WHAT IS ECONOMICS ?

Economists are interested in understanding human behavior not only for

its own sake, but for the policy implications of this knowledge. How can
we know what to expect from changes resulting from public policy or
business decisions unless we understand why people behave the way they
do? The methods of economic inquiry are best described as “eclectic”
meaning they are drawn from many sources according to their usefulness
to the subject matter. Economists borrow from the social sciences to
theorize about human behavior. They borrow from mathematics to express
theories concisely. And they borrow from statistics to make inferences
from real-world data about hypotheses suggested by economic theory.

As in other scientific disciplines, theory in economics is an abstraction, or

simplification, of innumerable complex relationships in the real world.
When thinking about some aspects of behavior, say a family’s spending
decisions or why the price of oil fluctuates so much, economists will
develop a model that attempts to explain the behavior under examination.
Elements of the model derive from economic theory. Economists study the
model to see what hypotheses, or predictions, it suggests. These can then
be checked against real-world data. An economist’s model will typically be
built not with hammer and nails, but with pencil, paper, and computers.
The appropriate degree of abstraction for an economic model is
determined, to a large extent, by the problem at hand and is not something
that can be specified in advance for all problems. ( Economics, 6 th Ed.,
Baumol, William J. and Blinder, Alan S., 1994).

Some Basic Economic Principles and Concepts

Economics – It is a social science that deals on the study of how society

allocates its scarce resources to the maximum satisfaction of human wants
and needs. (--- Prof. Roberto S. Rimorin, PUP, 1982 ---)

Factor of Production: Land, labor, capital, and entrepreneur

Fruits of Production: Land - Rent; Labor – Salaries and/or Wages;

Capital – Interest/ Dividend, entrepreneur- Profit

Sectors of the Economy: Household/Consumer Sector; Public/Government

Sector; Private Sector, and
Rest-of-the-World/Foreign Sector
Branches of Economics:

Microeconomics - Concerns with the detailed look at the economic

decisions made by individuals and businesses considered as a single unit
(a person and a firm) and the effect of government policies have on them.

Macroeconomics - Deals with the broad measurements of economic

activities of group of individuals and businesses (firms/industry) such as
average price level, employment, and total output (GNP, GDP, Balance of
Trade, etc.)

Economic Reasoning - The application of theoretical and factual tools of

economic analysis to explaining economic developments or solving
economic problems say descriptive method, applied, policy economics,
scientific, inductive, statistical, deductive, etc.

Free Good - A production or consumption good that does not have a

direct cost say sunlight and air we breathe.

Economic Goods - Any goods or services that are scarce, of use and has
a value/price.

Chart - A graphical representation of statistical data or other information

say descriptive charts, pie charts, line graph, column chart, bar chart, etc.

Diagram - A graph that shows the relationship between two or more

variables that may or may not have values that can actually be measured; a
graphical model.

Inverse Relationship - A relationship between two variables in which the

value of one decreases as the value of the other increases.

Direct Relationship - A relationship between two variables in which their

values increase and decrease together.

Economic Concept - A word or phrase that conveys and economic idea.

Economic Models - These are simplified representation of cause-and-

effect relationships in a particular situation. Models may be in verbal,
graphic, or equation form.

Trade - off - The choice between alternative uses for a given quantity of
a resource.

Opportunity Cost - A real economic cost of goods and services produced

measured by the value of the sacrificed alternative.
Production Possibility Curve/Frontier - The line on a graph showing the
different maximum output combinations of goods and services that can be
obtained from a fixed amount of resources.

Price Stability - A constant average level of prices for all goods and
services.

Inflation - A continuously rising general price level resulting in a reduction

in the purchasing power of money.

Full Employment - Employment of nearly everyone who desires to work.

In practice, an unemployment level of not more than 4 – 5 % is considered
full employment.

Economic Growth - An increase in the production capacity of the

economy even in one or two its sectors – public, private, household and
rest-of- the- world sector.

Market Economy - An economic system in which the basic questions of

what, how, and for whom to produce are resolved primarily by buyers and
sellers interacting in markets.

Market or Marketplace - A network of dealings between buyers and sellers

or a resource or product (good or service); the dealings may take place at a
particular location, or they make take place by communication at a distance
with no face-to-face contact between buyers and sellers.

Centrally Directed (Command) Economy - An economic system in which

the basic questions of what, how, and for whom to produce are resolved
primarily by government authority.

Traditional Economy - An economic system in which the basic questions

of what, how, and for whom to produce are resolved primarily by custom
and tradition.

Mixed Economy - An economic system in which the basic questions of

what, how, and for whom to produce are resolved by a mixture of market
forces with governmental direction and/or custom and tradition.

Specialization - Concentrating the activity of a unit or a production

resource – especially labor – on a single task or production operation.
Also applies to the specialization of nations in producing those goods and
services that their resources are best suited to produce.
Demand - The relationship between the quantities of a good or service
that consumers desire to purchase at any particular time and the various
prices that can exist for the good and service.

Demand Schedule - A table recording the number of units of a good or

service demanded at various possible prices.

Demand Curve - A graphic representation of the relationship between

price and quantity demanded.

Quantity Demanded - The amount of a good or service that consumers

would purchase at a particular price and time.

Law of Demand - The quantity demanded of a good or service varies

inversely with its price; the lower the price the larger the quantity
demanded, and the higher the price the smaller the quantity demanded.

Income Effect - The effect of a change in the price of a good or service on

the amount purchased that results from a change in purchasing power of
the consumer’s income due to the price change.

Substitution Effect - The effect of a change in the price of a good or

service on the amount purchased that results from the consumer
substituting a relatively less expensive alternative.

Necessity - A good or service which is considered essential to a person’s

well-being.

Luxury - A good or service which increases satisfaction but it is not

considered essential to well-being.

Consumer Tastes and Preferences - Individual liking or partiality for

specific goods and services.

Substitute - A product that is interchangeable in use with another product.

Complement - A product that is employed jointly in conjunction with

another product

Supply - The relationship between the quantities of a good or service that

sellers wish to market at any particular time and the various prices that can
exist for the good or service.

Supply Schedule - A table recording the number of units of a good or

service supplied at various possible prices.
Supply Curve - A graphic representation of the relationship between price
and quantity supplied.

Law of Supply - The quantity supplied of a good or service varies directly

with its price; the lower the price the smaller the quantity supplied, and the
higher the price the larger the quantity supplied.

Equilibrium Price - The price at which the quantity of a good or service

offered by suppliers is exactly equal to the quantity that is demanded by
purchasers in a particular period of time.

Price Elasticity of Demand - The relative size of the change in the quantity
demanded of a good or service as a result of a small change in its price.

Elasticity Ratio - A measurement of the degree of response of a change in

quantity to a change in price say elastic, inelastic, and unitary.

Utility - The amount of satisfaction a consumer derives from consumption

or a good or service.

Marginal Utility - The amount of satisfaction a consumer derives from

consuming one additional unit (or the last unit consumed) of a particular
good or service.

Diminishing Marginal Utility - The common condition in which the

marginal utility obtained from consuming an additional unit of a good or
service is smaller that the marginal utility obtained from consuming the
preceding unit of the good or service.

Consumer Equilibrium - The condition in which consumers allocate their

income in such away that the last peso spent on each good or service and
the last peso saved provide equal amounts of utility.

Real Interest Rate - The quoted interest rate calculated on an annual basis
and adjusted for changes in the purchasing power of money during the
duration of the loan.

Real Capital - The buildings, machinery, tools, and equipment used in

production.

Break-even Point - The output level of a firm at which total revenue equals
total costs (TR = TC).

Law of Diminishing Marginal Returns - The common condition in which

additional inputs produce successively smaller increments of output.
Maximum Profit Level - The output level of a firm at which the revenue
from one additional unit of production (marginal revenue)is equal to the
cost of producing that unit (marginal cost).

Differentiated Products - Similar but not identical products produced by

different firms.

Absolute Advantage - When each of two producers can produce a different

good or service more efficiently than can the other producer, each of the
producers has an absolute advantage in the good or service that he
produces most efficiently.

Comparative Advantage - When one producer has efficiently advantage

over another producer in two separate products, but has a greater
advantage in one product than in the other, the efficient producer has
comparative advantage in the product in which he has the greater relative
efficiency; and the inefficient producer, on the other hand, has a
comparative advantage in the product in which his efficiency disadvantage
is not as large.

Interdependence - The relationship between individuals and institutions in

a country or between countries that arises because of specialization of
production.

Short Run Period - A period of time so short that the amount of some
factor inputs cannot be varied.

Long Run Period - A period of time sufficiently long that the amount of all
factor inputs can be varied.

Fixed Costs - Production costs that do not change with changes in the
quantity of output.

Productivity - A ratio of the amount of output per unit of input; denotes

the efficiency with which resources (people, tools, knowledge, and energy)
are used to produce goods and services; usually measured as output per
hour of labor.

Pure Monopoly - An industry in which there is only one firm.

Cartel - An industry in which the firms have an agreement to set prices

and/or divide the market among the members of the cartel.

Oligopoly - A shared monopoly in which there is no explicit agreement

among the firms.
Tax – a financial charge or other levy imposed upon individual or legal
entity by a State or any functional equivalent of a State like the local
government units.

Characteristics of a sound/good tax system:

1. Canon of Ability to Pay 7. Canon of Elasticity

2. Canon of Equality 8. Canon of Flexibility
3. Canon of Certainty 9. Canon of Simplicity
4. Canon of Convenience 10. Canon of Diversity
5. Canon of Economy 11. Canon of Uniformity
6. Canon of Productivity

Agrarian Reform - is the transfer of control and ownership of agricultural

land to the actual tillers with a package support services from the
government or from any of its instrumentalities.

Comprehensive Agrarian Reform Program (CARP) – a major government

interventions to effect rural development in the Philippines.

1. All alienable and disposable lands of the public devoted to

agriculture.
2. All lands of the public domain in excess of the specific limits as
determined by the Congress of the Philippines.
3. All other lands owned by the government devoted to or suitable to
agriculture.
4. All private lands devoted to or suitable for agriculture regardless of
the agricultural products raised or that can be raised thereon.