Contents : Teach : Lesson 5
A. Scarcity and Pricing
- Good and services are considered scarce, when theyre not
free. Either they need to be bought or replaced with another
resource of equal value.
- Not all things come with a price tag. Resources such as water
and air are considered to be free.
- Almost all resources are scarce resources. Almost all goods and
services are scarce goods and services.
- Such scarcity therefore brings about price in goods and
services. Price measures the value of a given commodity.
- The prices are determined by the Price Mechanism. It has two
components: Supply and
- Demand is the behavior of buyers towards certain goods and
- Such behavior is determined in the price change and quantity
demanded of the product.
- There is an inverse relationship between price and quantity
demand. When price increases, demand decreases and when price
decreases, demands increases. (see chart)
- The chart shows the behavior of buyers towards different price
- If the price decreases, many people will be able to afford it,
thus raising demand, but if the price increases, few people will be
able to afford it and so the demand drops.
- On the other hand, Supply is the behavior of the suppliers of
resources and commodities.
- It is determined by price and quantity supplied of the
- The relationship between price and supply is direct. Therefore,
when the prices go up, so will the supply and vice versa. (see
- The chart shows the behavior of suppliers at different price
- At higher prices, suppliers are willing to produce more goods
in search of higher profit.
D. Price Determination
- Price is controlled by these two market forces, so prices,
demand, and quantities vary from time to time, but theres one
position in which the price, both satisfies supply and demand. This
is called Price Equilibrium.
- In state of excess demand, theres not enough supply to
satisfy the needs of the people. In order to increase the supply
and meet the demand, suppliers will need more profit. Therefore
prices go up to produce more of the product.
- In contrast, the state of excess supply, theres a bulging
surplus of supply compared to the little demand. In such situation,
sellers are pressured to capture the small market, in order to
maximize their profits. Theyll be forced to bring down the
price in order to attract more buyers.
E. Factors Affecting Shifts in Price
- (Demand) Theres an unstable flux of salaries in
society. The people will have more or less money to buy
- (Demand) A change of price in substitute commodity
occurs. A substitute commodity is a product that satisfies similar
needs as the original commodity. (e.g. beef for pork)
- (Demand) A rise or falls of the price of complementary
commodities happen. Complementary commodities are products used
jointly with the original commodity. (e.g. Original Commodity: cars
& Complementary Commodities: gasoline)
- (Demand) There is an increase/decrease in
- (Demand) A redistribution of income to or away from
certain people who favor a kind of commodity happens. For instance,
people from Town X like pizza, so their income will determine the
demand for pizza.
- (Supply) Theres change in the desire of
producers to supply more or less.
- (Supply) Prices of substitute commodities change.
- (Supply) Prices of resources (land, labor, and
- (Supply) Improvements or deterioration in technology
is done. If technology improves the production of Brand X, then
more of Brand X will be made.
F. Application of Price Determination
- In the theory of Price Determination, it is assumed that the
market is in Perfect Competition. Under such situation, all buyers
and sellers arent in a position to dictate the price and
demand of products.
- Unfortunately, in reality, Perfect Competition is very rare.
Big corporations, legislators, and trade unions control most
- Although quite limited in nature, it can still give a pretty
good picture of the developmental situation. Its limitations should
be kept in check.
- (see also Causes:
Supply and Demand)
- Economics lesson plans were based and adopted from Fr. Roberto
Yap's economics notes found in the Tulong Dunong Sourcebook and
Michael P. Todaro: Economics for a Developing World