Lesson 1

Economics
Princess Cole
 What are the economic problems you have
observed in the word today?
 Is the basic and central economic problem confronting every
society.

 It is the heart of the study of economics and the reason

behind its establishment.
 It is a commodity or service being in short supply, relative to
its demand.

 It pertains to the limited availability of economic resources

relative to society’s unlimited demand for goods and services.
 Try to analyze the figures.
Limited
Unlimited
Resources
Wants

Scarcity
Limited
Unlimited
Resources
Wants

Allocation
 Economics

• Is a science that deals with the management of scarce

resources.
• It is also described as a scientific study on how individuals
and the society generally choices.
• Specifically, it is the study of the problem using available
resources as efficiently as possible so as to attain the
maximum fulfilment of society’s unlimited demand for
goods and series.
 Origin of the term “Economics”

• The two Greeks roots of the word economics are oikos –

meaning household and nomus – meaning system or
management.
• Oikonomia or oikonomus therefore the management of
household.
 Importance of Studying Economics
• To understand the society
• To understand global affairs
• To be an informed voter
 3 E’s in Economics
• Efficiency – refers to productivity and proper allocation of
economic resources
• Equity – means justice and fairness
• Effectiveness – means attainment of goals and
objectives
 Important Economic Terms
• Wealth – refers to anything that has functional value
(usually in money) which can be traded for goods and
services. It is the stock of assets owned by individuals or
households.
• Consumption – refers to direct utilization or usage of the
available goods and services by the buyer or the
consumer sector
 Important Economic Terms
• Production – defines as the formation by firms of an
output (products or service). It is the combination of land,
labor and capital in order to produce output.
• Exchange – the process of trading goods and/or service
for money and/or equivalent. It also includes the buying of
goods and services either in the form of barter or through
market.
 Important Economic Terms
• Distribution – the process of allocating or apportioning
scarce resources to be utilize by the household, the
business sector and the rest of the world
 Positive and Normative Economics
• Positive Economics – is an economic analysis that
considers economic conditions “as they are” or “as it is”.

Examples:

The economy is now experiencing a slowdown because of

too much politicking and corruption in the government
• Normative Economics – is an economic analysis which
judges the economic conditions “as it should be”. It is
concerned with human welfare.
Example:

The Philippine government should initiate political reforms

in order to regain investor confidence, and consequently
uplift the economy.
The Classical, Keynesian and
Modern Economics

Brief History
 Birth of Economic Theory: Classical Economics

• Economic theory saw its birth during the mid 1700s and
1800s.
• Adam Smith of Scotland is a father of economics. He was
responsible for the recognition of economics as a
separate body of knowledge.
• His book “wealth of the nations”, published in 1776,
became known as the “bible in economics”.
• His major contributions is the analysis of the relationship
between consumers and supply.
 Continuation…

• John Stuart Mill was heir to David Ricardo, who

developed the basic analysis of the political economy.
• The term political economy is an older English term that
applies management o an entire polis (state).
• Karl Max a German, also emerged this period. His major
work, Das Kapital, the centrepiece from which major
socialist though was to emerge.
 Neoclassical Economics (1870s)

• Its main concern was market system efficiencies.

• Leon Walras, who introduced the general economic
system and Alfred Marshall, who became the most
influential economist during that time because of his book
“principles in economics”.
• Leon Walras, develop the analysis of equilibrium in
several markets.
 Keynes’ General theory of Employment, Interest and Money

• John Maynard Keynes is 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
(1993), concern about the extent and duration of the
worldwide interwar depression led him to look for other
explanations of recession.
 Non-Walrasian Economics (1939)

• During this period, John Hicks was recognized for his

analysis of the IS-LM model, which is considered as an
important macroeconomics model.
• IS refers to the goods market for a given interest rate,
while LM means money market for a given value for
aggregate output or income.
• The IS-LM mode is a theoretical construct that integrates
the real IS(investment-saving) and the monetary
LM(demand for, and supply for money).
 Post-Keynesian Economics (1940-1950s)

• This period introduced major post-Keynesian,

neoclassical economist, whose views are known as the
post-Keynesian “mainstream economics”.
• This period also welcome various economist like Paul A.
Samuelson, Kenneth J. Arrow, James Tobin and
Lawrence Klein.
 New Classical Economics

• This period highlighted the importance of adherence of

national expectations hypothesis and analysis.
• It include various economic phenomena in formulating
different kind of studies and new theories of economics.
• This development in economics is applicable to concerns
of developing countries.
• The great economist like Smith, Ricardo and Malthus
address this problem.
 History

• The history of economic ideas provides information

regarding theories that can be revisited in order to
evaluate present and future economic issues.
 Four Basic Questions of Economics
1. What to produce?
2. How to produce?
3. How much to Produce?
4. For whom to produce?
1. What to produce?

An economy must identify what are the commodities needed

to be produced for the utilization of the society in everyday
life.
A society must also take into account the resources that it
possesses before deciding what goods or services to produce.
2. How to produce?

There is a need to identify the diferent methods and techniques in order

to produce commodities.
the society must determine whether to employ labor or intensive
production.

Labor intensive production uses more of the human resource or manual

labor in producing goods and services than capital resources. this kind of
production is advisable to a society with large population.
• 3. How much to produce?

• This identities the number of commodities needed to produced in

order to answer the demand of the society. The optimum amount of
production must be approximated by producers.
• Underproduction will result to a failure to meet the need and wants
of the society.
• On the other hand, overproduction results to excess goods and
services going to waste.
• 4. For whom to produce?

• This question identities the people or sectors who demand the

commodities produced in society.
• Economists must determine the “target market” of the goods and
services which to produced to understand their consumption behaviors
and patterns.
• An understanding of this result to higher sales of good , and ultimately
to increased profits.
• For those who can pay the highest price is for whom goods and services
are produced.
Branches of Economics
• MICROECONOMICS
and
• MACROECONOMICS
 Microeconomics and Macroeconomics

• Economics has two major branches of study.

• One is concerned with individuals decision making and
the other is involved in understanding the behaviour of the
society.
 Microeconomics

• Branch of economics which deals the individuals decision

of units of the economy- firms or household.
• The market is the central concept of microeconomics. It
focuses on its two main players- the buyer and the seller,
and their interaction with one another.
 Macroeconomics

• Is the branch of economics that studies the relationship

among broad economic aggregates like national income,
national output, money supply, bank deposits, total
volume of savings, investment, consumption
expenditures, general price level of commodities,
government spending, inflation, recession, employment,
and money supply.
• The term macro, in contrast to micro, implies that it seeks
to understand the behaviour of the economy as a whole.
 Opportunity Cost
What is an 'Opportunity Cost‘ ?
• Opportunity cost refers to a benefit that a person could
have received, but gave up, to take another course of
action.
 Formula for Calculating Opportunity Cost?

• When assessing the potential profitability of various

investments, businesses look for the option that is likely
to yield the greatest return.

• Often, this can be determined by looking at the expected rate

of return for a given investment vehicle.
• However, businesses must also consider the opportunity
cost of each option. Assume that, given a set amount of
money for investment, a business must choose between
investing funds in securities or using it to purchase new
equipment.
• No matter which option is chosen, the potential profit that
is forfeited by not investing in the other option is called the
opportunity cost. This is often expressed as the difference
between the expected returns of each option:

• Opportunity Cost = Return of Most Lucrative Option -

Return of Chosen Option
 The Concept of Opportunity Cost

• Refers to the foregone value of the next best alternative.

• The thing thus given up is called the opportunity cost
one’s choice.
• Opportunity cost is expressed in relative price. This
means that the price of one item should be relative to the
price of another.
 Factors of Production
• Land
• Labor
• Capital
• Entrepreneurship
 Land
• 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 and above.
• The compensation for use of land is called RENT
 Labor
• Is any form of human effort exerted in the production of
goods and services. It covers a wide range of skills,
abilities, and characteristics
• Reward for labor is SALARY/WAGE
 Capital
• Is 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
• A nation’s capital stock is dependent on its level of
savings.
• Savings refer to that part of person’s income which is not
spent on consumption.
 Cont.
• Reduction of productive capacity of capital is called
depreciation.
• The reward for the use of capital is called INTEREST.
 Entrepreneurship
• Is an economic good that commands a price referred to
as profit/loss
• An entrepreneur is a person who organizes, manages,
and assumes the risk of a firm, taking a new idea or a
new product and turning it into a successful business
• He/she decides what combinations of land, labor and
capital are to be used in the production process
 Circular Flow Model

Economic Resources
(Land, Labor, Capital)

FIRMS
HOUSEHOLDS
(Producers)

Output of Goods
and Services
 Basic Decision Problem
• Consumption
Members of the society, with their individual wants, determine
what types of goods or services they want to utilize or consume, and
the corresponding amounts thereof that they should purchase or
utilize
• Production
Producers determine the needs, wants, and demands of
consumers, and decide how to allocate their resources to meet
these demands.
 Basic Decision Problem
• 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.
• Growth over Time
This is the last basic decision problem that a society or nation
must deal with. As society continues indefinitely, all the problems of
choice, consumption, production and distribution must be seen in
the context of how they will impact future events.
Economic System
 Types of Economic Systems
• Traditional economy
• Command economy
• Market economy
• Socialism
• Mixed economy
 Traditional Economy

• Is basically a subsistence economy.

• A family produces for its own good for its consumption.
• The decision on what, how, how much, and for whom to
produce are made by the family head.
 Command Economy

• Is a type of economy wherein the manner of production is

dictated by the government.
• The government decide on what, how, how much, and for
whom to produce.
• In this system, all productive enterprise are owned by the
people and administered by the state.
 Market Economy

• Market economy or capitalism’s basic characteristic is that

the resources are privately owned. And that people
themselves make the decisions.
• It is also a an economic system wherein most economic
decisions and means of production are made by the
owners.
 Socialism

• Is an economic system wherein key enterprises are

owned by the state.
• Private ownership is recognized but however the state
has a control over a large portion of capital assets.
• The main emphasis of this system is an equitable
distribution of income and wealth.
 Mixed Economy

• Is a mixture of market system and the command system.

• The Philippine economy is described as a mixed economy
since it applies a mixture of three forms of decision
making. However, it is more market oriented rather than
command or traditional.
 Having the understanding about the economics. Based on your personal
observation, make a short discussion of the current status of the Philippine
economy. ( Give at least 3 observations)

 Guidelines:
• Government system and its performance
• various social unrest and crimes
• Environmental status