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Applied Economics
Module 3:
Application of Supply and Demand
AIRs - LM
LU_Applied Economics_Module 3
ABM – Applied Economics
Module 3: Application of Supply and Demand
Second Edition, 2021
Copyright © 2021
La Union Schools Division
Region I
All rights reserved. No part of this module may be reproduced in any form without written
permission from the copyright owners.
Management Team:
LU_Applied Economics_Module 3
Senior High School
Applied Economics
Module 3:
Application of Supply and Demand
LU_Applied Economics_Module 3
Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear
learners, can continue your studies and learn while at home. Activities,
questions, directions, exercises, and discussions are carefully stated for you
to understand each lesson.
Each SLM is composed of different parts. Each part shall guide you
step-by-step as you discover and understand the lesson prepared for you.
In addition to the material in the main text, Notes to the Teacher are
also provided to our facilitators and parents for strategies and reminders on
how they can best help you on your home-based learning.
Please use this module with care. Do not put unnecessary marks on
any part of this SLM. Use a separate sheet of paper in answering the exercises
and tests. And read the instructions carefully before performing each task.
Thank you.
LU_Applied Economics_Module 3
Target
A market system is a powerful tool for the allocation because the changes in price
from market transactions create incentives and disincentives on buyers and sellers
to address disparities between demand and supply. The instrument of allocation is
the market price determined by the interactions of the buyers and the seller in the
market.
This module will help you understand how demand and supply interact in a
market to determine the equilibrium price and the quantity.
After going through this module, you can attain the following objectives:
Learning Competency:
Subtasks:
1. State the law of demand and supply, and define market equilibrium
2. Explain the law of demand and supply and illustrate how equilibrium
price and quantity are determined
3. Discuss and explain the factors affecting demand and supply
4. Apply the principles of demand and supply to illustrate how prices of
commodities are determined
5. Analyze how demand and supply forces can affect the value of the
Philippine peso about foreign currencies.
Before going on, check how much you know about this
topic. Answer the pretest on the next page in a
separate sheet of paper.
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LU_Applied Economics_Module 3
Jumpstart
_____1. What economic term refers to the amount of some goods or services
that are consumers willing and able to purchase at each price?
A. Demand B. Equilibrium C. Market D. Supply
_____2. What economic term refers to the quantity of goods that the seller is willing
to offer for sale?
A. Demand B. Equilibrium C. Price D. Supply
_____3. Which refers to the quantity of a commodity that producers are willing to
sell at a particular price at a particular point in time?
A. Supply
B. Quantity supplied
C. Supply curve
D. Supply schedule
_____4. Choose the word that makes the statement incorrect in this statement – “In
substitution effects of goods, when the price of mango increases, pineapple
can be a substitute for mango.”
A. Increases
B. Pineapple
C. Substitute
D. Substitution effects
_____5. Headline news today, September 28, 2020, that the price of gasoline per
liter will rise on September 30, 2020. What is the result of this news?
A. Supply of gasoline decreases.
B. Today's supply of gasoline increases.
C. Today's demand for gasoline increases.
D. The price of a liter of gasoline falls today.
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LU_Applied Economics_Module 3
Discover
Economists use the term demand to refer to the amount of some good or service
consumers are willing to purchase at each price. Demand is based on needs and
wants— a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective, they are the same.
What a buyer pays for a unit of the specific good or service is called price. The
total number of units purchased at that price is called the quantity demanded. A
table that shows the quantity demanded at each price is called a demanding
schedule. A demand curve shows the relationship between price and quantity
demanded on a graph.
The law of supply and demand explains the interaction between the sellers of
a product and the buyers. It shows the relationship between the availability of a
particular product and the demand for that product has on its price.
Demand
The quantity demanded is determined at each price with the following demand
functions: Qd – 6-P/2. At a price of Php10 per bottle, Ana is willing to buy one bottle
of vinegar for a given month. As the price goes down to Php8, the quantity she is
willing to buy goes up to two bottles. At a price of Php 2, she will buy five bottles.
There is a negative relationship between the price of a good, and the quantity
demanded that good. A lower price allows the consumer to buy more, but as price
increases, the amount the consumer can afford to buy tends to go down.
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Price per bottle Number of bottles
Php 0 6
2 5
4 4
6 3
8 2
10 1
The demand curve is a graphical illustration of the demand schedule with the
price measured on the vertical axis (Y), and the quantity demanded measured on the
horizontal axis (X). The value is plotted in the graph and is represented as connected
dots to derive the demand curve (Figure 1). The demand curve slopes downward,
indicating the negative relationship between the two variables: price and quantity
demanded.
12 1, $10
10 2, $ 8
8 3, $6
6 4, $4
4 5, $ 2
2 6 , $0
0
0 2 4 6 8
Figure 1: Hypothetical Demand Curve of Martha for Vinegar (In Bottles) in One
Month
The downward slope of the curve indicates that as the price of vinegar
increases, the demand for the sound decreases. The negative slope at the demand
curve is due to the income and substitution effect.
The income effect is felt when a change in the price of a good changes
consumers' real income or purchasing power, which is the capacity to buy with a
given income. Purchasing power is the volume of goods and services one can buy
with his/her income.
The substitution effect is felt when a change in the price of a good changes
demands due to alternative consumption of substitute goods. For example, lower
prices encourage consumption away from higher-priced substitutes on top of buying
more with the budget (income effect). The higher price of a product encourages
cheaper substitutes, further discouraging demand for the former already limited by
less purchasing power (income effect).
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LU_Applied Economics_Module 3
The Law of Demand
Using the assumption of” ceteris paribus,” which means all other related
variables except those that are being studied at the moment and are held constant,
there is an inverse relationship between the price of a good and the quantity
demanded good.
For example, if the price of video game drops, The demand curve is always
the demand for the games may increase as downward sloping due to the law
more as people want the games. of diminishing marginal utility.
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• Consumer expectations – The expectation or prospect of what will happen to
the price can influence the demand for the commodity. For example, if you
believe that rice prices will increase tomorrow, there is a tendency for
consumers to increase their consumption today.
• Market – The size and characteristics of the market can also be influencing
the demand for a commodity. An increasing population can contribute to the
expansion of existing markets for various commodities. A lower birth rate,
coupled with an aging population, may alter the composition of demand by
shifting the demand toward the needs of the elderly and away from goods and
services that target the youth.
Supply
Supply refers to the quantity of goods that the seller is willing to offer for sale.
The supply schedule shows the different quantities the seller is willing to offer for
sale. The supply schedule shows the different quantities the seller is willing to sell
to different prices. The supply function shows the dependence of supply on the
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. Supply can be illustrated using
a table or a graph. A supply schedule is a table, like Table 2, that shows the quantity
supplied at a range of different prices. A supply curve is a graphic illustration of the
relationship between price, the vertical axis (Y), and quantity supplied, shown on the
horizontal axis (X). The supply schedule and the supply curve are just two different
ways of showing the same information
Php 20 200
40 300
60 400
80 500
100 600
As shown in Table 2, the relationship between the price of fish and the
quantity that Jose is willing to sell is direct. The higher the price, the higher the
quantity supplied. When plotted into a graph, we obtain the supply curve.
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LU_Applied Economics_Module 3
120
100 600, P100
80 500, P80
60 400, P60
40 300, P40
20 200, P20
0
0 200 400 600 800
Quantity Supplied (in kilos)
We derive a supply curve upward sloping or slopes from left to right, indicating
the direct relationship between the price of the good and the quantity supplied of that
good. From Php20 per kilo to Php100 per kilo, the quantity supplied increase from
200 to 600 per kilos. Conversely, as the price falls, the quantity supplied decreases.
The law of supply demonstrates the quantities that will be sold at given price.
The higher the price, the higher the quantity supplied and vice versa.
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LU_Applied Economics_Module 3
• Taxes – Business establishments are required to pay a number of taxes to
various levels of government. It is a monetary expense on the part of the firms,
the payment of taxes can be considered as a part of the cost of production,
although taxes are not factor inputs nor raw materials; they are still
considered as part of operating a business. Thus, an increase in sales tax,
real estate tax, and other business taxes can increase the cost of supplying a
commodity. This may discourage the sellers from increasing their supply of a
commodity in the market.
The supply curve is a vertical line; over time, the supply curve slopes upward;
the more supplier expects to be able to charge, the more they will be willing to produce
and bring to market.
In the equilibrium point, the two slopes will intersect. The market price is
sufficient to induce suppliers to bring to market that same quantity of goods that
consumers will be willing to pay for at that price.
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LU_Applied Economics_Module 3
MARKET EQUILIBRIUM
When the supply and demand curves intersect, the market is in equilibrium.
This is where the quantity demanded, and the quantity supplied are equal. The
corresponding price is the equilibrium price or market-clearing price; the quantity is
the equilibrium quantity.
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LU_Applied Economics_Module 3
Explore
Directions: Read and analyze the sentence. Identify what factor affecting the
demand and supply is being asked in the sentence. After identifying the factor,
classify if it is a factor that affects demand or supply by writing the word
Demand or Supply on the second space. Write your answer in a separate sheet
of paper. (2 points each number)
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LU_Applied Economics_Module 3
Deepen
At this point, you are now ready to apply your knowledge of what you
had learned about demand and supply in real-life situations.
Direction: Analyze the three (3) problems. The following data were taken from
an invoice of Company X. The company imports gasoline from other countries.
Use graphing paper for your answers.
A.) a.1 Plot or graph the data. Interpret the results.
Price
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LU_Applied Economics_Module 3
a.2 Analyze the data and describe the curve.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
1.20 550
1.40 600
1.60 640
1.80 680
2.00 700
2.20 720
Price
Quantity Supplied
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LU_Applied Economics_Module 3
C.) c.1 Using the data from demand and supply (refer to A & B), determine the
equilibrium point of the demand and supply curves.
Price
c.2. How much is the equilibrium price? Interpret your answer on the demand and
supply for gasoline base on the chart you plotted.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________.
GRAPHING RUBRIC
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LU_Applied Economics_Module 3
5 Intervals may The graph has a The graph may Variables may
Approaching not count by title or labels for or may not start not be on the
Standard… the same both axes, or the at 0,0. correct axes.
(almost) number of unit the variable
units. It may be is measured in.
unclear what
the numbers
correspond
with (space or
line).
3 Intervals may The graph does The graph may Variables may
Below not count by not have a title or may not start not be on the
Standard the same or labels for the at 0,0. correct axes.
(oops) number of axes.
units.
Unclear what
the numbers
correspond
with.
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LU_Applied Economics_Module 3
POST-TEST. Multiple Choice
Directions: Read each item carefully. Write only the letter of the best answer
for each test item. Use a separate sheet for your answers.
_____1. What microeconomic law states that all other factors being equal, as the
price of a good or service increases, consumer demand for the goods or
services will decrease and vice versa?
A. Ceteris paribus B. Law of Demand
C. Law of Supply D. Law of Supply and Demand
_____2. Which law states that all other factors being equal, as the price of a good or
service increases, the quantity of goods or services that suppliers offer will
increase?
A. Ceteris paribus B. Law of Demand
C. Law of Supply D. Law of Supply and Demand
_____3. What economic term refers to the willingness of the consumer to buy a
commodity at a given price?
A. Demand B. Equilibrium
C. Price D. Supply
_____4. What economic term refers to the quantity of goods that the seller is willing
to offer for sale?
A. Demand B. Equilibrium
C. Price D. Supply
____ 5. Choose the economic term that refers to the quantity of a commodity that
producers are willing to sell at a particular price at a particular point in
time?
A. Quantity supplied B. Supply
C. Supply Schedule D. Supply curve
_____6. Classify the following factors affecting the demand of a commodity. Which
does NOT belong to the group?
A. Income B. Market
C. Price of Production Inputs D. Taste
_____7. Classify the following factors affecting the supply of a commodity. Which
does NOT belong to the group?
A. Market B. Price of Production Inputs
C. Taxes D. Technology
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LU_Applied Economics_Module 3
_____8. Applying the law of demand, other things remaining the same,
A. As the demand for cheeseburgers increases, the price of a
cheeseburger will fall.
B. As income increases, the quantity of cheeseburgers demanded will
increase.
C. As the price of a cheeseburger rises, the quantity of cheeseburgers
demanded will decrease.
D. As the price of a cheeseburger rises, the quantity of cheeseburgers
demanded will increase.
_____9. Being a grade 12, what commodities are in demand to you and other
learners during this school year?
I. Branded school bag III. Smartphone
II. Laptop IV. WIFI
A. I & II B. II & III
C. II & IV D. III & IV
_____ 10. Analyze the given choices. What does it mean when economists speak of
references as influencing demand?
A. An individual's attitudes toward goods and services.
B. Directly observable changes in prices and income.
C. The availability of a good to all income classes.
D. The excess of wants over the available supplies.
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LU_Applied Economics_Module 3
LU_Applied Economics_Module 3
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a.2) A Demand Curve for Gasoline. The demand schedule shows that as the price rises,
quantity demanded decreases, and vice versa. The downward slope of the demand curve
illustrates the law of demand- the inverse relationship between the prices and the quantity
demanded.
DEEPEN
A.)a.1.
GAUGE: JUMPSTART:
1. B Pretest:
2. C 1. A 2. D 3. B 4. B 5. B
3. A
4. D EXPLORE:
5. A
6. C Enrichment Activity1:
7. A
1. Taste & Preference, Demand
8. C
9. C 2. Consumer Expectation, Demand
10. D
3. Natural Conditions, Supply
4. Price of production inputs, Supply
5. Tax, Supply
Answer Key
LU_Applied Economics_Module 3
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C.)c.1
c.2) The equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600
million gallons. If you had only the demand and supply schedules and not the graph, you could
find the equilibrium by looking for the price level on the tables where the quantity demanded
and the quantity supplied are equal.
B.)b.1
b.2) A Supply Curve for Gasoline. The supply schedule shows the quantity supplied of gasoline
at each price. As prices rises, quantity supplied also rises, and vice versa. The upward slope of
the supply curve illustrates the law of supply – that a higher price leads to a higher quantity
supplied, and vice versa.
References
BOOKS
LINKS
• https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-
supplyand-equilibrium-in-markets-for-goods-and-services/
• https://economictimes.indiatimes.com/definition/law-of-demand
• https://economictimes.indiatimes.com/definition/quantity-demanded
• https://economictimes.indiatimes.com/definition/quantitysupplied#:~:text=De
finition%3A%20Quantity%20supplied%20is%20the,a%20
particular%20point%20of%20time.
• https://www.investopedia.com/terms/l/law-of-supply-demand.asp
• https://www.thoughtco.com/calculating-economic-equilibrium-1147698
• https://www.ducksters.com/money/supply_and_demand.php
• https://www.sagepub.com/sites/default/files/upmbinaries/97660_Chapter_
4_Demand%2C_Supply%2C_and_Market_Equilibri um.pdf
• https://www.rappler.com/newsbreak/in-depth/what-philippine-
economycould-be-like-after-coronavirus
• https://koax.com/docs/supply-and-demand-worksheet-answers-16a7df
.
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