microeconomicstar - start to midterm

Basic Microeconomics with Taxation and Agrarian Reform (ECON101)

by

Nicanor B. Lazaro Jr.

Paul Samuelson American Economist Won Nobel Memorial Prize in

Economic Science Writer of "Economics: An

Introductory Analysis" Graduated PhD in Economics at

Harvard At 25 years old; one of the

youngest Professor at Massachusetts Institute of Technology (MIT)

Father of Modern Economics

Introduction to Microeconomics

Microeconomics is all about Scarcity.

People and Firms making decisions in a world full of scarcity.

People make decisions to consume,

Firms make decisions to produce


Scarcity

Constrained Optimization

Trade-offs


Constrained Optimization:

The minimization of anobjective function subjectto constraints on thepossible values of theindependent variable


Constrained Optimization:


Scarcity

Constrained Optimization

Trade-offs


Trade Offs in Microeconomics:

What people and firms are willing to give up to achieve something.

In Filipino: Diskarte

Economic Models

2 Prime Movers of Economics:

a) Consumers

b) ProducersDetermine their Behavior

Economic Models

A MODEL is a description any relationship of 2 or more Economic Variable.

Note: Economic Models are never precise nor are they accurate.

Function of Models is to be able to create simplified assumption to capture the tendencies derived from the data.

Economic Models

Assumptions:

Consumers: Need/Want Goods (Utilities Maximization/UM)Limited Wealth (Budget Constraint/BC)

* UM subject to BC = Consumption Decisions

Producers /Firm: Maximized Profit (MP)

Consumer Demand (CD) & Input Cost (IC)

* MP subject to CD & IC = Consumption Decisions

Economic Models

3 Fundamental Questions of Economics:

1. What goods and services should be produced?

2. How to produce goods and services?

3. Who get the goods and services produced?

Prices (V)

Economic Models (Example)


Samsung Galaxy S5

Application 3 Fundamental Questions:

1) What goods or services should be produced? A High-end, Top of the line Smart Phone

2) How to produce goods and services? Parts from Korea, labor from China, Carry the Samsung Brand name

3) Who get the goods and services produced? Consumers with the buying power


Taylor Swift Manila Concert

Application 3 Fundamental Questions:

1) What goods or services should be produced? Live Concert Featuring Taylor Swift

2) How to produce goods and services? Top of the line production equipment, production crew, Taylor Swift

3) Who get the goods and services produced? Consumers with the buying power and convenience of time to purchase ticket

Positive vs. Normative Economics

Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved.

Summary:1. Positive Economics- The way things are

2. Normative Economics- The way things should be


Example Statement:

I. People tend to shop at SM more when they get a pay raise (Positive Statement)

II. People should shop at SM after pay raise (Normative Statement)

III. Rich people need to pay taxes (?)

IV. If families with annual income over Php. 250,000.00 paid more taxes, overall tax revenues will increase." (?)

Positive vs. Normative Economics Example:

Case:1999 Kidney for Sale@ E-BAY (US)

Starting Price: $25,000.00

Closing Price:$6,000,000.00++

* Note: EBAY is a Perfectly Competitive Market


Positive Analysis:

Prices increased by 99.58%

Very High Demand

Very Low Supply


Positive Analysis:

Prices increased by 99.58%

Very High Demand

Very Low Supply

Adam Smith (1st Economist) - Water / Diamond Paradox

Why is water, the essence of life cheaper than a non-essential mineral , like diamond?

Analysis: Water has high demand but higher supply Diamond has low demand but lower supply

Positive vs. Normative Economics Normative Analysis:

Unethical Body parts must be screened by medical practitioner Inequality of the Poor / Rich (Persons right to live) Kidney allocation should be determined by who needs it the most People have to paternalistic attitude not to thinks things over when

money is involved


Example Statements:

The Philippine unemployment rate was below 5 percent in 1998

The inflation rate in the Philippines is too high.

Last year the economy grew by 2 percent.

The stock exchanged index sells high during recession.


Example Statements:

The minimum wage should be increased as a method of reducing poverty.

Janet Lim Napoles's property must be returned to the honest Filipino Tax Payers.

There will be an increase in future employment if the K to 12 policy is applied.

If the sales increases this quarter then bonuses will be bigger.


Tip:

Usually Positive Statements are written in an "If.. Then" format.

Usually Normative Statements are written with words like "Should, must, ought & I think"

Supply & Demand Curves


Definitions:

Price: Monetary equivalent for the value of goods or services

Quantity: Volume of production of goods or amount of rendered services

Supply (S): The total amount of a specific good or service that is available to consumers

Demand (D): Refers to how much (quantity) of a product or service is desired by buyers


Definitions:

Equilibrium:

A state of serenity and balance in economic conditions due to the lack of outside forces causing disruption. It occurs at the point where quantity demanded and quantity supplied are equal.


Case:

The Price of pork tenderloin is P200.00 a kilo.

The Supplier agrees to so process 500 kilos a day.

Assumption:

E = 500 kilos of pork tenderloin subject to P200.00 per kilo.

Supply & Demand CurvesPhp. 400.00

Php. 200.00

Php. 0.00

Php. 300.00

Php. 100.00

0 kilo 250 kilos 500 kilos 750 kilos 1000 kilos

Shocking the Equilibrium

Sample Case:

The Price of beef tenderloin increased P300.00 a kilo.

Pork is a Substitutability to beef. Substitutability - One that takes the place of another; a replacement

Majority of the dishearten beef buyers doesnt want to consume chicken, fish, seafood or vegetable


Sample Case (Demand Increase Shift):

Beef consumers will shift to pork

Demand for pork would increase

Producers up to a certain point will no longer be able to satisfy the demand of the consumers

Shocking the EquilibriumPhp. 400.00

Php. 200.00

Php. 0.00

Php. 300.00

Php. 100.00


E2


Sample Case (Supply Decrease Shift):

Swine Flu affects local piggeries

Pig medicine increase production costs

Demand for pork still the same

Shocking the EquilibriumPhp. 400.00

Php. 200.00

Php. 0.00

Php. 300.00

Php. 100.00


Law of Demand

Inverse relationship between price & quantity demanded Price goes up, Quantity (buy) goes down

Price goes down, Quantity (buy) goes up

Analysis: Prices of goods goes up, people wont buy.

Prices of goods goes down, people will buy.

PQPrices goes up Prices goes down

Law of Demand

Law of Demand

Effects for demand behavior

Substitutability effect

Income effect (Value of money)

Law of Diminishing Marginal Utility (more you consume the less satisfaction you get)

Law of Supply

Direct relationship between price & quantity demanded Price goes up, Quantity (produce) goes up

Price goes down, Quantity (produce) goes down

Analysis: Prices of goods goes up, firms produce more.

Prices of goods goes down, firms produce less.

PQ

Prices goes up

Quantity goes up

Law of Supply

Law of Supply

Effects for supply behavior

Trade off: Labor vs Leisure Effect

Prices are low; pay less attention (Leisure)

Prices rises; pay more attention and produce more (Labor)

PQ

DisequilibriumS

D

P1

Q1

Surplus

ShortageP2

Q2

E

Disequilibrium

Application of Law of Demand and Supply

P1-Increases price of goods

Lower purchase by consumers (D)

Increase production by firms (D)

P2 Decreases price of goods

Increase purchase by consumers (D)

Lower production by firms (D)

Disequilibrium

Surplus: Quantity produced is bigger than the quantity demanded

Shortage: Quantity produced is smaller than the quantity demanded

Change in demand vs. Change in quantity demanded

Change in quantity Demanded A Change in price changes

quantity demanded

Movement along the curve (a - c)

Change in Demand At every given price, the quantity

demanded has changed

P

Q

$5

$4

a b

c

10 20

* note: The only variable affecting quality demanded is pricePrice doesn't shift the curve

Change in Demand At every given price, the

quantity demanded has changed.

Example Scenarios; Changes in income

Changes in taste

Changes in expectations

Changes in the market size

Changes in the price of related goods & service

P

Q

P

Q

Increase in Demand(Shift In)

Decrease in Demand(Shift Out)

Change in Supply At every given price, the

quantity supplied has changed

Example Scenarios;

Change in technology

Change in input prices

Change in the expectations

Change in the number of producers

Change in the price of related goods and services

P

Q

P

Q

Increase in Supply(Shift Out)

Decrease in Supply(Shift In)

Application: Increase on the Demand

Statement: Corn makes you smarter

Analysis: Demand for corn would increase

Consumer Initiative

Producers will take advantage Law of Supply

From Leisure Shift to Labor

P, Q

P

Q

E

Application: Decrease on the Demand

Statement: Corn makes you lose hair

Analysis: Demand for corn would decrease

Consumer Initiative

Producers will take advantage Law of Supply

From Labor Shift to Leisure

P, Q

P

Q

E

Application: Increase on the Supply

Statement: 15% yield increase in corn

harvest

Analysis: Supply for corn increases

Producers initiative

Consumers will take advantage Law of Demand

P, Q

P

Q

E

Application: Decrease on the Supply

Statement: La Nia, Destroyed 30% Corn

Crops

Analysis: Supply for corn decreases

Producers initiative

Consumers will take advantage Law of Demand

P, Q

P

Q

E

Application:

Statements: Samsung Galaxy S5 the BPOs choice

Petroleum Big Time Rollback

MRT / LRT privatization

Garlic (bawang) cartel strikes again

Iphone 5c defective batteries (short life)

DLSAU featured on Kris TV

Florida Buses are very accident prone

Gen. Santos Tunas have bigger schools this year

Due to popular customer suggestions, Star Buck coffee now has a double Venti frappe size.

Japan lifts Philippine Travel Visa

Elasticity:

Elasticity of Demand Shows how sensitive the quantity demanded is to a change in price.

Price elasticity of supply is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

Elasticity of Demand:

Law of Demand: Price goes up, Demand goes down

Price goes down, Demand goes up

Question: How much?

If the price goes up, how much does the quantity go down?

If the price goes down, how much does the quantity go up?

Inelastic Demand:

Quantity demanded is insensitive to a change in price

P2

P1

Q2 Q1

Perfectly Inelastic Demand:

Quantity demanded remains the same even with price change

P2

P1

Q2

Q1

Elastic Demand:

Quantity demanded is very sensitive to a change in price

P2P1

Q2 Q1

Perfectly Elastic Demand:

The percent change in quantity results in no percent change in price

P2P1

Q2 Q1

What Influences Elasticity?

Substitution: Elasticity

Commodities with several direct alternatives playing with, almost to identical, similar prices have a tendency to substitute each other easily with the slightest change in price.

ex: Candies, Cigarettes, Sodas, Coffee, Water, etc.

What Influences Inelasticity?

Substitution: Inelasticity

Commodities with, limited to none, alternatives and with a necessity-like function.

ex: Medical Operations, Specialized Technical Services, Specialty Medicines (Penicillin & Insulin).

Elasticity Co-efficient;

Formula: %Q

%PAssuming that: 10% increase in price

10% increase in quantity

10%/10% = 1

Unit Elastic (Coefficient 1) :

A percent change in price results in a percent change in quantity by the same proportion

1

PQ

Elasticity Co-efficient: Unit Elastic (Coefficient 1) 45degrees


Formula: %Q



50%/10% =5

Elastic (Coefficient > 1) :

A percent change in price results in a larger percent change in quantity.

1 Elasticity

PQ

Elasticity Co-efficient: Elastic (Coefficient > 1)


Formula: %Q



5%/10% =0.5

Inelastic (Coefficient < 1) :

A percent change in price results in a smaller percent change in quantity

1Inelasticity

PQ

Elasticity Co-efficient: Inelastic (Coefficient < 1)

Inelasticity of Supply:

Law of Supply: Demand goes up, Prices goes up

Demand goes down, Price goes down

Question: How much?

If the demand goes up, how much does the price go up?

If the demand goes down, how much does the price go down?

Inelastic Supply:

Quantity supplied is insensitive to a change in price.

P2

P1

Q2Q1

Inelastic Supply:

Quantity supplied is sensitive to a change in price.

Examples: Maximized Output Factories, Agricultural Plantations, Power Plants (Producers not retailer)

Elastic Supply:


P2

P1

Q2Q1

Elastic Supply:


Examples: Event Shirts, Memorabilia & Elections Paraphernalia

Cross-price Elasticity of Demand : Show's how sensitive the quantity of one product

is to a change in the price of a different product

Formula: %Qa

%Pb

O



Formula: %Qa

%PbExample: Price of b increased by 10%

Quantity of a increased by 10%

10%/10% = 1

O

Positive CP: Substitution



Formula: %Qa

%PbExample: Price of b increased by 10%

Quantity of a decreased by 10%

-10%/10% = -1

O

Negative CP: Complements



Formula: %Qa

%Pb

Example: Price of b increased by 0%

Quantity of a increased by 10%

O

Neutral CP: No Relations

Cross-price Elasticity of Demand :

Examples: Substitution (Pork & Beef, Ice Tea & Sodas, etc.)

Complements (Cereals & Milk, Beer & Sisig, etc.)

No Relations (Shampoo & e-load, Paper & Ham, etc.)

Causation VS Correlation:

Correlation: Feedback (Substitution / Complement)

Causation: Taking two things that move together and assuming one causes the other



Example: (1920s/USSR) Cholera Outbreak

Pheasants are getting sick with cholera, the Russian Czar sent doctors to inspect and help the situation. The more doctors came, the more dead.

Pheasants killed doctors thinking they bring death to the community.



Example: (1960s/ Harvard) SAT Review

Majority of student that topped the SAT test are not SAT Reviewers. As a result the Dean of Harvard discourages SAT Reviews for incoming students.

Review Centers are vultures preying on the insecurities of students.



Example: (1950s/ Poland) Breast Milk

Majority of babies getting sick were breast fed. This opted the Poland to ban breast milk to infants 6 month above.

Cause of sickness, radiation poisoning from nearby power grid.



Example: (Economic Application) Petroleum

The price of Gasoline increased in May 2010.

The price of mouthwash decreased in May 2010.

So, Gasoline has an indirect impact to mouthwash.

Policy: Gasoline price must rise more for mouthwash to be more cheaper.


Group Activity: (1/4 yellow pad)

Site 3 REAL, Non-economic related examples of Causation

Site 3 REAL, Economic related examples of Causation

* Not yet discussed example.

On Monday, we will review everything in relation to Elasticity in preparation for your mid-terms

microeconomicstar - start to midterm

Documents