Republic of the Philippines

PANGASINAN STATE UNIVERSITY

Sta. Maria, Pangasinan

Name: Shena L. Cano Date:

BSE IV- TLE Rating:

Title: Demand Elasticity and Supply Elasticity

Objectives:
a. Define Elasticity
b. Explain the Demand Elasticity and Supply Elasticity
c. Solve the Demand Elasticity and Supply Elasticity

PRE TEST:
I. Multiple Choices: Encircle the letter of the best answer.

1. It refers to the degree of responsiveness in supply or demand in relation to changes in price.

a. Income Elasticity b. Supply Elasticity c. Elasticity d. Demand Elasticity
2. If the price of a good increases, then
a. the demand for complementary goods will increase.
b. the demand for the good will increase.
c. the demand for substitute goods will increase.
d. the demand for the good will decrease.
3. The law of demand refers to the
a. inverse relationship between the price of a commodity and the quantity demanded of
the commodity per time period.
b. direct relationship between the desire a consumer has for a commodity and the amount of
the commodity that the consumer demands.
c. inverse relationship between a consumer's income and the amount of a commodity that
the consumer demands.
d. direct relationship between population and the market demand for a commodity.
4. This states that all other factors being equal, as the price of a good or service increases,
consumer demand for the good or service will decrease and vice versa.
a. Law of Demand
b. Demand Schedule
c. Law of Effect
d. None of the above
5. Which of the following goods would you expect to have the largest income elasticity of
demand?
a. Rice b. Toothpaste c. Beer d. stereo equipment
6. Karen's income elasticity of demand for bottles of her favorite wine is 1.5. Currently, her
Income is equal to 50,000 and she normally buys 500 bottles per year (Unless Karen entertains a
lot, she has a problem). If her income increases to 55,000 how many bottles of her favorite wine
will she buy per year?
a. 425 b. 550 c. 575 d. 515
7. A function can be defined as a mathematical expression that states a relationship between two
or more variables containing cause and effect relationship.
a. Demand Curve
b. Demand Function
c. Demand Slope
d. Demand Schedule
8. Demand curves have a negative slope because
a. firms tend to produce less of a good that is more costly to produce.
b. the substitution effect always leads consumers to substitute higher quality goods for
lower quality goods.
c. the substitution effect always causes consumers try to substitute away from the
consumption of a commodity when the commodity's price rises.
d. an increase in price reduces real income and the income effect always causes consumers
to reduce consumption of a commodity when income falls.
9. If a good is normal, then a decrease in price will cause a substitution effect that is
a. positive and an income effect that is positive.
b. positive and an income effect that is negative.
c. negative and an income effect that is positive.
d. negative and an income effect that is negative.
10. If a change in the price of a good causes no change in total revenue
a. the demand for the good must be elastic.
b. the demand for the good must be inelastic.
c. the demand for the good must be unit elastic.
d. buyers must not respond very much to a change in price.

BODY:
What is Elasticity?

Elasticity refers to the degree of responsiveness in supply or demand in relation to

changes in price. If a curve is more elastic, then small changes in price will cause large
changes in quantity consumed. If a curve is less elastic, then it will take large changes in
price to effect a change in quantity consumed. Graphically, elasticity can be represented
by the appearance of the supply or demand curve. A more elastic curve will be horizontal,
and a less elastic curve will tilt more vertically.

'Demand elasticity refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income. Demand elasticity is
calculated by taking the percent change in quantity of a good demanded and dividing it
by a percent change in another economic variable. A higher demand elasticity for a
particular economic variable means that consumers are more responsive to changes in
this variable, such as price or income.

BREAKING DOWN 'Demand Elasticity'

Demand elasticity measures a change in demand for a good when another economic
factor changes. Demand elasticity helps firms model the potential change in demand due
to changes in price of the good, the effect of changes in prices of other goods and many
other important market factors. A grasp of demand elasticity guides firms toward more
optimal competitive behavior and allows them to make more precise forecasts of their
production needs. If the demand for a particular good is more elastic in response to
changes in other factors, companies must be more cautions with raising prices for their
goods.

The Law of Demand

law of demand is a microeconomic law that states, all other factors being equal, as the
price of a good or service increases, consumer demand for the good or service will
decrease, and vice versa.
Two concepts that explain why there is an inverse relationship by Price and
Demand
'Substitution Effect'

The substitution effect is the economic understanding that as prices rise or income
decreases consumers will replace more expensive items with less costly alternatives.
Conversely, as the wealth of individuals increases, the opposite tends to be true, as lower-
priced or inferior commodities are eschewed for more expensive, higher-quality goods
and services, known as the income effect.

The Income effect in economics can be defined as the change in consumption resulting
from a change in real income. This income change can come from one of two sources:
from external sources, or from income being freed up (or soaked up) by a decrease (or
increase) in the price of a good that money is being spent on.

THREE METHODS OF THE DEMAND CONSUMPTION

Demand Schedule:
Demand schedule refers to a tabular representation of the relationship between price and
quantity demanded. It demonstrates the quantity of a product demanded by an individual
or a group of individuals at specified price and time.

Demand Curve:
Demand curve shows a graphical representation of demand schedule. It can be made by
plotting price and quantity demanded on a graph. In demand curve, price is represented
on Y-axis, while quantity demanded is represented on X-axis on the graph. R.G Lipsey
has defined demand curve as “the curve which shows the relationship between the price
of a commodity and the amount of that commodity the consumer wishes to purchase is
called Demand Curve.”

Demand Function:
A function can be defined as a mathematical expression that states a relationship between
two or more variables containing cause and effect relationship. Similarly, demand
function refers to the relationship between the quantity demanded (dependent variable)
and the determinants of demand for a product (independent variables). In other words,
demand function states the influence of various factors of demand, such as price,
customer’s income and habits, and standard of living, on the demand of a product.

Alfred Marshall Demand, Alfred Marshall Theories Definition

Marshall's suggestion that the influence of demand on price determination is relatively easy to
analyze may well be correct. Yet there were problems with the theory of demand that Marshall
was not able to solve satisfactorily. He seemed to recognize these difficulties and avoided them
by assumption. His most important contribution to demand theory was his clear formulation of
the concept of price elasticity of demand. Price and quantity demanded are inversely related to
each other; demand curves slope down and to the right. The degree of relationship between
change in price and change in quantity demanded is disclosed by the coefficient of price
elasticity. The coefficient of price elasticity is

eD = - percent change in quantity demanded / percent change in prices = (Ap/p) / (Aq/q)

Price Elasticity of Supply

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in
price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing
market conditions, especially to price changes. The following equation can be used to calculate
PES.

When the coefficient is less than one, the supply of the good can be described as
inelastic; when the coefficient is greater than one, the supply can be described as
elastic.An elasticity of zero indicates that quantity supplied does not respond to a price
change: it is "fixed" in supply. Such goods often have no labor component or are not
produced, limiting the short run prospects of expansion. If the coefficient is exactly one,
the good is said to be unitary elastic.

The quantity of goods supplied can, in the short term, be different from the amount
produced, as manufacturers will have stocks which they can build up or run down.
Formula 3.3

The calculation of elasticity of supply is comparable to the calculation of elasticity of

demand, except that the quantities used refer to quantities supplied instead of quantities
demanded.

Factors that influence the elasticity of supply include the ability to switch to production
of other goods, the ability to go out of business, the ability to use other resource inputs
and the amount of time available to respond to a price change.

Over a short time period, firms may be able to increase output only slightly in response to
an increase in prices. Over a longer period of time, the level of production can be
adjusted greatly as production processes can be altered, additional workers can be hired,
more plants can be built, etc. Therefore, elasticity of supply is expected to be greater over
longer periods of time.
POST TEST :

II. IDENTIFICATION : Identify what is described in the statement. Write your answer
on the provided space before the number.

______________1. It refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income.
_____________2. In economics can be defined as the change in consumption resulting
from a change in real income.
_____________3. He explained how supply and demand, costs of production and price
elasticity work together. And developed the supply-and-demand curve that is still used to
demonstrate the point at which the market is in equilibrium.
______________4. It measures the responsiveness of quantity supplied to a change in price.
______________5. It is the economic understanding that as prices rise — or income decreases —
consumers will replace more expensive items with less costly alternatives.

True or false
___________1. A firm’s total revenue is equal to price times demand.
___________2. The price elasticity of demand coefficient is, technically, always negative, but for
convenience economists ignore the minus sign.
___________3. If demand is inelastic and price falls, then total revenue will rise.
___________4. If the elasticity of demand is unitary and the price rises, then total revenue will
rise.
___________5. A major determinant of price elasticity of demand is the number of
complementary products available.

Solve the problem below:

Problem : Yesterday, the price of envelopes was 3 a box, and Julie was willing to buy 10
boxes. Today, the price has gone up to 3.75 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?