Republic of the Philippines CvSU Mission

CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
ECON23: BASIC MICROECONOMICS for global competitiveness.

MODULE 01: CONCEPTS OF ECONOMICS

TOPICS:

✓ Economic Activity
✓ Price Theory
✓ Economic Theory
✓ Basic Economic Problems
✓ The Circular Flow of Economic Activity; and
✓ Economic System Models

LEARNING OBJECTIVES:

✓ Identify different activities involved with economics;

✓ Discuss the price and economic theory
✓ Relate the price and economic theory to relevant and current situations;
✓ Justify the fundamental economic problems using the concept of economics as a basis;
✓ Discuss the circular flow of the economy and its components;
✓ Differentiate various economic systems being practiced in different countries;

Concepts of Economics – Module 1

Economics

It has been discussed and described by scholars in number of satisfying ways:

✓ … studies the efficient allocation of the scarce means of production toward the satisfaction of human wants. (Slavin)
✓ … a social science concerned with using scarce resources to obtain maximum satisfaction. (Walstad and Bingham,
1993)
✓ … the study of how societies use scarce resources to produce valuable commodities and distribute them among
different people. (Samuelson and Norhaus, 1992)
✓ … the study of production, distribution, selling, and use of goods and services. (Collin, 1997)
✓ … the study of how people use their limited resources to try to satisfy unlimited wants. (Parkin and Bade, 1991)
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally
According to The Economist website, the most concise definition of economics is; the study of howupright individuals
society uses its
for global competitiveness.
scarce resources, defined by Thomas Carlyle, a 19th-century Scottish philosopher and writer.

Economics, thus, lay emphasis on the need to take full advantage of our material output given an amount of resources.
The crucial truth, however, these resources are only limited suffering from scarcity – imbalance between human needs and
wants and the means of satisfying those, considering this as the central economic problem.

Human desires are never ending whether it is a need or a want, especially now where different innovations have been
taking the spot of everyone’s attention. Nobody could deny the fact that the world is in a fast-pacing regime due to the
advent of new technologies. The primary problem is, there are never enough resources to produce all of the goods and
service4s that people want. This is where the company plays its role.

An economy relates the study of human action and how people should make choices. It is a system for organizing the
allocation of resources to produce and distribute the goods and services to satisfy human wants. The more proficient and
flexible the economy is, the more wants we can satisfy.

Economic Activity

The economic activity definition pertains to the production, supply, buying, or selling of goods or services and its
primary purpose of economic activity is to satisfy the needs and desires of individuals. The consumption of a good or service
is also considered an economic activity. These activities occur in a wide variety of ways, degrees, and complexities in
society. The term is normally used in theory as an element that drives economies. This is tied to the purpose of economic
activity as a means of gaining wealth and generating revenue. Economic activity is the driving force behind the flow of
goods and services in an economy. The physical distribution of things around an economy is another form of activity.

Types of Economic Activities

a. Primary Economic Activity

✓ Primary economic activity usually involves raw materials (mainly collecting them). This can include
logging, mining, and farming. Many smaller and less developed countries rely on these activities and export
the materials. The types of materials a country can collect or harvest are primarily tied to physical
geography.
b. Secondary Economic Activity
✓ Secondary economic activity is usually the next step in production following the collection of raw materials.
This often results in manufacturing something from those materials, such as paper from wood or pulp, or
refining ore into metal.
c. Tertiary Economic Activity
✓ Tertiary economic activity involves services to other people. From hospitals to taxis, tertiary activities make
up the vast majority of developed countries' economic activity, with 80% of the jobs falling under the
tertiary economic sector. Tourism, banking, transport and commerce are more examples of tertiary activities
d. Quaternary Economic Activity
✓ Quaternary economic activity is intellectual based. It involves work that creates, maintains, transports or
develops information. This includes research and development companies and many activities involving
information such as internet technology or computer engineering.
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
Price Theory
for global competitiveness.

✓ The theory of price is an economic theory that states that the price for a specific good or service is determined by
the relationship between its supply and demand at any given point. Prices should rise if demand exceeds supply and
fall if supply exceeds demand.

a. Price - the specific amount of money a buyer needs to pay to acquire a product or service. It is a fixed or stated
value for a particular item.
b. Pricing - the strategy, process, or method a business uses to determine the price of its products or services. It
includes factors such as costs, competition, market demand, and perceived value.

Pricing Strategies

1. Customer Value-Based Pricing

✓ The idea behind customer value-based pricing is to price a product based on the value it brings to customers
rather than the cost of producing it. Thus, the pricing decision starts by examining customer value - how
much the product is worth to customers. Within value-based pricing, there are two further pricing
approaches.
a. Good-value pricing - involves offering a quality product and good service at a reasonable price.
b. Value-based pricing - includes adding value through product features and services to justify the higher
prices.

2. Cost-Based Pricing
✓ involves setting prices based on the costs incurred by producing and marketing the product. This pricing
method sets a floor price which means a minimum price a company should charge to recover costs. One of
the most common cost-based pricing methods is cost-plus pricing. Cost-plus pricing involves adding a pre-
set mark-up to the cost of producing a product (e.g. adding a 20% mark-up).

3. Competition-Based Pricing
✓ The final primary pricing strategy is competition-based pricing. Competition-based pricing involves setting
prices based on competitors' pricing strategies. To use this approach, a company has to examine its
competitors and their strategies, including:
a. Competitors' market offering,
b. Customers' value perception of competitors' offerings,
c. Competitors' current pricing strategies,
d. How strong/weak competitors are,
e. Whether there is a niche/underserved market.

Adam Smith was an 18th-century Scottish economist, philosopher, and author who is considered the father of modern
economics. Smith argued against mercantilism and was a major proponent of laissez-faire economic policies. In his first
book, The Wealth of Nations (1776), Smith proposed the idea of an invisible hand theory—the tendency of free markets to
regulate themselves using competition, supply and demand, and self-interest. It is when people act in their own interests,
they can unintentionally help society.
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
Economic Theory
for global competitiveness.

It is defined as the study that aims to develop methods to meet the basic human needs of everyone and contribute to
resolving conflicts of interest without violence, ultimately promoting general welfare and peaceful transformation of
conflicts in society. It is also a set of principles, concepts, and models that aim to explain how economies function and how
individuals, businesses, and governments make decisions regarding resource allocation, production, and consumption. It is
the foundation of economics as a discipline, providing tools to understand various economic phenomena and predict
outcomes based on different variables.

Economic Theory provides an outlet for research in all areas of economics based on rigorous theoretical reasoning
and on topics in mathematics that are supported by the analysis of economic problems. Published articles contribute to the
understanding and solution of substantive economic problems.

Three Major Theories of Economics

1. Neoclassical Economic Theory

✓ Alfred Marshall, William Stanley Jevons, Léon Walras
✓ Neoclassical economics is centered on the idea of supply and demand as the primary forces that determine
prices, output, and resource allocation. It assumes that individuals and firms act rationally, seeking to
maximize utility (consumers) and profit (firms), while markets are generally efficient. It emphasizes market
efficiency, rational choices, and minimal government intervention, with the belief that market forces
naturally lead to equilibrium.
2. Keynesian Economic Theory
✓ John Maynard Keynes
✓ Keynesian economics challenges the neoclassical view that markets are always self-correcting, particularly
during economic downturns. Keynes argued that insufficient aggregate demand (total spending in the
economy) could lead to prolonged periods of high unemployment and underutilized resources. It advocates
for active government intervention, particularly in times of economic downturns, to manage demand and
prevent prolonged periods of unemployment and economic instability.
3. Marxian Economic Theory
✓ Karl Marx
✓ Marxian economics critiques capitalism from the perspective of class struggle and focuses on the
contradictions within the capitalist system that, according to Marx, would eventually lead to its downfall.
Marxian theory argues that capitalism inherently exploits workers (the proletariat) by paying them less than
the value they produce, with the surplus (profit) being appropriated by capitalists (the bourgeoisie). It offers
a critique of capitalism, focusing on the inherent inequalities, class struggles, and exploitation within the
system, predicting its eventual demise and replacement with socialism.
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
The Three Economic Questions
for global competitiveness.

The concept of the three economic questions—what to produce, how to produce, and for whom to produce—does not
have a single specific creator. Rather, it is a foundational concept in economic theory that has been developed and refined
over time by numerous economists and thinkers.

However, it is deeply rooted in the works of classical economists such as:

a. Adam Smith: In his book The Wealth of Nations (1776), Smith explored how markets function to allocate resources
and answer the fundamental economic questions through the "invisible hand" of supply and demand.
b. David Ricardo and John Stuart Mill: These economists also contributed to the development of classical economic
thought, focusing on the allocation of resources, distribution of wealth, and production processes.

What to Produce?

This question addresses what goods and services should be produced, given the limited resources available. Societies must
decide which goods to focus on based on factors like consumer demand, resource availability, and economic priorities. For
example, should more resources be allocated to healthcare, education, or luxury goods?

How to Produce?

This question deals with the methods of production. It asks how resources (labor, capital, land) should be combined to
produce goods and services. Societies must decide whether to use labor-intensive or capital-intensive production methods,
considering cost efficiency, technology, and environmental impact.

For Whom to Produce?

This question focuses on distribution—who will receive the goods and services that are produced. It deals with how the
output of the economy is distributed among different individuals and groups in society, addressing issues like income
inequality and social welfare.

The Circular Flow of Economic Activity

It refers to the flow of money around an economy. The flow of money refers to how money moves through an
economy by constantly being exchanged for goods and services. Money can move into this system by way of injections or
flow out in the form of leakages.
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
for global competitiveness.

The three-sector model of the circular flow of income includes households, businesses (companies), and the
government. This model illustrates how money, resources, goods, and services circulate through an economy. Here’s how
each sector functions:

1. Households
✓ Households provide the factors of production (labor, land, capital, and entrepreneurship) to businesses and
the government. In return, they receive income in the form of wages, rent, interest, and profits.
✓ Households use this income to purchase goods and services from businesses, contributing to the demand
side of the economy.
✓ They also pay taxes to the government, which are used to fund public services.
2. Businesses (Companies)
✓ Businesses use the factors of production provided by households to produce goods and services.
✓ They sell these goods and services to households and the government, generating revenue.
✓ Businesses also pay taxes to the government and receive government-provided services (like infrastructure
and legal protections), which help in their operations.
3. Government
✓ The government collects taxes from both households and businesses.
✓ It uses this revenue to provide public goods and services, such as education, healthcare, defense, and
infrastructure.
✓ The government also makes transfer payments (like social security or unemployment benefits) to
households, which contributes to the flow of income in the economy.

Factors of Production

The factors of production are land, labor, capital, and entrepreneurship. These inputs are needed for the creation of
goods and services. Those who control the factors of production often enjoy the greatest wealth in a society. In capitalism,
the factors of production are most often controlled by business owners and investors. In socialist systems, the government
exerts greater control over the factors of production.
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
skilled and morally upright individuals
1. Land
for global competitiveness.
✓ This refers to natural resources used in production, such as land, water, minerals, forests, and oil. Land
includes anything that comes from the earth and is used to produce goods and services.
✓ Rent (or Land Rent) is the price paid for the use of land. This can include payments for agricultural land,
commercial properties, or any land used in production activities.
2. Labor
✓ Labor refers to the human effort—both physical and mental—that is used in the production process. It
includes the work done by individuals in exchange for wages or salaries.
✓ Wages are the compensation paid to workers for their labor. This can be hourly wages, salaries,
commissions, or bonuses.
3. Capital
✓ Capital refers to man-made goods that are used in the production of other goods and services. This includes
tools, machinery, buildings, and technology. It’s important to note that capital is not money itself, but the
equipment and infrastructure that helps produce goods.
✓ Interest is the payment made for the use of capital. It represents the cost of borrowing capital or the return
on investment for owners of capital.
4. Entrepreneurship
✓ Entrepreneurship is the ability and willingness of individuals to organize the other factors of production
(land, labor, and capital) to create goods and services. Entrepreneurs take risks, innovate, and make strategic
decisions to start and manage businesses.
✓ Profit is the financial return that entrepreneurs receive after all costs (including wages, rent, and interest)
have been deducted from total revenue. It rewards them for their risk-taking and innovation.

Economic System Model

It refers to the structure and mechanisms a society uses to allocate resources, produce goods and services, and
distribute them among its population. It addresses the three fundamental economic questions: what to produce, how to
produce, and for whom to produce. There are different types of economic systems, each with unique ways of managing
these processes.

There are four primary types of economic systems in the world: Capitalism, Socialism, Communism, and Fascism.

1. Capitalism
✓ Capitalism is an economic system where the means of production (factories, machinery, land, etc.) are
owned by private individuals or corporations, and economic activities are driven by the pursuit of profit.
Individuals and businesses own property and have the freedom to use it as they see fit and the prices,
production, and the distribution of goods are determined by supply and demand in competitive markets.
While the government's role is minimal, mainly to enforce laws and protect property rights, though
regulations may be applied to correct market failures.
✓ Examples: The United States, Japan, and Germany.
2. Socialism
✓ Socialism is an economic system where the means of production are owned or controlled by the state or the
public, with an emphasis on reducing inequality and providing public welfare. Resources and enterprises
 Republic of the Philippines CvSU Mission
CvSU Vision
The premier university in
CAVITE STATE UNIVERSITY Cavite State University shall
historic Cavite recognized for Bacoor City Campus provide excellent, equitable and
excellence in the development SHIV, Molino VI, City of Bacoor relevant educational opportunities in
of globally competitive and the arts, science and technology
morally upright individuals. through quality instruction and
relevant research and development
activities.
It shall produce professional,
are owned by the public or the government, rather than private individuals.and
skilled morally
The upright individuals
government aplays
for global competitiveness.
significant role in directing economic activities, planning production, and distributing goods and services
according to the needs of society. Socialism seeks to provide basic needs like healthcare, education, and
housing for all citizens through redistribution of wealth.
✓ Examples: Sweden (with a strong social welfare system), Denmark, Norway, Venezuela.
3. Communism
✓ Communism is an extreme form of socialism where all property is collectively owned, and there is no class
distinction. The goal is to establish a classless society where everyone shares equally the benefits of
production. Communism seeks to eliminate class distinctions by abolishing private ownership of the means
of production. In practice, communist states have typically been highly centralized, with the government
controlling almost all aspects of economic and social life. In theory, all goods and resources are shared by
the community, and each person contributes and receives according to their ability and needs.
✓ Examples: North Korea, Cuba, and historically, the Soviet Union.
4. Fascism
✓ Fascism is an authoritarian system that combines a centralized, dictatorial government with a controlled or
corporatist economy, where the state exerts strong control over economic and social life while maintaining
elements of private ownership. The government has complete power, often led by a single party or leader,
and controls both economic and political life. Fascist regimes typically promote the collaboration of the
government with large industries and corporations, with the state directing economic activities in line with
national interests. Fascism emphasizes extreme nationalism and the use of military force to achieve national
objectives.
✓ Examples: Italy under Benito Mussolini and Nazi Germany under Adolf Hitler.

References:

✓ Baumol, W., Blinder, A. & Solow, J. (2021). Basic Microeconomics (2021 Edition). New Tech Park,
Singapore:Cengage Learning Asis Pte Ltd.
✓ Dornbusch, R., et al (2018) Macroeconomics. 13thed. New York McGraw Hill.
✓ Marcelo, D. (2016). Microeconomics: Theories and Applications. Library Services & Publishing Inc.
✓ Shapiro, D., MacDonald, D. & Greenlaw, S. (2024). Principles of Macroeconomics 3e. Vk Publications, 2024
✓ Taylor, T., Shapiro, D. & Greenlaw, S. (2017). Principles of Microeconomics 2e. 12th Media Services, 2017

Prepared by:
Rosette P. Sarmiento
Instructor
[email protected]