Module 04: Implications of Market Pricing in Making Economic Decisions

I. LEARNING COMPETENCIES
1. Determine the implications of market pricing on economic decision-making.
2. Explore the elasticity of demand and supply.
3. Solve problems on price elasticity of demand and supply.
4. Value the implications of market pricing in decision making.

II. LESSON PRESENTATION

Motivation
Read the following article on Demand, Supply and Elasticity of Clean Water in the
Philippines. This will help you understand better our new lesson.

The Marketing Price System

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.
For example, 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 by them want to
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).

Image 4.1. Equilibrium Characteristics (Source: DepEd Applied Economics Module by Dela Cruz et al.)

Price System in a Market Economy: Its Characteristics

The prices of goods that we encounter everyday to the things we buy plays 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 tables 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
.

Image 4.2. Price System Characteristics (Source: DepEd Applied Economics Module by Dela Cruz et al.)
Prices Are Market Driven

Image 4.3. Price Are Market Driven (Source: DepEd Applied Economics Module by Dela Cruz et al.)

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

Image 4.4. The Law of Demand (Source: DepEd Applied Economics Module by Dela Cruz et al.)
The Law of Supply

Image 4.5. The Law of Supply (Source: DepEd Applied Economics Module by Dela Cruz et al.)

How Do Supply and Demand Create an Equilibrium Price?

Image 4.6. Equilibrium Price (Source: DepEd Applied Economics Module by Dela Cruz et al.)

Price Elasticity of Demand and Supply

What is going to the woman in the picture? Write your insight on
the blanks provided.

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 c) inelastic or
not very responsive. (Source: Investopedia)
Effects of Change in Demand and Supply
Elastic Demand or Supply Curve - indicates that quantity demanded or supplied respond to
price changes in a 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).
Formula:
Price Elasticity of Demand (PED) = % Change in Quantity Demanded / % Change in Price

Image 4.7. Price Elasticity of Demand (Source: DepEd Applied Economics Module by Dela Cruz et al.)
a) 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.
Example real estate- housing - There 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.
b) 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.
Example 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, aircon, iPhone, Cigarettes
c) 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
d) Perfectly Elastic - a small percentage change in price brings about a change in quantity
demanded from zero to infinity.
Perfectly elastic - the coefficient of elasticity is equal to infinity (∞)
e) Perfectly Inelastic - the PED is =0 any change in price will not have any effect on the demand
of the product.
Perfectly inelastic - the percentage change in demand will be equal to zero (0)

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

II. 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.
Formula:
YED = % Change in Demand / % 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.
Example (the demand for units of air-conditioning increases as the income of the consumer
increases and the demand for electric fan decreases)
Normal good: units of air-conditioning; Inferior good: electric fan
The Inferior Goods - the demand decreases when consumer income rises; demand increases
when consumer income decreases)
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)
III. 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.
Formula:
XED = % Change in Quantity Demanded of Good X / % Change in Price of Good Y
Interpretation:
If the value of XED is positive - substitute goods
If the value of XED is negative - complements goods
If the value of XED is zero - two goods are unrelated

IV. Price Elasticity of Supply (PES)

The measure of the responsiveness of quantity to a change in price. It is the percentage
change in supply as compared to the percentage change in price of a commodity.
Formula:
PES = % Change in Quantity Supplied / % Change in Price
Interpretation:
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

Image 4.8. Price Elasticity of Supply (Source: DepEd Applied Economics Module by Dela Cruz et al.)
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.

III. SUMMARY OF LESSON

 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.

IV. ACTIVITIES
A. Problem Solving and Critical Thinking Analysis
Directions: Analyze the problems carefully. Answer the problems and present your solutions.
Interpret the results. (5 pts. each)
1) If there are 10 bottles of water and there are 20 students who want to drink these bottles of
water, there will be only 10 students whose demands are met while the others will not.
Analysis: We can conclude that there is _____________________ in the supply.
2. If price of canned good in the grocery store increases by 8% and the quantity demanded
decreases by 12%, what is price elasticity of demand? Is it elastic, inelastic or unitary elastic?
Solution:
Interpretation: This means it is ____________________________________
3. If a 4% increase in price of 1 pack of bread leads to an increase in the quantity supplied of 8%
describe the price elasticity.
Solution:

Analysis of Price elasticity: ________________________________________

B. Solving Problem on Price Elasticity

Directions: Analyze each problem carefully. Answer the questions below.
1. Suppose the price of ethyl alcohol rises by 20 %. As a result, the demand for substitute hand
soap rises by 10%. (10 pts.)
A) What is the cross-elasticity of demand for hand soap with respect to the price of ethyl
alcohol? Encircle your answer. Present your solution.
a) + 2
b) + 0.5
c) - 0.5
d) – 2

B) Analysis on price elasticity _________________________________________

C) Interpret your analysis on the kind of good__________________________
2. If a 20% decrease in the price of international calls lead to a 35% increase in the quantity of
calls demanded, we can conclude that the demand for phone calls is: (10 pts.)
A) Solution:

B) Analysis on price elasticity __________________________________

V. ENRICHMENT

HOW DO YOU RESPOND TO PRICE ELASTICITY?

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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? Answer in 5-10 sentences. (10 pts.; 7 - Quality of Ideas, 3 - Organization of Ideas)

VI. EVALUATION
A. Identification
Direction: Read the sentences carefully. Identify the word or phrase that is appropriate to each
item. (2 pts. each)
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.
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.

B. True or False
Direction: Read the sentences carefully. Write TRUE if the statement is correct and FALSE if the
statement is incorrect. (2 pts. each)
1. Elasticity of demand refers to the change in demand when there is a change in
another factor such as price or income
2. If demand for a good or service is static even when the price changes, demand is said
to be inelastic
3. Examples of elastic goods include gasoline, while inelastic goods are items like canned
goods and vitamin c tablets
4. The law of demand states that “elasticity shows how much a good or service is
demanded relative to its movement in price”.
5. Inelastic demand is when a demanded quantity for masks changes by a greater
percentage compared to its percentage change in price
6. The opposite of a market economy is a planned economy, where investment and
production decisions are decided by the government.
7. Unit elastic is when a percentage change in demand equals the price.
8. A mango fruit with an elastic demand gets more sales when its price drops slightly.
When its price goes up, it stays longer in the box.
9. The demand curve shows how quantity demanded for apple responds to price
changes. The flatter the curve, the more elastic is the demand for an apple.
10. The midpoint elasticity is greater than 1.

C. Enumeration on Price Elasticity of Goods

Directions: Please conduct a survey or observe the market in your vicinity. This can make you
become aware of your environment. Give examples of goods considered as elastic and inelastic.
You may work with your parents and siblings. (1 pt. each)

VII. RESOURCES
Dela Cruz et al. DepEd Applied Economics Module. Division of City Schools Manila.
https://redmonteconomics.weebly.com/blog/demand-supply-and-elasticity-of-clean-water-in-the-philippines
https://www.investopedia.com/terms/d/demand.asp
https://study.com/academy/lesson/characteristics-of-the-price-system-in-a-market-economy.html
https://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html
https://www.ducksters.com/money/supply_and_demand.php
https://www.investopedia.com/terms/l/law-of-supply-demand.asp
https://www.thoughtco.com/calculating-economic-equilibrium-1147698
https://www.intelligenteconomist.com/price-elasticity-of-supply
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