SCARCITY

is the basic and central economic problem confronting every society. It is the heart of the study of economics and the reason behind its establishment.

Scarcity defined in various ways: a commodity or service being in

short supply, relative to its demand.

in quantitative terms, it is said to exist when at a zero price there is a unit of demand.

it pertains to the limited availability of economic resources relative to society’s unlimited demand for good and services (Kapur 1997).

Problem of Scarcity

Limited Resources Unlimited wants

Scarcity

This illustrate the interaction of limited resources available and unlimited wants of the society. If limited resources fall short to meet the unlimited wants of the society, it will eventually create a problem, which is called “scarcity”.

ECONOMICS

is a science that deals with the management of scarce resources. It is also described as a scientific study on how individuals and the society generally make choices (Fajardo 1997).

study of the problem of using available economic resources as efficiently as possible so as to attain the maximum fulfillment of society’s unlimited demand for goods and series.

is simply scarcity and choice (Slavin 2005).

assist individuals and societies in making proper choices –-- that is, the allocation and utilization of economic resources, with the end in view of satisfying human wants for goods and services.

Economics

Limited Resources Unlimited Wants

Allocation

This depicts the relationship between available limited resources and the unlimited wants of the society. This shows that when limited resources fail to meet the unlimited wants of the society, economics comes into play in order to effectively and efficiently allocated resources.

Relationship between Economics and Scarcity

The problem of scarcity gave birth to the study of economics. Their relationship is such that if there is no scarcity, there is no need for economics. The study of economics was essentially founded in order to address the issue of resource allocation and distribution, in response to scarcity.

Two Greek roots of the word economics are oikos- meaning household and nomus- meaning system of management. Oikonomia or oikonomus means “management of household.”

With the growth of the Greek society until its development into city-states, the word became known as “state management.”

The term, “management of household” pertains to the microeconomic branch of economics while “state management” refers to the macroeconomic branch of economics.

Origin of the term “economics”

Ceteris Paribus Assumption

- means “all other things held constant or all else equal.” This assumption is used as a device to analyze the relationship between two variables while the other factors are held unchanged.

Brief historical introduction

aims to give a background on most profound names in the study of economics and their important contributions in this field of study.

Brief History: The Classical, Keynesian and Modern Economics

Economic theory saw its birth during the mid 1700s

and 1800s.

Adam Smith- regarded as “Father of Economics.” His book, “Wealth of the Nations”, became known as “the bible in economics” for a hundred years.

His major contributions was his analysis of the relationship between consumers and producers through demand and supply, which ultimately explained how the market works through the invisible hand.

Birth of Economic Theory: Classical Economics

John Stuart Mill was the heir to David Ricardo, who developed the basic analysis of the political economy or the importance of a state’s role in its national economy.

Political economy- applies management to an entire polis (state).

Karl Marx- a German, is much influenced by the conditions brought about by the industrial revolution upon the working classes.

His major work, Das Kapital, is the centerpiece from which major socialist thought was to emerge.

Neoclassical Economics (1870s)

Believed to have transpired around the year 1870.

Its main concern was market system efficiencies.

Leon Walras- introduced the general economic system. Also developed the analysis of equilibrium in several markets.

Alfred Marshall- most influential economist because of his book Principles in Economics. He developed the analysis of equilibrium of a particular market and the concept of “marginalism”.

John Maynard Keynes- an English economist,

offered an explanation of mass unemployment and suggestions for government policy to cure unemployment in his influential book: The General Theory of Employment, Interest and Money.

He argued that there is no assurance that savings would accumulate during a depression and depress interest rates, since savings depend on income and with high unemployment incomes are low.

Keynes’ General Theory of Employment, Interest and

Money

John Hicks- was recognized for his analysis of the IS-

LM model, an important macroeconomic model.

IS- refers to the goods market for a given interest rate.

LM- means money market for a given value of aggregate output or income.

IS-LM model is a theoretical construct that integrates the real, IS (investment saving), and the monetary, LM (demand for, and supply for money), sides of the economy simultaneously to present a determinate general equilibrium position for the economy as a whole.

Non-Walrasian Economics (1939)

saw the development of the rules and

regulations of different private and public institutions.

Introduced major post-Keynesian, neoclassical economists, whose views known as the post-Keynesian “mainstream economics”.

This period welcomed various economists like Paul A. Samuelson, Kenneth J. Arrow, James Tobin and many more.

Post-Keynesian Economics (1940 and 1950s)

highlighted the importance of adherence

to national expectations hypothesis and analysis, includes various economic phenomena in formulating different kinds of studies and new theories in economics.

it is applicable to concerns of developing countries, and was largely an outcome of concern for the growth of developed countries.

New Classical Economics

Positive Economics

is an economic analysis that considers economic conditions “as they are”, or considers economics “as it is”.

Uses objective or scientific explanation in analyzing the different transactions in the economy.

It simply answers the question ‘what it is’.

Example of positive statements:The economy is now experiencing a slowdown because of too much politicking and corruption in the government.

economic analysis which judges economic conditions “as it should be’. Concerned with human welfare.

deals with ethics, personal value judgments and obligations analyzing economic phenomena.

It answers the question ‘what should be’.

referred to as policy economics because it deals with the formulation of policies to regulate economic activities.

Examples of normative statements:The Philippine government should initiate political reforms in order to regain investor confidence, and consequently uplift the economy.

Normative Economics

1. What to produce?2. How to produce?3. How much to produce?4. For whom to produce?

Four Basic Economic Questions

Relationship of Economics to other Sciences

Economics is considered the “queen” of all social sciences because it covers almost every activity of man in relation to the society.

1. Business Management- business basically provides employment opportunities to members of the society, and is an important vehicle in the balance of economic activity.

2. History- economic ideas provides information regarding theories that can be revisited in order to evaluate present and future economic issues.

3. Finance- management of money, credit , banking and investment. Money & Finance are important in economics.

4. Physics- innovations and output brought about by physics greatly affect the study of economics.

5. Sociology- study of the behavior of societies. In relation to sociology, economics essentially deals with the behavior of economic subjects.

6. Psychology- is primarily useful in the study of microeconomics, which scrutinizes and focuses on the smallest units of the economy.

Importance of Studying Economics

1. To understand the Society-economics seeks to analyze transactions

made by the society and its members.

2. To understand Global Affairs-economics seeks to explain the internal

operation and trade policies of countries.

3. To be Informed Voter-understanding of economics develops

individuals to be a wise voters.

1. Efficiency

-refers to productivity and proper allocation of economic resources. Also it refers to the relationship between scarce factor inputs and outputs of goods and services.

2. Equity-means justice and fairness.

3. Effectiveness-means attainment of goals and objective.

3 Es in Economics

Important Economic Terms

1. Wealth -refers to anything that has a functional value (usually money), which can be traded for goods and services.

2. Consumption - refers to the direct utilization or usage of the available goods and services by the buyer or the consumer sector.

3. Production -defined as the formation by firms of an output (products or services).

4. Exchange- process of trading goods and/or services for money and/or its equivalent.

5. Distribution- process of allocating or apportioning scarce resources to be utilized by the household, business sector and the rest of the world.

Microeconomics

Branch of economics which deals with the individual decisions of units of the economy- firms, households, and how their choices determine relative prices of goods and factors of production. The market is its central concept. It focuses in two main players- the buyer and the seller, and their interaction with one another.

Microeconomics discussed the theories of demand and supply, individual decision making, theories of production, output, and cost of firm’s profit maximization objective, different types of business organizations and kinds of market structure.

It is a branch of economics that study the

relationship among the broad economic aggregates like national income, national output, money supply, bank deposits, total volume of savings, investment, consumption, expenditure, general price level of commodities, government spending, inflation, recession, employment, and money supply (Kapur 1997).

Macro implies that it seeks to understand the behavior of the economy as whole.

Macroeconomics

Macroeconomics focuses on the four specific sectors of

economy:1.The behavior of the aggregate household (consumption);

2.The decision making of the aggregate business (investment);

3.The policies and projects of the government (government spending); and

4.The behavior of external/foreign economic agents, through trading (export and import).

The Concept of Opportunity Cost

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. The thing thus given-up is called the opportunity cost of one choice.

It is expressed in relative price.

Opportunity Cost

Saving (Firm/Individual)

Credit (Interest) Investment (Profit)

Factors of Production1. Land- refers to all natural resources, which are

given by, and found in nature, and are, therefore, not made by man. This includes the forest, mountain, rivers, oceans, minerals, air, and sunshine, light, etc. Compensation for use of land is called rent.

2. Labor- is any form of human effort exerted in the production of goods and services. It covers a wide range of skills, abilities, and characteristics.

3. Capital- is man-made goods used in the production of other goods and services. This includes the buildings, machinery, and other physical facilities used in the production process.savings- refers to the part of person’s income, which is not spent on consumption.Depreciation- reduction of productivity of capital.Interest- reward for the use of capital.

4. Entrepreneurship- an economic good that commands a price referred to as profit or loss. An entrepreneur is a person who organizes, manages and assumes the risks of a firm, taking a new idea or new product and turning it into a successful business.

The Circular Flow Model

Economic Resources (Land, Labor, Capital)

HOUSEHOLDS FIRMS (Producers)

Output of Goods and Services

Basic Decision Problem1.Consumption- determine what types of goods, or

services they want to utilize or consume, and the corresponding amounts of thereof that they should purchase and utilize. It is the basic decision problem that the consumers must always deal with in their day to day activities.

2.Production- a problem generally concern of producers. They determine the needs, wants , and demand of consumers, and decide how to allocate their resources to meet these demands.

3.Distribution- this problem addressed to the government. There must be proper allocation of all the resources for the benefits of the whole society.

4.Growth over Time- the last basic decision that a society or nation must deal with. All the problems of choice, consumption, production, and distribution have to be seen in the context of how they will affect future event.

Types of Economic Systems1. Traditional economy- it is a subsistence

economy. A family produces goods only for its own consumption. The decisions on what, how, how much, and for whom to produce are made by the family head, in accordance with traditional means of production.

2. Command Economy- type of economy wherein the manner of production is dictated by the government. It is an economic system characterized by collective ownership of most resources, and the existence of central planning agency of the state. In this system, all productive enterprises are owned by the people and administered by the state.

3. Market Economy or Capitalism- characterized by that the resources are privately owned, and that the people themselves make the decisions. Under this economic system, factors of production are owned and controlled by individuals, and people are free to produce goods and services to meet the demand of consumers who, in turn, are also free to choose goods according to their own likes.

4. Socialism- economic system wherein key enterprises are owned by the state. It recognizes private ownership. In this system, state has no control over a large portion of capital assets, and is generally responsible for production and distribution of important goods. The main emphasis of this system is on equitable distribution of income and wealth. It is considered as an economy bordering between capitalism and communism.

5. Mixed Economy- this economy is a mixture of market system and the command system. However, it is more market-oriented rather than command or traditional.

The Basic Analysis of Demand and Supply

Demand is usually affected by the behavior of consumers.

Supply is usually affected by the conduct of producers.

The consumers identifies his/her needs, wants, and demands.

The producers address these by accordingly producing goods and services.

The consumer gains satisfaction while the producer gains profit.

where buyers and sellers meet. the place where they both trade or exchange

goods or services and it is where their transaction takes place.2 Kinds of Market

Wet market- where people usually buy vegetables, meat, etc.

Dry market- where people buy shoes, clothes or other dry goods.

it does not necessarily refer to a tangible area where buyers and sellers could be seen transacting.

Market

pertains as to the quantity of a good or

service that people are ready to buy at given prices within a given time period.

Demand implies three things: desire to possess a thing; the ability to pay for it or means of

purchasing it; and willingness in utilizing it.

Demand

The Law of Demand states that if price

goes UP, the quantity demanded will go Down. Conversely, if price goes DOWN, the quantity demanded will go UP ceteris paribus.

The reason for this is because consumers always tend to MAXIMIZE SATISFACTION.

Law of Demand

is a table that shows the relationship of prices and the specific quantities demanded at each of these prices.

the information provided by a demand schedule can be used to construct a demand curve showing the price-quantity demanded relationship in graphical form.

Demand Schedule

Hypothetical Demand Schedule for Rice Per Month

Situation Price (P) Quantity (kg)

A 5 8

B 4 13

C 3 20

D 2 30

E 1 45

Demand Curve

it is a graphical representation showing the relationship between price and quantities demanded per time period.

Most demand curves slopes downwards because:a. as the price of the product falls, consumers will tend to substitute this (now relatively cheaper) product for others in their purchases.b. as the price falls, this serves to increase their real income allowing them to buy more products.

Demand CurveP

Q

D

The Y-axis represents price (P), while the X-axis represents the quantity demanded (Qd).

Demand Function

shows the relationship between demand for a commodity and the factors that determine or influence this demand.

these factors are --- the price of the commodity itself, prices of other related commodities, consumers’ level of incomes, taste and preferences, size and composition of level of population, distribution of income etc.

Change in Quantity Demanded

- There is a change in quantity demanded if the movement is along the same demand curve.

A change in quantity demanded is brought about by an increase (decrease) in the product’s price.

The direction of the movement however is inverse considering the Law of Demand.

Change in Quantity Demanded vs. Change in Demand

Change in Quantity Demanded

P

D

P₁

P₂

Q₁ Q₂

a

b

D

Change in quantity demanded occurs when price of the product changes, thus, resulting to a change in

quantity demanded.

Change in Demand

There is a change in demand if the entire demand curve shifts to the right side resulting to an increase in demand. At the same price, therefore, more amounts of goods and service are demanded by consumer.

Conversely demand decreases or falls if the entire demand curve shifts downward or to the left. At the same price, less amounts of a good or service are demanded by the consumers.

Change in DemandP

P₁

D

D’

Q₁ Q₂

P

P₁

D’

D

Q₁Q₂

a. Increase in Demand b. Decrease in Demand

4. Population change- an increasing population results to an increase in the demand for some types of goods or services, and vice versa.

5. Substitute goods- are goods that are interchanged with another good. In a situation where the price of a particular good increases a consumer will tend to look for closely related commodities.

6. Expectations of future prices- if the buyers expect the price of a good or service to rise (or fall) in the future, it may cause the current demand to increase (or decrease). Expectations about the future may alter demand for a specific commodity.

Supply (Firms/Seller’s side)

Supply is the quantity of goods or services that firms are ready and willing to sell at a given price within a period of time, other factors being held constant .

It is a product made available for sale of firms.

It states that “if the price of a

good or services goes up, the quantity supplied for such good or service will also goes up; if the price goes down the quantity also goes down, ceteris paribus.”

Law of Supply

Supply Schedule- it is a schedule listing the various prices

of a product and the specific quantities supplied at each of these prices.

Hypothetical Supply Schedule for Rice Per Month

Situation Price (P) Quantity (kg)

ABCDE

54321

484130175

Supply Curve- it is a graphical representation showing

the relationship between the price of the product or factor of production (e.g. labor) and the quantity supplied per time period.

SP

Q

Supply Function

- a form of mathematical notation that links the dependent variable, quantity supplied (Qs), with various independent variables which determine quantity supplied.

Qs= f (own price, number of sellers, price of factor inputs, technology, etc.)

Change in Quantity Supplied

-a change in quantity supplied if the movement is along the same supply curve. It is brought about by an increase (decrease) in the product’s own price.

Change in Quantity vs. Change in Supply

Change in Quantity SuppliedP

P₁

SP₂

QQ₁ Q₂

a

b

Change in quantity supplied happens when price of the product changes, thus, resulting to a change in quantity supplied.

There is a change in supply when the entire demand supply curve shifts rightward or leftward. At the same price, therefore, more amounts of a good or service are supplied by producers or sellers.

Supply decreases if the entire supply curve shifts to the left. At the same price, fewer amounts of a good or service are sold by producers.

Increase (decrease) in supply is caused by factors other than the price of the good itself such as change in technology, business goals, etc. resulting to the movement of the entire supply curve rightward (leftward).

Change in Supply

Change in Supply

P₁

P P S’

Q₁ Q₂

P

P₁

Q₁ Q₂

S’ S

Q Q

Forces that cause the supply curve to change1. Optimization in the use of factors of production

- optimization in the utilization of resources will increase supply, while a failure to achieve such will result to a decrease in supply.

Optimization- refers to the process, or methodology of making something as fully perfect, functional, or effective as possible. 2. Technological change- introduction of cost-reducing innovations in production technology increase supply. 3. Future expectations- impacts sellers as much as buyers. If sellers anticipate a rise in prices, they may choose to hold back the current supply to take advantage of the future increase in price, thus decreasing market supply. If sellers however expect a decline in the price for their products, they will increase present supply.

4. Number of sellers- has a direct impact on quantity supplied. The more sellers there are in the market the greater supply of goods and services are available.

5. Weather Conditions- bad weather, such as typhoons, drought or other natural disasters, reduces supply of agricultural commodities while good weather has an opposite impact.

6. Government policy- removing quotas and tariffs on imported products also affect supply. Lower trade restrictions and lower quotas or tariffs boost imports, thereby adding more supply of goods in the market.

Market EquilibriumThe meeting of supply and demand results to what is referred to as ‘market equilibrium.’

Equilibrium -understood as a “state of balance.” Pertains to a balance that exists when quantity demanded equals quantity supplied. It is the general agreement of the buyer and the seller at a particular price at a particular quantity.

Equilibrium Point-there are always two sides of the story, the

side of the buyer and that of the seller.

Equilibrium Market Price

is the price agreed by the seller to offer its good or service for sale and for the buyer to pay for it.

it is the price at which quantity demanded of a good is exactly equal to the quantity supplied.

Two Conditions may

happen:

Surplus Shortage

What happens when there is market disequilibrium?

is a condition in the market where the

quantity supplied is more than the quantity demanded.

the tendency is for sellers to lower market prices in order for the goods to be easily disposed from the market.

there is a downward pressure to price when there is a surplus in order to restore equilibrium in the market.

Surplus

Equilibrium Market Price and Quantity

P

50

40

30

20

10

50 100 150 200 250 300Q

b

cd

a

D

S

Equilibrium point

Shortage

Equilibrium between quantity demanded and quantity supplied (X-axis are the prices and Y-axis

are the quantities).

is a condition in the market in which quantity demanded is higher than supplied.

there is a possibility of consumers being abused, while the producers are enjoying imposing higher prices for their own interest.

it exists below the equilibrium point.

there is an upward pressure to prices to restore equilibrium in the market.

is due to the fact that consumers bid up prices in order for them to acquire the goods or services that are in short supply.

Shortage

What happens if disequilibrium in the market persists at longer

period of time? the government may intervene by imposing price

controls.Price control- is the specification by the government of minimum and/or maximum prices for goods and services.

the price may be fixed at a level below the market equilibrium price or above it depending on the objective in mind.

price controls may be applied across a wide range of goods and services as part of prices and incomes policy aimed at combating inflation.

Floor Price

legal minimum price imposed by the government.

undertaken if a surplus in the economy persists.

is a form of assistance to producers by the government for them to survive business.

imposed by the government on agricultural products especially when there is bumper harvest.

Price controls are classified into two types: floor price and price

ceiling

Price Ceilinglegal maximum price imposed by the government.

utilized by the government if there is a persistent shortage of goods in the economy.

imposed by the government to protect consumers from abusive producers or sellers who take advantage of the situation.

The Concept of Elasticity

Elasticity means responsiveness. It is a ratio of the percent change in one

variable to the percent change in another variable.

It is a tool used by economist for measuring the reaction of a function to changes in parameters in a relative way.

It is a measure of the degree of

responsiveness of quantity demanded of a product to a given change in one of the independent variable which affect demand for that product.

Elasticity of Demand

Classification of demand elasticity according to factors

that cause the change1.Price Elasticity of demand is a responsiveness of consumers’ demand to change in price of the good sold.2.Income Elasticity of demand is the responsiveness of consumers’ demand to change in their incomes.3.Cross Elasticity of demand is the responsiveness of demand for a certain good, in relation to changes in price of other related goods.

It define as the percentage change in quantity

demanded caused by a 1 percent change in price.

Ed=

Demand Price Elasticity

∆ Quantity demanded∆ Price

Demand for a product is said to be inelastic

if consumers will pay almost any price of the product, while demand for a product may be elastic if the consumers will only pay a certain price, or a narrow range of prices, for the product.

Demand is inelastic if the computed elasticity coefficient is less than 1(Ep< 1).

Demand is elastic if the computed elasticity coefficient is greater than 1(Ep> 1).

Interpretation of the Elasticity Coefficient

Demand Elastic

4

3

2

1

5 10 15 20 25 30 35

b

a

Q

cD

P

An elastic demand curve is flatter than a typical demand curve. This is because a smaller change in price (broken line ab) calls forth a greater change in quantity demanded, (broken line bc).

Demand Inelastic

4

3

2

1

5 10 15 20 25 30 35

P

Q

a

bD

c

An inelastic demand curve is steeper than a typical demand curve. This is because a large change in price (broken line ab) calls forth a smaller change in quantity demanded, (broken line bc)

Extreme Types of Demand Elasticity

a. Perfectly Inelastic b. Perfectly Elastic

P

D

P

Q

D

Q

Perfectly price inelastic, that is, price changes have no effect at all on quantity demanded. A perfectly inelastic demand curve is straight line.

Demand can be perfectly price elastic, that is, any amount will be demanded at the prevailing price. A perfectly demand cure is a straight horizontal line.

Elasticity of Supply

It refers to the reaction or response of the sellers or producers to price changes of goods sold.

It is a measure of degree of responsiveness of supply to a given change in price.

It is a percentage change in quantity supplied given a percentage change in price

Es=

∆ Quantity supplied

∆ Price

If a change in price results in a more than proportionate change in quantity supplied then the supply is price elastic.

4

3

2

1

5 10 15 20 25

a

P

Sc

b

Q

Supply Elastic

An elastic supply curve is flatter than normal supply curve. This is because a smaller change in price (broken line bc) calls forth a greater change in quantity supplied (broken line ab).

If a change in price produces a less than proportionate change in the quantity supplied than supply is price inelastic.

Supply Inelastic

4

3

2

1

P

a

c

S

b

Q

5 10 15 20 25 30

An inelastic supply curve is more vertical than a normal supply curve. This is because any change in price (broken line bc) calls forth a smaller change in quantity supplied (broken line ab).

Supply can be perfectly price inelastic, that is, price changes have no effect at all on quantity supplied. A perfectly inelastic supply curve is illustrated by a straight vertical line.

Supply can be perfectly price elastic, that is, any amount will be supplied at the prevailing price. A perfectly elastic supply curve is straight horizontal line.

Extreme Types of Supply Elasticity

b. Perfectly Elastica. Perfectly Inelastic

Q

D

Q

D

PP

Factors that Determines Supply Elasticity

TimeTime is a determinant of supply elasticity as producer responds to changes in prices from time to time in a given certain period.

Time horizon involved with which production can be increase

Supply can only be increased (decrease) in response to an increase (decrease) in demand/ price by working firms’ existing plant more intensively, but this usually adds only marginally to total market supply.