Objectives for Chapter 1

At the end of Chapter 1, you will be able to answer the

following:
1. What are the most important theories in the history
of economic thought?
2. What is scarcity?
3. Why do we need to study Economics?
4. What are the basic goals of the study of economics?
5. What are the four aspects of utilization?
6. What are the roles of the economist?
7. What is the essence of the production possibilities
frontier and the circular flow diagram?
8. Compare and contrast the 2 branches of Economics.
9. How would you identify a positive economic
statement and a normative economic statement?

Chapter 1
INTRODUCTION: Economics in General
He who will not economize will have to agonize.
-Confucius
Economics came from the Latin word oikonomia or
oikonomos which refers to someone who manages
the household. It was coined by an ancient philosopher
called Xenophone. It may sound too simple, but actually
the economy is very similar to the household in terms of
some general aspects. Managing the national economy is
not totally different from managing a household. It requires
almost the same values and consideration. Both household
and nation/country experience the concept of scarcity.
A household faces many decisions. It must decide whether
the members of the household do which task and what
each gets in return: Who cooks dinner? Who does the
laundry? Who gets the extra dessert at dinner? Who gets
to choose what TV show to watch? In short, the household
must allocate its scarce resources among its various

members, taking into account each members ability,

efforts, and desires.
Like a household, a society faces many decisions. A society
must find some way to decide what jobs will be done and
who will do them. It needs some people to grow food, other
people to make clothing, and still others to design
computer software. Once the society has allocated people,
as well as land, building, and machines, it must also
allocate the output of goods and services they produce. It
must decide who will eat the cake and who will eat the
bread. It must decide who will drive a Porsche and who will
take the jeepney. The Management of the societys
resources is important because resources are scarce. The
economy cannot produce all the goods and services people
wish to have. Just as each member of the household
cannot get everything he or she wants, each individual in
the society cannot attain the highest standard of living to
which he or she might aspire.
The history of humanity has a rich history of economic
theories. From then till now, humanity has been trying to
analyze, understand, and explain the workings of the
economy so that they could improve the societys status
and living standard. In the next part, we would have a brief
survey of economic theories and their proponents who
really influenced the world through their ideas.

Brief History of Economic Thoughts

Economics only became an independent field during the
modern period, through the efforts of many thinkers
specifically through the ideas and writings of Adam Smith.
His book, entitled An Inquiry into the Nature and Causes of
the Wealth of Nations, or simply The Wealth of Nations,
published in 1776 is one of the most important doctrines in
the field of economics. It can be considered as the bible of
economics. It gave emphasis on the concepts we now
consider as the most basic in the field.
Having said this, I didn't mean that economics only
became useful during Adam Smith's time. The Wealth of
Nation can actually be considered as a by-product of the
very rich though conflicting ideas prior to the 18 th century.
Economic theories can already be traced centuries before
Adam Smith. We have the Physiocrats, the mercantilist,

even during the Medieval period, scholars like St. Thomas

Aquinas and St. Augustine, though concentrated on
theology, had theorized on how economies works as well,
same thing with great philosophers like Plato and Aristotle.
Plato (427-347 BCE) According to Plato in The Republic,
money is used as a medium of exchange in buying goods
and services. During his time people were using precious
stones such as gold, silver, and copper in exchanging
goods and services. Market also, according to Plato is a
place where income and employment takes place. He said
that market is not capable of self-regulation; rather it
requires administrative control to eliminate usury, profit
and interest. Money and trade must be subject to
administrative interest and control. Thus he proposed
communism where the state has absolute power. In this
market theory, Plato proposed equal or just distribution of
opportunities to individuals because usury and profit
makes the rich becomes richer, and the poor becomes
poorer.
Aristotle (384-322 BCE) Aristotles focus on personal
ethics led him to devise a notion of fairness that could be
applied in exchange, but his most important contribution to
economics by initiating the study of economic value. He
did so by distinguishing the ways in which way a product
can be used. All articles of property have two possible
uses. Both of these uses belong to the article as such, but
they do not belong to it in the same manner, or to the
same extent. One use is proper and peculiar to the article
concerned; the other is not. Take the shoe for example. It
can be used both for wearing and for exchange.
Implicit to these uses, according to Aristotle, there are two
types of values. Use value relates to a goods intrinsic
characteristics, whereas exchange value relates to how
much the good can fetch in return for other goods.
Thomas Aquinas (1225-1274) St. Thomas Aquinas
combined the ideas of Aristotle with Christian laws, thereby
laying the groundwork for the religiously based medieval
thought known as Scholasticism. Given the breath of
Aquinas interest, it is not surprising that his treatment of
worldly affairs included economics in particular. He
attempted to define fairness in monetary transactions and
trade. Aquinas extended Plato and Aristotles view that the

proceeds of usury represent an unfair profit made at the

expense of the borrower. In Aquinas words from the
Summa Theologica: To receive usury for money lent is, in
itself, unjust, since it is a sale of what does not exist.
Adam Smith (1723-1790) It may only be a coincidence
that Adam Smiths great book The Wealth of Nations was
published in 1776, the exact year that American
revolutionaries signed the Declaration of Independence.
But the two documents share a point of view that was
prevalent at the time: Individuals are usually best left to
their own devices, without the heavy hand of government
guiding their actions. This political philosophy provides the
intellectual basis for the market economy and for free
society more generally.
Why do decentralized economies work so well? It is
because people can be counted on to treat one another
with love and kindness? Not at all. Here is Adam Smiths
description of how people interact in a market economy:
Man has almost constant occasion for the help of his
brethren, and it is in vain for him to expect it from their
benevolence only. He will be more likely to prevail if he
can interest their self-love in his favour, ans show them
that it is for their own advantage to do for him what he
requires of them Give me that which I want, and you
shall that this which you want, is the meaning of every
such offer; and it is in this manner that we obtain from
one another the far greater part of those good offices
which we stand in need of.
It is not from the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but from their
regard to their own interest. We address ourselves, not to
their humanity but to their self-love, and never talk to
them of our own necessities but of their advantages.
Nobody but a beggar chooses to depend chiefly upon the
benevolence of his fellow-citizens
Every Individual neither intends to promote their public
interest, nor knows how much he is promoting it He
intends only his own gain, and he is in this, as in many
other cases, led by an invisible hand to promote an end
which was no part of his intention. Nor is it always the
worse for the society that it was no part of it. By pursuing
his own interest he frequently promotes that of the
society more effectually than when he really intends to

promote it.

Smith is saying that participants in the economy are

motivated by self-interest and that the invisible hand
of the marketplace guides this self-interest into promoting
the general economic well-being. Many of Smiths insights
remain at the center of modern economics.
David Ricardo (1772-1823) David Ricardo, a British
political economist, wrote The High Prices of Bullions
(1809) and Principles of Political Economy and Taxation
(1817). In the former, he discussed a method of
determining the real price of bank notes, while on the
latter, Ricardo offered several theories based on his studies
on the long range distribution of wealth. Ricardo feared
that increasing population would lead to a shortage of
productive land; his theory of rent is based on relative land
productivity.
He supported the classical theory of international trade,
emphasizing national specialization and freedom and
competition. His labor theory of value, states that wages
are determined by the price of food which is determined by
the cost of production and the amount of labor required to
producing the food.
Thomas Robert Malthus Malthus used the idea of
diminishing returns to explain low living standards.
Population, he argued, tended to increase geometrically,
outstripping the production of food, which increases only
arithmetically. The force of the rapidly growing population
against the limited amount of land meant diminishing
returns to labor. The result, he claimed, was chronically low
wages, which prevented the standard of living for most of
the population from rising above the subsistence level.
John Stuart Mill (1806-1883) Coming at the end of the
Classical Tradition, John Stuart Mill parted company with
the earlier classical economists on the inevitability of the
distribution of income produced in the marker system. He
discussed this in his magnum opus, A System of Logic
(1845). Mill pointed to a distinct difference between the
markets two roles: Allocation of resources and distribution
of income. The market might be efficient in allocating
resources but not in distributing income, he wrote, making
it necessary for the society to intervene.

Karl Marx (1818-1883) Marx is a German economist,

philosopher, sociologist, and revolutionist whose writings
form the basis of the body of ideas known as Marxist
(Though Karl Marx himself said that he is not a Marxist).
With the aid of Friedrich Engels,
Marx produced much of the
Some Important
theory
of
Socialism
and
Thinkers and
Communism.
Schools of Thoughts
in Economics:
Marx major works on political
economy are best illustrated in Ancient Period
his books, Theories of Surplus
- Plato
Value (1860) and Das Capital - Aristotle
(1867). In Das Capital, Marx - Kautilya
analyzed the capitalist process - Confucius
of production. He elaborated his - Lao Tzu
version of the labor theory of Medieval Period
value and his conception of - St. Augustine
surplus value and exploitation, - St. Thomas
which he said would lead to a Modern Period
falling, orate of profit and Mercantilism
ultimately
the
collapse
of Physiocratic period
industrial capitalism.
Classical school
John Maynard Keynes (1883- - Adam Smith
1946) John Maynard Keynes was - David Ricardo
Robert
born the year Karl Marx died. - Thomas
Malthus
Before Keynes, economist are
John Stuart Mill
mostly pessimists, they are
gloomy naysayers, Nothing can - James Mill
be done, Do not interfere, It - Jean Baptiste Say
will never work. But Keynes was Marginalist school
an unswerving optimist. He Marxist school
wrote, There is no reason to put Institutionalist
up
with
recessions
and Keynesian
School
depressions.
The
economic
of Economics
problem is not- if we look into Neo-Marxists
the
futurethe
permanent Monetarism
problem of the human race.
Rational
Expectations
His
General
Theory
of
Theory
Employment,
Interest,
and
Contemporary
Money (1936), is a response to
Economics
high rates of unemployment in
- Alfred Marshall
Britain in the wake of the
- Milton Friedman
- Thorstein Veblen
- George Orwell
- Friedrich Von Hayek
- Paul Samuelson
- Paul Krugman

depression. His main thesis was that full employment could

be reached with the aid of government spending. He
advocated active government management of the
economy as a key responsibility of the government to
counteract the peaks and troughs of the business cycle.
Keynes believed that laissez faire capitalism did not offer
appropriate solutions for the economy of the 20th century.
Through the use of fiscal and monetary policies, recessions
can be eliminated and economic prosperity can be
controlled. This would help the smooth the boom/bust
effect of the business cycle as he saw it. His theories
underpinned the fundamental relationships and ideas of
macroeconomics and it is fair to say that Keynes was
singularly responsible for the creation of the concept of
macroeconomics.
As you could see, a survey of just some of the major
economic thoughts showed us how economic theories are
constantly changing. Keynesian theory, with its emphasis
on active government policies to promote high
employment, dominated the economic policy making in the
early post-war period. But starting in the late 1960s,
troubling inflation and lagging productivity prodded
economists to look for new solutions. A lot of theories have
emerged. We have the Monetarism which updates the
Quantity Theory. It reemphasizes the capital role of money
growth in determining inflation. Another is the Rational
Expectations Theory, which provides a contemporary
rationale for the pre-Keynesian tradition of limited
government involvement in the economy. It argues that the
markets ability to anticipate government policy actions
limits their effectiveness.
There are many other contemporary theories in economics.
These theories has been and still are being debated and
tested. Some were accepted, some modified, others
rejected. It is a continuous cycle as we continue to answer
basic economic problems. As for us, let us try first to have
a keener understanding of what Economics is all about.

What is Economics?
Economics is a social science that deals with the study of

the proper utilization of the available scarce resources to

meet the insatiable needs and wants of man and the
society. It is the study of how economic entities manage
their scarce resources. In most societies, resources are
allocated not by an all-powered dictator but through the
combined actions of millions of households and firms.
Economists therefore study how people make decisions:
how much they work, what they buy, how much they save,
and how they invest their savings. Economics also studies
how people interact with one another. Finally, economists
analyze forces and trends that affect the economy as a
whole, including the growth in average income, the fraction
of the population that cannot find work, and the rate at
which prices are rising.
The study of economics has many facets, but it is unified
by several central ideas. One of which is the concept of
scarcity.

What is Scarcity?
Scarcity is a situation where resources and/or condition
which is inevitable to all human beings wherein resources
are always finite and they are limited. All resources are
said to be scarce. John Locke, in his Two Treatises of the
government said that nature is generous to man.
Everything that we are consuming came from nature and
its derivatives. In Economics, we consider three major
economic resources. These are land, labor and capital.
There have been debates which is the most important of
the three. Some economists say its land, others labor,
some say capital. As for me, I would of course, the safest
answer, and say all the three are important, but I would
say/add that the foremost, is land.
Land is the foremost important precisely because
everything else, labor and capital, are all dependent from
land, they all come from nature. By the way, it is important
to note that land resources are also known as natural
resources.
Labor, also known as man power resources, cannot survive
without gifts of nature. All of our psychological needs, like
food, water, clothing and others cannot be produced by

man on his/her own. It has to harvest them from nature

first. Unlike God, man cannot produce/create anything out
of nothing. A shirt is made in a factory with machines out
of cotton which comes from nature. A machine is created
with metals and alloys which again came from nature. With
this example, we prove that technology is also dependent
but not just from land, but also from labor. Technology is a
product of how man ingeniously uses the resources
available to him.
Land, then, is the key to all other resources. It is a good
thing that unlike labor and technology. Land has the
capacity to regenerate itself. A tree can grow even in the
absence to man and technology. Diamonds are created by
nature without participation of man, same thing with falls,
rivers, flowers, petroleum, and so on. However, scarcity
still takes place. The question is, why? Scarcity is an
inevitable needs and wants.
FYI : WHO STUDIES
Man's desire are unlimited, it
ECONOMICS?
is infinite, while the resources
that we use to meet these George W. Bush- Former US
desires are limited.
President
Danny Glover- Actor
Kofi Annan- Former UN
Secretary General
Donald Trump- Real Estate/ TV
Mogul
Lionel Richie- Singer
Cate Blanchett- Actress
Tiger Woods- Golfer
Steve Ballmer- CEO, Microsoft
Arnold SchwarzeneggerActor, Governor of California
Mick Jagger- Singer, Rolling
Stones

Locke disagree with this, he

said nature is abundant. There
is more than enough at any
given time. The problem is
when man's needs and wants
now grows much faster than
what is required for nature to
regenerate itself. Thus, this
situation would lead to scarcity
of resources, which is a
condition that we face every
LIST OF FILIPINO
day of our lives. But this is
ECONOMIST
where economics would make
itself useful to us. Economics * Diosdado Macapagal
is the study of the proper * Gloria Macapagal-Arroyo
utilization of our available * Solita Monsod (Mareng
scarce resources to meet the Winnie)
* Joey Salceda
insatiable needs and wants of * Mar Roxas
man and society. Utilization of
resources is fragmented into four distinct aspects:
Allocation,
production,
distribution
and
consumption.

Why Study Economics?

These are just some of the rationale why one needs to

study economics:
Benefits of Knowledge
In todays globalized world, actions in one economy affect
all other economies, at least to some extent. For example,
a decrease in the availability of oil in the Middle East can
lead to an increase in the unemployment rate in the
Philippines. A decrease in oil availability leads to an
increase in the price of oil. This increase in the price of oil
increases business cost in the Philippines, which lead to a
lower output. A lower output leads to less employment, or
ultimately higher unemployment. Do not worry if these
steps do not make sense right now; they will all be
explained throughout the term. By understanding how
economic actions affect one another, you will be able to
better understand the world around you.
Economics and Politics
Since the dawn of time, economics and politics have been
intertwined in every society across the globe. Every
political action is in some way affected by the societys
economy. Whether it is war over natural resources or
political re-election, all events are affected by some aspect
of an economy. Take a look back at all the Philippine
Presidents. Whenever, there is a tough economic time,
majority of the time there is political uncertainty. During
political races, the economy is often the major topic of
debate. Views on taxes, spending, social programs, and
war are primarily shaped by the politicians economic view.
Prevention of Ignorance
If everyone across the world understood the basics of
economics, the world would be a more stable place. Basic
economics can tell us the dos and donts during times of
instability. For example, during the Great Recession in the
United States which began in approximately 2008, many
Americans panicked and sold all stock holdings as values
plummeted across the board. While some Americans were
using these stocks as retirement holding they would soon
be cashing out, many Americans held stocks as additional
sources of income. The theory of long-run economics is
based upon the idea that the economy eventually corrects

itself. Had many Americans simply held onto their stocks,

prices would have eventually returned to normal (as they
did), and no losses would have been taken. Instead, people
panicked and decreased their financial investments. The
decrease in financial investments only hurt businesses
more, causing them to cut even more jobs, ultimately
leading to higher unemployment and less stable economy.
Soon you will be able to understand and appreciate these
statements as we go on in our term.

Economic Instinct
Whether you are taking this course as part of the general
education curriculum or as an introductory course to your
bachelors degree in Economics, it is essential to recognize
that we are all instinctively economist. It is a part of your
daily routine to budget your allowance, allocate your
resources, produce a good or service, etc. Thus, in a
natural way, you are a practitioner of economics.
As an Economics practitioner, you should be familiar of the
fields language and its way of thinking. As mathematicians
talk about postulates and axioms, integrals, limits.
Philosophers talk about substance and accidents, egoism,
ulititarianism and phenomenology. Accountants talk about
assets, liabilities, T-accounts, and net worth.
One should be acquainted with the vocabulary of an
economist. Supply and demand, consumer surplus,
indifference
curves,
production
possibility
frontier,
deadweight loss- these terms are part of an economists
language. Within the book, we would be encountering
many new terms and some familiar words that economists
use in specialized ways. At first this new language may
seem unnecessarily obscure, but you will see, later on that
its value is very helpful as it will provide you with a new
and useful way of thinking. Just as you cannot be a
mathematician, or a philosopher, or an accountant
overnight, learning to think like an economist will take
some time, we hope that this book will give you an an
opportunity to develop and practice this skill, and soon you
will appreciate yourself as an instinctive economists.

Fundamentals of Economics:
Circular Flow Diagram and the Production
Possibilities Frontier
The Economy is a complicated entity, yet with illustrations
and diagrams, we may be able to get a glimpse of how the
economy works. The circular flow diagram and the
production possibilities frontier are two very useful and
ingenious ways of understanding the fundamentals of
economic activity.
The Circular Flow Diagram
Figure 1. The Circular Flow

The diagram is a schematic representation of the organization of the

economy. Decisions are made by households and firms. Households
and firms interact in the market for goods and services (where
households are buyers and firms are sellers) and in the market for the
factors of production (where the firms are the buyers and the
households are the sellers). The outer set arrows shows the flow of
money (pesos), and the inner set of arrows shows the corresponding

The economy consists of millions of people engaged in

many activities- producing, consuming, hiring, employing,

and so on. To understand how the economy works, we
need a model that explains, in general terms, how the
economy is organized and how participants in the economy
interact with one another.
Figure 1 illustrates a model of the economy called a
circular-flow diagram. In this model, the economy is
simplified to included only two types of decision makers
firms and households. The figure presents in a simplified
manner the two types of markets in the economy, the
market for goods and services, also known as the product
market, and the market for the factors of production, also
known as the factor market. The two markets are
illustrated by the upper loop and the lower loop of the
circular flow diagram, respectively. Firms produce goods
and services using inputs such as labor, land, and capital
(buildings and machines). These inputs are called the
factors of production. Households own the factors of
production and consume all the goods and services that
the firms produce.
The circular flow diagram in figure 1 is one simple model of
the economy. It dispenses with details that, for some
purposes, are significant. A more complex and realistic
circular flow model would include, for instance, the roles of
government and international trade which will be provided
in a much later chapter in the book.

Production Possibility Frontier

Figure 2.

The production possibilities frontier shows the combinations of

output- in this case Product A and Product B- that the economy
can possibly produce. The economy can produce any
combination on or inside the frontier. Points outside the frontier
are not feasible given the economys resources.

The Production Possibility Frontier (PPF) also known as

the Transformation Curve is an economic model that
shows the various combinations of two goods that can be
efficiently produced given limited available resources, such
as land, labor, technology, etc. Sometimes it is also
referred to as the PPC or the Production Possibilities Curve.
The PPF or PPC represents the menu of goods and services
available to society. Every point within the transformation
curve is a situation called Productive Efficiency, wherein
you cannot produce more of a good without curtailing the
production of other goods. As long as the economy is
producing in a point along the curve, that means we are
within the productive efficiency region. Along the
Productive Efficiency region, resources are optimally used.
Examples are Point A, B, and C along Figure 2. Points at the
left of the transformation curve are within the area of
inefficiency, where resources are mostly idle and not
optimally used. Example is Point X. Points at the right of
the transformation curve are within the non-feasible

region, meaning the combination is not within the

productive capacity of the economy. No matter how
resources are allocated between the two products, the
economy just cannot produce at Point Y. Given all the
technology, the economy does not have enough factors of
production to support that level of output.
The production possibilities frontier simplifies a complex
economy to highlight some basic but powerful ideas:
scarcity, efficiency, trade-offs, opportunity cost, and
economic growth. As you study economics, these ideas
will recur in various forms. The PPF offers one simple way
of thinking about them.
In analyzing the PPF or PPC, we take several basic
assumptions, these are:
1. Land, labor and capital are all fixed.
2. Technology is constant.
3. There is only a choice between 2 goods or services.
The analysis of the Production Possibilities Frontier will only
be correct assuming these three to be true. However, of
course in reality, any economy, or any nation can
overcome these assumptions, thus we may have shifts in
our PPF as well.

Figure 3. A Shift in the PPF

brought by overall economic
growth.

Figure 4. A Shift in the PPF

brought by a biased technological
change. The move from point B
to C was caused by an
improvement in the technology
used to produce butter only.

The 2 Branches of Economics:

Microeconomics and Macroeconomics

There are two branches of economics as it is studied on

various
levels,
namely:
microeconomics
and
macroeconomics. We can study the decisions of the
individual households and firms- that is microeconomics.
Or we can study the operation of the economy as a whole,
which is the sum of all the activities of all the decision
makers in the markets-that is macroeconomics.
To define formally, microeconomics is the study of how
households and firms make decisions and how they
interact in specific markets. Macroeconomics is the study
of economy-wide phenomena. A microeconomist might
study the effects of tariffs on the Philippine shoe industry,
or the effects of government subsidy on the agricultural
sector. A macroeconomist might study the effects of
borrowing by the central government, the changes over
time in the economys rate of unemployment and inflation,
or alternative policies to promote growth in human
development index.
While both fields deal directly with economics, they have
obvious contrast. What may be true at one level of an
economy may not be true at another. Sometimes, there is
a conflict between micro and macroeconomics, as whats
good for one may not be good for the whole, and vice
versa.

2 Kinds of Economic Analysis:

Positive and Normative Analysis
There are two kinds of economic analysis, sometimes also
referred to as the two views in economics. Economists are
often times asked to explain the causes of certain
economic events. Why, for example, is unemployment
tends to increase or decrease at specific times of the year?
On the other hand, sometimes economists are asked to
recommend policies or resolutions to improve economic
situations. What, for instance, should the government do to
in order to decrease the unemployment rate? When
economists are trying to explain the world, they are
scientists, thus they are giving a positive view on the
economy. When they are trying to help improve it,
suggesting and recommending what steps can be taken by

individuals, firms, government, etc., they are policy

advisers, thus they are making a normative claim about
the economy.
Positive economics is the view in economics that
concerns on the description and explanation of economic
phenomena. It focuses on facts and cause-and-effect
behavioral relationships and included the development and
testing of economic theories. These are usually statements
that can be proved or disproved by reference to facts.
Normative economics is that view in economics that
expresses value judgments about economic fairness or
what the economy ought to be like or what goals of public
policy ought to be. These are usually statements that
represents opinion which are subjective by nature.
To help clarify the two roles that economists play, let us
analyze some economic statements. Because scientists
(positive economists) and policy advisers (normative
economists) have different goals, they use language in
different ways. For example, suppose Mang Pandoy and
Aling Norma are discussing the trade-off between inflation
and unemployment. Here are their comments:
Mang Pandoy: A low level of inflation leads to a rise in
unemployment.
Aling
Norma:
The
government
should
prefer
unemployment to inflation.
Whether you agree or disagree with these statements,
notice that Mang Pandoy and Aling Norma differ in what
they are trying to do. Mang Pandoy is speaking like a
positive economist: He is making a claim about how the
economy works. Aling Norma is speaking like a normative
economist: She is making a claim about how to improve
the economy.
Now, the question is which is more important, is it the
Positive analysis, or the Normative analysis?
Answer: Both are important of course. Although at first it
may seem like normative analysis is more useful however
imagine making a suggestion on what we should do in the
economy without understanding first the nature and
current state of the economy. Somehow, it can be
compared to a doctor prescribing medication without first

observing the patient and without looking at his/her

laboratory results. It can lead to a tragedy. Thus we can
conclude that the positive and the normative economist
should work hand in hand in resolving the economic
problem.

N. Gregory Mankiws 10 Principles of Economics

Professor Mankiw is a professor of economics at Harvard
University. He studied at Princeton University and MIT. He
developed the 10 Principles of Economics as a summary of
Summary
the unified central ideas of the many facets of economics.

1. People face trade-offs.

Economics
social science
that
deals
with
2. The costisofthe
something
is what you
give
up to
get the
it.
study
of
the
proper
utilization
of
the
scarce
3. Rational people think at the margin.
resources
to meettothe
insatiable needs and wants
4. People respond
incentives.
of
man.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize
economic
Utilization
ofactivity.
resources is fragmented into four
7.
Government
sometimes
improve market
distinct aspects:can
Allocation,
production,
distribution
outcome.
and consumption. Their key considerations are
8. A countrys standard of living depends on its ability
priority,
quantity and quality, equity, and utility,
to produce goods and services.
respectively.
9. Prices rise when the government prints too much
money.

Economists try to address their subject with a

scientists objectivity. Like all scientists, they make
appropriate assumptions and build simplified
models to understand the world around them. Two
simple economic models are the circular flow
diagram and the production possibilities frontier
(PPF).

The circular-flow diagram is a simplified model

which included only two types of decision makers
firms and households. Firms produce goods and
services using inputs such as labor, land, and
capital (buildings and machines).

The field of economics is divided into two subfields:

microeconomics
and
macroeconomics.
Microeconomists study the decision making by
households and firms in the marketplace.
Macroeconomists study the forces and trends that
affect the economy as a whole.

A positive statement is an assertion about how the

Questions for Review and Application:

1. Why do economists sometimes offer conflicting
advice as policy makers?
2. What is the difference between a positive and a
normative statement? Give an example of each.
3. Name one economic interaction that is not covered
by the simplified circular-flow-diagram.
4. Identify the major proponents of economic theories
and give their most important contribution in the
field.
5. What are the two subfields into which economics is
divided? Explain what each subfield studied.

Quiz 1. Introduction: Economics in General

Name:
_______________________________
_________________
Section:
___________
Date:
__________
_________________

Score:
Professor:

Direction: Multiple Choice: Choose the best answer.

_____1. It is the social science that deals with the proper
utilization of resources to meet the needs and wants of
man.
A. Economics
B. Macroeconomics

C. Microeconomics
D. Philosophy
E. All of the Above

_____2. The following are stages/aspects of utilization

EXCEPT:
A. Allocation
B. Distribution

C. Consumption
D. Production
E. All of the Above

_____3. He wrote the book entitled An Inquiry into the

Nature and Causes of the Wealth of Nations.
A. Adam Smith
B. John Stuart Mill

C. David Ricardo
D. Milton Friedman

_____4. According to Aristotle, there are two types of value:

intrinsic value and ________.
A. Exchange Value
B. Real Value

C. Extrinsic value
D. Use Value

_____5. The following are Classical economists EXCEPT:

A. Adam Smith
B. Karl Marx

C. David Ricardo
D. John Stuart Mill

_____6. What is the key concept in production?

_____7. What is the key concept in allocation?

A. Equity
B. Quality

C. Priority
D. Utility

_____8. In this model, the economy is simplified to

included only two types of decision makers firms and
households.
A. Circular-Flow-Diagram
C. PPF
B. Indifference Curve D. Budget Line
_____9. The subfield of economics which deals with the
study of the forces and trends that affect the economy as
a whole.
A. Positive View
B. Normative View

C. Microeconomics
D. Macroeconomics

_____10. These kinds of statements are descriptive.

A. Positive View
C. Microeconomics
B. Normative View
D. Macroeconomics

Quiz 2. Introduction: Economics in General

Name:
_______________________________
_________________
Section:
___________
Date:
__________
_________________

Score:
Professor:

I. Identification:
_______________1. It means limited, fixed, and exhaustible.
_______________2. A branch of economics that deals with
the study of the economy as a whole.
_______________3. Also known as descriptive economics.
_______________4. A branch of economics that deals with
the fragmented aspects of the economy.
_______________5. Economics came
Oikonomia which means _______.

from

the

word

_______________6. The means setting aside a portion of

ones income to specific needs or wants. It is also known
as budgeting.
_______________7. Also known as prescriptive economics.
_______________8. The 2 players in the economy.
_______________9. The 2 sides of the economy.
_______________10. The Science that deals with the
utilization of resources to meet the needs and wants of the
society.
II. Enumeration:
Give the Four (4) aspects of utilization and identify the key
concept for each.
1. _________________________________
2. _________________________________
3. _________________________________