MODULE MANAGERIAL ECONOMICS

CHAPTER 4: Demand and Elasticity

Objectives:
a. The students will be able to explain the concept of “ elasticity ” of
demand
b. the students will be able to calculate the elasticity

Discussion problems:

Problem : Which of the following goods are likely to have elastic demand, and which are likely
to have inelastic demand?

Home heating oil

Pepsi
Chocolate
Water
Heart medication
Oriental rugs

ANSWER:
Elastic demand: Pepsi, chocolate, and Oriental rugs
Inelastic demand: Home heating oil, water, and heart medication

Problem : Yesterday, the price of envelopes was P3 a box, and Julie was willing to buy 10
boxes. Today, the price has gone up to P3.75 a box, and Julie is now willing to buy 8 boxes. Is
Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?

ANSWER:
To find Julie's elasticity of demand, we need to divide the percent change in quantity by the
percent change in price.

% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%

% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8

Her elasticity of demand is the absolute value of -0.8, or 0.8. Julie's elasticity of demand is
inelastic, since it is less than 1.

For more knowledge please check the link provided;

https://www.youtube.com/watch?v=HHcblIxiAAk
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Inelastic demand in economics is when people buy about the same amount, whether the price
drops or rises. This situation happens with things that people must have, like gasoline and food.
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 is when changes in price impact the quantity demanded.

2. Unit elastic demand is 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
occurred when the ratio of quantity demanded to price is between zero, perfectly inelastic, and
one, unit elastic.3

For example, beef prices in 2014 rose over 20%, but demand only fell by 3.9%. 4 5 This result
revealed that the demand for beef was fairly inelastic. The demand schedule for beef shows a
genuine example of how real-life factors affected beef’s demand in 2014.
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Inelastic Demand Curve

You can also tell whether the demand for something is inelastic by looking at the demand
curve.6 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.

IMPORTANT: The more inelastic the demand, the steeper the curve. If it's perfectly inelastic,
then it will be a vertical line.

The quantity demanded won't budge, no matter what the price is. That's shown in the chart
below with the perfectly inelastic—vertical line—curve.

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.7 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.

Examples

There is no example in real life of something with perfectly inelastic demand. If that were the
case, then the supplier could charge an infinite amount, and people would have to buy it.

The only thing that would come close would be if someone managed to own all the air or all the
water on earth. There is no substitute for either. People must have air and water, or they'd die in
a short period. Even that's not perfectly inelastic. The supplier couldn't charge 100% of the
income in the world. People would still need some money for food, or they'd starve within a few
weeks. It's hard to imagine a situation that would create perfect inelastic demand.

But some products come close. For example, gasoline is something that drivers need a certain
amount of each week. Gas prices change every day. If there is a drop in supply, the prices will
skyrocket. That's what happened during the OPEC oil embargo in 1973 when
the Organization of the Petroleum Exporting Countries stopped oil exports to the United
States.8 1

People will still buy gas because they can't immediately change their driving habits. To shorten
their commute time, they'd need to change jobs. They'd still need to get groceries at least
weekly. They could go to a closer store, if possible. But most people would tolerate higher gas
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prices before they would make such drastic changes. You can see how that would
cause demand-pull inflation.

The Bottom Line

In economics, elasticity refers to the responsiveness of a product’s demand to price changes. In

contrast to the elastic type, inelastic demand is:

 Hardly responsive to price changes. Regardless of price, the product's quantity

demanded remains the same or barely changes in response.
 The demand for gas exemplifies it. Consumers will not buy more or less of gas, despite
a price increase or decrease.1
 A steep demand curve graphically represents it. The steeper the curve, the more
inelastic the demand for that product is.

SOURCES:
I. U.S. Bureau of Labor Statistics. "Using Gasoline Data to Explain
Inelasticity." Accessed Feb. 4, 2020.
II.Federal Reserve Bank of St. Louis. "Elasticity of Demand - The
Economic Lowdown Podcast Series, Episode 16 Transcript."
Accessed Feb. 4, 2020.
III.Iowa State University Extension and Outreach. "Elasticity of
Demand." Accessed Feb. 4, 2020.
IV.AgWeb. "Meat Market: A History of U.S. Meat Consumption."
Accessed Feb. 4, 2020.
V.U.S. Bureau of Labor Statistics Data. "All Uncooked Ground
Beef, Per LB. (453.6 gm) in U.S. City Average, Average Price,
Not Seasonally Adjusted." Accessed Feb. 4, 2020.
VI.U.S. Department of Transportation Federal Highway
Administration. "Economics: Pricing, Demand, and Economic
Efficiency—A Primer." Accessed Feb. 4, 2020.
VII.University of Victoria. "Principles of Economics: 3.3 Other
Determinants of Demand." Accessed Feb. 4, 2020.
VIII. Office of the Historian. "Oil Embargo,
1973–1974." Accessed Feb. 4, 2020.

For more knowledge please check the link provided;

https://www.youtube.com/watch?v=ShzPtU7IOXs
MODULE MANAGERIAL ECONOMICS