Implications of Market Pricing in Economic Decisions PDF

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 c...

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?and shoes What 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 The buyers of the players depend in the on the prices as market. 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 A surplus pushes not always attain pressure in a downward manner on the price and equilibrium a shortage pushes immediately. During this pressure in an upward adjustment period of manner on the price to price to set on achieve the equilibrium level. equilibrium level, the market is said to be in 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 “It means that there will be SUPPLY – “a variation or greater or bigger percentage change in determinant will variation or difference in the result to a proportionately quantity demanded or supplied when one of their greater variation or change determinants changes in demand or supply”. (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 DEMAND the price of a related good, which 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”. ED = (% 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 XED = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 Coke) / change of Pepsi, here’s the equation”: (% 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)