(1) Managerial Economics Allocation

Coined from two words: Managerial and Economics  Scarcity is one of the main reasons why economics exist.
 Scarcity - the condition where wants and needs of people are not satisfied
 Managerial - from the root word “manager”, meaning a person who does the
because of limited resources.
planning, organizing, leading, and controlling functions in an organization.
 Law of scarcity - human needs and wants are unlimited while resources are
 Economics - a social science concerned with the efficient and effective
limited.
allocation of resources
 Is scarcity same with shortage?
o What goods and how many of them should be produced?
o What resources should be used in production?
o At what price should the goods be sold? The Economic Way of Thinking
o Who will work?
 How economists think can be described in 3 applicable ways
1. decision making during scarcity
Social Science as distinguished from natural sciences 2. rational behavior
3. marginal analysis
 Examples of natural sciences
 Chemistry - combining 2 (H) Hydrogen and 1(0) oxygen to form water H2O
 Physics - law of gravity; whatever goes up must go down Decision Making
 Social Science
 In a world of scarcity, most of the things we do would require us to make choices.
 Social - talking about people; way of thinking, behavior, preferences,
 Because resources are limited, decision makers should decide what to have and
choices they make
what to forgo.
 Economists call these sacrifices opportunity cost.
Efficiency vs Effectiveness  Opportunity cost is the cost we forgo to getting something else. The cost of that
which you get is the value of which is sacrificed to obtain it.
 Effectiveness - achievement of goals; getting the desired outcome  "There is no such thing as free lunch."
 Efficiency - attaining maximum output with the least possible input
o Example: goal to produce 1,000 pieces of polo shirts every month with
the current number of employees (15 sewers) Rational Behavior
o 1,500 shirts with 15 sewers or 1,000 shirts with 12 sewers
 Human behavior reflects “rational self-interest", meaning, they would always
 Efficiency and effectiveness could be best depicted by the Production Possibilities find a way to increase their utility.
Frontier (PPF). It represents points at which an economy is most efficiently  Utility, in economics refers to an individual's pleasure, happiness, or satisfaction.
producing its goods and services. o Whatever makes a person happy and satisfied gives him/her a specific
 The Production-Possibilities Frontier refers to the idea that in a given economy,
utility.
factors of production such as labor and capital are scarce.
 However, what makes it a bit complicated is that the same person may make
o Therefore, there is only a finite amount of any one good that can be
different choices under different circumstances.
produced, and the scarce resources must be carefully allocated to the
production of many goods.
Marginal Analysis

 In essence, before we choose a certain alternative, we often ask ourselves if

this will be “beneficial or not.”
  In economic perspective, these questions are also asked, but they are often (2) Principles of Economics
answered in a unique way by using an approach we call marginal analysis or
Origin of the word Economics
comparing marginal cost and marginal benefits.
 Marginal means additional, change in, or add in.  “Economy” comes from the Greek word “Oikonomia” which means the one who
manages the household.
Why study economics?  Applied to society, conomics is the study of how society manages its scarce
 By now, you may realize that there are things that exist in our lives that are resources.
economic in nature; that alone is a good reason why we have to study economics:
Concept of Economics
to help a person better know and understand what is happening in the world and
hopefully be a driver for social change.  Economics is the art and science of choice. In the face of unlimited needs and
wants, among the scarce resources which have alternative uses.
Branches of Economics  Resources are scarce and the uses to which they can put to are unlimited. One has
1. Microeconomics to choose the best among the available alternatives.
- Focuses on how decisions are made by individuals and firms, and the
consequences of those decisions. A HOUSEHOLD AND AN ECONOMY FACE MANY DECISIONS:
- It is often focused on how a certain firm or individual can utilize its  Who will work?
resources in an efficient manner.  What goods and how many of them should be produced?
 What resources should be used in production?
2. Macroeconomics  At what price should the goods be sold?
- Examines the aggregate behavior of the economy, which includes the
actions taken by all the individuals and firms to produce a particular level
TEN PRINCIPLES OF ECONOMICS
of economic performance as a whole.
- If micro economics looks on a firm, macroeconomics would view all the 1. How people make decision
firms and all the other determinants of total national income and deals 2. How people interact
with their aggregate consumption and investment, and look at the overall 3. How the economy as a whole works
level of prices, instead of just the individual prices.
HOW PEOPLE MAKE DECISIONS
Methodologies of Economics
1. Positive Economics looks on how the economy works. 1. People face trade-offs
2. Normative economics focuses on what should be. 2. The cost of something is what you give up to get it
3. Rational people think at the margin
Basic Circular Flow 4. People respond to incentives
 The basic circular flow model or diagram represents the players in an
economy, which are the households and the firms.
P-01: PEOPLE FACE TRADE-OFFS

 Trade-off is a situation that involves losing one quality or aspect of something in

return for gaining another quality or aspect.
 SOCIETY FACES TRADE OFF BETWEEN EFFICIENCY & EQUITY
 Efficiency: Society getting the most out if it from its scarce resources
 (Equity) Effectiveness: Distributing economic prosperity fairly among the
individuals of the society.
P-02: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT  Firms decide who to hire and what to produce.
 Adam Smith: firms and household interacting in markets. “The Invisible Hand”
 Making decisions requires comparing the costs and benefits of alternative courses
of action.
 Nothing comes for free in this world. You need to give up something in order to P-07: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
gain something.
 When a market fails to allocate resources efficiently, the government can change
 The OPPORTUNITY COST of an item is what you give up to get that item.
the outcome through public policy. Examples are regulations against monopolies
and pollution.
P-03: RATIONAL PEOPLE THINKING AT THE MARGIN

 A rational decision-maker takes action if and only if the marginal benefit of the HOW THE ECONOMY AS A WHOLE WORKS
action exceeds the marginal cost.
8. The standard of living depends on a country’s production.
9. Prices rise when the government prints too much money.
P-04: PEOPLE RESPOND TO INCENTIVES 10. Society faces a short-run tradeoff between inflation and unemployment.

 Incentives: Something that induces a person to act

 It may be punishment or reward P-08: THE STANDARD OF LIVING DEPENDS ON A COUNTRY’S PRODUCTION
 People responds to incentive because people make decision by comparing costs
 Countries whose workers produce a large quantity of goods and services per unit
and benefits
of time enjoy a high standard of living. Similarly, as a nation’s productivity grows,
 Incentives play a central role in study of economics.
so does its average income.
 Incentives are crucial to analyzing how market work.
Standard of living can be measured:
HOW PEOPLE INTERACT  By comparing personal incomes
 By comparing the total market value of a nation’s production
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes. P-09: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY

 When a government creates large quantities of the nation’s money, the value of
P-05: TRADE CAN MAKE EVERYONE BETTER OFF the money falls.
 As a result, prices increase, requiring more of the same money to buy goods and
 Trade allows each person to specialize in the activities he or she does the best. By
services.
trading with others, people can buy a greater variety of goods and services.

P-010: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND

P-06: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
UNEMPLOYMENT
 An economy that allocates resources through the decentralized decisions of many
 Phillips Curve: Shows short-run tradeoff between inflation & unemployment.
firms and households as they interact in markets for goods and services.
 Lowe unemployment-Higher inflation
 Market economy:
 Inverse relation between unemployment and inflation.
a) Allocates resources
 Monetary Policy- instruments of control.
b) Decentralized decisions
c) Firms and households as they interact
 Households decide what to buy and who to work for.
3 DEMAND AND SUPPLY  Inferior goods such as noodles, sardines, dried fish have an increased demand
Market in times of crisis because this is the time when people's income is low and
 Market is where buyers and sellers meet to trade commodities. these are the cheaper commodities that they can afford
 Market has two important elements 1. buyers and 2. sellers.  Inferior goods have a negative correlation between price and income.
 These two elements are the same two entities that form the demand and  If a person's income is high, he/she would demand for normal goods /
supply. superior goods because these are what s/he believes s/he deserves, but
 The buyers are the ones who determine the market demand, the sellers  If the income is low, a person would demand for inferior goods because these
determine the supply in the market. are something that s/he can afford.
3. Price of related goods
DEMAND  Related goods could either be a substitute good or a complementary good.
 Demand is the quantity of goods or services buyers are able and willing to buy at a. Substitute goods are goods that can replace another good in its
different prices. absence like coffee or chocolate drink, chicken, beef, or pork. If the
1. Normal goods price of a commodity increases, we can expect the demand of its
2. Superior goods substitute goods to increase and vice versa.
3. Inferior goods b. Complementary goods are goods that go hand in hand with each
other like coffee and creamer. If the price of a commodity will
Factors affecting demand increase, we can expect the demand of its complementary good to
1. Price increase as well
 Price is the amount of money that a buyer gives to a seller in exchange for a 4. Taste and Preference
good or a service.  Prices of cigarettes have Increased due 1o sin tax. Still, the number of smokers
 Price is inversely proportional to or has a negative correlation with price. As with the same cigarette consumption remains the same
price increases, quantity demand tends to decrease.  If you prefer the taste of crispy cream, although there is a cheaper alternative,
 The law of demand states that as price increases, quantity demand will you are likely to buy it despite increases in price
decrease, ceteris paribus.  As taste and preference increase for a goad, we can expect an increase in
2. Income demand for that product and vice versa
 Income is money or value that an individual or business entity receives in 5. Expectation on Future Prices
exchange for providing a good or service or through investing capital.  Examples: sale, panic buying
 Income is directly proportional to or has a positive correlation with price. As  As people expect prices to increase in the future, quantity demand at present
income increases, quantity demand would generally increase. will increase, and if prices will decrease in the future, quantity demand at
 However, this depends upon the kind / type of goods purchased. present will decrease.
 Normal goods are goods or services that have increasing demand whenever 6. Changes in Population
Income increases  As population increases, quantity demand is likely to increase.
 Normal goods have a positive correlation between income and demand.
 Examples of normal goods include food, clothing, and household appliances.
 A superior good is a good that people demand more of, as their incomes SUPPLY
increase.  SUPPLY is the quantity of goods or services sellers are willing and able to sell
 Superior goods have a positive correlation between income and price. all different prices.
 These products are typically more expensive and rare, such as diamonds and  The law of supply states that, as price increases, quantity supplied will also
classic cars. increase, ceteris paribus.
 Superior goods often serve as status symbols, making them highly desirable
for individuals seeking to display their wealth as they become richer. Factors affecting supply
 An inferior good is one whose demand drops when people's incomes rise. 1. Input price
When incomes are low or the economy contracts, inferior goods become a  Price of raw materials to produce the product Example increase in the price of
more affordable substitute for more expensive goods. flour and sugar bakeries will not be able to produce the same quantity with
the same budget.
  The cost of input increases, quantity supplied is likely to decrease and vice-
versa
2. Price of related goods and services
 If the price of a substitute good of a commodity increases, the supply of the MOVEMENT and SHIFTING DEMAND CURVE
other will increase or vice versa If the price of a complementary good of a  Movement along the demand curve depicts the change in both the price and
commodity increases, the supply of the other will decrease and vice versa. quantity demanded, from one point to another. Other things remain
 Example: increase in the price of coffee increases suppliers will decrease unchanged, a change in the quantity demanded due to the change in the price
supply of creamer due to decrease demand of coffee of the product or service, results in the movement of the demand curve. The
3. Expectation on future prices movement along the curve can be in any of the two directions
 An increase in the price in the future will lead to a decrease in supply all Upward Movement indicates contraction of demand, in essence, a
present. fall in demand is observed due to price rise.
 Hoard to maximize future gains. Downward Movement It shows expansion in demand, Le demand for
4. Technology the product or service goes up because of the fall in prices.
 Technological advancements increase the supply of a commodity
5. Government regulation The shift of the Demand Curve
 A high amount of money to be paid to the government and/or many difficult  When there is a change in the quantity demanded of a particular commodity,
requirements to comply with, is likely to decrease supply in that area. at each possible price, due to a change in one or more other factors (non-price
6. Number of suppliers such as income, tastes and preferences, etc.), the demand curve shifts.
 If the number of suppliers increases, the supply will also increase  The demand curve can shift either to the left or the right, depending on the
7. Unexpected calamities or natural disasters factors affecting it.
 Unexpected calamities or natural disasters will decrease the supply in that  If the income changes, then a change in price shifts the demand curve shifts to
area. When unexpected calamities or natural disasters happen we cannot the right which indicates that there is an increase in the desire to purchase the
expect the affected areas to produce, as they also need to cope with whatever commodity at all prices.
damage the disaster has caused.  We can conclude that with an increase in income the demand curve shifts to
the right.
 On the other hand, if the income falls, then the demand curve will shift to the
MARKET EQUILIBRIUM left, decreasing the desire to purchase the commodity.
 Buyers/Consumers want lower price, sellers/producers want higher price
 As these two components are important, we should determine a price that MOVEMENT and SHIFTING SUPPLY CURVE
will be advantageous to both.  Movement along the supply curve or change in quantity supplied refers to
 Equilibrium is a point where quantity demanded is equal to the quantity extension and contraction of supply of a commodity caused by change in own
supplied. This is the point where buyers are willing and able to buy the price of the commodity. When price increases, there is an upward movement
product ore avail the service, and where the sellers are also willing and able to (a -b) along the supply curve, called extension of supply; and when price
sell their product or deliver the service decreases, there is a downward movement (b -a) along the supply curve,
 Draw a demand and supply curve. called contraction of supply.
 The market equilibrium can be determined through the intersection of supply
and demand. The shift of the Supply Curve
 Shift of supply curve or change in supply refers to increase or decrease in
supply of a commodity caused by change in factors other than own price of
SUPPLY and DEMAND CURVE the commodity. When other factors change in the favorable direction, the
A. The demand curve is downward sloping from left to right, depicting an supply curve shifts to the right showing an increase in supply, and when other
inverse relationship between the price of the product and quantity factors change in an unfavorable manner the supply curve shifts to the left
demanded. showing a decrease in supply.
B. The supply curve is upward sloping depicting a direct relationship between
the price of the product and quantity demanded
IN SUMMARY
 Market is a place where buyers and sellers meet to trade commodities. Market has
2 important elements: the buyers and the sellers.
 Demand is the schedule of quantities of goods or services at certain areas that
people are willing and able to buy at different prices. The law of demand states
that as price increases, quantity demand will decrease ceteris paribus.
 Demand can be affected by income, price of related goods and services, taste and
preference, expectation on future prices, and changes in population.
 Normal goods are goods or services that have an increasing demand whenever
income increases.
 Inferior goods are goods or services that are decreasing whenever income
increases.
 Related goods could either be a substitute good or a complementary good.
 Substitute goods are commodities that could replace another commodity in its
absence.
 Complementary goods are goods that go hand in hand with each other.
 Supply is the quantity of goods or services sellers are willing and able to sell at
different prices.
 The law of supply states that as price increases, quantity supply will increase
ceteris paribus.
 Supply can be affected by Input price, price of related goods or services,
expectation on future prices, technology, government regulations, number of
suppliers, and unexpected calamities or natural disasters.