2. by Jean Lee C. Patindol, 2011-12
The Economy
Government
ConsumersProducers
taxes
services
taxes
services
Produce goods and
services,
Receive payments
Make payments,
Receive goods and
services
3. Firms and Households:
The Basic Decision-Making Units
A firm is an organization that transforms
resources (inputs) into products (outputs). Firms
are the primary producing units in a market
economy.
An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking
a new idea or a new product and turning it into a
successful business.
Households are the consuming units in an
economy. They also provide the inputs in an
economy.
by Jean Lee C. Patindol, 2011-12
4. Input Markets and Output Markets:
The Circular Flow
The circular flow
of economic
activity shows
how firms and
households
interact in input
and output
markets.
by Jean Lee C. Patindol, 2011-12
5. Product or output
markets are the markets
in which goods and
services are exchanged.
Input markets are the
markets in which
resources—labor,
capital, and land—used
to produce products, are
exchanged.
by Jean Lee C. Patindol, 2011-12
6. Input Markets and Output Markets:
The Circular Flow
Goods and servicesGoods and services flowflow
clockwise. Firms provideclockwise. Firms provide
goods and services;goods and services;
households supply laborhouseholds supply labor
services.services.
• PaymentsPayments (usually money)(usually money)
flow in the oppositeflow in the opposite
direction (counterclockwise)direction (counterclockwise)
as the flow of laboras the flow of labor
services, goods, andservices, goods, and
services.services.
by Jean Lee C. Patindol, 2011-12
7. Input Markets
Input or factor markets are the markets in which
the resources used to produce products are
exchanged. They include:
The labor market, in which households supply work for
wages to firms that demand labor.
The capital market, in which households supply their
savings, for interest or for claims to future profits, to firms
that demand funds to buy capital goods.
The land market, in which households supply land or other
real property in exchange for rent.
Inputs into the production process are also called
factors of production.
by Jean Lee C. Patindol, 2011-12
8. Product/Output Markets
are the markets in which goods and
services are exchanged.
Demand for outputs/products
Supply of outputs/products
by Jean Lee C. Patindol, 2011-12
9. Demand in Product/Output
Markets
Factors influencing willingness and ability to buy (determinants of
demand):
Price of the good
Non-price determinants:
Taste or level of desire for the good by the buyer
Income of the buyer
Normal Goods are goods for which demand goes up when income is higher and
for which demand goes down when income is lower.
Inferior Goods are goods for which demand falls when income rises.
Prices of related products
Substitute products (directly competes with the good in the opinion of the buyer)
Complementary products (used along with the good in the opinion of the buyer
Future expectations
Expected income of the buyer
Expected price of the good
For the total demand: the number of buyers in the market
by Jean Lee C. Patindol, 2011-12
10. Quantity demanded (Qd) – the quantity of a
good that consumers are willing and able to buy
at a particular price, ceteris paribus (given all
other things constant); a particular point in the
demand curve or schedule; influenced only by
price; movement along a curve
Demand (D) – the relationship between the
price of the good and the quantity that
consumers are willing and able to purchase in a
specified time period, ceteris paribus; the entire
demand curve or schedule itself; influenced by
non-price factors; shift of the curve
by Jean Lee C. Patindol, 2011-12
11. Demand Schedule for Super Cola
Price (in pesos per unit) Qd (in million units)
9 1
8 3
7 5
6 7
5 9
4 11
3 13
by Jean Lee C. Patindol, 2011-12
12. Price
(P), in
pesos
per
unit
0
Quantity demanded (Qd), in
million units
A
B
C
G
Qd
Demand (demand
curve or
schedule)
movement
Shift in
demand
A
B
C
G
Qd
Demand (demand
curve or
schedule)
by Jean Lee C. Patindol, 2011-12
13. The Law of Demand
As the price of a good decreases/increases,
ceteris paribus, the quantity of that good that
consumers are willing and able to buy
increases/decreases
Price is the independent variable; Qd is the
dependent variable
There is an inverse relationship between price
and quantity demanded.
by Jean Lee C. Patindol, 2011-12
14. Supply in Product/Output
Markets
Factors affecting willingness and ability to produce and sell (supply
determinants):
Price of the good
Non-price determinants:
Changes in number of producers
Resource prices (prices of the inputs necessary to produce the good)
Technological changes
Prices of other goods
Substitute
Complementary
Expectations of future prices
Natural bounty/ calamity
Government incentives/disincentives:
Subsidies (incentives)
Taxes (disincentives)
by Jean Lee C. Patindol, 2011-12
15. Quantity supplied (Qs) – the quantity of a good
that producers are willing and able to produce
and sell at a particular price, ceteris paribus
(given all other things constant); a particular
point in the supply curve or schedule; influenced
only by price; movement along a curve
Supply (S) – the relationship between the price
of the good and the quantity that producers are
willing and able to produce and sell in a
specified time period, ceteris paribus; the entire
supply curve or schedule itself; influenced by
non-price factors; shift of the curve
by Jean Lee C. Patindol, 2011-12
16. Supply Schedule for Super
Cola
Price (in pesos per unit) Qs (in million units)
9 10
8 9
7 8
6 7
5 6
4 5
3 4
by Jean Lee C. Patindol, 2011-12
18. The Law of Supply
As the price of a good decreases/increases,
ceteris paribus, the quantity of that good that
producers are willing and able to sell
decreases/increases.
Price is the independent variable; Qs is the
dependent variable
There is a direct relationship between price and
quantity supplied.
by Jean Lee C. Patindol, 2011-12
