APECO 102 – SEMIFINALS NOTES

I. Supply Analysis
 Supply  Supply Function
- the willingness of sellers to offer a given - It presents how the supply for a certain
quantity of a good or service for a given commodity is affected by different
price. determinants or variables
- It should be remembered that sellers - Qs =c +d ( P )
normally sell more at a higher price than at a Qs = Quantity Supplied at a given price
lower price
C = Intercept of Supply Curve; Constant
 Quantity Supplied
determined by non-price determinant.
- It refers to the amount of goods that a seller
d ¿Slope of the supply curve/ Change in Qs
is willing to offer for sale
P=Price of theGood
 The Law of Supply
- “As the price increases, the quantity supplied Example:
of that product also increases” Ceteris
Suppose that the current price of good A is P5. the
Paribus.
intercept of the supply curve is 3 while the slope
- There is a direct relationship between the
is 0.25. determine how much good A will be
price of a good and the quantity supplied of
supplied by seller X.
that good.
 Supply Schedule
- “It represents the various quantities the
supplier is willing to sell at certain prices
- It denotes the relationship between the
supply and the price, while all non-price
variables remain constant.

Practice:

 Supply Curve
- It illustrates the supply schedule graphically;
it has an upward slope which signifies the
direct relationship between the price and
quantity supplied for that commodity

 Change in Quantity Supplied vs. Change in
Supply
- Change in Quantity Supplied
If the price of the commodity changes,
the quantity supplied will also change. In
this case, it will only move along the same
supply curve
- Changes in supply
There will be an increase or decrease in
the supply of commodities if the non-price
determinants vary. This will lead to a shift
in the supply curve. Higher supply results in
shifting to the right of the curve and lower
supply will lead to shifting to the left of the
curve.
II. Non-price Determinants of Supply
 Price of Production Input – Value added to raw
materials through the process of production
- Intermediate Input – raw materials; these are
still going to be processed or transformed
into higher levels of output.
example: Lumber, Oil, Mineral
- Factor Input – processing or transforming
input
example: Labor, Capital, Land
 Taxes
- monetary expense paid to the government
 Technology - The manner in which factor inputs
process intermediate inputs is done through
technology (Improved technology = short run)
 Expectation of Future Prices - Anticipation on
what is going to happen on the price of the
commodity
 Number of Sellers
- The more sellers of a good, the higher the
supply.
- More suppliers of a commodity will shift the
supply curve of that good to the right.
III. Market Equilibrium
 Market
- A venue where consumers and suppliers of
goods transact on buying or selling of any
items is called a market.
- It sets the amount of good or service to be
rendered and most importantly the price that
the output is going to be sold or bought.”
 Market Equilibrium
- A state of balance between demand and
supply. D=S
- Equilibrium market price is the price agreed
by the seller to offer its good or service for
sale and for the buyer to pay for it.
- It is the price at which the quantity
demanded of a good is exactly equal to the
quantity supplied
- At this price buyers are buying all the goods
they desire, sellers are selling all the goods
they desire, and there is no pressure for the
market price to change.
- SURPLUS – Supply is higher than demand
due to price hike.
- SHORTAGE – Lack of supply due to the
rise of demand.
 Market Equilibrium: LABOR

 Solving the Equilibrium

Demand equation: Q D=a−b ( P )

 Price controls
- When the market is experiencing a surplus, Supply equation: Qs =c +d ( P )
there is a possibility that producers will lose.
Conversely, when the market is encountering Equilibrium Condition: Q D=Q s
a shortage, there is a likelihood that
consumers will be abused. If this happens,
the government may intervene by imposing PRACTICE:
price controls.
 the specification by the government of
minimum or maximum prices for certain
goods and services
 the price may be fixed at a level below
the market equilibrium price or above the
market equilibrium price
 Floor Price
- Above the equilibrium
- the legal minimum price imposed by the
government on certain goods and services.
- The setting of a floor price is undertaken by
the government if a surplus in the economy
persists.
- floor price is a form of assistance to
producers by the government for them to
survive in their business.

 Price Ceiling
- Usually below the equilibrium price
- The legal maximum price imposed by the
government.
- The setting of a price ceiling is undertaken
by government if there is a persistent
shortage of goods.
- Price ceiling is imposed by the government
to protect consumers from abusive producers
or sellers who take advantage of situations
such as occurrence of a calamity.
 IV. ELASTICITIES
 Elasticity of Demand
PRICE Elasticity of DEMAND (PED)
- This quantifies or measures the sensitivity of
response of the quantity demand to the
change in price of the good or service.
- This concept is computed based on
percentage changes.
Note: The coefficient of elasticity is negative due
to the opposite relationship between the price of
the product and the quantity demanded for that
product”. In this case, we say that the coefficient
of elasticity is absolute value* (ignoring the
negative sign, so it is always positive)
PRACTICE:
 INTERPRETATION OF THE
COEFFICIENT OF PED
Elastic
- PED is greater than 1 = PED > 1
- The good is non-essential
- Buyers are sensitive to its price.
Inelastic
- PED is less than 1 = PED < 1
- The product is an essential or important good
- buyers show little response to the change in
its price.
Unitary elastic
- Coefficient of price elasticity is equal to 1 =
PED = 1
- There is proportional variation or change in
the Qd and the price of the product”.
Perfectly elastic
- PED is = ∞
- This signifies when seller increases the
prices of his product, no one will buy from
him.
Perfect inelastic
- PED is = 0
- “It means that consumers still buy the exact
quantity of the product regardless of the
price
 Elasticity of Supply
PRICE Elasticity of SUPPLY (PES)
- This calculates how the suppliers respond to
the variation of products’ price in the
market”
- This concept is computed based on
percentage changes.
- PES = (% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑) /
(% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒)
 - PES is = ∞
- A kind of supply in which quantity supplied
does not respond at all to a change in price.
Perfect inelastic
PRACTICE: - PES is = 0
- A kind of supply in which quantity supplied
is unlimited at a given price, but no quantity
can be supplied at any other price.

 Income Elasticity of Demand

- This signifies the sensitivity of quantity
demanded to the % change in income of the
consumers.

Note:
 INTERPRETATION OF THE
COEFFICIENT OF PES - A positive sign (+) for Ei shows that it is a
normal good.
Elastic - A negative sign (-) for Ei shows that it is an
- PES is greater than 1 = PES > 1 inferior good.
- Producers can increase output without a rise PRACTICE:
in cost or a time delay
Inelastic
- PES is less than 1 = PES < 1
- Firms find it hard to change production in a
given time period. Supply is relatively
unresponsive to a change in demand.
Producers may find it easier to put up prices.
Unitary elastic
- Coefficient of price elasticity is equal to 1 =
PES = 1
- A supply relationship in which the
percentage change in quantity of a quantity
supplied is the same as the percentage
change in price in absolute value
Perfectly elastic
 - When value of Cross Price Elasticity is
negative (-) meaning it’s a Complement
good
Patrick’s income increases from 10,500 pesos to - When Cross Price Elasticity is zero
20,500 pesos annually and his demand for meaning the two products are unrelated
burger increases from 10 to 15 annually.
PRACTICE:

Given: The initial quantity of Pepsi is 10 and the

subsequent quantity is 12. the initial price of
Original Qd (Q1) = Coca-Cola is 65 and subsequently 70.
New Qd (Q2) = Qx = 1

Original Income =
Qx = 2

New income =
Py1 =

Py 2 =

 Cross Price Elasticity of Demand

- This computes how the demand quantity of a
certain product changes as the price of a
related good changes
- Cross-price elasticity computes how the
demand for a good respond to the change in
the price of its substitute good or
complement goods”.

Note:
- If the value of Cross Price Elasticity is
positive (+) meaning it’s a Substitute good