MICROECONOMICS

Instructor:
Alvin L. Tubog

Mobilephones should be switched off or

turned into a silent mode.
We should wait quietly for the lesson to begin.
We should raise our hand and wait to be asked
when asking or answering a question.
We should not eat or drink inside.
Cheating means an outright final grade of 5.00
There will be no special quizzes and recitation
allowed.
We speak kindly and respectfully to each
other.

Part 1. Economics the Science of Scarcity

Part 2. Microeconomics Fundamentals
Part 3. Product Markets and Policies
Part 4. Factor Markets and Related Issues
Part 5. Market Failure, Public Choice, and SpecialInterest-Group Politics
Part 6. Economics Theory-Building and Everyday
Life
Part 7. International Economics and Globalization

The word economy comes from a Greek

word oikonomos which simply means one
who manages a household

A social science that studies how individuals,

governments, firms and nations make
choices on allocating scarce resources to
satisfy their unlimited wants.

Land

All natural resources, such as minerals,

forests, water, and unimproved land.
Labor the physical and mental talents
people contribute to the production process.
Capital Produced goods that can be used as
inputs for further production, such as
factories, machinery, tools, computers and
buildings.

Entrepreneurship

The talent that some people have for

organizing the resources of land, labor, and
capital to produce goods, seek new business
opportunities, and develop new ways of doing
things.

Scarcity
The condition in which our wants for goods
are greater than the limited resources
available to satisfy those wants.

Effects:
Choices
Need for a rationing device
Competition

Choices

Rationing

device a means for deciding who

gets what of available resources and goods.

Competition

Determine What type of effect of scarcity are the

following:
1.Higher interest rates for late payment on credit card bills.
2.Sun offered unlimited call and text while Globe and
Smart has unli call to all network.
3.At least 6 years of professional experience is required to
process an immigrant visa for Canada.
4.Guess brand over Levis brand of pants for a 20% savings.
5.Panel interview is the last stage of the hiring process for
an assistant accountant at SM.

Read each statement carefully and identify which category

of economics to which it belongs :
1.Cheap capital and low labor costs might be good for
output growth
2.Traders had expected the peso to breach P47 adollar on
Monday.
3.Jollibee reported a 6% growth in attributable net income
to 3.86 Billion in the first nine months of 2005.
4.Law makers are currently deliberating the modernization
of the bureau of customs.
Cheap capital and low labor costs might be good for output
growth, but household demand is being throttled.

Opportunity Cost
Is what a person sacrifices when he chooses
one option over another.

Opportunity cost and behavior

The higher the opportunity cost of doing
something is, the less likely it will be done.

Decision making characterized by weighing

the additional (margin) benefits of a change
against the additional(margin) costs of a
change with respect to current condition.

25

50

75

100

125

Something that encourages or motivates a

person to undertake an action.

Economists think in terms of unintended

effects.

Ceteris Paribus. A latin term meaning all

other things constant or nothing else
changes

Theory. An abstract representation of the

real world designed with the intent to better
understand it.

Abstract. The process (used in building

theory) of focusing on a limited number of
variables to explain or predict an event.

Identify whether the statement is positive or

normative.
1.The government should enforce minimum prices
for beers to control alcohol consumption
2.The government is right to introduce a ban on
smoking in public places.
3.Pollution is the most serious economic problem
4.Higher interest rate will reduce house prices.
5.If the government raises the tax on beer, this
will lead to a fall in profits of the brewers.
6.A rise in average temperatures will increase the
demand for sun screen products.

Positive economics the study of what is

in economics. A statement that can be
proved or disproved by reference to facts.

Normative Economics the study of what

should be in economics. A statement that
represent an opinion which cannot be proven
or disproved.

One person has a comparative

advantage over another if his or her
opportunity cost of performing a task
is lower than the other persons
opportunity cost

Everyone does best when each person (or

each country) concentrates on the activities
for which his or her opportunity cost is
lowest.
No. of bicycle
assembled per hour

No. of t-shirt sew per

Hour

Wally

Jose

10

A graph that describes the maximum amount

of one good that can be produced for every
possible level of production of the other
good.
1. Attainable point any combination of goods
that can be produced using currently
available resources.
2. Unattainable point any combination of
goods that cannot be produced using
currently available resources.

3. Inefficient point any combination of goods

for which currently available resources enable
an increase in the production of one good
without a reduction in the production of
another.
4. Efficient point any combination of goods
for which currently available resources do not
allow an increase in the production of one
good without a reduction in the production of
another.

Choices in productions
Pairs of shoes
per Month

Pairs of Slippers
per Month

200

100

50

100

C
200

Shoes
100
0

- Production possibilities
curve for the plant
50
Slippers

100

Two variables are directly related if they

change in the same way.
Example:

(1)
When Income Is (Y)

(2)
Consumption Is (X)

(3)
Point

0
100
200
300
400
500

60
120
180
240
300
360

A
B
C
D
E
F

Two variables are inversely related if they

change in opposite ways.
(1)
When Price of
Burger Is:

(2)
Quantity Demanded
of Burger

(3)
Point

P150
125
100
75
50
25

60
120
180
240
300
360

A
B
C
D
E
F

Two variables are independent if, as one

changes the other does not.

In addition to knowing how two variables are

related, we also often need to know how
much one variable changes as the other
changes.

Slope
The ratio of the change in the variable
on the vertical axis to the change in the
variable on the horizontal axis

Negative Slope
Positive Slope
Zero Slope
Infinite slope
Slope of a curve

Formula:
Slope = Y/X

Any point on the 45-degree line is

equidistant from each axis. For example,
point A is the same distance from the vertical
axis as it is from the horizontal axis

A pie chart is a convenient way to represent

the different parts of something that when
added together equal the whole.

Bar graph is another visual aid that

economists use to convey relative
relationships.
Sales History

There is inverse relationship between price and quantity

demanded.
Price
5
Supply
4
3
2
1
Demand
Quantity
10 20
30
40
50

There is a direct relationship between price and quantity.

Price
5
Supply
4
3
2
1
Quantity
10 20
30
40
50

Price
5
4
3
2
1

Supply

10

20

30

40

Demand
Quantity
50

1.

2.

3.

Substitution effect Changes in price

motivate consumers to buy relatively
cheaper substitute goods.
Income effect Changes in price affect
the purchasing power of consumers
income.
Law of diminishing return As you
continue to consume, you will eventually
get less additional utility or satisfaction
from each unit you consume

1.
2.
3.
4.

1.

Taste / Preferences
Number of consumers
Price of Related Goods
Income
Normal Goods Income and the demand
for the product are directly related
Inferior goods Income and the demand
for the product are inversely related.
Expectation

What happens to the demand for a product

when the price decrease?
Answer. Demand stay the same but the
quantity demanded increase.

There is a direct relationship between price and quantity.

Price
5
Supply
4
3
2
1
Quantity
10 20
30
40
50

1.
2.
3.
4.
5.

Price of Resources
Number of Producers
Technology
Taxes & Subsidies
Expectations

Question:
What happens to the supply for a product
when the price increases?
Answer:
Price changes the quantity supplied
The 5 shifters change the supply.

Surplus When quantity supplied is greater

than quantity demanded.
Shortage When quantity demanded is greater
than quantity supplied.

Quantity Demanded is insensitive to price

Quantity demanded is sensitive to price

Quantity Supplied is insensitive to price

Quantity supplied is sensitive to price

Make sure to draw a graph corresponding the

given problem:
1.What happens when the price of related
products increases by 20%? a)Ep? b)Eq? c) D?
d) S? e)Qs f)Qd
1.What

happens when the supply curve shifts to

the left and the demand curve also shifts to
the left? a)Ep? b)Eq? c) D? d) S? e)Qs f)Qd

Price Ceiling
Is the maximum price a seller is allowed to
charge.
Price Floor
Minimum Price a seller is allowed to charge.

Costs of production,
the production function,
total cost,
fixed cost,
variable cost,
average cost,
marginal cost,
short run and long run costs.
3 types of profit

1.

2.

3.

Accounting Profit = the difference

between a firms total revenue and its
explicit costs.
Economic Profit = the difference between
a firms total revenue and the sum of its
explicit and implicit costs.
Normal Profit = accounting profit minus
economic profit.

Explicit Costs the actual payments a firm

makes to its factors of production and other
suppliers.

Implicit Cost The opportunity costs of the

resources supplied by the firms owners.

Economic Loss an economic profit that is

less than zero

Mr. X is a businessman owning an internet

caf within the City of Malolos. His payment
for space rental, equipment and other
supplies come to Php100,000 per year. The
only input he supplies is his own labor and he
considered the business just as attractive as
his only employment opportunity as an IT
teacher at a salary of Php110,000 per year.
Mr. Xs revenue is Php220,000 per year. What
is his accounting profit, economic profit and
normal profit should he remain to be in
business?

Total
Revenue

Explicit
Cost

Implicit
Cost

Accounting
Profit

Economic
Profit

Normal
Profit

220,000

100,000

110,000

120,000

10,000

110,000

1.

How will Mr. Xs economic profit change if

his annual revenue declined to
Php200,000?

2.

Suppose Mr. Xs cousin, who owns the space

he rented for his internet caf business,
dies and leaves him as the only heir. If the
space could be rented to some other
businessman for Php60,000 per year, should
Mr. X remain in internet caf business?

Monopoly, production and

pricing decisions, welfare cost
of monopoly, anti-trust laws
and regulation, price
discrimination.
Oligopoly, collusion and
cartels, game theory and Nash
equilibrium, prisoners
dilemma.

Learning Objectives:
Distinguish 3 types of imperfectly competitive
industries (Monopoly, Oligopoly, Monopolistic
competition)
Identify the 5 sources of market power & describe
why economies of scale are the most enduring of
the various sources of monopoly power.
Apply the concept of marginal cost and marginal
revenue to find the output level.

Pure monopoly the only supplier of a unique

product with no close substitutes.
Oligopoly an industry structure in which a
small number of large firms produce products
that are either close or perfect substitutes.
Monopolistic competition an industry
structure in which a large number of firms
produce slightly differentiated products that
are reasonably close substitutes for one
another.

Perfectly Competitive Fir

Market
Price
0

Quantity

The demand curve confronting a perfectly

competitive firm is perfectly elastic at the
market price.

Imperfectly Competitive Firm

Market
Price
D
0

Quantity

The demand curve confronting an

imperfectly competitive firm is downwardsloping.

A firms ability to raise the price of a good

without losing all its sales
Firms that confront downward-sloping
demand curves are said to enjoy market
power. A common misconception is that a
firm with market power can sell any quantity
at any price it wishes. It cannot. All it can do
is pick a price-quantity combination on its
demand curve.

1.
2.
3.
4.
5.

Exclusive control over important

inputs
Patents and Copyrights
Government licenses or Franchises
Economies of scale
Network Economies

If a single firm controls an input

essential to the production of a
given product, that firm will have
market power.

Patents give the inventors or

developers of new products the
exclusive right to sell those products
for a specified period of time. In the
same way, copyrights protect the
authors of movies, music, books,
and other published works.

When a firm doubles all its factors of

production, what happens to its output?
Constant

returns to scale If output exactly

doubles.
Increasing

return to scale or economies of

scale if output more than doubles.
Natural

Monopoly a monopoly that results

from the economies of scale.

Examples:

Bets VHS DVD DVRs

Microsofts

Windows Operating System

Two video game producers,

Nintendo and Play station, each
have fixed costs of 200,000 and
marginal costs of .80 per game. If
Nintendo produces 1M units per year
and Playstation produces 1.2M, how
much lower will Playstations
average total production cost be.

NINTENDO

PLAYSTATION

1,000,000

1,200,000

Fixed Cost

200,000

200,000

Variable Cost

800,000

960,000

1,000,000

1,160,000

1.00

.97

Annual Production

Total Cost
ATC per Game

Two video game producers,

Nintendo and Play station, each
have fixed costs of 10,000,000 and
marginal costs of .20 per game. If
Nintendo produces 1M units per year
and Playstation produces 1.2M, how
much lower will Playstations
average total production cost be.

NINTENDO

PLAYSTATION

Annual Production

1,000,000

1,200,000

Fixed Cost

10,000,000

10,000,000

200,000

240,000

10,200,000

10,240,000

10.20

8.53

Variable Cost
Total Cost
ATC per Game

How big will Playstations unit cost

advantage be if it sells 2M units per
year, while Nintendo sells only
200,000?

For both the perfectly competitive

firm and the monopolist, the
marginal benefit of expanding
output is the additional revenue the
firm will receive if it sells one
additional unit of output. In both
cases, this marginal benefit is called
the firms marginal revenue.

The change in a firms total revenue that

results from a one-unit change in output.
8

Price 6
5

2 3 4
8
Quantity (units/week)

Calculate marginal revenue for the

monopolist as it expands output from 3
to 4 units per week and then from 4 to
5 units per week.

A market failure exist whenever the free

market equilibrium quantity of output is
greater or less than the socially optimal level
of output. The free market will either
product too much of a good or too little.

Externalities -

When the private benefits to the consumers

of a product are greater than the social
benefits of its consumption. There are
spillover costs resulting from the
consumption of the product born by society
as a whole.

When the consumption of the good or service

is creates benefits of society beyond those
enjoyed by the individual consumer. MSB >
MPB