CHAPTER 1

INTRODUCTION TO THE
STUDY OF ECONOMICS
 CHAPTER 1 REPORTERS

Colleen Tac-on Rumnor Artajo Jane Limosnero Paulo Merto

Introduction What is Micro-Economics? Production Possibility Understanding Graphs
Economics Importance of Studying Frontier Opportunity Formulas Using Graphs
Scarcity and the Microeconomics Cost An Increasing Steps in Drawing Graph
Factors of Production Normative and Positive Opportunity Cost Three Understanding and
Circular Flow Model Economics Economic System Interpreting Slopes
4 Principles in Economics
 Economics
Economics is the study of
allocation of scarce resources to
satisfy unlimited human wants.
The limited resources where
combined and used to satisfy
unlimited human wants cause
scarcity. The efficient allocation
of scare resource is the heart of
economics.
 Three basic questions in any
economic system.
1. What are the goods and services
to produce?

2. How do we produce these goods

and services?

3. Who consumes the goods and

service produced?
Scarcity and the Factors of
Production
1. Land or Natural resources - In economics land is
everything that is above or beneath the surface of the
earth.

2. Labor - Any physical or mental effort used to produce

goods or services.

3. Capital - are goods that produce other goods.

4. Entrepreneurship - This is the ability to use and

coordinate the production and sale of goods and services
Circular
Flow
Model
WHAT I S

MICROECONOMICS?
WORDS BEHIND MICROECONOMICS
Mircro - refers to the small-scale or individual
level of analysis.
Economics - refers to the broader field
of study that explores how societies
allocate their limited resources to meet
their wants and needs.
MICROECONOMICS
Is a branch of economics.
It studies the interaction between
individual units of the economy.
It studies the behavior of consumers and
firms, their collective decision that affect
the allocation of resources.
It also includes the study of public policies
influence on the market output.
WHAT ARE THE IMPORTANCE OF
MICROECONOMICS?
- It can help us understand the market and to
predict and explain the changes in the market
prices in a small scale.
- It can help make personal and managerial
decisions
- It helps us make better decision in life.
EXAMPLE
if the government imposes additional
tax on cigarettes it will make the
commodity more expensive, young
smokers may consume less. Since
studies show that smoking and lung
cancer are directly related, an increase
in tax that can decrease cigarettes
consumption, It thereby decreases lung
cancer incident among adults
Normative and
Positive Economics
Normative Economics - It involves making
value judgments and policy
recommendations based on ethical, political,
or social values.

Positive Economics - It focuses on objective

analysis and description of economic
phenomena as they are, without making
value judgments or policy
recommendations.
EXAMPLE of normative economics
We should increase the Conditional Cash
Transfer Program of the government," according
to one government social worker. The Cash
Transfer Program of the government aims to
alleviate extreme poverty. Some experts claim
that the government budget is not enough for
the program to succeed. However, others may
claim that increasing budget for the program
diverts funds from other important government
activities. It may have negative consequences on
the fiscal situation of the country.
Example of
positive economics

The economy registered a

7.8% Gross Domestic Product
(GDP) growth for the first
quarter of 2013.
4 Principles IN ECONOMICS

• Opportunity Cost

• Marginal Principle

• Principle of Diminishing Return

• Spilover or Externality Principle

Opportunity Cost

in microeconomics is what
you give up when you choose
one option over another. It's
the value of the next best
thing you could have done or
the alternative you didn't
choose. It is a foregone return.
Marginal principle

in microeconomics means
making choices by thinking
about whether doing a bit
more of something is worth it.
If the extra benefit is bigger
than the extra cost, it's a
good choice.
Components of
Marginal Principle

• Marginal Benefit - is the additional benefits

earned by increasing a certain activity.
• Marginal Cost - is the additional cost
incurred by increasing a certain activity.

Following cost such as Fixed Cost, Variable

Cost, Implicit Cost, Explicit Cost and The
Economic Cost.
EXAMPLE

If an internet café decides to

operate for an additional hour, the
manager must determine their
marginal benefit and marginal
cost. The business will be better if
the marginal benefit is grater than
their marginal cost
 Marginal Benefit

Using the marginal benefits, it can be

300 suggested that the manager continue to
Benefit
/ Cost
increase the hours of operations until the
Per marginal benefit is equal to marginal cost.
Hour In this , the marginal curve is negatively
200
sloped, the internet café must be open for
10 hours.

130 Marginal Cost

8 9 10

Hours per day, KYM Internet Café is open

Figure 1.2 Marginal Principle and the KYM Internet Cafe

 The manager of the business must carefully
establish their cost.
• Fixed Cost - The fixed cost is that does not change with the increase or decrease of
output, even if the manager will have the internet café open 24 hours a day, the rent
remains the same.

• Variable Cost - The firm variable cost that changes if there are changes in the level
of output. For example, the labor cost of the internet café increases as the number of
hours it is opened also increases.

• Implicit Cost - implicit costs are the opportunity costs associated with using
resources in a particular way rather than in their next best alternative use.
If the manager could have an extra income by doing an extra on some other business,
it should be a foregone return.

• Explicit Cost - explicit costs are the actual, direct, and quantifiable monetary
expenses that a business or individual incurs in the process of producing goods,
services, or pursuing an activity.

• Economic cost - This is the sum of the explicit and implicit cost.
Principle of Diminishing
Return

This states that as the

number of an input
increases, while other
inputs are constant, the
output will increase at a
decreasing rate.
Example
Table 1.1 Diminishing Return for T-shirts
Number of Workers 1 2 3 4 5 6 7
Total number of t-shirts produced 20 38 52 60 64 66 66
Additional t-shirts from hiring the worker 20 18 14 8 4 2 0
Total number of t-shirts produced

7 • • 70
•
6 • 60
•
5 50
4 40
•
3 30
2 • 20
1 10
0 0
1 2 3 4 5 6 7
Number of Workers
Spillover or Externality
Principle.

This spillover
or externalities suggest that
cost or benefits of
certain activities can "spill
over" to people who
are not part of the
transactions.
EXAMPLE

Suppose a big mining firm dumps all

its untreated mine tailings and
waste in the river where adjacent
community relies on their livelihood.
Due to this activity, it destroys the
Php5 million cost of livelihood every
month. The mining firm will ignore
the spillover cost of Php5 million.
Production Possibility Frontier (PPF)

An economic model showing

how an economic actor, such
as a company or a nation,
could make tradeoffs in the
production of different
commodities.
Opportunity Cost

The potential benefits

that an individual,
investor, or business
misses out on when
choosing one alternative
over another.
An Increasing
Opportunity Cost

As you increase the production of

one good, the opportunity cost to
produce the additional good will
increase. When you increase
production of an existing product,
you need more resources,
including labor, equipment, and
raw materials.
Three Economic System

1. Command Economic System - a type of economic

system that aims to create equality. A central
planning bureau decides what, how, how much and
for whom to produce. Requiring everybody to work,
the state eliminates unemployment. However,
choices for goods and services are limited. The lack
of profit does not motivate governments owned
firms to be efficient.
2. Market-based Economy - In this economic
system, profit gives firms incentives to produce
goods and services consumer wants. Firms aim
to be efficient to reduce cost and compete in the
market. The price system and a high degree of
economic freedom encourage firms and
consumers to efficiently allocates resource.
Government does not intervene in the market.
3. Mixed Economic System - In a mixed economic
system, the government and private sectors participate
in the economy. State-owned enterprises exist with
private firms. It is a combination of both command and
market economic system. This system tries to combine
the advantages of command and market economy.
State-owned enterprises exist because the government
wants to provide basic services (e.g. power and water
utilities, telecommunications, mass transportation.)
Government closely monitors the market and imposes
regulatory policies on some industries.
WHAT IS A GRAPH?

A graph is a visual data representation or

mathematical relationship. It consists of
points, or vertices connected by lines or
curves, called edges. Graphs are used to
represent and analyze other types of
information, such as mathematical functions,
relationships between variables, networks
and data sets.
 A graph is a visual tool to illustrate the
relationship between two variables. A
variable is something that can be
measured and can be assigned different
values.
 1. Draw horizontal and
STEPS TO DRAW A GRAPH vertical lines. The
horizontal line is the x-
axis. The vertical line is the
y-axis. The intersection
between the x and y-axis
is called the point of
origin. As we move away
from the origin point to
the right, the x-axis value
increases. Similarly, as we
move away from the y-
axis the value of y
increases as well.
2. The work hours variable day variable is on the horizontal
line or x-axis while the daily income is on the vertical line or y-
axis, Moving along the x-axis, the number of hours increases
from zero to 10 hours. Meanwhile, moving along the y-axis the
income increases from zero to Php400.

3. Returning to Table 1.4. tells us that if the mechanic chooses

to work for 5 hours he will be receiving Php200 of income.

4. Going back to Figure 1.7, one can look for the value of five
on the x-axis, because that is where the value of number of
hours per day is located. We draw a straight line up. In the y-
axis, we look for the value 200; because that is the income,
the mechanic will receive if he works for 5 hours according to
Table 1.4. Then we draw a dashed line straight to the right.
5. The intersection between the two-dashed lines
shows the combination of work hours and daily
income for the mechanic. In the Figure 1.8 below it is
marked point b, to show the combination of 5 work
hours and Php200 income.

6. To find the different combination of work hours and

income repeat steps 3 to 5. After all the points have
been located and identified, it is connected to draw a
curve that shows the relationship between work hours
and income.
 Interpreting slopes
Interpreting slopes is an important
skill in understanding graphs and
mathematical relationships. The
slope of a line or curve on a graph
represents the rate of change
between two variables or quantity
 The slope can be computed
with the following formula:
Shift Between Curves
Figure 1.8 shows the relationship
between the work hours and
income. It shows that if work hours
increase income also increase
Solving Equations
Most often, it is easier to explain the relationship
between two variables in an algebraic equation.
It is a means through which the impact of one
variable to another variable can be computed.

There is a positive relationship between a higher

price and an increase in quantity supplied. For
example, in a hypothetical market the equation
Qs = -20+160P represents the relationship
between price and quantity supplied. Qs is the
quantity supplied and P is the price. The Table 1.5
below describes this relationship:
Given the price, the 6 quantity supplied can be
computed using the formula above.
Qs-20+ 160P
Qs = -20 + 160(6)
Qs=-20 +960
Qs = 940
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