Economics 11 First Long Exam Reviewer Demand

Scarcity: the central economic problem Quantity Demanded:

o Amount of a good that buyers
- Lack of supply for goods and services;
are willing and able to purchase
shortage
Demand Schedule:
Economics: study of how individuals and o Table that shows price of a good
societies choose to use the scarce resources that and the quantity demanded
nature and previous generations have provided Price of Tix Q.D
0 31
2 Main Branches of Economics 50 20
a) Macroeconomics: growth, 100 12
200 2
unemployment, inflation, balance of
trade, deficits, cyclical fluctuations
b) Microeconomics: looking at individual Demand Curve: graph of the
consumers and producers, opportunity relationship between price of a good &
costs, quantity
- Rational decision making (weighing
marginal cost) Note: Low price, High Demand: High
- Social implications of choices Price, Low Demand (Inverse
Relationship)
Market: an institution that facilitates
transactions between buyers and sellers Factors in Demand Curve Shift

The Circular Flow a) Income

o Higher income, Higher Demand
b) Changes in price of related goods
c) Complimentary & Substitute
Ex: Coffee and Creamer
d) Taste of Buyers
o Perceived obsolescence (peer
pressure)
o Planned obsolescence
(deteriorating goods)
e) Expectations
o High demand during peak
season
Neoclassical Economics f) Number of Buyers
- Assumes the competitive market where
buyers and sellers have negligible
influences on price
Competitive Market
- Studying the Supply and Demand of the
market is one of the tools used to
understand and explain how the market
works.
Supply change easily with changes in price, the curve
is inelastic
Quantity Supplied:
Price Elasticity
o Amount of a good that
producers will make available to - Measure that allows us to understand
the market how buyers and sellers respond to
change in market conditions
- Analyze demand & supply with greater
precision
- Measure of how much quantity
demanded/supplied of a good respond to
change in the price
Formula: Price Elasticity
(Q2 – Q1) / [(Q2 + Q1)/2]
------------------------------------
(P2 – P1) / [(P2+P1)/2]
Supply Schedule: Perfectly Inelastic = 0
o Table that shows price of a good o QD/QS doesn’t respond to price
and quantity supplied changes
Factors in Supply Curve Shift Perfectly Elastic = Infinity
a) Input Prices o QD/QS changes infinitely w/
o Materials used for production change in price
b) Technological Development o At certain price, infinite number
o Innovation will be demanded
o Labor cost go down, production
goes up
c) Expectations
d) Number of Sellers
Demand and Supply Curve
o The market is not perfect
o Government interferes in the
market
o Mere theoretical construction;
impossible to identify which
changes are due to supply or
Unit Elastic = 1
demand
o QD/QS changes by the same
Elasticity - Refers to the degree of
percentage as price
responsiveness a curve has with respect to price.
If quantity changes easily when price changes,
then the curve is elastic; if quantity doesn't

Note: Price elasticity greater than or equal to 1 =
elastic: Price elasticity less than or equal to 0 =
inelastic
Demand tends to be more elastic due to:
a) Large number of close substitutes
b) Good is a luxury
c) Longer the time period
Elasticity & Total Revenue (TR)
o TR = Price x Quantity
TR – Amount paid by buyers and received by
sellers for a good
Income Elasticity
- Demand measures how much Q.D. of a
good respond to a change in consumers’
income
Formula: % Change in Q.D / % Change in
Income
2 Types of Goods
a) Normal Goods
o Higher income raises Q.D for
normal goods and lowers Q.D
for inferior goods
b) Inferior Goods
o Goods consumers regard as
necessities tend to be income
inelastic
Ex: Food, Fuel, Clothes, Utilities
o Goods consumers regard as
luxuries tend to be income
elastic
Cross Price Elasticity
- Measure of how much Q.D of one good
responds to change in price of another
good
Formula: % Change in Q.D of G1 / %
Change in price of G2
Theory of Consumer Behavior
o Utility approach
o Indifference curve approach
Utility – amount of satisfaction derived from
consumption of a commodity
Cardinal Utility
o Consumer is capable of
assigning to every good a
number representing the
amount or degree associated
with it and is called utils
o Numerical value, Quantitative
Ordinal Utility
o Enough to be able to rank
bundles of commodities
according to order of
preference
o Qualitative
Total Utility – total amount or overall
satisfaction gained from consuming a
good/service.
- Increases as amount of commodity
increases to a maximum point called:
Saturation Point.
Marginal Utility – additional satisfaction
gained from consuming another unit of a
good/service.
- Incremental utility decreases as one
consumes more and more of a
commodity.
MU = Change in Total Utility over Change in
Quantity
Diminishing Marginal Utility
 - More and more consumed, process of
consumption will yield smaller and
smaller additions to utility/
satisfaction.
- Willing to pay a lower price for
additional units of the commodity since
you would be deriving lower levels of
MU each time.
Consumer Equilibrium
- Consumers are constrained by their
budget and prices of goods/services
- Given income, how much are you going
to allocate among the goods that you
want
- Consumers want to maximize total
utility/satisfaction
- People budget their money
Equi-marginal Principle
- Consumers allocate income
- MU derived from last peso on good 1 is
same with good 2
Mux/Px = Muy/Py
Income = (Price of X) (x) + (Price of Y)(y)
Marignal Rate of Substitution
- Rate at which a consumer is willing to
trade one good for another.
Theory of Production and the Firm
- All firms aim for profit maximization
- Firms really want to earn profit
- Gov’t intervenes in the market
 If bank raises interest rates, people will
put their money.
 If bank lowers interest rates, people will
get their money
Production - inputs are combined, transformed,
into outputs
Factors of Production
a) Land
b) Labor
c) Capital
Firm – organization that decides to produce a
good/service to meet a perceived demand.
Production Process
1) Know how much outputs to supply
2) Know which production technology to
use (efficient)
3) How much of each input to demand?
Total Economic Costs
a) Out of pocket costs
b) Normal Rate
c) Opportunity cost (trade off)
Economic Profit = Total Revenue – Total
Economic Cost
Types of Production Processes
a) Labor-Intensive Technology
o Relies more on human labor
than machines
b) Capital- Intensive Technology
o Relies more on machines than
human labor
Marginal Product
- Additional output that can be produced
by adding one more unit of input.
Ceteris Paribus = Everything
considered equal
Law of Diminishing Returns
- When additional units of a variable input
are added, eventually marginal product
of variable input declines.
- Applies on short run
Imperfectly Competitive Industries
a) Monopoly
o No close substitutes
o Single firm produces a product
o No supply curve because
producer controls price and
quantity
- Why do monopolies exist?
 o Gov’t provides right to a frim to
produce a good
o Ownership of a key resource
- Social Cost of Monopolies
o Welfare Loss – consumers
suffer from high prices
o Rent-Sacking Behavior –
actions taken by household or
firms to preserve profits
o Gov’t Failure – gov’t is
cheated/ is cheating
o Public Choice Theory – public
officials act in their own self-
interest as firms do too.
- Price Discrimination
o Charging different prices to
different buyers
o Perfect PD – occurs when a
firm charges maximum
amount that buyers are willing
to pay.
- Remedies for Monopolies
o Anti-Trust Laws
o Regulation
o Doing Nothing.
b) Oligopoly
c) Monopolistic Competition
Externalities & Public Good
Externality – cost/ benefit imposed or bestowed
on an individual or a group that is outside or
external to the transaction.
Marginal Social Cost (MSC)
- Total cost to society of producing an
additional unit of a good/ service
- MSC = sum of marginal costs of
producing a product and correctly
measured damage costs involved in
production.
Marginal Private Cost (MPC)
- The amount that a consumer pays to
consume an additional unit of a
particular good
Marginal Damage Cost (MDC)
- Additional harm done by increasing the
level of an externality-producing activity
by 1 unit.
Internalizing Externalities
5 approaches have been taken to solving
the problem of externalities
a) Government imposed taxes and
subsidies
o Sin Tax Law in products
o Subsidies ex: health programs
b) Private bargaining and negotiation
o Talk to neighbors
c) Legal rules and procedures
d) Sale or auctioning of rights to impose
externalities
e) Direct government regulation
o Governments putting conditions
*All five provide decision makers with an
incentive to weigh the external effects of their
decisions
*Provide financial cost on the damages is the
most controversial part of environmental
economics
Public Good
Markets are distinguished by their:
- Excludability – property of a good
whereby a person can be prevented from
using it
- Rivalry – property of a good whereby
one person’s use diminishes other
people’s use
Types of Goods
a) Private Goods
b) Natural Monopolies
c) Common Resources
d) Public Goods
Free Rider problem
- people unwilling to pay for
goods/services
- as much as possible a person will not
pay
- people enjoy the benefits of public
goods