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[email protected] Applied
Economics
1st Quarter
Week 4 Module
This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at your own pace and time. You will be enabled to
process the contents of the learning resource while being an active learner.
This module has the following parts and corresponding icons:
This part includes introduction, most essential
LET’S START
learning competency / objectives of the whole
module.
This part includes an assessment that aims to
LET’S TRY check what you already know about the topic to be
learned.
This part includes a brief discussion of the lesson.
LET’S LEARN This aims to help you discover and understand
new concepts and skills.
This part includes a brief discussion of the lesson.
LET’S EXPLORE
This aims to help you discover and understand
new concepts and skills.
This part includes an overall idea of the topic of
LET’S WRAP UP the whole module for better understanding.
This part includes a task which aims to evaluate
LET’S CHECK your level of mastery in achieving the learning
competency.
REFERENCES This part includes a list of all sources used in
developing this module.
REMINDERS:
o Don’t forget to type/write your name on the bottom part of the 1st page of this
module.
o Answer all the activities included in this module.
o If you will submit the module online, make it in a PDF file to prevent the
collision of pictures and text, as well as to prevent the file formatting.
GOOD LUCK AND GOD BLESS!
This module was written for you to accomplish at home. It was carefully designed
so that you can work at your own pace and allow self-discovery of the concept through
activities that you will perform. Activities were also selected to allow independent
learning which also aims to develop students’ reading comprehension skills through
understanding written texts.
After going through the module, you are expected to:
1. determine the implications of market pricing on economic decision-making
2. determine the implications of market pricing in making economic decisions
3. explore the elasticity of demand and supply
4. solve problems on price elasticity of demand and supply
d. value the implications of market pricing in decision making
Directions: Read the sentences carefully. Write TRUE if the statement is correct and
FALSE if the statement is incorrect.
__________1. Elasticity of demand refers to the change in demand when there is a
change in another factor such as price or income
__________2. If demand for a good or service is static even when the price changes,
demand is said to be inelastic
__________3. Examples of elastic goods include gasoline, while inelastic goods are
items like canned goods and vitamin c tablets
__________4. The law of demand states that “elasticity shows how much a good or
service is demanded relative to its movement in price”.
__________5. Inelastic demand is when a demanded quantity for masks changes by a
greater percentage compared to its percentage change in price
__________6. The opposite of a market economy is a planned economy, where
investment and production decisions are decided by the government.
__________7. Unit elastic is when a percentage change in demand equals the price.
__________8. A mango fruit with an elastic demand gets more sales when its price
drops slightly. When its price goes up, it stays longer in the box.
__________9. The demand curve shows how quantity demanded for apple responds to
price changes. The flatter the curve, the more elastic is the demand for an apple.
__________10. The midpoint elasticity is greater than 1.
LESSON 4:
IMPLICATIONS OF MARKET
PRICING IN MAKING ECONOMIC
DECISIONS
THE MARKETING PRICE SYSTEM
A shortage is when there is an excess demand for the quantity supplied. While
surplus is excess in supply.
For example, if there are 10 bottles of water and there are 20 students who want
drinking these, then there will be only 10 students whose demands are met while the
others will not be able to be given anything. There is shortage in the supply.
If producers make too many bottles of water and consumers cannot by them
want to buy them, there will be surplus.
PRICE SYSTEM IN A MARKET ECONOMY
Let us find out more about the price system. We have learned that demand is
the willingness of the consumers to buy goods and services. In economics, the
willingness to buy goods and services should be accompanied by the ability to buy, also
called the “purchasing power”. This is referred to as an effective demand (source:
Investopedia).
PRICE SYSTEM IN A MARKET ECONOMY: ITS CHARACTERISTICS
Let us learn more! The prices of goods that we encounter every day to the things
we buy plays a crucial role in determining an efficient distribution of resources in a
market system. The prices will help us to make every day economic decisions about our
needs and desires. They are the indications of the acceptance of a product; the more
popular the product, the higher the price that can be charged.
PRICES ARE MARKET DRIVEN
PRICE ELASTICITY OF DEMAND AND SUPPLY
CATEGORIES OF PRICE ELASTICITY
According to Agarwal, P. (2018) and Judge, S. (2020), there are four categories of price
elasticity are the following:
I. The Price Elasticity of Demand
Price elasticity of demand is the responsiveness of quantity demanded, or how much
quantity demanded changes, given a change in the price of goods or services.
*The mathematical value is negative. A negative value indicates an inverse
relationship between price and the quantity demanded. But the negative sign is
ignored (Judge, S. 2020).
*The mathematical value is negative. A negative value indicates an inverse
relationship between price and the quantity demanded. But the negative sign is
ignored (Judge, S. 2020).
a) Elastic Demand (PED > 1) - the percentage change in price brings about a more than
proportionate change in quantity demanded.
b) Inelastic Demand (coefficient of the elasticity is less than 1) – is when an increase
in price causes a smaller % fall in demand.
c) Unitary Elastic Demand - When the percentage change in demand is equal to the
percentage change in price, the product is said to have Unitary Elastic demand.
*Unitary elastic - PED or the price elasticity of demand is 1
d) Perfectly Elastic - a small percentage change in price brings about a change in
quantity demanded from zero to infinity.
*Perfectly elastic - the coefficient of elasticity is equal to infinity (∞)
e) Perfectly Inelastic - the PED is =0 any change in price will not have any effect on
the demand of the product.
*Perfectly inelastic - the percentage change in demand will be equal to zero (0)
POINT ELASTICITY
a) The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction
in the total revenue of the firm.
b) The demand curve is linear (straight line), it has a unitary elasticity at the midpoint.
The total revenue is maximum at this point.
c) Any point above the midpoint has elasticity greater than 1, (Ed > 1).
II. The Income Elasticity of Demand (YED)
The income elasticity of demand is the relationship between changes in quantity
demanded for a good and a change in real income.
III. Cross Price Elasticity of Demand or (XED)
Cross price elasticity of demand is he effect on the change in demand of one good as a
result of a change in price of related to another product.
IV. Price Elasticity of Supply (PES)
The measure of the responsiveness of quantity to a change in price. It is the percentage
change in supply as compared to the percentage change in price of a commodity.
PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 Price
PRICE ELASTICITY OF SUPPLY
Determinants of Price Elasticity of Supply
Agarwal, P. (2020) said, price elasticity of supply can be influenced by the following
factors:
1. Marginal Cost- If the cost of producing one more unit keeps rising as output rises or
marginal cost rises rapidly with an increase in output, the rate of output production will
be limited. The Price Elasticity of Supply will be inelastic - the percentage of quantity
supplied changes less than the change in price. If Marginal Cost rises slowly, supply will
be elastic.
2. Time - Over time price elasticity of supply tends to become more elastic. The
producers would increase the quantity supplied by a larger percentage than an increase
in price.
3. Number of Firms - The larger the number of firms, the more likely the supply is
elastic. The firms can jump in to fill in the void in supply.
4. Mobility of Factors of Production- If factors of production are movable, the price
elasticity of supply tends to be more elastic. The labor and other inputs can be brought
in from other location to increase the capacity quickly.
5. Capacity - If firms have spare capacity, the price elasticity of supply is elastic. The
firm can increase output without experiencing an increase in costs, and quickly with a
change in price.
Directions: Please analyze the problems carefully. Answer the problems and present
your solutions. Interpret the results.
Part I. Problem Solving and Critical Thinking Analysis
1) If there are 10 bottles of water and there are 20 students who want to drink these
bottles of water, there will be only 10 students whose demands are met while the others
will not.
Analysis: We can conclude that there is _____________________ in the supply.
2. If price of canned good in the grocery store increases by 8% and the quantity
demanded decreases by 12%, what is price elasticity of demand? Is it elastic, inelastic
or unitary elastic?
Solution:
Interpretation: This means it is ____________________________________
3. If a 4% increase in price of 1 pack of bread leads to an increase in the quantity
supplied of 8% describe the price elasticity.
Solution:
Analysis of Price elasticity: ________________________________________
Part II. Solving Problem on Price Elasticity
Directions: Analyze each problem carefully. Answer the questions below.
1. Suppose the price of ethyl alcohol rises by 20 %. As a result, the demand for
substitute hand soap rises by 10 %.
A) What is the cross-elasticity of demand for hand soap with respect to the price of ethyl
alcohol? Encircle your answer. Present your solution
A) + 2 B) + 0.5 C) - 0.5 D) – 2
B) Analysis on price elasticity _________________________________________
C) Interpret your analysis on the kind of good__________________________
2. If a 20% decrease in the price of international calls lead to a 35% increase in the
quantity of calls demanded, we can conclude that the demand for phone calls is:
A) Solution:
B) Analysis on price elasticity __________________________________
A demand curve shows the relationship between quantity demanded and price in
a given market on a graph.
The law of demand states that a higher price typically leads to a lower quantity
demanded.
A supply curve shows the relationship between quantity supplied and price on a
graph.
The law of supply says that a higher price typically leads to a higher quantity
supplied.
The equilibrium price and equilibrium quantity occur where the supply and
demand curves cross.
The equilibrium occurs where the quantity demanded is equal to the quantity
supplied.
If the price is below the equilibrium level, then the quantity demanded will exceed
the quantity supplied.
Excess demand or a shortage will exist. If the price is above the equilibrium level,
then the quantity supplied will exceed the quantity demanded.
Excess supply or a surplus will exist. In either case, economic pressures will
push the price toward the equilibrium level.
Directions: Read the sentences carefully. Write TRUE if the statement is correct and
FALSE if the statement is incorrect.
__________1. The opposite of a market economy is a planned economy, where
investment and production decisions are decided by the government.
__________2. Inelastic demand is when a demanded quantity for masks changes by a
greater percentage compared to its percentage change in price
__________3. Unit elastic is when a percentage change in demand equals the price.
__________4. The law of demand states that “elasticity shows how much a good or
service is demanded relative to its movement in price”.
__________5. A mango fruit with an elastic demand gets more sales when its price
drops slightly. When its price goes up, it stays longer in the box.
__________6. Examples of elastic goods include gasoline, while inelastic goods are
items like canned goods and vitamin c tablets
__________7. The demand curve shows how quantity demanded for apple responds to
price changes. The flatter the curve, the more elastic is the demand for an apple.
__________8. If demand for a good or service is static even when the price changes,
demand is said to be inelastic
__________9. The midpoint elasticity is greater than 1.
__________10. Elasticity of demand refers to the change in demand when there is a
change in another factor such as price or income
FOR CONTENT:
ABM-APPLIED-ECONOMICS-12_Q1_W3_Mod3.pdf
Articles:
Agarwal, P. (2018) Price Elasticity of Supply. Retrieved on June 04 2020 from
https://www.intelligenteconomist.com/price-elasticity-of-supply
Amadeo, K. (2020) Elastic Demand with Its Formula, Curve, and Examples Retrieved
on June 04 2020 from https://www.thebalance.com/elastic-demand-definition-formula-
curve-examples-3305836; https://www.thebalance.com/inelastic-demand-definition-
formula-curve-examples-3305935
Judge, S. (2020) Characteristics of the Price System in a Market Economy. Retrieved
on June 04 2020 from https://study.com/academy/lesson/characteristics-of-the-price-
system-in-a-market-economy.html
Pettinger, T. (2019) Role and Function of Price in Economy Retrieved on June 04 2020
from https://www.economicshelp.org/blog/1170/economics/role-and-function-of-price-in-
economy/
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