BASICS OF ECONOMICS

Definition of Economics

y The proper allocation and efficient use of

available resources for the maximum satisfaction of human wants (Fajardo)

y The study of how societies use scarce

resources to produce valuable commodities and distribute them among different people (Samuelson)

y The science of choice. It studies how people

choose to use scarce resources or limited productive resources (labor, equipment, technical, knowledge) to produce various commodities and to distribute these commodities for consumption.(Nordhaus)
y A scientific study which deals with how

individuals and society in general make choices. (Sicat)

Importance of Economics
y Economics is important in order to understand

problems facing the citizen and the family; to help the government promote growth and improve the quality of life while avoiding depression and inflation and to analyze fascinating patterns of social behavior.

y A good knowledge of economics offers many

favorable possibilities.
y y It guides us how to: y -make a living

-distribute the available -maximize profits

scarce resources properly y -use money wisely and consumer satisfaction y -run a business

Nature of Economics
y Economics is concerned with accurate appraisal of

facts and events about our material life. It is classified as a social science because it deals with the study of mans life and how he lives with other men. It is interdependent with other sciences like Psychology, History, Sociology, Political Science and Geography

Division of Economics
y Macroeconomics-deals with the economic

behavior of the whole economy or its aggregates such as government, business and households. y -concerned with the discussion of topics like gross national product, level of employment, national income, general level of prices, total expenditures

y Microeconomics-deals with the economic

y y y y

behavior of individual units such as the consumers, firms and the owners of the factors of production. Examples: price of rice, The number of workers of a certain firm Income of Mr. Tan Expenditures of PLDT

Branches of Economics

y Production- process of producing or creating goods

needed by the households to satisfy their needs. The factors of production are called inputs and the goods and services that have been created are called outputs of production

y Distribution- marketing of goods and services to

different economic outlets for allocation to individual consumer. In monetary terms, this is the allocation of income among persons or households. y Exchange-process of transferring goods and services to a person or persons in return for something. At present, the medium of exchange used in the market is money.
y

y Consumption- the proper utilization of economic

goods. However, goods and services could not be utilized unless you pay for it. Hence, we can also say that consumption is spending money for goods and services in order to yield satisfaction. y Public Finance- pertains to the activities of the government regarding taxation, borrowings and expenditures. y -deals with the efficient use and fair distribution of public resources in order to achieve maximum social benefits.

Tools of Economics
y Logic- science that deals with sound thinking and

reasoning. With the wise application of logic, one may be able to arrive at a conclusion.
y y Mathematics-science that deals with numbers and

their operations. Economics is actually the most quantifiable discipline among social sciences. It can quantify population, income, national product, aggregate number of firms

y Statistics- branch of mathematics dealing with the

analysis and interpretation of numerical data. y -deals with the process of collecting, tabulating and analyzing data to test the validity of a certain hypothesis. Through statistics, one may be able to reject or accept an assumption made on a certain phenomenon

Economic System
y The term economic system simply means the

organization of economic society with reference to the production, exchange, distribution and consumption of wealth (Castillo) y -the way the economic units are organized to make decisions on the economic problems of society. These problems are: 1) what to produce?; 2) how to produce?; 3) How much to produce?

y Economic system is not superimposed. It evolves on

the kind of social structure a society has. There is no ideal economic system because governance varies from one society to another.
y

Basic Economic Problems

y Because of the scarcity of resources, every economic

system is faced with the following problems:

y y What to produce y The system must determine the desires of the people.

y y y y

Goods and services to be produced are based on the needs of the consumers. Factors that must be taken into consideration in producing the goods and services: Availability of Resources Physical environment Customs and traditions of the people

y How much to produce y Knowing what to produce is not enough.. The system

must know how much of the chosen goods should be produced. y -it must determine how many of these buyers are willing to buy the goods and services produced by the economy. y -the peoples taste and preference plays a major factor in determining production

y How to produce y Equally important is the systems task of selecting

the proper combination of economic resources in producing the right amount of output. Through several combinations of resources, goods are produced. y -the quality of output must come first before quantity.

y For whom shall goods and services be

produced? y The last question has something to do with the problem of distribution. Once the goods are produced, how shall they be distributed?

Types of Economic System

y There are four commonly used economic systems.

They vary according to the types of resources they might give to certain economic issues such as what goods to produce and in what quantities, the process by which the goods are produced and how these are to be distributed.

y Traditional Economy y Known as the subsistence economy. In this type of

economy, people produce goods and services for their own consumption. Decisions are based on customs and traditions and the production techniques are outmoded and sometimes obsolete.

y Command Economy y Under this system, government takes hold of the

economy of the State. The system works based on the interest of the country and not on the individual. The government answers the major economic questions through its ownership of resources and its power to enforce decisions.

y Market Systemy

In a capitalistic system, business enterprises are owned and controlled by private individuals. One of the major features of this system is free enterprise meaning that any individual can engage in any enterprise which he thinks will yield him a profit in competition with other businesses.

y Mixed economy y Mixture of the different types of economy. The

private capitalist and the government play a major role in solving the basic problems of the economy for the benefits of the consumers. The government sets the laws and rules that regulate economic life, produces educational and police services, and regulates pollution and business.

Module 2 Production

y Production can be defined as combining of raw

materials or economic resources in order to come up with a finished product useful for everyday living.

Factors of Production
y Land- includes all natural resources, above, on, and

below the ground such as soil, rivers, lakes, oceans, forests, mountains, mineral resources and climate. y -considered as economic resources because it has a price attached to it. One cannot utilize these natural resources without paying for it usually in the form of rent or lease.

y Labor-termed as human resources y

-refers to all human efforts, be it mental or physical that helps produce want satisfying goods and services.

y Capital-finished products used to produce goods

y Entrepreneur-French word which means

enterpriser. y the organizer and coordinator of the other factors of production: land, labor and capital y one who is engaged in economic undertakings and provides society with goods and services it needs.
y Foreign Exchange-refers to the dollar and dollar

reserves that the economy has

Classification of Inputs
y Fixed Inputs-these are inputs that do not change

with the volume of production. This means, whether you produce or not, these factors of production are unchanged. y Examples: land and capital

y Variable Inputs-these inputs change in accordance

with the volume of production. No production means no variable inputs. y Examples: labor and entrepreneur y The process of transforming both fixed and variable inputs into finished goods and services is also called production. The quantity and quality of goods and services produced depends on the quality and quantity of inputs used.

The Law of Diminishing returns

y The Law of Diminishing Returns is also known

as Law of Diminishing Marginal Productivity. It states that when successive units of a variable input (like farmers) work with a fixed input (like one hectare of land), beyond a certain point, the additional product (output) produced by each additional unit of variable input decreases.

y Production function states the relationship between the

y y y y y

inputs used and the outputs produced. It simply states as: y=f(x) where: y=output x=input This is read as y is a function (or depends on) of x The production function is a technical relationship between output and input, a physical relationship, and therefore, a non-economic relationship.

Production Possibility Frontier

y Under the field of macroeconomics, the production

possibility frontier represent s the point at which an economy is most efficiently producing its goods and services and therefore allocating its resources in the best way possible. If the economy is not producing quantities indicated by the PPF, resources are being managed inefficiently, and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

Opportunity Cost
y Opportunity cost is the value of what is forgone in

order to have something else. The value is unique for each individual. You may, for instance, forgo ice cream in order to have an extra helping of mashed potatoes. For you, mashed potatoes have a greater value than dessert. But you can always change your mind in the future because there may be some instances when the mashed potatoes are just not as attractive as the ice cream.

y The opportunity cost of an individuals decision is

determined by his or her needs, wants, time and resources (income). y This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost.