BASIC ECONOMICS REVIEWER:

CHAPTER 1: CONCEPTS & DEFINITIONS

Economics: [Management of the household] Study of efficient allocation of scare resources.

Created wants: That which arise from the introduction of new products, that fulfill some consumer’s
perceived needs.
Inflation: An increase in the overall prices of good and services.
Interest rates: Tells us how much we can earn by putting our money in a bank.
Demonstration effect: The impact of people wanting to imitate one another (ex. The latest smart-phone
comes out any everyone wants it because it is the latest model)
Private wants: Personal wants (things we can afford on our own)
Public wants: Those which are more desired by larger groups, things that no individual person would
pay for (ex. Roads, parks)
Scarcity: Fact of life that makes man’s material wants never fully satisfied (because resources are
limited, and man’s wants are unlimited)
Law of Diminishing Returns: If one input in the production of a commodity is increased while all other
inputs are held fixed, a point will eventually be reached at which additions of the input yield
progressively smaller, or diminishing, increases in output. (Ex. In the classic example of the law, a
farmer who owns a given acreage of land will find that a certain number of laborers will yield the
maximum output per worker. If he should hire more workers, the combination of land and labor would
be less efficient because the proportional increase in the overall output would be less than the
expansion of the labor force. The output per worker would therefore fall). This is the return from adding
a resource to a given product, which decreases as the amount of rechanneled resources increases,
given that all other ourputs are constant. (Law of increasing opportunity cost)
Say’s Law: Denotes that supply creates its own demand.
Law of Increasing Cost Transformation: States that labor may change depending on the cost of
demand. Employment depends on what consumers want (Ex. More roads are needed, so there is a
demand for people who build roads, rather than people who plant rice)
Tradition Economy: An economy where economic choices are defined by past experiences.
Command / Planned Economy: An economy that makes its fundamental economic choices through a
leader, or a centrally planned group.
Market system: When the price of a commodity determines how much of it will be produced.
Opportunity cost: That which is incurred when making an economic choice, the cost of what you give
up.
Positive Statement: A descriptive statement that talks about factors affection decisions. This statement
is based in scientific inquiry, and is backed by quantifiable data.
Normative statement: A statement that makes a resolution about what ought to be (suggesting
alternatives through perspective)
Productivity: That which indicates an improvement in the economy’s capability to produce more from
the same resources. This means greater efficiency, and often refers to labor.
Law of Increasing Opportunity Cost: This is the reason behind the concavity of the PPF. It states that
as more of the same input is employed in the production of a particular good, the corresponding
increase in total tends to become smaller and smaller, if the amount of other inputs required in the
production process are kept constant.

CHAPTER 2: CONCEPTS & DEFINITIONS

Econometrics: The branch of economics concerned with the use of mathematical methods.
Empirical science: Based and concerned with verifiable observation or experience, rather than theory
or pure logic.
Social science: That which deals with the interrelationships among individuals and groups within
society – it is concerned with the issues of the nature of man and society.
Hypothesis: A supposed, temporary explanation made on a basis of limited evidence as a starting
point for further investigation.
Deductive method: When there is no certainty in the conclusion, but the reasoning is still logical.
Inductive method: Observing recurring information and coming up with a general conclusion.
Assumptions:
Logic: That which is needed in deriving conclusions from economists. This pertains to assumptions
about the behavior of certain economic values.
Theory: (Derived from the greek word, theoria—which means “to look at”) It is an explanation of what
things are in the real world, and why they behave the way they do.
Mathematics: Facilitates such deductions when relationships become high complex and it is
indispensable when concepts being dealt with go beyond the range of literary logic.
Statistics: That which is used to test the validity of economic hypothesis as well as give numerical flesh
to the skeleton of mathematical functional relationship. And give insight with data and numerical
statistics.
Variable: An element, or factor that is liable to change.
Functional relationship: The relationship between economic variables that are related to each other
(like supply and demand).
Value Judgments: Judgments from daily experience or conclusions borrowed from other sciences. As
long as these value judgments are made explicit, the scientific nature of economic inquiry will still be
safeguarded.
Models and assumptions: That which are used to simplify reality. That people use to make decisions.

CHAPTER 3: CONCEPTS & DEFINITIONS

Barangay economy: Grassroots.

Bourgeouis: Middle-class people upholding capitalist ideologies.
Consumer sovereignty: When the desires or needs of a consumer control the outpost of production.
Feudal lord: A man of rank during ancient regime.
Industrial revolution: Transition to a new manufacturing process from manual labor to technology.
Unemployment flourished during this time.
Laissez fairre: A policy or attitude of letting things remain constant without interfering. Minimum
government intervention to let demand and supply naturally interact.
Manorial system: All economic activity is controlled by the lord of the manor.
Mercantilism: Belief in the benefit of profitable trading.
Right to private property: Private ownership rather than government ownership of land.
Efficiency: The property of society getting the most it can from its scarce resources.
Equity: The property of distributing economic prosperity fairly among the members of society.

CHAPTER 4: CONCEPTS & DEFINITIONS

Market faulire: When a market is left on its own and fails to allocate resources efficiently.
Market power: When one person has supreme monopoly over something.
Market economy: decisions regarding investment, production, and distribution are based on supply
and demand, and prices of goods and services are determined in a free price system.
Labor theory of value: Argues that the economic value of a good or service is determined by the total
amount of socially necessary labor required to produce it
Cost of production theory: the price of an object or condition is determined by the sum of the cost of
the resources that went into making it. The cost can comprise any of the factors of production
(including labor, capital, or land) and taxation.
Utility: Measure of preferences over some set of goods and services.
Utility theory: Represents satisfaction experienced by the consumer of a good.
Quantity demanded: amount of a product people are willing or able to buy at a certain price; the
relationship between price and quantity demanded is known as the demand.
Demand schedule or curve: Indicates that there is an inverse relationship between price and quantity
demand.
Quantity supplied: The quantity of a commodity that producers are willing to sell at a particular price at
a particular point of time.
Supply curve:
Law of increasing marginal costs:
Equilibrium: The agreement between the buyers and sellers on a price in which goods are to bee
purchased and produced. This is when market occurs.
Elasticity: That which measures how responsive an economic variable is to a change in another. Price,
quantity, inflation blah.
Price elasticity: Sensitivity of price, formula is percentage of quantity demanded over percentage
change in price.
Income elasticity: demand measures the responsiveness of the quantity demanded for a good or
service to a change in the income of the people demanding the good, ceteris paribus. It is calculated
as the ratio of the percentage change in quantity demanded to the percentage change in income.
Cross elasticity: measures the responsiveness of the quantity demanded for a good to a change in the
price of another good, ceteris paribus.
Ceteris Paribus: All other things (factors being held constant).

BASIC ECONOMICS NOTES:

Study of Economics: The focus and analysis is on the entire nation, not just the behavior and
relationships among smaller units – such as firm, industry, or region.

Economics: This is a social science that studies, and seeks to allocate scarce human and non-human
resources among their alternative uses in order to satisfy unlimited human wants and desires. (Comes
from the Greek word “oeko” which means management, and “nomia” which means of the household –
therefore, management of the household)

FIELD OF ECONOMICS:

1.) Microeconomics – This develops tools and analyzes business firms and small industries. This
studies the economics of the consumers and firms, and studies how households and firms
make decisions – and how they interact with markets.

2.) Macroeconomics – This pertains to the economics of a nation. The economic concepts used
are: national income, jobs, wage rates, peso-dollar exchange rates, and dollar reserves on a
national level. This study also includes wide phenomena including inflation, unemployment,
and economic growth – this takes into account the economy as a whole (aggregate).

ECONIMIC RESOURCES (FACTORS OF PRODUCTIVITY):

1.) Land – This consists of all natural resources including land, everything beneath and above it,
minerals, water, air, trees, livestock, poultry, and all other forms of these raw materials that
can be used in production – and supply humans with food, and basic need for survival.
2.) Labor – This comprises of all human beings who extract raw materials, process these raw
materials, and turn them into products, investment goods. These people also transport and
sell raw materials and finished products to households and firms.
 3.) Capital – These are materials such as tools, machinery, and equipment used to “extract and
process” raw materials into finished goods as well as buildings, roads, and other forms of
infrastructure. This only pertains to man-made goods used to produce other goods.
~ Financial capital – This represents all the money put into, or retained for
use of business.
4.) Entrepreneur – This is a person who puts together / organizes the other factors of productivity
to make needed goods and services. He may also be the manager of a business
establishment or any of the divisions. He ensures that the resources are well-organized into
productive units, and not wasted.

Measures of criteria for an economic system: This ultimately depends on the wants of every society,
and what they desire to achieve. This system must also coincide with the society’s hierarchy of wants
and values.

Economics as a SCIENCE: This is because the scientific method is used. Economics is a systematic
knowledge that addresses the basic problem of scarcity and the appropriate allocation of goods. It is a
social science because it deals with relationships between people in society.

The scientific method:

- Observation and hypothesis development
- Definition and assumption
- Induction or deduction to arrive at a conclusion
- Empirical and statistical testing

~ A scientific mind is a logical mind – he knows the various step taken in the thinking process in order
to arrive at the right conclusions. There are two ways of thinking – the inductive method and the
deductive method.

Four Fundamental Questions:

1.) What to produce

2.) How much to produce
3.) How to produce
4.) For whom to produce

OVERCOMING SCARCITY (Economic goals):

Full employment – One must learn to maximize the use of their labor resources. Even though labor is
usually refused.

Sources of growth in productive capacity:

1.) Increase resources
2.) Productivity – This indicates and improvement in the economy’s capability to produce more
from the same resources.

Factors of Low Productivity:

a.) Wrong choice of technology.
b.) Defective organization of resources
c.) Non-existence or poor quality of resources

What is another kind of resource? Foreign exchange – That which is not wanted for its own sake, but
is sought because it enabled a country to import raw materials, machinery, and many other goods and
services, not available domestically.

Why is there SCARCITY? : This is due to the fact that man’s needs and wants are unlimited and,
actual goods and services meant to satisfy man are limited.

How do economists work? : Economists interpret facts guided by a set of models and assumptions.

- As humans, we are confronted with many choices, and this brings about opportunity costs.
We have to weigh and compare our cost benefits, and incentives. (Ask our selves, if I do this,
how much will I get?)
- Without agreement of price and quality of goods, there is no market. (The market is the actual
exchange between the buyer and the seller – the economic market does not pertain the
physical market, where food is bought but rather, the actual exchange)
- Another interaction involves the government. The government ideally tells us what is good or
bad for how goods are regulated in society.
- Standard of living – The ability to produce the goods and services for the benefit our economy.
This depends on productivity to put up our own businesses, and produce goods and services.
We also need the ability to make purchases.
- If so much money is flowing in the economy, and too much money is being printed, that is
inflation.
- Some problems we face in our time are poverty, wealth, slavery, freedom, chaos and justice.

BATH TUB MODEL:

 - Lower water shows unemployment.
- The water in this tub symbolizes economic activity.
- The expansion of this bathtub requires infrastructure.
- Rising water means an increase in economic activity.
The goal is to produce goods that can be exported (not people, like OFW’s), ideally that involving
farms.

Monetary policy – Exchange rate/ Trade National government

central banks. (M) policy. (X) spending and taxes.
(G)
Inflow.
Savings Importation Taxes

Law of SUPPLY and DEMAND:

- Indicates that when an item is scarce, but many people want it, the price of that item
increases. Conversely, if there is a larger supply of an item that consumer demand warrants,
the price will fall (when sales decline, and demand rises).
- When unemployment is high, employers often offer lower salaries.

a.) Law of demand – This pertains to consumers. It talk about how price affects demand. The
lower the price, the higher the demand. The higher the price, the lower the demand. (On the
graph, the demand curve slopes downward from left to right)

b.) Law of supply – For all things remaining constant, the higher the price for a good or service,
the higher the supply. The goal is to gain profit. On a graph, the supply curve slopes upward
from left to right.

What causes a shift in the demand / supply curve?

A movement is different from a shift. The change in price only causes a movement in the demand
curve, when everything else is constant. The demand curve only shift when external factors are
involved – here are some demand curve shifters:

1. Taste of people or preferences.

2. Future expectations
3. Advertising
4. Income
5. Season
6. Population (demographic, who you’re pitching the product to)
7. Price of related goods (possible substitutions)

Shift in DEMAND:
- Taste or preferences
- Number of consumers
- Price of related goods (that could potentially be substitutes)
- Income
- Consumer expectations

Shift in SUPPLY:
- Price of resources
- Number of producers
- Technology
- Taxes and subsidies
- Expectations

ELASTICITY:

A measure of a variable's sensitivity to a change in another variable. In economics, elasticity

refers the degree to which individuals (consumers/producers) change their demand/amount supplied in
response to price or income changes. Elasticity is used to assess the change in consumer demand as
a result of a change in the good's price. When the value is greater than 1, (luxury items, cars) this
suggests that the demand for the good/service is affected by the price, whereas a value that is less
than 1 (milk, gasoline) suggest that the demand is insensitive to price, people will purchase these
items regardless of how much the price changes. Businesses often strive to sell/market products or
services that are or seem inelastic in demand because doing so can mean that few customers will be
lost as a result of price increases.

Elasticity: % Change in Quantitiy

% Change in Price

How people make decisions:

1.) People face trade-offs (an action doesn’t yet take place)
To get one thing that we like, we usually have to give up another thing that we like – trading off one
goal against another.

2.) People then have to assess the opportunity cost and make a choice.
They sacrifice what they deem to have less benefits, or less rewarding. They weigh the benefits of
alternative courses of action. The opportunity cost of an item is what you give up to get that item.

3.) Thinking at the margin

When you think ahead and come up with an integrative answer, one that appeals to a grey zone.
When you weigh incentives and possible action plans. A rational descisionmaker takes an action only if
the marginal benefit exceeds the marginal cost.

4.) Incentives
That which people respond to – the behavior of people change when the costs or benefits change.
Rational people compare the marginal benefit to the marginal cost. Therefore, rewards encourage
people to make decisions, people consider the most rewarding option. Incentives manipulate the way
people think.

How people interact:

1.) Trade
When people produce the same goods, they compete for the same customers. Trade is when two
bodies produce what each individual body doesn’t have. Trade between two countries makes each
country better off. Trade allows each person to specialize in what he does best, and enjoy a greater
variety of goods and services.

2.) Market
Decisions are made via circular flow, the interactions made by households and firms. The response to
the allocations of budgets, wages, salaries, investments, and how they cycle around the country. Price
is taken into great consideration when assessing the economy’s wealth and capability to produce and
provide.

3.) Government
The government creates/implements policies to achieve more equitable distribution of economic well-
being.

How the economy works as a whole:

1.) Standard of living

This is the quality of life of the people. It is the ability to produce goods and services. All standads of
living attribute itself to the differences in country’s productivity. The growth rate of a nation’s
productivity determines the growth rate of its average income. To ensure good productivity, the workers
must be well educated, and provided with tools and technology.

2.) Overprinting of money by the government

This causes inflation, which is an overall increase in the level of prices in the economy, because it
lowers the value of the currency. It debases it. When a government creates lots of money, the value of
the nation’s money falls.

3.) Short-run trade off

We face a short run trade off when prices are too slow to adjust. And in order to reduce inflation, firms
let go of employees, so the have less salaries to pay hence, save themselves from bankruptcy. This is
the trade-off, giving up employees.