Market Pricing and

Elasticity of
Demand and
Supply
 Factors affecting Price
Determination
A. Product Cost
B. The Utility and Demand (Elasticity of
Demand)
C. Market Competition
D. Government Intervention
E. Pricing Objectives
F. Marketing Methods Used
 A. Product Cost
The price of a commodity is based on its total cost. There are
three types of costs to be considered: fixed, variable, and semi
variable. These costs may be incurred during the production,
distribution, and selling of the products.
➢ Fixed Costs- are those that remain unchanged at all levels of transaction.
Fixed costs may include salary, rent of building etc.

➢ Variable Costs- are directly related to the levels of production or sales.

Ex. raw material, labor costs, etc.

➢ Semi-variable Costs- are those that change with the level of activity, but not
in direct proportion. Ex. fixed salary plus graded commission depending on
the volume of sales.
B. The Utility and Demand (Elasticity of
Demand)
➢ When a product has elastic demand, a little change
on its price may have a big impact on its demand.

➢ In case of inelastic demand, a variation in the prices

does not really affect demand. That means consumers
would still buy despite a change in price.

➢ Thus firms cannot easily impose higher prices on

commodities with elasttic demand while they can
charge more on products with inelastic demand.
 C. Market Competition
➢ It is important to consider the nature and degree of
competition in determining prices.
➢ When competition is low, firm may impose higher price
for its products.
➢ However, when the level of competition is intense, the
price of a product must be determined on the basis of
competitors’ price and their product quality
➢ In general,
“ The higher the competition, the lower the price”
 D. Government Intervention
Some companies may 1.Price Control- refers to the fixing of prices
monopolize an industry or a by the government. By restricting prices
below or above their equilibrium level, the
sector in an economy. Firms government creates shortage or surplus.
usually charge high price for
➢ Price Ceiling- a maximum price at which a
their products to make more good sold.
profit. However, in order to Ex. Gasoline price is regulated in some
countries.
protect public interests, the ➢ Price Floor- a legal minimum price at which a
government may intervene by product can be sold.
Ex. the minimum wage is the legal lowest
imposing price controls and price for labor that any employer may pay.
taxes. 2. Taxes- “Higher duty and tariff increase the
price vice versa.”
 E. Pricing Objectives
a. Profit Maximization- this is the usual objective of any business.
➢ During a short run, a firm may charge high prices to earn
maximum profit.
➢ During a long run, a business may reduce its prices to capture
many buyers and therefore earn more through increased sales.

b. Obtaining Market Share Leadership

➢ A firm usually keeps its price low of its objectives is to obtain a
big market share. Low price would result to an increse in sales.
But in a firm has a specific target market, for instance the upper
class, it will surely sell at a high price.
 F. Marketing Methods Used

Marketing methods used by a firm like advertising,

packaging, distribution system, quality of sales team, customer
service, etc. also affect pricing scheme.

The more expensive these things are, the higher the

final price.
 WHAT IS
ELASTICITY

20XX 9
 WHAT IS ELASTICITY
SPRING OR WEIGHT BALANCE SPRING OR WEIGHT
(SOMETHING THAT BALANCE
REACTS/RESPONDS)
(REACTS/ RESPONDS TO
THE WEIGHT
OR CHANGE IN WEIGHT)

WEIGHT (SOMETHING WEIGHT (CAN BE

THAT CHANGES)
CHANGED; CAN BE
LIGHT OR HEAVY)

20XX 10
 ELASTICITY
❖Elasticity involves two variables:

▪ variable that changes (usually price or the other

determinants of either demand or supply; called the
independent variable)

▪ variable that reacts/ responds to changes (usually

quantity demanded or quantity supplied; called the
dependent variable)

20XX 11
 ELASTICITY
Hence, elasticity measures the
responsiveness of the dependent variable
(usually quantity demanded or quantity
supplied) to a change in the independent
variable (usually price or the other
determinants of demand and supply).

20XX 12
DEMAND ELASTICITY
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 that affect
demand for the product.
20XX 13
 PRICE ELASTICITY
Price elasticity of demand refers to the
degree of reaction or response of the buyer
to changes in price of goods and service.
Buyers tend to reduce their purchases as
price increases and tend to increase their
purchases as price falls. Income elasticity of
demand is the responsiveness of consumers’
demand to a change in their income.
20XX 14
 CROSS PRICE ELASTICITY
Cross price elasticity of demand is
the responsiveness of demand for a
certain good, in relation to changes in
the price of related goods.

20XX 15
Price Elasticity
of Demand
(PED)
 Price Elasticity of Demand (PED)

Price elasticity of Demand (PED)- Is the

measure of responsiveness of quantity demanded
to price change. Gathering and analyzing data on
how buyers respond to price change can help
business reduce risk and uncertainty. Knowing this
concept of PED can definitely assist firms set price
and forecast sales.
 PED is calculated by using these formulas,

Percentage change in
quantity demanded of a
given good X, relative to a
percentage change in its
price, all else constant.
Point Elasticity Formula The word “coefficient” is used to
describe the value for elasticity of
demand. The answer is always
“negative” due to the negative
relationship of price and demand.
However, the coefficient is
always expressed in absolute
Arc or Midpoint Formula value.

NOTE: The arc or midpoint formula is

preferable when calculating PED because it is
consistent, giving the same answer
regardless of the direction of the change.
The most common method in the measurement of price
elasticity of demand is the arc elasticity.
Arc or Midpoint Formula
 TYPES OF ELASTICITY
OF DEMAND

20XX 22
 TYPES OF ELASTICITY OF DEMAND
1. Inelastic Demand (PED <1)
NOTE: If the coefficient of PED is
less than 1, then demand is price
inelastic. This means that demand
is unresponsive to price change.

A rise in price (from P1 to P2) leads

to an increase in total revenue.
 TYPES OF ELASTICITY OF DEMAND
2. Elastic Demand (PED >1)
NOTE: If the coefficient of PED is
greater than 1, then demand is
price elastic. This means that
demand is highly responsive to price
change.
A change in quantity demanded is
proportionately higher than the price
reduction. Firms gain more revenue by
reducing their prices.
TYPES OF ELASTICITY OF DEMAND
3. Perfecty Inelastic Demand (PED =0)
NOTE: If the coefficient of PED is equal to
zero, then demand is perfectly price
inelastic. This means that demand is not
affected by any price change.

Demand for a product is perfectly price

inelastic if consumers are still able and
willing to buy at any price. If supply curve
shifts to the left, which means reduction in
supply, equilibrium price may increase but
the quantity demanded remains unaffected.
 TYPES OF ELASTICITY OF DEMAND
4. Perfecty Elastic Demand (PED =infinity)
NOTE: If the coefficient of PED is infinite,
then demand is perfectly price elastic.
There is only one price that consumers are
willing to pay.

Shift in supply would not result to any

change in the equilibrium price. This
condition exists only in extremely
competitive markets where there are
too many sellers and therefore none
has the power to raise the price.
TYPES OF ELASTICITY OF DEMAND
5. Unitary Elastic Demand (PED = 1)
NOTE: If the coefficient of PED is 1, then
demand is unitary elastic. A change in
price is exactly the same with the change in
demand.

Shift in supply would not result to any

change in the equilibrium price. This
condition exists only in extremely
competitive markets where there are
too many sellers and therefore none
has the power to raise the price.
Value of price elasticity Elasticity definition Relationship among variables Consumer behavior
coefficient

Consumers are sensitive

|ep| > 1 Elastic demand %ΔQDX > %ΔPx or responsive to price
change.

Consumers are not

|ep| < 1 Inelastic demand %ΔQDX < %ΔPx sensitive or responsive to
price change.

Consumers are neither

|ep| = 1 Unit or unitary elastic %ΔQDX = %ΔPx responsive or not
demand responsive
Value of price elasticity Elasticity definition Relationship among variables Interpretation of Coefficient
coefficient

A 1% increase (decrease) in
|ep| > 1 Elastic demand %ΔQDX > %ΔPx price leads to a more than
1% decrease (increase) in
QD

A 1% increase (decrease) in
|ep| < 1 Inelastic demand %ΔQDX < %ΔPx price leads to less than 1%
decrease (increase) in QD.

A 1% increase (decrease) in
|ep| = 1 Unit or unitary elastic %ΔQDX = %ΔPx price leads to a 1% decrease
demand (increase) in QD.
 If the demand for the product is
price inelastic, then you may
change (especially increase) the
price because consumers would
still buy it.
 While of the demand is elastic, in
which consumers are sensitive to
price change, don’t increase the
price (or just minimal increase).

Otherwise, consumers may switch to

competitors’ or substitute products.
 INCOME ELASTICITY
Income elasticity of Demand measures the
degree to which consumers respond to a change in
income by purchasing more or less of a certain
good. The coefficient of income elasticity of demand
𝐸𝑖 is determined by:

20XX 32
 INCOME ELASTICITY
In discussing income elasticity of demand, it is essential
to distinguish a normal good from an inferior good. A good is
considered normal if a rise in income brings an increase in
the demand and a fall in income brings a decrease in its
demand.
For most goods, the income elasticity coefficient is positive.
This means that more of the goods are demanded as income
rises. It can be concluded that a positive income elasticity
indicates a positive relationship between income and demand.
20XX 33
 INCOME ELASTICITY
An inferior good indicates a rise in income brings a
decrease in demand and a fall in income brings an increase in
demand. This means, that the consumption of other
goods/products decrease (or increase) as income increases
(or decreases). The income elasticity is negative, revealing a
negative relationship between income and demand.

20XX 34
 CROSS PRICE ELASTICITY
Cross Price Elasticity of Demand measures the responsiveness
of demand to change in the prices of other goods indicating how
much more or less of a particular goods is purchased as other prices
change. It is define as the percentage change in quantity demanded
of one good (X) divided by the percentage change in the price of a
related good (Y). The formula is:

20XX 35
 CROSS PRICE ELASTICITY
NOTE:
➢Two goods are considered substitutes if there is a positive relationship
between the quantity demanded of one good and the price of the other
goods.
➢Two goods are considered complements if there is a negative
relationship between the quantity demanded of one good and the price of
the other good, hence, the cross elasticity of demand for complement is
negative.
➢ An estimates of cross elasticity of demand are useful to retailers in their
pricing decisions.
➢For example, when a grocery store cuts the price of bread, the store will
sell more bread but will also sell more complementary goods such as
jelly, peanut butter, ham and cheese.
20XX 36
 CROSS PRICE ELASTICITY
EXAMPLES:
➢New cars, technological gadgets, and clothes are products that have positive income elasticity
and considered as a normal good.
➢Used clothing, home cooked food, and riding a jeepney are considered as an inferior good or
services because consumers of these goods decrease their purchases as their income rise.
➢ An increase in the price of bananas increase the demand for mangoes as consumers substitute
mangoes for bananas.
➢The price of a burger falls by 10 percent and the demand for pizza decreases by 5 percent the
cross elasticity for pizza with respect the price of a burger is :
𝐄𝐱𝐲 = −𝟎.𝟎𝟓 /-𝟎.𝟏𝟎 = 0.50 (Burger and Pizza are substitutes)
➢The price of soda falls by 10 percent and the quantity of pizza demand increases by 2 percent.
The cross price elasticity of demand for pizza with respect to the price of cola is:
➢ 𝐄𝐱𝐲 = 𝟎.𝟎𝟐 /−𝟎.𝟏𝟎 = − 0.20 (Soda and Pizza are complements)
20XX 37