Elasticity

Means “Responsiveness”.

It is the ratio of the percent change in another variable.

It is a tool used by economists for measuring the reaction of a function to changes in parameters in a relative way.

Demand Elasticity

Is a measure of the degree of responsiveness of quantity demanded of a product to a given change in one of the independent variables which affect demand for that product.

Classification of demand elasticity according to factors that cause the change:

Price elasticity of demand

Is the responsiveness of consumers’ demand to change in price of the good sold.

Income elasticity of demand

Is the responsiveness of the consumers’ demand to a change in their income.

Cross elasticity of demand

Is the responsiveness of demand for a certain good, in relation to changes in price of other related goods’.

DEMAND ELASTICITY

Refers to the reaction or response of the buyers to changes in price of goods and services.

5 TYPES OF DEMAND ELASTICITY

ELASTIC DEMAND

A change in price results to a greater change in quantity demanded.

INELASTIC DEMAND

A change in price results to a lesser change in quantity demanded.

UNITARY DEMAND

A change in price results to an equal change in quantity demanded.

PERFECTLY ELASTIC

Without change in price, there is infinite change in quantity demanded.

PERFECTLY INELASTIC

A change in price creates no change in quantity demanded.

DETERMINANTS OF DEMAND ELASTICITY

NUMBER OF GOOD SUBSTITUTE

many substitute- elastic

Without substitute-inelastic

PRICE INCREASE IN PROPORTION TO INCOME

Very little effect- inelastic

Involves substantial amount- elastic

IMPORTANCE OF THE PRODUCT TO THE CONSUMERS

Not important- elastic

Important- inelastic

Elasticity of supply

Refers to the reaction or response of the sellers/producers to price change of goods.

2 Important Factors of Supply Elasticity:

a. Time

b. Time horizon involved with which production can be increased.

c. Time

d. Time horizon involved with which production can be increased.

THEORY OF CONSUMER BEHAVIOR

Law of diminishing marginal utility

Utility-satisfaction

Marginal utility refers to the additional satisfaction of a consumer whenever he consumes one more unit of the same good.

Production

Is the creation of goods and services to satisfy human wants.

Kinds of goods

Economic goods

Free goods

Factors of production are called inputs of production.

Goods and services that have been created by the inputs are called outputs of production.

The process of transforming both fixed and variable inputs into finished goods and services is called theory of production.

The technical relationship between the application of inputs (factors of production) and the resulting maximum obtainable output is known as production function.

LAW OF DIMINISHING RETURNS

Also known as law of diminishing marginal productivity.

It states that when successive units of variable input (like farmers) work with a fixed input (like one hectare of land), beyond a certain point the additional product (output) produced by each additional unit of variable, input decreases.

Message of the Law

Marginal product is defined as the additional product brought about by one additional unit of a variable input (farmer).

When marginal product increases, total product also increases. When marginal product decreases, total product increases at a decreasing rate, and when marginal product is below zero or negative, total product falls.

There is a proper combination of a variable input into a fixed input in order to attain the maximum output.

It is not advisable to keep on increasing the number of farmers to work in one hectare of rice field. If they are many, most of them have nothing to do. They only hamper the works of the other farmers.

A good knowledge of factor proportion contributes to profit maximization or production efficiency.

ECOOMIC COST

Total Cost- sum total cost of production

Fixed Cost- cost which remains constant regardless of the volume of production

Variable Cost- changes in proportion to volume of production

Average Cost- unit cost

AC= TC

Q

Marginal Cost- additional or extra cost brought about by producing one additional unit.

MC= ∆ TC = TC2-TC1

∆Q Q2-Q1

Explicit Cost- expenditure cost

-costs paid in cash

Implicit Cost- non-expenditure cost

- imputed cost of self-owned or self employed resources based on their opportunity costs.

Opportunity cost- a foregone opportunity or alternative benefit.

- the economic cost of an input used in a production process is the value of output sacrificed elsewhere. The opportunity cost of an input is the value of foregone income in best alternative employment.

When MC is falling, it pulls down AC, and when MC is rising, it pulls up AC. MC intersects AC at its lowest portion.

Short run- refers to a period of time which is too short to allow an enterprise to change its plant capacity, yet long enough to allow a change in its variable resources.

Long run- refers to a period of time which is long enough to permit a firm or enterprise to alter all its resources or inputs (both fixed and variable factors).

External economies of scale- refers to those factors which are outside the firm or enterprise, but they contribute to the efficiency of the latter in terms of increased output and decreased unit cost of production.

Government policies, electrification, transportation and communication facilities

Internal economies of scale- these are the factors inside the firm or enterprise which contribute to the efficiency of the latter.

Division of labor, human resources development, managerial specialization, proper use of machines and equipment, favorable management policies, effective utilization of by-products, and modern techniques of production.

Appropriate Techniques of Production

Labor- intensive technology- more labor inputs and less capital inputs.

Capital-intensive technology – more capital inputs and less labor inputs.