IMPLICATIONS OF MARKET PRICING

IN
MAKING ECONOMIC DECISIONS

Prepared by: Sarah Jane Valenzuela-Yosa

Lesson Objectives:

1. Determine the implications of market pricing

in making economic decisions .

2. Explore the elasticity of demand and supply.

3. Solve problems on price elasticity of demand

and supply.

4. Value the implications of market pricing in

decision making.
 Demand, Supply and Elasticity of Clean Water in the
Philippines 8/27/2015

According to an article created by Vice News, there are 55

people who die in the Philippines every day because of the
lack of clean water. As one can see clean water is greatly
needed by all people. As a student who is lucky to be given all
the necessities needed in life it would be normal not to think
of this because we normally do not notice it. However, we
need to. According to Katrina Arianne Ebora, who works for
UNICEF’s Water, Sanitation and Hygiene program in the
Philippines stated that “Over 30 million people in the
Philippines do not have access to improved sanitation
facilities.” Also, according to the PIS by 2050 the population
of the areas with poverty in Manila will reach over 9 million!
With the rising population of the Philippines there will be a
problem with the economy of clean water because there will
be too much demand for the supply of water. .
 The Marketing Price System

SHORTAGE
- is when there is an excess demand for the
quantity supplied.

SURPLUS
-If producers make too many goods but the
consumers didn’t have the capacity to buy
them, then there is surplus of supply.
“purchasing power”.
-the willingness to buy goods and services accompanied
by the ability to buy
EQUILIBRIUM
Equilibrium is a point of
balance or a point of rest. It is
also called “market-clearing
price”.
Equilibrium price is the price
at which the producer can sell
all the units he wants to
produce and the buyer can buy
all the units he wants
Quantity demanded and
quantities supplied are equal.
CHARACTERISTICS
The supply and demand are
balanced in equilibrium.
The economic forces are
balanced and in the absence of
external influences, the
(equilibrium) values of
economic variables will not
change.
The amount of goods or
services sought by buyers is
equal to the amount of goods
or services produced by sellers.
 Price
___________________
Quantity Supplied
Quantity Demanded

SHORTAGE

Price Increases
Quantity Increases

Price
__________________
Quantity Supplied
Quantity Demanded

SURPLUS

Price decrease
Quantity decreases
PRICES
-prices of goods that we encounter everyday to the
things we buy plays a crucial role in determining an
efficient distribution of resources in a market system
help us to make every day economic decisions about
our needs and desires.

-indications of the acceptance of a product

-the more popular the product, the higher the price

that can be charged

-decided by interactions between the producers and

the consumers
-a signal for shortages and surpluses which help
firms and consumers respond to changing
market conditions.

-If a good is in shortage – price will tend to rise.

Rising prices discourage demand, and
encourage firms to try and increase supply.

-If a good is in surplus – price will tend to fall.

Falling price encourage people to buy, and cause
firms to try and cut back on supply.
MARKET PRICE

-the point that the

supply and demand
curves intersect.
(Judge, S. 2020)
 PRICE ELASTICITY OF DEMAND AND
SUPPLY

Price elasticity
-measures the responsiveness of the quantity
demanded or supplied of a good to a change in its
price.
Elasticity can be described as:
a) elastic or very responsive and
b) unit elastic, or inelastic or not very
responsive
 Effects of Change in Demand and Supply

•Elastic demand or supply curve

-indicates that quantity demanded or supplied
respond to price changes in a greater than
proportional manner.

•Inelastic demand or supply curve

- one where a given percentage change in price
will cause a smaller percentage change in quantity
demanded or supplied.

•Unitary elasticity
-means that a given percentage changes in price
leads to an equal percentage change in quantity
demanded or supplied.
 CATEGORIES OF PRICE ELASTICITY

1. THE PRICE ELASTICITY OF DEMAND

-Price elasticity of demand is the responsiveness of
quantity demanded.
-The mathematical value is negative.
-A negative value indicates an inverse relationship
between price and the quantity demanded.

Price Elasticity of Demand (PED)= % change in

quantity demanded % Change in price -
***Elastic Demand***
-the percentage change in price brings about a more
than proportionate change in quantity demanded.

***Inelastic Demand ***

-when an increase in price causes a smaller % fall in
demand.

***Unitary Elastic Demand***

-When the percentage change in demand is equal to
the percentage change in price, the product is said to
have Unitary Elastic demand.
***Perfectly Elastic***
-a small percentage change in price brings about
a change in quantity demanded from zero to
infinity.

***Perfectly Inelastic ***

- the Price Elasticity Demand is =0 any change in
price will not have any effect on the demand of
the product.
POINT ELASTICITY

a) The midpoint elasticity is less than 1. (Ed < 1).

Price reduction leads to reduction in the total
revenue of the firm.

b) The demand curve is linear (straight line), it has

a unitary elasticity at the midpoint. The total
revenue is maximum at this point.

c) Any point above the midpoint has elasticity

greater than 1, (Ed > 1).
2. THE INCOME ELASTICITY OF
DEMAND (YED)
-It is the relationship between changes in quantity
demanded for a good and a change in real income.

3. CROSS PRICE ELASTICITY OF

DEMAND (XED)
-The effect on the change in demand of one good
as a result of a change in price of related to
another product.
4. PRICE ELASTICITY OF SUPPLY (PES)

-The measure of the responsiveness of quantity to

a change in price. It is the percentage change in
supply as compared to the percentage change in
price of a commodity. PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
 Determinants of Price Elasticity of Supply

Agarwal, P. (2020) said, price elasticity of supply can be

influenced by the following factors:

1. Marginal Cost-
- If the cost of producing one more unit keeps
rising as output rises or marginal cost rises
rapidly with an increase in output, the rate of
output production will be limited.
- The Price Elasticity of Supply will be
inelastic - the percentage of quantity supplied
changes less than the change in price.
- If Marginal Cost rises slowly, supply will be
elastic.
2. Time
-Over time price elasticity of supply tends to become more
elastic. The producers would increase the quantity supplied
by a larger percentage than an increase in price.

3. Number of Firms
-The larger the number of firms, the more likely the supply is
elastic. The firms can jump in to fill in the void in supply.

4. Mobility of Factors of Production

-If factors of production are movable, the price elasticity of
supply tends to be more elastic. The labor and other inputs
can be brought in from other location to increase the capacity
quickly.

5. Capacity
-If firms have spare capacity, the price elasticity of supply is
elastic. The firm can increase output without experiencing an
increase in costs, and quickly with a change in price.
Thank you 