ECONOMICS is a social science that deals with the proper allocation of scarce or limited resources to

satisfy unlimited human wants and needs.

The term economics comes from the Ancient Greek oikonomia, that means "management of a household,
administration") from oikos, that means "house" + nomos, that means "custom" or "law"), hence "rules
of the house(hold)".

MAIN DIVISIONS OF ECONOMICS

The main divisions of economics are Microeconomics and Macroeconomics. Microeconomics deals most
particularly with the detailed economic behavior of households and firms. Microeconomics examines the
behavior of basic elements in the economy, including individual agents (such as households and firms or
as buyers and sellers) and markets, and their interactions while Macroeconomics deals with the
aggregate economic activity of a nation, usually larger in scope. Macroeconomics analyzes the entire
economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and
fiscal policy.

Other broad distinctions include those

a. between Positive Economics (describing "what is") and Normative Economics (advocating "what ought
to be");
b. between economic theory and applied economics;
c. between rational and behavioral economics; and
d. between mainstream economics (more "orthodox" dealing with the "rationality-individualism-
equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social
structure nexus").

ECONOMIC ANALYSIS

Economic analysis may be applied throughout society, as in business, finance, health care, and
government, but also to such diverse subjects as crime, education, the family, law, politics, religion,
social institutions, war, and science.

One analyze a behavior by describing "what is" or Positive Economics; or by advocating "what ought to
be or what should be" or Normative Economics

THE TYPES OF ECONOMIC SYSTEM ARE THE FOLLOWING:

(a) Traditional;
(b) Command;
(c) Market; and
(d) Mixed

THE BASIC ECONOMIC PROBLEMS INCLUDE THE FOLLOWING:

(a) what to produce?;
(b) how to produce?;
(c) how much to produce?; and
(d) for whom goods will be produced?

FACTORS OF PRODUCTION OR ECONOMIC RESOURCES

(a) Land pertains to natural resources as source of raw materials. Also, this includes everything that is
above and beneath the earth;

(b) Labor pertains human resources as source of manpower or human effort;

(c) Capital includes everything that are manmade goods that are used to produce other goods i.e.
machineries and equipment; and

(d) Entrepreneurial Ability covers the innovative skills of a person in combining the other factors of
production in the creation of goods and services.
TEN PRINCIPLES OF ECONOMICS

How People Make Decision?

1. People Face Trade-off.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives
How People Interact
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Government can sometimes improve market outcomes.
How the Economy as a Whole Works
8. A country's standard of living depends on its ability to produce goods and services.
9. Price rises when government prints too much money.
10. Society faces a short-run trade-off between inflation and unemployment.

PRODUCTION-POSSIBILITY FRONTIER (PPF) is an expository figure for representing scarcity, cost,

and efficiency. In the simplest case an economy can produce just two goods (say "guns" and "butter").
The PPF is a table or graph (as at the right) showing the different quantity combinations of the two
goods producible with a given technology and total factor inputs, which limit feasible total output. Each
point on the curve shows potential total output for the economy, which is the maximum feasible output
of one good, given a feasible output quantity of the other good.

Efficiency is the property of society getting the most it can from its scarce resource.
Equality is the property of distributing economic prosperity uniformly among the members of
society.
Opportunity cost is the cost of something that one must give up in order to obtain something.
Rational people are people who systematically and purposefully do the best they can to
achieve their objectives.
Marginal change is a small incremental adjustment to a plan of action.
Incentive is something that induces a person to act.
Market economy is an economy that allocates resources through the decentralized decisions of
many firm and households as they interact in markets for goods and services
Property right is the ability of an individual to own and exercise control over scarce resources.
Market Failure is a situation in which a market left on its own fails to allocate resources
efficiently.
Externality is the impact of one persons action to the well-being of a bystander.
Market power is the ability of a single economic actor (or a small group of actors) to have a
substantial influence on market prices.
Productivity is the quantity of goods and services produced from each unit of labor input.
Inflation is an increase in the overall level of prices in the economy.
Business cycle is the fluctuation in the economic activity, such as employment and production.

The basic circular flow of goods and services and income is a simple model of the economy showing
flows of money, goods/services and factors of production between firms and households.

In the absence of government and international trade this simple model shows that households provide
the factors of production for firms who produce goods and services. In return the factors of production
receive factor payments, such as wages, which in turn are spent on the output of firms.

BASIC CIRCULAR FLOW a diagram that shows the relationship of the different economic players,
their interaction and the flow of goods/services.
Supply is the amount or quantity of goods that the producers would like to sell at a specific price and at
a given time.
Law of Supply the claim that, other things equal (ceteris paribus), the quantity supplied of a good
rises when the price of the good rises.
Supply Schedule a table that shows the relationship between the price of a good and the quantity
supplied.
Supply Curve a graph that shows the relationship between the price of a good and the quantity
supplied.
Quantity Supplied, Not Supply
While the two terms are occasionally confused, quantity supplied is not the same as supply.

Quantity supplied is the specific quantity that sellers supply at a specific supply price. Quantity supplied
is matched up with a specific price. Should the price change, then so too does the quantity supplied.
Quantity supplied is a single number.

Supply, however, is the range of prices and quantities. It is all price-quantity pairs that make up the
supply curve. Supply is a whole range of numbers.

Factors or Determinants of Aggregate Supply

(a) number of sellers

(b) technology
(c) government regulation and taxes
(d) availability of raw materials
(e) prices of inputs
(f) expectation of future prices
(g) government subsidies

Demand is the amount or quantity of goods that the consumers would like to consume at a specific
price and at a given time.
Law of Demand the claim that, other things equal (ceteris paribus), the quantity demanded of a good
rises when the price of the good decreases.
Demand Schedule a table that shows the relationship between the price of a good and the quantity
demanded.
Demand Curve a graph that shows the relationship between the price of a good and the quantity
demanded.

Factors or Determinants of Aggregate Demand

(a) income;
(b) tastes and preferences;
(c) prices of related goods;
(d) buyers' expectations of future prices; and
(e) number of buyers
Department of Agrarian Reform Virgilio de los Reyes
Department of Agriculture Proceso Alcala
Department of Budget and Management Florencio Butch Abad
Department of Education Rev. Armin Luistro
Department of Energy Carlos Jericho Petilla
Department of Environment and Natural Resources Ramon Paje
Department of Finance Cesar Purisima
Department of Foreign Affairs Albert Del Rosario
Department of Health Dr. Enrique Ona
Department of Interior and Local Government Mar Roxas
Department of Justice Leila de Lima
Department of Labor and Employment Rosalinda Baldoz
Department of National Defense Voltaire Gazmin
Department of Public Works and Highways Rogelio Singson
Department of Science and Technology Mario Montejo
Department of Social Welfare and Development Corazon Soliman
Department of Tourism Ramon Jimenez
Department of Trade and Industry Gregory Domingo
Department of Transportation and Communication Joseph Emilio Abaya
Commissioner of the Bureau of Internal Revenue Kim Jacinto-Henares
Commissioner of Bureau of Customs - Ruffy Biazon

Elasticity is the measurement of how changing one economic variable affects others.

For example:

"If I lower the price of my product, how much more will I sell?"
"If I raise the price, how much less will I sell?"
"If we learn that a resource is becoming scarce, will people scramble to acquire it?"

In more technical terms, it is the ratio of the percentage change in one variable to the percentage
change in another variable. It is a tool for measuring the responsiveness of a function to changes in
parameters in a unitless way.

Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity
of demand, elasticity of substitution between factors of production and elasticity of intertemporal
substitution.

Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in
understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the
firm, and distribution of wealth and different types of goods as they relate to the theory of consumer
choice. Elasticity is also crucially important in any discussion of welfare distribution, in particular
consumer surplus, producer surplus, or government surplus.

Generally, an elastic variable is one which responds a lot to small changes in other parameters. Similarly,
an inelastic variable describes one which does not change much in response to changes in other
parameters.

"Elasticity is a measure of responsiveness. The responsiveness of behavior measured by variable Q to a

change in environment variable P is the change in Q observed in response to a change in P. Specifically,
this approximation is common:

elasticity = (percentage change in Q) / (percentage change in P)

The key thing to understand is that we use elasticity when we want to see how one thing changes when
we change something else. How does demand for a good change when we change its price? How does
the demand for a good change when the price of a substitute good changes? These are the type of
questions that elasticities help us answer.

The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response
of quantity demanded due to a price change.

The formula for the Price Elasticity of Demand (PEoD) is:

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

Calculating the Price Elasticity of Demand

You may be asked the question "Given the following data, calculate the price elasticity of demand when
the price changes from Ph9.00 to Ph10.00" Using the chart on the bottom of the page, I'll walk you
through answering this question.

First we'll need to find the data we need. We know that the original price is Ph9 and the new price is
Ph10, so we have Price(OLD)=Ph9 and Price(NEW)=Ph10. From the chart we see that the quantity
demanded when the price is Ph9 is 150 and when the price is Ph10 is 110. Since we're going from Ph9 to
Ph10, we have Qd(OLD)=150 and Qd(NEW)=110, where "Qd" is short for "Quantity Demanded".

So we have:

Price (OLD)=9
Price (NEW)=10
Qd (OLD)=150
Qd (NEW)=110

To calculate the price elasticity, we need to know what the percentage change in quantity demand is and
what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is:

[Qd(NEW) - Qd(OLD)] / Qd(OLD)

By filling in the values we wrote down, we get:

[110 - 150] / 150 = (-40/150) = -0.2667

We note that % Change in Quantity Demanded = -0.2667

(We leave this in decimal terms. In percentage terms this would be -26.67%).

Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

Similar to before, the formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity demand and the percentage change in price, so we can
calculate the price elasticity of demand.

Final Step of Calculating the Price Elasticity of Demand

We go back to our formula of:

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

We can now fill in the two percentages in this equation using the figures we calculated earlier.

PEoD = (-0.2667)/(0.1111) = -2.4005

When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative
value. We conclude that the price elasticity of demand when the price increases from Ph9 to Ph10 is
2.4005.

How Do We Interpret the Price Elasticity of Demand?

A good economist is not just interested in calculating numbers. The number is a means to an end; in the
case of price elasticity of demand it is used to see how sensitive the demand for a good is to a price
change.

The higher the price elasticity, the more sensitive consumers are to price changes.

A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great
deal less of it and when the price of that good goes down, consumers will buy a great deal more.

A very low price elasticity implies just the opposite, that changes in price have little influence on
demand.
Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or
inelastic between Ph9 and Ph10". To answer that question, you use the following rule of thumb:

If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)

If PEoD = 1 then Demand is Unit Elastic

If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always positive.
In the case of our good, we calculated the price elasticity of demand to be 2.4005, so our good is price
elastic and thus demand is very sensitive to price changes.

The Price Elasticity of Supply

It measures the rate of response of quantity demand due to a price change. If you've already read The
Price Elasticity of Demand and understand it, you may want to just skim this section, as the calculations
are similar.

We calculate the Price Elasticity of Supply by the formula:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

Calculating the Price Elasticity of Supply

You may be asked "Given the following data, calculate the price elasticity of supply when the price
changes from Ph9.00 to Ph10.00" Using the chart on the bottom of the page, I'll walk you through
answering this question.

First we need to find the data we need. We know that the original price is Ph9 and the new price is Ph10,
so we have Price(OLD)=Ph9 and Price(NEW)=Ph10. From the chart we see that the quantity supplied
(make sure to look at the supply data, not the demand data) when the price is Ph9 is 150 and when the
price is Ph10 is 110. Since we're going from Ph9 to Ph10, we have Qs (OLD) = 150 and Qs (NEW) = 210,
where "Qs" is short for "Quantity Supplied".

So we have

Price(OLD)=9
Price(NEW)=10
Qs(OLD)=150
Qs(NEW)=210

To calculate the price elasticity, we need to know what the percentage change in quantity supply is and
what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Supply

The formula used to calculate the percentage change in quantity supplied is:

[Qs(NEW) - Qs(OLD)] / Qs(OLD)

By filling in the values we wrote down, we get:

[210 - 150] / 150 = (60/150) = 0.4

So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it
would be 40%). Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

Similar to before, the formula used to calculate the percentage change in price is:

[Price(NEW) - Price(OLD)] / Price(OLD)

By filling in the values we wrote down, we get:

[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity supplied and the percentage change in price, so we can
calculate the price elasticity of supply.

Final Step of Calculating the Price Elasticity of Supply

We go back to our formula of:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

We now fill in the two percentages in this equation using the figures we calculated.

PEoD = (0.4)/(0.1111) = 3.6

When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue
since we have a positive value. We conclude that the price elasticity of supply when the price increases
from Ph9 to Ph10 is 3.6.
How Do We Interpret the Price Elasticity of Supply?

The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The
higher the price elasticity, the more sensitive producers and sellers are to price changes.

A very high price elasticity suggests that when the price of a good goes up, sellers will supply a great
deal less of the good and when the price of that good goes down, sellers will supply a great deal more.
A very low price elasticity implies just the opposite, that changes in price have little influence on supply.

Often you'll have the follow up question "Is the good price elastic or inelastic between Ph9 and Ph10". To
answer that, use the following rule of thumb:

If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)

If PEoS = 1 then Supply is Unit Elastic

If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoS is always positive.
In our case, we calculated the price elasticity of supply to be 3.6, so our good is price elastic and thus
supply is very sensitive to price changes.

The Income Elasticity of Demand

It measures the rate of response of quantity demand due to a raise (or lowering) in a consumers income.

The formula for the Income Elasticity of Demand (IEoD) is given by:

IEoD = (% Change in Quantity Demanded)/(% Change in Income)

Calculating the Income Elasticity of Demand

Given the following data, calculate the income elasticity of demand when a consumer's income changes
from Ph40,000 to Ph50,000. Using the chart on the bottom of the page, I'll walk you through answering
this question.
The first thing we'll do is find the data we need. We know that the original income is Ph40,000 and the
new price is Ph50,000 so we have Income(OLD)=Ph40,000 and Income(NEW)=Ph50,000. From the chart
we see that the quantity demanded when income is Ph40,000 is 150 and when the price is Ph50,000 is
180. Since we're going from Ph40,000 to Ph50,000 we have Qd(OLD)=150 and Qd(NEW)=180, where
"Qd" is short for "Quantity Demanded".

So you should have these four figures written down:

Income(OLD)=40,000
Income(NEW)=50,000
Qd(OLD)=150
Qd(NEW)=180

To calculate the price elasticity, we need to know what the percentage change in quantity demand is and
what the percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is:

[Qd(NEW) - Qd(OLD)] / Qd(OLD)

By filling in the values we wrote down, we get:

[180 - 150] / 150 = (30/150) = 0.2

So we note that % Change in Quantity Demanded = 0.2 (We leave this in decimal terms. In percentage
terms this would be 20%) and we save this figure for later. Now we need to calculate the percentage
change in price.

Calculating the Percentage Change in Income

Similar to before, the formula used to calculate the percentage change in income is:

[Income(NEW) - Income(OLD)] / Income(OLD)

By filling in the values we wrote down, we get:

[50,000 - 40,000] / 40,000 = (10,000/40,000) = 0.25

We have both the percentage change in quantity demand and the percentage change in income, so we
can calculate the income elasticity of demand.

Final Step of Calculating the Income Elasticity of Demand

We go back to our formula of:

IEoD = (% Change in Quantity Demanded)/(% Change in Income)

We can now fill in the two percentages in this equation using the figures we calculated earlier.

IEoD = (0.20)/(0.25) = 0.8

Unlike price elasticities, we do care about negative values, so do not drop the negative sign if you get
one. Here we have a positive price elasticity, and we conclude that the income elasticity of demand when
income increases from Ph40,000 to Ph50,000 is 0.8.

How Do We Interpret the Income Elasticity of Demand?

Income elasticity of demand is used to see how sensitive the demand for a good is to an income change.
The higher the income elasticity, the more sensitive demand for a good is to income changes.

A very high income elasticity suggests that when a consumer's income goes up, consumers will buy a
great deal more of that good.

A very low price elasticity implies just the opposite, that changes in a consumer's income has little
influence on demand.

Often an assignment or a test will ask you the follow up question "Is the good a luxury good, a normal
good, or an inferior good between the income range of Ph40,000 and Ph50,000?" To answer that use the
following rule of thumb:
 If IEoD > 1 then the good is a Luxury Good and Income Elastic

If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic

If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic

In our case, we calculated the income elasticity of demand to be 0.8 so our good is income inelastic and
a normal good and thus demand is not very sensitive to income changes.

Giffen goods, in fact, are goods that have upward-sloping demand curves. How can it be possible that
people are willing and able to buy more of a good when it gets more expensive? To understand this, it's
important to keep in mind that the change in quantity demanded as a result of a price change is the sum
of the substitution effect and the income effect.

The substitution effect states that consumers demand less of a good when it goes up in price and vice
versa. The income effect, on the other hand, is a bit more complex, since not all goods respond the same
way to changes in income.
When the price of a good increases, consumers' purchasing power decreases, and they effectively
experience a change akin to a decrease in income.

Conversely, when the price of a good decreases, consumers' purchasing power increases, and they
effectively experience a change akin to an increase in income.

Therefore, the income effect describes how the quantity demanded of a good responds to these effective
income changes.

If a good is a normal good, then the income effect states that the quantity demanded of the good will
increase when the price of the good decreases, and vice versa. (Remember that a price decrease
corresponds to an income increase.)

If a good is an inferior good, then the income effect states that the quantity demanded of the good will
decrease when the price of the good decreases, and vice versa. (Remember that a price increase
corresponds to an income decrease.)