Basic Concepts in

Economics, a Review

Presented by: Prof. Shirley C. Riñoza, DBA

IABF-FEU
Economics, defined

 Economics is the study of how

individuals and societies choose to
use the scarce resources that nature
and previous generations have
provided.
 Economics is the study of how scarce
resources are allocated among
conflicting demands.
 http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
The Scope of Economics
 Macroeconomics
is the branch of economics that examines the
economic behavior of aggregates -- income,
employment, output and so on...
 Microeconomics
is the branch of economics that examines the
functioning of individual industries and the
behavior
of individual decision-making units -- business
firms
and households and the effects of government
economic policy on these units.
http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
Sub-disciplines of Economics
 international economics, labour
economics, welfare economics,
resource economics, environmental
economics, managerial economics,
financial economics, urban
economics, and spatial economics
The Method of Economics
 Positive Economics
- An approach to economics that seeks to understand
behaviour and the operation of systems without
making judgments. It describes what exists and
how it works.

 Normative Economics
- An approach to economics that evaluates economic
outcomes as good or bad, and may prescribe
courses of action. Also called policy economics.
http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
Other terminologies:
 Opportunity Costs
the opportunity cost of something is that
which we give up when we make that
choice or decision. The implication is that
all decisions involve trade-offs.
“There’s no such thing as a free lunch!!”
 Marginalism
In weighing the costs and benefits of a
decision, it is important to weigh only the
costs that are contingent upon the decision.
http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
Theories and Models
 Economic Theory
-is a statement or set of related statements about cause
and effect action and reaction.

 Economic Model
- is a formal statement of an economic theory. Usually
a mathematical representation of a presumed
relationship between two or more variables

 Empirical Economics
-is the collection and use of data to test economic
theories
http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
Basic Economic Questions:
 1. What to Produce ? - Output
Determination
 2. How to Produce ? - Input
Determination
 3. For Whom to Produce ?
Beneficiaries of Production
Approaches to answer the Basic
Economic Questions

 Social Process of Tradition

 Political Process of Command
 Market Process : Price Mechanism
 Economic Policy and Five Criteria for
Judging Economic Outcomes
1. Efficiency
In economics, allocative efficiency. An efficient economy is
one that produces what people want and does so at the least
possible cost.
2. Equity
Equity means fairness, but what this means is open
to debate. Social programs and many policy debates
are centred on the issue of fairness.
3. Growth
Economic growth is an increase in the total output of an
economy. Often measured against population growth to find
growth per capita.
4. Full employment
Full employment is a condition in which all resources available
for use are being used.
5. Price Stability
A condition in which there is little inflation in prices.
http://people.uleth.ca/~richard.mueller/econ1012.ch01.PDF
Economic System
 is a particular set of social institutions
 which deals with the production,
distribution and consumption of goods and
services in a particular society
 including their relationships to productive
resources, such as through the convention
of property.
 it addresses the problems of economics,
such as the allocation of scarce resources in
a given economy
http://en.wikipedia.org/wiki/Economic_system
Economic Systems
 Traditional system – subsistence
economy; self-reliant but without any
surplus; decisions accdg to tradition
set by our forefathers
 Command system – means of
production owned by government;
decisions by government planners
Economic system

 Market system – resources are

privately owned; decisions by people
themselves; systems work through
markets & prices; consumer is
sovereign; competition exist
 Mixed system – contains elements of
a combination of economic systems
(i.e., socialism, market socialism)
Traditional economic system
 Based on agriculture
 Limited barter trade
 Neolithic Civilizations
 Early River Valley Civilizations
Market system
 Based upon Supply and Demand
 Usually focus on consumer goods
 Little government control
Command system
 Controlled by strong, centralized
government
 Usually focuses on industrial goods
 Little attention paid to agriculture and
consumer goods
Mixed system
 Combination of Market and Command
economic systems
 Market forces control most consumer
goods
 Government directs industry in need
areas.
http://regentsprep.org/Regents/global/themes/economic/index.cfm
Market vs. Planned systems
 Market system – “hands off” system
as in capitalism
 Planned system – “hands on” system
as in socialism
http://en.wikipedia.org/wiki/Economic_system
Economic Structure
 How the economy is organized
 An economy is made up of the
different sectors and each sector has
characteristics and functions
 Size of business firms, composition of
industries ; these determine regional
and sub-regional economic
performance
(http://www.swo.org.uk/state_of_the_south_west/content.asp?
paragraph_order=970&chapterid=2)
Philippine economic structure
 Major Industries
 Food, petrochemicals, chemicals,
electronics and electrical machinery,
footwear and garments, beverages
 Major Exports
 Electronic components, articles of
apparel and clothing accessories,
metal products
Philippine Economic Structure
 Major Imports
 Transport equipment, Iron and Steel,
Materials/Accessories Imported on consignment basis for
the manufacture of Other Electrical and Electronic
Machinery and Equipment and Cereals and Cereal
Preparations.
 Major Trading Partners
 USA, Japan, Netherlands, Singapore, Taiwan, HongKong,
Malaysia, Germany, Rep. of Korea and PROC
 Major Investors
 USA, Japan, Germany, Singapore, Taiwan, Argentina,
Virgin Islands, France, Great Britain
Economic Activities
 Production
 Distribution
 Allocation
 Consumption
Economic Sectors
 Households
 Business
 Government
 Foreign
Building models
 2 sector economy
 3 sector economy
 4 sector economy
2-sector economic model

c. 2014 Pearson Education, Inc. Publishing as Prentice Hall

3-sector economic model

https://www.geeksforgeeks.org/circular-flow-of-income/
4-sector economic model

https://www.geeksforgeeks.org/circular-flow-of-income/
Self-check
1. What are the 4 economic activities?
2. What are the 4 economic sectors and
their role?
3. What is an economic model? Give an
example.
4. Illustrate an example of an
opportunity cost a)that an economic
individual incurs; b) that a business unit
incurs.