Elasticity

ELASTICITY 

Elasticity is a measure of a variable's sensitivity to a change in another variable, most commonly this sensitivity is the change in price relative to changes in other factors. It assesses the change in consumer demand as a result of a change in a good or service's price (Hayes,2021).

Demand Elasticity

The reaction or response of the buyers to changes in price of goods and services (Fajardo, 1990).  Elasticity of demand can be determined by the reaction of the consumers or buyers, if there is a change in price that causes to demand less or more of the good, the demand is “elastic”. In contrary, if the change brings almost no change or no change at all then the demand is “inelastic”.

Types of Demand Elasticity

Elastic Demand. When the change in price results to a greater change in quantity demanded. Under this situation the elastic coefficient is greater to one (1). It means that the consumers or buyers are very sensitive to the change of price. Example of commodities are; electronic gadgets such as camera, television and smart phones which are not very important.

Inelastic Demand. This means a change in price results to a lesser change in quantity demanded. It is when the elasticity coefficient is less than one (1). The consumers or buyers are not sensitive to the change of the price because the commodities are essential to them.  Example are clothing and shelter.

Unitary Elastic Demand. This means that a change in price would result to an equal change in quantity demanded. The elastic coefficient is equal to one (1). The reaction of the consumers or buyers or to the quantity demanded is similar to the change of the price. These types of commodities are semi-essential goods.

Perfectly Elastic Demand. No change in price existing. However, there is an infinite change in quantity demanded. When the elastic coefficient equals infinity. The demand is directly tied to the price of the commodity. There isn’t really any real-life commodity to be considered. This is essential to economic analysis.

Perfectly Inelastic Demand.  This means that a change in price creates no change in quantity demanded.  It is when elasticity coefficient equals zero. Example of this, is during emergency situation or pandemic where vaccines are important regardless of the price. 

Determinants of Price Elasticity of Demand

The availability of substitutes. Once the price of a product or commodity increase the people tend to look for substitute, this makes the demand “elastic”. However, if there is no substitute commodity available, it makes the demand “inelastic.

Income increase in proportion or the price. The quantity of demand will not change if income increase same with the price of the commodity. The demand for essential goods like sugar and salt shall remain as “inelastic.”

The Number of Uses of a Commodity.  For example, milk has several uses. If the price of the milk increase it will be used only for essential purposes such as feeding the children. If the price of milk decrease, it would be utilized to other uses such as preparation of cakes and sweets.

Time. If the time is long enough to substitute the commodity demand tends to be elastic. The longer the period, the more it is easy to both consumers and producers to adjust. 

PRICE ELASTICITY OF DEMAND

The price elasticity of demand can be measured by dividing the percentage change in the quantity of the demand by the percentage change in the price of the product. 

Elasticity of Supply

Supply elasticity refers to the reaction or response of the sellers/producers to price change of goods (Fajardo, 1990). It establishes a quantitative relationship between quantity of supply and the price of a commodity.

Types of Supply Elasticity.

Elastic Supply. A change in price results to a greater change in quantity supplied. It is evident to this situation that the producers are sensitive to the change of price. This are the commodity which can be easily produced by manufacturing firms.

Inelastic Supply. A change of price results to a lesser change in quantity supplied.  The producers are not sensitive to change of price. Example of this type are the goods that cannot be produced immediately like agricultural products.

Unitary Supply. A change in price results to an equal change in quantity supplied.

Perfectly elastic supply.  Without change in price, there is an infinite (without limit) change in quantity supplied. There is no real-life example.

Perfectly inelastic supply.  When the price change, there is no change in quantity supplied. Examples are products that have limited supply such land area, it is fixed regardless of price. 

Determinants of Supply Elasticity

Time. It is evident that agricultural product requires time to adjust its production, from planting to harvesting crops, this may take months or even years which makes it inelastic. However, the manufacturing industries, can usually adjust their output that makes it elastic.

The Nature of the Good. There are four (4) factors of production, classified to fixed factors such land and capital and variable factors such labor and management. If the factors of production can be easily transferred from the production of one good or commodity to that another, the supply will be elastic. For instance, a farmer can easily transfer from growing palay to another crop like corn.

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Supply and Demand

LAW OF SUPPLY AND DEMAND

The law of supply and demand states that when supply is greater than demand prices decreases. When demand is greater than supply, price increases. When supply is equal to demand, price remains constant

DEMAND

According to Fajardo (1991), demand is the schedule of various of quantities of communities which buyers are willing and able to purchase at a given price, time and place. It is the consumer's desire and ability to purchase a good or services.

DETERMINANTS OF DEMAND

1.       Income of the Buyers

2.       Number of Consumers

3.       Taste or Preference

4.       The prices of related goods or services

5.       Consumer expectations.

Shifter in income is based on whether or not it is normal good or inferior good. A good is normal when you consume or demand more of it because your income has increased. Inferior goods do not necessarily mean they are inferior in quality to normal goods; it simply means people tend to buy more of them when their income is lower and less when their income is higher.

This means income and for the product are directly related on normal goods and income and demand for the product are inversely related.

What is determinant of Demand?

It is a factor in demand which cause fluctuations or movements to the demand curve. This fluctuations lead to the changes of quantity demanded and the price of the product or service

Explanation to the behavior of the consumers whenever there is increase in price.

It is very evident if the price increase consumers buy less goods and services and if the price decrease consumers buy more goods and services. The following reasons to these circumstances are;

1.       Substitution Effect - it refers to the changes in price motivate by consumers to buy relatively cheaper substitutes good.

2.       Income Effect – The changes in price that affects the purchasing power of consumers’ income.

Table 1. Demand schedule
PRICE	QUANTITY DEMANDED
1	60
2	50
3	40
4	30
5	20
6	10

CHANGES IN QUANTITY DEMANDED VS. CHANGE IN DEMAND

GRAPH 1. CHANGE IN DEMAND
	Change in Demand. A change in demand means that the entire demand curve shifts either left or right. The initial demand curve D0 shifts to become either D1 or D2. This could be caused by a shift in tastes, changes in population, changes in income, prices of substitute or complement goods, or changes future expectation

GRAPH 2. CHANGE IN QUANTITY DEMAND
	Change in Quantity Demanded. A change in the quantity demanded refers to movement along the existing demand curve, D0. This is a change in price, which is caused by a shift in the supply curve.

DEMAND FUNCTION

Gabay, Remotin & Uy (2007). It is a mathematical expression of the Law of Demand or the relationship between price and quantity demanded.

Quantity demand is the function of the price of goods and services, income of the consumers, price of related commodities, and the size of the population expressed in a mathematical equation:

                     Qd = f (P,Y,Pc,Ps)
                   

                 Where:

                   Qd  = quantity demand
                     P = price of goods and services
                     Y = income of the consumers
                     Pc = price of related communicates

                     Ps= Population

Demand Function:

Qd = a – bP 

Table 2. Demand Schedule for Shoes
Price	Quantity Demanded
1	100
2	80
3	60
4	40
5	20

 

Example demand schedule for shoes can also be expressed in the equation:

Qd = 120 – 20p

Where Qd stands for the quantity demanded of and P stands for the price one thousand pesos per pair of shoes. This manifests that if the price rises by one thousand, the Qd will drop by pairs of shoes. It is unlikely that price of a shoes will drop to zero, because is the amount or quantity that will be demanded if the price is zero. Based on the instruction that is: multiple the price by 200 and subtract the product form 1200.

Substituting the value of P or price presented on Table 2, we can verify the result and compare it to the value presented on the table. Assuming we use 2 as the value of price.

    Qd = 120 – 20 (P)

      = 120 -  20 (2)

      = 120 – 40

      = 80

Guide Video: https://www.youtube.com/watch?v=XhMQGmalnuk

LAW OF DEMAND

      As price increases, quantity demanded decreases, and as the price decreases, quantity demanded increases. To elucidate if the price increase, consumers tend to buy less goods and services. If the price decreases, consumers tend to buy more goods and services  

SUPPLY 

The schedule of various quantities of commodities which producers are willing and able to produce and offer at a given price, place and time (Fajardo, 1991). It describes the amount of goods and services for the consumers.

DETERMINANTS OF DEMAND

1.       Technology

2.       Cost of Production

3.       Price expectation

4.       Price of Related Goods

5.       Taxes and subsidies

Table 2. Supply schedule
PRICE	QUANTITY SUPPLIED
1	10
2	20
3	30
4	40
5	50
6	60

CHANGES IN QUANTITY SUPPLIED VS. CHANGE IN SUPPLY

GRAPH 3. CHANGE IN SUPPLY
	Change in Supply. A change in supply is caused by factors other than the price of the product. Decrease in supply, shifting the supply curve from S1 to S1. At the price P1, the quantity supplied will decrease from Q1 to Q2.

GRAPH 4. CHANGE IN SUPPLY
	A change in quantity supplied - refers to a change in quantity offered for sale as a result of a change in the price of the product. Suppose the price of a good increases from P1 to P2. The quantity supplied will increase from Q1 to Q2.

 SUPPLY FUNCTION

It is a mathematical expression of the Law of Supply or relationship between price (p) and quantity (Qs)

The supply curve can be expressed mathematically in a function form as:

Qs = f (Price, other factor held constant)

Supply can also be expressed in an algebratic equation. Unlike the demand curve, has a positive slope. The supply function is estimated as:

Qs = f (P,P, I, Gs, n)

               Where:

         Qs = quantity supplied

         P = price of the goods and services

        Pi = cost of inputs used

          I = government taxes

                   Gs = government subsidies

                     n = number of firms

 

 

Table 3. Supply Schedule for Shoes
Price	Quantity Supplied
1	20
2	40
3	60
4	80
5	100

 

Using the supply schedule for shoes in table 3, supply function is estimated as: 

                            Qs = 0 + 20P

Where Qs is the quantity supplied of shoes and P stands for price.

This equation can be verified by the values of price shown in table 2 to compare the result. Let us use 2 as the value of price, hence, quantity supply of shoes can be estimated as follows:

 

 Qs = 0 + 20P

 Qs = 0 + 20(2)

 Qs = 20 (2)

   Q = 40

Guide Video: https://www.youtube.com/watch?v=H83dHEnG2B0

LAW OF SUPPLY

As price increase, quantity supplied also increase, and as price decreases, quantity supplied also decreases.

MARKET EQULIBRIUM

Gabay, Remotin & Uy (2007), there is an inverse relationship between demand and supply.  It is evident that consumers are willing to buy goods and services at a lower price. However, producers are willing to sell goods and services at a higher price. This circumstance creates equilibrium price and quantity, also known market equilibrium. It is the state which implies a balance between opposing forces, a situation in which quantity demanded and quantity supplied are equal. It is determined by the intersection of the demand curve and supply curve which means the quantity that consumers will buy is equal to the amount or quantity the producers are able and willing to offer.

Example 

Table 4. Demand and Supply Schedule of Shoes
Points	Price	Quantity Demanded	Quantity Supplied	State of Market	Pressure on Price
A	1	100	20	Shortage (-80)	Upward
B	2	80	40	Shortage (-40)	Upward
C	3	60	60	Equilibrium (0)	Neutral/Equal
D	4	40	100	Surplus (40)	Downward
E	5	20	100	Surplus (80)	Downward

 MATHEMATICAL APPROACH OF MARKET EQUILIBRIUM

Under the market equilibrium Qd intersects with Qs at a particular point. Given the demand function and supply function, the equilibrium price and quantity can be derived.

Based on the preceding examples of the demand and supply schedule of shoes and equate the two, tha is:

                                               Qd = Qs

                                   1200-200P = 0 + 200P

Transposing similar terms,

                                     1200 – 0 = 200P + 200P

                                           1200 = 400P

                                          1200  = 400

                                                 3 = P

Equilibrium price is 3,000

By the substituting the equilibrium price into the demand and supply function, equilibrium quantity can be derived:

                             Qd = Qs

                               1200 - 200P = 0 + 200P

                            1200 – 200 (3) = 0 + 200 (3)

                                  1200 – 600 = 0 + 600

                                              600 = 600

Guide Video: https://www.youtube.com/watch?v=dhONLIo35Tc

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