Professional Documents
Culture Documents
METHODOLOGY OF ECONOMICS
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
Economic policies
What to produce
How to produce
For whom to produce
Economic Goals
Economic growth
Equitable distribution of income
Price stability
Full employment
Economic freedom
Economic security
Buyers
Transaction
Sellers
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
Supply Curve
Determinants of Supply
Resource price
Technology
Price of related goods or price of
competing products
Firms expectations about future prices
Number of suppliers
Taxes and subsidy
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.
Budget = Px Qx + Py Qy
Output = f (inputs)
Classification of Inputs
Production Periods
MP = TP / L
AP = TP / Labor
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.