Basic Microeconomics PDF

BASIC MICROECONOMICS Their relationship is such that if there is no scarcity, there is no need for economics. MODULE 1: The Concept of Opportunity Cost E...

BASIC MICROECONOMICS Their relationship is such that if there is no scarcity, there is no need for economics. MODULE 1: The Concept of Opportunity Cost Economics- is the efficient allocation of the scarce means of production toward the satisfaction of Population Cost- it is the value of what is given up human need and wants when one makes a choice Scarce- refers to our economics resources like Decision Problem land, labor, and capital, which we use to produce all the goods and services Consumption- the individual wants, determine what types of goods and services they want to Scarcity- is a or service being in short supply and utilize or consume also the limited availability of economic resources Production- determining the needs, wants, and Factors of Production demands of consumers, and decide how to allocate their resources to meet these demands Land- refers to all natural resources, which are given by, and found in nature, and are, therefore, Distribution- there must be proper allocation of all not manmade the resources for the benefit of the whole society Labor- is any form of human effort exerted in the Growth Over Time- as time goes by the society production of goods and services continue to grow in numbers as well as the needs and wants Capital- is manmade goods used in the production of other goods and services For Basic Economic Question Entrepreneurship- is a person who organizes, What to produce? manages and assumes the risks of a firm, taking a How to produce? new product and turning it into a successful How much to produce? business For whom to produce? The Circular Flow Model 3 Es in Economics Efficiency- refers to productivity and proper allocation of economic resources Effectiveness- attainment of goals and objectives Equity- means justice and fairness Positive Economics- is an economic analysis that considers economic condition “as they are” or “as it is” Normative Economics- is an economic analysis which judges economic conditions “as it should be” Ceteris Paribus Assumption- it means “all other constant are equal” Microeconomics- is the branch of economics which deals with the individual decisions of units of the economy Macroeconomics- is the branch of economics that studies the relationship among broad economic The Relationship Between Economics and Scarcity  Brief History: The Classical, Keynesian and Modern Economics Birth of Economic Theory: Classical Economics Economic theory saw its birth during the mid 1700s and 1800s Adam Smith- the “Father of Economics” - His book “Wealth of the Nation”, published in 1776, become known as the “the bible of economics” for a hundred years - Invisible Hand- the analysis of the relations between consumers, producers through demand and supply, which ultimately explained how the market works Types of Economic System Traditional Economy- a basically subsistence economy Command Economy- the manner of production dictated by the government Market Economy or Capitalism’s- the resources are privately owned, and that the people themselves make the decisions Socialism- an economic system wherein key enterprises are owned by the state Mixed Economy- a mixture of market system and John Stuart Mill- developed the basic command economy analysis of the political economy or the Important Economic Term importance of a state’s role in its national economy Wealth- refers to anything that has a functional - Political Economy- is an older value (usually in money) which can be traded for English term that applies goods and services management to an entire polis (state) Consumption- refers to the direct utilization or Karl Marx- a German, he is much usage of the available goods and services by the influenced by the conditions brought about buyer (individual) or the consumer (household) by the industrial revolution upon the sector working classes. Production- defined as the formation or creation by - Das Kapital- is the centerpiece firms of an output (product or services) from which major socialist thought was to emerge Exchange- the process of trading or buying and selling of goods and/or services for money and/or Neoclassical Economics (1870s) its equivalent Believed to have transpired around the Distribution- the process of allocating or year 1870 appropriating scarce resources to be utilized by the Leon Walras- introduced the general household, the business sector, and the rest of the economic system world - Developed the analysis of equilibrium in several markets Alfred Marshall- become the most influential economist during the because of his book Principles in Economics  - developed the analysis of Keynesians, particularly monetarists led by equilibrium of a particular market Milton Friedman. and the concept of “marginalism” This period featured prominent economists such as Paul A. Samuelson, Kenneth J. Keynes’ General Theory of Employment, Arrow, James Tobin, Lawrence Klein, Joan Interest and Money Robinson, and Michael Kolechi. John Maynard Keynes- is an English Additionally, a notable stream of thought economist who offered an explanation of emerged from liberal market post- mass unemployment and suggestion for Keynesians, particularly monetarists led by government policy to cure unemployment Milton Friedman. in his influential book: The General Theory New Classical Economics of Employment, Interest and Money (1936) New Classical Economics emphasized the Keynes criticized classical political national expectations hypothesis and its economists for focusing on the distribution role in analyzing various economic of national output rather than the overall phenomena, leading to new theories in level of economic activity. He emphasized economics. This development addressed economic aggregates like National Income, issues relevant to developing countries, Consumption, Savings, and Investment. stemming from concerns about growth in Keynes argued that during a depression, developed nations. Notable economists like savings may not accumulate due to low Adam Smith, David Ricardo, and Thomas incomes, and investment relies on Malthus also engaged with these growth- business confidence, which is also low in related issues. such conditions. He noted that wage rates are “sticky” and unlikely to fall significantly, THE BASIC ANALYSIS OF DEMAND AND and any decrease would further reduce SUPPLY consumption and worsen the depression. Demand- pertains to the quantity of a good or Non-Walrasian Economics (1939) services that people are ready to buy John Hicks- recognized for his analysis of Demand affected by the consumers; supply the IS–LM Model, which is considered as affected by the producers an important macroeconomic model Supply- is where buyers and sellers meet IS- refers to the goods market for a given interest rate Kind of Markets LM- means money market for a given value of aggregate output or income Tangible IS–LM Model- is a theoretical construct Wet Market- people usually buy that integrates the real, IS (investment- vegetables, meat etc. saving), and the monetary, LM (demand for, Dry Market- people buy shoes, clothes, or and supply for money), sides of the other dry goods economy simultaneously to present a determinate general equilibrium position for Intangible the economy as a whole Stock Market, Real Estate Market, Labor Market Post-Keynesian Economics (1940 and 1950s) Methods of Demand Analysis The development of rules and regulations of different private and public institutions Demand Schedule- a table showing the This period introduced major post- relationship between prices and quantities Keynesian, neoclassical economist, whose demanded views are known as the post-Keynesian - As price increases, quantity “mainstream economic” decreases This period featured prominent economists such as Paul A. Samuelson, Kenneth J. Demand Curve- a graphical representation of the Arrow, James Tobin, Lawrence Klein, Joan demand schedule Robinson, and Michael Kolechi. Additionally, a notable stream of thought Demand Function- shows the relationship emerged from liberal market post- between demand for a commodity Changes in Quantity Demanded- a movement 3) Future Expectations- this factor impacts along the same demand curve due to a change in sellers as much as buyers prices 4) Number of sellers- the more sellers there are in the market the greater supply of Change in Demand- the entire demand curve goods shifts to right (left) 5) Weather Conditions- bad weather Forces that Cause Changes in Demand 6) Government Policy- removing quotas and tariffs on imported products also affect 1) Taste or Preferences- personal likes or supply dislikes of consumers in certain goods 2) Changing Incomes- an income increase Market Equilibrium- a balance that exist when leads to higher demand leads to lower quantity demanded equals quantity supplied demand Equilibrium Market Price- the price agreed by the 3) Occasional or Seasonal Products- seller to offer its good or service for sale, the price certain events like Christmas or Valentine’s at which quantity demanded of a good is exactly day causes temporary spikes in demand for equal to quantity supplied related products 4) Population Change- an Market Equilibrium 5) Substitute and Complementary Goods- substitute; can replace each other, Surplus- quantity supplied is more than the complementary; products that are used quantity demanded together Shortage- quantity demanded is higher than 6) Expectations of Future Prices- if quantity supplied consumers expect prices to rise, they may have buy more now Price Controls- the specification by the government of minimum of maximum prices Supply (Firms/Seller’s side)- quantity of goods and services that firms are ready sell at a willing Floor Price- legal minimum price, protect the price producers Methods of Supply Analysis Ceiling Price- legal maximum price, protect the consumers from abusive producers Supply Schedule- a table listing the variables of a product and specific quantities supplied MODULE 2: Supply Curve- graphical representation showing The Concept of Elasticity the relationship between the price of the product sold and the quantity supplied Elasticity- is an economic concept used to measure the change in the aggregate quantity Supply Function- a form of mathematical notation demanded of a good or service in relation to price that links the dependent variable, with various movements of that good or service independent variables Elasticity of Demand Law of Demand- as price increases, a quantity demanded decreases Demand Elasticity- is a measure of the degree of responsiveness of quantity demanded of a product Law of Supply- as price increases the quantity to a given change in one of the independent supplied also increases variables which affect for that product Change in Quantity Supplied- occurs of these is Forces that Cause Demand Elasticity to Change a movement from one point to another point along supply curve Price Elasticity of Demand-consumer demand to change in price of the good sold Changes in Supply- happens when the other entire supply curve shifts left or right Income Elasticity of Demand- consumer demand to a change in their income Forces that Cause the Supply Curve to Change Cross Price Elasticity of Demand- the 1) Optimization in the Use of Factors of responsiveness of demand for a certain good, in Production- process or methodology of relation to changes in price of other related goods making or creating something fully perfect 2) Technological Change- introduction of Price Elasticity of Demand- dealing with the cost-reducing innovations sensitivity of quantities bought by a consumer to a change in the product price Elasticity of Supply- measure of the degree of Safety Needs- these are the needs to be free of responsiveness of supply to a given change in price Two Important Factors Time Time Horizon A thought: A product is considered to be elastic if the quantity demand of the product changes more than proportionally when its price increases or decreases. Conversely, a product is considered to be inelastic if the quantity demand of the product changes very little when its price fluctuates. Consumer- is the one who demands and consumes goods and services Consumer Behavior- is the study of consumers and the processes they use to choose, use (consume), and dispose of products and services, including consumers’ emotional, mental, and physical danger and the fear of losing one’s work, behavioral responses property, food, or shelter Goods- refer to anything that provides satisfaction Social Needs- these needs cover the value of the to the needs, wants, and desires of the consumer sense of belongingness, love, care, acceptance and understanding of family, relatives and friends, Services- are any intangible economic activities, and to be accepted by others that likewise contribute directly or indirectly to the satisfaction of human wants Esteem Needs- these needs explain the importance of self-esteem, recognition, status of an Tangible Goods be Classified According to but individual and the general acceptance of the society not Limited to the following: to an individual. Consumer Goods- these are the goods that yield Self-actualization Needs- these needs explain the satisfaction directly to any consumer worth of a person’s self-development, growth and realization and achievement. Essential or Necessity Goods- goods that are necessary in our daily existence as human beings The Economics of Satisfaction Luxury Goods- are those which men may do not Marginal Utility- defined as the additional do without, but which are used to contribute to his satisfaction that an individual derives from comfort and well being consuming an extra unit of a good or service Economic Goods- are both useful and scarce, it - Marginal means ‘additional’ or also has value attached to it and price has to be extra paid for its use Total Utility- the total satisfaction that a consumer Free Good- a good that abundant that there in derives from the consumption of a given quantity of enough of it to satisfy everyone’s needs without a good or service ina particular time period anybody paying for it Maximizing Total Utility- continuously consuming Taste or Preferences- consumers have various more units of a certain good until our satisfaction taste and preferences according to their age, falls down zero income, education, gender, occupation, customs and traditions as well as culture Consumer Surplus- is a measure of the welfare we gain from the consumption of goods and services, Maslow’s Hierarchy of Needs or the benefits that we derive from the exchange of goods Physiological Needs- these are the basic needs for sustaining human life itself, such as food, water, Indifference Curve- a graph showing different warmth, shelter, sex and sleep combination of bundles of goods, each measured as to quantity , between which a consumer is indifferent Marginal Rate of Substitution (MRS)- the rate at which a person will give up good to get more food and at the same time remain indifferent Budget Line- a consumer, given his fixed budget, must spend wisely and efficiently in order to maximize his satisfaction Purpose of a Budget- is not to spend more than what you have