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7/28/2019 Principles of Economics 01
1/19
Fundamentals of
Economics
Elements of Economics
Slides prepared by Neil Angelo Halcon
7/28/2019 Principles of Economics 01
2/19
Definition of Economics Economics as an allocation of wealth
Economics is a social science that deals with theallocation of scarce resources to satisfy unlimitedhuman needs and wants
Allocation is a mechanism of distribution used bysociety to address the needs and wants of citizens inan environment characterized by scarcity ofresources (3 types: price system, command system,traditional system) Price System: market forces to determine the value of goods
and services
Command or Planning System: based on the dictates of thegovernments central planning agency
Traditional System: based on social consensus and traditions
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Definition of Economics Economics as creation and consumption of
wealth process of distribution and production Process of distribution: how products are transacted in
the market and the impact of the relative power ofactors in the market in determining the price
Process of production: transforming raw materials tonew products
Economics as a science of choice OptimizationOptimization: getting the best option from limited
resources
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Problems of Material Survival and
Progress Relating economics to goals of society social
survival and social progress
Besides economics, these are answered byculture and politics
In economics, the society is concerned withwealth as a means of ensuring its material
survival and growth. Economic development is not only expansion of
wealth but the equitable distribution of the fruitsof this wealth
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Basic Economic Questions
What goods to produce?
Refers to a productive activity of any society.The relative importance of human needs and
wants will have to be matched with the availableresources for production The social mechanism for ranking the relative
importance of human needs and wants is:
Market system: the price people attach to thesegoods and services
Command system: the priorities made by the centralplanning agency
Traditional society: the social norms
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Basic Economic Questions
How many will be produced?
Concerned with the amount of goods and
services that will be produced by the societybased on human wants, extent of wealth andtechnology used in production. The system of allocation or mechanism for ranking
human wants is:
Market system: the price of the commodity
Command system: The goals of society as formulatedby the state
Tradition
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Basic Economic Questions
Who will produce it?
Refers to the amount of productive inputs to be
used based on the availability of resources aswell as on their relative productivities.Market system: the price of the productive input is
compared with its productivity to determine whether itwill be employed or not
Command system: the planning board decides to usemore labor regardless of their productivity
Traditional society: groups of people are assignedspecific social tasks
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Basic Economic Questions
How will it be produced?
Focuses on the technology to be used.Technology does not only describe the process
of combining resources but also refers to theintensity of use of a resource relative withanother resource.Market system: the market mechanism will evaluate
the relative cost of productive inputs and theirproductivities
Command system: the planning board decides to usecapital intensive techniques even if it is laborabundant
Traditional society: traditional techniques > modern
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Basic Economic Questions
For whom will it be produced?
Consumption
Market system: the portion allocated to
various citizens will depend on their relative
contributions in the production process
Command system: redistribution as part ofsocial equity
Traditional society: based on the value they
give to the community
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Methods of Economics
Scientific Method: Formulation of the problem
Arise from existing issues or limitations of previous studies
Establishing hypothesis Can be accepted or rejected
Gathering data and information
Historical approach
Experimental approach
Other methods
Treatment and analysis of data
Use of statistics
Interpretation of results together with the conclusion
Accept or reject hypothesis based on the analysis of data
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Relationship of Economics with
Other Fields of Knowledge Use of scientific method physical
sciences
Formulation of theories and conceptsmathematics, logic, philosophy
Topic coverage social studies
Level of analysis is broader thancommercial sciences Commercial sciences = practical
Economics = theoretical
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Positive and Normative Economics
Positive economics is descriptive inapproach, in the sense that it illustrateswhat is happening to the various actors,
sectors and institutions within and outsidethe economy.
Describes the world as it is
Normative economics is prescriptive inapproach, in the sense that it directs us onwhat ought to be done.
Prescribes how the world should be
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Microeconomics and
Macroeconomics Microeconomics deals with the analysis on
how the allocation of scare resources is
conducted by small economic units,sectors, and institutions in the economy.
Macroeconomics is also about theallocation of scarce resources but takesthe analysis at the perspective of theentire economy.
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Use of Mathematics
Mathematics is used because it is very effective
in describing the relationships of economic
variables and actors by means of equations tosimplify complicated concepts and relationships.
To prevent misconceptions and confusions in
the meaning of a certain theory. Mathematics is
used because it is more effective in givingformal, exact, and simple illustration of a theory.
7/28/2019 Principles of Economics 01
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Using models
A model is a simplified summary of an
economic reality thus economists make
several assumptions which can sometimesmake the model unrealistic but despite
shortcomings, their simplicity and logic in
making a general view on what ishappening in the economy
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Using Graphs
A 2 dimensionalgraph can give agraphicalillustration of therelationshipbetween 2economic
variables. In this case, a
positive/directrelationship
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Using Statistical Analysis
To measure whether economic
relationships are true in reality, there is a
need to empirically test these models. Econometrics is a branch of statistics used
to empirically test the statistical
significance of these economicrelationships
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Prediction and Ceteris Paribus
For example, demand of a product is affected by
different factors including the price of the
product, price of other products, income, tasteand preference, etc. If we want to single out the
effect of price on the demand of the product, we
have to make an assumption that other factors
are not changing while the price of thecommodity is changing.
Ceteris Paribus is a Latin phrase that translates
to "holding other things constant"
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Principles of Economics(N. Gregory Mankiw)1. People face trade-offs
2. The cost of something is what you gave up to get it3. Rational people think at a margin
4. People respond to incentives
5. Trade can make everyone better-off
6. Markets are usually a good way to organize economicactivity
7. Governments can sometimes influence market
outcomes
8. A countrys standard of living depends on its ability toproduce goods and services
9. Prices rise when government prints too much money
10. Society faces a short-run trade-off between inflation
and unemployment