LESSON1: RESOURCE ALLOCATION AND ECONOMICS

 “THERE is no such thing as abundance …….. That’s why there is economics”

 Economic Decisions & Resources

 Section 1

 What is Economics?

 Economics is the study of the choices that people make to satisfy their needs and wants. The
study of economics is divided into 2 categories: microeconomics and macroeconomics.

 Microeconomics is the study of choices made by economic actors such as individuals,

household, companies.

 Macroeconomics examines the behavior of entire economies.

 Economic Decisions

 Individuals make decisions. The two types of decision makers are producers and consumers.

 Producers are groups or individuals that make goods or services. Consumers buy the goods or
services. Consumers choose what to buy and producers choose what to provide.

 You make decisions based on needs and wants.

 A need is anything that is necessary for survival, such as food, clothing, and shelter.

 Wants are goods and services that people consume beyond what is necessary for survival.

 Goods are physical objects that can be purchased, and services are actions or activities
performed for a fee.

 Economics Resources

 Economic decisions involve resources.

 A resource is anything that can be used to satisfy a consumer’s want or need. Resources that can
be used to produce goods and services are known as factors of production.

 Factors of Production

 Natural Resources: Items provided by nature. Considered a resource when it is scarce and
payment is necessary.

 ex. land, water, oil, air

 Human Resources: Human effort exerted during production. Can be physical or intellectual.
  ex. factory workers, preachers, bankers

 Capital Resources: Manufactured materials used to create products. Includes capital goods and
the money used to create them. Capital goods are buildings, structures, machinery, and tools
(factories, dams, stores, computers, hammers). The finished product that people buy is called a
consumer good.

 Entrepreneurship: The organizational abilities and risk-taking involved in starting new business
or introducing a new product. An example of a successful entrepreneur: Michael Dell, founder
of Dell Corporation (Dell Computers). The company’s revenue is more than $25 billion a year.

 Scarcity and Choice

 Section 2

 Scarcity

 All resources are limited. People’s wants are unlimited. The combination of limited economic
resources and unlimited wants results in a condition known as scarcity.

 Scarcity is the most basic problem with economics because it forces people to make decisions
about how to use resources effectively.

 To determine how to best distribute their resources, a society must answer three basic
economic questions: What to produce; how to produce; for whom to produce.

 Economic Questions

 What to produce?

 Needs and wants can never be fully met. Therefore economic systems must determine
the urgency of those needs and wants. Ex. Large population of school-age children
move to town. Should a new school be built or the existing schools be expanded?

 How to produce?

 Society chooses to allocate resources in many different ways. Ex. Construction of the
new school. What contractor will you use? How will it be funded? What materials will
be used?

 For whom to produce?

 A society must determine how to distribute the goods and services that it produces. Ex.
Who will go to the new school? Will it be a traditional public school with zoning? Will it
be a school targeted for students with special abilities?

 Productivity
  After choosing what, how and for whom, a society must carry out those decisions to make sure
those resources are used effectively.

 The problem of scarcity forces people to find ways to use resources effectively. This is
determined by productivity, the level of output that results from a given level of input. Are you
working to maximum capacity?

 Companies always try to find ways to increase efficiency, which is the use of the smallest
amount of resources to produce the greatest amount of output. TIME IS MONEY.

 One option is for a company to use division of labor: assigning a small number of tasks
to each worker. Because tasks are performed repeatedly, workers gain expertise in
their assigned tasks known as specialization. This allows them to work faster and to
produce more.

 Another option is technology. Workers are replaced by machines that work faster and
longer. This lowers the cost of the product and the need for workers.

 Trade-offs & opportunity Costs

 Section 3

 Trade offs & Opportunity Costs

 Choosing among alternative uses for available resources forces individuals to make decisions. If
a resource is used to produce or consume one good, that same resource cannot be used to
produce or consume something else. One good is sacrificed for another. This sacrifice is called
a trade-off.

 The cost of the trade-off is called the opportunity cost. Opportunity cost is the value of the next
best alternative that is given up to obtain the preferred item.

 Example

People face trade-offs and opportunity costs every day.

 You have 2 events you want to attend in the same week: a concert and a baseball game.

 The tickets cost about the same but you only have enough money for one ticket.

 You must make a trade-off because you can’t afford both tickets.

 If you spend money on a ticket to the concert, the alternative choice-the ticket to the baseball
game-is the opportunity cost of buying the concert ticket. The opportunity cost is the next best
alternative.

 Another Example
  Most choices however involve more trade-offs. Although many trade-offs may be possible
within a set of choices, only one of these-the next best choice-is considered the opportunity
cost.

 Example: Deciding how you will spend your summer afternoon. You can choose a trip
to the beach, a trip to an amusement park, or go to the mall.

 After some thought, you decide that you are not interested in the amusement park, and
although the mall sounds fun (making this your second choice), you choose to go to the
beach.

 The opportunity cost to the beach is your second best choice: the mall.

 Decision Making Grid

 Production Possibilities

 Scarcity, Trade-offs, & Opportunity Costs

 Businesses face the same economic decisions that we do on a much larger scale.

 Money is their scarce resource. They must decide how to use that resource to generate the
most profit.

 This decision involves discussing trade-offs and opportunity costs. What product can they make
that will get them the most profit off of their existing resources?

 This is illustrated by a production possibilities frontier.

 Production Possibilities Frontier

LESSON 2
Demand and Supply Analysis

Demand

 Demand indicates how much of a good consumers are willing and able to buy at each possible
price during a given time period, other things constant.

 In another word, demand is an intention to buy/purchase goods.

 Demand is different than wants and needs since willingness and ability to buy is
critical to demand.
  Desire to possess a thing

 The ability to pay for it

 Willingness in utilizing it

Law of Demand

 Says that quantity demanded varies inversely with price, other things constant

 The higher the price, the smaller the quantity demanded

 The lower the price, the larger the quantity demanded

 Price Quantity Demanded

 Price Quantity Demanded

 Reason : consumers always tend to MAXIMIZE SATISFACTION

Demand Analysis

1. Demand Schedule – a table shows the relationship of prices and the specific quantities demanded at
each of these price. It can be used to construct a demand curve.

Demand Curve for Pizza

Demand and Change in Quantity Demanded

Demand Function

Example:

Individual Demand & Market Demand

 Individual demand refers to the demand of an individual consumer.

 Market demand is the sum of the individual demands of all consumers in the market.

 Important: Unless otherwise noted, we will be referring to market demand.

Shifts of the Demand Curve

 Demand curve focuses on the relationship between the price of a good and the quantity
demanded when other factors that could affect demand remain unchanged:

i. Money income of consumers.

ii. Prices of related goods.

 iii. Consumer expectations.

iv. Number and composition of consumers in the market.

v. Consumer tastes.

vi. Demand shifts to the right the demand increases

vii. Demand shifts to the left the demand decreases

Increase in the Market Demand

Changes in Consumer Income

 Goods can be classified into three broad categories:

 Normal goods: the demand increases when income increases and decreases when
income decreases.

 Luxury goods: the demand increases when income increases and decreases when
income decreases.

 Inferior goods: the demand decreases when income increases and increases when
income decreases .

Changes in the Prices of Related Goods

 Prices of other goods are another of the factors assumed constant along a given demand
curve.

 Two general relationships

i. Two goods are substitutes if an increase in the price of one shifts the demand for the
other rightward and, conversely, if a decrease in the price of one shifts the demand for
the other good leftward.

ii. Two goods are complements if an increase in the price of one shifts the demand for
the other leftward and a decrease in the price of one shifts the demand for the other
rightward.

Changes in Consumer Expectations

 If individuals expect income to increase in the future, current demand increases and vice
versa.

 If individuals expect prices to increase in the future, current demand increases and decreases
if future prices are expected to decrease.
Supply

 Supply indicates how much of a good producers are willing and able to offer for sale per
period at each possible price, other things constant.

 Law of supply states that the quantity supplied is usually directly related to its price, other
things constant.

 The lower the price, the smaller the quantity supplied.

 The higher the price, the greater the quantity supplied.

Law of Supply

 As price increases, other things constant, a producer becomes more willing to supply the
good.

 higher prices attract resources from lower-valued uses.

 Higher prices also increase producer’s ability to supply the good.

 Since the marginal cost of production increases as output increases, producers must
receive a higher price for the output in order to be able to increase the quantity
supplied.

Supply Schedule and Curve for Pizzas

Supply Curve – graphical representation showing the relationship between the price sold or factor of
production and the quantity supplied per time period. The supply curve slopes upward from left to right
indicating that price rises(falls) more (less) is supplied. The upward slope indicates the positive
relationship between price and quantity supplied

Supply Function- the quantity supplied is affected/influence by other factors which are price of the
product, number of sellers, price of factor inputs, technology, business goals, importations, weather
conditions and govt. policies and etc.
QS=f(products own price, number of sellers, price of factors input, technology)
QS= a + bP
Ex: Price 5
intercept 3
slope 0.25
3 + 0.25 (5)
Qs= 4.25 units

Supply and Quantity Supplied

 Supply refers to the relation between the price and quantity supplied as reflected by the
supply schedule or the supply curve.
  Quantity supplied refers to a particular amount offered for sale at a particular price, a
particular point on a given supply curve.

 Change in quantity supplied occurs if there is a movement from one point to another along
the same supply curve. Affected by price only.

 Change in supply – the entire supply curve shifts leftward or rightward (price is constant)
affected by technology, business goals etc.

Individual Supply and Market Supply

 Individual supply refers to the supply of an individual producer.

 Market supply is the sum of individual supplies of all producers in the market.

 Unless otherwise noted, we will be referring to market supply.

Shifts of the Supply Curve

 Determinants of supply other than the price of the good:

i. State of technology.

ii. Prices of relevant resources.

iii. Prices of alternative goods.

iv. Prices of goods that joint-in supply.

v. Producer expectations.

vi. Number of producers in the market.

vii. Supply shifts to the right the supply increases

viii. Supply shifts to the left the supply decreases

Change in Technology Can Mean an Increase in Supply

Changes in the Prices of Relevant Resources

 Resources that are employed in the production of the good in question.

 For example, if the price of wheat flour falls, the cost of making bread declines, supply
increases.

 Conversely, if the price of some relevant resource increases, supply decreases.

Prices of Alternative Goods

  Alternative goods are those that use same resources employed to produce the good under
consideration

 For example, as the price of bread increases, so does the opportunity cost of
producing pizza and the supply of pizza declines

 Conversely, a fall in the price of an alternative good makes pizza production more
profitable and supply increases

Changes in Producer Expectations

 When a good can be easily stored, expecting future prices to be higher may reduce current
supply.

 More generally, any change expected to affect future profitability could shift the supply curve.

Number of Producers

 Since market supply sums the amounts supplied at each price by all producers, the market
supply depends on the number of producers in the market.

 If that number increases, supply increases.

 If the number of producers decreases, supply decreases.

Demand and Supply Create a Market

 Demanders and suppliers have different views of price.

 Demanders, consumers, pay the price .

 Suppliers, sellers, receive the price.

 As price rises, consumers reduce their quantity demanded along the demand curve, and
producers increase their quantity supplied along the supply curve.

Markets

 Where the buyers and seller meets

 Sort out the conflicting price perspectives of individual participants – buyers and sellers.

 Represent all arrangements used to buy and sell a particular good or service.

 Reduce transaction costs of exchange –costs of time and information required for exchange.

 Adam Smith’s invisible hand.

The Market for Pizzas

Equilibrium

 When the quantity consumers are willing and able to pay equals the quantity producers are
willing and able to sell, the market reaches equilibrium.

 Equilibrium state of balance

 Market equilibrium meeting of supply and demand.

 Independent plans of both buyers and sellers exactly match.

 Market forces exert no pressure to change price or quantity.

Changes in Equilibrium

 Once a market reaches equilibrium, that price and quantity will prevail until one of the
determinants of demand or supply changes.

 A change in any one of these determinants will usually change equilibrium price and quantity
in a predictable way.

Shifts of the Demand Curve

 Given an upward-sloping demand curve, an increase in demand leads to a rightward shift of

the demand curve, increasing both the equilibrium price and quantity.

 Alternatively, a decrease in demand leads to a leftward shift of the demand curve, reducing
both the equilibrium price and quantity.

Shifts of the Supply Curve

 An increase in supply: a rightward shift of the supply curve reduces equilibrium price but
increases equilibrium quantity

 A decrease in supply: a leftward shift of the supply curve increases equilibrium price but
decreases equilibrium quantity

 Given a downward-sloping demand curve, a rightward shift of the supply curve decreases
price, but increases quantity

 A leftward shift increases price, but decreases quantity

Market Disequilibrium

Surplus – condition in the market where the quantity supplied is more the quantity demanded.

Downward pressure to price

Shortage – condition in the market in which the quantity demanded is higher than the quantity supplied
at a given price.

Upward pressure to price

Simultaneous Shifts in Demand and Supply

 As long as only one curve shifts, we can say for sure what will happen to equilibrium price and
quantity.

 If both curves shift, however, the outcome is less obvious.

Disequilibrium Prices

 Disequilibrium is the condition in the market when plans of buyers do not match plans of
sellers.

 Usually temporary as the market gropes for equilibrium.

 The forces behind the adjustment from disequilibrium to equilibrium is known as the price
mechanism.

Market Intervention

 In practice, the government sometimes doesn't allow market forces to determine a price of
goods & services.

 Normally market intervention is in the form of price control which it can be a direct/indirect
price control.

 A direct price control is by enforcing the price floors/ceilings policy while indirect price control
is by imposing tax to increase prices or giving subsidies to lower prices.

Market Equilibrium

Demand Equation QD = a-b(P)

Supply Equation QS = a+b(P)

Equilibrium Condition QD = QS

QD, QS and P is unknown, the parameter in equations is a and the coefficient is b. Given this we can
solve the equilibrium price (PE) and equilibrium quantity (QE).

Ex: find PE and QE

QD = 68 – 6P

QS = 33 + 10P
= a-b(P) = a+b(P)

= 68-6(P) = 33+10(P)

= 68-33 = 10P+6P

= 35 = 16P

PE = 35/16

PE = 2.19

Next determine the QE

68 – 6(2.19) = 33 + 10(2.19)

68 – 13.14 = 33 + 21.9

QE= 54.86 = 54.9

QE = 55 units

Complete the Table

Solve the quantity demanded and quantity supplied. Use the following given:
QD = 68 – 6(P)
QS = 33 + 10(P)
Indicate whether surplus or shortage