CHAPTER I: INTRODUCTION TO APPLIED ECONOMICS

 
DEFINITION OF ECONOMICS
 
I’m guessing you’re expecting to see the definition of Economics here already. But let’s not work that
way, shall we? I’d like to explain chunk by chunk so you can, hopefully, appreciate what Economics
really is.
 
Like I said, decisions that what we’ve talked about earlier is part of Economics. Actually, Economics
cover many aspects of human life! Since this is quite broad, we cannot even escape the economic
implications of human actions, behavior, and decision. Consequently, this explains why we teach
Economics to a student like you to prepare the youth on their roles as members of a society which
envisions material survival, stability, and growth.
 
Since we’re talking about Economics, let me tell you that there are three strands in the development of
the definition of Economics and these are:
 1. Wealth
 This strand defines Economics as the science of wealth-getting and wealth-using. As the focus is
on wealth, this pertains to activities answering the two major economic problems in any society, and that
is production and consumption.
2. Making Choices
 In everything that we do, whether we produce or consume, whether it is wealth-getting or wealth-
using, we make decisions and these decisions are based on alternative choices. It could also tackle how
resources can be distributed to the consumers.
 In making a decision, we have to consider a major concept in the study of economics, and that
is opportunity cost. Remember the choices you made earlier? Whichever option you did not choose, that
has now become your foregone alternative. Therefore, in whatever you decide upon, there will always
be a sacrificial choice; hence, an opportunity cost.
3. Allocation
 Economics is primarily a social science. As a social science, it utilizes a systematic or scientific
method in the study of society and its components. Further, Economics is a study of allocation of scarce
resources to answer to the unlimited human needs and wants.
  
Now, if you genuinely understood and appreciated the three strands, I bet it’ll be easy for you to know
and remember what Economics is.
 
“Economics is a social science which analyzes
the production, consumption,
and distribution of goods and services.”
 
See what I did there? You’ve got all three strands, make sense out of these, and boom! You now have
your definition for Economics.
 
BRANCHES OF ECONOMICS
 
1. Microeconomics

 It deals with the behavior of individual components as an economic agent such as
household, consumer, worker, firm, and individual owner of production (producer).
 It also refers to the study of choices by individuals.
 
2. Macroeconomics

 It deals with the behavior of economy as a whole with the view to understand the interaction
between economic aggregates such as employment, inflation, and national income / country’s GNP.
 

➤ Basic Categories of Economics

1. Positive Economics

o It describes facts and data in the economy.
o It avoids making value judgments.
2. Normative Economics

o It involves ethics and value judgment.
o It is subjective.
3. Applied Economics

o It applies tenants behind economic theories and principles to real-world situations with the
desired aim of predicting possible outcomes.
 
Since our class is Applied Economics, it is only fair that I highlight the subject as a practical tool to utilize
in dealing with our economic transactions because it uses economic theories to interpret real-world
phenomenon. We don’t just study theories here but we make it a point to study how we can apply it
today.
 
“HOW DOES ECONOMIC SYSTEM AFFECT THE ECONOMIC TRANSACTIONS OF A COUNTRY?”
 
Economic System refers to a set of economics institutions that dominate a given economy with the
main objective of solving economic problems.
 
Below are the four economic systems. By reading the various categories, can you guess which
economic system does the Philippines practice?
 

☞Traditional Economy

 It is a system whose past experiences are used as bases for economic decisions.
 Economic decisions are made with great influence from the past because it is copying /
duplicating the decisions made by previous generations.
 East Africa was once a Traditional Economy but is already transitioning.

☞Command Economy

 It is a system in which people do not have political and economic freedom.
 Factors of production and distribution are owned and managed by the state.
 This is also called Socialism.
 Countries that practice Command Economy are China, North Korea, Cuba, Iran, Libya, and
Russia.

☞Free Market Economy


 It is a system that consult with the majority, which means that interaction takes place
between buyers and sellers in determining the price of a particular good / commodity.
 This is also called Capitalism.
 Hong Kong practices Free Market Economy.

☞Mixed Market Economy


 In reality, there is no economy using the purest form of economic system. Hence, a mixed
economy, with elements of the first three systems mentioned, are present in varied degrees.
 Both private and public institutions exercise economic control.
 Countries such as India and France have this type of economic system.
 

LOGIC TIME!
So far, have you already guessed which economic system does the Philippines practice? Well, I’m
hoping you got this one, the answer is: Mixed Market Economy.
 
“WHAT IS SCARCITY AND HOW DOES IT AFFECT THE SOCIETY?”
 
“Scarcity is the basic and central economic problem
confronting every society.”
 
Scarcity is the heart of the study of economics and the reason behind its establishment. It can be
defined in various ways:

1. as a commodity or service being in short supply, relative to its demand which implies a constant
availability of a commodity or economic resource relative to the demand for them;
2. in quantitative terms, scarcity is said to exist when at a zero price there is a unit of demand, which
exceeds the available supply; and
3. pertains to the limited availability of economics resources relative to society’s unlimited demand for
goods and services.
 
When studying scarcity, bear in mind that once the limited resources fail short to meet the unlimited
wants of the society, it will eventually create a problem, which is then called scarcity.
 
 

➤ I AM ECONOMIST!
Now that we’re done with the lesson for this week, let’s try to practice and utilize our learning. With that
being said, kindly look around you. Observe and identify situations or events that have something to do
with satisfying your needs and/or wants. What are the implications of those activities in the economy?
Refer and use the table below.
 
Event(s) Economic Implications

   

 
 ➤ GENERALIZATION:
Human endeavor is mainly concerned with the satisfaction of material wants. It is centered on the task of
making a living, the most absorbing interest of man. To that end, man in all ages and among all classes
of people struggled to bring about changes in his environment – the acquisition of wealth in order to
satisfy human wants. Economics generally deals with the activities of man in the production, distribution
and consumption of goods and services to obtain wealth in order to satisfy human wants and needs.
This social science was mainly categorized into: macroeconomics that deals with the behavior of
economy as a whole; and, microeconomics that deals with the behavior of individual components as an
economic agent. Moreover, there are four economic systems in placed to solve economic problems
namely; traditional economy, command economy, free market economy, and mixed market economy.
Lastly, as we continue to dwell deeper about economics, be reminded of the word “scarcity” – the heart
of the study of economics. Remember that economics involves the production of wealth, commodities
and services, that is, considering the scarce resources to be utilize in order to satisfy varied human
wants and needs.

CHAPTER I: INTRODUCTION TO APPLIED ECONOMICS

 
REVISITING ECONOMICS AS A SOCIAL SCIENCE
 
We’ve learned in the previous week that Economics is primarily a social science. We’ve further explained that as a social science, it
uses a scientific method in the study of allocation of scarce resources to answer to the unlimited human wants. Below is the diagram
that shows the economic implication of our resources versus our needs and wants.
 As you can see above, we only have limited or scarce resources which are being directed towards production for
the unlimited human wants and needs. Now, aren’t you wondering how we’ll survive if we’re faced with limited resources
and unlimited needs and wants? That’s where Economics comes in. The economic problem is to match limited resources
to unlimited wants and needs. Allocation alone addresses this issue so is all other theories and practices I’ll be explaining
as we go further with our lessons.
 
Resources are limited based on its physical quantity and its use.
1. Limited in physical quantity
 As in the case of land, which has a finite quantity.
2. Limited in use
 As in the case of labor and machinery, which can only be used for one purpose at any one time.
 
Factors of Production
 1. Land
 acreage and raw materials
2. Labor
 unskilled, semiskilled, professional
3. Capital
 machines, factories, transportation equipment, and infrastructure
4. Entrepreneurship
 organizing the other factors of production and risk-taking
 
As a social science, economics if related to other social sciences that study other dimension of a society.
 For political science, it is the study of how the creation and utilization of power is being studied for the preservation, stability,
and growth of a society as a political unit.
 On the other hand, behavioral sciences such as sociology, anthropology, and psychology systematically examines behavior,
people’s beliefs, and society’s value system.
 
 
ECONOMICS AS AN APPLIED SCIENCE
 
The study of economics has been perceived as too theoretical since it deals with principles, laws, and assumptions
governing human behavior in the allocation process. This theoretical treatment may look as if economics is devoid of
applications. But that perspective is farther from the true concept and intent of economics.
 
Many of the principles, laws, and theories developed in economics can be applied in a number of fields.
 In commercial sciences such as in the field of accountancy, the information generated in the recording and analysis
of transactions on the state of assets of any establishment can be useful in making business decisions pertaining to
wealth accumulation and wealth utilization.
 In marketing, understanding the behavior of consumers can be useful to firms in expanding their market share.
 
In studying Applied Economics, it is essential to know that there are two fundamental concepts in economics, these are
choice and opportunity cost. Given that resources are limited, producers and consumers have to make decisions between
competing alternatives. Last week you’ve enumerated the decisions you made and what choices you picked. We’ll explain
further how those have to do something with economics.
 
 
1. Choice
 All economic decisions involve making choices.
 This is the best option you’ve chosen.
2. Opportunity Cost
 The loss of the next best option / next best alternative.
 Represents the real sacrifice.
 
Making an economic choice creates a sacrifice because alternatives must be given up, which results in the loss of benefit
that the alternative would have provided. Let’s put it this way, if you have ₱150.00 as an allowance and you decided to
purchase one monster milktea worth ₱150.00 instead of buying one cheeseburger and one large soda with a total worth
of ₱150.00, buying the milktea means the loss of the benefit that would have been gained from the latter. Another, for
limited resources such as land, if a new school has been built instead of building a new factory for a business, the
opportunity cost of choosing the school is the loss of factory, and what could have been produced.
 
“The true cost of any decision is always the closest option not chosen.”
  
 
BASIC ECONOMIC PROBLEMS AND THE PHILIPPINE SOCIOECONOMIC DEVELOPMENT IN THE 21 ST CENTURY
 
Of all the seemingly economic problems that we might think of, there are three very dominant basic economic problems.
 
 
1. What to produce?
 Each and every economy must determine what products and services, and what volume of each, to produce. In
some way, these kinds of decisions should be coordinated in every society.
 
2. How to produce?
 Societies decide on the mix of resources to use to create the desired output of goods and services.
 
3. For whom to produce?
 Finally, all societies need to decide who will get the output from the country’s economic activity, and how much they
will get.
 
From these three problems, it can be seen that the basic concepts of supply and demand respond to economic problems
but a point of analysis is how economics moved beyond how to meet society’s needs and wants so that authentic
development is pursued.
 
I have gathered a few data pertaining to the status of the Philippines in the past five years. There are still a lot that has to
improve in our country but I’d like you to know of the three major problems the country has,
specifically, unemployment, poverty, and poor infrastructure.
 GENERALIZATION
 
The study of economics has been perceived as too theoretical since it deals with principles, laws, and assumptions
governing human behavior in the allocation process. This theoretical treatment may look as if economics is devoid of
applications. But that perspective is farther from the true concept and intent of economics.
           
            Factors of production are the resources that serve as the foundation of the economy; they are what people utilize
to create products and services. Economists classify production factors into four categories:

1. Land
2. Labor
3. Capital
4. Entrepreneurship
 
            There are three extremely dominating core economic problems among all the ostensibly economic concerns that
we may consider. These are:
 

1. What to produce?
2. How to produce?
3. For whom to produce?
            There is still much that needs to be improved in our country, but I'd like you to be aware of three key
problems that we face:
 

1. Unemployment
2. Poverty
3. Poor infrastructure
 CHAPTER II: APPLIED ECONOMICS
 
THE MARKET
 
            Demand is generally affected by the behavior of consumers while supply is usually affected by the conduct of
producers. The interplay between these two is the foundation of economic activity. As the economy cannot operate
without the interaction between the consumer and the producer, it is essential, therefore, that you understand the different
movements of the demand and supply curve, as well as the concept of market equilibrium. However, before you dwell
with all of that, you have to be familiarized first with the market.
 
Market
 It is where buyers and sellers meet.
 It is the place where they both trade or exchange goods or services – in other words, it is where their transactions
take place.
 
Types of Markets

1. Wet Market

o

 is where people usually buy vegetables, meat, etc.

1. Dry Market

o

 is where people buy shoes, clothes, or other dry goods.
 
Note: In economic parlance, the term market does not necessarily refer to a tangible area, it can represent an intangible
domain where goods and services are traded, such as the stock market, real estate market, or labor market.
 

LOGIC TIME!
                How would you differentiate a Wet Market and a Dry Market without using the description given above?
 
DEMAND
 
            Before I discuss to you all the essential components of demand, I’d like you to memorize by heart the term:

“Ceteris Paribus”
 
            This is an economic term which means “other things held constant”. There may be instances later wherein an
economic principle is not applicable but if we talk of the ideal set-up, we might get a hold of this principle as an indicator
for the discussion. I am then encouraging you now to understand this term genuinely as we shall be using this often on
the succeeding lessons.
 
A.  Demand
 
             Demand pertains to the quantity of a good or service that people are ready to buy / purchase at given prices within
a given time period, when other factors besides price are held constant (ceteris paribus).
 
Demand implies three things:

1. desire to possess a thing;

2. the ability to pay for it or means of purchasing it; and
3. willingness to utilize it.
 
 B.  Law of Demand
 

↑P ↓D    ↓P ↑D
The Law of Demand states that if price goes up, the quantity demanded will go down. Conversely, if price goes down, the
quantity demanded will go up (ceteris paribus).
 

LOGIC TIME!
The reason for this is because consumers always tend to maximize satisfaction.
 
C.  Demand Schedule
                 A demand schedule is a table that shows the relationship of prices and the specific quantities demanded are each of these
prices. To further explain to you how a demand schedule works, refer to the example of demand schedule below:
                                              Demand Schedule for Rice (per month)
 SITUATION PRICE (P) QUANTITY (KG)
A 5 8
B 4 13
C 3 20
D 2 30
E 1 45
The table shows the various prices and quantities for the demand for rice per month. For instance, at a given price of P5,
the buyer is willing to purchase only 8 kilograms of rice (situation A). However, at a price of P1, he is willing to buy 45
kilograms of rice (situation E).
 

LOGIC TIME!
When you construct a demand schedule, make sure that the situations are arranged chronologically with the
corresponding prices and quantities.
 
D.  Demand Curve
                      A Demand Curve is a graphical representation showing the relationship between price and quantities demanded per
time period. A demand curve has a negative slope; thus it slopes downward from left to right.
  
The figure above illustrates a typical demand curve. The y-axis represents price (P), while the x-axis represents the
quantity demanded (Qd). The (negative) slope measures the change in quantity demanded for a unit change in price. This
indicates that as the price of commodities decreases, more goods will be bought by the consumer. The downward slope
indicates the inverse relationship between price and quantity demanded.
 
Most demand curves slope downwards because:

1. as the price of the product falls, consumers will tend to substitute this (now relatively cheaper) product for others in
their purchases; and
2. the price decline of the product serves to increase their real income, allowing them to buy more products

When you construct your demand curve, make sure that there is an equal increment in the respective axis. For example,
you may plot the quantity with an equal interval of 50; hence, you may label your x-axis as 50, 100, 150, 200, etc.
 
E.  Change in Quantity Demanded vs. Change in Demand
There is a Change in Quantity Demanded if the movement is along the same demand curve. The direction of the movement is
inverse considering the Law of Demand.

The figure illustrates the concept of change in quantity demanded wherein P1 increases to P2 resulting to change in Q200
to Q100 and a movement along the demand curve from point A to point B.

LOGIC TIME!
                     A change in the quantity demanded is brought about by an increase (decrease) in the product’s price.
There is a Change in Demand if the entire demand curve shifts to the right side or left side. The demand curve shifts to the right /
upward as a result of increase in demand; hence, goods or services that remain at the same price are demanded in higher amounts
by consumers.
                      Conversely, a demand curve shifts to the left / downward if the demand decreases or falls; thus, at the same price,
fewer amounts of a good or service are demanded by the consumers.
 The figure illustrates the concept of change in demand wherein Q250 decreases to Q200, despite P1 remaining, and a
shift of demand curve from right to left (downward). The movement of point A to point B illustrates a decrease or fall in
demand.
 

LOGIC TIME!
                        Increase (decrease) in demand is brought by factors other than the price of the good itself.
 
F.  Forces that Cause the Demand Curve to Change
There are several reasons why demand changes, and thus, causes the demand curve to change. The following are the
general reasons for the change in demand.
 
1. Taste or Preference
 It pertains to the personal likes or dislikes of consumers for certain goods and services. tend to look for closely
related commodities.
 2. Income
 Increasing incomes of households raise the demand for certain goods or services, and vice versa. This is because
an increase in one’s income generally raises his capacity or power to demand for goods and services which (s)he cannot
purchase at a lower income.
3. Occasional Products
 The various events or seasons in a given year also result to a movement of the demand curve, with reference to
particular goods.
4. Population
 An increasing population leads to an increase in the demand for some types of goods or service, and vice versa.
5. Substitute Goods
 Substitute goods are goods that are interchanged with another good. In a situation where the price of a particular
good increases, a consumer will tend to look for closely related commodities.
6. Expectations of Future Prices
 If buyers expect the price of a good or service to rise (or fall) in the future, it may cause the current demand to
increase (or decrease). Also, expectations about the future may alter demand for a specific commodity.
 
 G. Price Elasticity of Demand
Price Elasticity refers to the type of elasticity that deals with the degree of responsiveness of people when there are changes in
prices.
Different Degree of Elasticity
1. Elastic
 Demand or supply is elastic when there is a greater change in quantity demanded or supplied.
 Demand or supply is sensitive to economic changes.
 In mathematical equation, it is always greater than one.
 2. Inelastic
 Demand or supply is inelastic when there is a lesser change in quantity demanded or supplied.
 Demand or supply does not usually change in relation to economic changes.
 In mathematical equation, it is always less than one.
3. Unit Elastic
 Demand or supply is unit elastic when there is an equal change in quantity demanded or supplied.
 Demand or supply proportionately changes in relation to economic changes.
 In mathematical equation, it is equal to one.
                         There are a lot of ways how we can compute for the price elasticity of demand. In order for us to focus our
efforts in learning about elasticity, we are to focus on one method of computing the price elasticity of demand which is
called the Point Method / Statistics Method.
The formula for the Point Method is the following:

The formula of the price of elasticity of demand is change in quantity demanded divided by quantity over the
change in price divided by price. It is further broken down to the formula you see at the right wherein:
 The elasticity of demand is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change—
nothing more. It is read as an absolute value; hence, even if the value you computed is negative, the negative sign is omitted as it
shall be considered an absolute value. Say, your computed price elasticity of demand is -3.5, your final answer shall now be 3.5. In
this case, a 1% rise in price causes a change in quantity demanded of 3.5%. The greater than one elasticity of demand
means that the percentage change in quantity demanded will be greater than a one percent price change.

GENERALIZATION
                Demand is an economic principle referring to a consumer's desire to purchase goods and services and
willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a
good or service will decrease the quantity demanded, and vice versa. Market demand is the total quantity demanded
across all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an
economy. Multiple stocking strategies are often required to handle demand.
 
            A change in demand refers to a shift in the entire demand curve, which is caused by a variety of factors
(preferences, income, prices of substitutes and complements, expectations, population, etc.). In this case, the entire
demand curve moves left or right. A change in quantity demanded refers to a movement along the demand curve, which
is caused only by a chance in price. In this case, the demand curve doesn’t move; rather, we move along the existing
demand curve.
    There are several reasons why demand changes, and thus, causes the demand curve to change. The following are the
general reasons for the change in demand:

1. Taste or Preference
2. Income
3. Occasional Products
4. Population
5. Substitute Goods
6. Expectations of Future Prices
Price Elasticity refers to the type of elasticity that deals with the degree of responsiveness of people when there are
changes in prices. The following are the three degrees of elasticity:

1. Elastic
2. Inelastic
3. Unit Elastic

CHAPTER II: APPLIED ECONOMICS

 

SUPPLY
 

Hello, future professional! Last week, you were tasked to study all about the market, demand, law
of demand, demand schedule, demand curve, change in quantity demanded vs change in demand,
forces that cause the demand curve to change, and price elasticity of demand. This week, we will be
proceeding to the supply side.
 
Before we start with the lesson proper, let me first know your thoughts with the quote, “If you know
what people need, you have gotten more knowledge of a fortune than any amount of capital can give you” from
Russell H. Conwell, an American lawyer and educator, known for his work Acres of Diamonds. You can
put your ideas in the provided box.
 
  
Again, before we dwell with the other side of the coin, may I remind you that we are still using the
term ceteris paribus as there are similar premises of supply and demand.
 

A. Supply
Supply pertains to the quantity of goods or services that firms are ready and willing to sell at a
given price within a period of time, other factors being held at constant (ceteris paribus).
 

B. Law of Supply

↑P ↑S    ↓P ↓S
 
The Law of Supply states that if the price of a good or service goes up, the quantity supplied for
such good or service will also go up. Conversely, if the price goes down, the quantity supplied also goes
down (ceteris paribus).
 

LOGIC TIME!
The law of supply implies that higher price is an incentive for business firms to produce more goods or services as
this will maximize their profits.
 
C. SUPPLY SCHEDULE
A Supply Schedule is a schedule listing the various prices of a product and the specific quantities
supplied at each of these prices. To further explain to you how a supply schedule works, refer to the
example of supply schedule below:
                                        Supply Schedule for Rice (per month)

SITUATION PRICE (P) QUANTITY (KG)

A 5 48

B 4 41

C 3 30

D 2 17

E 1 5

The table shows the various prices and quantities for the supply for rice per month. For instance, at a given price of P5, the
seller is willing to sell 48 kilograms of rice (situation A).  However, at a price of P1, he is willing to sell 5 kilograms of rice
(situation E).
 

Why is there a change or movement in the supply curve?

 

LOGIC TIME!
 When you construct a supply schedule, make sure that the situations are arranged chronologically with the
corresponding prices and quantities.
 

D. SUPPLY CURVE
A Supply Curve is a graphical representation showing the relationship between the price of the
product / factor of production and the quantity supplied per time period. A supply curve has a positive
slope; thus, it slopes upward from left to right.

The figure above illustrates a typical supply curve. The y-axis represents price (P), while the x-axis
represents the quantity supplied (Qs). The positive slope indicates that as the price of commodities increases
(decreases), more (less) goods will be offered for sale by the producers.
 
 Consistent with the Law of Supply, this is how producers react:
 higher prices entice producers or sellers to supply more goods or services because of their profit motive;
while
 lower prices diminish their goal of putting additional investment because of the possibility of incurring a
loss.
 

LOGIC TIME!
When you construct your supply curve, make sure that there is an equal increment in the respective axis.
For example, you may plot the quantity with an equal interval of 100; hence, you may label your x-axis as
100, 200, 300, 400, etc.
 

E. CHANGE IN QUANTITY SUPPLIED VS. CHANGE IN SUPPLY

There is a Change in Quantity Supplied if the movement is along the same supply curve. The direction of the
movement is positive considering the Law of Supply
 The figure illustrates the concept of change in quantity supplied wherein P15 increases resulting to
change in Q1250 to Q1500 and a movement along the supply curve from point A to point B.
 

LOGIC TIME!
A change in the quantity supplied is brought about by an increase (decrease) in the product’s own price.
 
 There is a Change in Supply if the entire supply curve shifts to the right side or left side. The
supply curve shifts to the right / downward as a result of increase in supply; hence, more goods will be
offered for sale by producers. Conversely, a supply curve shifts to the left / upward if the supply
decreases; thus, at the same price, producers sell fewer amounts of a good or service.

The figure illustrates the concept of change in supply wherein Q1250 increases to Q1500, despite P1 remaining, and a shift of
supply curve from left to right (downward). The movement of point A to point B illustrates an increase in supply.
 

What are the factors that can cause the supply curve to change?

LOGIC TIME!
Increase (decrease) in supply is caused by factors other than the price of the good itself.
 

F. FORCES THAT CAUSE THE SUPPLY CURVE TO CHANGE

Just like demand, there are also forces that cause the supply curve to change. Below are some of the reasons
that cause the supply curve to change:
1. Optimization in the use of factors of production
 An optimization in the utilization of resources will increase supply, while a failure to achieve such will result to a
decrease in supply.
 Optimization refers to the process, or methodology of making something as fully perfect, functional, or effective as
possible.
2. Technological change
 The introduction of cost-reducing innovations in production technology increases supply on one hand. On the other
hand, this can also decrease supply by means of freezing the production, through problems that the new technology might
encounter, such as technical trouble.
3. Future expectations
 This factor impacts sellers as much as buyers. If sellers anticipate a rise in prices, they may choose to hold back
the current supply to take advantage of the future increase in price, thus decreasing market supply. However, if sellers
expect a decline in the price for their products, they will increase present supply.
4. Number of sellers
 The number of sellers has a direct impact on quantity supplied. Simply put, the more sellers there are in the
market, the greater supply of goods and services will be available.
5. Weather conditions
 Bad weather, such as typhoons, droughts, or other natural disasters, reduces the supply of agricultural
commodities, while good weather has an opposite impact.
6. Government policy
 Removing quotas and tariffs on imported products also affect supply. Lower trade restrictions and lower quotas or
tariffs boost imports, thereby, adding more supply of goods in the market.
 

LOGIC TIME!
Let me tell you some of the government policies in terms of supplying goods in the country:
A. Duties and taxes are imposed by the government on imported products that enter the country.
B. Quotas are limitations on the number of quantities of imported goods that could enter a country. This is used in order to
protect domestic or local products.
 
G. PRICE ELASTICITY OF SUPPLY
Like in computing the price elasticity for demand, we are still to utilize the discussed degrees of elasticity,
namely, elastic, inelastic, and unit elastic as well as the Point Method / Statistics Method for computing the price elasticity
of supply.
 
The formula utilizing the Point Method for computing the price elasticity of supply is the following:

The formula of the price of elasticity of supply is change in quantity supplied divided by quantity over the change in price
divided by price. It is further broken down to the formula you see at the right wherein:

In order for you to understand further, let’s take this activity below and do the step-by-
step process.
 
The other day, Pinky advertises to sell corned beef for ₱ 65.00 each can and was able to sell 50 cans.
Yesterday, she believed that pricing them ₱ 70.00 would be enough as she was able to sell 60 cans.
Today, she decides that she can charge more. She then raised the price to ₱ 77.00 and supplied 70 cans.
The next day, she sold 76 cans priced at ₱ 80.00. However, on the following day, she only sold 78 cans
priced at ₱ 83.00.
 a)     Make the schedule of the transactions.
Directions b)     Plot the curve of the transactions.
: c)     Compute for the elasticity of each succeeding day up to the last day.
d)     Specify the degree of elasticity based on each computation.
 
Now, with the scenario above, let’s try to accomplish the requirements.
a.) As we are tasked to make the schedule of the transactions, we must be able to identify what
schedule is required. Since the scenario is about selling goods, then we must label it as Supply
Schedule since we are in the point of view of the seller. Next, we identify the chronological order of the
events and reflect its corresponding prices and quantities. Our schedule should look like this:
 
SUPPLY SCHEDULE

b.) Next, we plot the curve of

the transactions. As earlier mentioned, the x-axis shall be the quantity while the y-axis is the price. We
also take note that in plotting the curve, we must not forget the labels as well as to make sure that the
increments of the number in the axes are equal. Our curve should look like this:

c.) Now, we compute the elasticity for each succeeding day up to the last day. In doing this, we pair-up
situations since we’re taking into consideration two points per computation of elasticity. Since we have 5
situations in the supply schedule, there must be four computations of price elasticity since we must have
the pairing of point A to point B, B-C, C-D, and D-E. In computing for the price elasticity, we use the
Point Method discussed earlier.
 
For the first computation of price elasticity of supply, we take into account the supply schedule for
point A to point B. In view of situations A and B, the latter is the new while the former is the old;
hence:
 
Now, we use our data to compute for the price elasticity of supply using the Point Method:
 

A-B

Unlike price elasticity of demand, price elasticity of supply is always a positive number. It is because
quantity supplied and price of the commodity share direct relationship. For situation A-B, the price
elasticity of supply is 2.6 which can now be read as in a 1% rise in price, there is a 2.6% increase in
quantity supplied.
 Note: For your final
answer, only include up to 2 decimal places by rounding off the hundredths place.
 
d.) After computing for the price elasticity of supply, we must also identify the degree of elasticity.
Considering the discussions we had earlier, we can now identify the degree.
Since situations A-B, B-C, and C-D have PES greater than one, the degree of elasticity is elastic. This only means that the producer is sensitive to
economic changes with regard to the computed price elasticity of supply. While for situation D-E, the PES is less than one; hence, the degree of
elasticity is inelastic. Therefore, it is not sensitive to economic changes.

GENERALIZATION
           Supply describes the total value of a good or service that is available to customers. The supply
schedule illustrates different quantities the seller is keen to sell at various prices.
 
The schedule depicts a positive or direct relationship that prevails between price and quantity
supplied. As price increases, the quantity supplied rises; as price decreases, the quantity supplied falls.
This relationship is called the Law of Supply. A supply schedule tells us that the firms will produce and
offer for sale more of their product at a high price tan a low price.
 
Meanwhile, price is the value that consumers exchange to obtain a desired product. It is an
obstacle from the viewpoint of the buyer, who is on the paying end. The greater the price, the lesser the
consumer will purchase. But the supplier or seller is on the receiving end of the product’s price. To a
 seller, price represents income, which serves as an incentive to produce and sell more products. The
greater the price, the higher this incentive and the higher the quantity supplied.

COLUMN A COLUMN B
a. occurs when the quantity supplied of a good, service,

1.    MARKET or resource is greater than the quantity demanded

b. the quantity that will be sold and purchased at the equilibrium price
2.    SHORTAGE
 

c. the only price where the plans of the consumers and the plans of producers

3.    SURPLUS agree

d. occurs when the quantity demanded of a good, service,

4.    EQUILIBRIUM or resource is greater than the quantity supplied

e. an interaction of buyers and sellers where goods,

5.    DISEQUILIBRIUM services, or resources are exchanged

f. this occurs when quantity supplied is not

6.    EQUILIBRIUM PRICE equal to quantity demanded; a shortage or surplus is experienced when this happens

7.    EQUILIBRIUM QUANTITY g. this occurs when price has adjusted until

 quantity supplied is equal to quantity demanded

MARKET EQUILIBRIUM
Now that we’re done with our demand and supply situations, I’d like to cap off our chapter 2.1 with the
fusion of two situations by introducing Market Equilibrium. It is imperative for you to learn how each situation is
important as well as how these two situations work hand in hand in determining the limitless implications of every
economic transaction by now proceeding to reconciling both for our discussion.
 
A. Market Equilibrium
Before I explain further how market equilibrium works, let’s try to “dissect” first the meanings/ definitions
of each word in an economic sense.
Market - - where buyers and sellers meet

- place where goods or services are traded / exchanged

- where transactions of buyers and sellers take place
Equilibrium

- state of balance
- meeting of supply and demand at a particular price
- exists when quantity demanded is equal to quantity supplied
 
By taking into consideration the connotations of each word, we try to make sense out of it. Relating now both
concepts, we can now explain that  Market Equilibrium pertains to a general agreement of the buyer and the seller
at a particular price and a particular quantity.

At equilibrium point, there are always two sides of the story - the side of the buyer, and that of the
seller. For instance, given the price of ₱ 70.00, the buyer is willing to purchase 15 units. On the seller side, he is
willing to sell the quantity of 15 units at a price of ₱ 70.00. It simply shows that the buyer and seller agree on one
particular price and quantity.
 
LOGIC TIME!
The main concept of equilibrium explains that there is a balance between price and quantity of goods bought by
consumers and sold by sellers in the market.
 
B. Equilibrium Market Price
Equilibrium Market Price is the price agreed by the seller to offer its good or service for sale and
for the buyer to pay for it. Specifically, it is the price at which quantity demanded for a good is exactly
equal to the quantity supplied.
The equilibrium market price and quantity can be best depicted in a graph.
As illustrated in Figure 1, the demand curve (D) depicts the quantity that consumers are willing to buy at
particular prices; the supply curve (S) depicts the quantity that producers are prepared to sell at a
particular price (x-axis are the quantities and y-axis are the prices). The equilibrium market price (e) is
generated by the intersection of the demand and supply curves.
As we can observe in the graph, the market equilibrium (e) is the point of intersection between the
supply (S) and demand (D) curves, that is, at P = 30 and Q = 150.
 
C. Market Disequilibrium
What happens when there is market disequilibrium?
 

LOGIC TIME!
When there is market disequilibrium, two conditions may occur: a surplus or a shortage.

Surplus
 - It is a condition in the market where the quantity supplied is more than the quantity demanded.
When there is surplus, the tendency is for sellers to lower market prices in order for the goods to
be easily disposed from the market. Which only means that when there is a surplus, there is a
downward pressure on price, in order to restore equilibrium to the market. This is depicted in Figure 2 by
the arrow from point a going down to the equilibrium point (e).
 As we can observe in the graph (Figure 2), surplus is a situation above the equilibrium point. This
is because quantity supplied (say at P = ₱40.00, QS = 200 units) is greater than quantity demanded (at P
= ₱40.00, QD = 100 units), resulting in an extra 100 units of goods being supplied in the market.
 
A higher initial price (say at ₱40.00) results in excess supply (QS = 200 units and QD = 100 units).
The excess supply is depicted by the area abe. In this case, the oversupply of 100 units forces the price
down in order to eliminate the excess supply.
 

Shortage
- It is a condition in the market where the quantity demanded is more than the quantity supplied.
When the market is experiencing shortage, there is a possibility that consumers can be abused,
while the producers enjoy imposing higher prices for their own interest. When there is a shortage, there
is an upward pressure on prices in order for them to acquire the goods or services that are in short
supply. This is depicted in Figure 2 by the arrow going up from point d to the equilibrium point (e).
 
As we can see in the Figure 2, shortage exists below the equilibrium point. For instance, at price
₱20.00 quantity demanded QD = 200 units, while quantity supplied QS = 100 units. This is because
sellers are not willing to sell at the lower price yet consumers demand for more.
A lower initial price (say at ₱20.00) results in excess demand of 100 units (Q S = 100 units and QD =
200 units). This is depicted by the area cde. In this case, price is forced up in order to eliminate the
excess demand.
 
D. Price Controls
What happens if disequilibrium in the market persists at a longer period of time?
 

LOGIC TIME!
If disequilibrium happens for a long period of time, the government may intervene
by imposing price controls.
 

Price Control
- is the specification by the government of minimum and/or maximum prices for goods and services.
 
The price may be fixed at a level below the market equilibrium price or above it, depending on the
objective in mind. In the former case, for instance, the government may wish to keep the price of some
goods (e.g. food) down as a means of assisting poor consumers. In the latter case, the aim may be to
ensure that producers receive an adequate return (price support for farmers, for instance). Generally,
price controls may be applied across a wide range of goods and services as part of price and income
policy, aimed at combating inflation.
 
Price controls are classified into two types:
1. Floor Price
- It is the legal minimum price imposed by the government.
- This is undertaken if a surplus in the economy persists.
- Floor Price is a form of assistance to producers by the government for them to survive in their business
and are generally imposed on agricultural products.
 

2. Price Ceiling
- It is the legal maximum price imposed by the government.
- It is utilized by the government if there is persistent shortage of goods in the economy.
- Price Ceiling is commonly imposed by the government to protect consumers from abusive producers or
sellers who take advantage of a shortage situation and is usually done by the government after the
occurrence of a calamity, such as typhoons.
 
E. The Partial Equilibrium Analysis
As part of understanding how market (dis)equilibrium can be identified, we can utilize the partial
equilibrium analysis which can interpret the situation at hand, particularly if there is market
equilibrium, surplus, or shortage. Moreover, the partial equilibrium method equates supply and demand
in one or more markets so that prices stabilize at their equilibrium level.
With this, we use the following equation system:

Demand equation QD = a - bP

Supply equation QS = -c + dP

Equilibrium condition QD = QS

 As you can observe on the given equations above, the equilibrium condition states that the
quantity demanded is equal to the quantity supplied; that is because in market equilibrium there is no
surplus nor shortage.
 

LOGIC TIME!
In order for you to understand further, let’s take the exercises below and do the step-by-step process.
 

Given:
Unknown:
a = 68
                      PE
b=6
                      QD / QE
c = 33
                      QS / QE
d = 10

 
A. First, we determine the equilibrium price (PE) in order for us to determine the quantity demanded (QD)
and quantity supplied (QS) for the given. Now, let me ask you, how can we compute for the PE with only
the a,b,c, and d given? For that, we consider the equations given for demand and supply. Hence, we
equate quantity demanded and quantity supplied for our equilibrium solution.
Considering now the demand and supply equations, we have the following:

QD = a - bP QS = -c + d
 QD = 68 - 6P QS = -33 + 10P

Next, since the equilibrium condition is QD = QS, we translate it into:

a - bP = -c + d

68 - 6P = -33 + 10P

With that, we transpose it and find for the equilibrium price (PE).

B. Having now computed the equilibrium price, we can now compute for the quantity demanded and
quantity supplied. Since we are to consider the PE, the QD and QS shall have the same outcome as the
equilibrium condition is QD = QS. We then try to separately compute for the quantity demanded and
quantity supplied. We first do the former through substitution.
 QD = a - bP
QD = 68 - 6 (6.3125)
QD = 68 - 37.875

QE = 30.125  

 
C. Finally, we compute for the quantity supplied and let’s check if we get the same outcome.

QS = -c + dP
QS = -33 + 10 (6.3125)
QS = -33 + 63.125

QE = 30.125  

 
As we have computed above, the QD and QS were equal (30.125) as there is an equilibrium
brought about by the equilibrium price. That is why when you use P E as our reference price, we
can label our QD and QS as QE.
 
The exercise that we just accomplished was for the equilibrium situation wherein the quantity demanded
is equal to the quantity supplied. How about if there is a surplus situation? What if it’s a shortage? How
can we determine those?
 
 Unlike in market equilibrium, when there is a market disequilibrium, either surplus or shortage, the
quantity demanded and quantity supplied are not equal. To remind you again of those conditions, let me
simplify my explanations I previously provided in the earlier parts of this week’s lessons.
 
 When there is a surplus, the quantity demanded is less than the quantity supplied; hence:
QD < QS
 When there is a shortage, the quantity demanded is more than the quantity supplied; hence:
QD > QS
 
To elaborate further, we try to accomplish the table below by using the same given (a, b, c, d) but
instead of looking for the equilibrium price, demand, and supply, we determine if there is a shortage /
surplus considering the given prices by computing for their corresponding quantity demanded and
quantity supplied.

Price QD QS

₱8.00    

₱7.00    

₱6.00    

₱5.00    

₱4.00    
 
We try to complete the table above by computing and determining if there is a surplus or shortage.
 
Let’s do the first row.
 

A. Determining now the quantity demanded, we have the following computation:

QD = a - bP
QD = 68 - 6 (8)
QD = 68 - 48

QD = 20  

B. Now, let’s compute for the quantity supplied.

QS = -c + dP
QS = -33 + 10 (8)
QS = -33 + 80

QS = 47  

C. Considering now our computed quantity demanded and quantity supplied, we compare and
determine the market disequilibrium if the price of goods is pegged at ₱8.00.

20 <  47
 QD <  QS

                                                                                                           Surplus
 

Since the quantity supplied is greater than the quantity demanded, the market disequilibrium
situation here is surplus.
 
D. With our computation above, we then fill-up the table below:

Price QD QS

₱8.00 20 47

₱7.00    

₱6.00    

₱5.00    

₱4.00    

 
Now, try to compute for the remaining prices first before you refer to the completed table and solutions
below.

Price QD QS
 ₱8.00 20 47

₱7.00 26 37

₱6.00 32 27

₱5.00 38 17

₱4.00 44 7

Price - ₱ 7.00
 

QD = a - bP
QD = 68 - 6 (7)
QD = 68 - 42

QD = 26  

26 < 

QD < 

Surplus

 
 Price - ₱ 6.00

QD = a - bP
QD = 68 - 6 (6)
QD = 68 - 36

QD = 32  

   
32 > 

QD > 

Shortage

 
Price - ₱ 5.00

QD = a - bP
QD = 68 - 6 (5)
QD = 68 - 30

QD = 38  

38 > 
 QD > 

Shortage

 
Price - ₱ 4.00

QD = a - bP
QD = 68 - 6 (4)
QD = 68 - 24

QD = 44  

44 > 

QD > 

Shortage

If you can notice, the shortage situation started at price ₱6.00. Going back to our market equilibrium
computation, our PE is 6.3125; hence, if we are to refer with our market disequilibrium situations, prices
below that is shortage while prices beyond the PE is surplus.
 

GENERALIZATION
 
 The word equilibrium means balance. A market is in equilibrium if at the market price, the quantity
demanded is equal to the quantity supplied. The price at which the quantity demanded is equal to the
quantity supplied is called the equilibrium price or market clearing price. The equilibrium price is the only
price where the plans of consumers and the plans of producers agree—that is, where the amount
consumers want to buy the product, quantity demanded, is equal to the amount producers want to sell,
quantity supplied.  This common quantity is called the equilibrium quantity. At any other price, the
quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price.
Disequilibrium is when the market fails to find an equilibrium point. It is an imbalance between supply
and demand - such that supply exceeds the level of demand or demand exceeds the available supply.
 
If a market is at its equilibrium price and quantity, then it has no reason to move away from that
point. However, if a market is not at equilibrium, then economic pressures arise to move the market
toward the equilibrium price and the equilibrium quantity.
CHAPTER II: APPLIED ECONOMICS
 

APPLICATION OF DEMAND AND SUPPLY

 
A. Prices of Basic Commodities
Commodity
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type;
commodities are most often used as inputs in the production of other goods or services.
A commodity possesses these properties:

1. It is a good that is usually produced and/or sold by many different companies.

2. It is uniform in quality between companies that produce and sell it.  Meaning, one cannot tell the difference between one
firm’s product and another. This uniformity is referred to as fungibility .
Examples of Commodities
Lumber, oil, and electricity could all be considered commodities, while Levi’s jeans or Sketcher’s shoes would not
be, as consumers consider them to be distinct from jeans and shoes sold by other firms. Economists call this
distinctness, product differentiation.
 
B. Labor Supply, Population Growth, and Wages
                  The analysis of demand and supply can also be used in the determination of the wage rate in the labor market.
As in any market, the labor market is composed of those that demand labor services, as indicated by the demand curve
for labor, and those that supply labor services, as indicated by the supply curve of labor. These major actors in the labor
market are motivated by the changes in the price of labor which is indicated by the wage rate.
 For this graph, it simply portrays the curve/slope of the major actors in the labor market. The demand curve (indicated in
red) is downward sloping while the supply curve (indicated in blue) is upward sloping. For the demand curve, these imply
those that demand labor services such as firms or business entities looking for employees. On the other hand, the supply
curve specifies those that supply labor services and in this case, these are the laborers or employees.
 
a. Application of Demand
  Similar to other demand curves, the demand curve for labor is downward sloping. This means that there is an
indirect relationship between the wage rate and the quantity of labor services that is bought in the market. At a high wage
rate, the demand for labor is low while at the low wage rate the demand for labor is high.
b. Application of Supply
 The supply of labor is also influenced by the wage rate. The laborers are the ones supplying the labor services in
the labor market. To them, the wage rate is the opportunity cost of having leisure. It is assumed that individuals use their
time by choosing having leisure or devoting it to work. Given this, if the wage rate is very low, very few laborers are willing
to work since they would rather have leisure because the price of leisure is very low. At this low wage rate, the foregone
income of not working is very low. On the other hand, if the wage rate is high, the demand for leisure decreases since the
opportunity cost of not working is very high. As they devote less time for leisure, they will be willing to offer more time for
work. Thus, we observe a positive relationship between wage rate and the supply of labor services.
In the illustration above, we depict a market for labor services. The intersection of the demand for labor and the
supply of labor will yield the equilibrium wage rate.
If the equilibrium price is considered too low by the laborers, they may demand the government to impose a price
floor or a minimum wage.
 With this regulation, the reaction of the firms is to demand less labor services. Hiring additional workers will mean
the net returns to firms is negative implying that their profit may decline as a consequence. From the point of view of the
suppliers of labor services, they may find the minimum wage attractive and they offer more hours for work. With demand
for labor decreasing while the supply of labor increasing with the minimum wage will result in an excess supply of workers
seeking work but cannot be hired because of the strict requirements of higher value of marginal products by the firms.
This excess supply of labor services ends up as unemployed workers.
 
Although the objective of the government in setting the minimum wage is to provide a decent life for workers, this
policy may be considered counterproductive because it creates unemployed workers.
 
C. Labor Migration and the Overseas Filipino Worker (OFW) Phenomenon
Overseas Filipino
 Is the term encompassing all Filipino migrants, whether permanent or temporary, legal or unauthorized.
Overseas Filipino Workers
 Represent a subset of overseas Filipinos, and are temporary migrants.
 Currently, there are millions of Filipinos working abroad. The push and pull factors have often been utilized to
explain the temporary labor migration of Filipinos. However, the demand and supply analysis can also be used to describe
the phenomenon of Overseas Filipino Workers (OFWs). Similar to the market for labor services, temporary labor migration
of Filipinos can be analyzed in terms of demand for OFWs and supply of OFWs in the international labor market. The
illustration below can help understand why many Filipino workers want to become OFWs even at the low foreign wage
and decreasing foreign wage rate.
 Source: economicsonline.co.uk
 
a. Application of Demand
 Demand for OFWs is influenced by the foreign wage rate. As foreign wage rate decreases, foreign firms will
demand more OFWs as they equate the wage rate with the value of the marginal productivity of workers. This downward
sloping demand for OFWs is shown by DLF1.
b. Application of Supply
 The supply of OFWs is positively influenced by the foreign wage rate. As the foreign wage rate increases it
becomes more attractive for Filipinos to work abroad. This positive relationship is shown in the supply of OFWs SLF1.
The intersection between the supply curve of OFW, SLF1 with the demand curve for OFWs, DLF1 at e1 gives the
equilibrium wage rate WE1 and employment of OFWs at LE1.
However, this supply of OFWs is also influenced by the exchange rate. The higher the value of the US dollars in
terms of Philippine peso, more Filipinos will be inclined to work abroad. Suppose the exchange rate ER is PHP 40 per US
dollar. A salary of USD 1,000 per month abroad will translate into PHP 40,000 per month. However, if the ER is now PHP
50 per US dollar, the same salary of USD 1,000 can be exchanged for PHP 50,000. With the increase in the ER, working
abroad becomes attractive even if the wage rate abroad is not changing.
Suppose the exchange rate increases or the peso depreciates, the supply curve of OFWs shifts to the right to SLF2.
With the demand curve not changing, a new equilibrium is set at point e2 with a lower wage rate, WE2 and a higher
employment of OFWs at LE2. Thus, even at a lower foreign wage rate, there will be more OFWs willing to go abroad
because the Philippine peso value of their reduced foreign wage is still high with a depreciated Philippine peso. The
demand for OFWs also increases because the foreign wage has declined encouraging foreign firms to hire more Filipino
workers.
 

GENERALIZATION
 
The law of supply and demand is an economic theory that explains how supply and demand are related to each
other and how that relationship affects the price of goods and services. It's a fundamental economic principle that when
supply exceeds demand for a good or service, prices fall. When demand exceeds supply, prices tend to rise.
 
            Markets for labor have demand and supply curves, just like markets for goods. The law of demand applies in labor
markets this way: a higher salary or wage—that is, a higher price in the labor market—leads to a decrease in the quantity
of labor demanded by employers, while a lower salary or wage leads to an increase in the quantity of labor demanded.
The law of supply functions in labor markets, too: a higher price for labor leads to a higher quantity of labor supplied; a
lower price leads to a lower quantity supplied.
 CHAPTER II: APPLIED ECONOMICS
 
APPLICATION OF DEMAND AND SUPPLY
 
A. The Philippine Peso and Foreign Currencies
                 Another application of the demand and supply analysis is the determination of the exchange rate.
The exchange rate is the price of a foreign currency. For example, the exchange rate between Philippine peso and US
dollar is ₱50.00 per US dollar. This means that the price of one US dollar is 50 Philippine pesos. This price of US Dollar or
exchange rate (ER) can be determined by the interaction of the demand for US dollars and the supply of US dollars in the
market for foreign exchange.
                  By telling us how many pesos you have to give up to get a dollar, the peso-dollar exchange rate simply
represents the price of a US dollar.
 As with any other market price, this exchange rate is intricately tied to the forces of demand and supply. For
instance, you can expect the price of a dollar to go down (say, from P50 to P45 a dollar) if there’s weaker demand for it. In
this case, there’s an appreciation (or “strengthening”) of the peso. Meanwhile, you can expect the price of a dollar to
increase (say, from P45 to P50 a dollar) when there’s a lower supply of it. Hence, a depreciation (or “weakening”) of the
peso.
 
Remember what Lysander Spooner have said, “In reality there is no such thing as inflation of prices, relatively to
gold. There is such a thing as depreciated currency.” Read more on our discussion to better understand what Lysander
Spooner is trying to tell us in connection with the Philippine and Foreign Currencies.
 
                                                                        How does the Law of Demand and Supply affect
currencies?
1. Application of Demand
 The demand for US dollars in the Philippines is influenced primarily by its demand for imports since the country needs US
dollars to pay for our imports. Just like the demand curve developed earlier, the demand for US dollars has an indirect relationship
with the exchange rate, in this case the price of a US dollar. The higher price of a US dollar, imports become expensive. As imports
become expensive, our quantity demand for US dollars decreases. This is denoted by the downward sloping demand curve.
          When Filipinos lost their employment and income as a result of the pandemic, they avoided purchasing goods from
other countries. This lowered the overall demand for dollars, which can be used to pay for imported items. More
importantly, the pandemic has halted imports of capital goods and raw materials, both of which are necessary for an
industry. The weak demand for imports is arguably the most important element driving the peso's recent appreciation.
 
2. Application of Supply
 The supply of US dollars, on the other hand, is based on the inflows of US dollars into the country brought by export receipts,
remittances and capital inflows. The supply of US dollars has a positive relationship with the exchange rate. As the exchange
increases from ₱40 to ₱50 per US dollar, it can motivate exporters to export more and Filipinos to work overseas and send
remittances. When the exchange rate decreases or the peso appreciates from ₱40 to ₱30 per US dollar, there is a disincentive to
export and for workers to work overseas. Because of this, we have a positively sloping supply of US dollars as indicated in the
illustration above.
          During the pandemic, a large amount of money has flooded in due to the Duterte government's increased foreign
borrowings in an effort to tackle COVID-19 and its repercussions. However, the inflow of cash was matched by significant
outflows. This is, of course, due to the fact that some OFWs have been relocated and repatriated since the pandemic
began. Thousands more have lost their jobs and are stranded abroad. Consumer spending will be hampered and our
economy's recovery will be derailed if OFWs are unable to send money back home. The resulting decrease in dollar supply
tends to depreciate the peso.
 
The intersection of the demand curve and the supply curve will determine the equilibrium exchange rate.
 
B. The Philippine Housing Shortage and the Real Estate Boom: Rent and Price Structure
             Another application of the demand and supply analysis is the determination of the rent which is the price for a
fixed factor input. Typically, rent refers to the price of using land, a fixed input, in the process of production. You probably
wonder why the price of land or rent in the commercial districts of Makati, Taguig, and Ortigas in Metro Manila are
significantly higher than the same area of agricultural lands in rural Samar or Bicol. In some remote areas of the country,
some lands remain idle. Home prices, like stock and bond prices, are highly influenced by the law of supply and demand.
When there is more demand, prices tend to rise; when there is more supply, prices tend to decline.

 
 How does the Law of Demand and Supply affect Real Estate?
1. Application of Demand
 Consider a very low demand for land as indicated by D0. The intersection of supply curve S1 and demand curve D0 at
point e0 will give us a very low price of land or rent, R0. Since R0 is lower than the cost of putting land into productive use C0, the
owners of the land are getting negative net surplus or negative pure rent. In this case, there is no incentive for landowners to use
their land. Thus, the land remains idle.
 Consider a high demand for land as indicated by D1. The intersection of supply curve S1 and demand curve D1 at point e1 will
give us a price of land or rent, R1 which is higher than R0 and C0. Since R1 is relatively higher than C0, the owners of the land earn
some positive net surplus or some pure rent. Since the price of land is not as much, landowners may use this land in productive
activities that can afford to pay the modest price of land. In most cases, this type of land can be used for agricultural production.
 However, if the demand for land is very high as indicated by D2, its intersection with the supply curve S1 at point e2 will set the
equilibrium price of land or rent. In this case, it is significantly higher than R1 and substantially higher the C0. At this price of land, the
landowners are reaping huge pure rent. Since the price of land is very high, those who will use it for business and other productive
purposes must devise ways to recover the huge cost of land use.
        Because of the prohibitive price of land in commercial districts in highly urbanized cities in Metro Manila, those who buy or
acquire a lease on land in these areas construct high rises and condominiums to recoup the cost of acquiring land. They sell the
units at prohibitive prices or charge high rental rates to their tenants to recover the hundreds of millions of Philippine pesos spent in
acquiring the land. It does not make good business or economic sense to construct a two-story building in these commercial districts
or use it for agricultural production because such initiatives cannot recover the expensive cost of the land.
 
GENERALIZATION:
 
          An application of demand and supply can also be analyzed in the determination of exchange rate. Through this
week’s lesson, we have learned that the demand for US dollars has an indirect relationship with the exchange rate. This
goes to say that the higher the price of a US dollar is, the imports to Philippines become more expensive. In contrary, the
supply of US dollars has a positive relationship with the exchange rate.
        We have also analyzehe application of demand and supply in the determination of rent. Rent is related to the fixed
input in the process of production which is land, and is basically referred as the price one pay for the use of the land.
 
 The Law of Demand and Supply is a basic economic principle that explains the relationship between supply and
demand for a good or service, and how that interaction affects the price of that good or service.
 
When there is a high demand for a good or service, its price rises. If there is a large supply of a good or service but
not enough demand for it, the price falls. The reason is that people will bid up the prices when there is relative scarcity,
and there will be unsold items when there is an oversupply.