Topic: Economics and Its Nature

Leader: Alfonso, Marvin S.

Members:
Austria, Lyra Marie C.
Buendicho, Diane Christine
Lebrilla, Erika
Pascual, Maria Charina Jane

I. Economics and Its Nature

A. Economics

The term “Economics” came from the greek word “oikonomikos” or

“oikonomia”, it literally translates to the “task of managing household”. Economics is
generally defined as the study of production, distribution and consumption of wealth,
goods and services including scarcity and choice, because Economics does not deal
with money or wealth alone but it is also considered existing in the decisions made
by individuals every day. In the reality of life, human cannot have everything he
wants because of limited resources that is why we need to know how to weigh and
analyse the results and benefits of our choices to come up with the best decisions.
Economics also focuses on the behaviour and interactions of economic agents and
how the economy works.

Economics is also defined by different economists:

1. Adam Smith- He was a Scottish Philosopher and is

widely considered as the first modern economist. He
defined Economics as an “inquiry into the nature and
causes of the wealth of nation”. Like mercantilists, he did
not believe that the wealth of nation lies in the
accumulation of precious metals like gold and silver. For
him, wealth may be defined as those goods and services
 which command value-in-exchange. Economics is
concerned with the generation of the wealth of nations. It
is not concerned only with the production of wealth but
also in distribution of wealth.
2. Alfred Marshall- In his book ‘Principles of Economics
published in 1890 he placed emphasis on human
activities or human welfare rather than on wealth.
Marshall defines economics as “a study of men as they
live and move and think in the ordinary business of life.”
He argued that economics, on one side, is a study of
wealth and, on the other, is a study of man.
3. Lionel Robbins - Defined economics as the subject that
studies the allocation of scarce resources with countless
possible uses. In his 1932 text, “An Essay on the Nature
and Significance of Economic Science,” Robbins said the
following about the subject: “Economics is the science
which studies human behaviour as a relationship
between ends and scarce means which have alternative
uses.” Human beings have unlimited wants. They are
constantly making effort to satisfy it with limited
resources. The nature of this is if one want is satisfied
another want arises. It is impossible that a person has all
of his wants fulfilled that is why they struggle to produce
more goods or more income to continue their life.
4. Paul Samuelson- According to him, “Economics is the
study of how people and society choose, with or without
the use of money, to employ scarce productive resources
which could have alternative uses, to produce various
commodities over time and distribute them for
consumption now and in the future among various
persons and groups of society.” His goal was to be able
 to tell (by observing a consumer’s choices) whether he or
she was better off after a change in prices, and indeed,
Samuelson determined the circumstances under which
one could tell. The consumer revealed by choices his or
her preferences—hence the term “revealed preferences.”

B. Microeconomics VS Macroeconomics

The difference between microeconomics and macroeconomics is simple.

Microeconomics is the study of economics at an individual, group or company
level. Macroeconomics, on the other hand, is the study of a national economy as
a whole.

Microeconomics focuses on issues that affect individuals and companies.

This could mean studying the supply and demand for a specific product, the
production that an individual or business is capable of, or the effects of
regulations on a business. Macroeconomics focuses on issues that affect the
economy as a whole. Some of the most common focuses of macroeconomics
include unemployment rates, the gross domestic product of an economy, and the
effects of exports and imports.

Microeconomics studies individuals and business decisions while

macroeconomics analyzes the decisions made by countries and governments.
Microeconomics has a lesser coverage in terms of economic issues as it only
focuses of individuals, businesses, and the decisions made by it considering the
factors that could affect its outcome. Macroeconomics, on the other hand has a
greater scope and covers majority of the country's and government's decisions
as it widely affects the resources, economic issue and the matters considered in
particular governance.
C. The Circular Flow Diagram

Circular flow diagram is a graphical representation of the flows of goods,

services and money within a market economy. It shows where the money goes and
what it’s exchanged for. In the diagram, there are two main characters, known as
firms and households, where “firms” represent producers and “households”
represent consumers. Households consume goods offered by the firms. However,
households also offer firms the factors they need to produce goods and services for
the consumers, which is also the household. While the firm offer goods and services.
In order to do this, firms take the factors from households such as land, labor, and
capital and convert raw materials into goods and services that the consumers need
and want. The firm is the one who pay wages, interest and profit to household in
return for the use of their production. Government levy taxes on households and
firms in order to provide certain benefits to everyone.

D. Economic Methodology

Economic methodology is the study of methods, especially the

scientific method, in relation to economics, including principles
underlying economic reasoning.

1. Scientific Method – it deals with formulating of hypothesis based on

observations - explanations of cause-effect relationships based upon the
 facts. (e.g. If the product or service of a business has no substitute, then the
owner can manipulate the price of the product or service.)
2. Hypothesis Testing - it is the rejection or modification of the hypothesis. It
uses statistics to determine if the hypothesis is true or not. There are some
statistical tests used to validate the hypothesis. First is a Z-test, it determines
whether two population means are different when the variances are known
and the sample size is large. It can be used to test hypotheses in which the z-
test follows a normal distribution. The second one is the t-test, it determines if
there is a significant difference between the means of two groups, which may
be related in certain features.
3. Theory – it is the systematic arrangement of facts, interpreting the facts and
making conclusion or generalizations (e.g. Adam Smit's famous book " An
Inquiry into the Nature and Cause of the Wealth of Nations" stated his theory
"The Theory of Moral Sentiments" which states that the free market or the
consumers regulate themselves by the means of demand, supply and
competition.)
4. Law or Principle – it explains or predict the behaviour of individuals and
institution - generalize about economic behaviour. (e.g. Law of Demand
states that the demand of a product is inversely proportional to its price.) -
Models - simplified representations (e.g. Demand Curve shows the negative
relationship of demand and price.)
5. Other-things-equal assumption (Ceteris paribus) - it means that most of the
time something will occur as a result of something else. (e.g. If the price of
meat increases, the consumers' demand of the meat decreases)