Supply and Demand

Needs

Wants

PHYSIOLOGICAL NEEDSSAFETY NEEDSBELONGING NEEDSESTEEM NEEDSSELF

ACTUALI-ZATIONMASLOWS HIERARCHY of NEEDS

Satisfy:NeedsWantsPROFITSMARKETSDemandSupplyPreference:Low pricesPreference:High priceConsumersProducers and Sellers

TERMS TO REMEMBERMarket a place where buyers and sellers interact and engage in exchangeDemand reflects the consumers desire for a commoditySupply the amount of a commodity available for saleAggregate demand the totality of a group of consumers demandAggregate supply the totality of a group of producers supply

TERMS TO REMEMBERDemand Schedule the quantities consumers are willing to buy of a good at various pricesSupply schedule the quantities producers are willing to offer for sale at various pricesMovement along the curve a change from one point to another on the the same curveShift of the curve a change in the entire curve caused by a change in the entire demand or supply schedule Equilibrium condition of balance or equality

TERMS TO REMEMBERNonprice factors also known as parameters, are factors other than price that also affect demand or supplyDemand function shows how quantity demanded is dependent on its determinantsSupply functions shows how quantity supplied is dependent on its determinantsPrice ceiling is minimum limit at which the price of a commodity is set

TERMS TO REMEMBERPrice floor a minimum limit beyond which the price of a commodity is not allowed to fallSurplus an excess of supply over the demand for a good

The Law of DemandLaw of Demand: A principle that states that there is an inverse relationship between price of a good and the amount of it buyers are willing to purchase.An increase in costs - reduce the likelihood that it will be chosenLower the price -stimulating consumption of it

THE LAW OF DEMAND The Demand For Medical Care Derived from the Demand For Health2 Reasons: DEMAND FOR HEALTHIt is a consumption commodity it makes the consumer feel betterIt is an investment commodity state of health will determine the amount of time available to the consumer

Patients seeksConsultation with MD or Another healthprofessional

MD decides Which goods andServices thePatient needs;Ex. Drugs, Hospitalization, Surgery, laboratoryprocedure

Patientconsumes And pays forThe goodsAnd servicesTo improve healthPatient relies on MD for informationHealthcare Good or Services

Exhibit 1: THE LAW OF DEMANDAs the Price of Paracetamol fell during the 1979-1986, consumers purchased more of them. The consumption level of Paracetamol (other products or services) is inversely related to their Price197919831986

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Demand Schedule and Demand CurveThe demand schedule shows the quantity of the product demanded by a consumer or an aggregate of consumers at any given priceThe demand function shows how the quantity demanded of a particular goods responds to price changeThe demand schedule must specify the time period during which the quantities will be boughtIt can be seen from Tablet that at lower prices of X, people get attracted to buy morePRICE of XQuantity DemandedP 45100 40150 35200 30 250 25 300 20 350

Demand Schedule and Demand curveThe Demand curve is a graphical presentation of the demand schedule and therefore, contains the same prices and quantities presented in the demand schedulePlotting the data from the Table, we now arrive at the following figureThe normal demand curve slopes downward from left to right. Any point on the demand curve reflect the quantity that will be bought at the given price 50 100 150 200 250 300 350 4005045403530252015105 0 0 0000Quantity DemandedPrice

THE DEMAND CURVE@ The demand curve is a graphical representation of the demand schedule.@ It is a downward sloping curve.@ It shows the inverse relationship between the price and quantity of goods that consumers are willing to buy.

The Demand CurveThe demand curve, a downward sloping curve, shows the relationship between the price of a good and the quantity demanded.At the lower price (P1), quantity demanded is higher (Q2).At a higher price (P2), quantity demanded is lower (Q1). Quantity Q1 Q2PriceP2P1D

CETERIS PARIBUS ASSUMPTIONFactors other the PRICE which also influence the quantity of Demand1. Own price of the product2. Tastes and preference3. Income4. Expectations on the future price5. Prices of related goods like substitutes6. Compliments and the size of the population

NOTE:Therefore, the functional relationship between PRICE and QUANTITY demanded is essential since non price factors are assumed as CONSTANT.The Law of Demand now States: Assuming other things constant, PRICE and QUANTITY demanded are INVERSELY PROPORTIONAL

1. Own Price of the ProductA higher own price of a product A lower own price of a product Decreases the demandIncrease the demandNOTE: There is an inverse relationship between the price of the product and the quantity being demanded

2. Average IncomeDifferential 1Differential 2Income 1Income 2Product PriceRelationship of Income and Price. With the price of a theoretical product constant, more of such product will be bought with Income 2 which has a bigger Differential 2, compared to that of Income 1, with a smaller Differential 1

3. Population Size and DemographicsAs the population increases, more people will use commodities. As more members of the population enter adulthood, the demand for specific products that are being used by this specific age group also increases.Remember that an increase in population generally increase the demand for most products, and changes or shifts in population demographics will affect the demand for specific products.

Prices of Related GoodsSubstitute products change and move in the opposite directionSubstitute ProductsAre commodities that decrease the use of another product when more of these other products is usedRelationship of Substitute ProductsStep 1: Price of MRT fares decrease.Step 2: Decrease of MRT fare results in increased demand for MRTStep 3: Increase in demand for MRT results in decrease in demand for aircon buses (substitute product) MRTAIRCONBUS1. MRT fare decreases2. Increased Demand for MRT2. Demand for Aircon buses decreases

4. Prices of Related GoodsComplementary products change in the same directionComplementary products Are commodities that decrease the use of another product when less of the other complement is used-and vice versaLower gasoline prices tend to increase the demand not only for gasoline but also for cars.Greater use of one leads to more use of the other and vice versa.1. Price2. Decreased demand for gasGASCars3. Decreased demand for cars

Taste of buyersInfluences buying decisions but is more difficult to assessDifficult to measure but very important factors in decisions of customersFailure in determining buyers tastes may lead to disastrous mistakes in the choice of products to offer to consumers

6. Other Particular Factors climate and weather affect the demand for specific productExample: Summer increases the demand for cough and cold preparations

The following changes in the non price factors may cause the corresponding shift in the Demand curveIncrease in IncomeDecrease in incomeGreater taste/preferenceLess taste/preferenceIncrease in populationDecrease in populationGreater speculationLess speculationShift to the rightShift to the leftShift to the rightShift to the leftShift to the rightShift to the leftShift to the rightShift to the left

The Demand shiftsShift to the right indicates a positive (+) shift, or an increase in actual demand for a commodityShift to the left indicates a negative(-) shift, or a decrease in the actual demand for a commodity.Movement along the curve are appreciated when only the prices of products are changed. There will be no actual shift.D(-)(+)Decrease in demandMovement along the curveIncrease in demandPriceQuantity

THE DEMAND SHIFTRemember thatA shift to the left corresponds to an actual decrease in demandA shift to the right corresponds to an actual increase in demandThere is a movement along the curve if only the prices of products are manipulated

The of Law of SupplySupply is the amount of a commodity available for saleAggregate supply the totally of a group of producers supplySupply schedule is the quantities of goods and services producers are willing to offer for sale at various prices

The Law of SupplyLaw of Supply: A principle that states there will be a direct relationship between the price of a good and the amount of it offered for saleHigher prices will induce producers to supply a greater amount

TERMSPROFIT: An excess of sales revenue relative to the cost of production. The cost component includes the opportunity cost of all resources, including those owned by the firm. LOSS: Deficit of sales revenue relative to the cost of production, once all the resources used have received their opportunity cost. Losses are a penalty imposed on those who use resources in lower, rather than higher, valued uses as judged by buyers in the market.

The supply curveThe supply curve is an upward sloping curve. It shows the relationship between a goods and the quantity that producers are willing to produce and sellAt lower price (P1), the quantity produced and sold is lower (Q1).At higher price (P2), the quantity produced and sold is higher at (Q2).SQ1 Q2P1P2PriceQuantity

The Supply of Health ServicesExpert advice from physician or other health personnelHospital/clinic facilitiesPharmaceuticals;Medical technology

Substitution of Inputs

Type of InputsTraditionalSubstitutesExamplesObstetricManpower forNormal spontaneous deliveryPhysiciansTrained NursesKamuningLying-in-clinicDrugs

DrugsBranded

PharmaceuticalsGenerics

HerbalsGeneric Law

Flavier HerbalDrug program

Factors Determining Supply

Own Price of the Product- a higher own price of a certain product gives better profits to the producers and sellers of the product- when producing and selling a certain product give businesses more profits, producers will produce and sell more

2. PRODUCTION COSTSRelationship between product costs and different selling prices to make profitHigher prices lead to higher profits (profit 1 < profit 2). This gives producers incentive to produce moreProfit 1Profit 2Selling Price 1Selling Price 2Product CostProduct XYZ

Technology and Input PricesThe relationship between production costs changes because of changes in technology and input prices and its effect on profitsProfit 1Cost 1Cost 2Product XYZSelling PriceTechnology Input PricesProfit 2A decrease in production costs (costs 1 > cost 2), brought about by improvements through technology and input prices gives better profits (profit 2 > profit 1) and thus incentives for producers to produce and sell more

4. Price of Production SubstitutesABC CompanyLimited 6MsXLow PriceYHigh PriceZ Low PriceEffect of prices of production substitutes on a certain product. More of the higher-priced product is produced relative to the lower-priced products

5. Market organization

Types:Monopoly is a market structure in which a commodity is supplied by a single firmOligopoly is a market state of imperfect competition, in which the industry is dominated by a small number of competitors, producing and selling the same products

TERMSPerfect competition is the best for consumersCharacteristicsThe number of sellers is numerousThe products offered by sellers are almost the same or indistinguishable

TERMSMonopolistic competition is a market structure in between oligopoly and perfect competition wherein many sellers supply goods that are close, but not perfect substitutes

Different Market organizations and their effect on the quantity supplied and prices of products

Type of Market OrganizationDescriptionEffect on Q SupplyEffect on PricesMonopoly

Oligopoly *Cartel

Perfect CompetitionSingle Player/single productFew players/same product

Many players/same productLow/very low

Low to high

HighVery high

High

Low/very low

6. Particular FactorsCold weather GovernmentNOTE: These factors may be either increase or decrease the supply of these commodities

THE SUPPLY SHIFTPriceQuantityP3P2P1Q1 Q2 Q3Decrease in supplyIncrease in supplyMoving along the curve

A shift to the left corresponds to an actual decrease in supplyA shift to the right corresponds to an actual increase in supplyThere is only a movement along the curve if only the prices of products are manipulatedRemember that

Supply Schedule and Supply CurveThe supply schedule shows the quantities that are offered for sale at various prices. If the quantities offered are only one seller, then it is an individual supply schedule. The aggregate supply quantities of group of sellers are presented as market supply schedule.From the above schedule, we can see that higher prices serve as incentives for the sellers to offer more X for sale. While low prices discourage them from offering more quantities to sell.PriceQuantity supplied45 18040 15035 120 90 6020 30

Supply Schedule and Supply CurveThe supply curve is upward sloping from left to right. It shows a direct relationship between price and quantity supplied. Any point on the supply curve reflects the quantity that will be supplied at the given priceAfter analyzing the above relationship we can now state that as price increases, the quantity supplied of the product tends to increase and as price decreases, quantity supplied instead decreases306090120180210

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Exhibit 3: The Supply CurveAs the price of a product increases, other things constant, producers will increase the amount of the product suppliedP3P2P1Q1 Q2 Q3S

The Law of SupplyChanges in Supply and Shifts of the Supply CurveChanges in non price factors shall now take place. This will like wise result in a change in the position or slope of the supply curve and a change in the entire supply schedule. The increase or decrease in the entire supply is also shown through a shift of the entire supply curve. Factors, (determinants that influence supply), may all cause an increase in the actual supplyThis will be shown through a rightward shift of the supply curve from S1 to S2. At a price of P40, whereas quantity supplied used to be 150 packs, the new supply at that price is now 200 packs which is on a point on the new supply curve.ES1S2

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The Law of SupplyChanges in Quantity Supplied and movements Along the Supply CurveConsider the price of P 25 per packs. At the price, the sellers will offer for sale 60 packs of X. Should there be an increase in price to P30, quantity supplied will increase to 90 packs. This is reflected as a movement along the supply curve and is referred to as change in the quantity supplied. This is a change from point B to point C on the supply curve and is caused by a change in the price of the goods. There are also non price determinants that influence supply, includes cost of production, availability of economic resources, number of the firms in the market, technology applied, producers goals, these factors are again assumed constant to enable us to analyzed the effect of a change in price on quantity supplied.BC

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The following changes in the non price factors may cause the corresponding shift in the demand curveIncrease in the number of sellersDecrease in the number of sellersBetter technologyDecrease in the cost of productionGoals of the firmShift to the right

Shift to the left

Shift to the rightShift to the rightIt depends

Supply and Demand InteractionsSupply and Demand forces are not staticThey interact dynamicallyFactors other than price affect either supply or demand forces, the supply and demand curves shift either to the left or rightThis causes either an increase (shift to the right) or a decrease (shift to the left) is supply or demand

Supply and Demand InteractionsAt certain price (P), buyers are willing to buy a certain quantity (Q) of diapersAlso at the same price suppliers are willing to produce and sell the same quantity of diapersThis price and quantity is depicted by (E) equilibrium pointSurplus (supply exceeds demand)Shortage (demand exceeds supply(E) D = SPriceQuantitySDQPP2P3

Supply and Demand InteractionsThe equilibrium point may have a number of technical definitionsIt is the point at which the supply curve intersects the demand curveIt is the point of perfection combination where supply is just equal to demandEquilibrium is the point at which the price (P) and Quantity (Q) of the commodity that the buyers are willing to buy, is just equal to the price (P) and quantity (Q) that producers are willing to produce and sell

EquilibriumExcess DemandSurplus SupplySDQPQuantityPriceP2P3

Supply and Demand InteractionsAt a price higher (P2) than equilibrium price (P), more suppliers will be willing to produce and sell more, while buyers will buy less. This brings about a surplus situation. There is pressure to decrease prices to entice consumers to buyAt a price lower (P3) than equilibrium price (P), more buyers will be willing to buy more, less suppliers will be willing to produce and sell. This brings about the shortage of goods, and pressure to increase prices to entice producers to produce and sell morePQQuantityPriceP2P3SDESurplus SupplyExcess Demand

Market EquilibriumThe E is attained at the point where demand is equal to supplyThis point of equality is the Equilibrium point.It is corresponds to a price P40, which is the E priceAt this price the Q supplied is also 150 packsThe ideal situation is when all the Q that is offered will bought by the consumers, and all the demand will be met by the sellersAny price above or below P40 will be temporary because price will revert to the E level.403545100 120 150 180 200Surplus Supply80Excess Demand80E

Market EquilibriumConsider the price P45This is a price above E priceAt this price the quantity demanded is only 100 packs while the seller will be attracted to offer a bigger quantity and this is 180 packsThere is difference of 80 packs representing a surplus of goods if seller maintained their price at that levelTo disposed unsold goods, sellers have to lower their prices and price level will ultimately settle at E point100 120 150 180 200403545Surplus Supply

Excess Demand

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Market EquilibriumAnalyze what happens at a price of P35, which is lower than E price.This low price will attract the buyers to demand for more, this quantity demanded corresponds to 200 packsThe low price will discourage the sellers from offering more. Q supplied at the price of P35 is down to 120 packsThe difference of 80 packs represents a shortage of the productTo fully exploit demand, the consumers be willing to pay more and revert the price level at P40 where supply meets demands100 120 150 180 200Excess Demand80Surplus Supply80E403545

Example: Supply and DemandThe table indicates the supply and demand conditions for healthcare services.When the price exceeds P10, an excess supply is present, which places downward pressure on price.In contrast, when the price is less than P10, an excess demand results, which causes the price to rise.Thus, the market price will tend toward P10, at which point supply and demand will balance350 450 550 650 75010QuantityPriceSDExcess SupplyExcess Demand

Price of ProductQuantity SuppliedQuantity DemandedCondition in the MarketDirection on Pressure on Price13625400Excess SupplyDownward12600450Excess SupplyDownward 11575500Excess SupplyDownward10550550BalanceEquilibrium9525600Excess DemandUpward8500650Excess DemandUpward7475700Excess DemandUpward

A hypothetical Shift in the Market Supply Curve with Demand Curve Kept ConstantThe point E is subject to change shifts in either the demand curve alone, or supply curve alone, or both D and S curves at the same time can cause change in E in E point.Example: a rightward shift of the supply curve, with the original demand curve maintained, will result in a decrease in E price.In the graph, the original E price is at P3 per capsule. The rightward shift of the supply curve has caused the E price to drop P2 per capsule.S1S2D1ABQ1 Q2P3P2PriceQuantityExcess Supply

Hypothetical Shift of the Market demand Curve with the Market Supply Curve Kept ConstantIn the like manner, a shift of the demand curve with the original supply curve maintained will cause a change in the E point.In this graph, a rightward shift of the demand curve, with the supply curve maintained, has caused the E price to increase from P3 to P4 per capsule.BAD2D1S1 Q1 Q2 Q3P4P3PriceQuantityExcess Demand (Q3-Q1)

A hypothetical simultaneous shift in both the Demand and Supply CurvesIn the graph, both the D and S curves show a rightward shift.Since the increase in D is proportionate to the increase in S, the E price is maintained at P3 per capsule.However, the new E point corresponds to a bigger quantity which is now Q5 capsule to a new E position over time as result of a shift of either the D curve or the S curve of a commodity.S1S2D2D1Q3 Q5P3QuantityPrice

THUMBNAIL SKETCHThese factors increase (decrease the Demand for a good:

A rise (fall) in consumer incomeA rise (fall) in the price of a good used as a substitute A fall (rise) in the price of a complementary good often used with the original goodA rise (fall) in the expected future price of the goodThese factors increase (decrease) the supply of a good:

A fall (rise) in the price of a resource used in producing the goodA technological change allowing cheaper production of the goodFavorable weather (bad weather or a disruption in supply due to political factors, or war)

Repealing The Laws of Supply And DemandPrice Ceiling a legally established maximum price that sellers may chargeShortage a condition in which the amount of a good offered by sellers is less than the amount demanded by buyers at the existing price. An increase in price would eliminate the shortage.Price Floor a legally established minimum price that buyers must pay for good or resourceSurplus a condition in which the amount of a good that sellers are willing to offer is greater than the amount that buyers will purchase at the existing price. A decline in price would eliminate the surplus.

Elasticity - the responsiveness of demand and supply to a change in its determinantsPrice Elasticity - the percentage change in quantity compared to a percentage change in priceIncome elasticity of Demand - percentage change in quantity demanded compared to percentage change in incomeCross elasticity of Demand - percentage change in quantity demanded of one good compared to the percentage change in the price of a related good.

Elasticity of Supply and Demand

Coefficient of elasticity absolute value of elasticityTotal Revenue price multiplied by quantityInferior goods goods which are bought when income levels are low, the demand for which tends to decrease when income increase.Normal goods goods for which demand tends to increase when income increaseSubstitute goods goods used in place of each otherComplementary goods goods that supplement each other and are, therefore, used togetherTERMS

Elasticity of DemandDemand Elasticity indicates the extent to which changes in price cause changes in the quantity demanded Classification of Elasticity of Demand

1. Price elasticity of demand2. Income Elasticity of Demand3. Cross elasticity of Demand

The Concept of Elasticity in Pharmacoeconomics/HealthcareOBJECTIVES 1. Sellers are naturally expected to hope for more demand for their product2. Higher revenues3. To make some decisions to improve demand for their product

ElasticityPrice Elasticity Of Demand is used to determine the responsiveness of demand to change in the price of the commodity

Formula:

EP = percentage change in quantity demanded percentage change in price

= QD2 - QD1/QD1 P2 - P1/P1

where EP = price elasticity of demand QD2= new quantity demanded QD1 = original quantity demanded P2= the new price P1= the original price

ElasticitySample ProblemOriginal quantity demanded = 10,000 pcs antihypertensive drugsOriginal price = P5.00 per tabletNew quantity demanded = 16,000 pcs of antihypertensive drugsNew price = P4.00 per tablet

Answer:16,000 -10,000/10,000 4.00 -5.00/5.00

= 3

ElasticityClassification of price Elasticity of Demand1. Elastic Is that type of demand where the quantity that will be bought is affected greatly by change in price. The change must be greater than elasticity coefficient of 1.2. Inelastic This refers to the demand where a percentage change in price creates a lesser change in quantity demanded.Example: When 20% reduction in price caused only a 10% increase in demand. The elasticity coefficient in this type is less than 1.3. Unitary Demand A change in price creates an equal change in quantity demanded. Example: When 20% price reduction resulted to 20% increase in demand. The elasticity under unitary demand is equal to the coefficient of 1.

Figure 1: Elastic DemandIs the type of demand where the quantity that will be bought is affected greatly by changes in price. The change must be greater than elasticity coefficient of 1.Original quantity demanded = 10,000 pcs of antihypertensive drugsOriginal price = P5.00 per tabletNew quantity demanded = 16,000 pcs of antihypertensive drugsNew price = P4.00 per tablet EP = 16,000 10,000/10,000 4.00 5.00/5.00 = 3 QD1QD2

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Figure 2: Inelastic DemandThis refers to the demand where a percentage change in price creates a lesser change in quantity demanded. Example: When a 20% reduction in price caused only a 10% increase in demanded. The elasticity coefficient in this type is less than 1Original quantity demanded = 10,000 pcs of antihypertensicve drugsOriginal price = P5.00 per tabletNew quantity demanded = 11,000 pcs of antihypertensive drugsNew price = P4.00EP = 11,000 10,000/10,000 4.00 5.00/5.00 = 0.5QD1QD2

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Figure 3: Unitary DemandIn this type of demand, a change in price creates an equal change in quantity demanded. Example: When 20% price reduction resulted to 20% increase in demand. Elasticity under unitary demand is equal to the coefficient of 1.Original quantity demanded = 10,000 bottles of syrupsOriginal price = P5.00 per bottleNew quantity demanded = 12,000 bottles of syrupsNew price = P4.00 per bottle

EP = 12,000 10,000/10,000 4.00 5.00/5.00 = 1QD1QD2

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Implications of Price Elasticity of Demand

@ when elasticity is known, it can guide the seller in making decisions about priceIf the price elasticity of demand is greater than 1, the price should be lowered; if less than 1, the price should be increase

ElasticityIncome Elasticity of DemandIncome Elasticity of demand refers to the determination of the responsiveness of demand to change in consumer incomeFormula:

EY = percentage change in quantity demanded percentage change in income= QD2 -QD1/QD1 Y2 -Y1/Y1

Where EY = income elasticity of demand Y2= the new income Y1= the original incomeNote: When elasticity is greater than 1, demand is said to be income elastic; less than 1 - inelastic; equal to 1 - unitary

ElasticityCross Elasticity of DemandCross elasticity of demand is the responsiveness of the quality demanded of a particular good to changes in the prices of another goodFormulaQA2 - QA1/QA1PB2 - PB1/PB1

WhereEC = cross elasticity of demandedQA2= new demand for product AQA1 = original demand for product APB2= new price of product BPB1= original price of product B

NOTE:If cross elasticity is positive, the goods are SUBSTITUTES.Example: if 2% increase in the price of paracetamol drug which causes a 0.66% increase in the demand for mefenamic acidIf cross elasticity is negative, the goods are COMPLIMENTSExample: If hospitalization fee increases results to a decrease in the demand for health professionals, hospital personnel are complements

ElasticityThe following summarize the change in revenue under the two basis elasticity conditionsPrice Increase Price DecreaseElasticDecreaseIncreaseInelasticIncreaseDecrease

Income Elasticity Of Demanded1. > 1 means demand is elastic and the good is superior2. < 1 means demand is inelastic and the good is inferior3. = 1 means demand is unitary and the good is normal

ElasticityDeterminants of demand Elasticity1. The price of goods in relation to the consumers budget2. The availability of substitutes3. The type of Good4. The time under consideration

ElasticityElasticity of Supply refers to the responsiveness of the sellers to a change in priceFormulaES = percentage change in quantity suppliedpercentage rise in price = QS2 - QS1/QS1P2 - P1/P1Where:ES = price elasticity of supplyQS2 = new quantity suppliedQS1 = original quantity suppliedP2 = new priceP1 = original price

ElasticityClassification of supply Elasticity1. Elastic Supply - is where the quantity supplied is affected greatly by changes in the price. The change is greater than the elasticity coefficient of 1.2. Inelastic Supply - when the quantity supplied is not affected greatly by changes in the price, supply is said to be inelastic. The elasticity coefficient is less than 13. Unitary Elastic Supply - When the % change in the quantity supplied is equal to the percentage change in price. The elasticity coefficient is equal to 1.

Figure 4: Elastic SupplyIs where the quantity supplied is affected greatly by changes in the price. The change is greater than the elasticity coefficient of 1.New quantity supplied = 18,000 bottlesOld quantity supplied = 10,000 bottlesNew price (P2) = P6.00/bottleOld price (P1) = P5.00/bottle

ES = 18,000 10,000/10,000 6.00 5.00/5.00 = 4QS2QS21

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Figure 5: Inelastic SupplyWhen the quantity supplied is not affected greatly by changes in the price, supply is said inelastic. The elasticity coefficient is less than 1.New quantity supplied = 11,000 bottlesOld quantity supplied = 10,000 bottlesNew price = P6.00/bottleOld price = P5.00/bottle

E = 11,000 10,000/10,000 6.00 5.00/5.00 = 0.5QS2QS1

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Figure 6: Unitary Elastic SupplyWhen the percentage change in the quantity supplied is equal to the percentage change in price. The elasticity coefficient is equal to 1.New supplied = 12,000 bottlesOld quantity supplied = 10,000 bottlesNew price = P6.00/bottlesOld price = P5.00/bottles

E = 12,000 10,000/10,000 6.00 5.00/5.00 = 1

QS2QS1

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ElasticityDeterminants of Supply Elasticity1. The feasibility and cost of storage

2. The ability of producers to respond to price changes

3. Time

ElasticityElasticity is a measure of responsiveness.The most common elasticity measurement is that of price elasticity of demand. It measures how much consumers respond in their buying decisions to a change in price.

ElasticityE = (percentage change in quantity) / (percentage change in price);Where E = coefficient of elasticityRead that as elasticity is the percentage change in quantity divided by the percentage change in price

Demand and Price ElasticityAn important characteristic of demand is the relationship among market price, quantity demand and consumer expenditure. Demand - a reduction in market price will usually lead to an increase in quantity demanded.

Demand and Price ElasticityIn some cases a reduction in price will be more than offset by a large increase in quantity demanded -- a situation where demand is price sensitive or price elastic.

Demand and Price ElasticityIn other cases, the reduction in price results in a proportionally smaller increase in quantity demanded-- a situation where demand is price insensitive or price inelastic.

Demand and Price ElasticityElastic demand (E>1)relative change in revenue > relative change in priceInelastic demand (E

Coefficient of ElasticityCalculate the coefficient of elasticity if we reduce the price for Tolnaftate cream from $3 to $2.80 and this results in an increase in sales from 55 to 85 tubes. Q = (85-55)/85 x 100%= 35%P = (32.8)/3 x 100%= 6.7%E = Q/P = 35%/6.7% = 5if E > 1 increase in revenue

Demand Curve and ElasticityAs a result of the different degrees of elasticity, there are different ways of presenting the Demand CurvePPPPQdQdQdQdD1 is relatively elastic, a change in price leads to a significant change in Qd.D1D2D4D3D2 is relatively inelastic, a change in price leads to a very slightly change in Qd.D3 is perfectly elastic. At given price, Qd can change infinitelyD4 is perfectly inelastic. At any price, the Qd will remain the same. Qd is equal to zero

Price Elasticity of SupplyAs a results of the varying degrees of elasticity of supply, the following supply curves are also possible:S1S3S2S4QsQsQsQs P P P PS1 is relatively elastic: A change in price results in a significant change in Qs.S3 is perfectly elastic: At a given price, Qs may change infinitelyS2 is relatively inelastic: A change in price results in a slight change in QS.S4 is perfectly inelastic: At any price, Qs remains constant or Qs = 0

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