GROUP – 9

APPLIED ECONOMICS
 LET'S PLAY A GAME
:remember all the first letter of each picture

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___ ___ ___ ___ ___ ___
D E M A N D
 THE
APPLICATION
OF DEMAND
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 WHAT IS
DEMAND?
• Is one of the two influential
economic forces that play a
role in setting the price of a
particular product.

• Is an economic concept that

relates to a consumers desire
and willingness to purchase a
good or service for a specific
price.

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DEMAND IS BASED ON:
• the people’s needs
and wants
• people’s ability to pay
• Decision to avail as
much as they want
 LAW OF DEMAND:
A microeconomics law that
states, all other factors being
equal, as the price of a good or
service increases, consumers
demand for the good or service
will decrease and vice versa.

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 ?
Together with the law of supply, the law of
demand helps is understand why things are
priced at that level, and to identify
opportunities to buy what are perceived to
be underpriced (or sell overpriced) products,
assets, or securities. For instance, a firm
may boost in response to rising prices that
have been spurred by a surge in demand
A table of quantity demand of goods
at different price levels.
A graph depicting the relationship
between the price of a certain commodity
and the quantity of that commodity that
is demanded at a certain price.
• Can be used either for the price-
quantity relationship for an individual
consumer, or for all consumers in a
particular market.
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 ELASTICITIES OF DEMANDS

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 measure of responsiveness that
tells us how a depended variable
such as quantity responds to a
change in a independent variable
such as price.

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 ELASTICITY IS DIVIDED INTO
FIVE BROAD CATEGORIES:
1) PERFECTLY ELASTIC
2) ELASTIC
3) PERFECTLY INELASTIC
4) INESLASTIC
5) UNITARY

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 1) ELASTIC DEMAND – elasticity that is greater
than one, it indicates high responsiveness to
changes in price.
2)INELASTIC DEMAND – elasticity that is less
than one, it indicates a low responsiveness
to change in price
3)UNITARY ELASTICITIES – indicates
proportional responsiveness of either
demand or supply.

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 PERFECTLY ELASTIC AND
PERFECTLY INELASTIC - refers to
the two extremes of elasticity

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 4) PERFECTLY ELASTIC – response to price is
complete and infinite: a change in price
results in the quantity falling to zero.
5) PERFECTLY INELASTIC – means there is no
damage in quantity at all when the price
changes.

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 EXACT FORMULATION OF PRICE
ELASTICITY OF DEMAND

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

=
OR 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
∆𝑄/𝑄 ∆𝑄 𝑃
= = × (∆= change)
∆𝑃/𝑃 ∆𝑃 𝑄

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 There is a slight problem with the computation of
percentage changes in this manner. We get different
answers depending on whether we move up or down the
demand curve. One way out to this difficulty is to take
the average of two prices and take the two quantities
over the range we are considering and comparing the
change of the average, instead of comparing it to the
price or quantity at the start of the change.

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 The formula for calculating
price elasticity of demand
becomes:
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
n= ÷
𝑆𝑢𝑚 𝑜𝑓 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠/2 𝑆𝑢𝑚 𝑜𝑓 𝑝𝑟𝑖𝑐𝑒𝑠/2

∆𝑄1 ∆𝑃
n= ÷
(𝑄1+𝑄2) (𝑃1 + 𝑃2)
Q1 and Q2 are two different quantities
P1 and P2 are two different price

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 To calculate the elasticity, instead of using simple
percentage changes in quantity and price, economist
sometimes use the average percentage change in
both quantity and price. This is called the Midpoint
Method for Elasticity:

MIDPOINT METHOD FOR ELASTICITY

The advantage of using the Midpoint method is that we

get the same elasticity between two price points
whether there is a price increase or decrease. It is
because the formula uses the same base for both cases.
The midpoint method is referred as the arc Elasticity in
some textbooks.
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 A drawback of the midpoint method is that as
the two points gets farther apart, the elasticity
value loses its meaning. For this reason some
economist prefer to use the Point Elasticity
Method. In this method we need to know what
value represent the initial value and new value.
FORMULA:

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 EXAMPLE:

Calculate the elasticity as price decreases from $70 at

point B to $60 at point A

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 SOLVING:

3000−2800
% change in quantity = × 100
(3000+2800)/2

200
= × 100
2900

= 6.9

60−70
% change in price = × 100
(60+70)

−10
= × 100
65

= −15.4

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 NOTE:Price elasticities of demand are
always negative since price and
quantity demanded always moves in
the opposite direction of the demand
curve. But by convention, we talk
about elasticities as positive 6.9%
numbers. So mathematically, we take Price elasticity of demand=
the absolute value of the result. And − 15.4%
now we'll ignore this detail (the
negative sign). Just remember to
interpret elasticities as positive = 0.45%
numbers.

This means that if the price changes by 1% the quantity demanded will
change by 0.45%. The change in the price will result in a smaller percentage
change in the quantity demanded. Example a 10% increase in the price will
result in only 4.5% decrease in the quantity demand. And a 10% decrease in
the price will result in only 4.5% increase in the quantity demand.

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 A 1% change in price causes a response
greater than 1% change in quantity
demanded

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 a 1% change in prices causes a
response of exactly 1% change in the
quantity demand

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 A 1% change in price causes a response
of less than 1% change in quantity
demanded

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 measures the degree of
responsiveness of the quantity
demanded of a commodity to
change in its price.

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 a. Price - Elastic Demand
— negative relationship exist between small
changes in price and changes in total revenue.
— the price elasticity of demand is greater than
one.
b. Unit Price - Elastic Demand
— small changes in price do not change the total
revenue
c. Price - Inelastic Demand
— positive relationship between small changes in
price and total revenue
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 The relationship between the price elasticity of
demand and total revenue brings together some
important microeconomic concepts.

The theory states that, along the given

demand curve, price and quantity changes will
move in the opposite directions one increase
and the other on decreases

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 ▪ Ease of Substitution - the greater
number of substitute products
available, the greater elasticity of
demand will be.
▪ Number of Uses - the greater number
of users that uses a specific
commodity, the greater its elasticity of
demand.

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 ▪ Proportion of Income Spent on the
Product - the greater the proportion
of Income which the price of product
represents, it tends to have a greater
elasticity of demand.
▪ Time - elasticity of demand tends to
be greater in the long-run that the
short-run. We consider time as an
important role in the shaping of
demand curve.
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 ▪ Durability - the greater durability of
a product, the greater its elasticity
of demand will be.
▪ Addiction - forming - habit of using
or buying a product repeatedly.

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 ▪ The Price of Other Products - a rise in the price of a
product will cause the demand for its substitutes to
rise and the demand for its complements to fall.
Thus, an increase (or decrease) of demand by a
constant percentage leaves elasticity unchanged, but
a rightward shift of the curve by a fixed amount
reduces the elasticity.

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 1.Elasticity decreases when the whole
demand curve moves outwards

2.Elasticity remains unchanged when

demand curve swivels.

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 Value of Elasticity - an increase (+) in price will
cause a fall (–) in quantity.
Arc Elasticity - an estimate of Elasticity along
range of a demand curve.
Arc Elasticity of Demand - measures the
average price in the range along the demand
curve and the average quantity in this range.

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 Income Elasticity of Demand - helps us
forecast the pattern of consumer
demand as the economy grows, and
people get richer.
- measures the degree of
responsiveness of the quantity of a
product that is demanded, to changes in
income.

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 • goods with positive income
elasticities are called normal goods
• goods with negative income
elasticities are called inferior goods

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 Cross - Elasticity
The responsiveness of quantity demand
of one commodity to change the prices
of other commodities is often of
considerable interest.

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 THANK YOU!

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