Basic

Concepts of
Economics
 ECONOMICS:
From the Greek Words "OIKOS" means HOUSEHOLD and
"NOMOS" means MANAGEMENT.

ECONOMICS IS HOUSEHOLD MANAGEMENT

● Economics is the study of;
○ how society manages its scarce resources.
○ how people interact with one another.
○ how individuals and societies choose to use the scarce resources that
nature and previous generations have passed to them.
● Economics is a social science that deals with the efficient allocation of
scarce resources to satisfy man's unlimited wants and needs.
Society, must be able to create a system of
allocating resources that will be able to answer or
solve the three (3) fundamental economic
problems:

1. What products to produce?

2. For whom should these products be produced?
3. How and how much to produce?
THE FUNDAMENTAL ECONOMIC PROBLEMS
1. What products to be produced? A product can be defined as anything which a buyer is
willing to part away his money within exchange for that particular commodity. The first
function of the society is to decide what products are to be produced. Since the resources at
the disposal of the society are scarce, it has to make a choice.

2. For whom should these products be produced? After deciding what products are to be
produced, we should answer for whom will the said product be produced? In short, this is a
problem of distribution.

3. How and how much to produce? After knowing what products to produce and for whom
they will be produced, the question now is how we will be able to produce them and how
much of it is for whom. There are various alternative methods or techniques of producing
goods. The society has to choose the least cost combination of producing the goods.
THE LAW OF
DEMAND AND
SUPPLY
THE LAW OF DEMAND

The law that explains the relationship between price and

quantity demanded which is inversely proportional. It states
that "as the price of a good or service increases, the quantity
demanded decreases, and vice versa", ceteris paribus. If the
price of a product increases, less consumers would want to buy
that product, and vice versa.

Price
Demand
DEMAND SCHEDULE AND DEMAND CURVE
• Demand schedule shows the different quantities of goods that a
consumer is willing to buy at various prices.
• Demand curve is a graphic representation of the correlation between
the price of a good or service and the quantity consumed for a given
period.
Besides price, the following are factors affecting demand;

1. Changes in income (Income effect)

2. Availability and prices of substitutes (Substitution effect)
3. Availability and prices of complementary goods
4. Changes in the number of consumers
5. Changes in tastes and preferences
6. Future/ price expectations
1. Changes in income (Income effect)
• When income goes up, consumers buy more.
• When income goes down, consumers buy less.
Ex. If a family's income of P15,000 raises by P10,000, now the family can buy
more of goods and services they used to buy.

2. Availability and prices of substitutes

• If the price of product A increases significantly, consumers switch to its
cheaper substitute/ alternative, thus decreasing the demand for A.
• If the price of product A decreases significantly, consumers of its substitute
switch to it, thus increasing the demand for A.
Ex. If the price of Coke increases, people may buy Pepsi instead. Similarly, if the
price of pork increases, then people would switch to chicken or fish.
3. Availability and prices of complementary goods
• If the price of complementary good for product A falls, then the demand for
both increases.
• If the price of complementary good for product A rises, then the demand
for both decreases.
Ex. If the price of ink falls significantly, then the demand for printers increase. The
same goes with gasoline and cars.

4. Changes in the number of consumers

• The more buyers there are, the higher the demand.
• The fewer buyers there are, the lower the demand.

Ex. The demand for goods and services in cities (where there are more people) are
higher than the demand in rural areas.
5. Changes in tastes and preferences
• If a product is on trend or becomes popular, the demand for it increases.
• If a product is outdated or if an alternative becomes more popular, its
demand decreases.
Ex. In early 2000s, the demand for iPod skyrocketed because it was on tend.
However, when smartphones were released, its demand decreased.

6. Future/ price expectations

• When consumers expect the price of commodities to rise, then they demand
buy more.
• When people expect the price to fall, then they are discouraged to buy now.
Instead, they wait till that time comes.
Ex. After the announcement of the Enhanced Community Quarantine (ECQ) due to
Covid19 pandemic on mid-March 2020, panic buying of basic commodities
followed fearing possible shortages and inflation.
THE LAW OF SUPPLY

The economic law that explains the relationship between price

and quantity supplied which is directly proportional. It states
that "as the price of a good or service increases, the quantity
supplied increases, and vice versa", ceteris paribus. If the
price of a product increases, the producers would be willing to
supply more of that product, and vice versa.

Price Supply
SUPPLY SCHEDULE AND SUPPLY CURVE
• Supply schedule is a chart that shows the different quantities of goods/service
that a producer is willing to provide/produce to meet demand at various prices.
• Supply curve is a graphical representation of the relationship between the price
of a good or service and the quantity supplied for a given period of time.
Aside from price, the following are factors affecting
supply:

1. Cost of production cost of inputs

2. Changes in productivity / Technological progress
3. Changes in the number of sellers
4. Fiscal policy / taxes
5. Future/ price expectations
1. Cost of production / Cost of inputs
There are four factors/ inputs of production which are land, labor, capital, and
entrepreneurship.
• When production costs go up, supply goes down.
• When production costs go down, supply goes up.
Ex. When raw materials, salary for workers, machines and factories, and/or
conceptualizing or planning a business cost a lot, then producers could make fewer
products.

2. Changes in productivity / Technological progress

Technology has a big role in affecting productivity. Using automated machines
definitely speeds up production.
• When productivity goes up, supply goes up.
• When productivity goes down, supply goes down.
Ex. China invested heavily on technology on its mass production that it became the
number one exporter in the world.
3. Changes in the number of sellers
• More sellers in the market increases supply.
• Fewer sellers in the market decreases supply.
Ex. Nueva Ecija is considered the "rice granary of the Philippines" where there are
plenty of rice sellers.

4. Fiscal policy / taxes

Both local and imported products are subjected to different taxes and these costs
are added to the price of these products.
• Higher duty and tariff will restrict supply.
• Lower duty and tariff will stimulate supply.
Ex. Raw materials and finished products are sometimes imported, so if custom
duty and tariff rises, it will restrict and decrease supply.
5. Future/ price expectations
• When producers expect the prices to go up, they increase supply.
• When producers expect the prices to go down, they decrease supply.
Ex. When "All Soul's Day" is approaching, farmers of flowers increase their
production because the demand and the price are high.
Equilibrium
market
Equilibrium market
Equilibrium market is a state wherein demand is equal to supply. This is an
implicit agreement of how much buyers and sellers are willing to transact to
each other. The price at which demand, and supply are equal is the equilibrium
price, also called as "market clearing price"

In this figure, equilibrium price is denoted

by the E. The upward sloping curve is the
supply curve (S) and the downward
sloping curve is the demand curve (D).
Equilibrium quantity is attained when
quantity demanded is equal to
quantity supplied (Qd = Qs).
Disequilibrium and Shifts
In a market (free market) economy, disequilibrium happens when supply and
demand are not equal. This imbalance of the two creates disequilibrium prices,
high surpluses, and shortages.

• Supply > Demand = Surplus

• Supply < Demand = Shortage
> When the quantity supplied is more than the
quantity demanded it results to surplus.
Eventually, this will encourage sellers to lower
their prices to eliminate the surplus.

> When the quantity demanded is greater than

the quantity supplied shortage exists. Later,
this would lead to price increase, an
opportunity to make more profit.