56 General Economics

Republic of the Philippines
CARCAR CITY COLLEGE

Luanluan Street, Poblacion I, Carcar City, Cebu
Tel # 487-0063/487-9077
Subject : General Economics with Land Reform and Taxation Discussion No. : 5&6
Class Schedule : BSA-3
Topics : ✓ Law of Supply

✓ Elasticity of Demand and Supply
Objectives : At the end of this weekly module, you must have:

a. explained the law of supply and market supply;
b. calculated elasticities of demand and supply; and
c. explained the concept of elasticities.
I. ACTIVITIES
Draw five (5) products that show the concept of Law of Supply and Demand.
II. ABSTRACTION
TOPIC
5 LAW OF SUPPLY
Supply is defined as the ability and willingness to sell or produce a particular product and service in a given period of time at a
particular price, ceteris paribus.
Law of Supply
The law of supply that the higher the price of a product, the greater is the quantity supplied of that product and the lower the
price, the lower is the quantity supplied, ceteris paribus.
Assumptions:
• Cost of production remains constant
• Number of sellers remain the same.
• Price of related goods (complements or substitutes) do not change.
• Availability of other inputs remain unchanged
Based on the law of supply, a positive relationship exists between the price and the quantity supplied.
Supply Schedule and Supply Curve
The supply schedule for a product is the list of quantity supplied at different prices assuming all other influences are constant.
The supply schedule represents a functional relationship between price and quantity supplied. It assumes that other supply
determinants such as the state of technology, government policies and price of related good are all constant. Table 1 shows the
quantity of pilot pens supplied at each price level.
Price Quantity (units)

5 10
4 8
3 6
2 4
1 2
A supply curve shows the relationship between the quantities supplied of a product and its price provided everything else is constant. It
is an upward sloping curve.
Individual Supply and Market Supply
Individual supply is the relationship between the quantity of a product supplied by a single seller and its price.
Market supply is the relationship between the tot
al quantity of a product supplied by adding all the quantities supplied by all sellers in the market and its price.
Market supply is the combination of individual supply.

MARKET SUPPLY = ∑ INDIVIDUAL SUPPLY
Price Seller A Seller B Market Supply
5 10 8 18
4 8 7 15
3 6 6 12
2 4 5 9
1 2 4 6
Plot the supply curves based on the information given in the Table above. We have assumed that the market consists of only two
sellers. A and B. The market supply curve is a horizontal summation of individual supply curves.
Determinants of Supply
1. Price of Related Goods
2. Cost of production
3. Expected future price
4. Technological advancement
5. Number of Sellers
6. Government policies
7. Improvement Infrastructures
TOPIC
6 ELASTICITY OF DEMAND AND SUPPLY
Change in Quantity Demanded versus Change in Demand

Changes in determinants of demand influence consumers
purchasing plans and cause a movement or a shift in the demand
curve.
Change in Quantity Demanded- If the price of products change

and other factors are constant, there will be a movement along the
demand curve. In figure 2.3 (a), when the price is at 20, the
quantity demand is for 10 units. When the price increase to 30,
the quantity demand falls from 10 units to 5 units. The movement
along the demand curve from 20 and 10 units (point b) to 30 and 5
units (point a) illustrates the change in quantity demanded.
An upward movement along the demand curve- Decrease in

quantity demanded. (Contraction of demand)
A downward movement along the demand curve- Increase in

quantity demanded (Expansion of demand)
Change in Demand- If the price of a product is constant and

other factors (refer to the determinant of demand) change, there will be a shift of the demand curve. For example, when the number of
buyers or population increases, the demand curve will shift from D0 to D1 as shown in Figure 2.3 (b). When the price is 20 on D0 (point
B), the quantity demand is for 10 units and at the same price on D (point C), the quantity demand is for 15 units.
Price Elasticity of Demand (∑d)

Price elasticity of demand measures the sensitivity/ responsiveness of the quantity demanded due to a change in its price.
Example:
1. If the price of pens decreases for Php 2 to Php 1 and the quantity demand for pens increases from 40 to 50 units, calculate
the price elasticity of demand.
Solution:
Q1= 40; Q2= 50; P1= 2; P1= 1
Generally, the co-efficient of price elasticity of
Q Q P demand always shows a negative sign because
Ed = 2- 1 X 1
Q1 P2- P1 there is an inverse relationship between the price
and quantity demanded. Therefore, we use the
absolute value and the negative signs can be
omitted.
= -O.5
If the direction of price and quantity changes, for example if price increase from 1 peso to 2 peso, and quantity demanded decreases
from 50 units to 40 units, the price elasticity of demand is 10/50 or 0.2. Difference in both answers is due to the calculation from
different base. Another way to calculate elasticity of demand is using the midpoint formula. Midpoint formula computes the
percentage change by dividing the change by the midpoint at the initial and endpoint.
From the same example, if the price increases from 1 peso to 2 peso, the results is the same 0.667. The midpoint formula gives the
same coefficient of price elasticity of demand regardless the direction of price increase or decrease.
Degree of Price Elasticity of Demand

1. Elastic Demand
If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster
than price. If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price.
2. Inelastic Demand
A change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not
very responsive to changes in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food
purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly
change their driving behavior if gasoline prices rise.
3. Unitary Elastic Demand
If the elasticity coefficient is equal to one, demand is unitarily elastic. For example, a 10% quantity change divided by
a 10% price change is one. This means that a 1% change in quantity occurs for every 1% change in price.
4. Perfectly Inelastic Demand
5. Perfectly Elastic Demand
Determinants of Price Elasticity of Demand

1. Existence of substitutes
2. Proportion of the expenditure on a product
3. Nature of goods
4. Income level
5. Time dimensions
6. Habits
7. Complementary goods
8. Frequently purchased products
Change in Quantity Supplied versus Change in Supply
Changes in the influence the sellers’ plans can cause a movement or a shift in the supply curve.
Changes in Quantity Supplied

If the price of a product changes while other factors remain constant, there will be a movement along the supply curve. The
movement along the supply curve illustrates changes in the quantity supplied.
An upward movement along the supply curve- Increase in quantity supplied. Figure 2.13 (a), from point b to point a.
A downward movement along the supply curve- Decrease in quantity supplied. Figure 2.13 (a) from point b to point c.
Changes in Supply
If the price of a product is constant and other factors (refers to the determinant of supply) change, there will be a shift of the
supply curve.
An increase in supply- supply increases and supply curve shifts to the right.
A decrease in supply- supply decreases and supply curve shifts to the left.
Elasticity of Supply
Price elasticity of supply measures the sensitivity or responsiveness of the quantity supplied due to a change in the price of a
product or service.
Degree of Elasticity
The degree of supply elasticity is the same as in the case of demand. Table 2.9 summarizes the elasticity of supply. For more details,
refer to the demand explanations.
Determinants of Price Elasticity of Supply
1. Technology Improvements
2. Time Period
3. Availability and mobility of factors of production
4. Nature of the market
5. Perishability
Practical Importance of Price Elasticity of Supply
1. Taxation- the concept of price elasticity of supply can assist the government in formulating taxation policies. Imposition of tax
on goods with inelastic supply, will not affect the supply much. However, if supply is elastic, taxes imposed will be reasonable.
2. Burden of tax- the taxpayer and seller in the ratio of elasticity of demand and supply will share the burden of tax imposed by the
government. Therefore, knowledge of elasticity of supply is essential to sellers or producers.
III. ASSESSMENT
A. Short Response Test. Please answer briefly and concisely the following questions. Please be guided by the rubrics below.
Areas of 3 2 1
Assessment
Ideas Ideas are very organized and Ideas are too general Ideas are vague or unclear
consistent
Organization Organized beg/mid/end Some organization; attempt No organization; lack
at a beg/mid/end beg/mid/end
Perception Writing shows a clear Writing shows adequate Writing shows little
understanding understanding understanding
1. Define the Law of demand and Law of Supply. Using appropriate diagrams, explain how demand curve and supply curve
illustrates the related law.
2. Differentiate change in quantity demanded and change in demand.
3. What is a market?
4. Briefly explain 4 determinants of demand and 4 determinants of price elasticity of demand.
B. Table Completion. Fill-in the appropriate supply of the following price. Plot the supply curves for the individual supply and
market supply.
PRICE Individual 1 Individual 2 Market Supply

5 15 25
4 11 9 20
3 8 17
2 7 12
1 4 4
Plot the supply curve for the price and quantity supplied for fertilizers given below.
Price Quantity (units)

10 25
8 20
6 15
4 10
2 5
IV. APPLICATION
A.1. The table below shows the relationship between price of a product A and the quantity demand for products A and B.
Price of A Quantity Demand for A (kg) Quantity Demand for B (kg) Consumers Income
6 100 20 2000
6.50 90 30 1800
7 70 50 1600
7.50 40 70 1400
8 10 85 1200
a. Calculate the price elasticity of demand for A if the price of A increases from 7 to 8 peso per kg and indicate whether the demand
is elastic or inelastic?
b. List two factors that can influence the price elasticity of demand.
V. REFERENCES
Vengedasalam, D., and Madhawan, K. 2010. Principles of Economics, 2nd edition. New York: Oxford Univ. Press pg. 32-57
Prepared by:
AMELITA G. ALKUINO
AgriECON 312 Instructor

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Republic of the Philippines

CARCAR CITY COLLEGE

Class Schedule : BSA-3

Topics : ✓ Law of Supply

Objectives : At the end of this weekly module, you must have:

Price Quantity (units)

Market supply is the combination of individual supply.

6 ELASTICITY OF DEMAND AND SUPPLY

Change in Quantity Demanded versus Change in Demand

Change in Quantity Demanded- If the price of products change

An upward movement along the demand curve- Decrease in

A downward movement along the demand curve- Increase in

Change in Demand- If the price of a product is constant and

Price Elasticity of Demand (∑d)

Degree of Price Elasticity of Demand

Determinants of Price Elasticity of Demand

Changes in Quantity Supplied

PRICE Individual 1 Individual 2 Market Supply

Price Quantity (units)

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