LSPU Basic Microeconomics Module 1 PDF

Republic of the Philippines Laguna State Polytechnic University Province of Laguna LSPU Self-Paced Learning Module (SLM) Course Basic Microeconomics Sem/AY First Semeste...

Republic of the Philippines Laguna State Polytechnic University Province of Laguna LSPU Self-Paced Learning Module (SLM) Course Basic Microeconomics Sem/AY First Semester/2024-2025 Module No. 1 Lesson Title Resource Utilization, Economics and Analysis of Demand and Supply. Week 1-3 Duration Date August 19 – September 6, 2024 This lesson will discuss the overview of the major concepts in Microeconomics that will Description give students knowledge on how important Resource Utilization is to individual. Economics of the Lesson will be reviewed and its two major branches will be given emphasis. The Basic analysis of demand and supply and its important factors will be explained clearly. Learning Outcomes Intended Students should be able to meet the following intended learning outcomes: Learning Demonstrate understanding on the basic concepts in Microeconomics. Outcomes Explain what is Resource Utilization. Differentiate Macroeconomics and microeconomics. Evaluate the Demand and Supply analysis. Targets/ At the end of the lesson, students should be able to: Objectives Appraise the basic concepts in Microeconomics. Discuss Resource Utilization. Compare Macroeconomics and microeconomics. Recognize the Demand and Supply analysis. Student Learning Strategies Online A. Online Discussion via Google Meet Activities You will be directed to attend in a Four-Hour class discussion on Basic Microeconomics: History and Overview. To have access to the Online (Synchronous/ Discussion, refer to this link: ____________________. Asynchronous ) The online discussion will happen on August 19 – September 6, 2024 from 7:00-9:00AM. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna (For further instructions, refer to your Google Classroom and see the schedule of activities for this module) B. Learning Guide Questions: 1. What is Economics? 2. How important is the study of Economics? 3. What are the two branches of economics 4. What is the focus of study in microeconomics? 5. What is a Resource Utilization? 6. Why is intelligent resource utilization beneficial to the economy? 7. What is Demand and Supply? 8. How do we economize through demand and supply analysis? Note: The insight that you will post on online discussion forum using Learning Management System (LMS) will receive additional scores in class participation. Lecture Guide RESOURCE UTILIZATION AND ECONOMICS Offline Activities (e-Learning/Sel f-Paced) Economics Defined Economics is defined in various ways. In fact, if we will ask you how you understand the word, you will give us another definition which may be different in language but would have the same meaning as the others. However, we can define economics as the efficient allocation of the scarce means of production toward the satisfaction of human needs and wants. You might be wondering what the definition is all about. As you may have noticed, there are two important concepts in the definition of economics. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna The scarce means of production refers to our economic resources like land, labor, and capital, which we use to produce all the goods and services that we need and want. But why do we produce and ultimately buy these goods and services? Because they give us satisfaction! The problem however is that we do not have enough resources to produce all the goods and services that we desire. This is because our resources are limited or scarce while our wants are generally unlimited. Given this condition, we cannot produce everything that we want since there is scarcity or limitedness of resources. This is where economics comes in: we try to-make the best of a less-than-ideal situation. In other words, we try to use our limited resources by efficiently allocating them so that we are able to produce all the goods and services that will maximize our satisfaction. In the succeeding discussions, we take a closer look at the concepts of resources, scarcity, and the satisfaction of human wants. Origin of the word "economics" The two Greek roots of the word economics are oikos — meaning household — and nomus — meaning system or management. Oikonomia or oikonomus therefore means the "management of household." 'With the growth of the Greek society until its development into city-states, the word became known or was referred to as "state management". Consequently, the term, “management of household" now pertains to the microeconomic branch of economics, while the phrase "state management" presently refers to the macroeconomic branch of economics (Fajardo 1977): Because of its far-reaching significance, in the early years, economics covered other scholarly fields, such as religion, philosophy, and political science. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Scarcity: The Central Problem of Economics Source: https://www.yourdictionary.com/articles/examples-scarcity-economics-nature Scarcity is the basic and central economic problem confronting every man and society. It is the heart of the study of economics and the reason why you are studying it now. Authors have defined scarcity in different ways- some of which are complexly stated while others are simplified exposition of the concept. One author in particular defines scarcity as a commodity or service being in short supply, relative to its demand (kapur 1997) which implies a constant availability of a commodity or economic resource relative to the demand for them. In quantitative terms, scarcity is said to exist when at a zero price there is a unit of demand, which exceeds the available supply (kapur 1997). Scarcity can also be looked into as the limited availability of economic resources relative to man’s or society’s unlimited demand for goods and services. Since human wants and needs are unlimited and the available resources are finite, scarcity naturally results leaving the society with the problem of resource allocation. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: https://relivingmbadays.wordpress.com/2012/08/25/the-fundamental-economic-proble m/ If the problem of scarcity does not exist, there is no need for us to economize. But since we know that our resources are limited and therefore, we cannot produce all the goods and services we want to buy, then there is a need for us to properly allocate our resources so that we are able to produce the goods and services that will maximize our satisfaction. In fact, without scarcity there is no need for us to study economics and economists need to find other work. You already know that individuals and groups within the society have innumerable wants, and to satisfy these wants, there are available resources that can be utilized. However, since these resources are limited, they are not freely available. Economics steps in to assist individuals and societies in making proper choices — that is, the allocation and utilization of economic resources, with the end in view of satisfying human wants for goods and services. Figure 1.2 illustrates the relationship between available limited resources and unlimited wants of man and society and the role of allocating these resources. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified book 2016 Factors of Production You might have noticed in our previous discussions that we have been talking about resources. But what exactly are the resources or factors of production that we have been referring to? There are four economic resources which serve as inputs in the production process. We refer to these resources as the factors of production and they include the land, labor, capital, and entrepreneurship. Below is a more comprehensive discussion of each factor. Land This broadly refers to all natural resources, which are given by, and found in nature, and are, therefore, not manmade. It does not solely mean the soil or the ground surface, but refers to all things and powers that are given free to mankind by nature. In this sense, land comprises all the materials and things, which are available beneath the soil or above it. 'It includes the forests, mountains, rivers, oceans, minerals, air, sunshine, light, etc. Land can sometimes be classified as a fixed resource. Land is the main source of raw materials like timber, mineral ores, etc., which are utilized in the production of goods and services,' The compensation for use of land is called rent. Labor Labor is any form of human effort exerted in the production of goods and services. Labor covers a wide range of skills, abilities, and characteristics. It includes factory or construction workers who are engaged in manual or physical work. It can also LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna refer to an economist, nurse, doctor, lawyer, professor and other workers and professionals who are mainly involved in mental work. The supply of labor in a country is dependent on the growth of its population and on the percentage of the population that is willing to join the labor force. Naturally, a country with a high population growth rate is expected to come up with a bigger labor supply. On the other hand, the younger the population structure the higher will be the population who will join the labor force. The compensation for labor rendered is salary or wage. Capital Capital is manmade goods used in the production of other goods and services. it includes the buildings, factories, machinery, and other physical facilities used in the production process. Accordingly, a nation's capital stock is dependent on its level of saving. Saving refers to that part of a person's or economy's income, which is not spent on consumption. The reduction of productive capacity of capital is called depreciation. The reward for the use of capital is called interest. At this point, we have to emphasize that money is not actually considered as capital in economics as it does not produce a good or service but it is rather a form of asset that is used mainly as a medium of exchange. Entrepreneurship An entrepreneur is a person who organizes, manages and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. Often times, the entrepreneur is not presented as a separate factor of production, but is classified as part of labor. However, since an entrepreneur performs a special type of work, which is the creation of goods and services, it should not be considered as part of labor. Entrepreneurs also possess managerial skills needed in building, operating, and expanding a business. Specifically, he is the one who decides what combinations of land, labor and capital are to be used in the production process. Entrepreneurship is an economic good that commands a price referred to as profit or loss. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna The Circular Flow Model Before we proceed further with our discussion, let us first look at how these resources are utilized by the household and business sectors. We can simplify this by" illustrating it through the Circular Flow Model. You might already have an idea that the dynamic market economy creates continuous, repetitive flows of goods and services, resources, and money. The circular flow diagram, shown in Figure 1.3, illustrates the flow of resources and output from households to businesses, and vice versa. Observe that in the diagram we group private decision makers into businesses and households and group markets into the resource market and the product market., The upper half of the circular flow diagram represents the resource market: the place where resources or the services of resource suppliers are bought and sold. In the resource market, households sell resources (i.e., land, labor, capital) and businesses buy and use them in the production of goods and services. Households own all economic resources either directly as workers or entrepreneurs or indirectly through their ownership of business corporations. They sell their resources to businesses, which buy them because they are necessary for producing goods and services. This is represented by the inner arrow from the household sector going to the business sector. The funds that businesses pay for resources are costs to businesses but are flows of income in the form of wage, rent, interest, and profit to the households. This is represented by the outer arrow from the business sector going to the household sector. Productive resources therefore flow from households to businesses, and money flow from businesses to households. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: https://wiki.ubc.ca/The_Circular_Flow_Diagram LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: https://study.com/academy/lesson/circular-flow-diagram-in-economics-definitio n-example.html The lower half of the model represents the product market: the place where goods and services produced by businesses are bought by and sold to the households. In the product market, businesses combine the resources owned by the households (i.e., land, labor, capital) to produce and sell goods and services. This is represented by the inner arrow from the business sector going to the household sector. In return, the households receive income from selling their resources to the businesses. Consequently, the households use the(limited) income they have received from the sale of resources to., buy goods and services that the businesses produced in the form of consumption expenditure. This is represented by the outer arrow from the household sector going to the business sector. The monetary flow of consumer (household) spending on goods and services yield sales revenues for businesses. Businesses-compare those revenues to their costs in determining profitability and whether or not a particular good or service should continue to be produced and sold: The circular flow model depicts a complex, interrelated web of decision making and economic activity involving businesses and households. For the economy, it is the circle of life. Businesses and households are both buyers and sellers. Businesses buy resources and sell products. Households buy products and sell resources. As shown in Figure 13, there is a counter clockwise real flow of economic resources and finished goods and services and a clockwise money flow of income and consumption expenditures. What is the relationship between Economics and Scarcity? If we will go back again to our previous discussion, we noted that the problem of scarcity gave birth to the study of economics. Their relationship is such that if there is no scarcity, there is no need for economics. The study of economics is therefore, essential in order to address the issue of resource allocation and distribution, in response to scarcity. In the allocation of our limited resources however, we have to give up something in order to get what we want. In other words, we cannot have everything that we want because of the limited resources therefore something must be given up or traded off. This brings us now to the concept of opportunity cost, one of the most important economic concepts that you need to know and understand very well since all of us try to apply this concept everyday of our lives. The Concept of Opportunity Cost Because people cannot have everything they want, they are forced to make choices between several options. In making a choice people face opportunity cost. But what is LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna opportunity cost? In economics, opportunity cost refers to the foregone value of the next best alternative. In particular, it is the value of what is given-up when one makes a choice. The thing thus given-up is called the opportunity cost of one's choice. When you make choices, there is always an alternative that you have to give up. Moreover, a producer, who decides to produce shoes, gives up other goods that he could have produced like bags using the same resources. If you bought this book Microeconomics with your limited allowance, you gave up the chance of eating out or watching movie or playing computer games. Opportunity cost however is expressed in relative price. This means that the price of one item should be relative to the price of another. Example: If the price of Coke is P20.00 per can and one piece of cupcake is P10.00, then the relative price of Coke is 2 pieces of cupcake. Therefore, if a consumer only has P20.00 and chooses to buy a bottle of Coke with it, then we can say that the opportunity cost of that bottle of Coke was the 2 pieces of cupcake, assuming that the cupcakes were the next best alternative. Figure 1.4 below further illustrates the concept of opportunity cost. Source: Microeconomics Simplified book 2016 Basic Decision Problems LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Below are some decision problems that households, firms, the government, and society must think about in order to properly manage their resources. Consumption Members of society, with their individual wants, determine what types of goods and services they want to utilize or consume, and the corresponding amounts thereof that they should purchase and utilize. The choices range from food, to shelter, to clothing, etc. There is also a choice between privately used goods or those supplied by government, such as national security and defense, infrastructure, or irrigation. Consumption is the basic decision problem that the consumers must always deal with in their day-to-day activities. Production The problem of production is generally a concern of Producers. They determine the needs, wants, and demands of consumers, and decide how to allocate their resources to meet these demands. Goods and services may be produced by different methods of production, depending on the firm's technological state, and on the available resources within the society. Distribution This problem is primarily addressed to the government. There must be proper allocation of all the resources for the benefit of the whole society. In a market economy, though, absolute equality of every member, as to the distribution of resources, can never be achieved. Growth over Time This is the last basic decision problem that a society or nation must deal with. Societies continue to live on. They also grow in numbers. On the one hand, people have definite lives, but societies (or nations) have longer, if not infinite lives. All the problems of choice, consumption, production, and distribution have to be seen in the context of how they will affect future events. Four Basic Economic Questions To address the problem of scarcity and solve the basic decision problems, the society must answer the four basic economic questions of What to produce? How to produce? For whom to produce? and how much to produce? 1. What to produce? LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna The question of what to produce tells us that an economy must identify what are the goods and services needed to be produced for the utilization of the society in the everyday life of man. A society must also take into account the resources that it possesses before deciding what goods or services to produce. For example, an island nation, blessed with agricultural resources, and which does not possess advanced technology should not opt to produce space shuttles or satellites because its resources are incapable of producing these outputs. However, it can take advantage of its natural resources and it can produce agricultural goods and tourism services. In a market economy, what gets produced in the society is driven by prices. Resources are allocated to the production of goods and services that have high prices and low input prices relative to one another. 2. How to produce? This question tells us that there is a need to identify the different methods and techniques in order to produce goods and services. In other words, the society must determine whether to employ labor intensive production or capital-intensive production. Labor intensive production uses more of the human resource or manual labor in producing goods and services than capital resources. Generally, this kind of production is advisable to a society with large population. In countries where labor resources are abundant and therefore there is high supply of labor, the cost of labor is usually cheap, for instance the Philippines, Vietnam, and China. On the other hand, capital intensive production employs more technology and capital goods like machineries and equipment in producing goods and services rather than using labor resources. This type of production is generally utilized by countries with high level of capital stock and technology, and with scarce labor resources, like Japan, Germany, and the USA. The decision of what form of technology is to be employed depends more on the availability of cheaper resources and less of more expensive inputs. Thus, if there is abundant supply of labor (capital) then this resource will be cheaper and will cost less so production will be labor (capital) intensive. 3. How much to produce? The question of how much to produce identifies the number of goods and services needed to be produced in order to answer the demand of man and society. The optimum amount of production must be approximated by producers. Underproduction (shortage) results to a failure to meet the needs and wants of the society. On the other hand, overproduction results to excess (surplus) goods and services going to waste. 4. For whom to produce? LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna This question identifies the people or sectors who demand the commodities produced in a society. Economists must determine the "target market" of the goods and services which are to be produced to understand their consumption behaviors and patterns. An understanding of these results to higher sales of goods, and ultimately to increased profits. We can therefore say that for those who can pay the highest price is for-whom goods and services are produced. 3 Es in Economics In the production of goods and services there are three Es that need to be considered. These are: efficiency, effectiveness, and equity. Efficiency Efficiency refers to productivity and proper allocation of economic resources. It also refers to the relationship between scarce factor inputs and outputs of goods and services. This relationship can be measured in physical terms (technological efficiency) or cost terms (economic efficiency) (Pass & Lowes 1993). Being efficient in the production and allocation of goods and services saves time, money, and increases a firm's output. For instance, in the production of a commodity, a firm utilizing modern technology can improve the quantity and quality of its products, which ultimately translates into an increase in revenue and profit. Effectiveness Effectiveness means attainment of goals and objectives. Economics therefore is an important and functional tool that can be utilized by other fields. For instance, with the use of both productions (through manual labor or through technological advancements); whatever the output is, it will be useful for the consumption of the society and the rest of the world. Equity Equity means justice and fairness. Thus, while technological advancement may increase production, it can also bear disadvantages to employment of workers. Due to the presence of new equipment and machineries, manual labor may not be necessary, and this can result in the retrenchment or displacement of workers. Positive and Normative Economics Positive economics is an economic analysis that considers economic conditions "as they are", or considers economics "as it is". It uses objective or scientific explanation in analyzing the different transactions in the economy. It simply answers the question `what is. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Examples of Positive statements: The economy is now experiencing a slowdown because of too much politicking and corruption in the government. The economy is now on a slowdown because the world is experiencing a financial and economic crisis. Other reasons are also due to the financial problem of US, increase on the prices of crude oil and lack of investors or capital deficiency. On the other hand, normative economics is an economic analysis which judges economic conditions "as it should be". It is that aspect of economics that is concerned with human welfare. It deals with ethics, personal value judgments and obligations analyzing economic phenomena (Kapur 1997). It answers the question 'what should be'. It is also referred to as policy economics because it deals with the formulation of policies to regulate economic activities (Omas-as 2008). Examples of Normative statements: The Philippine government should initiate political reforms in order to regain investor confidence, and consequently uplift the economy. In order to minimize the effect of global recession, the Philippine government should release a stimulus package geared towards encouraging economic productivity. Ceteris Paribus Assumption In economic analysis however we cannot consider all the factors that affect' economic situations or phenomena. Therefore, economists have devised a way of simplifying complex economic phenomena through the assumption of "Ceteris Paribus". This assumption is important in studying economics. Ceteris paribus means "all other constant or all else equal." This assumption is used as a device to analyze the relationship between two variables while the other factors are held unchanged. It is widely used in economics as an exploratory technique as it allows economists to isolate the relationship between two variables. For instance, with the question: what is the impact of a change in the price of rice on consumption behavior of consumers, ceteris paribus (or other things remaining constant) If the price of rice increases by 20 percent, how much consumption will there be, assuming no simultaneous change in other variables — that is, assuming that income, number of family members, population, laws and so on all remain constant. The setting of the other factors constant is what ceteris paribus is all about since including the other factors in the analysis will make it complex and difficult for an economist to explain the relationship between price and consumption behavior. Microeconomics and Macroeconomics LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna We have been talking about individuals, firms or businesses, households, and society. But how do they differ? In order to distinguish each of this, economics has two Major branches of study: one is concerned with individual decision making (microeconomics); and the other is involved in understanding the behavior of the society as a whole (macroeconomics). Microeconomics Microeconomics is the branch of economics which deals with the individual decisions of units of the economy—firms and households, and how their choices determine relative prices of goods and factors of production. In a capitalist economy, the market is the central concept of microeconomics, It focuses on its two main players—the buyer and the seller, and their interaction with one another. Microeconomics operates on the level of the individual business firm, as well as that of the individual consumer. It concerns how a firm maximizes its profits, and how a consumer maximizes his satisfaction. Among the topics discussed in microeconomics are the principles of demand and supply, elasticity of demand and supply, individual decision making, theories of production, output and cost of firms, a firm's profit maximization objective, different types of business organizations, and kinds of market structures. (Case 2003) Macroeconomics Macroeconomics is the branch of economics that studies the relationship among broad economic Aggregates like national income, national output, money supply, bank deposits, total volumes of savings, investment, consumption expenditure, general price level of commodities, government spending, inflation, recession, employment, and money supply (Kapur 1997). The term macro. in contrast to micro, implies that it seeks to understand the behavior of the economy as a whole. Macroeconomics focuses on the four specific sectors of the economy: the behavior of the aggregate household (consumption); the decision making of the aggregate business (investment); the policies and projects of the government (government spending);.and the behavior of external/foreign economic agents, through trading (export and import). Moreover, macroeconomics also discusses the measurement of gross national product and gross domestic product, the business cycle, the five macroeconomic goals, the general price level, employment, money and the financial markets, monetary and fiscal policies, and economic growth and development. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: www.economicshelp.org Types of Economic Systems To address economic problems, several economic systems have been created and applied throughout history. Below is an enumeration of these. Traditional Economy Traditional economy is basically a subsistence economy. A family produces goods only for its own consumption. The decisions on what, how, how much, and for whom to produce are made by the family head, in accordance with traditional means of production. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Command Economy Command economy is a type of economy, wherein the manner of production is dictated by the government. The government decides on what, how, how much, and for whom to produce. It is an economic system characterized by collective ownership of most resources, and the existence of a central planning agency of the state. In this system, all productive enterprises are owned by the people and administered by the state. Market economy or capitalism's basic characteristic is that the resources are privately owned, and that the people themselves make the decisions. It is an economic system wherein most economic decisions and means of production are made by the private owners. Under this economic system, factors of production are owned and controlled by individuals, and people are free to produce goods and services to meet the demand of consumers, who, in turn, are also free to choose goods according to their own likes. Socialism Socialism is an economic system wherein key enterprises are owned by the state. In this system, private ownership is recognized. However, the state has control over a large portion of capital assets, and is generally responsible for the production and distribution of important goods: In socialist-economy, the main emphasis is on equitable distribution of income and wealth. As such, it is considered as an economy bordering between capitalism and communism. Mixed Economy This economy is a mixture of 'Market system and the command system. The Philippine economy is described as a mixed economy since it applies a mixture of three forms of decision-making. However, it is more market-oriented rather than command or traditional. Important Economic Terms Economics has its own unique language. Thus, for a student to truly understand the different concepts and theories in economics, an understanding of these terms should first be achieved. Wealth Refers to anything that has a functional value (usually in money) which can be traded for goods and services. Accordingly, wealth is the stock of the net assets owned by individual or households. In aggregate terms, one widely used measure of the nation’s LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna total stock of wealth is that of the “marketable wealth”, that is, physical and financial assets which are in the main relatively liquid. (Pass and Lowes 1993). Consumption Consumption refers to the direct utilization or usage of the available goods and services by the buyer (individual) or the consumer (household) sector. It is also the satisfaction obtained by Consumers for the use of goods and services (Pass & Lowes 1993) Production Production is defined as the formation or creation by firms of an output (products or services). It is basically the process by which land, labor and capital are combined in order to produce outputs of goods and services. Exchange This is the process of trading or buying and selling of goods and/or services for money and/or its equivalent. It also includes the buying of goods and services either in the form of barter or through market. Distribution This is the process of allocating or apportioning scarce resources to be utilized by the household; the business sector, and the rest of the world. In specific term, however, it refers to the process of storing and moving products to customers often through intermediaries such as wholesalers and retailers (Pass.& Lowes 1993). Brief History: The Classical, Keynesian and Modern economics. This brief historical introduction aims to give a background on most profound names in the study of economics and their important contributions in this field of study. Birth of Economic Theory: Classical economics Economic theory saw its birth during the mid 1700s and 1800s. During this era, two important economists emerged. First is Adam Smith of Scotland, who is considered the most important personality in the history of economics—being regarded as the "Father of Economics". Among others, he Was responsible for the recognition of economics as a separate body of knowledge. His book, "Wealth of the Nations", published in 1776, became known. as "the bible in economics" for a hundred years (Fajardo 1977). One of his major contributions was his analysis of the relations between consumers, and producers through demand and supply, which ultimately explained how the market works through the invisible hand. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: https://twitter.com/stopcorruption1/status/1301752624463699968 Other important classical economists include John Stuart Mill who was the heir to David Ricardo, who developed the basic analysis of the political economy or the importance of a state's role in its national economy. The term political economy is an older English term that applies management to an entire polis (state). Karl Marx, a German, also emerged during this period. He is much influenced by the conditions brought about by the industrial revolution upon the working classes. His major work, Das Kapital, is the centerpiece from which major socialist thought was to emerge. (Sicat 1983) Neoclassical Economics (1870s) Neoclassical Economics was believed to have transpired around the year 1870. Its main concern was market system efficiencies. It brought recognition to such economists as Leon Walras, who introduced the general economic system, and Alfred Marshall, who became the most influential economist during that time because of his book Principles LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna in Economics. Leon Walras developed the analysis of equilibrium in several markets. On the other hand, Alfred Marshall developed the analysis of equilibrium of a particular market and the concept of "marginalism". (Sicat 1983) Keynes' General Theory of Employment, Interest and Money John Maynard Keynes is an English economist who offered an explanation of mass unemployment and suggestions for government policy to cure unemployment in his influential book: The General Theory of Employment, Interest and Money (1936). Keynes' concern about the extent and duration of the worldwide interwar depression led him to look for other explanations of recession. (Pass & Lowes 1993) In particular, Keynes argued that classical political economists were concerned with the relative shares in national output of the different factors of production, rather than the forces which determine the level of general economic activity, so that their theories of value and distribution related only to the special case of full employment. Concentrating upon the economic aggregates of National Income, Consumption, Savings, and Investment, Keynes provided a general theory for explaining the level of economic activity He argued that there is no assurance that savings would accumulate during a depression and depress interest rates,' since savings depend on income and with high unemployment incomes are low. Furthermore, he argued that investment depends primarily on business confidence which would be low during a depression so the investment would be unlikely to rise even if interest rate fell. Finally, he argued that the wage rate would be unlikely to fall much during a depression given its 'stickiness', and even if it did fall, this would merely exacerbate the depression by reducing consumption. Non-Walrasian Economics (1939) During the Non-Walrasian Era, John Hicks was recognized for his analysis of the IS—LM model, which is considered as an important macroeconomic model. IS refers to the goods market for a given interest rate, while LM means money market for a given value of aggregate output or income. The IS-LM model is a theoretical construct that integrates the real, IS (investment-saving), and the monetary, LM (demand for, and supply for money), sides of the economy simultaneously to present a determinate general equilibrium position for the economy as a whole (Pass & Lowes 1993). Post-Keynesian Economics (1940 and 1950s) After World War II, the Post-Keynesian Period saw the development of rules and regulations of different private and public institutions. This period introduced major post-Keynesian, neoclassical economists, whose views are known as the post-Keynesian "mainstream economics". This period welcomed various economists like Paul A. Samuelson, Kenneth J. Arrow, James Tobin and Lawrence Klein, to mention some recognized leaders; and others are Joan Robinson and Michael Kolechi. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Another stream of thought was introduced by liberal market post-Keynesians, mainly the monetarists, led by Milton Friedman. (Sleet 1983) New Classical Economics New Classical Economics highlighted the importance of adherence to national expectations hypothesis and analysis, which included various economic phenomena in formulating different kinds of studies and new theories in economics. This development in economics is applicable to concerns of developing countries, and was largely an outcome of concern for the growth of developed countries. The great economists like Smith, Ricardo and Malthus addressed this problem. (Sicat 1983). THE BASIC ANALYSIS OF DEMAND AND SUPPLY Demand is generally affected by the behavior of consumers, while supply is usually affected by the conduct of producers. The interplay between these two is the foundation of economic activity. Thus, the consumer identifies his needs, wants, and demands, while producers address these by accordingly producing goods and services. In the end, the consumer gains satisfaction while the producer gains profit. As the economy cannot operate without this interaction between the consumer and the producer, it is essential, therefore, that students understand the different movements of the demand and supply curves, as well as the concept of market equilibrium. This chapter provides a discussion of the elements of demand and supply. An understanding of these concepts is essential in the study of economics. Demand Demand pertains to the quantity of a good or service that people are ready to buy at given prices within a given time period, when other factors besides price are held constant. Simply put, the demand for a product is the quantity of a good or service that buyers are willing to buy given its price at a particular time. Demand therefore implies three things: desire to possess a thing (good or service); the ability to pay for it or means of purchasing it (price) and willingness in utilizing it. Market Take note that when there is demand for a good or service, there is a market. A market is where buyers and sellers meet. It is the place where they both trade or exchange goods or services—in other words, it is where their transaction takes place. There are different kinds of markets, such as wet and dry. Wet market is where people usually buy vegetables, meat etc. On the other hand, dry market is where people buy shoes, clothes, or other dry goods. However, in economic parlance, the term market does not LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna necessarily refer to a tangible area where buyers and sellers could be seen transacting. It can represent an intangible domain where goods and services are traded, such as the stock market, real estate market, or labor market--where workers offer their services, and employers look for workers to hire. Methods of Demand Analysis Demand can be analyzed in several ways. However, the most common way of analyzing demand is through demand schedule, demand curve, and demand Function. Demand Schedule A demand schedule is a table that shows the relationship of prices and the specific quantities demanded at each of these prices. Generally, the information provided by a demand schedule can be used to construct a demand curve showing the price-quantity demanded relationship in graphical form. Table 2.1 presents a hypothetical demand schedule for rice per month. Source: Microeconomics Simplified Book 2016 Take note that as the price goes up (down) the quantity of rice being purchased by the consumer goes down (up). This implies that quantity demanded is inversely related with price. In other words, consumers are not willing to purchase more rice at higher prices but will consume more if prices are low. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Demand Curve As we have said earlier, the demand curve is a graphical representation showing the relationship between price and quantities demanded per time period. A demand curve has negative slope thus it slopes downward from left to right. The downward slope indicates the inverse relationship between price and quantity demanded. Observe that most demand curves slope downwards because (a) as the price of the product falls, consumers will tend to substitute this (now relatively cheaper) product for others in their purchases; (b) as the price of the product falls, this serves to increase their real income allowing them to buy-more products (Pass & Lowes 1993). Figure 2.1 illustrates a normal demand curve. Source: Microeconomics Simplified Book 2016 Let us assume that the price of good A is at price Po. At this price level, quantity demanded for good A is at Qo and therefore demand will be at point Do along the demand curve D, However, if price will increase to P1, quantity demanded will LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna decrease to Q1 and demand will move upward towards point D1 along the same demand curve. The reason why quantity demanded decreased after the price increased to P1, is because of the inverse relationship price and quantity demanded. Thus, in such situation, consumers will purchase less of good A at higher prices than when it was at its original price P0 But what will happen to quantity demanded if price will decline to say P2? If you said quantity demanded will increase to Q2, then you are correct. Why? Because as we can see in same figure, if price will decrease to P2 quantity demanded will increase to U and demand will therefore be at point Dr Observe again that-the reverse happened when price of good A declined to P2. In this case quantity demanded increased to Q2. Why` Because consumers will purchase more of good A at lower prices than when it was at its original price This brings us now to the Law of Demand which states that 'if price goes UP, the quantity demanded of a good will go DOWN'. Conversely, 'if price goes DOWN, the quantity demanded of a good will go UP ceteris paribus'. The reason for this is because consumers always tend to MAXIMIZE SATISFACTION. Demand Function Demand can also be analyzed mathematically through a demand function. A demand function also shows the relationship between demand for a commodity and the factors that determine or influence this demand. These factors are—the price of the commodity itself, prices of other related commodities, level of incomes, taste and preferences, size and composition of level of population, distribution of income, etc. Demand function is expressed as a mathematical function. Thus, we can show our mathematical function for demand as LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 We can now illustrate our demand function using a hypothetical example. Let us assume that the current price of good A is P5.00. The intercept of the demand curve is 3 while the slope is 0.25. If we want to determine how much of good A will be demanded by consumer X, we can simply substitute the given values to our equation, thus: QD = 3 - 0.25 (5) = 3 -1.25 QD = 1.75 units of good A But, what if the price of good A will increase to P6.00? What will now be the new quantity demanded by consumer X? If you say 1.5 units, then you are correct. Again, by simply substituting our values to our demand equation you will arrive at the new quantity demanded. What happened to quantity demanded? There is a decrease of 0.25 units because of the increase in price. Again, this is because of the inverse relationship between price and quantity demanded. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Change in Quantity Demanded vs. Change in Demand Before we go on further with our discussion of the concept of demand, let us first distinguish change in quantity demanded and change in demand. This is important since a change in quantity demanded must not be confused with a change in demand. Change in Quantity Demanded We can say that there is change in quantity demanded (symbolized as △QD) if there is a movement from one point to another point — or from one price-quantity combination to another — along the same demand curve. A change in quantity demanded is Mainly brought about by an increase (a decrease) in the product's own price. The direction of the movement however is inverse considering the Law of Demand. We can explain change in quantity demanded through a demand curve. Figure 2.2 below illustrates the concept of change in quantity demanded. We can see in this figure that the original price is at P0 and at this price level quantity demanded is at Q0. The point of interaction between Po and Qo is at point a along the demand curve. Now let us assume that price decreases to P1. As a result, quantity demanded will increase to Q1 because of the change in the product's price. As a result, quantity demanded will move to point b along the same demand curve because of the decrease in price as shown by the arrow. The reverse however will happen if price will increase. We can therefore say that there is change in quantity demanded if the price of the good being sold changes. This is shown by a movement from one point to another point along the same demand curve. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 Change in Demand There is a change in demand if the entire demand curve shifts to the right (left) resulting to an increase(decrease) in demand due to other factors other than the price of the good sold. At the same price, therefore, more amounts of a good. or service are demanded by consumers. Figure 2.3a illustrates an increase in demand. In the figure, we can observe that the entire demand curve shifts upward or to the right (indicated by the arrow) from D to D'. We can, also observe that at the same price P0 more goods will be demanded by consumers (from Q0 to Q1). Conversely demand decreases or falls if the entire demand curve shifts downward or to the left. Thus, at the same price level, less amount of a good or service are demanded. by consumers. A decrease in demand is illustrated in Figure 2.3b. We can observe in the, figure that the entire demand curve shifted downward or to the left (indicated by the arrow) from D to D'. if price remains at the same level, demand for the product or service will decrease (from Q0 to Q1). Increase (decrease)in demand is brought about by factors other than the price of the good itself such as tastes and preferences, price of substitute goods, etc. resulting in the shift of the entire demand curve either upward or downward. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 Forces that cause the demand curve to change There are several reasons why demand changes and thus cause the demand curve to move either upward or downwards. The. following are the more general reasons for the change in demand. Taste or preferences Tastes or preferences pertain to the personal likes or dislikes of consumers for certain goods and services. g. tastes or preferences change so that people want to buy more of a commodity at a given price, then an Increase in demand will result or vice versa. As an illustration: Remember the craze for IPods? This came about in the Philippines sometime in 2006, and everyone just wanted to have one. At that time, there were quite a number of MP3 player brands being sold in the market However, for some reasons, consumers were just so engrossed with the thought of having an iPod MP3 player, to the point that some shops had all their stocks sold out. This is a clear example of consumer preferences when it came to MP3 players during that time Consumers preferred a certain brand because at that time, it was "in" to have an iPod. Consumer LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna preference towards a certain product increases the demand Tor that product. However, products Which consumers' do not prefer, suffer a decrease in demand. Changing incomes Increasing incomes of households raise the demand for certain goods or services or vice versa. This is because an increase in one's income generally raises his capacity or power to demand for goods or services which he is not able to purchase at lower income. On the other hand, a decrease in one's income reduces his purchasing power, and consequently, his demand for some goods or services ultimately declines. Take for example Juan who is receiving a monthly salary of Php 10,000.00. He loves to buy shirts during payday. With his income, he could only buy 3 shirts per month. After a year, however, he was promoted to a higher position. Due to his, promotion his salary increased to Php 20,000.00 per month. Because of the increase in Juan's salary, he can now afford to buy more shirts, say 6 shirts per month. His capacity to buy more shirts (and other goods or services for that matter) is simply the result of the increase in his monthly income. Occasional or seasonal products The various events or seasons in a given year also result to a movement of the demand curve with reference to particular groups. For example: during Christmas season, demand for Christmas trees, parols, and other Christmas decors increases. Moreover, the demand for food items like ham and quezo de bola also increases. Similarly, as Valentine’s Day approaches, the demand for roses and chocolates also rises. It should be noted, however, that after these events, demand for these products returns back to the original level. Population change An increasing population leads to an increase in the demand for some types of good or service, and vice-versa. This simply means that more goods or services arc to be demanded because of rising population. In particular, increase in population generally results to an increase in demand for basic goods, such as food and medicines. On the other hand, a decrease in population results in a decline in demand. Substitute and complementary goods Substitute goods are goods that are interchanged with another good. In a situation where the price of a particular good increases a consumer will tend to look for closely related commodities. Substitute goods are generally offered at cheaper price, consequently making it more attractive for buyers to purchase. For instance, Juan wants to buys a pair of Nike rubber shoes. But the price of the shoes that he wanted was worth P5,000.00 Considering the price and his lower budget of P3000.00 he opted for an alternative brand of shoes with a lower price, say Converse shoes. In this situation, Nike and Converse shoes are substitutes. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna On the other hand, complementary goods are goods that complement with each other. In other words, one good cannot exist without the other good. For instance, your pen cannot write if there is no ink in it or your cellphone cannot function if you do not have a sim card or a load. Expectations of future prices If buyers expect the price of a good or service to rise (or fall) in the future, it may cause the current demand to increase (or decrease). Also, expectations about the future may alter demand for a specific commodity. Take for example the fluctuating prices of rice. If households expect that a drastic increase in the price of rice will happen after a week, their natural behavior is to purchase and stock-up rice before the price goes up. Thus, at that given point in time there will be an increase in demand for rice due to consumer stock piling because of the expected increase in its future price. Practical application of the concept of change in quantity demanded and change in demand Let us now consider some practical applications of the concept of change in quantity demanded and change in demand, which you have earlier learned. We already know that the price of gasoline in the domestic market tends to change every now and then. Because of the price changes, private car owners tend to lessen the consumption of gasoline during high prices by not using their cars, but tend to increase their consumption during low prices by utilizing more their cars. On the other hand, because of the increase in the price of gasoline, the sale of cars has declined. This is because cars and gasoline are complementary goods so that the increase in the price of gasoline will result in a decline in the sale of cars. Of course, cars will not run without gasoline so that the higher the price of gasoline (say P100.00 per liter) the' lower will be the demand for cars. The reverse will happen if the price of gasoline will decrease to say P30.00 per liter or even lower. The first situation illustrates the concept of change in quantity demanded because the only factor that causes the change was the price of gasoline. The second situation, on the other hand, illustrates the concept of change in demand since other factors made the demand to change. Supply (Firms/Seller's side) We now go to the other side of the coin which is supply. Simply defined, supply is the quantity of goods and services that firms are ready and willing to sell at a given price within a period of time, other factors being held constant. It is the quantity of goods and LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna services which a firm is willing to sell at a given price, at a given point in time. Thus, supply is a product made available for sale by firms. It should be remembered that sellers normally sell more at a higher price than at a lower price. This is because higher price results to higher profits. Methods of Supply Analysis Just like demand, supply can also be analyzed through a supply schedule, supply curve, and supply function. Supply Schedule A supply schedule is a table listing the various prices of a product and the specific quantities supplied at each of these prices at a given point in time. Generally, the information provided by a supply schedule can be used to construct a supply curve showing the price/quantity supply relationship in graphical form. Table 2.2 presents a hypothetical, supply schedule for rice per month. Source: Microeconomics Simplified Book 2016 Observe that as price increases quantity supplied also increases. For instance, if the price of rice per kilo is P35.00, sellers will be willing to Sell 48 kilos of rice in the market. However, if the price of rice will decrease to P11.00, sellers will only be willing to sell 5 kilos of rice. As we have noted earlier, high prices provide incentives to sellers to sell more because of the expected increase in their profits. However, when prices decline, these become a disincentive on the sellers to sell more goods and services in the market since their profits will be low. Supply Curve LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna A supply curve is a graphical representation showing the relationship between the price of the product sold or factor of production (e.g., labor) and the quantity supplied per time period. The typical market supply curve for a product slope upward from left to right indicating that as price rises (falls) more (less) is supplied. The upward slope indicates the positive relationship between price and quantity supplied. This is illustrated in Figure 2.4. Source: Microeconomics Simplified Book 2016 Let us assume that the price of good A is at Po. At this price level quantity supplied is at Q0, so that our supply it at S0 in our supply curve S. Suppose the price of good A increases, say to the level of P1. Definitely, quantity supplied will also increase, and in our illustration this will be up to the level of Q1. Therefore, supply will now be at S1, in our supply curve. Take note that at the new price P1 quantity supplied has increased to Q1. What is the reason behind this? Again because of the direct relationship between price and quantity supplied. Of course, the reverse will happen if price will decrease to say P2. Under this new price, quantity supplied will only be at Q2, so that supply will only be at S2 in the supply curve. This now brings us to the Law of Supply. The law states that if the price of a good or service goes up, the quantity supplied for such good or service will also go up; if the price goes down the quantity supplied will also go down, ceteris paribus. The Law of LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Supply implies that higher price is an incentive for business firms to produce more goods or services as it will maximize their profits. In particular, given the higher price, producers or sellers normally increase their supply of goods or services to increase their profits. As such, they will always want that price of their goods are high. On the other hand, at a lower price only those producers or sellers who are more efficient in their operations will survive. These producers or sellers are those who are able to maximize their resources, who handle their budget well, and who know how to handle these kinds of situations. Conversely other producers or sellers who are less-efficient and with bad budgeting system will run the risk of losing profits or may even be removed in the market (Sicat 2003). This is what the Law of Supply means: that higher price entices producers or sellers to supply more goods or services because of their profit motive while lower price diminishes their goal of putting additional investment because of the possibility of incurring a loss and taken out of the market. Supply Function A supply function is a form of mathematical notation that links the dependent variable, quantity supplied (Qs), with various independent variables which determine quantity supplied. Among the factors that influence the quantity supplied are price of the Product, number of sellers in the market, price of factor inputs, technology, business goals, importations, weather conditions, and government policies. Thus, we can transform our statement in a mathematical. function as follows: Qs = f (product's own price, number of sellers, price of factor inputs, technology, etc.) Given our supply function, we can now derive our supply equation: Qs = a+bP Where: Qs = quantity supplied at a particular price a = intercept of the supply curve b = slope of the supply curve P = price of the good sold We can now illustrate our supply equation using a hypothetical example. Suppose the price of good A is P5.00. The intercept of the supply curve is 3 and the slope of the supply Curve is 0.25. If we want to know how much of good A will be supplied by sellers, we can simply substitute the values in our supply equation. Thus, Qs = a + bP = 3 + 0.25 (5) = 3 + 1.25 LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Qs = 4.25 units But suppose the price of good A increases to P6.00, what will new be the quantity of goods to be ,supplied by the seller? If your answer is 4.5 units, then you are correct. Why? Because, as we have noted earlier, higher prices induce sellers to sell more, so that in our hypothetical example; when the price of good A increased to P6.00 the quantity supplied increased to 4.50 units. Change in Quantity Supplied vs. Change in Supply. Before we go on further with our discussion of the concept of supply, let us first distinguish change in quantity supplied and change in supply. This is important since a change in quantity supplied must not be confused with a change in supply. Change in Quantity Supplied A change in quantity supplied occurs if there is a movement from one point to another point along the same supply curve. A change in quantity supplied is brought about by an increase (decrease) in the product's own price. The direction of the movement however is positive considering the Law of Supply. Figure 2.5 illustrates the concept of change in quantity supplied. As you can see in this figure, the original price is at P0 and the corresponding quantity supplied is at Q0. The point of interaction between P0, and Q0 is point a along the supply curve S. Now let us assume that price increases to P1. As a result, quantity supplied will increase to Q1. Quantity supplied will therefore move from point a to point b along the same supply curve because of the increase in price of the same product. The reverse however will happen if price will decrease. A change in quantity supplied therefore happens if the price of the good being sold in the market changes, and this is illustrated by a movement from one point to another point along the same supply curve. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 Change in Supply A change in supply happens when the entire supply curve shifts leftward or rightward. At the same price, therefore, less (more) amounts of a good or service is supplied by producers or sellers. Figure 2.6a illustrates an increase in supply. In the figure, we can see that the entire supply curve moves rightward (indicated by the arrow) from S to S'. We can therefore observe that at the same price P0. more goods will be offered for sale by producers (from Qo to Q1). On the other hand, supply decreases if the entire supply curve shifts leftward. At the same price, fewer amounts of a good or service are sold by producers. A decrease in supply is illustrated in Figure 2.6b. We can see in the figure that the entire supply curve shifts leftward (indicated by the arrow) from S to S'. We can also see that at the same price Po, supply for the product will decrease (from Q1 to Q0). Increase (decrease) in supply is caused by factors other than the price of the good itself such as change in technology, business goals, etc. resulting to the movement of the entire supply curve rightward (leftward). LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 Forces that cause the supply curve to change Just like demand, there are also other factors that cause the supply curve to change. Below are some of the factors that cause the supply curve to change. Optimization in the use of factors of production An optimization in the utilization of resources will increase supply, while a failure to achieve such will result to a decrease in supply. Optimization in this sense refers to the process or methodology of making or creating something as fully perfect, functional, or effective as possible. Simply put, it is the efficient use of resources. In business parlance, it can mean maximum production of output at minimum cost. Thus, the optimization of the various factors of production (i.e., land, labor, capital and entrepreneurship) results to an increase in supply, and vice versa (Sicat 2003). Technological change LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna The introduction of cost-reducing innovations in the production technology increases supply on one hand. On the other hand, this can also decrease supply by means of freezing the production through the problems that the new technology might encounter, such as technical trouble (Samuelson and Nordhaus 2004). Take for example AST Motors Corporation, which uses Machine "A" in the production of its cars. Machine "A" can produce 20 cars per week. However, after 3 years of production, AST Motors Corporation decided to replace Machine "A" with the newer and faster Machine "B", which can fully produce 80 cars per week. Because of the introduction of this new technology (Machine "B"), the quantity of cars supplied by AST Motors Corporation increased from 20 cars per week to 80 cars per week. However, if Machine "B" malfunctions and such was not fixed immediately, AST Corporation's production of cars would decrease and thus not meet the optimum level of production using Machine "B". Future expectations This factor impacts sellers as much as buyers. If sellers anticipate a rise in prices, they may choose to hold back the current supply to take advantage of the future increase in price, thus decreasing market supply. If sellers however expect a decline in the price for their products, they will increase present supply. For example: If MVB Meat Company expects a drastic increase in prices of meat within the following week, it may opt to hold its supply of meat for the meantime and sell it only upon application of the price increase, thus, reducing the present supply of meat in the market. Conversely, if NKR Company, a producer of pager, expects that its product will be rendered obsolete after 2 years due to the introduction of cellular phones in the market. it may decide to sell all its stock of pagers in order to presently earn profit from their sale, rather than have them unsold in the following years, considering its apparentobsoleteness in the near future. Number of sellers The number of sellers has a direct impact on quantity supplied. Simply put, the more sellers there are in the market the greater supply of goods and services will be available. For example, during the Christmas season, more tiangge stores sell t-shirts and RTWs resulting to an increase in the available shirts and RTWs in the market. Moreover, if more farmers will plant rice instead of other crops, then the supply of rice in the market will increase due to more production assuming that no destructive calamities will strike the country. Weather conditions Bad weather, such as typhoons, drought or other natural disasters, reduces supply of agricultural commodities while-good weather has an opposite impact. For instance, if a LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna typhoon. destroys the vegetable farms in Benguet Province, the supply of vegetables particularly in markets of Metro Manila will decline. Government policy Removing quotas and tariffs on imported products also affect supply: Lower trade restrictions and lower quotas or tariffs boost imports, thereby adding more Supply. of goods in the market. In order for imported products to be accepted in a country, there is a need for importers to pay the government the required tariffs or duties and taxes. Importers must also abide by the quota required by the government on certain products. Quotas are limitation on the number or quantities of imported goods which could enter a country. This is used in Order to protect domestic or local products. Market Equilibrium From a separate discussion of demand and supply, we now proceed with reconciling the two. The meeting of supply and demand results to what is referred to as 'market equilibrium'. As earlier said the market referred to here is a situation `where buyers and sellers meet', while equilibrium is generally understood as a `state of balance'. Market equilibrium generally pertains to a balance that exists when 'quantity demanded equals quantity supplied. Market equilibrium is the general agreement of the buyer and the seller in the exchange of goods and services at a particular price and at a particular quantity. At equilibrium point, there are always two sides of the story, the side of buyer and that of the seller. For instance, given the price of P10.00 the buyer is willing to purchase 20 units. On the seller side, he is willing to sell the quantity of 20 units at a price of P10.00. This simple illustration simply shows that the buyer and seller agree at one particular price and quantity, that is P10.00 and 20 units. This is the main concept of equilibrium: that there is a balance between price and quantity of goods bought by consumers and sold by sellers in the market. Equilibrium market price Equilibrium market price is the price agreed by the seller to offer its good or service for sale and for the buyer to pay for it. Specifically, it is the price at which quantity demanded of a good is exactly equal to quantity supplied of the same good. The equilibrium market price and quantity can best be depicted in a graph. As illustrated in Figure 2.7, the demand curve depicts the quantity that consumers are willing to buy at particular prices; the supply curve depicts the quantity that producers are prepared LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna to sell at particular prices. The equilibrium market price is generated by the intersection of the demand and supply curves. A higher initial price (say at P40.00) results in excess supply (QS = 200 units and QD = 100 units). The excess supply is depicted by the area abc. In this case, the oversupply of 100 units forces prices down in order to eliminate the excess supply. At lower initial price (say at P20.00) results in excess demand of 100 units(Qs= 100 units and Qd= 200 units). This is depicted by the area cef. In this case price is forced up in order to eliminate the excess demand. Only at price P30.00 are demand and supply initiations fully synchronized. What happens when there is market disequilibrium? When there is market disequilibrium, two conditions may happen: a surplus or a shortage may occur as shown in Figure 2.7. Surplus Surplus is a condition in the market where the quantity supplied is more the quantity demanded. When there is a surplus, the tendency is for sellers to lower market prices in order for the goods and services to be easily disposed from the market. This means that there is a downward pressure to price when there is a surplus in order to restore equilibrium in the market. This is depicted in Figure 2.7 by the arrow from point b going down to the equilibrium point. Generally, a surplus happens when there are more products sold in the market by sellers but few products are bought by consumers. This is because the quantity of goods that buyers are willing to buy at a given price is less than the quantity of goods that sellers are willing to sell at the same price. This is shown in the illustration in Figure 2.7 where buyers are only willing to buy 100 units of good A when the price is at P40.00 so that quantity demanded is only at point a in our demand curve D. On the other hand, at that same, price level, sellers are willing to sell 200 units so that, quantity supplied is at point b of our supply curve S. Considering that quantity supplied at 200 units is greater than quantity demanded at 100 units, there is. an excess supply of 100 units of good A in the market that are unsold. These unsold goods are the surplus in this particular situation, which is illustrated by the points a, c, and b in our figure. Now, how can be surplus of good A be eliminated? The way by which a surplus can be eliminated in the market is by lowering the current price until it reaches the equilibrium price, as shown by the arrow going down the equilibrium point c. In our figure, the equilibrium price is P30.00 at point c and no other point in the figure shows that quantity demanded is equal to quantity supplied. Under this situation it is the seller that influences the lowering of the price until the equilibrium price and quantity are attained. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna Source: Microeconomics Simplified Book 2016 Shortage The reverse happens when shortage occurs in the market. Shortage is basically a condition in the market in which quantity demanded is higher than quantity supplied at a given price. As you may have observed in Figure 2.7, a shortage exists below the equilibrium point. In particular, a shortage happens when quantity demanded is greater than quantity supplied at a given price. For instance, in our illustration at price P20.00 quantity demanded for good A is at 200 units, which is at point fin our demand curve D. But at the same price level quantity supplied for good A is only 100 units, which is at point e in our supply curve. Why is this so? Because in this particular situation buyers are LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING  Republic of the Philippines Laguna State Polytechnic University Province of Laguna willing to buy more at the lower price but sellers will only be willing to sell less since at lower price, they will only gain less profit. The shortage area in this situation is shown in the figure by the area cef. So, what happens when there is a shortage of goods and services in the market? When there is a shortage of goods and services in the market, what happens is that there is an upward pressure on prices to restore equilibrium in the market. In this particular situation, it is the consumers that will influence that price to go up since they will bid up prices in order for them to acquire the goods or services that are in short supply. This is depicted by the arrow going up from point e to the equilibrium point c. For as long as there is disequilibrium in the market, prices will still go up until such situation is normalized. Changes in Demand, Supply, and Equilibrium We already know that demand might change because of the factors other than the price of the goods and services sold like changes in consumers' income, tastes and preferences, and variations in the prices of related goods. Similarly, supply might also change in response to changes in technology, cost of production, and government policies. What effect will such changes in supply and demand have on equilibrium price and quantity? This is now our concern here in this section: to show to you the effect on equilibrium price and quantity when either demand or supply changes because of the effect of the factors other than price. Changes in demand Suppose that the supply of some goods (say, bread) is constant and demand increases (because of increase in income or change in the tastes and preferences of consumers for example). This situation is illustrated in Figure 2.8. As you can observe in the figure, the new intersection of the supply and demand curves is at higher values on both the price and the quantity axes because of the shift of the demand curve upwards. Thus, from the original E0 of P30.00 and 150 units, a new equilibriu