Economics Goods or services are highly elastic if a slight price

• From the Greek word“oikonomia” which change leads to a sharp change in the quantity
means household management. demanded or supplied.
• Economics is the study of the production, Inelastic Good or Service – changes in price witness
distribution, and consumption of goods and only modest changes in the quantity demanded or
services. supplied
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• It addresses the proper allocation and 𝐸𝑑 = 𝐸𝑠 =
%△𝑃 %△𝑃
efficient use of scarce resources to meet Elastic Demand – Ed > 1
human wants and needs. Inelastic Demand – Ed < 1
Scarcity and Opportunity Cost Unitary Elastic Demand – Ed= 1
• Scarcity: The central problem in economics; Perfectly Elastic Demand – Ed = α demand is
resources are limited while human wants are responsive enough to changes in price. Horizontal
unlimited. demand curve shows.
• Opportunity Cost: The value of the next best Perfectly Inelastic Demand – Ed = 0 (Vertical
alternative that is given up when making a Curve)
choice. It includes both implicit (non- Elastic Supply – Es > 1
monetary) and explicit (monetary) costs. Inelastic Supply – Es < 1
Economics as a Social Science Unitary Supply – Es = 1
• Economics studies human behavior, choices, Perfectly Elastic Supply – Es = α supply is
and interactions within society. responsive enough to changes in price. Horizontal
The Relation of Eco to Other Social Sciences curve.
• History: Economic factors shape historical Perfect Inelastic Supply – Es = 0 (Vertical Curve)
events. Factors Affecting Demand Elasticity
• Geography: Location affects economic 1. The availability of substitutes
prosperity. ▪ This means that consumers can easily
• Political Science: Political systems and switch to alternative products if the
economic theories influence each other. price of the original good increases.
• Mathematics: Provides tools that economists 2. Amount of income available to spend on the
use like algebra and calculus good.
• Philosophy: Shaping economic theories and ▪ Refers to the total a person can spend
ethical considerations. on a particular good or service.
• Ethics: Economics often addresses what 3. Time
"ought to be," particularly in policy-making. ▪ Allows consumers to adjust
consumption in the short run and find
Economics as a Science
substitutes or adjust their consumption
Economics is one of these fields of science. Before
habits in the long run.
the concepts are obtained, economists underwent
Income Elasticity of Demand
systematic steps to come such as:
• The degree to which an increase in income
1. Determine the problem.
will cause an increase in demand
2. Formulate hypothesis or wise guess.
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3. Gather pertinent data 𝐸𝑦 =
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4. Analyze and interpret the date gathered.
Income elasticity -- Ey > 1
5. Make conclusion and generalization
Income inelastic -- Ey < 1
Branches of Economics
• Microeconomics - studies individual Cross Price Elasticity of Demand
behavior of firms and households. - the proportionate change in demand for one item
• Macroeconomics - looks at the economy as a in response to a change in the price of another
whole. item.
Production Possibilities Frontier (PPF) Positive cross-price elasticity: When two goods are
- Graph showing maximum production substitutes. P and D increase.
combinations of two goods. Negative cross-price elasticity: When two goods
are complements. P increase, D decrease
Positive Economics - focuses on facts and cause- % △ 𝑄𝑑𝑥
and-effect relationships. 𝐸𝑥𝑦 =
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Normative Economics - involves opinions on what Level of satisfaction is measured as utility and the
should happen. unit of satisfaction is called utils.
Elasticity - the degree to which a demand or supply Ordinal method is done when an individual ranks
curve reacts to a change in the price and other the utility for commodity.
determinants Cardinal method is the process in which individual
give the intensity of utils he derives in 1 unit of
goods.
Marginal utility is additional or extra utils the 2. When TP starts to decline, MP is negative.
individual gains when he or she consumes additional 3. When MP is equal to AP, AP starts to decline.
1 unit of commodity.
The Law of Diminishing Marginal Productivity or
Saturation point is the point where your total utility
Marginal Return
curve is on its peak and the marginal utility is equal
- states that as the firm adds extra units of inputs,
to 0.
the marginal product declines, holding other
Law of diminishing Marginal Utility states that as
variables constant.
we consume more and more units of goods, the
Fixed costs are cost incurred by the firm that does
marginal utility decreases.
not vary with the production.
Indifference curve is a tool which shows different
Variable cost on the other hand is cost incurred by
combinations of goods and services yielding the
the firm in which it does vary with the production.
same level of satisfaction.
Average total cost is the quotient of total cost and
Indifference curve has four assumptions:
total output. Can be used as the basis for pricing and
1. There are only two goods available in the
it should be greater than ATC.
market.
Average variable cost is the quotient of variable cost
2. Curve bows against the origin.
and quantity. It denotes the variable cost incurred of
3. Any point along the curve utilizes the same
1 unit of product.
level of satisfaction.
Marginal cost (MC) measures the increase in total
4. Indifference curve never intersects.
cost that arises from an extra unit of production.
Indifference map is a set or collection of
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indifference curves which represents various levels 𝑀𝐶 =
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of satisfaction or utility.
Short-run is the timeframe in which require an
Indifference curve lie above and to the right of
immediate concern.
another indicates a higher level of satisfaction.
Long-run require planning before you can make a
Budget constraints refer to the constraints that decision.
consume face as a result of limited incomes.
Perfect competitive market - known for many
Budget line
buyers and many sellers selling the same product.
▪ Goods confirmations where total
spend equals income. Monopoly - It is the sole seller of its product or the
▪ Represents combinations of goods only producer of goods and services.
purchasable by income 2 Barriers Category
Consumer equilibrium is the point where budget 1. Technological barriers
line tangent to the indifference curve. It is a 2. Legal Barriers
combination of goods in which the individual Classification of Monopoly
optimize his utility and budget. 1. Natural Monopoly. Single firm can supply the
𝑀𝑈𝑥 𝑃𝑥 𝑀𝑈𝑥 𝑀𝑈𝑦
= 𝑃 or 𝑃𝑥 = 𝑃 entire market.
𝑀𝑈𝑦 𝑦 𝑦
2. Legal Monopoly. Government grants to a private
Supply and demand individual or firm over the product or service
▪ the two words that economists use most 3. Coercive Monopoly. It includes the principle of
often. pure.
▪ the forces that make market economies work.
Oligopoly
Modern microeconomics is about supply, demand,
▪ Few sellers offering identical products.
and market equilibrium.
▪ Interdependent firms.
Total revenue is the amount of goods being sold or
▪ Best to cooperate and act like monopolists.
services being rendered.
▪ Produce small output, charge above marginal
Total Cost is the market value of the inputs a firm
cost.
uses in production.
Cooperation is the situation in which firms under the
Firm's cost of production includes all the
market creates either collusion or cater.
opportunity costs of making its output of goods and
Collusion is an agreement among firms in a market
services.
about quantities to produce or prices to charge.
Economic profit - total revenue minus total cost,
Cartel is a group of firms acting in monopoly or one
including both explicit and implicit costs.
firm.
Accounting profit - the firm's total revenue minus
Self-interest is a condition in which the competition
only the firm's explicit cost prevails among the group of sellers in the industry.
Production function shows the relationship
between quantity of inputs used to make a good and Monopolistic competition
the quantity of output of that good. ▪ Many Sellers
▪ Product Differentiation
Marginal product is the increase in output that
▪ Free entry and exit
arises from an additional unit of that input.
The relationship of the production curves is as
follows:
1. When TP is on its peak, MP is equal to zero.