I.

ELASTICITY CONCEPT
Definition of Elasticity II. CONSUMER BEHAVIOR
Elasticity is the degree of responsiveness of quantity Consumer
demanded or supplied to a change in price or other A consumer is a person who demands goods and
economic factors. services to satisfy needs and wants.
It measures how strongly consumers or producers react
when conditions change. Consumer Behavior
General formula: Consumer behavior studies how consumers
purchase, use, and dispose of goods and services.
It explains why consumers buy certain products and
how they react to price changes.

Types of Elasticity Goods and Services

1. Price Elasticity of Demand (PED) Goods
Measures the responsiveness of quantity demanded Goods are tangible products that satisfy consumer
when price changes. needs.
Formula: Examples:
• food
• clothing
• appliances

Services
Services are intangible economic activities that
satisfy wants.
Examples:
• banking
• hairdressing
• telecommunications
• insurance

Types of Consumer Goods

Consumer Goods
2. Price Elasticity of Supply (PES) Goods that provide direct satisfaction to consumers.
Measures the responsiveness of quantity supplied to
price changes. Necessity Goods
Formula: Goods that satisfy basic needs of humans.
Examples:
• food
• water
4. Cross Elasticity of Demand • medicine
Measures how demand for a good changes when the Demand for these goods is usually inelastic.
price of another related good changes.
Formula: Luxury Goods
Goods that provide comfort but are not essential.
Examples:
• jewelry
Supply Elasticity Types • luxury cars
Elastic Supply • designer clothing
Price change causes a greater change in quantity Demand for these goods is usually elastic.
supplied.
Unitary Elastic Supply Tastes and Preferences
Price change causes an equal change in quantity Consumer tastes are influenced by:
supplied. • age
Perfectly Elastic Supply • income
A very small price change causes infinite change in • education
supply. • gender
• occupation
Determinant of Supply Elasticity • culture
Time is the principal determinant of supply elasticity.
• customs and traditions
• Short run → supply is less elastic
These factors influence demand in the market.
• Long run → supply is more elastic
Maslow’s Hierarchy of Needs 1. Problem Recognition
Maslow classified human needs into five levels: Consumer identifies a need.
1. Physiological Needs (food, water, shelter) 2. Information Search
2. Safety Needs (security, protection) Consumer gathers product information.
3. Social Needs (friendship, belonging) 3. Evaluation of Alternatives
4. Esteem Needs (respect, recognition) Consumer compares products.
5. Self-Actualization (personal fulfillment) 4. Purchase Decision
Consumers generally satisfy lower-level needs first. Consumer chooses and buys a product.
5. Post-Purchase Evaluation
Utility Consumer evaluates satisfaction.
Utility is the satisfaction or pleasure a consumer
receives from consuming goods or services. III. CONCEPT OF PRODUCTION COST
Production Theory
Total Utility Production theory explains how firms combine
Total Utility (TU) is the total satisfaction obtained resources to produce goods efficiently.
from consuming a certain quantity of goods. It studies the relationship between inputs and output.

Marginal Utility Factors of Production

Marginal Utility (MU) is the additional satisfaction 1. Land – natural resources
gained from consuming one more unit of a good. 2. Labor – human effort
3. Capital – tools and machines
Law of Diminishing Marginal Utility 4. Entrepreneurship – organizing and risk-taking
This law states that:
As more units of a good are consumed, the additional Production Function
satisfaction decreases. Shows the relationship between inputs and output.
Example: 𝑄 = 𝑓(𝐿, 𝐾)
1st slice of pizza → very satisfying
2nd slice → less satisfying Where:
3rd slice → even less satisfying Q = output
This explains why the demand curve slopes L = labor
downward. K = capital

Consumer Surplus Short Run vs Long Run

Consumer surplus is the difference between the Short Run
price consumers are willing to pay and the actual At least one factor of production is fixed.
price they pay. Example:
Formula: • factory building
Consumer Surplus = Willingness to Pay − Market Price
Long Run
Demand Curve and Consumer Behavior All inputs are variable.
The demand curve shows the relationship between Firms can change:
price and quantity demanded. • machines
Characteristics: • labor
• downward sloping • production capacity
• higher price → lower demand
• lower price → higher demand Law of Diminishing Returns
Reasons: States that:
• diminishing marginal utility When more units of a variable input are added to a fixed
• substitution effect input, marginal output eventually decreases.
• income effect
Types of Production Costs
Indifference Curve Explicit Cost
An indifference curve shows different combinations Actual monetary payments made by the firm.
of two goods that give the same satisfaction to the Examples:
consumer. • wages
Characteristics: • rent
• downward sloping • electricity
• do not intersect
• higher curves represent higher satisfaction Implicit Cost
Opportunity cost of using the firm's own resources.
Consumer Decision Process Example:
Steps in consumer behavior: • owner's time
 • owner's building MR = Marginal Revenue
MC = Marginal Cost
Opportunity Cost
The value of the next best alternative that is Economies of Scale
sacrificed. Occurs when average cost decreases as production
increases.
Normal Profit Reasons:
Minimum profit needed to keep the firm operating. • specialization
It is considered an implicit cost. • bulk production
• efficient technology
Short Run Costs
Fixed Cost (FC) Diseconomies of Scale
Costs that do not change with output. Occurs when average cost increases due to large
Examples: production scale.
• rent Reasons:
• insurance • management problems
• salaries • coordination issues

Variable Cost (VC) MOST IMPORTANT TERMS FOR MIDTERMS

Costs that change with production level. Elasticity
Examples: Price Elasticity of Demand
• raw materials Price Elasticity of Supply
• wages Income Elasticity
• electricity Cross Elasticity
Consumer Behavior
Total Cost (TC) Utility
𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 Marginal Utility
Total Utility
Law of Diminishing Marginal Utility
Average Costs Consumer Surplus
Average Fixed Cost Demand Curve
𝐹𝐶 Indifference Curve
𝐴𝐹𝐶 = Production Theory
𝑄
Factors of Production
Explicit Cost
Average Variable Cost Implicit Cost
𝑉𝐶 Opportunity Cost
𝐴𝑉𝐶 = Fixed Cost
𝑄
Variable Cost
Total Cost
Average Total Cost Average Cost
𝑇𝐶 Marginal Cost
𝐴𝑇𝐶 = Profit Maximization (MR = MC)
𝑄

or
𝐴𝑇𝐶 = 𝐴𝐹𝐶 + 𝐴𝑉𝐶

Marginal Cost
Marginal Cost (MC) is the additional cost of
producing one more unit of output.
Formula:
Δ𝑇𝐶
𝑀𝐶 =
Δ𝑄

Profit Maximization Rule

A firm maximizes profit when:
𝑀𝑅 = 𝑀𝐶

Where:
PART I. MULTIPLE CHOICE 10. The curve showing combinations of goods with
Choose the correct answer. equal satisfaction is:
1. Elasticity refers to the: A. demand curve
A. cost of production B. supply curve
B. responsiveness of quantity to price changes C. indifference curve
C. number of goods produced D. cost curve
D. income of consumers
11. The relationship between price and quantity
2. Price elasticity of demand measures: demanded is shown by the:
A. change in income A. demand curve
B. responsiveness of demand to price changes B. supply curve
C. cost of goods C. production curve
D. level of production D. utility curve

3. When elasticity is greater than 1, demand is: 12. The study of how consumers make buying
A. perfectly elastic decisions is called:
B. elastic A. consumer behavior
C. inelastic B. production theory
D. unitary elastic C. cost theory
D. elasticity theory
4. Goods that satisfy basic human needs are
called: 13. Natural resources used in production are called:
A. luxury goods A. labor
B. necessity goods B. capital
C. substitute goods C. land
D. inferior goods D. entrepreneurship

5. Which of the following is a luxury good? 14. Human effort used in production is called:
A. rice A. labor
B. medicine B. capital
C. jewelry C. land
D. water D. investment

6. Which of the following is an example of a 15. Tools and machines used in production are
service? called:
A. laptop A. labor
B. haircut B. land
C. cellphone C. capital
D. shoes D. enterprise

7. The satisfaction received from consuming goods 16. Costs that do not change with production are
is called: called:
A. demand A. variable cost
B. supply B. fixed cost
C. utility C. marginal cost
D. profit D. total cost

8. Additional satisfaction from consuming one more 17. Costs that change with the level of output are:
unit is called: A. fixed costs
A. marginal utility B. variable costs
B. total utility C. marginal costs
C. average utility D. average costs
D. consumer demand
18. The formula for total cost is:
9. The law stating that additional satisfaction A. TC = FC + VC
decreases with more consumption is: B. TC = FC − VC
A. Law of Supply C. TC = FC × VC
B. Law of Demand D. TC = FC ÷ VC
C. Law of Diminishing Marginal Utility
D. Law of Production
 19. The additional cost of producing one more unit Compute the Average Fixed Cost.
is:
A. total cost 5. Variable Cost = ₱360
B. marginal cost Output = 60 units
C. average cost Compute the Average Variable Cost.
D. fixed cost
6. Total Cost increases from ₱500 to ₱560 when
20. A firm maximizes profit when: output increases from 20 units to 25 units.
A. TC = FC Compute the Marginal Cost.
B. MR = MC
C. MC = FC 7. A consumer is willing to pay ₱120 for a product
D. TR = TC but the market price is ₱90.
Compute the Consumer Surplus.
PART II. TRUE OR FALSE
Write TRUE if correct, FALSE if incorrect. 8. Fixed Cost = ₱400
1. Elasticity measures responsiveness to price Variable Cost = ₱600
changes. Compute the Total Cost.
2. Elastic demand means quantity changes less
than price. 9. Total Cost = ₱900
3. Luxury goods usually have elastic demand. Output = 90 units
4. Necessity goods usually have inelastic demand. Compute the Average Total Cost.
5. Goods are tangible products.
6. Services are intangible activities. 10. Variable Cost = ₱500
7. Utility means satisfaction gained from Output = 100 units
consuming goods. Compute the Average Variable Cost.
8. Marginal utility is the total satisfaction from
consumption.
9. The Law of Diminishing Marginal Utility states
that additional satisfaction decreases.
10. The demand curve slopes upward.
11. An indifference curve shows equal satisfaction
combinations.
12. Land is a factor of production.
13. Labor refers to machines used in production.
14. Capital refers to tools and equipment used in
production.
15. Fixed costs change with output.
16. Variable costs change with production level.
17. Total cost equals fixed cost plus variable cost.
18. Marginal cost is the additional cost of producing
one more unit.
19. Opportunity cost is the value of the next best
alternative.
20. In the long run, all inputs can be changed.

PART III. PROBLEM SOLVING

(10 points each)
1. Price increases from ₱10 to ₱12 while quantity
demanded decreases from 100 units to 80
units.
Compute the Price Elasticity of Demand.

2. A firm has:
Fixed Cost = ₱500
Variable Cost = ₱300
Compute the Total Cost.

3. If Total Cost is ₱800 and output is 40 units,

compute the Average Total Cost.

4. Fixed Cost = ₱200

Output = 50 units