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CHAPTER 3: ELASTICITY AND ITS APPLICATION
DEFINITION/CONCEPT
ELASTICITY OF DEMAND – MEASURES THE DEGREE OF RESPONSIVENESS IN
QUANTITY DEMANDED FOR A GOOD DUE TO A SEVERAL FACTORS
• PRICE ELASTICITY OF DEMAND – MEASURES THE DEGREE OF
RESPONSIVENESS IN QUANTITY DEMAND FOR A GOOD WHEN THE PRICE
OF ITSELF CHANGES.
• CROSS ELASTICITY OF DEMAND – MEASURES THE DEGREE OF
RESPONSIVENESS IN QUANTITY DEMANDED FOR A GOOD DUE TO A
CHANGE IN PRICE OF ANOTHER GOOD
• INCOME ELASTICITY OF DEMAND – MEASURES THE DEGREE OF
RESPONSIVENESS IN QUANTITY DEMANDED DUE TO A CHANGE IN
INCOME LEVEL
ELASTICITY OF SUPPLY – MEASURES THE RESPONSIVENESS OF QUANTITY
SUPPLIED TO A CHANGE IN THE PRICE OF A GOOD WHEN ALL OTHER FACTORS
REMAIN THE SAME.
FORMULAE
PED:
= % ∆ Qx / % ∆ Px
= ∆Q / Q1 x P1 / ∆P
= (Q2-Q1) / Q1 x P1 / (P2-P1)
CED:
= % ∆ Qx /% ∆ Pz
= ∆ Qx / Qx1 X Pz1 / ∆Pz
= Qx2-Qx1 / Qx1 X Pz1 / Pz2-Pz1
