Professional Documents
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ECON Module 3
ECON Module 3
MODULE IN
BASIC MICROECONOMICS
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Table of Contents
Introduction .......................................................................................................................... 6
C. Discussion ...................................................................................................................... 7
MARKETS ............................................................................................................................. 7
DEMAND .............................................................................................................................. 9
a. Income ................................................................................................................ 13
b. Tastes .................................................................................................................. 13
d. Expectations ....................................................................................................... 14
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DETERMINANTS OF SUPPLY ......................................................................................... 17
c. Productivity ........................................................................................................ 18
Equilibrium ....................................................................................................................... 21
Surplus: ........................................................................................................................ 21
D. References .................................................................................................................... 23
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Instruction to the User
This module will provide you wit2h an educational experience while independently
accomplishing the task at your own time and pace. It also aims to ensure that learning is
unhampered by health and other challenges. This module will serve as an alternative
learning material to that of regular classroom teaching and learning delivery. The
instructor will facilitate and explain the module to the students to achieve its expected
learning outcomes, activities and to ensure that they will learn amidst of pandemic.
Value this module for your own learning by heartily and honestly answering and doing
the exercises and activities. Time and effort were spent in the preparation of this
module in order that your learning may continue amidst this Covid-19 pandemic.
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Introduction
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A. Markets, Demand and Supply, and the Price System
B. Learning outcomes
At the end of this module, the students are expected to be able to:
D. Discussion
Important Terminologies
Market: a place or service that enables buyers and sellers to exchange goods and services
Barter: the direct exchange of goods and services without the use of money
Double coincidence of wants: the situation that exists when A has what B wants and
B has what A wants
Transaction costs: the costs involved in making an exchange (i.e. buy and sell or in
barter trading)
Relative price: the price of one good expressed in terms of the price of another good
MARKETS
The supermarket, the stock market, and the market for foreign exchange are similar in
that well-defined goods and services are exchanged.
A market maybe a specific location, such as the supermarket or the stock market, or
it may be the exchange of particular goods or services at many different locations, such as
the foreign exchange market.
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Market Definition
Barter and Money Exchanges
The purpose of markets is to facilitate the exchange of goods and services
between buyers and sellers. ln some cases money changes hands; in others only goods
and services are exchanged. The exchange-of goods and services directly, without
money, is called barter.
Most markets involve money because goods and services can be exchanged more
easily with money than without it. For example, when IBM purchases microchips from
Yakamoto of Japan, IBM and Yakamoto don't exchange goods directly. Neither firm
may have what the other wants.
The transaction costs (the costs associated with making an exchange of finding
a double coincidence wants for barter transactions are typically very high Money
reduces these transaction costs.
Relative Price
When people agree to trade or exchange, they must agree on the rate of exchange,
or the price. The price of an exchange is a relative price—the price of one good
expressed in terms of the price of another good. In a barter exchange a relative price
is established between the goods traded.
For example:
When the lawyer exchanges 2 hours of work for I hour of the plumber's work, the
relative price established is 2/1 or 2:1.
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DEMAND
Demand and supply determine the price of any good or service. To understand
how a price level is determined and why a price rises or falls, it is necessary to know
how demand and supply function.
• quantity demanded - the amount of a product that people are willing and
able to purchase at a specific price.
• Demand - the amount that people would be willing and able to purchase at
every possible price.
Demand is the quantities demanded at every price.
Thus, the statement that "the demand for U.S. white wine rose after a 300
percent tariff was applied to French white wine" means that at each price for
U.S. white wine, more people were willing and able to purchase U.S. white
wine. And the state quantity demanded of white wine fell as the price of white
wine rose" were willing and able to purchase less white wine because the price
of the wine rose.
The more formal definition of the law of demand can be broken down into five
phrases:
The second phrase (that people are willing and able to purchase)
indicates that people must not only want to purchase some good, they must be able
to purchase that good in order for their wants to be counted a membership to the
paradise Valley Country Club, but because the membership costs $35,000, she is not
able to purchase the membership. Though willing, she is not able. At a price of
$5,000, however, she is willing and able to purchase the membership.
The third phrase (during a particular period of time) points out that the
demand for any good is defined for a specific period of time. Without reference to a
time period, a demand relationship would not make any sense. For instance, the
statement that "at a price of $3 per Happy Meal, 13 million Happy Meals are
demanded" provides no useful information. Are the 13 million meals sold in one week
or one year? Think of demand as a rate of purchase at each possible price over a
period of time—2 per month, I per day, and so on.
The fourth phrase (decreases as the price of that good or service rises
and increases as the price falls) points out that price and quantity demanded
move in opposite directions; that is as the price rises, the quantity demanded falls, and
as the-price—falls, the quantity demanded rises.
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The final phrase (everything else held constant), ensures that the
determinants of demand do not change.
The table in Figure 1 is a demand schedule for video rentals (movies). It shows
the number of videos that a consumer named Bob would be willing and able to rent at
each price during the year, everything else held constant. As the rental price of the
videos gets higher relative to the prices of other goods, Bob would be willing and able
to rent fewer videos.
At the high price of (A) $50 per video, Juan indicates that he will buy only
1 video during the month. At a price of (B) $4 per video, Juan tells us that he will buy
2 videos during the month. As the price drops from $50 to $40 to $30 to $20 and to
$10, Juan is willing and able to buy more videos. At a price of (E) $10, Juan would
buy 5 videos during the month.
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price of the videos and the quantity of an individual is willing and able to purchase
(rent).
Video Purchases
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A
50
B
Price per video ($)
40
C
30
D
20
E
10
0
1 2 3 4 5
Quantity (Number of videos)
All demand curves slope down because of the law of demand: as price
falls, quantity demanded increases.
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What does it mean to say that demand changes?
For example, if Bob's Income rises, then his demand for video rentals rises.
At each and every price, the number of videos Bob is willing and able to rent each year
rises.
The demand curve shifts when income, tastes, prices of related goods,
expectations, or the number of buyers changes. Determinants of demand affects the
demand curve.
DETERMINANTS OF DEMAND
There are seven (7) items that determines a demand for a commodity or
service. These are the: (a) income; (b) individuals' (consumers') tastes and
preferences; (c) prices of related goods and services; (d) expectations; (e) number of
buyers; and (f) international effects.
a. Income
The demand for any good or service depends on income. The higher
someone's income is, the more goods and services that person can purchase at any
given price. The increase In Bob's Income causes his demand to increase.
b. Tastes
The demand for any good or service depends on individuals' tastes and
preferences. For decades, the destination of choice for college students in the East and
Midwest during spring break was Fort Lauderdale, Florida. In the early 1990s, many
students decided that Mexico offered a more exciting destination than Fort
Lauderdale. Regardless of the prices of the Fort Lauderdale and Mexican vacations,
tastes changed so that more students went to Mexico. The demand curve for the
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Mexican vacation shifted to the right while that for the Fort Lauderdale vacation
shifted to the left.
Substitute goods can be used for each other, so that as the price of one rises,
the demand for the other rises, too.
Bread and crackers, BMWs and Acuras, video rentals and theater movies,
universities and community colleges, electricity and natural gas are, more or less,
pairs of substitutes. As the price of cassette tapes rises, everything else held constant,
the demand for CDs will rise and the demand curve for CDs will shift to the right. As
the price of theater movies increases, the demand for video rentals will rise and the
demand curve for the videos will shift to the right.
Complementary goods are used together, and as the price of one rises,
the demand for the other falls.
Bread and margarine, beer and peanuts, film, shoes and socks, video rentals
and VCRs are examples of pairs of complementary goods. As the price of cameras
rises, people tend to purchase fewer cameras, but they also tend to purchase less film.
The demand curve for a complementary good shifts to the left when the price of the
related good increases.
d. Expectations
Expectations about future events can have an effect on demand today.
People make purchases today because they expect their income level to be a
certain amount in the future, or they expect the price of certain items to be higher in
the future.
For example, people invest in the stock market thinking that the price of the
shares of stocks that they will buy today will increase in the future.
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e. Number of buyers
Market demand consists of the sum of the demands of all individuals. The
more individuals there are with income to spend, the greater the market demand is
likely to be.
For example, the populations of Florida and zona are much larger during the
winter than they are during the summer. The demand for any particular good or
service in Arizona and Florida rises (the demand curve shifts to the right) during the
winter and falls (the demand curve shifts to the left) during the summer.
f. International Effects
The law of demand says the amount of a good or service that people are
willing and able to purchase during a particular period of time falls as the price rises
and rises as the price falls.
Quantity supplied is the amount of the good or service producers are willing
and able to offer for sale at a specific price, during a period of time, everything else
held constant.
According to the law of supply, as the price of a good or service rises, the
quantity supplied rises, and vice versa.
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The formal statement of the law of supply consists of five phrases:
The first phrase (The quantity of a well-defined good or service that) is the
same as the first phrase in the law of demand.
The second phrase (producers are willing and able to offer for sale)
indicates that producers must not only want to offer the product for sale but must be
able to offer the product.
The third phrase (during a particular period of time) points out that the
quantities producers will offer for sale depend on the period of time being considered.
The fourth phrase (increases as the price of the good or service increases
and decreases as the price decreases) points out that more will be supplied at
higher than at lower prices.
The final phrase (everything else held constant) ensures that the
determinants of supply do not change.
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DETERMINANTS OF SUPPLY
Factors other than the price of the good that influence supply:
a. prices of resources,
b. technology and productivity,
c. expectations of producers,
d. number of producers, and
e. the prices of related goods and services.
a. Prices of Resources
If labor costs (one of the resources used to produce video rentals) rise, higher
rental prices will be necessary to induce each store to offer as many videos as it did
before the cost of the resource rose. The higher cost of resources causes a decrease in
supply, meaning a leftward shift of the supply curve, in other words, the diagonal line
(termed as curve) on the graph, moves from its original place going to the left.
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Two interpretations of a leftward shift of the supply curve are possible:
1. One comes from comparing the old and new curves in a horizontal direction; and
2. the other comes from comparing the curves in a vertical direction. In the vertical
direction, the decrease in supply informs us that sellers want a higher price to
produce any given quantity.
c. Productivity
- is defined as the quantity of output produced per unit of resource. Improvements
in technology cause productivity increases, which lead to an increase in supply.
d. Expectations of Producers
Sellers may choose to alter the quantity offered for sale today because of a
change in expectations regarding the determinants of supply. A supply curve
illustrates the quantities that suppliers are willing and able to supply at every
possible price level.
The supply curve will shift if producers expect something to occur that will
alter the anticipated profits at every possible price level, not just a change in one
price.
For instance, the expectation that demand will decline in the future does not
lead to a shift of the supply curve; it leads instead to a decline in quantity supplied as
the new demand curve intersects the supply curve at a lower level of prices and
output.
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e. Number of Producers
When more people decide to produce a good or service, the market supply
increases. More is offered for sale at each and every price, causing a rightward shift of
the supply curve.
For instance, if the video store can offer videos or arcade games with equal
ease, an increase in the price of the arcade games could induce the store owner to
offer more arcade games and fewer videos. The supply curve of videos would then
shift to the left.
g. International Effects
Many firms purchase supplies from other nations, or even locate factories and
produce in other nations. Events in other parts of the world can influence their costs
and thus the amounts they are willing to supply. Nike purchases its shoes from
manufacturers in other parts of the world, particularly Asia. Suppose the
manufacturing costs in Malaysia are 78 Ringgit. In 1997 the exchange rate was .3150
U.S. dollars to the ringgit, so that manufacturing costs in terms of dollars were $24.57
(.3150 >< 78). In December 2000, the exchange rate had risen to .2632 U.S.
dollars to the ringgit.
With the same manufacturing costs of 78 ringgit, the dollar costs had fallen to
$20.52 (.2632 X 78). Thus, the costs to Nike had fallen over the years without any
changes in production. This means the supply curve of Nike shoes shifted out.
A change in supply occurs when the quantity supplied at each and every
price changes or there is a shift in the supply curve.
Equilibrium: the price and quantity at which quantity demanded and quantity
supply are equal
Determination of Equilibrium
The intersection point when the supply line (or curve) and the demand line (or
curve) is the equilibrium price, the only price at which the quantity demanded and
quantity supplied are the same. You can see that at any other price the quantity
demanded and quantity supplied are not the sane. These are called disequilibrium
points.
Whenever the price is greater than the equilibrium price, a surplus arises. For
example, at $4, the quantity of videos demanded is .48. and the quantity supplied is
84. Thus, at $4 per video there is a surplus of 36 videos—that is, 36 videos are not
rented.
Conversely, whenever the price is below the equilibrium price, the quantity
demanded is greater than the quantity supplied and there is a shortage. For instance,
if the price is $2 per video, consumers will want and be able to pay for more videos
than are available.
Producers who are stuck with videos sitting on the shelves getting brittle and
out of style will lower the price and reduce the quantities they are offering for rent in
order to eliminate a surplus. Conversely, producers whose shelves are empty even as
consumers demand videos will acquire more videos and raise the rental price to
eliminate a shortage. Surpluses lead to decreases in the price and the quantity
supplied and increases in the quantity demanded. Shortages lead to increases in the
price and the quantity supplied and decreases in the quantity demanded.
A shortage exists only when the quantity that people are willing and able to
purchase at a particular price is more than the quantity supplied at that price. Scarcity
occurs when more is wanted at a zero price than is available.
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Equilibrium
Equilibrium is established at the point where the quantity that suppliers are
willing and able to offer for sale is the same as the quantity that buyers are willing and
able to purchase.
Disequilibrium: a point at which quantity demanded and quantity supplied are not
equal at a particular price
Surplus: a quantity supplied that is larger than the quantity demanded at a given
price; it occurs whenever the price is greater than the equilibrium price
Shortage: a quantity supplied that is smaller than the quantity demanded at a given
price; it occurs whenever the price is less than the equilibrium price.
Price floor: a situation where the price is not allowed to decrease below a certain
level. The price is set above the equilibrium price. This creates a surplus.
Price ceiling: a situation where the price is not allowed to rise above a certain level
– the price is set below the equilibrium price. This creates a shortage.
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Activity: Quiz
Directions: Answer the following questions in not less than 50 words each. Write your
answers on a piece of paper to be submitted on our Google classroom (Module 3 Quiz)
2. Look at the determinants of demand. Give one scenario or situation where each
determinant is observable (5 points each x 7 determinants = 35 points).
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3. Look at the determinants of supply. Give one scenario or situation where each
determinant is observable (5 points each x 7 determinants = 35 points).
4. In your own words, how do you differentiate demand schedule from demand
curve? (10 points)
5. How do you think COVID-19 pandemic affects the demand and supply of
commodities in the Philippines? (10 points)
6. Make a demand schedule and a demand curve for the following data. Make sure
to label your table and graph accordingly (10 points each. One point deduction
will be given for every missing label or data).
Maria needs gift wrappers for her annual gift giving activities. In order to make
her gifts colorful, she buys gift wrappers with different designs and in different
quantity:
a. red wrappers: 50 pcs., 10 pesos each;
b. green wrappers: 60 pcs., 8 pesos each;
c. yellow wrappers: 70 pcs., 6 pesos each;
d. blue wrappers: 80 pcs., 4 pesos each; and
e. white wrappers: 90 pcs, 2 pesos each.
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F. References
Boyes, W. & Melvin, M. (2002). Micro Economics. Fifth Edition. Houghton Mifflin
Company. USA
Greenlaw, S.A. & Shapiro, D. (2018). Principles of Microeconomics, 2 nd edition.
Openstax, Rice University, Houston, Texas, USA
______. 2020. https://www.educba.com/pie-chart
______.2020. https://www.statisticshowto.com/probabilityandstatistics/des
criptivestatistics/barchart-bar-graph-examples/
______. 2020. https://www.smartdraw.com/line-graph
Mankiw, N.G. (2021). Brief Principles of Macroeconomics, 9 th edition. Cengage
Learning. USA.
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Congratulations for completing this module
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