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Lesson 1: Economics as a Social Science
ECONOMICS
● Study of what constitutes rational
human behavior in the endeavor to
fulfill needs and wants
● Understanding how society allocates
its scarce resources
● Almost always, human activities
involve economics
“If you are born poor it's not your fault. But if
you die poor it's your fault.” - Bill Gates
Economics From Different Perspective
1. FAJARDO - Economics is the proper
allocation and efficient use of available
resources for the maximum satisfaction of
human wants
2. NORDHAUS - Economics – is the
science of choice. It studies how people
choose to use scarce resources to produce
various commodities
3. SICAT - Economics is a scientific study
which deals with how individuals and
society make general choices
4. WEBSTER - Economics branch of
knowledge that deals with production,
distribution and consumption of goods and
services
5. MARSHALL - Economics studies about
wealth getting and wealth using activities of
man.
ECONOMIC ACTIVITIES
● Earning money
● Buying goods and services
● Depositing and withdrawing money
in bank
SCIENCE - it collects scientific data; it is
based on the formulation of theories and
law
SOCIAL SCIENCE - study of societies and
the relationships among individuals within
those societies.
ECONOMICS - is the study of how people
use their scarce resources to satisfy their
unlimited wants.
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ECONOMICS is the study of how people THE ESSENCE OF STUDYING

use their scarce resources to satisfy their ECONOMICS
unlimited wants.
1. To understand the world better
● Applying the tools of economics can
help you understand global and
cataclysmic events such as war,
famines, epidemics and depression.

2. To gain self-confidence and become wise

decision maker
● Mastery of economics

MACROECONOMICS
● Deals with the economic behavior of
the whole economy or its aggregates
(composed of individual units)
● Aggregates business, government
and households
● Discusses the following:
(1) Gross National Product
(2) Level of Employment
(3) National Income
(4) General level of prices
● “EMPLOYMENT and INCOME
ANALYSIS”

MICROECONOMICS
● Deals with the economic behavior of
individual units such as: consumer,
firms, landowners
● Discusses the following:
(1) Price of rice
(2) Numbers of workers in a
certain firm
(3) Income of Mr. Fu
(4) Expenditures of PLDT
● “PRICE THEORY”
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Lesson 2: The Economic Problem
ECONOMICS IS EVERYWHERE
What is the Economic Problem?
SCARCITY - exists when the economy are
not enough to meet the wants or needs of
people or the society.
TYPES OF SCARCITY
1. Physical Scarcity - When resources
needed to satisfy wants and needs are not
available
2. Physiological Scarcity - When resources
are available but cannot be used by the
person or entity to satisfy their wants or
needs.
POINTS TO REMEMBER: To attain wants
and needs, people must make use of wise
economic decisions to prevent SCARCITY.
This can only be achieved by a
comprehensive understanding of the basic
principles of ECONOMICS.
Lesson 3: GOODS AND SERVICES
GOODS - are items that you can see, feel
and touch that require scarce resources to
produce and satisfy human wants.
TYPES OF GOODS
1. Free Goods - Goods that has no
opportunity cost
2. Private Goods - a product produced by a
privately owned business and purchased to
increase the utility, or satisfaction, of the
buyer.
3. Public Goods - it refers to a commodity
that is made available to all members of a
society. Paid by the government.
SERVICES - something not physical that
requires scarce resources to produce and
satisfy human wants.
LESSON 4: Productive Resources
PRODUCTIVE RESOURCES - It is also
called factors of production, inputs, or
simply resources, sort into three broad
categories:
1. Human Resources
● are people who work to produce a
good or service. Examples of human
resources are a truck driver,
plumber, teacher and nurse.
● LABOR = the effort the human
contribute
● ENTREPRENEURSHIP = combines
land, labor and capital in new ways
2. Natural resources
● are things that occur naturally in the
world and can be used to produce a
good or service. These resources
are gifts of nature and are present
without human intervention.
● We can classify our resources as
renewable and non renewable.
● RENEWABLE = air, water, trees,
plant
● NON-RENEWABLE = minerals, oils,
gas, energy
3. Capital Resources
● are goods produced and used to
make other goods and services.
Examples of capital resources are
an office building, computer, oven,
and wrench
“There is no such thing as a free lunch.”
There is no free lunch in economics, which
means that everything comes with a price.
The price may not always be money. If you
get something for free, there is a cost that
has to be paid somewhere in the wider
economic system.
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LESSON 5: Economic Theory
ECONOMIC THEORY - A simplification of
economic reality used to make predictions
about the real world.
Goal of Economic Theory - To make
predictions for the real world.
GOAL OF ECONOMIC THEORY
1. Explain how interactions arise and create
costs and benefits
● Economists try to explain the effects,
or results, of economic transactions.
2. Propose hypotheses, construct, and
apply ‘models’ to test these hypotheses.
● Like all scientists, economists
develop hypotheses to why
economic behavior takes place, and
then construct models to test these
hypotheses.
3. Gather data and come up with a Theory
● Theory must be tested against the
real world, which means gathering
statistical data about real events. In
this way, a model can be improved
and revised when necessary.
4. Predict behavior based on these theories.
● The ultimate goal of the economist is
to predict future behavior.
SIMPLIFY THE PROBLEM - A good theory
is simple enough to be understood. The
more detailed a theory gets, the more
confusing it becomes, and the less useful it
may seem.
Simplify Assumption - Assumptions aid us
in better understanding economic issues
and make sense of the behavior of
individuals, groups and institutions in an
economy.
MAJOR ASSUMPTIONS IN ECONOMICS
1. Rationality - Economists assume that
individuals act in a logical and predictable
manner and pursue goals which will benefit
them.
Rational Self Interest
● Why do people start their own
businesses?
● Why do companies donate to
charities?
● Why do you think companies give
bonuses instead of salary
increases?
● Why do banks like to lend money?
11
2. Profit MAximization - It means you try to
maximize the expected benefit achieved
with a given cost or to minimize the
expected cost of achieving a given benefit.
3. Perfect Information - In most markets, it is
assumed that consumers and producers
have complete and accurate information
about products, services, prices, utility,
quality, and production methods. This
assumption enables economists to study
market processes and effects of policies on
markets more accurately.
4. Ceteris Paribus - Latin phrase which
means “all things being equal” or “other
things held constant”, refers to the
assumption which controls the effects of
other variables apart from those that are
being analyzed in the study.
FALLACIES IN ECONOMICS
1. Failure to hold things constant under
ceteris paribus
● This is an error in analysis
committed when aN individual
considers other extraneous variables
in studying an economic
phenomenon. This results in invalid
conclusions since they are no longer
in keeping with the economic theory
or model being considered.
 – ECONOMICS NOTES –
2. Post hoc fallacy
● This fallacy relates to the Latin
phrase post hoc ergo propter hoc
which describes how people make
the mistaken notion that since a
change happened after an event,
then such change was caused by
the event that came before it.
● “Everytime I wash my car, it rains the
following day. Therefore, washing
my car caused the rain to come
down
● “After a black cat crossed my path, I
failed my math test. That cat caused
me to fail”
3. Fallacy of composition
● This fallacy occurs when one
considers a trait of one part or
aspect of something as true and
applicable for the whole.
● Paradox Thrift: During an economic
recession, if everyone starts saving,
the aggregate savings will reduce
● One standing: If I stand, I can stand
better; All standing: If we all stand,
we can all see better
4. Sweeping Generalization
● This fallacy refers to a statement
that oversimplifies a specific
scenario presenting it as a general
rule.
POSITIVE ECONOMICS - seeks to
understand behavior without making
judgements of the outcome; it is measurable
and can be proved.
Example:
Does a currency devaluation fuel inflation?
Are oil prices contributing to a GDP
slowdown?
NORMATIVE STATEMENTS - Analyzes
outcomes of economic behavior, evaluates
them as good and bad, and sometimes
prescribes a course of action; it cannot be
measured or proved.
Example:
Higher education should be FREE.
We must try to boost disposable income.
LESSON 6: Marginal Analysis
MARGINAL
● Incremental, additional, extra or one
more
● refers to a change in economic
variable, or a change in the status
quo.
MARGINAL BENEFIT
● maximum amount a consumer is
willing to pay for an additional good
or service.
● It is also the additional satisfaction or
utility
MARGINAL COST
● the cost added by producing one
additional unit of a product or
service.
MARGINAL ANALYSIS is an examination
of the additional benefits of an activity
compared to the additional costs incurred by
that same activity. Companies use marginal
analysis as a decision-making tool to help
11them maximize their potential profits.
Examples:
★ Deciding whether to hire new
employees.
★ A company must decide whether to
add a new line of products.
★ Deciding whether to find side hustle.
★ When you decide to go out to eat at
an eat-all you can consider the cost
and benefit of that decision.
Law of Diminishing Marginal Utility
● The law of diminishing marginal
utility states that all else equal, as
consumption increases, the marginal
utility derived from each additional
unit declines.
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LESSON 7:
ECONOMIC EFFICIENCY is a state where
every resource is allocated optimally so that
each person is served in the best possible
way.
EQUALITY - resources are allocated
equally and everyone gets the same share
EFFICIENCY - resources are allocated
optimally and we have generated as much
11satisfaction as possible
TRADE OFF - giving up of one thing in
return to another
PRODUCTION EFFICIENCY - the optimal
method of producing goods at the lowest
cost
ALLOCATIVE EFFICIENCY - the optimal
distribution of scarce resources
Productive efficiency (or production
efficiency)
● is a situation in which the economy
or an economic system could not
produce any more of one good
without sacrificing production of
another good and without improving
the production technology.
● means that, given the available
inputs and technology, it’s
impossible to produce more of one
good without decreasing the quantity
of another good that’s produced.
PRODUCTION POSSIBILITY FRONTIER
● a curve that illustrates the variations
in the amounts that can be produced
of two products if both depend upon
the same finite resource for their
manufacture.
● the point at which a country’s
economy is most efficiently
producing its various goods and
services and, therefore, allocating its
resources in the best way possible.
 – ECONOMICS NOTES –
LESSON 7: Absolute vs Comparative
ABSOLUTE ADVANTAGE
● is where a nation is more efficient at
making a product than another. In
other words, it requires fewer
resources to make a final good or
service.
● The concept of absolute advantage
was developed by 18th-century
economist Adam Smith in his book
The Wealth of Nations to show how
countries can gain from trade by
specializing in producing and
exporting the goods that they can
produce more efficiently than other
countries.
● Countries with an absolute
advantage can decide to specialize
in producing and selling a specific
good or service and use the
generated funds to purchase goods
and services from other countries.
● Absolute advantage explains why it
makes sense for individuals,
businesses, and countries to trade
with each other. Since each has
advantages in producing certain
goods and services, both entities
can benefit from the exchange.
● This mutual gain from trade forms
the basis of Smith’s argument that
specialization, the division of labor,
and subsequent trade lead to an
overall increase in prosperity from
which all can benefit. This, Smith
believed, was the root source of the
eponymous "Wealth of Nations."
COMPARATIVE ADVANTAGE
● an economy's ability to produce a
particular good or service at a lower
opportunity cost than its trading
partners.
● In his book On the Principles of
Political Economy and Taxation,
David Ricardo argued that even if a
country has an absolute advantage
over trading many kinds of goods, it
can still benefit by trading with other
countries if that have different
comparative advantages.
ASSUMPTIONS
● Both Smith's theory of absolute
advantage, anD Ricardo's theory of
comparative advantage, rely on
certain assumptions and
simplifications in order to explain the
benefits of trade. Both theories
assume that there are no barriers to
trade: they do not account for any
costs of shipping or additional tariffs
that a country might raise on
another's imported goods.
 – ECONOMICS NOTES –
● More crucially, these theories both
assume that a country's absolute
advantage is constant, and scales
equally. In other words, it assumes
that producing a small number of
goods has the same per-unit cost as
a larger number and that countries
are unable to change their absolute
advantages. In reality, countries
often make strategic investments to
create greater advantages in certain
industries.
LESSON 8: Economic Systems
5 MAJOR DIVISION OF ECONOMICS
1. PRODUCTION - involves combining
productive resources to produce goods
and services that could satisfy the needs
and wants of the people.
2. CONSUMPTION - the branch of
Economics that is concerned with spending
by households and firms on goods and
services.
3. DISTRIBUTION - examines the allocation
of the national income among various inputs
or factors of production. Distribution can
also refer to the distribution of income
among individuals and households.
4. EXCHANGE - refers to the buying and
selling of goods and services, either through
barter or the medium of money.
5. PUBLIC FINANCE - is the division of
economics that studies taxation and
expenditures by governments and the
economic effects.
THE BASIC ECONOMIC QUESTIONS
1. WHAT TO PRODUCE
● A society determines the kind and
quantity of products it will produce
depending on what the consumers
want to buy or are willing to pay for.
2. HOW TO PRODUCE
● A society decides who will produce
goods and services and what
process of production will be used.
● Goods may be produced by
corporations, small
business-owners, or the government
itself.
● The process of producing goods
may be addressed depending on the
costs and availability of resources
needed.
3. FOR WHOM TO PRODUCE
● The question revolves around the
issue of who will benefit from the
goods and services. Therefore, a
consumer who has the capacity to
pay for certain goods and services is
more likely to benefit than one who
cannot afford them.
ECONOMIC SYSTEM
● The answers for what, how and for
whom to produce are influenced by
the structure of a society’s economic
system.
● An economic system is
characterized by the type of
institutions responsible for the
management and allocation of
resources used in the production of
goods and services.
TYPES OF ECONOMIC SYSTEM
1. TRADITIONAL ECONOMY - Based on
culture and rituals, and is focused on the
community as a whole.
2. COMMAND ECONOMY - Relies on the
government to make all economic
decisions.
 – ECONOMICS NOTES –

Problems with pure command economy

● Consumers get low prioritY
● Little freedom of choice
● Central planning can be inefficient
● Resources are sometimes wasted
No role for Entrepreneurs

3. MARKET ECONOMY - driven by

consumers whose decisions determine how
the industries and financial markets will
operate. 1

Problems with pure market economy

● Difficulty enforcing property rights

● Some people have few resources to sell
● Some firms try to monopolize markets
● No public goods
● Economic Fluctuations

4. MIXED ECONOMY - utilizes government

involvement while also applying free market
concepts.