and Shifts in Supply
and Demand
 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.

FORMULA:
 Example
Quantity Demanded
Income
(Per Unit)

₱1000.00 200
₱2000.00 800

Q2 = 800 Y2 = ₱2000.00
Q1 = 200 Y1 = ₱1000.00
 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.

Formula:
Where: QA = Quantity demanded of
Good A
PB = Price of Good B

QA2 = 600 PB2 = ₱15.00

QA1 = 500 PB1 = ₱10.00
EXAMPLE
EVALUATION. Solve for the elasticities.
Describe the significance of the values of the
elasticities:

• An increase in the price of good B from P10.00 to P15.00

cause the quantity demanded for good A to decrease
by 20% from level of 80 units.
• An increase in Jose’s income from P3000 to P3500
causes his demand for steak to increase from 5 to 6
kilos a month.
• Steak sells at a price of P50.00 per kilo. An increase in
the price of steak by 10% causes your demand to
decrease from 10 to 8 kilos a month.