Module 1 BA121 Basic Microeconomics____________________________________________

Lilibeth E. Tenedero
CBA Faculty, UEP

Unit 1
Introduction
Overview

Welcome to Unit 1 of this course.

Today, people are getting to be more and more concerned about Economics.
The current economic situation seems to interest everybody in society; the bread-
earner, the laborer, the bank teller, the accountant, the college professor, and even
the student. While some of these people have had no actual background in
Economics, it comes as a challenge for the college student to familiarize himself with
what Economics is about. He gets to learn how to analyse economic theory and to
explain why things are happening in the nation. (Pagoso, et al., 2013)

This module, however, does not give you all you need to know. Some topics
have been deliberately excluded from this module. So, we encourage you to do your
own search for additional topics that you wish to add in order to have a clear
understanding of the unit.

Learning Outcomes

After learning this module, you should be able to:

1. Identify the basic economic problems.
2. Articulate the importance of learning microeconomics.
3. Argue/express appreciation for the different types of economic system.
4. Demonstrate awareness of the circular flow of economic activities.
Economic Activity

Man’s basic economic activity consists of efforts to satisfy human wants with
the use of goods and services. Three elements are involved in this objective of
satisfaction, the human wants which varies from basic needs to comfortable and
meaningful ones; the use of resources which are the land, labor, capital and
intrepreneurship; and the technique of production which shows how resources are
used and combined in production.

Task 1

In your experience as a consumer of basic goods and services, was

there an instance that you create wants for comfort, luxury, and meaningful
life?

Cite some common influencer of these kinds of goods and services.

Economic Analysis and Economic Policy

Economic analysis is the process of directing economic relationships by

examining economic behavior and events, and determining the causal relationships
among the data and activities observed. It is an aid in understanding how economy
operates because it explains how economic variables are related to one another. It
permits prediction of the results of changes in the economic variables. It also serves
as basis of policy formulation.

Economic policy consists of intervention or courses of action taken by the

government or other private institutions to manipulate the results of economic
activity. The economic policy adopted by the government may be monetary, fiscal, or
trade for the purpose of achieving economic welfare.

Price Theory and Economic Theory

Price theory (microeconomic theory) and the theory of the economy as a

whole (macroeconomic theory) constitute the basic analytical tool kit of the discipline
of economics. The principles of both are applied to special subject areas such as
monetary economics, international and finance, public finance, manpower
economics, agricultural economics, regional economics, and so on. Both are
essential to a thorough understanding of economic activity.

Microeconomics and Macroeconomics

Microeconomics is concerned primarily with the market activities on individual

economic units such as consumers, resource owners, and business firms. It is
concerned with the flow of goods and services from business firms to consumers,
the composition of the flow, and the process for establishing relative prices of the
component parts of the flow.

Characteristics of Microeconomics:

a. It looks at the decisions of individual units.

b. It looks at how prices are determined.
c. It is concerned with social welfare.
d. It has a limited focus.
e. It develops skills.

Macroeconomics treats the economic system as a whole rather than treating

the individual economic units of which it is composed. The value of the overall flow of
goods (net national product) and the value of overall flow of resources (national
income) receive the focus of attention. (Pagoso, et. al, 2013)

Task 2

In your own understanding, give at least three instances wherein the

situation deals with microeconomics.

Economic Models

Microeconomics makes extensive use of modelling, comparative statics, and

mathematics. Economic models are composed of a series of statements of
assumptions or given and statements of implications or deductions. The statement
described the essential features of an item or process and the interrelationships
between factors or variables model.

Among the best known economic model is that of a competitive market, or

“supply and demand.” The supply and demand situations developed and explained
in economics text are actually examples of economic models. The market model is
an example of comparative static analysis.

The supply and demand relationships could be expressed in three different

forms: verbal (or logical), mathematical, and graphical. Let us illustrate by using the
“Law of Supply.”

The Law of Supply can be expressed in the following words: Supply is a

schedule of prices and quantities that a supplier would be willing to offer for sale at
each price per period of time. As suppliers, they would be encouraged to sell more at
higher prices and would sell less at lower prices.

The mathematical notation of supply is:

Qs = 500P ….. this means that if the price is, say P1, quantity
supplied (Qs) would be P500 (P500 x 1 = P500); if the price is P3 quantity supplied
would be P1,500 (P500 x 3 = P1,500). Thus, there is a direct relationship between
price and quantity supplied as explained verbally. (Pagoso, et al., 2013)

The law of supply can also be expressed graphically. If we compute the

supply schedule as expressed in the equation, Qs = 550P, we will have the following
table:

Table 1
Supply Schedule
Price Quantity Supplied

1 P 500
2 1,000
3 1,500
4 2,000
5 2,500
6 3,000

The above-mentioned table can be expressed in the following graph:

6 Price

3 Figure 1

1 Quantity Supplied

500 1000 1500 2000 2500 3000

The Circular Flow of Economic Activity

Within the economy, the basic activities of production, consumption,

employment, and income generation take place through the interrelationship existing
between the basic consuming unit, which is the household and the basic producing
unit, which is the firm.

You will find below the simplified model of the circular flow of economic
activity:

The top loop in the diagram shows the business firm supplying the household
with goods and services in exchange for payments representing consumption
expenditures. On the other hand, the business firm has to use economic resources
consisting of land, labor, capital, and entrepreneur to produce these goods and
services. The household provides the firms these resources in exchange for
payments in the forms of rent, interest, wages, salaries, and profit. (Pagoso, et. al.
2013)
 Figure 2 Circular Flow of Economic Activity

Goods and Services

Economic Resources

Household Business Firm

Money Payment for Wages

Interest, Rent
Consumption Expenditures

Task 3

In your community, have you observed any instance of a circular flow of

economic activity? How? Using the frame on top, make your own flow of this kind of
activity in paragraph form. Cite some of it in simple way.

Hello! Bored na ba kayo? Mag unat-unat for few minutes and be revived. 

Basic Economic Problems

All nations big or small, developed and under developed, have to find answers
to the following problems:

 What to produce?
 How much to produce?
 How to produce?
 For whom to produce?
 So in answering the needs of the society, an economic system has the
function of determining what goods and services to produce as well as the order of
their importance. This will naturally depend on the needs of the economy as well as
its goals and objectives. The economic system has to perform the task of organizing
productive efforts to produce the selected goods and services in the proper
quantities. It must also determine how these goods and services be shared among
the members of the society. (Pagoso, et. al., 2013)

Task 4

Unemployment is a problem that leads to existence of idle

resources. Do you agree or disagree? Why? Explain briefly and give at
least two examples.

Types of Economic System

a. Traditional economic system – production decisions are made according

to customs and traditions.
b. Command economy – the answers to the basic economic problems are
dictated by the government through the head of the nation or a group of
men designated to make the decisions.
c. Market system – deals with the economic problems by considering
consumers’ choices.
d. Mixed economy – a combination of the previously mentioned economic
systems.

Task 5
1. What do you think is the economic system of the Philippines?
Why? Explain briefly.
2. Cite an example of a traditional economy. Briefly say
something about your example.

SUMMARY

Man’s basic economic activity consists of efforts to satisfy human wants

with the use of goods and services.

Economic analysis is the process of directing economic relationships by

examining economic behaviour and events, and determining the causal
relationships among the data and activities observed. Economic policy
consists of intervention or courses of action taken by the government or other
private institutions to manipulate the results of economic activity.

Price theory (microeconomic theory) and the theory of the economy as a

whole (macroeconomic theory) constitute the basic analytical tool kit of the
discipline of economics.

Microeconomics is concerned primarily with the market activities on

individual economic units such as consumers, resource owners, and business
firms. Macroeconomics treats the economic system as a whole rather than
treating the individual economic units of which it is composed.

The basic economic problems are: what to produce, how much to

produce, how to produce, and for whom to produce.

The types of economic system are: traditional, command, market, and

mixed economic system.

Congratulations! You have finished module 1. How did you go so far with this
module? Did you find it easy? Difficult? I hope you enjoyed answering it. Now
let’s see the result of your assessment. If you get a score of 90% and above,
you are excellent. If your result is above 40% but below 90%, you got an
average score. If 40% and below, you need to go over your module, read it
again and understand.

*Pls submit your answers thru my email ad: bethtene3119@gmail.com

References:

Gregory Mankiw N., Principles of Microeconomics. 6th Edition, South

Western Cengage Learning, International Edition, 2012.

Pagoso, Cristobal M. et. al., Introductory Microeconomics. 3rd

Edition, Rex Book Store. Manila, Philippines, 2006.

Sexton, Robert L., Exploration of Microeconomics, Cengage

Learning Asia Pte Ltd., 2012.

Pindych, Robert and ,Rubinfeld, Daniel, Microeconomics, 7th Edition.

Pearson Education, Inc. Copyright 2009.

Wonnacott, Ronald and Wonnacott Paul, /Introduction of

Microeconomics, 3rd Edition, Mc Graw Hill Book Company.