MODULE 4

Target
To the casual observer, market activity seems to be a bewildering and uncoordinated mass of transactions.
Each individual in the market society is free to buy what and when he pleases, to sell what and when he pleases, to
produce or to consume what he pleases, or to refrain altogether from any or all of these activities. Transactions may
involve any of innumerable commodities or services, they may involve any of a wide range of quantities and qualities,
and they may be concluded at any of a wide variety of prices.
Market pricing is a means of organizing economic activity. It does this primarily by coordinating the decisions
of consumers, producers, and owners of productive resources. Millions of economic agents who have no direct
communication with each other are led by the price system to supply each other’s wants. In a modern economy the
price system enables a consumer to buy a product he has never previously purchased, produced by a firm of whose
existence he is unaware, which is operating with funds partially obtained from his own savings.
Last module, we talked about the market demand, market supply and market equilibrium. In our new topic,
we will link more of these variables to the market price system.
This learning material will help you to determine the implications of market pricing on economic decision-
making.

After going through this module, you are expected to:

Determine the implications of market pricing on economic decision-making. (ABM_AE12-Ie-h-6)
Subtask:
Directions: Give the meaning of the following words/phrases. You may use the internet to substantiate your ideas.
Price Elasticity__________________________________________________________
Price Elasticity of Demand_______________________________________________
Price Elasticity of Supply________________________________________________

Jumpstart
Prices are an expression of the consensus on the values of different things, and every society that permits
exchanges between people has prices. Because prices are expressed in terms of a widely acceptable commodity, they
permit a ready comparison of the comparative values of various commodities—if shoes are P300.00 per pair and ball
pens are P10.00 each, a pair of shoes is worth 30 ball pens. The price of anything is its value in exchange for a
commodity of wide acceptability: the price of a car may be some 100 pieces of gold bars or 2500 pieces of paper
currency. Thus, the system of prices can be arranged to reward or penalize any kind of activity.
Activity 1: Looking back to your lessons
Direction: As we go further, let us try to recall the concepts of market demand, market supply and market equilibrium.
Please answer the following in a clean one-fourth sheet of paper and attach your answers to this module. Write TRUE
if the statement is correct and FALSE if it is incorrect.
_______ 1. The equilibrium point is the level where the demand and supply curves intersect.
_______ 2. If the price is above the equilibrium level, the quantity demanded is greater than the quantity supplied.
_______ 3. If the price is below the equilibrium point, the quantity demanded is lesser than the quantity supplied.
________4. The law of demand applies during online sales of computers when consumers rush to buy products at
30% discounts.
_______ 5. The law of supply applies when the producers supply more masks at a higher price; selling at
higher quantity at a higher price increases revenue.
________6. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied.
________7. Shortage will exist if the price is below the equilibrium point
________8. The law of supply and demand explains the interaction between the sellers of a product and the buyers.
________9. The demand curve is always downward sloping due to the law of diminishing marginal utility.
_______10. The supply curve shows an upward slope.

Discover
The Marketing Price System
Directions: Please read this article on Demand, Supply and Elasticity .
Of clean water in the Philippines
This will help you understand better our new lesson.

Demand, Supply and Elasticity of Clean Water in the Philippines

According to an article created by Vice News, there are

55 people who die in the Philippines every day because
of the lack of clean water. As one can see clean water

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is greatly needed by all people. As a student who is
lucky to be given all the necessities needed in life it
would be normal not to think of this because we
normally do not notice it. However, we need to.
According to Katrina Arianne Ebora, who works for
UNICEF’s Water, Sanitation and Hygiene program in
the
Philippines stated that “Over 30 million people in the Philippines do not have access to improved sanitation
facilities.” Also, according to the PIS by 2050 the population of the areas with poverty in Manila will reach
over 9 million! With the rising population of the Philippines there will be a problem with the economy of clean
water because there will be too much demand for the supply of water.
(Source: https://redmonteconomics.weebly.com/blog/demand-supply-and-elasticity-of-clean-water-
in-the-philippines)
In the article above, the causes and effects of the water shortage around the Philippines could be
best explained if we could understand the concepts of demand and supply elasticity of the clean water.
A shortage is when there is an excess demand for the quantity supplied. While surplus is excess in
supply. For example, if there are 10 bottles of water and there are 20 students who want drinking these, then
there will be only 10 students whose demands are met while the others will not be able to be given anything.
There is shortage in the supply. If producers make too many bottles of water and consumers cannot buy
them, there will be surplus.

Price System in a Market Economy

Let us find out more about the price system. We have learned that demand is the willingness of the
consumers to buy goods and services. In economics, the willingness to buy goods and services should be
accompanied by the ability to buy, also called the “purchasing power”. This is referred to as an effective
demand (source: Investopedia).

EQUILIBRIUM
Equilibrium is a point of balance or a
point of rest. It is also called “market-
clearing price”.
Equilibrium price is the price at which
the producer can sell all the units he
wants to produce and the buyer can buy
all the units he wants
Quantity demanded and quantities
supplied are equal.
CHARACTERISTICS
The supply and demand are balanced in
equilibrium.
The economic forces are balanced and in
the absence of external influences, the
(equilibrium)valuesofeconomic
variables will not change.
The amount of goods or services sought
by buyers is equal to the amount of
goods or services produced by sellers.

Price System in a Market Economy: Its Characteristics

The prices of goods that we encounter every day to the things we buy play a crucial role in
determining an efficient distribution of resources in a market system. The prices will help us to make every
day economic decisions about our needs and desires. They are the indications of the acceptance of a
product; the more popular the product, the higher the price that can be charged. Example is when a table
are for sale in your community today and is assumed that they are not very important as compared to other
products or commodities that we need to survive especially that our movements are very limited.
Neither the producers nor consumers can impact the prices; consumers can buy whatever they
want; nor can producers make and sell whatever they want. Prices are decided by interactions between
the producers and the consumers.
Price acts as a signal for shortages and surpluses which help firms and consumers respond to
changing market conditions.
If a good is in shortage – price will tend to rise. Rising prices discourage demand, and
encourage firms to try and increase supply.
If a good is in surplus – price will tend to fall. Falling price encourage people to buy, and cause
firms to try and cut back on supply.
Prices help to redistribute resources from goods with little demand to goods and services

The market price is the point that the supply and demand curves intersect. (Judge, S. 2020)
We explore more how equilibrium happens. Let us analyze the charts below. The chart shows a
surplus – the quantity is greater than demand. When quantity is greater than demand it causes prices to
go down

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 Figure 1. The Equilibrium Figure 2. The Surplus
Point or the Market Price Point
Point

Prices are market driven - The producers can make what

they want and consumers are free to purchase what they want. This
means that customers live in a market economy. When prices are
high, supply increases as many firms join the market (Judge, S.
2020). Let’s say the units of cellular phones. The numbers of
suppliers have increased because of high prices of the cellular
phones. When smartphones were new in the market, there were
fewer producers and prices were high. The high prices

attracted the producers to join the market (Judge, Figure 3. Shortage Point

S. 2020).

In shortage, quantity is less than the demand; it causes prices to go up due to scarcity. Example
of which is the shortage in masks and ethyl alcohol in the market. There is shortage in the supply, thus,
price tends to go up or tends to go higher (Judge, S. 2020).

Law of Supply and Demand

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

Demand is the desire of a consumer to purchase
goods or services and willingness to pay for that product
or services at a given price. If all other factors remain
equal, the higher the price of a good, the fewer people will
demand that good. “the higher the price, the lower the
quantity demanded” and vice versa. The demand curve is
always downward sloping due to the law of diminishing
marginal utility.
Figure 4. Demand Curve
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. The law of
supply says "as the price of a product increases,
companies will produce more of the product”. When
graphing the supply vs. the price, the slope rises.

Figure 5. Supple Curve

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How Do Supply and Demand Create an Equilibrium Price?
Equilibrium price is the price at which a producer can sell all the units he wants to produce
and a buyer can buy all the units he wants. Supply and demand are balanced, or in equilibrium. The
demand curve is downward sloping; this is due to the law of diminishing marginal utility. The supply
curve is a vertical line; overtime, supply curve slopes upward; the more suppliers that are expected to
charge higher, the more they are more willing to produce and bring products to the market. In the
equilibrium point, the two slopes will intersect. The market price is sufficient to induce suppliers to bring
to market that same quantity of goods that consumers will be willing to pay for at that price.

Price Elasticity of Demand and Supply

Price elasticity measures 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 and b)
unit elastic, or inelastic or not very responsive.

Figure 6. The equilibrium point

• Elastic Demand or supply curve indicates that quantity demanded or supplied respond to price
changes in greater than proportional manner

Inelastic demand or supply curve is one where a given percentage change in price will cause a
smaller 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:

I. The Price Elasticity of Demand

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 quantity demanded. But the negative sign is ignored (Judge, S. 2020). Price Elasticity of Demand
(PED) = % change in quantity demanded % Change in price

Figure 7. Price Elasticity of Demand

Elastic Demand (PED > 1) - the percentage change in price brings about a more than proportionate
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 1.
Examples are real estate and housing - are many different housing choices. People may live in a townhouses,
condos, apartments, or resorts. The options make easy for people to not pay more than they demand.
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, and the coefficient of the elasticity is less than 1.
An example is gasoline – gasoline has few alternatives; people with cars consider it as a necessity
and they need to buy gasoline. There are weak substitutes, such as train riding, walking and buses. If the
price of gasoline goes up, demand is very inelastic. Other Examples: Diamonds, air conditioners, iPhone,
Cigarettes
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 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.
Perfectly Elastic - a small percentage change in price brings about a change in quantity demanded
from zero to infinity. The PED is =0 any change in price will not have any effect on the demand of the product
and the percentage change in demand will be equal to zero (0).

Point Elasticity
The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction in the total
revenue of the firm.
The demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total
revenue is maximum at this point.
Any point above the midpoint has elasticity greater than 1, (Ed > 1).

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. (YED = % change in quantity demanded/ % change in 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. An example is the demand for units of air-
conditioning increases as the income of the consumer increases and the demand for electric fan decreases.
The normal good here are the units of air-conditioning while the inferior goods are the electric fans.
Inferior Goods – the demand decreases when consumer income rises; demand increases when
consumer income decreases. It 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 demand 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).

Cross Price Elasticity of Demand or (XED)

Cross price elasticity of demand is the effect on the change in demand of one good as a result of a
change in price of related to another product. XED = (% of change in the quantity demanded of good X / %
of change in the price of good Y). If the value of XED is positive, it is a substitute good. If the value of XED is
negative, therefore it is complements good and if the value of XED is zero, the two goods are unrelated.

Price Elasticity of Supply (PES)

The measure of the responsiveness of a 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 = % change in quantity demanded of
a good or service supplied /
% change in price). 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.

If Pes > 1 = supply is price elastic

Pes = 0 = supply is perfectly inelastic
Pes = infinity = supply is perfectly elastic
Pes < 1 = supply is price inelastic

Figure 8. Elastic Supply

Figure 9. Inelastic Supply

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 Figure 11. Perfectly Elastic Supply
Figure 10. Perfectly Inelastic

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 quickly with a change in price.

To summarize what we’ve learned:

A demand curve shows the relationship between quantity demanded and price in a given market
on a graph.
The law of demand states that a higher price typically leads to a lower quantity demanded.
A supply curve shows the relationship between quantity supplied and price on a graph.
The law of supply says that a higher price typically leads to a higher quantity supplied.
The equilibrium price and equilibrium quantity occur where the supply and demand curves cross.
The equilibrium occurs where the quantity demanded is equal to the quantity supplied.
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity
supplied.
Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity
supplied will exceed the quantity demanded.
Excess supply or a surplus will exist. In either case, economic pressures will push the price toward
the equilibrium level.

Explore

Enrichment Activity 1: Check your understanding!

Directions: Please read the sentences carefully. Identify the word or phrase that is appropriate to each
item. Copy and answer in a separate sheet of paper.

1. A _____________ shows the relationship between quantity demanded and price in a given market on
a graph.
2. The __________________________ states that, higher the price, the higher the quantity supplied.
3. __________________means that a given percentage changes in price leads to an equal
percentage change in quantity demanded or supplied.
4. _______________means the effect on the change in demand of one good as a result of a change in
price of related to another product.
36
5. __________________ those goods for which the demand rises as consumer income rises.
6. ____the coefficient of the elasticity is less than 1; when an increase in price causes a smaller % fall in
demand.

Assessment 1: Elastic or Inelastic?

Directions: Please conduct a survey or observe the market in your vicinity. This can make you aware of
your environments. Give examples of goods considered as elastic and inelastic. You may work with your
parents and siblings. Copy and answer in a separate sheet of paper.

ELASTIC GOODS INELASTIC GOODS

1 1
2 2
3 3
4 4
5 5
6 6
7 7

Enrichment Activity 2: Graph Analysis

Directions: Please analyze the graph and answer the questions below. Copy and answer in a
separate sheet of paper.

When do you have a When do you have

surplus in the a shortage in the
supply of product? supply of
____________________ product?
____________________ __________________
____________________ __________________
____________________ __________________
_ __________________

Using the chart above, kindly describe the point where there is a

Surplus ____________________________________
Shortage ___________________________________
Equilibrium in price _________________________
Assessment 2: Situational Analysis

Directions: Please read the statements carefully and answer what is being asked afterwards. Copy
and answer on a separate sheet of paper.

1. In the market, the price elasticity for the demand of canned goods sold by Friendship
Grocery Store is the:
__________________________________________________________________________________
2. If demand for sacks of rice in Friendship Grocery Store is price elastic, then a
__________________________________________________________________________________
3. If the cross-price elasticity between soap bar and liquid soap commodities is 1.5 then
____________________________________________________________________________.
4. The price elasticity of demand for a certain good tends to be:
_______________________________________________________________________________.
5. If the price elasticity of supply of cup noodles is 0.60 and the price increase by 3 percent, then the
quantity supplied for cup noodles increases by how by? Show your solution.
__________________________________________________________________________________

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 Deepen

How do you respond to price elasticity?

Directions: Read and analyze the statements below and answer the questions following the problem. Write
your answer in a separate one whole sheet of paper. Your answer should be 4-6 sentences.

People have unlimited needs and wants for their personal satisfaction and because of that the prices of
products easily get changed. Everyone is affected with the new normal in the market. The prices of products
have become very expensive since the outbreak of the pandemic, not only in our locality, but in the whole
world.
If your income or the income of your family is not enough to purchase the basic commodities needed by your
family, what goods would you buy, instead? What economic or marketing strategies would you apply? How
would you respond to the price changes of these commodities? What is your long-term plan for the
sustainability of acquiring your needs and wants as an individual amidst this pandemic?

Gauge

ANSWER ME, PLEASE?

Directions: Read carefully each item. Use a separate sheet for your answers. Write only the letter of the
best answer for each test item.

1. What do you call the situation where there is an excess supply for the quantity demanded?
A. Shortage B. Surplus C. Equilibrium D. Breakeven
2. What do you call the situation where there is an excess demanded for the quantity supplied?
A. Shortage B. Surplus C. Equilibrium D. Breakeven
3. What is referred to as the willingness to buy any goods or services should be accompanied with
the ability to buy?
A. Efficient Demand B. Effective Demand C. Quality Demand D. Equilibrium on
Demand
4. When there is equilibrium, the supply and demand are usually?
A. Conflicting B. Unstable C. Balanced D. Matched
5. What is defined as the price at which the producer can sell all the units he produced in agreement
with the buyer?
A. Fixed Price B. Book Value C. Par Price D. Equilibrium Price
6. What acts as a signal for shortage and surpluses?
A. Demand B. Supply C. Price D. Goods
7. Which statement about price is NOT TRUE?
A. Prices are decided by interactions between the buyer and the seller
B. If a good is in a shortage, prices tend to rise
C. If a good is in a surplus, prices tend to fall
D. Price doesn’t really help resources from goods with little demand to goods or services
8. Which is a situation that causes price to go up due to scarcity when quantity is less than demand?
A. Shortage B. Equilibrium C. Surplus D. Price Floor
9. Which situation causes price to go down due to oversupply when the demand is less than the
quantity supplied?
A. Price Ceiling B. Surplus C. Shortage D. Equilibrium
10. What shows the interaction of the availability of a product and the desire for that product on its
price?
A. The Theory of Marginal Utility B. The Law of Demand and Supply
C. The Theory of Marginal Return D. The Law of Attraction
11. What is called as the desire of a consumer to purchase goods or services at a given price?
A. Supply B. Equilibrium C. Price Specification D. Demand
12. What measures the responsiveness of the quantity demanded or supplied of a good to a change in
its price?
A. Demand Elasticity B. Supply Elasticity C. Price Elasticity D. Marginal Elasticity
13. What happens when the percentage change in quantity demanded is greater than the percentage
change in price, and the coefficient of the elasticity is greater than 1?
A. Inelastic Supply B. Elastic Demand C. Inelastic Demand D. Elastic Supply
14. When the percentage change in demand is equal to the percentage change in price, the product is
said to have?
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 A. Unstable Elastic Demand B. Stable Elastic Demand
C. Hybrid Elastic Demand D. Unitary Elastic Demand
15. What is defined as the relationship between changes in quantity demanded for a good and a
change in real income?
A. XED B. YED C. PES D. P

REFERENCES :

Book:

Rosemary P. Dinio, PhD and George A. Villasis. 2017. Applied Economics. Manila:
Rex Book Store, Inc.
E-Sites:
https://www.youtube.com/watch?v=HHcblIxiAAk;

https://www.youtube.com/watch?v=nOlOf_KEnrw
Websites:

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
fro 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/

https://www.investopedia.com/ask/answers/012915/what-difference-between-inelasticity-and-
elasticitydemand.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://global.oup.com/uk/orc/busecon/economics/gillespie_econ4e/student/mcqs /ch05/

https://cdn.mises.org/Market%20Theory%20and%20the%20Price%20System_2.pdf? fbclid=IwAR3V-
Qdz_G-s4XWwBKvWFl_0nzSD3sJPefM_jdfcnfP9O_-fig8W6u3GBqM

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