ELASTICITY

Price Elasticity of Demand- Degree of responsiveness of quantity demanded to a change in price

Interpretation

=1 : Unitary Elastic. Per 1 unit change in price, there is also a 1 unit change in Qd

>1 : Elastic. Consumers are very responsive to changes in price.

<1 : Inelastic. Changes in price do not affect Qd.

Income Elasticity of Demand- The degree of responsiveness of a percentage change in Qd with a percentage change in
income(Y).

>1 : Luxury Good <1 : Necessity > 0 : Normal Good < 0 : Inferior Good

Price Elasticity of Supply- A means to measure the relationship of quantity supplied and price.

Interpretation

=1 : Unitary Elastic. Per 1 unit change in price, there is also a 1 unit change in Qs

>1 : Elastic. Producers are able to increase production even with an increase in cost of production.

There is a considerable increase in price of goods being sold.

<1 : Inelastic. Producers are hindered to produce more .

Change in price is insignificant.

MARKET STRUCTURES

Pure competition

Is a market structure where there are many buyers and sellers..None of them can cause changes in price and quantities of
goods and services..Sellers in this kind of market structure are called “price takers”.. A single buyer is insignificant in this kind of
structure and can be easily replaced by new buyers… The same actually goes for sellers… Goods and services in a purely
competitive setup are homogeneous or exactly the same,It is also probable that they came from the same source

Monopoly-There is only one seller that represents the whole industry.. The monopolist is a “price maker”.. There is only one
good/service and there are no close substitutes, hence consumers have no choice but to patronize that product or service.. A
monopolist may offer the same good/service at different prices. This practice is called price discrimination.

Oligopoly-There is more than one seller but remain to be few so that a considerable degree of market power is exercised.. Few
players can coordinate price and production.. Also called as a cartel.. Several types:*Players are the same or there are no
disparities between them,*There is a dominant player among several players,*There are only 2 players.

Monopolistic Competition-Many firms selling differentiated products,Meaning, products seem to be different but are actually
not.. Consumer’s loyalty is important— that is, when consumers prefer their brand over others… Demand is relatively elastic in
a monopolistic competition.
SUPPLY AND DEMAND

Market demand curve-a schedule of quantities of a good that buyers are willing to purchase at different prices over a period of
time.. other things held constant: average incomes, size of market, prices of related goods; preferences; and special influences..
If the price of a good is low, the quantity demanded for that good is high, while holding other factors constant(ceteris paribus)

Other factors affecting demand- Quantity demanded also depends on other things besides the own-price of the good:

• as average income increases or the market size expands, more of the good is demanded at any price

• if the price of a substitute falls or the price of a complement rises, less of the good is demanded at any price

Changes in other factors shift the demand curve

Other factors Change in demand

higher income shift right

bigger market(population) shift right

higher price of substitute shift right

stronger preferences shift right

Changes in consumer speculation it depends

Market supply curve-a schedule of quantities of a good that sellers are willing to supply at different prices over a period of
time;.. other things held constant: given technology, weather conditions, prices of inputs, prices of other possible outputs.. The
willingness of sellers to produce at various possible prices. .. When prices of a particular good is high, the quantity supplied will
also be high.

Changes in other factors shift the supply curve

Other factors Change in supply

better technology shift right

higher input prices shift left

higher price of related goods shift left

Increase in number of sellers shift right

Policy changes, such as:

environment standards shift left

taxes on inputs shift left

What determines the price that prevails? producers and consumers respond to price

• but what determines the price they respond to?

• curiously enough, the actions of the producers and consumers themselves determine the price

• price ® actions ® price

• price will change as long as actions continue to be revised; actions will change as long as prices continue to change
 • If quantity demanded exceeds quantity supplied

• Buyers cannot all be accommodated

• They seek to outbid each other for the limited quantity, which pushes up the price

• Hence it cannot be a condition of equilibrium

• A shortage exists

• The opposite case if quantity supplied exceeds quantity demanded

• Here, price would be pushed down.

• A surplus exists

Equilibrium price-that price at which quantity demanded equals quantity supplied.. the price where buyers and sellers see no
need to revise their decisions or actions

Consumer theory

Utility-Utility refers to a good or a service’s want-satisfying ability.

Total utility- is the overall happiness derived by a consumer with regard to his/her consumption of a product

Marginal Utility- refers to the additional utility received in every consumption of an additional unit of good.

Budget Line- A graphical representation of the amount of goods a consumer can afford. Affordability depends on the good’s
price and the buyer’s income.

Indifference Curve-Illustrates a consumer’s responsiveness or indifference based on a combination of two products(X and Y).

Optimum combination- is the highest indifference curve that touches the budget line at a point of tangency.

PRODUCTION THEORY

Production- is a process of transformation of resources into a good.

Resources- are referred to as inputs and those created are called outputs.

Fixed inputs do not change as output increases

Variable input changes as output increases.

Production Function-Refers to the greatest output that can be created given an exact number of inputs. Q = f (land, labor,
capital)

Fixed costs -are costs that do not change as output increases

Variable costs- are costs that change as output increases

TC = TFC + TVC

Where: Marginal Cost:

MC = change in TC / change in Q

Where:
 ATC is Average Total Cost

TC is Total Cost AFC is Average Fixed Cost

TFC is Total Fixed Cost AVC is Average Variable Cost

TVC is Total Variable Cost Q is Quantity or Output

ATC = AFC + AVC MC is Marginal Cost

ATC = TC / Q

AFC = TFC / Q

AVC = TVC / Q

Revenue -is the total amount of money received by firms from selling goods.

Profit- is the difference between total revenue and total costs

When total revenue is equal to total cost, no profit is made. There is also no loss in this instance. This is called a break-even
point, a situation where a firm’s gain from its economic activity is equal to the costs it incurred.

INTRO TO ECONOMICS

Economics- is the study of the production, consumption and distribution of goods, services and resources.

Production- is the process of transformation of a good from a resource into a product.

A finished product is called a final good

Factors of Production

Land – refers to the physical land and everything in it— resources, flora, fauna, its’ topology, even bodies of water.

Labor – any input done by man in the process of production

Capital – refers to not only the monetary capital, but also to the machinery involved, the structure where production happens

Entrepreneurship – A skill used mainly to assess risks and take advantage of technological innovations and new techniques in
production

Scarcity- We cannot just produce and produce to meet our needs and wants.. We actually need and want an infinite number
of things.. Resources are limited.. The challenge of economics then, is efficient production

Economic Questions :WHAT to produce HOW MUCH to produce (quantity) HOW to Produce it (manufacture) FOR WHOM to
Produce (who gets what)

Opportunity Cost -When we talk about opportunity cost, it is the cost or value of that which we gave up.

Economic Systems

• Tradition-Subsistence-based systems.. Exchange is not necessarily the normal mode of transacting.. Profit is not
necessarily the objective of exchange, if it does happen
• Command-Also called centrally planned economies.. A central authority makes the fundamental economic choices for
the society

• Market- In a market system, the buyer and seller are sovereign beings. Producing and consuming is ‘decentralized’

• Mixed

– No society can ever apply market systems in their absolute forms

– The best that can be done is to apply characteristics of other market systems

– Modern societies then, can be seen to be made up of three sectors:

1) The private sector, composed of firms and households

2) The public or government sector

3) The foreign sector, when it transacts with the rest of the world from where it imports and to where it
exports its goods and services as well as capital

• When we are only looking at economic data and interpret them, and when we withhold value judgments, we are doing
positive economics.

• However, when we take another step and make a value judgment, such as whether one thing is good or bad, or when
we call for a certain action, when we say what ought to be done, we are already doing normative economics.

• Microeconomics studies the way an individual economic actor makes his/her decisions in the market.

• The producer, or the consumer is the unit of analysis in microeconomics.

• The largest unit in microeconomics is called the industry. Industries are made up of firms that produce a similar
product.

• Microeconomics is concerned with the way a market for a factor operates so that we can determine the market price of
the particular factor under study and the quantity of the product that is bought and sold.

• Microeconomics is the study of the way the market for a particular good or service works.

• Macroeconomics focuses on total or aggregate expenditure on the national output produced, the overall level of prices
of composite of the goods and services, and the charges therein over time.

• The unit of analysis is the nation.

• Macroeconomics deals with questions of a relatively larger context than that of microeconomics. Examples are
employment and unemployment rates, and national income.

• Macroeconomics asks what role the government plays in the economy.