Introduction to Economics ● For a society to survive and grow, it must have enough

resources => need to expand or create wealth to have the

Definition of Economics goods and services that can be utilized.
● Origin of the term "economics" ● This view helps in understanding problems of production and
● The two Greek roots of the word economics are oikos - distribution.
meaning household and nomus - meaning system or ● Study how these activities are transacted in a market and the
management. Oikonomia or oikonomus, therefore, means the impact of the various actors in the market in the determination
"management of household." of the price of a good or input.
● With the growth of the Greek society until its development into
city-states, the word became known or was referred to as Problem of Material Survival and Growth
"state management". ● In economics, society is concerned with wealth as means of
ensuring its material survival and growth.
Economics as allocation of wealth ● Any society will need resources like labor, capital, and land in
● Economics is defined as a social science that deals with the order to create goods and services for the material well-being
allocation of scarce resources to satisfy unlimited human and survival of its people.
needs and wants. ● Society also wants an expanded and improved food, shelter
● There is a need for society to decide on how to use limited and clothing for its people. This economic development is not
wealth efficiently to answer the needs and wants of our only an expansion of wealth but the equitable distribution of
people; this is the vital role of the process of allocation. the fruits of wealth.
● Allocation: mechanism of distribution to address the needs and
wants of citizens in an environment with scarce resources. Basic Economic Questions:
○ Price system of allocation: used market forces to 1. What goods to produce, and how much?
determine the value of goods and services. 2. How many will be produced?
○ Traditional system of wealth allocation: based on social 3. Who will produce it?
consensus and tradition handed down generations. 4. How will it be produced?
○ Command system of allocation: based on the dictates 5. For whom will it be produced?
of the government's central planning agency
Economic Resources
Economics as creation and consumption of wealth Also known as factors of production. Used to produce goods
● Economics was once defined as the science of wealth-getting and services
and wealth-using. Classification of Resources
  Land - soil and natural resources found in the wild and ○ Principle 4: People respond to incentives
not man-made. Landowners get a lease known as rent ■ Rational people are induced to act, i.e. the
 Labor - physical human involvement in production Eg. prospect of a reward or
Works in building, machine operators, and works in ● How people interact
manufacturing, nurses, lawyers, doctors etc "The ○ Principle 5: Trade can make everyone better off
income received by laborers is referred to as Wage. ■ Rather than being self-sufficient, people can
 Capital - man-made commodities that are used to specialize in producing one good or service and
manufacture products and services. The capital owner exchange it for other goods. Countries also
receives an income which is called Interest. benefit from trade and specialization.
 Entrepreneurship - transformis an idea into a ○ Principle 6: Markets are usually a good way to
business. In order to add to supply, an entrepreneur organize economic activity
incorporates the other three output factors, innovation ■ "Organize economic activity" means
and risk-takers are the most successful entrepreneurs. determining the basic economic questions.
Profits - are the money entrepreneurs receive. ○ Principle 7: Governments can sometimes improve
market outcomes
Ten Principles of Economics ■ Government may alter market outcomes to
● Overview of what economics is all about; the principles were promote equity. Public policy may promote
introduced by N. Gregory Mankiw efficiency.
● How people make decisions ● How the economy as a whole works
○ Principle 1: People face trade-offs ○ Principle 8: a country's standard of living depends
■ All decisions face trade-offs. Society faces an on its ability to produce goods and services
important trade-off between efficiency and ■ The most important determinant of living
equality. standards is productivity
○ Principle 2: The cost of something is what you give ○ Principle 9: Prices rise when the government prints
up to get it too much money
■ Making decisions requires comparing the costs ■ The faster the government creates money, the
and benefits of alternative courses of action. greater the inflation rate.
The concept of opportunity cost. ○ Principle 10: Society faces a short-run trade-off
○ Principle 3: Rational people think at the margin between inflation and unemployment
■ Rational people make decisions by evaluating ■ In the short-run (1-2) years, many economic
costs and benefits of marginal changes, and policies push inflation and unemployment in
incremental adjustments to an existing plan. opposite directions.
 ■ treatment and analysis of data
Importance of studying economics ■ the interpretation of results and conclusion
● To learn a way of thinking ● Relationship of economics to other sciences
○ The most important reason for studying economics; ○ Business Management
○ There are three concepts that can change the way you ○ History
look at everyday choices: opportunity cost, ○ Finance
marginalism, and the working of efficient markets. ○ Physics
■ Opportunity cost - the best alternative that we ○ Psychology
forgo, or give up, when we make a decision. ○ Sociology
■ Marginalism - the weighing of the costs and ● Positive and Normative Economics
benefits of a decision. ○ Positive economics is an economic analysis that
■ Efficient marker - "no free lunch"; a market considers economic conditions "as they are", or
wherein profit opportunities are eliminated considers economics "as it is". It uses objective or
almost instantaneously. scientific explanation in analyzing the different
● To understand society transactions in the economy. It simply answers that
○ Economics seeks to analyze transactions made by the question 'what is'. •
society and its members, particularly with regard to ○ Normative economics is economic analysis which
details on their behavior and decision-making. judges economic conditions "as it should be". It is that
● To understand global affairs aspect of economics that is concerned with human
○ Economics seeks to explain the internal operation and welfare. It deals with ethics, personal value judgments
trade policies of countries. It also measures the and obligations analyzing economic phenomena. It
competitiveness of each country and identifies its answers the question 'what should be'. It is also
comparative advantage in relation to other states. referred to as policy economics because it deals with
● To be an informed citizen the formulation of policies to regulate economic
○ An understanding of economics develops individuals to activities.
be wise voters.
● Economics has two major branches:
Methods of economics ○ Microeconomics
● Scientific method ■ Deals with the individual decisions of units of
○ Comprised of five major tasks: formulation of the the economy-firms and households, and how
problem establishing possible answer or hypothesis their choices determine relative prices of goods
gathering data and information and factors of production.
 ■ The market is the central concept of ○ It is used to illustrate economists' hypotheses, theories,
microeconomics. It focuses on its two main and estimates on what is happening in a particular
players the buyer and the seller, and their economy. Basically, it is a simplified summary of an
interaction with one another. economic reality.
■ Microeconomics operates on the level of the ● Using graphs
individual business firm, as well as that of the ○ It is a simplified version of mathematics and logic in
Individual consumer. It concerns how a firm making economic models. Its overall objective is to
maximizes its profits, and how a consumer give a whole, simple and clear illustration of an
maximizes his/her satisfaction. economic theory.
○ Macroeconomics ● Using statistical analysis
■ Studies the relationship among broad economic ○ These are used to measure whether economic
aggregates like national income, national relationships are true in reality.
output, money supply, bank deposits, total
volume of savings, investment, consumption Ceteris Paribus Assumption
expenditure, general price level of commodities, ● The assumption of "Ceteris Paribus" is important in studying
government spending, inflation, recession, and economics. Ceteris paribus means "all other things held
employment. constant or all else equal."
■ Macroeconomics focuses on the four specific ● This assumption is used as a device to analyze the
sectors of the economy: the behavior of the relationship between two variables while the other factors are
aggregate household (consumption); the held unchanged. It is widely used in economics as an
decision making of the aggregate business exploratory technique as it allows economists to isolate the
(investment); the policies and projects of the relationship between two variables.
government (government spending); and the
behavior of external/foreign economic agents, Problem: Scarcity, Choice and Opportunity Cost
through trading (export and import). ● Scarcity
○ It has two elements: wants and the means of fulfilling
● Use of mathematics those wants. These can be interrelated.
○ It is widely used by economists due to the precision of ○ The degree of scarcity is constantly changing
the language in presenting arguments in economic depending on production.
analysis.
● Using models ● Opportunity Cost
 ○ Because people cannot have everything they want, ○ Laissez-faire: French; "allow them to do”
they are forced to make choices between several ○ Lack of government involvement; individuals and firms
options. Opportunity cost refers to the foregone value make the decisions in the manner of production.
of the next best alternative. It is the value of what is ● Socialism
given-up when one makes a choice. The thing thus ○ Economic system wherein key enterprises are owned
given-up is called the opportunity cost of one's choice. by the state; private ownership is recognized but the
○ When one makes choices, there is always an state has control over a large portion of capital assets
alternative that has to be given up. A producer, who and is generally responsible for the production and
decidesto produce shoes, gives up other goods that he distribution of important goods.
could have produced using the same resources. A ○ The main emphasis: equitable distribution of income
student, who buys a book with his limited allowance, and wealth.
gives up the chance of eating out or watching a movie. ● Mixed Economy
○ Combination of free market and the command
The Resource Flow Model economy.

Role of the government

● 2 Main Roles:
○ Government as a Referee
■ Setting the rules that determine relations
between business and households.
○ Government as an Actor
■ Collecting money in taxes and spending that
money on projects such as defense, education
and health.
Types of Economic Systems ● Specific roles for government
● Traditional Economy ○ Providing a stable set of institutions and rules
○ A subsistence economy; ○ Promoting effective and workable competition
● Command Economy ○ Correcting for externalities
○ The manner of production is dictated by the ○ Ensuring economic stability and growth
government. The government decides on what, how, ○ Providing public goods
how much, and for whom to produce. ○ Adjusting for undesirable market results
● Laissez-Faire Economies: Free Market/Market Economy
What causes unemployment? ○ refers to the quantity of goods and services that firms
● Number of jobs is not enough for the number of people are ready and willing to sell at a given price within a
entering the job market period (Viray and Avila-Bato 2018).
● Rural-urban migration increases due to employment
opportunities ● The Law of Demand and Supply
● Many of the unemployed are fresh graduates ○ States that all other things remain constant (Ceteris
Paribus), the higher the price of a good the lesser the
Solutions to Unemployment demand for that good and the lesser the price the
● Appropriate economic policies higher the demand.
● Improve educational system of the country especially in rural ○ Relationship between the price and demand is
areas inversely related.
● Minimize rural-urban migration by improving economic ○ It is because of the substitution effect and income
environment in rural areas effect.
● Proper coordination between government and the private ■ Substitution effect: the price of Product A
sector increases the consumer will look for its
● Slowing population growth substitute and will cause a decrease in quantity
● Provision of more investment opportunities demanded for Product A.
■ Income Effect: an increase in price of a product
Poverty will cause a decrease in quantity demanded
● Common Causes: because the consumer may not afford to buy all
○ Increase in population the things just like before.
○ Increase in the cost of living
○ Unemployment ● The Law Of Supply
○ Income inequality ○ States that the quantity of products offered to be sold is
directly related with the price.
Demand and Supply ○ When the price increases the quantity supplied
● Demand increases too and if the price decreases the quantity
○ If our needs and wants can be backed by our buying supplied decreases too.
power, it becomes demand.
○ the ability and the willingness to buy the product at a ● Analyzing Demand
given price within a given time period.
● Supply
 ○ Demand Schedule - a table that shows the price of a ○ Supply Curve - a graphical representation that shows
good and the quantity demanded for that good at a the relationship between the price of a good and the
given price within a given period. quantity supplied at a given point of time.
○ Demand Curve - a graphical representation that shows ● Change in Quantity Supplied compared to Changes in
the relationship between the price of a good and the Supply
quantity demanded for that good at a given price. ○ Changes in quantity supplied happen when there is
■ usually uses the information in the demand change in the quantity of goods produced to be sold
schedule. because of the change in price. It happens because
businessmen or entrepreneurs are prepared to sell
● Changes in Quantity Demanded compared to Changes in their goods at a higher price to yield more profit.
Demand ○ Changes in supply is a shift of supply curve because
○ Changes in quantity demanded happen when there is a of some factors other than price.
change in the demand for a product because of the ● The entire supply curve shifts to the left. It means that at the
change in price. same price the quantity of goods supplied by the producer
○ There is a change in demand when there is a change decreases not because of the decrease in price but because
in quantity demanded because of some factors other of the increase in the number of sellers.
than price. ○ Factors that can Cause Changes in Supply
● The change in demand may be affected by several factors ■ Technology
such as: ■ Cost of production
○ Taste and preferences ■ Number of sellers
○ Income ■ Government policies (Taxes and subsidies)
○ Seasonal products ■ State of nature (weather)
○ Population change ■ Prices of related goods produced
○ Prices of related goods (substitute/complementary ■ Future expectations (possible increase in price)
goods)
○ Expected future prices, income and credit Market Structure – Perfect Competition
 Market structure
● Analyzing Supply o refer to the different market features that determine
○ Supply Schedule - table that shows the prices of a relations between sellers to each other, of sellers to
good and the quantity supplied at each price at a given buyers and more.
point of time  Characteristics Of A Market Structure
 o The item sold and the extent of production  The combination of a wide range of firms, which freely
differentiation. enter or leave the market and which considers prices
o The case or difficulty of entering and exiting the as information, since each firm only provides a
market. relatively small share of the good to the market and
o The number of companies in the market. thus do not have a great influence on it.
o The number of buyers and sellers in the market.  Cannot influence the levels of market prices.
 Market  Buyers are numerous, which also means that they
o is a set of buyers and sellers, commonly referred to as cannot influence or set prices.
agents, who through their interaction, both real and o Characteristics of Perfect Competition:
potential, determine the price of a good, or a set of  Many firms
goods.  Freedom of entry and exit
 Concept of a Market Structure  All firms produce an identical or
o Characteristics of a market that influence the behavior homogeneous product.
and results of the firms working in that market.  All firms are price takers,
 Main Aspects That Determine Market Structures  Demand curve is perfectly elastic
o Number of agents in the market (both sellers and  Perfect information and knowledge
 Homogeneous product: all firms offer
buyers)
the same goods, with the same
o Relative negotiation strength, in terms of ability to set
characteristics and quality as the others,
prices
without any variations.
o Degree of concentration among them
 Large number of buyers and sellers:
o Degree of differentiation and uniqueness of products
there should be a sufficient quantity of
o Case, or not, of entering and exiting the market. buyers and sellers, so that no action
 Types Of Market Structures from a single agent will affect the market
o Perfect competition structure or its prices.
o Imperfect competition:  No entry or exit barriers: there has to be
 Monopolistic competition free entry and exit of agents in the
 Oligopoly market. This assumption is of special
 Monopoly. interest for firms, which must be able to
enter or leave the market freely.
PERFECT COMPETITION  Price flexibility: price adjustments to
changes happen as fast as possible.
 Usually, price changes are assumed  The monopolist is able to charge whatever price they wish
immediately. due to the absence of competition.
 Free and perfect information: all agents  Refers to where a single firm controls the entire market. In
have perfect knowledge of products and this scenario, the firm has the highest level of market
their prices, and everything else related power, as consumers do not have any alternatives.
to them, as well as free access to this o With monopolies:
information.  The monopolist maximizes profit
 No government intervention: markets  It can set the price
should be left alone as government  There are high barriers to entry and exit
intervention would only lead to  There is only one firm that dominates
imbalances in perfectly competitive the entire market.
markets. o Characteristics of Monopoly:
 There is one producer or seller of a
Perfect competition markets are almost impossible to find in the real particular product and there is no
word as all markets have some type of imperfection. This is the difference between a firm and an
reason they are mostly considered only theoretically. In the industry. A firm itself is an industry.
Agricultural markets there are several farmers selling identical  A monopoly has full control on the
products (carrots) to the market, and many buyers. At the market, it is supply of a product.
easy to compare prices. Therefore, agricultural markets often get  There is no close substitute of a
close to perfect competition. monopoly's product in the market.
 There are restrictions on the entry of
Types Of Market Structure-Imperfect Competition other firms in the area of monopoly
 or Imperfectly Competitive markets is one in which some of the product.
rules of perfect competition are not followed.  A monopolist can influence the price of
 Virtually, all real world markets follow this model, as in practice a product. A price-maker, not a price-
all markets have some form of imperfection. taker.

MONOPOLY MONOPOLISTIC COMPETITION

 The exact opposite form of a market system as perfect  A market that has quite a large number of firms, producing
competition. a variety of goods which are close substitutes of each
 There is only one producer of a particular good or service, other.
and generally no reasonable substitute.
  Examples of monopolistic competition: Clothing Designer that the product sold by the two firms is homogeneous
label clothes are about the brand and product and there is no substitute for it.
differentiation  Examples where two companies control a large
 Characteristics of Monopolistic Competition Market: proportion of a market are: (i) Pepsi and Coca-
o Many firms Cola in the soft drink market
o Freedom of entry and exit. o CARTEL is defined as a group of firms that gets
o Firms produce differentiated products meaning that together to make output and price decisions.
there is a perception that the goods.  The conditions that give rise to an oligopolistic
o Are different for reasons other than price (through market are also conducive to the formation of a
branding) cartel.
o Firms have price inelastic demand; they are price  The oligopolistic market structure builds on the following
makers because the good is highly differentiated assumptions:
they can set the price o All firms maximize profits
o Buyers and sellers have imperfect information as o Oligopolies can set prices
they do not have all the information about products, o Barriers to entry and exit exist in the market
consumers and competitors. o Products may be homogeneous or differentiated
o Only a few firms dominate the market.
OLIGOPOLY MARKET STRUCTURE  Characteristics of Oligopoly
 There are just a few interdependent firms that collectively o Product branding: Each firm in the market is selling a
dominate the market. While individually powerful, each of branded product
these firms also cannot prevent other competing firms from o Entry barriers: Entry barriers maintain supernormal
holding sway over the market. profits for the dominant firms. It is possible for many
 Examples of firms in this market structure are smaller firms to operate on the periphery of an
telecommunications and petroleum companies oligopolistic market, but none of them is large enough
 Depending on the industry, each of the firms might also sell to have any significant effect on prices and output
products that are somewhat differentiated from those of the o Inter-dependent decision-making: Inter-dependence
other firms. means that firms must take into account the likely
 Their interdependence means that they are also likely to reactions of their rivals to any change in price. Output
change their prices according to their competitors. or forms of non-price competition
o DUOPOLY is a special type of oligopoly, in which there
are exactly two sellers. Under duopoly, it is assumed
 o Non-price competition: Non-price competition is a o For example, the demand for salt is said to be inelastic
consistent feature of the competitive strategies of because same quantity of it will be purchased even if
oligopolistic firms. price rises or declines.
o Whereas, demand for a car is elastic because a small
ELASTICITY OF DEMAND rise/fall in price may greatly reduce increase its
 Meaning of Price Elasticity of Demand demand. Price elasticity of demand is expressed as
o Elasticity, roughly, means responsiveness. What under:
response demand of a commodity shows when there is Percentage change ∈demand
Ep=
either increase or decrease in its price, is explained Percentage change∈ price
with the help of elasticity. Greater response means
greater elasticity and small response indicates less Five cases/kinds of price elasticity of demand
elasticity.  Perfectly Inelastic Demand: Demand for a commodity
o Prof. Alfred Marshall had introduced the concept of will be said to be perfectly inelastic, if the quantity
elasticity of demand in the economic theory. In his demanded does not change at all in response to a
words, “The elasticity (or responsiveness) of demand in given change in price. If 10 percent change in price
a market is great or small according as the amount results in zero percent change in demand, it is exactly
demanded increases much or little for a given fall in inelastic demand. The demand curve, in this case, is
price and diminishes much or little for a given rise in vertical straight line perpendicular to Y-axis.
price.” We may thus define elasticity of demand as the  Inelastic or less than Unit Elastic Demand: Demand
ratio of the percentage change in quantity demanded to for commodity will be said. To be inelastic (or less than
the percentage change in price. unit elastic) if the percentage change In quantity
o Demand may be elastic or inelastic. demanded is less than the percentage change in price.
o When due to a small change in price, there is a great If 10 percent change in price results in 6 percent
change in demand, it is said that demand is elastic. change in demand, it is inelastic demand.
o If a 5 percent cut in prices of car results in an increase  Unitary Elastic Demand: Demand for a commodity
in 30 percent in sales, demand is said to be highly will be said to be unit clastic if the percentage change
elastic. In other words, demand has responded greatly. in quantity demanded equals the percentage change in
o On the other hand, if a great change in price is followed price. If 10 percent change in price results in 10
by a small change in demand, it is inelastic demand. percent change in demand, it is unit elastic demand.
The demand curve in such case is called rectangular
hyper- bola.
 More than Unit Elastic: Demand for a commodity will
be said to be more than unit clastic if a change in price
results in a significant change in demand for this
commodity. If 10 percent change in price results in 14
percent change in demand, it is elastic demand.
 Perfectly Elastic Demand: Demand for a commodity
is said to be perfectly elastic, when a small change in
its price results in an infinite change in its quantity
demanded. If 10 percent change in price results in (a)
percent change in demand, it is exactly elastic
demand. In this case, demand curve is horizontal
straight line parallel to X-axis. The first and the last
cases are rare in real life.