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BASIC MICROECONOMICS HANDOUTS WEEK 1

ECONOMICSS- The social science concerned with how individuals, institutions and society make
decisions under condition of scarcity.

MICROECONOMICS – The part of economics concerned with individual decision making units, such as a
consumer, a worker or a business firm. It examines the workings of individual industries and the
framework of decision making by individual players in the economy, principally the households and the
business firms. Example , when we study the income and expenditure of an individual bank, we are
dealing with microeconomics. But when we deal with the income and expenditures of the whole
banking industry, then we are engaged in the study of macroeconomics. However what may be true in
microeconomics may not be true to macroeconomics. For example, a palay farmer gets better harvest.
This means more income for him. But if all palay farmers have increased their harvests, it is not
favorable to them, because more supply reduces the price of palay.

MACROECONOMICS – Part of economics concerned with the economy as a whole. Examines the
economy as a whole or its basic subdivisions or aggregates, such as the government, household and
business sectors. In using aggregates, macroeconomics seek to to obtain an overview, or general outline,
of the structure of the economy and the relationships of its major aggregates. Macroeconomics speaks
of such economic measures as total output, total employment, and total income, aggregate
expenditures, and the general level of prices In analyzing various economic problems. Very little
attention is given to specific units making up the various aggregates.

AGGREGATES – a collection of specific economic units treated as if they were one unit

Economic problems – The need for individuals and society to make choices because wants exceeds
means (scarcity). To make choices is necessary because economic wants are unlimited but the means
(income, time, resources) for satisfying those wants are limited.

BUDGET LINE – a line that shows various combinations of two products a consumer can purchase with a
specific money income, given the products’ prices or more technically it is called budget constraints. It is
a schedule or curve that shows various combinations of two products a consumer can buy with a specific
money income.

The
Budget Line. Whole Unit combination of products A and B Attainable with an income of P120.
------------------------------------------------------------------------------------------------------------------------------
Units of Product A Units of Product B Total Expenditure
(price = P20/unit) (price = P10/unit) Product A + B = 120
------------------------------------------------------------------------------------------------------------------------------
6 0 120 + 0 =120
5 2 100 + 10 = 120
4 4 80 + 40 = 120
3 6 60 + 60 = 120
2 8 40 + 80 = 120
1 10 20 + 100 = 120
0 12 0 + 120 = 120

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7
Income=P 120
6 A=P 20
5
Unattainable
4
Income=P 120
3 Attainable B=P 10
2

0
0 1 2 3 4 5 6 7 8 9

To explain further what is a budget line, we have the example graph and the table above. Suppose
that you have P120 and you decided to purchase product A and product B. Product A are P20 each and
Product B are P10 each. Your purchase option are shown in the table above. At one extreme, you might
spend all of your P120 “INCOME” ON 6 Product A’s at P20 each and have nothing left to spend on
Product B. Or by giving up 2 Product A ’s and thereby gaining P40, you can have 4 Product A’s at P20
each and 4 Product B’s at P10 each. And so on to the other extreme on Product A. , at which you buy 12
Product B’s ay P10 each, spending you entire income on Product B and nothing left to spend on Product
A. Note that the line (curve) is not restricted to whole units of Products A and B as is the table. Every
point on the line represents a possible combination of Products A and B.
All the combinations of Products A and B on or inside (below) the budget line are attainable from the
P120 of money income. You can afford to buy for example 3 Product A’s at P20 each and 6 Product B’s
at P10 each. You can obviously afford to buy 2 Product A’s and 5 Product B’s, thereby using only P90 of
your P120. But to achieve maximum utility, you will want to spend the whole P120. The budget line
shows all combinations that cost exactly the full P120.
In contrast, all combinations beyond (above) the budget line are unattainable. The P120 limit simply
does not allow you to purchase. For example, 5 Product A’s and 5 Product B”s will cost P150 and would
clearly exceed the P120 limit. In this example the attainable combinations are on and within (below) the
budget line ; the unattainable combinations are beyond (above) the budget line

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HANDOUTS WEEK 2

FOUR PRINCIPLES IN ECONOMICS

1. Opportunity cost – this is a foregone return. Every turn and twist in our life, choices and the
need to decide, confronts us. The limitation of our resources hinder us enjoy all goods and
services we like. An example is when you visit a friend, who offers you a choice between juice
and soft drink. You choose the juice. The opportunity cost of choosing the juice is the soft drink.
Since you choose the juice, you can no longer enjoy the soft drink.
2. Marginal Principle – an economic activity will increase if its marginal benefit is greater than its
marginal cost. Marginal benefit are the additional benefits earned by increasing a certain
activity. Marginal cost is the additional cost incurred by increasing certain activity.
3. Principle of Diminishing Return – this states that as the number of input increases, while other
inputs are constant, the output will increase at a decreasing rate.

Number of workers 1 2 3 4 5 6 7
Total Number of T-shirts Produced 20 38 52 60 64 66 66
Additional T-shirts from hiring the worker 20 18 14 8 4 2 0

Above shows the hypothetical data concerning the production of t-shirts, the different pieces of
equipment used in producing t-shirts are sewing machines, cutters, scissors, etc. and these are fixed
inputs. If the first worker is doing the work, alone, he can produce 20 shirts. Suppose the second worker
was hired, he can produce only 18 shirts, less than the first worker can. Why? Because they have to
share the different equipments. The second worker might have to wait until the first worker finishes
using the sewing machine. If the second worker can contribute 18 shirts to the production, the third
worker can only contribute 14 shirts less than the first and the second worker. We can observe that as
the number of workers hired increases, the number of shirts produced increases at a decreasing rate.
4. Spillover or Externality Principle – This principle suggests that cost or benefits of certain
activities can “spillover” to people who are not part of the transactions. For example the
construction of a huge dam can displace communities near it. But it will benefit the agricultural
sector interms of irrigation, the water supply targeted areas. In this scenario, there are spillover
costs and benefits.

Three Types of Economic System

1. Command Economic System – The state owns all resources. It aims to create equality. A central
planning bureau decides what, how, how much and for whom to produce. Requiring everybody
to work, the state eliminates unemployment. However choices for goods and services are
limited. The lack of profit does not motivate government owned firms to be efficient. The
government controls completely the allocation, distribution and organization of resources, and
regulates prices and wages.
2. Market Based economy – Profit gives firms incentives to produce goods and services that will
satisfy consumer wants. Firms aims to be efficient to reduce cost and compete in the market.
The price system and a high degree of economic freedom encourage firms to efficiently allocate
resources. Government does not intervene in the market.
3. Mixed Economic system – The government and the private sector participate in the economy,
State owned enterprises exist with private firms. It is a combination of command and market
economy. State-owned enterprises exists because the government wants to provide basic
services ( power and water utilities, telecommunications). Government closely monitors the

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market and imposes regulatory policies on some industries. Government allows the free
interaction of consumers and producers in the market, bur exercises regulatory power to
protect the consumer or the market. Monopoly exists with close supervision from the
government . the government also promotes the equal distribution of wealth.

Graph – a visual tool to depict the relationship between two variables.a variable is something that can
be measured and can be assigned different values. For example a person is interested in the
relationship between his daily income and the number of hours he works. The variables involved are his
daily income and the number of hours he works.

Example:
Table showing work time and income.

Work hours per day 0 5 8 10

Income per day 0 200 320 400
The table above shows that if a person do not work , he earns nothing. If he works for 5 hours, he earns
P200, for 8 hours he earns P320, and if he works for 10 ours, he earns P400.

Steps in Drawing the Graph:

1. Draw a horizontal and a vertical line. The horizontal line is the X axis and the vertical line is the Y
axis. The intersection between the Y and X axis is called the point of origin. As we move away
from the point of origin going to the right, the value of the X axis increases. Similarly as we move
up from the point origin the Y axis increases.
2. The work hours variable is on the horizontal line or X axis while thr daily income is on the
vertical line or Y axis. Moving along the horizontal line (X axis), the number of hours increases
from zero to 10 hours. While moving along the vertical line (Y axis) the income increases from
zero to P400.
3. Returning to tha table, if the person works for 5 hours, he will receive P200 income.
4. Look for the value of 5 on the X axis and draw a dash line going up, then look for the value of
200 on the Y axis and draw a dash line going right. The intersection of the dash lines shows the
combination of the work hours (5) and income (P200) and mark it as point B.
5. To find the different combinations of work hours and daily income repeat steps 3 and 4.after all
the points have been located and identified it is connected, to draw a curve (line) that shows the
relationship between work hours and income.

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Relationship between Hours Worked and Daily Income

Y-axis
450
400 d
350 c
300
Daily Income(Php)
250 b
200
150
100
50
0
0 2 4 6 8 10 12

X-axis
Hours Worked per Day

NOTE: The work hours are the independent variable and income the dependent
variable. This means that the increase/decrease in income depends on the
increase/decrease of work hours.

Slope – it is often used in determining the responsiveness of one variable from the changes in another
variable,

Vertical difference between two points

Slope = --------------------------------------------------------
Horizontal difference between two points
Steps in computing the Slope:
1. Two points from the previous table were picked from points b and c.
2. The vertical distance between b and c 120 that is 320-200
3. The horizontal distance between b and is 3 that is 8-5

Slope = 320-200/8-5
= 120/3
= P40

The slope tells that if there is a 3 hour increase in work time it increases income by P120, so that the
income per hour is P40. This is the hourly wage.

ACTIVITY 2-1

Prepare a graph from the data shown on the table below. Plot the independent variable on X axis and
dependent variables on Y axis.

Study time ( hours) 0 2 4 6 8

Exam score (points) 0 30 50 70 90

HANDOUTS WEEK 3

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Utility – Satisfaction derived from the consumption of a commodity.

Utility Theory of Price = “It is the satisfaction that a certain commodity could bring to a consumer that
determines the price” Therefore the cost of production is not the only determinant of price.
Demand – A schedule or curve that shows the various amounts of product that consumers will purchase
at each of several possible prices during a specified period of time.
Demand Schedule – The quantities of good, consumer are willing to buy at various prices.
Directly Proportional – means that both variables increase and decrease at the same time
Inversely Proportional – Means that one variable goes up and one variable goes down.
Equilibrium point – Point of equality of demand versus supply
Market – The place where buyers and sellers interact and engage in exchange
Price – the value of goods in terms of money. The higher the price, the less the consumer will buy. But
to a supplier, price represents revenue, which is needed to cover cost and earn revenue.
Price Floor – the minimum limit beyond which the price of commodity is not allowed to fall
PRICE Ceiling – The maximum limit at which the price if the commodity is set.

LAW OF DEMAND – The principle that other things equal, as price falls, the quantity demanded rises,
and as price rises, the quantity demanded falls. Price and demand are inversely proportional.

Other Factors that Determine Demand:

1. Taste – a favorable change in consumer taste (preferences) for a product means more of it will
be demanded at each price. It refers not only to food but also dress, color, cars, cellphones etc.
2. Number of Buyers – an increase of the number of buyers in the market increses demand.
3. Income
a. Superior goods or Normal goods – Products whose demand increases or decreases directly
with changes in income.
b. Inferior goods – goods whose demands increases or decreases inversely with money
income.
4. Prices of related goods – a change in the price of related good may either increase or decrease
the demand of a product, depending on whether the good is a substitute or complement.
a. Substitute goods – one that can be used in place of another. An increase in the price of one
will increase for the demand of another. When prices of fish increases, consumers will buy
less fish, and consumers will increase their demand for meat.
b. Complementary goods – one that is used together with another good. They are used
together and they are typically jointly demanded.If the price of the complement goes up,
the demand for the related good will decline. Conversely, if the price of the complement
falls, the demand for the related good will increase.
c. Independent goods – goods that are unrelated to one another. There is no demand
relationship. The change in the price of one will have virtually no effect on the demand for
the other.
5. Expected prices – changes in expected prices may shift demand. An expectation or of a higher
price in the future may cause consumers to buy now, in order to beat the anticipated the
anticipated price rise, thus increasing the current demand. In contrast an expectation of falling
prices may decrease current demand for products.

Demand Chart

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Y-Values
20
18
16
14
PX

12
10
8
6
4
2
0
0 5 10 15 20 25 30 35 40 45

QDX

Demand Curve for Commodity X

Demand for commodity X

PX (Price of Good/Unit) 18 16 14 12 10 8 6 4 2
QDX (quantity Demand) 0 5 10 15 20 25 30 35 40

SUPPLY – a schedule or curve showing the amounts of a product that producers will make available for
sale at each of a series of possible prices during a specific period.
Law of Supply – the principle that, other things equal, as price rises, the quantity supplied rises, and as
price falls, the quantity supplied falls. Other things equal, firms will offer for sale more of their products
at a high price than at a low price. Tis, again, is basically common sense.

Other Factors that Determine Supply:

1. Resource Prices – the prices of the resources used in th production process help determine the
costs of production incurred by firms. Higher resource prices raise production costs and,
assuming a particular product price, squeeze profits. The reduction in profits reduces incentives
for firms to supply output at each product price. Increase in the prices of coffee beans and milk
will increase the cost of making lattes and therefore reduce their supply. In contrast, lower
resource prices lower production costs and increase profits. S when resource prices fall, firms
supply greater output at each product price.
2. Technology – Improvements in technology (techniques of production0 enable firms to produce
unit of output with fewer resources.
3. Taxes and subsidies - Businesses treat sales and property taxes as costs. Increases in those taxes
will increase production costs and reduce supply. In contrast , subsidies are taxes in reverse. If
the government subsidizes production of a good, it in effect lowers the producers’ costs and
increase supply.
4. Prices of other goods – firms that produce a particular product, say, soccer balls, can usually use
their plant and equipments, to produce alternative goods, say basketballs and volleyballs. The

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higher prices of these “other goods” may entice soccer ball producers to switch production in
those goods in order to increase profits.
This substitution in production results in the decline in the supply of soccer balls. Alternatively
when basketballs and volleyballs decline in price relative to soccer balls, firms will produce
fewer of those products and more soccer balls, increasing the supply of soccer balls.
5. Expected Prices – Changes in expectations about the future price of a product may affect the
producers current willingness to supply the product. It is difficult, however, to generalize about
bow a new expectation of higher prices affect the present supply of the product. Farmers and/or
traders anticipating a higher price of rice in the future might withhold some of their stocks in the
market, thereby causing a decrease in the current supply of rice. In contrast, some
manufacturing industries expecting an increase in price of their products, may produce more,
causing current supply to increase.
6. Number of sellers – Other things equal, as more firms enter the industry, the larger the number
of suppliers, the greater the market supply. Conversely, the smaller the number of firms in the
industry, the less the market supply.

SUPPLY CHART

Supply Chart
20
18
16
14
12
10
PX

8
6
4
2
0
0 5 10 15 20 25 30 35 40 45

QDX

Supply Curve of Commodity X

Supply Schedule of Commodity X

PX (Price of Good/Unit) 18 16 14 12 10 8 6 4 2
QDS (Quantity Supply) 40 35 30 25 20 15 10 5 0

Market Equilibrium – is a condition wherein the quantity demand per unit of time and quantity
supplied in the same period are equal.

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Equilibrium Price – The price in the competitive market in which the quantity demanded and quantity
supplied are equal.
Equilibrium Quantity – the quantity demanded and the quantity supplied that occur at the equilibrium
price in a competitive market. The quantity at which the intention of buyers and sellers match so that
the quantity demanded and the quantity supplied are equal.

Equilibrium chart

ACTIVITY 3-1
1. Explain the law of demand. Why is a demand curve slope downward?
2. Explain the law of supply. Why is a supply curve slope upward?

HANDOUTS WEEK 4

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PRICE CONTROL – Government control prices in an attempt to protect a disadvantaged group though it
may hurt the interest of the other group. Laws against usury, price ceiling in areas hit by calamities, rent
control, are measures to protect people from abuse. There is a wide support for price control, although
economists oppose this except during calamities and emergencies. Price control tend to distort the
allocation of scarce resource resulting in a market shortage or surplus. Price ceiling, a price control
below the equilibrium point, result in shortages. Price floor, a price control above the equilibrium point,
causes surplus.
PRICE CEILING – Suppose that the supply and demand of sugar is at equilibrium at the price of P50 per
kilo and the government impose a lower maximum at 30/ kilo. The supply of sugar will decrease and
demand will increase. Some consumers will be lucky to buy at a lower price while others will not be able
to get it.
The invisible hand in the market fails to distribute sugar in the market, an alternative mechanism
must take its place. Government might require buyers to queue in a recognized store and limit the kilos
prof sugar that they can buy. Economists argue that there is an opportunity loss for people who spent
their time in a queue and the cost of sugar might be higher than if the government did not impose any
price control. Suppose that at the price of P30/kilo, a baker can save P20/kilo, but he waits in line for 3
hours to buy a maximum of 3 kilos, therefore saving P60. However he earns P50/hour; since he is
waiting in line, he incurs a P150 opportunity loss. If there were no price control, the buyer only pays
P150; with a floor price, the baker pays P90 for the sugar and incur a P150 opportunity loss, a total cost
of P240.
Incentives to evade is always present when government imposes price control. The shortage of
sugar may create a sugar black market, where a buyer although at a higher price buys as many kilos as
they need. Illegitimate organizations may smuggle sugar in the country. However, it requires a more
invasive government and a more expensive bureaucratic procedure. Temporarily, rationing may solve
shortage problem, the government can easily monitor the producers, based on rationing tickets received
and issued.
PRICE FLOORS – The government imposes price floors to prevent prices from further decreasing. The
objective of the government is to protect an industry or a sector. Imposing a minimum wage is an
example of a price floor: it aims to protect the labor sector. The price floor is above the market
equilibrium price.
Suppose that the equilibrium market price of sugar is at P45/kilo, producing 2 million metric tons of
sugar for the market and the government wants to protect and encourage additional production of
sugar in the country and set a price floor of P/kilo. The price floor encourages the industry to produce
more output to the point where producers marginal cost is equal to the floor price. However, due to an
increase in price, cosumers will reduce their consumption of sugar. This creates market surplus, the
supply greater than the demand at this condition the sugar prices tends to drop. If the government
desires to maintain the price floor, it resort to the following.
1. Buy all the surplus sugar in the market. But the problem of where to dispose this surplus sugar
arises.
2. The government may choose to strictly impose the price floor and let the surplus sugar go to
waste. This means that there are farmers who will not be able to sell their output, creating a
problem for government.
3. The government controls the production of sugar. A farmer must get government rights before
planting sugar cane, firms will get license before milling sugar, and sellers will get government
permit before selling sugar, this situation creates bureaucracy and increases cost.

ACTIVITY 4-1

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Answer the following questions;

1. At the start of the quarantine period during this covid 19 pandemic, the government pegged the
price of fish not to exceed P200/kilo. Is it price ceiling or floor price? Explain.
2. The government during this pandemic has the policy that allows tenants not to pay their rental
dues as they fall due or they can extend the payment of their rental fee. Is this policy fair.
Explain.

HANDOUTS WEEK 5

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ELASTICITY – the degree of sensitivity to the changes in price

Demand Elasticity – refers to the reaction or response of consumers to alterations in prices of goods or
services. Consumers tend to decrease their purchases as price increases, and tend to increase their
purchases whenever price decreases. These are logical reactions to price changes. However, such
responses changes in accordance to the nature of the products and certain needs of the buyers. For
example, if a product is very vital to the consumers, they have to have it despite a remarkable increase
in price. On the other hand, there are goods that a slight increase in their prices make many consumers
hesitant to buy such product. These goods are not important to them.

TYPES OF DEEMAND ELASTICITY:

1. Elastic demand – A change in price results to a bigger change in quantity demanded. For
example a 20% change in price (increase or decrease) creates 60% change in quantity demanded
(decrease or increase). This shows that consumers are very sensitive to price change. They are
easily discouraged to buy the products if the price increase. Such product are not very
important but they give comfort or pleasure to the consumer or buyer. Example are
refrigerators, camera, TV sets, motorcycles etc.
2. Inelastic Demand – a change in price results to a lesser change in quantity demanded. For
example, a 10% change in price only creates a percent change in quantity demanded. This
means that consumers are not sensitive to price change. Products under this criterion are very
important to consumers. They cannot live without such goods like rice, medicine or shelter
.People have to buy said goods even if there is a remarkable increase in their prices. However, a
very remarkable decrease in the prices of the said goods have a very slight increase in quantity
demanded. For example, a big decline in prices of rice and medicine does not encourage people
to eat more rice or to take more medicine.
3. Unitary Elastic Demand – a change in price results to an equal change in quantity demanded. For
example, a etc.50% change in price produces a 50% change in quantity demanded. Goods or
services under this criterion are semi-important goods. Examples are clothings, shoes etc.

Formula to Compute Elasticity of Demand:

Percentage change in Qantity demanded
Elasticity of Demand = -------------------------------------------------------
Percentage Change in Price

It is interpreted as:

Quantity New (QN) – Quantity Old (QO)

Quantity Old (QO)
Elasticity of Demand (ED) = -------------------------------------------------
Price New (PN)– Price Old (PO)
Price Old (PO)

Example: Mario reduced the price of his fruit juice from P10 to P5. He discovers that the demand for his
product increased from 1,000 liters to 2,000 liters. Determine the demand elasticity.Using the formula
QN-QO
QO
E = ------------

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PN-PO
PO

2,000 – 1,000
1,000
E = ---------------------------
5-10
10
1,000
1,000
ED = -------------------
-5/10
ED = 1/-.5
ED = -2

Note: the negative sign is set aside and only the absolute value of the coefficient is considered. The
percentage change in quantity demanded is obviously higher than the percentage change in price and
the elasticity coefficient is higher than 1, this means that the demand for the good is elastic. If the
quantity demanded registers a percentage change less than the percentage change in the price, and the
elasticity coefficient is less than 1, the demand is described as inelastic. Should the change in quantity
demanded is in the same proportion as the change in price, then the elasticity coefficient is equal to 1,
the demand is unitary.
In the above example the elasticity of demand is -2, set aside the negative sign, therefore it is 2 and it
is greater than 1, elasticity of demand is elastic.

ACTIVITY 5-1 – Determine the price elasticity of demand whether it is elastic, inelastic or unitary for
each quantity demanded. Explain.
Quantity Demanded Price
50 P20
40 P40
30 P60

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