TOPIC 4

ELASTICITY :
Elasticity of demand
&
Elasticity of supply

6/19/2017 1
 4 TYPES OF ELASTICITY

ELASTICITY OF DEMAND
Price Elasticity of Demand, Ed
Income Elasticity of Demand, Ey
Cross Elasticity of Demand, Ex

ELASTICITY OF SUPPLY
Price Elasticity of Supply, Es
2
1. PRICE ELASTICITY OF DEMAND, Ed

To measure the responsiveness/

sensitivity of the quantity demanded
due to a change in its price.

Def: The responsiveness of the change

in quantity demanded due to the
change in Price.

3
 FORMULA:

d = % Quantity demanded

% Price

d = Q2 Q1 x P1
Q1 P2 P1

Noted here, the price elasticity of demand measure the

responsiveness of the change in the quantity demand of
good A when the price of good A changes. This occurs
when the price of the good itself change.
 DEGREE OF PRICE ELASTICITY OF DEMAND

Elastic
Price elasticity coefficient is greater than 1 (d >1)
Percentage change in Price is less than percentage
change in Qd.
Demand curve is greatly downward sloping
Price

small
change in
price

Quantity demand

Large change in
quantity
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 Elastic
This happen with good that has many substitutes.
For example soap, shampoo and toothpaste.
If the price of Colgate toothpaste increase, for
example increase from RM2 to RM2.20, the quantity
demand for Colgate toothpaste will decrease in a
large amount.
This is because the consumer will find another
substitute for Colgate toothpaste, i.e buying Darlie
toothpaste as a substitute.
Consumer is very responsive towards the change in
price.
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 DEGREE OF PRICE ELASTICITY OF DEMAND

Inelastic
Price elasticity coefficient is smaller than 1 (d <1)
Percentage change in Price is more than percentage
change in Qd.
Demand curve is steeper
Price

large
change in
price

Quantity demand

small change in
quantity
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 Inelastic
This happen with good that has less substitutes. For
example petrol and cigarette .
If the price of petrol increase, for example increase
from RM2 to RM2.50, the quantity demand for
petrol will decrease in a smaller amount.
This is because the consumer cannot substitute
petrol for something else, hence even if the price
increase, consumer will still buy the product but in
lesser amount.
Consumer is less responsive towards the change in
price.
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 DEGREE OF PRICE ELASTICITY OF DEMAND

Unitary elastic
Price elasticity coefficient is equal to 1 (d =1)
Percentage change in Price is equals to the percentage
change in Qd.
Demand curve is evenly downward sloping.
Price

5%
change in
price

Quantity demand

5% change in
quantity
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 Unitary elastic
This is a rare case.
If the price of the product slightly change, for
example increase by 5%, the quantity demand
for that good will also decrease by 5%.

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 DEGREE OF PRICE ELASTICITY OF DEMAND

Perfectly elastic
Price elasticity coefficient is infinity (d =)
Percentage change in Price will result to the
percentage change in Qd = 0
Demand curve is horizontal
Price

change in
price

Quantity demand
change in quantity = 0

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 Perfectly elastic
This is an extreme case.
If the price of the product slightly change, for
example increase from RM2 to RM2.05, the
quantity demand for that good will be zero.
Nobody will buy the product if the price of the
product increase.

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 DEGREE OF PRICE ELASTICITY OF DEMAND

Perfectly inelastic
Price elasticity coefficient is equal to 0 (d =0)
Percentage change in Price equal to zero percent
change in Qd
Demand curve is vertical
Price

change in
price

Quantity demand
quantity unchanged

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 Perfectly inelastic
This is an extreme case.
If the price of the product increase in a large amount, for
example increase from RM 2 to RM 10, the quantity demand
for that good will not be affected.
The consumer will still buy the product even though the price
of the product increase.
This happen with product with no substitute. For example
insulin for diabetic patient.
Only one company produce insulin, so if the price increase the
patient will still buy the product because it is essential for the
patient. This company is said to have monopoly power. They
can secure their profit because their product is unique
without any substitute.
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 Example 1:
The following table below shows the
hypothetical demand for Good A and Good B
for a given price of Good A and consumers
income.
Price of Qty Quantity Consumers
Good A demanded demanded of income
of Good A Good B
RM3 150 30 RM1000

RM5 130 60 RM1500

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a) Calculate the price elasticity of demand for Good A when
price falls from RM5 to RM3
b) Based on your answer in (a) is the demand for Good A elastic,
inelastic or unitary elastic?
Ed = Q2-Q1 x P1
P1 = 5 Q1 P2-P1
P2 = 3
Q1 = 130 Ed = 150-130 x 5
Q2 = 150
130 3-5
To know the types
of elasticity,
Ed = 0.15 x -2.5 compare the final
For Ed we will only
take the absolute answer with the
value, neglect the Ed = -0.38/ 0.38 coefficient. In this
negative sign. case 0.38 is less
than 1, hence it is
Ed < 1 (inelastic demand) inelastic

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 EXAMPLE 2:
A steel mill raises the price of steel by 5 percent, which results
in a 4 percent reduction in the quantity of steel demanded.
The demand curve facing this firm is?

For this question, used this formula

Ed = % change in Quantity demand

% change in Price

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 SOLUTION
Ed = - 4 = - 0.8/ 0.8
+5

for Ed we will take the absolute value so the final

answer will be 0.8, it is Ed < 1 ( inelastic demand)

Noted here, if it said increase, it will be positive (+5)

but when it said decrease it will be negative (-4)

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 DETERMINANTS OF PRICE ELASTICITY OF
DEMAND
Necessities versus luxury goods/nature of
goods
Existence of substitutes
Share of budget spent/proportion of
budget
Time dimensions
Habits
Income level
(page: 40. p/s: please dont be confuse with the
determinant of demand page 31)
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 INCOME ELASTICITY OF DEMAND, Ey

measure the responsiveness/

sensitivity of changes in quantity
demanded for a product due to a
change in income

Def: The responsiveness of the

change in quantity demanded due to
the change in Income.
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 FORMULA:

y = % Quantity demanded

% Income

y = Q2 Q1 x Y1

Q2 Y2 Y1
 TYPES OF GOODS & INCOME ELASTICITY

(i) Normal goods

Income elasticity coefficient is greater than 0
but less than 1. (0 <y <1)
As income increases, the quantity demanded
increases but the percentage increase in Qd is
less than the percentage increase in income.
Relationship between Qd and Y is shown by
upward sloping curve.
Examples : food, clothes, newspapers, etc
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 INCOME ELASTICITY OF DEMAND
Normal goods
Percentage change in income is more than percentage change
in Qd.
When income increase, the quantity demand increase in
smaller amount compare to the increase in income.
This good normally purchased regardless there is an increase in
income or not.
income

large
change in
income

Quantity demand

small change in
quantity
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 (ii) Luxury goods
Income elasticity coefficient is greater
than 1. (y 1)
As income increases, the quantity
demanded increases but the percentage
increase in Qd is more than the
percentage increase in income.
Example : antique furniture, luxury
cars, jewelry

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 INCOME ELASTICITY OF DEMAND
Luxury goods
Percentage change in income is less than percentage change in
Qd.
When income increase, the quantity demand increase in larger
amount compare to the increase in income.
This good is purchased only when the income increase. People
wait until there is an increase in income to buy luxury goods.
income

small
change in
income

Quantity demand

Large change in
quantity
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(iii) Giffen goods/inferior goods
Income elasticity coefficient is less than 0.
(y < 0)
As income increases, people will reduce
their demand on this kind of goods. As
income increases, the quantity demanded
decrease.
Relationship between Qd and income is
shown by downward sloping curve.
(negative relationship)
Examples : low quality goods. Salted fish,
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second hand cars, bundle goods
 INCOME ELASTICITY OF DEMAND
Giffen/inferior goods

When income increase, the quantity demand decrease.

This good is will not be bought when the income increase as
people will avoid this types of goods when they have more
income.

income

Income
increase

Quantity demand

Quantity demand
decrease
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 (iv) Necessity goods
Income elasticity coefficient is equal to 0.
(y = 0)
As income increases, no effect on the
quantity demanded of the goods.
As income increases, the quantity
demanded unchanged
Relationship between Qd and income is
shown by horizontal curve.
Example : rice, vegetables, salt.
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 INCOME ELASTICITY OF DEMAND
Necessity goods
When income increase, the quantity demand is unchanged
This good is not affected by the change in income as people
buy this good in the same amount regardless the change in
income.
For example salt, the consumption of salt is still the same even
though the income increase.
income

large
change in
income

Quantity demand
No change in
quantity

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 Example 1:
The following table below shows the
hypothetical demand for Good A and Good B
for a given price of Good A and consumers
income.
Price of Qty Quantity Consumers
Good A demanded demanded of income
of Good A Good B
RM3 150 30 RM1000

RM5 130 60 RM1500

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a) Calculate the income elasticity of Good A when income
increases from RM1000 to RM1500. Based on your answer, what
is the type of Good A?
Ey = Q2-Q1 x Y1
Y1 = 1000 Q1 Y2-Y1
Y2 = 1500
Q1 = 150
Q2 = 130 Ey = 130-150 x 1000
150 1500-1000

Ey = -0.13 x 2 To know the types

of elasticity,
compare the final
For Ey we will not
Ey = -0.26
answer with the
neglect the negative Ey < 0 (giffen goods) coefficient. In this
sign. case -0.26 is less
than 0, hence it is
this is a giffen
good
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 EXAMPLE 2:
If your income increased by 10 percent and the quantity of
curry puff you demanded increased by 5 percent, your income
elasticity of demand for curry puff is

For this question, used this formula

Ey = % change in Quantity demand

% change in Income

SOLUTION : Ey = + 5 = 0.5
+10

It is 0 < Ey < 1 , this is a normal good.

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 CROSS ELASTICITY OF DEMAND, Ex

Definition :
..measure the responsiveness/ sensitivity of
quantity demanded of a product (A) due to a change
in the price of related product (B).

Def: The responsiveness of the change in

quantity demanded of good B due to the
change in Price of good A.

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 FORMULA:

= % Quantity demanded B

% Price A

= QB2 QB1 x PA1

QB1 PA2 PA1

Noted here, the cross elasticity of demand measure the

responsiveness of the change in the quantity demand of
good B when the price of good A changes. This occurs
when the price of the related good changes.
 TYPES OF GOODS & CROSS ELASTICITY

(i) Substitute goods

Cross elasticity coefficient is greater than 0
(x > 0)
Cross elasticity coefficient is positive.
An increase in the price of one good will cause an
increase in the demand for another good.
For example, chicken and fish are substitute goods. If
the price of fish increase, the demand for chicken will
increase. This is because people will decrease the
consumption of fish as the price is expensive and will
substitute fish with the less expensive chicken.
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 CROSS ELASTICITY OF DEMAND
Substitute goods
When price of fish increase, the quantity demand chicken
increase.
Consumer will not buy fish when the price of fish increase as
they will substitute fish with the less expensive chicken.

Price of
fish

Price
increase

Quantity of chicken

Quantity demand
decrease
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 TYPES OF GOODS & CROSS ELASTICITY

(ii) Complementary goods

Cross elasticity coefficient is less than 0
(x < 0)
Cross elasticity coefficient is negative.
An increase in the price of one good will cause a
decrease in the demand for another goods.
For example, battery and torch light are complementary
goods. If the price of torch light increase the demand
for battery will decrease. This is because people will
decrease the consumption of battery as the price of
torch light is expensive because people use torch light
6/19/2017 together with the battery. 37
 CROSS ELASTICITY OF DEMAND
Complementary goods

When price of torch light increase, the quantity demand

battery decrease.
Consumer will not buy battery when the price of torch light
increase as they will not buy torch light.

Price torch
light

Price
increase

Quantity battery

Quantity demand
decrease
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 TYPES OF GOODS & CROSS ELASTICITY

(iii) Unrelated goods

Cross elasticity coefficient is equals to 0
(x = 0)
Cross elasticity coefficient is zero.
An increase in the price of one good has no effect on
the demand for another good.
For example, pen and shoe are unrelated goods. If the
price of shoe increase, the demand for pen will not
change. This is because these two goods are unrelated.
The change in price of one good has no effect on the
other good.
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 CROSS ELASTICITY OF DEMAND
Unrelated goods
When price of shoe increase, the quantity demand is of pen
unchanged
Demand of pen is not affected by the change in price of shoe as
they are unrelated goods.

Price of
Shoe

Increase
in price of
shoe

Quantity of pen
No change in quantity
demand of pen
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 EXAMPLE 1:

The following table below shows the hypothetical

demand for Good A and Good B for a given price of
Good A and consumers income.

Price of Qty Quantity Consumers

Good A demanded demanded of income
of Good A Good B
RM3 150 30 RM1000

RM5 130 60 RM1500

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 a) Calculate the cross elasticity of demand for good B when
price of Good A increases from RM3 to RM5.
b) What is the relationship between Good A and Good B?

Ex = QB2-QB1 x PA1
PA1 = 3 QB1 PA2-PA1
PA2 = 5
QB1 = 30
QB2 = 60 Ex = 60- 30 x 3
30 5-3 To know the types
of elasticity,
compare the final
Ex = 1 x 1.5
answer with the
For Ex we will not coefficient. In this
neglect the negative case 1.5 is more
Ex = 1.5
sign.
Ex > 0 (Substitute good) than 0, hence it is
this is a substitute
good

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 EXAMPLE 2:
If the cross price elasticity of demand between fish and chicken
is 2, then a 2% increase in the price of fish will result in?
For this question, used this formula

Ex = % change in Quantity demand of chicken

% change in price of fish

SOLUTION : Ex = Qty chicken

Price fish

2 = a
+2

2 x 2 = a , a = 4 , for here means 4 % increase in the Quantity

6/19/2017 demand for chicken 43
 PRICE ELASTICITY OF SUPPLY

Measures the sensitivity/responsiveness of the

quantity supplied due to a change in the price of a
product or service.

Def: The responsiveness of the change in quantity

supply due to the change in Price.
PRICE ELASTICITY OF SUPPLY (cont.)

FORMULA:

s = % Quantity Supplied
% Price

S = Q2 Q1 x P1
Q1 P2 P1

Noted here, the price elasticity of supply measure the

responsiveness of the change in the quantity of good A
when the price of good A changes. This occurs when the
price of the good itself change.
 DEGREE OF PRICE ELASTICITY OF SUPPLY

Elastic
Price elasticity coefficient is greater than 1 (s >1)
Percentage change in Price is less than percentage
change in Quantity supply.
Supply curve is greatly upward sloping
Price

small
change in
price

Quantity supply

Large change in
supply
6/19/2017 46
 DEGREE OF PRICE ELASTICITY OF SUPPLY

Inelastic
Price elasticity coefficient is smaller than 1 (s <1)
Percentage change in Price is more than percentage
change in Quantity supply
Supply curve is steeper
Price

large
change in
price

Quantity supply

small change in
quantity supply
6/19/2017 47
 DEGREE OF PRICE ELASTICITY OF SUPPLY

Unitary elastic
Price elasticity coefficient is equal to 1 (s =1)
Percentage change in Price is equals to the percentage
change in Qs.
Supply curve is evenly upward sloping.
Price

5%
change in
price

Quantity supply

5% change in supply
6/19/2017 48
 DEGREE OF PRICE ELASTICITY OF SUPPLY

Perfectly elastic
Price elasticity coefficient is infinity (s =)
Percentage change in Price will result to the
percentage change in Qs = 0
Supply curve is horizontal
Price

change in
price

Quantity supply
change in quantity = 0

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 DEGREE OF PRICE ELASTICITY OF DEMAND

Perfectly inelastic
Price elasticity coefficient is equal to 0 (s =0)
Percentage change in Price equal to zero percent
change in Qs
Supplycurve is vertical
Price

change in
price

Quantity supply
quantity unchanged

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 EXAMPLE 1
a) If price of shoes increases from RM20 to RM30 and quantity
supplied increases from 40 to 50 units. Calculate the price
elasticity of supply
b) Based on your answer in (a) is the supply for Good A elastic,
inelastic or unitary elastic?
Es = Q2-Q1 x P1
P1 = 20 Q1 P2-P1
P2 = 30
Q1 = 40
Q2 = 50 Es = 50 - 40 x 20 To know the types
of elasticity,
40 30-20 compare the final
For Es we will not answer with the
neglect the negative coefficient. In this
Es = 0.25 x 2
sign. case 0.5 is less
than 1, hence it is
Es = 0.5 inelastic
Es < 1 (inelastic supply)
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 Technology Time Period
improvements

Availability and
mobility of factors
DETERMINANTS OF PRICE of production
ELASTICITY OF SUPPLY

Perishability
Nature of the
market

(page: 57. p/s: please dont be confuse with the determinant of supply page 51)
 EXERCISE:
Refer to the table below and answer the
following questions:

Price of Qty Qty Income per

Good A demanded demanded month
(RM) for Good for Good (RM)
A B
2 1500 1000 5000
4 1200 800 3500
6 1000 600 2000
8 900 500 1400
10 800 400 1300
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12 600 200 1000
a) Calculate the price elasticity of good A when its price
increases from RM8 to RM12. Identify the degree of
elasticity of good A.

6/19/2017 54
b) Calculate the cross elasticity of demand for Good B
when the price of Good A increases from RM4 to
RM10. State the relationship between Good A and B.

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 c) Calculate the income elasticity of demand for
Good B when income increases from RM1400
to RM3500 per month.

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d) Based on question (b) Good B then must be
a/an_______________ good.

6/19/2017 57
 ADDITIONAL QUESTIONS
Assume the price elasticity of demand for shrimp is 2.
At price of RM15 per kilogram, quantity demanded is
40 kilograms. If the price falls to RM12 per kilogram,
the quantity demanded will rise to

A. 16 kilogram.
B. 20 kilogram.
C. 56 kilogram.
D. 65 kilogram.

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A family with an income of RM20.000 per annum purchases 100
units of a good per month. The family's income rises to
RM25.000 per annum and income elasticity of demand is -2 for
this good. What is the new quantity purchased each month?
A. 50
B. 75
C. 125
D. 200

The price of pineapples falls by 5% and quantity demanded

increases by 6%. This means that the demand for pineapples is
A. perfectly elastic
B. elastic
C. perfectly inelastic
D. inelastic
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If the price elasticity of demand is perfectly elastic, any increase
in the price of a good may cause the quantity demanded to be
A. negative.
B. increase.
C. zero.
D. infinite.

If demand for a good increases as income decreases, this good is

A. a normal good.
B. a luxury good.
C. a Giffen good.
D. a necessity good.

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The price of durians falls by 5% and quantity demanded
increases by 6%. This means that the demand for durians is
A. perfectly elastic
B. elastic
C. perfectly inelastic
D. Inelastic

The price of pizza increases by 22% and the quantity demanded

of pizza falls by 25%. This indicates that demand for pizza is
A. elastic.
B. inelastic.
C. unitary elastic.
D. perfectly elastic.

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