Elasticity of Demand and Supply

• Elasticity: measures how strongly the demand and supply respond to changes in their determinants
• Degrees of Elasticity:

  • Inelastic
  • Unitary Elastic
  • Elastic
• Inelastic (<1): determinant will lead to a proportionately lesser change in demand or supply
• Unitary Elastic (= 1): proportionately equal change in demand or supply
• Elastic (>1): proportionately greater change in demand or supply
• Demand Elasticity: measures how much the quantity demanded changes with a given change in price, consumer‘s income, change in price or a related product
• Inelastic Demand: insensitive to a change in price; very few substitutes (oil, rice)
• Relatively Elastic Demand: quantity is sensitive to price; many substitutes or are luxuries
• Unit Elastic Demand: =1, price is equally inversely proportional to quantity and vice versa
• Perfectly Inelastic Demand: =0, price increase does not affect quantity; percent change in quantity
• Perfectly Elastic Demand: =infinity, a change in price results in the quantity falling to zero
• Price Elasticity of Demand Determinants:

  • Availability of Substitutes
  • Necessity of the product
  • Num of competitors
  • Adjustment time
  • Income proportion
• Supply Elasticity: measures responsiveness of the quantity supplied of a product or service to the change in its price
• Perfectly Elastic Supply: a small change in price results in an infinite change in the quantity supplied; suppliers are willing and able to supply an unlimited quantity of goods at a specific price (go lang)
• Perfectly Inelastic Supply: change in price has no effect on the quantity supplied; supplier is unable to increase or decrease the quantity of the product (hindi na kaya)
• Relatively Elastic Supply: percentage change in quantity supplied > percentage change in price; supplier is sensitive to price fluctuations and can adjust quantity supplied (meron pa)
• Relatively Inelastic: change in quantity < change in price; supplier is less responsive to price changes and can make minor changes to quantity supplied (meron pa wait lang!)
• Factors Affecting Price Elasticity of Supply:

  • Production Cost
  • Availability of Substitutes
  • Nature of Product
  • Production Process
  • Time frame