CONCEPT

OF
ELASTICTY
Elasticity
–measures the
responsiveness of one
variable to a certain change
of another variable
Price Elasticity of Demand
–measures the responsiveness
of the quantity demanded
with respect to the changes
in its price
 Formula for Price Elasticity

% Change in Quantity
Price Elasticity =
% Change in Price
 𝑄2− 𝑄1
𝑄1
PED=
𝑃2− 𝑃1
𝑃1
Point Elasticity

–is the price elasticity of demand

at a specific point on the demand
curve
Arc Elasticity
–is the value of PED over a range of
prices
 (𝑃1+ 𝑃2 )
(Q2 – Q1 ) 2
ƐARC= 𝑥
(P2 – P1 ) (𝑄1+ 𝑄2 )
2
 Degrees of PED
1. Elastic demand- the elasticity coefficient is greater than one. (>1)
2. Inelastic demand- the elasticity coefficient is less than one. (<1)
3. Unitary demand- elasticity coefficient is equal to one. (=1)
4. Perfectly elastic- has an elasticity coefficient of infinite (∞)
5. Perfectly inelastic- has a coefficient of zero (0)

Note: ALL ANSWERS MUST ALWAYS BE IN ABSOLUTE VALUE.

Determinants of Price
Elasticity of Demand

1. The importance or degree of necessity of

the goods
2. Number of available substitute
3. The proportion of income in price changes
4. The time period
Income Elasticity of Demand

–measures the responsiveness of

quantity demanded in response
to a change in income
YED simply measures whether
the product or services is a
normal or inferior goods
.
 Formula for Income Elasticity

% Change in Quantity
Income Elasticity =
% Change in Income
 𝑄2− 𝑄1
𝑄1
YED=
𝑌2− 𝑌1
𝑌1
Normal Goods
-when its YED is positive
-this indicates positive sign (+) or Ɛ > 0
-means that as income increases, more goods
and services will be demanded
Normal, necessity
– Have an income elasticity of demand of
between 0 and +1

Normal, luxury
– Have an income elasticity of demand of >1
Inferior Goods
– When its YED is negative
– this indicates negative sign (-) or Ɛ < 0
– means that as income rises, quantity
demand for such goods declines
Cross Price Elasticity

- measures the responsiveness of

quantity demanded of a good to a
change in the price of another
good
Formula for Cross Elasticity

% Change in Quantity of Good X

XED=
% Change in Price of Good Y
 𝑄𝑥2− 𝑄𝑥1
𝑄𝑥1
XED=
𝑃𝑦2− 𝑃𝑦1
𝑃𝑦1
Complementary Goods
–are goods that are used in
conjunction with other goods
–negative (-)
Substitute Goods

–goods that can be used in place of

another
–positive(+)
Unrelated

= zero (0)