Module 1Micro.ppt

MICROECONOMICS SIMPLIFIED Edilberto B. Viray, Jr. MAE Ma. Jesusa Avila – Bato, MAE Lucky Raymundo M. Malveda, MAE MODULE I RESOURCE UTILIZATION & ECONOMICS ANVIL PUBLISHING INC., 2016 Learning Objectives After reading and studying this chapter...

MICROECONOMICS SIMPLIFIED Edilberto B. Viray, Jr. MAE Ma. Jesusa Avila – Bato, MAE Lucky Raymundo M. Malveda, MAE MODULE I RESOURCE UTILIZATION & ECONOMICS ANVIL PUBLISHING INC., 2016 Learning Objectives After reading and studying this chapter, you should be able to: Define economics Define scarcity Identify the factors of production Understand the concept of opportunity cost Identify the four basic economic questions Describe the three Es in economics Differentiate microeconomics from macroeconomics Categorize the different types of economic systems  Define Economics  The Three E’s in Economics  Scarcity  Economic Analysis: Positive and Normative Economics  Factors of Production  Ceteris Paribus  Circular Flow of Model  Microeconomics and  The Concept of Macroeconomics Opportunity Cost  Types of Economic Systems  Basic Decision Problems  Important Economic Terms  Origin and Foundation  Distribution of Economics  Brief History of Economics:  Four Basic Economic  The Classical, Keynesian Questions and Modern Economics What is ECONOMICS?  A science that deals with the management of scarce resources. It is also described as a scientific study on how individuals and the society generally make choices.  It should be noted that individuals and groups within the society have innumerable wants, and to satisfy these wants, there are available resources that can be utilized. However, since these resources are finite, they are not freely available. Economics steps in to assist individuals and societies in making proper choices – that is, the allocation and utilization of economic resources, with the end in view of satisfying human wants for goods and services. Origin of the term “economics” The two Greek roots of the word economics are oikos – meaning household – and nomus – meaning system or management. Oikonomia or oikonomus therefore means the “management of household.” With the growth of the Greek society until its development into city-states, the word became known or was referred to as “state management”. Scarcity  The basic and central economic problem confronting every society.  It is also “limited resources in Demand.”  The heart of the study of economics, and the reason behind its reality. Factors of Production 1. Land --------------------- Rent 2. Labor -------------------- Salary/Wages 3. Capital ------------------- Interest 4. Entrepreneurship ------- Profit The Circular Flow Model The Concept of Opportunity Cost Because people cannot have everything they want, they are forced to make choices between several options. Opportunity cost refers to the foregone value of the next best alternative. It is the value of what is given-up when one makes a choice. The thing thus given-up is called the opportunity cost of one’s choice. When one makes choices, there is always an alternative that has to be given up. A producer, who decides to produce shoes, gives up other goods that he could have produced using the same resources. A student, who buys a book with his limited allowance, gives up the chance of eating out or watching movie. Basic Decision Problems Consumption ------------- Consumers Production ---------------- Producers Distribution ---------------- Government Growth Over Time -- Society & the rest of the World Four Basic Economic Questions 1.What to produce? 2. How to produce? 3. How much to produce? 4. For whom to produce?  3 Es in Economics 1. Efficiency refers to productivity and proper allocation of economic resources 2. Equity means justice and fairness 3. Effectiveness means attainment of goals and objectives. Positive and Normative Economics Positive economics is an economic analysis that considers economic conditions “as they are”, or considers economics “as it is”. It uses objective or scientific explanation in analyzing the different transactions in the economy. It simply answers that question ‘what is’. Normative economics is economic analysis which judges economic conditions “as it should be”. It is that aspect of economics that is concerned with human welfare. It deals with ethics, personal value judgments and obligations analyzing economic phenomena. It answers the question ‘what should be’. It is also referred to as policy economics because it deals with the formulation of policies to regulate economic activities. Ceteris Paribus Assumption The assumption of “Ceteris Paribus” is important in studying economics. Ceteris paribus means “all other things held constant or all else equal.” This assumption is used as a device to analyze the relationship between two variables while the other factors are held unchanged. It is widely used in economics as an exploratory technique as it allows economists to isolate the relationship between two variables.  Economics has two major branches: Microeconomics  Deals with the individual decisions of units of the economy—firms and households, and how their choices determine relative prices of goods and factors of production.  The market is the central concept of microeconomics. It focuses on its two main players— the buyer and the seller, and their interaction with one another.  Microeconomics operates on the level of the individual business firm, as well as that of the individual consumer. It concerns how a firm maximizes its profits, and how a consumer maximizes his/her satisfaction. Macroeconomics  Studies the relationship among broad economic aggregates like national income, national output, money supply, bank deposits, total volume of savings, investment, consumption expenditure, general price level of commodities, government spending, inflation, recession, and employment.  Macroeconomics focuses on the four specific sectors of the economy: the behavior of the aggregate household (consumption); the decision making of the aggregate business (investment); the policies and projects of the government (government spending); and the behavior of external/foreign economic agents, through trading (export and import). Types of Economic Systems Traditional Economy It is basically a subsistence economy. A family produces goods only for its own consumption. Command Economy It is a type of economy, wherein the manner of production is dictated by the government. The government decides on what, how, how much, and for whom to produce. Market Economy or capitalism’s basic characteristic is that the resources are privately owned, and that the people themselves make the decisions. It is an economic system wherein most economic decisions and means of production are made by the private owners. Types of Economic Systems Socialism It is an economic system wherein key enterprises are owned by the state. In this system, private ownership is recognized. Mixed Economy This economy is a mixture of market system and the command system. The Philippine economy is described as a mixed economy since it applies a mixture of three forms of decision- making. Important Economic Terms Wealth Consumption Production Exchange Distribution Brief History: The Classical, Keynesian and Modern Economics David Ricardo, 1772-1823 John Maynard Keynes, 1883-1946 Adam Smith, 1723-1790 Birth of Economic Theory: Classical Economics Adam Smith, 1723-1790 He is considered the most important personality in the history of economics—being regarded as the “Father of Economics”. He was responsible for the recognition of economics as a separate body of knowledge. His book, “Wealth of the Nations”, published in 1776, became known as “the bible in economics” for a hundred years. One of his major contributions was his analysis of the relationship between consumers and producers through demand and supply, which ultimately explained how the market works through the invisible hand. David Ricardo He developed the basic analysis of the political economy or Karl Marx A German, who is influenced by the conditions brought about by the industrial revolution upon the working classes. His major work, Das Kapital, is the centerpiece from which major socialist thought was to emerge. Neoclassical Economics (1870s) Leon Walras, who introduced the general economic system, and Alfred Marshall, who became the most influential economist during that time because of his book Principles in Economics. Walras developed the analysis of equilibrium in several markets. On the other hand, Marshall developed the analysis of equilibrium of a particular market and the concept of “marginalism”. Keynes’ General Theory of Employment, Interest and Money John Maynard Keynes An English economist who offered an explanation of mass unemployment and suggestions for government policy to cure unemployment in his influential book: The General Theory of Employment, Interest and Money (1936). Keynes’ concern about the extent and duration of the worldwide interwar depression led him to look for other explanations of recession. Furthermore, he argues that investment depends primarily on business confidence which would be low during a depression so the investment would be unlikely to rise even if interest rate fell. Finally, he argued that the wage rate would be unlikely to fall much during a depression given its ‘stickiness’, and even if it did fall, this would merely exacerbate the depression by reducing consumption. Non-Walrasian Economics (1939) John Hicks was recognized for his analysis of the IS–LM model, which is an important macroeconomic model. IS refers to the goods market for a given interest rate, while LM means money market for a given value of aggregate output or income. Post-Keynesian Economics (1940 and 1950s) This Era saw the development of rules and regulations of different private and public institutions. This period introduced major post-Keynesian, neoclassical economists, whose views are known as the post-Keynesian “mainstream economics”. This period welcomed various economists like Paul A. Samuelson, Kenneth J. Arrow, James Tobin and Lawrence Klein, to mention some recognized leaders; and others are Joan Robinson; and Michael Kolechi. Another stream of thought was introduced by liberal market post-Keynesians, mainly the monetarists, led by Milton Friedman. New Classical Economics New Classical Economics highlighted the importance of adherence to national expectations hypothesis and analysis, which included various economic phenomena in formulating different kinds of studies and new theories in economics. This development in economics is applicable to concerns of developing countries, and was largely an outcome of concern for the growth of developed countries. The great economists like Smith, Ricardo and Malthus addressed this problem. Discussion Questions 1.Describe how scarcity affects the economic system of a certain country. 2. Differentiate positive from normative economics by utilizing simple examples. 3. Identify distinguish economist and the importance of their works. 4. Differentiate microeconomics from macroeconomics. 5. Explain opportunity cost using you own example/experience. End of Module I