THE FLOW OF ECONOMY

The Circular Flow of Economy

Goods &
Services
Factors of
Production

Household
Sector

Business Sector

Factors of
Payments
Payment fro
Purchase of
G&S

Scarcity
Refers to the condition that all
resources are available only in limited
supply.

Law of Scarcity
States

that goods are scarce because

there are not enough resources to
produce all the goods that people want
to consume.

Societys

resources: (Factors of
Production)
Natural gifts (land, forest, minerals)
Human (mental & physical)
Manufactured aids (tools, machinery,
buildings)

Commodities
Refers to the things that are produced
Can be Goods & Services

Goods
Tangible

Services
Intangible

Concept of Opportunity Cost

Peoples

choices between several

options
Refers to the foregone value of
the next best alternative
Value of what is given-up when
one makes choice

Elements of Demand &

Supply

Demand
Pertains

as to the quality of good

and service that people are ready
to buy at a given prices within a
given time period
Desire to possess a thing
Ability to pay for it or means of purchasing it
Willingness in utilizing it

Quality Demand
The amount of goods or services consumers
are willing and able to buy/purchase at a
given price, place and period of time

Law of Demand
Price

increases, quantity
demanded decreases and as the
price decreases quantity demand
increases
Relationship of price and
quantity, law observed
regularity in the market
Validity of the Law of demand
Ex.

Justification of the Law of

Demand
Income

Effect

Prices of goods decreases consumers

can afford to buy more
Substitution

Effect

Substitute for the goods (alternative)

Determinants of Demand
Consumers

Income

Change in income will have change

in demands
Normal Good
Inferior Good

Consumers

Expectation of Future

prices
Quantity of a good demanded within
any period depends not only on
prices in that period but also on
prices expected in future periods.

Prices

of Related Products

A demand for any particular good will be

affected by changes in the prices of related
goods
Substitute Products
Goods that can be use to replace other goods

Complimentary Products
Goods that go together or can be use without the other

Consumers

Taste and Preferences

Major factor in determining demand for nay

product
Population

Increase in population means more demand for

goods and services

Demand

Schedule

Shows a tabular representation of

relationship between the quantity of
good demanded and the price of the
good
ANNA'S DEMAND
SCHEDULE FOR
T ELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00

QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0

Demand Curve
a

graph illustrating how much of

a given product a household
would be willing to buy at
DEMAND
different prices. ANNA'S
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00

QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0

SUPPLY
The

maximum units/quantity of
goods or services producers can offer
Quantity supplied
Refers to the amount or quantity of goods and
services producers are willing and able to
supply at a given time.

Law of Supply
As

prices increases, quantity

supplied also increases and as
price decreases quantity supplied
also decreases

Determinants of Supply
Change

in Technology
Cost of Inputs Used
Inc in price of the input or cost of
production decreases quantity of supply
Expectation

of Future Price
Price of Related products
Government Regulation and Taxes
Government Subsidies
Number of firms in the market

Supply Schedule
A

tabular representation of the

relationship between quantity of
a good supplied and its prices

Quantity supplied represents the number of

units of a product that a firm would be willing and
able to offer for sale at a particular price during a
given time period.

Supply Curve
A supply

curve is a graph illustrating

how much of a product a firm will
supply at different prices.

Market Equilibrium
A

state which implies a balance

between the opposing forces, a
situation in which quantity
demanded and quality supplied
are equal
The quality that consumers will
buy is equal to the amount or
quantity the producers are able
and willing to offer.

Price Control
Price

Ceiling

A maximum price a good or services

is bought and sold.
Ex. Rent control RA 9653
No inc in rental for a year and 7% inc
only

Price

Floor

Government impose minimum price