Pointers to review in Basic Microeconomics

The law of demand states that holding all other things constant, as a price increase , quantity
demanded decreases and as the price decrease, quantity demanded increases. The law of
supply states that, holding all other things constant, as price decreases, quantity supplied
decreases and as the price increases, quantity supplied increases .

Market Equilibrium
● A situation in which the price has reached the level where quantity supplied equals
quantity demanded.
Equilibrium price
● Agreeable price between the buyers and the sellers.
Equilibrium Quantity
● The quantity supplied and quantity demanded at the equilibrium price.
● If the market is not at equilibrium, market forces tend to move it to equilibrium.
● If the market price is above the equilibrium value, there is an excess supply in the
market ( a surplus) which means there is more supply than demand.
● If the market price is below the equilibrium value, then there is excess in demand (
supply shortage). In this incase , buyers will bid up the price of the good or service in
order to obtain the good or service in short supply.
Price Ceiling
● A maximum price at which a certain product can be sold.
● It is set lower than equilibrium market price.
Price floor
● The lowest legal price a certain commodity/good can be sold.
● It is set higher than equilibrium market place.
Surplus
● Occurs when quantity supplied exceeds quantity demanded.
● It is found above market equilibrium.
Shortage
● Occurs when quantity demanded exceeds quantity supplied.
● It is found below market equilibrium.

Price control
● Imposed by government can set a price ceiling or a maximum price at which a product
can be sold.
Price ceilings
● Are imposed because the government feels that the market price is to high.

The opposite of price ceiling is the price floor or minimum price. Price floor are imposed to
help the firms or the suppliers of goods and services. Price floors are the set higher than the
equilibrium price.
When the government imposes either a price ceiling or price floor, shortages and
surpluses result. Shortage happens when quantity supplied demanded is greater than
quantity supplied.
In the Philippines, Ra 7581 or the price Act is promulgated to seeks to stabilize the prices of
basic necessities and prime commodities by prescribing measures against undue price
increases during emergency situations.

Own Price Elasticity of Demand

● The degree of responsiveness of consumers to a price change of the commodity.

Total Revenue Test

● When the demand is elastic , an increase in price will actually decrease total revenue.
● When demand is inelastic, an increase in the price will increase total revenue.
● In the case of unit elastic demand, an increase or decrease in the price leaves total
revenue. This is because the percentage increase or decrease in price is exactly
matched by a corresponding percentage increase or decrease in quantity demanded
and sold.

Cross Price Elasticity of Demand

● The cross price elasticity of demand tells us how sensitive consumer purchases of a
good are to a change in price of another commodity.
● When Exy is negative, the two goods are complementary goods i.e. an increase in the
price of good Y decreases the demand for good X.

Income Elasticity of Demand

● The degree to which buyers respond to a change in their incomes is known as the
income elasticity of demand.
● Ei is positive when the good is a normal good such that more of the food is demanded
when income increases and vice versa.
● A negative income elasticity of demand suggests that the good is an inferior good,ie..
demand for the good decreases as income increases.

The Consumer Behavior

● Is the study of individuals , groups or organizations and the processes they use to select,
secure and dispose of products, services, experiences or ideas to satisfy needs and the
impacts that those processes have on the consumer and society.
Utility
● An economic term referring to the total satisfaction received from consuming a good or
service.
Util.
● A hypothetical unit of measure that is commonly used by economists to present
hypothetical information about utility and consumer demand theory
Cardinal Utility
 ● Is the measurement of satisfaction using numerical values (1,2,3 etc.) that are
comparable and based a bench mark or scale. Height and weight are common cardinal
measures.
Ordinal Utility
● Is the ranking of preferences (first, second,third etc.) that are only comparable on a
relative basis.

Utility and Behavioral Factors

Cultural Factors
● Culture is one of the most fundamental determinants of a person's wants and behaviors.
Social Factors
● A consumer’s behavior is also influenced by social factors such as the consumers
reference groups, family and social roles and statuses.
Personal Factors
● A buyer's decision are also influenced by personal outward characteristics such as the
buyer's age and life cycle, occupation, economic circumstances, lifestyle, personality
and self concept.
Psychological factors
● A person's purchases are also influenced by psychological factors: motivation,
perception, learning and beliefs and attitudes.

Two quantitative concepts related to the utility are total utility and marginal utility:

Total Utility
● Refers to the total satisfaction of wants and needs obtained from the use or consumption
of a good or service.
Marginal utility
● Refers to the additional utility or satisfaction of wants and needs, obtained from the
consumption or use of an additional unit of a good.

Law of Diminishing Marginal Utility

● The amount by which total utility rises with consumption of an additional unit of a good
and also states that there is a general decrease in the satisfaction derived from a
product as more units of the product are consumed.

Assumptions of the Law

● Rationality- consumers aims to maximization of utility subject to availability of his
income.
● Constant marginal utility of money- It is assumed in the theory that the marginal utility of
money used for purchasing goods remains constant.
● Character of the consumer does not change.
● No change to fashions, customs,, taste
● No change in the price of the commodity.
Equi-marginal rule of consumer behavior
● A principle wherein in order to maximize consumer satisfaction, consumers should
allocate their money/income so that peso spent on each good yields the same amount of
marginal utility.

Production Function
● Refers to the physical relationship between the inputs of a firm and their input goods and
services at a given period of the time assuming all other things remain the same.

There are different periods that must be considered when discussing the production function.
These are the short run production and long run production function.

Total Product
● In simple terms we can define total product as the total volume or amount of final output
produced by a firm using given inputs in a given period of time.
Marginal Product
● The additional output produced as a result of employing an additional unit of the variable
factor input is called the marginal product.
Average Product
● It is defined as the output per units or the average of the total product per unit of input
and can be calculated by dividing the total product by the inputs (variable factors).

Costs of Production

Fixed costs
● Are those that do not vary with output and typically include rents, insurance ,
depreciation, up costs and normal profit.
Variable costs
● Are costs that do vary with output and they also called direct costs.
The total variable costs (TVC)
● Curve slopes up at an accelerating rate , reflecting the law of diminishing marginal
returns.
The total cost (TC)
● Curve is found by adding total fixed and total variable costs.
Average fixed costs
● Are found by dividing total fixed costs by output.
● As fixed costs is divided by an increasing output average fixed costs will continue to fall.
Marginal Cost
● Is the cost of producing one extra unit of output.
● Ut can be found by calculating the in total cost when output is increased by one unit.