PRINCIPLES OF

ECONOMICS
(WITH TAXATION AND AGRARIAN
REFORM)

Submitted to : Dr. Vidal

Submitted by : Meneses, Joshua A.
 PART 1

INTRODUCTION
TO
ECONOMICS
 CHAPTER 1

Economic Way
of Thinking
CHAPTER 1 :
ECONOMIC WAY OF THINKING
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Problems of Scarcity

Limited Unlimited
Resouces Wants
Scarcity
If limited resources fall short to meet the unlimited wants
of the society, it will eventually create a problem, which
is called,”scarcity”.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Economics

Limited Unlimited
Resources Wants
Allocation

When limited resources fail to meet the unlimited wants

of the society, economics comes into play in order to
effectively and efficiently allocate resources.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
The Relationship Between
Economics & Scarcity
The study of economics was essentially founded
in order to address the issue of resource allocation
and distribution, in response to scarcity.

Ceteris Paribus Assumption

Ceteris paribus is an assumption used by
economist to simplify the analysis of complex
economic phenomenon which means “all other things
held constant or all else remaining equal”.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Positive & Normative Economics
Positive economics is an economic analysis that
considers economic conditions “as they are”, or
considers economics “as it is”.

On the other hand, Normative economics is economic

analysis which judges economic conditions “as it
should be”. It is that aspect of economics that is
concerned with human welfare.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Four Economic Questions

1.) What to produce?

2.) How to produce?
3.) How much to produce?
4.) For whom to produce?
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Importance of Studying Economics
 To understand the Society

 To understand Global Affairs

 To be an Informed voter

3 Es in Economics
 Efficiency

 Equity

 Effectiveness
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Important Economic Terms
 Wealth - refers to anything that has a functional
value, which can be traded for good and services.
 Consumption - refers to the direct utilization or
usage of the available goods and services by the
buyer or the consumer sector.
 Production – defined as the formation by firms of
an output (product or services).
 Exchange – process of trading goods for its
equivalent.
 Distribution – refers to the process of storing and
moving products to customers through retailers.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Microeconomics &
Macroeconomics
Economics has 2 major branches of
study: one is concerned with
individual decision making; and the
other is involved in the
understanding the behavior of the
society as a whole.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
 Microeconomics – it deals with the
individual decision of units of the
economy- firms and households, and
how their choices determine relative
prices of goods and factors of
production. It focuses on the buyer
and the seller, and their interaction
with one another.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
 Macroeconomics – it focuses on the four
specific sectors of the economy: the
behavior of the aggregate household
(consumption); the decision making of the
aggregate business (investment); the
policies and projects of the government
(government spending); and the behavior
of external/ foreign economic agents,
through trading (export and import).
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Opportunity Cost
Saving(Firm/Individual)

Credit Investment
(Interest) (Profit)

Opportunity cost is the foregone value of

the next best alternative. It is the value of
what is given-up when one makes a choice.
CHAPTER 1 :
ECONOMIC WAY OF THINKING
Factors of Production

 Capital
 Entrepreneurship
 Land
 Labor
CHAPTER 1 :
ECONOMIC WAY OF THINKING
The Circular Flow Model
 PART 2

CONCEPT
OF
MICROECONOMICS
 CHAPTER 2

The Basic Analysis

Of Demand
& Supply
CHAPTER 2 :
DEMAND AND SUPPLY
CHAPTER 2 :
DEMAND AND SUPPLY
 Demand – it pertains as to the quantity
of a good or service that people are ready
to buy at given prices within a given time
period, when other factors besides price
are held constant.

 Law of Demand – it states that if price

goes UP, the quantity demanded will go
DOWN and Conversely.
CHAPTER 2 :
DEMAND AND SUPPLY
Demand Schedule
A demand schedule shows the likely
number of purchases based on a series of
arbitrarily chosen prices.

This table shows the various

prices and quantities for the
demand for cookies per week.
CHAPTER 2 :
DEMAND AND SUPPLY
Demand Curve
A demand curve has negative slope thus it
slopes downward from left to right. The
downward slope indicates the inverse
relationship between price and quantity.
CHAPTER 2 :
DEMAND AND SUPPLY
Change in Quantity Demanded

Change in quantity
demanded occurs
when price of the
product changes,
thus, resulting
to a change in
quantity demanded
CHAPTER 2 :
DEMAND AND SUPPLY
Change in Demand
CHAPTER 2 :
DEMAND AND SUPPLY
Forces that cause the change
in demand curve.
 Taste or Preferences
 Changing Incomes
 Occasional or Seasonal Products
 Population Change
 Substitute Goods
 Expectations of Future Prices
CHAPTER 2 :
DEMAND AND SUPPLY
 Supply (Firms/Seller’s Side) – it is
the quantity of goods or services that
firms are ready and willing to sell at a
given price within a period of time, other
factors being held constant.

 Law of Supply – states that if the

price of the good or service goes UP, the
quantity supplied will also go UP, ceteris
paribus.
CHAPTER 2 :
DEMAND AND SUPPLY
Supply Curve
A demand curve is positively sloped. This slope
indicates that as the price commodities increases,
more goods will be offered for sale by the
producers.
CHAPTER 2 :
DEMAND AND SUPPLY
Forces that causes the supply
curve to change
 Optimization in the use of factors of
production.
 Technological Change
 Future Expectations
 Number of Sellers
 Weather Conditions
 Government Policy
CHAPTER 2 :
DEMAND AND SUPPLY
Equilibrium Market Price and
Quantity
CHAPTER 3

The Concept
Of Elasticity
CHAPTER 3 :
THE CONCEPT OF ELASTICITY
Price Elasticity of Demand
 A measure of the responsiveness of
quantity demanded to changes in price.
 Measured by dividing the percentage
change in the quantity demanded of a
good by the percentage change in its
price.
 Economists compute price elasticity of
demand using midpoints as the base
values of changes in prices and
quantities demanded.
CHAPTER 3 :
THE CONCEPT OF ELASTICITY
Perfectly Elastic and Perfectly Inelastic
Demand
Percentage change in quantity demanded
Ed = -------------------------------------------
Percentage change in price
 Elastic Demand (Ed > 1): the numerator is
greater than the denominator, the coefficient is
greater than 1 and demand is elastic.
 Inelastic Demand (Ed < 1): the numerator is less
than the denominator , the coefficient is less than
1, and demand is inelastic.
CHAPTER 3 :
THE CONCEPT OF ELASTICITY
 Unit Elastic Demand (Ed = 1): If the numerator
and denominator are the same, the coefficient is
equal to one. The quantity demanded changes
proportionally to a change in price.
CHAPTER 3 :
THE CONCEPT OF ELASTICITY
Elastic and Inelastic Demand
 Perfectly Elastic Demand (Ed = ∞) If the
quantity demanded is extremely
responsive to a change in price.
 Perfectly Inelastic Demand (Ed = 0) If
quantity demanded is completely
unresponsive to changes in price, demand
is perfectly inelastic. A change in price
causes no change in quantity demanded.
CHAPTER 3 :
THE CONCEPT OF ELASTICITY
Price Elasticity of Demand
DETERMINANTS OF PRICE
ELASTICITY ON DEMAND
 Number of Substitutes: The more
substitutes for a good, the higher the price
elasticity of demand; the fewer substitutes
for a good, the lower the price elasticity of
demand. The more broadly defined the
good, the fewer the substitutes; the more
narrowly defined the good, the greater the
substitutes.
 Necessities Versus Luxuries: The
more that a good is considered a luxury
rather than a necessity, the higher the
price elasticity of demand.
DETERMINANTS OF PRICE
ELASTICITY ON DEMAND
 Percentage of One’s Budget Spent on
the Good: The greater the percentage of
one’s budget that goes to purchase a good,
the higher the price elasticity of demand;
the smaller the percentage of one’s budget
that goes to purchase a good, the lower
the elasticity of demand.
 Time: The more time that passes, the
higher the price elasticity of demand for
the good; the less time that passes, the
lower the price elasticity of demand for
the good.
CROSS ELASTICITY OF DEMAND
 Measures the responsiveness in the
quantity demanded of one good to changes
in the price of another good.
 Defined as the percentage change in the
quantity demanded of one good divided by
the percentage change in the price of
another good.
 This concept is often used to determine
whether two goods are substitutes or
complements and the degree to which one
good is a complement to or substitute for
another.
INCOME ELASTICITY OF DEMAND
 Measures the responsiveness of quantity
demanded to changes in income.
 Define as the percentage change in
quantity demanded of a good divided by
the percentage change in income.
 Income elasticity of demand is positive (Ey
> 0) for a normal good.
 The demand for an inferior good decreases
as income increases.
INCOME ELASTICITY OF DEMAND
 If Ey >1, demand is
considered to be
income elastic.
 If Ey <1, demand is
considered to be
income inelastic.
 If Ey =1, demand is
considered to be
unit elastic.
PRICE ELASTICITY OF SUPPLY
 Measures the responsiveness of
quantity supplied to changes in
price.
 Defined as the percentage change in
quantity supplied of a good divided
by the percentage change in the
price of the good.
 Supply can be classified as elastic,
inelastic, unit elastic, perfectly
elastic, or perfectly inelastic.
PRICE ELASTICITY OF SUPPLY
PRICE ELASTICITY OF SUPPLY AND TIME
 The longer the period
of adjustment to a
change in price, the
higher the price
elasticity of supply.
 Additional production
takes time.
 Reducing production
takes time.
 CHAPTER 4

Consumer’s Behavior
&
Utility Maximization
CHAPTER 4:
CONSUMER BEHAVIOR & UTILITY MAX.
Law of Diminishing Marginal
Utility

 Added satisfaction declines as a consumer

acquires additional units of a given product
 Consumer wants in general are insatiable, but
wants for particular items can be satisfied
 Durable goods such as an automobile
CHAPTER 4:
CONSUMER BEHAVIOR & UTILITY MAX.
Utility
 A product has utility if it can satisfy a want:
Utility has a wanting satisfying power
 Satisfaction or pleasure one gets from consuming
it
 Utility and usefulness are not synonymous

 Utility is subjective—a specific product may vary

widely from person to person
 Utility is difficult to quantify
CHAPTER 4:
CONSUMER BEHAVIOR & UTILITY MAX.
 Total utility
 Total amount of satisfaction or pleasure a
person derives from consuming some specific
quantity
 Marginal utility

 The extra satisfaction a consumer realizes

from an additional unit of that product
 Change in total utility that results from the
consumption of 1 more unit of a product
LAW OF DIMINISHING MARGINAL
UTILITY
Total Utility

Marginal Utility (Utils) Total Utility (Utils)

30
(1) (2) (3)
Tacos Total Marginal
Consumed Utility, Utility, TU
Per Meal Utils Utils 20

0 0
1 10
] 10 10

2 18
] 8

3 24
] 6 0 1 2 3 4 5 6
Units Consumed Per Meal
7

4 28
] 4
Marginal Utility

5 30
] 2 10

6 30
] 0 8
6
28 ]
-2 4
7 2
0
-2 MU
1 2 3 4 5 6 7
Units Consumed Per Meal
THEORY OF CONSUMER BEHAVIOR
Numerical Example:
Utility-Maximizing Combination of
Products A and B Obtainable with an
Income of $10 (2) (3)
Product A: Product B:
Price = $1 Price = $2
(b) (b)
(a) Marginal (a) Marginal
(1) Marginal Utility Marginal Utility
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Compare
Fourth
Marginal
6 6
Utilities
16 8
Then
Fifth Compare
5 Per5 Dollar12- MU/Price
6
Choose
Sixth the4 Highest4 6 3
Check
Seventh Budget
3 - Proceed
3 to4Next Item
2
THEORY OF CONSUMER BEHAVIOR
Numerical Example:
Utility-Maximizing Combination of
Products A and B Obtainable with an
Income of $10 (2) (3)
Product A: Product B:
Price = $1 Price = $2
(b) (b)
(a) Marginal (a) Marginal
(1) Marginal Utility Marginal Utility
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third Compare
Again, 7 Per Dollar
7 - MU/Price
18 9
Fourth the Highest
Choose 6 6 16 8
Buy
FifthOne of Each
5 – Budget5 Has $5 Left
12 6
Proceed
Sixth to Next
4 Item 4 6 3
Seventh 3 3 4 2
THEORY OF CONSUMER BEHAVIOR
Numerical Example:
Utility-Maximizing Combination of
Products A and B Obtainable with an
Income of $10 (2) (3)
Product A: Product B:
Price = $1 Price = $2
(b) (b)
(a) Marginal (a) Marginal
(1) Marginal Utility Marginal Utility
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth
Again, 6 Per Dollar
Compare 6 16
- MU/Price 8
Fifth
Buy One More 5B – Budget
5 12Left
Has $3 6
Proceed
Sixth to Next
4 Item 4 6 3
Seventh 3 3 4 2
THEORY OF CONSUMER BEHAVIOR
Numerical Example:
Utility-Maximizing Combination of
Products A and B Obtainable with an
Income of $10 (2) (3)
Product A: Product B:
Price = $1 Price = $2
(b) (b)
(a) Marginal (a) Marginal
(1) Marginal Utility Marginal Utility
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Fifth 5 5 12 6
Again, Compare Per Dollar - MU/Price
SixthOne of Each
Buy 4 – Budget
4 Exhausted6 3
Seventh 3 3 4 2
THEORY OF CONSUMER BEHAVIOR
Numerical Example:
Utility-Maximizing Combination of
Products A and B Obtainable with an
Income of $10 (2) (3)
Product A: Product B:
Price = $1 Price = $2
(b) (b)
(a) Marginal (a) Marginal
(1) Marginal Utility Marginal Utility
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Fifth 5 5
Final Result – At These12Prices,6
Sixth 4 4 6 3
Purchase
Seventh 3 2 of Item
3 A and
4 4 of 2B
THEORY OF CONSUMER BEHAVIOR
Algebraic Restatement:

MU of Product A MU of Product B
Price of A
= Price of B

8 Utils 16 Utils
$1
= $2
Optimum Achieved - Money Income is Allocated so
that the Last Dollar Spent on Each Product Yields
the Same Extra or Marginal Utility
DERIVING THE DEMAND CURVE
Same Numeric Example:

Price of Product B
Price Per Quantity
Unit of B Demanded

$2 4
1 6 1

Income Effects DB
0
Substitution Effects 4 6
Quantity Demanded of B
APPLICATIONS AND EXTENSIONS
DVDs and DVD Players
The Diamond-Water
Paradox
The Value of Time
Medical Care Purchases
Cash and Noncash Gifts
INDIFFERENCE CURVE ANALYSIS
Budget Line (Constraint)
 Income Changes
 Price Changes
12
Units of A Units of B Total Income = $12
(Price = $1.50) (Price = $1) Expenditure
10 PA = $1.50

Quantity of A
8 (Unattainable)
8 0 $12
6 3 12 6
4 6 12 4 Income = $12
PB = $1
2 9 12 (Attainable)
2
0 12 12
0
2 4 6 8 10 12
Quantity of B
INDIFFERENCE CURVE ANALYSIS
What is Preferred
 Downsloping
 Convex to Origin
 Marginal Rate of Substitution
(MRS)
12
j
CombinationUnits of AUnits of B 10

Quantity of A
j 12 2 8

k 6 4 6 k
l
4 m
l 4 6
2 I
m 3 8
0
2 4 6 8 10 12
Quantity of B

Return to Chapter 19
INDIFFERENCE CURVE ANALYSIS
 The Indifference Map
 Equilibrium Position at Tangency

12

10
PB
MRS =
PA
8
Quantity of A

Preferred –
6 W But Requires
More Income
4 X

I4
2 I3
I2
I1
0
2 4 6 8 10 12
Quantity of B
Return to Chapter 19
DERIVATION OF THE DEMAND CURVE
Measurement of Utility
12
Marginal Utility Marginal Utility
10 of A of B
Quantity of A =
8 Price of A Price of B
6
X
At $1 Price for B,
4
6 Units are
2
I2
I3 Purchased
0
2 4 6 8 10 12
Record the Results
Quantity of B As Price of B
Increases to $1.50,
Price of B

Only 3 Units of B are

$1.50
Bought
1.00
Record the Results
.50
DB Connect the Points to
1 2 3 4 5 6 7 8 9 101112
Create the Demand
Quantity of B Curve Return to Chapter 19
CHAPTER 5

The Profit
Maximizing
Firm
MODELING FIRMS’ BEHAVIOR
 Most economists treat the firm as a
single decision-making unit
 the decisions are made by a single
dictatorial manager who rationally
pursues some goal
profit-maximization
PROFIT MAXIMIZATION
A profit-maximizing firm chooses
both its inputs and its outputs with
the sole goal of achieving maximum
economic profits
 seeks to maximize the difference
between total revenue and total
economic costs
OUTPUT CHOICE
 Total revenue for a firm is given by
TR(q) = P(q)q
 In the production of q, certain
economic costs are incurred [TC(q)]
 Economic profits () are the
difference between total revenue and
total costs
 = TR(q) – TC(q) = P(q)q – TC(q)
OUTPUT CHOICE

 The necessary condition for choosing the level of

q that maximizes profits can be found by setting
the derivative of the  function with respect to q
equal to zero

d dTR dTC
 ' (q )   0
dq dq dq

dTR dTC

dq dq
OUTPUT CHOICE

 Tomaximize economic profits, the

firm should choose the output for
which marginal revenue is equal to
marginal cost
dTR dTC
MR    MC
dq dq
PROFIT MAXIMIZATION
revenues & costs Profits are maximized when the slope of
the revenue function is equal to the
slope of the cost function
TC
TR

But the second-order

condition prevents us
from mistaking q0 as
a maximum

output
q0 q*
MARGINAL REVENUE

 If a firm can sell all it wishes without

having any effect on market price,
marginal revenue will be equal to
price
 If a firm faces a downward-sloping
demand curve, more output can only
be sold if the firm reduces the good’s
price
MARGINAL REVENUE

 If a firm faces a downward-sloping

demand curve, marginal revenue
will be a function of output
 If price falls as a firm increases
output, marginal revenue will be
less than price
MARGINAL REVENUE
 Suppose that the demand curve for a sub sandwich is
q = 100 – 10P
 Solving for price, we get
P = -q/10 + 10
 This means that total revenue is
TR = Pq = -q2/10 + 10q
 Marginal revenue will be given by
MR = dTR/dq = -q/5 + 10
PROFIT MAXIMIZATION
 To determine the profit-maximizing
output, we must know the firm’s
costs
 If subs can be produced at a constant
average and marginal cost of $4,
then
MR = MC
-q/5 + 10 = 4
q = 30
AVERAGE REVENUE CURVE

 Ifwe assume that the firm must

sell all its output at one price, we
can think of the demand curve
facing the firm as its average
revenue curve
 shows the revenue per unit
yielded by alternative output
choices
MARGINAL REVENUE CURVE
 The marginal revenue curve shows
the extra revenue provided by the
last unit sold
 In the case of a downward-sloping
demand curve, the marginal revenue
curve will lie below the demand
curve
MARGINAL REVENUE CURVE
As output increases from 0 to q1, total
price revenue increases so MR > 0

As output increases beyond q1, total

revenue decreases so MR < 0

P1

D (average revenue)

output
q1
MR
MARGINAL REVENUE CURVE
 When the demand curve shifts, its
associated marginal revenue curve
shifts as well
 a marginal revenue curve cannot
be calculated without referring to a
specific demand curve
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

price SMC

P* = MR SATC
SAVC

Maximum profit
occurs where
P = SMC

output
q*
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

price SMC

P* = MR SATC
SAVC

Since P > SATC,

profit > 0

output
q*
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

price SMC

P**

P* = MR SATC
SAVC

If the price rises

to P**, the firm
will produce q**
and  > 0
output
q* q**
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM
If the price falls to
price SMC P***, the firm will
produce q***

P* = MR SATC
SAVC

P***
profit maximization
requires that P =
SMC and that SMC
is upward-sloping
output
q*** q*
<0
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

 The positively-sloped portion of the short-run

marginal cost curve is the short-run supply
curve for a price-taking firm
 it shows how much the firm will produce at
every possible market price
 firms will only operate in the short run as
long as total revenue covers variable cost
 the firm will produce no output if P < SAVC
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

 Thus, the price-taking firm’s short-run

supply curve is the positively-sloped
portion of the firm’s short-run marginal
cost curve above the point of minimum
average variable cost
 for prices below this level, the firm’s
profit-maximizing decision is to shut
down and produce no output
SHORT-RUN SUPPLY BY A PRICE-
TAKING FIRM

price SMC

SATC
SAVC

The firm’s short-run supply

curve is that portion of the
SMC curve that is above
minimum SAVC
output
SUPPLY FUNCTION
 The supply function for a profit-
maximizing firm that takes both
output price (P) and input prices
(v,w) as fixed is written as
quantity supplied = q*(P,r,w)
 thisindicates the dependence of
output choices on these prices
SUPPLY FUNCTION
 The supply function provides a convenient
reminder of two key points
 the firm’s output decision is
fundamentally a decision about hiring
inputs
 changes in input costs will alter the
hiring of inputs and hence affect output
choices as well
PRODUCER SURPLUS IN THE
SHORT RUN
A profit-maximizing firm that decides to
produce a positive output in the short run
must find that decision to be more favorable
than a decision to produce nothing
 This improvement in welfare is termed (short-
run) producer surplus
 what the firm gains by being able to
participate in market transactions
PRODUCER SURPLUS IN THE
SHORT RUN

SMC
price If the market
price
is P*, the firm
will produce q*
P*
Producer surplus is the
shaded area below P*
and above SMC
output
q*
PRODUCER SURPLUS IN THE
LONG RUN

 By definition, long-run producer surplus is

zero
 fixed costs do not exist in the long run
 equilibrium profits under perfect
competition with free entry are zero
CHAPTER 6

The
Business
Organization
 TYPES OF FIRMS
 Sole proprietorship – a business owned and run
by one person.
 In 2000, 73% of all businesses in the U.S. were sole
proprietorships.
 Advantages of sole proprietorships:
-easy start-up
-flexible (can make decisions quickly)  management
is all you
-the profits are yours
-you are your own boss
-no business taxes; all income for you
-easy exit  pay your bills and stop working
 DISADVANTAGES OF SOLE
PROPRIETORSHIPS
-Unlimited Liability  you are responsible for
everything
-it’s hard to borrow money
- Size and Efficiency—you have to do everything
yourself. You may be good at some things
(making the product) but not at others
(keeping the financial records, doing the
insurance paperwork)
-limited management experience
-hard time finding qualified employees
-Limited Life – business dies when you die
 PARTNERSHIPS
 Partnerships – business jointly owned by two or
more persons.
 In 2000, partnerships accounted for 7.1% of
business organizations in the U.S.
 There are two types of partnerships:
*general partnerships – all partners actively run
the business
*limited partnership – at least one partner is not
active in running the business and has limited
responsibility for the debts & obligations of the
business.
 FORMING A PARTNERSHIP
 It’s
sort of like getting a marriage pre-nup.
 Legal papers are drafted that specify:
-how profits are divided.
-how new partners may join.
-how property is divided if the partnership
ends.

Warning  You are responsible for the

debts of your partners!
ADVANTAGES OF PARTNERSHIPS:
-easy to start
-easy to manage
-you get your share of the profits
-can attract financial capital easier than
sole proprietorships
-larger, so some economies of scale present
 More efficient operations (people can
specialize)
-easier to attract qualified employees
DISADVANTAGES OF
PARTNERSHIPS:
-responsible for the acts of all the other
partners
-if you are a limited partner, not involved in
daily activity, you only lose your original
investment
- limited life  when a partner dies or leaves, it
ends. It must be dissolved legally and
reorganized with the remaining partners.
(They usually want to keep the old name.)
-conflict between partners
-bankruptcy – if you’re not a limited partner,
you have to pay any debts!
CORPORATIONS

 Corporation – a form of business

organization that is recognized by the law
as having all the legal rights of an
individual.
 They have the right to buy & sell property,
enter into legal contracts, and to sue &
be sued.
 In 2000, corporations were 19.9% of
business organizations, but were
responsible for 88.8% of all sales.
CORPORATIONS
 Forming a Corporation:
 File for permission from the federal (national)
government or the state where your HQ will be
 “charter” is granted: states name, address,
purpose, number of shares of stock, etc.
 Sell stock (“IPO”) at an initial price
 Stock value goes up and down according to
your profitability
 Issue dividends (hopefully)
STOCK?
 Stock – a certificate of ownership in a firm.
 Stockholders – a.k.a. – shareholders –
investors in a corporation (they own
stock).
 The money from the stockholders
(investors) is used to set up the firm.
This money is called financial capital.
TYPES OF STOCK
 Common stock – basic form of
ownership in a corporation. Each
share is worth one vote for the
board of directors, who run the
company.
 Preferred Stock – non-voting shares
of stock, but these shareholders
receive profits before common
stockholders.
Figure 3.3
Ownership, Control, and Organization of a Typical Corporation
ADVANTAGES OF CORPORATIONS
 Easy to raise financial capital
1.) sell stock
2.) issue bonds  a written promise to repay the
amount borrowed in the future
 Hire professional managers
 Limited liability for the corporation’s
owners: the corporation itself is
responsible for all debts, not the owners. If
it goes out of business, stockholders do
not have to repay the corporation’s
debts.
 Unlimited life – the firm doesn’t die when a
shareholder does.
ADVANTAGES OF CORPORATIONS

 Easeof transferring ownership:

 If you don’t want to be part owner
any more, you just sell your stock.
 Much easier than a sole
proprietorship trying to find someone
to buy the entire business.
DISADVANTAGES OF
CORPORATIONS
 Difficultto start
 Shareholders have little say about
how the business is run
 Double taxation – the firms profits
are taxed and then the profit that is
distributed to shareholders is also
taxed.
 Subject to government regulation.
DISADVANTAGES OF
CORPORATIONS
Corporations are subject to more government
regulation than sole proprietorships and
partnerships.
 register with the state
 register with the Securities & Exchange
Commission—the SEC—to sell stock to the
public
 publish info on their sales and profits on
a regular basis
 get approval to buy or merge with other
companies.
ESTIMATING CASH FLOW
Depreciation: gradual wear and tear (the
amount less your stuff is worth at the end than
it was at the beginning)
income statement: report showing “gross”
income, sales, expenses to make your product,
depreciation…
 and “net” income! (net income = profits
after taxes)
…after you add depreciation back in, you end up
with one type of Cash flow
 “positive” cash flow:
 or “negative” cash flow:
GOAL OF COOPERATIVES
 Cooperative - a voluntary association of
people formed to carry on some kind of
economic activity that will benefit its
members.
 Producer and worker cooperatives are
associations in which the members join in
production and marketing and share the
profits.
COOPERATIVES
 Theconsumer
cooperative is a
voluntary
association
 They buy bulk
amounts of goods
such as food and
clothing on behalf
of its members.
 The goal is lower
prices for members.
CHAPTER 7

The Market
Structure
MARKET STRUCTURE
 Characterizedby the degree of
competition among business in the
same industry

 Types of Competition:
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Monopoly
PERFECT (PURE) COMPETITION
 When a large number of buyers and
sellers exchange identical products
under five conditions
1) There should be a large number of
buyers and sellers
2) The products should be identical
3) Buyers and sellers should act
independently
4) Buyers and sellers should be well-
informed
5) Buyers and sellers should be free to
enter, conduct, or get out of business
PERFECT COMPETITION
 Under a Perfect Competition
 Supply and demand set the equilibrium
price
 Each firms sets a level of output that
will maximize its profits at that price
 Imperfect Competition

 Refers to market structures that lack

one or more of the five conditions
MONOPOLISTIC COMPETITION

 Meets all conditions of perfect competition except

for identical products
 Use product differentiation

 Real or imagined differences between

competing products in the same industry
 Use non-price competition

 Advertising, giveaways, promotional

campaigns
 Sell within a narrow price range to try to raise
the price = profit maximization
OLIGOPOLY
A few large businesses dominate an
industry
 When one business makes a move, the
others usually follow
 Ex: a price war…cuts in airline ticket
 Sometimes results in collusion or price-
fixing which is illegal
 Collusion: formal agreement to set
prices
 Price-Fixing: charge the same
MONOPOLY
 One seller of a product that has no
close substitutes

 Natural Monopoly
 Geographic Monopoly
 Technological Monopoly
 Government Monopoly
 PART 3

INTRODUCTION
TO
MACROECONOMICS
 CHAPTER 8

Macroeconomics
Fundamentals
INTRODUCTION TO
MACROECONOMICS
 Microeconomics examines the behavior of
individual decision-making units—business
firms and households.
 Macroeconomics deals with the economy as a
whole; it examines the behavior of economic
aggregates such as aggregate income,
consumption, investment, and the overall level
of prices.
 Aggregate behavior refers to the behavior
of all households and firms together.
INTRODUCTION TO
MACROECONOMICS
 Microeconomistsgenerally conclude
that markets work well.
Macroeconomists, however, observe
that some important prices often seem
“sticky.”
 Stickyprices are prices that do not
always adjust rapidly to maintain the
equality between quantity supplied and
quantity demanded.
THE ROOTS OF
MACROECONOMICS

 Classical economists applied

microeconomic models, or “market
clearing” models, to economy-wide
problems.
 However, simple classical models failed
to explain the prolonged existence of
high unemployment during the Great
Depression. This provided the impetus
for the development of macroeconomics.
THE ROOTS OF
MACROECONOMICS
 In 1936, John Maynard Keynes published
The General Theory of Employment,
Interest, and Money.
 Keynes believed governments could
intervene in the economy and affect the
level of output and employment.
 During periods of low private demand, the
government can stimulate aggregate
demand to lift the economy out of
recession.
RECENT MACROECONOMIC
HISTORY
 Fine-tuning was the phrase used by
Walter Heller to refer to the
government’s role in regulating
inflation and unemployment.
 The use of Keynesian policy to fine-
tune the economy in the 1960s, led to
disillusionment in the 1970s and
early 1980s.
MACROECONOMIC CONCERNS
 Three of the major concerns of
macroeconomics are:
 Inflation
 Output growth
 Unemployment
INFLATION AND DEFLATION
 Inflation is an increase in the overall price
level.
 Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations are rare, but have been used
to study the costs and consequences of even
moderate inflation.
 Deflation is a decrease in the overall price
level. Prolonged periods of deflation can be
just as damaging for the economy as
sustained inflation.
OUTPUT GROWTH:
SHORT RUN AND LONG RUN

 The business cycle is the cycle of short-term ups

and downs in the economy.
 The main measure of how an economy is doing is
aggregate output:
 Aggregate output is the total quantity of goods and
services produced in an economy in a given period.
OUTPUT GROWTH:
SHORT RUN AND LONG RUN

 A recession is a period during which

aggregate output declines. Two
consecutive quarters of decrease in output
signal a recession.
 A prolonged and deep recession becomes a
depression.
 Policy makers attempt not only to smooth
fluctuations in output during a business
cycle but also to increase the growth rate
of output in the long-run.
GOVERNMENT IN THE MACROECONOMY

 There are three kinds of policy

that the government has used
to influence the
macroeconomy:
1. Fiscal policy
2. Monetary policy
3. Growth or supply-side policies
GOVERNMENT IN THE MACROECONOMY

 Fiscal policy refers to government policies

concerning taxes and spending.
 Monetary policy consists of tools used by
the Federal Reserve to control the quantity
of money in the economy.
 Growth policies are government policies
that focus on stimulating aggregate supply
instead of aggregate demand.
THE THREE MARKET ARENAS

 Households, firms, the

government, and the rest of
the world all interact in three
different market arenas:
1. Goods-and-services market
2. Labor market
3. Money (financial) market

128 of
THE THREE MARKET ARENAS
 Households and the government purchase
goods and services (demand) from firms in
the goods-and services market, and
firms supply to the goods and services
market.
 In the labor market, firms and
government purchase (demand) labor
from households (supply).
 The total supply of labor in the economy
depends on the sum of decisions made
by households.
THE THREE MARKET ARENAS
 In the money market—sometimes called
the financial market—households
purchase stocks and bonds from firms.
 Households supply funds to this market
in the expectation of earning income,
and also demand (borrow) funds from
this market.
 Firms, government, and the rest of the
world also engage in borrowing and
lending, coordinated by financial
institutions.
THE METHODOLOGY OF
MACROECONOMICS

 Connections to microeconomics:
 Macroeconomic behavior is the sum
of all the microeconomic decisions
made by individual households and
firms. We cannot understand the
former without some knowledge of
the factors that influence the latter.
AGGREGATE SUPPLY AND
AGGREGATE DEMAND
 Aggregate demand is the
total demand for goods
and services in an
economy.
• Aggregate supply is the
total supply of goods and
services in an economy.
• Aggregate supply and
demand curves are more
complex than simple
market supply and demand
curves.
EXPANSION AND CONTRACTION:
THE BUSINESS CYCLE
 An expansion, or boom,
is the period in the
business cycle from a
trough up to a peak,
during which output and
employment rise.
• A contraction, recession,
or slump is the period in
the business cycle from a
peak down to a trough,
during which output and
employment fall.
CHAPTER 9

Gross
Domestic
Product
FIGURE 1: THE CIRCULAR-FLOW DIAGRAM
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income (=GDP)
profit (=GDP)
GROSS DOMESTIC PRODUCT (GDP) IS…
…the market value of all final goods &
services produced within a country
in a given period of time.

Final goods are intended for the end user.

Intermediate goods are used as components
or ingredients in the production of other goods.
GDP only includes final goods, as they already
embody the value of the intermediate goods
used in their production.
GROSS DOMESTIC PRODUCT (GDP) IS…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP includes tangible goods

(like DVDs, mountain bikes, beer)
and intangible services
(dry cleaning, concerts, cell phone service).
GROSS DOMESTIC PRODUCT (GDP) IS…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP includes currently produced goods,

not goods produced in the past.
GROSS DOMESTIC PRODUCT (GDP) IS…
…the market value of all final goods &
services produced within a country
in a given period of time.

GDP measures the value of production that occurs

within a country’s borders, whether done by its
own citizens or by foreigners located there.
APPROACH IN MEASURING GDP
1. Industrial Approach- The value
added created in all the sectors of the
economy.
2. Expenditure Approach - The sum of
the domestic spending on final goods
(less domestic demand satisfied by
imports).
3. Income Approach – The Wage, Rent,
Interest and Profit Income generated by
the domestic economy.
 EXPENDITURE APPROACH
C Consumption Consumer durables, non-
+ durables, services
I Investment Structures (incl. Residential),
+ Equipment, and Inventory
G Government Government Spending on
+ Consumption Goods, Services, and Salaries.
X EXports Goods & Services Shipped
- Abroad
IM IMports Goods & Services from Abroad
= GDP A + NX = (C + I + G) + (X – IM)
 INCOME APPROACH
 Survey domestic residents and calculate
their wage income, interest income,
rental income plus the income of
proprietors of small firms plus the profits
& depreciation of the corporate sector.
 Subtract net international income
flows.
REAL VERSUS NOMINAL GDP
 Inflation
can distort economic variables like
GDP, so we have two versions of GDP:
One is corrected for inflation, the other is not.
 Nominal GDP values output using current
prices. It is not corrected for inflation.
 Real GDP values output using the prices of
a base year. Real GDP is corrected for
inflation.
THE GDP DEFLATOR
 The GDP deflator is a measure of the overall level of
prices.
 Definition:

Nominal GDP
GDP deflator = 100 x
real GDP

 One way to measure the economy’s inflation

rate is to compute the percentage increase in
the GDP deflator from one year to the next.
 CHAPTER 10

Economic Fluctuations,
Unemployment
& Inflation
BUSINESS CYCLES
 There are a number of theories
regarding the nature and causes of
business cycles.
 Classicals are a group of
economists who generally favour
laissez-faire or noninterventionist
policies.
 Keynesians generally favour
activist policies.
BUSINESS CYCLES
 Classical economists argue that
business cycles are to be expected in
a market economy.
 Keynesian economists believe that
fluctuations can and should be
controlled.
THE PHASES OF THE BUSINESS
CYCLE
 The peak is the top of the business
cycle.
 A boom is a very high peak,
representing a big jump in output.
 The downturn is the phenomenon of
economic activity starting to fall
from a peak.
THE PHASES OF THE BUSINESS
CYCLE
A recession is a decline in real
output that persists for more than
two consecutive quarters in a year.
 A depression is a large recession.
 The bottom of the recession or
depression is called the trough.
BUSINESS CYCLE PHASES

Expansion Recession Expansion

Peak
Total Output

Secular
growth
trend
Trough

0
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.-
Mar June Sept. Dec. Mar June Sept. Dec. Mar June
 UNEMPLOYMENT
Unemployment – it refers to the idle resources of the
economy. In a more specific term, however, this refers
to the unemployed labor resource, which is measured
by the unemployment rate during a particular period
of time.

Types of Unemployment
 Frictional unemployment
 Structural unemployment
 Cyclical unemployment
 Seasonal unemployment
 TYPES OF UNEMPLOYMENT
 The frictionally unemployed are people who are
between jobs or just entering or reentering the labor
market.
 A person who is out of work for a relatively long period
of time, say, a couple of years, is structurally
unemployed.
 Cyclical unemployment is anything above the sum of
frictional and structural unemployment
 Seasonal unemployment. At any given time in a year,
a couple of hundred thousand people may be out of work
because this is their ‘slow season.’
INFLATION
 It is the rise in the general price level.

Theories of Inflation
 Demand-pull inflation. When the aggregate
demand in an economy strongly outweighs the
aggregate supply.

 Cost-push inflation. A phenomenon in which

the general price level rise (inflation) due to
increases in the cost of wages and raw materials.
 CHAPTER 11

Fiscal and Monetary

Policies
FISCAL POLICY
 Through fiscal policy, regulators attempt to improve
unemployment rates, control inflation, stabilize
business cycles and influence interest rates in an
effort to control the economy.

 Discretionary Fiscal Policy

- Non-mandatory changes in taxation, spending, or
other fiscal activities by a government in response to
economic events or changes in economic conditions.
Discretionary fiscal policy implies
government actions above and beyond existing fiscal
policies, and often occurs in periods of recession or
economic turbulence.
MONETARY POLICY
 Monetary policy is the actions of a central
bank, currency board or other regulatory
committee that determine the size and
rate of growth of the money supply, which
in turn affects interest rates. Monetary
policy is maintained through actions such
as modifying the interest rate, buying or
selling government bonds, and changing
the amount of money banks are required
to keep in the vault (bank reserves).
CHAPTER 12

Principles
of Taxation
TAXES AND THE ECONOMY
The government collects taxes from people
who have the capacity to earn more
income and accumulate wealth. In return,
the government uses the tax revenues
collected to provide social services such as
health and education to the less fortunate
members of society, provision of public
works and highways as well as national
defense and police protection. This cycle of
wealth and income redistribution is a
system that helps stabilize the economy.
PRINCIPLES OF TAXATION

 Benefit Principle:  Ability-to-Pay

those who benefit Principle: people
from government should be taxed
services should be the according to their
ones who pay for them ability to pay,
and in proportion to regardless of the
what they receive. benefits they receive.
 TYPES OF TAXES
 Proportional: imposes same percentage rate
of taxation on everyone
 Progressive: imposes a higher percentage
rate of taxation on people with high incomes
than on those with low incomes
 Regressive: imposes a higher percentage
rate of taxation on low incomes than on
high incomes
CHAPTER 13

Agrarian
Reform
IMPORTANCE OF
AGRARIAN REFORM
 Agrarian Reform is very significant for
the economy of any country because more
than half of the population is employed in
the agricultural sector. Agriculture is the
main source of livelihood especially for the
developing countries. Reforms are
important because they protect the rights
of the farmers .
AGRARIAN REFORM AND THE
ECONOMY
An effective agrarian reform is a precursor to
successful economies where there are evident
agricultural improvements and growth in
income which leads to economic development.
 On Agricultural Productivity

 On Poverty

 Income and Living Standards

 Employment

 Investment and Capital Formation

 Impartiality in Rural Population

MEASURES OF AGRARIAN REFORM
 Public Health Provisions
 Family Planning
 Education & Training of Farmers
 Reorganization of Land Reform Agencies
 Labor Laws to Agricultural Workers
 Construction of Infrastructure Facilities
 Organization of Voluntary Associations
 Provide Employment Opportunities
 Community Development in Nature