Module 3: The Discipline of Economics

Objectives:
o Connect the discipline of economics

I. What is Economics?
o Economics – study of the allocation of resources within the household level.
Greek words: oikos (house) and nomos (costum/law)—refers to the rules
implemented in the household to ensure its efficient management.
o 19th century was recognized “political economy” as referring to its analysis of
systematic exchanges that include production rate, labor relations, and
commodity consumptions.
o Later replaced with the term “economy” to refer to the discipline that studies the
interaction of economic agents and the systems in which they perform their
transactions.
II. Development of Economic Thought
o Chanakya (350 BCE)
 Arthashastra – are welfare state, labor inequality, and economic
diversification. The state is to ensure that every member will have access
to production and services
o St. Thomas Aquinas (Summa Theologica)
 Discussed the concept of “just price.”—a just or a fair price is attained by
lowering the margin of profit without sacrificing the labor cost. Raising
the prices of highly demanded products is immoral.
o 16th-18th centuries
 Dominant economic practice prevailing during that time was
“mercantilism.”—allows a strict government regulation of trade within
its territories. (Victor de Riqueti)
 Characterized by the implementation of tariffs and heavy exportation of
products.
o Thomas Mun (A Discourse of Trade from England unto the East Indies)
 Urged the government to limit local consumption of products so that these
will be available for exportation.
o Adam Smith (The Wealth of Nations)
 Promoted the concept of free market and argued that the self-interests of
individuals promote a healthy competition in the market, which in turn,
provides the societal benefit of having self-regulating prices and
availability of goods.
o Alfred Marshall (Principles of Economics)
 Smith’s theory is problematic due to:
 Focuses too much on wealth without considering the value of
human welfare
 The invisible hand is only as good as the market when it is free from
monopoly of the upper class.
  Defined economics as “ a study of man in the ordinary business of life. It
enquires how he gets his income and how he uses it. The study of wealth is
on the one side, the study of man is on the other and more important side.
o David Ricardo (On the Principles of Political Economy and Taxation)
 Suggested the concept of “specialization” wherein the country must
produce goods that it is most competent with and import goods that it
does not specialize on.
III. Fields of Economics
o Microeconomics – focuses on small scale market interactions that transpire
between individual consisting business forms and households
o Macroeconomics – focuses on the analyzing of the determinants of national
income.
o Mainstream economics – focused on understanding the interconnection between
the concepts of rationality, individualism, and equilibrium. Human participate in
economic activities based on some precalculated cost and the benefit of doing so
—rational choice theory.
o Heterodox economics – shift from mainstream economics. Focuses on the
interconnection of concepts like institutions, history, and social structure. Allows
for an examination of social reality as intrinsically dynamic and organic.
o Economic theory – an umbrella term that refers to the explanation and
understanding of the process and interactions related to the production and
consumption of goods within a market system.
o Applied Economics – utilizes economic theories and formulas to real-world
scenarios with the goal of predicting possible events and outcomes.
o Positive economics – aims to explain economic phenomena and behavior.
o Normative Economics – focuses on providing explanations and arguments on
how economic policies should be.
IV. Key Concepts in Economics
o Market
- Exchange between consumers and sellers transpire
- A system where such exchanges of goods take place
- A theoretical arena where sellers compete for the patronage of costumers.
o Supply and Demand
- Supply refers to the entirety of available goods that the market can offer
- Demand represents the actual quantity of goods or services that the public
requires from the market.
o Specialization
- Refers to a method in production where in the process of producing goods and
services is concentrated to a particular group of individuals or region.
o Production
- Process wherein raw materials are transformed into usable goods or
commodities.
- Its elements include land (source of natural resources), labor (human
resources), capital (financial resources), and entrepreneurship (the process of
engaging in an economic activity.
V. Research Methods in Economics
 o Behavioral Economics
- Provides analysis that fuses economic principles with psychological
framework.
- Presents a more individualistic and realistic twist to the usual abstract and
formula-based projections of classic economics.
o Classical Economics
- maintains that the market must be free from intervention for it to have a
dynamic and self-perpetuating trajectory.
o Computational Economics
- Involves the development of mathematical methods with the aid of
computers.
o Econometrics
- Using formulas derived from mathematical and statistical procedures,
econometrics provides quantitative analysis and projections of an economic
phenomenon.
o Evolutionary Economics
o Experimental Economics
o Praxeology
- Human actions are done on a calculated purpose or objective.
VI. Current Applications of Economics
o Economics of Education
- Considers the impact of education as a key point in analyzing the economic
behavior and potentials of individual groups.
 Why do people invest in education?
 How does having an education promote social development?
o Environmental Economics
- The processes involved in the harvest and transfer of raw materials and
products entail consequences to the environment.
- Corporations also utilizes research from this field in drafting their community
projects.
o Welfare Economics
- The promotion of an equitable distribution of wealth within a society.