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Time allotment: 3 Hours
Objectives: at the end of the lesson, you are expected to

Trace the evolution of the word economics though several language;

Give a standard definition of the term economics;
Enumerate related words to the key terms in the definition of economics;
Generate an original definition for the term economics;
Explain the history behind the household management in detail;
Summarize the reason why student have to study the course Economics in

these modern times;

7. Outline the economics method in proper sequence;
8. Summarize the limitation of economics models;
9. Explain the various approaches to economic thinking ; and
10. Differentiate microeconomics from macroeconomics as regards their
aspects of




Several authors define the term economics in various ways. The American
Heritage Dictionary, for example, defines this term as follows:
Economics is from the Greek world oikonomia or oikonomos which means
management of household: oikos (house) + nomos (managing).
In the modern world, economics, means

1) The careful or thrifty use or management of resources, as of income,
materials, or labor; or
2) The management of resources of a country, community, or business.
Somebody interested in the evolution of the word economics may inspect the

oikos + nomia

ekonomiya / ekonomya
Economics is a social science that deals with the efficient allocation of scare
resources to satisfy mans unlimited wants and needs.
At the heart of the study of economics is the irony found in the definition of
economics. How do we reconcile something limited (scarce) against something
unlimited? How do we make do with something finite (scarce) against something
infinite (unlimited)?
This is why economics is necessary science to be studied. There remains a
great need to study how man behaves, particularly on how he decides given
several choices. The study of economics is supposed to help man made good
decision and better judgments. One of the simplest tools that can be used in the
location of scarce resources is the Production Possibilities Curve and Frontier (PPC /
PPF) discussed in the next module.
The modern understanding of the word economics is that a household
But what is really the concept behind the term economics? For one to
understand how the entire concept and managing ones household ever come into
being, one must be able to trace the simplest timeline of mans evolution, and
consequently, the challenges of managing ones environment.
Scientist believes that prior to 11,000 B.C. the temperature of the word was
so radical it was change several degrees below zero in a span of a few weeks to a
few years. This made survival extremely difficult for many species since the
adjustment period was variably inconsistent.
However, it is also believe that after 11,000 B.C. somehow the words
temperatures started to slowly stabilize and slowly warm. This allowance the
melting of the polar ice caps, thereby creating fresh water bodies. These bodies of
water, in turn, paved the way for the promulgation of many species, and

guaranteed their survival. We all know that the common denominator for species to
exist is the presence of water. Man, was one of these species.
Paleontologist and anthropologist were able to find relics of our ancestral
nomads from 9,000 B.C, these nomads were know to roam large territories and
consume whatever they can in their immediate environments. Usually traveling in
tribes or clans, they had to employ simple delegation techniques in order to
survive. Men know to make weapons, hunt for food and look for viable shelters.
Women were known to take care of children, appropriate food, make clothing and
maintain their shelters.
These nomadic activities of gathering resources and delegation task among
members of the tribe or the clan are the simplest examples of managing a
household. It was usually the oldest (wisest) member of the tribe or clan who was
the recognize leader of these group. In other clans, it was strongest male who
became the leader, these leaders, in turn, had the ultimate responsibility of
managing the households needs.
For 3,000 years, our ancestral nomads roamed the earth. It came to a point
however, as man was slowly developing his intelligence, that the notice one
important fact about nature: that even though all the resources in one area has
already been utilized the consumed, in the same flora and fauna that have been
use up returned to the original states, or were replace after being left untouched
for quit sometimes. The nomad started rationalizing this phenomenon. He later on
found out that the key to survival and sustaining an entire ecosystem was
freshwater bodies. Water supported all life in an areas; its absence spells the
definite extinction of species in the areas.
The major characteristic of nomadic activities was self sufficiency providing
for everything they need without depending on other tribes or clans. The modernday economic term for self - sufficiency (and independence) is autarky. These
nomad had a find their own food, shelter, clothing, medicine, etc. Men were known
to be food providers and very good hunters. Women were known take care of
shelter, and made clothing from hunted animals. The eldest of the tribe were
known to be medicine men or shamans.
In 6,000 B.C. these nomads started setting down near fresh water bodies.
Man started to build more permanent shelters, started livestock activities, learned
the techniques of food production, and cultivation and irrigation.
The first known settlers were the Chinese along the Yang Tze river delta,
making them the oldest known civilization, and the second most populous country
Settlers in the Middle East came around 2,800 B.C. along the Tigris and
Euphrates river. These rivers today are found in modern day Iraq.

The table below approximates the early transition of man from early nomadic
tribes into modern civilization.
11,000 B.C

9,000 B.C.
6,000 B.C.
3,000 B.C.
2,800 B.C.


(ice age) polar ice caps started to melt,
earliest known start of the creation of
bodies of water in the world.
Earliest traces of nomadic activity
Earliest known civilization
(Tigris and Euphrates)
Next known civilization
(India, Indus river)
Middle East civilizations
( Tigris and Euphrates)

Some major characteristics of civilization are the following:

a) A more or less permanent territory;
b) Food production though field cultivation (ager cultural ) or
c) Early practices of specialization (food producers, hunters,
fishing, soldiers, warehouse and granary keepers, blacksmith,
pottery, etc.);and
d) An early system of government.
Before we go on further, it is important to address the questions, why do we
need to study economics? Why is it included as basic subject I all college courses in
the Philippines? Answering these is as basic as asking. Why we study Science?
Math? English and Filipino?
The answer to all of these is quite the same and obvious. We study these courses
because they form intrinsic part of our everyday living. The same is true with
economics. It is so basic and so evident in our everyday life, and yet not too many
appreciate it nor understand it. This is why we try our best to understand the world
a little better and make better decisions by studying Economics.
After examining why we study economics and what possible careers are
available to all who pursue the course, let us now discuss how it is studied.

Economics uses standard method of analysis, which one must know to fully
comprehend and appreciate its concepts and discussions. The method is based on a
blend of both the scientific method and policy analysis.
The Scientific Method
The scientific method is the process by which the scientists, collectively and
over time; endeavor to construct an accurate (i.e. reliable, consistent and non
arbitrary) representation of the world.
Recognizing that personal and cultural beliefs influence both our
interpretations of cultural phenomena, we aim through the use of standard
procedures and criteria to minimize those influences when developing a theory. As a
famous scientist once said, Smart people (like smart lawyers) can come up with
very good explanations for mistaken points of view.
In summary, the scientific method attempts to minimize the influence of bias
or prejudice in the experimenter when testing a hypothesis or theory.
The scientific method has four steps:
1. Observation and description of a phenomenon or group of phenomena.
2. Formulation of a hypothesis to explain the phenomena.
3. Use of the hypothesis to predict the existence of other phenomena, or to
predict quantitatively the results of new observations.
4. Performance of experimental tests of the predictions by several
independent experimenters and properly performed experiments. If the hypothesis
is supported by experiments, it may come to be regarded as a theory or law of
Common Mistakes in Applying the Scientific Method
As stated earlier, the scientific method attempts to minimize the influence
the scientists bias on the outcome of an experiment. That is, when testing a
hypothesis or a theory, the scientist may have a preference for one outcome or
another, and it is important that this preference not affect the results or his
interpretation. The most fundamental error is to mistake the hypothesis of an
explanation of a phenomenon, without performing experimental tests. Sometimes,
common sense and logic temp us into believing that no test is needed. There
are numerous examples of this, dating from the Greek Philosophers to the present

Another common mistake is to ignore or rule out data which do not support
the hypothesis. Ideally, the experimenter is open to the possibility that the
hypothesis is correct or incorrect. Sometimes, however, a scientist may have a
strong belief that the hypothesis is true (or false), or feels internal or external
pressure to get a specific result. In that case, there may be a psychological
tendency to find something wrong such as systematic effects- with data which
do not support the scientists expectations, while data which do agree with those
expectations may not be checked as carefully. The lesson is that all data must be
handled in the same way.
Another common mistake arises from the failure to estimate quantitatively
systematic errors (and all errors). There are many examples of discoveries, which
experimenters missed whose data contained away as a systematic background.
Conversely, there are many examples of alleged new discoveries which later
proved to be due to systematic errors not accounted for by the discoverers.
In the field where there is active experimentation and open communication
among members of the scientific community, the biases of individuals or groups
may be avoided because experimental tests are repeated by different scientists
who may have different biases. In addition, different types of experimental setups
have different sources of systematic errors. Over a period spanning a variety of
experimental tests (usually at least several years) a consensus
Policy Analysis
develops in the community as to which experimental results have stood the
test of time.
A policy is a course of action or interaction chosen by public authorities to
address a given problem or interrelated set of problems. It is anchored on a set of
values regarding appropriate public goals and a set of beliefs about the best way to
achieve those goals and a set of beliefs about the best way to achieve those goals.
The idea of public policy assumes that an issue is no longer a private affair.
Policy analysis is basically an approach to evaluate policies in the public
Common approaches are to first define the problem , define evaluation
criteria, identify all alternatives, evaluate alternatives, and then choose the best
Policy analysis is similar to program evaluation in trying to determine whether
something works, but the former looks at policy rather than programs. Policy
analysts can come from many backgrounds including sociology, psychology,

economics, political science , public policy, public administration or many other
The Economic Method
The economic method consists of five steps, as follows:
1. State the problem. This is a very important step in economic thinking.
Being able to properly define the problem allows analysts to narrow down
and focus on the specific aspect not needs to be solved.
2. Apply the relevant economic model. The purpose of an economic model is
to make predictions of what will happen given the phenomenon being
studied. Economic models usually consists of, but are not limited to,
graphs, charts, tables and figures. These models help economists analyze
phenomena, generate abstracts and try to simplify reality.
3. Identify solutions. This important step deals more on requiring the analysts
or economist to list all possible solutions to the given problem.
4. Evaluate solutions. The step considers the various advantages and
disadvantages of the identified solutions in item 3 above. It is in this
stage that the work of an economist begins to overlap that of the policy
maker, who also evaluates solutions. Some key considerations include
costs versus benefits, and possible side effects and spillover effects of the
5. Select and implement a solution. In the selection and implementation
stage, it is the policy maker and not the economist that does these.
Although the economist sometimes also participates in this stage, he is
usually more of an adviser than an implementer.
Common Pitfalls in Using the Economic Method
In applying the methodology, the economist usually commits some pitfalls:
1. Biases and Preconceptions the use of personal judgments in the analysis
of the facts.
2. Loaded Terminologies employing long definitions for some concepts and
emotionally loaded terminologies.
3. Fallacy of Composition assuming that what is true to the parties is also
true for the whole.

4. Post hoc, ergo propter hoc fallacy- presuming that if one event precedes
another , it necessarily is the cause of the latter.
5. What is true for depression is true to prosperity fallacy in using similar
theories and policies in dealing with varying economic situations.
In the light of the methodology, it can be gleaned that the economist has two
main functions: a. to analyze, as objectively as possible, and b. to plan, taking into
account that its purpose is simply to recommend to decision makers.
Although economics uses very scientific approach and is considered the
oldest (and the queen) of social sciences, the models in economics are not perfect ,
thus having its own inherent limitations. Some of these limitations are:
1. The liberal use of assumptions. Although these assumptions usually have
solid bases, we cannot guarantee that these assumptions are error-free. It is
possible that other factors were not considered when the assumption was made.
2. Ceteris Paribus. A major assumption in all economic models used by
economists is embodied in this Latin phrase, which means everything stands still or
everything else is held constant. For models and laws to hold true, it should be free
from the influence of other factors. In reality, however, it is very difficult to isolate
an event from another event and try to establish a relationship between them.
3. Short run and Long run. It cannot also be denied that predictions made in
economics could have different short run (short term) and long run (long term)
effects. Short run means the effect in the immediate future following the occurrence
of a phenomenon. Long run means the effect in the continuing future, beyond the
immediate period.
4. The use of graphs. Graphs are often used in economics to explain the
behavior of individual consumers, firms, industries and economies. Although these
graphs ideally simplify analyses of studied phenomena, they are usually limited to
the variables incorporated into the graphs. In many cases, only two variables may
be studied at a time, using the Cartesian plane. In some instances, variables could
not immediately be quantified and thus, could not be plotted in a graph.
Given these limitations of economic models, it is important to remember that
economics is an attempt to put broad concepts into a capsule and simplify reality
into an abstract models. These models have guided many policy makers for several
centuries, and although economics is the oldest known social science today, we
could not discount the fact that it is still an evolving science. The numerous
economists still alive up to today evidence this truth.

Before we end our discussion in this module, let us briefly take a look at the
various approaches to economic thinking- the positive economic approach and the
normative economic approach.
Positive economics is that approach used in economics that tells us what
is. It is factual, objective and is used to describe the occurrence of a phenomenon.
Usually, positive statements in economics are quantified. The positive economic
approach is more descriptive than predictive in its usage.
Normative economics, on the other hand, is that approach, which tells us
what should be or what ought to be. This is more subjective and more judgmental
than positive economics. In practice, normative statements are far more difficult to
quantify. In contrast, the normative economic approach is more predictive than
descriptive in its usage.
The analysis of economic situations, behaviors, or problems can be done
through a micro or macro perspective, the two branches or methods of exposition of
the science of economics. The distinction between them can best be explained by
comparing their main features, presented in the table below.
Macroeconomics is the study of the relationship of the broad economic
sectors making up the entire national or global economy. Microeconomics, on the
other hand , studies decision-making of individual economic units such as one
producer or one household.
Macroeconomics studies aggregate supply and aggregate demand and
uses average , general absolute price levels; Microeconomics studies individual
supply and individual demand and uses relative prices.
There are six distinct aspects of the two approaches, thus:
Aspect of Study



Units of the Study

Individual consumers,
producers, workers, traders,

Aggregate units such

International economy.


Optimization and
maximization of personal
gains and profits.

maintenance of high levels of
production and employment.


Micro activities emerge on






consumers choices


growth depend

upon the


This approach is functional

under static conditions and
small time intervals.

This approach is functional

under dynamic conditions


It is concerned with small

adjustments, for which the
application of a marginal
method is suitable.

dynamic changes inviting the
mathematical techniques.


Micro adjustments in resource

allocation are made in
response to changes in
relative prices of goods and
services. The Aggregate level
of income or total economic
activities is considered to be

Macro approach attempts to

find the conditions of longterm expansions in output as
a whole, assuming relative
prices as constant (or

This distinction between micro and macroeconomics as presented above is

only a matter of theoretical convenience. The two approaches are complementary
and not competitive; one cannot consider these to be watertight compartments.
Moreover, the distinction is to be understood as relative in nature. The problems of
a city municipal corporation are macro in nature as compared to those individual
citizens, but a city unit is micro as when compared to the state, and the state unit is
micro as compared to the nation and the national unit can be considered micro in
the context of the global economy. Again all economic problems and activities,
whether micro or macro, are ultimately connected with making a choice and
optimization. They emerge out of and or concerned with human behavior.
Household Management
Indus River

Ager Cultura

Ice Age

Tigris and Euphrates Rivers


Economic Method

Scientific Method
Ceteris Paribus




Long Run

Positive Economics



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Dobson, Stephen and Susan Palferman. Introduction to Economics. London:
Oxford University Press, 1999.
Henderson, J. Vernon and William Poole. Principles of Economics. Lexington,
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