Economics Reviewer

1. BASIC ECONOMIC CONCEPTS

1. Economics Defined:

1. Economics is the proper allocation and efficient use of available resources for maximum satisfaction of human wants. It is a study of how we manage our scarce resources.
2. Scarcity arises from the assumption of unlimited wants and desires and the fact that resources to obtain the goods and services are limited.
3. Opportunity cost is the value of benefits foregone from alternative uses of resources.

2. Economics is a science that is concerned with the following fundamental economic activities:

1. Production simply means the process of transforming raw materials (inputs) to a finished product (output).
2. Distribution refers to the physical appointment of goods and services from the producers to the consumers or it is simply called as marketing distribution or trade (barter).
3. Consumption is the process of using goods and services in the direct satisfaction of human wants; most function in the economics.
4. Exchange is the transfer of ownership over goods and services from one person to another.

3. Basic Terms in Economics:

1. Positive economics deal with what is or the scientific analysis of economic
2. Normative economics deals with what should be or suggest what ought to be.
3. Goods refers to things that are produced, traded, sold, bought, and utilized which satisfy a person’s wants and desires.
4. Goods are tangible when they are in the form of material goods and commodities like shoes, books
5. They are intangible goods when they in the form of services, like services rendered by doctors…
6. Consumer goods are intended for final use by the consumer, like milk, soft drinks, and food.
7. Capital goods are used in creation or production of other goods and services like buildings…
8. Essential or necessity goods are used to satisfy the basic needs of man such as food, clothing, shelter
9. Luxury goods are goods that man may do without, but are used to contribute to his comfort and well-being, such as chocolates, perfumes, expensive cars, and houses.
10. Durable goods are goods that last more than three (3) years when used on regular basis. 
11. Non-durable goods include food, medicine, and clothing among others.
12. Consumers are people who use goods and services. 
13. Services are the effort rendered by someone for a price such as haircut or doctor’s visit.
14. Value is an assignment of worth basically expressed in terms of price
15. Wants are means of expressing a perceived need or desire for goods and services
16. Economic goods are kinds of goods that command a price.
17. Free goods are goods that have no price and are available at more than the amount people want.

4. Factors of Production:

1. Land production includes all natural resources, including minerals deposit, water, etc.
2. Labor is any form of human effort like physical which is exerted in the production of goods.

1. Physical labor includes those that extract raw materials and process these into finished goods.
2. Mental labor includes teacher, lawyers, doctors, nurses, and other who provide services.

3. Capital refers to the machinery, tools, equipment, and structures used in the production of goods…

1. Financial capital represents all the money received from and retained for used in business.

4. Entrepreneurship is the ability of an individual to prove the right kind of good or service at the right place and time, to the right people at the right price.

5. Divisions of Economics:

1. Microeconomics is the division of economics that studies the economy in parts.
2. Macroeconomics deals with the economic behavior of the whole economy.

2. FUNDAMENTAL ECONOMIC PROBLEMS AND ECONOMIC SYSTEMS

1. Economic problems exist because of two fundamental facts: resources are limited and human wants are unlimited.

2. Four Basic Economic Problems:

1. What goods are to be produced? 
2. How much goods are to be produced? 
3. How are goods and services produced? 
4. For whom are the goods produced?

3. Economic System:

1. An economic system is comprised of the various processes of organizing and motivating labor, producing, distributing, and circulating of the fruits of human labor…
2. Types of economic system:

1. Traditional economy is an economy that answers the four questions on the allocation and distribution of goods based on social customs and how the society has dealt with this question in the past.
2. Market economy is an economy wherein resources are privately owned and decisions are made by the people themselves. 
3. Command economy is an economy where the four questions are all answered by the gov’t. 
4. Mixed economy is a blend of free market economy and government intervention.

3. THE CIRCULAR FLOW MODEL

1. The Interrelationship between the Household Sector and Business Sector:

1. Economic activities take place within the economy. These include production, consumption, employment, and income generation.
2. Economic activities refer primarily to production that employs resources such as land, labor, capital, and entrepreneurship.
3. Production is the use of economic resources in the creation of goods and services for the satisfaction of human wants.

2. The Circular Flow Model (Frank Knight)

1. The circular flow of income model, or simply the circular flow, is a model used to show the flow of resources and income through an economy.

4. THE CONCEPT OF DEMAND AND DEMAND ANALYSIS

1. Demand:

1. The theory of supply and demand shows how consumer preferences determine consumer demand for goods and services and how business costs determine supply in the product market.
2. A market is defined as an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods, services and resources.
3. Demand for a product is the amount of the good or service that buyers in a specific market are willing and able to buy per unit of time, ceteris paribus or “other things held constant.” 
4. The demand schedule shows the various quantities of the product that will be bought at various prices at a specific time and place
5. The demand curve is the graphical representation of the demand schedule.

2. The Law of Demand – when the price of the product is increased, and the “other things” are kept constant, buyers tend to buy less of the commodity. On the other hand, when the price decreases, buyers tend to buy more of the commodity.

1. A consumer tends to buy more of a product or service if its price falls due to two factors:

1. Income Effect. As price falls, the purchasing power of the consumers is enhanced because they can buy more of a product.
2. Substitution Effect. As price falls, the product become less expensive compared to similar products so that the consumers tend to buy more of a product and less of a similar product.

2. Determinants of Demand or Demand Shifter:

1. 
   
2. Tastes and preferences
3. Number of buyers. 
4. Income. 
5. Prices of related goods. 
6. Expectations.

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5. THE CONCEPT OF SUPPLY AND SUPPLY ANALYSIS

1. Supply

1. The supply of a product is the amount of goods such and services that producer or service providers are able and willing to offer in a specific market per unit of time, other things held constant. 
2. The supply schedule shows the various quantities of the good or service that is offered to the market at various possible prices.
3. The supply curve is the graphical representation of the supply schedule.
4. A market schedule is the sum of the quantities of a commodity offered by a group of sellers.

2. The Law of supply states that as price of the commodity rises, keeping “other things” constant, sellers tend to offer more to the market, and as the price of the commodity declines, sellers tend to offer less to the market.

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4. Determinants of Supply:

1. 
   
2. Resource prices. 
3. Technology. 
4. Number of sellers. 
5. Taxes and subsidies. 
6. Prices of other goods or services.

6. 
   

5. Market Equilibrium is the price and quantity where the forces of supply and demand are in balance

7. THE CONCEPT OF ELASTICITY

1. Price Elasticity of Demand

1. The price elasticity of demand measures the responsiveness or sensitivity of consumer purchases to price changes.
2. Different Forms of Elasticity:

1. Elasticity Demand. Demand is elastic if the percentage change in price results in a larger percentage change in quantity demanded, or Ed is greater than one.
2. Inelastic Demand. Demand is inelastic if the percentage change in price results in a smaller percentage change in quantity demanded, or Ed is less than one.
3. Unitary elastic Demand. This special case occurs when the percentage change in price results in the same percentage change in quantity demanded, or Ed is equal to one.
4. Perfectly Inelastic demand. This extreme situation occurs price change does not change at all quantity demanded, or Ed is equal to zero.
5. Perfectly elastic Demand. This extreme situation occurs when a small price reduction causes buyers to increase their purchase from zero to all they can obtain, or Ed is equal to infinity.

3. Revenue is defined as the proceeds generated by selling products and services while Profit is the net income.
4. The income elasticity of demand   measures the responsiveness of consumer to a change in their incomes by buying more less of goods.
5. Cross elasticity of demand measures the response of a consumer purchase of one product X to a change in the price of another product Y.

2. Price Elasticity of Supply

1. The price elasticity of supply measures the responsive of sellers to change in price of the products they offer in the market.
2. The coefficient of the price elasticity of supply may also be interpreted as:

1. Elasticity supply. When the percentage change in the price result in a larger percentage change in quantity supplied, or E is greater than one.
2. Inelastic Supply. When the percentage change in the price causes a smaller percentage in quantity supplied, or E is less than one.
3. Unitary supply. When the percentage change in price results in the same percentage change in quantity supplied, or E is equal to one.

8. CONSUMER BEHAVIOR: UTILITY APPROACH

1. The Concept of Utility

1. Utility means satisfaction or pleasure.
2. Total Utility (TU) is the total amount of satisfaction derived by a consumer from consuming a particular good or service
3.  Marginal Utility (MU) refers to the extra additional satisfaction or pleasure derived by an individual when he consumes an additional unit of a good or service.
4. The Law of Diminishing Marginal Utility states that a person consumes more and more of a given commodity (the consumption of other commodities being held constant), the marginal utility of the commodity eventually will tend to diminish.
5. Utility maximization is achieved if the marginal utility of the last peso spent for any other good or service.

9. THE CONSUMER BEHAVIOR: INDIFFERENCE THEORY

1. Indifference Curve

1. The Indifference theory assumes that consumer could tell which of two consumption bundles they prefer without having to tell by how much they prefer it.
2. An Indifference Curve (IC) is a curve that shows different combinations of two goods which yield the same level of satisfaction.

1. It is downward sloping or negatively sloped. 
2. Convex to the origin. 
3. Indifference curves do not intersect or touch one another.

3. An Indifference map consists of a set of Indifference curves. It shows the preferences of the consumers.

2. The Marginal Rate of Substitution indicates the rate at which a consumer would exchange units of one product for additional units of another product.

1. The first basic assumption of indifference theory is that the algebraic value of MRS is always negative. 
2. The second basic assumption of indifference theory is that the MRS between any two commodities depends on the amount of the commodities currently being consumed by the household.

3. A Budget or consumption possibility line shows the various combinations of two products which can be purchased by the consumer with his income, given the prices of the products.

10. MARKET STRUCTURES

1. Market and Market System 

1. Markets and prices are key characteristics of the market system
2. The market system – called capitalist or free-enterprise system- depends on the competition of  economic units such as businesses and households.
3. An industry is a group of businesses or firms that produce the same product or service.

2. Four distinct market structures:

1. Pure competition involves a large number of sellers producing a standardized product.

1. Price takers - they cannot influence the price of the product. 
2. Production of most agricultural products is an example of pure competition.
3. Entry or exit in a purely competitive industry is very easy because there are no financial, legal and technological obstacles

2. A monopolistic competition is composed of many firms (from more than 20 to less than 100) but is different from purely competitive industry because the firms produce differentiated products.

1. Establishments include restaurants, grocery stores, palay buying stations
2. Entry or exit in the market offer obstacle

3. Oligopoly involves a few firms producing either standardized products or differentiated products. 

1. In this industry, entry or exits is relatively more difficult. 
2. Commercial banks, oil firms, auto car makers and electronic companies are examples of oligopolistic firms.
3. It is composed of a few firms dominated by two to five larger producers. Each firm is thus a price marker.
4. The oligopoly models are identified based on the pricing and output behavior:

• Non-collusive oligopoly or kinked demand curve. This type occurs when firm reacts to a competitor’s price change by matching the price change or ignoring the price change.
• Collusive oligopoly. Firms in an oligopoly collude by agreeing to fix prices, to divide the market, or to restrict competition among them.
• Price leadership. Practices evolve in this type of oligopoly when the dominant firm, usually the largest or most efficient firm initiates price changes and automatically all follow the leader.

4. Pure Monopoly is a market structure where there is only one firm producing a unique product. 

1. Entry in this industry is blocked.

• Economic of scale. 
• Patent and licenses
• Ownership or control of an essential resource
• Natural Monopolies

11. THE BUSINESS FIRM

1. The firm is an institution within which managers organize resources in an effort produce goods and services by the most efficient means possible.

2. Forms of Business Organizations

1. Sole Proprietorship. A sole proprietorship is a business owned by one individual and the easiest and simplest business enterprise to organize. Such being the case, it is the most common form of business ownership.
2. Partnership. Partnership is a term applied to an association of two or more persons who have agreed to combine their labor, property, and skill, or some or all of them, for the purpose of engaging in lawful business and sharing profits and losses between them.
3. Corporation. A corporation is a legal entity that exists as distinct from the individuals who control and invest in it.

1. Investors control a corporation through the election of a managing body, known as a Board Directors.
2. Corporations may be classified as non-profit corporations, profit corporations, private and government-owned and controlled corporations (GOCC’s)

4. Cooperative. A cooperative is a business organization that advocates equality of rights and privileges among all owners. This entity is owned and operated democratically by its members.

1. It may be a marketing cooperative, credit cooperative, consumer cooperative, agricultural cooperative.

12. THE PRODUCTION FUNCTION

1. Concept of Production

1. Production is the transformation of inputs and factors of the production into an output in the form of goods and services.

1. Fixed inputs such as land and machineries are costly to acquire in such a short notice.
2. Variable inputs such as labor and raw materials are easily increased or decreased in quantity in the short run.
3. An isoquant is a curve that shows the various combinations of inputs that will produce a certain level of output.
4. Marginal Rate of Technical Substitution (MRTS) states that as we increase more of one input, some amount of the other input is given up without affecting the output.

2. The total physical product (or TP-total product) is the quantity of output produced per time period given the inputs. 
3. The average physical product (or AP-average product) of an input is the total divided by the amount of the inputs used to produce an output. 
4. The marginal physical product (or MP- marginal product) of an input is change in the total product resulting from a one-unit change in the amount of the inputs, holding the quantities of the other inputs constant.
5. The Law of Diminishing Marginal Returns state that as the amount of some input is increased in equal amount, holding other inputs constant, and the increase in output will decrease beyond some point.

2. Three Stages of Production:

1. Stage 1 occurs where the marginal product is increasing and it is higher than the average product curve. 
2. Stage 2 occurs where the marginal is decreasing but still positive until it reaches 0, the average product is higher than the marginal product. 
3. Stage 3 occurs where the total product is decreasing as more of the input is used, marginal product is negative and the average product is positive but decreasing.

13. COST ANALYSIS

1. The Concept Of Cost

1. Costs are the expenditures for the purchase of raw materials, wage and salaries of employees, machineries and equipment, interest on loan, overhead costs and other items used or production.
2. Explicit costs are payments directly paid by the producer based on receipts of purchases.
3. Implicit costs are those that involve the use of resources owned by the owner of the business like his own labor to operate or manage the business.
4. Opportunity cost is the value of the resource in its next best alternative use.
5. The firm's total production costs which are the sum of the explicit and. implicit costs tend to equal the opportunity costs of the resources it uses.
6. Economic cost is the amount required to keep the resources in their present use.

2. Measures of Costs

1. Fixed costs (FC) are paid regardless of output while variable costs (VC) are paid as output changes in the short-run. 
2. The total variable costs (TVC) are the sum of all variable costs. 
3. The sum of the two costs is equal to the total costs (TC). 
4. An average total cost (ATC) is equal to the total costs divided by the total output. 
5. The marginal costs (MC) is equal to the change in total cost divided in the change in total output per given period. 
6. Short-run costs are incurred by the firm where some inputs are fixed while long-run costs are expenses where all inputs are varied.

3. Profit Maximization

1. The main objective of business firms is to maximize profit.
2. Profits are like the net earnings or take-home pay of a corporation.
3. It is the total revenue (TR) a firm receives from the sale of its product minus all costs - explicit and implicit, in producing a product.