Economic growth determined by two factors
Is the study of the proper allocation and efficient use of scarce resources to produce commodities for the satisfaction of unlimited needs and wants of man.
ORIGIN: Greek word oikonomia
Oikos = house
Nomos = custom or law
Hence, "rules of the household"
Goals of Economics:
To strengthen economic freedom.
Promote economic efficiency.
Promote economic stability.
Improve economic security.
Attain a high level of growth in the economy.
Efficiency - producing more output with the use of fewer resources.
Stability means there is no violent ups and downs in the economy.
No market place = no personal income
Economic Growth - means that the capacity to produce goods and services is increasing, and it is growing more rapidly than the population.
Or Goods & Services>Population
Growth is determined by two factors:
1. Expansion in the resources available for producing goods and services.
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E.g. Larger labor force.
2. Improved skills and technology.
Economics is a social science because it deals with the study of life of man and how he deals with others as a member of society.
Microeconomics - deals with the behavior of individual components.
E.g. Person, household, firm, industry.
Macroeconomics - deals with the behavior of economy as a whole with the view to understanding the interaction between economic aggregates such as employment, inflation, and national income.
Aggregate - collection of specific economic units treated as if they were one unit. E.g. Consumers in the Philippines.
Positive Economics - focuses on facts and cause-and-effect relationships. It deals with what the economy is actually like. "What is."
Normative Economics - incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. "What ought to be."
The law of scarcity states that goods are scarce because there are not enough resources to produce all the goods that the people want to consume.
Opportunity Cost - To obtain more of one thing , society forgoes the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice.
Economic wants - desired, related to politics trading systems, related to money systems
Non-Economic Wants - wants which do not involve cost, not related to money systems
Shortage - a time period where demand is higher than the actual supply, this economic problem can be overcome in future time periods.
Scarcity - resource exists only in a limited quantity, a scarcity of an item means that not much of it exists at all
Economic System - is a particular set of institutional arrangements and a coordinating mechanism - to respond to the economizing problem.
Traditional Economy - Economic decisions are made with great influence from the past, change is slow, Mongolia
Command System - communism or socialism, government owns most property resources and economic decision making occurs through a central economic plan. North Korea and Cuba
Market System - Capitalism, the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.
Pure Capitalism = laissez-faire (let it be), Phils., most countries
Mixed Economy - Both private and public institutions exercise economic control Japan, U.S.A., Sweden
Aggregate Output - The primary measure of the economy's performance is its annual total output of goods and services.
GDP - aggregate output as the dollar value of all final goods and services produced within the borders of a given country during a given period of time.
Intermediate goods - Goods and services that are purchased for resale or for further processing or manufacturing.
Final goods - consumption goods, capital goods, and services that are purchased by their final users.
2 ways of looking at GDP
Views GDP as the sum of all the money spent in buying it.
Also known as the output approach.
Views GDP in terms of the income derived or created from producing it.
Also known as the earnings or allocations approach.
GDP = Gross Domestic Product
C = Personal Consumption Expenditures
Ig = Gross Private Domestic Investment
G = Government Purchases
Xn = Net Exports
Personal Consumption Expenditures
- Covers all expenditures by households on:
1. Durable consumer goods (car, ref, video recorders)
2. Nondurable consumer goods (bread, milk, vitamins, pencils, toothpaste)
3. Consumer expenditures for services (of lawyers, doctor, mechanics, barbers).
LAW OF SUPPLY AND DEMAND
Demand - schedule/curve that shows the various amounts of a product that consumers are willing and able to purchase.
Law of Demand Ceteris Paribus ("other things equal") as price falls = quantity demand rises: as price rises = quantity demanded falls. Inverse relationship
Supply - schedule/curve showing the various amounts of a product that producers are willing and able to make available for sale
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Law of Supply As price rises = quantity supplied rises; as price falls = quantity supplied falls. For a supplier, price represents revenue.
Kinds of Goods
Normal/ Superior Goods - demand varies directly with money income. Income increase= demand increase
Inferior Goods- demand varies inversely with money income. Income increase= demand decrease. Ex: 2nd hand goods
Substitute Goods- used in place of another good.
Complimentary Goods- used together with another good. Ex: Spaghetti noodles and spaghetti sauce.
Independent goods- the vast majority of goods are not related to one another. Ex: egg and car
Change in quantity demanded - movement from one point to another point - from one price-quantity combination to another - on a fixed demand schedule or demand curve.
Change in demand- a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand).
Determinants of Demand (PCCPCP)
1. Price of the Good itself.
2. Consumer's Income
3. Consumer's Expectation of Future Prices.
4. Prices of Related Commodities/Goods.
5. Consumer's Tastes and Preferences.
*When any of these determinants changes, the demand curve will shift to the right or left.
Determinants of Supply (RCTCEGN)
1. Resource prices.
2. Change in Technology.
3. Taxes and Subsidies.
4. Change in the price of related goods.
5. Expectation of Future Price.
6. Government regulation and taxes.
7. Number of sellers in the market.
Elasticity - measures the responsiveness of one variable to a certain change of another variable.
Elasticity = percentage change in variable x I percentage change in variable y
TYPES OF ELASTICITY (E, I, UE, PE, PI,)
1. Elastic- percentage change in variable x is greater than the percentage change in variable y. PED (coefficient: > than 1)
2. Inelastic- percentage change in variable x is less than the percentage change in variable y. PED (coefficient: < than 1)
3. Unitary Elasticity- percentage change in variable x is equal to the percentage change in variable y when the coefficient is equal to 1. PED (coefficient = 1)
4. Perfectly Elastic- any change in variable y will have an infinite effect on variable x. PED (coefficient: âˆž) 0.1111â€¦
5. Perfectly Inelastic - any change in variable y will have no effect on variable x. PED (coefficient: 0)
Price Elasticity- measures the percentage change in quantity with respect to percentage change in price.
Price Elasticity of Demand; Price Elasticity of Supply.
Price Elasticity of Demand- measures the responsiveness of the quantity demanded with respect to its price.
Formula: Q- quantity; P- price
PED = Q2 - Q1
P2 - P1
CLASSIFICATIONS OF PRICE ELASTICITY OF SUPPLY
Elastic Supply- change in price leads to a greater change in quantity supplied.
Inelastic Supply - change in price leads to a lesser change in quantity supplied.
Unitary Elastic Supply- a change in price leads to an equal change in quantity supplied.
Perfectly Elastic Supply- no change in price but results to an infinite change in quantity supplied.
Perfectly Inelastic Supply- change in price has no effect on quantity supplied
DETERMINANTS OF PRICE ELASTICITY OF SUPPLY (Alfred Marshall)
Monetary or Intermediate- supply will be perfectly inelastic and supply is fixed.
Short-run- supply is inelastic. The output production can increase even if equipment is fixed.
Long-run- supply is elastic. New firms are expected to enter or old one may leave the industry.
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