BASIC MICROECONOMICS MATH IN MICROECONOMICS

- Starts with the philosophy in

ADAM SMITH (The Wealth of Nations) decision-making, simplify it (i.e. ceteris
- every individual necessarily labours to render the annual paribus, etc.), and prove or disprove
revenue of the society as great as he can. mathematically.
- He generally, indeed, neither intends to promote the public
interest, nor knows how much he is promoting it. PROS
- By preferring the support of domestic to that of foreign - You are able to prove theory by numbers
industry, he intends only his-own security; led by an can help predict can be shown and
invisible hand-to promote an end which was no part of his illustrated graphically.
intention.
- “By pursuing his own interest, he frequently promotes that CONS
of the society more effectually than when he really intends to - May be oversimplified may have a strong
promote it." conclusions based on oversimplifications.

TAKEAWAYS Three things to keep in mind when dealing

Core of Capitalism with microeconomics:
The Right to Independence • A person makes a decision on the basis
Innovation and Productivity of satisfaction. Businesses make decisions
Micro and Macro Statements based on competition in the market. The more
the competitors, the lesswiggling room they
MICRO have in pricing their goods and services.
- Deals with individual actors making a decision on how to • The cost of foregone opportunity will
allocate scarce resources. These decisions affect prices and always be a factor for individuals and
markets among other things. businesses when they make decisions.
• When you think about it this way, you can
MACRO deduce that in microeconomics, you gain the
- Deals with aggregates. ability to always look at two sides of a
- This focuses on policy related issues which will impact the transaction. Three, if we're going to include
network as a whole. government.
- Do you increase or decrease taxes? Do you regulate or
IN ORDER TO MAKE A TRANSACTION WITHIN AN
deregulate? What happens to prices if the interest rate goes ECONOMY, AS AN INDIVIDUAL IN CHARGE Of
up? What happens to investments if interest rates go down? SPENDING YOUR OWN MONEY, YOU HAVE TO
CONSIDER SEVERAL ASPECTS, AMONG OTHERS:

GOAL OF FIRM: 1. HOW MANY OPTIONS DO YOU

- Maximize the wealth of shareholders. ACTUALLY HAVE?
2. HOW MANY PEOPLE ARE LOOKING
"An economist is an expert who will know tomorrow why the INTO THE SAME OPTIONS THAT
things he predicted yesterday didn't happen today." YOU'RE CONSIDERING?
- LAWRENCE PETERS 3. WHAT CHOICE WILL FIT YOUR
BUDGET AND WILL MAKE YOU THE
HAPPIEST ENTITY ON EARTH?
4. WHAT'S THE COST OF YOU FORGOING THE NEXT ECONOMICS
BEST ALTERNATIVE OPTION? • Study of choice in a world of scarcity.
5. WILL YOU STILL BE SATISFIED WITH IT AFTER A • Study of how scarce resources are managed
LONG PERIOD OF TIME? by individuals and society.
• Study on how to best allocate finite resources.
SCARCITY
- In daily life, it means that there's not too much of something SCARCITY - Having finite resources.
to go around and limited resource for unlimited wants. • Not all resources are renewable.
• Value is important. Thus, if one has need but
THE OPPOSITE OF SCARCITY have none of equal value due to limit of
- The opposite of scarcity is the notion of a free resource a resources, trade will not commence – Poor
resource with no cost. resource allocation.
• Results in less production of goods and
WHAT ARE THESE? services – To have scarcity, things must be
- These may be goods, services, resources those that if without LIMITED and WANTED!
cost, will be used freely and consumed far more than what's • There are some goods that are plentiful but
available. These are goods that people have to give up they’re not wanted, so they’re not scarce!
something to get.
THE ECONOMIC PROBLEM:
WHAT IS IT? - Wants are infinite but resources are finite.
- These are goods, services, and resources that are infinitely
abundant, or in a certain context, are so abundant that Limited Resources Scarcity of goods &
people can have as much of it as they want. services Unlimited wants =
ECONOMIZING PROBLEM (must make
RIVALRY choices)
- COMPETITION FOR A LIMITED RESOURCE
ECONOMIZING: INDIVIDUAL
RIVAL GOOD • Reduce your wants
- One person consuming the good will limit others' ability • Sacrifices – Trade-offs
to consume it simultaneously. • Allocate your available resources - Prioritizing

EXCLUDABILITY ECONOMIZING: SOCIETY

- The degree to which a good, service or resource can be • Economic growth – Increase ability to
limited to only paying customers, the degree to which a produce!
supplier, producer or other managing body (e.g. a • More resource, better resource, better
government) can prevent "free" consumption of a good. technology.
• Improve allocation of resources – Use
available resources wisely!
• Reduce expectations – Reduce wants!
• Worst option. Only when in dire need.

“Economics is a science which studies human behavior as a

relationship between ends and scarce means which have
alternative uses.” - Lionel Robbins British Economist
IMPROVING USE OF AVAILABLE RESOURCES
• Production Efficiency – Producing at a minimum cost.
• Using only necessary resources.
• Using resources where they are best suited. KEY QUESTION TO SOLVE THE PROBLEM:
• Using appropriate technology. • What to produce?
• Allocation Efficiency – Produce the right mix of goods; more • How to produce?
of what people want; less of what people don’t want. • Whom to produce? Or Who to produce for?
• Full Employment – Use of ALL available resources, not just ADDITIONAL:
labor. (+ Full Production). • How to accommodate change?
• Equity – “Fair” distribution of income. • How to promote progress?
• Who owns and controls the factors of production?
REGARDING FULL EMPLOYMENT
• Full employment
- Does not mean no unemployment or underemployment. ECONOMIC RESOURCE:
- People who are willing and able to work can get a job. LAND
- Highest amount of skilled and unskilled labor at a given time. - Any natural resource used to create a
- All available labor is being used efficiently. product.
• Unemployment rate is from 4% - 5%. - Ground where resources originate.

LABOR
REGARDING FULL PRODUCTION
- Exertion of a person’s mind and body to
• Doesn’t mean that all plants and equipment are working 100%
produce a good or service.
at any given time.
- Work and time wherein a person is duly
• Ideally 90% - 100%
compensated.
• At 100% is a bit impossible since PPE may break down at some
- Human resource.
point.
• As long as all available resources are fully used, constraints
CAPITAL
withstanding, there is maximum production capacity
- Manufactured aids to production.
(Production Possibilities Frontier/PPF).
• Constraints: Institutional, legal, custom, repairs and - Tools or machinery that produce goods and
services.
damage to PPE.
ENTERPRISE MARKETS ARE USUALLY A GOOD WAY
- A profitable combination of all economic resources. TO ORGANIZE ECONOMIC ACTIVITY
- Promotes innovation necessary for production. - Most economic surpluses are produced
- A project, a willingness to take on a new project, an when the “Invisible Hand” guides
undertaking or business venture. (Sole Proprietorship, households and firms In market interaction.
Partnership, Private Limited Companies/Ltd., Public Limited
Companies/PLC). - The Invisible Hand (Market Mechanism)
• Unseen forces that guide the market.
Making Economic Decisions • Even without government
Two things to remember: intervention (laws and regulations that
- A human being has no satisfaction. disrupts the flow of the economy), the
- A human being always chooses what would be most personally market will eventually find
beneficial. equilibrium.
- Time – Effort
NOTE: Market Equilibrium:
THE TRADE-OFF • Market demand and supply balance each
- Sacrificing an option to choose another. other to create a stable price.
- Describes what we have to give up in order to get
another.
I. THE CIRCULAR FLOW (Mankiw, 2018)
Example: You’ve got 700k saved up and you’re debating whether
or not to buy a car or a house. Which one would you choose?
a. House (you want your own place)
b. Car (comfort when commuting) (If I choose the house,
I will not be getting a car!)

THE OPPORTUNITY COST

- Implicit cost of the alternative good foregone.
- Value of missed opportunity.

Example: Cost incurred as a result of selecting an option. You’ve

got 700k saved up and you’re debating whether or not to buy a
car or a house. Which one would you choose?
a. House (you want your own place)
b. Car (comfort when commuting)
(If I choose the house, I will not get the opportunity to have
comfort when commuting!)

LAW OF INCREASING OPPORTUNITY COST

- Opportunity cost increases as one additional unit of the good
is produced.
II. 4 FACTORS OF PRODUCTION Government gets all profits. No one must be
LAND richer than the central power.
- includes the "gifts of nature," or natural resources not
created by human effort. 3. MARKET ECONOMY
CAPITAL - Firms and households act in self-interest to
- includes the tools, equipment, and factories used in determine resource-allocation, goods to
production. produce, and their market.
LABOR - “Laissez Faire” economy has no government
- includes people with all their efforts and abilities. intervention and is an ideal, but impossible due
ENTERPRISE to existence of some form of government
- are individuals who start a new business or bring a product regulation.
to market. - Advantage: Opportunities for
entrepreneurship. More enterprises mean more
III. THE 4 ECONOMIC QUESTIONS jobs. Households can pay highest amount for
• What to produce (and how much)? goods and services. Firms only produce
– To satisfy wants profitable goods. Competition for resources
• How to produce? leads to the most efficient use of the factors of
– To maximize production to meet as many wants as possible production. Incentive for constant innovation.
• For whom to produce? Businesses heavily invest in research and
– Whose wants is the most deserving to allocate towards. development.
• Who owns and controls the factors of production?* – Disadvantage: There are cases when
– Who owns land, labor, capital, and societal benefits are secondary. Exploitation by
enterprise/entrepreneurship? monopolies.

ECONOMIC SYSTEMS 4. THE MIXED ECONOMY

IV. TYPES OF ECONOMICS: - An economy with a mix of private and public
enterprise.
1. TRADITIONAL ECONOMY - Private and state-owned entities share
– Ancient. Rural. Second or Third World. Land-based control of owning, making, selling, and
(farming). exchanging goods in a given area (particularly a
– Advantage: Close-knit communities. Role for each member. country).
Socially satisfied.
– Disadvantage: Lack of technology and advanced medicine.

2. COMMAND ECONOMY
– Large chunk of the system is under a centralized power
(government).
– Advantage: Resources can be mobilized in a bigger scale.
Focus on society than person.
– Disadvantage: No innovation. Rationing goods and services
due to poor planning
– (cannot calculate demand because it’s the pricing agent).
Power can take away rights, privileges, and raise taxes.
 - The Free-Rider Problem: Someone uses or
V. GOVERNMENT ROLE IN A MIXED ECONOMY overuses (abuses) shared resources, goods, and
• Collect taxes services without paying for it with their fair
• Provide safety share or not paying at all.
• Provide infrastructure (public) Occurs when:
• Creates legal system to operate (Legislation makes the law). • Everyone can consume a resource in unlimited
• Regulate economic entities – Introduces prohibition of amounts.
production for harmful goods – Regulates method of production • No one can limit anyone else's consumption.
(according to labor and environmental laws). • Someone has to produce and maintain the
resource.
VI. MARKET FAILURES
- Inefficient distribution of goods and services in the free Underproduction of merit goods
market. - Merit Goods: Goods with positive
externalities
• Externalities - Personal interest of an entity creates an • Overproduction of demerit goods
impact on a third party. Leads to market failure because – Demerit Goods: Goods with negative
equilibrium (balance between producer’s cost and buyer’s externalities
benefit) is not true equilibrium. • Tragedy of the Commons
– Occurs when individuals neglect the well-
A. NEGATIVE EXTERNALITY being of society to pursue self-interest. This
- Production or consumption of a good inflicts cost without leads to over-consumption of scarce, rivalrous,
compensation to another party. or non excludable resources.
- Producer doesn’t bear cost = Excess production NOTE: – Rivalrous – can only be used by one
e.g. Widget factory → produces pollution → cost of pollution person. – Non-excludable good –
unaccounted for → doesn’t reflect true cost (if it does, public/shared/common good.
production will decrease to reflect it).
B. POSITIVE EXTERNALITY
- Benefit spills over to a third party without direct cost • Distortion of Price Mechanisms: Taxes and
- Buyer does not get all the benefits of the good = resulting in subsidies may artificially raise or lower prices
decreased production. and distort how markets work to allocate scarce
e.g. Quality education → Produces knowledgeable and trained resources.
citizens → (unaccounted for when benefits are considered) • Excessive Bureaucracy: high costs incurred
increased tax revenue from better-paying jobs, less crime, because government intervention needs to be
overall stability →Less production than true equilibrium (less legislated, executed, and judged.
than equilibrium). • Imperfect Information: policymakers don’t
know the extent of the issues in the market.
ENVIRONMENTAL CONCERNS: • Unintended consequences of legislation:
- Affects development sustainability legislation may have negative consequences
• Unchecked Monopoly (e.g. legislation on demerit goods, traffic
- Monopolies restrict output to boost prices calming systems).
• Lack of Public Goods
- Public goods: goods where the total cost of production does
not increase with the number of consumers.
THE ISMs TYPES OF MARKET STRUCTURE
• Communism: Command economy. Government holds all • PURE MENOPOLY
power and factors of production. – A single firm controls the entire market,
• Socialism: Government owns and controls the means of leaving it to do as it wishes for profit.
production. Personal property may be allowed (depending on • OLIGOPOLY
benevolence of government) but only in the form of consumer – Domination by a few firms, resulting in
goods or rent. limited competition. They can collaborate with
• Capitalism: Private sector owns and controls the means of or compete against each other to use their
production. Price is dictated by market (demand and supply). collective market power to drive up prices and
earn more profit.
YOU HAVE 2 COWS • MONOPOLISTIC COMPETITION
● Communism: You give them to the government, and the – A large number of small firms competing
government then gives you some milk. against each other. Firms sell similar but highly
● Socialism: The government takes one and gives it to your differentiated products.
neighbor. • PURE COMPETITION
● Fascism: You give them to the government, and the – A large number of small firms competing
government then sells you some milk. against each other.
● Capitalism: You sell one and buy a bull.
● Nazism: The government takes both and shoots you. THE COMPETITIVE MARKET
– A market in which there are so many buyers
THE MARKET and so many sellers that each has a negligible
• MARKET: A group of buyers and sellers of a particular good impact on the market price.
or service. – Sellers are aware that they have rivals or
– Organized: Specific time and place. Has auctioneers. competition and they have limited control over
– Unorganized: No specific time and place. No auctioneers. price of their goods and services – If they
People choose among available options. change price or quantity relative to price, buyers
• ASSUMPTION: Markets are perfectly competitive. may purchase somewhere else.
• PERFECTLY COMPETITIVE MARKET:
TYPES OF MARKET – The goods offered for sale are all exactly the
• GOODS MARKET same
– Market for goods and services, wherein buyers provide the – The buyers and sellers are so numerous that
demand and suppliers provide the supply. no single buyer or seller has any influence over
• LABOR MARKET the market price.
– Job market, wherein employers provide the demand and - Buyers and sellers are price takers (can buy all
employees provide the supply. they want, can sell all they want).
• CAPITAL MARKET (Financial Market)
– Financial market, where securities are traded.
• BLACK MARKET
– Market for illicit and contraband goods (and services).