2. Some terms to remember:Some terms to remember:
• ElasticityElasticity - the responsiveness of
demand/supply to a change in its
determinant.
• Price ElasticityPrice Elasticity - the percentage
change in quantity compared to a
percentage change in price.
• Arc ElasticityArc Elasticity - the coefficient of price
elasticityof demand between 2 points
along the demand curve.
3. • Point ElasticityPoint Elasticity - the coefficient of
price elasticity of demand at one point
along the demand curve.
• Coefficient of ElasticityCoefficient of Elasticity - absolute
value of elasticity.
• Income Elasticity of DemandIncome Elasticity of Demand -
percentage change in quantity
demanded compared to the percentage
change in income.
4. • Cross Elasticity of DemandCross Elasticity of Demand -
percentage change in quantity
demanded of one good compared to the
percentage change in the price of a
related good.
• Total RevenueTotal Revenue - price multiplied by
quantity.
5. • Inferior GoodsInferior Goods - goods which are
bought when income leves are low, the
demand for which tends to decrease
when income increases.
• Normal GoodsNormal Goods - goods for which
demand tends to increase when income
increases.
6. • Substitute GoodsSubstitute Goods - goods used in place
of each other.
• Complementary GoodsComplementary Goods - goods that
supplement each other and are,
therefore, used together.
7. • Engel CurveEngel Curve - a curve depicting the
quantities of a good the consumer is
willing to buy at all income levels,
assuming ceteris paribus.
• Prestige GoodsPrestige Goods - are goods bought for
the status and prestige they give to the
consumer, and are bought when the
prices are high.
8. • Price Elasticity of DemandPrice Elasticity of Demand - or the
dgree of responsiveness of quantity
demanded to a change in price is
measured by dividing the percentage in
quantity demanded by the percentage
change in price.
9. Market Demand for Pork for a period of 1 DayMarket Demand for Pork for a period of 1 Day
PointPoint PricePrice
Quantity DemandedQuantity Demanded
(in Kilos)(in Kilos)
AA 3030 120120
BB 3535 100100
CC 4040 8080
DD 4545 5050
10. • ElasticElastic - the percentage change inthe percentage change in
quantity demanded is higher than thequantity demanded is higher than the
percentage change in price, the elasticitypercentage change in price, the elasticity
coefficient is greater than 1.coefficient is greater than 1.
• InelasticInelastic -- the percentage change inthe percentage change in
quantity demanded less than thequantity demanded less than the
percentage change in price, the elasticitypercentage change in price, the elasticity
coefficient is less than 1.coefficient is less than 1.
11. • UnitaryUnitary - Should quantity demandedShould quantity demanded
change in the same proportion as thechange in the same proportion as the
change in price, the elasticity coefficientchange in price, the elasticity coefficient
is equal to 1.is equal to 1.
12. • Price Elasticity of Demand has twoPrice Elasticity of Demand has two
measures :measures :
1. Arc Elasticity1. Arc Elasticity - the coefficient of the- the coefficient of the
price elasticity of demand between twoprice elasticity of demand between two
points along the demand curve.points along the demand curve.
Q - change in quantity demandedQ - change in quantity demanded
P - change in priceP - change in price
13. e a = ____e a = ____Q____Q____ / ____/ ____P____P____
(Q1+Q2)+2 (P1+P2)+2(Q1+Q2)+2 (P1+P2)+2
2. Point Elasticity2. Point Elasticity - the elasticity at one- the elasticity at one
point along the demand curve.point along the demand curve.
epa =epa = Q/QQ/Q
P/PP/P
14. • Let us use the Ff:Let us use the Ff:
demand scheduledemand schedule
to show how thisto show how this
formula works.formula works.
PointPoint PP QQ
AA 88 00
BB 77 1010
CC 66 2020
DD 55 3030
EE 44 4040
FF 33 5050
GG 22 6060
HH 11 7070
II 00 8080
15. • Computing the point elasticity for a
change from points B to C we get:
epa = Q . P
Q P
= 10 . 7 = 70
10 1 10
= 7.0
18. Point Elasticity
The measurement of point elasticity is more
exact than that of arc elasticity.
It measures only one point on the demand
curve, such as point A on the following
graph:
20. Arc Elasticity
• becomes point elasticity when the distance
between the two points originally measured
becomes zero.
21.
22. On the demand curve shown on the preceding grapph,
dp/dx measures the slope of the demand curve for small
price changes from point A.
Geometrically, this slope is equal to MA/MT, thus equating
dp/dx with MA/MT or dx/dp = MT/MA.
Since price at point Z is MA and quantity at that point is
OM, then at point A
epp = MT/MA x MA/OM = MT/OM
23. Commodities and Their Elasticities
We already learned that the more essential a good is to the
consumer, the more inelastic will be the demand for the
good.
The less of a necessity a good is, the more elastic is the
demand for it.
24. Infants’ Milk
Medicine
Rice
Water
Electricity
Salt
Sugar
Goods have elasticity's
which are
GREATER THAN ONE:
Signature Bags
Chocolates
Family Computers
Imported Shoes
Perfumes
Compact Discs
Goods have elasticity's
which are
LESS THAN ONE:
25. Substitution and Price Elasticity
of Demand
The degree of substitution betweem a
products and related products determines
its price elasticity of demand.
The extent of substitution depends on
the substitution effect.
26. An increase in price will, on the other hand, benefit the producer if demand
is inelastic because this will cause an increase in his total revenue. For example,
If demand is elastic, an increase in price may not benefit the producer as
shown in the following example.
27. The increase in price has resulted in a significant decrease in demand
consequently causing the total revenue to decrease:
A decrease in price may ultimately benefit the seller if demand is elastic.
However, if demand is unitary elastic, neither an increase nor a decrease
in price will affect the seller’s total revenue as can be seen in the examples below.
30. * A change in price and quantity demanded
(QD) can increase revenue and earnings
depending on the price elasticity of demand
31. Elasticity condition
A decrease in price would increase earnings if
demand were price elastic enough to stretch Quantity
Demanded (QD) and revenue in order to offset the
increase in in cost with more quantity produced
A seller can increase earnings with a decrease in price if
the product were substitutable enough to wrest
considerable demand from rival products to maximize
elasticity.
33. The Tax Burden
When a good is sold a sales tax has to be paid to the
government on the sale of commodity
The buyer and the seller shoulders the burden is
dependent mostly on the degree of elasticity of the
demand for the goods
35. Bigger Tax Burden for the Seller
* The demand for the good is highly elastic, as reflected in the highly
slanting demand curve
36. Bigger tax burden for the buyer
It happens when the buyer cannot do away with consumption of a good
37.
38. A measure of the relationship between a change in the
quantity demanded for a particular good and a change
in real income. The formula for calculating income
elasticity of demand is:
INCOME ELASTICITY OF DEMAND= % CHANGE IN
DEMAND/% CHANGE IN INCOME
39. THREE TYPES OF GOODS:
1. SUPERIOR GOODS- is a good/service
that you are more likely to purchase as
your expendable income increases.
2. INFERIOR GOODS- Is a good/services
that decreases in demand when consumer
income rises(or rises in demand when
consumer income decreases)
3. NORMAL GOODS-are those goods for
which demand rises when income rises
and falls when income falls.
40. ENGEL’S LAW
Economic theory that the proportion of
income spent on food decreases as
income increases, other factors
remaining constant. This law does not
suggest that the money spent on food
falls with increase in income, but in
instead that the percentage of income
spent on food rises slower than the
percentage increase in income.
41. CONSUMPTION LINE
Also termed propensity-to-consume line or
consumption function, shows the
relation between consumption
expenditures and income for the
households sector. The income measure
commonly used is national income or
disposable income. Occasionally a
measure of aggregate production such
as gross domestic product, is used
instead
42.
43.
44. -Important decisions about what and how many goods to produce
depends very much on the entrepreneur’s estimate of future demand.
-If the entrepreneur produces much more than what is demanded, he
would have an inventory in his hand.
-If this inventory is much more that what is necessary, this becomes
an added cost in the form of money tied up too much inventory in
addition to storage and spoilage cost.
-If the entrepreneur produces much less than what is demanded, he
would be missing out on what could have been additional profits
earned.
-It is very important that the entrepreneur knows some forecasting
techniques.
45.
46. The computation of this method is
carried out by getting the
percentage change between two
values which is simply ratio of the
change between two years
expressed in percentage form
48. - This method uses statistical tools and is the most commonly
used method Of computing long term trend of time series .On
these grounds, the resulting Trend line can be characterized
as a “line of best fit” since the sum of the square
Deviations is at a minimum.
The equation for the straight line trend is
Yt = a + bX
where X is the independent variable
a and b are referred to as unknowns.
They are also called constants because once
Their values are determined, they do not change
49. Where:
ΣY
a = ——
ΣN
ΣXY
b = ——
ΣX^2
Going back to the aforementioned Equation, we can now substitute our Values based
on the table, thus, Yt = a + bX
Where:
ΣY 272.60
a = —— = —— = 30.29
N 9
ΣXY 77.7
b = —— = —— = 1.30
ΣX^2 60
50. Our trend equation is , thus:
Yt = 30.29 + 1.30 X
We can now compute our forecast for 1986 and 1987. Since the last year (1985)
In our table is given an X value of 4, the X values for 1986 and 1987 should be 5
And 6 respectively. Our forecasts for 1986 and 1987 would then be computed, thus:
Y86 = 30.29 + 1.30 (5)
= 30.29 + 6.50
= 36.79
Y87 = 30.29 + 1.30 (6)
= 30.29 + 7.80
= 38.09
