Chapter 4 - Supply and Demand - Expectations: Future expectations of prices can affect

current supply. - Number of Sellers: More sellers

1. Laws of Supply and Demand increase market supply.
- Government Policies: Taxes, subsidies, and
Law of Demand: regulations can impact supply.
- Definition: States that, all else being equal, as the price
of a good or service decreases, the quantity demanded 3. Market Equilibrium
increases, and as the price increases, the quantity
demanded decreases. Definition:
- Reason: Due to the substitution effect (consumers will - Market equilibrium occurs when the quantity demanded
buy more of a cheaper good) and the income effect (a equals the quantity supplied at a particular price, known
lower price increases consumers' purchasing power). as the equilibrium price, with the corresponding quantity
- Demand Curve: Graphical representation showing the as the equilibrium quantity.
inverse relationship between price and quantity
demanded, typically downward-sloping. Graphical Representation:
- The intersection of the supply and demand curves
Law of Supply: indicates the market equilibrium.
- Definition: States that, all else being equal, as the price
of a good or service increases, the quantity supplied Disequilibrium:
increases, and as the price decreases, the quantity - Surplus: When the price is above equilibrium, leading
supplied decreases. to excess supply (quantity supplied > quantity
- Reason: Higher prices provide an incentive for demanded).
producers to supply more. - Shortage: When the price is below equilibrium, leading
- Supply Curve: Graphical representation showing the to excess demand (quantity demanded > quantity
direct relationship between price and quantity supplied, supplied).
typically upward-sloping.
Adjustments to Equilibrium:
Example: - Prices adjust to eliminate surpluses and shortages,
- Rice Market in the Philippines: moving the market towards equilibrium.
- When the price of rice decreases, consumers buy
more rice (increase in quantity demanded). Example:
- When the price of rice increases, farmers are willing - Philippine Vegetable Market:
to produce and sell more rice (increase in quantity - During a typhoon, the supply of vegetables may
supplied). decrease, leading to a shortage. Prices will rise until the
market reaches a new equilibrium.
2. Determinants of Supply and Demand
4. Applications in the Philippines
Determinants of Demand:
- Price of the Good: Movement along the demand curve. Real-World Examples:
- Income: Normal goods (demand increases with
income) vs. inferior goods (demand decreases with Rice Market:
income). - Government Intervention: The National Food Authority
- Prices of Related Goods: (NFA) often intervenes in the rice market to stabilize
- Substitutes: Goods that can replace each other (e.g., prices and ensure sufficient supply. For instance, during
rice and noodles). periods of shortage, the government may import rice or
- Complements: Goods that are often used together release buffer stocks.
(e.g., rice and ulam).
- Tastes and Preferences: Changes in consumer Fuel Prices:
preferences can shift demand. - Global Influence: The price of fuel in the Philippines is
- Expectations: Future expectations of prices or income influenced by global oil prices. A rise in global oil prices
can affect current demand. can decrease the supply of fuel domestically, leading to
- Number of Buyers: More buyers increase market higher prices and adjustments in consumer demand.
demand.
Minimum Wage Policies:
Determinants of Supply: - Labor Market Impact: Setting a minimum wage above
- Price of the Good: Movement along the supply curve. the equilibrium wage can lead to a surplus of labor
- Input Prices: Higher input costs decrease supply (e.g., (unemployment). The government’s role is to balance
cost of fertilizers for farmers). fair wages with employment levels.
- Technology: Technological improvements increase
supply.
Sugar Industry: Supply Shifts:
- Supply Shocks: Weather conditions, such as droughts, An increase in supply shifts the supply curve to the right,
can drastically affect the supply of sugarcane, impacting leading to a lower equilibrium price and a higher
sugar prices and market equilibrium. quantity.
A decrease in supply shifts the supply curve to the left,
leading to a higher equilibrium price and a lower
Chapter 5 – Market Equilibrium quantity.

1. Introduction to Market Equilibrium 6. Dynamic Adjustments

Market Equilibrium occurs when the quantity of a good Price Adjustment Process: Markets naturally move
or service that consumers are willing and able to buy toward equilibrium through price adjustments.
equals the quantity that producers are willing and able to If there's a surplus, prices fall to encourage more
sell. demand and less supply.
Equilibrium Price (P*): The price at which the quantity If there's a shortage, prices rise to discourage demand
demanded by consumers equals the quantity supplied and encourage more supply.
by producers.
Equilibrium Quantity (Q*): The quantity traded at the 7. Government Intervention
equilibrium price.
Price Ceilings: A maximum price set below equilibrium
2. Supply and Demand Overview (e.g., rent controls), leading to shortages.
Price Floors: A minimum price set above equilibrium
Demand Curve: A graph showing the relationship (e.g., minimum wage), leading to surpluses.
between the price of a good and the quantity demanded
by consumers. 8. Applications of Market Equilibrium
Typically, downward sloping (as price decreases,
quantity demanded increases). Predicting Market Outcomes: By analyzing shifts in
Supply Curve: A graph showing the relationship between supply and demand, economists can predict changes in
the price of a good and the quantity supplied by equilibrium price and quantity.
producers. Policy Impact: Government policies (taxes, subsidies,
Typically, upward-sloping (as price increases, quantity price controls) affect market equilibrium, influencing
supplied increases). consumer and producer behavior.

3. Achieving Market Equilibrium

Chapter 6 - Elasticity of Demand and
At Equilibrium: Supply
There is no surplus or shortage in the market.
No external pressure on prices to rise or fall. 1. Price Elasticity of Demand
Mathematically, equilibrium is where:
𝑄𝑑 = 𝑄𝑠 Definition:
Where: 𝑄𝑑 is quantity demanded, and 𝑄𝑠 is quantity - Price Elasticity of Demand (PED) measures the
supplied. responsiveness of quantity demanded to a change in
price.
4. Disequilibrium - It is calculated as the percentage change in quantity
demanded divided by the percentage change in price.
Surplus: Occurs when the price is above the equilibrium
price, leading to excess supply (quantity supplied Formula:
exceeds quantity demanded). % Change in Quantity Demanded
Producers reduce prices to sell excess goods. 𝐏𝐄𝐃 =
% Change in Price
Shortage: Occurs when the price is below the
equilibrium price, leading to excess demand (quantity
Interpretation:
demanded exceeds quantity supplied).
- Elastic Demand: PED > 1. Quantity demanded is highly
Producers increase prices due to high demand.
responsive to price changes (e.g., luxury goods).
- Inelastic Demand: PED < 1. Quantity demanded is less
5. Shifts in Supply and Demand
responsive to price changes (e.g., essential goods).
- Unitary Elasticity: PED = 1. Percentage change in
Demand Shifts:
quantity demanded is equal to the percentage change in
An increase in demand shifts the demand curve to the
price.
right, resulting in a higher equilibrium price and quantity.
A decrease in demand shifts the demand curve to the
Factors Influencing PED:
left, resulting in a lower equilibrium price and quantity.
- Availability of Substitutes: More substitutes make
demand more elastic.
- Necessity vs. Luxury: Necessities tend to have inelastic lead consumers to switch to margarine, resulting in a
demand, while luxuries have elastic demand. positive cross-price elasticity.
- Proportion of Income Spent: Higher proportion of
income spent on a good makes its demand more elastic. 4. Price Elasticity of Supply
- Time Horizon: Demand is usually more elastic in the
long run as consumers have more time to adjust. Definition:
- Price Elasticity of Supply (PES) measures the
Example: responsiveness of quantity supplied to a change in price.
- Gasoline: Demand for gasoline tends to be inelastic in - It is calculated as the percentage change in quantity
the short-run (people still need to commute), but more supplied divided by the percentage change in price.
elastic in the long-run (people can switch to more fuel-
efficient cars or public transport). Formula:
% Change in Quantity Supplied
2. Income Elasticity of Demand 𝐏𝐄𝐒 =
% Change in Price

Definition: Interpretation:
- Income Elasticity of Demand (YED) measures the - Elastic Supply: PES > 1. Quantity supplied is highly
responsiveness of quantity demanded to changes in responsive to price changes (e.g., easily producible
income. goods).
- It is calculated as the percentage change in quantity - Inelastic Supply: PES < 1. Quantity supplied is less
demanded divided by the percentage change in income. responsive to price changes (e.g., specialized goods).

Formula: Factors Influencing PES:

% Change in Quantity Demanded - Production Time Frame: Shorter production times
𝐘𝐄𝐃 =
% Change in Income make supply more elastic.
- Availability of Resources: More available resources
Interpretation: make supply more elastic.
- Normal Goods: YED > 0. Demand increases as income - Spare Capacity: More spare capacity makes supply
increases (e.g., restaurant meals). more elastic.
- Inferior Goods: YED < 0. Demand decreases as - Flexibility of Production: More flexible production
income increases (e.g., instant noodles). processes make supply more elastic.

Example: Example:
- Luxury Cars: Luxury cars have a high-income elasticity - Agricultural Products: Agricultural products often have
of demand, meaning demand increases significantly as an inelastic supply in the short-run due to factors like
incomes rise. growing seasons and land availability.

3. Cross-Price Elasticity of Demand 5. Applications and Examples

Definition: Real-World Applications:

- Cross-Price Elasticity of Demand (XED) measures the
responsiveness of the quantity demanded of one good to Philippine Economy:
a change in the price of another good. - Consumer Goods: Understanding the price elasticity of
- It is calculated as the percentage change in quantity demand for consumer goods can help businesses set
demanded of good A divided by the percentage change optimal pricing strategies.
in price of good B. - Public Transport: Analyzing the income elasticity of
demand for public transport services can inform policy
Formula: decisions on fare adjustments.
% Change in Quantity Demanded of Good A
𝐗𝐄𝐃 = Global Examples:
% Change in Price of Good B
- Oil Market: The price elasticity of supply in the oil
Interpretation: market affects how quickly oil producers can respond to
- Substitute Goods: XED > 0. An increase in the price of changes in global demand and prices.
good B leads to an increase in the demand for good A - Technology: Cross-price elasticity of demand for
(e.g., tea and coffee). smartphones and tablets influences marketing strategies
- Complementary Goods: XED < 0. An increase in the and product development.
price of good B leads to a decrease in the demand for
good A (e.g., printers and ink cartridges).

Example:
- Butter and Margarine: These goods are considered
substitutes, so an increase in the price of butter may
Chapter 7 - Market Structures Price and Output Determination:
• Firms in an oligopoly are interdependent and
1. Types of Market Structures may engage in strategic behavior, including
price fixing or collusion.
Definition: • Pricing can be more rigid compared to
Market structures refer to the organizational and competitive markets.
competitive environment within which firms operate and
make pricing and output decisions. Examples:
• Telecommunications (e.g., major telecom
A. Perfect Competition companies).

Characteristics: D. Monopolistic Competition

1. Many Small Firms: Numerous sellers with no
single firm having significant market power. Characteristics:
2. Homogeneous Products: Products offered by all 1. Many Firms: Numerous firms compete in the
firms are identical. market.
3. Easy Market Entry and Exit: Low barriers to 2. Differentiated Products: Products are similar but
entry and exit allow firms to enter or leave the not identical, allowing firms to have some control
market freely. over pricing.
3. Relatively Easy Entry and Exit: Barriers to entry
Price and Output Determination: are low, making it easier for new firms to enter
• Firms are price takers, meaning they accept the and exit the market.
market price and cannot influence it.
• Equilibrium is achieved where supply equals Price and Output Determination:
demand. • Firms have some degree of market power due to
product differentiation.
Examples: • In the long run, firms earn normal profit as new
• Agricultural markets (e.g., rice, corn). entrants drive down prices.

B. Monopoly Examples:
• Retail and restaurant industries.
Characteristics:
1. Single Firm Dominates the Market: One firm 2. Impacts on Prices, Efficiency, and Consumer Choice
controls the entire market.
2. Unique Product: No close substitutes are Perfect Competition:
available. • Prices: Prices are determined by market forces
3. Significant Barriers to Entry: High barriers such and are typically lower due to competition.
as patents, resource control, or government • Efficiency: Allocative and productive efficiency
regulations prevent other firms from entering the are achieved as firms produce at the lowest cost
market. and price equals marginal cost.
• Consumer Choice: High variety of products at
Price and Output Determination: competitive prices.
• The monopolist has significant control over the
price and can set it to maximize profit. Monopoly:
• Typically results in higher prices and lower • Prices: Higher prices due to lack of competition.
output compared to competitive markets. • Efficiency: Allocative inefficiency as the
monopolist restricts output to increase prices,
Examples: leading to a deadweight loss.
• Public utilities (e.g., electricity distribution). • Consumer Choice: Limited choice as there is
only one provider.
C. Oligopoly
Oligopoly:
Characteristics: • Prices: Prices may be higher compared to
1. Few Large Firms: A small number of large firms competitive markets due to collusion or market
dominate the market. power.
2. Differentiated Products: Products may be similar • Efficiency: Can be less efficient compared to
but not identical. perfect competition due to potential for price
3. High Barriers to Entry: Significant barriers due to rigidity and reduced output.
economies of scale, brand loyalty, or high capital • Consumer Choice: Limited variety as a few firms
requirements. control the market.
Monopolistic Competition:
• Prices: Prices are higher than in perfect
competition but lower than in monopoly.
• Efficiency: Some inefficiency due to excess
capacity but firms compete to innovate and
differentiate.
• Consumer Choice: Wide variety of differentiated
products.

3. Case Studies from Philippine Industries

A. Telecommunications:
Market Structure: Oligopoly.
• Firms: Major players include PLDT, Globe
Telecom, and Smart Communications.
• Implications: Limited competition results in
higher service prices and sometimes reduced
quality. Regulatory measures and market entry
by new players have impacted competition.
B. Retail:
Market Structure: Monopolistic Competition.
• Examples: Grocery chains like SM Supermarket
and Robinsons.
• Implications: Diverse range of products with
varying prices. Firms compete through product
differentiation, customer service, and
promotions.
C. Agriculture:
Market Structure: Perfect Competition (in some
segments) and Monopolistic Competition (in others).
• Examples: Rice and vegetable markets.
1. Implications: Prices are influenced by supply and
demand. Farmers face competitive pressures
but also benefit from government support and
subsidies.