CHAPTER 1: ECONOMICS
by the sacrifice of the next best alternative for using those resources.
What is economics?
• Economics is a study of human activity both at individual and national
level.
• It was only during the eighteenth century that Adam Smith, the Father of
Economics, defined economics as the study of nature and uses of
national wealth’.
“Economics is a study of man’s actions in the ordinary business of life: it
enquires how he gets his income and how he uses it”. - Dr. Alfred Marshall
“The science, which studies human behavior as a relationship between ends
and scarce means which have alternative uses”. - Prof. Lionel Robbins
MICRO vs MACRO ECONOMICS
● Microeconomics studies individuals and business decisions, while
macroeconomics analyzes the decisions made by countries and
governments.
● Microeconomics focuses on supply and demand, and other forces that
determine price levels, making it a bottom-up approach.
● Macroeconomics takes a top-down approach and looks at the economy as
a whole, trying to determine its course and nature.
● Investors can use microeconomics in their investment decisions, while
macroeconomics is an analytical tool mainly used to craft economic and
fiscal policy.
Terms in Economics
Scarcity - refers to the condition wherein most things that people want are available
only in limited.
- the imbalance between our desires and means of satisfying those desires.
Economic Good - anything which yields utility and which could command a price if
bought or sold in the market.
Wants - refer to a person’s desires or preferences for specific ways to satisfying a
basic need.
Opportunity Cost - the cost of choosing the use resources for one purpose measured
The Fundamental Economic Problem
1. What Goods and Services should be produced?
2. How should these Goods and Services be produced?
3. For whom should these Goods and Services be produced?
POSITIVE ECONOMICS
Positive economics is a stream of economics that focuses on the description,
quantification, and explanation of economic developments, expectations, and
associated phenomena.
NORMATIVE ECONOMICS
Normative economics focuses on the ideological, opinion-oriented, prescriptive,
value judgments, and "what should be" statements aimed toward economic
development, investment projects, and scenarios
Nature of Managerial Economics
1. Close to microeconomics:
• Managerial economics is concerned with finding the solutions for
different managerial problems of a particular firm. Thus, it is more close
to microeconomics.
2. Operates against the backdrop of macroeconomics :
• In other words, the managerial economist has to be aware of the limits
set by the macroeconomics conditions such as government industrial
policy, inflation and so on.
3. Offers scope to evaluate each alternative:
• Managerial economics provides an opportunity to evaluate each
alternative in terms of its costs and revenue.
4. Interdisciplinary:
• The contents, tools and techniques of managerial economics are
drawn from different subjects such as economics, management,
mathematics, statistics, accountancy, psychology, etc.
Scope of Managerial Economics
a. The selection of product or service to be produced.
b. The choice of production methods and resource combinations. • The relationship between price and quantity demanded is the subject of the
law of demand.
c. The determination of the best price and quantity combination
Law of Demand
d. Promotional strategy and activities.
- indicates that “the quantity of any good which buyers are ready to
e. The selection of the location from which to produce and sell goods or service to purchase varies inversely with the price of the good”
consumer.
• Low Price not only motivate current buyers to buy more of the commodity
The scope of managerial economics covers two areas of decision making but also attract new buyers to buy.
• Operational or Internal issues The Demand Curve
• Environmental or External issues • The price per unit is represented in the vertical axis.
• The quantity demanded for each price level is indicated in the horizontal
axis.
CHAPTER 2: DEMAND, SUPPLY AND PRICE
Non Price determinants of demands
Basic Elements of Demand and Supply
• Average income of consumers
The Market
Persons basically purchase the necessities with their income.
Market
• Size of the market
- exist when buyers wishing to exchange money for a good or service are in contact
with sellers wishing to exchange goods or services for money The demand curve is affected by the number of people living in a given
area.
- it is where people are left alone to make their own transactions
• Price and availability of related goods
- it is where the forces of demand and supply interact
Goods that are related tend to influence each other demand.
How a Market Functions
Two types of related goods:
• The actions and decisions of buyers constitute demand for product or
services. a. Substitute goods
• The sellers’ decision and actions constitute supply. - goods that compete with each other
• The higher the demand is for product and services, the higher will be the b. Complementary goods
demand for economic resources.
- goods that are used jointly
Market Demand
• Preferences or taste
- refers to the buyers’ willingness and ability to pay a sum of money for some
amount of a particular goods or service People of different cultures vary in taste and preferences.
 • Special influences Supply is highly dependent on the cost of production.
There are certain developments that influence demand for certain goods • Number of Suppliers
and services.
Supply is also dependent on the number of sellers.
• Expectations about the future economic conditions
• Prices of Goods and Services
When people expect changes in the economy, their reaction will affect
demand for certain products. The prices of some goods and services affect the supply of other goods and
services.
Shifts in the Demand Curve
• Taxes and Subsidies
• When the adjusted demand schedule is plotted in a graph, the original
demand (C1) will shift to the left (C2) when there is a decrease in demand, Payment of taxes is an added component of the cost of production.
and shift to the right (C3) when there is an increase in demand. • Subsidies
Money given to firms by the government to help them maintain their current
Market supply or desired output.

- defined as the quantity of a good or service which sellers desire to sell at • Technology
a given price Improvements in technology make possible the production of goods at
The supply situation may be presented in two ways: services at lower costs.

1. the supply schedule, and Shifts in the Supply Curve

2. the supply curve. • Plotting the adjusted supply schedule in a graph will show that the original
supply curve (S1) shifts to the left (S2) when supply decreased, and to the
Supply Schedule right (S3) when supply increased
- tabular presentation showing the relationship between a commodity’s
market price and the amount of the commodity that producers are willing to
produce and sell, other things held equal. Market Equilibrium

Supply Curve When the individual schedules of supply and demand are put together, there will
be a price where the quantity buyers want to buy exactly equals the quantity
• graphical illustration of the supply schedule which sellers are offering for sale.
• As price goes up, the quantity of goods and services under consideration
tends to increase. Inversely, as the price goes down, the quantity supplied
tends to decrease.
Non Price Determinants of Supply
• Cost of Production
CHAPTER 3: ELASTICITY • Less than 1 (Inelastic Demand)

Elasticity • Equal to 1 (Unitary Demand)

• is the measure of the sensitivity of responsiveness of quantity demanded or Elastic Demand
quantity supplied to changes in prices (or other factors).
• Indicates the extent to which changes in price (or other factors) cause • a type of demand where the quantity that will be bought is affected greatly
changes in the quantity demand. by the changes in the price.
• Goods which are elastic are goods with many substitutes and a very
Elasticity of demand competitive market. (ex: softdrinks) pepsi vs. coca cola
• Indicates the extent to which changes in price (or other factors) cause Inelastic Demand
changes in the quantity demand.
• type of demand where a percentage change in price creates a lesser
change in quantity demanded.
Demand Elasticity May Be Classified As: • Goods which are inelastic are goods with no substitutes and a little
competitive market.
1. Price Elasticity of Demand
2. Income Elasticity of Demand Unitary Demand
3. Cross Elasticity of Demand • in this type of demand, a change in price creates an equal change in
PRICE ELASTICITY OF DEMAND quantity.

• used to determine the responsiveness of demand to changes in the price INCOME ELASTICITY OF DEMAND
of the commodity. • refers to the determination of the responsiveness of demand to a change in
consumer income

Remember:

If Price Elasticity of Demand is Remember:

• Greater than 1 (Elastic Demand) If Income Elasticity of Demand is
 • Greater than 1 (Elastic Demand)

• Less than 1 (Inelastic Demand)

• Equal to 1 (Unitary Demand)

CROSS ELASTICITY OF DEMAND

• is the responsiveness of the quality demanded of a particular good to

changes in the price of another goods.
• The demand for a certain good may be affected also by a change in the
price of another good. From the economic stand point.

CHAPTER 4: PRODUCTION AND COST

The Concept of Production
• The creation of any good or service for the purpose of selling to buyers.
• The creation of outputs by business firms, by government agencies, and by
non profit institutions like schools and hospitals.
Transforming Inputs into Outputs
• Production is an activity where inputs are transformed into outputs. To be
able to do it, the following are required.
Substitute goods 1. Assembling the necessary inputs; and
2. Transforming the inputs through a recipe and technological process into
• The cross elasticity of demand for product A relative to a change in outputs of goods and services.
price of product B is positive. The Four Factors of Production
Complimentary Goods 1. Labor
2. Land
• The cross elasticity of demand for product A relative to change in price
3. Capital
of product B is negative.
4. Entrepreneurship
ELASTICITY OF SUPPLY CATEGORIES OF PRODUCTION ACTIVITIES
• refers to the responsiveness of the seller to change in the price. 1. Unique-Product Production
- This type of production activity has its output “made-to-order”
PRICE ELASTICITY OF SUPPLY
products and services.
- Production activity starts when an order comes in.
2. Rigid Mass Production
 - Involves the manufacture of uniform products in large quantity Average Product
using well-defined, proven, and usually inflexible technology.
3. Flexible Mass Production • The average product refers to the total output divided by the quantity of the
- Processing is done in two stages. The first stage involves mass variable inputs under consideration.
production of standardized components. Marginal Product
- In the second stage, the components are assembled into final
products that appear different from one another. • Is the additional output attributed to the increase in the quantity of the
4. Process Or Flow Production variable inputs under consideration
- A continuous flow of output is the feature of process or
flow production. Cost of Production
- Integrated technology is employed to move a
• Cost incurred by a business when manufacturing a good or producing a
continuous flow of raw materials inputs through the
service.
system.
• A company that knows how much it will cost to produce an item or produce
Production Functions a service, will have a clearer picture of how to better price the item or service
and what will be the total cost to the company
• The relationship between the amount of inputs required and the amount of
output that can be obtained. Fixed Cost

Analysis of the Production Process - is the portion of the Total Cost which remains unchanged even if the level
of output changes. (ex. Rent)
• The classes of inputs
• The time frame references Variable Cost

The classes of inputs: - is the part of total cost that do vary with the amount of output produced. (ex.
Salaries and Wages, Raw Materials)
• A fixed input is one whose quantity cannot be readily changes when
market conditions indicate that a change in output is desirable. Total Cost (TC) = Fixed Cost + Variable Cost
• A variable input is one whose quantity can be readily changed when
Average Cost (AC) = Total Cost / Volume of Output
a change in output is desires.
Average Cost (AC) =AFC + AVC
The time frame references:
Marginal Cost
• Short-run refers to that time frame in which the input of one or more
productive agent is fixed. - is the increase or decrease in the total cost of a production run for making
• Long-run refers to a period of time in which all factors of production one additional unit of an item.
and costs are variable.
Total Output
• Refers to the total amount of output produced in physical units such as bags
of fertilizer, bottles of vinegar, or pair of shoes.