Introduction to Basic Microeconomics (ECON 101)

Introduction to Economics

• Definition: Economics is the study of how individuals, families, businesses, and societies make critical decisions and allocate scarce resources to meet unlimited needs.
• The Economy: Created by the interaction of resources, people, businesses, governments, and markets to produce and distribute goods and services.
• Scarcity: The fundamental problem where resources are structurally limited while human desires are limitless.
• Choice: Because of scarcity, consumers must select among competing alternatives.

Core Economic Principles

• Opportunity Cost: The value of the next-best alternative sacrificed when making an economic selection.
  • Case study: A teacher pays $₱5,000$ for a workshop; the real economic cost is the $₱5,000$ fee plus the lost teaching wages.
• Invisible Hand: A metaphor by Adam Smith describing how self-interested individuals in a free market can accidentally promote the public interest through competition, leading to lower prices and better products.
• Ceteris Paribus: A Latin term meaning "other things being equal" used to isolate variables in economic theory.

Laws of Supply and Demand

• Law of Supply: $Ceteris Paribus$, when the price of a good increases, the quantity supplied increases. Conversely, when the price decreases, the quantity supplied decreases.
• Law of Demand: $Ceteris Paribus$, when the price of a good increases, the quantity demanded decreases. Conversely, when the price decreases, the quantity demanded increases.
• Market Interventions:
  • Price Ceilings (Cap): Keeps goods affordable but can lead to shortages (e.g., Rice Subsidies).
  • Price Floors (Floor): Guarantees baseline compensation but can lead to surpluses or lower employment demand (e.g., Minimum Wage Laws).

Trade and Decision Making

• Comparative Advantage: Trade is mutually beneficial if parties focus on what they produce relatively best, even if one is more efficient at everything.
• Voluntary Exchange: Increases overall welfare as parties trade what they value less for what they value more.
• Thinking at the Margin: Rational choices rely on incremental changes. Proceed only if $\text{Marginal Benefit (MB)} > \text{Marginal Cost (MC)}$.

Externalities and Efficiency vs. Equality

• Externalities: Costs or benefits imposed on bystanders not involved in a transaction.
  • Negative: Factory pollution.
  • Positive: Public vaccines.
  • Cures: Market incentives, pollution taxes, and carbon permits.
• Efficiency vs. Equality Trade-off:
  • Efficiency: Maximizing $GDP$ and output (e.g., automation).
  • Equality: Fair distribution of wealth (e.g., cash transfers).
  • Conflict: High taxes for social programs may reduce business investment incentives.

Branches of Economics and Modeling

• Microeconomics: Investigates specific behaviors of individuals, households, and firms (e.g., a coffee shop's pricing).
• Macroeconomics: Examines system-wide variables and national outcomes (e.g., inflation, unemployment, and interest rates).
• Production Possibility Frontier (PPF): Represents production boundaries.
  • Points on the curve: Efficient (maximum resources used).
  • Points inside the curve: Possible but inefficient.
  • Points outside the curve: Impossible with current resources.
• Circular Flow of Income: A model where firms pay wages to workers, and workers purchase products from firms.

Let’s Check Your Understanding

Direction: Identify whether each situation is an example of Microeconomics or Macroeconomics.

• Question 1: A bakery owner decides to increase the price of bread due to higher flour costs.
  • Answer: Microeconomics
• Question 2: The Philippine government monitors the country's inflation rate and unemployment rate.
  • Answer: Macroeconomics
• Question 3: A consumer chooses between buying a smartphone or a tablet based on their budget.
  • Answer: Microeconomics
• Question 4: The Bangko Sentral ng Pilipinas adjusts interest rates to control inflation.
  • Answer: Macroeconomics
• Question 5: A local restaurant studies customer preferences to determine which menu items to offer.
  • Answer: Microeconomics

Post-test

Direction: Identify the term or concept being described.

• Statement: The social science that studies how people allocate scarce resources to satisfy unlimited wants and needs.
  • Answer: Economics
• Statement: A situation in which human wants are greater than the available resources to satisfy them.
  • Answer: Scarcity
• Statement: The value of the next best alternative that is given up when a choice is made.
  • Answer: Opportunity Cost
• Statement: A Latin term meaning "other things being equal" or "all other factors held constant."
  • Answer: $Ceteris Paribus$
• Statement: A situation in which a third party is affected by an economic activity without being directly involved in it.
  • Answer: Externality
• Statement: The economic principle that explains how two parties can benefit from trade even when one party is more efficient at producing all goods.
  • Answer: Comparative Advantage