Basic Microeconomics PDF

BASIC MICROECONOMICS DIVINE GRACE S. TIRIA  Lesson 1 Nature and Scope of Economics Learning Objectives: *Define Economics *Apply the concepts of scarcity, choice and opportunity costs for making smart choices *Discuss the types of factors of production What is Economics? Economics co...

BASIC MICROECONOMICS DIVINE GRACE S. TIRIA  Lesson 1 Nature and Scope of Economics Learning Objectives: *Define Economics *Apply the concepts of scarcity, choice and opportunity costs for making smart choices *Discuss the types of factors of production What is Economics? Economics comes from the ancient Greek word ‘‘Oikos” which means home of household and “Nemein” which means “management” Economics deals with the proper allocation of scarce resources to satisfy the unlimited needs and wants of the society. Economics deals with the interaction of business and consumer. BASIC TERMS TO UNDERSTAND ECONOMICS Needs Wants-something that a person desires but is not essential for survival Goods-products or services that have value and are useful to consumers. Tangible Goods Intangible Goods Luxury Goods Consumer Goods-products or services that people buy for personal use or enjoyment Capital/Industrial Goods-goods used in the production of other goods and services Economic Good-is a good which is both useful and scarce. It has a value attached to it and a price has to be paid for its use.  BASIC ECONOMIC CONCEPT 1. Scarcity- insufficient resources to supply all the desires and needs of individuals. In the production of goods and services; there are issues that economics may encounter. 2. Choice- A choice is a comparison of alternative. The problem of scarcity leaves us in a situation in which we must constantly choose which of our wants we will seek to satisfy. 3. Opportunity Cost- best alternative forgone. People must make choices because of limited resources.  REMEMBER Scarce resources and unlimited desires → Scarcity Scarcity and alternative uses → Choice Choice → Opportunity cost  Central Economic Problems of any Economy All modern economies have certain fundamental or basic economic problems to deal with. The limited resources have led to the problem of how to assign the scare resources in order to achieve maximum satisfaction. 1. What to produce- it involves selection of what should be produced and in what quantity in order to satisfy consumer wants as best as possible using the available resources. 2. How much to produce– refers to the quantity of each good that will have to compose the total output. 3. How to produce? – is a question on the technique of production and the manner of combining resources to come up with the desired output. 4. For whom to produce? – refers to the market to which the producers will sell their products. Three Parts to the Production Process: Factors of Production Producer Consumer Factors of Production What to Know/Review? 1. What is Economics? 2. What are the Factors of Production? Define each.  SCOPE OF ECONOMICS  Division of Economics/Economic Activities: -Production -Distribution -Exchange -Consumption Inputs or PRODUCTION Resources DISTRIBUTION EXCHANGE CONSUMPTION  Branches of Economics: MICROECONOMICS MACROECONOMICS -comes from Greek word “mikros” -comes from Greek word “makros” -deals with the economic behavior of -deals with the economic behavior of the individual unit such as consumer, firms, whole economy. and the owner of factors of production. -also known as employment and income -studies consumer behaviour,product analysis. pricing, firms’ behaviour, factor pricing, Overall Price etc. National Income - also known as the price theory International Trade Price of Rice Foreign Exchange Unemployment Employment in San Miguel Corp. Production of Purefoods products Economic Theory the ideas and principles that aim to describe how economies work. Approach to economic theory: Positive Normative Positive Economics Vs Normative Economics Positive Economics- is concerned with statements that can be proved by appealing to relevant facts and figures. It focuses on cause-and-effect relationships. Ex: Increasing the minimum wage results in a higher unemployment rate. The GDP of the Philippines is lower than that of Singapore in 2018. Normative Economics- requires normative statements that are based on value judgement. It concentrates on the formulation of economic policies about what economy should be like or what certain policy actions or recommendations should be undertaken. Example: The Philippine government should not tax online businesses. It is right to spend on social works more than the public works. Economic Model Circular Flow Diagram One of the main basic models taught in economics is the circular flow model, which describes the flow of money and products throughout the economy in a very simplified way. The model represents all of the actors in an economy as either households or firms, and it divides markets into two categories: Markets for good and services (Product Market) Markets for factors of production (Resource/Factor Markets)  Wages, rents, costs interest, profit resources labor, land, capital, entrep BUSINESSES HOUSEHOLDS -buy resources -sell resources -sell products - buy products PRODUCT MARKET -Businesses sell -Households buy revenue Consumption expenditures Statics and Dynamic Statics- the word ‘static’ implies causing to stand or unchanged. Dynamics- the word ‘dynamics’ means causing to move. In economics, the term ‘dynamics’ refers to the study of economic change. DEMAND AND SUPPLY Learning Objectives: At the end of this chapter, the student should be able to: -Define what a market is; -Describe and explain what is the law of demand and supply, and determine the factors that affect them; What is a market? -is a place where buyers and sellers meet to trade commodities. Two Important Elements: -Buyer -Seller DEMAND is the willingness and ability to buy a product. is the relationship between the price of a good and the quantity demanded. is also defined as the schedule of quantities of a good that people are willing to buy at different prices. QUANTITY DEMANDED- is the amount that consumers plan to buy during a period at a particular price. Demand Schedule- is a table that lists the different quantities demanded of a product, at different prices over a particular time period. Table 1 Daily demand for Train tickets from Oxford to London in the winter months. Demand Curve- is a graphic display of the change in demand of a good resulting from a change in price in a given time period. Demand Function- is a mathematical expression of the relationship between price and quantity demanded. Formula: Qd=a-b(P) Qd=60-2(P) Directions: Analyze this problem. The following data were taken from an invoice of Company X. The company imports gasoline from other country. Plot or graph the data. Interpret the results. Company A is trying to determine the best pricing strategy for its brand new 40" 4K HDTV. The company has performed market analysis including conducting surveys of potential consumers and has pulled together the following demand schedule. Plot or graph the data. Price per TV Estimated Demand $1,500 1000 $1,250 1250 $1,000 2000 $850 3000 $750 5000 Compute the quantity demanded for the following prices. Price Quantity Demanded 20 18 16 8 4 Exercise # 1 Directions: Analyze this problem. The following data were taken from a hypothetical demand schedule of the demand for a boat ride in the underground river in Puerto Princesa, Palawan. Plot or graph the data. Interpret the results. Price (in Php) Quantity Demanded 1,000 1,145 1,250 1,120 1,350 1,110 1,400 1,105 1,500 1,095 1,800 1,065 2,000 1,045 What to Know/Review? 1. Division of Economics 2. Branches of Economics 3.Economic Model COST RESOURCE MARKET RESOURCES INCOME BUSINESS HOUSEHOLD BUY SELL SELL BUY PRODUCT MARKET REVENUE CONSUMPTION EXPENDITURE Demand Quantity Demanded Law of Demand Demand Schedule Demand Curve Demand Function Changes in Demand- shifts in the demand curve. An increase in demand-a rise in demand at any given price. A decrease in demand-a fall in demand at any given price. FACTORS THAT AFFECT DEMAND: Income Tastes or Preference Number of Buyers Price of Complementary Goods and Price of Substitute Goods Expected Future Price INCOME -Normal Goods-refer to products or services that exhibit an increase in demand as consumer income rises. -Inferior Goods-are products or services for which demand decreases as consumer income rises. QUANTITY DEMANDED INCOME INFERIOR NORMAL GOODS GOODS TASTE OR PREFERENCE NUMBER OF BUYERS  Price of Complementary Goods and Price of Substitute Goods COMPLEMENTARY GOODS-are products that go hand in hand. SUBSTITUTE GOODS-are those goods that can be used in place of another because they could perform the same function. Expected Future Price Future Price SUPPLY -is the willingness and ability of sellers to produce and offer goods and services at different prices during a specific time period. Supplier Producer Entrepreneur Quantity Supplied Is the total amount of a goods or services that producers and suppliers will produce and sell at a given market price. Law of Supply QS QS Ceteris Paribus-is an assumption that price is the only factor that affects supply Supply Schedule- is a table that shows the quantity supplied at different prices in the market. Supply Function- is a mathematical expression of the relationship between price and quantity supplied. Formula: Qs=100+20(P) Supply Schedule For Teddy Bear Price Quantity Supplied 45 1000 40 900 35 800 30 700 25 600 20 500 Changes in Supply -changes in supply conditions causing shifts in the supply curve. Key points: An increase in supply: a rise in supply at any given price, causing the supply curve to shift to the right. A decrease in supply: a fall in supply at any given price, causing the supply curve to shift to the left. Factors that Affects Supply: Production Costs Number of Producers Expected Future Price Technology Government Tax Marketing Price System- is a component of any economic system that uses prices expressed in any form of money for the valuation and distribution of goods and services and the factors of production. Price- the monetary value of a product as established by supply and demand. -is a signal that helps us make our economic choices. Price Quantity Quantity demanded Supplied 50 2 200 6 000 45 2 500 5 000 40 3 000 4 300 35 3 800 3 800 30 5 000 3 600 25 7 000 3 500  Market Supply and Demand for Tickets Total Quantity Price per Ticket Total Quantity Supplied per Demanded per Month Month 6 000 50 2 200 5 000 45 2 500 4 300 40 3 000 3 800 35 3 800 3 600 30 5 000 3 500 25 7 000 Surplus- the amount by Shortage- the amount by which the quantity which the quantity supplied of a product demanded of a product exceeds the quantity exceeds the quantity demanded at a specific supplied at a specific (above-equilibrium) price. (below-equilibrium) price.