Economics

The social science that involves the use of scarce resources to satisfy unlimited wants.

Scarcity
A condition where there are insufficient resources to satisfy all the needs and wants of a population.

2 Types of Scarcity
• Relative Scarcity – when a good is scarce compared to demand.
• Absolute Scarcity - when supply is limited.

Choice and Decision-making

Because of the presence of scarcity, there is a need for man to make decisions in choosing how
to maximize the use of the scarce resources to satisfy as many wants as possible. This means that, in
making a decision, one alternative (or possibly more) is discarded in favor of another.

• Because of the presence of scarcity, there is a need for man to make decisions in choosing how
to maximize the use of scarce resources to satisfy as many wants as possible.
• Example:
– A homemaker who has a monthly budget needs to decide on how to utilize it to pay the
rent, to buy food, to pay the children’s tuition fees, and to buy new clothes and shoes.
If the budget is not enough, then the homemaker has to give up some of these things.
She needs to make a choice.
If she decides not to buy new shoes for her children at the start of the school year, then
this is the choice she gave.

How does ECONOMICS relate to SCARCITY?

• This is reason why people have to practice economics.
• Part of human behavior is the tendency of a man to want or to have as many goods and services
as he can, however, his ability to buy goods and services is limited by his income and purchasing
power.

OPPORTUNITY COST
 It refers to the value of the best foregone alternative.
 It holds true for individuals, businesses, and even a society.

Economic resources
These are the resources used to produce goods and services. They are more commonly referred
to as factors of production.

ECONOMIC RESOURCES
1. Land – soil and natural resources that are found in nature and are not man-made. Owners of
lands receive a payment known as rent.
2. Labor – physical and human effort exerted in production. The income received by labors is
referred to as wage.
3. Capital – man-made resources used in the production of goods and services. The owner of
capital earns an income called interest.
Why is ECONOMICS considered as a SOCIAL SCIENCE?
 It is considered a social science in that it studies human behavior.
 It studies how individuals make choices in allocating scarce resources to satisfy their unlimited
wants.
social science, is the study of society and how people behave and influence the world around
them.

Two branches of economics:

macroeconomics and microeconomics

MACROECONOMICS
 It is a division of economics that is concerned with the overall performance of the entire
economy.
 It studies the economic system as a whole rather than the individual economic units that make
up the economy.
 It focuses on the overall flow of goods and resources and studies the causes of change in the
aggregate flow of money, the aggregate movement of goods and services, and the general
employment of resources.
 It is about the nature of economic growth, the expansion of productive capacity, and the growth
of national income.

MICROECONOMICS
 It is concerned with the behavior of individual entities such as the consumer, the producer, and
the resource owner.
 It is more concerned on how goods flow from the business firm to the consumer and how
resources move from the resource owner to the business firm.
 It is also concerned with the process of setting prices of goods that is also known as Price
Theory.
 It studies the decisions and choices of the individual units and how these decisions affect the
prices of goods in the market.
 It examines alternative methods of using resources in order to alleviate scarcity.
Basic All societies are faced with basic questions in the economy that have to be answered in
order to cope with constraints and limitations. What are these questions?

Economic Problems of Society

• What to produce and how much
 the goods and/or services to be produced
 the quantity of goods to be produced
• How to produce
 the production method (resource mix and technology)
• For whom to produce
 the market for the goods and/or services
Economic Systems
A country may be under any, or even a combination, of these three types of economic systems.

1. Traditional Economy
Decisions are based on traditions and practices upheld over the years and passed on from
generation to generation. Methods are stagnant and therefore not progressive. Traditional
societies exist in primitive and backward civilizations.
2. Command Economy
This is the authoritative system wherein decision-making is centralized in the government or a
planning committee. Decisions are imposed on the people who do not have a say in what goods
are to be produced. This economy holds true in dictatorial, socialist, and communist nations.
3. Market Economy
This is the most democratic form of economic system. Based on the workings of demand and
supply, decisions are made on what goods and services to produce. People’s preferences are
reflected in the prices they are willing to pay in the market and are therefore the basis of the
producers’ decisions on what goods to produce.

Why Economics Is Important

 Why there is a need for everybody, including the government, to budget and properly allocate
the use of whatever resources are available;
 How to make more rational decisions in spending money, saving part of it, and even investing
some of it; and
 On the national level, how the economy operates and to decide for themselves if government
officials and leaders are effective in trying to shape up the economy and formulate policies for
the good of the nation.

Scientific Approach in the Empirical Testing of an Economic Theory

This scientific approach involves these steps.
1. State the propositions or conditions that are taken as given and do not need further
investigation, as the basic starting point of investigation. These propositions will serve as the
premises upon which the theory is established.
2. Observe facts in connection with the activity that you want to theorize.
3. Apply the rules of logic to the observed facts to determine causal relationships between
observed factors and to eliminate facts that are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may be tested as to whether they
are valid or not.
5. Use statistics and econometrics as empirical proof in testing the hypotheses.