Reviewer Applied Economics

Applied Economics  Income Elasticity - measures the responsiveness
Lessons 6,8, and 11 of the quantity demanded for a good or service

(Elasticity, Market Structure, Types of Industries) to a change in income.
ELASTICITY – defined as the degree of responsiveness of

a variable to the change of another variable.
 Price Elasticity – degree of responsiveness of

quantity due to change in price.
Or
Products in Income Elasticity

a. Normal good – Income elasticity is positive
*Luxury/Superior goods – greater than 1
b. Inferior good – Income elasticity is negative
Or Facts:
1. The sign is important in considering the
income elasticity, whether positive or
Types of Elasticity negative.
a. Elastic – coefficient is greater than 1 2. A good is superior or normal if for an
(absolute value) instance, our income increases, quantity
b. Inelastic – coefficient is less than 1 (absolute demanded will increase. If our income
value) decreases, quantity demanded will also
c. Unitary – coefficient is equal to 1 (absolute decrease (direct relationship). You will buy
value) more of the product if your income increase,
d. Perfectly Elastic – coefficient is equal to 0 and you will buy less if your income
e. Perfectly Inelastic – coefficient is infinite decreases.
3. A good is inferior if for an instance, our
Facts: income increases, quantity demanded will
1. Law of demand and supply should always be decrease. If our income decreases, quantity
considered whether to use price elasticity of demanded will increase (indirect
demand or supply. relationship). You will buy more if your
2. Greater % change in quantity compared to income decreases, and you will buy less if
price would result to an elastic product your income increases.
3. Greater % change in price compared to
quantity would result to an inelastic product.
4. Price elasticity of demand is always negative,  Cross-price Elasticity - measures the
price elasticity of supply is always positive. responsiveness in the quantity demanded of
5. A business would always consider selling an one good when the price for another good
elastic product since it is more sensitive to changes.
price changes, thus maximizing profit.
b. Considered as price makers or setters
c. Scale and legal barriers are present
d. Maximizes profit (medium profit)
e. Product can be the same, with some degree
of differentiation
f. Has a limited market power over consumers
Q2A – Q1A g. Tendency to be involved in cartel: the illegal
Q1A agreement of the sellers to set the price of
Or =
P2B – P1B their products to maximize profit.
P1B h. Examples can be gasoline business,
telecommunications, car manufacturers,
television networks.
Products in Cross-price elasticity
 Monopolistic Competition or Imperfect
a. Substitute products – if the coefficient is positive
Competition – many sellers or retailers of several
b. Complementary products – if the coefficient is
brands wherein there are many consumers.
negative
a. Relatively inelastic product

Facts:
b. Considered as price makers or price takers
1. An increase in price of Product 1 that leads to an
c. Some scale and legal barriers are present
increase of purchase in Product 2 means they are
d. Maximizes profit (Medium profit)
substitutes and vice versa. (direct relationship)
e. Product can be the same, with some degree
2. A decrease in price of Product 1 that leads to an
of differentiation (advertising, branding,
increase of purchase in Product 2 means they are
designs, promotions, etc.)
complements and vice versa (indirect
f. Has limited market power over consumers
relationship)
g. Examples are clothing, shoes, bags,
accessories, restaurants, hygiene products,
MARKET STRUCTURE
etc.)
 Monopoly – one seller wherein there are many
 Perfect competition – many sellers are present in
buyers (monopsony – one buyer, many sellers)
the market with many buyers as well.
a. Products are elastic in which there are many
b. Considered as price makers or setters
close substitutes
c. Scale, legal and government barriers are
b. Prices of goods are determined by market
present
equilibrium (intersection of demand and
d. Maximizes profit (high profit)
supply)
e. Highly differentiated product
c. Considered as price takers
f. High market power over consumers
d. Generally, there are no barriers to entry
g. Examples can be MERALCO, patented or
e. Low profit but can earn abnormal profits in
licensed medicines or inventions.
the short run
f. Products are homogenous (same quality,
 Oligopoly – few sellers are present in the market
appearance, components)
that are very sensitive to the price changes of
g. Has no market power
competitor’s products
h. Examples are agricultural products
(vegetables, fruits, meat, milk, etc.)
2. Soft goods or consumables – products with one
TYPES OF INDUSTRIES time use or cannot be used for a period of
more than three years
 Agribusiness – a large scale business intended to 3. Hard goods or durable goods – does not wear
produce products and services for farming for the out easily and can be used for more than three
purpose of earning income or profit from it. years
4. Arts – pertain to products related to galleries
1. Hog raising – production of pork meat (Viajeros and fixtures like musical instruments, display
– buying your pork meat in bulk for a cheap images and the like.
price)
2. Poultry raising – production of chicken meat, Other topics:
and/or eggs. a. International trade – the exchange of goods and
3. Cattle raising – production of cow meat and milk services across borders in different countries
4. Goat raising – production of goat meat and milk;
Boar goat breed for meat consumption, Anglo- Ranking of top international traders with
Nubian breed for milk production Philippines:
5. Rice Farming – production of rice, IRRI 1. Japan
(International Rice Research Institute) located in 2. China
Los Baños, Laguna studies efficient ways in rice 3. USA
farming. 4. Singapore
6. Vegetable Farming – some examples in your 5. Korea
book are tomato, cucumber, ampalaya, sweet
bell pepper, string beans.
7. Fish pens – some examples are bangus, tilapia,
oysters, prawns, pangasius, catfish
8. Corn farming – an alternative for rice in which
corn is produced
 Manufacturing – the process of converting raw

materials, components, or parts into finished goods
1. Furniture making – examples are chairs, tables,

bookshelves, benches, sofas, etc. Prepared by Sir Jai Anueco 
2. Drinking water business – everlasting natural God bless!
mineral essential for survival
3. Soap manufacturing – the production of soap
and other related products
4. Commercial bread making – baking of bread in
the vicinities of household areas or in bigger
factories.
 Retail – the buying and selling of finished goods
1. Food products – usually require cold storage

because of perishable goods

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Applied Economics  Income Elasticity - measures the responsiveness

Lessons 6,8, and 11 of the quantity demanded for a good or service

ELASTICITY – defined as the degree of responsiveness of

 Price Elasticity – degree of responsiveness of

Products in Income Elasticity

a. Relatively inelastic product

 Manufacturing – the process of converting raw

1. Furniture making – examples are chairs, tables,

 Retail – the buying and selling of finished goods

1. Food products – usually require cold storage

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