Applied Economics

Quarter 1 – Module 3:
Analyzing Market Demand,
Market Supply
and Market Equilibrium
Personal Development
Alternative Delivery Mode
Quarter 1 – Module 1: Analyzing Market Demand, Market Supply and Market
Equilibrium
First Edition, 2020

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Applied Economics
Quarter 1 – Module 3:
Analyzing Market Demand,
Market Supply and Market
Equilibrium
Introductory Message
For the facilitator:

Welcome to Applies Economics for Grade 12 Alternative Delivery Mode (ADM)

Module on Analyzing Market Demand, Market Supply and Market Equilibrium !

This module was collaboratively designed, developed and reviewed by educators

both from public and private institutions to assist you, the teacher or facilitator in
helping the learners meet the standards set by the K to 12 Curriculum while
overcoming their personal, social, and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration
their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of
the module:

Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to
manage their own learning. Furthermore, you are expected to encourage and assist
the learners as they do the tasks included in the module.

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For the learner:

Welcome to Applied Economics for Grade 12 Alternative Delivery Mode (ADM)

Module on Analyzing Market Demand, Market Supply and Market Equilibrium!

The hand is one of the most symbolized part of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a
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This module was designed to provide you with fun and meaningful opportunities
for guided and independent learning at your own pace and time. You will be
enabled to process the contents of the learning resource while being an active
learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in
the module.

What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.

What’s In This is a brief drill or review to help you link

the current lesson with the previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of

the lesson. This aims to help you discover
and understand new concepts and skills.

What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.

What I Have Learned This includes questions or blank

sentence/paragraph to be filled in to
process what you learned from the lesson.

What I Can Do This section provides an activity which will

help you transfer your new knowledge or

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 skill into real life situations or concerns.

Assessment This is a task which aims to evaluate your

level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

to you to enrich your knowledge or skill of
the lesson learned. This also tends retention
of learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of
the module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.

We hope that through this material, you will experience meaningful learning
and gain deep understanding of the relevant competencies. You can do it!

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 What I Need to Know

This module was designed and written with you in mind. It is here to help
you master the law of supply and demand, market equilibrium, and factors
affecting the economic situation. The scope of this module permits it to be used in
many different learning situations. The language used recognizes the diverse
vocabulary level of students. The lessons are arranged to follow the standard
sequence of the course. But the order in which you read them can be changed to
correspond with the textbook you are now using.

The module is divided into three lessons, namely:

 Lesson 1. Market Demand
 Lesson 2. Market Supply
 Lesson 3. Market Equilibrium

After going through this module, you are expected to:

1. Explain demand, quantity demanded, and the law of demand
2. Identify a demand curve and a supply curve
3. Identify factors that affect demand
4. Explain supply, quantity supply, and the law of supply
5. Identify factors that affect supply
6. Explain equilibrium, equilibrium price, and equilibrium quantity
Identify factors that affect supply and demand equilibrium.

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 What I Know

A. Choose the one alternative that best completes the statement or

answers the question. Write the chosen letter on your worksheet.

1. Economics is best described as the study of:

a. how markets find resources
b. how businesses maximize profits
c. how goods and services are produced
d. how a country chooses to allocate its scarce resources
e. how banking works
2. Economics looks at
a. how governments satisfy business demand
b. how businesses use unlimited resources to satisfy unlimited
consumer wants
c. how people use unlimited resources to satisfy limited wants
d. how people use scarce resources to satisfy unlimited wants
e. how people use unlimited resources to satisfy their unlimited
wants
3. The relation that the law of demand defines is,
a. Income and price of a commodity
b. Price and quantity of a commodity
c. Income and quantity demanded
d. Quantity demanded and quantity supplied
4. The law of demand means?
a. As the quantity demanded rises, the price rises
b. As the price rises, the quantity demanded rises
c. As the price rises, the quantity demanded falls
d. As supply rises, the demand rises
5. The law of demand states that, other things remaining the same, the
higher the price of a good, the
a. smaller is the demand for the good.
b. smaller is the quantity of the good demanded.
c. larger is the quantity of the good demanded.
d. larger is the demand for the good.
B. TRUE OR FALSE. Write your answer on the space provided in your worksheet
______1. When there is a shortage in a market, there is upward pressure on price.
______2. When we move up or down a given demand curve, all non-price
determinants of demand are assumed to be constant.
______3. If the price of a substitute to good X increases, then the demand for good X
will increase.

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______4. A higher price for batteries would tend to increase the demand for
electricity.
______5. The assumption behind a demand curve is that no economic factors other
than the product’s price are changing. Economists call this assumption ceteris
paribus, a Latin phrase meaning “other things being equal.”

Lesson

1 Market Demand
In the past module you have learned to examine the utility and application of
applied economics to solve economic issues and problems in the Philippine setting.
Now, in this module you will learn new skills in reading supply and demand
graph’s and schedules to help you in analysing market supply, market demands
and market equilibrium.

What’s In

ACTIVITY 1
Economic Scarcity and the Function of Choice:

The following exercises are designed to help students apply their knowledge on the
concept of economic scarcity and incentives that can influence our choices.

Exercise 1: Scarcity
Below is a list of business models that are implemented by various fictitious
companies.

Scarcity
Item Description Resource
present?

A company produces hand-made jewelry using

A
diamonds.
A company produces cell phones which use gold-
B
plated semi-conductors.

A company makes bottled air from Earth in

C anticipation to sell it to aliens as a souvenir
whenever they visit.
A company provides management consulting
D
services to its clients.

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Required:
For each business model, determine the key resource and whether or not there is
scarcity for that resource.

Exercise 2: Incentives
Below is a list of incentive plans provided by the government.

No. Incentive
Families who belong to the poorest of the poor will benefit in the government
program called 4Ps or Pantawid Pamilyang Pilipino Program. The 4Ps is a
human development measure of the national government that provides
1 conditional cash grants to the poorest of the poor, to improve the health,
nutrition, and the education of children aged 0-18. Each child receives every
month a health grant of Php 500 and another Php500 or Php300 for education
grant in high school and in elementary, respectively

2 People that buy MRT passes on an annual basis gets a 30% discount.
3 The Liquor Commission imposes a 20% tax on all alcohol products sold.

Required:
For each incentive, determine the behaviour that the government is trying to
encourage.

What’s New

ACTIVITY 1. 2
The unprecedented outbreak of coronavirus worldwide is driving the demand for
disposable face mask. Specifically, in the Philippines the disposable face cover is
extensively used in the health sector. With an increasing COVID-19 cases along
with other diseases that were admitted in the OPD or in our frontline triad every
day, the demand for the product in our health sector were expected to increase
remarkably.
The function of disposable face mask is to reduce or eliminate the chances of our
frontline workers of being affected by potential environmental contaminants and
also our first line of defence as a preventive measure against SARS COV 19 virus or
globally known as COVID-19 virus. The demand for disposable face mask is likely
to be driven by the existing pandemic in our country with rising consumer
awareness regarding the transmission of COVID-19 Virus from person to person via
droplets, contact, and fomites. More so, a continuing rise in outbreaks of COVID 19
cases in different provinces of our country spikes up the demand of disposable face
mask among the general public.

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Local manufacturer of this product was face with the problem of scarcity of raw
materials and labour force because of the strict implementation of quarantine
policy in the country. The cost of manufacturing it locally is too high as well as the
demand for it. Local manufacturers were still at a lost on how to augment the
current demand of the product without affecting the current price of it. Because of
the increasing price of disposable facemask as well as the increasing demand of it
by the general public as well as private hospitals, our local government opt to
import disposable face mask to address the current demand. Whereas, majority of
the general public resorted to homemade fashioned face cover or handmade
fashionable facemask sold at the marketplace because of the rising price of the
disposable face mask.
What are the factors driving the disposable face masks market?
My Journal Write your explanation in the activity sheets.

Below is the hypothetical demand schedule of disposable face mask before the
outbreak of COVID19 and during the pandemic.

Table 1.1 The Market for Disposable Face Mask

Before During
(in thousand of boxes) (in thousand of boxes)
Price Quantity
Quantity Demanded Quantity Demanded (per box) Quantity Demanded Demanded
Health Sector – A General Public - B Health Sector - C General Public –
D
50 30 100 100 90
35 25 150 85 45
20 15 200 60 20
15 10 250 40 15
10 5 300 20 10

1. Prepare a demand graph for quantity demanded on health market

sector before and during the pandemic.

2. Prepare a separate demand graph for quantity demanded on general

public market sector before and during the pandemic

3. What is the Demand Curve of Disposable Face mask during the

pandemic. Graph and label properly.
(Note: with quantity demanded on the horizontal axis and the price per box on the
vertical axis)

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 What is It

A market is a place where individuals, households, and businesses are engaged in

the buying and selling of products and services through various modes. Markets
have two agents: a buyer (consumer) and a seller.
A Buyer - one who buys something (goods or services)

A Seller – one that offers for sale

The working of a market is governed by two forces, which are demand and supply.
These two forces play a crucial role in determining the price of a product or service
and size of the market. Demand represents the buyers in a market, while supply
represents the sellers.
Supply and demand are the fundamental concepts in economics. We will start in
understanding the Demand Curve (Consumer or buyer side) first.

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What is Demand in Economics?
Demand is an economic principle can be defined as the quantity of a product that
a consumer desires to purchase goods and services at a specific price and time,
when other factors besides price are held constant (ceteris paribus).
Demand is based on needs and wants—a consumer may be able to differentiate
between a need and a want, but from an economist’s perspective they are the same
thing.
Demand is also based on ability to pay. If you cannot pay for it, you have no
effective demand. In other words, both the ability to buy something and the
willingness or the desire to buy to make the purchase must be present in order to
constitute demand. Or simply say the word “demand” refers to the ability and
willingness of people to buy things.
Demand therefore implies three things:

 desire to possess a thing (needs & wants)

 the ability to pay for it or means of purchasing it; and
 willingness to utilize it

Absence of one of the element would mean no demand at all.

The Law of Demand
The Law of Demand says that as the Price goes UP, the Quantity Demanded will go
DOWN. Conversely, if Price goes DOWN. The Quantity Demanded will go UP, ceteris
paribus. What a buyer pays for a unit of the specific good or service is called Price.
The total number of units purchased at that price is called the Quantity
Demanded.

↑P ↓Qd ↓P ↑Qd
The following are some popular definitions of the law of demand given by experts:
Law of Demand Example
Take the example of an individual, who needs to purchase bottled water. In the
market, a pack of three bottles water is priced at 100 and the individual purchases
the pack. In the next week, the price of the pack is reduced to 90. This time the
individual purchases two packs of soft drinks. In the third week, the price of the
pack has risen to 110.
This time the individual does not purchase the pack at all. It is a common
observation that consumers purchase a commodity in greater quantities when its
price is low and vice versa.
This inverse relationship between the demand and price of a commodity is
called the law of demand.
The following are some popular definitions of the law of demand given by experts:

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Robertson defines the law of demand as “Other things being equal, the lower the
price at which a thing is offered, the more a man will be prepared to buy it.”

Marshall defines the law of demand as “The greater the amount to be sold, the
smaller must be the price at which it is offered in order that it may find purchasers;
or in other words, the amount demanded increases with a fall in price and
diminishes with a rise in price.”

Ferguson defines the law of demand as “Law of Demand, the quantity demanded
varies inversely with price.”

The Demand Schedule

To show the rise and fall of the market demands of certain goods or services,
economist will construct a demand schedule to illustrate the definite relationship
between market price of a good and the quantity demanded of that good. Demand
schedule, which are listings that shows the various amounts of an item that
buyers are willing to buy at various prices, is illustrated in a table form.
Example of demand schedule ( Table 1.2 )

The Market for Disposable Face Mask

Pric (in thousand of boxes)
e Quantity Quantity Total
(per Demanded Demanded Quantity
box) Health General Demanded
Sector - C Public – D
100 40 20 60
150 35 15 50
200 30 10 40
250 25 5 30
300 20 0 20
The Demand Curve
Demand curve is a graphical representation showing the relationship between
price and quantities demanded per time period. A demand curve has a negative
slope, thus it slopes downward from left to right. The downward slope indicates the
inverse relationship between price and quantity demanded

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CHANGE IN QUANTITY DEMANDED
The demand schedule has a serious limitation, for example you want to know how many
disposable face masks would be demanded at a price of P275.00 per box? We know the
answer lies between 200 to 250 thousand boxes, but we cannot be more specific. Because
of this limitations economist often construct demand curve to be able to estimates the
quantity demanded at the given price of goods. A Demand curve shows the relationship
between price and quantity demanded on a graph like Figure 2, with quantity demanded on
the horizontal axis and the price per box on the vertical axis. (Note that this is an exception to
the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the
dependent variable (y) goes on the vertical. Economics is not math.)

An example of demand curve shown below base from the demand schedule above, graphs
the price of disposable face mask on the vertical line, and the quantity demanded on the
horizontal line.

Graph 1.1 – Demand curve graph of DFM

Php275; 25,000 boxes

Each dot along the demand curve represents a single price and quantity relationship from
the demand schedule (Table1.2), thus at the price of P150 per box of disposable face mask,
we can see that 50,000 boxes will be demanded by the consumer. At a price of P300 per
box, only 20,000 boxes will be demanded, and so on. The rest of the line that is not marked
by dots represents the in-between data points, whereas, we can derived an estimates of
quantity demand for a given price within the demand curve. To answer the example above;
25,000 boxes of disposable face mask will be demanded if the price were P275per box.

Economic concepts that affect the quantity demanded in relation to price.

Why does quantity demanded tend to fall as prices rises? There are a couple of
economic concepts that help to explain the law of demand. They are the (1) the
income and substitution effects; the income effect simply indicates that, a decline
in the price of a goods will increase the purchasing power of one’s money income,
consumer are able to buy more goods than before. For example, a decline in the
price of fish will increase the purchasing power of consumer income making them
able to buy more fish.
The substitution effect on the other hand suggests that when the price of good rises,
one has the reason to substitute the cheaper goods for similar goods which are now

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relatively expensive. Like for example if the price of disposable face masks
increases, I will buy handmade fashioned face mask which is cheaper than that of
disposable one.
And (2) the principle of diminishing marginal utility. In any given time period
each buyer of the goods will derive less satisfaction or benefit or “utility” from each
successive unit of a goods consumed. For example, the second pack of chocolate
will yield less satisfaction than the first; the third still with less benefit or utility
than the second and so forth. Because consumption is subject to diminishing
marginal utility – successive units of a given product yield less and less extra
satisfaction, consumer therefore will buy only additional units if price is reduced.

Figure 1.3
Normal InferiorMarginal
Good GoodUtility (MU)

Decreased Increased Increased in

Demand Demand MU
Increased in Price
Increased Decreased Decreased in
Decreased in Price
Demand Demand MU

CHANGE IN DEMAND
Let us go back to our starter activity and post this problem to analyse further the difference
of change in quantity demanded as to change in the demand of DFM.
Why does the quantity demanded for disposable face mask tend to fall as the price
rises?
---------
In Table1.2 During the pandemic demand curve of DFM shifted to the right indicating a
positive relation of price and quantity demanded of DFM in the market. So, why does the
demand curve shift? Sometimes, consumers decide to buy more or less, of particular
goods at all possible prices. When, this happens, a change in demands takes place. Unlike a
simple change in quantity demanded, which results from a change in price of the goods, a
change in demand involves a change in the entire demand schedule and the demand
curve. This change in demand is because of the influences other than the change of price of
goods, which for example are expectations, taste or life preferences that reflects genuine
psychological and physiological needs; size of the population increases thus the potential
market for the goods increases too; average income of the consumer increases, people
tend to buy more of almost everything; prices of related goods or substitute items and
lastly changes in the availability and prices of complementary items.
Price of related goods and complementary goods:
A Complementary good is a product or service that adds value to another. Example,
cereal and milk, DVD and a DVD player, petrol and a car. In other words, they are two goods

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that the consumer uses together. It affects demand in a way like if demand for DVD
decreases people will no longer purchase DVD player or vice versa.
A Substitute goods are two or more products that the consumer can use for the
same purpose. Classic examples of substitute goods are the butter and margarine, if butter
increase in price, consumer will purchase more margarine as substitute of the pricey butter.
The figure below summarizes how our demand for a certain good can be impacted by price
fluctuations of other goods.

Complementary Substitute
Item Item
Figure 1.4

Decreased
Increased Demand
Demand
Increased in price
Decreased
Decreased in Price Increased Demand
Demand

Average income of the consumer

Having more money means you can buy more goods, but there are some goods that
you may actually buy less of. In Economics we classify goods into two types: inferior goods
and normal goods. For inferior goods, as your income rises your demand falls. For normal
goods, as income rises your demand rises. Like for examples on a student budget noodles,
canned goods are inferior foods compared to fastfood chicken and rice combo meal. As the
student graduated, got a job and now earning income, the student will likely eat less noodles
and canned goods but will now eat at the fastfood restaurant. On the other hand, as the
students income increases, he/she will likely consume more fastfood and other fine dining
foods, making them normal goods.
The table below summarizes the different effects income changes can have on
demand curve.

Figure 1.5 Normal Inferior

Good Good

Increased Decreased
Increased in Income Demand Demand

Decreased in Decreased Increased

Demand Demand
Income

Taste or Life preferences

Our tastes and preferences change over time, as well as our habit and life preferences, may
it be physical or physiological. Marketing departments also constantly try to influence your

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preferences, and sometimes even create them. That’s because the more you prefer a
product, the more you will demand it.
Expectations
Our expectation of the future price of a good can affect how much we will demand for
it today. How soon you expect prices to change will affect the power of expectations.
If you expect the good to become more expensive, your present demand will increase.
If you expect the good to become less expensive your present demand will decrease.

What’s More

Let us do some exercises to deepen our understanding of market

demand. Choose the letter of the correct answer and write it on your activity
sheets provided or journal notebook.

1. Odette saw that the price of peaches had gone down, and so she decided to
buy more peaches.
Based on this information only, what does Odette's reaction reflect?
a. Odette's demand for peaches has increased.
b. Odette's quantity demanded for peaches has increased.
c. Odette has experienced an increase in income.
d. Odette observed that there has been an increase in the price of other
fruit, a substitute for peaches.
e. Odette expects future price changes.

2. According to the law of demand, what happens when the price of ice cream
maker machine decreases?
a. The quantity supplied of Ice Cream Maker Machine increases
b. The demand for the toppings used by Ice Cream Maker Machine
decreases
c. The quantity demanded of Ice Cream Maker Machine increases.
d. The supply of Ice Cream Maker Machine decreases
e. The demand for Ice Cream Maker Machine decrease

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 3. Aida, Lorna, and Fe's demand schedules for chicken inasal are all given in
the table below. Assume that these three people are the only buyers in the
market for chicken inasal.
Aida's
quantity Lorna's quantity Fe's quantity
Price demanded demanded demanded
P0.00 10 8 6
P1.00 8 6 4
P2.00 6 4 2
P3.00 4 2 0
P4.00 2 0 0
P6.00 0 0 0
Which of the following best describes the market demand schedule for
chicken inasal?
a. Price; Market Quantity
P0.00 0
P1.00 12
P2.00 6
P3.00 12
P4.00 8
P6.00 0

b. Price; Market Quantity

P0.00 16
P1.00 12
P2.00 8
P3.00 4
P4.00 2
P6.00 0

c. Price; Market Quantity

P0.00 14
P1.00 10
P2.00 6
P3.00 2
P4.00 0
P6.00 0

d. Price; Market Quantity

P0.00 24
P1.00 18
P2.00 12
P3.00 6
P4.00 2
P6.00 0

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 Key Terms
Term Definition
all of the quantities of a good or service that buyers would be willing
and able to buy at all possible prices; demand is represented
demand graphically as the entire demand curve.
a table describing all of the quantities of a good or service; the demand
demand schedule is the data on price and quantities demanded that can be
schedule used to create a demand curve.
a graph that plots out the demand schedule, which shows the
demand curve relationship between price and quantity demanded
all other factors being equal, there is an inverse relationship between a
good’s price and the quantity consumers demand; in other words, the
law of demand is why the demand curve is downward sloping; when
law of demand price goes down, people respond by buying a larger quantity.
the specific amount that buyers are willing to purchase at a given price;
quantity each point on a demand curve is associated with a specific quantity
demanded demanded.
change in
quantity a movement along a demand curve caused by a change in price; a
demanded change in quantity demanded is a movement along the same curve
when buyers are willing to buy a different quantity at all possible prices,
change in which is represented graphically by a shift of the entire demand curve;
demand this occurs due to a change in one of the determinants of demand.
changes in conditions that cause the demand curve to shift; the
mnemonic TONIE can help you remember the changes that can shift
determinants of demand (T-tastes, O-other goods, N-number of buyers, I-income, E-
demand expectations)
normal good a good for which demand will increase when buyers’ incomes increase.
a good for which demand will decrease when buyers’ incomes
inferior good increase.
substitute goods that can replace each other; when the price of a good increases,
goods the demand for its substitute will increase.
complement goods that tend to be consumed together; when the price of a good
goods increases the demand for its complement will decrease.

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 What I Have Learned

Test yourself by answering the following questions in your journal or

worksheet;

1. State the law of demand.

2. What is the difference between demand and quantity demanded?
3. What factors can lead to a change in demand? List an example.
4. How is the word “demand” used in Economics?
5. Will the plan of Department of Education to have an online and blended
learning system shift the demand curve for gadgets and internet usage?
Why?
6. What situation in your student life that you can site as an example of the
income and substitution effect principle.

What I Can Do

Activity 1.3
To explore how the law of demand operates in your community, ask a merchant/business
owner or a sari-sari store owner in your community, what items in their store that they
usually alter the price if the demand decreases or increases, and which of these items they
generally put on sale and why. Summarize your findings in a short report.

Assessment

A. Match each of the following terms with the correct definition.

15
Substitution effect demand curve demand schedule market
Principle of diminishing marginal utility Income effect demand
Quantity demanded law of demand price elasticity of demand

1. A law stating that as the price of goods or services increases and other things remain
unchanged, the quantity demanded by buyers will decrease; as the price of goods or
services decreases and other things remain unchanged, the quantity demanded by
buyers will increase.
2. A listing showing the various amounts of an item that buyers are willing and able to
buy at various possible prices during some state time period.
3. The arrangement through which potential buyers and sellers come together to
exchange goods and services.
4. The ability and willing ness of people to buy things.
5. The ability to purchase more or less of an item without spending any more or less
money.
6. A graphical representation of demand schedule.
7. A specific quantity that will be demanded at a specific price.
8. The tendency for individuals to receive less and less additional satisfaction from an
item as they obtain more and more units of the item during a specified time period.
9. The tendency of consumers to substitute lower priced item for more expensive items.
10. What a buyer pays for a unit of the specific good or service.

Additional Activities

Activity 1.4

Cut, paste and explain

Cut several recent newspaper of magazine clippings that describe a change in the demand
of some commodity. Paste the clippings in a clean bond paper and attached one whole
sheet of pad paper. Write on it your analysis of the demand (prepare a demand schedule
and the graph if applicable) and explain the factors affecting changes on demand of your
chosen commodity.

16
 Answer Key

Assessment What's New What I Know

Matching Ans. Starter Activity Multiple Choice True or False

No. 1 - Key factors 1. d

1. The law of demand
that are driving the 1. True
2. Demand schedule 2. d
market growth include
3. Markets 2. True
4. Demand
the increasing need to 3. b
5. Income effect
curb the number of 3. True
COVID-19 cases in 4. c
6. Demand curve 4. True
7. Quantity Demanded our country and the 5. b
8. Principle of rising health 5. True

diminishing marginal awareness among

utility consumers.
9. Substitution effect
10. Price

What's In
Solution - Exercise 1
Ite
Resource Scarcity present?
m
A Diamonds Yes
B Gold Yes
No (although theoretically there is a limited amount of air around Earth, a
C Air
single company would never be able to absorb all of it!)
D Labor Yes

Solution - Exercise 2
No
Behavior
.
1 Having babies (i.e., growing the population size)
2 Using environmentally-friendly transit instead of personal cars to commute to work.
3 Consume alcoholic beverages in moderation.

17
 What's More
1. b. A change in quantity demanded is a change in the quantity that a buyer is
willing to buy in response to a price change.
2. c. The law of demand suggests that price and quantity demanded change in
opposite directions. When the price of a good decreases, its quantity demanded
increases.
3. d. The market demand is the sum of individual demand curves.

References
www.merriam-webster.com

https://www.geektonight.com/what-is-demand-in-economics/

https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-supply-and-
equilibrium-in-markets-for-goods-and-services/Soaring 21st Century Mathematics
6, pp. 62-78
https://www.thoughtco.com/basic-supply-and-demand-analysis-1147945
https://www.thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-1146930

https://pressbooks.bccampus.ca/uvicecon103/chapter/1-1-what-is-economics-and-why-is-it-
important/

https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/economics-
terms-and-concepts/supply-and-demand

Principles of Economics With Taxation and Agrarian Reform Simplified; Pages27 – 45; Author:
Edilberto B. Viray Jr.; Ma. Jesusa Avila-Bato; Antonio Carlos B. Bautista

https://study.com/academy/lesson/what-is-economics-definition-history-timeline-importance.html

18
 What I Know

MULTIPLE CHOICE. Choose the one alternative that best completes the statement
or answers the question. Choose the letter of the best answer.
1. At the existing price, quantity supplied exceeds the quantity demanded; also
called a surplus.
a. Equilibrium price c. Excess demand
b. Excess supply d. Shortage
2. The relationship between price and the quantity supplied of a certain good or
service.
a. Surplus c. Supply
b. Law of supply d. Price
3. The total number of units of a good or service producers are willing to sell at
a given price.
a. Quantity demanded c. Quantity supplied
b. Quantity surplus d. Quantity shortage
4. What a buyer pays for a unit of the specific good or service
a. Price c. Price elasticity
b. Equilibrium Price d. Price reduction
5. Each point on a supply curve represents
a. the highest price sellers can get for each unit over time.
b. the lowest price buyers will accept per unit of the good.
c. the lowest price for which a supplier can profitably sell another unit.
d. the highest price buyers will pay for the good.
6. An increase in the number of fast-food restaurants
a. ncreases the demand for substitutes for fast-food meals.
b. raises the price of fast-food meals.
c. increases the supply of fast-food meals.
d. increases the demand for fast-food meals.
7. People come to expect that the price of a gallon of gasoline will rise next
week. As a result,
a. next week's supply of gasoline decreases.
b. the price of a gallon of gasoline falls today.
c. today's supply of gasoline increases.
d. today's demand for gasoline increases.
8. If there is surplus of a good, then the quantity demanded ________ the
quantity supplied and the price will ________.
a. is less than; rise c. is less than; fall
b. is greater than; fall d. is greater than; rise
9. A rise in the price of a good causes producers to supply more of the good.
This statement illustrates
a. the nature of an inferior good. c. the law of demand.
b. the law of supply. d. a change in supply.

19
 10.A consumer might consider in-line skates and elbow-pads to be
a. unrelated goods.
b. substitutes.
c. products with upward sloping demand curves.
d. complements.

Lesson

2 Market Supply

In the past lesson you have learned new skills in reading graph’s and demand schedule to
help you in analysing market demand and demand curve. In this lesson, you will gain
another skill reading graphs and supply schedule in analysing market supply and supply
curve.

What’s In

Activity 2.1
In the past lesson we have learned to plot the demand graph of disposable face
mask in relation to the current pandemic in our country. Demand is relative to
consumer behaviour in their willingness and ability to purchase a goods or
services, while Supply is relative to Suppliers behaviour in their willing ness and
ability to produce and make goods and services available for sale in the market.

Let us presume, in continuation to our starter activity in the previous lesson, the
suppliers ability to make or produce the disposable face mask and made it
available for sale in the market. Below is the hypothetical supply schedule of
disposable face mask in the health sector and general public.

Base on the graph below perform the following task;

1. Graph the supply schedule for the Health Sector.

2. Graph the supply schedule for the General Public Sector.
3. Graph the supply curve for disposable face mask

20
 Table 2.1 Supply Schedule for Disposable Face Mask (DFM) –
Health Sector
Quantity Supplied – Quantity Supplied –
Price Health Sector General Public
(in thousand boxes) ( in thousand boxes)
300 300 600
250 250 450
200 200 350
150 150 300
100 100 150

What’s New

Figure 2.1

1. Refer to the graph above. A change from Point A to Point E represents a(n):
a. increase in supply.
b. decrease in supply.
c. increase in quantity supplied.
d. decrease in quantity supplied.
2. Refer to the above graph again. A change from Point A to Point D represents a(n):
a. decrease in quantity supplied.
b. increase in quantity supplied.
c. decrease in supply.
d. increase in supply.
3. Refer to the above graph again. A change from Point A to Point B represents a(n):
a. increase in supply.
b. decrease in supply.
c. increase in quantity supplied.
d. decrease in quantity supplied.

21
 What is It

Supply for Goods or Services

The law of demand only partially explains the relationship between price and the
quantity of goods and services bought and sold. The other part of the explanation
lies in the concept of supply. Like the word “demand” the word “supply” also has a
specific meaning in economics. When economists talk about supply, they mean the
amount of some good or service a producer is willing to supply at each price. Price
is what the producer receives for selling one unit of a good or service. Supply, is
the quantity of goods or services that the firms are ready and willing to sell at a
given price with in a period of time, other factors being held as constant. Thus,
supply is a product made available for sale by the manufacturer or supplier.

Law of Supply

↑P↑ Qs ↓P ↓Qs

The relationship between price and quantity supplied is known as the law of
supply. According to the law of supply, if the price of good or service goes up, the
quantity supplied for such good or service will also go up; if the price goes down,
the quantity supplied also goes down, ceteris paribus. Like the law of demand this,
law is largely common sense. It should be remembered that, as prices rise,
supplier/sellers will be willing to supply larger quantities of their goods and
services.

The Supply Schedule

Just like demand, supply can be stated in the form of schedule. A supply schedule
is a schedule listing the various prices of a product and the specific quantities
supplied at each of these prices. Generally, the information provided by a supply
schedule can be used to construct a supply curve showing the price vs quantity
supplied relationship in graphical form.

The Supply Curve

The supply schedule has the same limitations as the demand schedule, economist
usually present the data from supply schedule graphically in the form of supply
curve. Simply, a supply curve is a graphic illustration of the relationship between
price, shown on the vertical axis, and quantity, shown on the horizontal axis. The

22
supply schedule and the supply curve are just two different ways of showing the
same information.

Figure 2.2

Vertical axis

Horizontal axis

Change in supply versus change in quantity supplied

Just as demand can change, supply can change as well. There is a change in
quantity supplied if the movement is along the same supply curve. A change in
quantity supplied occurs if the price of the good being sold in the market by the
sellers, changes. It is illustrated by movement from one point to another point
along the same supply curve.

Figure 2.3
In this diagram the movement is along the supply curve. A change in
quantity supplied is a movement along the supply curve in response to a
change in price.

 A higher price causes an extension along the supply curve (more is supplied)
 A lower price causes a contraction along the supply curve (less is supplied)

A change in supply is a shift of the entire supply curve in response to something

besides price. There is change in supply when the entire demand-supply curve
shifts upward or downward.

23
 Figure 2.4 Upward Shift of Supply Curve (to the left)

In this diagram the supply curve shifts to the left. It leads to a higher price and fall
in quantity demand. The supply curve may shift to the left because of:

 Higher costs of production

 Higher taxes
 Fall in productivity

Figure 2.5 Downward shift of supply curve (to the right)

In this diagram, supply and demand have shifted to the right. This has led an
increase in quantity (Q1 to Q2) but price has stayed the same.

It is possible, that if there is an increase in demand (D1 to D2) this encourages

firms to produce more and so supply increases as well.

Factors affecting supply

Just like demand there are also forces that cause the supply curve to change.
There are a number of factors that cause a shift in the supply curve: input prices,
number of sellers, technology, natural (e.g. weather conditions) and social factors
(government policy), as well as expectations.

24
Number of sellers

The number of sellers in a market has a direct impact on supply. When more firms
enter a market to sell a specific good or service, supply increases. For example if
more farmers will plant rice instead of other crops, the supply of rice in the market
will increase due to more production, assuming that no destructive calamities will
strike the country. That is the supply curve shifts to the right. Meanwhile, when
firms exit the market, supply decreases, i.e. the supply curve shifts to the left.

• Number of Sellers: An increase in the number of sellers in a market will shift

market supply to the right, and a decrease in the number of sellers will shift
market supply to the left.

Input Prices

Firms use a number of different inputs to produce any kind of good or service (i.e.
output). When the prices of those inputs increase, the firms face higher production
costs. As a result, producing said good or service becomes less profitable and firms
will reduce supply. That is the supply curve shifts to the left (i.e. inward). By
contrast, a decrease in input prices reduces production costs and therefore shifts
the supply curve to the right (i.e. outward).

• Input Prices: An increase in input prices will shift the supply curve to the
left. Conversely, a decrease in input prices will shift the supply curve to the right.

Technology

The use of advanced technology in the production process increases supply

because it increases productivity, which makes the production of goods or services
more profitable. As a result, the supply curve shifts right. But need to take note
that technology in the context of the production process usually only causes an
increase in supply, but not a decrease. The reason for this is simple: new
technology is only adopted if it increases productivity. Otherwise, sellers can just
stick with the technology they already have, which does not affect productivity (and
thus supply).

• Technology: An increase in technology will shift the supply curve to the right.
Conversely, a decrease in technology will shift the supply curve to the left.

Weather Condition (Natural Factors)

Typhoon, droughts or other natural disasters, reduces the supply of agricultural

commodities, while good weather increases or has an opposite impact. For
instances, Kanla-on eruption destroys the vegetable farm in Kanla-on, the supply of
vegetables particularly in Negros Island will decline.

Government Policy (Social Factors)

Taxes and restricted regulations are imposed by the Government on imported

products as well as local goods. Removing quotas and tariffs on imported products
will increase the supply of imported goods, but it will greatly affect local products

25
that is why it is regulated and some restrictions were implemented to protect
domestic or local products.

Future Expectations

Last but not least, the seller’s expectations of the future have a significant impact
on supply. This factor impacts sellers as much as buyers. Sellers, if they expect
prices to increase in the near future, they will hold some of their output back (i.e.
reduce current supply) in order to increase supply in the future, when it becomes
more profitable.

• Expectations: A change in expectations that increases current supply will

shift the supply curve to the right, and a change in expectations that decreases
current supply will shift the supply curve to the left.

In a nutshell, any change in supply causes the supply curve to shift. An increase in
supply causes the entire supply curve to shift to the right, and a decrease in supply
causes the entire curve to shift to the left.

What’s More

Technology:

Pam sells hand-shaped soaps at farmer's market. She recently created a

revolutionary new soap production technique that doubled her production without
having to use more resources.

What changes as a result of Pam’s innovation?

a. The supply of hand-shaped soap increases.

b. The supply of hand-shaped soap decreases.
c. The demand for soap increases.
d. The quantity supplied of hand-shaped soap decreases.
e. The demand for soap decreases.

26
 a. higher worker wages
b. an improvement in technology used in production
c. an increase in raw material prices
d. a decrease in the number of producers in the market
e. an increase in the taxes

Factors of Production / Input prices

Assume that basketballs and volleyballs use identical resources to produce and can
be made with the same workers and machinery.

How would an increase in the price of basketballs affect the production of

basketballs and volleyballs?

a. Quantity supplied of basketballs will not be affected

b. Supply of volleyballs will decrease
c. Supply of volleyball will increase
d. Quantity supplied of volleyballs will increase
e. Quantity supplied of basketballs will decrease

Expectations

Assume that crayons can be stored indefinitely.

What happens today if producers of crayons expect to get higher prices in the
future?

a. The demand for crayons increases

b. The supply and demand for crayons both increase
c. The supply of crayons increases
d. The supply of crayons decreases
e. The quantity supplied of crayons decreases

27
Check your understanding with these following questions;

1. How is the word “supply” used in economics?

2. State the law of supply.
3. Describe the difference between supply and quantity supplied.
4. What factors can cause a change in supply?

What I Can Do

Activity 2.2
During the quarantine period COVID 19 pandemic early March of this year up to
this period of MGCQ, the local government unit issued ordinances for closure of
several businesses and others were allowed but with imposed restrictions as to no
dining in allowed, no customers more than 50% of the establishment capacities are
allowed and the like. Because of these restrictions local businesses in your
barangay were affected. Several business owners resorted into online selling. In
your community site for a business establishment or look for a local entrepreneur
who opted for online selling and interview him/her about their online business
initiatives, what are the factors affecting production of their products and selling it
online. List down your observation and make a report using supply curve analysis.

What I Have Learned

Assessment
1. An increase in the price of a product will reduce the amount of it
purchased because:
a. supply curves are upsloping

28
 b. the higher price means that real incomes have risen.
c. consumers will substitute other products for the one whose price
has risen.
d. consumers substitute relatively high-priced for relatively low-
priced products.

2. Refer to Figure above. A change from Point A to Point C represents a(n):

a. increase in supply.
b. decrease in supply.
c. increase in quantity supplied.
d. decrease in quantity supplied.
3. If bread is an inferior good, then what will happen in the market for
bread as the consumer income increases?
a. The quantity will increase.
b. The quantity will decrease.
c. The price will fall.
d. Both a) and c) are correct.
e. Both b) and c) are correct.
4. ________________ is the study of how group of individuals make decisions
about the allocation of scarce resources.
a. Positive economics
b. Normative Economics
c. Economist
d. Economics
5. Suppose that the supply curve for a good is vertical. In this case we
would expect
a. Nothing to be sold so not tax collected
b. A tax placed on the buyer to be borne entirely by the seller
c. A tax placed on the buyer to be borne entirely by the buyer
d. The tax to be shared equally both buyer and seller
6. Say at the current price there is an excess supply in the market for
bicycles. In the future the price for bicycles will:
a. Increase.
b. Decrease.
c. Stay the same.
d. Increase or decrease; but really can’t tell.
7. Say the price for MP3 songs increases. Other things equal the:
a. Demand for MP3 songs will decrease
b. Quantity demanded for MP3 songs will decrease
c. Supply for MP3 songs will increase
d. Quantity supply for MP3 songs will decrease

29
 8. A good that is not scarce
a. Would have a vertical supply curve over the relevant range
b. Would have a zero price
c. Is not in demand
d. Would have an infinite price

9. If the number of suppliers in the microcomputer industry increases, what

would we expect to happen?
a. The number of microcomputers sold will fall
b. The price of microcomputers will rise.
c. The supply curve will shift left
d. Movement along the demand curve will occur.
10. A supply curve is a graphical illustration of the relationship between
price, shown on the vertical axis, and ____________, shown on the
horizontal axis.
a. Demand
b. Quantity
c. quantity supplied
d. quantity demanded

Additional Activities

Activity 2.3
After learning the law of supply and demand, write the things you gained from lesson
1 & 2.

I have known that . . .

Knowledge

I learned these skills . . .

Skills

After these activities, I felt . . .

Attitude

30
 I become more . . .

Habits

Answer Key

What I Assessment
Know Multiple Choice
Multiple 1. C
Choice 2. B
1. B 3. E
2. C 4. D
3. C 5. B
4. A 6. B
5. C 7. B
6. C 8. B
7. D 9. D
8. C 10. B
9. B
10. D

31
What’s More
Technology:
Answer:
a. an improvement in technology used in production
Better technology leads to an increase in supply and a shift to the right.

What changes as a result of Pam’s innovation?

a. The supply of hand-shaped soap increases.
When technology improves, Pam can make soap at every price. Therefore her supply curve will increase (shift to the Right)
Factors of Production / Input prices
Answer :
a. Supply of volleyballs will decrease
Since basketballs and volleyballs are substitutes in production, producers will allocate more resources towards basketballs and
fewer towards volleyballs when basketballs prices increase.
Expectations
Answer:
a. The supply of crayons decreases
If suppliers expect a better price in the future, and the item can be stored, seller can keep that item in inventory and sell it later,
rather than today. This decreases the supply of good today.

References

- https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-
supply-and-equilibrium-in-markets-for-goods-and-services/Soaring
21st Century Mathematics 6, pp. 62-78
- https://www.thoughtco.com/basic-supply-and-demand-analysis-1147945
- https://www.thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-
1146930
- https://pressbooks.bccampus.ca/uvicecon103/chapter/1-1-what-is-economics-and-
why-is-it-important/
- https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-
labor/economics-terms-and-concepts/supply-and-demand
- Principles of Economics With Taxation and Agrarian Reform Simplified; Pages27 –
45; Author: Edilberto B. Viray Jr.; Ma. Jesusa Avila-Bato; Antonio Carlos B. Bautista
- https://opentextbc.ca/principlesofeconomics/chapter/3-2-shifts-in-demand-and-
supply-for-goods-and-services/
- https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/unit-2-
supply-and-demnd/22/e/changes-in-the-determinants-of-supply

32
 What I Know

MULTIPLE CHOICE:
1. The term "ceteris paribus" means that:
a. everything is variable.
b. all variables except those specified are constant.
c. no one knows which variables will change and which will remain constant.
d. what is true for the individual is not necessarily true for the whole.
2. The ___________ is the only price where quantity demanded is equal to quantity
supplied.
a. equilibrium price
b. horizontal axis intercept
c. vertical axis intercept
d. market price
3. If the price is below the equilibrium level, then the quantity demanded will exceed the
quantity supplied. This is known as ___________________
a. excess supply
b. excess demand
c. ceteris paribus
d. a price ceiling
4. The ____________ is the quantity where quantity demanded and quantity supplied
are equal at a certain price.
a. quantity demanded
b. equilibrium quantity

33
 c. demand schedule
d. supply schedule
5. Which of the following definitely causes a fall in the equilibrium price?
a. a decrease in both demand and supply
b. an increase in demand combined with a decrease in supply
c. a decrease in demand combined with an increase in supply
d. an increase in both demand and supply

MATCHING TYPE:

Column A Column B
1. Surplus _____ a.) is the legal maximum price imposed by the
government.
2. Floor Price _____ b.) is a condition in the market in which demand is higher
than supply.
3. Equilibrium _____ c.) is the legal minimum price imposed by the government.
4. Shortage _____ d.) generally pertains to a balance that exists when
quantity demanded equals quantity supplied.
5. Price Ceiling _____ e.) is a condition in the market where the quantity supplied
is more than the quantity demanded.

Lesson

3 Market Equilibrium

In the past lesson you have learned new skills in reading graph’s, demand and
supply schedule. In this lesson, we will discuss the market price agreed by both
seller and buyer that we call equilibrium market price.

What’s In

Activity 3.1
The current pandemic forces our legislative government offices to imposed stricter public
ordinances in our country in order to slowdown and eventually eradicates the virus that
affected us all. The pandemic also affected the educational system of our country. Our head

34
of state, declared that no face to face class until vaccine will be made available to the public.
Because of this mandate the educational department of our country planned to take the
educational level to a new normal which are online classes and blended learning system.
Our current educational system created an opportunity to our local computer and tablet
manufacturer to hasten their production because of this anticipated demand to rise as the
opening of class comes near.

Supposed, a local manufacturer projected the market demand and market supply curve of
their Computer APPO during this time of pandemic. Below is the hypothetical schedule of
projected market demand and market supply of Computer APPO.

Price Market Demand of Market Supply of

(in thousand pesos) Computer APPO Computer APPO
(in million units) (in million units)
10 800 200
15 700 400
20 600 600
25 500 800

1. Refer to the demand and supply schedule above. If price is P15 thousand, quantity
supplied would be
a. 200 million units.
b. 400 million units.
c. 500 million units.
d. 700 million units.
2. At a price of P20
a. the market would be in equilibrium.
b. 600 million units would be bought and sold.
c. there would be no pressure for price to change.
d. All of the above are true.
3. In this market, equilibrium price and quantity would be
a. P15, 400.
b. P20, 600.
c. P25, 500.
d. P25, 800.

What’s New

35
One of the most important aspects of the transactions between buyers and seller in a market
is the determination of prices. In a competitive market, demand for and supply of a good or
service determine the equilibrium price. From previous lessons of supply and demand we
now proceed to reconciling the two market. In order to understand how supply and demand
determine market price, let us put together the demand and supply curves for Computer
APPO.

Draw the market model (a demand curve and a supply curve) of Computer APPO, base from
the demand and supply schedule above.

Equilibrium

Graph 3.1 Supply and Demand Curve for Computer APPO

Base on the graph above the quantity demanded and the quantity supplied equals at the
price of P20. Therefore, the equilibrium price for Computer ABC is P20 and the equilibrium
quantity is 600 units.

What is It

EQUILIBRIUM
The word “equilibrium” means “balance.” In Economics, equilibrium generally pertains to a
balance that exists when quantity demanded equals quantity supplied. It is the point where
the supply curve (S) and the demand curve (D) cross. It shows the general agreement of the
buyer and the seller at a particular price and a particular quantity. Price is defined as the
pecuniary consideration that induces the exchange of a unit of a commodity or service
between the buyer or and the seller. Assuming that the exchange involve is voluntary, price
may be thought of as a manifestation of a “meeting of minds.”

36
 Figure 3.2

Equilibrium Market Price

The equilibrium market price is that price at which the quantity demanded just equals the
quantity supplied which occur graphically at the intersection of the supply and demand
curves shown in Graph 3.1 above.

A higher initial price (say P25) results in excess supply (Q S = 800 and QD = 500) of 300
units. The excess supply of 300 units forces the price down in order to eliminate the excess
supply. While, a lower initial price (say at P10) results in excess demand (QS = 200 and QD =
800) of 600 units. In this case price is forced up in order to eliminate the excess demand.
Only at price P20 are demand and supply starts fully synchronized.

MARKET DISEQUILIBRIUM
What happens when there is market disequilibrium? When there is market disequilibrium,
two conditions may occur: a surplus or a shortage.

SURPLUS

Figure 3.3

At a price above the equilibrium, producers want to supply more than consumers want to
buy, which results in a surplus of goods and exerts downward pressure on prices.

37
Surplus is a condition in the market where the quantity supplied is more the quantity
demanded. When there is surplus, the tendency of the seller is to lower market prices in
order for the goods to be easily disposed in the market and to restore equilibrium to the
market.

SHORTAGES

Figure 3.4

Similarly, the price below the equilibrium generates shortages. Shortage is a condition in
the market in which demand is higher than the supply. When the market is experiencing
shortage, there is a possibility that consumers can be abused, while the producers enjoy
imposing higher prices. When there is a shortage, there is an upward pressure on prices to
restore equilibrium to the market, due to the fact that buyers will tend to bid for prices in
order for them to acquire the goods or services that are in short supply.

Government Interference and the Laws of Supply and Demand

What happens if disequilibrium in the market persists at a longer period of time? If this
happens, the government may intervene by imposing price controls and the government can
establish prices that are either above or below the prices set by the free market. This
intervention has taken the form of either price ceilings or price floors. This price control is
the specification by the government of minimum and/or maximum prices for goods and
services. The price may be fixed below the market equilibrium price or above it, depending
on the current economic event that affects demand – like an occurrence of worldwide
pandemic, new normal way of living and expectations about the future health and economic
status of our government; and/or on the current economic event that affects supply – like a
change in natural conditions, input prices, development of new technology, new competitor,
government policies that affect production like curfew hours, skeletal forces applied, and
minimum number of workers allowed in an establishment and the like.

38
Price Ceilings

Price ceilings are government-imposed regulations that prevent prices from rising above a
certain maximum level. During periods of rapidly rising prices, the government has at tmes
attempted to halt the price increase by making it illegal for prices to rise above a level it has
established. For example the price of face shield and face mask in the market this current
COVID19 pandemic. The government required the people to mandatory use of face mask
and face shield in public places like grocery stores, government offices, hospital and public
transportation. Hoarder of face shield were planning to sell the required public health
standard PPE at a price of P60 to a high price of P100 pesos because they have seen the
future increase in demand of face shield. The government set the price of face shield not
more than P50 pesos to prevent the price of face shield in the market from getting high and
to prevent false shortage of face shield in the market.

Price Floors

Price Floors or Floor Price are government-imposed regulations that prevent prices from
falling below a certain minimum level. This is undertaken if a surplus in the economy
persists. In this case, government may impose a minimum price on producer’s
commodities. The government often establishes price floor for agricultural products in order
to prevent the price of these produce or product from falling below the cost of production.
Thus, it is preventing bigger losses on the part of the producers (especially farmers). In other
words, the government guarantees farmers a certain minimum price of their produce for
them to survive in their business. Generally, floor price are imposed on agricultural products
by the government, especially when there is bumper harvest.

What’s More

When prices are established by a free market, then there is a balance between supply and
demand. The quantity supplied at the market price equals the quantity demanded at that
price. So, the government imposition of price controls causes either excess supply or excess
demand, since the legal price often differs greatly from the market price. Let us take a look at
the 2 graphs below to understand more the effect of government imposed price control with
the prices of goods and services in the free market.

Graph A

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A price ceiling creates a shortage when the legal price is below the market equilibrium
price, but has no effect on the quantity supplied if the legal price is above the market
price. A price ceiling below the market price creates a shortage causing consumers to
compete vigorously for the limited supply, limited because the quantity supplied declines with
price.

Example of a price ceiling: Rent Control

Rent control is a common type of price ceiling in municipalities with large tourism market
(e.g. Boracay, El Nido Palawan, Baguio). It is often impose to make housing affordable to
migrant workers and lodging rate affordable also for tourist especially long staying tourist.
However, rent control decreases the availability of hotels or apartments, since suppliers or
landlords do not wish to spend money to build more apartments when they cannot charge a
profitable rent/rate. More so, landlords do not build anymore apartments, but also, do not
maintain the ones they have, not only to save cost, but also because they do not have to
worry market demand, since there is excessive demand for rent-controlled apartments.
Hence, excess demand and limited supply leads to a large shortage.

Graph B

40
Likewise, since supply is proportional to price, a price floor creates surplus if the legal price
exceeds the market price. Suppliers are willing to supply more at the price floor than the
market wants at that price.

Example of a price floor: Minimum Wage

Minimum wage law require employers to pay all employees at least the minimum wage rate.
The purpose of this act is to ensure workers a minimum standard of living. While the
minimum wage increases, it increases unemployment, since the demand for labor, as is the
demand for other things, varies inversely to price. So while the employed earn higher wages,
the unemployed earn nothing. Teenagers and minorities are particularly affected. People
with specialized skills have a larger market demand, so they are unaffected by minimum
wage laws because their pay already exceeds the minimum wage.

What I Have Learned

Activity 3.2
Fill in the accompanying table, showing whether equilibrium price and equilibrium
quantity go up, down or stay the same, or indeterminate.

No Change in Supply An Increase in Supply A decrease in Supply

41
 P= P= P=
No Change in Demand
Q= Q= Q=

An Increase in P= P= P=
Demand Q= Q= Q=

P= P= P=
A Decrease in Demand
Q= Q= Q=

What I Can Do

Activity 3.2
Can you think of an example of a good in this current pandemic which there was a
shortage? What happened to the price of that good? Discuss and illustrate your
thoughts in a graphical or table form. Write your answer in your journal.

Activity 3.3

Using correctly labelled graph, show the impact on equilibrium price and quantity in
the market for smart phone if the cost of producing them during this pandemic
increases. [Explain]

Assessment

1. Considering the existence of the economic principle, Ceteris Paribus, which

figure illustrates a supply curve?

42
2. Considering the existence of the economic principle, Ceteris Paribus, which
figure illustrates a demand curve?

3. Refer to the graph below; which of the following correctly identifies the
equilibrium price and quantity of good Y?

a. P3, QA b. P4, QB c. P5, QC d. P4, QC e. Point X

4. Refer to the graph above; which of the following represents the shortage that
would result in this market at a price of P5?
a. QA - QB b. QB - QC c. QC d. QC - QA e. QA

43
 5. The equilibrium price and quantity in the above figure is
a. ₱2; 100units. b. ₱8; 400units. c. ₱4; 400units d. ₱6; 300units

6. At a price of ₱10 in the above figure, there is

a. a surplus of 400 units. b. a shortage of 200 units.

c. a surplus of 200 units. d. a shortage of 400 units

7. At a price of ₱4 in the above figure,

a. there is a surplus of 200 units. b. the equilibrium quantity is 400 units.

c. the quantity supplied is 400 units. d. there is a shortage of 200 units.

8. If the good in the above figure is a normal good and income rises, then the
new equilibrium quantity
a. is more than 300 units.
b. is less than 300 units.
c. could be less than, equal to, or more than 300 units.
d. is 300 units.
9. The initial supply and demand curves for a good are illustrated in the above
figure. If there are technological advances in the production of the good, then
the new price for the good
a. is ₱6.
b. is more than ₱6.
c. could be less than, equal to, or more than ₱6.
d. is less than ₱6.
10. The initial supply and demand curves for a good are illustrated in the above
figure. If there is a rise in the price of the resources used to produce the good,
then the new price
a. is less than ₱6.
b. is more than ₱6.
c. could be less than, equal to, or more than ₱6.
d. is ₱6

Additional Activities

Activity 3.4

Suppose the total demand and the total supplies for face shield per month in the market are
as follows:

Thousands of boxes Thousands of boxes Surplus (+)

Price per shield
demanded supplied or shortage (-)
85 25.00 45

44
 80 40.00 60
75 50.00 75
70 60.00 80
65 80.00 90
60 100.00 100

a.) complete the table above in the surplus and shortage column. Write the plus sign (+) for
surplus and negative sign (-) or shortages or equal sign (=) for equilibrium.

b.) What will the market or equilibrium price? What is the equilibrium quantity? Using the
surplus-shortage column, explain why your answers are correct?

c.) Using the above data, graph the demand and supply for face shield. Be sure to label the
axes of your graph correctly. Label equiliprium price “P” and equilibrium Quantity “Q”.

d.) Why will ₱25.00 not be the equilibrium in this market? Why not P100.00?

e.) Assume now that the government establishes a ceiling price of, say P40.00 for face
shield. Explain carefully the effects of this ceiling price. Demonstrate your answer
graphically. What might prompt government to establish a ceiling price?

f.) Assume now that the government establishes a supported price of say, ₱60.00. Explain
carefully the effects of this supported price. What might prompt the government to establish
this price support?

g.) Legally fixed prices strip the price mechanism of its rationing function. Explain this
statement in terms of your answers to situation e and f above.

Answer Key

What I know

Multiple choice Matching Type

1. B 1. E
2. A 2. C
3. B 3. D
4. B 4. B
5. C 5. A
What’s In.

1. B
2. D

45
 3. B

What I have learned.

No Change in Supply An Increase in Supply A decrease in Supply

P = same P = down P = up
No Change in Demand
Q = same Q = up Q = down

An Increase in P = up P = ambiguous P = up
Demand Q = up Q = up Q = ambiguous

P = down P = down P = ambiguous

A Decrease in Demand
Q = down Q = ambiguous Q = down

What I can do.

Assessment.

1. B
2. A
3. B
4. D
5. D
6. A
7. D
8. A
9. D
10. A

Additional Activitie

a.

Thousands of pieces Thousands of pieces Surplus (+)

Price per shield
demanded supplied or shortage (-)
85 25.00 45 -
80 40.00 60 -
75 50.00 75 =
70 60.00 80 +
65 80.00 90 +
60 100.00 100 +

b. Market Equilibrium Price = Php50.00; Merket Equilibrium Quantity = 75,000 pieces

46
 Explanation: The equilibrium price is 50 pesos per shield, it is at this point that the seller agreed to
supply the 75,000 boxes demanded by consumers market.

c.
120

100
Price

80

60
Market Equilibrium
PE 40

20

15 30 45 60 75 90 105

Quantity QE

References

- https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-
supply-and-equilibrium-in-markets-for-goods-and-services/Soaring
21st Century Mathematics 6, pp. 62-78
- https://www.thoughtco.com/basic-supply-and-demand-analysis-1147945
- https://www.thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-
1146930

47
 - https://pressbooks.bccampus.ca/uvicecon103/chapter/1-1-what-is-economics-and-
why-is-it-important/
- https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-
labor/economics-terms-and-concepts/supply-and-demand
- Principles of Economics With Taxation and Agrarian Reform Simplified; Pages27 –
45; Author: Edilberto B. Viray Jr.; Ma. Jesusa Avila-Bato; Antonio Carlos B. Bautista
- https://opentextbc.ca/principlesofeconomics/chapter/3-2-shifts-in-demand-and-
supply-for-goods-and-services/
https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-
equilibrium/market-equilibrium-tutorial/a/changes-in-equilibrium-price-and-quantity-the-four-step-
process-cnx