MACROECONOMICS • OPPORTUNITY COST- the highest-value, next- best 2.

Concavity or the bowed out shape of PPF exhibits

alternative that must be sacrificed to attain the law of deminishing returns
THE ART & SCIENCE OF ECONOMIC ANALYSIS something or to satisfy a want.
3. Point I is feasible but inefficient
MEANING OF ECONOMICS PRODUCTION POSSIBILITIES CURVE- a curve representing
all possible combination of total output that could be 4. Point N is infeasible but can be possible if there is
❖ To Cynics, ECONOMICS is common sense made an improvement of technology and others
produced assuming 1. a fixed amount of productive
difficult resources can be added
resources of a given quantity & 2. the efficient use of those
❖ ECONOMICS is a SOCIAL SCIENCE that studies how resources TYPES OF ECONOMIC STATEMENT
people allocate their LIMITED RESOURCES to
OTHER ASSUMPTIONS: Branches of ECONOMICS
satisfy their UNLIMITED WANTS.
1. Only 2 goods are produced in an economy MICROECONOMICS- the study of decision making
❖ RESOURCES things used to produce other things to
satisfy people’s wants. 2. Society has only 3 factors of production: land, undertaken by individuals and by firms
labor & capital, they are fixed but can be
❖ WANTS – what people would buy if their incomes ❖ Effects of increase in the price of gasoline
transferred from one sector to another
were unlimited
❖ Imposition of VAT
3. Technology does not change over the period of
SCARCITY, CHOICE & OPPORTUNITY COST
time specified ❖ Increase in the salary of employees
• SCARCITY- a situation in which the ingredients for
4. All productive resources are fully employed MACROECONOMICS- the study of the behaviour of the
producing the things that people desire are
economy as a whole
insufficient to satisfy all wants LAW OF DEMINISHING RETURNS- STATES THAT AT A
CERTAIN POINT, THE RESULTING ADDITION TO OUTPUT ❖ Inflation
-Scarcity exist because human wants
DECREASES WHEN THE USE OF ONE INPUT IS INCREASE
always exceed what can be produced with the limited
HOLDING THE USE OF ALL OTHER INPUTS CONSTANT ❖ Effects of worldwide economic crisis to our
resources and time that nature makes available
economy
PPF Captures:
• Every CHOICE involves giving up another
❖ GNP growth
opportunity to do or use something else. 1. All points along the frontier represent maximum
possible combination of food and clothing output ❖ National budget
The Economic Problems SCHEDULE & DEMAND CURVE  POPULATION/NO OF CONSUMERS

ECONOMIC SYSTEMS REASON WHY THERE IS A NEGATIVE RELATIONSHIP BET. SHIFT IN Qd DUE TO INCREASE IN Y
PRICE VS. DEMAND
COMMAND ECONOMY SHIFT IN Qd DUE TO DECREASE IN Y
SUBSTITUTION EFFECT- when goods becomes expensive,
• The decisions on how to answer the basic consumers tend to replace it with something cheaper CON’T DETERMINANTS OF DEMAND
economic questions are depends on the political
2. PRICE OF RELATED COMMODITIES
leadership REASON WHY THERE IS A NEGATIVE RELATIONSHIP BET.
PRICE VS. DEMAND SUBSTITUTE GOODS- product that consumers buy as
• The government hand is very visible in this system
replacement of the goods whose price increase
INCOME EFFECT-increase the purchasing power of a
MARKET ECONOMY consumer because of the decrease in price of a commodity Ex.$ pork↑=Qd chicken↑
• The decision on how to answer the questions is SCHEDULE & SUPPLY CURVE COMPLEMENTARY GOODS- Goods that are consumed
decided by individuals via the mechanism of
demand & supply OTHER INFLUENCES THAT DETERMINE OUR PURCHASES together
OR DEMAND /DEMAND SHIFTERS Ex. $ coffee↑=Qd sugar↓
• There is an invisible hand that governs the
economy INCOME(Y) 3. CONSUMER EXPECTATION
DEMAND & SUPPLY A. NORMAL GOODS PRODUCTS FOR WHICH DEMAND A CONSUMER WHO EXPECT SHORTAGE OR SHARP PRICE
IS POSITIVELY RELATED TO INCOME INCREASE IN THE COMING WEEKS
YOU CAN MAKE EVEN A PARROT INTO A LEARNED
ECONOMIST – ALL IT MUST LEARN ARE THE 2 WORDS B. INFIRIOR GOODS- GOODS THAT ARE USUALLY AN EMPLOYEE WHO WILL BE TERMINATED DUE TO HIS
“DEMAND” AND “ SUPPLY” PATRONIZED BY LOW EARNING CONSUMERS CONTRACTUAL STATUS
-ANONYMOUS  INCOME CON’T DETERMINANTS OF DEMAND
MARKET EQUILIBRIUM  PRICE OF RELATED COMMODITIES  CONSUMER TASTES & PREFERENCES
DEMAND  CONSUMER TASTES AND PREFERENCES Ex. Candles during all saints day
SUPPLY  CONSUMER EXPECTATION demand for new models of cell phone
  NUMBER OF CONSUMERS MARKET EQUILIBRIUM • PRICE ELASTICITY OF DEMAND- MEASURE OF HOW
MUCH THE QUANTITY DEMANDED OF A CERTAIN
Many buyers will increase demand for a certain GOVERNMENT INTERVENTION GOOD CHANGES AS A RESULT OF A RELATIVE
goods
MINIMUM PRICE POLICY CHANGES IN ITS PRICE
DETERMINANTS OF SUPPLY • RATIO OF THE PERCENTAGE CHANGE IN QUANTITY
FLOOR PRICE/ PRICE SUPPORT- MUST BE SET ABOVE THE
 RESOURCE PRICE EQUILIBRIUM PRICE DEMANDED TO THE PERCENTAGE CHANGE IN
PRICE
 PRICE OF RELATED GOODS IN PRODUCTION EXAMPLE ARE AGRICULTURAL PRICE SUPPORTS AND
MINIMUM WAGES ELASTIC DEMAND
 TECHNOLOGY
BEING DONE TO HELP THE PRODUCERS • THE PERCENTAGE CHANGE IN QUANTITY EXCEEDS
 PRODUCERS EXPECTATION THE PERCENTAGE CHANGE IN PRICE
MAXIMUM PRICE POLICY
 NUMBER OF SELLERS • THE GOODS ARE MORE RESPONSIVE TO CHANGE
PRICE CEILING/ PRICE CONTROL- IMPLEMENTED WHEN IN PRICE
 WEATHER PRICES OF CERTAIN ITEMS ARE SAID TO BE TOO HIGH.
• CHARACTERISTIC OF ELASTIC GOODS
INTERACTION BET. SUPPLY & DEMAND LEGALLY ESTABLISHED MAXIMUM PRICE FOR A GOOD OR
SERVICE 1. THOSE WHICH HAVE NUMEROUS CLOSE
MARKET EQUILIBRIUM- A CONDITION WHICH IMPLIES A
SUBSTITUTE Ex. Banana, Cellphone
BALANCE BETWEEN DEMAND AND SUPPLY EXAMPLE ARE RICE AND RENTED DWELINGS
2. THOSE WHICH ARE CONSIDERED AS LUXURIES Ex.
EQUILIBRIUM PRICE-THE AMOUNT FIRMS WANT TO BEING DONE TO HELP THE CONSUMERS Expensive perfume, jewelry
SUPPLY MATCHES EXACTLY BY THE AMOUNT CONSUMERS
WANTS TO BUY. MARKET SUPPLY & DEMAND FOR CORN 3. LIMITED USE Ex. Laurel, banana blossoms

EQUILIBRIUM QUANTITY- MARKET CLEARING AMOUNT 4. TIME FRAME UNDER CONSIDERATION Ex.
Rambutan during its season
SURPLUS- A SITUATION WHERE QUANTITY SUPPLIED IS THE CONCEPT OF ELASTICITY
GREATER THAN QUANTITY DEMANDED INELASTIC DEMAND
• ELASTICITY-THE MEASURE OF RESPONSIVENESS OF
SHORTAGE- A SITUATION WHERE QUANTITY DEMANDED QUANTITY DEMANDED OR SUPPLIED TO CHANGES
IS GREATER THAN QUANTITY SUPPLIED IN PRICE,INCOME OR PRICE OF RELATED GOODS
 • THE PERCENTAGE CHANGE IN THE QUANTITY • They can not decrease their prices otherwise they Supply is said to be inelastic to price if the percentage
DEMANDED IS LESS THAN THE PERCENTAGE will loose their profit change of quantity supplied is less than the percentage
CHANGE IN PRICE change in price.
PERFECTLY INELASTIC DEMAND
• CHARACTERISTICS OF INELASTIC GOODS Ex. Goods that are difficult to produce
• BUYERS ARE WILLING TO MAINTAIN THE
1. THOSE WHICH HAVE NO SUBSTITUTE Ex. QUANTITY OF THEIR DEMAND WHETHER THE PERPECTLY ELASTIC SUPPLY
Electricity, Gasoline PRICE INCREASED OR DECREASED
Supply is perfectly elastic to price if buyers can demand
2. THOSE WHICH PEOPLE CONSIDER AS NECESSITIES • Ex. Insulin, coffin any amount of these goods without affecting their prices
Ex. Rice, School Uniform at all
PRICE ELASTICITY OF SUPPLY
3. THOSE ON WHICH AN INSIGNIFICANT PART OF Ex. Grocery items
• PRICE ELASTICITY OF SUPPLY- MEASURE OF HOW
INCOME IS SPENT Ex. Needle, candy
MUCH THE QUANTITY SUPPLIED OF A CERTAIN PERFECTLY INELASTIC SUPPLY
UNITARY DEMAND GOOD CHANGES AS A RESULT OF A RELATIVE
Supply is perfectly inelastic to price if the quantity supplied
CHANGES IN ITS PRICE
• THE PERCENTAGE CHANGE IN QUANTITY is totally unresponsive to price changes
DEMANDED IS EQUAL TO THE PERCENTAGE ELASTIC SUPPLY
Ex. Highly specialized or items that are unique
CHANGE IN THE PRICE OF A COMMODITY
Supply is said to be elastic to price changes if the
• EX. NEWSPAPER percentage change in quantity supplied is greater than the PRICE ELASTICITY OF DEMAND-RATIO OF THE PERCENTAGE
CHANGE IN QUANTITY DEMANDED TO THE PERCENTAGE
percentage change in price.
PERFECTLY ELASTIC DEMAND CHANGE IN PRICE
Ex. Goods which are relatively easy to manufacture
• CONSUMERS ARE NOT READY TO ACCEPT PRICES Σᴅ=%∆Q/%∆P
OTHER THAN THOSE FIXED BY THE MARKET UNITARY SUPPLY
Σᴅ=∆Q/AveQ
• OCCUR WHEN THERE IS PERFECT COMPETITION Supply is unitary elastic to price if the percentage change
∆P/AveP
Ex. DVD tapes in Quiapo of quantity supplied is equal to the percentage change in
price %∆Q=Q2-Q1/AveQ
• They can not increase their prices otherwise they
will go to other sellers INELASTIC SUPPLY ∆Q=Q2-Q1
AveQ=Q1+Q2/2 Σᴅ=Q2-Q1 -120/(280/2)

%∆P=P2-P1/AveP Q1+Q2/2 -------------------

∆P=P2-P1 P2-P1 4/(24/2)

AveP=P1+P2/2 P1+P2/2 120/140

Σᴅ=Q2-Q1 Solve the PRICE elasticity below -----------

Q1+Q2/2 • Qd1=200 4/12

P2-P1 • Qd2=80 -0.857

P1+P2/2 • P1=$10 --------- = -2.57

• P2=$14 0.333

• Qd1=200 Σᴅ=Q2-Q1 Absolute value

• Qd2=80 Q1+Q2/2 • Σᴅ=<1 or 0.0001-0.9999 INELASTIC

• P1=$10 P2-P1 • Σᴅ=>1 or 1.000001-∞ ELASTIC

• P2=$14 P1+P2/2 • Σᴅ=1 UNITARY

• Qs1=10 Σᴅ=80-200 • Σᴅ=0 PERFECTLY INELASTIC

• Qs2=20 (200+80/2) • Σᴅ=∞ PERFECTLY ELASTIC

• P1=PhP4,000 ---------------- .667/.222=3.00

• P2=PhP5,000 14-10 ELASTIC SUPPLY

Formula (10+14/2) THE THEORY OF CONSUMER BEHAVIOUR

Chapter 5 coke consumed increases, total utility also increases while If the price of mango is high we tend to
the marginal utility decreases. buy less, but why is it that we tend to eat mango which is
UTILITY more delicious at this time when it is expensive? It is just
TOTAL UTILITY CURVE like when spaghetti is given by a neighbor, the more we
(FIGURE 1) want of it because we find it more delicious than when it is
-Refers to the degree of satisfaction per MARGINAL UTILITY CURVE cooked at home?
unit of consumption. (FIGURE 2) The reason is, the less we have of a thing,
- the moment the consumer starts using Figure 1 and 2 shows the behavior of total the more we want of it. In other words, we can say that as
the product , a certain level of utility is derived. a person gets more and more of a particular commodity,
utility and marginal utility curves a graph which exhibit the
Law of Diminishing Utility. the marginal utility of the successive units of the good
2 THEORIES REGARDING CONSUMER BEHAVIOR
diminishes.
1. Cardinal utility theory At 6 bottle of coke is consumed total utility
reaches its peak which is called the saturation point. Now, 2. ORDINAL UTILITY THEORY
2. Ordinal utility theory if you decided to drink some more coke, total utility starts Is also called the indifference theory which
to decline. Column (3) measures marginal utility as the
1. CARDINAL UTILITY THEORY states that utility is not measurable but can only be ranked
extra utility gained when 1 extra unit is consumed. The fact or compared.
Is a theory w/c states that utility is that marginal utility declines with higher quantity
measurable. consumed illustrates the law of diminishing marginal Given an apple, grapes and ponkan, we
utility. may not say that eating apple gives 20 utils, grapes 30 utils
UTILS – is the unit of measurement for and ponkan 25 utils but instead we may just say that
satisfaction. LAW OF DIMINISHING MARGINAL UTILITY grapes is the most preferred, followed by ponkan and the
The law of diminishing marginal utility states that least preferred is apple.
TOTAL UTILITY AND MARGINAL UTILITY FOR COKE
(TABLE 1) as one consumes more and more of a particular good, For the other people, apple can be the
marginal utility decreases. The law is more of psychological most preferred followed by ponkan and the least in the
Drinking a bottle of coke gives 5 utils, law and forms the basis of downward sloping demand preference is grapes and for the few they may just that
drinking 2 will increase total utility to 9 utils and so on. curve which says that the higher the price , the lower the their level of satisfaction from the three fruits are the
quantity demand. same. Therefore, they are indifferent, it doesn’t matter
The table from the last slide shows that if
a bottle of a coke is just in ones mind and nothing has which one will be chosen.
been eaten total utility is zero. Notice that as quantify of
ORDINAL UTILITY THEORY The indifference curve shows different Given Px=1, Py=2 and Budget (Y) =20. The
combinations of two goods that can be consumed and that combination of good X and (Py) that can be purchased is
In this theory we assume that people yield the same level of satisfaction or utility. determined by the equation:
know what they like, their choice is consistent, and that
they prefer more than less. But we also recognize that INDIFFERENCE CURVES Budget= PxQx + PyQy
people have different taste and appetite, what is good for (FIGURE 3)
20 = 1 Qx + 2Qy
one may not be good for others and that taste and
preference are relative. INDIFFERENCE CURVES
20=1(0)+2(10)
Figure 3 shows the Indifference curve of
20=0+20
good x and y. Points A, B and C lie on the same indifference
ORDINAL UTILITY THEORY curve, therefore, whichever combination of x and y gives 20=20
the same level of utility hence, one can not make a choice
Another thing to recognize is that people because all combinations are equally preferred. Point D on THE BUDGET CONSTRAINT
are rational beings. Whenever a rational consumer makes the other hand belongs to the higher indifference curve so
a choice he always maximizes satisfaction or minimizes combination D is more preferred because utility is higher
expenses. at that point. Budget Function is a mathematical
equation showing various combinations of 2 goods that
THE BUDGET CONSTRAINT
can be purchased given the same budget or income.
ORDINAL UTILITY THEORY A budget line is a locus of points that
BUDGET SCHEDULE
shows different combinations of two goods that can be
(TABLE 2)
purchased given the same money income or budget. In
Example, when you are eating at the constructing a budget line, one has to determine the price By substitution, the budget schedule is as follows:
canteen it depends upon you on what food you think is of good(Px) and good(Py) and the corresponding budget
good that may suit your taste or preference. The choice (Y).
may not be a popular choice for everyone but as far as you
BUDGET SCHEDULE
are concerned, your choice maximizes your satisfaction.
THE BUDGET CONSTRAINT A Budget Schedule is a list or table that
INDIFFERENCE CURVE
shows various combinations of two goods that can be
purchased given the same money income as in table 2.
BUDGET LINE happens, the next to consider is how much be spent to Remember, utility or satisfaction can only
(FIGURE 4) given the choices. As rational beings, individuals prefer to be derived the moment you start using the goods. If you
spend less than to spend more. decide not to use your old clothes, shoes, etc. Give them
BUDGET LINE out because for other people who have less of them, they
INDIFFERENCE CURVES can give greater utility.
The Budget line is given by line AE in (FIGURE 5)
Figure 4 if the consumer spends all of his income on good CHAPTER 6
Y, he could purchase 10 units of it. This is point A. if all Rational consumer maximizes expenses at point D, the
income is spent on good X, he could purchase 20 units of point of consumer’s equilibrium. Production Fuction
that good. This is point E. By joining both points, we can
now draw the budget line AE. CONSUMER EQUILIBRIUM The production function shows a technical
relationship between the firms inputs and its output.
BUDGET LINE
This can be expressed in the mathematical form:
Any point like F and G which are to the The only problem is that we usually tend
to equate quality of the product to its price and sometimes Output = f (inputs)
right of the budget line represent unattainable
combination that require more than Php. 20 budget , while if a good is more expensive the more it is preferred
compared to a less expensive good. This above function shows that output is
at any point to the left of the budget line are maximum dependent on the factors of production or inputs used by
attainable or can be purchased with the given budget. CONSUMER EQUILIBRIUM the firms. This further means that the value of the firm’s
output depends on the amount of inputs that they use
CONSUMER EQUILIBRIUM As reminder, if you buy a more expensive such as land, labor, capital, and entrepreneur. The more
item, the more you need to use it to maximize its utility. inputs used in the production by the firm, the higher the
On the contrary, people become more attached to a more output, and the less inputs used, the lower the output.
The Consumer’s equilibrium is the point expensive item to the extent of not using it. It becomes
where the budget line is tangent to the highest “for their eyes only”. The expensive eating utensils at Fixed Inputs and Variable Input
indifference curve. home remain in the cupboard or on display instead of
being used daily. See what glasses are used everyday, Inputs are classified into fixed inputs and
CONSUMER EQUILIBRIUM variable inputs.
empty bottles of coffee or cheese.
There are cases where one may find it CONSUMER EQUILIBRIUM Fixed inputs are inputs whose quantity is not changed by
difficult to choose because he is indifferent, that level of the firm, regardless of its reasons.
satisfaction between choices are the same and if it so
Variable inputs are input whose quantities can readily be MP = ∆TP / ∆L brings us to the next discussion on the stages of
changed. production.
=TP2-TP1/
Production Periods Average Product (AP) – is the total product per
L2-L1/ unit of the variable input.
There are three different production periods in
Economics; these are the very short-run, short-run and the 22-10/2-1 AP = TP / Labor
long-run period. 12/1 Marginal Product (MP) – is the additional or extra
very short-run period or immediate period – is a =12 product contributed by the last worker, given an increase
production period in which all factors of production used in the use variable input. As to formula: MP = change in
by the firm are fixed inputs. AP = TP / Labor TP / Labor

short-run period – is a production period which =10/1 MP = ∆TP / ∆L

some inputs are fixed while other are variable. Resources
=10 The Three Stages Of Production
that can be varied in the short-run are called variable
inputs while those that cannot be changed are called fixed Table 6.1 exhibits the Law of Diminishing I . Stage of Increasing Returns – this stage is where any
inputs. Marginal Returns. Notice that the firms operates in the addition in variable inputs used, TP increases at an
short-run period. This shows that as number of worker increasing rate.
long-run period – is a production period in which
increases total product of the firm continuosly increases.
the all the inputs used in production of the firm are all II. Stage of Decreasing Returns – this is the stage where
Total product continuously increases from 10 until it
variable firms. the producer continuosly employs more labor input to a
reaches 52 sacks as more workers are employed.
fixed land, total product continues to increase but ata
The Law of Diminishing Marginal Returns
Notice that the 9th worker is employed, decreasing rate (increasing slowly) until it reaches the
The law states that as successive units of variable total product declines from 52 to 50 sacks. A decline in the maximum production level at 52 cavans.
inputs are added to fixed inputs, total product increases at total product despite an increasing use of variable input is
a decreasing rate at acertain point declines. due to the fact that land is fixed. A fixed input has a III. Stage of Negative Returns – stage III is referred to as
maximum potential as exhibited in Table 6.1. The the stage of over-utilization of and the fixed input.
Table 6.1 maximum production capacity of a hectare of land is 52 Economics Costs
Total Product, Marginal Product and Average Product sacks of palay in the example from upland farm. This
- this is the payment for the inputs that the firm uses in the produced. If the labor is a variable input, wages is the The table shows the cost schedule of the
production processes payment for variable cost. TVC is the sum of all variable hypothetical firm in the short run. Total Fixed Cost is 10
costs, is increases as output increases. TVC curve is upward regardless of output while Total Variable Cost increases as
- does not only include those payment to outsiders who sloping. output increases.
supply the inputs called explicit cost, but also the implicit
cost. Total cost is the sum of all variable and fixed costs in Average Fixed Cost as shown in the above table
producing any given level of output. It is the sum of total continously declined as output increases from P10.00 to
Explicit cost are monetary expenditures paid to outsiders fixed costs (TFC) and total variable cost (TVC). P1.25. Average Variable Cost which declines initially first
who supply the inputs. from P5.00 to P3.75 then granted to rice continously. This
ATC, AFC, AVC and MC behavior of AVC which decline from P15.00 reaches
Implicit costs are the cost of self-owned or deld-owned or
self employed resoures. Average Total Cost is cost per unit of output, this minimum at P5.83 before it continously increase.
decreases as output increases, reaches minimum then Production Costs in the Long-Run
Opportunuiy cost measures things that must be given up increases. (ATC and AVC are U shaped curves.) ATC is alos
orsacrified when alternative over the other. the price of AFC and AVC. Cost
Cost can also be viewed in the aspect of Average Fixed Cost (AFC) is fixed cost per unit of the Economics of scale exists when long run average costs
the three different production periods, the very short-run, product AFG declines as output increases with an decline as output rises, and larger firms will be more
short-run and the long-run period. Table 6.2 shows the asymptotic curve about the horizontal axis. efficient than small firms.
mathematical definitions of total, average and marginal
cost in the three production periods. Average Variable Cost is total the variable cost per unit of Diseconomies of scale are said to exist in the range where
output. It initially decreases, reaches a minimum and rises average costs rise with increases in output. Diseconomies
Total Fixed Cost, Total Variable cost and Total Cost as output expands. of scale emerge because managerial skillls have reached its
Total Fixed Costs are those taht do not vary with output point of diminishing returns.
Marginal Cost (MC) is the additional or the extra cost
like rentals ant their amount would be the same even if associated with the additional unit of the goods produced.
output is one unit or one million units. The costs of fixed MC first declines and that continuosly rises as output is
inputs are fixed costs. Fixed costs are also often referred to increased.
as overhead or unavoidable costs. TFC is the sum of all
fixed cost it is constant and so its curve is a horizontal line.

Total Variable costs are costs that vary directly with Short Run Cost for the Firm:
output, rising as more is produced and falling as less is