Elasticities of Demand and Supply

Learning Objectives

• Define and discuss elasticity and price elasticity of demand.
• Analyze the significance of the degree of change in demand with respect to the change in determinants.
• Solve and analyze cases on price elasticity of demand.

Priming Activities

Scenario: Yesterday, you purchased 1 kilo of rice worth P40 per kilo for daily consumption. Today, the price is P35 per kilo. What would happen to your demand?

• Answer: Increase

Under “ceteris paribus,” the basic law of demand tells us there is an inverse relationship between price and demand.

Key Concepts

• Elasticity: The degree of responsiveness of buyers and sellers to changes in market conditions.
• Price Elasticity: Measures the responsiveness of quantity demanded or supplied to a change in the price of a good.

Categories of Price Elasticity

• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Price Elasticity of Demand
• Price Elasticity of Supply

Price Elasticity of Demand (PED)

• Definition: Price elasticity of demand is the responsiveness of quantity demanded to a change in the price of goods or services. The mathematical value is negative, but the negative sign is ignored as it indicates an inverse relationship between price and quantity demanded.
• Formula:

  PED = %Change in Quantity Demanded / %Change in Price

  PED = (Q2 - Q1) / Q1 / (P2 - P1) / P1

Types of Price Elasticity of Demand

• Elastic Demand: When the percentage change in quantity demanded is greater than the percentage change in price.
  • Coefficient of elasticity > 1
  • Example: Real estate (housing), where many alternatives allow people to avoid paying more than necessary.
• Inelastic Demand: When the percentage change in quantity demanded is less than the percentage change in price.
  • Coefficient of elasticity < 1
  • Example: Gasoline, where few substitutes are available, making demand inelastic.
• Unitary Elastic Demand: When the percentage change in quantity demanded equals the percentage change in price.
  • PED = 1
  • Example: Products like Gardenia Bread or certain electronics.
• Perfectly Elastic Demand: A small price change leads to an infinite change in quantity demanded. This is a rare theoretical case and doesn’t apply in real life.
• Perfectly Inelastic Demand: No change in quantity demanded regardless of the price change.
  • PED = 0
  • Example: Essential items like rare medicines or fresh water during droughts.

Generalization

• Price elasticity of demand is an economic indicator showing how quantity demanded reacts to price changes. It helps economists understand supply and demand adjustments and market operations.

Assessment

Identify whether the following goods are elastic or inelastic:

• Cigarettes: Inelastic
• Toyota Car: Elastic
• Apple iPhones: Elastic
• Gardenia Bread: Elastic
• Condominiums: Elastic
• Diamonds: Inelastic

Assignment

Question: If your income or your family's income is not enough to purchase the basic commodities needed by your family, what goods would you buy instead? What economic or marketing strategies would you apply? How would you respond to the price changes of these commodities? (Minimum of 3 sentences response).

Reference

Dinio, R. P., Villasis, G. A., 2017, Applied Economics, Rex Book Store, Inc.