ECONONE REVIEWER

Economics- is the study of how individuals and societies choose to use scarce resources to produce commodities that satisfy human wants, and is also a social science because it deals with human behavior. Microeconomics- is the branch of economics that studies the behavior of individual decision-making units such as firms and households. Macroeconomics- is the branch of economics that examines the behavior of economic aggregates total income, output, employment, prices, and etc on a national scale. Positive Economics- studies economic behavior and situations without making any judgment. Ex. By increasing the prices of a normal good, the demand will decrease. Normative Economics- deals with what ought to be or what suggestions could be made for the situation. Criteria for Economic Outcomes: Equity- the fairness Efficiency- producing what we want at the least cost Economic Problem Factors of Production Terms: Consumer goods- goods produced for present consumption Investment- increase in capital stock Production- process where resources (inputs) are made into useful goods and services (outputs). Opportunity Cost- is that which we give up or forgo when we make a decision or a choice. Production Possibilities Frontier- is a graph that shows all of the combinations of goods and services that can be produced if all of societys resources are used efficiently. Economic Growth- refers to the increase in total output of an economy. Happens when new resources are acquired or the present resources are used more efficiently. (Land, labor, and capital) Also, when new technology is acquired, grow can be experienced. 3 Basic Questions Because of Scarcity Land- refers to the natural resources Labor- both quality and quantity of labor Capital- man made goods used to produce more goods

What gets produced? How des it get produced? Who gets what is produced?

Economic Systems- used by the societies to solve the economic problem. Command economies Laissez-faire economies- free market system, distribution is decentralized and the amount of goods that a household gets depends on wealth and income. Mixed economies

Market- institution where buyers and sellers interact Factor market Product Market

Free market system- The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay. Consumers dictate what will be produced. (consumer sovereignty) There are no pure planned economies or pure laissez-faire economies. Reasons For Government Intervention Market failures (monopolies, imperfect competition, etc) Inequitable income distribution Goals of the Government in Intervention 1. 2. 3. 4. Provide public goods Redistribute income Reduce inefficiencies Stabilizing the economy

Interdependence and Trade Interdependence occurs because people are better off when they specialize and trade with others. Patterns of production and trade are based upon differences in opportunity costs.

The bases of trade are comparative advantage and opportunity costs. Exports- goods that are going to be brought to other countries Imports- goods that are brought in a country from another. Firms and Households Firm- is an organization that transforms resources into products.

Entrepreneur- is the person responsible for managing, organizing and assuming the risks for the firm. Households- consume the products or goods produced by the firms in an economy. Supply and Demand- buyers determine demand, and seller determine supply Concept of Competitive Market- is where there are many buyers and sellers such that one action would have a negligible impact in price. Competitions 1. Perfect Competition- products are the same, buyers and sellers are price takers which means that they have no influence over price. 2. Monopoly- there is only one seller who controls the price 3. Oligopoly- few sellers 4. Monopolistic Competition- many sellers selling slightly differentiated products which are sold at different prices. Demand Quantity Demanded- the amount of a good that buyers are willing to buy or are able to Law of Demand- all things held constant, when the price of a good rises, the quantity demanded falls. Demand Schedule- a table that shows the relationship between the price and the quantity demanded Demand Curve- a graph of the demand schedule Market Demand- sum of all the individual demands for a particular good or service Shifts in the Demand Curve- can be a shift to the left (decrease in demand) or the right (increase in demand) Consumer income Price of related goods Taste Expectation, etc. As the income increases, the demand for a normal good increases while the demand for an inferior good decreases.

When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements. Supply Quantity Supplied- the amount of a good that sellers are willing to sell at a given price

Law of Supply- In the Law of Supply, it states that firms will increase their output, and sell more if the price of a good is high, and is manifested in the upward sloping supply curve. This is because every firms objective is to maximize the profits. Supply Schedule- table that shows he relationship between the price of a good and the amount that sellers are willing to sell Supply Curve- graph of the supply schedule Market Supply- sum of all individual supplies for a certain good or service Shifts in the Supply Curve- can be to the left or to the right, shifts can happen by a change in determinant except the price Input Prices Technology Expectations Number of Sellers

Equilibrium- the level where the price has reached the point where quantity supplied equals quantity demanded. Equilibrium Price- where the Quantity supplied and the quantity demanded meet. Equilibrium Quantity- The quantity supplied and the quantity demanded at the equilibrium price. Surplus-when the price is > the equilibrium price then the Qs > than the Qd Shortage- when the price is < the equilibrium price then the Qs <than the Qd Law of Supply and Demand- the price of a good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Cost of Production Supply and demand are the two things that we consider in economics, and together with market equilibrium, they explain microeconomics. In the Law of Supply, it states that firms will increase their output, and sell more if the price of a good is high, and is manifested in the upward sloping supply curve. This is because every firms objective is to maximize the profits. Profit= total revenue- total cost Total revenue is the total amount collected by the firm which is price x quantity. While total cost is the total value of the input products used to make the products. Economic and Accounting Profit

Economic includes both the implicit and the explicit costs so it is the total revenue minus the explicit and implicit costs, while the accounting profit includes only the explicit costs. To solve for the accounting profit, it is the total revenue minus the explicit costs. Implicit costs are the forgone alternative actions without an actual payment Explicit costs are the payments made by a firm (direct need to pay or outlay) Because both implicit and explicit costs are considered, economic profit is always lower than the accounting profit.

Production Function It basically shows the relationship between he quantity of inputs used and the quantity of outputs.

Marginal Product- is the increase in output for every additional unit of input. Diminishing Marginal Product The marginal product of an input decreases as the amount of input increases. Ex. As more and more workers are hired, the marginal product decreases, this is because the workspace may be limited and less and less work falls to each worker. When graphed, the slope in the marginal product becomes flatter and flatter.

Total-Cost Curve shows the relationship between the quantity of the product produced and the cost of producing the product. This determines the pricing of a good. 2 types of costs: Fixed costs- ones that o not change regardless of the output. Such would be the rent and etc. Variable costs- ones that vary when production or the quantity produced changes. Total Cost = total fixed costs + total Variable costs. Average cost is basically the firms cost divided by the quantity produced. ATC= AFC + AVC

Marginal Cost Measures the increase in cost for every additional unit of output produced.

M C

(c h a n g e in to ta l c o s t) (c h a n g e in q u a n tity )

T C Q

The marginal cost rises when more is produced. This is because of the diminishing marginal product.

Cost Curves and their Shapes The ATC is U shaped The bottom of the U shaped curve is where the ATC is at its lowest and is referred to as the efficient scale. ( marginal cost curve crosses the average total cost curve)

ATC is high at when very little is produced because the AFC is spread over a small quantity ATC declines as output increases The ATC rises because the AVC also rises

Marginal Cost and Average Total Costs MC<ATC, ATC is going down MC>ATC, ATC is rising

Short run and Long run- in the short run, most costs are fixed, but in the long run, all fixe costs become variable costs. Economies of Scale- a property where the long run ATC falls as the output increases Diseconomies of Scale- a property where the long run ATC rises as the output increases Constant Return to Scale-a property where the long run ATC remains the same as the output increases Source: Villegas, B.M. (2001). Guide to Economics for Filipinos. Philippines: University of As