CLUSTER 1

MODULE 2

APPLIED ECONOMICS

LEARNING MODULE
APPLICATION OF DEMAND AND SUPPLY

LESSONS:

1. Market Structures
2. Supply-Demand and the Philippine Labor Market
3. Supply-Demand and Philippine Economic Problems

OVERVIEW

The purpose of this reading is to build an understanding of the importance of

market structure. As different market structures result in different sets of
choices facing a firm’s decision makers, an understanding of market structure is a
powerful tool in analyzing issues such as a firm’s pricing of its products and, more
broadly, its potential to increase profitability. In the long run, a firm’s profitability
will be determined by the forces associated with the market structure within which
it operates. In a highly competitive market, long-run profits will be driven down by
the forces of competition. In less competitive markets, large profits are possible
even in the long run; in the short run, any outcome is possible. Therefore,
understanding the forces behind the market structure will aid the financial analyst
in determining firms’ short- and long-term prospects.
Lesson 1: Market Structures

LEARNING OUTCOMES

In this lesson, learners are expected to:

1. Define market structure

2. Describe the Characteristics and distinguish the features of the market
structures (perfect competition, monopoly, monopolistic competition, and
oligopoly

LEARNING CONTENT

After looking at the basic principles of demand and supply, it will also be
helpful to learn about the market structures in which sellers can operate. Each
structure will be described in terms of the nature of the product being sold, the
number of buyers and sellers in the market, and the ease of entering or exiting the
market.

Market Structures

 Refers to the competitive environment in which buyers and sellers operate

 Is best defined as the organisational and other characteristics of a market.
We focus on those characteristics which affect the nature of competition
and pricing – but it is important not to place too much emphasis simply on
the market share of the existing firms in an industry.

Competition

 It is rivalry among various sellers in the market.

 As students, we are familiar with the word competition. We are
exposed to competition in school: spelling bees, quiz bees and sports
fests.
 On the television, we watch beautiful girls from all over the world
compete for the Miss Universe or Miss World title. We see how
various teams of the PBS compete to win the championship.
 The market is a situation of diffused, impersonal competition among sellers
who compete to sell their goods and among buyers who use their purchasing power
to acquire the available goods in the market.

There are varying degrees of competition in the market depending on the

following factors;

 Number and size of buyers and sellers

 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and inputs owners
 Degree of knowledge of economic agents regarding prices, costs,
demand and supply conditions.

Perfect Competition

 Implies an ideal situation for the buyers and sellers.

The following are characteristics of a perfectly competitive market:

 There are so many buyers and sellers that each has a negligible
impact on market price. Change in output of a single firm will not
perceptibly affect market price of the good. No single buyer can
influence the price since he/she purchases only a small amount.
Buyer cannot extract quantity discounts and credit terms.
 A homogenous product is sold by sellers, which means the
products are highly similar in such away consumers will have no
preference in buying from one seller over another. The goods
offered for sale are all exactly the same or are perfectly
standardized.
 Perfect mobility of resources refers to the easy transfer of
resources in terms of use or in terms of geographical mobility.
 There is perfect knowledge of economic agents of market
conditions such as present and future price, costs, and economic
opportunities.
  Market price and quantity of output are determined exclusively
by forces of demand and supply.

In this market, there are large numbers of buyers and sellers. Sellers offer
a standardized product, a homogenous good that is not different from the others in
the market. The sellers can easily enter into or exit from the market as there are
no barriers to entry to and exit from the industry. The buyers and sellers are well
informed about prices and sources of the goods.

Because of the large number of buyers and sellers, no individual decision-

maker can significantly affect the price of the product by changing the quantity it
buys and sells. Thus, the seller is a price taker and has to follow the market price
in selling his/her good.

The standardized product offered by sellers means that the buyers do not
perceive differences between the products of one seller from that of another; for
example, rock salt will not contain any obvious difference whether one buys it in
Paranaque or Las Piñas.

Easy entry into and exit from the market means there are no significant
barriers or special costs to discourage new entrants and likewise there are no
barriers that will prevent the sellers from exiting the market.

Well-informed buyers and sellers simply means that buyers and sellers have
all relevant information needed to make their decision to buy or sell.

So, is perfection competition is powerful and many markets, while not strictly
perfectly competitive, come reasonably close.

Imperfect Competition

 It refers to a situation where the characteristics of an economic market do

not fulfil all the necessary conditions of a perfectly competitive market,
resulting in market failure.

Types of imperfectly competitive market

Monopoly

 It exists when a single firm that sells in that market has no close substitutes.

Consumers tend to have a bad image of a monopoly. They fear that monopolies
tend to jack up prices of the goods since consumers have no choice and cannot buy
the good from any other seller. Because the absence of competition, there is also
the danger that consumers will suffer from poor quality of the good and poor service
delivered by the monopolist.

Monopoly can exist for the following reasons:

 A single seller has control of entire supply of raw materials.

 Ownership of patent or copyright is invested in a single seller.
 The producer will enjoy economies of scale, which are savings from a
large range outputs.
 Grant of a government franchise to a single firm.

While monopoly enjoys a lot of power in the market, it actually does not have
unlimited market power because it faces indirect competition for consumers’ money
for all goods.

Monopolist’s quantity of output will be lower to enable him to set the price
higher. Because of this, to prevent abuses, there is need for stricter government
laws.

A monopoly can easily exist when there are barriers to entry that may cause
other firms to stay out of the market instead of entering and competing with firms
already there. The reason could be due to legal barriers like government
restrictions, patents, and copyrights.

Because it is the only supplier in the market, the firm is free to determine its
output level and its price. Once the firm determines its output level, it also
determines its price; it is thus a price setter. Once the firm determines its price,
it also determines its output level that will enable it to maximize its profits.

Monopolistic Competition

 Wherein products are differentiated and entry and exit are easy.
 Allows such variety of choices.
  Since many firms exist in the market, consumers also have the freedom to
choose from whom to buy good.

This market combines some characteristics of perfect competition and

monopoly. Its key characteristics are;

 A blend of competition and monopoly;

 Firms sell differentiated products, which are highly substitute but are
not perfect substitutes;
 Many sellers offer homogenous or differentiated products, similar but
not identical and satisfy the same basic need;
 Changes in product characteristics to increase appeal using brand,
flavour, consistency, and packaging as means to attract customers;
 There is free entry and exit in the market that enables the existence
of many sellers; and
 It is similar to a monopoly in that the firm can determine
characteristics of product and has some control over price and quantity.

The firm under monopolistic competition faces downward sloping curve. This
means that it can sell more by changing less and can raise price without losing all
customers. As such, the firms in this market are given room to set different prices
by their product differences. In other words, a firm can set a higher price because
it has something different to offer its buyers.

Non-price competition this refers to any action a firms takes to shift the
demand curve for its output to the right without having to sacrifice its price. This
may include better services, product guarantees, free delivery, more attractive
packaging, better location, and advertising. The firm can either sell more by
charging a lower price or it can even raise its price without losing all of its customers
because it has the capacity of developing loyalty among its customers. Hence, firms
in this market structure are price setters. However, the demand curve by the firm
is more elastic than the demand curve faced by a monopolist.

Oligopoly

 It is a market dominated by a small number of strategically interacting firms.

  Few sellers account for most of or total production since barriers to free
entry make it difficult for new firms to enter:

Its characteristics are;

 Action of each firm affects other firms; and

 Interdependence among firms.

These strategically interacting firms try to raise their profits by colluding

with each other to raise prices to the detriment of consumers. Just take a look at
the oil industry. Producers of oil from all around the world can manage to raise
prices by agreeing with each other on what prices to charge the consumers. Thus,
countries that use lot of oil have no choice but to buy from these producers at high
prices.

Oligopolies may exist due to the existence of barriers, which may include
economies of scale, reputation of the sellers, and strategic and legal barriers such
as the grant of patents/franchises, loyal following customers, huge capital
investments and specialized input, and control of supply of raw materials by a few
producers.

Cooperative behaviour in Oligopoly usually takes the form of price-fixing or

output-setting agreements such as the one maintained by the OPEC (Organization of
Petroleum Exporting Countries.

SIGNIFCANCE OF THE MARKET STRUCTURE

The type of market structure in which the business operates will determine
the amount of market power or control the business owner will enjoy. Greater market
power means a greater ability to control prices, differentiate the products one
offers for sale, thus, leading to opportunities for more profits.
Lesson 2: Supply-Demand and the Philippine Labor Market

LEARNING OUTCOMES

In this lesson, learners are expected to:

1. Relate population growth with the country’s labor supply and apply the law
of demand and supply in the determination of wages of labor;
2. Deduce how excess supply of labor has led to the phenomenon of the
Overseas Filipino Worker;
3. Apply the law of demand and supply to Philippine housing shortage and show
how this has led to the real estate boom in the country:

LEARNING CONTENT

After learning about the workings of demand and supply and how these forces
affect the market, we will now focus on how the forces of demand and supply, the
theory and principles, can help in analysing Philippine economic problems.

LABOR SUPPLY, POPULATION GROWTH, AND WAGES

Labor supply

 Also known as labor force

 It refers to the portion of the population
 15 years old and over who are willing and able to work, including those who are
actively seeking work but have not found work and those who are employed
  There are likewise other people who are excluded from the labor force such
as full-time housewives or househusbands, fulltime students, those who are
physically and mentally disabled and therefore cannot work, as well as those
who do not wish to work and are not actively seeking for work.

The country’s labor supply is vital to the economy, since their contribution to
production of goods and services determines the value of the country’s Gross
Domestic Product. In 2014, as of April, Philippine labor force was reported at 41.6%
million, with an estimated 38.7 million total employed persons in July 2014,
translating into an employment rate of 93%. Of this number of employed people,
60% were males and the largest number of employed persons consisted of the age
group 25 to 34 years with 26.4% of the total employed. Fifty percent of employed
persons were in the services sector. Laborers and unskilled workers comprised one-
third of the employed persons. Wage and salary workers were registered at 57.5%.

Full-time workers are those who work for 40 hours or more while part-time
workers work less than 40 hours.

In April 2014, full-time workers comprised 59.3 percent of the total employed.

Employment growth in large enterprises in Metro Manila continued to be positive

at 1.02% during the fourth quarter of 2014 but this reflected a marked slowdown
compared with the same quarter of the previous year at 3.22%. The country’s labor
force grew by an average of 2.5% or an addition of 962,000 persons in 2014.

The 2014 average annual employment data showed a positive note, employment
level grew by 2.8% compared to 2013 – a net gain employment generation that
exceeded one million. Employment was boosted by robust growth in industry (4.1%)
together with a sustained growth in services (3.1%) and modest recovery in
agriculture (1.7%). Both the rates of unemployment and underemployment eased
slightly from the previous year. Employment growth in 2014 was largely driven by
the rise in part-time employment (9.1%) alongside the increase in the number of self-
employed persons and unpaid family workers.
PHILIPINE POPULATION

Let us now look at the Philippine population statistics in order to relate

population growth to the growth of our labor supply and to the demand for goods
and services. This will also help us analyse why the prices of basic commodities have
been increasing.

The Philippine census is an official count of the population of a certain local

administrative unit in the Philippines. The population is enumerated every 5 years.

The population of the Republic of the Philippines reached more than 100 million
people in 2014, registering an increase of 2.0% versus the previous year. The
population of the Philippines represents 1.38% of the world’s total population. The
distribution of Philippine population among the 3 biggest regions is shown in Figure
2.10.

Figure 2.10. Distribution of Philippine Population, (2013)

 (Source: National Statistics Office)

Table 2.4. Summary of Projected Population, by Five-Year Interval

Philippines: 2000-2040 (Medium Assumption)

Source; Philippine Statistics Authority, National Statistical Coordination Board

Let us now look at the population statistics and see how our population growth
over the years affected the Filipino’s quality of life. We can see that from 2000 to
2005, which are the census years, population increased by approximately 8 million
Filipinos. In 2005 to 2010, the increase was approximately 9 million Filipinos. From
2010 to 2015, it is estimated that close to 9 million Filipinos will be added to the
total population. It is logical to say that more Filipinos mean more mouths to feed;
thus, demand for products and services will naturally increase. If the supply of
these goods does not increase as fast as the demand, their prices will naturally
increase. Housing, school buildings, health care, and food may no longer be sufficient
to meet the needs of the growing population. In table 2.5, we see that while
population has been declining, and is expected to decline further over the next 25
years.
 Table 2.5. Average Annual Growth Rates, Philippines: 2000-2040

Source; Philippine Statistics Authority, National Statistical Coordination Board

Another significant population demography is the age distribution. In Table

2.6, a comparison is made between sex and age distribution of males to females in
both 2010 and 2015, with males exceeding females by a very small margin.

Table 2.6. Distribution of Philippine Population by Age and Sex, 2010 and 2015
 Source; Philippine Statistics Authority, National Statistical Coordination Board

What is interesting in this table is how Philippine population is distributed

among age groups. It can be seen that in 2010, more than 21 million of total
population fell under the age group of 0 to 4 and 5 to 9. These are very young
children who normally go to school, do not work, and therefore depend on their
parents for their subsistence and living requirements. This translates to a high
dependency ratio on the productive member of the population. Then we have the
older retired age group of 65 year old to 80+ numbering a little over 2 million. These
people who may not have adequately prepared financially for their retirement will
add to the dependency burden on the productive members of the population.

It is thus important to study population in terms of age distribution, to see

how much of the population is made up of the age group than can join labor supply
and therefore contribute to income generation and production of goods. This will
mean less dependency on the part of the very young and the old members of the
population. Relating this to the concept of demand and supply, one can 13nalyse the
big proportions of dependent members of population contribute to increased demand
without the capacity to contribute to supply of goods and services. This can lead to
s shortage of social services, housing, schooling, health care, and transportation. The
high demand is also a reason of increasing commodity prices.

THE PHILIPPINE WAGE GROWTH SITUATION

Usually, when Labor Day is celebrated in the Philippines on May 1, labor unions
and organizations clamor for wage increases. The government protects the workers
through the imposition of minimum wages. But workers always claim that these
minimum wages are not enough for their subsistence. Let us take a look at the
minimum wages in the National Capital Region.

Table 2.7. Current Minimum Wage

National Capital Region (NCR)
As of April 04, 2015
(in Pesos)
 Source; Philippine Statistics Authority, National Statistical Coordination Board

The above minimum wages apply in the NCR. Minimum wages in the other
regions in the Philippines are lower depending on the cost of living in the specific
region or sector:

The setting of minimum wages by the government assures protection for

workers that they are not underpaid by employers, and gives the guarantee of a
sufficient income to meet their basic needs.

LABOR MIGRATION AND THE OVERSEAS FILIPINO WORKERS

Another distinct feature of Philippine labor is the growth of laborers whom

we call the OFWs or Overseas Filipino Workers. Primarily because of a high
unemployment rate in the country, currently at 6.4% Filipinos have started to find
work in other countries. In addition to this, migration is also affected by wage gaps
among countries. Because wages are higher in the United States and other more
developed economies, Filipino teachers, engineers, doctors, nurses and other heal th
professionals and technical workers have opted to migrate. So, even if the supply
doctors in the country may be limited, because of the higher wages abroad, some
doctors prefer to migrate and work in foreign countries. In 2014, there were
2,320,000 registered OFWs.

Table 2.8. Distribution of Overseas Filipino Workers by Bex and Region (2014)

Source: Philippine Statistics Authority

2014 Survey on Oversea Filipinos
 Scattered all over the world, our overseas Filipino workers have been hailed
as our modern –day heroes, contributing to the growth of the ceremony and sending
millions of dollars to their families back home in the Philippines. The lack of jobs in
their native land, and the low wages for whatever jobs are available are the main
reasons Filipinos, both male and female, try to find work in foreign countries.
Oversupply of workers has resulted in low-wage levels since workers compete among
each other for these limited job openings. Those unwilling to work at these low-wage
levels look for greener pastures, which they find in foreign countries. They do a
wide variety of jobs; professionals, health workers, caregivers, engineers and
construction workers, entertainers, and teachers.
Lesson 3: Supply-Demand and Philippine Economic Problems

LEARNING OUTCOMES

In this lesson, learners are expected to:

1. Analyze how demand and supply forces can affect the value of the
Philippine peso in relation to foreign currencies;
2. Understand how savings channelled into investments can affect the
economy;
3. Explain the concept of minimum wage; and
4. Discuss why it is necessary for the government to impose taxes.

LEARNING CONTENT

Trading with other countries is also an important economic activity that

impacts on the economy. When we trade with other countries, we need a common
currency to use to pay for goods we buy from them and for them to pay for us for
goods we sell to them. When we travel to foreign countries, we may bring peso or
the US dollar, then convert them into local currency of the country which we visit.
For example, we convert our dollar into baht when we go spending in Thailand, to
rupees in India, euros in Spain and other European countries, and yen in Japan. This
is why we need conversion rates and these are based on the existing foreign
exchanges rates.
The rate of conversion of the Philippine peso to a foreign currency is reflected
in the exchange rate. If we have pesos that we need to convert into dollars, we need
to know the current exchange rate. These rates are dependent on the workings of
demand for and supply of the currency in the market. For example, if the US dollar
is in demand, the price of the dollar will increase and will be reflected in a higher
exchange rate in favour of the dollar, which means one will need more pesos to buy
dollars.

Exports
 Selling locally made products
 Means we earn dollars as payment for these goods bought by foreign buyers.

Imports
 We buy goods from other countries

Table 2.9. Peso-Dollar/ Euro Exchange Rates

Table Continuation below

 Source: Bangko ng Sntral ng Pilipinas, as of April 16, 2015

Table 2.9 lists the various currencies into which the Philippine peso is
convertible, the most commonly traded currency in the world is the US dollar.
Before the United States economy experienced economic recession in 2008 to 2010,
the dollar had a very high value in the market. In the Philippines, the dollar was at
its highest when we needed P55 to buy one dollar. Today, the exchange has gone
down to the level of P44 to P45 per dollar. This I likewise the effect of the workings
of demand and supply in the market. When the supply of a currency increases, its
value tends to decrease and we pay a lower price for it. When the demand for a
foreign currency increases, its value will increase and we pay a higher price for it.

We need foreign currencies to trade with other countries. When we buy

imported brands like Nestle chocolates, Prada bags, or Nike shoes, the importers
pay for these in the currency of the country from which we buy these goods. When
we visit England to see the famous London bridge or to visit the Westminster Abbey,
to catch a glimpse of Prince William or Prince Harry, and then go shopping at their
popular department store Harrods, we need to exchange our money into British
pounds so we can enjoy doing of all these.
HOUSING SHORTAGE AND THE REAL ESTATE BOOM IN THE PHILIPPINES

Demand and supply also play an important role in the Philippine real estate
situation. In the late 1990s, during the Asian financial crisis, construction hit low
levels in the Philippines. Some high profile construction projects were abandoned
and demand for housing was at a low level. Some real estate companies even had to
close. This was the effect of decreased demand for construction projects.

However, as soon as the Asian countries recovered from the crisis, the
construction sector also started to recover. High-rise condominium buildings and
townhouses started to bloom in the metropolis. In Metro Manila, we still continue
to see new buildings rising. The real estate boom currently being experienced in the
country may also be traced to the booming Business Process Outsourcing (BPO)
sector in the country. With the rising number of BPOs in the metropolis, there is a
need to put up offices, which also means an increase in the demand for commercial
spaces. And with more employees working in these offices, some moving from the
province to Metro Manila, there is also a rise in the demand for residential spaces.

Table 2.10 shows occupied housing units in order to give us an idea of demand
for housing in the country.

Table 2.0. Total Number of Occupied Housing Units in the Philippines by

Census Year, 1960 to 2010

Decennial Census Total Population ( in thousand)

1960 4,435.2
1970 5,668.8
1980 7,919.9
1990 11,161.7
2000 14,891.1
2010 19,715.7

Source: Philippine Statistics Authority, National Statistics Office, Aug. 2013

 The residential market in the country continues to grow because of Filipinos
who pursue their dream of owning houses. Rich people continue to have more options,
with new housing available at The Fort in the Global City in Taguig, as well as in
Alabang, in Makati, Quezon City, and Parañaque.

The increase in residential demand may also be traceable to the OFW sector,
with remittances allowing their families back home to buy more affordable houses.
Office buildings and high-rises continue to sprout all around us. We see numerous
construction sites, as developers try to meet the backlog in housing for Filipinos.
Promotion of housing developers is so aggressive, we walk around the malls and their
agents come up to us with beautiful brochures informing us of available condominiums
or townhouses with financing made easy, and with light terms for the buyer.

RENT AND PRICE STRUCTURE

Rent
 The layman’s concept of rent is payment for the use of land or buildings
belongings to others.
 It is the compensation made to the owner of such land or building.
 From the point of view of economics, it refers to a payment made to or for a
factor of production over and above the amount expected by its owner.
Economic rent
 Is the positive difference between the actual payment made for a factor of
production (such as land, labor, or capital) to its owner and the payment level
expected by the owner, due to exclusivity or scarcity.
 Economic rent exist due to market imperfections. Without market
imperfections, there would be no need for payment of rent.
Henry George (2014) describes the concept of rent in economics as follows:
“In the economic meaning of rent, payments for the use of any of the products
of human exertion are excluded, and of the lumped payments for the use of houses,
farms, etc., only that part is rent which constitutes the consideration for the use of
the land. The part that is paid for the use of buildings or other improvements is
properly interest, as it is a consideration for the use of capital.”

In short economic rent is any unearned income.

 BIBLIOGRAPHY

Books
Rosemary P. Dinio, PhD, et.al., Apllied Economics, First Edition,Manila Philippines, Rex
Bookstore

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