Economics

Economics Mark Benedict M. Guia CPA MBAReviewerCRC-ACE The CPA Professional Review SchoolEconomicsis thesocial sciencethat studies economic activity to gain an understanding of the processes that govern the production, distribution and consumption of goods and services An exchange economymicroeconomicsDefinitionHow an individual consumer spends his income to maximize satisfactionHow a business firm combines resources or factors of production to maximize profits and minimize losses How the price of each commodity and each type of resource is determined by demand and supply. How individual decisions are affected by different forms of market organizationLaw of DemandAs the prices of commodity decreases, all other things being constant, the quantity of the product that buyers are willing and able to buy increases. (Inverse relationship with price)Buyers response will be greater after they have had time to adjust more fully to a price change Principles behind Consumer ChoiceThere is always a limited income, while unlimited desires necessitates choiceConsumers make good choices to achieve their purposesConsumers can substitute between like goods and servicesConsumers make decisions based on imperfect information Law of Diminishing Utility Determinants of DemandPrice (Primary determinant) Non-Price Determinants Income Population Taste and Preference Price Expectation Price of related goodsSubstitution Effect Change in Demand Movement along the demand curve = change in price of goods and services Shift of the demand curve = Change in income, preference, or prices of other goods and/or services Types of Demand Elasticity Elastic DemandInelastic DemandUnitary Elastic DemandPerfectly Elastic Demand (Purely competitive market) Perfectly Inelastic Demand (Medicines without no Substitute) Determinants of Demand Elasticity Number of Substitute Goods Price Increase in proportionate to income Importance of the product to the buyers (Luxury goods versus Essential Goods) Price Elasticity of Demand

Income Elasticity of Demand

Cross Elasticity of Demand

Determinants of SupplyPrice (Primary determinant) direct relationship Non-Price DeterminantsTechnology Cost of Production Number of Sellers or ProducersPrices of Other goodsPrice Expectations Taxes and Subsidies

Change in Supply Movement along the supply curve - change in price of a good or service Shift of the supply curve change in costs, input prices, technology, or prices of related goods and servicesType of Supply ElasticityElastic Supply Inelastic Supply Unitary SupplyPerfectly Elastic SupplyPerfectly Inelastic SupplyPrice Elasticity of Supply

Demand, Supply and Market Equilibrium Quantity Demanded < Quantity Supplied = Surplus Quantity Demand = Quantity Supplied = Equilibrium Quantity Demand > Quantity Supplied = Shortage

Theory of Consumer Behavior UtilityMarginal Utility Law of Diminishing Marginal UtilityFactors of Production Land (sometimes called natural resources)Labor Capital (Product of the past industry of man, a wealth, and to be used to produce more value) Explicit CostsImplicit CostsEconomic ProfitAccounting ProfitEntrepreneurship

Market Structures Pure Competition Pure Monopoly Monopolistic CompetitionOligopoly Macroeconomics DefinitionA branch of learning that specializes on the study of economic activities on the aggregate level.A study of the behavior of the economy as a whole. Its main concern are total output, total income, general level of employment (unemployment rate) and general price level (inflation)

General Concerns of MacroeconomicsUnemploymentInflation Growth and Development Interest Policy Level of Taxation and Government BudgetInternational Trade Policy

Four Sectors of Economy

Components of Aggregate Demand Private Consumption Private InvestmentGovernment ExpendituresNet Export (export minus import)

Factors Affecting the General Level of Demand Fiscal (Taxes and Spending) and Monetary (Financial System) Policies of the Government Changes in Asset Values (Real and Financial Assets) Economic performance of trading partners abroad Oil Price Changes

Determinants of Aggregate SupplyChanges in the cost of production Changes in taxes and subsidies Increase in demand of local products abroad

National Output Gross Domestic Product (GDP)Gross National Product (GNP)Net National Product (NNP)National Income (NI) Personal Income (PINc)Disposable Income (DI) Personal Savings (PS)

Business Cycle

Key Market Indicators Civilian Labor ForceUnemployedLabor Force Participation Rate Unemployment RateFull Employment Natural Rate of Unemployment Inflation Anticipated Inflation Unanticipated Inflation

Keynesian Theory Average Propensity (Tendency) to Consume (APC)Average Propensity to Save (APS)Marginal Propensity to Consume (MPC)Marginal Propensity to Save (MPS)