ECONOMICS

WHAT IS ECONOMICS?
• Economics is a social science concerned with the
production, distribution, and consumption of goods and
services. It studies how individuals, businesses,
governments, and nations make choices on allocating
resources to satisfy their wants and needs, trying to
determine how these groups should organize and
coordinate efforts to achieve maximum output.
 TYPES OF ECONOMICS
• Microeconomics focuses on how individual consumers
and firm make decisions; these individuals can be a single
person, a household, a business/organization or a government
agency.

• Macroeconomics studies an overall economy on both a

national and international level. Its focus can include a distinct
geographical region, a country, a continent, or even the whole
world.
 5 ECONOMIC QUESTIONS SOCIETY
(WE) MUST FIGURE OUT
• WHAT to produce ?(make)
• HOW MUCH to produce/(quantity)
• HOW to Produce it?(manufacture)
• FOR WHOM to Produce?(who gets what)
• WHO gets to make these decisions?
 WHAT ARE ECONOMIC
RESOURCES?
Economic Resources-
the things we used to
make other goods
 SCARCITY
Pertains to unlimited
wants and needs but
limited resources
2 TYPES OF SCARCITY
• Relative Scarcity-is when the goods is
scarce compared to its demand.
• Absolute Scarcity- is when supply is
limited
WE MUST MAKE
CHOICES
 WHAT ARE NEEDS AND WANTS?
Needs-“stuff” we must have to survive,
generally: food, shelter, clothing.
Wants– “stuff” we would really like to have
 OPPORTUNITY COST

The Value of the Next Best

Choice
SO HOW DO WE GET ALL THIS “STUFF” THAT WE
HAVE TO DECIDE ABOUT? DECISIONS,
DECISIONS…
 PRODUCTION
•Production-Is how much stuff
an individual, business,
county or even the world can
make
WHAT DO WE NEED TO
MAKE ALL OF THIS
STUFF?
 4 FACTORS OF PRODUCTION
• LAND – Natural Resources–
Water, natural gas, oil, trees (all the stuff we find on, in, and under the
land)
• LABOR – Physical and Intellectual
Labor is manpower
• CAPITAL-Tools, Machinery, Factories– The things we use to make things–
Human capital is brainpower, ideas, innovation
• ENTREPRENEURSHIP – Investment $$$– Investing time, natural resources,
labor and capital are all risks associated with production
 ECONOMIC SYSTEMS
Is the means through which society
determines the answers to the basic
economics problems. A country may be
under the following types or even a
combination of the three economic systems:
 ECONOMIC SYSTEMS

• Traditional economy- decision are based on

traditions and practices upheld over the years
and passed on from generation to generation.
Methods are stagnant and therefore not
progressive. Traditional societies exist in
primitive and backward civilization.
 ECONOMIC SYSTEMS

• Command economy- this is the authoritative system

wherein decision-making is centralized in the
government or a planning committee. Decisions are
imposed on the people who do not have a say In what
goods are to be produced. This economy holds true a
dictatorial, socialist, and communist nations.
 ECONOMIC SYSTEMS

Market economy- this is the most democratic form of

economic system. Based on the workings of demand
and supply, decisions are made on what goods and
services to produce. People’s preferences are
reflected in the prices they are willing to pay in the
market and are therefore the basis of the producers
decisions on what goods to produce.
 SCIENTIFIC APPROACH IN THE
EMPIRICAL TESTING OF AN ECONOMIC
THEORIES
• State the prepositions or conditions that are taken as given and do not need
further investigations as the basic starting point of investigation.
• Observes facts in connection with the activity that we want to theorize.
• Apply the rules of logic to the observed facts to determine causal relationships
between observed factors and to eliminate facts that are unnecessary and
irrelevant.
• Establish a set of principles such as that formulated hypotheses may be tested
to whether thay are valid or not.
• Use statistics and econometrics as empirical proof in testing the hypotheses.
 DIFFERENTIATE POSITIVE ECONOMICS FROM
NORMATIVE ECONOMICS

• Positive economics “deals with what is”- things that

are actually happening.
• Normative economics ”refers to what should be- that
which embodies the ideal such as such as an ideal
rate of population growth or the most effective tax
systems.
 MEASURING THE ECONOMY
GROSS NATIONAL PRODUCT (GNP)- is the market value of final products, both sold and unsold,
produced by the resources of the economy in a given period.

GNP = C + I + G + ( X - M)
Where:
C= household and individual consumptions
I= investment
G = government expenditure of goods and services
X = export
M = import components
ECONOMICS AS AN APPLIED SCIENCE

is the application of rconomic

theory and econometrics in
specific settingf eith the goal of
analyzing potential outcomes.
THE PHILIPPINES BASIC ECONOMIC PROBLEMS

• UNEMPLOYMENT- is a situation where people who are willing and able to work are
seeking work but can not find jobs
• POVERTY- is the state of being extremely poor. It is a condition where people’s
basic needs for food ,clothing and shelter are not being meet.
POVERTY LINE- refers to a minimum income level used as an official standard
for determining the proportion of a population living in poverty.
• BOOMING POPULATION GROWTH- is another basic econoics problem that can
be connected to the issue of scarcity; is the increase in the number of individuals in a
population.
 ASEAN ICON
LEE KUAN YEW (1923-2015)
Is an economic icon and an example of how a
leader of a previously undeveloped country can lead
to overcome its country’s basic economic problems
prosperous nation in shoutheasr asia.
APPLICATION OF
DEMAND AND
SUPPLY
 LEARNING OBJECTIVES

• Explain the law of supply ad demand.

• Discuss and explain the factors that affect demand and supply
• Apply the principles of demand and supply to illustrate how
prices of commodities determined.
• Distinguish between elastic and in elastic demand and supply.
WHAT DO YOU MEAN
BY MARKET?
 2.1 BASIC PRINCIPLES OF DEMAND AND
SUPPLY

• Market – is an interaction between buyers and

sellers of trading or exchange. It is where the
consumers buy and the seller sells.
• Goods Market-is the most common type of
market because it is where we buy consumers
goods.
• Labor Market- is where workers offer services and
look for jobs, and where employers look for a worker
to hire.
• Financial Market- which includes the stock market
where securities of corporations are traded.
• Purely Competitive Market- (similar products) the
agreed price between a buyer and seller is also the
market price or price for all
WHAT IS THE
MEANING OF
DEMAND?
 DEMAND
is the willingness of a consumer to buy a commodity at a
given price. A demand schedule shows the various quantities the
consumer is willing to buy at various prices. A demand functions
shows how the quantity demanded of a good depends o its
determinants, the most important of which is the price of the good
itself, thus the equation:
Qd = f (P) Qd= Quantity demanded – Price/2
 DEMAND SCHEDULE

PRICE PER BOTTLE NUMBER OF BOTTLES

0 6
2 5
4 4
6 3
8 2
10 1
 DEMAND CURVE
12

P 10
R 8
I 6
C 4
2
E
0
0 1 2 3 4 5 6

QUANTITY
• Income Effect- is felt when a change in the price of a
good changes consumer’s income or purchasing power,
which is the capacity to buy with a given income or in
other words purchasing power is the volume of goods and
services one can buy with his/her income.
• Substitution Effect – is felt when a change in the price of
a good changes demand due to alternative consumption
of substitute goods.
 THE LAW OF DEMAND

• Ceteris Paribus- which means all other related variables except

those that are being studied at the moment are held constant, there
is an inverse relationship between price of a good and the quantity
demanded for that good. As the price increase, the quantity
demanded for that product decreases. The low price of the good
motivates the consumers to buy more. When price increases, the
quantity demanded for the goods decreases.
 NON-PRICE DETERMINANTS OF DEMAND

• Which includes income, taste, expectations,

prices of the related goods, and population. These
non-price determinants can cause an upward or
downward change in the entire demand for the
product and this change is referred to as a shift of
the demand curve.
The demand function will now read:
D = f (P, T, Y, E, PR, NC)
Which states that the demand for a good is a
function of Price(P), taste (T), income(Y).
expectations(E), price of the related goods
(PR), and the number of consumers (NC)
 Substitute Goods- are those that are used in place
of each other, like butter and margarine and sugar and
artificial sweeteners. In the case of substitute goods, an
increase in the demand for one good leads to a
decrease in the demand for the other goods. So, if the
price of the goods increases, the demand for the goods
will decrease while the demand for its substitute goods
will increase.
 Complementary goods- are those goods that
are used together, such as a cellphone and a sim
card, a car and car tires, and coffee and creamer. In
case of complementary goods, an increase in the
demand for a good will lead to an increase in the
demand for the complements since they are used
together. Thus, if the price of the goods increases,
the demand for it will decreases and the demand
for its complement will likewise decrease.
WHAT IS THE
MEANING OF
SUPPLY?
 SUPPLY
refers to the quantity of goods that a seller is willing to offer
for sale. The supply schedule shows the different quantities the
seller is willing to sell at a various price. The supply function shows
the dependence of supply on the various determinants that affect it.
Note: The higher the price, the higher the quantity supplied. Supply
curve that is upward sloping, indicating the direct relationship
between the price of the goods and the quantity supplied of that
good.
 SUPPLY SCHEDULE

PRICE OF FISH SUPPLY (IN KILOS)

20 200
40 300
60 400
80 500
100 600
 SUPPLY SCHEDULE
7
6
5
4
3
2
1
0
0 20 40 60 80 100 120 140
 THE LAW OF SUPPLY

Using the same assumptions of “ceteris paribus”, (other things

constant) there is a direct relationship between the price of good
and the quantity supplied of that good. As the price increase, the
quantity supplied of that product also increases. The high price of
the good serve as motivation for the seller to offer more for sale.
Thus, when the price increases, the quantity supplied of the
goods increases since seller will take as an opportunity to
increase his/her income.
 NON-PRICE DETERMINANTS OF SUPPLY

which includes cost of production, technology,

and availability. These non-price determinants can
cause an upward or downward change in the entire
supply of the product, and this change referred to as
shift of supply curve.
 SHIFTS OF THE SUPPLY CURVE

The reason for a movement along the supply curve is the change in the
price of the goods. Once supply increase due to non-price determinants, the
entire supply curve will shift to the right to reflect an increase, or to the left to
reflect a decrease.
The Supply function will now read:
S=f (P, C, T, AR)
Where the supply(S) of a good is a function of the price of that good (P),
the cost of production(C), technology(T), and the availability of raw materials
and resources (AR).
 2.2 DEMAND AND SUPPLY IN RELATION TO
THE PRICE OF BASIC COMODITIES

Equilibrium – is a state of balance when demand is equal to

supply. The equality means that the quantity that sellers are willing
to sell is also the quantity that buyers are willing to buy for a price. Is
an implicit agreement between how much buyers and sellers are
willing to transact. The price at which demand and supply are equal
is the equilibrium price. Market Equilibrium is attained at the point
of intersection of the demand and supply curve.
 APPLICATION OF DEMAND AND SUPPLY IN
RELATION TO HOUSING SHORTAGE

• Rent control- is a type of invention that affects prices. Rent control

is equivalent to setting of a price ceiling on the rent.
• Real estate boom- refers to the surge in the demand for housing
and residential property.
• Rent- payment for the use of land belonging to a landowner
• Price ceiling- the highest price that the seller can charge for the
goods being sold, normally set by the government.
 2.3 ELASTICITIES OF DEMAND AND SUPPLY

Elasticity- the degree of the response of demand and supply a

change in price or a non-price determinant.
Coefficient of Elasticity- is the number obtained when the
percentage change in demand is divided by the percentage change
in the determinant.
In terms of how responsive demand and supply are, degrees of
elasticity may either be:
• Elastic – a change in a determinant will lead to a proportionately
greater change in demand or supply. The absolute value of the
coefficient of elasticity is greater than 1.
• Inelastic- a change in a determinant will lead to a proportionately
lesser change in demand or supply. The absolute value of the
coefficient of elasticity is less than 1.
• Unitary elasticity- a change in a determinant will led to a
proportionately equal change in demand or supply. The absolute
value of the elasticity is equal to 1.
 ELASTICITY DEMAND
Price Elasticity of Demand-this measures the responsiveness of demand to a change in the price of the
good the concept of elasticity is measured in percentage changes. The value of price elasticity may be
measured in two ways:
Arc elasticity- the value of elasticity is computed by choosing two points on the demand curve and
comparing the percentage changes in the quantity and the price on those two points. The computation of
arc elasticity makes use of the following formula:
Ep = {(Q2-Q1)}/{(Q2-Q1)/2} / {(P2-P1)}/{(P2-P1)/2}
Where:
Q2= new quantity demanded

Q1= original quantity demanded

P2= new price of the good
P1= original price of the good
 Point Elasticity- measures the degree
of elasticity on a single point on the
demand curve. Changes on a single point
are infinitesimally small.
Ep = {(Q2-Q1)/Q1} / {(P2-P1)/P1}
 INCOME ELASTICITY OF DEMAND

This measures how the quantity demanded changes as

consumers income changes. Income Elasticity of demand is equal to
(% change in quantity)/ (% change in income).
A positive (+) sign in IE signifies that the good demanded is a
normal good, which is what a consumer tends to buy more when his
income increases. The negative (-) sign for EI indicates that the
demand for inferior goods, which are goods that are brought when
incomes are low because low incomes prevent the consumers from
buying higher priced goods.
 CROSS PRICE ELASTICITY OF DEMAND

This measures how quantity demanded

changes as the price of a related good changes.
It measures the responsiveness of the demand
for a good to the change in the price of a
substitute good or a complement.
• A positive (+) sign for CE signifies that the two goods
involved are substitute goods which means that as the
price of the substitute good increase, the demand for the
other good will increase. The negative (-) sign for CE
indicates that the two goods are complements, which
means that the demand for a good will increase when
the price of a complement decreases.
 PRICE ELASTICITY OF SUPPLY

With regard to supply price elasticity of supply determines

whether the supply curve is steep or flat. A steep curve signifies a
high degree of elasticity or ability to change, while flat curve
indicates an inability to change in response to a change in the
price of the good. Goods that are easy to produce have elastic
supply while those which need a long tome to produce and which
are hard to make have inelastic supply.