LESSON 1: INTRODUCTION TO APPLIED ECONOMICS

Scarcity - is one of the key concepts of economics. It Incentives - are benefits or costs of an action that influence
means that the demand for a good or service is greater people's decisions and behavior. Stated another way, incentives
than the availability of the good or service. can make people do something they wouldn't otherwise do.
Economic resources - is another term for factors of Incentives are important to economics for two reasons: how
production. They include human resources such as labor people respond to them and how they are created and used.
and entrepreneurship and non-human resources such as Economic profit - is money earned after taking explicit and
land and capital. Sometimes we refer to them briefly as implicit costs into account. Accounting profit is the net income
inputs. for a company or revenue minus expenses. You can determine
Economics - is the study of the production, distribution, economic profit by subtracting total costs from a company or
and consumption of goods and services. investment's total revenue or return.
Economists address these three questions:
a. Explicit costs - are defined as costs that involve spending
(1) What goods and services should be produced to meet
money.
consumer needs?
b. Implicit costs- are non-monetary opportunity costs.
(2) How should they be produced, and who should
produce them?
Inflation- occurs when prices rise across an economy. It is often
(3) Who should receive goods and services?
described as “too much money chasing too few goods”, and it
generally happens during periods of economic growth.
Opportunity cost - refers to what you have to give up to Stagflation is a period of quickly rising prices but with
buy what you want in terms of other goods or services. simultaneously low or negative economic growth and high
When economists use the word “cost,” we usually mean unemployment.
opportunity cost. Money- is a commodity accepted by general consent as a
Economic system - is a means by which societies or medium of economic exchange. It is the medium in which prices
governments organize and distribute available resources, and values are expressed. It circulates from person to person and
services, and goods across a geographic region or country. country to country, facilitating trade, and it is the principal
Economic systems regulate the factors of production, measure of wealth.
including land, capital, labor, and physical resources. An Banking- is the business of protecting money for others. Banks
economic system encompasses many institutions, lend this money, generating interest that creates profits for the
agencies, entities, decision-making processes, and patterns bank and its customers. A bank is a financial institution licensed
of consumption that comprise the economic structure of a to accept deposits and make loans. But they may also perform
given community. Economic systems are grouped into other financial services.
traditional, command, market, and mixed systems. Labor- is a force of production that refers to the work people do
Free enterprise, or the free market - refers to an economy to produce goods and services. It includes all the physical and
where the market determines prices, products, and mental efforts that go into the production of goods and services.
services rather than the government. Businesses and Globalization - is the word used to describe the growing
services are free of government control. Alternatively, free interdependence of the world's economies, cultures, and
enterprise could refer to an ideological or legal system populations, brought about by cross-border trade in goods and
whereby commercial activities are primarily regulated services, technology, and flows of investment, people, and
through private measures. information.
Competition - In economics, it is defined as an activity Elastic - is a term used in economics to describe a change in the
involving two or more firms, in which each firm tries to get behavior of buyers and sellers in response to a single variable like
people to buy its own goods in preference to the other a change in price or other variables for a good or service.
firm's goods. For example, by offering different products,
better deals or by other means.
The law of demand - is a fundamental principle of
economics that states that at a higher price, consumers
will demand a lower quantity of a good.
The law of supply- is a basic economic concept. It states
that an increase in the price of goods or services results in
an increase in their supply. Supply is defined as the
quantity of goods or services that suppliers are willing and
able to provide to customers.

Studying economics is important in our daily lives. Everyone would like to know information about it because it affects one’s income,
spending, and lifestyle. Economics is concerned with identifying the choices one makes now and, in the future

WORD BANK: PRODUCTIVE RESOURCES ARE SORTED INTO THREE

CATEGORIES:

Human Resources - is a broad category of human efforts, both

physical and mental, used to produce goods and services. Labor,
such as the labor of a cab driver or a brain surgeon, is the most
Scarcity - is a condition facing all societies because they are not enough productive resources to satisfy people’s unlimited wants.
Productive resources - The inputs used to produce the goods and services that people want.
Economics - The study of how people use their scarce resources to satisfy their unlimited wants.
Human resources - The broad category of human efforts, both physical and mental, used to produced goods and services.
Labor - The physical and mental effort used to produce goods and services.
Entrepreneur - A profit seeker who develops a new product or process and assumes the risk of profit and loss.
Natural resources - So-called “gifts of nature” used to produce goods and services; includes both renewable and exhaustible
resources.
Capital goods - All human creation used to produce goods and services, for example, factories, trucks, and machines.
Good - An item you can see, feel, and touch that requires scarce resources to produce and satisfies human wants.
Service - Something not physical that requires scarce resources to produce and satisfies human wants.

Economics is about making choices. You make economic choices every day. You make choices about whether to buy a second-hand
laptop or save for college and to take a home-packed lunch to school or buy from a fast-food restaurant. You already know more
about economics than you realize.

The Economic Problem:

Would you like a new car, a nicer home, better home, better meals, more free time, more spending money, or more sleep? Who
would not? Even if you satisfy some of these desires, others keep popping up. Here is the economic problem: Although your wants
or desires are virtually unlimited, the productive resources available to help satisfy these wants are scarce. Scarcity creates the
economic problem.

Question: Productive resources are limited. Therefore, you cannot have all the goods and services you want; as a result, you must
choose some things and give up others.

Productive resources, or forces of production, are the inputs used to produce the goods and services that people want. Because
productive resources are scarce, goods and services are scarce too. A productive resource is scarce when it is not freely available.
Because productive resources are scarce, you must choose from the many wants.

Economics examines how people use their scarce resources to satisfy their unlimited wants. A taxicab driver uses the cab and other
scarce resources, such as knowledge of the city, driving skills, gasoline, and time to earn income. That income in turn, buys housing,
groceries clothing, electronic gadgets, and other goods and services that help satisfy some of the driver’s unlimited wants.

LESSON 2:

LAND + CAPITAL + LABOR = GOODS AND SERVICES Economic Theories

Land - any natural resources, including energy, used in Economists explain their theories about how they think the
production. economy works. To tell a convincing story, an economist
Capital - the tools, machines and buildings used in the relies on case studies, anecdotes, parables, the listener’s
production process. personal experience, and supporting data.
Labor - the time and energy human put into production in
exchange for wages. Normative versus Positive Statements

Economists try to explain how the economy works.

We Have Six Economic Goals: Sometimes they focus on how the economy should work
1. Economic Freedom rather than how it does work.
2. Economic Efficiency
3. Economic Equity Normative Economic statement because it reflects
4. Economic Growth someone’s opinion. An opinion cannot be shown to be true
5. Economic Security or false by reference to the facts.
6. Economic Stability
Ex: “The unemployment rate in the Philippines should be
lower”

Positive Economic statement because it is a statement about

economic reality that can be supported or rejected by
reference to the facts.
Economic Theory / Economic Model is a simplification of economic reality used to make predictions about the real world. The goal
of economic theory is to make predictions about the real world.

To help develop a theory, economist make simplifying assumptions. It is divided into two categories:

1. Other-things-constant assumption - the idea is to identify the variables of interest and then focus exclusively on the relations
among them, assuming that nothing else of importance changes - that other things remain constant.

Example:
Suppose you are interested in how a change in the price of soft drink brand affects the amount purchased. To isolate the relationship
between these two variables- price and quantity purchased- you assume for purposes of the model that there are no changes in
other relevant variables such as consumer income, the price of another soft-drink brand, and the average outdoor temperature
(demand when the weather is hot).

2. Economist also make assumptions about what motivates people - how people behave. These are called Behavioral Assumptions
because they specify how economic decision makers are expected to behave. Perhaps the most basic behavioral assumption is
that people make choices based on self-interest.

Rational Self - Interest

A key assumption about behavior is that, in making choices, you rationally select alternatives you perceive to be in your best
interest. By rational, economist mean that you try to make the best choices you can, given the information available. In general,
rational self-interest means that you try to maximize the expected benefit achieved with a given cost or to minimize the expected
cost of achieving a benefit.

Market Participants THE CIRCULAR-FLOW MODEL

There are four types of decision makers in the economy:
The Circular-Flow Model describes the flow of resources,
Households - play the leading role in the economy. As products, income, and revenue among economic decision
consumers, households demand the goods and services makers. A simple circular-flow model focuses on the interaction
produced. As resource owners, households supply the between households and firms in a market economy.
resources used to produce goods and services.

Firms, governments, and the rest of the world - demand

the resources that the household supply. They then use the
resources to supply the goods and services that household
demand. The rest of the world includes foreign households,
foreign firms and foreign governments that supply
resources and products to the Philippine markets and
demand resources and products from Philippine Markets.

Markets are the means by which buyers and sellers carry

out exchange. By bringing together the two sides of
exchange, demand and supply, markets determine price and
quantity. Markets also involves other ways for buyers and
sellers to communicate, such as the stock market,
telephones, bulletin boards, classified ads, the internet, and
face-to-face bargaining.

https://www.youtube.com/watch?v=mN5HPJYJzus

LESSON 3: OPPORTUNITY COST AND ECONOMIC QUESTIONS AND ECONOMIC SYSTEMS

Opportunity Cost and Choice Choose Among Alternatives

Scarcity means insufficiency of resources to meet the wants You now have some idea what opportunity cost is and how it
of consumers and insufficiency of resources for producers can vary depending on the situation. To apply this concept to
that hamper enough production of goods and services. the specific economic decisions you make, follow these
guidelines: calculate opportunity cost, consider your time
LIMITED RESOURCES UNLIMITED HUMAN WANTS involved, and ignore sunk cost.

Choices & Decision-making Calculate Opportunity Cost

Economists assume that your rational self-interest will lead you

to select the most valued alternative. This does not mean you
must calculate the value of all possible alternatives. Because
acquiring information about alternatives is costly and time
consuming, you usually make choices based on limited or even
Because of scarcity, there is a need for us to make decisions in choosing how to maximize the use of the scarce resources to satisfy
as many wants as possible.
The opportunity cost of the chosen item or activity is the value of the best alternative you must pass up. One can think of
opportunity cost as the opportunity lost.

Estimate Opportunity Cost

Only the individual decision maker can select the most attractive alternative. You, the chooser, seldom know the actual value of the
best alternative you gave up, because that alternative is “the road not taken.”

Opportunity Cost Varies

Your opportunity cost depends on your alternatives. This is why you’re less likely to study on a Saturday night than on a Tuesday
night. On Saturday night, the opportunity cost of studying is higher because your alternatives are more attractive than they’re on a
Tuesday night when there’s less to do.

Consider Your Time Involved Economic System is the set of mechanisms and institutions that
The sultan of Brunei is among the world’s richest people, resolves the what, how, and for whom questions. Some
with wealth estimated at USD 20 billion based on huge oil standards used to distinguish among economic systems are:
revenues that flow into his tiny country. Supported by his
great wealth, the sultan appears to have overcome the Who owns the resources?
What decision making process used to allocate resource & products?
economic problem caused by scarcity. However, although he
What types of incentives guide economic decision makers?
can buy just about whatever he wants, his time to enjoy
these goods and services is scarce. Pure Market Economy

Ignore Sunk Cost In a pure market economy, private firms account for all
Suppose you have just finished shopping and are wheeling production. Features of this economic system include the
your shopping cart to the checkout. How do you decide private ownership of all resources and the coordination of
which line to join? You pick the one you think will take less economic activity based on the prices generated in free,
time. What if, after waiting ten minutes in a line that barely competitive markets. Any income from selling resources goes
moves, you notice a cashier has opened another line and exclusively to the resource owners.
invites you to check out? Do you switch to the open line, or The Invisible Hand of Markets
do you think, “I’ve already spent ten minutes in this line, I’m
staying here”? Resource owners have property rights to the use if their
resources and are free to supply those resources to the highest
The ten minutes you waited represents a sunk cost, which is bidder. Producers are free to make and sell whatever they
the cost you already have incurred and cannot recover, believe will be profitable. Consumers are free to buy whatever
regardless of what you do now. they can afford. All this voluntary buying and selling is
Economic decision makers should consider only those costs coordinated by competitive markets that are free from any
that are affected by their choice. Sunk costs are not government regulations.
recoverable. Therefore, sunk costs are irrelevant and should
Market prices guide resources to their most productive use and
be ignored.
channel goods to those consumers who value them the most.
Markets transmit information about relative scarcity, provide
Opportunity cost - the value of the best alternative passed
incentives to producers and consumers, and distribute income
up for the chosen item or activity.
among resources suppliers.
Sunk cost - A cost you have already paid and cannot recover,
regardless of what you do now. Adam Smith - a Scottish economist, market forces coordinate
production as if by an “invisible hand.” Smith argued that
Economic Questions and Economic Systems although each individual pursues his or her self-interest, the
What should the economy produce? How should it produce “invisible hand” of market competition promotes the general
this output? For whom should it produce? One way to welfare.
distinguish among economic systems is to focus on the role
of the government. Imagine a range from the freest to the Problems with Pure Market Economies
most government-controlled economic system. A pure 1. Difficulty Enforcing Property Rights - no central authority to
market economy stands at one end of the range and a pure ensure laws are implemented. Markets will breakdown if you
command economy stands at the other. could not safeguard your property or enforce contracts.
2. Few Resources to Sell - Because some markets do not guarantee
THE THREE ECONOMIC QUESTIONS even a minimum level of income, some people would have
difficulty surviving.
1. What goods and services will be produced? 3. Firms Try to Monopolize Markets - although the invisible hand of
- Because of unlimited wants and needs and scare market competition usually promotes the general welfare, some
resources, methods must be used to allocate goods producers may try to monopolize the market by either unfairly
and services. driving out competitors or by conspiring with competitors to
- Because of scarcity, economies must somehow increase prices.
decide what to produce. 4. No Public Goods - Private firms do not produce so-called public
2. How will they be produced? goods, such as national defense. Once produced, public goods are
available to all, regardless of who pays and who does not pay for
them.
5. Externalities - Market prices reflect the benefits to buyers and the
costs to sellers. Some production and consumption, however,
 - Economic systems must determine how output is to be produced. Which resources should be used, and how should they be
combined to make each product?
3. For whom will they be produced?
- Who will consume the goods produced? The economic system must determine how to distribute the fruits of production
among the population.
- This question is often referred to as the distribution question.

Pure Command Economy

Mixed, Transitional and Traditional Economies
In a pure command economy, all resources are government
The Philippines is a mixed economy.
owned and government officials coordinate production. At
least in theory, ownership of all resources is public, or
communal. That is why a command economy is sometimes A Mixed Economic System is a system that combines aspects
called communism. Central planners answer the three of both capitalism and socialism. A mixed economic system
economic questions, and they also decide how to produce protects private property and allows a level of economic
these goods and who should get them. freedom in the use of capital, but also allows for governments
to interfere in economic activities
The Visible Hand of Central Planners A Transition Economy or Transitional Economy is an economy
Rather than rely on competitive markets, central planners which is changing from a centrally planned economy to a
direct the allocation of resources and products. In a pure market economy. Transition economies undergo a set of
command economy, the central authority, or government, structural transformations intended to develop market-based
controls all resources, including labor. Central planners’ institutions. These include economic liberalization, where
direct production through government-run enterprises, prices are set by market forces rather than by a central
which usually face no competition. planning organization. In addition to this trade barriers are
removed, there is a push to privatize state-owned enterprises
PROBLEMS WITH PURE COMMAND ECONOMY and resources, state and collectively run enterprises are
1. Consumers Get Low Priority restructured as businesses, and a financial sector is created to
- Shortage of consumer goods (empty store shelves) facilitate macroeconomic stabilization and the movement of
2. Little Freedom of Choice private capital. The process has been applied in China, the
former Soviet Union and Eastern bloc countries of Europe.
3. Central Planning can be Inefficient
4. Resources Owned by the Central Authority are A Traditional Economy is a system that relies on customs,
Sometimes Wasted history, and time-honored beliefs. Tradition guides economic
5. Environmental Damage- prioritize the goal of products decisions such as production and distribution. Societies with
traditional economies depend on agriculture, fishing, hunting,
produced by the central planners.
gathering, or some combination of them. They use barter
6. No Role for Entrepreneurs instead of money.

LESSON 4: THE DEMAND CURVE, ELASTICITY OF DEMAND AND CHANGES IN DEMAND

The primary building blocks of a market economy are Substitution Effect

demand and supply. Consumers demand goods and services demand includes the other-things-constant assumption.
that maximize their utility, and producers supply goods and Among “other things” assumed to remain constant are the
services that maximize their profit. prices of other goods. For example, if the price of pizza
declines while other prices remain constant, pizza becomes
Law of Demand
cheaper. Consumers are more willing to buy pizza when its
Demand indicates how much of product consumers are both price falls. People tend to substitute pizza for other goods. This
willing and able to buy at each price during the given time is called the substitution effect of a price change.
period, other things constant. Because demand pertains to a On the other hand, an increase in the price of a pizza, other
specific period- a day, a week, a month- you should think of things constant, increases its relative price. Pizza’s opportunity
demand as the amounts purchased per time period at each cost increases- that is, the amount of other goods you must
price. Also, notice on the emphasis on willing and able. give up buying pizza increases. This higher opportunity costs
The relation between price and quantity demanded reflects causes consumers to substitute other goods for the now
an economic law. The law of demand says that quantity higher-priced pizza, thus reducing their quantity of pizza
demanded varies inversely or negatively, with price, other demanded.
things constant (ceteris paribus). Thus, the higher the price, Remember that the change in the relative price- the price of
the smaller the quantity demanded. The lower the price, the one good relative to the price of other goods - causes the
greater the quantity demanded. substitution effect.
Demand, Wants, and Needs Income Effect
The income effect of a lower price increases your real income
Consumer demand and consumer wants are not the same and thereby increases your ability to purchase goods. Because
thing. Nor is demand the same as need. You may have of the income effect, consumers typically increase their
outgrown your rubber shoes and need a new one. But if the quantity demanded after a price decrease. Conversely, an
increase in the price of a good, other things constant, reduces
your real income, thereby reducing your ability to purchase
goods and services. Because of income effect of a price
price is P2,000, you may decide your old shoes will do for now. If the price drops enough- say P1,000- then you become both willing
and able to buy a new one.

Diminishing Marginal Utility Elasticity of Demand

When you purchase a pizza because you are hungry, the first Knowing the law of demand is useful, but the demand curve
slice really tasted good. The second slice after finishing the offers you more information. It can show you how sensitive
first one, tasted good but not as good as the first slice. When quantity demanded is to a change in price.
you will eat the third slice, the satisfaction you experience
from eating the pizza diminishes. The satisfaction you derive Elasticity of demand measures how responsive quantity
from an additional unit of a product is called Marginal Utility. demanded is to a price change, the percent change in quantity
The marginal utility you derive from each additional slice of demanded divided by the percent change in price.
pizza declines as your consumption increases. Your
experience with pizza reflects the

Law of Diminishing Marginal Utility. This law states that the

more of a good an individual consumes per period, other
Ex:
things constant, the smaller the marginal utility if each
additional unit consumed. Consumers buy things to increase What is the demand elasticity when
their satisfaction or utility. the price of a pizza falls from P120 to
P90? The percent increase in quantity
Demand Schedule and Demand Curve
demanded is the change in quantity,
A Demand Curve Slopes downward from left to right, 6 million, divided by 14 million.
reflecting the law of demand- that is, price and quantity
6,000,000 / 14,000,000 = 0. 4285 or 43%
demanded are inversely, or negatively related other things
constant. Several things are assumed to remain constant So, quantity demanded increases by 43 percent. The percent
along the demand curve, including the prices of other goods. change in price change of P30 divided by P120 is
Demand curve shows how much of
a good people will want at 30 / 120 = 0.25 or 25%
differentBprices. The quantity
Elasticity of demand is the percent increase in quantity
demanded increases as the price
demanded, 43 percent, divided by percent decrease in price,
gets lower.
25 percent equals 1.7
Demand Vs Quantity Demand
E = 0.43 / 0.25 = 1.72 or 1.7 (Elastic)
An individual point on the demand curve shows the quantity
demanded. Quantity demanded means the amount Elasticity Values & Total Revenue
demanded at a particular price. This relation is represented
by the demand schedule or the demand curve. To recap,
Quantity Demanded refers to a specific amount of the good
on the demand schedule or the demand curve, whereas Economists sort elasticity into three general categories.
Demand refers to the entire demand schedule or demand Elastic = percent change in = reducing the price by 5
curve. quantity demanded percent causes quantity
exceeds 1.0. demanded to increase by 5
Individual Demand and Market Demand
percent. Thus, the total
= the quantity
Individual Demand is the demand of an individual consumer revenue increases.
demanded is relatively
like you while Market Demand is the sum of the individual responsive to a change
demands of all consumers in the market. in price.

Changes That Shift the Demand Curve Unit = the resulting elasticity = reducing the price by 5
Elastic is 1.0 percent causes quantity
A demand curve isolates the relationship between price and demanded to increase by 5
= If the percent change
percent. In this case, total
quantity demanded when other factors that could affect in quantity demanded
revenue remains unchanged.
demand are assumed constant. These other factors are often just equals the percent
referred to as determinants of demand. The determinants of change in price
demand include the following:
Inelasti = Resulting elasticity lies = reducing the price by 5
1. Consumer income c between 0 and 1.0 percent causes the quantity
2. The price of related goods ( Related products are = Relatively demanded to increase, but by
products whose demand is influenced by a price change unresponsive to a less than 5 percent. So, the
of another related product. Example: in purchasing a change in price. total revenue falls.
= if the percent change
home, you need to purchase furniture (related product) in quantity demanded is
along with it. less than the percent
3. The number and composition of consumers change in price
4. Consumer’s expectations
5. Consumer’s taste
Total Revenue DETERMINANTS OF DEMAND ELASTICITY
Knowledge of elasticity is especially valuable to producers, Availability of Substitutes - The greater the availability of
because elasticity also indicates how a price change affects
substitutes for a good and the more similar these are to the
total revenue. Total revenue is price multiplied by the
good in question, the greater the good’s elasticity of demand.
quantity demanded at the price. What happens to total
revenue when price decreases? A lower price means that 1. Share if Consumer’s Budget Spent on the Good - This
producers are paid less for each unit sold, which tend to reflects the willingness and the ability to purchase a good
decrease total revenue. According to the law of demand, at alternative prices.
however, a lower price increases quantity demanded, which 2. Duration of the adjustment period - The longer the
tends to increase total revenue.
adjustment period, the easier it is to find lower-priced
Knowing the product’s elasticity can help businesses with substitute. Thus, the longer the period of adjustment, the
their pricing decisions. If demand is inelastic, producers will more responsive the change in quantity demanded is to a
never willingly cut the price because doing so, would reduce given price change.
their total revenue. The percent increase in quantity
demanded would be less than the percent decrease in price.
Why cut the price if selling more reduces total revenue?

LESSON 5: THE SUPPLY CURVE AND SHIFT OF THE SUPPLY CURVE

LAW OF SUPPLY Importance in Economics:

With demand, the assumption is that consumers try to 1.
Understanding Market Behavior: It helps economists and
maximize utility, the incentive that motivates their behavior. policymakers understand how producers respond to
With supply, the assumption is that producers try to changes in market conditions, particularly price changes.
maximize profit. Profit is the incentive that motivates the This knowledge is crucial for predicting market behavior
behavior of suppliers. and making informed economic decisions.
2. Price Mechanism: The law of supply is a key component of
ROLE OF PROFIT
the price mechanism, which is the dynamic process by
A firm tries to earn profit by transforming resources -> which prices are determined in a free-market economy.
products. When demand and supply interact, they establish
equilibrium prices that efficiently allocate resources.
 Profit = Total Revenue – Total Cost 3. Allocation of Resources: Understanding the law of supply
 Total Revenue = Price X Quantity Sold is vital for the efficient allocation of resources within an
 Total cost = cost of all resources used in producing the economy. It helps ensure that goods and services are
goods and services produced in quantities that match consumer demand.
 Total Revenue = Total Cost (Breakeven) 4. Business Decision-Making: For businesses, knowing the
law of supply is essential for making production and
When total revenue just covers total cost, a firm breaks even.
pricing decisions. Firms must assess how changes in
Over time, total revenue must cover total cost for the firm to
production costs, technology, and market prices will
survive. If total revenue falls short of total cost year after
impact their ability to supply goods profitably.
year, the firm will fail.
5. Government Policy: Policymakers use the law of supply to
The Law of Supply is a fundamental concept in economics design and implement economic policies. For example,
that describes the relationship between the price of a good they may consider how taxes, subsidies, or regulations
or service and the quantity of that good or service that affect producers' decisions to supply certain goods or
producers are willing and able to supply in a given time services.
period. 6. Market Stability: Understanding supply dynamics can help
prevent market imbalances and shortages. Policymakers
The Law of Supply: All else being equal, as the price of a good and market participants can use this knowledge to
or service increases, the quantity supplied by producers also mitigate supply disruptions and maintain market stability.
increases, and as the price decreases, the quantity supplied decreases.

2 key components of law of supply and its importance in economics:

1. Price and Quantity Relationship: 2. Ceteris Paribus Assumption:

The law of supply illustrates a direct The law of supply assumes that
and positive relationship between all other factors influencing
price and quantity supplied. When the supply, such as production costs,
price of a product or service rises, technology, government
producers have an incentive to supply regulations, and producer
more of it to the market because they expectations, remain constant.
can earn higher profits. Conversely, This allows economists to isolate
when the price falls, the incentive to the impact of price changes on
supply decreases. supply.
Supply in economics is influenced by a variety of factors that SUPPLY
affect a producer's willingness and ability to provide goods and
services to the market. Understanding these factors is essential Just as demand is a relation between price and quantity
for predicting and analyzing changes in supply. demanded, supply is a relation between price and quantity
The main factors that influence supply include: supplied. Supply indicates how much of good producers are
willing and able to offer for sale per period at each price,
1. Price of the Product (P): The most fundamental factor other things constant. The law of supply says that the
influencing supply is the price of the product itself. quantity supplied is usually, directly, or positively, related to
According to the law of supply, as the price of a product its price, other things constant. Thus, the lower the price, the
increases, the quantity supplied by producers generally smaller the quantity supplied. The higher the price, the
increases, and as the price decreases, the quantity supplied greater the quantity supplied.
typically decreases. This positive relationship between price
and quantity supplied is a central tenet of supply analysis.
2. Production Costs (C): The cost of producing goods or Figure 1.1 presents the market supply schedule and market supply
curve S for pizza. A supply curve shows the quantities of a particular
services significantly impacts supply. Key components of
good supplied at various prices during a given time period, other
production costs include: things constant. Both show the quantities of 12-inch pizzas supplied
 Labor Costs - Wages and salaries paid to workers. per week at various prices by the many pizza makers in the market.
 Materials and Inputs - The cost of raw materials,
components, and other inputs needed for production.
 Technology - Advances in technology can reduce
production costs, making it more profitable to supply
more goods at a given price.
 Taxes and Subsidies - Taxes increase production costs,
while subsidies can reduce them.
3. Technological Advancements: Improvements in technology
can increase the efficiency of production, reduce costs, and
lead to an increase in supply. This can be seen in various As you can see, price and quantity supplied are directly related,
industries, such as manufacturing, agriculture, and other things constant. The supply curve shows, for example, that at a
price of Php 60 per pizza, the quantity supplied is 16 million per
information technology.
week, at a price of Php 90, the quantity supplied increases to 20
4. Number of Producers: The total number of producers or
million.
firms in a market can impact supply. When more producers
enter a market, supply tends to increase, and when Like the demand curve, the supply curve reflects a particular period
producers exit, supply may decrease. This factor is of time. It shows quantity supplied per period. For any supply curve,
influenced by barriers to entry and exit in the industry. it is assumed that the prices of other goods the business could
5. Expectations: Producer expectations about future market produce using these same resources remain unchanged. Thus, along
the supply curve for pizza, the price of pizza changes relative to
conditions, including prices and demand, can influence
other prices, which do not change. The supply curve shows the effect
supply decisions. If producers anticipate higher future of a change in the relative price of pizza- that is relative to the prices
prices, they may reduce current supply to take advantage of of other goods the resources could supply. Producers have a profit
those higher prices later, and vice versa. incentive to supply more pizza at a higher price than at a lower price,
6. Government Policies and Regulations: Government policies so the supply curve slopes upward, from left to right.
and regulations, such as taxes, subsidies, trade restrictions,
and environmental regulations, can have a significant
More Willing to Supply
impact on supply. For example, taxes on production can
increase costs and reduce supply, while subsidies can Producers offer more for sale when the price rises for two
incentivize increased production. reasons. First, as the price increases, other things constant, a
7. Natural and Environmental Factors: Natural events, producer becomes more willing to supply the good. Prices act
weather conditions, and environmental factors can affect as signals to existing and potential suppliers about the
supply, especially in industries like agriculture and energy. rewards for producing various goods. An increase in the price
Droughts, natural disasters, and climate changes can disrupt of pizza, with other prices remaining constant, creates a profit
supply chains and reduce the availability of certain goods. incentive to shift some resources out of producing other
8. Resource Availability: The availability of key resources, such goods, whose prices are now relatively lower, and into pizza,
as land, labor, and capital, can limit or expand production whose price is not relatively higher. A higher pizza price
capacity. Changes in the availability of these resources can makes supplying pizza more profitable and attracts resources
affect supply in various industries. from lower-valued uses.
9. Market Conditions: Market conditions, including the level
of competition, consumer preferences, and changes in More Able to Supply
demand, can influence supply decisions. High demand in a
Higher prices also increase the producer’s ability to supply the
competitive market may encourage producers to increase
good. The cost of producing an additional unit of good usually
supply, while a lack of demand can lead to decreased
rises as output increases – that is, the marginal cost of
supply.
production increases as output increases. Because suppliers
10. Global Events and Trade: Events on a global scale, such as
face a higher marginal cost of producing the good, they need
geopolitical conflicts, economic crises, and changes in
to get a higher price to be able to increase the quantity
international trade agreements, can affect the supply of
supplied. A higher price makes producers more able to
goods and services by disrupting supply chains and
increase quantity supplied.
influencing production costs.