Chapter 5

Elasticities of Demand and Supply

Introduction

In the intricate tapestry of economic systems, the interplay between demand and supply forms
the cornerstone of market forces. Demand, representing consumers' willingness and ability to
purchase goods or services, and supply, representing producers' willingness and ability to offer
those goods or services, interact to determine market prices and quantities. A comprehensive
analysis of demand and supply necessitates a deep dive into their responsiveness or elasticity to
changes in various determinants.
This chapter delves into the elasticity of demand and supply concerning price and income. By
examining how changes in price or income affect the quantity demanded or supplied, we can
gain valuable insights into the behavior of consumers and producers in the marketplace. The
elasticity of demand measures the sensitivity of the quantity demanded to change in price, while
the elasticity of supply gauges the responsiveness of the quantity supplied to price fluctuations.
To provide a structured and informative analysis, this chapter will adopt a systematic approach.
For each elasticity topic discussed, we will begin by presenting the relevant measurement
techniques. These measurements will serve as the foundation for our subsequent analysis and
interpretation. By understanding the mathematical underpinnings of elasticity, we can draw
meaningful conclusions about the relationships between price, income, and the quantities
demanded or supplied.
 We have learned how demand and supply respond to changes in their determinants.
Goods, however, are different in terms of how demand and supply respond to changes in these
determinants. The degree of their response to a change is referred to as elasticity. Elasticity is a
measure of how much buyers and sellers respond to changes in market conditions.
The coefficient of elasticity is the number obtained when the percentage change in
demand is divided by the percentage change in the determinants.
We've learned how changes in various factors can influence demand and supply.
However, it's important to recognize that not all goods respond to these changes in the same way.
Some goods are more sensitive than others to fluctuations in price or other determinants.
The concept of "elasticity" quantifies the degree to which buyers and sellers react to changes in
market conditions. It measures how much their behavior, in terms of the quantity demanded or
supplied, shifts in response to price changes or other relevant factors.
To calculate elasticity, we compare the percentage change in demand to the percentage change in
the determinant that caused it. This ratio, known as the coefficient of elasticity, provides a
numerical value that indicates the responsiveness of demand. A high coefficient of elasticity
suggests that demand is highly sensitive to changes in the determinant, while a low coefficient
implies a less sensitive response.
By understanding elasticity, we can gain valuable insights into the dynamics of markets and the
behavior of consumers and producers. This knowledge can be applied in various contexts, such
as pricing strategies, policymaking, and resource allocation.

In terms of how responsive demand and supply are degrees of elasticity may either be:
1. Elastic
A Change in a determinant will lead to a proportionately greater change in
demand or supply. The absolute value coefficient of elasticity is greater than 1.
Additionally, a small change in price or another factor will lead to a much larger change
in the quantity demanded or supplied. In other words, consumers and producers are very
sensitive to changes in market conditions.
For instance.
1. Imagine you want a specific brand of sneakers. If the price goes up a little bit,
you might decide to buy a different brand instead.
2. People are more likely to change their minds about buying expensive items
like jewelry or designer clothes if the price goes up even a little.
 3. If the price of Coca-Cola goes up people might switch to Pepsi or another
brand.
That shows elastic demand because a small price change made you change your
buying decisions
2. Inelastic

When the coefficient of elasticity is less than 1, it indicates that a given

percentage change in price or income will result in a proportionally smaller percentage
change in quantity demanded or supplied. This phenomenon is known as inelastic
demand or supply, where consumers or producers exhibit limited responsiveness to these
factors.

For instance,
1. If the gas prices rise significantly, most people will still need to drive to work,
school, and other destinations.
2. Most households and businesses rely on electricity for essential functions.
Even if prices rise, it’s difficult for consumers to reduce their consumption
significantly in the short term.
3. For people with diabetes, insulin is a necessity. Even if the price increases
dramatically they will likely continue to purchase it to manage their condition.

Basically, inelastic demand signifies that even if the price of a good or service
fluctuates substantially, consumers will continue to purchase a similar quantity. This is
often the case for essential goods or services, such as gasoline, electricity, or healthcare.
Conversely, inelastic supply implies that producers are unable or unwilling to
significantly alter their output in response to price changes. This might be due to factors
like limited resources, production constraints, or government regulations.

Several factors can contribute to inelastic demand or supply, including:

1. Lack or substitute
The absence of readily available alternatives may lead to a diminished
sensitivity to price change.
2. Necessity
Essential goods or services that are considered indispensable are often
inelastic as consumers must purchase them regardless or price.
3. Time constraints
In the short term, consumers may be unable to adjust their consumption
patterns due to time limitations or other factors.
4. Addiction or habit
Consumers may exhibit reduced sensitivity to price fluctuations due to
their dependence on these products.
 3. Unitary elastic
A proportional relationship between changes in a determinant and changes in
demand or supply characterizes a specific economic condition. When the coefficient of
elasticity equals 1, it indicates that a given percentage change in price or income will
result in an equally proportionate change in the quantity demanded or supplied.
For instance,
1. If a popular band increases ticket prices for their concert by 20%, fans may
reduce their purchases by 20% to accommodate the higher cost.
2. If a luxury brand increases the price of its designer handbags by 25%,
consumers may reduce their purchases by 25% to maintain their budget for
luxury items.
3. If a popular streaming service increases its subscription price by 12%,
subscribers may cancel or reduce their usage by 12% to cut costs.
Lastly, unitary elasticity highlights the delicate balance between price changes
and consumer behavior. By recognizing and understanding this relationship, we can gain
valuable insights into the dynamics of markets and the factors that influence economic
decisions.

Elastic Demand
Three types of elasticity of demand deal with the responses to a change in the price of the
good itself in income and in the price of a related good, which is a substitute or a complement.
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 = Elasticity Coefficient

Q1 = original quantity demanded
Q2 = new quantity demanded
 P1 = New price of the good
P2 = Original price of the good

For instance,
Applying the demand elasticity formula, we can solve the elasticity coefficient.
The price of pizza is P 80 and the quantity sold is 280 because of the high demand in
pizza, the price increased by P 150 and the quantity sold is 560.

560-280 150-80
(280+560)/2 (80+150)/2
280 70
420 115
0.67 0.61
1.10 Elasticity Coefficient

For instance,
Applying the demand elasticity formula, we can solve the Inelasticity coefficient
assuming that the price will decrease from P 6.00 to P 4.00 and the quantity demanded
increases from 0 to 10 units.

10-0 4-6
(0+10)/2 (6+4)/2
10 -2
5 5
2 -0.4
-5 Inelasticity Coefficient
 Elastic Demand Curve
P

3
a
2

1 b c
0
5 10 15 20 25 30 35

A flatter-than-typical demand curve indicates a high degree of price elasticity.

This means that a relatively small change in price leads to a proportionally larger
change in quantity demanded. In other words, consumers are highly sensitive to price
fluctuations and are more likely to adjust their consumption patterns significantly in
response to price changes.

Inelastic Demand Curve

P

3 a
2

1 b c
0
5 10 15 20 25 30 35

A steeper demand curve indicates that a significant change in price results in a

relatively smaller change in quantity demanded. This implies that consumers are less
responsive to price fluctuations, and their purchasing decisions are less influenced by price
variations.