ACC-101: MANAGERIAL ECNOMICS

LESSON 2:
1ST SEMESTER | A.Y. 202Y – 202Y
LECTURER: SIR/MS.

The Economic Problem: Scarcity and Choice product and engage in free trade with other
products that you do not have
What is Production?

 Production is the process by which resources are Absolute Versus Comparative Advantage
transformed into useful forms. Output per Day of Work
 Resources, or inputs, refer to anything provided by Food Clothing
nature or previous generations that can be used Country A 6 3
directly or indirectly to satisfy human wants. Country B 1 2
o Capital resources/Man-made Resources
o Human resources/Labor Resources
o Natural resources/Land Resources  Country A has an absolute advantage because it
can produce more food and more clothing in one day
Three Basic Questions than country B.
 Country A has a comparative advantage in the
 The mechanics of decision making in a larger
production of food because a worker in country A can
economy are more complex, but the type of
produce 6 times as many units of food as a worker in
decisions that must be made are nearly identical.
country B, but only 1.5 as many units of clothing.
 All societies must decide:
o Relatively, country A is more developed than
o What will be produced?
country
o How will it be produced?
o Who will get what is produced? Output per Day of Work
Food Clothing
Country A 6 = 6/6 = 1 3 = 3/6 = 1/2
Country B 1 = 1/1 = 1 2 = 2/1 = 2

Country A 6 = 6/3 = 2 3 = 3/3 = 1

Country B 1 = ½ = 1/2 2 = 2/2 = 1

 The opportunity costs can be summarized as follows:

 For food:
Specialization, Exchange and Comparative o 1 unit of food costs country A ½ unit of
Advantage clothing.
 The opportunity cost of country A for
 David Ricardo developed the theory of food is ½ unit of clothing
comparative advantage to explain the benefits of o 1 unit of food costs country B 2 units of
specialization and free trade. The theory is based clothing.
on the concept of opportunity cost:  The opportunity cost of country B for
o Opportunity cost is that which we give up food is 2 unit of clothing
or forgo, when we make a decision or a o For this example, Country A is better
choice. producer of food kasi ½ clothing lang ang
 According to the theory of competitive advantage, sinasacrifice niya. So Country A has a
specialization and free trade will benefit all trading comparative advantage in terms of food
parties, even those that may be absolutely more production than Country B
efficient producers.  For clothing:
o In other words, even if you are a better o 1 unit of clothing costs country A 2 units of
producer than another country, you still food.
benefit when you specialize on a certain o 1 unit of clothing costs country B ½ unit of
food.

Page | 1
 o In terms of clothing, Country B has a
comparative advantage because it only gives
up ½ unit of food, compared Country A, who Capital Goods and Consumer Goods
gives 2 units of food  Consumer goods are goods produced for present
 Conclusion: consumption. (final products)
o Country A will specialize in producing food,  Capital goods are goods used to produce other
and country B will specialize in the production goods or services over time. (For investments)
of clothing.
o Country B, which is a less developed country
can be more a more efficient producer also if
The Production Possibility Frontier
we look at the opportunity cost of both
countries  The production possibility frontier (PPF) is a graph
o The theory of comparative advantage says that shows all of the combinations of goods and
that if you are giving up less than another services that can be produced if all of society’s
country is giving up in terms of production, resources are used efficiently.
you can be an efficient producer of whatever
product you specializes
o Country A could also trade with Country B for
clothing and Country B will trade with Country
A with its food requirements
o You specialize at whatever you good at and
the rest of the goods that you need, you just
trade with another country
 Specialization also works to develop skills and raise
productivity.
o If palagi mo ginagawa, magiging bihasa ka s  The PPF is a concave curve with respect to the origin
apaggawa ng product na yon o Convex yung kabaliktaran
o You are able to develop skills and raise  The production possibility frontier curve has a
productivity if ayon yung ginagawa mo negative slope that indicates the trade-off that a
everyday society faces between two goods.
o In the case of product possibility frontier
curve, we have a downward slope or a
Weighing Present and Expected Future Costs and negative sloping curve—meaning tumaas
Benefits yung isa, baba yung isa or vice versa
o There’s always a trade that you have to face
 Investment is the process of using resources to  The slope of the PPF is also called the marginal rate
produce new capital. Capital is the accumulation of of transformation (MRT).
previous investment.
 Because resources are scarce, the opportunity cost
of every investment in capital is forgone present
consumption.
o If you invest a particular resource, you will
forego its present use—kasi gagamitin mo
yung investment for the future use
o When you invest your product on a certain
product or service, you forego present
consumption—meaning hindi mo siya
magagamit sa ngayon. Gagamitin mo siya in
the future hoping na kikita yung investment
mp  Points inside of the curve are inefficient.
o So any point inside of the curve means that
Example of Investments you are not maximizing the use of your
o Time deposit resources
o Health Insurance o Because the point of efficiency are found
o Real Estate points along the curve or along the line
o Educational Plan
o Stocks
Page | 2
 o At any point along the line, you are producing same. We need to give up or sacrifice
at maximum capacity or you are utilizing all something in order to produce more of the
your resources efficiently other
 At point H, resources are either unemployed, or are
used inefficiently.
o So di siya nagagamit gn wasto The Law of Increasing Opportunity Cost

 Point F is desirable because it yields more of both

goods, but it is not attainable given the amount of  The concave shape of the production possibility
resources available in the economy. frontier curve reflects the law of increasing
o The point is already outside the PPF curve— opportunity cost.
it’s not attainable at the moment  As we increase the production of one good, we
sacrifice progressively more of the other.
o e.g. Corn and Wheat – magkaiba naman
yung use of resources
o Learning Curve – you also have to spend
some additional cost if you transfer your
production from corn to wheat or vice versa.
There are costs involved.

Economic Growth

 Economic growth is an increase in the total output

 Point C is one of the possible combinations of goods of the economy. It occurs when a society acquires
produced when resources are fully and efficiently new resources, or when it learns to produce more
employed. using existing resources.
 The main sources of economic growth are capital
accumulation and technological advances.

 A move along the curve illustrates the concept of

opportunity cost.  Dati ang kaya mo lang i-produce ay 550 Capital
 In order to increase the production of capital goodso, Goods at 1,300 Consumer Goods. But because,
the amount of consumer goods will have to decrease. maybe, technological advancements or you are able
o To produce more capital goods, you have to to source new raw materials/resources, you are able
decrease the production of your consumer to increase your product of both Capital and
goods—because of limited resources, you Consumer goods
cannot produce of more both goods at the  Outward shifts of the curve represent economic
growth.
Page | 3
 To increase the production of one good without o There are market forces
decreasing the production of the other, the PPF curve o Laissez-faire = “leave alone”
must shift outward. o It is the market that decides what goods and
 From point D, the economy can choose any services should be produced—kung ano ba
combination of output between F and G. yung demand o gusto ng tao, ayo yung
ibebenta ng sellers
 A market is the institution through which buyers and
sellers interact and engage in exchange.

Laissez-Faire Economies: The Free Market

 Consumer sovereignty is the idea that consumers

ultimately dictate what will be produced (or not
produced) by choosing what to purchase (and what
not to purchase).
 Free enterprise: under a free market system,
individual producers must figure out how to plan,
 Not every sector of the economy grows at the same organize, and coordinate the production of products
rate. and services.
 In this historic example, productivity increases were o In a market economy, there’s what we call
more dramatic for corn than for wheat over the 50- “Peso Votes”—parang you cast your vote on
year period. a particular product.
o Pag maraming may gusto ng milktea,
maraming bibili ng milktea kasi ang daming
The Economic Problem bumoboto kumabaga
o In a market economy, ang consumer ang
 The economic problem: Given scarce resources,
nasusunod in coordination with the seller
how, exactly, do large, complex societies go about
 The distribution of output is also determined in a
answering the three basic economic questions?
decentralized way. The amount that any one
o All economies have to answer these 3 basic
household gets depends on its income and wealth.
economic problems
o Unlike in command economy, it is centralized
 Economic systems are the basic arrangements
 The basic coordinating mechanism in a free-market
made by societies to solve the economic problem.
system is price. Price is the amount that a product
They include:
sells for per unit. It reflects what society is willing to
o Command economies
pay.
o Laissez-faire economies
o Nagkakasundo ang buyer at seller sa price
o Mixed systems
 In a command economy, a central government
either directly or indirectly sets output targets,
incomes, and prices.
o Owned by government—government owned
almost everything
o “what goods and services to be produced will Mixed Systems, Markets, and Governments
be dictated by the government?”
o Everything is dictated by the government  Markets are not perfect, and governments play a
major role in all economic systems in order to:
 In a laissez-faire economy, literally from the French: o Minimize market inefficiencies
“allow (them) to do,” individual people and firms o Provide public goods
pursue their own self-interests without any central o Redistribute income
direction or regulation. The central institution of a o Stabilize the macroeconomy
laissez-faire economy is the free-market system.  Promote low levels of unemployment
o There is private ownership of resources—you  Promote low levels of inflation
can put up your own business or property  The government has still its role even if you are a free
o Through demand and supply, it will answer all enterprise or a laissez-faire economy—may role pa
the 3 economic problems—it will all depend rin na dapat gampanan ang gobyerno
on the market

Page | 4
Public Goods – are produced by the government for
public consumption. Products that only the government
has the incentive to produce.

o Examples: infrastructure—road, public buildings.

public schools, national security, bridges, waiting
sheds, police, firemen, etc.
o Characteristics of Public Goods:
Non-rival – if someone is using it, you can still use
it

Non-excludable – no one is excluded from using

it, whether you are rich or poor, or paying taxes
or taxes. You are not excluded from enjoying the
benefit provide by public goods

Private Goods – produced by private companies

o Examples: car, Expressways 9NLEX, SLEX)

Page | 5