INTRODUCTION TO ECONOMICS
ECONOMICS
According to Bingham, et al. economics defines as a social science concerned with using scarce resources to obtain maximum satisfaction of the unlimited materials wants of society.
FOUR ECONOMIC RESOURCES
Land
Labor
Capital
Entrepreneurial Ability
These resources include land which deals with natural resources such as timber, oil, soil etc. Labor deals with work and time for which employees are paid. Capital deals with man-made goods used to produce other goods or service. It consists mainly of plant and equipment. Then, entrepreneurial ability, the least of the four basic resources deals to risk his or her own money to set up business whenever it losses or progress.
DIVISION OF ECONOMICS
Microeconomics
Macroeconomics
Economics are divided into two types these are microeconomics and macroeconomics.
Microeconomics is the study of economics which deals with the behaviour and activities of individuals in specific units such as entrepreneurs while macroeconomics is the study of entire behaviour of the economy and the factor and forces which cause depression, inflation and recession.
ELEMENTS OF ECONOMICS
Goods
Services
The elements of economics are goods and services. Goods deals with anything that satisfies human wants. In economics, the term good also includes services and money. These goods were classified according to types. These are according to use, purpose and availability. Services are immaterial or intangible goods rendered by any individual, like the services of a lawyer an engineer or a CPA.
Chapter 2
Elements of Demand and Supply
The Market
A market is a place where buyers and sellers meet. A market exists when there is an interaction between buyers and sellers. The actions or decisions made by the buyers constitute demand for a product or service. The actions or decisions made by the sellers constitute supply.
Market Demand
Market demand is the actual or potential demand for a product within a particular market. It also refers to the willingness and ability of the buyers to pay a sum of money for a particular good or services.
Law of Demand
The law of demand states that “the quantity of any good which buyers are ready to purchase varies inversely with the price of the good”. This means that as the price increases, the demand decreases; as the price decreases, the demand increases.
Determinants of Demand
The factors that affect demand for goods or services are the following:
Income of the consumer
Price of Related Goods
Consumer’s task or Preferences
Price Expectation
Population
Market Supply
Supply refers to the quantity of a good that will be offered for sale by the seller at a given price. Supply implies ability and willingness of sellers to sell their products to the buyers.
Law of Supply
The law of supply states that “the quantity of a good offered for slae at a given market at a particular time varies directly with the price”. This means that when the price of a good increases, the supply of a good increases, the supply of a good also increases and as the price of a good decreases, the supply of a good also decreases.
Determinants of Supply
Aside from price, there are other factors that affect the supply for goods or services. These are the following:
Cost of Production
Available Resources
Number of Suppliers and Sellers
Technology
Taxes
Weather
Equilibrium
This is the intersection between demand and supply curve. This means that when there is more demand than supply, there will be shortage of goods or services and the tendency is for the price to increase. If there is more supply of goods than the quantity demanded, there is a surplus of goods or services and the tendency is for the price to decrease.
Price Equilibrium
When the demand and supply are equal, it is called price equilibrium. If the price is below the equilibrium, there is a shortage; if the price is above the equilibrium, there is a surplus.
Chapter 3
The Concept of Production
Production is very important in any kind of bussiness because how can the economy and society grow without it? Most of what we see on the market are manufactured from the raw materials that come from nature, except fruits and vegetables. This process is called production.
Production
Production is the creation of goods and services to satisfy human wants and needs. It is also the creation of products or services and convertion and transformation of resources into a finished physical product.
The five M's of Production is needed for the proper management to minimize cost and maximize the profits.
Manpower
Money
Machine
Materials
Methods
Factors of Production
The factors of production are the economics resources, which are needed to produce goods. These are the; land that refers to all natural resources, the labor that is the most important factor of production, the capital that are used in the further production and the entrepreneur that performing the management function.
Classification of Production Management
Planning
Organizing
Staffing
Directing
Controlling
Budgeting
The Input-Output Relationship
Process of Production
Input (Raw Materials) --> Process (Manufacturing/Production)
--> Output (Finished Product)
The raw materials converted into finished products through a successive stages of processing and are ready for marketing.
Rules of Production
1. When the total revenue (TR) is greater the the total cost (TC), produce more.
2. When the total revenue (TR) is less than the total (TC), stop producing.
3. When the total revenue (TR) is equal to total cost (TC), mentain the production or continue producing.
Under the short-run period, below are the rules of production.
1. When the total revenue (TR) is greater than the variable cost (VC), operate.
2. When the total revenue (TR) is less than the variable cost (VC), shutdown.
Variable Cost (VC)
The operating expenses incured by the business like cost of raw materials, salaries and wages, etc.
Cost of Production
The payments of land or building and use of money borrowed there are other classifications of cost, namely:
1. Average Cost- the cost of each unit devided by the number of output.
2. Fixed Cost- the cost of production which remains constant or fixed even if the level of output changed.
3. Variable Cost- the cost that varies according to the volume of production.
4. Total Cost- the sum of all the expenditures (FC+VC) in producing goods and services.
Law on Pricing
To be aware of pricing and the law that protects consumers, a primer on R.A. 7581 which is known as the price act. This primer provides the consumers the basic information that entrepreneurs will find useful so as to prevent legal problems while managing the business.
Methods in Setting the price of the Products
1. Cost Oriented Pricing
The price of the product is based on the money used or the cost of production that all cost are added and divided by the number of products produce to get the cost per unit that a certain percentage of the cost per unit is also added which is known as the mark-up or arrive at the selling price per unit.
Formula that used in Cost Oriented Pricing
Price= total / no. of pruducts-produce + mark-up
Example:
If the total cost of producing bottles of nata de coco (340g) is Php20,00 and the total no. of bottled nata de coco produced is one thousand and the mark-up is 20%, then the price would be Php24.00
Price = Total Cost / no. of products produced + mark-up
= Php 20,000 / 1000 + mark-up (20%)
= Php 20.00 + Php 4.00
Price = Php 24.00
Under this method, there are two pricing techniques that can be used, namely:
Cost-plus Technique
Literally means cost plus mark-up, as illustrated above.
Break-even Technique
The income is equal to the total cost.
2. Demand-Oriented Pricing
It based primarily on the number of demand of the buyer for the product. The greater the demand, the higher the price and vice-versa despite similar cost per item in either case. Pricing may depend upon the costumer, place, version of the products.
3. Competition-Oriented Pricing
Same products that are selling by the different seller are different also with the price. As we the buyers buying products we go to the cheaper than the one that a bit higher price than the other one.
Chapter 4
Market Structure
Market is a geographical area where in a number of potential customers for a product or service exist. It is also a place where buyers and sellers meet and transact business. There are two kinds of market that can be classified according to the following: (1) Perfect Market : Pure or Perfect Competition. A market situation where there are many sellers selling similar kinds of product and services. Examples: Sugar, Coffee. ; Pure or Perfect Monopoly. It only sells unique kind of product and services. Examples: DeCorp (2) Imperfect Market : Monopolistic Competition. Selling identical products or services. Examples: Toothpastes, soap, lotion, shampoo. ; Oligopoly. There are only few sellers or firms that dominate the market. Examples: Washing Machine, Television, Refrigerator. ; Monopoly. There is only one seller selling a unique kind of goods and services. Examples: NAPOCOR.
Marketing is define as an exchange between parties of either product, service or an idea to satisfy a need or a want through a system. There are called 5 P’s of marketing namely: Product it is an outcome it can be tangible and intangible; Price that must be considered in three objectives, the profit-oriented, Sales-oriented, and the Status quo ; Place where they distribute the products that can be categorized by two : The Consumer Goods and the Industrial Goods ; Promotion can be Personal Selling, Advertising and Sales Promotion. And the last P of marketing is Public Relation where in the marketer needs to establish a good public relation to the customers
Chapter 5
The Concept of Elasticity
Economics commonly measure responsiveness of demand to changes in the price of the commodity using the concept of elasticity. It includes the different responses or reactions of different groups of individuals in relation to the increase or decrease in prices of commodities available in the market.
Elasticity refers to the measure of the responsiveness of the buyers and sellers to changes in the prices. Economists measure price elasticity by dividing the percentage of change in the quantity demanded of goods and services by the percentage change in price.
Elasticity of Demand
Elasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.
Formula:
Measurement of Demand Elasticity
1. Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.
Formula:
Formula:
Formula:
Elastic demand (ED > 1) – means that the percentage change in quantity demanded is greater than the percentage change in price.
Inelastic demand (ED < 1) – means that the percentage change in price is a lesser change in quantity demanded as a response to the change in price.
Unitary demand (ED = 1) – is where there is an equal change in price, it creates an equal change in quantity demanded.
Perfectly elastic demand – is when there is an infinite change in quantity demanded while there is no change in price.
Perfectly inelastic demand – occurs when there is no change in quantity demanded as an outcome of the change in price.
Determinants of Demand Elasticity
The price of goods in relation to consumers budget.
The availability of substitute
Type of goods
Time under consideration
Elasticity of Supply
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, with all other factors remaining the same.
Formula:
1.The feasibility & cost of storage
2.The ability of producer to response on the price change
3.Time
Chapter 6
Theory of Consumer Behaviour
Today, many of the most successful companies here and abroad have designed their entire organizations to serve the consumers. These companies are committed to developing quality products and services and sell them at a price that gives consumers high value.
Factors Affecting Consumer Behaviour
These are many factors affecting consumer behavior, namely: cultural, social, personal and psychological in nature.
Cultural Factors
We treat culture as the meaning that is shared by most people in a social group. In broad sense, culture includes common affective reactions, typical cognitions (beliefs) and characteristics patterns of behavior.
Most human societies exhibit social stratification. Stratification takes the form of social class frequently. Social classes show distinct product and brand preferences. For example, the lower income classes tent to read Abante while the middle and higher income classes read newspapers like Manila Bulletin or Philippine Star.
Values of individual are highly influenced by the cultural environment. For example, an American or Western child is exposed to the values of achievement and success, progress, comfort and efficiency while a Filipino child on the other hand is exposed to the values of hiya.
The Theory of Utility
From the millions of things that are available in the market, each of us manages to sort out a set of goods and services to buy. During the nineteenth century, the weighing of values was formalized into a concept called utility.
Utility is the satisfaction or reward a product yields relative to its alternatives. It is a basis of choice.
Diminishing Marginal Utility
In making their choices, most people spread their income over many different kinds of goods. One reason people prefer variety is that consuming more and more of any goods reduces the marginal or extra satisfaction they get from further consumption of the same good.
Marginal Utility (MU) is the additional satisfaction gained by the consumption or use of one or more unit of something. It is important to distinguish marginal utility from total utility. Total Utility (TU) is the total amount of satisfaction obtained from consumption of a good or service. Marginal utility comes only from the last unit consumed; total utility comes from all units consumed.
In 1890, Alfred Marshall called this familiar and fundamental tendency of human nature, the law of diminishing marginal utility. The law of diminishing marginal utility states that the more of any good is consumed in a given period, the less satisfaction (utility) is generated by consuming each additional (marginal) unit of the same good.
The table shows the marginal utility (MU) for every piece of apple consumed. In the same table, you will observe that the MU of consuming every piece of apple decreases. Hence, MU is computed as the change in total utility (TU) over the change in quantity (Q).
Chapter 7
Measuring National Output and Income
An economic system is designed to provide goods and services to people. Measuring the success of an economy is an undertaking that is necessary for various groups, especially government policy makers. Determining the national income is one way of knowing the extent of the achievements of economy.
National income is the value of income from the sales of goods and services in a country. It is aggregation of the incomes received by resources owners, specifically wage or salary, interest, rent and profits, including what ever income is earned from abroad.
In estimating national income, three approaches are available: (1) the industrial origin approach, which is a determination of sum of the market value of the tota production of all the major industries comprising the economy; (2) the product or expenditure approach which involves calculating the sum of all expenditures on final goods; and (3) the income approach which is an aggregation of total amount of earnings of all economic resource owners.
The GDP and GNP are two important concepts in measuring national income and output. The GDP is the annual value of goods and services paid for inside a country, regardless of the citizenship of the resource owners. The GNP annual value of goods and services paid to citizens of a particular country.
Disposable income is also an important concept to learn a it is the amount available to household for the purchase of goods and services. Disposable income is the income left after deducting taxes and national insurance.
Terms to Remember:
National Income Investment
GDP Consumers Durables
GNP Government Expenditures
Market Value Net Factor Income from abroad
Value Added
Consumption
Chapter 8
Consumptions and Savings
National income is the source of funds for consumption and saving. The direct satisfaction of human wants and the use of raw materials and other inputs in the production process are the concerns of consumption.
Consumption expenditures rise as disposable income increases. The rate of increase in consumption expenditures, however, is lower than the rate of increase in disposable income.
The proportion of consumer spending against disposable income differ among the various income levels. Spending priority depends on the urgency of the need. Given a certain amount of income, the basic necessities are taken care of first. As income increases, spending for the less urgency of the need. Given a certain amount of income, the basic necessities are taken care of first. As income increases, spending for the less urgent needs, becomes prominent.
When people or institutions decide to forego consumption, they are actually saving; and they do it for a variety of reasons. Total savings consists of personal savings, business savings, government savings, and foreign savings. As income rises, savings are more viable.
The proportion of income devoted to consumption is called the average propensity to consume, while the proportion devoted to savings is called the average propensity to save.
The proportion of a small increase in income which will be devoted to increase consumption is referred to as the marginal propensity to consume, while the proportion of an increase in income that is referred to as the marginal propensity to save.
The level of consumption is determined by the distribution of national income, rate of interest, the desire of people to hold cash, price levels, population, income, taxes, attitudes and values.
Terms to Remember:
Consumption Function Average propensity to save
Saving Marginal propensity to consume
Average propensity to consume
Marginal propensity to save
