Intermediate Microeconomic Theory. W3 W4

ILOCOS SUR COMMUNITY COLLEGE
Quirino Stadium, Zone V, Bantay, Ilocos Sur, Philippines 2727 ISCC Barangay Demo Farm Campus
Tel. No. (077) 604-0285 Barangay Labnig, San Juan, Ilocos Sur
e-mail address: [email protected] Tel. No. (077) 722-5870
COURSE TITLE Intermediate Microeconomic Theory

COURSE CODE NUMBER OF UNITS 3 UNITS
COURSE PRE- NONE
REQUISITE/S
MODULE TITLE Review of Demand and Supply
CONTACT GEMMA A. JAVIER
INFORMATION OF Contact number: 09993726175
THE INSTRUCTOR FB account: Xavier Gmz
Email:[email protected]
I. COURSE DESCRIPTION
The course introduces the students to the economics of the firm and how resource is allocated by
individual decision- making units. In particular, the course expounds on the basic microeconomic
theories governing the concepts of demand and supply; production theory; costs theory, and pricing
and output determination.
II. COURSE OUTCOME

At the end of the course, given the relevant situations/conditions, the learners will be able to:
- Gain an understanding and mastery of microeconomic principles to practical policy
economic and business issues.
- Apply the business principles
III. MODULE INTRODUCTION

This module describes demand and supply which is the driving force behind a market economy.
This is one of the most important factor in decision making because it assists the managers in
predicting changes in production and input prices.
IV. LEARNING OUTCOME

After studying this module, the learner will be able to:
LO1 - Understand the demand and supply analysis

LO2 - Identify the factors that affect the demand and supply
LO3 - Calculate and apply the elasticity of demand and supply
V. COURSE POLICIES
a. The mode of delivery for this subject will be a combination of offline (modules) and
online. The course package contains necessary information needed in this subject. To
enhance further your learning, there will be pre-recorded lectures uploaded in our
virtual classroom;
b. You must follow the study schedule set for this subject for you to be properly guided
and to maintain your progress;
c. You are allowed to have your own pacing in reading the module and other reading
materials but please be reminded that there are some activities that requires you to meet
deadlines and submit your home-based tasks on time;
d. You are free to utilize reading materials online or printed books to enhance your
learning;
e. You are advised to frequently check on the virtual classroom and to the group chat for
any update on learning activities given by the instructor;
f. A learning package containing the Course guide, study guide, assignment/activity

guides, & assessment guide will be uploaded in the virtual classroom and will also be
given in printed forms/digital format
g. Make-up exams will only be given for excused absences (Doctor’s excuse, obituary, etc.)
deemed valid at my discretion. Make-up exams will not be given without written can
send via online notification prior to the exam by the student and approval from the
instructor. I am under no obligation to provide the student with the opportunity to
make-up exams due to unexcused absences. Make-up exams will not be the same exam
given to the rest of the class.
h. Lecture Exams/Final: There will be two exams during the semester . The second will
occur during your scheduled final time. Exams will assess your understanding of the
factual material as well as your ability to understand meaning and context and to
synthesize information from more than one lecture. Exams will typically (but not
always) consist of definitions and concepts, short answer and two major essays. Please
note, you will only have the regularly scheduled class time to complete exams. This
may apply to all learners
i. All assignments and other requirements MUST be submitted ON TIME. Late
submissions will still be admitted provided that the learner will give
acceptable/justifiable reason, but will have a corresponding point deduction;
j. All tasks requiring an individual output MUST be done INDIVIDUALLY;
k. For group projects, it is the responsibility of each learner to get in touch with their group
mates;
l. Each of you must respect the views and opinions of everyone and practice proper
netiquettes;
m. CHEATING is considered a MORTAL SIN. Any form of cheating will not be tolerated.
Copy-pasted works without proper citation of the author will be rejected. You will be
given only 1 chance to redo your output, otherwise you will be marked failed for that
activity;
n. Learners who failed to submit requirements on time will be marked INCOMPLETE for
the final grade, but will be given a chance to submit their lacking within 1 semester
only. Failure to do so will make them failed from the class;
o. Learners who were able to submit all requirements and taken all the quizzes and exams
but still did not gain a passing grade are marked CONDITIONAL and will be given a
requirement/task to complete to determine if she/he will be able to pass the course;
Consultation time with your instructor is strictly done during working hours only, 8am
to 5pm from Monday to Friday. Queries and other matters that concerns the subject will
only be entertained during the specified time and day.
VI. OUTLINE OF TOPICS
Information sheet 1 Concept of Elasticity of Demand
VII.
STUDY SCHEDULE
TIME FRAME OUTLINE OF TOPICS
MODULE 1: Introduction
a. Review of Supply and Demand Analysis
Week 1 – 3
Week 4-5 MODULE 2: Theory of Consumer Behavior

a.
Preferences and Utility
b.
The Mathematics of Utility Maximization
c.
Constraints on Consumption: Budget Line
d.
Price Consumption Curves and Derivation of Individual
demand curves
e. Relationships Between Shape of Price Consumption Curve and
Price Elasticity of Demand
f. Income and Substitution Effect
Week 6-8 MODULE 3: Theory of the Firm
a. Production Function
b. Short-run Production and the Law of Diminishing Returns
c. Short-run Product and Curves: One Variable Input
d. Isoquants: Two Variable Inputs
e. Long-run Production and Returns to Scale
Week 9-12 MODULE 4: Cost Theory
a. Nature of Cost
b. Relation of Production and Cost Functions
c. Short-run Cost Functions
d. Long-run Cost Functions
e. Economies and Diseconomies of Scale
f. Relationship Between Long-run and Short -run Cost Curves
STUDY GUIDE
To guide the learners to go along the course package, these icons were used to represent
learning activities that goes along the learning process:
➢ this icon represents a quiz/exam/guide questions that the learner

needed to answer;
➢ this icon represents the references made used for the contents of this course
package;
➢ this icon represents an information sheet containing the topic/lesson that the
learner must study;
➢ this icon represents important information the learners have to take note of;
➢ this icon represents an activity/assignment/requirement the learners must

learn and do;
➢ this icon represents the set date for deadlines of submission for a certain
requirement;
➢ this icon represents the learning objectives for the content/s of the course
package;
➢ this icon represents the study schedule recommended for the content/s of
this course package including all the learning activities embedded in each
information sheet;
➢ this icon is used to represent all learner’s guides (course guide, activity
guides, assessment guides, study guides) that shall help them accomplish this
course package;
➢ this icon is used to represent the MODULE INFORMATION

Information sheet 1:
The Concept of elasticity
LEARNING ACTIVITIES
1. Read and understand information sheet 1 containing the concept of elasticity.
2. Income elasticity of demand (Ei) is defined as the responsiveness of demand when a

consumer’s income changes. It is defined as the ratio of the change in quantity demanded over the
change in income.
The higher the income elasticity of demand, the more sensitive demand for a good is to changes
in income. This means that a very high-income elasticity of demand suggest that when a
consumer’s income goes up, consumers will cut back their purchases of that good to an even higher
degree. A very low price elasticity implies that changes in a consumer’s income will have little
effect on demand.
Income elasticity of demand is useful for governments and firms to help them decide what
gods to produce and how a change in overall income in the economy affects the demand for their
products, i.e., whether it’s elastic or inelastic.
Income elasticity of demand can be positive or negative. This depends on the type of good. A
normal good has a positive sign, while an inferior good has a negative sign.
For example, if a person experiences a 20% increase in income, the quantity demanded would
be 20% / 20% = 1. This would make it a normal good.
The formula for calculating the Income Elasticity of Demand is defined as the ratio of the
changes in income.
Ei = percentage change in Quantity demanded (% Δ in Qd)

percentage change in consumers income (%Δ in I )
we express this as the following:

Ei = [(Q2 – Q1) / Q1]/ [(I2 – I1) / I1)]
Q2 – New Quantity Demanded ; Q1 – Old Quantity Demanded
I2 – New Income ; I1 – Old Income
Types of Income Elasticity of Demand

We can categorize income elasticity of demand into 5 different categories depending on the value.
1. Normal goods have a positive income elasticity of demand so as consumers’ income increase, there
is an increase in quantity demanded. A normal good has an income elasticity of demand that is
positive, but less than 1
2. Inferior goods have a negative income elasticity of demand meaning that demand falls as income
rises. In other words, as an economy improves and wages rise, consumer would rather have a
more costly alternative than inferior goods. However, the term “inferior” doesn’t refer to quality,
but rather, affordability. Inferior goods include all of the goods and services that people purchase
only because they can’t afford higher quality substitute of these goods.
3. Luxury goods on the other hand have an income elasticity of demand that is greater than 1. People
spend a greater portion of their income on luxury goods as their income rises.
Example:
1. Aggregate consumer income is P600 million / year and quantity demanded by these consumers is
40,000/year. If income increases to P900 million/year, demand for this normal good also increases
to 100,000/year. Computing for the income elasticity of demand,
Ei = [(Q2 – Q1) / Q1]/ [(I2 – I1) / I1)]

= [(100,000 – 40,000) / 40,000]/ [(900M – 600M) / 600M)]
= (60,000 / 40,000) / ( 300M /600M)
= 1.5 / 0.5
= 3 (luxury goods)
A 1 percent increase in consumer income leads to a 3 percent increase in the quantity demanded
for air travel.
2. Aggregate consumer income is P500 million / year and quantity demanded by these consumer is
300,000 km/year. If income increases to P700 million/year, the demand for the bus ride falls to
100,000 km/year. Computing fort the income elasticity of demand,
Ei = [(Q2 – Q1) / Q1]/ [(I2 – I1) / I1)]
= [(100,000 – 300,000) / 300,000]/ [(700M – 500M) / 500M)]
= ( -200,000 / 300,000) / (200M / 500M)
= - 0.67 / 0.4
= -1.68 (inferior good)
A 1 percent increase in aggregate consumer income decreases the quantity of bus rides demanded
by 1.68 percent.
3. Cross-Price Elasticity of Demand (Exy) measures the responsiveness of quantity

demanded of a particular good to price changes of another good. It is the ratio of the percentage
change in quantity demanded of Good X to the percentage change in the price of Good Y.
For business, Exy is an important strategic tool. This elasticity measure can help determine
whether or not it is a good move to increase or decrease selling prices, or to substitute one for
another to generate revenues
There are three types of cross-price elasticity of demand:

• Substitute goods. When the cross-price elasticity of demand for product A relative to a
change in the price of product B is positive, it means that the quantity demanded for product
A has increased in response to a rise in the price of product B. Many consumers have switched
from consuming product B to consuming product A. This implies that most consumers
perceive products A and B as substitute that satisfy similar preferences.
Substitute will always have a positive Cross-Price Elasticity or greater that zero.
• Complementary goods. When the cross-elasticity of demand for product A relative to
change in the price of product B is negative, it means that the quantity demanded of A has
decreased relative to rise in the price of product B. even though the price of product A is
unchanged, many consumers still decreased their consumption of it because the price increase
for product B made consuming these products together more expensive. This implies that
most consumers perceive products A and B as complements that are more enjoyable
consumed together than consumed separately.
Complements will always have a negative Cross Price Elasticity of less than zero.
• Unrelated products. These are goods that show no relationship in consumer
consumption patterns. Price changes in one product don’t affect the quantity consumed of the
other product.
Unrelated goods will always have a cross price elasticity of 0.
Knowing a product’s cross price elasticity of demand for other related products allows a firm
to better understand the market that it is serving. This firm can better identity how many competitors
share the same product space in the eyes of consumers, as well as how sensitive sales revenues are to
changes in the marketing strategy of complementary products outside f its own market. This kind of
valuable information can reduce the firm’s exposure to financial risk. Firms use this information to
develop targeted strategies that optimal respond to the price changes of both competing and
complementary products.
How to Calculate Cross price elasticity
Exy = Percentage Change in Quantity Demanded for Good X
Percentage Change in the Price of Good Y
= [(Qx2 – Qx1) / Qx1]/ [(Py2 – Py1) / Py1)]
Qx2 – New Quantity Demanded of Good x
Qx1 – Old Quantity Demanded of Good x
Py2 – New Price of Good Y
Py1 – Old Price of Good Y
Example:
1. Consider two goods, tea and coffee, which are substitute. The quantity of tea demanded is 1000
kg/year. Suppose that the price of coffee increase from P150/kg. to P450/kg. As people
substitute tea for coffee, the demand for tea increase to 1800 kg/year, leading to an outward shift
in the demand curve. To compute:
Exy = [(Qx2 – Qx1) / Qx1]/ [(Py2 – Py1) / Py1)]

= [(1800 – 1000) / 1000]/ [(450 – 150) / 150)]
= (800/1000)/ (300/ 150)
= 0.8/2
= 0.4
A 1 percent increase in the price of coffee leads to a 0.4 percent increase in the quantity demanded for
tea.
2. Consider two goods coffee and cream, which are complements. The quantity of coffee demanded
is 600 kg/year. If the price of cream were to increase from P 100.00/kg to P 400.00 / kg, people
would buy lesser coffee at 300 kg/year. Then:
Exy = [(Qx2 – Qx1) / Qx1]/ [(Py2 – Py1) / Py1)]

= [(300 – 600) / 600]/ [(400 – 100) / 100)]
= ( -300 / 600 ) / ( 300/100)
= -0.5 / 3
= - 0. 17
A 1 percent increase in the price of cream leads to a 0.17 percent decrease in the quantity demanded
for coffee. Complementary goods have negative cross-price elasticity.
Price Elasticity of Supply

Like consumers, firms also respond to price changes in their decisions on hiw much to
produce. Price elasticity of supply is defined as the responsiveness of quantity supplied of a good to
its market price. It is the percentage change of quantity supplied divided by the percentage change
in price, or mathematically:
Es = (%ΔQs)
(%ΔP)
= [(Qs2 – Qs1) / Qs1]/ [(P2 – P1) / P1)]
Qs2 = New quantity supplied ; Qs1 = Old quantity supplied

P2 = New Price ; P1 = Old Price
And like the price elasticity of demand, the price elasticity of supply is categorized according to its
value.
1. Price-elastic supply (Es > 1) = the percentage change in quantity supplied is greater than
the percentage change in price.
2. Perfectly elastic (Es = ∞ ) = any change in price will result in an infinite amount of change
in quantity.
3. Unit elastic supply (Es = 1) = the percentage change in quantity supplied is the same as the
percentage change in price.
4. Price inelastic supply ( Es < 1) = the percentage change in quantity supplied is less than the
percentage change in price.
5. Perfectly inelastic (Es = 0) = there is no change in quantity supplied when the price
changes.
DISCUSSION FORUM: for the benefit of interacting with your fellow classmates, a
discussion board has been created in our virtual classroom with guide questions where
you are required to comment your insight regarding the topic. Please refer to the attached
discussion forum guide at the end of this module for the complete instruction and how you will be
evaluated.
IX.ACTIVITY GUIDE
(Instructions/guidelines/procedures in performing each learning activity intended to
assess learning of all students are completely explained in this area)
1. DISCUSSION FORUM GUIDE
GUIDELINES
Discussion forum is an electronic message boards for asynchronous communication regarding the
concepts being tackled in our class. You are expected to post your thoughts in a conversational
tone.
i. I will be posting guide questions for discussion in our virtual classroom. You
are expected to post at least twice to thrice on each forum. Your first post
will an answer for the guide question, and you are also encouraged to
respond or react to the postings of your classmates;
ii. Discussion forums are intended for conversations about our topic, you are
expected to be at your modest when interacting with each other. Postings
that are out of the topics gives the learner a deduction point;
iii. Remember that when you post your comments/reactions, you must respect
the opinions of your classmates and to always have proper netiquette when
conversing with each other;
iv. Please refrain from copy-pasting works of others. You can use them as your
reference then summarize the idea/thought but make sure to properly cite
your sources;
v. Be guided by the rubric to be uploaded in the virtual classroom for the
assessment of your participation.
RUBRICS:
CRITERIA 4 3 2 1
2. ACTIVITY GUIDE
i. Your activity/assessment test on this chapter will be uploaded at our
google classroom
ii. The activity/assessment test will be posted at google classroom 2

days before the end of your scheduled time of chapter discussion
and reading (ex. The chapter will be 2 weeks scheduled (sep. 27-oct.
8) the activity/assessment test
iii. will be posted on oct. 7 at 8:00 am and it will be scheduled to closed
automatically at oct 8 at 11:59 PM.
RUBRICS:
CRITERIA 4 3 2 1
X. ASSESSMENT GUIDE
(Performance of learners will be graded as the following assessment percentage presented
below)
LECTURE CLASS STANDING 60%
• Discussion forum
• Journal
• Narrative report
Chapters evaluation 40%

• Assessment test
• Performance test
• Quiz
• examinations
GRADING SYSTEM:
a. MIDTERM GRADE:
Class standings = 60%
Major Exam = 40%
p. TENTATIVE FINAL GRADE:

Class standings = 60%
Major Exam = 40%
*** FINAL GRADE =mid. Grade (40%) + tentative Final grade(60%)
I. REFERENCES
(the following materials are used as references in creating the content of these course
package)
TEXTBOOKS Bautista, C.M (2013) Economics and Society. Ateneo de Manila

University Press
EBOOKS
WEB/INTERNET SITE
YOUTUBE VIDEO
II. THE INSTRUCTOR
The instructor was born in Sto. Domingo Ilocos sur. She finished Bachelor of Science in Business
Administration major in Financial Management, she also took up units in Bachelor of Secondary
Education major in Social Science, and at present she is taking her Master of Arts in Education
major in Educational Management at University of Northern Philippines. She is also a License
Professional Teacher and now currently working as an Instructor and SHS Teacher in Ilocos Sur
Community College.

Intermediate Microeconomic Theory. W3 W4

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ILOCOS SUR COMMUNITY COLLEGE

COURSE TITLE Intermediate Microeconomic Theory

II. COURSE OUTCOME

III. MODULE INTRODUCTION

IV. LEARNING OUTCOME

LO1 - Understand the demand and supply analysis

f. A learning package containing the Course guide, study guide, assignment/activity

Week 4-5 MODULE 2: Theory of Consumer Behavior

➢ this icon represents a quiz/exam/guide questions that the learner

➢ this icon represents an activity/assignment/requirement the learners must

➢ this icon is used to represent the MODULE INFORMATION

The Concept of elasticity

2. Income elasticity of demand (Ei) is defined as the responsiveness of demand when a

Ei = percentage change in Quantity demanded (% Δ in Qd)

we express this as the following:

I2 – New Income ; I1 – Old Income

Types of Income Elasticity of Demand

Ei = [(Q2 – Q1) / Q1]/ [(I2 – I1) / I1)]

3. Cross-Price Elasticity of Demand (Exy) measures the responsiveness of quantity

There are three types of cross-price elasticity of demand:

Exy = [(Qx2 – Qx1) / Qx1]/ [(Py2 – Py1) / Py1)]

Exy = [(Qx2 – Qx1) / Qx1]/ [(Py2 – Py1) / Py1)]

Price Elasticity of Supply

Qs2 = New quantity supplied ; Qs1 = Old quantity supplied

ii. The activity/assessment test will be posted at google classroom 2

Chapters evaluation 40%

p. TENTATIVE FINAL GRADE:

*** FINAL GRADE =mid. Grade (40%) + tentative Final grade(60%)

TEXTBOOKS Bautista, C.M (2013) Economics and Society. Ateneo de Manila

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