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Supply
Response of the
buyers and sellers to
a change in price.
Both sellers and buyers
react to a change in
price.
Such reactions vary
depending on the
importance of the
products and their
ability to produce in a
given time.
Elasticity of Demand
Elasticity of Demand
Refers to the reaction or response of the buyers to
change in price of goods and services.
However this reaction vary in accordance
with the nature of the product, if it is
important or not to the consumers.
2. Inelastic demand
ELASTICITY FORMULA
Q
Elasticity =
Q
P
P
Q
Q
P
P
= the difference between the original quantity and the new quantity (disregard
the negative sign
= the original quantity
= the difference between the original price and the new price (disregard the
negative sign)
= the original price
ELASTICITY FORMULA
Example
YEAR
QUANTITY
DEMANDED
PRICE
1988
100
1989
60
Solution
Q = 40
Q = 100
P =1
P =4
1=unitary elastic
Less than 1= inelastic demand/supply
Practical Examples:
1. Wage determination If the product has an
elastic demand, a reduction in its price
increases quantity demanded. This means
more sales and profits for the company. The
company now is in the position to raise the
wages of its workers.
2. Farm production guide Producers must be
careful in overproducing goods whose demand
is inelastic, like agricultural products because
prices of these products decrease which will
affect in turn the income of the farmers.
Practical Examples:
3. Maximize profits A reduction in
Practical Examples:
4. Imposition of sales taxes
Government officials 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 elastic demand.
Thought Experiments
ELASTICITY OF
SUPPLY
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1. Elasticity of Supply
2. Input Prices
3.Determinants of Elasticity
of Supply
4. Consumer Behavior
Elasticity of Supply
price
Elasticity of Supply
Supply elasticity refers to the reaction of the sellers or
producers to change in the price of goods. However
such response of the sellers vary in accordance with
the kind of goods they produce.
S
S
ELASTICITY FORMULA
Q
Elasticity =
Q
P
P
Q
Q
P
P
= the difference between the original quantity and the new quantity (disregard
the negative sign
= the original quantity
= the difference between the original price and the new price (disregard the
negative sign)
= the original price
ELASTICITY FORMULA
Example
YEAR
QUANTITY
DEMANDED
PRICE
1988
100
1989
60
Solution
Q = 40
Q = 100
P =1
P =4
1=unitary elastic
Less than 1= inelastic demand/supply
Thought Experiments
PERSON
DOG
ROSE
2 BOTTLES
OF WATER
Quantity of a
good
Consumed
1
Total Utility
Marginal
Utility
12
14
15
15
MARKET STRATEGY
Indifference Curve
Good X
The word
indifference means
showing no bias or
neutral.
0
3
An indifference curve
is a curve which
2
0
shows different
combinations of two
0
1
goods which yield the
same
level
of
1
2
3
0
satisfaction.
Good Y
Coke or Pepsi
I dont care whether you have Coke or Pepsi, as
long as it is cola.
I like apples and bananas. If you cut the number
of apples in half and double the number of
bananas, I am just as well off.
Lenovo or Acer
An indifference map is
composed of a series of
indifference curves. Each curve
to the right of another provides
greater satisfaction because its
constitutes combinations of
more units (or kilos) of two
products (meat and fish)
Expenditures
Total
1
2
3
4
1
5
4
3
2
5
25 + 125
50 + 100
75 + 75
100 + 50
25 + 125
150
150
150
150
150
Units of
product B
Total Expenditures
5
4
3
2
1
1
2
3
4
5
Good
X
A
D
B
C
Good Y