CHAPTER 5-ELASTICITY AND ITS APPLICATION

ELASTICITY
• Is a measure of how much buyers and sellers respond to changes in
market conditions
• It is a measure of responsiveness of quantity demanded or quantity
supplied to a change in one of its determinants
PRICE ELASTICITY
• Measures how much the quantity demanded responds to a change in
price

• Price elasticity of demand= % change in qty demanded / % change in

price
Example: suppose that a 10% increase in price of
an ice cream cone causes the amount of ice cream
you buy to fall by 20%
• Price elasticity of demand = 20% / 10% =2

• Elasticity is 2

• The change in quantity demanded is proportionately twice as large as

the change in price
MIDPOINT METHOD
• POINT A PRICE = php4 QTY= 120
• POINT B PRICE = PHP6 QTY= 80

• MIDPOINT PRICE = PHP 5 QTY= 100

 (Q2-Q1) / [(Q2+Q1) / 2]
PRICE ELASTICITY OF DEMAND =

(P2-P1) / [(P2+P1) / 2]
ELASTIC VS INELASTIC GOODS
ELASTIC GOODS
• When a little change in the price
of a product results in a
substantial change in the
quantity demanded
• LUXURY GOODS
• Above 1
INELASTIC GOODS
• Inelastic demand refers to a
change in the price of a good
result in no or slight change in
the quantity demanded.
• BASIC NECESSITY
• Below 1
 PROBLEM 1
period DEMAND price
2015 1000 PHP 50.00
2016 1500 PHP 49.50

PROBLEM 2
period DEMAND price
2015 1000 PHP 50.00
2016 500 PHP 100.00

PROBLEM 3

PERIOD DEMAND (METRIC TONS) AVERAGE PRICE (USD)

2015 13200 380.0466
2016 13300 388.2666
DETERMINANTS OF PRICE ELASTICITIES
• Availability of substitute products
• Importance of goods within a consumer’s budget
• The length of the period to which the demand curve pertains
MARGINAL REVENUE
• Defined as the change in total revenue given a one-unit change in
quantity.

• MR = Change in TR / Change in Q

• In the competitive marketplace a business must decrease

pricing to encourage more consumers to purchase their product
or service. When small businesses reduce pricing, they seek to
produce additional units for sale as long as they realize profit
from additional production.
QUANTITY PRICE TR MR

10 5 50 5

11 5 55 5

15 4 60 1.25

QUANTITY PRICE TR MR

10 5 50 5

11 4 44 -6

12 3 36 -8