SUBJECT: BASIC ● • As Adam Smith noted in 1776,

MICROECONOMICS the wealth of nations consists of

the goods and services they
LESSON 1: produce, or, on another level, the
resources—the land, labor,
What Economics Is All About
capital, and entrepreneurial ability
Economics: the study of how society —that actually produce these
goods and services.
manages its scarce resources, e.g. Most of us are used to economizing; we
save up our scarce pesos and deny
• how people decide what to buy, how ourselves various tempting treasures
much to work, save, and spend sowe will have enough money for that
one big-ticket item— a new car, a sound
• how firms decide how much to
system, a trip to Boracay. Since our
produce, how many workers to hire
money are scarce and we can’t buy
• how society decides how to divide its everything we want, we economize by
resources between national defense, making do with some lower-priced
consumer goods,
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protecting
environment, and other needs
the items—a Parisian instead of a Rusty
Lopez, chicken instead of steak, or an
education at a state university rather
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Scarcity: the limited nature of than at an UE.
society’s resources
If there were no scarcity, we would
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Economics is the efficient allocation of not need to economize.

the scarce means of production toward
the satisfaction of human wants.

The scarce means of production are our The Economic Problem

resources, which we use to produce all
● Human wants are relatively
the goods and services we buy.
limitless.
Scarcity and the Need to Economize ● Make a list of all the things you’d
like to have.Now add up their
If there were no scarcity, we would not entire cost.
need to economize. ● Chances are you couldn’t earn
enough in a lifetime to even begin
• Most people tend to see scarcity as not to pay for half the things on your
enough dollars, but as John Maynard list.
Keynes pointed out more than 70 years Our necessities are few but. Our
ago, this is an illusion. We could print all wants are endless.
the money we want and still have
scarcity. The Four Economic Resources
 ● • Land • The return paid to the owners of
● • Labor capital is interest.
● • Capital
● • Entrepreneurial Ability ENTREPRENEURIAL ABILITY
• Entrepreneurial ability is the least
LAND - familiar of our four basic resources.
• It includes natural resources (such as • The entrepreneur sets up a business,
timber, oil, coal, iron ore, soil, and water) assembles the needed resources, risks
as well as the ground in which these his or her own money, and reaps the
resources are found. profits or absorbs the losses of this
• Land is used not only for the extraction enterprise.
of minerals but for farming as well. • Often the entrepreneur is an innovator,
• And, of course, we build factories, such as Andrew Carnegie (U.S. Steel),
office buildings, shopping centers, and John D. Rockefeller (Standard Oil),
homes on land. Henry
• The basic payment made to the Ford (Ford Motor Company), Steven
owners of land is rent. Jobs (Apple Computer), Bill Gates
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LABOR - Labor is the work and time for
(Microsoft), and Sam Walton (Walmart).

which employees are paid. Our economic problem, then, is that

• The police officer, the computer
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we have limited resources available
programmer, the store manager, and to satisfy relatively unlimited wants.
the assembly-line worker all supply
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labor. • The reason why you, and everyone

• About two-thirds of the total resource else, can’t have three cars, a town
costs are paid to labor in the form of house and a country estate with
wages and salaries. servants, designer clothing, jewelry, big
screen TVs in each room, and a
CAPITAL - Capital is “man”-made goods $50,000 sound system is that we just
used to produce other goods or don’t have enough resources to produce
services. everything that everyone wants.
• It consists mainly of plant, equipment,
and software. The United States has Therefore, we have to make choices,
more capital than any other country in an option we call opportunity cost.
the world.
• This capital consists of factories, office
buildings, and stores. Our shopping TRADE-OFF- All decisions involve
malls, the Empire State Building, and tradeoffs.
automobile plants and steel mills (and
all the equipment in them) are
examples of capital.
 Examples: -Going to a party the night China also has a mixed economy; the
before your midterm leaves less time for public sector produces about one-third
studying. the goods and services.

-Having more money to buy stuff 4 Economic Question

requires working longer hours,
1. What shall we produce?
which leaves less time for leisure. 2. How Shall These Goods and
Services Be Produced?
-Protecting the environment requires 3. For Whom Shall the Goods and
resources that could otherwise be used Services Be Produced?
to produce consumer goods. 4. How much (how many) will be
produced?
OPPORTUNITY COST - The
opportunity cost of anychoice is the What shall we produce?
forgone value Of the next best
alternative. In the United States, most of the
production is geared toward consumer
• Helps us view the true cost of decision
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making
In the United States and Japan there is
• Implies valuing different choices no central planning authority, but rather
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a hodgepodge of corporate and
The thing we give up (that is, our
government officials, as well as
second choice) is called the
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individual consumers and taxpayers

opportunity cost of our choice.
How Shall These Goods and Services
Be Produced?
LESSON 2: The Mixed Economy
Everything is produced by private
MIXED ECONOMY In a mixed businesses. Not only are all the goods
economy, there is a private sector and a and services that consumers purchase
public sector. produced by businesses, but so are
most of what the government
In U.S., Close to 90 percent of our purchases.
goods and services originate in the
private sector, although the government How much (how many) will be
co-opts some of this product for its own produced?
use.
Economics may be divided into two
parts: production, which we dealt with in
the first two questions, and distribution.
In the first question, we asked what the
economic pie should be made of; in the • It is often said that everyone has a
second, we talked about how the pie price, which means that nearly all of us,
would be made. Now we are ready to for a certain sum of money, would do
divide up the pie. some nasty things.

• In a mixed economy, both the • Not only does everyone have a price,
government and the market have roles but everything has a price as well.
in answering:
• Just as prices send signals to
• (1) What shall we produce? consumers, they also signal producers
or sellers.
(2) How shall these goods and services
be produced? COMPETITION- •Competition makes
the price system work.
(3) How much or how many to produce?
(4) For whom shall these goods and • If large sectors of the Philippine
services be produced? industry are not very competitive, then
the price system doesn’t work all that
• In nearly all mixed economies the
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government plays a relatively minor role even more invisible.
in production but may play a relatively
strong role in distribution. Trust - • Under capitalism, we assume
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that individuals will do the right thing,
The Invisible Hand and because most people are quite
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trustworthy, the system works very

• Adam Smith coined this term in 1776,
efficiently.
he was thinking about an economic
guidance system that always made Economics is the efficient allocation
everything come out all right. of the scarce means of production
toward the satisfaction of human
• He believed that if people set out to
wants
promote the public interest, they will not
do nearly as much good as they would if The Circular-Flow Diagram: a visual
they pursued their own selfish interests. model of the economy, shows how
money flow through markets among
• Smith said that the entrepreneur is
households and firms
motivated by self-interest.
Two types of “actors”:
The invisible hand is really the profit
motive. ● • households
● • firms
The Price Mechanism
Two markets:
• the market for goods and services the market system or capitalism.The
system is characterized by the private
• the market for “factors of production” ownership of resources and the use of
markets and prices to coordinate and
Factors of production: the resources
direct economic activity. Participants act
the economy uses to produce goods &
in their own self-interest.
services, including
CAPITALISM- Capitalism is
● labor
characterized by private ownership
● land
● capital (buildings & machines of most of the means of
used in production) production—that is, land, labor, capital,
● Entrepreneurial ability and entrepreneurial ability.Individuals
are moved to produce by the profit
Households:
motive. Production is also guided by the
▪Own the factors of production,sell/rent price system.
them to firms for income
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▪Buy and consume goods & services kept to a minimum; basically, it
ensures that everyone sticks to the
Firms: rules.
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▪Buy/hire factors of production,use them COMMUNISM “The theory of the
to produce goods and services Communists may be summed up in the
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single sentence: Abolition of private

▪Sell goods & services property,” declared Karl Marx and

Economic System - A particular set of Friedrich Engels in The Communist

institutional arrangements and a Manifesto. Who would own everything?
coordinating mechanism—to respond tO The state. And eventually, the state
the econThe Command System The would wither away and we would be left
Market System with a workers’ paradise.

The command system is also known Instead of a guidance system of prices

as socialism of communism.In this to direct production, a government
system, the government owns most planning committee dictated exactly
property resources economic what was produced, how it was
decision-making occurs through a produced, how much and how many
central economic plan.omizing problem. and for whom the goods and services
were produced.
THE MARKET SYSTEM - the polar
alternative to the command system is
Communism doesn’t work because (3) a large-scale redistribution of income
people like to own stuff. —Frank from the wealthy and the well-to-do to
Zappa, Musician the middle class, working class, and the
poor.
Facism• In 1922 Benito Mussolini took
power in Italy, leading the world’s first The economies of such countries as
fascist government. “Fascism should Sweden, Canada, Great Britain, and,
recently, France and Greece have been
more appropriately be called described as socialist, not only by
corporatism because it is the merger of government officials in those countries
state and corporate power,” but by outside observers as well.
• Although Mussolini’s Italy followed this LESSON 3: SUPPLY AND DEMAND
model, it was Hitler’s Germany, a
decade later, that truly placed power in Markets - is a group of buyers and
the hands of an absolute dictator. sellers of a particular product.

• In Nazi Germany, the ownership of PRICE SYSTEM- Interaction of the

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resources was in private hands, while
the government dictated what was to be
forces of supply and demand in the
marketplace.
produced.
Demand -The schedule of quantities of
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• The problem with describing the fascist a good or service that people are willing
economic model is that there really is no and able to buy at different prices. The
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model. The means of production are left lower the price, the more people will
in private hands, with varying degrees of buy.
governmental interference. Generally,
those in power are highly nationalistic,
so a high proportion of output is directed
toward military goods and services.

SOCIALISM -In general, these

economies have

three characteristics:

(1) government ownership of some of

the means of production;

(2) a substantial degree of government

planning; and
 Equilibrium -It is where the supply and
SUPPLY - The schedule of quantities of
demand curves cross.
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a good or service that people are willing
and able to sell at different prices.
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At higher prices, the suppliers are willing
and able to sell larger and larger
quantities while the buyers are willing to
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buy smaller and smaller quantities. Vice

versa
Surplus - Occurs when the actual price, FORMULA : Surplus = Quantity
or the market price, is greater than the Supplied – Quantity Demanded
equilibrium price.
What happens when there’s a
❑You measure it by finding the surplus?
horizontal distance between Quantity
supplied and Quantity demand. ❑The forces of demand and supply
automatically work to eliminate it
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prices to the extent where there is no
unsold ticket
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Shortage - ❑Occurs when the market
price is below the equilibrium price
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❑You can also measure it by finding the

horizontal distance between Quantity
Demanded and Quantity Supplied.

FORMULA: Shortage =Quantity

Supplied – Quantity Demanded
 Price ceiling

❑Highest price allowed in the market

❑]Protects the consumers

Price ceilings are set by the government

as a form of price control. the
government tells business firms, “don’t
charge more than this amount.”
Forces of demand and supply work
together to establish an equilibrium • A ceiling prevents prices from rising.
price at which there are no shortages
and surpluses Shift of/increase or decrease in
demand
Price ceiling and Price floor
• An increase in demand leads to an
Price floor increase in both equilibrium price and
os quantity. Vice versa
❑Lowest price allowed to go in the
market • Non-price determined
❑Protects the sellers
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• the government has created this price
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floor to protect the sellers from selling

their products too low and encourage
them to continue their businesses.

• The government has created this price

floor and surplus to keep the price at a
predetermined level.
Shift of/increase or decrease in
supply

• An increase in supply lowers

equilibrium prices and raises equilibrium
quantity. Vice versa

LESSON 4: CHANGES IN SUPPLY

AND DEMAND
Demand is the schedule of quantities of
a good or service that people are willing
and able to buy at different prices.

LAW OF DEMAND

When the price of a good is lowered,

more of it is demanded; when it is
raised, less is demanded.

Inverse relationship

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WHAT IS THE MARKET?
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It is where people buy and sell
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CHANGES IN DEMAND - A change in,

or a departure from the current schedule

WHAT CAUSES CHANGES IN

DEMAND?

1. Changes in Income- when your

income goes up, you can afford
to buy more goods and services

a. Normal goods- varies directly with

income (I↑D ↑)

b. Inferior goods- varies inversely with

income (I↑D↓)

2. Changes in the Prices of Related

Goods and Services
a. Substitute goods- prices are directly
related (Px↑Py↑)

b. Complementary goods-prices are

inversely related (Px↓Py↑)

3. Changes in Taste and reference

Depends on what people like based on
consumer patterns, natural occurrences,
effect of advertisements

4, Changes in Price Expectations - If

prices increase, stock up before the
changeIf prices decrease, hold off
purchases

5. Changes in Population - As the

population increases, the demand for a

increase.
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particular good or service tends to
CHANGES IN SUPPLY - A change in,
or a departure from the current schedule
LAW OF SUPPLY - when the price of a
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WHAT CAUSES THE CHANGE IN
good is increased, more of it is SUPPLY?
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produced; when it is decreased, less is

1. Changes in the Cost of
supplied.
Production- if the cost of raw
Supply is a schedule of quantities of a materials, labor,capital,
good or service that people are willing insurance, or anything else goes
and able to sell at various prices. up, then, supply goes down
2. Technological Advancement- a
REASONS WHY QUANTITY technological improvement will
SUPPLIED : INCREASE AS PRICE increase productivity, thus an
INCREASE: increase in supply
3. . Change in the Number of
1. Many business owners quickly realize Suppliers- when more sellers
how much profit they could make by enter an industry, supply rises
increasing their output

2. New firms, attracted by higher prices

and large profits will enter the industry