C H A P TE R 3 :

ELASTIC I TY A N D I T S
AP P L IC A TI O N
PREPARED BY:

RISTIAN M. CONE JOS, M B A

JOHN CH
CONCEPT OF ELASTICITY
MEASURES THE RESPONSIVENESS OF ONE VARIABLE TO A CERTAIN CHANGE OF
ANOTHER VARIABLE

 ELASTICITY
 THE PERCENTAGE CHANGE IN ONE VARIABLE IN RELATION TO THE PERCENTAGE
CHANGE IN ANOTHER VARIABLE
 DEMAND ELASTICITY
 ELASTICITY CAN BE APPLIED TO DEMAND IN ORDER TO MEASURE ITS RESPONSIVENESSTO
THE CHANGES ON IT SELECTED DETERMINANTS.

 PRICE ELASTICITY
 IT MEASURES THE RESPONSIVENESS OF THE QUANTITY DEMANDED WITH RESPECT THE
CHANGES IN ITS PRICE.
 ARC ELASTICITY
 THE ARC PRICE ELASTICITY OF DEMAND MEASURES THE RESPONSIVENESS OF QUANTITY
DEMANDED TO A PRICE. IT TAKES THE ELASTICITY OF DEMAND AT A PARTICULAR POINT
ON THE DEMAND CURVE, OR BETWEEN TWO POINTS ON THE CURVE.

 POINT ELASTICITY
 MEASURES A VERY SMALL CHANGE IN BOTH THE PRICE AND QUANTITY ON A DEMAND
CURVE ON A PARTICULAR POINT.
EXTREME CASES OF PRICE ELASTICITY OF DEMAND
PERFECTLY ELASTIC DEMAND – DEMAND
IS PERFECTLY ELASTIC WHEN DEMAND IS
TOTALLY RESPONSIVE TO CHANGES IN
PRICE

PERFECTLY INELASTIC DEMAND –

DEMAND IS PERFECTLY INEELASTIC
WHEN QUANTITY DEMANDED IS TOTALLY
DOES NOT RESPONSE TO ANY CHANGES
IN PRICE.
DEGREE OF PRICE ELASTICITY OF DEMAND
ELASTIC – GREATER THAN 1
INELASTIC – LESS THAN 1
UNITARY – EQUAL TO 1
 FORMULA FOR PRICE ELASTICITY OF DEMAND
OR
FORMULA FOR POINT ELASTICITY

OR
=
OR
=
LEGEND:
PROBLEM NO. 1 FOR ELASTICITY OF DEMAND
POINT PRICE QUANTITY

A 4 0

B 3 10

C 2 20

D 1 30

E 0 40

SOLVE THE FOLLOWING:

 POINT B AND A
 POINT E AND C
 POINT C AND D
 SOLUTION FOR PROBLEM 1: POINT ELASTICITY

SOLUTION: SOLUTION: SOLUTION:

 POINT B AND A  POINT E AND C  POINT C AND D

= = =
= = =
= = =
= = =
= -6.90 OR 6.90 = -0.34 OR 0.34 = -0.60 OR 0.60

= ELASTIC = INELASTIC = INELASTIC

 FORMULA FOR ARC ELASTICITY
=
LEGEND:
 SOLUTION FOR PROBLEM 2: ARC ELASTICITY

SOLUTION: SOLUTION: SOLUTION:

 POINT B AND A  POINT E AND C  POINT C AND D
= = =
= = =
= -10 = -10 = -10
= -10 = -10 = -10
= -7 OR 7 = -0.3 OR 0.3 = -0.6 OR 0.6

= ELASTIC = INELASTIC = INELASTIC

INCOME ELASTICITY OF DEMAND
 THE RESPONSIVENESS OF QUANTITY DEMANDED IN RESPONSE TO A CHANGE IN INCOME.
 THE COEFFICIENT SIGN SHOULD NOT BE IGNORED AND MUST BE INDICATED.
FORMULA FOR INCOME ELASTICITY OF DEMAND
=
OR
=/
LEGEND:
TYPES OF GOODS
NORMAL LUXURY – GREATER THAN 1
NORMAL NECESSITY – EQUAL TO ZERO BUT
NOT GREATER THAN 1 OR EQUAL TO 1.

INFERIOR – LESS THAN TO ZERO

PROBLEM NO. 2: INCOME ELASTICITY

400 20
500 35
600 43
700 47
800 50
900 48
1000 47
SOLUTION NO.2: INCOME ELASTICITY
TYPE OF GOOD
400 20 - - - -
500 35 500-400/400 = 0.25 35-20/20 = 0.75 0.75/0.25 = 3 NORMAL LUXURY
600 43 600-500/500 = 0.20 43-35/35 = 0.23 0.23/0.20 = 1.15 NORMAL LUXURY

700 47 700-600/600 = 0.17 47-43/43 = 0.09 0.09/0.17 = 0.53 NORMAL NECESSITY

800 50 800-700/700 = 0.14 50-47/47 = 0.06 0.06/0.14 = 0.43 NORMAL NECESSITY

900 48 900-800/800 = 0.13 48-50/50 = -0.04 -0.04/0.13 = -0.31 INFERIOR

1000 47 1000-900/900 = 0.11 47-48/48 = -0.02 -0.02/0.11 = -0.18 INFERIOR
 SUPPLY ELASTICITY
 MEASURES THE RESPONSIVENESS OF QUANTITY SUPPLIED IN RESPONSE TO A
PERCENTAGE CHANGE IN THE PRICE OF THE PRODUCTS.
DEGREE OF PRICE ELASTICITY OF SUPPLY
ELASTIC – GREATER THAN 1
INELASTIC – LESS THAN 1
UNITARY – EQUAL TO 1
EXTREME CASES OF PRICE ELASTICITY OF SUPPLY
PERFECTLY ELASTIC SUPPLY – THIS
OCCURS WHEN THERE IS NO CHANGE IN
PRICE AND THERE IS AN INFINITE
CHANGE IN QUANTITY SUPPLIED

PERFECTLY INELASTIC SUPPLY – THIS

HAPPENS WHEN A CHANGE IN PRICE HAS
NO EFFECT ON QUANTITY SUPPLIED.
 FORMULA FOR PRICE ELASTICITY OF SUPPLY
OR
FORMULA FOR POINT ELASTICITY

OR
=
OR
=
LEGEND:
PROBLEM NO. 3 FOR ELASTICITY OF SUPPLY
POINT PRICE SUPPLY

A 4 40

B 3 30

C 2 20

D 1 10

E 0 0

SOLVE THE FOLLOWING:

 POINT B AND A
 POINT E AND C
 POINT C AND D
 SOLUTION FOR PROBLEM 3: POINT ELASTICITY OF SUPPLY

SOLUTION: SOLUTION: SOLUTION:

 POINT B AND A  POINT E AND C  POINT C AND D

= = =
= = =
= = =
= = =
=1 =1 =1

= UNITARY = UNITARY = UNITARY