ECON NOTES.pdf

ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Why do we need to study economics? - Part of our daily life. - helps you to think strategically and make decisions to optimize the outcome. - enables people to understand people, businesses, markets, a...

ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Why do we need to study economics? - Part of our daily life. - helps you to think strategically and make decisions to optimize the outcome. - enables people to understand people, businesses, markets, and governments, and, therefore, better respond to the threats and opportunities that emerge when things change. - Infinite scarcity - Scarcity means there's not ECONOMICS enough of something for everyone who wants it. It happens when the demand for a A social science essential for managing scarce resources to satisfy unlimited human resource, like food, water, or wants and needs. time, is greater than the supply. Because things are limited, Economics study the choices we make and people have to make choices also the consequences of these choices. about how to use them. Scarcity is why we can't have everything Study of how people use their limited we want all the time. resources to fulfill unlimited wants and need. This graph shows the concept of scarcity using a seesaw as a metaphor. Two branches of economics On the left side (downward side): It represents human wants. We want a lot of things, like food, Microeconomics fun, travel, homes, cars, and - Study of small individual economic more. This is described as units. "virtually limitless" because there - Households, firms, and industries is no end to what people may making choices desire. On the right side (upward Macroeconomics side): It represents the resources - Studies the segregate behavior of available to fulfill those wants, the entire economy like land, labor, capital, and - Unemployment, inflation, GDP, enterprise (businesses and international trade innovation). However, these resources are limited. There's only so much land, workers, money, and innovation available at any given time. ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Seesaw imbalance: The fact that Taxes also help redistribute wealth to the left side is heavier (pushed reduce economic inequality and provide down) shows that human wants social safety nets. Additionally, they enable are infinite and always growing, the government to invest in projects that stimulate economic growth and stability. while the right side is lighter because the resources are Life blood of the economy. limited and can't meet all these demands. This diagram represents the circular flow of the economy, showing how money, Summary: goods, services, and resources move between different players in the economy: People have endless wants and desires, but the resources (land, labor, money, Individuals (households), Businesses etc.) to satisfy those wants are limited. (firms), Government, and the Markets This imbalance is the core of (Product and Resource Markets). scarcity—why we can't always get Here's a simple explanation of each part: everything we want. 1. Individuals (Households): The Circular Flow They supply resources (like labor, land, capital) to businesses through the resource market. In return, they earn income (wages, rents, etc.). They demand goods and services from the product market and spend their income on them. 2. Businesses (Firms): Businesses demand resources (labor, capital) from the resource market to produce goods and services. They pay households for these resources (wages, rents, etc.). They supply goods and services to the product market and earn Micro level - business to product market revenue when households and individuals buy those goods and Macro level - government services. Individuals pay taxes Businesses pay taxes Product market is following the rules 3. Markets: and regulations of the government Product Market: This is where Governments need taxes to fund public goods and services are exchanged. services and infrastructure, such as Individuals spend their money here education, healthcare, and transportation. ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 to buy things, and businesses sell Economics Resources their products here. Resource Market: This is where businesses get the resources (labor, Used in the production of goods capital, etc.) they need. Individuals (tangible) and services (Intangible) supply these resources, and Classified as land (asset), businesses pay for them. labor(expenses), capital(equity), and enterprise 4. Government: Scarce relative to the unlimited wants The government collects taxes from both individuals and businesses. In Asset - resource with economic value that return, it provides public goods (like an individual, corporation, or country owns infrastructure, defense) and transfer or controls with the expectation that it will payments (like social security or provide a future benefit. unemployment benefits). A liability is something a person or It also provides subsidies to company owes, usually a sum of money. businesses and regulates the economy. Liabilities are settled over time by transferring economic benefits, including Circular Flow Summary: money, goods, or services. Money Flow: Individuals earn Capital - can also be associated with a income by supplying resources, company’s assets that require significant which businesses use to produce capital to finance or expand. Capital can be goods. Individuals then spend their held through financial assets or raised from income on these goods, providing debt or equity financing. businesses with revenue. Taxes are collected by the government, which redistributes money in the form of public goods and transfer payments. Goods and Resources Flow: Individuals provide resources to businesses, and businesses provide goods and services to individuals. This cycle continuously keeps the economy running. ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 future price increases. These one-time speculations drive up demand for a short period but still add to the overall list of wants. In short, these factors contribute to why people always seem to want more, even though resources are limited. 4 FACTORS AFFECTING UNLIMITED HUMAN WANTS Population: As the number of people grows, so do the BASIC ECONOMICS CONCEPTS wants. More people means more needs for food, housing, clothing, and other goods and services. The larger the population, the 1. Scarcity- economic resources are limited more demand there is for resources. compared to wants which are unlimited Changing Tastes and Preferences: scarcity – impossible to satisfy our unlimited wants with the limited resources People's desires change over time due to trends, technology, and culture. For wants always exceed the limited resources example, someone might want the latest smartphone or a new style of clothing. Peoples’ wants are greater than the These shifts in preferences create new economy’s ability to produce desirable wants and keep increasing demand for goods & services newer things. Arises because human wants for goods & Income: services are infinite but the resources required to produce them are finite. When people earn more money, they often want to buy more or better things. A higher a relative concept – resources are not income means people can afford more scarce in themselves, they are scarce in luxury items, vacations, or better-quality relation to the demands placed upon them products, leading to even more wants. a universal problem as it applies to all One-time Speculations of Consumers: economies Sometimes people make sudden or no country in the world has enough temporary decisions to buy things based on resources to produce specific reasons, like a sale, a fad, or fear of ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 enough goods & services to completely - The government decides to build a satisfy all the wants of its people. hospital, so the school must be forgone/sacrificed (opportunity cost) always exists and cannot be eliminated, it - Every choice involves a sacrifice or can be only reduced. trade-off - Choosing more of one thing means 2. Choice giving up something else in exchange because of scarcity, we cannot fulfill all - It is a direct result of scarcity and wants and must choose from the available occurs every time choice is made alternatives. - This is a real cost, the cost of an item not in terms of money, but in Choice is necessary because resources can terms of the resource, good or be used in lots of ways to make different service that had to be given up to goods & services. obtain that item. The only way unlimited wants can be reconciled with limited resources is through choice Economic Systems As there are insufficient resources to satisfy - All nations face the problem of all wants, choices must be made at all scarcity levels i.e. individual consumers, producers, - They have insufficient resources to and the government. produce all the goods & services which their citizens need and want As scarcity is universal, everyone must - An economic system is a system choose which attempts to solve the basic economic problem of scarcity. They have to address three basic questions 3. Opportunity cost the second best alternative forgone after making a choice. the second best-foregone alternative. Example: - Government has a piece of vacant land to be used either to build a hospital, a school, or a sports center (scarcity). - Because the land is enough for only one project, then choice must be made from the alternatives available (choice). ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 WHAT TO PRODUCE? Traditional Economic system Means choosing the mix of goods & services to produce Traditional economy is a system where goods production and distribution are driven Example: Should the economy devote by culture, and traditions. The barter system resources to health and education or is characteristic of traditional economies. defense and police? In 2022, The World Population Review HOW TO PRODUCE? labeled Brazil, Haiti, Alaska, Yemen, Canada, and Greenland as traditional Who will do the production and which economies. Most conventional economic method of production will be used. systems are found in Asia, Africa, Latin America, and the Middle East. Should the economy use labor-intensive technique and everyone has a job or use more efficient methods of production that involve the use of machines even if this Planned (Command) Economic System means fewer jobs? (Socialism) FROM WHOME TO PRODUCE? Means who will consume the goods & there are no price signals, so planners services after they have been produced cannot accurately forecast which products will be needed or adapt to changing How will we decide who receive the output? conditions. This means that there may be unnecessary shortages or surpluses of Should an economy be geared to provide certain goods. goods & services to every person as equally as possible or should those who work hard The government owns all resources get more? What to produce? – producing more public What is the best method of distributing goods like roads, public schools, and public products to ensure the highest level of hospital wants are met? Types of Economic Systems 1. Traditional economy 2. Command Economy 3. Market economy 4. Mixed economy ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 - land, labor, capital, management Technology, education, and training is fixed. Revisiting SCARCITY Do we always face scarcity? Unlimited wants and desires and limited resources It forces us to make choices (Rational choices) All choices involves making sacrifices. We CHAPTER CHECKLIST have to give up the next best alternative when we make a choice There are no free Use the production possibilities frontier to lunches in economics. illustrate the economic problem and calculate opportunity cost. OPPORTUNITY COST 1. Define PPF and Opportunity cost 2. Explain how people gain from specialization and trade. One of the pervasive effects of scarcity Cost of giving up an alternative by selecting the next best choice PPF The more we have goods, the more we sacrifice those other things. Production Possibilities Frontier (PPF) In The opportunity cost is important in the field of macroeconomics, it is the point PPF because a country will decide at w/c economy is most efficiently producing how to best allocate its resources its goods and services in a given time according to its opportunity cost period, and therefore allocating its resources in the best way possible. TRADE-OFF What are some of the assumptions - is often expressed as opportunity used to explain production PPF? cost. - involves a sacrifice that must be Why make assumptions? made to obtain a desired product or experience. - Simplify complex situation - Understanding the trade-off for every decision you make helps ensure that Easy to understand by focusing on key you are using your resources variables of interest while keeping all other (whether it's time, money or energy) background variables constant. wisely. (Ceteris Paribus) Available resources are fixed and fully employed. ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 OPPORTUNITY COST SUPPLY AND DEMAND: PRICE AND QUANTITY DETERMINATION IN COMPETITIVE What is Opportunity cost? MARKETS - The next best alternative sacrificed when a decision is made What is the opportunity Cost of attending this class? - Ask yourself, if you did not attend this class, what is the next best activity you would have done? - Spending time with your family and friends - Watching TV MAIN POINTS Revisiting rational choice and inventives DEMAND SUPPLY Rational Choice and Incentives EQUILIBRIUM / DISEQUILIBRIUM - A rational choice is one that uses the available resources to most Circular flow of economic activity effectively satisfy the wants of the person making the choice. The circular flow of economic activity You make a decision that does not make shows the connection between firms and you worse off households in input and output markets. - Cost: What You Must Give Up - Opportunity cost What is demand? - The highest-valued alternative forgone. It is the relationship between quantity demand and price, within a specific period. Or it is the relationship between the maximum willingness to pay in return for something of value Buyer has the marginal benefit, can buy though it is not a need. May pambili kaya bibili. ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Input Markets and Output Markets Individual vs. Market demand Market demand is the horizontal sum of individual demands It is market demand that commands our interest A competitive market offers homogenous products, meaning the goods and services offered are identical. Quantity demanded Quantity demanded is the amound (number Output, or product, markets are the of units) of a product that a household markets in which goods and services are would buy in a given time period if it could exchanged. buy all it wanted at the current market price. Input markets are the markets in which resources: Demand in output markets Labor Capital land Used to produce product are exchanged. Payments flow in the opposite direction as the physical flow of resources, goods, and services (counterclockwise). Input Markets Input markets include: Labor market in which households supply work for wages to firms that demand labor. A demand schedule is a table showing Capital market in which households supply how much of a given product a household their savings, for interest or for claims to would be willing to buy at different prices. future profits, to firms that demand funds to buy capital goods. Demand curve are usually derived from demand schedules. Land market in which households supply land or other real property in exchange for rent.  ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 The Demand curve The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices. The Law of Demand The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price. This means that demand curves slope downwards. - Increase in price, decrease in demand - Decrease in price, increase in demand Demand vs quantity demanded ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Determinants of Household Demand A household’s decision about the quantity of a particular output to demand depends on: The price of the product in question The income available to the household The household’s amount of accumulated wealth. The prices of related products available to the household. The household’s tastes and preferences. The household’s expectations about future income, wealth, and prices. Other properties of demand curves - Demand curves intersect the quantity (X)-axis, as a result of time limitations and diminishing marginal utility. - Demand curves intersect the (Y)-axis, as a result of limited Demand Determinants incomes and wealth. Income and Wealth Income is the sum of all households wages, salaries, profits, interest payments, rents and other forms of earnings in a given period of time. It is a flow measure. Wealth, or net worth, is the total value of what a household owns minus what it owes. It is a stock measure. qD = f [quantity demand is dependent on the ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Related Goods & Services An inferior good is the opposite of a normal good. - Cheap substitute Normal goods experience an increase in demand when incomes increase. - Necessities Normal goods are also called necessary goods. Luxury goods - They are not deemed essentials or necessities to live. - These goods are highly desired and can be purchased when a consumer’s income rises. - Purchasing luxury goods depends on a consumer’s wealth or assets. Inferior goods - Describes a good whose demand drops when people’s incomes rise. - These goods fall out of favor as incomes and the economy improve as consumers begin buying more costly substitutes instead. - When incomes are low, or the economy contracts , inferior goods become a more affordable substitute for a more expensive good. - I.e. taking a bus vs. driving a new car ELE PE - PRINCIPLES OF ECONOMICS 1st Semester | A.Y. 2024– 2025 Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect substitutes are identical products. Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa. Shift of demand vs. Movement along a demand curve - A change in demand is not the same as a change in quantity demandedx. - In this example, a higher price causes lower quantity demanded. - Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from Da to Db.