Price Elasticity of Demand

FormulaInterpretationExercises

Objectives:

Define price elasticity of demand;

Compute for the price elasticity of demand;

interpret the price elasticity of demand.

Price Elasticity of Demand

Responsiveness of quantity demand as a result of a change in price

price elasticity of demand

Price elasticity of demand = % change in quantity demanded

% change in price

ED = % Q % P

Q2 – Q1 ED = Q

P2 – P1 P

price elasticity of demand

Where:

Q2 = new quantity demand Q1 = initial quantity demand P2 = new price P1 = initial price Q = ave. quantity demand P = ave. price

Rule:

If Ed = 1, Unitarygreater than 1, elasticless than 1, inelastic

Interpretation:

ELASTIC= luxury

has close substitutes

has many uses

INELASTIC=necessity

has no or few substitutes

forms an insignificant part of the expenditures

Example:

The price of burger increased from 25 to 30 pesos. The quantity demand dropped from 200 to 150. Is burger a necessity or a luxury?

Solve for Ed and interpret the results.

PRICE QUANTITY DEMAND

1. 10 2012 10

2. 10 1515 13

Price Quantity Demand3. 25 50

50 254. 5 20

5 405. 5 20

10 20

When the price of rice per kilo rose by 4 pesos from 25 pesos, the quantity demand decreased from 500 kilos to 475 kilos. Compute for Ed. Interpret the result.

Remember Me…

As an entrepreneur, how would you price an elastic and an inelastic good?

Explain.

Price Elasticity of Supply

FormulaInterpretationExercises

Objectives:

Define price elasticity of supply;

Compute for the price elasticity of supply;

interpret the price elasticity of supply.

Price Elasticity of Supply

-responsiveness of quantity supply given a change in the price of the product.

ES = % Qs

% P

ES = Q2 – Q1

Q P2 – P1

P

price elasticity of supply

RULE:

When Es > 1, elastic, manufactured good

< 1, inelastic, agricultural good

= 1, unitary elastic, semi-manufactured or semi-agricultural

Exercises: Solve for Es and interpret the results.

1. P1= 20 ; Q1 = 100P2= 25 ; Q2 = 150

2. When the fishermen learn that the price of tilapia increases from 80 pesos per kilo to 100 , they increase their harvest by 1,000 kilos only from 12,000.

Remember Me…

Suppose you would like to engage in business, which would you opt to produce and sell, an elastic or an inelastic good? Why?

Recap for the two lessons

What is the difference between price elasticity of demand and price elasticity of supply?

As a consumer, how useful is the principle of the price elasticity to you?

How about as an entrepreneur?