Microeconomics 101
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This document provides an overview of microeconomics. It defines economics as the study of how societies allocate scarce resources to produce and distribute goods and services. The document outlines different types of economic systems and explains that most modern economies are mixed, with roles for both markets and governments. It also summarizes key microeconomic concepts like supply and demand, market equilibrium, and the role of prices in signaling resource allocation.
Microeconomics 101
- 1. MICROECONOMICS 101 MARILYN P. ALLANIGUE, MMC, MPA August 17, 2014
- 2. WHAT IS ECONOMICS? Economics covers all kinds of topics. But at the core it is devoted to understanding how society allocates its scarce resources. Economist from pre-war to modern world define economics as the following:
- 3. ECONOMICS ASKS WHAT GOODS ARE PRODUCES, HOW THESE GOODS ARE PRODUCED AND FOR WHOM THEY ARE PRODUCED ECONOMICS ANALYZES MOVEMENT IN THE OVERALL ECONOMY – TRENDS IN PRICES, OUTPUT, UNEMPLOYMENT, AND FOREIGN TRADE. ONCE SUCH TRENDS ARE UNDERSTOOD, ECONOMIST HELPS DEVELOP THE POLICIES BY WHICH GOVERNMENTS CAN IMPROVE THE PERFORMANCE OF THE ECONOMY.
- 4. ECONOMICS IS THE STUDY OF COMMERCE AMONG NATIONS. IT HELPS EXPLAINS WHY NATIONS EXPORTS SOME GOODS AND IMPORT OTHERS, AND ANALYZES THE EFFECT OF PUTTING ECONOMIC BARRIERS AT NATIONAL FRONTIERS ECONOMICS IS THE SCIENCE OF CHOICE. IT STUDIES HOW PEOPLE CHOOSE TO USE SCARCE OR LIMITED PRODUCTIVE RESOURCES (LABOR, EQUIPMENT, TECHNICAL KNOWLEDGE), TO PRODUCE VARIOUS COMMODITIES (SUCH AS WHEAT, OVERCOATS, CONCERTS AND MISSILES) AND TO CONTRIBUTE THESE GOODS FOR CONSUMPTION.
- 5. ECONOMICS IS THE STUDY OF MONEY, BANKING, CAPITAL AND WEALTH. AMONG THESE DEFINITION, THE MOST COMMON THEME IS – ECONOMICS IS THE STUDY HOW SOCIETIES USE SCARCE RESOURCES TO PRODUCE VALUABLE COMMODITIES AND DISTRIBUTE THEM AMONG DIFFERENT PEOPLE.
- 6. TWO BRANCHES OF ECONOMICS MACROECONOMICS – functions of economy as a whole MICROECONOMICS – analyzes the behavior of individual components like industries, firms and households such as the producer and consumer/households make decisions to allocate limited resources
- 7. THREE PROBLEMS OF ECONOMIC ORGANIZATION Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft those who hunger and are not fed. – President Dwight D. Eisenshower
- 8. 1. What commodities are to be produced and in what quantities? How much of each of the many possible goods and services should the economy make? And when they will be produced? 2. How shall goods be produced? By whom and with what resources and in what technological manner are they to be produced?
- 9. 3. For whom shall goods to be produced? Who gets to eat the fruit of the economy’s efforts? How is the national product to be divided among different households? Are we to have a society in which a few are rich and many poor? Shall high incomes go to managers or workers or landlords? Shall the selfish inherent the earth? Shall the lazy eat well?
- 10. INPUTS AND OUTPUTS IN ECONOMIC LANGUAGE, THE THREE CENTRAL ECONOMIC TASKS OF EVERY SOCIETY ARE REALLY ABOUT CHOICES AMONG AN ECONOMY’S INPUTS AND OUTPUTS • INPUTS are commodities or services used by firms in their production processes. •OUTPUTS are the various useful goods or services that are either consumed or employed in further production.
- 11. THREE CATEGORIES OF INPUTS • LAND – generally the natural resources, the gift of the nature for our productive processes • LABOR – consists of the human time spent in production •CAPITAL – resources form the durable goods of an economy, produced in order to produce other goods
- 12. MARKET, COMMAND AND MIXED ECONOMICS COMMAND ECONOMY – is directed by centralized control of government. In a command economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions.
- 13. MARKET ECONOMY – is guided by an informal system of prices and profits in which most decisions are taken by private individuals and firms. Consumption is determined by individual’s decisions about how to spend the wages and property incomes generated by their labor and property ownership.
- 14. IN A MARKET ECONOMY, THESE QUESTIONS ARE HANDLED BY THE MARKET • WHAT & HOW MUCH TO PRODUCE: determined by demand & supply conditions, individual choices, & pursuit of profit. • HOW TO PRODUCE: determined by technology & resource costs. • DISTRIBUTION: based on ability & willingness to pay the price. • WHAT IF CONSUMER WANTS OR TECHNOLOGY CHANGE? Those changes alter demand & supply, which changes prices, profits, & consequently output levels & distribution.
- 15. THE CIRCULAR FLOW money to pay for goods & services Households & Resource Owners Firms Product Markets goods & services labor & other resources resource payments such as wages, rents, & interest Resource or Factor Markets
- 17. THE MARKET IS NOT THE ONLY WAY THAT THE BASIC QUESTIONS OF ECONOMICS CAN BE ANSWERED • In some less developed nations, a traditional economic system is used • Custom & tradition determine the answers • Social arrangements & culture dictate the solutions • Change occurs only very gradually
- 18. ALL SOCIETIES HAVE DIFFERENT COMBINATIONS OF COMMAND AND MARKET; ALL SOCIETIES ARE MIXED ECONOMICS.
- 19. TRADE, MONEY AND CAPITAL ADVANCE ECONOMIES HAVE THREE FEATURES: • Trade Specialization – trade between individuals and countries depends on specialization – Division of Labour • Money – it measures the economic value of things and is used for financing trade • Capital – it leverages labour power into a much more efficient factor of production and increases production
- 20. TRADE SPECIALIZATION AND DIVISION OF LABOUR • In today’s world, countries depends on specialization of individuals and firms • Connected by an extensive network of trade • Specialization occurs when people concentrated on a particular set of tasks. CAPITAL AND LAND ARE HIGHLY SPECIALIZED. SPECIALIZATION GIVES GREATER PRODUCTIVITY. INDIVIDUALS AND COUNTRIES VOLUNTARILY TRADE GOODS IN WHICH THEY SPECIALIZE FOR OTHERS’ PRODUCTS – vastly increasing the range and quantity of consumption. Have potential to raise living standards.
- 21. MONEY • It is the means of payment • Due to the acceptance of money as payment for goods and debts trade is facilitated • Government control the money supply through their central banks • Like other factors, money can spoil the economy or can overheat the economic engine
- 22. CAPITAL • Capital has to be produced before it is used •More capital formation consumption cut and more saving increase future productivity and future consumption • In market economy, capital is privately owned – income from the capital goes to individuals capitalism
- 23. MARKETS AND GOVERNMENT IN A MODERN ECONOMY THREE ECONOMIC ROLE OF THE GOVERNMENT 1. Increase efficiency by promoting competition, curbing externalities like pollution and providing public good 2. Promote equity by using tax and expenditure programs to redistribute income towards particular group 3. Foster macroeconomic stability and growth – reducing unemployment and inflation
- 24. EFFICIENCY Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. (Adam Smith, The Wealth of the Nation, 1776)
- 25. ACCORDING TO SMITH: PERFECTLY COMPETITIVE MARKETS WILL PRODUCE AN EFFICIENTLY ALLOCATION OF RESOURCES – ECONOMY IS ALWAYS ON PPF (PRODUCTION POSSIBILITY FRONTIER).
- 26. WHY DOES AN ECONOMY FALL SHORT OF EFFICIENT PERFECT COMPETITION? •Imperfect competition •Externalities •Public Goods
- 27. EXTERNALITIES – involve involuntary imposition of costs or benefits •Governments are more concerned about the negative externalities rather than positive ones •Government regulations are designed to control externalities like air and water pollution, damage from strip mining, hazardous wastes, etc
- 28. IMPERFECT COMPETITION • It happens when a buyer or a seller affects the price level •Consequences of imperfect competition 1. When it happens society moves inside the PPF 2. Too high price and too low input is the hallmark of the inefficiencies associated with imperfect competition
- 29. EQUITY – MARKET DO NOT PRODUCE A FAIR DISTRIBUTION OF INCOME WHICH IS NOT ACCEPTABLE FROM THE SOCIAL POINT OF VIEW. IF INCOME INEQUALITY EXISTS, GOVERNMENT CAN TAKE THE FOLLOWING STEPS:
- 30. •CAN ENGAGE PROGRESSIVE TAXATION 1. Taxing large income at a higher rate than small incomes 2. Impose heavy taxes on wealth •CAN MAKE TRANSFER PAYMENTS LIKE AID FOR ELDERLY, BLIND AND DISABLED PEOPLE 1. Can subsidize the consumption of low-income group
- 31. MACROECONOMIC GROWTH AND STABILITY • Economic growth denotes the growth in nation’s output •Macroeconomic policies for stabilization and economic growth include fiscal policies along with monetary policies
- 32. • Fiscal policies – change in taxes and change in government spending •Monetary policies – change in money supply and money demand affect interest rates and credit conditions
- 33. IN MOST OF THE INDUSTRIALIZED COUNTRIES, WE FIND SOME VARIANT OF A MIXED ECONOMY. • The market determines output and prices in most individual sectors •Government steers the overall economy with programs of taxation, spending and monetary regulations.
- 34. GOVERNMENT CAN REMEDY SHORTCOMINGS OF THE MARKET FAILURE OF INVINSIBLE HAND GOVERNMENT INTERVENTION CURRENT EXAMPLES OF GOVERNMENT POLICY Inefficiency Monopoly Externalities Public Goods Intervenes in markets Intervenes in markets Subsidize worthwhile activities Antitrust law Antipollution laws, anti-smoking ordinances National defense Inequality Unacceptable inequalities of income and wealth Redistribute income Progressive taxation of income and wealth Income-support program (ex. Food stamps) Macroeconomic Problems Business cycles (high inflation and unemployment) Stabilize through macroeconomic policies Monetary policies (ex. Changes in money supply and interest rates) Fiscal policies (ex. Taxes and spending programs) Slow economic growth Stimulate growth Invest in education Reduce budget deficit and raise national savings rate
- 35. LAW OF SUPPLY AND DEMANDS (VIDEO AND GRAPHS)
- 36. WHAT IS THE LAW OF DEMAND? •The lower the price of a good, the larger the quantity consumers will buy. •So the demand curve slopes downward from left to right.
- 37. WHAT IS THE DIFFERENCE BETWEEN DEMAND & QUANTITY DEMANDED? • DEMAND is the entire curve that shows the relation between price & quantity purchased. • QUANTITY DEMANDED is one particular quantity on the demand curve.
- 38. WHAT IS THE LAW OF SUPPLY? • The higher the price of a good, the larger the quantity firms will be willing to produce and sell. • So the supply curve slopes upward from left to right.
- 39. WHAT IS THE DIFFERENCE BETWEEN SUPPLY AND QUANTITY SUPPLIED? • SUPPLY is the entire curve that shows the relation between price & quantity provided. •QUANTITY SUPPLIED is one particular quantity on the supply curve.
- 40. THE ECONOMICS OF DEVELOPING COUNTRIES THE FOUR ELEMENTS IN DEVELOPMENT 1. Human Resources 2. Natural Resources 3. Capital Formation 4. Technology
- 41. ISSUES IN ECONOMIC DEVELOPMENT 1. Industrialization vs. Agriculture 2. Inward vs. Outward Orientation 3. The danger of Overspecialization 4. State vs. Market
- 42. SOME OF THE ELEMENTS OF A MARKET-ORIENTED POLICY ARE THE FOLLOWING: a. Low tariff and few quantitative restrictions b. Easy entry and exit c. Promotion of small business and the fostering of competition d. Stable macroeconomic environment – taxes are predictable, prices are stable and the government budget is balanced.
- 43. Geography has made us neighbors History has made us friends Economics has made us partners And necessity has made us allies Those whom God has so joined together Let no man put asunder President John F. Kennedy
- 44. Thank You! Marlyn P. Allanigue, MMC, MPA August 17, 2014