Oligopoly

The first two types of market structure are the extreme of two
parties. Now, it's time to go to the market that lies between the two.
First of it is the oligopoly. Oligopoly is a market structure having
few seilers..
The characteristics of an Oligopoly Market are as follows:
-Few sellers offering similar or identical products. There is no
specific number in the word of few, as long as you can still notice
how many sellers you have in the marker that is still few.
-Interdependent firms. The firms under this type of market depend
on each other. The action of one firm has noticeable effect on the
other firm.
-Best off cooperating and acting like a monopolist by producing a
small quantity of output and charging a price above marginal cost
Because of the few sellers, the key feature of oligopoly is the
tension between cooperation and self-interest.
Cooperation is the situation in which firms under the market creates
either collusion or cater.
-Collusion is an agreement among firms in a market about
quantities to produce or prices to charge.
-Cartel is a group of firms acting in monopoly or onefirm.
Self-interest is a condition in which the competition prevails among
the group of sellers in the industry. This is the opposite cooperation.
Because of self-interest, strategic planning exists. The firms must
know to play the game of gaining customers.
It seems that cooperation is favourable in the part of firm. But, on
part of consumer, it is not. Competition among sellers is good in the
consumer because it tends to lower the price of commodity. This is
the reason why cartel and collusion is prohibited by law.
Product under this market structure nationally is the oil and
telecommunication. This industry composes only of few firms
competing to the large market.
Monopolistic Competition
The last type of market structure which falls between perfect
competition and monopoly is the monopolistic competition. From
the name itself, we can determine its meaning, monopoly with
competition or the combination of monopoly and perfect
competition. Monopolistic competition is a type of market structure
having many buyers and sellers selling differentiated product. In
this type of market, they can set their own price since they product
differentiated product. The cost incurred in producing the goods
varies depending on the raw materials they used in production.
The characteristics of Monopolistic Competition are the following:
-Many sellers. This characteristic of this type of market is being
adopted in the perfect competitive market.
-Product differentiation. In this type of market, the product is
differentiated or heterogeneous. Each product produce by a certain
firm is not similar to those produce by other businesses.
-Free entry and exit. Unlike the monopoly and oligopoly, there are
low barriers to enter in this type of market. The technology adopted
by this firm most of the time is not too sophisticated which requires
small amount for capitalization. Legally, government does not give
the sole rights to produce the commodity. The government
requirements they just looking is the business permit, sanitary
permits and others. Besides from that, there are no high legal
barriers for this.
Products under this type of market structure are the CD's or DVD,
novels, books, restaurants, and apparels. if you will observe the way
of setting their price, each firm can set their own price. Even the
product itself, it is different in the specification but similar in nature.
As shown in the table5.2, in short-run fixed cost is constant as 3.00. Because the products of all firms are perceived to be identical and
In long-run, the cost and quantity were computed by adding the cost the prices of all sellers are known, a consumer will purchase at the
incurred in the next short-run period. As you can notice, as quantity lowest price available in the market. No sales can be made at any
increases, total cost also increases higher price.

Market Structure Firms have free entry and exit. This is the implication of the fourth.
Characteristic of an industry in which any potential entrant has
Objectives Students will understand market structures and how access to the same technology and inputs that existing firms have.
sellers within the market compete both perfectly and imperfectly. That is, if it is profitable for new firms to enter the industry, they
Students will understand the relationship between different market will eventually do so. Free entry does not mean that a new firm
structures and how they compare and contrast with one another. incurs no cost when it enters the industry, but rather that it has
Overview access to the same technology and inputs that existing firms have.
With regards to the free exit, because firm can easily enter the
As individual, we must admit that our behaviour depending on the industry, it is also possible that firms may gain loss and decide to
environment and number of persons where we belong. You have stop producing and exit in the market. It is also easy for the firm to
different behaviour if you're alone, and different if you are within exit with no legal or technological barriers to consider.
the circle of your friends. Definitely, you behave differently if you
are in a large group. The same with the firm, its behaviour varies Example of product under this type of market structure (national
depending on its environment which is known as the market market) are rice, flour, and sugar. If you can notice, nationally, all of
structure. this product have the same characteristics and almost same prices.

Lesson Proper Different Market Situations

Market structure is divided into four types, the perfect competitive MONOPOLY
market, monopoly, oligopoly, and monopolistic competition. If perfect competitive firm is composed of many buyers and sellers,
the extreme opposite of it is the monopoly. Monopoly is considered
as the extreme of imperfect competition. A firm is considered a
monopoly if...
It is the sole seller of its product or the only producer of goods and
services. This gives a reason why seller in this type of market is
price maker while the consumers are price taker. Firms are the one
who can set the price since it is the sole seller.
Its product does not have close substitutes. There are times that you
are the sole seller of the said product but the problem is that there
are goods or services who can satisfy the same needs and wants. If
this case occur in the market, you cannot be consider as monopoly
since seller doesn't have the control in the market. Consumer can
still make a choice between two products.
Perfectly Competitive Market
Classification of Monopoly
A perfect competitive market is a market structure which is known
for many buyers and many sellers selling the same product. A 1. Natural Monopoly. Single firm car supply the entire market.
perfectly competitive market has the following characteristics:
2. Legal Monopoly. Government grants to a private individual or
There are many buyers and sellers in the market. An industry that firm over the product or service
consists of many small buyers and sellers; one of the characteristics
3. Coercive Monopoly. It includes the principle of pure
of a perfectly competitive industry.
Monopoly arises because of the barriers to entry. These barriers
The products sold by the sellers are homogenous. Products that
usually fall in this category.
consumers perceive as being identical Products that consumers
perceive as being identical. - Technological barriers. it is the requirement of firm which is
technological in nature. Technology refers to the machinery,
Firms can freely enter or exit the market. Equal access to resources
processes and methodology to produce a certain goods. It always
A condition in which all firms--those currently in the industry, as
requires large capitalization that's why only one sector or the
well as prospective entrantshave access to the same technology and
government invests to this type of market structure. The products
inputs.
under this type of market usually are the necessity of the society
consumers of the prices charged by all sellers in the market; one of that's why consumer cannot
the characteristics of a perfectly competitive industry.
avoid patronizing the goods and services provided by monopolist.
Due to these characteristics, the firms under this market become:
-Legal Barriers. It is the requirements necessary to establish a
Both buyer and seller are price taker. This is implied by the first business under this industry which is mandated by the government.
characteristics. A seller or a buyer that takes the price of the product With regards to being the sole seller, government gives the single
as given when making an output decision (seller) or a purchase right to produce the good.
decision (buyer. That is, a firm takes the market price of the product
In a small market, there are times in which natural monopoly exist.
as given when making an output decision and a buyer takes the
Natural monopoly exists when single firmcan supply a good or
market price as given when making purchase decisions.
service to an entire market at a smaller cost than could two or more
There is law of one price. This is the implication of the second and firms.
third characteristics. In a perfectly competitive industry, the
Example of product under this market is electricity, water and the
occurrence of all transactions between buyers and sellers at a single,
LRT and MRT. All of these services are necessity of household and
common market price. Transactions between buyers and sellers
there is only one provider. They can control the price but still
occur at a single market price. 90 Time
government intervenes here to protect the welfare of the society.
Relationship between Production Function, Marginal Product and Variable cost on the other hand is cost incurred by the firm in which it
Average Product does vary with the production. If you have your production you will
incur it, if you have zero production, your variable cost is equal to zero
As shown in Figure 5.2, total product (TP) function is increasing
too. An example of this is the cost for your raw materials. As you
while marginal product (MP) and average product (AP) are in
produce more, of course you're going to use more raw materials;
decreasing pattern. But when the firm added the gth worker, total
therefore you will incur more cost on it.
product starts to decline.
As you can notice at 8th worker, the marginal product (MP) curve
starts to intersects x axis which means marginal product is equal to
zero. Another thing that is noticeable from the graph is that when
the MP intersects the AP, AP starts to decline.
In short the relationship of the production curves is as follows:
1. When TP is on its peak, MP is equal to zero.
2. When TP starts to decline, MP is negative.
3. When MP is equal to AP, AP starts to decline.

Law of Diminishing Marginal Productivity

As we can noticed from the graph, MP is declines as we add more Most of the time, economist deals with the average total cost. Average
and more units of labor. This can be explained by the law of total cost is the quotient of total cost and total output.
diminishing marginal productivity or marginal return. The law states
that as the firm adds extra units of inputs, the marginal product ATC = TC / Q
declines, holding other variables constant. Average total cost is important to determine because it depicts the cost
An example of this situation is, imagine you are working in a plant incurred of 1 unit of product. Hence, it can be used as the basis for
site with the size good enough with 3 machines and workers. At your pricing. Remember that your price must be greater than ATC.
first, when you are the only one worker, definitely you are very Average variable cost is the quotient of variable cost and quantity. It
productive since you can utilize the three machines and the whole denotes the variable cost incurred of 1 unit of product
plant size. But as you add more and more workers, time will come
that you need to pause for a while and wait the machine to vacate so AVC = TVC/Q
you can operate. Therefore there will be idle time which leads to
Marginal cost (MC) measures the increase in total cost that arises from
decline of marginal product.
an extra unit of production. Marginal cost helps answer the following
The Various Measures Of Cost question:

Earlier, we already discuss the one measure of cost, the implicit and How much does it cost to produce an additional unit of output?
explicit cost. Now, we're going to discuss another measure of cost of
MC = (change in total cost) = TC
production. In terms of explicit cost, we have fixed cost and
variable cost. (change in quantity) Q
Fixed costs are cost incurred by the firm that does not vary with the Applying the formula, we may fill up the table:
production. Whether you produce or not, you still incur that cost.
The best example of this cost is the depreciation cost. If you stop
the production, your plant site, machine and others will depreciate HYPOTHETICAL COSTS SCHEDULE
and on your book, you're going to account for it. If you produce
more, the same value of depreciation that you account on your Table 5.1 Cost Table Incurred by Firm
accounting book. That's why it does not vary with the production. Cost also varies depending on the timeframe. When we talk about
Variable cost on the other hand is cost incurred by the firm in which timeframe, we are talking about short-run and longrun. Actually there
it does vary with the production. If you have your production you is no specific time in which we can say it is short-run or long run.
will incur it, if you have zero production, your variable cost is equal Short-run is the timeframe in which require an immediate concern
to zero too. An example of this is the cost for your raw materials. As while long-run require planning before you can make a decision.
you produce more, of course you're going to use more raw Between today and tomorrow, short run is today while tomorrow is the
materials; therefore you will incur more cost on it. long-run.

The Various Measures Of Cost Notice that these costs are incurred by the firm for short-run. In long-
run, all cost become variable cost. To prove this, examine the table:
Earlier, we already discuss the one measure of cost, the implicit and
explicit cost. Now, we're going to discuss another measure of cost of
production. In terms of explicit cost, we have fixed cost and
variable cost.
Fixed costs are cost incurred by the firm that does not vary with the
production. Whether you produce or not, you still incur that cost.
The best example of this cost is the depreciation cost. If you stop
the production, your plant site, machine and others will depreciate
and on your book, you're going to account for it. If you produce
more, the same value of depreciation that you account on your
accounting book. That's why it does not vary with the production.
 Opportunity cost
The value of the next best alternative that is forgone when another
alternative is chosen.
The opportunity cost of a particular alternative is the payoff associated
with the best of the alternatives that are not chosen.
Example: What is the cost to an airline of using one of its planes in
scheduled passenger service?
An airline's expenditures on fuel and salaries are explicit costs
Whereas the income it forgoes by not leasing its jets is an implicit
cost. The sum total of the explicit costs and the implicit costs
represents what the airline sacrifices when it makes the decision to fly
one of its planes on a particular route which is the opportunity cost.
Case No. 5.1
Suppose that you own and manage your own business and that you are
contemplating whether you should continue to operate over the next
year or go out of business, if you remain in business, you will need to
spend Php100,000 to hire the services of workers and Php80,000 to
purchase supplies; if you go out of business, you will not need to incur
these expenses. In addition, the business will require 80 hours of your
time every week. Your best alternative to managing your own business
is to work the same number of hours in a corporation for an income of
Php 75,000 per year
In case number 6.1, the opportunity cost of continuing in business
over the next year is Php55,000. This amount includes an explicit cost
of Php80,000—the required cash outlays for labor and materials; it
also includes an implicit cost of Php 75,000—the income that you
In this case, quantity 2-6 for both commodities satisfies the
forgo by continuing to manage your own firm as opposed to choosing
condition of consumer equilibrium. But to determine which
your best available alternative.
combination she can afford, then you need to multiply the
combination of goods to its price. In this case the point where Jayce Economic Versus Accounting Profit
will consume 4 units of pizza and 4 movie theatre. In computation
Economic profit
- Total revenue minus total cost, including both explicit and
implicit costs.
Accounting profit
- The firm's total revenue minus only the firm's explicit cost

Theory of Production and Cost Market Structure

The Market Forces of Supply and Demand

Supply and demand are the two words that economists use most
often. Supply and demand are the forces that make market
economies work. Modern microeconomics is about supply, demand,
and market equilibrium. Profit, Total Revenue and Total Cost
The firm's main goal or objective is to maximize profit. As we all
Production And Costs
know, profit is computed as the difference of Total Revenue and
Total Cost The production function shows the relationship between quantity
of inputs used to make a good and the quantity of output of that
𝛱= TR - TC
good. Figure 5. 2 show the graph of production function.
Total revenue is the amount of goods being sold or services being
Along the production function curve, you can notice the do we
rendered. This can be computed as quantity sold multiply by its
call marginal product. The marginal product of any input in the
price.
production process is the increase in output that arises from an
TR = P XQ additional unit of that input. It is the slope of production function
curve.
Total Cost is the market value of the inputs a firm uses in
production. A firm's cost of production includes all the opportunity
costs of making its output of goods and services. A firm's cost of
production includes explicit costs and implicit costs.
Explicit costs are input costs that require a direct outlay of money
by the firm.
Implicit costs are input costs that do not require an outlay of money
by the firm.
 Figure 4.3 shows the budget line of an individual. If individual has
PhP 1000 therefore at point a, individual can buy 10 units of foods
and 4 units of clothes. On the other hand, using PhP 1000 as well,
individual can purchase to point B where he can buy 4 units of
foods and 12 units of clothes.

Figure 4.3 shows the budget line associated with the combination of
the good X and Y given in the Table 4.1 as you can see, giving up of
a unit clothing saves PhP 20 and buying two units of costs PhP 10 ,
the amount of clothing given up for food along the budget line is a
=
straight line from point A to point F in this scenario, the budget
Figure 4.2 is an example of indifference curve. We have two li9ne is given by the equation F+20 (c ) = PhP 100.
commodities, the food and cloth. An individual feels indifferent what
Consumer Equilibrium
combination of foods and clothes should he consume. At point A, the
individual may consume 10 units of food and 4 units of clothes. Both A Consumer equilibrium is the point where budget line tangent to the
and B utilizes the same level of utility or satisfaction. indifference curve. In real sense, it is a combination of goods in
which the individual optimize his utility and budget.
Indifference map is a set or collection of indifference curves which
represents various levels of satisfaction or utility. Indifference curve lie Referring to table 3.2, the consumer equilibrium can be found at
above and to the right of another indicates a higher level of point C. therefore, individual can consume 7 units of food and 8
satisfaction. units of clothes which also satisfy his income.

If indifference curves IC and IC2 intersects, one of the assumption

(i.e., No.4 of consumer theory is violated. Based on this diagram, the
consumer should be indifferent among combination of Goods A, B and Mathematically, consumer equilibrium can be expressed in terms of:
yet C. Yet B should be preferred to A because B has more of both
goods.
Budget Constraints
Budget constraints refer to the constraints that consume face as a result
of limited incomes.
Budget line refers to all confirmations of goods for which the total
amount of money spent is equal to income.
As we all know, there is no free in this world. All commodities have its
price. Therefore an individual cannot easily choose among the
combination of goods that lies along the indifference curve. Therefore,
we may say that we are constraints with our budget.
In order to determine the combination of goods that will satisfy our
utility and budget, economist use the budget line. Budget line is the Where Mux is the marginal utility for first commodity, MUy is the
line that represents combination of goods that can be purchased by marginal utility for second commodity, Px is price of first
your income. commodity and Py is the price of second commodity.
Let us say that Jayce wants to buy pizza and render video rentals.
Suppose that she has a monthly budget for two commodities of PhP
3.00, each pizza cost PhP 6.00 and video rentals of PhP 36.00.
Exy = % change in Qd good A% change in price good B for I prefer apple than orange but I prefer orange than mango. From this,
example if there is an increase in the price of tea by 10% and Qd of Joyce ranks the fruit as apples rank 1, orange rank2 and mango as rank
coffee increase by 2%, then Exy = +0.2 . 3. Cardinal method is the process in which individual give the intensity
of utils he derive in 1 unit of goods. In above example, Joyce may rate
Cross –Price Elasticity measures whether the goods is a substitutes
apple as 7 utils while orange has 4 utils and mango has 1 util.
or complementary.
Most of the time, the individual use ordinal method but for the purpose
Substitute goods are altenrative. There Exy will be positive. The
of studying consumer behaviour, economist often ask the cardinal value
weak substitutes like tea and coffee will have a low Exy.
of utility of individual. For example, you ask the level
Complementary goods are goods which are used together,
therefore Exy is negative.
When setting prices firms will have to look at what alternatives the
consumer has, if there are no close substitutes they will be able to
increase the price. For this reason firms spend a lot of money on
advertising to differentiate their products.

of satisfaction in consuming water since water is free. Considering that

you just finish jogging for 3 hours. Table 4.1 shows the total utility and
marginal utility for every glass of water you drink.
As you can notice, total utility for glass of water increases. When you
drink 1 glass of water, your level of satisfaction is 5, but when you drink
additional glass, your satisfaction increases to 9 and so on.
However, if we’re going to look for the value of marginal utility, it
declines as you consume additional glass of water. Marginal utility is
additional or extra utils the individual gains when he or she consumes
additional 1 unit of commodity. From table 4.1, when you drink 1 glass
of water marginal utility is 5, when you drink another glass of water, the
marginal utility is 4. But when you drink the 5th glass of water, your
marginal utility is equal to 0 and when you drink the 6th glass, MU is
equal to -1. When you graph tour Total Utility (TU) and Marginal
Utility (MU).

Hence, the cross effect of the price of the margarine on the demand
for butter is positive and that implies that the goods are substitute
for each other.

From figure 4.1, we can glean then when TU curve is on its peak, MU
intersects the X-axis which means MU is equal to zero. The graph of
MU is downward sloping. At the 5th glass of water, you already at the
saturation point. Saturation point is the point where your total utility
curve is on its peak and the marginal utility is equal to 0.
In this instance, we can observe the law of diminishing marginal utility.
Law of diminishing Marginal Utility states that as we consume more
and more units of goods, the marginal utility decreases.
Indifference Curve
Indifference curve is a tool which shows the different combination of
goods and services that an individual consumes that yields the same
In example no.2, coffee (Y0 and sugar (X) in determining their level of satisfaction or utility. Indifference curve has four assumptions:
relationship. This implies that the goods are complementary. 1. There are only two goods available in the market.
Theory of Consumer Behaviour 2. Indifference curve bows against (convex) the origin.
Utility as Satisfaction 3. Any point along the curve utilizes the same level of satisfaction.
Level of satisfaction is measured as utility and the unit of 4. Indifference curve never intersects
satisfaction is called utils. Remember that the higher the utils, the
higher the level of satisfaction. Utility can be measured in two
methods, the ordinal and cardinal method. Ordinal method is done
when an individual ranks the utility for commodity. For example,
Joyce ranks apple, orange and mango according to level of
satisfaction he derive in consuming 1 unit of fruit. Then using the
ordinal method Joyce will answer in this way:
3.Time. The third influential factor is time. If the price of cigarettes Exy = % change in Qd good A% change in price good B for
goes up PhP 4 per pack, a smoker with very few available substitutes example if there is an increase in the price of tea by 10% and Qd of
will most likely continue buying his or her daily cigarettes. This means coffee increase by 2%, then Exy = +0.2 .
that tobacco is inelastic because the change in price will not have a
significant influen ce on the quantity demanded. However, if that Cross –Price Elasticity measures whether the goods is a substitutes
smoker finds that he or she cannot afford to spend the extra PhP 4 per or complementary.
day and begins to kick the habit over a period of time, the price Substitute goods are altenrative. There Exy will be positive. The
elasticity of cigarettes for that consumer becomes elastic in the long run. weak substitutes like tea and coffee will have a low Exy.
Computation of Elasticity Complementary goods are goods which are used together,
therefore Exy is negative.
When setting prices firms will have to look at what alternatives the
consumer has, if there are no close substitutes they will be able to
increase the price. For this reason firms spend a lot of money on
advertising to differentiate their products.
Steak sells at a price of P250/kilo. An increase in its price by 10%
causes your demand to decrease from 10 to 7 kilos a month.
Income Elasticity of Demand
In the second factor outlined above, we saw that if price increases while
income stays the same, demand will decrease. In follows, then, that if
there is an increase in income, demand tends to increase as well. The
degree to which an increase in income will cause an increase in demand
is called inco0me elasticity of demand, which can be expressed in the
following equation:
Income Elasticity of Demand measures the percentage change in
quantity demanded over the percentage change in price.

Again, denoting the quantity and income, the Price Elasticity of

Demand as:

Hence, the cross effect of the price of the margarine on the demand
for butter is positive and that implies that the goods are substitute
for each other.

If Ey is greater than one, demand for the item is considered to have a

high income elasticity. If Ey is less than one, demand is considered to
be income inelastic. Luxury items usually have higher income elasticity
because when people have a higher income, they don’t have to forfeit as
much to buy these luxury items.
Cross Price Elasticity of Demand
This is the proportionate change in demand for one item in response to a
change in the price of another item.
It is ‘positive‘ where the two items are mutual substitutes and any
increase in the price of one (say butter) will increase the demand for the
other (say margarine). It is ‘negative’ when the items are
complementary and any increase in the price of one (say cars) will
decrease the demand for the other (say tires). See also elasticity, also
called cross price elasticity.
In example no.2, coffee (Y0 and sugar (X) in determining their
Price Elasticity of Demand refers to the percentage change in quantity relationship. This implies that the goods are complementary.
demanded of a good over the percentage change in the price of another
Theory of Consumer Behaviour
good.
Utility as Satisfaction
Level of satisfaction is measured as utility and the unit of
satisfaction is called utils. Remember that the higher the utils, the
higher the level of satisfaction. Utility can be measured in two
methods, the ordinal and cardinal method. Ordinal method is done
when an individual ranks the utility for commodity. For example,
This measures the % change in Qd for a good after the change in price Joyce ranks apple, orange and mango according to level of
of another. satisfaction he derive in consuming 1 unit of fruit. Then using the
ordinal method Joyce will answer in this way:
 Supply is inelastic when the percentage change in the quantity
supplied is less than the percentage change in price. The coefficient
of elasticity is less than one , (Es < 1).

Demand is perfectly inelastic when the polar extreme of demand is

vertical demand curve that does not respond to any changes in price.
Vertical demand curve shows perfectly inelastic demand (Ed = 0)
Price Elasticity of Supply
Supply is unitary elastic when the percentage change in the
Consumption is not the only thing that changes when prices rise or fall. quantity supplied and price is equal. It has an elasticity coefficient
Business firms also respond to price in their wise decision about how is equal to one, (Es = 1)
much goods to produce. Price elasticity of supply as the responsiveness
of the quantity supplied of a good to its market price.
To make it easy and precise, the elasticity of supply is the percentage
change in quantity supplied divided by the change in price.
The concrete definition of the price elasticity of supply, is as follows:

Supply is considered perfectly elastic when supply is responsive

enough to changes in price. Horizontal supply curve shows
perfectly elastic supply, (Es = α) .
It occurs when a change in pride has no effect on quantity supplied.
Vertical supply curve shows perfectly inelastic supply, (Es = 0).

Factors affecting Demand Elasticity

Supply is considered elastic when the percentage change in quantity
supplied is greater than the percentage change in price. The coefficient 1.The availability of substitutes. This is probably the most
of elasticity is greater than one, ( Es > 1). important factor influencing the elasticity of a good or service. In
general, the more substitutes, the more elastic the demand will be.
For example, if the price of a cup of coffee went up by PhP1
consumers could replace their morning caffeine with a cup of tea.
This means that coffee is an elastic good because an increase in its
price will cause a large decrease in demand as consumers start
buying more tea instead of coffee.
However, if the price of caffeine were to go up as a whole, we
would probably see little change in the consumption of coffee or
tea because there are few substitutes for caffeine. Most people are
not willing to give up their morning cup of caffeine no matter what
the price. We would say, therefore, that caffeine is an inelastic
product because of its lack of substitutes. Thus, while a product
within an industry is elastic due to the availability of substitutes,
the industry itself tends to be inelastic.
2.Amount of income available to spend on the good. This factor
Supply is considered elastic when the percentage change in quantity affecting demand elasticity refers to the total a person can spend on
supplied is greater than the percentage change I price. The coefficient of a particular good or service. Thus, if the price of a can of Coke
elasticity is greater than one, (Es > 1). goes up from PhP 1 to PhP 2 and income stays the same, the
income that is available to spend on coke, which is PhP 4, is now
enough for only two rather than four cans of Coke. In other words,
the consumer is forced to reduce his or her demand of Coke. Thus
if there is an increase in rice and no change in amount of income
available to spend on the good, there will be an elastic reaction in
demand; demand will be sensitive to a change in price if there is no
change in income.
Normative economics refers to the statement of opinion and stating what
should be done or what ought to be. This can not be proved and disproved
by anyone since this is an opinion. It involves ethical judgment and norms
of fairness. Should poor people be required to work if they are to get
government assistance? Should employment be raised to ensure that
inflation does not become too rapid? There are no rights or wrong answers
to these questions because they involve ethics and values rather than facts.
They can be resolved by political debate and decisions, not by economic
analysis alone. The examples of this statement are:
• Government should monitor the supply of bangus in wet market to avoid
over pricing
• Individual must look opportunity outside the country to lessen the Demand is considered elastic when the percentage change in
unemployment in our country quantity demanded is greater than the percentage change in
• Economic policy maker should maintain the good performance of our price. The coefficient of elasticity is greater than 1.
country. If the price elasticity of demand for a good is elastic (Ed > 1), a
price rise will make the TR fall and vise versa.

Elasticity of Demand and Supply

Lesson Proper
A good or service is considered to be highly elastics if a slight change in
price leads to a sharp change in the quantity demanded or supplied.
Usually these kinds of products are readily available in the market and a
person may not necessarily need them in his or her daily life. On the other
hand, an inelastic good or service is one in which changes in price witness
only modest changes in the quantity demanded or supplied, if any at all.
These goods tend to be things that are more of a necessity to the consumer
in his or her daily life.
To determine the elasticity of the demand and supply curves, we can use
this simple formula
Demand is considered inelastic when the percentage change in
price is greater than the percentage change in quantity
demanded. The coefficient of elasticity is less than one.
If the price elasticity of demand for a good is inelastic (Ed <a
Denoting the quantity and price by Q and Pm we write the Price Elasticity price rise will give increase to TR, and vise versa.
of Demand as:
If elasticity if greater than or equal to one, the curve is considered to be
elastic. If it is less than one, the curve is said to be inelastic.

where:

Demand is unitary elastic when the percentage change in

quantity demanded and price is equal. Likewise, it is unitary
elastic when coefficient is equal to one.
If the price elasticity of demand for a good is unitary elastic(Ed
= 1), a price will definitely not affect the TR.

As we mentioned previously, the demand curve is a negative slope, and if

there is a large decrease in the quantity demanded with a small increase in
price, the demand curve looks flatters, or more horizontal. This flatter
curve means that the good or service in question is elastic.
Elasticity = (% change in quantity / % change in price)

Demand is considered perfectly elastic when demand is

responsive enough to changes in price. Horizontal demand
curve shows perfectly elastic demand (Ed = α). If the price
elasticity of demand is perfectly elastic (Ed = α), an increase in
price makes a zero TR.
Economics
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cellphone, apparels, and the like.
choices. As we all know, when you make choices, you need to sacrifice.
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communication services or SMS, electricity and the like.
sacrificed when you continue studying is your tuition fee, miscellaneous
Decision making is not new to us; the moment you wake-up you make a
and allowance. Besides form the monetary units, you losses a chance to Figure 1.2 shows two groups of decision making (that is,
decision. Will I wake up early or not, will I wear my uniform or not, will I
have a monthly salary amounting to around PhP 8,000 and above. households and firms). The coordinating mechanism which brings
commute or ride with my car and others. Even when we buy commodities,
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The answer to the first question is because we have a lot of choices and
cost and explicit cost. Explicit cost is the value of alternative forgone in In modern society, the conduct of economic activity is performed
once we choose one alternative there is something we need to give up.
terms of monetary lay-out. In the case above, that is the tuition and with the use of factor markets (money), such that aside from
That is why economics arises.
miscellaneous fee you will incur when you continue to study. On the other circular flow of funds (i.e. money). Funds that flow from
hand,
What implicit cost is the cost incurred without monetary lay-out. In the
is Economics? households producing units represent money expenditures by
above example, implicit cost is the opportunity of working and gained PhP household sectors on goods and services, and the same time,
Economics
8,000 per month.came from the Greek word “oikonomia” which means represent the receipts from sales/ revenues from the point of even
household management. This is the basic unit of society of Greece. It of the firms. The money that flow the firms to households
The Circular
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the etymology represents money income arising from the use by the firms of the
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knowledge thatany point the
studies in this diagram distribution
production, can be factors of productions owned by the households, at the same time
theand
starting point. Household
consumption of goods is theservices.
and one who provides the factors of that these payments represent the expenditures incurred by the
production such as land, labor, capital and entrepreneur to the firm. In firms in the production process.
If we’re going to define economics, it is a social science that
return, firm will pay he factors of production in the form of rent, wages, deals with the
studyand
of proper Branches of Economics
interest profit. allocation and efficient utilization of scarce productive
resources to produce goods and services for the maximum satisfaction of Economics has two main branches, namely microeconomics and
unlimited human wants and needs. macroeconomics. These branches are also known as the two main
Needs are necessary for man’s survival like food, clothing and shelter. divisions of economics.
Without these needs, we are not able to survive in this world. There are Microeconomics deals with individual behavior of firms and
different kinds of goods like consumer goods, luxury goods, essential households. It deals with specific area in the circular flow diagram.
goods, economic goods, and free goods, tangible and intangible one. The examples of coverage of microeconomics are as follow:
Economics deals with proper allocation of scarce productive resources. • Price of rice
Definitely we need to allocate properly basically because there is scarcity.
Scarcity is the basic problem of economics. Economics will not exist when • Employment in San Miguel Corporation
there is scarcity. Therefore, scarcity is a situation in which the available
• Production of Monterey products
resources are not enough to meet its objectives.
• Employees in Fortune Cement Corporation
Why is economics a social science?
Macroeconomics studies the overall or aggregate behavior of the
Economics is a social science definitely because it deals with the study of
economy as a whole. This includes the behavior of firms and
man’s life and how he lives with other people.
household together and treats them as one. In addition to the
If we are going to observe our environment, we can notice that we have a economic actor mentioned, there is government and foreign
lot of resources such as water, air, labor and other. Why do we have sectors that will affect the whole economy. The following are
scarcity? examples of areas concern by macroeconomics:
Circular flow diagram shows the relationship of households and firms and • Overall price (inflation/deflation)
We have scarcity because of unlimited needs and wants of the people. Our
this can be explained through the consumption and producing or even by
satisfaction of goods and services insatiable, meaning once people
consuming and producing output. • Employment in national level
satisfied, he will still look for another thing that can satisfy him again
In this diagram, there are two economic units involved. The household • National output of production
For example, an individual told to himself that after he graduated college,
which is the consuming unit and the firm is the producing unit.
he become satisfied because he can find work. After three years, he noticed • National income
that beingisathe
Household BSone
degree
whoholder is not
purchase enough
goods to be promoted
and services thenultimate
that is the he
• Interest rate
decides to finish Masters Degree.
end products of the economic system. After four years, this person wants to be
the CEO then he decides to take up Doctorate Degree. From these • International trade
Firm is an organization
examples, we can noticethatthat
produces
peoplegoods and
has no services for sale.
satisfaction.
• Foreign exchange
Microeconomic Circular
The Relation of Flow to
Economics Diagram
other Social Sciences
• Unemployment
Land as a factor of production will refer to all natural resources such as
History
terrain of land, animals, plants, water, air and the like. This land is paid by • Money supply
History
firms is related
in terms to economics in a number of ways. First, it provides
of rent.
economics with the material that economists can then analyze. Secondly, • Aggregate expenditure
Labor refers
history to all
itself hasphysical and mental
been influenced to aefforts of human
large extent used to produce
by economic factors.
goods and many
services. Usually labor comes from their fundamental resource Positive and Normative Economics
Indeed, wars, conflicts and revolutions came about as a result
which is time.disputes.
economic WithoutIntime, we can
addition, accomplish
numerous nothing.that
inventions Wages is the
shaped the The output of economics usually express in policy and statement
payment for labor.
course of history where introduced to improve the economic condition of to enhance current situation. To understand the nature of policy
the inventor
Capital refers toorall
people in general.
physical things that represents to all human creations and statement, the students must determine the difference between
used to produce goods and services. Examples of this are machines, positive and normative economics.
Geography
buildings, money and the like. Interest is the payment for capital. Positive economics refers to the statement of what will happen? It
Geography is another social science that is closely linked to economics. A deals with the question such as: Why do doctors earn more than
Entrepreneurship pertains
favorable geographic to individual
position who
is a large invest capital,
determinant take
of the the risk to
prosperity of a
produce waiters? What is the economic impact of raising taxes? These are
nation.goods and services
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mentioned factors
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production.
determineThis is different
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potential Labor pertains
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and abundance
theoffirm while entrepreneur pertains to the owner of the firm. After the reference to analysis and empirical evidence. The examples of
available resources. these statements are:
firms operation and selling entrepreneur will receive profit (π) as payment
to him. On the other hand, firm is the one which produces the product such • The price of bangus increase from P110.00 per kg to P115.00 per
as goods and services after utilizing the factors of production. Those goods kg
and services will be consumed or rendered by the household. In return,
household will pay the goods and services in terms of sales and fees. • Unemployment of the Philippines rises by 10%
Learning Material 1 Eco 1 Political Science
Nature and Scope of Economics Politics and economics come hand in hand. As John Maynard Keynes, a
famous economist, once observed, “Practical men, who believe
In day to day activities, there a lot of things we encounter. New situation,
themselves to be quite exempt from any intellectual influence, are usually
new persons, new things but one thing does not change, that individuals
the slaves of some defunct economist.” Economic theories influence
make decisions.
politics. For example, the ideas of economic liberalization pioneered by
Decision making is not new to us; the moment you wake-up you make a Milton Freedman had a large influence on the policies of President
decision. Will I wake up early or not, will I wear my uniform or not, will I Reagan. Political theories also influence economics. Foe example, Adam
commute or ride with my car and others. Even when we buy commodities, Smith used many political ideas of John Locke.
do I buy branded clothes or the common one? The question is, why do we
Philosophy
need to decide and how to deal this decision making?
Philosophy and economics are so closely intertwined that it is sometimes
The answer to the first question is because we have a lot of choices and once
impossible to distinguish one from the other. For example, much of Karl
we choose one alternative there is something we need to give up. That is
Marx’s writing can be categorized as both economic and philosophical
why economics arises.
works. Another example is Milton Freedman. While he is primarily
What is Economics? regarded as an economist, a distinct libertarian philosophy plays a central
role in all his ideas.
Economics came from the Greek word “oikonomia” which means household
management. This is the basic unit of society of Greece. It shared with the Mathematics
etymology of the field of ecology.
Mathematics provides the tools that economists use. Particularly
Economics is a field of knowledge that studies the production, distribution important are algebra and calculus, as they allow economists to construct
and consumption of goods and services. elaborate econometric models that study the Gross Domestic Product
(GDP) employment, inflation and other macroeconomic variables.
If we’re going to define economics, it is a social science that deals with the Mathematics is also used in microeconomics, for example, to calculate the
study of proper allocation and efficient utilization of scarce productive optimal price of an economic good.
resources to produce goods and services for the maximum satisfaction of
unlimited human wants and needs. Ethics

Needs are necessary for man’s survival like food, clothing and shelter. Ethics is a social science of moral conduct. It asks the question, what
Without these needs, we are not able to survive in this world. There are ought to be. There was time when economists held that economics was
different kinds of goods like consumer goods, luxury goods, essential goods, concerned only with the question, what is, and not with the question, what
economic goods, and free goods, tangible and intangible one. ought to be. But today practically all economists hold that economics is an
ethical; science as well as positive science, that is it is concerned with
Economics deals with proper allocation of scarce productive resources. what ought to be in the economic sphere, as well as with what is.
Definitely we need to allocate properly basically because there is scarcity.
Scarcity is the basic problem of economics. Economics will not exist when Economics as a Science
there is scarcity. Therefore, scarcity is a situation in which the available
When we talk about science, it is a systematic body of knowledge that
resources are not enough to meet its objectives.
follow scientific steps to come up with certain knowledge. Economics is
Why is economics a social science? one of these fields of science. Before the concepts being obtained,
economists underwent systematic steps to come such as:
Economics is a social science definitely because it deals with the study of
man’s life and how he lives with other people. 1. Determine the problem.

If we are going to observe our environment, we can notice that we have a lot 2. Formulate hypothesis or wise guess.
of resources such as water, air, labor and other. Why do we have scarcity?
3. Gather pertinent data through observation, surveys, experimentation,
We have scarcity because of unlimited needs and wants of the people. Our interviews and others.
satisfaction of goods and services insatiable, meaning once people satisfied,
4. Analyze and interpret the date gathered.
he will still look for another thing that can satisfy him again
5. Make conclusion and generalization from your findings.
For example, an individual told to himself that after he graduated college, he
become satisfied because he can find work. After three years, he noticed that Economics and Scarcity
being a BS degree holder is not enough to be promoted then he decides to
As we all know, scarcity is the main problem in economics. To address
finish Masters Degree. After four years, this person wants to be the CEO
this problem, economists formulate a simple tool to determine the
then he decides to take up Doctorate Degree. From these examples, we can
opportunity cost of certain economic activity. One of the simple tools used
notice that people has no satisfaction.
in decision making is the Production Possibilities Frontier (PPF). PPF has
The Relation of Economics to other Social Sciences four assumptions:
History 1.There are only two commodities available in the economy.
History is related to economics in a number of ways. First, it provides 2. PPF curve bows to the origin.
economics with the material that economists can then analyze. Secondly,
3. Any point along the PPF curve utilizes the same number of resources.
history itself has been influenced to a large extent by economic factors.
Indeed, many wars, conflicts and revolutions came about as a result 4. The higher the PPF curve, the higher the level or resources available in
economic disputes. In addition, numerous inventions that shaped the course the economy.
of history where introduced to improve the economic condition of the
inventor or people in general.
Geography
Geography is another social science that is closely linked to economics. A
favorable geographic position is a large determinant of the prosperity of a
nation. The primary factors in a country’s geographic position that
determine its economic potential are proximity to markets and abundance of
available resources.