Elasticity of Demand And

Supply

Elasticity of Demand And

Supply

Response of the
buyers and sellers to
a change in price.
Both sellers and buyers
react to a change in
price.
Such reactions vary
depending on the
importance of the
products and their
ability to produce in a
given time.

Elasticity of Demand
Elasticity of Demand
Refers to the reaction or response of the buyers to
change in price of goods and services.
However this reaction vary in accordance
with the nature of the product, if it is
important or not to the consumers.

Types of Demand Elasticity

1. Elastic A change in
price results to a
greater change in
quantity demanded.
Example: a 20% increase in
price lead to a 60% increase
or decrease in quantity
demanded. This shows
buyers are very sensitive to
price change. They are
discourage to buy the
product when price increases
and encouraged to buy more
when price decreases.

Types of Demand Elasticity

2. Inelastic demand

change in price results to a lesser change in

quantity demanded.
For example a 50% change in price creates only a
5% change in quantity demanded. This means
buyers are not sensitive to price change.

Types of Demand Elasticity

Products under
this category are
essential to the
buyers. However,
a big decrease in
the prices of the
afforementioned
goods has a very
little effect on
quantity demanded

Types of Demand Elasticity

3. Unitary Demand
A change in price
results to equal
change in
quantity
demanded.
For example a 25%
increase in price
produces a 25%
change in

Types of Demand Elasticity

4. Perfectly elastic demand
Without change in price, there is an infinite
change in quantity demanded.

Types of Demand Elasticity

5. Perfectly Inelastic demand A change in price
creates no change in quantity demanded.
This applies to products without substitutes and
this is a situation which involves life and
death to an individual.

Types of demand elasticity

Determinants of Demand Elasticity

1. Number of Good substitute
Demand is elastic for products with
many good substitute.
An increase in the price of such product
induces buyers to look for good
substitute. On the other hand, product
without good substitute have an
inelastic demand. Buyers have no or
little choice except to purchase them.

Determinants of Demand Elasticity

2. Price increase in proportion to income
If the price increase has very little effect on
income or budget of the buyers, demand
is inelastic. But if the price increase
involves a substantial amount in
proportion to the income of consumers,
demand is elastic.

Determinants of Demand Elasticity

3. Importance of the product to the
consumer Luxury goods are not
that important to the people, so,
these have elastic demand.
However products which are
essential to the people like rice,
water and power supply have
inelastic demand.

ELASTICITY FORMULA
Q

Elasticity =

Q
P
P

Q
Q
P
P

= the difference between the original quantity and the new quantity (disregard
the negative sign
= the original quantity
= the difference between the original price and the new price (disregard the
negative sign)
= the original price

ELASTICITY FORMULA
Example

YEAR

QUANTITY
DEMANDED

PRICE

1988

100

1989

60

Solution
Q = 40
Q = 100

P =1
P =4

If Elasticity coefficient (answer) is:

More than 1= elastic demand/supply

1=unitary elastic
Less than 1= inelastic demand/supply

Economic Significance of Demand

Elasticity
1. A good knowledge of demand elasticity
helps the businessmen in planning their
pricing strategies.
2. In the case of the government, it guides
the economic managers in formulating
appropriate tax programs.
3. The market price of products influence
wages, rents, and profits.

Practical Examples:
1. Wage determination If the product has an
elastic demand, a reduction in its price
increases quantity demanded. This means
more sales and profits for the company. The
company now is in the position to raise the
wages of its workers.
2. Farm production guide Producers must be
careful in overproducing goods whose demand
is inelastic, like agricultural products because
prices of these products decrease which will
affect in turn the income of the farmers.

Practical Examples:
3. Maximize profits A reduction in

price causes more quantity

demanded. Businessmen can
estimate how far they can cut their
prices to be able to generate their
target sales. Evidently a substantial
price reduction favors goods with
highly elastic demand.

Practical Examples:
4. Imposition of sales taxes
Government officials should exercise
prudence in taxing goods and
services. Otherwise instead of
getting more money from the
people, they get less. It is not
advisable to increase taxes on
goods with elastic demand.

Thought Experiments

Mr. Pedro, a farmer, notices that the price

of potatoes increases. However, he is still
sad because he cant produce more upon
knowing such great news. Why?
Mr. Garcia invested his money in acquiring
a land. He did not have any intention of
selling it for 20 years. Why?

ELASTICITY OF
SUPPLY

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1. Elasticity of Supply
2. Input Prices
3.Determinants of Elasticity
of Supply
4. Consumer Behavior

 Elasticity of Supply

- the measure of responsiveness in Quantity

supplied (Qs)

to a change in price (P); Degree of

producers' sensitivity to

price

Elasticity of Supply
Supply elasticity refers to the reaction of the sellers or
producers to change in the price of goods. However
such response of the sellers vary in accordance with
the kind of goods they produce.

Types of Elasticity of Supply

1. Elastic A change in price (increase or
decrease) results to a greater change in
quantity supplied. This means producers and
sellers are very responsive to change

Types of Elasticity of Supply

2. Inelastic A change in price results to a lesser change in
quantity supplied. This shows that producers and sellers
have very weak response to price change. With a high
price, they like to increase their quantity supplied, but they
cannot do it at once.

Types of Elasticity of Supply

3. Unitary A change in price results to an equal change in
quantity supplied. This is a border line case between
elastic and inelastic supply. Examples of these goods
must be those that are classified as semi-industrial or
semi- agricultural product.

Types of Elasticity of Supply

4. Perfectly elastic
Without change in price,
there is an infinite
(without limit) change in
quantity supplied.
Example of this is a
situation in a poor
country with an unlimited
number of jobless
individuals who are
willing to work.

Types of Elasticity of Supply

5. Perfectly inelastic A
change in price has no
effect on quantity
supplied. Land is an
example of this
coomodity. Land area
is fixed regardless of
price. The increase in
population has
tremendously
increased the price of
land.

Determinant of Supply Elasticity

TIME

is the only determinant of

supply elasticity. It depends on how the
producers and sellers could respond
immediately to a change in price.

Supply Elasticity Graphs

S

S
S

ELASTICITY FORMULA
Q

Elasticity =

Q
P
P

Q
Q
P
P

= the difference between the original quantity and the new quantity (disregard
the negative sign
= the original quantity
= the difference between the original price and the new price (disregard the
negative sign)
= the original price

ELASTICITY FORMULA
Example

YEAR

QUANTITY
DEMANDED

PRICE

1988

100

1989

60

Solution
Q = 40
Q = 100

P =1
P =4

If Elasticity coefficient (answer) is:

More than 1= elastic demand/supply

1=unitary elastic
Less than 1= inelastic demand/supply

Thought Experiments

Why is Maria not happy after riding the

rollercoaster for the 10th time today?
Can you happily consume your favorite ice
cream in one hour or one day and receive
the same satisfaction of eating one cone
of ice cream?

Theory of Consumer Behavior

1. Law of
Diminishing
Returns or
Marginal
Productivity
2. Indifference
Curve
3. Budget Line

Law Of Diminishing Returns or

Marginal Utility
Utility means satisfaction
Marginal utility refers to the
additional satisfaction whenever
a consumer consumes one
more unit of the same good.
Consumption of more
successive units of the same
goods increases total utility
but at a decreasing rate
because marginal utility
diminishes.

PERSON
DOG
ROSE
2 BOTTLES
OF WATER

Total utility increases at a decreasing rate due

to a diminishing marginal utility

Quantity of a
good
Consumed
1

Total Utility

Marginal
Utility

12

14

15

15

MARKET STRATEGY

Indifference Curve

Good X

The word
indifference means
showing no bias or
neutral.
0
3
An indifference curve
is a curve which
2
0
shows different
combinations of two
0
1
goods which yield the
same
level
of
1
2
3
0
satisfaction.
Good Y

 Coke or Pepsi
I dont care whether you have Coke or Pepsi, as
long as it is cola.
I like apples and bananas. If you cut the number
of apples in half and double the number of
bananas, I am just as well off.
Lenovo or Acer

An Indifference schedule showing the

various combinations of meat and fish
Combinations Kilos of Meat Kilos of Fish
A

An indifference map is
composed of a series of
indifference curves. Each curve
to the right of another provides
greater satisfaction because its
constitutes combinations of
more units (or kilos) of two
products (meat and fish)

Budget Line or Consumption

Possibility Line
This indicates the various combinations of
two products which can be purchased by
the consumer with his income, given the
prices of the product
A

Expenditures

Total

1
2
3
4
1

5
4
3
2
5

25 + 125
50 + 100
75 + 75
100 + 50
25 + 125

150
150
150
150
150

A budget line schedule showing the various

combination of two products with a fixed budget of
P150 and the unit price of both products at 25.
Units of
product A

Units of
product B

Total Expenditures

5
4
3
2
1

1
2
3
4
5

P125+ P25= P150

P100+ P50= P150
P75+P75= P150
P50+P100= P150
P25+P125=P150

Equilibrium of the Consumer

Good
X

Equilibrium of the consumer showing B as the

combination of two goods which provide
maximum satisfaction to the consumer. This is
also the point where the budget line is tangent to
the indifference curve.

A
D

B
C

Good Y