Elasticities of Demand and Supply

Elasticities of Demand
and Supply
Elasticity
 Wehave learned how demand and
supply respond to changes in their
determinants.
 Goods,however, differ in terms of
how demand and supply respond to
changes in these determinants.
 Thedegree of their respond to a
change is called elasticity.
Elasticity
 Elasticity is a measure of how
much buyers and sellers respond to
changes in market conditions.
 The coefficient of elasticity is the
number obtained when the
percentage change in demand is
divided by the percentage change in
the determinant.
Degrees of Elasticity
 Elastic – a change in determinant
will lead to proportionately greater
change in demand or supply. The
absolute value of the coefficient of
elasticity is greater than 1.
 Ifthe price of LPG increases by 10%
and as a result the quantity demanded
goes down by 12%, then we say that
the demand for LPG is elastic.
 Inelastic – a change in demand will
lead to a proportionately lesser
change in demand or supply. The
absolute value of the coefficient of
elasticity is less than 1.
 Suppose the price of cellphone load
goes up by 5% and the quantity
demanded goes down by 3%, then we
can say that demand for cellphone load
is inelastic.
 Unitary Elastic – a change in
determinant will lead to a
proportionate equal change in
demand or supply. The absolute
value of the coefficient of elasticity
is equal to 1.
 Let us say that the price of string
beans goes down by 6% and as a result
the quantity demanded goes up by 6%
also, we describe the demand for
string beans as unitary elastic.
Elasticity of Demand
 There are three types of elasticity
of demand that deal with the
responses to a change in the price
of the good itself, in income, and in
price of a related good, which is a
substitute or a complement.
Price Elasticity of Demand
 This measures the responsiveness of
demand to a change in the price of
the good.
 Theconcept of elasticity is
measured in percentage changes.
 The
value of price elasticity may be
measured in two ways:
1. Arc Elasticity – the value of elasticity
is computed by choosing two points in
the demand curve and comparing the
percentage changes in the quantity
and the price on those two points.
Where:
Q2 = new quantity demanded
Q1 = original quantity demanded
P2 = new price of the good
P1 = original price of the good
 Normally, coefficient of the price of
elasticity of demand has a negative
sign because if reflects the inverse
relationship between price and the
quantity demanded.
 The size of the coefficient, regardless
of the negative sign, will signify the
nature of the good involved.
2. Point Elasticity – measures the
degree of elasticity on a single point
on the demand curve. Changes in a
single point are infinitesimally small.
 Price elasticity is important to the
seller since it gauge how far demand
can change relative to price. It
measures how far consumers are
willing to buy a good especially when
its price rises reflective of the
economic, social, and psychological
forces shaping consumer preference.
Income Elasticity of Demand
 Thismeasures how the quantity
demanded changes as consumer
income changes.
 Itis equal to the percentage change
in quantity demanded divided by
the percentage change in income.
Income Elasticity of Demand
A positive sign (+) for IE signifies that
the good demanded is a normal good,
which is what a consumer tends to
buy more when his income increases.
 Thenegative (-) sign for IE indicates
the demand for inferior goods, which
are goods that are brought when
incomes are low because low income
prevent the consumers from buying
higher priced goods.
Cross Price of Elasticity of Demand
 This measures how quantity

demanded changes as the price of a
related good changes.
 Cross elasticity (CE) measures the
responsiveness of the demand for a
good to the change in the price of a
substitute good or a complement.
A positive sign (+) for CE signifies

that the two goods involved are
substitute goods which means that
as the price of the substitute good
increases, the demand for the other
good will increase.
 This is true with rice and bread, which
are substitute goods.
 The negative sign (-) for CE

indicates that the two goods are
complements, which means that the
demand for a good will increase
when the price of a complement
decreases.
 CE for cellphones and cellphones loads
is negative.
Price Elasticity of Supply
 With regard to supply, price
elasticity of supply determines
whether the supply curve is steep or
flat.
A steep curve signifies a high
degree of elasticity or ability to
change while a flat curve indicates
an inability to change in response to
a change in the price of the good.
Price Elasticity of Supply
 Goods that are easy to produce
have elastic supply while those
which need a long time to produce
and which are hard to make have
inelastic supply.

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Elasticities of Demand

 This measures how quantity

A positive sign (+) for CE signifies

 The negative sign (-) for CE

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