ECONOMICS

Economic thoughts of the Greek

For Plato:
First- it increases output and improves the welfare of the individual in society by
producing more goods and services.
Second- it is a component of justice.
For Xenophone: (a student of Socrates)
Viewed division of labor and the allocations of resources within LATIFUNDA as a way
of self-sufficiency. He said that with efficient management of this large estate, it will
eventually lead to self-sufficiency. He termed this kind of management as
OECONOMICUS
For Aristotle:
Divided the concerns into 2 separate fields:
OIKONOMIKS- dealt with the production and consumption of goods with the
production and consumption of goods. It was an analysis of how decisions were made
regarding the mgt. of resources.
CHREMATISTIKS- encompassed the activities of money-making as well as some
aspects of production. It studied human activities involved with wealth-getting which
could be natural or unnatural.
THE RISE OF MERCANTILISM
Mercantilism- an economic theory that holds the prosperity of a nation depends
upon its supply of capital and that the global volume of trade is unchangeable.
Economic assets, or capital are represented by bullion (gold,silver and trade value)
held by the state, which is best increased through positive balance of trade with
other nations (exports minus imports).
-Suggests that the ruling govt should advance these goals by playing a protectionist
role in the economy by encouraging exports and discouraging imports, especially
through the use of tariffs. The economic policy based upon these ideas is often called
mercantile system.
THE PHYSIOCRATS
-are groups of economists who believed that the wealth of the nation is derived solely
from the value of land agriculture or land development.
THE LAISSEZ-FAIRE THEORY
-is a French phrase which means let do from the French diction first used by the
18th century physiocrats as an injunction against government interference with trade,
it became used as a synonym for strict free market economics during the early and
mid 19th century.

THE INDUSTRIAL REVOLUTION AND CLASSICAL ECONOMICS

-Following Adams Smith Wealth of Nations, classical economists such as David
Ricardo and John Stuart Mill examined the ways the landowners, capitalists and
laboring class produce and distribute national riches. In the midst of the London
slums, Karl Marx castigated the capitalists system of the exploitation and alienation
he saw around him, before neo-classical economics in a new imperial era sought to
erect a positive, mathematical and scientifically grounded field above normative
politics.
ADAM SMITH
- considered as the founder of classical school, constructed an explanation on how
social behavior is regulated. His view of economics was shaped by the world he
observed. He saw a world where each person sought their own self interest but was
constrained by morality, markets and government.
DAVID RICARDO (The Theory of Comparative Advantage)
-most notable work is his Principles of Political Economy and Taxation. He opens the
first chapter with a statement of the labor theory of value. In the next chapter, he
demonstrated that prices do not correspond to this value. He retained the theory,
however as an approximation. He continued to work on his value theory to the end of
 his life. He believed that wages should be left to free competition, so there should be
no restrictions on the importance of agricultural products from abroad.
THOMAS ROBERT MALTHUS AND THE PRINCIPLE OF POPULATION
-Malthus largely developed his view interaction to the optimistic opinions of his father
and his associates notably, Jean Jacques Rousseau. In his work An Essay on the
Principle of Population, he made the famous production that the population would
outrun food supply, leading to the decrease in the flood per person.
MARGINALIST SCHOOL
-Classical Economist theorized that prices are determined by the cost of production.
Marginalist economists emphasized that prices also depends upon the amount of
consumer satisfaction provided by individual goods and services.
MARXIST ECONOMICS
-thought comes from the work of German economist Karl Marx.
The Capital was published in Germany in 1867. He focused on the labor theory of
value in what he considered to be the exploitation of the workers by the capitalists.
Marx proclaimed the capitalism was doomed and would soon be followed by the
business depressions, revolutionary upheavals and socialism.
THE NEO CLASSICAL ECONOMICS
-Neo Classical Economist popularized the term ECONMKICS as a substitute for the
earlier termed political economy.
-Systematized supply and demands as joint determinants of price and quantity in the
market equilibrium, affecting both the allocation of output and the distribution of
income.
-It dispensed with the labor theory of value inherited from classical economics in
favor of the marginal utility theory of value on the demand side and a more general
theory of costs on the supply side.
ALFRED MARSHALL
-dominant figure in British economics from about 1890 until his death in 1924. His
specialty was microeconomics-the study of individual market and industries, as
opposed to the study of the whole economy.
KEYNESIAN ECONOMICS
-published the great work The General Theory of Employment Interests of money
-Keynes famously remarked this long run is misleading guide to current affairs. In
the long run we are dead. Economists set themselves too easy, too useless a task if
in tempestuous season they can only tell us that when the storm is long past the
ocean is flat again.

THE WORLD OF ECONOMICS AND ITS SIGNIFICANCE

Economics-may appear to be the study of complicate tables and charts, statistics and
numbers, but more specifically, it is the study of what constitutes rational human behavior in
the endeavor to fulfill needs and wants.
-comes from the Greek word OIKANOMIA meaning household management.
Definitions are as follows:
*Fajardo, it is the proper allocation and efficient use of available resources for the
maximum satisfaction of human wants.
* Samuelson, it is the study of how societies use scarce resources to produce
valuable commodities and distribute them among different people.
* Nordhaus, it is the science of choice. It studies how people choose t use scarce
resources or limited productive resources (labor, equipment, technical, knowledge) to
produce various commodities and to distribute these commodities to consumption.
*Sicat, as a scientific study which deals with how individuals and society in general
make choices.
*Castillo, as the study of how man could best allocate and utilize the scarce resources
of society to satisfy his unlimited want.
*Webster, as a branch of knowledge that deals with the production, distribution and
consumption of goods and services.
Importance of Economics
-Economics is imp0ortant in order to understand problems facing the citizen and the
family, to help government promote growth and improve the quality of life while
avoiding depression and inflation and to analyze fascinating patterns of social
behavior.
The Nature of Economics
*Economics is a science. A science is a body of systematic knowledge built upon by
conscious efforts., arrived after a long series of observations and experimentations.
Made up of different explanations, called theory. Facts and events about our material
life.
*Economics is classified as a social science because it deals with the study of mans
life and how he lives with other men.. concerned with human beings and his behavior.
Interdependent with other sciences like Psychology, the science of mind. History, the
science that records and explains past events; Sociology, the science that deals with
the development of society; Political Science, the science of government; Geography,
the science that determines the main resources of a region. Religion, traditions and
belief can discourage or encourage economic development.

The Economic Environment and its process

Branches of Economics
Macroeconomics- deals with the economic behavior of the whole economy or its
aggregates such as government, business and household.
Concerned with the discussion of topics like gross national product, level of
employment, national income, general level of prices, total expenditures,etc. It is also
known as employment and income analysis.

Microeconomics- deals with the economic behavior or individual units such as the
consumers, firms and the owners of the factors of production.
Divisions of Economics
1 Production-refers to the process of producing or creating goods needed by the
households to satisfy their needs. The factors of production are called inputs and the
goods and services that have been created are called outputs of production.

2 Distribution- refers to the marketing of goods and services to different economic

outlets for allocation to individual consumers. In monetary terms, this is the
allocation of income among persons or households.

3 Exchange- process of transferring goods and services to a person or persons in

return for something. At present, the medium of exchange used in the market is
money.

4 Consumption- refers to the proper utilization of economic goods. However, goods

and services could not be utilized unless you pay for it.

5 Public Finance- pertains to the activities of the government regarding taxation,

borrowings, and expenditures. Deals with the efficient use and fair distribution of
public resource in order to achieve maximum social benefits.

Tools of Economics
1 Logic- a science that deals with sound thinking and reasoning. Facts and proofs
should be presented; otherwise such reasoning will be clouded by an iota of doubt.
With the wise application of logic, one may be able to arrive at a conclusion.

2 Mathematics- a science that deals with numbers and their operations. To quantify
population, income, national product, aggregate number of firms, etc.

3 Statistics- a branch of Mathematcs dealing with the analysis and interpretation of

numerical data. Deals with the process of collectiong, tabulating and analyzing data
to test the validity of a certain hypothesis.
THE INPUTS OF PRODUCTION
The Economic Resources
1 Land- consist of free gifts of nature which includes all natural resources above, on,
and below the ground such as soil, rivers, lakes, oceans, forests, mountains, mineral
resources and climate.

2 Labor- termed as human resources. Refers to all human efforts, be it mental or

physical that help to produce want satisfying goods and services.

3 Capital- a finished product, which is used to produce goods. Consists of all man-
made aids to further the production process such as tools, machinery and buildings.
Serves as an investment.

4 Entrepreneur- a French word meaning enterpriser. Is the organizer and coordinator

of the other factors and production: land labor and capital. He is one who is engaged
in economic undertakings and provides society with goods and services it needs.

5 Foreign Exchange- refers to the dollar and dollar reserves that the economy has.

Classification of Inputs
1 Fixed Inputs- are inputs that do not change with the volume of production. This
means, whether you produce or not, these factors of production are unchanged. E.g
Land and capital.

2 Variable Inputs- inputs change in accordance with the volume of production. No

production, no variable inputs. E.g labor and entrepreneur.

Production Function
-states the relationship between the inputs used and the outputs produced.
Y= f(x)
Significance of the Production Function
Stage 1- there is an increasing rate of production.
Stage 2- there is a decreasing rate of production.
Stage 3- total output decreases even though inputs continue to increase. This is called the
stage of negative production. Law of Diminishing Return.
Law of Diminishing Return
Also known as the Law of Diminishing Marginal Productivity. It is a basic law of
economics and technology. The law states that: when successive units of a variable
input (like farmers) work with a fixed input (like one hectare of land), beyond a
certain point, the additional product (output) produced by each additional unit of
variable input decreases.

THE PRODUCTION POSSIBILITY FRONTIER (PPF)

PPF- represents the point at which an economy is most efficiently producing its goods and
services, and therefore allocating its resources in the best way possible.
Importance of PPF
It illustrated the definition of economics as the science of choosing what goods to
produce.

It provides a rigorous definition of scarcity. It shows the outer limit of producible

goods dictated by the law of scarcity. Scarcity is a reflection of the limitation on our
living standards imposed by the PPF.

It can also illustrate the three basic problems o economic life- what how and for
whom.

It can also illustrate the general point that we are always choosing among limited
opportunities.

Opportunity Cost- is the value of what is foregone in order to have something else.
THE ECONOMIC MODELS AND THE FLOW OF PRODUCTION
The Economic System
-simply means the organization of economic society with reference to the production,
exchange, distribution and consumption of wealth
-is the way the economic units are organized to make decisions on the economic problems of
society
The Basic Economic Problems
Scarcity-refers to the tension between our limited resources and our unlimited wants and
needs.
1 What to produce- the system must determine the desires of the people. Goods and
services to be produced are based on the needs of the consumers.

Factors to consider in producing goods and services:

Availability of resources

Physical Environment

Customs and traditions of the people

2 How much to produce- The system must know how much of the chosen goods
should be produced. It must determine how many of these buyers are willing to but
the goods and services produced by the economy.

3 How to produce- Equally important is the systems task of selecting the proper
combination of economic resources in producing the right amount of output.

4 For whom shall goods and services be produced?- has something to do with the
problem of distribution.

Specialization and Comparative Advantage

By using specialization, a country, instead of dividing up its resources could
concentrate on the production of the one thing that relative to itself, it can do best.

Determining how countries exchange goods produced by a comparative advantage.

The best for the best is the backbone of international trade theory. This is
considered an optimal allocation of resources, whereby economies, in theory would
no longer be lacking any of their needs.

Absolute Advantage
A country or an individual can produce more than another country, even though both
have the same amount of inputs.

Types of Economic System

1 Traditional Economy- also knows as the subsistence economy. In this type of
economy, people produce goods and services for their own consumption. Decisions
are based on customs and traditions and the production techniques are outmoded
and sometimes obsolete.

2 Command Economy- under this system, the government takes hold of the
economy of the State. The govt does policy formulation, economic planning and
decision-making.

3 Market System- business enterprises are owned and controlled by private

individuals. One of the major features of this system is free enterprise meaning that
any individual can engage in any enterprise.

4 Mixed Economy- mixture of different types of economy. Private and Government.

The Circular Flow of Economic Activities

Related Economic Concepts:
 1 Flow- quantity measured over a particular period of time. E.g income

2 Stock- quantity measured at a given point in time. E.g wealth

3 Circular Flow- movement of economic activities that is taking place in the economic
system.

4 Market- a place where buyers and sellers interact together and are eventually
engaged in exchange.

5 Economic Resources- factor of production or inputs to production (land, labor,

capital)

6 Basic Needs- needs of a man required for his survival like food, clothing and shelter.

7 Goods- yields satisfaction to someone. Tangible in form of material goods, Intangible

in form of services.

Classification of Goods (accdg. To use) :

Consumer Goods- goods that are ready for consumption

Capital Goods- goods that are used in furtherance of production

Essential goods- are goods used to satisfy the basic needs of man

Luxury goods- are goods that give something or add pleasure and comfort, but not
absolutely necessary.

In general, goods are classified as:

Economic goods- have values or price attached to it
Free goods- need no payment

OUTFLOWS AND INFLOWS OF THE CIRCULAR FLOW

The Outflows and Inflows

Factors that affect the individual consumer not to utilize his income:

Savings- an income not spent for consumption. Represent a non-use of output.

Taxes- a compulsory contribution to support the government.
Imports- goods bought by the Philippines from other countries.

An outflow is a flow of income that goes out of the circular flow.

To bring back the funds to the circular flow:

Investment- it constitutes a spending decision that results in the use if output and
productive resources.
Government Expenditures- the govt. collects taxes to defray expenses or its
infrastructure projects and other economic development projects.
Exports- products purchased by the country from other countries are reciprocated by
foreign countries by buying our products.

Deflation- too much outflows of money in our economy

Inflation- too much inflows of money in our economy

ECONOMIC STRATEGIES

Objectives of Monetary Policy

 To maintain internal and external monetary stability in the Phils. And to preserve the
international value of the peso and its convertibility to other freely convertible
currencies
To foster monetary, credit and exchange conditions conducive to a balanced and
sustainable growth of the economy.

Tools of Monetary Policy

1 Required Reserves- lending behavior of commercial banks

2 Rediscounting- prerogatives from being the bankers of banks.

3 Open Market Operations- participating in the purchase and sale of government

securities in active money market.

4 Selective Credit Control- this tool lets the BSP selects the kind of credit it will give
to clients. It tries to prioritize its lending activity either to production or consumption.

5 Moral Suasion- this tool tries to test the persuasive ability of the Chairman of the
Monetary Board and the Governor of the BSP.

Fiscal Policy
-Accdg. To Villegas and Abola, fiscal policy necessarily concerns itself with the manipulation
of the inflows (govt spending) and outflows (taxes) of the government sector.
-is an instrument which can push the economy towards equilibrium, when there are
disequilibriating elements operating in the economy.
Taxation: A Tool of Fiscal Policy
Taxation- referred to as the inherent power of the State, acting through the legislature, to
impose and collect revenues for the purpose of supporting the government and its
recognized objects.
FOREIGN TRADE POLICY- is a set of activities that tends to manipulate imports and
exports of the economy. It controls the level of money supply in its desired level through
export and import.

Price effect of Import and Export

Imports tend to bring down domestic prices by bringing into the system more finished goods
or raw materials for processing into final goods, at the same time they bring out funds.
Exports- opposite effect
Tools of Foreign Trade Policy
1 Administrative or Exchange Control- a tool that tries to avoid the dollar
deficiency by controlling its sale.

2 Exchange rate Regimes- The price of the dollar in terms of pesos is known as the
exchange rate. Dollar can be sold or bought in the market at a specific price at a
given time.

Three types of exchange rate:

Flexible exchange rates- exchange rates of dollars to pesos is determined
by the demand and supply of dollars.

Fixed exchange rates- a tool where the rate of exchange is fixed by

monetary authorities for extended period of time.

Multiple exchange rates- another system by which the foreseen balance of

payments problems may be solved is to have a multiple exchange rate and
have buyers and sellers transact at different exchange rates.

3 Tariffs and Subsidies- Tariffs are taxes imposed on imports which are based on
either the value of the product (ad valorem) or on the physical unit of measure.
BASIC OF DEMAND AND SUPPLY
Demand- means the desire for a particular good backed up by sufficient purchasing power.
-It is also the schedule of various quantities of commodities which buyers are willing to
purchase at various prices in a given time and place.
Potential Demand- not backed up by the ability to pay or no purchasing power

Effective Demand- backed up by the ability to pay

Demand Schedule- reflects the quantities of goods and services demanded at different
prices.

The Law of Demand

-may be stated as the quantity of commodity which buyers will buy at a given time and
place will vary inversely with the price. Price increase, demand decrease. Price decrease,
demand increase.
General tendencies:
Income effect- at lower prices, an individual has a greater purchasing power. We
can buy more goods and services but at higher prices, we can buy less.

Substitution effect- we tend to buy goods with lower prices. In case the price
increases, we look for substitute whose prices are lower.

Determinants of Demand
1 Income- People buy more goods and services when their income increases, but will
buy less if their income decreases. Changes of income will change their demand for
goods and services.

2 Population- more people means more demand for goods and services.

3 Tastes and Preferences- demand for goods and services increases when people
like or prefer them.

4 Price expectations-when people expect the prices of goods, they will buy more of
these goods.

5 Prices of related goods- when the price of a certain good increases, people tends
to buy substitute products.

The Ceteris Paribus Assumption

-assuming that the determinants of demand are constant, price and quantity demanded are
inversely proportional to each other.
Changes in Demand- refer to the shift of demand curve which is brought about by the
changes in the determinants of demand, like income, population, price expectation and so
forth.
Changes in Quantity Demanded- indicate the movement from one point to another point.
This means, the demand curve does not change its position like that of the demand curve in
the changes in demand.

The Law of Supply

- states that the quantity offered for sale will vary directly with price.

Supply- is the schedule of various quantities of commodities which producers are willing
and able to produce and offer at various prices in a given time and place.
-in other words, it is the amount of goods and services available for sale at given prices in a
given period of time and place.
Supply Schedule- shows the different quantities that are offered for sale at various prices.
It may reflect the individual schedule of only one producer or the market schedule showing
the aggregate supply of a group of sellers or producers.
Determinants of Supply
1 Technology- refers to techniques or methods of production.

2 Cost of Production

3 Number of Sellers- more sellers or more factories means an increase in supply. Vice
versa

4 Taxes and Subsidies

5 Weather

Changes in Supply- pertains to a shift of supply curve brought by changes in the

determinants of supply.
Changes in Quantity Supplied- show the movements from one point to another point in
a constant supply curve.

THE MARKET EQUILIBRIUM

Equilibrium of Demand and Supply
Elasticity of Demand and Supply
Other concepts of elasticity:
1 Elasticity- is a measure used in response to changes in the determinants of
demand and supply.

2 Price Elasticity- a measure used in determining the percentage change in quantity

against the percentage change in price.

3 Income Elasticity- the percentage change in quantity compared to the percentage

change in income.

4 Cross Elasticity- the percentage change in quantity of one good compared to the
percentage change in the price of related goods.

Price Elasticity of Demand- refers to the degree of reaction or response of the buyers to
changes in price of goods and services.
To derive the price elasticity of demand, we use the formula
Ep= Q2-Q1
Q1
P2-P1
P1

Types of Elasticity
1 Elastic-when a percentage change in price leads to a proportionately greater
percentage change in quantity demanded.
2 Inelastic- when a percentage change in price results I a proportionately lesser
change in price evokes less than one percent change in quantity demanded.
3 Unitary- when a percentage change in price leads to a proportionately equal
percentage change in quantity demanded. The coefficient of elasticity is equal to 1.
4 Perfectly elastic- at a given price, percentage change in quantity demanded can
change infinitely.
5 Perfectly inelastic- a percentage change in price creates no change in quantity
demanded. No change in the quantity of demand. The coefficient is zero.

Price Elasticity of Supply- is also the response of quantity offered for sale for every
change in price.
Formula:
Effect of Elasticities on Market Equilibrium
 - For demand, the more elastic the new demand is, the less will be the increase in
price, and the greater will be the expansion of quantity sold.
- For supply, the less elastic the supply is the higher the increase in price and the
smaller the quantity increase will be, while the more elastic supply is, the less will be
the increase in price and the greater the increase in quantity sold.

Income Elasticity
- The Coefficient of income elasticity measures a products percentage change in
quantity as a ratio of the percentage change in income which caused the change in
quantity.

Cross Elasticity
- The coefficient of cross elasticity of demand relates a percentage change in quantity
demanded of Good A in response to a percentage change in the price of Good B.
Thus,