2.3.

ELASTICITIES OF DEMAND AND SUPPLY

Elastic, unitary and inelastic refer to the price elasticity of demand, a calculation that determines how price
sensitive the market is for specific goods. That relationship between price and demand determines whether the
demand for the product is described as elastic, inelastic or unitary. Inevitably, some products are more price
sensitive than others.
1. Elastic Demand
When a change in demand is greater than the change in price, the demand for the product or good is said
to be elastic. When a product is elastic, slight changes in price lead to huge changes in the demand for the product.
Many goods and services that not necessity items are usually highly elastic. To determine the elasticity of the
demand for a product, the percent change in quantity is divided by the percent change in price. When this equation
is calculated, the answer reveals a product’s elasticity. If the answer to the equation is equal to or greater than
one, the product is considered elastic.

2. Inelastic Demand
Inelastic refers to the change in demand being less than the change in price on the product or good.
Products considered inelastic are typically products people consider necessities. Changes in prices do not change
the demand for the product very much. When the elasticity equation is calculated, goods that are considered
inelastic have an answer that is less than one.

3. Unitary Demand
Goods that are considered unitary in terms of elasticity are goods that result in no effect in demand even
when prices change. There are few goods ever considered unitary, but products such as medicine or utilities can
sometimes reach this point. No matter what prices are charged, people find a way to purchase the goods,
regardless. Companies selling goods that are unitary often make large profits because people consider these goods
a necessity above all other goods.

Elasticity of Demand
There are three types of elasticity of demand that deal with responses to a change in the price of the good
itself, in income, and in the price of a related good, which is a substitute or a complement.
Price of Elasticity of Demand

1. Arc price elasticity:

It is slightly different from the price elasticity as defined above. We have seen that price elasticity is given
as

Here, changes in demand and price are taken to be proportionate changes to their original levels, Q 1 and
P1 respectively. If the points are separated by a larger distance on the demand curve, it is customary to express
the change in demand and price as a proportion of their average values rather than of their original values.

2. Point price elasticity:

Point price elasticity refers to the price elasticity at a point on the demand curve. In other words, it accounts
for the price elasticity of demand in the close proximity of the point, that is, proportionate change in demand in
response to an infinitesimally small change in price at the point.

𝑸𝟐 − 𝑸𝟏 𝑷𝟐 − 𝑷𝟏
𝑬𝒑 = ( )÷( )
𝑸𝟏 𝑷𝟏
Price elasticity is important to the seller since it gauges how far demand can change relative to price. The
price elasticity of demand measures how far consumers are willing to buy a good especially when its price rises
reflective of the economic, social, and psychological forces shaping consumer preference.

Income Elasticity of Demand

Income Elasticity of Demand (YED) is the responsiveness of demand when a consumer’s income
changes. It is defined as the ratio of the change in quantity demand over the change in income.

YED is useful for governments and firms to help them decide on what goods to produce and how a change
in overall income in the economy affects the demand for their products, i.e., whether it’s inelastic or elastic.

Income Elasticity of Demand can be positive or negative. This depends on the type of good. A normal
good has a positive sign, while an inferior good has a negative sign.
For example, if a person experiences a 20% increase in income, the quantity demanded for a good
increased by 20%, then the income elasticity of demand would be 20%/20% = 1. This would make it a normal
good.

Cross Price Elasticity of Demand

Cross Price Elasticity of Demand (XED) is the responsiveness of demand for one good to the change in
the price of another good. It is the ratio of the percentage change in quantity demanded of good x to the change
in the price of Good Y. In business, Cross Elasticity of Demand is important because it will help determine
whether or not it is a good move to increase or decrease prices or to substitute one product for another for revenue.
There are three types of cross price elasticity of demand: substitute goods, complimentary goods and
unrelated products.

A. Cross Elasticity of Demand for Substitutes

When the cross elasticity of demand for product A relative to a change in the price of product B is positive,
it means that in response to an increase in the price of product B, the quantity demanded of product A has
increased. An increase in the price of product B means that more people will consume A instead of B, and this
will increase the quantity demanded of product A.

Substitutes will always have a positive Cross Price Elasticity or greater than zero.

B. Cross Elasticity of Demand for Compliments

When the cross elasticity of demand for product A relative to the change in the price of product B is
negative, it means that the quantity demanded of A has decreased relative to an increase in the price of product
B. An increase in the price of B will reduce the quantity demanded of A.

Compliments will always have a negative Cross Price Elasticity or less than zero.

C. Cross Elasticity of Demand for Unrelated

These are goods that show no relationship. Unrelated goods will always have a Cross Price Elasticity of
Demand = 0

PRICE ELASTICITY OF SUPPLY

With regard to supply, price elasticity of supply determines whether the supply curve is steep or flat. A
steep curve signifies a high degree of elasticity or ability to change, while a flat curve indicates an inability to
change response to a change in the price of the good. Goods that are easy to produce have elastic supply while
those which need a long time to produce and which are hard to make have inelastic supply.

2.4. MARKET STUCTURE

After looking at the basic principles of demand and supply, it will be also helpful to learn about the market
structures in which sellers can operate. Each structure will be described in terms of the nature of the product being
sold, the number of buyers and sellers in the market, and the ease of entering or exiting the market. Market
structure refers to the competitive environment in which buyers and sellers operate.
Competition is rivalry among various sellers in the market. As students, we are familiar with the word
competition. We are exposed to competition in school; spelling bees, quiz bees, and sports fest. On the television,
we watch beautiful girls from all over the world compete for the Miss Universe of Miss World title. We see how
the various teams of the PBA compete win the championship.
The market is a situation of diffused, impersonal competition among sellers who compete to sell their
goods and among buyers who use their purchasing power to acquire the available goods in the market.
There are varying degrees of competition in the market depending on the following factors:
1. Number and size of buyers and sellers
2. Similarity or type of product bought and sold
3. Degree of mobility of resources
4. Entry and exit firms and input owners
5. Degree of knowledge of economic agents regarding prices, costs, demand, and supply conditions.

PERFECT COMPETITION
Perfect competition describes a market structure where competition is at its greatest possible level. To
make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect
competition:
1. Large number of buyers and sellers
2. Homogenous product is produced by every firm
3. Free entry and exit of firms
4. Zero advertising cost
5. Consumers have perfect knowledge about the market and are well aware of any changes in the market.
Consumers indulge in rational decision making.
6. All the factors of production, viz. labour, capital, etc, have perfect mobility in the market and are not
hindered by any market factors or market forces.
7. No government intervention
8. No transportation costs
9. Each firm earns normal profits and no firms can earn super-normal profits.
10. Every firm is a price taker. It takes the price as decided by the forces of demand and supply. No firm
can influence the price of the product.

IMPERFECT COMPETITION
Imperfect competition is a competitive market situation where there are many sellers, but they are
selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the name
suggests, competitive markets that are imperfect in nature.

Imperfect competition is the real world competition. Today some of the industries and sellers follow it
to earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order to
earn more profits.

If a seller is selling a non-identical good in the market, then he can raise the prices and earn profits. High
profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit the
market.
We shall discuss:

1. Monopoly
A monopoly exists when a single firm that sells in the market has no close substitutes. The existence of a
monopoly depends on how easy it is for consumers to substitute the products for those of other sellers.
Consumers tend to have a bad image of a monopoly. The fears that monopolies tend to jack up prices of
their good since consumers have no choice and cannot buy the good from any other seller. Because of the absence
of competition, there is also the danger that consumers will suffer from poor quality of the good and poor service
delivered by the monopolist.
Monopoly can exist for the following reasons:
 A single seller has control of entire supply of raw materials
 Ownership of patent or copyright is invested in a single seller
 The producer will enjoy economics of scale, which are savings from a large range of outputs
 Grant a government franchise to a single firm.
While a monopoly enjoys a lot of power in the market, it actually does not have unlimited market power
because it faces indirect competition for consumers’ money for all goods
Monopolist’s quantity of output will be lower to enable him to set the price higher. Because of this, to
prevent abuses, there is need for stricter government laws.
A monopoly can easily exist when there are barriers to entry that may cause other firms to stay out of the
market instead of entering and competing with firms already there. The reason could be due to legal barriers like
government restrictions, patents and copyrights.
Because it is the only supplier in the market, the firm is free to determine is output level and its price.
Once the firm determines its output level, it also determines its price; it is thus a price setter. Once the firm
determines its price, it also determines its output level that will enable it to maximize its profits.
The monopolist faces a downward-sloping demand curve; meaning, the lower the price, the higher the
quantity that will be bought by the consumer.

2. Monopolistic Competition
Monopolistic competition is a market structure which combines elements of monopoly and competitive
markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can
differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However,
because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to
normal profits in the long term.
This market combines some characteristics of perfect competition and monopoly. Its key characteristics
are:
a) a blend of competition and monopoly
b) firms sell differentiated products, which are highly substitutable but are not perfect substitutes;
c) many sellers offer heterogeneous or differentiated products, similar but not identical and satisfy the same
basic need;
d) changes in product characteristics to increase appeal using brand, flavour, consistency, and packaging s
means to attract customers;
e) there is free entry and exit in the market that enables the existence of many sellers; and
f) it is similar to a monopoly in that the firm can determine characteristics of product and has some control
over price and quantity.
The firm under monopolistic competition faces a downward-sloping demand curve. This means that it can
sell more by charging less and can raise price without losing all customers. As such, the firms in this market are
given room to set different prices by their product differences. In other words,, a firm can set a higher price
because it has something different to offer its buyers.
The firm tends therefore to engage in non-price competition. This refers to any action a firm takes to
shift the demand curve for its output to the right without having to sacrifice its prices. This may include better
service, product guarantees, free home delivery, more attractive packaging, better locations, and advertising. The
firm can either sell more by charging a lower price or it can even raise its price without losing all of its customers
because it has the capacity of developing loyalty among its customers. Hence, firms in this market structure are
price setters. However, the demand curved faced by the firm is more elastic than the demand curve faced by a
monopolist.
3. Oligopoly
An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few
firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small
firms may also operate in the market.
Its characteristic are:
a) action of each firm affects other firms; and
b) interdependence among firms.
These strategically interacting firms try to raise their profits by colluding with each other raise prices to
the detriment of consumers. Just take a look at the oil industry. Producers of oil from all around the world can
manage to raise prices by agreeing with each other on what prices to charge the consumers. Thus, countries that
use a lot of oil have no choice but to buy from these producers at high prices.
Oligopolies may exist due to the existence of barriers, which may include economies of scale, reputation
of the sellers, and strategic and legal barriers such as the grant of patents/franchise, loyal following of costumers,
huge capital investments and specialized input, and control of supply of raw materials by a few producers.
Cooperative behaviour on oligopoly usually takes the form of price-fixing or output-setting agreements
such as the one maintained by the OPEC (Organization of Petroleum Exporting Countries)

SIGNIFICANCE OF THE MARKET STRUCTURE

The type of market in which the business operates will determine the amount of market power or control
the business owner will enjoy. Greater market powder means a greater ability to control prices, differentiate the
products one offers for sale, thus, leading to opportunities for more profits.

2.5. SUPPLY- DEMAND AND THE PHILIPPINE LABOR MARKET

After learning about the workings of demand and supply and how these forces affect the market, we will
now focus on how the forces of demand and supply, the theory and principles, can help in analyzing Philippine
economic problems.

LABOR SUPPLY, POPULATION GROWTH, AND WAGES

The people of a country are very important as a resource used in the production of goods and services.
Population is the source of labor supply although not all of a country’s population are part of the labor supply. In
the Philippines, the labor supply, also known as the labor force, refers to the portion of the population, 15 years
old and over who are willing and able to work, including those who are actively seeking work but have not found
work and those who are employed. There are likewise other people who are excluded from the labor force such
as full-time housewives or househusbands, full-time students, those who are physically and mentally disabled and
therefore cannot work, as well as those who do not wish to work and are not actively seeking for work.
The country’s labor supply is vital to the economy, since their contribution to production of goods and
services determines the value of the country’s Gross Domestic Product. In 2014, as of April, Philippine labor
force was reported at 41.6 million, with an estimated 38.7 million total employed persons in July 2014, translating
into an employment rate of 93%. Of this number of employed people, 60% were males and the largest number of
employed persons consisted of the age group 25 to 34 years with 26.4% of the total employed. Fifty percent of
employed persons were in the services sector. Laborers and unskilled workers comprised one-third of the
employed persons. Wage and salary workers were registered at 57.5%
Full-time workers are those who work for 40 hours or more while part-time workers work for less than 40
hours.
In April 2014, full-time workers comprised 59.3 percent of the total employed.
Employment growth in large enterprises in Metro Manila continued to be positive at 1.02% during the
fourth quarter of 2014 but this reflected a marked slowdown compared with the same quarter of the previous year
at 3.22%. The country’s labor force grew by an average of 2.5% or an addition of 962, 000 persons in 2014. This
placed the total working population in the active workforce at 40.1 million. The figure corresponds to a higher
labor force participation rate (LFPR) of 64.4% than 63.9% in 2013.
The 2014 average annual employment data showed positive note, employment level grew by 2.8 compared
to 2013 – a net gain or employment generation that exceeded one million. Employment was boosted by robust
growth in industry (4.1%) together with a sustained growth in services (3.1%) and modest recovery in agriculture
(1.7%). Both the rates of unemployment and underemployment eased slightly from the previous year.
Employment growth in 2014 was largely driven by the rise in part-time employment (9.1%) alongside the increase
in the number of self-employed persons and unpaid family workers. The country’s labor force grew by an average
2.5% or an addition of 962, 000 persons in 2014. This placed the total working population in the active workforce
at 40.1 million. The figure corresponds to a higher labor force participation rate (LFPR) of 64.4%. than last year’s
63.9 %.(“Labor Force Survey” NSO 2015)

PHILIPPINE POPULATION
Let us now look at the Philippine population statistics in order to relate population growth to the growth
of our labor supply and to the demand for goods and services. This will also help us analyze why the prices of
basic commodities have been increasing.
The Philippine census is an official account of the population of a certain local administrative unit in the
Philippines. The population is enumerated every 5 years.
The population of the Republic of the Philippines reached more than 100 million people in 2014,
registering an increase of 2.0% versus the previous year. The population of the Philippines represents 1.38% of
the world’s total population. The distribution of Philippine population among the 3 biggest regions is shown in
Figure 2.11

Figure 2.11. Distribution of Philippine Population, (2013)

Table 2.4. Summary of Projected Population, by Five-Year Interval
Philippines:2000 – 2040(Medium Assumption)
Year Both Sexes Male Female
2000 76,946,500 38,748,500 38,198,000
2005 85,261,000 42,887,300 42,373,700
2010 94,013,200 47,263,600 46,749,600
2015 102,965,300 51,733,400 51,231,900
2020 111,784,600 56,123,600 55,661,000
2025 120,244,500 60,311,700 59,912,800
2030 128,110,000 64,203,600 63,906,400
2035 135,301,100 67,741,300 67,559,800
2040 141,669,900 70,871,100 70,798,800

Let us now look at the population statistics and see how our population growth over the years has affected
the Filipino’s quality of life. We can see that from 2000 to 2005, which are the census years, population increased
by approximately 8 million Filipinos. In 2005 to 2010, the increase was approximately 9 million Filipinos. From
2010 to 2015, it is estimated that the close to 9 million Filipinos will be added to the total population. It is logically
to say that more Filipinos mean more mouths to feed; thus, demand for products and services will naturally
increase. If the supply of these goods does not increase as fast as the demand, their prices will naturally increase.
Housing, school buildings, health care, and food may no longer be sufficient to meet the needs of the growing
population. In Table 2.5, we see that while population has been increasing, the rate of growth of population has
however been declining, and is expected to decline further over the next 5 years.

Table 2.5.Average Annual Growth Rates, Philippines: 2000-2040

Year Growth Rate
2000-2005 2.05
2005-2010 1.95
2010-201 1.82
2015-2020 1.64
2020-2025 1.46
2025-2030 1.27
2030-2035 1.09
2035-2040 0.92

Another significant population demography is the age distribution. In Table 2.6, a comparison is made
between sex and age distribution in 2010 and the projections for 2015. A close look at the table shows an almost
equal distribution of males and females in both 2010 and 2015, with males exceeding females by a very small
margin.

Table 2.6.Distribution of Philippine Population by Age and Sex, 2010 and 2015
Age Both Sexes 2010 Bothe Sexes 2015
Male Female Male Female
Total 94,013,200 47,263,600 46,749,600 102,965,300 51,733,400 51,231,900
0-9 10,984,800 5,619,400 5,365,400 11,386,600 5,828,500 5,558,100
5-14 10,370,300 5,289,200 5,081,100 10,950,900 5,595,100 5,355,800
10-19 9,801,500 5,006,300 4,795,200 10,343,600 5,269,700 5,073,900
15-24 9,603,300 4,900,900 4,702,400 9,757,800 4,978,600 4,779,200
20-29 8,857,500 4,478,600 4,378,900 9,544,900 4,865,300 4,679,600
25-34 7,892,000 3,940,800 3,951,200 8,795,500 4,439,500 4,356,000
30-39 7,001,500 3,474,900 3,526,600 7,842,700 3,910,200 3,932,500
35-44 6,008,400 3,013,200 2,995,200 6,942,200 3,439,600 3,502,600
40-49 5,442,300 2,737,600 2,704,700 5,924,800 2,962,400 2,962,400
45-54 4,702,100 2,376,700 2,325,400 5,330,100 2,669,800 2,660,300
50-59 3,931,600 1,974,500 1,957,100 4,554,700 2,285,500 2,269,200
55-64 3,050,800 1,521,500 1,529,300 3,747,900 1,860,500 1,887,400
60-69 2,307,800 1,122,800 1,185,000 2,843,700 1,392,700 1,451,000
65-74 1,559,300 735,700 823,600 2,055,900 973,200 1,082,700
70-79 1,189,400 533,700 655,700 1,305,700 593,200 712,500
75-84 700,500 298,500 402,000 904,200 384,000 520,200
80+ 610,100 239,300 370,800 734,100 285,600 -----

What is interesting in this table is how Philippine population is distributed among age groups. It can be
seen that in 2010, more than 21 million of total population fell under the age group of 0 to 4 and 5 to 9. These are
very young children who normally go to school, do not work, and therefore depend on their parents for their
subsistence and living requirements. This translates to a high dependency ratio on the productive members of the
population. Then we have the older retired age group of 65 year old to 80+ numbering a little over 2 million.
These people who may not have adequately prepared financially for their retirement will add to the dependency
burden on the productive members of the population.
It is thus important to study population in terms of age distribution, to see how much of the population is
made up of the age group that can join labor supply and therefore contribute to income generation and production
of goods. This will mean less dependency on the part of the very young and the old members of the population.
Relating this to the concept of demand and supply, one can analyze that big proportions of dependent members
of population contribute to increased demand without the capacity to contribute to supply of goods and services.
This can lead to a shortage of social services, housing, schooling, health care, and transportation. The high demand
is also a reason for increasing commodity prices.

THE PHILIPPINE WAGE SITUATION

Usually, when Labor Day is celebrated in the Philippines on May 1, labor unions and organizations clamor
for wage increases. The government protects the workers through the imposition of minimum wages. But workers
always claim that these minimum wages are not enough for their substance. Let us take a look at the minimum
wages in the National Capital Region.
Table 2.7.Current Minimum Wage
National Capital Region (NCR)
as of April 4, 2015
(in Pesos)
Sector/Industry Basic Basic New Basic COLA New
Wage Wage Wage Minimum
Increase Wage
Rates
Non-Agriculture P451.00 P15.00 P466.00 P15.00 P481.00
Agriculture(Plantation and Non P410.00 P15.00 P429.00 P15.00 P444.00
Plantation)
Private Hospitals with bed P414.00 P15.00 P429.00 P15.00 P444.00
capacity of 100 or less
Retail/Service Establishments P414.00 P15.00 P429.00 P15.00 P444.00
employing 15 workers or less
Manufacturing Establishments P414.00 P15.00 P429.00 P15.00 P444.00
regularly employing less than 10
workers

The above minimum wage apply in the NCR. Minimum wages in the other regions in the Philippines are
lower depending on the cost of living in the specific regions or sector.
The setting of minimum wages by the government assures protection for workers that they are not
underpaid by employers, and gives the guarantee of a sufficient income to meet their basic needs.

ACTIVITY: Answer the following questions based from what you have learned in this module.
1. Explain the difference between elastic and inelastic goods based on the law of demand.
2. What does arc elasticity tell you?
3. What can you say about the Philippine wage situation?
4. What did you observe from the Philippine population growth ?
5. How does population growth affect the supply of Labour?