Académique Documents
Professionnel Documents
Culture Documents
1
Module on Microeconomics/Assoc. Prof. Norie L. Maniego
Definition of Economics
CHOICE
OPPORTUNITY
COST
3
Examples of Economic Agents and the Choices
That They Face
Economic Agent or Unit Examples of economic decisions or choices
Household How to satisfy the needs of the households; how to plan future
of family members?
Laborer How to find productive employment; how to improve welfare;
how to provide for old age?
Firm What goods to produce at the cheapest possible cost; how to
keep market position?
Entrepreneur How to combine labor, capital and land to produce goods at
cheapest possible costs; how to deal with uncertainty in
economic conditions and to take risk to advance business
plans?
Owners of capital How to achieve the best return from among the alternative
investment projects?
Government How to raise revenues to finance operations to maintain
activities of the government?
4
One means by which society allocate scarce resources
and goods is the market system.
5
Macroeconomics
The prefix macro means large, indicating that
macroeconomics is concerned with the study of the
market system on a large scale.
Macroeconomics considers the aggregate performance of
all markets in the market system and is concerned with the
choices made by the large subsectors of the economy—the
household sector, which includes all consumers; the
business sector, which includes all firms; and the
government sector, which includes all government
agencies.
6
Microeconomics
The prefix micro means small, indicating that
microeconomics is concerned with the study of the
market system on a small scale.
Microeconomics looks at the individual markets that
make up the market system and is concerned with the
choices made by small economic units such as individual
consumers, individual firms, or individual government
agencies.
7
Macroeconomics vs. Microeconomics
GDP grew by 4.6% in the Philippines in 2008.
8
Relationships between facts, theories and
policies in economics
GOOD ECONOMIC
THEORIES-LAWS & COURSE OF
FACTS PRINCIPLES ACTION/SOLUTIONS
POSITIVE NORMATIVE
9
Normative versus Positive
Economics
Normative—incorporates value judgments about what the
economy should be like or what particular policy or actions
should be recommended to achieve a desirable goal.
Positive—focuses on facts and cause and effect
relationships. It tries to establish scientific statements
about economic behavior, and deals with what the
economy is actually like.
10
Normative versus Positive Statements
The price of rice should be increased to improve the
well being of farmers (normative)
After a good harvest, the price of rice will fall. But after
a bad harvest, the price of rice will increase(positive)
11
ECONOMIC SYSTEM
Set of institutional arrangements and coordination
mechanism to respond to the economizing economic
problems.
1. Traditional economic system
2. Command economic system/socialism or
communism
3. Market system or capitalism
4. Mixed system
12
Five Fundamental Questions
What goods and services will be produced?
How will the goods and services be produced?
Who will get the goods and services?
How will the system accommodate change?
How will the system promote progress?
13
The Circular Flow Model
14
Exercise 1:
I. Indicate whether each of the following statements
applies to microeconomics or macroeconomics
1. The unemployment rate in the United States was 5.8% in
March 2003.
2. XYZ company laid off 15 workers last month.
3. US output adjusted for inflation, grew by 2.4% in 2002.
4. The consumer price index rose by 1.6% in 2002.
5. The price of sugar decreased by P10 last month.
15
Module on Microeconomics/PUP Open University-Asst. Prof. Norie L. Maniego
Exercise 2
II. Identify each of the following as either a positive or a normative
statement
1. It was too hot today.
2. Other things equal, higher interest rates reduce the total amount of
borrowings.
3. Interest rates are too high.
4. The government should increase the minimum wage in order for the
workers to cope up with the rising prices of goods.
5. An increase in the price of rice will lead to a reduction in the quantity
demanded for rice.
16
Demand and Supply
Analysis
17
Circular Flow of Economic Activity
18
Demand
19
Law of Demand
20
Explanations for Law of Demand
21
Substitution Effect
23
Exhibit 1: Demand Schedule
& Demand Curve for Pizza
(a) Demand Schedule
(b) Demand Curve
Price per Quantity Demanded
Pizza per Week (millions)
P18
a) P15 8
a
b) 12 14 P15
c) 9 20
d) 6 26
P9 c
The demand schedule lists possible
prices, along with quantity
demanded at each price. The P6 d
demand curve at the right shows
each price / quantity combination P3 e
listed in the demand schedule as a
point on the demand curve. P0
8 14 20 26 32
Millions of Pizzas per week
24
Demand and Quantity Demanded
P15.00 a
Demand for pizza is not a
25
Individual Demand Market
Demand
26
Shifts of the Demand Curve
Suppose income
increases: some P15
consumers will now be
b f
able to buy more pizza Price 12
at each price
market demand
9
increases demand
shifts to the right from
D to D' 6
A decrease in
D'
demand will mean 3
demand shifts to the D
left from D' to D.
0
8 14 20 26 32
Millions of pizzas per week
28
Changes in Consumer Income
Goods can be classified into two broad categories:
Normal goods: the demand increases when income
increases and decreases when income decreases
Inferior goods: the demand decreases when income
increases and increases when income decreases
29
Changes in the Prices of Related Goods
30
Changes in Consumer Expectations
31
Module on Microeconomics/PUP Open University-Asst. Prof. Norie L. Maniego
Supply
35
Individual Supply and Market Supply
36
Shifts of the Supply Curve
Determinants of supply other than the price of the
good
State of technology
Prices of relevant resources
Prices of alternative goods
Producer expectations
Number of producers in the market
37
Exhibit 4:Change in Technology Can Mean an Increase in Supply
S
S'
A more efficient P15.00
technology, a high-
g
tech oven, is invented 12.00 h
38
Changes in the Prices of Relevant Resources
39
Prices of Alternative Goods
40
Changes in Producer
Expectations
When a good can be easily stored, expecting future
prices to be higher may reduce current supply
More generally, any change expected to affect
future profitability could shift the supply curve
41
Number of Producers
42
Module on Microeconomics/PUP Open University-Asst. Prof. Norie L. Maniego
Demand and Supply Create a
Market
Demanders and suppliers have different views of
price
Demanders, consumers, pay the price
Suppliers, sellers, receive the price
As price rises, consumers reduce their quantity
demanded along the demand curve, and producers
increase their quantity supplied along the supply
curve
43
Markets
44
Exhibit 5: The Market for Pizzas
45
Exhibit 5: The Market for Pizzas
At initial price P12, Price S
producers supply 24
P15.00
million pizzas per week Surplus
(supply curve) while
12.00
consumers demand only 14
million: excess quantity c
9.00
supplied (or surplus) of 10
million pizzas per week
6.00
To eliminate this surplus,
suppliers put downward
3.00
pressure on prices
As prices fall, quantity D
0
supplied declines and 14 20 24
quantity demanded Millions of pizzas per week
increases: market moves
towards equilibrium at
point c
46
Exhibit 5: The Market for Pizzas
S
Initial price is P6 per
pizza, 26 million are P15.00
demanded, but
producers supply only Price 12.00
16 million: an excess c
quantity demanded (or 9.00
shortage) of 10 million
pizzas per week 6.00
Shortage
As prices increase,
producers increase 3.00
quantity supplied and D
consumers reduce their 0
16 20 26
quantity demanded, Millions of pizzas per week
moving towards
equilibrium at point c
47
Module on Microeconomics/PUP Open University-Asst. Prof. Norie L. Maniego
Equilibrium
48
Equilibrium
49
Changes in Equilibrium
50
Exhibit 6: Effects of an Increase in Demand
51
Exhibit 6: Effects of an Increase in Demand
Assume one of the
Price
S
determinants of demand
changes so that demand
increases from D to D'
After the increase, the g
amount demanded at P9 is P12
30 million – which exceeds c
the amount supplied of 20 9
million pizzas: shortage and
upward pressure on price
As price increases, D'
quantity demanded
D
decreases along the new 0
demand curve, D'. The 20 24 30 Millions of pizzas per week
quantity supplied increases
along the existing supply
curve, S, until the two
quantities are in
equilibrium.
52
Shifts of the Demand Curve
53
Exhibit 7: Effects of an Increase in Supply
54
Exhibit 7: Effects of an Increase in Supply
S
Suppose supply shifts from
S to S' increases S'
After supply increases, the
amount supplied at the initial
price of P9 increases from 20 c
to 30 million pizzas per week
P9
a surplus exists
Surplus puts downward 6
d
pressure on price quantity
demanded increases along the
existing demand curve until a
new equilibrium is reached.
20 26 30
Millions of Pizzas per Week
55
Shifts of the Supply Curve
57
Exhibit 8: Indeterminate Effect of an
Increase in Both Supply and Demand
58
Exhibit 8: Indeterminate Effect of an
Increase in Both Supply and Demand
b) Shift in supply dominates
Price
shifts by more than
demand: price
decreases from p to p''
p
and quantity increases
p"
Conversely, if both
supply and demand
decrease with the shift
in supply dominating, D"
price will increase and D
quantity will decrease. 0
Q Q" Units per period
59
Exhibit 9: Effects of Changes in Both
Supply and Demand
Change in Demand
Demand increases Demand decreases
60
Disequilibrium Prices
61
Exhibit 11: Price Floors and Price Ceilings
62
Exhibit 11a: Effects of a Price Floor
Monthly rent
Suppose the market-clearing
rent is P1,000 per month with
50,000 apartments being rented
Now suppose the government P600
decides to set a maximum rent of
Shortage
P600
At this ceiling price, 60,000
rental units are demanded
However, only 40,000 are
supplied, a shortage
D
0
40 50 60
Thousands of rental units per month
64
The algebraic approach to equilibrium.
To solve simultaneously, one first rewrites either the demand or the supply
equation as a function of price. In the example above, the supply curve may be
rewritten as follows:
Substituting this expression into the demand equation, one can solve for the
equilibrium price:
67
Impact of a Change in Supply &
Therefore Price on the Quantity Demanded
Price (dollars per pizza)
40.00 S0
…a S1
large An increase
30.00 fall in in supply
Large price change and
price... brings ... small quantity change
20.00
10.00
… and a small
5.00 increase in quantity
Da
0 5 10 13 15 20 25
Quantity (pizzas per hour)
68
Impact of a Change in Supply…
An increase
40.00 S0
in supply
Price (peso per pizza)
brings ... S1
20.00
15.00
Db
10.00
… and a large
increase in quantity
0 5 10 15 17 20 25
Quantity (pizzas per hour)
69
Price Elasticity
Price Elasticity of Demand
Percentage change in quantity demanded
Ep Percentage change in price
%Qd
Ep
%P
The ratio of the two percentages is a
number without units.
70
Price Elasticity
Example
Price of oil increases 10%
Quantity demanded decreases 1%
-1%
Ep .1
10%
71
TYPES OF ELASTICITY
Hypothetical Demand Elasticities for 4 Products
Product % Change in % Change in Elasticity
price (%P) quantity (%QD/%P)
demanded
(%QD)
72
Price Elasticity Ranges: Extreme Price Elasticities
D P1 never touches
the demand curve
Perfect
inelasticity, Perfect
P1 P1 elasticity,
zero elasticity,
infinite
no matter how
elasticity,
much Price
Price
the slightest
changes, 30
D increase
Quantity
P0 in price will
Price
stays the
lead to
same;
zero sales.
insulin
0 8 0
Quantity Demanded per Year Quantity Demanded per Year
(millions of units) (millions of units)
73
Price Elasticity Ranges
Summary from Table
Elastic Demand
%Q %P; EP 1
Unit Elastic
%Q %P; EP 1
Inelastic Demand
%Q %P; EP 1
74
Elasticity of Demand
Calculating elasticity
Change in Q Change in P
Ep
Sum of quantities/2 Sum of prices/2
Change in Q Change in P
or Ep
(Q1 Q2 )/2 (P1 P2 )/2
Q P
or Ep
Avg. Q Avg. P
75
The Relationship Between Price Elasticity of Demand and
Total Revenues for Cellular Phone Service
P1.10 0 0
21.000
1.00 1 1.0
.90 2 6.333
1.8
.80 3 3.400 Elastic
2.4
.70 4 2.143
2.8
.60 5 1.144
3.0
.50 6
3.0 1.000 Unit-elastic
.40 7
2.8 .692
.30 8
2.4 .467
.20 9 Inelastic
.10 10 1.8 .294
1.0 .158
76
Total Revenue and Elasticity
Total Revenue
=
Price Per Good
X
# of Goods Sold
TR = P X Q
.80
Unit
Price
elastic
.55
Inelastic
demand
0 Quantity
55 110
3.00 Maximum
Total Revenue
total revenue
(peso)
When demand
is inelastic,
When demand is price cut decreases
elastic, price cut total revenue
increases total
revenue
Quantity
0 55 110
78
Relationship Between Price
Elasticity of Demand and Total Revenues
Price Price
Decrease Increase
79
PRICE DESCRIPTION IMPACT ON TOTAL
Price Elasticity of Demand
ELASTICITY
OF DEMAND
REVENUE
80
Total Revenue and Elasticity
Total Revenue Test:
Estimate the price elasticity of
demand by observing the change in
total revenue that results from a
change in price (ceteris paribus).
82
Determinants of Price
Elasticity of D
ED is greater:
– The greater the availability of substitutes,
and the more similar the substitutes
– The more important the good as a share of
the consumer’s budget
– The longer the period of adjustment (time)
Price Elasticity of Supply (Es)
Percentage change in quantity supplied of x/percentage
change in price of x
Q2-Q1/(Q1+Q2)/2
P2-P1/(P1+P2)/2
Where: Q2= final quantity
Q1=initial quantity
P2=final price
P1=initial price
84
Example:
Suppose an increase in the price of a good from P4 to P6
increases the quantity supplied from 10 units to 14 units.
The percentage in the price would be 2/5 or 40 percent, and
the percentage change in quantity would be 4/12 or 33
percent
Es=0.33/0.40
Es=0.83
85
Income Elasticity
of Demand
Demand responsiveness to a change in
consumer income
Percentage change in demand divided by
the percentage change in income that
caused it
Inferior goods
– Negative income elasticity
Normal goods
– Positive income elasticity
Income Elasticity
of Demand
Normal goods
– Income inelastic
• Elasticity between 0 and 1
• Necessities
– Income elastic
• Elasticity > 1
• Luxuries
Cross-Price Elasticity
of Demand
Responsiveness of D for one good to
changes in P of another good
%∆ in demand for one good divided by
%∆ in price of another good
– If positive: substitutes
– If negative: complements
– If zero: unrelated