Comprehensive Study Notes on Microeconomics: Economic Systems, Demand, Supply, and Elasticity

Economic Systems & The Circular Flow of Economic Activities

• Pure Capitalism (Theoretical)

  • Primary Focus: Private property security, consumer sovereignty, and making a profit.
  • Characteristics: Minimum state interference; private business ownership; unchecked competition can sometimes create standard monopolies.
  • Example: Theoretical pure capitalism.

• Mixed Economy (Socialism / Hybrid Framework)

  • Core Drivers: A dual framework blending private market independence with state regulatory controls.
  • Primary Focus: Balancing economic freedom with government welfare safety nets.
  • Characteristics: Joint ownership of tools; citizens choose their careers; resource issues are handled via a mix of open market pricing and official laws.
  • Examples: The Philippines, the United States, Japan.

• The Circular Flow of Economic Activities

  • Traces the real and monetary flows flowing through a mixed economy.
  • The Three Main Economic Sectors:
  • Household Sector: The foundational consuming unit. It owns all primary resources/factors of production.
  • Business Sector: The foundational producing unit. It buys inputs from households and transforms them into goods and services.
  • Government Sector: The regulatory unit. It ensures fair trade and collects taxes, fines, and dues to fund social public services.
  • The Two Interacting Markets:
  • Input Market (Factor Market): The venue where households sell their resource inputs (land, labor) to buying business firms.
  • Output Market (Product Market): The venue where firms sell finished goods and services to households, utilizing the consumption spending of citizens.

Basic Microeconomics: Theory of Demand

• 1. Conceptual Foundations of Demand

  • Demand Definition: The volume of goods and services that consumers are both willing and financially able to buy at various price points during a set timeframe.
  • The Law of Demand: Ceteris paribus (holding all other variables constant), there is an inverse (negative) relationship between price ($P$) and quantity demanded ($Q_d$). When price goes up, quantity demanded goes down ($P \uparrow \rightarrow Q_d \downarrow$). This sets a downward-sloping demand curve.
  • Three Justifications for the Law of Demand:
  1. Substitution Effect: When a product's price jumps, buyers purchase cheaper alternative substitutes instead.
  2. Income Effect: Higher prices lower a consumer's real purchasing power, forcing them to buy less.
  3. Law of Diminishing Marginal Utility: Each extra unit of a good consumed provides less additional satisfaction than the previous one, so consumers will only buy more if the price drops.

• 2. Determinants of Demand & Mathematical Modeling

  • Price Determinants: Cause movements along a demand curve.
  • Non-Price Determinants: Cause shifts of the demand curve.
  • Determinants Breakdown & Economic Relationships:
  • Price ($P$): Price $\uparrow \rightarrow Q_d \downarrow$; Price $\downarrow \rightarrow Q_d \uparrow$ | Resulting Relationship: Inverse / Negative
  • Income ($I$) - Normal Goods: Income $\uparrow \rightarrow Q_d \uparrow$; Income $\downarrow \rightarrow Q_d \downarrow$ | Resulting Relationship: Direct / Positive
  • Income ($I$) - Inferior Goods: Income $\uparrow \rightarrow Q_d \downarrow$; Income $\downarrow \rightarrow Q_d \uparrow$ | Resulting Relationship: Inverse / Negative
  • Related Price ($P_r$) - Substitutes: Substitute Price $\uparrow \rightarrow Q_d \uparrow$; Substitute Price $\downarrow \rightarrow Q_d \downarrow$ | Resulting Relationship: Direct / Positive
  • Related Price ($P_r$) - Complements: Complement Price $\uparrow \rightarrow Q_d \downarrow$; Complement Price $\downarrow \rightarrow Q_d \uparrow$ | Resulting Relationship: Inverse / Negative
  • Price Expectations ($P_e$): Future Price Expected $\uparrow \rightarrow$ Current $Q_d \uparrow$ | Resulting Relationship: Direct / Positive
  • Tastes & Preferences ($T$): Consumer Preference $\uparrow \rightarrow Q_d \uparrow$ | Resulting Relationship: Direct / Positive
  • Number of Consumers ($N$): Market Buyers $\uparrow \rightarrow Q_d \uparrow$ | Resulting Relationship: Direct / Positive
  • Range of Alternatives ($R$): Available Similar Goods $\uparrow \rightarrow Q_d \downarrow$ | Resulting Relationship: Inverse / Negative

• The Demand Functions

  • Generalized Function:$Q_d = a - bP \pm cI \pm dP_r + eT + fP_e + gN - hR$
  • Ordinary Function:$Q_d = a - bP$
  • Variables Defined:
  • $a$ (intercept): The quantity demanded if price is zero.
  • $b$ (slope): Represents the change in $Q_d$ per unit change in price.

• Math Application: Deriving the Ordinary Demand Equation & Schedule

  • Problem Context: Given the Generalized Function:     $Q_d = 836 - 7P + 9I + 13P_r + 6T + 16P_e + N - 3R$
  • Parameter Values: $I = 3$, $P_r \text{ (substitute)} = 8$, $T = 10$, $P_e = 13$, $N = 100$, $R = 30$.
  • Step 1: Substitute values into the generalized equation$Q_d = 836 - 7P + 9(3) + 13(8) + 6(10) + 16(13) + 100 - 3(30)$
  • Step 2: Solve operations$Q_d = 836 - 7P + 27 + 104 + 60 + 208 + 100 - 90$
  • Step 3: Simplify to find the Ordinary Equation ($Q_d = a - bP$)$Q_d = 1245 - 7P$
  • Steps 4 & 5: Construct the Demand Schedule by plugging in prices
  • If $P = 30$: $Q_d = 1245 - 7(30) = 1035$
  • If $P = 60$: $Q_d = 1245 - 7(60) = 825$
  • If $P = 85$: $Q_d = 1245 - 7(85) = 650$
  • If $P = 105$: $Q_d = 1245 - 7(105) = 510$
  • If $P = 120$: $Q_d = 1245 - 7(120) = 405$

Basic Microeconomics: Theory of Supply

• 1. Conceptual Foundations of Supply

  • Supply Definition: The maximum quantity of goods and services that producers are willing and able to offer for sale at various prices.
  • The Law of Supply: Ceteris paribus, there is a direct (positive) relationship between price and quantity supplied ($Q_s$). When a product's price goes up, producers increase production to capture higher profits ($P \uparrow \rightarrow Q_s \uparrow$). This sets an upward-sloping supply curve.

• 2. Non-Price Determinants of Supply & Curve Shifts

  • Cost of Inputs ($C$): Costs $\uparrow \rightarrow Q_s \downarrow$ (Inverse relationship).
  • Technology ($T_e$): Innovation $\uparrow \rightarrow$ Efficiency $\uparrow \rightarrow Q_s \uparrow$ (Direct relationship).
  • Taxes ($T_x$) vs. Subsidies ($S_b$):
  • Taxes act as costs, reducing supply ($T_x \uparrow \rightarrow Q_s \downarrow$).
  • Subsidies are financial assistance, increasing supply ($S_b \uparrow \rightarrow Q_s \uparrow$).
  • Price of Related Goods ($P_r$):
  • Substitutes: If a substitute's price rises, resources switch to that good, cutting the original product's supply.
  • Complements: If a complement's price rises, joint production increases supply for both.
  • Other Factors:
  • Number of Sellers ($N$): Direct relationship ($N \uparrow \rightarrow Q_s \uparrow$).
  • Resource Availability ($A$): Direct relationship ($A \uparrow \rightarrow Q_s \uparrow$).
  • Favorable Weather/Season ($W$): Direct relationship ($W \uparrow \rightarrow Q_s \uparrow$).
  • Future Price Expectations ($P_e$): Inverse relationship — sellers hold back current stock if they expect higher future prices ($P_e \uparrow \rightarrow \text{Current } Q_s \downarrow$).

Introduction to Market Elasticity

• 1. Conceptual Framework of Elasticity
  • Definition: Elasticity measures the quantitative responsiveness of one economic variable to a change in another.
  • Mathematical Formulation:$\varepsilon = \frac{\%\Delta x}{\%\Delta y}$
  • Symbolic Key:
  • $\varepsilon$ represents epsilon (elasticity).
  • $\Delta$ represents change.
  • $x$ is the independent variable.
  • $y$ is the dependent variable.