Module 1: Introduction to

Economics
Module Overview
In this module you will learn about the economy, its functions and characteristics. You will also
learn about basic concepts in economics as well as their use in establishing economic goals
and policies. Enjoy learning!

Motivation Question
What are your recent accomplishments in this time of a pandemic? If there are none, you can
start learning about the economy here!

Module Pretest

Instructions: Answer whether the following statements are true or false.

1. An economy is a simple system, with very few variables to understand.
2. The value of a resource is a result of its scarcity.
3. Economics is not a social science.
4. Policy-making is a daunting process.
5. Economic goals are valid for all economies.
Lesson 1.1: The economy defined

Lesson Summary
This lesson will introduce you to the characteristics of an economy. It will also provide you with
an understanding of how resources are valued from an economic perspective.

Learning Outcomes
1. Discuss the characteristics of an economy.
2. Determine the relative valuation of commodities.

Motivation Question
How can you start to reach your potential value?

Discussion
As you read the news articles you see on social media or watch on the television, a
particular topic arises more consistently than others. We may name it as business news or, in
general, news about the economy. While hardly understood by most, the economic news is
essential to businesses, politicians, and us mere consumers. GDP figures, inflation, and
unemployment rates, level of FDIs are all over the news these days. How are they relevant to us?
In what ways can the different sectors mentioned use this seemingly complicated jargon? In
this class, we will try to have your minds enlightened about the study of the economy. We will
learn more about these complex statistics and theorize on how interrelated these variables are.
Lastly, we will look at how we can manage the economy through economic policies that prove
to promote the welfare of the citizens.
But first, we have to ask, what is an economy? And why do we need to be mindful of it?

Economy

When we think about the word economy, we intuitively see dollars or peso signs. In all
fairness, money is a crucial element of an economy, and without it, the modern world we are
living right now may be hard to picture out. Ultimately, we use money to buy and sell goods and
services with; it is how we usually enjoy stuff today. This is one of the features of the capitalistic
nature of the current global economy. In this regard, we say that "capitalism" is only one of the
many ways of making an economy work. There are a few other systems to follow in running an
economy; we will go through them later on. With these things mentioned, we go back to the
question, what is an economy?
 In a colloquial sense, an economy is characterized as an area or setting where
production, exchange and distribution, and consumption takes place. Different economic agents
do these activities in an almost never-ending manner. These agents do these activities in order
to acquire material gain or benefit.
Economies are usually place-based or bounded by their localities' geographical
boundaries. For example, the Leyte province has its own economy different from that of the
Cebu province. However, both are a part of the broader Philippine economy where both islands
belong to geographically. Recently terms like the underground economy, internet, and digital
economies, and even the newer "gig" economy characterize the setting wherein business
transactions occur in these set-ups. In this regard, economies do not only reflect geographical
location but as well as the medium and the feature of work.
By and large, an economy follows a system for achieving and distributing resources.
Aside from being bound by geographical location, the norms and cultural values, politics, level
of technological advancement, natural resources, and ecology of an area determines its
economy and how it functions. The natural resources and ecology of an area limit the kinds of
goods it can produce; for example, we can't expect a landlocked economy, like Bhutan or Laos,
as exporters of fish and other marine resources. Politics and cultural norms affect the taste and
preference of citizens with the types of goods they can acquire. If a country's government
deems narcotics as illegal drugs, then its distribution is widely limited and is left in the black
market. Also, spending in the Philippine economy is high in the months leading to Christmas as
we customarily celebrate it through religious practice.
From the things discussed, we may ask whether those activities that do not involve
monetary exchange constitute the economy? Is giving gifts an economic (contributing to the
economy) transaction? How about caring for young children and the sick? What about voting?
Can it also be economical and not merely political? The answer to all these questions is, yes!
For an activity to be considered economical, resources must be used to fulfill needs.
This gives resources its value. Time, effort, and monetary expenditure allotted in taking care of
sick family members are used to ensure the sick grow back to full health. Meanwhile, voting is
an exercise where citizens choose leaders whose policies align with their own politics. It is done
as insurance to having a better life in the future.

Resources and Scarcity

Resources are inputs used to meet a specific goal. In economics, they are assets or
services that an agent use to provide material benefit or utility. Just like mentioned, time is
considered an economic resource. More tangible examples include physical and intellectual
labor, land and natural resources, physical and financial capital, and even entrepreneurial skills.
These are broad categories, but necessarily anything that is used with the end goal of
benefitting one's self or the society, in general, can be called a resource.
Related to the discussion is the question of how they are valued. Why are commodities
today priced differently from each other? Why is an accountant paid more significant here in the
country compared to an elementary school teacher? One tenet of classical economics is that
commodities or resources get their value from their scarcity relative to other items. According
to this, an accountant is paid higher than a teacher because there are relatively fewer
accountants than teachers. Or perhaps, in proportional terms, there is a lesser number of
accountants to accountant jobs than the number of teachers to teaching jobs. This is one way
of thinking about the scarcity theory of value. In terms of goods, for example, whenever extreme
weather affects fishermen's catch negatively, fish prices would tend to be higher than usual.
Another example, if a country's population is undereducated, it may not be able to supply
industries with its need for highly-skilled workers. This scarcity for labor drives wages up for this
need, enticing the people to invest in their education.
This discussion of scarcity is important when looking at the broadest aspects of the
economy. National policies that promote the welfare of the majority of the citizens are
discussed and debated by politicians day in and day out. The agreed policies must be able to
provide the most considerable benefits as compared to those that were not approved; be aware
that these policies often do not prove the same goal. Later on, we will discuss the goals and
practice of policy-making; we will realize those specific policies, while addressing one problem
may exacerbate the effects of another. Economics teaches that in the economic sphere of life,
we are faced with trade-offs. In choosing one thing, we must forego another. The decision's
opportunity cost is the benefits one could have had choosing the foregone alternative. Realizing
this is important because, as said, governments and nations are bound by their capacity to
finance programs and policies. Therefore, they must be able to select the best policy that will
give the most benefits according to several criteria.

Mixed-economic system

The current economic system, as adopted by most countries in the globe, is that of a
mixed system. This categorization means that it works with aspects of both capitalism and
government central-planning. Capitalism is an ideology that envisions that an economy works
well when people are left to their own, in pursuit of their self-interest, without government control
and intervention. The ideology leads to a system of private ownership of natural resources and
means of production. By allowing people to pursue the things they consider is best for their well-
being, the consequential free-market system allocates goods and services in the most efficient
way possible; that is, resources are used to their highest value. For example, the market system
allows the efficient transfer of natural resources like land through the exchange of its property
rights in a land title with a monetary payment. The most significant consideration of the seller of
land would be to give the land title to the buyer that quotes the highest price for the land. In theory,
one offers to pay the highest price for a resource when, in hindsight, he/she gets the highest
possible benefit from the transaction as compared with the other potential buyers. In the case of
the land buyer, he offers the highest amount to purchase the land because he knows he can create
a substantial continuous income stream from cultivating the land, building a factory or whatever
use of the land he has in mind.
Our current mixed system has elements of government control and intervention because
while the free markets allocate resources efficiently, the issue of equity, or fairness, may not be
addressed at all. If the exchange of goods and services is determined by whoever can give the
highest offer price to a resource, then those that cannot afford to offer a considerable amount
will not be able to gain resources for themselves or their family. For example, if a kilo of rice is
given to the person that can bid the highest price, poor Filipino households may never consume
rice in their lives. In this sense, the poor are at a disadvantage, and this where the government
can step in and ensure that all people from different walks of life can enjoy even the most basic
necessities by allowing these goods to be competitively priced low. This possibility is the reason
why we have policies like the SRP or the suggested retail price, minimum wages across different
provinces, and the 4Ps subsidies, among others.
The free market system has its drawbacks. Poverty, pollution, crime, and other social
problems abound when individual self-interest is not aligned with what is socially and
environmentally right and just. Self-interest by those that are wealthy and powerful may produce
results that make the lives of those that don’t have the resources difficult. Government regulation
is needed to combat these possible abuses and adverse outcomes.
The market system has these three characteristics:
1) Division of labor and specialization,
2) Reliance on capital goods, and
3) Reliance on comparative advantage.

Because there is significant competition among producers in a market economy,

producers must have excellent technical efficiency within their production processes; that is, it
can produce as many products for every unit of input they use. Division of labor and specialization
helps to improve the technical efficiency of companies by dividing tasks into small components.
When an employee is focused on doing his job repetitively, the training and experience improve
his work efficiency; cost per unit of output declines because of improved efficiency.
Capital goods augment the productivity of labor in producing goods and services. Capital
is used when it adds cost-savings to production. The need to compete leads production in the
modern economy to be more and more mechanized and many digitized.

Business cycle

Since the 1800s, human welfare has been increasing due to the developments in
technology and the resulting industrialization. The 3 episodes of industrialization that the global
economy has experienced throughout modern history have brought significant human welfare
improvements. Technologies like the oil-fueled engine, advanced medicine, selective breeding of
crops and livestock, the internet, among many others, have greatly improved how many in the
world live and lifted millions of people out of poverty. Now that we are in the advent of the Fourth
Industrial Revolution, we expect more people to be lifted out of poverty while also adding more
comfort to the ordinary person.
Because of how modern economies are built, where marketed commodities are affected
by the changes in supply and demand, availability of capital, and future expectations, they
naturally move through a series of accelerated growth and down-turns. Many factors can cause
these changes to the economy. The development of new products and new technologies seem
to increase the spirits of people by increasing their consumption expenditures. This experience
is very much felt in the Philippines, where remittances fuel consumption expenditure from
Filipinos working abroad. The excessive income of OFW families allows them to buy goods that
are looked at as luxurious from the standards of the more common Filipinos.
Great calamities like typhoons, earthquakes, and volcanic eruptions adversely affect the
increase in the per capita income of nations, as livelihoods cease to exist in largely hit areas. The
recent COVID-19 pandemic is significant proof of how natural events can seep into the economy,
producing disastrous effects. The Philippine economy shrunk to about 16.5% in the second
quarter of 2020. This figure means that the GDP figure in the second quarter of 2020 is 16.5%
less than the GDP figure for the second quarter of 2019. The last episode of a global recession
was way back in 2008. The Global Financial Crisis, as it was called, was caused by irregularities
in the housing market in the United States. With it, many people lost their livelihoods and the value
of their houses and other assets.
The recurrent ups and downs of economic activity in market economies are called the
business cycle. Troughs are when employment and output are at the lowest for a period. The
peaks are when output and employment are at the highest. The period leading towards the trough
is called a recession (downturn). A prolonged recession is called depression. After a trough, a
recovery or expansion (upturn) period occurs. These downturns and upturns are short-run
variations in economic activity that may last from several months to 2-3 years.

Figure 1. Trend in the Philippine economic growth

The graph shows the growth in Philippine GDP since the 1970s. As can be seen here the
recent decline in GDP has been the biggest during the time covered; more prominent than the
deterioration caused by the turmoil during the Martial Law years. As observed, the growth rate in
the Philippine economy has never been steady. There are a lot of up and down movements
throughout the years. These fluctuations in GDP come from many factors. These factors could
include shocks in the supply of commodities, expectations from consumers and the business
sector, political turmoil, among many others.
The peaks and troughs are associated with a long-term secular trend. Secular trends are
general movements in a particular direction that are observed for many years.
 Figure 21. Theoretical business cycle

The diagram above shows the hypothetical variation in short-run Real GDP moves around
the long-run secular trend (straight diagonal line). The secular trend moves upward over time,
meaning Real GDP expectedly increases over time. We can see the troughs and peaks in the
business cycle in the graph, which are followed by expansions and recessions, respectively.
These variations in the economy’s output affect the number of employed people, which in turn
may also affect the economy’s price level. We will discuss about unemployment and inflation in
the following sections.

Learning Tasks/Activities
Think of ways in which scarcity affects your family's livelihood.

Assessment
Answer the following question:
1. What are the opportunity costs associated in your decision to continue your education
this semester despite the effects of the pandemic? What are the opportunities that
you've forgone?

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module1,
Lesson1.
 2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A

Lesson 1.2: Economics defined

Lesson Summary
This lesson will define economics, its branches and methodology.

Learning Outcomes
1. Define economics.
2. Distinguish the two main branches of economics.
3. Discuss the concept of rationality and how it is used in economics.
4. Discuss the main economic goals of nations and discuss the steps in policy formulation.

Motivation Question
Do you set goals every time a new year begins? How are you planning to achieve these?

Discussion
In the previous lesson, we have discussed an economy and its resources. We have also
discussed the importance of allocating resources to their best use because of its nature of
scarcity. In this lesson, we will define economics, its branches, and its methodology.

Economics

Simply put, economics is the study of the economy. This definition, while mostly vague,
is a broad representation of how economics should be studied. Earlier, we have discussed that
activities like caring for the sick, giving of gifts, and voting are considered as economic
activities. These examples are commonly bypassed in economics texts in favor of examples
that include a monetary exchange.
 Economist Lionel Robbins from the London School of Economics defined economics as
the study of human behavior as it pertains to meeting one's needs through scarce means.
Robbins emphasized that economics, to a great extent, is a social science studying human
behavior. This behavior is put under the lens of rationality, where people are thought to be
calculating with perfect information needed to make a choice. The notion of scarcity also
appears in his definition. He acknowledged that while resources are limited, human wants are
often unlimited or insatiable. This dilemma puts us to make choices everyday, and economists
want to learn why we are making these choice patterns.
The Core-Econ organization, based in the UK, defines economics in a similar fashion but
without the notions of scarcity and rationality. To them, economics is the study of how
economic agents acquire their resources after interacting with others and the natural
environment and how this behavior changes over time. Their definition appreciates the natural
environment to be our primary source of livelihood and resources. The biosphere and the
physical environment is an integral part of the economy because we obtain resources like land,
energy, raw materials, and water from it. At the same time, it becomes a reservoir for the
pollution and waste matter that our economic activities emit.

Branches of economics

There are two distinct divisions in economics: microeconomics and macroeconomics.

Microeconomics is the study of individual decision-making of individual agents in the pursuit of
their goals. As mentioned, this decision-making is often in the perspective of human rationality.
Microeconomics deals with things like utility and profit as the sole goal of consumers and
producers, respectively. For example, a consumer faces the definition of whether to buy a new
car or instead invest it for a house in the future. What things must the consumer consider?
Microeconomics would suggest that the consumer should buy the good which maximizes his
utility. However, he must also consider his own budget as well as the prices of the alternative
goods. The same kind of decision process will a businessman face in to which investment to
acquire. He must choose the one investment that will give him maximum profits but at the
constraint of his budget and the price of these investments. Rationality comes to play when
assumed that no other factors affect this decision aside from those stated, and the agent can
make perfect calculations in the effect of maximizing his goal.
Macroeconomics meanwhile, is the study of the larger economy. It studies economies in
the aggregate, meaning that it adds up all economic activities into several measures and advise
policymakers as to how improve the present conditions of these activities. The main goal of
macroeconomic policy is to keep the economy operating smoothly. This could mean that prices
of goods are usually at stable level or that the number of unemployed people are considerably
low. Or it could also mean that financial sector is healthy, in that debtors can pay their debts to
their creditors, and there is an ample supply of funds for opening businesses and expansions.

Economic goals and policy

One function of governments is to plan for its economy. These plans must be in line with
a set of goals it has for its economy. These goals could include:
1. economic growth – growth in real GDP over time;
 2. economic efficiency in the distribution or resources through price mechanism –
commodities and resources are allocated to their most valuable uses and waste is
eliminated or minimized;
3. freedom to do business activities citizens wish to do with little regulation;
4. income equality – gaps in the income of the rich and poor households to be not
exceptionally large ;
5. job security – small chance of losing one’s job;
6. full employment – all available labor resources are used;
7. stable price level – inflation that is consistently low and predictable;
8. greater access to education and healthcare; and a
9. robust local economy.

These goals can be achieved in many different ways, and policy-making can help in doing
so. All of these do have their own merits; however, they must be taken in the context of the needs
of the citizens. For example, the widely supported call for the end of contractualization in the
Philippines comes form the fact that many of the workers in the country's labor force are not
highly-skilled; they lack the necessary certifications to be considered highly-skilled. To these
group and their supporters, job security is an essential economic goal to achieve the higher goals
of growth and income equality. Meanwhile, for richer countries like the USA and countries in
Europe, economic freedom might be put at a higher pedestal. Some political and economic
ideologies in the western countries, would want their governments to decrease their influence on
the economy. The call for legalizing the market for some illicit drugs is an example of serving the
economic goal of higher economic freedom.
We can deduce from the discussion above that policy-making is a daunting task because
the job of prioritizing which goal to meet first is complicated and confusing—complicated
because there are several ways to meet a particular goal and confusing because these things are
brought to the political arena where they are debated and put into the whims of politicians.
Careful planning and policy-making is needed if the government wants to have the
slightest improvement in achieving its goals. The following are the rudimentary steps in policy-
making:
1. stating goals – the goal must be specific and measurable;
2. options – identify the various ways of achieving the goal, outlining its associated costs
and benefits, choose one; and
3. evaluate – gather and analyze data that will prove the effectiveness of the policy in
meeting the goal; if it was not able to do it, reexamine previous options and select.

Learning Tasks/Activities
The Philippines is currently in crisis because of the COVID pandemic. One of the sectors that are
gravely affected is the education sector. Think carefully about the problems that COVID has
brought to the education sector.
Assessment
Answer the following question:
1. In your opinion, what is the appropriate policy that the government could undertake in
order to minimize the negative effects of COVID to the education sector? Specify which
goal you are referiring, whether to minimize possible transmissions among students, to
minimize household expenditure on education, etc. Outline three possible policy moves,
outline their pros and cons and select one that the government will do that will best
achieve your goal.

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module1,
Lesson2.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A

Lesson 1.3: Mathematical tools in economics

Lesson Summary
This lesson introduces you to the exercise of mathematical modelling in economics.

Learning Outcomes
1. Recognize dependent and independent variables from an equation.
2. Analyze the relationship of variables from an equation
Motivation Question
Which people do you consider as models in your life? Which parts of their personality do you
consider praise-worthy? Why do you aspire to have these qualities as well?

Discussion
We already know that economies are complex systems. In studying it, we often take one
part at a time and explore its patterns. The simplest way to learn from it is through the use of
mathematics in elucidating patterns of behavior. These mathematical constructs that show
economic relationships are called as economic models.
Economic models are expressed in words, tables, graphs, and mathematical functions
and equations. The goal of doing economic modeling is to simplify reality to understand the
complex system of the economy and economic behavior. They, however, are put to constant
criticism as they can often be unrealistic. Some economists would argue that models should be
judged in terms of explaining power rather than its realism; if the model predicts the economy's
behavior majority of the time then it cannot be considered as unuseful. It should be noted that
economic models are only as good as the practicality of its assumptions. One commonly used
assumption in economics is ceteris paribus. This assumption tells us that when studying one
part of the economy, we must assume that other factors remain constant. In reality, in any
single decision we make, we consider many things. The goal for using this assumption is to
separate the contribution of the many factors individually, in making the decision. The same
goes for the national economy. We might explore the question of why the countries GDP has
grown well over the past decade. To make a clear understanding of a country's economy, the
economy's components must be looked at carefully. As is done in economics, models are
meant to represent, not to replace, the real world of economic behavior. They are mere tools, not
ends, in the process of understanding economic reality.
For example:

Economists link the volume of consumption by the household sector to the receipt of
disposable income. Such behavior is specified by saying that consumption, C is a function of
disposable income, Yd or

𝐶 = 𝑓(𝑌𝑑 )
The expression above shows that aggregate consumption depends on the receipt of
disposable income:

▪ Consumption, C = dependent variable

▪ Disposable income, Yd = independent variable

In the example's case, the ceteris paribus assumption allows the economist to make
precise statements about the theoretical relationship between consumption and disposable
income.

If C is assumed to be a function of Yd, one is able to specify in the model how a change
in Yd affects the aggregate C. The functional notation, as shown in the expression, is a concise
and convenient way of presenting hypothesized economic behavior. It defines economic
relationship under study; which is the dependent and the independent variable

The expression C = f (Yd) shows that aggregate consumption depends on the receipt of
disposable income. If the relationship has been statistically established, it is possible to specify
consumption behavior through an equation.

Suppose that the equation gives the measured relationship of consumption and
disposable income:

𝐶 = 40 + 0.8𝑌𝑑
The measured relationship between C and Yd is shown in Table 1.
Table 1. Relationship between consumption and disposable income

Yd (P) Consumption (P)

400 360

500 440

600 520

700 600

800 680

900 760

In the absence of statistical measurement, it is possible to specify the function.

Generally, a consumption function follows the following expression:

𝐶 = 𝑐𝑜 + 𝑏𝑌𝑑
where:

C = Dependent variable; positively related to Yd; moves in the same direction as

disposable income

co = Represents factors that are held constant (autonomous variable)

b = Measures the relationship between the dependent and independent variables;

behavioral coefficient for Yd; measures the influence of Yd upon the level of C; slope of the
consumption function

Yd = Represents disposable income

In any economic model, we can categorize variables into two. Endogenous variables are
values which value is determined within the model. Exogenous variables, meanwhile, are
variables which value is determined by forces outside the model; change in exogenous variable
is classified as autonomous change (not affected by changes in independent variable)
 From the numeric example above, if outside forces change the function from C = P40 +
0.80Yd to C = P50 + 0.80Yd, then there is a P10 autonomous increase in consumption spending.

The numerical consumption function above tells us that there is P40 consumption
regardless of the level of disposable income. Consumption changes by P0.80 per P1.00 change
in disposable income. Consumption changes in the same direction as disposable income. P40 =
exogenous variable; 0.80 Yd = endogenous variable.

Learning Tasks/Activities
Think of how related the macroeconomic variables of income, unemployment, and inflation are.
If they are related, how do you think will each behave when the others change? For example, if
income in the economy will increase, what could happen with unemployment? Will it increase or
decrease?

Assessment
𝐶 = 40 + 0.8𝑌𝑑
Given the equation above, solve fopr the value of C when the value of 𝑌𝑑 is 1000, 1500, and
2000.

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module1,
Lesso3.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A
Module Posttest

Instructions: Answer whether the following statements are true or false.

1. An economy is a simple system, with very few variables to understand.
2. The value of a resource is a result of its scarcity.
3. Economics is not a social science.
4. Policy-making is a daunting process.
5. Economic goals are valid for all economies.

References and Additional Resources

Dornbusch, R., Fischer, S. and Startz, R., 2014. Macroeconomics. New York, N.Y.: McGraw-Hill Education.
Campbell R. McConnell and Stanley L. Bruce, Economics. 2018. New York: McGraw-Hill.
Gabunada, F.2006. Lecture Notes in ECON 102: Macroeconomics. Visayas State University.

Answers to the Pretest

1. False
2. True
3. False
4. True
5. False

Answer to the Posttest

1. False
2. True
3. False
4. True
5. False