LECTURE NOTES

IN
ECONOMICS 11
GENERAL ECONOMICS
WITH LAND REFORM AND
TAXATION

prepared by:
Prof. Rufina F. Capuno
 PART 1
INTRODUCTION TO ECONOMICS
Chapter 1. Fundamental Concepts of Economics
1. Origin of the term “economics”
Economics come from the Greek word such as “eikos” meaning household and
“nomus” meaning system or management. Oikonomia or oikonomus therefore means
the management of household.
With the growth of the Greek society until its development into city-states, the
word referred to as “state management”. Consequently, in the term “management of
household” now pertains to the microeconomics branch of economics, while the phrase
“state management” presently refers to the macroeconomic branch of economics.
Because of its far-reaching significance, in the early years, economics covered other
scholarly fields, such as religion, philosophy, and political science.

2. Scarcity
Scarcity is the basic and central economic problem confronting every society. It is
defined as a commodity or service being in short supply, relative to its demand which
implies a constant availability of commodity or economic resource relative to the demand
for them. In quantitative terms, scarcity is said to exist when at a zero price there is a unit
of demand, which exceeds the available supply. Simply put, scarcity pertains to the
limited availability of economic resources relative to society unlimited for goods and
services.

Since human wants and needs are unlimited and the available resources are finite,
scarcity naturally results leaving the society with the problem of resource allocation.

3. Definition of Economics
a. Paul S. Samuelson defines Economics as the study of how people and society end up
choosing, with or without the use of money, to employ scarce or limited resources
that could be used in the production of good and services to satisfy human wants.
b. It is a science of making choices, in the present and over time.
c. Economics is a scientific study concerned with human behavior. It is therefore a
social science.
d. Economics is interdependent with other sciences like sociology, political science,
history, geography, physics and even religion.
e. Adam Smith defines it as an inquiry into the nature and causes od the wealth of
nations.
4. What is the relationship between Economics and Scarcity?
The problem of scarcity gave birth to the study of economics. It is the heart of the
study of economics and the reason behind the establishment. Their relationship is such
that is there is no scarcity, there is no need for economics. The study of economics was
essentially founded in order to address the issue of resource allocation and distribution, in
response to scarcity.

5. Four Basic Economic Questions

a. What to produce? An economy must identify what are the commodities needed to
be produced for the utilization of the society in everyday life. A society must also take
into account the resources that it possesses before deciding what goods or services to
produce.

For example, an island nation, blessed with agricultural resources, and which does not
possess advanced technology should not opt to produce space shuttles or satellites
because its resources are incapable of producing these outputs. However, it can take
advantage of its natural resources, and it can produce agricultural good and tourism
services.

In market economy, what gets produced in the society is driven by prices. Resources
are all allocated to the production of goods and services that have high prices and low
input relative to one another.

b. How to produce? There is a need to identify the different methods and techniques in
order to produce commodities. The society must determine whether to employ labor
intensive production or capital-intensive production.

Labor intensive production uses more of the human resource or manual labor in
producing goods and services than capital resources This kind of production is
advisable to a society with large population. In countries where labor resources are
abundant, the cost of labor is usually cheap, for instance the Philippines and Vietnam.
Goods are produced by employing more of cheaper resources and less of more
expensive inputs.

On the other hand, capital intensive production employs more technology and capital
goods like machineries and equipment in producing goods and services than labor
resources. This type of production should be utilized by countries with high level of
capital stock and technology, and with scarce labor resources, like Japan, Germany,
and the USA.
 c. How much to produce? This identifies the number of commodities needed to be
produced in order to answer the demand of the society. The optimum amount of
production must be approximated by producers. Under production will result to a
failure to meet the needs and wants of the society. On the other hand, overproduction
results to excess goods and services going to waste.

d. For whom to produce? This question identifies the people or sectors who demand
the commodities produced in a society. Economists must determine the "target
market" of the goods and services which are to be produced to understand their
consumption behaviors and patterns. An understanding of these result to higher sales
of goods, and ultimately to increased profits. For those who can pay the highest price
is for whom goods and services are produced.

Why Study Economics?

a. To understand the Society - Economics seeks to analyze transactions made by the society
and its members, particularly with regard to details on their behavior and decision making.

b. To understand Global Affairs - Economics seeks to explain the internal operation and trade
policies of countries, it also measures the competitiveness of each country and identifies its
comparative advantage in relation to other states.

c. To be an Informed Voter - An understanding of economics develops individuals to be wise

voters. Knowledge of economics provides individuals with an understanding of economic
policies that are apt for the state's current situation. With this in mind, voters have an informed
choice in selecting leaders based on their economic, social, and political platform, rather than on
their apparent popularity.

Three Es in Economics
 Efficiency - refers to productivity and proper allocation of economic resources. It also
refers to the relationship between scarce factor inputs and outputs of goods and services.
This relationship can be measured in physical terms (technological efficiency) of cost
terms (economic efficiency). Being efficient in the production and allocation of goods
and services saves time, money, and increases a company's output for instance, in the
production of commodities, firms utilizing modern technology can improve the quantity
and quality of products, which ultimately translates into an increase in revenue and profit.

 Equity - means justice and fairness Thus, while technological advancement may increase
production, it can also bear advantages to employment of workers. Due to the presence of
new equipment and machineries, manual labor may not be necessary, and this can result
in the retrenchment or displacement of workers.
  Effectiveness - means attainment of goals and objectives. Economics is an important and
functional tool that can be utilized by other fields. For instance, with the use of both
productions (through manual labor or through technological advancement), whatever the
output is it will be useful for the consumption of the society and the rest of the world.
5 Important Economic Terms
Wealth – refers to anything that has a functional value (usually in money), which can be traded
for goods and services. Wealth, therefore, is the stock of new assets owned by individuals or
households. In aggregate terms, one widely used measure of the nation’s total stock of wealth is
that of the ‘marketable wealth’, that is, physical and financial assets which are in the main
relatively liquid.
Consumption – refers to the direct utilization or usage of the available goods and services by the
buyer or the consumer sector. It is also the satisfaction obtained by the consumers for the use of
goods and services.
Production – is defined as the formation by firms of an output (products or services). It is the
combination of land, labor and capital in order to produce outputs of goods and services.
Exchange – is the process of trading goods and/or services for money and /or its equivalent. It
also includes the buying of good and services either in the form of barter or through market.
Distribution – is the process of allocating or apportioning scare resources to be utilizing by the
household, the business sector, and the rest of the world. In specific term however, it refers to the
process of storing and moving products to customers often through intermediaries such as
wholesalers and retailers.
Microeconomics and Macroeconomics
Microeconomics is the branch of economics which deals with the individual of units of the
economy – firms and households, and how their choices determine relative prices of good and
factors of production. The market is the central concepts of microeconomics. It focuses on its
two main players – the buyer and the seller, and their interaction with one another. It operates on
the level of the individual business firm, as well as that of the individual consumer. It concerns
how a firm maximizes its profits, and how a consumer maximizes his/her satisfaction.
Macroeconomics is the branch of economics that studies the relationship between among broad
economic aggregates like national income output, money supply, bank deposits, total volumes of
savings, investment, consumption expenditure, general price level of commodities, government
spending, inflation, recession, employment and money supply. The term macro, in contrast to
micro, implies that it seeks to understand the behavior of the economy as whole. Also discusses
the measurement of gross national product and gross domestic product, the business cycle, the
five macroeconomic goals, money and the economy, monetary and fiscal policies, and economic
growth and development.
Opportunity Cost – Because people cannot have everything they want; they are forced to make
choices between several options. Opportunity cost refers to the foregone value of the nest best
alternative. It is the value of what is given up when one makes a choice. The thing thus given up
is called the opportunity cost of one’s choice.
When one makes choices, there is always an alternative that has to be given up. A producer, who
decides to produce shoes, gives up other goods that he could have produced using the same
resources. It is expressed in relative price. The means that the price of one item should be relative
of the price of another.
Scientific Methods Used in Economics
Economics, being a science, is a systematic body of knowledge. It uses scientific methods in data
gathering, analyzing the data and making conclusions. Data are mostly obtained through
observation and interviews. Conclusions are based on generalizations within the limits of certain
specific assumptions. This is the empirical method. Data are properly organized for analysis. Out
of this economic behavior or conditions. Theories or principles of economics are represented by
the models in the form of verbal statements, graphs, numerical tables and mathematical
equations. An economic principle or theory, which is put in action becomes an economic policy
or applied economics.
Key Elements of Economic Activity
Human wants – Economic activity is directed towards the satisfaction of human wants. These
provide the driving and motivating force whose fulfillment may be thought of as the end or goals
of economics activity for the general public, those government leaders, and others.
Two characteristics of human wants: (1) They are varied, and (2) In the aggregate, over time,
they are insatiable.
Origin of wants:
a. Wants arise for what the human beings must have in order to continue functioning. The
desire for food is the most obvious case in point.
b. Wants arise, too, from the culture in which we live, for every society dictates certain
requisites for the “good life” – certain standards of housing and food consumption,
appreciation of the arts; and possession and consumption of such items as automobiles,
television sets, vcd/dvd/mp4 players, and the other personal and household gadget.
c. Satisfying of our biological and cultural needs require a wide variety of goods. Individual
taste vary and are different.
d. Wants are generated by the activity necessary to satisfy other wants; want-satisfying
activity may be said to create new wants.
Economic resources – the things which are needed to carry on the production of good and
services to satisfy human wants; also called as the factors of production or inputs of production.
They are the most basic resources and tools used in the production of goods and services. These
resources are classified into:
 a. Labor or human resources – consist of labor power or the capacity for human effort –
both of mind and muscle – used in the production of goods.
b. Capital or non-human resources – include all non-human resources that can contribute
toward placing goods in the hands of the ultimate consumer.
Techniques of production – together with quantities and qualities of resources in existence,
these limit the level of output that an economy can achieve. Techniques of production are the
know-hows and physical means of transforming resources into want-satisfying form.
The Graphs Used in Economics Analysis
Variables is something that by a number; it is used to analyze what happens to other things when
the size of the number changes (varies). Generally, dependent variables are those when the
value of another variable changes, while independent variables are those changes will cause the
dependent variable the change. In short, independent variables is the CAUSE, and dependent
variables shows the EFFECT.
The slope of a straight line is the ratio of the vertical change to the corresponding horizontal
change as we move to the right along the line, or as it is often said, the ratio of the “rise” over the
“run”
How to measure Slope? Slope indicates how much the lines rises (Fig 1a) per unit of movement
from left to right, or falls (Fig 1b)

In figure 1a, the slope is equal to (10-5) divided by (13-3). So, the slope is 5/10 or ½. What is the
slope of Figure 1b in the sample illustration?
Different Typres of Slope of a Straight-line Graph

PART 2
 PRODUCER-CONSUMER RELATIONSHIP
Chapter 2: Basic Analysis of DEMAND AND SUPPLY
2. 1 DEMAND
2.1.1 Demand is the consumers’ desire for a specific good or services for which they are
willing and able to buy at various prices during a particular period of time, “ceteris paribus” (a
Latin phrase meaning “other things being equal or unchanged”). Consumers express their desire
for goods and services only by actually buying them. Wishful thinking doesn’t count.
2.1.2 Quantity demanded is the number of units. (amount) of a goods or services that
consumers buy at various price levels during a specified period of time.
2.1.3 Demand schedule is a table showing the quantity demanded of certain product or
services at each price level during a specified period of time, ceteris paribus (holding all other
determinants of demand constant or unchanged).
2.1.4 Demand curve is the simple a graphical representation of a demand curve schedule. It
is sloping downward from left to right (Figure 6). Its slope is negative.

2.1.5 Law of Demand

The law of demand states that as price increases quantity demanded decreases, and as price
decreases quantity demanded increases. Consumers are most likely to buy more goods and
services as price decreases and buy less goods and services as price increases, ceteris paribus.
2.1.6 Demand Equation. Mathematically, the relationship between price and quantity can be
presented as:
 Qd = a – bP Where: Qd = quantity demanded of certain product
a = intercept, constant
b = slope or coefficient
p = price of the product
2.1.7 Change in Demand versus Change in Quantity Demanded
Change in demand is the shifting of the demand curve either to the left or to the right due
to the changes in the determinants of demands or the factors affecting it like income, population,
price exception, etc. (Figure 7a)
Change in quantity demanded is the movement ding a given demand curve showing a
change in quantity demand due to a change in price of a good itself, ceteris paribus. It is the
movement from one point to another point in the demand curve (Figure 7b). The demand curve
does not change its position.

2.1.8 Determinants of Demand

 a. Taste/Preferences. A change in consumer tastes favorable to a product means that
more are demanded of it at a given price, that is, demand will increase.
Unfavorable change in consumer preferences will cause demand to decrease,
shifting demand curve to the left.
b. Population. An increase in the number of consumers will result increase in
demand. Fewer consumers will be reflected by a decrease in demand. For
example, an increase in the number of family members would mean more demand
for food by the family, and the higher is the rate population growth, the more is
the demand for food in the country.
c. Consumer Income. For most commodities, a rise in income normally shifts
demand curve outward to the right. Conversely, the demand of a product will
decline in response to a decrease in income. Commodities whose demand varies
directly with normal income are called normal goods; those goods whose varies
inversely with a change in nominal oncome are called inferior goods.
d. Prices of related goods. When the price of a certain product increases, people
tend to buy a substitute product. Thus, two goods are called substitutes if an
increases in the purchase of one good will result to a decrease in the quantity
purchased of the other good, ceteris paribus. However, in the case of
complementary goods, the price of one good and the demand for the other good
decreases. Thus, two goods are called complements if an increase in the purchase
of one good will result to an increase in the quantity purchased of the other good,
ceteris paribus.
e. Price expectation. When people expect the prices of goods, especially basic
commodities like rice, to increase tomorrow or next week, they buy more of these
goods now. in the same manner, they may decrease their demand for such
products now if they expect prices to decrease tomorrow-or next week. The
reason for such consumers' behavior is to economize.
2.2. SUPPLY
2.2.1. Supply refers to the willingness and ability of producers or sellers to sell goods and
services at all alternative prices, other things being equal
2.2.2. Quantity supplied is the number of units (amount) of a good or service that producers or
sellers sell at various price levels during a specified period of time.
2.2.3. Supply schedule is a table-showing the quantity supplied of a certain product or service at
each price level during a specified period of time, ceteris paribus (holding all other determinants
of supply constant or unchanged).
2.2.4. Supply curve is a graphical representation of a supply schedule. It is rising upward from
left to right (Figure 8). Its slope is positive.
2.2.5 Law of Supply
The law of supply states that as price increases quantity supplied also increases, and as price
decreases quantity supplied also decreases. This positive relationship between price and quantity
supplied is the law of supply. Producers are willing and able to produce and offer more goods at
a higher price than at a lower price, ceteris paribus, With the law of supply quantity supplied and
price are positively related (unlike in the law of demand in which quantity demanded, and price
are negatively related).
2.2.6. Supply Equation. The mathematical formula used to represent the relationship between
price and quantity supplied is:
Qs = c+ dP where: Qs = quantity supplied of a certain product
a = intercept, constant
b = slope or coefficient
p = price of the product
2.2.7. Change in Supply versus Change in Quantity Supplied

Change in supply pertains to changes in the determinants of supply. Graphically, an increase in

supply shifts the supply curve to the right while a decrease in supply shifts the supply curve to
the left, with no changes in price.

Change in quantity supplied is a movement along a given supply curve, showing a movement
from one point to another on the same supply curve. Change in quantity supplied Is an increase
or decrease in the specific quantity supplied at each possible price of the commodity, represented
by a movement along a given supply curve. Quantity supplied changes because price changes.

2.2.8 Determinants of Supply

a. Technology. This refers to the techniques or methods of production. Modern technology
that uses modern machines increases supply of goods.
b. Cost of production. In producing goods, raw materials are needed, together with
workers (labor). If the price of raw materials or the salaries of the workers increase, it
means higher cost of production.
c. Number of sellers. More sellers or more factories mean an increase in supply.
Conversely, smaller number of sellers or factories means less supply.
d. Prices of other goods. Changes in the price of goods affect the supply of such goods.
Fox example a decrease in the price of rice may likely encourage a rice farmer to produce
more corn if this gives him more profit.
e. Price expectations. If producers expect prices of their products to increase very soon,
they usually keep their goods for a while and then release them in the market when the
 prices are already high (a condition called hoarding). This creates artificial shortage and
therefore increases prices of the products.
f. Taxes and subsidies. Certain taxes increase cost of production. Higher taxes discourage
production because it reduces the profit of businessmen. Thus, the government extends
tax exemptions to a number of new and necessary industries to stimulate the growth.
Similarity, tax Incentives are granted to foreign investors to increase foreign investments
in the Philippines resulting in an increase in production of goods. Subsidies, which are
financial grants or financial assistance may likewise be given to producers. Subsidies are
also referred to as "negative tax".
2.2.9. Market Demand, Market Supply and Market Equilibrium
Consumers (buyers) and producers (sellers) exchange goods and services in the market. In this
context, market is not the same as market place. Market occurs when buyers and sellers agree
on the price and quantity to be traded. Buying and selling can be done by telephone or through
the internet, and today's business transactions do not necessarily involve immediate, actual or
instantaneous payments.
a. Market demand is the sum (total) of all individual consumers' demand for goods and
services.
b. Market supply is the sum (total) of all individual producers or sellers' supply of goods and
services.
c. Market equilibrium a condition in which the value or amount of market demand is equal to
the value or amount of market supply.' This is sometimes written as D= S which means thar the
quantity of demand is the same in value as quantity of supply, and that same quantity is referred
to as market equilibrium quantity. When this condition occurs, me market equilibrium price is
determined.
c. Market equilibrium price is sometimes called "market-determined price". It’s the resulting
price when market demand exactly the same as market supply. In a purely competitive market
condition, supply and demand forces interact freely. This interaction, i.e.., change in market
demand or supply, results to changes in the market price. This is one important consideration in
understanding the difference between individual and market demand or supply analysis. For
example, any change in individual demand cannot change the market price, but a change in
market demand can change the market price. Thus, when market demand decreases (leaving
market supply unchanged), the market price tends to decrease as well. But what if (1) market
demand increases, with market supply unchanged, what will happen the market price?
Or if (2) market supply decreases, but market demand unchanged, what will happen to the
market price? Or if (3) market supply increases, with market demand unchanged, what will
happen to the market price? Or what if (4) both market demand and market supply change, what
will happen to the market price? In all four situations cited above, and in any other possible
logical variations, it is clear that any change in market supply market demand will cause a
change in the market price.
d. Market disequilibrium. When market demand and market supply are not equal, there is
market imbalance, hence market disequilibrium. In this case, there is neither market equilibrium
price nor market equilibrium quantity. Surplus occurs when S> D and shortage happens when
D> S. This market imbalance will put pressure in the market price such that the market will
continuously adjust until such time that equilibrium will again be realized.
If the market price is above the equilibrium value, there is an excess supply in the market, a
surplus occur which means there is more supply than demand. In this situation, sellers will tend
to reduce the price of their good or service to clear their inventories. They probably will also
slow down their production or stop ordering new inventory. The lower price entices more people
to buy, which will reduce the supply further. This process will result in demand increasing and
supply decreasing until the market price equals the equilibrium price.
If the market price is below the equilibrium value, then there is excess in demand, a shortage
occur. In this case, buyers will bid up the price of the good or service in order to obtain the good
or service in short supply. As the price goes up, some buyers will quit trying because they don't
want to, or can't, pay the higher price. Additionally, sellers, are more than happy to see the
demand increasing, and will start to supply more of it. Eventually, the upward pressure on price
and supply will stabilize at market equilibrium.
Table 3) shows different price levels at different amounts of demand and supply of a commodity
in the market, use this set of data to make a graph (Figure 10) that shows the interaction of
market demand and market supply.
Table 3. Determination of market equilibrium price and quantity.
Price D S Surplus/Shortage Pressure on Price

8 0 < 80 Surplus Downward

7 10 < 70 Surplus Downward

6 20 < 60 Surplus Downward

5 30 < 50 Surplus Downward

4 40 = 40 Neither Equilibrium

3 50 > 30 Shortage Upward

2 60 > 20 Shortage Upward

1 70 > 10 Shortage Upward

0 80 > 0 Shortage Upward

2.2.9.4 Mathematical Derivation of Market Equilibrium:
Demand Equilibrium: D = Qd = a – b P
Supply Equation : S = Qs = c + d P
At Equilibrium: Qd = Qs

a–bP=c+dP
a–c=dP+dP
Therefore,
a−c
P = d+ b , the market equilibrium price.
Example Problem:
Given: Qd = 10 – ¾ P and Qs = 4 + ¼ P
Solve for the market equilibrium price (Pe) and market equilibrium quantity (Qe).
At Equilibrium: Qd = Qs To solve for the market equilibrium (Qe).
10 – ¾ P = 4 + ¼ P substitute P = 6 to the given Qd and Qs
10 – 4 = ¼ P + ¾ P 10 – ¾ (6) = 4 + ¼ (6)
6 = 4/4 P 10 – 4.5 = 4 + 1.5
Pe = 6 5.5 = 5.5
Thus,
Qd = Qs = Qe
Chapter 3. The Concept of Elasticity
3.1 Elasticity of Demand (εd)
In Economics, elasticity means responsiveness. In general, itis the ratio of the percent change in
one variable to percent change in another variable.
Elasticity of demand, in particular, is a concept devised to indicate the degree of responsiveness
of quantity demand to changes in market price. It refers primarily to percentages changes in P
and Q and is independent of the units used to measure P and Q.
5.1.1 Categories or Types of Reactions of Buyers to Price Changes of Goods and Services
a. Elastic demand - when the unit change in the quantity of good demanded is greater than the
unit change in price. That is %∆ Q >AP hence εd > 1.
b. Inelastic demand when the unit change in the quantity demanded is lesser than the unit
change in price. That is %∆ Q< ∆ Phence 0< εd <1.
c. Unitary elasticity - when the unit change in quantity demanded is equal to the unit change in
price. That is ∆ Q = ∆ P hence εd =1.
d. Perfectly inelastic - change in price creates no change in quantity demanded. Demand curve
is vertical no and parallel to the Y-axis; εd = 0
e. Perfectly elastic - without change in price, there is an infinite change in quantity demanded.
Demand curve is parallel to the X axis or horizontal axis; εd = æ
3.1.2 Numerical Measurement of Demand Elasticity
Percentage change ∈Qd % ∆∈Qd
εd = Percentage change∈ P or
% ∆∈ P
Take note that the category of elasticity considers the absolute value of the elasticity, that is
Methods of Computing Elasticity:
a. Arc elasticity – the elasticity computed between two separate points on the
demand curve. It is computed using the formula:

∆Q ( P 1+ P 2 ) /2
εd = ∆ P x
( Q1+Q 2 ) /2
Table 4. Sample exercise on measuring demand elasticity using arc elasticity formula.

Fill in the correct values of ∆ P, ∆ Q and Elasticity εd at different price levels.

Take note that ∆ P = new P – old P and ∆ Q – old ddQ
b. Point elasticity – the computed at a single point on the demand curve for an
infinitesimal change in price. It is computed using the formula given below.
∆ Qd P1 ∆ Qd P1
εd = Qd 1 x ∆ P or ∆ P x Qd 1

Sample Problem:
 Suppose the price of Good X went up form P100 to P101; and the quantity brought
decreased by 4 units, from 200 units to 196 units a day. Solve for the price elasticity of demand
of this product and interpret the result using the absolute value.
−4
εd = 1 x 100
200
= −400
200
= -2 = / 2 / hence Elastic demand.

3.1.3 Determinants of Elasticity

a. Number of substitute goods. Demand is elastic for a product with many substitute goods. An
increase in the price of such product induces buyers to look for substitute goods. On the other
hand, products without substitute goods have an inelastic demand. In this case, buyers have little
or no choice except to purchase them if they really need them. Example, electricity for a factory.
b. Price increase in proportion to income. If the price increase has very little effect on the
income or budget of the buyers, demand is inelastic. But, if the price increase involves a
substantial amount in proportion to the income of consumers, demand is elastic.
c. Luxuries versus necessities. The demand for "necessities" tends to be inelastic, the demand
for "luxuries" tends to be elastic. Rice and electricity are generally regarded as necessities, we
"won’t be comfortable" without them. A price increase will not reduce significantly the amount
of rice consumed, or the amounts of lighting and power used in a household.
d. Time. Generally speaking, the demand for a product tends to be more elastic over a long
period of time One aspect of this generalization has to do with the fact that many consumers are
creatures of habit. when the price of the product rises, it takes time to seek out and experiment
with other products to see if they are acceptable. Over time, the consumers adjust and accept
substitute products.
3.1.4 Price Elasticity of supply, εs - is a measure of the responsiveness of the quantity of supply
to changes in the price of the good or service, given the supply curve for it. Generally speaking.
we can only expect a greater output response and therefore greater elasticity of supply if the
producer has enough time to adjust to a given price change. That is, when the producer has the
time to shift resources for the production of the commodity. The shifting of resources takes time;
the longer the time, the greater the resource "shiftability". Hence, the greater is the output
response and its elasticity. Therefore,
a. If producers are responsive to price changes, supply is elastic. If they are relatively insensitive
to price changes supply is inelastic.
b. The main determinant of the elasticity of supply is the amount of time that a producer has to
respond to a change in the price of his product.
3.2.1 Categories or types of reactions of sellers to price changes of goods they are
producing/selling

a. Elastic supply. A % change in price result to a greater % change in quantity

supplied. (εs >1)
b. Inelastic supply. A % change in price result to a lesser % change in quantity
supplied. (εs<1>0)
c. Unitary supply. A % change in price result to an equal % change in quantity
supplied. (εs = 1)
d. Infinitely elastic supply. Without change in price, there is an infinite (without limit) change in
quantity suppled. (εs = ∞)
e. Perfectly inelastic supply. A change in price has no effect on the quantity supplied. (εs = 0)

3.2.3 Price Market Periods.

1. In the momentary market period supply is fixed; there is not enough time to change output
and so supply is perfectly inelastic. Q remains the same, but the price Increase is high.
2. In the short-run, factory capacity is fixed; producers can produce more within given time;
supply is therefore more elastic; Q increases price also increases but not as high as during a
momentary period.
3. In the long run, all desired adjustments including changes in factory capacity can be made;
firms abandon old factories or build new ones and when new firms enter the industry or old ones
leave it; supply becomes much more elastic, but the price increase is little.
Chapter 4. The Theory of Consumer Behavior
4.1.1 Utility Theory – So you can easily understand the subsequent topics, it is important that
you know first the following terminologies.
Utility – the ability of a good to satisfy a human want, it refers to the satisfaction or benefit
obtained by a consumer from whatever goods and services he/she consumes.

Total utility (TU) – refers to the entire amounts of satisfaction a consumer receives at various
level of consumption. The more of an item a consumer consumes per unit of time, the greater
will be his/her total utility or satisfaction from it, but only up to a certain level (see DMU).

Marginal utility (MU) -is defined as the change in the total utility resulting from a one unit
change in consumption per unit of time i.e. the marginal utility of consuming one more unit of
commodity X is equal to the change in TU per unit change in the amount of X used, thus MU =
∆ TU ÷ AX.

Principle of Diminishing Marginal Utility (DMU) – states that the more you have of anything.
The less important to you is any one unit of it.

Law of Diminishing Utility – states that the desirability of a given commodity tends to diminish
as additional unit is acquired.

Objectives – A rational consumer aways aims to maximize his/her satisfaction or utility. The
consumers’ preferences are described by his/her utility curves for the various goods and services
that confront him/her. The choice problem is to select from these the kinds and amounts that
will yield the greatest possible sum/total of utility:

Constraints – The consumer is constrained by his/her income (The amount of money that he/she
has to spend per unit of time) and the prices of the goods and service available to him/her.
Typically, his/her income per unit of time is more or less a fixed amount. Faced with these
limiting factors, he/she tackles the problem of choice.
Table 5. An Individual’s total utility and marginal utility from consuming various
quantities of Good X.
Quantity of Good X Total Utility (TUx) Marginal Utility (MUx)
Consumed
0 0 -
 1 4 4
2 7 3
3 9 2
4 10 1
5 10 0
6 8 -2

4.1.2 Conditions for Consumer Equilibrium

Between the consumption of two commodities X and Y, the consumer optimizes satisfaction with
his/her available income or budget (B) for the two commodities:
MUx MUy MUx Px
Px
= Py
or
MUy
= Py

At B = (Px) (Qx) + (Py) (Qy).

Where: MUx = additional satisfaction received from additional unit of X.
MUy = additional satisfaction received from additional unit of Y.
Px = price of X
 Py = price of Y
Qx = quantity of amount of X
Qy = quantity of amount of Y

Sample Problem: