The Nature and Importance of Economics

The Nature and Importance of EconomicsProf. Dang GannabanCASOBJECTIVESTo define Economics.To explain the basic economic problem.To discuss the different concerns of Economics.To relate Economics with other Social Sciences.To identify the two main divisions of Economics.To enumerate and differentiate economic systems, resources and goals.

Economics Defineda social science concerned with using scarce resources to obtain maximum satisfaction. (Walstad and Bingham, 1993)

Economics Definedthe study of how societies use scarce resources to produce valuable commodities and distribute them among different people. (Samuelson and Norhaus, 1992)

Economics Definedthe study of production, distribution, selling, and use of goods and services. (Collin, 1997)

Economics Definedthe study of how people use their limited resources to try to satisfy unlimited wants. (Parkin and Bade, 1991)

Question:What is the common ground of the definitions?

The Common Ground:Resources are scarce.

Human needs and wants are unlimited.

TWO OPPOSING REALITIES!More Definitions:SCARCITY the imbalance between our desires and the means of satisfying those desires. (Hyman, 1992)

The condition wherein most things that people need and want are available only in limited supply.

More Definitions:WANTS refer to a persons desires or preferences for specific ways for satisfying a basic need. (Bannock, 1974)

More Definitions:OPPORTUNITY COST the cost of choosing to use resources for one purpose measured by the sacrifice of the next best alternative for using those resources. (Hyman, 1992)

Question:From the foregoing definitions, what do you find to be the basic economic problem?

The Fundamental Economic Problem:SCARCITY

The Decision Questions:What goods and services must be produced and in what quantities?Rice or weapons?If rice, how much of what type?

The Decision Questions:How shall these goods and services be produced?Who shall produce them?What resources and technologies shall be used?

The Decision Questions:For whom shall these goods and services be produced?Who shall consume them?What are the benefits from the results of economic activities?

The Concerns of Economics:PRODUCTION, DISTRIBUTION and CONSUMPTION of goods and services.

Economics is Concerned with:PRODUCTIONThe creation or addition of utility.Utility is the economic term for usefulness. It is the ability of a good or service to satisfy a want.Form UtilityPlace UtilityTime UtilityPossession UtilityEconomics is Concerned with:PRODUCTIONFactors: (Economic Resources)Land land and natural resourcesLabor time and effort of human beings involved in the production process.Capital goods used to produce other goodsEntrepreneurship undertaking that combines the three other factors in the production process.

Economics is Concerned with:DISTRIBUTIONThe allocation of the total product among the factors of production. The distribution of money comes among the factors of production.Land RENTLabor WAGESCapital INTERESTEntrepreneurship PROFIT

Economics is Concerned with:CONSUMPTIONThe use of a good or a service. Without it, there would be no need for production and distribution.

Economics is Concerned with:GOODS AND SERVICESCharacteristics of Economic Goods: MaterialUsefulScarceTransferable

Economics is Concerned with:GOODS AND SERVICESEconomic Services non-material activities that are useful, scarce, and transferable.

Give examples of economic services

Economics and the Social SciencesEconomics is related to:Political ScienceGovernment has a role in the economy

Because:

SociologyLow standard of living leads to social problems.

Economics and the Social SciencesEconomics is related to:Because:Photos courtesy of: Mio Cade & Sidney Snoeck

PhilosophyEconomic acts are humans acts (morality).

Economics and the Social SciencesEconomics is related to:Because:Economic development occurs through time.

History

Economics and the Social SciencesEconomics is related to:Because:Divisions of Economics:Concerned with the behavior and activities of specific economic units individuals, households, firms, industries and resource owners.Critical concept MARKET MICROECONOMICSDeals with the behavior of economy as a whole w/ respect to output, income, the price level, foreign trade, unemployment & other aggregate economic variables.MACROECONOMICSEconomic Goals: Economic GrowthFull EmploymentEconomic EfficiencyPrice Level StabilityEconomic FreedomEquitable Distribution of IncomeEconomic SecurityBalance of Trade

Economic Goals:1. Economic GrowthSociety desires a higher standard of living manifested by the production of more and better quality goods and services.

Economic Goals:2. Full EmploymentThere must be jobs for those who are willing and able to work.

Economic Goals:3. Economic EfficiencyThe utilization of resources to derive the maximum benefits for the society.

Economic Goals:4. Price Level StabilityThe economy should be able to avoid great fluctuations in the general level of prices.

Economic Goals:5. Economic FreedomHigh degree of freedom to choose what economic activity to undertake afforded to various sectors.

Economic Goals:6. Equitable Distribution of IncomeThe condition whereby the rich get richer and the poor get poorer is prevented.

7. Economic SecurityEnough provision must be accorded for those who are not able to earn minimal income like the aged, the chronically ill, the disabled, etc.

Economic Goals:Economic Goals:8. Balance of TradeBalance between import expenditures and export revenues must be maintained.

SUMMARYEconomics is the study of the production, allocation, and consumption of limited resources to satisfy unlimited human needs and wants.

The basic economic problem is scarcity.

Economics is mainly concerned with production, distribution, consumption, as well as goods and services.SUMMARYEconomics is related to various discipline in the Social Sciences.

Economic goals include economic growth; full employment; economic efficiency; price level stability; economic freedom; equitable distribution of income; economic security; and balance of trade

Main Reference:Principles of Economics by Roberto Medina, Chapter 1.Seatwork:Answer the following questions:

What are the ten Principles of Economics?Differentiate efficiency from equity.Who is Adam Smith?What is the meaning of Smiths Invisible Hand?Prepare for a quiz on Friday.