Chapter 1

Problem
Limited Unlimited
Resources Wants
Scarcity
 The limited availability
of economic resources
relative to society’s
unlimited demand for
goods and services.
 Solution
Limited Unlimited
Resources Wants
 Economics

 Science that deals with

the management of
scarce resources.
Origin of “Economics”
 Oikos – household
Oikos

Oikonomus  Nomus – system or

/ management
Oikonomia
 Oikonomus/Oikonomia
Nomus
– management of the
household
Ceteris Paribus

 “all other things held

constant” or “all else
equal”
Adam Smith

 “Father of Economics”

 Wealth of the Nations

Positive vs. Normative
Positive Normative
Economics Economics

Economic analysis that considers Economic analysis that considers

economic conditions “as they are” economic conditions “as it should
or considers economics “as it is”. be”.

“The government should initiate

“The economy is now in a slowdown
political reforms in order to regain
because the world is experiencing
investor confidence and
financial and economic crisis.”
consequently uplift the economy.”
4 Basic Economic Questions
1. What to 2. How to
produce? produce?

3. How much 4. For whom

to produce? to produce?
 History

Business
Finance
Management

Relationships of
Economics with ECONOMICS
Other Sciences

Psychology Physics

Sociology
Importance of studying economics

To understand
society

To understand
global affairs

To be an
informed voter
3 Es in Economics
• Refers to productivity and
Efficiency proper allocation of resources

Equity • Justice and fairness

• Attainment of goals and

Effectiveness objectives
Economic Terms
 Wealth – anything
which has functional
value (usually in money)
which can be traded for
goods and services

 Consumption – direct
utilization or usage of
available goods and
services by the buyer
Economic Terms
 Production – the
combination of land,
labor and capital in order
to produce outputs of
goods and services

 Exchange – the process

of trading goods and/or
services for money or its
equivalent
Economic Terms
 Distribution – the
process of allocating or
apportioning scarce
resources to be utilized
by the household, the
business sector, and the
rest of the world
Branches of Economics

Microeconomics Macroeconomics

The study of economy-

The study of how
wide phenomena,
households and firms
including inflation,
make decisions and how
unemployment, and
they interact in markets
economic growth
Opportunity Cost

 Refers to the value of

what is given-up
when one makes a
choice
Factors of Production
Land • Refers to all natural resources

• Any form of human effort exerted in the

Labor production process

• Man-made goods used in the production of other

Capital goods and services

• Person who decides what combinations of land,

Entrepreneur labor and capital are to be used in the production
process
Circular Flow Model
Basic Decision Problems
Consumption Production

• Consumers • Producers

Distribution Growth Over Time

• Government • Society
Economic Systems
1. Traditional Economy
 Basically a subsistence
economy

 Ownership of resources:
owned by family

 Decision making:
head of the family
Economic Systems
2. Command Economy
 Also known as communism

 Ownership of resources:
collective ownership of most
resources

 Decision making:
state/government
Economic Systems
3. Market Economy
 Also known as capitalism

 Ownership of resources:
privately owned

 Decision making:
private individuals
Economic Systems
4. Socialism
 An economic system wherein
key enterprises are owned by
the state

 Ownership of resources:
private ownership is recognized
but the state has control over a
large portion of capital assets

 Decision making:
State and private individuals
Economic Systems
5. Mixed Economy

 A mixture of market system

and command system