Applied Economics Reviewer

2 quizzes: 1 for prelims; 1 for finals

Lesson 1: Introduction to
Economics

Vid:

Economics is not “pag-aaral para dumami ang pera”

Economics is “pag-a-allocate ng scarce resources”

(meaning, limited, nauubos, or may hangganan) like
allowances, budget, time (you watched this video so
nawalan ka ng oras for other videos [opportunity
cost]

Economics is part of making sound choices.

Economics

Definition: A social science essential for managing

scarce resources to satisfy unlimited human wants
and needs.

- The management of sources.

- A social science because it deals with the
Talk to her if you missed an exam to be given a behavior of people hiven an economic
special task condition

Economics is about making choices.

- Hindi mo pwede kunin lahat kasi

mawawalan yung iba. Kaya may poverty
kasi hindi nakakasabay ang supply sa
demand.

The word “economics” comes from the Greek word

oekonomia, which means management of the
household
 Applied Economics Reviewer

Normative: The current Philippine president

Two main branches of economics
1. Microeconomics
Scarcity
- deals with firms and consumers. It focuses
on the behavior of a particular unit of the
economy
2. Macroeconomics
- deals with the aggregates. Its scope is wider
as it studies the entirety of an economy
- Ex: GDP, Interest Rate, Even the behavior of
people. (this is why we have behavioral
economics)
needs to step down to decrease the price of
onions
- Arises because man’s wants are infinite.
While his resources are limited
- Thus, society has to allocate these
resources among conflicting needs and
wants.
o Human wants
-non-essential things we can live
without
-factors affecting wants: population,
tastes and preferences, income and
speculations
o Needs
-things we cannot live without
-food, shelter and clothing

- Because there is scarcity, either in resources

Methods of Economics
or in goods or in services produced, there is
1. Positive Analysis a need to choose from the various
- describes what exists and how things work. possibilities at hand
It is based on scientific inquiry and backed o A trade off refers to giving up
by quantifiable data. something for the other (action
itself)
o Opportunity cost is a benefit, profit
or value of something that must be
2. Normative Analysis given up to acquire something else
- based on value judgments and prescriptions (cost of that decision)
- Based on opinion Classification of Resources

 Land – all natural resources that exists

without man’s intervention
 Labor
- human inputs like manpower and skills that
are used in transforming resources
*Other Examples:  Capital
Positive: The current Philippine president is - man-made resources used to create
Bong Bong Marcos another product
- Different from the definition in accounting
because there it is puhunan. In economics,
resources
 Applied Economics Reviewer
 Entrepreneurship
- Integrates land, labor and capital to create
new products or business
Basic Economic Questions
 What to produce?
- what consumers want to buy or willing to
pay for
- Ex. In our area, there is lack of medical
supplies. Therefore, pwede mo Negosyo
yan.
 How to produce?
- who will produce goods and what process
of production will be used.
- Two production types:
1. Capital intensive – majority of capital
are used for production (ex: machines)
2. Labor intensive – requires manpower
(ex: farming)
 For whom to produce?
- who will benefit from the goods and
services produced.
- Who is your target? It must be specific
- If students, sinong mga students? Taga-UST
ba or Taga-UP? So you can adjust your
products based on your target market
- K.Y.C. – know your customer
- You cannot require your target markets to
buy your product since they have their own
preference (brand loyalty)
Economic System
- Characterized by the type of institutions
responsible for the management and
allocation of resources used in the
production of goods and services
- Framework of economy
- Reveals the key players of the economy
- Three known economic systems:
1. Market economic system - the price of
a commodity determines what, for
whom and how much of it will be
produced.
2. Command economic system - all
resources are owned by the
government, thus, production is
planned and dictated by it; Government
is responsible for all decisions
3. Mixed economic system all three basic
economic questions are answered by
both the government and private
entities in consideration of their mutual
benefit.
- Philippine’s system
- If di kaya ng government, pwede ipasa
sa private entity (privatization)
Lesson 2: Supply and Demand
Supply
- Willingness of sellers to produce and sell a
good at various possible prices.
Law of Supply
- The price and quantity supplied have a
direct relationship. (positive)
Supply Curve
- a graphic representation of the relationship
between price and quantity supplied.
- The price appears on the vertical axis, while
the quantity supplied appears on the
horizontal axis.
- Upward sloping curve. Meaning price and
quantity supplied move in the same
direction. If mataas si price mataas din
supply.
 Applied Economics Reviewer

- cost of production refers to the prices of all

resources needed to manufacture a
product. The higher the cost, the lower the
quantity supplied.
 Change in technology
- the use of machinery and other equipment
leads to a faster way of producing goods,
thus, yielding a higher output.
 Change in the government policies
- different government policies affect
changes in supply.
- Ex: if nagsabi si BIR na magtataas ng taxes,
so need magcomply
Supply schedule

- a table that shows the relationship between

Demand
the price of a good and the quantity
supplied. - Willingness of the buyer or consumer to pay
- At $2, quantity is 0 but when the price for a certain good.
increased to $4, quantity supplied also
supplied Law of Demand

- The price and quantity demanded have an

indirect relationship.
- If the price of a good is high, the quantity
demanded will be low

Demand Curve

- a graphic representation of the relationship

between price and quantity demanded
- The price appears on the vertical axis, while
the quantity demanded appears on the
Factors that Influence Supply
horizontal axis.
 Change in the number of sellers - Downward sloping curve. Because price and
- the higher the number of sellers in the quantity demanded have an inverted
market, the more supply of products will be relationship
available
- ex: we only have one company that
produces electricity; limited producers of
aircrafts
o advantage of less sellers: less supply
so high demand; sellers can control
the price
 Change in cost of production
 Applied Economics Reviewer
Market Equilibrium
Demand schedule
- a table that shows the relationship between
the price of a good and the quantity
demanded.
- The higher the price the lesser the quantity
demanded
Factors that influence demand
 Change in income
- a consumer will buy more goods when
there is an increase in income
 Change in the size of population
- population growth means an increase in the
size of the market demand, and a decline in
population means a decrease in demand.
- Ex: ang dami nagdedemand ng onions pero
konti lang yung supply.
 Change in tastes and preferences
- a good for which consumers’ tastes and
preferences are greater, its demand would
be large.
 Change in the consumers’ speculations
- if a buyer assumes the price of a good will
increase in the future, the demand for that
good today increases
- Ex: expected na tumaas ang price ng
gasoline next week so ngayong palang
magpapagas ka na.
- Balance between demand and supply
- refers to a price at which both parties
produces and consumers are agreed to
exchange
- a condition of equilibrium is reached when
the quantity of supply and demand are
balanced or equal at a given price level.
 Formula for Quantity Supplied (Qs) :
Qs = c + dP
*(+) because it shows the direct relationship
between price and supply
where P is price, and c is constant
 Formula for Quantity Demanded (Qd) :
Qd = a – bP
*(-) because it shows the indirect
relationship between price and
where P is price, and a is constant
 Equate Qs and Qd to solve for the
equilibrium
Qs = Qd
c + dP = a – bP
 Applied Economics Reviewer
Example: Qs = -4 + 8p; Qd = 26-2P
Qs = Qd
-4 + 8P = 26 – 2P
2P + 8P = 26 + 4
10P = 30
P = 3, equilibrium price, or Pe
*to get the the equilibrium quantity, substitute
the value of Pe to either Qs or Qd
Qs = -4 + 8 (3) = 20, equilibrium quantity or Qe
*Sometimes, the government sets a price floor or a
price ceiling. This intervention could bring about
surplus or shortage.
Price Ceiling
Price Floor
- For example, if the government sets a price
floor for palay, that is higher than the
equilibrium price, then there would be
more suppliers willing to produce and sell
palay.
- Thus, surplus would occur.
- Tinataas ng government ang presyo to
entice more to produce kaso bumababa ang
demand since mataas yung presyo kaya
nagkaka surplus.
 Surplus
- Experienced when the price of a good is
above the equilibrium point.
- This means the quantity supplied exceeds
the quantity demanded. (Qs > Qd)
- This is to be avoided because there would
be a waste of resources.
 Shortage
- Experienced when the price of a good is
below the equilibrium point.
- This means that the quantity demanded
exceeds quantity supplied. (Qd > Qs)
- This would require the need for
importation. In the end mas mahal ang
presyo.
- Supposed we have a house-rent market. In
the graph, 3 is the equilibrium price, while
30 houses is the equilibrium quantity.
- Now, the government determines a price
ceiling of 2. At this rate there is a shortage.
Demand for houses is 40 but supply is for
only 20 houses.
- Ibababa ng government yung presyo kaya
mas maraming buyers ang gusting bumili
kaso hindi na makakapag produce si seller if
mababa na presyo.
- Ex: dati binaba ng government presyo ng
meat products so maraming bumibili kaso
nagsuffer na yung sellers kaya hindi
nagtagal yung price ceiling.
 Applied Economics Reviewer
Goods in the Market
Vid: Onion price hike
May chance na magsabay yung imported onions
with the harvest being gathered by domestic
farmers kasi harvest season na. If that happens,
magtataas parin ang presyo kasi uunahin yung
imported para mabawi yung pinangbili. So matatalo
yung domestic.
Substitute Goods
- Different brands and models
- Goods that serve the same purpose as the
original and can be used as an alternative.
- They are goods that are in competitive
demand.
- A rise in the prices of Good S will lead to a
contraction in demand for Good S
- This might then cause some consumers to
switch to a rival product Good T
- Examples: Tea and coffee, Smartphone
Brands, Rival ride sharing apps, Competing
supermarket chains, Online streaming
platforms, Cereal brands, restaurants, grab
or jeep
Complementary Goods
- Two or more distinct items or goods whose
use is associated or interrelated with each
other.
- They are products which are bought and
used together.
- A fall in the price of Good X will lead to an
expansion in quantity demand for X
- Complements are said to be in joint
demand.
- If mataas demand sa toothbrush mataas din
demand sa toothpaste
- Examples: Cars and tires, Fish and chips,
Smartphones and apps, Solar panels &
batteries, Flights and taxi services, Shoes
and polish, Pasta and pasta sauces
Inferior Goods
- an increase in income causes a fall in
demand for these goods.
- a decrease in income causes a rise in
demand for these goods.
- a type of good whose demand shows an
inverse relationship with the consumer’s
income.
- Also applies when there is little accessibility
to another product.
- Ex: instant noodles, siomai, sardines
Normal Goods
- an increase in income causes a rise in
demand for these goods.
- a decrease in income causes a fall in
demand for these goods.
- a type of good whose demand shows a
positive relationship with the consumer’s
income.
- Ex: rice
Luxury Goods
- an increase in income causes a bigger
percentage increase in demand.
- a good for which demand increases more
than proportionally as income rises, so that
expenditures on the good become a greater
proportion of overall spending.
- Depends on the taste and preference of the
buyer.
- Ex: Sa iba luxury ang Charles and Keith na
bag pero sa iba normal good siya.
Necessity Goods
- something needed for basic human
existence.
- example: food, electricity, housing, water
 Applied Economics Reviewer

 Total Utility (TU) – overall

Theory of Consumer Behavior
The Theory of Consumer Behavior is where the law
of demand is derived. This is because the
consumers are the ones interested in buying and
consuming products.
Recall that humans have unlimited wants and
needs, which are not always fulfilled because of the
limited resources. For this reason, whenever a
consumer’s needs or wants are met, he or she
positively achieves a degree of happiness and
satisfaction. In economics, this want-satisfying
ability is called utility. Since there is no exact
measurement of this value, economists rate utility
in utils.
In consumer behavior theory, it is expected that
every buyer’s choice revolves around a utility-
maximization rule.
happiness/satisfaction derived from
consumption.
 Marginal Utility (MU) – amount of
additional utility received in every
consumption of an additional unit of a
good. (extra)
As an example, imagine a boy craving for siomai.
The table below shows the boy’s utility for every
piece of siomai he eats. Notice that with his first
piece, the boy gets 10 utils but it diminishes as he
consumes more and more of the same good. The
difference of marginal utility (MU) from Q1 to Q2 is
1 and Q2 to Q3 is 2, and so on and so forth.
Likewise, adding the marginal utility of Q1 and Q2
gives us the boy’s total utility (TU) for his first two
piece of siomai. The same is true for the succeeding
MUs.

That is, a consumer buys the product that can

provide him or her the highest level of satisfaction
or utility.

Whenever a consumer is faced with a selection of

alternatives, he or she will always choose the
product that will give him or her more pleasure.

Law of Diminishing Marginal Utility

States that as a consumer uses up a good or a
service, he or she tends to get less and less satisfied
with it through time.
The greatest satisfaction is experienced
consuming the first quantity of the said good.
Less satisfaction is derived from consuming more
and more of a good. (“sawa” factor)
To understand more about this law, we have to look
at the two utility concepts:
*Kaya no value yung MU sa first piece kasi
kakasimula palang niya kumain, wala pa siyang
extra happiness. Pero pag darting sa 2nd piece,
umaakyat yung MU.
by
*to get the MU, you need to get the difference
between TU2 and TU1 Then TU3 and TU2, so on so
forth.
*See how nagging 0 na ung MU sa 5 th piece? It
means highest level of satisfaction na. Kaso pinilt pa
niya kumain ng another piece, kaya negative na
yung MU value kasi naumay na.
 Applied Economics Reviewer
From the table, we can gather the following
observations:
1. Marginal utility is the change in total utility
as we consume an additional unit of a
product. Total utility, therefore, changes
relative to the change in marginal utility.
2. Total utility, in general, increases as more
and more units of the product are
consumed. However, at some point, when
the marginal utility is less than 0, total
utility decreases.
3. Marginal utility diminishes as the
consumption of the same good becomes
higher. (Law of Diminishing Marginal Utility)
Budget Line
- A budget line shows all those combinations
of two goods.
- A graphical representation of the amount of
goods a consumer can afford.
- All those combinations which are within the
reach of the consumer will lie on the budget
line.
- Focuses on the affordability of both
products.
If you underspend, you do not fully utilize your
budget (may sumosobra); if you overspend, then
you would need to borrow money kasi ubos na pera
mo.
Key points for Budget Line:
 A budget line separates what is affordable
from what is not affordable.
 Budget line slopes downwards as more of
one good can be bought by decreasing
some units of the other good.
 Goods which cost exactly equal to
consumer’s income lie on the budget line.
 Goods which cost less than consumer’s
income shows under spending. They lie
inside the budget line.
 Goods which cost more than consumer’s
income are not available to the consumer.
They lie outside the budget line.
Indifference Curve Analysis
- A graph showing combination of two goods
that give the consumer equal satisfaction
and utility.
- Each point on an indifference curve
indicates that a consumer is indifferent
between the two and all points give him the
same utility.
- This approach to consumer behavior is
based on consumer preferences.
- Focuses on the trade off.
*Trade off: action of giving up ; Opportunity Cost:
Ano yung halaga ng nawala sayo kapag pinili mo
yung isa over the other.
Properties of indifference Curve:
 Negative downward slope (indicates trade
off)
 Applied Economics Reviewer

*kahit yung budget line downward sloping

curve kasi may trade off. Hindi po pwede
bilhin lahat
 Further away from the origin an
indifference curve lies.(Higher Indifference
curves represent higher levels of
satisfaction)
 Indifference curve does not intersect
 Convex to the origin.
 Furthermore, the slope of indifference
curve is the marginal rate of substitution
(MRS)
 MRS shows how much of good Y the
consumer would be willing to trade for Other Key Concepts:
some units of good X.
 Income Effect
- occurs when the allowance or budget of a
consumer can no longer purchase the same
amount of goods as before, then his income
has declined.
 Substitution Effect
- occurs when the increase of price of a good
will make a consumer look for a substitute.
Optimum Combination  Equimarginal Principle
If we combine the budget line and the indifference - states that a rational consumer will
curve, the optimum combination is the highest maximize his utility or satisfaction when the
indifference curve that touches the budget line at a marginal utility per peso spent on one good
point of tangency. At the optimum level, a is equal to the marginal utility per peso
consumer is able to buy the maximum amount of spent on any other good he consumes.
two goods given a specific budget. This is shown by The table shows the Total Utility of Joseph derived
point Q. from eating pizza in the evening while studying:
 Applied Economics Reviewer
How much marginal utility does Joseph derive from
the third piece of pizza?
After eating how many pieces of pizza does
marginal utility start to decline?
Theory of Production
Recall that in Chapter 1 the discussion on the
factors of production (classification of resources).
Resources are transformed into goods and services
that have considerable value (utility) to consumers.
This process is called production. In the production
process, these resources are also referred to as
inputs while the goods and services created are
called outputs.
The production function refers to the greatest
output that can be created given an exact number
of inputs. It is expressed as:
Q = f (land, labor, capital)
Output (Q), is a function of land resources, which
may also refer to raw materials; labor, which is a
manpower resource; and capital, which includes
equipment, machinery, and other capital goods.
There are two kinds of inputs in the short-term
production:
 Fixed inputs
- do not change as output increases. (ex: land
resources)
 Variable inputs
- change as output increases. However, in the
long run, all inputs are variable.
Just as the consumers’ objective for consumption is
utility maximization, producers in the market seek
for profit maximization, or maximize the revenue
but minimize the costs of production.
Law of Diminishing Marginal Returns
- States that as more inputs are added to
production while holding other inputs fixed,
the additional outputs start to diminish at a
certain point.
- If machineries and equipment are constant,
that is, no other additional machines will be
used in the production, and we add more
workers, the additional amount of output
produced will gradually fall.
- It is possible that the first unit of labor
added may yield a considerable increase in
output.
- But, as the firm continues to employ more
and more labor, production will eventually
reach the point where additional increases
in output start to decline.
For example, a production of tricycles. Table below
shows MP or Marginal Product which is the change
in output given the additional variable inputs
holding other inputs fixed. TP refers to Total
Product and AP is the Average Product, which is TP
per unit of added input (TP / L). Notice how MP
diminishes through time.
 Applied Economics Reviewer

Isoquant traces out the different combinations of

capital and labor inputs that a firm can use to
produce the given amounts of output.

Three Phases of Returns to Scale:

1. Increasing Returns to Scale

- at Phase I, as TP increases, AP decreases,
and MP diminishes.
2. Constant Returns to Scale
- at Phase II, MP is zero. An additional
variable input yields no increase in output.
AP decreases as TP is at its maximum.
3. Decreasing Returns to Scale
- TP starts to diminish at phase III.

Long Run and Short Run Analysis

In production analysis, two time frames are used.
 short run
- is where a firm adjusts only its variable
input.
 long run
- is where all inputs are variable.
In determining production efficiency, we use the
concepts of isocost and isoquant.
Combining the two graphs yields the least cost
combination. The least cost combination is the
point where the highest isoquant curve touches the
isocost line at a point of tangency. At this point, two
conditions were met – the firm spends the least and
produces the maximum output using all available
inputs.

Isocost is a line that represents all possible

combinations of capital and labor inputs that are of
equal total cost.
 Applied Economics Reviewer
Labor-intensive and Capital-intensive Businesses
 Capital Intensive
- business is operated more with machine,
land and equipment over labor (capital
input is greater than labor input).
- Ex: vending machine
 Labor-Intensive
- business is operated more with labor (labor
input is greater than capital input).
- Ex: farming, which needs a lot of manpower
Cost Theory
In this chapter, we will study how costs and profit
affect market behavior. Cost is one of the most
important concepts in Economics. It refers to actual
or real expenses incurred in the production of goods
and services.
In analyzing costs, we will identify different types of
costs:
Total Fixed Cost (TFC)
- also known as the fixed input ; costs that do
not change as the output increases. (Ex.
Rent which is payment for land as input,
including raw materials)
Total Variable Cost (TVC)
- refers to variable input; costs that change as
the output increases. (Ex. Labor cost)
Total Costs are computed by simply adding the total
variable costs and total fixed costs.
TC = TFC + TVC
Other Types of Cost:
Average Total Cost (ATC) = AFC + AVC or TC / Q
Average Fixed Cost (AFC) = TFC / Q ; where Q is
output
Average Variable Cost (AVC) = TVC / Q
Formula for Marginal Cost (MC) :
*MC is the cost of producing one more unit of a
good.
Practice Exercise:
Revenue and Profit
 Revenue
- is the amount of money received by firms
from selling goods and services.
 Profit
- it is the difference between total revenue
and total costs. It is expressed as:
TP= TR – TC
where TP is Total Profit
The other formula for the analysis of revenue and
profit is: TR = P x Q
 Applied Economics Reviewer

Where MR is Marginal Revenue which refers to the

additional revenue generated by selling additional
unit of a good.

For a firm to maximize profit, marginal revenue and

marginal cost must be balanced with the price. At
the point when total revenue is only equal to total
cost, no profit will be made. However, there is also
no loss at this instance. This means that the firm has
a break-even in its production. A break-even point
refers to a situation where a firm’s gain from its
economic activity equals the costs it incurred.

When the profit is zero, the firm is at break-

even point., where it might still opt to continue
operations. Once the firm starts to incur losses or
negative profits, it might be better for the firm to
continue operating to recover some losses.
However, a firm should decide to shut down if the
price of the product is equal to the firm’s AVC.