ECONOMICS JCHIO

• The study of the ALLOCATION of SCARCE resources to meet UNLIMITED human wants.
• a social science that studies the choices individuals, business firms, and governments make as they cope with scarcity
• The study of how society manages its scarce resources.
Scarcity
• Limited nature of society’s resources
Economics is generally classified into two categories
1. Microeconomics
o Concerned with decision-making by individual economic agents such as firms and consumers.
o the study of choices that individuals, households and business firms make, the way these choices interact, and the
influences that governments exert on these choices.
o Concerned with the behavior of individuals or groups organized into firms, industries, unions, and other identifiable
agents.
o Focus of microeconomics is on decision making, markets, behaviour and purchasing decisions of individuals and
firms.
o Market price is determined based on demand and supply
▪ Demand
• The quantity of a good or service that consumers are willing and able to purchase at a range of
prices at a particular time.
• Market demand for a product is actually a schedule of the amount that would be purchased at
various prices, with all other variables that affect demand being held constant.
• Law of demand
o “ the higher the price, the lower the demand.”
• Demand Curve
o A change in the price of product causes a movement along the demand curve, also called
a CHANGE IN QUANTITY DEMANDED.
o A shift in the demand curve is called a CHANGE IN DEMAND. An increase in demand
drives the demand curve to shift rightwards
• Factors affecting demand other than price
o Price of substitute goods (DIRECT)
o Price of complement products (INVERSE)
o Expectations of increase in price (DIRECT)
o Consumer income and wealth (DIRECT FOR NORMAL. INVERSE FOR INFERIOR)
o Consumer taste (UNDEFINED)
o Size of the market (DIRECT)
o Population growth (DIRECT)

Elasticity of demand
• Relationship between the percentage change in quantity demanded and percentage change in price
• Degree of customer response to price change
Ed = % in quantity demanded / % in price
% quantity demanded = change in quantity demanded / average quantity
% in price = change in price / average price

Ed Elasticity Quantity demanded Effect of price increase

>1 Elastic Reacts more proportionately to changes in prices Decrease in total revenue
=1 Unitary Reacts proportionately to change in prices No effect on total revenue
<1 Inelastic Reacts less proportionately to changes in prices Increase in total revenue
=0 Perfectly inelastic Does not react to changes in price Increase in total revenue
Elastic – change in price causes consumers to choose a much smaller amount of a product
Examples:
➢ The demand for LUXURY goods tends to be more elastic than the demand for BASIC or STAPLE goods.
➢ The demand for badly needed goods like ‘maintenance’ medicine tends to be perfectly inelastic.

SUPPLY
• The amount of a product that would be supplied at various prices.
• The higher the price the more products that would be supplied.
• Law of supply
o The higher the price, the greater the quantity supplied.”
• Supply curve
o A change in the price of product causes a movement along the supply curve, also called a
CHANGE IN QUANTITY SUPPLIED.
o A shift in the supply curve is called a CHANGE IN SUPPLY. An increase in supply
drives the supply curve to shift rightwards (S1 to S2).
• Factors affecting supply other than price
o Number of producers (DIRECT)
o Production cost (Inverse)
o Price of substitutes (Inverse)
o Price of complimentary goods (Direct)
o Technological advances (Direct)
o Government subsidies (Direct)
o Tax and tariffs (Inverse)
 o Government price controls
o Price expectations (Direct)

Elasticity of supply
• Percentage of change in quantity supplied is equals to the change in price
ES>1 = elastic ES=1 (unitary) ES<1 = inelastic

Equilibrium
➢ a state wherein the demand and supply are in balance.
➢ Equilibrium price
o the price at which the quantity demanded equal quantity supplied -- the intersection of the demand curve and the
supply curve. This is also known as the market-clearing price.
➢ Equilibrium quantity
o is the quantity bought and sold at the equilibrium price.

CAPITALISM: FREE-MARKET ECONOMY

➢ The nature of economic activity, at the microeconomic, macroeconomic and international levels, depends on the political
environment or ECONOMIC SYSTEM within which economic activit ies take place.
➢ CAPITALISM is a “free market” economic system where individuals & business f irms determine production, distribution
and consumption of goods and services in an open or free market.
o Resources are privately owned rather than state-owned (as opposed to socialism).
o Economic decisions are made primarily by individuals and business firms rather than by the state.
o The price of goods and services is based on supply and demand in the general market (i.e., MARKET ECONOMY)
rather than through central planning

FACTORS of PRODUCTION
➢ the scarce economic resources needed to produce goods and services. The four (4) most common factors of production
include:
o LAND – refers to NATURAL resources such as land, water, mineral, timber
o LABOR – refers to HUMAN resources such human works, human skills, human efforts
o CAPITAL – refers to FINANCIAL resources (e.g., savings) and MAN-MADE resources (e.g., equipment)
o ENTREPRENEURSHIP – refers to the human resource that organizes land, labor and capital

2.
Macroeconomics
• Concerned with the aggregate performance of the entire economic system.
• Concerned with performance of the country’s economy or global economy
• Focuses on measures of economic output, employment, inflation, and trade surpluses or deficits.
• Levels of economic activity is measured based on a number of benchmarks including:
i. Nominal gross domestic product (GDP)
• price of all goods and services produced by a domestic economy for a year at current market
prices.
ii. Real GDP
• The price of all goods and services produced by the economy at price level adj usted (constant)
prices. Price level adjustment eliminates the effect of inflation on the measure.
iii. Potential GDP
• The maximum amount of production that could take place in an economy without putting pressure
on the general level of prices.
iv. Net GDP
• GDP minus depreciation
v. Gross national product (GNP)
• The price of all goods and services produced by labor and property supplied by the nation’s
residents.
METHODS TO CALCULATE GDP
• INCOME APPROACH
• adds up all incomes earned in the production of final goods and services, such as wages, interest, rents,
dividends, etc.
• EXPENDITURE APPROACH
• adds up all expenditures to purchase final goods and services by households, businesses, and the
government.
• it includes personal consumption expenditures, gross private investment in capital goods AND country’s
net exports
Expenditure approach Income Approach
GDP = C + I + G + (X-M) GDP = W+SE Income + rent + interest + profits +
indirect business taxes + deprec. + income from
foreigners

➢ ECONOMIC GROWTH happens when there is an increase in real GDP in an economy.

➢ RECESSION happens when there is a decline in real GDP growth (i.e., negative GDP growth).
➢ DEPRESSION – is the prolonged form of recession; it is a major downsizing in the economy with conditions similar to that
of a recession, but more severe and long-lasting.
 ➢ Economists use ECONOMIC INDICATORS to forecast turns in the business cycle. Indicators may lead, lag or coincide with
economic activity. Common examples include:
o Leading indicators – building permits, new orders for consumer goods, stock prices
o Coincident indicators – level of retail sales, current unemployment rate, level of industrial production
o Lagging indicators – duration of unemployment, loans outstanding, ratio of inventories to sales

Business cycles
• fluctuation in aggregate economic output that lasts for several years.

Peak
• date on which a recession starts
• when the economy is at its highest point and start heading downwards
Recession
• period of negative GDP growth.
• At least several consecutive quarters of negative GDP growth.
Depression
• Long lasting recession
Trough
• Date on which the recession end and the economy starts heading up again.
Expansion
• Time from trough, through recovery and all the way to the next peak.

INFLATION AND UNEMPLOYMENT

➢ INFLATION is a sustained increase in an economy’s average price level.
➢ Causes of inflation
o Demand pull
▪ When too much demand for certain goods and services are not met by corresponding increase in the supply
o Cost push
▪ When there is an increase in production costs either due to higher wages or higher cost of raw materials and
other inputs also known as wage push theory and supply shock theory, respectively.

The most common indices used to measure inflation are:

➢ Consumer price index (CPI)
o Measures price changes for goods and services purchased by consumers
➢ Wholesale price index (WPI)
o Measures price changes for goods at wholesale level, specifically finished goods, intermediate goods and crude
materials
➢ GDP DEFLATOR
o Changes in prices for goods and services included in GDP

Deflation
➢ the decrease in the average price level
Disinflation
➢ the decline in inflation rate.

There is an inverse relationship between inflation and unemployment rate

Three types of unemployment

➢ CYCLICAL unemployment
o reflects changes in the business cycle; cyclical unemployment increases during RECESSION and decreases during
EXPANSION.
➢ FRICTIONAL unemployment
o associated with the normal workings of an economy; new college graduates or newly resigned employees who are
looking for a job will fall into this category.
➢ STRUCTURAL unemployment
o occurs when there is a ‘mismatch’ between the kind (location) of jobs available and the skills (location) of those
who are unemployed.
FISCAL POLICY vs Monetary Policy
➢ FISCAL and MONETARY policies are created to effectively counter recessionary or inflationary tendencies.
➢ Fiscal policy
o government actions, such as taxes, subsidies, and government spen ding, designed to achieve economic goals.
o An increase in deficit, either due to an increase in government spending or to a decrease in taxes, is called a FISCAL
EXPANSION while an increase in taxes to reduce a deficit is called FISCAL CONTRACTION.
o If a government collects more in taxes than it spends, it has a BUDGET SURPLUS; if a government spends more
than it collects in taxes, it has a BUDGET DEFICIT.
➢ Monetary policy
o Changing interest rates and the money supply in the economy is called MONETARY POLICY; these actions are
usually under the control of the Central Bank like the BANGKO SENTRAL NG PILIPINAS (BSP):
▪ When economy is in recession, BSP might lower interest (discount) rates, buy back government securities
in open-market operations or decrease reserve requirements to inject money in the economy.
▪ To prevent inflation from increasing, BSP might increase interest (discount) rates, sell government
securities or increase reserve requirements to diminish the money supply in the economy.

Methods in economics
1. economic theory
• relies upon principles to analyze behavior of economic agents.
• typically rigorous, mathematical representations of human behavior with respect to the production or distribution o f
goods and services in microeconomics and the aggregate economy in macroeconomics
2. Empirical economics
• relies upon facts to present a description of economic activity.

INTERNATIONAL TRADE & FOREIGN CURRENCY

Common reasons for international trades:

EXPANSION – To develop new markets for the sale of goods and service abroad
OUTSOURCING – To obtain commodities not otherwise available domestically
COST-CUTTING – to obtain goods and services at lower costs than available domestically

The value of exports minus the value of imports is called the BALANCE OF TRADE:
TRADE SURPLUS – when a nation exports more than it imports.
TRADE DEFICIT – when a nation imports more than it exports.

FOREIGN EXCHANGE MARKET is the market in which the currency of one country is exchanged for the currency of another. It is
made up of importers, exporters, banks, foreign currency dealers/brokers.
EXCHANGE RATE is the price of one currency unit expressed in units of another co untry’s currency.
DIRECT exchange rate – the domestic price of one unit of foreign currency ($ 1 = P 50)
INDIRECT exchange rate – the foreign price of one unit of domestic currency (P 1 = $ 0.02)
SPOT exchange rate – exchange rate between currencies for immediate delivery (“on the spot”).
FORWARD exchange rate – exchange rate between currencies for future exchange or delivery.
APPRECIATION (DEPRECIATION) happens when a currency becomes stronger (weaker) since it takes less (more) of that
currency to buy another currency.

MARKET STRUCTURES
1. Perfect competition
a. It is composed of a large number of sellers, each of which is too small to affect the price of the product or service
b. The firms sell virtually an identical product
c. Firms can enter or leave very easily
d. The firm’s demand curve is perfectly elastic
e. The firm can sell as many goods as it can produce at the equilibrium price but no goods at a higher price.
f. In a perfectly competitive market a firm will continue to produce and sell products until the margin cost is greater
than marginal revenue.
g. In a perfectly competitive market there is no product differentiation and the key to being successful is being the
lowest cost producer in the marketplace.
2. Pure monopoly
a. a market in which there is a single seller of a product or service for which there are no close substitutes.
b. Pure monopoly exists due to the following reasons
i. Increasing returns to scale
ii. Control over the supply of raw materials
iii. Patents
iv. Government franchise
c. Monopolies that exist when economic or technical conditions permit only one efficient supplier are called natural
monopolies.
d. The monopolist sets the price for the product
e. The demand curve for the firm is negatively sloping; the company must reduce price to sell more output.
f. The company has little market incentive to innovate or control costs.
3. Monopolistic competition
a. Characterized by many firms selling a differentiated product or service. The differentiation may be real or only
created by advertising, and there is relatively easy entry to the market but not as easy as in a perfectly competitive
market.
b. The demand curve in a monopolistic competitive market is negatively sloped and firms tend to produce and sell
products until the marginal revenue is less than average variable cost.
c. The strategies of firms in monopolistic competitive markets tend to focus on product or service innovation.
4. Oligopoly
a. Oligopoly is a form of market characterized by significant barriers to entry. As a result there are few (generally
large) sellers of a product.
b. Oligopolists often attempt to engage in nonprice competition
c. The kinked-demand-curve model seeks to explain the price rigidity in oligopolistic markets.
d. Generally, in the oligopolistic market there is a price leader that determines the pricing policy for the other
producers.
e. If left unregulated, oligopolists tend to establish cartels that engage in price fixing.

*Monopsony – a market where there is only one buyer for all sellers
*Black market - an illegal market wherein people conduct transactions at prices (usually high) forbidden by the government.