MODULE 1 : INTRODUCTION TO COURSE AND ECONOMICS

Economics
- Is the study of ALLOCATION OF SCARCE RESOURCES to meet UNLIMITED
human wants.

VITAL FUNCTION OF AN ECONOMY:

● Consumption
● Production
● Capital Formation

Economizing of Resources
- refers to making optimum use of the available resources.

TWO GENERAL CATEGORIES OF ECONOMICS

1. Microeconomics - concerned with decision-making by individual

economic agents such as firms and consumers.

2. Macroeconomics - concerned with the aggregate performance of the

entire economic system.

METHODS IN ECONOMICS

A. Empirical economics - relies upon facts to present a description of

economic activity.

B. Economic theory - relies upon principles to analyze behavior of economic

agents.
FORMS OF LOGIC

A. Inductive logic - creates principles from observation.

B. Deductive logic - hypothesis is formulated and tested.

USEFULNESS OF ECONOMICS
- economics provides an objective mode of analysis, with rigorous models
that are predictive of human behavior.

a. Scientific approach
b. Rational choice

ASSUMPTIONS IN ECONOMICS
- economic models of human behavior are built upon assumptions; or
simplifications that permit rigorous analysis of real-world events, without
irrelevant complications.

a. model building - models are abstractions from reality - the best model is
the one that best describes reality and is the simplest Occam’s Razor.

b. simplifications:
1. ceteris paribus - means all other things equal.
2. There are problems with abstractions, based on assumptions. Too often, the
models built are inconsistent with observed reality - therefore they are faulty
and require modification. When a model is so complex that it cannot be easily
communicated or its implications easily understood - it is less useful.
GOALS AND THEIR RELATIONS

a. POSITIVE economics is concerned with what is;

b. NORMATIVE economics is concerned with what should be.

1. Economic goals are value statements, hence normative.

c. Economics is not value free, there are judgments made concerning what is
important:
1. Individual utility maximization versus social betterment
2. Efficiency versus fairness
3. More is preferred to less

d. Most societies have one or more of the following goals, depending on

historical context, public opinion, and socially accepted values:
1. Economic efficiency
2. Economic growth
3. Economic freedom
4. Economic security
5. Equitable distribution of income
6. Full employment
7. Price level stability
8. Reasonable balance of trade

GOALS ARE SUBJECT TO:

a. interpretation - precise meanings and measurements will often

become the subject of different points of view, often caused by politics.
 b. goals that are complementary are consistent and can often be
accomplished together.

c. conflicting - where one goal precludes, or is inconsistent with

another.

d. priorities - rank ordering from most important to least important;

again involving value judgments.

THE FORMULATION OF PUBLIC AND PRIVATE POLICY

Steps in formulating policy:

1. stating goals - must be measurable with specific stated objectives to be

accomplished.

2. options - identify the various actions that will accomplish the stated goals
& select one, and

3. evaluation - gathers and analyzes evidence to determine whether policy

was effective in accomplishing a goal, if not re-examine
options and select options most likely to be effective.

OBJECTIVE THINKING:

a. bias - most people bring many misconceptions and biases to economics.

 1. Because of political beliefs and other value system components,
rational, objective thinking concerning various issues requires the
shedding of these preconceptions and biases.

b. fallacy of composition - is simply the mistaken belief that what is true for
the individual, must be true for the group.

c. cause and effect - post hoc, ergo propter hoc - After this, because of this
fallacy.

1. correlation - statistical association of two or more variables.

2. causation - where one variable actually causes another.

d. cost-benefit or economic perspective - marginal decision-making - if

benefits of an action will reap more benefits than costs it is rational to do that
thing.

1. Focus on the addition to benefit, and the addition to cost as the basis
for decision-making.
 MODULE 2 : THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

The Economic Problem

Needs - the essentials of life, such as food and shelter

Wants - desires for non-essential items
Economic Problem - the problem of having unlimited wants, but limited
resources to satisfy them.
Scarcity - limited nature of resources, which underlies the basic economic
problem.
Economic Resources - basic items that are used in all types of production,
including natural, capital, and human resources.
Natural Resources - the resources from nature that are used in production,
including land, raw materials, and natural process.
Capital Resources - the processed materials, equipment, and buildings used
in production; also known as capital.
Human Resources - the efforts of people involved in production, including
labor and entrepreneurship.

Three basic questions must be answered in order to understand an

economic system:
1. What gets produced?
2. How is it produced?
3. Who gets what is produced?

Capital - refers to the things that are themselves produced and then used to
produce other goods and services.
The basic resources that are available to a society are factors of production:
1. Land
2. Labor
3. Capital

Production - is the process that transforms scarce resources into useful

goods and services.

Inputs - resources or factors of production

Outputs - goods and services of value to households

Opportunity Cost - is that which we give up or forgo, when we make a

decision or a choice.

Capital Goods - are goods used to produce other goods and services.

Consumer Goods - are goods produced for present consumption.

Investment - is the process of using resources to produce new capital.

Capital is the accumulation of previous investment.
Production Possibilities Curve (PPC)

- The production possibility

frontier curve has a negative
slope, which indicates a trade-off
between producing one good or
another.
 NOTE: Points inside the curve are inefficient.

● At point H, resources are either unemployed, or are used

inefficiently.

● Point F is desirable because it yields more of both goods,

but it is not attainable given the amount of resources
available in the economy.

● Point C is one of the possible combinations of goods

produced when resources are fully and efficiently
employed.
● A move along the curve illustrates the concept of
opportunity cost.

● From point D, an increase production of capital goods

requires a decrease in the amount of consumer goods.

● The slope of the ppf curve is also called

the marginal rate of transformation
(MRT).

● The negative slope of the ppf curve

reflects the
law of increasing opportunity cost. As we
increase the production of one good, we
sacrifice progressively more of the other.
 Note: Outward shifts of the curve represent economic
growth.

● An outward shift means that it is possible to increase

the production of one good without decreasing the
production of the other.

● From point D, the economy can choose any

combination of output between F and G.

Economic Systems - are the basic arrangements made by societies to solve the
economic problem. They include:

● Command economies
● Laissez-faire economics
● Mixed Systems

Command economy - a central government either directly or indirectly sets output

targets, incomes, and prices.
Laissez-faire economy - individuals and firms pursue their own self-interests
without any central direction or regulation.
● In a laissez-faire economy, the distribution of output is also determined in a
decentralized way. The amount that any one household gets depends on its
income and wealth.

Free-market system - the central institution of a laissez-faire economy.

Market - is the institution through which buyers and sellers interact and engage in
exchange.

Consumer sovereignty - is the idea that consumers ultimately dictate what will be
produced (or not produced) by choosing what to purchase (and what not to
purchase).

Free-enterprise - under a free market system, individual producers must figure out
how to plan, organize, and coordinate the production of products and services.

Price - basic coordinating mechanism in a free market system

- Is the amount that a product sells for per unit. It reflects what society is willing
to pay.

Since markets are not perfect, governments intervene and often play a major role in
the economy. Some of the goals of government are to:

● Minimize market inefficiencies

● Provide public goods
● Redistribute income
● Stabilize the macroeconomy:
○ Promote low levels of unemployment
○ Promote low levels of inflation
 INTERDEPENDENCE AND THE GLOBAL ECONOMY (MODULE 3)
Study online at https://quizlet.com/_cp8rde

1. Open Economy is a type of economy where not only domestic factors but
also entities in other countries engage in trade of products
(goods and services).

2. Closed Economy is one that does not interact with other economies in the
world. There are no exports, no imports, and no capital
flows.

3. Foreign Invest- quite simply, is investing in a country other than your home
ment one.

4. Foreign Direct In- refers to investments made by an individual or firm in one

vestment (FDI) country in a business located in another country.

5. Balance of Trade also known as the trade balance, refers to the difference
(BOT) between the monetary value of a country's imports and
exports over a given time period.

6. Current Account represents a country's net income over a period of time.

7. Capital Account records the net change of assets and liabilities during a
particular year.

8. Capitalism is a political and economic theory which states that indi-

viduals are free.

9. Capitalist countries is on
the role of individuals rather than the state.

10. THE ELEMENTS (1) freedom of enterprise,

OF A CAPITAL- (2) self-interest,
IST IDEOLOGY (3) competition,
ARE: (4) markets and prices, and
(5) a limited role for government.

11. Market Economy is an economic

system in which economic decisions and the pricing of
goods and services are guided by the interactions of a
country's individual citizens and businesses.

1/3
 INTERDEPENDENCE AND THE GLOBAL ECONOMY (MODULE 3)
Study online at https://quizlet.com/_cp8rde
12. THE CHARAC- (1) the division of labor & specialization,
TERISTICS OF A (2) significant reliance on capital goods,
TYPICAL OF (3) reliance on comparative advantage.
MARKET SYS-
TEM
ARE:

13. International is the exchange of goods and services between countries.

Trade

14. Economic Money systems began to be developed for the function of ex-
change. The use of money as currency provides
a centralized medium for buying and selling in a market.

15. BARTER ECON- is a cashless economic system in which services and

OMY goods are traded at negotiated rates.

16. FIAT MONEY is any money that is accepted by a government for paying
taxes or debt, but is not pegged to or backed directly by
gold and other valuables.

17. EXCHANGE is the value of one

RATE nation's currency versus the currency of another nation or
economic zone.

18. CIRCULAR represents the organization of an economy in a simple

FLOW DIAGRAM economic model.

19. Perfect Competi- There is generally a large number of buyers and sellers.
tion Buyers and sellers sell identical products (there is no need
for advertising).

Perfect competition markets are highly competitive mar-

kets in which many sellers are competing to sell their
product.

20. MONOPOLY there is one seller of a particular product

there are barriers to entry of the market to prevent com-

petetion.
2/3
 INTERDEPENDENCE AND THE GLOBAL ECONOMY (MODULE 3)
Study online at https://quizlet.com/_cp8rde

21. Natural Monop- market situation where the costs of production are mini-
oly mized by having a single firm produce the product.

22. Geographic Mo- based on absence of other sellers in a certain geographic

nopoly area.

23. Technological based on ownership or control of a manufacturing method,

Monopoly process or other scientific advance.

a. Patent-exclusive right to manufacture, use or sell inven-

tion (usually good for 20 years).

b. Copyright-authors, art (good for their lifetime plus 50

years)

24. Government Mo- monopoly owned and operated by the government.

nopoly

25. MONOPOLISTIC A large number of firms compete.

COMPETITION
Each firm produces a differentiated product.

26. OLIGOPOLY Few very large sellers dominate the industry and compete
with one another. Examples: Burger King, McDonald's and
Wendy's.

27. Collusion is formal agreement between sellers to set specific prices

or to otherwise behave in a cooperative manner (For ex-
ample, OPEC = Organization of

28. Price-fixing is a form of collusion where firms establish the price of a

product or service, rather than allowing it to be determined
naturally through free market forces.

3/3
 DEMAND AND SUPPLY (Module 4)
Study online at https://quizlet.com/_cp8uiq

1. MARKET Place where goods and services are brought and sold.

2. MARKET MECH- The market for a product works on certain market prin-
ANISM ciples i.e the laws that govern the working of the market
system, also called market mechanism.

3. DEMAND The law of demands states that as price increases (de-

creases) consumers will purchase less (more) of the spe-
cific commodity, ceteris paribus.

4. MARGINAL UTIL- The change in utility derived from the consumption of one
ITY more unit of a commodity.

5. DIMINISHING The idea that utility with the amount added to total utility
MARGINAL will decline when additional units are consume past some
UTILITY point has also the status of principle.

6. Income Effect Is the effect that as a person's income increases (or the
price of item goes down {which effectively increases com-
mand over goods} more of everything will be demanded.

The income effect suggest that as income goes down

(price increases) then less of the commodity will be pur-
chased.

7. SUBSTITUTION Is the effect that as the price of a commodity increases,

EFFECT consumers will buy less of it and more of other commodi-
ties.

In other words, consumer will attempt to substitute other

goods for the commodity that became more expensive.

8. QUALITY DE- Changes in the price of a commodity causes movements

MANDED along the demans curve.

9. CHANGES IN DE- Movements of the demand curve itself, either to the left or
MAND right.

10. The price of the Product. - usually, when a goods price

falls, more will be bought
1/2
 DEMAND AND SUPPLY (Module 4)
Study online at https://quizlet.com/_cp8uiq
FACTORS AF-
FECTING DE- Price of other Goods - demand for one product can often
MAND depend on the price of another

Tastes and Fashion - people's demands change over time

as fashions change.

Advertising - consumers can be informed about new or

improved products.

11. CHANGE IN THE As with the curve a change in the price

QUANTITY SUP-
PLIED

12. FACTORS AF- The price of the Product - generally the higher the price
FECTING SUP- that a firm can get for its products, the more it will offer for
PLY sale.

Cost of Production - id a firm's costs fall, it can supply more

of its products.

Prices of other goods - the price of alternative products

affects the quantity supplied of others.

Technology - advances in production techniques can fuel

greater supply of some products

13. MARKET EQUI- Putting Demand and Supply Together - The market price
LIBRIUM can be seen at the point where the demand and supply
lines across.

2/2
 Unit 1:
Introduction
Module 1 Introduction to Course and Economics

Learning Objectives

At the end of this module, the students should be able to:

1. Define Economics;
2. Determine the Basic Concepts of Economics;
3. Identify and Understand the different methods used by economists in their
analyses.

Introduction

Specifically, this module will focus on specific definitions, policy, and objective
thinking. A discussion of the role of assumptions in model building will also be offered as
a basis for understanding the economic models that will be built in the succeeding
modules.

Lesson Proper

1. Economics Defined - Economics is the study of the ALLOCATION of

SCARCE resources to meet UNLIMITED human wants.

a. Microeconomics - is concerned with decision-making by individual economic

agents such as firms and consumers. (Subject matter of this course)

b. Macroeconomics - is concerned with the aggregate performance of the entire

economic system. (Subject matter of the following course)

c. Empirical economics - relies upon facts to present a description of economic

activity.

d. Economic theory - relies upon principles to analyze behavior of economic

agents.
 e. Inductive logic - creates principles from observation.

f. Deductive logic - hypothesis is formulated and tested.

2. Usefulness of economics - economics provides an objective mode of analysis,

with rigorous models that are predictive of human behavior.

a. Scientific approach

b. Rational choice

3. Assumptions in Economics - economic models of human behavior are built

upon assumptions; or simplifications that permit rigorous analysis of real-world events,
without irrelevant complications.

a. model building - models are abstractions from reality - the best model is the one
that best describes reality and is the simplest B Occam=s Razor.

b. simplifications:

1. ceteris paribus - means all other things equal.

2. There are problems with abstractions, based on assumptions. Too often,

the models built are inconsistent with observed reality - therefore they are faulty
and require modification. When a model is so complex that it cannot be easily
communicated or its implications easily understood - it is less useful.

4. Goals and their Relations –

a. POSITIVE economics is concerned with what is;

b. NORMATIVE economics is concerned with what should be.

1. Economic goals are value statements, hence normative.

c. Economics is not value free, there are judgments made concerning what
is important:

1. Individual utility maximization versus social betterment

2. Efficiency versus fairness

 3. More is preferred to less

d. Most societies have one or more of the following goals, depending on

historical context, public opinion, and socially accepted values:

1. Economic efficiency,

2. Economic growth,

3. Economic freedom,

4. Economic security,

5. Equitable distribution of income,

6. Full employment,

7. Price level stability, and

8. Reasonable balance of trade.

5. Goals are subject to:

a. interpretation - precise meanings and measurements will often become

the subject of different points of view, often caused by politics.

b. goals that are complementary are consistent and can often be

accomplished together.

c. conflicting - where one goal precludes, or is inconsistent with another.

d. priorities - rank ordering from most important to least important; again

involving value judgments.

6. The Formulation of Public and Private Policy - Policy is the creation of

guidelines, regulations or law designed to affect the accomplishment of specific economic
goals.

a. Steps in formulating policy:

1. stating goals - must be measurable with specific stated objectives to be

accomplished.

2. options - identify the various actions that will accomplish the stated goals
& select one, and
 3. evaluation - gathers and analyzes evidence to determine whether policy
was effective in accomplishing goal, if not re-examine options and select option
most likely to be effective.

7. Objective Thinking:

a. bias - most people bring many misconceptions and biases to economics.

1. Because of political beliefs and other value system components

rational, objective thinking concerning various issues requires the
shedding of these preconceptions and biases.

b. fallacy of composition - is simply the mistaken belief that what is true for
the individual, must be true for the group.

c. cause and effect - post hoc, ergo propter hoc - Aafter this, because of
this@ B fallacy.

1. correlation - statistical association of two or more variables.

2. causation - where one variable actually causes another.

a. Granger causality states that the thing that causes another

must occur first, that the explainer must add to the correlation, and
must be sensible.

d. cost-benefit or economic perspective - marginal decision-making - if

benefits of an action will reap more benefits than costs it is rational to do
that thing.

1. Focus on the addition to benefit, and the addition to cost as

the basis for decision-making.

a. Sunk costs have nothing to do with rational

decision-making.
Self-Assessment-Questions (SAQ)

STUDY GUIDE

Food for Thought:

1. Most people have their own opinions about things. How might opinions be of
value? Explain.

2. Compare and contrast deductive logic with inductive logic.

3. What evidence can statistical analysis provide? Critically evaluate this evidence
and explain the role of empirical economics in developing economic theory.

Multiple Choice:

1. Which of the following is not an economic goal?

A. Price Stability
B. Full Employment
C. Economic Security
D. All of the above are economic goals

2. If we provide school lunches for children from households with incomes below the
poverty level, and finance the school lunch program with an increase in taxes on incomes
in excess of $100,000, these actions are likely to:

A. Promote stability but reduce growth

B. Promote equality but reduce freedom
C. Promote efficiency but reduce equality
D. Promote efficiency but reduce security
True/ False:

_______ 1. Non-economists are no less or more likely to be biased about economics

than they are about physics or chemistry.

________ 2. Assumptions are used to simplify the real world so that it may be rigorously
analyzed.
 Unit 1:
Introduction
Module 2 Economic Problems

Learning Objectives

At the end of this module, the students should be able to:

1. Understand Basic Economic Principles;

2. Examine scarcity and factors of production;
3. Identify and Understand what economic efficiency, opportunity costs and
different economic systems.

Introduction

The purpose of this module is to introduce several economic principles that will be
useful in understanding the costs, markets, and the materials to follow in subsequent
modules. This chapter will examine scarcity, factors of production, economic efficiency,
opportunity costs, and economic systems. In this module the first economic model will
also be discussed, the production possibilities frontier (or curve).

Lesson Proper

1. The economizing problem involves the allocation of resources among competing

wants. There is an economizing problem because there are:

a. unlimited wants

b. limited resources
2. Resources and factor payments:

a. land - includes space (i.e., location), natural resources, and what is commonly
thought of as land.

1. land is paid rent

b. capital - are the physical assets used in production - i.e., plant and equipment.

2. capital is paid interest

c. labor - is the skills, abilities, knowledge (called human capital) and the effort
exerted by people in production.

3. labor is paid wages

d. entrepreneurial talent - (risk taker) the economic agent who creates the
enterprise.

4. entrepreneurial talent is paid profits

3. Full employment includes the natural rate of unemployment and down time for
normal maintenance (both capital & labor). However, full production or 100% capacity
utilization cannot be maintained for a prolonged period without labor and capital breaking-
down:

a. underemployment - utilization of a resource in a manner, which is less than

what is consistent with full employment - using an M.D. as a practical nurse.

4. Economic Efficiency consists of the following three components:

a. allocative efficiency - is measured using a concept known as Pareto

Superiority (or Optimality)

1. Pareto Optimal - is that allocation where no person could be made

better off without inflicting harm on another.

2. Pareto Superior - is that allocation where the benefit received by one

person is more than the harm inflicted on another. [cost - benefit approach]

b. technical efficiency - for a given level of output, you minimize cost or

(alternatively) for a given level of cost you maximize output.

c. full employment - for a system to be economically efficient then full employment

is also required.
5. Allocations of resources imply that decisions must be made, which in turn involves
choice. Every choice is costly; there is always the lost alternative -- the opportunity cost:

a. opportunity cost - the next best alternative that must be foregone as a

result of a particular decision.

6. The production possibilities curve is a simple model that can be used to show
choices:

a. assumptions necessary to represent production possibilities in a simple

production possibilities curve model:

1. efficiency

2. fixed resources

3. fixed technology

4. two products
7. Law of Increasing Opportunity Costs is illustrated in the above production
possibilities curve. Notice - as we obtain more pizza (shift to the right along the pizza axis)
we have to give up large amounts of beer (downward shift along beer axis).

8. Inefficiency, unemployment and underemployment are illustrated by a point inside

the production possibilities curve, as shown above. (identified by this symbol):

a. Inefficiency is a violation of the assumptions behind the model, but

do not change the potential output of the system.

9. Economic Growth can also be illustrated with a production possibilities curve. The
dashed line in the above model shows a shift to the right of the of the curve which is called
economic growth.

a. The only way this can happen is for there to be more resources or
better technology.

b. Growth will change the potential output of the economy, hence the
shift of the entire curve.

10. Economic Systems rarely exist in a pure form. The following classification of
systems is based on the dominant characteristics of those systems:

a. pure capitalism - private ownership of productive capacity, very limited

government, and motivated by self-interest.

1. laissez faire - government hands-off; markets relied-upon to perform

allocations.

2. costs of freedom - poverty, inequity and several social ills are

associated with the lack of protection afforded by government.

b. command - government makes the decisions - with force of law (and

sometimes martial force)

1. Often associated with dictatorships

c. traditional - based on social mores or ethics or other non-market, nonlegislative

bases

1. Christmas gift giving is tradition

d. socialism - maximizes individual welfare based on perceived needs, not

contributions; generally concerned more with perceived equity than efficiency.
e. communism - everyone shares equally in the output of society (according to
their needs), generally no private holdings of productive resources

1. The former Soviet Union espoused communism, but also was mostly
command

2. Utopian movement in the U.S.

f. mixed system - contains elements of more than one system - U.S. economy is
a mixed system (capitalism, command, and socialism are the major elements, with
some communism and tradition)

1. All of the high income, industrialized economies are mixed economies

e. Even with mixed systems there are substantial variations in the amounts of
socialism, capitalism, tradition, and command exist in each example.
Self-Assessment-Questions (SAQ)
 Unit 1:
Introduction
Module 4 DEMAND AND SUPPLY

Learning Objectives

At the end of this module, the student is expected to:

1. Familiarize oneself with the concepts of demand and supply.

2. State the Law of Demand and the Law of Supply.
3. Identify the determinants of demand and supply.
4. Explain how the forces of demand and supply interact to attain equilibrium in
the market.
5. Apply the Law of Demand and Supply to different economic situations.

Introduction

In an economy where prices are continuously rising, people have always wondered
what factors cause prices to fluctuate. This module aims to show that demand and supply
are the main forces that cause prices t increase or decrease. The module also tries to
explain why an increase in the price of a commodity will make consumers what to buy
less of it and producers what to sell more and why a price decrease will cause he opposite
reaction.

Lesson Proper

Terms to Remember:

Market – a place where buyers and sellers interact and engage in exchange.

Demand – reflects the consumer’s desire for a commodity.

Supply – the amount of a commodity available for sale.

Aggregate demand – the totality of a group of consumer’s demands.

Aggregate supply – the totality of a group of producer’s supplies.

Demand Schedule – the quantities consumers are willing to buy of a good at various
prices.

Supply schedule – the quantities producers are willing to offer for sale at various prices.

Movement along the curve – a change from one point to another on the same curve.

Shift of the curve. – a change in the entire curve caused by a change in the entire
demand or supply schedule.

Nonprice factors – also known as parameters, are factors other than price that also
affect demand or supply.

Demand function – shows how quantity demanded is dependent on its determinants.

Supply function – shows how quantity supplied is dependent on its determinants.

Equilibrium – condition of balance or equality.

Price ceiling – is the maximum limit at which the price of a commodity is set.

Price floor – a minimum limit beyond which the price of a commodity is not allowed to
fall.

Surplus an excess of supply over the demand for a good.

The Market Mechanism

A market is a mechanism through which buyers and sellers interact in order to

determine the price and quantity of a good or a service. Price is the value of a good in
terms of money. In the market system, prices serve as signals to both the producers and
the consumers. If a consumer wants more a good, this will cause the price of that good
to increase. Rising prices encourage producers to increase the supply of the good. High
prices are therefore a green light to producers since these normally mean rising profit
margins.
 DEMAND

Demand Schedule and Demand Curve

The demand for a product is defined as the quantity that buyers are willing to buy.
The demand schedule shows the quantity of the product demanded by a consumer or an
aggregate of consumers at any given price. From our daily experience of buying and
selling, we know that higher prices influence people to buy less. Therefore, the demand
function shows how the quantity demanded of a particular good respond to price change.
In addition, the demand schedule must specify the time period during which the quantities
will be bought.

Figure 1

The quantity demanded values are rates of purchases at alternative prices.

It can be seen from the table that at lower prices of a commodity, people get
attracted to buy more. The demand curve is graphical presentation of the demand
schedule and therefore, contains the same prices and quantities presented in the demand
schedule.
 The normal demand curve slopes downward from left to right. Any point on the
demand curve reflects the quantity that will be bought at the given price.

The Law of Demand

After analyzing the above relationship, we can now state that as price increases
the quantity demanded of the product decreases, but as price decreases, the quantity
purchased will instead increase.

Changes in Quantity Demanded and Movements along the Demand Curve

Looking back at Figure 1, the consumers are willing to buy more of a commodity
when price is decreases. A drop in the price will attract the consumers to increase their
purchases. This is a movement from one point to another point along the demand curve
and is described as a change in quantity demanded.

Ceteris Paribus Assumption

Let us know restate the Law of demand by taking into account that there are factors
other than price which also influence the quantity of demand, namely: taste and
preferences, income, expectation on future prices, prices of related goods like
substitutes and complements, and the size of the population. Therefore, the
functional relationship between price and quantity demanded is essential since these
nonprice factors are assumed as constant. The Law of Demand now states, “Assuming
other things constant, price and quantity demanded are inversely proportional.”

Changes in Demand and Shifts in the Demand Curve

If the ceteris paribus assumption is dropped, then changes in the nonprice factor
shall take place. This will result in a change in the position or slope of the demand curve
and a change in the entire demand schedule.

The increase or decrease in the entire demand is shown through a shift of the
entire demand curve and referred to as a change in demand.
 Figure 2
Hypothetical Shift of the Demand Curve to the right

For example, if an increase in consumer incomes results in an increase of

consumer’s purchases the effect is shown in the above graph.

The above graph shows a shift of the demand curve from d1 to d2. This is a right
ward shift and reflects and increase in actual demand at every price level. Whereas, with
the increase in consumer income, the new demand curve is reflected as D2.

The demand curve may also shift to the left. Decrease in consumer incomes, in
the price of a substitute good, may all cause the actual demand to decrease. This will be
shown through a leftward shift in the demand curve.
 Figure 3
Hypothetical Shift of the Demand Curve to the left

The following changes in the nonprice factors may cause the corresponding shift
in the demand curve:

• Increase in income + shift to the right

• Decrease in income
• Greater taste/preference
• Less taste/preference
• Increase in population
• Decrease in population
• Greater speculation
• Less speculation
- shift to the left
+ shift to the right
- shift to left
+ shift to the right
- shift to the left
+ shift to the right
- shift to the left
 SUPPLY

The concept of supply shows the seller’s side of the market.

Supply Schedule and Supply Curve

The supply of a product is defined as the quantity that sellers are willing to sell.
The supply schedule shows the quantities that are offered for sale at various prices. If
the quantities offered are only of one seller, then it is an individual supply schedule. The
aggregate supply quantities of a group of sellers are presented as a market supply
schedule.

Figure 4
Hypothetical Market Supply Schedule and Supply Curve
 From the given schedule, we can see that higher prices serve as incentives
for the sellers to offer more for sale, while low prices discourage them from offering more
quantities to sell.

The above schedule can be depicted as a supply curve. The supply curve
contains the exact prices and quantities in the supply schedule. In effect, it is the
graphical representation of the supply schedule.

The supply curve is upward sloping from the left to right. It shows a direct
relationship between price and quantity supplied. Any point on the supply curve reflects
the quantity that will be supplied at that given price.

After analyzing the above relationship, we can now state that as price
increases, the quantity supplied of a product tends to increase and as price decreases,
quantity supplied instead decreases.

Changes in Quantity Supplied and Movements Along the Supply Curve

Looking back at Figure 5, the sellers are willing to sell more of a commodity when
price is increases. This is reflected as a movement along the supply curve and is referred
to as change in the quantity supplied. This is a change from point A to point B on the
supply curve and is caused by a change in the price of the good.
THE LAW OF SUPPLY

As in the theory of demand, there are also nonprice determinants that influence
supply. These include cost of production, availability of economic resources, number of
firms in the market, technology applied, and producer’s goals. Under the ceteris paribus
assumption, these factors are again assumed constant to enable us to analyze the effect
of a change in price on quantity supplied.

This law of supply now states, “other things assumed as constant, price and
quantity supplied are directly proportional.”

Changes in Supply and Shifts of the Supply Curve

Once again, let us drop the ceteris paribus assumption, which means changes in
nonprice fa tors shall now take place. This will likewise result in a change in the position
or slope of the supply curve in a change in the entire supply schedule. The increase or
decrease in the entire supply is also shown through a shift of th entire supply curve.
Factors, like the use of improved technology, increase in the number of sellers in the
market, and decrease in the cost of production, may all cause an increase in the actual
supply. This will be shown through a rightward shift of the supply curve as shown in the
Figure 5.

Figure 5
Hypothetical Shift of the Market Supply
 This graph shows a rightward shift of the supply curve from S1 to S2. From price 1
whereas quantity supplied changes as price increase reflected on price 2 on that point is
a new supply curve. Thus, the rightward shift of the supply curve is the effect on an
increase in supply caused by a change in the nonprice factor. In the same manner, a
leftward shift of the supply curve will reflect as the decrease in supply.

The following changes in the nonprice factors may cause the corresponding shift
in the demand curve:

• Increase in the number of sellers - shift to the right

• Decrease in the number of sellers - shift to the left
• Decrease in the cost of production - shift to the right
• Goals of the firm - it depends

MARKET EQUILIBRIUM

Demand and supply should eventually be analyzed as one since the market
operates within the forces of both demand and supply. This is exactly what a British
economist, Alfred Marshall, has in mind when he combined the Law of Demand and the
Law of Supply into one law.

Combining the demand and supply curves will show the point of market
equilibrium. This equilibrium is attained at the point where demand is equal to supply.

There is only one point in the graph where demand is exactly equal to supply. This
point of equality is the equilibrium point.

What is Equilibrium?

Equilibrium is the state in which market supply and demand balance each
other, and as a result prices become stable. Generally, an over-supply of goods
or services causes prices to go down, which results in higher demand—while an
under-supply or shortage causes prices to go up resulting in less demand. The
balancing effect of supply and demand results in a state of equilibrium.
 The demand curve, D, and the supply curve, S, intersect at the equilibrium
point E, with an equilibrium price of 1.4 dollars and an equilibrium quantity of
600. The equilibrium is the only price where quantity demanded is equal to
quantity supplied. At a price above equilibrium, like 1.8 dollars, quantity
supplied exceeds the quantity demanded, so there is excess supply. At a price
below equilibrium, such as 1.2 dollars, quantity demanded exceeds quantity
supplied, so there is excess demand.

SAQ 1

Indicate shortages or surplus of demand or supply given the following data: Show
graphical presentation.

Price Qd Qs Shortage/Surplus

P2 80 20

4 70 40

6 60 60

8 50 80

10 40 100

12 30 120

14 20 140
 SAQ 2

State what happens to the Philippine market demand and supply curves under the
following conditions: (Increase, Decrease, Same)

Electricity-run cars are introduced and used in the country.

1. On demand _______________ 2. On supply ________

The oil fields of Iraq, a major supplier of the country, are burned

3, On demand ______________ 4. On supply _________

OPEC decides to decrease the price of oil

5. On demand__________ 6. On supply ___________

An increase in the price of the dollar causes oil to be more expensive in the country.

7. On demand _________ 8. On supply ________

Careless days are made compulsory by the government

9. On demand_________ 10. On supply___________

Oil mines are discovered in Palawan.

11. On demand____________ 12. On supply____________

Saudi Arabia increases its quotes in oil sales to the Philippines.

13. On demand_____________ 14. On Supply____________

A substitute for oil is discovered by Filipino inventors.

15. On demand_____________ 16. On supply_____________

 SAQ 3

Supposing the extreme combinations which can be produced of Good A and Good
B with a give resources are given as follows:

Good A Good B

Combination 200 0

Combination 0 50

Construct a graph showing the production possibilities curve. Explain the

relationship depicted by the curve.

SAQ 4

Plot the following hypothetical demand schedule of pork in the market:

Price of Beef (Per Kilo) Quantity Demanded (In Kilos)

P150.00 90

P140.00 100

P100.00 130

P75.00 150

P60.00 170

P40.00 200
 SAQ 5

Plot the following hypothetical supply schedule of Bangus in the market

Price of Bangus (Per Kilo) Quantity Supplied (In Thousand)

P120.00 700

P100.00 650

P90.00 600

P75.00 500

P60.00 400

P50.00 300

Video

https://www.youtube.com/watch?v=ducr0_LoL_M

References

https://www.investopedia.com/terms/e/equilibrium.asp

https://www.khanacademy.org/economics-finance-
domain/microeconomics/supply-demand-equilibrium/market-equilibrium-
tutorial/a/market-equilibrium
INTRODUCTION TO COURSE
AND ECONOMICS
MARILOU C. HERNANDEZ
SUBJECT INSTRUCTOR
 INTRODUCTION

•Specifically, this module will focus on specific

definitions, policy, and objective thinking. A
discussion of the role of assumptions in model
building will also be offered as a basis for
understanding the economic models that will be
built in the succeeding modules
ECONOMICS DEFINED

•Economics is the study of the

ALLOCATION of SCARCE resources to
meet UNLIMITED human wants.
TWO GENERAL CATEGORIES OF
ECONOMICS
• A. Microeconomics - is concerned with decision-making by
individual economic agents such as firms and consumers.
(Subject matter of this course)

• B. Macroeconomics - is concerned with the aggregate

performance of the entire economic system. (Subject matter of the
following course)
METHODS IN ECONOMICS

• A.Empirical economics - relies upon facts to present

a description of economic activity.

• B. Economic theory - relies upon principles to

analyze behavior of economic agents.
FORMS OF LOGIC

• A. Inductive logic - creates principles from

observation.

• B. Deductive logic - hypothesis is formulated

and tested.
•
USEFULNESS OF ECONOMICS

- economics provides an objective mode of analysis, with

rigorous models that are predictive of human behavior.

• a. Scientific approach

• b. Rational choice
ASSUMPTIONS IN ECONOMICS

- economic models of human behavior are built upon assumptions; or simplifications that permit rigorous
analysis of real-world events, without irrelevant complications.

• a. model building - models are abstractions from reality - the best model is the one that best
describes reality and is the simplest Occam’s Razor.

• b. simplifications:

• 1. ceteris paribus - means all other things equal.

• 2. There are problems with abstractions, based on assumptions. Too often, the models built are
inconsistent with observed reality - therefore they are faulty and require modification. When a
model is so complex that it cannot be easily communicated or its implications easily understood - it
is less useful.
GOALS AND THEIR RELATIONS

• a. POSITIVE economics is concerned with what is;

• b. NORMATIVE economics is concerned with what should be.

• 1. Economic goals are value statements, hence normative.

• c. Economics is not value free, there are judgments made concerning what is important:

• 1. Individual utility maximization versus social betterment

• 2. Efficiency versus fairness

• 3. More is preferred to less

• d. Most societies have one or more of the following goals, depending on historical context, public
opinion, and socially accepted values:

• 1. Economic efficiency,

• 2. Economic growth,

• 3. Economic freedom,

• 4. Economic security,

• 5. Equitable distribution of income,

• 6. Full employment,

• 7. Price level stability, and

• 8. Reasonable balance of trade.

GOALS ARE SUBJECT TO:

• a. interpretation - precise meanings and measurements will often become the

subject of different points of view, often caused by politics.

• b. goals that are complementary are consistent and can often be accomplished
together.

• c. conflicting - where one goal precludes, or is inconsistent with another.

• d. priorities - rank ordering from most important to least important; again involving
value judgments.
THE FORMULATION OF PUBLIC AND PRIVATE POLICY

• Steps in formulating policy:

• 1. stating goals - must be measurable with specific stated objectives to be accomplished.

• 2. options - identify the various actions that will accomplish the stated goals & select one,
and

• 3. evaluation - gathers and analyzes evidence to determine whether policy was effective in
accomplishing goal, if not re-examine options and select option most likely to be effective.

•
OBJECTIVE THINKING:

a. bias - most people bring many misconceptions and biases to economics.

• 1. Because of political beliefs and other value system components rational,

objective thinking concerning various issues requires the shedding of these
preconceptions and biases.

• b. fallacy of composition - is simply the mistaken belief that what is true for the
individual, must be true for the group.

• c. cause and effect - post hoc, ergo propter hoc - After this, because of this fallacy.
OBJECTIVE THINKING:

• . correlation - statistical association of two or more variables.

• 2. causation - where one variable actually causes another.

• a. Granger causality states that the thing that causes another must occur
first, that the explainer must add to the correlation, and must be sensible.

• d. cost-benefit or economic perspective - marginal decision-making - if benefits of an action

will reap more benefits than costs it is rational to do that thing.
OBJECTIVE THINKING:

• 1. Focus on the addition to benefit, and the addition to cost as the basis for
decision-making.

• a. Sunk costs have nothing to do with rational decision-making.

• https://www.wallstreetmojo.com/economy/
INTERDEPENDENCE AND THE MARILOU C. HERNANDEZ
GLOBAL ECONOMY Subject Instructor
(MODULE 3)
An open economy is a
type of economy where
not only domestic factors
but also entities in other
countries engage in trade
of products (goods and
services). ... It contrasts
with a closed economy in
which international trade
and finance cannot take
place.
FOREIGN INVESTMENT VERSUS U.S.
INVESTMENT ABROAD

Foreign investment, quite simply,

is investing in a country other than your
home one. ... Foreign direct
investment (FDI) refers
to investments made by an individual or
firm in one country in a business located
in another country.
The balance of trade (BOT),
also known as the trade
balance, refers to the difference
between the monetary value of a
country's imports and exports
over a given time period. A
positive trade balance indicates
a trade surplus while a
negative trade
balance indicates
a trade deficit.
CURRENT ACCOUNT VS. CAPITAL
ACCOUNT
The current
account represents a country's
net income over a period of
time, while the capital
account records the net change
of assets and liabilities during a
particular year. ... The sum of
the current account and
capital account reflected in the
balance of payments will always
be zero.
CAPITALIST IDEOLOGY
Capitalism is a political and
economic theory which states
that individuals are free. They
are free to make money, own
businesses, sell goods and
services and crucially own
private property. Emphasis
within capitalist countries is on
the role of individuals rather than
the state.
THE ELEMENTS OF A CAPITALIST
IDEOLOGY ARE:
freedom of enterprise,
(1)

(2) self-interest,
(3) competition,
(4) markets and prices, and
(5) a limited role for government.
 WHAT IS A MARKET ECONOMY?
A market economy is an economic
system in which economic decisions and
the pricing of goods and services are
guided by the interactions of a country's
individual citizens and businesses. There
may be some government intervention
or central planning, but usually this term
refers to an economy that is more market
oriented in general.
THE CHARACTERISTICS OF A TYPICAL
OF MARKET SYSTEM ARE:
(1) the division of labor & specialization,
(2) significant reliance on capital goods,
(3) reliance on comparative advantage.
International trade is
the exchange of goods
and
services between cou
ntries. Trading globally
gives consumers and
countries the
opportunity to be
exposed to goods and
services not available
in their own countries,
or which would be
more expensive
domestically.
 MONEY
Economic money systems began to be
developed for the function of exchange.
The use of money as currency provides
a centralized medium for buying and
selling in a market. This was first
established to replace bartering.
Monetary currency helps to provide a
system for overcoming the double
coincidence of wants. The double
coincidence of wants is a ubiquitous
problem in a barter economy, where in
order to trade, each party must have
something that the other party wants.
When all parties use and willingly
accept an agreed-upon monetary
currency, they can avoid this problem.
 BARTER ECONOMY
A barter economy is a
cashless economic
system in which
services and goods
are traded at
negotiated rates.
 FUNCTIONS OF MONEY
To summarize, money
has taken many forms
through the ages, but
money consistently has
three functions: store
of value, unit of
account, and medium
of exchange.
Medium of exchange. Money's most important function is as a
medium of exchange to facilitate transactions. Without money, all
transactions would have to be conducted by barter, which involves
direct exchange of one good or service for another. The difficulty
with a barter system is that in order to obtain a particular good or
service from a supplier, one has to possess a good or service of
equal value, which the supplier also desires. In other words, in a
barter system, exchange can take place only if there is a double
coincidence of wants between two transacting parties. The
likelihood of a double coincidence of wants, however, is small and
makes the exchange of goods and services rather difficult. Money
effectively eliminates the double coincidence of wants problem by
serving as a medium of exchange that is accepted in all
transactions, by all parties, regardless of whether they desire each
others' goods and services.
Store of value. In order to be a medium of exchange, money
must hold its value over time; that is, it must be a store of
value. If money could not be stored for some period of time
and still remain valuable in exchange, it would not solve the
double coincidence of wants problem and therefore would
not be adopted as a medium of exchange. As a store of value,
money is not unique; many other stores of value exist, such as
land, works of art, and even baseball cards and stamps. Money
may not even be the best store of value because it depreciates
with inflation. However, money is more liquid than most other
stores of value because as a medium of exchange, it is readily
accepted everywhere. Furthermore, money is an easily
transported store of value that is available in a number of
convenient denominations.
Unit of account. 

Money also functions as a unit of account, providing

a common measure of the value of goods and services
being exchanged. Knowing the value or price of a
good, in terms of money, enables both the supplier and
the purchaser of the good to make decisions about
how much of the good to supply and how much of the
good to purchase.
 FIAT MONEY
Fiat money is any money
that is accepted by a
government for paying
taxes or debt, but is not
pegged to or backed
directly by gold and other
valuables. Fiat money
does not have significant
intrinsic value or use
value.
https://www.youtube.com/watch?v=U8Yn5jT8Hyc
 EXCHANGE RATE
An exchange rate is the
value of one
nation's currency versus the
currency of another nation
or economic zone.
THE CIRCULAR FLOW DIAGRAM
In economics, the circular
flow diagram represents the
organization of an economy in
a simple economic model.
This diagram contains,
households, firms, markets for
factors of production, and
markets for goods and
services.
MARKET STRUCTURES
PERFECT COMPETITION
MONOPOLY
MONOPOLISTIC COMPETITION
OLIGOPOLY
https://www.studocu.com/en-ca/document/the-univ
ersity-of-western-ontario/economics/multiple-choice
-questions-chapter-2/7554841
DEMAND AND
SUPPLY
(Module 4)
MARILOU C. HERNANDEZ
Subject Instructor
►What is Demand?
between the quantity demanded and the price of a
particular commodity
.
► These two effects are called the; (1)
income effect, and (2) the substitution
effect. Together these effects guarantee a
downward sloping demand curve
►What is Supply?
► What is Market Equilibrium?