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# By: Sam D.

Fuego
School of Liberal Arts
Ateneo de Zamboanga University

ELASTICITY OF DEMAND

Learning Objectives
Express and calculate price elasticity of demand;
Understand the economic significance of price
elasticity of demand and total revenues, and
Discuss the factors that determine the price
elasticity of demand.

Elasticity of Demand
Demand elasticity refers to the 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
whenever 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

Elasticity of Demand
For example, if a product is very important to the
consumers, they have to buy it despite the big
increase in its price.
There are products with just a slight increase in
their prices, but many consumers are reluctant to
These products are not important to them.
They can still live without said products.

Types of demand
elasticity
1. Elastic demand
A change in price results to a greater change in
quantity demanded.
For example, a 20 percent change in price
(decrease or increase) creates a 60 percent
change in quantity demanded(increase or
decrease).
This shows buyers are very sensitive to price
change.
They are easily discouraged to buy the products
if their prices increase.
However, they are easily encouraged to buy the
same products if their prices decrease.

Types of demand
elasticity
Such products are not very important to them, but
they provide comforts and pleasure to the
consumers.
These are the luxury goods like stereo, radio,
camera, etc.

Types of demand
elasticity
2. Inelastic demand
A change in price results to a less change in
quantity demanded.
For example, a 50 percent change in price creates
only a 5 percent change in quantity demanded.
This means buyers are not sensitive to price
change.
Products under this category are very essential to
They cannot live without them or it is hard to live
without such products.

Types of demand
elasticity
Products like rice, medicine, shelter or cell phone.
However, a big decrease in the prices of the these
products has a very little increase in quantity
demanded.
For example, a great decline in the prices of rice
and medicine does not encourage people to eat
more rice or take more medicine.
They only buy as much as the requirement of
their normal consumption.

Types of demand
elasticity
3. Unitary demand
A change in price results to an equal change in
quantity demanded.
For example, a 25 percent change in price
produces a 25 percent change in quantity
demanded.
Goods or services under this category are
considered semi-luxury or semi-essential goods.
Some types of clothing or shoes are either luxury
or essential good.

## Extreme Price Elasticities

Perfectly Inelastic Demand
A demand curve that is a vertical line.
It has only one quantity demanded for each price.
No matter what the price, quantity demanded does not
change.
This is an extreme situation which involves life or death
to an individual.
Regardless of price, he has to buy the product like
medicine with no substitute.

## Extreme Price Elasticities

Perfectly Elastic Demand
A demand curve that is a horizontal line.
It has only one price for every quantity.
Without change in price, there is an infinite change in
quantity demanded.

Types of demand elasticity showing the various degrees of reactions of buyers brought about by price change.

0
Q

Q
Elastic

Inelastic

## Types of demand elasticity showing the various

price change.

0
Perfectly Elastic

0
Perfectly Inelastic

## Determinants of Demand Elasticity

1. Number of good substitutes
Demand is elastic for a product with many good
substitutes.
An increase in the price of such product induces
buyers to look for good substitutes.
On the other hand, products without good
substitutes have inelastic demand. Buyers have
little or no choice except to purchase them if
they really need them. E.g. electricity.

## Determinants of Demand Elasticity

2. Price increase in proportion to income
If the price increase has very little effect on the
income or budget of the buyers, demand is
inelastic.
For example, a 40 percent increase in the price of
bread means only a few centavos. Thus, the result
is only slight decrease in quantity demanded.
But if the price involves a substantial amount in
proportion to the income of consumers, demand is
elastic.
For example, a 40 percent increase in tuition fees
is likely to discourage many very poor families
from sending their children to college.

## Determinants of Demand Elasticity

3. Importance of the product to the consumers
Luxury goods are not very important to many
Filipinos.
Examples are diamond rings, sport cars,
expensive wines, elegant clothing, etc. So, these
are elastic.
On the other hand, essential goods are very
important to people. Rice is important to all
consumers. Electricity is important to factory
owners. Gasoline is important to the
transportation industry. All of these are inelastic.

Elasticity Formula
Ep =

change in Q

change in P

(Q1 + Q2)/2

(P1 + P2)/2

Elasticity formula:
Change in Quantity
refers to the difference between the original quantity
and the new quantity. Disregard negative sign.

Change in Price
refers to the difference between the original price
and the new price. Disregard negative sign.

PROBLEM
Year

Quantity
Demanded

Price

2001

10,000

400

2002

6,000

600

2003

8,000

500

2004

15,000

400

2005

7,000

600

2006

10,000

300

2007

11,000

200

2008

5,000

800

2009

5,000

600

2010

4,000

900

2011

6,000

700

QUIZ 1
Given the table, solve for Ed :
1. Year 2001-2002
2. Year 2002-2003
3. Year 2005-2006
4. Year 2008-2009
5. Year 2009-2010
a). And tell whether it is elastic, inelastic or
unitary. Round off only the final answer to