The Economy including impact of their choices on

individual markets.
➢ "invisible hands" or market forces as
introduced by Adam Smith, the father Macroeconomics- the branch of
of modern economics economics that focuses on the impact of
➢ Economics is a social science that choices on the total or aggregate level of
examines people's choices available economic activity. (MACRO CONCERNS:
for them. It is the study of activities of “Inflation"- measure of the rate of change
market forces. in the average price for the entire
➢ Market forces make the goods economy; "Unemployment" represent the
available for consumers in one place. aggregate of all labor markets
➢ Elements: Producers, Traders,
Economist’s Tool Kit
Government and Consumers
➢ SELECTION: scarcity, choice and ➢ Economists examine relationships
opportunity cost between VARIABLES (changes in value)
➢ SCARCITY means limited resources ➢ Economists used SCIENTIFIC METHOD
➢ FUNDAMENTAL ECONOMIC QUESTIONS (systematic set of procedures through
: (1) what should be produced? (2) which knowledge is created)
how should goods/services be ➢ In scientific method, HYPOTHESES are
produced? (3) for whom should suggested and tested, if then generally
goods/services be produced? accepted, it becomes a THEORY, if
➢ Every CHOICE has an OPPORTUNITY then, universally tested and accepted,
COST, and OPPORTUNITY COST affects it becomes a LAW.
the CHOICES of the people.
➢ OPPORTUNITY COST of any CHOICE is Model in Economics
the value of the best alternative that ➢ A MODEL is a set of simplifying
had to be released in exchange of assumptions about some aspects of
making CHOICES. the real world.
Economic way of thinking ➢ Economists often use graphs to
represent economic models. These
➢ Economists give special emphasis to models help us generate hypotheses
the role of OPPORTUNITY COST in their about the real world.
analysis of any choices. ➢ Two problems inherent in tests of
➢ Economists assumed that individuals hypotheses in economics are: all-other-
make CHOICES to best serve their SELF- things-unchanged, and the fallacy of
INTEREST. false cause.
➢ Economists focused on the effects of ➢ Positive statements are factual and
SMALL CHANGES (choice at a margin) can be tested. Normative statements
maximizing individuals decision. are value judgments that cannot be
tested. Most of the disagreements
Areas of Economic Analysis
among economists stem from
Microeconomics - the branch of differences in values.
economics that focuses on the choices
made by individual decision-making units
in the economy (consumers and firms),
CONFRONTING SCARCITY: CHOICES IN ➢ PROBLEM: when savings retained
PRODUCTION longer in banks at lower fixed interest
rates beaten by inflation.
Production
➢ ENTERPRISE: coordinates activities of
➢ The process of producing goods and the other three factors namely, land,
services available for sale in the market. labor, and capital. The ENTREPRENEUR
The value or satisfaction that people is a person who operates the
derive from the goods and services ENTERPRISE. It used TECHNOLOGY
they consume or pursue is called which is the knowledge applied to the
UTILITY. Ultimately, the economy's production of goods and services.
factors of production create UTILITY Both ENTREPRENEUR and TECHNOLOGY
and serve the INTERESTS of the people. are the keys in utilization of an
➢ FACTORS: land, labor, capital and economy's factor of production.
enterprise (responsible for the ➢ The ENTREPRENEUR pays rent for land,
production of economy) wages to labor, and interest to
borrowed capital, and the surplus it
Factors of Production earns above cost is called PROFIT.
➢ LAND - political boundaries which can ➢ Innovative vs imitative entrepreneur.
be used for agriculture, residential, The Production Possibilities Curve
commercial purposes.
➢ URBAN land is costly than RURAL land ➢ It is a graphical presentation of the
due to the presence of vertical (bldg) alternative combinations of goods and
and horizontal (road) developments. services an economy can produce.
➢ PROBLEM: conversion of land-use, fair ➢ Competitive Advantage happens
market value, alienable disposable when opportunity costs is lower than
land. any other.
➢ LABOR FORCE or human capital (18-65 ➢ Law of Increasing Opportunity Costs
y/o) is a subset of total population in a holds that as an economy moves along
country that has skills, training, or its production curve in producing more
experience that can be used in goods, the opportunity costs of
production. additional units of that good will
➢ SALARY earners are those with fixed increase.
employment and benefits (Full or part ➢ The downward slope of the production
timers) possibilities curve is an implication of
➢ WAGE earners are those with fixed scarcity.
tenure of employment and not ➢ The bowed-out shape of the
entitled to privileges. production possibilities curve results
➢ PROBLEM: unemployment, from allocating resources based on
underemployment. comparative advantage. Such an
➢ CAPITAL: savings, bank deposits and allocation implies that the law of
interests, shares of stocks (financial increasing opportunity cost will hold.
capital), office buildings, machineries
and tools, raw materials or natural
resources (physical capital)
➢ The more savings, the more available
resources for investment
EFFICIENT AND INEFFICIENT PRODUCTION ➢ Policies to encourage growth involve
postponing consumption to increase
➢ EFFICIENT production happens when
capital and human capital.
an economy is operating on its
production possibilities curve. SOURCES OF ECONOMIC GROWTH
➢ INEFFICIENT production happens when
➢ Any increase in the quantity or quality
an economy operating inside its
of the factors of production available
production possibilities curve. It could
to the economy or improvement in
be producing more goods without
technology contributes to economic
using additional labor, capital, or
growth.
natural resources.
CLASSIFYING ECONOMIC SYSTEMS
SPECIALIZATION
➢ Market Capitalist Economy, known as
➢ It implies that economy is producing
"free enterprise", resources are
goods and services has a comparative
generally owned by private individuals
advantage.
who have power to make decisions
➢ The ideas of comparative advantage
about their use.
and specialization suggest that
➢ Command Socialist Economy, the
restrictions on international trade are
government is the primary owner of the
likely to reduce production of goods
capital and natural resouces and has
and services.
broad power to allocate the use of
APPLICATION OF PRODUCTION factors of production.
POSSIBILITIES MODEL ➢ Mixed economies combine elements
of market capitalist and of command
➢ One of the most important implications
socialist economic systems.
of the concepts of comparative
advantage and the production DEMAND AND SUPPLY
possibilities curve relates to
PRICE AND THE DEMAND CURVE
international trade. If nations
specialize, they will rely on each other. ➢ The quantity demanded of a good or
They will sell the goods in which they service is the quantity buyers are willing
specialize and purchase other goods and able to buy at a particular price
from other nations. during a particular period , all other
things unchanged (ceteris paribus).
ECONOMIC GROWTH
➢ A demand schedule is a table that
➢ It is the process through which an shows the quantities of a good or
economy achieved outward shift in its service demanded at different prices
production possibilities curve (that during a particular period, all other
outward shift is an increase in physical things unchanged.
quantity or quality of factors of ➢ A movement along the demand curve
production available to an economy that results from a change of price is
or a technological gain will allow the called a change in quantity
economy to produce more goods and demanded.
services.
➢ The law of demand holds that, for expectations, natural events, number
virtually all goods and services, a higher of sellers.
price leads to reduction of quantity
DETERMINATION OF PRICE AND QUANTITY
demanded and a lower price leads to
increase in quantity demanded. ➢ The equilibrium price in any market is
➢ A shift in the demand curve is called a the price at which quantity demanded
change in demand. equals supplied.
➢ A variable that can change the ➢ The EQUILIBRIUM QUANTITY is the
quantity of a good or service quantity demanded and supplied at
demanded at each price is called a the equilibrium price
DEMAND SHIFTER. ➢ SURPLUS is the amount by which the
➢ In general, if a reduction in the prices of quantity supplied exceeds the quantity
one good increases the demand for demanded at the current price.
another, the two goods are called ➢ SHORTAGE is the amount by which the
COMPLEMENTS. quantity demanded exceeds the
➢ If a reduction in the price of one good quantity supplied at the current price.
reduces the demand for another, the
two goods are called SUBSTITUTE. THE CIRCULAR FLOW MODEL
➢ A good for which demand increases ➢ It provides a look at how market works
when income increases is called a and how they are related to each
NORMAL GOOD. other. It shows flows of spending and
➢ A good for which demand decreases income through the economy.
when income increases is called an
INFERIOR GOOD. PRICING

PRICE AND THE SUPPLY CURVE ➢ Water vs Gold

➢ The price is not dependent on use or
➢ The quantity supplied of a good or purpose , it is determined by the
service is the quantity sellers are willing operation of the forces of demand and
to sell at a particular price during a supply.
particular period, all other things ➢ HIGH DEMAND, low supply, high price
unchanged. ➢ LOW DEMAND, high supply, low price
➢ A SUPPLY SCHEDULE is a table that
shows quantities supplied at different APPLICATION OF DEMAND AND SUPPLY
prices during a particular period, all
➢ Demand and supply determine prices
others things unchanged.
of shares of stocks. The equilibrium price
➢ A SUPPLY CURVE is a graphical
of a share of stock strikes a BALANCE
representation of a supply schedule.
between those who think the stock is
➢ A change in quantity supplied is a
worth more and those who think it is
movement in supply curve cause by a
worth less than the current price.
CHANGE IN PRICE.
➢ If a company's profits are expected to
➢ A variable that can change the
increase, the demand curve for its
quantity of a good or service supplied
stock shifts to the right and the supply
at each price is called a SUPPLY
curve shifts to the left, causing
SHIFTER. (eg. prices of factors of
equilibrium price to rise. The opposite
production, returns from alternative
would occur if a company's profits
activities, technology, seller
were expected to decrease.
➢ Other factors that influence the price of
corporate stock include demographic
and income changes and overall
health of the economy.
➢ Price floors create surpluses by fixing
the price above the equilibrium price.
At the price set by the floor, the
quantity supplied exceeds the quantity
demanded.
➢ In agriculture, price floors have created
persistent surpluses of a wide range of
agricultural commodities. Govt
typically purchase the amount of the
surplus or impose production
restrictions to reduce the surplus.
➢ Price ceilings create shortages by
setting the price below equilibrium. At
the ceiling price, the quantity
demanded exceeds the quantity
supplied.
➢ RENT CONTROLS are an example of a
price ceiling, and thus they create
shortages of rental housing.
➢ It is sometimes the case that rent
controls create "backdoor"
arrangements, ranging from
requirements that tenant rent items
that they do not want to outright
bribes, that result in rents higher than
would exist in the absence of the
ceiling.
➢ The rising share of the output devoted
to health care represents a rising
opportunity costs. More spending on
health care means less spending on
other goods and services.
➢ The model of demand and supply can
be used to show the effect of third-
party payers (health insurers) on total
spending. With the third-party payers,
the quantity of services consumed rises,
qs does spending.