Elasticity Midpoint Formula on PED

 it is a measure of the impact of one variable

over the other.
 a elasticity of b – the percent increase in a
when there is a percent increase in b assuming
all other factors that affect b are constant Example: A researcher would like to know the
impact of price change to the detergent bar in
Price Elasticity of Demand Muntinlupa City. If the price of detergent bar
 it is the measure of how much the quantity changed from Php 20 to Php 25, what is the PED if
demanded of a good responds to a change in demand changed from 100 to 95?
the price of that good.
 it is the measure of percent decrease in the
quantity demanded of goods and services when
there is a percent increase in their price.
(ceteris paribus)

PED = percent change in quantity demand divided

by the percent change in price
5 types of graphical representation of a PED
 PED with Perfectly Inelastic Demand
Example 1: the price of sardines increases by 5%,  commodities with an elasticity of 0
and the quantity demanded decreases by 10%.  even if the price changes, the quantity
demand would still remain the same
PED = -10/5 = 2 (this means that if there is a 1%  PED with Inelastic Demand
change in the price, we can expect 2% decrease in  this happens when a product is a necessity
quantity demand. in the market
 the change in price is always higher than
Example 2: Supposed that the price of cappuccino the change in demand
increases from Php 90 to Php 110, what is the PED  commodities are still in demand in the
if demand falls from 100 to 90? market
 PED with Unit Elastic Demand
 PED with an Elastic Demand
 change in price is always lower than the
change in demand
 an increase in price is tantamount to a
large decrease in quantity demand
 PED with Perfectly Elastic Demand
elastic – PED > 1  commodities with an elasticity of infinity
inelastic – PED < 1  if the price remains the same, the quantity
unit elastic – PED = 1 demand would be infinite

5 possible reasons for the PED to be higher

 the larger the number of close substitutes there Income Elasticity of Demand
are for a good  it is the measure of how much the quantity
 the good is a luxury demanded of a good responds to a change in
 if spending on the good is a large portion of consumer’s income
total spending  it is computed as a percentage change in
 the more narrowly defined the good is quantity demanded divided by the percentage
 the longer the time available for buyers to change in income
adjust to a price change  it is the measure of percent increase in the
quantity demanded of goods and services when
there is a percent increase in the income

IED = percent change in quantity demand divided by

the percent change in income

Example 1: the income of people increases by 20%,

and the quantity demanded decreases by 10%.
IED = -10/20 = -0.5 (this means that if there is a 1% Cross-Price Elasticity of Demand
change in income, we can expect a 0.5% decrease  it is the measure of how much the quantity
in quantity demand) demanded of one good responds to a change
in the price of another good
Normal Goods  it is computed as the percentage change in
 those with an IED greater than zero (IED > 0) quantity demanded of the first good divided by
 goods or services that have an increasing the percentage change in the price of the
demand whenever income increases second good
 expected to be positive because there is a  it is the measure of percent increase in the
positive relationship between income and quantity demanded of goods and services when
normal goods there is a percent increase in the price of
 can be either a necessity or a luxury related goods of a commodity

Necessity (Income Inelastic) CPED = percent change in quantity demand of

 if IED is greater than 1 (IED > 1) commodity Y divided by the percent change in price
 examples: food, water, clothing, fuel, electricity, of commodity X
medical services, and other daily essentials

Luxury (Income Elastic) Example: the price of commodity X increases by

 if IED is less than 1 (IED < 1) 30%, and the quantity demanded of commodity Y
 examples: expensive drinks, luxury bags, increases by 10%
sports cars, and other commodities that require
high income before an individual can purchase CPED = 10/30 = 0.33333... (this means if there is a
these items 1% change in the price of commodity X, we can
expect a 0.33% increase in quantity demand of
Inferior Goods commodity Y
 those with an IED of less than zero (IED < 0)
 higher income decreases quantity demanded Substitutes
 those with a CPED greater than zero (CPED >
Example: Supposing that the income of Pateros 0)
residents increases from an average annual income  commodities with positive elasticity and direct
of Php 300,000 to Php 500,000. What is the IED of relationship with other commodities
good A if its demand increases from 100 to 190? Complementary Goods
 commodities with negative elasticity and
inverse
Midpoint Formula on CPED

Midpoint Formula of IED Price Elasticity of Supply

 it is the measure of how much the quantity
supplied of a good responds to a change in the
price of that good.
 it is the measure of percent increase in the
Example: A faculty would like to know the impact of quantity supplied of goods and services when
price change of a special type of pencil in the City of there is a percent increase in the price of such
Manila. If the average weekly income of the people (ceteris paribus)
in Manila changed from Php 10,000 to Php 15,000,
what is the IED if demand changed from 1,000 to PES = the percent change in quantity supply divided
1,050? by the percent change in price

Example 1: the price of sardines increases by 5%,

and the quantity supplied increases by 20%.
 CONSUMER BEHAVIOR
PES = 20/5 = 4 (this means that if there is a 1%  how consumers behave or what incentive they
change in the price, we can expect 4% increase in will get if they purchase a certain commodity
quantity supply)  Utility – an individual’s pleasure, happiness, or
satisfaction
 Consumer theory – argues that individual
consumption decisions are always made
because people desire to maximize their
satisfaction

Example 2: The price of lotion increases from Php 4 factors that buyers are completely aware of:
90 to Php 110. What is the PES if demand increases  The spending on any good or service is
from 100 to 120? exactly equal to the individual’s savings and
income – only an assumption because there
are people who buy more than their current
savings or income
 People are aware of the range of products
available in the market – only an assumption
because there are instances where people only
buy a commodity because of another person’s
influence
 People are aware of the prices of the
products in the market – this is important
because there are instances when people buy
a commodity out of impulse or those that they
have no prior exposure to
 People are aware of the capacity of the
product – whenever we buy a product, we are
completely aware of its functionality
5 graphical representations for a PES
 PES with Perfectly Inelastic Supply MEASURING UTILITY
 a good or service with an elasticity that  consumption bundles – these are certain
equals to zero combinations of two commodities that will yield
 if there is a change in price, quantity them a certain level of utility; could form an
supply would still remain the same indifference curve
 PES with Inelastic Supply  indifference curve – shows combinations of
 despite the large increase in price, there two commodities which, when consumed, will
would have a very minimal increase in yield the same level of satisfaction; depicts
quantity supply values that are considered by the utility function
 this happens when the product does not  utility function – shows an individual’s value of
have a high market demand, so the the utility attained from consuming each
producers are preparing not to have an conceivable bundle of goods
increasing loss  cardinal values – based on the number of “util”
 it is steep or the unit of satisfaction; most widely used way
 PES with Unit Elastic Supply in identifying utility
 PES with Elastic Supply  marginal utility – the satisfaction on the next
 the increase in price would lead to a higher units of the same commodity that you would
increase in quantity supplied consume
 PES with Perfectly Elastic Supply  law of diminishing marginal utility – shows
 the commodities with an elasticity that an increasing total utility, but a decreasing
equals to infinity marginal utility; argues that as you increase
 the price remains the same but the your intake of a certain commodity, you will
quantity supply would be infinite have a declining satisfaction on the next units
of the same commodity that you would
consume
 ordinal values – based on rankings
 marginal rate of substitution – the maximum
amount of a good that a consumer is willing to
give up to obtain one additional unit of another
good; one of its characteristics is the
 diminishing trend along the indifference curve,  the decision must lie on the indifference curve
making the curve convex that is depicting the most preferred combination
of the consumer

Engel curve
 it shows the relationship between the amounts
of product that people are willing to buy and
their corresponding income

FOREIGN EXCHANGE
In analyzing the indifference curve, there are 3  it is the exchange of one’s country’s currency
properties of consumer preferences: for another
 completeness – in every pair of consumption  in a free economy, the value of a country’s
bundles (X and Y), the consumer can say one currency is determined by supply and demand
of the following:  in other words, a currency’s value can be
 X is preferred to Y pegged to another country’s currency, such as
 Y is preferred to X the US dollar, or to a basket of currencies
 the consumer is indifferent between X and  the government of a country may also
Y (means the two goods are valued determine the value of its money
equally)  the value of any particular currency is
 transitivity – can be described by having determined by market forces related to trade
commodities X, Y, and Z (commence), investment, tourism, and
 means that if X is preferred to Y, and Y is geopolitical risk
preferred to Z, then X must be preferred to
Z Pegged or Pegging
 these three assumptions are not always  it refers to the practice of attaching or tying a
correct, but they adequately describe most currency’s exchange rate to another country’s
people and most ordinary choices currency
 non-satiation – more is better  it often involves preset rations, which is why it’s
 for economic goods, consumers always called a fixed rate
receive happiness from more, or at least  pegs are often put in place to provide stability to
can freely dispose of any excess from that nation’s currency by linking it to an already
stable currency
INDIFFERENCE MAP
 it is a graph containing a set of indifference Trade
curves showing two commodities among which  it is the voluntary exchange of goods or
describe a person’s preferences services between different economic factors
 a consumer has an infinite number of  since the parties are under no obligation to
indifference curves that depict each level of trade, a transaction will only occur if both
their satisfaction parties consider it beneficial to their interests
 they do not intersect  in financial markets, it refers to purchasing and
selling securities, commodities, or derivatives
THE BUDGET LINE  free trade means international exchanges of
 it provides the budget constraint of an individual products and services without obstruction by
 it is a graph that shows the combinations of tariffs or other trade barriers
goods or services of a person, where the total
amount of money spent is proportionate to his Free Trade Agreement
or her income  it is a pact between two or more nations to
 budget constraint – we have limited budget on reduce barriers to imports and exports among
different types of commodity them
2 possible scenarios could happen in a budget line:
 income could increase (will shift to the right) Free Trade Models
 prices could increase (will shift to the left)  Bilateral Free Trade Agreements
 clearing trade or side deal
CONSUMER’S CHOICE  it is an agreement between two or more
To maximize utility of an individual, it must satisfy parties or states to reduce trade deficits
two conditions:  Multilateral Free Trade Agreements
 the decision must lie on the budget line  involving three or more countries aims to
reduce trade barriers
  its offers are regarded the finest strategy  obli – few; pollien – sellers
for creating a truly global economy that  has imperfect market structure
opens markets to both small and large Bilateral Monopoly
countries on equal ground  one seller and one buyer
 Regional Free Trade Agreements Bilateral Oligopoly
 it have risen in number and reach over the  significant degree of seller concentration and
years, including a notable increase in large significant degree of buyer concentration
plurilateral agreements Duopsony
 these are reciprocal preferential trade  only two buyers but many sellers
agreements between two or more partners Duopoly
 Plurilateral Free Trade Agreements  only two sellers
 it cater for instances where certain  most basic type of oligopoly
member states may agree on rules on Monopsony
trade in specific subjects that not all  one buyer, many small suppliers
member states may agree to
 it come to the fore where there is no
multilateral consent
 Preferential Trade Agreements
 it is a trading bloc that gives preferential
access to certain products from the
participating countries

Tariffs
 one of the ways governments deal with trading
partners they disagree with is through this
 it is a tax imposed by one country on the goods
and services imported from another country to
influence it, raise revenues, or protect
competitive advantages

Trade Barriers
 it refers to any regulation or policy that restricts
international trade, especially tariffs, quotas,
licenses, etc.

Bubble
 it is an economic cycle that is characterized by
the rapid escalation of market value, particularly
in the price of assets
 crash or bubble burst – quick decrease in value
or a contraction

TYPES OF MARKET
Competitive Market
 no single consumer or producer has the ability
to influence the market
Perfect Competition
 large number of small firms, homogeneous
product, very easy entry or exit from the market
Monopoly
 mono – one or single; polein – to sell (Greek)
 single seller or producer, unique product,
impossible entry into the market
Monopolistic Competition
 many small firms, differentiated products, easy
market entry and exit
Oligopoly
 few sellers, either homogeneous or a
differentiated product, difficult market entry