University of Mindanao 1

College of Teacher Education “Physically Distanced but Academically Engaged”

UNIVERSITY OF MINDANAO
College of Teacher Education
Bachelor of Secondary Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning

(SDL)

Course/Subject: SST 212- Microeconomics

Name of Teacher: Wenji D. Sanchez

________________________________

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT

FOR REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS

INTENDED USE. THIS IS INTENDED ONLY FOR

THE USE OF THE STUDENTS WHO ARE
OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.

EXPECT REVISIONS OF THE MANUAL.

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Course Outline: SST 112- Human Geography
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“Physically Distanced but Academically Engaged”
Wenji D. Sanchez
wsanchez@umindanao.edu.ph
By appointment
0909-794-3439
August 2020
Blended (On-Line with face to face or virtual sessions)
54 Hours
Expected Self-Directed Learning
None
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A minimum of 95% attendance is required at all
scheduled Virtual or face to face sessions.
Details
This 3-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The face
to face sessions shall include the summative
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in the licensure examination for teachers.
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should be emailed to the course coordinator. It is also
expected that you already paid your tuition and other
fees before the submission of the assessment task.
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time by the course coordinator.
Since this course is included in the licensure
examination for teachers, you will be required to take
the Multiple-Choice Question exam inside the
University. This should be scheduled ahead of time by
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NECESSARY)
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Re-marking of Assessment
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your course coordinator. This is non-negotiable for all
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means that if your paper goes beyond 30%, the
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the reasons for the similarity. In addition, if the paper
has reached more than 30% similarity index, the
student may be called for a disciplinary action in
accordance with the University’s OPM on Intellectual
and Academic Honesty.
Please note that academic dishonesty such as
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to complete the task for you have severe
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approved extension of time, will be reduced by 5% of
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item for each day or part day that the assessment
item is late.
However, if the late submission of assessment paper
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Assessment tasks will be returned to you two (2)
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will require some or few of the students for online or
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validate the originality of the assessment task
submitted and to ensure that all the group members
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You should request in writing addressed to the
course coordinator his/her intention to resubmit an
assessment task. The resubmission is premised on
the student’s failure to comply with the similarity index
and other reasonable grounds such as academic
literacy standards or other reasonable circumstances
e.g. illness, accidents financial constraints.
You should request in writing addressed to the
program coordinator your intention to appeal or
contest the score given to an assessment task. The
letter should explicitly explain the reasons/points to
contest the grade. The program coordinator shall
communicate with the students on the approval and
disapproval of the request.
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Grading System
Preferred Referencing Style (IF
THE TASK REQUIRES)
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Head
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Online Tutorial Registration (IF
NECESSARY)
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If disapproved by the course coordinator, you can
elevate your case to the program head or the dean
with the original letter of request. The final decision
will come from the dean of the college.
Course exercises – 30% (including BlackBoard
forum)
1st exam – 10%
2nd exam – 10%
3rd exam – 10%
Final exam – 40
APA 7th Edition
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account which is a requirement to access the
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shall enroll the students to have access to the
materials and resources of the course. All
communication formats: chat, submission of
assessment tasks, requests etc. shall be through the
portal and other university recognized platforms.
You can also meet the course coordinator in person
through the scheduled face to face sessions to raise
your issues and concerns.
For students who have not created their student
email, please contact the course coordinator or
program head.
Dr. Jocelyn Bacasmot
Email: jbacasmot@umindanao.edu.ph
Phone: 082-3050647 local 102
Dr. Maribel Abalos
Email: mabalos@umindanao.edu.ph
Phone: 082-3050647 local 102
Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need,
the course coordinator with the approval of the
program coordinator may provide alternative
assessment tasks or extension of the deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
You are required to enroll in a specific tutorial time for
this course via the www.cte.edu.ph portal. Please
note that there is a deadline for enrollment to the
tutorial.
0923-602-8780
BSED@umindanao.edu.ph
Brigida E. Bacani
library@umindanao.edu.ph
0951-376-6681
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Course Description
The course focuses in analyzing the market system, means of production, consumption,
exchange, determinants of supply and demand, theories of consumer behavior, basic
economic theories, and history of economics.

Course Outcomes
At the end of the course, you should be able to:
1. Demonstrate knowledge of the market system, means of production, consumption,
exchange, determinants of supply and demand;
2. Demonstrate understanding on the theories of consumer behavior, basic economic
theories, and history of economics; and
3. Apply critical and creative thinking through a survey of small-scale
business/entrepreneurs on the challenges encountered.

Course Outline
I. Basic Concepts of Economics
II. The Elements of Demand and Supply
III. Elasticity of Demand and Supply
IV. Consumer Behavior
V. Production Theory
VI. Analysis of Cost, Profit, and Total Revenue
VII. Market Structures
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Unit 1
BASIC CONCEPTS OF ECONOMICS

Big Picture
Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Describe Economics as a field of formal study.
b. Explain the key concepts of economics.
c. Explain how economic systems answer the basic economic questions.
d. Differentiate positive and normative economics.
e. Explain the different economic models.

Unit Outline
Lesson 1: Meaning, Goals, and Branches of Economics
Lesson 2: Scarcity, Factors of Production, Choice, and Opportunity Cost
Lesson 3: Economic Problems and Economic Systems
Lesson 4: Methodologies of Economics
Lesson 5: Economic Models

Overview
This unit provides you an introduction to the basic concepts of economics that will help
you strengthen your working knowledge of the course.

Metalanguage
In this section, the most essential terms relevant to the study of this unit are defined.
Please refer to these definitions in case you will encounter difficulty in the in understanding
the concepts.
1. Resources: inputs available for the production of goods and services.
2. Scarcity: a situation in which wants and needs are in excess of the resources
available.
3. Choice: underpins the concept that resources are scare so choices have to be made
by consumers, firms, and governments.
4. Opportunity costs: defined as the next best alternative foregone when an economic
decision is made
5. Factors of production: anything that is useful in the production of goods and
services.
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Lesson 1: Meaning of Economics

Learning Objectives:
1. Describe Economics as a field of formal study.
2. Identify the factors of production

What is economics?
Economics is known as a social science. This means that it is the study of people in
society and how they interact with each other. Other social sciences include sociology,
political science, psychology, anthropology, and history. as the discipline of economics
evolved, certain branches of the discipline have incorporated the findings of many of these
other social sciences in order to explain economic behavior better.
The Earth is, to all intent and purposes, finite. This means that we only have a finite
amount of resources. Since we need to use these resources to produce the goods and
services that we need or want, the quantity of goods and services available to us is also
finite. Goods are physical objects that are capable of being touched (tangible), such as
mobile phone, vegetables, and cars. Services are intangible things that cannot be touched,
such as mobile-phone repairs and haircuts.
Although the resources used to produce goods and services are finite, human wants
and needs are infinite. Needs are things that we must have to survive, such as food, shelter,
and clothing. Wants are things that we would like to have but which are not necessary for
our immediate physical survival, such as televisions and mobile phones.
Scarcity exists because of the conflict between the finite resources available to the
world’s population and its infinite material needs and wants. This is where economics comes
in. Economics is the social science that examines the way that people behave and
interact with each other to overcome the problems that arise as a result of the basic
economic problem of scarcity.
It should be obvious that because of scarcity, choices have to be made. Therefore,
we can say that economics is the study of the choices that people make in overcoming
the problems that arise because resources are limited while needs and wants are
unlimited. Needless to say, the choices made by groups of people, can have significant
impact on other groups of people, and also on the environment. This must be taken into
account when examining economic issues.

Introduction to Economics
This video some key ideas of economics that influenced early
economic thinkers, such as Adam Smith.
https://www.youtube.com/watch?v=8JYP_wU1JTU

Economists like to claim that they can explain everything. But does that
really hold up? In this first lecture in INET’s “Economics For People”
series, Ha-Joon Chang examines whether economics is science, or
politics.
https://www.youtube.com/watch?v=D-
6rQmHpGfE&list=PLmtuEaMvhDZbNVIDHA-
MTVH0sLb5HP7Pn&index=3
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Activity 1
Instructions
1. Choose one product (e.g. TV, cellphone, milk tea, chocolate).
2. Write down as many things that you can think of that go into the process of
making that product. Your list should include everything you can think of such
as actions, materials, and machinery.
3. Post your chosen product and its inputs in the Activity 1 forum of our LMS.

Scarce resources
Economics categorize the resources into four types. These are known as factors of
production and are needed to produce goods or services.
1. Land: This includes all the resources provided by nature that are used to produce
goods. It includes the soil on which agricultural products are grown, anything that is
grown on the land and used in the production of other goods, and anything that is
found under the land, including oil, mineral, and elements. It therefore includes all
natural resources. This factor of production may be referred to as “natural capital.” .
2. Labour includes all human resources used in producing goods and services. It is the
physical and mental contribution of the existing workforce to production. Labor may
also be referred to as “human capital.”
3. Capital: Capital, which may also be referred to as “physical capital” is the factor of
production that includes all the buildings, offices, factories, machines, tools,
infrastructure, and technologies, and building that are used to produce goods and
service. Anything that has been made by human, and is used to produce a good or
services, is referred to as capital. When firms spend money on capital, this is know
as investment.
4. Entrepreneur: Management is the organizing and risk-taking factor of production.
Entrepreneurs organize the other factors or production—land, labor, and capital—to
produce goods and services. They may use their personal money and the money of
other investors to develop new ways of doing things and new products, buy the
factors of production, produce the goods and services, and hopefully, make a profit.

Some countries have large quantity of high-quality factors of production at their disposal.
They can create lots of goods and service to satisfy the wants of their people. Other
economies lack sufficient quantities of one or more of the factors. Developing countries, for
example, might have large quantities of land and labor but lack sufficient capital and
enterprise.

Four Factors of Production

Economists traditionally divide the factors of production into four
categories: land, labor, capital, and entrepreneurship. Learn how each of
these are define in this video.

https://www.youtube.com/watch?v=-IvwoqPh1_I
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Activity 2
Instructions
1. Classify the things you have listed as part of the process in the making of the
product you have chosen into land, labor, capital, or entrepreneurship. Post
your answers as reply to your post in activity 1. You can create a table for
your answer.
2. Answer the question below and post your answer as a reply to your post in
activity 1:

What will happen to the production process of the product you have chosen if
a bad event such as typhoon, war, or health crisis will happen? How will it
affect the price?
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Lesson 2: Scarcity, Choice, and Opportunity

Cost
Learning Objective:
1. Discuss the central concepts of economics.

Central Concepts in Economics

Throughout this will refer to these central or key concepts that overarch economic
issues. These concepts can help us explain economic concepts and are useful in analyzing
all economic events.
Choice and Opportunity Cost
All economic agents, whether they are consumers, producers, or the government,
must make choice about how to allocate the scarce resources available to them. For
example, in very simple terms, consumers have to decide which goods and service to buy.
Producers have to decide which products to produce and how to produce them.
Governments have thousands of decisions to make in trying to allocate the resources
available to them.
Whenever a choice is made by an economic agent concerning the use of its
resources, something is given up, or sacrificed, this leads us to a key economic concept,
known as opportunity cost. Opportunity costs is defined as the next best alternative
foregone when an economic decision is made. It simply means that opportunity cost is what
you give up in order to have something else.

Other Central Concepts in Economics

1. Scarcity. Scarcity is central in economics. Scarcity refers to the limited
availability of economic resources relative to society’s unlimited demand for
goods and services.
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2. Opportunity cost. Opportunity costs is highest valued alternative that must be

given up when a choice is made. Every time you make a choice, you incur an
opportunity cost.
3. Efficiency. Efficiency is a quantifiable concept, determined by the ratio of useful
output to total input. Allocative efficiency refers to making the best possible use of
scarce resources to produce combinations of goods and services that are
optimum for society, thus minimizing resource waste.
4. Incentives. People act from variety of motives. While not ignoring other motives,
economists emphasize that consumers and firms consistently respond to
economic incentives.
5. Decisions made at the margin (Marginal Principle). Decision making is
characterized by weighing the additional (marginal) benefits of a change against
the additional (marginal) costs of a change with respect to the current conditions.
a. Marginal Benefits. Refers to the additional benefits when consuming an
additional unit of a good or undertaking one more unit of an activity.
b. Marginal Costs. Refers to the additional costs when consuming an
additional unit of a good or undertaking one more unit of an activity.

Suppose a manager in a diagnostic clinic decided to operate for an additional

hour. It is more prudent if the manager determines if the MB of an extra hour
is greater or equal to the MC. If MC of the additional hour is greater than the
MB, it is better not to add an hour.
Quantitatively if the diagnostic clinic on average turned down 20 patients
every day, the manager could compute for the additional benefits. If they
accommodate these patients for an hour will bring additional revenue of
P6,000 (20 x P300). Suppose that the extra labor cost for an hour is P2,000, it
is
Branches of Economics
Like any other study, Economics can be broken down into more specialized
subfields. These are microeconomics and macroeconomics.
The Greek root “micro,” which means “small” tells us that microeconomics deals with
the behavior of individual components such as household, firm, and individual owner of
production. From the Greek word “macro,” which means “big,” macroeconomics deals with
the behavior of economy as a whole with the view of understanding the interaction
between economic aggregates such as employment, inflation, and national income.
Importance of studying Microeconomics
If you wanted to understand the market, microeconomics is for you. There are
several analysis tools useful to determine and explain changes in the market price. Notice
that the local government is proposing to tax online sellers and the national government
started collecting excise taxes on petroleum products. In other words, such government
actions increase the prices of commodities. These are the means for the government to
source additional revenue to sustain their various activities.

Microeconomics can help you become a better decision-maker. For instance, during
a pandemic, it is not advisable for people to panic-buy. On the other side, it is not profitable
for sellers to hoard. Microeconomics provides reasons to define the ideal actions of
individuals. Thus, microeconomics promotes a better society.
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Also, microeconomics helps policymakers formulate better government policies. For

instance, why do governments impose price freeze during a pandemic? Is it the interest of
the consumer? Does an extended quarantine help people?

Lesson 3: Economic Problems and Economic

Systems
Learning Objective:
1. Explain how economic systems answer the basic economic questions

Basic Economic Problems: What to produce, how, and for whom?

Because the fundamental economic problem of scarcity exists, societies need to
confront the following three interrelated questions:
1. What should be produced and in what quantities?
Using the scarce resources, how many computers should be produced, how many
bicycles, how much rice and how much milk? This has to be decided for all economic
goods.
2. How should things be produced?
There are many different ways of producing things are there are different
combinations of resources that may be used in production. Should shoes be
produced by an automated production line or by manual workers? Should crops be
grown with a high usage of fertilizer or grown organically?
3. For whom should things be produced?
Because we cannot satisfy all the wants of all the population, decisions have to be
taken concerning how many of each person’s wants are to be satisfied. On a broader
level, we need to decide whether everyone is going to have a more or less equal
share of what is produced or whether some will have more than others.

The Economic System

In answering the three basic economic questions, the four economic systems have a
significant role in solving the problem of what, who, and for whom these goods and services.
An economic system refers to set of economic institutions that dominate a given economy
with the main objective of solving the basic economic problems. The three economic
systems are panned, free market, and mixed economic systems.
In the real situation, economic systems are rarely 100 percent examples of any one
system. At present, there is no economy today applying a pure economic systems. Majority,
if not all, of these economic systems are present in varying degrees in any economy. The
Philippines for example, is best described as a market system but it contains many
command elements like regulatory agencies and executive orders issued by the president. In
a way, most economic systems are mixed, although they are usually identifiable as being
predominantly of one type or another.
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1. Planned Economy
In a planned economy, sometimes called a centrally planned economy or a
command economy, decisions as to what to produce, how to produce, and for whom
to produce, are made by a central body, the government.
All resources are collectively owned. Government bodies arrange all
production, set wages, and set prices through central planning. Decisions are made
by the government on behalf of the people and in theory, in their best interests.
The quantity of decisions to be made, data to be analyzed, and factors of
production to be allocated are immense. This makes central planning very difficult. If
one then adds the need to forecast future events accurately in order to plan ahead,
the task becomes almost impossible to achieve with any decent level of efficiency.
In the 1980s, almost a third of the world’s population lived in planned
economies, mainly in the USSR and China. These days, there are very few countries
that rely solely on planning. In Eastern Europe, the countries of the old USSR now
have clear market segments. The same is true in China.

2. Free market economy

In a free market economy, sometimes called private enterprise economy or

capitalism, prices are used to ration goods and services. All production is in private
hands and demand and supply are left free to set wages and prices in the economy.
The economy should work relatively efficiently and there should be few cases of
surpluses and shortages.
Individuals make independent decisions about what products they would like
to purchase at given prices and producers then make decisions about whether they
are prepared to provide those products. The producers’ decisions are based upon
the likelihood of profits being made. If there are changes in the pattern of demand,
then there will be changes in the pattern of supply in order to meet the new demand
pattern.
When consumers and producers work to their own best interests, the market
produces the “best” outcome for both. As the father of modern economics Adam
Smith said, “Every individual… generally, indeed, neither intends to promote the
public interest, nor knows how much he is promoting it… he intends only his own
gain, and he is in this… led by an invisible hand to promote an end which was no part
of his intention.” This is often used as a justification for arguing that there should be
minimal government interference in the economy.
3. Mixed Economy

As mentioned earlier, there is no economy today using the pure form of

economic systems. Rather, a mixed economy with elements of planned and free
market are present in varying degrees—that is both private and public institutions
exercise economic control. The private sector works through the market mechanism
while the government or public institution works through regulatory commands and it
owns and manages major industries such as transportation , electrification, and
others.

Key Concept Link

Scarcity and choice: The key concept of scarcity and choice applies in all
types of economy. How choices are made depends on the relative
importance of the government and the free market mechanism.
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Disadvantages of pure free markets Disadvantages of planned economy

Demerit goods (things that are bad for
people, such as drugs) will be over-provided,
driven by high prices and thus a high profit
motive.
Merit goods (things that are good for people,
such as education and health care) will be
underprovided, since will only be produced
for those who can afford them and not for all
people.
Resources may be used up too quickly and
the environment may be damaged by
pollutions, as firms seek to make high profits
and to minimize costs.
Large firms may grow and dominate
industries, leading to high prices, a loss of
efficiency and excessive power.
Total production, investment, trade, and
consumption, even in a small economy, are
too complicated to plan efficiently and there
will be misallocation of resources, shortages,
and surpluses.
Because there is no price system in
operation, resources will not be used
efficiently. Arbitrary decisions will not be able
to make the best use of resources.
Incentives tend to be distorted. Workers with
guaranteed employment and managers who
gain no share of profits are difficult to
motivate. Output and quality may suffer.
The dominance of the government may lead
to a loss of personal liberty and freedom of
choice.

Command and Market Economics

This video introduces the difference between command and market
economies.

https://www.youtube.com/watch?v=Ve6K10-Yx_M

Activity 3
Instructions
1. Complete the table by answering how the different economic systems answer
the basic economic questions.
2. Submit this activity in the Activity 3 section of the LMS.

What to produce How to produce For whom to

produce
Planned
economy
Free market
economy
Mixed economy
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Activity 4
Read the feature below and then answer the questions that follow. Post your answers in the
Activity 4 Discussion Forum.
China: the challenges of an ageing population
An ageing population is one usually associated with developed economies. Falling
birth rates and increased life expectancy in many European countries and Japan has
created a situation in which younger generations are facing the prospect of caring for an
ageing population.
This demographic situation is now a major problem in China. The origin lies in
China’s one-child policy which has restricted the number of children that most urban families
could have and was originally designed to reduce the rate of growth of a booming
population. There have been positive outcomes from this policy. At present more than 70%
of the population are able to work and produce goods – fueling China’s high level of
economic growth.
Fewer new workers are now joining the labour force and many of those who are do
not want to take on the low paid, unskilled jobs of the previous generation. In addition, China
is facing a substantial increase in the number of old people, resulting in additional pressures
on health and social care facilities. Projections suggest that the impact of demographic
change could have an even more adverse effect on the economy. Historically, production in
China has exceeded consumption, resulting in substantial trade surpluses with the rest of
the world. In contrast, over the next few decades consumption may exceed production; what
is certain is that by 2050 China will have far more elderly people than any other country,
26% of the total population.
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Source: ‘China’s rapidly ageing population’, Carnegie Europe, 5 July 2013; ‘Ageing China’, BBC News, 20 September
2012.

Questions
1. Summarize the main projected changes in the age composition of China’s
population between 2010 and 2050.
2. Suggest the likely effects of these changes on decisions concerning:
a what to produce
b how to produce
c for whom to produce.

Key Concept Link

Scarcity and choice: It should now be clear that China is facing a serious
economic problem brought about by an ageing population. Serious choices
have to be made. There are competing uses for scarce resources since even
in China, not all wants can be met.
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Lesson 4: Methodologies of Economics

Learning Objectives:
1. Explain the different methods of economic analysis.
2. Differentiate positive and normative economics.

Methodologies of Economics
The Scientific Methods of Economics
Economics, being a science, is a systematic body of knowledge. Economists have
developed techniques, referred to as the scientific approach or method in data gathering,
data presentation, and data analyses, that make a starting point in understanding economic
issues and eventually lead to creating decisions.
Basically, the scientific method can be categorized into:
a. Data Gathering. Economic knowledge is mostly obtained from observation of
economic events. Data is obtained through historical records and even interviews of
past performances which are organized in a way that can be easily analyzed. This is
sometimes called the empirical method.
b. Economic Analysis. Data gathered is useless if not analyzed. Raw data alone
cannot tell the reality. Hence, in order to synthesie observed data, economic analysis
is induced for the recorded data. It is an approach which predicts economic behavior
on the basis of assumptions.
c. Economic Conclusions. After laying down all assumptions, one proceeds to
reasoning in order to generate conclusions. Reasoning is categorized into: inductive
reasoning, which is the process of reasoning from particular to general, and
deductive reasoning, which is the process of reasoning from general to the particular.

Economics’ Methodology
The methodology of economics can be said to be divided into tow categories. The
first category is economic theory where abstract models are used as simple representations
of reality. The second category is empirical economic research which serves to verify the
predictions coming from an economic theory. These two categories complement each other
and are both integral parts of “doing economics.”
Economic Theory
Economic theory is that part off economics where simple models are used to
describe economic phenomena. These simple models may be in the form of graphs,
flowcharts, or sets of equations. The starting point of any economic model is a set of
assumption regarding the decision makers and their environment. From this set of
assumptions, the economist can often generate useful insights about how the economic
behavior responds to changes in the environment. The predicted economic behavior can
then lead to certain outcomes. The outcome of economic behavior are the ones economists
are interested in.
Empirical Economics
The economic theories and models discussed previously provide testable
hypotheses. These hypotheses are important for the advancement of any science including
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economics. They provide a continuous supply of fresh ideas that may or may not be true.
Hence, it is important that hypotheses generated by economic theory or model passes
repeated tests, it becomes a stylized fact and increases the credibility of the theory behind it.
The task of empirical economics is to confront testable hypotheses with real world data. If
the data does not support a particular hypothesis, then that hypothesis is suspect and needs
further testing. If the data does support a particular hypothesis, then the hypothesis is
tentatively accepted. A more conclusive acceptance of the hypothesis requires that it
repeatedly passes numerous tests.

Positive and Normative Economics

The study of economics is usually divided into two perspectives—positive economics
and normative economics.
The primary concern of positive economics is to give us an understanding of what is
going on with an economic program, behavior, policy, institution, or an economic event.
Thus, positive economics is descriptive in approach in the sense that it illustrates
what is happening to the various sectors, actors, and institutions within and outside
the economy. For example, positive analysis covers an explanation on how various sectors
of an economy interact with one another in the creation and consumption of wealth. The
behavior of consumers in the analysis of the demand for a product is likewise covered by
positive economics.
On the other hand, the normative analysis is a departure from description and
illustration of the economic events. It does however offer directions and decisions t toward
the attainment of ideal situations, actions, mechanisms, and economic order. Normative
economics is prescriptive in approach in the sense that it directs us on what ought to
be done. For example, the quest toward a more equitable distribution of income is under the
scope of normative analysis since it aims to achieve a legitimate social objective. In the
same manner, the prescription on the implementation of a more progressive taxation to
achieve an egalitarian society as well as the imposition of prohibitive tariffs on imported
goods to protect domestic industries are examples of the coverage of normative economic.
The topic of analysis is not exactly the condition that separates positive economics
from normative but the objectives these analyses want to pursue. Positive economics
aims at explaining how economic processes are conducted or how economic agents
behave. The intention of normative economics, on the other hand, is to give a
recommendation on what economic processes should be implemented or what behavior
should economic agents undertake to attain an ideal state of the economy.

Normative and positive statements

It is important to distinguish between Positive and Normative Economics.
Both play a role in policies.

https://www.youtube.com/watch?v=YtX6SGw7E3c
https://www.youtube.com/watch?v=ODYE_KaLjA0
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Check your understanding

Answer the quizzes found in the links below to check your understanding
of normative and positive economics.

https://forms.gle/Ev8gY7DEbdC2YDxw8
https://quizizz.com/join?gc=07064254
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Lesson 5: Economic Models

Learning Objective:
1. Discuss the different economic models.

Production Possibilities Curve (PPC)

Production Possibilities Curve is a curve showing the maximum combinations of two
types of output that can be produced in an economy in a given time period, if all resources in
the economy are being used efficiently and the state of technology is fixed. This simple
model may be used to illustrate the concepts of scarcity, choice, opportunity cost, and
efficiency.
Note that the PPC model contains several assumptions:

• It is assumed that the economy produces only two goods.

• It is assumed that the resources and state of technology are fixed.
• It is assumed that all the resources in the economy are fully employed.

Example:
Imagine living in an economy that produces just two goods, food and shelter.

• Economists often say than an economy is in productive efficient if it is producing

the maximum output with the resources and technology that it has. Each point on the
production possibilities curve represents the potential amounts of food and shelter
that can be produced in a given period, with a given quantity and quality of resources
in the economy available.
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• The economy cannot operate at point N (not attainable) during the given period
because not enough resources are currently available to produce that level of output.
• An economy is productive inefficient if it is producing less than the maximum
output with the resources and technology it has. If economy is operating at point I, or
any other point inside the production possibilities curve, it is not at full capacity and is
operating inefficiently.
• Economic growth refers to the increased productive capabilities of an economy. It is
illustrated by an outward shift in the PPF. Two major factors that produce economic
growth are (1) an increase in the quantity of resources and (2) an advance in
technology.

PPF can be used to illustrate the following economic concepts

1. Scarcity
2. Choice
3. Opportunity cost
4. Efficiency

PPC
These videos will explain how production possibilities curve illustrates
scarcity, trade-offs, opportunity cost, and efficiency.

https://www.youtube.com/watch?v=_7VHfuWV-Qg&t=5s
https://www.youtube.com/watch?v=pkEiHZAtoro
https://www.youtube.com/watch?v=O6XL__2CDPU
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Activity 5:
Complete the following activities. Submit this activity in the Activity 5 section of the LMS.
1. Suppose a production possibilities frontier include the following combinations
Cars Washing machines

0 1000

100 600

200 0

a. Graph the PPF

b. What is the opportunity cost of producing 100 cars?
c. What is the opportunity cost of producing 600 washing machines?
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The Circular Flow Model

Another model to illustrate how an economy might work is the circular flow model.
This will be developed further when macroeconomics is the focus, but at this point, it is
worthwhile to have an overview of the model, as it can illustrate the interdependence that
exists between key economic decision makers. As with the PPC model, there are certain
assumptions behind this model. A simple two-sector model of the economy is show in the
figure below.

The two sectors are household and firm. In this simplified model, household have two
roles: it is assumed that they are the owners of all the factors of production and they are the
people who buy the nation’s output of goods and services.
The Sectors

• Household sector: This includes everyone, all people seeking to satisfy unlimited
wants and needs. This sector is responsible for consumption and undertakes
consumption expenditures. It also owns all productive resources.
• Business Sector: This includes the institution that undertake the task of combining
resources to produce goods and services. This sector does the production. It also
buys capital goods with investment expenditures.

The Markets

• Product markets- markets where household are buyers and firms are sellers of goods
and services.
• Factor (or input) markets- markets where households sell the use of their inputs
(land, labor, capital, and entrepreneurship) to firms. Factor markets are used by
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business sector to acquire the inputs needed for production. Payment for these factor
services then generate the income received by the household sector.

Circular Flow Model

In this video, the Circular Flow Model and how products, resources, and
money flow in a market economy.

https://www.youtube.com/watch?v=mN5HPJYJzus

Check your understanding

Answer the quiz found in the link below to check you understanding of
circular flow model.

https://quizizz.com/join?gc=26225342
https://quizizz.com/join?gc=26225342

Unit 1 Review Quiz

Take the quiz found in the link below to review the important concepts in this unit.
https://quizizz.com/join?gc=43199166

Recommended Readings

• Chapter 4 of Ha-Joon Chang’s book Economics. The chapter discusses the different
approaches to economics.
• Chapter 1 of Thomas Sowell’s book Basic Economics: A common sense guide to the
economy. In this chapter, the author explains what economics is.