MICROECONOMICS

ECONOMICS
> the efficient/proper allocation of
scarce resources towards satisfaction of
human needs and wants.

SCARCITY
> the basic and central economic
problem confronting man and society.
Limited availability of economic resources
relative to man unlimited demand
FACTORS OF PRODUCTION

 Land – natural resources that comprises all the

materials and things which are available beneath
the soil and above it.
 Labor – any form of human effort exerted in the

production of goods and services.

 Capital – manmade goods used in the production

of other goods and services.

Ex. Buildings, factories, etc
 Entrepreneur – person who organizes, manage

and assumes the risks of a business

THE CIRCULAR FLOW MODEL

Resource Market
> at the upper level of the diagram, the
place where resources are bought and sold.
Product Market
> the lower level of the diagram, the
place where goods and services produced
by businesses are bought and sold to the
household.
BASIC DECISION PROBLEMS
 Consumption

 Production

 Distribution

 Growth over time

4 BASIC ECONOMIC QUESTIONS

 What to produce?

 How to produce?

 How much to produce?

 For whom to produce?

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
it is expressed in relative value, meaning the price
of one item should be relative to the price of
another item
Ex. If the price of coke is P20 per can and cupcake
is P10 per piece, the relative price of Coke is 2
cupcakes.
3E’s IN ECONOMICS
Efficiency
> refers to productivity and proper allocation of
economic resources
Effectiveness
> means attainment of goals and objectives
Equity
> justice and fairness
POSITIVE AND NORMATIVE ECONOMICS
 Positive Economics
> is an economic analysis that
considers economic conditions “as they
are” or “ as it is” and it answers the question
“what is?”
 Normative Economics

> an economic analysis which judges

economic condition “ as it should be”
it answers the question “ what should be?”
CETERIS PARIBUS ASSUMPTION
Ceteris Paribus
> means all other things are constant or all else
equal
> a device use to analyze the relationship between
two variables while the other factors are held
constant
MICROECONOMICS
> a branch of economics that deals with the
individual decisions of units of economy – the firms
and households and how their choices determine
relative prices of goods and factors of production
TYPES OF ECONOMIC SYSTEM
Traditional Economy
> a subsistence economy, a family
produces goods only for its own
consumption.

Command Economy
> a type of economy wherein the
manner of production is dictated by the
government. The government decides in
what, how, how much, and for whom to
produce.
Market Economy/capitalism
> the resources are privately owned and
the people themselves make the decisions
Socialism
> is an economic system wherein the
key enterprises are owned by the state.
Private ownership is recognized, however, the
state has control over a large portion of
capital asset and generally responsible for the
production and distribution of goods.
Mixed Economy
> a mixture of market and command
systems
CHARACTERISTICS OF
MICROECONOMICS
 It looks at the decisions of individual

units
 It looks at how prices are determined
 It is concerned with social welfare
 It develops skills – logical reasoning,

construction and use of models

BASIC ANALYSIS OF DEMAND AND SUPPLY
 DEMAND

> reflects the consumer’s desire for a commodity

> refers to quantity of a good or services that
people are ready to buy at a given prices within a
period of time
> it implies 3 things:
 Desire to possess a thing

 The ability to pay for its means or purchasing it

 Willingness in utilizing it
 Market

> Place where buyers and sellers meet

> It can represent intangible domain
where goods and services are traded,
like stock market and labor market
Two types of markets are
Wet market
Dry market
METHODS OF DEMAND ANALYSIS
Demand Schedule
> A table that shows the relationship of
price and the specific quantity demanded at
each prices.
Ex. Hypothetical Demand Schedule for
Rice
Situation Price/kilo Q/kilo
A 35 8
B 24 13
C 13 20
D 12 30
E 11 45
Most demand curves slope downwards because
 As the price of the product falls, consumers will

tend to substitute this product

 As price of the product falls, this serves to

increase their real income allowing them to buy

more products

Price has an inverse relationship with quantity

demanded
Law of demand
> States that if prices goes up, QD goes
down, if prices goes down, QD goes up.
Reason for this is “ consumers
always tend to MAXIMIZE
SATISFACTION
FORCES THAT CAUSES DEMAND CURVE
TO CHANGE
 Taste and preference

 Pertains to personal likes and dislikes of

consumersfor goods or services

 Changing Income

 Occasional or seasonal products

 Population change

 Substitute and complementary goods

 Expectations of future prices

DEMAND FUNCTION
> Shows the relationship between for
a commodity and the factors that determine
or influence this demand
These factors are:
 Price of the commodity itself

 Prices of related commodities

 Level of Income

 Taste and preference

 Size and composition of level of population,

distribution of income, etc.

 > It is also expressed in mathematical
function
QD = a – bP
Where:
QD = quantity demanded at a
particular price
a = intercept of the demand
curve
b = slope of demand curve
P = price of the good at a
particular time
Ex.: Assume that current price of good A is
P5.00, the intercept of demand curve is 3
while the slope is 0.25. If we want to
determine how much of good A will be
demanded by consumer X, we can simply
substitute the given values to our equation,
thus

Qd = 3 – 0.25 (5)
= 3 – 1.25
= 1.75 units of good A
CHANGE IN QD VS CHANGE IN DEMAND
Change in QD
> There is a movement from one point
to another, from one price – quantity
combination to another along the same
demand curve
Change in Demand
> There is a change in demand if the
entire demand curve shifts to the right/left
resulting to an increase or decrease in
demand due to other factors other than the
price of the good sold.
METHODS OF SUPPLY ANALYSIS
Supply Schedule
Table listing the various prices of products and
corresponding quantities supplied at each of these
prices at a given time.
Price QS in kilos

A 35 48

B 24 41

C 13 30

D 12 17

E 11 5
Supply Curve
A graphical representation showing the
relationship between price of the
product sold and quantity supplied.

Supply function
Form of mathematical notation that links
the dependent variable, QS with
various independent variables which
determines QS.
Factors that influence QS
 Price of the product

 Number of sellers in the market

 Price of factors inputs

 Technology

 Business goals

 Importation

 Weather conditions

 Government policies
QS = a + bP
Where:
Qs = quantity supplied
a = intercept of the supply curve
b = slope of supply curve
P = price of good sold
Ex.: Price of good A is P5.00, the intercept is
3 and the slope is 0.25. If we want to know
how much of good A is supplied by sellers,

Qs = a + bP
= 3 + 0.25 (5)
= 3 + 1.25
= 4.25 units
CHANGE IN SUPPLY VS. CHANGE IN
SUPPLY
Change in QS
> Occurs if there is a movement from
one point to another point along the same
supply curve
Change in Supply
> Happens when the entire supply
curve shifts leftward or rightward
MARKET EQUILIBRIUM
> Pertains to a balance that exists
when quantity demanded equals quantity
supplied
A general agreement of the buyer and seller
in the exchange of goods and services at a
particular price and quantity
EQUILIBRIUM MARKET PRICE
> The price agreed by the seller to
offer its products for sale and for buyers to
pay for it.
It is generated by the intersection of demand
and supply curve
 What happens when there
is market disequilibrium?

A surplus or shortage may

happen
SURPLUS
> A condition in the market where the
quantity supplied is more than the quantity
demanded
Sellers tend to lower market price of the product,
meaning there is a downward pressure to price
SHORTAGE
> A market condition in which quantity
demanded is higher than quantity supplied
Consumers influence the price to go up since they will
bid up prices in order for them to acquire the
product which causes an upward pressure
Scenario analysis
1. What is the effect on equilibrium price
if supply increase demand decrease?
2. Supply increase and demand
increase
1. Both changes decrease Ep
For Eq., an increase in supply increases quantity but
a decrease in demands reduces it.
If the increase in supply is greater than the decrease
in demand, Eq will increase but if the decrease in
demand is greater than the increase in supply, Eq
will decrease.
2. A supply increase lowers Ep while a demand
increase boosts it. If an increase in supply is larger
than the increase in demand, Ep will fall.
The effect on Eq is certain. An increase in supply and
demand will raise Eq.
PRICE CONTROLS
> The specification by the government
of minimum or maximum prices for certain
goods and services
FLOOR PRICE
> The legal minimum price imposed by
the government on certain goods and
services

“ price at or above the floor price is legal

and a price below is not”
MARKET EQUILIBRIUM:
MATHEMATICAL APPROACH

Demand equation: QD = a -
bP
Supply equation: QS = a +
bP
Equilibrium: QD = QS
Ex.: Look for the Pe and Qe given the
following:

Qd = 68 - 6P
Qs = 33 + 10P

Solving this
a - bP = a + bP
 a - bP= a + bP
68 - 6 (P) = 33 + (10P)
68 - 33 = 10P + 6P
35 = 16P
P = 2.19

Substitute the value of P

68 - 6 (2.19) = 33 + 10 (2.19)
68 - 13.14 = 33 + 21.9
54.86 or 55 units
THE CONCEPT OF ELASTICITY
ELASTICITY
> The ratio of percentage change in
one variable to the percentage change in
another variable
DEMAND ELASTICITY
> Is a measure of the degree of
responsiveness of quantity demanded of a
product to a given change in one of teh
independent variable which affect demand
for that product
TYPES;
Price Elasticity of Demand
Deals with the sensitivity of quantities bought by a
consumer to a change in product price
The percentage change in QD caused by a % change
in price.

ED = % change in QD
% change in price

EP = Q2 - Q1 / P2 - P1
(Q1 + Q2) / 2 (P1 + P2) / 2
Where
Ep = coefficient of arc/price elasticity
Q1 = original quantity demanded
Q2 = new quantity demanded
P1 = original price
P2 = new price
Ex. P Q
6 0
4 10
2 20
0 30
Ep = 10 – 0 / 4 - 6
(0+10)/2 (6+4)/2
= 10 / (-2)
5 5
= 50
(-10)
= -5
** the computed value of the price is
always negative

This is due to the very nature of the

relationship of price and QD, if price
increase, QD decreases therefore the
change is negative leading to a
negative price elasticity of demand
Income Elasticity of Demand
Measures the degree to which
consumers respond to a change in
their incomes buy more or less of a
good.

Ei = % change in QD
% change in income
Normal good
> A good is considered normal good if
a rise in income brings an increase in
demand and a fall in income brings a
decrease in demand.

Inferior good
> A rise in income brings a decrease
in demand and a fall in income brings an
increase in demand.
Cross Price Elasticity of Demand
Measures the responsiveness of demand to
changes in the price of other good
Defined as the percentage change in QD of
one good (X) divided by the percentage
change in price of a related good (Y).

Exy = % change in QD of good X

% change in price of good Y
ELASTICITY OF SUPPLY
> Refers to the reaction of the sellers
or producers to price changes of goods sold
> Measure of the degree of
responsiveness of supply to a given change
in price.
> % change in quantity supplied given
a % change in price

Es = % change in QS
% change in price
CONSUMER BEHAVIOR AND UTILITY
MAXIMIZATION
Consumer
> One who demands and consumes
products
Goods
> Refer to anything that provides satisfaction
to the needs, wants, desires of consumers
> Can be classified into:
Consumer goods
> Goods that yields satisfaction directly to
any consumer
 Necessity

> Goods that satisfy the basic needs

of man.
 Luxury

> Goods that men can live without

 Economic good

> It is both useful and scarce

 Services

> Any intangible economics activities

such as haircutting, banking, etc.
MASLOW’S HIERARCHY OF NEEDS
 Physiological Needs

 Safety Needs

 Social Needs

 Esteem Needs

 Self actualization needs

THE UTILITY THEORY
 Utility

> Refers to the satisfaction or

pleasure that a consumer gets from the
consumption of a product
 Utility Theory

> Explains how our satisfaction or

utility as consumers decline when we try to
consume more and more of the same good
at a particular point in time
 Marginal Utility
> The additional satisfaction that an
individual derives from consuming an extra unit of a
good or service.
> Marginal means “ additional” or “extra”
 Total Utility

> Total satisfaction that a consumer derives

from the consumption of a given quantity of a
product in a particular period of time
> The total benefit that a person gets from
the consumption of a good or service
> Usually increases as we consumer more
and more of a product but the increase is at
decreasing rate.
HYPOTHETICAL UTILITY SCHEDULE
FOR MAIS
Unit purchased Total Utility Marginal Utility

2 15 15

4 45 30

6 90 45

8 115 25

10 125 10
Law of Diminishing Marginal Utility
> States that as a consumer gets
more satisfaction in the long run, he
experience a decline in his satisfaction for
goods and services
> It means consumption of additional
unit of the same good increases total utility
but at a decreasing rate because marginal
utility diminishes
MU = change in TU
Change in quantity or
MU = TU2 – TU1
Q2 -- Q1
“ we can therefore say that we
have already reached the peak
of our satisfaction if
the marginal utility is already
zero.”
 Consumer surplus
> The difference between the total
amount that we are willing and able to pay
for a good or service and the total amount
that we actually pay for that good or service

Ex. You are interested in buying a pair of

pants. You went to the mall to look for pants
and your budget is P2,000. Then you found
out that the pants you liked most cost only
P1,500. What is your consumer surplus?
INDIFFERENCE CURVE
> A line that shows the combination of goods
among which a consumer is indifferent
 Hypothetical consumption of meat and fish

Combinati Meat (kg) Price of Fish (kg) Price of

on Meat fish

A 5 500 1 100

B 4 400 2 200

C 3 300 3 300

D 2 200 4 400

E 1 100 5 500
 Consumer can choose any of the
combination and will get the same
satisfaction at a limited budget of P600
thus he will be indifferent to any of the
combination
MARGINAL RATE OF SUBSTITUTION
> The rate at which a person will give
up good y, (the good measured in y axis) to
get more of good x ( the good measured on
x axis) and at the same time remains
indifferent
> Measured by the magnitude of the
slope of an indifference curve.
“ If the indifference curve is
steep,
MRS is high”

This implies that a person is

willing to give up a large number
of good y to get a small quantity of
good x and remains indifferent.
BUDGET LINE
> also called consumption possibility line
> shows the various combinations of two
products that can be purchased by he
consumer with his income given the prices
of the product

Purpose:
Not to spend more than what
you have
Hypothetical table for budget line
Beans in Price Onions in Price Budget
kg kg

5 125 1 25 150

4 100 2 50 150

3 75 3 75 150

2 50 4 100 150

1 25 5 125 150
PRODUCTION AND COST
 Production

> refers to any economic activity which

combines the four factors of production to
form an output that will give direct satisfaction
to customers.
> Process of converting inputs into
output
 Technology

> Body of knowledge applied to how

goods are produced
> Production process employed by
firms in creating goods and services
Two categories are:
 Labor Intensive

> It utilizes more labor resources than

capital resource
> Usually employed by economies
where labor resources are abundant and
cheap
 Capital intensive

> Utilizes more capital resources than

labor resources in the production process
> Employed by industrialized
economies since capital resources are
cheaper than labor
“The decision as to what type of
technology to employ depends
on the
availability of resources and
its cost”
PRODUCTION CONCEPTS
SHORT RUN VS. LONG RUN PRODUCTION
 Fixed inputs

> Is any resource the quantity of which

cannot readily be changed when market
conditions indicate that a change in output
is desirable
 Variable Inputs

> Is any economic resource the

quantity of which can be easily changed in
reaction to change in the level of output
 Short run
> A period of time so short that there is at least
one fixed input therefore changes in the output level
must be accomplished
 Long run

> A period of time so long that all inputs are

considered variable
 Production Function

> A functional relationship between quantities of

inputs used in production and outputs to be produced
> It specifies the maximum output that can be
produced with a given quantity of inputs given the
existing technology of the firm
Ex. O t-shirt = 1 sewing machine, 1 threads, 1 sewer, 1
fabrics, etc
Production Concepts
 Total products

> Refers to total output produced after

utilizing the fixed and variable inputs in the
production process
 Marginal Product

> The extra output produced by 1

additional unit of input while others are held
constant
 Average product

> It is equal to the total product

divided by the total units of input used.
 Labor TP MP AP
(Input)
1 8 8 8

2 20 12 10

3 37 17 12

4 57 20 14

5 72 15 14

6 80 8 13

7 85 5 12

8 88 3 11

9 86 -2 10
LAW OF DIMINISHING RETURNS
> Holds that we will get less and less
extra output when we add additional input
while holding other inputs fixed
 Increasing marginal return

> This happens when the marginal

product of an additional worker exceeds the
marginal product of the previous worker
 Decreasing marginal product

> Occurs when the marginal product

of an additional worker is less than the
marginal product of the previous worker
Returns to Scale
 Constant returns to scale

> Indicates a case where a change in all

inputs leads to a proportional change in output.
 Increasing returns to scale

> Also called economies of scale

> Happen when an increase in all inputs
leads to a more than proportional increase in
the level of output
 Decreasing returns to scale

> Occurs when a balance increase in all

inputs leads to a less than proportional
increase in total output
THE THEORY OF COST
 Cost

> Refers to all expenses acquired

during the economic activity or the
production of goods and services
 Explicit costs

> Are payments to non owners of a

firm for their resources such as labor or use
of a building
> Expenses made for the use of
resources not owned by the firm itself
 Implicit Costs
> Are opportunity costs of using
resources owned by the firm. These are
opportunity costs of resources because the
firm makes no actual payment
 Economic profit

> A firms economic profit is equal total

revenue less total cost
 Sunk Cost

> These are fixed costs that once we

have obligated ourselves to pay them, the
money becomes sunk into the business
 TC = TFC + TVC Q = 100
10,000 = 4,000 + 6,000
 AFC = FC / Q

= 4,000 /100
= 40
 AVC = VC / Q

= 6,000 / 100
= 60
 ATC = TC / Q or AFC + AVC

100 = 10,000 / 100

= 40 +60 = 100

MC = change in total cost / change in quantity

= change in total variable cost / change in quantity
TO OPERATE OR TO SHUT
DOWN?
TO OPERATE OR TO SHUT DOWN
The firm has two options in the long
run, to operate or to shutdown
If it will operate = it will product the
output that will give
The highest possible profit to the firm
If it is losing money, it will operate at
the output at which losses are
minimized.
If the firm shuts down = output is
zero
Fixed costs are still cost to the
firm
PROFIT, LOSS AND PERFECT
COMPETITION
 Profit Maximization

> The process by which a firm

determines the price and output level that
returns the greatest profit.
Approaches:
 Total revenue – total cost method

> Relies on the fact that profit equals

revenues minus cost
Profit = TR – TC
 Marginal cost – marginal revenues method
> Based on the fact that total profit in a
perfectly competitive market reaches its
maximum profit where marginal revenue
equals marginal cost

MR = MC

Total Profit = Output (Price – ATC)

PERFECT COMPETITION
> A market structure with many
well informed sellers and buyers of
identical products and no barriers in
entering or leaving the market
Characteristics are:
 Large number of small firms
 Homogenous products
 Very easy entry and exit
 “ What determines the
market price in a
competitively market
structure?
“The interaction of the supply
and demand”
Price taker or price
maker ?
OLIGOPOLY
> Market structure characterized by
 Few sellers

 Homogenous or differentiated products

 Difficult market entry

> Features are:

 Product branding

 Entry barriers

 Interdependent decision making

 Non price competition

Free deliveries and installation
Extended warranties for

consumers and credit facilities

Longer opening hours
Branding of products and heavy

spending on advertising and

marketing
Extensive after sales services
Importance of non price competition
under oligopoly
 Better quality of service
 Longer opening hours
 Extended warranties
 Discounts on product upgrades
 Relationships with suppliers
PRICE LEADERSHIP
> When one firm has a clear dominant
position in the market and the firms with
lower market shares follow the pricing
changes prompted by the dominant firm

Tacit collusion
> Occurs when firms undertake
actions that are likely to minimize a
competitive response
Explicit collusion
> When a market is dominated by few
large firms, there is always a potential for
businesses to seek to reduce market
uncertainty , if so, firms decided to engage
in price fixing agreements or cartels to
maximize joint profits

Price fixing
> Represents an attempt by suppliers
to control supply and fix price at an
acceptable level
Collusion is possible when:
 There are only small number of firms in the

industry and the barriers to entry protect the

monopoly power of existing firms in the long
run
 Market demand is not too variable

 Demand is fairly inelastic with respect to

price
 Each firm’s output can be easily monitored
Possible break down of cartels
Enforcement problems
Falling market demand
The success entry of non cartel

firms into the industry

BUSINESS ORGANIZATIONS
Forms:
 Single / Sole Proprietorship

> Form of business owned by a single person.

Advantages:
 Easy to organize

 The proprietor is the boss

 Financial operations are not complicated

 The owner acquires all the profit

Disadvantages:
 Limited ability to raise capital

 The proprietor has unlimited liability

 Limited ability to expand

 The business is entirely the responsibilities of the owner

Registration:
 Register the business name at DTI
 Pay municipal licenses to the local

government
 Application at the BIR
 Register with the BIR book of accounts
 Partnership

> Register the business name

with the DTI
> Have Articles of Co-Partnership
notarized and registered to SEC
> TIN from BIR
> Register books of accounts
Articles of Co-Partnership
 Name of the partnership

 Names of the partners

 Place of business

 Effective date of partnership

 Nature of business

 Investment of each partner

 Duration of the contract

 Rights, power and duties of partners

 Accounting period

 Manner of dividing profits and losses

 Liabilities of partners for partnership debts

Types of Partners
A.Based on their contribution
 Capitalist partner

> One that provides assets like money and

property to be utilized as the starting capital of the
business
 Industrial partner

> One that swears to give services or labor to

operate the operation of the business
> Usually the hands on partner in the business
 Capitalist industrial partner

> One that pledges money and property as the

starting capital of the business as well as his
services.
Based on liability of partnership debt
 General partner

> Liable for the partnership problem

particularly the debts of the business
> His liability to the business extends
to his personal property after partnership
assets has exhausted
 Limited partner

> Whose liability for the partnership

problems is limited
> His liability is limited to his capital
contribution
Advantages:
 Easy to form. Requirements are technically

similar with sole proprietorship

 More flexibility of operations

 More efficient operations

 Possibility of bigger resources

Disadvantages:
 Partners have unlimited liability for

partnership debts
 It has a limited life or lacks stability

 Conflict between partners is possible

3.Cooperative
> Only organization composed
primarily of small producers and consumers
who voluntarily join together to form
business enterprises which they themselves
own, control and patronize
 Cooperative Code of the Philippines

> Created in 1990 by virtue R.A. No.

6938 which serves as the current legal basis
for the operation of all cooperatives in the
country
Principles:
 Open and Voluntary membership
 Democratic control
 Limited interest on capital
 Cooperation among cooperatives and

members
 Corporation

> An artificial being created by

operation of law having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence
> Form of business organization in
which the owners have an undivided
ownership shares in the assets of the
corporation upon its dissolution and a share
in its profits corresponding to the amount of
shares of stocks which they own
Advantages:
 It has legal capacity

 It has continued and more or less

permanent existence
 Management is centralized

 Ability to raise more capital

Disadvantages:
 Complicated to maintain and not easy to

organize
 Government intervention

 Subject to higher tax

 Possibility of abuse of corporate officials

Classification of Corporation
A.Based o the nature of its capital
 Stock corporation

> The capital is in the form of

shares of stocks
 Non stock corporation

> There is no dividend distributed

to members, trustees or heads
B. Based on purpose
 Public corporation

> Is owned, formed and

organized by the government
 Private corporation

> Is owned, formed and

organized by the private sector/private
businessman.
C. Based on relation to another
corporation
 Parent Corporation

> One which has a controlling interest

(more than 50%) on another corporation so
that it has the power to elect the majority of
directors of the other corporation
 Subsidiary

> The investor corporation in which

the parent corporation has a controlling
power
E. Based on whether they want to open in
public or not
 Close corporation

> Limited to selected persons or family

members
 Open corporation

> Open to any person who may wish

to become a stockholder or member