Principles of Economics 01

7/28/2019 Principles of Economics 01

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Fundamentals of

Economics

Elements of Economics

Slides prepared by Neil Angelo Halcon


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Definition of Economics Economics as an allocation of wealth

Economics is a social science that deals with theallocation of scarce resources to satisfy unlimitedhuman needs and wants

Allocation is a mechanism of distribution used bysociety to address the needs and wants of citizens inan environment characterized by scarcity ofresources (3 types: price system, command system,traditional system) Price System: market forces to determine the value of goods

and services

Command or Planning System: based on the dictates of thegovernments central planning agency

Traditional System: based on social consensus and traditions


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Definition of Economics Economics as 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 ofactors in the market in determining the price

Process of production: transforming raw materials tonew products

Economics as a science of choice OptimizationOptimization: getting the best option from limited

resources


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Problems of Material Survival and

Progress Relating economics to goals of society social

survival and social progress

Besides economics, these are answered byculture and politics

In economics, the society is concerned withwealth as a means of ensuring its material

survival and growth. Economic development is not only expansion of

wealth but the equitable distribution of the fruitsof this wealth


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Basic Economic Questions

What goods 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 availableresources for production The social mechanism for ranking the relative

importance of human needs and wants is:

Market system: the price people attach to thesegoods and services

Command system: the priorities made by the centralplanning agency

Traditional society: the social norms


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How many will be produced?

Concerned with the amount of goods and

services that will be produced by the societybased on human wants, extent of wealth andtechnology used in production. The system of allocation or mechanism for ranking

human wants is:

Market system: the price of the commodity

Command system: The goals of society as formulatedby the state

Tradition


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Who will produce it?

Refers to the amount of productive inputs to be

used based on the availability of resources aswell as on their relative productivities.Market system: the price of the productive input is

compared with its productivity to determine whether itwill be employed or not

Command system: the planning board decides to usemore labor regardless of their productivity

Traditional society: groups of people are assignedspecific social tasks


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How will it be produced?

Focuses on the technology to be used.Technology does not only describe the process

of combining resources but also refers to theintensity of use of a resource relative withanother resource.Market system: the market mechanism will evaluate

the relative cost of productive inputs and theirproductivities

Command system: the planning board decides to usecapital intensive techniques even if it is laborabundant

Traditional society: traditional techniques > modern


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For whom will it be produced?

Consumption

Market system: the portion allocated to

various citizens will depend on their relative

contributions in the production process

Command system: redistribution as part ofsocial equity

Traditional society: based on the value they

give to the community


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Methods of Economics

Scientific Method: Formulation of the problem

Arise from existing issues or limitations of previous studies

Establishing hypothesis Can be accepted or rejected

Gathering data and information

Historical approach

Experimental approach

Other methods

Treatment and analysis of data

Use of statistics

Interpretation of results together with the conclusion

Accept or reject hypothesis based on the analysis of data


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Relationship of Economics with

Other Fields of Knowledge Use of scientific method physical

sciences

Formulation of theories and conceptsmathematics, logic, philosophy

Topic coverage social studies

Level of analysis is broader thancommercial sciences Commercial sciences = practical

Economics = theoretical


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Positive and Normative Economics

Positive economics is descriptive inapproach, in the sense that it illustrateswhat is happening to the various actors,

sectors and institutions within and outsidethe economy.

Describes the world as it is

Normative economics is prescriptive inapproach, in the sense that it directs us onwhat ought to be done.

Prescribes how the world should be


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Microeconomics and

Macroeconomics Microeconomics deals with the analysis on

how the allocation of scare resources is

conducted by small economic units,sectors, and institutions in the economy.

Macroeconomics is also about theallocation of scarce resources but takesthe analysis at the perspective of theentire economy.


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Use of Mathematics

Mathematics is used because it is very effective

in describing the relationships of economic

variables and actors by means of equations tosimplify complicated concepts and relationships.

To prevent misconceptions and confusions in

the meaning of a certain theory. Mathematics is

used because it is more effective in givingformal, exact, and simple illustration of a theory.


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Using models

A model is a simplified summary of an

economic reality thus economists make

several assumptions which can sometimesmake the model unrealistic but despite

shortcomings, their simplicity and logic in

making a general view on what ishappening in the economy


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Using Graphs

A 2 dimensionalgraph can give agraphicalillustration of therelationshipbetween 2economic

variables. In this case, a

positive/directrelationship


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Using Statistical Analysis

To measure whether economic

relationships are true in reality, there is a

need to empirically test these models. Econometrics is a branch of statistics used

to empirically test the statistical

significance of these economicrelationships


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Prediction and Ceteris Paribus

For example, demand of a product is affected by

different factors including the price of the

product, price of other products, income, tasteand preference, etc. If we want to single out the

effect of price on the demand of the product, we

have to make an assumption that other factors

are not changing while the price of thecommodity is changing.

Ceteris Paribus is a Latin phrase that translates

to "holding other things constant"


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Principles of Economics(N. Gregory Mankiw)1. People face trade-offs

2. The cost of something is what you gave up to get it3. Rational people think at a margin

4. People respond to incentives

5. Trade can make everyone better-off

6. Markets are usually a good way to organize economicactivity

7. Governments can sometimes influence market

outcomes

8. A countrys standard of living depends on its ability toproduce goods and services

9. Prices rise when government prints too much money

10. Society faces a short-run trade-off between inflation

and unemployment

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Principles of Economics 01