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Mr. Louie Samson (7/12/10)

HUMAN WANTS AND RESOURCES

The study of economics must start with the recognition of two undisputed facts of life, multiplicity of human
wants and scarcity of economic resources. Human wants are unlimited. As they become completely satisfied,
other wants start to arise. Thus, many a times, individuals must seek ways of achieving goods and objectives
with a minimum outlay of resources.

DEFINITION OF ECONOMICS
• Adam Smith, considered the father of Economics, defines it as an inquiry about the nature and causes of the
wealth of the nation.

• Feliciano Fajardo defines it as the proper and efficient use of available resources for the maximum
satisfaction of human wants.

• Ronan and Amores view it as a science that allocates scarce resources to satisfy unlimited human wants.

• Pagaso and his co-authors define it as a discipline that concerns with the production, distribution and use of
material goods and services.

• Sociologists look at it as a social science because it deals with how individuals and how the society generally
makes choices.

From these definitions, Economics is defined as a social science that is concerned with the efficient
utilization or management of limited (scarce) productive resources for the purpose of attaining the satisfaction
of unlimited human wants and needs.

Needs – basic necessities that man cannot live without

Wants – luxuries of man above basic needs
Goods/Services – anything that satisfies human wants and needs. Services are non-tangible goods

TENETS COMMON TO ALL AREAS OF ECONOMICS

1. SCARCITY – we do not live in the world of plenty. Most goods and services as well as the inputs used
in the production of goods are limited within a given span of time. There are not enough goods to satisfy the
nearly insatiable wants of all the people. If there were no scarcity, individuals would not be concerned about
the use of resources.

2. ALLOCATION – this concerns with putting the best alternative use of some resources. This must be
consistent among objectives and individuals. Allocation implies that scarce resources must be distributed
among competing uses.

e.g. allocation of time between study and play allocation of allowance among all expenses

3. GOAL – individual desires or wants often appear to be unlimited. Thus, wants compete for scarce
resources. Because of this competition, we must decide upon a priority system to order our competing wants
and attempt to attain the most satisfaction from those chosen.
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WHY DO WE NEED TO STUDY ECONOMICS?

1. There are many economic problems arising such as poverty, unemployment and inequality. Fundamentally,
these problems arise from the fact that human beings have many wants or should we say, unlimited wants. The
problems of economics arise because human wants can only be satisfied only at a sacrifice. It is possible to have
something only if effort is spent on having it.

2. Nature has given us free goods; the air we breathe is an example. But also, most goods are scarce. An effort
or a price has to be exchanged for their use.

3. To produce goods requires that inputs or factors of production be used. These are the resources applied to
production.

4. Some goods are directly used up for satisfaction (CONSUMER GOODS). They are consumed directly.
Others are used to produce other goods for the satisfaction of other needs (CAPITAL or PRODUCER
GOODS). And since goods are scarce, the problem of choice enters. The element of choice is related to the
concept of how one values the satisfaction of present wants for future wants. We must decide upon a priority
system to order our competing wants and attempt to attain the most satisfaction from those chosen.

5. As individuals and as member of the family, we must work to earn a living, purchase goods, pay taxes, save
money, buy insurances, etc. We do not live as individual alone. Directly or indirectly, we are affected by
economic forces.

Free Goods – resources that are unlimited in amount like the gift of nature. Examples are sunlight, the clean air
we breathe, water, etc.
Economic Goods – resources that are scarce or limited in amount

ECONOMICS AS A SCIENCE

Science is a systematic body of knowledge. It follows an orderly procedure of gathering data, analyzing facts,
experimentations and drawing conclusions from those existing phenomena.

e.g. How many molecules are present in water?

Ans. There are two molecules of hydrogen and one molecule of oxygen

But unlike Chemistry, Economics is an applied, not an exact science. It is often been disputed because the
phenomena that it treats of are subject to individual decisions, whims and prejudices and would not be capable
of scientific treatment. Its conclusion lacks the precision that characterized those of Chemistry and Physics.
While chemists and physicists could handle their experiments’ subject in their own way, the economists cannot
do the same thing for he is dealing with individual or human being with divergent thoughts, desires and
feelings; the personal element is a very inconsistent and elusive thing. The economists cannot experiment freely
with human being and his laboratory is the many motivated world of business.

e.g. when the price of the commodity increases, the demand decreases and the supply increases. But for
smokers, if the price of cigarette increases, the demand for other brand increases (an increase in the price of
the brand Marlboro leads to an increase in the demand for Winston)
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In Chemistry, at constant pressure, if the volume of liquid increases, the Temperature also increases (Charles’
Law)

The marks of a science are classification, generalization and logical arrangement of facts. Economics is an
accurate description of relationships among phenomena and of the principles and laws that concerns the
relationship between man and wealth.

ECONOMICS AS A SOCIAL SCIENCE

Like Psychology, it deals with people’s interaction with others, an interaction that affects the utilization of
material resources. It will be of an advantage then to a student of economics to look at the field as it relates to
other fields of science such as sociology, anthropology and others.

BRANCHES OF ECONOMICS

1. Microeconomics is the study of specific economic units that make up an economic sector. It studies the
economic behavior of individual decision-making units such as consumers, resource owners, producers and
business firms among others.

e.g. a. how an individual consumer spends his income to maximize satisfaction

b. how business firms combine resources to maximize profits

c. how the price of each commodity and each type of resources are determined by supply and demand

2. Macroeconomics is concerned with the economy as a whole. It examines the functioning of an economic
system as it copes with problems such as inflation, depression, unemployment, money supply, the general
price level of commodities and the level of output of goods and services of the economy. It studies the
aggregate level of economic activity such as:

a. total level of output

b. the level of national income
c. the total level of unemployment
d. general price level of the economy
e. total private expenditures
f. total investment
g. total government expenditures
h. total imports and exports of goods and services

Macroeconomics seeks the cause and cure for economic problems like unemployment, inflation and balance of
payments. Among the economic goals of a country are:
a.economic growth – produce more and better goods and services and develop a high standard of
living
b. full employment – provide suitable jobs for all citizens who are willing and able to work
c.economic efficiency – achieve the maximum fulfillment of wants using the available productive
resources
d. price-level stability – avoid inflation and deflation
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e.equitable distribution of income – ensure that no group of citizens faces stark poverty while
others enjoy extreme luxury
f. economic freedom – guarantee a high degree of freedom to do everything that will benefit each
individual
g. economic security – assurance of availability of goods in the market
h. balance of trade – maintain at least an equal amount of export and import

MAJOR DIVISIONS OF ECONOMICS

1. PRODUCTION – deals with the creation of economic goods, invariably termed as wealth. WEALTH
refers to material goods that are useful, scarce, valuable and transferable. Production also referred to as the
addition or creation of utility. UTILITY is the quality present in a good which renders it the capability to
satisfy human wants and needs. This division of economics deals with decision making of managers and
owners of business regarding the efficient use of resources to attain profit.

Characteristics of A Good To Be Considered A Wealth

a. it should possess utility
b. it must be transferable
c. it must be material and external to man
d. it must be scarce

Capital or Producer Goods – are goods used to produce other goods. It is also termed as inputs or resources.

TYPES OF UTILITY
a. Elementary utility – it is the want-satisfying quality of a good in its natural state, as for instance, fruits
and vegetables.
b. Form utility – there are things in which in their natural state give little or no satisfaction to human wants;
yet when processed into finished products or even in semi-finished products, yield tremendous satisfaction
to their users.
c. Place utility – many goods would give greater satisfaction if moved from place of abundance to place of
scarcity.
d. Time utility – it occurs when a commodity or service is more useful at one time than at another. (e.g. a
raincoat has no use during summer but becomes very useful during the rainy season)
e. Ownership utility – it results when the ownership of a good or service is transferred from one person to
another thereby adding utility to that good or service (e.g. a carabao would prove very valuable and useful
to a farmer in his occupation that it would be to a businessman or teacher).

FACTORS OF PRODUCTION

a. Land – refers to all natural resources, which are usable in the productive process such as arable land,
mineral deposits, forests and water resources.
b. Labor – refers to all physical and mental talents and efforts of men and women which can be used to
produce goods and services.
c. Capital – are man-made goods used in production such as tools, machineries, inputs, buildings and
networks. The term capital being defined does not refer to money which is available for use in the purchase
of machinery, equipment and other productive facilities. Because money produces nothing, hence, it is not
to be considered as an economic resource. Real capital – tools, machinery and equipment – is an economic
resource; money or financial capital is not.
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d. Entrepreneur – a person who sets up a business by combining land, labor and capital to supply a good or
service that he thinks society wants.

FACTOR PAYMENTS OF PRODUCTION

The suppliers of the factors of production receive factor payments or money income. The owner of the land
receives rental income from the user of the land. Labor receives wages and salaries for their effort. The factor
payment for capital is interest income. Entrepreneur hopes to make profit – normal profit – which is the
amount left behind after all allocations to the other economic resources have been made.

2. CONSUMPTION – the direct satisfaction of human wants by the enjoyment of the utility of goods. It deals
with the utilization of goods and services for the satisfaction of human wants. It also deals with how the finished
goods are utilized by the ultimate consumers.

3. DISTRIBUTION – the manner in which the society divides the allocated goods produced. It deals with how
outputs are divided into the various owners of production means. This constitutes the subject matters like rents,
wages, interest and profit and the distributive shares of the different factors of production.

4. EXCHANGE – this is chiefly devoted to the consideration of value and prices. The determination of prices of
commodities under different conditions is being discussed in this area. The principles of money, credit and
banking and their relation to price and the exchange of goods are subjects also included in this division.
MONEY is defined as the medium of exchange.

FUNDAMENTAL PROBLEMS OF THE ECONOMY

Scarcity of resources is a problem that always confronts the production of goods and services. But while
the availability of resources is limited, the human wants are insatiable. That is when economics comes in to
harmonize human wants with what he has. There are five fundamental economic questions that a society is
confronted. Each society is faced with these basic problems upon which the answers depend upon the type of
economic system that it is using.

1. “What is to be produced?” – refers to the kinds of goods and services that a society need to produce.
2. “How much is to be produced?” – refers to the level or degree the available resources should be utilized in
the process.
3. “How is it to be produced?” – refers to the combination of various resources and the techniques to be used in
production.
4. “Who is to receive it?”/”For whom is it to be produced?” – refers to how to divide up what has been
produced among consumers of an economy.
5. “How should the system adapt to change?” – refers to how the economic system can make the significant
reallocations of resources in order to preserve efficiency in their use.

These questions arise because resources, goods and services are scarce.

BASIC ECCONOMICS SYSTEM MODELS

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Economic System
A method or manner by which an economy is provided with the goods and services which are
distributed to the people. It is a group of economic institution regarded as a unit. Economic institutions are
social organizations, relationships and arrangements which determine in a given society the manner in which
scarce resources are utilized to satisfy human wants.

Functions of Economic System

1. It facilitates and controls the use of resources;

2. It determines the manner in which resources are harnessed and used to satisfy human wants;

3. It must provide incentives to production. The economic system must see to it that people
produce goods which do not directly satisfy human wants. Even the factor owners must be made to supply
these factors to the producers. If the economic system does not do this, a particular sector may disrupt the
flow of goods and thereby create problems for the society; and

4. The economic system must coordinate and control the economic activities of the people.

TYPES OF ECONOMIC SYSTEM

A. CAPITALISM/MARKET ECONOMY
– In this system, the factors of production and distribution are owned and managed by private individuals or
corporations. It is also known as free-enterprise economy or competitive market system or price-market
economy and it follows the “laissez faire policy.” Laissez faire is a french term which means “let alone policy
or leave it alone policy”. There is no government intervention in the market. The existence of this system is
based on the “Theory of the Invisible Hand.” The primary driving force of capitalism is self-interest. Each
economic unit attempts to do what is best for itself:

• Entrepreneurs – aim to maximize profits (minimize loss)

• Property owners – attempt to get the highest price for the sale or rent of their resources
• workers – attempt to maximize their utility by finding jobs which offer the best combination of wages, fringe
benefits and working conditions
• Consumers – in purchasing a specific product, seek to obtain it at the lowest possible price.

Principal Features/Characteristics of Capitalism

1. Absence of central planning commission – the government satisfies collective desires and
may interfere in the process to some degree but does not plan the whole economic process. The efficient
operation of market system allegedly makes significant government intervention unnecessary.

2. Private ownership of property/private enterprise – consumption goods and factors of production are privately
owned and the conduct of production is carried out by privately-owned enterprises. It also allows private
persons or businesses to obtain, control, employ and dispose of property resources as they see it. Private
ownership of the means of production is based on two important considerations:

a. in as mush as ownership of productive property means power over the lives of other people, it is
perhaps necessary to state that such power should be better diffused among the number of individuals
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b. technological progress would thrive best under a soil of freedom, the economic freedom enjoyed by
individuals, that is, the right to make basic economic decisions for themselves without interference from
external sources

3. Operation of the pricing process or pricing system – prices are determined and established by competing
buyers and sellers in both the product and resource markets.

4. Competitive conditions – the prices of goods and services are determined by competition; the struggle of
individual to enhance their own economic welfare.

5. Profit motive – in the process of competition, the different members of the economic system are guided by
the profit motive, and their success or failure is measured in terms of income, profit and loss.

6. Presence of essential economic freedom – this relates to free choice of consumption, occupation, freedom to
save, to invest, to own private property, individual initiative and such other freedoms as the limited role of
the government permits.

7. Presence of religion

Criticisms
• It is unplanned and such is wasteful. It operates without a comprehensive plan. The total of its production is
the result of decisions made by millions of persons who wish to gain livelihood by the production of goods and
services, usually for sale.

• The lure for profits results in ills. Businessmen in their desire to gain as much profits as the could resort to
unfair business practices like adulteration, manufacturing inferior quality products on purpose and others which
results in the exploitation of the consumers.

• There is lack of security on the part of the workers. The wages are often times insufficient to provide the needs
of his family commensurate with a decent standard of living.

• It is unjust in the distribution of wealth. It is pointed out that while there are too many idle rich living in their
incomes from land and other investments, yet at the same time, there are too many idle poor who cannot find
profitable employment.

• Business cycle seems characteristics of capitalism. Since the rise of the modern industrial system, there are
noted frequent recurring cycles of prosperities followed by depression with its attendant hardships.

B. COMMUNISM/COMMAND ECONOMY
– Sometimes called a “classless economy”, the factors of production and distribution are virtually owned and
managed by the state or government. It is the exact opposite of capitalism. The government determines the aim
of the economy directs production and regulates distribution and consumption of outputs. The state determines
the type, quality and quantity of commodities to be produced and arbitrarily allocates the output of production.
The state also regulates the prices of goods and services. Karl Marx is the father of Communism.

Essential Characteristics of Communism

1. Presence of central planning commission
2. Absence of religion
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3. No profit motive
4. No competition
5. No private ownership of property
6. No economic freedom
7. Prices are determined by the state

Criticisms
• The inducement to greater productivity does not take the form of monetary rewards or privileges. Rather they
are in form of threats or severe punishments.

• Those who express bitter denunciations or criticisms against communist ideas, policies or actions are likely to
get their due solitary confinement, if not execution.

Marxism
It is a body of social, political and economic thought derived from the writings of Karl Marx and his
collaborator, Friedrich Engels. At the center of Marx’s work in his analysis of capitalism; how it arose, how it
works (for whom it works better and for whom worse), and where it is likely to lead. Concentrating on the
social and economic relations in which people earn their livings, Marx saw behind capitalism’s legal façade, a
struggle of two main classes; the capitalists, who owned the productive resources, and the workers or
proletariat, who must work for wages in order to survive.

Communism vs. Religion

“The Essence of Christianity” by Ludwig Feuerbach argued that:

• God has been invented by humans as a projection of their own ideals. He wrote that man, however, in creating
God in His own image, had “alienated himself from himself.” He had created another being in contrast to
himself, reducing himself to a lowly, evil creature who needed both church and government to guide and
control him.

• If religion was abolished, Feuerbach claimed that human beings would overcome their alienation

• Marx applied this idea of alienation to private property, which he said caused humans to work only for
themselves, not for the good of their species.

• He called for a communist society to overcome the dehumanizing effect of private property

C. SOCIALISM/MIXED ECONOMY
– This is the combination of capitalism and communism. The major and strategic industries are owned and
managed by the state while minor industries belong to the private sector. Examples of major industries are
mining, power, transportation, and production of essential products. Minor industries include production of non-
essential products such as toys, toothbrush, cakes, chocolates, candies, etc.

Features of Socialism
• It is not opposed to capital; it is only opposed to private ownership
It seeks to abolish private capitalists “who thrive by collecting interests, rents and profits”
• It maintains the capitalistic features:

a. the use of pricing process to direct production through the allocation of its factors
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b. freedom of choice in consumption and in the pursuit of occupation

c. a private sector of small producing units
d. a public sector which oversees the fulfillment of collective objectives

• Social economic aims are consciously set and there is a central economic authority as well as central economic
plan to which processes are geared

• The major means of production are publicly-owned, though firms and small plants are allowed to remain in
private hands

Advantages of Socialism
1. High standard of living
2. Working day would be shortened
3. Social welfare would be increased
4. People would enjoy economic security

Disadvantages of Socialism
1. It would stifle initiative and incentive (profit motive is absent)
2. Individual freedom is lost
3. Evils are bound to result from the operation of industry

D. TRADITIONAL ECONOMIC SYSTEM

– One in which people’s economic roles are the same as those of their parents and grandparents. The means of
economic activities are based on customs, traditions and beliefs. Societies that produce goods and services in
traditional ways are found today in some parts of South America, Asia and Africa. There, people living in an
agricultural village still plant and harvest their own food in their own land. And the ways they produce clothing
and shelter are exactly the same as those used in the past. Tradition decides what these people do for living and
how their work is performed.

In some parts of the Philippines, this type of economic system still pervades, wherein families or some
tribes are still self-sufficient and need very little interaction and intervention from highly populated and
urbanized societies.