ELASTICITY

Elasticity
-is the responsiveness of
demand/supply to a change in its
determinant
-tells “how much” is the change as a
result to a change in determinant
 Kinds of Responsiveness
1. Elastic - the change in quantity demanded/supplied is
greater than the change in its determinant
- greater than 1
2. Inelastic - the change in determinant is greater than the
change in quantity demanded/supplied
- less than 1
3. Unitary - equal change in quantity and determinant
-equal to 1
4. Perfectly Elastic - results when a consumer's interest on product
rises to infinity if the determinant (price) falls
5. Perfectly Inelastic - a condition where the price of the product has no
effect on the quantity supplied/demand
 ELASTICITY OF DEMAND
1. Price Elasticity of Demand (PEd)
-responsiveness of quantity demanded
to a change in price

PEd = ∆Qd / ∆P
if PEd is
>1 , demand is elastic
<1 , demand is inelastic
=1 , demand is unitary
 ELASTICITY OF DEMAND
POINT P Qd
example:
A 30 125
B 35 100
C 70 80
Find PEd using D 90 60
1. points A-B
2. points B-C
3. points C-D
 ELASTICITY OF DEMAND
2. Income Elasticity of Demand (EY)
-measures a product's percentage change in
demand as a ratio of the percentage change in income

EY = %∆Qd / %∆Y
if EY is
>1 , demand is elastic and goods are superior
<1 , demand is inelastic and goods are inferior
=1 , demand is unitary and goods are normal
 ELASTICITY OF DEMAND
example: 25,000 E

20,000 D

15,000 C

10,000 B
5,000 A

100 200 300 400 500 600

Find EY using
1. points B to C
2. points D to E
 ELASTICITY OF DEMAND
3. Cross Elasticity of Demand (EC)
-measures the percentage change in the demand of
Good X to the percentage change in the price of good Y

EC= %∆Qx / %∆Py

if EC is (+) , commodities X and Y are substitutes

if EC is (-) , commodities X and Y are complements
ELASTICITY OF DEMAND

Find EC
 ELASTICITY OF SUPPLY
Price Elasticity of Supply (PEs)
-measures the change in the quantity supplied of a
commodity compared to a change in the price of such
commodity
PEs = ∆Qs/ ∆P
if PEs is >1 ; supply is elastic and goods are easy to manufacture
if PEs is <1 ; supply is inelastic and goods are difficult to
manufacture
if PEs is =1 ; supply is unitary and goods are neither easy nor
difficult to manufacture
 ELASTICITY OF SUPPLY
find PEs using points

1. A-B
2. D-E
Elastic, Inelastic, or
Unit Elastic
Elastic, Inelastic, or Unit Elastic
Elastic, Inelastic, or Unit Elastic
Elastic, Inelastic, or Unit Elastic
Elastic, Inelastic, or Unit Elastic
Elastic, Inelastic, or Unit Elastic
 BUSINESS FORECASTING
Forecasting is telling in advance a possible
event that may take place in the future.
These help manager prepare for the future.
 I. FORECASTING BY
EXTENSION OF THE PAST
When history is taken as the beginning point
for forecasting, it is believed that future
patterns tend to be extensions of past ones
and that some useful forecasts can be made
by studying the past behavior.

Also known as time-series method

 FORECASTING BY
EXTENSION OF THE PAST
AVERAGE FORECAST
1. Unweighted Average Forecast
2. Weighted Average Forecast
-giving a greater weight to the most recent data

Example: If the enrolment of SMC in 1985 was

1000 and it was 1500 in 1986, forecast for
1987.
 FORECASTING BY
EXTENSION OF THE PAST
MOVING AVERAGE FORECAST
Averages that are updated as new data
arrive. In using this, we move from one point
to another.
 
Example: Based on the given data
find the 3-month moving average
MONTH SALES IN MILLION

JANUARY 5

FEBRUARY 6.5

MARCH 4.5

APRIL 7

MAY 6

JUNE 8

JULY 5.5

AUGUST 9

SEPTEMBER 10

OCTOBER 9.5

NOVEMBER 9.75

DECEMBER 12
 II. FORECASTING BY THE USE
OF EXPONENTIAL SMOOTHING
This method uses a single weighting factor called alpha (α).
Alpha stands for the probability that the same actual sale will
take place.

Formula: Forecast = (α)(actual sale) + (1-α)(previous forecast)

 
•Example:
Suppose we want to forecast the sale of Kurimaw Sales Inc. for
the month of January of the following year, using α=.6, and the
previous forecast for December was 10.5M while the actual
previous sale was 12M.
 III. FORECASTING BY TREND
PROJECTION
This is a mathematical method which fits a trend line to a set of past observations
projecting the line into the future.

Formula for trend line: Y= a + bx

Where: Y= represents the quantity being forecasted
a= the point at which the trend line intercepts the vertical axis
b= slope of the line
x= independent variable, time

Formula for a and b.

b= (∑XY – nẊẎ)/ (∑X2- nẊ2) where x=time

Ẋ=∑X/n
Ẏ = ∑Y/n

a= Ẏ - bx
Example: Suppose that the sales of Dih Mah Alin
Supermart in the past 6 months of the year 2012
were recorded as follows:
MONTH ACTUAL SALES IN 000’S
MAY 250
JUNE 300
JULY 275
AUGUST 325
SEPTEMBER 290
OCTOBER 350

a. Forecast the sales in December 2012

b. Forecast the sales in March 2013.