ECONOMICS

Economic thoughts of the Greek

For Plato:
First- it increases output and improves the welfare of the individual in society by
producing more goods and services.
Second- it is a component of justice.
For Xenophone: (a student of Socrates)
Viewed division of labor and the allocations of resources within LATIFUNDA as a way
of self-sufficiency. He said that with efficient management of this large estate, it will
eventually lead to self-sufficiency. He termed this kind of management as
OECONOMICUS
For Aristotle:
Divided the concerns into 2 separate fields:
OIKONOMIKS- dealt with the production and consumption of goods with the
production and consumption of goods. It was an analysis of how decisions were
made regarding the mgt. of resources.
CHREMATISTIKS- encompassed the activities of money-making as well as some
aspects of production. It studied human activities involved with wealth-getting
which could be natural or unnatural.
THE RISE OF MERCANTILISM
Mercantilism- an economic theory that holds the prosperity of a nation depends
upon its supply of capital and that the global volume of trade is unchangeable.
Economic assets, or capital are represented by bullion (gold,silver and trade value)
held by the state, which is best increased through positive balance of trade with
other nations (exports minus imports).
-Suggests that the ruling govt should advance these goals by playing a
protectionist role in the economy by encouraging exports and discouraging imports,
especially through the use of tariffs. The economic policy based upon these ideas is
often called mercantile system.
THE PHYSIOCRATS
-are groups of economists who believed that the wealth of the nation is derived
solely from the value of land agriculture or land development.
THE LAISSEZ-FAIRE THEORY
-is a French phrase which means let do from the French diction first used by the
18th century physiocrats as an injunction against government interference with

trade, it became used as a synonym for strict free market economics during the
early and mid 19th century.

THE INDUSTRIAL REVOLUTION AND CLASSICAL ECONOMICS

-Following Adams Smith Wealth of Nations, classical economists such as David
Ricardo and John Stuart Mill examined the ways the landowners, capitalists and
laboring class produce and distribute national riches. In the midst of the London
slums, Karl Marx castigated the capitalists system of the exploitation and alienation
he saw around him, before neo-classical economics in a new imperial era sought to
erect a positive, mathematical and scientifically grounded field above normative
politics.

ADAM SMITH
- considered as the founder of classical school, constructed an explanation on how
social behavior is regulated. His view of economics was shaped by the world he
observed. He saw a world where each person sought their own self interest but was
constrained by morality, markets and government.
DAVID RICARDO (The Theory of Comparative Advantage)
-most notable work is his Principles of Political Economy and Taxation. He opens
the first chapter with a statement of the labor theory of value. In the next chapter,
he demonstrated that prices do not correspond to this value. He retained the
theory, however as an approximation. He continued to work on his value theory to
the end of his life. He believed that wages should be left to free competition, so
there should be no restrictions on the importance of agricultural products from
abroad.
THOMAS ROBERT MALTHUS AND THE PRINCIPLE OF POPULATION
-Malthus largely developed his view interaction to the optimistic opinions of his
father and his associates notably, Jean Jacques Rousseau. In his work An Essay on
the Principle of Population, he made the famous production that the population
would outrun food supply, leading to the decrease in the flood per person.
MARGINALIST SCHOOL
-Classical Economist theorized that prices are determined by the cost of production.
Marginalist economists emphasized that prices also depends upon the amount of
consumer satisfaction provided by individual goods and services.
MARXIST ECONOMICS
-thought comes from the work of German economist Karl Marx.
The Capital was published in Germany in 1867. He focused on the labor theory of
value in what he considered to be the exploitation of the workers by the capitalists.

Marx proclaimed the capitalism was doomed and would soon be followed by the
business depressions, revolutionary upheavals and socialism.
THE NEO CLASSICAL ECONOMICS
-Neo Classical Economist popularized the term ECONMKICS as a substitute for the
earlier termed political economy.
-Systematized supply and demands as joint determinants of price and quantity in
the market equilibrium, affecting both the allocation of output and the distribution
of income.
-It dispensed with the labor theory of value inherited from classical economics in
favor of the marginal utility theory of value on the demand side and a more general
theory of costs on the supply side.
ALFRED MARSHALL
-dominant figure in British economics from about 1890 until his death in 1924. His
specialty was microeconomics-the study of individual market and industries, as
opposed to the study of the whole economy.
KEYNESIAN ECONOMICS
-published the great work The General Theory of Employment Interests of money
-Keynes famously remarked this long run is misleading guide to current affairs. In
the long run we are dead. Economists set themselves too easy, too useless a task if
in tempestuous season they can only tell us that when the storm is long past the
ocean is flat again.

THE WORLD OF ECONOMICS AND ITS SIGNIFICANCE

Economics-may appear to be the study of complicate tables and charts, statistics

and numbers, but more specifically, it is the study of what constitutes rational
human behavior in the endeavor to fulfill needs and wants.
-comes from the Greek word OIKANOMIA meaning household management.
Definitions are as follows:
*Fajardo, it is the proper allocation and efficient use of available resources for the
maximum satisfaction of human wants.
* Samuelson, it is the study of how societies use scarce resources to produce
valuable commodities and distribute them among different people.
* Nordhaus, it is the science of choice. It studies how people choose t use scarce
resources or limited productive resources (labor, equipment, technical, knowledge)
to produce various commodities and to distribute these commodities to
consumption.

*Sicat, as a scientific study which deals with how individuals and society in general
make choices.
*Castillo, as the study of how man could best allocate and utilize the scarce
resources of society to satisfy his unlimited want.
*Webster, as a branch of knowledge that deals with the production, distribution and
consumption of goods and services.

Importance of Economics
-Economics is imp0ortant in order to understand problems facing the citizen and the
family, to help government promote growth and improve the quality of life while
avoiding depression and inflation and to analyze fascinating patterns of social
behavior.
The Nature of Economics
*Economics is a science. A science is a body of systematic knowledge built upon by
conscious efforts., arrived after a long series of observations and experimentations.
Made up of different explanations, called theory. Facts and events about our
material life.
*Economics is classified as a social science because it deals with the study of mans
life and how he lives with other men.. concerned with human beings and his
behavior. Interdependent with other sciences like Psychology, the science of mind.
History, the science that records and explains past events; Sociology, the science
that deals with the development of society; Political Science, the science of
government; Geography, the science that determines the main resources of a
region. Religion, traditions and belief can discourage or encourage economic
development.

The Economic Environment and its process

Branches of Economics
Macroeconomics- deals with the economic behavior of the whole economy or its
aggregates such as government, business and household.

Concerned with the discussion of topics like gross national product, level of
employment, national income, general level of prices, total expenditures,etc.
It is also known as employment and income analysis.

Microeconomics- deals with the economic behavior or individual units such as the
consumers, firms and the owners of the factors of production.
Divisions of Economics

1. Production-refers to the process of producing or creating goods needed by

the households to satisfy their needs. The factors of production are called
inputs and the goods and services that have been created are called
outputs of production.
2. Distribution- refers to the marketing of goods and services to different
economic outlets for allocation to individual consumers. In monetary terms,
this is the allocation of income among persons or households.
3. Exchange- process of transferring goods and services to a person or persons
in return for something. At present, the medium of exchange used in the
market is money.
4. Consumption- refers to the proper utilization of economic goods. However,
goods and services could not be utilized unless you pay for it.
5. Public Finance- pertains to the activities of the government regarding
taxation, borrowings, and expenditures. Deals with the efficient use and fair
distribution of public resource in order to achieve maximum social benefits.
Tools of Economics
1. Logic- a science that deals with sound thinking and reasoning. Facts and
proofs should be presented; otherwise such reasoning will be clouded by an
iota of doubt. With the wise application of logic, one may be able to arrive at
a conclusion.
2. Mathematics- a science that deals with numbers and their operations. To
quantify population, income, national product, aggregate number of firms,
etc.
3. Statistics- a branch of Mathematcs dealing with the analysis and
interpretation of numerical data. Deals with the process of collectiong,
tabulating and analyzing data to test the validity of a certain hypothesis.
THE INPUTS OF PRODUCTION
The Economic Resources
1. Land- consist of free gifts of nature which includes all natural resources
above, on, and below the ground such as soil, rivers, lakes, oceans, forests,
mountains, mineral resources and climate.
2. Labor- termed as human resources. Refers to all human efforts, be it mental
or physical that help to produce want satisfying goods and services.
3. Capital- a finished product, which is used to produce goods. Consists of all
man-made aids to further the production process such as tools, machinery
and buildings. Serves as an investment.
4. Entrepreneur- a French word meaning enterpriser. Is the organizer and
coordinator of the other factors and production: land labor and capital. He is
one who is engaged in economic undertakings and provides society with
goods and services it needs.
5. Foreign Exchange- refers to the dollar and dollar reserves that the
economy has.
Classification of Inputs

1. Fixed Inputs- are inputs that do not change with the volume of production.
This means, whether you produce or not, these factors of production are
unchanged. E.g Land and capital.
2. Variable Inputs- inputs change in accordance with the volume of
production. No production, no variable inputs. E.g labor and entrepreneur.
Production Function
-states the relationship between the inputs used and the outputs produced.
Y= f(x)
Significance of the Production Function
Stage 1- there is an increasing rate of production.
Stage 2- there is a decreasing rate of production.
Stage 3- total output decreases even though inputs continue to increase. This is
called the stage of negative production. Law of Diminishing Return.
Law of Diminishing Return

Also known as the Law of Diminishing Marginal Productivity. It is a basic law of

economics and technology. The law states that: when successive units of a
variable input (like farmers) work with a fixed input (like one hectare of land),
beyond a certain point, the additional product (output) produced by each
additional unit of variable input decreases.

THE PRODUCTION POSSIBILITY FRONTIER (PPF)

PPF- represents the point at which an economy is most efficiently producing its
goods and services, and therefore allocating its resources in the best way possible.
Importance of PPF

It illustrated the definition of economics as the science of choosing what

goods to produce.
It provides a rigorous definition of scarcity. It shows the outer limit of
producible goods dictated by the law of scarcity. Scarcity is a reflection of the
limitation on our living standards imposed by the PPF.
It can also illustrate the three basic problems o economic life- what how and
for whom.
It can also illustrate the general point that we are always choosing among
limited opportunities.

Opportunity Cost- is the value of what is foregone in order to have something

else.
THE ECONOMIC MODELS AND THE FLOW OF PRODUCTION
The Economic System

-simply means the organization of economic society with reference to the

production, exchange, distribution and consumption of wealth
-is the way the economic units are organized to make decisions on the economic
problems of society
The Basic Economic Problems
Scarcity-refers to the tension between our limited resources and our unlimited
wants and needs.
1) What to produce- the system must determine the desires of the people.
Goods and services to be produced are based on the needs of the consumers.
Factors to consider in producing goods and services:
Availability of resources
Physical Environment
Customs and traditions of the people
2) How much to produce- The system must know how much of the chosen
goods should be produced. It must determine how many of these buyers are
willing to but the goods and services produced by the economy.
3) How to produce- Equally important is the systems task of selecting the
proper combination of economic resources in producing the right amount of
output.
4) For whom shall goods and services be produced?- has something to do
with the problem of distribution.

Specialization and Comparative Advantage

By using specialization, a country, instead of dividing up its resources could

concentrate on the production of the one thing that relative to itself, it can do
best.
Determining how countries exchange goods produced by a comparative
advantage. The best for the best is the backbone of international trade
theory. This is considered an optimal allocation of resources, whereby
economies, in theory would no longer be lacking any of their needs.

Absolute Advantage

A country or an individual can produce more than another country, even

though both have the same amount of inputs.

Types of Economic System

1. Traditional Economy- also knows as the subsistence economy. In this type
of economy, people produce goods and services for their own consumption.
Decisions are based on customs and traditions and the production techniques
are outmoded and sometimes obsolete.

2. Command Economy- under this system, the government takes hold of the
economy of the State. The govt does policy formulation, economic planning
and decision-making.
3. Market System- business enterprises are owned and controlled by private
individuals. One of the major features of this system is free enterprise
meaning that any individual can engage in any enterprise.
4. Mixed Economy- mixture of different types of economy. Private and
Government.

The Circular Flow of Economic Activities

Related Economic Concepts:
1. Flow- quantity measured over a particular period of time. E.g income
2. Stock- quantity measured at a given point in time. E.g wealth
3. Circular Flow- movement of economic activities that is taking place in the
economic system.
4. Market- a place where buyers and sellers interact together and are
eventually engaged in exchange.
5. Economic Resources- factor of production or inputs to production (land,
labor, capital)
6. Basic Needs- needs of a man required for his survival like food, clothing and
shelter.
7. Goods- yields satisfaction to someone. Tangible in form of material goods,
Intangible in form of services.
Classification of Goods (accdg. To use) :
Consumer Goods- goods that are ready for consumption
Capital Goods- goods that are used in furtherance of production

Essential goods- are goods used to satisfy the basic needs of man
Luxury goods- are goods that give something or add pleasure and comfort,
but not absolutely necessary.

In general, goods are classified as:

Economic goods- have values or price attached to it
Free goods- need no payment
OUTFLOWS AND INFLOWS OF THE CIRCULAR FLOW
The Outflows and Inflows
Factors that affect the individual consumer not to utilize his income:
Savings- an income not spent for consumption. Represent a non-use of output.
Taxes- a compulsory contribution to support the government.

Imports- goods bought by the Philippines from other countries.

An outflow is a flow of income that goes out of the circular flow.
To bring back the funds to the circular flow:
Investment- it constitutes a spending decision that results in the use if output and
productive resources.
Government Expenditures- the govt. collects taxes to defray expenses or its
infrastructure projects and other economic development projects.
Exports- products purchased by the country from other countries are reciprocated
by foreign countries by buying our products.
Deflation- too much outflows of money in our economy
Inflation- too much inflows of money in our economy
ECONOMIC STRATEGIES
Objectives of Monetary Policy
To maintain internal and external monetary stability in the Phils. And to
preserve the international value of the peso and its convertibility to other
freely convertible currencies
To foster monetary, credit and exchange conditions conducive to a balanced
and sustainable growth of the economy.
Tools
1.
2.
3.

of Monetary Policy
Required Reserves- lending behavior of commercial banks
Rediscounting- prerogatives from being the bankers of banks.
Open Market Operations- participating in the purchase and sale of
government securities in active money market.
4. Selective Credit Control- this tool lets the BSP selects the kind of credit it
will give to clients. It tries to prioritize its lending activity either to production
or consumption.
5. Moral Suasion- this tool tries to test the persuasive ability of the Chairman
of the Monetary Board and the Governor of the BSP.

Fiscal Policy
-Accdg. To Villegas and Abola, fiscal policy necessarily concerns itself with the
manipulation of the inflows (govt spending) and outflows (taxes) of the government
sector.
-is an instrument which can push the economy towards equilibrium, when there are
disequilibriating elements operating in the economy.
Taxation: A Tool of Fiscal Policy
Taxation- referred to as the inherent power of the State, acting through the
legislature, to impose and collect revenues for the purpose of supporting the
government and its recognized objects.

FOREIGN TRADE POLICY- is a set of activities that tends to manipulate imports

and exports of the economy. It controls the level of money supply in its desired level
through export and import.
Price effect of Import and Export
Imports tend to bring down domestic prices by bringing into the system more
finished goods or raw materials for processing into final goods, at the same time
they bring out funds.
Exports- opposite effect
Tools of Foreign Trade Policy
1. Administrative or Exchange Control- a tool that tries to avoid the dollar
deficiency by controlling its sale.
2. Exchange rate Regimes- The price of the dollar in terms of pesos is known
as the exchange rate. Dollar can be sold or bought in the market at a specific
price at a given time.
Three types of exchange rate:
Flexible exchange rates- exchange rates of dollars to pesos is
determined by the demand and supply of dollars.
Fixed exchange rates- a tool where the rate of exchange is fixed by
monetary authorities for extended period of time.
Multiple exchange rates- another system by which the foreseen
balance of payments problems may be solved is to have a multiple
exchange rate and have buyers and sellers transact at different
exchange rates.
3. Tariffs and Subsidies- Tariffs are taxes imposed on imports which are
based on either the value of the product (ad valorem) or on the physical unit
of measure.
BASIC OF DEMAND AND SUPPLY
Demand- means the desire for a particular good backed up by sufficient purchasing
power.
-It is also the schedule of various quantities of commodities which buyers are willing
to purchase at various prices in a given time and place.

Potential Demand- not backed up by the ability to pay or no purchasing

power
Effective Demand- backed up by the ability to pay

Demand Schedule- reflects the quantities of goods and services demanded at

different prices.
The Law of Demand
-may be stated as the quantity of commodity which buyers will buy at a given time
and place will vary inversely with the price. Price increase, demand decrease. Price
decrease, demand increase.

General tendencies:

Income effect- at lower prices, an individual has a greater purchasing

power. We can buy more goods and services but at higher prices, we can buy
less.
Substitution effect- we tend to buy goods with lower prices. In case the
price increases, we look for substitute whose prices are lower.

Determinants of Demand
1. Income- People buy more goods and services when their income increases,
but will buy less if their income decreases. Changes of income will change
their demand for goods and services.
2. Population- more people means more demand for goods and services.
3. Tastes and Preferences- demand for goods and services increases when
people like or prefer them.
4. Price expectations-when people expect the prices of goods, they will buy
more of these goods.
5. Prices of related goods- when the price of a certain good increases,
people tends to buy substitute products.
The Ceteris Paribus Assumption
-assuming that the determinants of demand are constant, price and quantity
demanded are inversely proportional to each other.
Changes in Demand- refer to the shift of demand curve which is brought about by
the changes in the determinants of demand, like income, population, price
expectation and so forth.
Changes in Quantity Demanded- indicate the movement from one point to
another point. This means, the demand curve does not change its position like that
of the demand curve in the changes in demand.

The Law of Supply

-

states that the quantity offered for sale will vary directly with price.

Supply- is the schedule of various quantities of commodities which producers are

willing and able to produce and offer at various prices in a given time and place.
-in other words, it is the amount of goods and services available for sale at given
prices in a given period of time and place.
Supply Schedule- shows the different quantities that are offered for sale at
various prices. It may reflect the individual schedule of only one producer or the
market schedule showing the aggregate supply of a group of sellers or producers.

Determinants of Supply

1. Technology- refers to techniques or methods of production.

2. Cost of Production
3. Number of Sellers- more sellers or more factories means an increase in
supply. Vice versa
4. Taxes and Subsidies
5. Weather
Changes in Supply- pertains to a shift of supply curve brought by changes in the
determinants of supply.
Changes in Quantity Supplied- show the movements from one point to another
point in a constant supply curve.

THE MARKET EQUILIBRIUM

Equilibrium of Demand and Supply
Elasticity of Demand and Supply
Other concepts of elasticity:
1. Elasticity- is a measure used in response to changes in the determinants of
demand and supply.
2. Price Elasticity- a measure used in determining the percentage change in
quantity against the percentage change in price.
3. Income Elasticity- the percentage change in quantity compared to the
percentage change in income.
4. Cross Elasticity- the percentage change in quantity of one good compared
to the percentage change in the price of related goods.
Price Elasticity of Demand- refers to the degree of reaction or response of the
buyers to changes in price of goods and services.
To derive the price elasticity of demand, we use the formula
Ep= Q2-Q1
Q1
P2-P1
P1
Types of Elasticity
1. Elastic-when a percentage change in price leads to a proportionately greater
percentage change in quantity demanded.
2. Inelastic- when a percentage change in price results I a proportionately
lesser change in price evokes less than one percent change in quantity
demanded.
3. Unitary- when a percentage change in price leads to a proportionately equal
percentage change in quantity demanded. The coefficient of elasticity is
equal to 1.
4. Perfectly elastic- at a given price, percentage change in quantity
demanded can change infinitely.

5. Perfectly inelastic- a percentage change in price creates no change in

quantity demanded. No change in the quantity of demand. The coefficient is
zero.
Price Elasticity of Supply- is also the response of quantity offered for sale for
every change in price.
Formula:

Effect of Elasticities on Market Equilibrium

- For demand, the more elastic the new demand is, the less will be the increase
in price, and the greater will be the expansion of quantity sold.
- For supply, the less elastic the supply is the higher the increase in price and
the smaller the quantity increase will be, while the more elastic supply is, the
less will be the increase in price and the greater the increase in quantity sold.
Income Elasticity
- The Coefficient of income elasticity measures a products percentage change
in quantity as a ratio of the percentage change in income which caused the
change in quantity.
Formula:

Cross Elasticity
- The coefficient of cross elasticity of demand relates a percentage change in
quantity demanded of Good A in response to a percentage change in the
price of Good B. Thus,
Formula: