LECTURE 1:
INTRODUCTION
Can you live on 50 PhP a day?
*Data as of 2000
As of 2019, 67.5 daily
Why these alarming education
statistics?
Have our young Pinoys
lost interest in learning?
Because their parents
cannot afford the cost?
And the high cost does
not give them the
commensurate return on
their investments?
Because the teachers no
longer motivate nor
inspire?
Source: Virola, 2006. NSCB
Or is our society
transforming from
one that cherishes
education to one that
encourages boys and
girls to enroll in voice
and dancing schools,
and never mind if
they miss formal
classes?
Price of poverty or a
case of distorted
priorities?
If it is because of the
present high cost of
education, why was
education more
affordable in the good
old days?
Is there failure of
governance
somewhere?
How much does gov’t allocate on
public education?
Positive Economics
Statement
Normative Economics
Statement
We should spend at least
4% of our GDP on public
educational institutions.
Source: Virola, 2006. NSCB
How much resources do we allocate for
disaster control and management?
Origin of the word ‘Economics’
Ø Oikonomia
(oy-kon-om-eé-ah),
– Greek word that means
“household management”
What is Economics?
Methodology of economics
• Framework
• Assumptions (e.g., ceteris paribus)
• Models (math, graphs, equations)
It is a social science
that deals with the allocation
of scarce resources
to satisfy unlimited
human wants.
• Human
• Natural
• Physical
Economics is a science
“a body of systematized knowledge
concerning what is.”
§ seeks to explain the ‘why’ of things in the
world of economic behavior – production,
consumption, and distribution
§ Economic models - main tools used by
economists to explain economic phenomena.
§
Scarcity implies making choices.
OR
OR
Two Main Branches
Ø Microeconomics
-
studies behavior of individual economic units
households, firms, markets
Ø Macroeconomics
- Focus is on the whole/aggregate economy
- E.g., GNP, GDP, inflation, unemployment
Positive vs. Normative Economics
Ø
Positive Economics
- description and explanation of economic
phenomena
l Answers the question: “What is?”
•
•
•
•
The price of gasoline is Php 42.25/liter.
The population growth rate is 2.3%.
The minimum wage in NCR is Php 382/day
11 million Filipinos live on $1 a day
Positive vs. Normative Economics
Normative Economics
… is the application of positive economics
for the purpose of generating policy
prescriptions
Answers the question: “What should be?”
•
•
•
•
The price of gasoline should be Php 35.00/liter.
The population growth rate must only be at 2 %.
The minimum wage in NCR should be Php 400/day
Filipinos ought to live on at least $5 a day.
LECTURE 2:
The Economic Problem
What you have learned
in the last meeting
Ø Economics
l
l
l
is a social science.
Inquiry into the ‘why’ of things
Applies framework (way of thinking)
Uses models to explain complex reality
• assumptions e.g., ceteris paribus
• asserts that economic agents are optimizers
• normative vs positive economics
Ø
Ø
2 main branches: micro and macro
Scarcity is central to the study of economics
How would you choose
to use or allocate…
• 6 hours to study for Math, English and Econ
exams?
• Php 100 of your daily allowance?
• 5 hectares of agricultural land?
• Php 50 million of CDF if you were the
Governor of your province?
• Php 1 trillion budget for the Filipino people?
Scarcity of resources: Economic Problem
Problem of Choice; Problem of Allocation
The Four Basic Economic Problems
What to produce?
Ø How much to produce?
Ø How to produce?
Ø For whom to produce?
Ø
Systems of Allocation
• Economies run by tradition
• most ancient and prevalent way to solve
econ problem before 20th century
• Economies run by command
• ‘centrally-planned’ economies
• government decides on goods to produce
• Economies run by the market system
• completely unregulated market economy
Þ market is the institution that determines
the answers.
* actual economies fall somewhere in between
CETERIS PARIBUS
Ø
A Latin term that means “Holding all other
things equal or constant”
Examples
Ø I will enrol in Ateneo if the tuition fee is free,
cet. par.
Ø I will buy starbucks coffee if the price will go
down, cet. par.
Ø Filipinos prefers Jollibee to Mcdo, cet. par.
Lecture 3
Ten Principles of
Economics
TEN PRINCIPLES OF ECONOMICS
• A household and an economy
face many decisions:
– Who will work?
– What goods and how many of them
should be produced?
– What resources should be used in
production?
– At what price should the goods be
sold?
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
TEN PRINCIPLES OF ECONOMICS
Society and Scarce Resources:
– The management of society’s
resources is important because
resources are scarce.
– Scarcity. . . means that society has
limited resources and therefore cannot
produce all the goods and services
people wish to have.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
TEN PRINCIPLES OF ECONOMICS
§ Economics is the study of how society
manages its scarce resources.
§ Economists study how people make
decisions:
§ How much they work
§ What they buy
§ How much they save
§ How they invest their savings
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
TEN PRINCIPLES OF ECONOMICS
§ Economists also study how people
interact such as buyers and sellers.
§ Price determination.
§ Economists also analyze forces and
trends that affect the economy as a whole.
§ Growth in average income
§ The rate of price increase.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
HOW PEOPLE MAKE DECISIONS
§ There is no mystery to what an “economy”
is.
§ It’s a group people interacting with one
another as they go about their lives.
§ We start the study of economics with four
principles of individual decision making:
§ People face tradeoffs
§ The cost of something is what you give up to
get it.
§ Rational people think at the margin.
§ People respond to incentives.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 1: People Face Tradeoffs
“There is no such thing as a free lunch”
§ To get something we like, we usually have
to give up something we don’t like.
§ A student and her time:
§ Studying vs. napping or cycling.
§ Society’s tradeoffs:
§ Guns vs. Butter
§ Clean environment and higher income
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 1: People Face Tradeoffs
§ Society’s tradeoffs (cont’d):
§ Efficiency vs. Equity
§ Efficiency: Society getting the most it
can from its scarce resources.
§ Equity: Distributing economic
prosperity fairly among the members of
society.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 2: The Cost of Something
is what You Give Up to Get it
§ Making decisions requires comparing
the costs and benefits of alternative
courses of actions.
§ To go to university or not to go?
§ Opportunity cost: Whatever must be
given up to obtain some item
§ We define it as “The value of the best
forgone alternative use of the resource.”
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 2: The Cost of Something
is what You Give Up to Get it
Examples of Opportunity Cost
1. What do you give up to have good grades?
2. What do give up to have a fit body?
3. For you to have a good social life, what are the
things you need to give up?
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 3: Rational People Think
at the Margin
§ Marginal changes: Small incremental
adjustments to marginal changes.
§ Individuals and firms can make better
decisions by thinking at the margin.
§ By comparing the marginal benefits
(MB) with the associated marginal costs
(MC) of a decision.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 4: People Respond to
Incentive
• Marginal changes in costs or benefits
motivate people to respond.
• The decision to choose one alternative
over another occurs when that
alternative’s marginal benefits exceed its
marginal costs!
• There are good and bad incentives. Its up
to you how to make your workers
productive.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
HOW PEOPLE INTERACT
• The first four principles discussed how
individuals make decisions.
• The next three principles concern how
people interact with one another.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 5: Trade can Make
Everyone Better Off
• People gain from their ability to trade with
one another.
• Competition results in gains from trading.
• Trade allows people to specialize in what
they do best.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 6: Markets are Usually a
Good Way to Organize Economic
Activity
§ Market economy: An economy that
allocates resources through the
decentralized decisions of many firms and
households as they interact in markets for
goods and services.
§ Firms decide whom to hire and what to
make. Meanwhile, households decide
which firms to work for and what to buy
with their incomes.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 6: Markets are Usually a
Good Way to Organize Economic
Activity
§ Market economy: An economy that
allocates resources through the
decentralized decisions of many firms and
households as they interact in markets for
goods and services.
§ Firms decide whom to hire and what to
make.
§ Households decide which firms to work
for and what to buy with their incomes.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 6: Markets are Usually a
Good Way to Organize Economic
Activity
§ Invisible Hand: Adam Smith popularized this
idea to say that the government need NOT
to intervene or have minimal intervention
only, in the market.
§ He introduced the concept of Laissez faire
or Free market. Free Market can determine
the most efficient price of a good or a
commodity even without government
intervention.
§ This gave rise to market powers.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 7: Governments can
Sometimes Improve Market
Outcomes
§ When the invisible hand does not work.
§ Market failure: A solution in which a market left
on its own fails to allocate resources
efficiently.
§ Externality: The impact of one person’s actions
on the well-being of a bystander.
§ Market power: The ability of a single economic
actor (or small group of actors) to have a
substantial influence on market prices. (e.g.,
monopoly)
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 7: Governments can
Sometimes Improve Market
Outcomes
§ Why do we have the provision for state
universities?
§ Why do we have LRTs and MRTs?
§ Why do we have Day Care Centes?
§ Why do we have Universal Health Care?
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
HOW THE ECONOMY AS A
WHOLE WORKS
§ The last three principles concern the workings of
the economy as a whole.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 8: A Country’s Standard
of Living Depends on its Ability to
Produce Goods and Services
§ Standard of Living may be measured in
different ways (e.g. personal income or total
market value of a nation’s production.)
– Differences in standard of living between
countries or even provinces is attributable to
the productivity of the country or province.
§ Productivity: The amount of goods and
services produced from each hour of a
worker’s time.
Productivity => Standard of Living
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 9: Prices Rise when the
Government Prints Too Much
Money
§ When the government creates large
quantities of money, the value of the
money falls.
§ Inflation: General increase it the level of
prices
§ Hyperinflation: A period of icreasing
inflation
§ One cause of inflation is the growth in the
quantity of money.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 9: Prices Rise when the
Government Prints Too Much
Money
§ In Germany…
§ In January 1921, a daily newspaper cost
0.30 marks.
§ In November 1922, the same paper cost
70 000 000 marks.
§ Other case of hyperinflation
§ Zimbawe (2007)
§ Venezuela (2016)
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 10: Society Faces a
Short-Run Tradeoff Between
Inflation and Unemployment.
§ A tradeoff is where one thing increases
and another must decrease
§ In the short run, when prices are high,
producers are more enticed to produce
more, therefor, employing more workers.
§ This means, even though there is increase
in price (inflation), more workers are
employed (therefore reducing
unemployment).
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Principle 10: Society Faces a
Short-Run Tradeoff Between
Inflation and Unemployment.
§ Phillips curve: A curve that shows the
short-run tradeoff between inflation and
unemployment.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Summary
• When individuals make decisions, they
face tradeoffs among alternative goals.
• The cost of any action is measured in
terms of foregone opportunities.
• Rational people make decisions by
comparing marginal costs and marginal
benefits.
• People change their behavior in response
to the incentives they face.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Summary
• Trade can be mutually beneficial.
• Markets are usually a good way of
coordinating trade among people.
• Government can potentially improve
market outcomes if there is some market
failure or if the market outcome is
inequitable.
• Productivity is the ultimate source of
living standards.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
Summary
• Money growth is the ultimate source of
inflation.
• Society faces a short-run tradeoff between
inflation and unemployment.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition.
LECTURE 4:
Production Possibilities Frontier
Technological Choices and the Production
Possibilities Frontier (PPF)
Þ a tool useful for illustrating
choices available to society and its
constraints
Ø PPF º all the possible combinations of
the maximum amounts of two goods
and services that can be produced with
a given amount of resources and
technology
Ø PPF
Assumptions about the PPF
Ø Only
two goods are produced: food (F)
and cars (C)
Ø The society has limited resources (in
fixed supply)
Ø Resources can be transferred across
sectors
Ø The technology exhibits diminishing
marginal returns in the use of all inputs
Ø All productive inputs are fully utilized
Example of PPF: all resources used
Trade-off
A
B
C
D
E
F
OC or rate
of trade-off
DC
FOOD CLOTHING
CAR
DF DC
DF
(F)
(C) Specializing in
car prodn
0
1000
100
950
100 -50 -0.5
200
850
100 -100 -1
300
650
100 -200 -2.0
400
400Speciali- 100 -250 -2.5
500
0 zing 100 -400 -4
in food
prodn
Notes on the PPF (1)
Interpretation of points, say pt. D:
(1)
l
If we use all resources, we can produce at
most 300 units of Food and 650 units of
cars
Trade-off
(2)
l
If we want to ­ Food prodn, must ¯Car
Opportunity Cost of Food
(3)
l
l
amount of Cars that must be given up to
produce an extra unit of Food
Between points A and B, OC of F is 0.5
Notes on the PPF (2)
Opportunity cost
(4)
l
the value of the best foregone alternative
use of the resource
Rate of trade-off is increasing
(5)
l
in absolute value Þ increasing opportunity
cost of F
Implication
(6)
l
As we produce more of F, it gets harder to
substitute F for C
Graphical Illustration of PPF
C
1,200
1,000
A
800
Pts on the PPF are efficientfully employed resources using
best technology
B
D
Unemployment
of resources
600
I
400
Unattainable or
infeasible given current
resources and
technology
C
E
N
200
0
F
0
100
200
300
400
500
F
Does PPF answer Basic Econ
Questions?
Ø
What to produce?
l
Ø
How much to produce?
l
Ø
Shown by points along PPF
How to produce?
l
Ø
Shown by 2 goods on axes of PPF
Use technology that will enable economy to
produce goods represented by points along PPF
For whom to produce?
l
Not shown by PPF
Shifts in PPF
C
­ in resources and/or techno
improvements leads to an
outward shift in the PPF
­ in resources and/or techno
improvements in car
production only
­ in resources and/or techno
improvements in food
production only
­in resources and/or
techno improvements
of both F and C prodn
0
F