Demand and Supply

DESEO, CHRISTIAN B.
NOVEMBER 10 2023
BSA-2A MANAGERIAL
ECONOMICS
1. Explain elasticity of demand and supply.
The PRICE ELASTICITY OF DEMAND measures how responsive customers are to a price
change. It is the percentage change in the quantity demanded of a good or service divided by the
percentage change in the price.
When demand is elastic, a small change in price leads to a proportionally larger change in
quantity demanded. This implies that consumers are highly responsive to price changes. On the
other hand, if demand is inelastic, a change in price results in a relatively smaller change in
quantity demanded, indicating that consumers are less responsive to price fluctuations.
The PRICE ELASTICITY OF SUPPLY measures how responsive producers are to a price
change. It is the percentage change in quantity supplied divided by the percentage change in
price
If supply is elastic, a small change in price leads to a proportionally larger change in quantity
supplied. This suggests that producers can readily adjust their output levels in response to price
variations. Conversely, if supply is inelastic, changes in price result in a relatively smaller
change in quantity supplied, indicating that producers are less responsive to price fluctuations.
2. Discuss the different types of elasticities with examples.
PRICE ELASTICITY OF DEMAND (PED)

Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a
good to changes in its price. The formula for PED is:
PRICE ELASTICITY OF SUPPLY (PES)

Price elasticity of supply (PES) measures the responsiveness of the quantity supplied to changes
in the price of a good. The formula for PES is:
An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a
high responsiveness to changes in price. Include cookies, luxury automobiles, and coffee
EXAMPLE
 When the price of gasoline increases, people may choose to carpool or take public transit
instead. They may also switch to a more fuel-efficient car or reduce their overall driving.
An inelastic demand or inelastic supply is one in which elasticity is less than one, indicating low
responsiveness to price changes. Goods with inelastic demand include gasoline, necessary foods,
and prescription drugs.
EXAMPLE.
 One example of a good with inelastic supply is housing. If housing prices increase, it
is difficult and time consuming for businesses to build more homes or for landlords to
find more properties to rent.
Unitary elasticities indicate proportional responsiveness of either demand or supply.
EXAMPLE
 if the price of bananas decreases, the number of people buying it may increase
because now they can afford to buy more since prices have decreased.
Perfectly elastic means the response to price is complete and infinite. Products are luxury
products such as jewels, gold, and high-end cars.
EXAMPLE
 Vegetable/ Fruit Vendors located on a street. - So here all these vendors have to keep
an almost same price to get the demand; if any of them would increase their price
people would tend to move to another vendor.
Perfectly inelastic means change in price results in the quantity falling to zero. Perfectly inelastic
means that there is no change in quantity at all when price changes. Products that have limited
quantities, such as land or a painting from deceased artists.
EXAMPLE
 Football stadium with 5000 seats - Cannot increase the supply of seats no matter how
much tickets price increase, hence perfectly inelastic supply.
CROSS-PRICE ELASTICITY OF DEMAND (XED)
Cross-price elasticity of demand (XED) measures the responsiveness of the quantity demanded
of one good to changes in the price of another related good. The formula for XED is:
Example of Substitutes: Coffee and Tea - If the price of coffee (Py) increases, the quantity
demanded for tea (Qx) might increase, indicating a positive cross-price elasticity. These goods
are substitutes, and as the price of one rises, consumers switch to the other.
Example of Complements: Smartphones and Smartphone Cases - If the price of smartphones
(Py) rises, the demand for smartphone cases (Qx) may decrease, showing a negative cross-price
elasticity. These goods are complements, and as the price of one increases, consumers buy fewer
of both goods.
INCOME ELASTICITY OF DEMAND (YED)

Income elasticity of demand (YED) measures the responsiveness of the quantity demanded to
changes in consumer income. The formula for YED is:
Example of Normal Goods: Luxury Cars - If the YED for luxury cars is positive, an increase in
consumer income leads to a greater increase in the quantity demanded, as people can afford more
luxury items.
Example of Inferior Goods: Generic Food Products - If the YED for generic food products is
negative, an increase in income might lead to a decrease in the quantity demanded, as consumers
shift to higher-quality alternatives.

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DESEO, CHRISTIAN B.

1. Explain elasticity of demand and supply.

2. Discuss the different types of elasticities with examples.

PRICE ELASTICITY OF DEMAND (PED)

PRICE ELASTICITY OF SUPPLY (PES)

Unitary elasticities indicate proportional responsiveness of either demand or supply.

INCOME ELASTICITY OF DEMAND (YED)

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