Applied Economics Lesson 3.4

APPLIED ECONOMICS
Lesson 3.4 The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and
Housing Price Structure
Employment and Housing

 The influx of skilled workers in cities with rising economies is increasing the demand for housing.
 Increase demand for housing in these cities is pushing the price of rent and house purchases to
increase.
 The high demand for houses in growing cities creates a shortage of this commodity.
 In cities with weak economies, there will be a housing surplus because of an inadequate housing
demand.
Income and Basic Commodities

Economic growth causes an increase in personal income. Cities with higher income also have
higher prices for their basic commodities. If there is a high demand for commodities, it will increase the
need for shops or business spaces, therefore increasing the demand for rental spaces for business use. If
there is a high demand for commodities, it will increase the need for shops or business spaces, therefore
increasing the demand for rental spaces for business use. Housing and rental spaces are final goods,
while the input needed to create them are intermediate goods.
Taxation on Housing
Real property taxes in the Philippines are fixed by the local government. The Local Government
Code of 1991 gives the taxing authority to the local government to prevent double or multiple taxation.
If the general location has a low property tax rate, more people are encouraged to buy and rent
properties. Another factor that can affect housing demand is the interest rate or mortgage rate, in real
property terms. A low interest rate can shift the demand curve to the right (increase) since most
housing is bought using borrowed funds.
Lesson 3.5 Elasticities of Demand and Supply
Elasticity of Demand- Also known as the own price elasticity of demand

- It is the percentage change in quantity demanded in response to a given percentage
change in price.
Formula: ϵ = -%Δ of Qd / % Δ Ρ
Where the symbol for elasticity is e or epsilon and change is symbolized by A or delta.
To compute for elasticity, we will be using the arc formula:
x 1−x 0
ϵ=
p1 − p0
( x ¿ ¿ 1−x 0)/2 ÷ ¿
( p ¿ ¿ 1+ p 0)/2 ¿
Since both sides of the formula are divided by 2, it can be cancelled, giving us the formula
below:
x 1−x 0 p1 −p 0
ϵ= ÷
x 1−x 0 p 1+ p 0
Price Elastic Demand (ϵ > 1)
 A 1% change in will result in a more than 1% change in quantity demanded.
 Goods that have elastic demand are sensitive to price change.
Price Inelastic Demand (ϵ < 1)

 A 1% change in price result in less than 1% change in quantity demanded.
 Goods that have inelastic demand are less sensitive to price change.
Unit Elastic Demand (ϵ = 1)

 A 1% change in will result in exactly the same change in quantity demanded.
Perfectly Elastic Demand (ϵ = ∞)

 A price elasticity of demand equal to infinity exhibits a horizontal demand curve.
Perfectly Inelastic Demand Curve (ϵ = 0)

 A price elasticity of demand equal to zero exhibits a vertical demand curve.
Factors affecting elasticity of demand:

1. Number and availability of substitutes
2. Necessity or luxury
3. Definition of the market
4. Length of time
Relationship of Price Elasticity and TR
DO THIS! (1 Whole sheet of paper)

Problem:
1. An increase in the price of Good A from P10 to 15 caused the quantity demanded for
good A to decrease from 80 units to 60 units. Compute the price elasticity of demand. Is
demand elastic or inelastic?
2. The price of rice increased from P35 to P45 quantity demanded for rice change from 5
kilos to 4 kilos. Compute for the price elasticity of demand. Is price elasticity of demand for
rice elastic, inelastic or unit elastic?
Price Elasticity of Supply-This is the percentage change in quantity supplied in response to a given
percentage change in price.
Formula:
x 1−x 0 p 1− p0
ϵs= ÷
x 1−x 0 p1+ p 0
Price Elastic Supply (ϵs > 1)
- A 1% change in price will result in a more than 1% change in quantity supplied.
- Goods that have elastic supply are sensitive to price change.
Price Inelastic Supply (epsilon ϵ s < 1)
- A 1% change in price will result in a less than 1% change in quantity supplied.
- Goods that have inelastic supply are less sensitive to price change.
Unit Elastic Supply (ϵs = 1)
- A 1% change in price will result to exactly the same change in quantity supply.
Factors affecting price elasticity of supply:
1. Ease of production
2. Length of time
DO THIS! (1whole sheet of paper)

Problem:
1. Suppose that a price increase of milk from P105 to P120 per liter raises the amount milk
companies produce from 10,000 liters to 12,000 liters. Calculate the price elasticity of
supply. Is the price elasticity of supply elastic or inelastic?
2. The price of computer tablets have increased from 18,000 to $22.000. Quantity supplied
increased from 200 units to 240 units. Calculate the price elasticity of supply. Is the price
elasticity of supply elastic, inelastic, or unit elastic?
Income Elasticity of Demand-The income elasticity of demand measures the relative responsiveness of
quantity demanded when income changes.
Formula:
x1−x 0 Y 1−Y 0
ϵ I= ÷
x1−x 0 Y 1 +Y 0
If el is positive, the good is normal.
If el is negative the good is inferior.
DO THIS! (1whole sheet of paper)

Problem:
1. An increase in Jose's income from P30,000 to P35,000 causes his demand for steak
to increase from 5 kilos to 6 kilos per month. Compute the income elasticity. Is steak
a normal or an inferior good?
2. Manolo's income has increased from P10,000 to 12,000. His consumption of juice
drinks declined from 10 bottles to 5 bottles per month. Compute for the income
elasticity. Is the juice drink a normal or an inferior good?
Cross Price Elasticity of Demand-The cross-price elasticity of demand measures the relative
responsiveness of quantity demanded to changes in the price of another
good.
x 1−x 0 p y 1− p y 0
ϵ XY = ÷
x 1−x 0 p y 1+ p y 0
Formula:
 ϵ XY is positive if the goods are substitutes
DO THIS! (1 whole sheet of paper.

Problem:
1. Given that: x0 = 500 units py0 = P10
X1 = 600 units py1 = P15
Compute the cross-price elasticity of demand good x and good y. Are good x and y
complements or substitutes?
2. Given that: x0 = 800 units py0 = P0
X1 = 900 units py1 = P25
Compute for the cross-price elasticity of demand good x and good y. Are good x and y
complements or substitutes?
3. For each of the following pairs of goods which will have a more elastic demand and
why?
1. Water and soda drink
2. Salt and cotton
4. Suppose business travelers and vacationers have the following demand for airline
tickets from Manila to Legaspi City
As the airline tickets increase from ₱2,800 to ₱3,000, what is the price elasticity of
demand for:
i. business travelers?
ii. vacationers
 ϵ XY is negative if the goods are Complements
Lesson 3.6 Market Structures and Its Competitive Environment
Perfect Competition-Also known as competitive market

- This is a market structure with many buyers and sellers trading identical
products.
- Buyers and sellers must accept market prices; they are said to be price takers.
The price, marginal revenue, and demand curve in a perfectly competitive market is a horizontal line. To
maximize profit, the firm needs to produce at the point where MR = MC or at Q*.
A perfectly competitive market firm produces quantity at the point where MR = MC.
This is a market where there is a single seller of a particular product of type of product in the market.
The firm exhibit an enormous amount of market power because of the absence of rivals or
direct competitors.
Example
In Metro Manila and nearby suburbs surrounding it, electricity is provided by just one supplier. In this
case, it is an example of monopoly in a given geographical area.
Monopolistic Competition- A monopolistic competitive market possesses the features of both
monopoly and perfect competition.
- The graph of a monopolistic competitive market mimics the graph of a monopoly.
- The output is determined at the point where MR-MC and price is derived from the
demand
curve.
Oligopoly- This is characterized by a few sellers producing similar or differentiated products.
- Although illegal, most oligopolists may collude with one another to set prices and output
levels to benefit all of them.
- The graph of cooperating oligopolists is like the graph of the monopoly.
- They produce output at the intersection of MR MC denoted at QA.

Applied Economics Lesson 3.4

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APPLIED ECONOMICS

Employment and Housing

Income and Basic Commodities

Lesson 3.5 Elasticities of Demand and Supply

Elasticity of Demand- Also known as the own price elasticity of demand

Price Inelastic Demand (ϵ < 1)

Unit Elastic Demand (ϵ = 1)

Perfectly Elastic Demand (ϵ = ∞)

Perfectly Inelastic Demand Curve (ϵ = 0)

Factors affecting elasticity of demand:

Relationship of Price Elasticity and TR

DO THIS! (1 Whole sheet of paper)

DO THIS! (1whole sheet of paper)

DO THIS! (1whole sheet of paper)

DO THIS! (1 whole sheet of paper.

Lesson 3.6 Market Structures and Its Competitive Environment

Perfect Competition-Also known as competitive market

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