Applied Economics (LESSON: Market determinant of the quantity demanded

Pricing) and supplied is the price.

OBJECTIVES
Price Elasticity of Demand and Supply
1. define elasticity
Price Elasticity of Demand
2. compute for the demand elasticity and
Price elasticity of demand measures the
supply elasticity; and
change in demand in response to the
3. analyze the implication of elasticity in
change in price. For example, the price of
price determination.
pork increases by 5 % the price elasticity
will be determined by identifying the
percentage of decrease or increase in
demand due to the change in price
To compute the price elasticity (ep) of
demand the formula is:

Where:
Q1 = the original quantity demanded
Q2 = the new quantity demanded
P1 = the original price
P2 = the new price

To illustrate, let us have us have the

following example.
Product A has the following demand
schedule:

Example 1: Let us first consider the

Situation 1 and 2 where the price of
product A increases from 30 to 40 and the
quantity demanded decreases from 50 to
45. To compute for the elasticity coefficient
let us use the given formula for price
elasticity of demand.

“ELASTIC, We define it as being flexible

or having the ability to be stretched but
can go back to its original shape or size
like a rubber band.
In economics, the terms elasticity is used Example 2: To find out whether the
to define the change in behavior of the product will be having the same elasticity
sellers or buyers because of the change in at different price, let us consider Situation
price and/or other determinants of supply 2 and 3 for another example.
and demand. It measures how the sellers
or buyers respond to the changes in
determinants, mainly the price.
Elasticity of Demand and Supply
The degree of elasticity of different
products vary for several reasons. For the
customers and suppliers, the common
 The two examples show that at % change in price there will be 0.3 %
different price and quantity combination change in demand. The change in price
the price elasticity coefficient may not be cause a minimal change in demand. In
the same, a proof that the customers’ example 2. The price elasticity coefficient
reaction to price changes vary. is 0. It is perfectly inelastic. The change in
price does not affect the demand. In
interpreting the price elasticity coefficient,
To understand the meaning of the we ignore the negative sign. It is negative
elasticity coefficient, understanding the because the price and demand is inversely
types of elasticity can help us to analyze related.
and interpret it.
Types of Elasticity
A. Elastic - The percentage change in
quantity demanded is greater than the Demand Curves and Their Elasticity
percentage change in price. It has more
than 1 elasticity coefficient. It means that
if the price will increase there is a greater
possibility that the consumer will not buy
the product or may decrease the quantity
of the product to buy.
B. Inelastic - The percentage change in
Figure 1 is an example of an elastic
quantity demanded is lesser than the
demand curve showing that a small
percentage change in price. It has less
change in price cause the demand to
than 1 elasticity coefficient. It means that
change more.
the decision of the consumer to buy the
product is not that affected by the
increase or decrease in price. The seller
cannot assume that the consumer will buy
more if they will decrease the price since
the change in quantity demanded is only
minimal.
C. Unitary - The percentage change in
Figure 2 is an example of an inelastic
price is equal to the percentage change in
demand curve showing that a change in
quantity demanded. The elasticity
price cause a little change in demand.
coefficient is 1. It means that if the price
increase by 1 % the demand will decrease
by 1 % also and vice versa.
D. Perfectly elastic - When at the same
price, the change of demand is infinite.
It means that a small change in price may
cause a huge change in demand.
Figure 3 is an example of perfectly
E. Perfectly inelastic - When there is no
inelastic demand curve showing that the
change in demand despite the changes in
quantity demanded is not affected by the
price. Elasticity coefficient is zero. It
change in price.
means that the demand is not affected by
price at all. The demand will still be the
same even if there is an increase or
decrease in price.

Considering the two examples

above let us interpret the elasticity Figure 4 is an example of perfectly elastic
coefficient that we derive. In example demand curve. It shows a great change in
1, the price elasticity coefficient is -0.3. It demand.
is inelastic, which means that for every 1
Figure 5 is an example of unitary demand
curve. It shows that the percentage of
change in price is the same with the
percentage of change in demand.

Price Elasticity of Supply

Price is the main determinant of supply.
Its elasticity describes how the producer or
seller reacts or respond to the change in
price.
To compute the price elasticity (ep) of
supply the formula is:

Where:
Qs1 = the original quantity supplied
Qs2 = the new quantity supplied Income Elasticity and Cross Price
P1 = the original price Elasticity of Demand
P2 = the new price Demand elasticity can also be
To illustrate, let us consider the following determined by:
example: A. Income elasticity which measures
the change in demand in response to
the change in income of the
Given the supply schedule above, let us customers.
compute for the price elasticity of demand The formula for income elasticity
(ey) is:

Interpretation: The price elasticity Where:

coefficient of 1 means unitary. It means Q1 = the original quantity demanded
that for every 1 % change in price there Q2 = the new quantity demanded
will be 1 % change in quantity supplied. Y1 = the original income
Note: Interpretation is the same with how Y2 = the new income
you interpret the price elasticity of For example: An employee who earns
demand. P20,000 monthly can afford to buy his
favorite milk tea almost 3 times a week
Supply Curves and Their Elasticity but because of the pandemic in which
most of the employees are affected, they
are now reporting to their work 3 days a
week only instead of 5 days. His income is
affected and so with their expenses.
Instead of their regular monthly salary, he
receives P12,000 monthly. The purchase of
his favorite milk tea also reduced to once a
week only.
To compute for its income elasticity,
let us consider the following:

For this example, the income elasticity

coefficient shows that it is elastic. The
income really affects the demand for that
What I Have Learned
particular product.
Complete the sentences in column A.
B. Cross price elasticity which measures
Choose your answer from the choices
the change in demand for a good in
given in column B for each number and
response to the change in price of related
write the letter of your answer on the
(substitute or complementary) goods.
space provided
The formula for cross price elasticity
(ec) is:

Note: For quantity demanded (QD)

consider the quantity demanded for Good
A and for price, the change in price of
another good (Good B).
Example: The price of Product B increases
from ₱35.00 to ₱42.00 which cause some
of its consumer to decide buying Product
A, its substitute. The demand for Product A
increases from 500 units to 650 units.

The cross elasticity of 1.5 shows that it is

elastic. It means that a change in price of
a related good can cause a change in
demand for another good.

What I Can Do
Assessment
Compute for the elasticity. Show your
Solution.
(10 points each)