Erin Mae Aseron Ricalde Basic Microeconomics

BSBA FM1 (Group 2) Ma’am Aurora Susan Reyes

Question for Discussion – Page 58-59

1. Briefly discuss why the negative sign is usually ignored when computing for price
elasticity of demand.

To prevent any unnecessary confusion, the negative sign is ignored. When doing an
elasticity of demand calculation, the only thing that is looked at is the change in price and
the change in quantity. The negative sign does not matter because it does not impact the
elasticity of demand.

Price elasticity of demand is the percentage change in quantity demanded that occurs
with respect to a percentage change in price. Considering that an increase in the price of a
good or service would result to a decline in quantity demanded. It is expected that the price
elasticity of demand is negative because the relationship between price and quantity
demanded is inversely related. In essence, the minus sign is usually ignored when
computing for price elasticity of demand because it is expected that there will be a negative
or inverse relationship between quantity demanded and price.

2. Briefly explain the effect of price elasticity of demand to the total revenue. Cite an
example.

If there is a price change, it is imperative for a firm to understand what effect of such
change in price will do on total revenue. Any change in price will create two effects, to wit:
The Price Effect and The Quantity Effect. First is the Price Effect. This refers to an increase in
price that will result to a positive effect on revenue and vice versa, while on the other hand,
The Quantity Effect pertains to an increase in price that will lead to less quantity sold, and
vice versa.

However, because of the indirect relationship between price and quantity demanded,
the two effects influence total revenue in different directions. But, in deciding whether to
increase or decrease prices, a firm needs to determine what will be the net effect.
Nevertheless, elasticity presents the identity that the percentage change in total revenue is
equal to the percentage change in quantity demanded plus the percentage change in price.

Lastly here are some examples showing the relationship between the price elasticity of
demand and the total revenue.

 If the price elasticity of demand for a commodity is elastic, a price increase will make
the total revenue fall.
 When the price elasticity of demand for a good is inelastic, a price increase will give
rise to the total revenue.
 When the price elasticity of demand for a good is unitary elastic, a change in price
will not affect the total revenue.
 When the price elasticity of demand for a good is perfectly elastic, a price increase
creates a zero-total revenue.
 When the price elasticity of demand for a good is perfectly inelastic, a price increase
will cause total revenue to increase.
 3. Compute the total revenue and price elasticity of demand and fill in the missing
figures in the table presented below. Use the formula for point elasticity.

Points Price of Quantity Demand of Total Price Elasticity of

Good x Good x Revenue Demand
(Px) (Qdx) (P x Qd)
A 50 150 7,500 3.34
B 45 200 9,000 3.3
C 40 250 10,000 2.27
D 35 300 10,500 1.54
E 30 350 10,500 1.21
F 25 400 10,000 0.82
G 20 450 9,000 0.65
H 15 500 7,500 0.44
I 10 550 5,500 0.30

PATTERN:
POINT A – I POINT E - F
POINT A – B POINT F – G
POINT B – C POINT G – H
POINT C – D POINT H – I
POINT D – E

SOLUTION:

POINT A – I POINT A – B
Formula: Formula:
2Q -Q 1 2Q -Q 1

   Q 1        Q 1    

E =      P -P
d 2 1 E =      P -P
d 2 1

               P1                P1

= 550-150 = 200-150
150 150

10-50 45-50
50 50

= 400 = 50
150 150

-40 -5
50 50

= 2.67 = 0.33
-0.8 -0.1

Ed= |-3.34| or 3.34 Ed= |-3.3| or 3.3

ELASTIC ELASTIC
POINT B – C POINT D – E
Formula: Formula:
2Q -Q 1 2Q -Q 1

   Q 1        Q 1    

E =      P -P
d 2 1 E =      P -P
d 2 1

               P1                P1

= 250-200 = 350-300
200 300

40-45 30-35
45 35

= 50 = 50
200 300

-5 -5
45 35

= 0.25 = 0.17
-0.11 -0.14

Ed= |-2.27| or 2.27 Ed= |-1.21| or 1.21

ELASTIC ELASTIC

POINT C – D POINT E – F
Formula: Formula:
2Q -Q 1 2Q -Q 1

   Q 1        Q 1    

E =      P -P
d 2 1 E =      P -P
d 2 1

               P1                P1

= 300-250 = 400-350
250 350

35-40 25-30
45 30

= 50 = 50
250 350

-5 -5
40 30

= 0.2 = 0.14
-0.13 -0.17

Ed= |-1.54| or 1.54 Ed= |-0.82| or 0.82

ELASTIC INELASTIC
POINT F – G POINT H – I
Formula: Formula:
2Q -Q 1 2Q -Q 1

   Q 1        Q 1    

E =      P -P
d 2 1 E =      P -P
d 2 1

               P1                P1

= 450-400 = 500-550
400 550

20-25 10-15
25 15

= 50 = 50
400 550

-5 -5
25 15

= 0.13 = 0.1
-0.2 -0.33

Ed= |-0.65| or 0.65 Ed= |-0.30| or 0.30

INELASTIC INELASTIC

POINT G – H
Formula:
2Q -Q 1

   Q 1    

E =      P -P
d 2 1

               P1

= 500-450
450

15-20
20

= 50
450

-5
20

= 0.11
-0.25

Ed= |-0.44| or 0.44

INELASTIC
 4. The income of Mr. De la Cruz increased from P300 to P450 a day. His
demand for grocery items increased from 200 to 500. Compute for his
income elasticity of demand.

Solution:
Let: Y1=300              QD1=200
Y2=450              QD2=500

EY= QD2- QD1       X =    Y2+Y1

Y2-Y1                        QD2- QD1

EY=500-200    X        450+300
450-300                       500+200

EY= 300    X        750

150                   700

EY=2X1.07

EY=2.14

5. The price of product A increased from P20 to P40. The demand for Product
B went up from 100 to 200. Calculate the cross elasticity of demand.

Solution:
Let: QDX1=100              PX1=20
QDX2=200               PX2=40

EY= QDX2- QDX1       X        PY2+PY1

PY2-PY1                              QDX2- QDX1

EY=200-100    X        40+20
40-20                           200+100

EY= 100    X      60
20                 300

EY= 5 X 0.2

EY=1
Erin Mae Aseron Ricalde Basic Microeconomics
BSBA FM1 (Group 2) Ma’am Aurora Susan Reyes

Chapter Test – Page 59-60

1. Shown in the table is the income of an individual with corresponding unit of goods it can
purchase. Fill in the blanks and solve for the income elasticity. Also indicate the classification of
goods.

Income Qd of Good X % M % Qdx Income Classification

(M) (units/yr) Elasticity of Goods
5,000 100 1.4 1.8 0.29 Normal; Necessity
12,000 280 0.67 0.8 1.19 Normal; Necessity
20,000 504 0.45 0.4 0.89 Normal; Luxury
29,000 705 0.38 0.2 0.53 Normal; Luxury
40,000 846 0.33 -0.11 -0.33 Inferior
53,000 750 0.23 -0.10 -0.43 Inferior
65,000 677 -0.92 -0.85 -1.08 Inferior

SOLUTION:
FORMULA:

% M: % Qdx:
 12,000 – 5,000 /  280 - 100 / 100
5000 INCOME ELASTICITY
= 180/100
= 7,000/5,000 = 1.8
= 1.4  1.8 / 1.4 = 1.29
 0.8 / 0.67 = 1.19
 504 – 280 / 280  0.4 / 0.45 = 0.89
 20,000 – 12,000 /
= 224/280  0.2 / 0.38 = 0.53
12,000
= 0.8  0.11 / 0. 33 = 0.33
= 8,000 / 12,000
= 0.67  -0.10 / 0.23 = -0.43
 705 – 504 / 504  -0.85 / -0.92 = -1.08
 29,000 – 20,000 / = 201 / 504
20,000 = 0.40
= 9,000 / 20,000
= 0.45  846 – 705 / 705
= 141 / 705
 40,000 – 29,000 / = 0.2
29,000
= 11,000 / 29,000  750 – 846 / 846
= 0.38
= -96 / 846
= -0.11
 53,000 – 40,000 /
40,000
= 13,000 / 40,000  677 – 750 / 750
= 0.33 = -73 / 750
= - 0.10
 65,000 – 53,000 /
 100 – 677 / 677
53,000
= -577 / 677
= 12,000 / 53,000
= -0.85
= 0.23

 5,000 – 65,000 /
65,000
= -60,000 / 65,000
= -0.92
 2. Using the graph below, compute for the price elasticity of the following points:

POINT A and B POINT F and G

POINT B and C POINT G and H
POINT C and D POINT H and I
POINT D and E POINT I and J
POINT E and F POINT A and J

COMPUTATION:

POINT A and B
FORMULA: POINT B and C
2Q -Q 1 FORMULA:
   Q 1    
2Q -Q 1

E =      P -P
d 2 1
   Q 1    

               P1
E =      P -P
d 2 1

               P1

= 30-10
10 = 40-30
30
25-30
30 22.5-25
25
= 20
10 = 10
30
-5
30 -2.5
25
= 2
-0.17 = 0.33
-0.1
Ed= |-11.76| or 11.76
ELASTIC Ed= |-3.3| or 3.3
ELASTIC
 POINT E and F
POINT C and D FORMULA:
FORMULA: 2Q -Q 1

2Q -Q 1    Q 1    

   Q 1     E =      P -P
d 2 1

E =      P -P
d 2 1                P1

               P1

= 100-80
= 50-40 80
40
12.5-15
20-22.5 15
22.5
= 20
= 10 80
40
-2.5
-2.5 15
22.5
= 0.25
= 0.25 -0.17
-0.11
Ed= |-1.47| or 1.47
Ed= |-2.27| or 2.27 ELASTIC
ELASTIC

POINT F and G
POINT D and E FORMULA:
FORMULA: 2Q -Q 1

2Q -Q 1    Q 1    

   Q 1     E =      P -P
d 2 1

E =      P -P
d 2 1                P1

               P1

= 110-100
= 80-50 100
50
10-12.5
15-20 12.5
20
= 10
= 30 100
50
-2.5
-5 12.5
20
= 0.1
= 0.6 -0.2
-0.25
Ed= |-0.5| or 0.5
Ed= |-2.4| or 2.4 INELASTIC
ELASTIC
POINT G and H
FORMULA: POINT I and J
2Q -Q 1 FORMULA: 2Q -Q 1

   Q 1    
   Q 1    

E =      P -P
d 2 1
E =      P -P
d 2 1

               P1
               P1

= 120-110
110 = 150-130
130
5-10
10 1-2.5
2.5
= 10
110 = 20
130
-5
10 -1.5
2.5
= 0.09
-0.5 = 0.15
-0.6
Ed= |-0.18| or 0.18
INELASTIC Ed= |-0.25| or 0.25
INELASTIC

POINT H and I
FORMULA: POINT A and J
2Q -Q 1 FORMULA: 2Q -Q 1

   Q 1    
   Q 1    

E =      P -P
d 2 1
E =      P -P
d 2 1

               P1
               P1

= 130-120
120 = 10-150
150
2.5-5
5 30-1
1
= 10
120 = -140
150
-2.5
5 29
1
= 0.08
-0.5 = -0.93
29
Ed= |-0.16| or 0.16
INELASTIC Ed= |-0.03| or 0.03
INELASTIC
 3. Compute for the cross elasticity of the following commodities:
1ST SET OF GOODS
COMMODITY BEFORE AFTER
PRICE/UNIT QUANTITY PRICE/UNIT QUANTITY
RIBBON (Y) 3,000 1,000 3,500 850
INK (X) 450 700 450 600

COMPUTATIONS:
FORMULA:
-Q X

Q
X   

E =    -P
XY Y

            P
Y

= 600 – 700
       700        .
3,500 – 3,000
     3,000

= -100
    700   .
   500 
  3,000

= -0.14
    0.17

= -0.82

2ND SET OF GOODS

COMMODITY BEFORE AFTER
PRICE/UNIT QUANTITY PRICE/UNIT QUANTITY
USB (Y) 1,500 900 2,000 800
CD (X) 200 300 200 400

COMPUTATIONS:
FORMULA: -Q X

Q
X   

E =    -P
XY Y

            P
Y

= 400 – 300
      300        .
2,000 – 1,500
    1,500 

=  100
    300  .
   500
 1,500

= 0.33
   0.33

=1
Erin Mae Aseron Ricalde Basic
Microeconomics
BSBA FM1 (Group 2) Ma’am Aurora Susan
Reyes

ASSIGNMENT

Compute for the point elasticity of the following points:

POINT A – B POINT E – F
POINT B – C POINT F – G
POINT C – D POINT G – H
POINT D – E POINT A – H

POINTS P Qd
A 2 70
B 5 63
C 8 60
D 13 58
E 15 54
F 19 51
G 20 45
H 23 42

COMPUTATIONS:

POINT A and B
FORMULA: POINT B and C
Q -Q
2 1
FORMULA: Q -Q
   Q 1     2 1

E =      P -P
d 2 1
   Q 1    

               P1
E =      P -P
d 2 1

               P1

= 63-70
70 = 60-63
63
5-2
2 8-5
5
= -7
70 = -3
63
3
2 3
5
= -0.1
1.5 = -0.05
0.6
Ed= |-0.07| or 0.07
INELASTIC Ed= |-0.08| or 0.08
INELASTIC
POINT C and D
FORMULA: POINT E and F
Q -Q
FORMULA:
2 1

   Q 1    
2Q -Q 1

E =      P -P
d 2 1
   Q 1    

               P 1
E =      P -P
d 2 1

               P1

= 58-60
60 = 51-54
54
13-8
8 19-15
15
= -2
60 = -3
54
5
8 4
15
= -0.03
0.63 = -0.06
0.27
Ed= |-0.05| or 0.05
INELASTIC Ed= |-0.22| or 0.22
INELASTIC

POINT D and E
FORMULA: POINT F and G
2Q -Q 1
FORMULA:
   Q 1     2Q -Q 1

E =      P -P
d 2 1    Q 1    

               P 1 E =      P -P
d 2 1

               P1

= 54-58
58 = 45-51
51
15-13
13 20-19
19
= -4
58 = -6
51
2
13 1
19
= -0.07
0.15 = -0.12
0.05
Ed= |-0.47| or 0.47
INELASTIC Ed= |-2.4| or 2.4
ELASTIC
POINT G and H POINT A and H
FORMULA: FORMULA:
2Q -Q 1 2Q -Q 1

   Q 1        Q 1    

E =      P -P
d 2 1 E =      P -P
d 2 1

               P1                P1

= 42-45 = 42-70
45 70

23-20 23-2
20 2

= -3 = -28
45 70

3 21
20 2

= -0.07 = -0.4
0.15 10.5

Ed= |-0.47| or 0.47 Ed= |-0.04| or 0.04

INELASTIC INELASTIC
 4. Compute for the arc elasticity of the following points (from point A to H) on a demand
curve.

POINT A – B POINT E – F
POINT B – C POINT F – G
POINT C – D POINT G – H
POINT D – E POINT A – H

POINTS P Qd
A 2 70
B 5 63
C 8 60
D 13 58
E 15 54
F 19 51
G 20 45
H 23 42

COMPUTATIONS:
FORMULA:

POINTS A-B POINTS B-C POINTS C-D POINTS D-E 

= 63 – 70      ( 2 + 5 ) = 60 – 63       ( 5 + 8 ) = 58 - 60      ( 8 + 13 ) = 54 - 58      ( 13 + 15 )

     5 – 2   X       2          .      8 - 5   X        2          .    13 - 8   X       2          .    15 - 13   X       2         
                   ( 70 + 63 )                    ( 63 + 60 )                    ( 60 + 58 ) .
                          2                           2                           2                    ( 58 + 54 )
                          2
= -7       ( 7/2 )    . = -3       ( 13/2 )  . = -2       ( 21/2 )    .
    3   X  ( 133/2 )     3   X  ( 123/2 )     5   X  ( 118/2 ) = -4       ( 28/2 )    .
    2   X  ( 112/2 )
= -2.33 X 0.05 = -1 X 0.11 = -0.4 X 0.18
= -0.12 = -0.11 = -0.07 = -2 X 0.25
= -8

  POINTS E-F POINTS F-G POINTS F-G POINTS A-H

= 51 - 54      ( 15 + 19 ) = 45 - 51      ( 19 + 20 ) = 45 - 51      ( 19 + 20 ) = 42 - 70      ( 2 + 23 )

   19 - 15   X       2             20 - 19   X       2             20 - 19   X       2               23 - 2   X       2          .
. . .                    ( 70 + 42 )
                   ( 54 + 51 )                    ( 51 + 45 )                    ( 51 + 45 )                           2
                          2                           2                           2
= -28       ( 25/2 )    .
= -3       ( 34/2 )    . = -6       ( 39/2 )    . = -6       ( 39/2 )    .     21   X  ( 112/2 )
    4   X  ( 105/2 )     1   X  ( 96/2 )     1   X  ( 96/2 )
= -1.33 X 0.22
= -0.75 X 0.32 = -6 X 0.41 = -6 X 0.41 = -0.29
= -2.34 = -2.46 = -2.46
Erin Mae Aseron Ricalde Basic
Microeconomics
BSBA FM1 (Group 2) Ma’am Aurora Susan
Reyes

PRICE CEILING VS PRICE FLOOR

The opposite of a price ceiling is a price floor, which sets a minimum purchase price for a
product or service. Also known as “price support,” it represents the minimum legal
amount at which goods or services can be sold, operating within the traditional supply
and demand model.

Both floors and ceilings are forms of price controls. Like a price ceiling, a price floor may
be set by the government or, in some cases, by producers themselves. Federal or
municipal authorities may actually name specific figures for the floors, but often they
operate simply by entering the market and buying the product, thus propping its prices
up above a certain level.

Many countries periodically impose floors on agricultural crops and products, for
example, to mitigate the swings in supply and farmers' income that can commonly
occur, due to factors beyond their control.
 Deadweight Loss, Price Ceiling and Floor Quantitative

PRICE CEILING PRICE FLOOR

 5. The price of bicycle increased from P3,500.00 to P4,000.00. the demand for
motorcycle went up from 12,000 units to 12,500 units. Compute for the cross
elasticity of demand. Determine whether substitute or complement product.

FORMULA:

EXY = 12,500 – 12,000

12,000

= 4,000 – 3,500
3,500

= 500
12,000

= 500
3,500

= 0.04
0.14

EXY = 0.29

The bicycle and motorcycle are SUBSITITUTE PRODUCTS. The cross elasticity of
demand is POSITIVE.
Erin Mae Aseron Ricalde Basic Microeconomics
BSBA FM1 (Group 2) Ma’am Aurora Susan Reyes

Chapter Test – Page 59-60

1. Shown in the table is the income of an individual with corresponding unit of goods it can
purchase. Fill in the blanks and solve for the income elasticity. Also indicate the classification of
goods.

Income Qd of Good X % M % Qdx Income Classification

(M) (units/yr) Elasticity of Goods
5,000 100 - - - -
12,000 280 7000 = 1.4 180 = 1.8 1.29 Normal; Luxury
5000 100

20,000 504 8000 = 0.67 224 = 0.8 1.19 Normal; Luxury

12000 280
29,000 705 9000 = 0.45 201 = 0.40 0.89 Normal; Necessity
20000 504
40,000 846 11000 = 0.38 141 = 0.20 0.53 Normal; Necessity
29000 705
53,000 750 13000 = 0.33 -96 = -0.11 -0.33 Inferior
40000 846
65,000 677 12000 = 0.23 -73 = -0.10 -0.43 Inferior
53000 750
SOLUTION:
FORMULA:
% M % Qdx Income Elasticity
 12,000 – 5,000 / 5000  280 - 100 / 100 INCOME ELASTICITY
= 7,000/5,000 = 180/100
= 1.4 = 1.8  1.8 / 1.4 = 1.29
 0.8 / 0.67 = 1.19
 20,000 – 12,000 /  504 – 280 / 280  0.4 / 0.45 = 0.89
12,000 = 224/280  0.2 / 0.38 = 0.53
= 8,000 / 12,000 = 0.8  0.11 / 0. 33 = -0.33
= 0.67  -0.10 / 0.23 = -0.43
 705 – 504 / 504
 29,000 – 20,000 / = 201 / 504
20,000 = 0.40
= 9,000 / 20,000
= 0.45  846 – 705 / 705
= 141 / 705
 40,000 – 29,000 / = 0.20
29,000
= 11,000 / 29,000  750 – 846 / 846
= 0.38 = -96 / 846
= -0.11
 53,000 – 40,000 /
40,000  677 – 750 / 750
= 13,000 / 40,000 = -73 / 750
= 0.33 = - 0.10

 65,000 – 53,000 /
53,000
= 12,000 / 53,000
= 0.23