Applied Economics

Module : Week 1 -4

Name:______________________
Year: _________ Section:______________
_
 APPLIED ECONOMICS 1

Lesson 1:Economics as a Social Science and Applied Science in Terms of

Nature and Scope
At the end of the session, you should be able to explain the nature and scope of
economics, determine its fields: the micro and macroeconomics, resourcefully use the
different resources in the production of goods and services, and in real world,
efficiently consume these finished products.

THE NATURE AND SCOPE OF ECONOMICS

According to Molina, J. A. & Nadal, G. J I (2020), economics is a SOCIAL SCIENCE

concerned with the explanation and prediction of observed phenomena in the society. Economics
studies the way in the societies solve the fundamental problems of reconciling the unlimited desires of
individuals with scarcity of resources, susceptible to numerous alternative uses. Economics is also an
APPLIED SCIENCE because it uses the scientific method in its explanations, which consists of
observing reality and presenting questions and problems to arrive at the formulation of theories and
models. As an applied science, it follows a systematic procedure to solve issues and problems of the
society.

THE FIELDS OF ECONOMICS

Microeconomics and macroeconomics has perspectives on the economy.

*Microeconomics: focuses on the behavior of individual economic units and the functioning of
markets. Its perspective focuses on parts of the economy: individuals, firms, and industries.

*Macroeconomics: studies the functioning of economics as an aggregate (production, employment).

Its perspective looks at the economy as a whole, focusing on goals like production, the standard of
living, unemployment and inflation. Macroeconomics has two types of policies for pursuing these
goals: monetary policy and fiscal policy.

The Economic Agents/Stakeholders:

1. Consumers
• Consume goods and services /offer production factors
• Maximize utility

2. Producers
 APPLIED ECONOMICS 2

• Produce goods / demand productive factors

• Maximize profit
3. The public sectors
• Attempt to maximize the well-being of society
*The agents interact among themselves in a specific territorial, social, natural and/or cultural
framework that determines their relationships → Market
 APPLIED ECONOMICS 3

ECONOMIC RESOURCES OR FACTORS

In the article of Nowaczyk , J (2020) on Identifying the Factors of Production, he defined

economic resources as the factors of production for goods and services. The factors of production
are inputs combinations in the production of goods and services to make an economic profit for the
firms. These factors of production are land, labor, capital, and entrepreneurship. Resources are
limited in nature, but human wants and needs are unlimited, thus, an efficient allocation of these
resources or factors of production is a big challenge for every economy. Economics also helps the
entrepreneurs and the economy to allocate resources in the production of supplies to meet the
demands of the consumers.

 Land as a Factor of Production

Land – natural resources available to create supply such as raw materials that comes from the
ground. It can be a nonrenewable resource; commodities such as oil and gold; and renewable
resource, such as timber. Oil is a natural resource, but petroleum gas is a capital good. Farmland is a
natural resource, but a shopping center is a capital good.
 Labor as a Factor of Production
Labor is the work done by people- education, skills, and motivation and productivity. Productivity
measures how much each hour of worker time produces in output. Workforce receives wage for his
labor.
 Capital as a Factor of Production

Capital or capital goods are capital – the money that companies used to buy resources; manmade
objects like machinery, equipment, and chemicals that are used in production. For example, capital
goods include industrial and commercial buildings. A commercial aircraft is example of a capital good.
 Entrepreneurship as a Factor of Production

Entrepreneurship develops an idea into a business. An entrepreneur combines the other three factors
of production to add to supply. The most successful entrepreneurs are innovative and risk-takers. The
income entrepreneurs earn is profits.

Characteristics of Resources:

1.Scarcity: insufficient resources to supply all the desires and needs of individuals.
In the production of goods and services; there are issues that economics may encounter:
these include: for Land – inadequate land and natural resources; polluted areas; overcrowded
spaces; for Labor – unskilled workforce; mismatch of jobs; for capital – low quality of
equipment/machines; insufficient fund/capital; and for entrepreneurship – Inadequate training of
entrepreneurs; limited opportunity; scarcity of great ideas but many
competitors in the market.

2.Multiple use: Resources can have more than one possible use. For example, a plot of
land can be used to plant coffee or to build a factory.

3.Partially replaceable: one resource can replace another in the production of a good or
service (e.g., replace manual labor with technology).
 APPLIED ECONOMICS 4

Name: _________________________________________ Year and Section:_________________

Economics as a Social Science and Applied Science in Terms of Nature and Scope

Activity No. 1 Direction: Let us check your knowledge to our topic. Kindly arrange
the following words. These are the terms you commonly encounter when you make
decisions of going to the market. Examples of these items are given on the right column.

1. MIRECOOCNOMSCI ________________________ individuals and industries

2. TENAGILBDSOOG _________________________basic goods/commodities

3. SARCITYC _________________________shortage in supply

4. UXDOOSLUGYR _________________________expensive jewels and gems

5. CDAOTOASAGIP _________________________baking machines

Activity 2: Direction: Kindly choose the letter of the correct answer. Write your answer on the space
provided.

______1. The physical effort of the manpower to produce the protective devices of the frontliners
describes which factor of production?
a) Land b) Capital c) Labor d) Entrepreneur

______2. The great ideas, concepts and drive of the production managers to produce something new
describe which factor of production?
a) Land b) Capital c) Labor d) Entrepreneur

_______3. The computers of the production manager in an office are what kind of goods or products?
a) Consumer goods b) Either consumer goods or capital goods
c) Capital goods d) Economic goods

______4. Which best describes economics as a social and an applied science?

a) The study of things we need to survive
b) The study of how people make choices when they are faced with an unlimited supply of
resources
c) The study of human behavior
d) The study of how buyers make choices when there is limited supply of resources

______5. Which of the following are examples of human needs?

a) Water and a place to live like houses b) Iced caramel macchiato frappuccino
c) Flat screen televisions d) Laptops and computers

_____6. As a citizen of Manila, determine which is NOT TRUE of the economic activities
that have been observed in your locality:
a) Everyone has experienced buying limited supply of commodities
b) Everyone has inadequate supply of hygienic materials and protective devices
c) Some citizens have suffered from changes in the pandemic protocols of the government
d) The people in Manila have freely enjoyed traveling from one place to other.
 APPLIED ECONOMICS 5

_____7. Which of the following has NOT observed in the community during the ECQ in
the same locality?
a) Everyone enjoyed shopping in the market
b) Unemployment in the community was sharply experienced
c) Prices of commodities suddenly increased
d) The people in Manila were reluctant of the pandemic protocols.

Activity no. 3 CLASSIFICATION OF GOODS

Directions: Please perform independently. Pick all the goods and classify them accordingly.

Your mother went to the market to shop goods for the family. She purchased the following
goods. Canned goods; bread; sacks of rice; meat; vegetables; toothpaste; bath soaps; perfumes;
wrist watch; aircon to ventilate her store and coffee maker for her store.

Consumer good Industrial goods Essential Goods Luxury goods Economic goods

Activity no.4: Directions: Determine which factor of production is needed in the following problem

1. The ABM Manufacturing Co. hired a gardener. He uses a lawn mower for landscaping. Which
factor of production would you consider this machine?
Answer:____________________________________________

2. The owner of the company withdrew cash for the salaries of the employees. Which factor of
production would you consider cash on hand?
Answer:____________________________________________

3. The top manager of the firm said “the great ideas, concepts and emotional determination of a
person to produce something that consumers want to buy” is very important for the company. What
factor of production describes the ability to create great ideas?
Answer:____________________________________________

4. The farmers planted pineapple cuttings in the vacant area located in their locality. Which factor of
production would you consider a pineapple plantation?
Answer:____________________________________________
 APPLIED ECONOMICS 6

Activity no. 5 :Synthesis: Fill in the blanks in the appropriate information.

 Economics has two fields: micro and macroeconomics. __________________ study of

markets of good and services and focuses on the behavior of individual on products and
services in the market while_________________________ deals with the study of the
economy as a whole and focuses on aggregate indicators such as _______________;
____________________; ___________________.

 The Classification of goods: __________________;____________________;

____________;______________

 There are four factors of production or the resources needed to produce

products and services:________________;__________________; _______________;
_____________.

 Needs and wants are __________________while resources are_____________.

Name____________________________ Year/Section___________________

Activity no.6: Direction: Listed below are the resources for production of goods and services.
Please list down the economic issues to each resource of production that may harm the economy.
Choose your answer from the box below.
 APPLIED ECONOMICS 7

Activity no. 7:Directions: Please categorize the characteristics of microeconomics and

macroeconomics using the diagram below. This will enhance your creativity to solve issues in
the future.

Studies the behavior of individual economic units;

A. Focuses of the behavior of individual in the market
B. Focuses on parts of the economy: individuals, firms, and
industries;
C. Studies the economy as a whole
D. Focuses on goals like productions standard of living,
unemployment, and inflation.
E. Policies are focused on monetary policy and fiscal policy.
F. Studies of markets of good and services
 APPLIED ECONOMICS 8

Lesson 2: Utility and Application of Applied Economics to Solve

Economic Issues and Problems
In the article of Forbes Custom (2017), The Philippines: Asia’s New Economic Powerhouse,
the Philippine economy has transformed into one of Asia’s most dynamic economies on the back of
fast-paced Gross Domestic Product (GDP) growth.(www.forbes.com). For the longest time, it has all
the opportunities to sustain its growth and stability. However, due to the problem on pandemic, at
present, it is suffering from economic depression. The issue of scarcity on supply due to limited
resources, but unlimited wants, is the ultimate economic problem. Scarcity implies a limited quantity
of resources needed in production.
Guru, S. (2020) mentioned, the main issues on production include the products to produce;
how to produce these products and for whom to produce the products and how to make the economy
grow. Economics, therefore, is concerned with the allocation of resources to make the most efficient
use of these resources.

The Four Basic Economic Problems

In the article of Guru, S. (2020) Basic Central Problems Faced by an Economy, there are basic
problems common to all economies. In terms of production, common to all countries is the problem
on scarcity. This arises because the resources are limited and have alternative uses. This problem
gives rise to four basic problems of an economy.
In this topic, we will look into these basic problems of what to produce, whom to produce, how
to produce and what provisions on production for economic growth. As we said earlier, economics
can be a tool to solve these economic problems. Economists formulate strategic solutions to
economize the problems such as economic growth or the ability to produce goods and services,
reduce expectation or the ability to reduce our wants such as lessening consumption, and improve
the use of resources or the capacity to use our existing resources wisely.
(http://www2.harpercollege.edu/mhealy/eco212i/lectures/5es/5es.htm)

BASIC ECONOMIC PROBLEMS OF THE COUNTRY

1. What to Produce?
If there is scarcity of goods in a society, the firms have to make wise decision on what goods/service
should be produced and determine the quantity to produced. For example, which do we produce more, masks
or canned goods? But we need capital goods like machines, or consumer goods like laptops. The society must
decide the type and quantity of good/service to be produced to meet the immediate needs of the society.
2.How to Produce?
The production of goods or services needs effective methods and processes. For example, you
can produce PPEs using sewing machines; sardines using aqua resources like fish and land resources
like tomatoes. The production requires more labor and capital investment.
3. For whom to produce?
The society would always consider the immediate beneficiary of the goods. For Example when
we produce mask and PPEs we suppose to produce first these for the fronliners of COVID Pandemic
fight. A society decides on the distribution of the goods and services among the members of society
who need them the most.
4. What provision/laws should be made for economic growth?
A society uses its resources for current consumption. If a Society uses all its resources, then
its production capacity will not increase. The standard of living of the people and the income of the
workforce remain constant until the standard of living will decline in the future. The society must
decide also on the part of the resources to be saved for the future progress.
 APPLIED ECONOMICS 9

APPLIED ECONOMICS ON BASIC ISSUES AND PROBLEMS

Applied Economics seeks to solve the problems on scarcity. This happens when human wants for
goods and services exceed the available supply. In a modern economy, it is evident that a division of labor
happens when people earn income by specializing in what they produce. They will use that income to
purchase the products they need or want every day (BC Campus 2020).

Also, in the division of labor, it allows workers and firms to produce more. This is because: a)
agents focus on areas of advantage due to natural factors and skill levels; b) the agents learn and invent;
c) the agents take advantage of economies of scale. Division and specialization of labor only work when
individuals can purchase what they do not produce in markets. Applied economics then helps you
understand the basic problems facing the world today. It helps you become a well-rounded thinker. And
most importantly, it prepares you to be a good citizen.

Let’s analyze this passage. This will help you understand our new topic on the basic economic issues
and problems in the production of goods and services. Are you ready? If yes, you may now analyze
the situation.

Problem 1 You read about a traveling situation in which some airline passengers seem to get a “fast
pass” through security and move effortlessly through the boarding process, while other passengers
are waiting in long lines. In this example, the travelers who are moving quickly through the boarding
process are probably:

a) VIP passengers waiting longer more in an inconvenient line

b) Passengers who value time and convenience and are willing to pay additional fees for the
privileges and other services

c) Loyal passengers whom they knew beforehand in which line to go to avoid delays and
inconveniences

d) Government officials who are seated in the executive area

Economics can be a tool to solve economic problems on the production of goods and services.
Production is the process by which resources are transformed into useful forms. Resources are
things provided by nature that can be used directly or indirectly to satisfy human needs.

The basic economic problems on production includes: what to produce, whom to produce,
how to produce and what provisions on production for economic growth.

Strategic options/decisions to economize the problems include: economic growth – ability to

produce goods and services; reduce expectation- reduce our wants - lessening consumption; improve
the use of resources - use our existing resources wisely; don't waste the limited resources; productive
efficiency; allocate efficiency; full employment and equity of resources; and reduce expectations –
reducing wants.
 APPLIED ECONOMICS 10

Name: _________________________________________ Year and Section:_________________

Utility and Application of Applied Economics to Solve Economic Issues and Problems

Activity no.1: Check your Understanding.

Directions: Please read and answer the following sentences. Fill in the Blanks.
 Among nations, these are the common economic problems on production of goods and services:
a)__________________; b)_______________________; c) ________________;
d) __________________.

 Economics can be a tool to solve the fundamental problem in economics which is

_________________ in the production of goods and services.

 The strategic solutions/decisions/options to economizing problems include a)________________;

b)___________________; and c)_______________.

Activity no. 2: Identification

Part 1: Please read and analyze the questions carefully. 1) What do you think were the resources
used to produce the products (dresses)? 2) What were the issues/problems in the production of the
products?
 APPLIED ECONOMICS 11

Activity 3 . Multiple Choice (with critical thinking analysis)

Direction: Read the following statements carefully. Please write the correct answer on the space
provided.

_____1. Scarcity of resources in your locality (Manila) is evident. Only available are fabrics, electric
sewing machines and skilled workers. The government said, you are only allowed to work from home
to be safe and free from infection of viruses. Which items most likely you need to produce?

a) PPEs b) Canned goods c) Sacks of rice d) Sewing machines

_____2. Manila is ranked 2nd in the most cases of COVID patients in Metro Manila. The city needs
urgent services of the medical frontliners in curing the increasing number of patients. There is scarcity
in the raw materials for production. To whom would you produce first the available resources?

a) Soldiers b) Police Officers c) Medical Frontlines d) Your family

_____3. There is an urgent need of PPEs by the medical frontliners in the City of Manila due
increasing number of COVID patients every day. Which is not true of producing the products (PPEs)?

a. Import from China

b. TESDA students and skilled workers may produce the PPEs
c. Manufacturers/suppliers may supply the PPEs
d. Export PPEs to Japan as gross national products

_____4. The ABM Manufacturing Company decides to produce more on liquid soap than bar soap to
supply the growing demands in the market. It solves issues on:

a. Whom to produce b. How to produce c. How much incentive d. What to produce

 APPLIED ECONOMICS 12

Activity 3 :Collab Dept.

Directions: You may collaborate and communicate with your friends and family members in doing the
tasks. Currently, we are dealing with scarcity on units of bicycles. Below is a framework showing the
solution on how to deal with economic issues on meeting the products.

Question: As an agent of the economy, how will you deal with this scarcity? Choices are given
below. Place them in their proper columns as to economic growth; and improve the use of available
resources and reduce expectations.

A. ability to produce goods and services

B. reduce our wants or lessening consumption
C. use our existing resources wisely
D. don't waste limited resources
E. productive efficiency
F. allocates efficiency
G. full employment and equity of resources
H. reducing wants
 APPLIED ECONOMICS 13

Activity no.4: TRUE or FALSE

Directions: Please write TRUE if the statement is correct and FALSE if the statement is incorrect.
1. _______________Scarcity in goods and services happens if the resources in the production are
inadequate or scarce.

2. _______________Customers must choose among several alternatives if scarcity exists.

3. ________________ Income inequality is the gap in income that exists between the rich and the
poor customers willing to buy the same products.

4. ________________Shortage of goods and services is an economic problem; and shortages are

always constant

5. _________________The Build Build Build Program by the government aims to help improve the
infrastructure projects and other programs of the country.

Activity no. 5 : Multiple Choice. Choose the letter of the correct answer.

_____1. The fundamental economic problem that must be solved efficiently

a) Scarcity of resources b) Health system

c) Surplus of demands d) Export policies

_____2. Economists point out that scarcity must be addressed to protect the

a) The poor but not the rich

b) Both the poor and the rich
c) Neither the poor nor the rich
d) The poor but never the rich

_____3. What two factors contribute to scarcity in the production of goods and services?

a) Unlimited resources and limited wants

b) Unlimited resources and wants
c) Unlimited wants and limited resources
d) Limited resources and wants

_____4. If there is scarcity in public transportation, what should the learners do?

a) Home based learning is an alternative choice for access to education

b) Stop learning while waiting for transportation shortage to be solved
c) The government must import units of car from neighbor countries
d) All choices are applicable

_____5. The economists describe the amount of resources in an economy as:

a) Always constant b) Can never decrease or increase

c) Unlimited at any moment in time d) Limited at any moment in time
 APPLIED ECONOMICS 14

Activity no. 6: Right Choices!

Directions: Please read carefully. Despite the limited resources and scarcity of products for our
consumption, today, we still want to achieve maximum satisfaction. We make use as few resources
as possible, allocate our resources where they are best suited, and use the appropriate technology or
materials and produce the right goods and services. Given the resources below, please select the
most efficient products that could be produced to maximize production and help the economy

Activity no.7: Reflection Corner

 APPLIED ECONOMICS 15

Lesson 3: Market Demand, Market Supply, and Market Equilibrium

Economics helps us solve the problem on excess supply and excess demand, and lead it to a
balanced supply and demand. In our needs, we do not want oversupply. It means wastage of income.
For entrepreneurs, it is not efficient if their stocks or supplies are greater than the actual demand. It is
a loss not revenue.

In economics, there are terms that you must learn to understand the better market situations. A
demand or the amount of good or service consumers are willing to purchase at each price. If
customers cannot pay for it, there is no effective demand. Price is what a buyer pays for a unit of the
specific good or service. The total number of units purchased at that price is called the quantity
demanded.

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

 APPLIED ECONOMICS 16

The Law of Supply

How Do Supply and Demand Create an Equilibrium Price?

 APPLIED ECONOMICS 17

REMEMBER:

 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.
 APPLIED ECONOMICS 18

Name: _________________________________________ Year and Section:_________________

Lesson 3: Market Demand, Market Supply, and Market Equilibrium

Activity no.1
PART I. GRAPH ANALYSIS
Directions: Please analyze the graph and answer the questions below.

a) Locate the equilibrium point on the demand and supply graph. Put a point on the graph

b) If the price is above the equilibrium level, what could you predict with the demand and
supply?______________________

c) If below the equilibrium point what could you predict with the demand and supply?
__________________________

PART II. FILL IN THE BLANKS

Directions: Analyze the following statements carefully. Fill in the blanks.

1. The law of ______________________________ applies during online sales of

shoes; that is when consumers rush to buy products at 50% discounts.

2. The law of _______________________ applies when the producers supply

more pineapple juices at a higher price; selling at higher quantity at a higher
price increases revenue.
 APPLIED ECONOMICS 19

Activity No. 2 “Think, Learn and Challenge Opportunity”

Directions: Let’s analyze this passage. This will help you understand our new topic on demand,
supply and equilibrium. Please read carefully the
Supply, Demand and Marriage
By Robert H. Frank
In some cultures, romance isn’t nearly as important as cash when it comes to choosing a marriage
partner. And even when money plays no explicit role in selecting a mate, courtship customs are
governed by the venerable economic model of supply and demand. Under the dowry system in
India, for example, parents of older brides would typically pay more to prospective grooms. Men
with better jobs would receive larger payments, too. In short, there really is a marriage market in
many countries around the world, and economic principles apply to it. In markets with a
preponderance of women seeking partners, the terms of trade shift in favor of men. If more men are
seeking partners, the reverse is true.
https://www.nytimes.com/2011/08/07/business/economy/marriage-and-the-law-of-supply
anddemand.html
passage and answer the question below.
1. Under the dowry system in India, a market with more women seeking partners, the trade shift
favors the men. What law or economic principle is applicable?
______________________________________________________________________.
_______________________________________________________________________

2. In the same system, men with better jobs receive larger payments. What economic principle is
applicable to this situation? Justify your answer.
_______________________________________________________________________
_______________________________________________________________________

3. State the law of demand.

______________________________________________________________________
______________________________________________________________________

4. State the law of supply.

______________________________________________________________________
______________________________________________________________________
Activity no.3: Fill in the Blanks.
Directions: Read the sentences and fill in the blanks.
1. The ______________________________________ explain the interaction between the sellers of
a resource and the buyers for that resource.
2. The __________________________ states that, higher the price, the higher the quantity supplied.
3. A movement refers to a change along a _________________.
4. A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes
even though price remains__________________________.
5. When Supply and demand are balanced, it is called ____________________.
6. The _______________________________________states that ―the higher the price, the lower
the quantity demanded‖.
 APPLIED ECONOMICS 20

Activity 4. The Law of Demand and Supply

Directions: Analyze this problem. The following data were taken from an invoice of Company X. The
company imports gasoline from other country.
2.1) Plot or graph the data. Interpret the results.

2.2 Analyze data and describe the curve.

_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________________.
 APPLIED ECONOMICS 21

Activity 5. Problem Solving

Directions: Analyze the problem. The following are sets of data taken from the invoice of Company X.
The company imports gasoline from other country.
3.1) Plot or graph the data.

3. 2 Analyze data and describe the curve. Interpret the results.

__________________________________________________________________________
__________________________________________________________________________
_________________________________________________________________________.
 APPLIED ECONOMICS 22

3.3) Using the data from demand and supply,

a) Determine the equilibrium point of the demand and supply curves.
 APPLIED ECONOMICS 23

Activity no.6: True or False

A. Directions: Write TRUE if the statement is correct and FALSE if incorrect.

Write your answer before the number.
________1.The upward slope of the supply curve illustrates the law of demand— ―higher price
leads to a higher quantity supplied, and vice versa‖.
________2.The downward slope of the demand curve illustrates the law of supply—the inverse
relationship between prices and quantity demanded.
________3.Time is important to supply because suppliers must react quickly to a change in demand
or price.
________4.A shift in a demand or supply curve occurs when quantity demanded or supplied changes
even though price remains the same.
________5.The law of supply says that ―at higher prices, sellers will supply more of economic
goods‖.

B. Directions: Read the sentences carefully. Write the letter of the correct answer.

_____6. An increase in the price of electricity bill will force you to:
a. increase your demand for kerosene heaters and coal.
b. increase your demand for light bulbs and aircon.
c. increase your demand for stereos and videokes.
d. increase your demand for TVs and use of gadgets.

_____7. The market demand curve for apple shows the

a. effect on market supply of a change in the demand for apple
b. quantity of an apple that consumers like to buy at different prices.
c. marginal cost of producing and selling different quantities of an apple.
d. effect of advertising expenditures on the market price of an apple.

_____8. Economies experience an increased in unemployment and a reduced of activity during

recession. How does recession affect the market demand for new cars?
a. Demand for new cars shifts to the right.
b. Demand for new cars shifts to the left.
c. Demand for new cars has no shift
d. Demand for new cars either has or no shift
_____9. The market supply curve for gasoline shows the
a. effect on market demand of a change in the supply of gasoline.
b. quantity of gasoline that firms offer for sale at different prices.
c. quantity of gasoline that consumers are willing to buy at different prices.
d. All of the above are correct.

_____10. If Toyota firm is producing a car faster than people want to buy, there is
a. an excess supply of car and price can be expected to decrease.
b. an excess supply of car and price can be expected to increase.
c. an excess demand of car and price can be expected to decrease.
d. an excess demand and price can be expected to increase.
Activity no. 7: Solving Problem and Critical Thinking Analysis
 APPLIED ECONOMICS 24

Directions: Analyze the problem carefully. In December, the price of ―hamon‖ rises and the number
of ―hamon sold also rises. Is this a violation of the law of demand? Justify your answer.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

Activity no.8: Reflection Corner

Our case today can be compared to our topic. Let us understand that everything has
limitations in our consumption –our basic needs like food, shelter and water. Even our consumption
on the mode of transportation has limitation.

The challenge to us, consumers, is how we make use of our initiative, and utilize our income
to satisfy our demands at the most affordable prices; for the sellers to supply the needs of the
consumers while making profit; for the government to legislate the economy while helping all the
agents and to protect the monetary and fiscal transactions.

As a consumer, how can you sustain your needs (basic commodities) despite the challenges in
increased price of these items in the market?

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
 APPLIED ECONOMICS 25

Lesson 4: Implications of Market Pricing in 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 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).
 APPLIED ECONOMICS 26

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.
 APPLIED ECONOMICS 27

PRICES ARE MARKET DRIVEN

 APPLIED ECONOMICS 28

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

The Law of Supply

 APPLIED ECONOMICS 29

How Do Supply and Demand Create an Equilibrium 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)

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.
 APPLIED ECONOMICS 30

*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.

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 (∞)

 APPLIED ECONOMICS 31

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.
YED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
 APPLIED ECONOMICS 32

III. Cross Price Elasticity of Demand or (XED)

Cross price elasticity of dmand 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
 APPLIED ECONOMICS 33

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.

REMEMBER:

 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.
 APPLIED ECONOMICS 34

Name: _________________________________________ Year and Section:_________________

Lesson 4: Implications of Market Pricing in Making Economic Decisions

Activity no.1 :Directions: Please analyze the graph and answer the questions below. Write your
answer on the space/s provided for each question.

3. Using the chart above, kindly describe the point where there is a
a) surplus ____________________________________
b) shortage ___________________________________
c) equilibrium in price _________________________

4. What is surplus, shortage and equilibrium price? Define the terms.

Surplus______________________________________________________________
Shortage_____________________________________________________________
Equilibrium price_____________________________________________________
Activity no. 2: Multiple Choice Questions
Directions: Please read the statements carefully. Write the letter of the correct answer.

_____1. In the market, the price elasticity for the demand of canned goods sold by Aling Puring
Grocery Store is the:

a) ratio of the percentage change in quantity demanded for the goods to the percentage
change in its price
b) responsiveness of revenue to a change in quantity of the canned goods
c) ratio of the change in quantity demanded divided by the change in its price of the canned
goods
d) response of revenue to a change in the price
_____2. If demand for sacks of rice in Aling Puring Grocery Store is price elastic, then a:
a) rise in the price of sacks of rice will raise total revenue of the grocery
b) fall in the price of sacks of rice will raise total revenue of the store
c) fall in the price of sacks of rice will lower the quantity demanded
d) rise in the price of sacks of rice won't have any effect on total revenues
 APPLIED ECONOMICS 35

______3. If the cross-price elasticity between soap bar and liquid soap commodities is 1.5,
a) the two goods are luxury goods b) the two goods are complements
c) the two goods are substitutes d) the two goods are normal goods

______4. The price elasticity of demand for a certain good tends to be:
a) smaller in the long run than in the short run
b) smaller in the short run than in the long run
c) larger in the short run than in the long run
d) unrelated to the length of time

______5. If the price elasticity of supply of cup noodles is 0.60 and the price increase by 3 percent,
then the quantity supplied for cup noodles increases by how by?
a) 0.60 percent. b) 0.20 percent c) 1.8 percent d) 18 percent

Show me your solution in the box below:

Activity no. 3 : Problem Solving and Critical Thinking Analysis

Directions: Please analyse the problems carefully. Answer the problems and present your solutions.
Inerpret the results.

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?
 APPLIED ECONOMICS 36

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.

Activity no.4: 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:

B) Analysis on price elasticity __________________________________

 APPLIED ECONOMICS 37

Activity no.5: Identification

Directions: Please read the sentences carefully. Identify the the word or phrase
that is appropriate to each item.

1. A ________________ shows the relationship between quantity demanded and price in a given
market on a graph.

2. The __________________________ states that, higher the price, the higher the quantity supplied.

3. __________________means that a given percentage changes in price leads to an equal

percentage change in quantity demanded or supplied.

4. _______________means the effect on the change in demand of one good as a result of a change
in price of related to another product.

5. __________________ those goods for which the demand rises as consumer income rises.

6. _______________the coefficient of the elasticity is less than 1; when an increase in price causes a
smaller % fall in demand.

Activity no.6: Enumeration on Price Elasticity of Goods

Directions: Please conduct a survey or observe the market in your vicinity. This can make you aware
of your environments. Give examples of goods considered as elastic and inelastic. You may work
with your parents and siblings.
 APPLIED ECONOMICS 38

Activity no.7: True or False

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.

Activity no.8: Refection Corner

HOW DO YOU RESPOND TO PRICE ELASTICITY?

People have unlimited needs and wants for their personal satisfaction and because of that the
prices of products easily get changed. Everyone is affected with the new normal in the market. The
prices of products have become very expensive since the outbreak of the pandemic, not
only in our locality, but in the whole world. If your income or the income of your family is not enough to
purchase the basic commodities needed by your family, what goods would you buy, instead?
What economic or marketing strategies would you apply? How would you respond to the price
changes of these commodities?

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