Chapter I – Introduction to Economics

Lesson 1. Economics as a Social Science

Economics is the science which studies human behavior as a relationship between ends and scarce means which
have alternative uses (Stiegeter, 1986).

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them
among different people (Samuelson and Nordhaus, 1995).

Economics is a social science concerned with using scarce resources to obtain maximum satisfaction of the
unlimited material wants of society (Walstad and Bingham).

Economics is the study of production, distribution, selling and use of goods and services (Collin).

Economics is the study of how people use their limited resources to try to satisfy unlimited wants (Parkin and
Bade).

Economics – comes from Greek word oikonomia which literally means “household management”

- Two important factors: scarce resources and unlimited wants

- Three aspects: scarce resources, unlimited wants and maximum satisfaction

Economic Concepts

A. Scarcity – condition wherein most things that people want are available only in limited supply; these are
called economic goods
B. Economic Good – anything, either a physical commodity or a service, which yields utility and which could
command a price if bought or sold in the market
C. Unlimited Wants – a person’s desires or preferences for specific ways of satisfying a basic need
D. Opportunity Cost – cost of choosing to use resources for one purpose measured by the sacrifice of the next
best alternative for using those resources

Goals of Economics

1. To strengthen economic freedom

2. Promote economic efficiency
3. Promote economic stability
4. To improve economic security
5. Attaining a high level of growth in the economy

Lesson 2. Approaches and Branches of Economics

Branches of Economics

1. Microeconomics – “micro” means “small”

- Deals with the behavior of individual components such as household, firm, and
individual owner of production
- Seeks to understand and explain the behavior of individuals – the consumer, the
producer, the worker, the owner of the capital – as they respond to changes in their
economic environment, i.e., the relative scarcity of things involved in their chosen field
2. Macroeconomics – “macro” means “big”
- Deals with the behavior of economy as a whole with the view of understanding the
interaction between economic aggregates such as employment, inflation and national
income, imports and exports, exchange rate, interest rate, country’s foreign debt, etc.

Approaches to Economics

1. Positive Economics
It dwells on making statements about “what is” or predictions about “what will happen” when a
certain action that has implications on the allocation of scarce resources is proposed. It states what is or
expected to happen when the current conditions are changed either by domestic consumers or producers, by

AGRICULTURAL ECONOMICS AND TAXES, 2nd Sem AY 2018-2019

Prepared by: Ms. Rizzi Angelica T. Dagos
 Chapter I – Introduction to Economics

the international market, or by government intervention or policy. Positive economics has ‘no heart, no fear
nor favor’ on which particular segments of society would be favorably or adversely affected.
Examples:
a. A support price of PhP 10 per kilogram of corn for farmers, all other things equal, would encourage
domestic production by 500,000 metric tons.
b. If we remove our quantitative restrictions on the importation of corn and reduce tariffs on imports to
10% of value, many corn farmers will be grossly affected by reductions in their income.
c. On December, if the government will not impose price ceiling on selected commodities and goods, the
country will be experiencing higher inflation rate.
2. Normative Economics
It is concerned with “what should be” or “what is ought to be”. Normative statements are often
identified with policy prescriptions. Normative prescriptions are essentially coated with own value
judgments, revealing the bias of the people who prescribe policy action on particular issues. Normative
economics choose which sectors of the society to favor, protect, or give greater consideration.
Examples:
a. Government should provide a support price of PhP 10 per kilogram for corn farmers.
b. The importation of corn should not be allowed because doing so would be detrimental to the corn
farmers of the country.
c. The government should impose price ceiling on selected goods to prevent the producers from taking
advantage of Christmas season.

Lesson 3. Factors of Production

Economic Resources

Before any economic system could produce the required goods and services, they should be able to meet first
the required resources. These are the following:

1. Land
It is one of the four factors of production which include land used for agricultural or industrial
purposes as well as natural resources taken from above or below the soil. Natural resources consist
of energy resources like fossil fuel and geothermal emissions, non-energy resources like gold,
diamond and limestone, air and water, etc. It is also the source of all materials and food whether in
liquid, solid or gaseous form, in or above the earth. Payment is made through rent.
2. Labor
This is the factor of production which refers to the productive services embodied in human physical
effort, skill, intellectual powers, etc. This refers to the human effort, when the effort is rewarded by
some kind of pay. This also refers to the available physical and mental talents of the people who have
to produce goods and services. It consists of human time spent in production like driving buses,
feeding cattle, singing in night clubs, acting in movies, or repairing household appliances. Payment is
made through salary or wage.

 Blue-collar jobs
 White-collar jobs
 Labor-intensive technology
 Capital-intensive technology
3. Capital
The word comes from the Latin word ‘caput’ which means ‘head’. Refers to durable goods produced
in order to produce other goods. By creating this, the society expects that its use will improve or
increase future production. It consists of building, plant and machinery, roads, computers, ships,
technology, etc. Payment is made through interest.
 Capital formation – process of creating capital
 Investment – capital formation in economics
4. Entrepreneurial Ability
The first three factors of production will remain as they are unless someone or somebody utilizes
them to produce the required goods and services. Payment is made through profit. Actual production

AGRICULTURAL ECONOMICS AND TAXES, 2nd Sem AY 2018-2019

Prepared by: Ms. Rizzi Angelica T. Dagos
 Chapter I – Introduction to Economics

needs the ability of an entrepreneur to decide on and implement the right combination of the first
three factors of production. Generally, an entrepreneur has the following functions:
a. He organizes production by combining land, labor, and capital to make goods and services.
b. He makes business decisions by determining what goods or services to produce and how to produce
them.
c. He bears the risk of business decisions. He must suffer the consequences of losses if he fails, but in
the same light, he must reap the profits as a reward if he succeeds.
d. He innovates by introducing new products, new technology, and new ways of organizing business.

Lesson 4. Economic Systems

Economic system refers to a set of economic institutions that dominate a given economy with the main
objective of solving the basic economic problems: (1) what to produce, (2) how much to produce, (3) how to produce,
and (4) how much to produce.

In the real world, economic system is not 100% applied. Most of the time, an economic system of one country
is a combination of various economic system. But in a way, one economic system is dominant among other system.

A. Traditional Economy
- Economic decisions are made with great influence from the past.
- In this system, answers to the economic problems are answered by copying or duplicating the
decisions made by the previous generations.
- A system whose past experiences which were handed down from generation to generation are
used as bases for economic decisions.
- Simple and easy but changes are slow in this type of economic system.
- Production decisions are made according to customs and traditions.
- This is usually practiced in underdeveloped regions and in the mountainous areas where
transportation and communication is nonexistent.

Characteristics of Traditional Economy

1. Communal land ownership

2. The leader decides on the management of agricultural production which is the basis of the
economy.
3. The production, distribution, and use of economic resources are based on traditional practices.
4. New technologies are not welcomed since they are in contrast with the traditional practices of
their ancestors.
5. The economy is only its third priority while culture and religion are its foremost priorities.
6. Mines are used to gather raw materials for production.

B. Command Economy
- The factors of production and distribution are owned and managed by the state.
- Decisions in answering the basic economic problems are planned, done and dictated by the
government.
- Just like a military where the decisions are made by the top authority and relayed to the people in
the economy.
- This economic system works under the principle that the interests of the society should prevail
over that of the individuals.
- Individual preference and consumer’s choice are not considered at all.
- Consumers buy what is available and may have to do without what they want or what they need.

Characteristics of Command Economy

1. Resource allocation is being done by the government.

2. Presence of central planning of all economic activities.
3. There is no free competition (the government is the only seller).
4. Only the government plays the role in setting legal framework for economic life production and
distribution of goods and services.
5. The products or needs of the people are distributed based on the priorities set by the committee.

AGRICULTURAL ECONOMICS AND TAXES, 2nd Sem AY 2018-2019

Prepared by: Ms. Rizzi Angelica T. Dagos
 Chapter I – Introduction to Economics

C. Market Economy
- Individual consumers and businesses interact to solve the economic problems.
- Characterized by free enterprise wherein the economy operates on a system of voluntary
exchange and cooperation among private individuals and organizations.
- The price of commodity dictates what goods and services will be produced, how and for whom it
will be produces.
- The basic economic problems are answered once a price was agreed upon by the buyer and seller
and a sale was made.
- When buyers and sellers come together to agree on a purchase or sale, the transaction takes place
in what economists call a market.
- Market – any method by which, or a place at which, buyers can communicate with sellers.
- Advantage: no planning mechanism is necessary to produce the goods and services people want.

Characteristics of Market Economy

1. The private sector owns and manages the means of production.

2. The price system in a market structure applies to determine how much will be paid for a certain
commodity or service.
3. It is also known as laissez-faire or free enterprise.
4. There is minimum government interference on decisions pertaining to the management of the
economy.
5. Existence of competition often results to monopoly.
6. There is presence of economic power.

D. Mixed Economy
- With elements of traditional, command and market economies
- Private sector works through the market mechanism and minor industries, while public or
government institution works through regulatory commands and it owns and manages major
industries.
Characteristics of Mixed Economy:
1. The means of production are owned and controlled by the private sector as well as the
government.
2. The people decide on economic activities within the economy.
3. The combinations of the best features of capitalist and command economies are observable in the
market.
4. The problem of distribution of goods and services and allocation of economic resources are
determined through a combination of the market system and governmental laws and policies.

AGRICULTURAL ECONOMICS AND TAXES, 2nd Sem AY 2018-2019

Prepared by: Ms. Rizzi Angelica T. Dagos