Manecon Reviewer for Finals PDF

lOMoARcPSD|46858665 Manecon Reviewer for Finals Managerial Economics (Wesleyan University-Philippines) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by peepoo papi (jerbeehabagatpangilinan@...

lOMoARcPSD|46858665 Manecon Reviewer for Finals Managerial Economics (Wesleyan University-Philippines) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 MANECON Reviewer for FINALS!! Economics - study of how society manages its resources and is concerned with the efficient and effective allocation of the said resources Efficiency - attaining maximum output with the least possible input Effectiveness - attained by getting the desired outcome - doing the right thing Scarcity - a condition where wants and needs of people are not satisfied because of limited resources - the idea in which resources are limited because of the unlimited wants of man Shortage - a temporary condition where the demand on certain commodity or service cannot be met by the current supply Households – basic consuming unit in the economy - has four factors in the market—land, labor, capital, and entrepreneurship Markets – a set of arrangements by which buyers and sellers carry out exchange at mutually Time – the ultimate constraint in each activity involved in an opportunity cost Opportunity Cost – the value of the best alternative foregone when an item or activity is chosen - the cost we forgo to get something else - the cost of that which you get is the value of that which is sacrificed to obtain it Equilibrium – a condition that exists in a market when the plans of buyers match those of sellers, so the quantity demanded equals quantity supplied and the market clears Utility – the sense of an individual’s pleasure or satisfaction that comes from consumption - the individual’s pleasure, happiness, or satisfaction Production Possibilities Frontier (PPF) - represents the points at which an economy is most efficiently producing its goods and services, limiting the economy to two commodities Rational Behavior - the same person may make different choices under different circumstances Marginal Analysis - where the marginal cost and marginal benefit are compared Marginal - additional, change, or add in Microeconomics - focuses on how individuals and firms make decisions and what the consequences of those decisions are Macroeconomics - examines the aggregate behavior of the economy, which includes the actions of all individuals and firms to produce a particular level of economic performance as a whole Positive Economics - looks into how the economy works; statements based on facts Normative Economics - focuses on how the economy should be; often influenced by value judgments depending on circumstances Basic Circular Flow - shows the interdependence of two entities and the economy—households and firms. - flow of money and products throughout the economy - divides the market into two categories—market for goods and services and market for factors of production ------------------------------------------------------------------------------------------------------------------------------------------- Market - a place where buyers and sellers meet Two important elements of a market are buyers and sellers. Buyers - the ones who determine the market demand Sellers - the determinants of the supply in the market Demand - quantity of goods and services that buyers are willing and able to buy - usually depicted through tables, numbers, or graphs LAW OF DEMAND: As price increases, quantity demand will decrease ceteris paribus (assuming all factors are constant). Other factors affecting demand: Income - if a person earns a minimum wage, he/she naturally has lower purchasing power, so the demand for commodities is fewer When income increases, quantity demand will generally increase. Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 Normal goods - goods and services that have an increasing demand whenever income increases. Inferior goods - goods or services that have a decreasing demand whenever income increases. Price of Related Goods and Services Substitute goods - goods that can replace another commodity in its absence. If the price of a commodity increases, we can expect the demand for its substitute good to increase as well, and vice versa. Complementary goods - goods that go hand in hand with each other. If the price of a commodity increases, we can expect the demand for its complementary good to decrease, and vice versa. Taste and Preference As taste and preference increase, we can expect an increase in demand for that product, and vice versa. Expectation on Future Prices People expect prices to increase in the future, so QD at present will increase, and if prices decrease in the future, QD at present will decrease. Changes in Population As population increases, QD is likely to increase as well, and vice versa. Supply - quantity of goods or services that sellers are willing and able to sell at different prices. - if demand depicts the willingness and ability of people to purchase a commodity, supply shows the behavior of producers in selling their commodities. LAW OF SUPPLY: As price increases, quantity supplied will also increase ceteris paribus (assuming all factors are constant). Other factors affecting supply: Input Price If the cost of input increases, quantity supplied is likely to decrease, and vice versa. Price of Related Goods and Services If the price of a substitute good for a commodity increases, the supply of the other will also increase, and vice versa. If the price of a complementary good of a commodity increases, the supply of the other will decrease, and vice versa. Expectation on Future Prices An increase in price in the future will lead to a decrease in supply at present. Technology Technological development increases supply. Government Regulations A high amount of money to be paid due to government regulations is likely to decrease supply in an area. If the tax is high, we can expect a decrease in the supply of different commodities. When government subsidies increase, the supply will also increase because subsidies assist sellers to produce more. Number of Suppliers If the number of suppliers increases, the supply will also increase. Unexpected Calamities or Natural Disasters Unexpected calamities or natural disasters will decrease the supply in the area. Market equilibrium - a point where the quantity demanded is equal to the quantity supplied. - the point where the buyers are willing and able to buy the product or avail of the service, and where the sellers are also willing and able to sell their products or deliver their services. Another way of computing for equilibrium price and quantity is through a mathematical equation. Using the Underground River example again, we are able to arrive at two equations from its demand and supply schedules: QD = 1,245 – 0.1P Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 QS = 965 + 0.1P To get the equilibrium price and quantity, we should equate QS to QD: - QS = QD - 1,245 – 0.1P = 965 + 0.1P Transpose similar terms: - 1245 – 965 = 0.1P + 0.1P - 280 = 0.2P Divide both sides by 0.2: - 1,400 = P An increase in the quantity demanded will shift the demand curve to the right. A decrease in the quantity demanded will shift the demand curve to the left. ------------------------------------------------------------------------------------------------------------------------------------------- Elasticity - a measure of the impact of one variable over the other. Price Elasticity of Demand – the measure of how much the quantity demanded of a good respond to a change in the price of that good. - the measure of percent decrease in the quantity demanded of goods and services when there is a percent increase in their price. - Inelastic goods are goods with PED less than 1 (PED < 1). - Elastic goods are goods with PED greater than 1 (PED > 1 - Unit Elastic exists if PED is equal to 1 (PED = 1). Perfectly Inelastic Demand - a commodity with an elasticity of zero. This means that even if the price changes, the quantity demand will still remain the same. PED with Inelastic Demand - when, despite the large increase in price, quantity demand has a minimal decline. This happens when a product is a necessity in the market (such as food, fuel, electricity, and others) PED with Unit Elastic Demand - when the increase in price has a commensurate decrease in quantity demanded. If there is a 25% increase in price, there is also a 25% decrease in quantity demand. PED with Elastic Demand - when the increase in price has a significant decrease in quantity demanded. PED with Perfectly Elastic Demand - a commodity with an elasticity that equals to infinity ********************************************************************************************* Income Elasticity of Demand – the measure of how much the quantity demanded of a good respond to a change in consumer’s income. - the measure of the percentage increase in the quantity demanded of goods and services when there is a percent increase in the income. Normal goods - those with an IED greater than zero (IED > 0). By definition again, normal goods are goods or services that have an increasing demand whenever income increases. A normal good can be either a necessity or a luxury. If IED has a value greater than one (IED > 1), then the good is considered as income elastic or a luxury. If IED has a value less than 1 (IED < 1), then the good is considered as income inelastic or a necessity. Inferior goods - those with an IED of less than zero (IED < 0). Higher income increases the quantity demanded for normal goods, but decreases the quantity demanded for inferior goods. ********************************************************************************************* Cross-Price Elasticity of Demand – the measure of how much the quantity demanded of one good responds to a change in the price of another good. - the measure of percent increase in the quantity demanded of goods and services when there is a percent increase in the price of related goods of a commodity. Substitutes are those with a CPED greater than zero (CPED > 0). If the price of a commodity increases, we can expect the demand for its substitute good to increase. Complementary goods are those with a CPED less than zero (CPED < 0). If the price of a commodity increases, we can expect the demand of its complementary good to decrease. ********************************************************************************************* Price Elasticity of Supply Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 – the measure of how much the quantity supplied of goods responds to a change in the price of that good. - the measure of percent increase in the quantity supplied of goods and services when there is a percent increase in the price of such. Perfectly Inelastic Supply - a good or service with an elasticity that equals zero. This means that even if there is a change in price, the quantity of supply will still remain the same. PES with Inelastic Supply - when, despite the large increase in price, quantity supply has a very minimal increase. This happens when the product does not have a high market demand. PES with Unit Elastic Supply - when the increase in price has a commensurate increase in quantity supply. PES with Elastic Supply - when the increase in price leads to a higher increase in quantity supplied. Perfectly Elastic Supply - the commodities with an elasticity that equals infinity. We can see that if the supply curve is perfectly elastic, the price remains the same, but the quantity supply will be infinite. In measuring goods and services using PED, it can be classified as either elastic, inelastic, or unit elastic. ------------------------------------------------------------------------------------------------------------------------------------------- Consumer theory - argues that individual consumption decisions are always made because people desire to maximize their satisfaction from consuming various goods and services. - consumers rank all consumption bundles based on the level of satisfaction they feel after consuming these products or services. Consumption bundles - certain combinations of two commodities that will yield them a certain level of utility. These bundles can form an indifference curve. Indifference Curve - shows combinations of two commodities, which, when consumed, will yield the same level of satisfaction. The indifference curve depicts values that are considered by the utility function. Utility Function - shows an individual’s value of the utility attained from consuming each conceivable bundle of goods. These values can be either cardinal or ordinal. Cardinal values - based on the number of “util” or the unit of satisfaction. Ordinal values - based on rankings. Law of Diminishing Marginal Utility - This law argues that as you increase your intake of a certain commodity, you will have declining satisfaction on the next units of the same commodity that you will consume. Marginal Rate of Substitution or MRS - the maximum amount of a good that a consumer is willing to give up to obtain one additional unit of another good. Completeness - means that in every pair of consumption bundles (X and Y), the consumer can say one of the following: X is preferred to Y. Y is preferred to X. The consumer is indifferent between X and Y. (If Missy is indifferent, it means that the two goods are valued equally.) Transitivity - can be described by having commodities X, Y, and Z. It means that if X is preferred to Y, and Y is preferred to Z, then X must be preferred to Z. Non-satiation - simply means more is better. It may not be true for all, but it means that for economic goods, consumers always receive happiness from more, or at least can freely dispose of any excess from that. Indifference Map - a graph containing a set of indifference curves showing two commodities, among which describe a person’s preferences. - a consumer has an infinite number of indifference curves that depict each level of their satisfaction. - they do not intersect. Budget Line - provides the budget constraint of an individual. - a graph that shows the combinations of goods or services of a person, where the total amount of money spent is proportionate to his/her income. Budget constraint - when we naturally try to limit our purchase of goods in line with the current income that we have. To maximize the utility of an individual, it must satisfy two conditions: - The decision must lie on the budget line. Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 - The decision must lie on the indifference curve Inferior good - an increase in income will decrease our demand for this product. Normal good - an increase in income will increase our demand for this product. Engel curve - shows the relationship between the amounts of product that people are willing to buy and their corresponding income. Consumer theory argues that consumers can rank all the consumption bundles that they acquire based on the level of satisfaction they receive from consuming these products or services. These consumption bundles will yield to an indifference curve. Indifference curve - shows combinations of values between two commodities, which, when consumed, will yield the same level of satisfaction. ------------------------------------------------------------------------------------------------------------------------------------------- Revenue - computed by multiplying price with quantity. - Total Revenue = Price × Quantity - driven by the amount paid by the buyers to sellers (price) in purchasing a commodity and the number of commodities being purchased (quantity). To mathematically compute net profit, most of us use the basic and the most common understanding of income: accounting income. Accounting Income = Total Revenue – Total Cost Economic Profit The “Total Cost” that we have computed above is what we call explicit cost, which is the actual cost being paid by the firm to its suppliers, employees, and other expenses When opportunity cost is included in the computation of profit, it will be known as implicit cost: the opportunity cost of pursuing one option over the other. Accounting Profit = Total Revenue – Explicit Cost Economic Profit = Total Revenue – [Explicit Cost + Implicit Cost] Two functions of price: rationing and allocative. Rationing function of price - changes in prices attributed to the distribution of resources to consumers who need them the most. Allocative function of price - changes in prices that direct resources away from overcrowded markets and toward markets that are underserved. Production function - shows the relationship between quantity of inputs used to create a good and the quantity of output produced. Marginal product - the change (increase or decrease) in output from one additional unit of input. Law of Diminishing Marginal Product - the scenario where the marginal product of an input decreases as the quantity of the input increases. Fixed costs (FC) - costs that do not vary with the quantity produced. It means that they are the payment that a company pays regardless of whether it is gaining profit or not. Variable costs (VC) - costs that vary with the quantity produced. They are usually the input that a firm shoulders for every unit of production that it has. Total cost (TC) - the combination of fixed costs and variable costs (TC = FC + VC). Average costs - also called per-unit costs and can be determined by dividing the firm’s total cost by the quantity of output it produces. Marginal cost (MC) - the increase in total cost (TC) from an additional unit of production. - can also be defined as the increase in total variable cost (VC) in every additional unit of production Efficient scale - the quantity that minimizes ATC. Economies of scale - refer to the state where the long-run average total cost falls as the quantity of output increases. Constant returns to scale - refer to the state where the long-run average total cost stays the same as the quantity of output increases. Diseconomies of scale - refer to the state where the long-run average total cost rises as the quantity of output increases. This is the least ideal part because we know that higher ATC means less production, but more input. ------------------------------------------------------------------------------------------------------------------------------------------- Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 Market structures - the individual characteristics of each particular industry in our economy that also show the organization and composition of firms to the market. Perfect competition - economists refer to only one market structure when they talk about agricultural products. Perfect competition producers are price takers because they do not have any control when it comes to pricing. Characteristics of perfect competition: Number of firms in the country – Perfect competition has sellers/players, which is the reason why a single seller’s decision has no impact on the market price. Nature of the product produced – Products under perfect competition are usually identical or homogeneous. This is the reason why agricultural products are identified as examples of products under perfect competition. Degree of power each firm has – As there are many sellers offering the same products, each producer supplies a very small proportion of the total industry output. Degree to which the firm can influence price – Firms in this type of market structure have no influence on pricing. They are considered as price takers because they do not have control over the price they charge for their products. Non-price competition or advertisement – There is no need for an advertisement because everyone knows the products. Profit levels – Theoretically, profit on firms under perfect competition is very small as they just allow the market to dictate their price. Extent of barriers to entry – There is an easy entry and exit from the industry. Price = Demand, precisely because sellers set the price based on what the market will dictate. Monopolistic competition refers to a market situation with a relatively large number of sellers offering similar but not identical products. Examples are hair care products, fast-food restaurants, clothing stores, and the like. Characteristics of monopolistic competition: Number of firms in the industry – There are many numbers of sellers under monopolistic competition because the nature of the products is needed by people, and this is the reason why firms can expect a high demand if their products will be known by their target market. Nature of the product produced – As mentioned earlier, there are many players in this market structure offering similar but not identical products. Degree of power each firm has – Each producer can have either a large or small proportion of total industry output, depending on its impact on the market. Degree to which the firm can influence price – Firms under monopolistic competition may have some element of control over price because they can differentiate their products, in some way, from those of their rivals. Non-price competition or advertisement – Spending on advertisements and other ways to make the brand popular are intense in firms under monopolistic competition. Most of the commodities that we see in advertisements are firms that fall under monopolistic competition. Profit levels – The opportunities to earn and keep economic profit in this type of market structure are few but much higher than perfect competition. Extent of barriers to entry – There are easy barriers to entry and exit in this type of market structure. This is because the raw materials for the product are accessible in the market. A perfectly competitive market has many firms selling identical products, which all act as price takers in the face of the competition. In a monopolistic competition market structure, firms have market power because they can make their products different from those of their competitors in several ways: physical aspects of the product; location where the product is sold; intangibility of the product; and perceptions of the product. Oligopoly exists when there are a few large firms producing homogeneous or differentiated products that are dominated or much needed by the market. Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 - This market structure is characterized by very few players, usually dominated by many firms, but the industry is dominated by a small number of very large producers. This means a concentration ratio exists in this form of market structure. - Concentration ratio means the proportion of total market sales (or share) held by the top number of firms (say, 3–10 accounts) for a huge percentage (say, 75% and above) of all the sales in the industry. Characteristics of Oligopoly: Number of firms in the industry – There are a few large firms in a market structure under oligopoly. Nature of products produced – The products that the oligopolistic firms produce are often nearly identical. They only vary in price and the ways people can use their services, but the offer will still be the same. Degree of power each firm has – Producers can have a big impact on total industry demand because their products have the same purpose. Degree to which the firm can influence price – Firms under oligopoly must consider their rivals’ moves or changes in response to decisions about prices, output, and advertising because these will affect the demand for their products. Non-price competition or advertisement – Advertisements and other ways to make the brand popular are also intense for firms under oligopoly. Most of the firms under oligopoly here in the Philippines offer different promos for their products. Profit levels – Firms under oligopoly view their demands as inelastic for price cuts and elastic for price rise. This is the reason why the demand curves of oligopolies are kinked. Extent of barriers to entry – Entry for a firm under oligopoly is hard because of its huge capitalization, as well as different processes that the regulatory bodies impose before you can establish such business. Monopoly is characterized as a market structure where only one producer exists in the industry. It might still be rare because there are always some forms of substitutes that will be made available in the market. - Because monopolies offer products needed by a lot of people, they can have a monopoly power where firms (most of the time) influence the market in some way through their behavior. Characteristics of a Monopoly: Number of firms in the industry – A monopoly has only one seller. However, there are cases where only one company owns different players in the industry. This is still considered a monopoly, especially if the head of that conglomerate is more than one. Nature of the product produced – Products are usually exclusively distributed by one player but are still subject to government control to ensure that prices are monitored correctly. Degree of power each firm has – Firms under monopoly have a huge opportunity to gain, but government regulations might intervene at times. Degree to which the firm can influence price – Firms in this type of market structure have a significant influence on prices as they are the only producers in the market. They are considered price setters because they have control over what they charge for their products. Non-price competition or advertisement – Monopolies do not need to advertise themselves any longer. Profit levels – The profit of firms under monopoly is very high because they are the ones that can dictate the price of that commodity or service. Extent of barriers to entry – It is very difficult to enter into a monopolistic industry because of its huge capitalization, as well as the different processes that the regulatory bodies impose. ------------------------------------------------------------------------------------------------------------------------------------------- Measuring National Income Gross domestic product - the total market value of the final goods and services produced within a country during a given period. - only concerned with new or current production. Old output is not counted in the GDP of the current calendar year because it was already counted back at the time it was produced. Total market value Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 - does not only pertain to the tangible goods that an economy manufactures or produces. Services like health care and public transport, with corresponding salaries paid to their workers, are also included as they are both sold and bought in the market. - there are also service types that are not sold in the market but are still counted in the GDP. The best examples of these are the services provided by national and local governments. Final good or service - the end product of a process. It is the product or service that is actually being purchased by a particular consumer. Intermediate goods or services - the other goods used in the production process of a good or service. The price of the final good already reflects the value of all its components and is already the total contribution to the GDP. To count in GDP, the value of the intermediate goods will result in double counting and will mislead us. Capital goods - any tangible asset that is usually bought or invested in by an organization for the purpose of producing goods and services. - not considered as final goods because they are used to produce a final good, nor can they be considered as an intermediate good either, as they are used to produce not just one final good - even if capital goods are not intermediate or final goods, economists still include the market value of newly purchased capital goods in the computation of the GDP and argue that a country that invests in capital goods has and will likely have a higher GDP. Gross Domestic Product or GDP - only measures the final goods and services produced by the economic activities within the country. - GDP is the total market value of final goods and services. We measure GDP using either one of the two methods: 1. by adding the total market value of all the final goods and services produced in a country; or 2. by adding up the total value of money spent by the households, firms, government, and foreign sector on final goods and services and subtracting the money spent to purchase imported goods and services. Four components of Expenditure:  Consumption expenditure - It is the spending by households on goods and services such as food, clothing, and entertainment. - It constitutes the largest share of the nation’s output  Investment - It is the spending by firms on final goods and services, primarily capital goods. - It is also the sum of expenditures on equipment, structure, and inventories.  Government purchases - They are the final goods and services bought by the national government and local government units. - They are the sum of expenditures incurred by the government in providing different social services to the people. - Note, however, that there are types of government purchases that are not included in this component called transfer payments. - Transfer payments are payments made by the government for which no current goods and services are produced or received. Examples of these are social security benefits, unemployment benefits, and pensions paid to retired government workers.  Net exports - Exports are domestically produced final goods and services that are sold abroad. - Imports are purchases by domestic buyers of goods and services that are produced abroad. - If a country’s net export is positive, it shows that its domestically produced goods and services are demanded by the other countries. - If a country has a negative net export, it means that the country buys more from other countries instead of profiting from its domestic production. The relationship between GDP and expenditures on goods and services can be expressed in the following equation: Downloaded by peepoo papi ([email protected])  lOMoARcPSD|46858665 Y = C + I + G + NX where: Y = gross domestic product; C = consumption expenditure; I = investments; G = government purchases; and NX = net exports. Another way of GDP computation is the adding of the total income of capital and labor. - Labor income is the total wages, salaries, and incomes of the employed and self-employed of most economies, and it comprises two-thirds of the total GDP. - Capital labor is the total payments made to owners of physical capital, such as the rent paid for office buildings, profits of business owners who sell factories and machines, as well as royalty fees paid for copyrights and patents, and it is equal to one-thirds of the GDP. Nominal GDP vs Real GDP: Nominal GDP is the GDP computed using the current prices. Real GDP is the GDP computed using the prices of a base year and measures the real physical production of the year. GDP is used as a measure of economic well-being of a country that affects and influences points for decision- making as regards formulation of socioeconomic policies, business investments, and the level of consumption. GDP can only increase if there is an increase in the production of goods and services produced by factors of production. The more businesses and employment established and created in an economy, the more sources of funds in the form of taxes that the government can use for infrastructure projects. Gross national product - the total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced. - includes the market value of the products and services produced by the country’s citizens anywhere in the world. - the salary and profits earned by Overseas Filipino Workers or OFWs and local companies that have branches internationally both contribute to the Philippine GNP. Downloaded by peepoo papi ([email protected])