INTRODUCTION

BASIC ECONOMIC
PRINCIPLES
 BASIC ECONOMIC PRINCIPLES
• The root problem that economics deals with is scarcity.
• If society’s resources were abundant or unlimited
rather than scarce, then there would be no problem to
study. Society would just produce anything and every
thing it needs at any point in time and everyone would
have as much of everything he /she desires.
• However, scarcity alone does not explain completely
the economic problem. Paired with shorted of resources
are the multiple wants and desires of human beings
 BASIC ECONOMIC PRINCIPLES
• Since human beings have multiple wants and
desires, resources have alternative uses.
• Scarce resources need to be allocated among
different needs.
• The problem is to determine the optimum
use of resources to satisfy competing needs.
• Scarcity of resources plus multiplicity of
human wants equals economics
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• The word “economics” comes from the Greek
word oikonomia, meaning “management of
the household”
• The problem of managing the household
stems from two basic facts: limited resources
available to the household and the unlimited
needs of the members of the household.
• What is true of the household applies to any
social groupings
 BASIC ECONOMIC PRINCIPLES
• Economics is a social science that studies the
optimum allocation , over time of scarce
human and non-human resources among their
alternative uses in order to satisfy unlimited
human wants and desires. ( Guide to
Economics for Filipinos by Bernardo M.
Villegas)
 BASIC ECONOMIC PRINCIPLES
• SUMMARY
• 1. Science of Economics is necessary it deals
with basic and continuing problems that
confronts man and society, which is scarcity.
• 2. There are two facts of earthly existence
that brings about economic problems:
• Scarcity of resources and multiplicity of
human wants.
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• 3. Basic questions that face all economies and which
the science of economics tries to answer are:
• What commodities are being produced and in what
quantities?
• Who gets these commodities and in what quantities ?
• How are these commodities being produced?
• How efficiently are society’s resources being fully
utilized?
• Is the economy’s capacity to produce growing over
time?
 BASIC ECONOMIC PRINCIPLES
• Economics-study of the efficient allocation of
scarce resources in order to achieve certain
objectives( Business Economics for Filipino
Managers by Dr. Antonio M. Villegas)
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• Tangible and Intangible Factors:
• Tangible Factors – are those which can be
expressed in terms of monetary value ( prices
of goods, production costs)
• Intangible Factors – are those which are
difficult or impossible to express definitely in
monetary values ( irriducible factors)
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• Competition
• Perfect Competition- occurs when a certain
product or service is offered for sale by as
many vendors or suppliers and there is no
restriction against other vendors from
entering the market. Buyers are free to buy
from any vendor and vendors are free to sell
to anyone
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• Competition:
• Monopoly- opposite of competition. Perfect monopoly
occurs when a unique product or service is available from
a single supplier and entry of all other suppliers is
prevented.
• Under conditions of perfect monopoly , the single
vendor can control the supply and price of the product or
service.
• Examples : utilities (power, water, transport )
• Monopolies are subject to control of various gov’t
regulatory agencies re-price structures and supply
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• Competition:
• Oligopoly- occurs when there are few
suppliers and any action by anyone of the of
them will definitely affect the course of action
of the others.
• Examples: Oil companies, soft drinks
manufacturers ( with franchise from foreign
origin)
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• Price and Production:
• Price of a good or commodity or service- the amount of
money or its equivalent which is given in exchange for it
• In a capitalistic system , industry is based on profit, and
profit is in turn based on price.
• Goods that are in great demand and are scarce
command a high price relative to cost of production and
therefore will yield higher profits.
• Producers of such goods will exert all means to increase
their output.
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• Price and Production:
• On the other hand goods that have little
demand command a low price in relation to
the cost of production. Manufacturers of such
goods will decrease their production or cease
manufacturing the goods.
• Price therefore regulates production . If Price
goes up production will increase. If Price goes
down, production will decrease or cease.
 BASIC ECONOMIC PRINCIPLES
• Local and National Market
• Market- defined to be a place where sellers and
buyers come together.
• Local Market- limited locality , where certain
goods such as those which are
perishable are sold.
• National Market- goods sold all over the
country
• World Market- when goods are exported to other
countries
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• Consumer and Producer Goods
• Consumer Goods- those that are consumed
or used directly by people, or are things and
services which serve to satisfy human needs.
• Producer Goods- those which are used to
produce other goods and services for human
consumption.
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• Demand
• Demand- quantity of a certain commodity
that is bought at a certain price at a given time
and place.
• To be differentiated with the quantity of the
commodity which a person desires to
purchase . Desire without purchase is not
demand.
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• Law of Demand
• The demand for a commodity varies
inversely as the price of the commodity ,
though not proportionately.
• Price demand relationship:
• Price is low demand is great or increases
• Price is high demand decreases
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• Elasticity of Demand
• Elastic Demand- occurs when a decrease in selling
price will cause a greater than proportional increase
in volume of sales.
• Inelastic Demand- occurs when a decrease in price
will cause a less than proportionate increase in
sales. ( Ex. Rice)
• Unitary Elasticity of Demand-when te
mathematical product of price and volume of sales
remains constant.
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• Utility and Demand-
• Utility is the capacity of the commodity to
satisfy human needs and wants.
• If utility of a certain good to a certain
individual is great , his demand for that good is
great. If utility is less , demand is less.
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• Law of Diminishing Return
• An increase in the quantity of any good consumed
or acquired by an individual will decrease the
amount of satisfaction derived from that good.
• The utility of a commodity decrease with an
increase in the quantity available ( ex No. of cars)
• To increase utility of any commodity , it should be
different from other similar commodities. ( style,
size, use etc.)
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• Marginal Utility
• Marginal Utility- is the utility of the last unit
of the same commodity which is consumed or
acquired.
• The last unit of the same commodity is the
marginal unit
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• Supply
• Supply- is the quantity of a certain
commodity that is offered for sale at a certain
price at a given time and place.
• Unless a certain good is offered for sale , it
does not constitute a part of the supply.
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• Law of Supply
• The supply of the commodity varies directly
as the price of the commodity, though not
proportionately.
• As price increase, supply increases
• Price decreases, supply decreases
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• Law of Supply and Demand
• When free competition exists, the price of
the product will be that value where the
supply is equal to the demand
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• Law of Diminishing Return
• When one of the factors of production is
fixed in quantity or is difficult to increase,
increasing the other factors of production will
result in less than proportionate increase in
output.
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• Marginal Revenue and Marginal Cost
• Marginal Revenue- amount derived from
sale of an additional unit of a product.
• Marginal Cost – additional cost of producing
one more unit
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• Physical and Economic Efficiency
• The effective of the utilization of resources
• Efficiency= output/input
• Physical Efficiency= Output in physical
• units/input in physical
• units
• Economic Efficiency= Income in Pesos/ Cost
• in pesos