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The Concept of Elasticity

This document discusses the concept of elasticity in economics. It defines elasticity as the ratio of the percent change in one variable to the percent change in another variable. It then focuses on different types of demand elasticity: 1. Price elasticity of demand measures how responsive consumer demand is to changes in price. Income elasticity measures responsiveness to changes in consumer income. Cross elasticity measures responsiveness of demand for one good based on price changes in related goods. 2. Demand can be elastic (Ed > 1), inelastic (Ed < 1), or unit-elastic (Ed = 1) depending on whether a percentage change in price leads to a greater, lesser, or equal percentage change in quantity

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Mark Lawrence Lorca Fortes
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1K views

The Concept of Elasticity

This document discusses the concept of elasticity in economics. It defines elasticity as the ratio of the percent change in one variable to the percent change in another variable. It then focuses on different types of demand elasticity: 1. Price elasticity of demand measures how responsive consumer demand is to changes in price. Income elasticity measures responsiveness to changes in consumer income. Cross elasticity measures responsiveness of demand for one good based on price changes in related goods. 2. Demand can be elastic (Ed > 1), inelastic (Ed < 1), or unit-elastic (Ed = 1) depending on whether a percentage change in price leads to a greater, lesser, or equal percentage change in quantity

Uploaded by

Mark Lawrence Lorca Fortes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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The Concept Of

Elasticity

Elasticity of Demand
Elasticity
In economics, it means responsiveness.
In general, it is the ratio of the percent change
in one variable to the percent change in
another variable.
It is a tool used by economists for measuring
the reaction of a function to changes in
parameters in relative way.

Elasticity of Demand
Demand Elasticity
Is a measure of the degree of the
responsiveness of quantity demanded of a
product to a given change in one of the
independent variables which affect demand
for that product.

Classification of Demand Elasticity according to


factors that cause the change:
1. Price Elasticity of demand is the responsiveness of
consumers demand to change in price of the good sold.
2. Income Elasticity of demand Is the responsiveness of
consumers demand to change in their income.
3. Cross Elasticity of demand Is the responsiveness of
demand for a certain good, in relation to changes in price of
other related goods.

Equation for Price Elasticity of


Demand
Ed =

Qd / Q
P / P

Where:
Q = Q2
Q
1
d
Q
Q = 2+
Q1
2

P = P2 P21 +
P = P
P1
2

Types of Demand Elasticity


A. Elastic Demand (Ed > 1)
If the coefficient of the elasticity is greater than 1, demand is said to be price
elastic.
This means that the percentage change in price results in a greater
percentage change in quantity demanded.
B. Inelastic Demand (Ed < 1)
Demands tends to be inelastic if the percentage change in quantity demanded
is smaller than percentage change in price.
It is used to describe the situation in which the demand for a good or service
are unaffected when the price of that good or service changes. Inelastic means
that when the price goes up, consumers buying habits stay about the same, and
when the price goes down, consumers buying habits also remain unchanged.

Types of Demand Elasticity


C. Unit Elastic Demand (Ed = 1)
If the coefficient of the price is equal to 1, demand is unit
elastic. This condition exist if the percentage change in
quantity demanded is equal to change in price.
8

D. Perfectly Elastic Demand (Ed 1) and Perfectly


Inelastic Demand (Ed = 0)
If the demand is perfectly elastic, the price elasticity of
demand is infinite. Meaning, even a slight change in price
can result in an infinitely large change in quantity
demanded. Graphically the demand curve is horizontal.

On the other hand, price inelastic demand has zero


elasticity, which implies that the quantity demanded
says the same, no matter what the change in price is.
This is depicted graphically by a vertical demand curve.

Questions:
1. The price of a popular soft drink decreases from P10 to
P9. This leads to an increase in the demand, from 3
liters to 8 liters. Solve for the price elasticity of demand.
2. Suppose the price for the paper clips increases from P2
to P3. This results in a decrease in demand from 22
pieces to 20 pcs. Solve for the price elasticity of
demand.

Price elasticity of Demand


P

Elastic
Demand
(Ed > 1)

Inelastic
Demand
(Ed < 1)

P2 = 3

P1 =
10

P2 =

P1 =

Q1 =

Q2 =

Q2 =

Q1 =

20

22

Price elasticity of Demand


Unit - Elastic
Demand
P
(Ed = 1)
PP2 1

Perfectly Elastic and


Perfectly - Inelastic Demand
Perfectly Inelastic
Demand

Perfectly Elastic
Demand

Q Q
2

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