Applied Economics
Supply & Demand, Market Structures & Economic Indicators
Supply & Demand
Law of Demand
As price increases, quantity demanded decreases (and vice versa), ceteris paribus.
Inverse relationship: Price ↑ → Demand ↓
Law of Supply
As price increases, quantity supplied increases (and vice versa), ceteris paribus.
Direct relationship: Price ↑ → Supply ↑
Market Equilibrium
The price at which quantity demanded equals quantity supplied. At equilibrium, there is no shortage or surplus.
Surplus: Price above equilibrium → Qd < Qs
Shortage: Price below equilibrium → Qd > Qs
Demand Shifters (Non-Price Factors)
- Income: Normal goods ↑ with income; Inferior goods ↓
- Tastes/Preferences: Fashion, trends affect demand
- Price of Related Goods: Substitutes and complements
- Population: More buyers = more demand
- Expectations: Future price expectations
Supply Shifters
- Input Costs: Higher costs = less supply
- Technology: Better tech = more supply
- Number of Sellers: More suppliers = more supply
- Government Policies: Taxes, subsidies, regulations
- Natural Events: Weather, disasters
Market Structures
| Feature | Perfect Competition | Monopoly | Oligopoly | Monopolistic |
|---|---|---|---|---|
| Sellers | Many | One | Few | Many |
| Product | Identical | Unique | Similar/Different | Differentiated |
| Entry Barriers | None | High | High | Low |
| Price Control | None | High | Some | Some |
| Examples | Agriculture | Utilities | Telecom, Oil | Restaurants |
Perfect Competition
- Price takers (no market power)
- Homogeneous products
- Perfect information
- Free entry and exit
Monopoly
- Price maker (sets price)
- No close substitutes
- High barriers to entry
- Can earn long-run profits
GDP & National Income
Gross Domestic Product (GDP)
The total market value of all final goods and services produced within a country in a given period.
GDP = C + I + G + (X - M)
- C = Consumer spending
- I = Business investment
- G = Government spending
- X = Exports, M = Imports
Nominal GDP
GDP at current market prices. Affected by both quantity and price changes.
Real GDP
GDP adjusted for inflation. Uses constant prices from a base year. Better for comparison.
GDP Per Capita
GDP Per Capita = GDP / Population
Average output per person; indicator of living standards
Economic Indicators
Inflation
General increase in price levels over time, reducing purchasing power.
Inflation Rate = [(CPI new - CPI old) / CPI old] × 100
- CPI: Consumer Price Index measures price changes
- Causes: Demand-pull, Cost-push, Money supply
- Effects: Erodes savings, hurts fixed-income earners
Unemployment
People who are willing and able to work but cannot find employment.
Unemployment Rate = (Unemployed / Labor Force) × 100
Types:
- Frictional (between jobs)
- Structural (skills mismatch)
- Cyclical (recession)
- Seasonal (weather-based)
Business Cycle
The recurring pattern of economic expansion and contraction.
Interest Rates
The cost of borrowing money. Central banks (like BSP) use interest rates to control inflation and stimulate growth.
- Higher rates → Less borrowing → Slower growth
- Lower rates → More borrowing → Faster growth