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INTERACTIVE MODULE
FOR

APPLIED ECONOMICS
 ABM MODULE

ANN MARGARET A.
DELA FUENTE
Educ’l Attainment: BS in Accounting
Technology (BSAcT)
Subject: Applied Economics
Topic: Application of Supply and Demand

TNT: 09460677235

Margaret Dela Fuente

[email protected]

Module Content:
Lesson 2.1: Basic Principles of Demand and Supply
Lesson 1.3: Demand and Supply in Relation to the Prices of Basic
Commodities

LEARNING OUTCOME/COMPETENCIES
The learners…
 Explain the law of supply and demand, and how equilibrium price and
quality are determined.
 Discuss and explain factors affecting demand and supply
 Compare the prices of commodities and analyze the impact on consumers
 Explain market structures (perfect competition, monopoly, oligopoly, and
monopolistic competition)
 Analyze the effects of contemporary issues such as migration, fluctuations in
the exchange rate, oil price increases, unemployment, peace and order, etc.
on the purchasing power of the people.
 Introduction to Applied Economics

I. Pretest (True of False)

Direction: Write the correct answer on a Long bond paper/Yellow pad paper.

__________1. Supply and demand form the least fundamental concepts of economics.
__________2. Substitution effect is felt when a change in the price of a good changes demand due to
alternative consumption of substitute goods.
__________3. In the demand function D = f (P, T, Y, E, PR, NC), Y stands for Income.
__________4. The good market is the most common type of market because it is where we
buy consumers goods
__________5. Taste is not one of the factors on the increase of demand.
__________6. Supply is the willingness of a consumer to buy a commodity at a given price.
__________7. Supply refers to the quantity of goods that a seller is willing to offer for sale.
__________8. Profit Effect is felt when a change in the price of a good changes consumer’s real
income or purchasing power, which is the capacity to buy with a given income.
__________9. As the price increases, the quantity demanded for that product decreases, is
called the Law of demand.
__________10. Prices of related goods as substitute or complements also determine demand.
__________11. The number of suppliers is also an important determinant that will affect
market demand for a good.
__________12. As the price increases, the quantity supplied of that product also increases, is
called Law of supply.
__________13. The use of improved technology in the production of a good will result in the
increased supply of the good.
__________14. Demand and Supply are separable to Price.
__________15. Studying the law of demand and supply is not important.

II. Class Activity

Direction: Kindly write your answer in a long bond paper or Yellow Pad paper.

1. In your own words, define the following words:

a. Demand
b. Supply
c. Market

III. Instruction on the Proper use of this module:

1. Follow closely the instruction in every activity.
2. Be honest in answering and checking your exercises.
3. Answer the pre-test before going over the materials. This is to find out what you already
know.
4. Answer the exercises encountered at the end of every lesson.
5. Review the lesson that you think you failed to understand.
6. Seek assistance from your teacher if you need help.
IV. Introduction
Supply and demand form the most fundamental concepts of economics. Whether
you are an academic, farmer, pharmaceutical manufacturer, or simply a consumer, the basic
premise of supply and demand equilibrium is integrated into your daily actions. Only after
understanding the basics of these models can the more complicated aspects of economics be
mastered.

LESSON 2.1: BASIC PRINCIPLES OF DEMAND AND SUPPLY

A. THE MARKET
- A market is an interaction between buyers and sellers of trading or exchange. It is
where consumer buys and the seller sells.
There are three kinds of market:
a. The good market is the most common type of market because it is where we buy
consumers goods.
b. The labor market is where workers offer services and look for jobs, and where
employers look for workers to hire.
c. The financial market which includes the stock market where securities of corporates
are traded.

Activity 1.2: Write your answers on a Long Bond Paper/Yellow Pad paper.

1. WHY IS MARKET IMPORTANT?

2. LIST DOWN 10 GOODS THAT ARE IN DEMAND RIGHT NOW.
3. LIST DOWN 10 COMMON SUPPLIES.

B. DEMAND

It is logical for people to expect an increase in the demand for bathing suits, ice cream,
suntan lotion, and umbrellas during summer. During the typhoon months, people may
start buying raincoats, boots, and cold medicines. In June, when the school year starts,
demand for textbooks, school supplies, and uniforms normally go up. Valentine’s day
cause demand for flowers and chocolates to surge. We can therefore see that in various
seasons of the year, demand for certain types of goods will increase. On the other hand,
demand for rice, fish, salt and milk tends to be consistent all year.

- Demand is the willingness of a consumer to buy a commodity at a given price. A

demand schedule shows the various quantities the consumer is willing to buy at
various prices.
- A demand function shows how the quantity demanded of a good depends on its
determinants, the most important of which is the price of the good itself, thus the
equation:
 Qd = f (P)
This signifies that the quantity demanded for a good is dependent on the price of that
good. Presented in a table below is a hypothetical monthly demand schedule for
vinegar (in bottles) for one individual, Martha. The quantity demanded is determined
at each price with the following demand function:
Qd = 6 – P/2
Hypothetical Demand Schedule of Martha for Vinegar (in bottles)

Price per Bottle Number of Bottles

P0 6
2 5
4 4
6 3
8 2
10 1
There is a negative relationship between the price of a good and the quantity
demanded for the good. A lower price allows the consumer to buy more, but as price
increases, the amount the consumer can afford to buy tends to go down.

 Income effect is felt when a change in the price of a good changes consumer’s real
income or purchasing power, which is the capacity to buy with a given income.
 Substitution effect is felt when a change in the price of a good changes demand due to
alternative consumption of substitute goods.
The law of demand
- As the price increases, the quantity demanded for that product decreases. The low
price of the good motivates the consumer to buy more. When price increases, the
quantity demanded for the good decreases.

Non-Price determinants of demand

- Ceteris Paribus assumption is dropped, non-price variables that also affect demand
are now allowed to influence demand.
- The demand function will now read: D = f (P, T, Y, E, PR, NC), which states that
demand for a good is a function of Price (P), Taste (T), Income (Y), Expectations (E),
Price of Related Goods (PR), and Number of Consumers (NC). Factors other than the
price of the product are the non-price factors of demand:

a. If consumer income decreases, the capacity to buy decreases and the demand will
also decrease even when price does remain the same. The opposite will happen
when income increases.
b. Improve taste for a product will cause a consumer to buy more of that good even
if its price does not change.
 c. Another non-price determinant is consumer’s expectations of future price and
income. Consumer tend to anticipate change in the price of a good.
d. Prices of related goods as substitute or complements also determine demand.
Substitute goods are those that are used in place of each other, like butter and
margarine and sugar and artificial sweeteners.
e. The number of consumers is also an important determinant that will affect
market demand for a good.

Activity 1.3: Write your answers on a Long Bond Paper/Yellow Pad paper.

You will solve the demand schedule of consumer Robert given the following prices for bottled
water. Qd=60-P/2
Prices Qd
Php 0
2
4
6
8
10
12
14
16

SUPPLY
Demand showed us the side of the consumers and their reactions to changes in price and
other determinants. We now look at the side of the supplier.
- Supply refers to the quantity of goods that a seller is willing to offer for sale. The
supply schedule shows the different quantities the seller is willing to sell at various
prices. The supply function shows the dependence of supply on the various
determinant that affect it.
- Assuming that the supply function is given as: Qs = 100 + 5P and is used to
determine the quantities supplied at the given prices.
Supply Schedule of Pedro for Fish in One Week.

Price of Fish (per Kilo) Supply (in Kilos)

P 20 200
40 300
60 400
80 500
100 600
 As can be seen in the Table above, the relationship between the price of fish and the
quantity that Pedro is willing to sell is direct. The higher the price, the Higher the
quantity supplied.

The Law of Supply

As the price increases, the quantity supplied of that product also increases. The high price of the
good serves as motivated for the seller to offer more for sale. Thus, when price increases, the
quantity supplied of the good increases since the sell will take his as an opportunity to increase
his/her income.

Non-Price Determinants of Supply

- If the assumption of ceteris paribus is dropped, non-price variables are now allowed to
influence supply.
- The supply function will now read: S = f (P, C, T, AR), where the Supply (S) of a good is
a function of the price of that good (P), the cost of production (C), technology (T), and the
availability of raw materials and resources (AR).
a. Cost Production refers to the expenses incurred to produce the good. An increase in cost
will normally result in a lower supply of the good even when the price will not change
since the producer has to shell out more money to come up with the same amount of
output.
b. Technology is another significant non-price determinant of demand. The use of improved
technology in the production of a good will result in the increased supply of the good.

Activity1.3: Write your answers on the Long bond paper where you put your previous
answers.
On the other hand, for Rudolph, a seller of bottled water in the market, the supply function is
given as:
Qs= 5 + 5P
Price Qs
Php 0
2
4
6
8
10
12
14
16

V. NEW LEARNINGS
  A market is an interaction between buyers and sellers of trading or exchange. It is where
consumer buys and the seller sells.
 Demand is the willingness of a consumer to buy a commodity at a given price.
 Supply refers to the quantity of goods that a seller is willing to offer for sale.
 The demand function will now read: D = f (P, T, Y, E, PR, NC), which states that
demand for a good is a function of Price (P), Taste (T), Income (Y), Expectations (E),
Price of Related Goods (PR), and Number of Consumers (NC).
 The supply function will now read: S = f (P, C, T, AR), where the Supply (S) of a good
is a function of the price of that good (P), the cost of production (C), technology (T), and
the availability of raw materials and resources (AR).

VI. WHAT CAN I DO?

Direction: Write your answers on a Long bond paper together with your previous answers.

A. Indicate the effects of the given statement on the demand and supply of a good based on the following
outcomes. Write the phrase of your choice on the space provided before each demand and supply.
a. Shift to the right (increasing/positive)
b. Shift to the left (decreasing/negative)
c. No change

1. Well-received market innovation of a new cellphone

Demand for Cell phones ___________________________
Supply of cell phones ___________________________
2. Decrease in the price of good X
Demand for good X ___________________________
Supply for good X ___________________________
3. Anticipated increase in general price level of basic commodities
Demand for basic commodities ___________________________
Supply of basic commodities ___________________________
4. Government increases workers’ wages
Demand for basic commodities ___________________________
Supply of basic commodities ___________________________
5. Increase in death rates due to calamities
Demand for basic commodities ___________________________
Supply of basic commodities ___________________________
6. Migration of Filipinos to first world countries
Demand for basic commodities ___________________________
Supply of basic commodities ___________________________
7. New investments in the manufacturing of shoes
Demand for shoes ___________________________
Supplies of shoes ___________________________
8. New discovery of gold mines in the country
Demand for gold ___________________________
Supply of gold ___________________________

B. TRUE OR FALSE
__________1. Supply and demand form the least fundamental concepts of economics.
__________2. Substitution effect is felt when a change in the price of a good changes demand due to
alternative consumption of substitute goods.
__________3. In the demand function D = f (P, T, Y, E, PR, NC), Y stands for Income.
__________4. The good market is the most common type of market because it is where we buy
consumers goods
__________5. Taste is not one of the factors on the increase of demand.
__________6. Supply is the willingness of a consumer to buy a commodity at a given price.
__________7. Supply refers to the quantity of goods that a seller is willing to offer for sale.
__________8. Profit Effect is felt when a change in the price of a good changes consumer’s real income
or purchasing power, which is the capacity to buy with a given income.
__________9. As the price increases, the quantity demanded for that product decreases, is called
the Law of demand.
__________10. Prices of related goods as substitute or complements also determine demand.
__________11. The number of suppliers is also an important determinant that will affect market
demand for a good.
__________12. As the price increases, the quantity supplied of that product also increases, is
called Law of supply.
__________13. The use of improved technology in the production of a good will result in the
increased supply of the good.
__________14. Demand and Supply are separable to Price.
__________15. Studying the law of demand and supply is not important.

BIBLIOGRAPHY

APPLIED ECONOMICS by Rosemary P. Dinio, PhD and George A. Villasis

Book of Economics (New Edition) by Gerardo P. Sicat

https://www.investopedia.com/articles/economics/11/intro-supply-
demand.asp