Introduction to Economics ECONOMIC GOALS

LEARNING OBJECTIVES:
1. Define economics.
2. Discuss the importance and goals of economics.
3. Explain the ten principles of economics.
4. Determine the gains from trade.
Economic Efficiency Economic Growth Lower Unemployment Rate
5. Differentiate microeconomics from macroeconomics.
6. Discuss the methodologies of economics.
7. Identify the fundamental economic problems using the concept of economics
as a basis.
8. Differentiate various economic systems being practiced in different countries;
and
Favorable International Economic Freedom Economic Security
9. Discuss the circular flow of the economy and its components.
Trade
What is ECONOMICS?
Economics “the science of constrained choice”
TRADE-OFF
A trade-off (or tradeoff) is a situational decision that involves diminishing or
losing one quality, quantity or property of a set or design in return for gains in
other aspects. Economic Equity Economic Stability

OPPORTUNITY COST
Ten Principles of Economics
The costs or value of the choice NOT taken when you choose to do ONE thing.
A. How People Make Decisions
B. How People Interact C. How the Economy Works as a Whole
The principles of injection (injecting/adding money into the economy) is lower unemployment and higher prices.

A. How People Make Decisions

1. People Face Trade-offs
2. The Cost of Something is What You Give Up to Get It
3. Rational People Think at the Margin
*Economists generally assume that people are rational.
4. People Respond to Incentives
*Because rational people make decisions by comparing costs and benefits, they respond to
incentives.

The principles of
B. How People Interact
5. Trade can Make Everyone Better Off
6. Markets are usually a Good Way to Organize
Economic Activity
*Adam Smith made the observation that when households and firms interact in markets guided by
the invisible hand, it will result to society’s economic well-being.
7. Governments can Sometimes Improve Market Outcomes
The principles of
C. How the Economy Work as a Whole
8. A Country’s Standard of Living Depends on its
Ability to Produce Goods and Services
9. Prices Rise when the Government Prints Too
Much Money
10. Society Faces a Short-Run Trade-off between
Inflation and Unemployment
*Most economists believe that the short-run effect of a monetary
What if one country is better at everything?The theory of comparative
advantage provides this answer.

THINK ABOUT IT!!

BRANCHES OF ECONOMICS
MICROECONOMICS

✓ The prefix micro is derived

from the Greek word mikros,
which means “small”.

✓ Microeconomics therefore
studies the economic behavior of
individual economic decision
makers, such as a consumer, a
worker, a firm, or a manager.

✓ It also analyzes the behavior

of individual households,
industries and markets.
Examples:
 o Individual income and saving decisions of the consumer.
o Sari-sari store
o The housing market of a particular city/neighborhood.
o Individual firm’s output.
MACROECONOMICS

✓ By contrast, the prefix macro comes from the Greek word makros, which means “large.”

✓ Macroeconomics thus analyzes how an entire national economy performs. A course in

macroeconomics would examine aggregate levels of income and employment, the levels of interest
rates and prices, the rate of inflation, and the nature of business cycles in a national economy.
Examples:
o Gross Domestic Product
o Unemployment Rate
o National Savings

Methodologies of Economics
POSITIVE ECONOMICS o In improving the lives of people in poverty-stricken areas, the BSP should
carefully manage the level of inflation in the country”
✓ It is the approach that
o Pollution is the most serious economic problem.
tells us what it is. It is
factual, objective and The Fundamental Economic Problem
is used to describe the
1. What goods and services to produce and in what quantities?
occurrence of
a phenomenon. 2. How these goods and services should be produced and how much?
It is an economic analysis that explains what happens in the economy and why, 3. For whom should these goods and services be produced?
without making any recommendations to economic policy, or in simple idea, it
deals with how the economy works.
Examples: If we are going to closely analyze the three economic problems of economics,
these merely focus on the limitation of resources or the factors of production.
o A fall in incomes will lead to a rise in demand for own-label supermarket There is also the question on how to undertake the choosing of some
foods. combination of labor, equipment, building, and land to produce the goods and
o The rising price of crude oil on world markets will lead to an increase in services that people want. All these components of production are called
cycling to work. resources or factors of production which have an important role in answering the
o If the government raises the tax on beer, this will lead to a fall in profits of three economic questions.
the brewers.
Economic Resources also called as the factors of production. These are the things
NORMATIVE ECONOMICS needed to carry on production.
✓ It is the approach which tells us what should be, or what ought to be. It is more
subjective and more judgmental than positive economics. It is a statement that
makes recommendation to economic policy. This employed to make value
judgments about the economy and suggest solutions to economic problems.
Examples:
o The government should increase the minimum wage to P500 per day to
reduce poverty.
Factor Payment is the payment for the factors of production. Traditional Economy
One whose economic decisions is made with the great influence in the past. It
finds answers to the economic problems by copying and duplicating the decisions
made by previous generations.

Characteristics of Traditional Economy:

A. Communal land ownership;
B. The leader decides on the management of agricultural production which is
the basis of the economy;
C. The production, distribution, and use of economic resources are based on
traditional practices;
D. New technologies are not welcome since they are in contrast with the
traditional practices of their ancestors;
E. The economy is only its third priority while culture and its religion are its
foremost priorities; and
F. Mines are used to gather raw materials for production.

The Economic System

Command Economy/ Communism
Economic system refers to a set of economic institutions that dominate a
An economic system that society uses in allocating the scarce resources is
given economy with the main objective of solving the fundamental economic
the command economy. In this economic system, the factors of production are
problems.
owned and managed by the state.
The four economic systems or categories are traditional, command, free
market, and mixed market.
Characteristics of Command Economy:
A. Resource allocation is done by the government;
 B. Presence of central planning of all economic activities; Characteristics of Mixed Economy:
C. There is no free competition (the government is the only seller);
D. Only the government plays the role in setting legal framework for
economic life production and distribution of goods and services; and
E. The products or needs of the people are distributed based on priorities set
by the committee.

Market Economy/Capitalism
This economic system was different to the first two economic systems. Here,
individual consumers and businesses interact to solve the economic problems.

Characteristics of Market Economy: A. The means of production are owned and controlled by the private sector as
well as the government;
A. The private sector owns and manages the means of production;
B. The people decide on economic activities within the economy;
B. The price system in a market structure applies to determine how much will
C. The combinations of the best features of capitalist and command
be paid for a certain commodity or service;
economies are observable in the market; and
C. It is also known as laissez-faire;
D. The problem of distribution of goods and services and allocation of
D. There is minimum government interference on decisions pertaining to the
economic resources are determined through a combination of the market
management of the economy;
system and governmental laws and policies.
E. Existence of competition often results to monopoly; and
F. There is a presence of economic power. Law of Scarcity
The law of scarcity states that the goods are scarce because there are no
enough resources to produce all the goods that people want to consume.
Mixed Economy/Socialism
Goods can be classified as:
It is a mixture of capitalism and communism. It contains the characteristics of
both economic systems. 1. Consumer Goods and Capital Goods
2. Essential Goods and Luxury Goods
 3. Public Goods, Free Goods, and Economic Goods
There are also goods and services that counter the law of demand.

Veblen Good and Giffen Good

All human beings are using goods and services to satisfy their need and
wants. The act of making goods and services is called production, and the act of
using them to satisfy human wants is called consumption. Economists call such
resources factor of production because they are used to produce those things
that people desire. And these things are called commodities. These commodities
may be divided as goods and services.