MODULE 1 RESOURCE UTILIZATION AND ECONOMICS, ‘The Economic Problem: Scarce Resources, Unlimited Wants Lesson Outcomes: At the end of the lesson, the students will be able to: ¥ Define important terms such as economics, microeconomics and scarcity Y Differentiate macroeconomics from microeconomics Y Identify and describe the factors of production Y Explain the four (4) basic economic questions Y Describe economic systems 1.1 What is Economies? Economics comes from two Greek root words oikos ~ meaning household and nomus ~ meaning system ‘or management. Oikonomia or oikonomus means the management of household. The word became known as “state management” when the Greek societies developed into city-states Economics is defined as the efficient allocation of the scarce means of production toward the satisfaction ‘of human needs (Bato, Malveda, & Viray, Jr. 2016). It examines how people use their scarce resources to satisfy their unlimited wants. There are two (2) important concepts in the definition of microeconomics, namely: scarce means of production and unlimited wants. Economics resources use to produce goods and services such as land, labor and capital are scarce. In other words, we do not have enough resources to produce our unlimited wants due to scarcity of our resources. Thus, we try to use our limited resources by efficiently allocating them so that we are able to produce all the goods and services that will maximize our satisfaction. In economic analysis, not all factors affecting economic situations or phenomena can be considered. Thus, in order to simplify this, economists have devised an assumption known as “Ceteris Paribus”. A Latin phrase which means “all other things held constant” or “all else equal”. It is important in the study of cause and effect relationship between two variables where other relevant factors are assumed to be constant. For instance, in determining the impact of change in the price of sugar in the consumption behavior of consumers, ceteris paribus (or all other things remain constant). Applying the concept, factors such as family income, number of members in the family, population, etc. are assumed to remain constant. This approach allows economists to easily explain relationship between price and consumption behavior. Microeconomics vs Macroeconomics Economics has two (2) major branches of study: microeconomics and macroeconomics. Microeconomics is the study of decision making behaviors and allocation of scarce resources of individuals, firms and households. It generally applies to markets of goods and services and deals with individual and economic issues. It also examines individual economic choices and how it affects price, supply and demand in the goods market. ‘Macroeconomics is the study of the economic behavior and performance of an economy as a whole. it analyzes the decisions made by countries and governments and focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation. 1.2 THE PROBLEM OF SCARCI Scarcity is the basic and central economic problem confronting every man and society. It is the heart of the study of economics and the very reason to study economics. Scarcity refers to situations where the wants ‘exceed the means or simply the human wants exceed the resources and goods that contribute to fulfilling these wants (Kolmar, 2017).Humans have unlimited wants, however resources are limited to produce the goods and services we desire. This is where the study of economics is of great importance. It will help individuals and societies properly make decisions particularly allocation and utilization of resources. If the problem of scarcity does not exist, there is no need for us to economize. Goods and Services Resources are combined in a variety of ways to produce goods and services. Goods can be tangible or intangible. * Tangible Goods are physical products that can be touched e.g vehicles, computers, food items, furniture * Intangible Goods are products that do not have physical nature such as downloadable software, property Tights * Services are intangible products, acts or deeds transferred from seller to buyer e.g. medical treatment, expertise, consultancy. Goods Things that people make or grow to sell. a HE if a Services Fig. 1. Goods vs Services. https://www.tes.com/lessons/uxJtSPdqdZdIbA/goods-and-services 1,3 USE OF THEORIES AND MODELS TO UNDERSTAND ECONOMIC ISSUES AND PROBLEMS Birth of Economic Theory One of the most important persons in the field of economics is Adam Smith who is an 18th-century Scottish economists philosopher, and author, and is considered the “Father of Modern Economics”. He is most famous for his book entitled, "The Wealth of Nations” published in 1776. He is also made know for his idead on the importance of free markets, assembly-line production methods, and gross domestic product (GDP)- which formed the basis for theories of classical economics (Sharma, 2020), His major contribution is his analysis of the relationship between consumers and producers where the most prominent idea of the ‘invisible hand’ came about that guides the forces of supply and demand in the market. Economists analyze issues and problems with economic theories based on particular assumptions about human behavior. A theory is a set of assumptions or accpeted facts that is sued to provide a rational explanation of cause-and-effect relationships among a group of observed phenomenon. It isa simplified presentation of how tow or more variables interact with each other. Its purpose is to simplify complex issues enough to be understood, Sometimes, a model is used instead of theory. A model is a simplifed description of reality, designed to yield hypothesis about ceonomic behavior that can be tested. In other words, a theory is a more abstract presentation while a model is more applied or empirical presentation (Tukur, 2016). The Circular Flow Diagram There are two major types of decision makers in the economy: houscholds and businesses. A Circular Flow Model is a diagram that traces the flow of resources, products, income and revenue between these economic decision-makers. A market is a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms. Itis grouped into two (2): (1) Resource market is the place where resources ofthe suppliers are bought and sold and (2) product market isthe place where goods or services produced by businesses are bought and sold by the households.Fig. 1.2 Circular Flow Model In resource market, households sell resources (land, labor, capital) and businesses buy them and use them in the production of goods and services. This is represented by an inner arrow from households to businesses. The funds that businesses use to pay for resources flows as income to the households in the form of wage, rent, profit and interest. This is represented by the outer arrow from businesses to households. On the other hand, in terms of product market, businesses combine resources from households to produce goods and services represented by an inner arrow. In return, households gain income from selling their resources to the businesses. Households then use the limited income gained from selling resources to buy goods and services from businesses forming part of the consumption expenditure as represented by the outer arrow from households to businesses. In return, the monetary flow of consume spending on goods and services becomes sales revenues for the businesses. ‘The Circular Flow Model depicts complex, interrelated web of decision making and economic activities between businesses and households. 1.4 FACTORS OF PRODUCTION Factors of production or inputs are used to produce the goods and services that are used to produce our wants. There are four (4) broad categories of economic resources which serves as inputs to production are referred to as factors of production. 1. Land refers to all natural resources which are God-given and found in nature that are not man-made. It include all gifts of nature such as forest, bodies of water, oil reserves, air, sunshine and even animals. Land is the main source of raw materials like timber and mineral ores that are utilized in the production of goods and services. These are divided into renewable resources and exhaustible resources. Renewable resource can be drawn on indefinitely if used conservatively. Exhaustible resource are those that does not renew itself and so is available in a limited amount such as oil or coal. 2. Labor is any form of human effort, both mental and physical exerted in the production of goods and services. Labor covers a wide range of skills, abilities and characteristics, 3. Capital includes all man-made creations used to produce goods and services. It includes the buildings, factories, machinery and other physical facilities used in the production process. 4. Entrepreneurship. An entrepreneur 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. Entrepreneurial ability is a special kind of human skill of an entrepreneur which is a talent required to dream up a new product or find a better way to produce an existing one, organize production and assume risk of profit or loss.Opportunity Cost People cannot have everything they want, thus, they are forced to make choices from several options. This is where the concept of opportunity cost comes in. Opportunity Cost refers to the value of the best alternative that one must forgo in order to make a certain choice (Frakt & Piper, 2014). It is the value of what is given-up when one makes a choice. Thus, the thing given up is opportunity cost of one’s choice. For example, Anna is working as a tutor with a rate of Php 500.00 per hour. Instead of working, she went to a concert that costs Php 2,000 for two (2) hours. The opportunity cost is Php 1,000.00. Another example, Cris buys pizza instead of siomai and milktea with the same amount of money. The opportunity cost is the siomai and milktea. 1.5 BASIC ECONOMIC QUESTIONS ‘There are four (4) basic economics questions that the society must consider in order to solve decision problems and allocate resources properly. ‘* What to produce? - The people in the society identify what are the needed goods and services and decide which goods or services will be produced given the limited resources. * How to produce? -It involves the methods and techniques that will be employed in the production process of how a commodity will be produced considering the available technologies of the producer and resources, © How much to produce? ~ This involves the identification of the number of goods and services needed to be produced to meet the demands of the consumers. This question addresses the issues on underproduction and overproduction. ° For Whom to Produce? — This question identifies the target market of goods and services as to who demanded the commodities in order to understand their consumption behavior. 3 E’s in Economics There are important concepts that needs to be considered in production. 1. Efficiency. It is the ability — often measurable — to avoid wasting energy, money, efforts, materials and time in doing something or in producing a desired result. It signifies a level of performance that describes process that utilizes the minimum of inputs to create the greatest amounts of output, i.e. getting more out of less (https://marketbusinessnews.com/financial-glossary/efficiency-definition-meaning/). Being efficient in the production means production of goods and services 2. Effectiveness. It refers to the degree to which objectives are achieved and the extent to which targeted problems are solved. In contrast to efficiency, effectiveness is determined without reference to costs and, whereas efficiency means "doing the thing right," effectiveness means “doing the right thing” (http://www. businessdictionary.com/definition/effectiveness. html). 3. Equity. It is concerned with how resources are distributed throughout society (Pettinger, 2019). It is the concept or idea of faimess which suggests the income and opportunity are fairly distributed among different groups in the society. Positive and Normative Economics Positive economics is a branch of economics which describes and explains economic phenomena or conditions “as they are”, It answers the question “what is”. It is based on fact which uses objective or scientific explaination in analyzing the different transactions in the economy. On the other hand, normative economics, focuses on the value of economic fairness or what the economy ‘should be’ or ‘ought to be’. It is subjective and value-based, originating from personal perspectives, feelings, or opinions involved in the decision-making process (Fontinelle, 2020).1.6 TYPES OF An economie system is a strutcure by used by societies or governments in the production, resource allocation and distribution of goods and services across a geographic region or country. 1. Traditional Economy — it is a society where economic decisions are guided by customs, tradition and beliefs in the production of goods and services as well as in its distribution. It uses barter system for trade and no concept of currency. 2. Command Economy ~ It is where production of goods and services is governed by the government in terms of what should be produced, how much be produced and price for which the goods and services be sold. The government have control over economic decisions and production. 3. Market Economy — Its a capitalistic system, free enterprise where all resources are owned by individuals and private businesses who decide the alllocation of those resources and other economic activities. Economic decisions are made by buyers and sellers according to the laws of supply and demand which directs production of goods and services. 4. Socialism — It is an economic system characterized by social ownership. The government has a greater intervention where is owns most of the factors of production and responsible for production and distribution of important goods. It gives emphasis on the equal distribution of wealth and income. 5. Mixed Economy — it is a system with characteristics of combined traditional, command and market economies. It is where free markets coexist with the governemnt in resource allocation, commerce and trade. Goods are both owned by the private sectors and the government.