LESSON 1: Revisiting Economics as a Social Science

The word economy comes from the Greek word for “one who manages the household.” At first the origin might
seem peculiar. But, in fact, households and economies have much in common. A household faces many decisions such as:
Who cooks dinner? Who gets the extra rice at dinner? Who washes the dishes after? In short, the household must allocate
its scarce resources among its various members considering each member’s abilities, efforts and desires. Like a household,
a society must decide what jobs will be done and who will do them. It needs some people to grow food, other people to
make clothing, and still others to design a computer software.

WHAT IS ECONOMICS?
Economics has been defined in many ways. Some of these definitions are as follows:
(1) According to Mankiw, Economics is the study of how society manages its resources.
(2) Hall and Leiberman states that economics is the study of choice under the conditions of scarcity
(3) Castillo viewed economics as the study of how man could best allocate and utilize the scarce
resources of society to satisfy his unlimited want.
(4) Webster defined economics as a branch of knowledge that deals with the production, distribution
and consumption of goods and services.
(5) Economics, according to Sicat, is a scientific study which deals with how individuals and society in
general makes choices.
 In summary, economics covers all kinds of topics, but at the core, it is devoted to understanding how society
allocates its resources under the condition of scarcity. Scarcity is defined as the limited nature of society’s resources. Since
resources are generally scarce and human wants and needs tend to be unlimited, we need to study how society choose
from the menu of possible goods and services, how different commodities are produced, priced and who gets to consume
the goods that society produce.

SCARCITY, NEEDS, and WANTS

In a hypothetical world in which every resource—water, hand soap, expert translations of Hittite inscriptions,
enriched uranium, organic bok choy, time—was abundant, economists would have nothing to study. There would be no
need to make decisions about how to allocate resources, and no tradeoffs to explore and quantify. In the real world, on
the other hand, everything costs something; in other words, every resource is to some degree scarce.
Money and time are quintessentially scarce resources. Most people have too little of one, the other, or both. An
unemployed person may have an abundance of time, but find it hard to pay rent. A hotshot executive, on the other hand,
may be financially capable of retiring on a whim, yet be forced to eat ten minute lunches and sleep four hours a night. A
third category has little time or money. People with abundant money and abundant time are seldom observed in the wild.
Scarcity refers to the basic economic problem, the gap between limited – that is, scarce – resources and
theoretically limitless wants. This situation requires people to make decisions about how to allocate resources efficiently,
in order to satisfy basic needs and as many additional wants as possible.

One of the most basic concepts when it comes to saving money is that we must learn how to determine our needs
and wants. No matter where you seek financial advice, you’ll see or hear that seemingly simple concept over and over
again.
At first glance, it does seem simple. Our needs are the things we must
have to sustain us day to day: food, shelter, clothing, personal care items, and
in most cases safe, reliable transportation. Just about everything else can be
classified as a want (though might seem like a need) – entertainment,
electronics, leisure travel … the list of things we want is potentially endless.
Wants are desires for goods and services we would like to have but do
not need. Many wants may seem like needs. Needs are a special kind of want, and refer to things we must have to survive.
 THINK

In your own words, how would you differentiate needs from wants? What are your examples of
needs and wants?
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OPPORTUNITY COST

When economists refer to the “opportunity cost” of a resource, they mean the
value of the next-highest-valued alternative use of that resource. If, for example, you
spend time and money going to a movie, you cannot spend that time at home reading a
book, and you cannot spend the money on something else. If your next-best alternative to
seeing the movie is reading the book, then the opportunity cost of seeing the movie is the
money spent plus the pleasure you forgo by not reading the book.
Opportunity cost is the value of what you lose when choosing between two or more options. When you decide,
you feel that the choice you've made will have better results for you regardless of what you lose by making it.

THE ECONOMIC RESOURCES

Economic resources are also known as factors of production. There are four major factors of production, which

are utilized in our economy. They are as follows:

(1) Land – The physical space on which production takes place, as well as useful materials – natural resources – found

under it or in it, such as crude oil, iron, coal, or fertile soil.

(2) Labor – This is also termed as human resources. Labor refers to the time and effort, both physical and mental, spent

in producing goods or services.

(3) Capital – Capital has two economic types as a factor of production. Physical Capital consists of things like machinery

and equipment, factory buildings, computers and even hand tools like hammers and screwdrivers. Another type is

Human Capital – the skills and knowledge possessed by workers, (

4) Entrepreneurship – The ability and willingness to combine the other resources – land, labor, and capital – into a

productive enterprise.

CIRCULAR FLOW DIAGRAM

The circular-flow diagram (or circular-flow model) is a graphical representation of the flows of goods and money
between two distinct parts of the economy:
-market for goods and services, where households purchase goods and services from firms in exchange for money;
-market for factors of production (such as labour or capital), where firms purchase factors of production from
households in exchange for money.

The market for goods and services is the place where households spend their money buying goods and services
produced by firms. In other words, is the place where firms sell the goods and services they have produced, receiving a
revenue paid by households.

The circular flow diagram pictures the economy as consisting of two groups — households and firms — that
interact in two markets: the goods and services market in which firms sell and households buy and the labor market in
which households sell labor to business firms or other employees.
MACROECONOMICS AND MICROECONOMICS
The field of economics is traditionally divided into two (2) broad subfields: Macroeconomics and
Microeconomics.

Macroeconomics is the study of economy-wide phenomena dealing with economics behavior of the whole economy or
its aggregates such as the government and businesses. It is concerned with the discussion of topics like gross domestic
product (GDP) inflation, unemployment, and economic growth. Economist – and society at large – agree on three
important macroeconomic goals: economic growth, high employment, and stable prices.

Microeconomics is the study of how households and firms make decisions and how they interact in markets. It deals with
the economic behavior of individual units such as consumers, firms, and the owners of the factors of production. It looks
at the choices they make and how they interact with each other when they come together to trade specific goods and
services.

Micro and macroeconomics are intertwined, so as economists gain understanding of certain phenomena, they
can help nations and individuals make more informed decisions when allocating resources. However, we must note that
what is true in Microeconomics may not be true in Macroeconomics. For instance, a farmer gets better harvest. This means
more income for him, if all farmers have increased their harvest; it is not favorable for them. It is because, increasing the
supply reduces the prices of goods.

MICROECONOMIC CONCEPTS

Microeconomics is the social science that studies the implications of incentives and decisions, specifically about
how those affect the utilization and distribution of resources. Microeconomics shows how and why different goods have
different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how
individuals best coordinate and cooperate with one another. Generally speaking, microeconomics provides a more
complete and detailed understanding than macroeconomics.
Microeconomics is the study of what is likely to happen (tendencies) when individuals make choices in response
to changes in incentives, prices, resources, and/or methods of production. Individual actors are often grouped into
microeconomic subgroups, such as buyers, sellers, and business owners. These groups create the supply and demand for
resources, using money and interest rates as a pricing mechanism for coordination.

Utility is a term in economics that refers to the total satisfaction received from consuming a good or service.
Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. The
economic utility of a good or service is important to understand, because it directly influences the demand, and therefore
price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify.
Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service.
The concept of marginal utility is used by economists to determine how much of an item consumers are willing to
purchase. Positive marginal utility occurs when the consumption of an additional item increases the total utility. On the
other hand, negative marginal utility occurs when the consumption of one more unit
decreases the overall utility.

The Law of Diminishing Marginal Utility states that all

else equal as consumption increases the marginal utility
derived from each additional unit declines. Marginal utility is
derived as the change in utility as an additional unit is
consumed. Utility is an economic term used to represent
satisfaction or happiness. Marginal utility is the incremental increase in utility that results from consumption of one
additional unit.

EXPLORE

Click the link for a better understanding about the Law of Diminishing Utility
https://www.investopedia.com/terms/l/lawofdiminishingutility.asp
It should be carefully noted that is the marginal utility and not the total utility than declines with the increase in the
consumption of a good. The law of diminishing marginal utility means that the total utility increases but at a

Disposable income, also known as disposable personal income (DPI), is the amount of money that households
have available for spending and saving after income taxes have been accounted for. Disposable personal income is often
monitored as one of the many key economic indicators used to gauge the overall state of the economy.
DPI = Personal Income − Personal Income Taxes/Bills and other insurances

Disposable income is an important measure of household financial resources. For example, consider a family with
a household income of Php100,000, and the family has an effective income tax rate of 25% (versus marginal tax rate). This
household's disposable income would then be Php75,000 (Php100,000 – Php25,000). Economists use DPI as a starting
point to gauge households' rates of savings and spending.

MACROECONOMIC CONCEPTS

Macroeconomics is a vast subject and a field of study in itself.

However, some quintessential concepts of macroeconomics include
the study of national income, gross domestic product (GDP),
inflation, unemployment, savings, and investments to name a few.

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services
produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it
functions as a comprehensive scorecard of a given country’s economic health.
Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country
during a specific period. It provides an economic snapshot of a country, used to estimate the size of an economy and
growth rate. It can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation
and population to provide deeper insights. Though it has limitations, GDP is a key tool to guide policymakers, investors,
and businesses in strategic decision making.
 The calculation of a country's GDP encompasses all private and public consumption, government outlays,
investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. (Exports are
added to the value and imports are subtracted)

Gross national product (GNP) is an estimate of total value of all the final products and services turned out in a
given period by the means of production owned by a country's residents.
GNP measures the output of a country's residents regardless of the location of the actual underlying economic
activity. Income from overseas investments by a country's residents counts in GNP, and foreign investment within a
country's borders does not. This is in contrast to GDP which measures economic output and income based on the location
rather than nationality.

GNP and GDP can have different values, and a large difference between a country's GNP and GDP can suggest a
great deal of integration into the global economy.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the
decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods
and services in an economy over some period of time. The rise in the general level of prices, often expressed as percentage
means that a unit of currency effectively buys less than it did in prior periods.
 Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and
prices decline.

THINK

Go to https://money.cnn.com/2016/04/12/news/economy/venezuela-imf-economy/ and
read the article entitled, “Venezuela: the land of 500% inflation.” Then do the following:
1. Explain how Venezuela got into a state of hyperinflation.
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2. Based on the article, give your insights on the impact of politics to economic stability
in a country.
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POSITIVE AND NORMATIVE ECONOMICS

Normative economics is a perspective on economics that reflects normative, or ideologically prescriptive

judgments toward economic development, investment projects, statements, and scenarios.
Normative economics focuses on the ideological, opinion-oriented, prescriptive, value judgments, and "what
should be" statements aimed toward economic development, investment projects, and scenarios. Its goal is to summarize
people's desirability (or the lack thereof) to various economic developments, situations, and programs by asking or quoting
what should happen or what ought to be.
Normative economics is subjective and value-based, originating from personal perspectives, feelings, or opinions
involved in the decision-making process. Normative economics statements are rigid and prescriptive in nature. They often
sound political or authoritarian, which is why this economic branch is also called "what should be" or "what ought to be"
economics.
An example of a normative economic statement is: "The government should provide basic healthcare to all
citizens." As you can observe from this statement, it is value-based, rooted in personal perspective, and satisfies the
requirement of what "should" be.
 Unlike positive economics, which relies on objective data analysis, normative economics heavily concerns itself
with value judgments and statements of "what ought to be" rather than facts based on cause-and-effect statements. It
expresses ideological judgments about what may result in economic activity if public policy changes are made. Normative
economic statements can't be verified or tested.
Positive economics is a stream of economics that focuses on the description, quantification, and explanation of
economic developments, expectations, and associated phenomena. It relies on objective data analysis, relevant facts, and
associated figures. It attempts to establish any cause-and-effect relationships or behavioral associations which can help
ascertain and test the development of economics theories.
Positive economics is objective and fact-based where the statements are precise, descriptive, and clearly
measurable. These statements can be measured against tangible evidence or historical instances. There are no instances
of approval-disapproval in positive economics.
Here's an example of a positive economic statement: "Government-provided healthcare increases public
expenditures." This statement is fact-based and has no value judgment attached to it. Its validity can be proven (or
disproven) by studying healthcare spending where governments provide healthcare.

THINK

Give at least 3 examples of Normative and Positive Economic statements

Normative Positive

1.

2.

3.
DIVISIONS OF ECONOMICS

Economics has five (5) major divisions. These divisions are as follows:

(1) Production – This refers to the process of producing or creating goods needed by the households to satisfy their

needs and wants. The factors of production are called inputs and the goods and services that have been created are

called outputs of production.

(2) Distribution – This 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 household.

(3) Exchange – This is a 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 – This refers to the proper utilization of economic goods. Since goods and services could not be

consumed unless paid for, then we can also say that consumption is spending money for goods and services for direct

satisfaction

5) Public Finance – This pertains to the activities of the government regarding taxation, borrowings, and expenditures. It

deals with the efficient us e and fair distribution of public resources in order to achieve maximum social benefits.