ECONOMICS

Intro to economics
Key Terms
• Economics
• Scarcity
• Productive resources
• Human resources
Labor
Entrepreneur
Natural resources
Capital resources
• Goods
• Services
1.1 The Economic Problem
Economics
• A study on people, behavior, and choices
To learn more, we need to understand the economic problem:
1. People have unlimited needs and wants
2. Scarcity – there is a limited amount of resources
Economics is the study on how to use scarce resources to satisfy unlimited needs and wants of
humans.
Factors of Production
• Used to produce goods and services that people need and want
• Land – natural resources
• Labor – human effort
• Capital – human creations used to produce goods and services (ex: machines)
• Entrepreneurship – organizes the other factors and takes risks
Needs and Wants
• Require scarce resources to satisfy human needs and wants
 • Goods
• Tangible; something you can see, feel, and touch
• Services
• Intangible; not physical
1.2 Economic Theory
Macro vs Micro
• Microeconomics
• Focuses on the actions of individual agents in the economy (households, workers,
businesses)
• Answers questions/problems on an individual level
• Macroeconomics
• Focuses on the economy as a whole (unemployment, inflation, import/export)
• Answers questions/problems on a national level
Economic Theories and Models
• A simple representation of how two or more variables interact with each other (ex: Price
and Demand, Income and Demand, etc.)
• Theories makes economic concepts easier to understand
• A good model we can start with is the Circular Flow Diagram
Circular Flow Diagram
• Pictures the economy in 2 groups – households, and firms that interact in two markets:
• Good and Services Market (outer circle)
• Labor Market (inner circle)
• Market – place where buyers and sellers interact
Applied Economics
1.3 Economic Questions and Economic Systems
3 Economic Questions
All economies must answer three questions:
1. What to produce?
2. How do we produce it?
3. Who gets what we produce?
Economic System
• the set of mechanisms and institutions that resolves the what, how, and for whom
questions.
• Each systems answers the 3 Economic Questions differently
• Traditional
• Command/Planned
• Market
• Mixed
Traditional Economy
• Oldest economic system
• Economics affairs are organized by tradition, culture, religion
• Most occupations stay in the family
Command/Planned Economy
• Authority/Government controls the factors of production and how to answer the 3
questions
• Less freedom for individuals
• Ownership of resources for individuals is limited
• Monarchies, Communist countries are examples of this
Market Economy
• Individuals controls the factors of production and how to answer the 3 questions
• Coordination of economic activity is based on the prices generated in free, competitive
markets.
• Any income derived from selling resources goes exclusively to each resource owner.
• Invisible Hand – Adam Smith
Mixed Economy
• Most economies around the world are mixed, but belong in a spectrum.
• There is no country that is a true/complete command or market economy
Law of demand
Demand
• amount of some good or service consumers are willing and able to purchase at each
price
• Willing – consumers need/want a certain product for it to have demand
• Able – consumers need to have the income/money to pay for the product for it to
have demand
Price
• What the buyer pays for a unit of the good/service
Quantity Demanded (QD)
• The number of units of the good/service purchased at a certain price
Example: You buy 5 oranges at Php5.
Price – Php 5
QD – 5 units
Law of Demand
• A rise in price of a good/service almost always results in a decrease in Quantity
Demanded
• Buyers tend to avoid a good/service if there is an increase in price, while take advantage
of a good/service if there is a decrease in price.
• Price and Quantity Demanded have an inverse relationship. (As one increases, the other
decreases)
Examples:
• When gasoline prices go up, people will tend to use their cars less, reducing their gas
consumption.
• When the prices of air travel go up, people will tend to stay at home and not travel for
vacations.
Demand Schedule - A table that shows the quantity demanded at each price
Demand Curve - shows the relationship between price and quantity demanded on a graph
Demand is NOT the same as Quantity Demanded.
• Demand refers to the demand curve/demand schedule
• Quantity Demanded refers to a certain point in the demand curve/demand schedule.
 • The shape of demand curves varies depending on the good/service.
Supply
• amount of some good or service a producer is willing to supply at each price.
Price
• What the seller receives for selling a unit of the good/service
Quantity Supplied (QS)
• The number of units of the good/service that suppliers want to sell at a certain price
Law of Supply
• A rise in price of a good/service almost always results in an increase in Quantity Supplied
• Sellers want to take an advantage of increase in price to make profits, while avoid selling
at a decrease in price.
• Price and Quantity Supply have a positive relationship. (As one increases, the other also
increases)
Examples:
• When gasoline prices go up, suppliers will find ways to produce more gas for higher
profits.
• When the prices of phones increase, suppliers will produce more to take advantage of the
current price.
Supply Schedule - A table that shows the quantity supplied at each price
Supply Curve - shows the relationship between price and quantity supplied on a graph
Supply is NOT the same as Quantity Supplied.
• Supply refers to the supply curve/ supply schedule
• Quantity supplied refers to a certain point in the supply curve/demand schedule.
• The shape of supply curves varies depending on the good/service.
Market Equilibrium
Equilibrium
• The point where the demand and supply curves meet
• Means balance
 • If the market is at equilibrium, there is no reason to move away/change the price. If the
market is not in equilibrium, economic pressures will move the market toward
equilibrium.
Equilibrium Price
• The price which buyers and sellers agree upon.
Equilibrium Quantity
• The quantity where the amount consumers want to buy is the same with the amount
suppliers want to sell. (Quantity Demanded = Quantity Supplied)
Surplus
• When the price is above equilibrium, QD will drop, while QS will increase. This means
the supplier produced more goods/services than what the market needs. This means there
is a “surplus” of that good/service.
• The suppliers will then be pushed to decrease the price to sell that “surplus” or excess
goods. The market will then slowly return to equilibrium.
Shortage
• When the price is below equilibrium, QD will increase, while QS will decrease. This
means that the market demands/needs more than what the suppliers produced. This
means there is a “shortage” of that good/service.
• The suppliers will then be pushed to increase the price of the good/service. to take
advantage of the “hype”. The market will then slowly return to equilibrium.
Equilibrium
• Forces will always push the market to be at equilibrium.
2.1 Changes in demand
Shifts in the Demand Curve
• The previous lesson showed how price affected quantity demanded and supplied.
• However, Price is NOT the only thing that influences Demand and Supply.
Factors that affect demand
• Earlier, Demand was defined as the amount of some product a consumer is willing and
able to buy at each price.
• This means that aside from price, there are at least 2 more things that affect demand:
• Willingness = buyer’s preferences
• Ability to buy = buyer’s income
 • Before we proceed, we need to understand the concept of ceteris paribus.
The Ceteris Paribus Assumption
• A demand curve or a supply curve is a relationship between two, and only two, variables:
quantity on the horizontal axis and price on the vertical axis.
• The assumption behind a demand curve or a supply curve is that no relevant economic
factors, other than the product’s price, are changing.
• ceteris paribus, a Latin phrase meaning “other things being equal.”
• All demand and supply curves is based on the ceteris paribus assumption. If they aren’t,
then the laws of demand and supply may no be true.
• How can we analyze the effect on demand or supply if multiple factors are changing at
the same time—say price rises and income falls? The answer is that we examine the
changes one at a time, assuming the other factors are held constant or ceteris paribus.
• For example, we can say that an increase in the price reduces the amount consumers will
buy (assuming income, and anything else that affects demand, is unchanged).
Additionally, a decrease in income reduces the amount consumers can afford to buy
(assuming price, and anything else that affects demand, is unchanged)
How a change in income affects demand?
• Now imagine that the economy expands in a way that raises the incomes of many people,
making pizzas more affordable. How will this affect demand? How can we show this
graphically?
• As a result of higher income, demand increases and the curve shifts to the right.
• What happens when the economy slows down, people lose their jobs and income drops?
• As a result of lower income, demand decreases and the curve shifts to the left.
When a demand curve shifts, it does not mean that the quantity demanded by every individual
buyer changes by the same amount. In this example, not everyone would have higher or lower
income and not everyone would buy or not buy an additional pizza. Instead, a shift in a demand
curve captures a pattern for the market as a whole.
Normal good vs inferior good
• In the previous section, we argued that higher income causes greater demand at every
price. This is true for most goods and services. A product whose demand rises when
income rises, and vice versa, is called a normal good.
• A product whose demand falls when income rises, and vice versa, is called an inferior
good. Example: As incomes rise, many people will buy fewer generic brand groceries
 and more name brand groceries. They are less likely to buy used cars and more likely to
buy new cars.
Other factors that shift demand
1. Changing Tastes or Preferences
• From 1980 to 2014, the per-person consumption of chicken by Americans rose from 48
pounds per year to 85 pounds per year, and consumption of beef fell from 77 pounds per
year to 54 pounds per year, according to the U.S. Department of Agriculture (USDA).
2. Changes in the Composition of the Population
• A society with relatively more children, like the United States in the 1960s, will have
greater demand for goods and services like tricycles and day care facilities. A society
with relatively more elderly persons, as the United States is projected to have by 2030,
has a higher demand for nursing homes and hearing aids.
3. Changes in the Price of Related Goods
• The demand for a product can also be affected by changes in the prices of related goods
such as substitutes or complements.
• Substitute - good or service that can be used in place of another good or service
• A lower price for a substitute decreases demand for the other product.
• Example: A decrease in the prices of tablets, will result in a decrease in demand
for laptops and a shift to the left.
• A higher price for a substitute good, on the other hand, will result in the increase
in demand for the product.
• The demand for a product can also be affected by changes in the prices of related
goods such as substitutes or complements.
-Complements - goods are often used together, because consumption of one good
tends to enhance consumption of the other.
• Examples include breakfast cereal and milk; notebooks and pens or pencils, golf
balls and golf clubs
• If the price of golf clubs rises, since the quantity demanded of golf clubs falls
(because of the law of demand), demand for a complement good like golf balls
decreases, too.
• Similarly, a higher price for skis would shift the demand curve for a complement
good like ski resort trips to the left.
4. Changes in Expectations about Future Prices or Other Factors that Affect Demand
• For example, if people hear that a hurricane is coming, they may rush to the store to buy
flashlight batteries and bottled water. If people learn that the price of a good like coffee is
likely to rise in the future, they may head for the store to stock up on coffee now. These
changes in demand are shown as shifts in the curve.
In summary, a shift in demand happens when a change in some economic factor (other than
price) causes a different quantity to be demanded at every price.
Shifts in the Supply Curve
• The previous lesson showed how price affected quantity demanded and supplied.
• However, Price is NOT the only thing that influences Demand and Supply.
Factors that affect supply
• In thinking about the factors that affect supply, remember what motivates firms: profits,
which are the difference between revenues and costs.
• If a firm faces lower costs of production, while the prices for the good or service the firm
produces remain unchanged, a firm’s profits go up.
• When a firm’s profits increase, it is more motivated to produce output, since the more it
produces the more profit it will earn. (Vice-versa)
• Take, for example, a messenger company that delivers packages around a city. If the
price of gasoline falls, then the company will find it can deliver messages more cheaply
than before. Since lower costs correspond to higher profits, the messenger company may
now supply more of its services at any given price. For example, given the lower gasoline
prices, the company can now serve a greater area, and increase its supply.
• Conversely, if a firm faces higher costs of production, then it will earn lower profits at
any given selling price for its products. As a result, higher costs typically causes a firm to
supply a smaller quantity at any given price. In this case, the supply curve shifts to the
left.
How a change in income affects supply?
• What happens to the supply curve when the cost of production goes up? Following is an
example of a shift in supply due to a production cost increase.
Other factors that shift demand
1. Changes in Natural Conditions
• Ex: Weather, droughts, other seasonal changes
2. New Technologies for Production
 • Ex: Development of cheaper equipment for the manufacturing of goods
3. Government Policies
• Ex: Government taxes and subsidies
Price Controls
• Laws that government enacts to regulate prices are called Price controls.
• Price controls come in two flavors:
• Price ceiling
• keeps a price from rising above a certain level (the “ceiling”)
• Intended to support the ones paying money
• Price floor
• keeps a price from falling below a certain level (the “floor”)
• Intended to support the ones receiving money
Price Ceiling (Maximum price)
• Example: To appease voters, the city government implemented a price ceiling of $500,
meaning rent prices cannot exceed this price. However, since the prices of rental units
decreased, landlords converted their apartments to condos instead, decreasing the supply
of rental units. This causes a permanent shortage in rental units.
 Price ceilings have been proposed for other products. For example, price ceilings to limit
what producers can charge have been proposed in recent years for prescription drugs,
doctor and hospital fees, the charges made by some automatic teller bank machines, and
auto insurance rates.
 Price ceilings are enacted in an attempt to keep prices low for those who demand the
product.
 Economists agree that price ceiling reduces both the quantity and quality of the
good/service.
Price Floor (minimum Price)
• Example: To support farmers, the government set the price floor of corn at $7, which is
above the equilibrium price of $7. This causes the suppliers to produce more corn.
However, since the price is high, people will have less demand for the product, causing a
permanent surplus of corn. The government then purchases the surplus corn to make up
for the decrease in demand.
 If farmers aren’t paid high enough, they stop producing food.
  Governments set price floors for agricultural products to maintain a steady supply of
food.
Price Controls
• The vast majority of economists consider price control as counterproductive, as it yields
unintended results.