BASIC MICROECONOMICS

MODULE 1: NATURE AND SCOPE OF ECONOMICS AND MICROECONOMICS

ECONOMICS AS A SOCIAL SCIENCE
Economics -Is social science as it seeks to explain the relationships between people and societies
-“Queen of social sciences”
-Is also concerned about human behavior.
-Is unique in analyzing various areas of human behavior
Paul Samuelson- Cited that economics is the “queen of social sciences”
Economists- Answer different questions and solve problems using tools and methodologies,
which are far-reaching that other social scientists find overwhelming.

ECONOMICS DEFINED
Oikonomia - Greek word where economics come from
- Means the management of a family or a household. A household has inadequate
resources, and managing these resources will require certain decision-making skills.
NUMEROUS DEFINITIONS OF ECONOMICS:
➢​ Wealth Definition
➢​ Welfare Definition
➢​ Scarcity Definition
➢​ Growth-Oriented Definition
1.) WEALTH DEFINITION:
Adam Smith - Laid out in his magnum opus, “Wealth of Nations”, the definition of economics
focused on wealth creation.
- Defined economics as an inquiry into the nature and causes of the wealth of the
nation.
- Scottish economist
- Father of economics
2.) WELFARE DEFINITION:
Alfred Marshall- The definition of Economics was explained in his influential book “Principles
of Economics”, which focused on welfare and human activities instead of
wealth accumulation.
-To Marshall, economics is the study of mankind in the ordinary business of
life; it examines that part of individual and social action which is most closely
connected with the attainment and with the use of material required for
well-being.
3.) SCARCITY DEFINITION:
Lionel Robbins- The scarcity definition was credited to him and emphasized scarcity which is
central in the definition of economics.
- According to his book, “An Essay on the Nature and Significance of Economic
Science,” economics is the science which studies human behavior as a
relationship between ends and scarce means which have alternative uses.
- His famous definition was the most accepted definition of economics and still
generally used today.
- British Economist
4.) GROWTH-ORIENTED DEFINITION:
Paul Samuelson- The growth-oriented definition was credited to him, called by the New York
Times as the "foremost academic economist of the 20th century".
- According to him, “economics is a study of how people and society choose,
with or without the use of money to employ scarce productive resources which
could have alternative uses, to produce various commodities over time and
distribute them for consumption now and in the future among various persons
and groups of society.”
Mankiw(2010)- Defined economics as a science that studies how society manages its scarce
resources.
Krugman(2008)- Defined economics as the study of the production, distribution, and
consumption of goods and services.

IMPORTANCE OF STUDYING ECONOMICS

●​ Economics governs many aspects of life.
●​ Individuals whether rich or poor are always faced with making choices because scarcity
indeed exists.
●​ It is where proper knowledge in Economics is of greater importance.
●​ Studying economics will not only help us become wiser in making everyday life
decisions but will also make us aware of our interconnectedness with other people,
organizations, and the environment we live in to contribute to society and the economy.
REASONS WHY IT IS A NEED TO STUDY ECONOMICS:
1.​ Understand how goods or resources are produced and properly allocated to society.
2.​ Understand the behaviour and roles of the different individual decision-makers: the
households, firms, and the government.
3.​ Explain how the national or global economy operates.
4.​ Know the forces that affect the dynamics of any market.
5.​ Understand economic issues and trends.

SCOPE OF MICROECONOMICS
Microeconomics -As a major theoretical division of economics, focuses on the interaction
between households and firms.
-The two-sector economy model maps the flow of factors of production and
goods and services.
The Household (Producer)- Provides factors: Labor, land, and raw materials in exchange for
income
Firm (Consumer)- Uses these factors to produce final goods and services to generate revenue.
Price- All these exchanges in the market for factors of production and market for goods and
services are influenced by a common denominator, the price.
Equilibrium- When price is set to a level where demand meets supply then an equilibrium is in
effect.
- Changes in equilibrium is possible whenever price changes.
Microeconomics- Explains why consumers and producers behave the way they do using
theoretical foundation from classic economists Alfred Marshall, Adam Smith,
and Wilfredo Pareto.
TOPICS IN MICROECONOMICS LEADING TO OPTIMAL CHOICE:
➢​ Budget
➢​ Preference
➢​ Utility
➢​ Choice
➢​ Technology
➢​ Profit
➢​ Costs
Market structures such as: PERFECT COMPETITION, MONOPOLY, OLIGOPOLY, and
combination of these are also SALIENT CONCEPT in understanding more complex
microeconomic activities.

BRANCHES OF ECONOMICS
Microeconomics- Concerned with the behavior and decision-making of the individual players in
the economy, such as the consumers, businesses, and the government.
- Studies the prices, markets, buying decisions of consumers, selling decisions
of firms, costs of production, profit maximization, market failure, etc.
MICROECONOMICS TOPICS OF INTEREST:
●​ Supply and demand for goods and services in the market
●​ Worker’s decision, employment in an industry
●​ Price of a product
●​ Commodity market, labor market, etc.
●​ Domestic Trade
●​ Firm’s profit, household income
●​ Mortgage loan interest
●​ Government regulations, government failure

Macroeconomics- Is focused on the overall structure and performance of the national or global
economy.
- It is concerned with the analysis of aggregates.
- Studies the determination of national income, price level, employment,
economic growth, money, economic policies, international trade, among
others.
MACROECONOMICS TOPICS OF INTEREST:
●​ Aggregate demand and aggregate supply
●​ Employment and unemployment
●​ General price level and inflation
●​ Financial market, Stock exchange
●​ International trade
●​ National Income, GDP
●​ General Interest rate
●​ Government economic policies – fiscal and monetary policies

FOUR CORE PRINCIPLES OF ECONOMIC WAY OF THINKING

People are engaged in various activities—SELLING, DISTRIBUTING, EXCHANGING,
CONSUMING, and so on. These activities, at any rate, involve Individual Choice.
Krugman(2008)- Four economic principles describe the economic way of thinking and underlie
the economics of individual choice.
FOUR ECONOMIC PRINCIPLES: Rational Choice
Opportunity Cost
Choosing at the Margin
Responding to Incentives
1. Rational Choice- Choices are necessary because resources are scarce
2. Opportunity Cost- The true value of something is its opportunity cost.
3. Choosing at the Margin- “How much” decisions require making trade-offs at the margin:
comparing the costs and benefits of doing a little bit more of activity
versus doing a little bit less
4. Responding to Incentives- People usually respond to incentives, exploiting opportunities to
make themselves better off.

SCARCITY AND CHOICE

Scarcity- It is a situation where there is an insufficient or limited amount of resources available.
All people and economies experience it; it is every everywhere. It happens because
individuals’ wants are more than what can be produced.
- Is considered the most fundamental economic problem because resources are scarce,
and people have unlimited wants, choices have to be made among alternatives.
Economics- Is a study of decision making. It studies what choices people make, how they are
made, and what happens as a result.
Choice- Is the ability of an individual to make a decision. Thus, choice always involves decision
making.
"There is no such thing as free lunch"- This means that whatever goods and services are
given, they must be paid for by someone—that is, one
cannot get something for nothing.
- This also implies that every choice entails costs. These
costs may take in the form of time, money, or
something that is valued.
Trade-off- In economics literature, the act of giving up one thing in order to get something else.
-It is the alternative a person gives up when he makes a decision.

OPPORTUNITY COST
Opportunity Cost- Is one of the core ideas in the economic way of thinking and is vital to
understanding individual choice.
-If an individual chooses something, he gives up the other thing. This is the
opportunity cost of a decision.
Boyes (2008)- Defined opportunity cost as the highest-valued alternative that must be forgone
when a choice is made.
Alternative (What to do) Choice (What was chosen) Opportunity Cost

Buy a new gadget Save money in a bank The opportunity cost of buying a new
gadget is saving money in a bank

Produce a digital camera Manufacture a smartphone The opportunity cost of buying a new
gadget is saving money in a bank

Spend on public works Spend on healthcare The opportunity cost of spending on

public works is spending on healthcare

Resign from a job Put up a business The opportunity cost of resigning from
a job is putting up a business. The cost
of this decision is the lost wages for a
year

Eat adobo Eat kare-kare The opportunity cost of choosing

adobo is eating kare-kare. When
kare-kare- is chosen, then the
opportunity cost in the satisfaction
derived from eating adobo

Rational People- Always decide by carefully analyzing the benefits they would get and the cost
they would incur from their decisions.
- To put it another way, they compare their marginal benefits and marginal costs.
Marginal Cost- Is the extra cost of using one more unit of a good or service.
Marginal benefit- Is an additional satisfaction derived from consuming one more unit of a good
or service.
Cost-Benefit/Marginal Analysis- The study of weighing the benefits and costs usually for
decision making.

INCENTIVES
Scarcity- Requires everyone to choose and one thing that drives one person to make a decision
involves incentives.
Incentive
- Is a benefit or reward that encourages someone to behave in certain ways.
- Salary increase and bonuses paid to workers, recognition awards for students, price discounts
given to customers, and tax deductions to businesses are all forms of incentives.
WANTS VERSUS NEEDS
Wants- Are desires or unnecessary things that can be fulfilled by consuming a good or service.
Needs- Are things that people have to have in order to live a healthy and happy life. Vital for
survival.

ECONOMIC RESOURCES
❖​ Society has scarce economic resources.This includes all the natural, human, and capital
resources that are used in the production of goods and services.
Economic Resources
- Are the inputs or resources used in the production of goods and services.
- Inputs or factors of production.
FOUR BROAD CATEGORIES OF ECONOMIC RESOURCES: Land
Labor
Capital
Entrepreneurship
1. Land - This is the physical space or area on which production takes place. It also includes all
the economy’s natural resources such as land, water, and minerals used in the
production process.
-Lot, farmland, trees, forests, rivers, mineral, and oil deposits are examples of land
resources.
2. Labor - It refers to the time, physical and mental skills that people contribute to producing
goods and services.
-For example, a nurse working in a hospital is considered to be a labor resource. The
services rendered by a teacher and an economist are also examples of labor resources.
3. Capital - This covers the tools and other productive equipment utilized in producing
consumer
goods and services.
- The assembly plant, factory building, distribution facilities, computers as well as
human and financial capital fall in this resource category.
4. Entrepreneurship- This is the human resource responsible for combining or organizing the
land, labor, and capital resources into a good or service.
- The Entrepreneurs: Are skilled at making strategic business decisions.
They are creative, innovative, and future-oriented.
GOODS AND SERVICES
Economics Resources/Inputs of Production- Are primarily used to produce a final output.
These outputs are the goods and services that result from the production process, which are either
consumed by people or employed in further production by businesses.
Good
- Is a tangible commodity that is used to satisfy human wants, which can be purchased and
consumed.
- In economics literature, goods have a plethora of categories.
PLETHORA CATEGORIES: Economic Good and Free Good
Durable Good and Non-durable Good
Intermediate Good and Final Good
Consumer Good and Capital Good
Durable Goods- Are consumer products that are not consumed or that yield utility over a long
period of time (beyond 3 years)
-Examples: Vehicles, Books, Home Appliances.
Non Durable Goods- Are consumed over a short period of time
-Examples: Paper, Plastic cups and plates.
Intermediate Goods- Are referred to as those goods that are used by businesses in producing
goods and services.
-Example: Sugar can be used as intermediate goods for making sweets but
when sold to consumers directly it becomes final goods.
Consumer Goods- Are products used by consumers.
-Example: Food, Appliances, Clothing, Automobiles.
Capital Goods- Are man-made products used by businesses to produce consumer or other
capital
goods.
-Example: Buildings, Machineries, Tools.
Service- Is an intangible equivalent of a good that also brings satisfaction to human wants.
-Are activities or tasks that people provide for others’ demands.

MODULE 2: ECONOMIC MODELS

DEFINITIONS AND FORMS OF ECONOMIC MODEL
Model- Is necessary in order to reduce the complexity of economic problems.
- A simplified representation of a real situation that is used to better understand real-life
situations. (Krugman 2014)
Economic Model- Most economists define this as a simplified framework of reality and
representation of economic phenomena.
- Are designed to be simple, flexible, and useful to make an easier
understanding of how the economy functions partly and as a whole.
- Economic principles such as aggregate output, Production Possibility
Frontier, the functional relationship between consumption and national
income, and so on can be easily analyzed using an economic model.
ECONOMIC MODELS: Descriptive Model (Words/Statements)
Graphical Model (Graphical Model)
Mathematical Model (Mathematical Model)
Demand and Supply- A popular and essential economic model which economists use to
describe how markets work.
- This model defines the relationship between the price of a good and the
quantity that consumers will buy or producers will sell, assuming that
everything else is constant.
- This model can be stated verbally using the statements of the Law of
Demand or Law of Supply, be expressed mathematically using demand or
supply equation, or can be illustrated graphically using the demand or
supply curves/schedules, which makes it easier to understand.

CETERIS PARIBUS ASSUMPTION

Ceteris Paribus Assumption- Is applied to determine the causal relationships among variables.
- This assumption allows an analysis to examine the effect of
change in one variable letting all other relevant variables
unchanged.
Ceteris Paribus- Is a Latin phrase that means “other things being held constant.”

POSITIVE VERSUS NORMATIVE ECONOMICS

Positive Economics- Is concerned with statements that can be proved by appealing to relevant
facts and figures.
- It focuses on cause-and-effect relationships and involves theory
Development.
Examples of Positive Economics:​
●​ Increasing the minimum wage results in a higher unemployment rate.
●​ Recession is a serious economic issue.
●​ The GDP of the Philippines is lower than that of Singapore in 2018.
●​ If the government cuts taxes, then the supply of cigarettes will rise.
Normative Economics- Requires normative statements that are based on value judgments.
It concentrates on the formulation of economic policies about what the
economy should be like or what certain policy actions or
recommendations should be undertaken.
Examples of Normative Economics:
●​ The Philippine government should not tax online businesses.
●​ It is right to spend on social works more than the public works.
●​ The police earn more than teachers in the Philippines.
●​ Every Filipino ought to have equal access to freedom of expression.
●​
THE MICROECONOMICS CIRCULAR FLOW OF INCOME MODEL
Circular Flow of Income- Is a visual model that depicts how money, goods, and services flow
through markets between households and firms in the economy.
COMPONENTS OF CIRCULAR FLOW DIAGRAM:
Household and Firms
Resource Market and Product Market
Real Flow and Money Flow.
Income
1. Household and Firms:
-​ Households: Are considered the consuming unit of the economy that sells economic
resources and buys goods and services.
-​ Firms: Serve as the producing unit that buys inputs of productions and sells goods and
services.
2. Resource Market and Product Market:
-​ Resource Market: Is a market in which an economic resource is sold by households and
bought by households.
-​ Product Market: Is a place in which a good or service is sold by firms and bought by
households
3. Real Flow and Money Flow:
-​ Real (input-output) Flow: Indicates the movement of the economic resources flowing
from households to firms through the resource market and of
the goods and services flowing from firms to households
through the product market.
-​ Money Flow: Illustrates the movement of income or payment made in exchange for
supply economic resources and expenditures on goods and services.
4. Income- This represents the resource payments (rent, wage, interest) made by the households
in return for the resources (land, labor, and capital) provided by the households and
the profit received by firms from the consumption spending of goods and services.

Two Circular Flow Diagram:

The economy can be represented as two

cycles moving in opposite directions.
Inner Loop:
→ Economic resources flow from
households to firms
→ Goods and services flow from firms to
households.
→ The households sell land, labor, and
capital to the firms in the resource
market.
→ These resources will be organized by
firms to produce goods and services.
→ The output will then be sold to households in the product market.
Outer Loop:
→ Spending on goods and services flows from households to firms
→ Income flows from firms to households
→ The households receive income in the form of rent, wage, and interest as payments for
providing these resources.
→ The income will then be used to buy goods in the product market.
→ The firms use some profit received from the sales of the sales of the product to pay for
economic resources

THE PRODUCTION POSSIBILITIES FRONTIER MODEL

The Production Possibilities Frontier(PPF)
- Is a graphical model that illustrates the combinations of output that the economy can efficiently
produce using the available quantity of economic resources.
- Demonstrates the principles of choice and opportunity cost.
PPF CERTAIN ASSUMPTIONS: Fixed Resources
Full Employment
Two Goods Produced
Fixed Technology
1. Fixed Resources- The quantity of factors of production (land, labor, capital, and
entrepreneurial ability cannot be adjusted.)
2. Full Employment- The economy is at its full capacity using all available resources without
waste.
3. Two Goods Produced- Only two goods can be produced: consumer good or capital good.
4. Fixed Technology- The state of technology remains unchanged

→ Shows a hypothetical economy that devotes its

economic resources using two goods: delivery
trucks and smartwatches with different possible
combinations of output that could be produced
over a given period.
→ The units of delivery trucks are measured in the
horizontal axis and units of smartwatches on the
other.
→ The curve shows all the possible combinations
of two goods that can be produced given all
nation’s resources are fully and efficiently
employed.
→ For example, production could take place at
point B, with 30 thousand units of delivery
trucks and 50 thousand units of smartwatches
produced.
→ All points within the curve (A, B, C, D, E) are considered EFFICIENT because the output is
produced from available resources.
→ Points outside the PPF (H and I), are UNATTAINABLE.
→ In other words, production cannot take place beyond the curve as the economy is constrained
with resources to do this.
→ Points inside the PPF (F and G) are INEFFICIENT because the economy is not fully using
its resources.
GRAPHS IN ECONOMICS
Graphs- Economists always use it to represent economic relationships visually.
Mankiw (2015)- Pointed out that graphs serve two purposes:
- First: When developing economic theories, graphs offer a way to visually
express ideas that might be less clear if described with equations or
words.
- Second: When analyzing economic data, graphs provide a powerful way of
finding and interpreting patterns
GRAPHS OF A SINGLE VARIABLE CAN BE REPRESENTED: Pie Chart
Bar Graph
Line Graph
Pie Chart- Used to represent the different parts of something of a whole
Bar Graph- Useful to compare sets of numbers using rectangular bars.
Line Graph- Display information as a series of data or changes over time.
Rectangular Coordinate System- Is also known as the Cartesian coordinate
Is based on a two-dimensional grid, every point on the plane
can be identified by unique x and y coordinates.
x coordinate- The first number in each ordered pair which indicates the horizontal location of
the point.
y coordinate- The second number indicating the vertical location of the point
➢​ The point with both an x-coordinate and a y-coordinate of zero is known as the origin.
Quadrants- Axes naturally divide the plane up into four regions or quarters marked I, II, III, and
IV

Economic data normally require positive

numbers: The Price of a Product- The quantity
demanded or supplied, national income,
unemployment rate, and many more.
Quadrant I- Is the only appropriate region of
the coordinate system that can be applied for.
Graphing Economic Data- The dependent
variable (y) is placed on the vertical axis, and the
independent variable (x) is labeled on the
horizontal axis.

ECONOMIC VARIABLES
Variable- Is a quantity that can take a variety of values in a particular problem.
➢​ Many economic variables can take on more than one value: The profit earned by a firm,
The price of a face mask, Consumer’s income, Unemployment, or Inflation rate.
Constant- Latter does not change its value overtime
- A quantity has a value that remains unchanged throughout a specific problem.
Independent Variable- Represents the value that is changed
Dependent Variable- Is the observed result of the independent variable being changed.
In a linear relationship- y is said to be a function of x if every value of x is associated with
exactly one value of y.
In the function, y=f(x)- 𝑦 represents the dependent variable, and 𝑥 is the independent variable.
EXAMPLE: For instance, an entrepreneur wants to predict how much sales would be made for
every additional unit of a good sold. The quantity sold would be the independent
variable, whereas the sales or revenue would represent the dependent variable.
Mathematically, in R=25x, where R is the revenue, x is quantity sold, and 25 is the
price of the good, R and x are both variables, while P=25 is a constant. Revenue
depends on the quantity sold because as x increases, y also increases.
ECONOMIC RELATIONSHIPS
TWO OF ECONOMICS RELATIONSHIPS: Direct Relationship
Consumption-Income Relationship
Direct Relationship
-​ Relationship is a positive relationship between variables in which a change in the value
of one variable is associated with a change in the value of the other variable in the same
direction.
-​ If one increases, the other also increases. If one decreases, the other decreases.
-​ Examples: Price and Quantity Supplied
Demand for a Product and Number of Buyers
Cost of Production and Output Produced
Consumption Spending and GDP, and The Like.
-​ The graph of two variables having a direct relationship is illustrated by a curve that
slopes upward or an upsloping line.
Consumption-Income Relationship
-​ A rise in consumption (dependent variable) spending is associated with an increase in
income (independent variable); a fall in consumption is associated with a decrease in
income.
-​ If the independent variable rises, the dependent variable also increases, and vice versa.
Inverse Relationship
-​ Is a negative relationship between variables in which a change in the value of a variable
is associated with a change in the value of the other variable in an opposite direction.
-​ If one goes up, the other one goes down and if one goes down, the other one goes up.
Price and Quantity Demanded
-​ Popular example of an inverse relationship
-​ For consumers, the price of a product is inversely related to the quantity they will
purchase. As the price (independent variable) of goods increases, its quantity demanded
(dependent variable) decreases, and as the price decreases, the amount of goods
demanded increases.
-​ Examples: Tax Rate Incurred and The Number of Goods Supplied by a Firm
Demand for a Good and The Price of a Complementary Good
The Phillips Curve Illustrating the relationship between inflation and
unemployment.
→ When two variables are negatively or inversely related, the graph is illustrated by a curve that
slopes downward from left to right or downward sloping line.

THE SLOPE OF A CURVE

Slope- Determines how steep it is or how sensitive the dependent variable to a change in the
independent variable.
FOUR TYPES OF SLOPE: Positive Slope
Negative Slope
Infinite Slope
Zero Slope
Positive Slope- It indicates that x and y variables are positively related, and the line slopes
upward to the right.
Negative Slope- This indicates that x and y are negatively related, and the line slopes downward
to the right.
Infinite Slope- The value of the x-variable along the curve is constant; thus, the line is vertical.
Zero Slope- This means that there is no relationship between x and y. The value of the y-variable
is constant; thus the line is horizontal.
LINEAR EQUATION IN ECONOMICS
Linear Equation-Is a simple mathematical model that has numerous applications in economics.
- An algebraic expression that measures the relationship between two variables
represented by a straight line graph.
Equation of a Linear Relationship- y=mx+b
x- independent variable
y- dependent variable
m- slope of the line
b- constant term or vertical intercept
EXAMPLE: → The linear equation is given by Qa =300 - 2P, where Qa represents quantity
demanded, and P denotes the price of the good. This equation allows an analysis
to estimate the amount of quantity demanded at any specific level of price.
When the price is set to 100, it is predicted that the quantity demanded is 100.
→ To graph a linear relationship, identify two points that satisfy the equation, plot
them, and connect the points with a straight line.
→ Alternatively, find the x-intercept and horizontal y-intercept.
The x-intercept is where a line crosses the horizontal axis, and the y-intercept is
the point where the line crosses the vertical axis.

MODULE 3: THE ECONOMY AND ECONOMIC SYSTEM

NATIONAL ECONOMY VS GLOBAL ECONOMY

Economy- Plays a crucial role in determining how limited resources will be allocated to fulfill
all the wants and needs of different economic agents in a society.
- Refers to the structure in which various economic activities are organized by
economic players, including individuals, business organizations, or governments.
National Economy- Encompasses all the economic activities related to the production,
distribution, trade, and consumption of goods and services that take
place locally or domestically.
These interrelated activities take place in a country to fulfill the wants and
needs of those living and operating within the economy.
Philippines- Is the 36th largest economy in the world by nominal GDP, according to IMF
data. (Example of national economy)
- It’s now a newly industrialized country and one of Asia's fastest-growing
economies with an estimated GDP of $356 billion in 2019.
Global Economy- Covers all collective worldwide economic activities.
- It is characterized by globalization, international trade, finance, and global
investment.(193 total of economies)
- WORLD’S 5 LARGEST ECONOMY: United States
China
Japan
Germany
India
ECONOMIC ACTIVITIES
Economic Activities- All actions that occur at all levels within the economy involving the
 production, transfer, and consumption of goods and services.
ECONOMIC ACTIVITIES: Production
Distribution
Exchange
Consumption
1. Production- The first phase of the economic activity that involves the transformation of
inputs into final products.
- EXAMPLE: A company that manufactures perfume
A worker in a shoe factory making shoe
2. Distribution- The systematic way or process of how commodities and incomes are
properly allocated among economic resource owners.
- Include the compensation received by a worker and the profit or revenue
earned by a company.
- Characterized by the use of distribution systems
- Help move goods and services from the production site to the market.
- EXAMPLE: Delivery trucks
Roads
3. Exchange- This activity requires any transfer of money or trading of products and services
between buyers and sellers in a marketplace.
- EXAMPLE:Buying and selling of securities in a stock market
Trading of commodities through exports and imports
4. Consumption- This is the end phase of any economic activity, which requires the
utilization of goods and services to provide satisfaction to people.
- It represents the demand side of the market, thus, involves the purchasing
of goods and services in the economy
- EXAMPLE: Buying an ice cream in a grocery and eating it
SECTORS OF THE ECONOMY
Economic Sectors- Determine who are engaged in different activities
ECONOMIC SECTORS: PrimarySector
Secondary Sector
Tertiary Sector
Primary Sector- The agricultural sector of the economy that is concerned with the production
of raw materials and includes activities directly related to agriculture and the
use of natural resources.
- Farming, fishing, forestry, mining, oil extraction, and raw processing ar
activities that lie within this sector.
Secondary Sector- The industrial sector of the economy which covers the production of
finished goods, including the processing of materials produced by the
primary sector.
- Manufacturing, fast-moving consumer goods, energy utilities,
construction, and heavy industries are the activities associated with this
Sector.
Tertiary Sector- The service sector that covers the production and provision of intangible
commodities to consumers and businesses.
- Activities under this sector include transportation, distribution, retail, banking
and finance, information technology, tourism, education, healthcare.
PLAYERS OF THE ECONOMY
Economic Players- People and organizations who interact with one another and decide how
an economy’s resources are efficiently allocated
- A huge number of people and organizations involved in a modern
economy
ECONOMIC PLAYERS: Households
Firms
Government
Rest of the World
Households- These are individuals or groups of people living together and considered the
consuming-unit of the economy.
- They demand and consume the goods and services produced by the economy.
- As resource owners, they provide and supply land, labor, and capital to firms,
governments, and the rest of the world.
Firms- They represent the business sector of the economy responsible for transforming
inputs to outputs.
- These are the business organizations within which land, labor, and capital are
organized for the production of goods or services.
- They supply economic goods and services to services to different markets for
consumption by households, governments, and the foreign sector.
Government- The public sector of the economy responsible for the formulation and
implementation of economic policies.
- The government functions to provide public goods and services, maintain
competition, correct externalities, stabilize the economy, and redistribute the
income.
Rest of the World- This sector makes up foreign households, foreign firms, and foreign
governments that supply resources and commodities to a domestic
economy and demand resources or commodities from a local economy.
ECONOMIC GOALS
ECONOMIC GOALS (Micro-Level): Economic Efficiency
Economic Equity
Economic Security
Economic Freedom
Economic Efficiency- It ensures the utilization and allocation of the economy’s scarce
resources.
- This goal is achieved when available resources are efficiently
produced at its optimum level preventing any wastes.
Economic Equity- This pertains to the fair or equitable distribution of income and wealth
within a society.
- A fair distribution of income means that the gap between the rich and the
poor is too narrow.
Economic Security- This involves protection against economic risks where people in the
economy has a stable income for a decent living.
Economic Freedom- This goal is achieved when every member of a society can make a
choice or take economic decisions.
- People are free to buy goods, own a property, prefer an employment or
establish a business within the economy not constrained by the
government and others
ECONOMIC GOALS (Macro-Level): Economic Growth
Full Employment
Economic Stability
Reasonable Balance of Trade
Economic Growth-This is the economy’s ability to produce goods and services within a
specific period.
- Gross Domestic Product: Measures the productive capacity of the
economy that takes into account the entire economic real output.
Full Employment- It occurs when all available resources are utilized to capacity to produce
goods and services.
- This is expressed by the employment of the members of the labor force
measured by the employment or unemployment rate.
Economic Stability- It enables the economy to reduce excessive fluctuations in people’s
standard of living.
- There is neither inflation nor inflation. In other words, the economy has
stable prices of goods and services.
Reasonable Balance of Trade- This goal is achieved when the value of a nation's exports is
more than the value of its imports.
THE THREE FUNDAMENTAL ECONOMIC QUESTIONS: What to Produce?
How to Produce?
For Whom to Produce?
What to Produce?- The first fundamental question that requires making decisions about the
categories and quantities of goods and services to be produced.

How to Produce?- This question involves decisions about what production methods or
techniques to use and how economic resources are to be combined in
producing the final output.
For Whom to Produce?- The last question involves decisions on how goods and services are
distributed among members of society.
- It answers how much every member should get and how should this
good or service be delivered to them
TYPES OF ECONOMIC SYSTEM
Economic System- Means of organizing the economy’s activities to manage the problem of
scarcity and resource allocation.
FOUR ECONOMIC SYSTEMS: Traditional Economy
Market Economy
Command Economy
Mixed Economy
Traditional Economy- A system in which society decides according to traditions and customs.
- This economy is characterized by the use of old and inefficient
methods of production because of the lack of access to technology and
innovation.
- Resources are allocated based on practices from the past generation.
Market Economy- An economic system in which private individuals own and manage most
of the country’s wealth and resources.
-Sometimes called free enterprise or laissez-faire (to "let do”) economy as
there is no government intervention in a pure market economy.
- Households and firms determine what to produce, how to produce it, and
for whom the goods are to be produced.
- The government plays a limited role in the functioning of the economy.
- Characterized by private property ownership, freedom of choice and
enterprise, competition, markets and prices, economic incentives,
technology, specialization, and the use of money.
Command Economy- An economic system characterized by public control and ownership of
the economy’s resources.
- Government is the central authority that makes all the decisions
regarding resource allocation (Opposite of market economy).
Mixed Economy- It is a blended economic system that combines the characteristics of both
market and planned economies.
- Private individual decision-making and ownership of resources are
combined with government regulations.
- Major industries are owned or managed by the government while the minor
businesses belonged to the private sector
- Businesses are allowed to pursue their best self-interests, and the public
sector is also permitted to intervene and carry out their economic functions.
- In reality, most economies nowadays are mixed with varying degrees of
government intervention.

MODULE 4: MARKET FUNDAMENTALS

DEFINITION OF MARKET
Market- Is a place that enables two parties, buyers and sellers, to interact with each other or
exchange goods and services.
ELEMENTS/COMPONENTS OF MARKET: Buyers
Sellers
Goods and Services
Price
Money
Demarcation of Area
Buyers- People who demand and consume goods and services.
Sellers- Firms that produce or supply goods and services.
Goods and Services- The existence of commodity for transaction or exchange.
Price- The mechanism that regulates the quantities demanded and supplied.
Money- Serves as facility or medium of exchange.
Demarcation of Area- This includes the specific place or location, region, country or the whole
world.
CATEGORIES OF MARKETS
→ Markets arrange the interaction of buyers and sellers. It can be but does not have to be a
physical location like a supermarket.
FORMS OF MARKET: Virtual Market
Labor Market
Real Estate Market
Foreign Exchange Market
→ A market can be a specific location, such as a Retail Outlet. It may cover local, national,
or global in scale, such as the market for petroleum products.
→ Market may be a formally established process, such as the Philippine Stock Exchange, or
an unorganized one, like the underground or black market.
→ Markets vary in form, scale, location, types of participants, as well as the types of goods and
services traded.
MARKET CLASSIFICATION MARKETS

Nature of Commodities Product market (bicycle, and resource market

(labor market, capital market, land market)

Basis of Area or Geographic Location Local market, regional market, national market,
international market

Basis of Time Span Short-period market, long-period, secular-market

Basis of Regulation Regulated market and unregulated market

Volume of Transaction Wholesale market and retail market

Nature of Transaction Spot market and future market

 MARKET CLASSIFICATION MARKETS

Structure or degree of Competition Perfect competition and imperfect competition

MARKET STRUCTURE
Market Structure- Is an environment that describes the characteristics of a market influencing
the firm’s behavior in terms of pricing and output decisions.
- Firms trade goods and services under various market circumstances
- Is characterized by the number of buyers and firms in the market, the
nature of the product traded, the extent of information available to market
participants, and the ease of entry and exit from the market.
- Is determined by the nature and degree of competition prevailing in a
particular market
→ The degree of competition in the market from highest to lowest is perfect competition,
monopolistic competition, oligopoly, and monopoly.
MARKET STRUCTURES: Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
1. Perfect Competition- Is a market structure that features a large number of firms selling
homogenous products with no barriers to entry and exit, and perfect
information about market conditions.
- EXAMPLES: Agricultural Products Stock Exchange
Street Foods Online Shopping
Foreign Exchange
PERFECT COMPETITION CHARACTERISTICS: Numerous Sellers and Buyers
Homogenous Products
Perfect Information
No Barriers to Entry and Exit

Numerous Sellers and Buyers- Each may act independently of other agents, and each
contributes insignificantly to influence the market.
- Each firm is a price taker and does not influence the price.
- If a firm tries to increase its price, consumers will buy from
other competitors at a lower price instead. Thus, consumers may
be considered price makers.
Homogenous Products- All firms sell a homogenous product in a given industry.
- Product is homogeneous if one cannot be distinguished from competing
products from different firms. For instance, a buyer of tomatoes cannot
distinguish between the public market’s tomatoes and the supermarket’s
tomatoes. (Buyers are indifferent to the sellers.)
Perfect Information- Both buyers and sellers have instantaneous knowledge about the price,
product quality, production techniques, and so on.
- Buyers are knowledgeable about market prices, and firms know
everything that competitors do related to selling the product.
No Barriers to Entry and Exit- Since there are no transaction costs, both buyers and sellers do
not incur costs when they trade goods.
- Sellers can freely enter or exit the market without cost.
- There are no barriers that exist, keeping new sellers out of the
market.
2. Monopolistic Competition- Is a market structure that presumes a large number of buyers
and firms producing and selling differentiated products with
very few barriers to entry.

- EXAMPLES: Fast moving consumer goods Consumer electronics

Consumer goods Franchised business
Retail clothing Restaurants
MONOPOLISTIC COMPETITION CHARACTERISTICS: Many Buyers and Sellers
Differentiated Products
Easy Entry and Exit
Many Buyers and Sellers- This feature resembles perfect competition.
- Firms are price searchers.
Differentiated Products- All firms sell a slightly differentiated product.
- Product is differentiated if one differs slightly from other products in
the same market.
- Product Differentiation: May be attributed to branding, design and
packaging, advertisement, promotion, customer service
Easy Entry and Exit- Similar to perfect competition, firms can easily enter or exit from the
market as there are very few barriers, legal or otherwise.

3. Monopoly- Is a market structure that features one firm selling a unique product with
extremely high barriers to entry.
- EXAMPLES: Applications (Facebook, Word, etc.)
Utility Companies (Electricity&Water)
Goods and Services (Particular Area)
MONOPOLY CHARACTERISTICS: One Seller
Unique Product
Difficult Barriers to Entry
One Seller- There is only one firm that supplies products in the market.
- The firm is the industry.
- Since there is no competition, the firm enjoys the power of controlling the supply
and setting higher prices of products. (Monopolists: Are price makers)
Unique Product- The sole supplier sells a product that has no close substitutes or no
competitors.
Difficult Barriers to Entry- Entering the market or industry is difficult as the barriers to entry
are extremely high.
- Patents, trademarks, and government regulations act as barriers to
entry for new firms who wish to come into the industry.

4. Oligopoly- Is a market structure that features few firms producing or selling either
homogeneous or differentiated products having barriers to entry.
EXAMPLES: Oil Companies
Automobile Industry
Beer Industry
OLIGOPOLY CHARACTERISTICS: Few Sellers and Many Buyers
Homogeneous or Differentiated Products
High Barriers to Entry
Few Sellers and Many Buyers- There is a small number of interdependent firms that
dominate or control the market.
- The oligopolist is considered a price searcher.
Homogeneous/Differentiated Products
- Firms either produce homogeneous or differentiated products.
- Oligopolistic markets supply homogenous products such as petroleum and aluminum and sell
differentiated products such as automobiles and aircraft.
High Barriers to Entry- New firms face high barriers to entry; hence, it is difficult to enter an
oligopoly industry.
- Oligopoly firms are big and usually benefit from economies of scale.
MATRIX MARKET STRUCTURE CHARACTERISTICS
Characteristics Perfect Monopolistic Oligopoly Monopoly
Competition Competition

Number of Many Many Many Many

Buyers

Number of Many Many Few One

Firms

Type of Homogenous Differentiated Homogeneous Unique

Product /Differentiated

Barriers to
Entry

Firm’s Pricing Price Taker Price Searcher Price Searcher Price Maker
Power

Degree of Very High High Moderate/Low Low/None

Competition
Module 6: Supply

Supply- Represents the goods or services that companies, producers, and sellers provide to the
market.
- For most economists, supply refers to the quantity of goods or services that sellers are
both willing and able to sell at certain conditions.