Introduction to Microeconomics

Economics is a social science that deals with the efficient allocation of scarce
resources to satisfy the unlimited needs and wants.

(Social science studies the behavior of individuals and society rather than
physical matter.)

Oikonomia = household management

Microeconomics - Demand and supply

- Market Structure

Macroeconomics - Economic Growth

- Inflation

Economic Methodology & Types

Positive vs. Normative

Positive Economics deals with “what is” --- objective facts and data (e.g.,
The unemployment rate is 5%)
Normative Economics deals with “what ought to be” --- value judgments
and opinions (e.g., The government should lower taxes.) (Note: there’s
always a statement or opinion)
Inductive vs. Deductive Reasoning
Methods used to move from specific observations to general theories
(Inductive) or apply general theories to specific cases (Deductive).
Scientific Method
Like in research, the steps “Identify the problem → Formulate hypothesis
→ Collection of data → Analysis → Conclusion and recommendation” show
how economic theories are tested.

In efficient allocation, this means getting the most our of what we have.

Allocative vs. Productive Efficiency

Productive is about producing goods at the lowest possible cost (Note:
kung ano ang gagamitin to produce a product na more efficient.)
Allocative is about producing the specific goods that society wants most.
 (Note: based on prioritization of a country. For example, in North Korea
they prioritize militarization, they then they allocate mostly their
resources to their military, next is their education, so on so forth.)

3 Basic Economic Questions (that every society miust answer):

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

For scarce resources part, it was mentioned that the resources are limited.

Factors of production, and each has a corresponding payment.

Resources Description Income Payment

All natural resources

Land Rent
(water, minerals, etc.)

Labor Human effort and work Wages

Man-made
Capital tools/machinery (not Interest
just money)

The person who

Entreprenuership combines the other Normal Profit
three

(Note: Every resource used has an alternative use and therefore a cost.)

For Unlimited wants and needs part,

Unlimited wants/needs
Humans are “insatiable” --- we always want more.
Scarce Resources
There is a finite amount of land, labor, and capital
Wants > Resources = SCARCITY
 Because scarcity exists, and we are forced to make choices, which brings
us back full circle to Opportunity Cost.
Also, scarcity is a fundamental problem in Economics.

Lesson 2: Market
Microeconomics is the branch of economics that focuses on individual entities
such as households and firms.

It studies how individuals make choices and how these choices affect the market
(Note: Microeconomics focuses on the market not the whole economy, which is
the focus of macroeconomics).

In microeconomics, there is a circular flow that explains the exchange of

economic resources and goods/services between consumers and producers.

Consumers provide factors of production: land, labor, capital, and

entrepreneurship.
Producers use these factors to produce goods and services.
Every factor of production has an associated income payment:

Example: Land → Rent, Labor → Wage, Capital → Interest, Entrepreneurship →

Profit

Process: Once the producers produce the goods/service, they will sell it to

consumers, generating revenue (income from sales).

Note: Producers only produce economic goods, which are goods and services
that command a price. They do not produce free goods, because producing
something with zero price yields zero revenue and thus negative economic profit
(loss).

Economic Profit and Producer

What is the reason why producers shall not produce free good?

In computing economic profit, we have the formula of:

Profit = Total Revenue - Total Cost

Total Revenue is calculated as:

Revenue = Price x Quantity

For example: If a producer sells a good at zero price (free good), total
revenue is zero, but costs remain, resulting in negative economic profit (loss).

Producers avoid producing goods for free to prevent losses.

A market is a mechanism that brings together buyers and sellers who agree on a
price to conduct transactions.

A transaction involves an exchange of goods and services for money.

The earliest form of transaction is barter, which requires a double coincidence

of wants.

The agreed price during transactions is called the equilibrium price.

Markets do not require a physical place: online platforms like Facebook

Marketplace, Lazada, Shopee, and Zalora are examples of markets.

2 key concepts in market analysis:

1. Market Demand

Demand is the quantity of goods and services that buyers are both willing and
able to purchase at various prices during a given period, ceteris paribus (all

other factors constant).

Note: Both willingness and capability are necessary for demand to exist (e.g.,
willingness to buy an iPhone 12 without money does not constitute demand.
Likewise, having money but no desure for iPhone 12 also means no demand.).

The term ceteris paribus means all other factors affecting demand remain

constant except the price of the product itself.

2. Market Supply

Supply is the quantity of goods and services that sellers are both willing and
able to offer for sale at various prices during a given period, also ceteris paribus.

Note: Like demand, supply requires both willingness and capability of the
seller.

Demand Supply can be represented by:

Function: a mathematical expression relating price and quantity supplied
or demanded.
Schedule: a table showing price and quantity pairs.
Curve: a graph plotting price against quantity.

Demand and Supply Functions

Demand function equation:

QD = A − BP
Where:

QD​- quantity demanded

P - price

A - coefficient representing maximum quantity demanded when price is zero

B - slope showing how quantity demanded changes with price

Example: If P = 0 find Qd

QD = 80 − 4P

= 80 - 4 (0)

QD = 80

Interpretation:

-4 means for every 1 peso increase in price, reduces quantity demanded by 4

units (inverse relationship). Kapag tumataas ang bilihin, ang mga buyer ay
ayaw bumili ng marami instead konti lang ang binibili natin.

80 means maximum demand when price is zero.

Supply function equation:

QS = − A + BP

QS: quantity supplied

P: price

A: coefficient (negative value here, representing zero supply if price is zero)

B: positive slope indicating how quantity supplied increases as price increases

Example: If P = 0 find Qs

QS = − 10 + 5P

= - 10 + 5(0)

QS = - 10

Interpretation:

+5 means for every 1 peso increase in price, quantity supplied increases by 5

units. Kapag tumataas ang price ng product, ang mga supplier ay mas
willing magproduce ng produkto.
-10 which practically means zero production at zero price.

Demand and Supply Schedules

Price (P) Quantity Demanded Quantity Supplied (QS​)

(QD​)

0 80 - 4(0) = 80 -10 + 5(0) =-10

5 80 - 4(5) = 60 -10 + 5(5) = 15

10 80 - 4(10) = 40 -10 + 5(10) = 40

15 80 - 4(15) = 20 -10 +5(15) = 65

20 80 - 4(20) = 0 -10 +5(20) = 90

 Please note na sa mga activity, tayo ang maga-assign sa mga prices if
walang binigay si prof.

The demand schedule is derived by substituting prices into the demand

function. The supply schedule is derived similarly from the supply function.

Demand and Supply Curves

Curves are plotted on a Cartesian plane with price (P) on the vertical (Y) axis and
quantity (Q) on the horizontal (X) axis.

Demand curve: downward sloping, reflecting the law of demand:

As price increases, quantity demanded decreases (inverse relationship).

As price decreases, quantity demanded increases.
Supply curve: upward sloping, reflecting the law of supply:

As price increases, quantity supplied increases (direct relationship).

As price decreases, quantity supplied decreases.

Non-Price Determinants of Demand

The factors affecting demand other than price, summarized by the acronym
POINTS:

Determinant Effect on Demand Notes

P - Prices of Related Substitutes: direct 2 types:

Goods relationship
Substitute goods -
Complementary: these are the
Inverse relationship goods/servces that we
called alternative.
Example: If wala
budget for coke,
bibilhin na lang ay RC.

Complementary goods
 - these are
goods/services that
comes from pair.
Example: Kape and
asukal, if tumataas
ang price ng kape
bababa ang demand
for asukal.

O - Outlook Direct relationship Expectation of higher

(Expectation) future prices increases
current demand.

I - Income Direct for normal Income level affects

goods, inverse for the ability to buy;
inferior goods differs for normal and
inferior goods.

Normal goods - these

are the goods/services
we purchase because
we have higher
purchasing power/ we
have the capacity to
buy the products. (e.g.,
spam).

Inferior goods are the

goods/services we
bought because we
have lower purchasing
power/binibili dahil
tight ang budget. (e.g.,
maling instead of
spam).

N - Number of Buyers Direct relationship More buyers increase

 demand.

T - Taste and Direct relationship Favorable preferences

Preferences increase demand.

S - Season Varies Demand may increase

during certain seasons
or events (e.g.,
pandemics increase
grocery demand).

Non-Price Determinants of Supply

These factors shift the supply curve, summarized by the acronym RTPENT.

Determinant Effect on Supply Notes

R - Resource Price Inverse relationship These are the cost of

(Cost) production/ the use of
raw materials.
(Example: if tumataas
ang price ng harina
(raw material),
nakakaapekto sa cost
of production, which
bababa ang supply for
harina.)

T - Technology Direct relationship Improved technology

increases supply.

P - Prices of Inverse relationship Prices of rival goods

Competing Goods affect supply inversely.
In short, producers
switch production to
 more profitable goods.
(e.g., farmers switch
from corn to rice if rice
prices rise).

E - Expectation of Inverse relationship Expectation of higher

Future Prices future prices reduces
current supply
(producers withhold
supply to sell later).

N - Number of Sellers Direct relationship More sellers increase

supply.

T - Taxes Inverse relationship Higher taxes increase

production costs,
lowering supply.

S - Subsidies Direct relationship Government aid lowers

costs, increasing
supply.

Change in Quantity Demanded vs. Change in Demand

Change in quantity demanded:

Movement along the demand curve itself caused solely by changes in the
product’s price.
Example: Price rises from Php10 to Php15, quantity demanded decreases
from 40 to 20 units (movement along curve).

Change in demand:
 Shift of the entire demand curve caused by changes in non-price

determinants (income, preferences, related goods, etc.).

Example: An increase in income increases demand for spam (a normal
good), shifting the demand curve rightward (D1 to D2). (-->)
A decrease in income reduces demand, shifting the curve leftward. (<--)

Change in Quantity Supplied vs. Change in Supply

Change in quantity supplied:

Movement along the supply curve caused by changes in the product’s price.
Example: Price increase leads to movement from one point to another on
the same supply curve.

Change in supply:

Shift of the entire supply curve caused by changes in non-price

determinants (resource price, technology, etc.).
Example: Introduction of machinery (technology) increases supply,
shifting the curve rightward (S1 to S2). (-->)
Loss of electricity decreases supply, shifting the curve leftward. (<--)

Important Note:

Increase in demand or supply → rightward shift of the curve.

Decrease in demand or supply → leftward shift of the curve.
The movement na increase and decrease ay nangyayari lang sa
Change in Demand.
 Kapag Change in Quantity Demanded, ito ang mga changes from
point A to point B, and nangyayari lang because of the changes in
the price of the product.

Market Equilibrium

Market Equilibrium - is a situation where there is a talents in the market, and we

have to satisfy the assumption Qd = Qs. (there is a meeting of mind between the
buyer nad the seller, which means we will be able to determine what bwhat will
be the equilibrium price, and equilibrium quantity.)

3 Ways in finding market equilibrium:

Function or equations
Schedule
Graph

1. Function or Equations

Formula for market equilirbium:

Qd = Qs

Example for Quantity demand: Example for Quantity supply:

QD = 80 − 4P QS = − 10 + 5P
Interpretation:

Si buyer ay handang bumili ng 40 units ng isang good sa halagang 10 pesos,

and si seller ay handang magbenta kay buyer sa halagang 10 pesos.

2. Schedule/Table

How to identify the market equilibrium if available ang table/schedule,

just look at the price, quantity demanded, and quantity supplied. If the
quantity demanded ay equal sa quantity supplied, therefore, that would
be the equilibrium quantity, and the 10 pesos is the equilibrium price.

3. Graph
The intersection between the supply and demand curve is what we called
market equilibrium. From the equilibrium point, we can determined that
the equilibrium price is 10 pesos, and the equilibrium quantity is 40 units.

The area below the equilibrium point is what we called shortage, it exists
when there is a greater quantity demanded compare to the quantity
supplied.

The are above the equilibrium point is what we called surplus, it exists
when there is an excess supply compare to demand.
Lesson 3: Application and
Elasticity of Demand and
Supply
Price ceiling is defined as the maximum legal price that the government sets on
consumer goods (e.g., rice, oil, sugar) to prevent prices from rising further. This
policy tends to benefit consumers because the price is set below the equilibrium
price, making certain goods more affordable.

Using a graphical example, the equilibrium price is Php30. However, if the price is deemed
too high (e.g., meat prices rising from Php200 to Php400 per kilo), consumers reduce their
demand. To address this, the government may impose a price ceiling below the equilibrium
price.

For example equilibrium price is 30 pesos, but the givernment said to impose a ceiling price
below 30 but above 20, therefore Php 25.

Effects at 25 pesos:

Quantity supplied decreases from 500 to 400 (due to lower price, suppliers produce

less).
Quantity demanded increases from 500 to 600 (due to lower price, consumers want

more).
This mismatch results in a shortage because demand exceeds supply.

In short, ngkakaroon ng shortage if nagi-impose ang government ng price ceiling.

Price support which is the minimum legal price set by the government, often for agricultural

products like rice, to prevent prices from falling too low and harming producers (farmers).

Ang nagbebenefit ay ang mga producers.

Example: If the equilibrium price of rice is Php15, the government may set a price floor at

Php20 (above equilibrium).

Effects:

Demand decreases (from 500 to 400 units) due to higher price

Supply increases (from 500 to about 625 units) due to incentive to produce more

This leads to a surplus where supply exceeds demand. Often, the government buys this

surplus and sells it to consumers at lower prices, creating a win-win for both producers and

consumers.

Minimum Wage in the Labor Market

 The Labor market treats labor or services as a good/product.

Here, the wage is on the vertical axis and quantity of labor on the horizontal axis.

Demand for labor = employers who hire workers

Supply of labor = employees offering labor

The equilibrium wage is set by supply and demand. However, the government imposes a
minimum wage, which is the lowest legal daily wage employers can pay, to protect workers.

Example:

Equilibrium wage = Php300 for 100 wrorkers;

Minimum wage imposed by the government = Php537

And because the law says so, kailangan sumunod ni employer at ipa-sweldo niya
sa employees niya ay 537 pesos.

Effects of minimum wage:

Demand for labor decreases (from 100 to 50 workers) since it's more costly for
employers to hire many workers.
 Supply of labor increases (from 100 to 150 workers) as higher wages attract more

workers.

If mayroong minimum wage, nagkakaroon ng surplus of labor/unemployment.

Kasi konti lang ang mahi-hire, pero maraami ang gustong nagtrabaho.

Elasticity, which measures the responsiveness of one variable to changes in another (e.g.,
how price affects quantity demanded or supplied).

Types of elasticity introduced:

Price elasticity of demand - measures the responsiveness of quantity demanded to

changes in the price of the product, holding other factors constant (ceteris paribus).

Two methods for calculation:

End point formula (uses initial values as base)

susukatin ang slope ng buong demand curve

Midpoint formula (uses average of initial and final values to avoid bias)

Ang makukuhang answer ay sa gitna lang ng buong demand curve.

Numerically, hindi same ang answer sa end point formula at midpoint formula.
 However, if we interpret it using the different types of elasticity of demand, maga-

arrive pa rin sa iisang sagot.

An example is given:

Initial price P1=10, initial quantity demanded Q1=20

New price P2=5, new quantity demanded Q2=50

Calculation:
The interpretation of elasticity values is explained:

Elasticity Demand Type Consumer Demand Curve Typical

Value Response Shape Products

Ed > 1 Relatively Consumers Flatter Luxury goods,

elastic respond demand curve goods with

demand strongly to substitutes

price changes

Ed < 1 Relatively Consumers Steeper Necessities

inelastic respond demand curve

demand weakly to
price changes

Ed = 1 Unitary Percentage Intermediate -

elasticity changes in slope

price and
quantity

demanded
are equal

Ed = ∞ Perfectly Consumers Horizontal Purely

elastic respond demand curve competitive

demand infinitely to market goods

price changes (price takers)

Ed = 0 Perfectly Consumers Vertical Life-saving

inelastic do not demand curve goods (e.g.,

demand respond at all medicine)

 to price
changes

In short,

Relatively elastic demand, greater than 1. Kapag may pagbabago sa price, magre-react
agad si consumer. If tumaas ang price, hindi bibili si consumer and if bumababa ang

price, saka na bibili si consumer.

Mas mataas ang percentage of change ng quantity compare sa percentage of change

ng price.
For goods with relatively elastic demand (luxury items), reducing price increases

total revenue because consumers buy much more when prices drop.

Relatively Inelastic Demand, less than 1. Kapag may konting pagbabago sa price,

unresponsive ang mga consumer. Mas mataas na ang percentage ng pagbabago sa price
compare sa percentage ng pagbabago sa quantity.

For goods with relatively inelastic demand (necessities), increasing the price

increases total revenue because consumers still buy despite price hikes.
Unitary, the percentage of change ng price ay equal lang sa percentage of change sa
quantity.

example: a brother buying candy at Php1 each with Php20, buying 20 candies,
illustrating equal percentage changes in price and quantity.

Perfectly elastic demand, the consumers are very responsive sa price ng product. Kahit

maliit na reduction/increase, agad-agad magkakaroon sila ng reaction.

it occurs in perfectly competitive markets where firms are price takers, such as sa
palengke same prices lang ang mga gulay/prutas.
Perfectly inelastic demand, kahit magkano ang price bibili pa rin ang mga consumers

dahil essential ang product.

It usually involves life and death situations, such as anti-rabies vaccine, oxygen tank.

Price elasticity of Supply - measures the responsiveness of quantity supplied to

changes in the price of the good.

Formula is similar to Price elasticity of demand but focuses on supply

Example:
Note: Never magkakaroon ng negative sa price elasticity of supply, because
of the law of supply (price increase, supply increase and vice versa).

Same lang ang types of elasticity of supply sa types of price elasticity of

demand, same rules.

Income elasticity of demand (YED) - measures how the quantity demanded

changes with consumer income.

Interpretation:
Positive YED (e.g., 0.8) indicates a normal good, where demand increases as

income increases.
 Negative YED indicates an inferior good, where demand decreases as income

increases.

Cross price elasticity of demand - measures the responsiveness of quantity demanded

of product X to changes in the price of product Y.

Lesson 3: Utility Theory
Utility Theory - refers to the degree of satisfaction per unit of consumption of
[Link]

Utils - this is the degree of measure of utility

2 Types of utility theory:

1. Cardinal - utility is measurable (can use numbers)

Example:
Marginal utility - this is an additional satisfaction

Formula to get the marginal utility:

Step by step:

a. 1st row: Since the quantity consumed and total utility is at the start
of the column, and there is no previous quantity consumed and total
utility, the marginal utility is null.

b. 2nd row: Using the formula, just substitue the numbers on their
designated places.
 based on the table, the current total utility is 5, previous total
utility is 0. While the current quantity consumed is 1, previous
quantity consumed is 0.

c. 3rd - last row: Using the formula, substitute again the numbers on
their designated places.

Point of satiety - reached the maximum satisfaction/total utility.

If the total utility reached the maximum satisfaction, the marginal utility
is 0.

Cardinal Utility total utility - plot points from the 1st and 2nd column.
 Cardinal Utility marginal utility - plot points from the 1st and 3rd column.

High-price products tend to have higher marginal utility per unit because
they're rare/craved. Low-price ones have low MU per extra unit due to
plenty.

Example:

Expensive steak (like from Wolfgang Steakhouse) - rare and luxurious, so

the first bite gives huge joy (high marginal utility). Each extra bite still feels
premium, matching the high price.

Water - everyday and plentiful, so one more glass barely adds satisfaction
(low marginal utility).
 2. Ordinal - utility is immeasurable (can use orders or rankings).

Indifference curve - is a graph showing combination of two goods that give the
consumer equal satisfaction and utility.

Completeness - You can always compare any combo and say which satisfies
you more (or if equal).

Example: Spaghetti + burger feels better than burger + soda alone.

More is better - Extra goods always add satisfaction.

Example: Starting at 1 spaghetti + 1 burger + 1 soda, you'd happily take

more spaghetti (now 2 spag + 1 burger + 1 soda) for higher joy.

Mix-is-better - You always prefer a balanced “mix” of goods rather than

extreme amounts of just one (due to diminishing marginal utility).

Example: A mix of spaghetti + burger + soda tastes best.

Rationality - You pick the highest indifference curve (most satisfaction) your
budget touches.

Example: If the budget only fits burger + soda, choose that over just
spaghetti—it lands you on a higher satisfaction curve than going hungry or
picking less.

Example: In this example, the highest indifference curve is letter A.

Another example: Each curve has the same level of satisfaction, but the IC3 has
more higher satisfaction.

Assumptions:

1. The consumer acts rationally so as to maximize satisfaction.

2. There are two goods X and Y.
3. The consumer’s tastes, habits and income remain the same throughout the
analysis.
4. He prefers more of X to less of Y or more of Y to less of X.
a. Note: You prefer more of either good
5. An indifference curve is negatively inclined sloping downward.
a. Note: To get more x, you give up Y.
6. An indifference curve is always convex to the origin.
a. Note: The more X you have, the less Y you’re willing to give up for extra X.
7. The consumer arranges the two goods in a scale of preference which means
that he has both ‘preference’ and ‘indifference’ for the goods. He is
supposed to rank them his order of preference and can state if he prefers
one combination to the other or is indifferent between them.
8. Both preference and indifference are transitive.

BUDGET FUNCTION, SCHEDULE, AND LINE

It shows all the combinations of two commodities a customer can afford at

the provided market prices.
Note: Need ma-maximize ang budget (walang sobra/kulang)

Formula:

Example:

If: y = 50

Py (burger) = 15

Px (iced tea) = 10

List all possible combinations of burgers and iced tea that lie exactly on the
P50 budget line, and show how each combination fits the budget equation.

Iced Tea (x) Burger (y) Budget

Combination
(P10 per glass) Allocation
(P5 per piece)
Step by step:

a. Using this formula Y = Px x Qx + Py x Qy just substitute the numbers on

their designated places.

If: y = 50

Py (burger) = 15

Px (iced tea) = 10

Formula: Y = Px x Qx + Py x Qy

50 = 10 x 0 + 5 x 10

= 0 + 50

= 50

Therefore, the first combination is 0 Iced Tea, and 10 pcs of burger to

maximize the given budget (which is the 50 pesos).

Iced Tea (x) Burger (y)

Budget
Combination
(P10 per glass) (P5 per piece) Allocation

A 0 10 10x0 + 5x10=50

b. Using this formula Y = Px x Qx + Py x Qy just substitute the numbers on

their designated places.

If: y = 50

Py (burger) = 15

Px (iced tea) = 10
 Formula: Y = Px x Qx + Py x Qy

50 = 10 x 1 + 5 x 8

= 10 + 40

= 50

Therefore, the second combination is 1 Iced Tea, and 8 pcs of burger to

maximize the given budget (which is the 50 pesos).

Iced Tea (x) Burger (y)

Budget
Combination
(P10 per glass) Allocation
(P5 per piece)

A 0 10 10x0 + 5x10=50

B 1 8 10x1 + 5x8=50

c. Using this formula Y = Px x Qx + Py x Qy just substitute the numbers on

their designated places.

If: y = 50

Py (burger) = 15

Px (iced tea) = 10

Formula: Y = Px x Qx + Py x Qy

50 = 10 x 2 + 5 x 6

= 20 + 30

= 50

Therefore, the third combination is 2 Iced Tea, and 6 pcs of burger to

 maximize the given budget (which is the 50 pesos).

Iced Tea (x) Burger (y) Budget

Combination
(P10 per glass) (P5 per piece) Allocation

A 0 10 10x0 + 5x10=50

B 1 8 10x1 + 5x8=50

C 2 6 10x2 + 5x6=50

Continue until no further combinations of x and y are possible.

Iced Tea (x) Burger (y)

Budget
Combination
(P10 per glass) (P5 per piece) Allocation

A 0 10 10x0 + 5x10=50

B 1 8 10x1 + 5x8=50

C 2 6 10x2 + 5x6=50

D 3 4 10x3 + 5x4=50

E 4 2 10x4 + 5x2=50

F 5 0 10x5 + 5x0=50
Combination 6 maximizes both the budget and utility because it lies at the
point where the budget line is tangent to the indifference curve.
Production Theory
Different stages of production:

Stage 1: Increasing Return

The total product should increase as well as the margnal product.

Stage 2: Decreasing Diminishing

The marginal is decreasing, while the total input is increasing
The goal here is to maximize the output
Stage 3: Negative Return