THE CONCEPT OF

ELASTICITY
Elasticity of demand and
supply
 Elasticity of Demand
 Demand Elastic
 Demand Inelastic
 Elasticity of Supply
 Supply Elastic
 Supply Inelastic
 Extreme Types of Demand
and Supply Elasticity
 The Concept of Elasticity

 In economics, elasticity means responsiveness. In

general, it is the ratio of the percent change in
one variable to the percent change in another
variable
 A tool used by economists for measuring the
reaction of a function to changes in parameters in
a relative way
 The Concept of Elasticity
ELASTICITY OF DEMAND
• Demand elasticity, in particular, 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.
• Price elasticity of demand is the responsiveness of
consumers’ demand to change in price of the good sold
• Income elasticity of demand is the responsiveness of
consumers’ demand to a 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
 Think of this..

• We can often predict the direction of an

equilibrium change, but we don’t know the
magnitude.
• Knowing the price responsiveness of producers
and consumers will help us answer this question.
 Price elasticity of demand
Consumers with demand
D1 are more price
responsive (than for
consumers on D2):
- price goes up less and
quantity goes down more.
Example: From October 2018 to October 2019, the
price of gasoline rose by about 7% ($3.66 per gallon to
$3.91 per gallon). This increase brought about a
decrease in the gasoline consumption.

How do we quantify the changes? We do that by

measuring elasticity.
 Price elasticity of demand

• Percentage changes have the unfortunate characteristic

that the percentage change from A to B is not the
negative of the percentage change from B to A.
• This would mean the elasticity from A to B was
different from the elasticity from B to A, an undesirable
characteristic.
• Hence, the midpoint formula avoids the confusion of
whether we are going from A to B or from B to A.
• The advantage of the mid-point method is that one
obtains the same elasticity between two price
points whether there is a price increase or decrease.
This is because the denominator is an average
rather than the old value.
The midpoint formula
 Price Elastic:
If price elasticity of demand is larger (in
absolute value) than 1.

Price Inelastic:
If price elasticity of demand is smaller than
1, but greater than zero.
General Interpretation of Price Elasticity of Demand (Ped)
What is the price elasticity of demand from
March to April?

Solving
Qd Price
March 2000 $3.50
April 2500 $3.30
Following the formula, get the average quantity and price first
 Get the absolute value and it yields 3.8.
Since 3.8 is higher than 1, demand is price elastic
What if the quantity had only increased to
2100?

Qd Price
March 2000 $3.50
April 2100 $3.30

Please solve…
Answer:

Get the absolute value and it yields 0.8.

Since 0.8 is lower than 1, demand is price inelastic
• Demand Elastic
• Demand Inelastic
 • Extreme Types of Demand Elasticity

A vertical demand curve means that A horizontal demand curve means

quantity demanded does not change as quantity demanded is infinitely responsive
price changes. • So elasticity is zero. to price changes. • Elasticity is infinite
Determinants of Demand price elasticity:

(a)Ease of substitution - The availability of close substitute

(b)Length of time period – passage of time (people adjust)
(c)Whether the good is a luxury or a necessity ( People are more
flexible with luxuries than necessities)

(d)The share of a good in a consumer’s budget

(e)If a good is a small portion of your budget, you may not be
very sensitive to its price
 Price Elasticity of Supply

Reaction or response of the sellers or

producers to price changes of goods sold. It is
a measure of the degree of responsiveness of
supply to a given change in price
Price elasticity of supply is analogous to
price elasticity of demand:
• Assume that an apartment rents for $650 per month
and at that price 10,000 units are rented.
• When the price increases to $700 per month,
13,000 units are supplied into the market.
• By what percentage does apartment supply
increase? What is the price sensitivity?
• Calculate the price elasticity of supply for
apartment using the midpoint formula.
Answer
• Supply Elastic
 CHAPTER III: The Concept of Elasticity
• Supply Inelastic
• Extreme Types of Supply Elasticity

If price elasticity of supply is

If price elasticity of supply is infinity (a
exactly zero (a vertical line
horizontal line – may happen in a very
– may happen in very short
long time frame)
time frame)
 Determinants of Supply elasticity:
(a)TIME
(b)Time horizon involved with which production can be increased
 References
Microeconomics Simplified, Avila-Bato et.al
University of Washington Lecture notes on Economics
University of Hawaii Pressbooks. Principle of Economics