ECONOMICS

Economics

Social science concerned with using scarce resources to obtain maximum satisfaction of the unlimited wants of society.

Oikonomia

Greek work for “household management”

Ceteris Paribus Assumption

Other things being equal or constant.

Optimizers

Economic agents are _________ (makes the most out of everything).

Normative Economics

Application of positive economics to create policies.

Positive Economics

Explanation of economic phenomena.

Production, consumption, and distribution

“Why’s” of economic behaviour.

Factors of Production

Land, labor, capital, and entrepreneurial ability.

Land

Land and natural resources.

Labor

Productive services embodied in human physical effort, skills, intellectual powers, and other.

Capital

Durable goods to produce other goods.

Entrepreneurial Ability

Ability to use the three factors of production to produce required goods and services.

Microeconomics

How individual consumers and firms behave, and how the market allocates scarce resources. Does not concern the temporary fluctuations in the economy.

Macroeconomics

Concerns the economy as a whole. Explains why fluctuations happen, and investigate policies that can mitigate them.

Output, Employment, and Inflation

Three essential phenomena of the economy

Goods, Labor, and Assets Markets of the Economy

Its interactions affect the three essential phenomena of the economy.

Economic growth

Full employment

Economic Efficiency

Price level stability

Economic freedom

An equitable distribution of income

Economic security

Balance of trade

Economic Goals

People face tradeoffs

1st principle of economics.

Equity

Benefits of resources are distributed fairly

Efficiency

Society gets the most out of its scarce resources.

The cost of something is what you give up to get it

2nd principle of economics

Opportunity Cost

What you give up to obtain an item.

Rational people think at the margin

3rd principle of economics

Marginal Changes

Small, incremental adjustments to an existing action plan.

People respond to incentives

4th principle of economics

Trade can make everyone better off

5th principle of economics

Markets are usually a good way to organize economic activity

6th principle of economics

Market Economy

Allocates resources through decentralized decisions or firms and households.

Firms

Concerns itself with who to hire and what to produce.

Households

Concerns itself with what to buy and who to work for.

Invisible Hand

Market is guided by an ____________.

Government can sometimes improve market outcomes

7th principle of economics

Market Failure

When the market fails to allocate resources efficiently.

Causes of Market Failure

Externality and Market Power

Externality

Impact of one person or firm’s actions on the well-being of a bystander.

Market Power

Ability of a single person or firm to unduly influence market prices.

The standard of living depends on a country’s production

8th principle of economics

Ways to measure standard of living

Comparing personal incomes, and comparing the total market value of a nation’s producation.

Productivity

The amount of goods and services produced from each hour of a worker’s time.

Prices rise when the government prints too much money

9th principle of economics

Inflation

Increase in the overall level of prices in the economy.

Growth in the Quantity of Money

One of the causes of inflation.

Society faces a short-run tradeoff between inflation and unemployment

10th principle of economics

Phillip’s Curve

There is a short-run inverse relationship between inflation and unemployment.

Economic Models

Used to simplify reality in order to improve our understanding of the world.

The Circular Flow Diagram and The Production Possibilities Frontier

Economic Models

The Circular Flow Diagram

Visual model of how pesos flow through markets among households and firms.

The Production Possibilities Frontier

Graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Pareto Efficiency

Occurs when no possible reorganization of production or distribution can make everyone better off without making someone else worse off.

Vilfredo Pareto

Person that “pareto efficiency” was named after.

There are only two goods produced

1st assumption in production possibilities frontier.

Fixed amount of production resources at a given time.

2nd assumption in production possibilities frontier.

Resources is readily available to be transferred from one sector to another

3rd assumption in production possibilities frontier.

Technology exhibits diminishing marginal returns in the use of productive outputs

4th assumption in production possibilities frontier.

All productive resources are fully utilized.

5th assumption in production possibilities frontier.

Diminishing Marginal Returns

More of one factor, while others are at a constant, will result in lower per-unit returns at some point.

Elasticity

The responsiveness or sensitivity of consumers and producers to price and income changes.

Elastic

>1

Inelastic

<1

Unit Elastic

=1

Perfectly Elastic

Infinite

Perfectly Inelastic

0

Price Elasticity of Demand

Degree of responsiveness of consumers to a price change.

Inelastic Demand

Essential

Less or no substitute

Change in price of product that has no effect on income or budget

Elastic Demand

Not so essential

Huge number of substitutes

With effect on income or budget

Price Elasticity of Supply

Responsiveness of producers’ supply following a change in the price of the product.

Cross Price Elasticity of Demand

Reaction of consumers’ demand to a change in the price of another product.

Exy is Positive

Product x and y are substitute goods.

Exy is Negative

Product x and y are complementary goods.

Exy is zero or near zero

Product x and y are independent goods.

Income Elasticity of Demand

Degree to which buyers’ demand respond to a change in their incomes.

Ei is Positive

Good is a normal good.

Ei is >1

Good is a luxury.

Ei is <1

Good is a necessity.

Ei is Negative

Good is an inferior good.

Demand

Refers to the number or amount of goods and services are willing and able to buy at a given price, place, and a period of time.

Law of Demand

States that as price increases, quantity demanded decreases (if other factors remain constant).

Consumers’ Income

Consumers’ Expectations of Future Prices

Prices of Related Products

Consumer Taste and Preference

Population

Non-price determinants of demand

Consumers’ Income

Affects the demand of normal and inferior goods.

Normal Good

Its demand increase when income increases. Basic necessities such as rice, utilities, medical and dental services.

Inferior Good

Its demand falls when income rises. Includes public transportation.

Consumers’ Expectation of Future Prices

Demand is affect by prices expected in future periods.

Prices of Related Products

Demand for any particular good will be affected by changes in the prices of related goods.

Substitute Goods

Goods that can be used in place of other goods.

Complementary Goods

Goods that cannot be used without the other.

Consumer Tastes and Preference

Affected by religion, culture, traditions, age, trend, technology, and many more.

Population

Increase in ________ means more demand for goods and services.

Demand Function

Representation of the relationship between demand and its determinants expressed using mathematical language.

Qdx = a - bPx + e

Linear equation of demand function.

Demand Schedule

Shows the tabular representation of the relationship between quantity of a good demanded and the price of that good.

Demand Curve

Shows graphically the relationship between the quantity of a good demanded and its corresponding price, with other variables held constant.

Change in Demand

Shifting from one demand curve to another. Brough by the changes in the non-price determinants of demand.

Change in Quantity Demanded

Movement along a demand curve. Brought to by change in the price of goods and services.

Supply

Refers to the amount or quantity of goods and services producers are willing and able to supply at a given price, at a given period of time.

Law of Supply

States that as price increases, quantity supplied also increases.

Change in technology

Cost of inputs used

Expectation of future prices

Price of related goods

Government regulations and taxes

Government subsidies

Number of firms in the market

Non-price determinants of supply

Supply Functions

Mathematical expression of the relationship between price and quantity supplied.

Qsx = c + dPx + e

Linear equation of supply function.

Supply Schedule

Shows the tabular representation of the relationship between the quantity of a good supplied and its price.

Supply Curve

Graph that shows the relationship between the quantity of a good supplied and its price, with other variables held at constant.