CBM REVIEWER

REVIEWER I
Economics

is the study of how individual and societies choose to use

the scarce resources that nature and previous generations
have passed to them.
Economics is the study of the proper allocation and
efficient use of scarce resources to be able to satisfy the
unlimited needs and wants of humans.
Needs are essential for human life survival like food,
clothing, and shelter.
Wants are goods that give more satisfaction and make
more life pleasant and worth living.
Consumers are the final users of the produced goods and
services by the producers.

Goals of Economics

Economic Freedom - This includes consumer choice,

freedom of occupational choice, freedom to consume or
save, freedom to own properties, and freedom of
enterprise.
Economic efficiency - Producing more output using less
resources.
Economic stability - There are no violent ups and downs in
the economy. Growth in a changing world.
Economic security - Promote security of people living in
an economy. Providing decent jobs, education, and daily
needs of individual.
Attainment of high level of growth in the economy -
Capacity to produce goods and services is increasing and
growing rapidly than the population.
Social Sciences Related to Economics

We classify economics as a social science because it deals with the

study of life of people and how it deals with others as members of
the society. Below are some related social sciences to Economics.

Anthropology - Branch of science that studies the biological,

psychological, social, and cultural aspects of human life.
Political Science - Systematic study of the state and
government.
Sociology - It studies the society by means of analyzing human
groups, institutions, and its social relationships.
Psychology - Scientific study of the behavior and living
organisms with special attention to human behavior.
History - Social science that focuses on the study of past
events.

Branches of Business Economics

Microeconomics - deals with the behavior of individual components

such as household,

firm, and individual owner of production.

Macroeconomics - deals with the behavior of economy as a whole

with the view of understanding the interaction between economic
aggregates such as employment, inflation, and national income.

Methods of Economics

In Economics problems are examine in two different ways.

Positive Economics - An economic analysis that explains what

happens in the economy and why, without making any
recommendations.
Normative Economics - It is an economic statement that
makes recommendation. The statement is employed to make
value judgement about the economy and suggest solutions to
economic problems.
Scientific Method of Economics

Economics being a science, is a systematic body of knowledge.

Data Gathering - Data is obtained through historical records

and interviews of past performances that is organized in a way
that can be easily analyzed.
Economic Analysis - Synthesize gathered data.
Economic Conclusions - Reasoning to generate conclusions.
Reasoning is categorized into: inductive reasoning (reasoning
from particular to general); and deductive reasoning (reasoning
from general to particular)

Main Schools in the development of economic thought

Classical Economics

According to Adam Smith, “Selfish behavior by individuals lead

to an outcome that benefits everyone in society.”
The labor theory of value unified the theories of the classical
economists, which is different to value drawn from a general
equilibrium of supply and demand.
Classical economists observed economic and social
transformation brought by the industrial revolution.
They maintain a free-market economy, disputing a natural
system based on freedom and property.
use as a benchmark against which to measure the performance
of real-world economics.

Two Branches:

The general equilibrium theory and the quantity theory of money.

General equilibrium theory that was developed by Leon

Walras in 1874, the theory explained how much of each good
created and how the price of each good is related to every
other good.
Quantity theory of money was developed by David Hume, it
tells us what determines how much dollars an average
person will earn for an hour’s work, or how much pesos you
 will have to pay for a cellphone and the money cost to have
a holiday in Boracay.

Neoclassical Economics

Neoclassical economists presumed an element of

irrationality in the context of inter-temporal decision
making.
William Stanley Jevons, Irving Fisher, Alfred Marshall, and
Arthur Cecil Pigou observed a preference for present over
consumption, and each took this as evidence that
consumer foresight or will power was defective.

Keynesian Economics

The father of macroeconomics is John Maynard Keynes.

According to Keynes, the force that caused the Great Depression
was an impulsive fall in confidence about the future a kind of
mass panic affecting all stock
market participants. It was the stock market crashed that
caused the Great Depression. The economy did not revert back
to full employment because there is no self-correcting
mechanism.

New Classical Economics

Rational Expectation Theory conceptualized by Robert Lucas

and Thomas Sargent states that people understand how the
economy works and use all information available to them in
making their economic decisions.

REVIEWER II
Basic Economic Problems

What goods and services should be produced and in what quantities?

➢ It is not always possible to produce all goods and services

that people want because resources are limited. We cannot
produce all the materials we desire, so we tend to choose
which to produce out of scarce resources.
How these goods and services should be produced?

➢ There are two basic methods in producing goods and services.

➢ These are capital-intensive production process and labor-
intensive production process.
➢ Goods are produced using capital-intensive production
process because of mechanization and mass production,
while services are produced using labor-intensive production
process mainly due to high degree of customer contact.

For whom these goods and services be produced?

➢ We should think also whose generation will receive these goods

and services: the present or the future generation.
➢ We should answer also what is basis of rationing the said final
produced product to different consumers.

(To analyze the three economic problems of economics, these

merely focus on the limitation of resources or the factors of
production. There is also the question on how to undertake the
choosing of some combination of labor, equipment, buildings, and
land to produce the goods and services people want. All these
components of production are called resources or factors of
production, which have an important role in answering the three
economic questions.)

Factors of Production

Land - Source of all materials and food whether in liquid, solid,

or gaseous form, in or above the earth.
Labor - Available physical and mental talents of the people who
have to produce goods and services.
Capital - Tangible physical good that a person or society creates
in the expectation that its use will improve or increase future
production. The process of creating capital good is called capital
formation. Common term for capital formation in economics is
investment. Capital also refers to human capital.
 Entrepreneurship - People are combining the other three factors
of production to create some products or services to sell. They
hope for profit, but take risk, loss, or bankruptcy.

Characteristics of entrepreneurs:

a. Have competence to organize factors of production.

b. Know how to make business decisions.

c. Risk takers.

d. Innovators.

Economic System

Refers to a set of economic institutions that dominate a given

economy with the main objective of solving basic economic
problems.

Traditional Economy - Economic decisions are made with great

influence from the past. Essential characteristics are:

a. Communal land ownership

b. The leader decides on the management of agricultural production

which is the basis of the economy.

c. Production, distribution, and use of economic resources are based

on traditional practices.

d. Not opens for new technologies.

e. Economy is only its third priority while culture and religion are its
foremost priorities.

f. Mines are used to gather raw materials for production.

Command Economy - Factors of production are owned and managed
by the state. Decisions in answering the basic economic problems are
planned, done, and dictated by the government. Essential
characteristics are:

a. Resource allocation is done by the government.

b. Centralized planning of all economic activities.

c. Government is the only seller.

d. Only the government plays the role in setting legal framework for
economic life production and distribution of goods and services.

e. Products or needs of the people are distributed based on priorities

set by the committee.

Market Economy - Individual consumers and businesses interact to

solve the economic problem. Essential characteristics are:

a. Private sector owns and manages the means of production.

b. Price system in a market structure applies to determine how much

will be paid for a certain commodity or service.

c. Free enterprise

d. Minimum government interference

e. Existence of competition results to monopoly

f. Presence of economic power.

Mixed Economy - Elements of traditional, command, and free market.

Essential characteristics are:

a. Means of production are owned and controlled by the private

sector as well as the government.

b. People decide on economic activities within the economy.

c. Best features of capitalist and command economies are observable

in the market.
d. Problem of distribution of goods and services and allocation of
economic resources are determined through a combination of the
market system and governmental laws and policies.

Circular Flow of Economy

The diagram shows how the simple economy works. The household
sector owns the factors of production, such as, land, labor, capital,
and entrepreneurship while the business sector produces goods and
services out of production that the households supply.

Law of Scarcity

States that goods are scarce because there are not enough
resources to produce all goods that people want to consume.

Opportunity Cost

The price of the next best thing you could have done had you
not made your first choice.
Production Possibility Frontier

Shows the combination of two goods that can be efficiently produced

by using all the resources.

REVIEWER III
Demand and Supply

Demand - refers to the number or amount of goods and services

desired by the consumers at various prices in a particular period
of time. Quantity demanded is the amount of goods or services
are willing and able to buy/purchase at a given price, place, and
a period of time.

Supply - defined as the maximum units/quantity of goods and

services producers can offer. Quantity supplied refers to the
amount or quantity of goods and services producers are willing
and able to supply at a given price, at a given period of time.

Law of Demand and Supply

Law of Demand - states that as price increases, quantity

demanded decreases; and as price decreases, quantity demanded
increases (if other factors remain constant).
 Law of Supply - states that as price increases, quantity supplied
also increases; and as price decreases, quantity supplied also
decreases.

Determinants of Demand and Supply

Determinants of Demand

1. Consumer’s income

a. Normal good. Demand increases when income increases and

vice versa. For example, basic necessities such as rice, utilities,
medical and dental services.
b. Inferior good. Demand falls when income rises and vice versa.
For example, public transportation, reduces the consumption of
public utility instead they tend to drive their own car.

2. Consumers’ Expectations of Future Prices. Prices expected in

future periods. For example, expected increase in the price of
gasoline causes panic buying for car owners to maximize the
purchasing power of their money.

3. Prices of Related Products. Demand for any particular good will

be affected by changes in the prices of related goods.

a. Substitute products. Goods that can be used in place of other

goods.

b. Complementary goods. Goods that cannot be used without the

other.

4. Consumer Tastes and Preferences. Taste and preferences are

affected by religion, culture, traditions, age, trend, technology, and
many more.

5. Population. Increase in the population means more demand for

goods and services.

Determinants of Supply

1. Change in technology
2. Cost of inputs used
3. Expectation of future prices
 4. Price of related goods
5. Government regulation and taxes
6. Government subsidies
7. Number of firms in the market

Demand and supply curve

Demand Curve - shows graphically the relationship between the
quantity of a good demanded and its corresponding price, with
other variables held constant.
 Supply Curve - shows the relationship between the quantity of
a good supplied and its price, with other variables held
constant.

Change in demand and supply

Change in Demand versus Change in Quantity Demanded

Change in Supply versus Change in Quantity Supplied

Price Controls

Market Equilibrium
Surplus - a condition in the market where the quantity supplied
is more than quantity demanded.
 Shortage - a condition in the market in which quantity
demanded is higher than supplied.

Equilibrium Analysis

Supply equation: Qs = c + dP

Demand equation: Qd = a – bP

Equilibrium equation: Qs = Qd

3 Equations and Unknowns (Qd, Qs, P)

Exogenous variable: Y

Parameters/coefficients: a, b, c, d

Looke for the Pe and Qe?

Qs = 33 + 10P

Qd = 68 – 6P

REVIEWER IV
Elasticity

Elasticity - measures the responsiveness of one variable to a

certain change of another variable. Any change causes people
to react, and in the concept of economics, elasticity
measures this extent to which the people react.

Basic Formula:

Elasticity = percentage change in variable y

Percentage change in variable x

Price elasticity of demand

Measures the responsiveness of the quantity demanded with

the change in price.
Price Elasticity of Demand = Percentage Change in Quantity Demanded

Percentage Change in Price

Points Elasticity

Points A to E

PED = (393-700)/(700)/(15-4)/(4)=I-0.16I inelastic

Points E to A

PED = (700-393)/(393)/(4-15)/(15)=I-0.73I elastic

Arc Elasticity

Arc Elasticity = (393-700)/(15-4)x(4+15)/(2)/(700+393)/(2)=I-0.56I

inelastic

Interpretation of value:

In price elasticity of demand using point elasticity from A to

E, the computed value is 0.16 in absolute term. The indicates
that a 1% increase in the price of the commodity resulted to
a 0.16% decline in quantity demanded and vice versa.
Determinants of price elasticity of demand

The importance or degree of necessity of goods - The more

essential or necessary the goods or services, the more
inelastic the demand.
Number of available substitutes - Demands for goods with
greater number of substitutes are elastic, while goods with
less or no substitute have inelastic demand.
Proportion of income in price changes - Any change in price
resulting to a substantial effect on consumer’s income has
elastic demand.
Time period - The longer the time period, the more elastic or
less inelastic the demand will be.

Income elasticity of demand

The responsiveness of quantity demanded to a change in

income.

Basic formula:
Income Elasticity of Demand = Percentage Change in Quantity Demanded

Percentage Change in Income

Cross-price elasticity of demand

Another elasticity arises when we look at the response of

consumers in buying certain products the price of another
changes. Cross price elasticity of demand measures the
responsiveness of quantity demanded of a good to a change
in the price of another good.

Basic formula:
Cross Price Elasticity of Demand = Percentage Change in Quantity Demanded of Good X

Percentage Change in Price of Good Y

Price elasticity of supply

Measures the responsiveness of quantity supplied in response

to a percentage change in the price of the products.

Basic formula:

Price Elasticity of Supply = Percentage Change in Quantity Supply

Percentage Change in Price

Elastic Supply - a change in price leads to a greater change in

quantity supplied. Suppliers are sensitive at any change in
price.
Inelastic Supply - a change in price leads to a lesser change
in quantity supplied. Suppliers are weak in response to any
price changes.
Unitary Elastic Supply - a change in price leads to an equal
change in quantity supplied.
 Perfectly Elastic Supply - occurs when there is no change in
price and there is an infinite change in quantity supplied.
Perfectly Inelastic Supply - occurs when a change in price has
no effect on quantity supplied.

Determinants of price elasticity of supply

Importance and application of elasticity

Having knowledge of elasticity helps every policy formulating

body develop and/or formulate appropriate strategies and
programs.
It can determine the effect of price changes. Producers can
assess consumers’ responsiveness with respect to any change in
the price of commodity.
We can notice that for a given change in price, products
respond differently in terms of quantity demanded. Others
consider that by decreasing the price of a certain product,
particularly a basic commodity, sales volume will increase.