ECON01G- Principles of Economics
for specific ways of satisfying basic needs. To
Introduction to Economics Part 1
OVERVIEW
Most people have a general idea of what
Economics is. They live with it, they practice it.
Some will even be able to define it. Economics is
concerned with the production, distribution, and use
of material goods and services.
Adam Smith, the recognized father of
Economics, stated that Economics is “an inquiry into
the nature and causes of wealth of nations.
WHAT IS ECONOMICS?
The two Greek roots of the word economics are
oikos – meaning household – and nomus – meaning
system or management. Oikonomia or oikonomus
therefore means the management of household.
ECONOMICS DEFINED
 A social science concerned with man’s problem
of using scarce resources to satisfy unlimited
human wants. – Walstad and Bingham
 The study of how societies use scarce resources
to produce valuable commodities and distribute
them among different people – Samuelson and
Nordhaus
 The study of production, distribution, selling, and
use of goods and services – Collin
 A social science concerned with using scarce
resources to obtain the maximum satisfaction of
the unlimited material wants of society –
McConnel and Brue
 The study of how people use their limited
resources to try to satisfy unlimited wants
 The efficient allocation of the scarce means of
production toward the satisfaction of human
needs and wants.
2 FACTORS
1. Scarce resources
2. Unlimited human wants
Scarcity – the condition wherein most things that
people want are available only in limited supply.
These things, called economic goods, are
generally scarce and must somehow be rations
whether by price or by some other means.
Unlimited wants – a person’s desires or preferences
satisfy an unsatisfied need, a person wants
particular products or services.
GOODS – a good is anything which yields satisfaction
to someone.
2 TYPES OF GOODS:
1. Tangible goods – when they are in the form of
material goods or commodities
2. Intangible goods – they are in form of services.
GOODS CLASSIFICATION ACCORDING TO USES:
1. Consumer goods – goods which yield direct
satisfaction e.g. soft drinks, food.
2. Capital goods – goods used in production or
other goods and services. E.g. buildings, machineries,
equipment.
3. Essentials or essential goods – goods used to
satisfy the basic needs of man.
4. Luxury goods – goods man may do without but
are used to contribute to his comfort and wellbeing.
Other classifications:
5. Economic good – good which is both useful and
scarce. It has a value attached to it and price has
to be paid for its use.
6. Free good – if a good is too abundant that there
is enough of it to satisfy everyone’s needs
without anybody paying for it.
HOW ARE GOODS PRODUCED?
Goods are created by means of production. It
may involve the physical transformation of a
commodity such as conversion of leather into shoes.
This type of production takes place in the factory and
referred to as manufacturing or industry.
Production may also take place in the farm.
Planting and harvesting of rice, corn, coconuts and
sugar are agriculture production.
Even exploration for oil, mineral, and precious
metals is production. All these activities are carried
out to provide goods and services for use in the
satisfaction of man’s wants and needs.

ECONOMIC RESOURCES
 Things that are needed to carry on the
production of goods are called economic
resources or factors of production.
 They are the basic resources because they
constitute the basic needs in production.
 They are the most basic tools used in the
production of goods and services.
4 ECONOMIC RESOURCES
1. Land 3. Capital
2. Labor 4. Entrepreneur
LAND
 Strictly speaking, land refers to all natural
resources, which are given by and found in
nature, and are therefore, not man-made.
 Land is an economic good because it is scarce
and a price has to pay for it.
 People who own land and offer it to others for
their use earn an income called rent.
 The less the supply of land available for man’s
use, the higher is the rent that has to be paid
for it.
LABOR
 Labor is any form of human effort exerted in
the production of goods and services. It covers
a wide range of skills, abilities and
characteristics.
 The supply of labor in a country is dependent on
its production and on the percentage of its
population that is willing to join the labor force.
 The country’s supply of labor is also affected by
the migratory tendencies of its population and
by the influx of workers from other countries.
 Payment for labor is called salary or wage.
CAPITAL
 Refers to man-made goods used in the
production of goods and services.
 It does not only include money, it includes
buildings, machinery, raw materials, and other
physical necessities for the use in production.
 A nation’s capital is dependent on its level of
savings.
 Savings refer to the part of a person’s income
which is not spent on consumption.
 Capital is an economic good and the owner of
capital earns income for its use. This income is
called interest.
ENTREPRENEUR
 The one who combines the other economic
resources for use in the production of goods
and services.
 Entrepreneurship is an economic good that
commands a price. This price is the income
earned by the entrepreneur and is called
profit.
 Profit is the amount left behind after all
allocations to the other economic resources
have been made.
Functions of the Entrepreneur:
1. Organizes production by combining land, labor
and capital to make goods and services.
2. He makes business decisions by determining
what goods or services to produce and how to
produce them.
3. He bears the risk of his business decisions. He
must suffer the consequence of losses if he
fails, but in the same light, he must reap the
profits as a reward if he succeeds.
4. He innovates by introducing new products, new
technology, and new ways of organizing the
business.
THE NEED TO CHOOSE
3 FUNDAMENTAL ECONOMIC PROBLEMS
1. What goods and services must be produced?
2. How shall these goods and services be produced?
3. How much is to be produced?
4. For whom shall goods be produced?
What to produce?
An economy must identify what are the goods
and services needed to be produced for the
utilization of the society in the everyday life of man.
A society must also take into account the
resources that it possesses before deciding what
goods or services to produce.
In a market economy, what gets produced in
the society is driven by prices. Resources are
allocated to the production of goods and services
that have high prices and low input prices relative to
one another
 TYPES OF ECONOMIC SYSTEM
How to produce?
There is a need to identify the different
methods and techniques in order to produce goods
and services.
The decision of what form of technology is to be
employed depends more on the availability of
cheaper resources and less of more expensive inputs.
If there is abundant supply of labor then this
resource will be cheaper and will cost less so
production will be labor intensive.
How much to produce?
Identifies the number of goods and services
needed to be produced in order to answer the
demand of man and society.
The optimum amount of production must be
approximated by producers.
Underproduction (shortage) results to a failure
to meet the needs and wants of the society.
Overproduction results to excess (surplus)
goods and services going to waste.
For whom to produce?
Identifies the people or sectors who demand
the commodities produced in a society.
Economists must determine the “target
market” of the goods and services which are to be
produced to understand their consumption
behaviors and patterns
An understanding of these results to higher
sales of goods, and ultimately to increased profits.
For those who can pay the highest price is for
whom goods and services are produced.
THE 3 E’s OF ECONOMICS
1. Efficiency - productivity and proper allocation of
economic resources. Being efficient in production
allocation of goods and services saves time, money
and increases a firms output.
2. Effectiveness – attainment of goals and objectives.
Economics therefore is an important and functional
tool that can be utilized by other fields.
3. Equity – justice and fairness. While technological
advancement may increase production, it can also
bear disadvantages to employment of workers.
1. The Traditional Economy
2. The Command Economy
3. The Market Economy
4. The Mixed Economy
THE TRADITIONAL SYSTEM
 Basically a subsistence economy. A family
produces everything that it consumes.
 Decisions on what, how, and for whom to
produce are made by referring to the
traditional manner of doing things.
 Production is carried on in the methods used
by the forefathers, and is therefore very
primitive.
 This system is very backward since it does not
allow for change.
THE COMMAND ECONOMY
 Production is owned by the government.
 Its decisions are arrived at by planners or
government men who dictate what, how and
for whom to produce.
 There are 5 countries under command
economy.
THE MARKET ECONOMY
 Characteristic of this economy is that
resources are privately owned and decisions
are made by the people themselves.
 Since every consumer arrives at his own
decision, the system is coordinated through an
interlocking network of markets and prices.
 The system depends on prices set by the
conditions of demand and supply.
 Competition is supreme; there is consumer
sovereignty, and the price of the good is the
 Guiding factor for producers to know what and
how much to produce.
MIXED ECONOMY
 It is seldom that an economic system exists in
pure form. The US economy is predominantly
market, but it cannot be denied that there
exists some form of government control.
 Cuba can be best described as command since
its decision are planned by the government,
however, the price system is also used, even if
only minimally.

OPPORTUNITY COST
When one makes a choice, there is always an
alternative that has to be given up.
A producer who decides to produce shoes,
gives up other goods that could be produced with
the same resources.
 A student, who buys a book with his limited
allowance, gives up the chance of eating out or
watching a movie.
 An M.A. graduate, who decides to teach, gives up
the salary he would have earned had he worked in
a big firm like San Miguel Corporation.
The values of these alternatives given up are
referred to as opportunity costs.
Opportunity cost maybe defined as “the cost
choosing to use resources for one purpose measured
by the sacrifice of the next best alternative for using
those resources.” Example:
 If a farmer chooses to send his child to college
rather than expanding his farm’s output by 100%
his opportunity cost is the additional output of the
farm.
 If a person is considering sleeping rather than
choosing the next best alternative, like meeting a
friend, then the opportunity cost of sleeping is
meeting a friend.
SOCIETY’S TECHNOLOGICAL POSSIBILITIES
Since a nation has limited resources, it has to
cope by choosing different potential bundles of
goods. It also has to choose among the different
production techniques and who will consume the
goods and services it decides to produce. These
decisions involve choices on inputs to be used and
the outputs to be produced.
 Inputs refer to the commodities of services
used to produce the good or services.
 Existing technology is used to combine these
different inputs. Inputs consist of land labor
and capital.
 Land refers to gifts of nature to our productive
process. It is a term that covers natural
resources including minerals, forests, oceans,
and soil.
 Labor refers to the human resource used in
production. Labor includes farmers, doctors,
factory workers, drivers, or teachers
 Capital consists of man-made durable goods
which are used to produce other goods. They
include machinery, equipment and other tools.
 Outputs refer to useful goods and services
resulting from the production process. There
are goods that are either consumed like shoes,
or used in further production like machines.
THE TOOLS OF ECONOMICS
 Economics is a positive science that means it
deals with what it is. This in contrast to
normative economics which deals with what
should be.
 Economics, therefore, is a study that attempts
to explain how an economy operates.
 To be able to understand and explain economic
events and economic theories, the student of
economics must learn how to use the basic
tools of Economics.
HOW TO USE THE BASIC TOOLS OF ECONOMICS:
 Learn how to apply logic in order to enable him
to reason out properly and to draw conclusions.
 The use of mathematics will enable him to
conceptualize and quantify economic principle
 Use statistics to describe quantitavely human
behaviors and to serve as empirical evidence in
the testing of hypothesis
DIVISIONS OF ECONOMICS
1. Macroeconomics deals with the aggregates. It
presents pictures of the totals: income, output,
employment, spending, and price level. It
studies economy as a whole.
 It views all consumers as a unit e.g.
consumer sector, all businesses as an
aggregate unit
 E.g. the business sector, and all the various
government agencies as a unit.
 The purpose is to explain and predict the
structure and functioning of whole
economies.
2. Microeconomics studies the economy in parts.
It is the study of the price system, the
individual consumer, the individual firm. It
deals with the question: What determines the
breakdown of national income aggregates into
various types of goods and services.
 Examples are the determination of the price
of a single product, or the behavior of a
single consumer or business firm.