Elasticity

Measures the responsiveness of one variable to a certain change of another variable

The percentage change in one variable in relation to the percentage change in another variable

The basic formula used to determine elasticity is:

percentage change in variable x

percentage change in variable y Price Elasticity

Measures the percentage change in quantity with respect to percentage change in price

Price Elasticity of Demand

Measures the responsiveness of the quantity demanded with respect to its price

Other Measurements

of Elasticity Chapter 3 The Concept of

Elasticity Five Types of Elasticity 1. Elastic

percentage change in variable x is greater than the percentage change in variable y.

elasticity coefficient is greater than 1

2. Inelastic

percentage change in variable x is less than the percentage change in variable y

elasticity coefficient is less than 1

3. Unitary Elasticity

percentage change in variable x is equal to the percentage change in variable y

elasticity coefficient is equal to 1

4. Perfectly Elastic

any change in variable y will have an infinite effect on variable x

5. Perfectly Inelastic

any change in variable y will have no effect on variable x Basic formula:

Points Elasticity

ED = Q2 - Q1

P2 - P1

P2 - P1

P1 Arc Elasticity

Earc = Q2 - Q1 x (P1 + P2) / 2

P2 - P1 (Q1 + Q2) / 2

Classification of Price Elasticity of Demand

Elastic Demand – a certain good is price elastic when the elasticity coefficient is greater than 1

Inelastic Demand – a certain good is price inelastic when the elasticity coefficient is less than one

Unitary Elastic Demand – a certain good is unitary when elasticity coefficient is equal to 1

Perfectly Elastic Demand – a good is perfectly elastic when elasticity coefficient equals infinity

Perfectly Inelastic Demand – a good is perfectly inelastic when elasticity coefficient equals zero

Determinants of Price Elasticity of Demand

The importance or degree of necessity of the goods.

Number of available substitutes.

The properties of income in price changes.

The time period.

Price Elasticity of Supply

Measures the responsiveness of quantity supplied in response to a percentage change in the price of the goods.

Formula of Price Elasticity of Supply:

ES = Q2 - Q1

Q1

P2 - P1

Classification of Price Elasticity of Supply

Elastic Supply – a change in price leads to a greater change in quantity supplied

Inelastic Supply – a change in price leads to a lesser change in quantity supplied

Unitary Elastic Supply – a change in price leads to an equal change in quantity supplied

Perfectly Elastic Supply – this occurs when there is no change in price, and there is an infinite change in quantity supplied

Determinants of Price Elasticity of Supply

Monetary or Intermediate

Short-run

Long-run

Income Elasticity of Demand

the responsiveness of quantity demanded in response to change in income

Formula:

Ey = Qd2 - Qd1

Qd1

M2 - M1

M1 Summary of Income Elasticity Coefficient TYPES OF GOODS INCOME ELASTICITY COEFFICIENT Normal good

Inferior good

Normal, Luxury good

Normal, Necessity good

Positive elasticity ((E > 0)

Negative elasticity ((E < 0)

Positive elasticity greater than

one (E > 1)

Positive elasticity but less than

one ((E < 1)

Cross Elasticity of Demand

Measures the responsiveness of quantity demanded of a good to a change in the price of another good

Formula:

Exy = Qd2 - Qd1

Qd1

Py2 - Py1

Py1

Cross elasticity demand simply measures whether the good is a:

Complementary good – a good that is used in conjunction with other goods

Cross elasticity of demand is negative

Supplementary good – a good that can be used in place of another

Cross elasticity of demand is positive

Importance and Application of Elasticity:

Helps every policy formulating body develop appropriate strategies and programs

Determine the effect of price changes on the revenue

Hence, producers can asses consumers’ responsiveness with respect to any change in the price of commodity

end of chapter 3....

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# Chapter 3: Elasticity

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