MICRO ECONOMICS REVIEWER

WHAT IS ECONOMICS

➢ is the study of the choices that people make in overcoming the problems that arise
because resources are limited while needs and wants are unlimited.

4 FACTORS OF PRODUCTION

LAND

➢ natural resources such as oil, soil, minerals etc.

➢ Natural Capital

LABOUR

➢ human resources that produce physical and mental contribution.

➢ Human Capital

CAPITAL

➢ infrastructure and technologies that are used for production

➢ anything that has been made by human
➢ When firms spend money on capital, this is known as investment.

ENTREPRENEUR

➢ Organizes the other factors of production

CENTRAL CONCEPTS OF ECONOMICS

➢ SCARCITY - refers to the limited availability of economic resources relative to

society’s unlimited demand for goods and services.
➢ OPPORTUNITY COSTS - is highest valued alternative that must be given up when a
choice is made
➢ EFFICIENCY - refers to making the best possible use of scarce resources to produce
combinations of goods and services
➢ INCENTIVES - consumers and firms consistently respond to economic incentives.
➢ DECISIONS MADE AT THE MARGIN (MARGINAL PRINCIPLE)
MARGINAL BENEFITS. - additional benefits when consuming an additional
unit of a good.
MARGINAL COSTS - additional costs when consuming an additional unit of a
good.
 ECONOMIC SYSTEMS

PLANNED OR COMMAND ECONOMY

➢ resources and businesses are owned by the government.

➢ government decides what goods and services will be produced and what prices will
be charged for them.
➢ government decides what methods of production will be used and how much workers
will be paid.

FREE MARKET ECONOMY

➢ called private enterprise economy or capitalism

➢ All production is in private hands and demand and supply are left free to set wages
and prices in the economy
➢ In this setup, everyone was guided by an “invisible hand” wherein everyone functions
interdependently.

MIXED ECONOMIES

➢ Has both elements of Free Market and Command Economy

➢ private sector works through the market mechanism
➢ government works through regulatory commands and it owns and manages major
industries such as transportation, electrification, and others.

THE SCIENTIFIC METHODS OF ECONOMICS

➢ DATA GATHERING - data is obtained from observation of economic events and

historical records in which organized for analysis.
➢ ECONOMIC ANALYSIS – applied for the synthesization of gathered data. An approach
that predicts economic behavior on the basis of assumptions. Compare FA/TA in
economics.
➢ ECONOMIC CONCLUSIONS – an action that proceeds to reasoning in order to generate
conclusions. Reasoning is categorized into: inductive reasoning and deductive
reasoning.
ECONOMICS’ METHODOLOGY

➢ ECONOMIC THEORY
simple models are used to describe economic phenomena may be in the form
of graphs, flowcharts, or sets of equations.
starting point of any economic model is a set of assumption regarding the
decision makers and their environment.
➢ EMPIRICAL ECONOMICS
task of empirical economics is to confront testable hypotheses with real world
data.

PERSPECTIVES OF ECONOMICS

➢ POSITIVE ECONOMICS
primary concern is to give us an understanding of what is going on with an
economic program, behavior, policy, institution, or an economic event.
positive economics is descriptive in approach in the sense that it illustrates
what is happening to the various sectors, actors, and institutions within and
outside the economy.
➢ NORMATIVE ECONOMICS
offer directions and decisions t toward the attainment of ideal situations,
actions, mechanisms, and economic order.
prescriptive in approach in the sense that it directs us on what ought to be
done.

ECONOMIC MODELS

➢ PRODUCTION POSSIBILITIES CURVE (PPC)

showing the maximum combinations of two types of output that can be
produced in an economy in a given time period, if all resources in the economy
are being used efficiently and the state of technology is fixed.
Illustrates the concepts of scarcity, choice, opportunity cost and efficiency.
Follows these assumptions: economy produces only two goods, resources
and state of technology are fixed and e resources in the economy are fully
employed.
 Points A, B, C, D & E in the PPC represents the potential amounts of
manufactured food and shelter in a certain time period.
Point N – not attainable since it needs additional resources.
Point I – Inefficient since the economy never utilizes the maximum potential
of technology and resources they hold.
Two major factors that produce economic growth: an increase in the
quantity of resources and advancements in technology.

➢ THE CIRCULAR FLOW MODEL

illustrate the interdependence that exists between key economic decision
makers.
 THE SECTORS

HOUSEHOLD SECTOR

includes everyone
responsible for consumption and undertakes consumption expenditures.
owns all productive resources.

BUSINESS SECTOR

undertake the task of combining resources to produce goods and services. The sector
that does the production.
also buys capital goods with investment expenditures.

THE MARKETS

PRODUCT MARKETS

markets where household are buyers and firms are sellers of goods and services.

FACTOR MARKET

markets where households sell the use of their inputs (land, labor, capital, and
entrepreneurship) to firms.
used by business sector to acquire the inputs needed for production.
Payment for these factor services then generate the income received by the
household sector.

MARKET

➢ A market is where buyers or sellers meet. It is the place where they both trade or
exchange goods or services-in other words, it is where their transactions take place.
➢ a group of buyers and sellers of a particular good or service
➢ Gas station, malls, palengke, Philippine Stock Exchange, online markets, Roxas Night
Market

DEMAND

➢ Pertains to the quantity of good or services that people are ready to buy/purchase at
given prices within a given time period, when other factors besides price are held
constant (ceteris paribus)
➢ The quantity of a good or service that buyers are willing to buy given its price
DEMAND

Demand therefore implies three things:

1. Desire to possess a thing;

2. The ability to pay for it; and
3. Willingness to utilize it

LAW OF DEMAND

➢ states that, all other things being equal, the quantity demanded falls when the price
rises, and the quantity demanded rises when the price falls.

P↑QD↓ - P↓QD↑
There is a negative or inverse relationship between PRICE and QUANTITY DEMANDED

DEMAND SCHEDULE

➢ A table that shows the relationship of prices and the specific quantities demanded are
each of these prices.

DEMAND CURVE

➢ A graphical representation showing the relationship between price and quantities

demanded per time period.

CHANGE IN QUANTITY DEMANDED

➢ a movement along the demand curve that shows a change in the quantity of the
product purchased in response to a change in price.
There is only a change in quantity demanded as a response to change in PRICE but NO shift
in the demand curve.
CHANGE IN DEMAND

➢ A shift of the demand curve to the right (an increased in demand) or to the left (a
decreased in demand)

Change in a price of a product or a service leads to

Change in Quantity Demanded (movement along the Demand Curve)

Change in Income. Preferences, or prices of other goods or services leads to

Change in Demand (shift of a demand curve)

 FACTORS THAT SHIFT THE DEMAND CURVE

TASTE OR PREFERENCE

➢ It pertains to the personal likes and dislikes of consumers for certain goods and
services.

CHANGING INCOMES

➢ Increasing incomes of households raise the demand for certain goods or services and
vice versa.
➢ NORMAL GOOD- a good that people demand more of as their income rises. Ex. Car,
rice, new clothes.
➢ INFERIOR GOOD- a good that people demand less of as their income rises. Ex. Used
clothing, second-hand products.

OCCASIONAL OR SEASONAL PRODUCTS

➢ The various events or seasons in given year also result to a movement of the demand
curve, with reference to a particular goods. For example: Christmas Day, Valentines
Day.

POPULATION CHANGES

➢ More people simply mean that more goods or services are to be demanded.

PRICE OF OTHER GOODS (SUBSTITUTE GOODS)

SUBSTITUTES- are goods that can replace each other in consumption. E.g. chicken and
fish.

➢ Rule of SUBSTITUTE – it follows INVERSE RELATIONSHIP between the quantity

demanded of two separate goods.
➢ A lower price for a substitute decreases quantity demanded for the other product
➢ A higher price of the main product increases the demand of the substitute.

COMPLEMENTS - are goods that are used in conjunction with each other, for example
DVD player and DVDs.

➢ Rule of COMPLEMENTS – follows positive correlation between two separate goods in

terms of the demand.
 ➢ When the price of main product rises (tennis racket), the demand for complement
(tennis balls) will fall.
➢ Ex. When the demand for pencil rises, so as the erasers

EXPECTATIONS OF FUTURE PRICE

➢ If buyers expect the price of a good or service to rise in the future, it may cause the
current demand to increase.
➢ Ex. Weather Expectations

FACTORS THAT SHIFT THE DEMAND CURVE

➢ The demand curve shifts to the left when a factor adversely affects-decreases-
demand. The demand curve shifts to the right when a factor positively affects-
increases demand.
➢ Note a change in price does not cause a shift. Price changes causes slides along the
Demand Curve

FACTORS THAT SHIFT THE DEMAND TO THE LEFT

➢ Income falls (demand for a normal good)

➢ Income rises (demand for an inferior good)
➢ The price of substitute good falls
➢ The price of complementary good rises
➢ The good falls out of style
➢ There is a belief that the future price of the good will decline.
➢ The number of buyers in the market falls.

FACTORS THAT SHIFT THE DEMAND TO THE RIGHT

➢ Income rises (demand for normal good)

➢ Income falls (demand for an inferior good)
➢ The price of substitute good rises
➢ The price of complementary good falls
➢ The good is currently in style
➢ There is a belief that the future price of the good will rise
➢ The number of buyers in the market rises
VALIDITY OF LAW

➢ The law of demand if only true and correct if the ceteris paribus assumption if
followed. Ceteris paribus means all other things equal. This means that the factors of
production are held constant or unchanged in applying the law of demand.
➢ Ceteris Paribus Assumption is only applicable in Demand Curve, not with the Demand
Shifting.

NOTE: Mga naka red na fonts kay need ug further study, kay basin mali ang pagsabot
hahahaha.
 Glossary
command economy: an economy where economic decisions are passed down from
government authority and where resources are owned by the government.

competitive market: is one in which there is a large number of buyers and sellers, so that no
one can control the market price.

free market: a market in which the government does not intervene in any way.

market economy: an economy where economic decisions are decentralized, resources are
owned by private individuals, and businesses supply goods and services based on demand.

ceteris paribus: When changing one variable in a function (e.g. demand for some product),
we assume everything else held constant

demand: the relationship between the price of a certain good or service and the quantity of
that good or service someone is willing and able to buy

demand curve: a graphic representation of the relationship between price and quantity
demanded of a certain good or service, with price on the vertical axis and quantity on the
horizontal axis

demand schedule: a table that shows the quantity demanded for a certain good or service
at a range of prices

law of demand: the common relationship that a higher price leads to a lower quantity
demanded of a certain good or service and a lower price leads to a higher quantity
demanded, while all other variables are held constant

price: what a buyer pays for a unit of the specific good or service

quantity demanded: the total number of units of a good or service consumers wish to
purchase at a given price

complements: goods or services that are used together because the use of one enhances the
use of the other

substitutes: goods or services that can be used in place of one another

inferior good: good or service whose demand decreases when a consumer’s income
increases and demand increases when income decreases

normal good: good or service whose demand increases when a consumer’s income increases
and demand decreases when income decreases