Senior High School

Quarter 3 - Module 2
Lesson 1 & 2
Economics and the Real World

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 Introduction to Applied Economics

Economics is a broad ranging discipline that uses a variety of

techniques and approaches to address important social questions.
Because of the great complexity of human behavior, economists
are forced to abstract from many details, to make generalizations
that they know are not quite true and to organize what knowledge
they have in terms of some theoretical structure in our economy.
Furthermore, economics is important inunderstanding basic problems
such as those faced by individual citizens, families, or nations. It also helps
governments in promoting growth and improvements of the quality of lives
and analyzing remarkable patterns of social behavior. Because economic
questions enter into both daily life and national issues, a basic understanding
of economics is vital for sound decision-making by individuals and nation.
To better comprehend the basic or technical principles and
fundamentals in the study of economics, it is essential to
particularly familiarize the following terms and their corresponding
definitions as used in this study.

TERM DEFINITION
Applied economics The application of economic theory and
econometrics in specific settings with the goal of
analyzing potential outcomes.
Demand schedule Reflects the quantities of goods and services
demanded at different prices.
Economics Social science which deals with the allocation of
scarce resources to satisfy the unlimited human
wants.
Economic resources Also known as factors of production, are the
resources used to produce goods and services.

Economic system The framework in which a society decides on its

economic problems
Equilibrium price Condition of balance or equality
Law of Demand The quantity of a commodity which buyers will
buy at a given time and place will vary inversely
with the price.
Law of Supply The quantity offered for sale will vary directly with
prices.
Macroeconomics The branch of Economics that studies the
economy as a whole, also known as National
Income Analysis

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 Market Is a place where buyers and sellers interact with
each other and that exchange takes place among
them.
Microeconomics The branch of Economics that deals with parts of
the economy such as the household and the
business firm. It is also known as Price Theory.
Monopolistic competition Imperfectly competitive market wherein products
are differentiated and entry and exit are easy.

Monopoly When a single firm that sells in that market has no

close substitutes.
Oligopoly Market dominated by a small number of
strategically interacting firms.
Perfect competition Implies an ideal situation for the buyers and
sellers.
Scarcity Is a condition where there are insufficient
resources to satisfy all the needs and wants of a
population.
Supply schedule Shows the different quantities that are offered for
sale at various prices.

Lesson 1.1 Economics as a Social and Applied Science

Economicsis a social science which deals with the proper allocation of
scarce resources to satisfy the unlimited human wants. Economics is
classified as a social science because it deals with the study of man’s life and
how he lives with other men.
Obviously, economics is interdependent with other sciences like
sociology, political science, geography, religion and other social sciences. As
a social science, economics studies how individuals make choices in
allocating scarce resources to satisfy their unlimited wants.
Scarcity is the reason why people have to practice economics. Part of
human behavior is the tendency of man to want and to have as many goods
and services as he can. Scarcity is that fact of life which makes man’s
material wants never fully satisfied because the resources he has are limited
while his wants are almost unlimited. However, his ability to buy goods and
services is limited by his income and purchasing power. It is therefore in this
context that man has to practice economics.
From the resources point of view, some would define economics as the
study of the efficient allocation of scarce resources. Since resources are
generally scarce while human wants tend to be unlimited, economics
encounters not a few problems. The root problem, which is the real problem,
is the unjust distribution of productive resources among the members of the
society. The fundamental problem of unfair allocation of resources has been a
global problem. There are extremely very few rich while there are very many
poor.
Thus, in a broad sense, economics can be defined as a social science
that studies and seeks to allocate scarce human and non-human resources
among their alternative uses in order to satisfy unlimited human wants and
desires.
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The Economic Resources
Our economic resources are also known as factors of production or
inputs. There are five major factors of production, which are utilized in our
economy. These are land, labor, capital, entrepreneur, and foreign exchange.

1. Land - These resources consist of free gifts of nature which includes all
natural resources above, on, and below the ground such as soil, rivers, lakes,
oceans, forests, mountains, mineral resources and climate. Land is
considered economic resources because it has a price attached to it. One
cannot utilize this natural resource without paying for it usually in the form of
rent or lease.

2. Labor - This is also termed as human resources. Labor refers to all

human efforts, be it mental or physical, that help to produce want satisfying
goods and services. This applies not only to workers, farmers or laborers, but
also to professionals like accountants, economists or scientists. Labor is an
indispensable factor in the production of goods and services. In return, he
earns an income in the form of wages and/or salaries.

3. Capital - It is a finished product, which is used to produce goods. It

consists of all man-made aids to further the production process such as tools,
machinery and buildings. Capital also serves as an investment. Income
derived from capital is interest.

4. Entrepreneur - An entrepreneur is the organizer and coordinator of the

other factors of production: land, labor, and capital. An entrepreneur is one
who is engaged in economic undertakings and provides society with goods
and services it needs. He utilizes his initiative, talent and resourcefulness in
the creation of economic goods. He is able to compensate himself through the
acquisition of profits.

5. Foreign Exchange - This refers to the dollar and dollar reserves that the
economy has. This is mostly affecting the national economy in terms of import
and export transactions, and in the case of Philippine Overseas Filipino
Workers (OFW), is affecting their remittances of money to their families back
home.

Branches of Economics

The study of Economics is divided into two branches: Microeconomics

and Macroeconomics.

1. Microeconomics - It deals with the economic behavior of individual units

such as the consumers, firms, and the owners of the factors of production.
Such specific economic units constitute a very small segment of the whole
economy. For example, the price of rice, the number of workers of a certain
firm, the income of Mr. Cruz, the expenditures of PLDT, etc. Microeconomics
is also known as the Price Theory.

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 2. Macroeconomics - It deals with the economic behavior of the whole
economy or its aggregates such as government, business and households.
An aggregate is composed of individual units. The operation of the various
aggregates and their interrelationship is analyzed to provide a profile of the
economy as a whole.

Macroeconomics is concerned with the discussion of topics like gross

national product, level of employment, national income, general level of
prices, total expenditures, etc. It is also known as employment and income
analysis.

The Basic Economic Problems

All societies are faced with basic questions in the economy that
have to be answered in order to cope with constraints and
limitations. These are:

1. What to Produce? - First of all, the system must determine the desires
of the people. Goods and services to be produced are based on the needs of
the consumers. However, there are some factors that should be taken into
consideration in producing the goods and services the individuals need.
These are:

1.1. Availability of resources;

1.2. Physical environment; and
1.3. Customs and traditions of the people.

2. How much to Produce? - Knowing what to produce is not enough. The

system must know how much of the chosen goods should be produced. It
must determine how many of these buyers are willing to buy the goods and
services produced by the economy. Here, the people’s taste and preference
plays a major factor in determining production.

3. How to Produce? - When producing goods and services, one has to

think of how best to do it. The best way to make goods is not to spend too
much. This also means you have to make goods with quality. To make goods
like these, one has to know the best way of making goods. You have to
choose the cheapest way. But this way must also let you make something
with good quality.

4. For Whom Shall Goods and Services Produced? - The last question
has something to do with the problem of distribution. Once the goods are
produced, how shall they be distributed. Thinking about this problem means
asking, “Who gets what?” on a bigger scale. In this case, this means whatever
is being sold can be bought. But only those who have money and who want it
can buy what is being sold. The poor cannot buy the same goods and
services as rich people. When you have money, you have purchasing power.
It means, you have the power to buy things.

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Economic Systems

The term economic system simply means the organization of

economic society with reference to the production, exchange, distribution and
consumption of wealth (Leańo, et al., 2012). The economic system is the
means through which society determines the answers to the basic economic
problems mentioned. There are four commonly used economic systems.
These are:

1. Traditional Economy. It is also known as the subsistence economy. In

this type of economy, people produce goods and services for their own
consumption. Decisions are based on customs and traditions and the
production techniques are outmoded and sometimes obsolete.

2. Command Economy. Under this system, the government takes hold of

the economy of the State. The government does policy formulation, economic
planning and decision-making. It dictates on what to produce, how to produce
and for whom to produce. The system works based on the interest of the
country and not on the individual. In this case, the consumer could not choose
the goods and services he wanted. The government answers the major
economic questions through its ownership of resources and its power to
enforce decisions.

3. Market System - In a capitalistic system, business enterprises are

owned and controlled by private individuals. One of the major features of this
system is “free enterprise” meaning that any individual can engage in any
enterprise, which he thinks will yield him a profit in competition with other
businesses.
Inherent in a market economy is individualism or “laissez-faire” which means
“let alone” or freedom from government control of business enterprise. Private
firms make the major decisions about production and consumption.

4. Mixed Economy - This is a system which is a mixture of the different

types of economy. The private capitalist and the government play a major role
in solving the basic problems of the economy for the benefits of the
consumers. The government sets laws and rules that regulate economic life,
produces educational and police services, and regulates pollution and
business.

Methods of Economics
Because economics is a science, there is a right way of answering its
questions. To get the answers, we use what is called an empirical method.

Here, “empirical” means we get answers by studying things carefully. We

study what is given. If we can, we do math to get answers. We study facts
with care. How?
To do this, we have to put facts in order. We can make a list or a table of
what we know. It can also help if we study what causes things to happen. But
since we cannot study every little fact, we can make guesses. However, these
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guesses come from what we know for sure. We may call them
generalizations.
A generalization is something we think of as true in most cases. This
helps because we cannot always study everything. To make things simple, we
already guess how some people will act in the economy.
As a science, economics demands a way of answering questions. For
instance, the law of demand tells us that if the price of a good goes up, people
will not buy it as much. This will happen, ceteris paribus.
In this example, ceteris paribusis a generalization. It means the demand
law will be true if nothing but the price changes. It means everything else will
stay the same. If something aside from the price changes, the demand law will
be false.
For example, what if the money a person earns goes up? What if it goes
up more than the price of the good goes up? This means the person still has
more money to spend. So he will still buy the goods even if the price is higher.
Economics has what we call theories. Theories are ideas. They tell us
why people act a certain way. They also tell us why things are the way they
are.
Theories can be shown using tables or graphs, too. When we apply
economic beliefs in real life, we call them applied economics or economic
policy.

Economics as an Applied Science

Applied Economics is the application of economic theory and
econometrics in specific settings with the goal of analyzing potential
outcomes. John Neville Keynes is attributed to be the first to use the phrase
“applied economics” to designate the application of economic theory to the
interpretation and explanation of particular economic phenomena (Dinio, et
al., 2017).
We should be able to improve human welfare among Filipinos by the
investigation and analysis of economic problems in the real world. Applying
economic theory in our lives means trying to address actual economic issues
and be able to do something about it. The concept of scarcity and choice
should encourage us as individuals to help in our own way to provide
solutions to the country’s economic problems.

Less Utilizing Applied Economics

n
Have you ever asked who decides on the prices of the goods you buy?
For many people, the answer is easy. They think the government decides how
high or low prices should be. But this is not always true. For example, the
government may only regulate the prices of rice, gasoline, and apartment
rent. But the prices of most goods are determined by market price.

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 A market price is the price determined only by demand and supply. It also
means that the government had little say about that price. But what if the
government decided on a price that is higher than the market price? Who
would be affected? How will this affect the demand and supply for that good or
service?

In such a case, the sellers will be badly affected. Since people want
lowerpriced goods, they will buy less. That means if the price goes up, they
will not buy as much. The sellers will have a lot of goods that people are not
buying.

What about if the government mandate the sell of goods or services at a

price lower than the market price? In this case, remember that people want as
much profit as possible. If the government decides on a price lower than what
the market alone would have allowed, will the sellers be happy? The answer
is no. If people have to pay the sellers less for their goods, the sellers will get
less money.

In general, prices are decided upon by demand and supply. In this

chapter, we are going to study the law of supply and demand. It will also
discuss the price structure and the role of government in the process.

Lesson 2.1 Application of Demand and Supply

In an economy where prices are continuously rising, people have always

wondered what factors cause prices to fluctuate. The core of this lesson aims
to show that demand and supply are the main forces that cause prices to
increase or decrease. The lesson also tries to explain why an increase in the
price of a commodity will make consumers want to buy less of it and
producers want to sell more and why a price decrease will cause the opposite
reaction.
The Meaning of Demand
Demand is the schedule of various quantities of commodities which buyers
are willing to purchase at various prices in a given time and place. In simple
terms, demand means that someone wants something. In economics, it also
means a group people want to buy certain goods or services.
Demand tells us what people want. It also tells us what they can buy at a
certain time and place. Because it involves buying, it also involves at what
price people can buy it or are willing to buy it.
Determinants of Demand
1. Income. The amount of money people earns affects how much or how
little they buy. For example, the factory worker earns P10, 000 every month
while the business man earns P30,000. This means the factory worker has
less money. He can buy less than the businessman. However, when the
income of the factory worker goes up, he can buy more. Still, this will not
mean that he can already buy as much as the businessman can. But if the
income of the businessman goes down, he can buy less.

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 This means that a change in income leads to a change in the demand for
goods and services. More money means more demand. Less money means
less demand.
2. Population. More people means more demand for goods and services.
That is why, we can observe that there are more buyers in the city stores than
in the barrio stores. Conversely, less population means less demand for
goods and services. Obviously, business is poor in the rural areas compared
to business in the urban areas.
3. Tastes and preferences. Demand for goods and services increases
when people like or prefer them. Such tastes or preferences are greatly
influenced by advertisement or fashion. On the other hand, if a certain product
is out of fashion, the demand for it decreases.
4. Price Expectations. When people find out that prices are about to
increase, they buy more of these goods before the price changes. When
people find out that prices are about to go down, they will not demand these
goods as much.
Why do people act like this? It is because they want to use their money
wisely. They want to economize. It means they want to spend properly to buy
what they want or need at the best possible price. They want to save money
even after buying things.
5. Price of related goods. When the price of a certain good increases,
people tend to buy substitute products. For example, if the price of Colgate
increases, consumers buy less of Colgate and more of the close substitute
like Close-up or Hapee. This means, the demand for Colgate decreases while
the demand for substitutes increases. This means, if the price of one good
increases, the demand for the other good increases. For substitutes then,
price and quantity demanded are directly related.
Law of Demand
The law of demandmay be stated as “the quantity of a commodity which
buyers will buy at a given time and place will vary inversely with the price.”
This means that as price increases, quantity demanded decreases, and as
price decreases, quantity demanded increases other things are constant.
There are two ways of explaining why people buy more or less of a good
depending on price:
1. Income effect. At lower prices, an individual has a greater purchasing
power. This means he, can buy more goods and services. But at higher
prices, naturally, he can buy less.
2. Substitute effect. Consumers tend to buy goods with lower prices. In
case the price of a product that they are buying increases, they look for
substitutes whose prices are lower. Thus, the demand for higher priced goods
will decrease.
The Ceteris Paribus Assumption

The law of demand states that as price increases, quantity demanded

decreases, and as price decreases, quantity demanded increases. Such
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theory is true if we apply the Ceteris Paribus assumption wherein it assumes
that “all other things equal or constant.” Meaning, the determinants of
demand are constant and are not considered as factors that will affect
demand in the market. Thus, the law of demand, using the Ceteris Paribus,
can be restated as “assuming that the determinants of demand are
constant, price and quantity demanded are inversely proportional to
each other.”

However, if the determinants of demand are considered major factors or

greatly affects the demand in the market, then, the Ceteris Paribus
assumption is dropped.

Validity of the Law of Demand

As price increases, quantity demanded decreases; As
price decreases, quantity demanded increase.
A demand schedule reflects the quantities of goods and services
demanded at different prices. To understand this fully, let us analyze a
hypothetical demand schedule of brand X in the market as shown in Table 1
From the table, it is shown
that an individual would tend
to buy more when its price is
low than when the price is
high.

At a price of P35.00, quantity

demanded by the consumers
is 5 while a decrease of price
to P5.00 increases the
quantity demanded of the
consumers to 35.
PRICE QUANTITY DEMANDED

5 35

10 30

15 25

20 20

25 15

30 10

35 5

The demand schedule shown in Table 1 can also be understood through

graphical illustration known as the demand curve. In many instances, it is
more convenient to express the relation between prices and quantity
demanded by means of a demand curve. Figure 1 shows the translation of
Table 1 into a graphical illustration.
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 Figure 1. Graphical Illustration of a Demand Curve

In Figure 1, price is presented on the vertical axis

and quantity demanded on the horizontal axis. The
points can be connected in a continuous curve. We
label our demand curve with D, which means
demand, to indicate that it is the entire demand schedule.
It can be noted that the demand curve is sloping down. It shows that price and
quantity demanded are inversely
proportional. This inverse relationship between prices and quantity
demanded depicts the law of demand.
The Meaning of Supply
Supply is the schedule of various quantities of commodities which producers
are willing and able to produce and offer at various prices in a given time and
place. In other words, supply is the amount of goods and services available
for sale at given prices in a given period of time and place. Supply implies the
ability and willingness of sellers to sell.
Determinants of Supply
1. Technology. This refers to the method of production or how something is
produced. Having modern technology means being able to produce more.
This means more supply. If producers had to rely on old technology which
uses animals instead of machines, production would be slower. Better
technology means more supply produced and less cost of producing these
goods.
2. Cost of production. This refers to the things a producer has to spend on
to keep making goods and services. This includes: raw materials, laborers,
bank loan interests, taxes, and land or building rent. An increase in cost of
production makes it harder for the producer because he or she has to pay
more to keep producing. This is why when the cost of producing goes up, the
supply of goods most likely goes down.
The producer, given a higher cost of production, cannot produce as much.
Wage is a cost of production. Think of a factory. A factory needs workers. The
owner of the factory needs to pay the workers so that they will help him or her
make goods. Wage is a cost that the owner has to pay. It is the cost of making
something. This means that if the owner has to pay more wage, the cost of
production goes up. This means supply of the goods will go down.

For example, businessmen don’t want to sell more goods if they are not sure
that they will get as much money. If they have to pay workers more, that
means less of their profit will stay with the owners. They have to give more of
what they earn to the workers. What if sellers just increase price when cost of
production goes up? Won’t this help them get more money? It might, but not
all the time. Remember that higher prices mean less people will buy. This
means that if the cost of production doesn’t go down soon, sellers will
continue losing money. They might have to stop producing completely.
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3. Number of sellers. More sellers or more factories means an increase in
supply. On the other hand, less sellers or factories means less supply.
4. Prices of other goods. Since a price increase means less demand, a
producer may choose to produce something else to continue gaining profit or
to have more profit. Let us say, the price of rice goes up. If so, then a farmer
may choose to produce more corn instead because he knows that less people
will buy rice from him.
5. Price expectations. If producers expect prices to rise very soon, they
usually keep their goods and then release them in the market when the prices
are already high. Sadly, this leads producers to keeping their supply of goods
until prices increase. This is called artificial shortage. This is usually what
happens when the government says that the prices of some basic goods are
about to go up.
Some basic goods are: gasoline, rice, milk or cooking oil. What about if
producers expect a price decrease? In this case, they will lessen production.
Still, there are some exceptions, like farmers. They cannot lessen their crop
supply especially when their crops are already growing. On the other hand,
many factories increase the number of their goods due to expected price
increase.
6. Taxes and Subsidies. Certain taxes increase the cost of production.
Higher taxes discourage production because it reduces the earnings of
businessmen. That is why the government extends tax exemptions to some
new and necessary industries to stimulate their growth. Similarly, tax
incentives are granted to foreign investors in order to increase foreign
investment in the Philippines. This will result to more goods.
In the case of subsidies, there is financial assistance to producers. Clearly,
subsidies reduce the cost of production. This induces businessmen to
produce more.
The Law of Supply
The law of supply states that the quantity offered for sale will vary directly
with price. This means that as price increases quantity supplied also
increases; and as price decreases, quantity supplied also decreases. This
direct relationship between price and quantity supplied is the law of supply.
Producers are willing and able to produce and offer more goods at a higher
price than at a lower price. Obviously, sellers offer more goods at higher
prices because they make more profits. Such behavior of sellers or producers
is a natural inclination. No businessman is willing to produce goods if he
makes no profit.
The Ceteris Paribus Assumption of Supply
The law of supply is only correct if we apply the assumption of ceteris
paribus. This means the law of supply is valid if the determinants of supply
like cost of production, technology, number of sellers and so forth, are held
constant.

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 Validity of the Law of Supply
As price increases, quantity supply also increases,
As price decreases, quantity supply also decreases
The supply schedule shows the different quantities that are offered for
sale at various prices. The supply schedule may reflect the individual
schedule of only one producer or the market schedule showing the aggregate
supply of a group of sellers or producers. Table 2 gives you an idea of a
supply schedule.

Table 2 indicates that a seller offers a big quantity of brand Y in the

market if the price is high and likewise, sells only a few when the price is
low.
Table 2. Hypothetical Supply Schedule of Brand Y

PRICE QUANTITY
SUPPLIED
5 5

10 10

15 15

20 20

25 25

30 30

35 35

The supply schedule as shown in Table 2 can also be illustrated in

graphical form known as the supply curve. This is shown in Figure 2.

Figure 2. Graphical Illustration of the Supply Curve

It can be noted that the supply curve

has an upward slope. It shows that price
and quantity supplied are proportional to each other. This kind of relationship
depicts the law of supply. We label our supply curve with S to indicate the entire
supply schedule.

Lesson 2.2 Demand and Supply in Relation to the Prices of Basic

Commodities

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 We have seen that consumers demand different amounts of goods
and services as a function of their prices. Similarly, producers
willingly supply different amounts of goods and services depending
on their prices. What happens when suppliers and consumers
meet?

In this lesson, we will illustrate the effect of combining supply and demand.
We will also determine how the forces of demand and supply operate through
the market to produce an equilibrium price and equilibrium quantity.

Alfred Marshall, a British economist, introduced a kind of pricing

scheme by combining the law of demand and the law of supply.
With this combination, an equilibrium price and equilibrium
quantity is formulated. This is known as the market equilibrium.

Market Equilibrium

From a separate discussion of demand and supply, we now proceed with

reconciling the two. The meeting of supply and demand results to what is
referred to as “market equilibrium”. As earlier said the market referred to
here is a situation where buyers and sellers meet, while equilibrium is
generally understood as a “state of balance”.

Equilibrium

Market equilibrium generally pertains to a balance that exists when

quantity demanded equals quantity supplied. Market equilibrium is the general
agreement of the buyer and the seller in the exchange of goods and services
at a particular quantity. At equilibrium point, there are always two sides of the
story, the side of buyer and that of the seller.

For instance, given the price of P30.00 the buyer is willing to purchase
150 units. On the seller side, he is willing to sell the quantity of 150 units at a
price of P30.00. This simple illustration simply shows that the buyer and seller
agree at one particular price and quantity, that is P30.00 and 150 units. This is
the main concept of equilibrium: that there is a balance between price and
quantity of goods bought by consumers and sold by sellers in the market.

Table 3. Supply and Demand Schedules Indicating the Equilibrium Price

and Equilibrium Quantity

Quantity Supplied Price Quantity Demanded

50 P 10.00 250
100 P 20.00 200
150 P 30.00 150
200 P 40.00 100
250 P 50.00 50

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Equilibrium Market Price

Equilibrium market price is the price agreed by the seller to offer its good
or service for sale and for the buyer to pay for it. Specifically, it is the price at
which quantity demanded of a good is exactly equal to quantity supplied of the
same good.

Let us work through the supply and demand schedules in Table 3 to see
how supply and demand determine market equilibrium. To find the market
price and quantity, we find a price at which the amount desired to be bought
and sold just matches. If we try a price of P10.00, a producer would like to sell
50 units while consumers want to buy 250 units. The quantity demanded
exceeds quantity supplied. At price P40.00, a quick look shows that quantity
supplied which is 200 units exceeds the quantity demanded which is 100
units.

We could try another process, but we can easily see that the equilibrium
price is P30.00. At P30.00, consumers’ desired demand of 150 units is equal
with the desired supply which is also 150 units. This denotes that supply and
demand orders are filled, and consumers and suppliers are satisfied.
What happens when there is market disequilibrium?
When there is market disequilibrium, two conditions may happen: a
surplus or a shortage may occur as shown in Figure 3.
Surplus is a condition in the market where the quantity supplied is more
than the quantity demanded. When there is a surplus, the tendency is for
sellers to lower market prices in order for the goods and services to be easily
disposed from the market. This means that there is a downward pressure to
price when there is a surplus in order to restore equilibrium in the market. This
is depicted in Figure 3 by the arrow from point b going down to the equilibrium
point.
Generally, a surplus happens when there are more products sold in the
market by sellers but few products are bought by consumers. This is because
the quantity of goods that buyers are willing to buy at a given price is less than
the quantity of goods that sellers are willing to sell at the same price.
Shortage is basically a condition in the market in which quantity
demanded is higher than quantity supplied at a given price. As you may have
observed in Figure 3, a shortage exists below the equilibrium point. In
particular, a shortage happens when quantity demanded is greater than
quantity supplied at a given price.
When there is a shortage of goods and services in the market, there is an
upward pressure on prices to restore equilibrium in the market. In this
particular situation, it is the consumers that will influence that price to go up
since they will bid up prices in order for them to acquire the goods or services
that are in short supply. For as long as there is disequilibrium in the market,
prices will still go up until such situation is normalized.

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 The Law of Demand and Supply
When supply is greater than demand, price decreases;
When demand is greater than supply, price increases;
When supply is equal to demand, price remains constant.
This constant price is the equilibrium or market price. This means
that buyers and sellers agree on that price.

Price Controls
When the market is experiencing a surplus, there is a possibility that
producers will lose. Conversely, when the market is encountering shortage,
there is likelihood that consumers will be abused. What happens if
disequilibrium in the market persists for a longer period of time? If this
happens, the government may intervene by imposing price controls.
Price control is the specification by the government of minimum
or maximum prices for certain goods and services, when the
government considers it disadvantageous to the producer or
consumer.

Two Types of Price controls:

Floor Price - is the legal minimum price imposed by the
government on certain goods and services? The setting of a floor
price is undertaken by the government if a surplus in the economy
persists.

1. Price Ceiling - is the legal maximum price imposed by the

government? In most cases, a price ceiling is utilized by the government if
there is a persistent shortage of goods in the economy. The government
regularly monitors the market and imposes a maximum price on commodities,
which is to be strictly followed by producers and sellers. A price ceiling
therefore is imposed by the government to protect consumers from abusive
producers or sellers who take advantage of the situation. This is usually done
by the government after the occurrence of a calamity like typhoon or severe
flooding.

Market Equilibrium: A Mathematical Approach

In the previous discussions, we have discussed and presented market

equilibrium through graphical presentation. In this section, we will try to apply
a mathematical equation in determining the price and quantity equilibrium in
the market. Equation:
Demand equation: QD = a - b (P) (1)
Supply equation: QS = a + b (P) (2)
Equilibrium condition: QD = QS (3)
Take note that in the said equations, there are three unknown
variables: QD, QS, and P where QD is quantity demanded, QS is
quantity supplied, and P is price. Moreover, the parameter in
equations (1) and (2) is a and the coefficient is b. Given these

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 equations, we can now determine the equilibrium price and
quantity.
Example:
Look for the PE and QE given the following information:
QD = 68 - 6P
QS = 33 + 10P
Solving the problem, we can simply state our equilibrium equation as:
a - b(P) = a + b(P)
Substituting our values, we have:
68 - 6(P) = 33 + 10(P)
Solving for the unknown (P), we simply group like terms, thus
68 - 33 = 10P + 6P
35 = 16P
Dividing both sides by 16, we get
P = 2.19
Now we have determined the price of the goods. The next
problem for us is to determine the equilibrium quantity. Since we
already know the price, all we have to do is to substitute the value
of the price to our previous equations, thus:

68 - 6 (2.19) = 33 + 10 (2.19)

Solving the equation, our QD = QSis equal to 54.8 or we can set the value
in the whole number. Therefore, the equilibrium quantity is equal to 55 units
and the equilibrium price is P2.19.

Market structure refers to the competitive environment in which

buyers and sellers operate. Competitionis rivalry among various
sellers in the market. As a student, you are familiar with the word
competition. You are exposed to competition in school: spelling
bees, quiz bees, and sports fests. On the television, you watch
beautiful girls from all over the world compete for the Miss
Universe or Miss World title. You see how the various teams of the
PBA compete to win the championship.

The market is a situation of diffused, impersonal competition among

sellers who compete to sell their goods and among buyers who use their
purchasing power to acquire the available goods in the market.

There are varying degrees of competition in the market depending on

the following factors:

 Number and size of buyers and sellers

 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and input owners
 Degree of knowledge of economic agents regarding prices, costs,
demand, and supply conditions

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 Market Models Defined

1. Perfect Competition - the market has a lot of independent sellers. These

independent sellers offer the same goods. That is why they have to compete
against each other. Each seller is trying to get more profit than the others.

2. Monopoly - exists when a single firm that sells in the market has no
close substitutes. The existence of a monopoly depends on how easy it is for
consumers to substitute the products for those of other sellers.

3. Monopolistic Competition - this means there is almost a large number of

small sellers selling goods which are similar but not the same.

4. Oligopoly - is a market dominated by a small number of strategically

interacting firms. Few sellers account for most of the total production since
barriers to free entry make it difficult for new firms to enter.

Characteristics of Market Models

Perfect Competition
1. There is a large number of independent sellers.

2. Products are all the same. Because they are the same, they are
homogeneous. Examples are farm goods like rice, corn, or fruits.

3. No one seller and no one buyer can cause a change in the price of a
good.

There are too many sellers with the same good. If one seller decreases
his or her supply a lot, this will still not change the total supply of everyone
else in the market. The market price of the goods will stay the same.

At the same time, if one seller sells his or her goods at a lower price
than anyone else, many people will buy from him or her right away. If he or
she sells at a higher price than anyone else, he or she will not sell his goods.
The rise or fall of market price depends on total demand or total supply, not on
a single buyer or seller.

4. It is easy for new firms to enter the market. It is also easy for firms that are
already there to leave the market. For example, a vegetable vendor is free
to sell in the market. He or she only pays the market fee. If she no longer
wants to sell, she can simply leave the market.

5. There is no competition that does not include prices. Competition without

price means advertising or promotion, like commercials. But there is no
need for these because the goods being sold are all the same.
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 Monopoly
1. There is only one producer or seller.
2. Not all the products are exactly the same. This is because there are no
close substitutes for them. Some firms in real life which are pure
monopolies are the following: MERALCO, PLDT, and MWSS.
3. The monopolist chooses the price. Since he or she is the only one selling
the goods, he or she can lessen the output to make the price higher. He or
she can also increase supply if this will increase his profit.
4. It is very hard for new firms to enter the market. This is because there are
already other firms who know how to work in the market better.
If there is a monopolist, this firm is very powerful in the market. There are
also natural monopolies because there are some things like electricity or water
that cannot be sold by more than one company.
5. There may or may not be a lot of promotion of the goods sold by the
monopolist. By promotion we mean billboards or commercials.
Since no one else sells the goods sold by the monopolist, there is
no need to tell people to buy from a particular company. In a
market with a monopoly, the people can only buy from the
monopolist.
Monopolistic Competition
1. There are many sellers acting independently. This means at least 100
sellers. In terms of competition, this means a thousand or more sellers.
2. Products are not all the same. The products look different from each
other. They are also sold in different places. There are different commercials
and billboards for them.
Examples are banks, books, medicine, and gasoline stations
3. There is a limited control of price. Some sellers can decrease or
increase their prices a little. This is because their products are different.
For example, not all brands of soap have the same price
4. New firms do not have a very hard time entering the market. Still, they
have a harder time than firms in markets with pure competition. Why?
This is because they need more capital. There is also more competition
because their products have to be better. They also need to promote it better
so people will choose their goods instead of others.
5. There is more non-price competition. Non-price here means firms have
to try to have better services and better places to sell. Their goods also need
to look better so that people will choose to buy from them instead of from
other firms.

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Oligopoly
1. Only some firms are powerful in the market. Each firm produces a big
part of the total output of the industry.
2. Products are either the same or different. Raw materials like cement or
steel are all the same. Finished goods like typewriters or cars are different
from one another.
3. The producers agree on a price depending on what each of them wants.
The biggest among the sellers is called the price leader.
4. It is hard for new firms to enter the market. They need a lot of capital and
they need to produce a large number of goods. It is hard to beat the firms that
have been in the market longer because these firms know better. But new
firms can still enter the market.
5. There is a lot of product promotion among those who make different
goods. In the case of producers who all sell the same goods, they have to
promote themselves well.
Determinants of Market Structure
1. Government laws and policies. In some industries, the government
controls how competitive firms can be.
This is for the good of the buyers and the economy. For example, in
some industries that sell water or electricity, only one firm is allowed to sell
each service or good.
For transportation like public buses or communication like telephone
lines, the government will let only one or two firms in particular places in the
country. The government also makes sure that the monopolies don’t abuse
their power.
2. Technology. Because they have been monopolies for a long time, a lot
of firms have become very rich. This is because they did not have to try and
beat other firms to earn more profit.
But some new firms get hold of modern machines which help them
produce more goods and better goods compared to the monopolies. Because
of this, monopolies become oligopolies or monopolistic competition happens.
For example, abaca was once the best choice to use when making paper,
ropes, and fishing nets. But now, plastic is also used to make ropes, for
example.
The abaca industry is no longer a monopoly.
3. Business policies and practices. New firms might be scared of big firms.
Also, new firms do not have as much input to use, unlike the big firms.
Sometimes the big firms will even work together. This makes it harder for new
firms to earn profit. The new firms can even buy the new firms instead of
letting them work in the market.

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 4. Economic freedom. Being free in this sense can mean having things of
your own. It means being able to sell what you want as long as no one gets
hurt.
Having economic freedom may also mean firms can compete with one
another. In some cases, the firms try very hard to beat one another. Only a
few firms stay in the market.
In this case, a single seller or only a few can help in saying what the price
of goods should be. They can also say how much should be made.
Lesson 2.4 Contemporary Economic Issues Facing the Filipino
Entrepreneur
Philippine Peso and Foreign Currencies
Trading with other countries is also an important economic activity that
impacts on the economy. Selling locally made products, called exports, means
we earn dollars as payment for these goods bought by foreign buyers. In the
same manner, we buy goods from other countries, and these are our imports.
When we trade with other countries, we need a common currency to use to
pay for goods we buy from them and for them to pay us for goods we sell to
them. When we travel to foreign countries, we may bring peso or the US
dollar, then convert them into the local currency of the country which we visit.
The rate of conversion of the Philippine peso to a foreign currency is
reflected in the exchange rate. If we have pesos that we need to convert into
dollars, we need to know the current exchange rate. These rates are
dependent on the workings of demand for and supply of the currency in the
market. For example, if the US dollar is in demand, the price of the dollar will
increase and will be reflected in a higher exchange rate in favor of the dollar,
which means one will need more pesos to buy dollars.

Unemployment
Many things lead to unemployment. Technology can lead to
unemployment. How? For example, workers are needed to make shoes. But
one day, a new machine is made. It helps make more shoes faster. To buy
these machines and keep them working is cheaper than paying wages to
workers. So a shoe factory will no longer need a lot of workers. It will buy the
machines instead.
Business cycles also lead to people losing jobs. If the economy is doing
badly, less goods will be made. Less workers are needed. People will lose
their jobs. But not all things that lead to unemployment will last long.
What happens to a country when many of the people there don’t have
jobs? It means national income goes down and the government gets less
money. They have to stop working on some projects. It is because they do not
have enough money or funds. It means they cannot finish the roads or
schools they started building. Sometimes, they need to borrow money from
other countries.

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 Jobs are very important because they give people money. Without
money, people can’t but the things they need. They cannot buy basic goods
like food and water.
Inflation
There is inflation when the prices of goods and services are high. When
there is inflation, does this mean that the price of every good is getting higher?
The answer is no. In fact, some prices stay the same or even fall. Other prices
rise very suddenly.
Inflation is bad for many parts of the economy. It is very bad for those
who have fixed income. Fixed income means they get the same amount of
money all the time. It does not change. When prices go up, they cannot buy
as much as they need or want. Inflation is also bad when lots of people don’t
have jobs. Demand for goods and services go down when prices go up. This
means less goods are made and this leads to less jobs. Even those who have
savings in the banks have a hard time.
For example, people put money in banks. We call this money savings.
When you have savings, you can use it not only to buy goods but also to pay
money you already own. When you borrow money from the banks, you have
to pay what you owe plus interest.
Taxes
We pay taxes for the government to provide public goods and services
that empower and enable individuals and institutions alike (e.g., school,
business corporation) to pursue their dreams. One example of a public good
is farm access roads for farmers to transport their produce to the cities for the
needed cash income. Another example is the public school system to educate
children of poor families out of poverty. On the other hand, an example of a
public service is restoring peace and order in war-torn areas in Mindanao by
the armed forces and police that all can resume normal life. Another example
is the regulation of business permits by the City Hall to prevent industrial
overcrowding, which can dampen the incentive to do business. In other words,
we pay taxes for the government to provide a better place where we can
exercise our freedom securely, fairly, and progressively.

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