Applied economics Quarter 1 Module 3, Papers of Applied Economics

Download Applied economics Quarter 1 Module 3 and more Papers Applied Economics in PDF only on Docsity! Republic of the Philippines Department of Education National Capital Region DIVISION OF CITY SCHOOLS — MANILA Manila Education Center Arroceros Forest Park Antonio J. Villegas St. Ermita, Manila Applied Economics Implications of Market Pricing in Making Economic Decisions Es https://www.thoughtco.com/supply-and-demand-practice-questions-1146966 Quarter 1 Week 4 Module 4 Learning Competency *& Determine the implications of market pricing in making economic decisions “ ¢ € $e £& HOW TO USE THIS MODULE Before starting the module, I want you to set aside other task/s that may disturb you while enjoying the lessons. Read the simple instructions below to successfully enjoy the objectives of this kit. Have fun! 1. Follow carefully all the contents and instructions indicated in every page of this module. 2. Write on your notebook the concepts about the lessons. Writing enhances learning that is important to develop and keep in mind. 3. Perform all the provided activities in the module. 4. Let your facilitator/guardian assess your answers using the answer key card. 5. Analyze conceptually the posttest and apply what you have learned. 6. Enjoy studying! PARTS OF THE MODULE Expectations - These are what you will be able to know after completing the lessons in the module. Pre-test - This will measure your prior knowledge and the concepts to be mastered throughout the lesson. Looking Back to your Lesson - This section will measure what learnings and skills did you understand from the previous lesson. Brief Introduction- This section will give you an overview of the lesson. Activities - This is a set of activities you will perform with a partner. Remember - This section summarizes the concepts and applications of the lessons. Check your Understanding - It will verify how you learned from the lesson. Post-test - This will measure how much you have learned from the entire module [ LOOKING BACK TO YOUR LESSON As we go further, let us try to recall the concepts of market demand, market supply and market equilibrium. Please perform this. PART I. TRUE OR FALSE Directions: Write TRUE if the statement is correct and FALSE if tincorrect. Write your answer on the space provided for each number. 1. The equilibrium point is the level where the demand and supply curves intersect. 2. If the price is above the equilibrium level, the quantity demanded is greater than the quantity supplied. 3. If the price is below the equilibrium point, the quantity demanded is lesser than the quantity supplied. 4. The law of demand applies during online sales of computers when consumers rush to buy products at 30% discounts. 5. The law of supply applies when the producers supply more masks at a higher price; selling at higher quantity at a higher price increases revenue. 6. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. 7. Shortage will exist if the price is below the equilibrium point 8. The law of supply and demand explains the interaction between the sellers of a product and the buyers. 9. The demand curve is always downward sloping due to the law of diminishing marginal utility. 10. The supply curve shows an upward slope. PART II Make Meaning Internet Assisted Activity Directions: Give the meaning of the following words/phrases. You may use the internet to substantiate your ideas. Price Elasticity. Price Elasticity of Demand. Price Elasticity of Supply. Market Pricing on Making Economic Decisions Please read this article on Demand, Supply and Elasticity of Clean Water in the Philippines. This will help you understand better our new lesson. Enjoy reading! Demand, Supply and Elasticity of Clean Water in the Philippines 8/27/2015 According to an article created by Vice News, there are 55 people who die in the Philippines every day because of the lack of clean water. As one can see clean water is greatly needed by all people. As a student who is lucky to be given all the necessities needed in life it would be normal not to think of this because we normally do not notice it. However, we need to. According to Katrina Arianne Ebora, who works for UNICEF's Water, Sanitation and Hygiene program in the Philippines stated that “Over 30 million people in the Philippines do not have access to improved sanitation facilities.” Also, according to the PIS by 2050 the population of the areas with poverty in Manila will reach over 9 million! With the rising population of the Philippines there will be a problem with the economy of clean water because there will be too much demand for the supply of water. hitps://redmonteconomics.weebly.com/blog/demand-supply-and-elasticity-of-clean-water-in-the-philippines The Marketing Price System Last module, we talked about the market demand, market supply and market equilibrium. In our new topic, we will link more of these variables to the market price system. For example, in the article above, the causes and effects of the water shortage around the Philippines could be best explained if we could understand the concepts of demand and supply elasticity of the clean water. A shortage is when there is an excess demand for the quantity supplied. While surplus is excess in supply. For example, if there are 10 bottles of water and there are 20 students who _want drinking these, then there will be only 10 students whose demands are met | while the others will not be able to be given anything. There is shortage in the supply. If producers make too many bottles of water and consumers cannot by them want to buy them, there will be surplus. Price System in a Market Economy Let us find out more about the price system. We have learned that demand is the willingness of the consumers to buy goods and services. In economics, the willingness to buy goods and services should be accompanied by the ability to buy, also called the “purchasing power’. This is referred to as an effective demand (source: Investopedia). EQUILIBRIUM CHARACTERISTICS Equilibrium is a point of balance or a point of rest. It is also called The supply and demand are balanced in equilibrium. “market-clearing price’. The economic forces are balanced and in the absence of external influences, the (equilibrium) values of economic variables will not change. Equilibrium price is the price at which the producer can sell all the units he wants to produce and the buyer can buy all the units he wants Quantity demanded and quantities supplied are equal. The amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. Are you enjoying the lesson? Let us proceed to the next topic. Price System in a Market Economy: Its Characteristics Let us learn more! The prices of goods that we encounter everyday to the things we buy plays a crucial role in determining an efficient distribution of resources in a market system. The prices will help us to make every day economic decisions about our needs and desires. They are the indications of the acceptance of a product; the more popular the product, the higher the price that can be charged. Example is when a tables are for sale in your community today and is assumed that they are not very important as compared to other products or commodities that we need to survive especially that aour movements are very limited. Neither the producers nor consumers can impact prices; consumers can buy whatever they want; nor can producers make and _ sell whatever they want Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions. e Ifa good is in shortage — price will tend to rise. Rising prices discourage demand, and Prices are decided by encourage firms to try and increase supply. interactions between the producers and the consumers. e Ifa good is in surplus — price will tend to fall. Falling price encourage people to buy, and cause firms to try and cut back on supply. e Prices help to redistribute resources from goods with little demand to goods and services PRICE ELASTICITY OF DEMAND AND SUPPLY 4 Price elasticity measures the responsiveness of the by" \ _.. quantity demanded or supplied of a good to a change in its sw Ze price. Elasticity can be described as: a) elastic or very S ———=_ responsive and b) unit elastic, or inelastic or not very = responsive. (source: Investopedia) Can you guess what happened with this mom in a market? You may write your reaction in the shape towards her. = Effects of Change in Demand and Supply Elastic demand or supply curve indicates that quantity demanded or supplied respond to price changes in a greater * than proportional manner. ® Shocking Prices At Supermarket Inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. Unitary elasticity means that a given percentage changes in price leads to an equal percentage change in quantity demanded or supplied. CATEGORIES OF PRICE ELASTICITY According to Agarwal, P. (2018) and Judge, S. (2020), there are four categories of price elasticity are the following: I. The Price Elasticity of Demand Price elasticity of demand is the responsiveness of quantity demanded, or how much quantity demanded changes, given a change in the price of goods or services. *The mathematical value is negative. A negative value indicates an inverse relationship between price and the quantity demanded. But the negative sign is ignored (Judge, S. 2020). Price Elasticity of Demand (PED)= % change in quantity demanded % Change in price Price Porfoctly Inelastic \ Perfectly e elastic -—____ Unit ‘elasticity a ‘Quantity http://www economicsonline co.uk/ Competitive markets /Price elasticity of demand.html Figure 4 Price Elasticity of Demand 10 a) Elastic Demand (PED > 1) - the percentage change in price brings about amore than proportionate change in quantity demanded. When the percentage change in quantity demanded is greater than the percentage change in price, and the coefficient of the elasticity is greater than 1. Example real estate- housing - There are many different housing choices. People may live in a townhouses, condos, apartments, or resorts. The options make easy for people to not pay more than they demand. b) Inelastic Demand (coefficient of the elasticity is less than 1) — is when an increase in price causes a smaller % fall in demand. When the percentage change in quantity demanded is less than the percentage change in price, and the coefficient of the elasticity is less than 1. Example Gasoline — gasoline has few alternatives; people with cars consider it as a necessity and they need to buy gasoline. There are weak substitutes, such as train riding, walking and buses. If the price of gasoline goes up, demand is very inelastic. Other Examples: Diamonds, aircon, Iphone, Cigarettes c) Unitary Elastic Demand - When the percentage change in demand is equal to the percentage change in price, the product is said to have Unitary Elastic demand. Unitary elastic - PED or the price elasticity of demand is 1 d) Perfectly Elastic - a small percentage change in price brings about a change in quantity demanded from zero to infinity. Perfectly elastic - the coefficient of elasticity is equal to infinity (0) e) Perfectly Inelastic - the PED is =0 any change in price will not have any effect on the demand of the product. Perfectly inelastic - the percentage change in demand will be equal to zero (0) POINT ELASTICITY a) The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction in the total revenue of the firm. b) The demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total revenue is maximum at this point. c) Any point above the midpoint has elasticity greater than 1, (Ed > 1). II. The Income Elasticity of Demand (YED) The income elasticity of demand is the relationship between changes in quantity demanded for a good and a change in real income. 11 - YED = % change in demand % change in income Normal Goods — are those goods for which the demand rises as consumer income rises; positive income elasticity of demand so as consumers’ income rises more is demanded at each price. These goods shift to the right as income rises. YED is positive. As income rises, the proportion spent on cheap goods will reduce as now they can afford to buy more expensive goods. Example (the demand for units of air-conditioning increases as the income of the consumer increases and the demand for electric fan decreases) Normal good: units of air-conditioning; Inferior good: electric fan The Inferior Goods — the demand decreases when consumer income rises; demand increases when consumer income decreases) ------ Shifts to the left as income rises. YED is negative. * As income rises, the proportion spent on cheap goods will reduce as now they can afford to buy more expensive goods. Examples: the demand for cheap/generic electronic goods (let say electric fans) will fall as people income rises and they will switch to expensive branded electronic goods (unit of air-conditioning) III. Cross Price Elasticity of Demand or (XED) Cross price elasticity of dmand is he effect on the change in demand of one good as a result of a change in price of related to another product. * XED = % change in quantity demanded of good X % Change in price of good Y « « If the value of XED is positive - substitute goods ¢ If the value of XED is negative — complements goods ¢ If the value of XED is zero - two goods are unrelated IV. Price Elasticity of Supply (PES) ¢ The measure of the responsiveness of quantity to a change in price. It is the percentage change in supply as compared to the percentage change in price of a commodity. PES = % change in quantity Supplied % change in Price . a . If supply is elastic, producers can increase Price Elasticity of = SAIN Qs output without a rise in cost or a time Supply (PES) %Ain P delay. If supply is inelastic, firms find it |hard to change production in a given time |period. ntps://www inte lligenteconomist.com /price -elasticity- | ofsupply | PES = % change in quantity Supplied % change in Price If Pes > 1 = supply is price elastic Pes = 0 = supply is perfectly inelastic Pes = infinity = supply is perfectly elastic Pes < 1 = supply is price inelastic 12 Learning Module for Applied Economics B) Analysis on price elasticity C) Interpret your analysis on the kind of good If a 20% decrease in the price of international calls lead to a 35% increase in the quantity of calls demanded, we can conclude that the demand for phone calls is: A) Solution: B) Analysis on price elasticity A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price typically leads to a lower quantity demanded. A supply curve shows the relationship between quantity supplied and price on a graph. The law of supply says that a higher price typically leads to a higher quantity supplied. The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level. 15 Learning Module for Applied Economics ( CHECK YOUR UNDERSTANDING ] Part I. Identification Directions: Please read the sentences carefully. Identify the the word or phrase that is appropriate to each item. LA shows the relationship between quantity demanded and price in a given market on a graph. 2. The states that, higher the price, the higher the quantity supplied. 3. means that a given percentage changes in price leads to an equal percentage change in quantity demanded or supplied. 4. means the effect on the change in demand of one good as a result of a change in price of related to another product. 5. those goods for which the demand rises as consumer income rises. 6. the coefficient of the elasticity is less than 1; when an increase in price causes a smaller % fall in demand. Part II. Enumeration on Price Elasticity of Goods Directions: Please conduct a survey or observe the market in your vicinity. This can make you aware of your environments. Give examples of goods considered as elastic and inelastic. You may work with your parents and siblings. ELASTIC GOODS INELASTIC GOODS U1] -B| | JF U1] -B| | JF 16 Learning Module for Applied Economics Name. Year/Section Date Teacher. School Part I True or False Directions: Read the sentences carefully. Write TRUE if the statement is correct and FALSE if the statement is incorrect. 1. Elasticity of demand refers to the change in demand when there is a change in another factor such as price or income 2. If demand for a good or service is static even when the price changes, demand is said to be inelastic 3. Examples of elastic goods include gasoline, while inelastic goods are items like canned goods and vitamin c tablets 4. The law of demand states that “elasticity shows how much a good or service is demanded relative to its movement in price”. 5. Inelastic demand is when a demanded quantity for masks changes by a greater percentage compared to its percentage change in price 6. The opposite of a market economy is a planned economy, where investment and production decisions are decided by the government. 7. Unit elastic is when a percentage change in demand equals the price. 8. A mango fruit with an elastic demand gets more sales when its price drops slightly. When its price goes up, it stays longer in the box. 9. The demand curve shows how quantity demanded for apple responds to price changes. The flatter the curve, the more elastic is the demand for an apple. 10. The midpoint elasticity is greater than 1. 17 Learning Module for Applied Economics Name: Year/ Section. Date. Score WORKSHEET (ADDITIONAL ACTIVITY) Problem Solving and Critical Thinking Analysis Directions: Solve the following problems. Interpret the results. 1. Christine sells banana banana turon for Php 4.00 per piece. She sells 50 pes, and decides that she can charge more. She raises the price to Php6.00 per piece and sells 40 pieces. What is the elasticity of demand for her banana turon? a) Solution: b) Interpret the result of the demand elasticity: 2. Joy Lima manages a Sweet Chocolate Bar Store. She charges P100 per bar for her chocolate. You, the economist, have calculated the elasticity of demand for the chocolate in her town to be 2.5. a) If she wants to increase her total income or revenue, what advice will you give her and why? b) What economic principle apllies? Explain your answer. http://faculty fortlewis.edu/walker_d/practice_problems_-_elasticity.htm 20 Learning Module for Applied Economics PRETEST: Part I. Graph Analysis 1) Quantity supplied is greater than quantity demanded 2) Quantity demanded is greater than quantity supplied 3) a) Above the equilibrium point b) Below the equilibrium point c) The surplus and shortage points meet or intersect 4) Oversupply/surplus - the quantity supplied is greater than the quantity demanded Shortage /scarcity - the quantity supplied is less than quantity demanded Equilibrium - the point where the demand and supply curves intersect. Part II Multiple Choice A 3)c 5)Cc 2B 4)B LOOKING BACK TO YOUR LESSON: TRUE or FALSE 1. TRUE 5. FALSE 2. TRUE 6. TRUE 9, TRUE 3. FALSE 7. TRUE 10. FALSE 4. TRUE 8. TRUE Part II Make meaning internet assisted activity Price Elasticity — responsiveness of the market place to a change in price for a product Price Elasticity of Demand — economic measure of the change in the quantity demanded or purchased of product in relation to price changes Price Elasticity of Supply- measures the responsiveness to the supply of goods or services after a change in its market price (source: investopedia) ACTIVITIES: Part I 1. Scarcity in the supply of bottled water 2. Solution: -12%/8% = -.12/.08 = Answer -1.5. Again, drop the negative sign, so the elasticity is 1.5. Interpretation: Elastic (greater than 1) 3. First compute the price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price Solution: price elasticity = 35%/ (-20%) Answer: price elasticity = -175 Interpretation: The price elasticity is larger than one in absolute value, demand is elastic. 21 Learning Module for Applied Economics Part IIT 1. XED = % change in quantity demanded of good X % Change in price of good Y « If the value of XED is positive - substitute goods a) 20/10= 2 b) Positive c) It’s a substitute good 2. First compute the price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price a) Solution: price elasticity = 35%/ (-20%) Again, drop the negative sign b) Answer: price elasticity = -1.75 c) Interpretation: Since the price elasticity is larger than one in absolute value, demand is elastic. CHECK YOUR UNDERSTANDING 1. Demand Curve 4. Cross Price Elasticity of Demand 2. The Law of Supply 5. Normal Goods 3. Unitary Elasticity 6. Inelastic Demand Part II. Price Elasticity of Goods Elatic Goods InElastic Goods POST TEST Part I. TRUE OR FALSE 1. TRUE 5 FALSE 9 TRUE 2 TRUE 6 TRUE 10 FALSE 3 FALSE 7 TRUE 4 TRUE 8 TRUE WORKSHEET 1. To find the elasticity of demand, we need to divide the percentage change in quantity by the percentage change in price. a) Solution % Change in Quantity = (40 - 50)/(50) = -0.20 = -20% % Change in Price = (6.00 - 4.00)/(4.00) = 0.50 = 50% Elasticity = |(-20%)/(50%)| = |-0.4| = 0.4 Answer: The elasticity of demand is 0.4 b) Elastic 2. She should lower her price. Her price elasticity of demand for chocolate is elastic (greater than one) and therefore, when she lowers her price she will sell a lot more chocolate. The greater quantity sold will make up for her lower price, increasing her total revenue. In other words, she is selling at a lower price but making up for it in volume of sales. hitp:/ /faculty.fortlewis.edu/waller d/practice problems - elasticity htm 22