mMICROECONOMICS LAWS vs THEORY

 Laws – this are events; kung ano yung kaganapan

Lesson Proper:  Theory – it explains the law; bakit ganoong ang law
a. Definition
b. Nature of economics C. METHOD, TOOLS and MODELS
c. Approaches, methods, tools  pamamaraan to study economics
d. Divisions
e. Why study economics? a. Positive Economics
 based on the facts
Origin – Greek – ‘oikonomos’  looking in the world how the
economic works
 Economy and household are in relation with each  facts can test it
other in decision making/choice.  accuracy can see through facts
 ex. The law of supply which can
A. DEFINITION based in facts.
b. Normative Economics
Definitions according to the different economists:  Value judgments
 Mankiw – study of how society manages resources  ex. Traditions in households
 Lieberman-Hall – choice under circumstances of
security TOOLS
 Fajardo – proper allocation o naglalaan in economics, models to visualize to simplify the
 In economy – ilalalan economies
 Efficient use of available
MODELS
resources for maximum
o abstract representation of realities
satisfaction (goal)
o simplified relationship of reality
 Efficient –
o variables and their relationship
 Effective – nagagampanan yung
purpose / end gsoal o allow the diagnosis of economics variables
 Satisfaction – this is the end goal and forecast future behavior of variables
 McConwell & Brue – how individuals, (madidiagnose kung ano ang behaviro
institutions, society make optimal choices under that eventually you know the future of its
condition of scarcity behavior)
 Optimal choice – best choices o allows to design economic policies (there
 Marshall – ordinary business of life is should basis)
 How to accumulate wealth? o it contains words, graph, formula
 Equality – what is the best for
you
 Equity – what is best for you

FUNDAMENTAL TRUTHS

1. Scarce resources
2. Unlimited wants and needs

The point of views of this definition is

decision-making/choice, wealth, management, behavior
reflecting human behavior.

Welfare economics – these are the insurance; kapakanan ng

society
Feminist economics - feminist economics is an economics
that focuses on what is needed to produce a gender equal
society
Economic is also ART since it is a skill; decision making is
also a skill.

B. NATURE OF ECONOMICS
for ex. Law of Demand
 In social science which has systematic method.
o When observation is accepted then it can
be a theory.
 The study of behavior in creating choices.
 D. DIVISION
 Micro – behavior/choice of individuals and
institutions
 Macro – aggregate o pangkalahatan

sintax – pandagdag sa mga bisyo

ASSUMPTIONS and CONCLUSION

a. Simplifying Assumptions –
Ex.
b. Critical Assumptions
Ex. Condition
 Kapag hindi ito nasasatisfy
pwede ito hindi successfully
maconclude

PPF (Production Possibility Frontier)

 Economic model that shows how economic actor-

company (micro), nation (macro), could make
trade-off in production of different commodities
 Shows:
o Trade-off
o Opportunity cost
o Scarcity
o Production limit

Example:

Point X Y
Watermelon Shoes
(million of (million of
tons) pairs)
A 0 15
B 8 14
C 14 12
D 18 9
E 20 5
F 21 0

WEEK 3: ECONOMIC MODEL
Previous lesson:
1.1 DEFINITION AND QUESTIONS
Economics divides into two parts:
 Microeconomics: The study of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
 Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the
global economy of the choices that individuals,
businesses, and governments make.
Economics for different perspectives:
 Economic is proper allocation and efficient use of
available resources for maximum satisfaction of
human wants and needs - Fajardo
 Economic is an ordinary business of man, how man
gets income? How he invests it? Creation of
wealth. - Alfred Marshall
1.2 THE ECONOMIC WAY OF THINKING
Economics as a Social Science
 Economists try to understand and predict the effects
of economic forces by using the scientific method
first developed by physicists.
 The scientific method is a common-sense way of
systematically checking what works and what
doesn't work.
 An economist begins with a question or a puzzle
about cause and effect arising from some observed
facts
o Manghiram ng knowledge to investigate in
order to maximize and minimum the
resources that has cause and effect
o In economics, we use mathematical
functions
Economic Models
 An economist's second step is to build a model that
provides a possible answer to the question of
interest.
 An economic model is a description of some
feature of the economic world that includes only
those features assumed necessary to explain the
observed facts.
o Check Models Against Facts
 An economist's third step is to
check the proposed model against
the facts.
 Proposed model against
facts
 Ginagamit to foresees
that may happen in the
future
 There are two economic models which are common
known as PPF (production possibility frontier) and
circular flow.
o PPF is common economic model and also
shows: trade-offs, opportunity costs,
growth efficiency, etc,.
o Circular Flow Model that shows
interrelatedness.
 Models used words, graphs and mathematical
functions.
 In research in economics, theory uses models that is
utilized to test
To check an economic model against the facts,
economists use:
a. Natural experiments
 Natural experiments: A situation that arises in
the ordinary course of economic life in which
the one factor of interest is different and other
things are equal
b. Statistical investigations
 A statistical investigation looks for a
correlation.
o Correlation is the tendency for the
values of two variables to move
together in a predictable and related
way.
 This may be used in
economic research.
c. Economic experiments
 An economic experiment puts people in a
decision- making situation and varies the
influence of one factor at a time to discover
how they respond.
Disagreement: Normative versus Positive
 Economists sometimes disagree about assumptions
and models and also about what policy to use.
 Some disagreements can be settled by appealing to
further facts, but others cannot.
 Disagreements that can't be settled by facts are
normative statements-statements about what ought
to be.
 Disagreements that can be settled by facts are
positive statements-statements about what is
Explanation:
 Positive – why economic phenomenon happens?
 Normative – explaining what intervention should to
do
o Ex. Increasing prices of life
 in positive approach: rising
prices may be because of
inflation, collusion, cartel (an
 agreement between companies in  This is where you can create your model
the same industry to fix prices, 6. Formulate solution
limit production, and divide up  Here, you can now conclude what your model
markets.) can be.
 in normative approach: rising
process of rice may be judge with Example:
validity (value judgements); BBM 1. What is your choice variable?
to price control on rice yet this is
 No. of guests in the wedding
not fully long-term solution since
it will always increase the rice of
2. Brainstorm costs and benefits
rice and make it worst
 Afterall, focusing on agricultural
especially the farmers instead of Costs Benefits
importing (yet at some point, we - financial hardships (F) - fun
need also to trade) - stress - gifts
- judgments - validation of relationships
 Look at the problem: - share-off
o We also look at the: - meaningfulness
a. Demand side – tumaas ba ang
demand? or may bandwagon effect 3. Select your gave costs and benefits.
ang nangyari?
b. Supply side – ang problem ba is nasa Figure 3.1
supply? Nasa cartel? Costs Benefits
 Theory emphasizes how the world works; - financial hardships (F) - gifts (G)
application is how the world should work. - validation of relationships
(V)
Economics as Policy Tool
Minimize of maximize?
 Economics provides a way of approaching
Formula: maximization the no. of guests in the
problems in all aspects of our lives: personal,
wedding
business, and government.
4. Place your variables in word.

HOW TO CONSTRUCT ECONOMIC MODELS? max :g=−F ( g ) +G(g)+V ( g)

We have to reminder that as the prices (P) increases; then Where: F, G and V are independent variables; and names as:
the quantity of demand (Qd) decreases, as the prices (P)
decreases; then the quantity of demand (Qd) increases. (do  F - financial hardships
not forget si ceterus perimbus).  G - gifts
 V - validation
Illustration:
5. Brainstorm exogenous variable (these are
independent variables that can influence optimal
choice)
- now, think on the possible exogenous (independent)
variable that affects the maximization of guests
STEPS IN THE CONSTRUCTION OF AN ECONOMIC
Figure 3.2
MODEL
exogenous variable
1. Select a problem - income of bride and groom (i)
 There is a problem that an economic model - no. of extended family (e)
wanted to have solution - schedule (s)
2. Collect data now we can add it to our previous formula (see no. 4)
 What are the variables needed?
 Erogenous (dependent variable) and exogenous
(independent variable) max :g=−F ( g ,i ) +G( g , e)+V (g , s)
3. Formulate hypotheses
4. Testing of hypotheses Where: i, e, and s are independent variables; refer to figure
 If you already done formulate, you can now 3.2 for the reference
formulate by doing application in outside such
as markets, etc.,
5. Verify theory

METHODS OF ECONOMICS
Methods of economic analysis
a. INDUCTIVE- part of the whole, particulars to
general, individual to universal.
Process:
i. problem
ii. data gathering
iii. observation
iv. generalization
b. DEDUCTIVE- from general to specific
particular, universal to individual
i. problem
ii. formulating assumptions
iii. hypothesis
iv. verify-data gathering / test data
Descriptive Economics and Economic Theory
a. descriptive economics - the compilation of
data that describe phenomena and facts.
b. economic theory - a statement or set of related
statements about cause and effect, action and
reaction.
10 PRINCIPLES OF ECONOMICS (Mankiw)
I. How people respond make decisions?
Principle 1: People Face Tradeoffs
- To get one thing, we usually have to give up
something else
o Ex. Leisure time vs. work
Principle 2: The Cost of Something is What You Give Up to
Get It
- Opportunity cost is the second best alternative
foregone.
o Ex. The opportunity cost of going to
college is the money you could have
earned if you used that time to work.
Principle 3: Rational People Think at the Margin
- Marginal changes are small, incremental changes to
an existing plan of action
o Ex. Deciding to produce one more pencil
or not
Principle 4: People Respond to Incentives
- Incentive is something that causes a person to act.
Because people use cost and benefit analysis, they
also respond to incentives
o Ex. Higher taxes on cigarettes to prevent
smoking
II. How people interact?
Principle 5: Trade Can Make Everyone Better Off
- Trade can be better tat can use in transporting
goods.
o Dahil nangangailangan ng bawat bansa
ng resources which are not primarily seen
on their country.
/
Principle 6: Markets Are Usually a Good Way to Organize
Economic Activity
- Market is a way to organizes man’s needs. Market
will produce the most surpluses for the economy.
Principle 7: Governments Can Sometimes Improve
Economic Outcomes
- Market failures occur when the market fails to
allocate resources efficiently. (both consumers and
producers are not working; then there is no
economy)
o Market failure happen when the great
depression hits. It was devastated
occurrence where both consumers and
producers are not present for the economy.
- Governments can step in and intervene in order to
promote efficiency and equity.
o Government that protects both consumers
and producers. (ex. Patent law,
intellectual property law)
o Why sometimes? Because government can
possibly abuse and use it in malicious
way.
III. How the economy works as a whole?
Principle 8: The Standard of Living Depends on a Country's
Production
- The more goods and services produced in a country,
the higher the standard of living. As people
consume a larger quantity of goods and services,
their standard of living will increase
o Maayos ang pamumuhay kung naabot ang
needs and services ng mga tao.
Principle 9: Prices Rise When the Government Prints Too
Much Money (Inflation)
- When too much money is floating in the economy,
there will be higher demand for goods and services.
This will cause firms to increase their price in the
long run causing inflation.
o Kapag maraming print ang pera mas may
possibility na tataas ang demand.
Principle 10: Society Faces a Short-Run Tradeoff Between
Inflation and Unemployment

- In the short run, when prices increase, suppliers

will want to increase their production of goods and
services. In order to achieve this, they need to hire
more workers to produce those goods and services.
More hiring means lower unemployment while
there is still inflation. However, this is not the case
in the long-run.
o Government should not focus only either
inflation and unemployment.
 For the government to control,
we need to low the supply so
tataas ang IR (interest rate) na
kakaunti ang utang/investments
na hindi makakautang at
makakaexpand ang capotal para
sa producers that eventually UE
(unemployment) increases.
 If government focus only on
inflation rate, the IR will increase
so marami ang uutang o dadami
ang investements that eventually
tataas ang inflation dahil marami
pera
 WEEK 4 Principle of:

Previous lesson: i. Invisible hands – consumer and producers

is babalik pa din sa equilibrium
Why there is scarcity? ii. Division of labor – there is what we called
specialization where mas mabilis kung
- Because there is unlimited wants and needs ang mga ididivide ang gawin; thus, person can have
people its own specialization
iii. Law of absolute advantage – efficiency in
ECONOMIC THOUGHTS and IDEAS product; countries should see their
efficiency to produce more products
Mercantilism
iv. Free markets – prices are determined by
the equilibrium;
a. Nature
 Competition is highly
- Mercantilism is an economic through where the basis of a
encouraged since there is
country is the accumulated of goal and wealth.
no government intervention
- In 16th to 18th (actually 1700s) century where it happened.
b. David Ricardo
- The proponent of this ideas was the English and the
i. Absolute advantage applied to trade
French.
 I-produce yung products that re
o When mercantilism happened, people and
efficient
government do not have aim for the economy.
c. Jean Baptiste
b. Trends
i. Say’s Law
- Manufacturing more important than goal
 “Supply creates its own demand”
o maaaring magkaroon ng surplus kung hindi ito
 It means yung producers
nangyayari
creates demand
o maaaring magkaroon ng food security
 More products more
o hindi pwede magpasok ng rraw materials
income for workers
kaagad
 More income more buying
o agriculture must be the primary factor
products

- Trade surplus (gains from trade) exports were encourage d. Alfred Marshall
o exports encouraging manufacturing which
affects the flow of the money Proponent of: marginalism, d,emand, supply, equilibrium,
- Advocate imperialism elasticity, etc.

Physiocracy Karl Marx

a. Nature - Believes in equality; how resources distribute

- Natural law - But, connected to socialism / comman autonomy
o Hayaan ang market to do its own not where government get all the resources and decide
government on how it will distribute
b. Proponents o Hyper dependent to the government is
1. Francois Quesnay - forerunner
applicable in this economic idea.
2. Pierre Samuel du Pont de Nemours
- Natural economy - Socialism also connected to communism where
- Laizzes faire “let things alone” resources are impossible to control. People varies
- Market has its own mechanism when it comes to their needs.
- Invisible hands Ex. North Korea

c. Trends
1. Market should be left done best to itself.
2. Without heavy taxes, prices are changes excessive;
profits are prevented
o Hindi dapat magtaas ng prices ang mga
John Maynard Keynes
producers
3. Agriculture – more important i. Keynesian Theory – kailangan ng economic intervention in
a market failure; government interaction

visualization:

Key Forerunners Classical Economist

a. Adam Smith
- Father of Classical Economies
o “Theory of Moral Sentiments”
o An Inquiry to the wealth of Nations
 Bakit may mga mayayamang bansa

FOUR BASIC ECONOMIC QUESTIONS
Four Basic Economic Questions
- There is 4 basic fundamental question in economic
because of scarcity which affected since there is
unlimited wants and needs of people.
1. WHAT to produce?
- Consumer sovereignty
- Demand
o Ano ba yung nilikhang products or services?
2. HOW to produce?
- These are the methods, strategies para maproduce ang
mga products
- Primarily decision is to use the cheapest method and
most efficient production
o Paano ba naproproduce ang mga services and
products?
3. For WHOM to produce?
- Sino sino ang nagbebebenefit from the produced products
and services?
4. HOW MUCH to produce?
- Gaano kadami ang maproproduce na products?
ECONOMIC SYSTEM
 set of economic institutions that dominates a given
economy
 are those social organizations, relationships and
arrangements which determine in a given society the
manner in which scarce resources are utilized to satisfy
human wants
 determines the answer to the fundamental economic
questions (principal objectives)
 every economic system attempts to achieve in one way or
another, a viable economy where society as a whole can
be able to maximize the general welfare of the citizenry
focusing towards a common goal: high standard of living
for all citizens.
Regardless of what economic system a country adopts, salient
functions should characterize any economic system
1. to produce the goods for consumption of the population
2. to utilize the resources in efficient method of production
3. to employ the labor force in occupations where
productivity is at optimum
4. to apportion the wealth and income available to everyone
in an equitable manner
5. to encourage innovation and technology in order to
maximize efficiency, optimize satisfaction and minimize
waste
TYPES OF ECONOMIC SYSTEM
1. TRADITIONAL ECONOMY
a. Production methods, exchange and distribution of
income are made according to customs and traditions
b. Response to the problems of production and
distribution of economic goods is based on ways
procedures and systems which have been handed
down from one generation to the next
c. Problem of production is met using the mechanism in
identifying which goods to produce, in assigning the
task in the production process, and in deciding the
type of production technology to be used.
d. Subsistence economy- production is being shared
with in the community, taking only what they need
e. Type of economy very backward, it does not allow
change to respond to the changes in time
o This economy system is based on traditions,
customs and what are the practices.
o Usually happened on tribe communities
o How? Ipinapasa sa mga generations?
o Whom?
o Advantage: naprepreserve ang culture and
traditions yet;
o Disadvantage: no andvanced whet it comes in
production
2. CAPITALIST OR MARKET ECONOMY
(laissez-faire, market economy, free enterprise,
price mechanism, free market economy)
a. No government intervention
b. Existence of consumer sovereignty
c. Mobility of labor
d. Right to own property
e. Presence of competition
f. Profit motivation
g. Wide gap between rich and the poor
h. Existence of unemployment
i. Misallocation of resources
j. Shortage of manual labor
Visualization:
ALLOCATION OF RESOURCES
What to produce?
 Consumer sovereignty. The consumer will
dictate the types of goods to be produced.
How to produce?
 Technical efficiency- the producer will use
the least input to produce a given level of
output
 Economic efficiency- cheapest method of
production
For whom to produce?
 Basically determined by the peso votes
(those with purchasing power will
eventually get the goods). In other words,
higher income gap groups has the bigger
share of the national pie because of their
stronger purchasing power. (communist
argument)
Weaknesses and reasons why the government needs to
intervene in the market economy
Public Goods
1. Can be defined in terms of two principles.
a. Principle of non-excludability-
nobody can be excluded from using
the good
Visualization:

b. Principle of non-rivalry- where A is
using, B can also use it at the same
time. In other words, consumption of
good by A will not diminish the
consumption by B.
Visualization:
2. In market economy- private sector is not
willing to supply public goods.
a. Free rider problem- people enjoys
goods/services but does not pay for it.
It is impossible to price the product
(Ex. Street lights, defense,
lighthouses, road signs). Goods have
to be provided by the government.
Visualization:
3. COMMAND ECONOMY – Centrally planned
economy
- Ginawa para may pagkapantay-pantay
a. everything is controlled by the government – no
private sector
b. consumer sovereignty does not exist in communist
system
c. Due to absence of competition, complacency sets
in.
d. Theoretically, unemployment does not exist in the
communist system.
e. Theoretically, in a planned economy, there is no
difference between the rich and the poor. (class-less
society)
f. There is no business freedom in a communist
system
o Bawal magtinda
g. One of the demerits of this system is that the
government may produce goods that is not required
by the public.
Visualization:
4. The Mixed Economy- all economies are to some
extent, mixed. It’s just a matter of degree of
intervention.
 The US in theoretically a capitalist
economy but in reality, 10% of its
economic activities are carried out by the
government.
 As for China, it is theoretically communist
economy, yet there are new private
enterprises in China
 In the real world, all economies are to
some extent, mixed
Characteristics
a. There are both public and private sectors
working hand in hand so as to ensure economic
growth
b. The role of the public sector is not to compete
with but to compliment the private sector by
providing the infrastructure so that economic
activities can be carried out effectively and
efficiently
c. The government will not intervene in all matter
but only in particular industries, where,
o initial costs (incurred during the design
and construction phase) or the fixed
costs (costs independent to the
volume / based on time rather than the
quantity produced or sold by the
business ex: rent, lease, salary, utility,
insurance, loan repayments) are too
exorbitant for private sector undertake,
for example MRT in Singapore.
o Not profitable (low-cost public
housing)
o Involves provision of social services
(provided by the government to
increase the general living standard of
the people)
o Duplication is to be avoided and hence
wastage of resources which are scarce
 (single producer is necessary to
undertake certain economic activities to
avoid unnecessary competition)
o Strategic military reasons are involved
(self-sufficiency in terms of good
production, military equipment
o Humanitarian reasons are involved (if
all economic activities are to cater for
the rich who will cater for the needs of
the poor in remote, rural areas)
d. In a mixed economy, the government will try
to reduce income inequality by imposing WEEK 5: CIRCULAR FLOW OF MODEL
progressive tax system where higher income
earners are taxed more proportionately than the
Circular Flow Model
low income earners. (narrowing the gap
a. Circular flow model of output and income
between the rich and the poor) b. The Multiplier Effect
e. The government will also control the existence c. Inflows and Outflows
of monopolies. Single seller – reduced
production of output to maintain the price of a
commodity at artificially higher levels. An economic model that illustrates how money moves from
products to consumers and back again in an endless loop.
Government regulates and controls the
power of the monopolist. o The basic purpose of the circular flow model is to
understand how money moves within an economy.
Visualization: o It breaks the economy down into two primary players:
households and corporations.
o It separates the markets that these participants operate in
as markets for goods and services and the markets for
the factors of production.
o Other sectors can be added for more robust cash flow
tracking.
o The circular flow model is used to measure a nation's
income, as the circular flow model measures both cash
coming into and exiting a nation's economy.
o It is also used to gauge the interconnectivity between
sectors as a fully robust and strong economy will have
interaction between components. For instance, the
relationship between a government's taxation policies
and a household's consumption spending will have a
direct impact on a business's ability to sell goods.

Sectors of a Circular Flow Model

There are different types of circular flow models, each with a

different number of sectors it tracks. Below are the potential
sectors that could be included in a circular flow model. Each
sector within a circular flow model may be designated with a
capital letter often used to describe how to calculate GDP.

A. Household Sector

In a two-sector model, circular flow models start with

the household sector that engages in consumption
spending (C). Households contribute to an economy by
working (giving away time and labor) and by buying
products (giving away money). In return, households
consume products and utilize government programs.

B. Business Sector

In a two-sector model, circular flow models also include

the business sector that produces the goods. Businesses
absorb a variety of production costs including labor,
materials, and overhead. As a result, many companies are
able to manufacture products that benefit other parties.

C. Government Sector
In a three-sector model, government sector cash flows are
included. The government injects money into the circle
through government spending (G) on programs such as Social
Security and the National Park Service. It also extracts money
from households and businesses by way of taxes.

D. Foreign Sector

In a four-sector model, money also flows into the circle

through exports (X), which bring in cash from international
buyers from the foreign sector. By extension, this indicates
that the two-sector or three-sector models are domestic
activity only. The foreign sector is different from the
domestic sector as there may be administrative inefficiencies
that result in lost cash flow due to import taxes, duties, or
fees.

E. Financial Sector

In a five-sector model, cash flow from the financial sector is

added. This includes banks and other institutes that provide
cash flow via lending services. Some circular flow models
also outline investor activity, as cashflow from entrepreneurs
and investors may represent an inflow to businesses while net
profits from the company represent an outflow.