Module No.
3 Elasticity of Demand and Supply
Introduction
This module is a subsequent study on the responsiveness or elasticity of demand and supply
with respect to changes in item determinants. It forces on the elasticities with respect to firm and
income.
Intended Learning Outcomes
At the end of the module, the students are expected to:
1. Explain the concept of elasticity of demand and supply.
2. Differentiate elastic, inelastic, unit or unitary elasticity
3. Compute elasticity values of demand and supply given changes in price and quantity
4. Distinguish among the different degrees of elasticity of demand and supply
5. Apply the concept of elasticity to various economic situation
6. Recognize the value of elasticity in relation to a seller’s revenue
Discussion
A. Term and Concept about Elasticity of Demand and Supply
1. Elasticity – the degree of responsiveness of demand/supply to a change in its determinant.
2. Coefficient of elasticity – absolute value of elasticity.
B. Price Elasticity of Demand
1. Definition: the degree of responsiveness of quality demanded to a change in price as
measured by dividing the percentage change in quality demanded by the percentage change
in price.
2. Types/Kinds of Elasticity
a. Elastic – when the demand for a commodity whose one percent change in price result in
more than one percent change in quantity demanded; thus the coefficient values are
more than one.
b. Inelastic – is when the coefficient value is less than one; that is, the demand for a
commodity whose one percent change in price results to a less than one percent change
in quantity demanded.
c. Unit – elastic - when the demand for a commodity whose one percent change in price
results in an equal one percent change in quantity demanded.
d. Perfectly elastic – this is a horizontal demand curve whose coefficient value is infinity.
e. Perfectly inelastic – this is a vertical demand curve whose coefficient of elasticity is
equal to zero.
C. Elasticity and Revenue
1. Effects of Elasticity or Revenue (TR = P x Q)
a. When demand is price inelastic, a price increase will jack up total revenue.
b. When demand is price elastic, a price increase will decrease total revenue.
c. When its demand is price unit – elastic - a price increase will not change total revenue.
2. Measurements of its coefficient of elasticity
a. Old formula –
Qd Q d1 – Q d0
Σ= = Q d0
P
P1 - P 0
P0
b. Better formula
Q ÷ P
Σd=
(Q1 + Q2) ÷ 2 (P1 + P2) ÷ 2
D. Price Elasticity of Supply
1. Definition: it is the responsiveness of quantity supplied to changes in price.
2. Similar to price elasticity of demand, the price elasticity of supply falls into 5 categories.
a. Elastic
b. Inelastic
c. Unit – elastic
d. Perfectly elastic
e. Perfectly inelastic
3. Formula:
Qs
Σs= Ps
4. Market Period Immediate, Short Run and Long Run
a. Factors which determine elasticity of supply.
1. Ability of producers to increase production of inputs for production is easily
obtained at market prices, the supply is relatively elastic.
If production is difficult to expand, supply tends to be an elastic.
2. Time period of production being considered. If producers have a lot of time to
respond to change in price, the supply tends to be elastic.
If producers have limited time supply tends to be elastic.
E. Income Elasticity of Demand
1. Definition: It is a measure of a product’s percentage change in demand to the ratio of the
percentage change in income.
2. Formula:
Σy= Qd % Qd
Qd or
Y % Y
Y
Where:
Σy – income elasticity of demand
Qd – change in quantity demanded
Y – change in income
F. Midpoint formula of price elasticity
It is a precise calculation of percentages using the value halfway between 2 prices as the
basis for calculating percentage change in price and the midpoint value between 2
quantities as basis of calculating percentage change in quantity demanded.
Qd1 – Q d0
% Qd Qdo
Σp= =
% P P1 – P0
P0
G. Cross Elasticity of Demand
This is a measures of the responsiveness of the quantity of one good demanded to a
change in the price of another good.
% Qy % change in Qy demanded
Σxy= =
% Px % change in price of x
demanded
Wherein:
Qy2 - Qy1
% Qy = Qy1
Px2 – Px1
% Px = Px1
Note: value of Σxy Kind of Σxy
+ substitute
- complement
Learning Activities
Using the two (2) formula for computing price elasticity of demand, solve the following:
1. Assume that the old price is ₽18 with quantity demanded being 24 units. If the price to be
lowered to ₽12, quantity becomes 36 units. Solve for Σ.
2. a. Complete the table below:
P Qd TR
10 1
9 2
8 3
7 4
6 5
5 6
4 7
3 8
2 9
1 10
b. Draw the corresponding TR curve.
References
Pagoso, Cristobal, Dino Rose Mary Villasis, George
Introductory Microeconomics
Slavin, Stephen L. Microeconomics
Samuelson, Paul R. Microeconomics
