 ECONOMIC RESOURCES  A commodity or service being short supply, relative its demand

 PROBLEM OF SCARCITY which implies a constant availability of commodity or

 ALLOCATION PROBLEM economic resource relative to demand for them.
 It is said to exist when at a zero price there is a unit of demand
ECONOMICS which exceeds the available supply.
 Defined in various ways  It can be investigated as the limited availability of economic
 It is the efficient allocation of the scarce means of production resources relative to man’s or society’s unlimited demand for
toward the satisfaction of human needs and wants. goods and services.
 It illustrates the interaction of limited resources available and
2 Important Concepts the unlimited wants of man and society.
SCARCE MEANS OF PRODUCTION  It is the term if limited resources fall short to meet the
unlimited wants of the society, it will eventually create a
 refers to our economic resources like land, labor, and capital problem.
which we use to produce all the goods and services that we
need and want. ALLOCATION
o Why do we produce and ultimately buy these goods and  It depicts the relationship between available limited resources
services? SATISFACTION and the unlimited wants of man and society.
Origin of the word ECONOMICS Factors of Products / 4 Economic Resources
(Land, Labor, Capital, Entrepreneurship)
Greek roots
LAND
 OIKOS – it means household.
 This broadly refers to all natural resources, which are given by,
 NOMUS – it means system or management
and found in nature, and are, therefore, not manmade.
o OIKONOMIA or OIKONOMUS – it means
 It does not solely mean soil or the ground surface, but refers to
management of household all things and powers that are given free to mankind by nature.
 MANAGEMENT OF HOUSEHOLD - pertains to the  It comprises all the materials and things, which are available
microeconomic branch of economics. beneath the soil or above it.
 STATE MANAGEMENT – presently refers to  It includes the forests, mountains, rivers, oceans, minerals, air,
macroeconomics branch of economics. sunshine, light, etc.
Scarcity: The Central Problem of Economics  It can be classified sometimes as fixed resource.
 It is the main source of raw materials like timber, mineral, ores,
SCARCITY etc., which are utilized in the production of goods and services.
 Is the basic and central economic problem confronting every o RENT – the compensation for use of land.
man and society.
 It is the heart of the study of economics and the reason why
you are studying it now.
LABOR
 It is any form of human effort exerted in the production of
goods and services.
 It covers a wide range of skills, abilities, and characteristics.
 It includes factory or construction workers who are engaged in
manual or physical work.Factors of Produ
 It refers to an economist, nurse, doctor, lawyer, professor, and
other workers and professionals who are mainly involved in
mental work.
o SALARY or WAGE – the compensation for labor
rendered.
CAPITAL
 It is manmade goods used in the production of other goods and
services.
 It includes the buildings, factories, machinery, and other
physical facilities used in the production process.
o SAVINGS – refers to that part of a person’s or
economy’s income, which is not spent on
consumption.
o DEPRECIATION - the reduction of productive
capacity of capital.
o INTEREST – the reward for the use of capital.
NOTE: money is not actually considered as capital in economics as it
does not produce a good or services but it is rather a form of asset that
is used mainly as a medium of exchange.
ENTREPRENEURSHIP
 It is an economic good that commands a price referred to as
PROFIT or LOSS.
ENTREPRENEUR
o is a person who organizes, manages, and assumes
the risks of a firm, taking a new idea or a new
product and turning it into a successful business.
o It is not presented as a separate factor of production,
but it is classified as part of labor.
o It also possesses managerial skills needed in
building, operating, and expanding a business.
o Specifically, he is the one who decides what
combinations of land, labor and capital are to be
used in the production process.
The Circular Flow Model
DYNAMIC MARKET ECONOMY
 It creates continuous, repetitive flows of goods and services,
resources, and money.
CIRCULAR FLOW MODEL
 It illustrates the flow of resources and output from households
to businesses, and vice versa.
o Private decision makers (businesses and households)
 Businesses – buy resources, sells products
 Households – buy products, sell resources
o Markets (resource markets and product market)
 Resource Markets – upper part, the place where
resources or the services of resource suppliers
are bought and sold.
 Product Markets – lower part, the place where
goods and services produced by businesses are
bought by and sold to the households
 It illustrates the flow of resources and payments for their use as
well as the flow of goods and services and payment for them.
 Depicts a complex, interrelated web of decision making and
economic activity involving businesses and households.
  It is the Circle of Life
NOTE: the problem of scarcity gave birth to the study of economics.
No scarcity, no need for economics. The study of economics is
essential in order to address the issue of resource allocation and
distribution, in response to scarcity.
The Concept of Opportunity Cost
OPPORTUNITY COST
 Refers to the foregone value of the next best alternative.
 It is the value of what is given-up when one makes a choice.
 It is expressed in relative price.
 It means that the price of one item should be relative to the
price of another.
Basic Decision Problems
(Consumption, Production, Distribution, Growth over Time)
CONSUMPTION
 Is the basic decision problem that the consumers must always
deal with in their day-to-day activities.
PRODUCTION
 It is generally a concern of producers.
 They determine the needs, wants, and demands of consumers,
and decide how to allocate their resources to meet these
demands.
NOTE: The Methods of Production is depending on the firm’s
technological state, and on the available resources within the society.
DISTRIBUTION
 This problem is primarily addressed to the government.
 There must be proper allocation of all the resources for the
benefit of the whole society.
NOTE: absolute equality of every member can never be achieved.
GROWTH OVER TIME
 This is the last basic decision problem that a society or nation
must deal with.
Four Basic Economic Questions
1. WHAT TO PRODUCE?
 It tells us that an economy must identify what are the
goods and services needed to be produced for the
utilization of the society in the everyday life of a man.
 A society must also consider the resources that it
possesses before deciding what goods or services to
produce.
2. HOW TO PRODUCE?
 It tells us that there is a need to identify the different
methods and techniques in order to produce goods and
services.
 The society must determine whether to employ labor
intensive production or capital-intensive problems.
o LABOR INTENSIVE PRODUCTION
- it uses more of the human resource or
manual labor in producing goods and
services than capital resources.
- It is advisable to a society with large
population.
- Philippines, Vietnam, and China
o CAPITAL INTENSIVE PRODUCTION
- It employs more technology and capital
goods like machineries and equipment in
producing goods and services rather than
using labor resources.
- It is generally utilized by countries with
high level of capital stock and technology,
and with scarce labor resources.
- Japan, Germany, and USA
  It means justice and fairness.
3. HOW MUCH TO PRODUCE?
 It identifies the number of goods and services needed to
Positive and Normative Economics
be produced in order to answer the demand of man and
society. POSITIVE ECONOMICS
 The optimum amount of production must be
approximated by the producers.  it is an economic analysis that considers economic condition
o UNDERPRODUCTION (SHORTAGE) “as they are”, or considers economics “as it is”.
 It uses objective or scientific explanation in analyzing the
 Results to failure to meet the needs and
different transactions in the economy.
wants of the society.
 It simply answers the question “what it is”
o OVERPRODUCTION (SURPLUS)
 Results to excess goods and services NORMATIVE ECONOMICS
going to waste.
 it is an economic analysis which judges economic conditions
4. FOR WHOM TO PRODUCE?
“as it should be.”
 The question identifies the people or sectors who
 It is that aspect of economics that is concerned with human
demand the commodities produced in a society.
welfare.
 Economist must determine the “target market” of the
 It deals with ethics, personal value judgement and obligations
goods and services which are to be produced to
analyzing economic phenomena.
understand their consumption behaviors and patterns.
 It answers the question “what should be”
3 E’s in Economics (Efficiency, Effectiveness, Equity)  It is also referred to as a policy economics because it deals with
the formulation of policies to regulate economic activities.
EFFICIENCY
Ceteris Paribus Assumption
 Refers to productivity and proper allocation of economic
resources. CETERIS PARIBUS
 Refers to the relationship between scarce factor inputs and
 This assumption is important in studying economies
outputs of goods and services.
 It means “all other things held constant or all else equal”
 This relationship can be measured in:
 it is used as a device to analyze the relationship between two
o physical terms - TECHNOLOGICAL EFFICIENCY
variables, while the other factors are held unchanged.
o cost terms – ECONOMIC EFFICIENCY
 It is widely used in economics as an exploratory technique as it
EFFECTIVENESS allows economists to isolate the relationship between two
variables.
 It means attainment of goals and objectives.
EQUITY

Major Branches of Economics
MICROECONOMICS
 Concerned with individual decision making
 A branch of economics which deals with the individual
decisions of units of the economy (firms and household) and
how their choices determine relative prices of goods and
factors of production.
o MARKET
 it is the central concept of microeconomics
 It focuses on its two main player (buyer and
seller) and their interaction with one another
 Operates on the level of the individual business firms , as well
as that of the individual consumer.
 It concerns how a firm maximizes its profits, and how a
consumer maximizes his satisfaction.
MACROECONOMICS
 It is the branch of economics that studies the relationship
among broad economic aggregates like national income,
national output, money supply, bank deposits, total volumes of
of savings, investment, consumption expenditure, general price
level of commodities, government spending, inflation,
recession, employment, and money supply.
o MACRO - it seeks to understand the behavior of its
economy as a whole.
 It focuses on the four specific sectors of the economy:
o CONSUMPTION – behavior of the aggregate
household
o INVESTMENT – decision making of the aggregate
business
o GOVERNMENT SPENDING – policies and projects
of the government
o EXPORT and IMPORT – behavior of
external/foreign economic agents, through trading
Types of Economic System
(Traditional Economy, Command Economy, Market Economy,
Socialism, Mixed Economy)
TRADITIONAL ECONOMY
 It is basically a subsistence economy.
COMMAND ECONOMY
 It is a type of economy, wherein the manner of production is
dictated by the government
 It is an economic system characterized by collective ownership
of most resources, and the existence of a central planning
agency of the state.
 In this system, all productive enterprises are owned by the
people and administered by the state
MARKET ECONOMY
 Also, the capitalism’s basic characteristics
 it is where the resource is privately owned, and that the people
themselves make decisions.
 It is an economic system wherein most economic decisions and
means of production are made by the private owners
 Under this economic system, factors of production are owned
and controlled by individuals, and people are free to produce
goods and services to meet the demand of consumers, who, in
turn, are also free to choose goods according to their own lives.
SOCIALISM
 It is an economic system wherein key enterprises are owned by
the state
 In this system, private ownership is recognized.
  It is considered as an economy bordering between capitalism  It is basically the process by which land, labor, and capital are
and communism combined is order to produce outputs of goods and services

MIXED ECONOMY
 This economy is a mixture of market system and the command EXCHANGE
system
 This is the process of trading or buying and selling of goods or
o PHILIPPINE ECONOMY
services for money or its equivalent
 It is describing as a mixed economy since it
 It is also including the buying of goods and services either in
applies a mixture of three forms of decision-
the form of barter or through market
making.
 It is more market-oriented rather than command DISTRIBUTION
or traditional
 This is the process of allocating or apportioning scarce
Important Economic Terms resources to be utilized by the household, business sector, and
the rest of the world.
WEALTH
 It refers to the process of storing and moving products to
 Refers to anything that has a functional value which can be consumers often through intermediaries such as wholesalers
traded for goods and services and retailers
 It is the stock of net assets owned by individuals or households.
Brief History: The Classical, Keynesian, and Modern Economics
o MARKETABLE WEALTH
 It is the one widely used measure of the nation’s Birth of Economic Theory: CLASSICAL ECONOMICS
total stock of wealth
 Economic theory saw its birth during the mid-1700s and 1800s
 It is the physical and financial assets which are
 ADAM SMITH of Scotland
in the main relatively liquid
o He is considered the most important personality in the
CONSUMPTION history of economics.
o He is the father of economics
 Refers to the direct utilization or usage of the available goods
o He was responsible for the recognition of economics as
and services by the buyer or the consumer sector
 It is also the satisfaction obtained by consumers for the use of a SEPARATE BODY OF KNOWLEDGE
goods and services o His book is WEALTH OF THE NATIONS published
in 1776 became known as the BIBLE OF
PRODUCTION ECONOMICS
o One of his major contributions was his analysis of the
 It is defined as the formation or creation by firms of an output
relationship between consumers and producers through
 demand and supply, which ultimately explained how
the market works through the invisible hand.
 JOHN STUART MILL who was the heir to DAVID
RICARDO
o He developed the basic analysis of the political
economy or the importance of a state’s role in its
national economy
 POLITICAL ECONOMY – it is an older
English term that applies management to an
entire polis {state}
 KARL MARX a German
o He is much influenced by the conditions brought about
by the industrial revolution upon the working classes
o His major work
 DAS KAPITAL – is the centerpiece from
which major socialist thought was to emerge
NEOCLASSICAL ECONOMICS
 It was believed to have transpired around the year 1870
 Its main concern was market system efficiencies
 LEON WALRAS
o He introduced the general economic system
o He developed the analysis of equilibrium in several
markets
 ALFRED MARSHALL
JOHN HICKS
o He became the most influential economists during the
neoclassical economy because of his book
PRINICIPLES IN ECONOMICS
o He developed the analysis of equilibrium in particular
markets and the concept of MARGINALISM
Keynes’ General Theory of Employment, Interest, and Money
JOHN MAYNARD KEYNES
 An English economist who offered an explanation of mass
unemployment and suggestions for government policy to cure
unemployment in his influential book: THE GENERAL
THEORY OF EMPLOYMENT, INTEREST, AND
MONEY
 He is concern about the extent and duration of the worldwide
interwar depression led him to look for other explanations of
recession.
 He argued that classical political economist was concerned
with relative shares in national output of different factors of
production, rather than the forces which determine the level of
general economic activity
 He provided a general theory for explaining the level of
economic activity
 He argued that there is no assurance that savings would
accumulate during a depression and depress interest rates, since
savings depend on income and with high unemployment
incomes are low
 He argued that investment depends primarily on business
confidence which would be low during a depression so the
investment would be unlikely to rise even if interest rate fell
 He argued that the wage rate would be unlikely to fall much
during a depression given its ‘stickiness’, and even if it did fall,
this would merely exacerbate the depression by reducing
consumption.
NON-WALRASIAN ECONOMICS (1939)
 He was recognized for his analysis of the IS-LM Model
o IS-LM MODEL
 It is considered as an important macroeconomic
model
 It is a theoretical construct that integrates the
real, IS, and the monetary, LM, sides of the
 economy simultaneously to present a determine economic phenomena in formulating different kinds of studies
general equilibrium position for the economy as and new theories in economics
a whole.  This development in economics is applicable to concerns of
 IS or INVESTMENT-SAVING developing countries, and was largely an outcome of concern
o refers to the good market for a for the growth of developed countries.
given interest rate.  The great economists like:
 LM or DEMAND FOR, AND SUPPLY o SMITH, RICARDO, MALTHUS
FOR  They address this problem.
o Means money market for a given
Exercise 1- Identification
value of aggregate output or
income
____________________ 1. Refers to the scarce resources in demand.
POST-KEYNESIAN ECONOMICS (1940 and 1950s)
____________________ 2. Considered the father of economics.
POST-KEYNESIAN PERIOD ____________________ 3. The Greek word for economics.
____________________ 4. Developed the theory of political
 Saw the development of rules and regulations of different economy.
private and public institutions ____________________ 5. Considered as the bible of economics.
 This period introduced major post-Keynesian, neoclassical ____________________ 6. Developed the concept of IS-LM model.
economist, whose views are known as the post-Keynesian ____________________ 7. Refers to economics “as it is”.
“mainstream economics” ____________________ 8. Science that manages limited resources in
 This period welcomed various economist like: demand.
o PAUL A. SAMUELSON ____________________ 9. Developed the theory of money,
o KENNETH J. ARROW employment, and interest.
____________________ 10. Refers to economics “as it should be”.
o JAMES TOBIN
____________________ 11. A science related to economics, which
o LAWRENCE KLEIN deals with money.
o JOAN ROBINSON ____________________ 12. Denotes being productive.
o MICHAEL KOLECHI ____________________ 13. Refers to the creation of utility.
Another stream of thought was introduced by liberal market ____________________ 14. Branch of economics that studies the
post-Keynesians mainly the monetarist, led by MILTON behavior of the economy as a whole.
FRIEDMAN. ____________________ 15. The foregone value of what you give up
when you make choices.
NEW CLASSICAL ECONOMICS ____________________ 16. Refers to human effort exerted in
producing goods.
 Highlighted the importance of adherence to national ____________________ 17. It means justice or fairness.
expectations hypothesis and analysis, which included various
____________________ 18. A type of economic system wherein the
production and distribution of commodities are owned and controlled
by the government.
____________________ 19. Branch of economics concerned with
individual decision-making.
____________________ 20. Refers to man-made goods used in the
production of other goods and services.