Introduction to Economics PDF

INTRODUCTION TO ECONOMICS  takes a wider view and looks at the economies on a much larger scale—regional, national, continental, The Foundation off Economics...

INTRODUCTION TO ECONOMICS  takes a wider view and looks at the economies on a much larger scale—regional, national, continental, The Foundation off Economics or even global Adam Smith “FATHER OF ECONOMICS” ECONOMIC ACTIVITIES Defined Economics as “an inquiry into the nature and  It is related to production, distribution, exchange causes of the wealth of nations” and consumption of goods and services.  The primary aim of the economic activity is the WHAT IS ECONOMICS? production of goods and services with a view to make them available to consumer. - Economics is the study of what constitutes rational  Human activities which are performed in exchange human behavior in the endeavor to fulfill needs and for money wants.  Economic activities are those efforts which are under taken by man to earn income, money, wealth - A social science that studies how individuals, for his life and to secure maximum satisfaction of businesses, governments, and societies allocate scarce wants with limited scarce means. resources to satisfy their needs through the production, (ex. A worker works in a company to get consumption, and distribution of goods and services. wages.) - Economics asks what goods are produced, how these CLASSIFICATION OF ECONOMIC ACTIVITIES goods are produced, and whom they are produced. 1. Primary Sector - The word ECONOMICS comes from the Greek word - It refers to that sector of economy that use "oikonomia" which means management of household. natural resource to produce goods. - Agriculture and allied activities like mining, SCARCITY fishery, forestry, dairy, and poultry are included in this sector.  It is the main economic problem 2. Secondary Sector  scarcity refers to limitations–limited goods or - Also known as manufacturing sector or services, limited time, or limited abilities to achieve industrial sector. the desired ends. - An economic activity which people use raw  It means that the demand for a good or service is material to produce or manufacture new greater than the availability of the good or service. products of greater value.  It refers to the issue of having limited resources that - The sector which transforms one physical are required to meet unlimited human wants and good into another. needs 3. Tertiary Sector - It is the service sector of the economy WHY MAKE CHOICES? - This sector provides services to the general population and to businesses.  Because all goods, resources, and services are Ex. distribution, transportation, entertainment, limited. restaurants, healthcare, law.  We make choices about how we spend our money, 4. Quarternary Sector time, and energy so we can fulfill our needs and -It is the way to describe the knowledge based wants. part of the economy which typically  TRADE-OFFS are decisions involve picking one includes services such as information thing over all the other possibilities. technology, information generation and sharing, media and research and NEEDS - stuff we must have to survive. development. (ex. food, clothing and shelter) 5. Quinary Sector - Includes the highest levels of decision making WANTS - stuff we would really like to have. in a society or economy. (ex. fancy food, big screen tv, jewelry, bags.) - This sector would include the top executives or officials in such fields as government, science, TYPES OF ECONOMICS universities, non-profit, culture , healthcare and media. Microeconomics  is the study of individuals and business decisions. What is the importance of economics in our daily life?  is the field of economics that looks at the economic - behaviors of individuals, households, and companies. Macroeconomics  is the study that looks at the decisions of countries and governments. PRICE THEORY AND ECONOMIC THEORY APPROACHES TO ECONOMICS Price Theory Positive Economics  The theory of price is a theory which states that the price for goods and services is determined by Is an economic analysis that considers economic forces such as supply and demand. economic conditions “as they are” or considers  According to this theory, the relationship between economics “as it is”. The objective and scientific supply and demand influences price as to whether explanations are used in the analysis of different the prices of goods and services will rise or decline. transactions in the economy. It deals with the causal relationships that exists in economics. There is no value Economic Theory judgement and deals with “WHAT IS”.  An economic theory is a set of ideas and principles that outline how different economies function. Normative Economics Depending on their particular role, an economist may employ theories for different purposes. For In contrast, it deals with the way economic instance, some theories aim to describe particular relationships ought to be. Value judgement play an economic phenomena, such as inflation or supply integral part in the ranking of possible objectives and the and demand, and why they occur. choices to be made among them. It deals with “WHAT OUGHT TO BE”. Is an economic analysis that judges Basic Economic Problems economic conditions “as these should be”. It also focuses on policy making that will allow the ideal 1. What to produce? situation to be achieved. - refers to the kinds of goods and services that society needs to produce. FACTORS OF PRODUCTION 2. How to produce? - refers to the combination of various resources 1. LAND and techniques to be used in production. - Refers to all natural resources, which are given by and found in nature, therefore, not man-made. 3. How much to produce? - refers to the combination of various resources 2. LABOR and techniques to be used in production. - Refers to any human effort exerted on the production process of goods and services. 4. For whom to produce? - refers to how to divide up what has been 3. CAPITAL produced among consumers of an economy. - Refers to any man-made goods used to produce other goods and services. TYPES OF ECONOMIC SYSTEMS 4. ENTREPRENEURSHIP 1. Traditional Economy - An entrepreneur is the one who is responsible for - Production decisions are made according to organizing and managing the other factors of production. customs and traditions, preserved and transferred from generation to generation over the years. 2. Command Economy - Is the authoritative system wherein decision- making is centralized in the government or planning committee. 3. Market Economy - Describes an economic system wherein markets play a relatively large role. It is also known as the free market economy. It is the most democratic form of economic system. 4. Mixed Economy - It is an economic system that mixes central planning with competitive markets. It is a mix of a rather free economy as well as avoiding the issues with capitalism and socialist economies. DEMAND, SUPPLY AND MARKET EQUILIBRIUM (Determinants of Demand) Supply and Demand 1. Income (I). A change in income will cause a change Every economy must somehow solve three in demand. The direction in which the demand will basic economic problems: what should be produced, change in response to a change in income depends on how goods and services should be produced, and for the following type of goods: whom are the goods and services produced. Hence every economy must make a decision which rely on the a) Normal Goods (+). Refers to a good for which market system and price. demand at every price increases when income The law of supply and demand is a theory rises or vice versa. Example would be goods that that explains the interaction between the sellers of a are considered as part of our basic necessities resource and the buyers for that resource. The such as rice, utilities (electricity and water), medical theory defines the relationship between the price of a and dental services. given good or product and the willingness of people to b) Inferior Goods (-). Refers to a good for which either buy or sell it. Generally, as price increases, demand falls when income rises and vice versa. people are willing to supply more and demand less and Public transportation is a good example- as income vice versa when the price falls. of passenger in Manila increase significantly, they tend to reduce consumption for the service of public DEMAND utility vehicles as a mode of transportation and - It is the amount of goods and services that the instead drive their own cars. consumers/ buyers are willing and able to purchase. - Number or amount of goods and services desired by 2. Price Expectation (Pe). The quantity of good the consumers at various prices in particular period of demanded within the period depends not only on price in time. that period but also on prices expected in future periods. When someone expect higher prices in the future Market especially for the price of gasoline, the tendency for car - market is a mechanism through which buyers and owners is to buy more gasoline immediately (panic sellers interact in order to determine the price and buying) to maximize the purchasing power of their quantity of goods and services. money. In the same manner. Demand for gasoline decreases if car owners expect prices to decline in the Price future. - is the value of goods and services in terms of money. In the market system, the price serves as a signal to (Increase Pe Increase Qd) both the producers and the consumers. 3. Price of related product (Pr). The demand for any Quantity Demand (Qd) particular good will be affected by changes in the prices - It is the amount of goods and services that the of related goods. The direction in which the demand will consumers/ buyers are willing and able to purchase at a change in prices of related products depends on the particular time, place, and price. following relationship of products: Law of Demand a) Substitute Product (+). Goods that can be used in - “As the price increases quantity demanded decreases, place of other goods. They are related in such a and as the price decreases quantity demanded way that an increase in the price of one good increases, if other factors remain constant (ceteris causes an increase in the demand for the other paribus)”. good or vice versa. For example, in 2008, the spike in the price of gasoline pushed some car owners to Law: observed regularity in all market. convert to Liquefied Petroleum Gas (LPG) as an alternative for the vehicles. b) Complementary Goods (-). Goods that go Justification for the Law of Demand together or cannot be used without the other. They 1. Income Effect. are related in such a way that an increase in the - when the price of goods decreases, the consumer can price of one good will cause a decrease in the afford to buy more of it and vice versa. This simply demand for the other good. For example, in the implies that at a lower price, the consumers have same year of 2008, the rise in the price of aviation greater purchasing power. fuel resulted to less travel by tourists in the country causing a decline in hotel occupancy. 2. Substition Effect - It is expected that the consumers tend to buy goods 4. No. of Consumers(N). An increase in number of with a lower price. Hence, in case that the price of goods consumers means more demand for goods and services. that consumers buy increases, they look for substitutes Inversely, less number of consumers means less with lower price. demand for goods and services. China is fast becoming economic super power as investment are continuously (Increase in Price, Decrease Qd) flowing to their economy. The main reason for this is its huge market of 1.8 billion that has attracted investors from U.S. and Europe. 5. Taste and Preference(T). Consumers’ taste and represented by shifting from one demand curve preferences are major factors in determining the to another. demand for any product. Religion, culture, traditions, and age are some of the factors that can affect them. As Increase in demand - rightward shift preference and taste become inclined for a certain Decrease in demand - leftward shift product or vice versa. For example, Filipinos are becoming more health conscious and as a result, the SUPPLY demand for herbal supplements has increased - It is defined as the maximum units/quantity of goods substantially. and services producers can offer. It is also the amount of goods and services that the producers are 5. Range of the available goods (R). When the willing and able to sell. number of available goods or commodities (with the same purpose) gets high, the total market demanded Quantity Supplied (Qs) will be divided in each commodities. - It is the amount of goods and services that the producers are willing and able to sell at a particular time, place, and price. 3 Steps to get the Demand Law of supply 1. Demand Function - “As the price increases, quantity supplied also - the representation of the relationship between demand increases, and as the price decreases, quantity and all its determinants expressed in a mathematical supplied also decreases, ceteris paribus.” language using functional form. - A linear equation can be constructed using the (Determinants of Supply) simplified functional expression 1. Technology (Te). State-of-the-art technology that Qd = a-bP uses high- tech machines increases the quantity of goods and services which causes the reduction of the Ceteris Paribus Assumption production cost. For example, mass production is no possible without specialized machinery to product, high Ceteris Paribus, as defined by J. Bruce Linderman, is volume of standardized products such as cars, consume Latin for "all else being equal". The ceteris paribus product, and computers. assumption says that none of the independent variables changes. 2. Cost of production (C). An increase in the price of an input of the cost of production decreases the quantity Therefore, the functional relationship between price and supply because the profitability of the certain business quantity demanded is essential since non-price factors decreases. Competitive prices of Chinese products can are assumed as constant. The Law of Demand now contribute a very low labor cost. A Chinese worker is states "Assuming all things constant, price and willing to accept wage rate of only one dollar per day. quantity demanded are inversely proportional" 3. Price Expectation (Pe). Expectation about future 2. Demand Schedule prices can shift the supply curve. When producers - It shows the tabular representation of the relationship expect higher prices in the future commodities, the between the quantity of good demanded and the price of tendency is to keep their goods and releases them when that good. Other factor that may affect the quantity the price rises. Inversely, supply of such good demanded, such as the prices of other goods, are held decreases if producers expect prices to decline in the constant in drawing up the demand schedule. future. During natural calamities such as typhoons, we experience and immediate increase in the prices of 3. Demand Curve basic commodities such as rice. This increase can be - It shows graphically the relationship between the pointed to unscrupulous traders who hold the supply of quantity of good demanded and its corresponding price, rice in anticipation to further increase in its price. with other variables held constant. The demand curve is typically downward sloping. It describes the negative 4. Price of related product (Pr). Changes in the prices relationship between the price of the good and the of goods have a significant effect in the supply of such quantity that consumer want to buy at a given price. goods. A. Movement Along Demand a. Substitute Product (-). Goods that can be - It is due only to a change in the price of goods used in place of other goods. They are related in and services. Graphically is represented by a such a way that an increase in the price of one movement along a demand curve which good causes a decrease in the supply for the indicates a movement from one point to another other good or vice versa. For instance, an point of the same demand curve. increase in the price of pork may likely encourage poultry raisers to shift to hog farming B. Change in Demand if this gives them more profit. - It is bought the changes in the non-price determinants of demand. It is graphically  b. Complementary Product (+). Goods that go A. Movement Along Supply. together or cannot be used without the other. - It is due only to a change in the price of goods They are related in such a way that an increase and services. Graphically is represented by a in the price of one good will also causes an movement along a supply curve which indicates increase in the demand for the other good. a movement from one point to another point of the same supply curve. Increase in price will 4. Government Regulation and Taxes(Tx). It is lead to increase in quantity supplied (move to expected that taxes imposed by the government the right). Decrease in price will lead to increases cost of production which in turn discourages decrease in quantity supplied (move to the left). production because it reduces producers’ earnings. A higher degree of regulation will translate to lower supply B. Change in Supply. in the market. For example, medicine graduate must - It is bought the changes in the non- price pass the licensure examinations given by the determinants of supply. It is graphically government to guarantee that they meet the minimum represented by shifting from one demand curve requirements before they can legally practice profession. to another. No doubt this can reduces the supply of medical service in the market. Increase in supply- rightward shift Decrease in supply- leftward shift 6. Government Subsidies (SB). Subsidies or the financial aids/assistance given by the government MARKET EQUILIBRIUM reduce the cost of production which encourage more - It is the condition when quantity demanded is equal to supply. In japan, the government is subsidizing their quantity supplied. agricultural sector; any agricultural commodity that is not - The market equilibrium is determined by the purchased in the market will be bought by the intersection of the demand and supply curves. In other government to the farmers. This will ensure steady and words, the quantity that consumers will buy is equal to continuous supply of commodity in the market. the amount to the amount or quantity the producers are willing and able to offer. 7. Number of Seller(Se). An increase in the number of firms in the market leads to an increase in the supply of Shortage- It is a condition when the quantity demanded goods and services. The increase in the supply of exceeds quantity supplied. imported cars in the country is due to the rise in the dealers of those such as Ford, KIA, Hyundai, and the Surplus- It is a condition when the quantity supplied is like. greater than quantity demanded. 8. Availability of Inputs (A). The more available the Equilibrium quantity input or raw material use in production of a good, the The amount of a good bought and sold in market at a higher the supply of that good. prevailing equilibrium price. 9. Weather (W). The more favorable the weather is, QS = QD The higher the quantity supplied would be. Interference in the Market 3 ways to get the Supply - Thus far we have utilized demand and supply model in unregulated market (no government intervention) where 1. Supply Schedule price is determined solely by interactions between - It is the representation of the relationship between buyers and sellers. But in real world situations, this is supply and all of its determinants expressed in a not feasible, and the government here and around the mathematical language using functional form world try to control prices because some sectors do not benefit from the market-based perspective, or some Qs = c + dP sectors in the economy take advantage of price control. 2. Supply Schedule There are two broad kinds of price controls of the - It shows the tabular representation of the relationship government. These are price ceilings and price floors. between the quantity of good supplied and the price of that good. Other factor that may affect the quantity Price Ceiling is defined as the maximum price a good supplied, such as the prices of other goods, are held and service is bought and sold. This kind of price control constant in drawing up the supply schedule. is imposed by the government when there is excessive demand for a product in the market. In this kind of 3. Supply Curve market situation, the pressure on the price rise, and the - It shows graphically the relationship between the government tries to protect the consumers by creating quantity of good supplied and its corresponding price, law to keep the prices low. with other variables held constant. The supply curve is typically upward sloping. It describes the positive Government can also impose minimum price which is relationship between the price of the good and the referred to as price floor. The imposition of a minimum quantity that supplier is willing and able to supply at a price emanates from the desire of the government to given price. assist producers of goods and services. CONCEPT OF ELASTICITY Qd and P = Price Elasticity of Demand Elasticity Qd and Y = Income Elasticity of Demand - The concept of elasticity measures the responsiveness Qd and Prel = Cross-Price Elasticity of Demand of one variable to a certain change of another variable. Price Elasticity of Demand The basic formula used to determine elasticity is: Qd and P = Percentage change in variable x / Percentage change in Percentage change in Quantity Demanded / Percentage variable y change in Price Using mathematical symbols: - Price elasticity of demand is the percentage change in quantity demanded that occurs with respect to a ɛ = %∆x / %∆y percentage change in price. - It is expected that the price elasticity of demand is Where : ɛ = Greek letter epsilon used as a symbol for negative because the relationship between price and elasticity quantity demanded is inversely related. ∆ = Greek letter delta which means “change” % - However, it is the absolute value that is usually taken percentage and the negative sign is omitted. X = independent variable and y = dependent Variable Comparison of Slope and Elasticity TYPES OF ELASTICITY Elasticity is different from the slope of the demand curve. 1. Elastic - Ed/Es = > 1 (greater) The slope of demand curve, that is the flatness or D - if the percentage change in the quantity demanded steepness of the curve, is based on the total changes exceeds the percentage in price. in price and quantity. S - measures the relationship between change in quantity supplied following a change in price Elasticity is concerned with the total change relative to price and quantity. 2. Inelastic -