APPLIED ECONOMICS

Prepared by: Mrs. Briege Mariae I. Arante, LPT

 MODULE 2

Price
APPLICATION OF Price is the monetary value of a unit of commodity
SUPPLY AND DEMAND From the point of view of consumers, price is a payment for the purchase
  of a commodity whose value reflects the satisfaction or utility derived
from the consumption of a good or service
Chapter Objectives: From the point of view of producers, price is the revenue earned for a
After this chapter, you should be able to: commodity sold whose value reflects the cost of producing a unit of good
 Explain the law of supply and demand and illustrate hoe equilibrium or service
price and quantity are determined
 Discuss and explain the factors that affect demand and supply
 Distinguish between elastic and inelastic demand and supply Demand
 Describe the characteristics and distinguish the features of the Demand- is the behavior of potential buyers in a market. It is defined as
market structures the entire relationship between price and quantity. It shows the amount
of a good or service that buyer wishes to purchase at various prices
during some time period. So, quantity demanded of a commodity is
Basic Principles of Demand and Supply defined as the quantity of that commodity demanded at a certain price
  during any particular period of time.
The Market- is an interaction between buyers and sellers of trading or
exchange. It is where the consumer buys and the seller sell.
Goods Market- is the most common type of market because it is where Features of Demand:
we buy consumers goods.  It depends on the utility of the commodity.
 It always means effective demand. Always backed by purchasing
power and willingness or ability to spend it.
Labor Market- is where workers offer services and look for jobs, and  It is a flow concept.
where employers look for workers to hire.  It refers to demand for final consumer goods.
 It is always related to certain price.
Financial Market- which includes the stock market where securities of
corporations are traded.  It is desired quantity. It shows consumers wish or need to buy the
commodity.

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 It does not refer to quantity actually bought.
 
 

Factors Affecting/ Determining Demand:

Main Factors: Other Factors:

 Own price  Income distribution
 Prices of other goods  Past levels of demand and
 Consumer’s income income
 Weather conditions  Population growth
 Consumer’s tastes and  Government policy
preferences  Wealth of the consumer

Demand Function:
Functional relationship between demand for a commodity and its
determinants is known as demand function.

Dx= f (Px, Py, Y, T)

 
Where; Dx= Demand for commodity x;
Px= Price of commodity x;
Py= Price of another commodity;
Y= Consumer’s incomes
T= Consumer’s taste and preference
 

Law of Demand

The relationship between quantity of a good that consumers are

willing to buy and the price of the good that shows opposite relationship
between price and quantity demanded is known as law of demand. In
other words, higher the price, lower the demand and lower the price,
higher the demand, if other things remain the same. That is, the quantity
demanded is negatively related to the price of the good.

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 ACTIVITY 2.1
Research the Exceptions to the Law of Demand given above. Provide
the definition each. (15 points)

*Write your assignment in a SHEET OF WHITE INTERMEDIATE

PAPER
 

The demand curve slopes downwards to the right (or negatively sloped)
indicating that the quantity demanded is inversely related to the price of
the good.
Individual Demand and Market Demand
Reasons Behind Downward Slope of Demand Curve  
An individual demand curve is the demand for a good on the part of an
1. Law of diminishing marginal utility; individual consumer.
2. Substitution effect;
Market demand is the demand for a good on the part of all the
3. Income effect;
consumers taken together.
4. New consumers
 
 
Quantity
Exceptions to the law of demand: Quantity Quantity Demanded by
Price (SR/Kg) Demanded by Demanded by Individual “A+B”
 Giffen Goods Individual “A” Individual “B” (Market
 Veblen goods Demand)
1 5 4 5+4=9
 Exception of a price rise in future
2 4 3 4+3=7
 Bandwagon effect 3 3 2 3+2=5
 Emergency 4 2 1 2+1=3
 Good with uncertain product quality 5 1 0 1+0=1
 Snob appeal
 Brand loyalty Complementary Goods.
  Two goods are said to be compliments if an increase in the price of one
good leads to a fall in the quantity demanded of other.
 

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 the substitute good may increase the demand for the
commodity at hand and vice versa
Substitute Goods.
Two goods are said to be substitute if an increase in the price of one lead – If the other good is a complementary good, a decrease in its
to an increase in the quantity demanded of the other. price will have a positive impact on the demand of the good
  at hand and vice versa
• Expectation
– If you believe that the price of gasoline will increase
What is a Demand Curve? tomorrow, there is a tendency for consumers to increase
their consumption today
• A schedule of the willingness and capacity of a consumer to buy a • Taste
commodity at alternative prices at a given point in time ceteris – Shaped by cultural values, peer pressure or the power of
paribus (other things constant) advertising
• Market
• The only factor that influences the level of demand or consumption
– Population and demographic changes
is the price of the commodity itself

Demand Curve Downward Sloping

• Substitution Effect
– Decision of a consumer to substitute an expensive good with
cheaper goods when there is a price change
• Income Effect
– An increase in purchasing power will enable the customer to
buy more of the good and vice versa

 Principle of Diminishing Marginal Utility

Graph 2.1 The Demand Curve
• This implies that the additional satisfaction (utility) provided by an
additional commodity consumed is lower than the additional
satisfaction given by the previous level of consumption of the
Other Factors Affecting the Demand of a Commodity commodity
• Income • The optimal demand for a commodity is attained when its price is
– a higher level of income will give a person a higher capacity equal to the marginal utility derived from the last unit consumed
to consume and vice versa
• Prices of Other Commodities
– If the other good is a substitute, the increase in the price of

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Changes in Demand Curve What is a Supply Curve?
• Movement along the demand curve • A schedule showing a direct or positive relationship between the
price of the commodity and the level of output that the seller is
– Change in quantity demand resulting from the change in the
willing to supply at a given point in time ceteris paribus
price of the commodity
• As the price of the commodity increases, there will be more sellers
– As the price of a commodity decreases, the movement along
that will be willing to supply the good
the curve will lead to an increase in the quantity demand and
vice versa

Graph 2.2 Movement along the Demand Curve

• Shifts in demand curve Graph 2.4 The Supply Curve
– Changes in demand curve caused by any of the other factors
beside the price of the commodity
– A positive effect will shift the demand curve to the right
Other Factors Affecting Supply of a Commodity
(increase in the demand for a commodity)
• Price of Production Inputs
– A negative effect will shift the demand curve to the left
(decrease in the demand for the commodity) – The production of any commodity will require the use of 2
major inputs – intermediate inputs or raw materials and
factor inputs (land, labor, capital and entrepreneurship)
– When the price of production inputs increases, there will be
an increase in the cost of production and sellers will be
reluctant to maintain their previous level of supply

Graph 2.3 Shift in the Demand Curve to the Right

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• Taxes Supply Curve Upward Sloping
– An increase in sales tax, real estate tax and other business • Variations in the unit cost of production
taxes can increase the cost of supplying a commodity which
will in turn discourage sellers from increasing their supply Producer Cost of Production

A 5 per unit
• Technology
– Labor-intensive technology is used if the cost of labor is B 7 per unit
relatively cheap; Capital-intensive technology is used if
wages are high C 10 per unit

– Improvements in technology can lower production cost and

D 13 per unit
encourage firms to supply more
E 15 per unit
• Expectation
– If there is an expectation that the price of rice will increase – Who can supply the good, if the market price is 6? if the
next season, this will encourage farmers to plant more rice market price is 16?
now in anticipation of higher price in the future. This
expectation can also discourage rice dealers to sell rice – The previously ineffective producers at lower prices have
currently and some of them will keep a higher inventory of become more efficient and competitive as the price of the
rice currently so they can sell it in the future with higher commodity increases
returns.

Principle of Diminishing Marginal Productivity & Increasing

Marginal Costs
• A fixed factor input (capital, land) is mixed with a variable factor
input (labor), the employment of additional labor will increase the
total production but at a decreasing rate
• As the firm employs additional variable inputs, it also increases its
total cost of production. Since each additional variable input is less
productive than the previous ones, they become costlier to employ
(increasing marginal costs with the increase in output production)

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• Profit – difference between total revenue and total costs • Shift in the supply curve
• Maximum Profit – attained when the difference between total – Changes in other factors affecting supply except the price of
revenue and total costs is the widest or marginal revenue is equal to the commodity
marginal costs (marginal profit is zero) – A positive effect will shift the supply curve to the right
• As long as marginal profit is positive, there is motivation to (increase in the supply of a commodity)
increase production as this will increase profit – A negative effect will shift the supply curve to the left
(decrease in the supply of the commodity)

Changes in the Supply Curve

• Movement along the supply curve
– Change in the price of the commodity
– An increase in the price of the commodity will increase the
quantity supplied as shown by movement northeast along
the supply curve and vice versa

Graph 2.6 Shift in the Supply Curve to the Left

Determination of the Prices of Commodities

• Equilibrium Price
– When buyers and sellers transact in the market and they
agree on the price of the commodity and the amount to be
sold and bought

Graph 2.5 Movement along the Supply Curve

Graph 2.7 Market Equilibrium

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• Disequilibrium o Suppliers sell similar or undifferentiated products
– Cases when there are disagreements among buyers and o Free entry and exit
sellers on the price and quantity (excess demand and excess
supply) o Mobility of resources

o Perfect information

o Ideal market structure since it leads to an efficient use of

resources

 Monopoly
o A market structure characterized by a single seller in the
market
o Exact opposite of a perfect competition
o Enormous market power
o Unique product
o Huge profit (limiting production and setting higher price)
Graph 2.8 Excess Demand and Excess Supply
o Restrictions to entry (scale barriers and legal barriers)
o If there is only a single buyer, the market is known as a
monopsony
Contemporary Economic Issues Facing the Filipino Entrepreneur
There are 4 types of Market Structures based on the Market Power of the
actors in any transaction
Market Power  Oligopoly
 The ability of any actor or group of actors in the market to o A market structure characterized by few sellers producing
significantly influence the price in the market and the quantity to similar and differentiated products
be produced and sold
o Imperfect competition (there is competition among the few
 Aim of every actor is to enhance its market power sellers, but it is imperfect since the excess profit is only reduced
but not eliminated)
 Perfect Competition
o Interaction of these few sellers:
o A market structure where no single seller or buyer has
power to determine the price and the level of output in the – Independent actions – mimics a competitive market
market
– Collusion – forming a cartel and monopolizing the market
o Large number of buyers and sellers
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 – Since collusion is not allowed here, firms opt to react to FURTHER READING
their fellow firms’ decisions or follow the industry leader

 Monopolistic Competition Applied Economics book, read Chapter 2: APPLICATION OF

o This market structure has the elements of both competitive and DEMAND AND SUPPLY
monopolistic markets
o Imperfect competition  Lesson 2.1 Basic Principles of Demand and Supply
o Competitive (numerous sellers and buyers that can freely enter – The market
and exit the market) – Demand
o Monopolistic (product although similar, can be differentiated – The Law of demand
through advertising and packaging, which leads to brand loyalty) – Non-Price Determinants of demand
– Shifts of the curve demand
– Supply
– The Law of Supply
Market Structures an Implications for Entrepreneurs
– Non-Price determinants of supply
• If you have limited resources and productive capacity… – Shifts of the Supply curve
 Lesson 2.2 Demand and Supply in Relation to the Prices of Basic
• The firm may enter the perfectly competitive market, but the ability Commodities
to expand and find a niche is very limited – Market Equilibrium
• Thus, a monopolistically competitive market is better, although the – Determination of Market Equilibrium
firm must be cautious of potential rivals – Application of demand and supply in relation to housing
shortage
• Difficult in entering the monopolistic and oligopolistic market  Lesson 2.3 Elasticities of Demand and Supply
– Elasticity of Demand
– Price Elasticity of Supply
 Lesson 2.4 Market Structure
– Perfect Competition
– Imperfect competition
– Significance of the Market Structure
 Lesson 2.5 supply-Demand and the Philippine Labor Market
– Labor supply, population growth, and wages
– Philippine Population
– The Philippine Wage Situation
– Labor Migration and the Overseas Filipino Workers

 Lesson 2.6 Supply-Demand and the Philippine Economic Problems

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 – The Philippine Peso and Foreign Currencies
– Housing Shortage and the Real Estate Boom in the
Philippines
– Rent and Price Structure
– Savings and investment
– Rent
– Minimum Wage
– Economic Icon

 ACTIVITY 2.2
In the book provided; Applied Economics book, pages 55-56:

 Answer Summative Assessment II: A&B (provide your solution)

(20 points)

 Discussion Questions:
1. What is investment for? (5 points)
2. What condition prevents the poor from affording decent
housing? (5 points)
3. What are taxes for? (5 points)

Experiential Activity:
1. Enumerate Five (5) common public goods and services
government provides with the taxes we pay. Are the benefits of
these public goods and services worth the taxes your parents
pay? Explain. (10 points)