Fundamentals of Economics

Elements of Economics

Slides prepared by Neil Angelo Halcon

Definition of Economics

Economics as an allocation of wealth

Economics

is a social science that deals with the allocation of scarce resources to satisfy unlimited human needs and wants Allocation is a mechanism of distribution used by society to address the needs and wants of citizens in an environment characterized by scarcity of resources (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 the governments central planning agency Traditional System: based on social consensus and traditions

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 of actors in the market in determining the price Process of production: transforming raw materials to new products

Economics as a science of choice Optimization

Optimization:

getting the best option from limited

resources

Problems of Material Survival and Progress

Relating economics to goals of society social survival and social progress Besides economics, these are answered by culture and politics In economics, the society is concerned with wealth as a means of ensuring its material survival and growth. Economic development is not only expansion of wealth but the equitable distribution of the fruits of this wealth

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 available resources for production
The

social mechanism for ranking the relative importance of human needs and wants is: Market system: the price people attach to these goods and services Command system: the priorities made by the central planning agency Traditional society: the social norms

Basic Economic Questions

How many will be produced? Concerned with the amount of goods and services that will be produced by the society based on human wants, extent of wealth and technology 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 formulated by the state Tradition

Basic Economic Questions

Who will produce it? Refers to the amount of productive inputs to be used based on the availability of resources as well as on their relative productivities.
Market

system: the price of the productive input is compared with its productivity to determine whether it will be employed or not Command system: the planning board decides to use more labor regardless of their productivity Traditional society: groups of people are assigned specific social tasks

Basic Economic Questions

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 the intensity of use of a resource relative with another resource.
Market

system: the market mechanism will evaluate the relative cost of productive inputs and their productivities Command system: the planning board decides to use capital intensive techniques even if it is labor abundant Traditional society: traditional techniques > modern

Basic Economic Questions

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 of social equity Traditional society: based on the value they give to the community

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

Relationship of Economics with Other Fields of Knowledge

Use of scientific method physical sciences Formulation of theories and concepts mathematics, logic, philosophy Topic coverage social studies Level of analysis is broader than commercial sciences

Commercial

sciences = practical Economics = theoretical

Positive and Normative Economics

Positive economics is descriptive in approach, in the sense that it illustrates what is happening to the various actors, sectors and institutions within and outside the economy.
Describes

the world as it is

Normative economics is prescriptive in approach, in the sense that it directs us on what ought to be done.
Prescribes

how the world should be

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 the allocation of scarce resources but takes the analysis at the perspective of the entire economy.

Use of Mathematics

Mathematics is used because it is very effective in describing the relationships of economic variables and actors by means of equations to simplify 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 giving formal, exact, and simple illustration of a theory.

Using models

A model is a simplified summary of an economic reality thus economists make several assumptions which can sometimes make the model unrealistic but despite shortcomings, their simplicity and logic in making a general view on what is happening in the economy

Using Graphs

A 2 dimensional graph can give a graphical illustration of the relationship between 2 economic variables. In this case, a positive/direct relationship

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 economic relationships

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, taste and 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 the commodity is changing. Ceteris Paribus is a Latin phrase that translates to "holding other things constant"

Principles of Economics (N. Gregory Mankiw)

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People face trade-offs The cost of something is what you gave up to get it Rational people think at a margin People respond to incentives Trade can make everyone better-off Markets are usually a good way to organize economic activity Governments can sometimes influence market outcomes A countrys standard of living depends on its ability to produce goods and services Prices rise when government prints too much money Society faces a short-run trade-off between inflation and unemployment