THE CONCEPT OF ELASTICITY

ELASTICITY OF DEMAND

WHAT IS ELASTICITY ?
-ELASTICITY means RESPONSIVENESS.
-It is the ratio of the percent change in one
variable to the percent in another variable.
-It is a tool used by economists for
measuring reaction of a function to
changes parameters in a relative way
1
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.

2
CLASSIFICATION OF DEMAND ELASTICITY

• PRICE ELASTICITY OF DEMAND – Is the

RESPONSIVENESS of CONSUMER’S DEMAND to
CHANGE in PRICE of the good sold.
• INCOME ELASTICITY OF DEMAND – Is the
RESPONSIVE NESS of CONSUMER’S DEMAND to
CHANGE in their INCOME.
• CROSS ELASTICITY OF DEMAND – Is the
RESPONSIVENESS of DEMAND for a certain good, In
relation, to CHANGES in PRICE OF OTHER RELATED
GOODS

3
INTERPRETATION OF THE ELASTICITY
COEFFICIENT
ELASTIC – If the CHANGE in quantity demanded is GREATER
than CHANGE IN PRICE. If the computed elasticity
coefficients is GREATER THAN 1. (Ep > 1)
EX. Clothes, appliances, cars ( goods and services that have
many substitute which consumers may switch to are elastic)
INELASTIC – If the CHANGE in quantity demanded is LESS
THAN the CHANGE IN PRICE. If the computed elasticity
coefficient is LESS THAN 1. (EP < 1)
EX. Rice, pork, beef, fish, vegetables, antibiotics and oil
products (Goods and services for which are there no close
substitute)

4
 ELASTIC DEMAND CURVE

FIGURE 3.1
We can observe that the slope of an ELASTIC DEMAND
CURVE is FLATTER. Thus the more the demand curve
becomes HORIZONTAL the greater it become ELASTIC 5
 INELASTIC DEMAND CURVE

FIGURE 3.2
We can see that the slope of an INELASTIC DEMAND
CURVE is STEEPER . In fact the more the demand curve
become VERTICAL the greater it becomes INELASTIC
6
EXTREME TYPE OF DEMAND ELASTICITY

PERFECTLY INELASTIC – demand curve is a

straight VERTICAL LINE
PERFECTLY ELASTIC – demand curve is a
straight HORIZONTAL LINE
7
 ELASTICITY OF SUPPLY
-It refers to the reaction or response of
the sellers or producers to price changes
of goods sold.
-In other words, it is the measure of the
degree of responsiveness of supply to a
given change in price.
-It is the percentage change in quantity
supplied given in a percentage in price.

8
 SUPPLY ELASTIC CURVE

FIGURE 3.4
Just like an ELASTIC DEMAND CURVE the slope of an ELASTIC SUPPLY CURVE is
also FLATTER compared to a normal supply curve.
In fact, the more the supply curve tends to be HORIZONTAL the more that it
becomes highly ELASTIC 9
 SUPPLY INELASTIC CURVE

FIGURE 3.5
We can see that INELASTIC SUPPLY CURVE is more VERTICAL than a normal
supply curve. In fact, the more VERTICAL the supply curve is the more it
becomes highly INELASTIC

10
 EXTREME TYPES OF SUPPLY ELASTICITY

PERFECTLY INELASTIC – supply curve is illustrated

by straight VERTICAL LINE
PERFECTLY ELASTIC – supply curve is straight
HORIZONTAL LINE
11