What is Economics? A social science that deals with the allocation of scarce resources to satisfy man’s unlimited needs and wants. Utilitarian Principle – the greatest good for the greatest number of people. 1. Equity vs. Efficiency Equity – kung mas fair ba sa lahat Efficiency –Using less input to produce more output. 2. Short run vs. Long run Short-run – the decisions we make can have larger returns Scarce Resources – the resources are few/limited. 3 RESOURCES: 1. Land/Natural Resources 2. Labor/Human Resources 3. Capital Resources *All these resources are scarce. These resources are important because they are used to create goods and resources. • The number 1 problem in Economics is the problem of scarcity. It causes poverty, war, hunger, etc. Long-run Principle #2: The Cost of Something is What You Give Up to Get It. • • • • Making decisions requires comparing the costs and benefits of alternative choices. The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making. When we have to make a decision, we have to consider the opportunity cost. Opportunity Cost – relevant cost for decision making 3 MAJOR SUBDIVISIONS OF THE 10 PRINCIPLES OF ECONOMICS 1. How people make decisions 2. How people interact 3. How the economy as a whole works - It is what we gave up to obtain whatever we got from our choice It must be LOWER than our choice. Principles #3: Rational People Think at the Margin HOW PEOPLE MAKE DECISIONS Principle #1: People Face Tradeoffs • • People need to make a choice - Equity vs. efficiency - Short run vs. long run Whenever we make a choice, we have things that we need to consider because in every decision we make, there are consequences. Things to consider when we make a choice: Rational People – systematically and purposefully do the best they can to achieve their objectives. - - Make decisions by evaluating costs and benefits of marginal changes – incremental adjustments to an existing plan. What are the additional costs/gain on your part? Marginal changes – incremental adjustments to an existing plan. - Principle #4: People Respond to Incentives - Incentive – something that induces a person to act, i.e., the prospect of a reward or punishment. • • Rational people respond to incentives In Economics, incentives are more of a reward rather than a punishment. Between rewards and punishment, people respond more to reward rather than punishment in a business setting. Principle #5: Trade Can Make Everyone Better Off • • • Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Countries also benefit from trade and specialization: - Get a better price abroad for goods they produce - Buy other goods more cheaply from abroad than could be produced at home. No person or country has the monopoly of resources. Find your area of specialization and devote your resources there and then trade. Absolute Advantage – nobody else can produce it, the way you can. Comparative Advantage – marami kang kayang iproduce. Pero sa isang product, di ka masyadong magaling. HOW PEOPLE INTERACT Principles #6: Markets are Usually a Good Way to Organize Economic Activity - Market Economy – allocates resources through the decentralized decisions of many households and firms as they interact in markets. • Need not be in a single location. Need not be a place. It can be a situation. For it to be called a market, The interactions of buyers and sellers determines prices. Principle #7: Governments Can Sometimes Improve Market Outcomes Market Failure – when the market fails to allocate society’s resources efficiently. Example, if there is: Market power, a single buyer or seller has substantial influence on market price. • The government will intervene to even the playing field. So the situation will benefit both the producers and consumers. Price ceiling – maximum price allowed. HOW THE WHOLE ECONOMY WORKS Principle #8: A country’s standard of living depends on its ability to produce goods and services. • Market – a group of buyers and sellers. - there should be a buyer, seller, and commodity. Usually a good way to organize economic activity. A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets. The interactions of buyers and sellers determines the prices. • The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. If we want to increase our standard of living, we have to increase our production and productivity. Principle #9: Prices rise when the government prints too much money. Inflation – increases in the general level of prices - • In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. The faster the government creates money, the greater the inflation rate. Demand Pull Inflation – good inflation Cost Push Inflation – bad inflation Hyperinflation – pag-print ng mas maraming pera to increase income, pero hindi nag increase yung ability to buy the mga tao. - Printing additional money causes hyperinflation The faster the government prints money, the greater the inflation rate. Principle #10: Society faces a short-run tradeoff between inflation and unemployment • • . MAJORITY or ALL goods increased in price. Basket of goods – products na normally na binibili ng mga tao. • Stagflation – kapag ang economy ay tinamaan ng sabay na mataas na inflation rate at unemployment rate at hindi naagapan agad. LESSON 2: LAW OF DEMAND 2 PILLARS OF MICROECONOMICS 1. Law of Demand 2. Law of Supply In both Microeconomics and Managerial Economics, both are concerned with products and consumers. Managerial Economics would want to know how to run the business economically. To do that, the manager has to be guided by the different microeconomic theories: law of demand and law of supply. Demand – various quantities of goods and services consumers are willing and able to buy given different alternative prices. In the short run (1-2 years), many economic policies push inflation and unemployment in opposite directions. Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. Keynesian Economics – by John Maynard Keynes John Maynard macroeconomics Keynes – father of Demand Schedule – shows the different prices and the different quantities consumers are willing to buy. - Can show the law of demand Law of Demand – is a generalization of consumers’ behavior regarding price. - When the price increases, the quantity demanded goes down. When the price decreases, quantity demanded goes up. It assumes a “ceteris paribus” condition. If the situation is not ceteris paribus, we cannot guarantee law of demand. Ceteris Paribus – means holding all other factors constant. IF the condition is ceteris paribus = can claim law of demand. However, even on a ceteris paribus condition, there is an exception on the law of demand. This is goods of ostentation. Goods of Ostentation – when law of demand is not applicable. - NOTE: The relationship between price and quantity is inverse. Price and quantity demanded has negative relationship because when one increases, the other decreases. That is how consumers normally behave. This behavior is also seen in the demand Price and qD has a positive relationship Here, price increases and qD increases and as price decreases, qD decreases. Binibili ng consumers yung goods of ostentation kasi mataas ang presyo. Theory of Conspicuous Wealth – coined by Thorstein Veblen. - curve. - Goods of ostentation are the frivolous dresses of the women of leisure. Goods of ostentation ay binibili para ipagyabang. Hindi for its purpose, kundi para ipagyabang. DETERMINANTS OF DEMAND - Demand Curve – is a graphical presentation of demand. - Comes from the demand schedule Is downward sloping because of the inverse relationship between price and quantity demanded. Refer to the factors affecting demand. 1. Income - Will spell your ability to buy. - What could be expensive for you could be cheap for other people and vice versa. Relative – per person basis - The words cheap and expensive are relative. It depends on their ability to buy. - Their ability to buy depends on their income. Generally, as income increases, demand increases. And as income decreases, demand, decreases. Relationship of Population/Number of Consumers and Demand: As population increases, the Demand increases Superior Goods – these are the signs of progress. - Products that we buy as a sign that we are becoming rich. Normal Goods – works like superior goods. Relationship of Normal Goods and Superior Goods and Demand: As population decreases, the Demand decreases 3. Quality - Durability of the product; workmanship - If the quality worsens, less and less people would patronize the product. As Income (Y) increases, the Demand increases Relationship of Quality and Demand: As income (Y) decreases, the Demand decreases As the quality of the product improves, the Demand increases As the quality of the product worsens, the Demand decreases Inferior Goods – products that we do not want to buy anymore as we grow richer, because you feel you deserve something better than these goods. Relationship of Inferior Goods and Demand: As Income (Y) increases, the Demand decreases As income (Y) decreases, the Demand increases 4. Price of Related Goods a. Complements – are products that go together. - Ex. Coffee and sugar ; Cereal and Milk Relationship of Complements and Demand: As the price (P) of A increases, the Demand (D) for B decreases 2. Population/Number of Consumers - Yung product na binibili ay depende kung ilan yung mga gumagamit ng product. As the price (P) of A decreases, the Demand (D) for B increases b. Substitutes – replacement goods. - Products that are used for the same purpose and yield the same level of satisfaction. - the relationship of this only works for close substitutes. Example: Electricity ; Candle – not close substitutes because the capacity of candle is not the same as the capacity of the electricity. Relationship of Substitutes and Demand: As the price (P) of A increases, the Demand (D) for B increases As the price (P) of A decreases, the Demand (D) for B decreases *NOTE: This kind of relationship only works for close substitutes. 5. Price Expectation - Consumers shop with a budgetary constraint. Because of this, they want to be a step ahead. - If consumers expect an increase in price, consumers tend to panic buy. Price Expectation – forecast - Movement towards – you developed a liking for the product Movement Away – you used to like the product but you don’t like them anymore. Relationship of Taste and Preference and Demand: Anything that causes a movement toward a good will increase demand for that good Anything that causes a movement away from a good will decreases demand for that good 7. Advertisement Effective Advertisement – can be tested by the amount of sales. - An increase in sales means that the advertisement is effective Ineffective Advertisement – we do not expect any change on the demand. It will remain constant. Negative Advertisement – consumers didn’t like the advertisement. What we think will happen in the price in the future. Relationship of Price Expectation and Demand: As consumers expect an increase in Price (P), the Demand (D) increases As consumers expect a decrease in Price (P),the Demand (D) decreases 6. Taste and Preference - personal choice - there are different things that mold your taste and preference (e.g., culture, religion, season) Relationship of Advertisement and Demand: An effective advertisement will cause an increase in demand (D) An ineffective advertisement will cause demand (D) to remain constant A negative advertisement will cause the demand (D) to decrease Demand is not a mere desire to buy a product. For it to be considered a demand, ALL THREE MUST BE PRESENT: 1. Desire for the product 2. Willingness to pay for the product 3. Ability to pay for the product Qd = a-bP Where: a is the intercept of the Qd equation b is the slope of the Qd equation P is the price Intercept – value of the dependent variable when the independent variable is zero. Demand Function – equation for demand • • • Demand is a function of the different determinants of demand. Demand is a dependent variable. Demand for product x is a function of the price of product x, income of consumers, household size, quality of the product, price of the substitute goods, price expectation, taste and preference and advertisement. Therefore, a will be the value of Qd when P is zero. Slope – change in the dependent variable whenever the independent variable changes. The sign of the slope (b) is negative because the change in Qd is always opposite with the change in P. The relationship between the dependent variable (Qd) and the independent variable (P) is negative. Example: Qd = 5-2P Interpretation: a. Intercept When the price is zero, consumers are willing to consume as many as 5 units b. Slope • The most common demand equation is the two-variable (one dependent and one independent) Q = f(P) Quantity (Q) is a function (f) of Price (P) - It means that price only affects demand. If P will increase by 1 unit (peso), the Qd will decrease by 2 units. If P will decrease by 1 unit (peso), the Qd will increase by 2 units. • Yung symbol relationship. yung When P = 0, consumption is 10 nagsasabi ng a. Income - The Slope of Income and Quantity is positive because their relationship is positive. So if the income increases, the quantity also increases. - The product that is talked about here are superior goods because their relationship is positive. - The slope of the income can be negative when the given is inferior goods because their relationship of income and consumption in terms of inferior goods is negative. b. Population - The slope of the Po or population is positive which means as population increases, quantity increases and as population decreases, quantity decreases. c. Price Expectation - Its slope is also always positive d. Taste and Preference - Its slope can be positive and negative depending on the assigned dummy variable. e. Advertisement - Its slope can be positive or negative because its relationship towards quantity depends on 3 types of advertisements: effective, ineffective, and negative. CHANGE IN DEMAND AND CHANGE IN QUANTITY DEMANDED DEMAND QUANTITY DEMAND Quantity Demand (Qd) – is the particular quantity given a particular price Demand (D) – a range of quantities for a range of prices. CHANGE IN QUANTITY DEMAND (QD) Positive Negative CHANGE IN QD From 5 units to 6 units From 5 units to 4 units CHANGE IN DEMAND (D) Change in Demand – It at all price levels, you are willing to buy more. Positive change in Demand – means you are now willing to buy more at all price levels. So buong column ng demand yung papalitan hindi lang isa. Negative change in Demand – necessitates a decrease in everything. Change in Qd SUMMARY Same demand; change is from within Change in D Everything changes D = represents demand D1 = represents the new demand curve MOVEMENT ALONG THE DEMAND CURVE Change can be shown in graph. Change in Qd Change in D Movement along the D curve Shift of the D curve Price Qd Independent variable Dependent variable Movement Change • Depends on the independent variable (P) Depends on the dependent variable (Qd) Demand Curve – locus of points galing sa demand schedule. Shift to the Reflects a positive change in right Demand (D) Shift to the Reflects a negative change in left Demand (D) Change Movement in Qd along the demand curve Change Shift of the in D demand curve Kung ano ang galaw ni independent variable, which is Price (P), yun ang magiging movement along the demand curve. Downward Movement Upward Movement Price decreased Price increased Positive change in Qd Negative Change in Qd SHIFT OF THE DEMAND CURVE Price and Demanded Quantity Determinants of Demand (Income, Population , Quality, Price of Related Goods, Price Expectation, Taste and Preferences, Advertisements) REMEMBER: There will only be a change in Qd if and only if there is a change in the price of the good itself. There will be a change in D if the other determinants are involved. LAW OF SUPPLY Supply – taken from producers’ viewpoint - Various quantities of goods and services producers are willing and able to sell given different alternative prices. production as a way of increasing profits. - There is a direct relationship between price and quantity: quantities respond in the same direction as price changes. - The relationship between price and quantity supplied is positive. Producers – will be making sure that goods are available in the market SUPPLY SCHEDULE If ceteris paribus is present = can claim law of supply • - - - If price is 1 Peso, producers are willing to sell 10 units. But if price will increase by 2 pesos, then they will increase for 20 units. For different price levels, there will be different quantities supplied. Producers are more willing to sell when the price is high. Law of Supply – generalization of producers’ behavior regarding price. Because if the condition is not ceteris paribus, we cannot claim law of supply (same logic sa law of demand) Social Entrepreneurs – secondary lang sa kanila yung profit. - Ex. Environmentalists DETERMINANTS OF SUPPLY 1. Cost of Production/Input Prices - Biggest determinant next to price - How much money do they need to spend for them to be able to produce Relationship of Cost of Production/Input Prices and Supply: As the cost of production increases, supply decreases. As the cost of production decreases, supply increases. - Producers are more willing to offer more of a product for sale on the market at higher prices by increasing As consumers expect a decrease in Price (P),the Demand (D) decreases - - Cost of production affects small and medium entrepreneurs because they face the problem of scarcity in capital. The cost of production would dictate how much a producer needs to spend. 2. Technology - Refers to techniques of production - If our process/system improves, then we become better in producing a product so this will allow us to produce more. - If technology will deteriorate, supply will decrease. Relationship of Technology and Supply: As technology improves, supply increases. As technology deteriorates, supply decreases When can we say when technology has improved? - In production, we consider that technology improved if it takes us less resources to produce a unit of product. Relationship of Number of Sellers and Supply: As the number of sellers increases, supply increases. As the number of sellers decreases, supply decreases 4. Price Expectation - Hoard – means tinatago ng producers yung mga goods. May na-produce naman sila pero hindi nila binebenta. Relationship of Price Expectation and Supply: If producers are expecting an increase in price, supply will decrease. If the producers are expecting a decrease in price, supply increase. 5. Tax and Subsidy Tax – the flow of money is from people’s pockets to the government. - 3. Number of Sellers - If more sellers join the market, then there will be more of them producing the product. Since each producer contributes to the pool. - Every time a new seller joins the market, there will be more producers producing. If feeling ng mga producers, pataas na ng presyo, magkakaroon ng less supply in the market. Kasi producers resort to hoard or hoarding. Is an obligation Subsidy – the flow of money is from the government to the people. - Government assistance Is an option. Risk - the probability of incurring loss rather than gaining profit. 3 sectors 1. Agriculture 2. Manufacturing 3. Service Quantity Supplied (Qs) – refers to a particular quantity producers are willing to sell given a particular price. Supply (S) – refers to a range of quantities for a range of prices. Of these 3 industries, ang pinakamataas na risk ang agriculture. Binibigyan ng govt ng subsidy: infant industry and agriculture industry. Relationship of Tax and Subsidy with Supply: As the government imposes more and higher taxes, supply decreases. Supply Schedule – tabular presentation of supply. If the government extends more and higher subsidy, supply increases. 6. Political and Economic Conditions If politicians will make sound decisions, economy will prosper. Businesses are willing to pay premium to avoid disruption. Relationship of Political and Economic Conditions with Supply: If conditions are favorable to business, supply will increase. If conditions are unfavorable to business, supply will decrease. Change Movement in Qs along the supply curve Upward Movement – Positive change in Qs, Price increased Downward Movement – Negative Change in Qs, Price decreased Change Shift of the Shift to the right – in S supply Positive change in S curve Shift to the left – Negative Change in S MOVEMENT ALONG THE S CURVE – CHANGE IN QS CHANGE IN SUPPLY AND CHANGE IN QUANTITY SUPPLIED SHIFT OF THE S CURVE – CHANGE IN S Supply curve is upward sloping because of the positive relationship of price and supply. May mga panahon na may upward sloping na demand curve because of goods of ostentation. Supply curve will ALWAYS be upward sloping. The reason behind the positive relationship of Price and Supply is profit.
