Applied Economics

MODULE 2: MICROECONOMICS: The Price Theory

Subject Objectives

At the end of this module, learners are expected to:

1. explain the law of supply and demand, and how equilibrium price and
quantity are determined.
2. discuss and explain factors affecting demand and supply
3. graph demand and supply schedules
4. compare the prices of commodities and analyze price impact on
consumers

Start-up Activity

Man’s material needs and wants

List your material needs and wants.
NEEDS WANTS
= based on physiological, personal = goods that are beyond man’ needs
or socio-economic requirements
necessary for you to function and
live

NEEDS WANTS
1. 6. 1. 6.
2. 7. 2. 7.
3. 8. 3. 8.
4. 9. 4. 9.
5. 10. 5. 10.
Man’s focus on his wants rather than his needs
Based on your answers on Activity 1, what are your wants that you are willing
to let go for you to focus on your needs. List three (3) below and cite your
reasons for your action.

1.
2.
3.

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 Subject Content

Two Branches of Economics

Macroeconomics - This branch of economics studies the economy as
a whole usually as a country or as a region.
- This is also known as National Income Analysis.

Microeconomics - This branch of economics deals with the parts of

an economy, i.e. the household.
- This is also known as the Price Theory.

Microeconomics
This is the branch of economics with the individual decisions of units
of the economy—firms, households, and how their choices determine relative
prices of goods and factors of production (Marcelino, et al. 2010). It is the
economic analysis of the market behavior individual consumers and firms in
an attempt to understand the decision-making processes of households and
firms.
Characteristics of Microeconomics: (Pagoso, et al, 2006)
1. Microeconomics looks at the decisions of individual units.
2. Microeconomics looks at how prices are determined.
3. Microeconomics is concerned with social welfare.
4. Microeconomics has a limited focus.
5. Microeconomics help develop the skills of logical reasoning, the
construction and use of economic models, decision making for a variety
of situations, and the proper allocation of personal resources.

Core Ideas of Microeconomics

1. Supply - The quantity of available products (goods and
services) for a certain price.
2. Demand - The quantity of a product (a good or a service) that
consumers desire.
3. Market Equilibrium - this refers to a condition where a market price
is established through competition such that the
amount of goods or services sought by buyers is
equal to the amount of goods or services produced
by sellers.

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Classification of Human Needs
1. Basic Needs - food, shelter, and clothing
2. Essential Needs - goods that man needs to live comfortably,
i.e. appliances
3. Public Needs - public transportation, schools, hospitals
4. Luxury Needs - goods that are beyond being basic and essential,
i.e. cellular phones, laptops, and the like

Mixed Economy
The market is the main focus of the study of Microeconomics. In the
Market Economy, consumers are free to choose what goods and services they
will purchase within the limits of their income. This means individuals have
the right to property and with this, they gain the ability to buy, to sell and
establish their own businesses. In the system of Mixed Economy, there is this
mixture of the three other economic system types. In here, the Microeconomic
function of being concerned with the flow of goods and services from business
firms to consumers, the composition of the flow, and the process for
establishing the relative prices of the component parts of the flow is easily
seen because of it clearly follows the Circular Flow.

The Law of Demand

This Law states that as Demand goes up Prices go down. There is an
inversely proportional relationship between Price and Demand. This means
as prices of the good or service decreases, people will buy more of that said
good or service.

The Demand Curve

P•
The demand curve is downward
sloping, indicating the negative
relationship between the price of a
product and the quantity demanded.
D

0
Q

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Changes in the Demand Curve
1. Change in Price

This results in
movement along the
demand curve.

2. Change in a Non-Price Variable

a. For a Normal Good

There is an outward
shift in the demand
curve due to the
increase of income of the
consumers. The
increase of income
meaning more money to
buy more of their needs
and wants.

b. For an Inferior Good

There is an inward
shift in the demand
curve even if there is an
increase of income
because consumers will
choose the superior good
over the inferior good.

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Hypothetical Goods that do not follow the Law of Demand
1. Giffen Goods
These are inferior goods that are mere substitutes for more
expensive goods which, people buy more when they cannot afford
the superior goods.
2. Veblen Goods
These are goods that people buy because they are expensive and
also for show of wealth.

The Law of Supply

This Law states that as Price increases, Supply also increases. This
connotes a positive relationship between Price and Supply. As the Price of a
good goes up, the available supply of a good increases because higher prices
mean lower demand of the product and lower demand means less people who
are buying the good.

The Supply Curve

P S
The Supply Curve is an
upward sloping curve,
indicating the positive
relationship between the
price of a product and the
quantity supplied.
0
Q
Changes in the Supply Curve
1. Change in Price

This results in movement

along the Supply Curve

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 2. Change in the Cost of Production

a. The supply curve will

shift outward if costs
decrease. It means more
products will be
produced with almost
the same cost of
production.
b. The supply curve will
shift inward if costs
increase which means
less products will be
produced due to the
increase of production
costs.

3. Change in the Expected Demand

a. The supply curve will shift

outward if consumer
enthusiasm is expected to
increase.
b. The supply curve will shift
inward if there is an
expectation for consumer
preferences to change in
favor of an alternative good
or service.

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Equilibrium
This happens when the supply and demand curves intersect, the
market is in equilibrium. This is where the quantity demanded and the
quantity supplied are equal.

In reaching Economic Equilibrium, it assumes that all other external

forces are constant, and economic variables are constant. Economic
Equilibrium is the goal of Economic Activity—to reach a point where there is
a steady supply of goods satisfying the demand of the consumers. It’s quite
impossible to achieve this because there shall be points where surpluses or
shortages shall be incurred. Another is it is quite hard to maintain
equilibrium even for a short period of time. Most producers look at
equilibrium as a mere breakeven for them which make them eager to incur
surpluses to increase their income.
It is the job of the government to reach equilibrium but it is a collective
effort for the government is considered as an outside force in the circular flow
of resources in economics. But there are ways the government enforces its
will to regulate the economy and economic activity. We call these Government
Intervention wherein the government creates policies which they enforce to
protect public interest and to maintain (if there is) market and economic
stability.

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Government Intervention
This is the action done by the government to
combat if not prevent market inequities and promote
fairness. This is to protect the local market. When we
speak of local market, it consists of the consumers
(buyers), the sellers, and the producers. So if the
government protects the local market, the government is pertaining to the
protection of the consumers from defective, ineffective, unsatisfying,
overpriced etc. products, the government is protecting the producers from not
gaining the appropriate profit for their investment, and the government is
protecting the sellers from not gaining profit for their exerted effort (monetary
and labor) to buy and sell products. It short terms, the government protects
the interest of the market’s stakeholders.

There are three common interventions done by the government:

1. Taxation
2. Subsidies
3. Regulation

Taxation
This is a system of raising money to finance the state and
government. It is the supreme power of a sovereign state to
impose burdens or charges upon persons, property, or
property rights for public purposes. Taxes are the compulsory
contributions to support the state.

Subsidies
A Subsidy is benefit given by the government to groups or
individuals usually in the form of a cash payment or tax
reduction. The subsidy is usually given to remove some type of
burden and is often considered to be in the interest of the
public (http://www.investopedia.com)

It is a remedy done by the government to protect the market and its

stakeholders from either high market prices or high local taxes which they
would cover or lessen for them by giving a form of discount in either taxes or
processing fees.

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 An example of this would be the subsidy given by the government to
the National Food Authority for them to sell NFA rice at the lowest possible
selling price.

Regulation
Regulations are done by the government to promote
economic fairness. Sometimes these are done to promote
national unity and state advancement. This is the use of
legislative measures and government regulations to affect
economic outcomes. This can extend from forms of
government that control and regulate all aspects of economics to measures
which are enacted to address particular issues such
as deregulation of industries or measures intended to address
various economic factors (http://www.businessdictionary.com/). An example
of regulation done by the government is Price Control.

1. Price Control
a. Price Ceiling
- The establishment of a maximum price for a good/service or
certain goods or services to protect consumers.
- The government wants to ensure the good is affordable for as
many consumers as possible.
b. Price Floor
- The establishment of a minimum price for a good/service or
some goods or services to protect producers of said goods and
services.
- A government wants to ensure the good is profitable for as
many producers as possible.

In effecting Price Control regulations, there are these byproducts or side

effects of it in the economy. They can be deemed positive, negative or both
depending on the point of view of the economic stakeholder. In Price Ceiling,
there is the danger of shortages of goods. The producers of the controlled good
are not reaching profitable or not even break even status for their good that
is why they lessen their production for them to still gain some profit. In Price
Floor, on the other hand, there is surplus. Surpluses are excess goods that
are either left on the shelves, or in warehouses of both the sellers and
producers.

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 There are three types of surplus. First is Supply surplus. Supply
surpluses are the excess good which are generally added to the producer’s
inventory. If there is an increase in supply surplus that would mean that
sooner or later product prices would decrease for the excess to be sold. Worse
is when there is truly a large amount of supply surplus that would mean that
supply or production must halt for there is much of that product in the
market and that is not a profitable situation. That could lead to factory
foreclosure. Second is Consumer surplus. Consumer surplus is the gain
obtained by consumers because they can obtain a product for a lower price
than they would be willing to pay. This could be in the form of a bargain.
Because of the decrease in the price of a product, consumers will now be able
to buy more of that good. Lastly, we have Producer surplus. Producer surplus
is the benefit producers get by selling at a price higher than the lowest price
they would sell for. This would mean they’ll be gaining more profit.

Self-Assessment

Activity 1: Microeconomics
Write only the letter of the best answer.
_____ 1. This refers to the quantity of available products for a certain price.
a. Demand c. Equilibrium
b. Supply d. None of these

_____ 2. These are the needs that are beyond being basic and essential to
man.
a. Essential c. Luxury
b. Basic d. Wants

_____ 3. What is the other term for National Income Analysis?

a. Economics c. Gross Domestic Product
b. Microeconomics d. Macroeconomics

_____ 4. Which is not true about Microeconomics?

a. It looks at the behavior of firms c. It is concerned with
and of the household social welfare
b. It studies the economy as a d. It looks at how prices
whole are determined

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_____ 5. What is the other term for Microeconomics?
a. Price Theory c. Circular Flow
b. Law of Price d. Outflow Theory

_____ 6. This happens when Supply and Demand are equal.

a. Market Stability c. Market Equilibrium
b. Market Economy d. Market System

_____ 7. These are the needs that are usually provided by the state and
government.
a. Luxury Needs c. Basic Needs
b. Public Needs d. Personal Needs

_____ 8. This type of economic system is a mixture of the 3 basic economic

systems.
a. Mixed Economy c. Mixed Market
b. Mixed Production d. Mixed Equilibrium

_____ 9. This branch of Economics studies the economy as a whole.

a. Microeconomics c. Maicroeconomics
b. Macroeconomics d. Maecroeconomics

_____ 10. This is the quantity of a product that a consumer desires.

a. Supply b. Market price
b. Equilibrium d. Demand

Activity 2: Demand and Supply

Graph the following points and identify whether the curve made is a supply
or demand curve.
1. P1 10 Q1 30 2. P1 50 Q1 60
P2 20 Q2 20 P2 20 Q2 90

P P

0 0
Q Q

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 3. P1 75 Q1 100 4. P1 100 Q1 550
P2 60 Q2 85 P2 200 Q2 375

P P

0 0
Q Q

5. P1 5 Q1 15 6. P1 7.50 Q1 75
P2 25 Q2 8 P2 7.00 Q2 90

P P

0 0
Q Q

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 Activity 3: Demand Schedule
Plot the following hypothetical demand schedule for pork in the
market:
Price of Pork (per kilo) Quantity Demanded (in kilos)
P 175 60
160 75
150 85
125 100
105 130
P

0 Q

Activity 3: Supply Schedule

Plot the following hypothetical supply schedule of Bangus in the
market:
Price of Tuna (per kilo) Quantity Supplied (in kilos)
P 140 600
110 455
95 390
75 300
70 275

0 Q

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Activity 4: Government Control and Intervention
Republic Act No. 8479: The Oil Deregulation Law
After the Deregulation, the oil industry became more competitive and it
being more competitive, oil companies were encouraged to be more effective
and efficient in terms of their advertising and product quality.
Features of the Law:
 The government cannot interfere with the pricing, export and
importation of oil products, the establishment of retail outlets, storage
depots, ocean-receiving facilities and refineries.
 Large business establishments and government corporations can also
import their fuel requirements without securing any permit from the
government; they simply have to inform the DOE of their move.
Why is there the need for Deregulation?
 To save money.
- the government will no longer subsidize the market when prices go
up.
- tax payers’ money will be used for more resolute projects and
programs because it will no longer be use as a subsidy.
- the government would be able to use public funds for vital services
and infrastructure such as schools, hospitals, roads, bridges, and the
like.

Guide Questions:
1. What’s your first impression on the presented details of the oil
deregulation law?
2. Basing on your personal observation and knowledge, is the competitive
market formed by the enactment of this law healthy for the Philippine
economy? Cite an example proving your answer.
3. Would you like to change some parts of the law, or would you like to
repeal the law, or would you like to leave the law as it is? Explain your
answer

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 Self-Reflection

Encircle
your
answer

FORM
Read each statement and check ( ) the box that reflects your work
today.
Name: Date:

Section:

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1. I found this work interesting.

2. I make a strong effort.
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4. I understood all the
instructions.
5. I followed all the steps.
6. I learned something new.
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assignment.
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