AppEcon Students File Implications

Implications of Market
Pricing in Making Economic

Decisions
Module 4
OBJECTIVES:
1. determine the implications of market pricing

in making economic decisions
2. explore the elasticity of demand and supply
3. solve problems on the price elasticity of
demand and supply
4. value the implications of market pricing in
decision making
Market Pricing on Making
Economic Decisions
Please read this article on the Demand,
Supply, and Elasticity of Clean Water in
the Philippines. This will help you
understand better our new lesson.
Enjoy reading!
A shortage is when there is an excess demand
for the quantity
supplied. While surplus is excess in supply.
For example, if there are 10 bottles of water and there
are 20 students who
want drinking these, then there will be only 10
students whose demands are met, while the others will
not be able to be given anything. There is a shortage
in the supply.
If producers make too many bottles of water and
consumers cannot buy them
want to buy them, there will be a surplus.
Price System in a Market Economy
Let us find out more about the price system. We
have learned that
demand is the willingness of consumers to buy
goods and services. In
economics, the willingness to buy goods and
services should be
accompanied by the ability to buy, also called
“purchasing power”. This
is referred to as an effective demand (source:
Investopedia).
Price System in a Market Economy: Its Characteristics
The prices of goods that we encounter

every day the things we buy play a crucial
role in determining an efficient distribution
of resources in a market system. The prices
will help us to make everyday economic
decisions about our needs and desires.
They are the indications of the acceptance of a
product; the more popular the product, the
higher the price that can be charged.
Example is when tables are for sale in
your community today and is
assumed that they are not very
important as compared to other
products or commodities that we need
to survive especially since our
movements are very limited.
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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.
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PRICE ELASTICITY OF DEMAND AND SUPPLY
Can you guess

what happened
with this mom in
the market?
You may write
your reaction in
the shape towards
her.
Price elasticity measures the
responsiveness of the quantity
demanded or supplied of a good to a
change in its price. Elasticity can be
described as: a) elastic or very
responsive and b) unit elastic,
inelastic or not very responsive.
(source: Investopedia)
Effects of Change in Demand
and Supply
Elastic demand or supply curve
indicates that quantity
demanded or supplied responses to
price changes in a greater
than proportional manner.
Inelastic demand or
supply curve is one where a
given percentage change in
price will cause a smaller
percentage change in
quantity demanded or
supplied.
Unitary elasticity means that
a given percentage change in
price leads to
an equal percentage change in
quantity demanded or supplied.
CATEGORIES OF PRICE ELASTICITY
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 responsiveness of
quantity demanded, or how much quantity
demanded changes, given a change in the price of
goods or services.
*The mathematical value is
negative. A negative value indicates
an inverse relationship between
price and the quantity demanded.
But the negative sign is ignored
(Judge, S. 2020).
a) Elastic Demand (PED > 1)
- the percentage change in
price brings about a more
than proportionate change
in quantity demanded.
b) Inelastic Demand
(coefficient of the elasticity is
less than 1) – is when
an increase in price causes a
smaller % fall in demand.
c) 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 - PED or the price elasticity

of demand is 1
d) Perfectly Elastic - a small
percentage change in price brings
about a change in quantity
demanded from zero to infinity.
Perfectly elastic - the
coefficient of elasticity is equal
to infinity (∞)
e) Perfectly Inelastic - the PED is
=0 any change in price will not have
any effect on the demand of the
product.
Perfectly inelastic - the percentage
change in demand will be equal to
zero (0)
POINT ELASTICITY
a) The midpoint elasticity is less than 1. (Ed
< 1). Price reduction leads
to reduction in the total revenue of the firm.
b) The demand curve is linear (straight line), it
has a unitary elasticity at
the midpoint. The total revenue is maximum at
this point.
c) Any point above the midpoint has elasticity
greater than 1, (Ed > 1).
II. 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 𝑑𝑒𝑚𝑎𝑛𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
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.
For example (the demand for units of air-

conditioning increases as the income of the
consumer increases and the demand for
electric fan decreases)
A normal good: units of air-
conditioning; Inferior good:
electric fan
The Inferior Goods – the demand
decreases when consumer income
rises; the demand increases when
consumer income decreases)
Shifts to the left as income rises. YED is
negative. • As income rises, the
the proportion spent on cheap goods will
reduce as now they can afford to buy more
expensive goods. Examples: the demand for
cheap/generic electronic goods
(let’s say electric fans) will fall as people’s
income rises and they will switch to
expensive branded electronic goods (unit of air-
conditioning)
IV. Price Elasticity of Supply
(PES)
• The measure of the responsiveness of
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 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
Determinants of Price Elasticity of Supply
Agarwal, P. (2020) said price elasticity of supply can be
influenced by the
following factors:
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
The 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.
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.

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Implications of Market

Pricing in Making Economic

1. determine the implications of market pricing

The prices of goods that we encounter

Sample Footer Text 03/17/2024

Sample Footer Text 03/17/2024

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Can you guess

I. The Price Elasticity of Demand

Unitary elastic - PED or the price elasticity

For example (the demand for units of air-

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