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Elasticity of Supply

and Demand
Other Concepts of Elasticity
✘ Elasticity – It is a measure used in response to
changes in the determinants of demand and
supply.
✘ Price elasticity – A measure used in determining
the percentage change in quantity against the
percentage change in price.
Other Concepts of Elasticity
✘ Income Elasticity – The percentage change in
quantity compared to the percentage change
in income.

✘ 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
4
Price elasticity of demand refers to the degree of
reaction or response of the buyers to changes in
price of goods and services. 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 price.
Example
The price of rice of ₱16.00 per kilogram
at retail, leads to a daily total sales
among all markets in a given region of
100,000 kilos. The price then rises to
₱16.50 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 of rice?
Example
Given:
Demand Schedule of Commodity X
Price Quantity Demanded
4 100
5 60
Let:
Q1 = 100 P1 = 4
Q2 = 60 P2 = 5
Note
The mathematical presentation of price
elasticity of demand has a negative sign (-).
This is due to inverse relationship of price
and quantity demanded.
Interpretation of
Elasticity
An elasticity value of 0.20 means that a one
percent decrease in price leads to a 0.20
percent increase in quantity sold. Similarly, a
1.6 percent change is interpreted as 1.6
percent decrease in quantity sold for every
one percent increase in price.
To derive the price elasticity of demand, we use the
formula:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
ep =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Where:
𝑄2−𝑄1
Percentage change in quantity demanded =
𝑄1
𝑃2 −𝑃1
Percentage change in price =
𝑃1
Therefore:
𝑄2 −𝑄1
𝑄1
Ep = 𝑃2 −𝑃1
𝑃1
Types of Elasticity
✘ Elastic – Demand may be elastic when a
percentage change in price leads to a
proportionately greater percentage
change in quantity demanded. The
elasticity coefficient is more than 1.
Types of Elasticity
✘ Inelastic – Demand is described as
inelastic when a percentage change in
price results in a proportionately lesser
change in quantity demanded. The
coefficient of elasticity is less than 1.
Types of Elasticity
✘ Unitary –The coefficient of elasticity is
equal to 1.

✘ Perfectly elastic – At a given price,


percentage change in quantity demanded
can change infinitely.
Types of Elasticity
✘ 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 0.
Unitary Demand

Unitary Demand

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.
Formula:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑
ep =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

𝑄𝑠2 −𝑄𝑠1
𝑄𝑠1
es = 𝑃2 −𝑃1
𝑃1
Example
Given:
Supply Schedule of Commodity X
Price Quantity Supplied (Per Unit)
₱12.00 38
₱21.00 56
Let:
Qs1 = 38 P1 = ₱12.00
Qs2 = 56 P2 = ₱21.00
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. What does 0.62
mean? This means that for every 1% increase in
the price, quantity supplied will increase by 0.62
(62%).
Types of Supply Curve
Types of Supply Curve
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:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
ey =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒

𝑄2 −𝑄1
𝑄1
ey = 𝑌2 −𝑌1
𝑌1
Example

Given:
Income Quantity Demanded
₱1000.00 200
₱2000.00 800
Why is ey = 3? This means that for every 1%
increase in income, quantity demanded will
increase by 3%.
If quantity demanded is greater than 1, income
is elastic and the good is superior. If quantity
demanded is lesser than 1, income is inelastic
and the good is inferior; and if it is equal to 1, it is
unitary and the good is normal.
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:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷 𝑜𝑓 𝐺𝑜𝑜𝑑 𝐴
ec =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝐺𝑜𝑜𝑑 𝐵

𝑄2𝐴 −𝑄1𝐴
𝑄1𝐴 Where:
ec = 𝑃2𝐵 −𝑃1𝐵 QA = Quantity demanded of Good A
PB = Price of Good B
𝑃1𝐵
Example

Given:

QA1 = 500 PB1 = ₱10.00


QA2 = 600 PB2 = ₱15.00
What is ec = 0.4? This means that for every 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 2 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.
thanks!
Any questions?