Economics is the study of ways to reduce wants to  Macroeconomics – studies the entire national

eliminate the problem of scarcity. economy

Microeconomics (one of the definition) - is the study of Positive & Normative Statements
the choices made by individuals
Positive – can be tested; Normative – cannot
Example of Positive Statement
Good Economic Model
 “Prices rise when the government prints too
 includes only those feature of the world
much money”
that are needed for the purpose at hand
Economic Model – accurately explain how the economy
Production Possibility Curve (Production Possibility
is organized because it is designed to include every
Frontier)
feature of the real world

In her calculation of the cost of going to college, an Quantity of Capital

economist would include the amount of forgone Goods
earnings over the years spent at college.
4
Efficient Production – can be carried out anywhere
3
ON/BELOW the production possibilities frontier
2
Must answer the questions: _____________________
1
 What goods to produce?
0
 How to produce them?
0 0.1 0.2 0.3
 (e.g.) When China builds a dam using
few machines and a great deal of labor.
Increase in unemployment:
 For whom to produce them?
More workers:
Technological advances that allow a good to be
produced at a lower cost will shift the demand curve Building new factories:
________.
Technological advances:
Difference between slope and elasticity.
Efficiency in Production:
 Slope – measures absolute change
Example of Opportunity Cost
 Elasticity – measures percentage change
 By spending Thursday night studying for an
Government controls over market prices frequently
economics exam, a student was unable to
“backfire.”
complete a homework assignment for
Scarcity CANNOT be eliminated through… calculus class.
 Because Alden used all of weekend to paint
 the use of market mechanisms
his house, he was unable to visit his aunt.
 explorations that helps us find new resources
 By choosing to attend college, Ryzza was
 wise use of our resources not able to continue working as a TV host;
[Remember: We can never eliminate scarcity, but it can as a result, she gave up more than P5M in
be reduced by the right choices] earnings while she was in college.
 When the government chooses to use
Difference between microeconomics and resources to build a dam, these sources are
macroeconomics. no longer available to build a highway.
 Microeconomics – studies decisions of
individual people and firms
[not an example…] Because Maine is now being paid a
higher wage, she can afford to buy a new car even
though she is moving into a bigger apartment.
Market system (Market Economy)
 depends on the market to find the most
efficient way of using resources
 ______________________ - assures that firms
produce outputs that consumers actually desire
ceteris paribus – allows economists to focus on the
effects of only one change at a time
“The law of demand concludes that a RISE IN THE PRICE
OF A GADGET decreases the quantity demanded and
creates a movement upward ALONG THE DEMAND
CURVE”
The accuracy of the economist’s prediction
depends on whether the chairs X Corporation produce
are NORMAL GOODS… when an economist working for
the firm predicts that “if people’s income rise next year,
then the demand for our chairs will increase (ceteris
paribus).
The price of Pepsi decreased… then its quantity
demanded has increased
Movement Along The Demand Curve
 Sales managers decided to cut their prices, and
the increase in their sales has been remarkable
Example of Complements
 Both of Z and Y goods are complements…
Suppose that when the price of good Y goes
down, the demand for good Z goes up.
Shift in the Demand Curve for Digital Cloud Services
 A change in the price of a related service
 A change in wealth
 A change in income
[will NOT cause…] A change in price of digital cloud
services
The price of computer chips used in the manufacture of
personal computers has fallen.
 Increase in the supply of personal
computers
If Qd (quantity demanded) = 20 – 2P and Qs (quantity
supplied) = 5 + 3P, then the equilibrium price is 3 and
equilibrium quantity is 14.
20 – 2P = 5 + 3P
20 – 5 = 3P + 2P
15 = 5P
3=P
Problem. The price of a good rises and the quantity
decreases, the demand curve shifting ____________.
Problem. Suppose economics departments in the
Philippine universities are unable to fill many available
faculty positions then the salaries offered by these
departments are BELOW THE MARKET PRICE FOR
QUALIFIED ECONOMISTS.
Problem. The government of Economica announces
that it will purchase its farmers’ surplus of milk, we can
infer that Economica has a price floor ABOVE the
equilibrium price for milk.
[Remember] The price will adjust to bring the market to
equilibrium if it is NOT in equilibrium.
Problem. SPRING WATER
 Supply – decreases
 At the same time, DEMAND – increases
 Equilibrium price – rises
 Equilibrium quantity – increase/decrease/stay
the same
Along a straight-line demand curve…
 Price falls the ___________________________
Problem. Long-run supply of rice – perfectly elastic
 In the long run, a large rise in the price of rice
causes no change in the quantity of rice
supplied
[Remember] The good is necessity if it would cause the
demand for a good to be relatively inelastic.
Price – INCREASE
Demand – ELASTIC
Total Revenue – DECREASE
Problem. Rise of price of good A shift the demand curve
for good B – rightward

 if the cross price-elasticity of demand between

the two is positive (+).

Problem. PIZZA – normal good

 6% increase in income; 10% increase in quantity

demanded of
 income elasticity of demand – positive

Problem. Normally, a tax is placed on the sellers of

lemonade… BUYERS and SELLERS share the burden of
the tax

Problem. Insulin

 Demand – perfectly inelastic

 Real burden of an excise tax – borne entirely by
BUYERS

[Remember] A RISE IN PRICE. (Other things equal)

 Producer surplus will rise

 Consumer surplus will fall