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ECON 11

BASIC
ECONOMICS
WITH LRT

Daphnie Lei Pascua-Salvador


BASIC ECONOMICS
WITH LRT

Course Credit: 3 units


Contact Hours: 3 hours/week
Class Schedule: Thursday, 9:30-11:00 A.M.
Friday, 8:00-9:30 A.M.
BASIC ECONOMICS
WITH LRT

Course Requirements
Attendance
Major Exams (Prelims, Midterms and Finals)
Quizzes
Recitation
Activity Output
BASIC ECONOMICS
WITH LRT

Grading System
Exam 40%
Quizzes/Activity 30%
Recitation 10%
Requirement 10%
Assignment/Attendance 10%
100%

***Final Grade= Prelim Grade+ Midterm Grade+ Final Grade


3
I. The Nature and
Importance of
Economics
INTRODUCTION, BASIC CONCEPTS &
HISTORICAL OVERVIEW

Economics
“How societies use scarce resources to produce
commodities and distribute them among different
people.”
The efficient allocation of scarce resources.
INTRODUCTION, BASIC CONCEPTS &
HISTORICAL OVERVIEW

Two (2) Branches of Economics


 Microeconomics
- behaviour of individual entities (i.e. firms and
households) and their interactions (market)
 Macroeconomics
-overall performance of the economy (national income,
Output, price levels, employment)
INTRODUCTION, BASIC CONCEPTS &
HISTORICAL OVERVIEW

Two (2) Vital points of Economics


Scarcity
Economics becomes useless if everything is abundant,
the price is zero and there is no need for allocation and no
such a thing as Economic Goods

Efficiency
when resources are used in such a way that people can
get as much as they can get (specific to their wants and
needs)
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

 Basic Economic Problems

What commodities are produced and in what quantities?


How are they produced?
For whom are the goods produced and who benefits from the
production?
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

Market Economy

Economic questions are answered by the interactions of


households and firms (i.e. market)
a. What to produce?
 Product with the highest profit (dependent on demand/hh
behavior)
b. How to produce?
 Production technique that is most cost efficient (depends on
resources)
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

c. For whom to produce and who benefits from the production?


Since firms are profit-oriented, the goods are produced for those
with purchasing power
To those who benefits from the sale (highest profit) are those
who can answer to the demand the most
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

 Command Economy
- Government makes all the decisions or produces all the answers
to the three basic problems

 Mixed Economy
- Market decides on the questions most of the time, but the
government intervenes every now and then to correct market
failures
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

 Economic Role of the Government


The intervention of the government to the economy is due
to the existence of market imperfections that leads to the
inefficient allocation of resources
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

MARKET IMPERFECTIONS
1. Imperfect Competition
-when a buyer or seller can affect a good’s own price can lead to:
a. Too high prices of a product that effectively makes the product
inaccessible to those who need it
b. Too low prices that can make a producer’s business unsustainable
Government measures:
a. Price regulation
b. Foster competition
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

2. Externalities
- spill-over effects arising from certain market
transactions that create involuntary costs (negative) or
benefits (positive).
 Resulting inefficiencies:
a. Discourages consumption
b. Costs or benefits are not factored in to the transaction
Government Measures:
a. Licenses/regulations
b. Patents
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

3. Public Goods
- a good that is non-rival & non-excludable
- there is no incentive for private entities to create public
goods
- situation of a missing market
Government Measure:
government must thus take the responsibility of providing public
goods
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

4. Income and wealth distribution


- wide income disparities:
a. Dual or polarized markets
b. Economic and political instability

Government measures:
a. Taxation
b. Transfer payments
c. subsidies
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

5. Macroeconomic growth and stability


- slow growth can lead to business pessimism and further slump
the economy
- government must sometimes correct sluggish growth.

Government measures:
a. Fiscal policy
b. Monetary policy
III. Basic Elements
of Demand and
Supply
BASIC ELEMENTS OF DEMAND AND SUPPLY

 What is Market?
 “ a mechanism through which buyers (demand/consumers)
and sellers (supply/firms) set prices and exchange goods and
services.”
 Prices

Value of a good in terms of money.


BASIC ELEMENTS OF DEMAND AND SUPPLY

Functions of price
Terms at which consumers and producers voluntarily exchange
goods and services.
Coordinates the actions of consumers and producers.
BASIC ELEMENTS OF DEMAND AND SUPPLY

Three (3) Factors of Market Economy


1. Trade
 Exchange of goods among individuals (and countries)
2. Money
 Facilitates or smoothens trade by simplifying the
matching of suppliers and consumers
3. Capital
 Produced factor of production (output) made to bring
about a further output
DEMAND & SUPPLY

 Demand
- refers to be the amount of a good consumers (hh) buy at
certain price levels (and conditions)
a. the higher the price of something (cet. par.), the lower the
amount of that thing that hh are willing to buy
b. the lower the price of something, the more of it is bought
DEMAND & SUPPLY
Law of the Downward Sloping Demand Curve:

“When the price of a good increases (cet. par.), buyers


tend to buy less of the good. When the price of a
good decreases (cet. par), quantity demanded
increases.”
DEMAND & SUPPLY

Why does the Demand Curve Slope Downward?


a. Substitution Effect
- as the price of a good increases, people may substitute a similar
good for it (thus decreasing quantity demanded)
b. Income effect
- as the price of a good increases, one becomes “poorer” (real
income decrease) and can only demand less of the good than
usual
DEMAND & SUPPLY
Factors Affecting the Demand Curve

1. Average income
- as incomes rise, consumers tend to buy more goods
- as incomes decrease, consumers also tend to buy less

2. Market size
- bigger population, more demand
- lower population, smaller demand
DEMAND & SUPPLY

3. Availability of related good


a. Substitute good
– performs the same function of a certain good
- if a good’s substitute becomes cheaper, the demand for that
good drops
- if a good becomes cheaper (relative to its substitute), the
demand for that good rises
DEMAND & SUPPLY

b. Complimentary good
– good consumed along with another good
- if a good’s complement becomes cheap, demand for that good
may rise
-if a good’s complement becomes more expensive, demand for
that good may drop
DEMAND & SUPPLY

4. Tastes and preferences


- subjective elements that affect demand (either physiological,
psychological, traditional or cultural reasons or a combination
of the above)

5. Special Factors/Influences
- climate, geographical location, unanticipated events
DEMAND & SUPPLY

Demand Curve Shifts

- any (or a combination) of the factors mentioned


- Positive Effect shifts the Demand Curve to the Right
- Negative Effect shifts the Demand Curve to the Left
DEMAND & SUPPLY

Demand Curve Shifts vs. Movement Along the Demand Curve

- A movement along the Demand Curve is caused by a change in


the good’s own price.
- A Demand Curve shift is caused by a factor other than a change
in the good’s own price.
DEMAND & SUPPLY

Supply

- refers to be the amount of a good, producers are


willing to sell at certain price levels (and conditions)
- as more of a good is supplied, the price of that good
rises
DEMAND & SUPPLY

Law of Diminishing Returns:

“As more and more of a factor of


production is used to make a good, the
additional contribution of that factor will
add less and less to the total output of the
good. (cet. par.)”
DEMAND & SUPPLY

• Law of Diminishing Returns


- The only way to make more use of the additional factor of
production (and increase quantity supplied) is to increase all
other factors of production.
- This entails additional costs, which leads to an increase in price.
- Thus, the Upward Sloping Supply Curve.
DEMAND & SUPPLY
Market Supply
- Like that of demand, Market Supply is taken by summing up
the quantities supplied by all firms.

- Special Case:
 Monopoly – no market supply curve
DEMAND & SUPPLY

Factors Affecting the Supply Curve

1. Cost of production
- if the cost of production is cheap, the supply is high
- influenced by:
a. input prices
b. technological advances
DEMAND & SUPPLY

2. Market prices of related goods


- refers to alternate good or an output involving a
similar production process
- the higher the market price of an alternate good, the
lower the supply of the good in question
DEMAND & SUPPLY

3. Government Policies
- can affect the supply of goods deliberately or through
the production process (in terms of inputs or
technology or both)
a. deliberate effect – quotas
b. effect through production process
- restrictions (pollution)
- requirements (labeling)
DEMAND & SUPPLY

4. Special Influences
- refers to acts of nature such as calamities
• Supply Curve Shifts
- any or a combination of the above factors
- Positive Effect shifts the Supply Curve to the
Right
- Negative Effect shifts the Supply Curve to the
Left
DEMAND & SUPPLY

Supply Curve Shifts

- any or a combination of the above factors


- Positive Effect shifts the Supply Curve to the Right
- Negative Effect shifts the Supply Curve to the Left
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY

 Market Equilibrium
 happens at a point where the quantity demanded (QD) by the household
(HH) is equal to the Quantity Supplied (QS) by firms.

a. Equilibrium Price
 Price that results when quantity demanded is equal to the quantity
supplied
b. Equilibrium Quantity
 Output that results when quantity demanded is equal to quantity
supplied
EQUILIBRIUM IN THE COMPETITIVE
MARKET, DEMAND & SUPPLY ANALYSIS

Surplus
-when the quantity demanded is less than
the quantity supplied
- puts a downward pressure on price
EQUILIBRIUM IN THE COMPETITIVE
MARKET, DEMAND & SUPPLY ANALYSIS

Shortage
-when the quantity demanded is more than the quantity supplied
- puts an upward pressure on price

Demand & Supply Analysis


- allows us to make inferences of what happens to the market of a
good, in terms of equilibrium prices and quantities, following
shifts in demand and/or shifts in supply
DEMAND AND SUPPLY ANALYSIS
Demand/Supply Shift Effect on Equilibrium Price Effect on Equilibrium Quantity

Positive Supply Shift (Right) Decrease Increase

Negative Supply Shift (Left) Increase Decrease

Positive Demand Shift (Right) Increase Increase

Negative Demand Shift (Left) Decrease Decrease


DEMAND AND SUPPLY ANALYSIS

Demand and Supply Shift Effect on Equilibrium Price Effect on Equilibrium Quantity

Positive Supply Shift & Negative Decrease Little or no change


Demand Shift

Negative Supply &Negative Demand Little or no change Decrease


Shift

Positive Supply Shift & Positive Little or no change Increase


Demand Shift

Negative Supply Shift & Positive Increase Little or no change


Demand Shift
EQUILIBRIUM IN THE COMPETITIVE
MARKET, DEMAND & SUPPLY ANALYSIS

 Price Elasticity of Demand


-refers to how much the Quantity Demanded (QD) of a good changes
following a change in the good’s own price (P)
-percentage change in QD for every percentage change in (P)

 Elastic Demand (Price Elasticity of Demand is High)


-if QD of a good responds greatly to a change in P
 Inelastic Demand (Price Elasticity of Demand is Low)
-If QD does not respond much to a change in P
IV. Consumer
Behavior
v. The Concept of
Elasticity
ELASTICITY

Factors Affecting Price Elasticity of demand


1. Nature of the good
a. Luxury
-demand is price elastic
b. Necessity
-demand is price inelastic
ELASTICITY

2. Time Horizon
a. Short-run
-demand for most goods are mostly price-inelastic
b. Long-run
-demand for most goods are mostly price-elastic
ELASTICITY

3. Availability of substitutes
-the more substitutes a good has, the more price elastic its
demand
-consumers have more alternatives when the price of a good
changes
ELASTICITY
… on the Calculation of Price Elasticity of Demand (ED):

1. Elasticities are in absolute values.


-i.e. drop the signs
2. Elasticities deal with percentage changes (not absolute
changes)
-i.e. drop the units
3. Price Elasticity of Demand(Supply) is not equal to the slope of
the Demand(Supply Curve)
ELASTICITY
Calculation of Price Elasticity of Demand (ED)

ED = %ΔQD
%ΔP
ED = ΔQD/QD
ΔP/P
ED = QD2 – QD1 ÷ P2 – P1
(QD1 + QD2)/2 (P1 + P2)/2
ELASTICITY
Categories of Price Elasticity of Demand:

1. Price Elastic Demand

- a 1% change in P results to more than 1% change in QD

- when ED > 1
2. Price Inelastic Demand
- a 1% change in P results to a less than 1% change in QD
- when ED < 1
3. Unit Price Elastic Demand

- a 1% change in P results to a 1% change in QD

- when ED = 1
ELASTICITY

Price Elasticity of Demand & Demand Curves

– The higher the Price Elasticity of Demand, the flatter the demand curve.
– The lower the Price Elasticity of Demand the steeper the demand curve.
– The more elastic the demand for a good, the flatter the demand curve.
– The more inelastic the demand for a good, the steeper the demand curve
ELASTICITY

– Price Elasticity of Demand & Revenues

Revenue (R) = P x Q
ELASTICITY
Price Elasticity of Supply
-refers to how much the Quantity Supplied (QS) of a
good changes following a change in the goods own
price.
-percentage change in QS for every change in P
Price Elasticity of Supply is High (Elastic Supply) if the QS
of a good responds greatly to a change in P.
Price Elasticity of Supply is low (Inelastic Supply) if the
QS of a good does not respond much to a change in P .
ELASTICITY
Factors Affecting Price Elasticity of Supply:
1. Ease of Production
a. Supply of a good is price elastic if
-the good’s inputs or the good itself can be easily sourced.
- the good’s production process is not so complicated
b. Supply of a good is Price Inelastic if
- the good is rare or if its inputs are hard to find
- some degree of specialization is necessary to make the good
ELASTICITY
2. Time horizon
a. Short-run
-supply for most goods are mostly price-inelastic
b. Long-run
- supply for most goods are mostly price-elastic

***Production techniques need some time before they can be changed.


ELASTICITY
– Calculation of Price Elasticity of Supply (ES)

ES = Qs2 – QS1 ÷ P2 – P1
(QS1 + QS2)/2 (P1 + P2)/2
ELASTICITY
Categories of Price Elasticity of Supply
1. Price Elastic Supply
- a 1% change in P results to more than 1% change in Qs

- when ES > 1
2. Price inelastic Supply

- a 1% change in P results to a less than 1% change in QS


- when ES < 1

3. Unit Price Elastic Supply


- a 1% change in P results to a 1% change in Qs

- when Es = 1
ELASTICITY
Price Elasticity of Demand & Demand Curves

 The higher the Price Elasticity of Demand, the flatter the demand curve.
 The lower the Price Elasticity of Demand the steeper the demand curve.
 The more elastic the demand for a good, the flatter the demand curve.
 The more inelastic the demand for a good, the steeper the demand curve.