MODULE 1 : INTRODUCTION TO COURSE AND ECONOMICS

Economics
- Is the study of ALLOCATION OF SCARCE RESOURCES to meet UNLIMITED
human wants.

VITAL FUNCTION OF AN ECONOMY:

● Consumption
● Production
● Capital Formation

Economizing of Resources
- refers to making optimum use of the available resources.

TWO GENERAL CATEGORIES OF ECONOMICS

1. Microeconomics - concerned with decision-making by individual

economic agents such as firms and consumers.

2. Macroeconomics - concerned with the aggregate performance of the

entire economic system.

METHODS IN ECONOMICS

A. Empirical economics - relies upon facts to present a description of

economic activity.

B. Economic theory - relies upon principles to analyze behavior of economic

agents.
FORMS OF LOGIC

A. Inductive logic - creates principles from observation.

B. Deductive logic - hypothesis is formulated and tested.

USEFULNESS OF ECONOMICS
- economics provides an objective mode of analysis, with rigorous models
that are predictive of human behavior.

a. Scientific approach
b. Rational choice

ASSUMPTIONS IN ECONOMICS
- economic models of human behavior are built upon assumptions; or
simplifications that permit rigorous analysis of real-world events, without
irrelevant complications.

a. model building - models are abstractions from reality - the best model is
the one that best describes reality and is the simplest Occam’s Razor.

b. simplifications:
1. ceteris paribus - means all other things equal.
2. There are problems with abstractions, based on assumptions. Too often, the
models built are inconsistent with observed reality - therefore they are faulty
and require modification. When a model is so complex that it cannot be easily
communicated or its implications easily understood - it is less useful.
GOALS AND THEIR RELATIONS

a. POSITIVE economics is concerned with what is;

b. NORMATIVE economics is concerned with what should be.

1. Economic goals are value statements, hence normative.

c. Economics is not value free, there are judgments made concerning what is
important:
1. Individual utility maximization versus social betterment
2. Efficiency versus fairness
3. More is preferred to less

d. Most societies have one or more of the following goals, depending on

historical context, public opinion, and socially accepted values:
1. Economic efficiency
2. Economic growth
3. Economic freedom
4. Economic security
5. Equitable distribution of income
6. Full employment
7. Price level stability
8. Reasonable balance of trade

GOALS ARE SUBJECT TO:

a. interpretation - precise meanings and measurements will often

become the subject of different points of view, often caused by politics.
 b. goals that are complementary are consistent and can often be
accomplished together.

c. conflicting - where one goal precludes, or is inconsistent with

another.

d. priorities - rank ordering from most important to least important;

again involving value judgments.

THE FORMULATION OF PUBLIC AND PRIVATE POLICY

Steps in formulating policy:

1. stating goals - must be measurable with specific stated objectives to be

accomplished.

2. options - identify the various actions that will accomplish the stated goals
& select one, and

3. evaluation - gathers and analyzes evidence to determine whether policy

was effective in accomplishing a goal, if not re-examine
options and select options most likely to be effective.

OBJECTIVE THINKING:

a. bias - most people bring many misconceptions and biases to economics.

 1. Because of political beliefs and other value system components,
rational, objective thinking concerning various issues requires the
shedding of these preconceptions and biases.

b. fallacy of composition - is simply the mistaken belief that what is true for
the individual, must be true for the group.

c. cause and effect - post hoc, ergo propter hoc - After this, because of this
fallacy.

1. correlation - statistical association of two or more variables.

2. causation - where one variable actually causes another.

d. cost-benefit or economic perspective - marginal decision-making - if

benefits of an action will reap more benefits than costs it is rational to do that
thing.

1. Focus on the addition to benefit, and the addition to cost as the basis
for decision-making.
 MODULE 2 : THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

The Economic Problem

Needs - the essentials of life, such as food and shelter

Wants - desires for non-essential items
Economic Problem - the problem of having unlimited wants, but limited
resources to satisfy them.
Scarcity - limited nature of resources, which underlies the basic economic
problem.
Economic Resources - basic items that are used in all types of production,
including natural, capital, and human resources.
Natural Resources - the resources from nature that are used in production,
including land, raw materials, and natural process.
Capital Resources - the processed materials, equipment, and buildings used
in production; also known as capital.
Human Resources - the efforts of people involved in production, including
labor and entrepreneurship.

Three basic questions must be answered in order to understand an

economic system:
1. What gets produced?
2. How is it produced?
3. Who gets what is produced?

Capital - refers to the things that are themselves produced and then used to
produce other goods and services.
The basic resources that are available to a society are factors of production:
1. Land
2. Labor
3. Capital

Production - is the process that transforms scarce resources into useful

goods and services.

Inputs - resources or factors of production

Outputs - goods and services of value to households

Opportunity Cost - is that which we give up or forgo, when we make a

decision or a choice.

Capital Goods - are goods used to produce other goods and services.

Consumer Goods - are goods produced for present consumption.

Investment - is the process of using resources to produce new capital.

Capital is the accumulation of previous investment.
Production Possibilities Curve (PPC)

- The production possibility

frontier curve has a negative
slope, which indicates a trade-off
between producing one good or
another.
 NOTE: Points inside the curve are inefficient.

● At point H, resources are either unemployed, or are used

inefficiently.

● Point F is desirable because it yields more of both goods,

but it is not attainable given the amount of resources
available in the economy.

● Point C is one of the possible combinations of goods

produced when resources are fully and efficiently
employed.
● A move along the curve illustrates the concept of
opportunity cost.

● From point D, an increase production of capital goods

requires a decrease in the amount of consumer goods.

● The slope of the ppf curve is also called

the marginal rate of transformation
(MRT).

● The negative slope of the ppf curve

reflects the
law of increasing opportunity cost. As we
increase the production of one good, we
sacrifice progressively more of the other.
 Note: Outward shifts of the curve represent economic
growth.

● An outward shift means that it is possible to increase

the production of one good without decreasing the
production of the other.

● From point D, the economy can choose any

combination of output between F and G.

Economic Systems - are the basic arrangements made by societies to solve the
economic problem. They include:

● Command economies
● Laissez-faire economics
● Mixed Systems

Command economy - a central government either directly or indirectly sets output

targets, incomes, and prices.
Laissez-faire economy - individuals and firms pursue their own self-interests
without any central direction or regulation.
● In a laissez-faire economy, the distribution of output is also determined in a
decentralized way. The amount that any one household gets depends on its
income and wealth.

Free-market system - the central institution of a laissez-faire economy.

Market - is the institution through which buyers and sellers interact and engage in
exchange.

Consumer sovereignty - is the idea that consumers ultimately dictate what will be
produced (or not produced) by choosing what to purchase (and what not to
purchase).

Free-enterprise - under a free market system, individual producers must figure out
how to plan, organize, and coordinate the production of products and services.

Price - basic coordinating mechanism in a free market system

- Is the amount that a product sells for per unit. It reflects what society is willing
to pay.

Since markets are not perfect, governments intervene and often play a major role in
the economy. Some of the goals of government are to:

● Minimize market inefficiencies

● Provide public goods
● Redistribute income
● Stabilize the macroeconomy:
○ Promote low levels of unemployment
○ Promote low levels of inflation