Mahaplag NHS – Unified Learning Activity Sheet

(Mahaplag NHS - ULAS)

1
 LEARNING ACTIVITY SHEET
IN APPLIED ECONOMICS
Quarter 3 (Week 4)

Note: Please do not write anything on this LAS.

I. Learning Competency (LC Code)

*Determine the implications of market pricing on economic

decision-making

II. Background Information

Market Pricing on Making Economic Decisions

Please read this article on Demand, Supply and Elasticity of Clean Water in
the Philippines. This will help you understand better our new lesson. Enjoy reading!

The Marketing Price System

Last module, we talked about the market demand, market supply and market
equilibrium. In our new topic, we will link more of these variables to the market
price system. For example, in the article above, the causes and effects of the water
shortage around the Philippines could be best explained if we could understand the
concepts of demand and supply elasticity of the clean water.
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

2
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

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).

Equilibrium Characteristics
Equilibrium is a point of balance or a The supply and demand are balanced in
point of rest. It is also called “market- equilibrium.
clearing price”.

Equilibrium price is the price at which The economic forces are balanced and
the producer can sell all the units he in the absence of external influences,
wants to produce, and the buyer can the (equilibrium) values of economic
buy all the units he wants. variables will not change.

Quantity demanded and quantities The amount of goods or services sought

supplied are equal. by buyers is equal to the amount of
goods or services produced by sellers.

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.
Example is when tables are for sale in your community today and is assumed
that they are not very important as compared to other products or commodities
that we need to survive especially that our movements are very limited. Neither the
producers nor consumers can impact prices; consumers can buy whatever they
want; nor can producers make and sell whatever they want.
Prices are decided by interactions
between the producers and the consumers.
Price acts as a signal for shortages and
surpluses which help firms and consumers respond
to changing market conditions.

3
  If a good is in shortage – price will tend to rise. Rising prices discourage
demand, and encourage firms to try and increase supply.
 If a good is in surplus – price will tend to fall. Falling price encourage
people to buy, and cause firms to try and cut back on supply.
 Prices help to redistribute resources from goods with little demand to
goods and services
The market price is the point that the supply and demand curves intersect.
(Judge, S. 2020).
We explore more how equilibrium happens. Let
us analyze Figure 2.
Figure 2 shows a surplus – the quantity is
greater than demand. When quantity is greater than
demand it causes prices to go down.

PRICES ARE MARKET DRIVEN

The producers can make what they want and consumers are free to purchase
what they want. This means that customers live in a market economy. When prices
are high, supply increases as many firms join the market (Judge, S. 2020).

Let’s say the units of cellular phones. The

numbers of suppliers have increased because of high
prices of the cellular phones. When smartphones were
new in the market, there were fewer producers and
prices were high. The high prices attracted the
producers to join the market (Judge, S. 2020).
In shortage, quantity is less than the demand; it
causes prices to go up due to scarcity Example of which
is the shortage in masks and ethyl alcohol in the market.
There is shortage in the supply, thus, price tends to go
up or tends to go higher (Judge, S. 2020).

Law of Supply and Demand

The law of supply and demand explains the interaction between the sellers of
a product and the buyers. It shows the relationship between the availability of a
particular product and the desire (or demand) for that product has on its price.

The Law of Demand

Again, what is a demand? We said last time that
it is the desire of a consumer to purchase goods

4
or services and willingness to pay for that product or services at a given
price. If all other factors remain equal, the higher the price of a good, the fewer
people will demand that good. “the higher the price, the lower the quantity
demanded” and vice versa. (source: Investopedia)
The demand curve is always downward sloping due to the law of diminishing
marginal utility.

The Law of Supply

The law of supply demonstrates the quantities
that will be sold at a given price. The higher the price,
the higher The quantity supplied and vice versa.
The law of supply says ………………. “as the
price of a product increases, companies will
produce more of the Product”. When graphing the
supply vs. the price, , the slope rises.

How Do Supply and Demand Create an Equilibrium Price?

Equilibrium price is the price at which a
producer can sell all the units he wants to
produce and a buyer can buy all the units
he wants.
Supply and demand are balanced, or in
equilibrium The demand curve is downward
sloping. This is due to the law of diminishing
marginal utility.

The supply curve is a vertical line; overtime,

supply curve slopes upward; the more
suppliers expect t to charge higher, the
more they will be willing to produce and
bring products to market.
In the Equilibrium point, the two slopes will intersect. The market price is sufficient
to induce suppliers to bring to market that same quantity of goods that consumers
will be willing to pay for at that price.

PRICE ELASTICITY OF DEMAND AND SUPPLY

Price elasticity measures the responsiveness of the quantity demanded or
supplied of a good to a change in its price. Elasticity can be described as: a) elastic
or very responsive and b) unit elastic, or inelastic or not very responsive. (source:
Investopedia)

5
Effects of Change in Demand and Supply
Elastic demand or supply curve indicates that quantity demanded or supplied
respond to price changes in a greater than proportional manner.
Inelastic demand or supply curve is one where a given percentage change in price
will cause a smaller percentage change in quantity demanded or supplied.
Unitary elasticity means that a given percentage changes in price leads to an equal
percentage change in quantity demanded or supplied

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).

Price Elasticity of Demand (PED)= % change in quantity demanded % Change

in price

a) Elastic Demand (PED > 1) - the percentage change in price brings

about a more than proportionate change in quantity demanded.
When the percentage change in quantity demanded is greater than
the percentage change in price, and the coefficient of the elasticity
is greater than 1. Example real estate- housing - There are many
different housing choices. People may live in a townhouses, condos,
apartments, or resorts. The options make easy for people to not
pay more than they demand.

6
 b) Inelastic Demand (coefficient of the elasticity is less than 1) – is
when an increase in price causes a smaller % fall in demand.
When the percentage change in quantity demanded is less than the
percentage change in price, and the coefficient of the elasticity is
less than 1.
Example Gasoline – gasoline has few alternatives; people with cars
consider it as a necessity and they need to buy gasoline. There are
weak substitutes, such as train riding, walking and buses. If the
price of gasoline goes up, demand is very inelastic.
Other Examples: Diamonds, aircon, Iphone, Cigarettes

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

• YED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚e

quantity demanded for a good and a change in real income.

Normal Goods – are those goods for which the demand rises as consumer
income rises; positive income elasticity of demand so as consumers’ income
rises more is demanded at each price. These goods shift to the right as
income rises.

7
 YED is positive. As income rises, the proportion spent on cheap
goods will reduce as now they can afford to buy more expensive
goods.

Example (the demand for units of air-conditioning increases as the income of

the consumer increases and the demand for electric fan decreases)

Normal good: units of air-conditioning; Inferior good: electric

fan

The Inferior Goods – the demand decreases when consumer income rises;
demand increases when consumer income decreases).

---------- Shifts to the left as income rises. YED is negative.

• As income rises, the proportion spent on cheap goods will reduce as now
they can afford to buy more expensive goods. Examples: the demand for
cheap/generic electronic goods (let say electric fans) will fall as people
income rises and they will switch to expensive branded electronic goods (unit
of air-conditioning).

III. Cross Price Elasticity of Demand or (XED)

Cross price elasticity of demand is the effect on the change in demand of
one good as a result of a change in price of related to another product.

• XED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

𝑜𝑓 𝑔𝑜𝑜𝑑 𝑌
• If the value of XED is positive - substitute goods
• If the value of XED is negative – complements goods
• If the value of XED is zero - two goods are unrelated

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

PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐e

price of a commodity.

8
 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.

9
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.

10