Chapter 1

Value of Studying
Economics
Elements of Economics

Definition of Economics
n

Economics as an allocation of wealth

Economics is a social science that deals with the
allocation of scarce resources to satisfy unlimited
human needs and wants
Allocation is a mechanism of distribution used by
society to address the needs and wants of citizens in
an environment characterized by scarcity of
resources (3 types: price system, command system,
traditional system)

n
n

Economics as creation and consumption of

wealth process of distribution and production
Economics as a science of choice optimization

Problems of Material Survival and

Progress
n
n
n

Relating economics to goals of society social

survival and social progress
Besides economics, these are answered by
culture and politics
In economics, the society is concerned with
wealth as a means of ensuring its material
survival and growth.
Economic development is not only expansion of
wealth but the equitable distribution of the fruits
of this wealth

Basic Economic Questions

n
n

What goods to produce?

Refers to a productive activity of any society.
The relative importance of human needs and
wants will have to be matched with the available
resources for production
The social mechanism for ranking the relative
importance of human needs and wants is:
Market system: the price people attach to these
goods and services
Planning system: the priorities made by the central
planning agency
Traditional society: the social norms

Basic Economic Questions

n
n

How many will be produced?

Concerned with the amount of goods and
services that will be produced by the society
based on human wants, extent of wealth and
technology used in production.
The system of allocation or mechanism for ranking
human wants is:
Market system: the price of the commodity
Planning system: The goals of society as formulated
by the state
Tradition

Basic Economic Questions

n
n

Who will produce it?

Refers to the amount of productive inputs to be
used based on the availability of resources as
well as on their relative productivities.
Market system: the price of the productive input is
compared with its productivity to determine whether it
will be employed or not
Planning system: the planning board decides to use
more labor regardless of their productivity
Traditional society: groups of people are assigned
specific social tasks

Basic Economic Questions

n
n

How will it be produced?

Focuses on the technology to be used.
Technology does not only describe the process
of combining resources but also refers to the
intensity of use of a resource relative with
another resource.
Market system: the market mechanism will evaluate
the relative cost of productive inputs and their
productivities
Planning system: the planning board decides to use
capital intensive techniques even if it is labor
abundant
Traditional society: traditional techniques > modern

Basic Economic Questions

For whom will it be produced?
n Consumption
n

Market

system: the portion allocated to

various citizens will depend on their relative
contributions in the production process
Planning system: redistribution as part of
social equity
Traditional society: based on the value they
give to the community

Conclusion
n

We have discussed the important role played by

the science of economics in answering the basic
questions for materials survival. Although the
study of economics may be defined in various
ways, consistently it is about how societies deal
with its wealth. Different societies across the
globe and over the centuries have various ways
of answering the questions related to production
and distribution activities of a society.