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CHAPTER 1

3 basic economic problems


-What goods and services to produce and how much
-How to produce the goods and services
-For whom are the goods and services
*econonic system - set of economic institutions that dominates
a given economy.
Economic System Models
*Capitalism - the factors of production and distribution
are owned and managed by private individuals or corporations
- private property
- economic freedom
- free competition
- profit motive
*Communism - is exactly the opposite of capitalism. The
factors of production and distribution are owned and managed
by the state.
- no private property
- no free competition (the government is the only seller).
- no economic freedoms
- no profit motive
- presence of central planning
*Socialism - is a combination of capitalism and
communism. The major and strategic industries are owned and
managed by the state while the minor industries belong to the
private sector
Vital criteria to judge the performance of the various economic systems
*Abundance - This refers to goods and services that individual members of societ
y have received.
*Growth - The growth of the economy is tangible, and is measurable in terms of t
he number of buildings, houses, schools,
cars, hospitals, factories, or machines made in a given year.
*Stability - This refers to the absence of inflation and unemployment.
*Security - Economic security generally depends on economic stability.
*Efficiency - It simply means productivity. It is measured in terms of unit cost
or average cost.
*Justice and equity - These are the main problems of the poor countries. This is
one
key rerason why the progressive countries become more progressive
*Economic freedom - If a consumer is free to choose his food, style of his house
, any kind of appliances, his recreation, or his education,
then there is economic freedom.
Fundamental role of economics has been focused towards the attainment of the fol
lowing objectives:
- economic growth
- full employment
- price stability.
- economic freedom
- equitable distribution of wealth and income
- economic security
CHAPTER 2
*Price - value of a product or service. It is expressed in terms of a monetary u
nit like peso, dollar, or yen.
*Price system - very important in the economy bec it determines the allocation o
f goods and services among the members of society. It is also the mechanism of a
llocating goods and services through the rise or fall of prices caused by interp
lay of supply
and demand forces
*Demand - the schedule of various quantities of commodities
which buyers are willing and able to purchase at a given price,
time and place. It is determined by factors such as:
- income
- population
- taste and Preferences
- price expectation
- prices of related goods
Determinants of Demand Explained
*Income - People buy more goods and services when their incomes increase.
*Population - More people means more demand for goods and services.
*Tastes and preferences - Demand for goods and services increases when people li
ke or prefer them.
*Price expectafion - When people exPect the prices of goods,
especially basic commodities, they buy more of this goods
*Prices af related goods - When the price of a certain product
Increases, people tend to buy a substitute product (competitor)
Law of Demand
- Consumers are most likely to buy more goods and services as price decreases, a
nd buy less goods and services as price rises.
*Income effect - At lower prices, an individual has a greater
purchasing power.
*Substitution effect - Consumers tend to buy goods with lower
prices.
Supply
*Supply - schedule of various quantities of commodities which producers are will
ing and able to Produce and offer at a given price, place and time. Its determin
ants are:
- technologY
- cost of production
- number of sellers
- prices of other goods
- price expectations
- taxes and subsidies
Determinants of Supply Explained
*Technology - This refers to the techniques or methods of production.
*Cost of production - In producing goods, raw materials are ineeded, together wi
th laborers.
*Number of sellers - More sellers or more factories mean an increase in supply
*Prices of other goods - Changes in the price of goods affect the
supply of such goods.
*Price expectations - lf producets expect prices to rise very soon,
they usually keep their foods and then release them in the market
when the prices-are already high.
*Taxes and subsidies - Certain taxes increase cost of production.
Law of Supply
- As price increases, quantity supply also increases, and as price
decreases, quantity supply also decreases
*The law of supply and demand determines the prices of
goods and services in a free-market economy. The law
states that when demand is greater than supply, price
increases. When supply is greater than demand, price
decreases. This law also applies to the prices of the factors
of production. In our country, wages are very low due to
the oversupply of labor.
CHAPTER 3
*Demand elasticity - refers to the reaction or response of the buyers to change
s in price of goods and services.
Five types of demand elasticity or types of reactions of buyers to price changes
of goods and services:
*Elastic demand - A change in price results to a greater chinge in quantity dema
nded
*lnelastic demannd. A change in price results to a lesser change in quantity dem
anded
*Unitary demand. A change in price results to an equal change in quantity demand
ed.
*Perfectly elastic demand - Without change in price, there is an infinite change
in quantity demanded
*Perfectly inelastic demand - A change in price creates no change in quantity de
manded
Determinants of Demand Elasticity
*Number of good substitutes - Demand is elastic for a product with many good sub
stitutes
*Price increase in proportion to income - If the price increase has very litte e
ffect on the income or budget of the buyers, demand is inelastic
*Imrportnnce of the product to the consumers - Luxury goods are not very importi
nt to many Filipinos
With the right pricing strategy, businessmen may attain the following goals:
- achieve target return on investment
- maintain or improve a share in the market;
- meet or prevent competition
- maximize profits
Practical examples of economic significance of elasticity of demand:
*Wage determination - If the product has an elastic demand, a reduction in its p
rice increases quantity demanded.
*Farm production guide - Most agricultural products like rice, coconut and sugar
are inelastic
*Maximize profits - A reduction in price causes more quantity demanded.
*Imposition of sales taxes - Government planners should exercise prudence in tax
ing goods and services
Elasticity of Supply
*Supply etasticity - the reaction or response of the sellers/
producers to price change of goods
five types of elasticity of supply or types of responses of producers to price c
hanges:
*Elastic supply - A change in price results to a greater change in quantity supp
lied
*lnelastic stryply - A change in price results to a lesser change in quantity su
pplied.
*Unitary supply - A change in price results to an equal change in quantity supp
lied.
*Perfectly elastic supply - Without change in price, there is an infinite (witho
ut limit) change in quantity supplied.
*Perfectly inelastic supptty - A change in price has no effect on
quantity supplied.
Theory of Consumer Behavior
*Law of diminishing marginal utility - Utility means satisfaction. Marginal util
ify refers to the additional satisfaction of a consumer whenever he consumes one
more unit of the same good.
*lndifference curve. The word "indifference" means showing
no bias or neutral. It is a curve which shows different combinations of two good
s which yield the same level of satisfaction.
*Budget Line - various combinations of two products which can be purchased by th
e consumer with his income, given the prices of the products
CHAPTER 4
Factors of Production
1. Land - is an original gift of nature. It includes the soil,
rivers, lakes, oceans, mountains, forests, mineral resources, and climate,
2. Labor - is an exertion of physical and mental efforts of individuals.
3. Capital - is a finished product which is used to produce other goods.
4. Entrepreneur - is the organizer and coordinator of the land, labor and capita
l.
*Production - the creation of goods and services to satisfy human wants
Law of Dirninishing Returns
The law states that when successive units of a variable output (like farmerrs) w
ork with a fixed input (like one hectare of land)
beyond a certain point the additional product (output) produced by each addition
al unit of a variable, input decrenses.
*The message of the law - there is a proper combination of a variable input and
a fixed input in order to attain the maximum output
Economic Costs
*Total cost - is the sum total cost of production
*Eixed cost - is a kind of cost which remains constant regardless of the volume
of production
*Variable cost - is a kind of cost which changes in proportion to volume of prod
uction
*Average cost - This is also called unit cost. It is equivalent to total cost di
vided bY quantitY
*Marginal cost - is the additional or extra cost brought about by producing one
additional unit. It is obtained by dividing change in total cost by change in qu
antity.
*Explicit cost - This is also called expenditure cost
*Implicit cost -Another term for this cost is non-expenditure cost. The factors
of production belong to the users.
*Opportunity cost - Is a foregone opportunity or alternative benefit
*Short run - refers to a period of time which is too short to allow an enterpris
e to change its plant capacity, yet long enough to allow a change in its varinbl
e resources
*Long run - refers to a period of time which is long enough to permit a firm or
enterprise to enter all its resources or inputs (both fixed and varinble factor
s).
Economies of Scale
*External economies of scale - refers to those factors which are outside the fir
m or enterprise, but they contribute to the efficiency of the latter in terms of
increased output and decreased unit cost of production.
*internal economies of scale - th0se are the factors inside the firm or enterpri
se which contribute to the efficiency of the latter
*One side of the firm is cost or expenditure and the other side is income or rev
enue. The difference between cost and revenue is either profit or loss. In case
both are equal, then it is breakeven.
CHAPTER 5
Basic Market Models
*Perfect/pure type
- perfect or pure competition
- pure monopoly
*Imperfect/non-pure type
- monopolistic competition
- oligopoly
Market Models Defined
*Pure contpetition - is a market situation where there is a large number of inde
pendent sellers offering identical products
*Pure monopoly - reters to a market situation where there is only one seller or
producer supplying unique goods and services. A one-buyer market situation is kn
own as monopsony
*Monopolistic contpetition - pertains to a market situation where there is a rel
atively large number of small producers or suppliers sellling similar but not id
entical products.
*Oligopoly - is associated with a market situation where there are few firms off
ering standardized or differentiated goods and services. Such definition is not
precise because oligopoly includes a wider range of market structures than the o
ther three market models. On the other hand, a few buyer market situation is cal
led oligopsony.
Characteristics of Market Models
*Pure Competition
- There is a large number of independent sellers.
- Products are identical or homogeneous
- No single seller and no single buyer can influence the change in market price
of a product
- It is easy for new firms or sellers to enter the market and for existing firms
or sellers to leave the market
- There is no non-price competition like advertising, sales promotion, or packag
ing.
*Pure Monopoly
- There is only one producer or seller.
- Products are unique in the sense that there are no good or close substitutes a
vailable
- The monopolist makes the price
- It is extremely difficult for new firms to enter the market
- There may be or no extensive advertising or sales promotion depending on the g
oods or services of the monopoly
*Monopolistic Competition
- There is a large number of sellers acting independently
- Products are differentiated
- There is a limited control of price.
- Entry of new firms in the market is relatively easy3
- There is an aggressive non-price competition in product quarrty, credit terms,
services, locations, and physical appearance of the product.
*Oligopoly
- There are very few firms which dominate the market.
- Products are identical or differentiated
- There is a price agreement among the producers to promote their own economic i
nterests
- The entry of new competitors in the market is difficult
- There is strong advertising among those who produce differentiated products li
ke cars, ciglrettes and appliances
Determinants of Market Structure
- Government laws and policies
- Technology
- Business policies nnd practices
- Economic Freedom
Price and output Determination
*Pure competition - The demand curve of an individual firm under a purely compet
itive industry is perfectly elastic. This is because the decrease or increase of
the output of a single seller has no effect on the total supply and market pric
e
*Pure monopoly - There is only one firm that produces the product. The demand fo
r the product of the firm is the same as the market demand for the product. sinc
e there is only one firm, it is also the industry.
*Monopolistic competition - The demand curve of a firm under this market structu
re is highly elastic (but not perfectly elastic like that of the firm under pure
competition) because of the presence of a relatively large number of competitor
s selling close-substitute products.
*Oligopoly. Under this market stucture, there are very few firms which produce h
omogeneous or differentiated products. collusion is a common practice among the
oligopolists

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