BAM 040 P1 Reviewer

I. Outline

A. Definition of Terms
1. economy - organizational mechanism by which goods and services are
produced, sold and bought in a country or region

2. economics - is the social science of the efficient and effective allocation of

scarce resources to satisfy their unlimited need and wants

3. scarcity - (economics) the demand for a good or service is greater than the
availability of the good or service; one of the key concepts of economics

4. shortage - temporary condition where the demand on certain commodities and

services cannot be met by the current supply
NOTE:
** shortage = temporary
** scarcity = perpetual

5. opportunity cost - cost we forgo to getting something else

NOTE:
** opportunity cost = value of the other option

6. utility - (economics) individuals pleasure, happiness or satisfaction

7. marginal - additional, change in or add in

8. marginal benefit - the additional satisfaction or utility received for an additional

unit of good or service

9. marginal cost - the additional cost incurred for an additional unit of good or
service

10. Microeconomics - focuses on how decisions are made by individuals and firms,
and the consequences of those decisions

FOR EXAMPLE:
**whether price rises in the automobile or oil industries
**consumer behavior
**cost of production

11. Macroeconomics - examines the aggregate behavior of the economy

FOR EXAMPLE:
**unemployment rate
**inflation rate
BAM 040 P1 Reviewer

**how international trade affected the economic health of a country

12. market - place where buyers and sellers meet

13. ceteris paribus - assuming all factors are constant

14. demand - quantity of goods or services buyers are willing to buy

15. demand function - what describes a relationship between one variable and its
determinants; it describes how much quantity of goods is purchased at
alternative prices of the good and its related goods, alternative income levels,
and alternative values of other variables affecting demand

16. Law of Demand - states that ceteris paribus, price and quantity demanded are
inversely related

17. supply function - what describes a relationship between one variable and its
determinants; it describes how much quantity of goods is supplied at alternative
prices of the good and its related goods, alternative input/cost levels, and
alternative values of other variables affecting supply

18. Law of Supply - states that ceteris paribus, price and quantity demanded are
directly related

B. The Economic Way of Thinking (same concept with Core Economic Ideas in
your module)
1. decision-making during scarcity
> Choice is a Trade Off

2. rational behavior
> Choices Responds to Incentives

3. marginal analysis
> Benefit is What You Gain from Something
> Cost is What You Must Give Up to Get Something
> Most Choices are How Much Choice Made at the Margin
> People Make Rational Choices by Comparing Benefits and Costs

C. Porter’s 5 Forces Framework

● Created by Michael Eugene Porter
● First published in 1979
● Used to understand more about the main competitive forces at work in different
industries
BAM 040 P1 Reviewer

The 5 Forces:
● Industry Rivalry / Competitive
● Substitutes and Complements
● Power of Buyers
● Power of Input Suppliers
● Threat of New Entry / Barriers to Entry

D. Marginal Analysis

Formulae:
● Net Benefit = TOTAL BENEFIT - TOTAL COST
○ Total Benefit = NET BENEFIT + TOTAL COST
○ Total Cost = TOTAL BENEFIT - NET BENEFIT

● Marginal Benefit = CHANGE IN TOTAL BENEFIT / CHANGE

IN UNITS
𝑇𝐵2−𝑇𝐵1
○ Marginal Benefit =
𝑄2−𝑄1

○ 𝑇𝑜𝑡𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡 2= (
𝑀𝐵 𝑄2 − 𝑄1 + 𝑇𝐵1 )
● Marginal Cost= CHANGE IN TOTAL COST / CHANGE IN
UNITS
𝑇𝐶2−𝑇𝐶1
○ Marginal Benefit =
𝑄2−𝑄1

○ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡2= (
𝑀𝐶 𝑄2 − 𝑄1 + 𝑇𝐶1 )
● Marginal Net Benefit = MARGINAL BENEFIT - MARGINAL
COST
○ Marginal Benefit = MARGINAL NET BENEFIT + MARGINAL COST
○ Marginal Cost = TOTAL BENEFIT - NET BENEFIT

*** If it is easier for you to memorize the main formulae, you can use them along with algebra to
get any missing data in the marginal analysis.

E. Law of Demand
BAM 040 P1 Reviewer

Demand Function:
𝑑
𝑄𝑥 = 𝑓(𝑃𝑋 , 𝑃𝑌 , 𝐼 , 𝐻)
Interpretation of the above equation:
In determining the demand for good x, we need to consider the price of good x, the price
of related goods, our income (or budget), and other non price determinants (taste and
preference, future price of the good, etc.)

Linear Demand Function:

𝑄 = 𝑎𝑃 + 𝑏

where:
Q = quantity
b= factors influencing demand besides price
a = slope
P = price

*** slope in Demand should be negative

Demand Curve:

*** Demand Curve is sloping downwards

BAM 040 P1 Reviewer

Law of Demand - states that ceteris paribus, price and quantity demanded are inversely
related.
Meaning:
Increase in Price = Decrease in Quantity
Decrease in Price = Increase in Quantity

***In this situation, the price of an item is the only variable that should change, all else should
remain ceteris paribus. If only the price were to change, we can appropriately forecast the
outcome.

***Once other variables will change, there will be a shift in the demand curve.

F. Law of Supply

Demand Function:
𝑠
𝑄𝑥 = 𝑓(𝑃𝑋 , 𝑃𝑌 , 𝑊 , 𝐻)
Interpretation of the above equation:
In determining the quantity supplied for good x, we need to consider the price of good x,
the price of related goods, the price of inputs, and other non price determinants (technology,
future price of the good, etc.)
BAM 040 P1 Reviewer

Linear Demand Function:

𝑄 = 𝑎𝑃 + 𝑏

where:
Q = quantity
b= factors influencing demand besides price
a = slope
P = price

*** slope in Supply should be positive

Supply Curve:

*** Supply Curve is sloping upwards

BAM 040 P1 Reviewer

Law of Supply- states that ceteris paribus, price and quantity demanded are directly related.
Meaning:
Increase in Price = Increase in Quantity
Decrease in Price = Decrease in Quantity

***In this situation, the price of an item is the only variable that should change, all else should
remain ceteris paribus. If only the price were to change, we can appropriately forecast the
outcome.

***Once other variables will change, there will be a shift in the supply curve.
BAM 040 P1 Reviewer

Sample Problems:

1. Tom's supply equation for selling handmade mugs is as follows:

Q = 5 + 1.5P

a. How many mugs will he sell if the price is $2 a mug?

b. What if the price is $4 a mug?
c. If Tom's supply equation for his handmade mugs is now:
Q = -5 + 2P
At what price will he no longer be willing to sell mugs?

Solution:

a. Q = 5 + 1.5P
Q = [5 + 1.5(2)]
Q = 8 mugs

b. Q = 5 + 1.5P
Q = [5 + 1.5(4)]
Q = 11 mugs

c. Q = -5 + 2P
0 = -5 + 2P
5 = 2P
P = 5/2
P = $2.50