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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.