Introduction to the Study of Economics

Introduction to the Study of EconomicsEMERSON LACSON BERGONIO, MPA, LL.B.Central Bicol State University of Agriculture Calabanga CampusOutlineMeaning of EconomicsSignificance of Studying EconomicsHistorical Background of EconomicsGoals of EconomicsEconomics as Related to Other Social SciencesScope/Branches of EconomicsMethodologies of EconomicsThe Economic Systems and the Basic Economic QuestionsOpportunity Cost and Trade-Off

IntroductionThe main goal of this discussion is to provide the students an introduction to the concept of economics that will help them strengthen their working knowledge of the subjectWhat is EconomicsThe study of how people and society end up choosing with or without the use of money to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption now, or in the future among various groups in society.

It is concerned with the production, distribution and consumption of goods and services.

What is EconomicsThe study of the proper allocation and efficient use of scarce resources to produce commodities for the satisfaction of unlimited needs and wants of man.

A social science that deals with scarce resources and unlimited human wants.

Terms to RememberScarce/Scarcity resources are available but either they are improperly allocated or only limited in supply

Needs - things which we cannot live without. E.g. water, food & shelter

Wants these are non-essential things we can possibly live withoutFour factors that are identified with unlimited human wantsIncrease in populationChanges in tastes and preferencesIncrease in incomeSpeculations of consumersWhy Study Economics?To know how we can make our standard of living for coming years better than what we have now.To know whether there will be jobs available for us.To know how best we can spend our income.To know the future of business and how business can best meet the needs of the citizen.To know how our community will grow and how best we can contribute to and benefit from that growth.

Why Study Economics?To understand how our economy works for us to plan better.Economic knowledge enable us to make the choices that will help us live and plan better as individuals, as communities, and as a collection of nationsHistorical BackgroundStarted in ancient Greece which was the beginning of civilization.Early humans hunted all of the large game in Central America over a period of time, until there were no large animals left. After that, they had to hunt smaller animals in order to survive. When the smaller animals wer gone, people had to adapt or change to a different way of living, or they would die. In about 3,000 B.C., people learned to plant corn and other crops. At this time, people switched gradually from hunterer-gatherer society to a farming society.Historical BackgroundWith farming came, people did not move from one place to another in search for food but they grew and harvested their own foods.Also, with the farming came the rise of towns and villages and eventually cities.People began to become more and more interdependent. People began to have different professions.What Economists do?Analyze prices and production costs.Look into the activities in the marketPredict whether there will be a market for particular products.Concerned with getting resources needed for production and using resources effectively.Concerned with aggregate or totals, such as total production national income and total employment in the entire nation.Study the monetary system and tax system and their effects on peoples income, national output and growth.Predict the effects of borrowing, policies on credit on national income and production.Goals of EconomicsTo strengthen economic freedomPromote economic efficiencyPromote economic stabilityTo improve economic securityAttaining a high level of growth in the economyEconomics vs. Other Social SciencesAnthropologyPolitical ScienceSociologyPsychology History

Scope/Branches of EconomicsMICROECONOMICS deals with the economics of firms. It focuses on the behavior of a particular unit of the economy such as the consumers, producers and specific markets.Micro greek word which means smallit often deals with terms like consumers behavior, production theory, cost and profit and market structuresIt studies the behavior/actions of individual firms, markets and households.Issues examined: poverty, discrimination, monopoly, agricultural problems, big business and labor unions15Scope/Branches of EconomicsMACROECONOMICS deals with aggregates. Its scope is wider as it studies the entirety of an economy, whether national or international, as it attempts to determine economic changes. Macro greek word which means bigthe initial discussion begin on how growth and output are measured and how the multiplier worksLabor, employment, and inflation are included for long-run effects, as well as monetary, fiscal, and trade policies.IT DEALS W/ THE BEHAVIOR OF ECONOMY AS A WHOLE WITH THE VIEW TO UNDERSTANDING THE INTERACTION B/N ECONOMIC AGGREGATES SUCH AS EMPLOYMENT, INFLATION, AND NATIONAL INCOME.16Method of EconomicsNormative Economic Analysis looks at the outcome of economic behavior through judgments and prescriptions for courses of action.It has something to do with What ought to beIt involves ethics and values judgment. it values judgments of what is good and bad, what is true and false.It describes what is happening to the economy and why, without making any recommendation unless positive economics is made e.g. Government should levy more taxes to provide more services to the people

We owe this subject matter to a well known statistician and economist, Milton Friedman17Method of Economics2. Positive Economic Analysis simply strives to describe what exists and how things work. It has more objective orientation.It has something to do with What isIt describes facts and data in the economy.It gives policy recommendation as basis for normative economics E.g. Taxes provide government services to the people

IT DEALS W/ THE BEHAVIOR OF ECONOMY AS A WHOLE WITH THE VIEW TO UNDERSTANDING THE INTERACTION B/N ECONOMIC AGGREGATES SUCH AS EMPLOYMENT, INFLATION, AND NATIONAL INCOME.18Basic Economic Questions/ProblemsWhat goods and services should be produced?the kind and quantity of products

How should these goods and services be produced?who will produce; what process of production

For whom should these goods and services be produced?who will benefitIT DEALS W/ THE BEHAVIOR OF ECONOMY AS A WHOLE WITH THE VIEW TO UNDERSTANDING THE INTERACTION B/N ECONOMIC AGGREGATES SUCH AS EMPLOYMENT, INFLATION, AND NATIONAL INCOME.19Factors of ProductionLand covers all natural resources like air, water, forests, vegetation, & minerals

Labor human inputs such as manpower, efforts, skills/talents

Capital investment, machinery, equipment

Entrepreneurship resource that integrates factors of productionIT DEALS W/ THE BEHAVIOR OF ECONOMY AS A WHOLE WITH THE VIEW TO UNDERSTANDING THE INTERACTION B/N ECONOMIC AGGREGATES SUCH AS EMPLOYMENT, INFLATION, AND NATIONAL INCOME.20Economic System Refers to a set of economic institutions that dominate a given economy with the main objective of solving the basic economic problems.

It is characterized by the type of institutions responsible for the management and allocation of resources used in the production of goods and services.Categories of Economic System Traditional economyCommand/planning economyFree market economyMixed market economyCategories of Economic System Traditional economy is one whose economic decisions are made with great influence from the past.It find answers to the three economic questions by copying or duplicating the decisions made by previous generations.Production is carried on through methods used by their forefathers and are therefore primitive.Decisions made (e.g. what & how crops will be grown) is made by imitating what the tribe has always doneChange is slow. Everyones role is quietly observed.The task or responsibilities are assigned to members of the tribe in the same way those tasks were assigned in a previous generation.Essential Characteristics of Traditional EconomyCommunal land ownershipThe leader decides on the management of agricultural production w/c is the basis of the economyThe production, distribution, and use of economic resources are based on traditional practicesNew technologies are not welcomed since they are in contrast w/ the traditional practices of their ancestorsThe economy is only its third priority while culture and religion are its foremost prioritiesMines are used to gather raw materials for production.Categories of Economic System Command economy is where all economic resources are owned and managed by the state/government.Decisions in answering the basic economic problems are planned, done and dictated by the government.It operates like a military where the decisions are made from the top authority and whatever decisions made are relayed to the majority of the people in the economy.Citizens under this system have little or no political and economic freedom.What to produce more public goods like roads, public schools, and hospitalsHow to produce by employing all possible laborers using available machinery and equipmentFor whom to produce should be for the public25Essential Characteristics of Command EconomyResource allocation is done by the government.Presence of central planning of all economic activities.There is no free competition (the government is the only seller).Only the government plays the role in setting legal framework for economic life production and distribution of goods and services.The products or needs of the people are distributed based on priorities set by the committee.Categories of Economic System Market economy is where individual consumers and businesses interact to solve economic problem.the price of commodity dictates what goods and services will be produced, how and for whom it will be produced.conferment of majority is necessary.a good or service is purchased or sold for a price, and the price helps to determine what kinds of economic activity will take place in a market system.the decisions made by buyers and sellers help in determining the price of a particular good. The price in turn signals the ways our society decides what, how and for whom to produce. considered by some observers as auction.-When the price is agreed upon and a sale is made, it means that the 3 economic problems are answered-Each buyer and seller represents an economic unit that is motivated by self-interest to make the best deal it can for itself.-a good or service is purchased or sold for a price, and the price helps to determine what kinds of economic activity will take place in a market system.-the decisions made by buyers and sellers help in determining the price of a particular good. The price in turn signals the ways our society decides what, how and for whom to produce. 27Essential Characteristics of Market EconomyThe private sector owns and manages the means of production.The price system in a market structure applies to determine how much will be paid for a certain commodity/service.It is also known as laissez-faire or free enterprise.There is minimum government interference on decision pertaining to the management of economyExistence of competition often results to monopoly.There is a presence of economic power.

Categories of Economic System Mixed economy is where both private and public institutions exercise economic control. The elements of different economy are present in varying degrees.Private sector works through the market mechanism, and minor industries such as production & distribution of candies/cigarettes belong to them.The public or government institution works through regulatory commands and it owns and manages major industries such as transportation, electrification and others.29Essential Characteristics of Mixed EconomyThe means of production are owned and controlled by the private sector as well as the government.The people decide on economic activities within the economy.The combinations of the best features of capitalist and command economies are observable in the market.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.Selected countries under various economic systemTraditional EconomyCommand EconomyMarket EconomyMixed EconomyMongoliaNorth Korea, CubaChina, Peru, Philippines, Singapore, Mexico, Canada, France, HongkongJapan, USA, SwedenThe three ISMSCapitalism (market economic system)CommunismSocialism (command economic system)The three ISMS: CapitalismAn economic system in which most resources are privately owned, people are free to choose their occupation, the kind and amount of production is determined by price and people searching for a profit, and there is substantial amount of competition.It has three Aspects: 1) the institution of private ownership is generally accepted; 2) most people are free to pursue their own economic self-interests, that is, to work for personal gain; 3) people compete with one another to get ahead, to make a better product, to control markets in order to maintain/obtain large profit.The three ISMS: CommunismIt holds that the people themselves, not the government, own the means of production. In a communist state, everyone works at what he or she can do best. There is no system of wages of profits needed to spur people to work.Everyone simply takes from what is produced whatever he or she needs to live comfortably. No government or bureaucracy supervises what the people do.

34The three ISMS: SocialismAn economic system in which the government owns and operates the major industries of the country. The government decides in those major industries the answers to the three economic questions.There are also many variants of socialism as there are countries. In France and Italy, for example, many major industries are nationalized. Sweden is another example because of its extensive welfare programs, although some properties are privately owned.Socialism does not imply dictatorship. It can exist in democratic countries as well as authoritarian ones. The main reason for socialisms existence is that socialists hope to overcome capitalisms two important problems: the unequal distribution of income and wealth, and the uneven course of economic growth with periods of boom or bust. That is the reason why socialist countries whether democratic or not, tend to have a high degree of economic planning and government regulations.35The Circular Flow of EconomyCircular Flow of Production and Payment

Law of Scarcity, Opportunity Cost & Trade-OffScarcity refers to the condition that all resources are available only in limited supply

Law of Scarcity states that goods are scarce because there are not enough resources to produce all the goods that the people want to consume.

Opportunity Cost refers to the cost of giving up an alternative by selecting the next best choice or refers to the cost of using them in their best alternatives

Trade-off the opportunity cost of selecting one alternative rather than another. It is a situation in which more of one good thing can be obtained only by giving of another thing.

Production Possibility Frontier (PPF) a graph which shows the greatest sum of output given accessible inputs, or factors of production, in an economy.

Production Possibility Frontier (PPF)

GroupingsMIDTERM EXAM COVERAGEIntroduction to the Study of Economics - ELBEconomic Models and the Flow of Production Economic Strategies (Monetary & Fiscal Policy) Tanael, Timajo, Azaa

Basics of Demand and Supply Consumers Behavior TheoryAlviso, Baduria, Tantiado

Production TheoryTheory of CostsPait, Caon, San Andres

Market Structures Calomos, Combate, RubioGroupingsFINAL EXAM COVERAGE

Introduction to Macroeconomics - Calomos, Combate, Rubio

Inflation, Labor & UnemploymentGeneral Principles of Taxation & TaxesCondes, Esmarin, Palma

National Taxes Tax Administration and ProcedureCorporal, Rodriguez, Domalaza

Agrarian Reform and Comprehensive Agrarian Reform Program - Narvato, Garayan, Padre