QBA4 - Basic Microeconomics PDF

QBA4 - Basic Microeconomics Ten Principles of Economics WEEK 2: OVERVIEW OF ECONOMICS 1. People Face Trade-offs 2. The Cost of Somethi...

QBA4 - Basic Microeconomics Ten Principles of Economics WEEK 2: OVERVIEW OF ECONOMICS 1. People Face Trade-offs 2. The Cost of Something Is What You Give Up to Get It ECONOMIST & THEIR THEORIES 3. Rational People Think at the Margin Adam Smith – Father of Modern Economics 4. People Respond to Incentives Laissez-faire or Let Alone Policy - (a French phrase that 5. Trade Can Make Everyone Better Off translates to “allow to do.”) means separation of roles between 6. Markets Are Usually a Good Way to organize Economic the market sector and government in terms of economy. Activity David Ricardo 7. Governments Can Sometimes Improve Market Outcomes Law of Diminishing Marginal Returns - increasing a factor of 8. A Country’s Standard of Living Depends on Its Ability to production in the input doesn’t equate to the output ( input ≠ Produce Goods and Services output) 9. Prices Rise When the Government Prints Too Much Money Law of Comparative Advantage - The principle tells that a 10. Society Faces a Short-Run Trade-off Between Inflation and country should produce its specialized goods which have the Unemployment lowest opportunity cost (specialized/advantage) and trade for goods in the country that are produced less efficiently Economic Resources Thomas Robert Malthus 1. Land - refers to natural resources used to produce goods and Malthusian Theory – exponential growth of population vs services. sources or supply 2. Labor - is the work and time for which employees are paid John Maynard Keynes – Father of Modern Theory of 3. Capital - is all means of production (mainly plant and Employment & Father of Macroeconomics equipment) created by people. Keynesian Economics – a relationship of investment and 4. Entrepreneurial ability - is the ability to recognize a business business to employment opportunity and successfully set up a business firm to take Government intervention through their expenditure to the advantage of it. economic balance Karl Marx – Father of Communism Full Production – when our nation’s resources are being Equity of people in society. allocated in the most efficient manner possible. The government should own the factor of productions Full Employment - when a society’s resources are all being used with maximum efficiency ECONOMICS Underemployment - is the failure to use our resources - “oikonomos” means Household Management efficiently. - is the efficient allocation of the scarce means of production toward the satisfaction of human wants. Economic Models Economics As A Science 1. Production possibilities frontier - represents our economy at 1. Statement of the Problem full employment and full production. a. production possibilities 2. Hypothesis making curve represents a two-product economy at full employment. 3. Data gathering procedures 2. The Circular-Flow Diagram - a visual model of the economy 4. Interpretation and analysis of data that shows how dollars flow through markets among 5. Conclusion and recommendation households and firms Scope Of Economics Positive vs Normative Economic Analysis 1. Microeconomics - the study of how households and firms 1. Positive economic analysis - claims that attempt to describe make decisions and how they interact in markets what exists and how things work 2. Macroeconomics - the study of economy-wide phenomena, 2. Normative economic analysis – claims to attempt to prescribe including inflation, unemployment, and economic growth. courses or actions to yield an outcome Concepts of Microeconomics Fallacies in Making Models and Theories 1. Opportunity costs - what must be sacrificed when a choice is 1. Post hoc fallacy - Relating two or more events as if the first made. event causes the other events to happen 2. Supply and Demands 2. Ceteris paribus assumption - the failure to hold things 3. Elasticity constant. It occurs when generalizing events as if all are the same 4. Market equilibrium and the results are predictable. 5. Profit maximization 3. Fallacy of composition - simply states that what is true to a component is true to the entire thing. Shortage – a situation in which the quantity demanded is greater than the quantity supplied WEEK 3: THE MIXED ECONOMY Scarcity – the demand for a good or service is greater than the The Four Economic Questions availability of the good or service 1. What to Produce? - Deciding which goods and services should be produced. Hierarchy of Needs by Abraham Maslow 2. How to Produce? - Determining the methods and processes for 1. Physiological Needs production. 2. Safety Needs 3. For Whom to Produce? - Deciding who gets 3. Love and Belonging Needs the products and services. 4. Esteem Needs 4. How to Manage Economic Growth and Stability? - deals with 5. Self-Actualization Needs strategies to ensure long-term economic stability and growth  ECONOMIC SYSTEMS - Maintains our competitive system and ensures the relatively Command Economy - An economic system where the unfettered operation of the law of supply and demand. Barriers government or central authority makes all decisions about to competition are sometimes broken down by the government production and distribution. Central Planning: The Government plans and controls all Market Failure economic activities. - An external cost occurs when the production or consumption Public Ownership: Resources and businesses are owned by the of some good or service inflicts costs on a third party without state. compensation. No Market Prices: Prices and production quotas are set by the - An external benefit occurs when some of the benefits derived government. from the production or consumption of some good or service are Market Economy - An economic system where decisions about enjoyed by a third party. production and consumption are driven by the market and consumer preferences. Command-and-Control Regulations Private Ownership: Individuals and businesses own resources - The incentive to pollute is much stronger than the incentive to and goods. curb pollution. Price Mechanism: Prices are determined by supply and demand. - Government failure is the misallocation of resources in Limited Government Role: Minimal government intervention in the public sector. economic activities. Mixed Economy - An economic system that combines elements of both market and command economies. Capitalism ( e.g. South Korea, USA ) Coexistence: Both private and public sectors play roles in the - an economic system in which most economic decisions are economy. made by private owners and most of the means of production Regulation and Intervention: The government regulates and are privately owned. intervenes in certain sectors while allowing market mechanisms Communism ( e.g. Vietnam, Laos, North Korea) to operate in others. - an economic system characterized by collective ownership of Welfare State: The government may provide public goods and most resources and central planning. services such as healthcare and education. - Most of the countries are under dictatorship. Traditional Economy - An economic system that relies on Fascism customs, traditions, and historical methods to make economic - an authoritarian form of government under which the political decisions. leaders dictate what the owners of the privately held means of Custom-Based: Economic roles and practices are based on production will produce. tradition and customs. - The idea of fascism is to allocate the most budget to the Subsistence: Typically involves subsistence farming or hunting; government or in military movements then the latter will be on production is for personal use rather than for profit. the the private owners. Community Focus: Emphasis on community and family, with Socialism little emphasis on individual wealth. - an economic system in which the government owns most of the productive resources except labor; it usually involves the The Circular Model Players redistribution of income ➔ Households - China (self-declared) ➔ Business ➔ Government WEEK 4: SUPPLY AND DEMAND PRICE CEILING ➔ Financial Sectors a legal maximum on the price at which a good can be sold PRICE FLOOR CONCEPTS RELATED TO ECONOMIC MODELS a legal minimum on the price at which a good can be sold LAW OF SUPPLY AND DEMAND The INVISIBLE HAND - was coined by Adam Smith and referred the claim that the price of any good adjusts to bring the quantity to one’s self-interest, which guides a person to promote the supplied and the quantity demanded for that good into balance social interest, however unintentionally. EQUILIBRIUM PRICE MECHANISM - It determines the price and quantity sold a situation in which the market price has reached the level at which of nearly every good and service. quantity supplied equals quantity demanded COMPETITION - It makes the price system work. It is EQUILIBRIUM PRICE the rivalry among business firms. the price that balances quantity supplied and quantity TRUST - capitalism is based on trust. Lenders expect borrowers demanded to pay them on time and in full. Sellers ship goods or provide EQUILIBRIUM QUANTITY services in advance of payment. the quantity supplied and the quantity demanded at the EFFICIENCY - the conditions under which maximum output is equilibrium price produced with a given level of inputs. SURPLUS EQUITY - fair distribution of wealth and income a situation in which quantity supplied is greater than quantity across a society, wealth is distributed in a way that provides demanded everyone with a basic standard of living. SHORTAGE a situation in which quantity demanded is greater than quantity Role of Government supplied - provides the legal system under which our free-enterprise economy can operate. It enforces business contracts and defines the rights of private ownership.  WEEK 5: SUPPLY AND DEMAND 3. A student decides to spend their weekend working a part-time DEMAND job instead of studying for a major exam. As a result, they earn Quantity Demanded - the amount of a good that buyers are money but get a lower grade on the exam. The lower grade willing and able to purchase represents what economic concept? Law Of Demand - the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. 4. An investor believes that just because a certain stock has risen Demand Schedule- a table that shows the relationship between in price for five days in a row, it will continue to rise indefinitely. the price of a good and the quantity demanded What fallacy is this an example of? Demand Curve - a graph of the relationship between the price of a good and the quantity demanded 5. A politician argues, "The government should increase the minimum wage to ensure that all workers can live a dignified (Determinants of Demand) life." This statement is based on values and opinions. What type Changes in: of economics does this represent? Consumer Expectations Consumer Tastes or Preferences 6. To keep bread affordable for everyone, the government sets Income a maximum price that bakers can charge. However, many bakers Prices of Related Goods find that producing bread at such a low price is not profitable, so - Substitutes they produce less, leading to empty shelves in grocery stores. - complements What is this an example of? The Number of Consumers 7. A major recession hits, leading to widespread job losses and a Normal good - a good for which, other things equal, an increase significant decrease in household incomes. Consumers cut back in income leads to an increase in demand on spending for non-essential items like vacations and entertainment. What determinant of demand is this? Inferior good- a good for which, other things equal, an increase in income leads to a decrease in demand 8. As consumers expect future prices of gasoline to increase, they begin purchasing more now to avoid higher costs later. This Substitutes - two goods for which an increase in the price of one leads to a temporary spike in gasoline sales. Which determinant leads to an increase in the demand for the other of demand is influencing consumer behavior? Complements - two goods for which an increase in the price of 9. A company that produces both smartphones and laptops one leads to a decrease in the demand for the other notices a rising demand for laptops, prompting the firm to allocate more resources toward laptop production. This SUPPLY reallocation of resources is an example of how firms respond to Quantity Supplied- the amount of a good that sellers are willing what economic question? and able to sell 10. A country decides to implement a free-market system with Law of Supply - the claim that other things equal, the quantity minimal government interference, based on the idea that supplied of goods rises when the price of the good rises individuals acting in their self-interest will result in the best outcomes for society. Which economist's theory is this country Supply Schedule - a table that shows the relationship between applying? the price of a good and the quantity supplied. 11. A new video game console is released, and both consumers Supply Curve - a graph of the relationship between the price of and producers agree that Php 400 is a fair price where the a good and the quantity supplied. quantity demanded equals the quantity supplied. What concept does this represent? (Determinants of Supply) Changes in: 12. A small island nation specializes in producing and exporting Producers Expectations coconuts, but it must import most of its manufactured goods. Government Policies This specialization is part of what larger global economic Technology principle? Prices of other goods produced by the firm The Number of Producers 13. The government of a developing country decides to invest Input Prices more in infrastructure to stimulate job creation and economic growth. Which economic resource is primarily being enhanced 1. A local bakery bakes 500 loaves of bread daily. However, due by this investment? to an unexpected increase in population, there are 700 customers wanting to buy bread. The bakery is unable to meet 14. After a new fashion brand launches a popular line of clothing, the demand, and many customers leave empty-handed. What is they produce too much inventory, leading to piles of unsold this situation an example of? goods. They are forced to hold a clearance sale to reduce stock. What type of market condition is the company experiencing? 2. A community must decide how to allocate its limited land resources between building more schools or constructing new 15. A government introduces a progressive tax system where hospitals. This situation illustrates which fundamental economic higherincome individuals pay a larger percentage of their problem? income in taxes, aiming to reduce inequality. This is an example of a policy focused on which economic principle? 16. A country can produce either 100 units of wheat or 50 units 9. Which of the following represents a leftward shift in the of steel using its available resources. If it wants to produce more supply curve? steel, it must reduce wheat production. What economic concept A. A decrease in the price of inputs. does this trade-off illustrate? B. An improvement in production technology. C. An increase in government regulation that raises production 17. A politician claims that "what is true for a part of the costs. economy is always true for the whole economy." However, D. A decrease in consumer demand. economists argue this is not always the case. What economic 10. What might happen to the equilibrium price if both the fallacy is being committed here? demand and supply curves shift to the right? 18. In a particular country, the government controls all major industries and allocates resources, while consumers and private businesses have little influence on production decisions. What type of economic system is this? 19. A family wants to maximize their limited income to cover housing, food, education, and entertainment expenses. To achieve this, they must prioritize necessities over luxuries. What economic concept is this an example of? 20. When the prices of raw materials like steel rise, car manufacturers must adjust by producing fewer cars, as higher input costs make production more expensive. Which curve in the car market is affected? 1. What is the initial equilibrium price and quantity in the market? 2. Which could cause the shift in the demand curve in this scenario? A. A decrease in consumer preference for the product B. An increase in production costs C. A decrease in supply D. An increase in consumer preference for the product 3. After the demand curve shifts rightward, what happens to the equilibrium price and quantity? 4. Which of the following could be a possible reason for the rightward shift in demand? A. A decrease in the price of substitute goods B. A advertising campaign that increases consumer desire C. A decrease in consumer income for normal goods D. An increase in production technology 5. If the government imposes a tax on production, how would the supply curve likely shift? 6. What happens to the price when there is a simultaneous increase in demand (shift to the right) and decrease in supply (shift to the left)? 7. At the new equilibrium after the demand shift, how would consumer surplus likely be affected? 8. If the government sets a price ceiling below the new equilibrium price, what would happen in the market?