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REMIGIO G.

TIAMBENG
PSBA Faculty
AB Economics
Master of Business Administration
Doctor in Business Administration – Candidate
College Faculty for 32 years in various colleges
and universities
College Administrator for 8 years
Entrepreneur for 15 years
10 years in banking industry
REMIGIO G. TIAMBENG
Economics Professor
ACCOUNTING 16
MICROECONOMICS – 8:00 to 10:00 AM
MACROECONOMICS – 10:00 to 12:00 NN

SEPTEMBER 8, 2018
SATURDAY
MICROECONOMICS FUNDAMENTALS
1. THE CIRCULAR FLOW OF ECONOMIC
ACTIVITY
2. IMPORTANCE OF MICROECONOMICS
3. THE FOUR BASIC ECONOMIC PROBLEMS FOR
EVERY SOCIETY
4. FACTORS OF PRODUCTION
5. SCARCITY, CHOICES, OPPORTUNITY COST
and TRADE OFF
WHAT IS MICROECONOMICS?
Microeconomics (from Greek prefix mikro- meaning
"small") is a branch of economics that studies the
behavior of individuals and firms in making
decisions or choices regarding the allocation
of scarce resources and the interactions among
these individuals and firms and how these
decisions/choices affect the market (buyers and
sellers).
============================================
Firms - refers to all types of businesses
Individuals – refers to household or consumers/users
THE CIRCULAR FLOW OF ECONOMIC ACTIVITY
IMPORTANCE OF MICROECONOMICS
Microeconomics is the study of the choices made
by households, firms, and government, and of
how these choices affect the markets for goods
or services.
WE CAN USE MICROECONOMIC ANALYSIS TO:
1. Understand how market work and predict
changes
2. Make personal and managerial decisions
3. Evaluate public choices
FOCUS:
• CONSUMER/HOUSEHOLD as buyer of
finished goods and seller of factors of
production.
• FIRM/BUSINESS as seller of finished
goods and buyer of factors of
production.
• GOVERNMENT as regulator and
protector of business and consumers.
FACTS:
a) Individuals face an economic problem 
how to spend their limited income with their
unlimited needs and wants.

b) The economy faces an economic problem 


how to allocate the scarce resources to be able
to achieve its economic development.

ECONOMICS is based on SHORTAGE vs. SCARCITY


ECONOMIC SYSTEM an economic institution that
dominates a given economy.
THE FOUR BASIC ECONOMIC PROBLEMS FOR
EVERY SOCIETY
1) What to produce - what the economy should
produce in order to satisfy consumer wants?
2) How to produce - how to combine production
inputs to produce the goods as efficiently as
possible?
3) How much to produce - the cost of production
4) For whom to produce - Should the economy
produce goods targeted towards those who
have high incomes or those who have low
incomes?
FACTORS OF PRODUCTION
1) LAND – (Natural Resources) Using land for
industrial purposes allows nations to improve
the production processes for turning natural
resources into consumer goods.
2) LABOR – (Human Resources) the mental and
physical effort used to produce goods/services.
3) CAPITAL – (Physical and Financial Resources)
the use of machinery/technology to produce
and distribute goods/services.
4) ENTREPRENEURSHIP – (Skills, Talents, Abilities)
the organizer and transformer of economic
resources into consumer products.
SCARCITY, CHOICES,
OPPORTUNITY COST, and TRADE OFF
Scarcity is the fundamental economic problem of
having unlimited human wants and needs in a
world of limited resources.
Choice involves decision making. It can include
judging the merits of multiple options and
selecting one or more of them.
Opportunity Cost simply means giving up of
something to be able to gain another thing.
Trade-Off means giving up a portion of one thing
to gain a portion of another thing.
DEMAND AND SUPPLY
1. DEMAND versus SUPPLY
2. THE DEMAND SCHEDULE
3. THE DEMAND CURVE
4. THE LAW OF DEMAND AND SUPPLY
5. THE DETERMINANTS OF DEMAND AND SUPPLY
6. SUBSTITUTION EFFECT AND INCOME EFFECT
7. MARKET EQUILIBRIUM AND PRICING
8. CHANGE IN QUANTITY DEMANDED versus
CHANGE IN DEMAND
DEMAND versus SUPPLY
• DEMAND  THE BUYER’S SIDE OF THE MARKET:
DEMAND  the quantity of goods and services
that consumers are willing and able to purchase
at various prices during a period of time.

• SUPPLY  THE SELLER’S SIDE OF THE MARKET:


SUPPLY  the quantity of goods and services that
producers/sellers are willing and able to
offer/sell to the market at various prices during a
period of time.
THE DEMAND SCHEDULE:
The demand schedule is a table of the quantity
demanded of a good at different price levels.
Given the price level, it is easy to determine the
expected quantity demanded.
THE DEMAND CURVE:
a graph showing how the demand for a
commodity or service varies with changes in
its price. It is a graphic representation of a
market demand schedule.
THE LAW OF DEMAND AND SUPPLY
P↑ = D↓ - S↑ = the higher the price, the
lower the quantity demanded; the higher
the quantity supplied. (Inverse/indirect
relationship)

P↓ = D↑ - S↓ = the lower the price, the


higher the quantity demanded; the lower
the quantity supplied. (Direct relationship)
P↑ = D↓ - S↑ P↓ = D↑ - S↓
THE DETERMINANTS OF DEMAND

The five determinants of demand are:


• The price of the good or service.
• Prices of related goods or services. These are
either complementary (purchased along with) or
substitutes (purchased instead of).
• Income of buyers.
• Tastes or preferences of consumers.
• Expectations. These are usually about whether
the price will go up.
DETERMINANTS OF SUPPLY
There are numerous factors that determine
supply, and there are a total of 6 determinants
of supply, including:
• Innovation of the technology
• The number of sellers in the market
• Changes in expectations of the suppliers
• Changes in the price of a product or service
• Changes in the price of related products
• Changes in tax and subsidies
SUBSTITUTION EFFECT AND INCOME EFFECT
Substitution Effect -> is defined as the result of a price
increase, the consumer will substitute another
product in its place, or forgo the product altogether.
=>With a price decrease, new buyers will enter the
market, thus, the good will be cheaper relative to
other goods and is substitutes for them. EX. Coke vs.
Pepsi

Income Effect -> is defined as the result of a change in


a product's price relative to the consumer's
disposable income.
=>Individuals buy more when prices are lower or when
their income increases.
MARKET EQUILIBRIUM AND PRICING
• MARKET EQUILIBRIUM a market
condition where the supply in the market is
equal to the demand in the market.
• EQUILIBRIUM PRICE  the market price at
which the supply of an item equals the
quantity demanded.
• EQUILIBRIUM QUANTITY  the ​quantity
of ​goods or ​services that is ​supplied
or ​demanded at the ​equilibrium ​price.
THE EQUILIBRIUM POINT
GRAPHICAL ILLUSTRATION
PRICE FIXING/CONTROL
A government regulation establishing a
maximum/minimum price to be charged for
specified goods and services, especially during
period of inflation/deflation.

• DEMAND > SUPPLY = SHORTAGE  PRICE CEILING


A government-imposed price control or limit on how
high a price is charged for a product to protect
consumers.

• SUPPLY > DEMAND = SURPLUS  PRICE FLOORIN


A government-imposed price control or limit on how
low a price is charged for a product to protect
producers.
CHANGE IN QUANTITY DEMANDED
versus CHANGE IN DEMAND
CHANGE IN DEMAND The shift of the entire demand curve of
a product or service, caused by shifting trends or new
competition, which can either lower or raise the price.
CHANGE IN QUANITYT DEMANDED 
The movement along the demand curve caused
by a change in the price of the good.
PRICE ELASTICITY
1. PRICE ELASTICITY OF DEMAND
2. PRICE ELASTICITY OF SUPPLY
3. INCOME ELASTICITY
4. CROSS ELASTICITY
WHAT IS PRICE ELASTICITY?
The measurement of how responsive/reactive an
economic variable is to a change in another.

It gives answers to questions such as:


• "If I lower the price of my product, how much
more will I sell?"
• "If I raise the price of my product, how will that
affect the sales of other good?"
• "If the market price of a product goes down, how
much will those affect the amount that firms
will be willing to supply to the market?
ELASTIC and INELASTIC DEMAND
UNITARY ELASTICITY
PERFECTLY ELASTIC AND
INELASTIC DEMAND
PRICE ELASTICITY OF DEMAND 
Formula: Σd = %ΔQd / %ΔP

• ΔP = Σ = D  Consumer’s responses or reactions


towards change in price.

PRICE ELASTICITY OF SUPPLY


Formula: Σs = %ΔQs / %ΔP

• ΔP= Σ =S  Producer’s responses or reactions


towards change in price.
Income Elasticity of Demand
Income elasticity of demand refers to the sensitivity
of the quantity demanded for a certain good to a
change in real income of consumers who buy this
good, keeping all other things constant.

• Formula: Σy = %ΔQd / %ΔY


ΔY= Σ =D  Consumer’s responses or reactions
towards change in income.
Interpretation of Income Elasticity of Demand

Income elasticity of demand and types of goods


Income elasticity of demand (YED) measures the
responsiveness of demand to a change in income.
Types of Income Elasticity of Demand
There are five types of income elasticity of demand:

• High: A rise in income comes with bigger increases


in the quantity demanded.
• Unitary: The rise in income is proportionate to the
increase in the quantity demanded.
• Low: A jump in income is less than proportionate
than the increase in the quantity demanded.
• Zero: The quantity bought/demanded is the same
even if income changes
• Negative: An increase in income comes with a
decrease in the quantity demanded.
THE CROSS ELASTICITY OF DEMAND
Cross elasticity (Exy) tells us the relationship
between two products. it measures the
sensitivity of quantity demand change of product
X to a change in the price of product Y.

• Formula: Σxy = %ΔQx / %ΔPy

Simply put: It is a measure of how sensitive the


consumption of good X is to change in the price
of good Y.
Characteristics of
Cross Elasticity of Demand

• Exy > 0, Qd of X and Price of Y are directly


related. X and Y are substitutes.
• Exy = 0, Qd of X stays the same as the
Price of Y changes. X and Y are not related.
• Exy < 0, Qd of X and Price of Y are inversely
related. X and Y are complements.
CROSS ELASTICITY
CROSS ELASTICITY
THE ECONOMIC UTILITY
1. UTILITY THEORY
2. FOUR TYPES OF ECONOMIC UTILITY
3. WAYS TO MEASURE UTILITY
4. THE LAW OF DIMINISHING MARGINAL
UTILITY
UTILITY THEORY
• "Utility" in this context refers to the VALUE that
a purchaser receives in return for exchanging his
money for a company's goods or services.

• Companies seek to provide maximum customer


satisfaction through addressing as many of the
four types of utility as possible.

• UTILITY (value)  satisfaction, pleasure,


happiness, usefulness
• UTILSA hypothetical unit of measurement for
utility or satisfaction
What are the Four Types of
Economic Utility?
1. Form => refers to the specific product or service that a
company offers that provides lower costs, greater
convenience, or a wider selection of products.
For example, a manufacturing firm might offer the raw
material of rubber in the form of automobile tires.

2. Time => refers to easy availability of products or


services at the time when customers need or want to
purchase them.
The goal is to offer potential customers an added value. A
time element such as 24-hour availability might be a
value that a company chooses to offer.
Four Types of Economic Utility (cont.)
3. Place => refers primarily to making goods or services
readily and conveniently available to potential
customers.
Making a product available in a wide variety of stores and locations
is considered an added value addressing the issue of consumer
convenience.

4. Possession => refers to the benefit customers derive


from ownership of a company's product once they
have purchased it.
For example, if a company sells headphones, then it offers
customers an added value in listening to music available through
using the headphones to improve the functionality of a stereo
system. Offering favorable financing terms toward ownership is
another way a company might choose to improve the value of
possessing its products.
THERE ARE TWO WAYS TO MEASURE
UTILITY
CARDINAL (Qualitative Approach)means
satisfaction that can be measured in
numbers such as 1, 2, and 3.

ORDINAL  (Quantitative Approach) refers


to satisfaction which cannot be measured
in numbers but through observation such
as establishing a ranking among goods
(Class A, Class B, and Class C)
THE LAW OF DIMINISHING MARGINAL UTILITY:
• As a consumer consumes more and more units of a
specific commodity, the utility from the successive units
goes on diminishing.
WHAT IS INDIFFERENCE CURVE?
An indifference curve is a line showing all the
combinations of two goods which give a consumer
equal utility. In other words, the consumer would be
indifferent to these different combinations.
• Example of choice of goods which give consumers the
same utility
• The graph shows a combination of two goods that
the consumer consumes.

The indifference curve shows the bundles of goods A and B. To the


consumer, bundle A and B are the same as both of them give him
the equal satisfaction. In other words, point A gives as much utility
as point B to the individual. The consumer will be satisfied at any
point along the curve assuming that other things are constant.
BUDGET CONSTRAINT LINE
Depicts all combinations of two goods that can be
purchased with a given income at the given
prices of the two goods.
The budget constraint is straight line because its slope is constant
Optimal choice of goods for consumer:
-> Given a budget line of B1, the consumer will maximize utility
where the highest indifference curve is tangential to the budget line
(20 apples, 10 bananas)
-> Given current income – IC2 is unobtainable.
-> IC3 is obtainable but gives less utility than the higher IC1
The optimal choice of goods can also be shown with the
Equi-marginal principle
UTILITY-BUDGET LINE-INDIFFERENCE CURVE
Utility is maximized when the budget line is
tangent to the highest possible indifference
curve.
In the diagram, utility is maximized at point E, where the budget
constraint line is tangent to the indifference curve
As income rises, you can afford to consume on higher
indifference curves. This optimal choice will shift to the
right. This we can plot consumption as income rises.
Equi-marginal principle
Short Run vs. Long-Run
Cost of Production
Definition of Short Run:
• Short-run  a period of time over which at least one
factor must remain fixed.

• For most of the firms, the fixed resource or factor


which cannot be increased to meet the rising
demand of the good is capital i.e., plant and
machinery.

• Short run, then, is a period of time over which


output can be changed by adjusting the quantities of
resources such as labor, raw material, fuel but the
size or scale of the firm remains fixed.
Definition of Long Run:

• Long-run  there is no fixed resource. All


the factors of production are variable. The
length of the long run differs from industry
to industry depending upon the nature of
production.

• For example, a balloon making firm can


change the size of firm more quickly than a
car manufacturing firm.
THE LAW OF DIMINISHING RETURNS
If one factor of production (number of workers, for example) is
increased while other factors (machines and workspace, for
example) are held constant, the output per unit of the variable
factor will eventually diminish.
GRAPHICAL ILLUSTRATION:
ECONOMIES OF SCALE vs. DISECONOMIES OF SCALE
Economies of Scale are the cost advantages that
enterprises obtain due to their scale of operation
(typically measured by amount of output produced),
with cost per unit of output decreasing with
increasing scale. For example, the cost of producing one
unit is less when many units are produced at once.

Diseconomies of scale occur when a business grows so


large that the costs per unit increase. As output rises, it
is not inevitable that unit costs will fall.
It occurs for several reasons, but all as a result of the
difficulties of managing a larger workforce.
Cartel vs. Collusion
• Cartel is a formal and legal agreement of
cooperation formed between two or more
competitors in a specific industry. A cartel
will get together to set prices and control
levels of production with the aim of gaining
mutual benefit.

• Collusion is a secretive agreement between


two or more organizations, formed with the
aim of gaining illegal mutual benefits
MARKET
A set of conditions in which buyers and sellers
meet each other for the purpose of exchange of
goods and services for money.

Elements of Market:

• Presence of goods and services to be exchanged.

• Existence of one or more buyers and sellers.

• A place or a condition where buyers and sellers


of a good get in close touch with each other.
Types of Market/Market Model

Markets are classified according to the number


of firms in the market and by the commodity
to be exchanged.

MARKET STRUCTURE The collection of factors


that determine how buyers and sellers
interact in a market, how prices change, and
how different levels of the production and
selling processes interact.
Four basic types of market structure are:
• Perfect competition: many buyers and sellers
offering homogenous products, none being
able to influence prices.
• Monopolistic Competition: many buyers and
sellers offering heterogeneous products,
none being able to influence prices.
• Oligopoly: few or several large sellers who have
some control over the prices.
• Monopoly: single seller with considerable
control over supply and prices.