LESSON 2

BASIC MICROECONOMICS

Graph
• A diagram representation of data in an organized manner.
• The definition of a graph is a diagram showing the relationships between two or
more things
Direct and Inverse relationship
Direct relationship
• If one variable increases or decreases, so does the other.
Inverse Relationship
• If one variable increases the other variable will decrease or vice versa. (Opposite
direction)
Dependent and Independent Variable
The independent variable is the cause. Its value is independent of other variables
in your study.
The dependent variable is the effect. Its value depends on changes in the
independent variable.
What does it mean by other things being equal?
Ceteris Paribus
This Latin phrase is generally used for saying 'with other things being the same'. It
is particularly crucial in the study of cause and effect relationship between two specific
variables such that other relevant factors influencing these are assumed to be constant
by the assumption of Ceteris Paribus.
This commonly-used phrase stands for 'all other things being unchanged or constant'.
It is used in economics to rule out the possibility of 'other' factors changing, i.e. the specific
causal relation between two variables is focused.
• Relationship if two variables wherein the 1st variable changes while the 2nd variable
remains constant.
Slope of a line
In math, slope is used to describe the steepness and direction of lines. By just
looking at the graph of a line, you can learn some things about its slope, especially relative
to other lines graphed on the same coordinate plane. Consider the graphs of the three
lines shown below:
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First, let’s look at lines A and B. If you imagined

these lines to be hills, you would say that line B is steeper
than line A. Line B has a greater slope than line A.

Next, notice that lines A and B slant up as you

move from left to right. We say these two lines have a
positive slope. Line C slants down from left to right. Line
C has a negative slope. Using two of the points on the
line, you can find the slope of the line by finding the rise
and the run. The vertical change between two points is
called the rise, and the horizontal change is called
the run. The slope equals the rise divided by the run:

𝑟𝑖𝑠𝑒 (𝑣𝑒𝑟𝑡𝑖𝑐𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒)

𝑚(𝑠𝑙𝑜𝑝𝑒) =
𝑟𝑢𝑛 (𝐻𝑜𝑟𝑖𝑧𝑎𝑜𝑛𝑡𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒)

Vertical Intercept
• It is a point wherein a line intersects the vertical axis on the coordinate plane.
• The vertical intercept (y-intercept) is found by evaluating the function when the
input variable, x, is 0 and is always the same as the constant b. It can be thought
of as the original value of the function.

Economic System
An economic system is a means by which societies or governments organize and
distribute available resources, services, and goods across a geographic region or country.
Economic systems regulate the factors of production, including land, capital, labor, and
physical resources. An economic system encompasses many institutions, agencies,
entities, decision-making processes, and patterns of consumption that comprise the
economic structure of a given community.
Characteristics
The five characteristics of an inclusive economy are defined by the Foundation as the
following:
Participation– People are able to participate fully in economic life and have greater say
over their future. People are able to access and participate in markets as workers,
consumers and business owners. Transparency around and common knowledge of rules
and norms allow people to start a business, find a job, or engage in markets. Technology
is more widely distributed and promotes greater individual and community well-being.
Equity-More opportunities are available to enable upward mobility for more people. All
segments of society, especially poor or socially disadvantaged groups, are able to take
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advantage of these opportunities. Inequality is declining rather than increasing. People

have equal access to a more solid economic foundation, including equal access to
adequate public goods, services and infrastructure, such as public transit, education,
clean air and water.
Growth– An economy is increasingly producing enough goods and services to enable
broad gains in well-being and greater opportunity. Good job and work opportunities are
growing and incomes are increasing, especially for the poor. Economic systems are
transforming for the betterment of all, including and especially poor and excluded
communities. Economic growth and transformation is not only captured by aggregate
measures of economic output (such as GDP), but must include and be measured by other
outcomes that capture overall well-being.
Stability- Individuals, communities, businesses and governments have a sufficient
degree of confidence in their future and an increased ability to predict the outcome of their
economic decisions. Individuals, households, communities and enterprises are secure
enough to invest in their future. Economic systems are increasingly resilient to shocks
and stresses, especially to disruptions with a disproportionate impact on poor or
vulnerable communities.
Sustainability– Economic and social wealth is sustained over time, thus maintaining
inter-generational well-being. Economic and social wealth is the social worth of the entire
set of assets that contribute to human well-being, including human produced
(manufactured, financial, human, social) and natural capital. In the case of natural capital,
human use must preserve or restore nature’s ability to produce the ecosystem of goods
and services that contribute to human well-being. Decision-making must thus incorporate
the long-term costs and benefits, and not merely the short-term gains, of human use of
our full asset base.
What is a circular flow of economic activity?
• It is a model showing the basic economic relationships within a market country.
• demonstrates how money moves from producers to households and back again
in an endless loop.
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Resource and Product Market

Resource Market
• Is a market wherein a business can go and purchase resources to produce
goods and services.
Product Market
• it is the marketplace that is predicated entirely on the goods that are bought and
sold (products)
Demand, Supply, Market Equilibrium
Demand
• Is a schedule or a curve that shows the various amounts of a product that
consumers are willing and able to purchase at each of a series of possible prices
during a specific period of time.
• Demand shows the quantities of a product that will be purchased at a various
possible prices, other things equal.
• Demand is simply a statement of a buyer’s plans, or interactions, with respect to
the purchase of a product.
Supply
• Supply is a fundamental economic concept that describes the total amount of a
specific good or service that is available to consumers.
Market Equilibrium
• A situation where for a particular good supply = demand. When the market is in
equilibrium, there is no tendency for prices to change. We say the market-clearing
price has been achieved.
Law of Demand
• Is a negative or inverse relationship between price and quantity demanded
• As other things equal, as price falls, the quantity demanded rises, and as price
rises, the quantity demanded.
• The law of demand is consistent with common sense. People ordinarily do buy
more of a product at a low price than at a high price. Price is an obstacle that deters
consumers from buying. The higher that obstacle, the less of a product they will
buy; the lower the price obstacle, the more they will buy. The fact that businesses
have “sales” is evidence of their belief in the law of demand.
• In any specific time period, each buyer of a product will derive less satisfaction (or
benefit, or utility) from each successive unit of the product consumed.
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• We can also explain the law of demand in terms of income and substitution effects.
The income effect indicates that a lower price increases the purchasing power of
a buyer’s money income, enabling the buyer to purchase more of the product than
before. A higher price has the opposite effect. The substitution effect suggests that
at a lower price buyers have the incentive to substitute what is now a less
expensive product for similar products that are now relatively more expensive. The
product whose price has fallen is now “a better deal” relative to the other products.
Law of Supply
• As price rises the quantity supplied rises; as price falls, the quantity supplied falls.
• Because businesses seek to increase revenue, when they expect to receive a
higher price for something, they will produce more of it.
• Supply in a market can be depicted as an upward-sloping supply curve that shows
how the quantity supplied will respond to various prices over a period of time.
Demand Schedule
• Is a table of the quantity of a good that all consumers will purchase at a given
price.
• A demand schedule most commonly consists of two columns. The first column lists
a price for a product in ascending or descending order. The second column lists
the quantity of the product desired or demanded at that price. The price is
determined based on research of the market.
Supply Schedule
• A table that shows the quantity supplied at different prices in market.
• Supply schedule is a chart that shows how much product a supplier will have to
produce to meet consumer demand at a specified price based on the supply curve.
In other words, it’s basically a supply graph in spreadsheet form listing the quantity
that needs to be produced at each product price level.
Demand Curve
• A graphic representation of the relationship between product price and the quantity
of the product demanded.
• The demand curve will move downward from the left to the right, which expresses
the law of demand—as the price of a given commodity increases, the quantity
demanded decreases, all else being equal.
• Note that this formulation implies that price is the independent variable, and
quantity the dependent variable. In most disciplines, the independent variable
appears on the horizontal or x-axis, but economics is an exception to this rule.
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For example, if the price of corn rises, consumers will

have an incentive to buy less corn and substitute it for
other foods, so the total quantity of corn consumers
demand will fall.

Supply Curve
• A graphic representation of the correlation between the cost of a good and service
and the quantity supplied for a given period.
• On most supply curves, as the price of a good increases, the quantity of supplies
increases.
• Supply curves can often show if a commodity will experience a price increase or
decrease based on demand, and vice versa.
• The supply curve is shallower (closer to horizontal) for products with more elastic
supply and steeper (closer to vertical) for products with less elastic supply.
Note that this formulation implies that price is the independent variable, and quantity
the dependent variable. In most disciplines, the independent variable appears on the
horizontal or x-axis, but economics is an exception to this rule.
If a factor besides price or quantity changes, a new
supply curve needs to be drawn. For example, say
that some new soybean farmers enter the market,
clearing forests and increasing the amount of land
devoted to soybean cultivation. In this scenario,
more soybeans will be produced even if the price
remains the same, meaning that the supply curve
itself shifts to the right (S2) in the graph below. In
other words, supply will increase.
Diminishing Marginal Utility
• Decrease in satisfaction a consumer has from the consumption at each extra unit
of a good or services.
• The law of diminishing marginal utility explains that as a person consumes an item
or a product, the satisfaction (utility) that they derive from the product wanes as
they consume more and more of that product.
• Demand curves are downward-sloping in microeconomic models since each
additional unit of a good or service is put toward a less valuable use.
• Marketers use the law of diminishing marginal utility because they want to keep
marginal utility high for products that they sell.
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Change in Demand
• A change in demand represents a shift in consumer desire to purchase a particular
good or service, irrespective of a variation in its price.
• The change could be triggered by a shift in income levels, consumer tastes, or a
different price being charged for a related product.
• An increase and decrease in total market demand is represented graphically in the
demand curve.
Change in Supply
• Change in supply refers to a shift, either to the left or right, in the entire price-
quantity relationship that defines a supply curve.
• Essentially, a change in supply is an increase or decrease in the quantity supplied
that is paired with a higher or lower supply price.
• A change in supply can occur as a result of new technologies, such as more
efficient or less expensive production processes, or a change in the number of
competitors in the market.
• A change in supply is not to be confused with a change in the quantity supplied.
Change in quantity demanded
• In economics, quantity demanded refers to the total amount of a good or service
that consumers demand over a given period of time.
• Quantity demanded depends on the price of a good or service in a marketplace.
• The price of a product and the quantity demand for that product have an inverse
relationship, according to the law of demand.
A change in quantity demanded refers to a change in the specific quantity of a product
that buyers are willing and able to buy. This change in quantity demanded is caused by
a change in the price.

Change in quantity Supplied

A change in quantity supplied is a change in the specific quantity of a good that sellers
are willing and able to sell. This change in quantity supplied is caused by a change in the
supply price. It is illustrated by a movement along a given supply curve.
Factors Affecting Demand
Price of the Product- There is an inverse (negative) relationship between the price of a
product and the amount of that product consumers are willing and able to buy. Consumers
want to buy more of a product at a low price and less of a product at a high price. This
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inverse relationship between price and the amount consumers are willing and able to buy
is often referred to as The Law of Demand.
The Consumer's Income- The effect that income has on the amount of a product that
consumers are willing and able to buy depends on the type of good we're talking about.
For most goods, there is a positive (direct) relationship between a consumer's income
and the amount of the good that one is willing and able to buy. In other words, for these
goods when income rises the demand for the product will increase; when income falls,
the demand for the product will decrease. We call these types of goods normal goods.
The Price of Related Goods- As with income, the effect that this has on the amount that
one is willing and able to buy depends on the type of good we're talking about. Think
about two goods that are typically consumed together. For example, bagels and cream
cheese. We call these types of goods compliments. If the price of a bagel goes up, the
Law of Demand tells us that we will be willing/able to buy fewer bagels. But if we want
fewer bagels, we will also want to use less cream cheese (since we typically use them
together). Therefore, an increase in the price of bagels means we want to purchase less
cream cheese. We can summarize this by saying that when two goods are complements,
there is an inverse relationship between the price of one good and the demand for the
other good.
The Tastes and Preferences of Consumers- This is a less tangible item that still can
have a big impact on demand. There are all kinds of things that can change one's tastes
or preferences that cause people to want to buy more or less of a product. For example,
if a celebrity endorses a new product, this may increase the demand for a product. On
the other hand, if a new health study comes out saying something is bad for your health,
this may decrease the demand for the product. Another example is that a person may
have a higher demand for an umbrella on a rainy day than on a sunny day.
The Consumer's Expectations -It doesn't just matter what is currently going on - one's
expectations for the future can also affect how much of a product one is willing and able
to buy. For example, if you hear that Apple will soon introduce a new iPod that has more
memory and longer battery life, you (and other consumers) may decide to wait to buy an
iPod until the new product comes out. When people decide to wait, they are decreasing
the current demand for iPods because of what they expect to happen in the future.
Similarly, if you expect the price of gasoline to go up tomorrow, you may fill up your car
with gas now. So your demand for gas today increased because of what you expect to
happen tomorrow.
the Number of Consumers in the Market- As more or fewer consumers enter the market
this has a direct effect on the amount of a product that consumers (in general) are willing
and able to buy. For example, a pizza shop located near a University will have more
demand and thus higher sales during the fall and spring semesters. In the summers, when
less students are taking classes, the demand for their product will decrease because the
number of consumers in the area has significantly decreased.
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Factors Affecting Supply

Cost: Price may be defined as the amount a customer is willing to pay for a product or
service. This is the most important aspect that determines a product's supply.
According to the law of supply, when the price of a commodity rises, so does its supply,
and vice versa. This is referred to as the price fluctuation.
If there is any assumption that the price of the product will rise, supply in the current
market would often decrease in order to obtain greater profit in the future. That also
means that if the price is predicted to fall, the supply in the present market would likely
grow dramatically.
Aside from that, the price of alternatives and complementary commodities may have an
impact on a product's supply.
If the price of wheat rises, for example, farmers will cultivate more wheat rather than rice.
This might reduce the amount of rice available on the market. Overall, pricing is the most
important element affecting a product's availability. (Here)

Cost of Production: The cost of manufacturing and the supply of a commodity are
diametrically opposed. the cost of production rises, corporations will reduce their product
supply in order to save money.
For example, the cost of manufacturing has increased owing to high labour wages,
adverse natural circumstances such as crop failure, as well as increases in raw material
prices, taxes, transportation costs, and so on.
In this instance, the company's managers would either offer a reduced quantity of goods
to the market or keep the commodity on hand until the market price is surpassed.

Natural Conditions:
It implies that weather conditions have a direct impact on the availability of particular
goods. When the monsoon arrives on schedule, for example, the quantity of agricultural
goods increases.
During droughts, however, the availability of these goods declines. Some crops are
climate-sensitive, and their growth is solely dependent on weather conditions.
Kharif crops, for example, are best cultivated in the summer, whereas Rabi crops are
best grown in the winter.
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Technological advancements: One of the most critical supply factors. A better and more
modern technology enhances a product's production, resulting in an increase in the
product's supply.
The manufacturing of fertilisers and high-quality seeds, for example, boosts agricultural
productivity. This boosts the market's supply of food grains even further.
Transport Conditions: Refer to the fact that improved transportation infrastructure
boosts product supply. Transport is always a stumbling block to product supply, since
items are not delivered on time owing to insufficient transportation infrastructure. As a
result, even if the price of a product rises, the supply does not.

Factor Prices and their Availability: One of the most important factors of supply.
Factors are the inputs necessary at the moment of manufacturing, such as raw materials,
labour, equipment, and machineries.
There would be an increase in output if the factors were accessible in adequate quantity
and at a reduced price. This would boost a product's supply on the market.
For example, having access to low-cost labour and raw materials near a company's
production site may assist cut labour and transportation expenses. As a result, the
product's production and supply would grow.

Government Taxation Policy: Changes in taxation have an inverse effect on the supply
of a product. The profit margin of the product narrows when the government raises taxes.
As a result, the producer's supply is reduced.
Tax breaks and subsidies, on the other hand, are commonly utilised by the government
to enhance the supply of specific items by ensuring a higher profit margin for the
providers.

Related Goods Prices: The reality that the pricing of replacements and complementary
items have an impact on a product's supply.
If the price of wheat rises, for example, farmers will cultivate more wheat than is required.
This would reduce the amount of rice available on the market.

Calamities: Natural disasters such as war or starvation must have an impact on the
supply of products. We are all too familiar with commodity shortages caused by conflict
and production disruptions induced by hunger. Even at higher costs, sufficient supplies
are not available.
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The firm's goals and objectives: In general, a commodity's supply grows exclusively at
higher prices because it achieves the profit maximisation goal.
With the shift in the market, some companies are eager to supply more even at rates that
do not maximise their earnings. The goal of such businesses is to expand their market
share and improve their status and reputation.