MICROECONOMICS

Katrina Clare M. Labios

1
 Table of Contents

Module 1: Introduction to Economics 1

Introduction
Learning Objectives
Lesson 1. What Is Economics? 2
Lesson 2. Ten Principles of Economics 4
Lesson 3. Thinking Like an Economist 10
Lesson 4. The Problem of Scarcity 11
Lesson 5: Studying Choice in a World of Scarcity 12
Lesson 6: Economics: Micro and Macro 13
Assessment Task
Summary
References

Module 2: Microeconomics 17
Introduction
Learning Objectives
Lesson 1. The Themes of Microeconomics 18
Lesson 2. Why Study Microeconomics? 20
Lesson 3. Uses of Microeconomic Models in Your Life and Career 22
Assessment Task
Summary
References

Module 3: Demand and Supply 25

Introduction
Learning Objectives
Lesson 1. Demand 26
Lesson 2. Market Demand versus Individual Demand 27
Lesson 3. Supply 31
Lesson 4. Market Supply versus Individual Supply 32
Lesson 5. Supply and Demand Together 35
Assessment Task
Summary
References
Module 4: A Consumer’s Constrained Choice 40
Introduction
Learning Objectives
Lesson 1. Consumer Behavior 41
Lesson 2. Consumer Preferences 44
Lesson 3. Opportunity Cost 46
Assessment Task
Summary
References
2
Course Code : Econ 1

Course Description: This course deals with the basic principles of applied
economics, and its application to contemporary economic issues facing the
Filipino entrepreneur such as prices of commodities, minimum wage, rent,
and taxes. It covers an analysis of industries for identification of potential
business opportunities. The main output of the course is the preparation of
a socioeconomic impact study of a business venture.

Course Intended Learning Outcomes:

At the end of the course, the students should be able to:

1. Define the scope and principles of economics.
2. Analyze industries to find potential business prospects.
3. Recognize the choices made by individuals and businesses to make
better choices.

Course Requirements:
*Components of Class Standing are reflected in the OBTLP

▪ Assessment Tasks 60%

▪ Major Exams 40%
Periodic Grade 100%

PRELIM GRADE : 60% Assessment Task + 40% Prelim Exam

MIDTERM GRADE : 30% Prelim Grade + 70 % (60% Assessment
Task + 40% Midterm Exam)
FINAL GRADE : 30% Midterm Grade + 70 % (60% Assessment
Task + 40% Final exam)

3
 MODULE 1
INTRODUCTION TO ECONOMICS

Introduction

Every academic discipline has its own dialect and method of thinking. Axioms,
integrals, and vector spaces are topics discussed in mathematics. Psychologists discuss
cognitive dissonance and ego. Lawyers discuss torts, promissory estoppel, and venue. The
economics are the same. The language of the economist includes phrases like supply,
demand, elasticity, comparative advantage, consumer surplus, and deadweight loss. You’ll
come across a lot of unfamiliar terminology that economists employ in specific ways in the
upcoming sessions in addition to many new ones. This new tongue could at first seem overly
mysterious. But as you’ll discover, its real worth comes from its capacity to provide you a fresh
perspective on the world you live in. This course’s goal is to teach you the fundamentals of
economics.

Learning Outcomes

At the end of this module, students should be able to:

1. Analyze and determine what is economics;
2. Discuss the problem of scarcity;
3. Evaluate choice in a world of scarcity;
4. Compare and contrast microeconomics and macroeconomics
Lesson 1. What is Economics? (Mankiw, 2019)

Economics is the study of people going about their daily lives. Why should you start
studying economics as a student in the twenty-first century? There are three reasons.

The first reason of studying economics is that it will make it easier for you to
comprehend the environment in which you live. There are several issues surrounding the
economy that can spark your interest. Why is it so difficult to locate an apartment in New York
City? Why do airlines give discounts for round-trip tickets if the passenger stays an extra night
on a Saturday? Why does Robert Downey, Jr. receive so much pay to appear in films? Why
do certain nations experience high inflation rates while others experience stable prices? Why
is it easier to find a job some years and harder other years? These are just a handful of the
queries that an economics course might assist you in answering.

The ability to participate in the economy more intelligently is the second reason of
studying economics. You make a lot of financial decisions throughout your daily activities. You
get to choose how many years you want to spend in school while you're a student. You make
decisions about how much of your money to spend, how much to save, and how to invest
your savings as soon as you start a job. You may one day be in charge of a little or large
organization, and you will choose the pricing to charge for your goods. Your perspective on
how to make these decisions will change as a result of the revelations made in the ensuing
chapters. Even if studying economics won't make you rich on its own, it will provide you certain
tools that could be useful.

Studying economics will help you better comprehend the potential and constraints of
economic policy, which is the third reason to do so. Government officials at mayors' offices,
governors' mansions, and the White House are always thinking about economic issues. What
are the costs incurred by various taxes methods? What results from free trade with other
nations? Which environmental protection strategy works the best? What impact does a budget
deficit have on the economy? As a voter, you have a voice in the policies that determine how
society's resources are distributed. You can fulfill that responsibility better if you have a basic
understanding of economics. Who knows, maybe you'll become one of those policymakers
yourself eventually.
Thus, the principles of economics can be applied in many of life’s situations. Whether
the future finds you following the news, running a business, or sitting in the Oval Office, you
will be glad that you studied economics.

At first glance, it may seem strange that the word "economy" derives from the Greek
word "oikonomos," which meaning "one who administers a household." But in actuality,
economies and homes share a lot of similarities. A household must make numerous choices.
It must determine who in the household performs what duties and what is expected of each
member in return: Who makes dinner? One who does laundry at dinner, who gets the extra
dessert? Who has the car's wheel? In other words, a household must divide its limited
resources—such as time, dessert, and travel distance—among its numerous members, taking
into account their individual strengths, interests, and efforts.

Like a household, a society faces many decisions. It must find some way to decide
what jobs will be done and who will do them. It needs some people to grow food, other people
to make clothing, and still others to design computer software. Once society has allocated
people (as well as land, buildings, and machines) to various jobs, it must also allocate the

2
goods and services they produce. It must decide who will eat caviar and who will eat potatoes.
It must decide who will drive a Tesla and who will take the bus.

Economics is the study of how society manages its scarce resources. In most
societies, resources are allocated not by an all-powerful dictator but through the combined
choices of millions of households and firms. Economists, therefore, study how people make
decisions: how much they work, what they buy, how much they save, and how they invest
their savings. Economists also study how people interact with one another. For instance, they
examine how the multitude of buyers and sellers of a good together determine the price at
which the good is sold and the quantity that is sold. Finally, economists analyze the forces
and trends that affect the economy as a whole, including the growth in average income, the
fraction of the population that cannot find work, and the rate at which prices are rising.

3
Lesson 2. Ten Principles of Economics (Mankiw, 2019)

The study of economics contains numerous dimensions, yet they are all linked by a
few core ideas. We will look at the Ten Principles of Economics in this lesson to give you an
idea of what economics is all about.

Principle 1: People Face Trade-Offs

"There ain't no such thing as a free lunch," as the old saying goes. Aside from the
grammar, there is a lot of truth to this remark. To get what we want, we frequently have to give
up something else we want. Making decisions necessitates weighing one goal against
another.

Consider a student who must allocate her most valuable resource—time. She can
devote all of her time to economics, all of her time to psychology, or a combination of the two.
She gives up an hour of studying one subject for every hour she studies the other. And for
every hour she studies, she forfeits an hour she could have spent napping, biking, playing
video games, or working at her part-time job to supplement her income. People are more likely
to make smart selections if they comprehend their options. As a result, our study of economics
begins with acknowledging life's trade-offs.

Principle 2: The Cost of Something Is What You Give Up to Get It

Because people face trade-offs, making decisions requires comparing the costs and
benefits of alternative courses of action. In many cases, however, the cost of an action is not
as obvious as it might first appear.

Because people confront trade-offs, making decisions requires weighing the costs and
benefits of many options. However, in many circumstances, the cost of an action is not as
obvious as it first appears. Consider your decision to attend college. The main advantages
are intellectual stimulation and a lifetime of greater career options. But how much will it cost?
To answer this question, you might be tempted to tally up your tuition, books, lodging, and
board expenses. However, this amount does not accurately represent what you give up to
attend college for a year. There are two issues with this calculation. For starters, it includes
some expenses that are not directly related to attending college. Even if you drop out of
school, you will require a place to sleep and food to eat. Room and board are only college
expenses if they exceed the cost of living and eating at home or in your own apartment.
Second, this estimate ignores the most expensive aspect of attending college: your time.

You can't work a job and earn money if you spend a year listening to lectures, reading
textbooks, and writing papers. For most students, the earnings they sacrifice in order to attend
school are the most expensive part of their education. Decision makers should consider the
opportunity costs of each potential action while making any decision.

Principle 3: Rational People Think at the Margin

Economists typically believe that individuals are reasonable. Rational people work
methodically and purposefully to achieve their goals given the available opportunities. As you
study economics, you will come across companies that decide how many employees to hire
and how much product to produce and sell in order to maximize profits. You will also come

4
across people who decide how much time to spend working and what goods and services to
purchase with the resulting income in order to obtain the best level of enjoyment.

Some puzzling events can be explained by marginal decision making. Here is a

timeless question: Why does water cost so little when diamonds cost so much? Water is
essential for human survival, whereas diamonds are unnecessary. However, individuals will
spend considerably more money on a diamond than a cup of water. Because a person bases
their willingness to pay for a good on the marginal benefit that an additional unit of the good
would bring. In turn, the marginal benefit varies according to how many units a person already
owns. Water is necessary, but because there is so much of it available, the marginal
advantage of having a cup is minimal. Diamonds, on the other hand, are not necessary for
survival, but since they are so uncommon, having an extra diamond has a significant marginal
value.

A rational decision maker takes an action if and only if the action’s marginal benefit
exceeds its marginal cost. This principle explains why people use their movie streaming
services as much as they do, why airlines are willing to sell tickets below average cost, and
why people pay more for diamonds than for water. It can take some time to get used to the
logic of marginal thinking, but the study of economics will give you ample opportunity to
practice.

Principle 4: People Respond to Incentives

A person is motivated to behave because of an incentive, such as the possibility of

punishment or reward. People who are reasonable respond to incentives because they weigh
costs and benefits when making decisions. You'll find that the study of economics revolves
around incentives. One economist even suggested that the entire discipline could be summed
up as "People respond to incentives. What follows is commentary.

Incentives are key to analyzing how markets work. For example, when the price of
apples rises, people decide to eat fewer apples. At the same time, apple orchards decide to
hire more workers and harvest more apples. In other words, a higher price in a market
provides an incentive for buyers to consume less and an incentive for sellers to produce more.
As we will see, the influence of prices on the behavior of consumers and producers is crucial
to how a market economy allocates scarce resources.

Principle 5: Trade Can Make Everyone Better Off

Maybe the news has informed you that the Chinese are our rivals in the global
economy. This is accurate in some aspects because Chinese and American businesses both
manufacture similar products. In the marketplaces for apparel, toys, solar panels, car tires,
and a variety of other products, businesses in the United States and China compete for the
same clients. However, it is simple to be deceived while considering international
competitiveness. Trade between the US and China is not comparable to a sporting event
where one team wins and the other loses. Contrarily, trade between two nations has the
potential to benefit both.

To see why, consider how trade affects your family. When a member of your family
looks for a job, she competes against members of other families who are looking for jobs.
Families also compete against one another when they go shopping because each family
wants to buy the best goods at the lowest prices. In a sense, each family in an economy

5
competes with all other families. Despite this competition, your family would not be better off
isolating itself from all other families. If it did, your family would need to grow its own food, sew
its own clothes, and build its own home. Clearly, your family gains much from being able to
trade with others. Trade allows each person to specialize in the activities she does best,
whether it is farming, sewing, or home building. By trading with others, people can buy a
greater variety of goods and services at lower cost. Like families, countries also benefit from
being able to trade with one another. Trade allows countries to specialize in what they do best
and to enjoy a greater variety of goods and services. The Chinese, as well as the French,
Egyptians, and Brazilians, are as much our partners in the world economy as they are our
competitors.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

The collapse of communism in the Soviet Union and Eastern Europe in the late 1980s
and early 1990s was one of the last century’s most transformative events. Communist
countries operated on the premise that government officials were in the best position to
allocate the economy’s scarce resources. These central planners decided what goods and
services were produced, how much was produced, and who produced and consumed these
goods and services. The theory behind central planning was that only the government could
organize economic activity in a way that promoted well-being for the country as a whole. Most
countries that once had centrally planned economies have abandoned the system and instead
have adopted market economies. In a market economy, the decisions of a central planner are
replaced by the decisions of millions of firms and households. Firms decide whom to hire and
what to make. Households decide which firms to work for and what to buy with their incomes.
These firms and households interact in the marketplace, where prices and self-interest guide
their decisions.

At first glance, the success of market economies is puzzling. In a market economy, no

one is looking out for the well-being of society as a whole. Free markets contain many buyers
and sellers of numerous goods and services, and all of them are interested primarily in their
own well-being. Yet despite decentralized decision making and self-interested decision
makers, market economies have proven remarkably successful in organizing economic
activity to promote overall prosperity. In his 1776 book An Inquiry into the Nature and Causes
of the Wealth of Nations, economist Adam Smith made the most famous observation in all of
economics: Households and firms interacting in markets act as if they are guided by an
“invisible hand” that leads them to desirable market outcomes.
Principle 7: Governments Can Sometimes Improve Market Outcomes

If the invisible hand of the market is so great, why do we need government? One
purpose of studying economics is to refine your view about the proper role and scope of
government policy.

One reason we need government is that the invisible hand can work its magic only if
the government enforces the rules and maintains the institutions that are key to a market
economy. Most important, market economies need institutions to enforce property rights so
individuals can own and control scarce resources. A farmer won’t grow food if she expects
her crop to be stolen; a restaurant won’t serve meals unless it is assured that customers will
pay before they leave; and a film company won’t produce movies if too many potential
customers avoid paying by making illegal copies. We all rely on government-provided police
and courts to enforce our rights over the things we produce—and the invisible hand counts
on our ability to enforce those rights.

6
 Another reason we need government is that, although the invisible hand is powerful, it
is not omnipotent. There are two broad rationales for a government to intervene in the
economy and change the allocation of resources that people would choose on their own: to
promote efficiency or to promote equality. That is, most policies aim either to enlarge the
economic pie or to change how the pie is divided.

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and
Services

As we know, there are different standards of living in different countries, and this is
directly correlated to the country’s productivity. Not only that, but the changes over time of
standards of living can also be quite significant. For example, even in high-income countries,
the Western world has made leaps and bounds in what we consider to be the standard of
living. When compared to lower-income countries, the growth of the standard of living is
slower. This growth can be traced back to the goods and services produced in each country.
In places where workers are able to produce more goods, the standard of living is higher, and
vice versa. To increase the living standard, there need to be public policies that affect it without
negatively impacting productivity by way of increasing education and providing better access
to tools and technology.
The relationship between productivity and living standards also has profound
implications for public policy. When thinking about how any policy will affect living standards,
the key question is how it will affect our ability to produce goods and services. To boost living
standards, policymakers need to raise productivity by ensuring that workers are well educated,
have the tools they need to produce goods and services, and have access to the best
available technology.

Principle 9: Prices Rise When the Government Prints Too Much Money

In January 1921, a daily newspaper in Germany cost 0.30 marks. Less than 2 years
later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the
economy rose by similar amounts. This episode is one of history’s most spectacular examples
of inflation, an increase in the overall level of prices in the economy.

Although the United States has never experienced inflation even close to that of
Germany in the 1920s, inflation has at times been a problem. During the 1970s, the overall
level of prices more than doubled, and President Gerald Ford called inflation “public enemy
number one.” By contrast, inflation in the two decades of the 21st century has run about 2
percent per year; at this rate, it takes 35 years for prices to double. Because high inflation
imposes various costs on society, keeping inflation at a reasonable rate is a goal of economic
policymakers around the world.

What causes inflation? In almost all cases of large or persistent inflation, the culprit is
growth in the quantity of money. When a government creates large quantities of the nation’s
money, the value of the money falls. In Germany in the early 1920s, when prices were on
average tripling every month, the quantity of money was also tripling every month. Although
less dramatic, the economic history of the United States points to a similar conclusion: The
high inflation of the 1970s was associated with rapid growth in the quantity of money, and the
return of low inflation in the 1980s was associated with slower growth in the quantity of money.

Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment

7
 While an increase in the quantity of money primarily raises prices in the long run, the
short-run story is more complex. Most economists describe the short-run effects of money
growth as follows:

● Increasing the amount of money in the economy stimulates the overall level of
spending and thus the demand for goods and services.
● Higher demand may over time cause firms to raise their prices, but in the meantime, it
also encourages them to hire more workers and produce a larger quantity of goods
and services.
● More hiring means lower unemployment.

This line of reasoning leads to one final economy-wide trade-off: a short-run tradeoff
between inflation and unemployment. Although some economists still question these ideas,
most accept that society faces a short-run trade-off between inflation and unemployment. This
simply means that, over a period of a year or two, many economic policies push inflation and
unemployment in opposite directions.

Lesson 3. Thinking Like an Economist (Frank et al., 2022)

How many students are in your introductory economics class? Some classes have just
20 or so. Others average 35, 100, or 200 students. At some schools, introductory economics
classes may have as many as 2,000 students. What size is best?

If cost were no object, the best size might be a single student. Think about it: the whole
course, all term long, with just you and your professor! Everything could be custom-tailored to
your own background and ability. You could cover the material at just the right pace. The
tutorial format also would promote close communication and personal trust between you and
your professor. And your grade would depend more heavily on what you actually learned than
on your luck when taking multiple-choice exams. Let’s suppose, for the sake of discussion,
that students have been shown to learn best in the tutorial format.

Why, then, do so many introductory classes still have hundreds of students? The
simple reason is that costs do matter. They matter not just to the university administrators who
must build classrooms and pay faculty salaries, but also to you. The direct cost of providing
you with your own personal introductory economics course might easily top $50,000.
Someone has to pay these costs. In private universities, a large share of the cost would be
recovered directly from higher tuition payments. In state universities, the burden would be split
between higher tuition payments and higher tax payments. But, in either case, the course
would be unaffordable for most students.

With larger classes, of course, the cost per student goes down. For example, an
introductory economics course with 300 students might cost as little as $200 per student. But
a class that large could easily compromise the quality of the learning environment. Compared
to the custom tutorial format, however, it would be dramatically more affordable.

In choosing what size introductory economics course to offer, then, university

administrators confront a classic economic trade-off. In making the class larger, they risk

8
lowering the quality of instruction—a bad thing. At the same time, they reduce costs and hence
the tuition students must pay—a good thing.

Lesson 4. The Problem of Scarcity (Ragan, 2020)

One of the fundamental ideas in economics is scarcity. It indicates that there is a gap
between the supply and demand for an item or service. As a result, scarcity may restrict the
options available to consumers, who in the end drive the economy. Understanding scarcity
will help you better grasp how commodities and services are valued. Gold, diamonds, and
specific types of knowledge are examples of scarce things that are more valuable due of their
scarcity because sellers can charge more for them. These vendors are aware that they can
find customers at a higher price since there is a greater demand for their product or service
than there is supply.

Due of scarcity, decisions must be made. Because of scarcity, people, organizations,

and governments must deal with the issue of having endless needs but few resources. There
is a problem of scarcity in every economic system, from capitalism to socialism, when the
demand is greater than the supply.

Because resources are scarce, all societies face the problem of deciding what to
produce and how much each person will consume. Societies differ in who makes the choices
and how they are made, but the need to choose is common to all. Just as scarcity implies the
need for choice, so choice implies the existence of cost. A decision to have more of one thing
is necessarily a decision to have less of some other thing. The cost of the more of one thing
is the amount of the other thing we must give up in order to get it.

Individuals, businesses and governments are all affected by the problem of scarcity.
A college student with a few hundred ringgits to spend can either opt to spend that money on
a variety of items, from a stereo system to a computer; or not spend the money at all. Whatever
choice is made, there will be advantages and disadvantages associated with it.

Lesson 5. Studying Choice in a World of Scarcity (Frank et al., 2022)

If each of us could get all the food, clothing, and toys we want without working, no one
would study economics. Unfortunately, most of the good things in life are scarce—we can’t all
have as much as we want. Thus, scarcity is the mother of economics.

Even in rich societies, scarcity is a fundamental fact of life. There is never enough
time, money, or energy to do everything we want to do or have everything we’d like to have.
Economics is the study of how people make choices under conditions of scarcity and of the
results of those choices for society. In the class-size example just discussed, a motivated
economics student might definitely prefer to be in a class of 20 rather than a class of 100,
everything else being equal. But other things, of course, are not equal.

Students can enjoy the benefits of having smaller classes, but only at the price of
having less money for other activities. The student’s choice unavoidably will come down to
the relative importance of competing activities.

9
 That such trade-offs are widespread and important is one of the core principles of
economics. Although we have boundless needs and wants, the resources available to us are
limited. So having more of one good thing usually means having less of another. Inherent in
the idea of a trade-off is the fact that choice involves compromise between competing
interests. Economists resolve such trade-offs by using cost-benefit analysis, which is based
on the disarmingly simple principle that an action should be taken if, and only if, its benefits
exceed its costs. We call this statement the Cost-Benefit Principle, a core principle of
economics.

With this principle in mind, let’s think about our class-size question again. Imagine that
classrooms come in only two sizes—100-seat lecture halls and 20-seat classrooms—and that
your university currently offers introductory economics courses to classes of 100 students.
Question: Should administrators reduce the class size to 20 students? Answer: Reduce if, and
only if, the value of the improvement in instruction outweighs its additional cost.

This rule sounds simple. But to apply it we need some way to measure the relevant
costs and benefits, a task that’s often difficult in practice. If we make a few simplifying
assumptions, however, we can see how the analysis might work. On the cost side, the primary
expense of reducing class size from 100 to 20 is that we’ll now need five professors instead
of just one. We’ll also need five smaller classrooms rather than a single big one, and this too
may add slightly to the expense of the move.

In studying choice under scarcity, we’ll usually begin with the premise that people are
rational, which means they have well-defined goals and try to fulfill them as best they can.

Lesson 6. Economics: Micro and Macro (Frank et al., 2022)

Many subjects are studied on various levels. Consider biology, for example. Molecular
biologists study the chemical compounds that make up living things. Cellular biologists study
cells, which are made up of many chemical compounds and, at the same time, are themselves
the building blocks of living organisms. Evolutionary biologists study the many varieties of
animals and plants and how species gradually change over the centuries.

Economics is also studied on various levels. We can study the decisions of individual
households and firms. We can study the interaction of households and firms in markets for
specific goods and services. Or we can study the operation of the economy as a whole, which
is the sum of the activities of all these decision makers in all these markets.

The field of economics is traditionally divided into two broad subfields. By convention,
we use the term microeconomics to describe the study of individual choices and of group
behavior in individual markets. Macroeconomics, by contrast, is the study of the performance
of national economies and of the policies that governments use to try to improve that
performance. Macroeconomics tries to understand the determinants of such things as the
national unemployment rate, the overall price level, and the total value of national output.

Our focus in this lesson is on issues that confront the individual decision maker,
whether that individual confronts a personal decision, a family decision, a business decision,
a government policy decision, or indeed any other type of decision. Further on, we’ll consider
economic models of groups of individuals such as all buyers or all sellers in a specific market.

10
 No matter which of these levels is the focus, however, our thinking will be shaped by
the fact that, although economic needs and wants are effectively unlimited, the material and
human resources that can be used to satisfy them are finite. Clear thinking about economic
problems must therefore always take into account the idea of trade-offs—the idea that having
more of one good thing usually means having less of another. Our economy and our society
are shaped to a substantial degree by the choices people have made when faced with trade-
offs.

Microeconomics and macroeconomics are closely intertwined. Because changes in

the overall economy arise from the decisions of millions of individuals, it is impossible to
understand macroeconomic developments without considering the underlying microeconomic
decisions. For example, a macroeconomist might study the effect of an income tax cut on the
overall production of goods and services. But to analyze this issue, he must consider how the
tax cut affects households’ decisions about how much to spend on goods and services.
Microeconomics deals with the behavior of individual economic units—consumers, firms,
workers, and investors—as well as the markets that these units comprise. While
macroeconomics deals with aggregate economic variables, such as the level and growth rate
of national output, interest rates, unemployment, and inflation.

Despite the inherent link between microeconomics and macroeconomics, the two
fields are distinct. Because they address different questions, each field has its own set of
models, which are often taught in separate courses.

Assessment Task 1

Answer the following questions below.

In a few simple sentences, define Economics.
Why is scarcity the main problem of economics? What are
the problem of scarcity that the Philippines face?
How does scarcity influence your decision making and
choice in life? Give example.
What is the relationship between microeconomics and
macroeconomics? Give their similarities and differences.

Summary
Economics is the study of how people make choices under conditions of scarcity and
of the results of those choices for society. Economic analysis of human behavior begins with
the assumption that people are rational—that they have well-defined goals and try to achieve
them as best they can. In trying to achieve their goals, people normally face trade-offs:
Because material and human resources are limited, having more of one good thing means
making do with less of some other good thing. Our basic tool for analyzing these decisions is
cost-benefit analysis. The Cost-Benefit Principle says that a person should take an action if,

11
and only if, the benefit of that action is at least as great as its cost. The benefit of an action is
defined as the largest amount the person would be willing to pay in order to take the action.
The cost of an action is defined as the value of everything the person must give up in order to
take the action.

References
Mankiw, G. N. (2021). Principles of Microeconomics 9th Ed. Cengage
Ragan, C. T. (2020). Microeconomics 16th Ed. Pearson Canada Inc.
Frank, R., Bernanke, B., Antonovics, K. Heffetz, O. (2022). Principles of Microeconomics 4th
Ed. McGraw Hill LLC

12
 MODULE 2
MICROECONOMICS

Introduction

Why are seniors receiving discounts on public transportation systems? Why do flight
tickets cost so much during the holiday season? Such questions are considered to be
microeconomic, as they are focused on markets or individuals in an economy. Individuals and
firms allocate their limited resources to make themselves as well off as possible. Consumers
select the mix of goods and services that makes them as happy as possible given their limited
wealth. Firms decide which goods to produce, where to produce them, how much to produce
to maximize their profits, and how to produce those levels of output at the lowest cost by using
more or less of various inputs such as labor, capital, materials, and energy. The owners of a
valuable natural resource such as oil decide when to use it. Government decision makers
decide which goods and services the government will produce and whether to subsidize, tax,
or regulate industries and consumers to benefit consumers, firms, or government employees.
Microeconomics also analyzes market failures where productive results are not achieved.

Learning Outcomes

At the end of this module, students should be able to:

1. Analyze the themes of microeconomics;
2. Discuss the importance of studying microeconomics;
3. Distinguish the uses of microeconomics in life and career

Lesson 1. The Themes of Microeconomics

(Pindyck and Rubinfeld, 2018)

The Rolling Stones once said: “You can’t always get what you want.” This is true. For
most people (even Mick Jagger), that there are limits to what you can have or do is a simple
fact of life learned in early childhood. For economists, however, it can be an obsession.

Much of microeconomics is about limits—the limited incomes that consumers can

spend on goods and services, the limited budgets and technical knowhow that firms can use
to produce things, and the limited number of hours in a week that workers can allocate to labor
or leisure. But microeconomics is also about ways to make the most of these limits. More
precisely, it is about the allocation of scarce resources.
 The prefix micro is derived from the Greek word “mikros,” which means “small.”
Microeconomics therefore studies the economic behavior of individual economic decision
makers, such as a consumer, a worker, a firm, or a manager. It also analyzes the behavior of
individual households, industries, markets, labor unions, or trade associations.

For example, microeconomics explains how consumers can best allocate their limited
incomes to the various goods and services available for purchase. It explains how workers
can best allocate their time to labor instead of leisure, or to one job instead of another. And it
explains how firms can best allocate limited financial resources to hiring additional workers
versus buying new machinery, and to producing one set of products versus another. In a
planned economy such as that of Cuba, North Korea, or the former Soviet Union, these
allocation decisions are made mostly by the government. Firms are told what and how much
to produce, and how to produce it; workers have little flexibility in choice of jobs, hours worked,
or even where they live; and consumers typically have a very limited set of goods to choose
from. As a result, many of the tools and concepts of microeconomics are of limited relevance
in those countries.

Trade off. In modern market economies, consumers, workers, and firms have much more
flexibility and choice when it comes to allocating scarce resources. Microeconomics describes
the trade-offs that consumers, workers, and firms face, and shows how these trade-offs are
best made. The idea of making optimal trade-offs is an important theme in microeconomics.

Consumers. Consumers have limited incomes, which can be spent on a wide variety of goods
and services, or saved for the future. Consumer theory describes how consumers, based on
their preferences, maximize their well-being by trading off the purchase of more of some
goods for the purchase of less of others. We will also see how consumers decide how much
of their incomes to save, thereby trading off current consumption for future consumption.

Workers. Workers also face constraints and make trade-offs. First, people must decide
whether and when to enter the workforce. Because the kinds of jobs—and corresponding pay
scales—available to a worker depend in part on educational attainment and accumulated
skills, one must trade off working now (and earning an immediate income) for continued
education (and the hope of earning a higher future income). Second, workers face trade-offs
in their choice of employment. For example, while some people choose to work for large
corporations that offer job security but limited potential for advancement, others prefer to work
for small companies where there is more opportunity for advancement but less security.
Finally, workers must sometimes decide how many hours per week they wish to work, thereby
trading off labor for leisure.

Firms. Firms also face limits in terms of the kinds of products that they can produce, and the
resources available to produce them. General Motors, for example, is very good at producing
cars and trucks, but it does not have the ability to produce airplanes, computers, or
pharmaceuticals. It is also constrained in terms of financial resources and the current
production capacity of its factories. Given these constraints, GM must decide how many of
each type of vehicle to produce. If it wants to produce a larger total number of cars and trucks
next year or the year after, it must decide whether to hire more workers, build new
factories, or do both. The theory of the firm describes how these trade-offs can best be made.

Market. Business people, journalists, politicians, and ordinary consumers talk about markets
all the time—for example, oil markets, housing markets, bond markets, labor markets, and

14
markets for all kinds of goods and services. But often what they mean by the word “market” is
vague or misleading. In economics, markets are a central focus of analysis, so economists try
to be as clear as possible about what they mean when they refer to a market. It is easiest to
understand what a market is and how it works by dividing
individual economic units into two broad groups according to function—buyers and sellers.
Buyers include consumers, who purchase goods and services, and firms, which buy labor,
capital, and raw materials that they use to produce goods and services. Sellers include firms,
which sell their goods and services; workers, who sell their labor services; and resource
owners, who rent land or sell mineral resources to firms. Clearly, most people and most firms
act as both buyers and sellers, but we will find it helpful to think of them as simply buyers
when they are buying something and sellers when they are selling something. Together,
buyers and sellers interact to form markets. A market is the collection of buyers and sellers
that, through their actual or potential interactions, determine the price of a product or set of
products. In the market for personal computers, for example, the buyers are business firms,
households, and students; the sellers are Hewlett-Packard, Lenovo, Dell, Apple, and a
number of other firms. Note that a market includes more than an industry. An industry is a
collection of firms that sell the same or closely related products. In effect, an industry is the
supply side of the market.

Lesson 2. Why Study Microeconomics? (Besanko & Braeutigam, 2020)

Economics is the science that deals with the allocation of limited resources to satisfy
unlimited human wants. Think of human wants as being all the goods and services that
individuals desire, including food, clothing, shelter, and anything else that enhances the
quality of life. Since we can always think of ways to improve our wellbeing with more or better
goods and services, our wants are unlimited. However, to produce goods and services, we
need resources, including labor, managerial talent, capital, and raw materials. Resources are
said to be scarce because their supply is limited. The scarcity of resources means that we are
constrained in the choices we can make about the goods and services we produce, and thus
also about which human wants we will ultimately satisfy. That is why economics is often
described as the science of constrained choice.

Constrained choice is important in both macroeconomics and microeconomics. In a

microeconomic setting, a consumer might decide to allocate more time to work, but would
then have less time available for leisure activities. The consumer could spend more income
on consumption today, but would then save less for tomorrow. A manager might decide to
spend more of a firm’s resources on advertising, but this might leave less available for
research and development. Regardless of its market system, every society must answer these
questions:

▪ What goods and services will be produced, and in what quantities?

▪ Who will produce the goods and services, and how?
▪ Who will receive the goods and services?

Microeconomic analysis attempts to answer these questions by studying the behavior

of individual economic units. By answering questions about how consumers and producers
behave, microeconomics helps us understand the pieces that collectively make up a model of
an entire economy. Microeconomic analysis also provides the foundation for examining the
role of the government in the economy and the effects of government actions. Microeconomic

15
tools are commonly used to address some of the most important issues in contemporary
society. These include (but are not limited to) pollution, rent controls, minimum wage laws,
import tariffs and quotas, taxes and subsidies, food stamps, government housing and
educational assistance programs, government health care programs, workplace safety, and
the regulation of private firms.

Basic Concepts of Microeconomics

The study of microeconomics involves several key concepts, including (but not limited to):

● Incentives and behaviors: How individuals or groups of people respond to events that
they are faced with
● Utility theory: Depending on how much money they have available to spend,
consumers will decide which combination of commodities to buy and use in order to
maximize their enjoyment or "utility."
● Production theory: This is a study of production, or the method by which inputs are
changed into outputs. In order to maximize their earnings, producers aim to select
input combinations and methods of combination that will result in the lowest cost.
● Price theory: The theory of supply and demand, which determines prices in a
competitive market, is created as a result of the interaction between utility and
production theory. It comes to the conclusion that in a market with perfect competition,
consumers and producers are both charging the same price. Equilibrium in the
economy is the result.
Lesson 3. Uses of Microeconomic Models in Life and Career
(Perloff, 2020)

Have you ever imagined a world without hypothetical situations?

Microeconomic models can be very helpful for individuals, governments, and

businesses in making decisions since they explain why economic decisions are made and
allow us to make predictions. We look at examples of how microeconomics helps with practical
decision-making throughout this module. Here, we take a quick look at a few applications by
citizens and organizations.

Microeconomics is used by people to decide what to buy and other things. Examples
include figuring out whether to buy insurance, decide whether to invest in stocks or bonds,
take into account inflation when deciding whether to rent an apartment, and decide whether
to pay a lawyer by the hour or a portion of any settlement.

Citizens can base their voting choices on candidates' stances on economic concerns
with the aid of microeconomics. Government officials, both elected and appointed, frequently
apply economic models. Economic analysis has received more attention in recent
administrations. Before many projects can start, economic and environmental impact studies
must be completed. The President's Council of Economic Advisers and other federal
economists conduct analyses of all key initiatives' potential economic implications and provide
advice to national government agencies. In fact, governments frequently employ
microeconomic models to forecast the likely effects of a policy. It demonstrates how to forecast
the potential consequences of a tax-on-tax receipts, the market impacts of trade policies like
tariffs and quotas, and the implications on cooperation of governments publishing bidding

16
results. In order to determine the best ways to stop pollution and global warming, governments
also employ economics. Firm decisions are a result of microeconomic analysis. To boost their
revenues, businesses use price discrimination or bundle products. Game theory can be used
to forecast strategic decisions regarding price, quantity planning, advertising, and market
entry.

Thus, microeconomics is thus the study of how people and organizations decide how
to make the greatest use of few resources. Its concepts can be employed to make decisions
in daily life. After all, the majority of individuals only have a finite amount of time and money.

Assessment Task 2

Answer the following questions below.

As a student, why do you think it is important to study the
themes of economics and what are its benefits?
Describe in detail an example of how economics affect our
everyday life.
What significance do you expect microeconomics will have
in your future career?

Summary
Microeconomics refers to the branch of economics that studies the economy on an
individual and business level as opposed to macroeconomics which looks at the economy as
a whole. Microeconomics consists of concepts like consumer theory and utility - how
consumers make decisions to maximize happiness, producer theory - how businesses make
decisions to maximize profit, and market structures - how economic efficiency is affected. In
short, microeconomics looks at how resources are produced and consumed by individuals
and businesses. Microeconomics is important for all of us to understand the practical workings
of the economy. From consumers to business firms and governments, the principles of
microeconomics are utilized at every level. It gives insight on the conditions of economic
welfare where you will understand a variety of key concepts such as consumer choice and
behavior, goods and services, labor markets, and most importantly the standard of living and
condition of welfare of those people and what factors determine that welfare. Learning
microeconomics is a great way to gain an understanding of many factors that affect us in the
real-world such as income inequality, product pricing, and much more. Ultimately, learning
microeconomics is key in learning about the principles of economics- how economies function
and why they are the way they are.

17
 References
Besanko and Braeutigam (2020). Microeconomics 6th Ed. Wiley
Perloff, J. (2020). Microeconomics Theory and Applications 5th Edition Pearson Ed
Pindyck and Rubinfeld (2018). Microeconomics Global Edition Pearson Education Limited

18
 MODULE 3
DEMAND AND SUPPLY

Introduction

The cost of orange juice increases in supermarkets around the nation when a cold
front approaches Florida. Every summer, when it becomes hot in New England, hotel rates in
the Caribbean fall sharply. The cost of gasoline increases in the US when a war breaks out in
the Middle East, whereas the cost of a used Cadillac decreases. What ties these occurrences
together? They all demonstrate how supply and demand operate. The two terms supply and
demand are those that economists use the most, and for good reason. The forces of supply
and demand are what drive market economies. Each good's production volume and selling
price are decided by them. Any event or policy's potential impact on supply and demand must
be considered in order to determine how it will affect the economy. Supply and demand are
introduced in this module. It takes into account the actions and interactions of both buyers and
sellers. It demonstrates how a market economy allocates the limited resources through prices,
which are determined by supply and demand.

Learning Outcomes

At the end of this module, students should be able to:

1. Analyze the meaning of demand and supply;
2. Interpret the concept of the law of demand and law of supply;
3. Recognize the factors that affect demand and supply;
4. Identify the connection of demand and supply;
Lesson 1. Demand (Mankiw, 2021)

Demand in economics refers to a consumer's readiness to pay a particular price for

goods and services as well as their desire to buy them. Demand for a good or service typically
declines when its price goes up. The amount needed will rise when a product's price drops,
in a similar manner.

The Demand Curve: The Relationship between Price and Quantity Demanded

The quantity demanded of any good is the amount of the good that buyers are willing
and able to purchase. As we will see, many things determine the quantity demanded of a
good, but in analysis of how markets work, one determinant plays a central role: the good’s
price. If the price of ice cream rose to $20 per scoop, you would buy less ice cream. You might
buy frozen yogurt instead. If the price of ice cream fell to $0.50 per scoop, you would buy
more. This relationship between price and quantity demanded is true for most goods in the
economy and, in fact, is so pervasive that economists call it the law of demand: Other things
being equal, when the price of a good rises, the quantity demanded of the good falls, and
when the price falls, the quantity demanded rises.

The demand schedule is a table that shows the quantity demanded at each price. The demand
curve, which graphs the demand schedule, illustrates how the quantity demanded of the good
changes as its price varies. Because a lower price increases the quantity demanded, the
demand curve slopes downward.

Figure 1. Demand
Schedule and Demand Curve
(Mankiw, 2021)
The table in Figure 1 shows how many ice-creams cones Catherine would buy each
month at different prices. If ice-cream cones are free, Catherine buys 12 cones per month. At
$1 per cone, Catherine buys 10 cones each month. As the price rises further, she buys fewer
and fewer cones. When the price reaches $6, Catherine doesn’t buy any cones at all. This
table is a demand schedule, a table that shows the relationship between the price of a good
and the quantity demanded, holding constant everything else that influences how much of the
good consumers want to buy.

26
 The graph in Figure 1 uses the numbers from the table to illustrate the law of demand.
By convention, the price of ice cream is on the vertical axis, and the quantity of ice cream
demanded is on the horizontal axis. The line relating price and quantity demanded is called
the demand curve. The demand curve slopes downward because, other things being equal,
a lower price means a greater quantity demanded.

Lesson 2. Market Demand versus Individual Demand (Mankiw,

2021)

The demand curve in Figure 1 shows an individual’s demand for a product. To analyze
how markets work, we need to determine the market demand, the sum of all the individual
demands for a particular good or service.

The table in Figure 2 shows the demand schedules for ice cream of the two individuals
in this market—Catherine and Nicholas. At any price, Catherine’s demand schedule tells us
how many cones she buys, and Nicholas’s demand schedule tells us how many cones he
buys. The market demand at each price is the sum of the two individual demands.

The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally the
individual demand curves. At a price of $4, Catherine demands 4 ice-cream cones and
Nicholas demands 3 ice-cream cones. The quantity demanded in the market at this price is 7
cones.

The graph in Figure 2 shows the demand curves that correspond to these demand
schedules. Notice that we sum the individual demand curves horizontally to obtain the market
demand curve. That is, to find the total quantity demanded at any price, we add the individual
quantities demanded, which are found on the horizontal axis of the individual demand curves.
Because we are interested in analyzing how markets function, we work most often with the
market demand curve. The market demand curve shows how the total quantity demanded of
a good varies as the price of the good varies, while all other factors that affect how much
consumers want to buy are held constant.

27
 Figure 2. Market Demand as the Sum of Individual Demands
(Mankiw, 2021)

Shifts in the Demand Curve

Because the market demand curve holds other things constant, it need not be stable
over time. If something happens to alter the quantity demanded at any given price, the
demand curve shifts. For example, suppose the American Medical Association discovers that
people who regularly eat ice cream live longer, healthier lives. The discovery would raise the
demand for ice cream. At any given price, buyers would now want to purchase a larger
quantity of ice cream, and the demand curve for ice cream would shift.

Any change that raises the quantity that buyers wish to purchase at any given price
shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to
purchase at any given price shifts the demand curve to the left.

28
 Figure 3. Shifts in
the Demand Curve
(Mankiw, 2021)

Figure 3 illustrates shifts in demand. Any change that increases the quantity
demanded at every price, such as our imaginary discovery by the American Medical
Association, shifts the demand curve to the right and is called an increase in demand. Any
change that reduces the quantity demanded at every price shifts the demand curve to the left
and is called a decrease in demand.

Changes in many variables can shift the demand curve. Let’s consider the most important.

Income. What would happen to your demand for ice cream if you lost your job one summer?
Most likely, your demand would fall. A lower income means that you have less to spend in
total, so you would have to spend less on some—and probably most—goods. If the demand
for a good fall when income falls, the good is called a normal good. Normal goods are the
norm, but not all goods are normal goods. If the demand for a good rise when income falls,
the good is called an inferior good. An example of an inferior good might be bus rides. As your
income falls, you are less likely to buy a car or take a cab and more likely to ride a bus.

Prices of Related Goods. Suppose that the price of frozen yogurt falls. The law of demand
says that you will buy more frozen yogurt. At the same time, you will probably buy less ice
cream. Because ice cream and frozen yogurt are both cold, sweet, creamy desserts, they
satisfy similar desires. When a fall in the price of one good reduces the demand for another
good, the two goods are called substitutes. Substitutes are often pairs of goods that are used
in place of each other, such as hot dogs and hamburgers, sweaters and sweatshirts, and
movie tickets and film streaming services. Now suppose that the price of hot fudge falls.
According to the law of demand, you will buy more hot fudge. Yet in this case, you will likely
buy more ice cream as well because ice cream and hot fudge are often consumed together.
When a fall in the price of one good raise the demand for another good, the two goods are
called complements. Complements are often pairs of goods that are used together, such as
gasoline and automobiles, computers and software, and peanut butter and jelly.

29
Tastes. Perhaps the most obvious determinant of your demand for any good or service is your
tastes. If you like ice cream, you buy more of it. Economists normally do not try to explain
people’s tastes because tastes are based on historical and psychological forces that are
beyond the realm of economics. Economists do, however, examine what happens when
tastes change.

Expectations. Your expectations about the future may affect your demand for a good or
service today. If you expect to earn a higher income next month, you may choose to save less
now and spend more of your current income on ice cream. If you expect the price of ice cream
to fall tomorrow, you may be less willing to buy an ice-cream cone at today’s price.
Number of Buyers. In addition to the preceding factors, which influence the behavior of
individual buyers, market demand depends on the number of these buyers. If Peter were to
join Catherine and Nicholas as another consumer of ice cream, the quantity demanded in the
market would be higher at every price, and market demand would increase.
The demand curve shows what happens to the quantity demanded of a good as its
price varies, holding constant all the other variables that influence buyers. When one of these
other variables changes, the quantity demanded at each price changes, and the demand
curve shifts. A curve shifts when there is a change in a relevant variable that is not measured
on either axis. Because the price is on the vertical axis, a change in price represents a
movement along the demand curve. By contrast, income, the prices of related goods, tastes,
expectations, and the number of buyers is not measured on either axis, so a change in one
of these variables shifts the demand curve.

Lesson 3. Supply (Mankiw, 2021)

Supply can refer to anything in demand that is sold in a competitive marketplace,

supply is most used to refer to goods, services, or labor. One of the most important factors
that affects supply is the good’s price. Generally, if a good’s price increases so will the supply.
The price of related goods and the price of inputs like energy, raw materials, labor also affect
supply as they contribute to increasing the overall price of the good sold.

The Supply Curve: The Relationship between Price and Quantity Supplied

The quantity supplied of any good or service is the amount that sellers are willing and
able to sell. There are many determinants of quantity supplied, but once again, price plays a
special role in our analysis. When the price of ice cream is high, selling ice cream is quite
profitable, and so the quantity supplied is large. Sellers of ice cream work long hours, buy
many ice-cream machines, and hire many workers. By contrast, when the price of ice cream

30
is low, the business is less profitable, so sellers produce less ice cream. At a low price, some
sellers may even shut down, reducing their quantity supplied to zero.
Figure 4. Supply Schedule and Supply Curve
(Mankiw, 2021)
This relationship between price and quantity supplied is called the law of supply: Other
things being equal, when the price of a good rises, the quantity supplied of the good also rises,
and when the price falls, the quantity supplied falls as well.

The supply schedule is a table that shows the quantity supplied at each price. This
supply curve, which graphs the supply schedule, illustrates how the quantity supplied of the

good changes as its price varies. Because a higher price increases the quantity supplied, the
supply curve slopes upward.

The table in Figure 4 shows the quantity of ice-cream cones supplied each month by
Ben, an ice-cream seller, at various prices of ice cream. At a price below $2, Ben does not
supply any ice cream at all. As the price rises, he supplies a greater and greater quantity. This
is the supply schedule, a table that shows the relationship between the price of a good and
the quantity supplied, holding constant everything else that influences how much of the good
producers want to sell.

The graph in Figure 4 uses the numbers from the table to illustrate the law of supply.
The curve relating price and quantity supplied is called the supply curve. The supply curve
slopes upward because, other things being equal, a higher price means a greater quantity
supplied.

Lesson 4. Market Supply versus Individual Supply (Mankiw, 2021)

Just as market demand is the sum of the demands of all buyers, market supply Is the
sum of the supplies of all sellers. The table in Figure 5 shows the supply schedules for the
two ice-cream producers in the market—Ben and Jerry. At any price, Ben’s supply schedule
tells us the quantity of ice cream that Ben supplies, and Jerry’s supply schedule tells us the
quantity of ice cream that Jerry supplies. The market supply is the sum of the two individual
supplies.

31
 The graph in Figure 5 shows the supply curves that correspond to the supply
schedules. As with demand curves, we sum the individual supply curves horizontally to obtain
the market supply curve. That is, to find the total quantity supplied at any price, we add the
individual quantities, which are found on the horizontal axis of the individual supply curves.
The market supply curve shows how the total quantity supplied varies as the price of the good
varies, holding constant all other factors that influence producers’ decisions about how much
to sell.

The quantity supplied in a market is the sum of the quantities supplied by all the sellers
at each price. Thus, the market supply curve is found by adding horizontally the individual
supply curves. At a price of $4, Ben supplies 3 ice-cream cones and Jerry supplies 4 ice-
cream cones. The quantity supplied in the market at this price is 7 cones.

Figure 5. Market Supply as the Sum of Individual Supplies

(Mankiw, 2021)

Shifts in the Supply Curve

Because the market supply curve is drawn holding other things constant, when one of
these factors changes, the supply curve shifts. For example, suppose the price of sugar falls.
Sugar is an input in the production of ice cream, so the lower rice of sugar makes selling ice
cream more profitable. This raises the supply of ice cream: At any given price, sellers are now
willing to produce a larger quantity. As a result, the supply curve for ice cream shifts to the
right.

Figure 6 illustrates shifts in supply. Any change that raises quantity supplied at every
price, such as a fall in the price of sugar, shifts the supply curve to the right and is called an

32
increase in supply. Any change that reduces the quantity supplied at every price shifts the
supply curve to the left and is called a decrease in supply.

Figure 6. Shifts in the

Supply Curve
(Mankiw, 2021)

Any change that raises the

quantity that sellers
wish to produce at any given price shifts the supply curve to the right. Any change that lowers
the quantity that sellers wish to produce at any given price shifts the supply curve to the left.

There are many variables that can shift the supply curve. Let’s consider the most important
ones.

Input Prices. To produce their output of ice cream, sellers use various inputs: cream, sugar,
flavoring, ice-cream machines, the buildings in which the ice cream is made, and the labor of
workers who mix the ingredients and operate the machines. When the price of one or more of
these inputs rises, producing ice cream becomes less profitable, and firms supply less ice
cream. If input prices rise substantially, a firm might shut down and supply no ice cream at all.
Thus, the supply of a good is negatively related to the prices of the inputs used to make the
good.

Technology. The technology for turning inputs into ice cream is another determinant of supply.
The invention of the mechanized ice-cream machine, for example, reduced the amount of
labor necessary to make ice cream. By reducing firms’ costs, the advance in technology raised
the supply of ice cream.

Expectations. The amount of ice cream a firm supply today may depend on its expectations
about the future. For example, if a firm expects the price of ice cream to rise in the future, it
will put some of its current production into storage and supply less to the market today.

Number of Sellers. In addition to the preceding factors, which influence the behavior of
individual sellers, market supply depends on the number of these sellers. If Ben or Jerry were
to retire from the ice-cream business, the supply in the market would fall.

The supply curve shows what happens to the quantity supplied of a good when its
price varies, holding constant all the other variables that influence sellers. When one of these
other variables changes, the quantity supplied at each price changes, and the supply curve
shifts. To remember whether you need to shift or move along the supply curve, keep in mind
that a curve shifts only when there is a change in a relevant variable that is not named on

33
either axis. The price is on the vertical axis, so a change in price represents a movement along
the supply curve. By contrast, because input prices, technology, expectations, and the number
of sellers is not measured on either axis, a change in one of these variables shifts the supply
curve.

Lesson 5. Supply and Demand Together (Mankiw, 2021)

Having analyzed supply and demand separately, we now combine them to see how
they determine the price and quantity of a good sold in a market.

Equilibrium

The dictionary defines the word equilibrium as a situation in which various forces are
in balance. This definition applies to a market’s equilibrium as well. At the equilibrium price,
the quantity of the good that buyers are willing and able to buy exactly balances the quantity
that sellers are willing and able to sell. The equilibrium price is sometimes called the market-
clearing price because, at this price, everyone in the market has been satisfied: Buyers have
bought all they want to buy, and sellers have sold all they want to sell.

Figure 7 shows the market supply curve and market demand curve together. Notice
that there is one point at which the supply and demand curves intersect. This point is called
the market’s equilibrium. The price at this intersection is called the equilibrium price, and the
quantity is called the equilibrium quantity. Here the equilibrium price is $4.00 per cone, and
the equilibrium quantity is 7 ice-cream cones.

Figure 7. The Equilibrium of Supply and Demand

(Mankiw, 2021)

The equilibrium is found where the supply and demand curves intersect. At the
equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium

34
price is $4: At this price, 7 ice-cream cones are supplied and 7 ice-cream cones are
demanded.

The actions of buyers and sellers naturally move markets toward the equilibrium of
supply and demand. To see why, consider what happens when the market price is not equal
to the equilibrium price.

In panel (a), there is a surplus. Because the market price of $5 is above the equilibrium
price, the quantity supplied (10 cones) exceeds the quantity demanded (4
cones). Producers try to increase sales by cutting the price of a cone, which moves the price
toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $3
is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity
supplied (4 cones). With too many buyers chasing too few goods, producers can take
advantage of the shortage by raising the price. Hence, in both cases, the price adjustment
moves the market toward the equilibrium of supply and demand.
Figure 8. The Equilibrium of Supply and Demand
(Mankiw, 2021)

Suppose first that the market price is above the equilibrium price, as in panel (a) at a
price of $5 per cone, the quantity of the good supplied (10 cones) exceeds the quantity
demanded (4 cones). There is a surplus of the good: Producers are unable to sell all they
want at the going price. A surplus is sometimes called a situation of excess supply. When
there is a surplus in the ice-cream market, sellers of ice cream find their freezers increasingly
full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their
prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity
supplied. These changes represent movements along the supply and demand curves, not
shifts in the curves. Prices continue to fall until the market reaches the equilibrium.

Suppose now that the market price is below the equilibrium price, as in panel (b) of
Figure 9. In this case, the price is $3 per cone, and the quantity of the good demanded
exceeds the quantity supplied. There is a shortage of the good: Consumers are unable to buy
all they want at the going price. A shortage is sometimes called a situation of excess demand.
When a shortage occurs in the ice-cream market, buyers have to wait in long lines for a chance
to buy one of the few cones available. With too many buyers chasing too few goods, sellers
can respond to the shortage by raising their prices without losing sales. These price increases

35
cause the quantity demanded to fall and the quantity supplied to rise. Once again, these
changes represent movements along the supply and demand curves, and they move the
market toward the equilibrium.

Thus, regardless of whether the price starts off too high or too low, the activities of the
many buyers and sellers automatically push the market price toward the equilibrium price.
Once the market reaches its equilibrium, all buyers and sellers are satisfied, and there is no
upward or downward pressure on the price. How quickly equilibrium is reached varies from
market to market depending on how quickly prices adjust. In most free markets, surpluses
and shortages are only temporary because prices eventually move toward their equilibrium
levels. Indeed, this phenomenon is so pervasive that it is called the law of supply and demand:
The price of any good adjusts to bring the quantity supplied and quantity demanded of that
good into balance.
Assessment Task 3

Answer the following questions below.

What is the link between supply and demand?
What are the demand schedule and the demand curve,
and how are they related? Why does the demand curve
slope downward?
What are the supply schedule and the supply curve, and
how are they related? Why does the supply curve slope
upward?
Define the equilibrium of a market. Describe the factors
that affect demand and supply.
Describe the role of prices in market economies.
Summary
Economists use the model of supply and demand to analyze competitive markets. In
a competitive market, there are many buyers and sellers, each of whom has little or no
influence on the market price. The demand curve shows how the quantity of a good demanded
depends on the price. According to the law of demand, as the price of a good falls, the quantity
demanded rises. Therefore, the demand curve slopes downward. supplied depends on the
price. According to the law of supply, as the price of a good rises, the quantity supplied rises.
Therefore, the supply curve slopes upward. The intersection of the supply and demand curves
represents the market equilibrium. At the equilibrium price, the quantity demanded equals the
quantity supplied. The behavior of buyers and sellers naturally drives markets toward their
equilibrium. When the market price is above the equilibrium price, there is a surplus of the
good, which causes the market price to fall. When the market price is below the equilibrium
price, there is a shortage, which causes the market price to rise.

36
 Reference
G. Mankiw, (2021). Principles of Microeconomics 9th Edition Cengage

37
 MODULE 4
A CONSUMER’S CONSTRAINED CHOICE

Introduction

Microeconomics offers significant insights into the numerous issues and options that
customers must consider. Why is the US more successful with e-books than the Philippines?
How can we forecast how a price adjustment would impact customers' wants for goods now
using information about how budgets were distributed among different commodities in the
past? Would consumers prefer to get cash or food stamps in the same amount? Why do
young individuals purchase alcohol at a higher rate after turning 21? Why does someone
prefer coffee over tea? To answer these and other questions about how consumers allocate
their income over many goods, we use a model that lets us look at an individual’s decision
making when faced with limited income and market-determined prices. This model allows us
to derive the market demand curve that we used in our supply-and-demand model and to
make a variety of predictions about consumers’ responses to changes in prices and income.

Learning Outcomes

At the end of this module, students should be able to:

1. Analyze consumer behavior;
2. Evaluate factors that influence consumer behavior;
3. Discuss consumer preferences and why is it important;
4. Explain the concept of opportunity cost
Lesson 1. Consumer Behavior (Besanko & Braeutigam, 2020)

Why Do You Like What You Like?

Economies often seem like rollercoasters, with ups, downs, and unexpected turns that
can significantly alter the way consumers behave. The economic downturn that swept across
the globe in 2008 and 2009, sometimes referred to as the Great Recession, led to remarkable
adjustments in consumer behavior, with changes especially notable in sectors like the
automobile industry. Several factors contributed to these changes. Declining stock prices and
incomes meant that consumers generally had less money to spend on goods and services.
Higher fuel prices and increased consumer interest in the environment led many consumers
to purchase more fuel-efficient vehicles. Government programs also influenced consumer
behavior.

As economies recovered over the next decade, many consumers felt that they had
more money to spend as stock prices and incomes rose. The worldwide production of
automobiles increased, from just under 48 million cars in 2009 to more than 70 million in 2018.
Beyond the aggregate numbers, consumer behavior in the future will be influenced by
technological change, including the emerging shift from internal combustion engines to
electric vehicles and from driver-operated to robot-controlled vehicles.

As a consumer, you make choices every day of your life. Besides choosing among
automobiles, you must decide what kind of housing to rent or purchase, what food and clothing
to buy, how much education to acquire, and so on. Consumer choice provides an excellent
example of constrained optimization. People have unlimited desires but limited resources.
The theory of consumer choice focuses on how consumers with limited resources choose
goods and services.

Consumer behavior incorporates ideas from several sciences including psychology,

biology, chemistry, and economics. It is the study of consumers and the processes they use
to choose, use/consume, and dispose of products and services, including consumers’
emotional, mental, and behavioral responses.

Consumer behavior is best understood in three distinct steps:

1. Consumer Preferences: The first step is to find a practical way to describe the reasons
people might prefer one good to another. We will see how a consumer’s preferences for
various goods can be described graphically and algebraically.

2. Budget Constraints: Of course, consumers also consider prices. In Step 2, therefore, we

take into account the fact that consumers have limited incomes which restrict the quantities of
goods they can buy. What does a consumer do in this situation? We find the answer to this
question by putting consumer preferences and budget constraints together in the third step.

3. Consumer Choices: Given their preferences and limited incomes, consumers choose to
buy combinations of goods that maximize their satisfaction. These combinations will depend
on the prices of various goods. Thus, understanding consumer choice will help us understand
demand—i.e., how the quantity of a good that consumers choose to purchase
depends on its price.

41
Why is consumer behavior important?

Understanding consumer behavior is crucial for marketers because it enables them to

better communicate with customers. They can close the market gap and pinpoint the items
that are required and the products that are no longer in use by knowing how consumers
choose a product. Marketing professionals can display their goods in a way that has the
greatest influence on consumers by researching consumer behavior. Understanding
consumer purchasing behavior is the key to connecting with, involving, and convincing
potential customers to make a purchase from you.

A consumer behavior analysis should reveal:

● What consumers think and how they feel about various alternatives (brands, products,
etc.);
● What influences consumers to choose between various options;
● Consumers’ behavior while researching and shopping;
● How consumers’ environment (friends, family, media, etc.) influences their behavior.
Consumer behavior is often influenced by different factors. Marketers should study
consumer purchase patterns and figure out buyer trends. In most cases, brands influence
consumer behavior only with the things they can control; think about how IKEA seems to
compel you to spend more than what you intended to every time you walk into the store.
So, what are the factors that influence consumers to say yes? There are three
categories of factors that influence consumer behavior:

1. Personal factors: an individual’s interests and opinions can be influenced by

demographics (age, gender, culture, etc.)
2. Psychological factors: an individual’s response to a marketing message will depend
on their perceptions and attitudes
3. Social factors: family, friends, education level, social media, income, all influence
consumers’ behavior.

Types of consumer behavior

1. Complex Buying Behavior

When buyers purchase an expensive, infrequently purchased goods, they exhibit this
kind of behavior. They play a significant role in the research that consumers do before making
a high-value investment. Consider purchasing a home or a vehicle; these are examples of
complex purchasing behaviors.

2. Dissonance-reducing Buying Behavior

Despite being heavily involved in the purchasing process, the consumer finds it
challenging to distinguish different brands. Dissonance can happen when a customer fear
they will regret their decision. Consider purchasing a smartphone. Choosing one will be
dependent on cost and convenience, but once you've made the purchase, you'll want to make
sure you picked the appropriate one.

42
3. Habitual Buying Behavior

Habitual purchases are characterized by the fact that the consumer has very little
involvement in the product or brand category. Imagine grocery shopping: you go to the store
and buy your preferred type of bread. You are exhibiting a habitual pattern, not strong brand
loyalty.

4. Variety Seeking Behavior

In this situation, a consumer purchases a different product not because they weren’t
satisfied with the previous one, but because they seek variety. Like when you are trying out
new shower gel scents.

Lesson 2. Consumer Preferences (Pindyck and Rubinfeld, 2018)

Given the wide range of personal preferences and the abundance of goods and
services available for purchase in our modern economy, how can we logically describe
consumer preferences? When consumers make choices to raise their level of satisfaction,
this is referred to as consumer preference. Although some of the things that consumers buy
can be customized, they are not always able to get exactly what they want.

Consumer preference is a theory that has been around for decades. It has been used
to explain the behavior of consumers. Consumer preference can be applied in many different
ways, such as marketing, advertising, product design, etc. The theory states that consumers
are influenced by their own preferences, the preferences of others, and the context in which
they make decisions. Consumers are also influenced by social norms and cultural values,
which can be seen as social pressure to conform to certain behaviors or beliefs.

Consumer preference is a term used in economics to describe the decisions people

make in order to optimize their level of satisfaction. Although consumers can choose some of
the products they purchase, they are not always able to get exactly what they desire. An
important element of the economy is consumer preference. It is one of the most significant
variables affecting supply, demand, and price.

A basic example would be if a customer were at a restaurant and had two options for
entrees - chicken and steak. Which one would the consumer choose? They will likely choose
the one they like more or have more reason to buy. Utility is an important concept in
understanding consumer preference in economics and marketing. Utility refers to the total
satisfaction of consuming a good or service. It measures how much satisfaction a consumer
gets from consuming a good or service.

Consumer preferences are a crucial factor in economics. They can be defined as the
choices that consumers make when faced with a certain set of goods and services. Some
examples of consumer preference include:

▪ Brand loyalty
▪ Price sensitivity
▪ Quality of product

43
 ▪ Purchasing power

The most common example of consumer preference is deciding whether or not to buy a
product or service.

Some of the examples include:

● A customer chooses to spend money on a cheaper product than their competitors but
with a lower quality. In this example, the consumer prefers product accessibility and
lower cost rather than buying an expensive alternative.
● A customer chooses to buy a new car with an extended warranty because they know
that it will help them out if anything goes wrong with their old car. In this case, the
consumer prefers to purchase products with a higher guarantee of safety and security.
● A customer buys an expensive detergent brand because they want to get the best
quality and performance. In this example, the consumer is looking to extend the life of
their clothes by purchasing the best-performing detergent on the market.
● A customer chooses to get a massage from a self-employed masseur over getting one
at a corporate massage chain because the consumer prefers to support local
businesses. In this example, the consumer values local economy development.

Why is customer preference important?

In recent years, many businesses have recognized the significance of customer

preference theory. They have begun to improve their products and services by utilizing
customer data. Amazon, for example, uses customer data to ensure that its customers are
satisfied with their purchases.

Customer preferences can be used in many ways, such as:

● understanding what customers want from a product or service;

● creating new products or services based on what customers want;
● improving the quality of existing products or services.

Lesson 3. Opportunity Cost (Besanko & Braeutigam, 2020)

Managers are most experienced with cost presented as monetary expenses in an

income statement. Politicians and policy analysts are more familiar with costs as an expense
item in a budget statement. Consumers think of costs as their monthly bills and other
expenses. But economists use a broader concept of cost. To an economist, cost is the value
of sacrificed opportunities.

How much does it cost you to spend 20 hours per week studying microeconomics? Is
it the worth of whatever you would have done with those 20 hours in their place? How much
does it cost an airline to use one of its aircraft for regular passenger service? The cost of
operating the aircraft also includes the money the airline loses by not leasing its jet to other
parties (such as another airline) who would be willing to lease it, in addition to the money it
spends on items like fuel, flight-crew salaries, maintenance, airport fees, and food and drinks

44
for passengers. How much does it cost to fix an expressway? It would include the cost of
hiring labor, purchasing materials, and renting equipment, as well as the value of the time
drivers forfeit when stuck in traffic.

Viewed this way, costs are not necessarily synonymous with monetary outlays. When
the airline flies the planes that it owns, it does pay for the fuel, flight-crew salaries,
maintenance, and so forth. However, it does not spend money for the use of the airplane itself
(i.e., it does not need to lease it from someone else). Still, in most cases, the airline incurs a
cost when it uses the plane because it sacrifices the opportunity to lease that airplane to others
who could use it.

Because not all costs involve direct monetary outlays, economists distinguish between
explicit costs and implicit costs. Explicit costs involve a direct monetary outlay, whereas
implicit costs do not. For example, an airline’s expenditures on fuel and salaries are explicit
costs, whereas the income it forgoes by not leasing its jets is an implicit cost. The sum total
of the explicit costs and the implicit costs represents what the airline sacrifices when it makes
the decision to fly one of its planes on a particular route.

The economist’s notion that cost is the value of sacrificed opportunities is based on
the concept of opportunity cost. To understand opportunity cost, consider a decision maker,
such as a business firm, that must choose among a set of mutually exclusive alternatives,
each of which entails a particular monetary payoff. The opportunity cost of a particular
alternative is the payoff associated with the best of the alternatives that are not chosen.

The opportunity cost of an alternative includes all of the explicit and implicit costs
associated with that alternative. To illustrate, suppose that you own and manage your own
business and that you are contemplating whether you should continue to operate over the
next year or go out of business. If you remain in business, you will need to spend $100,000
to hire the services of workers and $80,000 to purchase supplies; if you go out of business,
you will not need to incur these expenses. In addition, the business will require 80 hours of
your time every week. Your best alternative to managing your own business is to work the
same number of hours in a corporation for an income of $75,000 per year. In this example,
the opportunity cost of continuing in business over the next year is $255,000. This amount
includes an explicit cost of $180,000—the required cash outlays for labor and materials; it also
includes an implicit cost of $75,000—the income that you forgo by continuing to manage your
own firm as opposed to choosing your best available alternative.

45
 Assessment Task 4

Answer the following questions below.

What is consumer behavior, consumer preferences and
why is it important to analyze?
What are the factors that influence customer behavior?
Explain opportunity cost. Is it a big deal in economics?
Why?
How opportunity cost affect your life? Give example.

Summary

The study of consumer buying behavior is most important for marketers as they can
understand the expectation of the consumers. It helps to understand what makes a consumer
buy a product. It is important to assess the kind of products liked by consumers so that they
can release it to the market. Marketers can understand the likes and dislikes of consumers
and design base their marketing efforts based on the findings. Consumer preference is a
concept that refers to the choices consumers make to maximize their satisfaction. Consumers
have some degree of control over the type of goods they buy, but they cannot always choose
what they want. Consumer preference is a key factor in the economy. The concept behind
opportunity cost is that, as a business owner, your resources are always limited. That is, you
have a finite amount of time, money, and expertise, so you can’t take advantage of every
opportunity that comes along. If you choose one, you necessarily have to give up on others.
They are mutually exclusive. The value of those others is your opportunity cost.

References
Besanko and Braeutigam. (2020). Microeconomics 6th Ed. Wiley
Pindyck and Rubinfeld (2018). Microeconomics Global Edition Pearson Education Limited

46