BM 221/ECON 124

Managerial Economics

Overview of Economics

Dr. Judy Ann Ferrater-Gimena

—
Economics
Economics – it is a social science with wise allocation of scarce resources
to produce goods and services, distributed them for consumption, to be
able to attain maximum satisfaction.
- is the study if the proper allocation and efficient use of scarce
resources to produce commodities for the satisfaction of unlimited needs
and wants of man
Father of Economics- Adam Smith-Scottish
17th century- An Inquiry into the Nature and Causes of the Wealth of Nation
5 principles
1. Invisible Hand-each works using one’s self-interest, nevertheless benefits the
whole market
2. Laissez-faire- absence of governmental control over business
3. Division of Labor-each individual person will specialized in part of the
production system
4. Free trade- non-governmental intervention in trading among nations (no
tariff/no quota
- accordance to the principles of natural liberality
5. Free enterprise- non-governmental intervention in the operation of
commercial enterprise
Industrial Revolution – 18th century England
introduction of machine in factories
Circular Flow of Economic Activity
 The Economic Activity of Man
4 sectors of the economy
1. Household- consuming unit
2. Business firm-producing unit Closed
3.Government-controls all other economic activities of man-economy
taxing power-revenue
buys goods from firms
hires labor
4. Rest of the World-exports and imports- Open economy
globalization)

Available resources < insatiable human wants

 4 factors of production
— Land- natural resources - Rent

— Labor-human effort exerted by man (intellectual, emotional,

psychological, physical)-Salaries & wages

— Capital-man-made resources- Interest

— Entrepreneurship/entrepreneurial ability- it entails special

ability of man in combining all other economic resources
(management, innovative, creative, etc.)-profits
 4 Economic Activities
1. Production- creation of human satisfying goods.
Transformation of inputs/raw materials into output

2. Distribution-transfer of position of the goods/services

from one sector to another sector

3. Exchange-financial transactions involves money

4. Consumption- using the goods and services

 Pillar of Economic Policy
— Scarcity- limited resources

— Choice- 5 Economic Questions

1. What goods and services to produces?- Set a system of prioritization
2. How to produce goods and services?-Methods of production- Traditional
method vs. modern method
3. For whom the goods and services to produce?
4. How much to produce?
5. When (normal & seasonal commodities) and where to produce?
Accessibility of production
1. accessible to the market
2. accessible to labor
3. accessible to the source of raw materials
4. accessible to the means of transportation

— Opportunity cost-value of foregone alternative

 Goals of Economics

ü To strengthen economic freedom-includes consumer choice, freedom of

occupational choice, freedom to consume or save, freedom to own properties, and
freedom of enterprise.
ü Promote economic efficiency-producing more output with the use of fewer
resources. There are many factors that contribute to efficiency-modern technologies,
machines and managerial skills
ü Promote economic stability-absence of volatile ups and downs in the economy.
The goal is consistent growth in a changing world, thus the movement of output of
the economy, employment and prices of goods and services should be kept at
reasonable ranges.
ü To improve economic security- continuous existence of market economy
depends on the economic security, because incomes are established in the market
place.
ü Attaining a high level of growth in the economy-means that the capacity to
produce goods and services is increasing, and it is growing more rapidly than the
population. Growth is determined by: 1. expansion in the resources available for
producing goods and services; and 2) improved skills & technology, including
managerial and entrepreneurial skills so that more goods and services an be
produced from the given resources.
 Divisions of Economics
— Microeconomics- pertains to the study of the behavior of
individual units in the economy

— Household & business firms

— Classical economics

— Macroeconomics- economy of the whole

(Employment & unemployment, inflation (increasing in the general
prices of the goods, monetary & fiscal policies)

1920’s- prosperous years for the US economy

1929- Wall Street collapse- Great Depression of 1930’s

1935-British John Maynard Keynes- General Theory of Employment
Interest & Money
-level of aggregate demand
 Economic Analysis and Policy

— Economic Analysis- is the process of directing economic

relationships by examining economic behavior and events, and
determining the causal relationships among the data and
activities observed.
1. Logic- is used to analyze relationships among economic
variables from particular to general (inductive) or through
deductive (from general to particular).
2. Statistics to quantitatively describe economic behavior and
serve as basis for hypothesis testing. A hypothesis becomes a
principle or theory when empirically validated.
3. Mathematics enables analysts to conceptualize and quantify
a hypothesis for empirical validation
 Purposes of Economic Analysis

1. Economic analysis is an aid in understanding how

economy operates because it explains how economic
variables are related to one another.

2. It permits prediction of the results of changes in the

economic variables.

3. It serves as basis of policy formulation.

 Economic Policy

— Consists of intervention or courses of action taken by the

government or other private institutions to manipulate the
results of economic activity.

— The policy adopted by the government may be monetary,

fiscal, or trade for the purpose of achieving economic
welfare.
 Scientific Methods of Economics

— Economics being a social science, is a systematic body of knowledge.

Economists have developed techniques, referred to as the scientific
approach or method in data gathering, data presentation and data
analyses, that make starting point in understanding economic issues and
eventually lead to creating decisions.
— Variables-are measures that can change from time to time from
observation to observation.
— Theory/Hypothesis-statement of the proposed relationship between two
or more variables
-unproven proposition tentatively accepted to explain
certain facts or to provide a basis for further investigation
— Model-a formal statement of a theory, usually mathematical statement of
a presumed relationship between to or more variables
— Principles- hypothesis that had withstand the rigors of testing (foolish
to regard set or principles and theories as absolute truth
— Law- absolute truth
 Construction of Economic Theory

1. Definition of the problem- Specification and definition of its postulates

2. Data Gathering-observation of the “facts” concerning the activity about
which we want to theorize
- observation, interview, data gathering tools
3. Economic analyses- application of the rules of logic to the observed facts in
an attempt to establish causal relationship among them and to eliminate as may
irrelevant and insignificant facts as possible
4. Hypothesis Testing- Once hypothesis have been formulated, they must be
thoroughly tested to determine the extent of which they are valid, that to the
extent to which they yield good explanations and predictions.
- apply statistics
ü Those hypothesis that will hold up most of the time in most of the
circumstances to which they are relevant- principles.
ü It would be foolish to regard a set of principles as a theory as an absolute
truth
 Functions of Economic Theory

The principal functions of economic theory fall into two

categories:
1. Explain the nature of economic activity
2. Predict what will happen to the economy as fact change

— The explanation of the nature of economic activity enables

us to understand the economic environment in which we
live-how part relates to others and what causes what.
— We would also like to be able to predict with some degree
of accuracy what is likely to happen to the key variables
that affect our well-being and to be able to do something
about them if we dislike the predicted consequences
 METHODOLOGIES OF ECONOMICS

— Economists differentiate between positive economics and

normative economics on the basis on whether the users of
theory are concerned with causal relationship only or
whether they intend some kind of intervention in
economic activity to later the course of that activity.
— POSITIVE ECONOMICS- describes the facts and data in
the economy, description of economic outcomes, with what
exist, how it works, without making judgment

— NORMATIVE ECONOMICS- judges economic outcomes;

what out to be, policy economics-courses of action (Law/
legislations)
 Ways of Expressing theories and models
— Verbal statement

— Tabular

— Graphical

— Mathematical notation