Economics Study Guide PDF

Lesson 1: Revisiting Economics as a Social Science Social Science – refers to any subject that deals with human behavior. − Political Science, Psychology, Ethics, ETC. come within the definition of social science. Economics – is a Social Science because it deals with one aspect of huma...

Lesson 1: Revisiting Economics as a Social Science Social Science – refers to any subject that deals with human behavior. − Political Science, Psychology, Ethics, ETC. come within the definition of social science. Economics – is a Social Science because it deals with one aspect of human behavior – how men deal with problems of scarcity. − Economics deals with human beings living in a society, I.E., in a large group of persons with touching interests and problems. − It does not deal with the problems of solitary individuals like Robinson Crusoe. − In a community of people everybody is influenced by the actions of the others. − Economics deals with the activities of people, living in an organized community or society, in so far as such activities are related to the earning and use of wealth or with the problems of scarcity, choice and exchange. − Samuelson says that economics is “the queen of the social sciences”. Is Economics a Science? ✓ The answer to this question is “YES and NO”. Economics – can never be an exact science, and is a different kind of discipline to, say, physics or chemistry. − Economics is a Social Science, which means that it studies aspects of human behavior. − Economics is generally regarded as a social science, although some critics of the field argue that economics falls short of the definition of a science for a number of reasons, including a lack of testable hypotheses, lack of consensus, and inherent political overtones. − Economics is generally regarded as a social science, which revolves around the relationships between individuals and societies. Science – the essence of science is Prediction. − Physical ‘laws’ tell us what we believe must happen. The Uncertainty of Economics – one of the primary arguments made against classifying economics as a science is a lack of testable hypotheses. − Underlying the difficulty in developing and testing an economic hypothesis are the nearly unlimited and often unseen variables that play a role in any economic trend. − The argument against considering economics as a science is based on the fact that controlled experiments cannot be performed in laboratories. Economists – most often analyze historical data either on a nationwide basis or by geographic region. − It's this inability to test hypotheses in a controlled environment (and the ability to eliminate outside influences that could impact results) that makes some argue that economics should not be considered a science.  The 4 Economists 1. Liam Halligan (Telegraph UK) – “Time to stop this pretense – Economics is not Science” − Unlike scientists, Economists don't provide solutions to the broad, macro problems humans face today. − Economics relies too much on "Soft" fields like politics, sociology and history to be a science. 2. Raj Chetty (New York Times) – “Yes, Economics is a Science” − Just because economists disagree does not mean that economics is a "Fake" science. − Economists today are approaching problems using an empirical, scientific method. − While economists may not be close to solving the big picture, "Macro" issues with the economy, they have had considerable success with empirically testing "Micro" solutions. 3. Paul Krugman (New York Times) – “Maybe Economics is a Science, but many Economists are not Scientists” − Economics is a science because it can be approached scientifically, and its theories can be tested. − However, economists aren't scientists because most of them are too politically polarized to view their findings objectively. 4. Caroline Baum (Bloomberg View) – “Economists should get out of the Science Lab” − With hard sciences like physics, scientific results can be repetitively duplicated, whereas the answer to most of the big economic questions is usually "It depends". − "Chetty admits that the “fundamental challenge” faced by economists is “our limited ability to run experiments.” − Economists may try to hold everything else constant -- “ceteris paribus” -- to test a single variable, but they can’t. Nor can their econometric models, no matter what the economists claim." Conclusion – Economics is a science because it deals with understanding the flow of information. − Economics deals with the flow of commodified information. − Knowledge is information that humans have extracted and is known to them. − Economics basically studies the flow of goods and services and a claim to those goods and services, goods and services are merely packages of information, what is termed as useful knowledge. − That economics studies the flow of information is a sufficient condition for it to be considered a science.  Lesson 2: 2 Categories of Economics 1. Microeconomics – is the study of individuals and business decisions. − Focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach. − Investors can use microeconomics in their investment decisions. − Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. − It considers taxes, regulations, and government legislation. − Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. − It takes a bottom-up approach to analyzing the economy. − In other words, microeconomics tries to understand human choices, decisions, and the allocation of resources. − Having said that, microeconomics does not try to answer or explain what forces should take place in a market. − Rather, it tries to explain what happens when there are changes in certain conditions. − Microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete. − A lot of Microeconomic Information can be gleaned from company financial statements. − The Rules in Microeconomics flow from a set of compatible laws and theorems, rather than beginning with empirical study. − Key Principles of Microeconomics: 1. Deman Supply and Equilibrium – prices are determined by the law of supply and demand. − In a perfectly competitive market, suppliers offer the same price demanded by consumers. − This creates an economic equilibrium. 2. Production Theory – this principle is the study of how goods and services are created or manufactured. 3. Costs of Production – according to this theory, the price of goods or services is determined by the cost of the resources used during production. 4. Labor Economics – this principle looks at workers and employers, and tries to understand patters of wages, employment, and income. 2. Macroeconomics – looks at the decisions of countries and governments. − Takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature. − Macroeconomics is an analytical tool mainly used to craft economic and fiscal policy. − Macroeconomics studies the behavior of a country and how its policies impact the economy as a whole. − It analyzes entire industries and economies, rather than individuals or specific companies, which is why it’s a top-down approach.  − It tries to answer questions such as “what should the rate of inflation be?” or “what stimulates economic growth?” − Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in unemployment, national income, rates of growth, and price levels. − Analyzes how an increase or decrease in net exports impacts a nation’s capital account, or how gross domestic product (GDP) is impacted by the unemployment rate. − Focuses on aggregates and econometric correlations, which is why governments, and their agencies rely on macroeconomics to formulate economic and fiscal policy. − Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy. John Maynard Keynes – is often credited as the Founder of Macroeconomics, as he initiated the use of monetary aggregates to study broad phenomena. ❖ Though these two branches of economics appear different, they are actually interdependent and complement one another. ❖ Many overlapping issues exist between the two fields. The Evolution of Macroeconomics 1. Macroeconomics in 1930’s – developed as a discipline in its own right in the 1930s when it became apparent that Classic Economic Theory (derived from microeconomics) was not always directly applicable to nationwide economic behavior. 2. Classic Economic Theory – assumes that economies always return to a state of equilibrium. − In essence, this means that if demand for a product increases, the prices for that product get higher and individual companies rise to meet the demand. 3. During the Great Depression – there was low output and wide-scale unemployment. − Clearly, this did not indicate equilibrium on a macroeconomic scale. Microeconomics Determines to Understand 1. How people and households spend their budgets. 2. What combination of products and services are the best fit for their needs and wants, in the context of their available budget. 3. How individuals decide whether or not to work, and if they choose to work, whether or not it will be full time or part time. 4. How people decide to save for the future, how much they choose to save, or whether they decide to go into debt. 5. How a business decides to produce and sell certain products, how it will produce it, how many of each it will sell, and for how much. 6. What causes them to decide how many workers it will hire. 7. How a firm will finance its business. 8. At what time a business will decide to expand, downsize, or even close.  Macroeconomics Strives to Answer 1. Which factors determine how many goods and services a country can produce. 2. What determines the number of jobs available in an economy. 3. What determines a country’s standard of living. 4. What factors cause the economy to speed up or slow down. 5. What causes organizations to hire or fire more labor on a national scale. 6. What causes the economy to grow over the long term. 7. What the state of the nation’s economic health is, based on improvement in the standard of living, low unemployment, and low inflation. Conclusion – it is clear that Macroeconomics does not exist in isolation, but rather is entwined with Microeconomics, and works in tandem in order to be efficient. − 15 choices based on microeconomic factors, whether from individuals or businesses, can impact macroeconomics in the long run. − Similarly, a national policy that involves microeconomics could affect how households and enterprises interact with their economy. Economics as an Applied Science Lesson 3: Applied Economics – applies the conclusions drawn from economic theories and empirical studies to real-world situations with the desired aim of informing economic decisions and predicting possible outcomes. − The purpose is to improve the quality of practice in business, public policy, and daily life by thinking rigorously about costs and benefits, incentives, and human behavior. − It can involve the use of case studies and econometrics, which is the application of real-world data to statistical models and comparing the results against the theories being tested. − Applied economics is the use of the insights gained from economic theory and research to make better decisions and solve real- world problems. − Individuals can also benefit from applying economic thinking and insights to personal and financial decisions. − If Economics is the science of studying how people use various, limited means available to them to achieve given ends, then Applied Economics is the tool to help choose the best means to reach those ends. − As a result, applied economics can lead to "To do" lists for steps that can be taken to increase the probability of positive outcomes in real-world events. Economics – is about making choices. − We make all kinds of choices every day. − What’s the best route to work? − Where should we go for dinner? Which job or career should I go for? − What are the pros and cons of finishing college versus taking a job. − Should I get married, have children, and if so, when? − Which politician should I vote for when they all claim they can improve the economy or make my life better?  Applied Economics Relevance in the Real World 1. Can Illustrate the Potential Outcome of Financial Choices made by Individuals – for example, if a consumer desires to own a luxury good but has limited financial resources, an assessment of the cost and long- term impact such a purchase would have on assets can compare them to the expected benefit of the good. 2. Can Help Business Make Better Decisions – understanding the implications of economic laws of supply and demand combined with past sales data and marketing research regarding their target market can help a business with pricing and production decisions. 3. Is an Invaluable tool for Public Policy Makers – Applied Economic Modeling is routinely used to project changes in unemployment, economic growth, and inflation at the national, regional, and state level. − Understanding the way the economic incentives and compensating behaviors created by public policy impact real-world trends in things like job growth. Language or Statements in Economics: − Often economist is asked to explain the Causes of Economic Events – why is unemployment higher, is unemployment higher for younger or older members of the working population? − Sometimes, economists are asked to recommend Policies to Improve Economic Outcomes – what should the government do to improve the economic well- being of teen-agers? − Key take-away: when economists are trying to explain the world, they are social scientists. When they are trying to improve it, they are policy makers. Normative vs. Positive Economics Positive and Normative Economics – are 2 standard branches of modern economics. 1. Positive Economics – describes and explains various economic phenomena. − Has an objective approach, based on facts. − It explains to people about how the economy of the country operates. − It is alternatively known as Pure Economics or Descriptive Economics. − Statements based on positive economics consider what’s actually occurring in the economy. − It helps the policy makers to decide whether the proposed action will be able to fulfill our objectives or not. − In this way, they accept or reject the statements. Minimum Wage Laws cause Unemployment – ignoring the point of agreement or disagreement, this statement is positive because it is simply attempting to describe the world as it is. We can confirm or refute positive statements by examining evidence. 2. Normative Economics – focuses on the value of economic fairness or what the economy should be. − Economics that use value judgments, opinions, beliefs. − Considers values and results in statements that state, ‘what should be the things’. − It incorporates subjective analyses and focuses on theoretical situations. − Suggests how the economy ought to operate. − It is also known as Policy Economics, as it takes into account individual opinions and preferences. The Government should Raise the Minimum Wage – the statement is normative. − It attempts to prescribe how the world should be. − Evaluating normative statements involves values as well as facts. − They cannot be judged by using data alone. − Deciding what is good and bad policy is not merely a matter of science. − It involves views on ethics, religion, and political philosophy. Basis for Comparison Positive Economics Normative Economics A branch of economics based on A branch of economics based on Meaning: data and facts is positive values, opinions and judgment is economics. normative economics. Nature: Descriptive Prescriptive Analyses cause and effect What it does? Passes value judgement. relationship. Perspective: Objective Subjective Study of: What actually is What ought to be Statements can be tested using Testing: Statements cannot be tested. scientific methods. It clearly describes economic It provides solutions for the Economic Issues: issue. economic issue, based on value. Conclusion – we can say that these two branches are not contradictory but complementary to each other, and they should go hand in hand. − While laying down laws and theories, economics should be treated as a positive science, but at the time of practical application, economics should be treated as a normative science. Needs vs. Wants Needs and Wants – the difference between needs and wants lies primarily in how essential they are to our survival. − We must meet the needs to support daily activities. − On the other hand, we don’t always have to fulfill wants because they are less essential. − Mostly, we are disappointed because we cannot satisfy our desires. − However, it does not pose a serious problem. 1. Needs – by the term needs, we mean those requirements which are extremely necessary for a human being to live a healthy life. − They are personal, psychological, cultural, social, etc. that are important for an organism to survive. − In ancient times the 3 Basic Needs of the man are Food, Clothing, and Shelter but with the passage of time, Education and Healthcare also became integral, as they improve the quality of life. − If needs are not satisfied in time, it may result in illness, inability in functioning properly or even death. 2. Wants – are defined as something that a person would like to possess, either immediately or at a later time. − Wants are the desires that cause business activities to produce such products and services that are demanded by the economy. − They are optional, I.E. An individual is going to survive, even if not satisfied. − Further, wants may vary from person to person and time to time. Basis for Comparison Needs Wants Wants are described as the goods Needs refers to an individual's and services which an individual Meaning: basic requirement that must be like to have, as a part of his fulfilled, in order to survive. caprices. Nature: Limited Unlimited What is it? Something you must have. Something you wish to have. Represents: Necessity Desire Survival: Essential Inessential Change: May remain constant over time. May change over time. May result in onset of disease or Non-Fulfillment: May result in disappointment. even death. Conclusion – on these two concepts of economics, it concluded that needs and wants are separate forces, that compels actions for satisfaction. − If needs are not met on time, the survival of a person is at stake whereas wants are something which a person is craving for, that does not challenge a person’s survival if not satisfied. − So, needs can be distinguished from wants on the basis of their level of importance. − Hence, the distinction is between what is required and what is desired. Scarcity and Choice 1. Scarcity – is why economics exist – we wouldn't have to worry about how scarce resources are allocated if those resources were unlimited. − It should be emphasized that economics is primarily concerned with the scarcity of resources. − Where there is scarcity, choices must be made! − Scarcity refers to the finite nature and availability of resources while choice refers to people’s decisions about sharing and using those resources. 2. Opportunity Costs – is the foregone benefit that would have been derived from an option not chosen. − It's what is given up. − The loss you take to make a gain, or the loss of one gain for another gain. − Represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. − Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making. − Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making. − Examples: − A student spends three hours and $20 at the movies the night before an exam. − The opportunity cost is time spent studying and that money to spend on something else. − A farmer chooses to plant wheat. − The opportunity cost is planting a different crop, or an alternative use of the resources (land and farm equipment). − A commuter takes the train to work instead of driving; it takes 70 minutes on the train, while driving takes 40 minutes. − The opportunity cost is an hour spent elsewhere each day. Considerable Factors of Opportunity Costs 1. The Monetary Value – invested in any opportunity must provide an adequate return. − Therefore, money is an essential factor involved in opportunity cost. 2. Time – is a valuable asset, and once invested, cannot be reversed. − The benefit which a particular opportunity provides over the period must be the highest compared to the other alternatives. 3. Energy – invested in the chosen alternative is equally essential and requires a lot of skills and evaluation. Conclusion – options are unlimited, but all of those may not fulfill the investing criteria of a person. − Therefore, a decision for selecting the most appropriate opportunity out of all, depending upon the requirements, priorities and taste of the person, is necessary. Allocation – the division of things into shares or portions. − In economics, the term refers primarily to the “allocation of resources,” the process by which economic resources get allotted (apportioned, assigned) to their particular uses for directly or indirectly satisfying human wants. − The allocation process in a particular society's economy is the process by which the three fundamental economic questions get answered in that society.  3 Fundamental Economic Questions 1. What goods and services are produced (and in what quantities)? 2. By which of the various available technological means and recipes are each of these goods and services to be produced from the available land, labor and capital? 3. For whom are each of these goods and services produced? (which specific individuals get to use/consume each unit of each good or service produced?) Conclusion – in order to solve the problem of scarcity, societies must make choices. − The basic economic questions are the main or basic choices that all societies must answer. − These choices are influenced or guided by the rules or parameters set by each society. − Efficiency is the goal of all economic decisions to solve the problem of scarcity. − Thus, the aim of each society is to answer the above questions efficiently. − We can’t have everything we want, so we have to make use of resources in the best way possible. − This is the basic tenet (main idea; theme) of economics. 10 Principles of Economics 1. People Face Tradeoffs – to get one thing, we usually have to give up something else. − Example: leisure time vs. work. 2. The Cost of Something is what You Give Up to get it – Opportunity Cost is the second best alternative foregone. 3. Rational People Think at the Margin – people will only take action of the marginal benefit exceed the marginal cost. 4. People Respond to Incentives – because people use cost and benefit analysis, they also respond to incentives. 5. Trade can make Everyone Better Off – trade allows countries to specialize according to their comparative advantages and to enjoy a greater variety of goods and services. 6. Markets are Usually a Good way to Organize Economic Activity – when households and firms interact in markets guided by the invisible hand, they will produce the most surpluses for the economy. 7. Governments can Sometimes Improve Economic Opportunities – Market Failures occur when the market fails to allocate resources efficiently. − Governments can step in and intervene in order to promote efficiency and equity. 8. The Standard of Living depends on a Country’s Production – the more goods and services produced in a country, the higher the standard of living. − As people consume a larger quantity of goods and services, their standard of living will increase 9. Price Rise when the Government Prints too much Money – when too much money is floating in the economy, there will be higher demand for goods and services. − This will cause firms to increase their price in the long run causing inflation. 10. Society Faces a Short-Run Tradeoff between Inflation and Unemployment – in the short run, when prices increase, suppliers will want to increase their production of goods and services. − In order to achieve this, they need to hire more workers to produce those goods and services. − More hiring means lower unemployment while there is still inflation. − However, this is not the case in the long run. Lesson 4: Snapshot of the Philippine Economy 1. Population – the Philippines’ population for 2024 is 119,106,224 million or 1.51% − Population aged 60 years and over comprised about 8.5% of the midyear population in 2020. − The percentage share of this age group is expected to increase to about 19.6% of the projected midyear population in 2055. − The percentage of children under five (5) years of age is estimated to decrease from 10.2% in 2020 to 6.0% in 2055. − Females of childbearing ages, that is 15 to 49 years old, comprised about one- fourth (25.6%) of the midyear population in 2020. − The percentage of this age group is projected to slightly decrease to 23.3% in 2055. 2. Economic Growth – government spending on infrastructure is expected to buy growth, aided by the steady progress in vaccination leading to greater people mobility and the revival of businesses. − Adb’s current investments in the country’s flagship projects include the Malolos Clark railway project, Edsa Greenways project, and the Angat water transmission improvement project. − The bank is preparing a $175 million loan to assist the government in building climate- and disaster- resilient bridges to improve road traffic flow in metro manila. − Philippine Economy’s Gross Domestic Product (GDP) growth has accelerated to 6.3% in the second quarter, faster than the adjusted 5.8% growth rate in the first quarter of 2024. − Robust domestic demand, particularly government spending and capital formation, otherwise known as investments, propelled growth in the first semester of 2024. − Government Spending grew by 6.6% in the first half of 2024, reversing the 1.4% contraction in the first semester of 2023 as we expedited the delivery of various programs. − Capital Formation expanded by 6.5% in the first half of this year, accounting for about one-fourth of the GDP growth.  − This expansion was fueled by the strong performance in public construction, which grew 19.5%, significantly higher than the 1.5% in the first semester of 2023. − Household Expenditure remained subdued at 4.6% due to elevated food prices. − Production Side of our economy, modest growth in manufacturing (4.0% in s1 2024) and sustained double-digit growth in construction (12.4% from 11.0%) − The Service Sector remained robust, recording a 6.8% growth rate in the year’s first half. − This sector remains the dominant contributor to our GDP growth, accounting for about 70% in the year’s first half. − The Agriculture Sector’s output declined by 0.9% as crop production contracted, particularly rice and sugarcane, due to the adverse effects of el Niño. 3. Industries – on the expenditure side, all sectors have already surpassed their pre-pandemic levels as of the first semester 2024. − Mining and quarrying and real estate have not yet reached their pre-pandemic levels, while transport and storage and other services are nearing their pre-pandemic levels. − These sectors account for 10.3% of the country’s GDP. 4. Inflation – inflation of food and non-alcoholic beverages increased to 6.4% in July 2024 from 6.1% in June 2024. − Meanwhile, non-food inflation increased to 3.1% in July 2024 from 2.3% in the preceding month. − Country’s overall inflation was higher at 4.4% in July 2024 compared to the 3.7% figure recorded in June, driven by faster inflation in food and non-food items. − Rice, meat, vegetables, fruits, and ready-made food products mainly drove food inflation. 5. Employment – in June 2024, the country’s employment rate was posted at 96.9%. − This was higher than the employment rate estimated in June 2023 at 95.5% and in May 2024 at 95.9%. − The number of Employed People in June 2024 was recorded at 50.28 million. − The Unemployment Rate in June 2024 dropped to 3.1%. − The number of Unemployed Individuals in June 2024 was registered at 1.62 million. − Labor Force Participation Rate (LFPR) in June 2024 was posted at 66.0%. − The Unemployment Rate in June 2024 increased to 12.1%. − The Services Sector continued as the top sector in terms of the number of employed persons with a share of 58.7%. − Wage and Salary Workers continued to account for the largest share of employed persons, accounting for 63.8%. − Youth Employment rate in June 2024 increased to 91.4%, from 1% in the same month last year and 88.8% in May 2024. 6. Philippine Peso – a much stronger US Dollar, which may briefly go beyond Php 58 level this year, may affect the country’s economic growth. − However, the domestic-driven economy of the Philippines and overseas remittances and BPO flows could soften the blow. − By the end of the 2nd quarter or early 3rd quarter of 2024, a US Dollar may be worth Php 58 or higher. − While a stronger dollar will lead to more costly imports, and, ultimately, higher inflation since we are largely an import-oriented economy, a weaker peso can also help the country since it has a lot of us dollar inflows from our overseas Filipino workers (OFW’s) and the business process outsourcing (BPO) sector, which should support the local economy. 7. Philippine Debt – the NG’s total outstanding debt was recorded at P15.18 trillion as of end - February 2024, up 2.63% from P14.8 trillion as of end-January. − 69.68% are Domestic Debt while 30.32% are Foreign Debt. − Domestic Debt amounted to P10.58 trillion, up 4.08% month-on-month "Due to the net issuance of government securities.” − Outstanding Debt could also still post new record highs amid the need to borrow by the government to continue financing budget deficits. − Data from the Department of Budget and Management (DBM) show that the borrowing program for 2024 was pegged at P2.46 trillion, higher than the P2.207 trillion in the past year. 8. Inflation – is particularly important since the Philippines is reliant on imports not only to produce exports but also for other commodities such as food and fuel. − Country is considered a net food and oil importer. − High prices in the global economy impact the country through other technological means, consumer purchases have shifted online through mobile phones. − Many of these products are imported. − Part of the increase in inflation was the exchange rate, which allows global inflation to affect the Philippines. 9. Poverty – poverty fell from 18.1% in 2021 to 15.5% in 2023, translating into 2.45 million Filipinos lifted out of poverty. − The poverty incidence among the population significantly dropped to 15.5% from 18.1% in 2021. − This translates to a decrease of 2.45 million Filipinos living in poverty. − Number of Food-Poor Families decreased to 740,000 in 2023 from 1.04 million families in 2021, marking a reduction of 300,000 families. − In terms of Population, the number of Food-Poor Individuals also saw a significant decline, dropping from 6.55 million in 2021 to 4.84 million in 2023, a decrease of 1.71 million individuals. − Philippine Statistics Authority (PSA) on Tuesday, May 7, reported that the national- level inflation rate in April inched up to 3.8%, which is slightly higher than the 3.7% recorded last March. − Poor households and areas outside metro manila were hit harder by inflation in April, driven mainly by soaring rice prices, el Niño damaging crops, and the peso’s depreciation against the dollar. Conclusion – the government may express their optimism about the GDP, that it meets or even exceeds the target, that remains to be a challenge. − But in terms of stats that matter more, we have nothing to be proud of. − We have to translate the growth to a better life for most, if not all, pinoys.  Lesson 5: Elements of Supply and Demand Demand Theory – refers to a theory that studies the relationship between the demand of consumer goods and their prices. − It is the premises of the demand curve that creates a link between the quantity demanded and price for a product. − With more supply of a product or service, its demand declines followed by the equilibrium price. Demand – refers to the quantity of a product or service that users are desirous and capable of purchasing at a said price in a given timeframe. − In order to fulfil their desires and wants, people tend to have demand for goods and services. − The product demand available at a specific price showcases how much satisfied a user would be after using the product. − Real demand takes place when the willingness to satiate a need is covered by the paying capacity of the customer. − Two factors that influence the demand for a product include: 1. Utility for satiating customers wants or desires. 2. The spending capacity of a consumer. − Demand in terms of economics may be explained as the consumers’ willingness and ability to purchase or consume a given item/good. − An increase in the price of a good will lead to a decrease in the quantity that may be demanded by consumers. − A decrease in the cost or selling price of a good will most likely lead to an increase in the demanded quantity of the goods. Law of Demand – indicates the existence of an inverse relationship between the price of the article and the quantity demanded by consumers. − Graphically represented by a line with a downward slope. Utility – the level of satisfaction that a consumer receives from a product. − The level of utility derived from a product varies from one user to another. Determinants of Demand 1. Price of the Product – people use price as a parameter to make decisions if all other factors remain constant or equal. − This implies an increase in demand when prices decrease, and a decrease in demand when prices increase. 2. Income of the Consumers – rising incomes lead to a rise in the number of goods demanded by consumers. − Similarly, a drop in income is accompanied by reduced consumption levels. 1. Normal Goods – those goods for which the demand rises as consumer income rises. 2. Inferior Goods – is a good whose demand decreases when consumer income rises. 3. Prices of Related Goods or Services – these are products whose demand is influenced by a price change of another related product. 1. Complementary Products – goods that are consumed together. − Two goods for which an increase in price of one good leads to a decrease in the demand for another. 2. Substitute Products – a product or service that consumers see as essentially the same or similar-enough to another product. − Two goods for which an increase for the price of one good leads to an increase in the demand for another. 4. Tastes and Preferences – consumer tastes/preferences are another important determinant of demand. − If consumer tastes change such that they now favor a product more, they will demand that product more and if their taste changes unfavorably they will demand a lower quantity of that product. 5. Expectations – change in consumer expectations about a product may affect the quantity they demand. − Expectations of a higher income or expecting an increase in prices of goods will lead to an increase in the quantity demanded. − Similarly, expectations of a reduced income or a lowering in prices of goods will decrease the quantity demanded. 6. Numbers of Buyers in the Market – the number of buyers has a major effect on the total or net demand. − As the number increases, the demand rises. − Furthermore, this is true irrespective of changes in the price of commodities. Supply – is the quantity of goods a firm offers to sell in the market at a given price. − Refers to the amount of goods or services that the producers/providers are willing and able to offer to the market at various prices during a period of time. Law of Supply – states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. − 2 Important Aspects of Supply: 1. Supply refers to what is offered for sale and not what is finally sold. 2. Supply is a flow; hence, it is a certain quantity per day or week or month, etc.  Determinants of Supply 1. Price of the Good/Service – the most obvious one of the determinants of supply. − With all other parameters being equal, the supply of a product increases if its relative price is higher. − Profit is key. 2. Price of Inputs – when goods require less inputs (material, money, etc.), they are cheaper to make, so the supply increases. − This would also apply to inferior goods. 3. Price of Related Goods – if a similar good is at a higher price and makes you more profit, the supply of the original good would fall while the supply of the similar good rises. 4. Inferior Goods – if those inferior goods make less money, the supply drops, and vice versa. 5. Number of Suppliers – when more people are making a goods, the supply increases. 6. Technology Improvements – when a technology makes it cheaper or easier to produce a good, you can make more. − Therefore, the amount of that good that can be produced increases, and the supply rises. 7. Expected Prices – if the expected price of a good is greater than the current price, suppliers will hold back their goods so that they can sell them later at higher prices. − This results in a drop in current supply. Equilibrium – Demand and Supply Together 1. Equilibrium – is achieved at the price at which quantities demanded and supplied are equal. − We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect. − Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. 2. Equilibrium Price – is where the supply of goods matches demand. − In a competitive market, demand for and supply of a good or service determines the equilibrium price. 3. Disequilibrium – when markets aren’t in a state of equilibrium. − A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. − Caused due to several reasons, from government intervention to labor market inefficiencies and unilateral action by a supplier or distributor. − Market forces tend to restore disequilibrium states back to their equilibrium. 4. Commodity – can only be sold when both consumers and producers consent with a price. − At this price, the market forces of demand and supply work in harmony and the market is said to be in equilibrium. 1. Shift in Demand – means at the same price, consumers wish to buy more. − A shift in the demand curve occurs when the whole demand curve moves to the right or left. − For example, an increase in income would mean people can afford to buy more gadgets even at the same price. − Causes of Shift in Demand Curve: 1. Income 2. Tastes and Preferences 3. Changes in the Composition of the Population 4. Changes in Expectations about Future Prices or other Factors that Affect Demand ❖ Shift to Demand Curve: − Demand curve could shift to the right for the following reasons: 1. The Good became more Popular (e.g. Fashion changes or successful advertising campaign) 2. The Price of a Substitute Good Increased 3. The Price of a Complement Good Decreased 4. A Rise in Incomes (assuming the good is a normal good) 5. Seasonal Factors 1.) Shift to the Left – decrease in demand. 2.) Shift to the Right – increase in demand. 2. A Movement Along – the demand curve occurs following a change in price. ❖ Movement Along the Demand Curve: 1.) Change in Price – it can either be Contraction (less demand) or Expansion/Extension (more demand) 2.) Contraction in Demand – an increase in price from $12 to $16 causes a movement along the demand curve, and quantity demand falls from 80 to 60. − We say this is a contraction in demand. 3.) Expansion in Demand – a fall in price from $16 to $12 leads to an expansion (increase) in demand. − As prices fall, there is a movement along the demand curve and more is bought. 1. Price Elasticity – measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. − It is computed as the percentage change in quantity demanded—or supplied— divided by the percentage change in price. 2. Elasticity – can be described as Elastic—or very responsive unit elastic, or Inelastic—not very responsive. 3. Elastic Demand or Supply Curves – indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner. 4. Inelastic Demand or Supply Curve – is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. 5. Unitary Elasticity – means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. 1. Price Elasticity of Demand – is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. 2. Price Elasticity of Supply – is the percentage change in quantity supplied divided by the percentage change in price. − Elasticities can be usefully divided into 5 Broad Categories: Perfectly Elastic, Elastic, Perfectly Inelastic, Inelastic, and Unitary. 1. Elastic Demand or Elastic Supply – is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. 2. Inelastic Demand or Inelastic Supply – is one in which elasticity is less than one, indicating low responsiveness to price changes. 3. Unitary Elasticities – indicate proportional responsiveness or either demand or supply. Midpoint Method for Elasticity – to calculate elasticity, instead of using simple percentage changes in quantity and price, economists sometimes use the average percent change in both quantity and price. − The advantage of the midpoint method is that we get the same elasticity between two price points whether there is a price increase or decrease. Point Elasticity Method – a drawback of the midpoint method is that as the two points get farther apart, the elasticity value loses its meaning; for this reason, some economists prefer to use the point elasticity method. Conclusion – price elasticity is the measure of the market's response to price changes. Elasticity is important to pricing decisions because it helps us understand whether raising prices or lowering prices will enable us to achieve our pricing objectives.