LECTURE 1: INTRODUCTION TO
ECONOMICS
ECONOMICS- a social science that deals with
the allocation of scarce resources to satisfy
man’s unlimited needs and wants
SCARCITY- insufficiency of resources to meet
all the needs and wants of a population
RELATIVE SCARCITY- a good is scarce
compared to its demand
Example: Bananas are abundant in the
Philippines but when typhoon destroys banana
plants, they become relatively scarce.
ABSOLUTE SCARCITY- supply is limited
Example: oil is absolutely scarce in the
Philippines so we rely heavily on imports from
oil producing countries like Iran
TRADE OFF- choosing one thing over the
other possibilities
OPPORTUNITY COST- refers to the value of
the best foregone alternative
- Value of things that could have gained
from alternatives that were not selected
ECONOMIC RESOURCES
- also known as factors of production
- resources used to produce goods and
services
1. Land- soil and natural resources
- payment for land owners is rent
2. Labor- physical and human effort
exerted in production
- income received is wage
3. Capital- man-made resources used in
production of goods and services
- income is interest
SOCIAL SCIENCE- study of society and how
people behave and influence the world around
them
ECONOMICS AS SOCIAL SCIENCE-
economics studies how individuals make choices
in allocating scarce resources to satisfy their
unlimited wants based on their social behaviors
TWO DIVISIONS OF ECONOMICS:
MACROECONOMICS
- division of economics that is concerned with
the overall performance of the entire economy
- it focuses on the overall flow of goods and
resources and studies the causes of change in the
aggregate flow of money, the aggregate
movement of goods and services and the general
employment of resources.
MICROECONOMICS
- concerned with the behavior and decisions of
individual entities such as the consumer, the
producer, and the resource owner
- it is more concerned on how goods flow from
the business firm to the consumer and how
resources move from the resource owner to the
business firm.
BASIC PROBLEMS OF SOCIETY
1. What to produce and how much
2. How to produce
3. For whom to produce
ECONOMIC SYSTEMS- means through
which society determines the answers to the
basic economic problems
1. Traditional economy
- traditional societies exist in backward
and primitive civilizations
- Methods are stagnant and therefore, not
progressive
- Practiced in indigenous communities
where life is less complicated and the
simple needs of the society can be self-
produced
2. Command System
- authoritative system
- decision-making is centralized in the
government or a planning committee
- The state or agency of government
maybe in charge in the allocation of
resources by using its political power in
answering the basic economic problems
- This economy exists in dictatorial,
socialist and communist nations
- Sometimes the government declares
authoritative system in times of
calamities, disasters, or national
emergencies
o Example:
o Typhoon destroyed crops,
damaged houses and business
establishments. The government
will:
 Ration commodities
 Impose price control
 Confiscate resources
 3. Market Economy
- The most democratic from of economic
system
- People’s preferences may reflect on the
prices they are willing to pay in the
market which becomes the basis of the
producers’ decisions on what goods to
produce
- There is Equilibrium price and output in
the market
- The basic economic problems are
answered based on the workings of
demand and supply
LECTURE 2: ECONOMICS AS AN
APPLIED SCIENCE
ECONOMICS AS AN APPLIED SCIENCE
- Using of tools such as logic,
mathematics, and statistics so students
can do empirical testing of an economic
theory in a scientific manner
SCIENTIFIC METHOD – A method of
inquiry from identifying a problem, proposing
alternative tentative answers or hypotheses,
testing the tentative answers to question or
problems at hand, gathering and treating the
data, and answering the question through the
conclusion
- Statistics and econometrics are used as
empirical proof in testing the hypothesis
POSITIVE ECONOMICS VERSUS
NORMATIVE ECONOMICS
Positive Economics
- Deals with “what is”
- things that are actually happening like
current inflation rate, number of
employed labor, or level of Gross
National Product.
- An overview of what is happening in the
economy that is possibly far from what
is ideal
Normative Economics
- Deals with “what should be”
- It embodies the ideal such as the ideal
rate of population growth or the most
effective tax system
- Focuses on policy formulation that will
help to attain the ideal situation
MEASURING THE ECONOMY
GROSS NATIONAL PRODUCT (GNP)
- The market value of final products, both
sold and unsold, produced by the
resources of the economy in a given
period
GROSS DOMESTIC PRODUCT (GDP)
- The market value of final products
produced within the country
GNP/GDP EXPENDITURE APPROACH
- Products are final when they have
reached the highest level of processing
o These are household and
individual consumption (C), and
government expenditure on
goods and services including
labor (G) and exports (X)
- Products, regardless of production
stages, are also considered final when
basically stocked (unused) as capital
goods and inventories of raw materials
and intermediate products
o Classified as investments (I),
they are stock of values for
future use
- Import components (M) are excluded
since they are produced in other
economies
Equation:
GNP= C + I + G + (X – M)
GNP/GDP INCOME APPROACH most important of which is the price of
the good itself
- Another way to account GNP and
classify its components is by resource Qd= f (P)
uses and contributions that make up the
production stages DEMAND CURVE
- Basic factors of production add value to
products as they are processed into - A graphical illustration of the demand
higher forms. If all payments for schedule, with the price measured on the
resource contributions (rent, wage, vertical axis (Y) and the quantity
interest, profit) went to resource owners, demanded on the horizontal axis (X)
GNP would simply be the sum of all Example demand function:
factor payments from the raw material Qd= 6-P/2
to the final production stage
Demand schedule for bottles of vinegar given
CHAPTER 2: APPLICATION OF DEMAND the following prices:
AND SUPPLY
Price per bottle of Number of bottles
THE MARKET vinegar
- An interaction between buyers and P0 6
sellers of trading or exchange 2 5
- It is where the consumers buy and the 4 4
seller sells 6 3
o Goods market- where we buy 8 2
consumer goods 10 1
o Labor market- where workers
offer services and look for jobs
and where employers look for Computation based on demand function Qd= 6-
workers to hire P/2
o Financial market- where Qd= 6- (0/2)= 6 Qd= 6-(6/2)= 3
securities of corporations are
traded Qd= 6-(2/2)= 5 Qd= 6-(8/2)= 2
LECTURE 3: BASIC PRINCIPLES OF Qd= 6-(4/2)= 4 Qd= 6-(10/2)= 1
DEMAND

DEMAND PRICE
- The willingness of a consumer to buy a 12
commodity at a given price
10
DEMAND SCHEDULE
8
- It shows the various quantities the 6
consumer is willing to buy at various Series 1
prices 4
2
DEMAND FUNCTION
0
- It shows how the quantity demanded of
a good depends on its determinants, the
1 2 3 4 5 Qd
 -There is negative relationship between
the price of a good and the quantity
demanded for that good
- At a lower price, consumer buys more
and at a higher price, consumption tends
to go down
- The downward slope of the curve
indicates that as the price of a
commodity increases, the demand for
this good decreases
- The negative slope of the demand curve
is due to income and substitution effects
o Income effect
- it is felt when a change in the
price of a good changes
consumer’s real income or
purchasing power
- if a good becomes more
expensive, real income
decreases and the consumer can
only buy less goods and services
o Substitution effect
- it is felt when a change in the
price of a good changes demand
due to alternative consumption
of substitute goods; consumers
substitute expensive goods with
cheaper goods
THE LAW OF DEMAND
- As price increases, the quantity demand
for that product decreases, other things
held constant (ceteris paribus)
- There is an inverse relationship between
the price of a good and the quantity
demanded
CETERIS PARIBUS
- all other related variables are held constant
except those that are being studied at the
moment
- other factors that may affect the demand for the
commodity are not changing and the only factor
that influences the level of demand is the price
only
NON-PRICE DETERMINANTS OF
DEMAND
- If ceteris paribus is dropped, non-price
variables that also affect demand are
now allowed to influence demand
(income, taste, expectations, prices of
related goods and population)
- Demand function will be: D= f( P, T, Y,
E, PR, NC ) which states that demand
for a good is a function of price (P),
taste (T), income (Y), expectations (E),
price of related goods (PR), and the
number of consumers (NC)
- The demand curve will shift to the right
to reflect increase in demand and shift to
the left to show decrease in demand due
to non-price determinants
1. Income – the income of the consumer
influences the capacity to purchase
Income ↑ QD↑ Shift to the right
Income ↓ QD↓ Shift to the left
2. Prices of related goods
a. Substitute
PSUBSTITUTTE ↑ QD of Chosen Good↑
Shift to the right
PSUBSTITUTTE ↓ QD of Chosen Good↓
Shift to the left
b. Complementary
PCOMPLEMENTARY ↑ QD of Other
Complement ↓ Shift to the left
PCOMPLEMENTARY ↓ QD of Other
Complement ↑ Shift to the right
3. Expectation – prospect of what is going
to happen to the price can influence the demand
of a commodity
PFUTURE ↑ QD↑ Shift to the right
PFUTURE ↓ QD↓ Shift to the left
4. Taste – preference that may influence
the demand for a commodity
Factors affecting taste:
a. Cultural values
 b. Peer pressure 100 600

c. Power of advertising
Computation based on the supply function Qs=
Taste ↑ QD↑ Shift to the right 100 + 5P
Taste ↓ QD↓ Shift to the left Qs= 100 + 5 (20)= 200
5. Number of consumers (market) – size Qs= 100 + 5 (40)= 300
and characteristic of the population
Qs= 100 + 5 (60)= 400
Population ↑ QD↑ Shift to the right
Qs= 100 + 5 (80)= 500
Population ↓ QD↓ Shift to the left
Qs= 100 + 5 (100)= 600

LECTURE 4: BASIC PRINCIPLES OF PRICE

SUPPLY
90
SUPPLY 80
70
- It refers to the quantity of goods that a
seller is willing to offer for sale 60
50
SUPPLY SCHEDULE 40 Series 1
30
- It shows the different quantities the 20
seller is willing to sell at various prices 10
SUPPLY FUNCTION 0
100 200 300 400 500 Qs
- It shows the dependence of supply on
the various determinants that affect it THE LAW OF SUPPLY
SUPPLY CURVE - Under the assumption of ceteris paribus,
there is direct relationship between the
- A graphical presentation of the supply price of a good and the quantity supplied
schedule; it is upward sloping indicating of that good
the direct relationship between the price
- As the price increases, the quantity
of the good and the quantity supplied of
supplied of that product also increases
that good
NON-PRICE DETERMINANTS OF
Example of supply function: Qs= 100 + 5P
SUPPLY
Supply schedule (based on given supply
1. Price of Production Input – value
function above):
added to raw materials through the
Price of Fish (per Supply (in kilos) process of production
Kilo)
P20 200 Intermediate Input – raw materials;
these are still going to be processed or
40 300
transformed into higher levels of output
60 400
Examples:
80 500
Lumber
 Oil LECTURE 5: MARKET EQUILIBRIUM
Mineral
In a market economy, a price is derived or
Factor Input – processing or determined if the forces of demand and supply
transforming input operate together.
Examples:
Labor Equilibrium
Capital - a state of balance when demand Is equal
Land to supply
PPRODUCATION INPUT ↑ - This equality shows that the quantity
Cost of Production↑ QS↓ that sellers are willing to sell is also the
PPRODUCATION INPUT ↓ quantity that buyers are willing to buy
Cost of Production↓ QS↑ for a price
2. Taxes – monetary expense paid to the
government
Taxes ↑ QS↓
120
3. Technology – the manner in which
factor inputs process intermediate inputs
is done through technology 100
Improvement or discovery in
technology 80
Improved technology (Cost of
Production) ↑ QS↓ 60 Demand
Obsolete technology (Cost of Supply
Production) ↓ QS↑ 40
4. Expectation – anticipation on what is
going to happen on the price of the 20
commodity
PFUTURE ↑ QS↑ 0
PFUTURE ↓ QS↓ 100 200 300 400 500 600 700 800

5. Availability of raw materials and

resources Market equilibrium is attained at the point of
Materials and Resources ↑ QS↑ intersection of the demand and supply curve.
Materials and Resources ↓ QS↓
DETERMINATION OF MARKET
NOTE: EQUILIBRIUM

- Once supply increases due to a non-
price determinant, the entire supply
curve will shift to the right; the supply
curve will shift to the left to reflect a
decrease in supply.
Assuming that the demand function for Good X
is:
Qd= 60- P/2
And the supply function for Good X is:

Qs= 5 + 5P

Applying the equations, we derive the following

demand and supply schedules given the prices
below:

PRICE DEMAND SUPPLY

 SCHEDULE SCHEDULE - The ideal situation in market economy is
FOR GOOD X FOR GOOD X at the point where the demand and supply curves
P0 60 5 intersect, which is known as market equilibrium
2 59 15 as mentioned above. However, during relative
4 58 25 scarcity (shortage) and overproduction (surplus),
6 57 35 the government may intervene to control the
8 56 45 price in the market.
10 55 55
- The problem of scarcity is addressed
12 54 65
through the changes in price and the
14 53 75 corresponding responses of buyers and sellers
16 52 85
Example:
Equilibrium quantity is attained where Qd= Qs 1. In case of shortage, the price normally
increases
Equilibrium quantity is 55 and the equilibrium
price is P10. Corresponding response in the market:
Through computation: Buyers – Decrease demand
60-P/2= 5+5P Sellers – Increase supply
60-5= 5P + P/2 In this case, a price ceiling is set by the
government to protect the buyers
2(55)= (5P + P/2) 2
2. In case of surplus, the price normally
110= 10 P + P decreases
110/ 11= 11P/11 Corresponding response in the market:
P= 10 Buyers – Increase consumption
Now, substitute the price P10 to the Qd and Qs Sellers – Reduce production
functions:
In this case, a price floor is set by the
For Qd: government to protect the sellers
Qd= 60- P/2

Qd= 60 – (10/2) LECTURE 6: ELASTICITY OF DEMAND

Qd= 60 – 5 AND SUPPLY

- Goods differ on how demand and supply

Qd=55
respond to changes in their determinants
For Qs: - This degree of response to a change is
called elasticity
Qs= 5 + 5P
ELASTICITY- it is a measure of how much
Qs= 5 + 5 (10) buyers and sellers respond to changes in market
conditions
Qs= 5 + 50
- The coefficient of elasticity is obtained
Qs= 55 when the percentage change in demand
 is divided by the percentage change in
determinant.
DEGREES OF ELASTICITY
1. Elastic- a change in determinant will
lead to a greater change in demand or
supply
- The absolute value of the coefficient of
elasticity is greater than 1.
Example: The price of LPG increases by
10% and the quantity demanded
decreases by 12%
Elasticity= 12 / 10
= 1.2
Then the demand for LPG is elastic
2. Inelastic- a change in determinant will
lead to a lesser change in demand or
supply
- The absolute value of the coefficient of
elasticity is less than 1.
Example: The price of cellphone goes
up by 5%; quantity demand goes down
by 3%
Elasticity= 3/5
= 0.6
Then the demand for cellphone is
inelastic
3. Unitary elastic- a change in determinant
will lead to an equal change in demand
or supply
- The absolute value of the coefficient of
elasticity is equal to 1.
Example: The price of beans decreases
by 6%; quantity demand increases by
6%
Elasticity= 6/6
=1
Then the demand for beans is unitary
elastic
3 TYPES OF ELASTICITY OF DEMAND:
1. Price elasticity
2. Income elasticity
3. Cross price elasticity (price of related
goods- substitute or complement)
*Price elasticity of demand
- It measures the responsiveness of
demand to a change in the price of the
good
- Price elasticity is measured in two ways:
1. Arc elasticity- the value of elasticity is
computed by choosing two points on the
demand curve and comparing the
percentage change in the quantity and
the price on those two points.
Formula:
Ep= ((Q2-Q1)/ ((Q2+Q1)/2)) ÷ ((P2-P1)/
((P2+P1)/2))
Where:
Q2= new quantity demanded
Q1= original quantity demanded
P2= new price of the good
P1= original price of the good
2. Point elasticity- measures the degree of
elasticity on a single point on the
demand curve
Formula:
Ep= ((Q2-Q1)/Q1) ÷ ((P2-P1)/ P1)
PRICE
ELASTICITY TYPE OF GOOD
Elastic non-essential good
Inelastic essential good
buyers are indifferent to
unitary elastic price change
Price elasticity is important to the seller since it
gauges how far demand can change relative to
price
 *Income elasticity of demand

- This measures how the quantity

demanded changes as consumer income
changes
Income elasticity of demand= % change
in Qd ÷ % change in income

INCOME
ELASTICITY TYPE OF GOOD
positive sign (+) normal good
negative sign (-) inferior good
Normal good= goods bought when income
increases

Inferior good= goods bought when income

decreases

*Cross Price Elasticity of Demand

- This measures how quantity demanded

changes as the price of a related good
(substitute or complement good)
changes

CROSS PRICE TYPE OF RELATED

ELASTICITY GOOD
positive sign (+) substitute goods
negative sign (-) complementary goods

PRICE ELASTICITY OF SUPPLY

PRICE ELASTICITY OF SUPPLY

SUPPLY DEGREE OF
CURVE TYPE OF GOODS ELASTICITY
steep curve goods that are easy to produce elastic
flat curve long time to produce inelastic