Supply and Demand

Needs

Wants

PHYSIOLOGICAL NEEDS
SAFETY NEEDS
BELONGING NEEDS
ESTEEM NEEDS
SELF


ACTUALI-
ZATION
MASLOWS
HIERARCHY of NEEDS
Satisfy:
Needs
Wants
PROFITS
MARKETS
Demand Supply
Preference:
Low prices
Preference:
High price
Consumers
Producers and Sellers
TERMS TO REMEMBER
1. Market a place where buyers and sellers interact and
engage in exchange
2. Demand reflects the consumers desire for a
commodity
3. Supply the amount of a commodity available for sale
4. Aggregate demand the totality of a group of
consumers demand
5. Aggregate supply the totality of a group of
producers supply
TERMS TO REMEMBER
6. Demand Schedule the quantities consumers are
willing to buy of a good at various prices
7. Supply schedule the quantities producers are
willing to offer for sale at various prices
8. Movement along the curve a change from one
point to another on the the same curve
9. Shift of the curve a change in the entire curve
caused by a change in the entire demand or supply
schedule
10. Equilibrium condition of balance or equality
TERMS TO REMEMBER
11. Nonprice factors also known as parameters, are
factors other than price that also affect demand or
supply
12. Demand function shows how quantity demanded is
dependent on its determinants
13. Supply functions shows how quantity supplied is
dependent on its determinants
14. Price ceiling is minimum limit at which the price of
a commodity is set
TERMS TO REMEMBER
15. Price floor a minimum limit beyond which the price
of a commodity is not allowed to fall
16. Surplus an excess of supply over the demand for a
good
The Law of Demand
Law of Demand: A principle that
states that there is an inverse
relationship between price of a
good and the amount of it buyers
are willing to purchase.
An increase in costs - reduce the
likelihood that it will be chosen
Lower the price -stimulating
consumption of it
THE LAW OF DEMAND
The Demand For Medical Care Derived from the
Demand For Health
2 Reasons: DEMAND FOR HEALTH
1. It is a consumption commodity it makes the
consumer feel better
2. It is an investment commodity state of health will
determine the amount of time available to the
consumer
Patients seeks
Consultation
with MD or
Another health
professional

MD decides
Which goods and
Services the
Patient needs;
Ex. Drugs,
Hospitalization,
Surgery, laboratory
procedure

Patient
consumes
And pays for
The goods
And services
To improve
health
Patient relies on
MD for information
Healthcare Good or Services
Exhibit 1: THE LAW OF DEMAND
As the Price of
Paracetamol fell
during the 1979-
1986, consumers
purchased more of
them. The
consumption level of
Paracetamol (other
products or services)
is inversely related
to their Price
0
200
400
600
800
1000
1200
1400
1600
1800
0 2 4 6 8 10 12 14 16
1979
1983
1986
Demand Schedule and Demand Curve
The demand schedule shows the
quantity of the product
demanded by a consumer or an
aggregate of consumers at any
given price
The demand function shows how
the quantity demanded of a
particular goods responds to
price change
The demand schedule must
specify the time period during
which the quantities will be
bought
It can be seen from Tablet that
at lower prices of X, people get
attracted to buy more
PRICE of X
Quantity Demanded
P 45 100
40 150
35 200
30 250
25 300
20 350

Demand Schedule and Demand curve
The Demand curve is a graphical
presentation of the demand
schedule and therefore, contains
the same prices and quantities
presented in the demand
schedule
Plotting the data from the Table,
we now arrive at the following
figure
The normal demand curve slopes
downward from left to right.
Any point on the demand curve
reflect the quantity that will be
bought at the given price
50 100 150 200 250 300 350 400
50
45
40
35
30
25
20
15
10
5

0
0
0
0
0
0
Quantity Demanded
Price
THE DEMAND CURVE
@ The demand curve is a graphical
representation of the demand schedule.
@ It is a downward sloping curve.
@ It shows the inverse relationship between the
price and quantity of goods that consumers
are willing to buy.
The Demand Curve
The demand curve, a
downward sloping curve,
shows the relationship
between the price of a good
and the quantity demanded.
At the lower price (P
1
),
quantity demanded is higher
(Q2).
At a higher price (P
2
),
quantity demanded is lower
(Q1).
Quantity
Q1 Q
2
Price
P2

P1

D
CETERIS PARIBUS ASSUMPTION
Factors other the PRICE which also influence the quantity
of Demand
1. Own price of the product
2. Tastes and preference
3. Income
4. Expectations on the future price
5. Prices of related goods like substitutes
6. Compliments and the size of the population
NOTE:
Therefore, the functional relationship
between PRICE and QUANTITY demanded
is essential since non price factors are assumed
as CONSTANT.
The Law of Demand now States:
Assuming other things constant,
PRICE and QUANTITY demanded are
INVERSELY PROPORTIONAL
1. Own Price of the Product
A higher own
price of a product
A lower own price
of a product
Decreases the
demand
Increase the
demand
NOTE: There is an inverse relationship
between the price of the product and
the quantity being demanded
2. Average Income
Differential 1
Differential 2
Income 1
Income 2
Product
Price
Relationship of Income and Price. With the price of a theoretical product
constant, more of such product will be bought with Income 2 which has a bigger
Differential 2, compared to that of Income 1, with a smaller Differential 1
3. Population Size and Demographics
As the population increases, more people will use
commodities. As more members of the population enter
adulthood, the demand for specific products that are being
used by this specific age group also increases.
Remember that an increase in population generally
increase the demand for most products, and changes or
shifts in population demographics will affect the
demand for specific products.
4. Prices of Related Goods
Substitute products change and move in the opposite direction
Substitute Products
Are commodities that decrease
the use of another product when
more of these other products is
used
Relationship of Substitute
Products
Step 1: Price of MRT fares decrease.
Step 2: Decrease of MRT fare
results in increased demand for
MRT
Step 3: Increase in demand for MRT
results in decrease in demand
for aircon buses (substitute
product)
MRT
AIRCON
BUS
1. MRT fare
decreases
2. Increased
Demand for MRT
2. Demand for
Aircon buses
decreases
4. Prices of Related Goods
Complementary products change in the same direction
Complementary products
Are commodities that
decrease the use of another
product when less of the
other complement is used-
and vice versa
Lower gasoline prices tend to
increase the demand not only
for gasoline but also for cars.
Greater use of one leads to
more use of the other and vice
versa.
1. Price
2. Decreased
demand for
gas
GAS
Cars
3. Decreased
demand for
cars
5. Taste of buyers
- Influences buying decisions but is more difficult
to assess
- Difficult to measure but very important factors
in decisions of customers
- Failure in determining buyers tastes may lead to
disastrous mistakes in the choice of products to
offer to consumers
6. Other Particular Factors
- climate and weather affect the demand for
specific product
Example: Summer increases the
demand for cough and cold
preparations
The following changes in the non price factors may
cause the corresponding shift in the Demand curve
Increase in Income
Decrease in income
Greater taste/preference
Less taste/preference
Increase in population
Decrease in population
Greater speculation
Less speculation
Shift to the right
Shift to the left
Shift to the right
Shift to the left
Shift to the right
Shift to the left
Shift to the right
Shift to the left
The Demand shifts
Shift to the right indicates a
positive (+) shift, or an increase
in actual demand for a
commodity
Shift to the left indicates a
negative(-) shift, or a decrease
in the actual demand for a
commodity.
Movement along the curve are
appreciated when only the
prices of products are changed.
There will be no actual shift.
D
(-)
(+)
Decrease
in demand
Movement
along the curve
Increase in
demand
Price
Quantity
THE DEMAND SHIFT
Remember that
1. A shift to the left corresponds to an actual
decrease in demand
2. A shift to the right corresponds to an actual
increase in demand
3. There is a movement along the curve if
only the prices of products are manipulated
The of Law of Supply
Supply is the amount of a
commodity available for sale
Aggregate supply the totally of a
group of producers supply
Supply schedule is the quantities
of goods and services producers
are willing to offer for sale at
various prices
The Law of Supply
Law of Supply: A principle that
states there will be a direct
relationship between the price of a
good and the amount of it offered
for sale
Higher prices will induce
producers to supply a greater
amount
TERMS
PROFIT: An excess of sales revenue relative to the cost
of production. The cost component includes the
opportunity cost of all resources, including those
owned by the firm.
LOSS: Deficit of sales revenue relative to the cost of
production, once all the resources used have
received their opportunity cost. Losses are a
penalty imposed on those who use resources in
lower, rather than higher, valued uses as judged by
buyers in the market.
The supply curve
The supply curve is an upward
sloping curve.
It shows the relationship
between a goods and the
quantity that producers are
willing to produce and sell
At lower price (P
1
), the
quantity produced and sold is
lower (Q
1
).
At higher price (P
2
), the
quantity produced and sold is
higher at (Q
2
).
S
Q1 Q2
P1
P
2
Price
Quantity
The Supply of Health Services
1. Expert advice from physician or other
health personnel
2. Hospital/clinic facilities
3. Pharmaceuticals;
4. Medical technology
Substitution of Inputs
Type of
Inputs
Traditional Substitutes Examples
Obstetric
Manpower for
Normal
spontaneous
delivery
Physicians Trained
Nurses
Kamuning
Lying-in-clinic
Drugs

Drugs
Branded

Pharmaceuti
cals
Generics

Herbals
Generic Law

Flavier Herbal
Drug program
Factors Determining Supply

1. Own Price of the Product
- a higher own price of a certain product
gives better profits to the producers and
sellers of the product
- when producing and selling a certain
product give businesses more profits,
producers will produce and sell more

2. PRODUCTION COSTS
Relationship between product costs and different selling
prices to make profit
Higher prices lead to higher profits (profit
1 < profit 2). This gives producers
incentive to produce more
Profit 1
Profit 2
Selling
Price 1
Selling Price 2
Product
Cost
Product
XYZ
3. Technology and Input Prices
The relationship between production costs changes because of
changes in technology and input prices and its effect on profits
Profit 1
Cost 1
Cost 2
Product
XYZ
Selling
Price
Technology
Input Prices
Profit 2
A decrease in production costs (costs 1 > cost 2), brought about by
improvements through technology and input prices gives better profits
(profit 2 > profit 1) and thus incentives for producers to produce and sell
more
4. Price of Production Substitutes
ABC Company
Limited 6Ms
X
Low Price
Y
High Price
Z
Low Price
Effect of prices of production substitutes on a certain product.
More of the higher-priced product is produced relative to the
lower-priced products
5. Market organization

Types:
1. Monopoly is a market structure in which
a commodity is supplied by a single firm
2. Oligopoly is a market state of imperfect
competition, in which the industry is
dominated by a small number of
competitors, producing and selling the
same products
TERMS
Perfect competition is the best for
consumers
Characteristics
The number of sellers is numerous
The products offered by sellers are
almost the same or indistinguishable
TERMS
Monopolistic competition is a market
structure in between oligopoly and
perfect competition wherein many
sellers supply goods that are close,
but not perfect substitutes
Type of
Market
Organization
Description Effect on Q
Supply
Effect on
Prices
Monopoly


Oligopoly
*Cartel

Perfect
Competition
Single
Player/single
product
Few
players/same
product

Many
players/same
product
Low/very low


Low to high



High
Very high


High



Low/very low
Different Market organizations and their effect
on the quantity supplied and prices of products
6. Particular Factors
a. Cold weather
b. Government
NOTE: These factors may be either
increase or decrease the supply of
these commodities
THE SUPPLY SHIFT
Price
Quantity
P3
P2
P1
Q1 Q2 Q3
Decrease in supply
Increase in supply
Moving along the
curve
1. A shift to the left corresponds to an
actual decrease in supply
2. A shift to the right corresponds to
an actual increase in supply
3. There is only a movement along
the curve if only the prices of
products are manipulated
Remember that
Supply Schedule and Supply Curve
The supply schedule shows
the quantities that are
offered for sale at various
prices. If the quantities
offered are only one seller,
then it is an individual
supply schedule. The
aggregate supply quantities
of group of sellers are
presented as market supply
schedule.
From the above schedule, we
can see that higher prices
serve as incentives for the
sellers to offer more X for
sale. While low prices
discourage them from
offering more quantities to
sell.
Price Quantity supplied
45 180
40 150
35 120
30 90
25 60
20 30

Supply Schedule and Supply Curve
The supply curve is upward
sloping from left to right. It
shows a direct relationship
between price and quantity
supplied. Any point on the
supply curve reflects the
quantity that will be supplied
at the given price
After analyzing the above
relationship we can now state
that as price increases, the
quantity supplied of the
product tends to increase
and as price decreases,
quantity supplied instead
decreases
0
10
20
30
40
50
60
0 50 100 150 200 250
30 60 90 120 180 210
Exhibit 3: The Supply Curve
As the price of a
product increases,
other things
constant, producers
will increase the
amount of the
product supplied
P
3

P
2

P
1
Q
1
Q
2
Q
3
S
The Law of Supply
Changes in Supply and Shifts of the Supply Curve
0
10
20
30
40
50
60
0 50 100 150 200 250
Changes in non price factors shall
now take place. This will like wise
result in a change in the position or
slope of the supply curve and a
change in the entire supply
schedule. The increase or decrease
in the entire supply is also shown
through a shift of the entire supply
curve. Factors, (determinants that
influence supply), may all cause an
increase in the actual supply
This will be shown through a
rightward shift of the supply curve
from S
1
to S
2
. At a price of P40,
whereas quantity supplied used to
be 150 packs, the new supply at
that price is now 200 packs which
is on a point on the new supply
curve.
E
S1
S2
The Law of Supply
Changes in Quantity Supplied and movements Along
the Supply Curve
Consider the price of P 25 per
packs. At the price, the sellers will
offer for sale 60 packs of X. Should
there be an increase in price to P30,
quantity supplied will increase to 90
packs. This is reflected as a
movement along the supply curve
and is referred to as change in
the quantity supplied. This is a
change from point B to point C on
the supply curve and is caused by a
change in the price of the goods.
There are also non price
determinants that influence supply,
includes cost of production,
availability of economic resources,
number of the firms in the market,
technology applied, producers goals,
these factors are again assumed
constant to enable us to analyzed
the effect of a change in price on
quantity supplied.
0
10
20
30
40
50
60
0 50 100 150 200 250
B
C
The following changes in the non price factors may
cause the corresponding shift in the demand curve
Increase in the
number of sellers
Decrease in the
number of sellers
Better technology
Decrease in the cost
of production
Goals of the firm
Shift to the right

Shift to the left

Shift to the right
Shift to the right
It depends

Supply and Demand Interactions
1. Supply and Demand forces are not static
2. They interact dynamically
3. Factors other than price affect either
supply or demand forces, the supply and
demand curves shift either to the left or
right
4. This causes either an increase (shift to
the right) or a decrease (shift to the left)
is supply or demand

Supply and Demand Interactions
At certain price (P),
buyers are willing to
buy a certain quantity
(Q) of diapers
Also at the same price
suppliers are willing to
produce and sell the
same quantity of
diapers
This price and quantity
is depicted by (E)
equilibrium point
Surplus (supply
exceeds demand)
Shortage (demand
exceeds supply
(E) D = S
Price
Quantity
S D
Q
P
P2
P3
Supply and Demand Interactions
The equilibrium point may have a
number of technical definitions
It is the point at which the
supply curve intersects the
demand curve
It is the point of perfection
combination where supply is
just equal to demand
Equilibrium is the point at
which the price (P) and Quantity
(Q) of the commodity that the
buyers are willing to buy, is just
equal to the price (P) and
quantity (Q) that producers are
willing to produce and sell

Equilibrium
Excess Demand
Surplus Supply
S
D
Q
P
Quantity
Price
P2
P3
Supply and Demand Interactions
At a price higher (P2) than
equilibrium price (P), more
suppliers will be willing to
produce and sell more, while
buyers will buy less. This
brings about a surplus
situation. There is pressure to
decrease prices to entice
consumers to buy
At a price lower (P3) than
equilibrium price (P), more
buyers will be willing to buy
more, less suppliers will be
willing to produce and sell.
This brings about the shortage
of goods, and pressure to
increase prices to entice
producers to produce and sell
more
P
Q Quantity
Price
P2
P3
S
D
E
Surplus
Supply
Excess
Demand
Market Equilibrium
The E is attained at the point
where demand is equal to supply
This point of equality is the
Equilibrium point.
It is corresponds to a price P40,
which is the E price
At this price the Q supplied is also
150 packs
The ideal situation is when all the
Q that is offered will bought by the
consumers, and all the demand
will be met by the sellers
Any price above or below P40 will
be temporary because price will
revert to the E level.
40
35
45
100 120 150 180 200
Surplus Supply
80
Excess Demand
80
E
Market Equilibrium
Consider the price P45
This is a price above E price
At this price the quantity
demanded is only 100 packs
while the seller will be
attracted to offer a bigger
quantity and this is 180 packs
There is difference of 80 packs
representing a surplus of
goods if seller maintained their
price at that level
To disposed unsold goods,
sellers have to lower their
prices and price level will
ultimately settle at E point
100 120 150 180 200
40
35
45
Surplus Supply

Excess Demand

80
80
E
Market Equilibrium
Analyze what happens at a price
of P35, which is lower than E
price.
This low price will attract the
buyers to demand for more, this
quantity demanded corresponds
to 200 packs
The low price will discourage the
sellers from offering more. Q
supplied at the price of P35 is
down to 120 packs
The difference of 80 packs
represents a shortage of the
product
To fully exploit demand, the
consumers be willing to pay more
and revert the price level at P40
where supply meets demands
100 120 150 180 200
Excess Demand
80
Surplus Supply
80
E
40
35
45
Example: Supply and Demand
The table indicates the supply
and demand conditions for
healthcare services.
When the price exceeds P10,
an excess supply is present,
which places downward
pressure on price.
In contrast, when the price is
less than P10, an excess
demand results, which causes
the price to rise.
Thus, the market price will
tend toward P10, at which
point supply and demand will
balance
350 450 550 650 750
10
Quantity
Price
S
D
Excess Supply
Excess Demand
Price of
Product
Quantity
Supplied
Quantity
Demanded
Condition in
the Market
Direction on
Pressure on
Price
13
625 400
Excess
Supply
Downward
12
600 450
Excess
Supply
Downward
11
575 500
Excess
Supply
Downward
10 550 550
Balance
Equilibrium
9
525 600
Excess
Demand
Upward
8
500 650
Excess
Demand
Upward
7
475 700
Excess
Demand
Upward
A hypothetical Shift in the Market Supply Curve
with Demand Curve Kept Constant
The point E is subject to change
shifts in either the demand curve
alone, or supply curve alone, or
both D and S curves at the same
time can cause change in E in E
point.
Example: a rightward shift of the
supply curve, with the original
demand curve maintained, will
result in a decrease in E price.
In the graph, the original E price
is at P3 per capsule. The
rightward shift of the supply
curve has caused the E price to
drop P2 per capsule.
S1
S2
D1
A
B
Q1 Q2
P3
P2
Price
Quantity
Excess Supply
Hypothetical Shift of the Market demand Curve
with the Market Supply Curve Kept Constant
In the like manner, a shift of
the demand curve with the
original supply curve
maintained will cause a
change in the E point.
In this graph, a rightward
shift of the demand curve,
with the supply curve
maintained, has caused the
E price to increase from P3
to P4 per capsule.
B
A
D2
D1
S1
Q1 Q2 Q3
P4
P3
Price
Quantity
Excess
Demand
(Q3-Q1)
A hypothetical simultaneous shift in both the
Demand and Supply Curves
In the graph, both the D and S
curves show a rightward shift.
Since the increase in D is
proportionate to the increase in
S, the E price is maintained at
P3 per capsule.
However, the new E point
corresponds to a bigger
quantity which is now Q5
capsule to a new E position
over time as result of a shift of
either the D curve or the S
curve of a commodity.
S1
S2
D2
D1
Q3 Q5
P3
Quantity
Price
THUMBNAIL SKETCH
These factors increase (decrease
the Demand for a good:

A rise (fall) in consumer income
A rise (fall) in the price of a good
used as a substitute
A fall (rise) in the price of a
complementary good often used
with the original good
A rise (fall) in the expected future
price of the good
These factors increase (decrease)
the supply of a good:

A fall (rise) in the price of a
resource used in producing the
good
A technological change allowing
cheaper production of the good
Favorable weather (bad weather
or a disruption in supply due to
political factors, or war)
Repealing The Laws of Supply And
Demand
Price Ceiling a legally established maximum price that
sellers may charge
Shortage a condition in which the amount of a good
offered by sellers is less than the amount
demanded by buyers at the existing price. An
increase in price would eliminate the shortage.
Price Floor a legally established minimum price that
buyers must pay for good or resource
Surplus a condition in which the amount of a good that
sellers are willing to offer is greater than the
amount that buyers will purchase at the existing
price. A decline in price would eliminate the
surplus.
Elasticity - the responsiveness of demand and
supply to a change in its determinants
Price Elasticity - the percentage change in
quantity compared to a percentage change
in price
Income elasticity of Demand - percentage
change in quantity demanded compared to
percentage change in income
Cross elasticity of Demand - percentage change
in quantity demanded of one good
compared to the percentage change in the
price of a related good.

Elasticity of Supply and Demand
Coefficient of elasticity absolute value of elasticity
Total Revenue price multiplied by quantity
Inferior goods goods which are bought when income
levels are low, the demand for which tends to
decrease when income increase.
Normal goods goods for which demand tends to
increase when income increase
Substitute goods goods used in place of each other
Complementary goods goods that supplement each
other and are, therefore, used together
TERMS
Elasticity of Demand
Demand Elasticity indicates the extent to
which changes in price cause changes in
the quantity demanded
Classification of Elasticity of
Demand

1. Price elasticity of demand
2. Income Elasticity of Demand
3. Cross elasticity of Demand


The Concept of Elasticity in
Pharmacoeconomics/Healthcare
OBJECTIVES
1. Sellers are naturally expected to hope
for more demand for their product
2. Higher revenues
3. To make some decisions to improve
demand for their product
Elasticity
Price Elasticity Of Demand is used to determine the responsiveness
of demand to change in the price of the commodity

Formula:

E
P
= percentage change in quantity demanded
percentage change in price

= QD
2
- QD
1
/QD
1

P
2
- P
1
/P
1

where E
P
= price elasticity of demand
QD
2
= new quantity demanded
QD
1
= original quantity demanded
P
2
= the new price
P
1
= the original price
Elasticity
Sample Problem
Original quantity demanded = 10,000 pcs antihypertensive drugs
Original price = P5.00 per tablet
New quantity demanded = 16,000 pcs of antihypertensive drugs
New price = P4.00 per tablet

Answer: 16,000 -10,000/10,000
4.00 -5.00/5.00

= 3
Elasticity
Classification of price Elasticity of Demand
1. Elastic Is that type of demand where the quantity that will
be bought is affected greatly by change in price. The
change must be greater than elasticity coefficient of 1.
2. Inelastic This refers to the demand where a percentage
change in price creates a lesser change in quantity
demanded.Example: When 20% reduction in price caused
only a 10% increase in demand. The elasticity coefficient
in this type is less than 1.
3. Unitary Demand A change in price creates an equal
change in quantity demanded. Example: When 20% price
reduction resulted to 20% increase in demand. The
elasticity under unitary demand is equal to the
coefficient of 1.

Figure 1: Elastic Demand
Is the type of demand where the quantity that will be bought is
affected greatly by changes in price. The change must be greater than
elasticity coefficient of 1.
Original quantity demanded =
10,000 pcs of antihypertensive
drugs
Original price = P5.00 per tablet
New quantity demanded =
16,000 pcs of antihypertensive
drugs
New price = P4.00 per tablet
E
P
= 16,000 10,000/10,000
4.00 5.00/5.00
= 3
0
1
2
3
4
5
6
7
0 5 10 15 20
Series1
QD1
QD2
Figure 2: Inelastic Demand
This refers to the demand where a percentage change in price
creates a lesser change in quantity demanded. Example: When a 20%
reduction in price caused only a 10% increase in demanded. The
elasticity coefficient in this type is less than 1
Original quantity demanded =
10,000 pcs of
antihypertensicve drugs
Original price = P5.00 per
tablet
New quantity demanded =
11,000 pcs of antihypertensive
drugs
New price = P4.00
E
P
= 11,000 10,000/10,000
4.00 5.00/5.00
= 0.5
0
1
2
3
4
5
6
7
0 5 10 15 20
Series1
QD1
QD2
Figure 3: Unitary Demand
In this type of demand, a change in price creates an equal
change in quantity demanded. Example: When 20% price reduction
resulted to 20% increase in demand. Elasticity under unitary
demand is equal to the coefficient of 1.
Original quantity demanded =
10,000 bottles of syrups
Original price = P5.00 per bottle
New quantity demanded =
12,000 bottles of syrups
New price = P4.00 per bottle

E
P
= 12,000 10,000/10,000
4.00 5.00/5.00
= 1
0
1
2
3
4
5
6
7
0 5 10 15 20
Series1
QD1
QD2
Implications of Price Elasticity of
Demand

@ when elasticity is known, it can guide the seller in making
decisions about price
If the price elasticity of demand
is greater than 1, the price should
be lowered; if less than 1, the
price should be increase
Elasticity
Income Elasticity of Demand
Income Elasticity of demand refers to the
determination of the responsiveness of
demand to change in consumer income
Formula:

E
Y
= percentage change in quantity demanded
percentage change in income
= QD
2
-QD
1
/QD
1

Y
2
-Y
1
/Y
1

Where E
Y
= income elasticity of demand
Y
2
= the new income
Y
1
= the original income
Note: When elasticity is greater than 1, demand is said to be
income elastic; less than 1 - inelastic; equal to 1 - unitary
Elasticity
Cross Elasticity of Demand
Cross elasticity of demand is the responsiveness of the
quality demanded of a particular good to changes in the
prices of another good
Formula
QA
2
- QA
1
/QA
1

PB
2
- PB
1
/PB
1


Where
E
C
= cross elasticity of demanded
QA
2
= new demand for product A
QA
1
= original demand for product A
PB
2
= new price of product B
PB
1
= original price of product B
NOTE:
If cross elasticity is positive, the goods are
SUBSTITUTES.
Example: if 2% increase in the price of
paracetamol drug which causes a 0.66% increase in the
demand for mefenamic acid
If cross elasticity is negative, the goods are
COMPLIMENTS
Example: If hospitalization fee increases results
to a decrease in the demand for health professionals,
hospital personnel are complements

Elasticity
The following summarize the
change in revenue under the two
basis elasticity conditions
Price Increase Price Decrease
Elastic Decrease Increase
Inelastic Increase Decrease

Income Elasticity Of Demanded
1. > 1 means demand is elastic and the good is superior
2. < 1 means demand is inelastic and the good is inferior
3. = 1 means demand is unitary and the good is normal
Elasticity
Determinants of demand Elasticity
1. The price of goods in relation to
the consumers budget
2. The availability of substitutes
3. The type of Good
4. The time under consideration
Elasticity
Elasticity of Supply refers to the responsiveness of the
sellers to a change in price
Formula
E
S
= percentage change in quantity supplied
percentage rise in price
= QS
2
- QS
1
/QS
1

P
2
- P
1
/P
1
Where:
E
S
= price elasticity of supply
QS
2
= new quantity supplied
QS
1
= original quantity supplied
P
2
= new price
P
1
= original price
Elasticity
Classification of supply Elasticity
1. Elastic Supply - is where the quantity
supplied is affected greatly by changes in the
price. The change is greater than the
elasticity coefficient of 1.
2. Inelastic Supply - when the quantity
supplied is not affected greatly by changes in
the price, supply is said to be inelastic. The
elasticity coefficient is less than 1
3. Unitary Elastic Supply - When the % change
in the quantity supplied is equal to the
percentage change in price. The elasticity
coefficient is equal to 1.
Figure 4: Elastic Supply
Is where the quantity supplied is affected greatly by changes in
the price. The change is greater than the elasticity coefficient of
1.
New quantity supplied =
18,000 bottles
Old quantity supplied =
10,000 bottles
New price (P2) =
P6.00/bottle
Old price (P1) =
P5.00/bottle

E
S
= 18,000 10,000/10,000
6.00 5.00/5.00
= 4
0
1
2
3
4
5
6
7
0 5 10 15 20
Series1
QS2
QS21
Figure 5: Inelastic Supply
When the quantity supplied is not affected greatly by changes
in the price, supply is said inelastic. The elasticity coefficient is less
than 1.
New quantity supplied = 11,000
bottles
Old quantity supplied = 10,000
bottles
New price = P6.00/bottle
Old price = P5.00/bottle

E = 11,000 10,000/10,000
6.00 5.00/5.00
= 0.5
0
1
2
3
4
5
6
7
0 2 4 6 8 10 12
Series1
QS2
QS1
Figure 6: Unitary Elastic Supply
When the percentage change in the quantity supplied is equal
to the percentage change in price. The elasticity coefficient is
equal to 1.
New supplied = 12,000 bottles
Old quantity supplied =
10,000 bottles
New price = P6.00/bottles
Old price = P5.00/bottles

E = 12,000 10,000/10,000
6.00 5.00/5.00
= 1

0
1
2
3
4
5
6
7
0 2 4 6 8 10 12 14
Series1
QS2
QS1
Elasticity
Determinants of Supply Elasticity
1. The feasibility and cost of storage

2. The ability of producers to
respond to price changes

3. Time
Elasticity
Elasticity is a measure of
responsiveness.
The most common elasticity
measurement is that of price
elasticity of demand. It measures
how much consumers respond in
their buying decisions to a change
in price.
Elasticity
E = (percentage change in
quantity) / (percentage change in
price);
Where E = coefficient of elasticity
Read that as elasticity is the
percentage change in quantity
divided by the percentage change
in price
Demand and Price Elasticity
An important characteristic of
demand is the relationship among
market price, quantity demand
and consumer expenditure.
Demand - a reduction in market
price will usually lead to an
increase in quantity demanded.
Demand and Price Elasticity
In some cases a reduction in price
will be more than offset by a large
increase in quantity demanded -- a
situation where demand is price
sensitive or price elastic.
Demand and Price Elasticity
In other cases, the reduction in
price results in a proportionally
smaller increase in quantity
demanded-- a situation where
demand is price insensitive or
price inelastic.

Demand and Price Elasticity
Elastic demand (E>1)
relative change in revenue > relative
change in price
Inelastic demand (E<1)
relative change in revenue <
relative change in price
Unitary elasticity relative change
in price & revenue are equal
Coefficient of Elasticity
Calculate the coefficient of elasticity if
we reduce the price for Tolnaftate cream
from $3 to $2.80 and this results in an
increase in sales from 55 to 85 tubes.
Q = (85-55)/85 x 100%
= 35%
P = (32.8)/3 x 100%
= 6.7%
E = Q/P = 35%/6.7% = 5
if E > 1 increase in revenue

Demand Curve and Elasticity
As a result of the different degrees of elasticity,
there are different ways of presenting the Demand Curve
P
P
P
P
Qd
Qd Qd
Qd
D1 is relatively elastic, a
change in price leads to a
significant change in Qd.
D1
D2
D4
D3
D2 is relatively inelastic, a
change in price leads to a
very slightly change in Qd.
D3 is perfectly elastic. At given
price, Qd can change infinitely
D4 is perfectly inelastic. At any
price, the Qd will remain the
same. Qd is equal to zero
Price Elasticity of Supply
As a results of the varying degrees of elasticity of
supply, the following supply curves are also possible:
S1
S3
S2
S4
Qs
Qs
Qs Qs
P

P
P
P
S1 is relatively elastic: A
change in price results in a
significant change in Qs.
S3 is perfectly elastic: At a given price,
Qs may change infinitely
S2 is relatively inelastic: A
change in price results in a
slight change in QS.
S4 is perfectly inelastic: At any price,
Qs remains constant or Qs = 0