BASIC MICROECONOMICS

Introduction : The Nature & Process of Economics

ECONOMICS
is the study of the making, buying, and selling of goods or services.

VOLUNTARY EXCHANGE

People will trade if they both get something from it.

• was used in the system of colonial trade. (barter)

• The colonists swapped goods that they had for things they needed.

OPPORTUNITY COST

is the value of what is given up when a choice is made.

• Every time you make a choice, you give up something else.

PRICE INCETIVES

Incentives can motivate people to take action

• A sale where items are ½ price is a price incentive.

SCARCITY

means that there are never enough resources to satisfy all human wants

ECONOMICS

study of the trade-offs and choices that we make, given the fact of scarcity

RATIONAL DECISION

a decision that takes into account the reason for making the decision.

• Decisions should be made taking individual and national goals into account because of scarcity
DEMAND, SUPPLY AND MARKET
PRICE

Primary deteminant of demand

NON-PRICE DETERMINANTS OF DEMAND

1. Income
2. Population
3. Taste and Preference
4. Price Expectations
5. Price of related goods

LAW OF DEMAND
Individual’s demand schedule showing the inverse relationship between prices and quantities
Price Quantity

Demanded
10 3
8 6
6 9
4 12
2 15

INCOME-EFFECT At lesser prices, a person has more purchasing power. This means
he can buy more goods and services.

SUBSTITUTE-EFFECT Consumers desire to buy goods with lower prices. In case the
price of a product that they are buying increases, they look for a substitute with a lower price.
LAW OF SUPPLY
Supply is the schedule of various quantities of commodities which producers are willing and able to produce and offer at a
given price, place and time.
Price

Quantity
Demanded
10 5
8 4
6 3
4 2
2 1

NON-PRICE DETERMINANTS OF SUPPLY

1. Technology
2. Cost of production
3. Number of sellers or producers
4. Prices of other goods
5. Price expectations
6. Taxes and subsidies

DEMAND,SUPPLY & EQUILIBRIUM

DEMAND the consumer’s desire and ability to purchase a good or service. It’s the
underlying force that drives economic growth and expansion. Without demand, no business would ever bother producing
anything.

DETERMINANTS OF DEMAND

1. Price of the goods

2. Price of related goods
3. Consumer’s income
4. Consumer’s tastes or preferences
 5. Price expectations

LAW OF DEMAND

The law of demand governs the relationship between the quantity demanded and the price. If the price increases, people
buy less. The reserve is also true. If the price drops, people buy more. But price is not the only determining factor. The law
of demand is only true if all other determinants don’t change.

Ceteris paribus “all other things being equal” or “holding other factors constant” .
The quantity demanded for a good or service is inversely related of the price.

DEMAND-CURVE Graphic representation of the relationship between product price

and the quantity of the product demanded

X axis- Price Y axis- Quantity

CURVE INDICATIONS

• Flat- people buy a lot more even the price changes a little
• Fairly steep- quantity demanded doesn’t change much, even though the price does

ELASTICITY OF DEMAND how much more, or less, demand changes when the price does. It’s
specially measured as a ratio. It’s the percentage change of the quantity demanded divided by the percentage change in
price.

THREE LEVELS OF DEMAND ELASTICITY

1.Unit Elastic-is when demand changes by the exact same percentage as the price does.

2.Elastic-is when demand changes by a greater percentage than the price does.

3.Inelastic-is when demand changes by a smaller percentage than the price does.

DETERMINANTS OF DEMAND ELASTICITY

1. Availability of Substitus
2. Proportion of Consumer Income
3. Nature of the Good
 4. Time Horizon
5. Classification of the Good

AGGREGATE-DEMAND also called as market demand which is the demand from a group of
people. It can be can be measured for a country. It’s the quantity of the goods or services the country produces that the
world’s population demands.

6 DETERMINANTS OF AGREGATE DEMAND

1. Price of the goods

2. Price of related goods
3. Consumer’s income
4. Consumer’s tastes or preferences
5. Price expectations
6. Number of buyers in the market

COMPONENTS OF GROSS DOMESTIC PRODUCT

1. Consumer spending
2. Business investment spending
3. Government spending
4. Exports
5. Imports, which are subtracted from aggregate demand and GDP

DEMAND AND FISCAL POLICY

GOLDILUCKS ECONOMY an ideal state for an economy whereby the economy is not expanding or
contracting by too much

FISCAL POLICY the use of government spending and taxation to influence the economy.
Policymakers use fiscal policy to boost demand in a recession or lower it during inflation. To boost demand, it either cuts
taxes or purchases more goods and services

DEMAND AND MONETARY POLICY

MONETARY-POLICY to central bank activities that are directed toward
influencing the quantity of money and credit in an economy

The Fed’s most effective tool for reducing demands is by raising interest rates. This shrinks the money supply and reduces
lending. With less to spend, Consumers and businesses might want more, but they have less money to do it with.
FISCAL POLICY VS MONETARY POLICY

FISCAL- taxation and spending policies MONETARY- price stability, full employment, stable economic growth

SUPPLY Supply is a fundamental economic concept that describes the total

amount of a specific good or services that is available to consumers.

Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on
a graph

LAW OF SUPPLY DIRECT RELATIONSHIP as the price of an item rises, suppliers will try
to increase their earnings by raising the amount available for purchase.

SUPPLY CURVE SHIFTS

• Rightward- When the quantity of a supplied product grows at the same price due to favorable changes in non-price
factors of production
• Leftward- When the quantity of a supplied commodity declines but the price remains the same
 TYPES OF SUPPLY

1. Short-term Supply- buyers can only buy a product depending on available supply.
2. Long-term Supply- the time available allows the provider to respond quickly to a change in demand.
3. Joint Supply- explains the consequential supply
4. Market Supply- willingness of suppliers to provide products to their customers in a day-to-day basis
5. Composite Supply- used to describe the supply of things that have several uses

BUYING PROCESS STAGES

decision-making process used by consumers regarding the market transactions before, during, and after the purchase of a
good or service

5 STEPS IN CONSUMER BUYING PROCESS

1. Problem Recognition- Recognizes the need for a service or product

2. Information Search- Gathers information in personal, commercial, public and experiemental
3. Evaluation of alternative- Weighs choices against comparable alternatives
4. Purchase Decision- Makes actual purchase
5. Post Purchase Decision- Reflects on the purchase they made

MARKET-EQUILIBRIUM Equilibrium is the state in which market supply and demand balance each
other, and as a result prices become stable.

EQUILIBRIUM PRICE The equilibrium price is where the supply of goods matches demand.
It the point where the supply and demand intersect
SURPLUS If the market price is above the equilibrium price, quantity
supplied is greater than quantity demanded, creating a surplus

SHORTAGE If the market price is below the equilibrium price, quantity supplied is
less than quantity demanded

FORMULAS
SLOPE OF SUPPLY

ELASTICITY OF DEMAND=