Lesson 1: Introduction to Economic Theory

Objective:
At the end of the lesson, students is expected to:
1. Define basic economic terms;
2. Identify the eleents involved in the objective of satisfying wants;
3. Differentiate economic analysis and economic theory;
4. Itemize the characteristics of microeconomics;
5. Apply the use of economic models in economic analysis;
6. Present an overvies of the circular flow in the economy;
7. Differentiate the types of economic system.

Today, current economic situation seems to interest everybody in

society. The provider, the laborer, the bank tellerm, the accountant, the
college professor, and even the student. While some of these people
have no backgroun in economics, it comes as a challenge for a college
student to familiarize himself with what economics is all about. He or
she gets to learn how to analyze economic theory and to explain why
things are happening in the economy.

To have an advantage in economics it is just proper to have a knowledge

on economic theory.

This are the following terms to Remember:

BASIC NEEDS - men’s need required for his survival.

CAPITAL - materials used in the production of goods and services
including money
ECONOMIC RESOURCES - inputs used in the production of goods and
services.
ECONOMIC SYSTEM - inputs used in the production of goods and
Services
ECONOMICS - a social science concerned with man’s problem of issuing
scarce resources to satisfy unlimited wants.
EMPIRICAL VALIDATION - the use of statistical evidence to prove the
validity of hypothesis.
ENTREPRENEUR - organizes all other factors of production to be used in
the creation of goods and services.

FREE ENTERPRISE SYSTEM - a system in which all economic resources

are privately owned. Individuals are free to engage in a business of their
choice.
FUNCTION - depicts the relationship between two or more variables. It
shows how one variable, called the dependent variable, depends on
another variable or variables, called the independent variable. For
example, the deamnd function shows how demand, the dependent
variable, varies according to a change in price, the independent variable.
LABOR - human effort expanded in production regarding basic
economics problems.
LAND - natural resource, not man-made covering anything found on or
under land, water, forest, minerals, and animals.
LUXURY GOODS - goods that man can do without.
MACROECONOMICS - the branch of economics that studies the
economy as a whole; also known as national income analysis.
MARKET - context in which buyers and sellers buy and sell goods,
services and resources.
MICROECONOMICS - the branch of economics that deals with parts of
the economy such as the household and the business firm;
also known as price theory.
NORMATIVE ECONOMICS - an analysis of economics which deals with
what should be

POSITIVE ECONOMICS - an analysis of economics which deals with what

actually is

RIGHT TO PRIVATE PROPERTY - the right of private individuas and

enterprises to own things of value.
THEORY/HYPOTHESIS - an unproven proposition tentatively accepted to
explain certain facts or to provide a bsis for further
Investigation
VARIABLE - a factor that is subject to change or variation

WANTS - the various desires and needs of consumers that have to be

satisfied through the use of goods and services.

Introduction