ELASTICITIES OF DEMAND

AND SUPPLY
The concept of
elasticity gives the
exact measurement
of the responsiveness
of quantity demanded
to changes in price.

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● Study the degree of responsiveness of
the quantity demanded or supplied of
a good to a change its determinants
can give.

● Determine whether elasticity can be

described as elastic - with greater
change, inelastic - with lesser change
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● Calculate the different elasticities of
demand and supply.

● Analyze different economic situations

using the concept of elasticity.

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TO BUY OR NOT?

Deciding whether or not to buy certain

commodities if there is an increase in price
depends on several factors. In this activity,
you need to pair up with another classmate.
Then, you and your partner need to explain
the reasons why you would decide to
continue buying or not buying a product if
there is an increase in price.
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1. IF THE PRICE OF RICE INCREASES,
WILL THE BOTH OF YOU CONTINUE TO
BUY OR NOT? WHY?

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2. IF THE PRICE OF MEDICINE
INCREASES, WILL YOU CONTINUE TO
BUY OR NOT? WHY?

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3. IF THE PRICE OF JUICE INCREASES,
WILL YOU CONTINUE TO BUY OR NOT?
WHY?

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How do price changes affect an individual’s
spending patterns?

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 ELASTICITY OF DEMAND

● Also known as the own price elasticity of

demand

● It is the percentage change in quantity demanded

in response to a given percentage change in price.

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 ELASTICITY OF DEMAND

Formula

𝝐 = - %Δ of Qd / % Δ P

Where the symbol for elasticity is 𝝐 or epsilon and

change is symbolized by Δ or delta.

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 ELASTICITY OF DEMAND

Formula

𝝐 = - %Δ of Qd / % Δ P

Where the symbol for elasticity is 𝝐 or epsilon and

change is symbolized by Δ or delta.

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 ELASTICITY OF DEMAND

To compute for elasticity we will be using the arc

formula:

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 ELASTICITY OF DEMAND

Since both sides of the formula are divided by 2, it

can be cancelled, giving us the formula below:

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 ELASTICITY OF DEMAND

Price Elastic Demand ( 𝝐 > 1)

● A 1% change in price will result in a more than 1%
change in quantity demanded.

● Goods that have elastic demand are sensitive to

price change.

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 ELASTICITY OF DEMAND

Price Inelastic Demand ( 𝝐 <

1)
● A 1% change in price will result in less than 1%
change in quantity demanded.

● Goods that have inelastic demand are less

sensitive to price change.

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 ELASTICITY OF DEMAND

Unit Elastic Demand ( 𝝐 = 1)

A 1% change in price will result in exactly the same

change in quantity demanded.

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 ELASTICITY OF DEMAND

Perfectly Elastic Demand ( 𝝐

= ∞)
A price elasticity of
demand equal to infinity
exhibits a horizontal
demand curve.

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 ELASTICITY OF DEMAND

Perfectly Inelastic Demand Curve ( 𝝐

= 0)
A price elasticity of
demand equal to zero
exhibits a vertical
demand curve.

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 ELASTICITY OF DEMAND

Factors affecting elasticity of demand:

1. Number and availability of substitutes

2. Necessity or luxury
3. Definition of the market
4. Length of time

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 RELATIONSHIP OF PRICE ELASTICITY AND TR

Elasticity Elasticity Effect When Price

Value Increase
(Total Revenue = Price x
Quantity)
Price elastic 𝝐<1 Total revenue decreases
demand
Price inelastic 𝝐<1 Total revenue increases
demand
Unit elastic 𝝐=1 Total revenue remains
demand constant
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AN INCREASE IN THE PRICE OF GOOD A
FROM ₱10 TO ₱15 CAUSED THE QUANTITY
DEMANDED FOR GOOD A TO DECREASE
FROM 80 UNITS TO 60 UNITS.

COMPUTE THE PRICE ELASTICITY OF

DEMAND. IS DEMAND ELASTIC OR
INELASTIC?

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STEP 1: USE THE FORMULA OF THE PRICE
ELASTICITY OF DEMAND

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STEP 2: SUBSTITUTE THE VALUES IN THE
FORMULA

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STEP 3: SOLVE FOR THE PRICE ELASTICITY
OF DEMAND.

𝝐 = 0.7142

A IS 0.7142. SINCE 𝝐 < 1, THEREFORE GOOD

THE PRICE ELASTICITY OF DEMAND OF GOOD

A IS INELASTIC. 25
The price of rice increased from ₱35 to ₱45
quantity demanded for rice change from 5
kilos to 4 kilos.

Compute for the price elasticity of demand.

Is price elasticity of demand for rice elastic,

inelastic or unit elastic?

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 PRICE ELASTICITY OF SUPPLY

This is the percentage change in quantity supplied in

response to a given percentage change in price.

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 PRICE ELASTICITY OF SUPPLY

Formula

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 PRICE ELASTICITY OF SUPPLY

Price Elastic Supply ( 𝝐s > 1)

● A 1% change in price will result in a more than

1% change in quantity supplied.

● Goods that have elastic supply are sensitive to

price change.

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 PRICE ELASTICITY OF SUPPLY

Price Inelastic Supply ( 𝝐s < 1)

● A 1% change in price will result in a less than 1%

change in quantity supplied.

● Goods that have inelastic supply are less

sensitive to price change.

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 PRICE ELASTICITY OF SUPPLY

Unit Elastic Supply ( 𝝐s = 1)

A 1% change in price will result to exactly the same

change in quantity supply.

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 PRICE ELASTICITY OF SUPPLY

Factors affecting price elasticity of supply:

1. Ease of production
2. Length of time

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SUPPOSE THAT A PRICE INCREASE OF MILK
FROM ₱105 TO ₱120 PER LITER RAISES THE
AMOUNT MILK COMPANIES PRODUCE FROM
10,000 LITERS TO 12,000 LITERS.

CALCULATE THE PRICE ELASTICITY OF

SUPPLY.

IS THE PRICE ELASTICITY OF SUPPLY ELASTIC

OR INELASTIC?

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STEP 1: USE THE FORMULA OF THE PRICE
ELASTICITY OF SUPPLY

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STEP 2: SUBSTITUTE THE VALUES IN THE
FORMULA

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STEP 3: SOLVE FOR THE PRICE ELASTICITY
OF DEMAND

THE PRICE ELASTICITY OF SUPPLY IS UNIT

ELASTIC.

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The price of computer tablets have
increased from ₱18,000 to ₱22,000.
Quantity supplied increased from 200 units
to 240 units.

Calculate the price elasticity of supply.

Is the price elasticity of supply elastic,

inelastic, or unit elastic?

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 INCOME ELASTICITY OF DEMAND

The income elasticity of demand measures the

relative responsiveness of quantity demanded when
income changes.

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 INCOME ELASTICITY OF DEMAND

Formula

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 INCOME ELASTICITY OF DEMAND

● If 𝝐I is positive, the good is normal.

● If 𝝐I is negative the good is inferior.

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AN INCREASE IN JOSE’S INCOME FROM
P30,000 TO P35,000 CAUSES HIS DEMAND
FOR STEAK TO INCREASE FROM 5 KILOS TO 6
KILOS PER MONTH.

COMPUTE THE INCOME ELASTICITY.

IS STEAK A NORMAL OR AN INFERIOR GOOD?

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STEP 1: USE THE FORMULA OF THE INCOME
ELASTICITY OF DEMAND.

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STEP 2: SUBSTITUTE THE VALUES IN THE
FORMULA.

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STEP 3: SOLVE FOR THE PRICE ELASTICITY
OF DEMAND.

𝝐I = 1.1821

THE INCOME ELASTICITY IS +1.1821,

INDICATING THAT STEAK IS A NORMAL
GOOD. 44
Manolo’s income has increased from
₱10,000 to ₱12,000. His consumption of
juice drinks declined from 10 bottles to 5
bottles per month.

Compute for the income elasticity.

Is the juice drink a normal or an inferior

good?

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 CROSS PRICE ELASTICITY OF DEMAND

The cross price elasticity of demand measures

the relative responsiveness of quantity demanded to
changes in the price of another good.

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 CROSS PRICE ELASTICITY OF DEMAND

Formula

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 PRICE ELASTICITY OF DEMAND

● 𝝐XY, is positive if the goods are substitutes.

● 𝝐XY, is negative if the goods are complements.

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GIVEN THAT:

X0 = 500 UNITS PY0 = P10

X1 = 600 UNITS PY1 = P15

COMPUTE THE CROSS PRICE ELASTICITY OF

DEMAND FOR GOOD X AND GOOD Y.

ARE GOOD X AND Y COMPLEMENTS OR

SUBSTITUTES?
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STEP 1: USE THE FORMULA OF THE CROSS
PRICE ELASTICITY OF DEMAND.

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STEP 2: SUBSTITUTE THE VALUES IN THE
FORMULA.

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STEP 3: SOLVE FOR THE PRICE ELASTICITY
OF DEMAND

𝝐XY = +0.4545

THE CROSS PRICE ELASTICITY IS +0.4545

INDICATING THAT GOOD X AND Y ARE
SUBSTITUTES.
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Given that:

x0 = 800 units py0 = 20

x1 = 900 units py1 = 25

Compute for the cross price elasticity of

demand for good x and good y.

Are good x and y complements or

substitutes?
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For each of the following pairs of goods
which will have a more elastic demand
and why?

1. Water and soda drink

2. Salt and cotton

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IDENTIFICATION. FILL IN THE BLANK WITH THE
CORRECT TYPE OF GOOD DESCRIBED IN THE
STATEMENT.

1. If the income elasticity good A is +

0.90,
good A is a _________.

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IDENTIFICATION. FILL IN THE BLANK WITH THE
CORRECT TYPE OF GOOD DESCRIBED IN THE
STATEMENT.

2. If the cross price elasticity of good Z is

- 1.3,
good Z is a _________.

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IDENTIFICATION. FILL IN THE BLANK WITH THE
CORRECT TYPE OF GOOD DESCRIBED IN THE
STATEMENT.

3. If the income elasticity of good B is -

1.0,
good B is a/an _________.

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IDENTIFICATION. FILL IN THE BLANK WITH THE
CORRECT TYPE OF GOOD DESCRIBED IN THE
STATEMENT.

4. If the price elasticity of demand of

good Y is 2, good Y is a/an _________.

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IDENTIFICATION. FILL IN THE BLANK WITH THE
CORRECT ANSWER TO COMPLETE THE
STATEMENT.

5. The more and better substitutes

available for a good, the
_________________________ its price
elasticity will be at a given set price.

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● Elasticity of demand or the own price
elasticity of demand is the percentage
change in quantity demanded in response
to a given percentage change in price.

● Price elasticity of supply is the

percentage change in quantity supplied in
response to a given percentage change in
price.
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● The income elasticity of demand
measures the relative responsiveness of

When income elasticity 𝝐I is positive, it is a

quantity demanded when income changes.

normal good. When income elasticity is

negative, it is an inferior good.

● The cross price elasticity of demand

measures the relative responsiveness of
quantity demanded of one good to changes
in the price of another good. 61
Suppose business travellers and vacationers
have the following demand for airline tickets
from Manila to Legazpi City:
Price of airline Qd (business
Qd (vacationers)
tickets travelers)

₱2600 2100 1000

₱2800 1900 600

₱3000 1800 300

As the airline tickets increase from ₱2,800
to ₱3,000, what is the price elasticity of
demand for:
i. business travelers?
ii. vacationers?