THE CONCEPT OF ELASTICITY

1. THE CONCEPT OF ELASTICITY

2. THE CONCEPT OF ELASTICITY
• Sellers are manually expected to hope for more demand for their products
• Higher revenues
• The buyer, ever anxious in getting the best value for his money
• The same predicament as the seller
WHAT IS ELASTICITY?
Changes in price may or may not affect the demand or supply of
any good or service.
A definition of elasticity is provided as follows:
• It is the measure of the sensitivity or responsiveness of quantity
demanded or quantity supplied to changes in prices.
• The definition indicates that elasticity concerns both supply and
demand.

3. ELASTICITY OF DEMAND
Demand elasticity indicates the extent to which changes in
price or other factors cause changes in the quantity demanded.
Demand elasticity may be classified as follows:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
Ep = percentage change in quantity demanded
Percentage change in price
= QD2 - QD1 / QD1
P2 - P1/ P1
Where Ep = price elasticity of demand
QD2 = new quantity demanded
QD1 = original quantity demanded
P2 = the new price
P1 = the original price
Price elasticity of Demand
Price elasticity is used to determine
the responsiveness of demand to changes in
the price of the commodity. It may be
classified with the use of formula below:

4. Sample problem:
Demand elasticity given as following:
•Original quantity demanded = 10,000 kg
•Original price = P5.00 per kilo
•New quantity demanded = 16,000 kg
•New price = P4.00 per kilo
Answer: 16,000 - 10,000 / 10,000 = 3
1.- 5.00 / 5.00
Price elasticity of demand Classified. As to
price elasticity, demand may be classified into
the following types:
Elastic Demand - is that type of demand where
the quantity that will be bought is affected greatly by changes in the
price. The change must be greater than elasticity coefficient of 1.
The demand for common luxuries (like most household appliances)
and goods capable of many uses (like paper) is elastic.
Inelastic demand - refers to the demand where a percentage change in price
creates a lesser change in quantity demanded. An example is when a 20%
reduction in price caused only a 10% increase in demand. The elasticity
coefficient in this type is less than 1.
The demand for necessities like food, clothing, and shelter is inelastic.
Unitary demand - a change in price creates as equal change in quantity
demanded. When a 20% price reduction resulted to a 20% increase in demand.
The unitary demand is equal to the coefficient of 1
Semi-luxury items are goods considered with unitary elasticity. Examples are
designer clothes, watches, and bath soap.

5. Implications of Price Elasticity of Demand
Determining demand elasticity serves a certain purpose. When elasticity is known. The seller in
making decisions about price “If the price elasticity of demand is greater than one, the price should be
lowered; if less than one, the price should be increased.“
Income elasticity of Demand
The demand for a product or service is affected not only by its price but also by other factors like
consumer income. The effect of consumer income on demand, the elasticity concept may be used.
Ey = percentage change in quantity demanded
Percentage change in income
= QD2 - QD1 / QD1
Y2 - Y1 / Y 1
Where Ey = income elasticity of demand
Y2 = the new income
Y1 = the original income
When elasticity is greater than 1, demand is said to be income
elastic; when less than 1, it is income inelastic; and when equal to 1, it is
unitary elastic.

6. Cross Elasticity of Demand
The demand for a certain good may be affected also by a change in the price of
another good.
The responsiveness of the quality demanded of a particular good to changes in
the price of another good is referred to as cross elasticity of demand. The percentage
change in the quantity demanded of the first good and dividing it by the percentage
change in the price of the second good. Representation of this relationship is as follows:
Percentage change in the quantity demanded of the first good and
dividing it by the percentage change in the price of the second good. Representation of
this relationship is as follows:
QA2 - QA1 / QA1
If cross elasticity is positive, the goods are substitutes. An
example is the 2% increase in the price of rice which causes a
0.66% increase in the demand for pan de sal.
If cross elasticity is negative, the goods are
complements. If tuition fee increases results to a decrease in the
demand for dormitories, school dormitories are complements.
Where:
Ec = cross elasticity of demand
QA2 = new demand for product A
QA1 = original demand for product A
PB2 = new price of product B
PB1 = original price of product B
PB2 - PB1 / PB1

7. Determinants of demand Elasticity
The demand elasticity of goods and services are not similar; some
are elastic, and some are inelastic certain factors (or determinants). As
follows:
The price of the good in relation to the consumer’s budget. A change in
price of cars drive consumers to think seriously about buying; while a
change in the price of toothpicks (from 50 centavos per box to 75 centavos
per box) are taken in stride.
The availability of substitutes. The demand elasticity of a good is affected
by the availability of substitutes. The more and the closer substitutes are, the
more people will switch to substitutes. When the price of the good rises.
The type of good. Whether it is luxury or a necessity. The demand for basic
staples like rice is inelastic consumers can scarcely avoid buying them.
Magazines and comics are luxuries and their demand is elastic because
people can avoid buying them when their price rises.
The time under consideration. If the price of rice rises, people may
consider switching will be slow, however, but much can be achieved when a
longer period is considered.

8. ELASTICITY OF SUPPLY
Elasticity of supply refers to the responsiveness of the sellers to a
change in price. This may determined by computing for the percentage
change in the quantity supplied of a good divided by the percentage change
in the price. Determining elasticity of supply is:
Es = percentage change in quantity supplied
Percentage rise in the price
= QS2 - QS1 / QS1
P2 - P1 / P1
Where:
Es = price elasticity of supply
QS2 = new quantity supplied
QS1 = original quantity supplied
P2 = new price
P1 = original price

9. ELASTICITY OF SUPPLY
Elasticity of supply refers to the responsiveness of the sellers
to a change in price. This may determined by computing for the
percentage change in the quantity supplied of a good divided by the
percentage change in the price. Determining elasticity of supply is:
Es = percentage change in quantity supplied
Percentage rise in the price
= QS2 - QS1 / QS1
P2 - P1 / P1
Where:
Es = price elasticity of supply
QS2 = new quantity supplied
QS1 = original quantity supplied
P2 = new price
P1 = original price

10. Determinants of Supply Elasticity
Supply is either elastic or inelastic depending on
whether or not the sellers are able to respond effectively to
changes in price. Supply elasticity will depend on the following
factors,
•The feasibility and cost of storage, if storage cost is high,
even if it is available, the sellers have no choice but to sell at
prevailing prices. Supply is inelastic in this case
•The ability of producers to respond to price changes. If the
producers can easily increase or decrease output when prices
rise or fall, supply is elastic.
•Time, with the passage of time, especially for long periods,
supply tends to be elastic. If there is a rise in prices, the
producers may not be able to make adjustments quickly, maybe
able to produce more.