ECON 011: Principles of Economics Lesson 1-3 PDF

ECON 011: PRINCIPLES OF ECONOMICS LESSON 1: INTRODUCTION TO ECONOMICS Economics in relation to other Social Sciences What is Economics? 1. Economics and Socio...

ECON 011: PRINCIPLES OF ECONOMICS LESSON 1: INTRODUCTION TO ECONOMICS Economics in relation to other Social Sciences What is Economics? 1. Economics and Sociology - Sociology examines the aspect It investigates scarcity and its impact on resource use, the of society, whereas economics specifically focuses on production of products and services, the increase of output economic components, analyzing how people navigate and well-being over time, and various other complicated demands and resources and significant societal issues. 2. Economics and Political Sciences - Political science addresses social behavior and aids in effective governance Microeconomics vs. Macroeconomics 3. Economics and History - they are closely connected, with Microeconomics history serving as a record of past events, including The study of decisions made by individuals and enterprises economic, political, and social condition on resource allocation and the pricing at which they trade 4. Economics and Psychology goods and services. Psychology, the study of human behavior, spans areas like child, mob, industrial, and criminal psychology Macroeconomics Economics, focuses on behaviour concerning unlimited wants and limited resources It investigates a country's behavior and how its policies affect 5. Economics and Geography - Geography studies the the economy in its entirety. distribution of a nation’s natural resources, both economic Importance of Economics and non-economics Economics plays a part in our daily lives since it influences Human wants and Resources how we make decisions and socialize around the world, and it Human wants are the desires, aspirations, and motives that allows each country's engagement to flow. human beings pursue for their satisfaction. 1. Budgeting - Assists individuals and families in making sound a. Non-Economic - These wants are non-material and pursued financial decisions. by human beings without paying any cost or being involved 2. Purchasing - Influences the prices of goods we buy in any economic activities. 3. Employment - influences job prospects, such as how many b. Economic - These wants are fulfilled by paying costs. It is jobs are available, how much people are paid, and what classified into three major categories, necessities, comforts, kind of benefits they receive. and luxuries. 4. Investment - Informs people how to make wise investment decisions by teaching them how financial markets work and Economic Wants the risks and benefits of various sorts of investments. 5. Globalization - Explains how globalization, such as a. Necessities - Wants that are considered essential for the international trade, people moving around, and the global existence of life. economy, affects people's daily life. Food, shelter, and clothes 6. Public Policy - Plays a significant part in the formulation of b. Comforts - Wants that create facilities and convenience in public rules and decisions, such as taxes, government life. expenditures, and regulations that affect both ordinary Motorcycle, electric fan, and computer citizens and enterprises c. Luxuries - Wants that provide a sense of entitlement, prestige, and high status in society. What if there’s no Economics in our world? Luxury car, a diamond ring, etc. 1. Increased Poverty Available Resources 2. Lack of Planning 3. Instability 1. Natural Resources - Raw materials found on and below the Earth’s surface. They are naturally occurring materials Social Science formed without any human intervention. 2. Human Labor - The analysis of the labor process, interactions Diverse as humankind's interests, they are all concerned with between workers and employers, and patterns of wage, people and groups of people. employment, and income distribution. Economic as Social Science 3. Capital - Anything that confers value or benefit to its owners. It focuses on human behavior within a structured group or Resources society, particularly when it comes to issues of scarcity, 1. Natural Resources - Materials and energy that occur choice, and exchange or the creation and use of money. naturally and are used in economic activities. Examples: Sun, Air, Water, Plants, Animals, Natural Gas, Coal, Petroleum  ECON 011: PRINCIPLES OF ECONOMICS Renewable - Resources that are available in infinite How to compute opportunity cost? quantity and can be used repeatedly. Opportunity Cost = FO – CO Nonrenewable - Resources that are limited in abundance due to their non-renewable nature and whose Where: Fo = Return on the best forgone option; CO = Return on availability may run out in the future. chose option 2. Behavioral Economics - It focuses on the psychological factors that affect decision-making processes. Economic Problems & Answers Prioritization and Allocation Methods are needed; a. Population Growth - Reproductive Health Law People can make decision based: b. Natural Disasters - National Calamity Fund & NDRRMC c. Poverty - Social Protection Floor (4Ps, pension for senior Tastes citizens) & Comprehensive Agrarian Reform Program (CARP) Income d. Unemployment - DOLE and other government agencies Market Prices working hand in hand to provide job opportunities for Filipinos Innovation Technology Existing problems that are not solved yet: This is very important for bridging the gap between needs and resources. Rising national debt Corrupt Government “Human wants are limitless but resources are limited” Increase of Imports Scarcity Inflation A phenomenon that occurs when the available resources How to do an Economic Analysis? are inadequate to meet the diverse range of human 1. Identify the problem demands and needs. 2. Define objectives or goals and figure out its consequences The concept of scarcity necessitates that society, 3. Study or find alternatives to solve the problems by organizations, and individuals engage in decision-making considering the objectives processes to distribute their limited resources effectively. 4. Ascertain the critical need for economic analysis Production Possibility Frontier (PPF) 5. Choose the tools of economic analysis 6. Compute and compare economic performance and Production Possibility Frontier consequences (PPF) is used to examine decision-making in the context Economic Tools of limited resources. 1. Economic Variables - The model can predict the value of This will help to balance the endogenous variables but not the exogenous variable. production of a product However, both of them can influence economic models and Different Types of Economics business cycles. Dependent Variables are affected by a change in the 1. Market Economies utilize market mechanisms as a means of value of another variable and depend on the resource allocation, relying on the decisions and independent variable. preferences of individuals. Independent Variables are not affected by a change in 2. Planned Economies rely on centralized planning to allocate the value of other variables. resources by social priorities. Endogenous Variables are variables whose value can be 3. Mixed Economies incorporate aspects from both market- obtained within the model. based and designed economic systems. Exogeneous Variables exist outside the model. Its value is Opportunity Cost obtained from the factors outside the economic model. Note: Constant Variables are variables that do not It refers to the assessment assigned to the alternative or change or vary. opportunity, with the highest value among those not chosen 2. Tables, Charts, & Graphs - These tools present functional When looking at opportunity costs, economists consider two relationship of sets of data or variables that are related to categories: each other. Explicit Cost a. Tables state the summary of events with titles and units, ❖ Payment - a monetary transaction made to others provide easy understanding and interpretation, and help while running a business that represents cash outflows in calculating derived quantities. Implicit Cost - Represents the opportunity cost of utilizing b. Charts are graphical representations of data that may or resources a company already owns. may not be related. It shows vivid presentations of  ECON 011: PRINCIPLES OF ECONOMICS economic results. Examples: pie chart, pictorial chart, bar This means that the demand for one purpose can affect chart, statistical chart its availability or supply for other purposes. c. Graphs help in illustrating basic concepts, indicate the Law of Demand association of variables, and represent numerical data by showing the relationship between numeric variables When the price of a good or service increases, the demand and how one number affects another. It is used for decreases, and conversely, when prices decrease, the strengthening points. demand increases. d. Lines and Curves show relationships between variables, Simply, it indicates the inverse relationship between price but it only indicates the location of various points. and demand. The relationship remains valid provided e. Slope is a change in one variable due to a change in that “all other things remain equal”. This part is crucial another variable. It is also known as “rise over run” that economists employ a Latin phrase to denote it – Positive slope - line moves upward from left to right. ceteris paribus. It serves as a concise way to show how Negative slope - line moves down from left to right. one economic factor affects another, assuming all other 3. Optimization - It is used to determine the value of an factors remain constant. independent variable that maximizes or minimizes the value The law of demand is strongly connected to the law of of a dependent variable. supply. The distinction lies in the fact that the first law 4. Linear Programming - It refers to a mathematical technique concentrates on how consumers react to price changes, used for optimization problems. whereas the latter centers on how suppliers respond to changes in price. LESSON 2: DEMAND, SUPPLY, AND MARKET EQUILIBRIUM Importance of Law of Demand Demand What is Demand? a. Set Product Prices - the law of demand decides how prices are set, considering what customers find valuable and their It refers to the quantity of goods or services that consumers choices based on the cost of goods. desire and are willing to purchase at a particular price at any b. Tax Revenues – governments apply the law of demand to given time. decide whether they should add new taxes or tariffs on products, especially for items consumers keep buying Concepts of Demand regardless of price changes. a. Market Demand – refers to the total quantity of a good or Exceptions to the Law of Demand service that consumers are willing and able to purchase at various prices within a specific market. (Mankiw, 2014) a. Giffen Goods - are a unique type of product where people This concept focuses on individual markets and reflects buy more of the item when its price increases and buy less the sum of all individual demands for a specific product when its price decreases. or service. This goes against the typical law of demand. b. Aggregate Demand – represents the total quantity of goods Giffen goods are usually essential items for low-income and services that all sectors of an economy (consumers, individuals, and when the price rises, they buy more of businesses, government, and foreign buyers) are willing to the same product, sacrificing other items they might buy at various price levels over a specific time. have bought instead. It reflects the overall demand in an entire economy. This behavior is due to the necessity of the goods, making them a rare exception to the usual demand patterns in Types of Demand economics. a. Effective Demand - Refers to how many goods or services b. Veblen or Ostentatious Goods - are products that people people are willing and able to purchase at various prices. buy because they are expensive and seen as status symbols. It shows the quantity of products that consumers are The demand for these goods increases as their price rises buying because they have the money to do so. because their high cost makes them desirable to certain b. Derived Demand - The demand for a factor of production or consumers, signaling wealth or social status. an input used in the production of goods and services. Factors Affecting Demand The demand for these inputs is derived from the demand for the final goods or services they help produce. According to Pettinger (2021), the factors affecting c. Joint Demand - The demand for two or more goods that are demand dictate how much an individual is willing to pay for a used together or complement each other. product, and understanding it can also help other When the demand for one product increases, it causes administrations or businesses to know what prices people are an increase in the demand for another related product. willing to pay for. d. Composite Demand - When a product or resource is demanded for multiple uses.  ECON 011: PRINCIPLES OF ECONOMICS All these factors are greatly summarized by an article Demand Curve Experimental Economics Center (2006) talks about how the The demand curve is a graphical focus of economics is the relationship between the price of a representation of the relationship product and how much the customers are willing to spend between the price of a good or money and buy the product. And so, understanding the factors service and the quantity that affect the demand for a product is important. demanded for a given period. The Price of the commodity/product graphs show the commodity’s Prices of other related goods price on the Y-axis and quantity on the X-axis. It follows the Level of income of the customers economic law of demand. Tastes and Preferences of consumer This curve generally slopes downward from left to right. This Population movement expresses the law of demand, which states that Consumers’ expectations about future prices as the price of a given commodity increases, the quantity demanded decreases if all else is equal. Demand Schedules Types of Demand Curve Demand Schedule is a table that shows the quantity demanded at different prices, this means that it can clearly a. Individual Demand Curve examines the price-quantity show how the customers react to the different price ranges relationship for an individual consumer, or how much of a of the product sold. product an individual will buy given a particular price. According to Frankfield (2022), a demand schedule is a b. Market Demand Curve plots the summation of the individual table that shows the quantity demanded of a product at demand curves in each market. different price intervals, it can become the basis of a c. Elastic Demand Curve - The demand curve is shallower demand curve that can help any business. It may look simple (closer to the horizontal axis) for products with more elastic enough, and a pretty basic concept of why a price increase demand. This occurs when a minor price change has a may mean a decrease in demand is truly simple yet significant effect on demand. necessary information. d. Inelastic Demand Curve - The demand curve for items that are less elastic or inelastic is steeper (closer to the vertical Types of Demand Schedules axis). If the price change doesn’t affect an item’s demand. a. Individual Demand is the quantity of products or services Movements and Changed in the Demand Curve bought by an individual household, it can be food, Upward and Downward Movement of the Demand Curve electronics, utilities, or any other things bought in the market. b. Market Demand is the collective information of all individual demands for a certain product. Uses of Demand Schedule Determine which price is most appealing Calculate the Elasticity of the product Predict the potential demanded quantity Identify other determinants of demand Create a demand curve using the data When the price of the commodity rises, the quantity demanded falls. It leads to the upward movement of the demand curve. It is also known as a contraction of demand. As shown in the figure, when the price rises from OP to OP2, Note that the demand quantity is different from the actual demand falls from OQ to OQ2. demand. It is tackled in an article from Khan Academy (2015), On the other hand, when the price commodity falls, the which says that demand and quantity demand are inherently quantity demanded rises. It leads to the downward different from each other. The article says that in economic movement of the demand curve. It is also known as the terminology, demand is simply the relationship between the expansion of demand. As shown in the figure, when the price price and the quantities demanded, but quantity demand is just falls from OP to OP1, demand rises from OQ to OQ1. the amount of quantity needed on a demand schedule. Meaning of Shift of the Demand Curve As noted above, the relationship between quantity and price will follow the demand curve if the four determinants of demand do not change. These determinants are: 1. Price or related goods or services  ECON 011: PRINCIPLES OF ECONOMICS 2. Income of the buyer Types of Supply 3. Tastes or preferences of the buyer a. Short-term supply 4. The expectation of the buyer In economics, it is a manufacturing planning phase When there is a change in the quantity demanded of a during which a company attempts to fulfill market particular commodity, at each possible price, due to a change demand by retaining one or more production inputs in one or more other factors, the demand curve shifts. The constantly while adjusting others. important aspect to remember is that the four determinants Changing inputs such as labor force, raw resources, and above, which were expected to remain constant, changed. so on keeps the short-run equilibrium. It indicates the Therefore, the demand follows a different curve for every price equilibrium between overall demand and the total change. supply (Wallstreetmojo Team). Short-run supply is more elastic than long-run supply Right and Left Shift of the Demand Curve because some factors can be adjusted more quickly. b. Long-term supply It refers to the available supply of goods when all inputs are variable. It is typically less elastic than short-term supply as more factors are adjustable. Moreover, the number of manufacturers in the market may also change in the long run. As a result, new businesses will enter the market if there are economic profits, and some firms will exit the market if there are economic losses (CFI Team). Exceptions to the Demand Curve Law of Supply a. Giffen goods A concept introduced by Sir Robert Giffen. These are The law of supply is a concept that connects the quantity of non-luxury products for which there is no viable substitute, supply offered by companies to the price at which they sell for instance, staple foods such as bread or rice. each product. b. Veblen goods It assists firms in increasing revenue and meeting market This concept is named after the economist Thorstein demands, which may help them boost profitability. Overall, Veblen, who introduced the theory of “conspicuous the law of supply states that a rise in a product's price leads consumption”. These goods have an exclusive nature to an increase in its supply or quantity, whereas a drop in and appeal as status symbols. These are generally luxury price leads to a decrease in supply (Indeed Editorial Team, items such as cars, yachts, fine wines, and designer 2023). jewelry that are high quality and out of reach for most consumers. Example of Law of Supply Importance of the Demand Curve price rises, supply rises As an example, due to the upcoming Christmas season, A demand curve can be a useful business tool because it the prices of seasonal goods have arisen, therefore a lot can show the prices at which consumers start buying less or of sellers are willing to supply more of these products, more. It can also point out the prices at which a company anticipating higher profits. can maintain consumer demand and earn reasonable price falls, the supply also falls profits. In short, it is crucial in making business pricing One example can be observed in the situation of oil decisions. prices in the Philippines wherein the oil companies implemented a decrease of Php 2.00 per liter for gasoline and Php 0.50 per liter for kerosene (Department of Energy, Supply 2023). different values and different supplies According to Kenton (2023), it is the basic economic This may be seen in companies, most often, workers will concept that describes the total amount of a certain be more inclined to supply more overtime hours if a commodity that is available to the market for consumption. management gives time-and-a-half compensation for Supply and demand are highly interconnected, and the two extra hours but if a manager offers normal pay for concepts are connected to form market equilibrium, which overtime hours, workers will supply less overtime hours. specifies the availability of supplies on the market and the prices at which they are sold. Exceptions in the Law of Supply a. Business Closures. In this case, since the business is closing or maybe in a financial crisis, the companies are forced to sell  ECON 011: PRINCIPLES OF ECONOMICS their goods at a lower price to earn money urgently. This b. Material Costs and Availability. Manufacturers frequently shows an exception in the law of supply in the sense that it face constraints based on the materials utilized in their does not follow the typical relationship between price and production procedures. Whether due to the scarcity of supply. supplies or delays in delivery, a company's ability to produce b. Uncontrollable Products. This refers to situations where the a product depends on the availability of the necessary supply of certain goods is limited by factors that are beyond materials to transform into the final goods. the control of producers. c. Technological Innovation. Businesses that have made For example, when it comes to products like crops that significant investments in technology and innovation are depend on farmland, there are constraints on how much likely to possess superior capabilities. can be produced. Even if prices for these goods become This could manifest in reduced machine downtime, more more favorable for farmers, they may not be able to effective utilization of materials, or quicker significantly increase supply because they are limited by manufacturing processes. factors such as the amount of available farmland. The performance of equipment and machinery is directly c. Monopolistic Industries. In monopolistic industries, the typical correlated with a company's potential to manufacture laws of supply and demand can be altered because there and supply goods to the market within a specified time is only one seller, known as a monopolist, in the market. frame. In this scenario, the monopolist has significant control d. Government Policy. Certain policies might restrict production over both the price and quantity of the product supplied, or introduce measures discouraging companies from and market forces play a diminished role in determining providing certain goods to the market. these factors. Conversely, companies could be incentivized through d. Perishable Goods. These are products that have a limited tax benefits or subsidies to increase their production. In shelf life and can spoil or become unsellable if not sold both scenarios, the government plays a direct role in quickly. Due to the urgency of selling before the affecting the volume of products introduced into the commodities' worth decreases, the law of supply might market. apply differently. e. Natural Factors. Unfavorable weather can damage crops, e. Rare/Collectible Items. A price increase is common for rare causing a shortage in the agriculture sector. or valuable objects whose supply is limited to a single event. Conversely, good weather can lead to bountiful harvests As a result, a higher, less predictable supply curve may exist and abundant supply. Weather plays a critical role in only at levels of supply. determining crop yields and, consequently, market availability. Importance of Law of Supply Supply Schedules Increasing profit. Businesses can indeed use the law of supply to explore strategies for increasing profit. Increasing the A supply schedule is a table that displays the quantity of a supply and raising prices, can also lead to increased product or service that suppliers are willing to provide at revenue because the business is selling more products at varying prices. It lays out the connection between price higher prices. In summary, the law of supply is important for levels and the corresponding amounts that producers are increasing profit because it guides businesses in making ready to supply to the market during a specific timeframe. strategic decisions related to supply and pricing. Usually, as the price rises, the quantity supplied also increases, Predicting their revenue. The law of supply is a useful tool for reflecting the law of supply in economics. businesses that helps them anticipate and potentially This supply schedule data is often used to create a graphical enhance income by matching their production and pricing representation known as the supply curve. The curve strategies with market demand. It enables them to make illustrates the relationship between price (on the vertical axis) educated decisions about how to best address the and the quantity supplied (on the horizontal axis). It's a requirements of their customers while maximizing their profits. fundamental tool in economics, showcasing how changes in Understanding market conditions. The law of supply could price influence the quantity of a product or service that help analyze investment possibilities and risks as well as make suppliers are willing to bring to the market. educated business and investing decisions. It sheds light on Maintaining a harmonious equilibrium between supply and how changes in supply and demand affect pricing and how demand is essential for a prosperous economy. According markets function. to Indeed (2023), a supply schedule serves as a valuable instrument for businesses to assess the required product Factors Affecting Supply quantity to satisfy consumer demand effectively. Grasping a. Consumer Demand. As the demand for a product grows the workings of this tool can enhance the operational among customers, companies will prioritize augmenting the efficiency of your company. supply of that product.  ECON 011: PRINCIPLES OF ECONOMICS Types of Supply Schedules in a market. The curve can be used to supply the consumer surplus, and it can be used by economists, governments, and a. Individual Supply Schedule. An individual supply schedule manufacturers to understand the needs of the customers outlines the quantity of a specific good or service that an (Kenton, 2023). individual producer or supplier is willing to provide at different price levels. It focuses on the output a single producer is Supply Curves willing to supply based on varying prices, keeping other The link between the price of an item or service and the factors constant. quantity of that good or service that producers are willing b. Market Supply Schedule. A market supply schedule and able to supply to the market, all other things being equal, aggregates the quantities of a particular good or service is represented by a supply curve. This is a fundamental that all producers in the market are collectively willing to concept in economics, notably in microeconomics. It is a supply at various price points. It considers the sum of diagram illustrating this relationship and is crucial for quantities supplied by all producers or suppliers operating in comprehending market dynamics. the market. Graphical Representation The price of the good or service is often plotted on the vertical axis (y-axis) of a graph, and the quantity delivered is typically shown on the horizontal axis (x-axis). This graphical representation helps economists and decision-makers Determinants of Supply Schedule understand how changes in pricing impact the quantity offered. Perishable nature of products Products with expiry dates can be supplied only within Upward Sloping their safe usability period. The supply curve generally has an upward left-to-right slope. The duration a product remains storable impacts the Accordingly, the quantity that producers are willing to supply quantity supplied at a specific price. grows as the price of the commodity or service rises. The law of Furthermore, maintaining a product's freshness during supply asserts that ceteris paribus (all other things being equal), transportation affects its supply; for instance, certain a rise in a good's price causes an increase in the amount foods and medicines necessitate specific temperatures supplied, and a decrease in a good's price causes a decrease to ensure safe consumption. in the quantity supplied. Government subsidies and taxes. Subsidies boost production, making things easier and Reference to Elasticity cheaper to make. Taxes do the opposite, making things a bit harder and more expensive to produce or use. The slope or steepness of the supply curve may provide information regarding the supply's elasticity. The result of Advantages of Supply Schedule producers' ability to change their output quickly and easily in response to price swings is a generally flat or horizontal supply a. Provides detailed, numerical data. It offers specific and curve. The supply curve will be steeper or more vertical in an quantitative information about the quantity supplied at inelastic supply because producers' ability to alter their output is different price levels. decreased. b. Granular representation. Particularly useful for precise calculations and understanding supply patterns Shifts in the Supply Curve comprehensively. c. Easy to interpret. Especially for individuals who may find Changes in factors other than price might cause the supply graphs or charts challenging to interpret. curve's position to fluctuate. Changes in manufacturing costs, technological advancements, input costs, governmental rules, Limitations of Supply Schedule taxes, subsidies, and predictions of future prices are only a few examples of these variables. The entire supply curve may shift to Can be time-consuming. Compiling and analyzing a the left (indicating a decrease in supply) or to the right comprehensive supply schedule for numerous price levels (indicating an increase in supply) when one or more of these can be laborious. elements change. Less visual. It may not provide an immediate visual understanding of the relationship between price and Types of Supply Curves quantity supplied. a. An elastic supply curve implies that the quantity supplied is Importance of Supply Schedule highly responsive to price fluctuations. In other words, modest changes in pricing have a The supply schedule is important because it allows producers significant impact on how much is being delivered. and manufacturers to understand the behavior of customers  ECON 011: PRINCIPLES OF ECONOMICS Supply curves with elastic demand are often flatter and d. Decrease in Supply. It describes a scenario in which the more horizontal. It is simple for producers to vary their vendors offer the same product in smaller quantities. output in response to price variations. The decline in supply is caused by an unfavorable shift in An important term in this case is supply elasticity, with high supply-related factors other than the commodity's price. elasticity implied by an elastic supply. It is brought on by rising input costs, rising prices of b. An inelastic supply curve suggests that the quantity supplied connected items, rising government taxes, and other is not very responsive to changes in price. factors. In this instance, variations in pricing lead to only minor Additionally, this idea. referred to as a change in the variations in the amount offered. supply curve to the left or inward (fewer items for the Inelastic supply curves are steeper and more vertical. The same price) ability of producers to immediately shift their output in Market Equilibrium response to price fluctuations is limited. Once more, supply elasticity is important, with inelastic It is discussed that supply represents the quantity of a good supply indicating low elasticity. or service that sellers and/or producers are willing to sell at a c. A perfectly elastic supply curve is a rather rare theoretical certain price, while demand represents the quantity that we, idea that depicts a scenario in which producers are willing the consumers, are willing to purchase at those prices. to provide any quantity of an item at a certain price but will On the other hand, when markets are not in a state of not do so at any other. As a result, the supply curve is vertical. equilibrium, they are in a state of disequilibrium. It is a d. Like perfect elasticity, perfect inelasticity is a concept where situation where there is an imbalance between supply and the quantity supplied remains the same despite price demand, leading to an excess supply (surplus) or excess fluctuations. A horizontal supply curve is the consequence. demand (shortage) at the standard market price. Movements and Changes in the Supply Curves Market Equilibrium in Mathematical Language Market Equilibrium and Disequilibrium (Graphical The movement of the supply curve is a representation of the Representation) change in the amount of a product supplied when its supply changes due to an increase or reduction in its price (all other factors remain constant). The supply curve changes to the right when the change in supply is higher and to the left when the change in supply is lower. There is a rise or fall in the quantity supplied together with a rise or fall in the supply price. When the supply is directly proportionate to the price while other parameters are held constant, there is an expansion or contraction. a. Expansion in supply. A supply expansion is when there is an increase in supply because of a price increase while all other variables remain the same. This causes the curve to rise. b. Contraction in supply. When the amount supplied decreases Chart the price at a vertical axis, and the quantity at the because of a decrease in the price of a good, all other horizontal axis. The demand slopes down because price elements remain the same. decreases as more customers demand it while the supply A decrease in supply is a reduction in the availability of a slopes up because producers will supply more at a higher specific item because of unfavorable changes to other price to increase their revenues. The equilibrium price is parameters. A downward shift in the supply curve found where these lines intersect. illustrates it. Unfortunately, reaching market equilibrium can only be c. Increase in Supply. It describes a situation in which a done in theory, because the prices of goods and services producer would prefer to sell more of a product at the same change with fluctuations, demand, and supply. price due to favorable changes in variables other than the An example is government interventions. Here, the commodity's price. government sets a price ceiling on rice below the market A rise in supply may result from a drop in production costs, equilibrium price determined by supply and demand to advancements in manufacturing methods, a decline in make it more affordable. This can create excess demand the cost of related commodities, a reduction in taxes, or a shortage of rice. Then, to address the shortage and and an increase in government subsidies, among other stabilize prices, the government may import rice from factors. other countries. These can lead to inefficiencies because The supply curve's movement to the right or outward is the government may have to allocate resources to another name for it (greater availability at the same cost). manage and distribute rice at controlled prices.  ECON 011: PRINCIPLES OF ECONOMICS Moreover, quality issues may arise as producers may cut Demand Elasticity corners to keep production costs down in the face of It refers to the change in demand when there is a change in price controls. another economic factor, such as price or income. It Another example is market dynamics where supply and measures the change in demand when the price or other demand are influenced by factors like consumer factors change. An elastic demand is one which the change preferences, technology advancements, and in quantity demanded due to a change in price is large. unexpected events (natural disasters or pandemics). Demand can be classified as elastic, inelastic or unitary. Calculating Equilibrium price using Algebra Elastic Demand Consumer durables: Items that are purchased frequently and can be postponed if price rises. The elasticity of demand is impacted by close replacements for a good. Consumers will rapidly convert Demand to the alternative product if the price of your product rises There is an inverse relationship between Qd and P. Since the or the price of the alternative product falls if another quantity demanded goes down as the price goes up, there product can be easily substituted for it. is a negative sign in front of the coefficient for P. For instance, all meat items, including beef, pork, and chicken. Recent years have seen a decrease in the price Supply of poultry, which has led to a rise in the consumption of poultry at the expense of beef and pork. Products with There is a positive correlation between quantity supplied and similar replacements so frequently have elastic demand. price because as price goes up, quantity supplied will go up which is why the coefficient in P in the quality supplied equation is positive. Lesson 3: Elasticity Concept Elasticity Measures of responsiveness Ratio of one variable’s percent change to another variable’s percent change. Example of computing elasticity of demand using the formula The key thing to understand is that we use elasticity when we want to see how one thing changes when we change When the price decreases from $10 per unit to $8 per unit, something else. the quantity increases from 30 units to 50 units. The elasticity It differs between products because some might be more coefficient is 2.25. necessary to the consumer. It is frequently used in demand analysis to quantify the impact of changes to the factors that influence demand. Used in production and cost analysis to assess how changes to input affect output and how changes to output affect costs. Causes of elasticity of Demand Price ranges, the nature of the good or service, income Demand levels, and the presence of any prospective alternatives. Consumers are likely to purchase items at a reduced cost if It is the willing to purchase at various prices during period of prices decline. time. Important Key Points that determine the elasticity of demand: According to Ferguson, demand refers to the quantities of commodity that the consumers are able to buy at each 1. Luxury or Necessity Goods – Luxury goods tend to have an possible price during a given period of time, other things elastic demand, while necessity goods have an inelastic being equal. demand. Purchasers can stop buying the luxury goods when According to B.R. Schiller, demand is the ability and their prices rise. willingness to buy specific quantity of a good at alternative 2. Percentage of Income – Big items in a budget tend to have prices. a more elastic demand than small item. For example, consumers may be affected by a 1 per cent rise or fall in price of a flat but are insensitive to such fluctuations in pens.  ECON 011: PRINCIPLES OF ECONOMICS 3. Substitute – Items that can be substituted easily have a more It is not required for consumption, which makes them elastic demand than those that cannot. more sensitive to income changes. 4. Time – The demand for a product becomes more elastic the They are goods without which people would not have longer the time period under consideration. It takes time to a problem subsisting, making those goods income decide about another product before buying it as one elastic. develops a habit of using a particular product. b. Inferior Goods A: Demand Elasticity It is a good that is demanded less as consumers’ income Measured as a percentage change in quantity demanded increases. divided by the percentage change in price, other things As consumer income rises, they demand less of an inferior remaining same. good. The income elasticity of demand for an inferior good is, therefore, negative. III: Cross-Price Income Cross elasticity of demand or Cross-price elasticity of demand is a measure of the responsiveness of the demanded quantity of one good to a change in the price of another good. I: Price Demand Elasticity Types of Cross Elasticity of Demand The ratio of the percentage change in quantity demanded of a product to the percentage change in price. a. Substitute Goods Economists employ it to understand how supply and Are goods that consumers consider to be demand change when a product's price changes. identical or similar enough for interchangeable It measures the responsiveness of the quantity demanded or consumption. supplied of a good to a change in its price. b. Complementary Goods It is computed as the percentage change in quantity Are goods that are consumed jointly or in joint demand. demanded—or supplied—divided by the percentage c. Goods with no Apparent Relationship change in price. Goods that are neither substitutes nor complements are II: Income Elasticity considered unrelated. In other words, there is no relationship between these goods as they are It measures the responsiveness of the quantity demanded to independent of one another. The value of the cross a change in consumer income. elasticity of demand between such goods is equal to Formula: %∆ 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅 zero. %∆ 𝑰𝒏𝒄𝒐𝒎𝒆 B: Supply Elasticity Two Types of Goods I: Price Supply Elasticity a. Normal Goods The elasticity of supply measures how much the quantity supplied of a good or service changes when there is a price It is a good that is demanded more as consumers’ change. income increases. The amount by which the quantity supplied increase or As consumer income rises, they demand more of a decreased with the price change depends on how elastic normal good. the supply of a good is. The income elasticity of demand for a normal good is, therefore, positive. The price elasticity of supply is the percentage change in Necessities quantity supplied divided by the percentage change in The income elasticity of demand will take the values price. It also measures the responsiveness of quantity between 0 and 1. supplied to changes in price. It required for consumption, which makes them less The price elasticity of supply is greater when the length of sensitive to income changes. time under consideration is longer because over time They are goods without which people would have producers have more options for adjusting to the change in problems subsisting, making those goods’ income price. inelastic. When applied to labor supply, the price elasticity of supply is Luxuries usually positive but can be negative. If higher wages induce The income elasticity of demand will take values people to work more, the labor supply curve is upward greater than one.  ECON 011: PRINCIPLES OF ECONOMICS sloping and the price elasticity of supply is positive. In some The numerical value of relatively elastic demand ranges very high-paying professions, the labor supply curve may between zero to one (ep