ELASTICITY OF DEMAND AND SUPPLY AND THEIR APPLICATION

Price Elasticity of Demand Is the degree of responsiveness of quantity demanded to a change in price. Economists define this in the following mathematical expression:

PED.png

In the equation, when the result of the price elasticity of demand is greater than 1, the consumers’ sensitivity to changes in price is said to be elastic. When it is less than 1, it is inelastic. However when price elasticity is equal to 1, the quantity demanded is unitary elastic.

Summary of Elasticity of Demand

Price Elasticity of Demand   Interpretation
=1 Unitary elastic
>1 Elastic
<1 Inelastic

Unitary Elastic Demand means that the total spending by consumers on the product will remains the same at each price level; that the change in price met with a proportionate change in demand.

Demand
Unitary Elastic

 

Elastic Demand means the change in quantity demanded will be proportionately higher than the reduction of price. if the demand for a product is price elastic, a supplier stands to gain extra revenue if they reduce their prices.

Demand
Elastic

Inelastic Demand is when people buy about the same amount whether the price drops or rises.

Demand
Inelastic

Example:

El Buen Viaje Petroleum Inc. sells Gasoline for Php 44.00 and the Quantity Demanded is 10 liters. When they decided to increase it to Php 55.00, it becomes 9 liters. Is the Quantity Demand Elastic or Inelastic?

Demand.png

Importance of Total Revenue in Pricing Decision

Total Revenue is important in pricing decision in identifying with price a quantity will yield high revenue. The Total Revenue is express as follows:Demand

Income Elasticity of Demand is the degree of responsiveness of a percentage change in quality demanded with a percentage change in income.

Demand.png

Income Elasticity of Demand     Interpretation
>1 Luxury Goods
<1 Necessity
>0 Normal good
<0 Inferior good

Example:

Addie earns Php 19,000.00 per month and he consumes Php 250 worth of coffee per month. When his income increase by Php 4,000.00 per month, He start to consume Php 1100 worth of coffee per month. Is Addie’s Demand for coffee Normal, Inferior, Necessity or Luxury?

Demand.png

Cross Elasticity of Demand Is a degree of responsiveness of a percentage change in quantity of a good with a percentage change in the price of other goods.

Cross Demand    Relation of goods
= 0 X and Y not related
>0, positive Substitutes
<0, negative Complements

Demand.png

Price Elasticity of Supply measures the relationship between change in quantity supplied following a change in price.

Demand.png

Price Elasticity of Supply   Interpretation
=1 Unitary elastic
>1 Elastic
<1 Inelastic

Demand.png

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