Chapter 1

INTRODUCTION

LESSON 1
BASIC ECONOMIC CONCEPTS

OBJECTIVES:
1. To define economics.
2. To discuss the importance of economics.
3. To discuss why we study economics.
4. To identify the fundamental economic activities and factors of production.
5. To compare the divisions of economics.

A. Basic Terms
 Needs – basic requirements for survival like food, water, and shelter. In recent years, we
have seen a shift of certain items from wants to needs like telephone services, motor
vehicles, and education.
 Moslow’s Hierarchy of Needs

 Wants – the various desires of man that must be satisfied with goods and services. Wants
are defined as something that a person would like to possess; either immediately or at later
time. Wants are not as important as needs, because a person can live without wants.
 Goods – things (tangible or intangible) that are produced, sold, bought, and utilized which
satisfy a person’s needs and wants.
 Services – the efforts rendered by someone for a price such as haircuts, doctor’s visits, legal
consulting, etc. which also satisfy human needs and wants. Non-physical, intangible parts of
the economy, as opposed to goods which we can touch or handle.
 Consumer Goods – goods that are intended for final use by the consumer like milk, soft
drinks, and food.
 Capital Goods – goods that are used in the creation or production of other goods like
buildings, machinery, and equipment.
 Essential or Necessity Goods – goods that are used to satisfy the basic needs of man such as
food, clothing, shelter, and medicine.
 Luxury Goods – goods that man may do without but are used to contribute to his comfort
and well-being, such as chocolates, perfumes, and expensive cars.
 Durable Goods – goods that last more than 3 years when used on a regular basis.
 Non-durable Goods – goods that last less than 3 years when used on a regular basis.
 HUMAN WANTS ARE UNLIMITED WHILE THE MEANS TO SATISFY THOSE WANTS ARE
LIMITED

B. Scarcity and Trade-off

 Scarce – means very small in amount.
 Scarcity – a situation that arises from the assumption of unlimited needs and wants and the
fact that resources to obtain goods and services are limited.
o It implies that we cannot have all that we want; hence, we need to make the best
use of scarce resources to satisfy our wants as much as possible.
o It limits our options and forces us to make hard choices which mean that in order to
get something, we must give up something else. There is always a trade-off to be
able to satisfy unlimited wants with limited resources.
o Trade-off will not only apply to individuals, families, and businesses but also to
governments or societies.
o Scarcity is the reason why people must “economize”.

C. Economics: Defined
 Economics is a study of how we manage our scarce resources.
 Economics is the proper allocation and efficient use of available resources for the maximum
satisfaction of human needs wants.
 Economics is concerned with production, distribution, and use of material goods and
services, and the study of human efforts to satisfy unlimited needs and wants with limited
resources.
 Economics helps us understand and predict price changes, and how the economy as a whole
works.

D. Reasons for Studying Economics

1. Economics helps us understand the marketplace and economic system.
2. Whether we are workers, employers, or the owners of a firm, economics is relevant to us.
3. As ordinary citizens, we can influence the public sector to make intelligent decisions about
how much money should be spent on basic services like education or health services.

E. Fundamental Economic Activities

1. Production – the process of transforming raw materials to a finished product.
2. Distribution – the physical apportionment of goods and services from the producers to the
consumers; it is simply called marketing distribution or trade.
3. Exchange – the transfer of ownership over goods and services from one person to another
and this is usually accomplished using money or credit.
4. Consumption – the process of using goods and services in the direct satisfaction of human
needs and wants; it is regarded as the most important function in economics because it is
the ultimate end of economic activity; without consumption, there would be no need for
production and distribution.

F. Factors of Production
1. Land – includes all the natural resources, including mineral deposits, water, air, trees,
poultry, livestock, and all other forms of these raw materials used in production of goods
and services.
2. Labor – any form of human effort like physical or mental, which is exerted in the production
of goods and services.
 3. Capital – refers to the machinery, tools, equipment, and structures used in the production of
goods and services.
4. Entrepreneurship – the ability of an individual to provide the right kind of good or service at
the right place and time, to the right people at the right price.
 Entrepreneur – the person who puts together or organizes the other factors of
production (land, labor, capital) to create goods and services which can satisfy the
needs and wants of man. He is innovative and a risk taker.

G. Divisions of Economics
1. Microeconomics:
 It studies the economy in parts. It deals with the economic behavior of individual
units such as the consumers, firms, and owners of the factors of production.
 It studies the decisions of individuals and businesses and the interaction of those
decisions.
 It explains the prices and quantities of goods and services, how market system works
and the effect of government regulations and taxes to individuals.
 It is concerned primarily with the market activities on individual economic units.
2. Macroeconomics:
 It deals with the economic behavior of the whole economy or its aggregates such as
government, business, and household, and how they grow and fluctuate.
 It is the division of economics that deals with aggregates. It presents pictures of
totals: income, output, employment, spending, and price level. It studies the
economy as a whole.
 It is concerned with the discussion of topics like gross national product, level of
employment, national income, general level of prices, total expenditures, and total
consumption.
 It treats the economic system as a whole rather than individual economic units of
which it is composed.