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Transcript of Jayvie Simpan
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MICROECONOMICSMICROECONOMICS
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CHAPTER 1:CHAPTER 1:ECONOMIC WAY
OF THINKING
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SCARCITYSCARCITY
commodity or service being in short supply.
limited availability of economic resources
relative to societys unlimited demand forgoods and services.
Since human wants and needs are unlimitedand the available resources are finite,scarcity naturally results leaving the societythe problem of resource allocation.
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ECONOMICSECONOMICS
science that deals with the problem ofresource allocation.
simply scarcity and choice.
From the two Greek words: oikos household and nomus system ormanagement.
Oikonomia/ Oikonomus management ofhousehold.
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CETERIS PARIBUS ASSUMPTIONCETERIS PARIBUS ASSUMPTION
all other things held constant or all elseequal.
used as a device to analyze relationshipbetween two variables while the otherfactors are held unchanged.
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CLASSICAL ECONOMICSCLASSICAL ECONOMICS
Adam Smith
Father of Economics.
wrote the Wealth of theNations which hadbeen the Bible ofEconomics for a hundredyears.
recognized Economicsas a separate body of
knowledge.
Birth of Economic Theory:
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John Stuart Mill
heir to David Ricardo.
developed the basic analysis of politicaleconomy or the importance of states rolein its national economy.
theory of political economy.
Karl Marx
influenced by the Industrial Revolution.
wrote Das Kapital from which major
socialist thought emerged.
CLASSICAL ECONOMICSCLASSICAL ECONOMICS
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NEOCLASSICAL ECONOMICSNEOCLASSICAL ECONOMICS
Leon Walras
introduced the general economic system.
developed analysis of equilibrium in severalmarkets.
Alfred Marshall
most influential economist during this time
because of his book Principles ofEconomics.
developed the analysis of equilibrium in aparticular market and the concept of
marginalism.
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KEYNESIAN ECONOMICSKEYNESIAN ECONOMICS
John Maynard Keynes
offered an explanationof massunemployment andsuggestions forgovernment policy to
cure unemployment inhis influential book:The General Theory ofEmployment, Interest
and Money (1936).
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NONNON-- WALRASIAN ECONOMICSWALRASIAN ECONOMICS
(1939)(1939) John Hicks
analyzed IS- LM
model, which isconsidered as animportantmacroeconomic
model.
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POSTPOST-- KEYNESIAN ECONOMICSKEYNESIAN ECONOMICS
(1940s and 1950s)(1940s and 1950s)
development of rules and regulations ofdifferent private and public institutions.
views are known as mainstreameconomics.
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NEW CLASSICAL ECONOMICSNEW CLASSICAL ECONOMICS
Highlighted the importance of adherence tonational expectations hypothesis and analysis.
Po
sitive Eco
no
mics economic analysis that considers economic
conditions as they are or considerseconomics as it is.
Normative Economics economic analysis which judges economic
conditions as it should be.
concerned with human welfare.
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FOUR BASIC ECONOMICFOUR BASIC ECONOMIC
QUESTION
SQUE
STION
S
1. What to Produce?
2. How to Produce?
- Labor Intensive
Production
- Capital IntensiveProduction
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FOUR BASIC ECONOMICFOUR BASIC ECONOMIC
QUESTION
SQUE
STION
S
3. How much to Produce?
- Underproduction failure to meetneeds/wants of society.
- Overproduction excess goods andservices going to waste
4. For Whom to Produce?
-target market - for those who can paythe highest price is for whom the goods andservices are produced.
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RELATIONSHIP OF ECONOMICSRELATIONSHIP OF ECONOMICS
TO OTHER SCIENCESTO OTHER SCIENCES
Business Management provides employment
opportunities to members of the society. History provides information regarding
theories that can be revisited to evaluatepresent and future economic issues.
Finance management of money, credit,banking and investment.
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RELATIONSHIP OF ECONOMICSRELATIONSHIP OF ECONOMICS
TO OTHER SCIENCESTO OTHER SCIENCES
Physics innovations and output.
Sociology behavior of societies;macroeconomics.
Psychology behavior of man;microeconomics.
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IMPORTANCE OFSTUDYINGIMPORTANCE OFSTUDYING
ECONOMICSECONOMICS
To understand society
To understand global
affairs
To be an informed voter
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3Es IN ECONOMICS3Es IN ECONOMICS
Efficiency productivity and properallocation of economic resources.
Equity justice and fairness.
Effectiveness attainment of goals andobjectives.
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IMPORTANT ECONOMICIMPORTANT ECONOMIC
TERMSTERMS
Wealth anything with functional value whichcan be traded for goods and services; stock of
net assets owned by individuals or households. Consumption direct utilization or usage of
available goods and services by the buyer/consumer sector.
Production formation by firms of an output.
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IMPORTANT ECONOMICIMPORTANT ECONOMIC
TERMSTERMS
Exchange process of trading goods andservices for money/ its equivalent.
Distribution allocating or apportioning scarceresources to be utilized by household, businesssector, and the rest of the world.
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2 MAJOR BRANCHES OF2 MAJOR BRANCHES OF
ECONOMICS
ECONOMICS
1. Microeconomics
- deals with individual decision of unit of
economy.
Market - central concept of
microeconomics.
Buyer and Seller - 2 main players
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2 MAJOR BRANCHES OF2 MAJOR BRANCHES OF
ECONOMICS
ECONOMICS
2. Macroeconomics
- studies the relationship among broad
economic aggregates; seeks to understandthe behavior of economy as a whole
Focuses on: consumption, investment,government spending, export and import.
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FACTORS OF PRODUCTIONFACTORS OF PRODUCTION
Land all natural resources.
Labor any form of human effort exerted in
the production of goods and services. Capital man- made goods used in the
production of other goods and services.
Entrepreneur person who organizes,manages and assumes the risk of the firm,taking a new idea or a new product andturning it into a successful business.
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BASIC DECISION PROBLEMSBASIC DECISION PROBLEMS
Consumption problem that consumers mustalways deal with in day-to-day activities.
Pro
ductio
n determine the needs, wants anddemands of consumers; decide how toallocate resources to meet needs.
Distribution addressed to the government;
proper allocation of all resources for benefit ofthe whole society.
Growth over Time last basic decision that thesociety or nation must deal with.
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TYPES OF ECONOMIC SYSTEMSTYPES OF ECONOMIC SYSTEMS
Traditional Economy subsistence economy.
Command Economy type of economy
wherein the manner of production is dictatedby the government.
all productive enterprise are owned by thepeople and administered by the state
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TYPES OF ECONOMIC SYSTEMSTYPES OF ECONOMIC SYSTEMS
Market Economy capitalism; resources areprivately owned and the people make thedecisions.
Socialism key enterprises are owned by thestate.
Mixed Economy mixture of market system
and command system.
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CHAPTER 2:CHAPTER 2:
THE BASIC ANALYSIS
OF DEMAND AND
SUPPLY
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MARKETMARKET
Where buyers and sellers meet; wheretransactions take place.
Doesnt necessarily refer to a tangible area;can be itangible domain where goods andservices are traded (stock market, real estatemarket, labor market).
KINDS OF MARKET Wet market - vegetables, meats, etc
Dry market - shoes, clothes.
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DEMANDDEMAND
Quantity of good or service that people areready to buy at given prices within a given
time period, when other factors besidesprice are held constant.
3 THINGS THAT A DEMAND IMPLIES:
Desire to possess a thing Ability to pay for it or means of purchasing it
Willingness in utilizing it
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Lawof Demand - If the pricegoes up, the quantity
demanded will go down, andvice versa, ceteris paribus
Demand Schedule - table thatshows relationship of pricesand specific quantitydemanded at each of theseprices.
DEMANDDEMAND
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Demand Curve - graphicalrepresentation showing
relationship between priceand quantities demanded pertime period.
Negative slope (downward
from left to right)- indicatesthe inverse relationshipbetween the price andquantity demanded.
DEMANDDEMAND
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Demand Function - showsthe relationship betweendemand for a commodityand the factors thatdetermine or influence thisdemand.
Expressed inmathematical function
QD-= f(own price,income, price of related
goods, etc)
DEMANDDEMAND
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CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDEDVS. CHANGE IN DEMANDVS. CHANGE IN DEMAND
CHANGE IN QUANTITY DEMANDED
if movement is along the same demand
curve. Brought out by increase or decrease in
products price.
Direction of the movement is inverse according to the
Law of Demand.
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CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDEDVS. CHANGE IN DEMANDVS. CHANGE IN DEMAND
CHANGE IN DEMAND
If the entire demand curve shifts to the left
(decrease in demand) or right (increase indemand).
Increase (decrease) in demand is broughtby factors other than the price of the good
itself such as tastes and preferences, priceof substitute goods, etc. resulting in the shiftof the entire demand curve either upwardor downward.
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FACTORS THAT CAUSE THEFACTORS THAT CAUSE THEDEMAND CURVE TO CHANGEDEMAND CURVE TO CHANGE
Taste or preference- personal likes/dislikesof consumers for certain goods or services.
Changing incomes
Occasional/ seasonal products variousevents or seasons in a given year
Population change
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FACTORS THAT CAUSE THEFACTORS THAT CAUSE THEDEMAND CURVE TO CHANGEDEMAND CURVE TO CHANGE
Substitute goods goods interchanged with
another good Expectations of Future Prices if the buyer
expects the price of a food or service to rise(or fall) in the future, it may cause the current
demand to increase (or decrease)
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SUPPLYSUPPLY
Quantity of goods or services that firms are readyand willing to sell at a given price within a periodof time, other factors being held constant
Lawof Supply- as the price of a good or servicegoes up, the quantity supplied for such a good or
service will also go up, and vice versa, ceterisparibus
Implies that higher price is an incentive forbusiness firms to produce more goods or
services as this will maximize profit
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Supply Schedule- schedule listing the variousprices of a product and specific quantitiessupplied at each of their prices.
Supply Curve-graphical representation showingthe relationship between price of product orfactor of production and the quantity supplied pertime period
- Positive slope (Upward from left to right)
SUPPLYSUPPLY
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Supply Function- form of mathematical notationthat links the dependent variable, quantity
supplied (Q-S), with various independent variableswhich determine the quantity supplied
Q-s = f(own price, number of sellers, price of
factor inputs, technology, etc.)
SUPPLYSUPPLY
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CHANGE IN QUANTITY SUPPLYCHANGE IN QUANTITY SUPPLYVS. CHANGE IN SUPPLYVS. CHANGE IN SUPPLY
CHANGE IN QUANTITY SUPPLIED - movement isalong the same supply curve
Brought about by an increase (decrease) inthe products own price
Direction of the movement is positive
CHANGE IN SUPPLY - entire supply curve shiftsrightward or leftward; at the same price,more/less amounts of good or service are
supplied by producers/ sellers.
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FORCES THAT CAUSE THEFORCES THAT CAUSE THE
SUPPLY CURVE TO CHANGESUPPLY CURVE TO CHANGE Optimization of the use of factors of production-
process or methodology of making somethingas fully perfect, functional or effective as
possible; efficient use of resources (land, labor,capital, entrepreneurship)
Technological Change- introduction of cost-reducing innovations
Future Expectations
Number of Sellers
Weather Conditions
Government Policy- removing the quotas, tariff
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MARKET EQUILIBRIUMMARKET EQUILIBRIUM
Meeting of supply and demand
EQUILIBRIUM- state of balance that exists whenquantity demanded equals quantity supplied;
General agreement of the buyer and seller at aparticular price at a particular quantity
EQUILIBRIUM MARKET PRICE- price agreed by theseller to offer its good or service for sale and for
the buyer to pay for it
Price at which quantity demanded of a good isequal to the quantity supplied
Intersection of the demand and supply curves
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MARKET DISEQUILIBRIUMMARKET DISEQUILIBRIUM
Surplus- condition in the market where Quantitysupplied > Quantity demanded
Market prices decrease in order for goods to
be easily disposed from the market
Downward pressure to price
Shortage condition in the market whereQuantity demanded > Quantity supplied
Market prices increase
Upward pressure to price
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PRICE CONTROLSPRICE CONTROLS
specification of the government of minimumand maximum prices of goods and services
Imposed by the government if disequilibrium
in the market persists over a longer period oftime
Floor Price- legal minimum price imposed by
the government when the surplus in theeconomy persists
Price Ceiling- legal maximum price imposed bythe government if there is a persistent shortage
of goods in the economy
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PARTIAL EQUILIBRIUM ANALYSISPARTIAL EQUILIBRIUM ANALYSIS
Demand Equation: QD = a bP
Supply Equation: QS = -c + dP
Equilibrium Condition: QD = QS
3 Equations and Unknowns: QD, QS, P
Exogenous variable: Y
Parameters/ Coefficients: a, b, c, d
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CHAPTER 3
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ELASTICITY OF DEMANDELASTICITY OF DEMAND
means responsivenessElasticity
is a measure of the degree of
responsiveness variables which affect
demand for that product.
Demand
elasticity
is the responsiveness of consumers
demand to change in price of the good
sold.
Price Elasticity
of demand
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is the responsiveness of consumer
demand to change in their income.
Income
elasticity ofdemand
is the responsiveness of demand fora certain good, in relation to
changes in price of other related
goods.
Crosselasticity of
demand
ELASTICITY OF DEMANDELASTICITY OF DEMAND
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INTERPRETATATION OF THEINTERPRETATATION OF THE
ELASTICITY COEFFICIENTELASTICITY COEFFICIENT
Demand for a product is to be INELASTIC if
consumers will pay almost any price for the product,
while demand for a product may be ELASTIC if theconsumers will only pay a certain price.
means that producer or seller can raise prices
without much hurting demand for its product.
The demand for a good is inelastic when the
change in quantity demanded is lass than the
change in price.
INELASTIC
DEMAND
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ELASTICITY OF DEMAND
means that consumers are sensitive to the price atwhich a product is sold and will only buy it if the
price rises by what they consider too much.
Demand for a good elastic if the change in quantity
demanded is greater than the change in price.
ELASTICITY OF SUPPLY
supply elasticity refers to the reaction or response
of the sellers or producers to price changes of
goods sold.
it is measure of the degree of responsiveness of
supply to a given change in price.
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Is one who demands goods and
services
the king in a capitalist or free
market economy
Consumer SovereigntyConsumer Sovereignty our power to determine what is
produced since we are the ultimate
purchasers of goods and services
ConsumerConsumer
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GoodsGoods
-refer to anything that providessatisfaction to the needs wants and
desires of the consumer
any tangible economic products that
contribute directly or indirectly to the
satisfaction of human needs and wants
ServicesServices are any intangible economic activities
that contribute directly or indirectly to
the satisfaction of human wants
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y Economic good
is that which is both useful and scarce
has a value attached to it and a price has
to be paid for its use
y Free good
if a good is so abundant that there is
enough of it to satisfy everyones need
without anybody paying for it
KINDS OF GOODSKINDS OF GOODS
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TASTES AND PREFERENCESTASTES AND PREFERENCES
Determined by age , income, education,gender, occupation, and traditions as well as
culture
y Preferences
are the choices made by us consumers as to
which products or services to consume
y Brand
is the name, term or symbol given to aproduct by a supplier in order to distinguish
his offering from that of similar product
supplied by competitors
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Maslows Hierarchy of needsMaslows Hierarchy of needs identifies the basic priorities of every
consumer
y Physiological needs
are the basic need for sustaining human life
itself, such as food, water, warmth, shelter,sex, and sleep
y Safety needs
are the needs to be free of physical dangerand the fear of losing ones work, property,food, or shelter
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UtilityUtility refers to the satisfaction or pleasure that an
individual or consumer gets from the
consumption of a good or service that (s)he
purchases
Utility Theory explain how our satisfaction or utility as
consumer decline when we try to consume
and more of the same good at a particular
point in time
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2IMPORTANT CONCEPT OF2IMPORTANT CONCEPT OF
UTILITY THEORYUTILITY THEORY
Marginal utility
is defined as the additional satisfaction
that an individual derives from consuming
an extra unit of a good or service
Total utility
is the total satisfaction that a consumerderives from the consumption of a given
quantity of a good or service in a
particular time period
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Law ofDiminishing Marginal Utility states that as a consumer gets more
satisfaction in the long-run, heexperiences a decline in his satisfactionfor goods and services
Consumer Surplus is a measure of the welfare we gain from
the consumption of goods and services,or a measure of the benefits that wederive from the exchange of goods
Is the difference between the totalamount that we are willing and able topay for a good or service and the totalamount that we actually pay for that
good or service
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Concave Utility Curve
Marginal Utility
Convex Utility CurveTotal Utility Curve
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CHAPTER 5
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refers to any economic
activity, which combines the
four factors of production to
form an output which will
give direct satisfaction to the
consumer is the act of combining
the factors of production
by firms or institutions
in order to producegoods and services
is the process of
converting inputs
into outputs
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these are commodities and services that are used to produce
goods and services
Three broad categories of
inputs
Land-includes natural resources, represents the gift of nature
to our productive processes
Labor-is the mental and physical ability used in the production
of goods and services
Capital-are the goods that are used in the production of other
goods and services
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is the body of knowledge applied to how goods are
produced
Two broad categories oftechnology
utilizes more labor resources than capital
resources
Labor Intensive
technology
utilizes more capital resources than labor
resources in the production process
Capital Intensive
Technology
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Fixed Input - is any resource the quantity of
which cannot readily be changed when
market conditions indicate that a change inoutput is desirable
Variable Input - is any economic resource thequantity of which can be readily changed in
response to changes in output
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Short Run - is a
period of time so
short that there is atleast one fixed input
therefore changes in
the output must be
accomplishedexclusively by
changes in the use of
variable inputs
Long Run - is a period
of time so long that all
inputs are consideredvariable
known as
planning
horizon
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is the functional relationship between quantities of
inputs used in production and outputs to be produced
Three Important Production Concepts
refers to the total output produce after utilizing the
fixed and variable inputs in the production processTotal product
which equals total product divided by total units of
input usedAverage Product
is the extra output produced by 1 additional unit of
that input while other inputs are held constantMarginal Product
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