11 SENIOR HIGH SCHOOL

APPLIED
ECONOMICS
Quarter 3 – Module 4
The Implications of Market Pricing
on Economic Decision-Making
Applied Economics – Grade 11
Alternative Delivery Mode
Quarter 3 – Module 4: The Implications of Market Pricing on Economic
Decision-Making
First Edition, 2020

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 11

Applied
Economics
Quarter 3 – Module 4
The Implications
of Market Pricing
on Economic Decision-Making
Introductory Message
For the facilitator:

Welcome to the Grade Level 11 Applied Economics Alternative Delivery Mode

(ADM) Module on The Implications of Market Pricing on Economic Decision-
Making!

This module was collaboratively designed, developed and reviewed by

educators both from public and private institutions to assist you, the
teacher or facilitator in helping the learners meet the standards set by the K
to 12 Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and
independent learning activities at their own pace and time. Furthermore,
this also aims to help learners acquire the needed 21st century skills while
taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing
them to manage their own learning. Furthermore, you are expected to
encourage and assist the learners as they do the tasks included in the
module.

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For the learner:

Welcome to the Grade Level 11 Applied Economics Alternative Delivery Mode

(ADM) Module on The Implications of Market Pricing on Economic Decision-
Making!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and
time. You will be enabled to process the contents of the learning resource
while being an active learner.

This module has the following parts and corresponding icons:

This will give you an idea of the skills or

What I Need to Know competencies you are expected to learn in
the module.

This part includes an activity that aims to

check what you already know about the
What I Know
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.
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or a situation.
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and understand new concepts and skills.

This comprises activities for independent

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skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.
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what you learned from the lesson.
This section provides an activity which will
What I Can Do help you transfer your new knowledge or
skill into real life situations or concerns.

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 This is a task which aims to evaluate your
Assessment level of mastery in achieving the learning
competency.
In this portion, another activity will be given
Additional Activities to you to enrich your knowledge or skill of
the lesson learned.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

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1. Use the module with care. Do not put unnecessary mark/s on any
part of the module. Use a separate sheet of paper in answering the
exercises.
2. Don’t forget to answer What I Know before moving on to the other
activities included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through
with it.
If you encounter any difficulty in answering the tasks in this module, do
not hesitate to consult your teacher or facilitator. Always bear in mind
that you are not alone.

We hope that through this material, you will experience meaningful

learning and gain deep understanding of the relevant competencies. You
can do it!

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 I

You participate in the market economy every time you buy or sell something. Markets
allow you to buy or sell for a price. Price is the amount you pay if you buy a good and the
amount you receive if you sell it. As a buyer, or demander, you like lower prices. As a seller,
or supplier, you like higher prices. How are these differing views about the price sorted out?

LEARNING COMPETENCY:

▪ Determine the Implications of Market Pricing on Economic

Decision-Making (NO CODE).

OBJECTIVES:

K: Analyze how Market Price is determined and its effect in

I
the economic decision-making;

S: Describe the role of Price in the economic market;

A: Relate to real life situations the effect of knowing

the market price in making economic decisions.

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 I

Pre-assessment:
I. Directions: Identify what is asked in each item. Write the letter of the correct answer in
your notebook.
1. When the quantity consumers are willing and able to buy equals the quantity that
producers are willing and able to sell.
A. Surplus B. Shortage
C. Market Equilibrium D. None of these are correct
2. At a given price, the amount by which quantity supplied exceeds quantity demanded; it
usually forces the price down.
A. Surplus B. Shortage
C. Market Equilibrium D. None of these are correct
3. At a given price, the amount by which quantity demanded exceeds quantity supplied; it
usually forces the price up.
A. Surplus B. Shortage
C. Market Equilibrium D. None of these are correct
4. A person who sells a merchandise or renders a service.
A. Buyer B. Laborer
C. Capitalist D. Seller
5. A person who purchases a merchandise or acquiring a service.
A. Buyer B. Laborer
C. Capitalist D. Seller

II. Directions: Draw the table in your notebook and supply the last 2 columns whether the
following situations result in the following: Surplus or Shortage, Effect on Price (Falls,
Rises or Remains the same)

Price (Pesos) Quantity Quantity Surplus or Effect on Price

Demanded Supplied Shortage
700 40 100
600 50 80
500 60 60
400 70 40
300 80 20

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 ’s In

Market Equilibrium
When the quantity that consumers are willing and able to buy equals the quantity that
producers are willing and able to sell, that market reaches market equilibrium. In
equilibrium, the independent plans of buyers and sellers exactly match, and there is no
incentive for change. Therefore, market forces exert no further pressure to change price or
quantity.

A Surplus Forces the Price Down

To understand how a particular market reaches equilibrium, you need to consider
demand and supply as shown in the next Figure that shows the market for pizza. What if the
price is initially set at P120? At that price, producers supply 24 million pizzas per week, but
consumers demand only 14 million, resulting in an excess quantity supplied, or a surplus of
10 million pizzas per week. This surplus means that suppliers are stuck with 10 million pizzas
they cannot sell at P120.

Suppliers desire to eliminate the surplus puts downward pressure on the price. As the
price falls, producers reduce their quantity supplied and consumers increase their quantity
demanded. As long as quantity supplied exceeds quantity demanded, the surplus forces the
price lower.

Market equilibrium occurs at the price at which the quantity demanded by consumers
is equal to the quantity supplied by producers. At prices, above the equilibrium price, the
quantity supplied exceeds the quantity demanded. At these prices there is a surplus, which
puts downward pressure on the price. At prices below equilibrium, quantity demanded
exceeds quantity supplied. The resulting shortage puts upward pressure on the price.

Task 1
Table 1. Market Schedules (Millions of Pizzas Per Week)
Price per Pizza Quantity Quantity Surplus or Effect on Price
(pesos) Demanded Supplied Shortage
150 8 28 Surplus 20 Falls
120 14 24 Surplus 10 Falls
90 20 20 Equilibrium Remains the
same
60 26 16 Shortage 10 Rises
30 32 12 Shortage 20 Rises

Based on the table above, Draw a graph in your notebook to show the Pizzas per week (in
millions) vs Price per Pizza (In pesos). Label where is the: Market Equilibrium, Surplus and
Shortage in the graph.

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 ’s New

What if the initial price of pizza is P60? Figure 1 shows that at that price, consumers
demand 26 million pizzas per week, but producers supply only 16 million. This results in an
excess quantity demanded, or a shortage, of 10 million pizzas per week. Consumers compete
to buy the product, which is in short supply. Competition among buyers creates market
pressure for a higher price. The arrow pointing up in the graph represents this pressure. As
the price rises, producers increase their quantity supplied and consumers reduce their quantity
demanded. The price continues to rise as long as quantity demanded exceeds quantity
supplied.

Thus, a surplus put downward pressure on the price, and a shortage puts upward
pressure. As long as quantity demanded and quantity supplied differ, this difference forces a
price change. Note that a shortage or a surplus always measured at a particular price. There is
no such thing as a general shortage or a general surplus.

Answer the question briefly.

1. How price can affect consumer behavior?

is It

Market Forces Lead to Equilibrium Price and Quantity

In Table 1, the demand and supply curves intersect at the equilibrium point. The
equilibrium price, which equates quantity demanded with quantity supplied, is P90 per
pizza. The equilibrium quantity is 20 million per week. The demand and supply curves
form an X at the intersection. The equilibrium point is found where “X” marks the spot. At
that price and quantity, the market is said to clear. That is why the equilibrium price is also
called the market-clearing price. Because there is no shortage and no surplus, there is no
longer pressure for the price to change. The equilibrium price remains at P90 unless there is
some change that shifts the demand or supply curve.

A market finds equilibrium through the independent and voluntary actions of

thousands, or even millions, of buyers and sellers. In one sense, the market is personal
because each consumer and each producer makes a personal decision about how much to buy
or sell at a given price. In another sense, the market is impersonal because it requires no

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conscious communication or coordination among consumers or producers. The price does all
the talking. The independent decisions of many individual buyers or many individual sellers
cause the price to reach equilibrium in competition markets.

Prices reflect relative scarcity. For example, in an airline company seat sale, one-
way flights from Manila to Bacolod are P500 more expensive than return flights. Why the
difference? Many more people from Manila want to go to Bacolod than vice-versa.

Market Exchange

To repeat, buyers prefer a lower price and sellers prefer a higher price. Thus, buyers
and sellers have different views about the price of a particular good. Markets help sort out
those differences. Markets answer the questions what to produce, how to produce it, and for
whom to produce it.

Adam Smith’s Invisible Hand

Market prices guide resources to their most productive uses and channel goods to
those consumers who value them the most. Market prices transmit information about relative
scarcity and provide incentives to producers and consumers. Markets also distribute earnings
among resource owners.

The coordination that occurs through markets takes place because of what Adam
Smith called the “invisible hand” or market competition. No individual or small group
coordinates market activities. Rather, it is the voluntary choices of many buyers and sellers
responding only to their individual incentives. Although each individual pursues his or her
own self-interest, the “invisible hand” of competition promotes the general welfare.

Market Exchange is Voluntary

Your experience with competition probably comes from sports and games, where one
side wins and the other loses. Market exchange is not like that. Market exchange is a
voluntary activity in which both sides of the market expect to benefit and usually do. Neither
buyers nor sellers would participate in the market unless they are expected to become better
off. A buyer values the product purchases at least as much as the money paid for it. A seller
values the money received at least as much as the product sold.

For example, a consumer pays P90 for a pizza only if he or she expects the marginal
benefit of that pizza to be worth at least the best alternative use of that P90. The producer
supplies a pizza for P90 only if he or she expects its marginal cost to be no more than P90.
Again, voluntary exchange usually makes both sides better off. Voluntary exchange is
typically win-win.
Role of Prices
Market prices serve as a signal to buyers and sellers about the relative scarcity of the
good. A higher price encourages consumers to find substitutes for good or even go without it.

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A higher price also encourages producers to allocate more resources to the production of this
good and fewer resources to the production of other goods.
In short, prices help people recognize market opportunities to make better choices as
consumers as producers. The beneficial effects or market exchange include trade between
people or organizations in different parts of the country, and among people and organizations
in different countries.

Markets Reduce Transaction Costs

A market sorts out the conflicting views of price between demanders and suppliers.
Markets also reduce transaction costs, or the costs of time and information needed to carry
out market exchange. The higher the transaction costs, the less likely it is that an exchange
takes place. For example, the car business needs areas of land so car dealers locate on the
outskirts of town, where land is cheaper. Dealers also tend to locate near each other because,
grouped together, they become a more attractive destination for car buyers. Any dealer who
makes the mistake of locating away from the others will miss out on a lot of business from
comparison shoppers. In this way, car dealers reduce the transaction costs of car shopping.
This is also why stores locate together downtown in suburban malls. More generally,
markets reduce transaction costs.

Factors that impact market price

Although the principle of market price ultimately depends on supply and demand,
there are a number of factors that can also affect market price.
Some things that can affect market price are controllable, while others are out of your
hands. Factors that impact market price include:
• Natural disasters
• World events
• Amount of wages paid to workers
• Decrease or increase in employment
• Pricing of luxury items versus necessities

Natural disasters or other world events (e.g., wars or attacks) can limit supplies to
manufacturers. Decreases in necessary supplies can slow down the production of goods or a
business’s ability to offer services. And if there’s a deficit in products or services, demand
can increase due to limitations.
Employment and the wages paid to workers can also affect the equilibrium price. A decrease
in employment or wages may cause consumers to penny pinch. And, consumers might not
afford to pay the same prices as before.
Likewise, an increase in jobs and wages results in consumers being able to pay more,
allowing for higher market prices for goods and services.
Market prices of luxury items have different equilibriums than basic necessities, like food.
And, luxury products and services break the basic rules of supply and demand. Although the
demand for luxury items is smaller, the prices are almost always high. Rarity does not impact
the price of the luxury item. Instead, consumers are willing to pay more for name brands and
quality.
The price of goods plays a crucial role in determining an efficient distribution of resources in
a market system.

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 • 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 which people value more.
• Adam Smith talked about ‘the invisible hand‘ of the market. This ‘invisible hand’
relies on the fluctuation of prices to shift resources to where it is needed.

How price affects consumer behavior

In the short-term, demand is very price inelastic. However, the higher price of oil also has an
effect on consumer behavior in the long-term.
• Consumers look for substitutes or other goods that can replace n the long run.
Therefore, over time, demand falls.
• Over time, people may start recycling or alternative ways to reduce the usage.
• Responding to these changing consumer preferences, firms will develop other
products- enabling more alternatives leads to less demand in long-term.

Limitations of price in the economy

Although the price has an important role in the economy, it has some limitations.
• In the presence of externalities, the price of goods does not reflect the true social
cost / social benefit. Therefore, a free market can cause under or over-consumption.
• Inequality. Price helps resources shift to areas of greatest demand, but it could lead to
an inequitable distribution of resources. For example, in a draught, the market price of
water could rise so much, people don’t have enough to drink. In this scenario, it may
be more appropriate to introduce a scheme of rationing – to ensure a fair distribution,
rather than efficient distribution.
• Monopoly. In a monopoly, high prices may not reflect shortages, but reflect
monopoly power and this leads to allocative inefficiency.

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 ’s More

1. Give some advantages of using prices to distribute economic products?

2. Explain the difficulties of allocating goods and services without a price system.
3. From your own experience, describe a situation that required rationing. What
criteria were used to allocate the good or service, and what were some of the
problems with each criteria?

I Have Learned

Task 2

Directions: Fill in the blanks. Write your answers in your activity notebook.
1. _____________________ happens when the quantity consumers are willing and able
to buy equals the quantity producers are willing and able to sell.
2. A __________ happens when at a given price, the amount by which quantity supplied
exceeds quantity demanded; usually forces the price down.
3. ____________ happens when at a given price, the amount by which quantity
demanded exceeds quantity supplied; usually forces the price up.
4. ___________ sends signals and provide incentives to buyers and sellers. When supply
or demand changes, market prices adjust, affecting incentives.
5. ____________________ is the costs of time and information needed to carry out
market exchange.

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 I Can Do

Task 3

Think Critically: Answer the following questions.

1. How would Mrs. Joson, owner of a dress shop, react if she found she had 30 extra
prom dresses that she could not sell at the current market price?
2. How would the owners of a nursery react if hundreds of customers wanted to buy
cactus plants at the current price of P150 when the nursery has 25 plants to sell?
3. How is it possible for both you and the owner of a fast-food restaurant to benefit when
you choose to buy a hamburger for P197?
4. What are the transaction costs involved in purchasing a pair of shoes at your local
mall?
5. What is reasonable to conclude about the quantity of a product that is demanded and
the quantity that is supplied if the price of the product does not change over many
months?

Level of General Approach Comprehension

Achievement
Exemplary •Addresses the questions. •Demonstrates an accurate and complete
(5 pts) •States a relevant, justifiable understanding of the questions.
answer. •Backs conclusions with data and
•Presents arguments in a logical warrants.
order. •Uses 2 or more ideas, examples and/or
arguments that support the answer.
Adequate •Does not address the questions •Demonstrates accurate but only adequate
(3 pts) explicitly, although does so understanding of questions because does
tangentially. not back conclusions with warrants and
•States a relevant and justifiable data.
answer. •Uses only one idea to support the answer.
•Presents arguments in a logical •Less thorough than above.
order.
Needs •Does not address the questions. •Does not demonstrate accurate
Improvement •States no relevant answers. understanding of the questions.
(1 pts) •Indicates misconceptions. •Does not provide evidence to support
•Is not clearly or logically their answer to the questions.
organized.
No answer (0
pts)

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Multiple Choice.
I. Directions: Identify what is asked in each item. Write the letter of the correct answer in
your notebook.
1. A local grocery store orders 200 cases of Soda Cola each week and sells them at a price of
P6.00 per case. At the end of the first week, they have only sold 160 cases. What economic
situation is the grocery store facing and what will have to happen to price in order for
equilibrium to be attained?
A. surplus; price will rise.
B. surplus; price will fall.
C. shortage; price will rise.
D. shortage; price will fall.
E. nothing since the market is in equilibrium.
2. Which of the following can lead to an increase in the supply for good X?
A. a decrease in the number of sellers of good X.
B. an increase in the price of inputs used to make good X.
C. an increase in consumers' income, assuming good X is a normal.
D. an improvement in technology used in production of good X.
D. none of the above
3. An increase in the price of electricity will:

A. increase the demand for kerosene heaters.

B. increase the demand for light bulbs.
C. increase the demand for stereos.
D. increase the demand for TVs.
4. Which of the following events will cause an increase in the market demand for Ganner (a
brand of beer)?
A. A decrease in the price of Ganner.
B. An increase in the price of Hyattkien (another brand of beer).
C. An increase in the price of Snappy peanuts (a complementary good).
D. An increase in income, if Ganner is an inferior good.
E. None of the above will cause an increase in demand.
5. An decrease in the price of flour will:

A. decrease the demand for sugar.

B. increase the demand for bread.
C. increase the price for bread.
D. decrease the price for bread.

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II. The following table gives the daily supply and demand for hot dogs at a sporting event.
Answer the following questions below:

Price Quantity demanded Quantity supplied

210 800 7,200

180 1,600 4,800

160 2,400 2,400

140 3,200 800

120 4,100 200

a. What is the equilibrium price of hot dog?

b. If the organizers of the sporting event decide to set the price at P180, how many hot
dogs will be sold?

Complete the following statements. Write your statements in your activity notebook.

1. As an ABM student, I have learned _______________________.

2. As an ABM student, it is very important for us to learn _______________________.
3. Using the knowledge I have learned in this lesson; I will be able
to._______________________.

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 16
What I Know
I.
1. C
2. A
3. B
4. D
5. A
II.
1. Surplus, Falls
2. Surplus, Falls
3. Equilibrium, Remains the same
4. Shortage, Rises
5. Shortage, Rises
What I Have Learned
1. Market Equilibrium
2. Surplus
3. Shortage
4. Prices
5. Transaction cost
What I Can Do
(Answers may vary)
What’s New
1. ( Answers may vary)
What’s More
(Answers may vary)
Assessment
I.
1. b
2. d
3. a
4. b
5. d
II.
1. P160 is the equilibrium price.
2. Only 1,600 hot dogs will be sold.
3. False, The expression "normal good" means that when a person's income increases, the consumption of that good also
increases.
References

Supply, Demand, And Market Equilibrium. Accessed: January 9, 2021

[https://www.washburn.edu/sobu/dnizovtsev/200P03_SD1ans.html]

Engage Learning 2017. Applied Economics: An Introduction, Quezon City: Abiva Publishing
House Inc.

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