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Economic Way of
Thinking
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Economics and Scarcity
Economics
A science that deals with the
management of scarce resources
Describes how individuals and thesociety generally make choices
From two Greek root words oikos
(household) and nomus
(management), jointly Oikonomia or
Oikonomus meaning Management
of Household
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Economics and Scarcity
Scarcity
The basic and central economic
problem confronting every society
a commodity or service being in shortsupply relative to its demand
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Economics and Scarcity
Limited resources Unlimited wants
Allocation
This shows that when limited resources fail to
meet the unlimited wants of the society,
economics comes into play in order to
effectively and efficiently allocate resources.
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Ceteris Paribus Assumption
Ceteris paribus means all other
things held constant or all else
equal
-this assumption is used as a deviceto analyze the relationship between
two variables while the other
factors are held unchanged.
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Contributors in Economics
Adam Smith
-He is being regarded as the Father
of Economics
-The author of the bible of
economics: Wealth of the Nations
John Stuart Mill
- He developed the basic analysis of
political economy
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Karl Marx
-the author of Das Kapital, thecenterpiece from which major socialistthought was to emerge
Leon Walras
-he introduced the general economicsystem
Alfred Marshall
-he developed the analysis ofequilibrium of a particular market and
the concept of marginalism
Contributors in Economics
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John Maynard Keynes
-The author of the influential book in
economics: The General Theory of
Employment, Interest, and Money John Hicks
-was recognized for his analysis of the
IS-LM model
Contributors in Economics
* IS-LM IS refers to the goods market for a given
interest rate; while LM means money market for a
theoretical construct.
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Positive and Normative Economics
Positive economics
-is an economic analysis that
considers economic conditions as
they are, or considers economicsas it is
Normative Economics
- is an economic analysis which
judges economic conditions as it
should be
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Four Basic Economic Questions
1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?
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Relationship of Economics to other Sciences
Business Management Business provides employment, which
is an important factor in economics.
History History provides information regarding
theories
Finance
Finance is a system which includes thecirculation of money, granting ofcredits, making of investments andprovision of banking facilities
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Physics Innovations and outputs brought by
physics greatly affect the study ofeconomics.
Sociology
The study of behavior of societies,helpful in the study of
macroeconomics Psychology
The study of behavior of man, useful inthe study of microeconomics
Relationship of Economics to other Sciences
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Branches of Economics
Microeconomics
This is the branch of economics which
deals with the individual decisions of
units of economy-firms, andhouseholds, and how their choices
determine relative prices of goods and
factors of production.
The market is the central focus ofmicroeconomics.
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Macroeconomics
This is the branch of economics that
studies the relationship among broad
economic aggregates like nationalincome, national output, money
supply, bank deposits, total volume of
savings, investment, consumption
expenditure, general price level ofcommodities, government spending,
inflation, recession, and employment.
Branches of Economics
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Opportunity Cost
Opportunity cost It refers to the foregone value of the
next best alternative.
e.g. If the price of an ice cream on stickis P20 and a piece of bread costs P5, ifthe consumer chose to buy 4 pieces of
bread, then the opportunity cost ofthe 4 pcs. of bread was the ice creamon stick, assuming that the ice creamwas the next best alternative.
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Factors of Production
1. Land- this broadly refers to natural resources
2. Labor
- refers to any form of human effort in the
production3. Capital
- are man-made goods used in theproduction process
4. Entrepreneurship- refers to a person who uses his skills andthe other factors of production to giveemployment and acquire profit
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Types of Economic Systems
1. Traditional economy-is basically a subsistence economy;where a family produces goods for itsown consumption.
2. Command economy-a type of economy, wherein themanner of production is dictated by thegovernment
3. Market economy (Capitalism)
-its basic characteristic is that theresources used for production areprivately-owned, and that peoplethemselves make the decision
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4. Socialism
-an economic system wherein
key enterprises are owned by the
state. But in this system, privateownership are also recognized.
5. Mixed economy
-an economic system which is a
mixture of market system and
command system.
Types of Economic Systems
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