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Elasticity

refers to a ratio or a measurement of the responsiveness of the buyers and sellers to price
changed.

refers to a ratio or a measurement of the responsiveness of the buyers and sellers to price changed.

Elasticity percentage change in the quantity demand


Demanded = ____________________________________
percentage change in the price

Classifications of Elasticity demand


1. Elastic demand (ED 1)- means that the percentage change in price creates a greater percentage
change in quantity demanded that is greater than one.
2. Inelastic demand- the percentage change in price creates a lesser change in quantity demanded
3. Unitary demand- a change in price creates an equal change in quantity demanded (ED-1).
4. Perfectly elastic demand- the change in price creates an infinite change in quantity demanded.
5. Perfectly Inelastic demand- a change in price creates a finite change in quantity demanded.

Elasticity Demand

Price Elasticity of Demand and Total Revenue


Elasticity Responsiveness of Quantity Demanded to change in price Terms
Coefficient

ED>1 Quantity demanded changes proportionately more than price change Elastic Demand
percentage change in quantity demanded is greater than percentage
change in price.
ED<1 Quantity demanded changes proportionately to price change or Inelastic Demand
percentage change is less than the percentage change in price.
ED=1 Quantity demanded changes proportionately to price change, or Unitary Demand
percentage change in quantity demanded is equal to percentage
change in price change.
ED= Quantity demanded changes in an infinite manner that causes small Perfectly inelastic
changes in price demand
ED=0 Quantity demanded does not changes as price changes Perfectly inelastic
demand
Total revenue is equivalent to the price of a good multiplied by the quantity of good sold.
Conditions
TR= price x quantity, Total expenditure=Price x quantity purchased, TR=TE
if the demand is inelastic, price and TR are inversely related. As price increase ( decrease), TR decrease
(increase).
if the demand is inelastic, price and TR are directly related. As price increases
(decreases), TR increases (decreases).
If unitary elastic, TR is independent of price. As price increases (decreases), TR
remains constant.

Determinants of Price: Elasticity of demand


1. Number of Substitute
2. Percentage of ones budget spent on the good
3. Time
4. Thinking through an Ad campaign

Price Elasticity of Supply

1. Elastic Supply (Es>1), a percentage change in quantity supplied creates a greater


change in the percentage change in price.
2. Inelastic Supply (Es<1) refers to a percentage change in quantity supplied that is
less than the percentage change in price.
3. Unitary elastic supply (Es=1) involves a percentage change in quantity supplied
that is equal to the percentage change in price.
4. Perfectly elastic supply (Es=) represents the case where a small change in price
changes the quantity supplied by an infinitely larger amount.
5. Perfectly inelastic supply (Es=0) represents the case where a change in price
brings no change in quantity supplied.

Determinants of Supply Elasticity

The determinants of supply elasticity are the time and effort exerted during the
production of goods and services.

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