Introduction

Over the past years, the study of economics has widened to

encompass a wider scope of topics. Samuelson and Nordhaus’
Economics (2001) mentioned the major definitions in this
growing subject. Among these are:

1. Economics studies how prices of land, labor, and capital are

determined and how these prices are used to allocate scarce
resources.

2. Economics looks into the behavior of financial market and

how it allocates capital to the rest of the economy.

3. Economics looks into the distribution of income and into

ways of helping the poor without causing harm to the country’s
economic performance.

4. Economics studies the impact on growth of government

spending, taxes, and budget deficits.

5. Economics examines the movements in income and

employment during the different stages of the business cycle
with the goal of developing government policies that will
improve economic growth.

6. Economics looks at trade patterns among nations and

analyzes the impact of trade barriers.

7. Economics examines growth in deevloping countries and

suggests ways to encourage the efficient use of resources.

ECONOMIC ACTIVITY
Man’s Basic Economic Activity

Man’s basic economic activity consists of efforts to satisfy

human wants with the use of goods and services. Three
elements are involved in this objective of satisfaction as
discussed in this section.

The first is human wants. The best description that they are
unlimited and vary from the needs for survival, otherwise
known as basic needs (e.g, food, clothing and shelter) to higher
needs for a comfortable and more meaningful life. In addition,
man is subject to create wants, develop them due to the
effects of advertising and demonstrative effects of
consumption as dictated by our culture. Thus, one may be
influenced to buy an iPad, laptop, or iPod only because others
have it. Economics is concerned with the satisfaction of many
of these human wants especially basic ones.

The second element is the use of resources. The basic

economic resources of a nation consist of land, labor, capital,
and entrepreneurship. Since these items are available in limited
amounts, man has to learn to allocate them properly in order to
maximize the number of wants that can be satisfied. The
economy should pay the owners of these basic factors of
production for the use of their resources such as rent for
land, wage or salary for labor, interest for capital, and profit
for entrepreneurship.

The last element is the technique of man also constitute the

basic exchange that takes place between the business firm and
the consumers.

CONSUMPTION
The household is the basic consuming unit in the economy.
Since human wants are unlimited, humans maximize their
satisfaction through the proper allocation or mix of
expenditures within the context of budget limitations. For
example, a student has an allowance to budget usually for a
given week. Five hundred pesos goes to transportation,
sandwiches, soft drinks, and even an occasional movie. However,
a decision to buy a new T-shirt means giving up some snacks at
school as the satisfaction that will be gained from the former
will outweigh the satisfaction foregone from the latter. The
opportunity foregone is called opportunity cost, defined as the
value of a foregone alternative of a specific resource.
Opportunity cost may also be exemplified in the earning value
of a university ground had it been used as a commercial center
instead of an educational institution.

The business firm serves as the economy’s producing unit to

satisfy human wants with goods and services. For example
production must take place in a factory before Shoemart can
sell beautiful high-healed pairs of shoes. The entrepreneur had
to hire shoe cutters and sewers and skilled workers; buy
leather, thread, metals, paste, shoe-making machineries; and
work on all these materials to come out with different shoe
designs and colors.

The use of resources generates income for the resource

owners. The owners of land in which a factory is constructed
charge rent for the use of their property. The shoe cutters,
pattern makers, dyers, and other workers have to be paid
wages for their efforts expended in production. The owner of
the business has to forego the alternative use of his money to
invest in the business for which he charges interest. Even the
entrepreneur has to do something out of pooling these
resources for production to gain income or profit. It is the
entrepreneur who basically makes the decision as how to
productiont resources should be best combined to come up
with the desired output.

SOME ECONOMIC PROBLEMS

Most societies aim to use economic activity as a channel to
improve the people’s standards of living within the limits of
available resources. Hence, a government can restructure the
economic system in order to solve its shortcomings or problems
like:
1. Unemployment
2. Economic instability that causes high and low production and
investment levels;
3. Low levels of growth and development, which make them
more difficult for underdeveloped and developing nations to
rise from their low levels of income and employment;
4. Inequality in income distribution resulting in the
concentrarion of the nation’s wealth in the hands of a few; and
5. Determination of the type of economic system to be adopted
to meet the country’s peculiar conditions and needs.

Unemployment is a problem because it leads to the existence

of idle resources. This means that income is foregone on
resources which would generate earnings to the owner if used.
Furthermore, economic instability in a nation makes it difficult
for producers to make accurate forecasts on demand and
consumption levels. This would cause fluctuations in their
production and supply of goods and services resulting to
surpluses or shortages of goods.

Poor countries especially suffer from low levels of economic

growth and development. They get caught in the vicious cycle
of poverty, making it difficult to get started on their
development. Their low levels of income deter them from
channeling funds to investments in order to propel economic
growth.

On the other hand, the problem of unequal income distribution

exists when too many people in the nation that belong to the
low income group cause a pyramidal structure in the economy.
The base which is made up of the majority of the population, is
the low income earners who can only afford to satisfy their
basic needs. The wealth of the nation is concentrated in a
small number of families who control the bulk of the country’s
purchasing power.

Lastly, the choice of the nation’s economic system is vital to

any country because it determines the manner in which goods
will be produced, the quantities of each good that will be
produced, and the distribution of these goods and services.

Economic Analysis

Economic analysis is the process of directing economic

relationships by examining economic behavior and events and
determining the causal relationships among the data and
activities observed.

A student of Economics who attempts to analyze

relationships among economic variables must learn to draw
conclusions from the particular to the general (inductive
reasoning) or from the general to the particular (deductive
reasoning.) This necessitates the use of the first tool of
economics which is logic.

On the other hand, an economic analyst uses statistics to

quantitatively describe economic behavior and therefore
serves as a basis in hypothesis testing. A hypothesis becomes a
principle or theory when empirically validated.

The third tool of economics is mathematics which enables an

analyst to foresee and assess a hypothesis for empirical
validation.

Purposes of Economic Analysis

1. Economic analysis is an aid in understanding how economy

operates because it explains how economic variables are
related to one another.

2. It permits prediction of the results of changes in the

economic variables.

3. It serves as a basis for just policy formulation.

Economic Policy

Economic policy consists of intervention or courses of action

taken by the government or other private institutions to
manipulate the results of economic activity. The economic
policy adopted by the government may be monetary, fiscal, or
trade for the purpose of achieving economic walfare.

Methodology

To make a useful, systematic study of economic activity, one

must use economic theory. Economic theory, like the theory of
any other science, consists of sets of principles or causal
relationships among the important facts or variables that
surround and permeate economic activity. We look first at the
constructions and functions of sets of economic principles;
then, we turn to the overall framework of the economic
discipline.

The Construction of Economic Theory

Any set of principles or theories must have a fundamental

starting point, consisting of propositionsons or conditions that
are taken as given, that is, without further investigation. We
call these premises or postulates upon which the theory is
established. In aerodynamics, the forces of gravity, the
operation of cetrifugal force, and the resistance of air may be
among the postulates of a theory involving lift, thrust and drag.
In economics on the other hand, we may build a theory of
consumer behavior on the postulate of consumer rationality,
defined as the general desire of consumers to secure as much
satisfaction they can in spending their incomes. Therefore, the
first step in the construction of a theory is the specification
and definition of its postulates.

The second step is the observation of facts concerning the

activity about which we want to theorize. For example, if the
activity in question is the exchange of groceries between
supermarkets and consumers, the activity should be looked into
as thoroughly as possible. As facts emerge from continued and
repeated observation, they will become apparent that some are
relevant while others are obviously insignificant and can be
discarded.

In the grocery exchange caase, the hair color of a consumer is

not likely to matter, but the weekly amounts of money that
consumers have to spend, the number of supermarkets
available to them, and the weekly quantities of groceries
available to be purchased will most certainly be important.
 The third step - and this one will frequently be taken
simultaneously with the second - the application of the rules of
logic to the observed facts in an attempt to establish causal
relationship among them and to eliminate as many irrelevant
and insignifican facts as possible. Deductive chains of logic can
state that certain effects follow certain causes in a regular
manner. We may reasno that because consumers with larger
incomes are willing to pay higher prices for specific goods an
increase in consumer incomes is likely to lead to higher prices.
Or, on the other hand, we can reason inductively. Repeated
observations can indicate that increase in consumer incomes
and increase in tprices occur simultaneously. With these
means, we reach the tentative conclusion that higher incomes
cause prices to rise such tentative statements of cause and
effect relationships are called hypotheses.

The fourth step in the process of establishing a set of

principles is a cruical one.

Once hypotheses have been formulated, they must be

thoroughly tested to determine the extent of which they are
valid, that is, the extent to which they yield good explanations
and predictions. The tools of statistics and econometrics are
of particular values in this respect. Some hypotheses will not
withstand the rigors of repeated testing, and consequently,
must be rejected. Others may look promising with
modifications and then the modified hypotheses must be
tested. Still other hypotheses may be found to hold up most of
the time in most of the circumstances to which they are
relevant. We usually refer to these as principles.

It would be foolish to regard a set of principles or a theory as

absolute truth. The testing process in economics and in other
sciences never ends. At any given point, we think of principles
as the best available statements of causal relationships;
however, additional data and better testing techniques may
enable us to improve on them over time. Economic theory is not
a once-and-for-all set of principles. It is continually evolving
and growing.

The Functions of Economic Theory

The principal functions of economic theory fall into two

categories: (1) to explain the nature of economic activity; and
(2) to predict what will happen to the economy as facts change.
The explanation of the nature of economic activity enables us
to understand the economic environment in which we live - how
one part relates to others and what causes what. We should
also like to be able to predict with some degree of accuracy
what is likely to happen to the key variables that affect our
well-being and to be able to do something about them if we
dislike the predicted consequences.

Economists differentiate positive economics and normative

economics aon the basis of whether the users of theory are
cocerned with causal elationship only, or they intend some kind
of intervention in economic activity to the course of that
activity. Positive economics is completely objective, limited to
the cause-and-effect relationships of economic activity; it is
concerned with the way economic relationships are. By way of
contrast, normative economics is concerned with what ought to
be. Value judgements must be necessarily be made, that is,
possible objectives to be achieved must be ranked, and choices.
Economic policy-making-conscious intervention in economic
activity with the intent of altering the course that it will take -
is essentailly normative in character. But if economic policy-
making is to be effective in improving economic well-positive
economic analysis. Policymakers should be cognizant of the full
range of consequences of the policies they recommend.

1st lesson/prelims
Basic micro/aat