CONCEPT OF ELASTICITY

You may have wondered why there are goods that you
purchase more(less) when price becomes less(more) while
there are goods that even if price become too high(low)still
you purchase the same quantity of that good.

Demand Elasticity
Is a measure of the degree of responsiveness of quantity
demanded of a product to a given change in one of the
independent variables which affect demand for that
product.
Factors of Demand Elasticity
Price Elasticity of Demand
Income Elasticity of Demand
Cross Price Elasticity
Price Elasticity of Demand
Is the responsiveness of consumers’ demand to
change in price of the goods sold.

Income Elasticity of Demand

Is the responsiveness of consumers; demand to a
change in their income

Cross Price Elasticity of Demand

Is the responsiveness of demand idea for a
certain good, in relation to change in price of
other related goods.
 The Price Elasticity of Demand
Arc Elasticity
 Is the measurement of price elasticity of demand
used in economics.
Formula:
EP = Q2 – Q1 ÷ P2 – P1
(Q2 + Q1)/2 (P1 + P2 )/2
Where:
EP = coefficient of arc price elasticity
Q1 = original quantity demanded
Q2 = new quantity demanded
P1 = original price
P2 = New Price
• Suppose we have the following price and quantity
schedule for good A.
Q1 = 10 Q2 = 20
P1 = 4 P2 = 2
Solve for the Price Elasticity = ?

Interpretation of the Elasticity Coefficient

Elastic demand
 if the computed elasticity coefficient is greater than one.
Inelastic Demand
 If the computed elasticity coefficient is less than one.
Unitary Demand
 If the computed elasticity is equal to 1.
 Factors that influence Demand Elasticity
a. Ease substitution
b. Proportion of total expenditures
c. Durability of product which may include:
1. Possibility of postponing purchase
2. Possibility of repair
3. Used product market

d. Length of time period

Income Elasticity of demand
Measures the degree to which consumers
respond to a change in their incomes by
purchasing more or less of a particular good.
Formula:
Ei = percentage change in quantity demanded
percentage change in income
For example;
Your income rises by 10% and it is resulted a 15%
normal goods.
Cross Price Elasticity
It measures the responsiveness of demand
changes in the price of another products.
Formula:
Exy = percentage change in the quantity demanded of X
percentage change in the price of Y
Example:
The price of a burger falls by 10 percent and the demand
for the pizza decreases by 5 %, What is the Cross Price
Elasticity?
 Elasticity of Supply
Refers to the reaction or response of the seller
or producers to prices changes of goods sold.
Formula:
Es = Percentage change in quantity supplied
Percentage change in price
• suppose the price of rice increases from P20 to P22,
the quantity supplied increase from 100 million metric
tons to 120 million metric tons.

Compute for the Elasticity of Supply?

 Factors determined Supply Elasticity
a) Time
 It change the number of supply of their
commodities depending on the movements
of price which shifts from time to time.

b) Time horizon involved with which production

can be increased.
 Supply can only be increased in response to
an increase in demand or price by working on
the firm’s existing plant more intensively.
 Seatwork
Supply Schedule
POINT PRICE (P) QUANTITY (Q)
A 898 784
B 785 675
C 623 567
D 539 452
E 243 293
F 198 100

Problem: Solve for the following Situation.

1. Point E to A 4. Point F to A
2. Point C to F 5. Point E to B
3. Point B to D
Show your Solution