Elasticity and its

Applications
 Elasticity
ELASTICITY - A general concept used to quantify the
response in one variable when another variable
changes.
%A
elasticity of A with respect to B
%B
 Price Elasticity of Demand
PRICE ELASTICITY OF DEMAND - The ratio of the
percentage of change in quantity demanded to the
percentage of change in price; measures the
responsiveness of quantity demanded to changes in
price.
% change in quantity demanded
price elasticity of demand
% change in price
 Types of Elasticity
PERFECTLY INELASTIC DEMAND - Demand in which
quantity demanded does not respond at all to a change
in price.

PERFECTLY ELASTIC DEMAND - the responsiveness of

demand to a change in price or the price elasticity is
infinite, thereby resulting in a flat demand curve.
 Types of Elasticity

Perfectly Inelastic Demand Perfectly Elastic Demand

 Types of Elasticity
INELASTIC DEMAND - Demand that responds somewhat, but not a great
deal, to changes in price. Inelastic demand always has a numerical value
between zero and -1.
UNITARY ELASTICTY - A demand relationship in which the percentage
change in quantity of a product demanded is the same as the percentage
change in price in absolute value (a demand elasticity of -1).
ELASTIC DEMAND - A demand relationship in which the percentage
change in quantity demanded is larger than the percentage change in
price in absolute value (a demand elasticity with an absolute value greater
than 1).
Summary of Price Elasticity of Demand
Price Elasticity of Demand Interpretation
=1 Unitary Elastic
>1 Elastic
<1 Inelastic
 Importance of Total Revenue in Pricing
Decisions
Total Revenue the total sale of products by the producer or
seller.
TR = P x Q
Where: TR is the total revenue; P is the price; and Q is the
quantity
 Calculating Elasticity
MIDPOINT FORMULA - A more precise way of calculating
percentages using the value halfway between P1 and P2
for the base in calculating the percentage change in
price, and the value halfway between Q1 and Q2 as the
base for calculating the percentage change in quantity
demanded.
 Midpoint Formula

2 1
1 + 2/2
Price Elasticity
2 1
1+2/2
 Income Elasticity of Demand
INCOME ELASTICITY OF DEMAND - A measure of the
responsiveness of demand to changes in income.
Income Elasticity of Demand
2 1
% =
1 + 2/2

2 1
% =
1+2/2
 Summary of Income Elasticity of
Demand
Income Elasticity of Demand Interpretation
>1 Luxury Good
<1 Necessity
>0 Normal Good
<0 Inferior Good
 Cross Elasticity of Demand
CROSS PRICE ELASTICITY OF DEMAND - A measure of
the response of the quantity of one good demanded to a
change in the price of another good.
 Cross Elasticity of Demand

2 1
% =
1+2/2

2 1
% =
1+2/2
Summary of Cross Elasticity of Demand
Cross Elasticity of Demand Interpretation
=0 X and Y are not related
>0, positive Substitute
<0, negative Complement
 Price Elasticity of Supply
ELASTICITY OF SUPPLY - A measure of the response of quantity
of a good supplied to a change in price of that good. Likely to
be positive in output markets.

% change in quantity supplied

elasticity of supply
% change in price
Summary of Price Elasticity of Supply
Price Elasticity of Supply Interpretation
=1 Unitary Elastic
>1 Elastic
<1 Inelastic
Using the graph below, compute for the price elasticity of demand.
Karen earns a monthly salary of Php 15,000 and
she consumes Php 2000 worth of beef per month.
When her income increased by Php 2000/month,
she started to consume Php3000 worth of beef.
Compute for the income elasticity of demand.
Compute for the Cross Elasticity of Demand
Calculate the income elasticity of
demand for each of the following goods.