WELCOME

TO THE WORLD OF
BASIC ECONOMICS
CONCEPTS AND THEORIES
 Exports earnings (x) in $

Govt. expenditures

consumption
Investment
(I)
CELL
Government

Household Firms
Rest of the
Banks World
wage,
interest,
profit, rent

tax
delivery of goods
and services
savings

Import spending
(m) in $
 Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
SERVICES Good and
Good and services
services sold bought

FIRMS HOUSEHOLDS

Land, labor
Inputs for and capital
Production
MARKETS FOR
FACTORS OF
PRODUCTION Income (=GDP)
Wages, rent, interest Flow of goods &
and profit (=GDP) services

Flow of money
THE CIRCULAR FLOW DIAGRAM
 Hi guys! I am Mr.
BISARES
Do you know what is
economics?

Let me be the one to

introduce to you,
It is the branch of
knowledge concerned
with the production,
consumption, and
transfer of wealth
It is also a…

social science that

studies how
individuals,
governments, firms
and nations make
choices on
allocating scarce
resources to satisfy
their unlimited
wants.
 2 SIDES OF SCARCITY

• since human wants and needs are

unlimited and the available resources are
finite, scarcity naturally results leaving the
society with the problem of resource
allocation
 YES ! You’re both right !

As a matter of fact, economics is

divided into two branches. Commonly
known as:

MACROECONOMICS
&
MICROECONOMICS
There are other Social
Sciences related to
Economics, namely:

• Anthropology
• Demography
• Geography
• History
• Political Science
• Psychology
• Sociology
 Study of large-scale
What is economic systems.
Macroecon
omics sir?
*national income
*employment
*inflation

of nation as a whole.
 It is the study of PARTICULAR
What about aspects of an economy.
Microecono
mics?
It is about how INDIVIDUALS
make economic decisions.
2 METHODS OF ECONOMICS

- Positive Economics

- Normative economics
Positive Economics do not have to be correct, but
they must be able to be tested and proved or
disproved.

The statement, "government-

provided healthcare increases
public expenditures

" is a positive economic statement,

because it can be proved or
disproved by examining healthcare
spending data in countries.
Normative economic statements are
opinion based, so they cannot be
proved or disproved.

For example, the statement,

"government should provide basic
healthcare to all citizens" is a normative
economic statement. There is no way to
prove whether government "should"
provide healthcare; this statement is
based on opinions about the role of
government in individuals' lives, the
importance of healthcare and who
should pay for it.
Positive and Normative Economics
• Positive economics – is an economic
analysis that considers economic
conditions “as they are”, or considers
economics “as it is”,
• It uses objective or scientific explanation
in analyzing the different transactions in
the economy.
• It simply answers the question ‘what is’.
• Statement that can be tested
 Example of positive statements:
 The sky is blue (if we know blue is, this can be tested)
 The temperature is 37 degrees (this can be tested)
 The economy is now experiencing a slowdown because of
too much politicking and corruption in the government.
 The economy is now on a slowdown because the world is
experiencing a financial and economic crisis.
 Other reasons are also due to the financial problem of the
US, increase on the prices of crude oil and lack of investors
or capital deficiency.
 ECONOMIC RESOURCES
C
E
L
L
Now, let us proceed to
our next topic…

PPF or PRODUCTION
POSSIBILITIES FRONTIER
 - the alternative combinations of two goods
that an economy can produce with given
resources and technology

- production possibilities curve (PPC)

represents the boundary or frontier of the
economy's production capabilities

- Producing on the curve means resources

are fully employed, while producing inside
What is PPF? the curve means resources are unemployed
 Below is the example of
Production Possibilities Curve:
 This particular production
possibilities curve illustrates
the alternative
combinations of two goods--
mango and banana --that
can be produced by the
economy.
PPF are faced
with
opportunity
cost
Opportunity cost refers to the value forgone in order to
make one particular investment instead of another

Opportunity cost is all about the most basic of economic

concepts: trade-offs

compromise
 Scarcity
• Is the basic and central economic
problem confronting every society.
• It is the heart of the study of ecomonics
and the reason behind its establishment
• Authors have defined scarcity in various
ways – some of which are complexly
stated.
• Economics involves the study of
the allocation of scarce resources.

• Allocating scarce resources

requires CHOICES!

• We have unlimited wants but

resources are limited thus, you
can’t always get what you want!
 HOW ECONOMICS HELP TO MANAGE SCARCITY?

three options are:

1. economic growth

2. reduce our wants, and

3. use our existing resources wisely (Don't waste

the few resources that we do have.)"
 5 Economic Questions
Society must figure out

• WHAT to produce
• HOW MUCH to produce
• HOW to Produce it
• FOR WHOM to Produce
• WHO makes these decisions?
 Types of Economic Systems

1. Traditional Economy
2. Command Economy
3. Market Economy
4. Socialism
5. Mixed Economy
 Traditional Economy
• is basically a subsistence
economy.
• A family produces goods only for
its consumption .
• The decisions on what, how, how
much, and for whom to produce
are made by the family head, in
accordance with the traditional
means of production.
 Command economy (Communism)
• Is the opposite of capitalism
where the economic system is
based on communal ownership,
and the means of production is
owned and managed by the state.
• This is also known as command
economy or classless society
 Market Economy (Capitalism)

Is an economic system where the means of

production are owned and managed by private
individuals or corporation, rather than the state or
the workers.
Characteristics
1. Profit motive 2. Economic freedom
3. Freedom to compete
4. Private ownership of property
5. Limited role of government
6. Presence of religion
 Mixed Economy
• This economy is a mixture of market
system and the command system.
• The Phillipine economy is described
as a mixed economy since it applies
mixture of three froms of decision-
making.
• However, it is more market-oriented
rather than command or traditional
 END
OF
CHAPTER ONE
DEMAND THEORY
The following are elements of Demand

GOODS SERVICES
DEMAND
consumer's desire and willingness to pay a price
for a specific good or service.

2 Types of Demand
*Absolute Demand- actual buying of goods
and services

* Potential Demand- desire to buy but can’t

afford
 table of the quantity demanded of a
good at different price levels

Demand Schedule
And
Demand Curve

a graph showing how the demand for a

commodity or service varies with changes
in its price.
Example…

A microeconomic law that states, all

other factors being equal (ceteris
paribus)
price Qd price Qd
 SLOPE

the change in the variable on the y-axis divided by the change in the
variable on the x-axis

In Price

In Qd
 Slope
The ratio of the change in the variable on the
vertical axis to the change in the variable on
the horizontal axis.
Formula: change in Y or rise
change in X or run
Symbol (otb)

Where: newY-oldY P2 – P1
newX-oldX Q2 – Q1
POINTS PRICE of beef (per Qd in kilos
Kilo)

A P280.00 100
B 275.00 110
C 265.00 125
D 262.00 130
E 255.00 137
F 250.00 145
The Law of Demand

The law of demand states that there is

a negative, or inverse relationship
between price and the quantity of a
good demanded and its price.
As price increases Qd decreases and as
price decreases Qd increases ceteris
paribus.
Symbols (otb)
Non-Price Determinants of Demand

1. Income
2. Population
3. Tastes and preferences
4. Price Expectations
5. Prices of related goods
6. Special influence
 1. Income

The amount of money or its equivalent

received during a period of time in
exchange for labor or services, from
the sale of goods or property, or as
profit from financial investments.
People buy more goods and services
when their income increases, but will
buy less if their income decreases,
thus affecting the demand for goods
and services
2. Population

More people means more demand for goods and services.

There are more buyers in the city stores than in t he barrio
stores. Conversely, less people, means less demand for
goods and services.
3. Tastes and preferences

Demand for goods and services increases when people like or

prefer them. Such tastes and preferences are greatly
influenced by advertisement or fashion. On the other hand,
if a certain product is out of fashion, the demand for it
decreases.
4. Price expectations
When people expect the prices esp. the basic commodities
like rice, soap, cooking oil or sugar to increase tomorrow or
next week, they will buy more goods. In the same manner,
they decrease their demand for each product if they expect
price to decline tomorrow or in a few days. The reason for
such consumer’s behavior is to economize.
5. Prices of related goods
When the prices of related goods increases, people tends to
buy substitute products.
Ex. If the price of Colgate increases, people buy less Colgate
and more of close substitute like Close-up, etc. This means
that if the price of goods increases, the demand of other
goods increases.
6. Special influence

 There are certain development that influence

D for certain goods and services.
 EX. summer - high D on air conditioning unit

Humidity- light
clothing
 It isAcaused
changebyin athe
change in one of
theoverall demand
five demand determinant and
A Change
relation, a change
is indicated by ainshift of the in Demand
all price-quantity
demand curve
pairs.
 A Change ItAischange in athe
caused by specific
change in the
in amount
demand of and
price the isgood thatby
indicated
a movement
buyers along the
are willing demand
and able
Quantity curve from one point to another
The to purchase.
Demande
Mechanics
d
of
Demand
and
Supply
 LAW OF SUPPLY

Supply is the amount of some product that

producers are willing and able to sell at a given
price

- a fundamental principle of economic

theory which states that, all else equal,
an increase in price results in an
increase in quantity supplied

- there is a direct relationship between

price and quantity: quantities respond in
the same direction as price changes.
tabular depiction of the relationship between price and quantity
supplied

Supply Schedule
And
Supply Curve

graphic representation of the relationship between product

price and quantity of product that a seller is willing and able
to supply
Example…

price Quantity supply

 SLOPE

the change in the variable on the y-axis divided by the change in the
variable on the x-axis

In Price

In Quantity Supply
 Shifts in Supply Curve

The position of a supply curve will change following

a change in one or more of the underlying
determinants of supply. For example, a change in
costs, such as a change in labour or raw material
costs, will shift the position of the supply curve
Rising costs
If costs rise, less can be produced at any given price,
and the supply curve will shift to the left.
Determinants of Supply

• Number of Seller
• Prices of Resources
• Taxes and Subsidies
• Technology
• Supplier’s Expectation
• Prices of Related Goods
• Prices of Joint Products
Changes in supply curve
Change in Quantity Supplied – it refers to
the movements of points along the
given supply curve. It happens when the
price of a good under consideration
changes.

Change in Supply – it refers to either a

movement to the right or to the left
movement or shift of the entire supply
curve. (otb)
MARKET EQUILIBRIUM
Market
Interaction of buyers and sellers.

Market equilibrium
When the quantity demanded equals
the quantity supplied—when buyers’ and
sellers’ plans are consistent.

Equilibrium price
The price at which the quantity
demanded equals the quantity supplied.

Equilibrium quantity
The quantity bought and sold at the
equilibrium price.
 Market equilibrium at the
intersection of the
demand curve and the
supply curve.

The equilibrium price

is $1 a bottle.

The equilibrium
quantity is 10 million
bottles a day.
 MARKET EQUILIBRIUM
Price: A Market’s Automatic Regulator
–Law of market forces
• When there is a shortage, the price rises.
• When there is a surplus, the price falls.
–Surplus or Excess Supply
–The quantity supplied exceeds the
quantity demanded.
–Shortage or Excess Demand
–The quantity demanded exceeds the
quantity supplied.
At 1.50 a bottle:

1. Quantity supplied is 11
bottles.

2. Quantity demanded is
9 bottles.

3. There is a surplus.

4. Price falls until the

market is in equilibrium.
 At 75 cents a bottle:

5. Quantity demanded
is 11 bottles.

6. Quantity supplied
is 9 bottles.

7. There is a shortage.

8. Price rises until the

market
is in equilibrium
 The Graphical Approach
P
S
Disequilibrium P

Price floor

Equilibrium P
Equilibrium pt.

Price ceiling
D

Equilibrium Q Q
 Price setting by the Government

Price Floor - It is the price set by

the government that is higher
than the equilibrium level. Ex.
(OTB)

Price Ceiling - It is the price set

below the equilibrium price. EX.
(OTB)
 Quack…Quack…
Let us proceed to our next topic,
entitled:

ELASTICITY
 Elasticity define as the
measurement of how responsive
an economic variable is to a
change in another.
"If I lower the price of my
product, how much more will I
sell?"
 Elastic
Price
Inelastic
Elasticity
Unitary
Luxury
Demand Income Necessity
Elasticity Elasticity Normal
Inferior
Cross
Substitute
Elasticity Elasticity
Complements

Elastic
Supply Supply
Elasticity

Inelastic
Supply
 PRICE ELASTICITY OF
DEMAND

(PeD or Ed) is a measure used in economics to show

the responsiveness, or elasticity, of the quantity
demanded of a good or service to a change in
its price.
 PRICE ELASTICITY OF
DEMAND

Qd / Average Q
% Qd
PeD = =
FORMULA
% P P / Average P
Where:

new Qd - old Qd
% Qd =
(old Qd + new Qd) / 2

PROCESS
new P - old P
% P=
(old P + new P) / 2
When the result of Price Elasticity of Demand is:

=1 Unitary elastic

>1 Elastic

<1 Inelastic
EXAMPLE

Mina sells tuyo for PHP20 per pack and gets

200 packs quantity demanded. However, if she
lower her price to PHP15, quantity demand
doubles. Is the demand for tuyo elastic or
inelastic? At what price will Mina get a bigger
revenue?
 400 - 200 200
% Qd = = = 0.67
(200 + 400) / 2 300

15 - 20 -5
% P= = = -0.29
(20 + 15) / 2 17.5

= - 2.31 Therefore 2.31, elastic

Compare the old TR with new TR and select which
price is better.

TR1 = P1 x Q1 TR2 = P2 x Q2

= 20 x 200 = 15 x 400

= 4, 000 = 6, 000

In this case, at an elastic demand, Mina gets a higher revenue

from the new price of tuyo.
 INCOME ELASTICITY OF
DEMAND

measures the responsiveness of

the demand for a good to a change in
the income of the people demanding
the good, ceteris paribus. It is
calculated as the ratio of the
percentage change in demand to the
percentage change in income.
 INCOME ELASTICITY OF
DEMAND

Qd / Average Q
% Qd
YeD = =
FORMULA
% Y Y / Average Y
Where:

new Qd - old Qd
% Qd =
(old Qd + new Qd ) / 2

PROCESS
new Y - old Y
% Y=
(old Y + new Y) / 2
When the result of Income Elasticity of Demand is:

>1 Luxury Good

<1 Necessity

>0 Normal Good

<0 Inferior Good

 EXAMPLE

Dio earns a monthly salary of PHP38 000

and he consumes 8php/ride and he rides
twice a day and 30 times/month. When
his income increases by 15% and he
started to consume 8php/ride and he
rides four times a day and
30times/month. Is Dio’s demand for
transportation normal, good, luxury or
inferior?
 960 - 480 480
% Qd = = = 0.67
(480 + 960) / 720
2

43 700 – 38 000 5 700

% Y= = = 0.14
(38 000 + 43 700) / 2 40 850

= 4.79, luxury
 When the result of the income elasticity is
greater than 1, the product is called a normal
good but is considered as luxury.
This happens when an increase in a consumer’s
income has caused a substantial increase in the
demand for a product.
On the other hand, when the resulting income
elasticity is a negative number, the good is said
to be inferior. A good becomes inferior when an
increase in income brings about the decrease in
demand.
A good is said to be the unitary if income
elasticity equals to 1.
 CROSS ELASTICITY OF
DEMAND

measures the responsiveness

of the demand for a good to a
change in the price of
another good.
 CROSS ELASTICITY OF
DEMAND

% Qd
Qdx / Average Qdx
for x
CeD = =
% P FORMULA
Py / Average Py
for y
Where:

new Qdx - old Qdx

% Qd =
For x (old Qdx + new Qdx) / 2

PROCESS
new Py - old Py
% P=
For y (old Py + new Py) / 2
When the result of Cross Elasticity of Demand is:

=0 X and Y are not related

>0, positive Substitute

<0, negative Complements

EXAMPLE

Good Qd1 Qd2 P1 P2

Nescafe 5 6 5 7

Kopiko 4 5 4 6
 6-5 1
% Qd = = = 0.18
For X (5 + 6)/ 2 5.5

6 - 4 2

% P = = = 0.4
(4 + 6) / 2 5
For Y

0.45, substitute
=
 PRICE ELASTICITY OF
SUPPLY

(PES or Es) is a measure used in

economics to show the
responsiveness, or elasticity, of
the quantity supplied of a good or
service to a change in its price.
 PRICE ELASTICITY OF
SUPPLY

Qs / (Average Q)
% Qs
PeS = =
FORMULA
% P P / (Average P)
Where:

new Qs - old Qs
% Qs =
(old Qs + new Qs) / 2

PROCESS
new P - old P
% P=
(old P + new P) / 2
When the result of Price Elasticity of Supply is:

=1 Unitary elastic

>1 Elastic

<1 Inelastic
EXAMPLE…

A 14-inch TV is originally sold at PHP

5,000. at this price, an appliance store is
able to sell 100 TVs in the market. The
following month, the new price of TV is
PHP 7,500. however, the store has only
increased its output by 5 units. How
elastic was the supply of the store’s TV?
 Change in Qs 5
% Qs = = = 0.05
(Average Qs) 102.5

Change in P 2 500

% P= = = 0.4
(Average P) 6 250

= 0.125, inelastic