Consumers Responsibility and Elasticity

Elasticity of Demand
Principles behind Consumer Choice How do Consumers Behave in Making a Choice?

Consumer Demand Curve

Relationships among Total Revenue, Total,

Expenditures and Price Elasticity of Demand Types of Demand Elasticity Showing the Various Degrees of Directions of Reactions of Buyers about by Price Change

 Determinants of Demand Elasticity Price Elasticity of Demand

Economic Significance of Demand

Elasticity Elasticity of Supply

Types of Supply Elasticity Showing the Various

Degrees of Reactions of Sellers/Producers Brought About by Price Change

 Determinant of Supply Elasticity

Reasons for the Increase of the Price Elasticity

Demand Midpoint Formula of Price Elasticity Income Elasticity of Demand Cross Elasticity of Demand

 Demand elasticity refers to the reaction

or response of the consumers to alterations in price of goods and services.

1. 2. 3. 4. 5.

There is always a limited income, while unlimited desires necessitate choices. Consumers make good choices to achieve their purposes. Consumers can substitute between like goods and services. Consumers make decisions based on imperfect information. Law of Diminishing Utility: As additional units of goods consumed increase utility, adding another unit and additional more units would mean that utility will eventually decline.

 Consumers will tend to adjust consumption of a

good or service until the marginal utility of consuming the good just equals the price of the good and service.

Diminishing Marginal Utility implies that as the price of a good rises, the amount demanded by the consumer will most likely go down. 2. Income and Substitution Effect is associated with change in price.
1.

 There are 5 types of demand elasticity or five types of

reaction of buyers to price changes of goods and services. 1. Elastic Demand 2. Inelastic Demand 3. Unitary Elastic Demand 4. Perfectly Elastic Demand 5. Perfectly Inelastic Demand

Number of Substitute Goods. 2. Price Increase in Proportionate to Income 3. Importance of the Product to the Buyers
1.

 Economists have devised a formula to measure

such responsiveness of consumers demand to price changes. This is known as the price elasticity of demand. The price elasticity of demand is the ratio of the percentage change in quantity of a given good demanded to the percentage change in its price.

Price Elasticity of Demand= Where

Q^d P Q^d = ( Q^d Q^d0) [ (Q^d1 + Q^d0) ] ,etc.

Is always negative 2. Increase in Price P > will always reduce the quantity demanded Qd < 0. 3. Shows the degree of consumers responsive to variations in the price of good. 4. Price Elasticity is affected by: a. Availability of Substitutes more substitutes mean more elastic demand b. Share of Total Budget Spent on Good smaller share means less elastic demand c. Length of Time Period the longer the time period, the more elastic demand
1.

Change in Quantity Demanded Elasticity = Quantity Demanded Prior to Change Change in Price Price Prior to Change Or Elasticity = ^Qd Qd ^p P0

 ^Q = Change in quantity demanded

Q = original quantity demanded ^P = Change in Price

P0 = Original Price

 Assume that the old price (or the price prior to

change) is Php 22 with quantity demanded being 6 units. Now, if the price is to be lowered to Php 20 a unit, the quantity demanded would become 10 units. The price elasticity of demand for this change in price can be computed by the above formula.

Elasticity =

^Qd Qo ^P P0

New Q Old Q Old Q New P Old P Old P

 Therefore, if given values are transformed on a table

form, it would be a simple Demand and Price relationship.

P 22 20

Q 6 10

10 6 4 E= 6 = 6 20 22 - 2 22 22 = 4 22 6 2 = 88 12 = 7.3 Elastic Price of Demand

 Values of E

1. = 0 2. o > but < 1 3. = 1 4. > 1 but < 10 5. infinite a

Kinds of E 1. Perfectly Inelastic 2. Relatively Inelastic 3. Unit Elastic 4. Relatively Elastic 5. Perfectly Elastic

 The concept of elasticity of demand is not just a

theoretical exercise which has no practical applications in business and economic policies. On the contrary, it has several implications in both private business and government planning. For instance, a good knowledge of demand elasticity helps the businessmen in planning their pricing strategies. In the case of the government, elasticity guides the economic managers in formulating appropriate tax programs. Clearly, the market price of a product influences wages, rents, interests and profits with the right pricing strategy.

a. Achieve target return of investment;

b. Maintain or improve a share in the market; c. Meet or prevent competition; and

d. Maximize profits.

Wage Determination 2. Farm Production Guide 3. Maximize Profits 4. Imposition of Sales Taxes
1.

 Supply elasticity refers to the reaction or response

of the sellers/producers to the price change of goods. Based on the law of supply, producers are willing and able to offer more goods at a higher price, and less goods at a lower price. However, such responses of producers vary in accordance with the kind of goods they produce. For example, there are goods which are impossible to produce in a short time in order to take advantage of increasing prices.

 These are the farm products which cannot be

increased in one-month time. In fact, some crops take several years to bear fruits like coconut. In the case of industrial goods, it usually takes a shorter period to increase their supply. Factories can respond to price increases by the overtime schedule of their workers. Like demand elasticity, there are also 5 types of elasticity of supply or types of responses of producers to price changes: 1. Elastic Supply 2. Inelastic Supply 3. Unitary Elastic 4. Perfectly Elastic Supply 5. Perfectly Inelastic Supply

Figure 3.8. Unitary Supply

Figure 3.10. Perfectly Inelastic Supply

 The principal determinant of supply elasticity is the

time involved in the ability of products to respond to price changes. If it takes a short time to produce to take an advantage of an increase in price, then supply is elastic. Factory products generally elastic. If a factory has sufficient available raw materials, it can increase its output by hiring more workers and let them work overtime. However, if such factory is already under full plant capacity, it can no longer term response to price change (increase). In the long run, the factory has to set up more buildings and machines, and hire more workers if price is still available.

 On the other hand, if it takes a long time to

produce the products, then supply is inelastic. Agricultural products are usually highly inelastic. It takes months or years to produce vegetables, fruits and crops. Clearly, this is one of the disadvantage of agriculture or farming. Products cannot immediately response to a price change. With respect to the formula in measuring the degree of elasticity of supply, the one which is used in demand elasticity is also applicable. Just change the quantity demanded into quantity supplied.

 Second Law of Demand says that buyers response will

be greater after they have had time to adjust more fully to a price change. Why?

Because they are better able to rearrange consumption patterns to take advantage of substitutes.

Elasticity of supply usually increases in the long run as more time is allowed to the firms to adjust production in response to price changes. 2. Over time, firms can adjust the levels of all factors of production in optimal ways to meet changes in price.
1.

 It is a precise calculation of percentage using the value

halfway between P1 and P2 as the basis in calculating percentage change in price, and the midpoint value between Q1 and Q2 as the basis of calculating the percentage change in quantity demanded.

% ^Qd =

^Qd (Q1 + Q2) 100% 2 Wherein: % ^Qd means % change in quantity demanded ^Qd means change in quantity demanded ^P (P1 + P2) 100% 2 Wherein: % ^P means % change in price ^P means change in price Midpoint Price Elasticity = % ^Qd % ^P % ^P =

Q1 is 2 pcs. Of green mangoes P1 is Php 15.00 price level Q2 is 4 pcs. Of green mangoes P2 is Php 10.00 price level

% ^Qd = Q2 Q1 (Q1 + Q2) 100% 2 = 4 mangoes 2 mangoes (2 mangoes + 4 mangoes) 2 =2 6 100% 2 = 66.7%

100%

% ^P = P2n P1 (P1 + P2) 100% 2 = Php 10 Php 15 (15 + 10) 2 =-5 25 100% 2 = - 40%

100%

% ^Qd % ^P = 66.7 -40 = - 1.67 Price Elasticity of Demand is Elastic.

 This is the measure of the responsiveness of demand

to changes in income. How to measure?

Income Elasticity of Demand = % change in Quantity Demanded % Change in Income Or ey = % ^Qd % ^Y

 This is a measure of the responsiveness of the quantity

of one good demanded to a change in the price of another good.

e x y = % Change in Quantity of y Demanded % Change in Price of x Or e x y = % ^Qy % ^Px

The End
De Guzman, Erika Melisa Cruz. (Manager) Amonin, Shayne Espiritu, Fatima Denise Jomutuya, Joy Mamorno, Jirah Ortencio, Joan Tabaranza, Jobelly