Opportunity cost

- When an option is chosen from alternatives, the opportunity cost is the "cost"
incurred by not enjoying the benefit associated with the best alternative choice.

Example:
1. If the price of coke is P20.00 per can and one piece of cupcake is P10.00,
then the relative price of coke is 2 pieces of cupcake. Therefor if a consumer
only has P20.00 and chooses to buy battle of coke with it, then we can say
that the opportunity cost of that bottle of coke was the 2 pieces of cupcakes,
assuming that the cupcakes were the next best alternative.

Savings (Firm/Individual)

Credit (Interest) Investment (Profit)

Figure 1.3 Opportunity Cost

This figure also illustrates the concept of opportunity cost. The savings of the
firm/individual is subject to two choices between credit and investment. If savings of an
individual will be put on credit, there is a possibility of earning interest or a bad debt
(not getting the money back), on the other hand, when savings of an individual is
invested, it may earn profit or may be subject to loss. With this in mind, what do you
think is the best choice or next alternative.

Production Possibility Frontier and Opportunity Cost

- The concept of trade-off is illustrated in economics by the production possibility
frontier of PPF. It is a graph which shows the greatest sum of output given the
accessible inputs, or factors of production, in an economy.
For example, consider the chart below. Imagine a national economy that can produce
only two things: wine and cotton. According to the PPF, points A, B, and C on the PPF
curve represent the most efficient use of resources by the economy.

For instance, producing five units of wine and five units of cotton (point B) is just as
desirable as producing three units of wine and seven units of cotton. Point X represents
an inefficient use of resources, while point Y represents a goal that the economy simply
cannot attain with its present levels of resources.
As we can see, in order for this economy to produce more wine, it must give up some of
the resources it is currently using to produce cotton (point A). If the economy starts
producing more cotton (represented by points B and C), it would need to divert
resources from making wine and, consequently, it will produce less wine than it is
producing at point A.

Moreover, by moving production from point A to B, the economy must decrease wine
production by a small amount in comparison to the increase in cotton output. But if the
economy moves from point B to C, wine output will be significantly reduced while the
increase in cotton will be quite small.

Keep in mind that A, B, and C all represent the most efficient allocation of resources for
the economy. The nation must decide how to achieve the PPF and which combination
to use. If more wine is in demand, the cost of increasing its output is proportional to the
cost of decreasing cotton production. Markets play an important role in telling the
economy what the PPF ought to look like.

Basic Decision Problems

- Below are some decision problems that households, firms, the government, and
society must think about in order to properly manage their resources.
➢ Consumption
➢ Production
➢ Distribution
➢ Growth over time
Consumption
- Members of the society with their individual wants, determine what types of
goods and services they want utilize or consume and the corresponding amount
thereof that they should purchase and utilize. The choice ranges from food to
shelter to clothing and etc. There is also a choice between privately used goods
or those supplied by the government such as national security and defense,
 infrastructure or irrigation. Consumption is the basic decision problem that the
consumers must always deals with in their day to day activities.
Production
- The problem of production is generally a concern of producers. Producers
determine the needs and wants and demand of consumers, and decide how to
allowance their resources to meet these demands. Goods and services may be
produced by different methods of production depending on the firm’s
technological state, and on the available resources achieved.
Distribution
- This problem is primarily addressed to the government. There must be a proper
allocation of all the resources for the benefits of the whole society. In a market
economy though, absolute equality of every member as to the distribution or
resources can never be achieved.
Growth over time
- This is the last basic decision problem that a society or nation must deal with.
Societies continue to live on. They also grow in numbers. On the other hand,
people have definite lives, but societies have longer, if not infinite lives. All the
problems of choice consumption, production and distribution have to eb seen in
the context of how they will affect future events.
Four Basic Economic Questions
- To address the problem of scarcity and solve the basic decision problems, the
society must answer four basic economic question:
➢ What to produce?
➢ How to produce?
➢ How much to produce?
➢ For whom to produce?
What to Produce?
- The questions of what to produce tells us that an economy must identify what
are the goods and services needed to be produced for the utilization of the
society in the everyday life of man. A society must also take into account the
resources that it possesses before deciding what goods or services to produces.
- Example: an island-nation, however blessed with agricultural resources but does
not possess advanced technology, should not opt to produce space shuttles or
satellites because its resources are incapable or producing these outputs.
However, it can take advantage of its natural resources and it can produce
agricultural goods and tourism services.
- In market economy, what gets produced in the society is driven by prices.
Resources are allocated to the production of goods and services that have high
prices and low input prices relative to one another.
How to produce?
- This question conveys that there is a need to identify the different methods and
techniques in order to produce goods and services. In other words, society must
determine whether to employ labor intensive production or capital-intensive
production.
- Labor Intensive Production uses more human resources or manual labor in
producing goods and services than capital resources. By the large, this kind of
production is advisable to a society with large population.
 - Capital Intensive Production – employs more technology and capital goods like
machineries and equipment in producing goods and services rather than labor
resources.
How much to produce?
- The question of how much to produce identifies the number of goods and
services needed to be produced in order to answer the demand of man and
society. The optimum amount of production must be approximated by
producers. Underproduction results failure to meet the needs and wants of the
society. On the other hand, overproduction results to excess goods and services
going to waste.
For whom to Produce?
- these questions identify the people or sectors who demand the commodities
produced in a society. Economist must determine the target market of goods
and services which are to be produced to understand their consumption
behaviors and patterns. An understanding of these results to higher sales of
goods, and ultimately to increased profits. We can say that for those who can
pay the highest price is for whom goods and services are produced.
3 E’s in Economics
➢ Efficiency – refers to productivity and proper allocation of economic resources. It
also refers to the relationship between scarce factors inputs and outputs of
goods and services.
Example; In the production of a commodity, a firm utilizing modern technology
can improve the quantity and quality of its product, which ultimately translate
into an increase in revenue and profit. This example shows that being efficient in
the production and allocation of goods and services saves, time, money, and
increase a firm’s output.
➢ Effectiveness- it means attainment of goals and objectives. Economics therefor is
an important and functional tool that can be utilized by other fields.
Example: With the use of both productions (through manual labor or through
technological advancement) whatever the output is, it will be useful for the
consumption of the society and the rest of the world.
➢ Equity – it means justice and fairness. Thus, while technological advancement
may increase production, it can also bear disadvantage to employee of
workers.

Positive Economics & Normative Economics

➢ Positive Economics – is an economic analysis that considers economic conditions
“as they are” or considers economics “as it is”. It uses objective or scientific
explanation in analyzing the different transactions in the economy.
➢ Normative economics- is an economic analysis which judges economic
condition “as it should be”. It is the aspect of economics that is concerned with
human welfare. It deals with ethics, personal value judgements and obligations
analyzing economic phenomena (Kapur 1977).
Types of Economic System
➢ Traditional Economy – is basically a subsistence economy. A family
produces goods only for its own consumptions.
➢ Command Economy- type of economy, wherein the manner of
production is dictated by the government.
➢ Market Economy- the basic characteristic of market economy is
capitalism’s basic characteristic, which means that the resources are
privately owned, and that the people themselves make the decision.
➢ Socialism- an economic system wherein key enterprises are owned by the
state. In this system, private ownership is recognized.
➢ Mixed economy- this economy is a mixture of market system and the
command system. The Philippine economy is described as a mixed
economy since it applies a mixture of three forms of decision-making.
However, it is more market oriented rather than command or traditional.