BA100: ECONOMICS

Unit 1: Intro to Econ

Five key terms are emerging in basic economics to maintain understanding: Economics, Microeconomics and
Macroeconomics, Opportunity Cost, Economy, and Economic System.

Economics is a social science concerned with properly allocating scarce resources used to produce the goods and
services that satisfy unlimited consumer wants and needs.

Economics is a broad spectrum of different choices, decisions, and alternatives. Economics is everything, from
individuals to aggregates. This is an instinct of an individual to survive, which may involve money. Still, your
decision to save money directly results from the scarcity problem due to unlimited wants and needs but limited
resources. This means that everything incurred with opportunity cost. Economics is a social science that deals with
the proper allocation of limited resources used to produce goods and services to meet the unlimited wants and needs
of the people. Economics is also defined as the study of how individual and societies choose to use scarce
resources (Case, Fair & Oster, 2012), which is all about how humankind make decisions on how to allocate these
resources (Greenlaw & Shapiro, 2011).

Economics involves the creation of policymaking on how the economy works. Positive and Normative Economics
are both tools used in policymaking. Positive Economics is the application of the scientific method and the process
of testing the hypothesis. A positive statement does not have to be correct, but it must be able to be tested and
proved or disproved with facts based on objective analysis. At the same time, Normative Economics is a perspective
on economics that reflects normative judgments or opinions toward the statement or situation based on subjective
analysis or value. These terms are being compared and contrasted, indicating how the world should be.
Exhibit 1 Comparison of positive and normative economics
Positive Economics Normative Economics
Talks about what is, what was, or will be It talks about should, think, ought, to
It allows us to test the statement with data Cannot be tested if true or false
Ex. People tend to shop at SM more when they get a Ex. Everyone should shop at SM.
pay raise.
Ex. Government-provided healthcare increases public Ex. Government should provide healthcare to all
expenditures. citizens.

There are two major branches of Economics: Microeconomics and Macroeconomics.

Microeconomics, from the word “Micro,” which means minor, is defined as a social science that focuses on
individual industries and human actions and decisions on how this affects their choices as the essential agent in
the economy: households and firms. Furthermore,
Macroeconomics, from the word “Macro,” which means big/large, is defined as the study of the economy of a
country as a whole, which focuses on a broader scope of the economy: government and the rest of the world.
Microeconomics is like an individual tree in the forest that concerns how plants grow and develop individually. At
the same time, Macroeconomics is the forest as the entire tree in the forest has been observed.

Economic Science is a social science that uses the scientific method to explain and understand how human behavior
responds to the scarcity problem. Moreover, Social Science studies society and how people behave and influence the
world around us. (ESRC, n.d.)

Factors of Production or Economic Resources are the goods or services available to individuals and businesses to
produce valuable consumer products. These are the inputs used in creating things or helping provide services in the
economy. These are Land, Labor, Capital, and Entrepreneurship. Land pertains to all-natural physical resources,
including all raw materials used to manufacture goods and services. These include timber, land, fisheries, farms, and
other similar natural resources. And usually a limited resource for many economies. Labor represents the human
capital available to transform raw or national resources into consumer goods, which refers to the workers involved
in production like factory workers, service cleaners, salesmen, hairdressers, and so on. These are some parts of the
human capital that process and produce goods and services to receive income in return. Capital represents
companies’ monetary resources to purchase natural resources, land, and other capital goods. It also represents the
significant physical assets that individuals and companies use when producing goods or services. These assets
include buildings, production facilities, equipment, vehicles, and other similar items. Entrepreneurship usually has
an idea for creating a valuable good or service and assumes the risk of transforming economic resources into
consumer products. Managerial functions of gathering, allocating and distributing economic resources or consumer
products to individuals and other businesses in the economy.

Scarcity is an underlying economic problem: the limited resources beyond the people’s desires. Scarcity has two
faces, limited resources and unlimited wants and needs. In this world of limited resources, people have unlimited
wants and needs where the current resources cannot meet the demands (Greenlaw & Shapiro, 2011).

Opportunity Cost is the best alternative given up or forgo upon making decisions to achieve another. It is the value
of what is foregone to have something else, which refers to a benefit that a person could have received but gave up
taking another course of action. People have to make a choice in their daily lives, which includes waking up in the
 morning or waking up late, going to school or slacking off and being late, riding a jeepney, or taking a cab. These
are the typical examples we do daily that require a decision involving an opportunity cost.

Production Possibility Frontier (PPF) is the alternative combination of goods produced if the economy fully uses
all available resources. An economy’ are limited because resources used to create goods and services are limited.
PPF can be represented with both PPF Curve and PPF Schedule. PPF Curve is a curve depicting all maximum
output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes
that all inputs are used efficiently. PPF Schedule is a table of numbers that illustrate the production possibilities of
an economy--the alternative combinations of two goods that an economy can produce with given resources and
technology
The PPF is the area on a graph representing production levels that cannot be obtained given the available
resources; the curve represents optimal levels. Here are the assumptions involved

For instance, producing five units of wine and five units of cotton (point B) is just as attainable
as producing three units of wine and seven units of cotton. Point X represents an inefficient
use of resources, while point Y represents a goal that the economy simply cannot attain with
its present levels of resources.

As we can see, for this economy to produce more wine, it must give up some of the resources
it is currently using to produce cotton (point A). If the economy starts producing more cotton
(represented by points B and C), it will need to divert resources from making wine and,
consequently, it will produce less wine than it is producing at point A.

Moreover, by moving production from point A to B, the economy must decrease wine
production by a small amount in comparison to the increase in cotton output. But if the
economy moves from point B to C, wine output will be reduced by about 50%, while the
‘ cotton output only increases by about 75%. Keep in mind that A, B, and C all represent the
most efficient allocation of resources for the economy. The nation must decide how to achieve
the PPF and which combination to use. For example, if more wine is in demand, the cost of
increasing its output is proportional to the cost of decreasing cotton production. Markets play
an important role in telling the economy what the PPF should look like.

This technique can be used by economists to determine the set of points at which a country’s economy is most efficiently allocating its resources to
produce as many goods as possible. If the production level is on the curve, the country can only produce more of one good if it produces less of some
other good.

If the economy is producing less than the quantities indicated by the curve, this signifies that resources are not being used to their full potential. In this
case, it is possible to increase the production of some goods without cutting production in other areas.

The production possibility frontier demonstrates that there are limits on production, given that the assumptions hold. Therefore, each economy must
decide what combination of goods and services should be produced to attain maximum resource efficiency.

The production possibilities curve illustrates the maximum possible output for two products when there are limited resources. It also illustrates the
opportunity cost of making decisions about allocating resources.

Businesses and economists use the PPF to consider possible production scenarios by changing resource variables. The PPF allows businesses to learn how
variables influence the production or decide which products to manufacture. Economists can use it to learn how much of a specific good can be produced
in a country while not producing another good to analyze economic efficiency levels and growth.

Circular Flow is a simple economic model illustrating the flow of goods and services through the economy. It
shows flows of goods and services and factors of production between firms, households, government, and the rest of
the world.

Household Sector includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for
consumption expenditures, which also owns all productive resources.

Business Sector is a function of firms to supply private goods and services to domestic households and firms, and households and
firms abroad. To do this, they use factors and pay for their services. This sector does the production that undertakes the task of
combining resources to produce goods and services.

Government Sector's prime function is to regulate, especially passing laws, collecting taxes, and forcing the other sectors to do what
they would not do voluntarily. It buys a portion of the Gross Domestic Product (GDP) as government purchases.

Foreign Sector includes anything and everything that lies beyond the borders of a nation. The domestic household, business, and
government sectors purchase imports produced in the foreign sector. The foreign sector then buys exports produced by the domestic
business sector.
The economy is concerned with the production, distribution, and trade, including the consumption of goods and
services by different economic players in the economy.
The economy is the broad set of interrelated production and consumption activities that determine the allocation of
scarce resources. This is also known as an economic system (Kenton from Investopedia, 2019).

Economic System is where the people, government, and society arrange and distribute the available resources,
goods, and services to the people across the country, which regulates the factors of production.

Economic System is how countries and governments distribute resources and trade goods and services. There are
three basic economic questions answered by different economic systems. (1) What to Produce? (2) How should it be
Produced? And (3) For whom should it be Produced? Five (5) economic systems are identified: Free Market,
Traditional Economy, Command Economy, Market Economy, and Mixed Economy.

Free Market refers to an economy where the government imposes few or no restrictions and regulations on buyers
and sellers. In a free market, participants determine what products are produced, how, when, and where they are
made, to whom they are offered, and at what price—all based on supply and demand.

A free-market economy is one without government intervention or regulation.

CHARACTERISTICS OF THE FREE MARKET:

 privately owned businesses
 balances demand and supply network
 drives innovation
 remains consumer-centric
 promotes fair play, self-control, cooperation, and competitiveness; and
 receives financial assistance from banks and brokerage firms.

Traditional Economy relies on customs to answer the three-basic question. Without technology and new ideas,
there is little room for change or innovation since it is centered on families, clans, or tribes, and the group’s good
always comes before individual desires. Eg. As a male, if your father were a fisherman, you would become a
fisherman. You would learn to make fishing nets the same way that he was taught, and you would distribute your
catch in the manner that it had always been done.
A traditional economy is a basic economic system where customs and traditions are the elements that determine the
way trade and commerce are performed. It is a self-sufficient economy where the community engages in different
activities to produce goods or services that are required by the rest of the community.

BARTER & EXCHANGE HAPPENED.

CHARACTERISTICS OF TRADITIONAL ECONOMY

 Centering around a family or tribe
 Existing in a hunter-gatherer and nomadic society
 Producing only what it needs
 Relying on a barter system
 Evolving once it starts farming and settling

Command Economy is a centrally planned economy where the government takes control of all political and
economic power. This is a type of economic system in which the fundamental questions of what, how, and for
whom to produce are resolved primarily by governmental authority.
A command economy, also known as a planned economy, is one in which the central government plans, organizes,
and controls all economic activities to maximize social welfare. Unlike free-market economies, command
economies do not allow market forces like supply and demand to determine production or prices.

GOVERNMENT RULE EVERYTHING

CHARACTERISTICS OF COMMAND ECONOMY:

 Government Control
 Budget And allocation of resources
 Prioritization
 No competition
 Authority

The choices of consumers and producers drive Market Economy. Consumers and producers benefit from each
other when they act in self-interest. Moreover, decisions are made not by the government but by individuals looking
out for their and their family’s best interests. The market economy dictates that producers and sellers of goods and
services will offer them at the highest possible price that consumers are willing to pay for goods or services. When
the level of supply meets the level of demand, a natural economic equilibrium is achieved.

DRIVEN BY THE CHOICES OF CONSUMERS AND PRODUCERS

CHARACTERISTICS OF MARKET ECONOMY:
 Private property
 Freedom of choice
 Motive of self-interest
 Competition
 System of markets and prices
 Limited government

A mixed economy has elements of traditional, command, and market systems, and the most common type of
economic system relies on both markets and governments to allocate resources. A mixed economic system is a
system that combines aspects of both capitalism and socialism. A mixed economic system protects private
property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in
economic activities to achieve social aims.

EVERYTHING IS MIXED UP

CHARACTERISTICS OF MIXED ECONOMY

 Co- Survival of Public and Private Sectors
 Economic Planning
 Safeguarding Consumer Rights
 Protection of Labor Rights

Unit 2: Law of Demand and Supply

Demand refers to how much buyers desire (quantity) a product or service. Demand is primarily based on the needs
and wants of the people – if you do not desire something, you will not buy it. Demand is based on the ability of a
person to pay for the product.
Demand Price refers to the price that people are willing to pay for goods and services when a particular amount or
quantity is available.
Quantity Demanded describes the total amount or number of goods and services demanded at a given point in time.

The Law of demand states that, if all other factors remain equal (Ceteris paribus), the higher the price of a good,
the fewer people will demand that good and vice versa. If the price of the product changes, most likely people’s
desire for the product also changes. Either people will purchase less of the product because of the increase in the
price, or purchase more of the product because of the decrease in its price. The Law of Demand will tell us, the
inverse relationship between the price and the quantity demanded.

Law of demand- Relationship between the price of the good or service and the quantity of that good or service
people are willing & able to buy.

The determinants of demand are the factors that can cause the demand curve to shift either to the left or right.

The determinants of the demand are broken down into five (5) parts:
• Buyer’s Income - the amount of income that buyers have available to spend affects the ability to purchase a good,
and it is the purchasing power of the individual.
Normal Goods are goods for which demand goes up when income is higher and for which demand goes down when
income is lower. Normal goods are what we usually purchase.
Inferior Good is good by which an increase in income will cause a fall in demand, and vice versa. The alternative
of the goods that is higher than the price of what we usually purchase.

In Normal Goods, there is a direct relationship between the buyer’s income and the demand, while in Inferior
Goods, there is an inverse relationship between the income and the demand.

• Buyer’s Preferences- the satisfaction derived from a good effect the willingness to purchase a good. The more
flavorful, the more you purchase.
• Prices of other goods- the demand for one good interrelated with the purchase of other goods, and the prices of
those goods.
- Substitute Goods is a goods that can serve as replacements for one another; when the price of one
increases, demand for the other goes up. For example, when buying a soda, people tend to compare both
Coke and Pepsi as people used to substitute one for the other.
- Complementary Goods are goods that “go together”; a decrease in the price of one good results in an
increase in demand for the complementary good, and vice versa. For example, Printer Ink, when the price
of the printer increase, people tend to purchase less of the printer which would eventually affect the
demand for ink as people will not buy Ink since they do not have use for it.

• Buyer’s Expectations- buyers decide how much to purchase based on the comparison of current and expected
future prices. When people expect that the price of a product or something increases, they will demand more of it,
but when buyers expect a lower price in the future, the demand may decrease

• Number of Buyers- states that the greater the number of consumers of a good, the greater the market demand for
it. As the number of buyers increases, the demand for a product also increases.

A demand Curve is a graphical illustration of how much of a given product a household would be willing to buy at
different prices.
A demand Schedule is a tabular illustration, showing how much of a given product a household would be willing
to buy at different prices. What you see here is also what you will see in the curve.
Quantity Demanded- The amount of product that people are willing and able to purchase at a specific place.

Law of Supply: all else being equal

Increase in price, increase in quantity supplied
The more u supply, the more u earn.
Supply refers to a fundamental economic concept that describes the total amount of a specific good or service that is
available to consumers.
Supply Price is the lowest price at which a given number of commodities will be offered under a given condition.
Quantity Supplied refers to the amount of the goods businesses provide at a specific price

The factors that can influence the shift in the supply are the determinants of the supply, while price causes a
movement along the curve.

The determinants of Supply are categorized into five (5) parts.

• Resource Price is the price paid for the use of resources in the production process that affects production cost and
the ability to sell a good. The input used in production can affect the supply.
- Price paid for the use of resources
- Input prices ↑, quantity supplied↓

• Technology refers to one of the important determinants of supply. Better and advanced technology increases the
production of a product, which increases the supply of the product. Technology also helps in reducing
production costs, which will lead to an increase in profit; thus, if the technology is deteriorating, this will
then reduce the supply.
- Important, increases the production of a product
- Input prices ↑, quantity supplied ↑
• Prices of other goods refer to the fact that the prices of substitutes and complementary goods also affect the
supply of a product. The supply of one good may increase or decrease depending on the price of a related
good, as producers allocate their resources to the product that will generate more profit.
- Prices of substitutes and complementary goods.

• Sellers’ Expectations refer to the perception of the seller towards the increase in the price of the product, which
will affect the supply. One's expectations can also affect how much of a product one is willing and able to
sell. Simply put, if sellers expect that the price of the product increases, sellers may try to hold the supply to
be able to supply more when the price already increases, this will cause a leftward shift of the supply
- Expectations affect how much of a product one is willing and able to sell.
- Example: other sellers will produce something next week, and the other seller will sell the product
ahead of time.

• Number of Sellers as more or fewer producers enter the market; this has a direct effect on the amount of a product
that producers (in general) are willing and able to sell. More competition usually means a reduction in
supply, while less competition allows the producer to have a more significant market share with a more
abundant supply.
- There will be competition.

A supply Curve is a graphical illustration showing how a product a firm will sell at different prices.
Supply Schedule refers to a tabular representation of how much of a product firm will sell at different prices.

Note: A change in the supply and the change in quantity supplied is not the same. Supply only changes when
there are changes in the determinants of supply.
A change in the price of goods or services will cause the quantity supplied to move along the supply curve.

The Law of demand and supply- are the basic principles in economics that explain the relationship between the
sellers of resources and the buyers of that resources being sold.
Market- Where consumers and producers exchange products
Equilibrium- is a state where economic forces such as supply and demand are balanced, and in the absence of
external influences, the (equilibrium) values of economic variables will not change.
Equilibrium Price refers to the price that exists when a market is in equilibrium.
Equilibrium Quantity refers to the quantity exchanged between buyers and sellers when a market is in
equilibrium.

Market Surplus occurs when there is excess supply- that is, the quantity supplied is greater than quantity
demanded; it is located above the equilibrium point.
Market Shortage is located below the equilibrium point, which occurs when there is excess demand- that is, the
quantity demanded is greater than the quantity supplied.

UNIT 3: ELASTICITY

Elasticity- used to measure the response of one variable.

An elastic demand is one in which the change in quantity demanded due to a change in price is large. When price
increases, we are sensitive to price change
An inelastic demand is one in which the change in quantity demanded due to a change in price is small. We are not
sensitive to price change.

Elasticity has five (5) categories in identifying the quantitative response of the consumer to the change in the price;
Elastic is an economic term meant to describe a change in the behavior of buyers and sellers in response to a price
change for a good or service. These are the product that has many available substitute goods by which an increase/
decrease in the price resulted in an increase/ decrease of the quantity demanded. When categorizing the responses, it
is considered elastic when the result is greater than one
Inelastic is an economic term used to describe the situation in which the quantity demanded or supplied of a good or
service is unaffected when the price of that good or service changes. Examples to this are gas, electricity, water,
drinks, clothing, tobacco, food, and oil, which people would likely still consume it with a slight change in its
quantity. It is considered inelastic response when it is less than one
Unit Elastic means that any change in the price causes an equal proportion change in quantity. Unit elastic, there is
nothing particularly notable example of goods that are unit elastic. If it happens that the response measurement
showed an equal to 1, then that response is categorized as unit elastic
Perfectly Elastic means that demand in which quantity drops to zero at the slightest increase in price. Perfectly
elastic is a theoretical concept that cannot be applied in a real situation; however, in some cases such as a perfectly
competitive market where products are homogenous. When the response result showed equal to infinite, then it is
said that it is Perfectly Elastic
Perfectly Inelastic. means that a consumer will buy a good or service regardless of the movement of price. An
example of this is insulin to a diabetic person or dialysis for a patient with kidney problems. It is said that when the
response is equal to zero, then it is perfectly inelastic

When measuring the relationship between a change in the quantity demanded of a particular good and a change in its
price, Price Elasticity of Demand is used

When measuring the relationship between a change in the quantity demanded of a particular good and a
change in its price, Price Elasticity of Demand is used.

Price Elasticity of Supply is the measure of the responsiveness in quantity supplied to the change in the price of
goods and service.

Income Elasticity of Demand refers to the sensitivity of the quantity demanded a particular good to a change in real
income of consumers who buy this good, keeping all other things constant

Cross Price Elasticity of Demand is an economic concept that measures the responsiveness in the quantity demand
of one good when a change in price takes place in another good, ceteris paribus
Cross Price Elasticity with Complementary is a good with a negative cross elasticity of demand, meaning the
good's demand is increased when the price of another good is decreased

A common method to calculate elasticity is by using the Midpoint Formula. Midpoint Formula was derived from
the price elasticity and is used to assess the relationship between the price and quantity and so as illustrating the
influence of supply.

OR

There are three (3) factors that determines the elasticity:

Availability of Substitute If substitutes are available, customers are likely to be very responsive to changes in price.
The greater the elasticity which the demand is elastic. Conversely, ff substitutes are not available; demand is likely
to be unresponsive to price changes, and more likely, the demand is inelastic.
Time Period of Analysis- The longer the period of time people has, the greater the opportunity for them to adjust to
the price changes. If the consumer has ample time to look for a substitute, it is most likely responsive to price.
The Proportion of Budget - a product that requires a large percentage of a consumer’s budget is likely to be elastic.
That means the greater the portion of the budget for a product, the greater the elasticity of demand, and vice versa.