APPLIED

ECONOMICS
(ABM-311)
 Vision
A technologically advanced university producing professionals and competitive
leaders for local and national development.

Mission
To provide quality education responsive to the national and global needs focused on
generating knowledge and technology that will improve the lives of the people.

Core Values
In pursuing its mission, goals, and objectives, the Eastern Samar State
University officials, faculty, staff, and students adhere to the following values:

Excellence
Individual commitment to excellence is central to the values that ESSU
promotes. The university will be able to achieve excellence through
adherence to the highest standards of performance and by collaborating with
the best in the fields of instruction, research, extension, and production.

Accountability
Every member of the ESSU community is accountable for his every action,
decision, or activities and for whatever money or property the university
entrusts to him. He must accept responsibility for whatever will be the
consequences it may bring and to disclose the results in a transparent
manner. Thus, he must act with caution and utmost consideration for ethics
and honesty in the workplace.

Service
Service is the commitment of the university to serve not only its stakeholders
to provide quality instruction, research, extension, and production but also to
serve the need of every member of the ESSU community to advance their
well- being.

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 Table of Contents
Unit 1: What Economics is About
Lesson 1: Government Price Controls 1
Lesson 2: Scarcity, Choice, and Trade-offs 2
Lesson 3: Classifying the Problems Economists Study 4
Lesson 4: The Basic Economic Problems 5

Unit 2: Opportunity Cost and Resource Allocation

Lesson 1: The Cost of Any Choice We Make 7
Lesson 2: Opportunity Cost and Social Choices 8
Lesson 3: The Circular Flow of Economic Activity 9
Lesson 4: Market Price and Opportunity Cost 13

Unit 3: Demand, Supply, and Price

Lesson 1: The Market Setting 15
Lesson 2: Demand and Supply for an Entire Market 15
Lesson 3: Price Adjustment and Market Equilibrium 22

Unit 4: Government Intervention in Market Prices

Lesson 1: Government Price Controls 26
Lesson 2: Price Control during Emergencies 26
Lesson 3: Minimum Wage: A Closer Look at Price Floors 27

Unit 5: Making Economic Decisions

Lesson 1: Decision in a World of Scarcity 29
Lesson 2: A Way of Thinking about Business Decisions 30
Lesson 3: Cost and Business Decision Making 30

Unit 6: Elasticity of Demand and Supply

Lesson 1: Meaning of Elasticity 33
Lesson 2: Elasticity of Demand 34
Lesson 3: Elasticity of Supply 35

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Unit 7: External Cost and Benefits of Business Activities
Lesson 1: External Costs and Benefits 37
Lesson 2: Economic Analysis of a Business Project 40

REFERENCES 42

ANNEX: COURSE GUIDE

QUALITY POLICY

iii
 General Instructions

 Use this learning guide with care.

 Do not write, highlight, erase, alter, or tear the pages

of this module.

 In answering activities or exercises, use a separate

sheet of paper or refer to your instructor for further or
other instructions.

 This learning guide must be returned after the end of

the semester.

If this learning guide is lost and found, please return to:

EASTERN SAMAR STATE UNIVERSIT

iv
Introduction
This introductory lesson on Economics aims to familiarize students with what
Economics is about and how day-to-day decisions and transactions affect the
economy. With the current situation that the whole world is in amid the COVID-19
pandemic, it pays to be knowledgeable of the different economic theories and how
such economic conditions can affect the lives of everyone.

At the end of this chapter, you are expected to:

 Define basic economic terms
 Describe how fundamental lessons of economics can be applied
 Determine the relationship between applied economics and economic theory
and how they are closely related

The word “economics” stemmed from the Greek “oikonomia” which means
household management. “Oikonomia” was first introduced by Xenophon in his work
“The Economist”. However, in the book of Murray N. Rothbard entitled “An Austrian
Perspective on the History of Economic Thought Volume 1”, it was written that the
first economist was “Hesiod” who was accustomed to the problem of scarcity.

Today, economics is defined in different ways by many economists. Mankiw

(2001) defines economics as the study of how society manages its scarce resources.
According to Parkin et al. (2008), economics is the social science that studies the
choices that individuals, businesses, governments and entire societies make as they
cope with scarcity and the incentives that influence and reconcile those choices. In
the book of Pagoso et al. (2014), economics was defined as a social science
concerned with man’s problem of issuing scarce resources to satisfy unlimited wants.

1
 People want goods and services. Goods are physical objects such as
cellphones and cars. Services are tasks performed for others, such as cellphone
repair and laundry services.

Scarcity refers to a condition in which people are unable to obtain what they
desire due to a scarcity of resources. The things/materials that people use to produce
the commodities and services that they desire are known as resources. When the
accessible quantity of a resource is less than the desired usage, it is considered
scarce. Limited resources must be divided or allocated among their various uses.
Because resources are scarce, goods and services are scarce. Take for example the
current situation that we have now. At the start of this COVID-19 pandemic, our
needs have shifted dramatically. Surgical face masks have become essential goods
and demand for this product has increased thereby depleting the available supply of
surgical face masks. Because of the scarcity of resources, producers found it hard to
keep up with the increasing demand.

Because of the increase in demand for surgical face masks, its price has drastically
increased. Scarce raw materials in making these face masks has depleted, however,
demand is constantly increasing, thereby resulting to increase in selling price.

2
 When we are faced with scarce resources, people are forced to make
choices. Making a choice would mean prioritizing or selecting one thing over the
other. Therefore, in a world of scarcity, people will face trade-offs – wherein you are
forced to choose between two things that you can’t have or avail of at the same time.

Since the pandemic required everyone to wear face masks when going out,
people made a choice between, for example, buying face masks or food/milk tea.

A trade-off emerges for an individual due to a lack of time or money (spending

power). The scarcity of resources, like as land, labor, capital, and entrepreneurship,
causes trade-offs for society as a whole. It's worth noting that the phrase "resources"
is a subset of the broader term "inputs," which refers to everything that goes into
making commodities and services.

4
Trade-off for an individual:

Buy face mask

Choices

Scarce Resource
(Money)

Buy milk tea

Trade-off for the Government:

Infrastructure projects

Choices

Scarce Resource
(Government funds)

Funding for COVID-19

Response

5
 Economic theory is divided into broad divisions depending on a set of criteria.
There are two types of economics: microeconomics and macroeconomics, as well as
positive and normative economics. The division between microeconomics and
macroeconomics is a technique of categorizing the various types of problems
economist research according to the level of detail we want to consider. The positive
economics versus normative economics distinction is based on the purpose of
analyzing a problem.

Microeconomics studies the impact of government on choices made by

individuals and businesses, and how these choices interact in the market. On the
other hand, macroeconomics is the study of the performance of the national
economy and the global economy (Parkin, et al.).

According to Satya P. Das (2007), Microeconomics refers mostly, but not

exclusively, to the analysis of scarcity and choice problems facing a single economic
unit such as a producer or a consumer. While macroeconomics deals with the
behavior of aggregates such as real Gross Domestic Product (GDP), employment,
interest rate and so on.

According to Pagoso et al. (2014), microeconomics is concerned with the flow

of goods and services from business firms to consumers, the composition of the flow,
and the process for establishing relative prices of the component parts of the flow.
Moreover, it is also concerned with the flow of resources (or services) from resource
owners to business firms, with their evaluation, and with their allocation among
alternative uses. Macroeconomics, on the other hand, focuses on the value of the

overall flow of goods (net national product) and the value of the overall flow of
resources (national income).

Positive economics tries to figure out how the world is, whereas normative
economics explores how the world should be.

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 With scarcity, economies must deal with the three basic economic problems that
must be addressed in order to fully understand an economic system:
 WHAT to produce
- We must decide what types and quantities of items to
produce because we do not have enough resources.
 HOW to produce
- To maximize scarce resources, i.e. to create the most
output with a given number of resources, we must first
decide which methods of production will be used.
 FOR WHOM to produce
- Because the commodities and services produced are insufficient, there is
a problem with distributing them among the population.

Goods and Services

Economics is concerned with the production and distribution of goods and
services. Goods are any tangible things that people need and want, while services
are the execution of work for another person in exchange for a fee.

The milk tea you buy from your favorite Milk Tea Shops are
considered goods. Restaurants may serve food, but they are in the
service industry.

There are numerous things to choose from. Food and clothing are examples
of consumer items that satisfy human desires or necessities. Raw materials and
instruments used to make consumer goods are known as producer goods.
Machineries employed in the manufacture of commodities or producer products are
referred to as capital goods.

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 There are various services available in the market. Transportation, food
(catering services), delivery services, and health, among others.

Assessment:

1. List down at least three (3) items you have bought for yourself in
the last 2 months. How much did you spend on them? Were you
satisfied with your purchases? What other things could you have
bought with the same amount of money?
2.

SCARCITY
Cause and Effect

Listed below are some problems regarding scarcity of resources. For each
problem (cause), list the economic effects of such scarcity.

Water Scarcity in South Africa

Scarcity of Money Resources in the Government
Scarcity of COVID-19 Vaccines in the Philippines

After listing down the cause and effects of scarcity in the different
situations cited above, evaluate the economic effects of scarcity whether
they are relative or absolute and why.

3. If you were to decide for our country, how will you manage the
government’s resources amid the COVID-19 pandemic and why
so? Explain.

4. When talking about the choices we make, do you agree that

ignoring what is sacrificed to get one thing that we want is a
common mistake? Why or why not? Explain in detail.

8
Introduction
Different options are available to us. Every day, we choose the best course of
action for our hard-earned money. However, there are expenses associated with
every action made. We'll look at opportunity cost in this chapter, which is the cost of
every decision we make. We'll also look at how markets and governments distribute
society's limited resources.

At the end of this chapter, you are expected to:

 Explain the cost of every decision we make
 Define and understand opportunity cost
 Identify the different methods of allocating scarce resources, especially in the
Philippine setting

As we saw in the previous chapter, scarcity forces people to make decisions,

and every decision entails a trade-off of one thing for another. When you choose to
spend your money on a movie ticket, you are foregoing the option to spend it on
something else you value, such as a book or a new pair of socks. When you choose
to spend your time watching a movie instead of doing something else that you value,
such as exercising or studying for a forthcoming exam, you forfeit the opportunity to
accomplish something else that you value.

So, the true cost of seeing a movie is the value you place on what you could
have gotten with your money and time otherwise. This is referred to as the
opportunity cost of the option because you are foregoing the opportunity to gain
other valuable items.

Let’s take the previous example. Let’s say the government is torn between
continuing the infrastructure projects and allocating funds for COVID-19 response.
Both options are important and has a significant effect on our economy and country
as a whole. But, given the situation we are in, we have to set aside some plans in
order to respond to the needs of the health sector amid this pandemic. If the
government
9
prioritize funding for COVID-19 response, they have to give up some if not all
Infrastructure projects for the year, and allocate funding in the next fiscal year or
when the situation gets better. The opportunity cost in this example is the value
placed on the infrastructure projects that were set aside including the supposed
benefits that our government would have gained because we prioritized COVID-19
response funding.

The value we place on the best opportunity that will have to be sacrificed if
that action is done is the opportunity cost of any decision we make.

The one we must consider while making our own decisions is opportunity
cost. You must balance the importance you place on one item with the importance of
the other. The higher the potential cost of doing something, the lower the likelihood of
it being done. It is more likely that something will be done if the opportunity cost is
low.

When examining the decisions of others, we must consider the opportunity

cost. The opportunity cost, according to economists, is the relevant cost of doing any
action — the only kind of cost that influences decisions. When economists study the
behavior of individuals and businesses, they keep this in mind.

We can all agree that better education for all Filipinos is a worthy objective.
To reach this goal, more people would need to have access to decent schools. As a
result, more and better-trained instructors (labor and human capital) would be
required, as well as more school buildings and equipment (physical capital). To
improve Philippine education, we must divert resources — land, labor, capital, and
entrepreneurship – away from the production of other goods that our government
desires. We'd have greater schooling but fewer health-care services, as well as other
commodities and services that would have been produced otherwise. The value
society sets on those other commodities and services we would have to do without is
the opportunity cost of improved education.

Education is a Basic Right

Education is free from kindergarten to the 12th grade. In a sense, every

10
Filipino should have access to a free and guaranteed college education. Let's try to
decipher this statement utilizing the concepts we've learned so far.

11
 Nobel Laureate and economist Milton Friedman famously said, "There is no
such thing as a free lunch." This statement emphasizes the idea that when
governments provide products and services to citizens for free, they incur opportunity
costs. When society offers someone with a free lunch, it depletes resources. Clearly,
the effort and materials/ingredients employed in the meal preparation and
presentation might have been put to better use elsewhere.

Is public education free since parents don't have to pay for their children's
attendance at public schools? To such a question, there is no obvious answer. The
price of obtaining an education can include the price paid by the parents. However,
there is a distinct cost associated with giving education, and that cost is the provider's
cost.
The term "free" means that no opportunity is forfeited. In the case of public
education, this is not the case. Resources previously used to support public
education are no longer accessible to provide other services that we desire, such as
medical care, housing, and so on. We have lost an opportunity to deliver another
public service that we desire.

Recognizing that the government incurs opportunity costs when it delivers

something for free to someone does not tell us what actions the government will or
should make. Nonetheless, it is critical to recognize opportunity cost because we are
more likely to make poor judgments if we do not consider the sacrifices that must be
made and the chances that must be forfeited.

The interaction between enterprises and households in the market is depicted

in Figure 1. The household is provided with the goods and services by the firm in the
market. Firms make money, while consumers spend money. Households sell labor,
land, and capital, which are used by companies as inputs for production, in factor
markets. Wages, rent, and profits from businesses provide money to households.

12
 Figure 1

Factors of Production: Inputs and Outputs

Fundamental resources are required by all business enterprises, whether

profit or non-profit organizations, in order to function. To put it another way,
resources are the inputs that are used to create outputs. The following are some of
these factors or resources:

Land and other natural resources

Labor (physical and mental)
Capital, including buildings and equipment
Entrepreneurship

The factors of production accessible to the economy are used to produce

goods and services.

Land and Natural Resources

Natural resources have two distinct features. One is, they are natural, in a
sense that they occurred/made naturally by nature without any human intervention.
Second is that, they can be utilized in the creation/production of goods and services.

13
However, in the proper utilization of natural resources, we must consider the
environmental implications of using such resource in order to avoid damaging the
environment.

Take for example the case of trees. There are so many uses for trees, from
wood to paper to pens. This kind of natural resource is so diverse that may trees are
cut down in order to keep up with the demand. However, trees are also considered
protectors of forests. They serve as a habitat for various species of birds and other
animals including insects. They are also the one naturally producing oxygen and
providing people and animals alike with different food (fruits and nuts). If we continue
to cut trees without planting new ones, we will be left with a tree-less world, which will
then result to devastating effects to our climate and environment.

Defining anything as a natural resource only if it can be utilized to

manufacture goods and services does not imply that a tree or a mountain are only
useful for their mineral resources. If the presence of a beautiful wilderness region is
useful to humans, then that wildness is providing a service. As a result, the
wilderness is a natural resource.

There are three strategies to increase the amount of natural resources

available to people. One example is the finding of new natural resources, such as the
discovery of a titanium ore deposit. The second is the finding of new applications for
resources, such as when new techniques enabled the productive use of oil or the use
of sand in the manufacture of computer chips. The third step is to find innovative
ways to harvest natural resources so that they can be used. The world's supply of
this crucial natural resource has expanded thanks to new technologies of identifying
and mapping oil sources.

Labor

Labor refers to human effort that can be used to manufacturing. Teachers,

doctors, chefs, nurses, lawyers are all employed in the economy. Unemployed
people who are unable to find work but are willing to are also considered part of the
pool of the economic workforce.

It can be useful in some cases to distinguish between two kinds of labor. The
first is the human equivalent of a natural resource. It is the natural ability of an

14
uneducated, unskilled person to contribute to a specific industrial process. However,
the majority of employees bring significantly more to the table. Human capital refers
to a worker's talents that can be utilized in production as a consequence of
education, training, or experience. Students who attend college or university are
developing their human capital. Human capital is acquired by workers who learn skills
via experience or training. Children who learn to read are developing their human
capital.

There are two ways to increase the amount of labor present in a market. One
approach is to increase total labor supply by increasing the number of people
available to work or the number of hours worked per week on average. The other
alternative is to increase the amount of human capital available to employees.

Capital

The most common misconception when we say capital is that it means

money. But in economics, money is not considered capital. The conditions in order
for a resource to be considered a capital resource are the following:

The resource must have been produced.

The resource can be used to produce other goods and services.

Money does not meet the second condition. It could not DIRECTLY be used
to produce goods and services. For example, you cannot produce clothing with using
money directly, right?

Money and other “paper” assets are financial

resources that does not quality as a capital resource, but they can be used to
purchase different factors of production such as the machinery (sewing machine)
used in our example above.

15
The Entrepreneur

The three factors of production discussed above can only be converted into a
final product or commodity through entrepreneurship. Entrepreneurs have the ability
to discover more effective ways of organizing resources to produce the goods and
services that consumers desire. They also the incentive to gather and apply the best
possible information and to think about new producers and new technology.

How Markets Coordinate Household and Firm Decisions

In a market economy, households and businesses make decisions, and

markets utilize price adjustments to coordinate those decisions. This procedure
demonstrates why a market economy uses the price system to determine who
receives what from available resources. Prices fluctuate in reaction to shifts in
customer preferences and manufacturing technologies, resulting in resource
reallocation. In other words, the market acts to raise prices to a level that allows
households and businesses to coordinate their autonomous decisions.

When prices are free to adapt to market forces and the price system works
efficiently, information about the opportunity cost of producing a good is represented
in prices. Assume that Resource A is used to make bread and cookies. If consumers
value cookies highly, then using Resource A to make bread has a high opportunity
cost. Strong demand for Resource A from cookies producers, on the other hand, will
drive up the price of Resource A, raising the cost of bread production. Because of the
greater production costs, the market price of bread will rise.

In a well-functioning market, commodities and services with high

opportunity costs of production will also have high prices. As a result, commodities
and services with low opportunity costs to produce will have low prices.

Resource Allocation in the Philippines

In the Philippines, the market is the most common means of allocating

resources. The majority of the markets where Filipinos perform their majority of their

16
trading are disorganized jumbles of buyers and sellers. Take, for example, the rice
market. Millions of Filipinos are buyers, while tens of thousands of retail businesses
are sellers. The merchants are aware that the purchasers have a variety of stores to
choose from.

However, the Philippine economy is a different story. There are numerous

examples of command-based resource allocation. Many economic decisions in
families and businesses are decided on the basis of command. In the larger
economy, the government has a significant role in resource allocation, particularly in
choosing what should be produced with society's resources and who should receive
it. Various levels of government collect a portion of our earnings as taxes and then
use the funds to provide services – educational, health, law enforcement, and so on
– that would have been underserved if left to the market. The government also
regulates corporate operations and influences market prices in a variety of ways. The
government strives to redress inequities in the distribution of income and wealth
through its taxes and expenditure systems.

Assessment:

1. Explain the link between scarcity of time or money.

2. Why is it critical to acknowledge that there is no such thing as free

medical care, free housing, or free bridges (“there is no charge to
cross

17
Introduction
To completely comprehend and analyze economic circumstances, it is
necessary to investigate demand and supply in terms of their response to changes in
their drivers. In a competitive market, the elasticities of demand and supply with
regard to price will be discussed in this chapter.

At the end of this chapter, you are expected to:

 Describe the nature of a competitive market

 Describe how demand and supply models can be used to estimate the
potential effects on various markets.
 Identify how supply and demand determine the price of an item and the
quantity bought and sold.

The market is made up of buyers and sellers who are forced to make
decisions in the face of shortage. They try to acquire and sell on the best possible
conditions. Buyers inquire about the many sorts of goods and services available, as
well as the costs they must pay. Sellers want to know what kinds of goods and
services buyers want and how much they're ready to pay for them. The interaction
between buyers and sellers determines how much and at what price can be bought
and sold.

Markets allow buyers and sellers to interact, share information, and trade.
The exchange of information between buyers and sellers is stimulated by
competition, allowing them to buy and sell on the best terms feasible.

DEMAND

The term "demand" refers to the whole relationship between a good's price

18
and the amount demanded.

19
 The quantity of a product that consumers are willing to purchase is known as
demand.

The quantity desired of an item or service is the amount that customers intend
to buy at a specific price over a specific time period. The quantity required does not
always correspond to the quantity purchased. When the quantity needed exceeds the
quantity of items available, the quantity purchased falls short of the quantity required.

Law of Demand

According to the Law of Demand, when prices rise, the amount demanded
decreases. The quantity demanded rises as prices fall. Prices and the quantity
demanded have an inverse relationship. The law of supply and demand can be
compared to a seesaw. As one side (prices) rises, the other side (prices) declines
(quantity demanded).

Demand Schedules and Demand Curves

Techniques for representing the demand-price relationship include demand

schedules and demand curves. While attention is focused on demand and price,
other factors of demand like as tastes, incomes, and the prices of replacements and
complements are held constant. In other words, purchasers' willingness and ability to
buy remain the same while attention is focused on how they would react to various
price levels.

Demand Schedule

A demand schedule states the relation between two variables of price and
quantity. Table 1 is an example of a demand schedule, which indicates the quantity
consumers want to buy at each price.

Table 1
Demand Schedule
Price (PhP) Quantity (units)

10 1,000

9 2,000

8 3,000

7 4,000

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 The table may read this way: If the price is PhP10, the number of units that
would be bought is 1,000. If the price is PhP9, the quantity would be 2,000 units. If
the price is PhP8, the quantity would be 3,000 units and if the price is PhP7, the
quantity would be 4,000 units. The schedule does not specify the price of the
commodity. It only tells the amounts that would be bought at different possible prices.
It also shows that the lower the price, the greater amount would be purchased.
Similarly, the higher the price, the smaller amount would be bought.

Theoretically stated in another way, price and quantity demanded are

inversely or negatively related. This is what we call the law of demand. This law has
been confirmed by many empirical investigations. Intuitively, this phenomenon may
be explained this way: At a given time in a given market, people will not buy more of
a commodity unless its prices becomes lower. The lower price makes it attractive for
those persons who are already buying some of the commodity to buy more of it and
causes other person to start buying some of the commodity. Of course, this is only
true in theory because to make the law stand, we have to assume that all other
determinants of demand are held constant which is not possible in real life.

Demand Curves

Price-demand relations can also be illustrated geometrically. It is just a matter

of transforming the demand schedule which shows the relation in numbers into a
demand curve. Figure 1 shows a demand curve. Adopting the example given in
Table 1, price is plotted on the vertical axis and quantity on the horizontal axis.

Figure 1
Demand Curve

12
10
Prices in Php

6
D
4

0
1 2 3 4 5 6
Quantity in
Thousands

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 The line D is a demand curve. It was drawn by connecting the points where a
set of given possible prices are intersected with their corresponding quantities. The
demand curve may be read in the same manner as in reading the demand schedule.
The only difference is we trace in the curve where a certain price, shown in the
vertical axis, intersects with the quantity, shown in the horizontal axis. By looking at
the price of PhP10, we can see that the quantity is 1,000 units. Similarly, at the price
of PhP8, the quantity is 3,000 units.

The Six Determinants of Demand

Demand determinants are variables that influence demand. We already know
that pricing influences or changes the quantity required. Tastes or preferences,
income, the substitution impact, the price of complementary items, population, and
consumer expectations, on the other hand, influence demand.

Taste or Preference

When you go to the mall to look for clothes, you buy the exact type of clothing
according to your taste and preference. Other people may not spend money for that
exact same clothing, but for you, it is perfect.

Taste and preference can be defined as individual inclination towards a

specific object, that cannot be dictated by any other factor that your own perception.

Income
When looking at the second determinant, income, we must consider the two
types of goods:

 Normal good – These are goods that people usually buy more of it when
there is an increase in their income.
 Inferior good – These are types of goods that people consume less when
their income increases.

The effect brought about by changes in income alters demand by allowing

customers to buy products that they would not typically buy because they could not
afford it.

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The Substitution Effect

Before the pandemic, we have personal brand preferences. However, on the

onset of the pandemic, we are now forced to buy generic brands since the brand that
we normally purchased pre-pandemic have greatly increased in price. This is what
we call the substitution effect. The brand that we once desired has now increased
their prices, so we find substitute/alternative products.

The Price of Complementary Goods

A car tire is a good example of complementary good. A car cannot function

forever without changing its tires. If, for example, the price of cars dramatically
increases, then there is a subsequent decrease in demand for car tires.
Complementary goods are goods that are used together or in conjunction with each
other.

Population

An increase or decrease in a country’s population will ultimately affect the

demand for products or services. A decrease in population, for example, would result
to decrease of demand for certain products and services.

Consumer Expectations

Future event expectations influence present demand for an item or service. If

LPG prices are projected to grow in the near future, demand for LPG will rise today. If
LPG prices are projected to fall in the near future, demand for LPG will fall today.

Note: An increase in demand is demonstrated on a graph by a shift to the right, while

a decrease in demand is indicated by a shift to the left.

SUPPLY

The supply of a product is the quantity of goods that sellers are willing to sell.

The quantity supplied of a commodity is the amount that manufacturers

intend to sell at a specific price within a given time period. The quantity given may or
may not
23
be the same as the quantity sold. When the amount supplied exceeds, the quantity
sought, the quantity purchased is less than the quantity delivered.

Law of Supply

According to the Law of Supply, the higher the price, the higher the amount
produced. When the price of a commodity falls, the quantity of that good falls as well.
Consider the law of supply as a set of scales. Prices are on one hand, while quantity
supplied is on the other. The opposite hand (prices) follows the rising or falling of one
hand (quantity supplied).

Supply Schedules

Like demand schedule, supply schedule is a relation between price and

quantities for a given commodity in a given market, and in a given period of time. It
indicates the quantity seller want to sell at each given price. The quantities are
dependent on prices only while all other variable that may affect quantity are held
constant. The variables that can determine quantity include the prices of closely
related commodities, the prices of the inputs that are needed in producing the
commodity, by forces such as the weather and other uncontrollable disturbances,
etc.

Table 2 presents a hypothetical supply schedule. The data in the table can be
imagined as applying to the sellers of rice grains of a particular brand in a particular
market on a particular day. Take note that the higher the price, the larger the quantity
and the lower the price, the smaller the quantity. This indicates a positive or direct
relationship between price and quantity. This relation generally holds in supply
schedules, but there are exceptions since there can be supply schedules where
larger quantities are sold at lower prices. This will be explained later.
Table 2
Supply Schedule
Price (Php) Quantity (Cavans)
1,500 500
1,400 550
1,300 600
1,200 650

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Supply Curves

Supply curves are drawn to show a smooth, continuous relation between

price and quantity. Like demand curves, supply curves may be straight lines or
curves. Figure 2 shows two supply curves, the S1 and the S2 curves. Both curves
have positive slopes since they go up to the right. Let us first consider the S 1 curve.
One price is shown in the figure, the price OP. At this price, the amount supplied is
PA. It is evident that more would be supplied at higher prices, and less would be
supplied at lower prices. The curve S2 signifies that there is a change in supply. An
increase in supply results in the shift of the entire supply curve or a rightward shift
from S1 to S2. At the given price of OP in S 2, more is supplied at PB. This is also true
with other points in S2. To illustrate a decrease is supply, the reverse would apply.

Figure 2
Supply Curves
Price

Quantity

The Six Determinants of Supply

Input Prices

The supply curve of a company is determined by its production costs. If a

company makes furniture and the price of wood rises, the company has no choice
but to reduce its output or raise the price of the furniture. Either choice alters the
supply curve of the company. A firm's supply curve will alter if the cost of land, labor,
or capital increases or lowers.

Producers’ Expectations

There may be changes in the prices of raw materials. Producers can

sometimes foresee these changes, resulting to a shift in their supply curves. Let’s
take for example a cabbage farmer in Baguio. If he is expecting a more intense
“Amihan”,
25
then he may try to harvest more cabbage to compensate for a future shortage. His
supply curve as a producer, ceteris paribus, will shift to the right.

Technology

Advancement in technology has dramatically changed the business

landscape. Production cost became less expensive because of these advancements.
If a cheaper alternative for LPG was invented, how would it affect the supply for the
regular LPG? Its supply curve would shift to the right, and there will be a decrease in
the price of LPG. With technology, we can use raw materials more efficiently,
lowering the opportunity cost.

*Opportunity cost is the foregone opportunity of choosing an alternative

A Change in the Price of Other Goods

If a supplier made leather bags and leather shoes, and the price of leather
shoes rose due to increase in demand, the supplier may choose to make fewer of
their leather bags and more of their leather shoes.

The Number of Suppliers

When there are more suppliers of a certain commodity in the market, it will
definitely increase the supply for that specific commodity, then supply curve then
shifts to the right.

Government

Governments have very significant effects to the supply of goods and

services. Taxes may make it difficult for producers to supply goods, on the other
hand, subsidies for products that benefits the general public can help producers
supply more of these products.

Note: A shift to the left means there is a decrease in supply and demand. On
the other hand, a shift to the right indicates an increase in supply and demand.

26
 When there is a mismatch between the quantity buyers choose to purchase
and for the quantity sellers choose to sell, a market shortage of surplus will result.

Shortages

If a law is enacted to limit price increases, a ceiling price or a maximum price,

may be imposed. This way, shortages can continue for long period of time. With
ceiling price imposition, seller would be unwilling to sell the quantity consumers want
to buy. When price increases and sellers’ costs change, shortages disappear.
Without the price ceiling, no shortages would occur because higher prices would
induce consumers to buy less even if seller would want to sell more. Regulations to
keep prices from going up usually create shortages.

Figure 3 provides a simplified illustration on how ceiling price operates. At a

ceiling price of Pm, the quantity demanded of D1 and supplied of S match at PmA
where there is no shortage or surplus. However, if demand would increase to D 2, a
shortage would occur because the quantity supplied would not change due to the
ceiling price. Quantity supply may increase only if there is a corresponding rise in
price.

Figure 3
Effect of Ceiling Price
Price

Quantity

Surpluses

When the government sets a floor price or a minimum price for a given
commodity, producers may be induced to produce more of the commodity which can

27
result in a surplus. When producers produce an amount of a commodity in excess of

28
what the consumers would be willing to buy, the price is said to be above the
equilibrium price. The size of the excess depends on the gap between the floor price
and equilibrium price and the shapes of the demand and supply curves. If the floor
price is maintained at a constant figure, the surplus may vary from time to time as
demand and supply change. At some point in time, the equilibrium price may rise
above the floor price so that surplus may temporarily disappear.

The Equilibrium Price

The equilibrium price in the market period is the price that equates the
quantity demanded with the quantity supplied. At this price buyer are willing to buy a
certain amount. Sellers are will to sell exactly the same amount. In this case, there is
no surplus and no shortage. Hence, the market is cleared. However, if the equilibrium
price is too high, some buyers may be dissatisfied. In the same manner, if the
equilibrium is too low, some seller may be disgruntled.

Figure 4 will help you visualize the determination of the equilibrium market
price. In some market in some short period of time, D and S are the demand and
supply curves. The two curves intersect at point A, which corresponds to the price
OP and to the quantity sold P 1A. At price OP1, demand and supply are equal. At
higher price, such as OP2, the quantity demanded is P2B and the quantity supplied is
P2C, giving rise to a surplus of BC since the quantity supplied is greater than the
quantity demanded. This situation forces the price to go down to its equilibrium level.
In like manner, at price P3 the quantity supplied of P3E is lesser than the quantity
demanded of P3F, resulting in a shortage of supply in the market. This would force
the price to go to its equilibrium level of a higher price if the consumers would like to
continue buying the same amount of the commodity. As long as prices can adjust,
there can be no such thing as a surplus or shortage. There will always be some price
that matches the intention of the buyers and sellers.

29
 Figure 4
Equilibrium of Demand and Supply

Price

Quantity

The movement of prices plays the important role of signaling producer and
consumers to change their selling and buying activities. An increase in consumer
desires causes demand to increase. The increase in demand causes the equilibrium
price to rise. Higher prices signal producers to offer a larger quantity for sale. The
higher price both carries the information that consumer now values the product more
highly and gives producers appropriate incentives to sell more.

Assessment:

1. Rice is in short supply in some parts of the country, while there is a

surplus in others. Why do various regions have shortages and
surpluses at the same time?

2. Explain why the number of word processors and other computer

software applications available on the market increases from year to
year using supply and demand concepts.

30
 BOOKS

Carnaje, G. P. (2016).
Applied Economics. Quezon City: Vibal Group Inc.
Gabay, B.K., Remotin Jr., R.M., & Uy, E.A. (2007).
Economics: Its concepts and principles. Manila: Rex Bookstore.
Mankiw, N.G. (2007).
Principles of microeconomics. Connecticut: Thomson South-Western
Klein, G., & Bauman, Y. (2010).
The cartoon introduction to economics: Volume One: Microeconomics. New
York: Hill & Wang.
Colander, D. (2012).
Microeconomics. New York: McGraw-Hill/Irwin.
Pagoso, C., Dinio, R., & Villasis, G. (2006).
Introductory to microeconomics. Manila: Rex Bookstore.
Parkin, P. & Bade, R. (2003).
Microeconomics. (5th Ed). Toronto: Pearson Education Canada, Inc.
Sowell, T. (2011).
Basic economics: A common sense guide to the economy. (4th Ed). New
York: Basic Books.

WEB SOURCES

Google: www.economicshelp.org

31
 COURSE GUIDE
Course: Applied Economics Semester Second SY 2021-2022
Class Schedule: Instructor:
Course Description
This course in Applied Economics has been designed to give students a working knowledge of
Economics, the social science that deals with the optimal use of scarce material resources to
maximize the satisfaction of human material needs and wants. This course deals with the basic
principles of applied economics, and its application to contemporary economic issues facing the
Filipino entrepreneur such as prices of commodities, minimum wage, price ceilings and price
floors,
and taxes. It covers an analysis of industries for identification of potential business opportunities.
Course Outline
SCHEDULE TOPIC
What Economics is About
Week 1-2  What is Economics?
 Scarcity, Choice, and Trade-Offs
 Classifying the Problems Economists Study
Opportunity Cost and Resource Allocation
Week 3-5  The Cost of Any Choice we Make
 Opportunity Cost and Individual Choices
 Opportunity Cost and Social Choices
 Basic Economic Problems
 The Circular Flow of Economic Activity
 Market Price and Opportunity Cost
 Resource Allocation in the Philippines
Demand, Supply, and Price
Week 6-8  The Market Setting
 Demand and Supply for an Entire Market
 Price Adjustments and Market Equilibrium
Week 9 MIDTERM
Government Intervention in Market Prices
Week 10-12  Government Price Controls
 Price Control during Emergencies
 Minimum Wage: A Closer Look at Price Floors
Making Economic Decisions
Week 13-15  Decision in a World of Scarcity
 A Way of Thinking about Business Decisions
 Cost and Business Decision Making

Elasticity of Demand and Supply

Week 16  Meaning of Elasticity
 Price Elasticity of Demand
 Elasticity of Supply

External Costs and Benefits of Business Activities

Week 17  External Costs and Benefits
 Economic Analysis of a Business Project
Week 18 FINAL EXAM
Course Requirements
Course Learning Outcomes Required Output
CLO1. Apply fundamental lessons in economics - Chapter Exercises
CLO2. Describe how Applied Economics and - Midterm and Final Examinations
economic theories are closely related and how it can
solve economic problems
CLO3. Critically reflect on the broader social
consequence of economic decision making
CLO4. Relate economic theory to real world social
32
and economic problems
CLO5. Formulate recommendations and strategies
on how to minimize and maximize a business’
negative impact and positive impact, respectively.
Course Policies Grading System
As student enrolled in the course you are required to
follow the following policies: There will be 2 rating periods: Mid-term
and Final Examinations.
1. All students are required to finish and pass
all the required outputs within the given amount of
time. 1. The grades for each rating period
shall be computed as:
2. Students are required to not write anything
on the given handout and use a separate yellow
60 %- Course Requirements
paper in answering all the chapter Exercises.
(Chapter Exercises)
3. Compilation of chapter exercises must be
40% - Major Examinations
placed in a folder labelled with student’s NAME,
STUDENT NUMBER, COURSE and SECTION, and 2. Average Grade = (Midterm + Final
the NAME of your Instructor. Grade)/2
4. Students are encouraged to contact their
instructors. Contact details can be found in this
course guide.
5. All students are required to conduct
themselves in an academically honest manner.
Misrepresenting someone else's work as your own,
taking credit for someone else's words or ideas,
obtaining advanced knowledge on secret test
materials, or acting in a way that could jeopardize
another student's academic achievement are all
examples of academic dishonesty. After three (3)
academic dishonesty violations, these students will
get an automatic 5.0 grade.
6. Do all the self-assessment task in the
learning material, and make sure to attend the
scheduled periodical examination which will be
announced ahead.
7. Other course policies will be based on the
student handbook.
References

1. Carnaje, G. P. (2016). Applied Economics. Quezon City: Vibal Group Inc.

2. Gabay, B.K., Remotin Jr., R.M., & Uy, E.A. (2007). Economics: Its concepts and principles.
Manila: Rex Bookstore.
3. Mankiw, N.G. (2007). Principles of microeconomics. Connecticut: Thomson South-Western
4. Klein, G., & Bauman, Y. (2010). The cartoon introduction to economics: Volume
One: Microeconomics. New York: Hill & Wang.
5. Colander, D. (2012). Microeconomics. New York: McGraw-Hill/Irwin.
6. Pagoso, C., Dinio, R., & Villasis, G. (2006). Introductory to microeconomics. Manila: Rex
Bookstore.
7. Parkin, P. & Bade, R. (2003). Microeconomics. (5th Ed). Toronto: Pearson Education
Canada, Inc.
8. Sowell, T. (2011). Basic economics: A common sense guide to the economy. (4th Ed). New
York: Basic Books.
9. Google: www.economicshelp.org
Students enrolled in the course may contact the assigned faculty during working hours, thru:
Facebook/Messenger : Jessa Oray
E-mail Address : [email protected]
Mobile Phone Number : 0905-765-0714

33
 Quality Policy
We commit to provide quality instruction, research, instruction, and production
grounded on excellence, accountability, and service as we move towards exceeding
stakeholders’ satisfaction in compliance with relevant requirements and well-defined
continual improvement measures.

“De kalidad nga edukasyon,

kinabuhi nga mainuswagon.”

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