Economics

Mark Benedict M. Guia CPA MBA

Reviewer
CRC-ACE The CPA Professional Review School

Economics
is thesocial science
that studies economic activity
to gain an understanding of the
processes that govern the
production, distribution and
consumption of goods and services
An exchange economy

MICROECONOMICS

Definition
How an individual consumer spends his
income to maximize satisfaction
How a business firm combines resources or
factors of production to maximize profits
and minimize losses
How the price of each commodity and each
type of resource is determined by demand
and supply.
How individual decisions are affected by
different forms of market organization

Law of Demand
As the prices of commodity
decreases, all other things being
constant, the quantity of the product
that buyers are willing and able to
buy increases. (Inverse relationship
with price)
Buyers response will be greater after
they have had time to adjust more
fully to a price change

Principles behind Consumer Choice

There is always a limited income, while
unlimited desires necessitates choice
Consumers make good choices to
achieve their purposes
Consumers can substitute between like
goods and services
Consumers make decisions based on
imperfect information
Law of Diminishing Utility

Determinants of Demand
Price (Primary determinant)
Non-Price Determinants
Income
Population
Taste and Preference
Price Expectation
Price of related goods
Substitution Effect

Change in Demand
Movement along the demand curve
= change in price of goods and
services
Shift of the demand curve = Change
in income, preference, or prices of
other goods and/or services

Types of Demand Elasticity

Elastic Demand
Inelastic Demand
Unitary Elastic Demand
Perfectly Elastic Demand (Purely
competitive market)
Perfectly Inelastic Demand
(Medicines without no Substitute)

Determinants of Demand
Elasticity
Number of Substitute Goods
Price Increase in proportionate to
income
Importance of the product to the
buyers (Luxury goods versus
Essential Goods)

Price Elasticity of Demand

Income Elasticity of Demand

Cross Elasticity of Demand

Determinants of Supply
Price (Primary determinant) direct
relationship
Non-Price Determinants
Technology
Cost of Production
Number of Sellers or Producers
Prices of Other goods
Price Expectations
Taxes and Subsidies

Change in Supply
Movement along the supply curve change in price of a good or service
Shift of the supply curve change in
costs, input prices, technology, or
prices of related goods and services

Type of Supply Elasticity

Elastic Supply
Inelastic Supply
Unitary Supply
Perfectly Elastic Supply
Perfectly Inelastic Supply

Price Elasticity of Supply

Demand, Supply and Market

Equilibrium
Quantity
Supplied
Quantity
Supplied
Quantity
Supplied

Demanded < Quantity

= Surplus
Demand = Quantity
= Equilibrium
Demand > Quantity
= Shortage

Theory of Consumer
Behavior
Utility
Marginal Utility
Law of Diminishing Marginal Utility

Factors of Production
Land (sometimes called natural resources)
Labor
Capital (Product of the past industry of man,
a wealth, and to be used to produce more
value)
Explicit Costs
Implicit Costs
Economic Profit
Accounting Profit

Entrepreneurship

Market Structures

Pure Competition
Pure Monopoly
Monopolistic Competition
Oligopoly

MACROECONOMICS

Definition
A branch of learning that specializes
on the study of economic activities on
the aggregate level.
A study of the behavior of the
economy as a whole.
Its main concern are total output, total
income, general level of employment
(unemployment rate) and general
price level (inflation)

General Concerns of
Macroeconomics

Unemployment
Inflation
Growth and Development
Interest Policy
Level of Taxation and Government
Budget
International Trade Policy

Four Sectors of Economy

Components of Aggregate
Demand

Private Consumption
Private Investment
Government Expenditures
Net Export (export minus import)

Factors Affecting the General Level

of Demand
Fiscal (Taxes and Spending) and
Monetary (Financial System) Policies
of the Government
Changes in Asset Values (Real and
Financial Assets)
Economic performance of trading
partners abroad
Oil Price Changes

Determinants of Aggregate
Supply
Changes in the cost of production
Changes in taxes and subsidies
Increase in demand of local products
abroad

National Output

Gross Domestic Product (GDP)

Gross National Product (GNP)
Net National Product (NNP)
National Income (NI)
Personal Income (PINc)
Disposable Income (DI)
Personal Savings (PS)

Business Cycle

Key Market Indicators

Civilian Labor Force

Unemployed
Labor Force Participation Rate
Unemployment Rate
Full Employment
Natural Rate of Unemployment
Inflation
Anticipated Inflation
Unanticipated Inflation

Keynesian Theory
Average Propensity (Tendency) to
Consume (APC)
Average Propensity to Save (APS)
Marginal Propensity to Consume
(MPC)
Marginal Propensity to Save (MPS)