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CHAPTER 1 NATURE, SCOPE AND

METHODOLOGY OF ECONOMICS

Economics

Greek word Oikonomia which means


household management which later on
became known as state management
Only recognized when Adam Smith
wrote his book An Inquiry into the
Nature and Causes of the Wealth
of Nations published in 1776
Considered as the Queen of Social
Sciences

Wealth of Nations became the bible of


economics for centuries
Adam Smith considered as the Father of
Modern Economics
Four Significant Concepts in the
Definition of Economics

Science
Social science as it involves
choices
o Choice involves sacrifice of its
alternative uses which is also
known as opportunity cost
o Opportunity cost refers to an
alternative action that should
have been undertaken instead.
It measures things that must be
given up or sacrificed when one
chooses one alternative over
the other.
Scarcity of resources
o Resources considered scarce
Human labor and
entrepreneurial abilitites
Non-human land and
capital
o Scarcity the fundamental
problem in any society. It limits
our options to choose.
o There is no such thing as a free
lunch. a core philosophy in
economics
Human wants

2 Big Branches in the Study of


Economics

Macroeconomics concerned with


the study of the aggregate economy
or the economy of ones country as a
whole. Considers the performance of
the four sectors in the economy
o Four Sectors in the Economy
Household
Business
Government
Foreign sectors
Microeconomics concerned with
the study of the behaviour of
individual consumer and firm or
industry in the economy or it looks
only at specific economic units of a
country

Descriptive economics involves


compiling or gathering of data relevant to a
particular problem

Primary data collected for ones


present purposes using direct
observation, surveys, and interviews
Secondary data collected from
statistical agencies like data on prices,
employment, interest, and national
income or the GDP

Theoretical economics the process of


deriving theories and principles
Economic theory

A generalization based on a variety of


facts about why or how an economic
event occurs
Helpful in solving economic problems
and serve as a guide in economic
planning and formulating economic
programs
Represented by models
When put into action, it becomes an
economic policy.

Economic policies

Courses of action based on economic


principles and are intended to solve a
specific economic problem and to
achieve economic goals
Typically implemented and
administered by the government
o Examples

Decisions made about


government spending
and taxation
Redistribution of income
Supply of money

Effectiveness of Economic Policies

Positive economics attempts to


describe how the economy and
economic policies work without
resorting to value judgments. The
distinguishing feature of this is that it
can be tested and either confirmed or
rejected based on facts.
Normative economics involves the
use of value judgments to assess the
performance of the economy and
economic policies

Interest the income payment


for capital
Entrepreneur someone who
combines land, labor, and capital to
produce goods and services. One who
assumes the risks in the quest for
profit
o Normal profit the income
payment for entrepreneurs.
Profit = Total revenue
total cost
Normal profit is always
positive while profit can
be positive, negative or
even zero.
o

Cost of production payment for the


factors of production. Money that comes out
from the producer

Inductive or empirical method applied


when researches are conducted from facts to
theory or from specific observations to
making generalized explanations about the
observed phenomenon
Deductive method precedes from general
behaviour to particular behaviour or from
theory to facts
Function a quantitative relationship
expressed in the form of an equation in
which one or more independent variables
uniquely determine the values of the
dependent variable

CHAPTER 2 SCARCITY AND THE


ECONOMIC SYSTEM
Classification of Resources

Land refers to God-given resources


used in production. It includes all
natural resources.
o Rent payment for the use of
land
Labor refers to the physical and
mental exertions of man to produce
goods and services
o Wages a general term used for
the payment of labor
Capital a man-made resource used
to produce other goods and services

Production Possibilities Curve (PPC) a


curve which depicts the trade-off between
two commodities. Helps society to better
understand and appreciate the significance
of scarcity, choice, and opportunity cost
Basic Problems in Economics is to
determine the most efficient and effective
way to allocate resources

What to produce
How to produce
For whom to produce

Economic system a set of economic


institutions that dominates a given economy

Institution a set of rules of conduct,


established ways of thinking, or ways
of doing things
Principal objective to solve the basic
economic problems

Four Main Types of Economic Systems

Traditional Economic System


economic decisions are made based
on customs and traditions
Market Economy or Free
Enterprise Economy or Capitalism
advocates forces within a
competitive market, which constitute
the invisible hand to determine how
resources should be allocated
Command System or the Centrally
Planned Economy or
Socialism/Communism relies on
the government to decide how the
countrys resources would be best
allocated
Mixed System or Mixed Economy
a combination of the market economy
and command economy

Economic Goals

Economic growth
Equitable distribution of income
Price stability
Full employment
Economic freedom
Economic security

Millennium Development Goals (MDGs)


these objectives were agreed upon by the
189 country members of the United Nations
in September 2000

Goal 1. Eradicate extreme poverty and


hunger.
Goal 2. Achieve universal primary
education.
Goal 3. Promote gender equality and
empower women.
Goal 4. Reduce child mortality.
Goal 5. Improve maternal health.
Goal 6. Combat HIV/AIDS, malaria and
other diseases.
Goal 7. Ensure environmental
sustainability.
Goal 8. Develop a global partnership
for development.

One of the programs of government to


accelerate the achievement of the MDGs is
the adoption Conditional Cash Transfer (CCT)
from Latin America which was dubbed as the
Pantawid Pamilyang Pilipino Program (4Ps).

Pantawid Pamilyang Pilipino Program


(4Ps) implemented by the Arroyo
administration in 2008, pursued by the
Aquino administration which benefitted 3.8
million families by 2012
Economic goods goods and services
which command a price
Zero-priced goods goods which does not
need to be paid for
Expenses money that comes out from the
consumer
Revenue payment received by the
producer from sale of the goods.
Synonymous to total sales

Total Revenue = Price x Quantity (TR


= PxQ)

Income payment money when received


by the consumer

CHAPTER 3 MARKET DEMAND AND


MARKET SUPPLY
Market exists as long as there are buyers
and sellers who agree on the price, hence a
transaction takes place
Market price or equilibrium price the
agreed price
3 Elements of the Market

Buyers
Transaction
Sellers

Demand refers to the quantity of a product


or service that the buyer is willing and able
to purchase at various possible prices
Ceteris paribus Latin words, All other
things constant
Law of Demand the higher the price of
the good, the lesser the quantity demanded
or the lower the price, the higher the
quantity demanded all other things held
constant
Demand function Qd = 80 + 4P

Demand schedule a list or table that


shows the inverse relation between price and
quantity demanded

Demand curve a locus of points that


shows the inverse relation between price and
quantity demanded
Determinants of Demand

Income
o Inferior or giffen goods
products whose demand
increases when income of
buyers declines
Tastes and preferences
Prices of related goods and services
o Substitute goods Example: If
price of rice increases, demand
for bread increases.
o Complementary goods
Example: If price of bread
increases, the demand for
butter declines.
Buyers expectations about future
prices
Number of buyers

Change in demand occurs when there is


a change in any of the other determinants of
demand. The entire demand curve will shift
either to the left or to the right if the other
determinants of a demand curve allowed to
vary.
Supply shows the different quantities of
good that sellers are willing and able to sell
at any given time at various possible prices
other things constant
Law of Supply demonstrates the direct
relation between the price and quantities
that will be sold. The higher the price, the
higher the quantity supplied.

Supply Curve
Determinants of Supply

Change in quantity demanded occurs


when there is a change in the price of the
good itself

Resource price
Technology
Price of related goods or price of
competing products
Firms expectations about future prices
Number of suppliers
Taxes and subsidy

Change in quantity supplied occurs


when there is a change in the price of the
good itself all other things constant
Effect of a Decrease in Demand

Change in supply occurs whenever any of


the other determinants of supply changes
Equilibrium

Means that all forces in the market are


in balance
Attained where quantity demanded is
equal to quantity supplied

Effect of an Increase in Supply

Surplus the excess of the quantity


supplied over quantity demanded
Shortage when the quantity demanded is
higher than quantity supplied
Equilibrium price the most stable price in
the market
Effect of a Decrease in Supply
Supply Increases, Demand Increases

Effect of an Increase in Demand


Supply Decreases, Demand Increases

Supply Decreases, Demand Decreases

CHAPTER 4 APPLICATION OF DEMAND


AND SUPPLY AND THE CONCEPT OF
ELASTICITY
Price ceiling or price control a
maximum legal price fixed by the
government on consumers goods like rice,
oil and sugar to keep prices from further
rising
Price support or floor price a minimum
price set by the government on producers
good to keep prices from further decline

Minimum wage the lowest daily wage


that employers may legally pay to workers.
Minimum wage is 426 pesos. Usually above
the equilibrium wage
Elasticity the dependent variable with
respect to change in independent variable
can be responsive, quite responsive
Four Kinds of Elasticity

Price Elasticity of Demand


measures the degree of
responsiveness of quantity demanded
due to changes in the price of the
good itself, other things constant
o Types
Elastic or Relatively
Elastic has flatter
demand curve. Example:
products which are
considered luxuries and
have a lot of substitutes
Unitary or Unit Elastic
Demand products for
which buyers allocate a
specific amount. Its curve
shows the percentage
change in quantity
demanded proportioned
to percentage change in
price.
Inelastic or Relatively
Inelastic Demand
products which are
considered basic goods

Perfectly Elastic
Demand a horizontal
demand curve. Its slope
is infinite or undefined.
Example: pure
competition
Perfectly Inelastic
Demand has a vertical
demand curve. Example:
a good which is
considered extremely
important at a given time
Income Elasticity of Demand
o Measures the degree of
responsiveness of quantity
demanded due to changes in
the consumers income other
things constant
o Income elasticity of demand
coefficients can be positive or
negative depending on the type
of product.
o For normal good, income
elasticity of demand is positive.
An increase in income will
normally increase quantity
demanded for that goods.
Cross Elasticity of Demand
o Measures the degree of
responsiveness of quantity
demanded due to changes in
the price of related goods, other
things constant
o It is positive when the goods
and services under study are
substitutes and for
complementary goods, it is
negative.
Price Elasticity of Supply
o Measures the degree of
responsiveness of quantity
supplied due to changes in the
price of the good itself other
things constant
o Works similarly to price
elasticity of demand. When
price elasticity of supply is
greater than one, supply is said
to be elastic. When less than
one, supply is inelastic and
when equal to one, it is unitary.

However, when supply is


perfectly inelastic, the elasticity
coefficient is equal to zero with
a vertical supply curve.
Perfectly elastic supply is
illustrated using a horizontal
supply curve with an elasticity
coefficient of infinity.

Factors that Affect Elasticity of Demand

Number of close substitutes available


Luxuries and necessities
Percentage of income spent on a good
Time period under consideration

CHAPTER 5 THE THEORY OF


CONSUMER BEHAVIOR

Indifference Curve shows different


combinations of two goods that can be
consumed that yield the same level of
satisfaction or utility
Indifference map a series of indifference
curve

Utility refers to the degree of satisfaction


per unit of consumption
Two Theories Regarding Consumer
Behavior

Cardinal Utility Theory a theory


which states that utility is measurable
o Utils the unit of measurement
for satisfaction
o Saturation point total utility
peak
Ordinal Utility Theory also called
the Indifference Theory which states
that utility is not measurable but can
only be ranked or compared
o Rational consumer a choice
one may always maximize
satisfaction or minimize
expenses (practical in short
siguro ito)

Law of Diminishing Marginal Utility


states that as one consumes more and more
of a particular good, marginal utility
decreases

Budget line a locus of points that shows


different combinations of two goods that can
be purchased given the same money income
or budget
Budget function a mathematical equation
showing various combinations of 2 goods
that can be purchased given the same
budget or income

Budget = Px Qx + Py Qy

Budget schedule a list or table that


shows various combinations of two goods
that can be purchased given the same
money income
Consumers equilibrium the point where
the budget line is tangent to the indifference
curve

CHAPTER 6 THEORY OF PRODUCTION


AND COST

Production function shows a technical


relationship between the firms inputs and its
output

Output = f (inputs)

Classification of Inputs

Fixed inputs inputs whose quantity


is not changed by the firm, regardless
of its reasons. Examples: factory
capacity and entrepreneur
Variable inputs inputs whose
quantities can readily be changed like
labor and raw materials

Marginal product (MP) the additional or


extra product contributed by the last worker

Three Stages of Production

Production Periods

Very short-run period or the


immediate period a production
period in which all factors of
production used by the firm are fixed
inputs
Short-run period a production
period in which some inputs used by
firm are fixed while others are variable
Long-run period a production
period in which all the inputs used in
production of the firm are variable
inputs

MP = TP / L

Stage of Increasing Returns this


stage is where any addition in variable
input used, TP increases at an
increasing rate. It is where the
production level is not yet efficient
because this is a stage of
underutilization of the fixed input.
Stage of Decreasing Returns this
is the stage where the producer
continuously employs more labor input
to a fixed land, total product
continuously increases at a decreasing
rate until it reaches the maximum
production level at 52 units
Stage of Negative Returns
referred to as the stage of overutilization of the fixed input

Economic cost the payment for the inputs


that the firm uses in the production
processes
Explicit cost monetary expenditures paid
to outsiders who supply the inputs
Implicit cost the cost of self-owned or selfemployed resources
Total Fixed Costs are those costs that do
not vary with output like rentals and their
amount would be the same even if output is
one unit or one million units. The sum of all
fixed costs, constant and its curve is a
horizontal line.

Law of Diminishing Marginal Returns


The law states that as successive units of
variable inputs are added to fixed inputs,
total product increases at an increasing rate,
continuously increases at a decreasing rate
and at a certain point total product declines.
Average product (AP) total product per
unit of the variable input

AP = TP / Labor

Total Variable Costs costs that vary


directly with output (like costs of labor and
raw materials). TVC is rising as more is
produced and falling as less is produced. It is
the sum of all variable costs. It increases as
output increases, hence TVC curve is upward
sloping.
Total cost the sum of total fixed costs and
total variable costs
Average Fixed Cost (AFC) fixed cost per
unit of the product. AFC declines as output

increases with an asymptotic curve along the


horizontal axis.
Average Variable Cost (AVC) total
variable cost per unit of output. It initially
decreases, reaches a minimum and rises as
output expands.
Average Total Cost (ATC) cost per unit of
output. This decreases as output increases,
reaches minimum then increases. ATC and
AVC are U-shaped curve. ATC is also the sum
of AFC and AVC.
Marginal Cost (MC) the additional or the
extra cost associated with the additional unit
of the goods produced

Long-Run ATC Curve composed of shortrun ATC curves which represent the various
plant sizes a firm is able to operate in the
long run
Economies of scale exists when long-run
average costs decline as output rises, and
larger firms will be more efficient than
smaller firms
Diseconomies of scale said to exist in the
range where average costs rise with
increases in output. It emerge because
managerial skills have reached the point of
diminishing returns.

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