Senior High School

Applied Economics
Quarter 1 – Module 4

Market Equilibrium
Applied Economics – Grade 12
Alternative Delivery Mode
Quarter 1 – Module 4: Market Equilibrium
Second Edition, 2021

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Applied Economics

Quarter 1 – Module 4
Market Equilibrium
 Table of Contents
Overview ………………………………………………………………………………. 2
General Instructions…………..………………….………………….………………. 2
What I Know (Pre-test) …………………………………….……….……………….. 3
What I Need To Know ………………………….………………….….……………… 4
Lesson 4 Market Equilibrium………………… ……………………………………. 4

What’s In…………………………………………………………………………. 4
What’s New – Activity 1 (Show Me the Plot 1)………………………………. 5
What Is It? ………………………………………………………………………. 5
What’s More – Activity 2 (Find My Match)…………………………………. 10
What I Have Learned – Activity 3 (Sum Me UP)…………………………….. 11
What I Can Do? - Activity 4 (Show Me the Plot 2)…………………………… 11
Additional Activity - Activity 5 (Making it Count!)……………………………. 12

Assessment ………………………………………………………………..…………… 12

Answer Key …………………………………………………………………..…………. 13

References ..…………………………………………………………………………….. 14
 OVERVIEW
Dear Teachers and Learners! The writers welcome you all to this Applied Economics
Module. This material tries to bring you to the basic principles of applied economics, and its
application to contemporary economic issues facing the Filipino entrepreneur such as prices
of commodities, minimum wage, rent, and taxes. It also covers an analysis of industries for
identification of potential business opportunities. The main output of the course is the
preparation of a socioeconomic impact study of a business venture.

As your partner in learning, we hope that you will not miss out every detail that we the
writers would like you to learn in this material. Do enjoy it as there are challenging and
interesting activities inside this learning module. Congratulations in advance for this will make
you the master of your own learning.

GENERAL INSTRUCTIONS

For the learners: For the teacher:

To be guided in achieving the To facilitate and ensure the students’
objectives of this module, do the learning from this module, you are
following: encouraged to do the following:

1. Read and follow instructions 1. Clearly communicate learning

carefully.
2. Write all your ANSWERS in your
Activity Book.
3. Answer the pretest before going
through the lessons.
4. Take note and record points for
clarification.
5. Compare your answers against
the key to answers found at the
end of the modules.
6. Do the activities and fully
understand each lesson.
7. Answer the self-check to monitor
what you learned in each lesson.
8. Answer the posttest after you
have gone over all the lessons.
competencies and objectives
2. Motivate through applications
and connections to real life.
3. Give applications of the theory
4. Discuss worked-out examples
5. Give time for hands-on
unguided classroom work and
discovery
6. Use formative assessment to
give feedback
7. Introduce extensions or
generalizations of concepts
8. Engage in reflection questions
9. Encourage analysis through
higher order thinking prompts
10. Provide alternative formats for
student work
11. Remind learners to write their
answers in their Philosophy
Activity Notebook

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 What I Know

PRE-TEST

Directions. Write TRUE in the space provided if the statement is correct and FALSE
if incorrect.

_______ 1. A market is a mechanism of interaction between buyers and sellers for

trade or exchange. The consumer sells and the seller buys.

_______ 2. The market equilibrium for a commodity is determined by the balancing

forces of the demand and supply of the commodity.

_______ 3. Another term used for equilibrium is stable.

_______ 4. The consumers’ income does not influence the demand for goods and
services. The increse in demand due to an increase in income is not
experienced in the economy.

_______ 5. When the income of the consumer increases it can shift the demand
curve upward to the right representing increase in demand.

_______ 6. In a market equilibrium, a higher price will result to constant demand.

_______ 7. The ceteris paribus assumes that price factor is not constant.

_______ 8. The law of supply and demand states that 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.

_______ 9. Surplus is an excess of supply over the demand for a good.

_______ 10. Price ceiling is a minimum limit beyond which the price of a commodity
is not allowed to fall.

Great job!
Later we will see if your answers are correct by reading the rest of this modu

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 Lesson Market Equilibrium
4

What I Need To Know

Objectives: After going through this module, the learners should be able to:

1. Define market equilibrium;

2. Explain market equilibrium through illustrations and examples; and

3. Identify and explain equilibrium price and equilibrium quantity.

What’s In

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.

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 What’s New
Activity 1. Show Me the Plot 1

Directions: Plot the following hypothetical market demand and supply schedules for
commodity Y and explain the graph. Do this in a graphing paper.

Quantity Supplied Price Quantity Demanded

5 P 6.00 9
6 P 7.00 8
7 P 8.00 7
8 P 9.00 6
9 P10.00 5
10 P11.00 4

What Is It?

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

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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

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.

In Figure 3, an illustration through graph of demand and supply can be seen.

Figure 3. Equilibrium Price and Equilibrium Quantity Established By Interaction

Between Demand and Supply

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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.

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

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 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:

1. 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.

Generally, this policy is resorted to in order to prevent bigger losses on the part
of the producers. Floor price is a form of assistance to producers by the government
for them to survive in their business.

2. 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.

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 = Q S (3)

Take note that in the said equations, there are three unknown variables: Q D, 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 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

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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 = QS is 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.

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 What’s More

Activity 2. Find My Match

Directions: Match the items in Column A with Column B.

Column A Column B

1. General agreement of the buyer and the a. Floor price

seller in the exchange of goods and services
at a particular quantity.

2. The legal minimum price imposed by the b. Price control

government on certain goods and services.

3. A condition in the market where the c. Adam Smith

quantity supplied is more than the quantity
demanded.

4. British economist who introduced a kind of d. Market equilibrium

pricing scheme by combining the law of
demand and the law of supply.

5. The quantity of a commodity which buyers e. Shortage

will buy at a given time and place will vary
inversely with the price.

6. The legal maximum price imposed by the f. Surplus

government.

1. This means that as price increases g. Alfred Marshall

quantity supplied also increases; and as price
decreases, quantity supplied also decreases.

8. The specification by the government of h. Price ceiling

minimum or maximum prices for certain
goods and services.
9. Basically a condition in the market in which i. Demand
quantity demanded is higher than quantity
supplied at a given price.

10. It means all other things equal or j. Ceteris Paribus

constant.

k. Law of Supply

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 What I Have Learned?
Activity 3. Sum Me UP

Based on the lesson, I have realized that the law of supply and
demand states
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________

What I Can Do?

Activity 4. Show Me the Plot 2
Directions: Plot the following hypothetical market demand and supply schedules for
commodity X in a graphing paper.

Quantity Demanded Price Quantity Supplied

(Units) (Peso) (Units)
150 P 30.00 900
300 25.00 800
350 20.00 700
600 15.00 600
800 10.00 400
1000 5.00 200

1. What is the equilibrium price? Equilibrium quantity? _______________

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 Additional Activity
Activity 5. Making It Count!
In our lesson about market equilibrium in which both buyers and sellers have mutual
agreement, produce a thirty (30) seconds television advertisement/commercial that
shows consumer satisfaction in terms of quality and price of certain product.

Assessment

Computation

Directions: Solve for Equilibrium PE and QE. Show your Solutions in Simplest Form.

1. QD = 2333 - 105P

QS = 599 + 2515P

2. Assume that the demand function is equal to:

QD = 5,000 - 1,000 P

Where the price range is P1.00 to P5.00, derive the demand schedule
economics.

Price QD

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 13
PRICE
Eq = 600 Ep = P15.00
QUANTITY
ACTIVITY 4. SHOW ME THE PLOT 2
PRICE
QUANTITY
ACTIVITY 1. SHOW ME THE PLOT 1
1. D 6. H
1. TRUE 6. FALSE
2. A 7. K
2. TRUE 7. FALSE
3. F 8. B
3. FALSE 8. TRUE
4. G 9. E
4. FALSE 9. TRUE
5. I 10. J
5. TRUE 10. FALSE
ACTIVITY 2. FIND MY MATCH PRE-TEST
Answer Key
ASSESSMENT

1. PE = 0.662 QD = 2264 QS = 2264

2. Price QD

P1.00 4,000

P2.00 3,000

P3.00 2,000

P4.00 1,000

P5.00 0

References

Dinio, Rosemary P. and George A. Villasis. Applied Economics. Manila,

Philippines. Rex Book Store, 2017.
Leańo, Roman Jr. D. Fundamentals of Economics with Agrarian Reform,
Taxation and Cooperatives (A Modular Approach). Manila, Philippines.
Mindshapers Co., Inc. 2012.

Pagoso, Cristobal M. et al. Introductory Microeconomics. Manila, Philippines.

Rex Book Store, 2006.
Villegas, Bernardo M. Basic Economics. Manila, Philippines. Center for
Research and Communication Foundation, Inc., 2010.

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