Macroeconomics 1st Semester-Midterm Reviewer

#1
WHAT IS ECONOMICS
A social science that studies and influences human behavior

Economics is the study of what constitutes rational human

behavior in the endeavor to fulfill needs and wants.

SCARCITY
Scarcity is an economic concept where individuals must
allocate limited resources to satisfy their needs. Scarcity
occurs when demand for a good or service is greater than
availability. Scarcity affects the monetary value individuals
place on goods and services.

THE FOUNDATION OF ECONOMICS

ADAM SMITH (1776)

THE FATHER
• Author of the famous book “An Inquiry into the Nature and
Causes of the Wealth of Nations”

LIONEL ROBINS
the science which studies human behavior as a relationship
between ends and scarce means which have alternative
uses
NEEDS AND WANTS

Needs:- "STUFF" we must have to survive.

•E.g.:- Food, Clothing and Shelter

Wants:- "STUFF" we would really like to have.

E.g.:- Fancy Food, big screen TV, jewelry. These are also
known as Luxuries.
People try to balance needs and wants.

#2
TYPES OF ECONOMICS
1·) MICRO
• Micro Economics studies how the individual parts of the
economy make decisions to allocate limited resources
• Microeconomics studies:
>how individuals use limited resources to meet unlimited
needs
>the consequences of their decisions
>the behavior of individual components like industries, firms
and households.
>how individual prices are set
>what determines the price of land, labour and capital
>Inquire into the strengths and weaknesses of the market
mechanism.
2·) MACRO
• Macroeconomics studies about the functioning of the
economy as a whole
• It examines the economy through wide-lens.
• Macroeconomics studies about
>the total output of a nation
>the way the nation allocates its limited resources of land,
labor and capital
➢ The ways to maximize production levels
➢ The techniques to promote trade
• After observing the society as a whole, Adam Smith noted
that there was an “invisible hand” turning the wheels of the
economy: a market force that keeps the economy
functioning.

Factors of Production
1. Land
2. Labor
3. Capital
4. Entrepreneurship

Types of Economic System

1. Market Economy
2. Command Economy
3. Mixed Economy

Market Economy
A market economy is a system where private individuals and
businesses drive the economy on the basis of demand and
supply without state intervention.
COMMAND ECONOMIES
In command economy the government takes economic
decisions.

➢ No Competition
➢ Government. Control
➢ Robust block markets
➢ Budget and allocation of resources

MIXED ECONOMIES
In the mixed economies the Government and the Market
work together in decision making.

➢ Co-survival of public and private sectors

➢ Economic Planning
➢ Safeguarding consumer rights
➢ Protection of labor rights

NATURE OF ECONOMICS
➢ ECONOMICS IS A SCIENCE
➢ ECONOMICS IS AND ART

Economics is a Science
➢ Like science, the economic laws are universal in nature
➢ Economics verifies fact and information like science.
➢ Economics does systematized investigation of a subject
matter.
➢ Laws of economics determine the cause and effect
relationships.
 ➢ Economics is thus, a science in some ways.

Economics is an Art
➢ Economics applies various ideas and solution for various
problems so as to get optimal utility by scarifying
possible least resources.
➢ Economics teaches us how to solve the problems of
society. It directly involved in solution of the problems by
formulating and making practical implementation of
various economic plan and policies.
➢ Economics is thus, an art in some ways.

METHODS OF ECONOMICS
➢ DEDUCTIVE
➢ INDUCTIVE

DEDUCTIVE METHOD: GENERAL TO SPECIFIC

i. Starts from the general and moves to the

particular.
ii. Begins with general assumptions and moves to
particular conclusions.
iii. Develops a theory, and then examines the facts to
see if they follow the theory

INDUCTIVE METHOD: SPECIFIC TO GENERAL

i. Starts from the particular and moves to the general.

ii. Begins with particular observations and moves to
general explanations.
 iii. Collects observations, then develops a theory to fit the
facts.
TOOLS OF ECONOMICS
➢ Mathematical tools
➢ Statistical tools
➢ Economical tools

MATHEMATICAL TOOLS
➢ DIFFERENTIAL EQUATIONS
➢ MATRIX ALGEBRA
➢ LINEAR EQUATIONS
➢ ECONOMIC MODELS
➢ OPTIMIZATION

STATISTICAL TOOLS
➢ REGRESSION ANALYSIS
➢ CORRELATION ANALYSIS
➢ CALCULATION OF PROBABILITIES

ECONOMICAL TOOLS
➢ THE LAW OF SUPPLY AND DEMANDS

#3
10 PRICIPLES OF ECONOMICS

Economics
"Economics "comes from A Greek word "Oikonomia"
• "one who manages A household Economics is the study of
how society manages its scarce resources.

According to Adam Smith, "Economics is the social science

that studies the production, distribution and consumption of
goods and services."
• According to the Oxford English dictionary, "Economics is
the branch of knowledge concerned with the production,
consumption, and transfer of 3 wealth".

01: PEOPLE FACE TRADE-OFFS

• Trade off is a situation that involves losing one quality or
aspect of something in return for gaining another quality or
aspect.

2:THE COST OF SOMETHING IS WHAT YOU GIVE UP TO

GET IT
•Making decisions requires comparing the costs and benefits
of alternative courses of action.
•Nothing comes for free in this world. You need to give up
some thing in order to gain something.

3:RATIONAL PEOPLE THINK AT THE MARGIN

• A rational decision-maker takes action if and only if the
marginal benefit of the action exceeds the marginal cost.

4: PEOPLE RESPOND TO INCENTIVES.

Incentives: Something that induces a person to act
•It may be punishment or reward 000
5: TRADE CAN MAKE EVERYONE BETTER OFF
• Trade allows each person to specialize in the activities he
or she does best. By trading with others, people can buy a
greater variety of goods or services.

6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE

ECONOMIC ACTIVITY
• An economy that allocates resources through the
decentralized decisions of many firms and households as
they interact in markets for goods and services.

7:GOVERNMENTS CAN SOMETIMES IMPROVE MARKET

OUTCOMES..
When a market fails to allocate resources efficiently, the
government can change the outcome through public policy.
Examples are regulations against monopolies and pollution.

8: THE STANDARD OF LIVING DEPENDS ON A

COUNTRY'S PRODUCTION.
• Countries whose workers produce a large quantity of goods
and services per unit of time enjoy a high standard of living.
Similarly, as a nation's productivity grows, so does its
average income.

9:PRICES RISE WHEN THE GOVERNMENT PRINTS TOO

MUCH MONEY
• When a government creates large quantities of the nation's
money, the value of the money falls. As a result, prices
increase, requiring more of the same money to buy goods
and services.
10: SOCIETY FACES A SHORT-RUN TRADEOFF
BETWEEN INFLATION AND UNEMPLOYMENT
•The Phillips curve captures the inverse relationship between
inflation and unemployment.
•Lower unemployment-Higher inflation.

CIRCULAR FLOW OF ECONOMICS ACTIVITIES

• THE FLOW OF PRODUCTION, INCOME, &
EXPENDITURE NEVER STOPS. IT IS A CIRCULAR
FLOW WITHOUT A BEGINNING OR AN END.

BASIC ECONOMICS ACTIVITIES

•PRODUCTION
Any process that creates value to the already existing goods
is called production

•CONSUMPTION
It means the use of utility of goods & services for the direct
satisfaction of individual and collective wants

•INVESTMENT OR CAPITAL FORMATION

It is that part of production during a year which is not
consumed but served as capital formation for further
production

INTER RELATIONSHIP AMONG DIFFERENT ECONOMIC

ACTIVITIES
• CONSUMPTION
 • PRODUCTION
• DEMAND
• INVESTMENT OR CAPITAL FORMATION

#4
THE CIRCULAR FLOW OF
OUTPUT AND INCOME

Content
•Definition The circular flow of output and income
•Components of The circular flow of output and income
•Conclusion

What is the circular flow of output and income?

The circular flow of output and income is a fundamental
economic model that illustrates how money moves through
an economy. It describes the interactions between different
sectors and how economic activities are interconnected.

•The circular flow of income model is a graphical

representation of the cyclical movement of money between
households and businesses in an economy, depicting the
exchange of labor and resources for income and the
subsequent spending of that income on goods and services
produced by businesses.

The circular flow of outcome and income consists of this

components:
Households
- provide factors of production (land, labor, capital, and
entrepreneurship) to firms and receive income (wages, rent,
interest, and profits) in return.

Firms
produce goods and services and sell them to households.
They pay households for the factors of production, creating a
continuous flow of income and expenditure.

Government
-can be included, which collects taxes from households and
firms and injects money into the economy through
government spending on goods, services, and transfers.

Foreign Sector
involves exports and imports. Households and firms may buy
goods and services from abroad (imports) and sell goods
and services to other countries (exports), impacting the flow
of money.

Financial Institutions
-also play a role by facilitating savings and investments.
Households deposit money into banks, which firms then use
for investment in production.

• In the basic model, the circular flow of income consists of

two components: Household and Firms
•In the real world, the model is a bit more complicated. It has
three extra components: Government, Foreign Sector, and
Financial institution

#5
THE MULTIPLIER EFFECT AND
THE CIRCULAR FLOW

MULTIPLIER EFFECT:
-refers to the proportional increase in national income or
economic output that results from an initial increase in
spending.

KEY COMPONENTS OF THE MULTIPLIER EFFECT:

1.Initial Change in Spending:
-The process starts with an initial increase (or decrease) in
spending, often from investment, government spending, or
consumer consumption. For example, a government might
decide to build new infrastructure.

2. Income Generation:
-The initial spending increases the income of those who are
directly involved in the project. For instance, construction
workers and suppliers receive wages and payments.

3. Increased Consumption:
- The recipients of this income are likely to spend a portion of
it on goods and services, increasing the income of others in
the economy. This, in turn, leads to further rounds of
spending,

3. Increased Consumption:
The recipients of this income are likely to spend a portion of
it on goods and services, increasing the income of others in
the economy. This, in turn, leads to further rounds of
spending.

4. Successive Rounds of Spending:

-Each subsequent round of spending generates more
income and, therefore, more consumption, though the size of
the impact diminishes with each round due to leakages
(such as savings, taxes, and imports).

5. Total Increase in Output:

-The cumulative effect of all these rounds of spending results
in a total increase in economic output that is larger than the
initial change in spending. This is the multiplier effect.

THE CIRCULAR FLOW OF ECONOMIC

ACTIVITY:
This diagram represents a more streamlined version of the
circular flow of economic activity, highlighting key
interactions between the main sectors: Households, Firms,
Government, Financial Institutions, and the Foreign Sector.
1.Households to Firms (Consumer Spending): Households
provide firms with money by purchasing goods and services,
driving the economy through consumer spending.

2. Firms to Households (Wages, Salaries, Dividends):

- In return, firms pay households wages, salaries, and
dividends, providing them with income.

3. Households to Government (Taxes):

Households contribute to the government by paying taxes,
which is a crucial part of government revenue.

4.Government to Households (Welfare, Services):

The government redistributes resources by providing welfare
services, infrastructure, and public goods to households.

5. Households to Financial Institutions (Savings, Investments

): Households save or invest part of their income in financial
institutions, contributing to capital formation.

6.Financial Institutions to Firms (Loans, Investments):

Financial institutions lend money to firms for investment and
production, fueling economic growth.

7.Firms to Financial Institutions (Repayments, Interest): -

Firms repay loans with interest, generating returns for
financial institutions and savers.

8. Firms to Foreign Sector (Exports): - Firms export goods

and services to the foreign sector, earning revenue.
9. Foreign Sector to Firms (Imports): - The foreign sector
supplies firms with imports, contributing to the variety of
goods and services available in the economy.

INFLOWS and OUTFLOWS

"Inflows" and "outflows" refer to the movement of resources,

materials, or money into and out of a system.

Definitions:
INFLOWS
The inputs or resources that enter into a system or process.

OUTFLOWS
The outputs or resources that leave a system or process.

Example of Inflows and Outflows (In a Business)

INFLOWS
Inflows could include revenue from sales, investments, or
loans.

OUTFLOWS
Outflows could include expenses like salaries, rent, or cost
of goods sold.

Example of Inflows and Outflows (In a manufacturing

process)
INFLOWS
Raw materials, energy, and labor are inflows.

OOUTFLOW
Finished products, waste, and emissions are outflows.

Example of Inflows and Outflows (In environmental science)

INFLOWS
Inflows could refer to the introduction of water or nutrients
into an ecosystem.

OUTFLOWS
Outflows could refer to the release of pollutants, water runoff,
or harvested resources from an ecosystem.

Cash Flow Management

Effective management of inflows and outflows is crucial for
maintaining liquidity and operational stability. Positive cash
flow (more inflows than outflows) allows for growth and
investment, while negative cash flow (more outflows than
inflows) can lead to financial difficulties.

Strategic Planning
Monitoring inflows and outflows helps in strategic planning.
Businesses can plan investments, budget for future
expenses, and make informed decisions about scaling
operations or cutting costs.
Risk Management
Regular analysis of inflows and outflows can help identify
potential risks early, allowing businesses to take proactive
measures to mitigate financial instability.

#6
DEMAND SCHEDULE AND
DEMAND CURVE
What is DEMAND?
The quantity of a good or service that consumers are willing
and able to purchase at various prices.

Demand Schedule
A table that shows the quantity demanded at different price
levels.
As the price decreases, the quantity demanded generally
increases (law of demand).

Demand Curve
A graph that represents the relationship between the price of
a good and the quantity demanded.
It is typically downward sloping, indicating an inverse
relationship between price and quantity demanded.

Characteristics of a Demand Curve

1. Downward slope: Higher prices lead to lower quantity
demanded, and vice versa
 2. Movement along the curve: Caused by changes in the
price of the good itself.
3. Shift of the curve: Caused by changes in factors other
than the price (e.g., income, preferences, price of
substitutes, etc.).

Factors Shifting the Demand Curve

1. Income levels
2. Consumer preferences
3. Prices of related goods (substitutes)
4. Population changes
5. Future price expectations

#7
LAW OF DEMAND
The law of demand states that a higher price leads to a
lower quantity demanded and that a lower price leads to a
higher quantity demanded.

INCOME AND SUBSTITUTION EFFECT

The income effect is the resulting change in demand for a

good or services caused by an increase or decrease in a
consumer's purchasing power or real income.

The substitution effect occurs when consumers replace one

product with another due to price changes and personal
finances
#8
CHANGES IN QUANTITY
DEMANDED AND MOVE
ALONG THE DEMAND CURVE

DEMAND
The willingness and ability of consumers to purchase a good
or service at a given price.

What is Quantity Demanded?

Quantity demanded is a term used in economics to describe
the total amount of a good or service that consumers
demand over a given interval of time. It depends on the price
of a good or service in a marketplace regardless of whether
that market is in equilibrium.

What is Demand Curve?

A graphical representation of the relationship between price
and quantity demanded, showing the inverse relationship
between the two.

Changes in Quantity Demanded vs. Changes in Demand

• Changes in quantity demanded refer to adjustments in the
amount purchased due solely to price fluctuations, while all
other factors remain constant.
• Changes in Demand a change in demand describes a shift
in consumer desire to purchase a particular good or service,
irrespective of a variation in its price.

Expansion and Contraction of Demand

.. Expansion of Demand: Occurs when the price decreases,
leading to an increase in quantity demanded.

Contraction of Demand: Occurs when the price increases,

leading to a decrease in quantity demanded.

Expansion and Contraction of Demand

.. Expansion of Demand: Occurs when the price decreases,

leading to an increase in quantity demanded.

Contraction of Demand: Occurs when the price increases,

leading to a decrease in quantity demanded.

Factors Affecting Demand

• What is Affecting Demand?
• Changes in demand occur when factors other than price
influence the quantity demanded.

• The key factors that cause changes in demand:

• - Income
- Tastes and Preferences
• - Prices of Related Goods (Substitutes and Complements)
• - Expectations about Future Prices

Population Changes
Increase and Decrease in Demand

Increase in Demand: Occurs when a factor other than price

leads to a higher quantity demanded at every price level.

• Decrease in Demand: Occurs when a factor other than

price leads to a lower quantity demanded at every price
level.

#9
CETERIS PARIBUS
ASSUMPTION

Simplifies Analysis

Ceteris paribus helps simplify complex situations by isolating

the effect of one variable, making it easier to understand the
direct relationship between that variable and the outcome.
This clarity is crucial for identifying cause-and-effect
relationships.

Supports Accurate Predictions

By keeping other factors constant, ceteris paribus allows for
more accurate predictions and reliable conclusions. It
provides a controlled framework that helps analysts and
researchers focus on specific changes without interference
from other variables.

APPLICATIONS TO ECONOMICS

Law of DDeman
Analyzing how a change in the price of a good affects the
quantity demanded, assuming no changes in consumer
income or preferences.

Supply and Demand Equilibrium-

Studying how shifts in supply impact market equilibrium
prices and quantities, while keeping demand constant.

Price Elasticity-
Evaluating how changes in price affect the quantity
demanded or supplied, with other factors like consumer
preferences and incomes held constant.

Market Analysis
- Understanding the effects of policy changes or
external shocks on specific economic variables

While assuming other conditions remain unchanged.

APPLICATION IN OTHER FIELDS

Social Sciences-
Examining how changes in a single factor, such as education
level, affect outcomes like income or social status, while
keeping other social and economic factors constant.

Marketing and Business Studies-

Assessing the effect of changes in price or advertising
strategies on consumer behavior, assuming that other
factors such as market conditions and competitor actions do
not change.

LIMITATIONS

Unrealistic Assumptions
Real-world scenarios often involve multiple variables that
change simultaneously, making it difficult to hold all other
factors constant.

Complex Interactions
The assumption may overlook interactions between
variables, leading to incomplete or misleading conclusions if
these interactions are significant.

Static Nature
It is more suited to static analyses and may not accurately
reflect dynamic environments where variables are constantly
changing.
#10
Changes in Demand and Shifts in
the Demand Curve
Introduction
The demand curve represents the relationship between the
price of a good and the quantity demanded. A shift in the
demand curve indicates a change in demand due to non-
price factors. Ceteris paribus assumption: holding other
factors constant.

Ceteris Paribus - is the commonly used Latin phrase

meaning 'all other things remaining constant.'

When using ceteris paribus in economics, it is often safe to

assume that all other variables, except those under
immediate consideration, are held constant,

#11
AGGREGATE DEMAND

-is a term used in MACROECONOMICS to describes the

TOTAL DEMAND for good produced domestically, including
consumer, goods, services, and capital goods.

Five Components of Aggregate Demand:

1.Consumer Spending
2.Business Spending
3.Government Spending
4.Export
5.Import

Formula:
AD=C+I+G+(X-M)

1. Consumer Spending
- The amount of money individuals use to purchase goods
and services for personal use.

2. Business Spending
The expenditures by companies on capital goods, services,
and other operational costs to support their activities and
growth.

3. Government Spending
- The funds allocated by the government for public services,
infrastructure, and other expenses to manage and support
the economy.

4. Export
- Goods or services produced in one country and sold to
buyers in another country.

5. Import
- Goods or services bought from foreign countries and
brought into the domestic market.

#12
DETERMINANTS OF
AGGREGATE DEMAND
Aggregate Demand is the total quantity of goods and
services in an economy that firms, households, government,
and foreigners want to buy at each price level, assuming all
other variables remain constant.

GRAPH
The aggregate demand (AD) curve is a graphical
representation of the relationship between the overall price
level in an economy and the total quantity of goods and
services demanded at each price level. It is a downward-
sloping curve, reflecting the inverse relationship between
price level and aggregate demand.

COMPONENTS OF AGGREGATE DEMAND

CONSUMPTION
This refers to the total spending by households on goods
and services, excluding the purchase of new housing.

INVESTMENT
This is the total spending by firms on capital, including
factories, office towers, machinery, and inventories.
GOVERNMENT SPENDING
All expenditure on the goods and services purchased by the
government.

NET EXPORTS
This is the nation's gross exports (X) less its gross imports
(M).

FORMULA:
AD=C+I+G+ (X-M)

THE SHIFTERS OF AGGREGATE DEMAND

• Consumer Confidence and Expectations

• Business Confidence and Expectations

• Government Policies

• Global Economic Conditions

#13
ELASTICITY OF DEMAND
WHAT IS ELASTICITY OF DEMAND?
The elasticity of demand refers to the change in demand
when there's a change in another economic factor, such as
price or income.
Demand is a feature of economics that refers to consumer
willingness or desire to purchase a product or service.

THREE (3) MAIN TYPES OF ELASTICITY

TYPES OF ELASTICITY OF DEMAND

1. PRICE ELASTICITY OF DEMAND

2. CROSS - PRICE ELASTICITY OF DEMAND
3. INCOME ELASTICITY OF DEMAND

• Price elasticity of demand (PED): Measures the

responsiveness of quantity demanded to a change in
price.
• Cross-price elasticity of demand (XED): The response in
demand relative to the price of other items.
• Income elasticity of demand (YED): The response in
demand relative to fluctuation in consumer income.
DEGREES OF ELASTICITY

You can determine whether demand is elastic, unitary or

inelastic based on this calculation.

• Ed > 1 : Demand is elastic and quantity changes faster

than price.
• Ed = 1 : Demand is unitary and quantity changes at the
same rate as price.

• Ed < 1: Demand is inelastic and quantity changes slower

than price.

DEGREES OF ELASTICITY

Perfectly elastic and inelastic demand are considered

theoretical scenarios as there aren't any real-life products
that could have these kinds of demand.

• Ed = ∞ Demand is perfectly elastic and there's an infinite

amount of change in quantity when price changes. The
demand curve is horizontal.

Ed = 0 Demand is perfectly inelastic and quantity does not

change even when there's a change in price. The demand
curve is vertical.

FACTORS THAT IMPACT ELASTICITY OF DEMAND

o Product type: If the product or service is crucial to
survival or a way of life, it is likely to have inelastic
demand.
o Available substitutes: Demand is more elastic if
there are more options or substitutes available.
o Social value: Certain items hold high social value for
many decades. In these cases, the demand for
these items rarely changes when prices change.
 o Product type: If the product or service is crucial to
survival or a way of life, it is likely to have inelastic
demand.
o Available substitutes: Demand is more elastic if
there are more options or substitutes available.
o Social value: Certain items hold high social value for
many decades. In these cases, the demand for
these items rarely changes when prices change.
o Customer budget or income: Some luxury items
have prices that are prohibitive by nature. This
exclusive design means that most price changes will
not deeply impact demand.
o Market competition: When a monopoly produces a
good or service, the item typically has an inelastic
demand. If a new competitor appears on the market,
then demand tends to become elastic.

#14
SUPPLY SCHEDULE AND
SUPPLY CURVE
INTRODUCTION
A supply schedule and a supply curve are fundamental tools
in economics used to understand the relationship between
the price of a good or service and the quantity that producers
are willing to supply. They are essential for analyzing market
dynamics and predicting how changes in price or other
factors might affect the availability of goods.

SUPPLY SCHEDULE
A supply schedule is a table that shows the quantity of a
good or service that producers are willing to supply at
different prices, assuming all other factors remain constant. It
demonstrates the law of supply, which states that as the
price of a good rises, the quantity supplied will also increase,
and vice versa.

SUPPLY CURVE
A supply curve is a graphical representation of the supply
schedule. It plots the price of a good on the vertical axis (y-
axis) and the quantity supplied on the horizontal axis (x-
axis). The supply curve typically slopes upwards from left to
right, reflecting the positive relationship between price and
quantity supplied.

FACTORS AFFECTING THE SUPPLY

• Cost of inputs: When the cost of inputs, such as raw

materials, labor, or energy, increases, the supply curve shifts
to the left. This is because producers are less willing to
supply the same quantity at a given price when their costs
are higher.
Technology: Technological advancements can lead to more
efficient production methods, which can increase supply and
shift the supply curve to the right.
Government policies: Government policies, such as taxes,
subsidies, or regulations, can affect supply. For example, a
tax on a good will increase the cost of production, shifting
the supply curve to the left.
• Number of producers: An increase in the number of
producers in a market will increase supply and shift the
supply curve to the right.
Expectations: If producers expect the price of a good to rise
in the future, they may reduce their current supply, shifting
the supply curve to the left.

APPLICATION OF SUPPLY SCHEDULE AND SUPPLY

CURVE

- Market Equilibrium: The intersection of the the demand

curve supply curve and de determines the equilibrium ne
supply curve and equilibrium quantity for a good or service.
This is is t the point, where the quantity supplied equals the
quantity demanded, and the market is în balance.
- Price Fluctuations: Changes in the determinants of supply
can cause shifts in the supply curve, leading to changes in
the equilibrium price and quantity. This helps explain
fluctuate in respon prices helps explain why prices in
response to factors like changes in production costs,
technology, or government policies.
--Business Decisions: Businesses can use supply schedules
and curves to make informed decisions about pricing,
production levels, and inventory management. By
understanding the relationship between price and quantity
supplied, they can optimize their operations and maximize
profits.
•- Policy Analysis: Policymakers can use supply schedules
and curves to evaluate the impact of policies on market
outcomes. For example, they can assess the effects of
taxes, subsidies, or regulations on the supply of goods and
services, and on consumer prices.
#15
LAW OF SUPPLY
Law of Supply

Introduction:
It is observed in markets that when high price of goods are
offered to sellers. They increase the supply of those goods
and when price level of those goods decreases, the seller
decreases the supply of those goods. This behavior of seller
is known as Law of supply.

The Law of Supply

The microeconomic law that states that, all other factors

being equal, as the price of a good or service increases, the
quantity of goods or services that suppliers offer will
increase, and vice versa.

Law of Supply
➢ As price increases quantity supplied increases
➢ As price falls quantity supplied falls

#16
Changes in Quantity Supplied
and Movements Along the Supply
Curve
Introduction

The supply curve in economics represents the relationship

between the price of a good or service and the quantity
supplied by producers. Understanding the dynamics of how
and why the supply curve shifts or moves is crucial for
analyzing market behaviors and making informed economic
decisions.

Quantity Supplied Vs. Supply

Quantity Supplied - Refers to the amount of a good or

service that producers are willing and able to sell at a
specific price. Changes in quantity supplied are typically
caused by a change in the price of the good itself.

• Supply Represents the overall relationship between prices

and the quantity supplied across various price levels.
Changes in supply are influenced by factors other than the
price of the good, such as production technology, input
costs, or government policies.

Movements Along the Supply Curve A movement along the

supply curve occurs when there is a change in the quantity
supplied due to a change in the price of the good, with all
other factors remaining constant.

Changes in Supply
Occur when the entire supply curve shifts due to changes in
factors other than the price of the good. This can result in a
new supply curve being established.

Factors Causing Changes in Supply

• Production Technology
• Input Prices
• Number of S
• Expectations
• Government Policies

#17
CHANGES IN SUPPLY AND
SHIFTS IN THE SUPPLY CURVE

FACTORS AFFECTING SUPPLY

1. PRICE OF INPUTS
Changes in the cost of inputs, such as labor, raw materials,
or capital, directly affect the cost of production. When input
prices increase, production becomes more expensive,
leading to a decrease in supply and a leftward shift of the
supply curve.

2. TECHNOLOGY
Technological advancements can significantly impact supply.
Improvements in technology often lead to increased
efficiency and reduced production costs. This results in an
increase in supply and a rightward shift of the supply curve.

3. GOVERNMENT POLICIES
Government policies, such as taxes, subsidies, and
regulations, can influence supply. Taxes on production
increase costs, leading to a decrease in supply and a
leftward shift of the supply curve.

4. EXPECTATIONS
Producers' expectations about future market conditions can
also influence current supply. If producers anticipate higher
prices in the future, they may choose to reduce current
supply and store goods for sale at a later date, leading to a
leftward shift of the supply curve.

5. NUMBERS OF SELLERS
The number of producers in a market also affects supply. An
increase in the number of sellers leads to an increase in
supply and a rightward shift of the supply curve.

CHANGES IN SUPPLY
Expansion in supply occurs when the supply of a good or
service increases, meaning producers are willing and able to
offer more of it at various price points. This shift is typically
represented by a rightward movement of the supply curve on
a graph.

CHANGES IN SUPPLY
Contraction in supply occurs when the supply of a good or
service decreases, meaning producers are willing and able
to offer less of it at various price points. This shift is typically
represented by a leftward movement of the supply curve on
a graph.

SHIFTS IN THE SUPPLY CURVE

LEFTWARD SHIFT IN THE SUPPLY CURVE

A leftward shift in the supply curve indicates a decrease in
supply. This means that at each price level, producers are
willing and able to supply a smaller quantity of the good or
service than before.

RIGHTWARD SHIFT IN THE SUPPLY CURVE

A rightward shift in the supply curve indicates an increase in
supply. This means that at each price level, producers are
willing and able to supply a larger quantity of the good or
service than before.

#18
AGGREGATE SUPPLY

Aggregate supply-
The total supply of goods and services produced within an
economy at a given price level within a certain period.

Factors that Affect Supply in the Economy

1. Prices
2. Production costs
3. The number of producers, (production)
4. Technology
5. The labor market

A shift in aggregate supply can be attributed to many

variables. They include:

• Changes in the size and quality of labor

• Technological innovations
• Wage increases
• An increase in production costs
• Changes in producer taxes and subsidies
• Changes in inflation

Two types of aggregate supply

➢ Short run aggregate supply - responds to higher
demand (prices) by increasing the use of current inputs
in the production process.
➢ Long run aggregate supply- is not affected by the price
level and is driven only by improvements in productivity
and efficiency.

#19
DETERMINANTS OF
AGGREGATE SUPPLY
Aggregate supply (AS) refers to the total quantity of goods
and services that firms in an economy are willing and able to
produce at a given overall price level.

The determinants of aggregate supply can be broadly

categorized into short-run and long-run factors:

Short-Run Determinants

Input Prices: Changes in the prices of factors of production

can affect aggregate supply. For example, if wages increase,
production costs rise, which can reduce aggregate supply in
the short run.
Productivity: Improvements in productivity (i.e., the efficiency
of production) can lead to an increase in aggregate supply. If
firms can produce more output with the same amount of
input, aggregate supply rises.

Government Policies: Regulations, taxes, and subsidies can

influence aggregate supply. For instance, an increase in
business taxes might decrease aggregate supply, while
subsidies might increase it.

Expectations of Future Prices: If firms expect prices to rise in

the future, they might reduce their current output to sell more
in the future, affecting short- run aggregate supply.

Long-Run Determinants
Capital Stock: The total amount of capital available (e.g.,
machinery, infrastructure) affects the economy's productive
capacity. An increase in capital stock typically increases
aggregate supply in the long run.
Labor Force: The size and skill level of the labor force
influence long-run aggregate supply. An increase in the labor
force or improvements in education and training can
enhance productivity and, hence, aggregate supply.
Technology: Technological advancements can improve
productivity and efficiency, shifting the long-run aggregate
supply curve to the right.

Natural Resources: The availability and quality of natural

resources (e.g., oil, minerals) impact an economy's ability to
produce goods and services. A discovery of new resources
or improvements in resource management can increase
aggregate supply.

Institutional Factors: The overall economic environment,

including property rights, legal systems, and political stability,
can influence long- term productive capacity and aggregate
supply.

#20
ELASTICITY OF SUPPLY

WHAT IS SUPPLY?
REFERS TO THE TOTAL AMOUNT OF A SPECIFIC GOOD
OR SERVICE THAT PRODUCERS ARE WILLING AND
ABLE TO OFFER FOR SALE AT A GIVEN PRICE IN A
GIVEN TIME PERIOD.

WHAT IS ELASTICITY OF SUPPLY?

*ELASTICITY OF SUPPLY MEASURES HOW MUCH THE

QUANTITY SUPPLIED OF A GOOD OR SERVICE
CHANGES IN RESPONSE TO A CHANGE IN ITS PRICE.

TYPES OF ELASTICITY OF SUPPLY

1.ELASTIC SUPPLY

*SUPPLY IS SAID TO BE ELASTIC WHEN A GIVEN

PERCENTAGE CHANGE IN PRICE LEADS TO A LARGER
CHANGE IN QUANTITY SUPPLIED.

NUMERICAL VALUE OF ES WILL BE GREATER THAN

ONE(1)

Formula:
Es=%change in Quantity Supplied/% change in Price

2. Inelastic Supply
➢ Supply is said to be inelastic when a given percentage in
price causes a smaller change in quantity supplied.
 ➢ Numerical value of elasticity of supply is greater than
zero but less than one

3. Unit Elasticity of Supply

If price and quantity supplied change by the same
magnitude, then we have unit elasticity of supply. Any
straight line supply curve passing through origin, has an
elasticity of supply equal to 1.

DETERMINANTS OF ELASTICITY OF SUPPLY

1. Availability of inputs
2. Time Horizon
3. Production capacity
4. Mobility of Resources

#21
APPROACHES TO NATIONAL INCOME ACCOUNTING

Introduction:
National Income Accounting is a method used to measure
the overall economic activity of a country.

Three main approaches to national income accounting:

• Income Approach
• Expenditure Approach
• Industrial Origin (or Production) Approach

1. Income approach

The Income Approach calculates national income by

summing all the incomes earned by individuals and
businesses in the economy.

Formula:
GDP = Total National Income + Sales Taxes + Depreciation
+ Net Foreign Factor Income

Example Scenario:
Consider a hypothetical country named "Econland" with the
following data for a specific year:

Total National Income (TNI) = 500 billion Sales Taxes = 50

billion

Depreciation = 30 billion

Net Foreign Factor Income = 20 billion

2. Expenditure Approach

The Expenditure Approach calculates national income by

adding up all the expenditures made in an economy.

Formula:

GDP = C + I + G + (X-M)

Example Scenario:
Consider a hypothetical country named "Econland" with the
following data for a specific year:

Consumption Spending = 300 billion

Investment Spending (1) = 100 billion
Government Spending (G) = 150 billion
Exports (X) = 80 billion
Imports (M) = 60 billion
3. Industrial Origin Approach (Production Approach)

The Industrial Origin Approach, also known as the

Production Approach, calculates national income by
summing the value added at each stage of production
across different sectors of the economy.

Formula:

GDP = Sum of Value Added by all Industries

Example Scenario:
Consider a hypothetical country named "Econland" with the
following data for a specific year:

Value Added by Industries:

- Agriculture: 50 billion
- Manufacturing: 120 billion
- Services: 80 billion

#22
GNP ACCOUNTING MEANING,
PURPOSE AND LIMITATIONS

WHAT IS GROSS NATIONAL PRODUCT (GNP)?

Gross National Product (Gnp) Measures The Total Value Of
Goods And Services Produced By A Country's Residents,
Regardless Of Where The Production Takes Place. This
Means That Gnp Includes Income Earned By Residents
From Overseas Investments, But Excludes Income Earned
By Foreign Residents Within The Country's Borders.

KEY DIFFERENCES BETWEEN GNP AND GDP:

- GNP focuses on nationality: It measures the output of a
country's residents, even if they are working abroad.

Importance of GNP:
GDP focuses on location: It measures the output produced
within a country's borders, regardless of who owns the
means of production.

GNP provides a valuable measure of a country's economic

output and its residents' overall economic well-being. A high
GNP indicates a strong economy and a high standard of
living.

CONCLUSION:
GNP is a useful measure for understanding a country overall
economic performance. It is important to note that GNP and
GDP are distinct measures, and each offers a different
perspective on a country’s economic activity.

#23
GNP VS GDP
INTRODUCTION

Gross National Product (GNP) and Gross Domestic Product

(GDP) are two key economic indicators used to measure the
economic performance of a country, but they differ in what
they account for.

GROSS DOMESTIC PRODUCT (GDP)

GDP focuses on the geographic location of production. It
measures the total market value of all finished goods and
services produced within a country’s borders in a specific
period, regardless of the nationality of the producers. This
means it includes the output of foreign- owned companies
operating within the country’s borders.

GROSS NATIONAL PRODUCT (GNP)

GNP, on the other hand, focuses on the nationality of the

producers. It measures the total market value of all finished
goods and services produced by a country's citizens and
businesses, both domestically and abroad. This means it
includes the output of domestically-owned companies
operating overseas.

CALCULATION

GDP: Calculated by summing up the value of all final goods

and services produced within a country's borders. This
includes consumption, investment, government spending,
and net exports (exports minus imports).
• GNP: Calculated by adding the value of all final goods and
services produced by a country's residents, both
domestically and abroad. This includes GDP plus net income
earned from foreign investments minus net income earned
by foreign residents within the country

Formulas for GNP and GDP

GROSS DOMESTIC PRODUCT (GDP)

• Expenditure Approach:
• GDPC+I+G+(X-M)
•C: Consumption expenditures by households
• I: Investment expenditures by businesses
G: Government expenditures on goods and services
X: Exports of goods and services
M: Imports of goods and services
• Income Approach:

GROSS NATIONAL PRODUCT (GNP)

GNP-GDP Net Income Received from Abroad

Net Income Received from Abroad: Income earned by

residents of a country from abroad (e.g., wages, profits,
interest) minus income earned by foreign residents within the
country.
SIMPLIFIED REPRESENTATION

GNP GDP + (Net Income Received from Abroad - Net

Income Paid to Abroad)

Advantages and Disadvantages

GDP:

Advantages:
➢ Easier to calculate and track.
➢ Reflects the economic activity within a country's borders.
➢ Useful for comparing economic
➢ performance across countries.

Disadvantages:
➢ Doesn't account for income earned by residents working
abroad.
➢ Can be influenced by foreign investment and production
within the Country

GNP:

Advantages:
➢ Reflects the overall economic activity of a country's
residents.
➢ Useful for understanding the economic well-being of a
nation's citizens.
Disadvantages:
➢ More complex to calculate.
➢ May not accurately reflect the economic activity within a
country's borders. of a country's residents.
➢ Useful for understanding the economic well-being of a
nation's citizens.

#24
NOMINAL GNP VS REAL GNP

GROSS NATIONAL PRODUCT

Gross national product (GNP) is the measure of all the final

goods produced by the labor of a country in a specific time
period, including earnings from abroad. In the formula for
GNP, the net factor income (NFY)/ from outside the
Philippines may be positive or negative. NFY is also the
difference between GNP and GDP.

The formula for measuring the GNP by industrial origin using

the value-added approach is:
A+1+SGDP NFY – GNP

Where:
A is agriculture
I is industry
S is service
NFY is net factor income from abroad

PER CAPITA GDP OR GNP

Per capita GDP or GNP measures the country's economic

growth by dividing the national income (GDP or GNP) by the
number of the The Nation's Income 77members of the
population. According to the National Statistics Office (NSO),
the total population of the Philippines as of August 2007 is
88.57 million. Given the 2007 GNP at current prices as
P7,227,312, the GNP per capita for 2007 is P81,600.

Per capita GDP

The per capita GDP of a country is often criticized for not

accurately reflecting the true figures of each family's income.
For example, if two families with different incomes have a
total income of P100,000/year, each family would receive a
different per capita GDP, resulting in a distorted figure.