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Economics- Is the study of how individuals, business firms, governments, and societies as a whole

make choices under conditions of scarcity.

Scarcity and Choice

Primary idea: We can’t have everything we need and want!

Needs: necessary for survival (Air, food, shelter)

Wants: item we desire but do not NEED to survive

Economics is the study of how people seek to satisfy their needs and wants by making choices.

We make these difficult choices because of the idea economists call scarcity.

Scarcity means that we have limited quantities of resources to meet our unlimited wants.

Resources are the most basic elements that people use to produce the goods and services that they
want.

Economics is about solving the problem of scarcity.

Goods – physical objects (Shoes and shirts)

Services – actions or activities that one person performs for another (Haircuts, dental checkups,
tutoring)

Although these goods and services are abundant, they are still scarce because there is always a
limit.

Scarcity ≠ Shortage

Shortage – when producers will not or cannot offer goods or services at the current prices (more
on this later, it is temporary)

Scarcity – always exists b/c our needs and wants are always greater than our resources

Choices means selecting one thing over another.

Trade-offs is a situation in which people have to choose between two things (or activities) that
cannot be done at the same time.

Individual Trade-off

− Scarce Time
− Scarce Money

Trade-off for Society

Scarcity of Resources (land, labor, capital and entrepreneurship)


The resources that are used to make all goods and services are factors of production.

− Land – all natural resources (found in nature) used to produce goods and services
− Labor – the effort that a person devotes to a task for which that person is paid
− Capital – any human-made resource used to produce other goods and services

There are two kinds of capital:

 Physical Capital- Human made objects used to create other goods and services
 Human Capital- Knowledge and skills a worker gains through education and experience

Entrepreneurs – ambitious leaders who decide how to combine land, labor, and capital resources
to create new goods and services

Branches of Economics

 Micro Economics
o Micro-from the greek word mikros, meaning “small”
o Micro economics takes a close-up view of the economy and analyzes individual parts of an
economy.
 Macro Economics
o Macro-from the Greek word makros, meaning “large”
o It takes an overall view of the economy.

Positive Economics attempts to determine how the world is. It is based on objective.
Normative Economics goes beyond how the world is and considers the world ought to be. It is
subjective.

Theory and Application of Economics

− National Income
− Inflation Rate
− Interest Rate
− Scarcity
− Price
− Quantity Demanded
− Quantity Supplied

Economic Theory- It is a statement or set of related statements of a presumed relationship


between two or more economic variables.

Economic Variables

− Price
− Quantity demanded
− Quantity supplied
− Etc.
Economic Model- It is often composed of diagrams or equations. It is a simplification model of the
real world.

Opportunity Cost- It is the best alternative choice that we forego.

Opportunity Cost and Individual Choices

“The higher the opportunity cost of doing something, the less likely it will be done. The lower the
opportunity of doing something, the more likely it will be done.”

Opportunity Cost and Social Choices

Better education for all filipinos is a goal that we can all agree on. Greater access to good schools
would be needed to achieve this goal.

It is not true that “free” implies no opportunity cost.

Economists argue that many choices are made “at the margin.”

− This means that many choices are about whether to do a little more or a little less of
something.
− It means additional.

Example: Tom finishes eating his burger and still a bit hungry. If the marginal benefits are greater
than the marginal costs, he orders another burger. If the marginal costs are greater than the
marginal benefits, he does not order another.

The employee makes a decision at the margin when he decides to work two hour over time.

All societies have to confront the following questions:

1. What should be produced with society’s resources?


2. How should they be produced?
3. Who would get what is produced?

Every society has relied primarily on one of the three means of deciding who gets what of available
resources:

1. Tradition remains a dominant force, decisions on who gets what of the available resources,
goods, and services are governed by traditional principles of fairness. Shaped by the
practices of the past are handed down from generation to another.
2. Command is the dominant method of resource allocation, decisions on who gets what of
available resources, goods, and services are governed by a central planning system. A
planning bureaucracy instructs factories what to produce and in what quantity, where to
buy their inputs, where to sell their outputs and how much to pay their workers.
3. Market is the dominant method of resource allocation, decisions on who gets what of
available resources, goods, and services are determined by the independent decisions of
individual consumers and produces through a system know as Price System.
Circular Flow in the Market Economy

Two types of market

− Product Markets
− Resource Markets

A market is any arrangement that enables buyers and


sellers to interact, get information, and engage in
exchange.

In product markets, business firms sell goods and


services to households who buy them. In resources
markets, households sell or rent out land, labor, capital,
and entrepreneurial services to business firms who buy or hire them. The clockwise flows are the
flows of good, services, and resources. The counterclockwise flows are the flows of payments.

Market Price and Opportunity Cost- The higher the cost of production will cause the market price
to rise.

The Role of the Entrepreneur

 Entrepreneurs have the ability to discover more effective ways of organizing resources to
produce the goods and services that consumers desire.
 They also have the incentive to gather and apply the best possible information and to think
about new products and new technology.

The Philippine economy is a mixed economy, in which markets allocate resources in most
individual sectors while government modifies market outcomes through its programs of
regulations, taxation, and spending.

The Market Setting

The market is made up of buyers and sellers making choices under conditions of scarcity.

 Buyers- They ask about the types of goods and services available and the prices they must
pay for them.
 Sellers- They inquire about the types of goods and services buyers want and the prices they
are willing to pay.

The circular flow of economic activity shows the connections between firms and households in
input and output markets.

The Basic Decision-Making Units

A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the
primary producing units in a market economy.
An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a
new idea or a new product and turning it into a successful business.

Households are the consuming units in an economy.

Competition in Market Setting

Competition among buyers and sellers stimulates the exchange of information that allows them to
buy and sell on the best terms possible.

Competition in Identical Market

Buyers compete with other buyers for the limited supply of the good.

Therefore competitions among buyers…

From the sellers point of view, competition among buyers brings the highest prices possible.

Sellers compete with other sellers for the consumers’ money.

Therefore competitions among sellers…

From the buyers’ point of view, competition among sellers brings the lowest prices possible.

In Perfectly Competitive Markets, there are many buyers and sellers of an identical product.

Economists use Supply and Demand Model when talking about competitive market– a market in
which a homogeneous good is traded by a large number of buyers and sellers.

Demand- It refers to the relationship between the price of a good or service and the quantity or
number of units all consumers in a market would choose to buy during a given time period.

Quantity Demanded- A given quantity of a good or service consumers would choose to buy at a
particular price.

A demand schedule is a table showing how much of a given product a household would be willing
to buy at different prices.

Demand curves are usually derived from demand schedules.

The demand curve is a graph illustrating how much of a given product a household would be
willing to buy at different prices.
The law of demand states that there is a negative, or inverse, relationship between price and the
quantity of a good demanded and its price.

An Increase in quantity demanded- An increase in the number of units that consumers would
choose to buy in response to a fall in price.

A Decrease in quantity demanded- A decrease in the number of units that consumers would
choose to buy in response to a rise in price.

Income- An increase in income leads consumers to buy more of most goods at each and every price.
A decrease in in income leads consumers to buy less t of most goods at each and every price.

− Normal Goods – A good for which demand increases when income increases.
− Inferior Goods – A good for which demand decreases when income increases.
− Tastes or preferences- An increase in the value that people place on hamburgers would
lead them to buy more hamburgers at each and every price.

Price of Related Goods

 Substitute – other goods that can be used in its place.


 Complement – They are consumed together.

Expectations of Future Prices- If people expect the price of a commodity to rise next week, they
may consume more today and consume fewer afterward.

Number of Buyers- The higher the population, the greater the demand for a certain good.

Supply-It refers to the relationship between the price of a good or service and the quantity or
number of units all sellers in a market would choose to sell during a given time period.

Quantity Supplied- A given quantity of a good or service sellers would choose to buy at a
particular price.

Supply Schedule- A method used to show the different amounts of a certain product or item that a
company would need to supply based on different price points.

The Law of Supply

 When the price of good rises, the quantity supplied goes


up.
 When the price of good falls, the quantity supplied goes
down.

Therefore, there is a positive relationship between the price


and quantity supplied. Ceteris paribus. Producers supply more at a higher price because
selling a higher quantity at a higher price increases revenue.
Movements Along the Supply Curve
An increase in quantity supplied A decrease in quantity supplied

− It is an increase in the number of units − It is a decrease in the number of units


that sellers would choose to sell in that sellers would choose to sell in
response to a rise in price. response to a fall in price.
− It is represented graphically by a − It is represented graphically by a
rightward movement along the supply leftward movement along the supply
curve. curve.

Shift of the Supply Curve

Technology If a technological improvement Expectations of future prices if the sellers


allows producers to produce more goods with expect that the price of the goods will rise
the same or fewer inputs, the cost of next week, they may decide to sell fewer
producing any given number of hamburgers hamburgers now and sell more afterward.
will fall. Producers will be able to offer more
hamburgers at any given price. Weather conditions Favorable weather
increases the productivity of all firms.
Prices of inputs used in production if the
cost of production is less costly, then the Number of sellers As new producers enter
supply of goods will increase. the industry, the supply of the goods
increases.
Prices of alternative goods produced
Substitute goods can be produced by using Taxes, subsidies, and regulations If the
the same resources. If the price of the government would increase the tax imposed
alternative good falls, producers receive less on the producers of goods, this increases the
income for. It is more likely that the suppliers cost of producing the goods and shift the
will switch production from the other supply curve to the left.
alternative good.
Price Adjustments and Market Equilibrium

Market Shortage or Excess Demand- It is a situation in which the quantity demanded is greater
that the quantity supplied.

Market Shortage Sample Illustration

Suppose that the price of a unit of hamburger is P40. At this price the quantity demanded is 60,000
and the quantity supplied is 40,000.

Market Surplus

It is a situation in which the quantity supplied is greater than the quantity demanded.
Market Surplus Sample Illustration

Suppose that the price of a unit of hamburger is P60. At this price, buyers want to purchase 40,000
hamburgers--- less than the 60,000 hamburgers are willing to offer.

Market Equilibrium

It is a situation in which two sides of the market balance each other.

It happens when the price balances the amount that consumers plan to buy and the amount that
producers plan to sell.

Equilibrium Price

It is the price at which quantity demanded equals quantity supplied.

Equilibrium Quantity

The quantity bought and sold at the equilibrium price.