APPLIED ECONOMICS

3RD QUARTER – WEEK 3

Learning Activity Sheet
Lesson 3.1: Market Demand

Economics, as per definition, it deals with human behavior and how people
interact with each other in a society. Hence, it is important to know how
individuals make choices out of the resources available. In the market and mixed
economy, we discussed that individuals are free to choose whatever they want to
buy. There are many factors which signal them to buy a certain product. However,
price is the main indicator of why consumers purchase a good or service. This
module will discuss the relationship of the price with the consumer’s buying power.

Market Demand
Demand is an economic principle referring to a consumer's desire to
purchase goods and services and a willingness to pay a price for a specific good or
service (Chappelow, 2020). If we are talking about market demand, it is defined as
the willingness and ability of consumers to buy different quantities of goods or
services at any given time at various possible prices. Because of scarcity, you
cannot get all what you want. Even if you have enough money to pay for a new
dress, you might decide not to buy it because it defies you with an opportunity
cost. There’s a great opportunity cost as the price of a product gets higher – the less
likely that you will buy.

Since price influences our buying decision, consumers are hesitant to buy
products at a higher price. Price is the amount of money that has to be paid to
acquire a given product. The number of units of a good that individuals are willing
and able to buy a particular price during a particular period is called quantity
demanded. As price increases, ceteris paribus, quantity demanded decreases - this
principle is called the law of demand. There is a negative relationship between price
and quantity demanded. Price and quantity demanded are regularly observed to be
negatively related for two reasons:
1. Substitution Effect – As the price of a good increase relative to the price
of the other goods, the opportunity cost of buying that good increases, and
consumers will switch to substitutes-other goods that can be used in its
place.
2. Income Effect – As the price of a good rises and income remains the
same, consumers, who could no longer afford to buy all the things that they
used to buy, would normally buy less of the good whose price has been
increased.

Demand Schedule
It is a table showing the quantities of a product that would be purchased at
various prices at a given time and place. Table 1 contains a hypothetical schedule
of the demand for sandwiches in a local market during school days. The left
column shows the various prices while on the right column shows the number of
units which consumers would choose to buy at a given price. As observed, as the
price rises, the quantity demanded declines.
 Table 1. Market Demand Schedule for Sandwiches

Situation Price per Unit Quantity

Demanded
A 30 20
B 25 40

C 20 60

D 15 80
E 10 100

Demand Curve
It is a graph showing the quantities of a product that would be purchased at
various prices at a given time. The market demand curve for sandwiches is a
graphical representation of a demanding schedule for sandwiches.

As shown in figure 1, the price is

scaled on the graph’s vertical axis
and quantity on the horizontal
axis. Each point on the curve
shows the number of sandwiches
that consumers would choose to
buy at a particular. In situation
A, at ₱30 consumers would buy
20 sandwiches. Situation B
represents the combination of 40
sandwiches at ₱25 while in
situation C, consumers will buy
60 sandwiches at ₱20 and so on.
When we connect all these
points, we obtain the market
curve, labeled as D – this
represents as
demand curve.

The market demand curve slopes downward towards the right. A

downwardsloping demand curve reflects the observed negative relationship between
price and quantity – law of demand. As the price decreases, the quantity demanded
increases, and vice versa. Since the assumption is that price is the only factor that
affects the quantity demanded, for every price change, there is a movement along
the demand curve. When the price of sandwiches falls from ₱25 to ₱20, the number
of units demanded by consumers rises from 40 to 60. There is a movement along
the demand curve from point B to C.

Non-Price Determinants and Shifts of the Demand Curve

We have discussed earlier that price is the only factor that determines the
quantity of a good or service that consumers choose to buy. Demand can be also
affected by other factors other than price, which is known as non-price
determinants. The non-price determinants are: (1) income of consumers; (2) tastes
or preferences of consumers; (3) number of buyers; (4) prices of related goods; and
(5) expectations of future prices. When these factors change, there is a shift in the
entire demand curve.

Figure 2 shows the

shifts in the market
demand curve that
results from a change
in one of the non-price
factors. The rightward
shift from D1 to D2
implies an increase in
demand. Consumers
would likely buy more
sandwiches at every
price. For example,
they would choose to
buy 80 instead of 60
sandwiches at ₱20. An increase in demand is an increase in the number of units
that consumers would choose to buy at every price. The leftward shift from D1 to
D3 represents a decrease in demand. Consumers would choose to buy less
sandwiches at each and every price. For example, they would choose to buy 40
instead of 60 sandwiches at ₱20. A decrease in demand is a decrease in the
number of units that consumers would choose to buy at each and every price.

1. Income
Individual income may change depending upon the economic situation. An
increase in income leads consumers to buy more goods at every price. A decrease
in income leads consumers to buy fewer goods at every price. There are two types of
goods as income basis, normal and inferior goods. For normal goods, demand
increases as income increases. If the sandwich is a normal good, an increase in
income leads to an increase in demand for sandwiches. For inferior goods, demand
decreases as income increases. An increase in income may lead some consumers to
buy less sandwiches because they can now afford to buy other better products like
hamburgers or pizza.

2. Tastes and Preferences

An increase in the likeness of the people place on sandwiches would lead
them to buy more sandwiches at every price. When people become more aggressive
to try new snacks, some of the consumers might choose to buy fewer hamburgers
at each and every price.

3. Number of Buyers
As the population gets bigger, the demand also increases. Metro Manila has
a greater demand because there are many consumers compared to other provinces.

4. Prices of the Related Goods

A. Substitutes Goods. As the price of a good increase the demand for that
good decreases and its substitute good will increase. Sandwiches and hamburgers
are substitute goods. If the price of sandwiches increases, consumer leads to buy
fewer sandwiches and buys more hamburgers.
B. Complimentary Goods. As the price of a good increase the demand for
that good decreases and the complimentary good also decreases. Sandwiches and
drinks are complimentary goods. If the price of sandwiches increases, the demand
for sandwiches decreases and so with the drinks.

5. Expectations of Future Prices

If people expect the price of sandwiches to rise next week, consumers may
buy more hamburgers now and consume fewer later on. If people expect the price
of a sandwich to fall next week, they may buy fewer sandwiches now and buy more
later on.

Lesson 3.2: Market Supply

Market Supply
Supply is a fundamental economic concept that describes the total amount
of a specific good or service that is available to consumers (Kenton, 2020). Supply
refers to the number of goods that producers are willing and able to sell at different
prices. It is also referred to the relationship between the price of a good or service
and the quantity or number of units all sellers in a market would choose to sell
during a given period. Just like demand, the price has a great effect on the
number of goods and services which producers are willing to produce. For sellers,
price signals businesses to sell the products or not. It is an indicator if the
business will gain profit or loss. If the price of a product rises, the number of units
available for sale increases. The number that producers are willing and able to sell
at a regular price during a particular period is called quantity supplied. The price
and quantity supplied are positively related. This economic theory refers to the law
of supply, which states that as the price goes up, ceteris paribus, the producers
will offer more for sale and if the price goes down, producers are reluctant to sell
and will offer to sell less.

Supply Schedule
The supply schedule shows the quantity of items sellers would offer for sale
at different prices. Table 1 contains a hypothetical schedule of the supply for a
sandwich in a local market during school days. The left column shows the various
prices while on the right column shows the number of units that producers would
choose to sell at a given price. As observed, as the price increases, the quantity
supplied goes up.

Supply Curve
It is a graph showing the quantities of a product that would sell at various
prices at a given time. The market supply curve for sandwiches is a graphical
representation of a supply schedule for sandwiches.

As shown in figure 1, the price is

scaled on the graph’s vertical axis and
quantity on the horizontal axis. Each
point on the curve shows the number
of sandwiches that sellers would
choose to sell at a particular price. In
situation A, at ₱10 sellers would sell
20 sandwiches. Situation B represents
the combination of 40 sandwiches at
₱15 while in situation C, sellers will
sell 60 sandwiches at ₱20, and so on.
When we connect all these points, we obtain the market curve, labeled as S – this
represents as the supply curve.

Non-Price Determinants and Shifts of the Supply Curve

Supply can also be affected by other factors other than price. The non-price
determinants of supply are; (1) the number of sellers; (2) cost of production; (3)
prices of alternative goods produced; (4) expectations of future prices; (5) weather
conditions; and (6) technology. When these factors change, there is a shift of the
entire supply curve.

Figure 2 shows the

shifts in the market supply
curve that results from a
change in one of the non-
price factors. The rightward
shift from S1 to S2 implies
an increase in supply.
Sellers would likely sell
more sandwiches at every
price. For example, they
would choose to sell 80
instead of 60 sandwiches at
₱20. An increase in supply
is an increase in the
number of units that sellers would sell to at each and every price. The leftward shift
from S1 to S3 represents a decrease in supply. Sellers would choose to sell fewer
sandwiches at each and every price. For example, they would choose to buy 40
instead of 60 sandwiches at ₱20. A decrease in supply is a decrease in the number
of units that consumers would sell at each and every price.

1. Number of Sellers
An increase in the number of sellers will increase the supply of goods and
services in the market. As new sandwich producers enter the market, the supply of
sandwiches increases. As they leave the market, the supply of sandwiches
decreases.

2. Cost of Production
Changes in input prices also change the supply of goods. An increase in the
minimum wage of workers will increase the price of input and some producers
cannot afford to pay the increase in wages, supply will decrease due to a decrease
in the number of workers.

3. Prices of Alternative Goods Produced

Suppose producers can easily switch from sandwich to pizza which
considered as substitutes goods. If the price of the pizza decreases, the producers
of pizza receive less income per pizza sold. With this, they switch the production to
sandwiches - which has a higher price compared to pizza, hence, the supply of
sandwiches increases.

4. Expectations of Future Prices

If producers expect prices to increase in the future, they may increase their
production now to gain profit when prices of that particular goods increases. If
prices expected to decrease in the future, producers may reduce production.
5. Weather Conditions
Favorable weather conditions increase the productivity of all firms. Weather
condition also affects the number of supplies, let say in Baguio, which is known for
their strawberries. Because of the weather in Baguio, they can produce more
strawberries. However, unfavorable weather and natural disasters disrupt the
production of firms.

6. Technology
Technology helps production easier and faster. If the producers employ technology
in production it could produce more products.

Lesson 3.3: Market Supply

Consumers and producers react differently to price changes. Higher prices

tend to reduce demand while encouraging supply, and lower prices increase
demand while discouraging supply. Remember that we have discussed the
economic goals and one of these is price stability – anchored in economic stability.
Economic theory suggests that in a free market there will be a single price that
brings demand and supply into balance. This module will give you an
understanding of how consumers are willing to purchase and how producers are
willing to supply at the agreed price and quantity.

Market Equilibrium
It is a situation in which demand and supply are equal. Equilibrium in a
market happens when the price balances the amount that consumers want to buy
and the amount that sellers want to sell.

Table 1. Market Demand and Supply for Sandwiches

 Figure 1 shows the combined demand curve and the supply curve for
sandwiches. The price at which the quantity demanded equals the quantity
supplied is called the equilibrium price. It is the price agreed by consumers and
sellers which in the graph is at ₱20. The quantity bought and sold at equilibrium
price is called the equilibrium quantity. It is the number of units that consumers
are willing to buy and sellers are willing to sell their products, which in the graph is
60 sandwiches. What will happen if the consumers and sellers do not agree given
the price and quantity? There will be a disequilibrium that would result in shortage
and surplus.

Market Shortage
The market shortage is one of the causes of disequilibrium. It is a situation
in which the quantity demanded is greater than the quantity supplied. This means
that there is an excess in demand. Let say, the price of a sandwich is ₱15. The
sellers are willing to sell 40
sandwiches at ₱15, referring to
point A. Meanwhile, consumers
are willing to buy 80 sandwiches
at ₱15, referring to point B. It is
seen that there are few sellers
want to sell at a lower price while
there are many consumers who
want to purchase at a lower price.
This will result in a shortage.
There is a shortage of 40 units
(Qs-Qd: 40-80, a negative sign
implies a shortage). Graphically,
a shortage occurs at any price
below the equilibrium point.

Market Surplus
The market surplus is another cause of disequilibrium. It is a situation in
which the quantity supplied is greater than quantity demanded. This means that
there is an excess in supply. Let
say, the price of the sandwich
increases to ₱25. The sellers are
willing to produce more
sandwiches, 80 units at point B.
At a higher price of ₱25,
consumers plan to buy less at 40
units of sandwiches. At ₱25,
sellers are willing to produce
more while consumers are likely
to buy less, hence it will result in
surplus. There is a surplus of 40
units (Qs-Qd: 80-40, a positive
sign implies surplus).
Graphically, a surplus occurs at
any price above the equilibrium point.

Effects of Changes in Demand and Supply

Some factors affect the shifts of the demand and supply curves as we have
mentioned in the previous lessons. The shifts of either demand or supply curve will
have a response to a change in price and quantity. With this shifting, new
equilibrium price and quantity are formed.

1. Change in Demand with No Change in

Supply
An increase in demand, for example,
an increase in the number of buyers, from
D1 to D2 raises the equilibrium price from
₱20 to ₱25 and the equilibrium quantity
from 60 to 80 units.

A decrease in demand, for

example, a decrease in the number of
buyers, from D1 to D3 lowers the
equilibrium price from ₱20 to ₱15 and
the equilibrium quantity from 60 to 40
units.

2. Change in Supply with No Change in Demand

An increase in supply, for

example, improvement of
technology, from S1 to S3 lowers
the equilibrium price from ₱20 to
₱15 and raises the equilibrium
quantity from 60 to 80 units.

A decrease in supply, for

example, the number of sellers are
less, from S1 to S3 raises the
equilibrium price from ₱20 to ₱25
and lowers the equilibrium quantity
from 40 to 60 units.
3. Increase in both Demand and Supply

The increase in demand and

supply result in an increase in
equilibrium quantity. The effect on
the equilibrium price is uncertain. An
increase in demand raises the
equilibrium price and an increase in
supply lowers the equilibrium price.
In figure 8, the equilibrium price falls
because the change of supply is
greater than the change in demand.
However, if the change in demand is
greater, the equilibrium price will
increase.

The decrease in both demand and

supply curve result in a decrease in
equilibrium quantity. The effect on
the equilibrium price depends on the
degree of the changes in demand and
supply. In this case, demand shift is
greater than the supply shift,
therefore equilibrium price decreases.
However, if the supply shifts greater
than demand, the equilibrium price
will increase.

ACTIVITIES
I. Directions: Identify the following situations below. Put (arrow up) if there is an
increase in demand, and (arrow down) if there’s a decrease in demand.
____________1. Overpopulation in urban area
____________2. There’s red tide in Cavite
____________3. There will be an inflation next week, the demand for goods today is
expected to
____________4. You want to exchange your US dollar bill however, the peso will be
expected to become strong next week.
____________5. The price of ice cream increases, the demand for sugar cone is
expected to

II. Directions: Read each statement carefully. Write T if the statement is correct,
otherwise write F.
 ____________1. Law of supply states that as price increases, aggregate supply
increases.
____________2. Quantity supplied refers to the number of goods and services willing
to produce at a particular price.
____________3. The relationship between price and quantity supplied is positive.
____________4. If prices expected to decrease in the future, producers may
encourage to produce more.
____________5. A change in supply refers to a shift in the supply curve.

III. Directions: Supply the information needed in the appropriate columns.

A. Compute for the number of units
B. Identify the market if it is shortage, surplus, or equilibrium.

Table 2. Market Demand and Supply of Product EBP

Published by the Department of Education - Schools Division of Pasig City

Development Team of the Self-Learning Module

Writer: Emmanuel B. Penetrante

Editor: Hedelita B. Calonia
Reviewers:
Content/Language: Hedelita B. Calonia
Technical: Emmanuel B. Penetrante
Management Team:
Ma. Evalou Concepcion A. Agustin
OIC-Schools Division Superintendent Aurelio G. Alfonso EdD
OIC-Assistant Schools Division Superintendent Victor M. Javeña EdD
Chief, School Governance and Operations Division and OIC-Chief, Curriculum
Implementation Division

Education Program Supervisors

Librada L. Agon EdD (EPP/TLE/TVL/TVE) Liza A. Alvarez (Science/STEM/SSP)
Bernard R. Balitao (AP/HUMSS) Joselito E. Calios (English/SPFL/GAS) Norlyn D.
Conde EdD (MAPEH/SPA/SPS/HOPE/A&D/Sports) Wilma Q. Del Rosario
(LRMS/ADM) Ma. Teresita E. Herrera EdD (Filipino/GAS/Piling Larang) Perlita
M. Ignacio PhD (EsP) Dulce O. Santos PhD (Kindergarten/MTB-MLE) Teresita P.
Tagulao EdD (Mathematics/ABM)