An Introduction to Economics

Hierarchy of Wants Here is how Maslows Ladder of Human Wants looks like: Personal Growth Self Respect Love and Belongingness Safety and Security Physical Needs

Fundamental Economic Concepts

Scarcity: when wants > resources available to satisfy wants forces people to make choices. Resources: limited; Wants: unlimited. Opportunity cost: value of next best thingreal costs that are measurable in terms of real value that is forgone when a choice is made.

Consumption Satisfies Needs and Wants

There are so many reasons why people consume certain goods and services. For example: 1. I like the color 2. I like the design 3. I want a new shirt 4. I will wear it for a party 5. I have the money to buy it 6. Its price is reasonable factors that affect peoples consumption behavior, the first four answers given above may be lumped into the category of tastes and preferences. The fifth answer refers to a persons purchasing power. The last answer is an indication of relative price.

Human Wants
The main concern of economics is the fulfillment of human wants among the competing uses of resources.
Categories:
Material Nonmaterial

Aspects (characteristics to be considered):

Physical involves certain mechanism of nerves, muscles, and sense organs programmed to respond to certain stimuli. Subjective based on the consciousness of enjoying pleasure and avoiding the unpleasant in anything that one does.

Basic Terms in Economics

1.

Good
Anything that yields satisfaction Anything used to satisfy a persons wants and needs.

Need is something you have to have, something you cannot live or do without and also things that are necessary for survival. Want is something you would like to have and that provides satisfaction. It is not absolutely necessary, but it would be a good thing to have.

Basic Terms in Economics

Types/Classification: 1. According to form
i.

Tangible goods
Are material goods Commodities

ii.

Intangible goods
Services

2.
i. ii.

According to use
Consumer goods yield satisfaction directly Capital goods goods used to produce other goods & services (ex.: building, machinery & equipments) *luxury Goods goods that man may do without, provides comfort and well-being; may be expensive & may only be purchased/enjoyed by those who can afford.

Basic Terms in Economics

Types/Classification: 1. Economic good
Is a good both useful & scarce Has value attached to it & price to be paid for its use.

2.

Free good
A good which is abundant & enough to satisfy everyones needs without paying for it.

Goods are created by means of production 1. Manufacturing or industry (goods & services) 2. Agricultural production 3. Exploration for oil, mineral and precious metals

Important concepts in Economics

In the context of having unlimited wants with the available economic resources (factors of production, we make Economic decisions wherein we make choices. Economic choice Involves the attainment of desired ends through the allocation of these scarce resources among alternative uses 1. Desired ends Whatever goal or objective is identified as urgent by the society Example: Meeting of the wants of different sectors also include other social systems politics, ideology, religion & morality *prostitution legalize, regulate collect taxes, illegal, many still engage in it.

Basic Terms in Economics

Economic choice Involves the attainment of desired ends through the allocation of these scarce resources among alternative uses 2. Allocation Does not mean distribution where everyone receives something means distributing resources so that desired ends are satisfied; partially satisfied or not satisfied at all. It may be that allocation decision is timeddetermined.

Basic Terms in Economics

Economic choice Involves the attainment of desired ends through the allocation of these scarce resources among alternative uses 3. Alternative uses Refers to many different choices which to the mind of the individuals, groups or societies are equally appealing. Its concept brings the concept of the opportunity cost

Important concepts in Economics

Here are some examples of scarcity and the tradeoffs associated with making choices: You have a limited amount of time. If you take a part-time job, each hour on the job means one less hour for study or play. A city has a limited amount of land. If the city uses an acre of land for a park, it has one less acre for housing, retailers, or industry. You have limited income this year. If you spend P500 on a music CD, thats P500 less you have to spend on other products or to save.

Concept of Scarcity
Scarcity
Means more than limited, for everything in the material world is limited but not everything is scarce.

The concept of scarcity arises because of certain qualities of resources and human wants.
Resources are prolific in that they can be substituted for capital in the production of commodity. Human wants are numerous and are multiplying as a result of several factors.

LAW OF SCARCITY AND OPPORTUNITY COST

Scarcity is the reason why people economize Refers to the limitations that exist in obtaining all the goods and services that people want. Economic scarcity exists when the productive resources of the economy are never enough to meet all the wants of the people in the society.

Concept of Economizing and Efficiency

There is a need to choose among the competing uses of resources in order that each scarce commodity will yield the highest level of satisfaction to the individual and to society. This involves the process called allocation. Allocation
A process of choosing among competing ends which resources are going to be employed for the production of commodities chosen to satisfy the human wants that have a higher value in the priority system.

To economize is to choose something with the minimum costs or to choose that which will give maximum benefit to the individual and to society. Efficiency is the proper use of resources to get the maximum benefit to society.
There is no unique way of allocating or choosing how resources should be utilized to meet human needs.

Definition
Economics: science of personal and group decisionmaking. Greater difference between benefits and cost of a decision easier to make a choice. Marginal Decision Making: choices that are a matter of degree. Margin: difference between costs of 2 alternatives or difference between 2 benefits. Positive Economics: what is-analyzes facts or data to establish scientific generalizations about economic behavior. Normative Economics: what ought to be-involves value judgments about what economy should be like; includes goals.

Macroeconomics vs. Microeconomics

Microeconomics: study of individual parts of economy and actions of individuals and firms. Macroeconomics: study of economy as a whole: focus on aggregate behaviors of producers and consumers.

THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

Three basic questions must be answered in order to understand an economic system: What gets produced?

How is it produced?
Who gets what is produced?
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Factors of production
The resources used to produce goods and services; also known as production inputs. Typical taxonomy land / natural resources labor Capital Entrepreneurial ability Alternative view Matter Energy Time Technology

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Classification / Broad Categories of the Factors of Production

1. Natural resources/Land Resources provided by nature and used to produce goods and services; gift of nature to our
productive processes Land used for farming for underpinning houses, factories, roads Energy resources that fuel cars Non energy resources like copper, iron ore and sand *environmental resources clean air & drinkable water

2.Labor The physical and mental effort people use to produce goods and services.
consist of human time spent in production teaching in school, working in factories ; requires different skill levels.

Factors of production
Human Capital resources The knowledge and skills acquired by a worker through education and experience. 4. Physical & Financial capital *Physical capital The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services. form the durable goods of an economy, produced in order to produce yet other goods. These goods include: machines, roads, computers, trucks, buildings *Financial Capital - Input of funds 5. entrepreneurship The effort used to coordinate the factors of productionnatural resources, labor, physical capital, and human capitalto produce and sell products.
3.
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Why Study Economics?

1. Understanding the allocation process in an environment of scarcity. 2. Knowing why the government collects taxes from our incomes, from the things we buy, and from the things we own. 3. Knowing the basis for collecting taxes and the allocation of government revenues for various expenditures. 4. Understanding the economic explanation why the government provides the people with such services as education, public utilities, roads, and national defense. 5. Role of money. 6. Knowing the basis of commercial relations among nations. 7. Knowing how societies increase their resources in order to grow and to improve the welfare of their members. 8. Learning the importance of economizing.

Types of Economic System

Traditional/Subsistence Economy Self-sufficiency of most households
Some societies have used customs and traditional beliefs as a basis for allocating the societys wealth and the fruits of its resources.

The Command Economy Government hand visible

There are societies where planning boards decide where resources are to be employed on the basis of societal objectives and political orientations.

Types of Economic System

The Market Economy Main institution within which all economic activities are situated in the market Resources are privately owned& decisions are made by the people themselves. Mixed Economy Mixture of the 3 forms of decision making
In many societies today, the price or market mechanism is used as a basis for allocation.

How the economy is organized? Circular-flow Diagram (Mankiw,2010)

Revenue MARKETS FOR GOODS AND SERVICES FIRMS SELL HOUSEHOLDS BUY Spending

Goods and services sold

Goods and services bought

FIRMS
Produce and sell goods and services

HOUSEHOLDS
Buy and consume goods and services

Hire and use factors of production

own and sell factors of production

Inputs for production

MARKETS FOR FACTORS OF PRODUCTION HOUSEHOLDS SELL

Land, labor & capital

Wages, rent, and profit

FIRMS BUY

Income

Inputs and Outputs ( Samuelson &

Nordhaus, 2010)
Inputs are commodities or services that are used to produced goods and services. Another term for this is factors of production. An economy uses its existing technology to combine inputs to produce outputs. Outputs are the various useful goods or services that result from the production process and are either consumed or employed in further production.

REFERENCES: Samuelson & Nordhaus (2010) Introduction to Economics Pagoso C., 2010, Introduction to Macroeconomics, Philippines: C & E Publishing House. Villegas B.M. and Abola V.A. (2010) Basic Economics. Center for Research and Communication Foundation, Inc. ISBN 971-91786-3-9 Villegas, B.M. (2010). Guide to Economics for Filipinos. Manila: Sinag-tala Publishers, Inc.So Coase, R. H. (2009), Essays on Economics and Economists, Chicago/London: The University of Chicago Press. Hausman, Daniel M. (2007), The Inexact and Separate Science of Economics, Cambridge: Cambridge University Press Landsburg, Steven E. (2008), The Armchair Economist, New York: The Free Press Melberg H.O. (n.d.) Definitions of economics: A short and uncritical draft of an introduction. From http://www.geocities.com/hmelberg/papers/981123.htm Mankiw 2010 fundamentals of Economics *Internet sites: http://ingrimayne.com/econ/Introduction/Defintns.html http://www.cr1.dircon.co.uk/pdffiles/1.1a.pdf+definitions+economics&hl=t&ct=clnk&cd=10&gl=ph http://www.carleton.ca/vpac/20000105/ http://en.wikipedia.org/wiki/Economics http://ph.answers.yahoo.com/question/index?qid=20080522065504AAmrerG http://wiki.answers.com/Q/What_are_the_branches_of_economics http://www.investopedia.com/ask/answers/110.asp: http://www.mcwdn.org/ECONOMICS/NeedWant.htm http://www.psychclassics.yorku.ca/Maslow/motivation.htm http://www.cdli.ca/courses/econ2203/unit01_org01_ilo04/b_activity.htm http://www.oswego.edu/~atri/e101ppc.html http://web.missouri.edu/~gc60f/oppcost.doc