Revisiting

Economics as a
Social Science
Economics
• Economics refers to the effective management of scarce resources
to satisfy unlimited wants and needs.
› It is a social science that studies the means by which individuals,
groups, and societies produce, distribute, and consume products and
services.
• The origin of the study of Economics is traced to Adam Smith who
wrote the book An Inquiry into the Nature and Causes of the Wealth
of Nations in 1776 and started the idea of Economics as a separate
source of knowledge from Philosophy.
• As the modern economy is primarily defined by knowledge and
technology, the conventional definition of Economics which focuses
on matching scarcity and wants is challenged by the need for better
organization to effectively address scarcity and human wants.
› Economists recognize the influence of incentives, choices, and
rules in managing an economy. This requires the free flow of
information which will give way to effective decision-making and
organization.
Basic Economic
Concepts
Scarcity
• Scarcity is a fundamental concept economics.
› It refers to the limitation of resources, particularly economic
resources such as land, capital, and entrepreneurship.
› Throughout our lives, we experience the reality of scarcity in
various situations, particularly when availing of products and
services.
Unlimited Human Wants and Needs
• Economics defines needs as things that are desired which are
essential for human survival, while wants are those that are desired
but are not essential for survival.
› If you were to list the things that you want to buy, own, and do in
life, that list would be endless. As we fulfill or meet one need or want,
we immediately look to meet another need or want, and so on.
› Another aspect of human wants and needs is the rapidly changing
tastes and preferences which are actually the result of the equally
rapidly developing technology.
Economic Resources and Factors of Production
LAND
• Land refers to all natural resources that exist without man’s
intervention.
› It encompasses all thing derived from the forces of nature such as
air, water, forest, vegetation, and minerals.
› The payment for land is called rent.
LABOR
• Labor refers to human inputs such as manpower skills that are used
in transforming resources into different products that meet our needs.
› The payment for labor is called wages and salaries.
CAPITAL
• Capital is a man-made factor of production used to create another
product.
› Examples are machinery and equipment used in manufacturing
companies.
› The payment for capital is interest.
ENTREPRENEURSHIP
• Entrepreneurship is the factor of production that integrates land, labor,
and capital to create new products.
› An entrepreneur is an individual who makes the decisions with
regard to production and utilizing the other factors or production.
› A successful entrepreneur not only creates new products – he or she
also innovates by improving an old ones.
 The Basic Economic Questions and
Economic Systems
1. What to produce?
› A society determines the kind and quantity of products it will produce
depending on what the consumers want to buy or are willing to pay for.
2. How to produce?
› A society decides who will produce goods and what process of
production will be used.
› Goods may be produced by corporations, small business-owners, or
the government itself.
› The process of producing goods may be addressed depending on the
costs and the availability of resources needed.
3. For whom to produce?
› The question revolves around the issue of who will benefit from
the goods and services produced.
› This depends on the distribution of wealth in a particular society.
› Therefore, a consumer who has the capacity to pay for certain
goods and services is more likely to benefit than one who cannot
afford them.

• The answers for what, how, and for whom to produce are influenced
by the structure of society’s economic system.
Economic System
• An economic system is characterized by the type of institution
responsible for the management and allocation of resources used in
the production of goods and services.
› Generally, there are three known economic system, namely,
market economic system, command economic system, and mixed
economic system.
1. Market Economic System
• A market economic system is where all economic resources are
owned by private entities.
› This system proposes the following answers to the three
economic questions:
1. produce goods that yield high profits;
2. produce at maximum efficiency with minimum costs;
3. distribute the goods to those who can afford to buy them.
2. Command Economic System
• A command economic system is where all resources are owned by
the government.
› The question “What to produce?” is answered by producing more
public goods like roads, public schools, and public hospitals.
› The question “How to produce?” is answered by employing all
possible laborers and using available machinery and equipment.
› The government answers the final question by producing for
public.
3. Mixed Economic System
• The mixed economic system is where all three questions are
answered by both the government and private entities in consideration
of their mutual benefit. Economic resources are owned by both.
› Today, most countries apply this type of economy but in different
proportions --- some countries employ an economic system which is
more command-oriented than market-oriented, while others have a
more market-oriented economic system.
Decision-making and Rationality
• The reality of scarcity means that people have to make choices with
regards to the resources that they wish to use or avail of.
› Decision making is an important aspect of economics. - An
important part of economic study is determining how individuals or
groups of individuals will behave given certain changes in the
economy.
•Economics uses the concept of rationality to predict the actions of
people.
› Rationality is defined as the assumption that individuals are
consistent and logical in their decision-making, and that they seek an
outcome that is most beneficial to them.
- The rationality test is one means of illustrating the concept of
rationality.
Opportunity Cost and Trade-off
• Opportunity cost is one of the evident effects of scarcity. This
refers to the cost of giving up an alternative by selecting the second
best choice.
› When resources are scarce or limited, consumers are compelled
to choose how to manage them efficiently and decide how much of
their wants or needs will be satisfied and how much of them will be
left unsatisfied. Hence, when a particular need is pursued, all the
other alternatives are forgone. And the more we have of a particular
good, the more we sacrifice other things.
• Trade-off occurs when an individual has made a choice, thereby
sacrificing all other alternative choices.
› Trade-offs could result in either the satisfaction of needs or
failure to meet them.