Jayvie Simpan

8/3/2019 Jayvie Simpan

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MICROECONOMICSMICROECONOMICS


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CHAPTER 1:CHAPTER 1:ECONOMIC WAY

OF THINKING


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SCARCITYSCARCITY

commodity or service being in short supply.

limited availability of economic resources

relative to societys unlimited demand forgoods and services.

Since human wants and needs are unlimitedand the available resources are finite,scarcity naturally results leaving the societythe problem of resource allocation.


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ECONOMICSECONOMICS

science that deals with the problem ofresource allocation.

simply scarcity and choice.

From the two Greek words: oikos household and nomus system ormanagement.

Oikonomia/ Oikonomus management ofhousehold.


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CETERIS PARIBUS ASSUMPTIONCETERIS PARIBUS ASSUMPTION

all other things held constant or all elseequal.

used as a device to analyze relationshipbetween two variables while the otherfactors are held unchanged.


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CLASSICAL ECONOMICSCLASSICAL ECONOMICS

Adam Smith

Father of Economics.

wrote the Wealth of theNations which hadbeen the Bible ofEconomics for a hundredyears.

recognized Economicsas a separate body of

knowledge.

Birth of Economic Theory:


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John Stuart Mill

heir to David Ricardo.

developed the basic analysis of politicaleconomy or the importance of states rolein its national economy.

theory of political economy.

Karl Marx

influenced by the Industrial Revolution.

wrote Das Kapital from which major

socialist thought emerged.

CLASSICAL ECONOMICSCLASSICAL ECONOMICS


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NEOCLASSICAL ECONOMICSNEOCLASSICAL ECONOMICS

Leon Walras

introduced the general economic system.

developed analysis of equilibrium in severalmarkets.

Alfred Marshall

most influential economist during this time

because of his book Principles ofEconomics.

developed the analysis of equilibrium in aparticular market and the concept of

marginalism.


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KEYNESIAN ECONOMICSKEYNESIAN ECONOMICS

John Maynard Keynes

offered an explanationof massunemployment andsuggestions forgovernment policy to

cure unemployment inhis influential book:The General Theory ofEmployment, Interest

and Money (1936).


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NONNON-- WALRASIAN ECONOMICSWALRASIAN ECONOMICS

(1939)(1939) John Hicks

analyzed IS- LM

model, which isconsidered as animportantmacroeconomic

model.


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POSTPOST-- KEYNESIAN ECONOMICSKEYNESIAN ECONOMICS

(1940s and 1950s)(1940s and 1950s)

development of rules and regulations ofdifferent private and public institutions.

views are known as mainstreameconomics.


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NEW CLASSICAL ECONOMICSNEW CLASSICAL ECONOMICS

Highlighted the importance of adherence tonational expectations hypothesis and analysis.

Po

sitive Eco

no

mics economic analysis that considers economic

conditions as they are or considerseconomics as it is.

Normative Economics economic analysis which judges economic

conditions as it should be.

concerned with human welfare.


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FOUR BASIC ECONOMICFOUR BASIC ECONOMIC

QUESTION

SQUE

STION

S

1. What to Produce?

2. How to Produce?

- Labor Intensive

Production

- Capital IntensiveProduction


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FOUR BASIC ECONOMICFOUR BASIC ECONOMIC

QUESTION

SQUE

STION

S

3. How much to Produce?

- Underproduction failure to meetneeds/wants of society.

- Overproduction excess goods andservices going to waste

4. For Whom to Produce?

-target market - for those who can paythe highest price is for whom the goods andservices are produced.


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RELATIONSHIP OF ECONOMICSRELATIONSHIP OF ECONOMICS

TO OTHER SCIENCESTO OTHER SCIENCES

Business Management provides employment

opportunities to members of the society. History provides information regarding

theories that can be revisited to evaluatepresent and future economic issues.

Finance management of money, credit,banking and investment.


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RELATIONSHIP OF ECONOMICSRELATIONSHIP OF ECONOMICS

TO OTHER SCIENCESTO OTHER SCIENCES

Physics innovations and output.

Sociology behavior of societies;macroeconomics.

Psychology behavior of man;microeconomics.


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IMPORTANCE OFSTUDYINGIMPORTANCE OFSTUDYING

ECONOMICSECONOMICS

To understand society

To understand global

affairs

To be an informed voter


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3Es IN ECONOMICS3Es IN ECONOMICS

Efficiency productivity and properallocation of economic resources.

Equity justice and fairness.

Effectiveness attainment of goals andobjectives.


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IMPORTANT ECONOMICIMPORTANT ECONOMIC

TERMSTERMS

Wealth anything with functional value whichcan be traded for goods and services; stock of

net assets owned by individuals or households. Consumption direct utilization or usage of

available goods and services by the buyer/consumer sector.

Production formation by firms of an output.


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IMPORTANT ECONOMICIMPORTANT ECONOMIC

TERMSTERMS

Exchange process of trading goods andservices for money/ its equivalent.

Distribution allocating or apportioning scarceresources to be utilized by household, businesssector, and the rest of the world.


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2 MAJOR BRANCHES OF2 MAJOR BRANCHES OF

ECONOMICS

ECONOMICS

1. Microeconomics

- deals with individual decision of unit of

economy.

Market - central concept of

microeconomics.

Buyer and Seller - 2 main players


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2 MAJOR BRANCHES OF2 MAJOR BRANCHES OF

ECONOMICS

ECONOMICS

2. Macroeconomics

- studies the relationship among broad

economic aggregates; seeks to understandthe behavior of economy as a whole

Focuses on: consumption, investment,government spending, export and import.


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FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

Land all natural resources.

Labor any form of human effort exerted in

the production of goods and services. Capital man- made goods used in the

production of other goods and services.

Entrepreneur person who organizes,manages and assumes the risk of the firm,taking a new idea or a new product andturning it into a successful business.


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BASIC DECISION PROBLEMSBASIC DECISION PROBLEMS

Consumption problem that consumers mustalways deal with in day-to-day activities.

Pro

ductio

n determine the needs, wants anddemands of consumers; decide how toallocate resources to meet needs.

Distribution addressed to the government;

proper allocation of all resources for benefit ofthe whole society.

Growth over Time last basic decision that thesociety or nation must deal with.


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TYPES OF ECONOMIC SYSTEMSTYPES OF ECONOMIC SYSTEMS

Traditional Economy subsistence economy.

Command Economy type of economy

wherein the manner of production is dictatedby the government.

all productive enterprise are owned by thepeople and administered by the state


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TYPES OF ECONOMIC SYSTEMSTYPES OF ECONOMIC SYSTEMS

Market Economy capitalism; resources areprivately owned and the people make thedecisions.

Socialism key enterprises are owned by thestate.

Mixed Economy mixture of market system

and command system.


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CHAPTER 2:CHAPTER 2:

THE BASIC ANALYSIS

OF DEMAND AND

SUPPLY


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MARKETMARKET

Where buyers and sellers meet; wheretransactions take place.

Doesnt necessarily refer to a tangible area;can be itangible domain where goods andservices are traded (stock market, real estatemarket, labor market).

KINDS OF MARKET Wet market - vegetables, meats, etc

Dry market - shoes, clothes.


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DEMANDDEMAND

Quantity of good or service that people areready to buy at given prices within a given

time period, when other factors besidesprice are held constant.

3 THINGS THAT A DEMAND IMPLIES:

Desire to possess a thing Ability to pay for it or means of purchasing it

Willingness in utilizing it


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Lawof Demand - If the pricegoes up, the quantity

demanded will go down, andvice versa, ceteris paribus

Demand Schedule - table thatshows relationship of pricesand specific quantitydemanded at each of theseprices.

DEMANDDEMAND


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Demand Curve - graphicalrepresentation showing

relationship between priceand quantities demanded pertime period.

Negative slope (downward

from left to right)- indicatesthe inverse relationshipbetween the price andquantity demanded.

DEMANDDEMAND


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Demand Function - showsthe relationship betweendemand for a commodityand the factors thatdetermine or influence thisdemand.

Expressed inmathematical function

QD-= f(own price,income, price of related

goods, etc)

DEMANDDEMAND


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CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDEDVS. CHANGE IN DEMANDVS. CHANGE IN DEMAND

CHANGE IN QUANTITY DEMANDED

if movement is along the same demand

curve. Brought out by increase or decrease in

products price.

Direction of the movement is inverse according to the

Law of Demand.


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CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDEDVS. CHANGE IN DEMANDVS. CHANGE IN DEMAND

CHANGE IN DEMAND

If the entire demand curve shifts to the left

(decrease in demand) or right (increase indemand).

Increase (decrease) in demand is broughtby factors other than the price of the good

itself such as tastes and preferences, priceof substitute goods, etc. resulting in the shiftof the entire demand curve either upwardor downward.


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FACTORS THAT CAUSE THEFACTORS THAT CAUSE THEDEMAND CURVE TO CHANGEDEMAND CURVE TO CHANGE

Taste or preference- personal likes/dislikesof consumers for certain goods or services.

Changing incomes

Occasional/ seasonal products variousevents or seasons in a given year

Population change


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FACTORS THAT CAUSE THEFACTORS THAT CAUSE THEDEMAND CURVE TO CHANGEDEMAND CURVE TO CHANGE

Substitute goods goods interchanged with

another good Expectations of Future Prices if the buyer

expects the price of a food or service to rise(or fall) in the future, it may cause the current

demand to increase (or decrease)


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SUPPLYSUPPLY

Quantity of goods or services that firms are readyand willing to sell at a given price within a periodof time, other factors being held constant

Lawof Supply- as the price of a good or servicegoes up, the quantity supplied for such a good or

service will also go up, and vice versa, ceterisparibus

Implies that higher price is an incentive forbusiness firms to produce more goods or

services as this will maximize profit


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Supply Schedule- schedule listing the variousprices of a product and specific quantitiessupplied at each of their prices.

Supply Curve-graphical representation showingthe relationship between price of product orfactor of production and the quantity supplied pertime period

- Positive slope (Upward from left to right)

SUPPLYSUPPLY


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Supply Function- form of mathematical notationthat links the dependent variable, quantity

supplied (Q-S), with various independent variableswhich determine the quantity supplied

Q-s = f(own price, number of sellers, price of

factor inputs, technology, etc.)

SUPPLYSUPPLY


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CHANGE IN QUANTITY SUPPLYCHANGE IN QUANTITY SUPPLYVS. CHANGE IN SUPPLYVS. CHANGE IN SUPPLY

CHANGE IN QUANTITY SUPPLIED - movement isalong the same supply curve

Brought about by an increase (decrease) inthe products own price

Direction of the movement is positive

CHANGE IN SUPPLY - entire supply curve shiftsrightward or leftward; at the same price,more/less amounts of good or service are

supplied by producers/ sellers.


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FORCES THAT CAUSE THEFORCES THAT CAUSE THE

SUPPLY CURVE TO CHANGESUPPLY CURVE TO CHANGE Optimization of the use of factors of production-

process or methodology of making somethingas fully perfect, functional or effective as

possible; efficient use of resources (land, labor,capital, entrepreneurship)

Technological Change- introduction of cost-reducing innovations

Future Expectations

Number of Sellers

Weather Conditions

Government Policy- removing the quotas, tariff


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MARKET EQUILIBRIUMMARKET EQUILIBRIUM

Meeting of supply and demand

EQUILIBRIUM- state of balance that exists whenquantity demanded equals quantity supplied;

General agreement of the buyer and seller at aparticular price at a particular quantity

EQUILIBRIUM MARKET PRICE- price agreed by theseller to offer its good or service for sale and for

the buyer to pay for it

Price at which quantity demanded of a good isequal to the quantity supplied

Intersection of the demand and supply curves


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MARKET DISEQUILIBRIUMMARKET DISEQUILIBRIUM

Surplus- condition in the market where Quantitysupplied > Quantity demanded

Market prices decrease in order for goods to

be easily disposed from the market

Downward pressure to price

Shortage condition in the market whereQuantity demanded > Quantity supplied

Market prices increase

Upward pressure to price


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PRICE CONTROLSPRICE CONTROLS

specification of the government of minimumand maximum prices of goods and services

Imposed by the government if disequilibrium

in the market persists over a longer period oftime

Floor Price- legal minimum price imposed by

the government when the surplus in theeconomy persists

Price Ceiling- legal maximum price imposed bythe government if there is a persistent shortage

of goods in the economy


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PARTIAL EQUILIBRIUM ANALYSISPARTIAL EQUILIBRIUM ANALYSIS

Demand Equation: QD = a bP

Supply Equation: QS = -c + dP

Equilibrium Condition: QD = QS

3 Equations and Unknowns: QD, QS, P

Exogenous variable: Y

Parameters/ Coefficients: a, b, c, d


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CHAPTER 3


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ELASTICITY OF DEMANDELASTICITY OF DEMAND

means responsivenessElasticity

is a measure of the degree of

responsiveness variables which affect

demand for that product.

Demand

elasticity

is the responsiveness of consumers

demand to change in price of the good

sold.

Price Elasticity

of demand


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is the responsiveness of consumer

demand to change in their income.

Income

elasticity ofdemand

is the responsiveness of demand fora certain good, in relation to

changes in price of other related

goods.

Crosselasticity of

demand

ELASTICITY OF DEMANDELASTICITY OF DEMAND


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INTERPRETATATION OF THEINTERPRETATATION OF THE

ELASTICITY COEFFICIENTELASTICITY COEFFICIENT

Demand for a product is to be INELASTIC if

consumers will pay almost any price for the product,

while demand for a product may be ELASTIC if theconsumers will only pay a certain price.

means that producer or seller can raise prices

without much hurting demand for its product.

The demand for a good is inelastic when the

change in quantity demanded is lass than the

change in price.

INELASTIC

DEMAND


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ELASTICITY OF DEMAND

means that consumers are sensitive to the price atwhich a product is sold and will only buy it if the

price rises by what they consider too much.

Demand for a good elastic if the change in quantity

demanded is greater than the change in price.

ELASTICITY OF SUPPLY

supply elasticity refers to the reaction or response

of the sellers or producers to price changes of

goods sold.

it is measure of the degree of responsiveness of

supply to a given change in price.


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Is one who demands goods and

services

the king in a capitalist or free

market economy

Consumer SovereigntyConsumer Sovereignty our power to determine what is

produced since we are the ultimate

purchasers of goods and services

ConsumerConsumer


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GoodsGoods

-refer to anything that providessatisfaction to the needs wants and

desires of the consumer

any tangible economic products that

contribute directly or indirectly to the

satisfaction of human needs and wants

ServicesServices are any intangible economic activities

that contribute directly or indirectly to

the satisfaction of human wants


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y Economic good

is that which is both useful and scarce

has a value attached to it and a price has

to be paid for its use

y Free good

if a good is so abundant that there is

enough of it to satisfy everyones need

without anybody paying for it

KINDS OF GOODSKINDS OF GOODS


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TASTES AND PREFERENCESTASTES AND PREFERENCES

Determined by age , income, education,gender, occupation, and traditions as well as

culture

y Preferences

are the choices made by us consumers as to

which products or services to consume

y Brand

is the name, term or symbol given to aproduct by a supplier in order to distinguish

his offering from that of similar product

supplied by competitors


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Maslows Hierarchy of needsMaslows Hierarchy of needs identifies the basic priorities of every

consumer

y Physiological needs

are the basic need for sustaining human life

itself, such as food, water, warmth, shelter,sex, and sleep

y Safety needs

are the needs to be free of physical dangerand the fear of losing ones work, property,food, or shelter


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UtilityUtility refers to the satisfaction or pleasure that an

individual or consumer gets from the

consumption of a good or service that (s)he

purchases

Utility Theory explain how our satisfaction or utility as

consumer decline when we try to consume

and more of the same good at a particular

point in time


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2IMPORTANT CONCEPT OF2IMPORTANT CONCEPT OF

UTILITY THEORYUTILITY THEORY

Marginal utility

is defined as the additional satisfaction

that an individual derives from consuming

an extra unit of a good or service

Total utility

is the total satisfaction that a consumerderives from the consumption of a given

quantity of a good or service in a

particular time period


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Law ofDiminishing Marginal Utility states that as a consumer gets more

satisfaction in the long-run, heexperiences a decline in his satisfactionfor goods and services

Consumer Surplus is a measure of the welfare we gain from

the consumption of goods and services,or a measure of the benefits that wederive from the exchange of goods

Is the difference between the totalamount that we are willing and able topay for a good or service and the totalamount that we actually pay for that

good or service


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Concave Utility Curve

Marginal Utility

Convex Utility CurveTotal Utility Curve


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CHAPTER 5


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refers to any economic

activity, which combines the

four factors of production to

form an output which will

give direct satisfaction to the

consumer is the act of combining

the factors of production

by firms or institutions

in order to producegoods and services

is the process of

converting inputs

into outputs


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these are commodities and services that are used to produce

goods and services

Three broad categories of

inputs

Land-includes natural resources, represents the gift of nature

to our productive processes

Labor-is the mental and physical ability used in the production

of goods and services

Capital-are the goods that are used in the production of other

goods and services


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is the body of knowledge applied to how goods are

produced

Two broad categories oftechnology

utilizes more labor resources than capital

resources

Labor Intensive

technology

utilizes more capital resources than labor

resources in the production process

Capital Intensive

Technology


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Fixed Input - is any resource the quantity of

which cannot readily be changed when

market conditions indicate that a change inoutput is desirable

Variable Input - is any economic resource thequantity of which can be readily changed in

response to changes in output


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Short Run - is a

period of time so

short that there is atleast one fixed input

therefore changes in

the output must be

accomplishedexclusively by

changes in the use of

variable inputs

Long Run - is a period

of time so long that all

inputs are consideredvariable

known as

planning

horizon


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is the functional relationship between quantities of

inputs used in production and outputs to be produced

Three Important Production Concepts

refers to the total output produce after utilizing the

fixed and variable inputs in the production processTotal product

which equals total product divided by total units of

input usedAverage Product

is the extra output produced by 1 additional unit of

that input while other inputs are held constantMarginal Product


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