COURSE SYLLABUS
Subject:
Managerial Economics
Course:
BS Accounting Information System
Unit Credits:
3 units
Time Allotment:
3 Hours / Week
Modalities:
Modular Approach/ Online Learning
COURSE DESCRIPTION
: This course provides about the introductory knowledge
about the principles, theory and applications of economics as a social science. This includes
the relationship of studying economics and the real world.
Period
Topic
PRELIM
Chapter 1 Introduction to Economics
Chapter 2 Elements of Demand and Supply
Chapter 3 Concept of Elasticity
Chapter 4 Theory of Consumer Behavior
Chapter 5 Theory of Production
Chpater 6 Analysis of Cost, Profit and Total Revenue
Chapter 7 Market Structure
Chapter 8 Business Cycle, Unemployment and Inflation
MIDTERM
PREFINAL
FINAL
COURSE REQUIREMENT:
GRADING SYSTEM:
*Class Standing
o Attendance
o Oral Participation
o Written Output
o Examinations
TOTAL
*Equivalent/ Transmuted Grades
Written Reports, Computations, Oral Presentation, Examinations and
Case Study
30%
30%
20%
20%
100%
Transmutations/Equivalent
1.00
98-100 Excellent
1.25
95-97
1.50
92-94 Very Satisfactory
1.75
89-91
2.00
86-88 Satisfactory
GWH/INC
Grade Withheld/Incomplete
2.25
2.50
2.75
3.00
5.00
DRP.
83-85
80-82 Fairly Satisfactory
77-79
75-76 Passed
74- Below
Dropped
References:
Managerial Economics Principles (v. 1.0).
Economics: Its Concepts and Principles, Bon Kristoffer G. Gabay et. Al .
Managerial Economics: Theory and Practice, Thomas J. Webster
PREPARED BY:
MR. RHEYJHEN M. CADAWAS, LPT, MAEd
Instructor
PRELIMINARY PERIOD
INTRODUCTION TO ECONOMICS
The main objective of Chapter I is to provide you an introduction to the basic concept of economics
and managerial economics. It will help you to strengthen your knowledge about the subject.
Pre-Activity:
1. Why Economics Is Dry And Difficult Subject?
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2. Do you believe that economics has been closely related to our daily lives? Yes or No? Why?
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GOALS OF ECONOMICS
• To strengthen economic freedom
• Promote economic efficiency
• Promote economic stability
• To improve economic security
• Attaining high level of growth in economy
DEFINITION OF ECONOMICS
Economics is a study of human activity both at individual and national level. Any activity involved in
efforts aimed at earning money and spending this money to satisfy our wants such as food, Clothing, shelter,
and others are called “Economic activities”.
It was only during the eighteenth century that Adam Smith, the Father of Economics, defined
economics as the study of nature and uses of national wealth’.
Definition:
Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “Economics is a
study of man’s actions in the ordinary business of life: it enquires how he gets his income and how he uses
it”.
Prof. Lionel Robbins defined Economics as “the science, which studies human behavior as a
relationship between ends and scarce means which have alternative uses”.
•
•
•
•
Other Definitions:
It is a social science that deals with just allocation of resources and efficient use of scarce resources in
order to satisfy the needs and wants.
It is concern with managing the problem of economic activities.
It is a wealth getting and wealth using activities of man
It is the art of making living
ECONOMICS AS RELATED TO OTHER SOCIAL SCIENCES.
ACTIVITY 1. Direction: Using the Web Diagram. List down other social sciences related to economics.
ECONOMICS
In connection with previous activity, how do you say so?
Other
Sciences
1.
2.
3.
4.
5.
Social Explanations
CONCEPTS OF ECONOMICS
• Wealth—anything that has value
• Consumption—refers to the process of direct utilization of goods and services by the household sector,
business sector and the rest of the world
• Production---refers to the creation of utility or a process by which economic are created.
• Exchange---is the process of trading of good and services for money, goods for goods, goods for
services and services for services.
• Distribution—is the process of allocating scarce resources to both household, and business sector and
the rest of the world
BRANCHES OF ECONOMICS
Microeconomics
➢ The study of an individual consumer or a firm is called microeconomics.
➢ Micro means ‘one millionth’.
➢ Microeconomics deals with behavior and problems of single individual and of micro organization.
➢ It is concerned with the application of the concepts such as price theory, Law of Demand and theories of
market structure and so on.
Macroeconomics
➢ The study of ‘aggregate’ or total level of economic activity in a country is called macroeconomics.
➢ It studies the flow of economics resources or factors of production (such as land, labor, capital, organization
and technology) from the resource owner to the business firms and then from the business firms to the
households.
➢ It is concerned with the level of employment in the economy.
➢ It discusses aggregate consumption, aggregate investment, price level, and payment, theories of
employment, and so on.
ACTIVITY 2. Directions. Identify whether the given economic activity is MICROECONOMICS or
MACROECONOMICS.
_____________1. Demand and Supply of commodities & determination of price by a firm.
_____________2. Aggregate Demand and Aggregate Supply analysis.
_____________3. Study of revenue of a firm.
_____________4. Inflation, deflation and controlling the situation.
_____________5. Employment and unemployment.
_____________6. Study of costs of producing a good by a firm.
_____________7. Determining producer's equilibrium (cost & revenue).
_____________8. Money supply.
_____________9. Interest rates.
_____________10. Utility of a consumer: satisfaction from consumption.
METHODS OF FORMULATING ECONOMIC THEORY
1. Data Gathering or Gather data about a problem or situations through interviews, observations, content
analysis.
2. Economic Analysis or Organization of the data for analysis.
3. Economic Conclusions or Application of the economic theory on the problem situation.
THEORY, MODEL and PRINCIPLE
 A theory, principle and model are basically the same, it is simplified description or explanation for
reality.
 It is in forms of GRAPHS, WORDS, MATHEMATICS, or NUMERICAL TABLES
 Some data are constant or static. It is referred as “CETERIS PARIBUS”.
ELEMENTS OF ECONOMIC THEORY
 VARIABLES– considered as a basic element of theories. (Value, Data, Numbers etc.)
 ASSUMPTIONS—creating possible explanation and prediction by taking other possibilities that affect
it.
 HYPOTHESIS—is a conditional statement about how variable becomes related to another.
 PREDICTIONS—are statement that follows assumptions and hypothesis of a theory.
METHODOLOGIES OF ECONOMICS
•
•
Normative Economics- “What ought to be?”
o It involves ethics and values judgement. It cannot be settled by a mere appeal. However, It does
not mean that they are unimportant. It values judgment of what is good or bad, what is true or
false.
o It describes what is happening to the economy and why, without making any recommendation
unless positive economics is made.
o Example: To know if today’s bloated budget deficit can be raising VAT to 12%. This case
needs a moral judgment which can be agreed upon and can only resolved through political
decision.
Positive Economics—“What is?”
o It has something to do with “What is”. It describes facts and data in the economy.
o It gives policy recommendation as basis for normative economics.
o Example: If we want to know what percent of SY 2019-2020 graduates of BCC are
unemployed?, We are talking about POSITIVE ECONOMICS. For it has available data and
factual evidence.
TYPES OF ECONOMICS
1. Household Economics – most common use of economics is for the family. At this level, anyone who
knows the economic principles will be able to improve the running of the household.
2. Business Economics – when a person or group of persons begins to work, they come under the system
of business economics in their workplace. In this type, you deal with the rent, salary, profits and others.
3. National Economics – Economic factors of problems affecting the whole nation. Deals with the
management of income, expenditures, wealth or resources of a nation.
4. International Economics – The highest stage of economic activities involving the business of one
country with other countries like trade, tourism, exchange rates.
MANAGERIAL ECONOMICS
Managerial Economics refers to the firm’s decision making process. It could be also interpreted as
“Economics of Management” or “ Industrial economics “ or “Business economics”.
NATURE OF MANAGERIAL ECONOMICS
1. Close to microeconomics: Managerial economics is concerned with finding the solutions for different
managerial problems of a particular firm. Thus, it is more close to microeconomics.
2. Operates against the backdrop of macroeconomics: The macroeconomics conditions of the economy are
also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be aware
of the limits set by the macroeconomics conditions such as government industrial policy, inflation and so
on.
3. Normative statements:
• A normative statement usually includes or implies the words ‘ought’ or ‘should’. They reflect
people’s moral attitudes and are expressions of what a team of people ought to do
• Such statement are based on value judgments and express views of what is ‘good’ or ‘bad’, ‘right’
or ‘ wrong’.
• One problem with normative statements is that they cannot to verify by looking at the facts, because
they mostly deal with the future. Disagreements about such statements are usually settled by voting on them.
4. Prescriptive actions:
• Prescriptive action is goal oriented.
• Given a problem and the objectives of the firm, it suggests the course of action from the available
alternatives for optimal solution.
• It also explains whether the concept can be applied in a given context on not. For instance, the fact
that variable costs are marginal costs can be used to judge the feasibility of an export order.
5. Applied in nature:
• ‘Models’ are built to reflect the real life complex business situations and these models are of immense
help to managers for decision-making.
•The different areas where models are extensively used include inventory control, optimization, project
management etc.
• In managerial economics, we also employ case study methods to conceptualize the problem, identify
that alternative and determine the best course of action.
6. Offers scope to evaluate each alternative:
• Managerial economics provides an opportunity to evaluate each alternative in terms of its costs and
revenue.
• The managerial economist can decide which is the better alternative to maximize the profits for the
firm.
7. Interdisciplinary:
• The contents, tools and techniques of managerial economics are drawn from different subjects such
as economics, management, mathematics, statistics, accountancy, psychology, organizational behavior,
sociology and etc.
SCOPE OF MANAGERIAL ECONOMICS
Managerial economics refers to its area of study. Managerial economics, Provides management with
a strategic planning tool that can be used to get a clear perspective of the way the business world works and
what can be done to maintain profitability in an ever-changing environment.
Managerial economics is primarily concerned with the application of economic principles and theories
to five types of resource decisions made by all types of business organizations.
a. The selection of product or service to be produced.
b. The choice of production methods and resource combinations.
c. The determination of the best price and quantity combination
d. Promotional strategy and activities. e. The selection of the location from which to produce and sell
goods or service to consumer.
The scope of managerial economics covers two areas of decision making:
• Operational or Internal issues
• Environmental or External issues
A. OPERATIONAL ISSUES
Operational issues refer to those, which are within the business organization and they are under the
control of the management. Those are:
1. Theory of demand and Demand Forecasting
2. Pricing and Competitive strategy
3. Production cost analysis
4. Resource allocation
5. Profit analysis
6. Capital or Investment analysis
7. Strategic planning
1. Demand Analyses and Forecasting:
➢ Demand analysis also highlights for factors, which influence the demand for a product. This helps
to manipulate demand. Thus demand analysis studies not only the price elasticity but also income elasticity,
cross elasticity as well as the influence of advertising expenditure with the advent of computers.
➢ Demand forecasting has become an increasingly important function of managerial economics. A
firm can survive only if it is able to the demand for its product at the right time, within the right quantity.
Understanding the basic concepts of demand is essential for demand forecasting
2. Pricing and competitive strategy:
➢ Pricing decisions have been always within the preview of managerial economics. Price theory helps
to explain how prices are determined under different types of market conditions.
➢ Competitions analysis includes the anticipation of the response of competitions the firm’s pricing,
advertising and marketing strategies. Product line pricing and price forecasting occupy an important place
here.
3. Production and cost analysis:
➢ Production analysis is in physical terms.
➢ While the cost analysis is in monetary terms cost concepts and classifications, cost-out- put
relationships, economies and diseconomies of scale and production functions are some of the points
constituting cost and production analysis.
4. Resource Allocation:
➢ Managerial Economics is the traditional economic theory that is concerned with the problem of
optimum allocation of scarce resources.
➢ Marginal analysis is applied to the problem of determining the level of output, which maximizes
profit.
➢ In this respect linear programming techniques has been used to solve optimization problems. In fact
lines programming is one of the most practical and powerful managerial decision making tools currently
available.
5. Profit analysis:
➢ Profit making is the major goal of firms. There are several constraints here an account of
competition from other products, changing input prices and changing business environment hence in spite of
careful planning, there is always certain risk involved.
➢ Managerial economics deals with techniques of averting of minimizing risks. Profit theory guides
in the measurement and management of profit, in calculating the pure return on capital, besides future profit
planning.
6. Capital or investment analyses:
➢ Capital is the foundation of business. Lack of capital may result in small size of operations.
Availability of capital from various sources like equity capital, institutional finance etc. may help to undertake
large-scale operations.
➢ Hence efficient allocation and management of capital is one of the most important tasks of the
managers.
➢ The major issues related to capital analysis are:
1.The choice of investment project
2.Evaluation of the efficiency of capital
3.Most efficient allocation of capital.
Knowledge of capital theory can help very much in taking investment decisions. This involves, capital
budgeting, feasibility studies, analysis of cost of capital etc.
7. Strategic planning:
➢ Strategic planning provides a long-term goals and objectives and selects the strategies to achieve
the same. . The perspective of strategic planning is global.
➢ strategic planning has given rise to be new area of study called corporate economics.
B. Environmental or External Issues:
They refer to general economic, social and political atmosphere within which the firm operates. A
study of economic environment should include:
The type of economic system in the country.
a. The general trends in production, employment, income, prices, saving and investment.
b. Trends in the working of financial institutions like banks, financial corporations, insurance
companies
c. Magnitude and trends in foreign trade;
d. Trends in labour and capital markets;
e. Government’s economic policies viz. industrial policy monetary policy, fiscal policy, price policy
etc.
➢ The social environment refers to social structure as well as social organization like trade unions, consumer’s
co-operative etc.
➢ The Political environment refers to the nature of state activity, chiefly states’ attitude towards private
business, political stability etc. ➢ The environmental issues highlight the social objective of a firm i.e.; the
firm owes a responsibility to the society. Private gains of the firm alone cannot be the goal.
LEARNING ENHANCEMENT
Task A. REFLECTION # 1
Summarize Chapter 1. Discuss what have you learned from this chapter.
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Rubrics for Reflections:
Features
15
12
Quality
of
Writing
It was written in extraordinary
style, very informative and well
organized
It was written in
interesting style,
somewhat informative
and organized
Grammar Usage
No wrong spelling, punctuations Few wrong spelling,
or grammatical errors.
punctuations or
grammatical errors.
8
7
It was written in little It was written in
style, little informative poor style, not
and poorly organized informative and
poorly organized
A number of wrong
So many wrong
spelling, punctuations spelling,
or grammatical errors punctuations or
grammatical errors
Task B. Cite an example on how you can use managerial economics in a real life situation.
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Rubrics for Task B:
Features
5
4
3
2
Quality of
Writing
It was written in extraordinary It was written in
style, very informative and
interesting style,
well organized
somewhat informative
and organized
It was written in little It was written in
style, little informative poor style, not
and poorly organized informative and
poorly organized
Grammar Usage
No wrong spelling,
punctuations or grammatical
errors.
A number of wrong
So many wrong
spelling, punctuations spelling,
or grammatical errors punctuations or
grammatical errors
Few wrong spelling,
punctuations or
grammatical errors.
Task 3. Research Activity. List down names of economist from ancient, medieval, classical, neo-classical
and modern period in the development of economic thought. Give their major contributions. Use additional
sheet/s to comply the activity.
Rubrics for Task C.
Features
Quality of
Output
25
20
It was written in extraordinary It was written in
style, very informative and
interesting style,
well organized.
somewhat informative
and organized.
15
10
It was written in little It was written in
style, little informative poor style, not
and poorly organized informative and
poorly organized
ELEMENTS OF DEMAND AND SUPPLY
Every economy must somehow solve the basic economic problems; what should be produced, how
goods and services should be produced, and for whom are the goods and services produced. Hence, every
managers, entrepreneurs or business men must make decisions to address the problems.
The main objective of Chapter II is to show how demand and supply work in a competitive market.
Also in this part, the basic concept of market equilibrium will be discussed.
Pre-Activity: Interpret. Write your observation using the table/schedule below.
Table 1
Table 2
Price
Quantity
Price
Quantity
1
100
1
20
2
80
2
40
3
60
3
60
4
40
4
80
5
20
5
100
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DEMAND
•
•
•
Demand in common parlance means the desire for an object
This means that the demand becomes effective only it if is backed by the purchasing power in addition
to this there must be willingness to buy a commodity.
Thus demand has three essentials – price, quantity demanded and time.
DEMAND VS QUANTITY DEMANDED
“Demand means the various quantities of goods that would be purchased at a particular price and not
merely the desire of a thing.”
“Quantity demanded is the amount of goods/services are willing and able to buy/purchase at a given
price, place and at a given period of time.”
DETERMINANTS OF DEMAND:
1. Price of the Commodity: The relation between price and demand is called the Law of Demand. It is not
only the existing price but also the expected changes in price, which affect demand.
2. Income of the Consumer: The second most important factor influencing demand is consumer income.
IThe demand for a normal commodity goes up when income rises and falls down when income falls. But in
case of Giffen goods the relationship is the opposite.
3. Prices of related goods: The demand for a commodity is also affected by the changes in prices of the
related goods also. Related goods can be of two types:
(i). Substitutes which can replace each other in use; for example, tea and coffee are substitutes. The
change in price of a substitute has effect on a commodity’s demand in the same direction in which
price changes. The rise in price of coffee shall raise the demand for tea;
(ii).Complementary foods are those which are jointly demanded, such as pen and ink. If the price of
pens goes up, their demand is less as a result of which the demand for ink is also less. The price and
demand go in opposite direction. The effect of changes in price of a commodity on amounts demanded
of related commodities is called Cross Demand.
3. Tastes of the Consumers:
The amount demanded also depends on consumer’s taste. Tastes include
fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a commodity
goes up, its amount demanded is more even at the same price. This is called increase in demand. The opposite
is called decrease in demand.
4. Population: Increase in population increases demand for necessaries of life. A change in composition of
population has an effect on the nature of demand for different commodities.
5. Government Policy:
Government policy affects the demands for commodities through taxation. Taxing a commodity
increases its price and the demand goes down. Similarly, financial help from the government increases the
demand for a commodity while lowering its price.
6. Expectations Price in the future:
If consumers expect changes in price of commodity in future, they will change the demand at present
even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near
future they may increase the demand for a commodity just now.
7. Climate and weather:
The climate of an area and the weather prevailing there has a decisive effect on consumer’s demand.
In cold areas woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy
day, ice cream is not so much demanded.
LAW OF DEMAND
Review Table 1 in Pre-Activity, It simply shows the relationship between price and quantity demanded
of a commodity in the market. In the words of Marshall, the Law of Demand states “the amount demand
increases with a fall in price and diminishes with a rise in price”.
EXCEPTIONS TO THE LAW OF DEMAND:
1. Giffen Paradox:
The Giffen good or inferior good is an exception to the law of demand. When the price of an inferior
good falls, the poor will buy less and vice versa. For example, when the price of maize falls, the poor are
willing to spend more on superior goods than on maize if the price of maize increases, he has to increase the
quantity of money spent on it.
2. Veblen or Demonstration effect:
‘Veblan’ has explained the exceptional demand curve through his doctrine of conspicuous
consumption. Rich people buy certain good because it gives social distinction or prestige for example
diamonds are bought by the richer class for the prestige
3. Ignorance:
Sometimes, the quality of the commodity is Judge by its price. Consumers think that the product is
superior if the price is high. As such they buy more at a higher price.
4. Speculative effect:
If the price of the commodity is increasing the consumers will buy more of it because of the fear that
it increase still further, Thus, an increase in price may not be accomplished by a decrease in demand.
5. Fear of shortage:
During the times of emergency of war People may expect shortage of a commodity. At that time, they
may buy more at a higher price to keep stocks for the future.
6. Necessaries: In the case of necessaries like rice, vegetables etc. people buy more even at a higher price.
DEMAND FUNCTION
There are 2 forms to show the relationship between the quantity of good demanded and the price of
that good, the Demand Schedule, if it is in a tabular form and Demand Curve if it is graphically illustrated.
The mathematical expression of the Law of Demand or the relationship between price and quantity
demanded is called Demand Function.
The Demand Function Equation is Qd = a – bP, it was derived from the factors effecting the demand.
Qd stands for Quantity demanded, where a is the intercept and b is the slope of the functions representing the
determinants of demand and P stands for Price.
Steps in finding the demand function of a given goods/services.
Table 1. Demand Schedule for Shoes
Price
1
2
3
4
5
Quantity Demanded
1000
800
600
400
200
1. Find the value of “b”.
/𝑏 =
∆𝑄
∆𝑃
/
Where, ∆ means difference, Q is for quantity and P is for Price.
Solutions:
𝑏=
𝑏=
800−1000
2−1
−200
1
𝑏 =/−200/
Therefore, the value of b is an absolute value of 200.
Step 2. Using the demand function equation, Find the value of “a”. Just substitute the given price, quantity,
and value of “b” for shoes.
Solutions:
Qd
1000
1000
1000+200
1200
= a – bP
= a – 200 (1)
= a – 200
=a
=a
Therefore, the value of c is 0.
Step 3. Substitute the value of “a and b” to the demand function equation.
Therefore, If the value of a is 1200 and b is 200. The demand function for shoes is Qd = 1200 – 200P.
Step 4. To check if the demand function is correct. Substitute each price from the table to letter “P” in the
demand function equation.
Price
1
2
3
4
5
Solutions: Supposing the price is 5.
Qd = 1200 – 200 (5)
Qd = 1200 – 1000
Qd = 200
Quantity Demanded
1000
800
600
400
200
Practice 1:
A. Find the Demand Function of the given data below. Find the missing value and show the
solutions at the back of this paper.
Price
30
25
20
15
10
5
Quantity Demanded
5
15
?
?
?
?
SUPPLY
• Supply means the goods and services to produce.
• This means that the supply becomes effective only it if is backed by producer in addition to this there
must be willingness to create a commodity.
• Thus supply has three essentials – price, quantity supplied, and time.
SUPPLY vs QUANTITY SUPPLIED
“Supply is defined as the maximum units/quantity of goods/services producers can offer.”
“Quantity Supplied refers to the amount or quantity of goods/services producers are willing and able
to supply at a given price, at a given period of time.”
DETERMINANTS OF SUPPLY:
1. Technology
- Better technology leads to higher productivity. This would lead to an INCREASE in supply.
- When technology breaks or becomes unavailable, it leads to a DECREASE in supply.
2. Input Costs
- Input costs refer to the costs of production inputs. (Think factors of production.)
- If the cost of inputs rise, supply will DECREASE
- If the cost of inputs falls, supply will INCREASE.
3. Prices of Other Goods that Could be Produced
- Keep in mind that entrepreneurs seek to maximize profit.
- If they see that the prices they can charge for other products are rising, they will have more incentive
to produce those other products. What will happen to the supply of the products they are currently
making? Supply will DECREASE.
- An example: FARMING… If a farmer thinks he can sell soybeans for a higher price, he will
DECREASE his supply of peanuts by planting more land in soybeans.
4. Taxes, Subsidies, and Regulations – all refer to the government’s impact on supply
- Higher taxes – supply will DECREASE
- Lower taxes – supply will INCREASE
- Subsidies to businesses – supply will INCREASE
- Subsidies to businesses removed – supply will DECREASE
- More regulations – supply will DECREASE
- Fewer regulations – supply will INCREASE
5. Expectation of Prices
- If you think you can get a higher price in the future, CURRENT SUPPLY will DECREASE.
- If you think you will get a lower price in the future, CURRENT SUPPLY will INCREASE.
- Example: You make Christmas ornaments. You think you can get a higher price for your items in
November and December. In February, your supply of ornaments will DECREASE but in
November, your supply of ornaments will INCREASE.
6. Number of Sellers
- More sellers in the market – supply will INCREASE
- Some sellers go out of business and leave the market – supply will DECREASE.
LAW OF SUPPLY
Review Table 2 in Pre-Activity, It simply shows the relationship between price and quantity supplied
of a commodity in the market. In the words of Marshall, the Law of Supply states “the amount supply increases
with a rise in price and diminishes in supply, fall in price”.
EXCEPTIONS TO THE LAW OF SUPPLY
1. Closure of business
When a business is on the verge of closure, the seller may sell the goods even at low prices in order to
clear the stock. Thus, in this case, the law of supply shall not hold true.
2. Agricultural products
We know that land is a limited resource and thus the agricultural produce can also not be increased
beyond a certain level. Hence, even if the prices increase the supply cannot be increased.
3. Monopoly
Monopoly is a situation where there is only a single seller of a commodity. Thus, he is the price maker
and has control over the prices.
In such a case, the law of supply may not apply as he may not be willing to increase the supply even
if the prices are high.
4. Competition
When there is a cut-throat competition in the market, the sellers may sell more quantity of goods even
at low prices. This is a situation where the law of supply will not apply.
5. Perishable Goods
A seller is willing to sell more goods that are perishable in nature even at low prices because if they
remain unsold they will yield only loss.
6. Rare goods
The goods that are rare such as artistic or precious goods have a limited supply. The supply of these
goods cannot be increased according to their demand or rising prices.
Thus, even if their price increases their supply cannot be increased. In this case, also the law of supply
shall not apply.
7. Out of fashion goods
The latest goods that are in fashion have high prices. But, the out of fashion goods have low prices.
The sellers may sell them out of fashion goods even at low prices. As these will become dead inventory and
also in order to realize the amount invested in the inventory.
SUPPLY FUNCTION
There are 2 forms to show the relationship between the quantity of good supplied and the price of that
good, the Supply Schedule, if it is in a tabular form and Supply Curve if it is graphically illustrated.
The mathematical expression of the Law of Supply or the relationship between price and quantity
supplied is called Supply Function.
The Supply Function Equation is Qs = c + dP, it was derived from the factors effecting the supply. Qs
stands for Quantity supplied, where c is the intercept and d is the slope of the functions representing the
determinants of supply and P stands for Price.
Steps in finding the supply function of a given goods/services.
Table 2. Supply Schedule for Shoes
Price
1
2
3
4
5
Quantity Supplied
200
400
600
800
1000
1. Find the value of “b”.
∆𝑄
/𝑑 = ∆𝑃 /
Where, ∆ means difference, Q is for quantity and P is for Price.
Solutions:
𝑏=
𝑏=
400−200
2−1
200
1
𝑏 =/200/
Therefore, the value of d is an absolute value of 200.
Step 2. Using the supply function equation, Find the value of “c”. Just substitute the given price, quantity, and
value of “d” for shoes.
Solutions:
Qs
200
200
200 - 200
0
= c + dP
= c + 200 (1)
= c + 200
=c
=c
Therefore, the value of c is 0.
Step 3. Substitute the value of “c and d” to the supply function equation.
Therefore, If the value of a is 1200 and b is 200. The demand function for shoes is Qs = 0 + 200P.
Step 4. To check if the supply function is correct. Substitute each price from the table to letter “P” in the
supply function equation.
Price
1
2
3
4
5
Solutions: Supposing the price is 5.
Qs = 0 + 200 (5)
Qs = 0 + 1000
Qs = 1000
Quantity Supplied
200
400
600
800
1000
Practice 2:
A. Find the Supply Function of the given data below. Find the missing value and show the
solutions at the back of this paper.
Price
30
25
20
15
10
5
Quantity Supplied
60
50
?
?
?
?
DETERMINATION OF MARKET EQUILIBRIUM
A condition which implies a balance between demand and supply is known as Market Equilibrium. It
is determined by the intersection of the demand and supply curves.
Let us combine the hypothetical data used in the pre-activity.
Price
Quantity
Supplied
20
Status of Market
Pressure in Price
1
Quantity
Demanded
100
(-80) Shortage
Upward
2
80
40
(-40) Shortage
Upward
3
60
60
(0) Equal
Neutral/Equal
4
40
80
(40) Surplus
Downward
5
20
100
(80) Surplus
Downward
Market Equilibrium of Demand and Supply
120
100
Surplus
80
Equilibrium
60
40
Shortage
20
0
1
2
Quantity Demanded
3
Quantity Supplied
4
5
Column1
As discussed earlier, market is in equilibrium when quantity demanded equals quantity supplied or
the Qd intersects with Qs at a particular point. Given the demand and supply function, the equilibrium price and
quantity can derived.
Let is examine the equilibrium point in the previous examples of demand and supply schedule for shoes and
equate the two, that is;
Qd
= Qs
1200 – 200P = 0 + 200P
Transposing the similar terms,
1200 – 200P = 0 + 200P
1200
1200
400
= 200P + 200P
= 400P
400
3 = P
Hence, the equilibrium price is 3.
By substituting the equilibrium price into the demand and supply function, equilibrium quantity can be
derived.
Qd
= Qs
1200 – 200(3) = 0 + 200(3)
1200 – 600 = 0 + 600
600
=
600
Hence, the equilibrium quantity is 600.
Price
1
2
3
4
5
Quantity Demanded
1000
800
600
400
200
Quantity Supplied
200
400
600
800
1000
Market Status
Shortage (-800)
Shortage (-400)
Equilibrium (0)
Surplus (400)
Surplus (800)
Practice 3:
A. Using the demand and supply function you discovered from Practice 1 and 2. Find the
equilibrium Price and Quantity of the given data below and show the solutions at the back of this paper.
Price
Quantity Demanded
Quantity Supplied
30
25
5
15
60
50
LEARNING ENHANCEMENT
Task A. REFLECTION # 2
Summarize Chapter 2. Discuss what have you learned from this chapter.
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Rubrics for Reflection:
Features
15
12
8
Quality of
Writing
It was written in extraordinary style, It was written in interesting It was written in little
very informative and well organized style, somewhat informative style, little informative
and organized
and poorly organized
Grammar Usage
No wrong spelling, punctuations or
grammatical errors.
7
It was written in poor
style, not informative
and poorly organized
Few wrong spelling,
A number of wrong
So many wrong
punctuations or grammatical spelling, punctuations or spelling,
errors.
grammatical errors
punctuations or
grammatical errors
Task B. Using the hypothetical table below, Complete the table and solve the following:
a. Demand and Supply Function
b. Equilibrium Quantity and Price
c. Plot the table.
Price
QD
QS
5
60
20
10
50
30
(per ballpen)
15
20
25
State of Market
Pressure of
Price