price elasticity

ObjectivesAt the end of the lesson, the students should be able to: define price elasticity of demand and price

elasticity of supply

identify the different types and characteristics of demand elasticity

identify the determinants of price elasticity of supply and demand

ObjectivesAt the end of the lesson, the students should be able to:

solve for the price elasticity of demand and price elasticity of supply

PRICE ELASTICITY OF

DEMAND AND SUPPLY

Law of Demand

price elasticity of demand

Measures the responsiveness of

demand to changes 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

elasticity ratio of percentage

Q = Q2 – Q1 P = P2 – P1

% Q = Q2 – Q1 % P= P2 – P1

Q P

Q = Q2 + Q1 P = P2 + P1 2 2

Characteristics

value type of demand Response to change

0

Perfectly inelastic demand

QD remains the same

0-1 Inelastic demand Minimal change in QD

1 Unitary elastic Change in price = change in demand

Characteristics

value type of demand Response to change

1+ Elastic demand Bigger change in QD

infinity

Perfectly elastic Any change in price would lead to extremely big change in QD

type of demand

Elastic

Inelastic

Unitary elastic

shape of demand according to elasticity

relatively flat

relatively steep

shape of demand according to elasticity

extremely flat

extremely steep

determinantsavailability of substitutes

importance of the item in the budget

time frame

Demand is more elastic when there are more substitutes

Demand is inelastic when the product is a more significant portion of the consumer’s budget

Demand can be more elastic over time

law of supply

price elasticity of supply

Measures the responsiveness of supply to the changes in price

ES = % S % P

ES = Q2 – Q1 Q

P2 – P1 P

price elasticity of supply

S = S2 – S1 P= P2 –P1

% S = Q2 – Q1 % P = P2 – P1 Q P

Q = Q2 + Q1 P = P2 + P1

2 2

price elasticity of supply

Characteristics:

Value Type of supply Response to change in price

0 Perfectly inelastic supply

QS remains the same

0-1 Inelastic supply Minimal change in QS 1 Unitary supply Change in price =QS

Characteristics: Value Type of supply Response to change in price

1 + Elastic supply Bigger change in QS Infinity Perfectly

elastic supply Any change in price would lead to extremely big change in QS

determinants

Manufactured goods

Agricultural goods

Seatwork

Compute for the price elasticity of demand:

DEMAND FOR good Y

A: Q1= 160 ; P1 =110B: Q2= 240 ; P2 =90

quiz: 1.Compute for the price elasticity of demand:

Q1= 200; P1= 11Q2= 100; P2= 15

2.Compute for the price elasticity of supply:

Q1= 75; P1= 30Q2= 175; P2= 31