Applied Economics

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

Learning Objectives:
At the end of the module, the students must be able to:
a. explain the concept of demand and supply.
b. explain various factors that determine the demand and supply.
c. solve problems on quantity demanded, quantity supplied, market equilibrium, and elasticity

DEMANDE CURVE

Demand refers to the behavior of people with regard to their willingness and ability to buy
products at given prices. Without the willingness or their ability to buy (called purchasing power),
the needs and wants of consumers cannot be considered their demand. The amount of goods
and services people are willing to buy and consume refer to the quantity demanded Qd. The
tabular quantity demanded at given prices P is called the demand schedule. The graphical
presentation of a demand schedule is termed as the demand curve.

The Law of Demand is simply understood to be that “ when prices of products increase, the
tendency of consumers is to buy less of the product, and when the prices of the products
decrease , the tendency of the consumers is to buy more of the product.” This law, like other laws,
only applies when all other things are held constant (ceteris paribus).

For example, Mang Tomas sells pandesal and he notice the demand whenever there are
changes in prices,

Quantity Price per

demanded piece
15 10
30 8
45 6
60 4

DEMAND CURVE
15
Price per piece

10

0
0 20 40 60 80
Quantity Demanded

The graph then manifests the Law of demand and the relationship of Price and quantity
demanded.
NON- PRICE DETERMINANTS IN DEMAND
Although price is the main determinant of the behavior of the people in the Law of Demand,
reality dictates that not all factors or all other things can be held constant. The following can
produce a shift in the demand:

1. Consumer Income – As it increases, the quantity demanded of a good normally increases

as well
2. Population- As population grows, it also means that the quantity demanded of the good at
any given price also normally increases
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

3. Consumer preferences- If the consumer tastes shifts in favor of a particular good, then there
will also be an increase in the demand of the good
4. Price availability of related goods – There two types of related goods, the complementary
and substitute goods.

Example:
 Tennis rackets and tennis balls are complementary goods. An increase in the price of
the tennis rackets reduces the demand for the tennis balls.
 Margarine and butter are substitute products since they produce almost similar utility
and satisfaction. An increase in the price of butter will reduce its demand and
increase the demand for margarine.

ELASTICITY OF DEMAND

The elasticity of demand, E is a measure to the extent to which the quantity of a good is
demanded. Qd responds to changes in the price of the good. This indicates the degree of
responsiveness or sensitivity of the quantity demanded attributable to a given change in an
independent variable, such as the price of the product, prices of competitive goods, expectation
of price changes, consumer incomes, tastes and preferences, and advertising expenditures.

Mathematically, the price elasticity of demand is shown as follows:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐸=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

(𝑞1 − 𝑞2 )/𝑞1 𝑞1 − 𝑞2 𝑝1
𝐸= 𝑜𝑟 𝑋
(𝑝1 − 𝑝2 )/𝑝1 𝑞1 (𝑝1 − 𝑝2 )

Where: E = computed elasticity demand (stated in absolute value)

𝑞1 = initial quantity demanded of the product
𝑞2 = new quantity demanded of the product
𝑝1 = price of the initial quantity being demanded
𝑝2 = price of the new quantity being demanded
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

CATEGORIES OF ELASTICITY OF DEMAND

Category Computation Interpretation Example Effects on expenditures (Graph) Example
1. Perfectly (𝟏𝟓𝟎−𝟏𝟓𝟎)/𝟏𝟓𝟎
E= (𝟒𝟎−𝟐𝟎)/𝟐𝟎 The changes in the quantity demanded of a 50 Education,
inelastic product do not vary compared to changes in Qd Price Salt

Price
E =0
the prices of the product being demanded. 150 40
0
0 50 100 150 200
150 20 Quantity demanded

2. Highly E=
(𝟏𝟔𝟎−𝟏𝟓𝟎)/𝟏𝟔𝟎
The changes in the quantity demanded of a 75 ___________
Inelastic (𝟔𝟎−𝟕𝟎)/𝟔𝟎
product do not vary significantly compared to Qd Price 70 ___________

Price
E =- 0.375 65
demand changes in the prices of the product being 160 60 ___________
E<1 60
demanded. 55 ___________
150 70
100 150 200
Every 1% change in the price expects the < 1% Quantity demanded
change in Qd.
3. Unitary E= The corresponding change in quantity being 150 ___________
Elastic (𝟏𝟎−𝟏𝟓)/𝟏𝟎
demanded of a product differs in direct Qd Price 100 ___________

Price
(𝟏𝟏𝟐.𝟓𝟎−𝟕𝟓)/𝟏𝟏𝟐.𝟓𝟎
demand proportion to the changes in the prices. 10 112.50 50 ___________
E=1
15 56.25 0 ___________
Every 1% change in the price yields 1% change 0 4 8 12 16
in the quantity demanded of the product. Quantity demanded

4. Highly E=
(𝟗𝟎−𝟕𝟎)/𝟗𝟎
The quantity being demanded of the product ___________
Elastic
(𝟏𝟎−𝟏𝟏)/𝟏𝟎
is highly sensitive to the changes in its prices. A Qd Price ___________
E= -2.22 17
demand small change in the price would almost 90 10 ___________
E<1
immediately cause a great change in the 70 11 9 ___________
quantity demanded of that product.
1
0 45 90
For every 1% change in the price, the change
in the quantity demanded for the product
would be greater than 1%.
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

5. Perfectly E=
(𝟏𝟓𝟎−𝟏𝟎𝟎)/𝟏𝟓𝟎
The quantity demanded of a product vary in 25 Luxury
(𝟐𝟎−𝟐𝟎)/𝟐𝟎
elastic great quantities compared to very little Items
E =𝜶 (𝒂𝒍𝒑𝒉𝒂) 20
change or no change of the prices of the 15
product being demanded.
10
5
Even though there is no price change, there
would be a corresponding change in the 0
0 50 100 150
quantity being demanded.

References:
1. Azarcon, et al. (2008). Principles of Economics. Baguio City: Valencia Book team.
2. Caoile, P. V. (2017). Applied Economics. Quezon City: Phoenix Publishing House, Inc.
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

Name: _____________________________________________ Date: ____________________ Score:_____________

A. Problem Solving. Analyze the following demand problem and answer the requirement by
writing the correct solutions on the spaces provided after each item. Emphasize the answers
with a double rule or a box.
Consider the demand schedule of Sinandomeng rice per sack of a certain barangay during the
pandemic disease COVID-19 in the Philippines:
Price in Php Quantity demanded
2200 55
2250 45
2350 40

a. Determine the equation of demand using :

1. Plot the schedule on the demand graph. Label appropriately. (5 points)

2. Answer the following questions: ( 3 points per item)

a. What is the highest price people are willing to buy the sack of rice?

b. If the price rises to P 2235, what would be the quantity demanded by the consumers?

c. How much would be the change in quantity demanded from the original price to the new
price in item b above?

d. If the quantity demanded at a particular time is 60 sacks, what is the expected price of the
commodity?

e. If the price is expected to decrease by P20 from the initial price, what would be the expected
impact to the quantity demanded of the product?
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 3 – Applied Economics Subject Teacher:

Name:______________________________________ Date:________________________Score:_________________
Multiple Choice. Read the following questions carefully and encircle the correct the letter
corresponding to the answer. (10 points, 1 point each)
1. Highly elastic demand is usually common among
A. Basic goods
B. Luxury goods
C. Medicines
D. Automobiles and crafts

2. The concept of elasticity was advocated by

A. Alfred Marshall
B. Adam Smith
C. David Ricardo
D. None of the above

3. When the quantity demanded of a product is highly sensitive to the changes in its prices, this is
known as
A. Highly elastic demand
B. Unitary elastic demand
C. Highly inelastic demand
D. Perfectly elastic demand

4. The Unitary elastic demand would have a corresponding elasticity of

A. Greater than one
B. Exactly equal to one
C. Less than one
D. Equal to or greater than one

5. Income elasticity has a ______________________ sign and this is due to the _____________________
relationship of income and demand.
A. Negative; direct
B. Negative; inverse
C. Positive; direct
D. Positive; inverse

6. Highly inelastic demand is common among

A. Luxury products
B. Basic products
C. Public products
D. Economic products

7. Highly elastic demand refers to that elasticity wherein

A. For every 1 % change in price there is a corresponding 1% change in the quantity
demanded of the product
B. For every 1% change in price, it is expected that the quantity demanded for the product will
be less than 1%
C. For a 1% change in quantity demanded, there is a corresponding change of more than 1%
of the price
D. None of the above