ECONOMICS 4.

Distribution: These four factors of production (Land,

Labor, Capital and Organization) are to be rewarded for
 derived from two Greek words, oikos (a house) and their services rendered
nemein (to manage) 5. Public Finance: It studies how the government gets
 ‘managing a household’ using the limited funds money and how it spends it.
available = study about public revenue and public expenditure.
 the study of allocation of scarce resources
 determinants of income, output, employment and B) MODERN APPROACH
economic growth.
1. Microeconomics -any particular decision-making unit
2 MAJOR FACTORS FOR THE EMERGENCE OF such as a household or a firm.
ECONOMIC PROBLEMS = also called price theory.
2. Macroeconomics - studies the behavior of the economic
1. The existence of unlimited human wants system as a whole
2. The scarcity of available resources = also known as income theory.
DEFINITIONS OF ECONOMICS ECONOMIC SYSTEM
1. ADAM SMITH = defined economics as the science of I.) Circular Flow of Goods and Money in an Economic
wealth. System
2. ALFRED MARSHALL = he defined “Political
Economy” or Economics is a study of mankind in the - In an economic system, the two economic units
ordinary business of life. (households and enterprises) are linked by a circular pattern
= based on the concept of welfare of economic activities
3. LIONEL ROBBINS = economics is a science which
studies human behavior = The interactions of households and firms bring together
4. PROF. PAUL SAMUELSON = the study of how men the two sides of economics: demand and supply.
and society choose = The action occurs in two sets of markets; that for INPUTS
AGRICULTURAL ECONOMICS and OUTPUTS.

- an applied social science that deals with how producers, = INPUT MARKETS = households offer their labor, land
consumers, and societies use scarce resources in the and capital.
production = OUTPUT MARKETS = the enterprises sell out the goods
 SCOPE OF ECONOMICS =province or field of study. and services to the consumers or households.

I. ECONOMICS – A SCIENCE AND ART II.) Types of Economy

1. Economics is a science - it have been systematically 1. CAPITALISM = use of capital with profit motive.
collected, classified and analyzed 2. SOCIALISM = means of production (capital
2. Economics – A Social Science - the process of equipment, buildings and land) are owned by the state.
satisfying wants is not only an individual process, but = The main aim of socialism is to run the economy for
also a social process. social benefit rather than private profit.
= to study social behavior. = Communism is a form of socialism
3. Economics is also an art = An art is a system of rules for = COMMUNISM = means an idealistic system.
the attainment of a given end. 3. Mixed Economy = mixture of the capitalism and
= A science teaches us to know; an art teaches us to do socialism.
= aims at achieving the goals of both capitalism and
II. POSITIVE AND NORMATIVE ECONOMICS socialism
A) Positive Economics = deals with what the economy is DEFINITIONS
actually like.
= focuses on facts and avoid value judgment 1. GOODS/VISIBLE GOOD/MATERIAL GOOD- Any
= concerned with “What is?”. tangible commodity that satisfies human want.
B) Normative Economics = involves value judgment about 2. SERVICE/INVISIBLE GOOD/IMMATERIAL GOOD
what the economy should be like - Any intangible thing that satisfies human want
=concerned with “What ought to be?”. 3. FREE GOOD - A good or service that has no price
4. ECONOMIC GOOD- Goods that are scarce or limited
III. SUBJECT MATTER OF ECONOMICS 5. CONSUMER GOOD- satisfy our wants directly
6. PRODUCER GOOD/CAPITAL
A.) TRADITIONAL APPROACH GOODS/INVESTMENT GOODS - do not satisfy our
1. Consumption = satisfaction of human wants through the wants directly
use of goods and services 7. PERISHABLE GOODS - decay or perish quickly
2. Production = creation of utility for satisfying human 8. DURABLE GOODS=lasts for a long period of time
wants 9. WEALTH = an easily transferable (material) good
=resources like land, labour, capital and organization 10. INCOME = Remuneration paid
are needed. 11. REAL INCOME =expressed in terms of commodity
3. Exchange = process of buying and selling constitutes 12. MONEY INCOME - expressed in terms of money
exchange.
 THEORY OF CONSUMER BEHAVIOR  tastes and preferences of the consumer
 income of the consumer
1. Consumption = satisfying human wants.
 prices of related goods (substitute and complementary
2. Wants = Anything that we desire is a want.
goods).
TYPES OF WANTS
FOUNDATION OF THE LAW OF DEMAND
1. NECESSARIES - essential for our existence
 Diminishing Marginal Utility
2. COMFORTS - lead to easy living
= improve our working efficiency.  Income Effect & Substitution Effect
3. LUXURIES - highly expensive MARGINALISM CONCEPT BY JOHN STUART MILL
4. Standard of Living = we are generally accustomed.
= KIRKPATRICK defined standard of living as “the - “Too much” occurs when we keep obtaining the products
meeting the physical and psychic needs and wants of beyond the point where their marginal cost equals their
the different individuals composing the family”. marginal benefit.
5. Utility = the power of a commodity or service to satisfy
a human want. CHANGES IN QUANTITY DEMANDED (Qd)
=UTILITY - ‘expected satisfaction’ - can only be brought about by a change in Price
=SATISFACTION = ‘realized satisfaction’
DETERMINANTS OF DEMAND
Kinds of Utility:
1. Change in Buyer Tastes – can lead to changes in
1. Form Utility = If the physical form of a commodity is demand for various goods and services
changed 2. Change in Number of Buyers
2. Place Utility = If a commodity is transported from one 3. Change in Income
place to another
 Normal Goods - demand increases as consumer income
3. Time utility = If the commodity is stored up for future
rises, and demand decreases as consumer income falls
usage
 Inferior Goods - demand decreases as consumer income
4. Cardinal utility concept = it is possible to measure and
rises, and demand increases as consumer income falls
compare the utilities of two commodities
4. Change in the Price of Related Goods
5. Ordinal utility = the utility cannot be measured; it can
 Substitute Goods
only be compared
 Total utility = consumption of all the units of a  Complementary Goods
commodity 5. Change in Expectations
 Marginal utility = change in the total utility  INCREASE IN DEMAND = Demand curve shifts to the
MARGINAL UTILITY = RIGHT
 DECREASE IN DEMAND = Demand curve shifts to the
CHANGE∈TOTALUTILITY
LEFT
CHANGE∈QUANTITY CONSUMED  CHANGES IN DEMAND = change in any of the
Determinants of Demand
∆ TUx  DEMAND FUNCTION = represents the relationship
Mux =
∆Qx between the quantity demanded of a product or service and
various factors that influence it, such as price, income, and
Law of Diminishing Marginal Utility the prices of related goods.
• This law indicates the familiar behavior of marginal utility, • Qd = 1,000 - 10P + 5I - 20Pr
i.e., as a consumer takes more and more units of a good, the
additional satisfaction that he derives from an extra unit of  ELASTICITY = measures the responsiveness of the quantity
the good goes on falling. demanded or supplied
ELASTICITY OF DEMAND
MARKET = All situations that link potential buyers ELASTIC DEMAND
with potential sellers
= There’s always Demand and Supply
( Q2−Q1 ) /Q 1
ED =
DEMAND = consumers are willing and able to ( P 2−P 1 ) / P1
purchase  QUANTITY is sensitive to a change in price
 If PRICE increases, QUANTITY DEMANDED will
LAW OF DEMAND
fall a lot
*ceteris paribus or “all else equal”  If PRICE decreases, QUANTITY DEMANDED
increases a lot
= If the price of a commodity falls, the quantity demanded
of it will rise CHARACTERISTICS OF ELASTIC DEMAND

= if price of the commodity rises, its quantity demanded will 1. MANY SUBSTITUES
decline. 2. LUXURIES
3. ELASTICITY COEFFICIENT IS MORE THAN 1
= There is an INVERSE RELATIONSHIP between price
and quantity demanded INELASTIC DEMAND

= These other things which are assumed to be constant are:  QUANTITY is sensitive to a change in price
  If PRICE increases, QUANTITY DEMANDED will LAW OF SUPPLY
fall a lot
 If PRICE decreases, QUANTITY DEMANDED = ceteris parivus, producers will offer more of a product at a
increases a lot high price than at a low price

CHARACTERISTICS OF INELASTIC DEMAND = DIRECT RELATIONSHIP

1. FEW SUBSTITUES CHANGE IN QUANTITY SUPPLIED = can only be

2. NECCESITIES brought by a change in price
3. ELASTICITY COEFFICIENT IS LESS THAN 1 DETERMINANTS OF SUPPLY
PERFECTLY INELASTIC DEMAND 1. Change in resource prices
 DEMAND REMAINS CONSTANT 2. Change in Technology
3. Change in taxes and subsidies
PERFECTLY ELASTIC DEMAND 4. Change in prices of other related goods
 Substitution in production
 BUY NOTHING IF THE PRICE INCREASES EVEN 5. Change in price expectations
SLIGHTLY 6. Change in number of suppliers
INCREASE IN SUPPLY = Supply curve shifts to the
MIDPOINT FORMULA
RIGHT
Q 2−Q1 DECREASE IN SUPPLY = Supply curve shifts to the
 % CHANGE IN QUANTITY = ×100 LEFT
(Q 2+Q 1)/2
P 2−P 1 PERFECTLY INELASTIC SUPPLY
 % CHANGE IN PRICE = ×100
( P 2+ P 1)/2  CONSTANT SUPPLY OF COMMODITY
REGARDLESS OF MARKET DYNAMICS
PRICE ELASTICITY OF DEMAND (PED)
PERFECTLY ELASTIC SUPPLY
 Measures how responsive the quantity demanded of a  INCREASE IN SUPPLY AT HIGHER PRICE
good to changes in its price
MARKET EQUILIBRIUM
% Change ∈Quantity Demanded
 PED =  Interaction of the forces of demand and supply
% Change ∈Price
1. If Demand is Elastic – PED > 1  Intersection of the supply curve and the demand curve
= very responsive to price changes for a product
2. If Demand is Unit elastic – PED = 1  SURPLUS = BIDDING DOWN OF PRICE by sellers
= percentage change in quantity demanded is exactly  SHORTAGE = COMPETETIVE BIDDING UP by
equal to percentage change in price buyers pushing the price up
3. If Demand is Inelastic – PED < 1  EQUILIBIRIUM QUANTITY = the QS and QD at the
= not very responsive to price changes EQUILIBRIUM PRICE

INCOME ELASTICITY OF DEMAND (YED) MARKET EQUILIBRIUM IN MATH EQUATIONS

 Measures how changes in consumer income affect the  QD = 240 – 2P

quantity demanded of a good  QS = -60 + 3P
% Change ∈Quantity Demanded LEGAL PRICES
 YED =
% Change ∈Income
1. If YED is POSITIVE – YED > 0  PRICE SUPPORT (PRICE FLOOR) – ABOVE
= good is a NORMAL GOOD EQUILIBRIUM PRICE
= as income increases, quantity demanded increases - Help for FARMERS
2. If YED is NEGATIVE – YED < 0 - Brings about SHORTAGE
= good is INFERIOR GOOD  PRICE CONTROL (PRICE CEILING) – BELOW
=as income increases, quantity demanded decreases EQUILIBRIUM PRICE
- Help for CONSUMERS
CROSS-PRICE ELASTICITY OF DEMAND (XED) - Brings about SURPLUS
 MARKET = COURNOT (FRENCH ECONOMIST) –
 Measures how changes in price of 1 good affect the market is the whole of any region which buyers and
quantity demanded of another related good sellers are in such free intercourse with price
 XED =
% Change ∈Quantity Demanded of Good A ESSENTIALS OF MARKET
% Change ∈Price of Good B 1. COMMODITY
 If XED is POSITIVE = 2 goods are SUBSTITUTE 2. EXISTENCE OF BUYERS AND SELLERS
= increase in the price of one lead to increase in the 3. PLACE
quantity demanded of the other 4. INTERCOURSE BETWEEN BUYERS AND
 If XED is NEGATIVE = 2 goods are COMPLEMENTS SELLERS
= increase in the price of one lead to a decrease in the
quantity demanded of the other MARKET STRUCTURE
SUPPLY = producers are willing to offer in the market
 STRUCTURE – something that has organization and  LONG RUN – planning period where all inputs are
dimension VARIABLE
1. PERFECT MARKET – perfect competition
2. IMPERFECT MARKET – perfect competition is LAW OF DIMINISHING RETURNS
lacking  As more of a single input is applied, the marginal
1) MONOPOLY MARKET – 1 SELLER increase in productivity will eventually decline
2) DUOPOLY MARKET – 2 SELLER  CONSTANT RETURN = CONSTANT LEVEL OF
3) OLIGOPOLY MARKET – MORE THAN 2 OUTPUT
SELLERS  INCREASING RETURN = INCREASING LEVEL OF
4) MONOPOLISTIC COMPETITION – LARGE OUTPUT
NUMBERS OF SELLERS  DECREASING RETURN = ADDITIONAL OUTPUT
MONEY  NEGATIVE RETURN = NO RETURN OR
DECREASING OUTPUT
 Anything the public readily accepts in payment for
goods and services MARGINAL PRODUCT
 ROBERTSON = money is discharge of obligations = any input is the increase in output
= generally acceptable as a means of exchange
= INCREASING RETURN
FUNCTIONS OF MONEY
= ∆ (DELTA) = change in
1. Serves as a medium of exchange
2. Store of value = ∆ Q - CHANGE IN OUTPUT
3. Standard means of value
4. Serves as a standard of deferred payments = ∆ L – CHANGE IN LABOR
5. Transfer value
 INFLATION = increase in the average level of prices ∆Q
= MARGINAL PRODUCT OF LABOR -
CAUSES OF INFLATION ∆L
1. CREEPING INFLATION – prices rise slowly
2. WALKING INFLATION – rise in price is more
pronounced
3. RUNNING INFLATION – movement of price
accelerates rapidly
4. HYPERINFLATION – alternative term for run away or
galloping inflation
-tremendous expansion in the supply of money
 DEFLATION – opposite of inflation
-fall in the general price level
THEORY OF PRODUCTION
ASSUMPTIONS AND MODELS
 ASSUMPTIONS = simplify the complex world
 MODEL = representation of a more complicated reality
 CIRCULAR FLOW DIAGRAM = visual model of
economy
5 ECONOMIC AGENTS
1. HOUSEHOLD
2. FIRM
3. GOVERNMENT
4. IMPORT/EXPORT
5. FINANCIAL MARKET
THEORY OF PRODUCTION
 FIRM = concerned with the purchase and employment
of resources
 PRODUCTION FUNCTION = physical relationship
between inputs and outputs of a good
= represented by a TABLE, EQUATION or GRAPH
SHORT-RUN VS. LONG RUN PLANNING PERIODS
 SHORT RUN – planning period where at least one
input is FIXED