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THE KEY PRINCIPLES OF ECONOMICS
Principle of Opportunity cost
The Marginal Principle
Principle of Voluntary Exchange
Principle of Diminishing Results
The Real-Nominal Principle
The Principle of Opportunity Cost
The value of what we sacrifice when we choose one thing over the other.
The Marginal Principle
refers to an increase in the level of activity if the marginal benefit exceeds the marginal cost.
Marginal Benefit is a maximum amount a consumer is willing to pay for an additional
good or service.
Marginal Cost is the cost of producing one more unit of a good.
Principle of Voluntary Exchange
Based on consumers and producers acting in their self-interest.
Principle of Diminishing Results
Predicts that after some optimal level of capacity is reached, adding an additional factor of
production will actually result in smaller increases in output.
The Real-Nominal Principle
Real vs Nominal
Real value is nominal value adjusted for inflation.
Nominal value of time-series data such as gross domestic product and incomes is
adjusted by a deflator to derive their real values.
Gross Domestic Product (GDP)
Is a measurement that seeks to capture a country's economic output.
Countries with larger GDPs will have a greater amount of goods and services generated within
them, and will generally have a higher standard of living.
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Demand, Supply, and Equilibrium
The Basic Decision-Making Units
Firms
Entrepreneur
Household
The Circular Flow of Real Economic Activity
Interaction of firms and households in the input and output market.
Demand
an economic principle referring to a consumer's desire to purchase goods and services and
willingness to pay a price for a specific good or service.
Quantity Demanded
the total amount of a good or service that consumers demand over a given period of time.
Changes in Quantity Demanded Vs. Changes in Demand
Changes in the price of a product affect the quantity demanded per period.
Changes in any other factor, such as income or preferences, affect demand.
Demand Schedule.
a table that shows the quantity demanded of a good or services at different price levels.
Demand Curve
graphical representation of the relationship between the price of a good or service and the
quantity demanded for a given period of time.
Income
is money what an individual or business receives in exchange for providing labor.
Net worth
is the total wealth of all the non-financial and financial assets owned by an individual or
institution.
Normal goods
Goods whose demand increases as consumer incomes increase.
Inferior goods
Is a good whose demand decreases when consumer income rises, unlike normal goods, for
which the opposite is observed.
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Substitutes
are good that can serve as replacements for one another; when the price of one increases,
demand for the other goes up.
Perfect Substitutes
Perfect substitute can be used in exactly the same way as the good or service it replaces. This is
where the utility of the product or service is pretty much identical.
Complements, complementary goods
a product or service that adds value to another. In other words, they are two goods that the
consumer uses together.
Market demand
the sum of all the quantities of a good or service demand per period by all the households
buying in the market for that good or service.
Profit
cost of making the product - product’s selling price
Supply
decisions depend on profit potential.
likely to react to changes in revenues and changes in production cost.
The amount of revenue that a firm earns depends on the price of its product on the market is
and how much it sells.
Quantity Supplied
the amount of a product that a firm would be willing to sell for a price at a time.
Supply Schedule
a table that shows how much firms will sell products at alternative prices.
Supply Curve
a graph which illustrates how much products a firm will sell per period at different prices.
The Law of Supply
If the price and quantity rise, then the supply curve will rise.
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Determinants of Supply
The goods or service’s price
The costs of producing the good
Expected future prices
Number of suppliers
Technology
The state of nature
Market Supply
the sum of all the quantities of a good or service supplied per period by the firms selling in the
market for that good or service.
Market Equilibrium
The price at which the quantity demanded equals the quantity supplied.
The quantity bought and sold at the equilibrium price.
Excess Demand or Shortage
when quantity demanded exceeds quantity supplied at the current price.
Shortage
If the price is below the equilibrium price, consumers plan to buy more than firms plan to sell. A
shortage results, which forces the price higher, toward the equilibrium price.
Surplus
If price is above the equilibrium, firms plan to sell more than consumers plan to buy.
Change in Equilibrium
In market economies, prices are the signals that guide economic decisions and thereby allocate
scarce resources. For every good in the economy, the price ensures that supply and demand are
in balance.
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Monopoly, Price Discrimination, Market Entry, Monopolistic Competition, and Oligopoly
MONOPOLY
An economic structure where a specific person or enterprise is the only supplier of a particular
good.
Profit-maximizing output
Monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue
and marginal costs of producing an extra unit
WHY IS MONOPOLY INEFFICIENT?
Monopoly is an imperfect market that restricts output in attempt to maximize profit.
No presence of market competitors = challenging for a monopoly to self-regulate and maintain
competitive overtime.
PATENT
An exclusive right granted for invention It creates monopolies, but reward innovation.
3 Kinds of Patents
Utility
Design
Plant
PATENT IN THE PHILIPPINES
1924, “An Act to Protect Intellectual Property” Republic Act No. 8293. An Act Prescribing the
Intellectual Property Code and Establishing the Intellectual Property Office, Providing for Its
Powers and Functions, and for Other Purposes.
MONOPOLY POWER
A firm’s ability to charge a price higher than its marginal cost.
The ability to price at a supracompetitive level (pricing above what can be sustained in a
competitive market)
PRICE DESCRIMINATION
Charging different prices to different customers for selling the exactly the same good.
3 Kinds of Price Discrimination
1. First-degree - different prices for every unit consumed.
2. Second-degree - different prices for different quantities.
3. Third-degree - different prices for different consumer groups.
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MARKET ENTRY
A new firm bringing in products or associated products into the target market.
THE EFFECTS OF MARKET ENTRY
It is possible for additional firms to enter the market, driving down prices and profit. It is
because the output decision is based on a marginal principle.
When a second firm enters the market, the monopoly’s demand and marginal revenue
curves shift inward.
The firm’s price and output level will have to be adjusted in order to follow the marginal
principle.
MONOPOLISTIC COMPETITION
A type of imperfect competition such that many producers sell products that are differentiated
from one another as goods but not perfect substitutes (such as from branding, quality, or
location).
3 KEY CHARACTERISTICS OF MONOPOLISTIC
Large Number of Small Firms
Slightly differentiated products
Relative freedom of entry into and exit out of the industry
2 DURATIONS OF EQUILIBRIUM
Short Run Equilibrium
Long Run Equilibrium
SHORT RUN EQUILIBRIUM
The duration of time in which production can be increased only by increase in using variable
resources on increasing demand.
3 Conditions of Firms
Super Normal Profits supernormal profit is all the excess profit a firm makes above the
minimum return necessary to keep a firm in business.
Normal Profits occurs when the difference between a company’s total revenue and
combined explicit and implicit costs are equal to zero
Minimum Losses firm can also have loss of fixed cost in short-run. A firm in equilibrium
incurs losses when it does not cover the average cost.
LONG RUN EQUILIBRIUM
Long- run is the duration of time in which firms can change the level of their plan, new firms can
enter into the market and old firms can leave the market.
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PERFECT COMPETITION
a type of competitive market where there are numerous sellers selling homogeneous products
or services to numerous buyers.
IMPERFECT COMPETITION
an economic structure, which does not fulfill the conditions of the perfect competition.
OLIGOPOLY
A small number of large firms having all or most of the sales in an industry.
Ex: Petron, Caltex, & Shell Globe, PLDT, & Converge Honda, Toyota, & Suzuki
OLIGOPOLY AND PRICING
Together, these companies may control prices by colluding with each other (acting as a cartel)
Firms in an oligopoly set prices, whether collectively in a cartel or under the leadership of one
firm, rather than taking prices from the market. Profit margins are thus higher than they would
be in a more competitive market.
DUOPOLY
Two companies together own all, or nearly all, of the market for a given product or service.
Ex: Globe & PLDT-Smart (telecommunication industry)
OVERCOMING THE DUOPOLISTS’ DILEMMA
The duopolists dilemma is that although both firms would be better off if they chose the high
price, each firm chooses the low price.
Guaranteed price matching
Repeated Pricing Games with Retaliation for Underpricing
1. Duopoly Pricing
2. Grim-trigger Pricing
3. Tit-for-Tat Pricing
INSECURE MONOPOLIST AND ENTER DETERRENCE
An insecure monopolist fears the entry of a second firm, and could react in one of two ways:
1. A passive strategy: allow the second firm to enter the market
2. An entry-deterrence strategy: try to prevent the firm from entering
NATURAL MONOPOLY
Can produce the entire output for the market at a lower cost that what it would be if there were
multiple firms operating in the market.
An industry that offers lower price and only have one firm and no competition.
Ex: Meralco, PLDT, Microsoft etc.
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TYPES OF NATURAL MONOPOLY
Regulated Natural Monopoly - A legal monopoly offers a specific product or service at a
regulated price.
Unregulated Natural Monopoly - Would attempt to maximize profits by producing the quantity
of output where marginal revenue equals marginal cost.
Why is Natural Monopoly Regulated?
Because the industry is heavily regulated to ensure that consumers get fair pricing and proper
services.
ANTITRUST LAWS
3 Acts of Key Laws
The Sherman Act
The Federal Trade Commission Act
Clayton Act
Congress passed the Interstate Commerce Act in 1887.
TRUST
Refers to a group of businesses that team up or form a monopoly in order to dictate pricing in a
particular market.
ANTITRUST
It is a government action that is designed to promote competition among firms in the economy.
U.S Antitrust Policy Three Primary Goals:
1. Prevent monopolization of industries through illegal practices and, in some cases, to break up
monopoly firms.
2. Prevent mergers that reduce competition and raise prices, although mergers may be allowed
where there are significant efficiencies.
3. Prevent or monitor certain types of business practices, such as price fixing, tying arrangements,
price discrimination, and predatory pricing.
WHAT HAPPENS WHEN A COMPANY VIOLATES ANTITRUST LAWS? IF FOUND GUILTY;
1. Jail up to three years
2. Pay a fine up to $350,000
3. Under federal antitrust law corporations can also be charged with criminal violations.

Unformatted Attachment Preview

THE KEY PRINCIPLES OF ECONOMICS • • • • • Principle of Opportunity cost The Marginal Principle Principle of Voluntary Exchange Principle of Diminishing Results The Real-Nominal Principle The Principle of Opportunity Cost ➢ The value of what we sacrifice when we choose one thing over the other. The Marginal Principle ➢ refers to an increase in the level of activity if the marginal benefit exceeds the marginal cost. • Marginal Benefit – is a maximum amount a consumer is willing to pay for an additional good or service. • Marginal Cost – is the cost of producing one more unit of a good. Principle of Voluntary Exchange ➢ Based on consumers and producers acting in their self-interest. Principle of Diminishing Results ➢ Predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. The Real-Nominal Principle ➢ Real vs Nominal • Real value is nominal value adjusted for inflation. • Nominal value of time-series data such as gross domestic product and incomes is adjusted by a deflator to derive their real values. Gross Domestic Product (GDP) ➢ Is a measurement that seeks to capture a country's economic output. ➢ Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living. Demand, Supply, and Equilibrium The Basic Decision-Making Units • • • Firms Entrepreneur Household The Circular Flow of Real Economic Activity ➢ Interaction of firms and households in the input and output market. Demand ➢ an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Quantity Demanded ➢ the total amount of a good or service that consumers demand over a given period of time. Changes in Quantity Demanded Vs. Changes in Demand ➢ Changes in the price of a product affect the quantity demanded per period. ➢ Changes in any other factor, such as income or preferences, affect demand. Demand Schedule. ➢ a table that shows the quantity demanded of a good or services at different price levels. Demand Curve ➢ graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. Income ➢ is money what an individual or business receives in exchange for providing labor. Net worth ➢ is the total wealth of all the non-financial and financial assets owned by an individual or institution. Normal goods ➢ Goods whose demand increases as consumer incomes increase. Inferior goods ➢ Is a good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed. Substitutes ➢ are good that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect Substitutes ➢ Perfect substitute can be used in exactly the same way as the good or service it replaces. This is where the utility of the product or service is pretty much identical. Complements, complementary goods ➢ a product or service that adds value to another. In other words, they are two goods that the consumer uses together. Market demand ➢ the sum of all the quantities of a good or service demand per period by all the households buying in the market for that good or service. Profit ➢ cost of making the product - product’s selling price Supply ➢ decisions depend on profit potential. ➢ likely to react to changes in revenues and changes in production cost. ➢ The amount of revenue that a firm earns depends on the price of its product on the market is and how much it sells. Quantity Supplied ➢ the amount of a product that a firm would be willing to sell for a price at a time. Supply Schedule ➢ a table that shows how much firms will sell products at alternative prices. Supply Curve ➢ a graph which illustrates how much products a firm will sell per period at different prices. The Law of Supply ➢ If the price and quantity rise, then the supply curve will rise. Determinants of Supply • • • • • • The goods or service’s price The costs of producing the good Expected future prices Number of suppliers Technology The state of nature Market Supply ➢ the sum of all the quantities of a good or service supplied per period by the firms selling in the market for that good or service. Market Equilibrium ➢ The price at which the quantity demanded equals the quantity supplied. ➢ The quantity bought and sold at the equilibrium price. Excess Demand or Shortage ➢ when quantity demanded exceeds quantity supplied at the current price. Shortage ➢ If the price is below the equilibrium price, consumers plan to buy more than firms plan to sell. A shortage results, which forces the price higher, toward the equilibrium price. Surplus ➢ If price is above the equilibrium, firms plan to sell more than consumers plan to buy. Change in Equilibrium ➢ In market economies, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. Monopoly, Price Discrimination, Market Entry, Monopolistic Competition, and Oligopoly MONOPOLY ➢ An economic structure where a specific person or enterprise is the only supplier of a particular good. Profit-maximizing output Monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit WHY IS MONOPOLY INEFFICIENT? ➢ Monopoly is an imperfect market that restricts output in attempt to maximize profit. ➢ No presence of market competitors = challenging for a monopoly to self-regulate and maintain competitive overtime. PATENT ➢ An exclusive right granted for invention It creates monopolies, but reward innovation. 3 Kinds of Patents • • • Utility Design Plant PATENT IN THE PHILIPPINES ➢ 1924, “An Act to Protect Intellectual Property” Republic Act No. 8293. An Act Prescribing the Intellectual Property Code and Establishing the Intellectual Property Office, Providing for Its Powers and Functions, and for Other Purposes. MONOPOLY POWER ➢ A firm’s ability to charge a price higher than its marginal cost. ➢ The ability to price at a supracompetitive level (pricing above what can be sustained in a competitive market) PRICE DESCRIMINATION ➢ Charging different prices to different customers for selling the exactly the same good. 3 Kinds of Price Discrimination 1. First-degree - different prices for every unit consumed. 2. Second-degree - different prices for different quantities. 3. Third-degree - different prices for different consumer groups. MARKET ENTRY ➢ A new firm bringing in products or associated products into the target market. THE EFFECTS OF MARKET ENTRY ➢ It is possible for additional firms to enter the market, driving down prices and profit. It is because the output decision is based on a marginal principle. • When a second firm enters the market, the monopoly’s demand and marginal revenue curves shift inward. • The firm’s price and output level will have to be adjusted in order to follow the marginal principle. MONOPOLISTIC COMPETITION ➢ A type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). 3 KEY CHARACTERISTICS OF MONOPOLISTIC • • • Large Number of Small Firms Slightly differentiated products Relative freedom of entry into and exit out of the industry 2 DURATIONS OF EQUILIBRIUM • • Short Run Equilibrium Long Run Equilibrium SHORT RUN EQUILIBRIUM ➢ The duration of time in which production can be increased only by increase in using variable resources on increasing demand. 3 Conditions of Firms • Super Normal Profits – supernormal profit is all the excess profit a firm makes above the minimum return necessary to keep a firm in business. • Normal Profits – occurs when the difference between a company’s total revenue and combined explicit and implicit costs are equal to zero • Minimum Losses – firm can also have loss of fixed cost in short-run. A firm in equilibrium incurs losses when it does not cover the average cost. LONG RUN EQUILIBRIUM ➢ Long- run is the duration of time in which firms can change the level of their plan, new firms can enter into the market and old firms can leave the market. PERFECT COMPETITION ➢ a type of competitive market where there are numerous sellers selling homogeneous products or services to numerous buyers. IMPERFECT COMPETITION ➢ an economic structure, which does not fulfill the conditions of the perfect competition. OLIGOPOLY ➢ A small number of large firms having all or most of the sales in an industry. Ex: Petron, Caltex, & Shell Globe, PLDT, & Converge Honda, Toyota, & Suzuki OLIGOPOLY AND PRICING ➢ Together, these companies may control prices by colluding with each other (acting as a cartel) ➢ Firms in an oligopoly set prices, whether collectively in a cartel or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market. DUOPOLY ➢ Two companies together own all, or nearly all, of the market for a given product or service. Ex: Globe & PLDT-Smart (telecommunication industry) OVERCOMING THE DUOPOLISTS’ DILEMMA ➢ The duopolists dilemma is that although both firms would be better off if they chose the high price, each firm chooses the low price. • Guaranteed price matching • Repeated Pricing Games with Retaliation for Underpricing 1. Duopoly Pricing 2. Grim-trigger Pricing 3. Tit-for-Tat Pricing INSECURE MONOPOLIST AND ENTER DETERRENCE ➢ An insecure monopolist fears the entry of a second firm, and could react in one of two ways: 1. A passive strategy: allow the second firm to enter the market 2. An entry-deterrence strategy: try to prevent the firm from entering NATURAL MONOPOLY ➢ Can produce the entire output for the market at a lower cost that what it would be if there were multiple firms operating in the market. ➢ An industry that offers lower price and only have one firm and no competition. Ex: Meralco, PLDT, Microsoft etc. TYPES OF NATURAL MONOPOLY • • Regulated Natural Monopoly - A legal monopoly offers a specific product or service at a regulated price. Unregulated Natural Monopoly - Would attempt to maximize profits by producing the quantity of output where marginal revenue equals marginal cost. Why is Natural Monopoly Regulated? ➢ Because the industry is heavily regulated to ensure that consumers get fair pricing and proper services. ANTITRUST LAWS 3 Acts of Key Laws • The Sherman Act • The Federal Trade Commission Act • Clayton Act Congress passed the Interstate Commerce Act in 1887. TRUST ➢ Refers to a group of businesses that team up or form a monopoly in order to dictate pricing in a particular market. ANTITRUST ➢ It is a government action that is designed to promote competition among firms in the economy. U.S Antitrust Policy Three Primary Goals: 1. Prevent monopolization of industries through illegal practices and, in some cases, to break up monopoly firms. 2. Prevent mergers that reduce competition and raise prices, although mergers may be allowed where there are significant efficiencies. 3. Prevent or monitor certain types of business practices, such as price fixing, tying arrangements, price discrimination, and predatory pricing. WHAT HAPPENS WHEN A COMPANY VIOLATES ANTITRUST LAWS? IF FOUND GUILTY; 1. Jail up to three years 2. Pay a fine up to $350,000 3. Under federal antitrust law corporations can also be charged with criminal violations. Name: Description: ...
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