Based on the law of demand, buyers are willing and able to purchase more goods and services at lower prices than at higher prices. These are natural reactions or inclination of buyers. These are natural reactions vary depending on the importance and availability of the goods and services. These varying reactions are known as demand elasticities.

1. ELASTICITY AND
CONSUMER
BEHAVIOR
CHAPTER 3

2.  Based on the law of demand, buyers are
willing and able to purchase more goods
and services at lower prices than at higher
prices. These are natural reactions or
inclination of buyers. These are natural
reactions vary depending on the
importance and availability of the goods
and services. These varying reactions are
known as demand elasticities.

3.  In the case of producers or sellers, they
have also their reactions to price changes.
They tend to sell more goods and services
when prices are higher. Their reactions
vary depending on their ability to produce
in a given time. For instance, they cannot
take advantage of higher prices if they
cannot produce the goods and services.
Such varying reactions of producers are
known as supply elasticities.

4. ELASTICITY OF DEMAND
 Demand elasticity – refers to the reaction
or response of the buyers to changes in price
of goods and services.

5. FIVE TYPES OF
DEMAND
ELASTICITY

6. 1. ELASTIC DEMAND
 A change in price results to a greater change in
quantity demanded. For example, a 20 percent
change in price (decreased or increase) creates a 60
percent change in quantity demanded (increase or
decrease) . This shows buyers are very sensitive to
price change.

7. 2. INELASTIC DEMAND
 A change in price results to a lesser change in
quantity demanded. For example, a 50 percent
change in price creates only a 5 percent change in
quantity demanded. This means buyers are not
sensitive to price change.

8. 3. UNITARY DEMAND
 A change in price results to an equal change in
quantity demanded. For example, a 25 percent
change in price produces a 25 percent change in
quantity demanded. Goods or services under this
category are considered semi-luxury or semi-
essential goods. Some types of clothing or shoes are
either luxury or essential goods.

9. 4. PERFECTLY ELASTIC DEMAND
 Without change in price, there is an infinite
change in quantity demanded. Such
demanded applies to a company which sells
in a purely competitive market.

10. 5. PERFECTLY INELASTIC DEMAND
 A change in price creates no change in
quantity demanded. This is an extreme
situation which involves life or death to an
individual. Regardless of price, he has to buy
the product like a medicine with no
substitute.

11. DETERMINANTS
OF DEMAND
ELASTICITY

12. 1. NUMBER OF GOOD SUBTITUTES
 Demand is elastic for a product with many
good substitutes. An increase in the price of
such product induces buyers to look for good
substitutes. On the other hand, products
without good substitutes have an inelastic
demand. Buyers have no or little choice
except to purchase them. Example,
electricity for a factory.

13. 2. PRICE INCREASE IN PROPORTION TO
INCOME
 If the price increase has very little effect on
the income or budget of the buyers, demand
is inelastic. For example , a 40 percent
increase in the price of a needle or candy
means only a few centavos. Thus, the result
is only a slight decrease in quantity
demanded.

14. 3. IMPORTANCE OF THE PRODUCT TO
THE CONSUMERS
 Luxury goods are not very important to
many Filipinos. So, these are elastic.
Examples are diamond rings, sports car,
expensive wines, elegant clothing, etc. Rice
is important to all consumers. Electricity is
important to factory owners. Gasoline is
important to the transportation industry. All
of these are inelastic.

15. ECONOMIC
SIGNIFICANCE OF
DEMAND
ELASTICITY

16. 1. WAGE DETERMINATION
 If the product has an elastic demand, a reduction in
its price increases quantity demanded. This means
more sales and more profits. The company is in a
position to raise the wages of its workers. But if
demand is inelastic, a reduction in its price has very
little effect on sales. Such price cut may even affect
the viability of the company.

17. 2. FARM PRODUCTION GUIDE
 Most agricultural products like rice, coconut and
sugar are inelastic. Quantity demanded does not
changed much even if there is a big decrease or
increase in price. Whenever there is an
overproduction of farm crops due to good harvest,
prices of said products decrease.

18. 3. MAXIMIZE PROFITS
 A reduction in price causes more quantity
demanded. Businessmen can estimate how far they
can cut their prices to be able to generate their target
sales. Even if the profit per unit is only 5 centavos
but millions of it are bought daily -- this is in a
better position to attain profit of P5 per unit but only
hundreds are bought daily. Evidently, a substantial
price reduction favors good with highly elastic
demand.

19. 4. IMPOSITION OF SALES TAXES
 Government planners should exercise prudence in
taxing goods and services. Otherwise, instead of
getting more money from the people, they get less. It
is not advisable to increase taxes on goods with high
elastic demand. A tax is an additional price. So, this
greatly decreases quantity demanded for the
product.

20. ELASTICITY OF
SUPPLY

21. Supply elasticity refers to
the reaction or response of
the sellers or producers to
price change of goods.

22. TYPES OF SUPPLY
ELASTICITY

23. 1. ELASTIC SUPPLY
 A change in price results to a greater change
in quantity supplied. This means producers
are very responsive to price change.

24. 2. INELASTIC SUPPLY
 A change in price results to a greater change
in quantity supplied. This means producers
are very responsive to price change. With a
high price, they like to increase their
quantity supplied, but they can not do it at
once.

25. 3. UNITARY SUPPLY
 A change in price results to an equal change
in quantity supplied. For instance, a 15
percent change in price creates a 15 percent
change in quantity supplied. This is a
borderline case between elastic and inelastic
supply.

26. 4. PERFECTLY ELASTIC SUPPLY
 Without change in price, there is an infinite
(without limit) change in quantity supplied.

27. 5. PERFECTLY INELASTIC SUPPLY
 A change in price has no effect on quantity
supplied.

28. THEORY OF
CONSUMER
BEHAVIOR

29. 1. LAW OF DIMINISHING UTILITY
 Utility means satisfaction. Marginal utility
refers to the additional satisfaction of a
consumer whenever he consumes one more
unit of the same good. Consumption of more
successive units of the same good increases
total utility, but at a decreasing rate
because marginal utility diminishes.

30. 2. INDIFFERENCE CURVE
 The word “indifference” means showing no
bias or neutral. An indifference curve is a
curve which shows different combinations of
two goods which yield the same level of
satisfaction.

31. BUDGET
LINE

32.  A budget or consumption-possibility line
indicates the various combinations of two
products which can be purchased by the
consumer with his income, given the prices
of the products. A consumer has a fixed
budget, and he has to spend his money
wisely to be able to maximize his
satisfaction. He has several combinations of
two products to choose.