BAC101 Prelim PDF

ECONOMICS 11. Fixed roadways - Congestion on roadways can create delivery delays and with a scarcity of land available to build new is a social science i...

ECONOMICS 11. Fixed roadways - Congestion on roadways can create delivery delays and with a scarcity of land available to build new is a social science in the sense that it helps us to understand roadways or railways in certain areas. how human beings behave and organize their activities to meet individual or society’s needs (needs, clothing, shelter), and Alternatives - The different alternative usages of scarce productive wants (knowledge, education, and others). It is defined as the resources widen the possibility of producing different kinds of study of how societies use scarce productive resources to goods and services. produce goods and services and to allocate them to satisfy individual and society’s needs and wants in a given period of Allocation - The scarcity of productive resources limits the amount time. of goods and services produced to be allocated. It hinders to meet all the needs and wants/desires of individual and the society since it THE ROLE OF ECONOMICS TO HUMAN LIFE is limited and not enough. Allocation then should meet the most important needs and wants. 1. Budgeting: Understanding economics helps individuals and households to make informed decisions about their budgets, Efficiency means is the best effective use of scarce productive including how much to save, spend, and invest. resources to satisfy human needs and wants. 2. Purchasing: Economics influences the prices of goods and services we purchase, including factors such as supply and Economic efficiency means that the economy produces the highest demand, inflation, and taxes. combination of quantity and quality of goods and services given the 3. Employment: Economics affects employment opportunities, availability of technology and resources. including job growth, wages, and benefits. It also helps Opportunity Cost It is the cost of giving up or sacrificing the next individuals to understand how to navigate the job market. best thing or the value of goods and services foregone. It is also 4. Investment: Economics provides individuals with the tools to considered forgone opportunity that of course due to our decisions make informed investment decisions, such as understanding made. Example, in deciding whether going to work or going to how financial markets work and the risks and returns college study, whichever you choose, the forgone value of the other associated with different types of investments. is what we call opportunity cost. 5. Globalization: Economics helps individuals to understand the impact of globalization, including the effects of international MARGINAL COSTS AND BENEFITS trade, migration, and the global economy on their daily lives. 6. Public policy: Economics is also important in shaping public An individual, in deciding, makes comparison of the cost and policy, including decisions about taxes, government spending, benefits. The consideration of marginal (additional) cost and and regulations that affect individuals and businesses. marginal (additional) benefits in choices made occurs due to the presence of scarcity. SCARCITY IN ECONOMIC RESOURCES Example: if you are going to buy or produce additional (extra) unit of item A, you should consider the additional (extra) cost The limited amount of resources, such as land, labor, and benefits obtained from such additional unit of A, if the entrepreneurial ability, and capital, available for use to satisfy marginal cost exceeds the marginal benefits, then it is not human needs and wants. Scarcity of economic resources works beneficial or satisfactory otherwise it is beneficial or through the interaction of demand and supply. The limited satisfactory. resources of oil are an evident that price fluctuates dramatically when supply falls. Extremely high pricing can reduce the REASONING/LOGIC OF ECONOMICS demand as a response. Economists rely on the scientific method in obtaining and Scarcity of resources includes: analyzing data and information about economic behaviors and operations, such method includes observation, formulation of 1. Land – there is scarcity in land area where population can grow hypothesis, establishing theories from those observation and food, raise livestock, develop housing and infrastructure. hypothesis, then combining those theories to make models. Conversion of agricultural land to industrial will lead to food Market Equilibrium is an economic model scarcity, depletion of forests reduces the availability of lumber Economic theories are statement of generalization relating to for housing construction. economic behaviors and economic operations. Economists 2. Housing: Housing can become scarce for certain populations, formulate theories using ceteris paribus assumption which regions or nations. Housing shortages can also happen during means other-things-equal (constant) assumptions, and most times of natural disasters, like fires, hurricanes and tornados. models are presented graphically. 3. Overuse of natural resources: Property rights and Example: Supply and Demand Theory is a microeconomic environmental protections often establish restrictions to theory that offers an economic model for price determination prevent the overuse of a body of water, land parcel, forest or which states that the price of goods and services vary until it animal. settles at economic equilibrium. 4. Commodities - Natural resources like gold, oil, silver and other fossil fuels are naturally rare. Other commodities, like THE LOGIC OF ECONOMICS diamonds, command a high price because of their limited availability and control of their market. 1. The post hoc policy. The policy involves the inference of 5. Water - Water scarcities can also happen through improper or causality. The post hoc policy occurs when we assume that, poor maintenance of infrastructure, like the pipes for a city's because one event occurred before another event, the first water supply, for example. event causes the second. 6. Labor - labor shortage when there is not enough of a certain 2. Failure to hold other things constant. It is a second pitfall when skill set, like doctors, nurses, teachers, pilots or engineers, for thinking an issue. For example, we might want to know example. Undereducated populations and labor strikes can also whether rising tax raise will raise or lower tax revenue. They result in a labor scarcity. argue that cutting rate will increase government revenue and 7. Healthcare - The healthcare industry experiences shortages in decrease budget deficit. Why is this reasoning fallacious? limited number of hospital beds and healthcare workers, Because peoples’ incomes grew during that period, total tax medical supplies, prescriptions and medications, like the annual revenues grew even though tax rates were lower. flu vaccine, are also prone to scarcity issues. 3. The fallacy of composition. Sometimes we assume that what 8. Seasonal shortages - Another seasonal shortage comes from holds true for a part of a system also hold true for the whole. In consumer demand, like purchasing holiday gifts. economics, however, we often find that the whole is different 9. International Diplomacy - An embargo or tariff on imports from from the parts. another country can cause a scarcity of the products or Here are some of the true statements that you will also consider the resources, along with border disputes, inflation rates and fallacy composition: government or international organization regulations. 10. Weather and Natural Resources - harsh climates can If one farmer has plenty of crop, she has a higher income; if all experience delayed shipments or deliveries of goods and farmers produce a record crop farm income will drop. services, causing temporary scarcities in communities.  If one person receives a great deal more money, that person product and resource prices that guide participants (resource will be better off; if everyone receives a great deal more owners, producers, consumers) as they make choices to pursue money, the society will be worse off. their self-interest. 6. Technology and Capital goods – With the presence of POSITIVE ECONOMICS VS. NORMATIVE ECONOMICS competition, freedom of choices, self-interest, and personal benefits in market system create an environment conducive for Positive economics describes and explains various economic innovation, discovery, and invention which lead to phenomena. Positive economics is based on fact and cannot be technological advancement and economic development. approved or disapproved (inflation rate, unemployment rate, 7. Specialization – is the use of resources to produce one or few consumer spending). good or services instead of wide range of goods and services. Normative economics focuses on the value of economic Human Specialization – is the use of labor resources fairness, or what the economy “should be” or “ought to be”. to produce one or few good or services instead of Normative economics is based on value judgment (the wide range of goods and services. government should offer basic healthcare for all people, the Specialization fosters learning by doing – to devote government should not discriminate against any citizen). time to a single task leads to a better skills and THE THREE PROBLEMS OF A FIRM upgraded techniques than working in different tasks. Specialization saves time – in doing single task, a 1. What commodities are produced and in what quantities? A person can do more with less time consumption and society must determine how much of each of the many possible save time in doing task they are trained thus avoids goods and services it will make and when they will be less error or work repetition. produced. Will business firm have produced pizza or shirts 8. Use of money – the extensive use of money being a medium of today? A few high quality shirts or many cheap shirts? exchange facilitates many economic activities. 2. How are goods produced? A society must determine who will 9. Active but limited Government – the participation of do the production, with what resources, and what production government increases overall effectiveness of the market they will use. Who farms and who teaches? Is electricity system such as how to correct market failures and others. generated from coal, or from oil or from sun? Will factories be run by people or robots? FACTORS OF PRODUCTION 3. For whom are goods are produced? Is the distribution of 1. Land – more generally natural resources. It consists of land for income and wealth fair and equitable? How is the national farming or underpinning houses, factories and roads; the product divided among different households? Are many poor people and few rich? energy resources that fuel our cars and heat our homes; and the non-energy resources like copper and iron ore and sand; TYPES OF ECONOMY environmental resources, such as clean air and drinkable water. 2. Labor – consists of the human time spent in production and the 1. Market economy is one in which individuals and private firms skills and knowledge used. It is the most crucial input for an make major decisions about the production and consumption. advanced industrial economy. 2. Command economy is one in which the government makes all 3. Capital – resources form the durable goods of an economy, important decisions about production and distribution. The produced in order to produce other goods. Capital goods include government owns most of the means of production (land, labor machines, roads, computers, software, trucks, steel mills, and capital); it also owns and directs the operation of automobiles, washing machines, and buildings. enterprises in most industries; the government is the employer of most workers. A command economic system is also called THE CIRCULAR FLOW OF ECONOMIC ACTIVITY socialism or communism. Some of the countries that use 1. Households are owners of factors of production-land labor, command economic systems are Russia, China, Cuba, North capital and entrepreneurial ability. They sell the services of Korea, Turkmenistan, Laos, Belarus, Libya, Myanmar, and Iran. these factors of production and receive income in return in the 3. Mixed economy – is a combination of command and market form of rent, wages, and interest and profit respectively. economy. Most decision are made in the market place, 2. Firms or producers decides on the goods and services to be however the government is an overseer in the functioning of market and pass law that regulate economic life. manufactured, it employs factors of production and makes payments to their owners and makes profit as they satisfy the Characteristics of the Market system wants and needs of consumers. 3. Government plays the key role in the type of economic 1. Private property – there is a presence of strong right of private systems-market(capitalist), socialist and mixed. property associated with freedom to negotiate binding legal contract that enable owners to obtain, use, and dispose of THREE MAIN ECONOMIC ACTIVITY property resources as they choose. The owners can also Production, consumption and exchange are the three main designate to whom are they going to leave behind their activities of the economy. Consumption and production are property in case they die. Property rights are extended to flows which operate simultaneously and are interrelated and intellectual property through patents, copyrights, and interdependent. Production leads to consumption and trademark which are long-term protections. consumption necessitates production. Production is a means 2. Freedom of enterprise and choice and consumption is the end of all economic activity. Both Freedom of enterprise- entrepreneurs and private production and consumption depend upon exchange. businesses are free to acquire and use economic resources to produce and market goods and services. SCARCITY AND CHOICE Freedom of choice- owners can either employ or dispose their property and money as they choose. The scarcity of physical resources is more fundamental than the 3. Self-interest – is an individual’s motive to achieve their own scarcity of funds. specific goal. It is the motivating force that makes people Hard choices-such us keeping our home cooler in summer and exhibit their free choices. saving gas by living closer to our homes. 4. Competition – It is the exercise of the freedom of choice in pursuit of monetary gain. Competition exists because of THE PRINCIPLE OF OPPORTUNITY COST Either two or more buyers or two or more sellers Opportunity cost is the value of the next best alternative that is acting independently in a particular product or given up. resource market. The freedom of sellers and buyers to enter or exit BUDGET LINE OR BUDGET CONSTRAINTS markets in accordance to their own economic self- interests. 1. Attainable and unattainable combinations of good and services 5. Market and prices - Market is a mechanism that brought seller 2. Trade off and opportunity cost and buyer together, the decisions conveyed in the market that 3. To make choices among different goods and services was made between buyers and sellers are determine by a set of 4. People capacity to purchase goods and services depends on Demand Schedule is a table showing how quantity demanded of their income. some product during a specified period of time changes as the price of that product changes, holding other determinants of quantity KNOWING GRAPHS IN ECONOMICS: demanded constant. Graph is a visual representation of the relationship between two SHIFTS OF THE DEMAND CURVE variables. A shift in quantity demanded curve occurs when any relevant Consumption and Income: shows that the direction of the arrow of variable other than price changes. These are the non-price the line goes up, means that consumption and income has direct determinants: changes in population size, consumer income, relationship (positive relationship) as income increases the taste and preferences, price of alternative/substitutes. If consumption increases. Positively or directly related variables has an consumers want to buy more at any and all given prices than up sloping line in graphs. they wanted previously, the demand curve shifts to the right Price and Quantity: shows the arrow of the line goes down, means (outward). If they desire less at any given price, the demand that that there is an inverse relationship between the two variables curve shift to the left (inward). (price and quantity) as price decreases the quantity increases, NON-PRICE DETERMINANTS moving in opposite directions. An inverse relationship of variables is shown in graphs as a down sloping line. 1. Consumer income Increase in income normally shift the demand curve outward to the right, as people get richer they DEPENDENT VARIABLE AND INDEPENDENT VARIABLE are able to buy things that they enjoy. Commodities whose Independent variable is the variable that changes first or the cause, quantity demanded increases as incomes rise and prices do not while Dependent variable is the effect or the variable that changes change are called normal goods. (ex. branded clothes rather because of the change in the independent variable just like in graph than second hand, macaroni and cheese rather than bread). A, the income is the independent variable while consumption is the 2. Population – a larger population will consume more goods, dependent variable. The graphing of income and consumption in does the shifting of the entire demand curve to the right. A graph A conforms with mathematical convention. decrease of population will shift the demand curve to the left. 3. Consumer preferences – If goods mount a successful SLOPE OF A LINE advertising campaign, consumers may buy more at any given price, the entire demand curve will shift to the right The slope of a straight Line is the ratio of the vertical change (rise or 4. Prices and Availability of Related Goods- Because chicken, pork drop) to the horizontal change (the run) between any two points of and fish are popular products that compete with beef, if any of the line. these alternatives items are cheaper, some consumer will Example: switch away from beef. Thus the demand curve for beef will shift to the left. Positive Slope SHIFT OF THE SUPPLY CURVE Slope= vertical axis / horizontal axis = 5 / 10 = ½ =.5 The quantity supplied in a market typically responds to many.5 being positive means the two variables involved are directly influences other than price. related. In the production of beef, variety of other factors influences Negative slope how much beef will be brought to the market; the weather, the cost of feed, the number and size of farms, the technology use Slope + vertical axis / horizontal axis = -10 / 4 = -2 ½ = -2.5 in the production. -2.5 being negative means the two variables involved have an A change in the price of the good causes a movement along a inverse relationship. fixed supply curve. Prices is not the only influence on quantity supplied, however. If any of these other influences change, the Infinite and Zero Slopes: Many variables have no relationship with entire supply curve shifts. one another. NON SUPPLY DETERMINANT 1. Size of the Industry – If more farmers enter the beef industry, the quantity supplied at any given price will increase. 2. Technological Progress- Technological progress that reduces the costs will shift the supply curve outward to the right. Automakers, for example, have been able to reduce production costs since industrial technology invented robots that can be programmed to work on several different car models. This SUPPLY AND DEMAND ANALYSIS technological advance has shifted the supply curve outward. 3. Prices of Inputs (cost of production) – Increase in the prices of The law of supply and demand is the fundamental tool of inputs that suppliers must buy will shift curve inward to the left. economic analysis. Economists use supply and demand analysis Decreases in the prices of inputs that suppliers must buy will to study issues as diverse as inflation and unemployment, the shift the supply curve outward to the right. effects of taxes on prices, government regulation on business, 4. Prices of Related Output – Sometimes production of one thing and environmental protection. also involves the production of other goods. The resources use MARKET is a mechanism through which buyers and sellers to produce one product can easily be shifted to the production interact to determine prices and change goods, services and of another product. A change in the price of one good produced assets. by a multiproduct industry may be expected to shift the supply The central role of the market is to determine the price of curves of other goods produced by the industry For example, a goods. A price is the value of goods in terms of money. Prices shoemaking company may be able to switch its production line serves as signals to producers and consumers. from shoes to boots, and a farmer may be able to switch his planting from wheat to barley. Quantity demanded is the number of units of a good that consumers are willing and can afford to buy over a specified period of time. The MARKET EQUILIBRIUM quantity demanded of any product normally depends on is price. Quantity demanded also depends on a number of other If consumers want more of any good, the price will rise, sending determinants, including population size, consumer incomes, tastes a signal to producers that more supply is needed. and preferences and the price of other products. Quantity The higher price encourages farmers to increase their demanded and its relationship to price is inverse other things held production of beef and, at the same time, encourages equal. consumers to substitute other foods for hamburgers and beef products.  If more computer programmers are needed to run internet business, the price of computer programmer (their hourly rate) will tend to rise. THE INVISIBLE HAND Adam Smith, the father of modern economics has shared his enthusiasm for the concept of the invisible hand. The invisible hand is a metaphor for the unseen forces that move the free market economy. For example, people are unhappy with the prices produced by free markets and thought they could do better by legislative decree and government offered protection of a variety of price controls. Laws have place price ceiling on some prices to protect buyers, whereas legislations has place floors under other prices to protect the sellers. SUPPLY AND DEMAND EQUILIBRIUM In a free market, price and quantity are determined by the intersection of the supply and demand curves. Equilibrium Market Price – it is the price agreed by the seller to offer its good or service for sale and the buyer willingness to pay for it. WHAT HAPPENS WHEN THERE IS MARKET DISEQUILIBRIUM? Surplus – Is a condition in the market where the quantity supplied is more than the quantity demanded. This means that there is a downward pressure to price when there is a surplus in order to restore equilibrium in the market. Shortage - A shortage is an excess of quantity demanded over quantity supplied. A shortage occurs below the equilibrium point. When there is a shortage of goods and services, there is an upward pressure to prices to restore equilibrium in the market. For as long as there is disequilibrium in the market, prices will still go up until such situation is normalized. PRICE CONTROLS Price controls is the specification by the government of minimum or maximum prices for certain goods and services when the government considers it disadvantageous to the producer or consumer. Price controls may be applied across wide range of goods and services as part of prices and incomes policy aimed at combating inflation. TWO TYPES OF PRICE CONTROL 1. Floor Price is the legal minimum price imposed by the government on certain goods and services. A price at or above the price floor is legal; a price below it is not. The setting of a floor price is undertaken by government if a surplus in the economy persists. Floor price is a form of assistance to producers by the government for them to survive in their business. Floor price is mainly imposed by the government of agricultural products especially when abundant harvest or the labor market by imposing minimum wages. 2. Price Ceiling is the legal maximum price imposed by the government. A price ceiling is usually below to the equilibrium price, for example P20.00. In most cases, a price ceiling is utilized by the government if there is a persistent shortage of goods (basic commodities like food items and oil products) in the economy. As such, the prices of goods affected by a shortage do not increase persistently. Because of this, the government regularly monitors the market and imposes a maximum price on commodities, which is to be strictly followed by producers and seller. A price ceiling therefore is imposed by government to protect consumers from abusive producers or sellers who take advantage of the situation. This is usually done by the government after the occurrence of a calamity like typhoon or severe flooding or pandemic