BASIC MICROECONOMICS

3. Applied Economics is concerned with

Lesson 1: Introduction to Microeconomics controlling future events or influencing
economic behavior or its consequences.
★​ Opportunity Cost
★​ Two Fundamental facts leading to the It is the benefit or income that is traded off or
Study of MICROECONOMICS foregone when choosing a particular use of a
resource among its alternative uses.
○​ A. Scarcity of Resources
★​ MACRO versus MICRO
○​ B. Unlimited Human Wants ●​ MICROECONOMICS is the study of the
★​ Types of Economic Resources behavior of individual decision making
○​ A. Land - natural resources, units in the society such as consumers
animals and producers
○​ B. Labor – human effort used in ●​ MACROECONOMICS is the study of the
the production process overall operation and performance of
○​ C. Capital – man made aids to the entire economy.
production
○​ D. Entrepreneurial Ability – special ★​ Economic Models
talent for innovation -​ These are general frameworks that may
These important economic resources are be used to examine cause and effect.
essential in producing a good or a service. They are simplified versions of reality or
Types of income phenomena.
★​ Types of Income -​ Economic Models can be either
●​ Rent - Landowner quantitative which calls for exact
●​ Wage - Laborer solutions or qualitative which can be
●​ Interest – Capitalist used to explain the dynamics of an
●​ Profit - Entrepreneur economic concern without providing
empirical solution or forecast.
ECONOMICS is the study of how we properly
★​ Circular Flow Model ( 2 Sector Model )
allocate and efficiently utilized our scarce
Sample 1 Illustration
resources in order to satisfy our unlimited
-​ Households offer their productive
human wants.
services to business in exchange for pay
★​ What do economist do?
in the form of rent, wages and interest
1. Descriptive Economics is concerned with
and owners receive profit.
gathering facts relevant
to a specific problem or aspect of the economy
2. Economic Analysis is deriving principles
from facts or observed
economic behavior.

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 ●​ Capitalism or Market Economy is an
economic system that is based upon
private property and the operation of
the market mechanism. (Right to own)
●​ Communism or Command Economy, the
government makes all economic
decisions.
●​ Socialism or Mixed Economy is the
transition phase as one country shift
★​ Key concepts in the Circular Flow Model from Capitalism to Communism. (Mixed
A. INPUT - things that the company uses government)
B. OUTPUT- goods and services ★​ Production Possibilities Frontier
C. INCOME -​ Production possibilities > gives >
D. EXPENDITURE- expenses combination of goods.
E. FACTOR or RESOURCE MARKET Ex. Fabric > produce t-shirt, dress,
F. PRODUCT MARKET pants.
★​ Basic Economic Problems It shows the various combinations of goods that
1. What to produce an economy is capable of
2. How much to produce producing given its existing economic
3. How to produce resources and technology.
4. For whom to produce It slopes downward because given a fixed
5. How to attain and maintain economic growth amount of inputs
★​ What to Produce Opportunity Cost = What we give up/ What we
2 Types of Goods: get
A. Consumer Goods – goods that are available ★​ Production Possibility Curve
for direct consumption
B. Capital Goods – goods that are used to
produce other goods and cannot be directly
consumed
-​ Should society produce more consumer
goods or more capital goods? Why?
★​ How much to produce
-​ Labor intensive
-​ Capital intensive (machines)
★​ Rightward Shift of Production Possibility
★​ For whom to produce
Curve
-​ Target market
★​ How to attain and maintain economic
growth
-​ manner by which a society adjust to
changes.
★​ Economic System
An economic system is the manner by which
institutions are arranged in the society in order
to solve the basic economic questions that
confront the society.

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 BASIC MICROECONOMICS
between price and quantity demanded
Lesson 2: Demand
in an algebraic expression.
Equation of a line Qd = 12,000 – 200P
Y=a±bX where :
where: Y= dependent variable Qd = Quantity demanded , P = Price
-​ a is the constant ★​ Law of Demand
↓ P ↑ D or ↑ P ↓ D
-​ b is the slope (the direction of the line)
where P = Price ↓ = decrease
-​ X is the independent variable
D =Demand ↑ = increase
ceteris paribus - all else being equal. Ceteris paribus= all else being equal
★​ Role of Prices ★​ Why is the Demand Curve downward
1.​ Prices help distribute limited goods to sloping?
buyers who are willing to pay for them. 1.​ Income Effect on price reduction- If
2.​ Prices show producers what and how prices of goods decline, consumers are
much to make. able to buy (more, less) with their fixed
3.​ Prices encourage producers to use income.
resources efficiently to create the most 2.​ Substitution effect of a price increase-
valued products. At a lower price, a product becomes
★​ Demand (more, less) attractive relative to other
-​ Consumer sovereignty dictates which items serving the same function.
goods and services must be produced in Substitute goods- goods that have the
a market economy. same function. Like pen and pencil
-​ Producers respond to the willingness Complimentary goods- goods that goes
and ability of the buyers to spend their together. Like coffee and creamer
money on a particular product or 3.​ Law of diminishing marginal utility
service. Utility- satisfaction
-​ Demand is the amount of goods and Diminishing - decreasing
services that consumers or buyers are ★​ Change in Quantity Demanded
willing and able to purchase given a list Increase in the Price of Good X → Decrease in
of prices during a specific period of quantity demanded of Good X. ( ↑ P ↓ D)
time. Decrease in the Price of Good X → Increase in
★​ Demand can be presented as: quantity demanded of Good X. ( ↓ P ↑ D )
●​ DEMAND SCHEDULE (price and ★​ Change in Demand
demand) A Change in Demand is denoted by a shift in
●​ DEMAND CURVE the location of the Demand Curve. It can either
●​ DEMAND Function- demand function is shift to the right or to the left depending on the
a behavior function for consumers. It scenario or situation
describes the inverse relationship given.
Formula:

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Original Demand Function : Qd1 = 500 – 2P An inferior good is a good whose demand falls
Qd2 = Qd1+0.50Qd1 as income rises.
where 0.50 is 50%
It is a good that a consumer buys only because
Price Qd1 Qd2
he cannot afford anything better for the time
80 340 510 being.
100 300 450
120 260 390 5. Price and Income Expectation – Consumers’
140 220 330 expectation about future price and income may
lead to an increase or decrease in demand.
★​ Non- Price Determinants of Demand
while price change can affect quantity
demanded, other factors can initiate a change
Summary of the effect of non-price
in the entire demand.
determinants of
1. Consumer taste and preferences can be
demand for a product or service
prompted by person’s age, sex, health
conditions, religion, fads or trends, credit ★​ 1. Favorable change in taste and
terms, tradition, culture, as well as changes in preferences – shift to the right
Unfavorable change in taste and
technology. Extensive advertising and
preferences – shift to the left
promotion generally boost sales of goods and ★​ 2. Increase in the price of substitute – shift
services. to the right
2. Prices of Related Goods. The price of a Decrease in the price of substitute – shift
to the left
substitute good or a complementary good is
★​ 3. Decrease in the price of compliment –
also important how the demand for a good or shift to the right
service change. Increase in the price of compliment – shift
to the left
A decrease in the price of a substitute good is
★​ 4. Increase in the number of buyers – shift
likely to cause an adverse effect on the sale of to the right
a particular good while a decrease in price of a Decrease in the number of buyers – shift
to the left
complementary will lead to an increase in the
★​ 5. Increase in expected price or income –
demand of a particular good. shift to the right
3. Number of Buyers Decrease in expected price or income -
4. Consumer Income – People with higher shift to the left
★​ 6. Increase in income (Normal Goods) –
income buy more quantities of goods and
shift to the right
services. While this observation holds true for Increase in income (Inferior Goods) – shift
Normal Goods, there are instances when the to the left.

demand for certain good falls as income rises.

A normal good is a good whose demand rises as
income rises.
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