Professional Documents
Culture Documents
OF SUPPLY
AND DEMAND
PRICES
OF BASIC
COMMODITIES
Rice remains
the most
important food
item in the
daily meals of
Filipinos.
The sensitivity of quantity
demanded for rice to the
change in price of rice is not
only explained solely by the
change in its price itself
(substitution effect) but also by
the change in the real income
(income effect) of consumers.
If ever prices of basic
commodities in the market
increases, naturally, the
tendency of the consumers is to
look for substitute products
which are lesser in price.
For complementary products
such as coffee and sugar or
bread and butter, an increase in
price of any complementary
product will decrease the
demand for the complementary
item and vice-versa.
How it
Works
If the quantity demanded
changes a lot when prices
change a little, a product is said
to be elastic. This often is the
case for products or services for
which there are many
alternatives, or for which
consumers are relatively price
For example, if the price of Cola
A doubles, the quantity
demanded for Cola A will fall
when consumers switch to less-
expensive Cola B.
When there is small change in
demand when prices change a
lot, the product is said to be
inelastic. The most famous
example of relative inelastic
demand is that for gasoline.
As the price of gasoline
increases, the quantity
demanded doesn’t decrease at
all that much. This is because
there are very few good
substitutes for gasoline and
consumers are still willing to buy
it even at relatively high prices.
Why it
Matters
Elasticity is important because it
describes the fundamental
relationship between the price
of a good and the demand for
that good.
Elastic goods and services
generally have plenty of
substitutes.
Example of
elastic goods &
services:
Furniture, motor vehicles,
instrument engineering
products, professional
services, and
transportation services.
Inelastic goods have fewer
substitutes and price change
doesn’t affect quantity
demanded as much.
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