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BASIC
ECONOMICS
WITH LRT
Course Requirements
Attendance
Major Exams (Prelims, Midterms and Finals)
Quizzes
Recitation
Activity Output
BASIC ECONOMICS
WITH LRT
Grading System
Exam 40%
Quizzes/Activity 30%
Recitation 10%
Requirement 10%
Assignment/Attendance 10%
100%
Economics
“How societies use scarce resources to produce
commodities and distribute them among different
people.”
The efficient allocation of scarce resources.
INTRODUCTION, BASIC CONCEPTS &
HISTORICAL OVERVIEW
Efficiency
when resources are used in such a way that people can
get as much as they can get (specific to their wants and
needs)
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
Market Economy
Command Economy
- Government makes all the decisions or produces all the answers
to the three basic problems
Mixed Economy
- Market decides on the questions most of the time, but the
government intervenes every now and then to correct market
failures
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
MARKET IMPERFECTIONS
1. Imperfect Competition
-when a buyer or seller can affect a good’s own price can lead to:
a. Too high prices of a product that effectively makes the product
inaccessible to those who need it
b. Too low prices that can make a producer’s business unsustainable
Government measures:
a. Price regulation
b. Foster competition
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
2. Externalities
- spill-over effects arising from certain market
transactions that create involuntary costs (negative) or
benefits (positive).
Resulting inefficiencies:
a. Discourages consumption
b. Costs or benefits are not factored in to the transaction
Government Measures:
a. Licenses/regulations
b. Patents
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
3. Public Goods
- a good that is non-rival & non-excludable
- there is no incentive for private entities to create public
goods
- situation of a missing market
Government Measure:
government must thus take the responsibility of providing public
goods
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
Government measures:
a. Taxation
b. Transfer payments
c. subsidies
BASIC ECONOMIC PROBLEMS, MARKETS &
GOVERNMENT IN A MODERN ECONOMY
Government measures:
a. Fiscal policy
b. Monetary policy
III. Basic Elements
of Demand and
Supply
BASIC ELEMENTS OF DEMAND AND SUPPLY
What is Market?
“ a mechanism through which buyers (demand/consumers)
and sellers (supply/firms) set prices and exchange goods and
services.”
Prices
Functions of price
Terms at which consumers and producers voluntarily exchange
goods and services.
Coordinates the actions of consumers and producers.
BASIC ELEMENTS OF DEMAND AND SUPPLY
Demand
- refers to be the amount of a good consumers (hh) buy at
certain price levels (and conditions)
a. the higher the price of something (cet. par.), the lower the
amount of that thing that hh are willing to buy
b. the lower the price of something, the more of it is bought
DEMAND & SUPPLY
Law of the Downward Sloping Demand Curve:
1. Average income
- as incomes rise, consumers tend to buy more goods
- as incomes decrease, consumers also tend to buy less
2. Market size
- bigger population, more demand
- lower population, smaller demand
DEMAND & SUPPLY
b. Complimentary good
– good consumed along with another good
- if a good’s complement becomes cheap, demand for that good
may rise
-if a good’s complement becomes more expensive, demand for
that good may drop
DEMAND & SUPPLY
5. Special Factors/Influences
- climate, geographical location, unanticipated events
DEMAND & SUPPLY
Supply
- Special Case:
Monopoly – no market supply curve
DEMAND & SUPPLY
1. Cost of production
- if the cost of production is cheap, the supply is high
- influenced by:
a. input prices
b. technological advances
DEMAND & SUPPLY
3. Government Policies
- can affect the supply of goods deliberately or through
the production process (in terms of inputs or
technology or both)
a. deliberate effect – quotas
b. effect through production process
- restrictions (pollution)
- requirements (labeling)
DEMAND & SUPPLY
4. Special Influences
- refers to acts of nature such as calamities
• Supply Curve Shifts
- any or a combination of the above factors
- Positive Effect shifts the Supply Curve to the
Right
- Negative Effect shifts the Supply Curve to the
Left
DEMAND & SUPPLY
Market Equilibrium
happens at a point where the quantity demanded (QD) by the household
(HH) is equal to the Quantity Supplied (QS) by firms.
a. Equilibrium Price
Price that results when quantity demanded is equal to the quantity
supplied
b. Equilibrium Quantity
Output that results when quantity demanded is equal to quantity
supplied
EQUILIBRIUM IN THE COMPETITIVE
MARKET, DEMAND & SUPPLY ANALYSIS
Surplus
-when the quantity demanded is less than
the quantity supplied
- puts a downward pressure on price
EQUILIBRIUM IN THE COMPETITIVE
MARKET, DEMAND & SUPPLY ANALYSIS
Shortage
-when the quantity demanded is more than the quantity supplied
- puts an upward pressure on price
Demand and Supply Shift Effect on Equilibrium Price Effect on Equilibrium Quantity
2. Time Horizon
a. Short-run
-demand for most goods are mostly price-inelastic
b. Long-run
-demand for most goods are mostly price-elastic
ELASTICITY
3. Availability of substitutes
-the more substitutes a good has, the more price elastic its
demand
-consumers have more alternatives when the price of a good
changes
ELASTICITY
… on the Calculation of Price Elasticity of Demand (ED):
ED = %ΔQD
%ΔP
ED = ΔQD/QD
ΔP/P
ED = QD2 – QD1 ÷ P2 – P1
(QD1 + QD2)/2 (P1 + P2)/2
ELASTICITY
Categories of Price Elasticity of Demand:
- when ED > 1
2. Price Inelastic Demand
- a 1% change in P results to a less than 1% change in QD
- when ED < 1
3. Unit Price Elastic Demand
- when ED = 1
ELASTICITY
– The higher the Price Elasticity of Demand, the flatter the demand curve.
– The lower the Price Elasticity of Demand the steeper the demand curve.
– The more elastic the demand for a good, the flatter the demand curve.
– The more inelastic the demand for a good, the steeper the demand curve
ELASTICITY
Revenue (R) = P x Q
ELASTICITY
Price Elasticity of Supply
-refers to how much the Quantity Supplied (QS) of a
good changes following a change in the goods own
price.
-percentage change in QS for every change in P
Price Elasticity of Supply is High (Elastic Supply) if the QS
of a good responds greatly to a change in P.
Price Elasticity of Supply is low (Inelastic Supply) if the
QS of a good does not respond much to a change in P .
ELASTICITY
Factors Affecting Price Elasticity of Supply:
1. Ease of Production
a. Supply of a good is price elastic if
-the good’s inputs or the good itself can be easily sourced.
- the good’s production process is not so complicated
b. Supply of a good is Price Inelastic if
- the good is rare or if its inputs are hard to find
- some degree of specialization is necessary to make the good
ELASTICITY
2. Time horizon
a. Short-run
-supply for most goods are mostly price-inelastic
b. Long-run
- supply for most goods are mostly price-elastic
ES = Qs2 – QS1 ÷ P2 – P1
(QS1 + QS2)/2 (P1 + P2)/2
ELASTICITY
Categories of Price Elasticity of Supply
1. Price Elastic Supply
- a 1% change in P results to more than 1% change in Qs
- when ES > 1
2. Price inelastic Supply
- when Es = 1
ELASTICITY
Price Elasticity of Demand & Demand Curves
The higher the Price Elasticity of Demand, the flatter the demand curve.
The lower the Price Elasticity of Demand the steeper the demand curve.
The more elastic the demand for a good, the flatter the demand curve.
The more inelastic the demand for a good, the steeper the demand curve.