CHAPTER ONE: INTRODUCTION TO ECONOMICS

- The study of economics is a part of our lives.

- Economic decision is needed in order to minimize risk.

Economic activity

"Man's best economic activity"

Man's basic economic activity consists of efforts to satisfy human wants with the use of
goods and services. Three elements are involved in this objective of satisfaction.

1. Human wants
-Human wants vary, from the needs for survival to higher needs for a comfortable
and more meaningful life. In addition, man is subject to created wants, developed
due to the effects of advertising and demonstrative effects of consumption.

2. Use of resources
-The basic economic resources of a nation consist of land, labor, capital and
entrepreneurship. The economy should pay the owners of these basic factor of
production for the use of their resources such as rent for the land, wage pr salary for
labor, interest for capital and profit for entrepreneurship.

3. Technique of production
-It shows how resources are used and combined in production. In effect, the basic
activities of man also constitute the basic exchange that take place between the
business firm and the consumers.

Economics
- A social science concerned with using scarce resources to obtain the maximum
satisfaction of the unlimited material wants of the society.

- The study of production, distribution, selling and use of goods and services.

Two important factors in the definition of Economics:

1. Scarce resources
- A country may have its limited but at the same time unlimited resources.

2. Unlimited wants
- A parson's desire or preference for a specific way of satisfying a basic need.

Goods are classified according to the following:

1. According to USE
a. Consumer goods
b. Capital goods

2. According to IMPORTANCE
a. Essential goods
b. Luxury goods

3. According to whether goods are ECONOMIC or FREE

a. Economic goods
b. Free goods
 4. According to the MEANS OF PRODUCTION
a. Industry
b. Agricultural production

ECONOMIC CHOICE
- Since wants are unlimited and resources are scarce choosing the best option is
essential. This can be achieved through the consideration of the so called “OPPORTUNITY
COSTS”.

OPPORTUNITY COST – the cost of choosing to use resources for one purpose
measured by the sacrifice of the next best alternative for using those resources.

THE FUNDAMENTAL ECONOMIC PROBLEM

Scarcity is the reason why people economize. It gives rise to economic problems and is
the reason why man has to make an economic decision before acquiring something of value.

In decision-making the following basic questions must be considered in order to come up

with the best solution.

1. What goods to produce?

2. How much goods to produce?

3. How goods shall be produced?

4. For whom shall goods be produced?

TYPES OF ECONOMIC SYSTEMS

1. Traditional economy

2. Market Economy

3. Command Economy
- A society in which the government owns all the nation's resources.

4. Socialism
- The government owns and operates the basic industries while private individuals are
allowed to operate the rests of the businesses.

5. Mixed Economy

THE ECONOMIC RESOURCES

1. Land
- natural resources, not man made.

2. Labor
- any form of human effort exerted in the production of goods.

3. Capital
- Investments to be used in the production of another goods and services.
 4. Entrepreneurial ability
- a person who combines other economic resources to produce the required goods and
services.

FUNCTIONS OF THE ENTREPRENEUR

1. Organize production.

2. Makes business decision and answers the basic questions.

3. Bear the risk

4. Innovates by introducing new product ideas and formulate new strategies.

GOALS OF ECONOMIC SYSTEM

1. Economic growth

2. Full employment

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3. Economic efficiency

4. Price level stability

5. Economic freedom

6. Equitable distribution of income

7. Economic security

8. Balance of trade

DIVISION OF ECONOMICS

1. Microeconomics
- Behavior and activities of specific economic units.

2. Macroeconomics
- Behavior of the economy as a whole.

Price theory and economic theory

Price theory (microeconomic theory) and the theory of the economy as a whole
(macroeconomic theory) constitute the basic analytical tool kit of the discipline of economics.
Both parts of the kit are essential to a thorough understanding of economic activity.

Microeconomics is concerned primarily with the market activities on individual economic

units such as consumers, resource owners, and business firms. It is concerned with the flow of
goods and services from business firms to consumers, the composition of the flow, and the
process for establishing the relative prices of the component parts of the flow.

Macroeconomics treats the economic system as a whole rather treating the individual
economic units of which it is composed. The value of the overall flow of goods and the value of
the overall flow of resources receive the focus of attention.
Comparative statics vs. Dynamic analysis

Comparative statics focuses in the shift in equilibrium positions for an individual decision
unit, a market, or an economic system. Let us say in a competitive market, demand and supply
for commodity reaches equilibrium at the price of P20 per unit. If demand exceeds supply, it is
possible that price would go up to say P22 per unit. Comparative statics is applicable here
because there is a shift in equilibrium brought about by an increase or shift in demand.

Equilibrium refers to a state in which there is a balance of internal forces and no

tendency for the situation to change unless outside forces intervene.

Dynamic analysis focuses on the pattern and rate of change for some variable between
points in time. In the static model, the initial price of P20 was predicted to go up to P22 without
telling us about the time it will take for the price to increase. If the model tells us that the price
of the commodity would go up in a week's time, then the dynamic analysis is used.

Partial vs. General equilibrium

Partial equilibrium analysis compared equilibrium changes for one decision unit or one
market independent of related changes in the economic system. It assumes for the purpose of
analysis that other factors will remain the same.

General equilibrium analysis recognizes the interdependence of all decisions units and all
markets in the economic system. It examines changes within the context of the entire system.
All variables are allowed to adjust in response to the initial change.
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