MICROECONOMICS

ECONOMICS

We can define economics as the efficient allocation of the

scarce means of production toward the satisfaction of human
needs and wants.
Two important concepts in the definition of economics:
First, the scarce means of production refers to our economic resources like land, labor,
capital, which we use to produce all the goods and services that we need and want.
The problem however is that we do not have enough resources to produce all the goods
and services that we desire. This is because our resources are limited or scarce while our
wants are generally unlimited. This is where the second important concept of economics
comes in: we try to make the best of a less-than-ideal situation.
 ORIGIN OF THE WORD “ECONOMICS”

The two Greek roots of the word economics are oikos -- meaning
household --- and nomus --- meaning system or management.
Oikonomia or oikonomus therefore means the “management of
household.”
 SCARCITY: THE CENTRAL PROBLEM OF ECONOMICS

Scarcity

One author, in particular, defines scarcity as a commodity or service being in short

supply, relative to its demand (Kapur 1997).
SCARCITY: THE CENTRAL PROBLEM OF ECONOMICS
SCARCITY: THE CENTRAL PROBLEM OF ECONOMICS
FACTORS OF PRODUCTION
LAND

In broad terms, land refers to all-natural

resources, which are God- given and
found in nature and so, these are not
manmade. Land does not solely mean
the soil or the ground surface; it refers
to all things and powers that are given
free to mankind by nature. The
compensation for use of land is called
rent.
FACTORS OF PRODUCTION
LABOR

Labor is any form of human effort exerted in the

production of goods and services. Labor covers a
wide range of skills, abilities, and characteristics.
It includes factory or construction workers who
are engaged in manual or physical work. It can
also refer to an economist, nurse, doctor, lawyer,
professor and other workers and professionals
who are mainly involved in mental work. The
compensation for labor rendered is called salary
or wage.
FACTORS OF PRODUCTION
CAPITAL

Capital is manmade product used in the

production of other goods and services. It includes
the buildings, factories, machinery, and other
physical facilities used in the production process.
FACTORS OF PRODUCTION
ENTREPRENEURSHIP

An entrepreneur is a person who organizes,

manages, and assumes the risks of a firm, taking a
new idea or a new product and turning it into a
successful business.
THE
CIRCULAR
FLOW MODEL
The figure illustrates the flow of
resources and payments for their
use as well as the flow of goods and
services and payment for them.
Thus, the household sector sells
resources to and buys products from
the business sector while the
business sector buys resources from
and sells products to the household
sector.
 WHAT IS THE RELATIONSHIP BETWEEN ECONOMICS AND SCARCITY?

Their relationship is such that if there is no scarcity, there is no need

for economics.
The study of economics is therefore essential in order to address the
issue of resource allocation and distribution, in response to scarcity.
WHAT IS THE
RELATIONSHIP
BETWEEN
ECONOMICS AND
SCARCITY?
 FOUR BASIC ECONOMIC QUESTIONS

To address the problem of scarcity and solve the basic decision problems, the society
must answer four basic economic questions of

What to produce?

How to produce?

For whom to produce?

How much to produce?

 FOUR BASIC ECONOMIC QUESTIONS

1. WHAT TO PRODUCE?

The question 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 a
man.
 FOUR BASIC ECONOMIC QUESTIONS

2. 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.
FOUR BASIC ECONOMIC QUESTIONS

3. 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.
 FOUR BASIC ECONOMIC QUESTIONS

4. FOR WHOM TO PRODUCE?

This question identifies the people or

sectors who demand the commodities
produced in a society.
 THE CONCEPT OF OPPORTUNITY COST

In economics, opportunity cost refers to the foregone value of the next best alternative. In
particular, it is the value of what is given-up when one makes a choice. The thing thus given-up
is called the opportunity cost of one’s choice.
 THE CONCEPT OF OPPORTUNITY COST

EXAMPLE

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. Therefore, if a consumer only has
P20.00 and chooses to buy a bottle 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.
THE CONCEPT OF OPPORTUNITY COST
GROWTH OVER TIME
Societies continue to live on. They also
grow in numbers. On the other hand,
people have definite lives, but societies (or
nations) have longer, if not infinite lives.
BASIC DECISION PROBLEMS
CONSUMPTION

Members of society, with their individual

wants, determine what types of goods and
services they want to utilize or consume, and
the corresponding amounts thereof that they
should purchase and utilize.
 BASIC DECISION PROBLEMS

PRODUCTION

Producers determine the needs, wants, and demands

of consumers, and decide how to allocate their
resources to meet these demands.
 BASIC DECISION PROBLEMS

DISTRIBUTION

There must be a proper allocation

of all the resources for the benefit
of the whole society.