BASIC MICROECONOMICS

CHAPTER 1: RESOURCE UTILIZATION AND .2. LABOR

ECONOMICS
Labor is any form of human effort
Economics as the efficient allocation of the exerted in the production of goods and services.
scarce means of production toward the Labor covers a wide range of skills, abilities, and
satisfaction of human needs and wants characteristics.

The two Greek roots of the word economics are 3. CAPITAL

“oikos” - meaning “household” and ‘nomus” -
meaning “system management”. Oikonomia or Capital is manmade goods used in the
Oikonomus therefore means the “ production of other goods and services. It
management of household”. includes the buildings, factories, machinery, and
other physical facilities used in the production
SCARCE MEANS OF PRODUCTION process.

Refers to our economic resource like land, 4. ENTREPRENEURSHIP

labor, and capital, which we use to produce all
the goods and services that we need and wants. An entrepreneur is a person who
organizes, manages and assumes the risks of a
SCARCITY: The Central Problems of Economics firm, taking a new idea or a new product and
turning it into a successful business.
SCARCITY - It is the basic and central economic
problem confronting every man and society. WHAT IS THE RELATIONSHIP BETWEEN
ECONOMICS AND SCARCITY?
KAPUR 1997 - He defined scarcity as a
commodity or service being in short supply, Their relationship is such that if there is
relative to its demand. no scarcity, there is no need for economics. The
study of economics is therefore essential in
FACTORS OF PRODUCTION order to address the issue of resource allocation
There are four economic resources and distribution, in response to scarcity.
which serves as inputs in the production
process. We refer to these resources as the
factors of production.

1. LAND

This broadly refers to all natural

resources, which are given by, and found in
nature, and are, therefore, not manmade. It
does not solely mean the soil or the ground
surface, but refers to all things and powers that
are given free to mankind by nature.
OPPORTUNITY COST refers to the forgone value The question of how much to produce
of the next best alternative. In particular, it is identifies the number of goods and services
the value of what is given-up when one makes a needed to be produced in order to answer the
choice. The thing thus given-up is called the demand of man and society.
opportunity cost of one’s choice.
4. FOR WHOM TO PRODUCE?
BASIC DECISION PROBLEMS
This question identifies the people or
CONSUMPTION sectors who demand the commodities
produced in a society.
Members of society, with their
individual wants, determine what types of 3 Es IN ECONOMICS
goods and services they want to utilize or
consume, and the corresponding amounts In the production of goods and services
thereof that they should purchase and utilize. there are three Es that need to be considered.
These are:
PRODUCTION
1. EFFICIENCY
The problem of production is generally
a concern of producers. They determine the Efficiency refers to productivity and
needs, wants, and demands of consumers, and proper allocation of economic resources. It also
decide how to allocate their resources to meet refers to the relationship between scarce factor
these demands. inputs and outputs of goods and services.

DISTRIBUTION 2. EFFECTIVENESS

This problem is primarily addressed to Effectiveness means attainment of goals

the government. There must be proper and objectives. Economics therefore is an
allocation of all the resources for the benefit of important and functional tools that can be
the whole society. utilized by other fields.

GROWTH OVER TIME 3. EQUITY

This is the last basic decision problem Equity means justice and fairness. Thus,
that a society or nation must deal with. while tehchnological advancement may
Societies continue to live on. They also grow in increase production, it can also bear
numbers. disadvantages of employment of workers.

FOUR BASIC ECONOMIC QUESTIONS MICROECONOMICS

To address the problem of scarcity and  Concerned with individual decision

solve the basic decision problems, the society making.
must answer the four basic ecnomic questions.  Deals with the individual decisions of
1. WHAT TO PRODUCE? units of the economy - firms and
households, and how their choices
The question of what to produce tells us determine relative prices of goods and
that an economy must identify what are the factors of production.
goods and services needed to be produced for
the utilization of the society in the everyday life MACROECONOMICS
of man.  Involved in understanding the behavior
2. HOW TO PRODUCE? of the society as a whole.

This question tells us that there is a  Studies the relationship among broad
need to identify the different methods and economics aggregates like national
techniques in order to produce goods and income, national output, money supply,
services. investment, consumption expenditures,
bank deposits, total volumes of savings.
3. HOW MUCH TO PRODUCE?
 TYPES OF ECONOMIC SYSTEMS services). It is basically the process by which
land, labor, and capital are combined in order
Traditional Economy is basically a subsistence to produce outputs of goods and services.
economy. A family produces goods only for its
own consumption. The decision on what, how, EXCHANGE
how much, and for whom to produce are made
by the family head, in accordance with This is the process of trading or buying
traditional means of production. and selling of goods and services for money
and/or its equivalent. It also includes the buying
COMMAND ECONOMY is a type of economy, of goods and services either in the form of
wherein the manner of production is dictated barter or through market.
by the government. The government decides on
what, how, how much, and for whom to DISTRIBUTION
produce. This is the process of allocating or
MARKET ECONOMY or capitalism’s basic apportioning scarce resources to be utilized by
characteristics is that resources are privately the household, the business sector, and the rest
owned, and that the people themselves make of the world.
the decisions. It is an economic system wherein CHAPTER 2: THE BASIC ANALYSIS OF DEMAND
most economic decisions and means of AND SUPPLY
production are made by the private owners.
DEMAND generally affected by the behavior of
SOCIALISM is an economic system wherein key consumers, while supply is usually affected by
enterprises are owned by the state. In this the conduct of producers. The interplay
system, private ownership as recognized. between these two is the foundation of
However, the state has control over a large economic activity. Thus, the consumer identifies
portion of capital assets, and is generally his needs, wants, and demands, while
responsible for the production and distribution producers address these accordingly producing
of important goods. goods and services. In the end, the consumer
MIXED ECONOMY is a mixture of market gains satisfaction while the producer gains
system and the command system. The profits.
Philippine economy is described as a mixed DEMAND pertains to the quantity of a good or
economy since it applies a mixture of three service that people are ready to buy at given
forms of decision-making. However, it is more prices within a given period of time.
market-oriented rather than command or
traditional. Demand therefore implies three things:

IMPORTANT ECONOMIC TERMS  Desire to possess a thing (good or

service);
Economics has its own unique language. Thus,
for a student to truly understand the different  The ability to pay for it or means of
concepts and theories in economics, an purchasing it (price); and
understanding of these terms should first be
 Willingness in utilizing it.
achieved.
MARKET - A market is where buyers and sellers
WEALTH refers to anything that has a functional
meet. It is the place where they both trade or
value (usually in money), which can be treated
exchange goods or services - in other words, it
for goods and services. Accordingly, wealth is
is the place where their transaction takes place.
the stock of net assets owned by individuals or
households. DEMAND SCHEDULE is a table that shows the
relationship of prices and the specific quantities
CONSUMPTION refers to the direct utilization
demanded at each of these prices.
or usage of the available goods and services by
the buyer (individual) or the consumer DEMAND CURVE - the demand curve is
(household) sector. graphical representation showing the
relationship between price and quantities
PRODUCTION is defined as the formation or
demanded per time period. A demand curve
creation by firms of an output (products or
has negative slope thus it slopes downward, Taste or preferences pertain to the
downward from left to right. The downward personal likes or dislikes of consumers for
slope indicates the inverse relationship certain goods and services. If taste or
between price and quantity demanded. preferences change so that people want to buy
more of a commodity at a given price, then an
DEMAND FUNCTION - shows the relationship increase in demand will result or vice versa.
between demand for a commodity and the
factors that determine or influence this  CHANGING INCOMES
demand. These factors are - the price of the
commodity itself, prices of other related Increasing incomes of households raise
commodities, level of incomes, taste and the demand for certain goods or services or vice
preferences, size and composition of l versa. This is because an increase in one’s
income generally raises his capacity or power to
MATHEMATICAL FUNCTION FOR DEMAND: demand for goods and services which he is not
able to purchase at lower income.
QD = f (product’s own price, income of
consumers, price of related goods, etc.)  OCCASIONAL OR SEASONAL PRODUCTS

We can therefore come-up with the The various events or seasons in a given
demand equation as: year also result to a movement of the demand
curve with reference to partcular goods.
QD = a - bP
 POPULATION CHANGE
Where:
An increasing population leads to an increase in
QD = quantity demanded at a particular the demand for some types of goods and
price. services, and vice versa. This simply means that
a = intercept of the demand curve. more goods or services are to be demanded
because of rising population.
b = slope of the demand curve.
 SUBSTITUTE AND COMPLEMENTARY
P = price of the good at at particular GOODS
time period.
Substitute goods are goods that are
We can now illustrate our demand function interchanged with another good. In a situation
using a hypothetical example. Let us assume where the price of a particular good increases a
that the current price of good A is P5.00. The consumer will tend to look for closely related
intercept of the demand curve is 3 while the commodities.
slope is 0.25. If we want to determine how
much of good A will be demanded by consumer  EXPECTATIONS OF FUTURE PRICES
X, we can simply substitute the given values to If buyers expect the price of a good or service to
our equation, thus: rise or fall in the future, it may cause the
QD = 3 - 0.25 (5) current demand to increase or decrease.

= 3 - 1.25 SUPPLY SCHEDULE - is a table listing the various

prices of a product and the specific quantities
QD = 1.75 units of good A supplied at each of these prices at a given point
in time. Generally, the information provided by
FORCES THAT CAUSE THE DEMAND CURVE TO
a supply schedule can be used to construct a
CHANGE:
supply curve showing the price/quantity supply
There are several reasons why demand relationship in graphical form.
changes and thus cause the demand curve to
SUPPLY CURVE - is a graphical representation
move either upwards or downwards. The
showing the relationship between the price of
following are the more general reasons for the
the product sold or factor of production (e.g.
change in demand.
labor) and the quantity supplied per time
 TASTE OR PREFERENCES period. The typical market supply curve for a
product slopes upward from left to right
indicating that as price rises (falls) more (less) is
supplied. The upward slope indicates the of methodology of making or creating
positive relationship between price and something as fully perfect, functional, or
quantity supplied. effective as possible.

SUPPLY FUNCTION  TECHNOLOGICAL CHANGE

A Supply Function is a form of The introduction of cost-reducing

mathematical notation that links the dependent innovations in the production technology
variable, quantity supplied (Qs), with various increases supply on one hand. On the other
independent variables which determine hand, this can also decrease supply by means of
quantity supplied. freezing the production through the problems
that the new technology might encounte, such
Qs = f (product’s own price, number of as technical trouble.
sellers, price of factor inputs, technology, etc.)
 FUTURE EXPECTATION
Given our supply function, we can now
derive our supply equation: This factor impacts sellers as much as
buyers. If sellers anticipate a rise in prices, they
Qs = a + bP may choose to hold back the current supply to
Where: take advantage of the future increase in price,
thus decreasing maket supply.
Qs = quantity supplied at a particular
price  NUMBER OF SELLERS

a = intercept of the supply curve The number of sellers has a direct

impact on quantity supplied. Simplu put, the
b = slope of the supply curve more sellers there are in the market the greater
supply of goods and services will be available.
P = price of the good sold.
 WEATHER CONDITIONS
We can now illustrate our supply equation using
a hypothetical example. Suppose the price of Bad weather, such as typhoons,
good A is P5.00. The intercept of the supply drought or other natural disasters, reduces
curve is 3 and the slope of the supple curve is supply of agricultural commodities while good
0.25. If we want to know how much of good A weather has an oppostie impact.
will be supplied by sellers, we can simply
substitue the values in our euqation. Thus,  GOVERNMENT POLICY

Qs = a + bP Removing quotas and tariffs on

imported products also affect supply. Lower
= 3 + 0.25 (5) trade restrictions and lower quotas or tariffs
boost imporrts, thereby adding more supply of
= 3 + 1.25
goods in the market.
Qs = 4.25 units
MARKET EQUILIBRIUM
FORCES THAT CAUSE THE SUPPLY CURVE TO
The meeting of supply and demand
CHANGE
results to what is referred to as “Market
Just like demand, there are also other Equilibrium”. As earlier said the market
factors that cause the supply curve to change. referred to here is a situation where buyers and
Below are some of the factors that cause the sellers meet, while equilibrium is generally
supply curve to change. understood as a “state of balance”.

 OPTIMIZATION IN THE USE OF EQUILIBRIUM MARKET PRICE

FACTORS OF PRODUCTION
Equilibrium Market Price is the price
An optimization in the utilization of agreed by the seller to offer its good or service
resources will increase supply, while a failure to for sale and for the buyer to pay for it.
achieve such will result to a decrease in supply. Specifically, it is the price at wich quantity
Optimization in this sense refers to the process
demanded of a good is exactly equal to quantity
supplied of the same good.

SURPLUS

Surplus is a condition in the market

where the quantity supplied is more than
quantity demanded. When there is a surplus,
the tendency is for sellers to lower market
prices in order for the goods and services to be
easily disposed from the market.

PRICE CONTROL

Price Control is the specification by the

government of minimum or maximum prices for
certain goods and services, when the
givernment considers it disadvantageous to the
producer or consumer.

FLOOR PRICE

A Floor Price is the legal minimum price

imposed by the government on certain goods
and services. A price at or above the price floor
is legal; a price below it is not.

PRICE CEILING

A Ceiling Price is the legal maximum

price imposed by the government to protect
consumers from abusive producers or sellers
who take advantage of the situation. This is
usually done by government after the
occurrence of a calamity like typhoon or severe
flooding.