Basic-Microeconomics-Module_WHOLE-JROMERO.pdf

Basic Microeconomics Joseph Anthony M. Romero Compiler Course No. BAC 201 Descriptive Title Basic Microeconomics Credit Units 3 School Year/Term 2022-2023/ 1st semester Mode of Delivery Blended Learning/Modified Face-to-face/Modular Name of Instructor Joseph Anthony M. Romero, CPA, MBA Course Description This course focuses on the study of the economic behavior of individual consumers, firms or industries and the distribution of total production and income. Moreover, it also seeks to analyze the market mechanism which establishes relative prices among goods and services and allocates society’s resources among their many alternative uses. Course Outcomes 1. Internalize and explain the theories and concepts concerning the economic behavior of individual consumers, firms, and industries and the distribution of total production and income; 2. Make descriptive analysis in the form of graphs, tables, etc. showing the relationships of the factors affecting the economic behavior of individual consumers, firms, and industries; 3. Appreciate the significance of the economic way of thinking in business decision making; and 4. Relate current events or trends to the study of economics and the management discipline SLSU Vision By 2040, Southern Leyte State University is a leading higher education institution that advances knowledge, innovation and compassion for humanity, creating an inclusive society and a sustainable world SLSU Mission We are a smart and green University that advances education, technological and professional instruction, research and innovation, community engagement services and progressive leadership in arts, sciences and technology that are relevant to the needs of our communities. We produce graduates and life-long learners equipped with knowledge that enhances lives and invigorates economic development CONTENTS Module No. Title Page Pre-Test 1-6 1 Introduction to Economics and Microeconomics 7-18 Exercises 19-22 2 Supply and Demand: How markets work 23-33 Exercises 33-38 3 Consumer Behavior 39-52 Exercises 53-55 4 Business Goals and Behavior 56-67 Exercises 68-70 5 Theory of Profit and Cost 71-83 Exercises 83-86 Post Test 87-92 MODULE GUIDE  This section provides a start-up activity to introduce LET’S TRY THIS! the lesson  This section introduces the lesson proper and provides LET’S LEARN THIS! valuable concepts for learning the topic  This section provides supplementary materials to LET’S LEARN MORE! enhance understanding of the lesson  This section provides a recall of what has been LET’S RECALL! introduced in the lesson  This section provides enabling activities for application LET’S Do THIS! of students’ learning Mr.  Defines the important terms used in the lesson for ease Economics of understanding  Contains some trivia and informative ideas related to the lesson  Provides a brief description of the next lesson Basic Microeconomics 1 PRE-TEST Multiple Choice Direction: This test is conducted to assess your prior knowledge of the topic. Read the questions carefully and choose the letter that corresponds to the best answer. Write the letter only. 1. The most fundamental economic problem is: a. Security b. Philippines buys more goods from foreigners than it sells to foreigners c. Health d. Scarcity 2. Economics is best defined as the study of how people, businesses, governments, and societies a. Attain wealth b. Make choices to cope with scarcity c. Choose abundance over scarcity d. Use their infinite resources 3. When a university decides to add to the football stadium instead of adding to the baseball stadium, it faces the: a. "what" tradeoff b. "how" tradeoff c. "why" tradeoff d. "for whom" tradeoff 4. Because we face scarcity, every choice involves: a. The question "what" b. Money c. An opportunity cost d. Giving up something for nothing 5. As an economic concept, scarcity applies to: a. Neither time nor money b. Both money and time c. Time but not money d. Money but not time 6. The opportunity cost of something you decide to get is: a. the amount of money you pay to get it b. the lowest valued alternative you give up to get it c. the highest valued alternative you give up to get it d. all possible alternatives that you give up to get it 7. Entrepreneurs do all of the following EXCEPT a. Bear risk from business decisions b. Come up with new ideas about what, how, when and where to produce c. Organize labor, land, and capital d. Own all the other resources 8. During the summer you have made the decision to attend summer school, which precludes you from working at your usual summer job in which you normally earn P10,000.00 for the summer. Your tuition cost is P6,000.00, books and supplies cost P400.00, and room and board cost P500.00. The opportunity cost of attending summer school is a. P6,000.00 b. P6,900.00 c. P10,000.00 d. P16,900.00 Basic Microeconomics 2 9. When a photographer decides to use a digital camera to take shots versus using a film, the photographer is facing the a. "what" tradeoff b. "when" tradeoff c. "how" tradeoff" d. "for whom" tradeoff 10. When the government chooses to use resources to build a dam, these sources are no longer available to build a highway. This choice illustrates the concept of a. Opportunity cost b. A market mechanism c. A fallacy of composition d. Macroeconomics 11. Is famed as the “father of modern economics” and wrote The Wealth of Nations. a. Michael Parkin b. Adam Smith c. Karl Marx d. Thomas Jefferson 12. Marginal benefit is the benefit a. That arises from the secondary effects of an activity b. Of an activity that exceeds its cost c. That your activity provides to someone else d. That arises from an increase in an activity 13. When firms in an economy start producing more computers and fewer televisions, they are answering the ________ question a. "how" b. "when" c. "what" d. "for whom" 14. When China builds a dam using few machines and a great deal of labor, it is answering the________ question a. "how" b. "when" c. "what" d. "for whom" 15. To answer the "for whom" question, we study a. Business cycles b. Technological change c. The global economy d. Income differences 16. Holding all other variables as constant and assessing the impact of the one variable that has changed is an example of using a. A flawed economic model b. The ceteris paribus assumption c. An untestable proposition d. Normative economic analysis 17. Which of the following is a resource as the term is used by economists? a. Money b. Labor c. Land d. All of the above Basic Microeconomics 3 18. In factor or input markets a. Consumers purchase products b. Firms supply goods c. Firms demand resources d. Households demand goods 19. Which of the following statements is true for a command economy? a. The state decides how to distribute what is produced b. Consumers have no choice concerning what they buy c. Manufacturers decide what is produced d. The amount of a good supplied always equals the amount of the good demanded 20. Which of the following is true of a market economy? a. Decisions are regulated by a central agency b. In its pure form, it is also known as a command economy c. It relies on millions of individual economic decisions to determine economic outcomes d. The government answers the basic economic questions of what gets produced, how it gets produced, and who gets it 21. In a command economy, ________ establishes what will be produced and when, sets production goals, and makes rules for distribution a. Individuals and households b. A centralized authority c. Only privately owned firms d. Individuals, households and privately owned firms 22. In a market system, self-interest motivates most people to a. Provide products for other people b. Avoid paying insurance premiums c. Remain self-sufficient d. Rely on government central planning 23. In broad terms the difference between microeconomics and macroeconomics is that a. Microeconomics studies the effects of government taxes on the national unemployment rate b. Macroeconomics studies the effects of government regulation and taxes on the price of individual goods and services whereas microeconomics does not c. Microeconomics studies decisions of individual people and firms and macroeconomics studies the entire national economy d. They use different sets of tools and ideas 24. Which of the following is a microeconomic topic? a. The reasons for a decline in average prices b. The reasons why Kathy buys less orange juice c. The cause of why the total unemployment increases d. The effect of the government budget deficit on inflation 25. Microeconomics focuses on all of the following EXCEPT a. The effect of increasing the money supply on inflation b. The purchasing decisions that an individual consumer makes c. The effect of an increase in the tax on cigarettes on cigarette sales d. The hiring decisions that a business makes 26. Is a group of buyers and sellers of a particular good or service a. Buying Group b. Selling Group c. Market d. Stock Exchange Basic Microeconomics 4 27. In this type of market structure, there is one large company that produces the product with very few substitute a. Perfect Competition b. Monopolistic Competition c. Oligopoly d. Monopoly 28. A situation in which there is an excess of the supply over the demand for a good a. Shortage b. Surplus c. Equilibrium d. Monopoly 29. When quantity demanded equals quantity supplied a. There must be no government intervention in the market b. The demand curve must be the same as the supply curve c. The market is in equilibrium d. All of the above 30. A situation in which there is an excess of demand over the supply of a good a. Shortage b. Surplus c. Equilibrium d. Monopoly 31. The law of ________ implies that as prices fall, ________. a. demand; demand falls b. supply; supply increases c. demand; demand increases d. demand; quantity demanded increases 32. According to the law of demand, quantity demanded increases as ________. a. prices rise b. prices fall c. demand increases d. demand decreases 33. According to the law of ________, there is a positive relationship between price and ________. a. supply; the quantity supplied b. supply; the change in supply c. demand; quantity demanded d. demand; change in demand 34. When prices go up – producers/sellers will be motivated to sell more. When prices go down – they will sell less. a. Law of Supply b. Law of Demand c. Equilibrium d. Disequilibrium 35. Laura is a manager for HP. When Laura decides whether to produce a few additional printers, she is choosing at the margin when she compares a. the extra revenue from selling a few additional printers to the additional costs of producing the printers b. the extra revenue from selling a few additional printers to the average cost of producing the additional printers c. the total revenue from sales of printers to the total cost of producing all the printers d. HP's printers to printers from competing companies, such as Epson Basic Microeconomics 5 36. Marginal utility is the ________ satisfaction gained by consuming ________ of a good. a. total; all units b. total; one more unit c. additional; one more unit d. additional; all units 37. Kathy eats five slices of pizza on a Saturday night but admits each slice of pizza doesnʹt taste as good as the previous one. This suggests that for Kathy the a. Total utility of slices of pizza is increasing by larger and larger increments b. Marginal utility of a slice of pizza is positive but decreasing c. Marginal utility of a slice of pizza is negative d. Total utility of slices of pizza is declining 38. Statement 1: The law of diminishing marginal utility implies that as a household consumes more of a product, its total utility will increase by smaller amounts ‐assuming marginal utility remains; Statement 2: A negative marginal utility implies negative total utility a. Only Statement 1 is true b. Only Statement 2 is true c. Both Statements are true d. Both Statements are false 39. An entrepreneur is a person who a. Assumes the risk of a firm b. Organizes and manages a firm c. Turns a new idea or product into a business d. All of the above 40. Firms engage in production to: a. Participate in the circular flow b. Develop a supply schedule c. Acquire profits d. Assume risk 41. The process of using ________ to produce new capital is known as ________. a. money; specialization b. resources; investment c. specialization; absolute advantage d. comparative advantage; inefficient production 42. An example of an investment is a. The purchase of an iPhone by a company for one of its salesmen b. The purchase of a shares of stock in San Miguel Corporation c. The purchase of a government Treasury bill d. All of the above 43. Which of the following demonstrates an act of production, as economists use the term? a. A worker places money in a pension fund b. An individual buys municipal bonds to avoid taxes c. A local nonprofessional theater company performs a play d. All of the above 44. The optimal production method a. Minimizes the normal rate of return b. Maximizes output regardless of cost c. Maximizes inputs d. Minimizes cost Basic Microeconomics 6 45. Costs of production are determined a. Only by the technologies that are available b. Only by the input prices that are available c. By the technologies that are available and by input prices d. By the technologies that are available and by the demand for the output 46. Total revenue minus total cost equals a. Profit or Loss b. Marginal cost c. Rate of return d. Marginal revenue 47. The formula for Total Cost is a. Total Cost = Total Fixed Cost - Total Variable Cost b. Total Cost = Total Variable Cost - Total Fixed Cost c. Total Cost = Total Variable Cost / Total Fixed Cost d. Total Cost = Total Variable Cost + Total Fixed Cost 48. The formula for Total Fixed Cost is a. Total Fixed Cost = Total Cost + Total Variable Cost b. Total Fixed Cost = Total Cost - Total Variable Cost c. Total Fixed Cost = Total Cost / Total Variable Cost d. Total Fixed Cost = Total Variable Cost - Total Cost 49. The Lawn Ranger, a landscaping company, has a total cost of P350,000.00 and a total fixed cost of P250,00000. The Lawn Rangerʹs total variable costs are a. P100,00.00 b. P150,00.00 c. P25,000.00 d. Indeterminate because the firmʹs output level is unknown 50. The dairy company, Farley Farm, has a total cost of P500,000 and a total variable cost of P150,000.00. Farley Farmʹs total fixed costs are a. P150,00.00 b. P350,000.00 c. P650,000.00 d. Indeterminate because the firmʹs output level is unknown Basic Microeconomics 7 MODULE 1 INTRODUCTION TO ECONOMIC THOUGHT & MICROECONOMICS INTENDED LEARNING OUTCOMES At the end of the lesson, you should be able to: 1. Explained the foundations of economic thought 2. Internalized the nature and scope of Microeconomics LET’S TRY THIS! In 2004, Mark Zuckerburg, the creator of Facebook ,invited five people into his room at Harvard to talk about a business opportunity. Only two went to meet him – Dustin Moskovitz and Eduardo Saverin and accepted the challenge! Later, they dropped from school to focus on their newly founded business. What started as an online community platform inside the university has now become the most influential social network in the world, boasting approximately to more than two billion monthly users. Today, both of them are billionaires and enjoyed the highly esteemed privilege of being co-founders of the world’s biggest social media platform – Facebook. QUESTIONS: 1. Imagine that you’re one of the five students invited by Mark, but you declined to his invitation, what could be the reason why you said “no” to talk about such a business opportunity? 2. What could have the two students lost by agreeing to meet Mark? 3. What if the three founders lose hope and shutdown their newly founded business and decided to finish their degree at Harvard? What could have happened to their careers? LET’S LEARN THIS! What is Question: Do any of these pictures related to your understanding of what Economics is? Basic Microeconomics 8 You might have heard the word “Economics” a lot – from newspapers, radio or television news, political advertisements, textbooks, your high school/college instructors. But what really is Economics? Is Economics a study of money and wealth or how to get rich? Is it a study about the stock market? Or is it about well-educated looking men forecasting the result of activities of a given market or the overall economy? Economics is the study of people and choices, the famous Economist Alfred Marshall defined Economics as: “A study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.” Let’s look at some examples:  Economics is a fresh high school graduate deciding whether to work or go to college and how that affects her future income.  Economics is a company deciding whether to produce tablets or smartphones and how that’s influenced by what we consumers want to buy.  Economics is the government deciding whether or not to increase its spending during a time of slow economic activity or is it worth going into debt. Understanding Economics can change the way you think and solve problems. No matter who you are, you will be using Economics. In fact, you are already using Economics right now! You made the choice to read this lesson. That means that you feel that the benefit outweighs the cost of doing other things. The cost of reading this lesson is the time you spent on not doing other things – the value of the next best alternative. Economists call this Opportunity Cost. If you’re still reading this lesson, it means that you believe this is the best use of your time and effort. Is a free Dinner free at all? Imagine this scenario, your boyfriend invites you for a dinner this evening, he will fetch you from school. You spent a moment thinking about the tasks that you would have to do tonight in preparation for your class report tomorrow. Nevertheless, you said yes to his invitation because you wanted to be with him, and who would say “no” for an invitation of a free dinner with your boyfriend? So, was there a cost on your part? Definitely, you did not spend a single centavo because your boyfriend paid for the dinner. But was it all free? What did you trade-off? What could have you accomplished if you said “no”? Basic Microeconomics 9 You could have finished your class report and sleep confidently knowing that you have prepared well for it. But because you weigh the benefits of going out with your boyfriend as more than the cost of your time in preparing for your class report, you chose what you thought will bring the most benefit. See, you are using Economics! In economics, we believe that resources are limited or scarce, these resources can be used in different ways. The cost of not being able to prepare for your class report is the opportunity cost of your decision to eat dinner with your boyfriend, that’s the trade-off. Opportunity Cost is the cost or value of the next best alternative. The one best thing that you gave up! Man’s Economic Activity Man is an economic being. Man’s basic economic activity consists of efforts to satisfy his needs and wants through the use of goods and services. There are three elements involved: 1. Human wants – human wants are unlimited. They vary from the needs for survival otherwise known as basic needs (e.g., food, clothing, and shelter), to higher needs for a comfortable and more meaningful life. In addition, mas is subject to created wants, developed due to effects of advertising and demonstrative effects of consumption. Human wants can be satisfied through goods and services. 1.1 Goods – These are physical or tangible items produced in an economy which can be sold. Goods can be categorized as follows: 1.1.1 Consumer goods – are final goods that give direct satisfaction to consumers (e.g. food, clothes, furniture, car, books, etc.) 1.1.2 Producer or Capital goods – are goods used in the production of other goods that satisfy the wants of the consumers directly or indirectly, such as machines, tools, tractors, agricultural and industrial raw materials (e.g. wool, coal, paper used in printing books, etc.) 1.2 Services – These consists of a function performed by one person for another. The products produced are intangible which cannot be seen or touched, rather, it is experienced. Services include banking, education, health and wellness, grooming (barber, salon, etc.), repairs, carpentry, etc. 2. Use of resources – the basic economic resources of a nation consists of land, labor, capital and entrepreneurship. Since these items are available in limited amounts, man has to learn to allocate them properly in order to maximize the number of wants that can be satisfied. 3. Technique of production – this shows how resources are used and combined in production. Thus, production is described as capital-intensive or labor-intensive depending on what factor is predominantly used. Basic Microeconomics 10 Business and the Production Process Business is an activity. Business is any lawful economic activity concerned with the production and distribution of goods and services for profit. The amount of capital investment, the size of organization, the number of employees and whether or not the business makes profit is immaterial. An entity is still a business if its objective is to make profits, this is the litmus test. Profit is the reward for taking risk in carrying out a business activity. A common feature that characterizes business activity is the transformation process. Any business has to utilize inputs, referred to as factors of production which are then transformed to produce an output, either a semi-finished product (e.g. rubber, cocoa, wheat, tin, etc.) or a finished one. The latter are sold directly to end consumers, while the former are sold on to another business to produce a finished product which are then sold to consumers. Shown below is a diagram of the production process flow: The factors of production need to be organized before they are combined to produce outputs. Economists classify factors of production in four main ways: 1. Land – includes all natural resources of the earth, not man-made, covering anything found on or under land including water, forests, minerals, and animals (land- and water-based); and pieces of land which factories or offices are built, or which is farmed. 2. Labor – pertains to all physical and mental effort provided by humans in production. This includes human activity ranging from the work of a Chief Executive Officers (CEO) in a private company or public institution to production staff and utility personnel. 3. Capital – materials used in the production of goods and services such as equipment, machineries, buildings, offices, shops, computers, mainframes, chairs, etc., including money. 4. Enterprise – the act of taking risks in the organization of the factors of production to generate business activity. The entrepreneur organizes the factors of production to be used in the creation of goods and services and hopes to receive a reward which includes profit and non-monetary rewards such as self-satisfaction, personal challenge, and personal autonomy. Basic Microeconomics 11 Demystifying Consumption The household is the basic consuming unit in the economy. Since human wants are unlimited, it maximizes its satisfaction through the proper allocation or mix of expenditures within the bounds of his/her budget. A student has a weekly allowance of P500.00 which he needs to budget for the week. His spending shall go to transportation, food, snacks, groceries, school supplies. There are also occasional purchases such as buying a cool t-shirt. A decision to buy a t-shirt means giving up some snacks as the satisfaction that will be gained from the former (buying a t-shirt) outweighs the satisfaction forgone from the latter (e.g. snacks). The business firm serves as the economy’s producing unit to satisfy human wants through goods and services. Production must take place in the factory before boutiques can sell those beautiful high-heeled pairs of shoes that the pretty ladies wear in school. The entrepreneur (owner of the shoe factory) had to gather the factors of production (e.g., hire some shoe cutters and sewers and skilled workers; buy leather, thread, metals, paste; shoe-making machineries) to come out with different shoe designs and colors displayed in the shop. The use of resources generates income for the resource owners. The owners of the land on which the factory is constructed charges rent for the use of his property. The shoe cutters, pattern-makers, dyers and other workers have to be paid wages for their efforts expended in production. The owner of the business have to forgo the alternative use (e.g. deposit in the bank to earn interest) of his money to invest in the business, this called capital. Even the entrepreneur has to do something out of pooling these resources for production and the income he earns is called profit. It is the entrepreneur who basically decides as to how production resources should be best combined in order to come with the desired output. The Fundamental Economic Problem As man is in pursuit of satisfying his wants (which is unlimited), he understands that his resources are limited. This is the fundamental economic problem – man’s unlimited wants and the scarcity of resources. The earth is blessed with resources of all kinds: oil, metals, land, minerals, Basic Microeconomics 12 plants, animals and so on. However, these resources are scarce. The need for Economics is anchored on this fundamental problem. Scarcity: Is a situation in which the amount of something available is insufficient to satisfy the desire for it. Resources are limited and can be used in different ways. All economic questions and problems arise from scarcity. Economics assumes people do not have all the resources to satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. Opportunity cost is the cost of the next best use of your time or money when you choose to do one thing rather than another. We just covered two important assumptions in economics: first is the idea of scarcity – people with unlimited wants but limited resources, and second, everything has a cost or an alternative use of it. And if these assumptions are true, then we need a way to analyze our choices and get the most of our limited resources. That’s Economics. Economics is:  The study of choice under conditions of scarcity.  The study of how scarce resources are allocated to fulfill the infinite wants of consumers.  As a society, since our resources (land, labor, and capital) are insufficient to produce all the goods and services we might desire, we need economics to guide us in our choices. Basic Economic Problems All nations, big or small, developed and underdeveloped, have to find answers to the following economic problems: Basic Questions Specific Questions: 1. What to Refers to the types of goods/services society desires. produce?  Will a country produce agricultural goods or capital goods?  Should the country focus on producing equipment for war or consumer goods? 2. How much to Refers to the quantity of each good that will compose the total output produce?  Supposing a country decides to manufacture shoes, how many pairs should be manufactured?  If rice production is a priority, how much should the total output be? Basic Microeconomics 13 3. How to Refers to the technique of production and the manner of combining the produce? resources.  What materials will be used to produce shoes?  Will the production of shoes involve the use of more labor or more machinery? 4. For whom to Refers to the market to which the producers will sell their products. produce?  Will shoes be sold to high income groups or poorer buyers?  Will the market be males, females or children?  Should the shoes be sold to domestic consumers or foreign markets? An Overview of the Economy Within the economy, the basic activities of production, consumption, employment, and income generation take place through the interrelationship existing between the basic consuming unit – household, and the basic producing unit – business firm in the overall economy. But there is also another key player in the economy who buys products and resources for the public – government. These interrelationships are shown in the Circular flow of Economic Activity model. Government The Circular-Flow Diagram is a visual model of the economy. It shows how money flow through markets among households and firms. There are three types of actors and two types of markets depicted in the diagram:  Three actors: a) Households b) Business firms c) Governments  Two markets: a) Product Market – market for goods and services b) Resources Market – market for factors of production (land, labor, and capital) Basic Microeconomics 14 Business firms sell goods and services to households in the product market. The households need to pay for those goods and services by selling their resources, like labor to firms. This is done in the resources market. Firms uses the money they earned from selling products and services in the product market to pay for resources in the resource market. The government also buys products and resources. For example, they buy equipment and uniforms from firms and hire government employees, like policemen and doctors. The government pays for public goods, like roads, bridges and pubic services, like firefighters and teachers. They also subsidize businesses to produce good stuffs, such as fuel efficient cars and so on. But where does the government get all the money? They get money from taxing households and businesses, and some of it from borrowing. The circular flow of products, resources and money, and the interaction between households, business firms and the government show just how a modern economy works. Types of Economic Systems A country’s economic system may be classified as traditional, command, or market systems. Traditional Command Market  In this system production  In this system, answers to  This system deals with the decisions are made the basic economic economic problems by according to customs and problems are dictated by considering consumers’ traditions. The producer the government through choices. The indicators are simply employs methods the head of the nation or a consumers’ demand in the that have been used years group of men designated by market as reflected in the before by his ancestors. the head to make the prices of goods and  This is usually practiced decisions. services. by underdeveloped  The government plans what  Market prices serve as regions and in to produce and how signals to the producers mountainous areas where resources should be about what goods to transportation and allocated. The system produce and how much of communication is works under the principle these goods should be practically non-existent. that the interests of society produced. High prices should prevail over that of indicate that goods are in the individuals, hence, demand and serve as go  Consumers’ choice are not signals for production. included in the decision However, prices of goods making process with regard tend to fall when not in to answering society’s basic demand and serve as red economic problems. light to decrease or limit the production. Basic Microeconomics 15 Planned Economy VS Market Economy Planned Economy Market Economy  The government controls the factors of  Individuals own the factors of production production (e.g. land, labor and capital) (e.g. land, labor and capital) Features of Planned Economy: Features of Market Economy:  Communism – A social order where  Laissez Faire – Is the belief that everyone owns the factors of production economies and businesses function best and output is distributed equally. For Karl when there is no interference by the Marx, its aim is the abolition of private government in production, commerce and property, a class-less society. trade. It comes from the French  Socialism – A system where there is both expression: “to leave alone” or “allow to private property and some public do”. ownership and control of industry.  Invisible hand – For Adam Smith, it refers  In both communism and socialism, there is to the mysterious power that leads people economic planning, and the government – each working for his own gain will result (in the form of a bureaucratic agency) to promoting the economic well-being of helps decide what, how much, how and for society. whom to produce.  In free market economy, business makes  Command economy – the economy is things for profit. As a result, consumers completely controlled by the government. benefit from a wide array of choices – features and prices that suit them. The Mixed Economy It is seldom that an economic system exists in its purest form.  The United States of America is market-oriented but there exists some form of government involvement and control, such as subsidies given to companies producing fuel efficient technologies.  The People’s Republic of China is basically command in nature (socialist) but it allows private share ownership. Some enterprises keep the profits among themselves instead of redistributing them to the public. The Philippine economy is a mixture of the three forms of economic systems discussed. In the mountains and isolated barrios, most farmers and still traditional in their production methods. While most buyers and sellers and influenced by the price system, it cannot be denied that the government plays a significant role in decision-making with regards to production, business, and industry. Basic Microeconomics 16 The existence of price control, strict government regulations, government support, and subsidy programs are proofs of the importance of government participation in decision-making in the country’s production activities. In a mixed economy like ours, the question of what to produce and how to produce answered predominantly through the price mechanism, are modified through government intervention in the form of direct controls, taxes, and subsidies. The problem of for whom to produce is also solved by the price-mechanism coupled with different forms of government regulation. The economy will produce those commodities that will satisfy the wants of those people who have the money to pay for them. Predominantly, the Philippine economy is free enterprise in nature, but the best way to describe our economic system is a mixed economy. Divisions of Economics Microeconomics and Macroeconomics constitute the basic analysis tool kit of the discipline of Economics. Both parts of the kit are essential to a thorough understanding of economic activity. Microeconomics Is concerned primarily on the behavior of households (consumers), firms (resource owners and business firms), and governments – the choices they make and their interactions in specific markets.  It is concerned with the flow of goods and services from business firms to consumers, the composition of the flow, and the process for establishing relative prices of the component parts of the flow.  It is concerned too with the flow of resources (or their services) from resource owners to business firms, with their evaluation, and with their allocation among alternative uses. Macroeconomics Treats the economic system as a whole rather than treating the individual economic units of which it is composed. It looks at the whole nation’s output: unemployment, inflation, interest rates, government spending and growth.  Macroeconomics concentrates on the causes of change in aggregate money flows, the aggregate movement of goods and services, and the general employment level of resources. Basic Microeconomics 17 Microeconomics Macroeconomics  Micro comes from the Greek word –  Macro comes from Greek word – “makros”, “mikros”, meaning small. meaning large.  It focuses on individual parts of an  Studies the economy as a whole. It focuses economy, rather than the whole. on the bigger picture of the economy. Microeconomics answer questions such as: Macroeconomics answer questions such as:  “How many workers should we hire to  “Will unemployment rise if there is an maximize profit?” increase in taxes?”  “If our main competitor releases their  “Will an increase in the money supply (or product in May, when is the best time to printing more money) boost output, or just release our products?” increase inflation?” Characteristics of Microeconomics As mentioned earlier, microeconomics is concerned with the process of resource allocation by individual decision units or markets. It is also concerned with the efficiency with which these resources are allocated. From this definition, some characteristics can be deduced: 1. Microeconomics looks at the decisions of individual units. It focuses on choices – resources allocations made by individual decision units as households, producers and firms. Relevant questions can be asked:  How efficiently are we using our resources?  Could we obtain more output from the same resources if we reorganize our methods of production? 2. Microeconomics looks at how prices are determined in various types of market structures (e.g. pure competition, monopoly, monopolistic competition, oligopoly). Relevant questions can be asked:  Should a monopolist increase its price?  Should a producer in an oligopolistic market lower his price? 3. Microeconomics is concerned with social welfare. It examines the efficiency, relative desirability, and choice of alternative methods by which resources are utilized to alleviate scarcity. Relevant questions can be asked:  Is it prudent to buy additional arms for defense or make public hospitals?  Is it wise to impose price control? 4. Microeconomics has a limited focus. It does not touch areas of economics at the aggregate level of employment of resources or the rate of inflation. Basic Microeconomics 18 5. The study of microeconomics can help develop one’s skill in logical reasoning, construction and use of models, in optimizing techniques useful for making decisions in a variety of situations, and personal resource allocation decisions. LET’S LEARN MORE!  Read the chapter entitled Ten Principles of Economics (page 3-15) in Principles of Microeconomics 8th Edition by N. Gregory Mankiw  Watch in Youtube:  Introduction to Economics: Crash Course Economics # 1 https://www.youtube.com/watch?v=3ez10ADR_gM  Economic Schools of Thought: Crash Course Economics #14 https://www.youtube.com/watch?v=tZvjh1dxz08  Economics in The Lion King - Econmovies https://www.youtube.com/watch?v=3eyQuNZVJGc LET’S RECALL! 1. In the opening activity we learned about the founders of Facebook and its beginnings, what concept/s in economics can best explain your answers to the questions asked? 2. What is the fundamental economic problem? Does Economics provide answers to this problem? If yes, then how? 3. Who are the actors involved in the economy? How do they interact with one another? 4. Explain the nature of the Philippine Economy. Why does the market economy work best with ours? 5. What are two divisions in the study of Economics? When do we use them? 6. As a future business leader or entrepreneur, why is microeconomics an excellent topic to study? In the next lesson, we’re going to tackle in detail about microeconomic concerns and concepts. We will begin with the mechanisms of markets and the interaction between demand, supply, and price. Basic Microeconomics 19 LET’S Do THIS! Exercise 1 PROBLEMS AND APPLICATIONS 1. Discuss some of the trade-offs faced in each of the following situation: a. A decision by an entrepreneur starting a small business to borrow some start-up capital from a bank or raise a fund through borrowing from friends and relatives. _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ b. A member of the government deciding how much to spend on some new military equipment for the defense industry. _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ c. A CEO deciding whether to invest in a new computerized inventory and data analytics system for several grocery outlets of the company _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ 2. You work in a bank and were planning to spend the Saturday going to watch with your son and daughter. However, your Boss asked you if you can help prepare some important financial data that the external auditor have requested. It is not compulsory to come in over the weekend but you understand that your Boss needed it so badly. a. If you decide to go to the football match, what is the cost to you of that decision? _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ b. If you decide to go into work for the weekend to help out your boss, what is the cost to you of that decision? _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Basic Microeconomics 20 Exercise 2 Multiple Choice: Encircle the letter of the best answer. 1. Economics is best defined as the study of how people, businesses, governments, and societies a. Attain wealth c. Choose abundance over scarcity b. Make choices to cope with scarcity d. Use their infinite resources 2. In this system, market prices serve as signals to the producers about what goods to produce and how much of these goods should be produced. a. traditional system c. market system b. command system d. mixed system 3. In this system, production decisions are made according to customs and traditions: a. traditional system c. market system b. command system d. mixed system 4. The system works under the principle that the interest of society should prevail over that of the individual: a. traditional system c. market system b. command system d. mixed system 5. In this system, the economic problems are answered predominantly through the price mechanism and modified through government intervention: a. traditional system c. market system b. command system d. mixed system 6. An economy where individuals exercise free enterprise: a. traditional system c. market system b. command system d. mixed system 7. The basic consuming unit: a. firms c. resource b. household d. mixed system 8. What economic problem does this situation point to: Will the production of shoes involve the use of more labor or more machinery a. “what to produce” c. “how to produce” b. “how much to produce” d. “for whom to produce” 9. When a university decides to add to the football stadium instead of adding to the baseball stadium, it faces the: a. "what" tradeoff c. "how" tradeoff b. “why" tradeoff" d. ”for whom" tradeoff Basic Microeconomics 21 10. Machines, tools, and equipment used in production: a. land c. entrepreneur b. labor d. capital 11. Because we face scarcity, every choice involves: a. The question "what" c. An opportunity cost b. Money d. Giving up something for nothing 12. The opportunity cost of something you decide to get is: a. the amount of money you pay to get it b. the lowest valued alternative you give up to get it c. the highest valued alternative you give up to get it d. all possible alternatives that you give up to get it 13. During the summer you have made the decision to attend summer school, which precludes you from working at your usual summer job in which you normally earn P10,000.00 for the summer. Your tuition cost is P6,000.00, books and supplies cost P400.00, and room and board cost P500.00. The opportunity cost of attending summer school is a. P6,000.00 c. P10,000.00 b. P6,900.00 d. P16,900.00 14. In broad terms the difference between microeconomics and macroeconomics is that a. Microeconomics studies the effects of government taxes on the national unemployment rate b. Macroeconomics studies the effects of government regulation and taxes on the price of individual goods and services whereas microeconomics does not c. Microeconomics studies decisions of individual people and firms and macroeconomics studies the entire national economy d. They use different sets of tools and ideas 15. Microeconomics focuses on all of the following EXCEPT a. The effect of increasing the money supply on inflation b. The purchasing decisions that an individual consumer makes c. The effect of an increase in the tax on cigarettes on cigarette sales d. The hiring decisions that a business makes Basic Microeconomics 22 Exercise 3 Matching Type: Write the letter that matches the correct answer in the blank. ___________ 1. Macroeconomics a. Subject to change on variations ___________ 2. Microeconomics b. Intervention by the government to manipulate results of economic activity ___________ 3. Theories c. Basic consuming unit of the economy ___________ 4. Variable d. Economic analysis ___________ 5. Household e. What, how, how much and for whom to produce ___________ 6. Normative economics f. Economy as a whole ___________ 7. First step in constructing g. Communist countries a theory h. Customs and traditions ___________ 8. Law of supply and demand i. Price theory j. State of balance ___________ 9. Basic economic problem k. Best known economic model ___________ 10. Traditional Economy l. Hypotheses ___________ 11. Command Economy m. Definition of postulates n. A problem that leads to existence of idle ___________ 12. Philippine Economy resources ___________ 13. Equilibrium o. Mixed economy ___________ 14. Economic Policy p. Principles q. It deals with what should be ___________ 15. Unemployment Basic Microeconomics 23 MODULE 2 SUPPLY AND DEMAND: HOW MARKETS WORK INTENDED LEARNING OUTCOMES At the end of the lesson, you should be able to: 1. Explain the mechanisms involved in markets and its behavior; and 2. Analyze and draw the functional relationship between demand, supply and price, and find the equilibrium price and quantity LET’S TRY THIS! The world is facing an unprecedented global health, social and economic emergency with the Covid-19 pandemic. Travel and tourism are among the severely affected sectors with airplanes on the ground, hotels closed and travel restrictions put in place in virtually all countries around the world. The Covid-19 pandemic has cut international tourist arrivals in the first quarter of 2020 and is expected to continue in the later quarters of the year. 100 – 120 million direct tourism jobs are at risk. This is by far the worst result in the historical series of international tourism since 1950 and would put an abrupt end to a 10-year period of sustained growth since the 2009 financial crisis. Considerable challenges remain ahead, starting with the unknown duration of pandemic and travel restrictions, in the context of a global economic recession. Countries around the world are implementing a wide range of measures to mitigate the impact of the Covid-19 outbreak and stimulate the recovery of the tourism sector. Source: https://unwto.org/impact-assessment-of-the-covid-19-outbreak-on-international- tourism QUESTIONS: 1. What is the impact of the pandemic on the demand, supply and price of products and services offered by the travel and tourism sector? 2. List two travel and tourism businesses in the Philippines that are still able to operate amidst the Covid-19 pandemic? 3. Describe the new normal for the travel and tourism market as a result of the pandemic and why it is so. Basic Microeconomics 24 LET’S LEARN THIS! What is a Market? The terms supply and demand refer to the behavior of people as they interact with one another in competitive markets. A market is a group of buyers and sellers of a particular good or service.  Buyers as a group determine the demand for the product  Sellers as a group determine the supply of the product Forms of Markets  Highly Organized. Example: markets for many agricultural commodities. Buyers and sellers of agricultural commodities meet at a specific time and place, and an auctioneer helps set prices and arrange sales.  Less Organized. Example: markets for ice cream. Buyers of ice cream do not meet together at any one time and sellers are in different locations and offer somewhat different kinds of ice cream. There is no auctioneer. Each seller posts a price per ice cream cone, and each buyer decides how much ice cream to buy at each store. In this case, consumers and producers of ice cream are closely connected. Though not organized, the group of ice cream buyers and ice cream sellers forms a market. “The key to markets is the concept of voluntary exchange. That is, buyers and sellers willingly decides to make a transaction.” Let’s say you go to a farmer’s market to buy one kilo of mangoes for one hundred pesos. In this case, you value the one kilo of mangoes more than the one hundred pesos you gave up to get it. On the other hand, the seller valued the one hundred pesos you paid more than the one kilo of mangoes. This transaction is win- win because you got your mangoes and the farmer got his money. You both feel better off. This is what voluntary exchange is. Is this that simple? Most markets are characterized by competition. Competition exists when two or more firms are rival for customers. Each firm strives to gain the attention and customs of buyers in the market. Basic Microeconomics 25 A perfectly competitive market is one with many buyers and sellers, so that no single buyer or seller has a significant impact on price. The idea of voluntary exchange is that sellers could not make themselves better off if they don’t make buyers better off. Types of Market Structures There are four basic types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly. These types of market structures vary based on the number of producers, control of production and barriers to entry. As shown in the diagram above, there is more competition and less concentration on the left end side of the spectrum, while less competition and more concentration on the right end side. 1. Perfect Competition – There are thousands of producers all growing identical products and are easy to get in the market. Example: fruits, vegetables, scissors, papers, etc. 2. Monopolistic Competition – Is a market with many producers with relatively low barriers to entry. Their products are similar but not identical. Example: furniture, fast-food (Mcdonalds or Burger King). 3. Oligopoly – Is a market with higher barriers to entry and is controlled by a few large companies. Like monopolistic competition, their products are similar but not identical. In an Oligopoly, firms make decisions with the actions of their competitors in mind. Example: cellphones, laptops, cars, motorcycles, air travel, television channels, etc.  Non-price Competition – Competition without changing the price (e.g. quality, location, service, advertising). The goal is to distinguish their products from competitors.  Price Leadership – When one company changes its price, its competitors decide if they’re going to follow. 4. Monopoly – There is one large company that produces a product with very few substitutes. Since high barriers prevent competition, a monopoly has a lot of control over the price. Example: electricity, water, other utilities, etc. Basic Microeconomics 26 The Market Mechanism A market is a mechanism through which buyers and sellers interact to determine the price of a good or service. Price is the value of a good in terms of money.  In the market system, prices serve as signals to both producers and consumers to act. If a consumer wants more of a good, this will cause the price of that good to increase. Rising prices encourage producers to increase the supply of the good. High prices are therefore a green light to producers since these normally mean rising profit margin. However, if a good is overstocked, suppliers of this good will lower their prices so they can dispose of their excess supply. These low prices will attract consumers to buy the goods. What will ensue because of this is the restoration of a balance or equilibrium between buyers and sellers. The Law of Demand & Supply Before we proceed to a comprehensive discussion of the interaction between demand, supply, and price, let’s familiarize important terminologies first:  Demand – reflects the consumer’s desire for a commodity.  Supply – the amount of a commodity available for sale.  Aggregate Demand – the totality of a group of consumer’s demand.  Aggregate Supply – the totality of a group of producer’s supply.  Demand Schedule – the quantities consumers are willing to buy of a good at various prices.  Supply Schedule – the quantities producers/sellers are willing to offer for sale at various prices.  Demand Function – shows how quantity demanded is dependent on its determinants.  Supply Function – shows how quantity supplied is dependent on its determinants  Equilibrium – a situation in which supply and demand have been brought into balance  Surplus – an excess of supply over the demand for a good.  Shortage – an excess of demand over the supply of a good.  Non-price factors – are factors other than price that also affect demand or supply. In the succeeding discussion, we will look at the concept of demand and supply in terms of quantity demanded and quantity supplied. Basic Microeconomics 27 Demand The demand for a product is the quantity that buyers are willing to buy.  Law of Demand: when prices goes up – people will buy less. When prices goes down – people will buy more. The demand schedule shows the quantity of the product demanded by a consumer or an aggregate of consumers at any given price. From our daily experience of buying and selling, we know that prices influence people to buy more or less. Therefore, the demand function shows how the quantity demanded of a particular good responds to price changes as stated in the law of demand. Shown below is the demand schedule for a kilo of rice for the month of November. 70.00 Qty. Price of Rice 65.00 Demanded 60.00 (per kilo) (in kilos) 55.00 50.00 55.00 75 45.00 50.00 100 40.00 35.00 45.00 125 30.00 D1 25.00 40.00 150 20.00 15.00 35.00 175 10.00 5.00 30.00 225 - 0 25 50 75 100 125 150 175 200 225 250 The demand curve is a graphical presentation of the demand schedule and therefore, contains the same prices and quantities presented in the demand schedule. The normal demand curve slopes downward from left to right. Let’s assume that the demand for rice increased in the month of December due to many parties and family celebrations during the Christmas season (assume no increase in price). 70.00 Qty. Qty. 65.00 Price of Demand- Demand- 60.00 Rice (per ed ed 55.00 kilo) (Initial) (Increase) 50.00 55.00 75 100 45.00 40.00 50.00 100 125 35.00 30.00 45.00 125 175 D1 D 25.00 2 40.00 150 200 20.00 15.00 35.00 175 225 10.00 5.00 30.00 225 250 - 0 25 50 75 100 125 150 175 200 225 250 Basic Microeconomics 28 We notice the shift of the demand curve as a result of the increase in the quantity demanded as influenced by people’s activity during the Christmas season. Increase in demand causes the demand curve to shift to the right and reflects an increase in actual demand at every price level. The demand curve may also shift to the left showing a decrease in demand. This shows that there are non-price factors that affect the demand of a particular good which causes the demand curve to shift to the right (increase) or left (decrease). Listed below are some non-price factors that affect the demand of a particular good. Non-Price Factors Shift in the slope of the Demand Curve Increase in income Shift to the right Decrease in income Shift to the left Greater taste/preference Shift to the right Less taste/preference Shift to the left Increase in population Shift to the right Decrease in population Shift to the left Greater speculation Shift to the right Less speculation Shift to the left Supply The supply for a product is the quantity that sellers are willing to sell.  Law of Supply: when prices goes up – producers/sellers will be motivated to sell more. When prices goes down – they will sell less. The supply schedule shows the quantities that are offered for sale at various prices. Shown below is the supply schedule of for a kilo of rice for the month of November. 70.00 Qty. Price of Rice 65.00 Supplied (per kilo) 60.00 (in kilos) 55.00 S1 55.00 225 50.00 45.00 50.00 220 40.00 35.00 45.00 175 30.00 25.00 40.00 150 20.00 15.00 35.00 125 10.00 30.00 75 5.00 - 0 25 50 75 100 125 150 175 200 225 250 Based on the schedule, we can see that higher prices serve as incentives for the sellers/producers to produce more rice for sale, while low prices discourage them from offering more quantities to sell. Basic Microeconomics 29 Let’s assume that the supply for rice increased in the month of December since suppliers are motivated to produce more rice in anticipation for the Christmas season (assume no increase in price). 70.00 Price of Qty. Qty. 65.00 Rice (per Supplied Supplied 60.00 S1 S2 55.00 kilo) (Initial) (Increase) 50.00 55.00 225 250 45.00 50.00 220 225 40.00 35.00 45.00 175 200 30.00 25.00 40.00 150 175 20.00 15.00 35.00 125 150 10.00 30.00 75 100 5.00 - 0 25 50 75 100 125 150 175 200 225 250 We notice the shift of the supply curve as a result of the increase in the quantity supplied. Increase in supply causes the supply curve to shift to the right and reflects an increase in actual supply at every price level. The supply curve may also shift to the left showing a decrease in quantity supplied. This shows that there are non-price factors that affect the supply of a particular good which causes the supply curve to shift to the right (increase) or left (decrease). Listed below are some non-price factors that affect the supply of a particular good. Non-Price Factors Shift in the slope of the Demand Curve Increase in the number of sellers Shift to the right Decrease in the number of sellers Shift to the left Better output of production Shift to the right Decrease in the cost of production Shift to the right Ceteris Paribus Assumption In analyzing the functional relationships between price and quantity demanded, as well as price and quantity supplied, non-price factors are assumed to be constant. Non-Price Factors Affecting Quantity Non-Price Factors Affecting Quantity Demanded Supplied Tastes and preferences Cost of Production Income Availability of economic resources Expectation on future prices Number of firms in the market Prices of related goods (substitute Technology applied components and complements) Producer’s goals Size of population Basic Microeconomics 30 The Ceteris Paribus assumes that:  The law of demand states “assuming other things constant, price and quantity demanded are inversely proportional”  The law of supply states “other things assumed as constant, price and quantity supplied are directly proportional” If the Ceteris Paribus assumption is dropped, then changes in the non-price factors shall take place. This will result in a change of position or slope of the demand curve and a change in the entire demand schedule. Market Equilibrium According to the famous economist Alfred Marshall, demand and supply should eventually be analyzed as one since the market operates within the forces of both demand and supply. Putting the demand and supply curves together will show the point of market equilibrium. This Market Equilibrium is attained at the point where demand is equal to supply. Using the information above for the demand and supply of the kilo of rice for the month of November, we will combine the demand and supply curves to look into the point of market equilibrium. 70.00 Qty. Price of Qty. 65.00 Demand- Rice (per Supplied 60.00 ed S1 kilo) (Initial) 55.00 (Initial) 50.00 55.00 75 225 45.00 50.00 100 220 40.00 35.00 45.00 125 175 30.00 D1 25.00 40.00 175 150 20.00 35.00 200 125 15.00 10.00 30.00 225 75 5.00 - 0 25 50 75 100 125 150 175 200 225 250 As shown in the graph, there is only one point where demand is equal to supply. This point of equality is the equilibrium point. It corresponds to a price of P40.00 – this is the equilibrium price. At this price, the quantity supplied equals the quantity demanded at 150 kilos of rice which represents the equilibrium quantity. Ideally, at the equilibrium point, all quantity that is offered for sale will be bought by the consumers, and all the quantity demand will be met by the quantity offered by the sellers. This is the ideal situation, any price above or below P40.00 will cause a mismatch on the part of the seller and the buyer. These mismatches can either be a surplus or a shortage. Basic Microeconomics 31 Let us consider the price above the equilibrium point, for example P50.00. At this price, there is a mismatch, the quantity demanded by the buyers is 100 kilos while the seller will be motivated to sell more at 180 70.00 kilos. There is a surplus of 80 65.00 60.00 kilos. This mismatch happens 55.00 Surplus S1 because high prices will 50.00 45.00 encourage producers/sellers to 40.00 Equilibrium Point produce more but only little 35.00 30.00 Shortage number of consumers will buy D1 25.00 them. A surplus is sometimes 20.00 15.00 called a situation of excess supply. 10.00 For prices below the 5.00 - equilibrium point, for example 0 25 50 75 100 125 150 175 200 225 250 35.00. At this price, the quantity demanded by the buyers is 175 kilos while the seller will sell only 125 kilos. There is a shortage of 50 kilos. This mismatch happens because this will attract buyers to demand for more, however, it will discourage seller from offering more. Hence, consumers’ demand will not be completely met. A shortage is sometimes called a situation of excess demand. Shifts of Either Demand and Supply Curve The points of equilibrium is subject to change. Shifts in either the demand curve alone, or the supply curve alone, or in both the demand and supply curve at the same time can cause a change in the equilibrium point. For example, a rightward shift of the demand curve (D2) with the original supply curve (S1) maintained, will result in an increase in the equilibrium price as shown in the graph. From 70.00 the original equilibrium price of 65.00 P40.00, the new equilibrium price 60.00 55.00 S1 has now shifted to P45.00 as a Original New Equilibrium 50.00 Equilibrium Point Point result of the rightward shift in 45.00 40.00 quantity demanded. 35.00 This means that an increase in 30.00 25.00 D1 D2 quantity demanded without a 20.00 change in quantity 15.00 10.00 supplied will result into a higher 5.00 equilibrium price. 25 50 75 100 125 150 175 200 225 250 Basic Microeconomics 32 A shift in the supply curve 70.00 (S2), with the original demand curve 65.00 maintained (D1), will result in a 60.00 S1 S2 55.00 decrease in the equilibrium price as 50.00 shown in the graph. From the original 45.00 Original equilibrium price of P40.00, the new 40.00 Equilibrium Point New Equilibrium equilibrium price has now shifted to 35.00 Point 30.00 about P37.5 as a result of the 25.00 D1 rightward shift in quantity supplied. 20.00 This means that an increase 15.00 10.00 in quantity supplied without a 5.00 change in quantity demanded will 25 50 75 100 125 150 175 200 225 250 result into a lower equilibrium price. Simultaneous Shifts in Demand and Supply Curve Let us now illustrate a case in a long run period, where demand and supply curves undergo shifts simultaneously. 70.00 The rightward shift of the 65.00 Demand curve (D2) and Supply 60.00 S1 S2 curve (S2) has a resulted in a 55.00 new equilibrium position at the 50.00 New Equilibrium intersection of D2 andS2. 45.00 Point 40.00 Original Equilibrium Because the increase in demand Point 35.00 was matched by a 30.00 proportionate increase in D1 D 2 25.00 supply, the Equilibrium price 20.00 15.00 has increased to about P42.50 10.00 while a new equilibrium 5.00 quantity increased to about 25 50 75 100 125 150 175 200 225 250 187.5 Conclusion: In this lesson we analyzed how markets work which is mostly affected by the interaction between supply and demand. Whenever you go to a shop to buy something, you are contributing to the demand for that item. Whenever you look for a job, you are contributing to the supply of labor services. Because supply and demand are such pervasive economic phenomena, the model of supply and demand is a powerful tool for analysis in every day decision making. Basic Microeconomics 33 LET’S LEARN MORE!  Read the chapter Those Two Lines (page 14-20) in Simplified Principles of Microeconomics by Hazbo Skoko  Watch in Youtube:  Supply and Demand: Crash Course Economics # 4 https://www.youtube.com/watch?v=g9aDizJpd_s  Demand and Supply - EconMovies #4: Indiana Jones https://www.youtube.com/watch?v=N-2mF0rGgUQ LET’S RECALL! 1. In the opening activity we learned about the impact of Covid-19 to the global travel and tourism sector, let’s revisit the first question: What is the impact of the Pandemic to the demand, supply and price of products and services offered by travel and tourism sector? 2. What is the principle behind markets? 3. What are the types of market structures? Illustrate them using a diagram. 4. State the law of demand and supply. 5. What are the non-price factors that affect demand? 6. What are the non-price factors that affect supply? 7. What is market equilibrium? In the next lesson, we’re going to discuss the concept of consumer behavior. We’re going to dig deeper about why consumers behave like they do and what motivates them. LET’S Do THIS! Exercise 1 PROBLEMS AND APPLICATIONS 1. Consider the market for large car manufacturer. For each of the scenarios, identify which of the determinant of supply or demand is affected. Indicate whether supply or demand is increased or decreased. Basic Microeconomics 34 a. People decide to have more children _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ b. A strike by steel workers raises steel prices _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ c. Engineers developed new automated machinery for the production of cars _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ d. A stock market crash lowers people’s wealth _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ e. The price of second-hand cars rises _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ 2. “An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.” Is this statement true or false? Explain. _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Exercise 2 True or False: Write TRUE in the space provided if the statement is correct and FALSE if incorrect. ____________ 1. A market is a mechanism of interaction between buyers and sellers for trade or exchange. The consumer sells and the seller buys. ____________ 2. The demand for a product is the quantity of a good that the buyers are willing to buy at certain prices. A demand schedule shows the different quantities that will be sold by the sellers given various prices. ____________ 3. A demand function shows how the quantity demanded of a good is dependent on its determinants, the most important of which is the price of the goods itself. ____________ 4. One of the non-price determinants of demand is taste. Taste or preference may vary from person to person. ____________ 5. The consumers’ income does not influence the demand for goods and services. The increase in demand due to an increase in income is not experienced in the economy. ____________ 6. An increase in population results in a greater demand since there will be more consumers as population increases. ____________ 7. The supply of a product is the quantity of goods that sellers are willing to sell. The supply schedule shows the different quantities that will be sold. ____________ 8. The demand curve is upward sloping to the right while the supply curve downward sloping. ____________ 9. When the income of the consumer increases it can shift the demand curve upward to the right representing increase in demand. ____________ 10. Expectations as to future incomes and prices may cause a shift of the demand curve. Basic Microeconomics 35 Exercise 3 Tell whether the curve will shift to the right or to the left. Write A in the blank if it shifts to the right and B if it shifts to the left. I. Demand Curve __________ 1. Increase in population __________ 2. Decrease in income __________ 3. Increase in income __________ 4. Increase in taste __________ 5. Decrease in population II. Supply Curve __________ 1. Increase in cost of production __________ 2. Increase in technology __________ 3. Decrease in cost of production __________ 4. Typhoon hit the rice lands __________ 5. Decrease in technology Exercise 4 Multiple Choice: Encircle the letter of the best answer. 1. Is a group of buyers and sellers of a particular good or service a. Buying Group c. Market b. Selling Group d. Stock Exchange 2. In this type of market structure, there is one large company that produces the product with a very few substitute a. Perfect Competition c. Oligopoly b. Monopolistic Competition d. Monopoly 3. A situation in which there is an excess of the supply over the demand for a good a. Shortage c. Equilibrium b. Surplus d. Monopoly 4. When quantity demanded equals quantity supplied a. There must be no government intervention in the market b. The demand curve must be the same as the supply curve c. The market is in equilibrium d. All of the above 5. A situation in which there is an excess of demand over the supply of a good a. Shortage c. Equilibrium b. Surplus d. Monopoly 6. The law of ________ implies that as prices fall, ________. a. demand; demand falls b. supply; supply increases c. demand; demand increases d. demand; quantity demanded increases Basic Microeconomics 36 7. According to the law of demand, quantity demanded increases as ________. a. prices rise c. demand increases b. prices fall d. demand decreases 8. According to the law of ________, there is a positive relationship between price and ________. a. supply; the quantity supplied b. supply; the change in supply c. demand; quantity demanded d. demand; change in demand 9. When prices goes up – producers/sellers will be motivated to sell more. When prices goes down – they will sell less. a. Law of Supply c. Equilibrium b. Law of Demand d. Disequilibrium 10. According to the law of demand there is negative relationship between ________ and ________. a. price; demand b. quantity; income c. price; income d. price; quantity demanded 11. In response to news reports that drinking a glass of red wine each day can reduce an individual’s risk of heart disease, there will most likely be a(n) a. increase in the demand for red wine. b. decrease in the supply of red wine. c. increase in the supply of red wine. d. decrease in the quantity demanded of red wine. 12. The quantity demanded of Coca Cola has increased. The best explanation for this is that a. the price of Pepsi has decreased. b. Coca Cola has instituted a new, successful advertising campaign. c. the price of Coca Cola has decreased. d. Pepsi consumers had an increase in income. 13. A change in the ________ of a good or service leads to a change in ________ that leads to a __________. a. supply; demand; change in price b. demand; quantity demanded; change in supply c. price; quantity demanded; movement along the demand curve d. quantity; supply; change in demand 14. A change in ________ leads to a change in demand that causes a ________. a. income or price of other goods; shift in the demand curve b. income or price of other goods; movement along the demand curve c. the price of the original product; shift of the demand curve d. income or price of the original product; movement along the demand curve 15. The change in the ________ of a good leads to a change in ________, which leads to a ________. a. price; quantity supplied; movement along a supply curve b. quantity; supply; change in demand c. supply; demand; change in price d. demand; quantity demanded; supply Basic Microeconomics 37 Exercise 5 Plot the demand and supply curve using a graphing paper. Scenario: You are a BSBA student enrolled in an event management class this first semester. Your class is assigned to organize a concert in order raise funds to support the construction of a new building at SLSU-TO. Your class targeted the student population of the Campus, suppose that the price of concert tickets is determined by market forces. Currently, the demand and supply schedules are as follows: Price per Quantity Demanded Quantity Supplied for Ticket for Tickets (D1) Tickets (S1) 50.00 450 200 75.00 400 250 100.00 350 350 125.00 300 400 150.00 200 450 175.00 150 550 Directions:  Plot the demand and supply schedule and draw the demand and supply curves.  Use the Y Axis for Price. From 0 to 200.00, Divisible of P25.00  Use the X Axis for Quantity. From 0 to 600 Divisible of 50 Questions: 1. What Quantity demanded at a particular price (as shown in the graph) that will render the condition a shortage? Provide all possible answers. 2. What Quantity supplied at a particular price (as shown in the graph) that will render the condition a surplus? Provide all possible answers. 3. What are the equilibrium price and quantity of tickets? 4. SLSU-TO Campus plans to increase its enrollment next year by 100 students. The additional students will have the following demand (D2) schedule for next year: Price per Quantity Demanded Ticket for Tickets (D2) 50.00 550 75.00 500 100.00

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