ELASTICITY OF DEMAND AND SUPPLY

Managerial Economics, defined

Managerial economics has been generally defined as the study of economic theories, logic and tools of
economic analysis, used in the process of business decision making. It involves the understanding and
use of economic theories and techniques of economic analysis in analyzing and solving business
problems.

-Responsiveness of demand/supply to changes of determinants

Demand Elasticity

It is the reaction or response of the buyers to changes in the determinants of goods and services

3 classification of demand elasticity

Price Elasticity
Income Elasticity
Cross elasticity

Classification of Demand Elasticity

Price Elasticity
-Responsiveness or sensitiveness of demand for a commodity to the changes in its price
-responsiveness to change in price
Income Elasticity
-Responsiveness or sensitiveness of demand to a change in consumer income
-responsiveness to change in income
Cross Elasticity
-Responsiveness or sensitiveness of the quantity demanded of a particular good to changes in
the price of other goods
-responsiveness of demand on related goods

Price Elasticity
Two ways to compute price elasticity
Arc Elasticity
Epa= Q₂-Q₁
_ (Q₁+Q₂)/2 _
P₂ – P₁
(P₁ + P₂ )/2
Point Elasticity
Epp= ∆Q/ Q
∆P/P
If answers are negative disregard negative sign get absolute value
Types of Price Elasticity
Relatively Elastic Demand
-means that the quantity demanded is sensitive to the price
-E>1
- medyo higa
 Luxury goods, signature bags, imported shoes, perfumes
Relatively Inelastic Demand
-means that the quantity demanded is not very sensitive to the price
-E < 1
- medyo tayo
Basic goods, infants milk, medicine, rice, water
Unitary Elastic Demand
-Indicates that the percentage change in the price of the good will equal the percentage change
in the demand for the good
-E=1
- 1 is to 1
Perfectly Inelastic Demand
-The quantity demanded is totally unreponsive to changes in price that means there is no change
in the quantity demanded when its price changes
-E=0
-tayo
Perfectly Elastic Demand

-The price of the commodity is totally unreponsive to changes in the quantity demanded that
means there is no change in price when quantity demand changes

-E=∞

- higa

Income Elasticity
Responsiveness or sensitiveness of demand to a change in consumer income

EY= ∆D/D
∆Y/Y
D is demand
Y is income

EY > 1 demand is elastic and the good is superior

EY = 1 demand is unitary the good is normal
EY < 1 demand is inelastic and the good is inferior
Study of income elasticity for food was made by Ernest Engel named Engel’s Law Increase in income
percentage spent on food tends to decrease as income increases

Cross Elasticity of Demand

Describes as the responsiveness or sensitiveness of the quantity demanded of a particular good to

changes in the price of another good.

ec= ∆Qx/Qx

∆Py/Py

X and y represents goods

If positive, the goods are substitutes

If negative, the goods are complements

Study of income elasticity for food was made by Ernest Engel named Engel’s Law Increase in income
percentage spent on food tends to decrease

Factors affecting Elasticity of Demand

-Availability of close substitute

-Necessities versus Luxuries

-Price of the good relative to the income of the consumer

Goods with many substitute tend to be elastic –example ballpen pilot there is a substitute
Necessities-Inelastic, Luxury-Elastic
Goods tend to have more elastic demand over longer time horizon example gasoline sa umpisa matirik
If price is cheap relative to income the demand tend to be inelastic example salt.

Elasticity of Supply

Measures how much the quantity supplied responds to changes in the price

The reaction or response of the sellers/ producers to changes in determinants of goods and services.

Types of Supply Elasticity

Elastic Supply
Inelastic Supply
Unitary Supply
Perfectly Elastic Supply
Perfectly Inelastic Supply

How to determine?
Es=∆Q/ Q
∆P/P