FUNDAMENTAL

ECONOMIC
CONCEPTS
MODULE 1
August 26, 2020
TOPIC 1:
THE FOUNDATION OF
ECONOMICS
■ Two basic facts of life: (1) scarcity, and (2) unlimited wants and
needs
scarce – limited (economic)
scarcity – state of insufficiency of resources
insatiable – never fully satisfied
■ When confronted with these basic facts of life, how do we
reconcile them?
TOPIC 1: THE FOUNDATION OF
ECONOMICS
Wa nts > Re so urc e s

SCARCITY

Opportunity
Benefits CHOICE
Cost

Value
Judgment
ECONOMICS: DEFINED

ECONOMICS IS A SOCIAL SCIENCE THAT

DEALS WITH THE PROPER ALLOCATION OF
SCARCE RESOURCES AMONG
ALTERNATIVE USES SO AS TO BRING
ABOUT MAXIMUM SATISFACTION TO THE
UNLIMITED WANTS AND NEEDS OF MAN.
ECONOMICS: DEFINED

1. SOCIAL SCIENCE – Economics studies man’s behavior

2. SCIENCE – a systematized body of knowledge based from
facts
- Economics is a discipline with bodies of knowledge
contributed by economists and economists are like
scientists in creating bodies of knowledge
- Economists also use scientific method
ECONOMICS: DEFINED

■ SCIENTIFIC METHOD - the development and testing of theories

about how the world works
1. Observation and description of a phenomenon or group of
phenomena
2. Formulation of hypothesis
3. Test of hypothesis (statistical techniques)
4. Conclusions (or generalizations) (come in the form of laws,
theories, models, principles)
METHODOLOGY OF ECONOMICS

Po lic y
Polic y Ec o no m ic s

The o re tic a l
The ory
Ec ono m ic s

De sc rip tive
Fac ts Ec ono m ic s
ECONOMICS AS A DISCIPLINE

■ We study economic theories, economic laws or economic

principles - a statements about economic behavior or the
economy that enables prediction of the probable effects of
certain actions
■ Theories, principles, and models are “purposeful
simplifications”
ECONOMICS AS A DISCIPLINE

1. Generalizations. Economic principles are generalizations

relating to economic behavior or to the economy itself.
Economic principles are expressed as the tendencies of typical
or average consumers, workers, or business firms. For
example, economists say that consumers buy more of a
particular product when its price falls. This “price-quantity”
principle, however, holds for the typical consumer and for
consumers as a group.
ECONOMICS AS A DISCIPLINE

2. Other-Things-Equal Assumption. In constructing their

theories, economists use the ceteris paribus or other-things-
equal assumption – the assumption that factors other than
those being considered do not change. They assume that all
variables except those under immediate consideration are held
constant for a particular analysis.
ECONOMICS AS A DISCIPLINE

3. Graphical Expression. Many economic models are expressed

graphically. Be sure to read topics on graphing.
ECONOMICS AS A DISCIPLINE

How useful are theories?

1. Economic theories are highly useful in analyzing economic behavior and
understanding how the economy operates.
2. They are the tools for ascertaining cause and effect within the economic
system. Good theories do a good job of explaining and predicting.
3. Also, they are useful for policy making. Policy economics is concerned
with application of policy to resolve (or minimize the impact of) an
economic problem. With an understanding of an economic behavior,
correct policies are made and implemented.
BRANCHES OF ECONOMICS

1. Microeconomics is the part of economics concerned with

individual units such as a person, a household, a firm, or an
industry. At this level of analysis, the economist observes the
details of an economic unit, or very small segment of the
economy. In microeconomics we look at decision making by
individual customers, workers, households, and business
firms. We measure the price of a specific product, the number
of workers employed by a single firm, the revenue or income
of a particular firm or household, or the expenditures of a
specific firm, government entity, or family.
 BRANCHES OF ECONOMICS
2. Macroeconomics examines either the economy as a whole or its basic
subdivisions or aggregates, such as the government, household, and
business sectors. An aggregate is a collection of specific economic
units treated as if they were one unit. In using aggregates,
macroeconomics seeks to obtain an overview, or general outline, of the
structure of the economy and the relationships of its major aggregates.
Macroeconomics speaks of such economic measures as total output,
total employment, total income, aggregate expenditures, and the
general level of prices in analyzing various economic problems. No or
very little attention is given to specific units making up the various
aggregates.
APPROACHES TO THE STUDY OF
ECONOMICS
Positive Economics focuses on facts and cause-and-effect
relationships. It includes description, theory development, and
theory testing (theoretical economics). Positive economics avoids
value judgments, tries to establish scientific statements about
economic behavior, and deals with what the economy is actually
like. Such scientific-based analysis is critical to good policy
analysis. Positive economics concerns what is, thus it is a “what is”
analysis.
APPROACHES TO THE STUDY OF
ECONOMICS
Normative Economics, incorporates value judgments about what
the economy should be like or what particular policy actions
should be recommended to achieve a desirable goal (policy
economics). Normative economics looks at the desirability of
certain aspects of the economy. It underlies expressions of support
for particular economic policies. Normative economics embodies
subjective feelings about what ought to be, making it a “what
ought to be” analysis.
TOPIC 3: ECONOMIZING
PROBLEM
■ Resources
Land (“rent”) Labor (“wage”)
Capital Goods (“interest rate”) Entrepreneurial Ability
■ Efficiency
Next to making choices, proper allocation of scarce resources that
society needs to be efficient in the use of these resources