Microeconomics 101

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

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

3. ECONOMICS ASKS WHAT GOODS ARE PRODUCES, HOW THESE
GOODS ARE PRODUCED AND FOR WHOM THEY ARE 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.

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 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.

5. ECONOMICS IS THE STUDY OF MONEY, BANKING,
CAPITAL AND WEALTH.
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.

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

7. 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. Eisenshower

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

9. 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?

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

11. THREE CATEGORIES OF INPUTS
• LAND – generally the natural resources, the gift of
the nature for our productive processes
• 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

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

13. 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.

14. IN A MARKET ECONOMY, THESE QUESTIONS ARE
HANDLED BY THE 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.

15. THE CIRCULAR FLOW
money to pay for goods & services
Households &
Resource Owners
Firms
Product Markets
goods & services
labor & other resources
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 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

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

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

20. 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. 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.

21. MONEY
• 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

22. CAPITAL
• 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

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

24. 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. (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).

26. WHY DOES AN ECONOMY FALL
SHORT OF EFFICIENT PERFECT
COMPETITION?
•Imperfect competition
•Externalities
•Public Goods

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

28. IMPERFECT COMPETITION
• It happens when a buyer or a seller affects
the price level
•Consequences of imperfect competition
1. When it happens society moves inside the PPF
2. 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:

30. •CAN ENGAGE PROGRESSIVE TAXATION
1. Taxing large income at a higher rate than small incomes
2. Impose heavy taxes on wealth
•CAN MAKE TRANSFER PAYMENTS LIKE AID
FOR ELDERLY, BLIND AND DISABLED PEOPLE
1. Can subsidize the consumption of low-income group

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

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

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

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

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

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

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

38. 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.
• So the supply curve slopes upward from left to
right.

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

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

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

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

43. 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

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