ECONOMICS Types of Unemployment

 Refers to the scientific study of human action, particularly as it relates to  Frictional – voluntarily search for new employment or transitioning
human choice and the utilization of scarce resources. from old to new job.
 Cyclical – impact of economic recession or expansion on the total
Branch of Economics unemployment rate. It happens when the demand for goods and
 Microeconomics – is the social science that studies the implications of
services in an economy decreases, forcing companies to lay-off
individual human action, specifically about how those decisions affect the
utilization and distribution of scarce resources. workers in an effort to cut costs.
 Macroeconomics – is a branch of the economics that studies how the  Seasonal – when people who work in seasonal jobs become
aggregate economy behaves. In macroeconomics, a variety of economy- unemployed when demand for labor decreases.
wide phenomena is thoroughly examined such as, inflation, price levels,  Structural – a long-lasting unemployment that comes about due to
rate of growth, national income, gross domestic product, and changes in shifts in an economy. It happens because through jobs are available,
unemployment. there’s a mismatch between what companies need and what
available workers offer.
Economic Perspective: “You can’t have it all”.  Technological – occurs when developments in technology and
working practices cause some country to lose their jobs.
Theories, Principles, and Models
 Scarcity – refers to the basic economic problem, the gap between limited –
that is, scarce, - resources and theoretically limitless wants. This situation Consumer’s Budget Line (Budget Constraint)
requires people to make decisions about how to allocate resources  It is a schedule or curve that shows various combinations of two
efficiently, in order to satisfy basic needs and as many additional wants at products a consumer can purchase with a specific money income.
possible.
 Choice – is a fundamental problem of economic, every individual has to
make a rational decision to choose between two alternatives because of
scarcity of resources.
 Opportunity Cost – the value of the best alternative forgone.
 Trade-off – Is a situation that involves losing one quality or aspect of
something in return for gaining another quality or aspect.

Concept of Scarcity, Choice, Opportunity Cost, and Trade-offs (PPF)

The Production Possibility Frontier (PPF) is a curve depicting all maximum
output possibilities for two goods, given a set of inputs consisting of
resources and other factors. The PPF assumes that all inputs are used Marginal Analysis: MB = MC
efficiently.  Marginal Benefits – A marginal benefit is the additional satisfaction
or utility that a person receives from consuming an additional unit
of a good or service. A person’s marginal benefit is the maximum
amount he is willing to pay to consume that additional unit of a
good or service.
 Marginal Costs – is the change in the total cost that arises when the
quantity produced is incremented by one unit, that is, it is the cost
producing one more unit of a good. In general term, marginal cost at
each level of production includes any additional costs required to
produce the next unit.
Note: the term “Marginal” means “one more”. The Circular Flow
 Input / Factor Markets
 The market in which the resources used to produce
products are exchanged.
 Labor, Land, and Capital
 Output / Products Markets
 The markets in which goods and services are exchanged.
 Goods & Services
 Input Market
 Labor Market
The input/factor market in which households supply work
 If MB > MC – willing to consume one additional for wages to firms that demand labor.
 If MB < MC – no additional units are consumed.  Land Market
 If MB = MC – represents equilibrium of consumption The input/factor market in which households supply land or
other real property in exchange of rent.
Positive and Normative Economics  Capital Market
 Positive – focuses on facts and cause & effect relationships. The input/factor market in which households supply their
- Description, theory development, theory testing savings, for interest or for claims to future profits, to firms
(proven & tested) that demand funds to buy capital goods.
- “What is”, specific – allows to test the statement with  Output Market
data. (Does not contain value judgement)  Goods & Services
- Must be from reliable sources. (Supported with data) Is a product that is of value can be used to satisfy some
 Normative – incorporates value judgements (opinionated) desire or need. Tangible item or service that the buyer is
- What ought to be or should be. unable or unwilling to produce on their own.
- Opinions & judgement
- Cannot be tested. Demand & Quantity Demand
Demand – refers to a relationship between price and quantity demanded.
Demand, Supply, and Market Equilibrium Demand refers to how much is desired at any possible price.

Basic-Decision Making Units Quantity Demand – refers to the specific amount that is desired at each
1. Firm – an organization that transforms resources (inputs) into given price. As a price goes up, quantity demand drops as price gets higher.
products (outputs). Firms are the primary producing units in a
market economy. The Law of Demand
2. Households – they are the consumers in general. Law of Demand – is the negative relationship between price and quantity
3. Entrepreneur – a person who organizes, manages, and assumes the demanded: As price rises, quantity demanded decreases; as price falls,
risks of a firm, taking a new idea or a new product and turning it into quantity demanded increases.
a successful business.
Demand Schedule – a table showing how much of a given product a
household would be willing to buy at different prices.
Demand Curve – a graph illustrating how much of a given product a  Expectations – your beliefs about future income or prices will affect
household would be willing to buy at different prices. your current purchasing decisions.
 Law of Diminishing Marginal Utility – decline in the marginal utility
that person drives from consuming each additional unit of that
product.

Demand Curve
Shift of Demand VS Movement along a Demand Curve

Shift of a Demand Curve – the change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good
and price of that good. The shift is brought about by a change in the original
conditions.
Factors affecting Demand:
A household’s decisions about what quantity of a particular output, or Movement along a demand curve – the change in quantity demanded
product, to demand depends on a number of factors including: brought about by a change in price.
 The price of the product in question
 The income available to the household
 The prices of other products available to the household
 The household’s tastes and preferences
 The household’s expectations about future income, wealth, and
prices
Other Determinants of Household Demand:
 Income – the sum of all household’s wages, salaries, profits, interest
payments, rents, and other forms of earnings in a given period of
time. It is a flow measure.
 Wealth or Net Worth – the total value of what a household owns
minus what it owes. It is a stock measure.
 Normal Goods – goods for which demand goes up when income is
higher and for which demand goes down when income is lower.
 Inferior Goods – good for which demand tends to fall when income
rises.
 Substitutes – goods that can serve as replacements for one another;
when the price of one increases, demand for the other increases.
 Prefect substitute – identical products.
 Complements / Complementary Goods – goods that “go together”;
a decrease in the price of one results in an increase in demand for
the other and vice versa.
 Taste Preferences – refers an individual’s attitude towards a set of
objects, typically reflected in an explicit decision-making process.
 Law of Supply and Equilibrium  The price required inputs (labor, capital, and land).
Supply – refers to how much is produced at every price. Relationship  The technologies that can be used to produce the product.
between quantity supplied and price of that good.
Supply Curve
Quantity Supplied – the amount of a particular product that a firm would be Shift of Supply VS Movement along a Supply Curve
willing and able to offer for sale at a particular price during a given time
period. Movement along Supply Curve – the change in quantity supplied brought
about by a change in price.
Law of supply – the positive relationship between price and quantity of a
good supplied: an increase in market price will lead to an increase in Shift of Supply Curve – the change that takes place in a supply curve
quantity supplied, and a decrease in market price will lead to a decrease in corresponding to a new relationship between quantity supplied of a good
quantity supplied. and the price of that good. The shift is brought about by a change in the
original conditions.
Supply Curve – a graph illustrating how much of a product a firm will sell at
different prices. Supply, as with demand, it is very important to distinguish between
movements along supply curves (changes in quantity supplied) and shifts in
Supply Schedule – a table showing how much of a product will sell at supply curves (changes in supply)
different prices.
Change in price of a good or service leads to change in quantity supplied
(movement along a supply curve).

Change in income, preferences, or prices of other goods or services leads to

Change in supply (shift of a supply curve).

Determinants of Supply
 Cost of Production – depends on a number of factors, including the
available technologies and the prices and quantities of the inputs
needed by the firm (labor, land, capital, energy, and so on).
 Prices of Related Products – the cost of producing the product,
which in turn depends on:
Market Equilibrium
 Efficiency – means of allocation and distribution (proper allocation and
Equilibrium – the condition that exists when quantity supplied and quantity distribution)
demanded are equal. Equity – value laden concept whether a particular distribution is fair
(fairness)

Market Failures
 Art of competition
 Involvement of the government in the marketplace
Excess Demand or Shortage – the  Market economy relies on private sectors selling market price, while
condition that exists when quantity government sectors should intervene to ensure that all primary
demanded exceeds quantity societal needs are met.
supplied at the current price.
Public Goods and Services
a) National Defense
b) Public Libraries
Excess Supply or Surplus – the condition that c) Highway Construction
exists when quantity supplied exceeds quantity d) Crime Prevention
demanded at the current price. e) Public Education

Spillovers
 Cost (or benefit) related to production or consumption “spill overs”
Price Floor and Price Ceilings onto people not involved in the production or consumption of the
good
Price Floor – keeps a price from falling  Do not consume, but directly affected.
below a certain level.
 Minimum price buyers are required Inequity
to pay for goods.  Inability of low-income people to meet their basic needs is “unfair”.
 A legal minimum price for the  From urban to rural issues.
market
 Meant to protect: Market Power
Suppliers/Producers.  Art of competition
 Competition as method for protecting consumer from unreasonable
Price Ceiling – keeps a price from rising above prices.
a certain level.
 Maximum price sellers are allowed to Instability – problems; employees idle
change for goods.
 A maximum legal price for the market
 Meant to protect: Consumers/Buyers

Efficiency and Equity

 Important Concepts in Understanding Growth

Harrod Domar Growth Model

1. Income – refers to the amount of money, property, and other

transfers of value received over a set period of time in exchange for
services or products.
2. Savings – the amount of money left over after spending and other
obligations are deducted from earnings. Savings represent money
Total Factor Productivity that is otherwise idle and not being put at risk with investments or
Growth in output unaccounted for by growth of labor and capital in a spent on consumption.
standard production function. 3. Investments – it involves putting capital to use today in order to
increase its value over time. An investment requires putting capital
Efficiency gains due to factors such as economies of scale, better to work, in the form of time, money, effort, etc., in hopes of a
management, marketing or organizational abilities, shift from low greater payoff in the future than what was originally put in.
productivity activities to high productivity activities with the same amount 4. Capital stock – in economics, it is the plant, equipment, and other
of labor and capital, or the impact of new technology that produces greater assets that help with production. In accounting, this is approximated
output with same capital and labor inputs. using sum of the company’s common stock and preferred stock at
the prices at which they were initially sold to the public during an
Y = f(K,L,A) offering.
5. Output – in economics, is the “quantity (or quality) of goods or
services produced in a given time period, by a firm, industry, or a
country”, whether consumed or used for further production. The
concept of national output is essential in the field of
macroeconomics.

Capital Output Ratio

  The concept of capital output ratio expresses the relationship
between the value of capital invested and the value of output.
 Capital output ratio is the amount of capital needed to produce one
unit of output.

What are some of the key limitations/problems of the Harrod-Domar

Growth Model?
 Increasing the savings ratio in lower-income countries is not easy.
Many developing countries have low marginal propensities to save.
Extra income gained is often spent on increased consumption rather
than saved. Many countries suffer from a persistent domestic
savings gap.
 Many developing countries lack a sound financial system. Increased
saving by households does not necessarily mean there will be
greater funds available for firms to borrow to invest.
 Efficiency gains that reduce the capital/output ratio are difficult to
achieve in developing countries due to weaknesses in human
capital, causing capital to be used inefficiently.
 Research and development (R&D) needed to improve the
capital/output ratio is often under-funded – this is a cause of market
failure.
 Borrowing from overseas to fill savings gap causes external debt
repayment problems later.

Asian Crisis and Recent Developments