ECON 2

BASIC MICROECONOMICS

Chapter 1
INTRODUCTION:
DEFINITION, NATURE AND
IMPORTANCE OF ECONOMICS
ECON 2
BASIC MICROECONOMICS

OBJECTIVES:
 Know the Meaning of Economics
 Evaluate the Great Economist Definition of Economics
 Identify the Different Branches of Economics
 Determine the Problem of Scarcity
 Identify Economic Resources
 Characterize the Different Economic System Models
 Determine the basis for Proper Allocation of Resources
ECONOMICS:

Came from the Greek word “oikonomia” which means management of

household expenditures.
This means that economics refers to the operation of household transactions.
Economics start from the simple unit of society: FAMILY
Putting economics to the upper bracket of society: GOVERNMENT
Economics is about the management or operation of the entire production
and consumption of the people to be able to meet everyone’s needs.
Therefore:
ECONOMICS IS THE STUDY OF EFFICIENT AND EFFECTIVE ALLOCATION OF
SCARCE RESOURCES IN ORDER TO SATISFY UNLIMITED WANTS OF THE
PEOPLE.
DEFINE ECONOMICS:

Adam Smith: The Father of Economics, Scottish Economist, Philosopher and Author
Economics as an inquiry about the nature and causes of the wealth of the nations.
Paul Samuelson: American Economist, win Nobel Memorial Prize in Economic Sciences
Economics is a study of how the society could possibly use and share the limited
resources into different items of products and services for all the sectors of the society for
the present and future consumption.
Gordon Paul Wonnacott: Economics Faculty of Columbia and Maryland University
It is a study of how man works, looks for food and finds material needs.
Economics emphasizes problem in production of how to solve or minimize problems.
Lloyd Reynolds: American Calligrapher and Professor at Reed College
It is the study of production, management and the use of scarce resources.
TWO DIVISIONS OF ECONOMICS:

MICROECONOMICS:
Micro means small. It refers to the study of small unit of the society’s consumption,
spending, production, and investment.
Example: family, household, person

MACROECONOMICS:
Macro means big. It refers to the study of large unit of the society’s consumption,
spending, production, and investment.
Example: banks, business, firms, government, countries
IMPORTANCE AND AIMS OF ECONOMICS

BASIC TOOLS OF ECONOMICS:

1. Logic – It is the science of good and sound reasoning. Conclusion must be
drawn from good reasoning or logical reasoning.

2. Mathematics – It answers the economic problems which are best solve with
the use of numbers and quantitative description.

3. Statistics – Some of the theories are based on observation & experimentation

through the use of statistics. It is the tool use in empirical validation.
THE PROBLEM OF SCARCITY

Economic resources are scarce and limited in supply. These resources are used
for the production of goods or services.
Four Factors of Production:
1. Land – considered the natural resources. Trees, water, forests, mineral and oil
are considered under the category of land as a factor of production.
2. Labor – refers to the labor force. The exertions of human energy in order to
produce or in layman’s term to work.
3. Capital – anything that is man made like machineries and equipment that are
used in the production of another product would be under capital.
4. Entrepreneur – Although it can be classified as under labor, it has a special
type of work and is therefore , not ordinary labor. He combines the other
resources for use in the production of goods and services.
FOUR ECONOMIC PROBLEMS

1. What are the products and services to be produced

2. How to produce
3. For whom to produce
4. Availability of the produce

TYPES OF ECONOMIC SYSTEM

5. Traditional Economy – backward type of economy
Production of goods, trading, and distribution of incomes are sanctioned by custom. The
method of production is carried over by the system used by forefathers. Technological change
and innovation are closely constrained because they clash with tradition. Religious and
cultural values are over and above economic activity. To attain status in the society, one must
belong to the highest position in the religion or tribe.
TYPES OF ECONOMIC SYSTEM
2. Command Economy – communistic economic structure
The government owns the means of production. The government dictates what, how, and
for whom to produce. Capital resources and consumer goods are being divided to its citizenry.
Example: The Communist China, USSR
Characteristics: No economic freedom, No free competition, No profit motive, No
religion
3. Market Economy – capitalism or free enterprise, leave it alone policy
The resources are privately owned and the people themselves make decisions.
The economic problems are being decided by the person who actively participates in the
interlocking network of market and prices. There are many independent buyers and sellers of
each product and resources therefore, competition arises giving height to consumer’s
sovereignty.
Example: USA, Philippines, Great Britain, Japan
Characteristics: Presence of economic freedom, Presence of economic motive, Presence of
competition, Presence of religion, No central planning
TYPES OF ECONOMIC SYSTEM
4. Mixed Economy – only very few countries with pure economic system.
USA- there exist market economy (capitalism), it cannot deny the the government is
controlling some of its goods.
USSR- basically known as command economy (communistic economy) also uses market
price in some of its commodity.
Philippines- applies three forms of economic system. The government controls the price
of our basic commodities depends its price on the demand and supply in the market. Some of
the economic activities are still being influenced by religion and cultural values. Example:
government controls the price of rice, milk, sugar and all agricultural products while other
commercial produce such as bags, clothes, cars, appliances greatly depend its prices on
the demand and supply in the market where competition is very stiff.