Chapter 2

Applied Economics: Basic concepts in economics

1. Buyers
 Buyer’s willingness to buy a particular goods = demand for good
 A noticeable behaviour of buyer in the market
 Buy less quantity if the price is high; buy more if the price is low.
2. Sellers
 The seller’s willingness to supply a particular good = seller’s supply of that good.
 Particular behaviour of seller in the market
 “Pagmarami and demand, less supply, taas presyo.”

Law of Demand: An inverse relationship exists between the price of good and the quantity of
the demand of that good.
Reason for a change in demand
 Change of price of a related goods
 Change in income
 Change in preferences
 Change in expectations

Law of Supply: A direct relationship exists between the price of good & the quantity supply of
that good.
Reason for change in supply
 Changes in the prices of goods
 Changes in the price of input
 Changes in technology

Relationship between demand and supply

1. Equilibrium
 Quantity & Price
 When the demand for good x equals the supply of good x, the market for good x is to
be equilibrium
2. Elasticity
 The responsiveness of demand or supply to the changes in prices or income is
measured by the elasticity of demand or supply.
- Price elastic
- Price inelastic

MACROECONOMICS - Branch of economics that examines the aggregate performance of all

market in the market system.

“3 Most commonly used measurement of macroeconomic performance”

1. Gross Domestic Product - The market value of all the final goods & services
produced domestically in a single year.
GROWTH RATE - The annual growth rate per year, value of GDP
- Positive growth rate = BOOM =growing
- Negative growth rate = RECESSION = falling
2. Rate of Inflation -
3. Unemployment Rate

MICROECONOMICS - Branch of economics which focuses on the behaviour of individual

consumers and individual firms.

“THEORY OF THE CONSUMERS”

Explain market demand for consumer behaviour. (FACTORS)
1. Preferences – (Utility & Preference) Pleasure or satisfaction that a consumer obtain from
the consumption of goods & services
2. Incomes
3. Price

“LAW OF DIMINISHING MARGINAL UTILITY”

The marginal utility of that one receives from consuming successive units of the same good or
service will eventually decrease as the number of units consumed increased.
“MARKET STRUCTURES”
When an economist analyse the production of the firm he takes into account the structure of the
market in which the firm is operating.

TYPES OF MARKET SYSTEM

1. Perfect Competition
2. Monopoly
3. Oligopolistic Market

A. PERFECT COMPETITION
 There must be many firms in the market, none of which is large in terms of its sale.
 Firms should be able to enter and exit the market easily.
 Each firm in the market produces & sells a non-differentiated goods or homogenous
products.
 All firms & consumers in the market have complete information about prices, product
quality, & production technique.
B. MONOPOLY
 There is only one firm operating, which is large in size.
 There is a high barrier in entry.
 There is no close substitute for the good the monopoly firm produces.
 A monopolist produces less output and sells it at a higher price than a perfectly
competitive firm.
C. OLIGOPOLISTIC MARKET
 Has only a few large firm
 Has a high barrier to entry.
 Produces either differentiated or homogenous goods.
 Example: automobile manufacturers, steel manufacturers, passenger airlines

Cartel Theory of Oligopolistic

 Cartel is group of firm that gets together to make output and price decisions.
 Example: Organization of Petroleum Exporting Countries (OPEC); Rice and Sugar cartel.

“TYPES OF GOODS”
1. Normal Goods: when income increases, the demand increases (premium beef, whole
wheat pasta)
2. Inferior Goods: when income decreases, the demand increases (sardines, instant
noodles)
3. Substitute Goods: goods that can be used in replacement of the other (if price of X goes
up, demand of Y goes up)
4. Prestige Goods: increase the status of consumers who own or use them, goods with
higher price based on the added value that the purchaser feels they will obtain from the
product

“TAXATION” - Inherent power of the state to impose and collect revenues to support the
necessary expenses of the government

PURPOSE OF TAXATION
1. To collect revenue for the government
2. To redistribute income
3. To check consumption of goods which are considered undesirable
4. To influence population trend

TYPES OF TAXES
A. DIRECT TAXES:
Based on income and wealth
Burden cannot be shifted to the third party,
Compulsory (income tax, residence tax, real state, estate tax, immigration tax
B. INDIRECT TAXES:
Based on expenditure and consumption
Burden can be shifted to the third party,
Optional; can be avoided (sales tax, import tax, VAT/EVAT