Module 1.1: What is Economics?

Economics is the science which studies human behavior. It is the science of choice since it deals how
individuals and societies choose to use the scarce resources that nature and previous generations have
provided. Scarcity is the basic concept in economics and it refers to a situation in which resources
(example money) are limited to satisfy human wants. Thus, it means that Economics looks at the
implication of the insufficiency of resources relative to human wants. Resources in economics are factors
of production that can be used for the production of good and services.  These resources may include
the natural resources (land, water, mineral, gas deposits, etc.), physical resources (machines, buildings,
equipment and other objects made by human beings to produce goods and services), and human capital
(knowledge and skills of workers).

Economics is a powerful tool to analyze how individuals and even nations react to or grapple with this
condition which is scarcity.   When faced with limited resources, there is a need to make better choices
because these resources can be used in different ways implying that production of one good or services
must be sacrificed for another. There is therefore a tradeoff in the production of goods and services that
satisfy human wants.  In economics, the analysis can be done at the micro-level dealing with the
behavior of consumers and producers or at the macro-level dealing with the behavior of an entire
economy. These decisions can be made by individuals, families, businesses, or societies. Economics
matters since no one ever has enough of things they want.

Module 1.2: Branches of Economics

There are two (2) branches of Economics:  Microeconomics and Macroeconomics.  Microeconomics is
the branch of economics that examines the functioning of individual industries and the behavior of
individual decision-making units—that is, business firms and households. Microeconomics deals with the
behavior of individual units when consuming and answers question on how they choose what to buy. It
also deals with the behavior of individual units when producing and answers question on how they
choose what to produce. 

On the other hand, Macroeconomics is the branch of economics that examines the economic behavior
of aggregates— income, output, employment, trade balance, inflation, and so on—on a national scale.
Microeconomics is said to be the foundation of Macroeconomic analysis with complementary
perspectives on the overall subject of the economy. In what follows are some concerns pertaining to
production, prices and income that differentiate Microeconomic from Macroeconomics.
Module 1.3: Microeconomic Analysis

Being the foundation of Macroeconomic analysis, Microeconomics attempts to examine or explain the
behavior of individual units in the economy by doing analysis on the economic decision-making process
on a smaller scale. This analysis involves the use of simplified economic models and assumptions to
facilitate understanding of the behavior of consumers and producers.  It is assumed that both
consumers and producers always act with economic rationality, the former trying to maximize
satisfaction or happiness out of his/her consumptions of goods and services and the latter trying to
maximize profit or minimize cost of producing the good and services.

Microeconomic analysis using simplified models involves use of assumptions.  These assumptions define
the set of circumstances in which a particular economic model is most likely to be applicable.  To
simplify microeconomic analysis, the Ceteris Paribus assumption is being invoked.  It is a Latin phrase
which means ‘all other things remaining equal’.   The concept of Ceteris Paribus is important in
economics because in the real world it is usually hard to isolate all different factors needed in the
analysis.  Invoking the assumption of Ceteris Paribus allows isolation of the effect of a change in one
variable on another variable by assuming that all other factors do not change. More formally, the Ceteris
Paribus Assumption entails that nothing changes except the factors being studied.

Microeconomic analysis requires the use of economic data. Data can be processed in different forms
(graphical or tabular) to obtain some insights necessary for making a good decision. Thus,
Microeconomic analysis needs a lot of graphs and tables because it uses more numbers and tracks more
trends than other social studies subjects.  Table 1 below shows an example of raw data on 50 soft drink
purchases.  Using frequency count or the number of purchases for a particular soft drink, the data on
soft drinks can be processed using graphical and tabular approaches. These represented in Table 2 and
Figure 1.
A graph is a visual representation of the relationship between two variables. Example of variables are
the prices of soft drink products and the associated quantity demanded. The relationship can be positive
or negative.   A positive relationship exists when variables change in the same direction.  This implies
that an increase (decrease) in the value of one variable increases (decreases) the value of the other. On
the other hand, a negative relationship exists when variables change in opposite directions which means
that an increase (decrease) in the value of one variable decreases (increases) the value of the other.

Illustration: Relationship Between Hours of Work and Income

Suppose that a student receives a weekly income which consists of a $20 weekly allowance from her
parents, and $4 per hour of work from her job.  The relationship between hours worked and the
student’s weekly income can be described by the following formula:

W = $20 + ($4 x hours worked)

In Table 3, the income per week in Column 2 can be computed by plugging in the number of worked
hours of the students into the formula.  If the number of work hours rendered by the student is zero (0),
the total weekly income is $20 (= $20 + ($4 x 0 hour).  On the other hand, if the number of hours worked
is 30, the total weekly income is $140.  Table 3 shows that as the number of hours worked increases, the
total weekly income also increases which is evident of a positive relationship between the two variables.
This positive relationship can also be gleaned from Figure 2 by plotting the values of the weekly income
on the vertical axis and hours worked per week on horizontal axis.  The line ab is upward sloping
indicative of a positive relationship between the two variables.
Table 4 shows the amount of DVDs and USB the consumer buys given fixed monthly income of $150. 
When the consumer buys zero (0) unit of DVDs, he can actually purchase 30 units of USB if spends his
entire monthly budget of $150.  However, if he decides to increase the purchased amount to 15 units of
DVD, he can’t buy any amount of USB indicating the inverse or negative relationship between his
purchases of DVDs and USBs.  The negative relationship between the two variables can also be
discerned in Figure 3 with a plotted line showing a downward direction. Remember that the line in
Figure 3 is derived by plotting on the graph the values of consumer purchases of DVDs and USBs as
reflected in Figure 3.

Module 1.4: Slope of the Line

In mathematics, the slope or gradient of a line is a number that describes both the direction (lines slope
from left to right or some slopes upward or downward) and the steepness of the line (some lines are
really steep, while others have a gentle slope). It is simply the change in y (a variable on the y-axis) over
a change in x (a variable in x-axis), or the rise (vertical difference in your y-axis) or run (horizontal
difference in your x-axis).  In Economics, one application of the concept of slope is in the commutation
of the elasticity of a product.
The slope of a straight line between two points can be computed mathematically. To calculate slope,
begin by designating one point as the “starting point” and the other point as the “end point” and then
calculating the rise (vertical difference in your y-axis) over run (horizontal difference in your x-axis)
between these two points. An example illustrating the slope calculation is shown in Figures 4 and 5.  In
Figure 4, the computed slope is 4 implying that an increase in the worked hours per week by 1 will lead
to an increase in weekly allowance by $4 showing positive relationship between the two variables.  In
Figure 5, the computed slope is -2 indicating that an increase in the purchase of DVD by 1 unit will lead
to a decrease in the purchase of USB by 2 units showing a negative relationship between the two
variables.

Module 1.5: Shifting of the Curve and Movement of the Curve

In Microeconomics, there is a need to differentiate the movement along the curve and the shifting of
the curve caused by a change in particular variable.  These concepts are commonly use in the analysis of
the behavior of consumers and producers using the supply and demand framework. A change in one of
the variables shown on the graph causes a movement along the curve. As seen in Figure 6, there are two
variables shown on the graph:  the weekly allowance and the change in work time.  A change in work
time causes a movement along the curve or from point to point along the curve.  Assuming the work
time increases from 10 to 22.  This increase will cause a movement along the curve from
point b to c showing an increase in the weekly allowance from $60 to $108.

On the other hand, a change in one of the variables that is not shown on the graph (assumed fixed)
shifts the entire curve. Given the formula for weekly allowance, W = $20 + ($4 x hours worked), the
weekly allowance from the parents is the variable that is not shown on the graph.  Suppose the parents
decided to increase the allowance from $20 to $35, the weekly allowance increases to $35 if he decides
not to work.  Note, the formula for the weekly allowance now becomes  W = $35 + ($4 x hours worked). 
The weekly allowance increases to $75 if the student decides to work by 10 hours.  An increase in the
allowance causes the entire curve to shift upward and this is clearly shown on Figure 6. 
Module 1.6: Use of Calculus in Microeconomics

One of the important concepts in Economics is marginal analysis.  This concept is based on the notion
that people like consumers and producers are rational and they think at the margin when making
decisions.  Marginal analysis for consumers involves figuring it out how much additional satisfaction or
happiness can be derived from buying one extra unit of the good. On the other hand, for producers,
marginal analysis is assessing the revenue that can be made from the production of one more unit of the
product relative to the unit cost of producing that product. Marginal analysis is therefore the process of
examining the change in an outcome variable caused by a unit change in another variable.  This concept
is an important decision-making tool especially in studying changes in consumer behavior in making
decisions pertaining to consumption as well as in producer behavior in making decisions with regard to
production. The changes in behavior can be studied using Calculus because it is a mathematics of
change.

Calculus provides the language of economics and it focuses heavily on functions and derivatives.
Functions examine the relationship between two or more variables.  The primary tool for studying
change is a procedure called differentiation (derivatives).  This procedure involves deriving a function
showing how one quantity changes in relation to another quantity.  The derivatives of function f (x)
study on how f (x) changes in relation to changes in x.  In the study of consumer behavior, the function
f(x) can be the utility function that numerically measures the change in satisfaction due to a unit change
in the consumption of particular good denoted by x.  Likewise, in the study of producer behavior, the f(x)
can be the production function that numerically measures the change in output due to a unit change in
the use of a particular input denoted by x.  In Calculus, there are several rules of differentiation
(derivatives) but in this course only 5 will be applied more frequently to investigate changes in consumer
and producer behavior.  These include rules on constant function, constant multiple function, power
function,  product, and sum.  These rules are illustrated as follows: