2nd Semester

2019-2020
Course Description
This course offers the student an opportunity to
learn the fundamental theories and analysis of demand,
supply, production cost, market and aggregates,
economic variables such as national income, money,
general price level, and introduction to the best concept
of taxation. This course also covers land reform and
cooperatives.
CHAPTER I
Economics and the Real World
HUMAN ACTIVITIES
 Earning money

 Buying goods and services

 Putting up a business

 Savings money in a bank

Economics guides us on how to:
 make a living

 use our money wisely

 run our business

 distribute our available resources properly

 maximize our profits

 and give importance on consumer satisfaction

Its definition
ECONOMICS is the proper allocation and
efficient use of available resources for the maximum
satisfaction of human wants.

It is a science concerned with the process or

system by which goods and services are produced, sold
and bought (Merriam-Webster).
 Resources are generally limited while
human wants tend to be unlimited, economics
encounters not a few problems. However, the
biggest problem is not limited resources like
land, money, machines, raw materials, technology,
skilled workers, or competent managers.
 The root problem, which is the real problem,
is the unjust distribution of productive
resources among the members of the society.

Maldistribution of wealth and income is the

root cause of poverty.
Extreme Poverty Line
Poor regions in the world are in:

 Africa

 Asia

 Latin America

(South America and Central America)

Rich countries
 United States of America

 Japan

 Germany

 France

 Canada

 Great Britain
Nature of Economics
Economics is classified as a social science
because it deals with the study of man’s life and how
he lives with other men.

Economics is interdependent with other

sciences such (1) sociology, (2) political science, (3)
history, (4) geography, and (5) physics.
Non-economic factors (reforms)
 Cultural

 Educational

 Social

 Political
Methods of Economics
Empirical method

 data are obtained through observations and interviews

 data are properly organized for analysis

 requires a careful study of the cause-and-effect

relationships of the various data

 relies on practical experience

 Out of the economic analysis, economic
principles and theories are formulated and derived.

Simply, economic principles are generalizations.

Ceteris paribus which means “other things being

equal or constant”.
 Economic principles or theories are useful
because they explain certain economic behaviors or
conditions. These are helpful in solving economic
problems likewise they serve as guides in economic
planning and formulating economic programs.
Forms of Economic Principles
 Verbal statements

 Graphs

 Numerical tables

 Mathematical equations
 An economic principle or theory which
is put in action becomes an economic policy
or applied economics.
Limitations of Economic Methods
There are limitations such as the biases and
values of those who get the facts, who make the
analysis, and who make the conclusion. Biases and
values (what is desirable or undesirable) are
naturally formed by the political, social, cultural,
and economic background of individuals.
Efficient Use of Resources
Economics deals with the efficient use of
available limited resources.

 Wise utilization of money

 Make our farms productive

 Factories must produce more

 Government must minimize its expenditures

Division of Economics
(1) Microeconomics – deals with economic
behavior of individual units such as the consumers,
firms and the owners of the factors of production.
Such specific economic units constitute a very small
segment of the whole economy.
Microeconomic activities
 Price of rice

 The number of workers of San Miguel

Corporation

 The income of Mr. Juan Dela Cruz

 The expenditures of CANORECO

 (2) Macroeconomics – deals with the
economic behavior of the whole economy or its
aggregates such as government, business and
household. The operations of the various aggregates
and their interrelationships are analyzed to provide a
profile of the economy as a whole.
Macroeconomic activities
 Gross national product

 Level of employment

 National income

 General level of prices

 Total expenditures
History of Economics
 Adam Smith’s book Wealth of Nations was
published in 1776. This became the bible of
economics for more than a century. Because of the
economic contributions of Smith in the field of
science, he has been considered the “Father of
Economics”
 Babylonian code of Hammurabi contains detailed
regulations for economic practices. (1) Justice, (2)
charity and (3) honesty were the rules in economic
dealings.
 Usury was prohibited. Profits were despised.
Babylonians had clear ideas about interests and
mortgages.
 The Phoenicians had good knowledge on commerce
and money.
 The Hebrews and the Hindus stressed the virtues of
industry, temperance, and economy.
 The Greek philosopher Plato recommended division of
labor in order to improve production.
 Aristotle explained the functions of money.
 Romans believed that agriculture was the only
honorable industry.

 During the early days of the Roman Republic, the boys

were taught to be good soldiers and farmers by their
fathers.

 During the middle ages, the Church under St. Thomas

Aquinas crusaded for distributive and compensatory
justices
Basic Economic Problems
All countries have economic problems,
including the richest countries. However, the
poorest countries have more far-reaching economic
problems.
In our country, we have been experiencing
deep economic problems like high prices,
unemployment, low income, capital deficiency.
Basic Economic Problems
Poor countries suffer from satisfying basic needs:

 Food

 Shelter

 Health

 Education
Basic Economic Problems
 Rapid population growth

 Inefficient government

 Maldistribution of wealth

Then social and economic injustices have remained

with them for centuries
The 3 basic economics problems
(1) What goods and services to produce and
how much

(2) How to produce the goods and services

(3) For whom are the goods and services

Economic System Models

(1) Capitalism

(2) Communism

(3) Socialism
 Capitalism – factors of production and distribution are
owned and managed by private individuals or corporations

Essential characteristics
-private property
-economic freedom
-free competition
-profit motive
 Communism – is exactly opposite of capitalism. The
factors of production and distribution are owned and
managed by the state.

The essential characteristics

-no private property -no motive profit
-no free competition -presence of central planning
-no economic freedom
 Socialism – is a combination of capitalism and
communism. The major and strategic industries are
owned and managed by the state while the minor
industries belong to the private sector.
Examples of major industries are:

 Transportation

 Electrification

 Mining

 Production of essential products

Examples of minor industries are:

 The production and marketing of candies, cakes, toys,

and etc.

Karl Marx, the “father of modern socialism”, called

socialism as the lower stage of post-capitalism and
communism as the higher stage post-capitalism
Vital criteria to judge an economic
system
 Abundance
 Growth
 Stability
 Security
 Efficiency
 Just and equity
 Economic freedom
Question for discussion:
What is the best economic
system? Why?
What is the goal of
economics?
Social Justice
Economics is concerned with the fair
distribution of goods and services, and the efficient
use of available scarce resources. The reason is to
obtain both optimum and maximum benefits for the
satisfaction of all members of society.
Objectives of economics
 Economic growth

 Full employment

 Price stability

 Economic freedom

 Equitable distribution of wealth and income

 Economic security
CHAPTER 2
Price of Goods and Services
Price – the value of a product or service.

The price system is very important in the

economy. It determines the allocation of
goods and services among the members of
society.
Demand
It is the schedule of various quantities of
commodities which buyers are willing and
able to purchase at a given price, time and
place.
Factors of demand
 Income

 Population

 Taste and preferences

 Price expectation

 Price of related goods

 Price Quantity Demanded
1 5
2 4
3 3
4 2
5 1

Table 2.1. Individual demand schedule showing the inverse

relationship between price and quantity.
 Figure 2.1. Individual demand curve showing a
downsloping curve indicates the inverse relationship
between price and quantity demanded.
Income
People buy more goods and services when
their incomes increase. Poor people who become
rich naturally purchase more basic goods like food,
clothing, shelter, and services like recreation,
medicare and education.
 On the other hand, if their income decrease,
demand for such goods and services also declines.
Hence, a change in income brings about a change in
the demand for goods and services, either increase
or decrease which is directly related to change in
income.
Population
More people means more demand goods and
services. There are more consumers in an urban
community than in a rural community. That is why we
can observe that there are more buyers in the city stores
than in barrio stores.
Tastes and Preferences
Demand for goods and services increases when
people like or prefer them. Such tastes or preferences are
greatly influenced by the advertisement of fashion. On
the other hand, if a certain product is out of fashion, the
demand for it falls.
Price expectation
When people expect the prices of goods,
especially basic commodities like rice, soap, cooking oil,
or sugar, to increase tomorrow or next week, they buy
more of these goods. In the same manner, they decrease
their demand for such products if they expect prices to
decline tomorrow or in a few days.
Prices of related goods
When the price of a certain product increases,
people tend to buy a substitute product (competitor).
For example, if the price of Tide increases, consumers
buy less of Tide and more of the other close substitutes
like Breeze or Tops.
Law of Demand
Consumers are most likely to buy more
goods and services as price decreases, and buy
less goods and services as price rises.
 1. Income effect. At lower prices, an individual
has a greater purchasing power. This means he can
buy more goods and services. But the higher prices,
naturally he can buy less.
 2. Substitution effect. Consumers tend to buy
goods and services with lower prices. In case the
price of a product that they are buying increase, they
look for substitutes whose prices are lower.
Validity of the Law of Demand
The law of demand states:

as the price increases, the quantity

demanded decreases, and as price decreases,
quantity demanded increases.
 The theory is only true if the assumption of
ceteris paribus is applied.

The law of demand is correct if the

determinants of demand are held constant; that is,
there is no change in income, taste, or population.
Supply
It is the schedule of various quantity of
commodities which producers are willing to
and able to produce and offer at a given price,
place and time.
Determinants of supply
 Technology

 Cost of production

 Number of sellers

 Prices of other goods

 Price expectation

 Taxes and subsidies

 Price Quantity supplied
1 1
2 2
3 3
4 4
5 5

Table 2.2. Individual supply schedule showing the direct

relationship between price and quantity.
 Figure 2.2. Individual supply curve showing a upward
slope curve indicates the direct relationship between price
and quantity supplied.
Technology
This refers to the techniques or methods
of production. Modern technology, which
uses modern machines, increases supply of
goods.
Cost of production
In producing goods, raw materials are needed,
together with laborers. If the price of raw materials
or the salaries of the laborer increase, it means
higher cost of production.
Number of sellers
More sellers or more factories mean an
increase of supply. Conversely, smaller
number of sellers or factories means less
supply.
Prices of other goods
Changes in the price of goods affect the
supply of such goods. For example, a decrease
in the price of rice may likely encourage a rice
farmer to produce more corn if this gives him
more profit.
Price expectations
If producers expect prices to rise very
soon, they usually keep their goods and then
release them in the market when the prices
are already high. This creates artificial
shortage due to hoarding.
Taxes and subsidies
Certain taxes increase cost of
production. Higher taxes discourage
production because it reduces the
earnings of businessman.
Law of supply
As price increase, quantity supplied also
increases, as price decreases, quantity
supplied also decreases.