Econ Midterm

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are abundant in quantity and that they can be had for the taking; they command no price.

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-Free resources

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*Goods and services also referred as the.....

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output or finish product; things which are produced to be sold.

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Classification of resources

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Land Labor or Human resources Capital

Entrepreneurship

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-covers all natural resources that exist without man’s intervention.

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Land

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-consist of labor power or the capacity for human effort both physically and mentally, used in producing goods.

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Labor or Human resources

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-manmade resources that is used to create another product.

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Capital

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-includes the managerial abilities that a person brings to the organization.

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Entrepreneurship

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can be owners or managers of firms.

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Entrepreneurs

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What is Technique?

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–refer to how resources are used and combined or allocated in the production.

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Labor intensive

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– production process that requires higher labor input than capital input in terms of cost.

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Capital intensive

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- production process that requires higher capital input than labor input in terms of cost.

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TEN PRINCIPLES OF ECONOMICS How people make decisions

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1. People face tradeoffs2. The cost of something is what you give up to get it3. Rational people think at the margin4. People respond to incentives How people interact5. Trade can make everyone better off6. Markets are usually a good way to organize economic activity7. Governments can sometimes improve market outcomes How the economy as a whole works8. A country’s standard of living depends on its ability to produce goods and services9. Prices rise when the government prints too much money10. Society faces a short-run tradeoff between inflation and unemployment

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Opportunity Cost

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- refers to the cost of giving up an alternative by selecting the best next choice.

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It is thevalue of foregone alternative;

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Opportunity cost

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the more we get of something the more we sacrifice a unit of other alternative.

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Opportunity cost

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- looking at the additional cost and additional benefits whether the extra unit of time, money or other resources allocated in some courses of action is worthwhile;

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Marginal Cost and Marginal Benefit

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marginal benefit must.....

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outweigh the marginal cost.

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Branches of economics – two major divisions of economics

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Microeconomic

Macroeconomic

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What is Microeconomics

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–concerns with the behavior of the sub units of the economy such as firms, individuals, government agencies;

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seek to understand and explain the behavior of the individual decision making units as they respond changes in their economic environment.

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Microeconomics

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What is Macroeconomic

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– is the study of the economy as a whole or aggregate;

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covers the total level of output, income, employment, consumption, investment, and prices for the economy as a whole.

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Macroeconomics

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Economic Activity

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Production Distribution Exchange Consumption Public Finance

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– an economic process of converting inputs (land, labor and capital) into outputs

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Production

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– the process of allocating or apportioning scarce resources to be utilized; the process of storing and moving products to customer often through intermediaries (wholesalers & retailers).

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Distribution

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– the process of trading or buying and selling of goods and services for money or its equivalent. It also includes the buying of goods and services either in the form of barter or through market.

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Exchange

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– refers to direct utilization or usage of the available goods and services by the buyer (individual) or the consumer (household).

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Consumption

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–the collection of taxes from those who benefit from the provision of public goods by the government and the use of those tax funds towards production and distribution of the public goods.

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Public Finance

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Fundamental Economic Problems

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 What to produce?

 How to produce?

 How much to produce?

 For whom to produce?

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– characterized by the type of institutions responsible for the management and allocation of resources used in the production of goods and services.

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Economic Systems

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Economic system

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 Market/capitalist economy Command/communist economy  Custom or traditional economy  Mixed economy

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– an economic system which run by individual players in the economy (seller and buyer). The fundamental economic problems are decided primarily by the interaction of demand and supply in the market; an institution of private property and private ownership of resources; free enterprise or competition; profit motivated; absence of central planning commission.

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 Market/capitalist economy

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–all economics resources are owned by government or by the public; decisionmaking is centralized in the hand of government; the economy has no ownership, no private property

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 Command/communist economy

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–the functioning of economy is governed by customs, belief, and traditions.

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 Custom or traditional economy

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– a mixture of two systems. Counties may refer as socialistic or a private enterprise depending on which sector is predominant.

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 Mixed economy

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The two broad reasons for a government to intervene in the economy is to.....

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promote efficiency and equity.

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3 Es in Economics

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Efficiency

Effectiveness

Equity

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– refers to productivity and proper allocation of economic resources.

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Efficiency

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– means attainment of goals and objectives.

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Effectiveness

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– means that the benefits of those resources are distributed fairly among society’s members.

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Equity

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What is Economic models?

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– are the tool used by economist to verified and falsified economic phenomena or theories

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a simplification of intricate relationship between economics agents and economic variables.

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Economic model

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Common elements or characteristics of economic models

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1. Ceteris Paribus2. The assertion that economic agents are optimizer 3. The distinction between Positive and normative economics

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- an assumption that all other things or factors are constant or equal.

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1. Ceteris Paribus

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-the assumption is consumer are utility maximizers and producer are profit maximizers and government seeks to maximize public welfare.

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2. The assertion that economic agents are optimizer

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Kinds of Analysis in Economics

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Positive Economics Normative Economics Circular Flow diagram Production Possibility Frontier (PPF) also called Transformation Curve.

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– describes the facts and behavior of the economy or “the way things are.

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Positive Economics

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Positive statements(positive economics) can be tested; concerned with the question

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“what is” or “what are”

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–involves ethics and value judgments; concerned with the question “what is ought to be”. E.g. Government should levy more taxes to provide more services.

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Normative Economics

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- A visual model of the economy that illustrates how households and business interact through markets for product and markets for resources.

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Circular Flow diagram

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What is circular flow diagram

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A cyclical activities that show how the economy works.

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–this shows the possible maximum combination of goods and services that an economy can produce given the available resources and existing technology at a given time;

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Production Possibility Frontier (PPF) also called Transformation Curve

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What is Production Possibility Frontier (PPF) also called Transformation Curve

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it gives a menu of choices to produce goods in the most efficient way in terms of resources use.

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Production Possibility Frontier (PPF) also called

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Transformation Curve

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PPF

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Production Possibility Frontier

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PPF Assumption

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1. There are only 2 goods produced2. Society is endowed w/ fixed amount of productive resources at a given time3. Resources could readily be transferred from one sector to another4. The technology exhibits diminishing marginal returns in the use of all productive inputs5. All productive resources are being fully utilized

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are the basic forces in the market.

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Demand and supply

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-place where trade between buyers and sellers (consumer and seller or producer take place).

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Market

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refers to the willingness of the buyer/ consumer to pay for certain goods and services;

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Demand

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What is demand

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represents the consumer’s preferences and purchasing power

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refers to the willingness of the producer/seller to produce the goods that the consumer look for;

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Supply

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settle in the market to trade or sell products in the hope of gaining profits.

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Supply

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What is supply

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capacity of the firms to produce a commodity;

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Concept of Demand Quantity demanded (Qd)

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The qty or amount of a good and services that consumers are willing and able to purchase during a specified period of time, ceteris paribus.

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Law of demand

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States that if the price of a certain goods and services rise the quantity demanded will fall, and if the price decreases the quantity demanded for that good will increase thus the quantity demanded for a commodity or service is negatively or inversely related to its own price, holding all other factors constant.

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Reasons why Price and Qty demanded are inversely related

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• Concept of Opportunity Cost• Purchasing Power• Utility

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Ways to present the demand and its determinants

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Demand Schedule or table

Curve Demand Function Market Demand

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– a numerical tabulation of the quantity demanded (Qd) of a good or services at selected

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Demand Schedule or table

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- a graph that obtains when price (one of the determinants of demand) is plotted against quantity demanded; the characteristic of the curve is downward sloping.

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Demand Curve

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– an equation or mathematical representation of demand as a function of its many determinants. Qd = a – bp

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Demand Function

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– sum of the demand of all individual buyers; the horizontal summation of the individual demand.

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Market Demand

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Factors affecting the Quantity demanded and the Shift in the demand curve

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1. Price of the product

2. Income

3. Consumer taste and preferences

4. Consumer expectation

5. Price of related goods with another goods

6. Population

7. Range of goods available in the market

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*Inferior Goods *Normal Goods

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(if income increases, quantity demanded decreases).

(if income increases, quantity demanded increases).

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–a good that can be used in place of another good

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*Substitute Goods

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– good that is consumed along

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*Complement Goods

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Concept of Supply

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Supply is the willingness of sellers to produce a good to sell at various possible prices; producers seek more profit

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It shows the relationship between the price of a particular good and the qty of the good that firms are willing to sell at that price all other things remaining the same.

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Concept of supply

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Why Price and Quantity supplied are directly related?

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 Profit or incentives (if the price is higher, it could allow the firm to earn more).

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Ways to present the supply and its determinants

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Supply Schedule or tableSupply Curve Supply FunctionMarket Supply Market supply curve

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– a numerical tabulation of the quantity supplied (Qs) of a good or services at selected Price, holding all other factors constant.

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Supply Schedule or table

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- a graph that obtains when price (one of the determinants of supply) is plotted against quantity supplied; the characteristic of the curve is upward sloping.

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Supply Curve

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– an equation or mathematical representation of supply as a function of its many determinants. Qs = c + dp

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Supply Function

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derived by considering the behavior of all the firms in the market.

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Market Supply

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tells how much all the firms in the market would produce to each price.

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Market supply curve

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Factors affecting the Quantity supplied and the Shift in the supply curve

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1. Price of the Product

2. Technology

3. Change in the prices of resource inputs

4. Price of related goods

5. Number of firms

6. Expectation of future prices,

7. Gov’t taxes, subsidies and regulations.

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The interaction among buyers representing the demand side and sellers representing the supply side will determine the equilibrium market price (P*) and equilibrium quantity (Q*).

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Market equilibrium

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In the market either one of 3 scenarios may happen

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Shortage

Equilibrium

Surplus

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– the quantity demanded is greater that the quantity supplied.

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Shortage

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What is shortage

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a condition of excess demand;

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– a condition of excess supply; the quantity demanded is less than the quantity supplied

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Surplus

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– a condition where the quantity that the consumers are willing to buy matches the quantity that the seller are willing to offer;

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Equilibrium

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- the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.

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Equilibrium Quantity (Q*)