Chapter 1

 Economy comes from the Greek word OIKONOMOS

meaning ONE WHO MANAGES A HOUSEHOLD
 SCARCITY – society has LIMITED RESOURCES
 ECONOMICS – study of HOW SOCIETY MANAGES ITS
SCARCE RESOURCES
How People Make Decisions
1ST Principle – People Face Trade-offs
 EFFICIENCY – the property of society GETTING THE MOST
IT CAN from scarce resources
 EQUALITY – PROPERTY OF DISTRIBUTING ECONOMIC
PROSPERITY UNIFORMLY among the members of society
Our study of economics starts by acknowledging LIFE’S
TRADE OFFS..
2ND Principle – The Cost of Something is What You Give Up to Get
It
 OPPORTUNITY COST – WHATEVER MUST BE GIVEN UP
TO OBTAIN SOMETHING
3RD Principle – Rational People Think at the Margin
 RATIONAL PEOPLE – PEOPLE WHO systematically and
purposefully DO THE BEST THEY CAN TO ACHIEVE THEIR
OBJECTIVES
 MARGINAL CHANGE – small incremental ADJUSTMENT
TO A PLAN OF ACTION
 MARGINAL BENEFITS – MAXIMUM AMOUNT consumer
will pay FOR AN ADDITIONAL SERVICE OR GOOD
 MARGINAL COST – CHANGE IN COST FROM MAKING
MORE OF SOMETHING
4TH Principle – People respond to incentives
 INCENTIVES – something that INDUCES A PERSON TO
ACT (I.E. REWARDS)
How People Interact
5TH Principle – Trade can Make Everyone Better Off
 Countries also benefit from the ability to trade with one
another
 Trade allow countries to SPECIALIZE IN WHAT THEY DO
BEST AND ENJOY A GREATER VARIETY OF GOODS
AND SERVICES
6TH Principle – Markets are usually a Good Way to Organize
Economic Activity
 MARKET ECONOMY – economy that ALLOCATES
RESOURCES THROUGH DECENTRALIZED DECISIONS
OF MANY FIRS AND HOUSEHOLDS
 INVISIBLE HAND – ADAM SMITH; METAPHOR FOR THE
UNSEEN FORCES THAT MOVE THE FREE MARKET
ECONOMY
7TH Principle – Government can sometimes Improve Market
Outcomes
 PROPERTY RIGHTS – ability of an individual to OWN AND
EXERCISE CONTROL OVER SCARCE RESOURCES
 MARKET FAILURE – situation in which a MARKET LEFT ON
ITS OWN FAILS TO ALLOCATE RESOURCES
EFFICIENTLY
 EXTERNALITY – IMPACT OF ONE’S ACTION ON THE
WELL-BEING OF A BY-STANDER
  MARKET POWER – ability of a single ECONOMIC ACTOR
to have SUBSTANTIAL INFLUENCE ON MARKET PRICES
How the Economy Works as a Whole
8TH Principle – A country’s standard of living depends on its
ability to produce goods and services
 PRODUCTIVITY – quantity of GOODS AND SERVICES
PRODUCED from each unit of labor input
9TH Principle – Prices Rise When Government Prints Too Much
Money
 INFLATION – INCREASE in the overall level of PRICES
OF GOODS AND SERVICES in the economy
 PRESIDENT GERALD FORD called inflation “PUBLIC
ENEMY NUMBER ONE”
10TH Principle – Society Faces a Short-run Trade-off Between
Inflation and Unemployment
 BUSINESS CYCLE – FLUCTUATIONS IN ECONOMIC
ACTIVITY (i.e. EMPLOYMENT AND PRODUCTION)
Chapter 3
 A Parable for the Modern Economy
o Production Possibilities Curve/Production Possibilities
Frontier
o Specialization and Trade
 Comparative Advantage – the ability to produce a good at a
lower opportunity cost than another producer/comparing
opportunity costs
 Absolute Advantage – when comparing the productivity of one
person, firm, or nation to that of another
  Trade can benefit everyone in society because it allows
people to specialize in activities in which they have a
comparative advantage.
 For both parties to gain from trade, the price at which they
trade must lie between the two opportunity costs.
 Import – goods produced abroad and sold domestically
 Export – goods produced domestically and sold abroad
Chapter 4
 Market – a group of buyers and sellers of a particular good or
service.
 Buyers determine the demand for the product; sellers
determine the supply of the product.
 Competitive Market – a market in which there are so many
buyers and so many sellers that each has a negligible impact
on the market price
 Perfectly competitive market characteristics:
a) The goods offered for sale are all exactly the same
b) Buyers and sellers are so numerous that no single buyer
or seller has any influence over the market price.
 Price takers – buyers and sellers in perfectly competitive
markets must accept the price the market determines
 Monopoly – markets which only have one seller
 Quantity Demanded – amount of good that buyers are willing
and able to purchase
 Law of Demand – the quantity demanded of a good falls when
the price of the good rises with other things being equal
(inverse relationship)
 Demand Schedule – table that shows the relationship
between the price of a good and the quantity demanded
 Demand curve – the line relating price and quantity demanded
 o Increase in quantity demanded = shifts the demand
curve to the right
o Decrease in quantity demanded = shifts the demand
curve to the left
 Market Demand – sum of all the individual demands for a
particular good or service
 Shifts in the Demand Curve
o Income – lower income means that you have less to
spend in total.
 If the demand for a good falls when the income falls,
the good is called a normal good.
 If the demand for a good rises when the income
falls, the good is called an inferior good.
o Prices of Related Goods
 Substitutes – two goods for which an increase in the
price of one leads to an increase in the demand for
the other
 Complements – two goods for which an increase in
the price of one leads to a decrease in the demand
for the other
o Tastes – if you like ice cream, you can buy more of it.
Economists normally do not try to explain this because
tastes are based on historical and psychological forces
that are beyond the realm of economics
o Expectations – your expectations about the future may
affect your demand for a good or service today
o Number of Buyers – more buyers mean more demand
Variable A Change in this variable…
Price of the good itself Represents a movement along
the demand curve
Income Shifts the demand curve
Prices of Related Goods Shifts the demand curve
 Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Buyers Shifts the demand curve
 Quantity Supplied – amount of a good that sellers are willing
and able to sell
 Law of Supply – the quantity supplied of a good rises when
the price of the good rises with other things being equal (direct
relationship)
 Supply Schedule – table that shows the relationship between
the price of a good and the quantity supplied
 Supply Curve – curve relating to the price and quantity
supplied
 Shifts in the Supply Curve
o Increase in Supply = shifts the supply curve to the right
o Decrease in Supply = shifts the supply curve to the left
 Input Prices – Supply of good is negatively related
to the price of inputs used to make the good.
 Technology
 Expectations – amount of a good a firm supplies
today may depend on its expectations about the
future.
 Number of Sellers – more number of sellers = more
supply
 Equilibrium – the point at which the supply and demand
curves intersect
 Equilibrium Price – the price at the intersection
 Equilibrium Quantity – the quantity at the intersection
 At the equilibrium price, the quantity of the good that buyers
are willing and able to buy exactly balances the quantity that
sellers are willing and able to sell.
  The equilibrium price is sometimes called the market-clearing
price because at this price, everyone in the market has been
satisfied.
 Surplus – a situation in which quantity supplied is greater than
quantity demanded
 Shortage – situation in which quantity demanded is greater
than quantity supplied
 Law of Supply and Demand – the claim that the price of any
good adjusts to bring the quantity supplied and the quantity
demanded for that good into balance
Chapter 5
 Elasticity – measure of the responsiveness of quantity
demanded or quantity supplied to a change in one of its
determinants
 Price Elasticity of Demand – measures how much the quantity
demanded responds to a change in price
o Inelastic – if the quantity demanded responds only
slightly to changes in price
o Elastic – if the quantity demanded responds substantially
to changes in the price
 Availability of Close Substitutes – goods with close
substitutes tend to have more elastic demand
because it is easier for consumers to switch from
that good to others
 Necessities versus luxuries – necessities tend to
have inelastic demands, whereas luxuries have
elastic demands
 Definition of the Market – markets tend to have
more elastic demand than broadly defined markets
because it is easier to find close substitutes for
narrowly defined goods
  Time Horizon – goods tend to have more elastic
demand over longer time horizons
Price elasticity of demand *always positive (absolute value)

Computing the price elasticity of demand using the midpoint

method
  It is considered elastic when the elasticity is greater than 1
which means the quantity moves proportionately more
than the price
 It is considered inelastic when the elasticity is less than 1
which means the quantity moves proportionately less than
the price
 If the elasticity is equal to 1, the percentage change in
quantity equals the percentage change in price and
demand is said to have unit elasticity.
 The flatter the demand curve that passes through a give
point, the greater the price elasticity of demand.
 The steeper the demand curve that passes through a given
point, the smaller the price elasticity of demand.
 If the elasticity is equal to 0, demand is perfectly inelastic
and the demand curve is vertical.
Income Elasticity of Demand
Cross-Price Elasticity of Demand

For the elasticity of supply

SAME LANG SA DEMAND PERO I CHANGE NIYO LANG ANG
QUANTITY DEMANDED INTO QUANTITY SUPPLIED HIHI