ECON02: Microeconomics

DEFINING ECONOMICS &

THEMES OF
MICROECONOMICS
AB Economics 2 - Group 1
 Defining Economics

Macroeconomics and Microeconomics

Lesson Economic Method

Outline Themes of Microeconomics:

Trades-Off;
Theories and Model;
Factors and Actors;
Prices and Markets.
DEFINING
ECONOMICS
Economics is often associated with wealth
and finance, but it is not all about money.

Economics is a social science. In basic terms,

it is the study of people and their choices. It
considers (divisions) how things are made
(produced), how things are moved around
(distributed), how things are used
(consumed), and trading (exchange).
 What does an Why is economics
economist do? important?
An economist evaluates programs, studies Economics helps us understand historical trends,
human behavior, and explains social phenomena. predict future outcomes, inform our decisions,
They can be teachers, advisors, and and become more efficient in our resource
consultants. Their contributions affect consumption.
everything from household decisions to It influences the price of your shoes to the jobs
government policy. that will be available in the future.
Macroeconomics
and Microeconomics
There are two major fields of economics: macroeconomics and microeconomics.

Macroeconomics: the study of production, employment, prices, and policies on a

national scale. It looks at the economy as a whole, including a nation’s output,
unemployment, inflation, interest rates, government spending, and growth. An
example would be international trade. The two main areas of macroeconomic
research are long-term economic growth and shorter-term business cycles.

Microeconomics: the study of how consumers, workers, and firms interact to

generate outcomes at the individual and business levels. Individuals are often
grouped into microeconomic subgroups such as buyers, sellers, and business
owners. Examples include a local bakery deciding what goods to sell or you
choosing to buy one product over another.
Economic Method
Economics as a science , the scientific method is used in
analyzing certain problems related to and affecting the
economy.

1. Identify the problem.

2.Gathering the data and information
3. Evaluating the data and formulating
theories.
4. Evaluating statistics of data.
5. Making policy.
It seeks to answer or solve the problem of SCARCITY and
SHORTAGE of resources in the society or world.
 THEMES OF
MICROECONOMICS
Trade-off
is when you choose one thing which causes you to have to give up, or sacrifice,
another.

Consumers
Consumers have limited incomes, which can be spent on a wide variety
of goods and services, or saved for the future.

Workers
Workers also face constraints and make trade-offs. First, people must
decide whether and when to enter the workforce. Second, workers face
trade-offs in their choice of employment. Finally, workers must
sometimes decide how many hours per week they wish to work, thereby
trading off labor for leisure.
Firms
Firms also face limits in terms of the kinds of products that they can
produce, and the resources available to produce them.
 Theory & Model
explanation and mathematical
prediction representation

A theory is a simplified representation of how two or more variables interact

with each other. The purpose of a theory is to take a complex, real-world issue
and simplify it down to its essentials. If done well, this enables the analyst to
understand the issue and any problems around it. A theory is a more abstract
representation.

A model is a more applied or empirical representation. We use models to test

theories.a simplified description of reality, designed to yield hypotheses about
economic behavior that can be tested.
 Positive and Normative
Analysis
Positive analysis deals with objective statements and facts. It focuses on
describing and explaining how the world works based on empirical evidence and
data. The goal is to understand and predict economic phenomena without making
judgments about their desirability.

Normative analysis involves value judgments and subjective opinions about what
ought to be. It focuses on evaluating and prescribing policies based on normative
criteria like fairness, equity, or ethical considerations.
Four Factors of Production
it refers to the elements needed by the economy to produce a certain good or
service

Land Labor Entrepreneurship

most important factor of people of the economy a person who has managerial ability and
production where all the blue collar job - strength willing to accept risk in entering
natural resources (raw white collar job - office business
material) came from

Capital Flow of Payment

anything used to produce goods and services Land Rent
structure capital - buildings or facilities
inventory capital - includes raw materials, Labor Wages
goods in-process, and finished goods Entrepreneurship Profit
equipment capital - tools, and instruments
Capital Interest
Actors in the Economy
participants of the economy, they use productive resources and interact with each
other with their respective motives and compensation, involving the flow of goods
and income.

Household Business Firms Government

acts as supplier and consumer produces goods extracts money (taxes) from
depending on which market acts as suppliers and sell goods households and businesses
owns all the 4 factors of and services in product market
production acts as buyers in factor
consumes goods and services markets of raw and labor
markets
Financial Sectors Overseas Sectors
includes banks and institutes that involved in the flow of resources,
provide cash flow (lending services) goods, services, and money from
collects money from households international economy
(savings) regulates import and export of
uses the savings to lend money to resources and in/out flow of money
businesses and earn interest on international market
Circular Flow of Economic Activities
it highlights the flow within the economy - flow of economic resources, goods and
services, and money.
it shows the interaction between two groups of economic decision-makers —
household and business and two types of economic markets — the market for
resources and goods and services.
 MODEL OF
SUPPLY AND DEMAND
is the number of products that a is the quantity of consumers who are
producer or seller is willing and capable willing and able to buy products at
to provide to buyers. various prices during a given period of
time.
The Law of Supply states that, all The Law of Demand states that, all
else being equal, as the price of a else being equal, as the price of a
good or service increases, the good or service decreases, the
quantity supplied by producers quantity demanded by consumers
increases, and as the price increases, and as the price increases,
decreases, the quantity supplied the quantity demanded decreases.
decreases. This direct relationship This inverse relationship between
shows how suppliers are motivated price and quantity demanded reflects
by price: higher prices make consumers' behavior: when something
production more profitable, so becomes cheaper, people are more
producers are willing to supply willing to buy it; when it becomes more
more expensive, they buy less.
 EQUILIBRIUM
is the state in which market supply and
demand balance each other, and as a result
prices become stable.

EQUILIBRIUM PRICE - as the price at which the

quantity demanded and quantity supplied of a
good or service are equal.
EQUILIBRIUM QUANTITY - as the quantity of
goods or services exchanged at the equilibrium
price.

Factors Affecting Equilibrium

Technological Advancements
Government Policies
Changes in the Number of Buyers or Seller
Expectations
GOVERNMENT
In economics, the government has limited but impactful tools to influence the market. Within
the supply and demand model, the government typically intervenes in one of four ways:

Tax: Imposes taxes on goods and services, increasing production costs or consumer prices,
which can reduce demand or supply.

Subsidize: Provides financial support to producers or consumers, lowering costs and

encouraging increased production or consumption of specific goods.

Price Floor/Price Ceiling: Sets minimum (price floor) or maximum (price ceiling) price limits,
preventing prices from moving too low or too high, which can lead to shortages or surpluses.

Tariff on Trade: Applies taxes on imported goods, raising the cost of foreign products to
protect domestic industries or reduce trade imbalances.
PRICE
refers to the amount of money required to purchase a
product or service. Price can also be seen as a measure of a
product’s value, insofar as people are willing to pay a certain
monetary amount to buy it.

also help indicate supply and demand—how much of certain

products people need—so that producers can determine how
much to produce. This system is called the “price mechanism,”
and it assumes prices naturally move until the supply of a
product matches demand.
Prices have three primary functions:

Prices help producers decide which goods to

produce and how much to make.
Prices help determine how to produce goods.
Prices determine who will get the goods.

the price system gives producers and consumers an

actionable measure of supply and demand.
REAL vs NOMINAL PRICE
Are two ways to look at the price of goods and services
over time, taking inflation into account.

- Nominal price is the actual price you pay for something

at a specific period of time, without adjusting for inflation.
It's the price tag you see on an item.
.
- Real price is the nominal price adjusted for inflation,
giving a more accurate picture of how the price has
changed in terms of purchasing power. It tells you how
much of a good or service you can buy with the same
amount of money over time.
 MARKET
A market is any place or venue where buyers and
sellers can exchange goods and services. A market
may be physical, like a retail outlet, or virtual, like an
online brokerage with no physical contact between
buyers and sellers.

The fundamental economic problem calls for making

definite decisions on what goods to produce, how
they shall be produced, and for whom they shall be
produced. To address the problem, the market is
used as the principal mechanism.
A market exists when "buyers wishing to exchange
goods and services are in contact with the sellers
wishing to exchange goods and services for money".

It is where people are left alone to make their own

transactions.

It is also where the forces of demand and supply

interact.

The meeting of these two opposing forces paves

way to providing answers to what goods to produce,
how they shall be produced and for whom they shall
be produced.

These happens because it is through the market

where "buyers make known their decisions to buy or
not to buy, and seller make known their willingness
and ability to sell or not to sell goods and services.
 MARKETS ARE STRICTLY MADE
UP OF BUYERS AND SELLERS

THE ACTION AND DECISIONS OF BUYERS

CONSTITUTE DEMAND FOR A PRODUCT
OR SERVICE, WHILE THE SELLERS
DECISIONS AND ACTIONS CONSTITUTE
SUPPLY.
Competitive vs. Non-Competitive
Markets
Competitive or Perfect competition is an idealized market condition
where many sellers compete to offer the best prices, and large
sellers have no advantages over smaller ones. Although perfect
competition rarely occurs in real-world markets, it provides a useful
model for explaining how supply and demand affect prices and
behavior in a market economy.

A market is not competitive when the agents acting in such a market

have the power to influence the price, directly or indirectly,
something that does not occur under perfect competition. Generally,
these agents have market power because they are few in number,
have access to relevant information and can foresee the
interdependence between their strategies and those of others.
Market Price
and Structure
Market price is a fundamental concept in economics and is influenced by
various factors that reflect the equilibrium between supply and demand in
a market.

Market price is the current price of a product or service.

The market price of a product or service is determined by the forces of

supply and demand. It's the price at which quantity supplied equals
quantity demanded.

In financial markets, market prices change constantly as people change

their bid or offer prices, or as sellers hit the bid or buyers hit the offer.
.
Market Price
and Structure
Market Structure defines how a market is organized based on the number of
firms, type of products, and competition level. this significantly affect the
behavior and interaction of buyers and seller

Types of Market Structure

Perfect Competition: Many sellers, identical products, price takers.

Monopolistic Competition: Many sellers, differentiated products, some

pricing power.

Oligopoly: Few large firms, products can be similar or different, strategic

pricing.

Monopoly: Single seller, unique product, significant pricing power.

Pure
(perfect)
Competition
Many and small sellers, so that no one can
affect the market.

Homogeneous/identical product.

Easy to enter and exit the industry.

Transparent and free information

Monopolistic
A market structure in which there are:
Many competing firms (many buyers and sellers)

differentiated products

Sellers are price searchers and price makers and

produce where MR=MC

free entry/exit in the industry in the long run

A mix between a monopoly and perfect competition

Oligopoly
• Few large firms: each must consider its rivals'
reactions in response to its decisions about
prices, output, and advertising.

Standardized or differentiated products

Entry is hard: economies of scale, huge capital

investment may be the barriers to enter.
Monopoly
1. A single seller: the firm and industry are
synonymous.
2. Unique product: no close substitutes for
the firm's product.
3. The firm is the price maker: the firm has
considerable control over the price because
it can control the quantity supplied.
4. Entry or exit is blocked.
 Reporters
AGUSTIN, Princess Erika V.
BANIQUED, Angelica
BAUTISTA, Trisha Mae V.
BAUTISTA, Tyron A.
CARAGAY, Kimber Josh A.
DORIA, Mark Angelo V.
FIESTA, Robert Jr.
JAZMIN, Phoebe Anne
LAGUNERO, Sarrah Kerstin
OBENARIO, Kimberly