BASIC ECONOMICS

Nature of Economics

Topics
Fundamental Economic Terms and
Concepts
Economic Activity and Resources
Types of Economic Systems
Macroeconomics and Microeconomics
National Development Goals

Fundamental Economic Terms

and Concepts
Economics can be traced to the time
when Adam Smith published his
path-breaking book, The Wealth of
Nations" in 1776.
Since that time, the study of
economics has undergone rapid
changes.

What is ECONOMICS?
1. Economics is the study of wealth.
2. Economics is the study of how human
beings go about the business of organizing
consumption and production activities.
3. Economics is the study of how to
improve society and make human
civilization possible.
4

What is ECONOMICS?
4. Economics is the study of people in their
ordinary life, earning and enjoying a living.
5. Economics is the study of how people
choose to use scarce or limited productive
resources to produce various commodities
and distribute these goods to various
members of society for their consumption.
6. Economics is the science that allocates
scarce resources to satisfy human wants.
5

 Of the definitions mentioned above, the last

definition summarizes what economics is.
Economics, first of all, is a science.
It, is highly related to other academic
disciplines. History, sociology, psychology,
anthropology, political science are all ,social
sciences whose studies overlap with those
of economics.
6

 Economics also draws from

mathematics and statistics.
Economics is concerned with the
wise allocation of scarce resources.
We have economic problems simply
because resources are scarce.
7

 Economics is also concerned with the

satisfaction of human wants which
are often, unlimited.
Economic problems exist because
resources are scarce while human
wants are unlimited.

The Importance of
Economics

To have a working knowledge of economics is

to understand a very important part of human
life.
We go through life concerned with earning a
living, earning money and what money can
buy.
Thus, an understanding of economics is an
understanding of life's principal preoccupation.
9

 A working knowledge of economics

would make the students and the
citizens economically literate.
A big part of the news and the
contents of the newspapers are
concerned with the economic
decisions of business and the
government.
10

 If people make no effort to

understand economic issues and do
not make intelligent position about
them, they surrender all power to
those who claim to understand.

11

 To illustrate, among the more

pressing economic issues we face
right now are:
Poverty
our debt problem
import liberalization

12

Poverty Line
According to a World Bank study, the
proportion of Filipinos living below the
poverty line increased from 66
perrcent in 1965 to 77 percent in
1983.
Ironically, the highest incidence of
poverty was among the country's food
producers - the farmers.
13

 In 1985, a nationwide survey

conducted by the National Economic
Development Authority (NEDA), the
Food and Nutrition Research Institute
(FNRI) and the National Census and
Statistics Office (NCSO) shows that
59.3 percent of Filipino families lived
below the poverty line set at P2,376
monthly for a family of six.
14

 The NSO analysis of its family income

and expenditures survey implies that
the economic situation of Filipino
families from 1991 to 1994 did
improve.

15

 In 1991, poverty incidence was

placed at 39.9% of total families.
In 1994, per capita poverty threshold
of P8,885 declined from 39.9% in
1991 to 35.5% in 1994.

16

ISSUES : The Financial Crisis

in Asia

As early as the first quarter of 1997, a number of

tell-tale events were evident prior to the outbreak
of a regional financial crisis.
In Korea, corporate debt problems were evident
with the failure of two chaebols (Hanbo and
Sammi).
In Thailand, Somprasong, a major land developer,
defaulted on foreign debt repayments as concerns
continued to brew over the financial health of
Finance One, a leading finance company.
17

 Thailand, where the crisis broke out

in full force, experienced exchange
market pressures and intense
speculative activities in May and June
and the Bangkok SET index trended
down steadily through most of the
second quarter.

18

 In the Philippines, tell-tale signs manifested

as early as February when the stock market
went through a series of consolidations due
to unfavorable developments (poor
corporate earnings, anticipated increase in
the US Fed Fund rates, etc.) that
precipitated a series of speculative attacks
on the peso and a surge in the average
daily turnover of foreign exchange
transactions in the Philippine Dealing
System (PDS) beyond normal levels.
19

 After several weeks of speculative

attacks, the Bank of Thailand
announced on July 2 its decision to
shift to a managed float of the baht
and called on the International
Monetary Fund for technical
assistance.

20

 The announcement caused several

regional currencies to experience pressure
,prompting regional authorities of affected
countries to take remedial actions.
In Manila, the Bangko Sentral ng Pilipinas
(BSP) was forced to intensify dollar sales
and raise its key policy rates to stave off
the speculative attacks on the peso.
21

 As effectiveness of this policy stance

diminished, the BSP allowed the peso
to float freely against US dollar on 11
July.
On the same day in Indonesia, Bank
Indonesia widened its intervention In
Malaysia, the defense of the ringgit
abandoned on 14 July.
22

 Pushed by the pressure, the rupiah was

allowed to float begging on 14 August.
In the middle of the quarter, the crisis
was stabilized partially and contained
Southeast Asia amid continued
mounting market pressure in Korea
where another major chaebol , Kia
Motors, suffered from financial distress.
23

 Likewise, intense speculative attacks

were experienced by Hongkong in
mid-August.
On 20 August, an IMF led financial
support package of $17.2 billion was
extended to Thailand.

24

ISSUES : Deregulation
Despite the traffic, living in southern
Metro Manila has its upside.
One of them is gassing up along Sucat
Road in Paranaque, where two new
players in the petroleum industry,
Unioil and Total, are competing with
the so-called Big Three- Petron, Caltex
and Shell.
25

 From Caltex, I shifted to Unioil last

year because of slightly cheaper prices
and cleaner restrooms.
Earlier this year, I shifted to Total
because its restroom is air
conditioned, always perfumed and
with ample supply of toilet paper. Its
prices were the same as Unioil's.
26

 Yesterday, when I gassed up again at Total, I

checked the pump prices along Sucat Road.
Caltex was selling premium gasoline at P13.16
per liter, unleaded at P12.75 and diesel at
P8.71.
Over at Petron, the prices were P13.18, P12.78
and P8.71, respectively.
Shell's were P13.18, P12.78 and P8.71 for the
same products.
27

 Compare these with Total's P13.10,

P12;73 and P8.71 and Unioil's'
P13.10, P12.75 and P8.69.
Not much difference there.

28

 Curious, I checked the pump prices across

town, in Manila Port Area, where the new
oil players have no presence .
The Caltex station near the Manila Hotel
was selling premium at P13.34, unleaded
at P12.98 and diesel at P9.33.
Prices at the Petron station near the
Manila Cathedral wereP13.25, P12.91 and
P9.34.
29

 The only reason I can think of for this

significant discrepancy in the pump
prices of the same company's gas
stations is competition.
And this was made possible by
deregulation of the oil industry.

30

 Its easy to paint the Big Three as national

ogres.
Are they engaged in cartelized pricing?
I don't have the inside tract on this, but I see
it the capitalist way; if there are two
convenience stores near each other, selling
the same product, with similar come-ons, the
main consideration of an ordinary consumer
is the price.
31

 This is why the Big Three's prices are

almost the same.
And this is why on Sucat Road, they
have been forced to bring down their
prices to keep up with the new
competition.

32

 More often, he will have to deliver the

bad news; that despite the oil
companies' heavy subsidy, a fuel price
increase is inevitable.
Every oil price hike will bring protesters
marching to Malacanang.
Is this what the government wants?
33

 Since the oil industry was deregulated,

about 35 new players have come in,
although none is engaged in petroleum
refinery like Petron, Shell and Caltex.
If we go back to regulation, we will keep
out these new players who are posing
stiff competition to the Big Three.

34

 Now the government is making

noises about reversing the trend.
President Erap should keep in mind
that in a regulated environment, he
can look good or pogi only if he's
announcing a fuel price reduction.

35

 Deregulation divorced oil pricing

from politics.

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Basic Terms in Economics

Good
is anything which yields satisfaction to someone.
It is anything used to satisfy a person's wants and
desires.
Goods may be tangible when they are in the form
of material goods or commodities.
They may also be intangible in the form of
services.
Tangible goods like shoes, books and umbrellas,
and intangible services like those rendered by the
doctor, the teacher, or the painter, are all used in
the satisfaction of human wants and needs.
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 Consumer Goods
classified according to use. Goods which
softdrinks and food are called
consumers goods.

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 Capitalized Goods
Goods used in the production of other
goods and services
Examples of these are buildings,
machinery, and equipment.

39

 Essential Goods
Goods may also be essentials, if they
are used to satisfy the basic needs of
man such as food, shelter, and
medicine.

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 Luxury goods
are those goods man may do without,
but are used to contribute to his comfort
and well being.
Perfume, chocolates and expensive cars
are luxury items that are purchased only
by those who can afford.

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 Economic goods
is a good which is both useful and
scarce.
It has a value attached to it and a price
has to be paid for its use.

42

 Free Goods
If a good is so abundant that there is
enough of it to satisfy everyone's needs
without anybody paying for it, that good
free.
Air is free, but air from the electric fan is
an economic good.

43

 Manufacturing or Industry Goods

Goods created by means of production.
It may involve the physical
transformation of a commodity such as
the conversion of leather into shoes.

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 Agricultural Production Goods

Production may also take place in the farm.
Planting and harvesting of rice, corn,
coconuts and sugar are agricultural
production.
Even exploration for oil, minerals 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.
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Economic Resources
The things which are needed to carry on
the production of goods and services are
called economic resources or factors of
production.
These resources are land, labor, capital,
and entrepreneur.
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.
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 Land
Strictly speaking, it refers to all natural
resources, which are given by and found in
nature, and are, therefore, not man made.
This term includes the soil, rivers, forests,
and mineral deposits.
Land is an economic good because it is
scarce and a price has to be paid for it.
Thus, 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.
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 Labor
It is any form of human effort exerted in
the production of goods and services.
Labor covers a wide range of skills,
abilities, and characteristics. It includes
factory workers who are engaged in
manual work.
It also includes the accountant, economist,
nurse, typist, and other numerous people
who leave their homes in the morning to
be in time for their 8-hour work.
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 The supply of labor in a country is

dependent on its population and on the
percentage of this population that is willing
to join the labor force.
Naturally, a country with a high population
growth rate is expected to come up with a
bigger labor supply.
Still, its number of workers will depend on
factors like the age distribution of the
population, the age at which young people
finish school and start work and the age at
which people retire.
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 The labor supply is also highly

dependent on the people's social and
cultural practices.
Are women workers discriminated
against?
Are married girls liberated enough to
work despite marriage, instead of being
plain housewives?

50

 The countrys supply of labor is also

affected by the migratory tendencies of its
population and by the influx of workers
from other countries.
While we lose hundreds of workers yearly
to Saudi Arabia, Libya, the USA and other
higher paying countries, our labor supply is
also expanded by the foreigners who come
here and get employed in jobs which
otherwise should be held by Filipinos.
51

 Since labor supply is not available in any

amount at a zero prize, anybody who
expends his efforts in the production of
goods and services earns an income.
Wages, which are the return on the use
of labor, include salaries, commissions,
tips, and other forms of remuneration.

52

 Capital
Capital refers to man-made goods used
in the production of goods and services.
Capital does not only include money, it
also includes buildings, machinery, raw
materials, and other physical necessities
for use in production.
A nation's capital is dependent on its
level of savings.
53

 Savings refer to the part of a person's

income which is not spent on consumption.
It therefore involves a sacrifice because
consumption has to be given up for one to
save.
Capital is therefore an economic good and
the owner of capital earns income for its use.
This income is called interest.
Thus, if you bring your money to the bank
for deposit, it earns interest because you are
actually lending capital to the bank.
54

 Entrepreneur
Oftentimes, the entrepreneur is not
presented as a separate factor of
production, but is classified as part of labor.
However, the entrepreneur does a special
type of work and is, therefore, not ordinary
labor.
He is the person who combines the other
economic resources for use in the
production of goods and services.
55

 He decides on the combination of land,

labor and capital to be used in production.
Since not everybody has the managerial
and organizational ability to be an
entrepreneur, entrepreneurship is an
economic good that commands a price.
This price is the income earned by the
entrepreneur and is called profit. It is the
amount that is left behind after all
allocations to the other economic
resources have been made.
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The Need to Choose

Scarcity is the reason why people
economize.
Scarcity refers to the limitations
that exist in obtaining all the goods
and services that people want.
It gives rise to economic problems
and it is the reason why man has to
make a choice.
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 If all goods were as free as air, there

would be no need to economize.
Because of scarcity, any society must
confront 3 fundamental and
interdependent economic problems:

58

 1. What to produce and how much?

This is
a decision on what goods and
services to produce and their quantities.
This would depend oh what is needed,
what is wanted and what has to be
produced.

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 2. How shall goods be produced?

This is decision of what resources are to
be used in production, by whom the
goods will be produced, the technological
manner in which production will take
place.
A country with an abundant labor supply
would be expected to use a larger
amount of that resource in its production
of goods and services.
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 3. For whom shall goods be produced?

This question is now on the problem of
distribution.
Who will benefit from the production of
goods and services?
How much of total production will each
consumer get?
Will the goods be bought by the rich or by
the poor?
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 These three questions are basic to all

economies.
However, the manners in which these
economies answer the problems differ.
The country's economic organization has a lot
to do with how the decisions to these
fundamental problems are arrived at.
In the same manner, the way a nation answers
the problems determines the type of econo mic system it adopts.
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Types of Economic Systems

1. The Traditional Economy
This is 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 type of economic system is very backward
since it does not allow for change.
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 2. The Command Economy

In this type of economy, the means of
production are owned by the
government.
Its decisions are arrived at by planners
or government men who dictate what,
how, and for whom to produce.

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 3. The Market Economy

The basic 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 market and f prices.
The system depends on prices set by the
conditions of demand and supply.

65

 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.

66

 It is in the goods market that the

prices of goods and services are
determined.
If there is a strong demand on the
part of the consumers for rice, this
will be reflected in the peso votes,
which are the amount of money they
are willing to spend on rice.
67

 Producers respond by obtaining land,

labor, and capital from the resource
market for use in the production of
rice.
The supply of rice in the market will
also determine the price at which
rice will be sold in the goods market.

68

 In the resource market, the prices of

the resources: the rent, salaries, and
interest, will depend on the amount
made available by the resource
owners as well as the amount of
these resources that the producers
will be. willing to hire.

69

 The Mixed Economy

It is seldom that an economic system exists in
pure form.
The United States economy is predominantly
market, but it cannot be denied that there
exists some form of government control.
The Union of Soviet Socialist Republic can best
be described as command since its decisions
are planned by the government, however, the
price system is also used, even if only
minimally. .
70

 The Philippine economy is a mixed

economy since it applies a mixture of
the 3 forms of decision-making.
However, it is more market-oriented
rather than command or traditional.

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 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.
72

 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.
When we make a decision to buy Good
A, we are in effect, making the decision
not to buy Good B.
73

 Let us study a graphical presentation of

this concept.
Let us say that you as a student, have a
weekly food allowance of sixty pesos.
You decide this week to spend it on a
combination of cokes and chicken
sandwiches.
In the school canteen, a chicken
sandwich cost P6.00 and a coke P2.00,
giving you the following alternatives:
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 The values of these alternatives given

up are referred to as opportunity costs.
When we make a decision to buy Good
A, we are in effect, making the decision
not to buy Good B.
Presenting the graphical representation
of the concept:

75

Let us say that

you as a student,
have a weekly
food allowance
ofp300.00. You
decide this week
to spend it on a
combination of
cokes and chicken
sandwiches. In the
school canteen, a
chicken sandwich
cost P30.00 and a
coke P10.00,
giving you the

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All possible combinations:

The connection of possible

combinations is the
consumption possibilities
line.
This is a downward sloping
line that reflects the inverse
relationship between the
consumption of cokes and the
consumption of sandwiches.
Let us say that your original
choice is a combination of 15
cokes and 5 sandwiches.
However, within the week, you
decide to eat one more
sandwich. You will have to give
up 3 cokes to do so. Your new
choice will be 12 cokes and 6
sandwiches and your
opportunity cost is the value
of the 3 cokes you have to
give up.
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 Let us now take the case of a laborer

who spends 8 hours of his 24hourday for sleep. The remaining 16
hours he can divide between work
and leisure.
The following table shows his
possible combinations of work and
leisure time.
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If the worker goes to work for 8 hours day,

this gives him a leisure time of 8 hours. On a
day that he is asked to go on overtime work of
2 hours he will have to give up 2 hours of his
leisure time.
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80

 Let us now look at the side of the producer.

Given a fixed amount of a resource, he has
the choice of what goods to produce with
that limitation.
Supposing a fixed amount of resource can
be used for food production or for the
construction of houses.
Let us show the alternative combinations
on the next graph.
81

The combinations of food

and houses are shown in.
the production possibilities
curve or production
frontier.
We can see that if all the
resources were devoted to
food production, a maximum
of 1,000 units of food would
be produced.
If on the other hand, all
Other combinations can be obtained at any resources were devoted, to
the construction of houses, a
other point along the curve.
maximum of 10 houses will
For example, on point C on the graph,
output would consist of 500 units of food and be built.

7 houses.
Point D on the graph, although a feasible
point, since it is within the curve, is not a
desirable combination since it would be a
production of output that is less than what is
the maximum feasible output.

82

 If an economy operates exactly on the

frontier, it is in a condition of full
employment since it uses up all the
available resources to produce the
maximum possible output.
Point D is a condition below full
employment and is characterized by idle
capacity since not all available resources
are used up.
83

 The production possibilities curve

is a downward sloping curve that is
concave to the point of origin.
The negative slope reflects the inverse
relationship between production of
houses and food.
However, as we move along the curve,
we give up larger amounts of food for
each additional house produced.
84

 The transfer of resource in the

production of a good where it is more
productive, to the production of
another good where it is less
productive would produce an overall
drop in .output.

85

 Supposing the economy originally operates at

point C on the curve.
Then a growing demand for food necessitates
a change to point F on the graph.
This means the economy has to give up 1
house to increase food production to 600
units.
This amount of housing that is given up is
another example of the concept of
opportunity cost.
86

 When economic policies are

formulated, the opportunity cost has to
be considered.
The implications of what has to be
given up have to be studied and
priorities have to be set.
Less urgent needs are given up for the
more important ones, in view of the
limitations existing in the economy.
87

Tools of Economics
Economics is a positive science that
means it deals with what is.
This is in contrast to normative
economics which deals with what
should be.
Economics is, therefore, a study that
attempts to explain how an economy
operates.
88

 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.
Firstly, he has to learn how to apply
logic in order to enable him to reason
out properly and to draw conclusions.
89

 Secondly, the use of mathematics

will enable him to conceptualize and
quantify economic principles.
Thirdly, he uses statistics to describe
quantitatively human behaviors and
to serve as empirical evidence in the
testing of hypothesis.

90

 These tools equip the economist or

even the student of Economics to
approach the subject in a scientific
manner.
This scientific approach can be
outlined. in the following stages:

91

 1. Observation
An analyst should be able to recognize
conditions, behaviors and events in the
environment.
By simply looking around, he shall be
able to obtain information necessary to
analyze an economic principle.

92

 2. Definitions and Assumptions

The analyst should describe the specific uses of
the study and the peripheral conditions which
affect the economic behaviours which are being
studies.

3. Deductions
These are hypotheses or theories presented for
empirical validation.
They are temporary conclusions made, based on
one's observations and are still subject to the
presentation of evidence.
93

 4. Empirical Testing
Deductions have to be tested as to their
validity and correctness.
The presentation of the empirical
evidence will be the basis of rejecting or
accepting a hypothesis.
The evidence gathered consists of
statistics which is used to verify one's
guesses.
94

 In the Philippines, important

government agencies serve as major
sources of statistics:
the National Census and Statistics Office
(NCSO),
the National Economic Development
Authority (NEDA),
the Central Bank
and even the municipios and the city halls.

95

Macroeconomics and
Microeconomics
Macroeconomics is the division of
Economics that deals with
aggregates.
It presents pictures of totals: income,
output, employment, spending and
price level.
It studies the economy as a whole.

96

 Microeconomics is the division of

Economics that studies the economy
inputs.
It is a study of the price system, the
individual consumer, the individual firm.
It deals with the following questions:
what determines the relative prices of goods?;
what determines the breakdown of national
income aggregates into various types of goods
and services?
97

 Macroeconomics and Microeconomics

are equally important.
One cannot study the whole without
studying the parts.
Neither can one break down
aggregates into components without
knowing what the aggregates are and
what components they are made of.
98

 The big picture is made up of parts.

Understanding the picture as a whole
is just as vital as understanding the
parts.

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