Economics

Economics a social science concerned with using scarce resources to obtain the
maximum satisfaction of the unlimited material wants of society. It deals with the
two extremes: scarce resources and unlimited human wants.
Scarcity the condition wherein most things that people want are available only in
limited supply
Economic Goods anything either a physical commodity or a service which yields
utility and which can command a price if bought or sold in the market
Opportunity Cost the cost of choosing to use resources for one purpose
measured by the sacrifice of the next best alternative for using these resources
Fundamental Economic Problems
1. What and how much to produce
2. How goods and services shall be produced
3. How the goods and services shall be distributed
Types of Economic Systems
1. Capitalism mainly characterized by private individuals owning and
operating the majority of business that produce goods and services and buy
and sell goods; solutions to economic problems are determined by
competition and consumer demand
a. Characteristics:
i. All economic decisions are made with no government
intervention
ii. Competition serves to determine the goods and services needed
by society
iii. Competition determines who will survive in the market place
b. Rights:
i. Right to private property
ii. Right to earn profit
iii. Right to engage in business
iv. Freedom to choose
2. Communism the government owns ALL nations resources; opposite of
capitalism
3. Socialism government owns and operates the basic industries; citizens are
allowed to operate small business
4. Mixed Economy one that has elements of two or more economic systems
Economic Resources
1.
2.
3.
4.

Land
Labor
Capital
Entrepreneurial ability

Task of the Entrepreneur

1. Organize production

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2. Make business decisions
3. Bear the risk of decisions
4. Innovates
Economic Goals
1.
2.
3.
4.
5.

Economic growth
Full employment
Economic efficiency
Price level stability
Economic freedom

Circular Flow of Economic Activity

Two Basic Activities:
1. Production
2. Consumption
Stock and Flow Concepts
1. Stock the measure of quantity at a point in time. It is an accumulation of a
commodity like gasoline in a fuel tank
2. Flow the measure of movement of quantity over a period of time. (Income
represents money earned per year and is also a flow)
The Circular Flow
Goods and Services

Expenditures
Business
es

Individ
uals
Income

Labor
The basic aspects of economy which include production and consumption are
subject to the stock and flow concepts which are circular in nature as shown.
Production Process
Economic resources of land, labor and capital are provided by the household
and used by the firms and produced returned to the household for consumption.
Business firms have the same circular flow.

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Flow Between Households and Firms
Good and Services
Consumer expenditures
Firm

Househol
Wages, rents, Dividents
Factors for production

According to Type of Goods Produces

1. Raw materials producers (Agri products, fish, wood, sugarcane)
2. Intermediate goods producers (construction materials, food seasoning, guitar
string, etc.)
3. Final goods producers (chocolate bars, coffee, refrigerators, TV, bicycles, etc.)
Income Flow
When money is spent by households for consumption and by firms for production, a
circular flow of income created.
Concept of Equilibrium
If the amount received by firms from households is equal to the amount received by
households from firms. Disequilibrium happens when either household or firms do
not spend all their income.
Basic Elements of Supply and Demand
Market exists when buyer wishing to exchange money for a good or service are in
contact with sellers wishing to exchange goods and services for money; place for
transactions
Market Demand buyers willingness and ability to pay a sum of money for some
amount of a particular good or service
Market Made Up Of:
1. Sellers
2. Buyers
The action and decision of buyers dictates demand for a product or service
Quantity Demanded Depends On:
1.
2.
3.
4.
5.

Needs
Preferences
Income level
Expectations
Prices of related commodities

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6. Buyers situation
But all the mentioned factors, the most important to consider is PRICE.
The relationship between price and quantity demanded is the subject of the
law of demand. In simple term, The law of demand indicates that the
quantity of any good which buyers are ready to purchase varies inversely
with the price of the good.
Non-Price Determinants of Demand
1.
2.
3.
4.
5.
6.

Average income of consumers

Size of the market
Price and availability of related goods
Preference or taste
Special influences
Expectations about future economic conditions

Demand Curve

Increa

Price

Decrea

Quantity
Supply Curve

Price

Decrea
Increa

Quantity
Non-Price Determinants of Supply
1.
2.
3.
4.
5.

Cost of production
Number of suppliers
Prices of goods and services related in production
Taxes and subsidies
Technology

Market Equilibrium
-

Suppl

Supply and demand are opposing forces

Pric
that must be considered
Dema
Quantit