MICROECONOMICS (ECO1)

BY: PROF. MARIA THERESA F. FRANCISCO, LLB, MBA

Submit Assignment #2
 Consumers
Who are consumers?
A consumer is one that buys good or service for consumption and
not for resale or commercial purpose. The consumer is an individual
who pays some amount of money for the thing required to consume
goods and services.
As such, consumers play a vital role in the economic system of a
capitalist economy.
Without consumer demand, producers would lack one of the key
motivations to produce: to sell to consumers.
RA 7394 Consumer Act of the Philippines
Eight (8) Basic Rights of Consumers

Right to basic needs;

Right to safety;
Right to information;
Right to choose;
Right to representation;
Right to redress;
Right to consumer education; and
Right to healthy environment
 Consumer Responsibility
Critical awareness –
The consumer responsibility to be more alert and questioning about the use, price
and quality of products and services.
You are given the right to information therefore; you have the responsibility to ask
questions. How much is this product? What can it do? Is it safe to use? What are its
hazards to my health? These are very basic questions, and the answers to them are
very important in guiding and assuring consumers to get the best value for their
money.
Action –
The consumer responsibility to assert yourselves and act to ensure that you get a fair
deal. Remember that as long as you remain passive consumers, you will
continuously be exploited.
Consumer Responsibility
Social Concern –
The consumer responsibility to be aware of the impact of our
consumption to other citizens, especially the less fortunate,
exploited, disadvantaged or groups whether in the local, national
or international community.
In today’s difficult times where resources are scarce, it is your
responsibility as consumers to think of what will be the effect of
your actions and choices to other people’s lives. Make use of our
resources wisely and never be wasteful. Practice conservation and
share with those who are in need.
Consumer Responsibility
Environmental awareness –
The consumer responsibility to understand the environmental
consequences of your consumption. You should recognize your
individual and social responsibility to conserve natural resources,
and protect Earth for the future generations. The planet we are
living in is our only home. We should protect and preserve it, for
it is our only our source of life.
Practice proper waste management and follow the three R’s –
reuse, reduce and recycle. Choose and make use of
environment-friendly products. It can save our natural resources
and refrain from causing damage to them.
Consumer Responsibility
Solidarity
The consumer responsibility to organize together to
develop the strength and influence to promote and
protect the rights, welfare and interests of the
consuming public. Make your voices heard as a united
consumer sector.
Cooperate and collaborate with the government in
ensuring consumer protection in the country.
Organize yourselves to come up with better legislations
in safeguarding your welfare, and refining the way we
engage business in our nation. It is when we are united
that we can accomplish greater things.
Imagine if every Filipino consumer asserts his or her
rights and fulfills his or her responsibilities, then
achieving the ultimate state of consumer protection in
the country will no longer be just an idea but a
possibility.
Elasticity of Demand and Supply
Elasticity is an economics concept that measures responsiveness of
one variable to changes in another variable.
Price elasticity is the ratio between the percentage change in the
quantity demanded (Qd) or supplied (Qs) and the corresponding
percent change in price.
Price elasticity of demand is the percentage change in the quantity
demanded of a good or service divided by the percentage change in
the price.
Price elasticity of supply is the percentage change in quantity
supplied divided by the percentage change in price.
Three (3) broad categories of elasticity

An elastic demand or elastic supply is one in which the

elasticity is greater than one, indicating a high
responsiveness to changes in price.
Inelastic demand or inelastic supply Elasticities that are
less than one indicate low responsiveness to price changes
and correspond.
Unitary elasticities indicate proportional responsiveness
of either demand or supply
 Summary of categories of Elasticity
IF… THEN… AND IT IS
CALLED…
% change in quantity
% change in quantity > % change in price ------------------------------- > 1 Elastic
% change in price

% change in quantity
% change in quantity = % change in price ------------------------------- = 1 Unitary
% change in price

% change in quantity
% change in quantity < % change in price ------------------------------- < 1 Inelastic
% change in price
Two (2) Types of Demand Elasticity
Income elasticity of demand refers to the sensitivity of the quantity
demanded for a certain good to a change in real income of
consumers who buy this good, keeping all other things constant.
The formula for calculating income elasticity of demand is the
percent change in quantity demanded divided by the percent change
in income. With income elasticity of demand, you can tell if a
particular good represents a necessity or a luxury.
Income elasticity of demand = % Qd / % income
The cross elasticity of demand is an economic concept that
measures the responsiveness in the quantity demanded of one
good when the price for another good changes.
Also called cross-price elasticity of demand, this measurement is
calculated by taking the percentage change in the quantity
demanded of one good and dividing it by the percentage change
in the price of the other good.
Cross elasticity of demand = % Qd g / % P og
Determinants of Price Elasticity of Demand
Determinant # 1. The Availability of Substitutes:
If for a commodity close substitutes are available, its demand
tends to be elastic. If the price of such a commodity goes up,
the people will shift to its close substitutes and as a result the
demand for that commodity will greatly decline.
The greater the possi-bility of substitution, the greater the price
elasticity of demand for it. If for a commodity substitutes are
not available, people will have to buy it even when its price
rises, and therefore its demand would tend to be inelastic.
Determinant # 2. The Proportion of Consumer’s Income
Spent:
Another important determinant of the elasticity of demand is
how much it accounts for in consumer’s budget. In other
words, the proportion of consumer’s income spent on a
particular commodity also influences the elasticity of demand
for it.
The greater the proportion of income spent on a commodity,
the greater will be generally its elasticity of demand, and vice
versa.
Determinant # 3. The Number of Uses of a
Commodity:
The greater the number of uses to which a commodity can
be put, the greater will be its price elasticity of demand. If
the price of a commodity having several uses is very high,
its demand will be small and it will be put to the most
important uses and if the price of such a commodity falls it
will be put to less important uses also and consequently its
quantity demanded will rise significantly.
Determinant # 4. Complementarity between Goods:
Complementarity between goods or joint demand for goods also affects
the price elasticity of demand. Households are generally less sensitive to
the changes in price of goods that are complementary with each other or
which are jointly used as compared to those goods which have
independent demand or used alone. For exam-ple, for the running of
automobiles, besides petrol, lubricating oil is also used.
It is worth mentioning here that for assessing the elasticity of demand for
a commodity all the above three factors must be taken into account. The
three factors mentioned above may reinforce each other in determining the
elasticity of demand for a commodity or they may operate against each
other. The elasticity of demand for a commodity will be the net result of
all the forces working on it.
Determinant # 5. Time and Elasticity:
The element of time also influences the elasticity of demand
for a commodity. Demand tends to be more elastic if the time
involved is long. This is because consumers can substitute
goods in the long run. In the short run, substitution of one
commodity by another is not so easy.
The longer the period of time, the greater is the ease with
which both consumers and businessmen can substitute one
commodity for another.
For instance, if the price of fuel oil rises, it may be difficult to substitute
fuel oil by other types of fuels such as coal or cooking gas. But, given
sufficient time, people will make adjustments and use coal or cooking gas
instead of the fuel oil whose price has risen. Likewise, when the business
firms find that the price of a certain material has risen, then it may not be
possible for them to substitute that material by some other relatively
cheaper one.
But with the passage of time they can undertake research
to find substitute material and can redesign the product or
modify the machinery employed in the production of a
commodity so as to economize in the use of the dearer
material.
Therefore, given the time, they can substitute the material
whose price has risen. We thus see that demand is
generally more elastic in the long run than in the short run.
Price Elasticity of Supply

Price elasticity of supply measures the responsiveness to

the supply of a good or service after a change in its market
price.
According to basic economic theory, the supply of a good
will increase when its price rises. Conversely, the supply
of a good will decrease when its price decreases
End of Lecture
Assignment next meeting:

What is consumer behavior and consumer surplus?

Discuss
What is marginal utility? Discuss.

Be ready for quiz next meeting.