Unit 1

BASIC ECONOMIC CONCEPTS

Topics

Topic 1: Introduction to Economics

Topic 2: Ten Principles of Economics
Topic 3: Thinking Like an Economist
Topic 4: Reading Graphs

Topic 1: INTRODUCTION TO ECONOMICS

INTRODUCTION

This is an introductory course to the field of economics. As we begin our journey into the world
of economics, it is important to quote from one of the most famous economists of all time, the
Scottish philosopher Adam Smith and this is from his book “The Wealth of Nations”, published
in 1776. By directing that industry, so that the industry in control of that individual actor in such
a manner, as its produce may be of the greatest value, he intends only his own gain. And he is
in this, as in many other cases, led by an invisible hand to promote an end which was no part
of his intention. And this term "the invisible hand" is famous. Led by an Invisible hand to promote
an end which was no part of his intention. He is saying, look, when individual actors just act in
their own self-interest, that often in aggregate leads to things that each of those individual actors
did not intend. Then he says: nor is it always the worst for society that it was no part of it. So, it
was not necessarily a bad thing. By pursuing his own interest, he frequently promotes that of
the society more effectually than when he really intends to promote it. (Can you relate this now
to people promoting self interest leads to in aggregate the effect of the pandemic?)

Becoming an economist is a sound professional choice. Studying economics provides one with
not just an understanding of human behaviour, but also cultivates in students the problem-
solving, analytical, communication and persuasion skills that are critical for success in today’s
job market. The deep insights into customer behaviour, business strategy and volatile markets
that economics provides can help companies make intelligent decisions to promote greater
business growth and success.

Understanding humans, and their motivations, is critical to designing initiatives that can have
social and economic impacts upon society at a local, regional and national level. Studying
economics provides one with not just an understanding of human behaviour, but also cultivates
in students the problem-solving, analytical, communication and persuasion skills that are critical
for success in today’s job market. In business, economists can provide key insights into how to
make a product or service appeal more to customers by de-constructing their incentives and
desires. The deep insights into customer behaviour, business strategy and volatile markets that
economics provides can help companies make intelligent decisions to promote greater business
growth and success.

In our daily lives, we are called to make choices at our homes and in the marketplace, how
much to spend and save, how to allocate our savings between different kinds of financial assets,
whether to take a regular cab or an Uber, how much to pay for health insurance, whether to
switch jobs, to move to a different city, where to go for vacation, and so on. These decisions
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are so much a part of our everyday life that they are also the domain of much of what politicians
constantly make promises to us about.

Understanding of economics is a basic civic literacy requirement. It teaches us how to make

choices, how to interact in society, how to evaluate the work being done by our elected
representatives and much more. Every citizen in a country needs to know economics so as to
live and participate meaningfully in the society.

Why it's important to understand economics? The case for economic literacy is a strong one.
George Stigler, a Nobel Laureate in economics, probably stated it best almost three decades
ago when he wrote: "The public has chosen to speak and vote on economic problems, so the
only open question is how intelligently it speaks and votes." In Stigler's view, economic literacy
is special because it contributes to two classes of knowledge. First, it serves as a "means of
communication among people, incorporating a basic vocabulary or logic that is so frequently
encountered that the knowledge should be possessed by everyone." Second, it is a "type of
knowledge frequently needed and yet not susceptible to economical purchase from experts."

The question that can be asked at this point in the discussion is "So what?" Why does it matter
whether a student has taken an economics course or knows something about basic economic
concepts? The answer is that economic knowledge has a direct and substantive effect on
people's opinions about economic issues. The study of economics can also provide valuable
knowledge for making decisions in everyday life.

Economics helps us identify the policy measures that encourage prosperity and avoid
inefficiency, making it a crucial driver in the search for sustainable growth. I would challenge
every student here to learn economics with fun. Yes they say economics subject is difficult, but
once you learn the tools and basics, it is a very interesting subject as you relate to your every
day life, in making decisions. In this course you will learn the meaning of economics, branches
of economics, positive and normative economics, human wants, goods and services, economy
and types, basic economic problem, economic systems, economic decision making

OBJECTIVES

1) investigate the complexity of the economic problem and apply economic decision-
making tools and processes to deal with the problem
2) demonstrate an understanding of the role of economic systems in relation to economic
problems particularly in the Philippines
3) Explain the differences between macroeconomics and microeconomics.
4) Apply the concepts of scarcity, choice and opportunity costs for making smart choices.
5) Compare and contrast economic and accounting profits.

LESSONS:

Top three Reasons Why Study Economics

1) The economy is an integral part of everyday life and economics is the study of things
that affect us daily and make decisions (Economists are armed and dangerous:
"Watch out for our invisible hands.")

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 2) To be better informed and equipped to analyze our human behavior (Economists can
supply it on demand).
3) Understanding economics allows us to intelligently and confidently debate government
policies and their consequences, and many more (You can talk about money without
ever having to make any).

The Meaning of Economics?

Economics is a social science that studies the allocation of scarce resources to satisfy unlimited
human wants. It came from a Greek word oikonomia which literally means “household
management”. Nowadays, the management of the country’s entire economy is certainly far
more complicated than “household management” yet the simple allocation of household income
to meet the needs of the family draws a powerful parallelism.

It deals with the phenomenon of scarcity. Scarcity is central to the study of economics. Scarce
means that people want more than there is. The study of economics is primarily because of
scarce resources. Scarcity is a fact of nature,

The satisfaction of unlimited wants as a society using the limited resources gives rise to the
problem of allocation. Allocation means making decisions about choices.

Major Ideas Involving the Meaning of Economics

Let us now turn to the major ideas involving economics

1. Many scholars and authors in the late eighteenth and early nineteenth century believed that
economics is the science of wealth. These scholars are called the classical thinkers. They
viewed that economics deals with the phenomenon of wealth which includes nature and
causes of wealth, creation of wealth by individuals and nations etc.

2. The problem with wealth definition was that it did not talk about people who had no wealth.
So many scholars in the early nineteenth century thought that economics should address
the issue of “welfare of the society” and not just wealth. Accordingly economics was seen
as science of welfare - welfare is both quantitative and qualitative in nature.

3. The welfare definition of economics explained only the material aspects of welfare. But
people want both material goods and non-material services. Since resources available with
every individual or society are scarce, people try to achieve their goals by alternative use of
these resources which they do by making appropriate choice. So economics was treated as
science of scarcity and choice. As science of scarcity and choice, economics studies
human behavior as relationship between ends and means which are scarce and have
alternative uses.

4. In the twentieth century the objective of achieving growth and development of the entire
economy gained momentum. Role of the government in economic growth and development
became increasingly important. So economics, no longer, remained limited to individual
decision making and use of resources only. Its scope has been expanded to include

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 production and consumption of commodities overtime so that the economy achieves growth
and development. So economics is treated as the science of growth and development

5. Economists of late twentieth century have also started talking about welfare of future
generation and protection of natural environment. Hence economics is also treated as
science of Sustainable Development. To achieve higher level of growth and
development, economies around the world have been exploiting natural resources and
polluting the environment.

Economics is a Science

 a body of systematized knowledge concerning what is.”

 seeks to explain the ‘why’ of things in the world of economic behavior – production,
consumption, and distribution
 Economic models - main tools used by economists to explain economic phenomena.

What Is an Economy?
When we say economy, it is the large set of inter-related production and consumption activities
that aid in determining how scarce resources are allocated. The production and consumption
of goods and services are used to fulfill the needs of those living and operating within the
economy, which is also referred to as an economic system.

The Two Branches of Economics

1) Microeconomics

The word “micro” means very small. So micro economics implies study of economics at a
very small level - the study of the smaller units within the economy. What does this exactly
mean? In a society comprising of many individuals collectively every single individual
makes just a small part. So the economic decisions taken by a single individual become the
subject matter of micro economics such as the household and firm-behavior and how they
interact in the marketplace. Some examples are on the discussions on subsidies, the price of
everyday items, distribution of income, quantity of goods and services that a seller can supply
in order to earn a profit, the price we pay for a good, and many more

2) Macroeconomics

It is–the study of the aggregate or the whole economy; it looks at economic problems as they
influence the whole of society. The word macro means very large. In comparison to an
individual, the society or the country or economy as a whole is very large. So the economic
decisions taken at the level of the economy as whole are subject matter of macroeconomics.
Take the example of the economic decisions taken by the government – the government
represents represents the whole country, not just any individual. So the decisions taken. Other
examples which involves solving the problems of the whole society include topics on
inflation or price hike, unemployment and economic growth and development. aggregate
level of output which concerns the whole population of the nation and hence are covered
under the study of macroeconomics.

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Positive and Normative Statements
The study of economics involves both positive and normative aspects in terms of
understanding the events taking place around us, taking decisions, prescribing rules and
regulations and implementing policies to solve economic problems
Positive statement is an objective, testable statement that describes what happens and why it
happens. It focuses on how people actually behave. Positive economics talks about the things
happening or might happen in the economic world
Normative statement – a subjective, contestable statement that attempts to prescribe what
should be done. It focuses on what should be or what ought to happen. It involves value
judgment. . Normative economics gives value judgments aboutthings and tells us to “What
should have happened”.

Positive economics talks about “What is” where as normative economics talks about “What
ought to be” or “what should be”. Examples:

i. Positive: Philippine COVID 19 has now reached 120,000, the second in Asia. It
describes what is happening
ii. Normative: The Philippines should not allow COVID 19 cases to reach 125,000. It gives
value judgement

Human Wants

To earn income people use resources man made or natural. Wants are unlimited but the
resources are limited/scarce.

It is human nature to have many goods in life. One may desire a good house, a car, a computer,
good food, decent clothes and so on. How can one get all of these? One may have these things
if he/she has money. If one does not have enough money, he/she cannot purchase all of these.
Our desires are to be fulfilled depending upon our capacity to pay or purchasing power. Not all
desires can be met as we need money and resources to satisfy them. The desires which are
backed by money and willingness to purchase may be called wants. Wants are satisfied with
the use of goods and services. Economic wants are satisfied by using goods and services
purchased from the market by paying a price. Non-economic wants are satisfied by using goods
and services which are not purchased from the market by paying a price. With the discovery
and new inventions, new wants arise and grow. Some wants may be necessary for the
existence of life. These are necessities. Wants, which make our life easy and comfortable, are
called comforts. Some wants give us pleasure but they are satisfied by costly goods are called
luxuries. Although a single want is satiable, all wants cannot be satisfied due to the scarcity of
resources.

Characteristics of wants

a) Wants are unlimited: Famous economist Marshall has rightly said that human wants are
countless in number and are varied in kind As soon as one want is satisfied another
want takes its place. This endless circle of wants continues through out life.
b) A single want is satiable. Each want taken separately can be satisfied. It has rightly been
said that there is a limit to each particular want.

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 c) Some wants arise again and again. Most wants recur. If they are satisfied once, they
arise again after a certain period. For example, we eat food and hunger is satisfied but
after a few hours, we again feel hungry and we have to satisfy our hunger again with
food.
d) Varying nature of wants. Wants vary with time, place and person. They are also
influenced by many factors like income, customs, fashion, advertisement etc.
e) Present wants are more important than future wants: A person uses most of his limited
resources for the satisfaction of present wants. He does not worry much about his future
wants because future is uncertain and less urgent.
f) Wants change and expand with development. A simple example to show how wants are
changing is the telephone.

Goods and Services

Goods – are items we value and desire. Goods tend to be tangible and intangible. Tangible
goods are items we value and desire that we can reach out and touch. Intangible goods are
goods that we cannot reach out and touch such as friendship and knowledge.

Services are intangible acts for which people are willing to pay such as legal counsel, medical
care and education.

All goods and services whether tangible or intangible, are produced from scarce resources and
can be subjected to economic analysis. Scarce goods created from scarce resources are called
economic goods. These goods are desirable and are limited in supply.

Bads are those items we do not desire or want where less is preferred to more such as garbage,
pollution, weeds and crime. The elimination of the bad – Garbage removal – is a good.

We all face scarcity – rich and poor alike – because we cannot have all the goods and services
we desire. However, scarcity affects everyone differently. Scarcity never has and never will be
eradicated. Our wants grow over time, so scarcity will never be eliminated.

Scarcity and Resources

Economics is concerned primarily with scarcity – how we satisfy our unlimited wants in a world
of limited resources. Scarcity exists when human wants exceed available resources, or when
resources are not enough to satisfy human wants. Resources are inputs used to produce goods
and services. The scarce resources can be grouped into four categories:
1. Labor – the physical and mental effort expended or used in the production of goods and
services, examples: the services of a teacher, nurse, surgeon
2. Land – includes “gift of nature”, the natural resources used in the production of goods and
services: trees, animals, water, minerals and so on.
3. Capital: physical and human capital. Physical capital are the equipment and structures used
to produce goods and services. Human capital – the productive knowledge and skill people
receive from education, on-the-job training, health and other factors that increase
productivity.

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4. Entrepreneurship is the process of combining labor, land and capital to produce goods and
services. Entrepreneurs make the tough and risky decisions about what and how to produce
goods and services.

The Economic Problem

Scarcity of resources: Economic Problem:

The Problem of Choice; Problem of Allocation

 Suppose you have 6 hours to study for Math, English and Econ exams?
 If you have Php 100 for your daily allowance? But you also want to watch a movie.
How would you allocate
These are a number of wants which are to be satisfied.

Why does the problem of choice arise?

If you had a magic wand or a magic lamp, you could have had everything to satisfy your
wants and the problem of making a choice would not arise. Since you can buy or get only one
item with your scarce resource, you face the problem of deciding exactly what good or service
is to be bought to satisfy your want. While making a choice as to which one to buy, notice
another important thing. That is, resources can be put into alternative uses.

Similarly, the economy also has to decide what goods and services are to be produced and
how resources are to be used. Thus the issue of ‘choice’ arises because a) the resources are
scarce and b) the resources can be put to many alternative uses.

The Four Basic Economic Problems

These are the economic questions every society faces. Because of scarcity, economies are
forced to allocate its limited resources. One way of allocating goods and services that is most
common is the market economy. Certain economic questions must be answered regardless of
the level of affluence or political structure. The fundamental questions every society faces are:
(a) what goods and services will be produced? (b) how much goods and service are to be
produced? (c) how will the goods and services be produced? (d) who will get the goods and
services produced?

1. What goods and services to be produced?

 Every society may face similar problem of choice; however the priorities may be
different. In less developed economies the choice may be between production of food
crops and manufacture of computers. In advanced economies the choice may be
between building more shopping malls or producing more cars.
 Consumers, firms and government must all make choices about what goods and
services will be produced and each one of those decisions has an opportunity costs. In
the market place, people “vote” in economic affairs with their peso (or dollars, yen, etc),
and this accounts for what is produced. This concept is called the consumer
sovereignty. Consumer sovereignty explains how individual consumers in market
economy determine what is to be produced.

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2. How much goods and service are to be produced?
 After deciding what goods and services to produce, the next question is in what
quantities.
 Because our wants exceed the amount of goods and services that can be produced
from our limited resources, it must be decided at what quantities of the wants should
have priority over the others.

3. How are goods and services are to be produced?

 It is related to the method by which these are to be produced. Once the goods to be
produced are decided, there is a problem of how to produce them. There are many
different ways (technology) to produce goods and services. What tools are needed, how
much land and how many workers are needed
 We must choose among multiple ways of producing the goods and services we want
because goods can generally be produced in several ways, using different combinations
of resources. Goods can be produced either labor intensive or capital intensive. Labor
intensive is a production that uses a large amount of labor. Capital intensive is a
production that uses a large amount of capital.

4. For whom goods and services are to be produce?

 In every society, some mechanism must exist to determine how goods and services are
to be distributed among the population.
 Who is to enjoy and get the benefit of the goods and services produced? It is not possible
to satisfy everyone’s want in the society due to scarcity, so it must be decided to whose
wants are to be satisfied. Should the economy produce more of food crops or more of
computers?

Economic Systems: Systems of Allocation

Economies are organized in different ways to answer the question of what is to be produced,
how much to be produced, How to produce and For whom to produce. Economies include:
traditional economy, command economy, market economy and mixed economy

1. Traditional economy: Economies run by tradition - most ancient and prevalent way to solve
econ problem before 20th century. Economic decisions are based on traditions

2. Command economy: Economies run by command - ‘centrally-planned’ economies

Government uses central planning to decide or coordinate most of economic activities, the
four economic problems. All the productive resources are owned and controlled by the
government in the overall interest of the society. Means of production are owned by the
government on behalf of the people

3. Market economy (free enterprise): Economies run by the market system: completely
unregulated market economy. Market is the institution that determines the answers.
Allocates goods and services through the private decisions of consumers, input suppliers
and firms. All the individuals have the right to own property and there minimum government
intervention in the economic activities. Government does not coordinate production
decisions of the citizens. Individuals are free to choose any occupation. Freedom of
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 enterprise - implies that business firms are free to acquire resources and use them in the
production of any
good or service. Self-interest is the guiding principle Actually, no nation has a pure market
economy.

4. Mixed economy: combination of two or the three economic systems, actual economies fall
somewhere in between of these. Mixed economy is an economy where the government and
the private sector determine the allocation of resources. Thus mixed economy has some
elements of both market economy and government controlled command economy

Economic Behaviour Assumptions

Self-Interest

Economists assume that individuals act as if they are motivated by self-interest and respond in
predictable ways to changing circumstances. This means that self-interest is a good predictor
of human behavior in most situations. Self-interest can include benevolence. Self-interest is not
the same as selfishness but simply means that people try to improve their own situation.

Rational Behavior

Economists assume that people, for the most part, engage in rational behavior. Rational
behavior merely means that people do the best they can, based on their values and information,
under current and anticipated future circumstances. Rational individuals weigh the benefits and
costs of their actions and they only pursue actions if they perceive the benefits to be greater
than the costs.

Economic Theory

What are economic theories?

Economic theories are statements or propositions used to explain and predict patterns of
behavior in the real world. They help us sort out and understand the complexities of economic
behavior that occur expectedly under certain circumstances. Theories cannot realistically
include every event that has ever occurred but weeds out the irrelevant facts from the relevant
ones. Without abstraction or simplification, the world is too complex to analyze. Economists
make a number of simplifying assumptions in their models.

The Scientific Method: Step by step

Step 1: Identify the question and define relevant variables
Step 2: Specify assumptions
Step 3: Formulate a hypothesis
Step 4: Test the hypothesis
Conclusion:
• Reject the hypothesis or
• Use the hypothesis until a better one comes comes along

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Developing a Testable Proposition
The beginning of any theory is a hypothesis, a testable proposition that make some type of
prediction about behavior in response to certain changes in conditions based on our
assumptions. In economic theory, a hypothesis is a testable prediction about how people
behave or react to a change in economic circumstances.

Using Empirical Analysis

To determine whether the hypothesis is valid, it must be engaged in empirical analysis – that
is, examine the data to see whether the hypothesis fits well with the facts. If the hypothesis is
consistent with real world observations, accept it; if it does not fit well with the facts, “go back
to the drawing board”.

From Hypothesis to Theory

After gathering the data, economic researchers must evaluate the results to determine whether
their hypothesis is supported or refuted. If supported, the hypothesis can be tentatively
accepted as an economic theory.

Virtually all economic theories share a condition usually expressed by the Latin phrase ceteris
paribus translated as “letting everything else be equal” or “holding everything else constant”.

ASSESSMENT
 Quizzes
 Project/Exercise/Discussion Paper

OPTIONAL READING:

Sewon Hur and Michael Jenuwine Lessons on the Economics of Pandemics from Recent
Research. Federal Research Bank of Cleveland, May 2020.
https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-
commentary/2020-economic-commentaries/ec-202011-research-economics-
pandemics.aspx

Tejvan. Economic effects of a pandemic. 2020.

Pettingerhttps://www.economicshelp.org/blog/161156/economics/economic-effects-of-a-
pandemic/. 3 May 2020

NEXT TOPICS

Topic 2: Ten Principles of Economics

Topic 3: Thinking Like an Economist
Topic 4: Reading Graphs

REFERENCES

McEachern,, William A. ECON Micro 2010-2011 ed. South-Western Cengage Learning. USA

Mankiw, Gregory. Economics Principles. Cengage Learning. 2009

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References

Objectives:
To understand the meaning of economics
To know the branches of economics

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