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REVIEWER (MACRO) Introduction to Economics APPROACHES AND METHODS IN ECONOMICS ➤ THE METHODOLOGY OF ECONOMICS ➤ECONOMICS: Its Meaning, Nature and Importance - model building...

REVIEWER (MACRO) Introduction to Economics APPROACHES AND METHODS IN ECONOMICS ➤ THE METHODOLOGY OF ECONOMICS ➤ECONOMICS: Its Meaning, Nature and Importance - model building in Economics The study of how societies choose to use scarce productive resources that have alternative uses, to produce Model - is a theory. It is composed of a number of commodities of various kinds, and to distribute them among assumptions from which conclusions or predictions are different groups. (Samuelson) deduced. The study that deals with how scarce resources are Economics being a science is a systematic body of knowledge. allocated to maximize the unlimited wants that individuals and It uses scientific methods in gathering data, analyzing the data societies want to fulfill. (Hashim Ali) and making conclusions. ➤ NOTIONS Political Economy - concerned with the relationship between politics and economics with emphasis on the role of power in economic decision-making. Positive Economics - deals with facts and avoid value judgment. It is concern with WHAT IS. Normative Economics - involves someone’s value judgment about what the economy should be liked. It is concern about WHAT OUGHT TO BE. ➤ THREE TOOLS IN ECONOMICS ➤ NATURE OF ECONOMICS Graphical - a graph is a diagram 1. It is a social science that shows relationships between 2. It is related to the other sciences and cannot be numbers. divorced from them. 3. It is an inexact science. ➤ DIVISION OF ECONOMICS Mathematical - its application to Macroeconomics - deals with the economic behavior of the economic analysis are found in the field whole economy or its aggregates such as government, of arithmetic and geometry which are business and household. useful tools in explaining phenomena. Microeconomics - deals with the economic behavior of individual units such as the consumers, firms and the owners of the factors of production. Statistical - used to determine the validity of economic hypotheses. ➤ THE PROBLEM OF SCARCITY Basic Problems and Economic Systems Scarcity may be defined as the imbalance between our desires and the means of satisfying those desires (Medina, 2003). Others view scarcity as a commodity or service being in ➤ THE BASIC ECONOMIC PROBLEM short supply, relative to its demand (Viray, et al. 2011). The fundamental economic problem is the issue of Scarcity. The problem of scarcity has given birth to the science A situation where there is not enough to satisfy of economics; the science that studies how men work to everyone’s wants. overcome scarcity. From the resources point of view, we may Choices must be made about how resources will be define economics as the study of efficient allocation of scarce used and understanding scarcity requires recognizing resources. that every choice involves sacrificing another option (Opportunity Cost). ➤ IMPORTANCE OF THE STUDY OF ECONOMICS 1. To form the habit of accurate observation and correct ➤ FACTORS OF PRODUCTION OR ECONOMIC interpretation of present economic trends and RESOURCES development 2. To understand our country’s agricultural, industrial Land - Refers to natural resources used in and commercial problems as they affect our production, including minerals, forests, and water. economic life and progress Labor - Refers to any form of human effort used in 3. To gain knowledge of how to conserve our individual producing goods and services. and national wealth Capital - Represents manufactured resources used in 4. To know how our government raises, controls and production, including machinery, tools, buildings, and utilizes public money other infrastructures. 5. To know what should be done to help make an Entrepreneurship - Refers to the ability to organize, independent Philippine economy sound operate, and risk factors of production for production. ➤ POINTS TO REMEMBER! Basically, when we talk about Economics, we speak of ➤ GOODS AND SERVICES making decisions considering that economics is Economic Goods - A product that requires defined as the study of choices that individuals and resources for production and thus has an opportunity societies make. cost. Examples include food, shelter, and medical Economics is both a positive and normative science. services As a social science, it is related to the other sciences Free Goods - A product that does not require any and can never be divorced from them. As an inexact resources for producing it, which means it has no science, it can never claim universality of its laws. opportunity cost. Examples are air, sunlight, and The term “ceteris paribus” which means “other ocean water. things being equal” is an assumption used by Consumer Goods - Yield satisfaction directly economists to qualify the validity of economic laws. (clothing and food) Three important tools are utilized in economics Capital Goods - Used in production of other goods namely: Graphical, Mathematical and Statistical. and services (Buildings, machinery and equipment) The problem of scarcity is the central problems of economics and the reason why people economize. It ➤ BASIC ECONOMIC QUESTIONS refers to the limitations that exist in obtaining all the These questions form the basis of all economic ideas and goods and services that society wants. theories on which individuals, businesses, and governments rely when making informed decisions about the allocation of resources. What To Produce? - This refers to the process of deciding TYPE OF ECONOMIC SYSTEMS which commodities and services an economy should prioritize. These choices have an important effect on resource ➤ ECONOMIC SYSTEM allocation, economic growth, and general population An economic system is a means used by societies or well-being. governments to organize and distribute the available resources, services and goods within their territory or their How To Produce? - When producing goods and services, it's neighboring countries. important to choose the right method based on factors like product type, market demand, and available resources. Economic systems are the basis in regulating the factors of Common methods include mass production, batch production, including land, capital, labor, and physical production, and job production, which are designed for resources. unique or low-demand items. Traditional Economic System For Whom To Produce? - This refers to the process of - A traditional economic system isn't primarily based deciding which commodities and services an economy should on money rather it relies on the traditional customs prioritize. These choices have an important effect on resource and beliefs of the people. Traditional economies are allocation, economic growth, and general population mostly based on hunting, fishing and gathering. In well-being. this type of system, there is no surplus, and bartering is their only way to exchange goods. What Provision Should Be Made For Economic Growth? - To encourage economic growth, numerous major Advantages: requirements must be adopted, including inclusive policies, human capital investment, infrastructure development, and Little conflicts among members entrepreneurial encouragement. Equal sharing of labors Eco friendly ➤ BASIC DECISION PROBLEMS To determine how to use resources wisely and properly, Disadvantages: society must address several fundamental decision problems: Exposed to changes in nature and weather patterns Consumption - It determines what type of the goods and Less Efficient services they want to utilize, considering their preferences, budget constraints, and the opportunity cost of their spending Capitalism Economic System choices. - is an economic system based on the private ownership of an individual, organization or Production - It determines the wants, needs and demands of companies that mainly focus on generating profits. consumers and decide how to allocate their resources to meet Since it is privately owned, owners can effectively run them. their business aligned to their interests. The prices of the goods are determined by the competition in the Distribution - It involves the government's responsibility to free market. allocate resources effectively for the benefit of society. Advantages: Growth Over Time - It is a fundamental decision for a Efficient production society, requiring societal considerations like choice, Consumer Sovereignty consumption, production, and distribution to ensure Has freedom long-term economic development and sustainable means. Disadvantages: Monopolies No government intervention Create gaps between rich and poor Communism Economic System Circular Flow of Economic Activity - also known as command economy, is an economic system that the government solely controls including the production of goods, investments, prices ,and ➤ ECONOMIC UNITS incomes. It has no freedom unlike capitalism. The economic units refer to a group of individuals who share income and expenditure in a national Advantages: economy. Social Welfare Units are fundamental entities influencing economic Low unemployment rates concepts through their responses or decisions. Stability Within an economic system, the fundamental activities of production, consumption, and exchange Disadvantages: are executed by two primary economic units, namely Inefficient resource allocation the firm and the household. No economic freedom Lack of innovation ➤ TWO ECONOMIC UNITS Household Socialist Economic System They are defined as individuals or groups living together - is a type of economic system that promotes equality under one roof. among its members. Every person in the community A vital economic unit that actively participates in the has an equal share of various elements of economy's consumption and exchange of goods and services productions, distributions, and exchange of resources. Firm Advantages: It is established by entrepreneurs who utilize the economic Equality resources to manufacture goods and services to make them No exploitation accessible in the market. A vital economic unit that actively participates in the Disadvantages: economy's production and exchange of goods and services. Lack of innovation Slow economic growth ➤ WHAT IS ECONOMIC ACTIVITY? Economic activity is any action that contributes to an Mixed Economy System economy's overall functioning and development: there - It is the combination of capitalism and socialism. It activities, include production, consumption, and employment. allows individuals or organizations to have private ownership, but the government may interfere in Production - Generate goods and services that economic activities. satisfy consumer desires. Employment - The utilization of economic Advantages: resources in production. Human resources. Has high efficiency Consumption - The final output of goods and Has freedom services that is ready immediate usage Consumer sovereignty Stability ➤ DIFFERENCE OF STOCK AND FLOW Innovation VARIABLES Disadvantages: Stock - An economic variable is considered a stock if it is Excessive taxation quantity measured at a particular point in time. Large disparity gaps between poor and rich Examples are money, capital, wealth, labor force, assets, loans, population, and bank deposits. Income inequality Flow - An economic variable is considered a flow if it is ➤ THE CIRCULAR FLOW OF OUTPUT AND quantity measured over a period of time. INCOME Examples are income, expenditure, gross domestic product (GDP), interest on capital, interest on loan, depreciation, and Two-Sector Model capital formation. (Circular Flow of Physical Goods and Money Income) ➤ CIRCULAR FLOW OF OUTPUT AND INCOME - The economy is divided into households and firms, The circular flow model illustrates the movement of with no government or foreign trade. money, goods, and services between economic sectors, - Households provide factors of production to firms creating a continuous cycle. and buy goods/ services from them. Firms produce goods/services and pay wages to households Monetary Flow (cash payments) Real Flow (factors and goods/services) ➤ FOUR MACROECONOMIC SECTORS Household Sector - All the individuals in the economy. - Provide the factors of production. Firm Sector - All business entities, corporations , and partnerships. - Produce goods and services for sale in the market and make factor payments to the household sector. Four-Sector Model Government Sector (The Circular Flow of Goods and Income of Households and - The center, state, and local governments. Firms with the Government and Foreign Countries) - Regulate the functioning of the economy. - Incorporates the government and foreign sector, - Incurs both revenue as well as expenditure. making it an open economy. Foreign Sector - Includes exports and imports affecting the economy - Transactions with the rest of the world. - Foreign trade implies net exports (exports minus imports). - Export and Import ➤ THE THREE MACROECONOMIC MARKETS Product Market - Goods or Output Market - Gross Domestic Product Financial Market - Legal Claims - it represents ownership of physical assets (capital and THE MULTIPLIER EFFECT AND THE other goods) CIRCULAR FLOW Resource Market - Factor markets ➤ THE MULTIPLIER EFFECT - used by the business sector to acquire the factor Refers to the proportional increase or decrease in final income services needed for production that results from a change in spending or investment. Measures the impact of changes in economic activity on total economic output  The Multiplier Effect is a concept in economics that Investment = 1/1-MPC describes how an initial change in spending can lead to a larger change in overall economic activity. Equity Multiplier - A company’s financial leverage. It highlights the interconnectedness of economic Formula: transactions and the ripple effects. Equity Multiplier = Total assets/Total equity The multiplier effect refers to the proportional amount of an increase, or decrease, in final income Earning Multiplier - Relation between stock price and that results from an injection, or withdrawal, of earnings spending. Formula: The money supply multiplier is also another variation Earning Multiplier = Stock price/Earnings per share(EPS) of a standard multiplier, using a money multiplier to analyze effects on the money supply. ➤ IMPACT OF MULTIPLIER EFFECT ➤ UNDERSTANDING THE MULTIPLIER EFFECT - Estimate the broader impact of capital investments Economic Growth on economic growth. - Boost economic growth by amplifying initial - Multiplier = Change in Income / Change in spending. Spending. - Example: If a $100,000 investment leads to a Direct and Indirect Impacts $200,000 increase in income, the multiplier is 2. This - Initial spending leads to further spending by others, means every $1 invested generates an extra $2 in generating more economic activity and income. income. - Estimate the broader impact of capital investments Multiplier and MPC(Marginal Propensity to Consumer) on economic growth. - MPC: Proportion of income spent on consumption. - Multiplier = Change in Income / Change in Higher MPC increases the multiplier effect Spending. - Multiplier = 1/(1 - MPC). For MPC of 0.8, multiplier - Example: If a P100,000 investment leads to a is 5. P200,000 increase in income, the multiplier is 2. This means every $1 invested generates an extra P2 in Is a High Multiplier Good? income. High multipliers = higher economic output and growth ➤ TYPES OF MULTIPLIER EFFECT Efficient currency circulation Increased economic activity Money multiplier - How banks increase money supply through lending. Causes of Multiplier Effect Formula: Can result from economic analysis, public, policy, or Money Multiplier = 1/Reserve Requirement Ratio corporate decisions. Policies may limit the multiplier effect to manage Deposit Multiplier - How banks create more deposits financial stability. through lending. Formula: ➤ CIRCULAR FLOW Deposit Multiplier = 1/Reserve Requirement Ratio The model represents the economy as a continuous cycle of money flow between different sectors. Fiscal Multiplier - Impact of government spending on GDP. Formula: Limitation of Circular Flow Fiscal Multiplier = 1/1-MPC Static Representation Impact of Changes Investment Multiplier - Effect of investment spending on Complexity aggregate income. Formula: ➤ INFLOWS AND OUTFLOWS Foreign Exchange Inflows - Movement of money, capital, or goods into a - When a country or business uses its foreign country or economy from external sources. exchange reserves to pay for imports, repay foreign debt, or for investments abroad. Factors that decrease the level of economic activity include savings, taxes, and imports. Trade - Represent payments made to foreign entities Managing inflows offers more flexibility. Effective policy for imported goods and services. implementation allows the government to promote exports, - When a country imports more than it attract investments, and boost spending whenever it aims to exports, it experiences trade outflows, stimulate economic activity. contributing to a trade deficit. Capital Financial Institutions - Foreign investments. (Foreign Direct - Customer withdrawals Investment, Foreign Portfolio Investment, - Loan repayments, or investments in other Foreign Loans. markets. - Funding Infrastructure projects, Business Expansion etc. Circular Flow Reflecting the Inflow and Outflow Remittances - Money sent by workers abroad to their home country. Trade - Goods and services that a country imports from other countries. - Return foreign goods and currency. Tourism and Services Analysis of Demand, Supply and Market - Money Spent by foreign tourists or on services provided internationally brings Equilibrium financial inflows into an economy. Outflows - the movement of money, resources, or capital Demand Schedule and Demand Curve leaving a particular economy, organization, or system The demand for a product refers to a schedule of the various Factors that increase the level of economic activity include quantities of commodities which an individual is willing and investment, government spending, and exports. able to buy Managing outflows poses a challenge since they are contingent The demand schedule shows the different price and quantity on income levels. As income rises, it's anticipated that savings, demanded combinations. tax payments, and import expenditures will also rise. ➤ LAW OF DEMAND Capital There are many factors affecting demand and these - Movement of financial capital out of a determinants of demand include population, income, country, often due to investors seeking better consumer's taste or preferences, price expectations and price returns or lower risks in other countries. of related goods. - Can weaken a country's currency and its financial markets. There are two reasons for the law of demand showing the inverse relationship between price and quantity demanded. - these are known as income effects and substitution effects. Ceteris Paribus Assumption Supply Curve a Latin phrase which means "all other things are held The supply curve is the graphical representation of constant. " It is a key assumption in Economics. Economists the supply schedule. It depicts the exact prices and quantities qualify the validity of economic laws/principles by making use in the supply schedule. of this assumption. Any point on the supply curve reflects the quantity that will be supplied at a given price Changes in Demand vs. Changes in Quantity Demanded This movement from one point to another point along the demand curve is described as a change in quantity demand or a movement along the demand curve. Change in Supply vs. Change in Quantity Supplied As reflected in Figure 3, a seller is willing to sell 6 units of a commodity at a given price of P6 and a rise in price Change in Demand and to P10 results in a corresponding increase in quantity supply Shift in the Demand Curve to 10 units. Any of the non-price This movement from one point to another point determinants of demand has along the supply curve is described as a change in quantity the effect of changing demand supply or a movement along the supply curve. or shifting the demand curve. A shift of the demand curve rightward represents an increase in demand while a shift leftward represents a decrease ➤ LAW OF SUPPLY Factors such as technology, After analyzing the relationship between the price of number of sellers, cost of a product and the quantity of it being supplied, it can be production, etc. have the effect of deduced that increase in price of a product results in a rise in changing supply or shifting the its quantity supplied while decrease in price will result in a supply curve. A shift of the corresponding decrease in quantity supplied. supply curve rightward represents an increase in supply while a shift This is the statement of the Law of Supply expressing leftward represents a decrease. the direct relationship between price and quantity supply. Supply Schedule ➤ DEMAND FUNCTION Supply is defined as a schedule of the different A demand function is a mathematical equation which quantities of commodities which sellers are willing to sell at expresses the demand of a product or service as a function of different alternative prices. the price and other factors such as the prices of the substitutes The supply schedule shows the quantities that are and complementary goods, level of income, taste and offered for sale at various prices. preferences, population, etc. Demand function, when expressed as a mathematical function, can be shown as: Qd = f (price, income of consumers, price of related goods, taste, etc.) We can come up with the demand equation as:  Qd = a - bP A is P10.00. The intercept of the supply curve is 50 while the Where: slope is 2.5. To determine how much of commodity A will be Qd = quantity demanded at a particular price supplied by sellers, we can simply substitute the given values a = intercept of the demand curve (the value of the Qd when to our equation,thus: the Price is equal to zero) Qs = a + bP = 50 + 2.5(10) = 50 + 25 b = slope of the demand curve (the rate of change between Qs = 75 the variables of Price and Qd) P = price of the good at a particular time period Suppose that the price of commodity A will increase to P14.00,what will now be the new quantity supplied by To illustrate the demand function using a hypothetical sellers? Again, substituting the given values to the equation, example, assuming that the current price of commodity A is we can now solve for the new quantity supplied as follows: P10.00. The intercept of the demand curve is 50 while the Qs = a + bP = 50 + 2.5(14) = 50 + 35 slope is 2.5. To determine how much of commodity A will be Qs = 85 demanded by consumer X, we can simply substitute the given values to our equation,thus: Qd = 50 - 2.5(10) ➤➤ Qd = 25 Price Control Suppose that the price of commodity A will increase When market disequilibrium happens, a situation to P14.00, what will now be the new quantity demanded by where supply exceeds demand (surplus) resulting to a possible consumer X? Again, substituting the given values to the lose for producers; or demand exceeds supply (shortage) equation, we can now solve for the new quantity demand as where the likelihood that consumers will be abused – such follows: situation warrant the intervention of the government Qd = 50 - 2.5(14) = 50 - 35 especially if the market disequilibrium persists at longer period Qd = 15 of time. The government may intervene by imposing price controls. ➤ SUPPLY FUNCTION Price Ceiling A supply function is a form of mathematical notation are maximum prices set by the government for linking the dependent variable, quantity supplied (Qs), with particular goods and services that they believe are being sold various independent variables which determine quantity at too high of a price and thus consumers need some help supplied like price of the product, number of sellers, purchasing them. technology, price expectations, taxes etc. Price Floor We can therefore transform the statement in a mathematical are minimum prices set by the government for certain function as follows: commodities and services that it believes are being sold in an Qs = f (price, number of sellers, technology, price unfair market with too low of a price and thus their producers expectations, taxes, etc.) deserve some assistance. Given the supply function, the supply equation can be derived as: Qs = a + bP Where: Qs = quantity supplied at a particular price a = intercept of the supply curve b = slope of the supply curve P = price of the good sold Using a hypothetical example, the supply equation can now be illustrated. Supposed that the price of commodity ➤ SUMMARY Demand and Supply Interaction - The price of a commodity changes based on demand and supply. Higher demand or lower supply increases prices, while lower demand or higher supply decreases prices. Demand and Supply Curves - The demand curve slopes downward, showing that higher prices lead to lower demand. The supply curve slopes upward, indicating that higher prices lead to higher supply Price Changes - Changes in price cause movements along the demand or supply curves. Government Price Controls - To manage market imbalances, the government may set minimum (floor) or maximum (ceiling) prices for goods and services. ➤ CHANGE IN SUPPLY VS. CHANGE IN QUANTITY SUPPLIED Change in Supply Refers to a shift of the entire supply curve. Happens due to factors other than price (e.g., technology, costs). For example: Improved technology increases overall supply Change in Quantity Supplied Refers to movement along the supply curve. Happens due to changes in the product's price. For example: If price increases, quantity supplied increases.