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This document provides an overview of key concepts in economics including:
1. Economics studies human behavior in making choices within the context of scarcity. It examines production, distribution, and consumption of goods and services.
2. There are two main types of economics - positive economics which objectively studies economic systems, and normative economics which makes judgments about economic outcomes and policies.
3. Key economic concepts include demand, supply, markets, factors of production, and different types of economic systems.
This document provides an overview of key concepts in economics including:
1. Economics studies human behavior in making choices within the context of scarcity. It examines production, distribution, and consumption of goods and services.
2. There are two main types of economics - positive economics which objectively studies economic systems, and normative economics which makes judgments about economic outcomes and policies.
3. Key economic concepts include demand, supply, markets, factors of production, and different types of economic systems.
This document provides an overview of key concepts in economics including:
1. Economics studies human behavior in making choices within the context of scarcity. It examines production, distribution, and consumption of goods and services.
2. There are two main types of economics - positive economics which objectively studies economic systems, and normative economics which makes judgments about economic outcomes and policies.
3. Key economic concepts include demand, supply, markets, factors of production, and different types of economic systems.
Economics Reviewer Normative Economics - looks at the outcomes of
the economic behavior and asks if they are good
Economics - is the branch of knowledge of goods & or bad whether they can be made better. services. - Case to case basis - Is first and foremost the study of human |prescriptions/suggestions + behavior in making choices. judgments - Proper and efficient production, distribution, - Elaborative/ essay type allocation, utilization of goods and services Two Subtypes of Positive Economics: and to satisfy the unlimited wants and needs Descriptive economics – is simply the gathering / of the society. collection and presentation of data that describes Malthusian Theory - according to this theory there is a phenomena and facts. E.g. NSO, NEDA. gap between food production and population growth. Economic Theory – is a statement of a set or sets Thomas Malthus- he stated that “As food production of related statements about cause and effect, grows arithmetically, population grows geometrically.” action and reaction. Abraham Maslow- Hierarchy of needs. Criteria for judging economic outcomes Scarcity- means that the society’s resources have less to 1. Efficiency (Allocative Efficiency) - production at a offer that the people wish to have. least possible cost. Foundations of Economics: - Least input to produce better output. Unlimited wants and needs 2. Equity – equal distribution of wealth and income. Scarcity of resources 3. Growth – increase in the total output of an Methodology in Economics: economy. Economic Theory – these are the theories and 4. Stability – there is no changes / minimal changes principles. “Trickledown effect” –the fruits of development must be - is an attempt to find realized not only on the top but trickle down also on poor explanations for observed people. economic phenomena. GIR – Gross International Reserves Economic Model – formal / mathematical Four Categories of Economic Resources: statement of a presumed relationship between 1. Land – includes all natural resources. two or more variables. - Income received from these resources is Controlled Variable – can be manipulated. rent/rental income. Uncontrolled Variable – cannot be manipulated. 2. Labor – refers to all the physical and mental Divisions of Economics: talents of individuals available and usable in Microeconomics – individual decision making producing goods and services. units (household and business firm). - Income received: wages/ salaries. Macroeconomics – function, behavior and 3. Capital – includes all produced goods used again operation of aggregate economic variables. to produce consumer goods and services. e.g. production & output - income received: interest. Employment 4. Entrepreneur- an individual who combine land, Investment capital and labor to produce goods and services. Income - Income received: profits. General level of prices/pricing Economic system – is a set of institutional arrangements and a group of coordinating mechanisms that respond to Examples of Macroeconomics: the economizing problem. Gross National Product (GNP) Three Types of Economic System: Gross Domestic Product (GDP) 1. Market Economy (Capitalism) - there is a private Two types of Market: ownership of economic resources and the use of Good market and prices to coordinate and direct Resource economic activity. Two kinds of questions that economist attempt to 2. Command Economy (Communism) – answer: government owns most property resources and Positive Economics – seeks to understand the there is central economic planning. behavior and the operation of the economic - Goods are allocated base from the needs of system without making judgments. the people. - It answers the questions: What exists? - “service oriented” And how it works? 3. Mixed Economy (Socialism) – an economic Types of Demand: system wherein the basic or key industries are 1. Primary or Consumer Demand – is the demand either owned or controlled by the government or for final goods. by the people collectively. a. Individual Demand – is the demand of an individual consumer for a given Circular Flow Diagram – a visual model of the commodity. economy shows the income received and payments b. Market Demand / Collective Demand – made by each sector of the economy. it is the sum total of individual demand. Economy’s two types of Decision Makers: 2. Derived Demand or Producer Demand – is the 1. Households demand for the factors of production. 2. Firms o Demand for the factors of production like Two types of market: bakers, oven, yeast, flour and other 1. Good / Product market depends on the desire and income level of 2. Resource Market the consumers for the final goods like PDI- Personal Disposable Income bread, cakes, pastries and other bakery PI- Personal Income products. Savings – unspent income. Factors affecting Demand (Determinants of Demand): - Leakage in the two sector model. 1. Numbers of Sellers Investment – remedy for the two sector model leakage. 2. Consumer’s Income(Superior/Norma Good l & Three Sector Model Inferior Good) Government + Household + Business 3. Consumer’s Tastes and preferences Tax – leakage in the three sector model. 4. Prices of related goods Government Expenditures – remedy. 5. Expectations Four Sector Model Two Types of Consumer’s Income: + Foreign Countries (Rest of the World) 1. Superior or Normal Good – is a good which Import – leakage demand increases as consumer income increases. Export – remedy. 2. Inferior Good – is a good which demand Production Possibility Frontier – a graph that shows the decrease as consumer income increases. various combinations of two commodities that the Substitute Goods (competing goods) – are goods which economy can possibly produce…… are used in place of other goods. Direct Relationship – implies that two variables change in Complementary Goods – are goods that go together. the same direction. Supply – is a schedule of the different quantities of goods Inverse Relationship – implies that two variables change that are sellers are willing and able to sell at different in the opposite direction. prices at a given time. Independent Variable – is the cause or source and the Quantity Supplied – is the amount of goods that the one that changes first. sellers are willing and able to sell at some particular price. Dependent Variable – the effect/outcome when Law of Supply - indicates that as price increases a larger independent variable changes. quantity will be sold, as price decreases, a smaller Demand – is a schedule of the different quantities of a quantity will be sold. good that the buyers are willing and able to buy at Types of Supply different prices at a given time. 1. Individual Supply – is the supply of an individual Quantity Demanded – is the amount of goods that the seller of a given commodity. buyers are willing and able to buy at some particular 2. Market / Collective Supply – is the sum total of price. individual supply. Law of Demand – indicates that as price increases, a Determinants of Supply smaller quantity will be bought; as price decreases, a 1. Number of Sellers larger quantity will be bought. 2. Change in technology / method of production Other explanation of Law of Demand: 3. Change in cost production Income Effect – means that a decrease in the 4. Expectations price of a product will increase the purchasing Market Equilibrium – the quantity that the buyers are power of one’s money income. willing to buy will be equal to the quantity that the sellers Substitution Effect – indicates that at a lower are willing to offer for sale. price one has the incentive to substitute the - No surplus / no shortage exist. cheaper good for similar goods, which are now - No pressure for the price to change. relatively expensive. Equilibrium Price – is the price at which quantity production of distribution and included in the demanded is equal to quantity supplied. cost to the ultimate consumer. Equilibrium Quantity – is the quantity exchanged at Value Added – is the difference between the cost of equilibrium price. materials/goods and the value of sales of goods. Surplus – is a situation wherein quantity supplied is Net National Product (NNP) – is gross national greater than quantity demanded. product less capital consumption allowances Shortage – is a situation wherein quantity demanded is (depreciation). greater than quantity supplied. NNP = GNP – Depreciation Gross National Product (GNP) – is the market value of all National Income – payments of income to the factors final goods and services produced in the economy during of production. a given period of time. NI = NNP – Indirect business taxes Final Goods – are goods which are final consumption by Personal Income (PI) – refers to payments of income the end user. to individuals such as rents paid to the owner of the Intermediate Goods – are goods which are to be land, wages paid to the laborers & interests paid to processed further into other goods. the owners of capital. Consumer Price Index (CPI) – is a tool used to measure Personal Disposable Income (DI) – refers to the the changes in price of the commodities. income left after deducting personal income taxes, Items that are not included/reflected in GNP: which the individual has at his disposal to spend or to 1. Quality of goods and services produced save. 2. Leisure Time Personal Savings (S) – refers to income not spent for 3. Housewives’ Services consumption. 4. Resale Consumption Function – is an equation showing the 5. Transfer Payments relationship between the level of consumption and 6. Security the level of disposable income. Methods used to measure GNP: Consumption Schedule – is a schedule showing the 1. Expenditure method/flow of product approach amounts of household plan to spend for consumer – this method measures all the money spent on goods at different levels of disposable income. goods and services by the following sectors: Savings – unspent income. a. Personal Consumption Expenditures (C) Average and Marginal Propensities – fraction of total – spending of consumers on final goods income that is consumed is the average propensity to and services. consume. b. Gross Private Domestic Investment (Ig) Non-Income Determinant of Consumption – amount – spending of business for new capital of disposable income is the central factor goods (investment). determining a household’s consumption and saving. c. Government purchases of goods and Amount of wealth owned by household services (G)- spending of all levels of Expectations government. Real interest rates d. Net Exports of goods and services(Xn) Consumer indebtedness - are the value of the goods sold outside Tax levels the country (exports) less the value of Investment – second major component of aggregate the goods sold in the country that are expenditure. made abroad (imports). - Refers to purchases of machinery, equipment 2. Income method or Earnings and cost approach – and tools, all construction and changes in this method accounts for all the money received inventories. for the production of goods and services. o Firms invest to earn profits. 3. Industrial Origin method – this method measures Aggregate Demand – refers to the quantity of goods and the value of goods and services produced by the services that consumers and firms would be willing to buy following industries: at any given price level. a. Agriculture, Fishery and Forestry Aggregate Supply – describes what output businesses b. Industrial Sector would be willing to produce and sell given prices, costs c. Service Sector and market conditions. 4. Value Added Method – this method measures Multiplier Effect – shows the number of times in which the value of the goods and services produced the ultimate income exceeds the initial increase in based on the value added at each stage of investment spending. Business Cycle – the recurrent but non periodic up and 4. Seasonal Unemployment – it is caused by down movement in the level of economic activity, which seasonal shifts in the labor and demand during extend over a period of several years. the year. Phases of Business Cycle: Working age population – this refer to those aged 15 1. Recession – a decline in the Real GDP that occurs years old and above and below 65. for at least two or more quarters. Labor Force = Employed + Unemployed 2. Low Point or Depression – state of economy Underemployment – situation where workers have where there are large unemployment rates and a neither the complimentary resources nor the decline in annual income. opportunities to increase what they perceive as their very 3. Expansion and Recovery – a period in which the low level of income. real GDP grows a recovery from recession. Employment – is a situation where a person 15 years old 4. Peak – the point at which the real GDP stops or older: increasing and begins its decline. Who works for pay either for somebody or in Cause of Business Cycle: his own enterprise for one or more hours per 1. Change in capital expenditures week. 2. Inventory adjustments Who works without pay for 15 hours or more 3. Innovation and imitation per week in a family enterprise. 4. Credit and loan policies Who has a job but has been temporarily 5. External shocks absent with or without pay. Inflation – is the general increase in prices across the economy. Labor Force Participation Rate – is the ratio of the labor Basic Types of Inflation force to the total population 15 years old or older. 1. Hyper Inflation – the most extreme inflation Full Employment – is something less than 100% phenomenon with yearly increases of three digit employment of labor force. percentage points and an explosive acceleration. Economists say that is at “full employment” 2. Extremely High Inflation – it ranges anywhere when it is experiencing only frictional or structural between 50% and 100%. unemployment. That is, full employment occurs 3. Moderate Inflation – can be characterized from when there is no cyclical unemployment. 1% to 5%. Arthur Okun – was the first to quantify the relationship Other Types of Inflation: between the unemployment rate and GDP gap. 1. Demand Pull Inflation – is caused by an increase Okun’s Law – states that for every one percentage point in total spending, which are not accompanied by by which the actual unemployment rate exceeds the increases in total amount of goods and services natural rate, a negative GDP gap of above 2 percent sold. occurs. 2. Cost Rush Inflation – is caused by increase in the Theories of Employment: costs of production, which causes firms to raise 1. Classical Theory of Employment – states that at prices. lower wages, employment increases. This implies Unemployment – a situation in which people in the labor that wage is determined by the interplay of force cannot find jobs within specific period. demand and supply of labor in the market. - People lose their jobs when production in the 2. Keynesian Theory of Employment – states that economy decline. employment is determined by aggregate demand Possible reasons for the decline in production: for goods and services. less spending (too much saving) John Maynard Keynes – according to him wage could not technological improvement be the primary cause of unemployment because if there Types of Unemployment: is a greater demand for goods and services in the 1. Demand Deficit/Cyclical Unemployment – it economy, the market is good inducing more production occurs when there is not enough demand to and higher employment. employ all those who want to work. 2. Frictional/Search Unemployment – when somebody loses their job (or chooses to leave it), they will have to look for another one. 3. Structural Unemployment – it occur when the structure of the industry changes.