APPLIED ECONOMICS

WEEK 5
MELC: Determine the implications of market pricing on economic
decision-making

PRICE CEILING AND PRICE FLOOR

After a natural disaster or during an unusual period, the prices of commodities go higher.
Consumers complain about unreasonably high prices of necessities. That’s why the
government is expected to take immediate action to stabilize the price.

To stabilize the price as well as to protect certain actors in the market, the government imposes
price control measures. The government may either set a PRICE CEILING or a PRICE FLOOR.

Price Ceiling (Pc) – is government-imposed maximums on the price of certain goods/services.

Illustrative example:
Before a natural calamity occur, the interaction of supply curve (S1) and
demand curve (D1) established the equilibrium price of sugar at P1 and
the equilibrium quantity at Q1 (see graph in the right).

After the natural calamity, the supply of sugar is drastically reduced and
the supply curve shifts to S2(see graph in the left). With no change in
demand, the price will settle at a higher price P2.

However, as consumers expect the price of sugar to increase in days

to come, their demand will increase and the demand curve will shift to
D2 (see graph in the right). With reduced supply and increased
demand, the price will further increase to P3.

Since the new equilibrium price (P3) is significantly higher than the
original equilibrium price (P1), many buyers/consumers may no longer
be able to afford to buy sugar at P3.

So the government may impose a price ceiling (Pc) (see graph in the
left).

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 With the imposition of price ceiling (Pc) which is much lower
than the P3, a “disequilibrium” can occur as ‘shortage’ or ‘excess
demand’.
At this lower price, Pc, the sugar suppliers will reduce their
sugar supply from Q3 to QSC, while the buyers will increase their
demand for sugar from Q3 to QDC (see the graph in the right).
The gap between quantity supplied (QSC) and quantity
demand (QDC) or the A and B is the amount of excess demand.

The price ceiling prevents the price of a good/service from rising above a certain level.
The imposition of price ceiling on the market for a particular good/service creates a situation in
which the quantity demanded exceeds the quantity supplied. It also creates a situation in which
the consumers/buyers are the ones who benefit while the producers/suppliers are the ones
who suffer.

Price Floor – is government-imposed minimums on the price of certain goods/services

Illustrative example:
Without a price floor, the equilibrium price (P1) and equilibrium quantity
(Q1) in the tobacco market are determined by the intersection of the
supply curve (S1) and demand curve (D1). (see graph in the right)

At P1, the tobacco farmers may find it too low to provide them
with income to have a decent living.
They may convince the government for support in terms of
imposition of a price floor (Pf) (see graph in the lef).
If the government agrees, it can set the price floor (Pf) at a
price which is higher than the equilibrium price (P1).

The imposition of a price floor (Pf) will result in a

“disequilibrium” situation described as ‘excess supply’ or ‘surplus’.
At this higher price, Pf, the tobacco farmers will be
encouraged to supply more tobacco from Q1 to QSF while the
consumers will reduce their demand from Q1 to QDF (see the
graph in the right).
The gap between quantity demanded (QDF) and quantity
supplied (QSF) or A and B is the amount of excess supply.

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 The price floor prevents the price from falling below a certain level. The imposition of a
price floor above the equilibrium price creates a situation in which the quantity supplied exceeds
the quantity demanded. Furthermore, it benefits the producers/suppliers while it makes the
consumers/buyers suffer.

MINIMUM WAGE RATE AS PRICE FLOOR

The labor market is composed of those that demand labor services and those that supply
labor services. Both of them are motivated by the changes in the wage rate.

Wage Rate - is the amount of base wage paid to a worker per unit of time

Determination of Wage Rate in the Labor Market

The price of labor or wage rate is determined by the

intersection of the supply curve of labor (SL) and the demand curve
for labor (DL) (see the graph in the right).
In other words, it is determined when the supply of labor
equals the demand for labor in the market.

Effect of Wage Rate on Supply of Labor

The supply of labor is influenced by the wage rate. For the

laborers or the ones supplying labor services in the market, the
wage rate is the opportunity cost of leisure.
Given this, if the wage rate is very low, very few laborers will
be willing to work and will rather have leisure. If the wage rate is
high, the more laborers will be willing to offer longer time for work
and will devote less time for leisure.
Thus, similar to other supply curves, the supply curve of labor
is upward sloping (see the graph in the left) and we observe a
positive relationship between wage rate and supply of labor
services.

On the other hand, at high wage rate, the demand for labor
services is low, while at the low wage rate, the demand for labor
is high.
Similar to other demand curves, the demand curve for
labor is downward sloping (see the graph in the right). This means
that there is an indirect relationship between wage rate and the
quantity of labor services that will be bought in the market

Minimum Wage - is the lowest possible renumeration that employers / firms can legally pay
their workers / laborers; serves as the price floor below which workers / laborers may not offer
their labor services.

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Imposition of Minimum Wage in the Labor Market

With the imposition of minimum wage (WM) higher than the

equilibrium wage rate (WE), the reaction of the employers / firms
is to reduce their demand for labor services from LE to LDM. On
the other hand, the laborers or the suppliers of labor services will
offer more hours for work from LE to LSM (see graph in the right).
The gap between LDM and LSM or A and B will end up as
“excess labor” or “unemployment”.

Laborers benefit from minimum wage, increasing their income while it can make
employers/firms to suffer, increasing the cost they incur. However, if there’s a leap in the
minimum wage, employers may no longer afford to hire laborers, thus creating a situation in
which more laborers are unable to find work.

THE PHILIPPINE PESO AND FOREIGN CURRENCIES (FOREIGN EXCHANGE MARKET)

The foreign exchange market is an over-the-counter global

marketplace that determines the exchange rate for currencies
around the world.

It takes place in many forms, through different channels all

over the world and wherever one currency is exchanged for another.

Exchange Rate - is the value of a country’s currency vs. that of another country or economic
zone; is how much it costs to exchange one currency for another.

Determination of Exchange Rate

Let us say that the exchange rate between Philippine

peso and US dollar is P50 per US dollar.
The price of US dollar or exchange rate (ERE) is
determined by the interaction of the supply of US dollars (SUSD)
and the demand for US dollars (DUSD) in the market for foreign
exchange (see the graph in the right).
Like any other equilibrium, the value of a currency of a
country in terms of other currency depends on upon the supply
of and demand for their currencies.

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Philippines’ Supply of US Dollars and Other Foreign Currencies

The Philippines is economically blessed to have steady supply of US and other major
foreign currencies. Export receipts, capital inflows and OFW remittances are sources of our
country’s supply of US dollars and other major foreign currencies.

The demand for US dollars and/or other major foreign currencies in the Philippines is
influenced primarily by its demand for imports since the country needs foreign currencies,
usually US dollars, to pay for our imports.

Effects of Changing Exchange Rates

The supply of US dollars has positive relationship with

exchange rate.
As the exchange rate increases (e.g. from P50 to P60 per
US dollar), it motivates exporters to export more and Filipino
workers to work overseas and send more remittances.
Therefore, country will have more US dollar supply (see graph in
the right).

But when the exchange rate decreases (when the peso

become stronger, e.g. from P50 to P40 per US dollar), there will
be a disincentive to exporters and for workers to work overseas
because it shrinks the money they will get (see graph in the left).
As a result, the country will have less US dollar supply.

While the demand for US dollars has an indirect

relationship with the exchange rate in this case the price of a US
dollar.
The higher exchange rate (the weaker the peso, e.g. from
P50 to P60 per US dollar), the more expensive/costly imports
and debt servicing become.
As imports and debt servicing become expensive,
importers may avoid importing and may delay paying debts.
Thus, the quantity demand for US dollars decreases.

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LABOR MIGRATION AND OVERSEAS FILIPINO WORKERS (OFW)

Millions of Filipinos are working overseas.

Statistics shows it goes up year by year. Many factors have often been used to explain the labor
migration of Filipinos. However, the supply and demand analysis can also be used to describe
the phenomenon of OFWs.

Labor Migration - is the movement of people from their home place to another place for the
main purpose of employment

The supply of OFWs and the demand for OFWs are both influenced by the foreign wage rate.

Influence of Foreign Wage Rate on Supply of OFWs

As the foreign wage rate increases, it becomes more attractive for

Filipinos to work abroad. This positive relationship is shown in the in
the supply of OFWs, SLF1. (see graph in the right)

Influence of Foreign Wage Rate on Demand for OFWs

As the foreign wage rate decreases, foreign firms seek services of

more OFWs as they equate the wage rate with the value of marginal
productivity of workers. This downward sloping demand for OFWs
is shown by DLF1 (see graph in the left)

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 The intersection between the supply curve of OFWs, SLF1
with the demand curve for OFWs, DLF1 at e1, gives the equilibrium
wage rate WE1 and the employment of OFWs at LE1(see the graph
in the right)

Influence of Foreign Exchange Rate on Supply of OFWs

Even at a low and/or not increasing foreign wage rate,

many Filipino workers still seek employment abroad. The
supply of OFWs can also be influenced by the exchange rate.

The higher the value of a foreign currency (e.g. US

dollar) in terms of Philippine peso, more Filipinos will still be
inclined to work abroad.

EXAMPLE 1:
Suppose the exchange rate is P50.00 per US dollar. A
monthly salary of USD 1,000 will translate into P50,000 per month.
However, if the exchange rate will increase to P60.00 per US
dollar, the same salary of USD 1,000 can be exchanged for
P60,000.
With an increase in the exchange rate, even without any
increase in the foreign wage rate, working abroad becomes more
attractive for Filipino workers (see the shift of the supply curve to
the right in the graph).

EXAMPLE 2:
Suppose the exchange rate is P50.00 per US dollar. A
monthly salary of USD 1,000 will translate into P50,000 per month.
However, if the exchange rate will only increase to P55.00 per US
dollar and the foreign wage rate will decrease to USD 950 per
month, it can be exchanged for P52,250, which is still P2,250
higher than P50,000.
With an increase in the exchange rate even with a decrease
in foreign wage rate, working abroad is still attractive (see the
downward shift of the supply curve in the graph in the left).

Aside of foreign wage rate and exchange rate, the movement of Filipinos to other countries for
the purpose of employment is also due to the following undesirable conditions/situations in the
country:
1) Uneven employment 5) Large family sizes
2) Lack of employment opportunities 6) Natural calamities
3) Poverty 7) War and conflict
4) Fragmentations of land

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RENT AND PRICE STRUCTURE

Many Filipinos live in a rented house or apartment. Renting in urban places is more costly than
in rural places.

Rent - is income from hiring out land, property, vehicle or any durable good; is any payment to
an owner or factor of production in excess of the costs needed to bring that factor into
production.

To tell what is the ideal rent / price of the use of land, we have to understand first how rent is
determine.

Determination of Rent

The supply curve of land is depicted by a vertical line S1

because land is fixed and can’t be increased with increase in
rent. Since supply of land is not responsive to change in price,
the rent or price of land is solely and entirely determined by the
demand for land.
There is a cost in putting a fixed land into productive use.
This is depicted by a horizontal line C (see the graph in the right).
Thus the difference between rent/price of land and the
cost in putting the land into productive use, will give the pure rent
realized by the owner of the land.

Say a very low demand for land is indicated by D1. The

intersection of supply curve S1 and demand curve D1 at point
e1 will give a very low rent/price of land at R1 (see the graph in
the lef).
Since R1 is lower than the cost of putting land into
productive use C, the owner is getting negative net surplus or
negative pure rent. There is no incentive for the owner, thus the
land remains idle.

If there will be a higher demand for land as indicated by

D2, the intersection of supply curve S1 and demand curve D2
at point e2 will give a rent/price of land at R2, which is relatively
higher than R1 and C (see the graph in the right).
Since R2 is higher than C, the owner of land will now
earn some positive net surplus or some pure rent. Thus, the
owner may use the land in productive activities that can afford
to pay the modest rent/price of land. In most cases, this land
can be used for agricultural production.

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 However, if the demand for land is very high as indicated
by D3, its intersection with the supply curve S1 at point e3 will
set the equilibrium rent/price of land at R3 which is significantly
higher than R2 and substantially higher than C. At this
rent/price of land, the owner will now reap huge pure rent.
Whoever will use the land for business and other
productive purpose must devise ways recover the huge cost of
land use since the rent is very high.

Rent/price of the use of land is determined by demand for land alone. The amount of
incentive/pure rent that will be earned by the land owner will tell what is the ideal rent or dictate
where to and how the land is best to be used.

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 Schools Division Office – Marikina City
Parang High School
Senior High School

NAME: __________________________________ Grade & Section: _____________ Date: _______

Activity Sheet # 18 in Applied Economics
Activity Title: “Effects of Price Ceilings and Price Floor on Supply and Demand”

Learning Competency:
1. Analyze market supply, market demand and market equilibrium
1.1 Identify the price control measures imposed by the government and explain each
1.2 Explain the effects of imposition of price controls on supply and demand

Directions: Analyze the situation and conditions below, plot the supply and demand schedules and
draw the disequilibrium brought about by imposition of price ceiling to be able to answer the questions
that follows.

Situation: A low income municipality in Region X decides to set

price ceiling on bread so it can make sure that bread is affordable
to the poor people. The conditions of supply and demand are found
below:

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 Answer the following questions:
1. Based on the interaction of S1 and D1, what is the equilibrium price (P1)? _______
What about the equilibrium quantity (Q1)? _______
2. If a P32.00 price increase in bread will make the supply to increase by 400 pcs. at all price
levels and the demand to decrease by 800 pcs. at all price levels, what is the equilibrium
price (P2) before the price ceiling? _______
What about the equilibrium quantity (Q2)? _______
3. What will the excess demand/shortage be if price ceiling is set at:
A) Pc1 – P54.00? _______
B) Pc2 – P62.00? _______

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 Schools Division Office – Marikina City
Parang High School
Senior High School

NAME: __________________________________ Grade & Section: _____________ Date: _______

Activity Sheet # 19 in Applied Economics
Activity Title: “Effects of Imposition of Minimum Wage in the Labor Market”
Learning Competency:
1. Analyze market supply, market demand and market equilibrium
1.1 Define wage rate and explain how it is determined
1.2 Identify the effects of wage rate on the supply of labor and demand for labor
1.3 Define minimum wage and explain the effects of imposition of minimum wage as
price floor in the labor market

Directions: Use the graph below to draw the disequilibrium brought about by the imposition
of a minimum wage and complete the paragraph that follows.

Based on the graph, the supply of labor equals the demand for labor at the wage rate
of __________ and at quantity of __________.

If the government were to set the minimum wage at P520 per day, the supply of
laborers/workers/employees who will be willing to work will __________ from LE of
300 to LSM of __________. On the other hand, the employers/firms will __________
their demand for laborers/workers/employees from LE of 300 to LDM of __________.
As a result of the minimum wage which higher than the wage rate, there will be
__________.

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 Schools Division Office – Marikina City
Parang High School
Senior High School

NAME: __________________________________ Grade & Section: _____________ Date: _______

Activity Sheet # 20 in Applied Economics
Activity Title: “Exchange Rates in the Foreign Exchange Market”
Learning Competency:
1. Analyze market supply, market demand and market equilibrium
1.1 Define exchange rate and explain how it is determined
1.2 Identify the sources of supply of US dollars and other major foreign currencies in
the Philippines
1.3 Explain why there is demand for US dollars and other major foreign currencies in
the Philippines
1.4 Identify the effects of changing exchange rates on imports, exports, labor, etc

Directions: Use the graph below to supply answers to the items that follow.

1. There is neither a surplus nor a shortage of US dollars at the exchange rate of _________.
2. If the exchange rate is P55.00 per US dollar, there is __________.
3. (Based on your answer in #2 item) By how many US dollars? _________.
4. If the exchange rate is P45.00 per US dollar, there is __________.
5. (Based on your answer in #4 item) By how many US dollars? __________.
6. There will be highest exports and biggest numbers of OFWs at the exchange rate of
__________.
7. There will be least imports and lowest amount of foreign debts paid at the exchange rate of
__________.
8-9.Philippine peso is stronger than the US dollar at the exchange rates of __________
and _________.
10. Philippine peso is at its weakest at the exchange rate of __________.

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 Schools Division Office – Marikina City
Parang High School
Senior High School

NAME: __________________________________ Grade & Section: _____________ Date: _______

Activity Sheet # 21 in Applied Economics
Activity Title: “Effects of Exchange Rate on Labor Migration and OFW Phenomenon”
Learning Competency:
1. Analyze market supply, market demand and market equilibrium
1.1 Define labor migration
1.2 Explain how foreign wage rate and exchange rate influence the supply of OFWs
and the demand for OFWs
1.3 Identify the other causes of labor migration
Directions: Analyze carefully the graph and the situation below, plot the new curve/s and answer
the questions that will follow.

Situation: Before the pandemic, the highest monthly salary of an OFW who works in the food service
industry was 1,800 US dollars which was equivalent to P89,100 at an exchange rate of P49.50 per US
dollar. When COVID19 spread worldwide, cities in different parts of the world, including in the US,
imposed lockdowns and international airports were closed. Even lockdowns are subsequently eased in
some places, the food service industry still could barely operate. Thousands of workers including the
OFWs were either laid off or had pay cut. Despite the effect of pandemic on many OFWs, experts see
that the Philippine peso will remain resilient.
If it is projected to end the year 2020 at the exchange rate of P52.00 per US dollar and the wage of
Filipinos working in food service industry will be reduced by 300 US dollars per month at all labor service
supply levels,
1. Will the supply of labor services of OFWs increase or decrease? ____________
2. By how many numbers? ____________
3. How much is the new equilibrium foreign wage rate going to be? ___________
4. How about the new equilibrium supply of labor services? ____________
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 Schools Division Office – Marikina City
Parang High School
5.
Senior High School

NAME: __________________________________ Grade & Section: _____________ Date: _______

Activity Sheet # 22 in Applied Economics
Activity Title: “Rent and Price Structure”
Learning Competency:
1. Analyze market supply, market demand and market equilibrium
1.1 Define rent
1.2 Explain how rent/price of the use of land is determined
1.3 Explain how and where it is best to use a purchased or leased land

Direction: Find out how much is the price of a square meter of lot in Quezon City and in rural
Rodriguez, Rizal or San Mateo, Rizal. Compare the price of lot in the two mentioned
locations. Explain why the price of a hectare of land in rural Rodriguez, Rizal or San Mateo,
Rizal could be lower than a 1,000 square meter of land in Quezon City and where it is best to
use a leased land in each mentioned location.

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