BASIC ECONOMICS: MARKETS,

PRICE, AND EQUILIBRIUM

TA N YA D A Q U I G A N - T O R R E N T E
HOW DO WE MEASURE ECONOMIC GROWTH?
To measure economic growth, it is important to look at the TOTAL income that everyone
in the economy is earning.
For an economy, income must equal expenditure because:
• Every transaction has a buyer and a seller.
• Every peso of spending by some buyer is a peso of income for
some seller

What is GDP?
Gross Domestic Product (GDP) is a measure of the income and expenditures of an
economy.
• It is the total market value of all final goods and services produced within a country in a given period of
time.
• GDP measures the output that is produced within the geographic borders of a country.
HOW DO WE MEASURE ECONOMIC GROWTH?
Two approaches in computing for GDP:

EXPENDITURE APPROACH VALUE-ADDED APPROACH

GDP (Y) is the sum of the following: GDP is the summation of the Gross Value-Added from
• Consumption (C) three major production sectors in the economy:
• Investment (I) • Agriculture
• Government Purchases (G) • Industry
• Net Exports (NX) • Services

Y = C + I + G + NX

GDP (Expenditure Approach) = GDP (Value-Added Approach)

HOW DO WE MEASURE ECONOMIC GROWTH?
Gross Domestic Product vs Gross National Product (GNP) and Real vs Nominal GDP:

• Nominal GDP values the production of goods and services at current prices.
• Real GDP values the production of goods and services at constant prices (current base year: 2000)

GNP = GDP + Net Factor Income from Abroad

NFIA = earnings of Filipinos abroad minus earnings of

foreigners in the Philippines

GDP/capita = GDP/population
HOW DO WE MEASURE ECONOMIC GROWTH?
Jobs Measure: Employment & Unemployment Rate

• Labor force – All those 15 years old and above

who are working or actively seeking work

• Underemployment rate – The number of people

who still feel the need to work additional hours to
earn more. They may either be working full-time
or not.
HOW DO WE MEASURE ECONOMIC GROWTH?
Price Measure: Inflation Rate & Consumer Price Index
Define the following:
• Inflation Rate
• Consumer Price Index

• Inflation Rate – usually defined as a general rise in

the price level or a decline in the purchasing
power of the peso
• Measures how fast prices are increasing

• Consumer Price Index – measure of a cost of a

typical consumer basket
HOW DO MARKETS WORK?
The Middle East is one of the world's largest suppliers of oil and 1. Price of gas increases across the world
gas. The region is home to some of the most significant oil reserves
and production capacities, making it a critical player in the global
energy market.

2. Price of used cars falls

What happens when war in the Middle East breaks

out?
HOW DO MARKETS WORK?

Supply and Demand are the forces that

make market economies work.
They determine the quantity of each good produced
and the price at which it is sold.

In the case of oil and gas…

• Countries across the world need oil and gas for
critical operations and transportation
• Hence, the Middle East supplies oil and gas to
different countries at a certain price based on the
quantity needed
HOW DO MARKETS WORK?
A market is a group of buyers and sellers of a particular good or service.
• The buyers as a group determine the demand for the product.
• The sellers as a group determine the supply of the product.

Example: Milk Tea Market

Seller Buyer

Sellers are in different locations Buyers are in different locations

Sellers offer a variety of similar products Each buyer decides what milk tea to buy

Each seller posts a price for a milk tea Each buyer decides how much milk tea to buy

Sellers are appealing to the same buyers The buyers choose from various sellers

Even if it is not organized, the group of buyers and sellers form a market.
HOW DOES COMPETITION WORK?
Competitive Market: A market in which there are many buyers and many sellers so that
each has a negligible impact on the market.
In the milk tea example, we know that…
• The milk tea market is highly competitive
• The buyers know that there are several options
• The sellers know that their products are similar

Hence, price and quantity are determined by all buyers and sellers as they interact in the marketplace.

In a competitive market… Two characteristics of a perfectly competitive

• No single buyer can influence the price because market:
each buyer purchases only a small amount 1. The goods offered for sale are the same.
• A seller has limited control over the price 2. The buyers and sellers are so numerous that no
because the product is homogeneous single buyer or seller has any influence over
the market price.
HOW DOES COMPETITION WORK?
Monopoly: A market where there is only one seller and this seller sets the price.
Give an example of a monopolistic industry

• Manila Electric Company (MERALCO) is an example of a monopoly

in Metro Manila.
• It is the only company that provides electricity distribution services in
Metro Manila and no other electricity distributors play in the region.

• Grab is another example of a monopoly in the ride-hailing industry

• Before other ride-hailing apps launched in the PH, Grab was the
only player and dictated the price of its services
HOW DOES DEMAND WORK?
The Demand Curve: The Relationship between Price and Quantity Demanded
Define the following:
• Quantity Demanded
• Law of Demand
• Demand Schedule
• Market Demand
• Quantity Demanded: The amount of a good that
buyers are willing and able to purchase.
• Law of Demand: The claim that, ceteris paribus,
the quantity demanded of a good falls when the
price of the good rises.
• Demand Schedule: A table that shows the
relationship between the price of a good and the
quantity demanded.
• Market Demand: The sum of all individual
demands for a particular good or service.
HOW DOES DEMAND WORK?
Shifts in the Demand Curve: If something happens to alter the quantity demanded at any
given price.
Variables that can shift demand:

1. Income: If the demand for a good falls when income

Right: falls, the good is called a normal good.
Increase in • If the demand for good rises when income falls, the
demand
good is called an inferior good. Example: Instead of
buying cars = use of Taxi.

2. Prices of related goods: When a fall in the price of one

good reduces the demand for the other good, the two
Left:
Decrease in goods are called substitutes.
demand • Example: Pair of goods that are used in place of
each other such as hotdogs and hamburgers.
• Complements: When a fall in the price of one good
raises the demand for another good.
HOW DOES DEMAND WORK?
Shifts in the Demand Curve: If something happens to alter the quantity demanded at any
given price.
Variables that can shift demand:

3. Tastes: A determinant of your demand. Examine what

Right:
Increase in
happens when tastes change.
demand
4. Expectations: Expectations about the future may affect
the demand for a good or service today.
• Example: An increase in income may increase
spending and decrease savings. Or expecting the fall
of a price might lead to a decrease of your
Left: willingness to purchase today.
Decrease in
demand
HOW DOES DEMAND WORK?
Shifts in the Demand Curve versus Movements along the Demand Curve (Mankiw)
HOW DOES SUPPLY WORK?
Supply Curve: The relationship between price and quantity supplied
Define the following:
• Quantity Supplied
• Law of Supply
• Supply Schedule

• Quantity supplied: The amount of good that

sellers are willing and able to sell.
• Law of Supply: Ceteris Paribus, when the price of
a good rise, the quantity supplied of the good
also rises. When the price falls, the quantity
supplied falls as well.
• Supply schedule: A table that shows the
relationship between the price of a good and the
quantity supplied, ceteris paribus
HOW DOES SUPPLY WORK?
Shifts in the Supply Curve: If something happens to alter the quantity supplied at any given
price.
Variables that can shift demand:

1. Production Costs: Changes in the cost of producing a

good or service

2. Technology: Advances in technology that make

production more efficient
Right:
Left: Increase in
Decrease in supply
supply
3. Number of sellers: the number of producers or
competitors in the market

4. Government Regulations: taxes, subsidies, and

other regulations
WHAT IS THE LAW OF SUPPLY AND DEMAND
Law of supply and demand: The price of any good adjusts to bring the quantity supplied
and quantity demanded for that good in to balance.
• Give an example of a disruption of market prices,
due to unequal supply and demand
WHAT IS MARKET EQUILIBRIUM?
Equilibrium: A situation in which the market price has reached the level at which quantity
supplied equals quantity demanded.

• Whether the price starts off too high or too low,

the activities of the many buyers and sellers
automatically push the market price toward the
equilibrium price.
• At equilibrium: All buyers and sellers are
satisfied.
• There is no upward or downward pressure on
the price.
• In most markets, surplus and shortage are only
temporary because prices eventually move
toward their equilibrium levels.
WHAT IS AN EXCESS DEMAND?
Excess Demand: Quantity of good demanded exceeds the quantity supplied. There is a
shortage of the good.

• Demanders are unable to buy all they want at

the going price.
• With too many buyers chasing too few goods,
sellers can respond to the shortage by raising
their prices without losing sales.
• These prices increase cause the quantity
demanded to fall and the quantity supplied to
rise.
• These changes represent movements along the
supply and demand curves. They move the
market toward the equilibrium.
WHAT IS AN EXCESS SUPPLY?
Excess Supply: Surplus of the good where suppliers are unable to sell all they want at the
going price

• Due to a surplus, sellers cut down the prices of

their goods
• The price decrease increases the Qd and
decreases Qs. There is a movement along the
supply and demand curves but no shifts
• Prices fall until the markets reaches the
equilibrium
WHAT IS ELASTICITY OF DEMAND?
The Elasticity of Demand: A measure of how much the quantity demanded (Qd) of a good
responds to a change in the price.

Elastic: Quantity demanded (Qd) responds to a Inelastic: Quantity demanded (Qd) slightly
change in price. responds to a change in price.
HOW DOES ELASTICITY WORK?
Major Influences on the Elasticity of Demand:
1. Availability of Close Substitutes: Goods with close substitutes tend to have more elastic demand. It is easier
for the consumers to switch from that good to others.
• Example: Butter and margarine

2. Necessity vs Luxury: Necessities tend to have inelastic demands while luxuries tend to have elastic demands.
It depends not on the intrinsic properties of the good but on the preference of the buyer.
• Example: Doctor’s appointment vs Buying a sailboat

3. Definition of the Market: Narrowly defined markets tend to have more elastic demand than broadly
defined markets. It is easier to find close substitutes for narrowly defined goods.
• Example: Ice cream = narrow category = elastic demand = easy to substitute with other desserts.

4. Time Horizon: Goods tend to have more elastic demand over longer time horizons.
• Example: Price of gasoline rises = quantity of gasoline demanded (Qd) falls slightly after a few months
HOW DOES ELASTICITY WORK?
Computing the Elasticity of Demand:

Price Elasticity of Demand = % Change in Quantity Demanded

(Qd)
_______________________________
% Change in Price (p)
Example: 10% increase in the price of an ice cream cone causes the amount of ice cream you buy to
fall 20%.

20%
Price Elasticity of Demand = ___ = 2

10%
HOW DOES ELASTICITY WORK?
The Income Elasticity of Demand: A measure of how much the quantity demanded (Qd) of
a good responds to a change in consumers’ income

Income Elasticity of % Change in Quantity Demanded (Qd)

Demand = _______________________________
% Change in Income

Example:
• Small income elasticity = Purchasing food and clothing
• Larger income elasticity = Purchasing Caviar and Diamonds
HOW DOES ELASTICITY WORK?
The Cross-Price Elasticity of Demand: A measure of how much the quantity demanded (Qd)
of one good responds to a change in the price of another good.

Cross-Price Elasticity of % change in Qd of good 1

Demand = __________________________
% change in the price of good 2

Example:
• Increase in Hotdog prices = Consumption of burgers
• Increase in price of computers = reduction of software demand
WHAT IS ELASTICITY OF SUPPLY?
The Elasticity of Supply: A measure of how much the quantity supplied (Qs) of a good
responds to a change in the price.

Elastic: Quantity supplied (Qs) responds to a change Inelastic: Quantity supplied (Qd) slightly responds to
in price. a change in price.
WHAT IS THE ROLE OF THE GOVERNMENT?
Policies have economic effects in the context of supply and demand in a market.
Example:
• American Association of Ice Cream Eaters complains that $3 price
is too high for everyone to enjoy a cone a day.
• National Organization of Ice Cream Makers complain that $3
price is too low and is diminishing the income of its members.
• Both groups lobby to the government to pass laws to alter the
market outcome by directly controlling the price of an ice cream
cone.
Define price ceiling and price floor
Price Ceiling: If ice cream eaters are successful in their lobbying, the
government imposes a legal maximum on the price at which ice cream
cones can be sold

Price Floor: If ice cream makers are successful, the government imposes
a legal minimum on the price
WHAT IS THE ROLE OF THE GOVERNMENT IN AFFECTING
THE ECONOMY?
Policies have economic effects in the context of supply and demand in a market.

Scenario 1: The government imposes a price ceiling of

$4 per cone.

• Equilibrium point is below the price ceiling, then it is

not binding.
• Market forces naturally move the economy to the
equilibrium.
• The price ceiling has no effect on the price or the
quantity sold.
WHAT IS THE ROLE OF THE GOVERNMENT?
Policies have economic effects in the context of supply and demand in a market.

Scenario 2: The government imposes a price ceiling of

$2 per cone.

• Equilibrium price is $3, above the price ceiling which

makes it a binding constraint.
• The forces of supply and demand tend to move
price toward the equilibrium price.
• But when market price hits the ceiling, it can, by law,
rise no further.
• HENCE: Market price = price ceiling
• The quantity of ice cream demanded (Qd) 125
cones exceeds the quantity supplied 75 cones which
will lead to a shortage
FOR YOUR INDUSTRIES

• Brainstorm and understand how government policies affect the market demand, market
supply, and prices within your industry