APPLIED ECONOMICS COMPLEMENT GOODS - two

goods for which an increase in the

price of one lead to a decrease in
the demand for the other.
ELASTICITY OF DEMAND
SUBSTITUTE GOODS - two goods
As a consumer, you are usually for which an increase in the price
demanding more of goods when its of one lead to an increase in the
price is lower, when your incomes demand for the other
are higher, when the value of
substitute goods is higher, or when
the rate of the complement goods
is cheaper. THE PRICE ELASTICITY OF
DEMAND
It is your natural reaction as a
consumer but, it is not happening PRICE ELASTICITY OF DEMAND
all the time. The level of the - is the responsiveness of quantity
consumers responsiveness varies demanded, or how much quantity
greatly, and it can measure by the demanded changes, given a
price of elasticity of demand. change in the price of goods or
services.
You can classify the demand
elasticity according to the factors The mathematical value is
that cause the change; the negative. A negative value
indicates an inverse relationship
 Price elasticity between price and the quantity
 Income elasticity demanded. But the negative sign
 Cross-price elasticity is ignored (Judge, S. 2020).

Price elasticity measures the

responsiveness of the quantity
demanded or supplied of a good to
a change in its price.
DEFINITION OF TERMS:
Elasticity can be described as:
ELASTICITY - use to determine
how changes in product demand a) elastic or very responsive
and supply related to changes in and
consumer income or the producer b) unit elastic, or inelastic or
price not very responsive.
ELASTIC DEMAND - slight change (source: Investopedia).
in the price will lead to a drastic
change in the demand for the
product.

Inelastic Demand- an elastic

product is one that consumers
continue to purchase even after a
change in price.
Price elasticity of demand is -The percentage change in price
the ratio of the percentage change brings about a more than
in quantity demanded of a product
to the percentage change in price.
Economists employ it to
understand how supply and
demand change when product's
price changes.

WHAT MAKES A PRODUCT

ELASTIC?

If a price change for a product

causes a substantial change in
either its supply or its demand, it
is considered elastic. Generally, it
means that there are acceptable
substitutes for the product.

Examples would be cookies, luxury

automobiles, and coffee.

WHAT MAKES A PRODUCT

INELASTIC?

If a price change for a product

doesn't lead to much, if any, proportionate change in quantity
change in its supply or demand, it demanded.
is considered inelastic. Generally,
it means that the product is -When the percentage change in
considered to be a necessity or a quantity demanded is greater than
luxury item for addictive the percentage change in price,
constituents. and the coefficient of the elasticity
is greater than
Examples would be gasoline, milk,
and iPhones Examples:

Real estate housing. There are

many different housing choices.
Price Elasticity of Demand People may live in a townhouses,
(PED) = condos, apartments, or resorts.
The options make easy for people
% change in quantity demanded to not pay more than they
Divided by the % Change in price demand.
a) ELASTIC DEMAND (PED> 1)
b) INELASTIC DEMAND - the PED is 0 any change in price
(COEFFICIENT OF THE will not have any effect on the
ELASTICITY IS LESS THAN 1) demand of the product. Perfectly
inelastic - the percentage change
- is when an increase in price in demand will be equal to zero (0)
causes a smaller % fall in demand.
POINT OF ELASTICITY
-When the percentage change in
quantity demanded is less than a) The midpoint elasticity is
the percentage change in price, less than 1. (Ed < 1). Price
and the coefficient of the elasticity reduction leads to
is less than reduction in the total
revenue of the firm.
Examples: b) The demand curve is linear
(straight line), it has a
Gasoline has few alternatives,
unitary elasticity at the
people with cars consider it as a
midpoint. The total
necessity and they need to buy
revenue is maximum at
gasoline. There are weak
this point.
substitutes, such as train riding,
c) Any point above the
walking and buses. If the price of
midpoint has elasticity
gasoline goes up, demand is very
greater than 1, (Ed > 1).
inelastic. Other Examples:
Diamonds, aircon, Iphone,
Cigarettes

CROSS ELASTICITY OF DEMAND

c) UNITARY ELASTIC DEMAND
- an economic concept that
-When the percentage change in measures the responsiveness in
demand is equal to the percentage the quantity demanded of one
change in price, the product is said good when the price for another
to have Unitary Elastic demand. good changes. Also called cross-
Unitary elastic-PED or the price price elasticity of demand, this
elasticity of demand is 1 measurement is calculated by
taking the percentage change in
the quantity demanded of one
good and dividing it by the
d) PERFECTLY ELASTIC percentage change in the price of
- a small percentage change in the other good.
price brings about a - change in The cross elasticity of demand is
quantity demanded from zero to an economic concept that
infinity. Perfectly elastic - the measures the responsiveness in
coefficient of elasticity is equal to the quantity demanded of one
good when the price for another
one changes.
e) PERFECTLY INELASTIC
The cross elasticity of demand for total sum of the initial and final
substitute goods is always positive quantities.
because the demand for one good
increases when the price for the 4. Now you'll need to calculate the
substitute good increases. denominator, which is the
percentage change in price. You
Alternatively, the cross elasticity of can do this by dividing the final
demand for complementary goods and initial prices by the total sum
is negative. of the last and initial prices.

When dealing with unrelated 5. Calculate the cross-price

goods, there is generally no cross- elasticity of demand by dividing
elasticity of demand. the percentage change in quantity
by the percentage change in price.
Companies often use the cross
elasticity of demand to determine
and set prices of their goods and
services. UNDERSTANDING CROSS
ELASTICITY OF DEMAND

In economics, the cross elasticity

of demand refers to how sensitive
the demand for a product is to
changes in the price of another
product. This means it determines
CALCULATING THE CROSS
the relationship between the
ELASTICITY OF DEMAND
quantity demanded of one good
Now that you have the formula for when the price for another good or
cross price elasticity of demand, product changes. Put simply, it
it's important to know how to use measures how demand for one
it to make your calculations. Here's good changes when the price of
a step- by-step run-through of how another (usually related one) does.
to do so.
You can use the formula to make
1. Figure out the total quantity comparisons of products that are
demanded of X and the initial price considered perfect substitutes for
of Y. one another or those that are
complementary to one another.
2. Determine the final quantity For substitute goods, the cross
demanded and the ending price of elasticity of demand remains
Y. positive, which means prices
increase when demand for one
3. For the numerator in the
good rises. Demand for
formula above, calculate the
complementary goods drops when
percentage change in the quantity
the price rises for another good.
demanded of X. Do this by
This is called negative cross
subtracting the last and first
elasticity of demand.
quantities and dividing that by the
Unrelated products do not affect This results in a negative cross
one another. For instance, an elasticity.
increase in the price of eggs does
not directly relate to an increase in
demand for olives.
Cross elasticity of demand helps
companies establish prices for
their goods, allowing for higher
SUBSTITUTE GOODS - The cross prices for products without
elasticity of demand for substitute substitutes. This is done by
goods is always positive because analyzing incremental price
the demand for one good changes for substitutes and
increases when the price for the strategically pricing
substitute good increases. For complementary goods, based on
example, if coffee prices increase, future demand.
then the quantity demanded for
tea (a substitute beverage)
increases as consumers switch to
a less expensive yet substitutable
alternative. This is reflected in the INCOME ELASTICITY OF
cross elasticity of the demand DEMAND - refers to the sensitivity
formula, as both the numerator of the quantity demanded for a
(percentage change in the demand certain good to a change in the
for tea), denominator (the price of real income of consumers who buy
coffee) show positive increases this good.

COMPLEMENTARY GOODS The formula for calculating income

Alternatively, the cross elasticity of elasticity of demand is the percent
demand for complementary goods change in quantity demanded
is negative. As the price for one divided by the percent change in
item increases. an item closely income.
associated with that item and
necessary for its consumption
decreases because the demand for Income Elasticity of Demand =
the main good has also dropped.
(D1-D0) / (D1 + D0) / (I1- 10) / (I1
For example, if the price of coffee + 10)
increases, the quantity demanded
for coffee stir sticks drops as
consumers are drinking less coffee
5 TYPES OF INCOME
and need to purchase fewer sticks.
ELASTICITY OF DEMAND:
In the formula, the numerator
(quantity demanded of stir sticks) 1.High: A rise in income comes
is negative and the denominator with bigger increases in the
(the price of coffee) is positive. quantity demanded.
2.Unitary: The rise in income is quantity supplied of a good is to
proportionate to the increase in changes in price. It is calculated as
the quantity demanded the percentage change in quantity
supplied divided by the
3.Low: A jump in income is less percentage change in price.
than proportionate to the increase
in the quantity demanded. Price elasticity of supply indicates
how quickly producers shift
4.Zero: The quantity production levels in response to
bought/demanded is the same price changes.
even if income changes
Economic theory predicts that
5.Negative: An increase in when prices rise, producers will
income comes with a decrease in want to increase the quantity
the quantity demanded. supplied to sell more at higher
prices.

If producers cannot cope with

NORMAL GOODS - have a
increasing demand, prices may
positive income elasticity of
continue to rise as quantity cannot
demand; as incomes rise, more
keep up.
goods are demanded at each price
level.

Normal goods whose income FORMULA OF ELASTICITY

elasticity of demand is between SUPPLY:
zero and one are typically referred
to as necessity goods, which are Price elastic supply (PES)=
products and services that
consumers will buy regardless of %Change in quantity supply (QS) /
changes in their income levels. % Change in Price
Examples of necessity goods and
The elasticity of supply is
services include tobacco products,
computed as the percentage
haircuts, water, and electricity.
change in quantity supplied
INFERIOR GOODS – have a divided by the percentage change
negative income elasticity of in price. The formula shows how
demand; as consumers' income much a change in price changes
rises, they buy fewer inferior the quantity supplied.
goods. A typical example of such a
type of product is margarine,
which is much cheaper than
butter.
ELASTIC SUPPLY - A price
elasticity supply greater than one
means supply is relatively elastic,
where the quantity supplied
changes by a larger percentage
PRICE ELASTICITY OF SUPPLY - than the price change.
is a measure of how sensitive the
PES > 1 • In the short term, capital is
fixed in the short run e.g.
SUPPLY COULD BE ELASTIC firms do not have time to
FOR THE FOLLOWING build a bigger factory.
REASONS:
• If it is difficult to employ
• If there is spare capacity in factors of production, e.g. if
the factory. highly skilled labor is needed.
• If there are stocks • With agricultural products,
available. supply is inelastic in the short
run, because it takes at least six
• In the long run, supply will
months to grow new crops. In
be more elastic because
September the farmer cannot
capital can be varied.
suddenly produce more potatoes
• If it is easy to employ more if the price goes up.
factors of production.

• If a product can be sold

UNIT ELASTIC SUPPLY - PES = 1
from the internet which
A PES equal to 1 indicates a
increases the scope of
proportionate response in quantity
international competition
supplied to a change in price. A
and increases options for
linear supply curve represents unit
supply.
elastic supply.

INELASTIC SUPPLY - The PES for

IMPORTANCE OF PES
relatively inelastic supply is
between zero and one. That means • Price Stability and Market
the percentage change in quantity Equilibrium
supplied changes by a lower
percentage than the percentage of • Understanding PES helps
price change. maintain price stability and
ensure equilibrium in the
PES < 1 market.
SUPPLY COULD BE INELASTIC • Government Intervention and
FOR THE FOLLOWING Taxation Policies
REASONS:
• Knowledge of PES influences
• Supply could be inelastic for government decisions on
the following reasons taxes and subsidies.
• Firms operating close to full
capacity.
Price elasticity of supply is crucial
• Firms have low levels of for businesses, policymakers, and
stocks, therefore there are no consumers.
surplus goods to sell.
It helps us understand how units he wants to producer and the
suppliers respond to changes in buyer can buy all the units he
price and how markets reach wants
equilibrium. Quantity demanded and quantities
supplied are equal.

MARKET SYSTEM Price System in a Market

Economy: Its Characteristics

SHORTAGE - is when there is an The prices of goods that we

excess demand for the quantity encounter everyday to the things
supplied. While surplus is excess in we buy plays a crucial role in
supply. determining an efficient
distribution of resources in a
For example, if there are 10 bottles market system. The prices will
of water and there are 20 students help us to make every day
who want drinking these, then economic decisions about our
there will be only 10 students needs and desires. They are the
whose demands are met while the indications of the acceptance of a
others will not be able to be given product; the more popular the
anything. product, the higher the price that
can be charged.
There is shortage in the supply. If
producers make too many
bottles of water and
consumers cannot by them PRICE - acts as a signal for
want to buy them, there will shortages and surpluses which
be surplus. help firms and consumers respond
to changing market conditions.
We have learned that demand is
the willingness of the consumers • If a good is in shortage – price
to buy goods and services. In will tend to rise. Rising prices
economics, the willingness to buy discourage demand, and
goods and services should be encourage firms to try and
accompanied by the ability to buy, increase supply.
also called the “purchasing • If a good is in surplus – price
power”. This is referred to as will tend to fall. Falling price
an effective demand encourage people to buy, and
cause firms to try and cut back
on supply.
EQUILIBRIUM - Equilibrium is a
point of balance or a point of rest.
It is also called “market-clearing
price”.
Equilibrium price is the price at
which the producer can sell all the
• Prices help to redistribute THE LAW OF SUPPLY AND
resources from goods with little DEMAND - explains the
demand to goods and services interaction between the sellers of
a product and the buyers. It shows
the relationship between the
availability of a particular product
and the desire (or demand) for
that product has on its price.

THE LAW OF DEMAND - It is the

desire of a consumer to purchase
goods or services and willingness
to pay a at for that product or
services at a given price. If all
other factors remain equal, the
higher the price of a good, the
The producers can make what they fewer people will demand that
want and consumers are free to good. “the higher the price, the
purchase what they want. This lower the quantity demanded” and
means that customers live in a vice versa.
market economy. When prices are
high, supply increases as many The demand curve is always
firms join the market (Judge, S. downward sloping due to the law
2020). of diminishing marginal utility.

Let’s say the units of cellular

phones. The numbers of suppliers THE LAW OF SUPPLY -
have increased because of high demonstrates the quantities that
prices of the cellular phones. When will be sold at a given price. The
smartphones were new in the higher the price, the higher the
market, there were fewer quantity supplied and vice versa.
producers and prices were high.
The high prices attracted the The law of supply says … “as the
producers to join the market price of a product increases,
(Judge, S. 2020). companies will produce more of
the Product”. When graphing the
In shortage, quantity is less than supply vs. the price, the slope
the demand; it causes prices to go rises.
up due to scarcity Example of
which is the shortage in masks and
ethyl alcohol in the market. There
is shortage in the supply, thus, HOW DO SUPPLY AND DEMAND
price tends to go up or tends to go
higher (Judge, S. 2020). CREATE AN EQUILIBRIUM
PRICE?
The law of supply demonstrates something or be more successful
the quantities that will be sold at a than someone else.
given price. The higher the price,
the higher the quantity supplied In economics, it is defined as an
and vice versa. activity involving two or more
firms, in which each firm tries to
The law of supply says … “as the get people to buy its own goods in
price of a product increases, preference to the other firm’s
companies will produce more of goods. For example, by offering
the Product”. When graphing the different products, better deals or
supply vs. the price, the slope by other means.
rises.
In other words, it is simply the
Equilibrium price is the price at effort of enterprises to be leaders
which a producer can sell all the in their industry and increase their
units he wants to produce and a market share.
buyer can buy all the unit he
wants.

Supply and demand are MARKET STRUCTURE - in

balanced, or in equilibrium economics, refers to how different
industries are classified and
The demand curve is downward differentiated based on their
sloping. This is due to the law of degree and nature of competition
diminishing marginal utility. for goods and services. It is based
on the characteristics that
The supply curve is a vertical influence the behavior and
line; overtime, supply curve outcomes of companies working in
slopes upward; the more a specific market.
supplier expect to charge higher,
the more they will be willing to Business entities comprise also an
produce and bring products to economy. In the economy, firms
market. differ from one another on how to
allocate their resources to produce
In the Equilibrium point, the the products and how to deliver
two slopes will intersect. The them to the consumers. They have
market price is sufficient to induce to plan how to meet the demands
suppliers to bring to market that of the consumers and participate
same quantity of goods that in the market.
consumers will be willing to pay for
that price. In the article of AU Online (2017),
A Guide to Types of Market
Structures, it defined market
structure as a starting point for
assessing economic environments
of firms.
COMPETITION - a situation in
which someone is trying to win
It also mentioned market structure Producers and consumers are
as a tool of understanding of how making coherent decisions for
companies and markets work allow their benefit. For instance,
business professionals and leaders producers make decisions to
to accurately judge industry and maximize their profits, and
market news, policy changes and consumers make decisions to
legislation and how the economy maximize their utility.
shapes important decisions.
There are no hindrances to enter
nor exit from this type of market.
Companies manufacture identical
PERFECT COMPETITION - occurs products that are not branded.
when there is a large number of Producers don’t have the power to
small companies competing influence the market price nor the
against each other. They sell
similar products (homogeneous), condition. Many and small sellers
lack price influence over the and no one can affect the market.
commodities, and are free to enter Homogeneous product is offered
or exit the market. by the companies. Free entry to
A type of market structure where and exit from the industry. All firms
many products are similar and only have the motive of profit
may substitute each other since maximization. No concept of
they have the same features, price consumer preference. Consumers
and, quality. can dictate the price.

There are many sellers and

consumers in this type of market MONOPOLY - A monopoly
with almost the same products. pertains to a situation wherein
Moreover, a perfectly competitive there is only a single company that
market requires few barriers to produces a certain product in the
enter and it is easy for producers entire market. Because of that,
to quit whenever they want. They they have the power or the
also have uniform prices that authority to manipulate their
depend on the demand and supply products, such as minimizing their
which means that the market has outputs to put higher prices in it
full control over implying prices. and to gain more profit. In this
Both the producers and consumers situation, consumers have a lesser
have perfect knowledge without benefit, especially when the
information failures. The details product is essential to them,
and information in this market are making them buy it despite being
easily accessible to all expensive.
participants. Thus, risk-taking is In a monopoly market, a single
not necessarily important and the company represents the whole
power of an entrepreneur is industry. It has no competitor, and
limited. it is the sole seller of products in
the entire market. This type of
market is characterized by factors structure, several companies sell
such as the sole claim to the same product but they have
ownership of resources, patent and their differences.
copyright, licenses issued by the
government, or high initial setup Those differences give them
costs. market power which lets them
charge higher prices for a product,
Monopolies commonly emerge but is within a certain range. These
because there is a high barrier to key factors can include style,
entry and exit in a particular brand name, location, packaging,
market. advertisement, and pricing
strategies, which became every
A single seller and no competitors firm’s basis in marketing.
in the market. Very unique and
highly predictable product or no Every firm is a price setter and can
close substitutes. The firm is the maximize their profit. They sell
price maker and the firm has similar yet slightly different
considerable control over the products. The consumers can favor
price. a product more than the other one.
• McDonald and Burger King,
It can control the quantity which both sell slightly different
supplied. Entry/exit is difficult and burgers. Nike and Adidas, which
blocked. Sole seller has the full both sell running shoes, but are
power to set price. Examples are different in some ways.
public transportations like MRT,
computer software manufacturer
like Microsoft.
OLIGOPOLY - a type of market
structure where firms dominate
the market by supplying either
MONOPOLISTIC COMPETITION - similar or differentiated products.
refers to an imperfectly There are only a few companies in
competitive market with the traits this structure and they have
of both the monopoly and control over price implying. It is
competitive market. Sellers also difficult to enter this market
compete among themselves and since there are a lot of barriers.
can differentiate their goods in
terms of quality and branding to Moreover, participants in
look different. In this type of oligopolies are price setters
competition, sellers consider the rather than takers. Some
price charged by their competitors examples of oligopoly companies
and ignore the impact of their own are the automobile industry, the
prices on their competition. steel industry, aircraft
manufacturing industry, etc.
When there is a numerous quantity
of small firms competing against Interdependent. Like for example,
each other, it is called a if one firm change and decreases
Monopolistic Competition. its price, it will significantly affect
However, in this type of market the other firms. Rampant
advertising since most companies competing against existing firms.
use national media to promote Higher barriers to entry, such as
their products. high capital requirements or legal
restrictions, create a less
competitive market environment
and allow existing firms to
MARKET POWER - refers to a maintain higher market power.
company's relative ability to
manipulate the price of an item in 3. PRODUCT DIFFERENTIATION:
the marketplace by manipulating
the level of supply, demand or The extent to which firms can
both. differentiate their products or
services from competitors can
A company with substantial influence the level of competition.
market power has the ability to In markets where products are
manipulate the market price and highly differentiated, firms may
thereby control its profit margin, have more market power as they
and possibly the ability to increase can charge higher prices based on
obstacles to potential new unique features or brand loyalty.
entrants into the market. Conversely, markets with lower
levels of product differentiation
Firms that have market power are tend to have more competition,
often described as "price makers" reducing market power.
because they can establish or
adjust the marketplace price of an 4. MARKET CONCENTRATION:
item without relinquishing market
share. Market concentration refers to the
dominance of a few large firms in a
market. When a few firms control a
significant market share, they
FACTORS AFFECTING THE have greater market power and
MARKET POWER can influence prices and market
conditions. Higher market
concentration often leads to
1. NUMBER OF FIRMS: reduced competition.

The number of firms operating in 5. GOVERNMENT

the market is a crucial determinant REGULATIONS:
of competition. In a market with a
large number of competitors, the Government regulations and
level of competition is higher, policies can impact competition in
leading to lower market power for a market. Regulations that limit
individual firms. entry or restrict competition can
increase market power for existing
2. BARRIERS TO ENTRY: firms. On the other hand,
regulations aimed at promoting
The presence of barriers to entry competition, such as anti-trust or
can restrict new firms from anti-monopoly laws, can reduce
entering the market and market power.
6. TECHNOLOGICAL
ADVANCEMENTS:

Technological advancements can

disrupt industries and alter the
level of competition. New
technologies can lower barriers to
entry, promote innovation, and
increase competition, reducing
market power for existing firms.

7. CONSUMER SWITCHING
COSTS:

If consumers face high costs when

switching from one product or
service to another, it can weaken
competition in the market. Higher
switching costs allow firms to
maintain market power as
consumers may be less likely to
switch to alternative products or
services.