Basic Mircoeconomics Prelims (Economic way of thinking, Demand and Supply, Market Equilibrium)

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Needs

Basic requirements essential for human survival and well-being

Wants

desires that can enhance the quality of life but are not necessary for basic existence

Land

All natural resources

Labor

any form of human effort

Capital

man-made goods in the production of goods and services

Entrepreneur

Person who combines the economic resources for use in the production of goods and services

Intangibility

Services lack physical substance and cannot be touched or stored

Inseparability

Services are often produced and consumed simultaneously; the provider and the customer are usually present during the service delivery

Perishability

Services cannot be stored or inventoried like products; unused capacity is lost

Heterogeneity/Variability

The quality of services may vary due to the human element involved in delivery

Scarcity

pertains to the limited availability of economic resources relative to society’s unlimited demand for goods and services.

Economics

A science that deals with the management of scarce resources to satisfy human needs and wants.

Oikos

Greek word meaning household

Nomus

Greek word meaning system or management

Oikonomia/Oikonomus

means management of household

Microeconomics

(division of economics) studies economy in parts. Is the study of price system, the individual consumer and the individual firm.

Macroeconomics

(Division of economics) deals with aggregates. It presents pictures of totals; income, output, employment, spending, and price level. It studies the economy as a whole.

Ceteris Paribus Assumption

means “all other things held constant or else equal.” This assumption is used as a device to analyze the relationship between two variables while the other factors are held unchanged

1700s-1800s

what years saw the birth of economic theory

Adam Smith

considered the most important personality in the history of economics; regarded as the “Father of Economics.” his analysis of the relationship between consumers and producers through demand and supply, which ultimately explained how the market works through the invisible hand

Wealth of the Nations

published in 1778, became known as the “bible ineconomics” for a hundred years

John Stuart and David Ricardo

developed the basic analysis of the political economy or the importance of a state’s role in its national economy

David Ricardo

Theory of comparative Advantage, based on this nations should export the goods which they enjoy the greatest advantage, and should import the goods which they have the greatest disadvantage

Karl Marx

Emphasized that labor must be socially necessary. Maintained that workers are the real producers of goods.

John Maynard Keynes

argued that inadequate overall demand could lead to prolonged periods of high unemployment. an English economist who offered an explanation of mass unemployment and suggestions for government policy to cure unemployment

John Hicks

was recognized for his analysis of the IS-LM model. The IS-LM model is a theoretical construction that integrates the real IS (investment-saving), and monetary , LM (demand for, and supply for money)

Positive Economics

is an economic analysis that considers economic conditions “as they are” , or considers economics ‘as it is” It uses objective or scientific explanation in analyzing the different transactions in the economy. It simply answers the question ‘what is’

Narrative Economics

Is economic analysis which judges economic conditions “as it should be ” is the aspect of economics that is concerned with human welfare. It deals with ethics, personal value judgments and obligations analyzing economic phenomena. It answers the question ‘what should be.’ Also referred to as policy economics

What to produce

An economy must identify what are the commodities needed to be produced for the utilization of the society in everyday life

How to produce

There is a need to identify the different methods and techniques in order to produce commodities. The society must determine whether to employ labor intensive production or capital intensive production.

Labor Intensive production

uses more of the human resource or manual labor in producing goods and services than capital resources

Capital Intensive production

employs more technology and capital goods like machineries and equipment in producing goods and services than labor resources

How much to produce

Identifies the number of commodities needed to be produced in order to answer the demand of the society.

Underproduction

will result to a failure to meet the needs and wants of the society.

Overproduction

results to excess goods and servicesgoing to waste

For whom to produce

Identifies the people or sectors who demand the commodities produced in a society

Business management

Business basically provides employment opportunities to members of the society, and is an important vehicle in the balance of economic activity

History

economic ideas provides information regarding theories that can be revisited in order to evaluate present and future economic issues.

Finance

Money and __ are important in the study of economics.

Physics

Innovations and output brought about by ___ greatly affect the

study of economics.

Sociology

The study of the behavior of societies and economics essentially deals with the behavior of economic subjects.

Psychology

___ is primarily useful in the study of microeconomics, which scrutinizes and focuses on the smallest units of the economy.

To understand Society

Economics seeks to analyze transactions made by the society and its members, particularly with regards to details on their behavior and decision making.

To understand Global affairs

Economics seeks to explain the internal operation and trade policies of countries, measures the competitiveness of each country, and identifies its comparative advantage in relation to other states.

To be an informed voter

An understanding of economics develops individuals to be wise voters by providing individuals with an understanding of economic policies.

Efficiency

Refers to productivity and proper allocation of economic resources

Equity

means justice and fairness

Effectiveness

means attainment of goals and objectives

Wealth

Refers to anything that has a functional values (usually in money), which can be traded for goods and services.

Consumption

Refers to direct utilization or usage of the available goods and services by the buyer or the consumer sector. also the satisfaction obtained by consumers

Production

Defined as the formation by firms of an output (products or services). the combination of land, labor, capita

Exchange

The process of trading goods and/or services for money and/or its equivalent. also includes the buying of goods and services

Distribution

The process of allocating or apportioning scarce resources to be utilized by the household, the business sector, and the rest of the world. It refers to the process of storing and moving products to customers often through intermediaries

Demand

One of the elements that make market economies work. In economics, pertains to the quantity of a good or service that people are ready to buy at given prices within a given time period. desire for goods or services and is backed up with sufficient purchasing power.

Demand Curve

traces the quantity of a good or service given a schedule of different prices.

Law of demand

the ___ states that holding all other things constant, the quantity demanded for a commodity or service is negatively or inversely related to its own price.

Thus, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises

Income

A higher ___ generally translates into greater ability to buy, and hence, raises the demand for goods and services.

Substitute good

a good that can be used in place of another good

Complementary good

a good that is consumed along with another good

Consumer tastes and preferences

New products and trends or fads influence consumer tastes

Expectations of future prices

The demand for specific commodities may also be affected by expectations about the future, i.e., future prices, future product availability, and future income

Unexpected events

Acts of nature and other ___ alter the demand for a good or service

Population/Number of buyers

An increase in the number of consumers affects the market demand for a good

Supply

is essential to the market economy. describes the behavior of firms that are producing and selling goods and services. In economics, it refers to the relationship between the price of a particular good and the quantity of the good that firms are willing to sell that price, all other things remaining the same

Law of supply

The higher the price, the higher the amount of quantity of a good that will be supplied by firms or producers. The lower the price, the lower the quantity of a good that will be brought to the market

Technology

Anything that changes the amount of outputs that a firm can produce with a given amount of inputs can be considered a change in ___

Change in the prices of resource inputs

When the prices of resource inputs such as raw materials, fuel products, and labor increase, it become costlier to produce goods. Firms would, therefore, sell less at any given price

Number of firms

The larger the number of sellers, the greater the market supply, other things remaining the same.

Expectations of future prices

Producers may withhold some of their current output in anticipation of higher prices in the next period. An anticipation of lower output prices in the future may cause firms to either increase supply now or reduce current production

Weather conditions

Typhoons, drought or other natural disaster reduces supply of agricultural commodities.

Government Policy

An increase in sales tax and other forms of taxes is an added cost to production and will decrease supply

Market Equilibrium

At a certain price, the quantity that consumers are, willing to buy matches the quantity that sellers are, willing to offer. There is neither excess supply or excess demand

Shortage

Quantity demanded is greater than quantity supplied

Surplus

An excess in supply

Price Ceiling

a maximum price at which a product can be sold. ____ are set lower than the equilibrium market price

Price Floor

minimum price at which a product can be sold. ____ are set higher than equilibrium price

Elasticity

The responsiveness (or sensitivity) to changes on certain factors (price, income etc.)

Price elasticity of demand

responsiveness of consumers’ demand to change in price of the goods sold.

Income elasticity of demand

responsiveness of consumers’ demand to change in their income.

Cross price elasticity of demand

is the responsiveness of demand for a certain good, in relation to changes in price of other related good

< 1

Inelastic

= 1

Unit elastic

> 1

Elastic

Inelastic demand

when price fluctuates, quantity demanded changes very little. Ex: Necessary good as insulin

Elastic demand

When price fluctuates, the quantity demanded changes a whole lot. Example: Goods and services with many substitutes

Positive income elasticity of demand

It refers to a condition in which demand for a commodity rises with a rise in consumer income and declines with a decline in consumer income.

Normal goods

Commodities with positive income elasticity of demand are ___

Negative income elasticity of demand

It refers to a condition in which demand for a commodity decreases with a rise in consumer income and increases with a fall in consumer income.

Inferior goods

Commodities with negative income elasticity of demand are ____

Cross elasticity of demand

refers to how sensitive the demand for a product is to changes in the price of another product.

Positive

The cross elasticity of demand for substitute goods is always ___ because the demand for one good increases when the price for the substitute good increases.

Negative

the cross elasticity of demand for complementary goods is ____. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.