APPLIED ECONOMICS
Jasthine Mikee L. Manito, LPT
Teacher
Price Elasticity of LESSON 4
Demand and Supply
Determine the implications of market pricing in
making economic decisions
1
Explore the elasticity of demand and supply
2
Lesson objectives: Solve problems on price elasticity of demand and
supply
3
Value the implications of market pricing in
decision- making
4
LET’S RECAP!
SHORTAGE
• It is when there is an excess demand for the quantity supplied.
PRICE
• It acts as a signal for shortages and surpluses which help firms
and consumers respond to changing market conditions.
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SURPLUS
• It is excess in supply.
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PRICE
ELASTICITY OF
DEMAND AND
SUPPLY
• Can you guess what happened
with this mom in a market?.
Price elasticity
• It measures the responsiveness of the quantity demanded or supplied of a
good to a change in its price.
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Effects of Change in Demand and Supply
• Elastic demand or supply curve indicates that quantity demanded or
supplied respond to price changes in a greater than proportional
manner.
• Inelastic demand or supply curve is one where a given percentage
change in price will cause a smaller percentage change in quantity
demanded or supplied.
• Unitary elasticity means that a given percentage changes in price
leads to an equal percentage change in quantity demanded or supplied.
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ACCORDING TO AGARWAL,
P. (2018) AND JUDGE, S.
Categories of Price (2020), THERE ARE FOUR
CATEGORIES OF PRICE
ELASTICITY WHICH ARE
Elasticity THE FOLLOWING:
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I. The Price Elasticity of Demand
Price elasticity of demand is the responsiveness of quantity demanded,
or how much quantity demanded changes, given a change in the price of
goods or services.
*The mathematical value is negative. A negative value indicates an
inverse relationship between price and the quantity demanded. But the
negative sign is ignored (Judge, S. 2020).
• Price Elasticity of Demand (PED)= % change in quantity
demanded
% change in price
a) Elastic Demand (PED > 1)
• The percentage change in price brings about a more than proportionate
change in quantity demanded.
• When the percentage change in quantity demanded is greater than the
percentage change in price, and the coefficient of the elasticity is greater
than 1.
• Example: real estate- housing - There are many different housing choices. People may live in a
townhouses, condos, apartments, or resorts. The options make easy for people to not pay more
than they demand.
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• Sample:
If price increases by 10% and consumers respond by
decreasing purchases by 20%, what is the price
elasticity of demand?
elastic
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b) Inelastic Demand (coefficient of the elasticity is less than 1)
• It is when an increase in price causes a smaller %
fall in demand.
• When the percentage change in quantity
demanded is less than the percentage change in
price, and the coefficient of the elasticity is less
than 1.
• Example: Gasoline – gasoline has few alternatives; people with cars consider
it as a necessity and they need to buy gasoline. There are weak substitutes,
such as train riding, walking and buses. If the price of gasoline goes up,
demand is very inelastic.
• Other Examples: Diamonds, aircon, Iphone, Cigarettes
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• Let us take the simple example of gasoline. Now let us assume
that a surge of 60% in gasoline price resulted in a decline in
the purchase of gasoline by 15%. Using the formula as
mentioned above, the calculation of price elasticity of
demand formula business can be done as:
• Price Elasticity of Demand = Percentage change in quantity /
Percentage change in price
• Price Elasticity of Demand = -15% ÷ 60%
• Price Elasticity of Demand = -1/4 or -0.25
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c) Unitary elastic – (PED = 1 )
• When the percentage change in demand is equal to the
percentage change in price, the product is said to have Unitary
Elastic demand.
• For example, a product's demand is unitary elastic if a 10%
change in its price leads to a 10% change in the quantity
customers desire. In this case, a price reduction might
motivate customers to request more product units.
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D) Perfectly elastic - the coefficient of elasticity is equal to infinity
(∞)
• A small percentage change in price brings about a change in
quantity demanded from zero to infinity.
• Perfect elastic demand is when the demand for the product is
entirely dependent on the price of the product.
• Examples of perfectly elastic products are luxury products such as
jewels, gold, and high-end cars.
• Other example: The price of a cup of coffee increases by $0.20,
consumers might decide to instead buy tea instead of coffee. Coffee is an
elastic product because a small increase in the price dropped the quantity
demanded.
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e) Perfectly Inelastic - the PED is =0
• any change in price will not have any effect on the demand of
the product.
• the percentage change in demand will be equal to zero (0).
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Let’s Practice!
• The price rise by 5% and the demand declines by 10%
– this is an elastic product.
• The price rise by 10% and the demand rise by 10%
– this product has a unit price elasticity.
• The price rise by 10% and the demand declined by 5 % – this
is an inelastic product.
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Quiz!
Directions: Please analyse the problems carefully.
Answer the problems and present your solutions.
Inerpret the results.
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Test I.
Test I.
Test I.
Thank you!
