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Calculating Elasticity of Demand Read the information below and write your answer on a separate paper. Suppose the demand schedule of your family for rice in a year as follows: Price/Kilo Quantity Demanded Quantity Demanded (income = P15,000) (income = P20,000) 100 400 500 80 850 1000 60 1,300 1,500 40 1,800 2,000 20 2,300 2,500 1. Compute the price elasticity of demand as the price of rice increases from P80 to P100 if (Y1) your income is P15, 000, and (Y2) your income is P20, 000. 2. Compute your income elasticity of demand as your income increases from P15, 000 to P20, 000 if (P 1) the price is P60, and (P2) the price is P20. 3. Interpret your derived elasticity for #1 and #2 and indicate whether these are elastic or inelastic.Es = Percentage change in quanitity Supplied Percentage change in price Where: Percentage change in quantity supplied = 92-01 Q1 Percentage change in price = P2-P1 P1 Therefore: Q2-Q1 Q1 Es = P2-P1 P1 Example: Suppose that the price of rice increase from P35 to P40 per kilo that encouraged the farmers to produce more "palay" from 126,0000 to 180,000 sacks per semester. Solution: Q2-Q1 180,000-126,000 54,000 Q1 126,000 126,000 43 Es = P2-P1 40-35 : 3 14 P1 35 35 Based on the above example, the elasticity of 3 reflects the fact that the quantity supplied moves proportionately thrice (3x) as much as the price. Since the price elasticity of 3 is more than 1, therefore, supply is elastic. If the elasticity is less than 1, then the supply is inelastic. It indicates that the quantity supplied moves proportionately less than the price. If the price elasticity is greater than 1, then the supply is elastic. It means that the aggregate supply shift proportionately more than the price.1"" HEMEH'I'EH HY Hull-HUME w gunmen: ECONOMICS ' Normal Good a good for which, other things equal, an increase in income leads to art increase in demand. _ Price Elasticity of Demand a measure of how much the quantity demanded of a good response to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Price Elasticity of Supply a measure of how much the quantity supplied of a good response tea change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price. Substitute Good two goods for which an increase in the price of one leads to an increase in the demand for the other. Superior Geed are luxury goods that are always expensive and often are relatively scarce or harder to come by. These are goods that are something very pleasant but not really needed in life. As a consumer, you are usually demanding more of goods when its price is lower, when your incomes are higher, when the value of substitute goods is higher. or when the rate of the complement goods is cheaper. it is your natural reaction as a consumer but. it is not happening all the time. The level of the ctrttsut'i'iers' responsiveness varies greatly, and it can measure by the price of elasticity of demand. You can classify the demand elasticity according to the factors that cause the change: the price elasticity, the income elasticity, and the cross-price elasticity. Price Elasticity of Demand The price elasticity of demand is dealing with the sensitivity of quantities bought by a consumer to a change in the product price. You can compute the price elasticity of demand, by using the following formula: Ed=l"er'centnge change in quantity demanded Percentage change in price 1ST SEMESTER SY 2022-2023 SUBJECT: ECONOMICS Where: Percentage change in quantity demanded = 22-21 Q1 Percentage change in price =12-141 P1 Q2-Q1 Therefore: Ed= Q1 P2-P1 P1 Where: Ed= Price elasticity of demand Q1= Original quantity demanded Q2= New quantity demanded P1= Original Price P2= New Price Interpretation of the Elasticity Coefficient You may interpret your computed elasticity as follows: Elastic - The result is greater than 1 (Ed > 1), which means that spending is relatively priced sensitive. Inelastic - The result is less than 1 (Ed1) Inferior Goods Unitary (ev =1) OKAY U Inelastic (ev 1), which means that spending is relatively priced sensitive. Inelastic - The result is less than 1 (Ed