BASIC
MICROECONOMICS
2
MIXED ECONOMY
Alfred Marshall - A great 3
English economist who came up
with the idea of the law of demand
and supply. According to him,
prices are set through the forces
of demand and supply as same as
the cutting done by two blades of
scissors. Just as you need two
blades in order for the scissors to
function.
Supply is Supply 4
the
quantity of Supply is the total quantity of a good that is
a good
that is
available for purchase at a given price. It is the
available relationship between the quantities of a good or
for
purchase service consumers will offer for purchase and the
at a given price charged for that good. Supply is not simply
price.
The law
of supply
the number of item available in the market, such
states that as '5 chocolates' or '17 books', because supply
the
quantity
represents the entire relationship between the
supplied quantity available for sale and all possible prices
for a good
rises as charged for that good. The specific quantity
the price desired to sell of a good at a given price is known
rises.
as the quantity supplied.
The law of supply states, 5
that, ceteribus paribus (latin
for 'assuming all else is held
constant'), the quantity
supplied for a good rises as
the price rises. In other
words, the quantity
demanded and price are
Examples of Quantity 6
Supplied: When the price of
a chocolate is P80 the
quantity supplied is 300
chocolates a week. If the
price of a chocolate falls
from P80 to P50, the
quantity supplied will fall
Supply Schedule 7
A supply schedule is a table that shows the
relationship between product prices and quantity
supplied.
Price Quantity Supplied
140 500
110 400
80 300
50 200
20 100
Supply Curve: 8
A supply curve is simply a supply
schedule presented in graphical
form. It shows the quantity
supplied at different prices. Supply
curves are drawn as 'upward
sloping' due to this positive
relationship between price and
quantity supplied. When there is a
change in quantity supplied there
The X-axis represents the
9
quantity sellers are
willing and able to sell at
a given price. On the
other hand, the Y-axis
represents the maximum
price the sellers are
Change in Supply: 10
There is a change in
supply when the change
alters the quantity. supplied
in a given price, vice versa.
When it happens, there is a
shift in the entire supply
curve. The following are
1. Technological
Innovation - lowers costs
and increases supply which
means that sellers are
willing to supply a greater
quantity at a given price or
equivalently they are willing
to sell a given quantity at a
2. Input Prices
12
- an increase in the
price of input
decreases supply
because of higher
costs incurred.
3. Taxes and
13
Subsidies - Tax
increases cost and also
considered as an input
price. Subsidy is
equivalent to a decrease
in the firms cost and
4. Expectation
14
- higher price of a
good in the future
increases the cost
of supplying now
and thus
5. Entry/Exit of
15
Producers - as
producers enter or
exit the market, the
number of sellers'
changes, directly
Price Floor and Price
16
Ceilings
Price Floors and Price
Ceilings are examples of
regulations established by
government intervention to
avoid loss and taking
advantage of opportunity in
Price Floor is the minimum 17
market price set for a certain
commodity established to prevent
manufacturers in instituting prices
that would ruin the market
economic system. For instance,
different rates of minimum wages
are implemented in different
geographic area in accordance to
the lifestyle of the household in
This is settled to assure that
18
the individuals are able to
A price
floor is the suffice one’s staple and
minimum
market
price set
afford provision of needs.
for a
certain
commodity
When a city establishes a
wage lower than the
minimum, the tendency is
that businessmen would
Thus, taking away the 19
opportunity from other cities
to be competitive in terms of
their labor market. Moreover,
if minimum wages are fixed all
throughout the country the
tendency is households would
transfer to the area that has
lower cost of lifestyle to
Price floor is only an issue 20
when they are set above market
clearing price because once it is
set beyond the market price;
there is a chance of excess
supply (surplus). When it occurs,
manufacturers might produce
more quantity unknowingly,
customers might not buy those
goods at the higher price and
Price Ceiling 21
Price Ceiling is the maximum
market price set for a certain
commodity and services that
is believed to be sold at an
unreasonable high price.
Equilibrium 22
Equilibrium refers to a situation
in which the price has reached the
level where quantity supplied
equals quantity demanded.
Surplus exists when there is an
excess in supply. In this case,
suppliers should lower the price to
increase sales, thereby moving to
the equilibrium.
Equilibrium 23
Equilibrium refers to a situation
in which the price has reached the
level where quantity supplied
equals quantity demanded.
Surplus exists when there is an
excess in supply. In this case,
suppliers should lower the price to
increase sales, thereby moving to
the equilibrium.
24
ELASTICITY
Elasticity 25
Elasticity is the amount of a
variable's sensitivity upon
change of a further variable.
Economically, elasticity refers
to the degree of change of
individual demands in reaction
to price or income changes.
The formula for computing 26
elasticity of demand is:
Ep = Percentage change in quantity
demanded.
Percentage change in price
Elasticity of demand
27
Elasticity
is the
amount of
is an significant
variation on the
a variable's
sensitivity
up-on
change of a
further
variable.
concept of demand
and can be classified
as elastic, inelastic
Elastic Demand 28
Elasticity Quantity demanded
is the
amount of
a variable's
extremely reacts when there
sensitivity
up-on
change of a
is a change in price. An
further
variable. example of products with an
elastic demand is those
goods not frequently
purchased, such as
Substitutes of a product affect the
29
elasticity of demand. If a product
can be easily substituted certainly
by another product, consumers
will merely shift purchases when
there is a price increase/decrease
for both goods. For example,
poultry and fish are both meat
products. When there is a
diminishing price of poultry,
Inelastic Demand 30
A change in price results in only a
small change in quantity
demanded. Simply, the quantity
demanded is not very responsive to
price changes. Examples of this are
daily necessities such as food.
When the price of food increases,
consumers will not reduce their
food purchases, granting there may
Unitary Elasticity 31
A change in price will
result to an equal
percentage of change in
quantity demanded. When
the price decreases from P8
per unit to P4 per unit, the
quantity sold increases from
Total Revenue
32
The total revenue a
firm obtains is the price
of the good multiplied by
the quantity sold.
Total Revenue = Price x
Quantity Sold
Assume that a firm increases the price of its 33
good, there would be a price or quantity
effect. When price increases, each unit sold
sells for higher price, which tends to raise
revenue. However, there is no assurance that
the consumers will patronize the goods as
same as before. Thus, after a price increase,
fewer units might be sold, which tends to
lower revenue. The price elasticity of demand
illustrates what happens to total revenue
when prices changes. Example: Suppose the
current price of a fish is P50.00, but that the
vendors must raise extra money for market
rent. Will raising the price of the fish to P55.00
Normal Goods 34
Normal goods are goods
that have a proportionate
response on its demand as
income changes. These goods
have positive income elasticity.
An example might be luxury
items; as the income level
increases, more people buy or
Inferior Goods 35
Inferior goods are the goods
that have inverse response on
its demand goods exist when
high class or superior goods
are available in the market. An
as income changes. Thus, it
has negative income elasticity.
Example of an inferior
36
good is public
transportation. When
consumers have less
wealth, they may forgo
using their own forms of
private transportation in
