BASIC

MICROECONOMICS

Learning Module 1
(Introduction to Economics)

Prepared by:

Ethyl Vilgrace Oliveros Pacaldo

Faculty, Institute of Arts and Sciences
ECONOMICS:

 is concerned with the production, distribution, and use of material goods and
services.
 It is an inquiry into the nature and causes of wealth of the nations.
 the study of using resources to produce goods and services as effectively and
efficiently as possible.

BASIC TERMS IN ECONOMICS:

Good – is anything which yields satisfaction to someone. It is anything used to satisfy a

person’s wants and desires. It may tangible when they are in the form of material goods
or commodities. They also may be intangible in the form of services. Tangible goods like
shoes, books and umbrella, and intangible services like those rendered by the doctor,
the teacher, or the painter are all used in the satisfaction of human wants and needs.

CLASSIFICATION OF GOODS:

According to use:

a. Consumer Goods – goods may also be classified according to use. Goods which
yield satisfaction directly, just like soft drinks and foods.
b. Capital Goods – goods used in the production of other goods and services like
buildings, machinery, and equipment.

According to essentiality:

a. Luxury Goods – are those goods man may do without, but are used to contribute
to his comfort, and well-being like perfume, chocolates and expensive cars and
luxury items that are purchased only by those who can afford.

According to Economic or Free:

a. Economic Good – is a good which is both useful and scarce. It has a value
attached to it and a price has to be paid for its use. It has a degree of scarcity and
therefore an opportunity cost.
 Types of Economic Goods:
1. Private Goods – foods, clothes, cars, and other consumer goods.
2. Common Goods – fish, timber, coal
3. Club Goods – Cinemas, private parks and satellite TV’s
4. Public Goods – Air, National defense

b. Free Goods – a good is abundant that there is enough of it to satisfy everyone’s

needs without anybody paying for it, like air.

According to Production:

a. Manufacturing or Industry Production Goods – goods that are created in the

factory.
b. Agriculture Production Goods – goods that takes place in the farm.

ECONOMIC RESOURCES

- The things which are needed to carry on the production of goods and services or
factors of production. These resources are land, labor, capital, and entrepreneur.
They are the basic resources because they constitute the basic needs in
production. They are the most basic tools used in the production of goods and
services.

Land - refers to all-natural resources which are given by and found in nature, and are,
therefore, not man-made. This term includes the soil, river, forest and mineral deposits.
It is an economic good because it is scarce and a price has to be paid for it. Thus. People
who own land and offer it to others for their use, earn an income called rent. The less
the supply of land available for man’s use, the higher is the rent that has to be paid for it.

Labor – is any form of human effort exerted in the production of goods and services. It
covers as wide range of skills, abilities and characteristics. It includes factory workers
who are engaged in manual work. It also includes the accountant, economist, nurse,
typist and other numerous people who leave their homes in the morning to be in time
for their 8-hour work.
Capital – refers to the man-made goods used in the production of goods and services. It
does not only include money; it also includes buildings, machinery, raw materials and
other physical necessities for use in production. A nation’s capital is dependent on its
level of savings.

THE NEED TO CHOOSE:

Scarcity is the reason why people economize. It refers to the limitations that exist in
obtaining all the goods and services that people want. It gives rise to economics
problems and it is the reason why man has to make a choice. If all goods were as free as
air, there would be no need to economize. Because of scarcity, any society must confront
three fundamental and interdependent economic problems.

1. What to produce and how much? This is a decision on what goods and services to
produce and their quantities. This would defend on what is needed, what is
wanted, and what has to be produced.
2. How shall goods be produced? This is a decision of what resources are to be used
in production, by whom the goods will be produced, the technological manner I
which production will take place. A country with an abundant labor supply
would be expected to use a larger amount of that resources in its production of
goods and services.
3. For whom shall goods be produced? This question is now on the problem of
distribution. Who will benefit from the production of goods and services? How
much of total production will each consumer get? Will the goods be bought by
the rich or by the poor?

These three questions are basic to all economies. However, the manners in which
these economies answer the problems differ. The country’s economic organization has a
lot to do with how the decisions to these fundamental problems are arrived at. In the
same manner, the way a nation answers the problems determines the type of economic
system is adopts.
TYPES OF ECONOMIC SYSTEM:

1. The Traditional Economy – This is basically a subsistence economy. A family

produces everything that it consumes. Decisions on what, how, and for whom to
produce are made by referring to the traditional manner of doing things.
Production is carried on in the methods used by the forefathers, and is therefore
very primitive. This type of economic system is very backward since it does not
allow for change.
2. The Command Economy – In this type of economy, the means of production are
owned by the government. Its decisions are arrived at by planners or
government men who dictate what, how, and for whom to produce.
3. The market Economy – The basic characteristic of this economy is that
resources are privately owned and decisions are made by the people themselves.
Since every consumer arrives at his own decision, the system is coordinated
through an interlocking network of markets and prices. The system depends on
prices set by the conditions of demand and supply. Competition is supreme;
there is consumer sovereignty, and the price of the good is the guiding factor for
producers to know what and how much to produce.

It is the goods market that the prices of goods and services are determined. If there
is a strong demand on the part of the consumers for rice, this will be reflected in the
peso votes, which are the amount of money they are willing to spend on rice. Producers
respond by obtaining land, labor, and capital from the resource market for use in the
production of rice. The supply of rice in the market will also determine the price at
which rise will be sold in the goods market. In the resource market, the price of the
resources; the rent, salaries, and interest, will depend on the amount made available by
the resource owners as well as the amount of these resources that the producers will be
willing to hire.
THE MIX ECONOMY

It is seldom that economic system exists in pure form. The United States
economy is predominantly market, but is cannot be denied that there exists some form
of government control. Cuba can best be described as command since its decisions are
planned by the government; however, the price system is also used, even if only
minimally.

The Philippine economy is a mixed economy since it applies a mixture of the

three forms of decision-making. However, it is more market-oriented rather that
command or traditional.

OPPURTUNITY COST

When one makes a choice, there is always an alternative that has to be given up.
A producer who decides to produce shoes gives up other goods that could be produced
with the same resources. A student who buys a book with his limited allowance gives up
the chance of eating out or watching a movie. An M.A graduate who decides to teach,
gives up the salary he would have earned had he worked in a big firm like San Miguel
Corporation.

The values of these alternatives given up are referred to as opportunity costs.

When we make a decision to buy Good A, we are in effect, making the decision not to
buy Good B.
Society’s Technological Possibilities

Since a nation has limited resources, it has to cope by choosing different

potential bundle of good. It also has to choose among the different production
techniques and who will consume the goods and services it decides to produce. These
decisions involve choices on inputs to be used and the outputs to be produced. Inputs
refer to the commodities or services used to produce the good or the service. Existing
technology is used to combine these different inputs. Inputs consist of land, labor and
capital.

Land refers to gifts of nature to our productive process. It is a term that covers
natural resources including minerals, forests, oceans and soil.

Labor refers to the human resource used in production. Labor includes farmers,
doctors, factory workers, drivers or teachers.

Capital consist of useful goods and services resulting from the production
process. These are goods that are either consumed like shoes, or used in further
production like machines.

the producer should stay on any point of the curve. Any combination outside the curve
is not possible since it will need more units of capital input.

Should there be an increase in the amount of capital available, this could be led to
a rightward shift in the production possibilities frontier curve, resulting in the increased
production of both goods X and Y. The rightward shift of the production possibilities
curve shows an increase in the production of both goods.

The Tools of Economics

Economics is a positive science that means it deals with what it is. This is in
contrast to normative economics which deals with what should be. Economics is
therefore, a study that attempts to explain how an economy operates. To be able to
understand and explain economic events and economic theories, the student of
economics must learn how to use basic economic tools. Firstly, he has to learn how to
apply logic in order to enable him to reason out properly and to draw conclusions.
Secondly, the use of mathematics will enable him to conceptualize and quantify
economic

principles. Thirdly, he uses statistics to describe quantitatively human behaviors and to

serve as empirical evidence in the testing of hypothesis.

These tools equip the economist or even the student of Economics to approach
the subjects in a scientific manner. This scientific approach can be outlined in the
following stages:

a. Observation – An analyst should be able to recognize conditions, behaviors and

events in the environment. By simply looking around, he shall be able to obtain
information necessary to analyze an economic principle.
b. Definitions and Assumptions – The analyst should describe the specific uses of
the study and the peripheral conditions which affect the economic behaviors
which are being studied.
c. Deductions – These are hypothesis or theories presented for empirical
validation. They are temporary conditions made based on one’s observations and
are still subject to the presentation of evidence.
d. Empirical Testing – Deductions have to be tested as to their validity and
correctness. The presentation of the empirical evidence will be the basis of
rejecting or accepting a hypothesis. The evidence gathered consists of statistics
which is used to verify one’s guesses. In the Philippines, important government
agencies serve as major sources of statistics: the National Census and Statistics
Office (NCSO), the National Economic Development Authority (NEDA), the
Central Bank, and even the municipal and city halls.