#CHAPTER

ONE
SCARCITY &
-
-

study of how societies use scarce resources

EFFICIENCY
to produce goods and services and
-

valuable goods are scarce and the society must

distribute them among different individuals use its resources efficiently

~ -

It explores the behavior of the financial concerns of economics will not go away because

markets (including interest rates , exchange of the fact of scarcity and efficiency
rates , and stock prices
-
Examines the reason why some people or If infinite quantities of every good could be

human desires were

countries have high incomes while others produced or if fully

are poor satisfied

=f People would not worry about
~
It goes on to
analyze ways that poverty stretching their incomes because

can be reduced without harming the could have

they everything they
economy wanted ; businesses would not
~
It studies business cycles (fluctuations need to fret over the cost of
in credit , unemployment , and inflation) along labor or healthcare ; govern-

with ways to regulate them ments would not need to

-
studies international trade and finance struggle over taxes or

and the impacts of globalization spending or pollution because no

particularly examines would

-

It the thorny one care .

=]
issues involved in opening up the Since all of us can have as much as

borders to free trade we pleased , no one will be concer-

~
asks how government policies can be used ned about the distribution of

to rapid incomes among different people

pursue important goals such as

economic
growth , efficient use of resources , or classes

full employment , price stability , and a fair Eden

of affluence all goods would be free all
-

distribution of income prices would be zero ,

markets

Economics is the study of choice would be

-

unnecessary
* no
society has reached a utopia of limitless

possibilities. Ours is a world of scarcity , full

of economic goods
 &

scarcity
-
one in which goods are
limited relative alternative uses-labor , land , capital can be

goods
to desires ; no free goods only economic
, . You
combined differently can
pro-
scarce resources :
with more labor and less
duce a good
·
labor/human res · land/natural res
.
capital or more land and less labor
.

capital/productive res.
·

or more labor and less land , etc.

*
If you add up all the wants , you quickly find that -

These cannot be completely substi-

there are simply not enough goods and services to
tutable

satisfy even a small fraction of everyone's *

essence of economics is to acknowledge the

consumption desire
reality of scarcity and figure out how to orga
.

* Given the unlimited wants , it is important that nize society in a way which produces the most

an economy makes the best use its limited

of efficient use of resources

resources commodities -

goods and services of different

Efficiency -
denotes the most effective use of a kinds

society's resources in satisfying

people's wants and needs MICROECONOMICS &
-

It is produced at the least cost so people MACROECONOMICS

will have most of these goods Microeconomics-branch of economics which today
Economic Efficiency requires -
that an economy is concerned with the behavior of

produce the highest combination of individual entities such as markets

,

quantity and quality of goods and firms , and households

services given its technology and -

Adam Smith is considered as the

scarce resources founder of microeconomics

* when no indi-
Economy is producing efficiently include the
-

study of monopoly
,
vidual's economic welfare can be improved role of international trade , & finance
1776
unless someone else is made worse off
* In the wealth
of Nations : Adam Smith considered

now individual prices are set studied the

Productive Efficiency -
occurs in an
economy wherein ,

determination of prices of land , labor , capital

you cannot produce (anymore) any
and inquired into the strengths and weaknesses
product without producing less of
of the market mechanism
another product ~
He identified the remarkable efficiency
commodities -

goods and commodities

properties of markets and explained how

productive resources
(inputs) :
the self-interest of individuals working
·
labor ·
Capital through the competitive market can produce

·
land a societal economic benefit
Macroeconomics concerned with the overall per-
-
ex : Because event B happened after even A

:
formance of the economy Event B is caused by event A .

examines wide variety of areas , such as how People

hate to to the hospitals.
-

a go

total investment and consumption are deter- When people go to hospitals they die
.

:
mined , how central banks manage money and They die because they go to the hospital
interest rates , what causes international .
2 Failure to hold other things constant

financial crises and why ceteris paribus

-

, some nations

grow rapidly while others stagnate failure to hold other things constant when
-

* General and
Theory of Employment , Interest thinking about an issue
(1936)
* The
Moneynby John Keynes :
developed an analysis economy is composed of so many

of what causes business cycles , with alternating things happening all at once , you need

spells of high unemployment and high inflation to find out whats the relationship of

price of good & aty of the good that

LOGIC OF ECONOMICS
a

is bought ; hold other things constant

scientific approach economists -

use this to under- Cie income , prices of other
.
goods)
stand economic life hold other things constant when
Always
-

economics is social science ; variable

-

a
you are analyzing the impact of a

measure , analyze , calculate on the economic

system
-involves observing economic affairs ex : 1) We want to know whether raising tax rates

and drawing upon statistics and the will raise or lower tax revenues : lower

historical record tax rates produce higher revenues

* Economics relies and theories 2) price of a good is invertedly related to a

upon analyses

Theoretical Approaches
-
allows economists to aty of a good that is bought (vice versa)

make broad generalizations 3) The price of beef may rise if more people are

Econometrics-specialized technique developed by willing to purchase it , and producers may sell

economists it for a lower price if fewer people want it

applies tools of statistics to Fallacy of composition

-

econo-3
. -
assume that what holds

mic problems true for a part of a system holds

3 common fallacies in Economics : true for the whole

. In economics

1. Post hoc fallacy-ergo propter hoc : "after this , whole is different from the sum

therefore because of this of the parts

you
-

inference of assume that what is true for

-

Involves the -
can

sality the part is also true for the whole

2 events one
happening after
-

*
Budding economists must be alert to common
the other
fallacies
 &

POSITIVE ECONOMICS -

By using cool heads to inform warm hearts , econo

VS NORMATIVE ECON .
mic science can do its part in finding the appro-

Positive Economics-deals with what is' (facts) priate balance for an efficient prosperous, ,

can all be resolved just society

by reference
d
-

to analysis and empirical evidence

Normative Economics-deals with 'what should be 3 PROBLEMS OF
-

involves ethical percepts and -ECONOMICORG

norms of fairness
-

every society must have a

way of determining
what commodities are produced , how these goods are
COOL HEADS AT THE SERVICE made , and for whom they are produced
OF WARM HEARTS -

choices are made with inputs & outputs

economic science's ultimate 3 fundamental questions organization :
goal is to improve the of economic
-

living conditions of people in their everyday lives ↓ what commodities are produced and in what

stated by Alfred Marshall quantities ?

-

A free and efficient society must determine how much of each

-

market will not necessarily

produce a distribution of income that is socially of the many possible goods and services it

acceptable will make and when they will be produced

4)
Determining the best route to economic progress .
2 How goods are produced ?

or an equitable distribution of society's output

-

society must determine who will do

requires cool heads that objectively weigh the the production , with what resources
,

costs and benefits of different approaches and what production techniques they
-

"From each according to his ability , to each accd, will use

"

to his need . For whom are goods

3 produced ?
To maintain a , gov't fruit of economic
-

must who
healthy economy preserve gets to eat the
-

incentives for people to work and save activity

Societies can support the unemployed for a

while , but when unemployment insurance pays

HOW ARE THESE PROBLEMS
too much for too long , people may come to
ANSWERED ?
depend upon the gov't & stop looking for work.
-

different societies are organized through

If they begin to believe that the gov't owes them alternative economic systems

cutting edge of enter Economics studies the various mechanism that

-

this
may dull the .
a living ,

prise a society can use to allocate its resources

discipline of Market Economies

·

society must strive to combine the ·

the marketplace with the compassion of social · Command Economies

·
Mixed Economies
programs
2 Command Economy government
fundamentally different ways of organizing makes all import
-

an

economy : tant decisions about production &

.
1 Governments make most economic decisions distribution

hierarchy give economic

-

those top of the the government owns most of the

-

on

commands to those further down the ladder means of production (land and capital)
Decisions are made in markets owns and directs the operations of
-

.
2

where individuals enterprise voluntarily

-

or enterprises of most industries

exchange goods and services, it is the employer of most

-

agree to workers &

usually through payments of money tells them how to do their jobs

where most economic questions it decides

-

market mechanism -
how the output of the society

are settled is to be divided among different goods

market economy-one in which individuals and pri- and services

Vate firms make the major decisions about

-

Gov't answers the major economic

production and consumption. questions through its ownership of

-

A system of prices , of markets , of profits resources & Its power to enforce

and losses , of incentives and rewards decisions

determines what , how , and for whom Mixed economies -

no society falls completely into

-decisions are made by all simultaneously either market/command economies

-
What Adam Smith calls the invisible
-
all societies are mixed economies
,

hand with elements of market and co-

-
people are doing/working all for them mmand

selves and yet what comes out , is the Economic life is organized either through hie
-

most efficient possible organization rarchical command or decentralized voluntary

ex . 1 .
Firms produce the commodities that yield markets

the highest profits (the what) by the techni-Gov't plays an important role in overseeing the

ques of production that are least costly (the functioning of the market ; government pass laws

now that regulate economic life , produce educational

c .
Consumption is determined by individuals' and police services and ,
control pollution
decisions about how to spend the wages & "Most societies today operate mixed economies

property incomes generated by their labor

and property ownership (for whom

Laissez-faire economy-extreme case of a mar-

ket economy

the government keeps its hands

-

off economic decisions

SCIETY'S
TECHNOLOGICAL .
3 Capital-resources form the durable goods

#POSSIBI tea resources

of

yet
an economy produced

other goods
, in order to produce

(labor technological knowledge , factories

,
and -
includes machines , roads computers , cars
, ,

tools land , energy

,

buildings , etc .

↳ In
deciding what and how should be produced
, the accumulation of specialized capital
the economy is deciding how to allocate its goods is essential to the task of economic

resources among the thousands of different dev't.

possible commodities and services

↳ Faced with the undeniable fact that

goods are
PRODUCTION POSSIBILITY
scarce relative to wants , an economy must de-
FRONTIER
↳
cide how to cope with limited resources
consumption opportunities of countries are limited

It must choose among different potential by the resources and the technologies available to

bundle of goods (the what) , select from them

different techniques of production (the Given : Resources/inputs

how) , and decide in the end who will Technology
assumptions : there are certain amount
of inputs
&
consume the goods (the for whom
resources in the economy (does not

INPUTS & OUTPUTS change ; given) . There is also a certain

level of technology in the economy

Inputs -
commodities/services that are used to pro-

#
duce goods and services

-
an economy uses its existing technology
to combine inputs to produce outputs
-factors of production

3 categories of Inputs :

1 Land-natural resources

F
land used for farming factories roads
,
-

, ,

↳ scarce
energy resources , nonenergy resources inputs and technology imply that the produce
& environmental resources (clean air tion of guns and butter is limited

and drinkable water) ↳ As we . .. to F , we are trans-

A to B
go from
2 Labor consist of human time spent in pro-
ferring labor , machines and land from the
-
.
,

duction
gun industry to butter and can thereby increase

most familiar and the most crucial butter production

-

for an advanced industrial eco-

↳ transformed into
input Butter is guns by the alchemy of di-

no my verting the economy resources from one use to the other

 The Production Possibility in a Graph infeasible/unattainable points -
outside the frontier (point 1)
NOT productive efficiency/inefficient-points inside

t
the

= (point u). Economy productive

curve has not attained

efficiency

↳ productive efficiency is not attained when unem.

ployment is high during severe business cycles

⑧
O
123 4 5 For infeasible if you: want to increase as much
,

Butter (millions oflbs) country needs to increase resources

Productio Possibility Frontier

Economic
Growth shifts the PPF outwards/

-shows the maximum quantity of goods that can be

↳
efficiently produced by an economy , given its tech- Increase in inputs/improve technological

nological knowledge and the gty of available inputs knowledge : enables a country to produce more

- it shows what it means when economy grows of all goods & services , shift out (right)
L
-menu of choices that an economy has to choose from
a) poor nation

I
>
-

The more an economy consumes today , the less can be its poor countries must

devote most of their

production of capital goods to turn out more consumption

goods in the future resources to food

·
·
ex . More resources the gov't uses to spend on public production

highways , less will be left to produce private goods F

Necessities (food)
like houses b) High income nations
L

#smooth
curveconnectsea cities / I- -

F
#
>
-

rich countries can afford

G
>
-

shows the schedule A

more luxuries as productive

L
15 O

&
B
·

along which society

·
12
potential increases
E

·
can substitute
9
>
-
with economic ,
growth
guns for butter
nation moves from A to B
,
6 E
It assumes a given ·

state of technology 3
expanding its food consump-
and a
given aty of F tion little compared with its increased consump
O ⑧ B

inputs 1 2 3 4 5
tion of luxuries

> >
-

consumption goods if
-

Smooth ppF reflects the menu of choice for the It can increase its of both it

economy
desires

> visual device for

-
what
showing types of goods are

available and in what countries

> As you produce pounds of butter , you produce

-

more less

& less guns

 OPPORTUNITY COSTS
Opportunity cost-concept pointed out by Robert Frost
-

Because resources are limited , we must

decide how to allocate our incomes / time

-what you give up is your forgone

opportunity
.

The next-best good that is forgone repre-

-

sents opportunity cost of a decision

This can be illustrated using PPF

Opportunity cost decision is the value

-

of a

of the good or service forgone

"Peirce the veil" of money to examine the real impacts

of alternative decisions

EFFICIENCY
Efficiency economy's
-
resources are being used as effec-

tively as possible to satisfy people's desires

Productive Efficiency -
one important aspect of overall

economic efficiency

occurs when an economy cannot produce more

-

of one good without producing less of another

good
Economy is its PPF rather than inside
-

on
 I
OPPORTUNITY COST

cost
Fortunity

"ups)00 of oran
-

C 2

5
8

10

. If producer is producing 6 apples and 2

1 a oranges,
but wants to make one more oranges they
, can

instead produce Papples and 3 oranges

OC of one 6-4
orange = -

3 -
2

=
2 apples

* Oc are always expressed in terms of a good

that is given up

·
pts along the PPF-efficient
·
pts inside the PPF =
inefficient
·
pts outside the PPF :
Unnatainable
Assume that Macroland produces haircuts and shirts with inputs of labors Macroland has 1000 hours
.

of labor available
. A haircut requires hours of labor , while a shirt requires 5 hours of labor
. Construct

PPF of Macroland :

#i renta
a

4) haircuts only , it
If Macroland produces can

produce 2 , 000 haircuts (no shirts)

shirts
: 1000/5 =
200 shirts

4) If Macroland produces shirts only , it

P

can produce 200 shirts (no haircuts)

Production Possibility Frontier

250

L
·
A

F
f
500

haircuts
 some scientists believe that we are rapidly depleting our . Assume that there
natural resources are

only two inputs (labor & natural resources) producing 2 goods (concerts and gasoline) with no improvement

insociety's technology over , "Show what would

time happen to PPF over time as natural resources are exhausted
.

b .
.
2
How would invention and technological improvement modify your answer ? Explain why It is said that

"
economic growth is a race between depletion & invention

b
·
.
Y
↳>
sparious
↓ natural resources
,
a decrease

(natural resources) will also reduce

outputs
.

,
in

PPF shift inwards/left

P PF shows that if invention and technological improvement takes place

in the economy , this will result to inputs being combined more efficiently
in order to produce more outputs . Ceteris paribus , PPF will shift outwards

.
C

Economic growth is a race between invention and deflation because economic growth is a process that

requires the need for new innovation and . Because of this , there's
technology a need for acquiring new

techniques for pursuing higher economic , and

growth thus new innovative methods and invention is required
.

These new techniques are acquired by making use of the natural resources because these new techniques
are recognized at the cost of some resources , confirming the statement "economic growth is a race between

depletion & invention

.
 -
CHAPTER TWO
Types of markets
:

XED
ECONOMY 9

.
b
centralized

Decentralized eg
eg . stock markets

. case for most workers

Mixed Economy -
combination of private enter- .
c E-commerce

prises working through the market

- * most important markets are for financial assets

place and gov't regulation taxation , leg .

stocks , bonds, foreign exchange , and mortgages
and programs. 2 main markets :

-every country in the world is a a market for goods , or the product market , output
mixed economy market

MARKET
b Market for resources ,
.
or the factor , or
market

MECHANISM input market

Price-value of the good

-

in terms of money

Market Mechanism -
Most economic activity in -
central role of markets is to determine price

most high income countries takes of goods

private represents the different items
-

place in markets terms on which

No single individual/organization/government is can be exchanged

responsible for solving the economic problems/ -coordinate the decisions of producers and

making the decision in a market economy consumers

Market economy-elaborate mechanism for coor -

-
balance wheel for the market mechanism

↳
dinating people , activities ,
and busi- balance the desire for buyers and sellers

nesses through a system of markets serves as signals to producers and consumers

and prices "If consumers want more of any good , prices

-communication device for pooling the will rise , sending signals to producers that
"

knowledge and actions of billions of more supply is needed

diverse individuals What is true of the markets for consumer goods is also

-no
single individual or organization true of market for factors of production (such as land

is responsible for production consump ,

-
and labor

tion , distribution , or pricing

. Market Equilibrium represents -
a balance among buyers

Marketplace
-
where markets determine prices. and sellers

wages and outputs equilibrium of supply & demand

·

Markets -
where buyers and sellers interact , ex-
prices
goods & services or assets , and determine
,
Market finds the equilibrium price that simultaneously . How
2 things are produced is determined by the

meets the desires of buyers and sellers competition among different producers
.
↳ ↳ Best
producers to meet price compe
Too high a price-glut of goods w/too much output way for -

· Too low a price produce long lines in

= stores & defin tition and maximize profits is to keep costs

ciency of goods at a minimum by adopting the most efficient

Equilibrium of supply & demand methods of production

prices for which buyers decide to buy EXACTLY . For whom

3 things are produced who is consuming
- -

the quantity that sellers desire to sell and how much-depends in large parts on the

and demand in the markets for factors of

Everyone working for his own benefit supply
·
Households production
trying to
get satisfaction from their expenditures Factor markets determine wage rates , land rents
,
- -

-all the consumers want to make the best for them-

interest rates and profits
. For the amount of money
selves they have , the buy -

factor prices

MARKET SYSTEM
the combination of goods that give them the maxi-

mum satisfaction .
Product Markets
·
Businesses D
S

·order Di
They're working for their business individually
-

demand
-

Trying to maximize the profits they make from

their businesses

↳
Businesses will have to minimize the

~ consumers
votes

Wesom A
cost of production
costs of production S
-
#onsumer Abusinesses
Productivity
↳
No one can influence the price of anything ! e of factor

⑯good
↳) There is pure competition , no monopolistic or

monoponistic elements

Pure competition -
no one can influence the price of

anything S Dtheybuyfactorsofproductia
supplying land , labor , capital Factor Markets
(b) they own factors of production
-

perfect competition

How Markets solve the 3 Economic

Problems 2 main markets

1 what goods and services will be produced is determined 1 .

Product market (goods outputs , products)
,

by the dollar votes of the consumers in their daily pur -

2. Factor
. Market (input , resources
chase decisions in the market
a protagonist
2 Sellers (businesses)
Profit-net revenues Serves as rewards and penalties 1.
buyers (household)
.
.

↳ ↳
for businesses and In the goods market : demanders in the goods market : They supply

guide

mechanism
the
market -
-
Profits :
ROFIT
total sales-total costs
↳in the
factor market : suppliers ↳in the factor market : demanders

* The
cheaper the factor production
the more they'll use it
,
 out Invisible Hand-private interests can lead to public gain
Market System-deals profits and losses to induce firms

to produce desired goods efficiently When it takes place in a well-functioning market

overview how consumers and mechanism

producers
* Economic theorists have proved that under limited
interact to determine prices and quantities for
both inputs and output conditions , perfectly competitive economy is efficient
Market failures -
markets leads to an inefficient out.
DUALMONARCHY come

Rulers of the market economy : If these are present remarkable efficiency

-

, of the

-
a Tastes / preference invisible hand may .
destroyed

I
be

taste of the population ; these innate and acquired

-

Market failures arise when :

tastes /as expressed in dollar votes of consumer de- is

a. There
.
imperfect competition (monopolies

I
mand) direct the use of society's spillovers outside
resources b When there are
. the market
-

They pick the point on the PPF

place
.
b Technology and other resources
Positive externality scientific
·
discoveries)
Economy's
-

resources limit the candidates for the

Negative externalities (pollution)
·

dollar votes of the consumers

c .
Income distribution is politically or ethically
Economy cannot go outside its PPF
unacceptable
determine what is going to be produced , how it's going
perfect competition with no market failures
to be produced and for whom it is
going to be produced
-markets will squeeze as many useful goods and
-consumers are trying to maximize the satisfaction
services out of the available resources as is possible
they get from the purchases they make -
-

profits (mini-
DISTINGUISHING FEATURES
-
Producers are trying to maximize

mize the cost of producing the good

OFAMODERN ECONOMY
-

* Combination Trade , specialization and division of lab or

of these selfish pursuits results in the 1.

society being on the PPF modern economies depend heavily specialization

-

on

When the society is trying to maximize and minimize

,
of individuals and firms , connected by an extensive

* society ends up on the PPF (where : depends where pro- network of trade

ducers and consumers balance) ·

Specialization -
occurs when people and countries
THE INVISIBLE HAND concentrate their efforts on a particular
Adam Smith-first recognized how a market economy set of task

organizes the complicated forces & It permits each

-

of supply person and countries to

demand &
to best advantage the specific skills
He saw the harmony between private profit that are available

and public interest highly productive in

-

people can become

a harrow field of expertise

very
 ·
Division of labor-dividing production into a Economic activity involves foregoing current consumption
number of small specialized tasks to increase our capital

Gains from trade-trade Every time people invests , we

· *
can enrich all na- are enhancing the future

tions and increase everyone's productivity of our economy and increasing future

living standards consumption

*
Specialization and trade are the key to high living

standards CAPITAL& PRIVATE PROPERTY

Globalization extension of specialization and
↳ In
-
reflects an a market economy , capital typically is

division of labor to the entire world privately owned , and the income from capital
.
2 Money allows to trade their specialized to individuals
people -
out goes
-

puts for the vast array of goods & services pro-property rights-bestow on their owners the ability to use,

duced by others exchange, or exploit their capital goods

payment in the form of currency limited

.
-

means of

and checks used to buy things Capital goods -

have market values , and people can buy and
-
lubricant that facilitates exchange/medium sell the capital goods for whatever price they

of exchange the goods will fetch

central banks -
where gov't control money supply Capitalism-ability of individuals to own and profit from

Hyperinflation -
when money gets overheated and capital

damage the economic engine

. Instance Labor -
most valuable economic resource

price increase very rapidly cannot be turned into commodity that can be
-

where a

. Capital-produced and durable

3 input which is itself bought and sold as a
private property
an output of the
economy Ex Slavery
.

*
-consists of a vast & specialized array of ma .

Specialization and the division of labor among people

Chines , buildings computers , countries create great efficiencies

,
software , etc. and

*
-

It has to be produced before you can use it Increased production makes trade possible
-
use of Capital involves time consuming ,
round money allows trade to take place efficiently

*
about methods
of production sophisticated financial system allows people's savings
If people willing to save (abstain from people's capital
#
flow smoothly
are to other

present consumption) , the society can devote

its resources to new capital goods VISIBLE

HAND OF GOVERNMENT
* a
larger stock of capital helps the economy grow
↳
by pushing out the PPF In an idealized market economy all goods and services

Poverty trap-when countries have low incomes

a few pro are voluntarily exchanged for money at competitive
ductive outlets for their savings , they save & market prices that reflect consumer valuations

invest a little
. and social costs
 >
-

* Economic imperfections lead to such ills as When imperfect competition , society may
arises

more inside its PPF

pollution unemployment financial panics
, , ,
and

extremes of wealth and poverty Effect of Imperfect competition :

*
No Prices rise above cost and to
·
consumer purchases
government anywhere in the world , at anytime,
no matter how conservative it is , keeps its hands that are reduced below efficient levels
off
↳Pattern
in the economy of too high a price and too low outputs

Government's 3 main functions in the market is the hallmark of the inefficiencies asso -

economy : ciated with imperfect competition

↳ to address market failures Monopolist -
extreme case of imperfect competition
.
1 increase efficiency by promoting competition
, curb
single supplier who alone determines the
-

externalities like pollution providing public particular good service

and price of a or

most important check for imperfect

goods
-

com-

.
2 Governments promote equity by using tax & expen- petition is the opening of markets to com-

diture programs to redistribute income toward par- petitors may it be foreign or domestic

ticular * Few monopolies withstand the attack of

groups can com-

.
3 Governments foster macroeconomic stability and
petitors unless government protect them through

growth
-
by reducing unemployment and inflation tariffs or regulations
Externalities (or spillover effects
while encouraging economic growth through fiscal
-

and monetary policy occur when firms or people impose costs or

benefits on others outside the marketplace

EFFICIENCY -

activity that helped or hurt people outside the

Perfect competition -

refers to a market in which no marketplace ; an economic transaction who economic

payment
firm or consumer is large enough to affect Government Regulations are designed to control -

the market price externalities like air and water pollution

,

atomistic homogeneity , perfect information damage from strip mining , hazardous wastes,
-

, ,

perfect mobility unsafe drugs and foods , radioactive

Perfectly competitive markets materials
-

will produce an

efficient allocation of resources Positive Externalities :

↳ Economy is on the PPF · construction of highway networks

* Industries are
subject to the checks and ·
support of basic science

balances of perfect competition Negative Externality

Imperfect competition -
Adam Smith's invisible hand is ·
air and water pollution
fully under perfect competition
damage from mining
·

This occurs when

-
·
a buyer or seller can
unsafe drugs and foods

affect a good's price

Public Even if the economy functioned with complete
goods-polar case of a positive externality is a

efficiency (always on its PPF) , even it was always

public good
-

commodities which can be enjoyed by every- choosing the right combination of goods (private &

one & from which no one can be excluded public) , it might still lead to a flawed outcome

-
>
ex National
.
defense It takes distribution of income (for whom

gov't spends a lot public goods given And this distribution might be
-
on as .

2 attributes of public goods unacceptable to society

.
1 Non-rivalry -
the cost of extending the overnment intervene through :
service to an additional person is zero .
1
Progressive taxation
↳
.
2 Non-excludability impossible -
to exclude taxing large incomes at a higher rate

individuals from enjoying it than small incomes

Taxes-gov't
&
must find the revenues to pay for its eg Federal
. income
-
redistributive
progressive
and for its income redistribution inheritance taxes
public goods taxation

programs .
2 Transfer Payments
↳ because
All levels gov't collect taxes to pay for low taxes cannot help those
-

who
of

their spending have no income at all , government do this

Not voluntary is subject to tax laws money payments to people

-

. Everyone

obligated This system provides "safety net" to

-

We are all to pay for our share of a

the cost
of public goods protect the
unfortunate from privation

-governments sometimes subsidize

EQUITY consumption of low-income groups by pro-

* Markets do not necessarily produce a fair distri- viding food stamps subsidized , medical

bution of income care , and low-cost housing

*
Market economy may produce inequalities in income

and consumption that are not acceptable in the MACROECONOMIC GROWTH

electorate AND STABILITY
Factors that determine income : Business Cycle-periodic bouts of inflation (rising prices
1 .
effort and recession (high unemployment)

2 . education How to control the worst excess of the business cycle :

. Inheritance
3 1 Fiscal policy gov't can affect output , employment,
I
.

4. factor
and inflation
prices .
2 Monetary policy

policies you't involve

5
. luck Fiscal -
the power to tax and the power

to spend

Monetary policies involves determining the supply of

-

money and interest rates

Economic growth-denotes the growth in a nation's

total output

Productivity -
represents the output per unit input or the

efficiency with which resources are used

Mixed Economy -
market determines output and prices in

most individual sectors while gov't steers

the overall economy with programs of taxation,

spending , and monetary regulation

↳ remedy
government can the
shortcomings
of the market

RISE OF THE
WELFARE STATE
laissez faire -
leave us alone' ; holds that gov't should

in economic
interfere as little as possible

affairs and leave economic decisions to the

private decision making of buyers and sellers

Welfare State -
one in which markets direct the detailed

activities of day to day economic life while

government regulates social conditions and

provides pensions , health care , & other

necessities for poor family

Many critics of the welfare state worried

that gov't interventions were tilting the

scales in favor of socialism

socialism which
-
the state owns , operates , and regulates

much of the economy

↓
=> DEMANDCHAPTERTHRE What are held constant :

.
1
Average
-key
income

determinant of demand

* its As incomes rise , individuals tend

Amount of commodity people buy depends price people's
-
a on

↳
The higher the price of a
good , other things held to
buy more of almost everything , even
constant , the fewer units consumers are willing if prices don't change
to buy ex . As income rise , people increase car purchases
Demand Schedule/Demand Curve .
2 Size of the market/population/market size

relationship between price and quantity bought measured in terms of population

-

affects the market demand curve

ex A growth in
.
population increases car purchase

. Prices of related
3 goods
substitutes/complement goods
-

-influence the demand for commodity

ex .
Demand for A
good tends to be low if
the price of substitute product B

At each market price , consumers will want to buy a is low

·

certain quantity of cornflakes Lower gasoline prices raise demand for cars

↳ As the price of cornflakes falls , the quantity .

4
Tastes / preferences

Taste represent
-

of cornflakes demanded will rise a variety of cultural

and historical influences

THE DEMAND CURVE ↳
may reflect genuine psychological
Demand curve-graphical representation of the demand or physiological needs

↳
schedule may include artificially contrived
-
found by adding together the Qd by al cravings
↳
individuals at each price may contain a large element of

horizontal summation of all the indi- tradition religion

-

or

vidual demand curves ex .

having a new car becomes a status symbol

-change in price leads to a move- .

5 Special Influences

ment the curve will affect the demand for particular goods
along
-

ex ·

Special influence include availability of

alternative forms of transpo , safety of auto

mobiles
 Law of downward-sloping demand : negative slope of demand shows the relationship between

Quantity and price related

-

are inversely its market price and the amount

·
Q when I
goes up goes down of that commodity that producers
-
curve slopes downward , going from northwest to are willing to sell , ceteris paribus
southeast Factors that are held constant in supply curve :

When the price of commodity is raised (other

·

a 1 .
Technology

things are held constant) , buyers tend to buy less -

consists of changes that lower the quantity of

of the commodity (vice versa) inputs needed to produce the same aty of output

talking about the movement along the curve Such advances include everything from scientific
- -

Quantity demanded tends to fall as price rises for breakthroughs to better application of existing
2 reasons technology simply reorganization of the
:
or work
-

.Substitution
1 effect -
occurs because a good becomes
flow

relatively more expensive when its price ex .

Computerized manufacturing lowers production costs

rises and increases supply

. Prices
.
2 Income effect-higher price generally reduce aty 2
of inputs

demanded -prices of inputs such as labor , energy , or

when a price goes up , I find myself machinery obviously have a very important inf-
-

than I was
somewhat poorer before luence on the cost of producing a given level

shifts in demand-when any of the 'constant' change of output

-
demand curve shift because influences ex . A reduction in the wage paid to autoworkers lowers

other than the good's price change production costs and increase supply
3 prices of related goods
when there are changes in factors other
-
.

than a good's own price which affect -particularly goods that are alternative outputs

the quantity purchased of the production process

· Demand increases when Qd at each price increases ex .

If the price of one production substitute rises
,

·
Demand decreases when Qd at each price decreases supply of another substitute will decrease

increase in demand-net effect of the changes in

·

If truck prices falls , the supply of cars rises

Government policies

underlyinignfence LE
4 .

>
Taxes and minimum wage laws can significantly
-

affect input prices

Supply side of a market-typically involves the terms on -Government trade policies have a major impact

which businesses produce and sell upon supply

their products ex "When . a free-trade agreement opens up the US

Supply Schedule (or curve) -

relates the quantity supplied market to Mexican footwear , total supply of

of a good to its market price , ceteris footwear in the United States increases
paribus
 Supply increases when
·
·

Removing goutas and tariffs on imported auto-

the amount supplied increases

mobiles increases total automobile supply

at each marketprice (shift right)

Supply
·

. decreases when amount supplied

5 Special Influences
-market structure will affect supply , and expecta-
decreases at each market price (shift left)

tions about future prices often have an impor

tant impact upon supply decisions

EQUILIBRIUM OF
ex · Internet shopping and auctions allow con- SUPPLY DEMAND
sumers to compare the prices of different Market Equilibrium supply -
and demand interact to

dealers more easily and drives high-cost produce an equilibrium price and quantity
sellers out of business
-

price and quantity where the forces of

. Cost of
6
production supply and demand

production costs for good relative tendency price to rise or

-

When a are low for the fall

-

no

to the market price , it is intersection of the supply

profitable for pro- come at the
-

ducers to supply a great deal and demand curve

-
firms willingly supply what consumers

willingly demand
supply and demand are in balance
-

forces of

and the price has settled at a sustainable

level

Equilibrium price -
amount that buyers want to buy is

just equal to the amount that sellers want

to sel

For each price , the aty of goods that producers want -

no shortages or surpluses at the equilibrium

to produce and sell price

* when the
direct relationship/positive relationship
~

forces of supply and demand are in

The higher the price , the greater the quantity produced balance , there is no reason for price to rise or fall,

and supplied as long as other things are remained unchanged

upward sloping supply curve

indemarketpriceandvanitys
shifts in supply when changes in factors other than a goods
-

desired to

E
,
own price affect the quantity supplied
As production costs fall , supply of goods increases. be bought and sold just match

↳ At
each price , producers will supply more of

#market
Equilibrium =

that .
good
price at which : Qd Q
F
=
↳ shifts to the right
Supply curve

ex When
.
price of oil rose because of political
disturbances
 Market-clearing price-equilibrium price SHIFT IN DEMAND

denotes that all supply and

-

Due to influences affecting demand :

-

consumer

demand orders are filled , the incomes , population , prices of related goods , or tastes
book are 'cleared' of orders
, changed
and demanders and suppliers are .
1
Rightward shift in Demand curve

satisfied -as income rises , at every price , consumers

supply and demand diagram-diagram that often show demand a higher quantity of a good
↳ The demand
the market equilibrium shift will cause a shortage of

surplus -
excess of quantity supplied over quantity of that good at the old price
demanded -

Increase in demand has will change the market

price where suppliers want to sell more than

equilibrium
↳
demanders want to buy Prices are bid upward until supply and

shortage =
At a low price , market shows a shortage
, or demand come back into balance at a higher
excess of quantity demanded over quantity price
supplied
↑ D -
49 , 4Q
under this condition , the competition among
-

↓ D -

↓P, ↓Q
buyers for limited goods causes the price to -

↑ S
-
↓P, 4 Q

rise -

-
↑P, ↓Q
↓S
Effect of a Shift in Supply or Demand

SHIFT IN SUPPLY
"
There might have been a change in technology Ex . Gasoline demand does not obey the law of downward
"
or input prices sloping demand

Leftward shift in supply :

-

1. rise in gasoline prices was due to movement

a shortage will develop at the original price

-

along the demand curve

bad harvest (or any leftward shift in supply priceslaty change

-
-

when in a market :

curve) raises prices , and by the law 4)

↓q
of ↑p of a good + =
supply curve has shifted
downward sloping demand , lowers quantity to the left (decrease
demanded in supply)
* The price continues to rise , until at the new equilibrium ↳
4 p 4aty
+ =
demand curve has shifted to

price , the amounts demanded and supplied are once

the right (increase in demand
again equal

.
2 Rightward shift in supply
- new technologies lower production costs
,

therefore increase supply

 RATIONING BY PRICES
By determining the equilibrium prices and quantities,

the market allocates or rations out the scarce goods

of the society among the possible uses

Marketplace -
does the rationing through the interaction

of supply and demand

rationing by purse
-

What goods are produced ?

answered by the signals of market prices
-

Those who have the most dollar votes have the

-

greatest influence on what goods are produced

For whom goods are produced ?

purse dictates the distribution of

-

power of the

income and consumption

When backed up by cash , the most urgently felt

needs get fulfilled through the demand curve

 CHAPTER 19
Microeconomics-studies individual prices , quantities , and .
2 What are the sources of inflation , and how can it

markets be kept under control

Macroeconomics-study of the behavior of the Market economy uses yardsticks

-

economy as to measure

a whole economic values and conduct business

Examines the forces that affect firms , Inflation situation of rising prices in the economy
·
-

consumers , and workers in the rising price yardstick is

When prices are
-

aggregate losing its value

-studies the sources of It is the sustained increase in the
·

persistent unem- general

ployment and high inflation price level in an economy

Two central themes in the survey of macroeconomics : -increase in the cost of living as the price
.
1 Business Cycle-short-term fluctuations in output, and goods of services rise

employment financial conditions and rate of inflation is the percentage

-

, ,
of

prices annual increase in a

general price level

Economic trends in output and

.
2
Growth-longterm Different Categories of Inflation :

living standards 1.
Hyperinflation inflation at extremely rates
-

3 Central Questions of Macroeconomics : (1 , 000 , 1 million , 1 billion times

1
Why do output and employment sometimes fall , and 2 .
Galloping Inflation -
is a rate
of 50 or 100 or

how can unemployment be reduced ? 200 % annually

All market economies show patterns of expansion .
3 Moderate Inflation price level that does not dis-

and contraction known as business cycles tort relative prices or incomes

political leaders around the world used the tools

-

severely
* The
of monetary and fiscal policy to reduce
unemploy
. Philippines has never had a galloping or
ment and stimulate economic activity hyperinflation
Macroeconomics suggest possible remedies , such key goal of macroeconomic policy : low and stable
-

as monetary policy to alter interest rates and cre- inflation

↳
dit conditions or using fiscal policy such as It can suggest the proper role of monetary

taxes and spending and fiscal policies , of exchange rate systems,

The lives and fortunes of millions of people depends and of an independent central bank in

upon whether economist find correct diagnoses for containing inflation

major macroeconomic ailments -
and upon whether . How can a
3 nation increase its economic growth?

gov't apply the right medicine at the right time This is the single most important goal of
-

macroeco
.

nomics concerns a nation's long term economic

growth
 -

This refers to the growth in per capita output OBJECTIVES & INSTRUMENTS
of a country OF MACROECONOMICS
↳
such growth is the central factor in determi--major macroeconomic goals are a high level and rapid
growth of output , low unemployment and
ning the growth in real wages and living ,

standards
stable prices -

Measuring Economic Success

* Nations want to know the ingredients in a success
.

ful growth recipes

1. Output-ultimate objective of economic activity is to
↳ factors in long term economic provide goods and services that the population
key growth
include : desires

· Gross Domestic Product (GDP)

well-regulated private markets for most

economic activity
-most comprehensive measure of the total output
·
stable macroeconomic policy in the economy

High
·
rates of savings and investment the measure of the market value
-

of all the final

and services (does not include the cost of

·

Openness to international trade goods

accountable and noncorrupt gov't goods because it is already part
·
intermediate of

GOALS & INSTRUMENTS OF

officials the cost of final
goods) = P, Q + PLQ2 + PaQ3 ...

-
EPQ for a particular year
MACROECONOMICS 2
ways to measure GDP :

a . Nominal GDP - measured in (actual) market prices

-

Problem : when comparing GDP over the years

it's prices)(9ty) If you're interested in finding

·

aty are , and

the there's a Din P, you wouldn't

know if the A in GDP is because the Din P or

of
Din
aty
. Real GDP-calculated in constant
b or invariant

prices
most closely wathed measure of output
-

Tradeoffs when achieving the goal :

-

sum the goods at a particular base price

#00
.
1
Increasing the rate of growth of output over the
% Growth rate of real GDP in year t

require greater investment in GDP

long run may
GDPt-1
education and capital

requires subject large business cycle swings

-

higher investment lower current to

-

consumption of items like food , clothing , and if spending patterns change sharply
recreation -

during business downturns : real GDP

,
↑ unemployment
Economic growth-long-term growth & improvement in in hard
Potential GDP-maximum sustainable level of output that

the economy can produce

ercapita
real growth -

When an economy is operating at its potential , there are

Recession-period of significant decline
high in total output,

levels of utilization and capital stock income , employment , that usually lasts for few
of the labor force a

↳ When contractions
output rises above potential output price inflation
, months and marked by widespread

tends to rise in many sectors of the economy

↳ below potential level of output leads to high Depression-severe and protracted downturn

unemployment output temporarily above its

-

can be

-
determined by the economy's productive capacity potential during booms and wartimes as

which depends upon the inputs ,

available (land capacity limits are strained

labor , capital) and the economy's technological High utilization rates may bring rising inflations &

efficiency are usually brought to an end by monetary or fiscal

Potential GDP tends to
steadily because
-

grow policy

inputs and technology change quite slowly over .

2 High employment, low unemployment
time -most directly felt by individuals

Real GDP Growth rates in the PH , (1946-1st half 2020) Working Age Population (WAP) - > 15 years old

·
1947-growth rate is 37'12 % Labor Force -

part of the WAP that is either employed or

-
devastated economy unemployed who are seeking for jobs
·
1946-1984- growth rates were NEVER negative It excludes those without work who are

·
1984-1985 -
Phil death crisis
.
not looking for jobs
↳
We didn't have any foreign exchange Labor Force Participation Rate (LFPR)

#RaborForcelation
=
↳ couldn't pay debts

·
1991-negative growth rate after 1985

-
minimal only Employment Rate percentage of
-
the labor force that

fell below zero is working

#Employment
rate due to the Asian death
1997-negative growth
Rate temployees
·

crisis

·
2020 -
the economy was contracted by 8 2 % bec .
.

Unemployment Rate -

percentage of the labor force that

of pandemic is not working but looking for work

Growth performance of PH presidents : -

tends to reflect the business cycle :
·
Roxas-highest performance ↓ output, tidemand for labor

Duterte-doing well until year 2020 growth rate is at 4 6%

.
↓ demand for labor = ↑unemployment
+
Marcos-lowest , 3 8% in 20 years Employment rate Unemployment Rate = 100 %
of service
·
.

underemployed employed people

-
who are not satisfied
with their work and needs more job
Underemployment Rate percentage of -
the employed who ·In 2002 , economists were appointed as BSP General

↳ BSP Governor : Ben Diokno

are looking for more work

·
visibly underemployed those who are working less Inflation target : 2-4 %
-

than 40 hours a week High inflation imposes many costs on an

economy

. Price
3 Stability ↳ causes : Taxes become highly variable
-
low and stable inflation rate ; or a gently rising price Real value's of people's pensions are eroded

level People spend real resources to avoid dep-

↳
steady a its steadily rising because if it's reciating rubles or pesos

steadily falling because there will be more Goals of Macroeconomic policy :

problems in deflation .
1 High and growing level of national output

Price indexes -
constructed by gov't statisticians .
2 High employment with , low unemployment

(Philippine Statistics Authority) to track prices . A stable

3 or gently rising price level
ex (P1yProducer Price Index , Wholesale Price Index
,

TOOLS OF
.

GDP Deflator

Consumer Price Index-measures the trend in the average

MACROECONOMICPOLICY
price of goods and services bought by Policy Instrument -
economic variable that can affect

consumers one or more of the macroeconomic goals

P= over all price level -

These are economic variables that can

Rate of Inflation -
how economists measure price stability be affected by the government. Under

percentage change in the overall level of the control of the government

prices from one year to the next .
1 Fiscal Policy -
denotes the use of taxes and government
expenditures

#late of Inflation in Yeart = Pt =

GDP
100 X
Government Expenditures gov't spending ; influence
-

Pt -1

↳ growth rate in prices

-

determines the relative size of the

. How much GDP is consumed

ector
publice privates
collectively
It talks about CPI
2 types of gov't expenditures :

Deflation -
occurs when prices decline (inflation rate .
1
Spending on goods and services

is negative purchases of tax construction of roads,

,

Hyperinflation-rise in the price level of a thousand or salaries for judges

a million percent a year .
2 Gov't transfer payments

Inflation Rate in the PH increase the incomes of unemployed

-

or

↳ the PH almost hit in 1984 elderly

a galloping inflation the

(marcos time) ex : Bayanihan I

↳ Now inflation rate in the PH is
,
managed be CCT
·

in 1990 , BSP had complete independence Pensions to gov't retirees

Taxation affects the economy in 2 ways : How do the Fed Reserve manage/maintain the country's
-

.
1 Taxes affect people's disposable income money and credit ?

taxes affect the amount people spend , as

-

by setting short-run
-

interest rate targets and

well as what they saved through buying and selling gov't securities to

Leaves households with more less dis-

-

or attain those targets

posable or spendable income Through its operations the ,

BSP influences many
4) taxes financial and economic variables , such as
affect the amount people
services as interest rates stock prices housing prices , and
spend on goods & well as , ,

private saving foreign exchange rates

↳ These financial variables affect spending

Private Saving is important because in Macroeco

nomics , savings & investments are very impor-

on investment , particularly in housing,

tant variables business investment , consumer durables,

Private and exports and imports

consumption and saving have important

effects on investment and output in the Historically , the Fed has raised interest rates when

short and long run

inflation threatened to rise too high
Taxes affect ↳ This
the prices of goods and factors led to reduced investment and consumpt
-

of production and thereby affect incentives tion , causing a decline in GDP and lower infla

and behavior tion

Many provisions of the tax code have an important Central Bank-key macroeconomic institution for

impact on economic activity through their effect on every country

the incentives to work and to save Open Economy

-
one whose borders are open to goods,
.
2 Monetary Policy -
what the gov't conducts through services , and financial flows
↳
managing the nation's money , credit , and Exchange rate system is also

banking system a central part of Monetary

↳ BSP or
through the Central bank ; policy
Federal Reserve
System
-
tool that countries most often rely on
INTERNATIONAL
to stabilize the business cycle , although LINKAGES
it becomes less potent in deep recessions Globalization -

phenomenon wherein nations increa-

Federal Reserve system singly participate in the world economy

affects the economy by short term interest and are linked together through trade

rates and finance

International economic policy

-

becomes

more important particularly in small,

open economies
Nations keep a close watch on their international Foreign Exchange Systems integral part -

of monetary policy

* In small
transactions open economies managing the
: rate is
exchange

Balance on current account -

one important measure in the single most important macroeconomic

watching international transaction policy

Represents the numerical International Economy intricate web of trading
a financial
-

difference -

between the value of exports and the connections among countries

*
When
value of imports , along with some adjust- international economic system runs smoothly ,
it

ments contributes to rapid economic growth

* Countries therefore consider
Net exports closely related
-
to currect accounts the impacts of trade

difference between the value of exports &

policies and international financial policies on their

the value of imports domestic objectives of high output , high employment, and

imports
et exports =
surplus exports exceeds
-

price stability
exports -

imports -

difference is surplus
-

the
-

AGGREGATL SUPPLY
-
-
country is exporting importing
-

when a more than

international Economic Policy-becomes more important a NDDEMAND

-

economies become more closely linked

International Exchange it serves -

as the ultimate goal of imp- Economic history of nations can be seen in their macroecono-

roving living standards mic performance

Major areas of concern :

Aggregate Supply
-

refers to the total quantity of goods and

1 .
Trade Policies services that the nation's businesses willingly

.
2 International Financial Mgmt produce and sell in a given period

Trade policies -
consist of tariffs , quotas , and other As depends upon the price level , productive

regulations that restrict or encourage imports capacity of the economy , and the level costs

and exports businesses would like to sell everything they

Have little effect on short-run macroeconomic can produce at high prices
-

performance prices and spending levels may be ,

depressed
↳
But from time to time
, restrictions on so businesses might find they have excess

international trade are so severe that capacity

they major economic dislocations, depends price level that businesses

-

cause on the

inflations , or recessions can charge as well as on the economy's capa-

International Financial Management -

a country's international city or potential output
trade are influenced by its foreign PotentialOutput-determined by the availability of produc-

exchange rate tive inputs (labor & Capital) and the

Foreign Exchange Rate-represents the price of its own currency managerial and technical efficiency with

in terms of the currency of other nations which those outputs are combined
 intersection
The diagram shows the major factors affecting
-

overall
National Output & Overall price level-determined by Aggregate

Supply and Aggregate Demand economic activity

Aggregate Demand-refers to the total amount that Aggregate S chedule

Demand -
represents what everyone in

different sectors in the economy willingly the economy would buy at

spend in a given period different aggregate price

AD total spendings goods and services levels (with other factors

-
= on

depends on the level of prices monetary policy

, , affecting AD held constant)

fiscal policy , etc . Aggregate Supply Schedule -

represents the quantity of goods

AD is affected by the prices at which goods and services that businesses are
-

are offered by exogenous forces

, like wars and willing to produce and sell at

weather , and by gov't policies different price levels , other thing

components of Aggregate Demand :

equal

.
1 Consumption (goods bought by consumers) Macroeconomic Equilibrium -
use the AD and As concepts to
business
.Investment
2
(construction of houses & factories + equipment see how equilibrium values of price and

.
3 Gov't purchases
(spending on teachers & missiles quantity are determined or to find the

.
4
Net Exports (difference between exports and imports P and Q that satisfy the buyers and

Equilibrium -
National output and price level settle at that sellers are all taken together

level where demanders willingly buy what -combination of overall price and quantity

businesses willingly sell at which all buyers and sellers are satisfied

The resulting output and price level determine with their overall purchases ,
sales , and prices

employment, unemployment , and international Macroeconomic policy played

-
a central role in the improved

trade business-cycle conditions

Aggregate Supply and Demand curves discovery and application of macroeconomics,

often used to help analyze macroeconomic conditions along with a good appreciation of the role
-

Chief
outcomes and limitations of monetary and fiscal policy
major variables
determining : reduced business-cycle volatility
AS and AD

↳ As & AD determine the major macroeconomic

variables
1 .

By how much did the purchasing power of the peso decline from the year you were born to the

second quarter of 2020 ?

PP =4 IBase date
X 100
-

CPI Target date

=
CP11998
x200

=
(0 205)
.
x 100
=
0 50 % .

To know how much it would cost to buy the same

thing in 2020 compared to 1998 :

(10

#
=> 2 35
.
php
↳
= (2 351)#1
. . 00 You need 2 .
35php in

the 2nd quarter of 2020 to

buy what costs #1 00 in .

1998
.
1 .

By how much did the purchasing power of the peso decline from the year you were born to the

second quarter of 2020 ?

pp = CPIbasedate x 100
Formula : --

CPI target date

CPI base date = 52 10.

CPI target date =

122 47 .

PP = 2 10
. x 100) Decline in purchasing power in peso =

122 47
. 100 -
42 54
.

=
7 46%

I t
= .

= 42 54 %
.

the purchasing power of peso declined by 57 46% .

from 1998 to the end of 2nd quarter of 2020

 FORMULAS:

i
Opportunity cost

cost
Fortunity
GDP Deflator

(nominalx
profit :
CHAPTER 28
.
1
Using the macroeconomic indicator data set , compute the growth rate of Philippine economy
in 2019
.

Growth rate = GDPt-GDPt-1

-100
GDPt-1

Given =

19368512 %
( 19368512
18265190 3
(
GDP 2019 = 8
x100
-
.
. .

GDP2018 = 18265190 3 . 18265190 3 .

) 033225)xo 040574896
:
.
= 6 .

ord(04
%
=
(0 06040574896) (100)
.

. What
2 is the GDP Deflator in 2019

GDP
GDP xo
or ) Nominal
GDP Deflator = Nominal
Real GDP
Given =

C -57647O
Nominal GDP 2019 =
19516418 3 .

Real GDP 2019 =

19368512 8 .

=
(1 007636389)100
.

=
100 . 7636389 or % 76 .

.What were the growth rates of nominal and real GDP in 2015 ?
3

Growth rate in Nominal GDP in 2015 :

S
3944157 4 13206828 3
(
NGDP2014 =
13206828 3 -
. -
.

X 100
.

NGDP2015 = 13944157 4 .
13206828 .
3

: 37327(x100 =
(0 05582938486O
:

=
5 582938486
.

Growth rate in real GDP in 2015 : or

5
58 %
.

RGDP2014 14096046 7
-( 14990907 5 14096046 7
= . .
-
.

100
RGDP2015 = 14990907 5 . 14096046 7 .

(0 0634831041)100
94060
=
= .

X100
= 6 . 34831041

ord
35 %
4.
Compute the inflation rate in 2019

CP[2018 =
117 30.

(20201
CPI 2019 =
120 20
X 100
.

(9)
=

x100
10 02472293265 o
=
.

=
2 . 472293265

or .
(47
%

How does this compare to GDP Deflator in the same year ?

·
The GDP Deflator in 2019 is 100 76 % While .
CPI in the same year is just 2 47 %
.

GDP Deflator is definitely higher because it takes into account

Comparing the 2,

all goods and service produced in 2019 while CPI only measures the

price and services bought by the consumers

.

5. Max's restaurant in subic had sales revenue of Php 30 million in 2019

5
. Its food ingredient
is Php . Its wage cost is
15 million Php 5 million , it paid 3 million in rent , Php 2 million in

added) for 2019 ?"How

A

interest. What was its contribution (value much profit did the

owners of the restaurant make ?

Given :

30 million Rent 3 million php cost = 5 million php

sales Revenue =
php =
Wage
Food ingredient = 15 million Interest =
2 million php
php
a .
value added = Total Sale-variable cost * other expenses
are fixed cost :
= 30 million -
15 million (food) · Rent

=
million php ·
Interest
·
wages
b .
Profit =

Sales-value added
-

Fixed costs

= 30 million -
15 million
-

(3m + 2 m +
5 m)
=
15m-10m

W
=
5 million php is the

it
of the owners

of Max's restaurant
. Assume no
6 government , and no international trade in a country
. Show that measured

savings is identical to measured investment

In accordance to macroeconomics
,

total output =
consumption +
Investment ; and

total output-consumption =
investment ; and

total earnings less consumption is savings

Thus , we can say that :

Savings = measured investment

7 which of the following is not included in the Philippine GDP

.

a . Gourmet meal prepared at home by the homeowner

. Purchase
b of a 1 , 000 sq meter lot in Makati

c .
Purchase of a roast chicken in Mang Andok's chicken Inasal not included

d Purchase
.
of an original Amorsolo painting included
e .
profits of sollibee from its restaurants in USA

f .
Tips received by the meal server in Carinderia

. Damage
g to houses and crops , from pollution resulting from mining operations
h .
Profits of a
drug dealer from his shabu sale

i. wheelchair bound
Salary of a caregiver from her care of a gentleman
gentleman marries caregiver in the preceding questions,
j

. The wheelchair bound the

and then she continues to take care of him

 IMPORTANT :

CH 1 . Production Possibility Frontier :

3 common falacies in Economics ·

Above the PPC =
unnatainable/infeasible
1. Post Hoc/Ergo propter no ·
Below the PPC =
inefficient (unemployment
Examples : ·
Along the PPC =
efficient
1
. Michael Jordan wore his lucky 3 types of PPF :

shirt in all his wins 1. Inverted PPF &

His team lost because he didn't -opportunity cost is decreasing
↓

wear his fave shirt. 2 .

Straight line L
·
His team wins everytime he
-

opportunity cost is constant

wears his shirt .

3 Common PPF L
. Failure to hold other
2 things constant The steeper the slope the larger the
aformen-
-

Examples : tioned sacrifice has to be

1
If the price of ,
milk increases ·
Downward sloping PDF : L

people will purchase less milk negative slope is due to the presence of OC
-

Ceteris paribus doesn't consider Upward Sloping PPFL

-
·

the price of competing products

, production of more of both goods is attained
-

the availability of milk or other by moving upwards

factors that would affect 1 some scientists believe that we are rapidly depleting
customer's decreasing desire our natural resources. Assume that there are only

to
buy less milk. 2 goods (concerts and gasoline) with no improvement
-

It only considers the the in society's technology over time

cause (increased price) with a . Show what would happen to pPF overtime as

one effect (decreased sales natural resources are exhausted

of milk)

101
Period 1
·

.
3 Fallacy of composition
· period 3 "Ceteris Paribus,
↓In input (natural
Examples :

1. Since Chuck plays basketball resources) will output

↳
well ,
thus the other members shift to the

of the basketball team must play left

well
2 Assume that Macroland produces haircuts and shirts with
CH. 3
labor Macroland has 1000 hrs of labor available· Demand Curve (44 , ↓Qd ; P > + (d)
inputs of .

inversely related
A haircut requires /2 hours of labor , while a shirt requires Factors Affecting Demand curve

5 urs . Construct PPF

of labor of Macroland
:
1. Income

Macroland's labor = 1 , 000 hrs ·

Normal good-product whose demand rises when

To make 1 haircut
= /2 hrs income rises

To make 1 shirt = 5 hrs

·

Inferior goods-demand falls when income

Haircuts : increases

1000 =2000haircutswall
,
as
Macro is -

when income increase , demand

curve for an inferior good shift

↳
If Macroland produces haircut only to the left
and no shirts
.
2
changing of tastes/preference
shirts :
.
3 Population
1000 = 200 shirts
.
4 Related Goods
↳
If Macroland produce shirts only and no
a .
Substitute -

good or service that can be

haircuts
used in place of another good or

#
service

lower price for substitute will

-

decrease the demand for the

other good shift

, to the left
b complements goods are often used together
-
.

because consumption of one tends

to enhance consumption of the

M
other

.
5
SpecialInfluences

-
Taste shift to greater popularity

Population likely to buy rises

↑
Income (for normal goods
P of substitute 4
P ↓
of complement
Future expectations encourage buying

0 &
goo :600 Too i
↓
80 7,200
Taste shift to lesser popularity
Population likely to buy
drops

↳
Income t (for a normal good
P or substitutest
-

P
of complements ↑
Futurediscourage
expectations buying
 I
*
supply curve If supply shifts leftward shortage will develop,

direct relationship (44 4QS ; ↓P , Qs) at the original price. Price will bid up until quantities
-

. be

Factors that affect supply curve willingly bought and sold are equal at new equilib-

1 . Price cap (movement along the curve rium El

*
. cost
2 of production Shift in the demand curve leads to excess demand
.

refining ↑ (shift to the left) Price will bid up as

equilibrium price and quantity
-

3 .
Gov't policies more upward to E" .

-
Taxes

4)
property tax↓ (shift to the right) Market for apples
.
4
Price of inputs P/1b -

M
-
price of inputs ↑ (shift to the left)
.
5 Price of Related goods
-
substitutes for production
↳
if p of productive goes up (shift to the left)
. No
6 . of suppliers
P
7 .

Technology - Q
(000s)
8
. Expected future prices

EX
-
P 1 . Scenario 1 :
Shortage

*
.
1 which of the ff . move - at Price 1/1b
,

3 QS = 2 , 000lbs and Qd = 4 , 000 lbs

ments would be described
2

as increase in a supply of Shortage : 2 , 000 lbs

a good ? 012345 Q .
2 Scenario 2 : surplus
> A tO D
-
at Price 4/1b

.
2 which of the ff movements .
QS = 4 , 900/16 and Qd = 1 , 800/lb

·
~

represent at in QS ? Surplus = 3 , 100 Ibs

>
- C tO A .
3 Scenario 3 :
Equilibrium
because a ↓inP would at Price 2/1b
,

O
cause a movement Y QS = Q&

curve S2 changes in Market Equilibrium

along a supply ,

.
1 New disease resistant apple invented
meaning Qs has decreased

*
in response to a decrease in P

Market Equilibrium

QS = Q&

Surplus = QS) Qd

Shortage = QS LQd
.
2 Study released on how apples prevent cancer EX

D2 .
1 How would a dramatic increase in the value of the

eve
stock market shift the AD curve ? What effect
would the shift have on the equilibrium level of

GDP and price level ?

·
>
-

industry
.
3 Pear cider launched a a
successful

campaign

"go
Apple cider demand

down
>
-

Apple demand ,
t

shift to the left increase in the value of stock market will increase
-

Q demand ; shift to the right

Apple supply ↓ , shif to the left The result would be an increase in the

= At the new EP , price is still the same because

equilibrium level of GDP and increase in price
farmers also produced less apple level

.
2 Suppose Mexico , one of the largest trading partners
4.
Apple pickers unionize ; demand wage increases and purchaser of a large aty of exports , goes into

S2

"Da
recession . Use AS/AD model to determine the likely

L
impact on our equilibrium GDP and price level

·
Increase in
E
>
Q
wage will decrease supply , therefore
-

Since imports depend

a
on GDP , if Mexico goes

shift to the left. into recession , its GDP declines and so do its

imports
CH19 This decline in our exports can be shown as

Shifts in Aggregate Demand : leftward shift in AD , leading to a decrease

1. right components of
:
AD (C , 1 , 6 , X) increase in GDP and price level

-shift to the
right ; Eq and Pt
.
2 Left components fall
:

shift to the left ; Eq of output & Pt

-
 I
. A
3 policy maker claims that tax cuts led the eco- * Increase in wages and increase in consumer

nomy out of a recession . Use AS/AD diagram to spending cause inflation

snow this Increase in Wages cause SPAS to decrease,

-

D 2
.

·
decrease in SRAS =
inflation
An increase in consumer
-

spending causes AD

to increase , increase in AD =
inflation

-Tax cuts increase consumer and spending depending

,

on where the tax cuts are targeted ; this will shift

AD to the right. If tax cuts occurred when the eco-

nomy was in recession-and GDP was less than poten

.

tial -
the tax cuts would increase GDP and lead the

economy out of recession

4.
Many financial analysts and economists eagerly

await reports on the home price index and consumer

confidence index. What would be the effects of negative

reports on both of these ? What about positive reports?

· a

negative report prices would make con-

-

A on home

sumers feel like the value of their homes (which

for most people is a major portion of their

wealth) .
has declined Negative report on consumer

confidence would make consumers feel pessimistic

about the future .
Both of these would likely reduce consumer

spending ; shift AD to the left , reducing GDP

and price level .

-
positive report will do the opposite
 FORMULAS

M
#Rc

Growth rate of Nominal GDP

Nominal GDPt-Nominal GDPt-1

R
F
MOMET T
ECOSSINVESTMEN

#
F
NEM

Free PRODUCT