TOPIC I: DEFINITION & TERMINOLOGY: ECONOMICS,

MICROECONOMICS AND MACROECONOMICS

TOPIC 1: ECONOMICS DEFINED

ECONOMICS occupies a primordial role in national development. The many diverse needs of
individuals are material in nature – the house where the family lives, the food, transportation,
school uniforms and myriad other needs are all the subject matter of economics as reflected in its
definition, vis:

“Economics is a social science that studies the maximization

of scarce(limited) resources in order to fulfill unlimited human
wants & needs.”

▪ Importance of understanding Economics

- It gives us the proper understanding on how our economy works
- We can know how economics affect our everyday lifestyle as it improves our decision
making on how we deal with our wants and needs while the resources are limited.

Historical Antecedent
Economics as a social science evolved in the 18 th century. However, it is only in this century
that the field is given proper recognition particularly in its provision of a set of tools to
understand socio-economic problems to arrive at rational solutions.

It is thus that this manual is written to help you understand various and numerous problems of
mankind as poverty, starvation, illiteracy, etc. This provides an entry point for the tools you
would have learned to apply to different situations and problems, simple and complex.

TOPIC II: FACTORS OF PRODUCTION; ECONOMIC THEORY &

PRICE THEORY
SALIENT OBSERVATIONS

1. That inequality in inherently a part of a capitalist country like ours.

2. Inequality is brought about by an imbalance in the ownership of resources (factors of
production like:
 1. Land – all gifts of nature
(rent - tawag sa bayad ng upa)

 2. Labor – exertion of human efforts

(salaries and wages for labor)
Salaries - fixed na sahod, definite ang sahuran like per month
Wages - it depends on the performance/hours of working

(*raw labor – exertion of human effort that does not need any training. Ex: janitor)
(*human capital- resulted with education; nag-eenhance sa raw labor
 Sources of human capital:
a. formal education – Four (4) years schooling (ex: lawyer)
b. non-formal education (ex: TESDA)
c. informal education – (hindi nakukuha sa formal education in which natututunan ito sa
everyday exposure, travel, and experiences)

3. Capital – produced goods used to produce more goods

(Interest for Capital)

(Ex: machinery, equipment, tools, raw materials) (It

is the thing money can’t buy)
(Capital is not represented by Money because you will never use money to produce
another goods)

 4. Entrepreneurship – ownership of enterprises

(Profit for Entrepreneurship)

(entrepreneur - willing to take risk)

(It is the entrepreneur learns the more)

* the higher the risk the higher the return, the lower the risk the lower the return
* the higher the risk, the higher the danger
* it is not being employed that make you rich, it is the entrepreneurship

All of the above production factors you have learned in your high school economics are
scarce. On one hand, whoever has more of each one will have better productivity and wealth
contributing to the disparity in the quality of human life. On the other hand, as economics has
taught us also, despite the limitation imposed on the scarcity of production factors, one has
the capability to maximize whatever resources he has to fulfil his unlimited wants and needs.
3. Limitations in the availability of resources may be overcome by enhancing what one has as
in land – when you build taller buildings in a small patch of land; labor-when you
enhance the productive capacity of your human potential via education, remember the
concept of human capital formation?

4. Any family or government has the objective of providing for a better quality of life for all
family members for the former or for all citizens for the latter. This is the subject matter of
economics- how to maximize limited resources in order to fulfill unlimited needs and wants.

Scarcity, Needs and Wants

Scarcity exists when the productive factors in society (land, labor, capital & entrepreneur) arenot
enough to meet all the needs and wants of the people in a society.

The reality of scarcity is ever present for the reason that wants and needs are unlimited while
resources are limited.

Needs are the things you cannot do without – those essential for survival (e.g., food, clothing,
shelter)
Wants are those you can do without (e.g., jewelries, home theatre, etc.).

Because of the presence of scarcity, individuals, families and even governments have to
make choices. In your case, for example, where do you spend your allowance – for books and
school supplies or for mobile data. For your family, the choice of leisure and travel against the
schooling of their children or, for the Philippine government, the decision to “lockdown” a
community and the consequent stoppage of economic activity (e.g., tricycles, buses, factories)
resulting to unemployment, poverty and the restlessness among many. All these arethe subject
matter of economics, the choice on how to “maximize scarce resources in order to satisfy
needs and wants”.

Depending on the level or scope of analysis made on an economic problem, they may fall
under any of the following branches of economic analysis:

1. Microeconomics – is the study of individual (small) economic entities as an employee, a business firm, a
community
Example, when a father finds his income insufficient to meet all their household needs, he looks
for ways to supplement it. He may work longer hours, do double jobs or reduce household
expenses. This is making a microeconomic decision on microeconomic level.
2. Macroeconomics – the study of aggregate(collective) economic entities. When all
microeconomic entities are taken together, collective needs emerge as say, need for
security, health facilities, roads, bridges, schools and many others. An individual or a
family does not concern himself with decisions of this nature. Decision making on a
collective scale, on the national level of governance falls under the national government.

Example of a macroeconomic analysis is when they decide what level of quarantine they
impose on a particular province, or city. It is a health decision insofar as it is also an
economic decision. The consequence of the long lockdown period is the unemployment of
people caused by businesses that have closed. In this instance, the government has to come out
with means to alleviate the hardship of the families thus is born the Social Amelioration
Program (Ayuda).

3. International Economics - When different countries interact via trade and commerce,
decisions are made.
Example: The decision to sell or not to sell a product – as in crude oil- is a subject matter of
international economics.

The Structure of an Economic System

For a better understanding of the dynamics of a microeconomic entity, we have to identify the
different sectors that make up our economy. Looking at a simplistic model of an economy, there
are two basic players, the household and the business sector.
Figure 1. The Circular Flow of Economic Activity

Goods and Services

Household Business Firm

Land Rent
Labor Salaries and Wages
Capital Interest
Entrepreneur Profit

Consumption Expenditure
Factors of Production
Under normal circumstances, it is from the household where all production
factors emanate.These are used in the production of goods and services sold to
the household sector. The business firm pays for the production factors used in
the form of rent for land, salaries (fixed na sahod, definite ang sahuran like per
month) and wages (it depends on the performance/hours of working) for labor,
interest for capital and profit for the entrepreneur. In return, the household
pays for the goods and services they use in the form of consumption
expenditures.

It is in this kind of a scenario that a third player enters – the government. It

comes in to moderate activities within an economy, assistance when necessary
for there are goods and services whose cost is so high that neither the business
nor the household sector can provide. The government provides for social goods
and services like roads, bridges, hospitals, schools and other institutions where
they source their income from taxes paid by their citizens.

Economic Theory & Price Theory

ECONOMIC THEORY is made up of statements that predict the relationship between economic
variables.

In this case, the problem is his absence of income- the theory – it is caused by
his being prohibited in the streets to take on passengers. Now if he wants to
solve the problem of his absence of income, he has to look for other sources
which will not require the usage of his tricycle for hire. He decides to cook food
items sold via online portal which he delivers. An economic problem giving rise
to an economic theory and a consequent solution to the problem.
 PRICE THEORY is made up of statements that predict the relationships
between variables relating to how prices are determined. It is concerned
primarily with the market activities of individual economic units such as the
consumers, resource owners, and business firms.

Basic Economic problems:

1. What to produce – the types of goods society desires

2. How much to produce – the quantity of each good
3. How to produce – the technique of production, labor or capital intensive,
and
4. For whom to produce – the market to which you are going to sell the
product.