APPLIED ECONOMICS

Competencies:
1. explain the law of supply and demand, and how equilibrium price and
quantity are determined ABM_AE12-Ie-h-4;
2. discuss and explain factors affecting demand and supply ABM_AE12Ie-
h-5;
3. compare the prices of commodities and analyze the impact on
consumers ABM_AE12-Ie-h-6;
Lesson 1: Law of Supply and Demand, and how equilibrium price and quantity
are determined.

WHAT’S IN

Have you tried buying goods on demand? Have you asked yourself why the
price is too high or too low? Do you believe that these form part in the
fundamental economic principle? In this lesson, you will discover why price rises,
goods falls down and vice-versa.

But before that, you have to unlock and familiarize first the unfamiliar
words that you will be encountering as you go along with the discussion in this
lesson.

WHAT IS IT

THE MARKET

A market is any activity for business set-up. It is where consumer buys and
the seller sells. It is categorized as local, national and international markets. Some
involves face-to-face contact between demander and supplier, others are
impersonal, with buyer and seller never seeing or knowing each other. The
concept of market is important because it is where a person who has excess
goods can dispose them to those who need them. This collaboration should lead
to an integral agreement between buyers and sellers on volume and price. A
purely competitive market is known to be as unique way of competition in which
there are many competing firms selling identical products or services.

DEMAND

Demand is the value of goods and services that buyers are willing to
purchase in every price. A demand schedule depicts the different quantities the
consumer is willing to buy at numerous prices. It centers on unlimited wants.
Demand function shows how the quantity demanded of a good depends on its
determinants, the most important of which is the price of the good itself, thus,
the equation :
 Qd = f(p)

This denotes that the quantity demanded for a good is reliant on the price
of that good. Presented in Table 1 is a hypothetical monthly demand schedule for
an empanada for one individual, Juan. The quantity demanded is determinable in
each price with the following demand function:

Qd = 6-P/2

Table 1 Hypothetical Demand Schedule of Juan for Empanada

Price per Empanada Quality Demanded

P0 6
2 5
4 4
6 3
8 2
10 1

At price P10, Juan is willing to buy one empanada for a given period. As
price goes down to P8, the quantity he is willing to buy goes up to two . At price
of P2, he will buy five. There is an indirect relationship between the price of a
commodity and the quantity demanded for that good. The lower price allows the
consumer to buy more, but as price rises, the amount the consumer can afford to
buy tends to go down.

THE LAW OF DEMAND

The law of demand is the basic principle of economics. After observing the
behavior of price and quantity demanded in the above schedule, we can now
state the Law of Demand. Using the assumption “ceteris paribus”, meaning all
other things being constant, there is an inverse relationship between the price of
a good and the quantity demanded for that good. The higher price consumers will
demand a lower quantity of a good. The low price of the good influences the
consumer to buy more.
 SUPPLY

Supply describes the total value of a good or service that is available to

customers. The supply schedule illustrates different quantities the seller is keen to
sell at various prices. The supply function shows the dependence of supply on
various determinants that affect it.

Assuming that the supply function is given as Qs = 100+5P and is used to

determine the quantities supplied at the given prices.

Table 1.2 Hypothetical Supply Schedule of James for Rice in One Week

Price of Rice in Php (per kilo ) Supply (in kilos )

20 200
40 300
60 400
80 500
100 600
As can be seen in Table 1.2, the relationship between the price of Rice and
the Quantity that James is willing to sell is direct. The greater the price, the higher
the quantity supplied.

THE LAW OF SUPPLY The schedule shown above depicts a positive or

direct relationship that prevails between price and quantity supplied. As price
increases, the quantity supplied rises; as price decreases, the quantity supplied
falls. This relationship is called the LAW OF SUPPLY. A supply schedule tells us that
the firms will produce and offer for sale more of their product at a high price than
a low price.

Price is the value that consumers exchange to obtain a desired product. It is

an obstacle from the viewpoint of the consumer or buyer, who is on the paying
end. The greater the price, the less the consumer will purchase. But the supplier
or seller is on the receiving end of the product’s price. To a seller, price represents
income, which serves as an incentive to produce and sell more products. The
greater the price, the higher this incentive and the higher the quantity supplied.
 Supply and Demand: MARKET EQUILIBRIUM

Demand and supply can identify how the buying decisions of households
and the selling decisions of businesses interact in determining the price of a
product and the quantity actually purchased and sold. Market equilibrium is a
condition where demand is equal to supply. The equality means that the quantity
that sellers are willing to sell is also the quantity that buyers are willing to
purchase for a price. As a market experience, equilibrium is the stability of market
demand, supply and price. It is also an agreement between how much buyers and
sellers are willing to transact. Equilibrium price is the price in the market at which
demand and supply are equal. A shortage occurs when quantity demanded
surpasses quantity supplied. While a surplus occurs when quantity supplied
exceeds quantity demanded.

Example of Determination of Market Equilibrium :

Assume a demand and supply function as the following:

(Demand) P=60-2Qd (Supply) P=30+4Qs

Where :
P=price Qd = Demand Qs = Supply in thousands
50-2Qd = 20+4Qs

At equilibrium, P=50 and Q = 5 as illustrated by the demand-supply

schedule and graph below.

Table 1.3 Demand-Supply Schedule

Demand Supply Price

58 34 1
56 38 2
54 42 3
52 46 4
50 50 5
48 54 6
46 58 7
44 62 8
 42 66 9
40 70 10

LESSON 2: Know the factors affecting demand and supply

WHAT’S IN

Supply and demand are essential in the market economy. Supply and
demand influenced each other and does impact the prices of consumer
goods and services within an economy. Rising and decreasing in
commodities prices, abundance and limited supply is well understood by
analyzing the impact of the factors affecting demand and supply. Sellers
and consumers play a crucial role as to how prices are determined. As
sellers, it is important to know what are the factors affecting consumers’
demand and to come up with better strategies in delivering good quality
products and services to consumers to ensure good value for money. As
buyers, it is important to know how sellers priced their products based on
the factors affecting supply and demand. Better understanding of this
aspect helps the consumers on making wise buying decisions. In general,
both sellers and buyers will have a better understanding and grasp as to
how buying and selling activities affects the economy as a whole.

WHAT IS IT

Non – Price Determinants of Demand:

The non-price factors once ceteris paribus assumption is dropped are now
allowed to influence demand. Cited below are the non-price factors
affecting demand:

1. Tastes and Preferences – Taste of the product affects the demand that
the buyer is willing to pay at a certain price. Once the product becomes
more desirable when it comes to the consumers taste and preferences
means the more products will be demanded at a certain price.
 Unfavorable change in the consumer’s taste and preferences will lead to
decrease of the products demand.

2. Number of Consumers – An increase of number of consumers in the

marketplace leads to the increase of demand. A decline of the number of
consumers in the marketplace decreases the demand.

3. Income –The income of the consumers affects their capacity to buy a

certain product. If consumer income increases, the consumers capacity to
buy also increases. If the consumers income decreases, the consumer’s
capacity to buy a product also decreases.

4. Prices of Related Goods – An increase or decrease of the demand on the

price of a related good depends whether the related good is classified as a
substitute or a complement product.

 A substitute product is classified as a good that can be replaced in

place of another product when the preferred product is not
available.
 A complementary good is classified as a product that is used
together with another good.
 Unrelated Goods is a change in the price of one product has little or
no effect on the demand for the other product. Examples are butter
and volleyball, carrots and automobiles.

5. Change in customers’ expectations - An expectation of a higher future

price increase may cause the consumers to buy more for a specific product in
order to beat the possibility of price increase, thus it increases the current
demand.

Non-price Determinant of Supply

1. Price of Resources – The cost of production incurred by the firm is

determined and is affected by the prices of the resources used in the
production process. Increase of the resources prices also increases the
production cost, assuming a particular product price, it potentially
reduces the profits.
2. Technology – Latest development and advancement in technology
enable firms to produce more units of output that leads to lower
production costs.
3. Taxes and Subsidies – Businesses considered taxes as an expense. An
increase of the production cost will also increase the sales of property
taxes and resulting to a reduced supply.
4. Prices of Other Goods –Companies that manufacture or sell a
particular product switched to other product line by means of increasing
its production of “other goods” when the prices of the “other goods”
increases in order to increase the profit.
5. Price Expectations –The willingness of a seller to produce or supply a
product is affected by the expectations of the product’s future price. 6.
Number of Seller – The more the sellers are in the marketplace, the
greater the supply. The fewer the sellers mean there is less supply.

LESSON 3: Compare the prices of commodities and its impact on

consumers

WHAT’S IN
Buyers and sellers play a significant role in the marketplace. A lot of
studies have been published regarding how demand and supply affect the
commodities prices. In this module, we are more focused on discussing
and analyzing how the prices of different commodities impact the
consumers.
Prices of commodities can go up, stabilized or go down. Learning an
idea of the basic knowledge on “how and why” the price of good and
services increase and decrease in our country. It widened your
understanding on what are the factors that affect the prices of
commodities and how this affects the buying behaviour and purchasing
power of the consumers.
Furthermore, there are some activities that capture your interest to
better understand the lesson. These activities will measure your decision
 making and learning to approve judgment in a particular situation. It will
also give you practical scenarios that will help you in your buying
decisions.

WHAT IS IT

Price of basic commodities

Commence with of commodity is any tangible item that can be

bought and sold. Like an oil, rice, fruits, vegetables and meat. Price will be
affected to the demand of the commodity of the consumers. When there
will be rise of price of chicken meat also there will increase of price in a
beef. It is called as substitute goods. However, when there is low stock of
rice there will be higher increase of price of a corn is it called as
complement goods. The basic prices of commodities will be affected on
supply and demand of a particular good.

Talking about supply and demand that if the price increases the
demand decreases while decreasing the price if the supply increases.
Demand is the consumer what they needs however supply is the product
the consumer needs.

Buying Behaviour of Filipinos

In term buying behaviour of Filipino have unique characteristics as

consumers since they buy a durable product for long term used. It should
be suit up with their preferences, behaviour brand loyalty, advertising and
value of money.

1.Preference – is the way it fit in to his/her beauty, hygiene, health and

convenience.
2. Behaviour brand loyalty – they prefer brand types of product.
3. Advertising – commercial affects preferences in buying products.
4. Value of money – choosing affordable products.
 Basic commodities vs. Prime Commodities

There are things that you want to buy like cell phone, laptop, tablet, and any
gadgets you love to buy. Delicious food you can buy in the mall and in the market.
You want to buy wonderful dresses and stylist shoes. You want expensive cars
and motorcycle that fit your convenience. However there things you buy for daily
needs like rice, meat, beef, fruit, and vegetable.

Basic commodities is different in prime commodities, basic commodities is the

thing that you really need while prime commodities the things you like to buy for
yourself. Example:

Basic Commodities:
Firewood
Charcoal
Cooking oil
Salt

Prime Commodities:
Cell phone
Cars
Tablets
Laptop