Flopped futurology predictions and economic choices shape the future

.
World View
Sample of 20th
–century futurology that flopped
1.Airplanes are interesting toys but no military
use
= Marshall Ferdinand Foch
French military strategist
Word War I commander 1981
2.The Horse is here to stay but the automobile is
only a novelty – a fad
= president of Michigan Bank that advice
Horace Racham not to invest in Ford
Motors

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3. There is no reason for individual to have a
computer in their home
= Kenneth Olsen, president of Digital
Equipment 1977
Analysis:
no one predicts the future well, but the
economic choices we make today about the
use of scarce resources will determine the
kind of future we have

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Chapter 1: Preliminaries
Slide 4
The Themes of Microeconomics
According to Mick Jagger*
& the Rolling Stones
“You can’t always get what
you want”

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Slide 5
Why Not?
Limited Resources

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Slide 6
Preliminaries
Microeconomics deals with:
Behavior of individual units
• When Consuming
– How we choose what to buy

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Slide 7
Preliminaries
Behavior of individual units
• When Producing
– How we choose what to produce

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Slide 8
Preliminaries
Markets: The interaction of
consumers and producers

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Slide 9
Preliminaries
Macroeconomics deals with:
Analysis of aggregate issues:
• Economic growth
• Inflation
• Unemployment
The Linkage Between Micro and
Macro-economics
Microeconomics is the foundation of
macroeconomic analysis

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Slide 10
Microeconomics
Allocation of Scarce Resources and Trade-
offs
• In a planned economy
• In a market economy
Microeconomics and Optimal Trade-offs
1. Consumer Theory
2. Workers
3. Theory of the Firm

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Slide 11
Microeconomics and Prices
The role of prices in a market
economy
How prices are determined

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Economy. . .
. . . The word economy comes from a
Greek word Oikonomia for “one who
manages a household.”

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Society and Scarce Resources:
The management of society’s
resources is important because
resources are scarce.
Scarcity implies choice and choice
implies cost.

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Scarcity . . .
. . . means that society has limited
resources and therefore cannot produce
all the goods and services people wish
to have.

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Scarce Resources and Production
Four types of resources
1.Land – a shorthand expression for any natural
resource provided by nature
2.Labor – the mental and physical capacity of
workers to produce goods/services
2.1 skilled
2.2 unskilled
2.3 Professional

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3. Capital – the physical plants machinery, and
equipment used to produced other
goods.
3.1 Capital goods – are human-made goods
that do not directly satisfy human wants and
needs
3.2 Financial Capital
4. Entrepreneurship/entrepreneur – the creative
ability of individual to seek profits by taking
risk and combining resources to produces
innovative product

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Economics
Economics is the study of how society manages
its scarce resources.
- science which studies human behavior as
relationship between end and scarce means
which have alternative uses
-- study of how societies use scarce
resources to produce valuable commodities
and distribute them among people

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18
Branches of Economics
1. Microeconomics
- study the small unit of economy
like individual as an economic agent
2. Macroeconomics
- study the economy as a whole like
behavior of the aggregate of economic
activity.

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Economists study. . .
How people make decisions.
How people interact with each other.
The forces and trends that affect the
economy as a whole.

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Ten Principles of Economics
1. People face tradeoffs.
2. The cost of something is what you give
up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
How People Make Decisions

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5. Trade can make everyone better off.
6. Markets are usually a good way to
organize economic activity.
7. Governments can sometimes improve
economic outcomes.
How People Interact

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8. The standard of living depends on a
country’s production.
9. Prices rise when the government prints
too much money.
10. Society faces a short-run tradeoff
between inflation and unemployment.
How the Economy as a Whole Works

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Slide 23
Theories and Models
Microeconomic Analysis
Theories are used to explain observed
phenomena in terms of a set of basic rules and
assumptions.
For example
• The Theory of the Firm
• The Theory of Consumer Behavior
Microeconomic Analysis
Models:
• a mathematical representation of a theory used to
make a prediction.

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Pitfalls in Economics
1.Cetiris Paribus – a latin phrase means while
certain variable changes, “all other things
remain unchanged”
Note: a theory cannot be tested legitimately
unless its cetiris paribus assumption satisfied.
1.Association versus Causation
Note:The fact that one event follows
another does not necessarily means that the first
event caused the second event

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Slide 25
Why Do Economist Diasagree
Positive Analysis
Positive analysis is the use of theories
and models to predict the impact of a
choice.
For example:
• What will be the impact of an import
quota on foreign cars?
• What will be the impact of an increase in
the gasoline excise tax?

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Slide 26
Positive versus Normative Analysis
Normative Analysis
Normative analysis addresses issues
from the perspective of “What ought to
be?”
For example:
• Maintaining the purchasing power of the
peso is more important than teenage
unemployment.

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Why study Economics?
1.Economics for citizenship
2.Professional and personal application
Foundation of Economics
1.Society’s material wants, that is material wants
of its citizen is virtually unlimited
2.Economic resources – means of producing
goods and services are limited or scarce

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The Circular-Flow Diagram
Firms
Households
Market for
Factors
of Production
Market for
Goods
and Services
SpendingRevenue
Wages, rent,
and interest
Income
Goods &
Services sold
Goods &
Services
bought
Labor, land,
and capital
Inputs for
production

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Economic Analysis
Good - is anything which yields
satisfaction to someone. It may be
tangible or intangible
Types of goods
Consumer Goods
Capital Goods
Essential Goods
Luxury goods
Economic Goods

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3. How much to produce?
- the quantity that will be produced
determining the demand of people.
- the goal is efficiency in production or
technical efficiency
4. For whom to produce?
- who will be given priority in the
consumption of such products.
- the goal is to reach the efficiency in
distribution or efficiency in exchange.

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The mechanism of choice
1. Market mechanism (the invisible hand)
– the use of market prices and sales to
signal desired output (or resource allocation)
2.Laissez faire – the doctrine of “leave it alone”
of nonintervention by government in the market
mechanism
3.Government Intervention and the Command
Economies

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4. Mixed Economy – an economy that use both
market signals and government directives to
allocate goods and resources
5. Market failure – an imperfection in the
market mechanism that prevents optimal
outcomes
6. Government failure – government
intervention that fails to improve economic
outcomes

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Basic Economic Activities
Resource Maintenance
-means tending to, preserving, or
improving the stocks of resources that
form the basis for the preservation and
quality of life.

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Production - is the conversion of resources
into usable products, which may be either
goods or services.
Distribution - is the sharing of products and
resources among people. In contemporary
economies, distribution activities take two
main forms: exchange and transfer.

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Consumption - refers to the process by which
goods and services are, at last, put to final use
by people.
There are four types of resources, also known
as factors of production, or inputs into
production:
Land
Labor
Capital
Entrepreneurial Activity

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Economics System
Story of cow and the farmer
In a capitalist system, the farmers buys the
cow ,milks it, and sells the milk. With the
profit he will buy another cow.
In a mixed system, the government interferes
in the life of the farmer and the cow via taxes
health regulation. So the farmer buy the cow
Milk it, sells it with profit and pays taxes.

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38
In the command system, there is no private
Property and no freedom. The government
owns everything. So the farmer milks the
cow, sells the milk, and the government takes
The cow and puts the farmer in jail.

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Economic System
Traditional Economy
An economic system in which production and
distribution questions are answered by looking
to the past
People will make what they always made; will
do the same work their parents did
Economic decisions are made by customs and
beliefs

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Command System
 An economic system in which production
and distribution questions are answered by
central planners (government)
 Economic decisions are made by the
government
 Planners estimate what goods will be needed
in the future and work backward to decide
what materials and workers are needed now
 Planners can be wrong about future needs,
and they do not provide people with many

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Market Economy
An economic system in which production and
distribution questions are answered by prices
and profits
Economic decisions are based on Free
Enterprise
Most Democratic countries have a variation of
a Market economy & a Command economy
(Mixed economy)
Businesses will make things using whatever
materials, labor, and technology earn the highest
profit

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Market Economy
 Standard of living is higher under a market
system than the others
 The price of a good depends on how much
of the good is available and how many
people want
 Producers turn resources into goods and
services
 Governments can also be producers when
they provide goods such as roads and
schools, or when they provide services such

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Mixed Economy
Individuals own most resources and determine
what and how to produce
Government regulates certain industries
Example: China; most nations
Market + Command = Mixed

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Economic System
Pure Capitalism
Capitalism
1.Private property – private individual and
organization own control their property
resources by means of the institution of private
property
2.Freedom of Enterprise and choice –
individual/organization posses both freedom of
enterprise and choice

.
3. Competition – competition prevents the
buyer and seller to exploit each others
4. Market and Prices (market system)
- used to communicate and coordinate the
decisions of buyers and sellers
5. Limited government – the role of
government is limited in a competitive and
capitalist economy

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Types of Market Structure
Monopolistic Competition
-also called competitive market, where there
are a large number of firms, each having a
small proportion of the market share and
slightly differentiated products(that is, the
products are substitutes, but, with
differences such as branding, are not
exactly alike).

.
-In monopolistic competition firms can
behave like monopolies in the short run -
including using market power to generate
profit

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Monopolistically competitive markets have the
following characteristics:
There are many producers and many
consumers in a given market, and no business
has total control over the market price.
Consumers perceive that there are non-price
differences among the competitors' products.
There are few barriers to entry and exit
Producers have a degree of control over price.

.
Perfect Competition
-is characterized by many buyers and sellers,
many products that are similar in nature and, as
a result, many substitutes.
Characteristic
there are few, if any, barriers to entry for new
companies
prices are determined by supply and demand

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Oligopoly
-Market form in which market or industry is
dominated by a small number of sellers
(oligopolists)
-The products that the oligopolistic firms
produce are often nearly identical and,
therefore, the companies, which are competing
for market share, are interdependent as a result
of market forces.

.
Characteristics
Profit maximization conditions: An oligopoly
maximizes profits by producing where marginal
revenue equals marginal costs
Ability to set price: Oligopolies are price setters
rather than price takers.
Entry and exit: Barriers to entry are high. The
most important barriers are economies of scale,
patents, access to expensive and complex
technology, and strategic actions by incumbent
firms designed to discourage or destroy nascent
firms

.
Number of firms: "Few" – a "handful" of sellers.
There are so few firms that the actions of one
firm can influence the actions of the other
firms.
Long run profits: Oligopolies can retain long run
abnormal profits. High barriers of entry prevent
sideline firms from entering market to capture
excess profits.
Product differentiation: Product may be
homogeneous (steel) or differentiated
(automobiles)

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Duopoly
-Is a specific type of oligopoly where only two
producers exist in one market.
Example;
Boeing and Airbus

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Oligopsony
-A market form in which the number of buyers
is small while the number of sellers in theory
could be large.
-This typically happens in a market for inputs
where numerous suppliers are competing to
sell their product to a small number of (often
large and powerful) buyers

.
Example
Cocoa
- Cargill, Archer Daniels Midland, Callebaut
American Tobacco Growers
- Altria, Brown and Williamson, Lorillard
Tobacco Company buy almost 90% of all
tobacco grown in the US

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Monopoly
-exists when a specific individual or an
enterprise has sufficient control over a
particular product or service to determine
significantly the terms on which other
individuals shall have access to it.
- Monopoly characterized by a lack of economic
competition, and lack of viable substitute goods

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Types of Monopoly
1. Natural monopoly or through merger
2. Government Granted
2.1 Single seller
2.2 Market power
Firm and industry
Price Discrimination - sells more quantities
charging less price against the product in a
highly elastic market and sells less quantities
charging high price in a less elastic market.

.
Example
-Coercive monopoly - government grants
exclusive privilege to a private individual or firm
to be the sole provider of a good or service
-law, regulation, copyright , patent, trademark
Sources of Monopoly powers
-Monopolies derive their market power from
barriers to entry - circumstances that prevent
or greatly impede a potential competitor's entry
into the market or ability to compete in the
market.

.
Three types of barrier to entry
1. Economic barriers: Economic barriers include
economies of scale, capital requirements, cost
advantages and technological superiority
Economy of scale - large start up costs give
monopolies an advantage over would be
competitors.
Capital requirements – large investment
capital and Large fixed costs also make it
difficult for a small firm to enter an industry and
expand

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Technological superiority - A monopoly may be
better able to acquire, integrate and use the
best possible technology in producing its goods
while entrants do not have the size or fiscal
muscle to use the best available technology
No substitute goods - A monopoly sells a good
for which there is no close substitutes.
Control of Natural Resources - A prime source
of monopoly power is the control of resources
that are critical to the production of a final
good.

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2.Legal Barriers
Legal rights can provide opportunity to
monopolize the market in a good
Example:
Intellectual property rights, including patents
and copyrights
3. Deliberate Actions: A firm engage in various
types of deliberate action to exclude
competitors or eliminate competition.
Example; collusion, lobbying governmental
authorities, and force.

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Monopoly versus competitive markets
1. Market power - ability to raise prices without
losing all one's customers to competitors.
Perfectly competitive market - zero market
power when it comes in setting prices.
Monopoly – has the power to set prices or
quantities
2. Price - In a perfectly competitive market price
equals marginal cost. In a monopolistic market
price is greater than marginal cost.

.
3. Product differentiation
-There is zero product differentiation in a
perfectly competitive market
-In monopoly, there is high to absolute product
differentiation in the sense that there is no
available substitute for a monopolized good
4. Number of competitors
5. Barriers to Entry

.
Monopsony
-Market structure in which only one buyer faces
many sellers
Example:
Government

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65
Scarcity and the World of Trade – Offs
and Unlimited Human Wants
a.If society can get all it wants of good A
when the price of good A is zero good A is
_____
b.If the price of good B is zero and the
society cannot get all it wants of good B
then good B is ____

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Scarcity and the World of Trade –
Offs and Unlimited Human Wants
Scarcity – is a natural phenomenon which sets
a limit in the production of goods and
services needed by man.
Free Goods – are those goods we consume
freely and for which no amount is paid
Economic goods are scarce
Noneconomic goods are not scarce

.
Because of Scarcity, choice and opportunity
costs arise
a. Due to scarcity, people trade off options
b. Law of Diminishing Marginal Returns
- Principles occurs in a short- run production
period where one particular factors of
production is a fixed input.

.
The (PPC) the production possibilities
curve is a graph of the inherent in a
decisions.
a. When the amount of one resources or
good that must be given up to produce an
additional units of another units of another
goods remain constant the PPC is straight
line

.
b. When the amount of one resource or good
that must be given up to produce an
additional units of an additional unit of
another good or resources rises PPC
bowed outward
c. A point on a PPC is an efficient point;
points inside a PPC are inefficient; points
outside the PPC are unattainable (possible)

.
How do we get to point outside the PPC?
1. Technological advancement which
increases Productivity
2. Discover new resources
3. Take resources (War)
4. Trade for Resources

.
Production Possibilities Curve (Frontier)
The WHOLE PPC
represents
“FULL
PRODUCTION”
Productive Efficiency
Full-Employment of
Resources
Consumer
Goods
0
100
1000100 200 300 400 500 600 700 800 900
.A
.B
.C
.D

.
Do economy’s always
produce on the PPC?
Point “E” represents a
point inside the PPC.
This economy could be
doing better…
Consumer
Goods
0
100
1000100 200 300 400 500 600 700 800 900
.A
.B
.C
.D
.E

.
Do economy’s always produce on
the PPC?
How about point “F”?
Point F is outside our PPC
It represents a combination of
Capital and Consumer Goods
that is currently not possible
with this economies resources
Consumer
Goods
0
100
1000100 200 300 400 500 600 700 800 900
.A
.B
.C
.D
E
.F

.
Production Possibilities Curve
The PPC shows ALL possible combinations of two
goods that can be produced if ALL available resources
are fully employed (used) with the best technology
currently available
Robotics
(Capital Good)
Compact Discs
B
C
E
F
A
G
How do we get to point G??
1. Technological advancement which
increases Productivity
2. Discover new resources
3. Take resources (War)
4. Trade for Resources
D
“OUR ECONOMY IS DRIVEN BY TECHNOLOGICAL ADVANCEMENT”

.
75
Human wants
- wants are hierarchical in nature
-starting from basic biological
demands progress up to upward and
culminate in self actualization
Hierarchy of Needs
1.Physiological needs
2.Safety needs
3.Need for feeling of love belongings

.
76
4. Need for self esteem, knowledge and
aesthetic expression
5.Need for self actualization
Factors Affecting Wants
Wants – can be described as the desire for
goods and services.
-attempts to satisfy wants given
limited resources forms the basis of all
economic activity.

.
77
Factors Affecting Wants
Personal – include sex, race, age and
other demographic factors
Psychological - involve a person’s
motivation, perception, ability and
knowledge, attitude, personality and
lifestyle.
Social – roles and family influences
social class, as well as culture and sub-
culture

.
78
Consumption – deals with buying and
using goods and services to satisfy our
human needs
- Is a major concern of economics in
which different activities of man
depend
Types of Consumption
Direct – happens when individual
satisfies himself upon buying and
using a certain product

.
79
Productive – buying goods to be used in
producing other goods describe this
type of consumption
Wasteful – buying things that do not give
satisfaction to a person
Harmful – goods that can endanger their
health even though it gives satisfaction

.
80
Factors that Affect Consumption
Income – consumption depend on how
much income we have
Occasions – celebrations of any
occasions makes people buy
Advertisement – a way of motivating and
convincing consumers to patronize a
certain products

.
81
Price – factor that limits consumption
Seasons – some things are bought
depending on the weather
Imitation – as we imitate what other
people buy, we consume more for
the same products.

.
82
Law of Consumption
Law of Variety
Law of Harmony
Law of Imitation
Law of Economic Order
Law of Diminishing Marginal Utility

.
Utility
- Refers to the satisfaction achieved in
consuming goods and services.
Two Classification of Utility
Marginal Utility – added satisfaction you
get
Total Utility – satisfaction you get in
buying and using the products

.
Everything you do in life involves choices
Your choices involves in many things including
incentives MB=MC, and utility maximization
Example:
With money in your pocket, you make choices
by Maximizing your satisfaction with each
pesos you spend.
Utility?

.
Marginal Utility
Example:
Let’s say you have a choice between either renting a
DVD or going to the movies
Which would you choose?
It depends on two things – budget constraint and what
is marginal utility per peso spent for each
Budget Constraint – how much money allotted for
renting a DVD or watching a movie
Marginal Utility per peso spent is additional
satisfaction per peso “you receive from each item you
purchase.

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