Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE-PRESIDENT FOR BRANCHES AND CAMPUSES
SANTA ROSA CAMPUS
City of Santa Rosa, Laguna

_______________________________________________________________________________________________________

INSTRUCTIONAL MATERIAL FOR

Basic Microeconomics
(ECON 20053)

COMPILED BY:

JOSEFINA T. COLCOL

March 20, 2023

 UNIT 1 – BASIC ECONOMIC CONCEPTS AND THEORIES

OVERVIEW:

Every human being whether a child, a student, mother, teacher, entrepreneur and politicians
have been closely related to Economics. Decisions on how to use time, money and efforts to
maximize satisfaction is a daily experience and can be crucial in every transaction. A mother will
not be able to cook breakfast without gas for the stove, wash a laundry without electricity and
even go to her errands if she has no money. In the office, a manager cannot run the firm’s
operation without a secretary, production supervisor and workers. The workers will not be able to
do their work without tools, materials and technology to produce the goods and deliver on time.
How much more, if a firm has no investors and no capital to operate. In the market, people are
waiting to satisfy their wants. This is the reason why we need to know what are those resources
that makes the production complete. Human wants has to be satisfied base on the attributes of
goods and services.

Economics will help the students understand the significance of Greek Economist theories in
the early development of World economy. It will inculcate studies base on the two branches of
economics.

LEARNING OUTCOMES:

After the completion of this unit, the students will be able to:
1. Distinguish free resources from economic resources.
2. Explain the importance of an economic activity.
3. Determine the relationship of economic activity with type of market.
4. Explain why we are experiencing scarcity.
5. Identify the elements of human wants

COURSE MATERIAL:

The growth of the Greek society from 200 to 1200BC caused the development of various
theories significant to its development into city-estates. Economics originated from the Greek word
Oikonomia which means household management. Greek personalities contributed greatly in the
field of economics and became the pattern of economic activity. In the History of Economics
Adam Smith, the Father of Economics” inspired in his first book entitled “The Theory of Moral
Sentiments”, 1976 the theories of famous Greek Economist during the ancient times such as
Plato, Socrates and Aristotle.
Plato's (428 B.C.- 348 B.C.) theory on specialization is an aid to social organization. He also
stated that man’s primary need was for food, shelter, and clothing. the origin of society is found in

2
the inability of men to be self-sufficient; they lack the ability to serve all their own needs through
their own labor. Each man possesses certain inherent qualities that make him better at some
things than at others. By and through specialization of tasks the members of a community can
improve their material conditions by producing that commodity at which they are most skilled and
trade quantities of it away for the other things that they need from others who are doing the same.
Xenophone (430-354 B.C.E) Xenophone or Xenophon was a Greek philosopher, soldier,
historian, memoirist, and the author of numerous practical treatises on subjects ranging from
horsemanship to taxation. Xenophon’s contribution to Economics include ideas related to the
division of labor and productivity, the efficiency of production, the notion of diminishing and
constant return to scale and the efficiency of management.
Aristotle (384-322 B.C.) Aristotle's economic criticisms are directed at wealth-getting in the
sense of money-making. He disregards the fact that men were able to search for unlimited wealth
even before money came into existence. Although he realized that wanting too much leads to
human failure. he placed a great deal of blame on money because it had no natural terminus.
Aristotle taught that when a man pursues wealth in the form of exchange value he would
undermine the proper and moral use of his human capacities. He failed to mention that men of
commerce provide useful public service and make money only if they do so. In addition, Aristotle
declared the three types of exchange as follows:

• First, Barter, the direct non-monetary exchange of commodities, is natural because it

satisfies the natural requirement of sufficiency. After direct working of the land, barter
between households is the next most natural means of wealth acquisition. For Aristotle,
natural exchange is based on the right to property being determined by the capacity for its
proper use. He sees barter as natural but inadequate because of the difficulty of matching
households with complementary surpluses and deficiencies. The concepts of surplus and
deficiency are normative and derive from the right of property.

• Second, Transferring of goods between households but mediated by money. Here each
participant starts and ends with use value which he approves of but the item is not being
used in its natural aim or function because it was not made to be exchanged. Aristotle
observes that what is natural is better than what is acquired and that an item that is final
is superior to another thing that is wanted for the sake of this item.

• Third is retail trade. A person buys in order to sell at a profit. Retail trade is concerned with
getting a sum of money rather than acquiring something that is needed and therefore
consumed. Whereas Aristotle views household management as praiseworthy and as
having a natural terminus, he is skeptical about retail trade because it has no natural
terminus and is only concerned with getting a sum of money.

When money becomes an intermediate element in exchange, the natural limits on

physical wants no longer exercise restraints on a person's desires. The lack of effective
natural restraints leads to the unlimited desire for wealth. There exist no natural conditions
restricting a person's desire to acquire money wealth. Usury is a form of trade which is
known as the begetting of money from money. Aristotle says that the usurer is the most
unnatural of all practitioners of the art of money-making. The lending of money at interest
is condemned as the most unnatural mode of acquisition.

Aristotle's economic criticisms are directed at wealth-getting in the sense of money-making.

He disregards the fact that men were able to search for unlimited wealth even before money came
into existence. Although he realized that wanting too much is a human failure, he placed a great

3
deal of blame on money because it had no natural terminus. Aristotle taught that when a man
pursues wealth in the form of exchange value he would undermine the proper and moral use of
his human capacities. He fails to mention that men of commerce provide useful public service and
make money only if they do so.

READINGS:

Please read Genesis 3:17-19 of the Holy Bible (New International Version or English
Standard Version). Find out the reason why we experience scarcity.

MEASUREMENT:

A short quiz at the end of this unit.

REFERENCES:

https://www.fff.org/explore-freedom/article/economic-ideas-plato-aristotle-ancient-greeks-part-1/

https://www.newworldencyclopedia.org/entry/Ancient_economic_thought

http://www.quebecoislibre.org/05/05091511.htm#:~:text=Aristotle%20was%20the%20first%20to
%20draw%20a%20distinction%

http://www.quebecoislibre.org/05/050915-
11.htm#:~:text=Aristotle%20was%20the%20first%20to%20draw%20a%20distinction%20betwe
en%20value,many%20of%20the%20classical%20economists.&text=Nevertheless%2C%20Arist
otle%20is%20one%20of,the%20history%20of%20economic%20thought.

http://www.quebecoislibre.org/05/050915-11.htm

4
Lesson 1 - Economic Activity

LEARNING MATERIAL:
The field of economics is generally divided into two (2) major parts also known as branches of
economics:
1. Macroeconomics. This part examines the performance of an economy as a whole. It
focuses on the behavior of economic indicators in aggregates, such as national income
and output, employment situation, inflation and general price level; and taxation situation
and the extent of government involvement in the economy.
2. Microeconomics. This part examines the workings of individual industries and the
framework of decision making by individual players in the economy, principally, the
households and the business firms. It also discusses the role of price in the efficient
allocation of resources. (Click https://bit.ly/2DNXnzb)

Fig. 1.1

Elements of Human Satisfaction:

1. Human Wants - It is anything that satisfies human being. Its characteristics are unlimited,
varied and insatiable. Good is anything that satisfies human being.

2. Use of Resources - The basic economic resources of a nation consist of land, labor, capital
and entrepreneurship. In the beginning, these are free but over the years man’s population
out-numbered these resources. A limited resource has its equivalent cost, so man has to
learn to allocate them properly in order to maximize the number of wants that can be satisfied.
The economy should pay the owners of these basic factor of production for the use of their

5
 resources such as rent for land, wage or salary for labor, interest for capital and profit for
entrepreneurship. Resources maybe free or economic.

3. Technique of Production – this shows how resources are used and combined in production.
This is employed to reach higher rate of productivity to serve a greater demand. However,
production is described as capital-intensive or labor-intensive depending on what factor is
predominantly used. Below are examples of advancement in production caused by the
acquisition of technology.

Resources:

What is consumption?
It will be defined as:
• using up of a resource
• the process of buying or using goods and services
• in economics, the use of goods and services by households.
The household is the basic consuming unit in the economics. Since human wants
are said to be unlimited, they maximize their satisfaction through the proper allocation
or mix of expenditures within the context of budget limitation.

6
 • it concludes that the price demanded by consumers is the same supplied by producers.
That results in economic equilibrium.

LEARNING ACTIVITY:
Assignment:
1. What is a resource based economy? (To answer in your template)

2. Watch Jacque Fresco’s “THE VENUS PROJECT” and write a reaction paper in 15
minutes. Upload I n Lesson 1 Folder in your google drive.

MEASUREMENT:
Quiz is based on the Work Plan schedule.

REFERENCES:
https://youtu.be/T9c821s9mjw
Jacque Fresco’s Resource Based Economy

7
Lesson 2 - Price Theory And Economic Theory

What is Microeconomics?

Microeconomics describes the pricing of products and money, causes of different prices to
different people, how can provide more or less benefit to producers, consumers and others, and
how individuals best coordinate and cooperate. This is the reason why microeconomics is also
known as a price theory. Generally speaking, microeconomics provides a more complete and
detailed understanding than macroeconomics.

Basic Concepts of Microeconomics

Display the slide to present the study of microeconomics involves several key concepts,
including (but not limited to):

• Incentives and behaviors: How people, as individuals or in firms, react to the situations
with which they are confronted.
• Utility theory: Consumers will choose to purchase and consume a combination of goods
that will maximize their happiness or “utility,” subject to the constraint of how much income
they have available to spend.
• Production theory: This is the study of production—or the process of converting inputs
into outputs. Producers seek to choose the combination of inputs and methods of
combining them that will minimize cost in order to maximize their profits.
• Price theory: Utility and production theory interact to produce the theory of supply and
demand, which determine prices in a competitive market. In a perfectly competitive market,
it concludes that the price demanded by consumers is the same supplied by producers.
That results in economic equilibrium.

In this study, the students will realize that resources are limited and because they have a
price, therefore, microeconomics is known as a price theory.

Economic Analysis/Economic Theory

According to Maconnell, economic theory is a body of economic principles built up as a result

of logical reasoning. We can call it a “base of tools” with which the economists analyze economic
problems. Economic theory derives principles from facts which are systematically arranged and
interpreted. “The task of economic theory is to systematically arrange, interpret and generalizes
upon facts”.

Economic theory thus is a statement or a set of related statements about cause and effect,
action and reaction.

8
Steps for Making an Economic Theory:

The main steps involved in constructing theory of economics are as under:

(i) Selecting the problem. The first step involved in the formulation of a theory is the selection
of problem which is related to the real world.

(ii) Formulation of hypothesis. The second step is to formulate hypothesis of the economic
problem to be analyzed.

(iii) Predictions. The third step required in the construction of a theory is to draw implications
from the assumptions by way of logical reasoning.

(iv) Testing of predictions. Finally, the predictions are tested by the process of observation
and statistical analysis of the data.

The economic theory is extremely valuable in explaining economic phenomenon, predicting

economic events, judging performance of the economy and in formulating economic policies.

The functions of Economic Theory

The principal functions of economic theory falls into 2 categories:
(1) to explain the nature of economic activity and
(2) to predict what will happen to the economy as facts change.

What is an Economic Policy:

Economic policy is an attempt to devise government actions and to design institutions that might
improve economic performance.

The creation of specific policies for achieving economic goals of the society is not simple and easy
matter. The main steps in policy formulation are as under:

Steps for Making an Economic Policy:

(i) Clear statement of goals. There should be clear statement of economic goals to be achieved.

(ii) Effects of alternative policies. The second step is to examine and consider the possible
effects of alternative policies designed to achieve the economic goal. For example, while
considering the merits and demerits of fiscal policy in the achievement of desired level
employment, the altering monetary policy must remain under examination.

(iii) Evaluation. The third step is to evaluate the effectiveness of the policies. The process of
evaluation should be continuous. If any drawback is found in it at any stage, it should he
improved.

9
What is an Economic Model

According to Pagoso, Microeconomics is composed of a series of statements of assumptions

or given and statements of implications or deductions. The statement described the essential
features of an item or process and the interrelationships between factors or variables model.

According to Khan, Economic models are a way of taking complicated ideas and events and
breaking them down into their most important characteristics. We use models in economics so
that we can focus our attention on a few things instead of getting bogged down a lot of details. In
this video, learn more about the role that models play in economics, and the importance of the
assumptions that underlie those models.

An economic model is a simplified version of reality that allows us to observe,

understand, and make predictions about economic behavior. The purpose of a model is
to take a complex, real-world situation and pare it down to the essentials. If designed well,
a model can give the analyst a better understanding of the situation and any related
problems. A good model is simple enough to be understood while complex enough to
capture key information. Sometimes economists use the term theory instead of model.
Strictly speaking, a theory is a more abstract representation, while a model is a more
applied or empirical representation. Often, models are used to test theories. In this course,
however, we will use the terms interchangeably.

The examples of economic theory as follows:

• Circular flow of income and expenditures
• Multiplier Effect
• Ceteris Paribus Assumption of Demand
• Theory of Consumer Behavior
• Theory of Cost and Profit

REFERENCES:
Introductory Microeconomics (Third Edition) by Pagoso, Dinio and Villasis, 2006 Introduction
to Microeconomics by Paraiso, Larano and Cuevas. 2011
https://www.khanacademy.org/search?referer=%2Feconomics-finance-
domain%2Fapmacroeconomics%2Fbasic-economics-concepts-macro%2Fintroduction-to-the-
economic- http://www.economicsconcepts.com/economic_analysis_and_economic_policy.htm
https://www.google.com/search?sxsrf=ALeKk00zn51x-
D0M6Z9KOmI9LKfLnsNzZw%3A1597247168412&ei=wA40X-7kGMfbhwOE0rToBA&q=eco

10
Lesson 3 - An Overview of the Economy

The students shall understand the relationship of this two in order to give credit on their
functions and how they affect the flow of goods and services in the economy.

The Circular Flow of Economic Activity

Fig.3.1

Households supply labor to firms and are paid wages in return. Firms use that labor to
produce pizzas and sell those pizzas to households. There is a flow of goods (pizzas) from firms
to households and a flow of labor services (worker hours) from households to firms.

Basic Economic Problems

Display the slide to allow the students understand that it is not easy to determine the most
efficient and effective way of resource allocation. This means that a decision must be made on
how the resources will be used to produce the goods and services which people in the society
need and want. This clarifies that
1. What to produce? This question would answer the decision regarding the type of goods
and services the society desires. It is also important to know whether the goods to be
produced is for consumption or investment.
2. How to produce? This answers the question on the techniques of production and the
manner of combining resources to come up with the desired output.

11
 3. For whom to produce? This question would help the firm to determine the gender of
consumers to answer the problem of distribution. It is the determination of how output is
to be divided or allocated among members of the society.
Types of Economic System
Set the slide and discuss the economic systems which may be classified as traditional,
command or market systems.
1. Traditional Economic Systems. The decisions are made based on customs and
traditions. The basic problems of what, how and for whom to produce are decided by
customs and traditions.
2. Market economy or Free Enterprise Economy or Capitalism. The basic problems of
what, how and for whom to produce are decided by the market system or simply the
demand and supply condition. The factors of production are managed and owned by
private individuals or corporation.
3. Command System or the Centrally Planned Economy or Socialism/Communism. The
economic system here relies on the government to decide how the country’s resources
would be best allocated.
4. Mixed System or Mixed Economy. This economic system is a combination of market
economy and command economy. Like the Philippines, there is a private and public
ownership of resources.

LEARNING ACTIVITY:

Using the basic economic problems present your self-made food product or
beverage you personally prepared to the class. A rubric will be posted in your gc.

Actual Product presentation on April 18, 2023, 2022.

12
Unit 2 – DEMAND, SUPPLY AND MARKET EQUILIBRIUM

OVERVIEW:
In a market economy or a capitalist economy, the interaction of demand and supply of goods
and services determine the price of good and services. This unit will explain the law of demand
and supply and determination of price.

LEARNING OUTCOME: After the completion of this unit, the students will be able to:
1. To define the theories of demand and supply.
2. To solve simple demand and supply equation.
3. To identify the conditions affecting the demand and supply of goods in the market.
4. To analyze and solve simple case study problems,
5. To determine the validity of theories in the past in relation to the current situation.

COURSE MATERIAL:
The Coca Leaves Production

“What does Mother’s Day flowers have to do with cocaine? Very little, most people would think.
But as an economist, I often explain to my students that the world is economically connected,
often in strange ways. The flower business is one of those strange economic connections.
Mother’s Day, which this year falls on May 10, is typically big for the American floral industry,
which depends on it for over a quarter of all holiday flower sales. It’s especially important to flower
vendors this year as the coronavirus has ravaged the industry, affecting both supply and demand.
About a third of cut flowers purchased in the U.S. come from California, while the rest are
imported. About 80% of those come from Colombia or Ecuador. The story of how both countries
became such an important source of flowers for the U.S. can be traced back to the U.S. war on
drugs.
In the late 2000s, the U.S. and Colombian government were looking for new ways to stem the
flow of cocaine into the U.S. Part of the strategy involved law enforcement: increasing
interdictions to stop drugs before they crossed the border and ramping up arrests of people selling
drugs in the U.S.
Another part of this strategy, however, was to convince farmers in Colombia to stop growing
coca leaves, a traditional Andean plant that provides the raw ingredient for making cocaine, by
giving them preferential access to U.S. markets if they grow something else. The goal of the
program was to give these subsistence farmers a legal crop that would be roughly as profitable
as growing coca leaves - whether flowers, honey or coffee. This is formally called crop
substitution.
In theory, by cutting back the supply of coca leaves, the price of the key raw material in cocaine
rises. This cost increase is passed along the supply chain, raising the price of cocaine at every
point. Why is raising the price of cocaine important? A basic idea in economics is the “law of
demand,” which says the higher the price of a product the less people buy, holding everything
else constant. Pushing up the price of cocaine should reduce the amount Americans consume.
Not just Colombia but also Ecuador, Bolivia and Peru – all coca-producing countries – get duty-
free access to U.S. markets in exchange for clamping down on illegal drugs, under the Andean
Trade Promotion and Drug Eradication Act.
Has crop substitution worked?

Well, not to eradicate the cocaine market. Only last year Colombia had a record coca crop,
and the street price of cocaine hasn’t budged. There are complicated reasons for this, including
the persistence of U.S. demand for drugs, regardless of source, the ingenuity of drug trafficking
organizations, and the cultural significance of coca leaf in the Andean region.

But this failed U.S. drug policy did lead to a surge in cut flower exports to the U.S. from both
Colombia and Ecuador. Colombia exported US$800 million worth of flowers to the U.S. in 2019,
up from $350 million in 2000. Ecuador’s exports tripled from $90 million in 2000 to $270 million in
2019. As a result of the increased supply, flower prices in the U.S. rose less than average
inflation. (Please click bit.ly/33Ua71O)

The students may group themselves into 5 and discuss among themselves the effect of huge
demand for Coca leaves in the life of the people. Find who are the people behind it and why the
government had stick in this far product.

LEARNING ACTIVITY:

1. The students may group themselves into 5 and discuss among themselves the effect of
huge demand for Coca leaves in the life of the people. Find who are the people behind
it and why the government has not stop the sale of this product despite the on-going war.
2. Make a positon paper about this material which may be submitted in two weeks time. By
watching the video below
The student may watch the video and write a position paper about this topic.

REFERENCES:
Understanding Economics by Payumo,
bit.ly/33Ua71O
ME https://youtu.be/FJzdrdVOfW0ASUREMENT:

14
Lesson 4 - Demand Market and its Determinants

Display the Slide 1 and discuss the coverage of the discussion for a week. Tell the class that the
discussion for the week will focus on the concept of demand economics.
Here is the Circular Flow of Economy

Fig. 4.1

Ask the class to share their understanding on the concept of circular flow of sconomy based on
their research assignment from last week. Call on at least 3 students to answer. Display Slide 2
and discuss the definition of the circular flow model. Refer to the information below for
explanation.
Circular Flow of Economy Model – refers to a visual model of the economy that shows
how money flows through the markets among households and firms.
Explain to the class that in this model, there are two kinds of decision makers – households
and firms. Explain to the class that in this model. Display slide 3 and discuss the following:
 Firms – are the ones that produce goods and services using inputs, such as labor,
land and capital. These inputs are called the factors of production. Furthermore,
the following are the definition of the factors of production.
1. Labor - refers to the human input into the production process. Each
individual has a different level of skills, qualities and qualifications. This is
known as the human capital.
2. Land - refers to the natural resources on the planet. It includes space on
the ground, hills, seas, oceans, etc.
3. Capital – refers to the man –made physical goods that are used to produce
other goods and services. It includes tools such as machines, computers
etc.

15
  Households - refers to the ones who own the factors of production and consume
all the goods and services that firms produce.

Furthermore, discuss to the class that households and firms interact in two types of markets
Display Slide 4 and discuss the following:

 Market for goods and services - households are buyers and firms are sellers.
In particular, households buy the output of goods and services that firms
produce.

Market for the factors of production – households are sellers and firms are buyers. In these
markets, household provide firmss the inputs that the firms use to produce goods and services.

The circular flow diagram is a simple way of organizing all the economic transactions
that occur between hoseholds and firms in the economy.

The Circular Flow – this diagram is a schematic is a schematic representation of the

organization of the economy. Decisions are made by households and firms. Households
and firms interact in markets for goods and services and in the markets for factors of
production. The outer set of arrows shows the flow of money, and the inner set of arrows
shows the flow of money, and the inner set of arrows show the flow of goods and services.
The Inner loop of the circular flow diagram - represents the flow of goods and
services between households and firms. The households sell the use of their labor, land
and capital to the firms in the markets for the factors of production. The firms then use
these factors to produce goods and services, which in turn are sold to households in the
markets for goods and services. Hence, the factors of production flow from households
to firms, and the goods and services from firms to households.
The outer loop of the circular flow diagram – represents the corresponding flow of
money. The households spend money to buy goods and services from the firms. The
firms use some of the revenue from these sales to pay for the factors of production, such
as the wages of their workers. What’s left is the profit of the firm owners, who themselves
are members of the households. Hence, spending on goods and services flows from
households to firm, and income in the form of wages, rent and profit flows from the firms
to households.
Afterwards, explain to the students that the circular flow of economy above is only a simple
model of the economy. There are more complex circular flow model that includes the roles of
the government and international trade. Yet these details are not crucial for basic
understanding of how the economy is organized.
Demand and Supply are two words that an economist use most often and for good reasons.
The two refers to the behavior
of the people as they interact with one another in markets. Indeed, the law of supply and demand
is the core of economics. First the next slide will elaborate on the definition of market as the arena
from which demand and supply works its functions in the economy.

Market – is a group of buyers and sellers of

a particular good or service. The buyer as
a group determine the demand for the product
and the sellers as a group determine the
supply of the product. It is a place where
buyers and sellers interact together. 16
 Demand refers to the quantity of a product or service that the buyer is willing and able to
purchase at various possible prices at any given time. Emphasize to the class that demand is the
amount of a good that buyers are willing and able to purchase. Ask then the students what factor/s
s/he will consider before buying his/her desired item. Expect that the students might give answers
such as the price, or the quality or the amount of money that s/he have.
Display the next slide, and explain to the class that these factors are known as the
determinants of demand

The Determinants of Demand

1. Price determinant
2. Non-price determinant
 Income of the buyer - this determinant answers the question, “for whom?”
 Population or number of buyers - the number of buyers has a direct effect on the
quantity of goods and services being purchased.
 Tastes and Preferences – this is influence mostly by advertisements.
 Prices of related goods
o Substitute products - these refers to goods that directly compete with the good
based on the opinion of the buyer. For instance, orange juice can be a
substitute to apple juice.
o Complementary products - use of the good based on the opinion of the buyer.
For instance, MP3 players and headsets are complements as the use of the
first product will also require the use of the second product.
 Future expectations - a person’s expectations about the future may affect her demand
for a good or service today.
Ceteris Paribus of demand - refers to the Latin phrase which literally means, “all other
things being equal.” Economist use the term ceteris paribus to signify that all the relevant
variables are held constant, except for the price.

The Demand Function, Demand Schedule and Demand Curve

Display the slide on the Law of Demand which shows the inverse relationship between
price and quantity which can be illustrated in three different ways through a demand
function, demand schedule and a demand curve.
Demand function is expressed in term of mathematical equation Qd = 80-4P
this shows that the slope of coefficient of the price is -4 which means that for every
peso increase in price quantity demanded decreases by 4 units. The constant term 80 is
the maximum quantity the market can absorb, and that is when the price is free or has a
zero price.
Demand schedule is a list or table that shows the inverse relation between price and
quantity demanded, all other things constant.

17
 Figure 4.2

The table shows that as price goes up from P10 to P15, quantity demanded
decreases from 40 to 20 units.

Demand curve is a locus of points that shows the inverse relation between price
and quantity demanded, all other things constant.

Figure 4.3
Demand Curve

Change in Quantity Demanded versus Change in Demand

A. Change in Quantity Demanded (ΔD)

 Display this slide to show that “a change in quantity demanded” occurs when there is
a change in the price of the good itself all other things constant.

18
 Figure 4.4
Demand Curve showing the change in Price

 The above figure shows that increasing the price from 10 to 15 results to a decrease
in quantity demanded as shown by point A to point B. A change in quantity demanded
is reflected by movement from one point to another point along a given demand curve
and this movement is due to a change in price of the good itself.

B. Change in Demand
 Display another slide to show that “a change in demand” occurs whenever any of the
other determinants of supply changes. An increase in demand is represented by either
a shift from D1 to D2 (increase) or a shift from D2 to d1 (decrease).

Fig. 4.5

The illustration above shows a shift of the demand curve from D1 to D2 (increase) or
D2 to D1 (which means decrease in the demand). The students must examine
closely the effect of every determinant in the market.

19
Lesson 5 – Supply, Firm and its Determinants

From the assignment of the students, ask at least two students to give the meaning of the law
of supply. Afterwards, display Slide and discuss the following:
Law of supply – states that, the higher the price, the larger the quantity supplied and all
other things held constant (ceteris paribus).
Supply shows the different quantities of commodities which producers are willing and able to
produce and make available for sale in the market at each specific price in a set of various prices
during some specified time period. This means that the higher the price, the higher the quantity
supplied. Producers supply more at a higher price because it will mean higher revenue.

Supply Function, Supply Schedule and Supply Curve

Supply function is expressed in term of mathematical equation
Qs = -10 + 5P shows the coefficient or the slope of the price is 5 and a constant term
-10. The coefficient is interpreted that for every peso increase in price, quantity supplied will
increase by 5 units while the constant term -10 implies that if price is zero, no one will ever supply
the good and is tantamount that no one will supply if price is below P2.
Supply Schedule below shows various combination of prices and quantity supplied by the
firm. It also shows that at higher prices the firm is inspired to supply more.

Fig 4.6

Fig. 5.1

Supply curve as shown in the Display slide, has an upward slope to the right reflecting
that as price increases the quantity supplied also increases.

20
 Fig. 5.2

Explain to the students that the dots along the line shows the proportional increase in
quantity as the price of good increase successively.

The Determinants of Supply (This will be presented by the next slide)

1. Price Determinant
2. Non-Price determinant
3.
 Resource price - has an inverse relation to supply. It is characterized with high
payment for land, labor, capital and entrepreneur which discourages seller’s hence
there will be a decrease in supply.
 Technology - has a direct relationship to supply because an improved technology
encourages producers creating increase in the supply of goods.
 The price of related goods or price of competing products - it has an inverse relation
to supply. Palay and corn to farmers are competing products, so if the price of Palay
increases farmers will plant Palay rather than corn to take advantage of higher Palay
price.
 Firm’s expectations about future prices – it has an inverse relation to supply. If the
price of rice is expected to increase, traders tend to hoard, hence, there will be a
decrease in supply.
 Number of suppliers – has a direct relation to supply. The more the number of sellers,
the higher the supply.
 Taxes and subsidy - has a direct relation to supply, respectively. Subsidy - has an
inverse and direct relation to supply respectively.

 Calamities - has a direct negative effect once typhoon, flooding and earthquake
affect the supply of goods.

Change in Quantity Supplied versus Change in Supply

C. Change in Quantity Supplied (ΔS)

21
  Display this slide to show that “a change in quantity supplied” occurs when there is a
change in the price of the good itself all other things constant.

Fig. 5.3

 The above figure shows that increasing the price from 5 to 10 from point A to point B
increases quantity supplied from 15 to 40 units. A change in quantity supplied is
reflected by movement from one point to another point along a given supply curve and
this movement is due to a change in price of the good itself.

D. Change in Quantity Supply

 Display another slide to show that “a change in supply” occurs whenever any of the
other determinants of supply changes. An increase in supply is represented by a shift
of the supply curve to the right. Alternatively, a decrease in supply is represented by
a shift of the supply curve to the left.

Increase in Supply Decrease in Supply

Fig. 5.4

 The illustration above shows a shift to the right of the supply curve, S1 to S2,
represents an increase in supply, while a shift to the left, S1 to S2, represents a
decrease in supply.

MEASUREMENT:

22
 A ten (10) point hypothetical supply analysis via Google form

A.
B.
C
D.

REFERENCES:

Payumo, page 35-51. Understanding Economics, 2014

Paraiso. Larano and Cuevas, page 15-25. Introduction to Microeconomics, 2011

Lesson 6 - Market Equilibrium and Demand Supply Equation

COURSE MATERIAL:

The students has to understand that demand and supply interact freely. Supply is represented
by producers or sellers, while demand is represented by buyers or consumers. The law of supply
describes that producers are willing and able to offer more goods at higher prices while the law
of supply describes that the buyers or consumers are willing and able to buy at lower prices.
Clearly, it shows that there is a conflict between the two parties. One favors high price while the
Other favors low price.

Display the slide, and explain that demand and supply should eventually be analyzed as one
since the market operates within the forces of both demand and supply. Combining the demand
and supply curves will show the point of market equilibrium. The equilibrium is attained at the
point when demand is equal to supply.

Fig 6.1

The Equilibrium Equation:

On this slide, the students will learn to combine their demand and supply analysis as
Qd = Qs
Solution:
Qd = 80-4P Qs = -10 + 5P
-4P- 5P = - 80 - 10
-9P = -90

23
 P = -90/-9
P = 10

Is the price of P10 really the equilibrium price? Let the student substitute the price of
P10.00 on the demand and supply function.
Therefore:
80 - 4(10) = -10 + 5 (10)
80 - 40 = -10 + 50
40 = 40

Then we can conclude that Pe = 10 and Qe = 40 units

This means that any price above P10 will result to surplus in the market while any price
below P10 will result to shortage.
Violations of the Law of Supply and Demand

A common way of attempting to go against the law is the use of price controls, where price
ceilings are set by the government normally on basic goods. Basically some of the commodities
from which price ceilings were set included laundry soap, milk, poultry, rice, chicken and pork.

MEASUREMENT:
A short quiz on equilibrium equation with time limit will be given on-line with under time pressure
A solution will be submitted using a cam photo shot and will be uploaded in the group page.

COPY SLIDE

REFERENCES:
https://bit.ly/2DcNQkZ
https://bit.ly/2QCdF0Z

24
UNIT 3 - THE THEORY OF CONSUMER BEHAVIOR

OVERVIEW:
This approach will make use of the concept of marginal utility or what we call additional
satisfaction in explaining the behavior of consumer’s demand. The students will be enlightened
why an individual or a group of people have different taste and preferences which must be
satisfied per unit of consumption of a good. The definition of words described here implies that
utility or satisfaction can be measured. The satisfaction obtained or acquired from successive
units of a given commodity and from various commodities can be ranked and compared.

LEARNING OUTCOME: After the completion of this unit, the students will be able to:

1. Identify the foundation of consumer behavior.

2. To differentiate utility from marginal utility
3. To analyze hypothetical data base on consumer satisfaction.

LEARNING MATERIAL:

1. Cultural Factors

Cultural factors exert the broadest and deepest influence on consumer behavior. The marketer
needs to understand the role played by the buyer’s culture, subculture, and social class.

a. Culture
Culture is the most basic cause of a person’s wants and behavior. Human behavior is largely
learned. Growing up in a society, a child learns basic values, perceptions, wants, and behaviors
from the family and other important institutions. A person normally learns or is exposed to the
following values: achievement and success, activity and involvement, efficiency and
practicality, progress, material comfort, individualism, freedom, humanitarianism, youthfulness,
and fitness and health.

Every group or society has a culture, and cultural influences on buying behavior may vary
greatly from country to country. Failure to adjust to these differences can result in ineffective
marketing or embarrassing mistakes. For example, business representatives of a U.S.
 community trying to market itself in Taiwan found this out the hard way. Seeking more foreign
trade, they arrived in Taiwan bearing gifts of green baseball caps. It turned out that the trip was
scheduled a month before Taiwan elections, and that green was the color of the political
opposition party. Worse yet, the visitors learned after the fact that according to Taiwan culture,
a man wears green to signify that his wife has been unfaithful. The head of the community
delegation later noted, “I don’t know whatever happened to those green hats, but the trip gave
us an understanding of the extreme differences in our cultures.” International marketers must
understand the culture in each international market and adapt their marketing strategies
accordingly.

b. Subculture
Each culture contains smaller subcultures or groups of people with shared value systems
based on common life experiences and situations. Subcultures include nationalities, religions,
racial groups, and geographic regions. Many subcultures make up important market segments,
and marketers often design products and marketing programs tailored to their needs. Here are
examples of four such important subculture groups.

c. Social Class
Almost every society has some form of social class structure. Social Classes are society’s
relatively permanent and ordered divisions whose members share similar values, interests, and
behaviors. Social class is not determined by a single factor, such as income, but is measured
as a combination of occupation, income, education, wealth, and other variables. In some social
systems, members of different classes are reared for certain roles and cannot change their
social positions. Marketers are interested in social class because people within a given social
class tend to exhibit similar buying behavior. Social classes show distinct product and brand
preferences in areas such as clothing, home furnishings, leisure activity, and automobiles.

2. Social Factors
A consumer’s behavior also is influenced by social factors, such as the consumer’s small
groups, family, and social roles and status.

a. Groups
Many small groups influence a person’s behavior. Groups that have a direct influence and
to which a person belongs are called membership groups. In contrast, reference groups serve
as direct (faceto- face) or indirect points of comparison or reference in forming a person’s
attitudes or behavior. Reference groups to which they do not belong often influence people.
Marketers try to identify the reference groups of their target markets. Reference groups expose
a person to new behaviors and lifestyles, influence the person’s attitudes and self-concept, and
create pressures to conform that may affect the person’s product and brand choices.

The importance of group influence varies across products and brands. It tends to be
strongest when the product is visible to others whom the buyer respects. Manufacturers of
products and brands subjected to strong group influence must figure out how to reach opinion
leaders—people within a reference group who, because of special skills, knowledge,
personality, or other characteristics, exert influence on others.

b. Family
Family members can strongly influence buyer behavior. The family is the most important
consumer buying organization in society, and it has been researched extensively. Marketers
are interested in the roles and influence of the husband, wife, and children on the purchase of
different products and services. Husband-wife involvement varies widely by product category
and by stage in the buying process. Buying roles change with evolving consumer lifestyles

26
 Children may also have a strong influence on family buying decisions. For example, it ran ads
to woo these “back-seat consumers” in Sports Illustrated for Kids, which attracts mostly 8- to
14- year-old boys. “We’re kidding ourselves when we think kids aren’t aware of brands,” says
Venture’s brand manager, adding that even she was surprised at how often parents told her
that kids played a tie-breaking role in deciding which car to buy. In the case of expensive
products and services, husbands and wives often make joint decisions.

c. Roles and Status

A person belongs to many groups-family, clubs, organizations. The person’s position in
each group can be defined in terms of both role and status. A role consists of the activities
people are expected to perform according to the persons around them.

3. Personal Factors

A buyer’s decisions also are influenced by personal characteristics such as the buyer’s age
and lifecycle stage, occupation, economic situation, lifestyle, and personality and self-concept.

a. Age and Life-Cycle Stage

People change the goods and services they buy over their lifetimes. Tastes in food, clothes,
furniture, and recreation are often age related. Buying is also shaped by the stage of the family
life cycle—the stages through which families might pass as they mature over time. Marketers often
define their target markets in terms of life-cycle stage and develop appropriate products and
marketing plans for each stage. Traditional family life-cycle stages include young singles and
married couples with children.

b. Occupation
A person’s occupation affects the goods and services bought. Blue-collar workers tend to
buy more rugged work clothes, whereas white-collar workers buy more business suits.
Marketers try to identify the occupational groups that have an above-average interest in their
products and services.

A company can even specialize in making products needed by a given occupational group. Thus,
computer software companies will design different products for brand managers, accountants,
engineers, lawyers, and doctors.

c. Economic Situation
A person’s economic situation will affect product choice. Marketers of income-sensitive goods
watch trends in personal income, savings, and interest rates. If economic indicators point to a
recession, marketers can take steps to redesign, reposition, and reprice their products closely.

d. Lifestyle
People coming from the same subculture, social class, and occupation may have quite
different lifestyles. Life style is a person’s pattern of living as expressed in his or her
psychographics. It involves measuring consumers’ major AIO dimensions—activities (work,
hobbies, shopping, sports, social events), interests (food, fashion, family, recreation), and
opinions (about themselves, social issues, business, products). Lifestyle captures something

e. Personality and Self-Concept

Each person’s distinct personality influences his or her buying behavior. Personality refers
to the unique psychological characteristics that lead to relatively consistent and lasting
responses to one’s own environment. Personality is usually described in terms of traits such
as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability, and

27
 aggressiveness. Personality can be useful in analyzing consumer behavior for certain product
or brand choices. For example, coffee marketers have discovered that heavy coffee drinkers
tend to be high on sociability. Thus, to attract customers, Starbucks and other coffeehouses
create environments in which people can relax and socialize over a cup of steaming coffee.

4. Psychological Factors

A person’s buying choices are further influenced by four major psychological factors:
motivation, perception, learning, and beliefs and attitudes.

a. Motivation
A person has many needs at any given time. Some are biological, arising from states of tension
such as hunger, thirst, or discomfort. Others are psychological, arising from the need for
recognition, esteem, or belonging. Most of these needs will not be strong enough to motivate the
person to act at a given point in time. A need becomes a motive when it is aroused to a sufficient
level of intensity. A motive (or drive) is a need that is sufficiently pressing to direct the person to
seek satisfaction. Psychologists have developed theories of human motivation. Two of the most
popular—the theories of Sigmund Freud and Abraham Maslow—have quite different meanings
for consumer analysis and marketing.

b. Maslow’s Theory of Motivation

Abraham Maslow sought to explain why people are driven by particular needs at particular
times. Why does one person spend much time and energy on personal safety and another on
gaining the esteem of others? Maslow’s answer is that human needs are arranged in a hierarchy,
from the most pressing to the least pressing. Maslow’s hierarchy of needs is shown in Figure. In
order of importance, they are physiological needs, safety needs, social needs, esteem needs,
and self-actualization needs. A person tries to satisfy the most important need first. When that
need is satisfied, it will stop being a motivator and the person will then try to satisfy the next most
important need. For example, starving people (physiological need) will not take an interest in the
latest happenings in the art world (self-actualization needs), nor in how they are seen or esteemed
by others (social or esteem needs), nor even in whether they are breathing clean air (safety
needs). But as each important need is satisfied, the next most important need will come into play.

c. Perception
A motivated person is ready to act. How the person acts is influenced by his or her own
perception of the situation. All of us learn by the flow of information through our five senses:
sight, hearing, smell, touch, and taste. However, each of us receives, organizes, and interprets
this sensory information in an individual way. Perception is the process by which people select,
organize, and interpret information to form a meaningful picture of the world.

d. Learning
When people act, they learn. Learning describes changes in an individual’s behavior arising
from experience. Learning theorists say that most human behavior is learned. Learning occurs
through the interplay of drives, stimuli, cues, responses, and reinforcement.

e. Beliefs and Attitudes

Through doing and learning, people acquire beliefs and attitudes. These, in turn, influence their
buying behavior. A belief is a descriptive thought that a person has about something. Buying
behavior differs greatly for a tube of toothpaste, a tennis racket, an expensive camera, and a new
car. More complex decisions usually involve more buying participants and more buyer
deliberation. Figure shows types of consumer buying behavior based on the degree of buyer
involvement and the degree of differences among brands.

28
The students has to understand that using a demographic profile in conducting research is
important to determine the taste and preferences of every consumer.

REFERENCES:
Introductory Microeconomics, Third Edition by Pagoso, Dinio & Villasis, 2006

LEARNING ACTIVITY:
To create an individual portfolio of goods you purchased in 6 months Dec 2022 – June 2023

MEASUREMENT:
Quiz on Optimum Combination Analysis

REFERENCES:
Click https://bit.ly/3lHqW6X (Impulse Buying)
Click https://bit.ly/2QHGut4 (Satisfaction)
Introductory Microeconomics by Pagoso
Introduction to Microeconomics by Mutya

29
Lesson 7 – Utility and Behavioral Factors

What is Utility?
Utility refers to the degree of satisfaction per unit of consumption of a good. It is a technical
term for satisfaction. Basically, there are two theories regarding consumer behavior namely, the
cardinal utility theory and the ordinal utility theory.
The Cardinal Utility Theory is a theory which states that utility is measurable. However, Utils
is the unit of measurement for satisfaction. Note this example below
Table 7.1

Tell the students to plot the data inside the table and find out the sha[e of the curve, Analyze
the points base on the barrio.
Formula: MU = TU/Q
where: MU - Marginal Utility
TU - Total Utility
Q - Quantity

The Ordinal Utility Theory is also known as the Indifference Theory which states that utility
is not measurable but can only be rnked or compared.
Utils is the unit of measurement for satisfaction

The Law of Diminishing Marginal Utility

The law states that as one consumes more and more of a particular good, additional or extra
satisfaction decreases. According to Payumo,a fiipino author, this is more of a psychological
particular good

30
Lesson 8 – The Indifference Curve, Budget Line and Optimum Combination

COURSE MATERIAL:

The Indifference Curve

The Indifference curve shows different combinations of two goods that can be consumed that
yield the same level of satisfaction or utility. A series of indifference curve is called an
indifference map.
Characteristics of indifference curves:
1. More goods are preferrable to fewer goods; this points to upper right preferred points in
lower left of utility curve diagram.
2. More goods are substitutable; hence, utility curves slope downward to the right.
3. Diminishing marginal rate of substitution between goods implies utility curves always
convex to the origin.
4. Indifference curve are everywhere dense, i.e. one through every point.
5. Indifference curves cannot cross because if they did, then individual would not be following
a rational ordering.

Fig. 8.1

Budget Line
A budget line is a locus of points that shows different combinations of two goods that can be
purcahsed given the same money income or budget. In constructing a budget line , one has to
determine the price of good x (Px) and price of y (Py), and of course, with the corresponding
budget (B).
Example: Px = 10,Py = 20 and Budget (B) = 200
Budget = Px Qx + Py Qy
200 = 10 Qx + 20 Qy
Given Px = 10, Py = 20 and Budget (B) = 200. The combination of good X and Y that can be
purchased is determined by the above equation, otherwise known as a Budget Function.

31
 Table 8.2
Display slide to describe line AE as the given budget line. If the consumer spends all
of his income on Good Y, he could purchase 10 units. This is point A. If all income is
spent on Good X, he could purchase 20 units of that good. This is point E. By joining
both points, we can now draw the budget line AE.

Fig. 8.3

Any point like F and G which are to the right of the budget line represent unattainable
combinations that require more than P200 budget, while at any point to the left of the budget line
like point K, the consumer spends less than 200. All combinations on the budget line are
maximum and attainable or can be purchased with the given budget.

LEARNING ACTIVITY/HOMEWORK:
Case Study: International Convergence of Tastes

MEASUREMENT:
Quiz via Google Form

REFERENCES:
Introductory Microeconomics, Third Edition by Pagoso, Dinio & Villasis, 2006

32
 Unit 4 - The Theory of Production

OVERVIEW
Production theory is the study of production, or the economic process of producing outputs
from the inputs used. Production uses resources to create a good or service that are suitable for
use or exchange in a market economy. This can include manufacturing, storing, shipping, and
packaging. Some economists define production broadly as all economic activity other than
consumption. They see every commercial activity other than the final purchase as some form of
production.
Production is a process, and as such it occurs through time and space. Because it is a flow
concept, production is measured as a “rate of output per period of time”. There are three aspects
to productions processes:
1. The quantity of the good or service produced.
2. The form of the good or service created.
3. The temporal and spatial distribution of the good or service produced.
A production process can be defined as any activity that increases the similarity between the
patter of demand for goods and services, and the quantity, form, shape, size, length and
distribution of these goods and services available to the market place.

LEARNING OUTCOME: After the completion of this unit, the students will be able to:

1. Differentiate Fixed and Variable Inputs and their value to the firm.
2. Apply the Law of Diminishing Return principle in actual firm case analysis.
3. To compute and plot total input and total product output

COURSE MATERIAL:
• Watch a documentary of General Motors
 • A print soft copy of General Motors Case Study, with questions to be answered as part
of the student’s assignment

General Motors Case Study Analysis

MEASUREMENT:

Twenty (20) points Multiple Choice Quiz

REFERENCES:

https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/production-cost-
andthe-perfect-competition-

Lesson 9 - The Production Function and Stages of Production

Display slide, to define few words such as:
Production is the creation of goods and services using the inputs of production.

Production Function is the physical relationship between inputs and outputs of goods and
services

Inputs of production refers to the factors of production which include land, labor, capital and
entrepreneurship. Inputs are classified as follows:

• Fixed inputs - they are those that remain constant regardless of the volume or quantity
of production. This means that whether you produce or not, the factors of production
is unchanged. Ex. Land, building

• Variable inputs - these are those that vary in accordance to the volume or quantity of
production. If there is no production; then, there is no variable inputs.
Ex. Labor, raw materials

34
The Law of Diminishing Returns

Display slide to define, It states when successive units of variable input is combined with a
fixed input, the total product (TP) or output (Q) will increase, but beyond some points the resulting
increases in output will become smaller and smaller.

• Total Product (TP) refers to the total production or output (Q).

• Marginal (Physical) Product (MP) is the additional output produced by employing one
additional unit input (X) holding the level of usage of all other inputs constant.
ΔQ
MP = ΔTP/ Δx or using Q to denote TP MP = -------
Δx

Average (Physical) Product (AP) is the output produced per unit of the input
AP = TP/x or using Q to denote TP AP = Q
-----
X
Display Slide, to show the total product (in cavans) schedule of rice production with
workers as variable inputs (x). Applying the formula we can find the solution below.

On another slide, below is the graphical presentation of the schedule, showing the
increasing rate of production as inputs (workers) were added, thus, total product and
marginal product increases at a certain point.

Table 9.1

35
Display slide, to see the plotted data below and explain to the students the theory in this drawing.

Fig. 9.2
The Three Stages of Production
Display the slide, present the table and the illustration above to explain the 3 stages of
production as follows:
1. Stage of Increasing Returns - this stage shows that as additional variable input is used,
Total Product (TP) increases at an increasing rate.

2. Stage of Decreasing Returns - This is the stage where the producer continuously employs
more labor input to a fixed land, Total Product (TP) continuously increases but at a
decreasing rate.

3. Stage of Negative Returns - it is the stage of over-utilization of the fixed input. Note that
as labor input increases, Total Product is then decreasing so the contribution of additional
labor input is already negative.

LEARNING ACTIVITY:

Computation
MEASUREMENT:
Twenty (20) points Multiple Choice via Google form REFERENCES:
https://people.wou.edu/~leadlej/Old/Winter%202011/EC%20460/Perloff_Chap6.pdf
https://www.google.com/search?q=stages+of+production&oq=Stages+of+Production&aqs=chrome.0.0l
7.5878j0j7&sour
https://study.com/academy/lesson/law-of-diminishing-returns-definition-examples-quiz.html

36
Lesson 11 – Production Isoquants and Isocost

Display slide, to explain that Isoquants represent the various combinations of two inputs that
can be used to produce the same level of output.

Characteristics of Isoquants
1. They slope downward to the right for those combinations of inputs that firms will want to
use.
2. They do not intersect.
3. They are convex to the origin.
Display slide, and explain that Isocost line contains all combinations of inputs that the same
budget can purchase at constant prices.
Below is an example of isoquant and isocost schedules and graphs. Table

9.1 Isoquant Schedules

The point of tangency of the Isoquant and Isocost curves shows the best combination of inputs
(labor and capital) given the capital outlay of P16,000.00. The firm must employ 20 units of labor
and 15 units of capital in its production process. The maximum output that the firm can produce
is 1000 units.

37
 Table 9.2 Production Input Combination Schedule

Theory of Cost and Profit

Display slide on cost concepts.

Cost of production - refers to the total payment by a firm to the owners of the factors of
production.

Factors of Production Factor Payment

Land Rent
Labor Wage or Salary
Capital Interest
Entrepreneurship Profit

The price of resources is measured in terms of opportunity cost.

• Opportunity cost - is the value of alternative product foregone

Explicit cost (Visible cost) is the actual expenditures made by the firm (that is usually
thought of as its only expenses).

• Implicit cost (Invisible cost) is the cost of self-owned, self-employed resources frequently
overlooked in computing the expenses the

• Short run and Long run viewpoints

38
 Short run is the planning period of the firm so short that some resources can be
classified as fixed while some are considered variable, while Long run is the planning
period pf the firm so long that all resources eventually become variable.

Short Run Cost Curves

In the short run, the total costs of a firm depend on the firm’s size and on the level (or volume)
of production. The component parts of Total Costs (TC) are Total Fixed Costs (TFC) and Total
Variable Cost (TVC).
TC = TFC + TVC
Fixed cost is the kind of cost which remains constant regardless of the level (or volume) of
production. The summation of all the fixed costs incurred by a firm in its production is the Total
Fixed Cost (TFC).
Variable cost is the kind of cost which changes in proportion to the level (or volume) of m
production. Total Variable Cost (TVC) is the totality of all the variable cost spent by the firm in its
production.,
Average and Marginal Cost Curves
• AFC = TFC/ Q
• AVC = TVC/ Q
• AC = TC/Q
• AC = AFC + AVC
• MC = ΔTC/ΔQ

Fig. 11.1

Profit, Loss and Break-even

Profit maximization involves the comparison of TR and TC. The mathematical formula to
derive profit (r) is by getting the difference between total revenue (TR) and total cost (TC).

39
 Proft = TR -TC

LEARNING ACTIVITY:
Illustrate a Production Office and Warehouse in one (1) short Bond Paper

MEASUREMENT:

Case Study Analysis on “Self Managed Teams: A Case of New Productivity Breakthrough.”

REFERENCES:
Manual for Mathematical Economics with Work Exercises by Silon, 2009 Understanding
Economics by Payumo, Maniago and Camba, 2014

http://www.darshan.ac.in/Upload/DIET/Documents/CE/Theory%20of%20production_05012015_06033
2AM.pdf

40