Economics
"Supply and Demand! Allocation of scarce resources. Economics is the study of how people, businesses, and governments make choices when resources are limited!"
1. Basic Economic Concepts - Scarcity and Choice 🎯
Economics is the study of how individuals, businesses, and governments allocate SCARCE resources to satisfy UNLIMITED wants.
The fundamental economic problem is scarcity - we have limited resources but unlimited wants. This forces us to make choices!
Microeconomics
Studies individual economic units
- • Consumer behavior
- • Business decisions
- • Market pricing
- • Industry analysis
Macroeconomics
Studies the economy as a whole
- • GDP and economic growth
- • Inflation and unemployment
- • Government policies
- • International trade
Key Terms:
- Opportunity Cost: The value of the next best alternative given up when making a choice
- Trade-offs: Giving up something to get something else
- Factors of Production: Land, Labor, Capital, Entrepreneurship (LLCE)
2. Law of Demand - The Inverse Relationship 📉
As Price ⬆️ , Quantity Demanded ⬇️
As Price ⬇️ , Quantity Demanded ⬆️
(Ceteris paribus - all other factors constant)
The demand curve slopes downward from left to right, showing the inverse relationship between price and quantity demanded.
Determinants of Demand (Shift the Curve):
- • Income: Normal goods (↑income = ↑demand) vs Inferior goods (↑income = ↓demand)
- • Tastes/Preferences: Changes in consumer preferences
- • Price of Related Goods: Substitutes and Complements
- • Expectations: Future price or income expectations
- • Number of Buyers: More buyers = more demand
📌 Movement vs Shift:
Movement along curve: Caused by change in PRICE of the good itself
Shift of curve: Caused by change in OTHER factors (determinants)
3. Law of Supply - The Direct Relationship 📈
As Price ⬆️ , Quantity Supplied ⬆️
As Price ⬇️ , Quantity Supplied ⬇️
(Ceteris paribus)
The supply curve slopes upward from left to right. Higher prices give producers incentive to produce more!
Determinants of Supply (Shift the Curve):
- • Input Prices: Cost of production (labor, materials)
- • Technology: Better tech = more efficient production
- • Number of Sellers: More sellers = more supply
- • Expectations: Future price expectations
- • Government Policies: Taxes, subsidies, regulations
- • Natural Events: Weather, disasters
4. Market Equilibrium - Where Supply Meets Demand ⚖️
Equilibrium: Quantity Demanded = Quantity Supplied
The market "clears" - no shortage or surplus
SHORTAGE (Excess Demand)
When: Price < Equilibrium Price
Qd > Qs (more demand than supply)
Result: Price tends to RISE
SURPLUS (Excess Supply)
When: Price > Equilibrium Price
Qs > Qd (more supply than demand)
Result: Price tends to FALL
📌 Example:
If market price of rice is ₱55/kg but equilibrium is ₱50/kg:
→ There's a SURPLUS. Producers have excess inventory.
→ Price will fall toward ₱50 to reach equilibrium.
5. Market Structures - Types of Competition 🏪
Market structure refers to the characteristics that determine seller behavior in a market.
| Feature | Perfect Competition | Monopolistic Competition | Oligopoly | Monopoly |
|---|---|---|---|---|
| Sellers | Many | Many | Few | One |
| Product | Identical | Differentiated | Similar/Different | Unique |
| Price Control | None (Price Taker) | Some | Some | Full (Price Maker) |
| Entry | Free | Relatively Easy | Difficult | Blocked |
| Examples | Agriculture | Restaurants, Clothing | Telcos, Airlines | Utilities |
Philippine Examples:
- • Oligopoly: Globe, Smart, DITO (Telecom) | San Miguel, Asia Brewery (Beer)
- • Monopolistic Competition: Sari-sari stores, Fast food chains
- • Monopoly: Meralco (in its service area), MWSS
6. Elasticity - Measuring Responsiveness 📐
Elasticity measures how sensitive quantity demanded or supplied is to changes in price or other factors.
Price Elasticity of Demand (PED):
PED = % Change in Quantity Demanded ÷ % Change in Price
Elastic (|E| > 1)
Qty changes MORE than price
Luxuries, goods with substitutes
Unit Elastic (|E| = 1)
Qty changes SAME as price
Revenue stays constant
Inelastic (|E| < 1)
Qty changes LESS than price
Necessities, addictive goods
Factors Affecting Elasticity:
- • Availability of substitutes: More substitutes = more elastic
- • Necessity vs Luxury: Necessities = inelastic
- • Time horizon: Longer time = more elastic
- • Proportion of income: Higher % = more elastic
7. GDP and Economic Indicators 📊
GDP (Gross Domestic Product) is the total value of all final goods and services produced within a country's borders in a year.
GDP Formula (Expenditure Approach):
GDP = C + I + G + (X - M)
C = Consumer spending | I = Investment | G = Government spending
X = Exports | M = Imports | (X-M) = Net Exports
Nominal GDP
GDP at CURRENT prices
Affected by inflation
Real GDP
GDP at CONSTANT prices
Adjusted for inflation (better measure)
| Indicator | What it Measures | Healthy Range (PH) |
|---|---|---|
| Inflation Rate | General price increase | 2-4% per year |
| Unemployment Rate | % of labor force without jobs | 4-6% |
| GDP Growth Rate | Economic expansion | 5-7% for PH |
📝 Practice Questions
1. If the price of coffee increases, what happens to the demand for tea (a substitute)?
Show Answer
Demand for tea INCREASES (shifts right). When a substitute becomes more expensive, people switch to the other good.
2. In a monopoly, is the firm a price taker or price maker? Why?
Show Answer
Price MAKER. As the only seller, the monopolist has full control over the market price.
3. If market price is below equilibrium, is there a shortage or surplus?
Show Answer
SHORTAGE (Excess Demand). At low prices, buyers want more but sellers produce less.
4. Why is rice considered to have inelastic demand?
Show Answer
Rice is a staple food (necessity) in the Philippines. People will buy it regardless of price changes because they need it to survive.
💡 Economics Exam Tips
- ✓ Demand = Inverse (price up, qty down) | Supply = Direct (price up, qty up)
- ✓ Movement vs Shift: Price change = movement; Other factors = shift
- ✓ Market structures: Remember from most competitive (Perfect) to least (Monopoly)
- ✓ Elasticity: Necessities are inelastic; Luxuries are elastic
- ✓ GDP formula: C + I + G + (X-M) - memorize this!
- ✓ Ceteris paribus: "All other things equal" - important assumption!
Test Your Knowledge! 🧠
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