Elasticity (2024-2025) PDF

ELASTICITY Objectives At the end of this How likely are you to…? lesson, the learner will be able to: How likely will you purchase Apple products if the price drops by 15%? Rate yourself from 1-10 (10 being the highest). How about your 1. iden...

ELASTICITY Objectives At the end of this How likely are you to…? lesson, the learner will be able to: How likely will you purchase Apple products if the price drops by 15%? Rate yourself from 1-10 (10 being the highest). How about your 1. identify the different internet connection consumption? If the price of an internet types of elasticity; connection on your mobile phone changed by 10%, how likely would 2. define elasticity; you be to change your internet usage? 3. relate elasticity of demand and supply to the price of goods and services; 4. explain the interaction of demand and supply in terms of price and market conditions; 5. analyze the effect of shortage and surplus on the price and quantity of goods and services in the market; Image from TechTarget 6. examine the effect A lot of price changes also burden the consumers. Other products of elasticity on demand and are unknowingly affected by price changes but do not necessarily supply; change their consumption since most are considered their needs. A lot of essential commodities needed for survival vary in price due to 7. suggests method of response/solution to increasing costs for factors of production. If you answer above 7 in problems caused by rating yourself in the questions, you are likely to adjust and still shortages and consumer the product even if there will be slight to much increase in surpluses; Consumption Choices product’s price. Below that, it is understandable to react and change 8. and value the the Howconsumption do we decidebehavior. on whatIn that way, we products areare yougoing goingtotochoose? discontinue What Lasallian way of speaking and acting your do subscription/consumption? we consider every time we shop? How did you pick your choices in sharing personal in the activity? At random? Favorites? experience. These are some of the questions that arise. Yes, the law of demand guides us with the We consider consumers’ many factors in reaction. buying But andusing the law goods consuming of supply and and demand, services. we all we’ll However, knowfocus that the demand on one factorwill thateither we increase consider orthe decrease. The same goes for the supply. most in consumption: Budget Constraints After studying the different factors that can affect the behavior of consumers, producers, and the market, we can now analyze the reactions of the major players within the market. With this lesson, we’ll somehow wholly understand why there are different reactions to the same event.  Elasticity You may have heard about elasticity in your different subjects like math and physics. In Physics, it is defined as the capability of a material to return to its original size and shape after applying any force that leads to its distortion. A perfect example of this is our elastic bands. In economics, there is also elasticity. Elasticity in economics shows the responsiveness of the consumers and producers to the changes in the market. We know from the previous lesson that there are factors that affect the behavior and choices of the players in the market. We have the law of demand and supply that explains the basic behavior, and we also studied the different factors that may affect their behavior. We just know that there are changes because of the different factors. Now, in this lesson, we’ll be able to know how much the changes will affect the behavior. Will the price Watch: How To Understand change greatly affect the demand for the product and cause the Elasticity (Economics) Watch: Introduction to price business to a great loss of income? Or will it still help the business to earn elasticity Link: of demand | APⓇ more? Microeconomics | Khan https://youtu.be/1XXhpHJTglg?fe Academy ature=shared Link: https://youtu.be/FBWJYH8DZ1g?f eature=shared Mathematically, elasticity is computed by two methods. We have the Point Elasticity and the Arc Elasticity. From the word itself, Point Elasticity shows the responsiveness of the demand or supply at one point only. This means the elasticity may change at a different point within the curve. On the other hand, the Arc Elasticity uses two points within the curve to get the midpoint. It doesn’t matter what the two points are to be used since they will give the same elasticity. So, because of this, we will be using the Arc Elasticity. There are different types of elasticity, and we’ll discuss them one by one. Own price elasticity measures the sensitivity of For this lesson, we’ll not be computing for the elasticity. Instead, we’ll a good or service's interpret the values and know their purpose in a situation. quantity demanded to price changes. It's calculated by dividing the percentage change OWN PRICE ELASTICITY in quantity demanded by the price change. High elasticity indicates The first type of elasticity that we have is the Own Price Elasticity. This high product demand measures the responsiveness of the consumers or producers to a sensitivity. certain product as the price of that product changes. The elasticity values can be interpreted as the following: |ε| = Elasticity’s absolute value (This means that the value is always positive.)  |ε| = 0 → Perfectly Inelastic CELL stands for |ε| < 1 → Inelastic Capital, |ε| = 1 → Unit Elastic Entrepreneurship, |ε| > 1 → Elastic Land, Labor |ε| = ∞ → Perfectly Elastic There are different interpretations of the elasticity values for demand and supply. We’ll take a look at them one by one. Own Price Elasticity of Demand This measures how much the quantity demanded of specific good changes due to a relative change in its price. |ε| = 0 → Perfectly Inelastic Now, if the value of the elasticity for demand is equal to zero, this means that even though there are price changes for a specific good or Goals service, in quantity the Studyingdemanded Political Science for that good or service will not Watch: Introduction to price elasticity of demand | APⓇ change. Microeconomics | Khan Academy If we show it in a graph: Link: https://youtu.be/FBWJYH8DZ1g?f eature=shared So, our demand curve is vertically straight. As you can see, even though we increase the price or decrease the price, the quantity demanded is still the same. An example of this is medicine. If a consumer is a diabetic patient, he or she will need insulin as maintenance. Now, even if the price changes, the quantity demanded by the patient will not change since it is maintenance. Thus, he or she will still be demanding the same amount of insulin. |ε| < 1 → Inelastic For inelastic, the graph is almost the same as the graph for the perfectly inelastic:  As you can see, even though there is a great increase or decrease in the price of the product, the change in the quantity demanded is not that big. Needs are a perfect example of goods or services with an inelastic elasticity of demand. Even though the price for the needs increased at a great value, we still need to consume those needs to survive. So, the Goalsdemanded quantity in Studying willPolitical Science still decrease, but not that much since these are survival needs. |ε| = 1 → Unit Elastic Now, if we look at the demand graph with an elasticity equal to 1, we’ll see that the percentage change in our price results in the same percentage change in our quantity. Watch: Why Maslow's Hierarchy Of Needs Matters by the School of Life https://youtu.be/L0PKWTta7lU |ε| > 1 → Elastic Now, if we have an elasticity that is greater than 1, our demand curve is elastic. Because of this, as the price changes, the change in our quantity demanded reacts remarkably.  Even though the price changes are only a little, our consumers are very responsive to the changes. Our wants usually have an elastic elasticity. With minor price changes, we tend to consume more of it or less of it Goals in Studying exceedingly. Political For example, there Science is a price change with iPhone 11. It got cheaper as they release the new iPhone 12. Some consumers would consume the iPhone 11 more, increasing the quantity demanded even though the price change is not that big. |ε| = ∞ → Perfectly Elastic Theoretically, there are products that change in quantity demanded, even though the price is not changing. The elasticity of these types of products is perfectly elastic. Own Price Elasticity of Supply measures the sensitivity of a good or service's quantity to price changes, with high indicating high Own Price Elasticity of Supply responsiveness and low This measures how much the quantity supplied of a specific good indicating less changes due to a relative change in its price. Now, the effects of responsiveness. elasticity are the same as the supply. The only difference with the Own Price Elasticity is the Supply curve and the impact of price changes on the quantity supplied.  |ε| = 0 → Perfectly Inelastic Same explanation as to the elasticity of demand, the perfectly inelastic supply will have prices that will not change the quantity supplied. |ε| < 1 → Inelastic Let’s practice your understanding with our computation. Try this! If the elasticity of supply is inelastic, the price changes won’t affect the product's quantity that much. There are a few changes with the quantity we supply. |ε| = 1 → Unit Elastic If it is unit elastic, the percentage change for the price is the same as the percentage change for the quantity supplied. |ε| > 1 → Elastic On the other hand, if it is elastic, then the supply is very responsive to the price changes. |ε| = ∞ → Perfectly Elastic  Again, if we have a perfectly elastic curve, the quantity changes even though we don’t have any price changes. Total Revenue, Pricing, Elasticity Now, what is the real use of the elasticity? Since we are talking about the responsiveness of quantity with price changes, elasticity will help the producers. The producers are the ones who set the price in the market since we know from Lesson 4 that we base our price on the costs of production. To help our producers decide if they decrease the price, they can use the product's elasticity, specifically the own price Read: Price Elasticity of elasticity of demand. Remember that we can get our total revenue if Demand Meaning, Types, we multiply the price and the quantity. The elasticity will then define the and Factors That Impact It by total revenue with the changes in the price and quantity. The Investopedia Team Link: If the product is inelastic, then the quantity demanded is not that https://www.investopedia.co responsive to price changes. This means that the change in price is m/terms/p/priceelasticity.asp greater than the change in demand. If the producer decides to decrease the price to increase the consumers’ demand, will it help the producer earn more revenue? NO! Why? The increase in demand is less than the price decrease, which means the revenue will decrease more than it will increase. But, if the producer decides to increase the price, the revenue will increase because of the greater increase in price than the decrease in quantity. If the product is elastic, then the quantity demanded is very responsive to price changes. So, if the producer decides to decrease the price, it will be beneficial for the business. This is because the increase in demand is greater than the price decrease. On the other hand, if the producers decide to increase the price, the revenue will decrease since the change in quantity is greater than the price increase. If the price is unit elastic, then the percentage change in price is the same as the percentage change of quantity. This means that there will be no changes in revenue.  INCOME ELASTICITY This measures the responsiveness of the quantity demanded to an individual's changes in income. Elasticity Values Description η>0 Normal good η1 Luxury η0 Substitute ℓ