Elasticities of Demand

and Supply
by: POLINAR, MARY GRACE A.
 Objectives:

1. We will learn how demand and supply respond to

changes.

2. We will learn and compute the elasticity of demand and

supply.
 Elasticity

-is a measure of how much buyers and

sellers respond to changes in market condition.
It is the degree of their response to a change.
-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 may either be:
1. Elastic - a change in a determinant will lead to a
proportionately greater change in demand or supply. the
absolute value of the coefficient of elasticity is greater
than 1.
example:
If the 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.
 Degrees of elasticity may either be:
2. Inelastic - a change in a determinant will lead to a
proportionately lesser change in demand or supply. The
absolute value of the coefficient of elasticity is less than 1.

example:
Suppose the price of cellphone load goes up by 5% and
the quantity goes down by 3%, then we say that demand for
cellphone load is inelastic.
 Degrees of elasticity may either be:
3. Unitary Elastic - a change in a determinant will lead to a
proportionately equal change in demand or supply. The
absolute value of the coefficient of elasticity is equal to 1.

example:
The price of the spring 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 3 types of elasticity of demand that deal with

the responses to a change in the;
 price of the good itself (Price Elasticity)

 in income (Income Elasticity), and

 in the price of a related good (Cross Price Elasticity),
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.  
The formula for calculating the coefficient of elasticity of
demand is:
Percentage change in quantity demanded divided by the percentage
change in price
If Ped=0 - then demand is said to be perfectly
inelastic.
If Ped is between 0 and 1, then demand is inelastic.
If Ped = 1 , then demand is said to be unit elastic.
A 15% rise in price would lead to a 15% contraction in
demand leaving total spending by the same at each
price level.
If Ped > 1, then demand responds more than
proportionately to a change in price i.e. demand is
elastic.
The diagrams below show demand curves with different price elasticity and the effect
of a change in the market price.

 When demand is inelastic – a rise in price leads to a rise in total revenue

 When demand is elastic – a fall in price leads to a rise in total revenue
 Price elasticity is important to the seller since it
gauges how far demand can change relative to price.
The price elasticity of demand measures how far
consumers are willing to buy a good especially when
its price rises reflective of the economic, social, and
psychological forces shaping consumers preference.
 Income Elasticity of Demand
This measures how the quantity demanded changes as
consumer income changes. Income Elasticity of Demand is
equal to :

Percentage change in quantity demanded

Income elasticityof demand = .
Percentage change in income
 For a normal good, the income elasticity of demand is
positive.
 When the income elasticity of demand is greater than 1,
demand is income elastic.
 When the income elasticity of demand is between zero and 1,
demand is income inelastic.
 For an inferior good, the income elasticity of demand is less
than 0.
 Cross Price 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.
 The formula used to calculate the cross elasticity of
demand is:

% change in quantity demanded of a good X

Cross elasticity of demand = .
% change in price of another good Y

 The cross elasticity of demand for a substitute is positive.

 The cross elasticity of demand for a complement is
negative.
 Price Elasticity of Supply
With regard to supply, price elasticity of supply determines
whether the suply 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 price
of the good. Goods that are easy to produce hve elastic supply
while those which need a long time to produce and which are
hard to make have inelastic supply.
Thank you for listening . . . God bless everyone :)