Be 313

BE 313
MANAGERIAL ECONOMICS
Prepared by: PEARL LETTEE D. MAUNES, MBA

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Big Picture in Focus:
Unit Learning C
Analyze Demand and Supply Elasticity.
Essential Knowledge
Elasticity refers to responsiveness.
Demand elasticity is a measure of the degree of
responsiveness of quantity demanded of a product to a given change in
one of the independent variables.
Price elasticity of demand is the responsiveness of consumers’ demand to change in the
price of the goods sold.
Income elasticity of demand is the responsiveness of consumers’ demand to a change in
their income.
Cross elasticity of demand is the responsiveness of consumers’ demand for a particular
good in relation to changes in the price of other related goods.
Essential Knowledge
Price elasticity is the percentage change in quantity demanded

caused by a 1% change in price, thus:
D 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑄! =
D 𝑃𝑟𝑖𝑐𝑒
Where : D - signifies an absolute change

Essential Knowledge
To measure the demand price elasticity, we will use the arc elasticity,
which is expressed in the following formula:
Q𝟐 – Q𝟏 P𝟐 – P𝟏
𝐄𝐩 = ÷
Q𝟏 + Q𝟐) / 2 (P𝟏 + P𝟐) / 2
where: Ep = Coefficient of arc price elasticity

Q1 = Original Quantity demanded
Q2 = New Quantity demanded
P1 = Original price
P2 = New price
Essential Knowledge
Suppose we have the following price
and quantity schedule for good X
Price Quantity From 0 to 10, and 6.00 to

6.00 0 4.00, price elasticity is -
|5| (see the solution).
4.00 10
2.00 20
0.00 30
Essential Knowledge
Now, assuming that we want to determine how consumers would react if the
price of good X will decrease. Applying the formula, we can solve the elasticity
coefficient, assuming that the price will drop from 6.00 – 4.00, and quantity will
increase from 0 to 10 units.
Using the formula,
Note the given situation: quantity will increase
10 – 0 4– 6 50 from 0 to 10 units, so 0 is the original quantity
𝐄𝐩 = ÷ 𝐄𝐩 = (P=Q1), and 10 is the new quantity (Q2).
0 + 10 ⁄ 2 6 + 4 ⁄ 2 −10 Likewise, the change in price is stated as a
decrease from 6.00 to 4.00, so 6.00 is the
10 −2 original price (P1), and 4.00 is the new price
𝐄𝐩 = ÷ Ep = - |5| elastic (P2).
5 5 Q1 = 0
10 5 Q2 = 10
𝐄𝐩 = 𝑥 P1 = 6
5 −2 P2 = 4
Essential Knowledge
NOTE: If you notice, price elasticity is always negative.

This is due to the inverse relationship between price and
demand wherein: if price increases, demand decreases;
if price decreases, demand increases. However, when
interpreting the price elasticity, we ignore the negative
sign and interpret the absolute value.
Essential Knowledge
Interpretation of the Elasticity Coefficient
1 Demand for a product is elastic if consumers will only pay a

certain price for a commodity. This means that buyers are sensitive to
price changes. The absolute value of the coefficient of elasticity is greater
than 1. If the price of LPG increases by 10% and as a result, the quantity
demanded goes down by 12%, then we say that the demand for LPG is
elastic because the change in demand is greater than the change in price
(price change to 10%, demand change to 12%).
Essential Knowledge
Generally, these are products with many substitutes, such as clothes,

appliances, cars, shoes, etc. If you increase your price, customers can
easily switch to other sellers.
So in our first example wherein Ep = - |5| and second example wherein
Ep = - |3|, we can say that the demand for the product is elastic because
both are greater than 1 (remember that we ignore the negative sign when
interpreting the price elasticity)
Essential Knowledge
2. Demand for a product is inelastic if consumers will pay almost any

price for the product. This means that whether the price increases/decreases,
the consumers will still buy the product. So if you are the seller, you can easily
raise prices without hurting your product's demand, knowing that the consumers
will still purchase. Generally, these products have no close substitutes such as
medicines (antibiotics), rice, vegetables, fruits, and oil, among others. For
example, if your child needs antibiotics, which is prescribed by the physician, you
would not wait until the price of antibiotics drops before buying it or purchase
another kind of medicine for your child. Whatever the price of antibiotics, you
have no option but to buy it for your child’s condition.
Essential Knowledge
The absolute value of the coefficient of elasticity is less than 1. Suppose

the price of cellphone load goes up by 5% and the quantity demanded
goes down by 3%, then we can say that demand for cellphone load is
inelastic because the change in demand is lesser than the change in
price (price change to 5%, demand change to only 3%)
If you get the - |0.2| answer when you solve the price elasticity if price
decreases from 2.00 to 0.00 and quantity increases from 20 to 30 units,
the interpretation would be inelastic because 0.2 is lesser than 1.
Essential Knowledge
3. . Demand for a product is unitary when the change in price results in

an equal change in demand. The absolute value of the coefficient of elasticity is
equal to 1. Let us say that the price of string beans goes down by 6%. As a result,
the quantity demanded goes up by 6%; also, we describe the demand for string
beans as unitary elastic.
Essential Knowledge
Extreme Types of Demand Elasticity
1. Demand is perfectly inelastic if changes in price do
not affect the quantity demanded. In this case, the curve will become a
vertical line.
2. . Demand is perfectly elastic when quantity demanded
is infinite, even if the percentage change in price is zero. If a firm increases
its price by 1%, no one will buy from that firm. In this case, the curve will
become horizontal.
Essential Knowledge
Elasticity of Supply
Supply elasticity pertains to the reaction or response of the sellers to
price changes of commodities. It is the percentage change in quantity
supplied given a percentage change in price. Thus,
∆ Quantity Supplied
𝐄𝐬 =
∆ Price
Essential Knowledge
Just like the demand elasticity, the following interpretations are used for supply
elasticity:
1. Elastic. Supply is elastic if a change in price results to greater change
in the quantity supplied. This means, an increase in demand will cause
only a small rise in price, but a significant increase in demand. Supply
could be elastic when there is spare capacity in the factory, and stocks
are available.
Essential Knowledge
2. Inelastic. Supply is inelastic if a change in price results in a smaller
change in quantity supplied. This means, an increase in demand will cause
a significant rise in price, but only a slight increase in demand. Supply
could be inelastic when firms are operating close to full capacity and no
surplus goods to sell.
3. Unitary. Supply of products is unitary when quantity supplied is the

same percentage or equal to the change in price.
Essential Knowledge
Extreme Types of Supply Elasticity

1. Perfectly Elastic. Supply is perfectly elastic if the quantity supplied is
unlimited at a given price, but no quantity can be supplied at any other
price.
2. Perfectly Inelastic. Supply is perfectly inelastic if changes in price do
not affect the quantity supplied. An example of this would be products
with limited quantities.
Self-Help
Self-Help: You can also refer to the sources below to help you further
understand the lesson:
* Author, S. (2019). How does price elasticity affect supply?. New York: Newstex. Retrieved from
https://search.proquest.com/docview/2251420909?accountid=31259
* Chen, X. (2017). Elasticity as relative slopes: A graphical approach to linking the concepts of
elasticity and slope. American Economist, 62(2), 258-267.
doi:http://dx.doi.org/10.1177/0569434516682713
* Investopedia stock analysis - valueclick: What factors influence a change in supply elasticity?
(2019). . Chatham: Newstex. Retrieved from
https://search.proquest.com/docview/2260520363?accountid=31259
*What factors influence a change in supply elasticity? (2019). . New York: Newstex. Retrieved
from https://search.proquest.com/docview/2295406580?accountid=31259

Be 313 - Unit Learning C

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Be 313 - Unit Learning C

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Prepared by: PEARL LETTEE D. MAUNES, MBA

Price elasticity is the percentage change in quantity demanded

Where : D - signifies an absolute change

where: Ep = Coefficient of arc price elasticity

Price Quantity From 0 to 10, and 6.00 to

NOTE: If you notice, price elasticity is always negative.

1 Demand for a product is elastic if consumers will only pay a

Generally, these are products with many substitutes, such as clothes,

2. Demand for a product is inelastic if consumers will pay almost any

The absolute value of the coefficient of elasticity is less than 1. Suppose

3. . Demand for a product is unitary when the change in price results in

3. Unitary. Supply of products is unitary when quantity supplied is the

Extreme Types of Supply Elasticity

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