Download Price elasticity of demand

BASIC OF DEMAND
AND SUPPLY
SEATWORK: PUT THIS IN GRAPH. WHAT IS INDICATED IN YOUR
HORIZONTAL & VERTICAL AXES?
EQUILIBRIUM
PRICE?
EQUILIBRIUM
QUANTITY?
1)
2)
3)
4)
5)
Assuming that there are 4 chickens demanded in the market. If
Chickenjoys are sold at P180, then how many Chickenjoys are
supplied? Is your answer a surplus or a shortage? Why? How
much is the shortage/ surplus?
At a price of P60, how much is the quantity demanded and
quantity supplied? If such price of the Chickenjoy will be sold in
the market, then will we experience a surplus or a shortage?
Why? How much is the shortage/ surplus?
What is the equilibrium price? What is the equilibrium quantity?
Explain.
Is P80 a price ceiling or a price floor? Why? Is there a shortage or
a surplus? Why? How much is it?
Is P160 a price ceiling or a price floor? Why? Is there a shortage or
a surplus? Why? How much is it?
price and quantity
demanded are inversely
proportional
illustrates the negative
relationship between price
and quantity demanded.
DEMAND
DESIRE TO HAVE THE
GOOD/ SERVICE
WITH PURCHASING
POWER
POTENTIAL
w/o purchasing power
EFFECTIVE
With purchasing
power
PRICE SYSTEM
SUPPLY & DEMAND
INTERACTS TO ALLOCATE
REASOURCES EFFICIENTLY
PRICE AND QUANTITY DEMANDED
ARE INVERSELY PROPORTIONAL
VERTICAL AXIS: PRICE
HORIZONTAL AXIS:
QUANTITY
AS PRICE INCREASES: QUANTITY DEMANDED
DECREASES
price and quantity
demanded are inversely
proportional
2 reasons
1. INCOME EFFECT
2. SUBSTITUTION EFFECT
 At lower prices, an
individual has a
greater purchasing
power
 buy more goods and
services.
 At higher prices, he
can buy less
 In case the price of a
product that they are
buying increases,
 they look for substitutes
whose prices are lower.
 Thus, the demand for
higher priced goods will:
 decrease
INCOME
POPULATION
TASTES AND PREFERENCES
PRICE EXPECTATIONS
PRICE OF RELATED
GOODS
INCREASE IN INCOME = INCREASE IN
DEMAND
MORE PEOPLE = INCREASE IN
DEMAND
DEMAND INCFREASES AS
INFLUENCED BY FASHION/
ADVERTISEMENT
DEMAND INCREASES = PRICE IS
EXPECTED TO INCREASE IN THE
FUTURE
INCREASE IN PRICE = INCREASE IN
DEMAND FOR SUBSTITUTE
PRODUCTS
“assuming that the
determinants of demand
are constant, price and
quantity demanded are
inversely proportional to
each other.”
INCREASE IN DEMAND = CURVE
SHIFT IS WHERE?
DECREASE IN DEMAND = CURVE
SHIFT IS WHERE?
WILLINGNESS OF SELLERS TO
PRODUCE & SELL
PRICE AND QUANTITY ARE
PROPORTIONAL TO EACH OTHER
PRODUCER IS WILLING TO SUPPLY
MORE PRODUCTS = INCREASE IN
PRICE
1.
2.
3.
4.
5.
TECHNOLOGY
COST OF PRODUCTION
NUMBER OF SELLERS
TAXES AND SUBSIDIES
WEATHER
ENHANCES THE INCREASE IN SUPPLY
REDUCES COST OF PRODUCTION
CAN YOU THINKOF A
PRODUCT THAT YOU ARE
THE ONLY SELLER?
INCREASE IN TAX = DECREASE IN
PRODUCTION
Tax incentives are granted
to foreign investors in
order to increase:
 foreign investment in
the country
SUPPLY INCREASES = DEMAND SEEN
ON WEATHER CHANGES
This means, the law of supply
is valid if the determinants
of supply (cost of
production, technology,
number of sellers, etc.) are
held constant
SHIFT OF SUPPLY CURVE TO THE
RIGHT = INCREASE IN SUPPLY
QUANTITY SUPPLIED & QUANTITY
DEMANDED ARE EQUAL
where quantity supplied and
quantity demanded are:
 equal.
the amount that buyers
want to pay is:
 just equal to the amount
that sellers want to sell.
SEATWORK:
EQUILIBRIUM
PRICE?
EQUILIBRIUM
QUANTITY?
 Price elasticity of demand
 Buyers are willing and able to
purchase more goods and services at
lower prices than at higher prices
 Price elasticity of supply
 Producers or sellers tend to sell more
goods and services when prices are
higher
 measure used
in response to
changes in the
determinants
of demand
and supply.
 A measure used
in determining
the percentage
change in
quantity
against the
percentage
change in price
 The percentage
change in
quantity
compared to
the percentage
change in
income.
 The
percentage
change in
quantity of one
good
compared to
the percentage
change in the
price of related
goods.
 Buyers tend to
reduce their
purchases :
 as price
increases
 Buyers tend to
increase their
purchases:
 as price falls
Q2 – Q1
Q1
______________ =
P2 –P1
P1
P1
Q1
P2
Q2
INVERSE RELATIONSHIP OF PRICE AND QUANTITY
DEMANDED
DISREGARD THE SIGN!
What is the meaning of
0.35
your answer?
When an elasticity value
is less than one, the
demand is inelastic.
When it exceeds 1, it is
elastic.
EVERY 1 % INCREASE IN
PRICE = .35% DECREASE IN
QUANTITY SOLD
Elastic
change in price leads
to a proportionally
greater percentage
change in quantity
demanded.
The elasticity
coefficient is more
than 1.
 lesser change in
price evokes less
than one
percent change
in quantity
demanded
 The coefficient
of elasticity is
less than 1
 change in price
leads to a
proportionately
equal percentage
change in
quantity
demanded.
 The coefficient of
elasticity is equal
to 1.
At a given
price,
percentage
change in
quantity
demanded
can change
infinitely
A percentage
change in
price creates
no change in
quantity
demanded.
The
coefficient is
zero.
Qs2 – Qs1
Qs1
_________________
P2 – P1
P1
P1
P2
QS1
QS2
DIRECT
PROPORTIONALITY OF
PRICE & QUANTITY
SUPPLIED
1.12
ELASTIC
Positive answer:
 direct proportionality of
price and demand
If it is greater than 1, it is an
elastic supply curve
If it is less than 1, it is inelastic
 FOR DEMAND:
 The more elastic the new demand is,
 decrease in price
 Increase in quantity sold = shortage or
surplus?
 The less elastic the new demand is,
 Increase in price
 Decrease in quantity sold = shortage or
surplus?
 FOR SUPPLY
 The less elastic supply is,
 the higher the increase in price
 Decrease in quantity sold =
shortage or
surplus?
 The more elastic supply is
 Decrease in price
 increase in quantity sold =
surplus?
shortage or
ie = percentage change in quantity
percentage change in income
Q2 –Q1
Q1
__________
Y2 –Y1_
Y1
INCOME
QUANTITY
DEMANDED
P 1000 (Y1) 200 (Q1)
P 2000 (Y2)
3
800 (Q2)
 for every 1% increase in income,
quantity demanded will increase by 3%
 If quantity demanded is greater than
one, income is elastic and the good
is superior.
 If quantity demanded is lesser than
one, income is inelastic and the
good is inferior
ANSWER IS
POSITIVE
ANSWER IS
NEGATIVE
COMPLEMENT OR SUBSTITUTE?
 responsiveness of the demand for a good to a change in
the price of another good.
ec = percentage change in QD of Good A
percentage change in price of Good B
= Q2A – Q1A
Q1A
____________
P2B – P1B
P1B
 Where:
QA: quantity demanded of Good A
PB: price of Good B
 Example:
 QA1 : 500 PB1: P10
 QA2: 600 PB2: P15
= Q2A – Q1A
Q1A
____________
P2B – P1B
P1B
 This means that for every 1% increase in the price of
Good B, there is an increase in the QD of Good A by
0.4%
 Substitutes: if the coefficient of cross elasticity is
positive, Goods A and B are substitutes.
 An increase in the price of Good B will cause consumers
to purchase more of Good A, the substitute good, thus
causing the quantity of Good A to increase.
 Complements: if cross elasticity is negative:
 Goods A and B are complements and are used together.
 If the price of Good B increases, the demand for B and
A decreases.