THE COLLEGE OF MAASIN

“Nisi Dominus Frustra”

Maasin City, So. Leyte

SENIOR HIGH SCHOOL DEPARTMENT

ABM STRAND

APPLIED ECONOMICS

Instructor: VIRGELYN U. SERDAN

Mobile: 09097244076
Email: virgelyn_udtohan@yahoo.com

Course Overview
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, rent, and taxes. It covers an analysis of industries for identification of potential
business opportunities. The main output of the course is the preparation of a socioeconomic
impact study of a business venture.

MODULE 2
APPLICATION OF SUPPLY AND DEMAND ANALYSIS

LEARNING COMPETENCIES

At the end of this module, as a learner I will be able to:

1. Analyze market demand, market supply and market Equilibrium.

2. Determine the implications of market pricing on economic decision-making.
3. Differentiate various market structures in terms of:
a. number of sellers
b. types of products
c. entry/exit to market
d. pricing power
e. others

PRE-TEST
 Describe the following terms in one sentence:
1. Demand
2. Supply
3. Equilibrium
4. Demand Curve
5. Supply Curve

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LESSON 1: ANALYSIS OF DEMAND AND SUPPLY

INTRODUCTION
Markets are strictly made up of buyers and sellers. The actions and decisions of buyers
constitute demand for a product or service, while the sellers’ decisions and actions constitute
supply. Markets are important because they act as the mechanism by which resources are
allocated.

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Market Demand
 Market demand refers to “the buyers’ willingness and ability to pay a sum of money for
some amount of a particular good or service”.
 In simple terms, the law of demand indicates that “the quantity of any good which buyers
are ready to purchase varies inversely with the price of the good”.
 From our daily experience of buying and selling, we know that higher prices influence
people to buy less. Therefore, the demand function shows how the quantity demanded
of a particular good responds to price change. In addition, the demand schedule must
specify the time period during which the quantities will be bought.
 The normal demand curve slopes downward from left.

The Demand Curve

What is a Demand Curve?

A demand curve is a schedule of the willingness and capacity of a consumer to buy a
commodity at alternative prices at a given point in time other things held constant.

THE LAW OF DEMAND

After analyzing the above relationship, we can now state that as price increases, the
quantity demanded of the product decreases, but as price decreases, the quantity purchased
will instead increase.

CHANGES IN QUANTITY DEMANDED AND MOVEMENT ALONG THE DEMAND CURVE

Looking back at figure 2.1, the consumers are willing to buy 250 kilos of x when price is
P30. A drop in the price to p25 will, however attract the consumers to increase their purchases
to 300 kilos. This is a movement from point D to E along the demand curve and is described as
a change in quantity demanded.

CETERIS PARIBUS ASSUMPTION

Let us now restate the law of demand by taking into account that there are factors other
than price. Therefore, the functional relationship between price and quantity demanded is
essential since these non-price factors are assumed as constant. The law of demand now
states, “Assuming other things constant, price and quantity are inversely proportional.

Other Factors Affecting the Demand of a Commodity

1. Income
2. Prices of other commodities
3. Expectation
4. Taste
5. Market

SUBSTITUTION AND INCOME

The inverse or negative relationship between the price of the commodity and the
quantity demanded shown in the demand curve can be explained through the substitution effect
and income effect of a price change.

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 The substitution effect describes the decision of a consumer to substitute an expensive
good with cheaper goods and when there is a price change. As a consequence of the
substitution effect, there will be a decrease in the consumption of one commodity as the price of
that commodity increases.
The income effect, on the other hand, refers to the modification of the consumption of a
commodity due to the change in the purchasing power of the consumer resulting from a price
change.

PRINCIPLE OF DIMINISHING MARGINAL UTILITY

The satisfaction of human wants is the purpose of using products and services.
Individual persons obtain satisfaction at increasing levels as they consume the product or
service in succession.
This means that the total utility of the product or service increases as more units are
consumed. This increase in utility is called marginal utility.
Marginal Utility refers to the satisfaction an individual receives from consuming one
additional unit of good or service.
As a buyer continues to consume a good his total satisfaction or utility increases;
however, the additional or marginal satisfaction decreases as a buyer consumes an additional
unit of good. This reduction in marginal satisfaction is attributed to the fact that consumers can
have a feeling of satisfaction when they continuously increase the consumption of a particular
commodity. Diminishing marginal utility implies that the additional satisfaction provided by an
additional commodity consumed is lower than the additional satisfaction given by the previous
level of consumption of the commodity.

SCHEDULE OF TOTAL AND MARGINAL UTILITY FOR MARIA SUNGA

GUAVAS TOTAL MARGINAL

COSUMED UTILITY (IN UTILITY (IN
(IN PIECES) UTILS) UTILS
1 50 50
2 80 30
3 100 20
4 110 10
5 90 -20
6 20 -70

CHANGES IN DEMAND AND SHIFTS IN THE DEMAND CURVE

If the ceteris paribus assumption is dropped, then changes in the non-price factor shall
take place. This will result in a change in the position or slope of the demand curve and a
change in the entire demand schedule.

Example:
Increase in consumer incomes results in an increase of consumer’s purchase.
Increase in income – shift to the right
Decrease in income – shift to the left
Greater taste/preference – shift to the right
Less taste/preference – shift to the left
Increase in population – shift to the right
Decrease in population – shift to the left
Greater speculation – shift to the right
Less speculation – shift to the left

 EXERCISE NO. 1 (Deadline February 10, 2021)

□ Why is the demand curve downward sloping?

□ Differentiate substitution and income effect.
□ Explain the concept of diminishing marginal utility. Cite example based on your experience.

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MARKET SUPPLY
Supply constitutes the one side of the market equation, of which the other one is
demand. Supply may be defined as “the quantity of a good or service which sellers desire to sell
at a given price.” The supply situation may be presented in two ways:
 The supply schedule
 The supply curve

Supply Schedule and Supply Curve

The supply schedule is a tabular presentation showing the relationship between a

commodity’s market price and the amount of that commodity that producers are willing to
produce and sell, other things held equal.
Suppliers are encouraged to produce and sell more of a particular commodity if a higher
price is paid for it by the buyers. The higher the price, therefore, the higher the quantity
supplied.

From the above schedule, we can see that higher prices serve as incentives for the
sellers to offer more X for sale, while low prices discourage them from offering more quantities
to sell.
The supply curve is upward sloping from left to right. It shows a direct relationship
between price and quantity supplied. Any point on the supply curve reflects the quantity that will
be supplied at that given prices.
After analyzing the above relationship, we can now state that as price increases, the
quantity supplied of a product tends to increase and as price decreases, quantity supplied
instead decreases.

CHANGES IN QUANTITY SUPPLIED AND MOVEMENTS ALONG THE SUPPLY CURVE

Let us study a point on the above supply curve. Consider the price of P25 per kilo. At the
price, the sellers will offer for sale 60 kilos of X. Should there be an increase in price to P30,
quantity supplied will increase to 90 kilos. This is reflected as a movement along the curve and
is referred to as change in the quantity supplied. This is a change from point B to point C on the
supply curve and is caused by a change in the price of the good.

THE LAW OF SUPPLY

As in the theory of demand, there are also non price determinants that influence supply.
These include cost of production, availability of economic resources, number of firms in the
market, technology applied, and producer’s goals. Under the ceteris paribus assumption, these
factors are again assumed constant to enable us to analyze the effect of a change in price on
quantity supplied.
The law of supply now states, “other things assumed as constant, price and quantity
supplied are directly proportional.

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 CHANGES IN SUPPLY AND SHIFTS OF THE SUPPLY CURVE

Once again, let us drop the ceteris paribus assumption, which means changes in non
price factors shall now take place. This will likewise result in a change in the position or slope of
the supply curve and a change in the entire supply schedule. The increase or decrease in the
entire supply is also shown through a shift of the entire supply curve.

The following changes in the non price factors may cause the corresponding shift in the demand
curve:

Increase in the number of sellers – shift to the right

Decrease in the number of sellers – shift to the left
Better technology – shift to the right
Decrease in the cost of production – shift to the right
Goals of the firm – it depends

Market equilibrium
Supply and demand are opposing forces that must be considered in the determination of
prices of commodities in the market.
When the individual schedules of supply and demand are put together, there will be a
price where the quantity buyers want to buy exactly equals the quantity which sellers are
offering for sale.
The price at which supply and demand are equal is the equilibrium price.

 EXERCISE NO. 2 (To be submitted on February 17, 2021)

1. Illustrate the Supply Curve.
2. What are the non-price determinants of supply?

 ASSESSMENT TASK FOR LESSON 1 and 2 (to be recorded and graded)

After reading and understanding the lesson 1, answer the following questions:
1. Differentiate demand curve from supply curve. (10 points)
2. What is a market equilibrium? Give an example. (5 points)
3. State the law of demand and law of supply. (10 points)
4. What are the non-price factors affecting the demand and supply? (10 points)

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FOR DISTRIBUTION NEXT WEEK

LESSON 3: OTHER APPLICATIONS OF SUPPLY AND DEMAND ANALYSIS

LESSON 4: CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO
ENTREPRENEUR