AE12 – Economic Development

Module 2: Basic Concepts in Economics

Ian Dave B. Custodio

Instructor
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Lesson 4: Fundamental Concepts in Economics

Learning objectives:
a. Define economics.
b. Distinguish the two main branches of economics.
c. Differentiate the various fields of economics.
d. Explain some basic concepts in the study of economics.
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Outline
4.1 What is Economics?
4.2 Branches of Economics
4.3 The Diverse Fields of Economics
4.4 Scarcity and Opportunity Costs
4.5 Why Study Economics?
4.6 Basic Economic Questions
4.7 The 3 Es in Economics
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4.1 What is Economics?

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Defining “Economics”
- economics is derived from the Greek word “oikonomia”, which is comprised of two
words: “oikos” and “nomos”

“oikos” or “eco” = household / home / family

“nomos” or “nemein” = management

“Oikonomia” = household management

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- a social science that examines how people choose among the alternatives available
to them. It is social because it involves people and their behavior. It is a science
because it uses, as much as possible, a scientific approach in its investigation of
choices.

- is the study of how humans make decisions in the face of scarcity.

Scarcity means that human wants for goods, services and resources exceed what is
available. Resources, such as labor, tools, land, and raw materials are necessary to
produce the goods and services we want but they exist in limited supply.
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- allocation of wealth and scarce resources to satisfy unlimited human needs and
wants. Allocation is a mechanism of distribution used by society to address the needs
and wants of citizens in an environment characterized by scarcity of resources.

- creation and consumption of wealth – process of distribution and production

Process of distribution: how products are transacted in the market and the impact of
the relative power of actors in the market in determining the price

Process of production: transforming raw materials to new products

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- a science of choice – Optimization

Optimization: getting the best option from limited resources
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According to Paul Samuelson:

Economics as the study of how people and society end up choosing, with or without
the use of money, to employ scarce or limited resources that could be used in the
production of goods and services to satisfy human wants.

According to Adam Smith:

- it is an inquiry into the nature and causes of the wealth of nations.

According to Alfred Marshall:

- it is on the one side a study of wealth; and on the other, a part of the study of man.
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4.2 Branches of Economics

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Branches of Economics
The two main branches of economics are:
1. Microeconomics
2. Macroeconomics
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1. Microeconomics
- deals with the analysis on how the allocation of scare resources is conducted by
small economic units, sectors, and institutions in the economy.

- focuses on the actions of individual agents within the economy – like households,
workers, and businesses.

- give emphasis on the choices made by individual decision-making units in the

economy —typically consumers and firms — and the impacts those choices have on
individual markets.
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Some Questions under Microeconomics

- What determines how households and individuals spend their budgets?
- What combination of goods and services will best fit their needs and wants, given
the budget they have to spend?
- How do people decide how much to save for the future, or whether they should
borrow to spend beyond their current means?
- What determines the products, and how many of each, a firm will produce and sell?
- What determines the prices a firm will charge?
- What determines how a firm will produce its products? What determines how many
workers it will hire?
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2. Macroeconomics
- looks at the economy as a whole and focuses on the impact of choices on the
total, or aggregate, level of economic activity.

- concerned about the allocation of scarce resources but takes the analysis at the
perspective of the entire economy.

- focuses on broad issues such as growth of production, the number of unemployed

people, the inflationary increase in prices, government deficits, and levels of exports
and imports. Central bank: Monetary policy, Government: Fiscal policy.
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Some Questions under Macroeconomics

- What determines the level of economic activity in a society?
- What determines how many goods and services a nation actually produces?
- What determines how many jobs are available in an economy?
- What determines a nation’s standard of living?
- What causes the economy to speed up or slow down?
- What causes firms to hire more workers or to lay them off?
- What causes the economy to grow over the long term?
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4.3 The Diverse Fields

of Economics
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The Diverse Fields of Economics

Individual economists focus their research and study in many diverse areas. Many of
these specialized fields are reflected in the advanced courses offered at most colleges
and universities.

Some are concerned with economic history or the history of economic thought.
Others focus on international economics or growth in less developed countries.

Still others study the economics of cities (urban economics) or the relationship
between economics and law.
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Economists also differ in the emphasis they place on theory.

Some economists specialize in developing new theories, whereas other economists

spend their time testing the theories of others.

Some economists hope to expand the frontiers of knowledge, whereas other

economists are more interested in applying what is already known to the formulation
of public policies.
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Some of the various fields of Economics

1. Comparative Economic Systems
- examines the way alternative economic systems function. Typically finds out the
advantages and disadvantages of the different economic systems.

2. Econometrics
- applies statistical techniques and data to economic problems in an effort to test
hypotheses and theories.
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3. Economic Development
- focuses on the problems of the low-income countries. Important concerns of
development economists include population growth and control, provision for basic
needs, and strategies for international trade.

4. Economic History
- traces the development of the modern economy. What economic and political
events and scientific advances caused the Industrial Revolution? What explains the
tremendous growth and progress of post-World War II Japan? What caused the Great
Depression of the 1930s?
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5. Economics of Race and Gender

- examines the role of race and gender in economic theory, in economic life, and in
policymaking. How has discrimination by race or gender affected the well-being of
households and the distribution of income and wealth?

6. Environmental Economics
- studies the potential failure of the market system to account fully for the impacts of
production and consumption on the environment and on natural resource depletion.
Have alternative public policies and new economic institutions been effective in
correcting these potential failures?
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7. Finance
- examines the ways in which households and firms actually pay for, or finance, their
purchases. It involves the study of capital markets (including the stock and bond
markets), futures and options, capital budgeting, and asset valuation.

8. History of Economic Thoughts

- grounded in philosophy, studies the development of economic ideas and theories
over time, from Adam Smith in the 16th century to the works of economists such as
Thomas Malthus, Karl Marx, and John Maynard Keynes.
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Because economic theory is constantly developing and changing, studying the history
of ideas helps give meaning to modern theory and puts it in perspective.

9. Industrial Organization
- looks carefully at the structure and performance of industries and firms within an
economy. How do businesses compete? Who gains and who loses?
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10. International Economics

- studies trade flows among countries and international financial institutions. What are
the advantages and disadvantages for a country that allows its citizens to buy and sell
freely in world markets? Why is the dollar strong or weak?

11. Labor Economics

- deals with the factors that determine wage rates, employment, and unemployment.
How do people decide whether to work, how much to work, and at what kind of job?
How have the roles of unions and management changed in recent years?
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12. Law and Economics

- analyzes the economic function of legal rules and institutions. How does the law
change the behavior of individuals and businesses? Do different liability rules make
accidents and injuries more or less likely? What are the economic costs of crime?

13. Public Economics

- examines the role of government in the economy. What are the economic functions
of government, and what should they be? How should the government finance the
services that it provides? What kinds of government programs should confront the
problems of poverty, unemployment, and pollution?
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14. Urban and Regional Economics

- studies the spatial arrangement of economic activity. Why do we have cities? Why
are manufacturing firms locating farther and farther from the center of urban areas?
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4.4 Scarcity and

Opportunity Costs
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Scarcity and Opportunity Costs

The problem of scarcity gave birth to the study of economics.

It is the heart of the study of economics and the reason behind its establishment.
Their relationship is such that if there is no scarcity, there is no need for economics.

The study of economics was essentially founded in order to address the issue of
resource allocation and distribution, in response to scarcity.
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Opportunity Cost
Because people cannot have everything they want, they are forced to make choices
between several options.

Opportunity cost refers to the foregone value of the next best alternative. It is the
value of what is given-up when one makes a choice.

The thing thus given-up is called the opportunity cost of one’s choice.
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When one makes choices, there is always an alternative that has to be given up.

A producer, who decides to produce shoes, gives up other goods that he could have
produced using the same resources.

A consumer, who decides to buy a pair of shoes, gives up other goods that he could
have bought using the same money.

It is also expressed in relative price. This means that the price of one item should be
relative to the price of another.
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All choices mean that one alternative is selected over another. Selecting among
alternatives involves three ideas central to economics:

1. Scarcity
2. Choice
3. Opportunity cost
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4.5 Why Study Economics?

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Reasons to study Economics

1. To learn a way of thinking
Economics has three fundamental concepts that, once absorbed, can change the way
you look at everyday choices: opportunity cost, marginalism, and the working of
efficient markets.

Opportunity cost
Nearly all decisions involve trade-offs. A key concept that recurs in analyzing the
decision-making process is the notion of opportunity cost.
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The full "cost" of making a specific choice includes what we give up by not making the
alternative choice.

A second key concept used in analyzing choices is the notion of marginalism.

Marginalism is the process of analyzing the additional or incremental costs or

benefits arising from a choice or decision.

A rational decision maker takes an action if and only if the action’s marginal benefit
exceeds its marginal cost.
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In weighing the costs and benefits of a decision, it is important to weigh only the
costs and benefits that arise from the decision.

Also, it is important to weigh costs and benefits because sometimes, sunk costs may
be incurred.

Sunk costs are costs that cannot be avoided (and sometimes, cannot be recovered)
because they have already been incurred.
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The third one is efficient markets.

The common way of expressing the efficient markets concept is "there's no such thing
as a free lunch“.

An efficient market is a market in which profit opportunities are eliminated almost

instantaneously.

Profit opportunities are often loosely referred to "good deals" or risk-free ventures.
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2. To understand the society

Economics seeks to analyze transactions made by the society and its members,
particularly with regard to details on their behavior and decision making.

3. To understand global affairs

Economics seeks to explain the internal operation and trade policies of countries.

It also measures the competitiveness of each country and identifies its comparative
advantage in relation to other states.
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4. To be an informed citizen – An understanding of economics develops individuals

to be wise voters.

Knowledge of economics provides individuals with an understanding of economic

policies that are apt for the state’s current situation.

With this in mind, voters have an informed choice in selecting leaders based on their
economic, social, and political platform, rather than on their apparent popularity.
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4.6 Basic Economic Questions

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Basic Economic Questions

1. What to produce?
- refers to a productive activity of any society. The relative importance of human
needs and wants will have to be matched with the available resources for production.

- using the economy’s scarce resources to produce one thing requires giving up
another. Producing better education, for example, may require cutting back on other
services, such as health care. Every society must decide what it will produce given with
its scarce resources.
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2. How much to produce?

- concerned with the amount of goods and services that will be produced by the
society based on human wants, extent of wealth and technology used in production.

3. How will it be produced?

- there are all sorts of choices to be made in determining how goods and services
should be produced.

- focuses on the technology to be used, the process of combining resources, and also
the intensity of use of a resource relative with another resource.
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4. For whom to produce?

- if a good or service is produced, a decision must be made about who will get it.

A decision to have one person or group receive a good or service usually means it will
not be available to someone else.

Every economy must determine what should be produced, how and how much should
be produced, and for whom it should be produced.
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4.7 The 3 Es in Economics

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The 3 Es in Economics
In judging economic outcomes, we may look at the following concepts:

1. Efficiency
– refers to productivity and proper allocation of economic resources.

It also refers to the relationship between scarce factor inputs and outputs of goods
and services. This relationship can be measured in physical terms (technological
efficiency) or cost terms (economic efficiency).
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Being efficient in the production and allocation of goods and services saves time,
money, and increases a company’s output.

For instance, in the production of commodities, firms utilizing modern technology can
improve the quantity and quality of products, which ultimately translates into an
increase in revenue and profit.
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2. Equity
– means justice and fairness.

Thus, while technological advancement may increase production, it can also bear
disadvantages to employment of workers.

Due to the presence of new equipment and machineries, manual labor may not be
necessary, and this can result in the retrenchment or displacement of workers.
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3. Effectiveness
– means attainment of goals and objectives.

Economics is an important and functional tool that can be utilized by other fields.

For instance, with the use of both productions (through manual labor or through
technological advancements), whatever the output is, it will be useful for the
consumption of the society and the rest of the world.
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References:
Baye, M. and Prince, J. (2022). Managerial Economics and Business Strategy 10th Edition. McGraw Hill
Capuno, R., Parilla, L. (2016). General Economics with Land Reform and Taxation Learning Guide. Department of
Economics, College of Management and Economics, Visayas State University
Case, K., Fair, R., Oster, S. (2016). Principles of Economics Global Edition. Pearson Education
Greenlaw, S. and Shapiro D., (2017). Principles of Economics, 2nd Edition. OpenStax – Rice University
Mankiw, G. (2021). Principles of Economics 9th Edition. Cengage Learning, Inc.
Principles of Economics (2016). University of Minnesota Libraries Publishing Edition
 THANK YOU!
Ian Dave B. Custodio, LPT, MSc
Part-time Instructor
Western Leyte College
E-mail: iandave.custodio@wlcormoc.edu.ph
Website: iandavecustodio.github.io
Telephone (Office): (053) 563 7064 local 1121
Western Leyte College
College of Accountancy and Business
A. Bonifacio St., Ormoc City, Leyte
E-mail: info@wlcormoc.edu.ph
Website: wlcormoc.edu.ph
Telephone: (053) 561 5310 / 255-8549