Razel Ann Galit Basic Microeconomics

BSBA FM1 (Group 2) Ma’am 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.

Minus signs are ignored to avoid unnecessary confusion. Only changes in price and changes in
quantity are taken into account when calculating elasticity of demand. The negative sign
doesn't matter as it doesn't affect the elasticity of demand.

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

The price elasticity of demand is correlated to total revenue. Since total revenue is the result of
price and quantity, elasticity measures the change in quantity demanded as a result of a change
in the price of the good thus changing the value of the total revenue.

For example, if demand is elastic at a given price level, a percentage decrease in price will result
in an even larger percentage increase in quantity demanded, resulting in a higher total revenue.
If, on the other hand, demand is inelastic at the original quantity level, a price increase will
result in a smaller percentage decrease in the quantity demanded — and total revenue would
also 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 Good Quantity Demand of Total Price Elasticity of

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
COMPUTATION:
POINT A and I POINT A and B POINT B and C POINT C and D
= =
Q -Q 2 1
= Q -Q Q -Q 2 1

Q -Q
2 1

   Q 1    
2 1
   Q    Q 1    

   Q
1    

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

E =      P -P
d 2 1

               P 1
d 2 1
               P                P1

               P
1

= 550-150 250-200 300-250

150 200-150 250
200
150
10-50 40-45 35-40
50 45-50 45
45
50
= 400 = 50 = 50
150 = 50 250
200
150
-40 -5 -5
50 -5 40
45
50
= 2.67 = 0.25 = 0.2
-0.8 = 0.33 -0.13
-0.11
-0.1
Ed= |-3.34| or 3.34 Ed= |-2.27| or 2.27 Ed= |-1.54| or 1.54
ELASTIC Ed= |-3.3| or 3.3 ELASTIC
ELASTIC
ELASTIC

POINT D and E POINT E and F POINT F and G POINT G and H POINT H – I

= =
Q -Q Q -Q
2 1
Q -Q 2 1
Q -Q
2 1

2Q -Q 1
   Q
2 1

   Q    Q    Q    Q

1    
1    
1    

E =      P -P
1    

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

E =      P -P
d 2 1

               P
d 2 1

               P 1
               P 1
               P 1
1
d 2 1

= 500-450
               P1
= 350-300 400-350 450-400
300 350 400 450
= 500-550
30-35 25-30 20-25 15-20
550
35 30 25 20
10-15
= 50 = 50 = 50 = 50
15
300 350 400 450
= 50
-5 -5 -5 -5
550
35 30 25 20
-5
= 0.17 = 0.14 = 0.13 = 0.11
15
-0.14 -0.17 -0.2 -0.25
= 0.1
Ed= |-1.21| or 1.21 Ed= |-0.82| or 0.82 Ed= |-0.65| or 0.65 Ed= |-0.44| or 0.44
-0.33
ELASTIC INELASTIC INELASTIC INELASTIC
Ed= |-0.30| or 0.30
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
Razel Ann Galit Basic Microeconomics
BSBA FM1 (Group 2) Ma’am 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

% 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  -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  677 – 750 / 750
= 13,000 / 40,000 = -73 / 750
= 0.33 = - 0.10
 100 – 677 / 677
 65,000 – 53,000 / = -577 / 677
53,000 = -0.85
= 12,000 / 53,000
= 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

POINT A and B POINT B and C POINT C and D POINT D and E POINT E and F
FORMULA: FORMULA: FORMULA: FORMULA: FORMULA:

2Q -Q 1
2Q -Q 1 2Q -Q 1
2Q -Q 1 2Q -Q 1

   Q 1    
   Q 1        Q 1    
   Q 1        Q 1    

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

               P1
               P1                P1
               P1                P1

= 30-10 = 40-30 = 50-40 = 80-50 = 100-80

10 30 40 50 80

25-30 22.5-25 20-22.5 15-20 12.5-15

30 25 22.5 20 15

= 20 = 10 = 10 = 30 = 20
10 30 40 50 80

-5 -2.5 -2.5 -5 -2.5

30 25 22.5 20 15

= 2 = 0.33 = 0.25 = 0.6 = 0.25

-0.17 -0.1 -0.11 -0.25 -0.17

Ed= |-11.76| or Ed= |-3.3| or Ed= |-2.27| or Ed= |-2.4| or Ed= |-1.47| or
11.76 3.3 2.27 2.4 1.47
ELASTIC ELASTIC ELASTIC ELASTIC ELASTIC
 POINT F and G POINT G and H POINT H and I POINT I and J POINT A and J
FORMULA: FORMULA: FORMULA: FORMULA: FORMULA:

Q -Q
2 1
Q -Q 2 1 Q -Q 2Q -Q 1
2Q -Q 1
2 1

   Q 1    
   Q 1        Q    Q 1    
   Q 1    
1    

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

               P 1
               P 1                P                P1
               P1
1

= 110-100 = 120-110 = 130-120 = 150-130 = 10-150

100 110 120 130 150

10-12.5 5-10 2.5-5 1-2.5 30-1

12.5 10 5 2.5 1

= 10 = 10 = 10 = 20 = -140
100 110 120 130 150

-2.5 -5 -2.5 -1.5 29

12.5 10 5 2.5 1

= 0.1 = 0.09 = 0.08 = 0.15 = -0.93

-0.2 -0.5 -0.5 -0.6 29

Ed= |-0.5| or Ed= |-0.18| or E = |-0.16| or Ed= |-0.25| or Ed= |-0.03| or

d
0.5 0.18 0.16 0.25 0.03
INELASTIC INELASTIC INELASTIC INELASTIC 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

QX   

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

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

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.
Razel Ann Galit Basic Microeconomics
BSBA FM1 (Group 2) Ma’am 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

POINT A & B POINT B & C POINT C & D POINT D & E

FORMULA: FORMULA:
= =
2Q -Q 1 2Q -Q 1 2Q -Q 1 2Q -Q 1

   Q 1        Q 1        Q 1        Q 1    

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

               P1                P1                P1                P1

FORMULA: FORMULA: 58-60 54-58

= 63-70 = 60-63 60 58
70 63
13-8 15-13
5-2 8-5 8 13
2 5
= -2 = -4
= -7 = -3 60 58
70 63
5 2
3 3 8 13
2 5
= -0.03 = -0.07
= -0.1 = -0.05 0.63 0.15
1.5 0.6
Ed= |-0.05| or 0.05 Ed= |-0.47| or 0.47
Ed= |-0.07| or 0.07 Ed= |-0.08| or 0.08 INELASTIC INELASTIC
INELASTIC INELASTIC
POINT E & F POINT F & G POINT G & H POINT A & H
FORMULA: FORMULA: FORMULA: FORMULA:
= = = =
2Q -Q 1
2Q -Q 1
2Q -Q 1
2Q -Q 1

   Q 1        Q 1    

   Q 1    
   Q 1    

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

               P1                P1
               P1
               P1

51-54 45-51 42-45 42-70

54 51 45 70
19-15 20-19 23-20 23-2
15 19 20 2
= -3 = -6 = -3 = -28
54 51 45 70

4 1 3 21
15 19 20 2
= -0.06 = -0.12 = -0.07 = -0.4
0.27 0.05 0.15 10.5
Ed= |-0.22| or 0.22 Ed= |-2.4| or 2.4 Ed= |-0.47| or 0.47 Ed= |-0.04| or 0.04
INELASTIC ELASTIC INELASTIC INELASTIC
Razel Ann Galit Basic Microeconomics
BSBA FM1 (Group 2) Ma’am Susan Reyes

CHAPTER 4 – KEY TERMS

 Arc Elasticity is the elasticity of one variable with respect to another between two given
points. It is used when there is no general way to define the relationship between the
two variables. Arc elasticity is also defined as the elasticity between two points on a
curve.

 Complementary Good goods that go together or cannot be used without the other

 Gross-Price Elasticity of Demand refers to how sensitive the demand for a product is to
changes in the price of another product.

 Elasticity measures the percentage change of one economic variable in response to a

percentage change in another.

 Income Elasticity of Demand an economic measure of how responsive the quantity

demanded for a good or service is to a change in income

 Inferior Good is an economic term that describes a good whose demand drops when
people's incomes rise. These goods fall out of favor as incomes and the economy
improve as consumers begin buying more costly substitutes instead.

 Luxury Good (or upmarket good) is a good for which demand increases more than what
is proportional as income rises, so that expenditures on the good become a greater
proportion of overall spending. Luxury goods are in contrast to necessity goods, where
demand increases proportionally less than income. Luxury goods is often used
synonymously with superior goods.
 Necessity Good Goods that are needed for basic human existence, e.g. food, water,
housing, electricity. 

 Normal Good a good for which demand at ever price increases when income rises or
vice versa

 Point Elasticity the property where a change in the price of a good or service will impact
the product's demand. 

 Price Elasticity of Demand the ratio of the percentage change in quantity demanded of
a product to the percentage change in price. 

 Price Elasticity of Supply measures the responsiveness to the supply of a good or service
after a change in its market price.

 Substitute Good goods that can be used in place for other goods. If the price of one of
the products rises or falls, then demand for the substitute goods or substitute good (if
there is just one other) is likely to increase or decline.
Razel Ann Galit Basic Microeconomics
BSBA FM1 (Group 2) Ma’am Susan Reyes

PRICE CEILING VS PRICE FLOOR

PRICE CEILING PRICE FLOOR

 A price ceiling keeps a price from  A price floor keeps a price from
rising above a certain level—the falling below a certain level—the
“ceiling”. “floor”.
 A price ceiling is a type of price  A price floor is the lowest legal
control, usually government- price that can be paid in markets
mandated, that sets the maximum for goods and services, labor, or
amount a seller can charge for a financial capital. Perhaps the best-
good or service. known example of a price floor is
 Price ceilings are typically imposed the minimum wage, which is based
on consumer staples, like food, on the normative view that
gas, or medicine, often after a someone working full time ought
crisis or particular event sends to be able to afford a basic
costs skyrocketing. standard of living.
 A price ceiling is the mandated  Price floors are sometimes called
maximum amount a seller is “price supports,” because they
allowed to charge for a product or support a price by preventing it
service. Usually set by law, price from falling below a certain level.
ceilings are typically applied to Around the world, many countries
staples such as food and energy have passed laws to create
products when such goods agricultural price supports. Farm
become unaffordable to regular prices and thus farm incomes
consumers. fluctuate, sometimes widely. So
 A price ceiling is a limit on the price even if, on average, farm incomes
are adequate, some years they can
be quite low. The purpose of price
supports is to prevent these
swings.

of a good or service imposed by

the government to
protect consumers by ensuring
that prices do not become
prohibitively expensive. For the
measure to be effective, the price
set by the price ceiling must be  A price floor is an established
below the natural equilibrium lower boundary on the price of a
price. commodity in the market.
Governments usually set up a price
floor in order to ensure that the
market price of a commodity does
not fall below a level that would
threaten the financial existence of
producers of the commodity.