Colegio de Dagupan

School of Business and AccountancyEconomic Development

Module 1
Introduction to Economics

Learning Outcomes:
1. Define economics, principles and discuss the features of the economic perspective.
2. Explain the role of economic theory in economics
3. Distinguish between microeconomics and macroeconomics.
4. Identify the categories of scarce resources and relate this to the nature of the economizing
problem.

Definition of Economics

● The social science concerned with the efficient use of limited or scarce resources to achieve
maximum satisfaction of human materials wants.
● Human wants are unlimited, but the means to satisfy the wants are limited.

10 Principles of Economics
● How People Make Decisions
Principle 1: People Face Trade-offs

Principle 2: The Cost of Something Is What You Give Up to Get It

Principle 3: Rational People Think at the Margin

Principle 4: People Respond to Incentives

● How People Interact
Principle 5: Trade Can Make Everyone Better Off

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

FYI: Adam Smith and the Invisible Hand

Principle 7: Governments Can Sometimes Improve Market Outcomes

● How the Economy as a Whole Works
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and
Services
Principle 9: Prices Rise When the Government Prints Too Much Money

Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment

The Economic Perspective

● Scarcity and choice

o Resources can only be used for one purpose at a time.
o Scarcity requires that choices be made.
o The cost of any good, service, or activity is the value of what must be given up to obtain
it. (​OPPORTUNITY COST​).
o People and society face trade-offs.
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School of Business and AccountancyEconomic Development
o There is no such thing as a “free lunch.”
● Rational Behavior
o Rational self-interest entails making decisions to achieve maximum fulfillment of goals.
o Different preferences and circumstances lead to different choices.
o Rational self-interest is not the same as selfishness.
● Marginal Analysis: comparing additional benefits and additional costs
o Most decisions concern a change in current conditions; therefore the economic
perspective is largely focused on marginal analysis.
o Each option considered weighs the marginal benefit against the marginal cost.
o Whether the decision is personal or one made by business or government, the principle is
the same.
o The marginal cost of an action should not exceed its marginal benefits.

Microeconomics and Macroeconomics

Economists develop economic principles and models at two levels.
Microeconomics ​is the part of economics concerned with decision making by individual customers,
workers, households, and business firms. We measure the price of a specific product, the number of
workers employed by a single firm, the revenue or income of a particular firm or household, or the
expenditures of a specific firm, government entity, or family.

Macroeconomics ​examines either the economy as a whole or its basic subdivisions or aggregates,
such as the government, household, and business sectors. An ​aggregate i​ s a collection of specific
economic units treated as if they were one unit. Therefore, we might lump together the millions of
consumers in the Philippine economy and treat them as if they were one huge unit called
“consumers.”

Why Study Economics?

● Economics for citizenship.

o Most political problems have an economic aspect, whether it is balancing the budget,
fighting over the tax structure, welfare reform, international trade, or concern for the
environment.
o Both the voters and the elected officials can fulfill their role more effectively if they have
an understanding of economic principles.
Colegio de Dagupan
School of Business and AccountancyEconomic Development
● Professional and personal applications
o The study of economics helps to develop an individual's analytical skills and allows
students to better predict the logical consequences of their actions.
o Economic principles enable business managers to make more intelligent decisions.
o Economics can help individuals make better buying decisions, better employment
choices, and better financial investments.

The Economizing Problem

The foundation of economics is the economizing problem: society's material wants are
unlimited while resources are limited or scarce.

● Unlimited wants (the first fundamental fact):

o Economic wants are desires of people to use goods and services that provide utility,
which means satisfaction.
o Products (goods and services) satisfy human needs and wants. They may be classified as
luxuries or necessities, but division is subjective.
o Goods are tangible products. An example is the ball pen that you used to take down
notes.
o Services are intangible products. An example is legal services provided by a lawyer to a
woman who files a case of annulment of marriage in court.
o Businesses and governments also have wants.
o Over time, wants change and multiply.
● Scarce resources (the second fundamental fact):
o Economic resources are limited relative to wants.
o Economic resources​ are also called factors of production and include four categories:

1. Land
Land means much more to the economist than it does to most people. To the economist
land ​includes all natural resources (“gifts of nature”) used in the production process. These
include forests, mineral and oil deposits, water resources, wind power, sunlight, and arable land.

2. Labor
The resource ​labor ​consists of the physical actions and mental activities that people
contribute to the production of goods and services. The work-related activities of a logger, retail
clerk, machinist, teacher, professional football player, and nuclear physicist all fall under the
general heading “labor.”

3. Capital
For economists, ​capital (​ or capital goods) includes all manufactured aids used in
producing consumer goods and services. Included are all factory, storage, transportation, and
distribution facilities, as well as tools and machinery. Economists use the term i​ nvestment ​to
describe spending that pays for the production and accumulation of capital goods.
Colegio de Dagupan
School of Business and AccountancyEconomic Development
Capital goods differ from consumer goods because consumer goods satisfy wants
directly, whereas capital goods do so indirectly by aiding the production of consumer goods. For
example, large commercial baking ovens (capital goods) help make loaves of bread (consumer
goods).

Note that the term “capital” as used by economists refers not to money but to tools,
machinery, and other productive equipment. Because money produces nothing, economists do
not include it as an economic resource. Money (or money capital or financial capital) is simply a
means for purchasing goods and services, including capital goods.

4. Entrepreneurial Ability
Finally, there is the special human resource, distinct from labor, called e
​ ntrepreneurial
ability. T
​ he entrepreneur performs several socially useful functions:
✔ Combines resources needed for production,

✔ Makes basic business policy decisions,

✔ Is an innovator for new products, production techniques, organizational

forms,
✔ Bears the risk of time, effort, and funds.

o Resource payments correspond to resource categories:

▪ Rent to owners of land resources

▪ Interest to suppliers of capital resources,

▪ Wages to owners of labor resources,

▪ Profits for entrepreneurs’ skills and abilities.

Colegio de Dagupan
School of Business and AccountancyEconomic Development

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Economics: Employment and Efficiency

● Basic definition: Economics is the social science concerned with the problem of using scarce
resources to attain the greatest fulfillment of society's unlimited wants.
● Economics is a science of efficiency in the use of scarce resources. Efficiency requires full
employment of available resources and full production.
o Full employment means all available resources should be employed.
o Full production means that employed resources are providing maximum satisfaction of
our economic wants. Underemployment occurs if this is not so.
● Two kinds of efficiency:
o Allocative efficiency means that resources are used for producing the combination of
goods and services most wanted by society-for example, producing compact discs
instead of long-playing records with productive resources or computers with word
processors rather than manual typewriters.
o Productive efficiency means that least costly production techniques are used to produce
wanted goods and services.
● Economic efficiency means producing the "right" goods (allocative efficiency) in the "right" way
(productive efficiency).

Economic Systems
Economic systems differ in two important ways: Who owns the factors of production and the method
used to coordinate economic activity.

● The market system:

o There is private ownership of resources.
Colegio de Dagupan
School of Business and AccountancyEconomic Development
o Markets and prices coordinate and direct economic activity.
o Each participant acts in his or her own self-interest.
o In pure capitalism the government plays a very limited role.
o In our country’s version of capitalism, the government plays a substantial role.

● Command economy, socialism or communism:

o There is public (state) ownership of resources.
o Economic activity is coordinated by central planning.
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School of Business and AccountancyEconomic Development
Module 1 – Exercises

Name ______________________________________ Score ___________________

I. Fill out the blanks. Choose your answer from the set of words given below.

Choices Economics Human wants

Limited Marginal benefit Marginal cost

Marginal decision-making Opportunity benefit

Opportunity cost Resources Satisfaction

Scarcity Time Trade-off

Unlimited Citizenship Business

1. _____________________ is a social science that deals with how individuals and society allocate
scarce resource to achieve maximum satisfaction of human wants.

2. Human wants are _____________________ but the resources that are used to satisfy these
wants are limited.

3. ____________________ means that there are limited resources used to satisfy human wants
which are infinite.

4. Scarcity requires that ________________ must be made.

5. The cost of any good, service or activity is the value of what must be given up to obtain it. What
you have to give up is your _________________________.

6. You have to give up something to obtain another thing. The thing that you obtained is called
____________________________.

7. Rational behavior means making decisions to achieve maximum ________________.

8. ________________________ means decisions are made by weighing the marginal benefits and
the marginal costs of an action.

9. Reducing your time for studying your lessons so that you can have more time watching TV is an
example of _______________________.

10. For a rational decision-maker, the marginal benefit of an action should be greater than its
______MARGINAL COST______________________.
Colegio de Dagupan
School of Business and AccountancyEconomic Development

11. ______________________ means that because of scarcity you should have l​ ess ​of one thing to
have m
​ ore ​of the other thing.

II. Encircle the letter of the correct answer.

1. Economics is best defined as the study of

A. prices and quantities.
B. inflation and interest rates.
C. how people make choices under the conditions of scarcity and the results of the
choices.
D. wages and incomes.

2. The basic economic problem is the combined existence of:

A. inflation and unemployment.
B. economic freedom and income equality.
C. scarce economic resources and unlimited economic wants.
D. growing populations and the depletion of natural resources.

3. Economic questions always deal with

A. financial matters.
B. political matters.
C. insufficient resources.
D. choice in the face of limited resources.

4. The central concern of economics is

A. poverty. D. overconsumption.
B. scarcity.
C. wealth accumulation.

5. The scarcity principle indicates that

A. no matter how much one has, it is never enough.
B. compared to 100 years ago, individuals have less time today.
C. with limited resources, having more of "this" means having less of "that."
D. because tradeoffs must be made, resources are therefore scarce.

6. The logical implication of the scarcity principle is that

A. one will never be satisfied with what one has.
B. as wealth increases, making tradeoffs becomes less necessary.
C. as wealth decreases, making tradeoffs becomes less necessary.
D. choices must be made.

7. The principle of scarcity applies to

A. the poor exclusively.
B. all consumers.
C. all firms.
D. everyone; consumers, firms, governments, and nations.

8. Jelly Ace is thinking about going to the movies tonight. A ticket costs ₱150 and she will have
to cancel her baby-sitting job that pays ₱50. The cost of seeing the movie is
A. ₱150
B. ₱100
Colegio de Dagupan
School of Business and AccountancyEconomic Development
C. ₱200
D. ₱200 minus the benefit of seeing the movie.

9. Which one of the following expressions best states the idea of opportunity cost?
A. "A peso saved is a peso earned."
B. "There can be too much of a good thing."
C. "There is no such thing as a free lunch."
D. "Do unto others what you want others to do unto you."

10. Which of the following is an economic explanation for why most college-aged movie stars do
not attend college?
A. They are too dumb to get into college.
B. They would find college life boring.
C. The opportunity cost is too great.
D. They cannot afford the room, board, and tuition fees most colleges charge.

11. A rational decision maker takes an action only if the

A. marginal benefit is less than the marginal cost.
B. marginal benefit is greater than the marginal cost.
C. average benefit is greater than the average cost.
D. marginal benefit is greater than both the average cost and the marginal cost.

12. You have finished your Associate in HRM course and have spent ₱100,000 for tuition and
other fees. You decided to study for another 2 years to obtain your BS HRM degree for which
you will be paying another ₱100,000. The marginal cost of studying for another 2 years is
A. ₱100,000
B. ₱200,000
C. ₱0
D. None of the above

13. You have calculated that your lifetime earnings as an Associate in HRM graduate amounts to
₱10,000,000. Also, you have computed that being a holder of BS HRM degree will allow you
to earn ₱15,000,000 during your lifetime. The marginal benefit of continuing your course
from Associate in HRM to BS HRM is
A. ₱5,000,000
B. ₱10,000,000
C. ₱15,000,000
D. ₱25,000,000

14. Given the data in #12 and #13,

A. The MB is greater than the MC.
B. The MC is greater than the MB.
C. The MB is equal to the MC.
D. None of the above

15. Based on economic principles and your answer above, the rational decision of the student
will be to
A. Continue studying to get her BS HRM degree.
B. Not continue her studies and find a job instead.
C. Shift her course to BS Information Technology.
D. Any of the above is the correct answer.
Colegio de Dagupan
School of Business and AccountancyEconomic Development
16. Economics is the study of how evenly goods and services are distributed within society.
A. True
B. False