SCARCITY is the basic and central economic problem confronting every society. It is the heart of the study of economics and the reason behind its establishment.
Scarcity defined in various ways: a commodity or service being in short supply, relative to its demand. in quantitative terms, it is said to exist when at a zero price there is a unit of demand. it pertains to the limited availability of economic resources relative to society’s unlimited demand for good and services (Kapur 1997).
Problem of Scarcity Limited Resources Unlimited wants ScarcityThis illustrate the interaction of limited resources available andunlimited wants of the society. If limited resources fall short tomeet the unlimited wants of the society, it will eventuallycreate a problem, which is called “scarcity”.
ECONOMICS is a science that deals with the management of scarce resources. It is also described as a scientific study on how individuals and the society generally make choices (Fajardo 1997). study of the problem of using available economic resources as efficiently as possible so as to attain the maximum fulfillment of society’s unlimited demand for goods and series.
is simply scarcity and choice (Slavin 2005). assist individuals and societies in making proper choices –-- that is, the allocation and utilization of economic resources, with the end in view of satisfying human wants for goods and services.
EconomicsLimited Resources Unlimited Wants AllocationThis depicts the relationship between available limitedresources and the unlimited wants of the society. Thisshows that when limited resources fail to meet theunlimited wants of the society, economics comes into playin order to effectively and efficiently allocated resources.
Relationship between Economics and Scarcity The problem of scarcity gave birth tothe study of economics. Theirrelationship is such that if there is noscarcity, there is no need for economics.The study of economics was essentiallyfounded in order to address the issue ofresource allocation and distribution, inresponse to scarcity.
Origin of the term “economics” Two Greek roots of the word economics are oikos-meaning household and nomus- meaning system ofmanagement. Oikonomia or oikonomus means“management of household.” With the growth of the Greek society until itsdevelopment into city-states, the word became known as“state management.” The term, “management of household” pertains tothe microeconomic branch of economics while “statemanagement” refers to the macroeconomic branch ofeconomics.
Ceteris Paribus Assumption - means “all other things heldconstant or all else equal.” Thisassumption is used as a device toanalyze the relationship betweentwo variables while the other factorsare held unchanged.
Brief History: The Classical,Keynesian and Modern Economics Brief historical introduction aims to give a background on most profound names in the study of economics and their important contributions in this field of study.
Birth of Economic Theory: Classical Economics birth during the mid 1700s Economic theory saw its and 1800s. Adam Smith- regarded as “Father of Economics.” His book, “Wealth of the Nations”, became known as “the bible in economics” for a hundred years. His major contributions was his analysis of the relationship between consumers and producers through demand and supply, which ultimately explained how the market works through the invisible hand.
John Stuart Mill was the heir to David Ricardo, who developed the basic analysis of the political economy or the importance of a state’s role in its national economy. Political economy- applies management to an entire polis (state).Karl Marx- a German, is much influenced by the conditions brought about by the industrial revolution upon the working classes.His major work, Das Kapital, is the centerpiece from which major socialist thought was to emerge.
Neoclassical Economics (1870s) around the year 1870. Believed to have transpired Its main concern was market system efficiencies. Leon Walras- introduced the general economic system. Also developed the analysis of equilibrium in several markets. Alfred Marshall- most influential economist because of his book Principles in Economics. He developed the analysis of equilibrium of a particular market and the concept of “marginalism”.
Keynes’ General Theory of Employment, Interest and Money John Maynard Keynes- an English economist, offered an explanation of mass unemployment and suggestions for government policy to cure unemployment in his influential book: The General Theory of Employment, Interest and Money. He argued that there is no assurance that savings would accumulate during a depression and depress interest rates, since savings depend on income and with high unemployment incomes are low.
Non-Walrasian Economics (1939) for his analysis of the IS-LM John Hicks- was recognized model, an important macroeconomic model. IS- refers to the goods market for a given interest rate. LM- means money market for a given value of aggregate output or income. IS-LM model is a theoretical construct that integrates the real, IS (investment saving), and the monetary, LM (demand for, and supply for money), sides of the economy simultaneously to present a determinate general equilibrium position for the economy as a whole.
Post-Keynesian Economics (1940 and 1950s) saw the development of the rules and regulations of different private and public institutions. Introduced major post-Keynesian, neoclassical economists, whose views known as the post- Keynesian “mainstream economics”. This period welcomed various economists like Paul A. Samuelson, Kenneth J. Arrow, James Tobin and many more.
New Classical Economics highlighted the importance of adherence to national expectations hypothesis and analysis, includes various economic phenomena in formulating different kinds of studies and new theories in economics. it is applicable to concerns of developing countries, and was largely an outcome of concern for the growth of developed countries.
Positive Economics considers economic conditions is an economic analysis that “as they are”, or considers economics “as it is”. Uses objective or scientific explanation in analyzing the different transactions in the economy. It simply answers the question ‘what it is’. Example of positive statements: The economy is now experiencing a slowdown because of too much politicking and corruption in the government.
Normative Economics economic analysis which judges economic conditions “as it should be’. Concerned with human welfare. deals with ethics, personal value judgments and obligations analyzing economic phenomena. It answers the question ‘what should be’. referred to as policy economics because it deals with the formulation of policies to regulate economic activities. Examples of normative statements: The Philippine government should initiate political reforms in order to regain investor confidence, and consequently uplift the economy.
Four Basic Economic Questions 1. What to produce?2. How to produce?3. How much to produce?4. For whom to produce?
Relationship of Economics to other Sciences Economics is considered the “queen” of all socialsciences because it covers almost every activity of man inrelation to the society.1. Business Management- business basically providesemployment opportunities to members of the society, and is animportant vehicle in the balance of economic activity.2. History- economic ideas provides information regardingtheories that can be revisited in order to evaluate present andfuture economic issues.3. Finance- management of money, credit , banking andinvestment. Money & Finance are important in economics.
4. Physics- innovations and output broughtabout by physics greatly affect the study ofeconomics.5. Sociology- study of the behavior of societies.In relation to sociology, economics essentiallydeals with the behavior of economic subjects.6. Psychology- is primarily useful in the studyof microeconomics, which scrutinizes andfocuses on the smallest units of the economy.
Importance of Studying Economics 1. To understand the Society -economics seeks to analyze transactions made bythe society and its members.2. To understand Global Affairs -economics seeks to explain the internal operationand trade policies of countries.3. To be Informed Voter -understanding of economics develops individuals tobe a wise voters.
3 Es in Economics1. Efficiency -refers to productivity and proper allocation ofeconomic resources. Also it refers to the relationshipbetween scarce factor inputs and outputs of goods andservices.2. Equity -means justice and fairness.3. Effectiveness -means attainment of goals and objective.
Important Economic Terms1. Wealth -refers to anything that has a functional value(usually money), which can be traded for goods and services.2. Consumption - refers to the direct utilization or usage of theavailable goods and services by the buyer or the consumersector.3. Production -defined as the formation by firms of an output(products or services).4. Exchange- process of trading goods and/or services formoney and/or its equivalent.5. Distribution- process of allocating or apportioning scarceresources to be utilized by the household, business sector andthe rest of the world.
Microeconomics Branch of economics which deals with the individual decisions of units of the economy- firms, households, and how their choices determine relative prices of goods and factors of production. The market is its central concept. It focuses in two main players- the buyer and the seller, and their interaction with one another. Microeconomics discussed the theories of demand and supply, individual decision making, theories of production, output, and cost of firm’s profit maximization objective, different types of business organizations and kinds of market structure.
Macroeconomics It is a branch of economics that study the relationship among the broad economic aggregates like national income, national output, money supply, bank deposits, total volume of savings, investment, consumption, expenditure, general price level of commodities, government spending, inflation, recession, employment, and money supply (Kapur 1997). Macro implies that it seeks to understand the behavior of the economy as whole.
Macroeconomics focuses on the four specific sectors of economy:1.The behavior of the aggregate household(consumption);2.The decision making of the aggregate business(investment);3.The policies and projects of the government(government spending); and4.The behavior of external/foreign economic agents,through trading (export and import).
The Concept of Opportunity Cost Opportunity cost refers to the foregone value of the next best alternative. It is the value of what is given-up when one makes a choice. The thing thus given-up is called the opportunity cost of one choice. It is expressed in relative price.
Factors of Production1. Land- refers to all natural resources, which are given by, and found in nature, and are, therefore, not made by man. This includes the forest, mountain, rivers, oceans, minerals, air, and sunshine, light, etc. Compensation for use of land is called rent.2. Labor- is any form of human effort exerted in the production of goods and services. It covers a wide range of skills, abilities, and characteristics.
3. Capital- is man-made goods used in the productionof other goods and services. This includes thebuildings, machinery, and other physical facilities usedin the production process.savings- refers to the part of person’s income, whichis not spent on consumption.Depreciation- reduction of productivity of capital.Interest- reward for the use of capital.4. Entrepreneurship- an economic good thatcommands a price referred to as profit or loss. Anentrepreneur is a person who organizes, manages andassumes the risks of a firm, taking a new idea or newproduct and turning it into a successful business.
The Circular Flow Model Economic Resources (Land, Labor, Capital)HOUSEHOLDS FIRMS (Producers) Output of Goods and Services
Basic Decision Problem1. Consumption- determine what types of goods, or services they want to utilize or consume, and the corresponding amounts of thereof that they should purchase and utilize. It is the basic decision problem that the consumers must always deal with in their day to day activities.2. Production- a problem generally concern of producers. They determine the needs, wants , and demand of consumers, and decide how to allocate their resources to meet these demands.3. Distribution- this problem addressed to the government. There must be proper allocation of all the resources for the benefits of the whole society.4. Growth over Time- the last basic decision that a society or nation must deal with. All the problems of choice, consumption, production, and distribution have to be seen in the context of how they will affect future event.
Types of Economic Systems1. Traditional economy- it is a subsistence economy. Afamily produces goods only for its own consumption. Thedecisions on what, how, how much, and for whom toproduce are made by the family head, in accordance withtraditional means of production.2. Command Economy- type of economy wherein themanner of production is dictated by the government. It is aneconomic system characterized by collective ownership ofmost resources, and the existence of central planningagency of the state. In this system, all productive enterprisesare owned by the people and administered by the state.
3. Market Economy or Capitalism- characterized by that theresources are privately owned, and that the people themselvesmake the decisions. Under this economic system, factors ofproduction are owned and controlled by individuals, and peopleare free to produce goods and services to meet the demand ofconsumers who, in turn, are also free to choose goods according totheir own likes.4. Socialism- economic system wherein key enterprises are ownedby the state. It recognizes private ownership. In this system, statehas no control over a large portion of capital assets, and isgenerally responsible for production and distribution of importantgoods. The main emphasis of this system is on equitabledistribution of income and wealth. It is considered as an economybordering between capitalism and communism.5. Mixed Economy- this economy is a mixture of market systemand the command system. However, it is more market-orientedrather than command or traditional.
The Basic Analysis of Demand and Supply Demand is usually affected by the behavior of consumers. Supply is usually affected by the conduct of producers. The consumers identifies his/her needs, wants, and demands. The producers address these by accordingly producing goods and services. The consumer gains satisfaction while the producer gains profit.
Market where buyers and sellers meet. the place where they both trade or exchange goods or services and it is where their transaction takes place. 2 Kinds of Market Wet market- where people usually buy vegetables, meat, etc. Dry market- where people buy shoes, clothes or other dry goods. it does not necessarily refer to a tangible area where buyers and sellers could be seen transacting.
Demand pertains as to the quantity of a good or service that people are ready to buy at given prices within a given time period. Demand implies three things: desire to possess a thing; the ability to pay for it or means of purchasing it; and willingness in utilizing it.
Law of Demand The Law of Demand states that if price goes UP,the quantity demanded will go Down. Conversely, ifprice goes DOWN, the quantity demanded will go UPceteris paribus. The reason for this is because consumers alwaystend to MAXIMIZE SATISFACTION.
Demand Schedule is a table that shows the relationship of pricesand the specific quantities demanded at each ofthese prices. the information provided by a demandschedule can be used to construct a demandcurve showing the price-quantity demandedrelationship in graphical form.
Hypothetical Demand Schedule for Rice Per Month Situation Price (P) Quantity (kg) A 5 8 B 4 13 C 3 20 D 2 30 E 1 45
Demand Curve it is a graphical representation showing the relationship between price and quantities demanded per time period. Most demand curves slopes downwards because: a. as the price of the product falls, consumers will tend to substitute this (now relatively cheaper) product for others in their purchases. b. as the price falls, this serves to increase their real income allowing them to buy more products.
Demand Curve P D Q The Y-axis represents price (P), while the X-axis represents the quantity demanded (Qd).
Demand Function shows the relationship between demand for a commodity and the factors that determine or influence this demand. these factors are --- the price of the commodity itself, prices of other related commodities, consumers’ level of incomes, taste and preferences, size and composition of level of population, distribution of income etc.
Change in Quantity Demanded vs. Change in Demand Change in Quantity Demanded - There is a change in quantity demanded ifthe movement is along the same demand curve. A change in quantity demanded is broughtabout by an increase (decrease) in the product’sprice. The direction of the movement however isinverse considering the Law of Demand.
Change in Quantity Demanded P P₁ a b P₂ D D Q₁ Q₂Change in quantity demanded occurs when price of theproduct changes, thus, resulting to a change in quantity demanded.
Change in Demand There is a change in demand if the entiredemand curve shifts to the right side resulting to anincrease in demand. At the same price, therefore,more amounts of goods and service are demanded byconsumer. Conversely demand decreases or falls if theentire demand curve shifts downward or to the left.At the same price, less amounts of a good or serviceare demanded by the consumers.
Change in Demand P P P₁ P₁ D’ D D D’ Q₁ Q₂ Q₂ Q₁a. Increase in Demand b. Decrease in Demand
4. Population change- an increasing population resultsto an increase in the demand for some types of goods orservices, and vice versa.5. Substitute goods- are goods that are interchangedwith another good. In a situation where the price of aparticular good increases a consumer will tend to lookfor closely related commodities.6. Expectations of future prices- if the buyers expect theprice of a good or service to rise (or fall) in the future, itmay cause the current demand to increase (or decrease).Expectations about the future may alter demand for aspecific commodity.
Supply (Firms/Seller’s side) Supply is the quantity of goods or services that firms are ready and willing to sell at a given price within a period of time, other factors being held constant . It is a product made available for sale of firms.
Law of Supply It states that “if the price of a good or services goes up, the quantity supplied for such good or service will also goes up; if the price goes down the quantity also goes down, ceteris paribus.”
Supply Schedule - it is a schedule listing the various prices of a product and the specific quantities supplied at each of these prices.Hypothetical Supply Schedule for Rice Per Month Situation Price (P) Quantity (kg) A 5 48 B 4 41 C 3 30 D 2 17 E 1 5
Supply Curve - it is a graphical representation showing therelationship between the price of the product or factorof production (e.g. labor) and the quantity suppliedper time period.P S Q
Supply Function - a form of mathematical notation thatlinks the dependent variable, quantity supplied(Qs), with various independent variables whichdetermine quantity supplied. Qs= f (own price, number of sellers,price of factor inputs, technology, etc.)
Change in Quantity vs. Change in Supply Change in Quantity Supplied -a change in quantity supplied if the movementis along the same supply curve. It is brought about byan increase (decrease) in the product’s own price.
Change in Quantity Supplied P S b P₂ a P₁ Q Q₁ Q₂ Change in quantity supplied happenswhen price of the product changes, thus,resulting to a change in quantity supplied.
Change in Supply There is a change in supply when the entire demand supply curve shifts rightward or leftward. At the same price, therefore, more amounts of a good or service are supplied by producers or sellers. Supply decreases if the entire supply curve shifts to the left. At the same price, fewer amounts of a good or service are sold by producers. Increase (decrease) in supply is caused by factors other than the price of the good itself such as change in technology, business goals, etc. resulting to the movement of the entire supply curve rightward (leftward).
Change in SupplyP P S’ S P S’P₁ P₁ Q Q Q₁ Q₂ Q₁ Q₂
Forces that cause the supply curve to change1. Optimization in the use of factors of production - optimization in the utilization of resources willincrease supply, while a failure to achieve such will result to adecrease in supply. Optimization- refers to the process, or methodology ofmaking something as fully perfect, functional, or effective aspossible.2. Technological change- introduction of cost-reducinginnovations in production technology increase supply.3. Future expectations- impacts sellers as much as buyers. Ifsellers anticipate a rise in prices, they may choose to hold backthe current supply to take advantage of the future increase inprice, thus decreasing market supply. If sellers however expecta decline in the price for their products, they will increasepresent supply.
4. Number of sellers- has a direct impact on quantitysupplied. The more sellers there are in the market thegreater supply of goods and services are available.5. Weather Conditions- bad weather, such as typhoons,drought or other natural disasters, reduces supply ofagricultural commodities while good weather has anopposite impact.6. Government policy- removing quotas and tariffs onimported products also affect supply. Lower traderestrictions and lower quotas or tariffs boost imports,thereby adding more supply of goods in the market.
Market EquilibriumThe meeting of supply and demand results to what isreferred to as ‘market equilibrium.’ Equilibrium -understood as a “state of balance.” Pertains to abalance that exists when quantity demanded equals quantitysupplied. It is the general agreement of the buyer and theseller at a particular price at a particular quantity. Equilibrium Point -there are always two sides of the story, the side ofthe buyer and that of the seller.
Equilibrium Market Price is the price agreed by the seller to offer its good or service for sale and for the buyer to pay for it. it is the price at which quantity demanded of a good is exactly equal to the quantity supplied.
What happens when there is market disequilibrium? Two Conditions may happen: Surplus Shortage
Surplus is a condition in the market where the quantity supplied is more than the quantity demanded. the tendency is for sellers to lower market prices in order for the goods to be easily disposed from the market. there is a downward pressure to price when there is a surplus in order to restore equilibrium in the market.
Equilibrium Market Price and P Quantity S 50 b a 40 Equilibrium point 30 20 c d Shortage 10 D Q 50 100 150 200 250 300Equilibrium between quantity demanded and quantity supplied (X-axis are the prices and Y-axis are the quantities).
Shortage is a condition in the market in which quantity demanded is higher than supplied. there is a possibility of consumers being abused, while the producers are enjoying imposing higher prices for their own interest. it exists below the equilibrium point. there is an upward pressure to prices to restore equilibrium in the market. is due to the fact that consumers bid up prices in order for them to acquire the goods or services that are in short supply.
What happens if disequilibrium in the market persists at longer period of time? by imposing price the government may intervene controls. Price control- is the specification by the government of minimum and/or maximum prices for goods and services. the price may be fixed at a level below the market equilibrium price or above it depending on the objective in mind. price controls may be applied across a wide range of goods and services as part of prices and incomes policy aimed at combating inflation.
Price controls are classified into two types: floor price and price ceiling Floor Pricelegal minimum price imposed by the government.undertaken if a surplus in the economy persists.is a form of assistance to producers by thegovernment for them to survive business.imposed by the government on agriculturalproducts especially when there is bumper harvest.
Price Ceilinglegal maximum price imposed by thegovernment.utilized by the government if there is apersistent shortage of goods in the economy.imposed by the government to protectconsumers from abusive producers or sellerswho take advantage of the situation.
The Concept of Elasticity Elasticity means responsiveness. It is a ratio of the percent change in one variable to the percent change in another variable. It is a tool used by economist for measuring the reaction of a function to changes in parameters in a relative way.
Elasticity of Demand It is a measure of the degree of responsiveness of quantity demanded of a product to a given change in one of the independent variable which affect demand for that product.
Classification of demand elasticity according to factors that cause the change1.Price Elasticity of demand is a responsiveness ofconsumers’ demand to change in price of the good sold.2.Income Elasticity of demand is the responsiveness ofconsumers’ demand to change in their incomes.3.Cross Elasticity of demand is the responsiveness ofdemand for a certain good, in relation to changes in priceof other related goods.
Demand Price Elasticity It define as the percentage change in quantity demanded caused by a 1 percent change in price. Ed= ∆ Quantity demanded ∆ Price
Interpretation of the Elasticity Coefficient Demand for a product is said to be inelastic if consumers will pay almost any price of the product, while demand for a product may be elastic if the consumers will only pay a certain price, or a narrow range of prices, for the product. Demand is inelastic if the computed elasticity coefficient is less than 1(Ep< 1). Demand is elastic if the computed elasticity coefficient is greater than 1(Ep> 1).
Demand ElasticP a432 c1 D b Q 5 10 15 20 25 30 35
An elastic demand curve is flatterthan a typical demand curve. This isbecause a smaller change in price (brokenline ab) calls forth a greater change inquantity demanded, (broken line bc).
Demand InelasticP4 a32 c1 b D Q 5 10 15 20 25 30 35 An inelastic demand curve is steeper than atypical demand curve. This is because a large change inprice (broken line ab) calls forth a smaller change inquantity demanded, (broken line bc)
Extreme Types of Demand ElasticityP D P D Q Q a. Perfectly Inelastic b. Perfectly Elastic
Perfectly price inelastic, that is, price changes have no effect at all on quantity demanded. A perfectly inelastic demand curve is straight line. Demand can be perfectly price elastic, that is, any amount will be demanded at the prevailing price. A perfectly demand cure is a straight horizontal line.
Elasticity of Supply It refers to the reaction or response of the sellers or producers to price changes of goods sold. It is a measure of degree of responsiveness of supply to a given change in price. It is a percentage change in quantity supplied given a percentage change in price ∆ Quantity supplied Es= ∆ Price
If a change in price results in a more than proportionate change in quantity supplied then the supply is price elastic. Supply Elastic P 4 S c 3 2 a 1 b Q 5 10 15 20 25
An elastic supply curve is flatter than normalsupply curve. This is because a smaller change in price(broken line bc) calls forth a greater change in quantitysupplied (broken line ab).If a change in price produces a less than proportionatechange in the quantity supplied than supply is priceinelastic.
An inelastic supply curve is more vertical thana normal supply curve. This is because any change inprice (broken line bc) calls forth a smaller change inquantity supplied (broken line ab).Supply can be perfectly price inelastic, that is, price changes have no effect at all on quantity supplied. A perfectly inelastic supply curve is illustrated by a straight vertical line.Supply can be perfectly price elastic, that is, any amount will be supplied at the prevailing price. A perfectly elastic supply curve is straight horizontal line.
P D P D Q Q a. Perfectly Inelastic b. Perfectly Elastic Extreme Types of Supply Elasticity
Factors that Determines Supply Elasticity Time Time is a determinant of supply elasticity as producer responds to changes in prices from time to time in a given certain period. Time horizon involved with which production can be increase Supply can only be increased (decrease) in response to an increase (decrease) in demand/ price by working firms’ existing plant more intensively, but this usually adds only marginally to total market supply.