1. What is Economics all about?

As we live in a world of scarcity, people need to know how make decisions in terms of allocating their
time, money, or any other type of resources that is in scarce supply and this is where economics come
into action. Basically, economics are evident in our everyday lives as it deals with how we make
decisions, mainly in terms of dealing with the major economic problem, the scarcity of resources. Thus,
this scarcity is brought about by two contrasting realities: the limited resources and unlimited needs and
wants of people. In social sciences, economics is the study of how societies manage this scarcity and
limitation to satisfy the unlimited needs and wants of the public through decisions made by the people,
themselves. Precisely speaking, how me make decisions and manage our scarce resources define the
actual essence of economics in our lives. In a practical set-up, this is mostly seen when people decide
what to buy, how much to work, save, and spend, how firms decide what product to sell, how the
society decides how to divide such scarce resources, and many other instances which all comes down to
making decisions in the end. Hence, in a nutshell, economics is the science of decision-making.

2. What are the ten principles of Economics, grouped them according to their category?

First Category: How individuals make economic decisions.

1. People face trade-offs – Trade-offs involve choosing between two alternatives wherein in order
to achieve one thing, we usually have to give up something else. For example, when we have to
choose between spending our time studying or just by doing leisure activities.
2. The cost of something is what you give up to get it (Opportunity Cost) – As we all know, people
ordinarily face trade-offs and they cannot avoid such circumstances where they need to make
choices in their lives. In every decision that we make, the alternative that we have chosen has its
corresponding opportunity cost. That opportunity cost implies what you have given up to get
that item which also equates to an opportunity loss.
3. Rational people think at the margin – As human beings, we have the capacity to decide whether
a certain deed is right or wrong. Economically speaking, when rational people think at the
margin, every choice that they make gives them greater marginal benefit than its marginal cost.
Hence, in making decisions, the option that we should choose should give us more benefit than
cost.
4. People respond to incentives – This principle implies that as often times, the decision of the
people is sometimes motivated by its benefits and incentives. For example, when there are
discounts and year-end sales in shopping malls, people are hurriedly trooping into stores to take
advantage of the sale and incentives that it may bring. This can also be exemplified in the Sin Tax
Law wherein to lower the demand of tobaccos, cigarettes, and the like, its price was made even
higher for health care purposes. Clearly, the price is its key factor.

Second Category: How people interact with one another.

5. Trade can make everyone better off – As we all know, people are not self-sufficient. Meaning to
say, we sometimes depend on other people to satisfy our unlimited needs and wants because
we cannot produce everything that we need. As we all have our own specializations, we use
them to trade what we have whereas as the needs, wants, and demands of the public increase,
these specializations do the same.
 6. Markets are usually a good way to organize economic activity – Certainly, market economies are
decentralized. Market is where people make exchange of goods, services, or resources that is
governed by prices. Sometimes, prices are negotiated wherein that is how buyers and sellers
interact with each other to organize economic activity. As such, market prices reflect both the
value of a certain product to the consumers and the cost of the resources used to produce it.
Aside from that, there is also what we call as invisible hand which is a metaphor used to move
the free-market economy wherein prices are the key instrument that signals people what to buy
and helps the firm to decide what product to sell to reach equilibrium in the market.
7. Governments can sometimes improve market outcomes – As we are living in a free-market
economy where people are given equal chances to put up their business for the promise of
profit, sometimes market failure arises. This failure is either caused by two reasons namely as:
externalities which are the effects of human doings and; market power wherein there is a single
producer that controls and manipulates the price in the market. In such circumstances, we need
to government to intervene in order to promote greater equity and fairness so that resources
are distributed evenly.

Third Category: Forces and trends that affect how the economy, as a whole, works.

8. A country's standard of living depends on its ability to produce goods and services – All people
have different standards of living and qualities of life. The average income of each country varies
largely depending on various measures of the people’s quality of life. These differences among
nations are reflected upon by the company’s productivity in which presumably, those rich
countries are more capable of producing much more goods and services than those living in
poor countries. Meanwhile, this productivity is, sometimes, influenced the country’s
accumulation of capital, the skills of their workforce, the openness of the economy, and many
others. That said, as the productivity rises, the economic well-being augment, as well.
9. Prices rise when the government prints too much money – Whenever there is a sudden increase
in the overall level of prices in the economy, inflation takes place. It mostly happens when the
supply of money has increased as a result of the government creating large quantities of bills. In
such circumstances, the prices of goods and services rise, as well, simply because of the increase
in the supply of money circulating in the economy.
10. Society faces a short-run tradeoff between Inflation and unemployment. – Inflation and
unemployment usually possess an indirect relationship because you cannot achieve both at the
same time. For instance, when the government prints a lot of money, that would eventually
stimulate the economy and reduce unemployment which, in the long run, will just result to
inflation. On the other hand, when the supply of money was narrowed down by the
government, that would just lead to huge unemployment for many. Economists call this short-
run tradeoff between Inflation and unemployment as ‘The Phillips Curve’ which states that
when inflation is high, unemployment is low, and vice-versa.

3. What are the problems confronting the Development of the Philippines?

Basically, our country, Philippines, is currently in its development stage; however, up until today’s time,
it still confronts numerous economic problems which hinder its further growth and progress.

1. Poverty – It is a state or condition where people experience a severe lack of economic resources to
sustain its basic needs for daily living. Because of their socioeconomic status and upbringing in life, they
cannot earn sufficient income that can provide them with the minimum necessities of life such as food,
shelter, clothes, etc. Generally, there are two types of poverty – first type is the absolute poverty which
is a poverty caused by lack of income to purchase needs for daily survival and is measured upon by two
factors: poverty threshold, the income needed to sustain one’s daily living and poverty incidence which
refers to the proportion of families/individuals whose per capita income is lower than the poverty
threshold. Second, the relative poverty is a condition where the national income is being distributed
among households in an economy.

2. Demographic changes and its economic implications – As our country experiences rapid population
growth time after time, the availability of land per person narrows down which then puts a toll on
productivity in the agricultural sector of the nation.

3. Low investment in human resource development – As the population increases, human capital rises,
as well. However, although this may seem positive at glance as the labor force can contribute in
economic growth, the quality of human resources is affected vastly. As they say, quality over quantity.
This only implies that a highly-trained workforce is more beneficial for economic well-being than a pool
of unskilled workers. That said, the Philippines should aim for higher benefits such as investing in higher
education, research and development, etc.

4. Weak infrastructure and food security – Although our country possesses a great quantity of human
capital, physical infrastructures and facilities expands transactions which depicts our need for more
roads, bridges, and any other networks for transportation and communication. Moreover, when it
comes to food security, our country constantly faces conflict in terms of food security and food self-
sufficiency because we import most of our foods in neighboring countries despite having the means to
produce such.

5. Slow adoption of modern technology – Our country is labeled as a labor-intensive economy wherein
we mostly rely on manual workforce to increase production. However, as technology advances time
after time, capital-intensive economy which makes the production much efficient and easier. That said,
the Philippines should gradually adopt to this set-up in order to cope up with the demands of the world
and, hereby, develop the well-being of our economy, at large.

6. Environmental sustainability and the country’s development thrust – As often times, as we continue
to strive for more development, the environment suffers its consequences. Because of extensive
urbanization in most places in our country, many areas are becoming highly polluted which destroys the
natural resources of environment. Thus, it must be kept in mind that the excessive use of natural
resources might, one day, deprive us from generating income from them. That said, it should always
have a balance and mitigate the negative consequences of our economic activities and the environment.

It involves the study of how the society

Economics is the study of mankind

How economy behaves reflects the behavior of individual

 How people make decisions

trade off

opportunity cost

margin

incentives

 How people interact

principles 5, 6, 7

FIRST FOUR PRINCIPLES HOW INDIVIDUALS MAKE DECISION

 People face tradeoffs

Between work and leisure

How to allocate time

Environment – lost of income or loss of jobs, plant closings but restrict powerplants by using alternative
fossil fuels

 The cost of something is what you give up to get it

Cost of tuition and buying books – going to college

The cost of doing anything is what you give up

If he want to go to college, you have to give up job

  Rational people think at the margin

Doesn’t have enough time, she can adjust her schedule to make money and at the same time have
enough time to study

Balance things out

Price their tickets to maximize profit

How to price unsold theater seats

 People respond to incentive

Comparing cost and benefits

No taxes – dumami ang tao ang nagshoshopping

Discounts in stores

Increase the price of cigarettes, bababa yung mga taong naninigarilyo teenagers are discouraged to
smoke

HOW PEOPLE INTERACT WITH EACH OTHER

 Trade can make everyone better off

People are not self-sufficient

They rely to other people to do tasks for them

You have something and I have something and when we exchange, all is better off

We rely to farmers for food

Gives customers a variety of goods and services

 Markets Are Usually a Good Way to Organize Economic Activity

Prices are negotiated

Market is where people make exchange that is governed by prices

Changing of prices is the method of allocating resources

Stamp show – there’s a lot of browsing and bargaining

We call our system a market economy

Firms decide what to make and who to hire people decide who to work on

Market economies are decentralized

How buyers and sellers interact with each other

Invisible hand – move the free market economy wherein prices are the key instrument that signals
people what to buy and firms decide what to sell. helps the demand and supply of goods in a free
market to reach equilibrium

 Governments Can Sometimes Improve Economic Outcomes

Market might fail to allocate resources in equitable way, government use to distribute resources

Governments can step in and intervene in order to promote efficiency and equity.

Market failure = unchecked market power or monopoly, when a person is able to manipulate or control
the market

To promote greater equity and fairness so that wealth is distributed evenly

Rewarded on their ability to produce things

The invisible hand does not mean equity

Are you aware of the saying that no man is an island? Yes, I am sure you are and the importance of trade
can be associated with that saying. One of the principles of economics under the category of how do
people interact states that, “Trade can make everyone better off.” As we all know, we, people, are not
self-sufficient individuals. Meaning to say, we, sometimes, or even most of the time, depend on other
people to satisfy our unlimited needs and wants because we cannot produce everything that we need
forever. Rationally speaking, we cannot grow our own food all the time; we cannot make our own
clothes, or even cut our hair by ourselves. That said, rather than being self-sufficient, we can specialize
in producing a particular good or service and exchange it for other goods or services. The idea that you
have something that I need and I have something that you need and we traded those needs then both
of us will be better off. As we all have our own specializations, we can use them to trade what we have
whereas as these needs and wants increase, these specializations increase as well to satisfy the
demands of the world. Thus, the essence of why economies can grow, why it is that markets are
important, or even why it is that the whole science of economics is important can be summed up with
the idea of trading.

Let us keep in mind that the world of trading is not like a zero-sum game where one person's gain is
equivalent to another's loss; rather, it is a positive-sum game. That means that we can all gain when it
comes to proper trading. Let’s take international trading for example. For many developing countries,
the growth and progression of their economies rest heavily on successful trade in regional and global
markets. This is because trading allows countries to expand markets for both goods and services that
otherwise may not have been available to it. As a result of international trade, the market contains
greater competition and therefore, more competitive prices, which brings a cheaper product home to
the consumer. That said, trading is, indeed, an essential factor in a country’s development that can
increase people’s standard of living, create employment for many people and most especially, in
empowering consumers to enjoy different kinds of goods.

Even just talking in front of you now can be an example of trading because
The first point of equilibrium is at P3 and Q60

The supply curve shifts to the right, indicating an increase in supply

The shifting of the supply curve creates a surplus where qs is greater than qd

Due to the surplus, price decreased and quantity increased

The new point of equilibrium is at P2.5 Q80

The first point of equilibrium is at P2.5 and Q80

The supply curve shifts to the left, indicating a decrease in supply

The shifting of the supply curve creates a shortage where qd is greater than qs

Due to the shortage, price increased and quantity decreased

The new point of equilibrium is established at P3 and Q60

Good day, everyone. I am Clarisse Penaredondo and I am here to discuss another non-price related
factor which affects the demand curve to shift to the left or to decrease in quantity demanded. More
specifically, we will talk about how the price of related goods, particularly, the complementary goods,
will shift the demand curve to the left; thus, creating surplus in the market equilibrium due to changes in
demand.

To start off, let’s define first what a complementary good is. In economics, a complementary good is a
good whose demand increases with the popularity of its complement. Basically, complements are goods
that are consumed together. That said, when the price of a good that complements a good increases,
then the quantity demanded of one good decreases and the demand for the other decreases, as well.
Let’s take printer and ink cartridges for example since the more printer acquired, the higher the demand
for ink cartridges.

Suppose that the price of printers increase in the market. As a result, the demand for printers decreases
and the cartridges, which is its complementary good, decrease as well. Since there is a decrease in
demand for ink cartridges, the demand curve shifts to the left, price decreases and quantity decreases as
well whereas a decrease in demand results in a decrease in the equilibrium levels of price and quantity.

For better understanding, let’s make a story out of this graph. The first point of equilibrium in terms of
the price and quantity for ink cartridges is established at P20 and Q40. Since the demand for printers
decrease and the demand for ink decrease as well, the demand curve shifts to the left, indicating a
decrease in demand. As such, the shifting of the demand curve creates a surplus because there are only
few number of buyers which implies that qs is greater than the qd for cartridges. Due to the surplus of
goods, price decreased and quantity decreased also for cartridges. Now, as we may notice, the new
point of equilibrium is now established at P15 and Q30; meaning to say, price and quantity decreased
because of the shifting of the demand curve to the left wherein price of printers is above equilibrium,
affecting the demand and price for ink cartridges.
So to sum up, as the price of a complementary good increases, its demand decreases causing the
demand curve to shift to the left. As a result, there is a surplus because the price is above the market
equilibrium and there are only few buyers. Meaning to say, the price will likely to decrease, as well as
the quantity of that good in order to achieve market equilibrium. That’s all and I hope you understand
how this works. Thank you so much and God bless.

Graph 1

The first point of equilibrium is at P15 and Q28.

Due to an increase in income, the demand curve shifts to the right, indicating an increase in the demand.

The change in demand creates a condition of shortage, which push the price up, resulting to an increase
in supply.

A new point of equilibrium is established at P18 and Q35.

Graph 2

The first point of equilibrium is at P23 and Q32.

Due to a decrease in income, the demand curve shifts to the left, indicating a decrease in the demand.

The change in demand creates a condition of surplus, which pull the price down, resulting to a decrease
in supply.

A new point of equilibrium is established at P18 and Q26.

Graph 3

The first point of equilibrium is at P15 and Q28.

Due to good weather, as illustrated in the shifting of the supply curve to the right, an increase in the
supply.

The change in supply creates a condition of surplus, which pull the price down, resulting to an increase
in demand.

A new point of equilibrium is established at P12 and Q35.

Graph 4

The first point of equilibrium is at P14 and Q32.

Due to effect of typhoon, the supply curve shifts to the left, indicating a decrease in the supply.
The change in supply creates a condition of shortage, which pull the price up, resulting to a decrease in
demand.

A new point of equilibrium is established at P18 and Q25.

 Inverse relationship between price and quantity

 As the price goes up, demand goes down because people buy less and when the price goes
down, people buy more which increases the quantity demanded.
 Elasticity – shows how sensitive a quantity demanded is to a change in price.
 Inelastic – increase in the price, qd decreases but just a little bit. (The quantity demanded is
insensitive to a change in price) The reason for this is that products that have an inelastic
demand have very few substitutes. Aside from that, it is a necessity and has elasticity coefficient
of less than one.
 Elastic – quantity is sensitive to a change in price. as the price goes up, the demand goes down a
lot. (There are many substitutes available).
 Unit Elastic = 1
 Vertical straight line or perfectly inelastic – an increase in price has no effect in quantity = 0
 Horizontal demand curve or perfectly elastic = coefficient is infinite
 The more sensitive the demand is to a change in price, the greater the elasticity demand
coefficient.

COEFFICIENTS

 0 = Perfectly Inelastic (Vertical)

 Less than 1 = Inelastic
 Equal to 1 = Unit Elastic
 Greater than 1 = Elastic
 Infinite = Perfectly Elastic (Horizontal)

PERFECT COMPETITION
  Perfectly Elastic
 Price = Demand = Marginal Revenue (since price taker in perfect competition)
 Marginal Cost (MC) = Marginal Revenue (MR) -> PROFIT MAXIMIZATION
 Total Revenue = Price x Quantity
 Total Cost = Cost x Quantity
 Economic Profit (inc. opportunity cost) = Total Revenue – Total Cost
 Height = Price – Cost
 Profits = Quantity (Price – Cost)
 Zero Economic Profit -> Cost = Price
 Economic Loss -> Cost > Price
 Shut Down -> Average Variable Cost = Marginal Cost
 Only efficient market structure.

MONOPOLY

 Elastic (Downward Sloping), become more elastic in the long run.

 They control the market.
 Total Revenue = Price x Quantity
  Total Cost = Average Total Cost x Quantity
 Economic Profit = Total Revenue – Total Cost
 Profit = Quantity x (Price – Average Total Cost)
 Average Revenue = Total Revenue / Quantity = PRICE (Average Revenue is the same as Price)
 Demand = Average Revenue
 Marginal Revenue = Change in Total Revenue / Change in Quantity
 Slope/Rate of Change = Rise / Run
 Monopoly charge more and produce less.

*Computation in Monopoly

 Quantity is given. Price is given. Total Cost is given.

 Total Revenue = Quantity x Price
 Profit = Total Revenue – Total Cost
 Average Revenue = Total Revenue / Quantity
 Average Cost = Total Cost / Quantity
 Marginal Revenue = Change in Total Revenue / Change in Quantity (minus sa nasa taas na value)
 Marginal Cost = Change in Total Cost / Change in Quantity (minus sa nasa taas na value)

MONOPOLISTIC COMPETITION
 Downward Sloping
 Large number of sellers selling slightly differentiated products.
 Low entry barriers.
 Each firm has price-making power. (Downward sloping)
 Economic profits cannot be earned in the long run.
 Neither allocative nor productive efficiency.
 Inverse relationship between price and quantity demanded.
 Marginal Revenue will be lower than the price it is selling its output for.
 A single price seller will have a marginal revenue that lies below the demand curve.
 Marginal Revenue is always less than the price (demand).
 Marginal Cost is J-shaped.
 Profit = Price – Average Total Cost
 Only earns profit in the SHORT RUN.
 Decrease in demand results in lower quantity and charge a lower price.
 Zero Economic Profit -> Average Total Cost = Price
 MC = MR tapos ay ita-taas hanggang sa ATC!!
 Monopolistic Competitors will only break-even.
 Not productively efficient -> ATC = MC (the firm will restrict its output on the minimum ATC)
 Not allocatively efficient -> Demand (Marginal Benefit) > Marginal Cost
Oligopolistic Competition

 Kinked Demand Curve

 Highly interdependent to one another.
 If a firm lowers its price, the other lowers its price too because the other firm does not want to
lose market share. Demand is highly inelastic below the equilibrium price.
 If the first firm raises its price, the other will keep its price to capture much of the market share
since its price remains low. Demand is highly elastic above the equilibrium price.