APPLIED

ECONOMICS
Angelie D. Paglicauan, MBA
The Marketing Price System
Learning Objectives:
1. determine the implications of market pricing in making
economic decisions,
2. discover the elasticity of demand and supply,
3. explain problems on price elasticity of demand and supply, and
4. value the inferences of market pricing in decision making
TAKREM
PLUSURS
CRIPE
BILIMEURIUQ
MANDED
CASTILE
PLYPUS
SENTILICA
GATEHORS
PHRAG
 Price System in a Market Economy
In economics, the 7 willingness to buy goods and services should be accompanied by
the ability to buy, also called the “purchasing power”. This is referred to as an effective
demand (source: Investopedia).
Price acts as a signal for shortages and surpluses which help firms and consumers
respond to changing market conditions.
• If a good is in shortage – price will tend to rise. Rising prices discourage demand,
and encourage firms to try and increase supply.
• If a good is in surplus – price will tend to fall. Falling price encourage people to
buy, and cause firms to try and cut back on supply.
• Prices help to redistribute resources from goods with little demand to goods and
services
The market price is the point that the supply and demand curves intersect. (Judge, S.
2020)
Let us analyze the charts below. The chart shows a
surplus – the quantity is greater than demand. When
quantity is greater than demand it causes prices to go
down.
• Prices are market driven - The producers can
make what they want and consumers are free
to purchase what they want. This means that
customers live in a market economy. When
prices are high, supply increases as many
firms join the market (Judge, S. 2020).
• In shortage, quantity is less than the demand; it causes prices to
go 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, price tends to go up or tends to go higher (Judge, S. 2020).
Law of Supply and Demand

The law of supply and demand explains the

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.
How Do
Supply and
Demand
Create an
Equilibrium
Price?
 • Price elasticity measures the
responsiveness of the quantity
Price demanded or supplied of a good to a
Elasticity change in its price.
of Demand • Elasticity can be described as:
• a) elastic or very responsive and
and Supply • b) unit elastic, or inelastic or not
very responsive.
 • Elastic demand or supply curve indicates
that quantity demanded or supplied
respond to price changes in a greater than
proportional manner.
Price • Inelastic demand or supply curve is one
Elasticity where a given percentage change in price
will cause a smaller percentage change in
of Demand quantity demanded or supplied.
and Supply • Unitary elasticity means that a given
percentage changes in price leads to an
equal percentage change in quantity
demanded or supplied.
 According to Agarwal, P. (2018) and Judge, S.
(2020), there are four categories of price elasticity
are the following:
I. The Price Elasticity of Demand
Price elasticity of demand is the
Categories responsiveness of quantity demanded, or how
of Price much quantity demanded changes, given a
change in the price of goods or services.
Elasticity The mathematical value is negative. A negative
value indicates an inverse relationship between
price and the quantity demanded. But the
negative sign is ignored
 Elastic Demand (PED > 1) - the percentage
change in price brings about a more than
proportionate change in quantity demanded.
When the percentage change in quantity
The Price demanded is greater than the percentage
change in price, and the coefficient of the
Elasticity elasticity is greater than 1.

of Inelastic Demand (coefficient of the

elasticity is less than 1) – is when an
Demand increase in price causes a smaller % fall in
demand. When the percentage change in
quantity demanded is less than the percentage
change in price, and the coefficient of the
elasticity is less than 1.
 Unitary Elastic Demand - When the
percentage change in demand is equal to the
percentage change in price, the product is said
to have Unitary Elastic demand. Unitary elastic
The Price - PED or the price elasticity of demand is 1.

Elasticity
of Perfectly Elastic - a small percentage change
in price brings about a change in quantity
Demand demanded from zero to infinity. The PED is =0
any change in price will not have any effect on
the demand of the product and the percentage
change in demand will be equal to zero (0).
The Price
Elasticity
of
Demand
Point Elasticity

• The midpoint elasticity is less than 1. (Ed < 1). Price

reduction leads to reduction in the total revenue of the firm.
• The demand curve is linear (straight line), it has a unitary
elasticity at the midpoint. The total revenue is maximum at
this point.
• Any point above the midpoint has elasticity greater than 1,
(Ed > 1).
The Income Elasticity of Demand
(YED)

The income elasticity of demand is the relationship

between changes in quantity demanded for a good
and a change in real income.
(YED = % change in quantity demanded/ %
change in income)
The Income Elasticity of Demand
(YED)

Normal Goods – are those goods for which the demand rises as consumer
income rises; positive income elasticity of demand so as consumers’ income
rises more is demanded at each price. These goods shift to the right as
income rises. YED is positive as income rises, the proportion spent on
cheap goods will reduce as now they can afford to buy more expensive
goods.
Inferior Goods – the demand decreases when consumer income rises;
demand increases when consumer income decreases. It shifts to the left as
income rises. YED is negative as income rises, the proportion spent on
cheap goods will reduce as now they can afford to buy more expensive
goods.
Cross Price Elasticity of Demand or
(XED)
Cross price elasticity of demand is the effect on the change in demand of
one good as a result of a change in price of related to another product.
XED = (% of change in the quantity demanded of good X / % of change
in the price of good Y).

• If the value of XED is positive, it is a substitute good. If the value of

XED is negative, therefore it is complements good and if the value of
XED is zero, the two goods are unrelated.
Price Elasticity of Supply (PES)

The measure of the responsiveness of a quantity to a change in

price. It is the percentage change in supply as compared to the
percentage change in price of a commodity.

PES = % change in quantity demanded of a good or service

supplied / % change in price).
Price Elasticity of Supply (PES)

• If Pes > 1 = supply is price elastic

• Pes = 0 = supply is perfectly inelastic
• Pes = infinity = supply is perfectly elastic
• Pes < 1 = supply is price inelastic
Price Elasticity of
Supply (PES)
 Determinants of Price Elasticity of Supply

1. Marginal Cost- If the cost of producing one more unit keeps rising as output rises or
marginal cost rises rapidly with an increase in output, the rate of output production will
be limited. The Price Elasticity of Supply will be inelastic – the percentage of quantity
supplied changes less than the change in price. If Marginal Cost rises slowly, supply will
be elastic.
2. Time - Over time price elasticity of supply tends to become more elastic. The
producers would increase the quantity supplied by a larger percentage than an
increase in price.
3. Number of Firms - The larger the number of firms, the more likely the supply is
elastic. The firms can jump in to fill in the void in supply.
Determinants of Price Elasticity of Supply

4. Mobility of Factors of Production- If factors of production are

movable, the price elasticity of supply tends to be more elastic. The labor
and other inputs can be brought in from other location to increase the
capacity quickly.
5. Capacity - If firms have spare capacity, the price elasticity of supply is
elastic. The firm can increase output without experiencing an increase in
costs, and quickly with a change in price.
Situational Analysis
Directions: Please read the statements carefully and answer what is being
asked afterwards.
1. In the market, the price elasticity for the demand of canned goods
sold by Friendship Grocery Store is the:
2. If demand for sacks of rice in Friendship Grocery Store is price
elastic, then a
3. If the cross-price elasticity between soap bar and liquid soap
commodities is 1.5 then
4. The price elasticity of demand for a certain good tends to be:
5. If the price elasticity of supply of cup noodles is 0.60 and the price
increase by 3 percent, then the quantity supplied for cup noodles
increases by how by? Show your solution
Explain the quotation.

“Do not save what is left after spending, but spend what is
left after saving.” – Warren Buffett