APPLIED

ECONOMICS

Learner’s Packet
 APPLIED
ECONOMICS
Grade 12
Quarter 2

Schools Division Office Management Team: : Rosemarie C. Blando, August Jamora,

Merle D. Lopez

Writer/s: Annalyn V. Perey

Evaluator / s : Victorino V. Butron

Illustrator: Julius Burdeos

Subject Title : Applied Economics

Quarter Number 2
First Edition, 2020

Published by: Department of Education SDO—Rizal

Schools Division Superintendent: Cherrylou D. Repia
Assistant Schools Division Superintendents:
Gloria C. Roque and Babylyn M. Pambid

2
 WEEKS
Economics as a Social Science and Applied Science in
Terms of Nature and Scope
1-2
I And The Basic Economic Problems of the country

The center of this lesson is to understand the differentiate economics as a

social sciences and applied in term of nature and scope.

After going through this lesson, the learners are expected to define basic
terms in applied economics, identify the basic economic problems of the country,
explain how applied economics can be used to solve economic problems.

D
THE NATURE AND SCOPE OF ECONOMICS
There are three strands in the development of the definition of economics.

1. Economics has been defined as a science of wealth-getting and

wealth –using. It implies that the motivation of the process of wealth accumula-
tion is the utilization of wealth for the individual’s satisfaction and society’s wel-
fare.
2. Economics is defined as a science of decision-making. In economics
when we make a choice from among alternatives, it implies that we are foregoing
and sacrificing the benefits that would have been derived from alternatives that
were not selected. In making decision, we have to consider a major concept in the
study of economics which is opportunity cost, which mean that our choice must
give us additional benefits that are least equal to or more than additional benefits
derived from the foregone alternatives.
3. Economics defined concentrates on the allocation process. As a so-
cial science that deals with study of allocation of scare resources to answer the
unlimited human wants. In many books, economics has been defined as a social
science that deals with the allocation of scare resources to meet the unlimited hu-
man wants.

Economics is a Social Science

According to Molina, J. A. & Nadal, G. J I (2020), economics is a SOCIAL SCI-
ENCE concerned with the explanation and prediction of observed phenomena in
the society. Economics studies the way in the societies solve the fundamental
problems of reconciling the unlimited desires of individuals with scarcity of re-
sources, susceptible to numerous alternative uses. Economics is also an APPLIED
SCIENCE because it uses the scientific method in its explanations, which consists
of observing reality and presenting questions and problems to arrive at the

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formulation of theories and models. As an applied science, it follows a systematic procedure to
solve issues and problems of the society.

Applied Economics is the application of the principles of supply, demand, trade-offs, opportunity-
costs, and other economic theories to solve real-world problems. It may be practiced in the microe-
conomic or macroeconomic level. Applying economic theories in our lives means trying to address
actual economic issues and be able to do something about it

Economics is the study of what constitutes rational human behavior in the endeavor to fulfill
needs and wants. It comes from the Greek word“oikanomia”meaning “household management”.
Economics is the study of social behavior guiding in the allocation of scarce resources to meet the
unlimited needs and desires of the individual members of a given society.

Two branches of economics

A. Microeconomics
it deals with the economic behavior of individual units such as consumers, firms, and the
owners of factors of production. It is also known as the Price Theory
B. Macroeconomics
it deals with the economic behavior of the whole economy or its aggregates such as govern-
ment, business and household. An aggregate is composed of individual units. It is concerned with
the discussion of topics like gross national product, level of employment, national income, general
level of prices, total expenditure etc. Also known as employment and income analysis

Fields of study in economics

Agriculture, natural resources, and the environment
The economics of farming, fishery, forests, and natural resources with a focus on prices,
markets, and hanging technologies. Topics include the study of markets for energy (oil, coal, and
electricity) and mineral resources, and policies to promote clean air, water, and land.
Behavioral economics
The study of the cognitive and emotional dimensions of economic decisions.
Business economics
The study of how firms make decisions. How do firms maximize profit? What prices should
they set and how much should they produce? What is the role of incentives within the firm for
managers to make good decisions and take on and manage risk.
Economic history
The study of how economies and economic outcomes have changed over history and how
economic institutions have developed. Topics include the emergence of markets, the forces shap-
ing the industrial revolution, the sources of improvements in agricultural productivity, and the in-
fluence of railroads and other new technologies.
Economic development
The study of why some countries have developed while others have not, with special focus
on the world’s less developed countries. . How might the industrialized countries improve
prospects for development around the world? Who gains and who loses under policies to help
economies develop?
Financial economics
The study of how to value and determine the price of assets with uncertain returns their
derivatives and the markets that trade them; the study of how firms finance their operations
and the capital structure of firms
Health and education economics
The study of determinants of educational attainment and health outcomes, and the im-
pact of government policies on these outcomes.
Industrial organization
The study of individual markets and the nature of competition. Topics include anti-trust
policy, the role of advertising, and how costs vary with the scale of operations. This field also
studies particular industries such as software and technology firms, sports, and tourism
International trade and finance
The study of trade among nations and the flow of money and payments across interna-
tional borders. Topics also include globalization and the balance of payments with other coun-
tries.
Labor Economics
The study of employers’ decisions to hire workers and employees’ decisions to work. This
involves determinants of wages, the incentives workers face, and the role of minimum wage
laws, unions, pensions, and training programs. Other topics of study include marriage and for-
mation of families, determinants of birth rates, migration, population change, and aging.
Law and economics
The study of individual economic decisions and institutions that are defined by the legal
system, such as property rights and contract law.
Macroeconomics and monetary economics
The study of the national economy and the determinants of national production, unem-
ployment, and inflation. This field also examines the role of the Federal Reserve System, inter-
est rates, and monetary
Mathematical and quantitative methods
The focus on various mathematical methods including how best to mathematically mod-
el, measure, and estimate economic phenomena, and how to create and evaluate experiments
that test economic theories and evaluate government policies.
Econometrics
Develops and uses statistical and mathematical tools to analyze economic issues and
policy questions.
Experimental economics
Develops and uses experiments, typically with human subjects, to study economic issues
and policy questions.

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Public Economics
The study of the role of government in the economy including how to evaluate government
programs, the design of tax systems, and how the political process makes decisions. Urban, rural,
and regional economics The study of the location decisions of households and firms with a special
focus on housing, transportation, and local government, and financial stability policy.

Adam Smith is the father of economics. He is an English professor who

served as the chief of Bureau of Customs, England. He was a well-traveled
man, tutoring the royalty of his time. He conceived a lot of rules, using the
French phrase laissez-faire, for free enterprise and the word entrepreneur
for the skill necessary to bring the factors of production into a coherent
whole. There rules are what we will take up in this book to help explain the
economic concept.
Economists had interpreted the works of Adam Smith. He put forth
the idea of the invisible hand in which each individual, in the pursuit of
his/her commercial activity for his own personal use, contributes I some
way to the common good, and well-being of society. The collective works of
Adam Smith, as well as that his contemporaries, fall under classical eco-
nomics where the emphasis lies on less government intervention, govern-
ment action is limited to police power, infrastructure development, entering into treaties with oth-
er governments, and collection of taxes.

Factors of Production
are the resources people use to produce goods and services; they are the building blocks of
the economy. Economists divide the factors of production into four categories: land, labor, capital,
and entrepreneurship.
1. Land
this includes any natural resource used to produce goods and services. This includes not
just land, but anything that comes from the land. Some common land or natural resources are
water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the pro-
duction process. These resources can be renewable, such as forests, or nonrenewable such as oil
or natural gas. The income that resource owners earn in return for land resources is called rent.

6
2. Capital

Capital differs based on the worker and the type of work being done. For example, a doctor
may use a stethoscope and an examination room to provide medical services. Your teacher may
use textbooks, desks, and a whiteboard to produce education services. The income earned by
owners of capital resources is interest.

3. Labor

is the effort that people contribute to the production of goods and services. Labor resources
include the work done by the waiter who brings your food at a local restaurant as well as the en-
gineer who designed the bus that transports you to school. It includes an artist's creation of a
painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid
for a job, you have contributed labor resources to the production of goods or services. The income
earned by labor resources is called wages and is the largest source of income for most people.

4. Entrepreneurs

is a person who combines the other factors of production - land, labor, and capital - to
earn a profit. The most successful entrepreneurs are innovators who find new ways produce
goods and services or who develop new goods and services to bring to market. Without the entre-
preneur combining land, labor, and capital in new ways, many of the innovations we see around
us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are
a vital engine of economic growth helping to build some of the largest firms in the world as well as
some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where
they have the freedom to start businesses and buy resources freely. The payment to entrepre-
neurship is profit.

Terms to Remember!

Scarcity refers to the limited availability of a resource in comparison to the limitless wants
Production is a process of combining various material inputs and immaterial inputs (plans,
know-how) in order to make something for consumption (output).
Allocation the process by which economic resources get allotted (apportioned, assigned) to their
particular uses for directly or indirectly satisfying human wants.
Wants is something that is desired. It is said that every person has unlimited wants, but limited
resources (economics is based on the assumption that only limited resources are available to
us).
Needs is something needed to survive while a want is something that people desire to have, that
they may, or may not, be able to obtain.
Trade-offs When making choices, there are things that we need to give up. Tradeoffs consist of
all the options that we give up when we make a choice. Following the previous example, you
planned to spend your limited allowance to buy 2 pieces of siopao and soft drinks to satisfy your
hunger. Your other option is to pay for a heavy value meal at 120 pesos or buy your favorite
meal combo at 115 pesos. You gave these options up since you can only afford to pay for the sio-
pao and drinks. The choices that you’ve given up are your
trade-offs.
Opportunity Cost Among all your trade-offs, the most desirable alternative that you gave up is
called the opportunity cost. In the previous example, the most desirable option is to buy your fa-
vorite meal combo at 115 pesos. You cannot afford it since you only have 100 pesos so you gave
it up. No matter what choice you make, there is an opportunity cost, or next best alternative,
that must be sacrificed. Opportunity cost is the highest valued alternative that must be sacri-
ficed in order to get something else. The key to making the best possible decision is to minimize
your opportunity cost

7
It is essential that you familiarize yourself with the study of economics. This will facilitate your un-
derstanding of economic analysis. Specifically you meet GOODS – which yields to your satisfac-
tion. It is anything used to satisfy your wants and needs.

Tangible Goods material goods or commodities.

Intangible Goods when they are in the form of services. Those rendered by doctors, engineers,
doctors and other professionals

Applied Economic Application

Applying Economic theories to current economic conditions can be extremely helpful for three rea-
sons.

1. Applying economics to the status of the economy of a company, a household or a country helps
to seep aside all attempts to dress up the situation so that it will appears to be worse or better
that it actually is.
2. Applied economics acts as a mechanism of determined what is steps can reasonably be taken
to improve the current economic situation.
3. Applied economic can teach valuable lessons on how to avoid the recurrence of negative situa-
tion or at least minimize the impact.

8
Econometrics can be subdivided into two major categories: Theoretical and Applied.
Economics uses tools such as frequency distributions, probability and probability distribution,
statically inference simple and multiple regression analysis, simultaneous equation models and
time series methods.
Why Study Economics?
A. Decision-Making Skills. An exposure to quantitative problem solving techniques is an im-
portant park of economics. The business sector typically rewards employees who have acquired
specific quantitative skills.
B. Problem Solving Abilities. People with education in economics develop an appreciation of the
social security. The issues are complex and the ability to deal with them suggest ways of im-
proving out standard of living in the broadest sense that required clear thinking.
C. Job Opportunities. Better job opportunities wait economics graduate. Business and govern-
ment are increasingly aware of the need for people who are trained in economics. They are em-
ployed in teaching government services, banks and business firms. Their duties may include re-
search, economics analyst, forecasting and consultant on capital investments.
Importance of Economics
1. A good knowledge of economics offers many favorable possibilities. It guides us how to make a
living, how to use our money wisely, how to run our business, how to distribute properly our
available scarce resources and how to maximize our profits and consumer’s satisfaction
2. . Economics is important in order to understand problems facing the citizen and the family; to
help the government promote growth and improve the quality of life avoiding depression and
inflation and to analyze fascinating patterns of social behavior.
3. . A basic understanding of economics is vital for sound decision making by individuals and na-
tion

Two Methods of Economics

1. Positive Economic : focuses on causes and effects, behavior relationships, and facts involved
in evaluation and development of economics theories often called "what is" economics.
Descriptive economics: the compilation of data that describe phenomena and facts.
Economics theory: set of related statements about cause and effect.
2. Normative Economics: express value or judgements about economic fairness or what outcome
of the economy ought to be. often called "what should be" economics.

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Economics Model:
1. The Circular Flow Diagram
a visual model of the economy that shows how dollars flow through markets among households and
firms.

2. The Production Possibilities Frontier

a graph that shows the combinations of output that the economy can possibly produce giv-
en the available factors of production and the available production technology.

10
 The Basic Economic Problems of the country

There are four basic questions to make the right decision

What to produce?
Every economy must determine what goods and services are to be produced and in what
quantities of each to produce. the system must determine the desire of people. Goods and services
to be produced are based on the needs of the consumers. These are the factors that should be tak-
en into consideration in producing the goods and services the individual need.
 Availability of resources
 Physical environment
 Customs and traditions of the people

How to produce?
The company must decide on how to use the resources to produce goods and services.
What combination of resources and technologies will be used to produced goods and services at
lowest price? The manufacture may wish to maximize profits and minimize production costs. They
may be combine labor and capital given the prices of labor and capital and productivity of those
resources.
Through several combinations of resources, goods are produced. A clear knowledge of ma-
nipulating the different factors of production helps a lot in coming up with the desired output. The
quality of output must come first before quantity
For whom to produce?
This question determine the distribution of goods and services. Goods and services will be
distributed to buyers in the basis of their ability and willingness to pay its existing market price.
The ability to pay prices for goods and service depends on the amount income that buyers have,
along with the prices of , taste and preferences for various goods and services.
What provision/laws should be always made for economic growth?
A society uses all its resources for current consumption. If a society uses all its resources,
then its production capacity will not increase. The standard of living of the people and the income
of the workforce remain constant until the standard of living will decline in the future. The society
must decide also on the part of the resources to be saved for future progress

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The Basic Economic Problems
1, Unemployment It refers to the portion of the labor who are eillig to en-
gage in productive activities yet fails to do so. It can hinder economic devel-
opment since the human resources of a country are not sufficiency utilized.
2. Poverty It is a restricting condition experienced by millions of families
that prevents them in attaining the minimum nutritional requirements for
daily living.

Two categories of poverty

1. Absolute poverty- is the lack of income to buy the basic food and necessities for subsistence
living. this is measured in terms of poverty threshold and poverty incidence.
Poverty threshold is the income needed to purchase these minimum nutritional require-
ments and other basic necessities for daily survival.
Poverty incidence – is the proportion of household in the country with family income lower
than the poverty threshold or poverty line.
2. Relative poverty is refer to structure on how the national income is being distributes among
household in an economy an di t measured by the Lorenz curve and the Gini coefficient.
Lorenz curve shows the share of the various household groups (ranked from the poorest
to the richest) on the total national income.

Gini coefficient is a measure of income inequality

derived from the Lorenz curve.
•Perfect equality is indicated by the value 0
•Perfect inequality has a value 1

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3. Weak infrastructure is refers to the basic
equipment and structure that are needed
for a country to function properly.

4. Income inequality refers to the gap

in income that exist between the rich
and the poor

5. Demography is the study of population

6. Inflation refers to the sustained and continued increase in the price of goods and services.
Economic growth as indicated by increasingly GDP, is the factor in bringing about inflation.
Hyperinflation or very high inflation slow economic growth and high un employment
is called stagflation
7. Slow Adoption of Modern Technology it refers to the manner of processing raw materials or
intermediate inputs into transformed outputs through the use of factors inputs. A technology that
is biased in the use of labor is called-intensive technology while capital-intensive technology refer
to use more capital relative to labor in the production process.

13
 E

Lesson 1.
Learning Task 1:
Cut out and paste news item that is related to any economic issue/situation. Read and an-
alyze the economics news. List down all the positive statements and normative statements.
In your own idea, were the normative statements correct or not? Explain your answer in
three five sentences.
Positive Economics___________________________________________
Normative Economics________________________________________
Analysis and suggestions based on your own ideas or belief________________________
__________________________________________________________________________________

Learning Task 2
1. Draw or make a concept map the functions of every factors of production in the processing of
every good and services
2. Categorize the characteristics of microeconomics and macroeconomics using the diagram below.
This will enhance your creativity to solve issues in the future

Studies the behavior of individual economic units;

a. Studies of markets of good and services
b. Focuses of the behavior of individual in the market
c. Studies the economy as a whole
d. Focuses on goals like productions standard of living, unemployment, and inflation.
e. Policies are focused on monetary policy and fiscal policy.
f. Focuses on parts of the economy: individuals, firms, and industries

14
 A
Lesson 1: Assessment 1:
Multiple Choice. Choose the letter of the best answer. Write the chosen letter on a sepa-
rate sheet of paper.

1. It is a condition when the supply of good, service, or resource is not enough to meet the
demand.
A. shortage b. allocation c. surplus d. excess
2. It deals with the big picture with the allocation of resources on the aggregate of resources
level.
A. Economics b. Microeconomic c. Econometrics d. Macroeconomics

3. It focus on the economic situations activities of individual decision-making units in society,

especially households and firms.
A. Economics b. Microeconomics c. Econometrics d. Macroeconomics

4. A field in economics that discuss and should rely more on mathematical equations, instead
graphs and logic, it uses statistics and calculus to explain economic phenomena.
a. Development Economics c. Financial economics
b. Econometrics d. Fundamental Mathematics in Economics

5. It refers to the things without which we can still survive

A. wants b. needs c. services d. money

6. What are the resources called that are needed to produce a good and services?
A. Needs and wants B. Factors and productions
C. Goods and services D. All of the above
7. It is in which yield to your satisfaction and anything used to satisfy your wants and needs
A. Tangible goods b. goods c. intangible goods d. consumer goods

8. It is the process of combining inputs to make something for consumptions. It is the act of
creating output.
A. consumption b. scarcity c. production d. output

9. The word that comes from the Greek word for "one who manages a household" is
A. market b. consumer c. producer d. economy

15
 E

Lesson 2
Learning Task 1:
1. Explain how applied economics can be used to solve economic problem
_______________________________________________________________________
_______________________________________________________________________
2. What are the implication of slow adoption of modern technology on the national economy”
________________________________________________________________________
____________________________________________________________________________

16
 A

Lesson 2 Assessment 2:
Matching type:
A.
1. it is the proportion of household in the country with family
Income lower than the poverty threshold or poverty line
2. refers to the structure on how the national income
is being distributed among households in an economy
3. it refers to the gap in income that exist between the rich and the poor
4. it the study of population
5.. Very high inflation

B.
A. Hyperinflation
B. Demography
C. Income equality
D. Relative poverty
E. Poverty

17
10. The word “economy” comes from the Greek word oikonomos, which means
A. “environment” c. “one who manages a household”
B. “production” d. “one who makes decisions”

11. The phenomena of scarcity stem from the fact that

A. Most economies’ production methods are not yet very good
B. In most economies, wealthy people consume disproportionate quantities of goods and
services.
C. Governments restrict production of too many goods and services
D. Resources are limited
12. When a society cannot produce all the goods and services people wish to have, it is said that
the economy is experiencing
a. scarcity. b. surpluses.
c. inefficiencies. d. inequalities.

13. Economics is the study of

A. Production methods
B. How society manages its scare resources
C. How households decide who performs which tasks
D. The interaction of business and government
14. In economics, the cost of something is
A. The dollar amount of obtaining it.
B. Always measured in units of time given up to get it.
C. What you give up to get in
D. Often impossible to quantify, even in principle
15. Which of the following principles is not one of the four principles of individual decision-
making?
A. people face trade-offs
B. trade can make everyone better off
C. people respond to incentives.
D. Rational people think at the margin

18
A

19
 20
Answers
Lesson 1: Lesson 2:
Answers… Answers..
Assessment: Assessment:
1. A 1. poverty
2. D 2. relative poverty
3. B 3. income equality
4. B 4. demography
5. A 5. hperinfaltion
6. B
7. B
8. C
9. D
10. D
11. D
12. A
13. B
14. C
15. B
 References

Economics Gregory Mankiw.5th edition

Tereso S. Tulao Jr. PH. D “Applied Economics for a Progressive Philippines”
Patrick V. Gadile, PD.D “ Applied Economics “
Jesus B. Remiter Jr. “Managing Resources, Securing the Future”
Roan D. Leano “Applied Economics for Senior High School”
Rica Delos Reyes PhD, Nestor Torrefranca, Uriel J. Ancheta “Applied Economics for Senior High
School”
Dr. Eloisa M. Macalinao “Applied Economics”
Module made by Batangas team
Module made by NCR team
Module made by Taguip team
https://www.econlib.org/library/Enc/bios/Smith.html
https://www.newyorkfed.org/medialibrary/media/education/MxE_01_%20Fields%20of 20Study
207.22.13.pdf
https://pcsb.instructure.com/courses/5054/pages/3-dot-2b-factors-of-production
https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-2-factors-of-
production#:~:text=The%20factors%20of%20production%20are,labor%2C%20capital%2C%
20and%20entrepreneurship.
https://cleartax.in/g/terms/scarcity
https://en.wikipedia.org/wiki/Production_(economics)
https://study.com/academy/lesson/the-difference-between-wants-vs-needs-
ineconomics.html#:~:text=In%20economics%2C%20a%20need%20is,economy%2C%20and%
20not%20always%20accurately.
https://www.stagneshs.org/ourpages/auto/2015/4/25/44353125/Unit%201%20Answer%
20Key.pdf
https://quizizz.com/admin/quiz/5b7564f0dfd12e00194449b9/factors-of-production https://
www.google.com/search
https://www.slideshare.net/HannahCullen/lesson-3-basic-economic-problems

21
 WEEKS
Market Demand, Market Supply 3-4
I and Market Equilibrium

These lesson focuses on the application of supply and demand. It also discusses the factors
affecting on the purchasing power of the people. Moreover, this module will provide you with infor-
mation on the present economic situations.

D
A market is any activity for business set-up. It is where consumer buys and the seller
sells. It is categorized as local, national and international markets. Some involves face-to-face con-
tact between demander and supplier, others are impersonal, with buyer and seller never seeing or
knowing each other. The concept of market is important because it is where a person who has ex-
cess goods can dispose them to those who need them. This collaboration should lead to an integral
agreement between buyers and sellers on volume and price. A purely competitive market is known
to be as unique way of competition in which there are many competing firms selling identical
products or services.
In economics, there are terms that you must learn to understand the better market situa-
tions. A demand or the amount of good or service consumers are willing to purchase at each price.
If customers cannot pay for it, there is no effective demand. Price is what a buyer pays for a unit
of the specific good or service. The total number of units purchased at that price is called the
quantity demanded
Analysis of Demand and Supply
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 desire (or
demand) for that product has on its price.
The Law of Demand
If all other factors remain equal, the higher the price of a good,
the fewer people will demand that good “the higher the price, t
he lower the quantity demanded” and vice versa.
The amount of a good that buyers purchase at a higher price
is fewer because as the price of good goes up,
the opportunity cost of buying the good also is less.
Consumers will avoid buying a product

22
For example, if the price of video game drops, the demand for games may increase as more people
want the games.
Factors Affecting Demand
a) income of buyers
b) number of potential buyers
c) preferences
d) complementary products
The demand curve is always downward sloping due to the demand curve is always downward slop-
ing due to the law of diminishing marginal utility.

The Law of Supply

The law of supply demonstrates the quantities that will be sold at a given price. “The higher the
price, the higher the quantity supplied and vice versa. Producers supply more at a higher price
because selling at higher quantity at a higher price increases revenue.
Factors Affecting Supply
a. Production capacity
b. production costs such as labor and materials
c. the number of competitors
d. Ancillary factors such as
e. material availability
f. weather,
g. reliability of supply chains
The law of supply says “as the price of a product increas-
es, will produce more of the Product‖.
When graphing the supply vs. the price, , the slope rises.

How Do Supply and

Demand Create an
Equilibrium Price?

23
Word Bank:
Wage
is monetary compensation (or remuneration, personnel expenses, labor) paid by an employ-
er to an employee in exchange for work done

Consumers
a person who acquires goods and services for his or her own personal needs

Substitution and income effects

Income effects refers to the modification of the consumption of a commodity due to the
change in the purchasing power of the consumer resulting from a price change.

Other things held constant or ceteris paribus means the other factors that may affect the de-
mand for the commodity are not changing. The only factor that influences the level of demand or
consumption is the price of the commodity itself.

Principles of diminishing marginal utility

It implies that the additional satisfaction provided by an additional commodity consumed is

lower than the additional satisfaction given by the level of consumption of the commodity

Taxes
Business establishments are required to pay a number of taxes to various levels of govern-
ments. The payment of taxes can be considered as part of cost of production. An increase in sale
tax, real estate, and other business taxes can increase the costs of supplying a commodity.

Technology
The manner in which various factor input process the raw materials is done through the
use of technology. Some firms may use labor-intensive technology if the cost of labor is relatively
cheap. Firms may use capital-intensive technology if wages are very high.

Expectation
The expectation or anticipation on what is going to happen on the price of the commodity
can also influence the amount supplied in the market.

Principles of diminishing marginal utility

It implies that the additional satisfaction provided by an additional commodity consumed is

lower than the additional satisfaction given by the level of consumption of the commodity.

24
 Equilibrium Characteristic

Equilibrium is a point of balance or a point of The supply and demand are balanced in
rest. It is also called “market clearing price” equilibrium

Equilibrium price is the price at which the
producer can sell all the units he wants to
produce and the buer can all the units he
wants.
Quantity demanded and quantities supplied
are equal
The economic forces are balanced and in the
absence or external influences, the
(equilibrium) values of economic variables
will not change
The amount of goods or services sought by
buyers is equal to the amount of goods or
service produced by sellers

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Price Elasticity of Demand and Supply Elasticity
It measure the responsiveness of the quantity demanded or supplied of a good to a change in its
price. Elasticity can be described as
a. elastic or very responsive
b. unit elasticity, or inelastic or not very responsive

Effects of Change in Demand and Supply

Elastic demand or supply curve indicates that quantity demanded or supplied respond to price
changes in aggregate than proportional manner
Inelastic demand or supply curve is one where a percentage change in quantity demanded or
supplied.
Unitary elasticity means that a given percentage changes in price leads to an equal percentage
change in quantity demanded or supplied.
CATEGORIES OF PRICE ELASTICITY
According to Agarwal, P. (2018) and Judge, S. (2020), there are four categories of price elasticity
are the following:
1. The Price Elasticity of Demand is the responsiveness of quantity demanded, or how much
quantity demanded changes, given a change in the price of goods or services. *The mathematical
value is negative. A negative value indicates an inverse relationship between price and the quanti-
ty demanded. But the negative sign is ignored (Judge, S. 2020).
Price Elasticity of Demand (PED)= % change in quantity demanded % Change in price

Elastic Demand (PED > 1) - the percentage change in price brings about a more than proportion-
ate change in quantity demanded.
When the percentage change in quantity demanded is greater than the percentage change in price,
and the coefficient of the elasticity is greater than
Example real estate- housing - There are many different housing choices. People may live in a
townhouse, condos, apartments, or resorts. The options make easy for people to not pay more
than they demand.
b) Inelastic Demand (coefficient of the elasticity is less than 1) – is when an increase in price
causes a smaller % fall in demand.
When the percentage change in quantity demanded is less than the percentage change in price,

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c). Unitary Elastic Demand - When the percentage change in demand is equal to the percentage
change in price, the product is said to have Unitary Elastic demand. Unitary elastic - PED or the
price elasticity of demand is 1
d) Perfectly Elastic - a small percentage change in price brings about a change in quantity de-
manded from zero to infinity. Perfectly elastic - the coefficient of elasticity is equal to infinity (∞)
e) Perfectly Inelastic - the PED is =0 any change in price will not have any effect on the demand
of the product. Perfectly inelastic - the percentage change in demand will be equal to zero (0)

POINT ELASTICITY
a) The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction in the to-
tal revenue of the firm.
b) The demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The to-
tal revenue is maximum at this point.
c) Any point above the midpoint has elasticity greater than 1, (Ed > 1).
II. The Income Elasticity of Demand (YED)
The income elasticity of demand is the relationship between changes in quantity demanded for a
good and a change in real income.
Normal Goods – are those goods for which the demand rises as consumer income rises; positive
income elasticity of demand so as consumers’ income rises more is demanded at each price. These
goods shift to the right as income rises.
YED is positive. As income rises, the proportion spent on cheap goods will reduce as now they
can afford to buy more expensive goods. Example (the demand for units of air-conditioning in-
creases as the income of the consumer increases and the demand for electric fan decreases)
Normal good: units of air-conditioning; Inferior good: electric fan
The Inferior Goods – the demand decreases when consumer income rises; demand increases
when consumer income decreases)
Shifts to the left as income rises. YED is negative. • As income rises, the proportion spent on
cheap goods will reduce as now they can afford to buy more expensive goods. Examples: the de-
mand for cheap/generic electronic goods (let say electric fans) will fall as people income rises and
they will switch to expensive branded electronic goods (unit of air-conditioning)
III. Cross Price Elasticity of Demand or (XED)
Cross price elasticity of demand is he effect on the change in demand of one
good as a result of a change in price of related to another product.
XED = % If the value of XED is positive - substitute goods
If the value of XED is negative – complements goods
If the value of XED is zero - two goods are unrelated
IV. Price Elasticity of Supply (PES)
• The measure of the responsiveness of quantity to a change in price. It is
the percentage change in supply as compared to the percentage change in price of a commodity.
PES = If supply is elastic, producers can increase output without a rise in cost or a time delay.
If supply is inelastic, firms find it hard to change production in a given time period.
https://www.intelligenteconomist.com/price-elasticityof-supply

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Determinants of Price Elasticity of Supply
Agarwal, P. (2020) said, price elasticity of supply can be influenced by the
following factors:
1. Marginal Cost- If the cost of producing one more unit keeps rising as output
rises or marginal cost rises rapidly with an increase in output, the rate of output
production will be limited. The Price Elasticity of Supply will be inelastic - the
percentage of quantity supplied changes less than the change in price. If Marginal
Cost rises slowly, supply will be elastic.
2. Time - Over time price elasticity of supply tends to become more elastic. The
producers would increase the quantity supplied by a larger percentage than an
increase in price.
3. Number of Firms - The larger the number of firms, the more likely the supply is
elastic. The firms can jump in to fill in the void in supply.
4. Mobility of Factors of Production- If factors of production are movable, the
price elasticity of supply tends to be more elastic. The labor and other inputs can
be brought in from other location to increase the capacity quickly.
5. Capacity - If firms have spare capacity, the price elasticity of supply is elastic.
The firm can increase output without experiencing an increase in costs, and

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 E

Part I. Problem Solving and Critical Thinking Analysis

Solving Problem on Price Elasticity Directions: Analyze each problem carefully.
Answer the questions below.
1. Suppose the price of ethyl alcohol rises by 20 %. As a result, the demand for substitute hand
soap rises by 10 %.
A) What is the cross-elasticity of demand for hand soap with respect to the price of ethyl alcohol?
Encircle your answer.
Present your solution. A) + 2 B) + 0.5 C) - 0.5 D) – 2
B) Analysis on price elasticity _________________________________________
C) Interpret your analysis on the kind of good__________________________

2. If a 20% decrease in the price of international calls lead to a 35% increase in the quantity of
calls demanded, we can conclude that the demand for phone calls is:
A) Solution:
B) Analysis on price elasticity _________________________________

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 A

Directions: Read the sentences carefully.

Write TRUE if the statement is correct and FALSE if the statement is incorrect. 1
 Elasticity of demand refers to the change in demand when there is a change in another factor
such as price or income
 2. If demand for a good or service is static even when the price changes, demand is said to be
inelastic
 3. Examples of elastic goods include gasoline, while inelastic goods are items like canned goods
and vitamin c tablets
 4. The law of demand states that “elasticity shows how much a good or service is demanded
relative to its movement in price”.
 5. Inelastic demand is when a demanded quantity for masks changes by a greater percentage
compared to its percentage change in price
 6. The opposite of a market economy is a planned economy, where investment and production
decisions are decided by the government.
 7. Unit elastic is when a percentage change in demand equals the price.
 8. A mango fruit with an elastic demand gets more sales when its price drops slightly. When its
price goes up, it stays longer in the box.
 9. The demand curve shows how quantity demanded for apple responds to price changes. The
flatter the curve, the more elastic is the demand for an apple.
 10. The midpoint elasticity is greater than 1.

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 References

Agarwal, P. (2018) Price Elasticity of Supply. Retrieved on June 04 2020 from

https://www.intelligenteconomist.com/price-elasticity-of-supply
Amadeo, K. (2020) Elastic Demand with Its Formula, Curve, and Examples Retrieved on June 04
2020 from
https://www.thebalance.com/elastic-demand-definition-formula-curve-examples-3305836;
https://www.thebalance.com/inelastic-demand-definition-formula-curve-examples-3305935
Judge, S. (2020) Characteristics of the Price System in a Market Economy. Retrieved on June 04
2020
from https://study.com/academy/lesson/characteristics -of-the-price-system-in-a-market-
economy.html
Pettinger, T. (2019) Role and Function of Price in Economy Retrieved on June 04 2020 from
https://www.economicshelp.org/blog/1170/economics/role-and-function-of-price-in-economy/

Websites

https://www.slideshare.net/kalaiyarasidanabalan/a-level-economics-chapter-2-core
https://www.investopedia.com/ask/answers/012915/what-difference-between-inelasticity-and-
elasticity demand.asp
https://www.sparknotes.com/economics/micro/elasticity/problems
https://www.investopedia.com/terms/l/law-of-supply-demand.asp
https://opentextbc.ca/principlesofeconomics/chapter/3-1-demand-supply-and-equilibrium-in-
marketsfor-goods-and-services/
https://global.oup.com/us/companion.websites/9780199811786/student/chapt2/multiplech
https://opentextbc.ca/principlesofeconomics/chapter/5 -1-price-elasticity-of-demand-and-
priceelasticity-of-supply
http://faculty.fortlewis.edu/walker_d/practice_problems_ -_elasticity.htm https://
www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html
https://redmontecon
https://global.oup.com/uk/orc/busecon/economics/gillespie_econ4e/student/mcqs/ch05/
https://study.com/academy/answer/if-a-20-decrease-in-the-price-of-long-distance-phone-calls-
leads; https://int.search.myway.com/search/AJimage.jhtml

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 32
Lesson 2:
Answers...
Answers
Lesson 1:
Answers…
Problem solving
1. XED = If the value of XED is positive - substitute goods a) 20/10= 2 b) Positive c)
It’s a substitute good 2. First compute the price elasticity of demand, which is
the percentage change in quantity demanded divided by the percentage change
in price a) Solution: price elasticity = 35%/ (-20%) Again, drop the negative sign
b) Answer: price elasticity = -1.75 c) Interpretation: Since the price elasticity is
larger than one in absolute value, demand is elastic.
Part I.
TRUE OR FALSE
1. TRUE
2. TRUE
3. FALSE
4. TRUE
5. FALSE
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. FALSE
E

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