Module 1 Economics the Study of Choice

LEARNING OBJECTIVES:

1. Define economics.
2. Explain the concepts of scarcity and opportunity cost and how they
relate to the definition of economics.
3. Understand the three fundamental economic questions: What should
be produced? How should goods and services be produced? For
whom should goods and services be produced?
4. Explain the distinguishing characteristics of the economic way of
thinking.
5. Distinguish between microeconomics and macroeconomics; positive economics and normative
economics.

Economics is derived from the Greek word “Oikonomia” –management of household or

household rules.

Economics is a social science that studies how people choose to use scarce productive
resources to produce various goods and distribute these goods to various members of the society
for their consumption.

It is a social science that examines how people choose among the alternatives available
to them. It is social because it involves people and their behavior. It is a science because it uses,
as much as possible, a scientific approach in its investigation of choices.

Scarcity, Choice, and Cost

All choices mean that one alternative is selected over another. Selecting among alternatives
involves three ideas central to economics: scarcity, choice, and opportunity cost.

Scarcity - is the condition of having to choose among alternatives. A scarce good is one for which
the choice of one alternative requires that another be given up. The fact that resources is scarce
means that society must make choices concerning its
use.

Scarcity and the Fundamental Economic Questions

The choices we confront as a result of scarcity raise three sets of issues. Every economy must
answer the following questions:

1. What should be produced? Using the economy’s scarce resources to produce one thing
requires giving up another.
2. How should goods and services be produced? There are all sorts of choices to be
made in determining how goods and services should be produced.
3. For whom should goods and services be produced? If a good or service is produced,
a decision must be made about who will get it.
Opportunity Cost
It is within the context of scarcity that economists define what is perhaps the most
important concept in all of economics, the concept of opportunity cost. Opportunity cost is the
value of the best alternative forgone in making any particular choice.

Example:
If you choose to spend PhP5,000 on a potted plant, you have simultaneously
chosen to give up the benefits of spending the PhP5,000 on a smart phone or an original Levis
jeans or a staycation at Luxe Hotel. If the smartphone is the most valuable of those alternatives,
then the opportunity cost of the plant is the value of the enjoyment you otherwise expected to
receive from the smart phone.

The concepts of scarcity, choice, and opportunity cost are at the heart of economics. A
good is scarce if the choice of one alternative requires that another be given up. The existence
of alternative uses forces us to make choices. The opportunity cost of any choice is the value of
the best alternative forgone in making it.

ANSWER THIS:

Identify the elements of scarcity, choice, and opportunity cost in each of the following:

1. The Department of Natural Resources and Environment (DENR) is considering an order

that a 5000-hectare area outside Marawi City be preserved in its natural state, because
the area is home to a deer that is considered an endangered species. Developers had
planned to build a housing development on the land.
2. The manager of Hacienda Luisita is considering whether to produce corn or Ashitaba next
cropping season. Assume that the quantities of labor and other materials required would
be the same for either type of production.
3. A young man who went to work as an electrician’s aide after graduating from senior high
school leaves his job to go to college, where he will obtain training as a registered electrical
engineer.

The Economic Way of Thinking

Economists study choices that scarcity requires us to make. This fact is not what
distinguishes economics from other social sciences; all social scientists are interested in choices.
What is it about the study of choices by economists that makes economics different from these
other social sciences?

Three features distinguish the economic approach to choice from the approaches taken in other
social sciences:

1. Economists give special emphasis to the role of opportunity costs in their analysis of
choices.

2. Economists assume that individuals make choices that seek to maximize the value of
some objective, and that they define their objectives in terms of their own self-interest.

3. Individuals maximize by deciding whether to do a little more or a little less of

something. Economists argue that individuals pay attention to the consequences of small
changes in the levels of the activities they pursue (the analysis of choices at the margin).
Why Study Economics?
1. A basic understanding of economics is essential for well-informed citizenship.

2. Since economics lays great stress on precise, systematic analysis, studying

economics invariably helps students improve theater analytical skills, which are
in great demand in the workplace.
3. Economics is also vital to business. An understanding of the basics of economic
decision making and the operation of the economic system enables business
manager and executives to increase profit.
4. Economics helps consumers and workers make better buying and employment
decisions and better financial decisions.

Knowledge of economics and mastery of economic perspective will help you run
business or manage your personal finances, but that is not the subject’s primary
objective. Instead, economics ultimately examines problems and decisions
from social rather than the personal point of view. The production, exchange,
consumption of goods and services are discussed from the viewpoint of society's
best interest, not strictly from the standpoint of one's own pocketbook.

Economic Methodology
Like the physical and life sciences, as well as other social sciences, economics
relies on the scientific method. It consists of a number of elements:
1. The observation of facts (real-world data)
2. Based on those facts, the formulation of a possible explanation of cause and
effect (hypothesis).
3. The testing of this explanation by comparing the outcomes of specific events and
the outcome predicted by the hypothesis.
4. The acceptance, rejection, or modification of the hypothesis, based on the eco
comparisons.
5. The continued testing of the hypothesis against the facts
6. As favorable results accumulate, the hypothesis evolves into a theory.

A very well tested and wide accepted theory is referred to as a law or principle.
Combinations of such laws or principles are incorporated into models-simplified
representations of how something works, such as a market or segment of the
economy.
Laws, principles, and models enable the economist, like the natural scientist
understand and explain reality and to predict the various outcomes of particular
actions. But as we will soon see, economic laws and principles are usually less certain
than the laws of physics or chemistry.
 Economic theories and principles are statements about economic behavior or
the economy that enable prediction of the probable effects of certain actions. They
are actually generalizations relating to economic behavior or the economy itself.

Other-Things Equal Assumption

Like other scientists, economists use the ceteris paribus or other-things-equal

assumption to construct their generalizations. They assume that all other variables except those
under immediate consideration are held constant for a particular analysis.

Abstractions
Economics principles, or theories, are abstractions - Simplification that omits
irrelevant facts and circumstances.

Macroeconomics and Microeconomics

Economists derive and apply principles about economic behavior at two levels.

Microeconomics looks at the specific economic units. At this level of analysis, the
economist observes the details of an economic unit, or very small segment of the
economy.
Macroeconomics examines either the economy as a whole or its basic subdivisions or
aggregates, such as the government, household, and business sectors.

Positive and Normative Economics

Both macroeconomics and microeconomics involve facts, theories, and policies.
Each contains elements of positive economics and normative economics.
Positive economics focuses on facts and cause-and effect relationships. It includes
description, theory development, and theory testing (theoretical economics).
Normative economics, incorporates value judgments about what the economy should be like
or what particular policy actions should be recommended to achieve a desirability of certain
aspects of the economy.
Examples:
Positive statement: “The employment rate in several European nations is higher than
that in the United States.
Normative statements: "European nations ought to undertake policies to reduce their
unemployment rates.
Positive statement: "Other things equal, if tuition is substantially increased, college
enrollment will fall."
 Normative statement: "College tuition should be lowered so that more students can
obtain an education."

SUMMARY

Choices are forced on us by scarcity; economists study the choices that people make.
Scarce goods are those for which the choice of one alternative requires giving up another. The
opportunity cost of any choice is the value of the best alternative forgone in making that choice.
Some key choices assessed by economists include what to produce, how to produce it, and for
whom it should be produced. Economics is distinguished from other academic disciplines that
also study choices by an emphasis on the central importance of opportunity costs in evaluating
choices, the assumption of maximizing behavior that serves the interests of individual decision
makers, and a focus on evaluating choices at the margin. Economic analyses may be aimed at
explaining individual choice or choices in an individual market; such investigations are largely the
focus of microeconomics. The analysis of the impact of those individual choices on such
aggregates as total output, the level of employment, and the price level is the concern of
macroeconomics. Working within the framework of the scientific method, economists formulate
hypotheses and then test them. These tests can only refute a hypothesis; hypotheses in science
cannot be proved. A hypothesis that has been widely tested often comes to be regarded as a
theory; one that has won virtually universal acceptance is a law. Because of the complexity of the
real world, economists rely on models that rest on a series of simplifying assumptions. The models
are used to generate hypotheses about the economy that can be tested using real-world data.
Statements of fact and hypotheses are positive statements. Normative statements, unlike positive
statements, cannot be tested and provide a source for potential disagreement.