NAZARETH HIGH SCHOOL OF BANSALAN, INC.

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Municipality of Bansalan
Province of Davao del Sur

MODULE 4 (Week 5). Implications of Market Pricing in Making Economic Decisions

Applied Economics Learning Module

APPLIED ECONOMICS
Module4. Lesson 5

Implications of Market Pricing in Making Economic Decisions

NAME OF THE STUDENT:

GRADE AND SECTION:

PREPARED BY: MS. NEVIRLYN A. SOLIS ,LPT

MODULE 4. Implications of Market Pricing in Making Economic Decisions

Applied Economics Learning Module

LEARNING MODULE FOR APPLIED ECONOMICS

 NAZARETH HIGH SCHOOL OF BANSALAN, INC.
Nazareno Street, Barangay Poblacion Uno
Municipality of Bansalan
Province of Davao del Sur

LESSON 4 Implications of Market Pricing in Making Economic

Decisions

LEARNING COMPENTENCIES:

 Determine the implication of market pricing on economic decion-making

PRETEST
Directions: Write TRUE if the statement is correct and FALSE if incorrect. Write
your answer In the space provided for each number.
_______1.The equilibrium point is the level where the demand and supply curves intersect.
_______2.The law of supply applies when the producers supply more masks at a higher price;
selling at higher quantity at a higher price increases revenue.
________3.Shortage will exist if the price is below the equilibrium point
________4.The law of supply and demand explains the interaction between the sellers of a
product and the buyers.
________5.The supply curve shows an upward slope.

EQUIP LESSON Market Pricing on Making Economic Decisions

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

Demand, Supply and Elasticity of Clean Water in the Philippines

8/27/2015
According to an article created by Vice News, there are 55 people who die in
the Philippines every day because of the lack of clean water. As one can see clean
water is greatly needed by all people. As a student who is lucky to be given all the
necessities needed in life it would be normal not to think of this because we normally
do not notice it. However, we need to. According to Katrina Arianne Ebora, who
works for UNICEF’s Water, Sanitation and Hygiene program in the Philippines
stated that “Over 30 million people in the Philippines do not have access to improved
sanitation facilities.” Also, according to the PIS by 2050 the population of the areas
with poverty in Manila will reach over 9 million! With the rising population of the
Philippines there will be a problem with the economy of clean water because there
will
be too much demand for the supply of water.

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.
S
T Price System in a Market Economy
A
C
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Nazareno Street, Barangay Poblacion Uno
Municipality of Bansalan
Province of Davao del Sur

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).
EQUILIBRIUM CHARACTERISTICS

Equilibrium is a point of
balance or a point of rest. It is The supply and demand are balanced in
also called “market-clearing equilibrium.
price”.

Equilibrium price is the price at The economic forces are balanced and in the
which the producer can sell all absence of external influences, the
the units he wants to produce (equilibrium) values of economic variables
and the buyer can buy all the will not change.
units he wants.

The amount of goods or services sought by

buyers is equal to the amount of goods or
Quantity demanded and services produced by sellers.
quantities supplied are equal.

Price System in a Market Economy: Its Characteristics

Let us learn more! The prices of goods that we encounter every day 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 table 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 an our movements are very limited.
Neither the producers nor consumers can impact prices; consumers can buy whatever
they want; nor can producers make and sell whatever they want Prices are decided by
interactions between the producers and the consumers. The market price is the point that the
supply
and demand curves intersect. (Judge, S. 2020)

P
Supply Demand
Q

Q
Figure 1.The Equilibrium Point or the Market Price Point

Price acts as a signal for shortages and surpluses which help firms and consumers
respond to changing market conditions.

If a good is in shortage – price will tend to rise. Rising prices discourage demand, and encourage
firms to try and increase supply.

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 NAZARETH HIGH SCHOOL OF BANSALAN, INC.
Nazareno Street, Barangay Poblacion Uno
Municipality of Bansalan
Province of Davao del Sur

If a good is in surplus – price will tend to fall. Falling price encourage people to buy, and cause
firms to try and cut back on supply.

Prices help to redistribute resources from goods with little demand to goods and services

The chart shows a surplus – the quantity is greater than demand. When quantity is greater
than demand it causes prices to go down.
P S

Surplus

D
Q
Figure 2. Surplus Point

PRICES ARE MARKET DRIVEN

The producers can make what they want and consumers are free to purchase what they
want. This means that customers live in a market economy. When prices are high, supply
increases as many firms join the market (Judge, S. 2020). Let’s say the units of cellular phones.
The numbers of suppliers have increased because of high prices of the cellular phones. When
smartphones were new in the market, there were fewer producers and prices were high. The high
prices attracted the producers to join the market (Judge, S. 2020).

D
Q
Figure 3. Shortage Point

In shortage, quantity is less than the demand; it causes prices to go up due to scarcity
Example of which is the shortage in masks and ethyl alcohol in the market. There is shortage in
the supply, thus, price tends to go up or tends to go higher (Judge, S. 2020).

Law of Supply and Demand

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 NAZARETH HIGH SCHOOL OF BANSALAN, INC.
Nazareno Street, Barangay Poblacion Uno
Municipality of Bansalan
Province of Davao del Sur

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.

PRICE ELASTICITY OF DEMAND AND SUPPLY

Can you guess what happened with this mom in a market? You
may write your reaction in the shape towards her. 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 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).
Price Elasticity of Demand (PED)= % change in quantity demanded % Change
in price

Price Perfectly inelastic

P Perfectly elastic

Unitary elasticity

Q
Figure 4 Price Elasticity of Demand

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 thepercentage change in price, and the coefficient of the elasticity is greater.
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

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 NAZARETH HIGH SCHOOL OF BANSALAN, INC.
Nazareno Street, Barangay Poblacion Uno
Municipality of Bansalan
Province of Davao del Sur

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 - 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.
• 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 he effect on the change in demand of one
good as a result of a change in price of related to another product.
• XED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓
𝑔𝑜𝑜𝑑 𝑌 • • 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. PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
If supply is elastic, producers can increase output without a rise in cost or a time delay. If
supply is inelastic, firms find it hard to change production in a given time period.
Price Elasticity of Supply (PES)   in Qs
 in P

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PES = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

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

PRICE ELASTICITY OF SUPPLY

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.
REMEMBER:
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.

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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

M
I Activity No.1
S Problem Solving and Critical Thinking Analysis
S Directions: Please analyze the problems carefully.
I Answer the problems and present your solutions.
O Interpret the results.
N

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: ________________________________________

Activity No.2 Directions:Identify the word or phrase that is appropriate to each item.
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.

Summative Assessment (Multiple Choice )

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CHECKPOINT!

Directions: Write TRUE if the statement is correctand FALSE if the statement is incorrect.
___________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.

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