Economics Review 1 PDF

ECONOMICS facing the citizens and the family - Comes from the Greek word 4. Helps the government promote “oikonomia” which means growth and improve quality of life “management of the 5. Analyze fascinating patterns of...

ECONOMICS facing the citizens and the family - Comes from the Greek word 4. Helps the government promote “oikonomia” which means growth and improve quality of life “management of the 5. Analyze fascinating patterns of household” human behavior - Refers to the effective management of scarce Nature of Economics resources to satisfy unlimited human wants and needs. SOCIAL SCIENCE: ECONOMICS DEFINED BY - because it deals with the study Feliciano Fajardo: Proper & of man's life and how he lives efficient use of available with other men. In other words, resources. ECONOMICS is concerned with Paul Samuelson: Study of how human beings and their societies use scarce behavior. It deals with the resources to produce relationships, and interactions of valuable commodities and one human being with another. distribute them among diff. people. INTERDEPENDENT WITH OTHER Gerardo Sicat: A scientific SCIENCES: study which deals with how individuals & society in Psychology - the science of the general, make choices. mind(deals with sound Castillo: Study of how man thinking and reasoning); could best allocate and utilize the scarce resources of History - the science that society to satisfy his unlimited records and explains past wants. events; Webster: A branch of knowledge that deals with the Sociology - the science that production, distribution, and deals with the development of consumption of goods and society; services. Political Science - the science IMPORTANCE OF ECONOMICS of government; 1. Our physical existence in this world depends upon Geography - the science that economics determines the main 2. Human activities involve resources of a region. economics 3. To understand the problems Religion - it is also related to  economics as the traditions expenditure of PLDT and beliefs can discourage or encourage economic BASIC ECONOMIC CONCEPT: development. SCARCITY ECONOMICS AS AN APPLIED - Is a fundamental concept of SCIENCE economics. - It is the application of economic - It refers to the limitation of principles and theories to real resources such as land, situations, and trying to labor, capital, and predict what the outcomes entrepreneurship. might be. It studies how theories work in practice - Scarcity is an economic concept rooted in one of the THE SCOPE OF ECONOMICS most basic facts of life: we live in a world of limited TWO BRANCHES: resources that requires choices about how they are MACROECONOMICS allocated. - deals with the economic - In economics, it refers to the behavior of the whole limited availability of economy or its aggregates resources for human such as government, consumption. business, and households. TRADE-OFF and OPPORTUNITY - concerned with the discussion COST of topics like gross national product, level of employment, - A trade-off occurs when a national income, general level decision leads to choosing of prices, and total one thing over another. expenditures. - Opportunity cost refers to what MICROECONOMICS you have to give up to buy - deals with the behavior of what you want in terms of individual units such as the other goods or services. consumers, firms, and the owners of the factors of - It is also the cost of not being production. For example: the able to do other things with price of rice, the number of time and resources because workers of a certain firm, the of doing the chosen activity. income of Mr. Duterte, the  FACTORS OF PRODUCTION - Because rational people make decisions by comparing - It refers to inputs applied to the costs and benefits, they production process to create respond to incentives. output: the goods and Ex. By offering a raise in the salary services produced in an of whoever works harder can induce economy. The essential people to work hard, which is a factors of production forming positive incentive. Whereas putting the building blocks of an a tax on a good fuel can induce economy include land, labor, people to consume it less which is a capital, and entrepreneurship negative incentive. 10 PRINCIPLES OF ECONOMICS How People Interact with Each Other 1. People face trade-offs 5. Trade can make anyone - “There is no such thing as a better off - Trade can make free lunch (TINSTAAFL).” everyone better off by Making decisions requires allowing countries to trading one goal for specialize in what they do another. best, allowing more consumption for everyone. 2. The cost of something is what you give up to get it 6. Markets are usually a good - Because people face way to organize economic trade-offs, making activity decisions requires - Markets are usually a good comparing the costs and way to organize economic benefits of alternative activity because the courses of action. invisible hand leads Ex. The cost of seeing a movie is not markets to desirable outcomes. just the price of the ticket, but the value of the time you spend in the 7. Government Can Sometimes theater. Improve Market Outcomes - Two broad reasons for the 3. Rational people think at the government to interfere margin - People tend to act in the with the economy: the best possible manner to promotion of efficiency maximize the and equality. utility of the consumption of the good or service. - Government policy can be most useful when there is 4. People respond to incentives market failure.  Market Failure: a situation produce goods and services, in which a market left on its and have access to the best own fails to allocate resources available technology. efficiently Ex. of Market Failure: 9. Increase in Money Supply ○ Externality: the impact of one Causes the Prices to Rise person’s actions on the well-being of a - The value of money falls when bystander. (Ex. Pollution) the government creates a lot ○ Market Power: the ability of a of money, so individuals single economic actor (or small group have more money, and the of actors) to have a substantial demand for goods and influence on market prices. services increases. - When the government creates Note: This principle states that the a large amount of money, government can improve market the value of money falls. outcomes. This is not to say that the - When the demand increases, government always does improve market outcomes. the price also increases and creates inflation of money. The Forces and Trends that Affect Inflation: sustained How the Economy as a Whole increase in the overall Works level of prices in the economy. 8. A Country’s Standard of Living Depends on Country Production - 10. Society faces a short-run Differences in the standard of living trade-off between inflation from one country to another are quite and unemployment large. - Most economists believe that - Changes in living standards over the short-run effect of a time are also quite large. monetary injection - The explanation for differences in (injecting/adding money into living standards lies in the economy) is lower differences in productivity. unemployment and higher Productivity: the quantity prices. of goods and services produced from - The short-run trade-off each hour of a worker’s time. between inflation and - High productivity implies a unemployment plays a key high standard of living. role in the analysis of the - To boost living standards the business cycle. policymakers need to raise Business Cycle: productivity by ensuring that fluctuations in economic activity, workers are well educated, such as employment and production. have the tools needed to DEMAND DEMAND SCHEDULE - An economic principle that refers - Shows the quantity demanded to a consumer’s desire to (Qd) at different prices and is purchase goods and services used to create the demand and willingness to pay a price curve. for a specific good or service. DEMAND CURVE MARKET - A graph that shows the inverse - A setup where two or more relationship between the price parties engage in an exchange and quantity demanded. of goods, services, and information. (interaction DETERMINANTS OF DEMAND between the buyer and seller) These are the factors that affect the demand for a good or LAW OF DEMAND service. - It tells/shows us the behavior of the consumers. DEMAND SHIFTERS (B.I.T.E.R.) - The relationship between the quantity demanded and price is inverse. 1. Buyers - These are the number of people who are QUANTITY DEMANDED willing and able to buy the - The amount of a good or service product. consumers are willing and able Ex. if the town you lived in recently to buy at different prices during had an increase in the number of a given period. teenagers, most of whom are students that live there, there would CETERIS PARIBUS most likely be an increase in the - Acts as a shorthand indication of number of school supplies sold. the effect of one economic variable such as price on 2. Income - How much money another variable such as each household makes quantity demanded. affects how much money they - A Latin phrase meaning, “other can spend. things equal”. Ex. If the average family income - Some other English translations decreases by 20%, it is most likely of the phrase are “all other that it will cause a shift to the left on things being equal”, “other the graph since they will not be things held constant”, “all willing and able to buy as many else unchanged”, and “all else products. being equal”. Normal Goods vs. Inferior Goods 3. Taste and Preferences - People (Under the Determinant, Income) have different interests and hobbies Income Effect: and this can affect the products they Normal Goods - The buy. demand for normal goods Ex. A new shoe company becomes rises when income is higher really popular among people, it will and falls when income is lower. cause the graph to shift to the right because more people will want it. Inferior Goods - The demand for inferior goods rises when income is less 4. Expectations - If a buyer knows and decreases with an increase in that the price of a certain product income. will change in the future, it will most likely affect when they buy the Socioeconomic Situation: product. Normal Goods - Usually in higher Ex. If the buyer thinks the price will demand during decrease in the future, they will buy economic boom times. less of the product now. Inferior Goods - Usually in higher demand during times 5. Related Goods - These are of economic recession. products that are usually sold Preferred When: together or can be sold instead of a Normal Goods - Incomes in society different one. are rising. Ex. If the price of a new phone Inferior Goods - Incomes in the decreases, more people will community are falling. probably buy the phone and it will Status: increase the sale of phone cases for Normal Goods - Associated with that phone. high financial situations and can be purchased as a CROSS DEMAND status symbol. Substitute Goods Inferior Goods - It does not function - A product would be the as status symbols substitute for another product and are usually purchased because the price of one due to necessity. affects the quantity demanded Examples: of the other. Normal Goods - Branded clothes, Ex. If prices go up for blueberries, full-cream milk, cars, consumers could potentially flat-screen TV. substitute them for strawberries, Inferior Goods - Coarse clothes, whose price either remained toned milk, bicycles, unchanged or even decreased. black & white TV. Complementary Goods DETERMINANTS OF SUPPLY - Are goods/services that are (Factors that cause a change in typically used together. When supply) the price of a certain good decreases, the demand for its 1. Production Technology complementary goods will - new technologies make increase. production efficient, thus, Ex. If prices go up for hotdogs, production will increase consumers would most likely buy less of the hotdog buns as well. 2. Cost of Resources/Production - When resources are expensive, supply Supply will shift to the left which means a - Is the schedule of various decrease in supply. As resources quantities of commodities that become less expensive, we will be able producers are willing and to provide more able to produce and offer at a given price. 3. Prices of related commodities - If a - Is the willingness of sellers to business can produce more than one offer a given quantity of a type of product with its equipment and good or service for a given labor, then it tends to produce a price. much higher-profit product and less of other products. Law of Supply - States: ceteris paribus, (all other 4. Expectations - A firm's decision things equal), as price about its level of production depends increases, quantity supply not only on the current price of the also increases, and as price goods but also on the firm’s decreases, quantity supply expectations about future prices. If also decreases. the firm expects the price of a good they produce to rise in the future, they may delay production or Law of Supply (Producer’s Point of withhold the goods from the market View) - Demonstrates the quantities thereby reducing the supply of the that will be sold at a given price good in the current period - The higher the price, the higher the quantity supplied, and vice 5. Government Intervention versa (subsidies and taxes) - Subsidies: The government’s payment to producers for each unit produced - this will increase supply. - Taxes: Payment from firms to the government - this will  decrease the supply 4 BASIC LAWS OF SUPPLY AND DEMAND Note: This results in a shift of the supply curve 1. If the SUPPLY INCREASES and DEMAND STAYS THE 6. Size of the market SAME, PRICE will go - If the number of firms in DOWN. the market increases, supply will increase as 2. If the SUPPLY DECREASES well, and vice versa. and DEMAND stays the SAME, the price will go UP Equilibrium Price - A balance of demand and 3. If the SUPPLY stays the SAME supply factors. Changes in and DEMAND INCREASES, the equilibrium price occur the PRICE will go UP when either their demand or 4. If the SUPPLY stays the SAME supply, or both, shift or move. and DEMAND DECREASES, the PRICE will go DOWN KEY CONCEPTS Market Clearing Price - is the equilibrium price, since everything produced in the market will be sold Excess Supply - exists when more of a product is being supplied to a market that is demanded at a certain price (also known as surplus) Excess Demand - exists when more of a product is in demand than what is supplied at a given price (also known as a shortage)