Soc. Sci. 2 - Chap. 3
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Transcript of Soc. Sci. 2 - Chap. 3
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Social Science 2 – Principles of Economics
Company LOGO
Chapter 3
Elasticity and Consumer Behavior
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Definition of Elasticity
• Elasticity measures the sensitivity of either demand or supply to a change in any of their determinants.
• Elasticity measures how responsive or unresponsive the quantity demanded (or supplied) is to changes in a given factor.
• Elasticity allows you to predict how a price change will affect the behavior of buyers or sellers.
-Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 42
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Demand Elasticity and Supply Elasticity
Demand Elasticities* Buyers are willing and able to purchase more goods and services at lower prices than at higher prices.* - such reactions vary depending on the importance and availability of the goods and services.
Supply Elasticities* Producers/sellers – they tend to sell more goods and services when prices are higher. - they cannot take advantage of higher prices if they cannot produce the goods and services. (varying reactions)
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 42
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Consumer Behavior
Nature of human satisfaction (consumer behavior)• - consumer of more goods of the same kind reduces the
level of satisfaction.• - our desire to satisfy our human wants are restricted by
our purchasing power or budget.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 51
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Elasticity of Demand
Elasticity of Demand- Demand elasticity refers to the reaction or response of the buyers to changes in price of
goods and services.- *If a product is very important to the consumers, they have to buy it despite the big increase in
its price.
Five Types of Demand Elasticity1. Elastic Demand – A change in price results to a greater change in quantity demanded. • e.g. : A 20 percent change in price (decrease or increase) creates a 60 percent change in
quantity demanded. (increase or decrease)• Buyers are sensitive to price change.
2. Inelastic Demand – A change in price results to a lesser change in quantity demanded. • e.g.: A 50 percent change in price creates only 5 percent change in quantity demanded.• Buyers are not sensitive to price change.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 43
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Five Types of Demand Elasticity
3. Unitary Demand – A change in price results to an equal change in quantity demanded.
• e.g.: A 25 percent change in price produces a 25 percent change in quantity demanded.
• * Semi-luxury or semi-essential goods. (*types of clothing/shoes)
4. Perfectly elastic demand – Without change in price, there is an infinite change in quantity demanded. Such demand applies to a company which sells in a purely competitive market.
5. Perfectly inelastic demand – A change in price creates no change in quantity demanded. This is an extreme situation which involves life or death to an individual. Regardless of price, he has to buy the product like a medicine without no substitute.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 44
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Determinants of Demand Elasticity
1. Number of Good substitutes 2. Price in proportion to income.3. Importance of the product to the consumers.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 45
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Elasticity Formula
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 46
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Economic Significance of Demand Elasticity
• Helps the businessmen in planning their pricing strategies• Guides the economic managers in formulating planning appropriate tax
programs.• Market price of a product influences wages, rents, interests, and profits.
*** With the right pricing strategy, businessmen may attain the following goals:
* Achieve target return on investment
* Maintain or improve a share in the market
* Meet or prevent competition
* Maximize profit
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 47-48
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Practical Examples of Economic Significance of Elasticity Demand
1. Wage Determination
2. Farm Production Guide
3. Maximize profits
4. Imposition of sales tax
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 47-48
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Elasticity of Supply
Supply elasticity refers to the reaction or response of the sellers/producers to price change of goods.
Five Types of Elasticity of supply
1. Elastic Supply – A change in price results to a greater change in quantity supplied.
• Producers are very responsive to price change.
2. Inelastic Supply – A change in price results to a lesser change in quantity supplied.
• Producers have a very weak response to price change.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 49
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Five Types of Elasticity of supply
3.) Unitary Supply – A change in price results to an equal change in quantity supplied.
• Semi-industrial/semi-agricultural products.
4.) Perfectly elastic supply – Without change in price, there is an infinite (without limit) change in quantity supplied.
5.) Perfectly inelastic supply – A change in price has no effect on quantity supplied.
e.g. land
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 49-50
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Five Types of Elasticity of supply
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 50
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Theory of Consumer Behavior
1. Law of Diminishing Marginal Utility – it refers to the additional satisfaction of a consumer whenever he consumes one more unit of the same good.
- Consumption of more successive units of the same good increases total utility, but a decreasing rate because marginal utility diminishes.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 51
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Law of Diminishing Utility
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 52
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Theory of Consumer Behavior
2. Indifference curve – is a curve which shows different combinations of two goods which yield the same level of satisfaction.
- The word indifference means showing no bias or neutral.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 52
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Theory of Consumer Behavior
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 53
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Budget Line
A budget or consumption possibility line indicates the various combinations of two products which can be purchased by the consumer with his income, given the prices of the products.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 54
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Budget Line
A budget or consumption possibility line indicates the various combinations of two products which can be purchased by the consumer with his income, given the prices of the products.
Source: Fajardo, F. (2001) Economics – Third Edition, Rex Bookstore: Manila p. 54
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Consumer Equilibrium
• When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer's income and the prices of the goods and services that the consumer wishes to consume. The consumer's effort to maximize total utility, subject to these constraints, is referred to as the consumer's problem. The solution to the consumer's problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium.
• Source:
http://www.cliffsnotes.com/WileyCDA/CliffsReviewTopic/Consumer-Equilibrium.topicArticleId-9789,articleId-9753.html, Date Retrieved: 12 July 2010
