Reviewer

1. Economics Reviewer
Economics - isthe branch of knowledgeof goods&
services.
- Is firstandforemostthe studyof human
behaviorinmakingchoices.
- Properand efficient production,distribution,
allocation,utilization of goodsandservices
and to satisfythe unlimitedwantsandneeds
of the society.
MalthusianTheory - accordingto thistheorythere isa
gap betweenfoodproductionandpopulationgrowth.
Thomas Malthus- he statedthat “Asfoodproduction
growsarithmetically,populationgrowsgeometrically.”
Abraham Maslow- Hierarchyof needs.
Scarcity- meansthat the society’sresourceshave lessto
offerthatthe people wishtohave.
Foundationsof Economics:
 Unlimitedwantsandneeds
 Scarcity of resources
MethodologyinEconomics:
 Economic Theory – these are the theoriesand
principles.
- is an attempttofind
explanationsforobserved
economicphenomena.
 Economic Model – formal / mathematical
statementof a presumedrelationshipbetween
twoor more variables.
ControlledVariable – can be manipulated.
UncontrolledVariable – cannot be manipulated.
Divisionsof Economics:
 Microeconomics– individual decisionmaking
units(householdandbusinessfirm).
 Macroeconomics– function,behaviorand
operationof aggregate economicvariables.
e.g. production &output
Employment
Investment
Income
General level of prices/pricing
Examplesof Macroeconomics:
 Gross National Product(GNP)
 Gross DomesticProduct(GDP)
Two types of Market:
 Good
 Resource
Two kinds of questionsthat economistattempt to
answer:
 Positive Economics– seekstounderstandthe
behaviorandthe operationof the economic
systemwithoutmakingjudgments.
- It answersthe questions:Whatexists?
Andhowit works?
 Normative Economics - looksat the outcomesof
the economicbehaviorandasksif theyare good
or bad whethertheycanbe made better.
- Case to case basis
|prescriptions/suggestions+
judgments
- Elaborative/essaytype
Two Subtypes ofPositive Economics:
 Descriptive economics – is simplythe gathering/
collectionandpresentationof datathatdescribes
phenomenaandfacts.E.g.NSO,NEDA.
 Economic Theory – is a statementof a setor sets
of relatedstatementsaboutcause andeffect,
actionand reaction.
Criteriafor judgingeconomicoutcomes
1. Efficiency(AllocativeEfficiency) - productionata
leastpossible cost.
- Leastinputto produce betteroutput.
2. Equity – equal distributionof wealthandincome.
3. Growth – increase inthe total outputof an
economy.
4. Stability– there isno changes/ minimal changes
“Trickledowneffect” –the fruitsof developmentmustbe
realizednotonlyonthe topbut trickle downalsoonpoor
people.
GIR – Gross International Reserves
Four Categoriesof Economic Resources:
1. Land – includesall natural resources.
- Income receivedfromthese resourcesis
rent/rental income.
2. Labor – refersto all the physical andmental
talentsof individualsavailable andusable in
producinggoodsandservices.
- Income received:wages/salaries.
3. Capital – includesall producedgoodsused again
to produce consumergoodsandservices.
- income received:interest.
4. Entrepreneur- anindividual whocombine land,
capital and laborto produce goodsand services.
- Income received:profits.
Economic system– isa setof institutional arrangements
and a group of coordinatingmechanismsthatrespondto
the economizingproblem.
Three Types of Economic System:
1. Market Economy (Capitalism) - there isa private
ownershipof economicresourcesandthe use of
marketand pricesto coordinate anddirect
economicactivity.
2. Command Economy (Communism) –
governmentownsmostpropertyresourcesand
there iscentral economicplanning.
- Goodsare allocatedbase fromthe needsof
the people.
- “service oriented”

2. 3. MixedEconomy (Socialism) – an economic
systemwhereinthe basicorkeyindustriesare
eitherownedorcontrolledbythe governmentor
by the people collectively.
Circular FlowDiagram – a visual model of the
economyshowsthe income receivedandpayments
made by eachsector of the economy.
Economy’s two typesof DecisionMakers:
1. Households
2. Firms
Two types of market:
1. Good / Productmarket
2. Resource Market
PDI- Personal Disposable Income
PI- Personal Income
Savings – unspentincome.
- Leakage inthe two sectormodel.
Investment– remedyforthe two sectormodel leakage.
Three Sector Model
Government+ Household+ Business
Tax – leakage inthe three sectormodel.
GovernmentExpenditures –remedy.
Four Sector Model
+ ForeignCountries(Restof the World)
Import – leakage
Export – remedy.
Production PossibilityFrontier– a graph that showsthe
variouscombinationsof twocommoditiesthatthe
economycan possiblyproduce……
Direct Relationship– impliesthattwovariableschange in
the same direction.
Inverse Relationship– impliesthattwovariableschange
inthe opposite direction.
IndependentVariable – isthe cause or source and the
one that changesfirst.
DependentVariable – the effect/outcomewhen
independentvariable changes.
Demand – isa schedule of the differentquantitiesof a
goodthat the buyersare willingandable tobuyat
differentpricesata giventime.
Quantity Demanded– isthe amountof goodsthat the
buyersare willingandable tobuyat some particular
price.
Law of Demand– indicatesthatas price increases,a
smallerquantitywill be bought;asprice decreases,a
largerquantitywill be bought.
Other explanationofLaw of Demand:
 Income Effect – meansthat a decrease inthe
price of a productwill increase the purchasing
powerof one’smoneyincome.
 SubstitutionEffect– indicatesthatat a lower
price one has the incentive tosubstitutethe
cheapergoodfor similargoods,whichare now
relativelyexpensive.
Types ofDemand:
1. Primary or ConsumerDemand – is the demand
for final goods.
a. Individual Demand – is the demandof an
individualconsumerfora given
commodity.
b. Market Demand / Collective Demand –
it isthe sum total of individual demand.
2. DerivedDemand or Producer Demand – isthe
demandforthe factors of production.
o Demand forthe factorsof production like
bakers,oven,yeast,flourand other
dependson thedesire and income level of
the consumers forthefinal goodslike
bread,cakes,pastriesand otherbakery
products.
Factors affectingDemand (Determinantsof Demand):
1. Numbersof Sellers
2. Consumer’s Income(Superior/NormaGoodl &
InferiorGood)
3. Consumer’sTastesandpreferences
4. Pricesof relatedgoods
5. Expectations
Two Types of Consumer’sIncome:
1. Superioror Normal Good – isa good which
demandincreasesasconsumerincome increases.
2. InferiorGood– isa goodwhichdemand
decrease asconsumerincome increases.
Substitute Goods(competinggoods) – are goodswhich
are usedinplace of othergoods.
ComplementaryGoods – are goodsthat go together.
Supply– isa schedule of the differentquantitiesof goods
that are sellersare willingandable tosell atdifferent
pricesat a giventime.
Quantity Supplied– isthe amountof goods thatthe
sellersare willingandable tosell atsome particularprice.
Law of Supply- indicatesthatasprice increasesa larger
quantitywill be sold,asprice decreases,asmaller
quantitywill be sold.
Types ofSupply
1. Individual Supply– isthe supplyof an individual
sellerof agivencommodity.
2. Market / Collective Supply– isthe sumtotal of
individualsupply.
Determinantsof Supply
1. Numberof Sellers
2. Change intechnology/methodof production
3. Change incost production
4. Expectations
Market Equilibrium– the quantitythatthe buyersare
willingtobuywill be equal tothe quantitythatthe sellers
are willingtoofferforsale.
- No surplus/no shortage exist.
- No pressure forthe price tochange.

3. EquilibriumPrice – isthe price at whichquantity
demandedisequal toquantitysupplied.
EquilibriumQuantity – is the quantityexchangedat
equilibriumprice.
Surplus – is a situationwhereinquantitysuppliedis
greaterthan quantitydemanded.
Shortage – isa situationwhereinquantitydemandedis
greaterthan quantitysupplied.
GrossNational Product (GNP) – is the marketvalue of all
final goodsandservicesproducedinthe economyduring
a givenperiodof time.
Final Goods – are goodswhichare final consumptionby
the enduser.
Intermediate Goods – are goodswhichare to be
processedfurtherintoothergoods.
ConsumerPrice Index(CPI) – is a tool usedto measure
the changesin price of the commodities.
Itemsthat are not included/reflectedinGNP:
1. Qualityof goodsand servicesproduced
2. Leisure Time
3. Housewives’Services
4. Resale
5. TransferPayments
6. Security
Methodsusedto measure GNP:
1. Expenditure method/flowofproduct approach
– thismethodmeasuresall the moneyspenton
goodsand servicesbythe followingsectors:
a. Personal ConsumptionExpenditures(C)
– spendingof consumersonfinal goods
and services.
b. GrossPrivate Domestic Investment(Ig)
– spendingof businessfornewcapital
goods(investment).
c. Governmentpurchasesof goods and
services(G)- spendingof all levelsof
government.
d. NetExports ofgoods and services(Xn)
- are the value of the goodssoldoutside
the country (exports) lessthe value of
the goodssoldin the countrythat are
made abroad (imports).
2. Income method or Earnings and cost approach –
thismethodaccountsfor all the moneyreceived
for the productionof goodsand services.
3. Industrial Origin method– thismethodmeasures
the value of goodsand servicesproducedbythe
followingindustries:
a. Agriculture,Fisheryand Forestry
b. Industrial Sector
c. Service Sector
4. Value AddedMethod – thismethodmeasures
the value of the goods andservicesproduced
basedon the value addedateach stage of
productionof distributionandincludedinthe
cost to the ultimate consumer.
Value Added– isthe difference betweenthe costof
materials/goodsandthe value of salesof goods.
NetNational Product (NNP) – is grossnational
productlesscapital consumptionallowances
(depreciation).
NNP= GNP– Depreciation
National Income – paymentsof income tothe factors
of production.
NI = NNP– Indirectbusinesstaxes
Personal Income (PI) – refersto paymentsof income
to individualssuch asrentspaidto the ownerof the
land,wagespaidto the laborers& interestspaidto
the ownersof capital.
Personal Disposable Income (DI) – referstothe
income leftafterdeductingpersonal incometaxes,
whichthe individualhasathis disposal tospendorto
save.
Personal Savings (S) – referstoincome notspentfor
consumption.
ConsumptionFunction– isan equationshowingthe
relationshipbetweenthe level of consumptionand
the level of disposable income.
ConsumptionSchedule – isa schedule showingthe
amountsof householdplantospendforconsumer
goodsat differentlevelsof disposableincome.
Savings – unspentincome.
Average and Marginal Propensities –fractionof total
income thatis consumedisthe average propensityto
consume.
Non-Income DeterminantofConsumption – amount
of disposableincome isthe central factor
determiningahousehold’sconsumptionandsaving.
 Amount of wealthownedby household
 Expectations
 Real interestrates
 Consumerindebtedness
 Tax levels
Investment– secondmajorcomponentof aggregate
expenditure.
- Referstopurchasesof machinery,equipment
and tools,all constructionandchangesin
inventories.
o Firms investto earn profits.
Aggregate Demand – referstothe quantityof goodsand
servicesthatconsumersandfirmswouldbe willingtobuy
at any givenprice level.
Aggregate Supply – describeswhatoutputbusinesses
wouldbe willingtoproduce andsell givenprices,costs
and marketconditions.
MultiplierEffect– showsthe numberof timesinwhich
the ultimate income exceedsthe initial increasein
investmentspending.

4. BusinessCycle – the recurrentbutnon periodicupand
downmovementinthe levelof economicactivity,which
extendoveraperiodof several years.
Phasesof BusinessCycle:
1. Recession– a decline inthe Real GDPthat occurs
for at leasttwoor more quarters.
2. Low Point or Depression – state of economy
where there are large unemploymentratesanda
decline inannual income.
3. Expansionand Recovery– a periodinwhichthe
real GDP grows a recoveryfrom recession.
4. Peak – the pointat whichthe real GDP stops
increasingandbeginsitsdecline.
Cause of BusinessCycle:
1. Change incapital expenditures
2. Inventoryadjustments
3. Innovationandimitation
4. Creditandloanpolicies
5. External shocks
Inflation– isthe general increase inpricesacrossthe
economy.
Basic Types of Inflation
1. Hyper Inflation– the mostextreme inflation
phenomenonwithyearlyincreasesof three digit
percentage pointsandanexplosive acceleration.
2. ExtremelyHigh Inflation – it rangesanywhere
between50%and100%.
3. Moderate Inflation– can be characterizedfrom
1% to 5%.
Other Typesof Inflation:
1. Demand Pull Inflation– iscausedby an increase
intotal spending,whichare notaccompaniedby
increasesintotal amountof goodsand services
sold.
2. Cost Rush Inflation– iscausedby increase inthe
costs of production,whichcausesfirmstoraise
prices.
Unemployment–a situationinwhichpeople inthe labor
force cannot findjobswithinspecificperiod.
- People lose theirjobswhenproductionin the
economydecline.
Possible reasonsfor the decline inproduction:
 lessspending(toomuchsaving)
 technological improvement
Types ofUnemployment:
1. Demand Deficit/Cyclical Unemployment –it
occurs whenthere isnotenoughdemandto
employall those who wanttowork.
2. Frictional/SearchUnemployment– when
somebodylosestheirjob(orchoosestoleave it),
theywill have tolookforanotherone.
3. Structural Unemployment–it occur whenthe
structure of the industrychanges.
4. Seasonal Unemployment– itis causedby
seasonal shiftsinthe laboranddemandduring
the year.
Workingage population– thisreferto those aged15
yearsoldand above and below 65.
Labor Force = Employed+ Unemployed
Underemployment–situationwhere workershave
neitherthe complimentaryresourcesnorthe
opportunitiestoincrease whattheyperceive astheirvery
low level of income.
Employment– isa situationwhere aperson15 yearsold
or older:
 Who worksfor payeitherforsomebodyorin
hisownenterprise forone ormore hours per
week.
 Who workswithoutpayfor15 hoursor more
perweekina familyenterprise.
 Who has a jobbut has beentemporarily
absentwithor withoutpay.
Labor Force Participation Rate – isthe ratioof the labor
force to the total population15yearsold or older.
Full Employment– issomethinglessthan100%
employmentof laborforce.
 Economistssay that is at “full employment”
when it is experiencing only frictional orstructural
unemployment.Thatis,fullemploymentoccurs
when there is no cyclical unemployment.
Arthur Okun – was the firstto quantifythe relationship
betweenthe unemploymentrate andGDP gap.
Okun’s Law – statesthat foreveryone percentage point
by whichthe actual unemploymentrate exceedsthe
natural rate, a negative GDPgapof above 2 percent
occurs.
Theoriesof Employment:
1. Classical Theory of Employment– statesthatat
lowerwages,employmentincreases.Thisimplies
that wage isdeterminedbythe interplayof
demandandsupplyof laborin the market.
2. KeynesianTheoryof Employment– statesthat
employmentisdeterminedbyaggregate demand
for goodsand services.
John Maynard Keynes– accordingto himwage couldnot
be the primarycause of unemploymentbecause if there
isa greaterdemandforgoodsand servicesinthe
economy,the marketisgoodinducingmore production
and higheremployment.