LECTURE NOTES IN ECONOMICS
unlimited needs and wants. (Scarcity = Limited Supply
INTRODUCTION
• NATURE AND SCOPE OF ECONOMICS
• SCARCITY AND OPPORTUNITY COST
• BASIC ECONOMIC PROBLEMS
• ECONOMIC SYSTEMS
• ECONOMIC GOALS
NATURE AND SCOPE OF ECONOMICS
DEFINITION OF ECONOMICS
 It comes from the Greek word “oikonomia”
which means household management.
 It deals with how man and society makes a
living, hence, focuses on economic activities
such as consumption, production, distribution
and exchange of goods and services.
 It is a science of choice.
 It is a social science that deals with proper
allocation of scarce resources to satisfy the
unlimited human needs and wants.
 As a science it uses procedures in dealing with
Economic problems.
1. Descriptive Economics – gathering of
relevant data.
2. Economic Analysis/Theory – generalization
from gathered facts. Economic theory is an
abstraction of economic reality.
3. Policy/Applied Economics – formulation of
policy based on economic theories
Economics as a Social Science
Social science studies human behavior just like
Psychology, Anthropology, History, Sociology and
Political Science.
Economics as a social science studies the economic
behavior of man which are reflected on how he
consumes, produce, distribute and exchange goods and
services. It focuses on how man makes a living.
Scarcity central to the study of Economics
Man is confronted with the problem of limited supply of
resources to meet his unlimited needs and wants. This
is the problem of scarcity.
Scarcity arises because resources are limited to meet
of Resources + Unlimited Demand for these Resources)
Scarcity is a fact of life and a universal phenomenon.
Everyone is burdened with scarcity.
Scarcity is the very essence of the study of Economics
Scarce Resources
Scarce resources are the economic resources. These
are classified as:
1. Land – all natural resources
2. capital –man-made goods intended to
facilitate production.
3. labor – manpower skills
4. entrepreneur – one who combines all the
economic resources in order to produce goods
and services.
Unlimited Needs and Wants
Man never gets satiated.
There are aggravating factors to the increasing needs
and wants:
1. population growth
Malthusian theory on Population
2. modernization/technology
3. demonstration effect
4. peer pressure
Choice
Because of scarcity, everyone has to choose how to use
given resources. They need to properly allocate them in
order to meet all needs and even wants.
In choosing an alternative or in making decision, man
needs to compare marginal benefit and the associated
marginal cost of every decision.
Opportunity Cost
In choosing, we should be aware of what to give-up or
sacrifice in favor of a decision or alternative chosen.
Whatever sacrificed (e.g. income, the satisfaction from
attending a party) is called opportunity cost.
Opportunity cost principle asserts that we have to
account for what is sacrificed in every decision made
and compare this with the benefit gained from decision.
In short, we use the cost-benefit analysis in making
decision. We always choose a decision with the least
sacrifice or opportunity cost. This also suggest that we
make the most on whatever decision made in order to
maximize the use of resources.
Basic Economic Problems/Questions
Because of scarcity, there are basic questions to be
addressed to. These are:
 What to Produce (Consumption)?
What kind?
How much?
 How to Produce (Production)?
labor-intensive technique vs. capital-intensive
technique
 For Whom to Produce (Distribution)
according to effort exerted vs. rationing
 Level of Resources or Up to what extent
resources should be used?
sustainable development
 Ability to Adapt to Changes or Flexibility?
Are we ready to face changes like the effects of conflict
between trading partners, environmental factors and
business trends?
Economic Systems
An economic system is a manner by which the basic
questions are answered. It describes the rules that
guide economic agents in allocating scarce resources.
Economic systems can be classified as:
1. Traditional society – Social or religious customs and
traditions largely determine economic decisions and
transactions. The basic questions are answered on the
basis of what these traditions dictate.
2. Capitalist Economic System
a) Freedom of choice and enterprise
b) Private ownership
c) Competition
d) Market Mechanism
e) Limited Role of the Government in the
Economy.
3. Command/Planned Economic System
a) Centrally planned/centralized decision making
b) Economic resources like capital and land are
owned by the state or workers’ occupations.
c) Dominant role of the government or a group in
the economy
4. Mixed Economic System
It is mixture of capitalist and command economic
systems. Hence, the market and the government play
significant roles in the economy.
Economic Goals
Economic societies answer the basic problems
differently (depending on its economic system) but
share common economic goals. These are:
1. rapid economic growth
2. full employment
3. price stability
4. equitable distribution of income
5. economic security
6. economic freedom
Rapid Economic Growth
Economic growth is a sustained increase in the capacity
of the nation to produce diverse output for its
population.
There are three basic requirements to increase
capacity to produce, namely:
1. capital accumulation or investment
2. increase in human capital
3. technological progress
Full-employment
Full-employment can be described as 96 percent of the
members of the labor force are employed.
It can be defined as suitable jobs are available to those
who are looking for work.
Members of the labor force may be out of work due to:
1. downswing in business activity (cyclical
unemployment)
2. their skills do not jibe with demand in the
industry (structural unemployment)
3. jobs are only available on a particular season of
the year (seasonal unemployment)
Price Stability
 Price stability means changes in the general
price level should be managed. It is normal for
the general price level to change but it should
be at a tolerable rate. A double digit rate of
change, whether increase or decrease, is a
macroeconomic problem.
 A rising general price level or inflation burdens
consumers especially the fixed income earners
because the amount goods and services a peso
can buy decreases. As the value of the peso
shrinks, savers and creditors suffer as well. The
interests earned may not be enough to cover
the depreciated value of the amount saved or
loaned to debtors
 Inflation may be caused by either excessive
demand (demand-pull) or high cost of
production (cost-push) factors.
 Deflation is described as falling general price
level. Suppliers are encouraged to sell more at
a higher price. This means that falling prices
discourage sellers and they tend to shut-down
operation during deflation. Closing down
operation begets another macroeconomic
problem of unemployment.
Economic Security
 Economic security means access to basic needs
especially the marginalized group and
dependents of society like children, elderly, and
chronically ill.
Equitable Distribution of Income
 Equitable distribution of income means closing
the gap between the rich and the poor. That is,
increasing the number of those in the middle
income group by making the poor richer.
 Eliminating the gap between the rich and the
poor requires
Economic Freedom
 Economic freedom means freedom to choose
 Hongkong and Singapore top rank in the
Economic Freedom of the World Index 2019 -
Cato Institute
 “to build a better world, we must have the
courage to make a new start. We must clear
away obstacles with which human folly has
recently encumbered our path ad release the
creative energy of individuals. We must create
conditions favourable to progress rather than
planning progress, …The guiding principle in any
attempt to create a world of free men must be
this: a policy of freedom for the individual is
the only truly progressive policy.” -Friedrich A.
Hayek
Two Main Branches of Economics
MICROECONOMICS
-studies the specific economic units of economic
society like the consumer, business firm and industry.
-it is concerned with the following :
a) consumer behavior
b) least-cost combination of inputs of production
c) optimum product mix
d) pricing of goods and factors of production
MACROECONOMICS
-Studies the macroeconomy as a whole
-It is concerned with fluctuations in the nation’s
output, employment and the general price level
Topics discussed are:
a) Measuring the nation’s output
b) Consumption, Savings, Investment and the
Multiplier Effect
c) Government Spending and Taxation
d) Fiscal Policy
e) Money, Banking and The Bangko Sentral ng
Pilipinas
f) Monetary Policy
g) International Trade and the Balance of Payment
Introductory Microeconomics • Price Expectations

 Demand and Supply Concepts As consumers expect price of a product to

 Market Equilibrium increase, say, next week, they tend to buy more
 Production and Cost Theories now.
 Market Structures
• Number of Consumers
 Price and Output Determination
An increase in number of consumers will mean
Demand and Supply Concepts
greater demand for a product.
Demand Concept
• Taste and Preference
1. Law of Demand
Fashion, climate and influencers can change our
2. Other Factors Affecting Demand
taste and preferences
3. Price Elasticity of Demand
Price Elasticity of Demand (Ed)
Supply Concept
 It measures the responsiveness of consumers
1. Law of Supply
towards changes in price of the product
2. Other Factors Affecting Supply
 It is the ratio of change in Qd to change in P or:
3. Price Elasticity of Supply
Ed = change in Qd/change in P

Kinds of Elasticity:
The Law of Demand
1. elastic – change in Qd is greater than
 Price of the product (P) is inversely related with
change in P
Quantity Demanded (Qd)
2. inelastic – change in Qd is less than
 The inverse relationship of P and Qd is
change in P
3. unitary – change in Qd equals change in
a. stated by the Law of Demand - As P increases,
P
Qd decreases assuming other factors are held
4. perfectly elastic – change in Qd is
constant.
infinite as a result of a change in price
b. Illustrated by the downsloping demand curve
5. perfectly inelastic – Qd does not change
c. expressed by the negatively sloped demand
as price changes
equation
Goods that elastic are:
Other Factors Affecting Demand
1. goods with many close substitutes
 Consumer’s income (Y)
2. luxuries
As Y increases, demand for normal/superior goods 3. high priced goods
also increases but demand for inferior goods
Goods that are inelastic are:
decreases.
1. unique goods
As Y decreases, demand for normal goods decreases
2. necessities
but demand for inferior goods increases.
3. goods that consume insignificant portion of the
 Price of substitute goods (Ps) or price of budget
complimentary goods (Pc)

As price of Coca-cola increases, demand for Pepsi – Relationship between Price of the product and Total
Cola increases Revenue
As price of gasoline increases, demand for cars 1. If the product is price elastic, a higher price will
decreases. result to a lower total revenue.
 2. If the product is price inelastic, a higher price Price Elasticity of Supply (Es)
will result to a higher total revenue.
 It measures the responsiveness of sellers
3. If the product is unit elastic, a change in price
towards changes in price of the product.
will not affect total revenue
 It is the ratio of % change in quantity supplied
to % change in price of the product.
 The sensitiveness of sellers to respond to price
The Law of Supply
change depends on
 Price of the product (P) is positively related with
Quantity Supplied (Qs) are directly a. the availability of raw materials
 The directly proportional relationship of P and b. The industry - generally, the agriculture sector
Qs is can hardly respond to changes in price because
its peculiarities in production.
a. stated by the Law of Supply - As P increases, Qs
also increases assuming other factors are held
constant. Other Elasticities of Demand
b. Illustrated by the upward sloping supply curve
Income Elasticity of Demand (Ie)
c. expressed by the positively sloped supply
equation  This measures the responsiveness of demand
for a product to changes in consumers’ income.
Other Factors Affecting Supply
Mathematically, it is the ratio of % change in
Cost of Production demand to % change in consumers’ income.
 The income elasticity of demand coefficient (Ie)
A higher cost of producing the product (e.g. cost of raw
of inferior good is less than zero or negative and
materials, wage, interest on borrowed money) results
more than zero or positive for normal goods.
to lower supply in the market.
Cross Elasticity of Demand (Ce)
Taxes and Subsidies
 This measures the responsiveness of demand to
Higher taxes imposed on sellers will result to lower
changes in price of related goods. Or it is the
supply of in the market. While more subsidies (grants
ratio of % change in demand to % change in
of the government to essential industries) will mean
price of related goods.
more of their goods offered in the market.
 The relationship of two goods (eg. Goods X and
Price Expectation Y) is said to be complementary or partner goods
if the Ce coefficient is less than zero, and
As sellers expect a higher price, they tend reduce
substitute if greater than zero.
present supply and wait for the higher price.

Technology

Improved technology will result to greater supply of the

good in the market.

Price of Other Goods

Sellers are attracted by high price. So, they tend to shift

to other goods with higher price.

Number of Sellers

The more sellers, the greater the supply of the good in

the market.