BAM 040: Managerial Economics

SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Lesson title: Own Price Elasticity of Demand and Total Revenue Materials:
Test (includes discussion of Producer Surplus) Student Activity Sheets
Lesson Objectives: References:
1. I can compute own price elasticity of demand. Managerial Economics by Viloria,
2. I can illustrate the relationship between own elasticity of demand Halcon, Avila-Bato & Viray
and total revenues. Managerial Economics Business
3. I can explain the concept of producer surplus. Strategy Ninth Edition by
Baye,Prince,2017

“However difficult life may seem, there is

always something you can do and succeed at.”

A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
Buenos dias my dear student! You are now loaded with knowledge and ideas about the very popular
concept in economics which is the Law of Supply and Demand. But before we end our discussion on
that topic, let me share with you what Producer Surplus is. We will also discuss today a very interesting
and challenging topic “Own Price Elasticity of Demand” and how it relates to the total revenue
generated by a firm. Clear your mind and let’s do this buddy!

B.MAIN LESSON
1) Activity 2: Content Notes (50 min)

Bring out your ballpen, highlighter, calculator and reference book to help you understand the topic.

Producer surplus is the difference between

how much a person would be willing to accept
for given quantity of a good versus how much
they can receive by selling the good at the
market price. The difference or surplus amount
is the benefit the producer receives for selling
the good in the market. A producer surplus is
generated by market prices in excess of the
lowest price producers would otherwise be
willing to accept for their goods.
(Investopedia.com)

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Points ABE represents the producer surplus. The producer will already earn at the
price of 20 but he can sell the goods/services at the price of 75.
To compute for producer surplus, use the formula of the area of right triangle which is
Area = ½ bh, where: ½ is constant, b stands for base and h for height.
Note: Base is on the x axis or the quantity demanded and height is on
the y axis or the price.

Let’s use the above figure to compute for the consumer surplus.

PS = ½ bh
PS = ½ (100)(75-20)
PS = ½ (100)(55)
PS = 2,750

✓ Producer surplus is located above the supply curve but below the market
equilibrium price. Equilibrium price (point E) corresponds to the intersection
of demand and supply curve.

The law of demand and supply is straightforward: consumers buy less when the price increases and
they buy more when the price is reduced; while producers supply more goods when the price is high
and less when the price is low. But how much more or how much less will they buy or produce?

The responsiveness (or sensitivity) of consumers and producers to price and income changes is
defined by the concept of elasticity. The own price elasticity of demand tells us the degree of
responsiveness of consumers to a price change of the commodity.
Own Price Elasticity of Demand – the degree of responsiveness of consumers to a price change of the
commodity.

Legend:

Qd2 = new quantity demanded

Qd1 = old quantity demanded
P2 = new price
P1 = old price

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

DIFFERENT ELASTICITY VALUES

Elasticity Description Comments/Interpretations
Value (Ed)
0 Perfectly Inelastic Price change does not lead to any change in quantity
demanded.
<1 Inelastic Percentage change in price results in a smaller percentage
change in quantity demanded.
=1 Unit Elastic Percentage change in price results in the same percentage
change in quantity demanded.
>1 Elastic Percentage change in price results in a larger percentage
change in quantity demanded.
∞ Perfectly Elastic Small decrease in price causes buyers to increase their
purchases or a small increase in price causes buyers to drop
out of the market.
Note: Disregard the negative values in determining the own price elasticity

Goods If Price Total Revenue Example of Goods Explanation

Consumers tend to buy
less of their wants
1. Elastic when the price is high.
Increases Decreases Wants
goods Example: when the
price of branded bags

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

increase, less
consumer will buy but if
the price decreases,
Decreases Increases Wants many consumers
prefer to buy those
bags.

Consumer will still buy

inelastic good no
2. Inelastic
Increases Increases Needs/Necessities matter what the price is
goods
because they need it.
Example: Consumers
will still buy medicine
despite of its price
because they need it.
Decreases Decreases Needs/Necessities

Two extreme cases arise when demand is said to

be perfectly inelastic or perfectly elastic. In
the former, a price change does not lead to any
change whatsoever in quantity demanded. In the
latter case, when demand is perfectly elastic, a
small decrease in price causes buyers to
increase the amount of their purchases from 0 to
all they can obtain. Similarly, a small increase in
price causes buyers to drop out of the market.
Figure 1 illustrates these two extreme cases

Total Revenue Test

When the price of a good changes, the total revenue of the firm also changes. However, the price and quantity
demanded move in opposite directions Which will dominate, the price change or the change in quantity
demanded? To determine this, it is important that we know the value of the own price elasticity of demand.
Total revenue is the total amount received by seller from the sale of a product. It is calculated bu multiplying
the product price by the quantity demanded and sold. ( TR = P x Q )
When demand is elastic, an increase in price will actually decrease total revenue. Though a higher price per
unit is received by the firm, fewer units are sold because consumers, in this case, are very responsive even to
a small changes in the price.
When demand is inelastic, an increase in the price will increase total revenue. The small decline in quantity
demanded and sold is offset by the increase in product price, since consumers are less responsive to price
changes.
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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

In the case of unit elastic demand, an increase or decrease in the price leaves total revenue unchanged. This
is because the percentage increase or decrease in price is exactly matched by a corresponding percentage
increase or decrease in quantity demanded and sold.

As an owner or a manager of a firm in the future, this topic is very important because you need
to determine what goods or services you will offer. If you are selling elastic goods, you need to
be cautious in changing/increasing your prices because your total revenue might decrease.
On the other hand, if you are selling inelastic goods, your income will depend on the price you
will set but always remember that there is always government intervention when the prices are
too high or too low (price ceiling and price floor application)

2) Activity 3: Skill-Building Activities (20min)

Part 1 (15 minutes)
Direction: Answer the following problems. Indicate your solutions.
Problem 1 : Yesterday, the price of envelopes was P3 a box, and Julie was willing to buy 10 boxes.
Today, the price has gone up to P3.75 a box, and Julie is now willing to buy 8 boxes.
(a) What is Julie's elasticity of demand? Answer: ____________________
Solution:

(b) Is Julie's demand for envelopes elastic or inelastic? Answer: ________________

Defend your answer on this box.

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

2.
Qd1 = 1,500 P1 = 100

Qd2 = 1,000 P2 = 200

(a) Compute the own price elasticity of demand and indicate whether elastic or inelastic.

Write your answers here.

3.
Qd1 = 15,000 P1 = 165

Qd2 = 26,000 P2 = 250

(a) Compute the own price elasticity of demand and indicate whether elastic or inelastic.

Write your answers here.

Part 2 (5 minutes)

Take a look at the figure on the right

side regarding the relationship of
price elasticity of demand and total revenue on the part of producers/suppliers.
Given that illustration above, identify at least 5 examples of elastic and inelastic goods.

5 Examples of Elastic Goods 5 Examples of Inelastic Goods

1._________________________________ 1._________________________________
2. ________________________________ 2. ________________________________
3. ________________________________ 3. ________________________________
4. ________________________________ 4. ________________________________
5. ________________________________ 5. ________________________________
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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

3) Activity 5: Check for Understanding (20min)

Let’s check if you really understand our discussion for today.

Direction: Complete the table below without looking at your concept notes.
No. Elasticity Description If price Total Revenue
Value (Ed)
1 0 Increase
2 Inelastic Decrease
3 Unit Elastic Increase
4 >1 Increase
5 ∞ Increase

Complete the graph

Figure 11.1 Figure 11.2

1. In Figure 11.1, label the axes and then drew a 2. In Figure 11.2, label the axes and then draw
demand curve for a good that has a perfectly a demand curve for a good that has a
elastic demand. perfectly inelastic demand

2, Compute the table below by calculating the price elasticity of demand.

%age %age Price

Change Change Elasticity 1. Answer the following questions:
in in of Demand a. What row has the most elastic demand?
Price Quantity b. Which row has the least elastic demand?
Demanded 2. Suppose the price-elasticity of demand for oil is
A 5 10 ? 0.3. If the quantity of oil decreases by 6%, what is
B 8 4 ? the effect on the price of oil?
C 3 0 ? 3. What does it mean when the demand for a good
is inelastic?
D 6 6 ?
E 1 8 ?

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #11

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)

A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.

B. Think about your Learning

1. What is the most important lesson you gained on this session?

__________________________________________________________________________________
_________________________________________________________________________________

2. What are your questions about this topic?

__________________________________________________________________________________
__________________________________________________________________________________

Key to Corrections

Skill Building Activities

Part 1
Problem #1: To find Julie's elasticity of demand, we need to divide the percent change in quantity by the percent change
in price.
(a) % Change in Quantity = (8 - 10)/(10) = -0.20 = -20%
% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8

(b) Her elasticity of demand is the absolute value of -0.8, or 0.8. Julie's elasticity of demand is inelastic, since it is less
than 1.
Problem #2 Problem #3
:
Answers: Answers:
Ed = 1,000 – 1,500 ÷ 200 - 100 Ed = 26,000 – 15,000 ÷ 250 - 165
1,500 100 15,000 165
= 0.33 ÷1 = 0.73 ÷0.52
= 0.33, INELASTIC = 1.40, ELASTIC
Part 2
Suggested Answers: *Elastic Goods – 1) gas from a particular station, 2) airline tickets, 3) soft drinks, 4)black
coffee, 5)branded clothing *Inelastic Goods – 1) gasoline, 2) concert tickets, 3) medical procedures,
4)medicines, 5) specialty coffee drinks Note: Answers may vary depending on the analysis of students

Submit your activity sheets before the end of the session!

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This document and the information thereon is the property of PHINMA Education