What is Elasticity?

Elasticity is a measure of just how much the

quantity demanded will be affected by a change in
price or income or change in price of related goods.

allows us to analyze supply and demand with
greater precision.
Elasticity
Determinants of Elasticity of Demand
Availability of substitutes
the better the substitute for a product the higher the
price elasticity of demand will tend to be.

Time
the longer the period of time, the more price elastic
is the demand for a product.

Necessities
It is argued that necessities have lower price
elasticity than luxuries.
An increase in price of necessities will barely reduce
the quantity demanded

Determinants of Elasticity of Demand
The availability of resources (substitutes)
If a product has many substitutes, then producers
can easily alter the pattern of production if its price
rises or fall. Its elasticity will be relatively high.
If producer have no alternative to substitute goods
and it is difficult to change the pattern of production
if the prices changed, the price elasticity of supply
will be low.

Determinants of Elasticity of Supply
A numerical measure of the relative
response of one variable to changes in
another variable.

Coefficient of Elasticity
Used to quantify the concept of elasticity:
price elasticity of demand
price elasticity of supply
income elasticity of demand
cross elasticity of demand
The coefficient can be calculated using:
simple endpoint or midpoint formulas
with more sophisticated calculus and logarithnic
techniques

Coefficient of Elasticity
The general formula for the coefficient of elasticity
between variable A and B is given as:



he more common forms:
Coefficient of Elasticity
Price Elasticity of Demand
- the relative response of quantity demanded to
changes in price.
it is specified as the percentage change in
quantity demanded to a percentage change in
price.
Price Elasticity of Supply
- the relative response of quantity supplied to
changes in price.
it is also the analogously specified as the
percentage change in quantity supplied to a
percentage change in price.
Types of Elasticity
INCOME ELASTICITY OF DEMAND
the relative response of demand to changes in
income or the percentage change in demand due
to a percentage change in income.

NORMAL GOODS - value of elasticity is greater then
0 but less than 1

INFERIOR GOODS - value of elasticity is less than 1
Types of Elasticity
CROSS ELASTICITY OF DEMAND
the relative response of demand to changes in the
price of another good or the percentage change in
demand for one good due to a percentage change
in the price of the other good.

SUBSTITUTE GOODS - increase in the price of one
good will lead to an increase in demand for the
other good; numerical value of positive

Types of Elasticity
COMPLEMENTARY GOODS - a rise in the price of
one good will result to a fall in the demand of the
other goods; with a value of negative


UNRELATED GOODS -if the price of one good rises
in the market, it is unlikely to result in a change in
quantity demanded of other unrelated goods.
Types of Elasticity
Elasticity of Demand
Price elasticity of demand is a measure of
how much the quantity demanded of a good
responds to a change in the price of that
good.

Price elasticity of demand is the percentage
change in quantity demanded given a
percent change in the price.

Elasticity of Demand
How to get the price elasticity of demand?
Price elasticity of demand =
(Q
2
Q
1
)/[ Q
2
+Q
1
2 ]
(P
2
P
1
)/[ P
2
+P
1
2 ]

Elasticity of Demand
The price of coffee from P3 goes up to P5 and the
demand falls from 15 cups to 5 cups.
(5-15)/[(5+15)/2]
(5-3)/[(5+3)/2]
=
= -2 (elastic)
Price elasticity of demand =
(Q
2
Q
1
)/[ Q
2
+Q
1
2 ]
(P
2
P
1
)/[ P
2
+P
1
2 ]

Elasticity of Demand
Inelastic Demand
Quantity demanded does not respond strongly to
price changes.
Price elasticity of demand is less than one. (<1)

Elastic Demand
Quantity demanded responds strongly to changes
in price.
Price elasticity of demand is greater than one. (>1)
Elasticity of Demand
Perfectly Inelastic
Quantity demanded does not respond to price
changes.
Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
Unit Elastic
Quantity demanded changes by the same
percentage as the price.
Price elasticity of demand is equal to one. (=1)

Elastic Demand (>1)
Flatter curve
P
Q
D
Small change in P
Big change in Qd
Elasticity of Demand
Elasticity of Demand
Perfectly Elastic Demand
Horizontal line
P
Q
D
Any change in P
Qd changes infinitely

Elasticity of Demand
Inelastic Demand (<1)
Steep curve
P
Q
D
Big change in P
Small change in Qd

Elasticity of Demand
Perfectly Inelastic Demand
Vertical line
P
Q
D
Change in P
No change in Qd

Elasticity of Supply
Price elasticity of supply is a measure of how much
the quantity supplied of a good responds to a change
in the price of that good.

Price elasticity of supply is the percentage change in
quantity supplied resulting from a percent change in
price.

Elasticity of Supply
How to get the price elasticity of supply?
Price elasticity of supply =
(Q
2
Q
1
)/[ Q
2
+Q
1
2 ]
(P
2
P
1
)/[ P
2
+P
1
2 ]

Elasticity of Supply
The price of roses from P40 goes up to P60 and the
supply goes up from 6,000 to 15,000 bunches.
(15,000-6,000)/[(15,000+6,000)/2]
(60-40)/[(60+40)/2]
=
= 2.14 (elastic)
Price elasticity of supply =
(Q
2
Q
1
)/[ Q
2
+Q
1
2 ]
(P
2
P
1
)/[ P
2
+P
1
2 ]

Elasticity of Supply
If price elasticity of supply (absolute value) is
= 1, Unit elastic
% change Qs = % change P
> 1, Elastic
% change Qs > %change P (sensitive to P
changes)
< 1, Inelastic
% change Qs < %change P (not sensitive to P
changes)



Elasticity of Supply
Inelastic Supply
Quantity supplied does not respond strongly to
price changes.
Price elasticity of supply is less than one. (<1)
Elastic Supply
Quantity supplied responds strongly to changes in
price.
Price elasticity of supply is greater than one. (>1)
Elasticity of Supply
Perfectly Inelastic
Quantity supplied does not respond to price
changes.
Perfectly Elastic
Quantity supplied changes infinitely with any
change in price.
Unit Elastic
Quantity supplied changes by the same
percentage as the price.
Price elasticity of supply is equal to one. (=1)

Elasticity of Supply
Inelastic Supply
Steep curve
P
Q
S
Big change in P
Small change in Qs

Elasticity of Supply
Perfectly Inelastic Supply
Vertical line
P
Q
S
Change in P
No change in Qs

Elasticity of Supply
Elastic Supply
Flatter curve
P
Q
S
Small change in P
Big change in Qs

Elasticity of Supply
Perfectly Elastic Supply
Horizontal line
P
Q
S
Any change in P
Qs changes infinitely