Economics Review PDF

**MANECON** **[ECONOMICS]** - Social science, needs and wants, produce various commodities, proper allocation - Often associated with wealth and finance, **but it is not all about money** - How society individuals and societies make decisions about **ways to use scarce resource...

**MANECON** **[ECONOMICS]** - Social science, needs and wants, produce various commodities, proper allocation - Often associated with wealth and finance, **but it is not all about money** - How society individuals and societies make decisions about **ways to use scarce resources to** **fulfill wants and needs, and their choices** **2 types of economics** a. **MACROECONOMICS** - Large scope; mission in national state - Study of production, employment, prices and policies on a national scale - Looks at the economy as a whole (a nation's output, unemployment, inflation, interest rates, government spending and growth - Ex. **International trade** b. **MICROECONOMICS** - Small parts; within the individuals - Study of how consumers, workers and firms to interact to generate outcomes at the individuals and business levels - Ex. **A local bakery deciding what goods to sell or you choosing to buy one product over another** **THREE PROBLEMS IN ECONOMICS** 1. **What to Produce** - Economy of every nation has to take a fundamental decision what to produce because of the limited resources - Depends on what type of goods and services to produce 2. **How to Produce-** alternative techniques of producing goods and services 3. **For Whom to Produce-** target market **Fundamental problem is SCARCITY** (unlimited wants and needs but limited resources) **Choices** - Know how to spend money, time and energy so we can fulfill our needs and wants - *WE MUST MAKE CHOICES! WHY?* **Resources, goods, and services are limited** **NEEDS AND WANTS-** both understood as psychological factors that drive human behavior **Needs-** individuals' basic requirement that must be fulfilled in order to survive **Wants-** desires for things that go beyond basic necessities (designer clothes, cars, luxuries) **Trade-offs** -- choose one thing which causes you to have give up or sacrifice another **Opportunity Cost-** Things we give up or don't do because we choose something else **FIVE BASIC ECONOMIC PRINCIPLES** 1. **Economic Choices Involve Costs** - Most basic understanding about economic choice is that **all choices have a cost** - Many of our decisions are made "**at the margin"** 2. **Incentives Influence People's Decisions** - Incentives (monetary rewards, subsidies) are factors that motivate people to pursue certain action and discourage others - Affect many types of decisions - Signal to consumers, businesses, workers, savers and investors, and other marketplace participants how they should use their scarce resources 3. **Competitive Markets Promotes Efficiency** - **Market** exists whenever people get together to make an exchange - **A competitive market**- one that brings large numbers of buyers and sellers together for purposes of exchange - Economists consider this to be the most effective type of market structure 4. **Government Interventions Address Market Shortcomings** - Since the Great Depression - Have expanded to provide additional public goods, support economic security and equity for vulnerable, regulate businesses, and stabilize the macroeconomy 5. **Specialization Promotes Productivity and Economic Interdependence** - Occurs when an individual, business, or region produces a specific product or narrow range of products - Promotes business productivity by encouraging the most efficient use of available resources **ECONOMIC SYSTEM** - Societies or governments organize and distribute available resources, services, and goods across a geographic region or country - Regulate the factors of production (land, capital, labor and physical resources) - Encompasses many institutions, agencies, entities, decision-making processes, and patters of consumption that comprise the economic structure of a given community **TYPES OF ECONOMIC SYSTEM** a. **Traditional** - Based on goods, services and work, all of which follow certain established trends - Relies a lot on people and there is very little division of labor or specialization - Very basic and the most ancient of the four types b. **Command** - Dominant centralized authority/ government that controls a significant part of the economic structure - Known as a **planned system** - Common in communist societies since production decisions are the preserve of the government c. **Market** - Based on the concept of free markets - There is a very little government interference - Government exercise little control over resources and doesn't interfere with important segments of the economy - **Regulation comes from the people and the relationship between supply and demand** d. **Mixed** - Combine the characteristics of market and command - Known as **dual systems** - Sometimes, a market system under strict regulatory control **ECONOMIC SCHOOL OF THOUGHT** A. **MERCANTILISM** - Belief that a country's wealth is derived from its ability to accumulate specie- **mainly gold and silver** - Mercantilist policies aimed to maximized a nation's exports while minimizing imports, leading to favorable balance of trade. - Government intervened in economic through **tariffs, subsidies and the establishment of colonies to secure raw materials and markets for finished goods** B. **PHYSIOCRACY** - Challenged the mercantilist view by arguing that agriculture was the sole source of wealth - Physiocrats advocated for policies that would boost agricultural productivity (**minimal government intervention and a single tax on land rent)** C. **CLASSICAL ECONOMICS** - **Adam Smiths, John Stuart Mill, David Ricardo** - Emphasized the role of free markets, individual self-interest, and the division of labor in driving economic growth and prosperity D. **NEOCLASSICAL ECONOMICS** - **Leon Walras, Alfred Marshall, Vilfredo Pareto** - Late 19^th^ century - Introduced mathematical rigor and refined analytical tools to the field - Emphasized the rational behavior of individuals and firms, utility maximization, and the crucial role of prices in coordinating economic activity E. **KEYNESIAN ECONOMICS** - Developed by **John Maynard Keynes** in response to the Great Depression, challenged the classical beliefs in the self- correcting nature of markets - Insufficient demand could lead to prolonged economic downturns and advocated for active government intervention through **fiscal policy** F. **MONETARISM** - Believed that excessive growth in the money supply leads to inflation, while a tight monetary policy can curb inflationary pressures - Generally favored limited government intervention and a rules- based approach to monetary policy - Faced challenges in predicting the velocity of money and has been criticized for its potential to slow economic growth under tight monetary conditions G. **DEVELOPMENT ECONOMICS** - Focuses on the economic transformation and progress of level-developed countries - **Gunnar Myrdal and Amartya Sen** established this field, recognizing the unique challenges faced by these nations in overcoming poverty and achieving sustainable growth. H. **NEW ECONOMIC THINKING** - **Rob Johnson** - The limitations of models that rely on unrealistic assumptions of perfect rationality and market efficiency - Emphasize the importance of considering distributional effects, social impacts, and the role of institutions in shaping economic outcomes **THE CIRCULAR FLOW MODE** **\ ** **PRODUCT MARKET-** the purchases of finished goods and services in an economy **FACTOR MARKET-** resource market; the purchase of resources in an economy **FLOW OF PRODUCTS,RESOURCES, AND MONEY PAYMENTS (UNG PIC)** **Two other flows:** a. **flow of products (goods and services) and resources on the outer circle** b. **flow of money payments on the inner circle** **FACTORS OF PRODUCTION** 1. **Labor** - The human effort that can be applied to the production of goods and services - People who are employed or would like to be are considered part of the labor 2. **Capital** - Has been produced for use in the production of other goods and services - Office buildings, machinery, and tools 3. **Natural resources** - Resources of nature that can be used for the production of goods and services **MANAGERIAL ECONOMICS** - Valuable tool for analyzing business situations - Tool to help managers make better decisions **MANAGERS** - Person who directs resources (whether people, money, machine etc) to achieve a stated goal (growth, revenue, profit) - Directs the efforts of others - Purchases inputs used in the production of output - Directs the product price or quality decisions **ECONOMICS** - Science of making decisions in the presence of scarce (limited) resources - **Resources** are used to produce a good or service - **Economic Decisions** are important because there are trade offs between scarcity and competition **MANAGERIAL ECONOMICS** - Study to understand how to direct scarce resources (capital, assets, people, etc) in the way that most efficiently achieves a managerial goal - **Spencer and Siegelman,** "defined as the **integration of economic theory** with business practice for the purpose of facilitating decision making and forward planning by management" **CHARACTERISTICS OF MANAGERIAL ECONOMICS** 1. Micro-economic in nature 2. Theory of Firm or Economics of Firm 3. Importance of Macroeconomics 4. Applied Approach 5. Perspective Nature 6. Decision Making at Managerial level 7. Coordinating Nature 8. Both Science and Art 9. As a complementary subject 1. Establish the objectives of the organization 2. Identify the problem 3. Examination of potential solutions 4. Analysis of the relative costs and benefits 5. **Sensitive Analysis-** analyze best available alternative under a variety of changes in assumption before making a recommendation 6. Implementation of a decision **ROLE OF PROFITS** **Accounting Profit** - Total amount of money taken in from sales (total revenue) minus the dollar cost of producing goods and services - **Accounting Profit = Sales -- Cost of Producing Goods and Services** **Economic Profit** - Difference between the total revenue (sales) and the total economic cost - **Economic Profit= Total Revenue- Total Opportunity Cost of Producing Goods and Services** **An employee could take a vacation and travel** **Explicit:** the explicit costs would include travel expenses, the cost of hotel room, and cost related to entertainment **Implicit:** relate to tradeoff, namely the wages that the employee could have earned if the vacation was not taken **OBJECTIVE OF THE FIRM** **Shareholder wealth-maximization**- a measure of the value of a form **Shareholder wealth-** equal to the value of a firm's common stock, which, in turn, is equal to the present value of all future cash returns expected to be generated by the firm benefits of its owners **SEPARATION OF OWNERSHIP AND CONTROL** - As sole proprietorships and closely held business grow into **limited liability corp** - Owners frequently delegate decision-making authority to professional managers in an agency relationship - **Manager-agents-** have much less to lose than the owner-principals, the agents seek acceptable levels of profit and shareholder wealth while pursuing their own self-interests. **AGENCY PROBLEM/CONFLICT** a. **Inherent unobservable nature of managerial effort** - Directly observing managerial input is even more unproblematic because managers contribute what one might call **creative ingenuity:** - **To mitigate the agency problems, firms incure severa agency cost** - Cost associated with resolving conflicts on interest among shareholders, managers and lenders. - Include cost of monitoring and bonding performance,cost of constructing contracts to minimize agency conflicts, and the loss of efficiency resulting from unresolved agent-principal conflicts 1. **Payroll expenditures-** to structure executive compensation 2. **Internal audits and accounting oversight boards-** to monitor management's actions 3. **Bonding expenditures and fraud liability insurance-** to protect the shareholders from managerial dishonesty 4. **Lost profits arising from complex organizational structure designed-** to limit managerial discretion **MANAGERIAL DECISION MODELING PROCESS** 1. **Formulation:** Problem formulation, Model construction, Input data 2. **Solution:** Determining and testing the solution 3. **Interpretation:** Analyzing and interpretation of the solution, sensitivity analysis and implementation. 1. Managerial economics is the **[application]** of microeconomic theory and methodology to problems faced by decision makers. It assists the managers in efficiently allocating **[scarce]** resources. 2. Opportunity cost is best defined as: **the amount given up when choosing one activity over the next best alternative** 3. Total Economic Cost= **explicit cost + implicit cost** 4. **Market equilibrium-** condition in the market where the quantity of a good or a service is equal to the quantity demanded 5. When a firm earns zero economic profit, [**total revenue**] equals total economic cost; therefore, **[accounting profit]** is positive 6. **Quantity demanded-** total amount of a good that purchasers wish to purchase at a given price during a given period of time 7. **Shareholder wealth maximization-** primary goal of the firm 8. **Principle of Diminishing Marginal Utility-** good or service decreases as the quantity of the good increases 9. **Cost vs Benefit Analysis-** evaluate the strengths and weaknesses of the projects by evaluating the cost and benefit it will produce 10. If the price of the tea falls and as consequence the demand for sugar rises. Tea and sugar are **complementary goods** 11. **The law of demand hypothesizes that, other things being equal-** the higher the price, the lower the quantity demanded 12. The economic concept of **opportunity cost** is most closely aasociated with **resource scarcity** 13. Managerial economics is best defined as **the study of how managers make decisions about the use of scarce resources** 14. If goods X and Y are substitute and the price of X falls, all other things being equal, the demand curve for Y will **shift to the left** 15. The use of market process in determining the allocation of scarce resources- **we should consider shifting to products where we can earn even more money** 16. **Scarcity-** resources are not able to meet the entire demand for a product 17. Shareholder's wealth can be measured by the **present value** of a firm's future **cash flows** 18. The higher the risk, the **higher** the return WALEY HERE YUNG SA ANO, SUPPLY AND DEMAND **😊☹😉** **CONSUMPTION THEORY** **How can a consumer with limited income decide which goods and service to buy** -- fundamental issue in Microeconomics **3 Distinctive steps to Understand Consumer Behavior/ BASIS OF CONSUMER THEORY** 1. **Consumer Preferences** - To find a practical way to describe the reasons people might prefer one good to another 2. **Budget Constraints** - We take into account the fact that consumers have limited income which restrict the quantities of goods they can buy 3. **Consumer Choices** - Given their preferences and limited incomes, consumers choose to buy combinations of goods that maximize their satisfaction **MARKET BASKET-** quantities or services that a consumers buy each month I. **CONSUMER PREFERENCES** A. **Completeness** - Consumers can **compare and rank all possible baskets**. For any two baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. - **Indifferent-** a person will be equally satisfied with either basket. - **A \> B, B \> A, A\~B** B. **Transitivity** - Necessary for consumer consistency - If a consumer prefers basket A over B and he also prefers basket B over C, therefore **he prefers A over C** C. **Non-Satiation** - **More is better than less**- consumer always prefer more of any good to less **INDIFFERENCE CURVE** - Represent all combinations of market baskets that provide a consumer with the same level of satisfaction **INDIFFERENCE MAP** - Graph containing a set of indifference curves showing the market baskets among which a consumer is different **Characteristics of Indifference Curves** 1. **Negatively sloped/ slopes downward to the right** - when the quantity of one commodity in combination is increased, the amount of the other commodity reduces - to remain the same on an indifference curve 2. **Convex to the Origin** - diminishing **marginal rate of substitution** gives a convex shape to the indifference curve **Marginal rate of Substitution** - maximum **amount of a good that a consumer is willing to give up** in order to obtain one additional unit of **another good**. - measures the value that the individual places on 1 extra unit of a good in terms of another 3. **Do not intersect** **Perfect Substitutes** - Two goods for which the marginal rate of substitution of one for the other is **constant** - two goods are SUBSTITUTES **when an increase in the price of one lead to an increase in the quantity demanded of the other** **Perfect Complements** - When two goods for which the MRS is infinite; the indifference curves are shaped as **right angles** - goods are COMPLEMENTS **when an increase in the price of one leads to a decrease in the quantity demanded of the other** - consumer always wants to consume the goods is **fixed proportion to each other** - indifference curves are **L-shaped** **Utility-** the satisfaction derives from the consumption of a commodity which determines consumption and demand behavior **Total Utility** - **satisfaction derived from the consumption of a commodity** which determines consumption and demand behavior - the total amount of satisfaction derived from consuming foods and services **Marginal Utility** - the change in utility that results from a one-unit increase in the quantity of a good consumed - the additional satisfaction derived from consumption of additional goods and services **II. BUDGET CONSTRAINTS** - constraints that consumers face as a result of limited incomes **Budget line** - all combination of goods for which the total amount of money spent is equal to income **2 important things to be analyzed** - effects of a **change in income** on the Budget line - effects of **change in price** on the Budget line **III. CONSUMER CHOICES** - Consumers **choose goods to maximize the satisfaction** they can achieve, given **the limited budget available** to them **The maximizing market basket must satisfy two conditions:** 1. It must be located on the budget line 2. It must give the consumer the most preferred combination of goods and services **Marginal benefit-** benefit from the consumption of one additional unit of good **Marginal Cost-** cost of additional unit of good **Corner Solutions** - A situation in which the marginal rate of substitution for one good in chosen market basket is not equal to the slope of the budget line