c




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‡Based on the law of
demand, buyers are willing
and able to purchase more
goods and services at
lower prices than at higher
prices.
  
‡Demand elasticity refers to
the reaction or response of
the buyers to changes in
price of goods and
services.
  
Ä. Elastic Demand
± A change in price results to a
greater change in quantity
demanded.
± Example:
A 20% change in price (increase or
decrease) creates a 60% change
(increase or decrease) in quantity
demanded.
Ê

  
2. Inelastic Demand
± A change in price results to a
lesser change in quantity
demanded.
± Example:
A 50% change in price creates only a
5% change in quantity demanded.
Ê


  
?. Unitary Demand
± A change in price results to an
equal change in quantity
demanded.
± Example:
A 25% change in price produces a
25% change in quantity demanded.
Ê

  
. Perfectly Elastic Demand
± Without change in price,
there an infinite change in
quantity demanded.
± Applies to purely
competitive market.
Ê

  
5. Perfectly Inelastic Demand
± A change in price creates
no change in quantity
demanded.
± Involves life or death
situation.
Ê 

   

Ä. Number of good substitutes
± Demand is elastic for a product
with many good substitutes. An
increase in the price of such
product induces buyers to look for
good substitutes.
± Products without good substitutes
have an inelastic demand. Buyers
have no or little choice.
   

2. Price increase in proportion to
income
± If the price increase has very little
effect on the income or budget of
the buyers, demand is inelastic.
± But if the price increase involves a
substantial amount in proportion to
the income of consumers, demand
is elastic.
   

?. Importance of the product to the
consumers
± Luxury goods are not very
important to many Filipinos. So,
these are elastic.
± Rice, electricity, and gasoline are
important. All these are inelastic.
! "




|
 Ê
Ê

m
the difference between the

original quantity and the new quantity.
(Disregard the negative sign)

original quantity.
mP
the difference between the
original price and the new price.
(Disregard the negative sign)
P
original price.
 #

‡ A good knowledge of demand
elasticity helps the businessmen
in planning their pricing
strategies.
‡ It guides the economic managers
in formulating appropriate tax
programs.
 #

Ä. Wage determination
±If the product has an elastic
demand, it has more sales and more
profit. The company is in position to
raise the wages of its workers.
±If the demand is inelastic, a
reduction in its price has very little
effect on sales. It may even affect
the viability of the company.
 #

2. Farm production guide
±Most agricultural products like rice,
coconut and sugar are inelastic.
Overproduction of farm crops due to
good harvest decreases the prices of
the product.
±As a result, total revenue or income
of the farmers also decline.
 #

?. Maximize profits
±A reduction in price causes
more quantity demanded.
±A substantial price reduction
favors goods with highly
elastic demand.
 #

. Imposition of sales taxes
± It is not advisable to increase taxes on
goods with high elastic demand. If the
demand is inelastic, a reduction in its
price has very little effect on sales. It
may even affect the viability of the
company.
± A tax is an additional price. So, this
greatly decreases quantity demand for
the product.