Lesson 1.

1
—Introduction of economics
A. Economics as a Social Science

-Social science is, broadly speaking, the study of society and

how people collectively behave and influence the world
around us. Economics, as a social science, studies human
behavior, just like psychology and sociology. Specifically,
economics studies how individuals, governments, firms, and
nations make choices in allocating scarce resources to satisfy
man's unlimited wants.
 B. Macroeconomics and Microeconomics

• Macroeconomics is a division of economics that deals with the overall performance of national and international
economies. It studies the aggregates of the economic system instead of its economic components or units. It
focuses on the overall flow of goods and resources and studies the causes of change in the aggregate flow of
money, the aggregate movement of goods and services, and the general employment of resources. It also inquires
into the nature of economic growth, the expansion of productive capacity, and the growth of national Income. Some
examples of macroeconomic problems that need to be addressed are the increasing unemployment and poverty
rates, slower national production growth, and lower labor force participation rate (willingness of workers to work).
Another example is the steep rise of commodity prices (inflation), which calls for some restraints on the money
supply or government spending. Macroeconomic topics include national Income determination, inflation,
employment, monetary and fiscal policy, and international trade..
 B. Macroeconomics and Microeconomics

• Microeconomics, on the other hand, is concerned about the behavior of the individual units of economic system
such as the consumer, producer, and households as resource owners. It is more concerned about how goods flow
from the business firm to the consumer and how resources move from the resource owner to the business firm. It is
also concerned about the process of setting the prices of goods, also known as Price Theory. Microeconomics
studies the decisions and choices of the individual units and how these decisions affect the prices of goods in the
market. Likewise, it examines the alternative methods of using resources to alleviate scarcity. It does not focus on
aggregate levels of production, employment, and income. Some examples of microeconomic concerns are
company plant relocation, the use of more technology, and changing of marketing product mix. Microeconomic
topics include supply and demand, consumer and producer choices, market system and pricing, individual wages,
and competition. Scarcity is the reason why people need to study economics. Economics, as a social science,
deals with the allocation of scarce resources to satisfy unlimited needs and wants. Well-known economist Alfred
Marshall described economics as a study of mankind in the ordinary business of life. It examines part of the
individual and social action, which are most closely connected to the attainment and use of material requisites of
the well-being. Scarcity and Opportunity Cost Because of the presence of scarcity, there is a need for us to decide
or choose how to maximize the use of scarce resources to satisfy as many of our needs and wants as possible. An
adult who has a monthly budget needs to decide how much to spend on rent, food, the children's tuition, and new
clothes and shoes. If the budget is not enough, then he/she has to give up some of these things. He/She needs to
make a choice. For example, he/she may decide not to buy new shoes for his/her children at the start of the school
year to maintain, say, food consumption and tuition payments. To understand further how people make choices, we
need to familiarize ourselves with the concept of opportunity cost.

Scarcity and
Opportunity Cost
-Because of the presence of scarcity, there is a need for us
to decide or choose how to maximize the use of scarce
resources to satisfy as many of our needs and wants as
possible. An adult who has a monthly budget needs to
decide how much to spend on rent, food, the children's
tuition, and new clothes and shoes. If the budget is not
enough, then he/she has to give up some of these things.
He/She needs to make a choice. For example, he/she may
decide not to buy new shoes for his / her children at the
start of the school year to maintain, say, food
consumption and tuition payments. To understand further
how people make choices, we need to familiarize
ourselves with the concept of opportunity cost.
C. Choice and Decision-making
Consumption Possibilities
- When a consumer has a limited budget, he/she
needs to decide how to use his/her available money.
Let us use the example of Joey in deciding how to
allocate his buying power to rice and mangoes. Let
us assume that rice costs Php150 per kilo while ripe
mango costs Php50.00 per kilo. If Joey has a budget
of Php450 to spend on rice and mangoes, the
following shows the combination of mangoes and rice
that Joey can buy with his budget:
 C. Choice and Decision-making
• These combinations are illustrated in Figure
1.1. The figure shows the different combinations
of mangoes and rice that consumer Joey can
buy with Php450. He can buy 3 kilos of rice and
no mangoes. He can, likewise, buy 9 kilos of
mangoes and no rice. However, Joey may
prefer to buy both rice and mangoes as a
consumption mix. Of the Php450, he can.
spend Php300 for 2 kilos of rice and the
remaining Php150 of the budget for 3 kilos of
mango.
- We see the inverse relationship between the quantity of rice
and mangoes that Joey can buy. The more rice Joey wants to
buy, the fewer mangoes he can purchase. To buy an additional
kilo of mango at 1/3 Php50.00, Joey has to give up buying kilo
of rice as opportunity costThe Php50.00 given up to buy
50/150 ). mangoes could otherwise buy this volume of rice
priced at 150 (i.e., By the same logic, one more kilo of rice
means giving up 3 kilos of mango. By connecting the possible
combinations of mangoes and rice that can be bought with his
budget, we derive Joey's consumption possibilities line. This
downward-sloping line indicates how many mangoes and rice
Joey can buy at the same time with his budget.
-The net benefit that Joey gains from giving up 3 kilos of
mango in exchange for 1 kilo of rice is the satisfaction gained
from additional rice consumption less the satisfaction foregone
from mango consumption. Joey is a net gainer if his satisfaction
from consuming more rice outweighs his dissatisfaction with
consuming fewer mangoes. Conversely, Joey is a net loser if his
dissatisfaction with consuming fewer mangoes outweighs his
satisfaction from consuming more rice.
 C. Choice and Decision-making

Production Possibilities
-The producer, on the other hand, also faces limitations of
resources to produce his/her target output. Let us say that
Lucas is a farmer with a fixed farm area of 1,000 sq. meters
that can be planted with either bananas or lanzones. With
his labor and capital, he can produce either bananas or
lanzones only or combine the production of both. If he
decides to devote more land to bananas, then he has less
space for planting lanzones as opportunity cost and vice
versa. He has to decide on the best combination of banana
and lanzones production that will maximize earnings. If
Lucas chooses the extreme left point on the curve, he can
produce 450 kilos of lanzones and 10 kilos of bananas. On
the extreme right point on the line, he can produce 120 kilos
of lanzones and 40 kilos of bananas. The other points are
possible combinations of the two crops that can be
produced. We can see the trade-off in this example. If Lucas
wants to produce more bananas, he has to devote less of
his resources to the cultivation of lanzones.
-Factors of production are the basic
inputs needed to produce goods and
services. By nature, these foundation
factors are limited and, therefore,
command payments that become income
for the resource owners.
01
• Land refers to natural resources that are
found in nature. Owners of land receive
payment known as rent. A person who
owns a condominium and leases it to
tenants earns rent and so does an owner
of a hectare of land tilled by farmer-
tenants
04
• Entrepreneurship is the factor of
production involved in combining the
different resources/inputs used to
produce goods and services. In ordinary
parlance, an entrepreneur is a
businessman who sets up a business
and assumes risks to earn a profit.
D. Factors of Production
02
• Labor refers to the human effort exerted
in production which includes manual
workers (like construction workers and
machine operators) and professionals
(like nurses, lawyers, and doctors). The
income received by workers is referred
to as wage or salary.
03
• Capital refers to man-made goods used to
produce other goods and services which
include machines, equipment, buildings,
and construction. The owner of a capital
earns an income called interest. When a
bank lends money to a borrower, that
person has to pay interest for the use of
that loan invested in say, machinery
 E. Basic Economic Problem of Society

● All socities are faced with basic questions in the economy that have to be answered to cope with constraints
and limitations. These are the following:

1. What to produce?
- Society must decide what goods and services to produce in the economy, i.e, the nature and quantity that
society will consume.

2. How to produce?
- This is a question on the production method of goods and services. This refers to the resources mix and
technology that will be applied in production.

3. For whom to produce?

- This is about the market of goods.

01
Traditional economy
• Decisions are based on traditions and practices
upheld over the years and passed on from generation
to generation. Methods are stagnant and are,
therefore, not progressive. Traditional societies exist
in primitive and backward civilizations.
F. Economic systems
02
Command Economy
• This is the authoritative system wherein decision-making is
centralized in the government or a planning committee.
Decisions are imposed on the people who have no say in what
goods are to be produced. This economy holds true in
dictatorships and socialists states.

03
Market Economy

• This is the most democratic economic system. Based on the

workings of demand and supply, decisions are made on what
goods and services to produce. Producers and consumers
decide what, how, and for whom to produce collectively
guided by the price system determined by supply and demand
(Chapter 2).
 F. Economic systems

04
Mixed Economy

• As the term implies, it is a combination of the three basic types of the

economic systems. As an economic system cannot exist in its pure form,
what normally happens is that it adopts a mixture of the three systems with
the dominance of one. While the Philippine economy is predominantly a
market economy, the government taxes those who have more to
redistribute purchasing power to the poor, say, by subsidy, as a socialist
approach. In the old socialist China, the government commanded
ownership of factories (resources), but workers could buy production
output in commune outlets with their wages in a market environment.
 G. Importance of economics
“Why do we need to study economics?”

- To know how important the subject is, all they need to do is read
the daily newspaper or watch the evening news on TV to see
that the most important items are economic in nature.

• - Economics will help the students understand why there is a

need for everybody, including the government , to allocate given
resources to meet society’s need according to priorities. It will
help one understand how to make more rational decisions in
spending money, saving part of it, and even investing some of
it..
• - On the national level, economics enable the students to first
take a look at how the economy operates. Then, they can figure
out if the government is doing a good job in inducing the
correct allocation of resources for society’s well-being with
appropriate growth and regulatory policies.
 H. The Scientific Approach
• Economics is a study
that attempts to explain
what is happening and This scientific approach involves the following steps:
what should otherwise
happen in the community 1. Formation of a specific hypothesis or intelligent guess to be empirically tested based
on general and established conditions. The Scientific approach also tests if these
in regards to resource
conditions on which the hypothesis is premised explains the hypothesis itself..
allocation against
unlimited needs. Using
2. Systematic observation and gathering of facts that can prove the theory.
the tools of logic,
mathematics, and
statistics, economics
science empirically tests 3. Application of logic to the observed facts that can also determine causal
economic theories in a relationships and eliminate unnecessary and irrelevant facts.
systematic, logical, and
factual way.
4. Empirical testing to validate the hypothesis, i.e., testing the facts if they explain and
support the hypothesis.

5. If not, finding the reason for invalidation and repeating the steps of the scientific
approach until a hypothesis is validated to become a theory.
 I. Positive Economics vs Normative Economics
Positive economics analyze the cause-effect and
interrelationship among factors and events. This is a
study of what is actually happening in the economy
like current inflation rates, national income, and
employment. In other words, this is an objective study
of economic realities as basis for economic decisions.
It is objective because it is supposed to be devoid of
bias for what is not real. One example of a positive
study is the primary theory of the Monetarist School of
Economics that it is the uncontrolled increase of
money supply that fuels inflation (sustained increase in
prices).
Normative economics passes judgment on economic
decisions by their outcome (as established by positive
economics), determining if they conform to some desired
standard of what is economically good or sound. This is a
study of what should be, like dispersing business investment
toward he countryside to reduce rural poverty incidences to a
tolerable level by international standard. To use again
Monetarism as an example, the policy to control inflation
should be rule-based and not discretionary to prevent abuse
of the money supply. The rule can fix money supply growth
for, say, the next five years to temper inflation following the
inflation rate standard of monetary soundness and prudence.
In well-managed economies, an inflation rate beyond or even
nearing 5% is already alarming enough to necessitate a
review of the monetary policy.