Econ 111 - Basic Microeconomics Notes

Economics

• Economics is a social science that deals with the proper allocation of scarce resources to satisfy unlimited needs and wants.
• It is also defined as the efficient allocation of scarce means of production to satisfy human needs and wants.
• Two key concepts:
  • Scarce means of production: Economic resources like land, labor, and capital.
  • Efficient allocation: Using limited resources to maximize satisfaction.

Origin of the Word "Economics"

• Derived from Greek roots:
  • oikos: household
  • nomus: system or management
• "Oikonomia" or "oikonomus" means "management of household."

Adam Smith

• The father of Modern Economics.
• Author of "An Inquiry into the Wealth of Nations."
• Developed the concept of division of labor.
• Developed the "Theory of Invisible Hand."

Scarcity

• The basic and central economic problem.
• It is the heart of the study of economics.
• Definition: Limited availability of economic resources relative to unlimited demand for goods and services.

Factors of Production

• Four economic resources used as inputs in production:
  • Land
  • Labor
  • Capital
  • Entrepreneurship

Land

• All natural resources, God-given, and not man-made.
• Compensation for use of land is called rent.

Labor

• Any form of human effort exerted in the production of goods and services.
• Covers a wide range of skills, abilities, and characteristics.
• Examples: Factory worker, construction worker, doctor, lawyer, professor, economist, etc.
• Compensation for labor is called salary or wage.

Capital

• Man-made product used in the production of other goods and services.
• Includes buildings, factories, machinery, and other physical facilities used in production.

Entrepreneurship

• A person who organizes, manages, and assumes the risks of a firm.
• Takes a new idea or a new product and turns it into a successful business.
• Creates goods and services and is not considered part of labor.

Four Basic Economic Questions

• What to produce?
  • Identify the goods and services needed for society's utilization.
• How to produce?
  • Identify the different methods and techniques to produce goods and services.
  • Determine whether to employ labor-intensive or capital-intensive production.
    • Labor-intensive production: Uses more human resources or manual labor (e.g., Philippines, Vietnam, China).
    • Capital-intensive production: Employs more technology and capital goods (e.g., Japan, Germany, USA).
• How much to produce?
  • Identify the number of goods and services needed to meet the demand of man and society.
• For whom to produce?
  • Identify the people or sectors who demand the commodities produced.
  • Determine the target market for the goods and services.

Branches of Economics

Microeconomics

• Deals with individual/small decisions of units of the economy such as firms and households.
• Topics include:
  • Principles of demand and supply
  • Elasticity of demand and supply
  • Individual decision making
  • Theories of production, output, and cost of firms

Macroeconomics

• Looks at the economy as a whole (national, regional, or global level).
• Studies the relationship among broad economic aggregates such as:
  • National income
  • National output
  • Money supply
  • Bank deposits
  • GDP (Gross Domestic Product)
  • GNP (Gross National Product)
  • Unemployment
  • Inflation
  • Economic growth

Division of Economics

Positive Economics

• Uses objective or scientific explanation in analyzing economic transactions.
• Answers the question "What is?"
• Based on facts or theory.
• Example: Price rises when there is a shortage and price falls when there is a surplus.

Normative Economics

• Answers the question "What should be?" or how.
• Based on value judgment/option, which cannot be tested.
• Example: Price of rice should be higher to help farmers earn more.

Basic Decision Problems

Consumption

• The basic decision problem consumers face daily.
• Members of society determine what types of goods and services they want to utilize or consume.
• Individuals also decide the corresponding amount that they should purchase and utilize.

Production

• Primarily a concern of producers.
• Producers determine the needs, wants, and demands of consumers.
• They allocate their resources to meet these demands.
• Goods and services may be produced by different methods of production, depending on the firm's technological state and available resources.

Distribution

• Primarily addressed to the government.
• Requires a proper allocation of all resources for the benefit of the whole society.

Growth Over Time

• The last basic decision problem that a society or nation must deal with.
• Societies continue to live on and grow in numbers.
• All the problems of choice, consumption, production, and distribution have to be seen in the context of growth over time.

Efficiency, Effectiveness, and Equity

Efficiency

• Refers to productivity and proper allocation of economic resources.
• Concerns the relationship between scarce factor inputs and outputs of goods and services.
• Being efficient saves time, money, and increases a firm's output.

Effectiveness

• Means attainment of goals and objectives.
• Is an important and functional tool that can be utilized by other fields.

Equity

• Means justice and fairness.
• Technological advancement may increase production but can also be a disadvantage to employment of workers.

Economic System

• A means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country.
• Economic systems regulate the factors of production, including land, capital, labor, and physical resources.
• Encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

Types of Economic System

• A method a society uses to organize, allocate, and distribute goods, services, and resources.
• Encompasses production, distribution, and consumption.
• Key types include market, command, and mixed economies.
• Each has varying degrees of government involvement and private ownership.

Traditional Economy

• Basically a subsistence economy.
• A family produces goods for its own consumption.
• Decisions on what, how, how much, and for whom to produce are made by the family head.
• Commonly found in rural settings in second and third world nations.

Command Economy

• The manner of production is dictated by the government.
• The government decides on what, how, how much, and for whom to produce.
• Characterized by collective ownership of most resources.
• Has a central planning agency of the state.
• All productive enterprises are owned by the people and administered by the state.

Market Economy

• Based on the concept of free markets.
• The government exercises little control over resources.
• It does not interfere with important segments of the economy.
• Regulation comes from the people and the relationship between supply and demand.
• Basic characteristic is capitalism.
• Resources are privately-owned, and people make the decisions.
• Factors of production are owned and controlled by individuals.
• People are free to produce goods and services to meet the demand of consumers.
• Consumers are free to choose goods according to their own likes.

Mixed Economy

• A mixture of market system and command system.
• The Philippine economy is described as a mixed economy.
• Applies a mixture of three forms of decision-making.
• More market-oriented rather than command or traditional.
• Most industries are private, while the rest (primarily public services) are under the control of the government.

The Basic Analysis of Demand

Demand

• Refers to the quantities of goods and services that buyers are willing and able to buy at different prices within a given period of time.
• Implies three things:
  • Desire to possess a product
  • The ability to pay for it
  • Willingness in utilizing it

Method of Demand can be expressed in 3 forms

• Demand schedule
• Demand function
• Demand curve

Price

• What a buyer pays for a unit of the specific good or service.

Quantity Demanded

• Refers to the total number of units purchased at that price.

Demand Schedule

• A tabular form that shows the quantity demanded of a good or service at different price levels.
• Can be graphed as a continuous demand curve where the Y-axis represents price and the X-axis represents quantity.

Demand Function

• $Qd = a – bP$
• Qd = quantity demanded at a particular price
• a = intercept (the value of Qd if price is 0)
• b = slope of the demand curve (change in Qd for every one peso change in price)
• P = price of the good at a particular time period
• (-)P and Qd is inversely proportional

Law of Demand

• As the price increases, quantity demanded decreases, and as the price decreases, quantity demanded increases, ceteris paribus (other factors are constant).

Factors Affecting Demand

Consumer's Income (Y)

• The effect of income depends on the type of good.
• For most goods, there is a positive (direct) relationship.
• When income rises, the demand for the product will increase; when income falls, the demand for the product will decrease.
• These types of goods are called normal goods.

Taste and Preferences (TP)

• Changes in taste or preferences can cause people to want to buy more or less of a product.
• Include changes in advertisement, fashion, customs, habits, news/discovery, occasions, weather, etc.

Price Expectations (Pe)

• Consumers' expectations regarding future prices influence demand.
• If consumers expect prices to rise in the future, they will demand greater quantities now.
• If consumers expect prices to fall in the future, they will postpone consumption, decreasing present demand.

Number of Consumers

• Affected by population size.
• If the population grows, the demand for a certain product will increase.

Price of Other Goods

• Related goods tend to influence each other's demand.
• Two types: substitutes and complements.
  • Substitutes: When the price of a good increases, people tend to buy substitute products.
    • For example, if the price of Colgate increases, consumers buy less of Colgate and more of Close-up or Hapee.
  • Complementary: A good whose use is related to the use of an associated or paired good.
    • Two goods (A and B) are complementary if using more of good A requires the use of more of good B. For example, printers and ink cartridges.

The Basic Analysis of Supply

• Supply refers to the quantities of goods and services that sellers are willing and able to sell at different prices in a given period of time.

Supply Schedule

• A table that shows quantity supplied of a good or service at different price levels.
• Can be graphed as a continuous supply curve on a chart where the Y-axis represents price and the X-axis represents quantity.

Supply Function

• $Qs = c + dP$
• Qs = quantity supplied at a particular price
• c = intercept of the supply curve
• d = slope of the supply curve
• P = price of the good sold

Law of Supply

• As the price increases, quantity supplied increases, and as the price decreases, quantity supplied decreases, ceteris paribus (other factors are constant).

Factors Affecting Supply

1. Price
2. Price of Inputs
3. Technology
4. Number of Seller/Firms
5. Price Expectation
6. Taxes and Subsidies
   • Tariff
   • Sin Tax
   • Import Quotas
   • Rice Tariffication Law
7. Government Policies
8. Price of Related Goods
   • Substitute in Production
   • Complementary in Production
9. Season/Occasion
10. Weather/Climate

Market Equilibrium

• The meeting of supply and demand.
• Market: A situation where buyers and sellers meet.
• Equilibrium: A "state of balance".
• Market equilibrium: A balance that exists when quantity demanded equals quantity supplied.
• The general agreement of the buyer and the seller in the exchange of goods and services at a particular price and quantity.
• At the equilibrium point, there are the perspectives of both the buyer and seller.

Equilibrium Market Price

• The price agreed upon by the seller to offer goods or services and the buyer to pay for it.
• The price at which quantity demanded is exactly equal to quantity supplied.
• Market disequilibrium can lead to two conditions:
  • Surplus
  • Shortage

Surplus

• A condition where the quantity supplied is more than the quantity demanded.
• The seller will lower the market price.

Shortage

• A condition where quantity demanded is higher than quantity supplied at a given price.

Price Controls

• Specification by the government of minimum or maximum prices for certain goods and services.

Price Floor

• The legal minimum price imposed by the government on certain goods and services.
• A price at or above the price floor is legal; a price below it is not.
• The setting of a price floor is undertaken by the government if a surplus in the economy persists.

Price Ceiling

• The legal maximum price imposed by the government.
• Usually below the equilibrium price.