FIRST QUARTER

MODULE 3: WEEK 3 and WEEK 4

SUPPLY AND DEMAND AND MARKET EQUILIBRIUM

CONTENT STANDARD : The learner demonstrates an understanding

of the law of supply and demand and factors
affecting the economic situation.
PERFORMANCE STANDARD : The learners shall be able to conduct a
survey
of a current economic situation within the
vicinity.
LEARNING OUTCOMES LO1: Conceptualize the law of supply and
demand and market equilibrium.
LO2: Explain the law of supply and demand
and how prices and quantity are determined
through graphical analysis.
LO3: Discuss and explain the factors
affecting demand and supply.
COMPETENCIES/CODE : Analyze market demand, market supply and
market equilibrium.

ABM _AE12-Ia-d-4; ABM_AE12-Ia-d-5; ABM_AE12-Ia-d-6

TOPICS : Introduction to Demand and Supply and

Market Equilibrium.

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 What I Know
Multiple Choice: Write the letter of your choice on a separate
sheet of paper.
1. What is a market?
a. Reflects upsloping demand and downsloping supply curves
b. Entails the exchange of goods but not services
c. Is an institution that brings together buyers and sellers
d. Always require face-to-face contact between buyer and seller

2. What does markets explain on the basis of supply and demand?

a. Assume many buyers and many sellers of a standardized
product
b. Assume market power so that buyers and sellers bargain
with one another
c. Do not exist in the real world economy
d. Are approximated by markets in which a single seller
determines price

3. What does the law of demand states?

a. Price and quantity demanded are inversely related
b. The larger the number of buyers in a market the lower will be
the product price
c. Price and quantity demanded are directly related
d. Consumers will buy more of a product at high prices than at
low prices

4. Which of the following is most likely to be an inferior good?

a. Fur coats c. Used clothing
b. Ocean cruises d. Steak

5. What kind of goods are Cameras and film?

a. Substitute goods c. Independent goods
b. Complementary goods d. Inferior goods

6. What is the effect of price floors and ceiling prices?

a. Both cause shortage
b. Both cause surpluses
c. Cause the supply and demand curves to shift until an
equilibrium is established
d. Interfere with the rationing function of prices

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7. What is ticket scalping?
a. The surplus of tickets that occurs when price is set below
equilibrium
b. The shortage of tickets that occurs when price is set above
equilibrium
c. Pricing tickets so high that an athletic or artistic event will
not be sold out
d. Reselling a ticket at a price above its original purchase price

8. What analogy can best illustrate the idea that equilibrium price and
quantity are jointly determined by supply and demand?
a. The wind and tide c. A scissors
b. A chess match d. Two sides of a coin

9. What happens to the equilibrium if the supply and demand curves for
a product both decrease?
a. Quantity must fall and equilibrium must rise
b. Price must fall but equilibrium price may either rise, fall or
remain unchanged
c. Quantity must decline but equilibrium price may either rise,
fall or remain unchanged
d. Quantity and equilibrium price must both decline

10. Assuming competitive markets with typical supply and demand

curves, which of the following statements is correct?
a. Supply with a decrease in demand will result in an increase
in price
b. Supply with no change in demand will result in an increase
in price
c. Supply with no change in demand will result in a decline in
sales
d. Demand with no change in supply will result in an increase
in sales

11. What is the equivalent of a one-peso per unit tax levied on

consumers of a good?
a. A one-peso unit tax levied on producers of the good
b. A one-peso unit subsidy paid to producers of the good
c. A price floor that raises the goods price by 1 peso per unit
d. A price ceiling that raises the goods price by 1 peso per unit

12. Which of the following would increase quantity supplied, increase

quantity demanded and decrease the price that consumers pay?
a. The imposition of a binding price floor
b. The removal of a binding price floor
c. The passage of a tax levied on producers
d. The repeal of a tax levied on producers

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13. When a good is taxed, what will be its effect to consumers if the
burden of the tax falls?
a. The tax is levied on consumers
b. The tax is levied on producers
c. Supply is inelastic and demand is inelastic
d. Supply is elastic and demand is inelastic

14. Which of the following would increase quantity supplied, decrease

quantity demanded and increase the price that consumers pay?
a. The imposition of a binding price floor
b. The removal of a binding price floor
c. The passage of a tax levied on producers
d. The repeal of a tax levied on producers

15. Why is producing a quantity larger than the equilibrium of supply

and demand inefficient?
a. Because the marginal buyer’s willingness to pay is negative
b. Because the marginal buyer’s willingness to pay is zero
c. Because the marginal buyer’s willingness to pay is positive but
less than the marginal seller’s cost
d. Because the marginal buyer’s willingness to pay is positive and
greater than the marginal seller’s cost

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 Introduction to Supply
Lesson
and Demand and Market
1 Equilibrium

What I Need To Know

The demand and supply and market equilibrium discussion is the
bread and butter of the study of Economics. The economic issues and
problems are better explained through the mechanisms of demand and
supply

This module will help you determine the importance of demand and
supply and why the mechanisms is considered to be the bread and butter of
economics.

At the end of this lesson, you are expected to:

1. Differentiate demand and supply.
2. Determine the factors affecting both demand and supply.
3. Graphically illustrate demand and supply.

What’s In
At this point, you will have to review on how to read and understand
graphs. Graphical analysis is important in understanding demand and
supply and market equilibrium.
Graph – is a two dimensional representation of a set of numbers or
data. The most common method of graphing two variables is the Cartesian
coordinate system. The system is constructed by drawing two perpendicular
lines: horizontal line or X-axis and vertical line or Y-axis.

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 The point at which the graph intersects the y-axis is the Y intercept,
the point at which the graph intersects the x-axis is the X-intercept.
The basic concepts of demand and supply in Lesson 1 will help you
understand the workings of market equilibrium. The economy does not work
well with demand alone nor with supply alone. Both mechanisms will have
to work together. It is not solely determined as to how many will be bought
and how many will be produced. The market equilibrium will help you
understand how the economy explains economic issues such as wage, oil
and gasoline prices and labor market. So let us review your learnings from
the previous lesson.
a. What are the determinants/factors of demand?
b. What are the determinants/factors of supply?
c. What is the difference between the change in demand and the change
in quantity demanded?
d. What is the difference between the change in supply and the change
in quantity supplied?

What’s New
Let us assess your understanding of demand and supply. Complete
the table and answer the questions below and write it on a separate paper.
MONTHS ACTIVITIES / WRITE THE THINGS TO FACTORS
CELEBRATION BUY FOR THE AFFECTING
CELEBRATION/ACTIVITY THE DEMAND
AND SUPPLY
JUNE
JULY
AUGUST
SEPTEMBER
OCTOBER
NOVEMBER
DECEMBER
JANUARY
FEBRUARY
MARCH
APRIL
MAY

1. Which month do you think has the higher willingness and ability of
consumers to purchase? What factors influences the consumer to
buy?

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 2. Which month do you think has the higher willingness and ability of
sellers to sell? What factors influences the seller to sell?

Before we start the discussion on market equilibrium. I want you to write

down on a separate sheet of paper at least 3 market transaction you observe
in the market and describe each transaction. The description should have
the following information:
1. What is the transaction about?
2. What is the problem?
3. What is the solution?
Information is very important in any economic transaction. Misinformation
leads to a failure in the market system.
Based on your experience, what is your definition of market?

What Is It
DEMAND
Demand – the willingness and ability of the consumer to purchase or buy.
Factors or determinants affecting demand:
1. Average Income – higher income means higher demand and lower
income means lower demand.
Classification of goods:
a. Inferior goods – inversely related to income, higher income but has
lower demand to a particular good
b. Normal goods – directly related to income, higher income implies
higher demand to some of the goods.
2. Size of the Market – referring to the population
a. Urban – higher demand because of higher in population
b. Rural – lower demand because of lower in population
3. Prices of related goods – becomes the benchmark for competition
Classification of goods:
a. Substitute goods – goods that are lower in price as of the other
goods, can only be a substitute goods if it has the same use value.
Example: detergent powders like Tide and Surf
If the price of product Y like TIDE increases, there will be higher
demand for product X like SURF

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 b. Complementary goods – goods that one cannot function without
the other
Example: toothpaste and toothbrush or bun and patty for
hamburger or gas and automobile
If the price of product Y increases like GAS increases, there will be
lower demand for product X like AUTOMOBILE.
4. Taste and Preferences – it matters on:
a. Age
b. Location
c. Quality and Brand name
d. Sex
e. Advertisements
5. Special influences
Classification:
a. Weather condition
b. Buyers expectation
Demand schedule – shows an inverse relationship between price and
quantity demanded. An example is illustrated below.
Price Quantity Demanded
5 4
4 8
3 12
2 15
1 20

Demand curve is the graphical representation of the demand schedule. Its

characteristic is downward sloping. An example is illustrated below.

Figure 1.

Change in Demand vs. Change in Quantity Demanded

Change in Demand denotes a shift of the demand curve. If demand curve
shifts right, it increases. If demand shifts left, it decreases. The shift is
caused by the factors affecting demand.

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Here are examples of how the determinants of demand other than price can
shift the demand curve.

1. Income of the buyers: If you get a raise, you're more likely to buy more
of both steak and chicken, even if their prices don't change. That
shifts the demand curves for both to the right.
2. Consumer trends: During the mad cow disease scare, consumers
preferred chicken over beef. Even though the price of beef hadn't
changed, the quantity demanded was lower at every price. That
shifted the demand curve to the left.
3. Expectations of future price: When people expect prices to rise in the
future, they will stock up now, even though the price hasn't even
changed. That shifts the demand curve to the right.
4. The price of related goods: If the price of beef rises, you'll buy more
chicken even though its price didn't change. The increase in the price
of a substitute, beef, shifts the demand curve to the right for chicken.
The opposite occurs with the demand for Worcestershire sauce, a
complementary product. Its demand curve will shift to the left. You
are less likely to buy it, even though the price didn't change, since you
have less beef to put it on.
5. The number of potential buyers: This factor affects aggregate demand
only. When there's a flood of new consumers in a market, they will
naturally buy more product at the same price. That shifts the demand
curve to the right. That happened when standards were lowered for
mortgages in 2005. Suddenly, people who hadn't been eligible for a
home loan could get one with no money down. More people bought
homes until the demand outpaced supply. At that point, prices rose in
response to the shift in the demand curve.

Change in Quantity Demanded denotes a movement of points along the

demand curve. The movement is caused by the change in the price.
An example is illustrated below.

Figure 2.

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Law of Demand: the higher the price, the lower the quantity that consumers
are willing and able to buy or purchase, on the other hand, lower the price,
the higher the quantity that consumers are willing to buy or purchase.

SUPPLY
Supply – the willingness and the ability of the supplier to supply or sell.
Factors or determinants affecting supply:
1. Prices of inputs/factors of production
a. Land – rent
b. Labor – wage
c. Capital – interest
A change in the price of inputs leads to a change in the supply, higher price
of inputs discourages suppliers to supply
2. Technology – the use of technology increases supply but part of it is
the cost, the advance the technology is the bigger the cost so higher
cost discourages suppliers to supply more.
3. Prices of related goods – promotions and marketing is important in
this factor, this the only means that the supplier can create their
strategy to augment their profit. The supplier will have to know its
substitute goods and its complementary.
4. Government policy – the economic role of the government is
important as one factor affecting supply. Like the implementation of
taxes or subsidies. Higher taxes discourage suppliers to produce
more. In the case of subsidy, which is a government support,
encourage suppliers to produce more.
5. Special influences
a. Weather condition
b. Sellers expectation
Supply schedule – shows a direct relationship between prices and quantity
supplied.
Price Quantity supplied
5 20
4 15
3 12
2 8
1 4

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Supply curve – the graphical representation of the supply schedule.

Figure 3.

Change in Supply versus Change in Quantity Supplied

Change in supply - denotes a shift of the supply curve. If supply curve shift
left, supply decreases and if supply curve shifts right, supply increases. The
shift in supply is caused by the factors affecting supply
Change in Quantity supplied – denotes a movement of points along the
supply curve, the movement of the points along the supply curve is caused
by the changes in the price.
An illustration:
MOVEMENT SHIFT

Figure 4

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Law of Supply: the higher the price, the higher the quantity that
sellers or producers are willing and able to supply, on the other
hand, the lower the price, the lower the quantity that sellers or
producers are willing to and able to supply.

Law of Demand and Supply:

P Q S
P Q S

Market is the interaction between buyers and sellers determined by price.

Recalling the law of supply and demand that the consumers and sellers
decision is primarily based on the price.
Market Equilibrium – the intersection of demand and supply, it means that
demand is equal to supply. The point of intersection is the equilibrium price
and quantity. It is at this point that suppliers agreed to supply at a certain
quantity at a certain price and buyers agreed to buy at a certain quantity at
a certain price. Above the equilibrium point is surplus. Below the
equilibrium point is shortage.
Surplus – known as excess supply, which means that supply is greater than
demand. The solution for surplus is to lower the price until such time that
the market will reach its equilibrium. For example, the very reason why
there are obsolete technologies or the buy 1 take 1 promo or the apparel on
sale.
Shortage – known as excess demand, which means that demand is greater
than supply. The solution of shortage is to increase the price until such time
that the market will reach its equilibrium. For example, the reason for the
price increase of rice during the Marawi siege it is because sellers are
encouraged and are willing and able to produce if price is high.

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To illustrate: The point of intersection is the equilibrium point. It is at this
point where buyers are willing to buy and sellers are willing to sell at a given
quantity. The Ep is the equilibrium price.

Figure 5
The interaction of supply and demand determines the optimal price and
quantity.
Reminder:
If demand rises, equilibrium price rises, equilibrium quantity rises
If demand falls, equilibrium price falls, equilibrium quantity falls
If supply rises, equilibrium price falls, equilibrium quantity rises
If supply falls, equilibrium price rises, equilibrium quantity falls

Price floor is a minimum price below which exchange is not permitted. If a

price floor is set above the equilibrium price, the price result will be excess
supply. For example, minimum wage law
Price ceiling is a maximum price that sellers may charge for a good usually
set by government. For example, rent control.

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 What’s More
A. TRUE or FALSE: Write TRUE if the statement is true and FALSE if the
statement is false. Write your answer on a separate sheet of paper.

1. If demand increases and supply simultaneously decreases,

equilibrium price will rise.

2. The rationing function of prices refers to the fact that government

must distribute any surplus goods that may be left in a competitive
market.

3. An increase in quantity supplied might be caused by an increase in

production costs.

4. Supply refers to the amount of a product that a producer will offer in

the market at some particular price.

5. An increase in demand accompanied by an increase in supply will

increase the equilibrium quantity but the effect on equilibrium price
will be indeterminate.

6. A government subsidy per unit of output increases supply.

7. Consumers buy more of normal goods as their incomes rise.

8. Toothpaste and toothbrushes are substitute goods

9. A government tax per unit of output reduces supply.

10. If market demand increases and market supply decreases, the

change in equilibrium price is unpredictable without first knowing the
exact magnitudes of the demand and supply changes.

11. The price of a good rises causing the demand for another good to
rise. Therefore, the two goods are complements.

12. A shift in demand causes the price of a good to fall. The shift must
have been a decrease in demand.

13. When the price of a good changes, the quantity of that good
demanded or supplied changes—that is the curve shifts or changes
position.

14. Cartesian coordinate system includes an X-axis and Y-axis.

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 15. Two inferior goods cannot be substitutes for each other.

B. Refer your answer from the choices below. Write the correct letter of
choice and illustrate or draw the graph. Use a separate sheet of paper.
(A) The S-curve shifts to the right.
(B) The D-curve shifts to the right.
(C) The S-curve shifts to the left.
(D) The D-curve shifts to the left.
(E) The S-curve doesn’t shift. Qs increases.
(F) The D-curve doesn’t shift. Qd increases
(G) The S-curve doesn’t shift. Qs decreases.
(H) The D-curve doesn’t shift. Qd decreases

1. The price of bread goes up. What happens to demand for peanut butter
as a complement of bread?

2. Hand sanitizer becomes very unpopular. What happens to demand for

rubbing alcohol as a substitute?

3. You get a 10% pay cut this pandemic. What happens to demand for
Normal Goods?

4. ABS-CBN goes out of business. What happens to the demand for public
airtime on TV?

5. A new tax is put on COVID-19 vaccines. What happens to the supply of

COVID-19 vaccines?

What I Have Learned

Answer the following questions on a separate sheet of paper.
A. During the 4-month quarantine due to pandemic, which of the
goods or services that you think you or your family has high in
demand? Why? Explain in 3 to 5 sentences.
B. In this pandemic, do you think supply creates its own demand?
Take the case of face mask or face shield as your good. Explain in 3
to 5 sentences.

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 What I Can Do
A. Graph each of the following sets of numbers. Draw a line through the
points. Use a separate sheet of paper.

Set 1 Set 2
X Y X Y
1 5 0 40
2 10 10 30
3 15 20 20
4 20 30 10
5 25 40 0

Set 1 Set 2

B. In the following situations, you are asked to determine the effects of a

given change in a determinant of demand or supply for product X
upon (1) the demand for or supply of X, (2) the equilibrium of X and (3)
the equilibrium quantity of X. Illustrate graphically and discuss your
graph. Use a separate sheet of paper.
1. Marvels income increases, what will happen to the demand if product
X is a normal good?
2. What will happen to the demand if there is an increase in the price of
a Surf detergent powder that is a close substitute for product X?
3. Due to this pandemic, what will happen to the demand if there is a
decrease in the number of consumers of product X?

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 Assessment
MULTIPLE CHOICE: Write the letter of your choice on a separate sheet of
paper.
1. What might have caused for the demand curve for COVID-19 swab test
kits shifts to the right?
a. A decline in income if swab test kit is an inferior good
b. A decline in the price of imported China made RT-PCR kit if swab
test kit and China made RT-PCR kit are substitute good
c. A change in consumer tastes that is unfavorable to swab test kit
d. An increase in the price of locally UP patented RT-PCR kit if UP RT-
PCR kit and swab test kit are complementary goods

2. What is the effect if the government subsidize the SME’s or small and
medium enterprises during this time of pandemic?
a. Reduces product supply
b. Increases product supply
c. Reduces product demand
d. Increases product demand

3. When can we determine if a market is in equilibrium?

a. There is no surplus of the product
b. All prices is above the intersection of the supply and demand
curves
c. The amount producers want to sell is equal to the amount
consumers want to buy
d. The demand curve is down sloping and the supply curve is up
sloping

4. What occurs at the equilibrium price?

a. Quantity supplied may exceed quantity demanded or vice versa
b. There are no pressures on price to either rise or fall
c. There are forces that cause price to rise
d. There are forces that cause price to fall

17
For questions 5-8: In the following situations, you are asked to determine
the effects of a given change in a determinant of demand or supply for
product X upon (1) the demand for or supply of X, (2) the equilibrium of X and
(3) the equilibrium quantity of X.

5. What is determined if there is an increase in income and X is a normal

good?
a. Increase D, increase P and increase Q
b. Increase D, increase P and decrease Q
c. Increase in S, increase P and increase Q
d. Decrease D, increase P and increase Q

6. What is determined if there is an increase in the price of a product that is

a close substitute for X?
a. Decrease D, increase P, and decrease Q
b. Increase D, increase P, and decrease Q
c. Increase D, increase P, and increase Q
d. Increase D, decrease P, and increase Q

7. What is determined if there is a decrease in the number of consumers of

product X?
a. Decrease S, decrease P, and decrease Q
b. Increase D, increase P, and decrease Q
c. Decrease D, decrease P, and decrease Q
d. Decrease D, decrease P, and increase Q

8. What is determined if there is an increase in the tastes and preferences

for product X?
a. Increase S, decrease P, and increase Q
b. Decrease S, decrease P, and decrease Q
c. Increase D, increase P and increase Q
d. Decrease D, decrease P, and decrease Q

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For numbers 9-13, refer to the figure below:

9. What determines the government set price floor?

a. Price A b. Quantity E c. Price C d. Price B

10. What determines the government set price ceiling?

a. Price A b. Quantity E c. Price B d. Price C

11. What determines the rent controls?

a. Price A b. Quantity E c. Price B d. Price C

12. What determines a government price support program to aid farmers?

a. Quantity E b. Price C c. Price A d. Price B

13. What determines a government set maximum permissible interest rate?

a. Price B b. Quantity E c. Price C d. Price A

For numbers 14-17, please refer to the figure below:

14. Which of the above diagrams illustrate the effect of an increase in our
health worker wages on the market for health workers?

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 a. A only b. B only c. C only d. D only

15. Which of the above diagrams illustrate the effect of a decline in the price
of face mask on the market?
a. A only b. A and D c. B only d. D only

16. Which of the above diagrams illustrate the effect of an increase in the
price of alcohol and sanitizer?
a. A and C b. A only c. B only d. C only

For numbers 17 and 18, refer to the diagram below that shows the demand
and supply curves for face shields.

17. Assume that a face shield is a normal good. An increase in the

price of
face shield due to an increase of prices of an input and a
simultaneous increase in consumer incomes will most likely have.
What is effect on the equilibrium price and quantity of face shields?
a. Increase in price, increase in quantity
b. Increase in price, indeterminate in quantity
c. Indeterminate in price, decrease in quantity
d. Decrease in price, decrease in quantity

18. If the government will regulate the price of face shields and
places a price ceiling on face shields that is below the equilibrium
price, which of the following will occur in the market for face shields?
a. There will be a shortage of face shields
b. There will be a surplus of face shields
c. The demand curve for face shields will shift leftward
d. The demand curve for face shields will shift rightward

20
19. A recent study found that an increase in tax for the essential
oil, an
ingredient for hand sanitizers would reduce the demand of isopropyl
alcohol. What can be concluded in that essential oil and isopropyl?
a. Substitute goods
b. Complementary goods
c. Inferior goods
d. Normal goods

20. Due to the demand for bicycles in the quarantine period, other
things
equal, a rise in consumer income will increase the demand for bicycle.
What is your prediction if based on that assumption?
a. Many goods that are substitutes for bicycles
b. Many goods that are complementary to bicycles
c. Few goods that are substitute for bicycles
d. Bicycles are normal good

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REFERENCES
Arnold, R. A. (2015). Principles of economics. 11th ed. Cengage Learning.
Greenlaw, S. A., Shapiro, D., & Taylor, T. (2018). Principles of economics-2e:
OpenStax. Retrieved from https://d3bxy9euw4e147.cloudfront.net/
oscms-prodcms/media/documents/Economics2e-OP_I2ne43X.pdf

Greenlaw, S. A., & Shapiro, D. (2017). Principles of macroeconomics 2e. Rice

University. Retrieved from https://d3bxy9euw4e147.cloudfront.net/
oscms-prodcms/media/documents/Macroeconomics2e-OP.pdf

Illinois Central College. (2010). Graphs in Economics. Economics Tutorials.

Retrieved from https://faculty.icc.edu/instructionaldesign/econ/
math/econGraphs.html. [Figure 1]

Illinois Central College. (2010). Graphs in Economics. Economics Tutorials.

Retrieved from https://faculty.icc.edu/instructionaldesign/econ/
math/econGraphs.html. [Figure 3]

Mankiw, G. N. (2015). Principles of economics. 7th ed. Cengage Learning

Piigsty.com. (2011). Economics 101 #8 Market Equilibrium. Retrieved from

https://piigsty.com/2011/10/11/economics-101-8-market-
equilibrium. [Figure 5]

Youtube.com. (2018/02/14). Movement Vs Shift in Demand Curve:

Difference between them with examples & comparison chart. Key
Differences. Retrieved from https://youtube.com/video-tutorial/
watch?v51gBc_7kpTk. [Figure 2]

Youtube.com. (2018/02/14). Movement Vs Shift in Supply Curve:

Difference between them with examples & comparison chart. Key
Differences. Retrieved from https://youtube.com/video-tutorial/
watch?v51gBc_7kpTk. [Figure 4]

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