The Concept

of Elasticity
Objectives
By the end of our discussion, you should be able to:

Define, calculate and explain the factors that

influence the following:
▸ Price elasticity of demand
▸ Cross elasticity of demand
▸ Income elasticity of demand
▸ Elasticity of supply
Elasticity measures the
responsiveness of one
variable to a certain
change of another variable.
measure - numbers or
coefficients
responsiveness - reaction
to change
Basic Formula:

Elasticity = percentage change in variable x

percentage change in variable y

Mathematically, we expressed this as:

ɛ = % Δx
% Δy
where:
ɛ = Greek letter epsilon used as a symbol for elasticity
Δ = Greek letter delta which means change
% = percentage
Types of Elasticity
▪ Elastic – The percentage change in variable x is greater than the
percentage change in variable y ( ɛ > 1 )
▪ Inelastic – The percentage change in variable x is less than the
percentage change in variable y ( ɛ < 1 )
▪ Unitary Elasticity – The percentage change in variable x is equal the
percentage change in variable y when the coefficient is equal to 1 (ɛ = 1)
▪ Perfectly Elastic – Any change in variable y will have an infinite effect
on variable x ( ɛ = ∞)
▪ Perfectly Inelastic – Any change in variable y will have no effect on
variable x ( ɛ = 0 )
Price Elasticity of Demand

the degree of responsiveness

of the quantity demanded of a
good to a change in its price
when all other influences on
buying plans remain the same.
Price Elasticity of Demand = Percentage change in quantity demanded
Percentage change in price
Two Measures of Price Elasticity of Demand

Arc Elasticity Point Elasticity

▪ the coefficient of the price ▪ the elasticity at
elasticity of demand one point along
between two points along the demand curve
the demand curve
Classifications of Price Elasticity of Demand

▪ Elastic Demand
▪ Inelastic Demand
▪ Unitary Elastic Demand
▪ Perfectly Elastic Demand
▪ Perfectly Inelastic demand
Perfectly Elastic Demand
Perfectly Inelastic Demand
Determinants of Price Elasticity of Demand

▪ The importance or degree of necessity of the goods

▪ Number of available substitutes
▪ The proportion of income in price changes
▪ The time period
Substitution has 3 factors:

The number of Desirability of a Relative importance of

competing products product relative to its consumer’s needs
substitutes due to its
quality
Income Elasticity of Demand
The coefficient of income elasticity of demand measures a product’s
percentage change in demand as ratio of the percentage change in
income , which caused the shift in the demand curve.

EY = % ΔD
% ΔY
where:
ΔD = change in demand
ΔY = change in income
 Engel’s Law states that when income
increases, the percentage that is spent for
food tends to decrease

Underlying reasons:

1. Gradual satisfaction of the consumer’s hierarchy of needs

from basic to the non-basic
2. Theory of diminishing marginal utility
Cross Elasticity of Demand
The coefficient of cross elasticity of demand measures the percentage
change in the demand of good X which is a shift of the demand curve
in response to a percentage change in the price of good Y.

ec = % ΔQx
% ΔPy

ec may have a coefficient of greater than one, less than one, or equal
to one which indicates demand sensitivity
Cross Elasticity of Demand
Good X and Good Y may be related in two ways:
▪ As substitutes
▪ As complements

If ec is positive, then Good X and Good Y are substitutes.

If ec is negative, then Good X and Good Y are complements.

The coefficient of the cross elasticity of demand measures

the degree of substitution or complementation between products.
Price Elasticity of Supply

measures the responsiveness

of quantity supplied in
response to a percentage
change in the price of the
goods.
Price Elasticity of Supply = Percentage change in quantity supplied
Percentage change in price

ɛS = %ΔQs
% ΔP
Classifications of Price Elasticity of Supply

▪ Elastic Supply
▪ Inelastic Supply
▪ Unitary Elastic Supply
▪ Perfectly Elastic Supply
▪ Perfectly Inelastic Supply
www.economicshelp.org
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Perfectly Elastic Supply

www.ezyeducation.co.uk
Perfectly Inelastic Supply

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Factors that influence
the elasticity of supply:

▪ Resource ▪ Time frame for

substitution the supply
possibilities decision
Demand Schedule:

Point Price Quantity

Demanded

A P30 120
B 35 100
C 41 40
D 50 36
Supply Schedule:

Point Price Quantity

Supplied

A P 550 440
B 500 400
C 300 225
D 200 200
E 80 100
Reference:

Pagoso, C. M., Dinio, R. P., Villasis, G. A., Meneses,

P. P., & Veloso, P. P. (2014). Introductory
Microeconomics (Fourth Edition ed.). Manila,
Philippines: REX Bookstore.

Gabay, B.K., Remotin, Jr.R.M., Uy, E.A.M. (2010).

Economics: Its Concepts and Principles. Manila,
Philippines: REX Bookstore

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