ENTREP 2 - Positive and Normative Economics

ENTREP 2 Positive Economics − refers to the objective analysis in the study of economics Economics – study of scarcity and its − objective study of a...

ENTREP 2 Positive Economics − refers to the objective analysis in the study of economics Economics – study of scarcity and its − objective study of an economy implications for the use of resources, that describes happenings in an production of goods and services, economy as they are without growth of production and welfare over being judgmental about the time, etc. situations − fact-based, all explanations given are backed up with Scarcity – when supply of a resource verifiable data cannot meet demand Investigative Process – economists look at what has happened and what is Good currently happening in a given − anything which yield satisfaction economy to form their basis of to someone predictions for the future − may be tangible in the forms of material goods or commodities − may be intangible in the forms of Example of Positive Economics services inflation rate unemployed rate housing market statistics Microeconomics – study of how and consumer spending individual actors make choices in response to changes in incentives, prices, resources, and/or methods of Normative Economics – focuses on production value-based judgments aimed at improving economic development, investment projects, and distribution of Macroeconomics – a branch of wealth economics that studies how an overall economy behaves Normative Statement – one that cannot be tested or verified and is Agricultural Economics – study of the based on a value judgment allocation, distribution, and utilization of the resources used, along with the commodities produced, by farming Cost − monetary value of all sacrifices made to achieve an objective − refer to the money expenses incurred by a firm in the production process Factors Determining the Cost Average Variable Costs (AVC) – fixed Size of plant – there is an costs divided by the quantity output. inverse relationship between size of plant and cost. As size of Total Revenue – the amount of firm plant increases, cost falls and receives for the sale of its output vice versa Level of Output – there is a Profit = total revenue - total costs direct relationship between output level and cost. More the Marginal Cost (MC) level of output, more is the cost − increase in total costs as a result and vice versa. of an increase in output by one Price of Inputs – there is a unit direct relationship between price − cost of producing an additional of inputs and cost. As the price unit of output of inputs rises, cost rises and vice versa. Assets – are in real and monetary State of Technology – more forms modern and upgraded the technology implies lesser cost Types of Assets: and vice versa. Real Assets – machinery, Management & Administrative buildings, materials, and Efficiency – efficiency and cost supplies are inversely related. More the Monetary Assets – forms of efficiency in management and money administration better will be the product and less will be the cost. Inventories – unsold goods which become the part of the firm’s stock Fixed Cost – cost that does not wary The Law of Demand – whenever the with output like rent and others price of any commodity increases, its quantity demanded decreases and vice Variable Cost – cost that varies with versa output like direct inputs in the production Factors Other Than Price Which Influence the Quantity Demanded Total Cost – fixed cost plus variable Tastes and preferences cost Income Expectation on future prices Average Total Costs (ATC) – total prices of related goods like costs divided by the quantity output substitutes Average Fixed Costs (AFC) – fixed costs divided by the quantity output Ceteris paribus Shortage – when the quantity − all other things remain the same demanded is greater than the quantity − holding other things constant supplied − no change in any other variable Elasticity of Demand – measures the Law of Supply degree of responsiveness of quantity − price and quantity supplied are demanded to changes in market price directly proportional and ceteris paribus 5 Categories of Elasticity of − when the price is increasing, the Demands supply is increasing Elastic Demand – one in which − shows the sellers side of the the change in quantity market demanded due to a change in price is large (greater Other Factors that Influence the percentage) Supply: Inelastic Demand – one in Cost of production which the change in quantity Number of firms in the market demanded due to a change in Availability of economic price is small (lesser resources percentage) Technology applied Unitary Demand – a percentage change in price Government policies results in an equal percentage change in quantity demanded Equilibrium Market Perfectly Elastic Demand – − state wherein demand is equal to without change in price or little, supply there is an infinite change in − implicit agreement of how much quantity demanded buyers and sellers are willing to Perfectly Inelastic Demand – a transact to each other change in price creates no change in quantity demanded Equilibrium Price − also called as “market clearing Elasticity Formula (Demand) price” − the price at which demand and (Qd1 – Qd2) / (Qd1 + Qd2) supply are equal (P1 – P2) / (P1 + P2) − a process of interaction between where: buyers and sellers Q – quantity P – price Disequilibrium – happens when supply and demand are not equal Elasticity Coefficient: greater than 1 = the demand is Surplus – when the quantity supplied is elastic, quantity changes faster more than the quantity demanded than price Equal to 1 = unitary demand  Less than 1 = inelastic demand, Elasticity of Supply – to show the quantity changes slower than responsiveness, or elasticity, of the price quantity supplied of a good or service to a change in its price Determinants of Elasticity of Price Elasticity of Supply (PES) Demand Formula: 1. Number of good substitutes ES = %ΔQs Demand is elastic for a %ΔP product with many goods Where: substitutes and inelastic %ΔQS = the percentage change for products without good in quantity supplied. substitutes. %ΔP = the percentage change in 2. Price increase in proportion to price income price increase has little effect in budget of the %ΔQS = Q2 – Q1_ x100 buyers (inelastic). But if Q2 + Q1 / 2 price increase involves substantial amount in %ΔP = P2 – P1_ x100 proportion to the income, P2 + P1 / 2 demand is elastic 3. Importance of the product to the consumers. Luxury goods (not Consumption important) are elastic − the use of goods and services by Necessities such as food households and basic commodities − the act of using resources to are inelastic. satisfy current needs and wants Consumers Determinant of Supply Elasticity 1. Time − people who buy or use goods 2. Ability to produce and services to satisfy their wants. − is someone who is the final user Opportunity Cost of an item − the value or benefit given up by engaging in that activity, relative Keynesian Theory to engaging in an alternative − states that if consuming goods activity and services does not increase − benefits that are lost when the demand for such goods and choosing one option over services, it leads to a fall in another production − developed by John Maynard Keynes Inflation – generally used to earn any Formula for Gross Domestic sustained or continuing increase in Product: price. GDP = C + I + G + (X-M) Inflation rate – the percentage change Where: in the price index from the proceeding C = consumer spending period. I = business investment G = government spending Demand-Pull Inflation – type of (X-M) = net exports inflation brought about by the excess demand pulling prices up Ways on Measuring the GNI/GNP Cost-Push Inflation – type of inflation Expenditure Approach where increase in the costs of Income Approach production push prices up Industrial Origin Approach Consumer Price Index (CPI) – a Expenditure Approach Formula: measure of the overall cost of the goods GNI = C + I + G + (X-M) +SD + NFIFA and services bought by a typical consumer. Where: C = personal consumption (costs Basis of Computing CPI: of the people for goods and − price and the quantity of goods services and services consumed by I = Investment (cost of the Filipinos supplier during the production of goods and services) Gross Domestic Product (GDP) G = Government Expenses − total money value of all final X&M = cost during exporting and goods and services produced importing within a country in a given time SD = Statistical Discrepancy period NFIFA = Net Factor Income from − one of the primary indicators Abroad (costs from OFWs and used to determine the overall Costs of foreigner from the well-being of a Philippines country’s economy and standard of living Income Approach: − enables economic policymakers GNI = EC + EI + CI + G to assess whether the economy is weakening or strengthening Where: EC = Employees compensation Gross National Product (GNP) EI = Entrepreneurial Income − total market value of all final CI = Corporate Income goods and services produced by the residents of a country during G = Government Income period of time Industrial Approach Formula: Firm – an entity, an organization that GNI = A + I + S + NFIA uses factors of production in producing or GNI = GDP + NFIA goods and services Where: Production A = Agriculture − transformation of inputs into I = Industry outputs S = Services − creation of goods and services to NFIA = Net Factor Income from satisfy human wants Abroad − any activity that increased consumers usability of goods Utility and services − ability of the good to satisfy a human want Opportunity Cost – costs or benefits − refers to the satisfaction or foregone in the alternative use of a benefit obtained by a consumer resource from whatever goods and services they consume Classification of Factors of Production: Total Utility – entire amount of Land – all natural resources or satisfaction or benefit obtained by a gift of nature consumer Labour – physical or mental activities of human beings Marginal Utility – added satisfaction a Capital – part of man-made consumer gets from having one more wealth used for fund or unit of a good or service production Entrepreneur – person who Formula: combines the different factors of Marginal Utility = change in total production and initiate the utility/change in the quantity of goods process of production and also consumed bears the risk Principle of Diminishing Marginal Diminishing Return – the point where Utility – states that the more you have marginal product decreases despite an of anything, the less important to you is increase in resource output any one unit of it Law of Diminishing Marginal Utility − states that for any good or Price Equilibrium Formula: service, the marginal utility of Qd = Qs that good or service decreases as the quantity of the good increases Producer – a person who creates services or combines the resources Marginal Utility Formula: Invisible – number of people MU = Mux/Px = Muy/Py working 40 hrs. or more per week and wanting more job Where: Mux = added satisfaction Unemployment Rate – the percentage received for additional unit of x of the labor force that is unemployed Muy = added satisfaction received for additional unit of y Labor Problems – conflicts on social Px = price of x reality with social ideals that normally Py = price of y rise out employment Consumer Price Index Formula: Labor Problems: CPI = TWP Current / TWP Base Year x Frictional Unemployment – 100 unemployment that result because it takes time for workers TWP – Total Weighted Price to search for the jobs that best suit their tastes and skills Structural Unemployment – Inflation Rate Formula: unemployment that result IR = CPI (Current Yr) – CPI (Past Yr) / because the number of jobs CPI of the past year x 100 available in some labor markets is insufficient to provide a job for everyone who want one Purchasing Power of Peso Formula: PPP (Year) = 100 / CPI of the Year The Laissez-Faire Theory − don’t interfere the world will take care of itself − police protection, health Labor Force – part of the population Malthusian Theory – explained that who are at least 15 years old, willing to the human population grows more work rapidly than the food supply until famines, war or disease reduces the Unemployed – a person who is at least population 15 years old, willing to work and able to work but cannot find a work Money – anything that is generally acceptable in payment for goods or Underemployed – part of the labor services and either valuable assets and force who work for less than 40 hrs. per for the discharge of debts week Visible – number of people working less than 40 hrs. per week and wanting more job Evolution of Payment: Characteristics of Central Bank of Autarky – family of tribal group the Philippines: that produces the level of goods publicly owned, non-profit and services equal to their government bank consumption. Money is not issues currencies and ultimate used. source of money Barter – possible only if the serves as a government banker, goods/services that an individual financial adviser is willing to exchange is exactly banker’s bank the same that another is willing lender of last resort to accept custodian of the country’s Commodity Money – use foreign exchange reserves uncoined metals like gold, silver regulation of monetary and and copper financial activities Coinage – solve the problem of short weighing The Central Bank of the Philippines IOU – I owe you was written on − created based on a law passed paper and receipt on June 15, 1948 (founded in Specialized Bankers – idea of 1948) lending out a portion of the − formally opened and started entrusted money while holding operations on January 3, 1949 on the rest of the safekeeping − regulates money supply and Electronic Fund Transfer supervises the financial system System/Electronic Money – makes use of computer Main Objectives of the Central Bank terminals for transactions and of the Philippines: automated maintains process stability of peso Functions of Money fosters monetary, credit and serves as a medium of exchange exchange conditions conductive serves as a unit of account or to economic growth standard of value serves as store of value Instruments of Monetary Control: 1. Reserve Requirement – proportion of deposits that banks Monetary Policy – controlled by the are mandated by BSP to keep Bangko Central ng Pilipinas or Central 2. Rediscount Rate – interest rate Bank of the Philippines that BSP charges commercial banks that borrow reserves to Bangko Central ng Pilipinas – central correct temporary shortages monetary authority that governs the level of money supply through policies by the monetary board