Big Picture A: Introduction to Economics

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to:

a) Explain the foundational concepts of microeconomics.

b) Discuss the basic analysis of demand and supply.
c) Analyze demand and supply elasticity.

Big Picture in Focus: ULO - A. Explain the foundational concepts

of microeconomics.

Metalanguage

To establish a common frame of understanding, the following essential terms are

operationally defined. You will encounter these terms as we go through the first ULO.
Please refer to these definitions in case you will encounter difficulty in understanding
the concepts.

Please proceed immediately to the "Essential Knowledge" part since the first lesson
also defines essential terms.

Essential Knowledge

To understand and perform the aforementioned Big Picture (Unit Learning Outcomes)
for the first three weeks, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to refer to these resources exclusively. Thus, you are expected to utilize
other books, research articles, and other available resources in the university's library,
e.g., ebrary, search.proquest.com, etc. that are available in the university’s library,
e.g., ebrary, search.proquest.com, etc.

Problem of Scarcity

To understand economics, let us first discuss the problems of scarcity. Scarcity is

defined as “a commodity or service being in short supply, relative to its demand (Kapur
1997). Taking its dictionary meaning, it simply means “shortage” or “being in short
supply” (Merriam-Webster). Scarcity or shortage of supply naturally occurs in the
society because human wants and needs are unlimited. So, if society's demand
exceeds the available resources, there is now a problem of resource allocation due to

1
scarcity. This is where economics comes into the picture. Basically, scarcity is central
in studying economics.

Definition of Economics

▪ It is a science that deals with the management of scarce resources.

▪ It is the study of how society allocates scarce resources and goods
▪ It is the scientific study on how individuals and the society make choices
▪ It is the study of the problem of using available economic resources as
efficiently as possible to attain the maximum fulfillment of society’s unlimited
demand for goods and resources

Origin of the term Economics

Two Greek Words

▪ Oikos – meaning household

▪ Nomus – system of management
▪ Oikonomia or oikonomus – management of household

Assumptions in Economics

Ceteris Paribus. This term means “all other things held constant or all else equal”.
This assumption is used as a device to analyze the relationship between two variables,
while the other factors are held unchanged. For example: What is the impact of a
change in price of rice on consumption behavior, ceteris paribus? (What is the impact
of a change in the price of rice on consumption behavior, assuming that income,
number of family members, population, laws, and so on all remain constant?

People Behind Economics

1. Adam Smith. He is considered as the “Father of Economics”, and his book, “Wealth
of the Nations” became known as the “Bible in Economics”. His contribution was his
analysis of the relationship between consumers and producers through demand and
supply, which ultimately explained how the market works through the invisible hand.

2. John Stuart Mill. He developed the basic analysis of the political economy or the
importance of a state’s role in its national economy.

2
3. Karl Marx. His major work, Das Kapital, is the centerpiece from which major
socialist thought was to emerge.

4. Leon Walras. He introduced the general economic system.

5. Alfred Marshall. He developed the analysis of equilibrium of a particular market

and the concept of “marginalism”.

6. John Maynard Keynes. He offered an explanation of mass unemployment, and

suggestions for government policy to cure unemployment in his influential book
entitled “The General Theory of Employment, Interest and Money”.

7. John Hicks. He was recognized for his analysis of the IS-LM model, which is
considered an important macroeconomic model.

Four Basic Economics Questions

1. What to produce?

An economy must identify the commodities needed to be produced for the utilization
of the society in everyday life. A society must also consider the resources that it
possesses before deciding what goods or services to produce.

2. How to produce?

An economy must identify the different methods and means to produce the
commodities. The society must determine whether to employ labor-intensive
production or capital-intensive production.

▪ Labor-intensive production uses more manpower in producing goods and

services.

▪ Capital-intensive production employs more technology and capital goods like

machinery and equipment in producing goods and services.

3. How much to produce?

An economy must identify the number of commodities needed to be produced in order

to answer the demand of the society. The optimum amount of production must be
approximated by producers to avoid overproduction/underproduction.

3
4. For whom to produce?

This question identifies the people or sectors that demand the commodities produced
in a society. “Target market” must be classified and their consumption behaviors must
be understood.

Positive and Normative Economics

Positive Economics is an economic analysis that considers economic conditions “as

they are”, or examines economics “as it is”. It simply answers the question ‘what is’.
Example:

▪ The economy is now experiencing a slowdown because of too much politicking

and corruption in the government.

▪ In the UK the rate of unemployment has increased by 50% in the past three
years.

Normative Economics is an economic analysis that judges economic conditions “as

it should be”. It is that aspect of economics concerned with human welfare and deals
with ethics, personal value judgments, and obligations analyzing economic
phenomena. It answers the question ‘what should be’.

Example:

▪ The Philippine government should initiate political reforms to regain investor

confidence, and consequently uplift the economy.
▪ The MPC should increase interest rates to deal with the rise in inflation.

Important Economic Terms

1. Wealth. This refers to anything that has functional value (usually in money), which
can be traded for goods and services. It is the stock of net assets owned by individuals
or households

2. Consumption. This refers to the direct utilization or usage of the available goods
and services by the buyer or the consumer sector.

3. Production. This refers to the formation of output (products or services). It is the

combination of land, labor, and capital to produce output of goods and services.

4
4. Exchange. This is the process of trading goods or services for money or its
equivalent. It also includes the buying of goods and services either in the form of barter
or through the market.

5. Distribution. This is the process of allocating or apportioning scarce resources to

be utilized by the household, the business sector, and the rest of the world.
Specifically, this refers to the process of storing and moving products to customers
often through intermediaries such as wholesalers and retailers.

Branches of Economics

1. Microeconomics. This branch is concerned with individual decisions of units of the

economy – firms and households, and how their choices determine relative prices of
goods and factors of production.

2. Macroeconomics. This branch of economics studies the behavior of the economy

as a whole – the relationship among broad economic aggregates like national income,
national output, money supply, bank deposits, total volumes of savings, investment,
consumption expenditure, general price of commodities, government spending,
inflation, recession, employment, and money supply.

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 represents the benefits an individual,
investor, or business misses when choosing one alternative over another.

Opportunity Cost Formula and Calculation

Opportunity Cost=FO−CO

where:

FO=Return on the best foregone option

CO=Return on the chosen option

For example:

Option A: To invest in the stock market hoping to generate capital gain returns.

5
Option B: To reinvest your money back into the business, expecting that newer
equipment will increase production efficiency, leading to lower operational expenses
and a higher profit margin.

Assuming the expected return on investment in the stock market is 12 percent over
the next year, and your company expects the equipment update to generate a 10
percent return over the same period. Now, if you choose option B, then the opportunity
cost is 2%, i.e., 12% - 10%, meaning – by reinvesting your money back into the
business, you would forego the opportunity to earn a higher return.

Factors of Production

1. Land. This factor refers to all-natural resources, which are given by, and found in
nature, and are therefore not man-made. It comprises all the materials and things,
which are available beneath the soil or above. It includes forests, mountains, rivers,
oceans, minerals, air, sunshine, etc. The compensation for the use of land is called
rent.

2. Labor. This factor refers to any form of human effort exerted in the production of
goods and services. Labor covers a wide range of skills, abilities and characteristics.
It includes factory workers who are engaged in manual work. It can also refer to an
accountant, economist, nurse, and other workers and professionals. The reward for
labor rendered is salary or wage.

3. Capital. This refers to man-made goods used in the production of other goods and
services. It includes buildings, machinery, and other physical facilities used in the
production process. The reward for the use of capital is called interest.

Note: Money is not considered capital in economics. It does not produce a good or
service, but it is rather a form of asset used as a medium of exchange.

4. Entrepreneurship. This is defined as the activity of setting up a business. An

entrepreneur is someone 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.

6
Circular Flow Model

Economic
Resources (Land,
Labor, Capital)

HOUSEHOLDS FIRMS (Producers)

Output of Goods
and Services

This figures shows the microeconomic circular flow model. It represents the basic
relationship between households (consumers) and firms (producers). Households
provide basic economic resources (land, labor, and capital) which are used by the
firms to produce goods and services which are eventually offered back to the
households.

Types of Economic Systems

1. Traditional Economy. This is basically a subsistence economy. A family produces

goods only for its own consumption. The family head decides on what, how, how much,
and for whom to produce.

2. Command Economy. This is a type of economy, wherein the government dictates

the manner of production. The government decides on what, how, how much, and for
whom to produce. In this system, all productive enterprises are owned by the people
and administered by the government.

3. Market Economy. The characteristic of this system is that the resources are
privately owned and that the people themselves make the decisions. The private
owners dictate the manner of production, 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 likes.

7
4. Socialism. In this economic system, key enterprises are owned by the state, but
private ownership is recognized. The state has control over a large portion of capital
assets. It is generally responsible for the production and distribution of essential
goods. The emphasis of this economic system is on the equitable distribution of
income and wealth.

5. Mixed Economy. This economy is a mixture of the market system and the
command system. The Philippine economy is described as a mixed economy since it
applies a combination of three forms of decision-making. However, it is more market-
oriented rather than command or traditional.

Self-Help: You can also refer to the sources below to help you
further understand the lesson:

* Chindarkar, N., & Thampapillai, D. J. (2018). Rethinking teaching of basic

principles of economics from a sustainability perspective. Sustainability,
10(5), 1486. doi:http://dx.doi.org/10.3390/su10051486

*Conversable economist: Dissecting the concept of opportunity cost (2016).

Chatham: Newstex. Retrieved from
https://search.proquest.com/docview/1775399881?accountid=31259

*Eve, R. M. (2016, Sep 19). Applying the concept of opportunity costs in personal
finance. Business Mirror Retrieved from
https://search.proquest.com/docview/1821102374?accountid=31259