Lesson 2.

3: Elasticities of
Demand and Supply
 Elasticities of Demand and
Supply
Elasticity- is an economic concept that refers to the responsiveness of
quantity demanded or quantity supplied to changes in its determinants,
particularly the price.
Coefficient of Elasticity- number obtained when the percentage change
in demand/supply is divided by the percentage change in the determinant.
•There are three types of elasticity of demand.
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross-Price Elasticity of Demand
 Price Elasticity of Demand
This measures the responsiveness of demand to a change in the price of
the good.
The value of the price elasticity may be measured in two ways:
1. Arc Elasticity- the value of elasticity is computed by choosing two points
on the demand curve and comparing the percentage changes in the
quantity and the price on those two points. The computation of Arc
Elasticity makes use of the following formula:

Where:
Ep= ÷ QD1= original quantity demanded
QD2= new quantity demanded
P1= original price of the good
P2= new price of the good
 Price Elasticity of Demand

2. Point Elasticity- measures the degree of elasticity on a single point on

the demand curve. The computation of Point Elasticity makes use of
the following formula:
Where:
Ep= ÷
Ep= Price elasticity of demand
QD1= original quantity demanded
QD2= new quantity demanded
P1= original price of the good
P2= new price of the good
 Price Elasticity of Demand

Normally, coefficient of the price elasticity of demand has a negative sign

because it reflects the inverse relationship between price and the quantity
demanded. In essence, the negative sign is ignored.
 Classification of Price Elasticity of
Demand
1. Elastic Demand- when the percentage change in the quantity
demanded is greater than the percentage change in price and the
coefficient of the elasticity is GREATER THAN 1.
2. Inelastic Demand- when the percentage change in the quantity
demanded is less than the percentage change in price and the
coefficient of the elasticity is LESS THAN 1.
3. Unit/Unitary Elastic Demand- when the percentage change in the
quantity demanded is equal to the percentage change in price and the
coefficient of the elasticity is EQUAL TO 1.
 Classification of Price Elasticity of
Demand
4. Perfectly Elastic Demand- when the quantity demanded changes by a
very large percentage in response to zero percentage change in price.
The coefficient of the elasticity is INFINITE.
5. Perfectly Inelastic Demand- when the quantity demanded remains
constant as the price changes. The coefficient of the elasticity is
ZERO.
 Price Elasticity of Demand
EXAMPLE:
For instance, “Coffee Tayo as Friend” increased the price of their
signature Iced Caramel Macchiato from Php120.00 to Php150.00 then
their customers’ demand decreases from 50,000 to 40,000 orders per
month. What is the price elasticity of demand of Iced Caramel Macchiato?
 Income Elasticity of Demand
This measures how the quantity demanded changes as consumer
income changes.
The computation of Income Elasticity makes use of the following
formula:
Where:

Ey= ÷ Ey= Income Elasticity of Demand

QD1= original quantity demanded
QD2= new quantity demanded
Y1= previous/old income
Y2= current/new income
 Classification of Elasticity
of Demand
1. Income Elastic Demand- if the percentage change in the quantity
demanded is greater than the percentage change in income. The
coefficient of elasticity is GREATER THAN 1.
2. Income Inelastic Demand- if the percentage change in the quantity
demanded is less than the percentage change in income. The
coefficient of elasticity is LESS THAN 1.
 Classification of Elasticity
of Demand
EXAMPLE:
If Mister Co has an increase in his income from Php40,000 to
Php50,000, he can buy 40 branded clothes per year, instead of 20. What
is the coefficient of income elasticity?
 Cross-price Elasticity of Demand
This measures the responsiveness of the quantity demanded of a
particular good to changes in the price of another good.
The computation of Income Elasticity makes use of the following
formula:
Where:

Ec= ÷ Ec= Cross-Price Elasticity of Demand

QA1= old quantity demanded for
product A
QA2= new quantity demanded for
product A
PB1= old price of product B
PB2= new price of product B
Classification of Cross-price Elasticity
of Demand
1. Cross-Price Elastic Demand- if the percentage change in the quantity
demanded of product A is greater than the percentage change in the
price of product B. The coefficient of elasticity is GREATER THAN 1.
2. Cross-Price Inelastic Demand- if the percentage change in the quantity
demanded of product A is less than the percentage change in the price
of product B. The coefficient of elasticity is LESS THAN 1.
Classification of Cross-price Elasticity
of Demand
EXAMPLE:
“Na-Ghost Cafe” recently reduced the price of their Special Nachos
from Php100 to Php80 and enjoyed a resulting increase in sales from 90
to 150 orders per day. Their signature Iced Choco also increased from 300
to 500 orders per day. What is the Cross-price Elasticity of Demand?
 Price Elasticity of Supply
This measures of the responsiveness of a quantity supplied to a change
in price.
The computation of Price Elasticity of Supply makes use of the following
formula:
Where:

Ep= ÷ Ep= Price Elasticity of Supply

QS1= original quantity supplied
QS2= new quantity supplied
P1= original price of the good
P2= new price of the good
 Classification of Price Elasticity of
Supply
1. Elastic Supply- when the percentage change in the quantity supplied is
greater than the percentage change in price and the coefficient of the
elasticity is GREATER THAN 1.
2. Inelastic Supply- when the percentage change in the quantity supplied
is less than the percentage change in price and the coefficient of the
elasticity is LESS THAN 1.
3. Unit/Unitary Elastic Supply- when the percentage change in the
quantity supplied is equal to the percentage change in price and the
coefficient of the elasticity is EQUAL TO 1.
 Classification of Price Elasticity of
Supply
4. Perfectly Elastic Supply- when the quantity supplied changes by a very
large percentage in response to zero percentage change in price. The
coefficient of the elasticity is INFINITE.
5. Perfectly Inelastic Supply- when the quantity supplied remains
constant as the price changes. The coefficient of the elasticity is
ZERO.
 PRICE ELASTICITY OF SUPPLY
EXAMPLE 1:
Compute for the Price Elasticity of Supply using the data given below.
Php15/per piece- old price
Php20/per piece- new price
500 pieces- old quantity supply
700 pieces- new quantity supply.
 PRICE ELASTICITY OF SUPPLY
EXAMPLE 2:
A rise in the price of eggplants from P40 to P50 per kilogram, caused by a
shift of the supply curve, increases the quantity supplied from 100 to 150
kilograms. The elasticity of supply is _______________.
 Lesson 2.4: Market Structures
Market structure- describes how firms are differentiated and
categorized based on the types of goods they sell and how their
operations are affected by external factors and elements.
Competition- is rivalry among various sellers in the market. In
economics, competition refers to the process by which various sellers
each try to offer better products, lower prices, and other advantages to
choosing their wares over a rival's
There are varying degrees of competition in the market depending on
the following factors specifically number and size of buyers and sellers,
similarity or type of product bought and sold, degree of mobility of
resources and others.
Perfect Competition- implies an ideal situation for the buyers and sellers.
Ideally, perfect competition is a hypothetical situation which cannot
possibly exist in a market.
Imperfect Competition- if one or more of the assumptions of perfect
competition will not be met, the market becomes imperfectly competitive.
 Perfectly Competitive Market
The following are characteristics of a perfectly competitive market:
1. There are many buyers and sellers that each has a negligible impact
on market price.
2. A homogenous product is sold by sellers. The goods offered for sale
are exactly the same or perfectly standardized.
3. Perfect mobility of resources refers to the easy transfer of resources in
terms of use.
 Perfectly Competitive Market
4. There is perfect knowledge of economic agents of market conditions
such as present and future prices, costs and economic opportunities.
5. Market price and quantity of output are determined exclusively by the
forces of demand and supply.
 Imperfectly Competitive Market
1. Monopoly- exists when a single firm that sells in that market has no
close substitutes. Consumers tend to have a bad image of a monopoly.
They fear that monopolies tend to jack up prices of their goods since
consumers have no choice and cannot buy the good from any other
seller.
Examples: ( Meralco, SM, Ayala, Maynilad Water and Grab)
 Imperfectly Competitive Market
2. Monopolistic Competition- where products are differentiated and allows
variety of choices. Since many firms exist in the market, consumers
also have the freedom to choose from whom to buy the good.
Examples: (Bakery Shops, Coffee Shops, Restaurants, Clothing
Industry, Shoe Industry and others.)
 Imperfectly Competitive Market
3. Oligopoly- is a market dominated by a small number of strategically
interacting firms. These firms try to raise their profits by colluding with
each other to raise prices to the detriment of consumers.
Examples: (Petrol Corporation such as Shell, Caltex, Sea oil. PLDT,
Toyota and others.)
 “He is Demand, I am Supply.
Our love is a never-ending Economics.”
-Anonymous