ECONOMICS

- Study of how society choose to use the scarce resources provided by previous generation

*ADAM SMITH Father of Economics

Two central economic problems:

1. SCARCITY/SCARCE RESOURCES limited; reasons why people make a choice and why opportunity cost arise
2. MULTIPLICITY OF WANTS AND NEEDS unlimited

OPPORTUNITY COST *Marginal Benefit

- Whatever must be given to obtain some items *Marginal Cost
- Which we forgo or give up when we make choices Marginal additional/extra;
change in
- Forgone alternative

PRODUCTION POSSIBILITIES FRONTIER (PPF) Basic economic problem:

- Efficient level of production A. What goods to produce?
B. How are goods produce?
C. For whom are the goods produce?
D. How much to produce?

OPTIMAL METHOD OF PRODUCTION Use more abundant resources and less scarce resources
LABOR INTENSE TECHNOLOGY utilizes human labor than machine
CAPITAL INTENSE TECHNOLOGY utilizes more machine than human labor

Resources categories
1. LAND includes all natural resources
2. LABOR consists of physical action & mental activities to produce goods and services
3. CAPITAL man made-aid in production
4. ENTREPRENEURIAL ABILITY - combines land, labor & capital to make them more productive

BRANCHES OF ECONOMICS:
1. MICROECONOMICS concern with the behavior of individual units, households, factors of production
& firm
2. MACROECONOMICS concern with the economy as whole

MICROECONOMICS MACROECONOMICS
Individual decision making Economy as whole
Individual prices of goods & services general//overall price level
Individual income National/total income
Individual consumption/expenditure Total consumption/expenditure
Individual output Total output (GDP)
Number of people hired/fired in a particular area or region Total employment & unemployment
It examines the tree It sees the forest

MARKET bring together buyers & sellers

DEMAND
- Schedule or a curve that shows the various amount of a product that consumers are willing and able
to purchase at each of a series of possible prices during a specific period of time

Primary determinant of demand Requisites of demand

1. Price Willingness to buy
1. Non price determinant of demand Ability to buy
a. Income
b. Population
c. Taste & preferences
d. Price expectation
e. Price of related goods
Complement goods used together with another goods
Substitute goods used in place of another goods

DEMAND SCHEDULE
- Table showing the relationship between price and the corresponding quantity demanded

DEMAND CURVE
- Graphical representation of demand schedule

Characteristics
1. Depicts the situation of a given period of time
2. Demand curve slopes downward

LAW OF DEMAND
- Other things equal, as price falls, the quantity demanded rises, and as the price rises, the quantity
demanded falls
- There is a negative or inverse relationship between price & quantity demanded
Validity of law of demand:
CETERIS PARIBUS = all else equal; all other things remain constant

CHANGE IN QUANTITY DEMANDED occurs when there is a change in price

CHANGE IN DEMAND occurs when there is a change in non-price

SUPPLY
- Schedule or a curve that shows the various amount of a product that producers are willing and able to
make available for sale at each of a series of possible prices during a specific period of time

Primary determinant of supply Requisites of supply

1. Price Willingness to sell
Non price determinant of supply Ability to sell
1. Technology
2. Resource price
3. Number of sellers
4. Producer expectation
5. Price of other goods
6. Taxes & subsidies
LAW OF SUPPLY
- Other things equal, as price falls, the quantity supplied falls, and as the price rises, the quantity
supplied rises
Validity of law of supply:
CETERIS PARIBUS = all else equal; all other things remain constant
CHANGE IN QUANTITY SUPPPLIED occurs when there is a change in price
CHANGE IN SUPPLY occurs when there is a change in non-price

INFLATION increase in the overall price level. It happens when many prices increase simultaneously
DEFLATION decrease in the overall price level

HYPER INFLATION
- period of very rapid increase in the general price level
- It happened when price level increase is more than 3 digit rate annually
- Uncontrollable inflation

2 types of Inflation
A. Demand pull
inflation happens when the increase in aggregate demand grows faster than the increase in aggregate
supply which creates shortage of supply
excessive demand relatively to supply of goods
inability of producers to immediately increase supply
B. Cost- Push
Rising price in terms of per unit production costs

Per unit production Cost = total input cost / units of output

Nominal Income
- number of dollar received as wages, rent, interest and profits
Real Income
- measure of the amount of G&S that nominal can buy
- it is the purchasing power of nominal income
- measurement of standard of living

BENEFITS OF INFLATION
1. Those with flexible incomes
2. Gain to debtors

HURT BY INFLATION
1. Fixed-Income receivers
2. Savers
3. Creditors

REDUCING INFLATION
1. Identify which type of inflation. Each type needs a different response
2. Control the money supply & the government tendency to overspend
3. Avoid too much politicking

Inflation = current price index (CPI2) previous price index (CPI1)

Previous price index (CPI1)

Rule of 70 calculate the number of years requires for a doubling of the price level