FDSA AVIATION COLLEGE OF SCIENCE AND TECHNOLOGY INC.

BKN Bldg., Mc Arthur Hi-Way, Camachiles, Mabalacat City. Pampanga

Dean of Academic Affairs Email: fdsa.academicaffairs@gmail.com
Phone number: (045) 598-0059

What Is Economics?
Economics is a social science that focuses on the production, distribution, and consumption of
goods and services, and analyzes the choices that individuals, businesses, governments, and
nations make to allocate resources.

Understanding Economics

Assuming humans have unlimited wants within a world of limited means, economists analyze
how resources are allocated for production, distribution, and consumption.

The study of microeconomics focuses on the choices of individuals and businesses,

and macroeconomics concentrates on the behavior of the economy as a whole, on an aggregate
level.

One of the earliest recorded economists was the 8th-century B.C. Greek farmer and poet Hesiod
who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity.
The publication of Adam Smith's 1776 book, An Inquiry Into the Nature and Causes of the Wealth
of Nations sparked the beginning of the current Western contemporary economic theories.

Microeconomics

Microeconomics studies how individual consumers and firms make decisions to allocate
resources. Whether a single person, a household, or a business, economists may analyze how
these entities respond to changes in price and why they demand what they do at particular price
levels.

Microeconomics analyzes how and why goods are valued differently, how individuals make
financial decisions, and how they trade, coordinate, and cooperate.

Within the dynamics of supply and demand, the costs of producing goods and services, and how
labor is divided and allocated, microeconomics studies how businesses are organized and how
individuals approach uncertainty and risk in their decision-making.

Macroeconomics

Macroeconomics is the branch of economics that studies the behavior and performance of an
economy as a whole. Its primary focus is the recurrent economic cycles and broad economic
growth and development.

It focuses on foreign trade, government fiscal and monetary policy, unemployment rates, the level
of inflation, interest rates, the growth of total production output, and business cycles that result in
expansions, booms, recessions, and depressions.

Using aggregate indicators, economists use macroeconomic models to help formulate economic
policies and strategies.

What Are Economic Indicators?

Economic indicators detail a country's economic performance. Published periodically by
governmental agencies or private organizations, economic indicators often have a considerable
effect on stocks, employment, and international markets, and often predict future economic
conditions that will move markets and guide investment decisions.

Gross domestic product (GDP)

The gross domestic product (GDP) is considered the broadest measure of a country's economic
performance. It calculates the total market value of all finished goods and services produced in a
country in a given year. The Bureau of Economic Analysis (BEA) also issues a regular report
during the latter part of each month. Many investors, analysts, and traders focus on the advance
GDP report and the preliminary report, both issued before the final GDP figures because the GDP
is considered a lagging indicator, meaning it can confirm a trend but can't predict a trend.

Retail sales

Reported by the Department of Commerce (DOC) during the middle of each month, the retail
sales report is very closely watched and measures the total receipts, or dollar value, of all
merchandise sold in stores. Sampling retailers across the country acts as a proxy of consumer
spending levels. Consumer spending represents more than two-thirds of GDP, proving useful to
gauge the economy's general direction.

Industrial production

The industrial production report, released monthly by the Federal Reserve, reports changes in the
production of factories, mines, and utilities in the U.S. One measure included in this report is
the capacity utilization ratio, which estimates the portion of productive capacity that is being used
rather than standing idle in the economy. Capacity utilization in the range of 82% to 85% is
considered "tight" and can increase the likelihood of price increases or supply shortages in the
near term. Levels below 80% are interpreted as showing "slack" in the economy, which may
increase the likelihood of a recession.

Consumer Price Index (CPI)

The Consumer Price Index (CPI), also issued by the BLS, measures the level of retail price
changes, and the costs that consumers pay, and is the benchmark for measuring inflation. Using
a basket that is representative of the goods and services in the economy, the CPI compares the
price changes month after month and year after year.

This report is an important economic indicator and its release can increase volatility in equity,
fixed income, and forex markets. Greater-than-expected price increases are considered a sign of
inflation, which will likely cause the underlying currency to depreciate.

Economic Systems

Five economic systems illustrate historical practices used to allocate resources to meet the needs
of the individual and society.

Primitivism

In primitive agrarian societies, individuals produced necessities from building dwellings, growing
crops, and hunting game at the household or tribal level.

Feudalism

A political and economic system of Europe from the 9th to 15th century, feudalism was defined
by the lords who held land and leased it to peasants for production, who received a promise of
safety and security from the lord.
Capitalism

With the advent of the industrial revolution, capitalism emerged and is defined as a system of
production where business owners organize resources including tools, workers, and raw materials
to produce goods for market consumption and earn profits. Supply and demand set prices in
markets in a way that can serve the best interests of society.

Socialism

Socialism is a form of a cooperative production economy. Economic socialism is a system of

production where there is limited or hybrid private ownership of the means of production. Prices,
profits, and losses are not the determining factors used to establish who engages in the production,
what to produce and how to produce it.

Communism

Communism holds that all economic activity is centralized through the coordination of state-
sponsored central planners with common ownership of production and distribution.

What Is a Command Economy?

A command economy is an economy in which production, investment, prices, and incomes are
determined centrally by a government. A communist society has a command economy.

What Is Behavioral Economics?

Behavioral economics combines psychology, judgment, decision-making, and economics to

understand human behavior.

Law of Supply and Demand in Economics: How It Works

What Is the Law of Supply and Demand?
The law of supply and demand combines two fundamental economic principles describing how
changes in the price of a resource, commodity, or product affect its supply and demand.

As the price increases, supply rises while demand declines. Conversely, as the price drops supply
constricts while demand grows.

Levels of supply and demand for varying prices can be plotted on a graph as curves. The
intersection of these curves marks the equilibrium, or market-clearing price at which demand
equals supply, and represents the process of price discovery in the marketplace.

Understanding the Law of Supply and Demand

It may seem obvious that in any sale transaction the price satisfies both the buyer and the seller,
matching supply with demand. The interactions between supply, demand, and price in a (more or
less) free marketplace have been observed for thousands of years.
Many medieval thinkers, like modern day critics of market pricing for select commodities,
distinguished between a "just" price based on costs and equitable returns and one at which the
sale was in fact transacted. Our understanding of price as a signaling mechanism matching supply
and demand is rooted in the work of Enlightenment economists who studied and summarized the
relationship.

Importantly, supply and demand do not necessarily respond to price movements proportionally.
The degree to which price changes affect the product's demand or supply is known as its price
elasticity. Products with a high price elasticity of demand will see wider fluctuations in demand
based on the price. In contrast, basic necessities will be relatively inelastic in price because people
can't easily do without them, meaning demand will change less relative to changes in the price.

Price discovery based on supply and demand curves assumes a marketplace in which buyers and
sellers are free to transact or not, depending on the price. Factors such as taxes and government
regulation, the market power of suppliers, the availability of substitute goods, and economic
cycles can all shift the supply or demand curves or alter their shapes. But so long as buyers and
sellers retain agency, the commodities affected by these external factors remain subject to the
fundamental forces of supply and demand. Now let's consider in turn how demand and supply
respond to price changes.

The Law of Demand

The law of demand holds that demand for a product changes inversely to its price, all else being
equal. In other words, the higher the price, the lower the level of demand.

Because buyers have finite resources, their spending on a given product or commodity is limited
as well, so higher prices reduce the quantity demanded. Conversely, demand rises as the price
falls and the product becomes more affordable and a better value.

As a result, demand curves slope downward from left to right, as in the chart below. Changes in
demand levels as a function of a product's price relative to buyers' income or resources are known
as the income effect.

Naturally, there are exceptions. One is Giffen goods, typically low-priced staples also known
as inferior goods. Inferior goods are those that see a drop in demand when incomes rise because
consumers trade up to higher-quality products. But when the price of an inferior good rises and
demand goes up because consumers use more of it in place of costlier alternatives, the substitution
effect turns the product into a Giffen good.

At the opposite end of the income and wealth spectrum, Veblen goods are luxury goods that gain
in value and consequently generate higher demand levels as they rise in price because the price
of these luxury goods signals (and may even increase) the owner's status. Veblen goods are named
for economist and sociologist Thorstein Veblen, who developed the concept and coined the term
"conspicuous consumption" to describe it.

The Law of Supply

The law of supply relates price changes for a product with the quantity supplied. In contrast with
the law of demand the law of supply relationship is direct, not inverse. The higher the price, the
higher the quantity supplied. Lower prices mean reduced supply, all else held equal.

Higher prices give suppliers an incentive to supply more of the product or commodity, assuming
their costs aren't increasing as much. Lower prices result in a cost squeeze that curbs supply. As
a result, supply slopes are upwardly sloping from left to right.

As with demand, supply constraints may limit the price elasticity of supply for a product,
while supply shocks may cause a disproportionate price change for an essential commodity.

Equilibrium Price

Also called a market-clearing price, the equilibrium price is the price at which demand matches
supply, producing a market equilibrium acceptable to buyers and sellers.

At the point where an upward-sloping supply curve and a downward-sloping demand curve
intersect, supply and demand in terms of the quantity of the goods are balanced, leaving no surplus
supply or unmet demand. The level of the market-clearing price depends on the shape and position
of the respective supply and demand curves, which are influenced by numerous factors.
Factors Affecting Supply

In industries where suppliers are not willing to lose money, supply will tend to decline toward
zero at product prices below production costs.

Price elasticity will also depend on the number of sellers, their aggregate productive capacity,
how easily it can be lowered or increased, and the industry's competitive dynamics. Taxes and
regulations may matter as well.

Factors Affecting Demand

Consumer income, preferences, and willingness to substitute one product for another are among
the most important determinants of demand.

Consumer preferences will depend, in part, on a product's market penetration, since the marginal
utility of goods diminishes as the quantity owned increases. The first car is more life-altering than
the fifth addition to the fleet; the living-room TV more useful than the fourth one for the garage.

References:
https://www.investopedia.com/terms/e/economics.asp
https://www.investopedia.com/terms/l/law-of-supply-
demand.asp#:~:text=The%20law%20of%20supply%20and%20demand%20combines%20two%
20fundamental%20economic,supply%20constricts%20while%20demand%20grows.