CHAPTER 1: REVISITING ECONOMICS
APPROACHES AND PRINCIPLES
ECONOMICS
● Is a social science which deals with the proper
allocation and efficient use of scarce resources
for the maximum satisfaction of human wants
(Fajardo, 1990)
● Economy is derived from greek word
“Oikonomus” or “Oikonomia” which means “One
who manages a household.
SCARCITY - Limited nature of society’s resources
DIVISIONS OF ECONOMICS
1. Microeconomics
Deals w/ the problems and analysis of behavior of
individual economic unit such as the consumer
(household), seller (firm), and owners of factors of
production
2. Macroeconomics
Deals w/ the problem of the whole economy and
how aggregated economic units or sectors such as
consumer, business, government and foreign
sectors are interrelated
2. Communism/Command economy: This is the
opposite of capitalism wherein the government
controls the economy.
3. Socialism: It s a mixture of capitalism and
communism.
FACTORS IN DECISION MAKING
1. People face tradeoffs.
2. Opportunity cost.
3. Making decisions at the margin.
4. People respond to incentives.
HOW INDIVIDUAL DECISIONS AFFECT OTHERS
5. Trade (exchange) can benefit everyone.
6. Markets are often a good way to organize
exchange.
7. Government can sometimes improve on markets.
THE CIRCULAR FLOW OF/ECONOMIC MODEL
HUMAN WANTS
Goods and services needed by human beings.
GOODS AND SERVICES
Those that yield satisfaction (tangible and intangible)
Classification of Goods:
1. Consumer Goods - Those that yield direct
satisfaction
2. Capital Goods - Those that are used in the
production of other goods (and services)
3. Essential Goods - These are the “basic” needs
of man
4. Luxury Goods - These are those that contribute
to mans comfort and wellbeing
RESOURCES
Refer to the factors or inputs of production. They are
those which are needed to produce goods and
services.
Classification of Resources
1. Land - natural resources, not man-made
2. Labor - physical and mental
3. Capital - anything that is used to produced other
goods and services.
4. Entrepreneurship - ability to organize and
coordinate land, labor, and capital
MICROECONOMICS AGENTS
Firms
- Produces and sell goods and services
- Buy inputs (labor,capital & raw materials)
Consumers/ Households
- Buy goods and services
- Sell inputs (labor services, loanable funds)
CHAPTER 2: DEMAND, SUPPLY, AND MARKET
EQUILIBRIUM
THE BASIC DECISION-MAKING UNITS
● A firm is an organization that transforms
resources (inputs) into products (outputs). Firms
are the primary producing units in a market
economy.
● An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking
a new idea or a new product and turning it into a
successful business.
● Households are the consuming units in an
economy.
THE CIRCULAR FLOW OF ECONOMIC ACTIVITY
BASIC ECONOMIC PROBLEMS
1. What goods and services to produce?
2. How to produce the goods and services and how
much?
3. From whom are these goods and services?
MODELS OF ECONOMIC SYSTEM
1. Capitalism/Market economy: Refers to the free
enterprise or laissez faire economy.
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The circular flow of economic activity shows the
connections between firms and households in
input and output markets
Output, or product, markets are the markets in
which goods and services are exchanged.
Input markets are the markets in which
resources—labor, capital, and land—used to
produce products, are exchanged.
Payments flow in the opposite direction as the
physical flow of resources, goods, and services
(counterclockwise).
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THE DEMAND CURVE
INPUT MARKETS INCLUDES
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The labor market, in which households supply
work for wages to firms that demand labor.
The capital market, in which households supply
their savings, for interest or for claims to future
profits, to firms that demand funds to buy capital
goods.
The land market, in which households supply
land or other real property in exchange for rent.
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DEMAND
● Demand is the schedule of various quantities of
goods and services w/c buyers are willing and
able to purchase at a given price, time and place
and all other factors are held constant (ceteris
paribus).
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“The only thing that affects the demand is the
price of the product.”
DETERMINANTS OF HOUSEHOLD DEMAND
A household’s decision about the quantity of a
particular output to demand depends on:
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price of the product
quality of the product
season
population
tastes and preferences
number of buyers
income of the buyers (inferior-/normal goods+)
prices of related products/goods (substitute
+/complementary-)
expected prices
religion
customs and tradition
promotion and advertisement
Quantity Demanded: is the amount (number of units)
of a product that a household would buy in a given
time period if it could buy all it wanted at the current
market price.
DEMAND IN OUTPUT MARKETS
THE LAW OF DEMAND
OTHER PROPERTIES OF QUANTITY DEMANDED:
● Demand curves intersect the quantity (X)-axis, as
a result of time limitations and diminishing
marginal utility.
● Demand curves intersect the (Y)-axis, as a result
of limited incomes and wealth.
INCOME AND WEALTH
● Income is the sum of all households wages,
salaries, profits, interest payments, rents, and
other forms of earnings in a given period of time.
It is a flow measure.
● Wealth, or net worth, is the total value of what a
household owns minus what it owes. It is a stock
measure.
RELATED GOODS AND SERVICES
● Normal Goods: are goods for which demand
goes up when income is higher and for which
demand goes down when income is lower.
● Inferior Goods: are goods for which demand falls
when income rises.
● Substitutes: are goods that can serve as
replacements for one another; when the price of
one increases, demand for the other goes up.
Perfect substitutes are identical products.
● Complements: are goods that “go together”; a
decrease in the price of one results in an increase
in demand for the other, and vice versa. (e.g.
3in1)
Shift of Demand Versus Movement Along a
Demand Curve
A Change in Demand Versus a Change in Quantity
Demanded
TO SUMMARIZE:
THE IMPACT OF A CHANGE IN THE PRICE OF
RELATED GOODS
PLOT THE DEMAND CURVE
PRICE
Qd
20
12
30
40
SUPPLY IN OUTPUT MARKETS
FROM HOUSEHOLD TO MARKET DEMAND
● Demand for a good or service can be defined for
an individual household, or for a group of
households that make up a market.
● Market demand is the sum of all the quantities of
a good or service demanded per period by all the
households buying in the market for that good or
service.
CHANGES IN DEMAND
A change in demand is a shift of the demand curve to
the right (an increase in demand), or to the left (a
decrease in demand).
● Shifts are cause by a change in one or more of
the determinants of demand.
THE SUPPLY CURVE AND THE SUPPLY
SCHEDULE
THE LAW OF SUPPLY
DETERMINANT OF SUPPLY
● The price of the good or service.
● The cost of producing the good, which in turn
depends on:
● The price of related products. (substitute
-/complementary+)
● Technology
● Price expectation
● Taxes and Subsidies
● Number of sellers
A CHANGE IN SUPPLY VERSUS CHANGE IN
QUANTITY SUPPLIED
PLOT THE SUPPLY CURVE
PRICE
Qs
20
2
30
40
MARKET EQUILIBRIUM
● The operation of the market depends on the
interaction between buyers and sellers.
● An equilibrium is the condition that exists when
quantity supplied and quantity demanded are
equal.
● At equilibrium, there is no tendency for the market
price to change.
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When supply shifts to the right, supply
increases. This causes quantity supplied to
be greater than it was prior to the shift, for
each and every price level.
TO SUMMARIZE:
MARKET DISEQUILIBRIA
INCREASE IN DEMAND AND SUPPLY
DECREASES IN DEMAND AND SUPPLY
RELATIVE MAGNITUDES OF CHANGE