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What Is Price Elasticity?

Price Elasticity is a measure of the relationship between a change in the quantity demanded
of a particular good and a change in its price. Price Elasticity of Demand (PED) is a term used
in economics when discussing price sensitivity. The formula for calculating price elasticity of
demand is:
Price Elasticity of Demand = % change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the
product is said to be elastic (or responsive to price changes). On the other hand, a product is
deemed inelastic if a large change in price is accompanied by a small amount of change in
quantity demanded.

Factors Affecting Price Elasticity

1. Substitutes
If there is a greater availability of substitutes, then the good is likely to be more elastic. For
example, if the price of one soda brand goes up, people can turn to other brands. So, a small
change in price is likely to cause a greater fall in quantity demanded.
2. Necessities
If a good is a necessity, then the demand tends to be inelastic. For example, if the price for
drinking water rises, then there is unlikely to be a huge drop in the quantity demanded since
drinking water is a necessity.
3. Time
Over time, a good tends to become more elastic because consumers and businesses have
more time to find alternatives or substitutes. For example, if the price of gasoline goes up,
over time people will adjust for the change, i.e., they may drive less or use public
transportation or form carpools.
4. Habit
The demand for addictive or habitual products is usually inelastic. This is because the
consumer has no choice but no pay whatever the producer is demanding. For example, if the
price for a pack of cigarettes goes up, it will likely not have any effect on demand.
PRICE ELASTICITY FORMULA

%∆ in Qd = Percentage Change

in Quantity Demanded. The Percentage Change in Quantity Demanded is the New Quantity
Demanded minus the Old Quantity Demanded divided by the Old Quantity Demanded.
%∆ in P = Percentage Change in Price. This is the New Price minus the Old Price divided by the
Old Price.
The value of Price Elasticity of Demand (PED) is always negative, i.e. price and demand have
an inverse relationship. This is because the ratio of changes of the two variables is
in opposite directions, so if the price goes up, demand goes down and the change will end
up negative.

Price Elasticity in Water Demand in The Philippines

In Philippines, like many countries, the increasing demand of water has concerned
authorities about managing and controlling water consumption and economists about
controlling the demand through increasing the cost of water consumption. In order to set an
effective policy to adjust water consumption, the economists attempted to estimate price
elasticity for water demand in various regions of the country. Anything scarce and in
demand commands a price; this is one of the basic principles of economics. Water is scarce
in some contexts (drought, degraded quality), so water pricing is increasingly seen as an
acceptable instrument of public policy. Water-use charges, pollution charges, tradable
permits for water withdrawals or release of specific pollutants, and fines are all market-
based approaches that can contribute to making water more accessible, healthier and more
sustainable over the long term. For this government are working toward the goal of
“internalizing” the full marginal costs (including environment costs) into decisions that
affect water use and water quality.
FACTORS THAT AFFECT WATER PRICING

 Quality Service of water concessionaires

 Cost of New Infrastructure build by concessionaires- all the concessionaires’ business-
related costs are passed onto the consumers
 Water Consumption - the more you use, the more you pay
 Unexpected decrease in water level in various Water Dam
Factor Affecting Water Bill
Computing Your Water Bill 
1. Current Charges before tax: 
 
 Basic Charge: This covers the cost of operating, maintaining, improving and
expanding the distribution network, as well as the facilities responsible for
bringing potable water to the end user. The Basic Charge is based on the
latest approved tariff schedule. 
 FCDA: This stands for Foreign Currency Differential Adjustment. This is a
percentage of the Basic Charge which accounts for fluctuations of the
Philippine Peso against other countries' currencies, subject to periodic
review and adjustment. The FCDA for the third quarter of 2019 is 2.43% of the
Basic Charge, equivalent to P0.69 per cubic meter, effective October 13,
2019. 
 
 Environmental Charge: This is 20% of the Water Charge (Basic Charge plus
FCDA) applicable to all customers.
 
 Sewer Charge: 0% of the Basic Charge will be added for Residential and Semi-
Business customers or 30% of Basic Charge for Commercial and Industrial
customers covered by a sewer line connection.
 
 Maintenance Service Charge: This covers the maintenance of the water
meter. The charge changes depending on the size of the water meter. The
minimum charge is P1.50 for a 13-mm size meter.

2. Value Added Tax (VAT): which is 12% of sum of A to E to get total current bill. The
government charges 12% of the total charges mentioned above.

3. Other Charges: If any, add other charges and previous unpaid amount to get the Total
Amount Due. 

Other Charges: These are special miscellaneous charges such as connection fees,

unscheduled desludging of septic tank service fees, etc. 

Previous Unpaid Amount: This pertains to charges billed prior to the billing period.
This should be settled immediately together with the current charges to avoid
disconnection of water service.