What is Economics?

Economics-It’s the study of scarcity, the study of how people use resources and respond to incentives, or the study of
decision-making. It often involves topics like wealth and finance, but it’s not all about money. Economics is a broad
discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming
years.

What is Economics in General?

Economics is the science of scarcity.

Scarcity is the condition in which our wants are greater than our limited resources.
Resources: Labor, capital, land, and entrepreneurship that are used to produce goods and services also known as factors of
production.
Production: the process of combining inputs in order to make something for consumption. It is the act of creating output.
Output : a good or service which has value and contributes to the utility of individuals
Distribution: the allocation of the total product among members of society.
Consumption: the use of a good or services.
Since we are unable to have everything we desire, we must make choices on how we will use our resources.
In economics we will study the choices of individuals, firms, and governments.
Economics - Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of
economic wants.
Economics as an Applied Science
Applied economics, as the name implies, is the application of economic theories and models in real life.
It consists of learning how choices effect individual decision making and how the availability of factors aid decision makers
craft sound judgement
Basic Economic Concepts
1. scarcity
2. Needs
3. wants
Economic means the efficient allocation of available resources. This definition has two underlying assumptions.
People have unlimited needs and wants, and these needs and wants drive consumption.
Concept of scarcity which means resources are limited.
Why study of economics?
I. To learn a way of thinking.
II. To understand society
III. To understand global affairs and be an informed citizen
Economics has three fundamental concepts:
Opportunity cost: the best alternative that people forego, or give up, when making a choice or decision.
Marginalism: the process of analysing the additional costs or benefit arising from a choice or decision
Efficient Markets: a market in which profit opportunities are eliminated almost instantaneously.
SCOPE OF ECONOMICS
Microeconomics-It deals with the functioning of individual industries and the behaviour of individual economic decision-
making units such as firms and household.
Macroeconomics- It looks at the economy as a whole and examines the factors that determine national output or product.
Methods of Economics
Positive Economics: focuses on causes and effects, behavioural relationships, and facts involved in the evolution and
development of economic theories. Often called” what is” economics.
1. Descriptive economics: the compilation of data that descripe phenomena and facts.
2. Economic theory: set of related statements about cause and effect.
 Normative Economics- expresses value or judgements about economic fairness or what the outcome of the economy
ought to be.
Model- A formal statement of a theory, usually a mathematical statement between two or more variables.
Variable-A measure that can change from time to time or from observation to observation.
Ockham’s razor-The principle that irrelevant detail should be cut away.
All Else Equal- Ceteris Paribus
A device used to analyse the relationship between two variables while the value of other variables are held unchanged.
Graph: a two-dimensional drawing showing a relationship usually between two set of numbers by means of a line or a
curve.
Demand: the quantity demanded is the amount of a product or service people are willing to buy at a certain price; the
relationship between price and quantity demanded is known as demand.
Supply: represents how much the market can offer.
Opportunity cost is defined as the benefit you give up because you choose to take one action in favour of another.
Absolute advantage is defined as having the ability or capacity to produce more output compared to another entity.
Comparative advantage means having a lower opportunity costs.
Factors of production
1.Land- This represents land and similar natural resources available such as farms and agricultural land. Land is typically
cultivated or improved for use in production. Use of land is paid in the form of rent payment. The factor income on the use
of land is rent
2.Labor- represents as human capital such as workers and employees that transform raw material and regulate equipment
to produce goods and services.
3. Capital- represents physical assets such as production facilities, warehouses, equipment, and technology used in the
production of goods and services. The term may also refer to investment capital used in production. The factor income for
capital is interest.
4. Entrepreneurship- this is sometimes referred to as enterprise. It represents the factor that decides how much of and in
what way the other factors are to be used in production. The return on entrepreneurship is profit.
Basic Economic Problems
1. Production- (What goods to produce and services to provide)
2. Distribution ( How to produce and how much to produce of these goods and services)
3. Consumption of Goods and Services (For whom to produce these good and services)
Basic Economics problems and the Philippine socioeconomic development in the 21st Century
Economic system- refer to the different ways of managing a nations’ available resources to answer the three economic
questions.
Economic systems Classified into four main types:
1. Free market economy,
2. Centralized economy,
3. Mixed economy
4. Traditional Economy
Free market economy
is a system characterized by competition and high level of private ownership.
Prices are set by market mechanisms or by the interaction of buyers and sellers in the market.
Resources are allocated freely based on the interaction of market forces (i.e., buyers and sellers).
Individuals and entities have the economic freedom to exchange goods and make decisions, which means that consumers
determine what to produce based on their preference, while the producers have the liberty to decide on how the products
will be produced.
The government maintains a hand-off role and has minimal involvement in achieving economic goals.
Laissez faire system is an example of a free market economy.
Centralized Economy
It is sometimes referred to as command economy.
Characterized by the heavy involvement of the government in managing the economy
Individuals have no or limited economic freedom and private ownership is limited.
Mixed Economy
An economic system that combines the features of free market and centralized systems is referred to as a mixed economy.
Free market forces and central planning together determine what to produce, how to produce, and whom to produce.
There is a balance between private and government accountability in achieving economic goals.
Traditional Economy
is characterized by customs and habits.
Barter is a mechanism where goods are exchange for another good.
MACROECONOMIC GOALS OF A COUNTRY
ECONOMIC GROWTH- is typically measured through GDP.
GDP- is defined as the value of all final goods and services that were consumed at a given period.
-synonymous with the economy’s output.
Business cycle is characterized by the upward and downward trend of the GDP observed a period of time, usually years.
Recession means a period of economic downturn characterized by high or increased unemployment, slow business and a
decline in consumer purchases.
Expansion- features low or decreased unemployment , increased production, and a rise in consumer spending driven by
higher income.
Full Employment
The upward and downward movements in the business cycle lead to unemployment.
-it is technically defined as having zero cyclical unemployment.
Price Stability
Price stability is formally the absence of prolonged inflation and deflation.
Deflation or the continuous decline in prices is not good thing because it contracts the money supply and limits
liquidity
In the 21st century, the Philippines has been faced with several economic problems such as the following:
Unemployment- occurs when a person is unable to find work.
Shortage- occurs when there is less supply than consumer demand
Surplus- occurs when there is excess supply than consumer demand.
Corruption-refers to dishonest or fraudulent behavior by people with power such as managers
Poverty-refers to the state or condition in which people do not have the minimum standard of life deemed accepted by the
society
Price Volatility-refers to the unpredictable changes in prices.
Tax Issues- refers to the compulsory contribution to the country’s revenue.
Issues on Education- includes tuition and other fees increase, bullying, and event graft and corruption.
What to produce-refers the first main problem of the economy which is to decide what products and services to produce
and in what quantity.
How to produce- refers to the economy’s basic problem which is to decide on how to produce the products. This involve
finding the efficient and effective technique for production.
Who gets what to produced- this refers to the problem on who will receive the products and services an economy
produces.
Global Challenges
War and Terrorism in the Middle East
Domestic Issues
Demand
Is an economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service.
Holding all other factors constant, an increase in the price of a good or service will decrease demand, and vice versa.
The Law of Demand
Consumer utility-refers to a person’s willingness and ability to consume a good in reaction to price changes.
The Law of Demand states that as the price of a good goes up (P ), the quantity demanded of that good goes down (Qd ),
all other things remaining constant(ceteris paribus)
Demand Schedule or a table of price and quantity values, you will be able to construct a demand curve and calculate its
slope.
Disposable Income refers to the net amount after taxes and other mandatory contributions have been deducted.
Income effect- as consumers’ income rises, quantity demanded of goods also increases.
Normal Goods
-Goods that display this attribute .
Engel Curve- convention of graphing consumer income and quantity demanded.
Which was named after Ernst Engel, a German statician from 19th century (1821-1896). He is also postulated Engel’s law,
which states that food expenditure as part of household income decreases as income rises.
Example: Clothes and Food
Inferior Good
-Goods that exhibit a decline in quantity demanded as consumer income rises.
Often poorer quality than normal goods. This drives consumers to substitute the inferior good for a better product when
their income improves.
Income elasticity relates to the chance in quantity demanded in response to an adjustment income.
Luxury Goods
Exhibit an increase in demand more than the proportionate increase in income.
Necessity Goods
-show an increase in demand that is less than the proportionate increase in income.
Veblen Good
Named after Thorstein Veblen, an American economist who came up with the idea. The Veblen effect is the propensity of a
good.
- to increase in demand when its price soars to the point of being extremely overpriced.
Substitutes
Goods that meet the same requirements or fulfill the same needs as another good.
The price of good A increases, the quantity demanded of its substitute also increases. The idea behind substitutes is
basically having alternatives.
Substitution effect- When a good becomes more expensive, its alternative become relatively cheaper and generally more
appealing.
Complementary Goods
Are generally consumed or used together.
There is interdependence between the two goods.
An increase in price of good decreases the quantity demanded of good, following the law of demand.
SUPPLY
Similar to the law of demand, supply is a function of price and others factors. This section will examine the supply
of goods.
The Law of Supply
Under the same premise of scarcity and efficient allocation of resources, the quantity supplied of a product or
service is a function of its price. But in contrast to the demand curve, which considers the consumer’s perspective,
understanding changes in the quantity supplied requires appreciating the standpoint of sellers and producers.
While quantity demanded is based on consumers utility, quantity supplied is based on the profit-maximizing characteristics
of firms. How business allocate their resources affects the amount of supply that will be available in the market. However,
the prices of their outputs and raw materials impact how they allocate their resources. This means that there is a positive
relationship between price and quantity supplied; both variables move in the same directions. To simplify, the law of supply
states that, ceteris paribus, an increase in price (P1) causes an increase in quantity (Q1). Conversely, a fall in price causes a
drop in quantity supplied.
The direct relationship between price and quantity supplied is the best explained looking at the supply curve. The
supply curve illustrates the linear characteristics of the law of supply. Points along the curve correspond to quantity
supplied at varying price level.
Notice that in contrast to the demand curve, the supply curve is upward sloping. And upward-sloping supply curve signifies
that the variables in the x- and y-axes have a positive relationship. A positive slope means that the two variables move in
the same direction. When variable 1 rises, the same happens to variable 2. more specifically, a higher price level
corresponds to a higher quantity supplied, vice versa.
Recall the discussion on how to calculate the slope of the demand curve. The same principle applies in computing
the slope of the supply curve. Only this time, the sigh is expected to be positive.
Determinants of Supply
Although procedures are assumed to be profit-maximizing and that price directly improve quantity supplied, there
are other determinants of supply. In this section, you will learn by the factors such as, production, innovations, and
producer expectations impact the decision of firm to produce more or less of a good.
Technology
Firms nowadays have to keep abreast of the latest innovations in order to compete and stay one step ahead of
their competitors. For example, advancement in computer technology has enable firms to be more profitable by increasing
their efficiency and reducing their costs of production.
Prices of Other Goods
Manufacturers often produce several products in the same or related line. Consider a manufacturer that produces two
goods, A and B. as the price of good A rises (𝑃_𝐴↑), the quantity supplied of good A also increases (𝑄_𝐴↑). This follows
the law of supply. What happens then to this manufacturer’s other product (good B)? Due to the higher potential profit
from good A, the manufacturer might decide to transfer some of its resources (from good B) to the production of good A.
This will lead to a decline in output for good B (𝑄_𝑎↓).
Producer Expectations
Producers who anticipate an surge (↑) in factor prices tend to increase production before the higher input prices become
in effect. This leads to an increase in quantity supplied 〖(𝑃〗_𝑠↑). For example, a cabinet maker who expects the price of
wood to increase in the coming months will use his or her stock of wood now to create as many cabinets as possible
(before the cost of making cabinet increases). The cabinets that will be sold at the higher price will yield higher returns for
the cabinet maker.
Government Policy
Taxes, subsidies, and import quotas imposed by the government impact quantity supplied of a good but different
ways.
Excise tax is a tax imposed on a manufactured goods. Excise tax is applicable to producers and sellers as opposed to
value-added tax (VAT) that is paid only by the consumers or end users.
A subsidy, on the other hand, is monetary assistance by the government in support of target industries or sectors of
the economy. A subsidy results in lower costs for recipient producers because the government pays a portion of the cost.
An import quota is limit to the volume that local producers can bring into the country. Import quotas are
particularly restrictive to manufacturers that rely heavily on imported raw materials for their production.
MARKET EQUILIBRIUM
A market is a meeting place for buyers and sellers where the buyer can purchase goods from a seller for a price that is
agreeable to both. In economics, “market” is not limited to physical location (e.g., what market) but also include
contemporary, online platform that is typical for the financial market (e.g., stocks exchange).
Market price – this price referred to as for an exchange of good to happen, the buyer and the seller must agree on the
price.
 Market Equilibrium – it is known as the point where the consumer and supplier expectations meet.
At this point, quantity demanded is equal to the quantity supplied (𝑄_𝑑=𝑄_ ). It determines the equilibrium price ( P*) and
quantity (Q*).
Shortage
Happens in the market when there is excessive demand. Shortage is represented by the shaded area under the equilibrium
price (P*). The higher prices will discourage consumers so quantity demanded will eventually decline (point 2) and
continue to converge in the market equilibrium level.
Market Surplus
In contrast, the excessive supply. Market surplus is represented area above equilibrium price (P*). In reaction, producers
will try to get rid of excess supply by reducing prices of goods and producing less. The cheaper price will attract consumers
and increase quantity demanded until the points converge in the market equilibrium.