Republic of the Philippines

PANGASINAN STATE UNIVERSITY

Bayambang Campus
Bayambang, Pangasinan

BASIC MICROECONOMICS

CHAPTER 2: ECONOMIC THEORY

THEORY

An idea or set of ideas that intented to explain facts or events. The general
principles or ideas that relate to particular subject.

ECONOMIC THEORY

Economic theory explain economic phenomena, to interpret why and how the
economy behaves and what is the best solution .How to influence or to solve the
economic phenomena. The economic theory is divided into positive and normative

The economic theories broadly fall under two categories:

Microeconomics

Microeconomics deals with the economy at a smaller level or at a smaller scale,

such as the market for a particular product or the behavior of an individual firm in
particular industry.

Macroeconomics

Macroeconomics, on the other hand, studies the behavior of the overall economy
although it sometimes also looks at economies of different regions that comprise the
overall economy.

Microeconomic theories economics in general and macroeconomics in particular is

define as the social science that deals with the problem of allocating limited resources
to satisfy unlimited wants.

Examples; Theory of demand, supply, and the price mechanism

Oligopoly market structure

Monopoly market structure

 The Need of Economic Theory

ECONOMICS

As a social science concerned chiefly with description and analysis of the

production, distribution, and consumption of goods and services.

Why do we need to study the economics?

Behind this definition are two key ideas in economics: that goods are scarce and
that society must use its resources efficiently. Indeed, economics is an important
subject because of the fact of scarcity and the desire for efficiency.

What is the purpose Of Economic Theory?

It is social science attempting to define the creation and distribution of value, and
explain system of barter and exchange, and the basis of monetary transactions and
system of credit. Also to explain economics effect of political decision, and to rationalize
and predict human behavior.

Why is economics Important in everyday life?

Importance of economics in our daily lives, from an individual perspective,

economics frame many choices we have to make about work, leisure, consumption and
how much to save. Our lives are also influenced by boarder Economic trend such as
inflation, interest rate and economic growth.

What is the importance of economics?

Economics is the important you get to know how societies, governments,

Households and individuals allocate their scarce resources. The economics can also
provide valuable knowledge for making decisions in everyday life. Economics is
concerned with the optimal distribution of resources in society.

Why is economics so important in Society?

Economics is the social science that examine how individual, businesses and
entire societies manage scarce resources. Because no resources exist unlimited
quantities, societies much establish priorities and decide how best to allocate resources
in such a way that meet as many needs and wants possible.
 THE NATURE OF ECONOMICTHEORIES

ECONOMICS

Is the scientific study of the ownership, use and exchange of scarce resource.

ECONOMIC THEORY

Try to explain economic phenomena, to interpret why and how the economy
behaves and what is the best solution to solve economic phenomena.

Three Competing Theories

1. KEYNESIAN THEORY

-Is a theory that says the government should increase demand to boost growth.

-Its main tools are government spending on infrastructure, unemployment

benefits, and education. A drawback is that overdoing Keynesian policies increases
inflation.

-British economist John Maynard Keynes developed this theory.

“Economic crises occurs not when the country does not have enough money, but when
the money is not being spent and thereby, not moving.”

-John Maynard Keynes

2. FRIEDMAN

a. Free Market Theory

b. Stockholder Theory

c. Theory of Consumption

a. FREE MARKET THEORY

Where the prices people pay for thing are agreed upon by the buyers and sellers
with little or no control of government.

b. STOCKHOLDER THEORY

A company’s only social responsibility is to increase profit for the owners

(stockholders) as long as it doesn’t engage in deception or fraud.
c. THEORY OF CONSUMPTION

States that people will make decisions on spending based on what we think our
income will be over time, what Friedman called our permanent income; and not just
current income, which be higher.

3. FISHER EFFECT

Is an economic theory created by economist Irving Fisher that describes the

relationship between inflation and both real and nominal interest rate.

Real Interest Rate = Nominal Interest Rate – Expected Inflation

The Construction and Function Of Economic Theory

Function of economic theory

1. Methodological Function- Allow you to define economics as the basis for the
development of a number of other economics disciplines (marketing, strategies,
management, pricing).

2. Practical Function- Is the scientist foundation of economic policy to identify

principles and practices of goods housekeeping ( economic policy).

3. Cognitive Function- is to comprehensively examine the form of economic

phenomena and their inner self, allowing you to discover the law by whivh develops the
national economy.

4. Predictive Function- is to determine the prospect for socioeconomic development in

the future.

5. Educational Function- is manifested in the information of economic thinking.

6. Ideological Function- however, we must remember that excessive indoctrination

may obstract the establishment of the objects laws of economic development.

Adam Smith- father of economics.