Economics – a social science that deals with the efficient allocation of scarce resources to meet human

wants and needs

Two Branches of Economics:

*Microeconomics – deals with consumers and producers

*Macroeconomics – deals with the aggregates (ex. Population, GDP, GNP, Inflation)

Basic Economic Questions:

What to produce? – society determines the kind and quantity of products it will produce depending on
what the consumers want to buy or are willing to pay for

How to produce? – society decides who will produce goods and what process of production will be used

For whom to produce? – who will benefit from the goods and services produced

Economic Systems:

*Market Economic System – producing goods that yield high profits; producing at constant returns to
scale with minimum cost; and distributing the goods to those who can afford to buy them

*Command Economic System – all resources are owned by the government and producing for the public

*Mixed Economic System – both the government and private entities own all resources and produce in
consideration of their mutual benefit

Law of Demand – states that there is a negative relationship between price and quantity demanded

- As price decreases, quantity demanded increases, holding other factors constant

- Formula: Qd = a – bP, where P is price, Qd is quantity demanded

Factors affecting demand: number of consumers, tastes and preferences, consumer speculation,
population, income

Law of Supply – states that there is a positive relationship between price and quantity supplied

- As price decreases, quantity supplied decreases, holding other factors constant

- Formula: Qd = c + dP, where P is price, Qs is quantity supplied

Factors affecting supply: number of producers, government policy, cost of production, technology

Market Equilibrium – exists when quantity demanded is equal to quantity supplied (Qd = Qs)
Surplus – exists when quantity supplied is greater than quantity demanded (Qs > Qd)

Shortage – exists when quantity supplied is less than quantity demanded (Qs < Qd)

Consumer’s Behavior Theory – consumers are the ones interested in buying and consuming products

Utility – want-satisfying ability; satisfaction that consumers get from buying

Law of Diminishing Marginal Utility – as a consumer uses up a good or service, he/she tends to get less
and less satisfied with it through time

Total Utility – overall satisfaction from consumption of a product

Marginal Utility – additional satisfaction received in every consumption of an additional unit of a good

Production Theory – how producers behave in a market

Production – resources are transformed into goods and services that have considerable value to
consumers

Factors of Production: land, labor, capital, entrepreneurship

Inputs – resources used for production

Output – finished product

*Producers in the market seek for profit maximization, maximize the revenue but minimize the costs of
production

Law of Diminishing Marginal Returns – states that as more and more inputs are added to production
while holding other inputs fixed, the additional outputs start to diminish at a certain point