Applied Economics-Q3-Module-4 for Learners PDF

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11APPLIEDECONOMICSQuarter 3 – Module 4The Implications of Market Pricingon Economic Decision-MakingSENIOR HIGH SCHOOLApplied Economics – Grade 11 Alternative Delivery Mode Quarter 3 – Module 4: The Implications of Market Pricing on Economic Decision-Making First Edition, 2020Republic Act 8293, secti...

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SENIOR HIGH SCHOOL

APPLIED ECONOMICS Quarter 3 – Module 4 The Implications of Market Pricing on Economic Decision-Making

Applied Economics – Grade 11 Alternative Delivery Mode Quarter 3 – Module 4: The Implications of Market Pricing on Economic Decision-Making First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this module are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Leonor Magtolis Briones Undersecretary: Diosdado M. San Antonio Development Team of the Module Writer: Farah B. Catapusan Editor: Jee Liza T. Inguito Reviewer: Maria Acenith D. Pastor Layout Artist: Bb. Boy Jonnel C. Diaz Management Team: Senen Priscillo P. Paulin, CESO V

Rosela R. Abiera

Fay C. Luarez, TM, EdD, PhD

Maricel S. Rasid

Nilita L. Ragay, EdD

Elmar L. Cabrera

Elisa L. Baguio, EdD

Printed in the Philippines by ________________________ Department of Education –Region VII Schools Division of Negros Oriental Office Address: Tele #: E-mail Address:

Kagawasan, Ave., Daro, Dumaguete City, Negros Oriental (035) 225 2376 / 541 1117 [email protected]

11 Applied Economics Quarter 3 – Module 4 The Implications of Market Pricing on Economic Decision-Making

Introductory Message For the facilitator: Welcome to the Grade Level 11 Applied Economics Alternative Delivery Mode (ADM) Module on The Implications of Market Pricing on Economic DecisionMaking! This module was collaboratively designed, developed and reviewed by educators both from public and private institutions to assist you, the teacher or facilitator in helping the learners meet the standards set by the K to 12 Curriculum while overcoming their personal, social, and economic constraints in schooling. This learning resource hopes to engage the learners into guided and independent learning activities at their own pace and time. Furthermore, this also aims to help learners acquire the needed 21st century skills while taking into consideration their needs and circumstances. In addition to the material in the main text, you will also see this box in the body of the module:

Notes to the Teacher This contains helpful tips or strategies that will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this module. You also need to keep track of the learners' progress while allowing them to manage their own learning. Furthermore, you are expected to encourage and assist the learners as they do the tasks included in the module.

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For the learner: Welcome to the Grade Level 11 Applied Economics Alternative Delivery Mode (ADM) Module on The Implications of Market Pricing on Economic DecisionMaking! This module was designed to provide you with fun and meaningful opportunities for guided and independent learning at your own pace and time. You will be enabled to process the contents of the learning resource while being an active learner. This module has the following parts and corresponding icons:

What I Need to Know

What I Know

This will give you an idea of the skills or competencies you are expected to learn in the module. This part includes an activity that aims to check what you already know about the lesson to take. If you get all the answers correct (100%), you may decide to skip this module.

What’s In

This is a brief drill or review to help you link the current lesson with the previous one.

What’s New

In this portion, the new lesson will be introduced to you in various ways; a story, a song, a poem, a problem opener, an activity or a situation.

What is It

This section provides a brief discussion of the lesson. This aims to help you discover and understand new concepts and skills.

What’s More

This comprises activities for independent practice to solidify your understanding and skills of the topic. You may check the answers to the exercises using the Answer Key at the end of the module.

What I Have Learned

This includes questions or blank sentence/paragraph to be filled in to process what you learned from the lesson.

What I Can Do

This section provides an activity which will help you transfer your new knowledge or skill into real life situations or concerns.

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Assessment

This is a task which aims to evaluate your level of mastery in achieving the learning competency.

Additional Activities

In this portion, another activity will be given to you to enrich your knowledge or skill of the lesson learned.

Answer Key

This contains answers to all activities in the module.

At the end of this module you will also find:

References

This is a list of all sources used in developing this module.

The following are some reminders in using this module: 1. Use the module with care. Do not put unnecessary mark/s on any part of the module. Use a separate sheet of paper in answering the exercises. 2. Don’t forget to answer What I Know before moving on to the other activities included in the module. 3. Read the instruction carefully before doing each task. 4. Observe honesty and integrity in doing the tasks and checking your answers. 5. Finish the task at hand before proceeding to the next. 6. Return this module to your teacher/facilitator once you are through with it. If you encounter any difficulty in answering the tasks in this module, do not hesitate to consult your teacher or facilitator. Always bear in mind that you are not alone. We hope that through this material, you will experience meaningful learning and gain deep understanding of the relevant competencies. You can do it!

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I You participate in the market economy every time you buy or sell something. Markets allow you to buy or sell for a price. Price is the amount you pay if you buy a good and the amount you receive if you sell it. As a buyer, or demander, you like lower prices. As a seller, or supplier, you like higher prices. How are these differing views about the price sorted out?

LEARNING COMPETENCY: ▪ Determine the Implications of Market Pricing on Economic Decision-Making (NO CODE).

OBJECTIVES: K: Analyze how Market Price is determined and its effect in the economic decision-making; S: Describe the role of Price in the economic market; A: Relate to real life situations the effect of knowing the market price in making economic decisions.

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Pre-assessment: I. Directions: Identify what is asked in each item. Write the letter of the correct answer in your notebook. 1. When the quantity consumers are willing and able to buy equals the quantity that producers are willing and able to sell. A. Surplus B. Shortage C. Market Equilibrium D. None of these are correct 2. At a given price, the amount by which quantity supplied exceeds quantity demanded; it usually forces the price down. A. Surplus B. Shortage C. Market Equilibrium D. None of these are correct 3. At a given price, the amount by which quantity demanded exceeds quantity supplied; it usually forces the price up. A. Surplus B. Shortage C. Market Equilibrium D. None of these are correct 4. A person who sells a merchandise or renders a service. A. Buyer B. Laborer C. Capitalist D. Seller 5. A person who purchases a merchandise or acquiring a service. A. Buyer B. Laborer C. Capitalist D. Seller II. Directions: Draw the table in your notebook and supply the last 2 columns whether the following situations result in the following: Surplus or Shortage, Effect on Price (Falls, Rises or Remains the same)

Price (Pesos) 700 600 500 400 300

Quantity Demanded 40 50 60 70 80

Quantity Supplied 100 80 60 40 20

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Surplus or Shortage

Effect on Price

’s In

Market Equilibrium When the quantity that consumers are willing and able to buy equals the quantity that producers are willing and able to sell, that market reaches market equilibrium. In equilibrium, the independent plans of buyers and sellers exactly match, and there is no incentive for change. Therefore, market forces exert no further pressure to change price or quantity. A Surplus Forces the Price Down To understand how a particular market reaches equilibrium, you need to consider demand and supply as shown in the next Figure that shows the market for pizza. What if the price is initially set at P120? At that price, producers supply 24 million pizzas per week, but consumers demand only 14 million, resulting in an excess quantity supplied, or a surplus of 10 million pizzas per week. This surplus means that suppliers are stuck with 10 million pizzas they cannot sell at P120. Suppliers desire to eliminate the surplus puts downward pressure on the price. As the price falls, producers reduce their quantity supplied and consumers increase their quantity demanded. As long as quantity supplied exceeds quantity demanded, the surplus forces the price lower. Market equilibrium occurs at the price at which the quantity demanded by consumers is equal to the quantity supplied by producers. At prices, above the equilibrium price, the quantity supplied exceeds the quantity demanded. At these prices there is a surplus, which puts downward pressure on the price. At prices below equilibrium, quantity demanded exceeds quantity supplied. The resulting shortage puts upward pressure on the price. Task 1 Table 1. Market Schedules (Millions of Pizzas Per Week) Price per Pizza Quantity Quantity Surplus or (pesos) Demanded Supplied Shortage 150 8 28 Surplus 20 120 14 24 Surplus 10 90 20 20 Equilibrium 60 30

26 32

16 12

Shortage 10 Shortage 20

Effect on Price Falls Falls Remains the same Rises Rises

Based on the table above, Draw a graph in your notebook to show the Pizzas per week (in millions) vs Price per Pizza (In pesos). Label where is the: Market Equilibrium, Surplus and Shortage in the graph. 7

’s New

What if the initial price of pizza is P60? Figure 1 shows that at that price, consumers demand 26 million pizzas per week, but producers supply only 16 million. This results in an excess quantity demanded, or a shortage, of 10 million pizzas per week. Consumers compete to buy the product, which is in short supply. Competition among buyers creates market pressure for a higher price. The arrow pointing up in the graph represents this pressure. As the price rises, producers increase their quantity supplied and consumers reduce their quantity demanded. The price continues to rise as long as quantity demanded exceeds quantity supplied. Thus, a surplus put downward pressure on the price, and a shortage puts upward pressure. As long as quantity demanded and quantity supplied differ, this difference forces a price change. Note that a shortage or a surplus always measured at a particular price. There is no such thing as a general shortage or a general surplus. Answer the question briefly. 1. How price can affect consumer behavior?

is It

Market Forces Lead to Equilibrium Price and Quantity In Table 1, the demand and supply curves intersect at the equilibrium point. The equilibrium price, which equates quantity demanded with quantity supplied, is P90 per pizza. The equilibrium quantity is 20 million per week. The demand and supply curves form an X at the intersection. The equilibrium point is found where “X” marks the spot. At that price and quantity, the market is said to clear. That is why the equilibrium price is also called the market-clearing price. Because there is no shortage and no surplus, there is no longer pressure for the price to change. The equilibrium price remains at P90 unless there is some change that shifts the demand or supply curve. A market finds equilibrium through the independent and voluntary actions of thousands, or even millions, of buyers and sellers. In one sense, the market is personal because each consumer and each producer makes a personal decision about how much to buy or sell at a given price. In another sense, the market is impersonal because it requires no 8

conscious communication or coordination among consumers or producers. The price does all the talking. The independent decisions of many individual buyers or many individual sellers cause the price to reach equilibrium in competition markets. Prices reflect relative scarcity. For example, in an airline company seat sale, oneway flights from Manila to Bacolod are P500 more expensive than return flights. Why the difference? Many more people from Manila want to go to Bacolod than vice-versa. Market Exchange To repeat, buyers prefer a lower price and sellers prefer a higher price. Thus, buyers and sellers have different views about the price of a particular good. Markets help sort out those differences. Markets answer the questions what to produce, how to produce it, and for whom to produce it. Adam Smith’s Invisible Hand Market prices guide resources to their most productive uses and channel goods to those consumers who value them the most. Market prices transmit information about relative scarcity and provide incentives to producers and consumers. Markets also distribute earnings among resource owners. The coordination that occurs through markets takes place because of what Adam Smith called the “invisible hand” or market competition. No individual or small group coordinates market activities. Rather, it is the voluntary choices of many buyers and sellers responding only to their individual incentives. Although each individual pursues his or her own self-interest, the “invisible hand” of competition promotes the general welfare. Market Exchange is Voluntary Your experience with competition probably comes from sports and games, where one side wins and the other loses. Market exchange is not like that. Market exchange is a voluntary activity in which both sides of the market expect to benefit and usually do. Neither buyers nor sellers would participate in the market unless they are expected to become better off. A buyer values the product purchases at least as much as the money paid for it. A seller values the money received at least as much as the product sold. For example, a consumer pays P90 for a pizza only if he or she expects the marginal benefit of that pizza to be worth at least the best alternative use of that P90. The producer supplies a pizza for P90 only if he or she expects its marginal cost to be no more than P90. Again, voluntary exchange usually makes both sides better off. Voluntary exchange is typically win-win. Role of Prices Market prices serve as a signal to buyers and sellers about the relative scarcity of the good. A higher price encourages consumers to find substitutes for good or even go without it.

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A higher price also encourages producers to allocate more resources to the production of this good and fewer resources to the production of other goods. In short, prices help people recognize market opportunities to make better choices as consumers as producers. The beneficial effects or market exchange include trade between people or organizations in different parts of the country, and among people and organizations in different countries. Markets Reduce Transaction Costs A market sorts out the conflicting views of price between demanders and suppliers. Markets also reduce transaction costs, or the costs of time and information needed to carry out market exchange. The higher the transaction costs, the less likely it is that an exchange takes place. For example, the car business needs areas of land so car dealers locate on the outskirts of town, where land is cheaper. Dealers also tend to locate near each other because, grouped together, they become a more attractive destination for car buyers. Any dealer who makes the mistake of locating away from the others will miss out on a lot of business from comparison shoppers. In this way, car dealers reduce the transaction costs of car shopping. This is also why stores locate together downtown in suburban malls. More generally, markets reduce transaction costs. Factors that impact market price Although the principle of market price ultimately depends on supply and demand, there are a number of factors that can also affect market price. Some things that can affect market price are controllable, while others are out of your hands. Factors that impact market price include: • Natural disasters • World events • Amount of wages paid to workers • Decrease or increase in employment • Pricing of luxury items versus necessities Natural disasters or other world events (e.g., wars or attacks) can limit supplies to manufacturers. Decreases in necessary supplies can slow down the production of goods or a business’s ability to offer services. And if there’s a deficit in products or services, demand can increase due to limitations. Employment and the wages paid to workers can also affect the equilibrium price. A decrease in employment or wages may cause consumers to penny pinch. And, consumers might not afford to pay the same prices as before. Likewise, an increase in jobs and wages results in consumers being able to pay more, allowing for higher market prices for goods and services. Market prices of luxury items have different equilibriums than basic necessities, like food. And, luxury products and services break the basic rules of supply and demand. Although the demand for luxury items is smaller, the prices are almost always high. Rarity does not impact the price of the luxury item. Instead, consumers are willing to pay more for name brands and quality. The price of goods plays a crucial role in determining an efficient distribution of resources in a market system.

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• • • • •

Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions. If a good is in shortage – price will tend to rise. Rising prices discourage demand, and encourage firms to try and increase supply. If a 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. Prices help to redistribute resources from goods with little demand to goods and services which people value more. Adam Smith talked about ‘the invisible hand‘ of the market. This ‘invisible hand’ relies on the fluctuation of prices to shift resources to where it is needed.

How price affects consumer behavior In the short-term, demand is very price inelastic. However, the higher price of oil also has an effect on consumer behavior in the long-term. • • •

Consumers look for substitutes or other goods that can replace n the long run. Therefore, over time, demand falls. Over time, people may start recycling or alternative ways to reduce the usage. Responding to these changing consumer preferences, firms will develop other products- enabling more alternatives leads to less demand in long-term.

Limitations of price in the economy Although the price has an important role in the economy, it has some limitations. • •

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In the presence of externalities, the price of goods does not reflect the true social cost / social benefit. Therefore, a free...