NAME: RACQUEL B.

MACALMA
COURSE AND SECTION: BSBA HRM II-A

MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy

INELASTIC AND ELASTIC DEMAND

Inelastic demand in economics is when people buy about the same amount whether
the price drops or rises. That happens with things people must have, like gasoline. Drivers must
purchase the same amount even when the price increases. Likewise, they don't buy much
more even if the price drops.
Inelastic demand is one of the three types of demand elasticity. It describes how much
demand changes when the price does. The other two are:
1. Elastic demand: When changes in price impact the quantity demanded.
2. Unit elastic demand: When changes in price cause an equal change in demand.

Formula
You calculate demand elasticity by dividing the percentage change in the quantity
demanded by the percentage change in the price. For example, if the quantity demanded
changes in the same percentage as the price does, the ratio would be one. If the price dropped
10% and the quantity demanded increased by 10%, then the ratio would be 0.1/0.1 = 1. The Law
of Demand says that the amount purchased moves inversely to price. You can ignore the plus
and minus signs. That ratio of one is called unit elastic.
Elastic demand is when the quantity to price ratio is more than one. If the price dropped
10% and the amount demanded rose 50%, then the ratio would be 0.5/0.1 = 5.
At the other extreme, if the price dropped 10% and the quantity demanded didn't
change, then the ratio would be 0/0.1 = 0. That is known as being perfectly inelastic. Inelastic
demand occurs when the ratio of quantity demanded to price is between zero, perfectly
inelastic, and one, unit elastic.
Inelastic Demand Curve
 NAME: RACQUEL B. MACALMA
COURSE AND SECTION: BSBA HRM II-A

You can also tell whether the demand for something is inelastic by looking at
the demand curve. Since the quantity demanded doesn't change as much as the price, it will
look steep. In fact, it will be any curve that is steeper than the unit elastic curve, which is
diagonal.
The quantity demanded won't budge, no matter what the price is. That's shown in the
chart below.
Five factors determine the demand for each individual. They are price, the price of
alternatives, income, tastes, and expectations. For aggregate demand, the sixth determinant
is the number of buyers. The demand curve shows how the quantity changes in response to
price. If one of the other determinants changes, it will shift the entire demand curve. More or
less of that good or service will be demanded, even though the price remains the same.
Elastic demand is when price or other factors have a big effect on the quantity
consumers want to buy. You'll see it most often when consumers respond to price changes. If
the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying
as much and wait for them to return to normal. Price is one of the five determinants of
demand.
If a good or service has elastic demand, it means consumers will do a lot of comparison
shopping. They do this when they aren't desperate to have it or they don't need it every day.
They'll also comparison shop when there are a lot of other similar choices.
The law of demand guides the relationship between price and the quantity bought. It
states that the quantity purchased has an inverse relationship with price. When prices rise,
people buy less. The elasticity of demand tells you how much the amount bought decreases
when the price increases.

Costs
Costs are the necessary expenditures that must be made in order to run a business.
Every factor of production has an associated cost. The cost of labor, for example, used in the
production of goods and services is measured in terms of wages and benefits. The cost of a
fixed asset used in production is measured in terms of depreciation. The cost of capital used
to purchase fixed assets is measured in terms of the interest expense associated with raising
the capital.
 NAME: RACQUEL B. MACALMA
COURSE AND SECTION: BSBA HRM II-A

Businesses are vitally interested in measuring their costs. Many types of costs are
observable and easily quantifiable. In such cases there is a direct relationship between cost
of input and quantity of output. Other types of costs must be estimated or allocated. That is,
the relationship between costs of input and units of output may not be directly observable
or quantifiable. In the delivery of professional services, for example, the quality of the output
is usually more significant than the quantity, and output cannot simply be measured in terms
of the number of patients treated or students taught. In such instances where qualitative
factors play an important role in measuring output, there is no direct relationship between
costs incurred and output achieved.

DIFFERENT WAYS TO CATEGORIZE COSTS

Costs can have different relationships to output. Costs also are used in different
business applications, such as financial accounting, cost accounting, budgeting, capital
budgeting, and valuation. Consequently, there are different ways of categorizing costs
according to their relationship to output as well as according to the context in which they
are used. Following this summary of the different types of costs are some examples of how
costs are used in different business applications.

Fixed and Variable Costs

The two basic types of costs incurred by businesses are fixed and variable. Fixed costs
do not vary with output, while variable costs do. Fixed costs are sometimes called overhead
costs. They are incurred whether a firm manufactures 100 widgets or 1,000 widgets. In
preparing a budget, fixed costs may include rent, depreciation, and supervisors' salaries.
Manufacturing overhead may include such items as property taxes and insurance. These fixed
costs remain constant in spite of changes in output.

Variable costs, on the other hand, fluctuate in direct proportion to changes in output.
In a production facility, labor and material costs are usually variable costs that increase as the
volume of production increases. It takes more labor and material to produce more output,
so the cost of labor and material varies in direct proportion to the volume of output.
 NAME: RACQUEL B. MACALMA
COURSE AND SECTION: BSBA HRM II-A

In addition to variable and fixed costs, some costs are considered mixed. That is, they
contain elements of fixed and variable costs. In some cases the cost of supervision and
inspection are considered mixed costs.

Direct and Indirect Costs

Direct costs are similar to variable costs. They can be directly attributed to the
production of output. The system of valuing inventories called direct costing is also known
as variable costing. Under this accounting system only those costs that vary directly with the
volume of production are charged to products as they are manufactured. The value of
inventory is the sum of direct material, direct labor, and all variable manufacturing costs.

Indirect costs, on the other hand, are similar to fixed costs. They are not directly related
to the volume of output. Indirect costs in a manufacturing plant may include supervisors'
salaries, indirect labor, factory supplies used, taxes, utilities, depreciation on building and
equipment, factory rent, tools expense, and patent expense. These indirect costs are
sometimes referred to as manufacturing overhead.

Under the accounting system known as full costing or absorption costing, all of the
indirect costs in manufacturing overhead as well as direct costs are included in determining
the cost of inventory. They are considered part of the cost of the products being
manufactured.

Product and Period Costs

The concepts of product and period costs are similar to direct and indirect costs.
Product costs are those that the firm's accounting system associates directly with output and
that are used to value inventory. Period costs are charged as expenses to the current period.
Under direct costing, period costs are not viewed as costs of the products being
manufactured, so they are not associated with valuing inventories.

If the firm uses a full cost accounting system, however, then all manufacturing costs—
including fixed manufacturing overhead costs and variable costs—become product costs.
They are considered part of the cost of manufacturing and are charged against inventory.
NAME: RACQUEL B. MACALMA
COURSE AND SECTION: BSBA HRM II-A