Elasticity of demand and supply department of Pub-ad

Concept of elasticity

1. CONCEPT OF ELASTICITY Kimberly D. Rolona

2. Elasticity of demand In economics , elasticity means responsiveness . In general, it is the ratio of the percent change in one variable to the percent change in another variable. It is a tool to changes in parameters in a relative way. Demand elasticity, in particular, is a measure of the degree of responsiveness of quantity demanded of a product to a given change in one of the independent variables which affect demand for that product.

3. Demand elasticity can be classified into different factors: 1. Price elasticity of demand is the responsiveness of consumers’ demand to change in price of the good sold. 2. Income elasticity of demand is the responsiveness of consumers’ demand to a change in their income. 3. Cross elasticity of demand is the responsiveness of demand for a certain good, in relation to changes in price of other related goods.

4. PRICE ELASTICITY OF DEMAND When we speak of the price elasticity of demand, we are dealing with the sensitivity of quantities bought to a change in the product price. We can therefore define demand price elasticity as the percentage in quantity demanded caused by a 1 percent change in price. Thus, we can derive price elasticity of demand using the following equation:

5. The result of the Price elasticity of demand can then be interpreted using the matrix below: Elasticity coefficient Responsiveness Terms Change in price causes a greater change in quantity demanded. Elastic Change in price causes a small change in quantity demanded. Inelastic A change in price is equal to the change in quantity demanded. Unitary

6. Sample Problem: Determine the Price Elasticity of Demand and indicate whether it is elastic, inelastic or unitary. POINT QUANTITY (Q) PRICE (P) A 135 355 B 145 350 Solve for ED from Point B-A

7. Solution:

8. Determinants of Price elasticity of Demand Determinants are the non-price factors that influence or affect the price elasticity of demand. The determinants are: 1.Availability of goods substitute for the commodity. 2.Number of uses the goods can be put into. 3.Price of the goods relative to the consumer’s purchasing power. 4.Time frame under consideration. The longer the period being considered, the more elastic the demand is. 5.Location along the demand curve. The location of the price quantity combination will determine whether demand is elastic, inelastic or unitary.

9. Elasticity of Supply Supply elasticity refers to the reaction or response of the sellers or producers to price changes of goods sold. In other words, it is a measure of the degree of responsiveness of supply to a given change in price. Moreover, it is the percentage change in quantity supplied given a percentage change in price. Thus,

10. The result of the Price elasticity of Supply can then be interpreted using the matrix below: Elasticity coefficient Responsiveness Elastic goods are usually viewed as luxury items. An increase in price for an elastic good has a noticeable impact on consumption. The good is viewed as something that individuals are willing to sacrifice in order to save money. Inelastic goods are often described as necessities. A shift in price does not drastically impact consumer demand or the overall supply of the good because it is not something people are able or willing to go without. Supply is perfectly inelastic. There is no change in quantity if prices change. Supply is perfectly elastic. A decrease in prices will lead to zero units produced.

11. Sample Problem: Determine the Price Elasticity of Supply and indicate whether it is elastic, inelastic or unitary. POINT QUANTITY (Q) PRICE (P) A 135 355 B 145 350 Solve for ES from Point A-B

12. Solution:

13. Determinants of Price elasticity of Supply There are numerous factors that impact the price elasticity of supply including the number of producers, spare capacity, ease of switching, ease of storage, length of production period, time period of training, factor mobility, and how costs react.