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1. MICROECONOMICS 101 MICROECONOMICS 101 MARILYN P. ALLANIGUE, MMC, MPA MARILYN P. ALLANIGUE, MMC, MPA August 17, 2014 August 17, 2014

2. WHAT IS ECONOMICS covers all it it is is devoted its WHAT IS ECONOMICS? ? all kinds to understanding scarce resources Economics devoted to its scarce Economics covers kinds of of topics understanding how resources. . topics. . But how society But at at the society allocates the core allocates core Economist economics Economist from economics as from pre as the pre- -war following: : war to to modern modern world world define define the following

3. ECONOMICS ASKS WHAT GOODS ARE PRODUCES, HOW THESE GOODS ARE PRODUCED AND FOR WHOM THEY ARE ECONOMICS ASKS WHAT GOODS ARE PRODUCES, HOW THESE GOODS ARE PRODUCED AND FOR WHOM THEY ARE PRODUCED 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. 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 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 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. 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. ECONOMICS IS THE STUDY OF MONEY, BANKING, CAPITAL AND WEALTH. AMONG THESE DEFINITION, THE MOST COMMON THEME IS STUDY HOW SOCIETIES USE SCARCE RESOURCES TO PRODUCE VALUABLE COMMODITIES AND DISTRIBUTE THEM AMONG DIFFERENT PEOPLE 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. ECONOMICS IS THE

6. TWO BRANCHES OF MACROECONOMICS – functions of economy as a whole TWO BRANCHES OF ECONOMICS MACROECONOMICS ECONOMICS 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 MICROECONOMICS

7. THREE PROBLEMS OF ECONOMIC ORGANIZATION 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. 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 Eisenshower

8. 1. 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? 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. 2. How shall goods be produced? By whom and with what resources and in what technological manner are they to be produced? How shall goods be produced? By whom and with what resources and in what technological manner are they to be produced?

9. 3. 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? 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 AND OUTPUTS •INPUTS in their production processes. •OUTPUTS that are either consumed or employed in further production. INPUTS are commodities or services used by firms OUTPUTS are the various useful goods or services

11. THREE CATEGORIES OF LAND – – generally the natural resources, the gift of the nature •LABOR production •CAPITAL economy, produced in order to produce goods THREE CATEGORIES OF INPUTS generally the natural resources, the gift of the nature for 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 INPUTS •LAND for our productive processes consists of the human time spent in our productive processes resources form the durable goods of an other

12. MARKET, COMMAND AND MIXED MARKET, COMMAND AND MIXED ECONOMICS ECONOMICS COMMAND ECONOMY control of government COMMAND ECONOMY – – is directed by centralized control of government. . is directed by centralized In a the major economic questions through its ownership of resources and its power to enforce decisions. In a command economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions. command economy, the government answers

13. MARKET ECONOMY 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. 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. is guided by an informal

14. IN A MARKET ECONOMY, THESE QUESTIONS ARE HANDLED BY THE IN A MARKET ECONOMY, THESE QUESTIONS ARE HANDLED BY THE MARKET 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. 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 THE CIRCULAR FLOW Product Markets money to pay for goods & services goods & services money to pay for goods & services goods & services Households & Resource Owners Firms labor & other resources labor & other resources resource payments such as wages, rents, & interest 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 • In some less developed nations, a traditional economic system is • Custom & tradition determine the • Social arrangements & culture dictate the • Change occurs only very 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 ANSWERED used answers solutions gradually

18. ALL SOCIETIES HAVE DIFFERENT COMBINATIONS OF COMMAND ALL SOCIETIES HAVE DIFFERENT COMBINATIONS OF COMMAND AND MARKET; AND MARKET; ALL ALL SOCIETIES ARE MIXED ECONOMICS. SOCIETIES ARE MIXED ECONOMICS.

19. TRADE, MONEY AND ADVANCE ECONOMIES HAVE THREE FEATURES: • Trade Specialization depends on specialization – Division of Labour TRADE, MONEY AND CAPITAL ADVANCE ECONOMIES HAVE THREE FEATURES: Trade Specialization – trade between individuals and countries CAPITAL • Money financing trade Money – it measures the economic value of things and is used for • Capital factor of production and increases production Capital – it leverages labour power into a much more efficient

20. TRADE SPECIALIZATION AND DIVISION OF LABOUR 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. SPECIALIZATION GIVES GREATER PRODUCTIVITY. INDIVIDUALS AND COUNTRIES VOLUNTARILY TRADE GOODS IN WHICH THEY SPECIALIZE FOR OTHERS’ PRODUCTS and quantity of consumption. Have potential to raise living standards. 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. CAPITAL AND LAND ARE HIGHLY SPECIALIZED. vastly increasing the range

21. MONEY MONEY • It 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 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 • Capital has to be produced before it is used • More capital formation more saving future consumption • In market economy, capital is privately owned income from the capital goes to individuals capitalism 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 consumption cut and increase future productivity and

23. MARKETS AND GOVERNMENT IN A MODERN ECONOMY THREE ECONOMIC ROLE OF THE GOVERNMENT MARKETS AND GOVERNMENT IN A MODERN ECONOMY THREE ECONOMIC ROLE OF THE GOVERNMENT 1. 1. Increase externalities like pollution and providing public 2. 2. Promote equity by using tax and expenditure programs to redistribute income towards particular 3. 3. Foster macroeconomic stability and growth unemployment and inflation Increase efficiency by promoting competition, curbing externalities like pollution and providing public good Promote equity by using tax and expenditure programs to redistribute income towards particular group Foster macroeconomic stability and growth – – reducing unemployment and inflation efficiency by promoting competition, curbing good group reducing

24. EFFICIENCY 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. 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) (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). 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 WHY DOES AN ECONOMY FALL SHORT OF EFFICIENT PERFECT COMPETITION? COMPETITION? •Imperfect competition •Externalities •Public Goods Imperfect competition Externalities Public Goods

27. EXTERNALITIES EXTERNALITIES – – involve involuntary imposition of costs or benefits • Governments are more concerned about the negative externalities rather than positive involve involuntary imposition of costs or benefits Governments are more concerned about the negative externalities rather than positive ones ones • Government regulations are designed to control externalities like air and water pollution, damage from strip mining, hazardous wastes, Government regulations are designed to control externalities like air and water pollution, damage from strip mining, hazardous wastes, etc etc

28. IMPERFECT COMPETITION •It happens when a buyer or a seller affects the price IMPERFECT COMPETITION It happens when a buyer or a seller affects the price level level •Consequences of imperfect competition 1. 1. When it happens society moves inside the PPF 2. 2. Too high price and too low input is the hallmark of the inefficiencies associated with imperfect competition Consequences of imperfect competition When it happens society moves inside the PPF 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: 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. 1. Taxing 2. 2. Impose heavy taxes on CAN ENGAGE PROGRESSIVE TAXATION Taxing large income at a higher rate than small incomes Impose heavy taxes on wealth large income at a higher rate than small incomes wealth •CAN MAKE TRANSFER PAYMENTS LIKE AID FOR ELDERLY, BLIND AND DISABLED PEOPLE 1. 1. Can subsidize the consumption of low CAN MAKE TRANSFER PAYMENTS LIKE AID FOR ELDERLY, BLIND AND DISABLED PEOPLE Can subsidize the consumption of low- -income group income group

31. MACROECONOMIC GROWTH AND STABILITY MACROECONOMIC GROWTH AND STABILITY •Economic growth denotes the growth in nation’s output Economic growth denotes the growth in nation’s output •Macroeconomic policies for stabilization and economic growth include fiscal policies along with monetary policies Macroeconomic policies for stabilization and economic growth include fiscal policies along with monetary policies

32. •Fiscal policies government spending Fiscal policies – – change in taxes and change in government spending change in taxes and change in •Monetary policies money demand affect interest rates and credit conditions Monetary policies – – change in money supply and money demand affect interest rates and credit conditions change in money supply and

33. IN MOST OF THE INDUSTRIALIZED COUNTRIES, WE FIND SOME VARIANT OF A MIXED ECONOMY. IN MOST OF THE INDUSTRIALIZED COUNTRIES, WE FIND SOME VARIANT OF A MIXED ECONOMY. •The market determines output and prices in most individual The market determines output and prices in most individual sectors sectors •Government steers the overall economy with programs of taxation, spending and monetary regulations. Government steers the overall economy with programs of taxation, spending and monetary regulations.

34. GOVERNMENT CAN REMEDY SHORTCOMINGS OF THE MARKET GOVERNMENT INTERVENTION GOVERNMENT CAN REMEDY SHORTCOMINGS OF THE MARKET GOVERNMENT INTERVENTION CURRENT EXAMPLES OF GOVERNMENT POLICY CURRENT EXAMPLES OF GOVERNMENT POLICY FAILURE OF INVINSIBLE HAND FAILURE OF INVINSIBLE HAND Inefficiency  Monopoly  Externalities  Public Goods Inefficiency Monopoly Externalities Public Goods Intervenes in markets Intervenes in markets Subsidize worthwhile activities Antitrust law Antipollution laws, anti-smoking ordinances National defense Progressive taxation of income and wealth Income-support program (ex. Food stamps) Monetary policies (ex. Changes in money supply and interest rates) Fiscal policies (ex. Taxes and spending programs) Invest in education Reduce budget deficit and raise national savings rate Inequality Unacceptable inequalities of income and wealth Inequality Unacceptable inequalities of income and wealth Redistribute income Macroeconomic Problems  Business cycles (high inflation and unemployment) Macroeconomic Problems Business cycles (high inflation and unemployment) Stabilize through macroeconomic policies Slow economic growth Slow economic growth Stimulate growth 

35. LAW OF SUPPLY AND (VIDEO AND GRAPHS) LAW OF SUPPLY AND DEMANDS (VIDEO AND GRAPHS) DEMANDS

36. WHAT IS THE LAW OF WHAT IS THE LAW OF DEMAND? DEMAND? •The lower the price of a good, the larger the quantity consumers will buy The lower the price of a good, the larger the quantity consumers will buy. . •So the demand curve slopes downward from left to right. So the demand curve slopes downward from left to right.

37. WHAT IS THE DIFFERENCE BETWEEN DEMAND WHAT IS THE DIFFERENCE BETWEEN DEMAND & & QUANTITY DEMANDED QUANTITY DEMANDED? ? • DEMAND relation between price & quantity purchased DEMAND is the entire curve that shows the relation between price & quantity purchased. . is the entire curve that shows the • QUANTITY DEMANDED quantity on the demand curve. QUANTITY DEMANDED is quantity on the demand curve. is one particular one particular

38. WHAT IS THE LAW OF SUPPLY? 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 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. So the supply curve slopes upward from left to right.

39. WHAT IS THE DIFFERENCE BETWEEN SUPPLY •SUPPLY relation between price & quantity provided WHAT IS THE DIFFERENCE BETWEEN SUPPLY AND SUPPLY is the entire curve that shows the relation between price & quantity provided. . AND QUANTITY SUPPLIED is the entire curve that shows the QUANTITY SUPPLIED? ? •QUANTITY SUPPLIED on the supply curve. QUANTITY SUPPLIED is on the supply curve. is one particular quantity one particular quantity

40. THE ECONOMICS OF DEVELOPING THE FOUR ELEMENTS IN 1. 2. Natural Resources 3. Capital Formation 4. Technology THE ECONOMICS OF DEVELOPING COUNTRIES THE FOUR ELEMENTS IN DEVELOPMENT 1. Human 2. Natural Resources 3. Capital Formation 4. Technology COUNTRIES DEVELOPMENT Human Resources Resources

41. ISSUES IN ECONOMIC DEVELOPMENT Industrialization vs. 2. 2. Inward 3. 3. The 4. 4. State ISSUES IN ECONOMIC DEVELOPMENT vs. Agriculture Inward vs. Outward The danger of Overspecialization State vs. Market 1. 1. Industrialization Agriculture Orientation vs. Outward Orientation danger of Overspecialization vs. Market

42. SOME OF THE ELEMENTS OF A MARKET ORIENTED POLICY ARE THE FOLLOWING a. a. Low tariff and few quantitative restrictions b. b. Easy entry and exit c. c. Promotion of small business and the fostering of competition d. d. Stable macroeconomic environment predictable, prices are stable and the government budget is balanced. SOME OF THE ELEMENTS OF A MARKET- - ORIENTED POLICY ARE THE FOLLOWING: : Low tariff and few quantitative restrictions Easy entry and exit Promotion of small business and the fostering of competition Stable macroeconomic environment – – taxes are predictable, prices are stable and the government budget is balanced. taxes are

43. Geography 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 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 has made us neighbors

44. Thank You! Thank You! Marlyn P. Allanigue, MMC, MPA August 17, 2014