INTRODUCTION TO ECONOMICS

LEARNING OBJECTIVES
• DEFINE BASIC TERMS IN APPLIED ECONOMICS
• IDENTIFY THE BASIC ECONOMIC PROBLEMS OF THE COUNTRY
 WHAT IS ECONOMICS?
• ECONOMICS DEFINED - ECONOMICS IS THE STUDY OF THE ALLOCATION OF SCARCE
RESOURCES TO MEET UNLIMITED HUMAN WANTS.
• IS A SOCIAL SCIENCE CONCERNED WITH USING SCARCE RESOURCES TO OBTAIN THE
MAXIMUM OF THE UNLIMITED WANTS OF SOCIETY.
• IS THE STUDY OF HOW SOCIETIES USE SCARCE RESOURCES TO PRODUCE COMMODITIES AND
DISTRIBUTE THEM AMONG DIFFERENT PEOPLE
• IS THE STUDY OF PRODUCTION, DISTRIBUTION, SELLING AND USE OF GOODS AND SERVICES
• IS THE STUDY OF HOW PEOPLE USE THEIR LIMITED RESOURCES TO TRY TO SATISFY UNLIMITED
WANTS.
 TYPES OF RESOURCES

• ECONOMIC RESOURCES- WITH THE USE OF MONEY

• NON-ECONOMIC RESOURCES- FREE, ABUNDANT IN SUPPLY
 ATTRIBUTES OF ECONOMIC RESOURCES
• SCARCE
• VERSATILE
• MUST BE COMBINED IN VARYING PROPORTIONS IN ORDER TO PRODUCE GOODS
 DIVISIONS OF ECONOMICS
• MICROECONOMICS - IS CONCERNED WITH DECISION-MAKING BY INDIVIDUAL ECONOMIC
AGENTS SUCH AS FIRMS AND CONSUMERS.
• MACROECONOMICS - IS CONCERNED WITH THE AGGREGATE PERFORMANCE OF THE ENTIRE
ECONOMIC SYSTEM.
 BRANCHES OF ECONOMICS
• POSITIVE ECONOMICS- ALSO KNOWN AS DESCRIPTIVE ECONOMICS; BASED ON FACTS AND
FIGURES
• NORMATIVE ECONOMICS- PRESCRIPTIVE ECONOMICS; VALUE JUDGEMENT
 CLASSIFICATIONS OF ECONOMIC SYSTEMS
• CLOSED ECONOMIC SYSTEM (COMMUNISM)- HIGHLY CENTRALIZED
• OPEN (CAPITALISM)- DECENTRALIZED, OPEN ENTERPRISE
• MIXED ECONOMIC SYSTEM- OPEN AND CLOSED
• TRADITIONAL ECONOMIC SYSTEM – BACKWARD ECONOMIC SYSTEM
 ECONOMIC ACTIVITIES
• PRODUCTION
• CONSUMPTION
• DISTRIBUTION
• EXCHANGE
CIRCULAR FLOW OF GOODS AND SERVICES
 FACTORS OF PRODUCTION
• LAND- IT IS THE ORIGINAL RESOURCES OR RESOURCES OF ALL MATERIAL WEALTH
• LABOR- IS THE EFFORT OF THAT PEOPLE CONTRIBUTING TO PRODUCTION OF GOODS AND
SERVICES
• CAPITAL- RESOURCES FROM THE DURABLE GOODS OF AN ECONOMY, PRODUCED TO
PRODUCE ANOTHER GOOD
• ENTREPRENEUR- IS THE PERSON WHO SUMS UP ALL THE FACTORS OF PRODUCTION TO EARN
A PROFIT
 FACTOR PAYMENTS
• RENT- FACTOR PAYMENT FOR THE USE OF LAND
• SALARY AND WAGES- FACTOR PAYMENT FOR THE USE LABOR
• INTEREST - FACTOR PAYMENT FOR THE USE CAPITAL
• PROFIT- FACTOR PAYMENT FOR ENTREPRENEURSHIP
 INPUT AND OUTPUT MARKET

• INPUT MARKET- INCLUDES COMMODITIES THAT ARE USED TO PRODUCED GOODS AND
SERVICES
• OUTPUT MARKET- RESULT OF PRODUCTION PROCESS THAT ARE EITHER CONSUMED OR USED
FOR FURTHER PRODUCTION.
MOST SOCIETIES HAVE ONE OR MORE OF THE FOLLOWING
GOALS, DEPENDING ON HISTORICAL CONTEXT, PUBLIC
OPINION, AND SOCIALLY ACCEPTED VALUES
• ECONOMIC EFFICIENCY
• ECONOMIC GROWTH
• ECONOMIC FREEDOM
• ECONOMIC SECURITY
• EQUITABLE DISTRIBUTION OF INCOME
• FULL EMPLOYMENT
• PRICE LEVEL STABILITY
• REASONABLE BALANCE OF TRADE.
 ECONOMIC GOALS ARE SUBJECT TO:
• INTERPRETATION - PRECISE MEANINGS AND MEASUREMENTS WILL OFTEN BECOME THE
SUBJECT OF DIFFERENT POINTS OF VIEW, OFTEN CAUSED BY POLITICS.
• GOALS THAT ARE COMPLEMENTARY ARE CONSISTENT AND CAN OFTEN BE ACCOMPLISHED
TOGETHER.
• CONFLICTING - WHERE ONE GOAL PRECLUDES, OR IS INCONSISTENT WITH ANOTHER.
• PRIORITIES - RANK ORDERING FROM MOST IMPORTANT TO LEAST IMPORTANT; AGAIN
INVOLVING VALUE JUDGMENTS.
 ECONOMIC PROBLEMS
1. THE ECONOMIZING PROBLEM INVOLVES THE ALLOCATION OF RESOURCES AMONG
COMPETING WANTS. THERE IS AN ECONOMIZING PROBLEM BECAUSE THERE ARE: LIMITED
AND UNLIMITED RESOURCES
2. RESOURCES AND FACTOR PAYMENTS: ISSUES ON FACTOR OF PRODUCTION AND FACTOR
PAYMENTS
3. FULL EMPLOYMENT INCLUDES THE NATURAL RATE OF UNEMPLOYMENT AND DOWN TIME
FOR NORMAL MAINTENANCE (BOTH CAPITAL & LABOR). HOWEVER, FULL PRODUCTION OR
100% CAPACITY UTILIZATION CANNOT BE MAINTAINED FOR A PROLONGED PERIOD
WITHOUT LABOR AND CAPITAL BREAKING-DOWN:
 ECONOMIC PROBLEMS
• 4. ECONOMIC EFFICIENCY CONSISTS OF THE FOLLOWING THREE COMPONENTS:
• ALLOCATIVE EFFICIENCY - IS MEASURED USING A CONCEPT KNOWN AS PARETO
SUPERIORITY (OR OPTIMALITY)
• PARETO OPTIMAL - IS THAT ALLOCATION WHERE NO PERSON COULD BE MADE BETTER OFF
WITHOUT INFLICTING HARM ON ANOTHER
• PARETO SUPERIOR - IS THAT ALLOCATION WHERE THE BENEFIT RECEIVED BY ONE PERSON IS
MORE THAN THE HARM INFLICTED ON ANOTHER. [COST - BENEFIT APPROACH
• TECHNICAL EFFICIENCY - FOR A GIVEN LEVEL OF OUTPUT, YOU MINIMIZE COST OR
(ALTERNATIVELY) FOR A GIVEN LEVEL OF COST YOU MAXIMIZE OUTPUT.
• FULL EMPLOYMENT - FOR A SYSTEM TO BE ECONOMICALLY EFFICIENT THEN FULL
EMPLOYMENT IS ALSO REQUIRED.
 ECONOMIC PROBLEMS
5. ALLOCATIONS OF RESOURCES IMPLY THAT DECISIONS MUST BE MADE, WHICH IN TURN
INVOLVES CHOICE. EVERY CHOICE IS COSTLY; THERE IS ALWAYS THE LOST ALTERNATIVE -- THE
OPPORTUNITY COST:
OPPORTUNITY COST - THE NEXT BEST ALTERNATIVE THAT MUST BE FOREGONE AS A
RESULT OF A PARTICULAR DECISION.
6. ECONOMIC SYSTEMS RARELY EXIST IN A PURE FORM.
7. LAW OF INCREASING OPPORTUNITY COSTS