THE ECONOMIC WAY OF THINKING

Definitions of Economics

 Economics is the study of how people allocate

scare resources for production, distribution,
and consumption (economic activity) of goods
and services, both individually and collectively.
 Studies how individuals, businesses,
governments, and nations make choice about
how to allocate resources
 Study of how societies use scarce resources to
produce valuable commodities and distribute
them among different people.
 (Tiambeng) Economics deals with how man
could best allocate and utilize the limited
(scarce) resources to be able to fulfill or satisfy
the unlimited needs and wants of the people.
 It is the social science concerned with the The Division of Economics
efficient use of scarce resources to achieve
maximum satisfaction of economic wants.  Divided because of Great Depression
 Economics comes from the Greek word
“oikonomia”, which means “household Macroeconomics
management”.
 Economics- Mother of all academic discipline,  The study of the entire economy as a whole
resource-focused. rather than individual markets.
 In general policy makers try to achieve three
Scarcity goals:
a. Keep the economy growing over time
 Is a gap between limited resources and (gross domestic product – GDP)
theoretical limitless needs and wants. b. Limit unemployment (unemployment rate)
 Is when our means (resources) to fulfill our c. Keep prices stable (inflation rate)
ends (desire, needs, wants, demands) are  GDP is the value of all final goods and services
limited and costly. produced within a country’s border in a specific
 It is a natural occurrence of how resources are period of time, usually a year.
becoming limited and not renewable, therefore a. Transactions where nothing new was
economic decisions must be made in order to produced – don’t count as GDP.
achieve maximum fulfillment. Thus, scarcity b. Also not including illegal activities.
limits our options, since we cannot have it all, c. Measured in dollars.
the society needs to decide on which to get and d. Nominal GDP is GDP not adjusted for
which to forgo/ sacrifice. inflation.
e. Real GDP is GDP adjusted for inflation.
Why study economics? Its importance  Recession – when two successful quarters, or
 Studying economics provides one with not just an six months, show a decrease in real GDP.
understanding of human behavior, but also  Depression – a severe recession. No
cultivates in students the problem-solving, production, kahit may pera ang tao walang
analytical, communication, and persuasion skills mabibili.
that are critical for success in today’s job market.  Unemployment rate is calculated by taking the
 The study of economics helps people understand number of people that are unemployed and
the world around them. It enables people to dividing by the number of people in the labor
understand people, businesses, markets, and force, times 100.
governments, and therefore better respond to
the threats and opportunities that emerge when
things change.
 a. Discouraged workers – unemployed
people that were looking for work, but
have given up.
b. There are three types of
unemployment:
1. frictional unemployment – the
time period between jobs, when a
worker is searching for, or
transitioning from one job to
another.
Microeconomics
2. structural unemployment –
unemployment caused by lack of  Focuses on how individual consumers and firm
demand for a worker’s specific make decisions; these individuals can be a
type of labor. single person, a household, a
3. cyclical unemployment – business/organization or a government agency
unemployment due to recession.  Individual, business, community, nations’
economic problems. Per unit/ small unit of
c. Natural rate of unemployment – the
society
lowest rate of unemployment that
 Direct to consumer’s needs
economy can sustain over a long period.
 Explains how and why different goods are
 Inflation – an increase in a currency supply valued differently, how individuals make
relative to the number of people using it, financial decisions, and how individuals best
resulting in rising prices of goods and services trade, coordinate and cooperate with one
over time. Instability of price in the market. The another.
general price of goods and services being sold
in the market are high. Government should intervene and regulate
 Deflation – a decrease in general price level of not interfere
goods and services. devaluation
The Basic Economic problems
 Foreign Trade
 Government fiscal and monetary policy 1. What to produce?
 Government has control under 2. How to produce?
macroeconomics, the implementor of change 3. How much to produce?
 Fiscal policy- how the government source out 4. For whom to produce?
the income and spend/use those income,
sources of gov’ income (1) taxation (2) selling
government policies (3) borrowing of money
from local financial institutions (4) borrowing
from Asian financial institutions (5) borrowing
from the world bank, international monetary
bank
 Congress- maker of nation budget to house of
representatives to senate to the president
 Monetary policy how the government
represented by Bank Sentral ng Pilipinas (BSP)
monitor our money supply or money
circulation, interest determinator to increase/
decrease the value of money/ currency
The Factors of Production Trade-Off

 You cannot produce if you eliminate one of  Decision consequences

the factors.  Give up a portion of one thing to gaining a
portion of another thing.
 Weigh the cost + benefit= trade-off
 In the essence of scarcity, we make choices on
which one to buy and consume and which to
sacrifice. The process of us valuing the
consequences of our decisions is called a Trade-
off. We weigh the cost and possible benefits of
our actions. We must always conclude to get
the portion that has a benefit equal to the cost,
but it is much better to look for something that
has a higher benefit than its cost.
 Labor- manual/physical labor and mental
 When you give up something you should get
labor
satisfaction more than that (something you
 Entrepreneurship- real entrepreneur has
gave up), you’ll do this by wise decision
ability and scientific knowledge/ calculated
 Getting two opportunities at the same time
knowledge but also intuition
however you give up only a PORTION but that
Opportunity Costs, Choices, & Trade-off portion should have huge benefit to you

Production Possibilities Frontier/model

 Frontier the boundary

 We are referring to choices, decision-making.
 PPF demonstrate the production of one
commodity may increase only if the production of
 Choice- are you thinking about the the other commodity decrease
consequences of your choice?  PPF is a decision-making tool for managers
 Why did you do that decision, justify it. deciding on the optimum product mix of the
 Opportunity Cost company
o lost/loss another term
o To get more of one thing, you forgo the
opportunity of getting something else.
o So, the cost of that which you get is the
value of that which is sacrificed to obtain it.
o Whatever you give up to do something
  Concave- is the boundary/ frontier/
resources, maximum utilization of resources,
the reason why it is concave because of the
statistical matter, i.e. scientific computation
 Traditional Economy
 A.B.C.- tangent on the line , any point tangent
o Institutionalized the rest of the system,
to that line you are able to produce
dito nagsimula,
everything to the fullest (effectively/efficient)
o Barter/trade- exchange of goods or
 D.E.- inefficient combinations, not all
services as exchange of commodity
resources fully utilized. Any dot inside the
(wala pang currency) lahat daw
concave it is inefficient like D.E. (kaya pa pero
tinitimbang
hindi ginamit meaning inefficient)
o Disadvantage- they cannot identify the
 F.- Unattainable, beyond your
exact value of the goods, no equal
ability/capacity/PPF. It is an output
value
combination that is not yet attainable
 This is example of opportunity cost according
1. The Market System (Pre-enterprise/ Capitalism)
to Prof. Tiambeng
 In this economic system, the business,
industries, and individuals are the one who
handles the market, “laissez faire”, meaning
leave alone or let it be. So the government
does not interfere with the market, and the
business sector and individuals are the one
that fully-controls the market circulation.
Adam Smith called this as “the invisible
hand”, the people have the freedom to sell
or buy among their self-interests. However,
some economists view this as something
chaotic, as laws and regulations made by the
government are needed for justice and
equality among the industries and the
o This is example of trade-off according to Prof. consumer only in time of crisis to provide
Tiambeng. stability.
o Y – created new concave because it utilizes the
resources beyond the capacity/ability to  Law of supply and demand (market
produce example with the use of technology mechanism)- the price of all product and
services can be decided upon the law of
The Economic System supply and demand. Not the government
note the producer not the buyer who
 Sistema ng paraan ng pamumuhay decides the price but the market
 Institution(generally) that dominates a given mechanism.
economy
 2. The Command System (Socialism) There are no more straight economic system, we are all
mixed by categories.
 The government has the overall
responsibility and control on the economy.
They are the one who decides the answers
for economic problems, such as what to Types of Economic Development
produce, how to produce, how much to
produce and for who it is for. The goal of  Developed Country-
the socialist economy is to produce profit  Developing Country-
not for self-interests but for the overall  Under developing Country- mayaman ang country
good of the society and not individuals. however hindi inefficient ang paggamit sa
Cuba, North Korea are example that has a resources, we don’t have the ability to cultivate/
command economic system or socialist. enrich the resources
 According to Mr. Tiambeng Economic Growth Vs. Economic Development
(communism), no poor no rich. Cuba and North
Korea are former communist country. Economic Growth
 Difference between communism and  Is an increase in a nation’s production of economic
socialist, communism pro-government, socialist
goods and services, compared from one period of
pro-people
time to another.
3. Socialist Economy

 key enterprises are owned by the state.

Private ownership is recognized; however, the
state has control over a large portion of capital
assets and is generally responsible for the
production and distribution of income and
wealth.

 As such, it is considered as an economy

 What are the two measures of economic growth?
bordering between capitalism and communism.
 Both GNP and GDP assess the economic growth
4. The Mixed Economic System however isa lang daw ang ginagamit.
 Gross National Product (GNP)-
 Here, capitalism and socialism are all production that is made by Filipinos in one
combined together. There is a specific amount year, Philippines and international.
of freedom for the private properties but the  Gross Domestic Product (GDP)-
government intervene on the decisions of measure the value of goods and services
industries and individuals. The means of produced by a nation. Dito lang sa
production is under the private sectors/ Philippines, kahit foreign investors, etc.
businesses but under the law and regulations 
of the government.
 Economic development
 Economic welfare of the people,
 Mixture of the different economies, it
can be seen a sort of spectrum as different kakayahang mamuhay above the level,
economies may be more or less driven by tumaas ang value ng pamumuhay.
government planning or the free market.  This is for long-term

 Governments, may intervene in the economy

through taxes, regulation, public ownership
and planning, while providing welfare support
and infrastructure development. Depending
on the specific economy, a larger or smaller
percentage of economic decisions will be
driven by supply and demand.
 services in order to help the primary and
secondary sector. 

o Instead of the product production, this

sector produces services maintenance
and repairs, training, or consulting.
Examples of service sector jobs include
housekeeping, tours, nursing, and
teaching.

The Sectors of an Economy The Capital Goods and the Consumer Goods

Industry- different businesses, smaller/ more specific  Capital Goods

group, produce goods and services. Pinagsamasama na
o It is the physical or tangible assets used
magkakahalintulad na negosyo
by a business to help the other
Sector- larger segment, lahat ng related products businesses produce valuable goods. It is
used for productive means. Money may
 Primary Sector (Agriculture) be known as capital, but it is not
included as a capital good, although it is
o These are the industries that are involved in used to buy the capital goods such as
the making or harvesting or extraction of raw machineries, buildings, technologies,
materials/ natural resources. Industries like, furniture, automobiles that are used for
mining, farming, fishery, forestry. In the rise of shipping or transferring goods etc.
modernization, there are much lower workers
who undergo this sector.  Consumer Goods

o Extraction of raw materials or natural o It is the valuable final goods made by

resources using the capital goods. It is bought for
the means of consumption only.
 Secondary Sector (manufacturing) Basically, it is only used to achieve
satisfaction but not for us to make a
o This is the sector where primary resources/ living.
raw materials gathered in the primary sector
are processed into another valuable good in o For final consumption
the means of production. Industry that is
involved in making output/finished goods,
such as manufacturing which makes burgers,
automobiles, clothes, and etc.

o Mechanized of technological production

 Tertiary Sector (Services)

o These are industries that provide services to

other industries/businesses It is divided into The Functions of Prices
sectors as well: Profit and Non-profit sectors.
Example, industries under profit sectors are  Exact value of goods and services
private hospitals and schools, transportation,
restaurants, banks, and etc. While in Non-
profit sectors are public schools and hospitals,
charities and etc. The Tertiary Sector provides
  Market refers to a place or condition wherein
buyers and sellers transact to be able to sell or
buy certain goods
 3 Elements in the market: they should be
willingness and ableness to sell or purchase at
various prices
o Seller-
o Buyer
o Product/services

The Circular Flow of Economic Activity

 In market mechanism, you are applying the law

of supply and demand.
 Market strategy- bargaining, they come up at
market equilibrium (decision of both side in
terms of price)
 Market disequilibrium- kapag hindi
nagkasundo, market equilibrium did not reach
 Households- consumers/ producers of land,
labor, capital, entrepreneurship
 Government- referee between businesses and
households, protect both sides, regulatory body
o Regulate the economic system
o The government gives permission/
rights to the households and businesses
to use natural resources.
o Taxes- revenue source of the
government,
o Provides goods and services to the
businesses and household.
 Demand should come first so the businesses
THE CONCEPT OF DEMAND, SUPPLY, AND MARKET can identify how many supplies the will
EQUILIBRIUM produce.

The Market Mechanism

Sa exam may fill in the blanks identification, about
different parts of law of supply demand, pati
quantitative, kasama demand schedule

 Indirect of inverse relationship ang law of

demand
 Dahil sa natural consumer behavior

 Fad is a trend or craze while passion is long-term

 dahil sa expectations of prices, nagpapanickbuying
ang mga tao

 Individual demand vs market demand

 Individual personal demand while market
demand is a group of people (aggregate market
demand) (conglomeration of demand)
 Market demand schedule shows the demand of
a group of people.
 y/vertical line price, x/horizontal line quantity
demand
 demand curve is downward sloping
 kaya straight line kasi equally distributed yung
quantity demanded

Equilibrium- intersection or meeting of the demand

and supply

 memorize yung graph!

 Surplus- supply is greater than demand

 Shortage- demand is greater than supply
 Pag nagdistribute or nag graph dapat equally
distributed
  Walang benefit ang government sa pagbibigay
 Government role na ito
ng subsidies
 Inflation- general price increase of basic needs
in the market, namomonitor
 Deflation- pagbaba ng presyo, mahirap
imonitor o manipulate
 Kapag nagtataasanyung presyo, maraming
factors ng demand.
 Kapag ang business ay monopoly or olygopoly,
tataas ang presyo
 2 type of comptetion- cut throat

Originally the demand curve place at the middle

The Dynamics of Supply and Demand

 Market dynamics are forces that will impact prices

and the behaviors of producers and consumers. In a
market, these forces create pricing signals which
result from the fluctuation (rising and falling in
number or amount/ variation) of supply and
demand for a given product or services. Fluctuation
is

 Market dynamics means the factors that affect a

market. From the theory of economics they would
 Supply curve to price direct relationship be supply, demand, price, wuantity, and other
 The main objective of the supplier is to make specific terms.
profit  From a business standpoint, market dynamics are
the factors tha effect the business model which
involves the applying party.
 Market dynamics can impact any industry or
government policy. Hence, the effect of these
emotions drives the actions of investors, traders,
and consumers.
Reasons for government Price Controls  Inelastic- usually pertains to needs, necessary
goods (necessity)
Usually, prices are set by the market forces (where  Unitary elastic- combination of both, what is
supply and demand meet). necessity to others might not be a necessity to
others
1. Make some goods more expensive (e.g. food to
 Perfectly elastic- extreme wants
increase revenue of farmers or discourage
 Perfectly inelastic- extreme needs
demand for demerit (unhealthy) goods.)\
2. Make some goods cheaper (e.g. to make sure
housing is affordable)
3. To stabilize prices (e.d. prevent rapid
fluctuations in the price of food)

Maximum Prices

 This is when the government wish to prevent

prices going above a certain level. If a maximum
price is placed below equilibrium, price will fall.
 But if the price is below the equilibrium,
demand will be grater than supply leading to a
shortage.  Price is the determinant here.
 The government may wish to use maximum  In graph 1- the consumer reacts to the prices
prices to reduce the cost of renting a house. changes, they become very sensitive in reacting
 The government may also use maximum prices to the price since luxury goods kaya elastic.
for important food-stuffs or pharmaceutical Nag-react ng malaki.
drugs which it wants to make more affordable.  Graph 2- Inelastic product nag-react ang
consumer ng maliit kasi necessities/needs ito.
PRICE ELASTICITY CONCEPT

 Elasticity/elastic- adjustable, nagbabago-bago,

adapat, the degree in which the effective desire
changes
 Price elasticity- nagaadopt depending on the price
 How the consumers react to the changes in price

Elasticity of Demand

 The degree to which the effective desire desire

(needs/wants) for something changes as its price
changes.
 In general, people desire things less as those things
become more expensive; or people desire thing  Nasa gitna, equal, same responsiveness.
more as those things become less expensive.
 A change in the price of a commodity affects its
demand.

Five Types of Price Elasticity of Demand

 Perfectly Elastic
 (Relatively) Elastic
 Unitary
 (Relatively) Inelastic
 Perfectly Inelastic
 Elastic- usually refers to luxury goods, non- Graph 1- price changes but the demand still the same
essential goods (wants)
Graph 2- the price sticks but the demand changes
ARC AND POINT ELASTICITY ELASTICITY OF SUPPLY

 Arc elasticity is the elasticity of one variable with  Price elasticity of supply measures the
respect to another between two given points. It is responsiveness to the supply of a good or service
used when there is no general function to define after a chang in tis market price.
the relationship between the two variables.  Elastic means the product is considered sensitive to
 Also defined as the elasticity between two points price changes.
on a curve. Averaging.  An elastic supply is one in which the elasticity is
 Ginagamit kung ang population ay malaki, kahit greater than one, indicating a high responsiveness
yung price and quantity basta kapag malaki, to changes in price.
various products are being tested  Inelastic means the product is not sensitive to price
 Point elasticity of demand is the ratio of movements.
percentage change in quantity demanded of a  An inelastic supply is one in which elasticity is less
good to percentae change in its price calculated at than one, indicating low responsiveness to price
a specific point on the demand curve. changes.
 Point elasticity- small values lang (ito lang daw
gagamitin namin), few buyers/seller/products  Responsiveness/ How sensitive are the supplier
being sold/bought when the product/ price changes?
 Magkaiba ang sagot sa arc and point elasticity.  Producers will produce more in the necessary
commodities rather than luxurious goods.
When we are going to compute the elasticity

Price Elasticity of Demand How Markets Work in Income Elasticity of Demand

 Consumers reaction in the change of income

 Nominal Income- the money you receive
wages/salaries from working
 Real Income- when the nominal income was
deducted by buying of basic commodities.
Measured against inflation of goods/services
 toothbrush when the price of toothpaste
changes
 Or responsiveness of customers to substitute
goods when you change your price

When the CED is positive (+) it is a substitute product

 2 types of normal goods- luxury and necessity

goods

When the CED is negative it is a complementary

product.

Low but positive income elasticity

Less quality goods ang inferior goods

If ced is zero, the products are not related or

independent

 For example, the responsiveness of consumers

to the change in quantity demanded of
 

o Other 2 sector, financial market and

global market (magiging
macroeconomic na)





Sellers in these questions are trying to figure out how

the consumers will react