INTRODUCTION IN ECONOMICS

‘Queen of Social Sciences.’

‘OIKOS’ + ‘NOMOS’
| |
Household Management

ADAM SMITH - Father of Modern Economics ‘An inquiry into the Wealth of Nation’ 1776
(1st book)

o A social science that deals with efficient application of scarce resources in order to
satisfy the unlimited needs and wants of men.

● Since we have unlimited desires, and only a fixed amount of resources available
to meet those desires, we can’t have everything that we want. Thus, scarcity
forces us to choose: we can’t have everything. Since scarcity forces us to choose,
and economics is the study of choice, scarcity is the fundamental concept of
all economics. If there were no scarcity, there would be no need to choose
between alternatives, and no economics!
● Scarcity means we have to decide how and what to produce from these limited
resources. It means there is a constant opportunity cost involved in making
economic decisions.
● Central economic problem.

o Called as “maximizing behavior” or more approximately “optimizing behavior”.

o Optimizing means selecting the best out of available resources with the objective of
maximizing gains from given resources.

o According to J.S. Mill, Economics is “the practical science of Production and Distribution
of Wealth.”

ECONOMICS
|
Activities of mankind are studied which are concerned with earnings and spending of
money.

For the successful handling of these activities certain laws and rules are formulated which
are known as various theories of economics.

Use of these rules & tools for analyzing business conditions and applying them for arriving
at various economic decision is known as Managerial Economics

What is Economics?
● Activities of mankind are studied which are concerned with earnings and spending of
money.
 ● It is the study of choice related to the allocation of scarce resources; it means
economics is at the core of what managers of these organizations do.
● Economics is a branch of social science that deals with the study of the allocation
of limited resources for production, distribution, and consumption of goods and
services to satisfy the unlimited needs and wants of people. Economics includes
any business, nonprofit organization, or administrative unit.
● Economics is a study of choice.
● Economics is concerned with the explanations of observed phenomena.

What is the use of Economics?

● We use economics to examine how managers may create or design organizations that
encourage people to make choices and do actions that will boost a firm's profitability.
● We study economics to create and to make wise choices and decisions.

What is the Importance of Economics?

● Economics provides the insights and analytical framework required to understand the
way our world operates, from the choices we make in our everyday lives, to how
businesses or governments achieve their desired objectives. Everyday, people make
choices that affect their lives, in big or small ways.

● Having knowledge in economics is important to all sectors of the economy.

● In Business, this will help them to predict or forecast the future of their business, they
will be guided on how to make the optimal decision, given a way to follow economic
theories and tools.
● In Ordinary People, It helps us to realize that management of our resources such as
budget, saving, and investment are an important part of our daily life. Using the
theory in day-to-day activities and making choices and decisions.
● In Government and Policy Makers, It can guide them in policy formulation and
evaluation specially on policies related to trade, taxation, poverty, prices, interest. Then
policy administrators and implementers can objectively achieve their goals.

BRANCHES OF ECONOMICS
What is Microeconomics?
● Microeconomics generally deals with particular organizations (firms, industry,
market) instead of the whole economy; it explains how and why these units make
economic decisions.
● Microeconomics reveals how industries and markets operate and evolve, why they differ
from one another, and how they are affected by government policies and global
economic conditions.
● Examples are: How consumers make purchasing decisions, How their choices are
affected by changing prices and incomes, How a local business decides to allocate
their funds. How a city decides to spend a government surplus. The housing market of
a particular city/neighborhood.

What is Macroeconomics?
● It is a branch of economics dealing with performance, structure, behavior, and
decision-making of an economy as a whole.
● Macroeconomics also involves the analysis of markets—for example, the aggregate
markets for goods and services, labor, and corporate bonds.
● Examples are: The total consumption and production of a region, Inflation, Gross
Domestic Product (GDP), National Income, Government Policies, Pandemic, and
Unemployment Levels.
 THEMES OF MICROECONOMICS

● Microeconomics is about limits —the limited incomes that consumers can spend on
goods and services, the limited budgets and technical know-how that firms can use to
produce things, and the limited number of hours in a week that workers can allocate to
labor or leisure.
● Microeconomics is also about ways to make the most of these limits
● It is about the allocation of scarce resources

What is Trade-Offs?
● A trade-off (or tradeoff) is a situational decision that involves diminishing or
losing one quality, quantity, or property of a set or design in return for gains in
other aspects.
● It is your choices, it is an options that lay down to you.
● Consumers, workers, and firms have much more flexibility and choice when it comes to
allocating scarce resources.
● Microeconomics describes the trade-offs that consumers, workers, and firms face,
and shows how these trade-offs are best made.

CONSUMERS - Consumers have limited incomes, which can be spent on a wide variety of
goods and services, or saved for the future.

CONSUMER THEORY - describes how consumers, based on their preferences, maximize their
well-being by trading off the purchase of more of some goods for the purchase of less of
others.
- We will also see how consumers decide how much of their incomes to save, thereby
trading off current consumption for future consumption.

WORKERS - First, people must decide whether and when to enter the workforce. — the
kinds of jobs—and corresponding pay scales—available to a worker depend in part on
educational attainment and accumulated skills. One must trade off working now (and earning
an immediate income) for continued education (and the hope of earning a higher future
income).
- Second, workers face trade-offs in their choice of employment. — For example, while
some people choose to work for large corporations that offer job security but limited
potential for advancement, others prefer to work for small companies where there is
more opportunity for advancement but less security.
- Workers must sometimes decide how many hours per week they wish to work,
thereby trading off labor for leisure.

FIRMS - Firms also face limits in terms of the kinds of products that they can produce, and
the resources available to produce them.

THEORY OF THE FIRM - describes how these trade-offs can best be made.
 - It tells us whether a firm’s output level will increase or decrease in response to an
increase in wage rates or a decrease in the price of raw materials.

PRICES AND MARKETS

- A second important theme of microeconomics is the role of prices.
- Microeconomics also describes how prices are determined. In a centrally planned
economy, prices are set by the government. In a market economy, prices are
determined by the interactions of consumers, workers, and firms.
- These interactions occur in markets—collections of buyers and sellers that together
determine the price of a good.

THEORIES AND MODELS

- THEORIES are developed to explain observed phenomena in terms of a set of basic

rules and assumptions.
- This is an explanation of why-things are as they are.
- This can be used to explain the cause and effect relationship of phenomena.
- This can be also used as a basis to predict a certain phenomenon.
- The theory uses this assumption to explain how firms choose the amounts of labor,
capital, and raw materials that they use for production and the amount of output
they produce.
- It also explains how these choices depend on the prices of inputs, such as labor, capital,
and raw materials, and the prices that firms can receive for their outputs.
- Economic theories are also the basis for making predictions.
- With the application of statistical and econometric techniques, theories can be used to
construct models from which quantitative predictions can be made.

MODELS

- A model is a mathematical representation, based on economic theory, of a firm, a

market, or some other entity.
- This refers to a tool used by economists to explain economic phenomena.
- It uses assumptions to simplify reality and these are made which deduces how people
behave.
- For example, we might develop a model of a particular firm and use it to predict by
how much the firm’s output level will change as a result of, say, a 10-percent drop in
the price of raw materials.
- Statistics and econometrics also let us measure the accuracy of our predictions.
- No theory, whether in economics, physics, or any other science, is perfectly correct. The
usefulness and validity of a theory depend on whether it succeeds in explaining and
predicting the set of phenomena that it is intended to explain and predict.
- The process of testing and refining theories is central to the development of
economics as a science.

- “The theory does explain a broad range of phenomena regarding the behavior,
growth, and evolution of firms and industries, and has thus become an important
tool for managers and policy makers.”
What is the Economic Model?
● An economic model is a simplified version of reality that allows us to observe,
understand, and make predictions about economic behavior. The purpose of a model
is to take a complex, real-world situation and pare it down to the essentials.
● It is the structural and scientific method of constructing or developing Solutions by
using basic economic principles, concepts, theories and Quantitative techniques such as
Mathematical and Statistical tools.

What is the Basic Concept Hypothesis?

- This is a conjecture / proposition that is subjected to empirical verification.
- Need to verify if the hypothesis is true or not using the data.
- Example: Lumabas sa data using statistical tool na significant ang relationship ng
income at consumer behavior, you may conclude that this hypothesis is true.

What is the Basic Concept of Economic Efficiency?

- This is experienced when firms are able to reduce the per unit cost of producing
the output.
- In simple terms, the firm maximizes the output at lowest possible cost.
- Mangyayari ito kung maraming napoproduce na good or maraming na-mixime na
production given na low lang yung inputs na nagamit mo or cost na na-incurred.
- (This will happen if there are a lot of goods being produced or a lot of mixed
production given that the inputs that you have used or the cost that has been incurred
are low.)

What are Goods?

- These refer to tangible and intangible things that can satisfy human wants
(things that we consume)
- Examples: Food, Shelter, Services.
- Tangible, Goods that can be physically touched; can be seen and touched such as
foods and clothes.
- Intangible, Goods that cannot be physically touched; sometimes we can feel, get, and
seen such as Professional Teaching Services (the knowledge from teacher cannot be
seen)

*Free Goods - Those that are abundant and can be acquired at zero price. (Air)
*Economic Goods - are scarce or limited and can be possessed at a price. (Raw Materials,
Food Products, Timber)
*Final Good or Finished Products - Those that are ready for final consumption.
*Intermediate Goods / Semi- finished Products - are those used for further production of a
good into finished products. (Raw Materials, Ingredients)

*BOTH GOODS AND SERVICES ARE CONSIDERED AS PRODUCTS. PRODUCT ARE THE
OUTPUT PRODUCED WITH THE USE OF RESOURCES.
POSITIVE VS. NORMATIVE ANALYSIS/ECONOMICS

● Microeconomics is concerned with both positive and normative questions.

POSITIVE - deals with explanation and prediction, normative questions with what ought to be.

- Statements that include only factual information, with no value judgments. “What is.”
- Based on facts or theory.
- Deals with the cause and effect relationship of economic phenomena which can be
tested using empirical evidence.

- Positive analysis is central to microeconomics.

- What will happen to the price, production, and sales of cars? What impact will this
policy change have on American consumers? On workers in the automobile industry?
These questions belong to the realm of positive analysis: statements that describe
relationships of cause and effect.

NORMATIVE - Statements that include value judgments, or opinions. “What is best?” “What
ought to be?”
- Normative analysis is not only concerned with alternative policy options; it also
involves the design of particular policy choices.
- It is based on value judgment or opinion which cannot be tested.

- For example, a comparison between a gasoline tax and an oil import tariff might
conclude that the gasoline tax will be easier to administer but will have a greater
impact on lower-income consumers. At that point, society must make a value
judgment, weighing equity against economic efficiency. When value judgments
are involved, microeconomics cannot tell us what the best policy is. However, it can
clarify the trade-offs and thereby help to illuminate the issues and sharpen the debate.

What is a Market?
● Market is a collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product or set of products.
● Markets are at the center of economic activity, and many of the most interesting issues
in economics concern the functioning of markets.
● Note that a market includes more than an industry. An industry is a collection of
firms that sell the same or closely related products. In effect, an industry is the
supply side of the market.

*Significant differences in the price of a commodity create a potential for arbitrage:

buying at a low price in one location and selling at a higher price somewhere else.
 SUPPLY AND DEMAND
What is Demand?
● The willingness of a buyer to purchase a certain good or service.

● For example, if more people can afford Iphone14, the market size and demand for
Iphone14 will increase. If there are fewer people able to afford the Iphone14, the market
and demand decrease.

What is Quantity Demanded?

● The amount of a good that buyers are willing to purchase at a given price for a given
period of time.

What is the Law of Demand?

● As the price of a good increases, other things being equal, the demand for that good
decreases.
● As the price of a good decreases, other things being equal, the demand for that good
increases.
● Concerned with the behavior of the consumer.

What is Supply?
● How much the market is willing to offer to consumers.
● Supply represents the quantity of a good or service that a market can offer. In other
words, how much is available or how much can be provided over a specific period.
● Example: This is just a scenario. You are a flower seller at the park. During Valentine's
Day, the Demand of flowers increases because many people during that occasion buy
many special flowers. You've noticed that you're running out of Supply on flowers. If the
Price is inverse to the Quantity Demanded and it is proportional to the Quantity
Supplied, The Quantity Demanded will be also inverse at Quantity Supplied.

What is Quantity Supplied?

● The amount of goods that producers and suppliers can offer to consumers.

What is the Law of Supply?

● As the price of a good increases, other things being equal, the supply of that good
increases.
● As the price of a good decreases, other things being equal, the supply of that good
decreases
● Concerned with the consumer of the producer.
What is Market Equilibrium?
● A market state where the quantity supplied is equal to the quantity demanded.

What is Equilibrium Price?

● The price when quantity supplied is equal to the quantity demanded of a certain good.

What is Equilibrium Quantity?

● The amount that consumers want to buy is equal to the amount that producers are
offering to the market.

What is Surplus?
● When quantity supplied is greater than quantity demanded.

What is Shortage?
● When quantity demanded is greater than quantity supplied.
 TYPES OF MARKET COMPETITION
What is a Perfect Competition?
● There are almost an unlimited amount of buyers and sellers in the market.
● Many sellers are selling almost the same product.
● Example ay mga nagbebenta ng manok sa palengke

What is Monopoly?
● There is only one seller or producer of a certain good in the market.
● The seller has the power or advantage to control the price of the good.
● Example is Meralco - the only company who distributes electrical supply sa atin

What is Monopolistic Competition?

● There are many sellers offering a similar, but not exact product.
● Consumers are given a variety of choices.
● Example is Taytay tiangge - almost all sellers are selling clothes pero hindi ganoon
magkakaparehas yung products nila

What is Oligopoly?
● There are a few or a handful of producers offering a similar, but still distinct product.
● These companies can either compete or collaborate with one another to set a certain
price for the product they’re offering in order to prevent other companies from
entering the market.
● Examples are Pepsi and Coca-cola who are dominating the softdrinks industry.

What is Monopsony?
● There is only one buyer of a certain good.
● Buyer has the advantage to set the price for the good that they’re consuming.