AIRBUS H155 - $10

MILLION
8-12 Passengers
2 Pilots
In-light
entertainment
Air-conditioned
Leather Seats
Cruise speed of
510,000,000 324km/h

PESOS 255,000,000 PESOS

 Nike air mag
$5,000
Modeled after the
shoes of Michael J.
Fox wore in the Back
in the Future II
Lights in heels
Only 1,500 pairs are
out
5,100 PESOS
With respect to price changes on
different types of goods and services
different level of responsiveness were
observed.
ELASTICITY
ELASTICITY gives answers to questions such as:

 "If I lower the price of a product, how much more will sell?"
 "If I raise the price of one good, how will that affect sales
of this other good?"
 "If the market price of a product goes down, how much will
that affect the amount that firms will be willing to supply
to the market?"
Elasticity
 Price Elasticity of Demand: the responsiveness of
quantity demanded to a change in price
 Price Elasticity of Supply: the responsiveness of
quantity supplied to a change in price
 Income Elasticity of Demand: the responsiveness of
quantity demanded to a change in income
 Cross Price Elasticity of Demand: the
responsiveness of quantity demanded of one good to
a change in the price of another good
 Demand elasticity
Degree of responsiveness of
quantity demanded to
changes in market price.
How to compute demand elasticity?

 GENERAL FORMULA OF DEMAND ELASTICITY

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑
d =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
Or

% 𝑖𝑛 𝑄𝑑
d =
% 𝑖𝑛 𝑃

Qd=quantity demanded
P= price
 How to compute demand elasticity?

Take note that the category of elasticity

considers the absolute value of the
computed elasticity.
ELASTIC DEMAND
CASE 1: % 𝑖𝑛 𝑄𝑑 > % 𝑖𝑛 𝑃 or 𝒅 >1
INELASTIC DEMAND

CASE 2 : % 𝑖𝑛 𝑄𝑑 < % 𝑖𝑛 𝑃 or 𝒅 < 1

UNITARY DEMAND

CASE 3 : % 𝑖𝑛 𝑄𝑑 = % 𝑖𝑛 𝑃 or 𝒅 = 1
PERFECTLY INELASTIC DEMAND

CASE 4 : 𝑑 = 0
 PERFECTLY ELASTIC DEMAND
CASE 5 : 𝑑 = 
Elasticity Examples
Inelastic Goods Price Elasticity

Eggs 0.06
Food 0.21
Health Care Services 0.18
Gasoline (short-run) 0.08
Gasoline (long-run) 0.24
Highway and Bridge Tolls 0.10
Elastic Goods
Luxury Car 3.70
Foreign Air Travel 1.77
Restaurant Meals 2.27
 First METHOD OF COMPUTING ELASTICITY

ARC ELASTICITY = two separate points in a demand curve

𝑄𝑑 (𝑃1 +𝑃2 )/2

𝑑 = x
𝑃 (𝑄𝑑1+𝑄𝑑2)/2

∆𝑄𝑑 =Qd2-Qd1
∆P=P2-P1
 EXAMPLE 1:

Determine the type of demand elasticity of Tesla cars given

the following changes in price and quantity demanded. Use
arc elasticity. Interpret results
P1 = 20 M
P2 = 10 M
Qd1 = 1car
Qd2 = 4 car
EXAMPLE 2:

Determine the type of demand elasticity of takos given the

following changes in price and quantity demanded. Use point
elasticity.
P1 = 30 pesos
P2 = 20 pesos
Qd1 = 5 takos
Qd2 = 7 takos
Arc elasticity exercise
P ∆P Qd ∆Qd (P1+P2)/2 (Qd1+Qd2)/2 𝜺𝒅 Category of
elasticity
6 0
___ ___ ___ ___ ___ ___

4 10
___ ___ ___ ___ ___ ___

2 20
___ ___ ___ ___ ___ ___

0 30
 Second METHOD OF COMPUTING ELASTICITY

POINT ELASTICITY = elasticity computed at a single point on

the demand curve
𝑄 𝑃1 𝑄 𝑃1
𝑑 = x or x
𝑄𝑑1 𝑃 𝑃 𝑄𝑑1
EXAMPLE 3:
 Suppose the price of Good X went up from P100 to
P101; and the quantity bought decreased by 4 units
from 200 units to 196 units a day. Solve for the price
elasticity of demand of the product using point
elasticity.
P1 = P100
P2 = P101
Qd1 = 200 units
Qd2 = 196 units
DETERMINANTS OF DEMAND ELASTICITY

1. Number of substitute goods.

 demand is elastic for products with many
substitutes
 Products without substitute goods have an
inelastic demand.
e.g. electricity
 DETERMINANTS OF DEMAND ELASTICITY
2. Price increase in proportion to income.
 If the price increase has very little effect
on the income of the buyers, demand is
inelastic.
 If price increase involves a substantial
amount in proportion to the income of
consumers, demand is elastic.
 DETERMINANTS OF DEMAND ELASTICITY

3. Luxuries versus necessities.

 the demand for necessities are
inelastic
 Luxury tends to be elastic
Example: make up vs food
 DETERMINANTS OF DEMAND ELASTICITY

4. Time
 the demand for a product tends to be
more elastic over long period of time.
 Price Elasticity of Supply

 A measure of the extent to which the quantity

supplied of a good changes when the price of the
good changes, and all other influences on
seller’s plans remain the same (ceteris paribus).
 Price Elasticity of Supply
 Perfectly Elastic Supply – When the quantity supplied
changes by a very large percentage in response to an
almost zero increase in price
 Elastic Supply – When the % change in the quantity
supplied > the % change in the price
 Unit Elastic Supply – When the % change in the
quantity supplied = the % change in price
 Inelastic Supply – When the % change in the quantity
demanded is < the % change in price
 Perfectly Inelastic Supply – When the quantity supplied
remains the same as the price changes
 Computing Price Elasticity of
Supply
 Percentage change in quantity supplied
Percentage change in price
• If Price Elasticity of Supply > 1, Supply
is elastic
• If Price Elasticity of Supply = 1, Supply
is unit elastic
• If price elasticity of supply< 1, Supply
is inelastic
Computing Price Elasticity of Supply
 A surge of 40% in pizza price resulted in an
increase in the supply of pizza by 25%.
Computing Price Elasticity of Supply

Price of a good falls from 15 pesos to 10

pesos and the supply decreases from 100
units to 50 units. Calculate elasticity of
supply.
Computing Price Elasticity of Supply

 Katherine advertises to sell cookies for $4 a

dozen. She sells 50 dozen, and decides that she
can charge more. She raises the price to $6 a
dozen and sells 40 dozen. What is the elasticity
of supply?
 Cross Elasticity of Demand
A measure of the extent to which the demand
for a good changes when the price of a
substitute or complement changes, ceteris
paribus

% Change in Quantity Demanded

% Change in Price of one of its substitutes or
complements
Cross Elasticity of Demand

 Measures the sensitivity of quantity demanded of

one good to changes in the price of related
goods.
 Positive elasticities implies substitutes
 Negative elasticities suggests complements
Cross Elasticity of Demand
 The quantity demanded or product A has increased by 12% in
response to a 15% increase in price of product B. Calculate the
cross elasticity of demand and tell whether the product pair is
(a) apples and oranges, or (b) cars and gas.
 Cross elasticity of demand
= % change in quantity demanded of A ÷ % change in price of B
= 12% ÷ 15%
= 0.67
 Cross Elasticity of Demand

 In early 2019, a consultant working with health

ministry suggested that the government should increase
the price of a pack of cigarettes from 200 Selgina
dollars (S$) to $600. A survey conducted in December
20X9 suggested that over the year, the quantity
demanded of marijuana decreased from 2,000 kgs per
day to just 800 kgs. Calculate the cross elasticity of
demand.
 Income Elasticity of Demand

A measure of the extent to which the

demand for a good changes when
income changes, ceteris paribus
% Change in Quantity Demanded
% Change in Income
WHAT ARE THESE ELASTICITIES WE MEASURE?
 Income elasticity – measures the sensitivity of
quantity demanded to changes in income.
1. A negative income elasticity of demand is associated
with inferior goods.
2. A positive income elasticity of demand is associated
with normal goods.
3. If income elasticity of demand of a commodity is less
than 1or Inelastic, it is a necessity good.
4. If the elasticity of demand is greater than 1 or elastic, it
is a luxury good or a luxury good.
 EXAMPLE: Income Elasticity of Demand
 Genovia has experienced exceptional growth in recent years.
Its GDP per capita has increased from around $30,000 to
$50,000 in last 5 years. Over the period quantity demanded of
personal cars has increased from 450,000 units per year to
600,000 units. Quantity demanded of public transport,
however, has declined from 10,000 buses to 7,000 buses.
Calculate income elasticity of demand and tell which product
is a normal good and which one is inferior.