Studied by 47 people
Economics
Social science concerned with using scarce resources to obtain maximum satisfaction of the unlimited wants of society.
Oikonomia
Greek work for “household management”
Ceteris Paribus Assumption
Other things being equal or constant.
Optimizers
Economic agents are _________ (makes the most out of everything).
Normative Economics
Application of positive economics to create policies.
Positive Economics
Explanation of economic phenomena.
Production, consumption, and distribution
“Why’s” of economic behaviour.
Factors of Production
Land, labor, capital, and entrepreneurial ability.
Land
Land and natural resources.
Labor
Productive services embodied in human physical effort, skills, intellectual powers, and other.
Capital
Durable goods to produce other goods.
Entrepreneurial Ability
Ability to use the three factors of production to produce required goods and services.
Microeconomics
How individual consumers and firms behave, and how the market allocates scarce resources. Does not concern the temporary fluctuations in the economy.
Macroeconomics
Concerns the economy as a whole. Explains why fluctuations happen, and investigate policies that can mitigate them.
Output, Employment, and Inflation
Three essential phenomena of the economy
Goods, Labor, and Assets Markets of the Economy
Its interactions affect the three essential phenomena of the economy.
Economic growth
Full employment
Economic Efficiency
Price level stability
Economic freedom
An equitable distribution of income
Economic security
Balance of trade
Economic Goals
People face tradeoffs
1st principle of economics.
Equity
Benefits of resources are distributed fairly
Efficiency
Society gets the most out of its scarce resources.
The cost of something is what you give up to get it
2nd principle of economics
Opportunity Cost
What you give up to obtain an item.
Rational people think at the margin
3rd principle of economics
Marginal Changes
Small, incremental adjustments to an existing action plan.
People respond to incentives
4th principle of economics
Trade can make everyone better off
5th principle of economics
Markets are usually a good way to organize economic activity
6th principle of economics
Market Economy
Allocates resources through decentralized decisions or firms and households.
Firms
Concerns itself with who to hire and what to produce.
Households
Concerns itself with what to buy and who to work for.
Invisible Hand
Market is guided by an ____________.
Government can sometimes improve market outcomes
7th principle of economics
Market Failure
When the market fails to allocate resources efficiently.
Causes of Market Failure
Externality and Market Power
Externality
Impact of one person or firm’s actions on the well-being of a bystander.
Market Power
Ability of a single person or firm to unduly influence market prices.
The standard of living depends on a country’s production
8th principle of economics
Ways to measure standard of living
Comparing personal incomes, and comparing the total market value of a nation’s producation.
Productivity
The amount of goods and services produced from each hour of a worker’s time.
Prices rise when the government prints too much money
9th principle of economics
Inflation
Increase in the overall level of prices in the economy.
Growth in the Quantity of Money
One of the causes of inflation.
Society faces a short-run tradeoff between inflation and unemployment
10th principle of economics
Phillip’s Curve
There is a short-run inverse relationship between inflation and unemployment.
Economic Models
Used to simplify reality in order to improve our understanding of the world.
The Circular Flow Diagram and The Production Possibilities Frontier
Economic Models
The Circular Flow Diagram
Visual model of how pesos flow through markets among households and firms.
The Production Possibilities Frontier
Graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Pareto Efficiency
Occurs when no possible reorganization of production or distribution can make everyone better off without making someone else worse off.
Vilfredo Pareto
Person that “pareto efficiency” was named after.
There are only two goods produced
1st assumption in production possibilities frontier.
Fixed amount of production resources at a given time.
2nd assumption in production possibilities frontier.
Resources is readily available to be transferred from one sector to another
3rd assumption in production possibilities frontier.
Technology exhibits diminishing marginal returns in the use of productive outputs
4th assumption in production possibilities frontier.
All productive resources are fully utilized.
5th assumption in production possibilities frontier.
Diminishing Marginal Returns
More of one factor, while others are at a constant, will result in lower per-unit returns at some point.
Elasticity
The responsiveness or sensitivity of consumers and producers to price and income changes.
Elastic
>1
Inelastic
<1
Unit Elastic
=1
Perfectly Elastic
Infinite
Perfectly Inelastic
0
Price Elasticity of Demand
Degree of responsiveness of consumers to a price change.
Inelastic Demand
Essential
Less or no substitute
Change in price of product that has no effect on income or budget
Elastic Demand
Not so essential
Huge number of substitutes
With effect on income or budget
Price Elasticity of Supply
Responsiveness of producers’ supply following a change in the price of the product.
Cross Price Elasticity of Demand
Reaction of consumers’ demand to a change in the price of another product.
Exy is Positive
Product x and y are substitute goods.
Exy is Negative
Product x and y are complementary goods.
Exy is zero or near zero
Product x and y are independent goods.
Income Elasticity of Demand
Degree to which buyers’ demand respond to a change in their incomes.
Ei is Positive
Good is a normal good.
Ei is >1
Good is a luxury.
Ei is <1
Good is a necessity.
Ei is Negative
Good is an inferior good.
Demand
Refers to the number or amount of goods and services are willing and able to buy at a given price, place, and a period of time.
Law of Demand
States that as price increases, quantity demanded decreases (if other factors remain constant).
Consumers’ Income
Consumers’ Expectations of Future Prices
Prices of Related Products
Consumer Taste and Preference
Population
Non-price determinants of demand
Consumers’ Income
Affects the demand of normal and inferior goods.
Normal Good
Its demand increase when income increases. Basic necessities such as rice, utilities, medical and dental services.
Inferior Good
Its demand falls when income rises. Includes public transportation.
Consumers’ Expectation of Future Prices
Demand is affect by prices expected in future periods.
Prices of Related Products
Demand for any particular good will be affected by changes in the prices of related goods.
Substitute Goods
Goods that can be used in place of other goods.
Complementary Goods
Goods that cannot be used without the other.
Consumer Tastes and Preference
Affected by religion, culture, traditions, age, trend, technology, and many more.
Population
Increase in ________ means more demand for goods and services.
Demand Function
Representation of the relationship between demand and its determinants expressed using mathematical language.
Qdx = a - bPx + e
Linear equation of demand function.
Demand Schedule
Shows the tabular representation of the relationship between quantity of a good demanded and the price of that good.
Demand Curve
Shows graphically the relationship between the quantity of a good demanded and its corresponding price, with other variables held constant.
Change in Demand
Shifting from one demand curve to another. Brough by the changes in the non-price determinants of demand.
Change in Quantity Demanded
Movement along a demand curve. Brought to by change in the price of goods and services.
Supply
Refers to the amount or quantity of goods and services producers are willing and able to supply at a given price, at a given period of time.
Law of Supply
States that as price increases, quantity supplied also increases.
Change in technology
Cost of inputs used
Expectation of future prices
Price of related goods
Government regulations and taxes
Government subsidies
Number of firms in the market
Non-price determinants of supply
Supply Functions
Mathematical expression of the relationship between price and quantity supplied.
Qsx = c + dPx + e
Linear equation of supply function.
Supply Schedule
Shows the tabular representation of the relationship between the quantity of a good supplied and its price.
Supply Curve
Graph that shows the relationship between the quantity of a good supplied and its price, with other variables held at constant.
