ECONOMICS CHAPTER 1

The Fundamentals of Economics

By:Prof. Michael Angelo P. Battung, MBA

ECONOMICS

Comes from the Ancient Greek Word “oikos” means house and “nomos” means custom or law

ECONOMICS

It is the study of the use of scarce resources to satisfy unlimited human wants and needs.

It deals on scarcity of resources on how a producer makes a best quality product with the use of limited raw materials.

ECONOMICS Need – Is something that you have to have.Want – Is something you would like to have.

ScarcityExists when there is not enough of something (product / service / resource) to satisfy everyone’s needs and wants at a ZERO PRICE.

ECONOMICS AS A SOCIAL SCIENCE

Positive Statements – Concern on what it is, was or will be. It is the assertions, statements, or theories may be simple or complex, but basically about matters of fact.

Normative Statements – Concern what one believes ought to be

ECONOMICS AS A SOCIAL SCIENCEThe well known tool use to determine the exact prediction is by the use of surveys and other statistical techniques.

ECONOMICS AS A SOCIAL SCIENCE

Variable – is a magnitude that can take on different possible values.

Important Roles of Economics:1. Analyzes how a society's institutions and technology affect prices and the allocation of resources among different uses.2. Explores the behavior of the financial markets, including interest rates and stock prices.3. Examines the distribution of income and suggests ways that the poor can be helped without harming the performance of the economy.4. Studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation.5. Studies the patterns of trade among nations and analyzes the impact of trade barriers.6. Asks how government policies can be used to pursue important goals such as rapid economic growth, efficient use of resources, full employment, price stability, and fair distribution of income.

Inputs and Outputs

Inputs – are commodities or services that are used to produce goods and services.

Outputs – are the various useful goods or services that result from the production process.

Resources and Commodities

A society’s resources consist of natural gifts like land, forests, and minerals, both mental and physical; and manufactured aids to production such as tools, machinery and buildings. Economists called it Factors of Production.

Commodity – The things produced from raw materials of nature to sustain human wants.

FACTORS OF PRODUCTION

LAND

LABOR

CAPITAL

COMMODITY

GOODS SERVICES

Resources and Commodities

Goods vs Service

CharacteristicOutput

Customer contact

Uniformity of input

Labor content

Uniformity of output

Measurement of productivity

Opportunity to correct

GoodsTangible

Low

High

Low

High

Easy

High

ServiceIntangible

High

Low

High

Low

Difficult

Lowquality problems

High

Resources and Commodities

Production – The act of making goods and services

Consumption – The act of using goods and services to satisfy wants

Efficiency – The use of a society’s resources in satisfying people’s wants and needs.

Production Possibility Frontier

The maximum amounts of production that can be obtained by an economy of inputs available.

How much different goods and services can be provided.

Production Possibility Frontierd Manufactured Production

CombinationFarm

Products (millions of

bushels)

Manufactured Products

1

2

3

4

5

514

11

5

0

015

15

25

30

Production Possibility Frontier

Production Combination

Farm Products

(millions of bushels)

9

15

30

12

6

3

252015105

Efficiency

The economy’s resources are being used as effectively as possible to satisfy people’s needs and desires.

Two Branches of Economics

Micro Economics – The branch of Economics concerned with the behaviour of individual entities such as markets, firms, and households.

Adam Smith

- Father of Classical Economics - In 1776 he created the book entitled “The Inquiry in the Nature and the Causes of the Wealth of Nations”. - He emphasized the law of “laissez-faire” meaning it is the natural process of the economy and should not intervene the government to prevent equilibrium.

- He also created the law of invincible hand. The government will not intervene to commodity prices.

Two Branches of Economics

Macro-Economics – Concerned with the overall performance of the economy.

John Maynard Keynes

- The government should spend money on public works, infrastructures, and economic programs to increased the resurgence of business activity, and the restoration of full employment.

Three Problems of Economic Organization

1. What to produce?2. How to produce?3. For whom to produce?

Economy

- A set of interrelated production and consumption activities.

Three types of economy:

1. Free – Market Economy – An economy in which the decisions of individual households and firms exert the major influence over the allocation of resources.

2. Command Economy – The major decisions about the allocation of resources are made by the government and in which firms and households produce and consume only as they are ordered.

3. Mixed – Economy – Combination of Command and Market Economy.