Economic Way Of

Thinking
Objectives

1. Define Scarcity and Economics

2. Identify the foundation of economics
3. Determine the importance of positive and normative
economics
4. Identify the 4 basic economics questions
5. Describe the 3 E’s in economics
6. Differentiate the microeconomics from
macroeconomics
7. Understand the concept of opportunity cost
8. Categorize the different types of economics systems
Economics and Scarcity: Definition
and relationship
SCARCITY
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.
 Limited Unlimited
Resources Wants

SCARCI
TY

FIGURE 1.1: Problem of

Scarcity
What is ECONOMICS?

Economics
Is a science that deals with the management of scarce
resources. It is the study of the problem using available
economics resources as efficiently as possible so as to
attain the maximum fulfillment of society and unlimited
demand for goods and services.
Limited Unlimited
Resource Wants

Allocati
on

FIGURE 1.2: Economics

The relationship between the
ECONOMICS and SCARCITY
Origin and Foundation of Economics

Origin of the term “Economics”

Two Greek roots of the word economics are:
oikos - meaning household
nomus – meaning system or management
Oikonomia or oikonomus, therefore, means the
“management of household”
CETRIS PARIBUS ASSUMPTION

“all things held constant or else

equal”
BRIEF HISTORY: THE CLASSICAL,
KEYNESIAN & MODERN ECONOMICS
BIRTH OF ECONOMIC THEORY:
CLASSICAL ECOMICS

ADAM SMITH is the “Father of

Economics”. His book “The Wealth
of Nations”, published in 1776,
became known as “the bible in
economics.”
 DAVID RICARDO
developed the basic
analysis of the
political economy.
 KARL MARX is a
German Ecomist who
greatly influenced by
the conditions
brought upon the
working classes by
the industrial
revolution. He’s major
work is “Das Kapital”
LEON WALRAS
developed the
analysis of
equilibrium in
several markets
 ALFRED
MARSHALL
developed the
concept of
marginalism.
JOHN MAYNARD KEYNES
publishes influential
book “the general
theory of
employment
interest and
money”
 JOHN HICKS
was recognized
for his analysis
of the IS-LM
model
NEOCLASSICAL ECONOMICS (1870s)
Its main concern was market system
efficiencies. It brought recognition to the
economists 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.
KEYNES GENERAL THEORY OF
EMPLOYMENT,INTEREST & MONEY (1936)

John Maynard Keynes is an English

economist who offered an explanation for
mass unemployment and gave suggestion
for government policy to cure
unemployment in his influential book: The
NON-WARLASIAN ECONOMICS (1939)
During the non-Warlasian Era, John Hicks
was recognized for his analysis of the IS-LM
model, which is considered as an important
macroeconomic model. IS refers to the
good market for a given interest rate, while
LM means money market for a given value
of aggregate output or income.
POST-KEYNESIAN ECONOMICS (1940s AND
1950s)
This period introduced major port-keynesian,
neoclassical economist, whose views are
know as post-keynesian “mainstream
economics”. This period welcomed various
economist like Paul A. Samuelson, Kenneth
J. Arrow, James Tobin and Laurence Klein,
to mention some recognize leaders and
NEW CLASSICAL ECONOMICS
This period highlighted the importance of
adherence to a national Expectations
Hypothesis and analysis, which included
various economics phenomena in
formulating different kinds of studies and
new theories in economics. This
development in economics is applicable to
the concerns of of developing countries, and
was largely an outcome of concern for the
grownth of developed countries. The great
economists like smith, Ricardo and Malthus
addressed this problem (sicat, 1983).
POSSITIVE AND NORMATIVE ECONOMICS
Positive Economics
A type of economic analysis that considers
economic conditions “as they are”. It can
be considered as a more “descriptive” way
analyzing economic conditions thereof.

Normative Economics
This a type of economic analysis that
judges economic conditions “as it should
be”. It answers the question ‘what should
be’. Its is a more “prescriptive” way of
explaining economic situations.
FOUR BASIC ECONOMIC QUESTIONS
WHAT TO PRODUCE
A society must also take into account the
resources it possesses before deciding what goods
of services to produce.
HOW TO PRODUCE
The society must determine whether to employ
labor-intensive production or capital-intensive
production.
HOW MUCH TO PRODUCE
This identifies the number of commodities that
need to be produced in order to answer the
demands of the society.
FROM WHOM TO PRODUCE
Economists must determine the “target market”
for the goods and services which are to be
Relationship of economics to other
sciences
• Business Management
• History
• Finance
• Physics
• Sociology
• Psychology
Importance of studying
Economics
•To understand society
•To understand global affairs
•To be informed voter
3E’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
•Consumption
•Production
•Exchange
•Distribution
 MicroECONOMICS and
• MacroECONOMICS
Microeconomics
This is the branch of economics that deals with
the individual decisions of units of economy-
firms and households, and how their choices
determine the relative prices of goods and affect
the different factors of production.
• Macroeconomics
It is the branch of economics that studies the relationship
among broad economics aggregates like national income,
national output, money supply, bank deposit, total volumes
of savings, investment, consumption expenditure, general
price level 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 alternatives. It is
the value of whatever is giving
up when one make a choice.
 Saving
( Firm/
Individual)

Credit Investme
(Interest) nt (Profit)

FIGURE 1.3: Opportunity Cost

Factors of Production

•Land
•Labor
•Capital
•Entrepreneurship
FIGURE 1.4: The Circular Flow
Model
ECONOMIC
RESOURCES
(Land, Labor,
Capital)

HOUSEHOLDS FIRMS
(Resources (Produc
Owners) ers)

Output Goods and

services
Basic Decision Problems

• Consumption
• Production
• Distribution
• Growth over time
Types of Economic System
•Traditional Economy
•Command Economy
•Market Economy
•Socialist Economy
•Mixed Economy
GOOD EVENING