APPLIED ECONOMICS “Economics is a social science which analyzes the production, consumption, and

WEEK 1 distribution of goods and services.”

DEFINITION OF ECONOMICS BRANCHES OF ECONOMICS

Decisions that what we’ve talked about earlier is part of Economics. Actually,
Economics cover many aspects of human life! Since this is quite broad, we cannot
even escape the economic implications of human actions, behavior, and decision.
We teach Economics to students to prepare the youth on their roles as members
of a society which envisions material survival, stability, and growth.
THREE STRANDS OF ECONOMICS
1) MICROECONOMICS
 It deals with the behavior of individual components as an economic agent
such as household, consumer, worker, firm, and individual owner of
production (producer).
 It also refers to the study of choices by individuals.
2) MACROECONOMICS
 It deals with the behavior of economy as a whole with the view to
understand the interaction between economic aggregates such as
employment, inflation, and national income / country’s GNP.

BASIC CATEGORIES OF ECONOMICS

1) WEALTH
 The science of wealth-getting and wealth-using.
 This pertains to activities answering the two major economic problems in
any society, and that is production and consumption.

2) MAKING CHOICES
 In everything that we do, whether we produce or consume, whether it is
wealth-getting or wealth-using, we make decisions and these decisions
1) POSITIVE ECONOMICS
are based on alternative choices. It could also tackle how resources can
 It describes facts and data in the economy.
be distributed to the consumers.
 It avoids making value judgments.
 In making a decision, we have to consider a major concept in the study of
economics, and that is opportunity cost. Remember the choices you
2) NORMATIVE ECONOMICS
made earlier? Whichever option you did not choose, that has now
become your foregone alternative. Therefore, in whatever you decide  It involves ethics and value judgment.
upon, there will always be a sacrificial choice; hence, an opportunity cost.  It is subjective.

3) ALLOCATION 3) APPLIED ECONOMICS

 Economics is primarily a social science. As a social science, it utilizes a  It applies tenants behind economic theories and principles to real-world
systematic or scientific method in the study of society and its situations with the desired aim of predicting possible outcomes
components. Further, Economics is a study of allocation of scarce
resources to answer to the unlimited human needs and wants.
Since our class is Applied Economics, I highlight the subject as a practical tool to
utilize in dealing with our economic transactions because it uses economic
theories to interpret real-world phenomenon.
“HOW DOES ECONOMIC SYSTEM AFFECT THE ECONOMIC TRANSACTIONS OF A
COUNTRY?”
Economic System refers to a set of economics institutions that dominate a given
economy with the main objective of solving economic problems.
FOUR ECONOMIC SYSTEMS
1) TRADITIONAL ECONOMY
 t is a system whose past experiences are used as bases for economic
decisions.
 Economic decisions are made with great influence from the past because
it is copying / duplicating the decisions made by previous generations.
 East Africa was once a Traditional Economy but is already transitioning.
2) COMMAND ECONOMY
 It is a system in which people do not have political and economic
freedom.
 Factors of production and distribution are owned and managed by the
state.
 This is also called Socialism.
 Countries that practice Command Economy are China, North Korea, Cuba,
Iran, Libya, and Russia.
3) FREE MARKET ECONOMY
 It is a system that consult with the majority, which means that interaction
takes place between buyers and sellers in determining the price of a
particular good / commodity.
 This is also called Capitalism.
 Hong Kong practices Free Market Economy.
4) MIXED MARKET ECONOMY
 In reality, there is no economy using the purest form of economic system.
Hence, a mixed economy, with elements of the first three systems
mentioned, are present in varied degrees.
 Both private and public institutions exercise economic control.
 Countries such as India and France have this type of economic system.
“WHAT IS SCARCITY AND HOW DOES IT AFFECT THE SOCIETY?”
“Scarcity is the basic and central economic problem confronting every society.”
Scarcity is the heart of the study of economics and the reason behind its
establishment. It can be defined in various ways:
1. as a commodity or service being in short supply, relative to its demand which
implies a constant availability of a commodity or economic resource relative
to the demand for them;
2. in quantitative terms, scarcity is said to exist when at a zero price there is a
unit of demand, which exceeds the available supply;
3. pertains to the limited availability of economics resources relative to society’s
unlimited demand for goods and services.
When studying scarcity, bear in mind that once the limited resources fail short to
meet the unlimited wants of the society, it will eventually create a problem,
which is then called scarcity.
GENERALIZATION:
Human endeavor is mainly concerned with the satisfaction of material wants. It
is centered on the task of making a living, the most absorbing interest of man.
To that end, man in all ages and among all classes of people struggled to bring
about changes in his environment – the acquisition of wealth in order to satisfy
human wants. Economics generally deals with the activities of man in the
production, distribution and consumption of goods and services to obtain
wealth in order to satisfy human wants and needs. This social science was
mainly categorized into: macroeconomics that deals with the behavior of
economy as a whole; and, microeconomics that deals with the behavior of
individual components as an economic agent. Moreover, there are four
economic systems in placed to solve economic problems namely; traditional
economy, command economy, free market economy, and mixed market
economy. Lastly, as we continue to dwell deeper about economics, be
reminded of the word “scarcity” – the heart of the study of economics.
Remember that economics involves the production of wealth, commodities
and services, that is, considering the scarce resources to be utilize in order to
satisfy varied human wants and needs
 WEEK 2
CHAPTER 1: INTRODUCTION TO APPLIED ECONOMICS
REVISITING ECONOMICS AS A SOCIAL SCIENCE
We’ve learned in the previous week that Economics is primarily a social science.
We’ve further explained that as a social science, it uses a scientific method in the
study of allocation of scarce resources to answer to the unlimited human wants.
Below is the diagram that shows the economic implication of our resources versus
our needs and wants.
As you can see above, we only have limited or scarce resources which are being
directed towards production for the unlimited human wants and needs. Now,
aren’t you wondering how we’ll survive if we’re faced with limited resources and
unlimited needs and wants? That’s where Economics comes in. The economic
problem is to match limited resources to unlimited wants and needs. Allocation
alone addresses this issue so is all other theories and practices I’ll be explaining as
we go further with our lessons.
RESOURCES ARE LIMITED based on its physical quantity and its use.
1. Limited in physical quantity – As in the case of land, which has a finite
quantity.
2. Limited in use – As in the case of labor and machinery, which can only be
used for one purpose at any one time.
FACTORS OF PRODUCTION
1. Land – acreage and raw materials
2. Labor – unskilled, semiskilled, professional
3. Capital – machines, factories, transportation equipment, and infrastructure
4. Entrepreneurship – organizing the other factors of production and risk-taking
As a SOCIAL SCIENCE, economics if related to other social sciences that study
other dimension of a society.
1. Political Science – it is the study of how the creation and utilization of power
is being studied for the preservation, stability, and growth of a society as a
political unit.
2. Behavioral Science – behavioral sciences such as sociology, anthropology,
and psychology systematically examine behavior, people’s beliefs, and
society’s value system.
ECONOMICS AS AN APPLIED SCIENCE
The study of economics has been perceived as too theoretical since it deals with
principles, laws, and assumptions governing human behavior in the allocation
process. This theoretical treatment may look as if economics is devoid of
applications. But that perspective is farther from the true concept and intent of
economics.
Many of the principles, laws, and theories developed in economics can be
APPLIED IN A NUMBER OF FIELDS.
1. Commercial Sciences (ex: Accountancy) – the information generated in the
recording and analysis of transactions on the state of assets of any
establishment can be useful in making business decisions pertaining to wealth
accumulation and wealth utilization.
2. Marketing – understanding the behavior of consumers can be useful to firms
in expanding their market share.
TWO FUNDAMENTAL CONCEPTS IN ECONOMICS:
Given that resources are limited, producers and consumers have to make
decisions between competing alternatives.
1. CHOICE
 All economic decisions involve making choices.
 This is the best option you’ve chosen.
2. OPPORTUNITY COST
 The loss of the next best option / next best alternative.
 Represents the real sacrifice.
Making an economic choice creates a sacrifice because alternatives must be given long-term vision for the Philippines which is coined as “Ambisyon Nation 2040”.
up, which results in the loss of benefit that the alternative would have provided. This is what the government plans to achieve by the year 2040.
Let’s put it this way, if you have ₱150.00 as an allowance and you decided to
purchase one monster milk tea worth ₱150.00 instead of buying one
cheeseburger and one large soda with a total worth of ₱150.00, buying the milk
tea means the loss of the benefit that would have been gained from the latter.
Another, for limited resources such as land, if a new school has been built instead
of building a new factory for a business, the opportunity cost of choosing the
school is the loss of
factory, and what could have been produced.
GENERALIZATION:
“The true cost of any decision is always the closest option not chosen.”
BASIC ECONOMIC PROBLEMS AND THE PHILIPPINE SOCIOECONOMIC The study of economics has been perceived as too theoretical since it deals
DEVELOPMENT IN THE 21ST CENTURY with principles, laws, and assumptions governing human behavior in the
1. What to produce? allocation process. This theoretical treatment may look as if economics is
devoid of applications. But that perspective is farther from the true concept
Each and every economy must determine what products and services, and
and intent of economics.
what volume of each, to produce. In some way, these kinds of decisions
should be coordinated in every society.
Factors of production are the resources that serve as the foundation of the
2. How to produce? economy; they are what people utilize to create products and services.
Societies decide on the mix of resources to use to create the desired output Economists classify production factors into four categories:
of goods and services.
1) Land
3. For whom to produce? 2) Labor
Finally, all societies need to decide who will get the output from the country’s 3) Capital
economic activity, and how much they will get. 4) Entrepreneurship
From these three problems, it can be seen that the basic concepts of supply and
demand respond to economic problems but a point of analysis is how economics There are three extremely dominating core economic problems among all the
moved beyond how to meet society’s needs and wants so that authentic ostensibly economic concerns that we may consider. These are:
development is pursued.
1) What to produce?
Three Major Problems in Our Country 2) How to produce?
- Unemployment 3) For whom to produce?
- Poverty
- Poor Infrastructure There is still much that needs to be improved in our country, but I'd like you to
Although there are some disturbing data we’ve seen, I’d like to inform you that be aware of three key problems that we face:
the Philippine government comes up with plans about the future. Below is the
1) Unemployment
 2) Poverty
3) Poor infrastructure A) DEMAND – pertains to the quantity of a good or service that people are ready
to buy / purchase at given prices within a given time period, when other
factors besides price are held constant (ceteris paribus).

WEEK 3 Demand implies three things:

1. desire to possess a thing
CHAPTER 2: APPLIED ECONOMICS
2. the ability to pay for it or means of purchasing it
THE MARKET 3. willingness to utilize it.
Demand is generally affected by the behavior of consumers while supply is usually
affected by the conduct of producers. The interplay between these two is the B) Law of Demand – states that if price goes up, the quantity demanded will go
foundation of economic activity. As the economy cannot operate without the down. Conversely, if price goes down, the quantity demanded will go up
interaction between the consumer and the producer, it is essential, therefore, (ceteris paribus).
that you understand the different movements of the demand and supply curve, as
well as the concept of market equilibrium. However, before you dwell with all of
that, you have to be familiarized first with the market.

Market C) Demand Schedule – a table that shows the relationship of prices and the
 It is where buyers and sellers meet. specific quantities demanded are each of these prices. To further explain to
 It is the place where they both trade or exchange goods or services – in other you how a demand schedule works, refer to the example of demand schedule
words, it is where their transactions take place. below:
SITUATION PRICE (P) QUANTITY (KG)
TYPES OF MARKET
A 5 8
1) Wet Market – is where people usually buy vegetables, meat, etc. B 4 13
2) Dry Market – is where people buy shoes, clothes, or other dry goods C 3 20
D 2 30
Note: In economic parlance, the term market does not necessarily refer to a E 1 45
tangible area, it can represent an intangible domain where goods and services are
The table shows the various prices and quantities for the demand for rice per
traded, such as the stock market, real estate market, or labor market.
month. For instance, at a given price of P5, the buyer is willing to purchase
only 8 kilograms of rice (situation A). However, at a price of P1, he is willing to
DEMAND
buy 45 kilograms of rice (situation E).
“Ceteris Paribus – This is an economic term which means “other things held
constant”. There may be instances later wherein an economic principle is not D) Demand Curve – a graphical representation showing the relationship
applicable but if we talk of the ideal set-up, we might get a hold of this principle between price and quantities demanded per time period. A demand curve
as an indicator for the discussion. I am then encouraging you now to understand has a negative slope; thus, it slopes downward from left to right.
this term genuinely as we shall be using this often on the succeeding lessons.

The figure above illustrates a typical demand curve. The y-axis represents price
(P), while the x-axis represents the quantity demanded (Q d). The (negative) slope
measures the change in quantity demanded for a unit change in price. This
indicates that as the price of commodities decreases, more goods will be bought
by the consumer. The downward slope indicates the inverse relationship between
price and quantity demanded.
Most demand curves slope downwards because:
1. as the price of the product falls, consumers will tend to substitute this (now
relatively cheaper) product for others in their purchases
2. the price decline of the product serves to increase their real income, allowing
them to buy more products.
E) Change in Quantity Demanded vs Change in Demand
F) Forces that Cause the Demand Curve to Change
Change in Quantity Demanded – if the movement is along the same demand
curve. The direction of the movement is inverse considering the Law of
Demand.
The figure illustrates the concept of change in quantity demanded wherein P1
increases to P2 resulting to change in Q200 to Q100 and a movement along
the demand curve from point A to point B.
Change in Demand – if the entire demand curve shifts to the right side or left
side. The demand curve shifts to the right / upward as a result of increase in
demand; hence, goods or services that remain at the same price are
demanded in higher amounts by consumers.
Conversely, a demand curve shifts to the left / downward if the demand
decreases or falls; thus, at the same price, fewer amounts of a good or service
are demanded by the consumers.
The figure illustrates the concept of change in demand wherein Q250
decreases to Q200, despite P1 remaining, and a shift of demand curve from
right to left (downward). The movement of point A to point B illustrates a
decrease or fall in demand.
There are several reasons why demand changes, and thus, causes the
demand curve to change. The following are the general reasons for the
change in demand.
1. Taste or Preference – It pertains to the personal likes or dislikes of
consumers for certain goods and services.
2. Income – Increasing incomes of households raise the demand for certain
goods or services, and vice versa. This is because an increase in one’s
income generally raises his capacity or power to demand for goods and
services which (s)he cannot purchase at a lower income.
3. Occasional Products – The various events or seasons in a given year also
result to a movement of the demand curve, with reference to particular
goods.
4. Population – An increasing population leads to an increase in the demand
for some types of goods or service, and vice versa.
 5. Substitute Goods – Substitute goods are goods that are interchanged
with another good. In a situation where the price of a particular good
increases, a consumer will tend to look for closely related commodities.
6. Expectations or Future Prices – If buyers expect the price of a good or
service to rise (or fall) in the future, it may cause the current demand to
increase (or decrease). Also, expectations about the future may alter
demand for a specific commodity.
G) Price Elasticity of Demand – refers to the type of elasticity that deals with the
degree of responsiveness of people when there are changes in prices.
Different Degree of Elasticity
1. Elastic
 Demand or supply is elastic when there is a greater change in
quantity demanded or supplied.
 Demand or supply is sensitive to economic changes.
 In mathematical equation, it is always greater than one.
2. Inelastic
 Demand or supply is inelastic when there is a lesser change in
quantity demanded or supplied.
 Demand or supply does not usually change in relation to economic
changes.
 In mathematical equation, it is always less than one.
3. Unit Elastic
 Demand or supply is unit elastic when there is an equal change in
quantity demanded or supplied.
 Demand or supply proportionately changes in relation to economic
changes.
 In mathematical equation, it is equal to one.
There are a lot of ways how we can compute for the price elasticity of demand. In
order for us to focus our efforts in learning about elasticity, we are to focus on
one method of computing the price elasticity of demand which is called the Point
Method / Statistics Method.
The formula for the Point Method is the following:
The formula of the price of elasticity of demand is change in quantity demanded
divided by quantity over the change in price divided by price. It is further broken
down to the formula you see at the right wherein:
Q1 – old demand
Q2 – new demand
P1 – old price
P2 – new price
The elasticity of demand is not followed by any units. Elasticity is a ratio of one
percentage change to another percentage change—nothing more. It is read as an
absolute value; hence, even if the value you computed is negative, the negative
sign is omitted as it shall be considered an absolute value. Say, your computed
price elasticity of demand is -3.5, your final answer shall now be 3.5. In this case, a
1% rise in price causes a change in quantity demanded of 3.5%. The greater than
one elasticity of demand means that the percentage change in quantity
demanded will be greater than a one percent price change.
WEEK 3
LAW OF DEMAND AND SUPPLY (DEMAND)
“Ceteris Paribus”
This is an economic term which means “other things held constant”. There may be
instances later wherein an economic principle is not applicable but if we talk of
the ideal set-up, we might get a hold of this principle as an indicator for the
discussion
A) DEMAND – pertains to the quantity of a good or service that people are ready
to buy / purchase at given prices within a given time period, when other
factors besides price are held constant (ceteris paribus).
Demand implies three things:
 1. desire to possess a thing; xaxis represents the quantity demanded (Q d). The (negative) slope measures
2. the ability to pay for it or means of purchasing it the change in quantity demanded for a unit change in price. This indicates
3. willingness to utilize it. that as the price of commodities decreases, more goods will be bought by the
consumer. The downward slope indicates the inverse relationship between
price and quantity demanded.
Most demand curves slope downwards because:
1. as the price of the product falls, consumers will tend to substitute this
B) LAW OF DEMAND – states that if price goes up, the quantity demanded will (now relatively cheaper) product for others in their purchases
go down. Conversely, if price goes down, the quantity demanded will go up
(ceteris paribus). 2. the price decline of the product serves to increase their real income,
allowing them to buy more products.

E) CHANGE IN QUANTITY DEMANDED VS. CHANGE IN DEMAND

C) DEMAND SCHEDULE – a table that shows the relationship of prices and the There is a Change in Quantity Demanded if the movement is along the same
specific quantities demanded are each of these prices. To further explain to demand curve. The direction of the movement is inverse considering the Law
you how a demand schedule works, refer to the example of demand schedule of Demand.
below:
Demand Schedule for Rice (per month) The figure illustrates the
SITUATION PRICE (P) QUANTITY (KG) concept of change in
A 5 8 quantity demanded
B 4 13 wherein P1 increases to
P2 resulting to change in
C 3 20
Q200 to Q100 and a
D 2 30
movement along the
E 1 45
demand curve from point
A to point B.
The table shows the various prices and quantities for the demand for rice per
month. For instance, at a given price of P5, the buyer is willing to purchase
There is a Change in Demand if the entire demand curve shifts to the right
only 8 kilograms of rice (situation A). However, at a price of P1, he is willing to
side or left side. The demand curve shifts to the right / upward as a result of
buy 45 kilograms of rice (situation E).
increase in demand; hence, goods or services that remain at the same price
are demanded in higher amounts by consumers.
D) DEMAND CURVE – a graphical representation showing the relationship
between price and quantities demanded per time period. A demand curve Conversely, a demand curve shifts to the left / downward if the demand
has a negative slope; thus, it slopes downward from left to right. decreases or falls; thus, at the
same price, fewer amounts of
The figure above illustrates a a good or service are
typical demand curve. The y-axis demanded by the consumers.
represents price (P), while the
 The figure illustrates the concept of change in demand wherein Q250
decreases to Q200, despite P1 remaining, and a shift of demand curve from
right to left (downward). The movement of point A to point B illustrates a
decrease or fall in demand.
F) Forces that Cause the Demand Curve to Change
There are several reasons why demand changes, and thus, causes the
demand curve to change.
General reasons for the change in demand.
1. Taste or Preference – It pertains to the personal likes or dislikes of
consumers for certain goods and services.
2. Income – Increasing incomes of households raise the demand for certain
goods or services, and vice versa. This is because an increase in one’s
income generally raises his capacity or power to demand for goods and
services which (s)he cannot purchase at a lower income.
3. Occasional Products – The various events or seasons in a given year also
result to a movement of the demand curve, with reference to particular
goods.
· Demand or supply is elastic when there is a greater change in
quantity demanded or supplied.
· Demand or supply is sensitive to economic changes.
· In mathematical equation, it is always greater than one.
2. Inelastic
· Demand or supply is inelastic when there is a lesser change in
quantity demanded or supplied.
· Demand or supply does not usually change in relation to economic
changes.
· In mathematical equation, it is always less than one.
3. Unit Elastic
· Demand or supply is unit elastic when there is an equal change in
quantity demanded or supplied.
· Demand or supply proportionately changes in relation to economic
changes.
· In mathematical equation, it is equal to one.

4. Population – An increasing population leads to an increase in the demand Point Method / Statistics Method – one method of computing the price elasticity
for some types of goods or service, and vice versa. of demand.
5. Substitute Goods – Substitute goods are goods that are interchanged FORMULA FOR THE POINT METHOD:
with another good. In a situation where the price of a particular good
increases, a consumer will tend to look for closely related commodities.
6. Expectations of Future Prices – If buyers expect the price of a good or
service to rise (or fall) in the future, it may cause the current demand to
increase (or decrease). Also, expectations about the future may alter The formula of the price of elasticity of demand is change in quantity demanded
demand for a specific commodity. divided by quantity over the change in price divided by price. It is further broken
down to the formula you see at the right wherein:
G) PRICE ELASTICITY OF DEMAND – refers to the type of elasticity that deals
with the degree of responsiveness of people when there are changes in Q1 – old demand
prices. Q2 – new demand
P1 – old price
Different Degree of Elasticity P2 – new price
1. Elastic
The elasticity of demand is not followed by any units. Elasticity is a ratio of one
percentage change to another percentage change—nothing more. It is read as an
absolute value; hence, even if the value you computed is negative, the negative
sign is omitted as it shall be considered an absolute value. Say, your computed
price elasticity of demand is -3.5, your final answer shall now be 3.5. In this case, a
1% rise in price causes a change in quantity demanded of 3.5%. The greater than
one elasticity of demand means that the percentage change in quantity
demanded will be greater than a one percent price change.
EXAMPLE FOR THE STEP-BY-STEP PROCESS (DEMAND)
Given:
On the 7th day of December, Danica went to the market to look for bundles of
c) Compute the elasticity for each succeeding day up to the last day. In doing
cups that she needs for her business. Upon strolling, she was able to find a store
this, we pair-up situations since we’re taking into consideration two points
that sells cups. The price of each bundle was ₱ 275.00, and Danica was willing to
per computation of elasticity. In computing for the price elasticity, we use the
purchase 16 bundles. The next day, Danica returned to the store to purchase
Point Method discussed earlier.
more but the price already increased to ₱ 280.00, so she only bought 12 bundles.
On December 9, she again bought 11 bundles of cups priced at ₱ 285.00 each. On
For the first computation of price elasticity of demand, we take into account
the fourth day, she purchased 10 bundles of cups pegged at ₱288.00 each.
the demand schedule for point A to point B. In view of situations A and B, the
latter is the new while the former is the old; hence:
Directions:
a) Make the schedule of the transactions. Q1 – 16
b) Plot the curve of the transactions. Q2 – 12
c) Compute for the elasticity of each succeeding day up to the last day. P1 – 275
d) Specify the degree of elasticity based on each computation. P2 – 280

Solution: A–B
a) Make the schedule of the transactions. The Schedule should look like this:
Q2−Q1 12−16
SITUATION PRICE QUANTITY Q1 16
A ₱ 275.00 16 PED= P ED= PES=−13.75 PES=13.75
P2−P1 280−275
B ₱ 280.00 12
C ₱ 285.00 11 P1 275
D ₱ 288.00 10 B–C
Q2−Q1 11−12
b) Plot the curve of the transactions. As earlier mentioned, the x-axis shall be the
Q1 12
quantity while the y-axis is the price. The Curve should look like this: PED= P ED= PES =−4.67 PES=4.67
P2−P1 285−280
P1 275
 C–D caused by a variety of factors (preferences, income, prices of substitutes and
Q 2−Q 1 complements, expectations, population, etc.). In this case, the entire demand
10−11 curve moves left or right. A change in quantity demanded refers to a
Q1 11 movement along the demand curve, which is caused only by a chance in price.
PED= P ED= PES=−8.64 PES=8.64
P2−P1 288−285 In this case, the demand curve doesn’t move; rather, we move along the
P1 285 existing demand curve.

Note: For your final answer, only include up to 2 decimal places by rounding There are several reasons why demand changes, and thus, causes the demand
off the hundredths place. curve to change. These are the general reasons for the change in demand:

d) After computing for the price elasticity of demand, we must also identify the 1) Taste or Preference 4) Population
degree of elasticity. 2) Income 5) Substitute Goods
3) Occasional Products 6) Expectations of Future Prices
A–B PED = 13.75 Elastic
B–C PED = 4.67 Elastic Price Elasticity refers to the type of elasticity that deals with the degree of
C–D PED = 8.64 Elastic responsiveness of people when there are changes in prices. The following are
the three degrees of elasticity:
Since all PEDs are greater than one, the degree of elasticity is elastic. This only
means that the consumer is sensitive to economic changes with regard to the 1) Elastic
computed price elasticity of demand 2) Inelastic
3) Unit Elastic
Let us remember this statement from Henry Hazlitt:
“Demand and supply are merely two sides of the same coin. They are the same WEEK 4
thing looked at from different directions. Supply creates demand because at
LAW OF DEMAND AND SUPPLY (SUPPLY)
bottom it is demand. The supply of the thing they make is all that people have, in
fact, to offer in exchange for the things they want.” A) SUPPLY – pertains to the quantity of goods or services that firms are ready
and willing to sell at a given price within a period of time, other factors being
GENERALIZATION: held at constant (ceteris paribus).
B) LAW OF SUPPLY – states that if the price of a good or service goes up, the
Demand is an economic principle referring to a consumer's desire to purchase quantity supplied for such good or service will also go up. Conversely, if the
goods and services and willingness to pay a price for a specific good or service. price goes down, the quantity supplied also goes down (ceteris paribus).
Holding all other factors constant, an increase in the price of a good or service
will decrease the quantity demanded, and vice versa. Market demand is the
total quantity demanded across all consumers in a market for a given good.
Aggregate demand is the total demand for all goods and services in an
economy. Multiple stocking strategies are often required to handle demand. C) SUPPLY SCHEDULE – a schedule listing the various prices of a product and the
specific quantities supplied at each of these prices. To further explain to you
A change in demand refers to a shift in the entire demand curve, which is how a supply schedule works, refer to the example of supply schedule below:
 SITUATION PRICE (P) QUANTITY (KG) to change in Q1250 to Q1500 and a movement along the supply curve from
A 5 48 point A to point B.
B 4 41
Logic: A change in the quantity supplied is brought about by an increase
C 3 30
(decrease) in the product’s own price.
D 2 17
E 1 5 There is a Change in Supply if the entire supply curve shifts to the right side or
The table shows the various prices and quantities for the supply for rice per left side. The supply curve shifts to the right / downward as a result of
month. For instance, at a given price of P5, the seller is willing to sell 48 increase in supply; hence, more goods will be offered for sale by producers.
kilograms of rice (situation A). However, at a price of P1, he is willing to sell 5 Conversely, a supply curve shifts to the left / upward if the supply decreases;
kilograms of rice (situation E). thus, at the same price, producers sell fewer amounts of a good or service.
The figure illustrates the concept
D) SUPPLY CURVE – a graphical representation showing the relationship of change in supply wherein
between the price of the product / factor of production and the quantity Q1250 increases to Q1500,
supplied per time period. A supply curve has a positive slope; thus, it slopes despite P1 remaining, and a shift
upward from left to right. of supply curve from left to right
The figure above illustrates a typical (downward). The movement of
supply curve. The y-axis represents point A to point B illustrates an
price (P), while the x-axis represents increase in supply.
the quantity supplied (Qs). The
positive slope indicates that as the Logic: The figure illustrates the concept of change in supply wherein Q1250
price of commodities increases increases to Q1500, despite P1 remaining, and a shift of supply curve from left
(decreases), more (less) goods will be to right (downward). The movement of point A to point B illustrates an
offered for sale by the producers. increase in supply.
Consistent with the Law of Supply, this is how producers react: F) Forces that Cause the Supply Curve to Change
1. higher prices entice producers or sellers to supply more goods or services Just like demand, there are also forces that cause the supply curve to change.
because of their profit motive; while Below are some of the reasons that cause the supply curve to change:
2. lower prices diminish their goal of putting additional investment because
of the possibility of incurring a loss. 1. Optimization in the use of factors of production
· An optimization in the utilization of resources will increase supply,
E) Change in Quantity Supplied vs Change in Supply while a failure to achieve such will result to a decrease in supply.
· Optimization refers to the process, or methodology of making
There is a Change in Quantity Supplied if the movement is along the same
something as fully perfect, functional, or effective as possible.
supply curve. The direction of the movement is positive considering the Law
of Supply.
2. Technological change
 The introduction of cost-reducing innovations in production
The figure illustrates the concept
technology increases supply on one hand. On the other hand, this can
of change in quantity supplied
also decrease supply by means of freezing the production, through
wherein P15 increases resulting
 problems that the new technology might encounter, such as technical
trouble.
3. Future expectations
 This factor impacts sellers as much as buyers. If sellers anticipate a
rise in prices, they may choose to hold back the current supply to take
advantage of the future increase in price, thus decreasing market
supply. However, if sellers expect a decline in the price for their
products, they will increase present supply.
4. Number of sellers
 The number of sellers has a direct impact on quantity supplied.
Simply put, the more sellers there are in the market, the greater
supply of goods and services will be available.
5. Weather conditions
 Bad weather, such as typhoons, droughts, or other natural disasters,
reduces the supply of agricultural commodities, while good weather
has an opposite impact.
6. Government policy
 Removing quotas and tariffs on imported products also affect supply.
Lower trade restrictions and lower quotas or tariffs boost imports,
thereby, adding more supply of goods in the market.
LOGIC: Let me tell you some of the government policies in terms of supplying
goods in the country:
a) Duties and taxes are imposed by the government on imported products
that enter the country.
b) Quotas are limitations on the number of quantities of imported goods
that could enter a country. This is used in order to protect domestic or
local products
G) Price Elasticity of Supply – Like in computing the price elasticity for demand,
we are still to utilize the discussed degrees of elasticity, namely, elastic,
inelastic, and unit elastic as well as the Point Method / Statistics Method for
computing the price elasticity of supply.
The formula of the price of elasticity of supply is change in quantity supplied
divided by quantity over the change in price divided by price. It is further
broken down to the formula you see at the right wherein:
Q1 – old demand
Q2 – new demand
P1 – old price
P2 – new price
The elasticity of supply is not followed by any units. Elasticity is a ratio of one
percentage change to another percentage change—nothing more. Say, your
computed price elasticity of supply is 13.5, in this case, a 1% rise in price
causes a change in quantity supplied of 13.5%. The greater than one elasticity
of supply means that the percentage change in quantity supplied will be
greater than a one percent price change.
EXAMPLE FOR THE STEP-BY-STEP PROCESS (SUPPLY)
Given:
The other day, Pinky advertises to sell corned beef for ₱ 65.00 each can and was
able to sell 50 cans. Yesterday, she believed that pricing them ₱ 70.00 would be
enough as she was able to sell 60 cans. Today, she decides that she can charge
more. She then raised the price to ₱ 77.00 and supplied 70 cans. The next day,
she sold 76 cans priced at ₱ 80.00. However, on the following day, she only sold
78 cans priced at ₱ 83.00.
Directions:
a) Make the schedule of the transactions.
b) Plot the curve of the transactions.
c) Compute for the elasticity of each succeeding day up to the last day.
d) Specify the degree of elasticity based on each computation.
Solution:
a) Make the schedule of the transactions. The Schedule should look like this:
SITUATION PRICE QUANTITY
 A ₱ 65.00 50 Q 2−Q1 70−60
B ₱ 70.00 60 Q1 60
C ₱ 77.00 70 PES= PES= PES=1.67
P 2−P1 77−70
D ₱ 80.00 76
P1 70
E ₱83.00 78

b) Plot the curve of the transactions. As earlier mentioned, the x-axis shall be the C–D
quantity while the y-axis is the price. The Curve should look like this: Q 2−Q1 76−70
Q1 70
PES= PES= PES=2.2
P 2−P1 80−77
P1 77

D–E
Q 2−Q1 78−76
Q1 76
PES= PES= PES=0.7
c) Compute the elasticity for each succeeding day up to the last day. In doing P 2−P1 83−80
this, we pair-up situations since we’re taking into consideration two points P1 80
per computation of elasticity. In computing for the price elasticity, we use the
Point Method discussed earlier. Note: For your final answer, only include up to 2 decimal places by rounding
off the hundredths place.
For the first computation of price elasticity of demand, we take into account
the demand schedule for point A to point B. In view of situations A and B, the d) After computing for the price elasticity of demand, we must also identify the
latter is the new while the former is the old; hence: degree of elasticity.
Q1 – 50
A–B PES = 2.6 Elastic
Q2 – 60
B–C PES = 1.67 Elastic
P1 – 65
P2 – 70 C–D PES = 2.2 Elastic
D–E PES = 0.7 Inelastic
A–B
Since situations A-B, B-C, and C-D have PES greater than one, the degree
Q 2−Q1 60−50 of elasticity is elastic. This only means that the producer is sensitive to
Q1 50 economic changes with regard to the computed price elasticity of supply.
PES= PES= PES=2.6 While for situation D-E, the PES is less than one; hence, the degree of
P 2−P1 70−65
65 elasticity is inelastic. Therefore, it is not sensitive to economic changes
P1
B–C GENERALIZATION:
 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 schedule 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 tan a low price.
At equilibrium point, there are always two sides of the story - the side of the
buyer, and that of the seller. For instance, given the price of ₱ 70.00, the
Meanwhile, price is the value that consumers exchange to obtain a desired
buyer is willing to purchase 15 units. On the seller side, he is willing to sell the
product. It is an obstacle from the viewpoint of the buyer, who is on the paying
quantity of 15 units at a price of ₱ 70.00. It simply shows that the buyer and
end. The greater the price, the lesser the consumer will purchase. But the
seller agree on one particular price and quantity.
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
LOGIC: The main concept of equilibrium explains that there is a balance
products. The greater the price, the higher this incentive and the higher the
between price and quantity of goods bought by consumers and sold by sellers
quantity supplied.
in the market.

B) Equilibrium Market Price – is the price agreed by the seller to offer its good
WEEK 5
or service for sale and for the buyer to pay for it. Specifically, it is the price at
LAW OF DEMAND AND SUPPLY (MARKET EQUILIBRIUM) which quantity demanded for a good is exactly equal to the quantity supplied.
The equilibrium market price and
quantity can be best depicted in a
graph.

As illustrated in Figure 1, the demand

curve (D) depicts the quantity that
consumers are willing to buy at
 where buyers and sellers meet  where buyers and sellers meet
particular prices; the supply curve (S)
 place where goods or services are  place where goods or services are
depicts the quantity that producers
traded / exchanged traded / exchanged
are prepared to sell at a particular
 where transactions of buyers and  where transactions of buyers and
price (x-axis are the quantities and y-
sellers take place sellers take place
axis are the prices). The equilibrium
A) MARKET EQUILIBRIUM – pertains to a general agreement of the buyer and
market price (e) is generated by the
the seller at a particular price and a particular quantity
intersection of the demand and supply curves.
 As we can observe in the graph, the market equilibrium (e) is the point of Shortage – It is a condition in the market where the quantity demanded is
intersection between the supply (S) and demand (D) curves, that is, at P=30 more than the quantity supplied.
and Q=150. When the market is experiencing shortage, there is a possibility that
consumers can be abused, while the producers enjoy imposing higher prices
C) Market Disequilibrium for their own interest. When there is a shortage, there is an upward pressure
What happens when there is market disequilibrium? on prices in order for them to acquire the goods or services that are in short
 When there is market disequilibrium, two conditions may occur: a surplus supply. This is depicted in Figure 2 by the arrow going up from point d to the
or a shortage. equilibrium point (e).
As we can see in the Figure 2, shortage exists below the equilibrium point. For
Surplus – It is a condition in the market where the quantity supplied is more instance, at price ₱20.00 quantity demanded QD = 200 units, while quantity
than the quantity demanded. supplied QS = 100 units. This is because sellers are not willing to sell at the
lower price yet consumers demand for more.
When there is surplus, the
A lower initial price (say at ₱20.00) results in excess demand of 100 units (QS
tendency is for sellers to
= 100 units and QD = 200 units). This is depicted by the area cde. In this case,
lower market prices in order
price is forced up in order to eliminate the excess demand.
for the goods to be easily
disposed from the market.
D) PRICE CONTROL
Which only means that
when there is a surplus, What happens if disequilibrium in the market persists at a longer period of
there is a downward time?
pressure on price, in order  If disequilibrium happens for a long period of time, the government may
to restore equilibrium to the intervene by imposing price controls.
market. This is depicted in Price Control – is the specification by the government of minimum and/or
Figure 2 by the arrow from maximum prices for goods and services.
point a going down to the
equilibrium point (e). The price may be fixed at a level below the market equilibrium price or above
it, depending on the objective in mind. In the former case, for instance, the
As we can observe in the graph (Figure 2), surplus is a situation above the government may wish to keep the price of some goods (e.g., food) down as a
equilibrium point. This is because quantity supplied (say at P = ₱40.00, QS = means of assisting poor consumers. In the latter case, the aim may be to
200 units) is greater than quantity demanded (at P = ₱40.00, QD = 100 units), ensure that producers receive an adequate return (price support for farmers,
resulting in an extra 100 units of goods being supplied in the market. for instance). Generally, price controls may be applied across a wide range of
goods and services as part of price and income policy, aimed at combating
A higher initial price (say at ₱40.00) results in excess supply (QS = 200 units inflation.
and QD = 100 units). The excess supply is depicted by the area abe. In this Price controls are classified into two types:
case, the oversupply of 100 units forces the price down in order to eliminate 1. Floor Price
the excess supply.  It is the legal minimum price imposed by the government.
 This is undertaken if a surplus in the economy persists.
  Floor Price is a form of assistance to producers by the government for Hence, we equate quantity demanded and quantity supplied for our
them to survive in their business and are generally imposed on equilibrium solution.
agricultural products.
2. Price Ceiling
 It is the legal minimum price imposed by the government. Considering now the demand and supply equations, we have the following:
 This is undertaken if a surplus in the economy persists. QD = a – bP QS = -c +d
 Floor Price is a form of assistance to producers by the government for QD = 68 – 6P QS = -33 +10P
them to survive in their business and are generally imposed on
agricultural products. Next, since the equilibrium condition is QD = QS, we translate it into:

E) The Partial Equilibrium Analysis – As part of understanding how market a – bP = -c + d

(dis)equilibrium can be identified, we can utilize the partial equilibrium 68 – 6P = - 33 + 10P
analysis which can interpret the situation at hand, particularly if there is
market equilibrium, surplus, or shortage. Moreover, the partial equilibrium With that, we transpose it and find for the equilibrium price (P E).
method equates supply and demand in one or more markets so that prices
stabilize at their equilibrium level. 68 – 6P = -33 + 10P

With this, we use the following equation system:

Demand equation Qd = a – bP 68 + 33 = 6P + 10P
Supply equation Qs = -c – dP 101 = 16P
Equilibrium condition QD = Q s 16 16
PE = 6.3125
As you can observe on the given equations above, the equilibrium condition
states that the quantity demanded is equal to the quantity supplied; that is b) Having now computed the equilibrium price, we can now compute for the
because in market equilibrium there is no surplus nor shortage. quantity demanded and quantity supplied. Since we are to consider the PE,
the QD and QS shall have the same outcome as the equilibrium condition is
EXAMPLE FOR THE STEP-BY-STEP PROCESS (MARKET EQUILIBRIUM) QD = QS. We then try to separately compute for the quantity demanded and
quantity supplied. We first do the former through substitution.
Given: Unknown:
a = 68 PE QD = a – bP
b=6 QD / Q E QD = 68 – 6 (6.3125)
c = 33 QS / Q E QD = 68 – 37.875
d = 10 QE = 30.125

a) First, we determine the equilibrium price (PE) in order for us to determine the c) Finally, we compute for the quantity supplied and let’s check if we get the
quantity demanded (QD) and quantity supplied (QS) for the given. Now, let same outcome.
me ask you, how can we compute for the PE with only the a, b, c, and d
QS = -c + dP
given? For that, we consider the equations given for demand and supply.
 QS = -33 + 10 (6.3125)
QS = -33 + 63.125 We try to complete the table above by computing and determining if there is a
surplus or shortage.
QE = 30.125
a) Determine the quantity demanded, quantity supplied, and market
As we have computed above, the QD and QS were equal (30.125) as there is
disequilibrium.
an equilibrium brought about by the equilibrium price. That is why when you
use PE as our reference price, we can label our QD and QS as QE.
Price = ₱8.00
The exercise that we just accomplished was for the equilibrium situation wherein QD = a – bP QS = -c + dP
the quantity demanded is equal to the quantity supplied. How about if there is a QD = 68 – 6 (8) QS = -33 + 10 (8)
surplus situation? What if it’s a shortage? How can we determine those? QD = 68 – 48 QS = -33 + 80
 Unlike in market equilibrium, when there is a market disequilibrium, either
QD = 20 QS = 47
surplus or shortage, the quantity demanded and quantity supplied are not
equal. 20 < 47
QD < QS
 When there is a surplus, the quantity demanded is less than the quantity Surplus
supplied; hence: Price = ₱7.00
QD < QS QD = a – bP QS = -c + dP
QD = 68 – 6 (7) QS = -33 + 10 (7)
 When there is a shortage, the quantity demanded is more than the quantity QD = 68 – 42 QS = -33 + 70
supplied; hence:
QD > QS QD = 26 QS = 37
26 < 37
To elaborate further, we try to accomplish the table below by using the same QD < QS
given (a, b, c, d) but instead of looking for the equilibrium price, demand, and Surplus
supply, we determine if there is a shortage / surplus considering the given prices
Price = ₱6.00
by computing for their corresponding quantity demanded and quantity supplied.
QD = a – bP QS = -c + dP
Complete the table. QD = 68 – 6 (6) QS = -33 + 10 (6)
QD = 68 – 36 QS = -33 + 60
Price QD QS Market Disequilibrium
₱8.00 QD = 32 QS = 27
₱7.00 32 > 27
₱6.00 QD > QS
₱5.00 Shortage
₱4.00
 Price = ₱5.00 supply exceeds the level of demand or demand exceeds the available supply.
QD = a – bP QS = -c + dP
If a market is at its equilibrium price and quantity, then it has no reason to
QD = 68 – 6 (5) QS = -33 + 10 (5)
move away from that point. However, if a market is not at equilibrium, then
QD = 68 – 30 QS = -33 + 50
economic pressures arise to move the market toward the equilibrium price and
the equilibrium quantity.
QD = 38 QS = 17
38 > 17 WEEK 6
QD > Q S
Shortage APPLICATION OF DEMAND AND SUPPLY

Price = ₱4.00 A) PRICES OF BASIC COMMODITIES

QD = a – bP QS = -c + dP
QD = 68 – 6 (4) QS = -33 + 10 (4) COMMODITY – a basic good used in commerce that is interchangeable with other
QD = 68 – 24 QS = -33 + 40 commodities of the same type; commodities are most often used as inputs in the
production of other goods or services.
QD = 44 QS = 7
A commodity possesses these properties:
44 > 7
QD > Q S 1. It is a good that is usually produced and/or sold by many different companies.
Shortage 2. It is uniform in quality between companies that produce and sell it.
 Meaning, one cannot tell the difference between one firm’s product and
If you can notice, the shortage situation started at price ₱6.00. Going back to
another. This uniformity is referred to as fungibility.
our market equilibrium computation, our PE is 6.3125; hence, if we are to
refer with our market disequilibrium situations, prices below that is shortage
Examples of Commodities
while prices beyond the PE is surplus.
Lumber, oil, and electricity could all be considered commodities, while Levi’s
jeans or Sketcher’s shoes would not be, as consumers consider them to be
GENERALIZATION:
distinct from jeans and shoes sold by other firms. Economists call this
distinctness, product differentiation.
The word equilibrium means balance. A market is in equilibrium if at the
market price, the quantity demanded is equal to the quantity supplied. The
B) LABOR, SUPPLY, POPULATION GROWTH, AND WAGES
price at which the quantity demanded is equal to the quantity supplied is called
the equilibrium price or market clearing price. The equilibrium price is the only
price where the plans of consumers and the plans of producers agree—that is,
where the amount consumers want to buy the product, quantity demanded, is
equal to the amount producers want to sell, quantity supplied. This common
quantity is called the equilibrium quantity. At any other price, the quantity
demanded does not equal the quantity supplied, so the market is not in
equilibrium at that price. Disequilibrium is when the market fails to find an
equilibrium point. It is an imbalance between supply and demand - such that
 The analysis of demand and supply can also be used
in the determination of the wage rate in the labor If the equilibrium price is considered too low by the laborers, they may demand
market. As in any market, the labor market is the government to impose a price floor or a minimum wage.
composed of those that demand labor services, as
indicated by the demand curve for labor, and those With this regulation, the reaction of the
that supply labor services, as indicated by the supply firms is to demand less labor services.
curve of labor. These major actors in the labor Hiring additional workers will mean the
market are motivated by the changes in the price of net returns to firms is negative implying
labor which is indicated by the wage rate. that their profit may decline as a
consequence. From the point of view of
For this graph, it simply portrays the curve/slope of the major actors in the labor the suppliers of labor services, they
market. The demand curve (indicated in red) is downward sloping while the may find the minimum wage attractive
supply curve (indicated in blue) is upward sloping. For the demand curve, these and they offer more hours for work.
imply those that demand labor services such as firms or business entities looking With demand for labor decreasing
for employees. On the other hand, the supply curve specifies those that supply while the supply of labor increasing
labor services and, in this case, these are the laborers or employees. with the minimum wage will result in an
excess supply of workers seeking work but cannot be hired because of the strict
a. Application of Demand – Similar to other demand curves, the demand curve requirements of higher value of marginal products by the firms. This excess
for labor is downward sloping. This means that there is an indirect supply of labor services ends up as unemployed workers.
relationship between the wage rate and the quantity of labor services that is
bought in the market. At a high wage rate, the demand for labor is low while Although the objective of the government in setting the minimum wage is to
at the low wage rate the demand for labor is high. provide a decent life for workers, this policy may be considered
counterproductive because it creates unemployed workers.
b. Application of Supply – The supply of labor is also influenced by the wage
rate. The laborers are the ones supplying the labor services in the labor C) LABOR MIGRATION AND THE OVERSEAS FILIPINO WORKER (OFW)
market. To them, the wage rate is the opportunity cost of having leisure. It is PHENOMENON
assumed that individuals use their time by choosing having leisure or devoting
it to work. Given this, if the wage rate is very low, very few laborers are Overseas Filipino – is the term encompassing all Filipino migrants, whether
willing to work since they would rather have leisure because the price of permanent or temporary, legal or unauthorized.
leisure is very low. At this low wage rate, the foregone income of not working
Overseas Filipino Workers – represent a subset of overseas Filipinos, and are
is very low. On the other hand, if the wage rate is high, the demand for leisure
temporary migrants.
decreases since the opportunity cost of not working is very high. As they
devote less time for leisure, they will be willing to offer more time for work.
Thus, we observe a positive relationship between wage rate and the supply of
labor services.

In the illustration above, we depict a market for labor services. The intersection of
the demand for labor and the supply of labor will yield the equilibrium wage rate.
Currently, there are millions of Filipinos working abroad. The push and pull factors
have often been utilized to explain the temporary labor migration of Filipinos.
However, the demand and supply analysis can also be used to describe the
phenomenon of Overseas Filipino Workers (OFWs). Similar to the market for labor
services, temporary labor migration of Filipinos can be analyzed in terms of
demand for OFWs and supply of OFWs in the international labor market. The
illustration below can help understand why many Filipino workers want to
become OFWs even at the low foreign wage and decreasing foreign wage rate.
a. Application of Demand – Demand
for OFWs is influenced by the
foreign wage rate. As foreign wage rate decreases, foreign firms will demand
more OFWs as they equate the wage rate with the value of the marginal
productivity of workers. This downward sloping demand for OFWs is shown
by DLF1.
b. Application of Supply – Demand for OFWs is influenced by the foreign wage
rate. As foreign wage rate decreases, foreign firms will demand more OFWs
as they equate the wage rate with the value of the marginal productivity of
workers. This downward sloping demand for OFWs is shown by S LF1.
The intersection between the supply curve of OFW, S LF1 with the demand curve
for OFWs, DLF1 at e1 gives the equilibrium wage rate W E1 and employment of
OFWs at LE1.
However, this supply of OFWs is also influenced by the exchange rate. The higher
the value of the US dollars in terms of Philippine peso, more Filipinos will be
inclined to work abroad. Suppose the exchange rate ER is PHP 40 per US dollar. A
salary of USD 1,000 per month abroad will translate into PHP 40,000 per month.
However, if the ER is now PHP 50 per US dollar, the same salary of USD 1,000 can
be exchanged for PHP 50,000. With the increase in the ER, working abroad
becomes attractive even if the wage rate abroad is not changing.
Suppose the exchange rate increases or the peso depreciates, the supply curve of
OFWs shifts to the right to SLF2. With the demand curve not changing, a new
equilibrium is set at point e2 with a lower wage rate, WE2 and a higher
employment of OFWs at LE2. Thus, even at a lower foreign wage rate, there will
be more OFWs willing to go abroad because the Philippine peso value of their
reduced foreign wage is still high with a depreciated Philippine peso. The demand
for OFWs also increases because the foreign wage has declined encouraging
foreign firms to hire more Filipino workers.
GENERALIZATION:
The law of supply and demand is an economic theory that explains how supply
and demand are related to each other and how that relationship affects the
price of goods and services. It's a fundamental economic principle that when
supply exceeds demand for a good or service, prices fall. When demand
exceeds supply, prices tend to rise.
The law of supply and demand is an economic theory that explains how supply
and demand are related to each other and how that relationship affects the
price of goods and services. It's a fundamental economic principle that when
supply exceeds demand for a good or service, prices fall. When demand
exceeds supply, prices tend to rise.
WEEK 7
APPLICATION OF DEMAND AND SUPPLY
(Philippine Peso and Foreign Currencies)
(Philippine Housing Storage and the Real Estate Boom: Rent and Price Structure)
A) The Philippine Peso and Foreign Currencies
Another application of the demand and supply analysis is the determination
of the exchange rate.
The exchange rate is the price of a
foreign currency. For example, the
exchange rate between Philippine
peso and US dollar is ₱50.00 per US
dollar. This means that the price of
 one US dollar is 50 Philippine pesos. This price of US Dollar or exchange rate capital goods and raw materials, both of which are necessary for an
(ER) can be determined by the interaction of the demand for US dollars and industry. The weak demand for imports is arguably the most important
the supply of US dollars in the market for foreign exchange. By telling us how element driving the peso's recent appreciation.
many pesos you have to give up to get a dollar, the peso-dollar exchange rate
simply represents the price of a US dollar. b. Application of Supply
 The supply of US dollars, on the other hand, is based on the inflows of US
As with any other market price, this exchange rate is intricately tied to the
dollars into the country brought by export receipts, remittances and
forces of demand and supply. For instance, you can expect the price of a
capital inflows. The supply of US dollars has a positive relationship with
dollar to go down (say, from P50 to P45 a dollar) if there’s weaker demand for
the exchange rate. As the exchange increases from ₱40 to ₱50 per US
it. In this case, there’s an appreciation (or “strengthening”) of the peso.
dollar, it can motivate exporters to export more and Filipinos to work
Meanwhile, you can expect the price of a dollar to increase (say, from P45 to
overseas and send remittances. When the exchange rate decreases or the
P50 a dollar) when there’s a lower supply of it. Hence, a depreciation (or
peso appreciates from ₱40 to ₱30 per US dollar, there is a disincentive to
“weakening”) of the peso.
export and for workers to work overseas. Because of this, we have a
positively sloping supply of US dollars as indicated in the illustration
As with any other market price, this exchange rate is intricately tied to the
above.
forces of demand and supply. For instance, you can expect the price of a
dollar to go down (say, from P50 to P45 a dollar) if there’s weaker demand for
 During the pandemic, a large amount of money has flooded in due to the
it. In this case, there’s an appreciation (or “strengthening”) of the peso.
Duterte government's increased foreign borrowings in an effort to tackle
Meanwhile, you can expect the price of a dollar to increase (say, from P45 to
COVID-19 and its repercussions. However, the inflow of cash was
P50 a dollar) when there’s a lower supply of it. Hence, a depreciation (or
matched by significant outflows. This is, of course, due to the fact that
“weakening”) of the peso.
some OFWs have been relocated and repatriated since the pandemic
began. Thousands more have lost their jobs and are stranded abroad.
How does the Law of Demand and Supply affect currencies?
Consumer spending will be hampered and our economy's recovery will be
derailed if OFWs are unable to send money back home. The resulting
a. Application of Demand
decrease in dollar supply tends to depreciate the peso.
 The demand for US dollars in the Philippines is influenced primarily by its
The intersection of the demand curve and the supply curve will determine the
demand for imports since the country needs US dollars to pay for our
equilibrium exchange rate.
imports. Just like the demand curve developed earlier, the demand for US
dollars has an indirect relationship with the exchange rate, in this case the
B) The Philippine Housing Shortage and the Real Estate Boom: Rent and Price
price of a US dollar. The higher price of a US dollar, imports become
Structure
expensive. As imports become expensive, our quantity demand for US
dollars decreases. This is denoted by the downward sloping demand Another application of the
curve. demand and supply analysis is the
determination of the rent which is
 When Filipinos lost their employment and income as a result of the
the price for a fixed factor input.
pandemic, they avoided purchasing goods from other countries. This
Typically, rent refers to the price
lowered the overall demand for dollars, which can be used to pay for
of using land, a fixed input, in the
imported items. More importantly, the pandemic has halted imports of
process of production. You
 probably wonder why the price of land or rent in the commercial districts of
Makati, Taguig, and Ortigas in Metro Manila are significantly higher than the
same area of agricultural lands in rural Samar or Bicol. In some remote areas
of the country, some lands remain idle. Home prices, like stock and bond
prices, are highly influenced by the law of supply and demand. When there is
more demand, prices tend to rise; when there is more supply, prices tend to
decline.
How does the Law of Demand and Supply affect Real Estate?
a. Application of Supply
 Consider the figure where the market for land is shown. The supply curve
of land is depicted by a vertical line S1 because land is fixed and cannot
be increased with increase in rent or the price of land. Since supply is not
responsive to the change in price, the price of land or rental rate is
determined by the demand for land alone. But before we consider the
impact of demand for land, we have to realize that there is a cost in
putting this fixed land into productive use. This is shown by C0. Thus, the
difference between the price of land and the cost, will give us the pure
rent realized by the owners of the land. This difference can be considered
as net surplus of owners by putting their land into productive use.
b. Application of Demand
 Consider a very low demand for land as indicated by D 0. The intersection
of supply curve S1 and demand curve D0 at point e0 will give us a very low
price of land or rent, R0. Since R0 is lower than the cost of putting land into
productive use C0, the owners of the land are getting negative net surplus
or negative pure rent. In this case, there is no incentive for landowners to
use their land. Thus, the land remains idle.
 Consider a high demand for land as indicated by D 1. The intersection of
supply curve S1 and demand curve D1 at point e1 will give us a price of land
or rent, R1 which is higher than R0 and C0. Since R1 is relatively higher than
C0, the owners of the land earn some positive net surplus or some pure
rent. Since the price of land is not as much, landowners may use this land
in productive activities that can afford to pay the modest price of land. In
most cases, this type of land can be used for agricultural production.
 However, if the demand for land is very high as indicated by D 2, its
intersection with the supply curve S1 at point e2 will set the equilibrium
price of land or rent. In this case, it is significantly higher than R1 and
substantially higher the C0. At this price of land, the landowners are
reaping huge pure rent. Since the price of land is very high, those who will
use it for business and other productive purposes must devise ways to
recover the huge cost of land use.
Because of the prohibitive price of land in commercial districts in highly urbanized
cities in Metro Manila, those who buy or acquire a lease on land in these areas
construct high rises and condominiums to recoup the cost of acquiring land. They
sell the units at prohibitive prices or charge high rental rates to their tenants to
recover the hundreds of millions of Philippine pesos spent in acquiring the land. It
does not make good business or economic sense to construct a two-story building
in these commercial districts or use it for agricultural production because such
initiatives cannot recover the expensive cost of the land.
GENERALIZATION:
An application of demand and supply can also be analyzed in the determination
of exchange rate. Through this week’s lesson, we have learned that the
demand for US dollars has an indirect relationship with the exchange rate. This
goes to say that the higher the price of a US dollar is, the imports to Philippines
become more expensive. In contrary, the supply of US dollars has a positive
relationship with the exchange rate.
We have also analyzed the application of demand and supply in the
determination of rent. Rent is related to the fixed input in the process of
production which is land, and is basically referred as the price one pay for the
use of the land.
The Law of Demand and Supply is a basic economic principle that explains the
relationship between supply and demand for a good or service, and how that
interaction affects the price of that good or service.
When there is a high demand for a good or service, its price rises. If there is a
large supply of a good or service but not enough demand for it, the price falls.
The reason is that people will bid up the prices when there is relative scarcity,
and there will be unsold items when there is an oversupply.

WEEK 8
MARKET STRUCTURE, PARTICULARLY ON PERFECT COMPETITION,
MONOPOLY, OLIGOPOLY, AND MONOPOLISTIC COMPETITION
MARKET STRUCTURE – is a classification system using the key traits of a market,
including the number of firms in the market, the similarity of the products sold,
and by the ease of entry / exit from the market structure.
Types of Market Structure:
1) PERFECT COMPETITION or PURE COMPETITION
 A large number of small firms
 Homogeneous product
 Very easy entry or exit from the maret
a. Large Number of Small Firms
 One of the characteristics of a perfectly competitive market are its many
firms and buyers, that is, a large number of independently-acting firms
and buyers, with each firm and buyer being sufficiently small and so is
unable to influence the price of a product transacted in the market.
 For instance, there are thousands of vegetable farmers in the Philippines.
If any single farmer were to raise the price of his vegetables, the going
market price for vegetables in the market will not be affected.
b. Homogeneous Product
 In a perfectly competitive market, the products offered by the competing
firms are identical not only in physical attributes but are also regarded as
identical by buyers who have no preference between the products of
various producers.
 For example, the rice produced by farmers in Nueva Ecija is similar to the
rice produced by farmers in Bohol. This assumption rules out rivalry
among firms in advertising and quality differences.
c. Very Easy Entry and Exit
 This means that there are no barriers to entry or impediments to the exit
of existing sellers. That is, new firms face no barriers to entry.
 Barriers can be in the form of financial, technical, or government-
imposed barriers such as licenses, patents, permits, copyrights, etc.
Does perfect competition happen in the real setting?
 However, in the real world, no market exactly fits the three assumptions of
perfect competition. The perfectly competitive market structure is only a
theoretical or ideal model, but some actual markets do approximate the
model fairly closely. A typical example of this type of market structure is the
agriculture sector or farm products markets.
2) MONOPOLY
 A single seller or producer
 A unique product
 Impossible entry into the market
a. Single Seller or Producer
 A monopoly market is comprised of a single supplier selling to a multitude
of small, independently acting buyers. In other words, a monopoly means
that a single firm is the industry. Local monopolies are more common
real-world approximations of the model than national or world market
monopolies.
 For example, MERALCO is a local electric power provider in Metro Manila
and of nearby provinces, while Manila Water is the distributor of water to
the residents of the northern areas of Metro Manila. Nationally, the
armed forces provide military service to the entire country.
b. Unique Product
 A unique product means that there are no close substitutes for the
monopolist's product. As such, the monopolist faces little or no
competition. In reality, however, there are few, if any, products that have
close substitutes.
 For example, buying a generator or using a gas lamp is a substitute for
MERALCO. Similarly, putting a deep well can be a substitute of Manila
Water.

c. Impossible Entry
 Barriers to entry are so severe in a monopoly that is why it is impossible
for new firms to enter the market. In other words, extremely high barriers
make it very difficult or impossible for new firms to enter an industry.
 Barriers to entry include (1) sole ownership of a vital resource, (2) legal
barriers like government franchises and licenses, and (3) economies of
scale.
Under monopoly, the consumer has only two choices either buy the
monopolist's product, or none at all because unlike perfect competition,
there are no close substitutes for the monopolist's product.
LOGIC: Monopoly is the opposite extreme of perfect competition.
3) Monopolistic Competition
 Many small firms
 Differentiated products
 Easy market entry and exit
a. Many Small Sellers
 Monopolistically competitive market is comprised of a large number of
independently acting firms and buyers. However, under monopolistic
competition, just like under perfect competition, the exact number of
firms cannot be determined. We can say therefore that the many-sellers
condition is met when each firm is so small (relative the total market) that
its pricing decisions have a negligible effect on the market price.
 For instance, Don Pedro owns a seafood restaurant in the Manila Bay
Area. He assumes that he can set prices slightly higher or improve
services independently without fear that his competitors will react by also
changing their prices or giving better service. In such a case, if any single
seafood restaurant raises its prices, the going market price for seafood
dinners will only increase by a negligible amount.
b. Differentiated Product
 The products offered by competing firms under a monopolistically
competitive market are differentiated from each other in one or more
respects.
 In our previous example, many customers think that Don Pedro's seafood
restaurant is the best along the Manila Bay area although there are other
restaurants that offer a similar product. A differentiated product has
close, but not perfect, substitutes. The importance of this viewpoint,
therefore, is that consumers are willing to pay a slightly high price for Don
Pedro's seafood. Our example makes clear that under monopolistic
competition, rivalry centers on non-price factors, in addition to price
competition. With non-price competition, a firm under this type of
market structure competes, using marketing strategies like advertising,
packaging, product development and innovation, quality control, and
customer service, rather than lowering the price.
c. Easy Entry and Exit
 In a monopolistically competitive market, there are no barriers to entry
preventing new firms from entering the market, or obstacles in the way of
existing firms leaving the market. Thus, unlike a monopoly, firms in a
monopolistically competitive market face low barriers to entry. However,
entry into a monopolistically competitive market is not quite as easy as
entry into a perfectly competitive market. Monopolistically competitive
firms sell differentiated products, so it is somewhat difficult for new firms
to become established.
 For instance, we can establish our own seafood restaurant along Manila
Bay since it is relatively easy to get a business permit, secure a loan, lease
a property, and start serving seafood. However, our restaurant may have
trouble attracting customers because Don Pedro's seafood restaurant has
established a reputation of being the best seafood restaurant in the area.
4) OLIGOPOLY
 Few sellers
 Either homogeneous or a differentiated product
 Difficult market entry
a. Few Sellers
 Under oligopoly, the bulk of market supply is in the hands of a relatively
few firms who sell to many small buyers. But what does “few firms” really
mean? As with other market structure, the answer is there is no specific
number of firms that must dominate an industry before it becomes an
 oligopoly. Basically, an oligopoly is a consequence of mutual
interdependence, that is, it is a condition in which an action of one firm
may cause a reaction from other firms.
 We are familiar with the “Big Three” oil companies in the Philippines,
namely Petron Corporation, Pilipinas Shell, and Chevron Corporation and
of the fact that these three firms dominate the oil industry in the country.
b. Homogeneous or Differentiated Products
 In an oligopolistic market, the products offered by suppliers may be
identical, or more commonly, differentiated from each other in one or
more respects. These differences may be of a physical nature (involving
functional features) or may be purely 'imaginary' in the sense that
artificial differences are created through advertising and sales promotion.
 For instance, the unleaded gasoline of Pilipinas Shell is identical with the
unleaded gasoline of Petron or Chevron. However, cars produced by the
major automakers, like Toyota and Ford, are differentiated products. If
such is the case, therefore, buyers in an oligopoly market may or may not
be indifferent as to which seller's product they buy. In other words, the
unleaded gasoline you buy at a Shell station is no different from that of a
Petron station, so you are indifferent in choosing whether to buy your gas
from the former or the latter.
Market Structures refer to the different market characteristics that determine
relations between sellers to each other, of sellers to buyers and more. The
concept of market structure is central to both economics and marketing. Both
disciplines are concerned with strategic decision making. In decision-making
analysis, market structure has an important role through its impact on the
decision-making environment. Economic market structures can be grouped
into four categories: perfect competition, monopolistic competition, oligopoly,
and monopoly.
The categories differ because of the following characteristics: The number of
producers is many in perfect and monopolistic competition, few in oligopoly,
and one in monopoly. The degree of product differentiation, the pricing power
of the producer, the barriers to entry of new producers, and the level of non-
price competition (e.g., advertising) are all low in perfect competition,
moderate in monopolistic competition, high in oligopoly, and generally highest
in monopoly.
WEEK 9
MARKET STRUCTURES
CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO ENTREPRENEUR

c. Difficult Entry SPECIAL TYPES OF MARKET STRUCTURE

 Similar to monopoly, there are formidable barriers of entry that make it
How do these special types of market structure differ from one another?
difficult for new firms to enter the market. High barriers to entry in an
oligopoly protect firms from new entrants. 1) BILATERAL MONOPOLY – is a market structure comprising of one seller (like
monopoly) and only one buyer (like monopsony). When there is only one
 These barriers include exclusive financial requirements, control over the
supplier and one customer in a market, it is called a bilateral monopoly. The
essential resource, patent rights, and other legal barriers. But the most
monopoly strength of the single supplier will lead to excessive prices being
significant barrier to entry in an oligopoly market is economies of scale.
charged to the single buyer. The lone buyer will try to get the best deal
For example, larger oil firms achieve lower average total costs than those
possible. Because both parties have competing aims, they must negotiate
incurred by small oil firms. Thus, we can see that even with the
based on their respective negotiating power, with a final price that falls
deregulation policy of the government, the dominant players in the
between the two parties' maximum profit points. When there is a small
industry are still the “Big Three”.
enclosed market with a limited number of players, or when there are several
players but switching buyers or sellers is prohibitively expensive, this situation
LOGIC: We can say that oligopoly is a competition “among the few”.
might exist. When neither party can agree on the terms of the transaction,
issues occur, and the negotiation stretches beyond what is acceptable.
GENERALIZATION:
 Instead of engaging in fair negotiations and exchanging draft contracts, the
buyer and seller, for example, misuse their rights by refusing to ship products,
imposing unproductive and discriminatory terms, and sending misleading
information to one another. This causes uncertainty and poses a threat to the
market as a whole.
What makes Bilateral Monopoly different from Bilateral Oligopoly?
2) BILATERAL OLIGOPOLY – is a market condition with a significant degree of
seller concentration (like oligopoly) and a significant degree of buyer
concentration (like oligopsony). This is a market structure in which there are a
few sellers on the supply side and a few purchasers on the demand side. Such
a market structure suggests the presence of countervailing market power,
which refers to market power developed by one side of the market in
response to market power developed by the other.
What are the differences between Duopsony and Duopoly?
3) DUOPSONY – is a market situation in which there are only two buyers but
many sellers. These two purchasers, when combined, decide market demand,
providing them significant bargaining power, assuming they are outnumbered
by companies competing to sell to them.
A community with only two operating restaurants that are hiring staff is an
example of a duopsony. If the town has a large number of waiters and chefs,
the two restaurants will have more bargaining leverage, allowing them to pay
cheaper wages than if there were more enterprises competing for workers.
Unless they choose not to work, chefs and waiters have little choice except to
accept the poor salary. This demonstrates that enterprises that are part of a
duopsony have the ability to cut not only the cost of commodities but also the
cost of labor.
4) DUOPOLY – is a market situation in which there are only two suppliers. A
duopoly occurs when two competing enterprises control the bulk of a market
sector for a product or service they offer. Even if it provides other services
that do not fall into the market area in question, a company can be a part of a
duopoly.
Google and Facebook, for example, have dominated the digital advertising
market for much of this decade and are a duopoly, although Google is not
linked with a duopoly in any of its other product sectors, such as computer
software.
It's important to distinguish between a duopoly and a duopsony. A duopoly
occurs when two competing enterprises control the bulk of a market sector
for a product or service they offer. Coca-Cola and Pepsi are considered a
duopoly since they control nearly all of the cola market. A duopsony, on the
other hand, is an economic situation in which there are only two major
customers for a certain product or service. As a result, buyers have a lot of
bargaining power and may set market demand as long as there are a lot of
companies competing to sell to them.
Is Monopsony favorable?
5) MONOPSONY – is a market situation in which a single buyer confronts many
small suppliers. A monopsony is a market condition in which the monopsonist
is the sole buyer. A monopsony, like a monopoly, has unfavorable market
conditions. The distinction between a monopoly and a monopsony is mostly
based on the governing companies. A monopsonized market is dominated by
a single buyer, whereas a monopolized market is dominated by a single seller.
Monopsonists are popular in places where they provide the majority or all of
the occupations.
CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO ENTREPRENEUR
What are the economic issues that are faced by Filipino entrepreneurs and how
do those impact us?
1) INVESTMENT AND INTEREST RATE – Besides knowing the market where
he/she can establish his/her business, an entrepreneur is also faced with
various issues affecting the costs of operating a business enterprise. One of
the major costs in conducting a commercial organization is the interest
payments on borrowed funds.
In establishing a business, an entrepreneur will need funds to finance its
initial operation as well as the acquisition of tools, machinery, and other
capital equipment in building his factory and physical plant. Because internal
resources coming from the entrepreneur and his business partners may not
be sufficient to finance these investment needs, the entrepreneur or his
company may have to borrow externally.
  External funds can be sourced from the capital market or the market for
funds. In this market, the demand for funds is made by firms and other
organizations that are deficient in funds to finance their investment
needs.
2) RENTALS AND THE COST OF BUSINESS OPERATIONS – It may not be wise for
a small and beginning enterprise, with limited resources, to locate its office in
high-end commercial districts because rental rates can eat up a huge part of
its revenues. But these commercial districts still attract numerous business
establishments despite the high rental rate.
There are several benefits of having an office in these commercial districts.
First, it gives legitimacy and prestige to the business enterprise. If a company
can afford the high cost of office space, it must be a genuine business venture
supported with huge resources and having favorable business revenues from
its operations. Second, there are economies or savings when business
enterprises are located in one strategic place. Aside from attracting a lot of
customers and clients, the transaction cost may go down if the office is
accessible to workers and near to the clients and service providers. Third,
these commercial districts are well planned and designed for business with
their good infrastructure and adequate support services. Because of these
benefits, many local government units as well as private real estate
developers are developing strategic areas in their localities into commercial
districts.
3) MINIMUM WAGE – A wage rate imposed by the government which is higher
than the equilibrium wage rate can have consequences on the labor market
as well as on firms. A minimum wage is an example of a floor price that
prevents the market to seek its equilibrium condition because of a
government policy or legislation. For labor intensive industries, the imposition
of a floor price on the wage rate can discourage firms to hire additional
workers since the wage rate has become prohibitive. With labor services
becoming more expensive, the comparative advantage of these firms is
compromised. As a result, some of these firms locate their manufacturing
plants in regions or countries where labor is relatively inexpensive.
4) TAXES – Various levels of government units impose a number of taxes
including business permits, real estate taxes, sales taxes, value added taxes,
income taxes, and taxes on traded goods and services. These taxes can
increase the cost of business operations and can threaten the profitability of
business enterprises at their initial stage of operations.
To attract pioneer and foreign and local enterprises to establish their
presence in the country, the government has crafted a program of tax
incentives to locate their business in the country.
GENERALIZATION
A bilateral monopoly exists when there is just one supplier and one customer in
a market. This creates uncertainty and puts the market at risk as a whole. On
the other side, a market structure in which there are a few suppliers on the
supply side and a few buyers on the demand side is known as a bilateral
oligopoly. Furthermore, duopsony is a market condition in which there are only
two buyers but numerous sellers. If they are outnumbered by enterprises
competing to sell to them, these two purchasers, when combined, determine
market demand, giving them tremendous bargaining power. A market
arrangement, however, in which there are just two suppliers is known as a
duopoly. Lastly, monopsony is a market condition in which a single buyer deals
with a large number of small suppliers.
An entrepreneur will require finances to start a firm, as well as funds to
purchase tools, machinery, and other capital equipment for the construction of
his factory and physical plant. Because the entrepreneur's and his business
partners' internal resources may not be sufficient to fund these investment
demands, the entrepreneur or his company may need to borrow money from
outside sources. Moreover, due to the fact that rental costs can take up a large
portion of a small and beginning business's revenue, it may not be wise for it to
locate its office in high-end commercial districts. Despite the high rental rates,
these commercial zones continue to attract a large number of businesses. The
competitive advantage also of these businesses is being eroded as labor
services become more expensive. As a result, some of these companies choose
to situate their production units in areas or countries where labor is cheap.