IMPLICATIONS OF

MARKET PRICING
IN MAKING
ECONOMIC
DECISIONS
 TANONG KO, SAGUTIN MO!

we use
What if the things that you or
desire
consume
like everyday
high-end become
cellphone, branded
scarce?
shoes andWhat will happen
clothes, to its
etc. become
price in
more the market?
expensive than before? Will
you still buy them? Why or why
not?
2
 A venue where
consumers and
The suppliers of goods
Market transact on buying
or selling of any
System
items is called a
market.
 The Market Price System
The price of commodity is
an index of cost or
sacrifice (for producers)
and benefit or satisfaction
(for consumers).
The Market Price System
The Market Price System
The price of the products determines the
economic decisions of the players in the
market.
The buyers depend on the prices as to how they
will satisfy their needs and desires.

The sellers depend on the prices as to the

quantity of products that they will supply in
the market.
Price System in the
Market Economy
 Price floor and Surplus”

Price floor is the minimum

or least price of a product
that is set by the
government to intervene in
the market price.
 Price floor and Surplus”
Since the price floor is set to be greater
than the equilibrium level, the normal
response of the sellers is to increase
their supply. But since the price is high,
the buyers’ response is to decrease their
demand for the product. In this event that
there is more supply of product than the
demand in the market, surplus of
products occurs.
Price floor and Surplus”
In this graph,
the Qd in
price floor is
less than the
Qs. This
distance
between the
Qs and Qd is
the surplus.”
 Price floor and Surplus”
EXAMPLE:
“There are times that the government administer
prices higher than equilibrium price to protect
the producers. One instance is when a typhoon
hit the country’s agricultural lands, so the
government tries to help farmers to still secure
good income amidst the calamity by setting a
price floor or the lowest price that is charged
to the products. This price floor is above the
equilibrium price to still attain higher prices for
the produce of the farmers.”
Price floor and Surplus”

Price ceiling is the

maximum price that is
charged for a product or
the maximum selling price.
 Price floor and Surplus”
Since price ceiling is set under the equilibrium
level, the normal response of the buyers to a
decreased price is to increase their demand.
However, due to lower price in the market, the
sellers or producers are discouraged to sell
more because of decrease in profit so they tend
to decrease their quantity supply. In this event
that there is greater demand for a commodity
but not being satisfied by the sellers, shortage
occurs.”
Price floor and Surplus”
“In this graph,
the Qd in price
ceiling is
greater than the
Qs. This
distance
between the Qs
and Qd is the
shortage”.
Price floor and Surplus”
 Price floor and Surplus”

When there is disequilibrium

(absence of equilibrium level on
price and quantity), or when there is
problem of scarcity in the market,
it is addressed through the changes
in price”. “Price plays as an
indication of shortage or surplus. It
Price floor and Surplus”
 Remember!
However, markets do not
A surplus pushes always attain equilibrium
pressure in a downward
manner on the price and
immediately. During this
a shortage pushes adjustment period of price
pressure in an upward to set on equilibrium level,
manner on the price to the market is said to be in
achieve the equilibrium
level. disequilibrium”.
ELASTICITIES OF DEMAND
AND SUPPLY
demand and demand and This degree of
supply respond supply of these response to a
to changes in products also change in
different react to changes determinant is
determinants in their called
(price, income, determinants. elasticity.
etc.).
ELASTICITIES OF DEMAND
AND SUPPLY

Elasticity is a measure of how much

buyers and sellers respond to changes in
market conditions or changes in
determinants”.
 DEGREES OF ELASTICITY:
1. ELASTIC DEMAND OR
SUPPLY – “a variation or
change in determinant will
result to a proportionately
greater variation or change
in demand or supply”.
“It means that there will be
greater or bigger percentage
variation or difference in the
quantity demanded or
supplied when one of their
determinants changes
(whether increases or
decreases)”.
 DEGREES OF ELASTICITY:
Example: Remember: “The
absolute value of
“If the price of a dress rise by the coefficient of
10% and this leads to decrease elasticity is greater
than 1”.
in the quantity demanded for that
dress by 12%, then we conclude
that the demand for dress is
elastic”.
 DEGREES OF ELASTICITY:
Computation:
E= “% change in Quantity demand or supply /
% change in determinant” (like price)
E= 12/10
E= = 1.2 ELASTIC
 DEGREES 2. INELASTIC
DEMAND OR
OF
SUPPLY*- “a change in
ELASTICITY determinant will result to
It shows that the result
a proportionately lesser
will be lesser or little change in demand or
percentage change in
quantity demanded or supply”.
supplied when one of
their determinants
changes (whether
increase or decrease)”.
 DEGREES Example:
“If the price of rice
OF
increases by 12% and
ELASTICITY as a result the quantity
Remember: “The
demanded goes down
absolute value of the by 6%, then it can be
coefficient of elasticity is
less than 1”. concluded that the
demand for rice is
inelastic”.
 DEGREES Computation:
OF
E= “% change in Qd or
ELASTICITY Qs” / “% change in
Remember: “The
determinant” (like price)
absolute value of the E= 6/12
coefficient of elasticity is
less than 1”. E= 0.5 INELASTIC
 DEGREES
OF
ELASTICITY 3. UNITARY ELASTIC”- “a
change in determinant will lead
Remember: The to an equal change in demand
absolute value of
the coefficient of or supply”.
elasticity is equal to
1.
 DEGREES Example:
OF “If the price of broccoli
ELASTICITY increases by 5% and this leads
to decrease in the quantity
Remember: The demanded for broccoli by 5%,
absolute value of
the coefficient of then it can be concluded that
elasticity is equal to the demand for broccoli is
1.
unitary elastic”.
 DEGREES
OF Computation:
ELASTICITY
E= “% change in Qd or Qs” / “%
change in determinant (like the
Remember: The
absolute value of price)”
the coefficient of
elasticity is equal to
E= 5/5
1. E= 1 UNITARY ELASTIC
According to Agarwal (2018) and
Judge (2020), there are three
categories of elasticity of demand.
These three types deal with the ELASTICITY
My
responses to a change in the price OF
Family
of the good itself, in income, and in
the price of a related good, which
DEMAND
is a substitute or a complement”.
 1. “Price Elasticity of Demand (PED)”

-This quantifies or measures the sensitivity of

response of the quantity demand to the
change in price of the good or service. This
concept is computed based on percentage
changes”.
 1. “Price Elasticity of Demand (PED)”
This formula for midpoint is used to calculate for PED
or price elasticity of demand”:

Where:
Change in Qty = Q2-Q1
Q1 = “original Qd”
Q2 = “new Qd”
Change in price = P2-P1
P1 = original price of the good
P2 = new price of the good
 1. “Price Elasticity of Demand (PED)”

Take note that the coefficient of elasticity is

negative due to the opposite relationship between
the price of the product and the quantity demanded
for that product”.

In this case, we say that the coefficient of elasticity

is absolute value* (ignoring the negative sign, so it
is always positive).
 1. “Price Elasticity of Demand (PED)”

Disregarding the negative sign, the coefficient of PED

represents the nature of the product involved:
➢ Elastic= “When the computed PED is greater than
1, it means that the demand for that product is
elastic”

(“the change in percentage of Qd is higher than the

change in percentage of price”)
 1. “Price Elasticity of Demand (PED)”

EXAMPLE OF ELASTIC PED:

Real estate is one example of this. Since there are
many different housing choices like townhouses,
condos, apartments, or resorts. The options make
easy for people to not pay more than they demand. It
is then a non- essential good because a little
increase in price of housing would make the buyers
look for other choices in the market.
 1. “Price Elasticity of Demand (PED)”

➢ Inelastic= “When the computed PED is less than

1, it means that the demand for that product is
inelastic”

(“The change in percentage of Qd is lower than the

change in percentage in price”)
 1. “Price Elasticity of Demand (PED)”

EXAMPLE OF INELASTIC PED:

“Gasoline is one example of this because there’s no
alternative for this good. It is a necessity for people
with car because they need to buy gasoline to use
the vehicle. There could be a weak substitute like
buses or train riding. If the price of the gasoline goes
up, drivers don’t have much of a choice but to still
buy it. Therefore, the demand for it is inelastic”.
 1. “Price Elasticity of Demand (PED)”

➢ Unitary elastic= “When the coefficient of price

elasticity is equal to 1, we say that the demand for it
is unitary elastic”.

“It shows that there is proportional variation or

change in the Qd and the price of the product”.
 1. “Price Elasticity of Demand (PED)”

➢ Perfectly inelastic= “If there is price variation or

price change of the product, the change in Qd is
equal to zero”.

➢ Perfectly elastic= “if there is a little %

change in the price of the good, the Qd
changes from 0 to infinity”.
1. “Price Elasticity of Demand (PED)”
 This signifies the sensitivity
2. “INCOME
of quantity demanded to the
ELASTICITY OF
% change in income of the
DEMAND (YED)”
consumers”.

YED = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑)/ (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚e)

Normal Goods*- goods that consumer tends to buy

more when their income increases. “The demand for
these products increases as the income of the
consumers rises”.
2. “INCOME
ELASTICITY OF A positive sign (+) for YED shows that
it is a normal good. As income
DEMAND (YED)” increases, buyers can now afford to
buy more expensive counterpart of the
goods that they were buying before.

Example:
As the consumers’ income increases, the demand for
beef steak rises and the demand for chicken
decreases.
 Inferior Goods*- goods that are bought
2. “INCOME by consumers when their income
becomes low or the demand for these
ELASTICITY OF products goes down as the income of the
DEMAND (YED)” consumers rises.
A negative sign (-) for YED shows that it is an inferior
good.

Example:
“When the income of the consumers goes up, the
demand for inexpensive brand of electric fans falls
because consumers will now switch to more expensive
brands of electric fans or they may even afford to buy
air-conditioning units”.
3. CROSS PRICE ELASTICITY (XED)*

This computes how the demand quantity of

a certain product changes as the price of a
related good changes”.

“Cross-price elasticity computes how the

demand for a good respond to the change
in the price of its substitute good or
complement goods”.
3. CROSS PRICE ELASTICITY (XED)*
XED = “(% 𝑐ℎ𝑎𝑛𝑔𝑒s 𝑖𝑛 Qd 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋) / (% price
change 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑌)”

For example, Coca-Cola Company wants to see the

relationship between the demand for their products and the
price of Pepsi and vice versa”.

“To compute the XED of the demand of Coke to the price

change of Pepsi, here’s the equation”:
XED = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 Coke) / (% 𝐶ℎ𝑎𝑛𝑔𝑒
𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 Pepsi)
 3. CROSS PRICE ELASTICITY (XED)*

If the value of Cross Price Elasticity is positive (+)

Substitute good

“(It shows that when the product price increases,

the demand for the substitute product rises)”
“Example: When the price of bread goes up, buyers will substitute
rice for bread”
3. CROSS PRICE ELASTICITY (XED)*

“When Cross Price Elasticity is zero”

“The two products are unrelated”

PRICE ELASTICITY OF
SUPPLY* (PES)
-This calculates how the suppliers respond to
the variation of products’ price in the market”.
SUPPLY
➢ “An elastic supply indicates that firms
can increase their output level without an
increase in cost or delay in time frame”.

➢ “An inelastic supply means that

producers have difficulty in changing their
output level in a given time frame”.

➢ “Perfectly elastic supply curve

(horizontal curve) is a case when firms are
prepared to supply any amount of good at a
certain price, but at any price decrease, the
supplier will never supply a good”.
SUPPLY
EXAMPLE OF PERFECTLY
ELASTIC

Example of perfectly elastic supply

curve are the goods in the
supermarket. Consumers can buy as
much as they want for as long as it is
on the prevailing price*. But they will
not be able to buy anything if they try
to buy the goods lower than the
prevailing price.
SUPPLY
PES = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑) / (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒)
SUPPLY
PES = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑) / (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒)