Economics

UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014

Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
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CHAPTER 18:
Economics
☛What is Economics? citizens who are willing and able
to work
 Science that deals with the proper Economic Achieve the maximum fulfillment
allocation and efficient use of available Efficiency of wants using the available
resources for the maximum satisfaction of resources
human wants. Price-level Avoid large upswings and
Stability downswings in the general price-
Table 1. TYPES OF ECONOMICS level
POSITIVE NORMATIVE Economic Guarantees that business,
ECONOMICS ECONOMICS- Freedom workers and consumers have a
“study of “study of what should be” high degree of freedom in their
what is” economic activities.
deals with involves ethical precepts and value Equitable Ensures that no group of citizens
factual judgments distribution of faces poverty while most others
analysis income enjoy abundance.
Economic Provides for those who are
Table 2. DIVISION OF ECONOMICS Security chronically ill, disabled, laid-off,
MICROECONOMICS MACROECONOMICS aged, or otherwise unable to earn
Deals with the economic Economic behavior of the minimal levels of income
behavior of individual whole economy or its Balance of Seeks a reasonable overall
unit aggregates Trade balance with the rest of the world
in international trade and
ECONOMIC MOTIVES: financial institutions
*Consumers- purchase mixture of goods and *Scarcity- less of a good is freely available than
services that provide the highest level of satisfaction; consumers would like
usually respond to the basis of price
*Employees- choose the mixture of leisure and work Economic goods- scarce goods. The desire for
that provides the highest level of economic goods exceeds the amount that is freely
satisfaction; usually respond to the basis of available from nature.
monetary incentive
Resource- refers to input used to produce economic
ECONOMIC PERSPECTIVE goods (e.g., land, labor, capital)
The Economic perspective stresses:
a. Resource scarcity and the necessity of RULES OF SCARCITY
making choices
b. Assumption of rational behavior 1. Scarcity sets a limit on the types of
c. Comparisons of Marginal cost and commodities to be produced.
benefit 2. It determines the extent to which one
production method would be better
Table 3. ECONOMIC GOALS than another.
Economic Produce more and better goods 3. It also helps to determine the relative
Growth and services, or develop a higher rewards of all productive factors in
standard of living distributing output.
Provide suitable jobs for all
1 Management Advisory Services (MAS) Committee : Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark
Confidente; Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo
Jay Labasan
Adviser: Mary Queen Ramos, CPA
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PRINCIPLES OF ECONOMICS look at prices when deciding what to buy
*How people Make Decisions and sell, they unknowingly take into
1. Principle of Trade-off account the social benefits and costs of
- there is no such thing as free their actions (Work of Invisible Hands).
lunch
- to get one thing that we
like, we have to give up 7. Government can sometimes improve
something to get what we market outcomes.
like - Government intervenes in
- trading-off of goals against economic activities to
another promote efficiency and
2. The cost of something is what you give up equity.
to get it.
- Comparison of costs and *Market failure- situation in which the
benefits from decisions market on its own fails to allocate resources
efficiently.
3. Rational people think at the margin Examples: Externality (pollution), Market
- Making decisions involves Power (monopoly)
small incremental
adjustments to an existing HOW THE ECONOMY AS A WHOLE WORKS
plan of actions 8. A country’s standard of living depends
- Rational decision makers on its ability to produce goods and
take an action if and only if services
the marginal benefit of the - Focuses on productivity
action exceeds the marginal (productivity affects the living
cost standard of people)
4. People respond to incentives - Growth rate of productivity
- When changes occur to determines the growth rate
benefits and costs, behavior of average income
and decisions also change. 1. Prices rise when the government prints
*How People Interact too much money
5. Trade can make everyone better-off - inflation
- We can’t get what we want 2. Society faces a short-run trade-off
without trading. between inflation and unemployment
6. Markets are usually a good way to - Reducing inflation is often
organize economic activity. thought to cause temporary
rise in unemployment.
Market economy- decisions are based on (Philip’s curve)
firms and households - Prices are slow to adjust
Firms and households interact in Government reduces quantity of

the market place, where prices and self- money=people spend less amount of
interest guide their decisions. Prices guide money=quantity of goods and services
their decision makers to reach an outcome reduces=reduction in
that, in many cases, maximize the welfare investment=unemployment
of the society as a whole. Because firms
Jay Labasan
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ECONOMIC MODELS
*Circular Flow Diagram (How the Economy is Organized)
Production Possibilities Frontier (shows various combinations of output that the economy can possibly produce
given the available factors of production and the available production technology).
BASIC ECONOMIC PROBLEMS
Consumption
“What goods or services to produce and how much?”
Production
“How to produce goods or services?”
Distribution
“For whom are the goods and services?”
ECONOMIC SYSTEM MODELS

- Used to answer the three economic problems
1. Capitalism
- factors of production and distribution are owned by private individuals or corporations.
-market economy, free-enterprise economy or laissez-faire economy (no government intervention
in economic affairs)
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Characteristics:
Private property Free Competition
Economic Freedom Profit Motive
2. Communism
-factors of production and distribution are owned by the state
-command economy or classless society
Characteristics:
No Private Property No Free Competition Central Planning
No Economic Freedom No Profit Motive
3. Socialism
-combination of capitalism and communism
-major and strategic industries are owned by the state; minor industries belong to the private sectors
MARKET: Defined
-group of actual and potential buyers with similar needs and wants interacting with sellers offering products
and services.
TYPES OF MARKET
A. Consumer Market
-marketing of consumer goods
-high competition, penetration, dynamics of channel of management and high manufacturing expenses
and distribution
B. Business Market
-selling of projects (Industrial Market)
-deals with bulk sales
-great need for promotions
C. Global Market
D. Government or Non-profit Market
-involves government offices, ordinances, factories, navy, army and other government departments
-entities might have limited purchasing budget and hence the price of products is limited.
FUNCTIONS OF MARKETING
1. Buying
-first step in the process of marketing
2. Assembly
-collection of goods from various sources and transporting them into common place called “market”
3. Selling
-involves in all personal and imperil act, securing and developing a demand for a given product or services
and communicating the sale for it
4. Market Research
-essential sales depend upon this
-helps supplier’s learn the quality and quantity of goods wanted by customers
5. Transportation
-movement of goods from suppliers to market
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6. Storing
-keeping goods in proper condition
7. Standardizing and grazing
8. Financing
9. Risk Takin
MARKET STRUCTURES
-theoretical for existing firms or industries in the real world
KINDS OF MARKET STRUCTURES
TABLE 4. MARKET MODELS

KINDS NUMBER AND SIZE NATURE OF PRODUCTS ENTRY AND EXIT OTHER
OF FIRMS CHARACTERISTICS
PERFECT Numerous firms; Homogenous Zero barriers Perfect mobility
COMPETITION small factor
-production is
perfectly mobile
allowing long term
adjustments to
market conditions.
MONOPOLISTIC Numerous firms; Differentiated Entry is relatively -limited control of
COMPETITION small (similar but not identical) easy price
-aggressive non-
price competition
(e.g., product
quality, credit
terms)
OLIGOPOLY Few firms; large Homogenous/Differentiated Relatively high -price makers, but
barriers to entry still mutually
independent
-collusion
PURE Single firm; large Unique High barriers to -firms has price-
MONOPOLY entry making powers
-market demand is
firm’s demand
What is Demand?
*quantity of a good or service that consumers are willing to buy at different prices during a period of time.
What is Aggregate Demand?
*totality of a consumer’s demand
Note: The Demand Curve is downward sloping due to substitution effect and the income effect.
PRICE DEMAND
Substitution Effect ↓ ↑
Income Effect ↓ ↑
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*If the price of certain product is high, the buyer tends to look for a substitute product with a lower price.
*If the Price of a product is high given a constant level of income, the demand for that product increases
DEMAND FUNCTION
-shows how quantity demanded is dependent on its determinants
Qd=a-bP
Where:
P=price
a=demand at 0
b=by how many will the demand increase
LAW ON DEMAND
-As price increases, demand decreases and vice-versa
DETERMINANTS OF DEMAND
Consumer Income Demand for
Normal Goods Inferior Goods
↑ ↑ ↓
↓ ↓ ↑
Consumer Taste and Preferences Shift in this determinant would affect change in demand and a shift in
quantity demanded.
Prices of Closely Related Goods Price of Product A Demand of Product B
Substitutes (A or B) ↑ ↑
Compliments (A and B) ↑ ↓
Consumer Expectations Changes in expected consumer incomes and prices of goods have effects
on demand of products.
Number of Consumers Demand
↑ ↑
↓ ↓
DEMAND SCHEDULE- a relationship between the prices of a commodity and quantity demanded at the various
prices, holding other determinants of the quantity demanded constant.
*A change in quantity demanded is different from a shift in the demand curve itself. Shift in the demand curve
occurs when one of the determinants change.
TYPE OF GOODS
INFERIOR GOODS Goods with the least priority from buyers.
NORMAL GOODS Goods normally prioritized by buyers
SUBSTITUTE GOODS Goods that can be used in place of other goods
COMPLEMENTARY GOODS Goods that go together
What is Price Elasticity of Demand (Ed)?

*measures the responsiveness of a change in quantity demanded to a change in the price of a product.
*% change in quantity demanded divided by the % change in Price.
Ed = Q1-Q2 / [(Q1 + Q2)/2] or TR = Price x Quantity
P1-P2 / [(P1 + P2)/2]
Ed Interpretation Price Up Price Down
>1 Elastic TR Down TR Up
<1 Inelastic TR Up TR Down
=1 Unitary Elasticity TR Same TR same
=0 Perfectly Inelastic n/a n/a
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What is Cross-Elasticity Demand (Exy)?

*measures the % change of one commodity demanded with a given % change in price of another commodity.
Exy = %Δ in Quantity Demanded of x
%Δ in Price of y If Exy is The Two Commodities are
Positive Substitutes
Negative Commodities
Zero Not Related
What is Income Elasticity of Demand (Ei)?

*measures % change in quantity demanded for a given % change in income.
Ei = %Δ in Quantity If Ei is The Goods are Profit Demanded
%Δ in Income >0 Normal Good ↑
<0 Inferior Good ↓
Zero Unrelated ?
What does Principle of Diminishing Marginal Utility States?

*Equal increments of additional consumptions of a good result in successively smaller additional of utility to the
consumer. A consumer receives lesser satisfaction as he consumes the product repeatedly.
*What is Indifference curves?
* These are all combinations of goods X and Y that give equal utility to a consumer.
Note: the farther the indifference curve is from the origin, the higher the level of utility. These curves are
nonlinear, cannot intersect, negatively sloped and are convex points for bundles of goods.
*What is Budget Constraint Line?
* depicts all combinations of two goods that can be purchased with a given income at the given prices of the two
goods.
Note: This line is a straight line because its slope is constant
Change Income Parallel shift in the line
Change in the price of one or both goods Change in the slope of the line
Proportionate change in relative process of both goods Parallel shift in the line
CONCEPT OF SUPPLY
SUPPLY
-maximum units/quantity of goods or services offered
Law of Supply states that the price of the product and the quantity supplied are directly related; i.e., the lower the
price, the lower the quantity supplied. This explains the upward line in the supply graph. Also, in short run, the
price of the product and the quantity supplied are positively related because of the law of diminishing returns.
LAW OF DIMINISHING RETURNS

-when successive units of variable input (e.g., farmers), work with a fixed unit (e.g., land) beyond a certain point,
the additional product produced by each additional unit of a variable input decreases.
*The validity of this law is based on two assumptions:
a. Successive units of a variable unit should be identical
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b. Same technology is applied
DETERMINANTS OF SUPPLY
Production prices
Prices of the other goods
Prices expectations
Technology
Taxes
Subsidies
The supply schedule is a relationship between the price of a good (on the vertical axis) and the quantity supplied
to the market ( horizontal axis) at each price, holding other determinants of the quantity supplied constant. A
change in a price commodity is represented as a movement along the supply schedule.
Supply curve shift is the change in the quantity supplied must be distinguished from a shift in the supply curve
itself. The latter is caused by a change in one of the determinants.
An increase in supply commodity A (a shift in the supply schedule to the right) can be caused by changes in the
following determinants.
 A decrease in a factor of the production price
 An improvement in technology
 A decrease in the demand of commodity (B), including firms to divert resources from the
production of B to A
 The expectation of price decreases
 A decrease in taxation of good or an increase in subsidization.
SUPPLY FUNCTION
QS= m+ nP
Where:
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QS= quantity supplied
m=supply at 0
n= by how many will the supply increase
P=price of goods
Market supply is the sum of the individual supply curves of all sellers in the market.
Price elasticity of supply (ES) is the responsiveness of a change in the quantity supplied to a percentage change in
the price in the commodity.
ES= % change in quantity supplied

% change in Price
Factors that affect supply elasticity
Cost and feasibility storage

Characteristics of the production process
Time
A perfect inelastic supply curve has an elasticity of zero. Thus, it occurs only when a firm cannot vary the quantity
in supply it supplies. A perfectly inelastic supply curve is depicted as a vertical line.
Market Equilibrium and Pricing
The market is the interaction of buyers and sellers brought into contract with one another to engage in purchases
and sales of economic goods.
Equilibrium between price and output is the point at which the demand and supply curves intersect. The graph
illustrates the concept of market equilibrium.
At the point of intersection of the demand curves, anyone wishing to purchase the good price can do so. The
market forces of supply and demand thus create an automatic, efficient rationing system.
Price fixing is the setting of mandatory or artificial prices. It often interferes with the free operation in the market.
Attempts to alter the output and price can have an effect on equilibrium.
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PRICE CEILING. Price is established below the equilibrium price causing shortages to develop. The usual result is
non-price competition among buyers which allocates the quantity that is supplied.
PRICE FLOOR
Price Floor - A minimum price is set above the equilibrium price, causing surpluses to develop
(e.g., many agricultural products). The price floor illustrates a surplus because of an artificially high price.
The pricing system acts to efficiently distribute economic goods to consumers willing to pay for them.
When a shortage exists, the market price will rise and the quantity demanded will decrease, eliminating
the shortage.
Attempts to circumvent the market often interfere with market forces, causing too many resources to go
into one sector of the economy and too few into others.
Jay Labasan

Economics

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Economics

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UNIVERSITY OF SAINT LOUIS-TUGUEGARAO

School of Business Administration and Accountancy, 2013-2014

Firms and households interact in Government reduces quantity of

BASIC ECONOMIC PROBLEMS

ECONOMIC SYSTEM MODELS

KINDS OF MARKET STRUCTURES

TABLE 4. MARKET MODELS

What is Price Elasticity of Demand (Ed)?

What is Cross-Elasticity Demand (Exy)?

What is Income Elasticity of Demand (Ei)?

What does Principle of Diminishing Marginal Utility States?

LAW OF DIMINISHING RETURNS

ES= % change in quantity supplied

Cost and feasibility storage

Market Equilibrium and Pricing

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