By: Athena Pamaqued

Source: Introductory Microeconomics 4th Edition

Author: Cristobal M. Pagoso, Rosemary P. Dinio, George A. Villasis
Pamela Pagoso- Meneses, Priscilla Pagoso-Veloso

Importance of Economics
to the Society
Economics studies how prices of land, labor,

and capital are determined, and how these

prices are used to allocate scarce resources
Economics look into the behavior of financial
market and how it allocates capital to the rest
of the economy
Economics looks into the distribution of
income and into ways of helping the poor
without causing harm to countrys economic
performance.

Economics studies the impact on growth of

government spending, taxes, and budget deficits.
Economics examines the movements in income
and employment during different stages of the
business cycle with the goal of developing
government policies that will improve economic
growth.
Economics looks at trade patterns among nations
and analyzes the impact of trade barriers
Economics examines growth in developing
countries and suggests ways to encourage the
efficient use of resources.

Microeconomics
the branch of economics that deals with parts
of the economy such the household and the
business firm; also known as price theory.
Is concerned primarily with the market
activities on individual economic units such as
costumers, resource owners, and business
firms.

Scarcity means that society has limited

resources
and therefore cannot produce all the goods
and services people wish to have.
Principles of Economics
1.People Face Trade offs.
*Efficiency vs. Equity

Efficiency means society gets the most that it

can be form its scarce resources
Equity means the benefits of those resources
are distributed fairly among the members of
the society

2. The cost of something is what you give up to

get it.

*Decisions require comparing costs and benefits

of alternatives
Whether to go to college or to work?
*The opportunity cost of an item is what you
give up to obtain that item

3. Rational people think at the margin

*Marginal changes are small, incremental
adjustments to an existing plan of action
People make decisions by comparing costs
and benefits of the margin
4. People respond to incentives
Marginal changes in costs or benefits motivate
people to respond

 The decision to choose one alternative over

another occurs when that alternatives

marginal benefits exceed its marginal costs.
5. Trade can make everyone better off.
People gain from their ability to trade with one
another
Competition results in gains from trading
Trade allows people to specialize in what they
do best.

6. Markets are usually a good way to organize

economic activity.
In a market economy, households decide what
to buy and who to work for.
Firms decide who to hire and to produce.
7. Governments can sometimes improve market
outcome.
When market fails(breaks down) government
can intervene to promote efficiency and equity

 Market failure occurs when the market fails to

allocate resources efficiently.

Market failure may be caused by an
externality, which is the impact of one person
or firms actions on the well-being of a
bystander
Market failure may also be caused by market
power, which is the ability of a single person
or firm to unduly influence market prices.

8. The standard of living depends on a countrys

production
Standard of living may be measured in different
ways:
By comparing personal incomes
By comparing the total market value if nations
production
*Almost all variation in living standards are explained
by differences in countries productivities.
Productivity-is the amount of goods and services
produced each hour of workers time

9. Prices rise when the government prints too

much money.
Inflation is an increase in an overall level of
prices in the country
One cause of inflation is the growth in the
quantity of money
When the government creates large quantities
of money, the value of the money falls.

10. Society faces a short-run tradeoff between

inflation and unemployment
Inflation
Unemployment

Its a short-run tradeoff

Economic Problem
Illustration:

Limited

Production

Unlimited

wants

Scarce
needs
Resources

wants and

Economic Models
are composed of a series of statements of
assumption or given and statements of
implications or deductions.
among the best-known economic models is
the competitive market or Supply and
Demand
The supply and demand relationships can be
expressed in three different forms: verbal (or
logical), mathematical and graphical

Let us illustrate by using the Law of Supply.

Verbally, the Law of Supply can be expressed in

the following words: Supply is a schedule of prices

and quantities that a supplier or suppliers are
willing to offer for sale at each price per period of
time. These suppliers would be encouraged to sell
more and higher prices and would sell less at
lower prices. This is because higher prices, other
things being constant, mean higher profits, and
lower prices mean lower profits. Thus, prices and
quantity offered for sale are directly related, that
is, the higher the prices, the more supply; the
lower the price, the less supply.

 The verbal explanation of the Law of Supply can

be expressed in mathematical notations too.

Mathematical notations are shortcut
representation of verbal explanations. The Law of
Supply can be expressed succinctly in an
equation:
Qs=500P
The equation Qs=500P means that if the price
is, say P1, quantity supplied would be
P1,500(500x=500; if the price is P3, quantity
supplied would be P1,500 (500x3=1,500)

Graph