Presented by: Leonides B.

Suing
Definition of Economics
 Economics as a study of wealth
 Utilization of wealth for production and consumption
 Economics as a study of making choices
 Opportunity cost: forgone benefits of an alternative
when making a choice
 Economics as a study of allocation
 Allocation of scarce resources to answer unlimited
human wants

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Definition of Economics
 Economics as a social science
 As a science, uses scientific method of inquiry
 As a social science, uses the scientific method to study
how society creates its material wealth, how it make this
wealth available to its people with minimum difficulties
and it expands its wealth
 Resources and the study of economics
 Natural resources, Human resources, Physical or man-
made resources

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Definition of Economics
 Resources and the study of economics (cont.)
 Raw materials: inputs of production subject to further
processing and transformation
 Factor inputs: transforming inputs that process the raw
materials and intermediate inputs into final goods and
services
 Resources are limited: time-consuming, competing uses

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Definition of Economics
 Human wants and economic analysis
 Human wants are differentiated human needs brought
about by differences in income, taste, environment,
socioeconomic status, etc.
 Scarcity as a source of economic problem
 Scarcity: limitation of resources to answer the expanding
human wants
 Economic goals of society: material survival, stability
and growth
 Scarcity vs. Shortage vs. Surplus

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Definition of Economics
 Allocation and the act of economizing
 Allocation: Social mechanism of distributing limited
resources to meet expanding human wants
 Market system as an allocation mechanism
 Market: state where buyers and sellers transact on the
purchase or sale of a good or service
 Price as cost (sacrifice) and benefit (satisfaction)
 The problem of scarcity is addressed through the
changes in price and the corresponding responses of the
buyers and sellers

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Definition of Economics
 Market system (cont.)
 How can the market system address shortage? or
surplus?
 3 basic economic questions:
 What to produce: increasing prices = high demand
 How to produce: maximize profit by lowering cost of
production
 For whom to produce: allocating a higher proportion of
output to members of a society with high purchasing
power

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Definition of Economics
 Command system as an allocation mechanism
 The state or agency of the government may be in charge
in the allocation of resources by using its political power
in addressing the basic economic problems of
production and distribution
 Used in times of calamities, disasters or national
emergencies when the market system cannot fully
operate
 Used in normal times by totalitarian and socialist states
to pursue industrialization and self-reliance, dictated by
the planning agency of the government
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Definition of Economics
 Tradition in the process of allocation
 Useful in situations where the operation of a market may
not be appropriate or the power of an organized state
has no control over a certain community
 Uses culture, social norms to temper wants by use of
community pressure and criticisms; resources are
communally owned and distribution is collectively
practiced
 Used by indigenous communities

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Economics as a Applied Science
 Economics is a social science and it deals with how
people interact with one another to sustain, stabilize
and develop the material dimension of a society
 Many of the principles, laws and theories developed in
economics can be applied to a number of fields.

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A Framework in Understanding
Decisions using Economic Analysis
 Marginal Benefit – additional benefit derived from an
additional activity
 Marginal Costs – additional cost incurred from an
additional production of a good or service
 MB>MC = Net MB positive = Total Net Benefit
increasing
 MB<MC = Net MB negative = Total Net Benefit
decreasing
 MB=MC = Net MB zero = Total Net Benefit maximum

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Variations in Benefits and Costs
due to Stage of Recognition
 Explicit costs: easily recognized since they are
expressed in monetary terms and may involve actual
financial outlays
 Implicit costs: may not have to incur any monetary
expense; opportunity costs
 Explicit benefits: can be measured in monetary terms
or levels of satisfaction or utility
 Implicit benefits: non-measureable

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Variations in Benefits and Costs
due to Stage of Recognition
 Spacial Dimensions in the Issue of Recognition
 Implicit benefits and implicit costs are harder to
recognize because of the spacial consideration of the
decision maker who may not be aware of the social or
public effect of his actions
 Exclusion of implicit social benefits and implicit social
costs will lead to improper allocation of resources with
its accompanying consequences

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Variations in Benefits and Costs
due to Stage of Recognition
 Temporal Dimension in the Issue of Recognition
 Present benefits and present costs are readily realized
while future benefits and future costs (which are implicit
benefits and implicit costs) are too distant in time to affect
the awareness of the decision maker
 Exclusion of future benefits and future costs will lead to
improper allocation of resources with its accompanying
consequences

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Variations in Benefits and Costs
due to Differences in Valuation
 Even if the decision maker recognizes the implicit
benefits and implicit costs of his action, the
differences between marginal benefits and marginal
costs can still persist
 The proper pricing and valuation of these implicit
costs may have an effect on the optimal decision

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Variations in Benefits and Costs
due to Differences in Valuation
 Spacial Dimension in the Issue of Valuation
 Even if the decision maker has recognized the social
benefits and social costs of his action, various
individuals may have different valuation of these social
impacts
 Temporal Dimension in the Issue of Valuation
 Discount rate: rate which a stream of future values is
reduced to make them comparable with present values

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Economics as an Applied Science
 Social, economic and business issues arise because of
the differences in marginal costs and marginal benefits
 These imbalances result in the improper allocation of
resources and manifest in various problems and issues
in society
 These are due to the non recognition as well as the
differences in valuing the implicit components of the
benefits and costs

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Basic Economic Problems
Confronting the Dev’t of the Phils.
in the 21st Cen.
 Poverty and Unequal Distribution of Income
 Absolute Poverty: lack of income to buy the basic food
and necessities for subsistence living
 Poverty Threshold: income needed to purchase the
minimum nutritional requirements and other basic
necessities for daily survival
 Poverty Incidence: proportion of households in the
country with family income lower than the poverty
threshold

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Basic Economic Problems
Confronting the Dev’t of the Phils.
in the 21st Cen.
 Poverty (cont.)
 Relative Poverty: the structure on how the national
income is being distributed among households in an
economy
 Lorenz Curve: shows the share of the various household
groups on the total national income
 Gini Coefficient: measure of income inequality derived
from the Lorenz Curve
 Perfect equality = 0; Perfect inequality = 1

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Basic Economic Problems
Confronting the Dev’t. of the Phils.
in the 21st Cen.
 Demographic Changes and its Economic Implications
 Population growth, is it good or bad?
 Economics of Childbirth: looks at the benefits and costs
of having a child
 Low Investment in Human Resource Development
 Knowledge capital: heavy investments in higher
education, science and technology, and research and
development

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Basic Economic Problems
Confronting the Dev’t of the Phils.
st
in the 21 Cen.
 Weak Infrastructure
 How to finance? Borrowing, taxation, public-private
partnership
 Pursuing Food Security
 Food security vs. food self-sufficiency
 Slow Adaptation of Modern Technology
 Labor intensive technology vs. Capital intensive
technology

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Basic Economic Problems
Confronting the Dev’t. of the Phils.
in the 21st Cen.
 Environmental Sustainability and the Country’s
Development Thrust
 The environment is part of natural resources where we
derive income from the utilization of its wealth.
 However, excessive use of our natural resources may
compromise its ability to provide income and other
benefits in the future.

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Synthesis
 We started with the realization that we live in an
environment of limited resources
 These limited resources must be properly used to give us
the highest level of satisfaction, welfare and net benefit
 Economics gives us three major mechanisms or systems of
allocating resources
 The tools of applied economics can be used in
understanding socioeconomic and business issues
 The tools of applied economics can also be used in
proposing alternative solutions to socioeconomic and
business problems

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