CHAPTER 1_ ECONOMICS1.pptx

ECONOMIC WAY OF THINKING Learning Objectives  Definition of Economics,  Economics Problems  Scientific Approach to Economics  Economics Models, Theories and Methods Key Terms: Needs vs Wants Resources Product vs Service Scarcity Economics   Land...

ECONOMIC WAY OF THINKING Learning Objectives  Definition of Economics,  Economics Problems  Scientific Approach to Economics  Economics Models, Theories and Methods Key Terms: Needs vs Wants Resources Product vs Service Scarcity Economics   Land – all natural resources  Labor – any form of human effort Economi  Capital – man-made goods in the production of goods c and services Resourc  Entrepreneur – person who combines the economic es resources for use in the production of goods and services Scarcity  pertains to the limited availability of economic resources relative to society’s unlimited demand for goods and services.   A science that deals with the management of scarce resources to satisfy human needs and wants. DEFINITION  Greek words – “oikos” – OF meaning household and ECONOMIC “nomus” – meaning system or management S “Oikonomia” or “oikonomus” – means management of household   Microeconomics – studies economy in parts. Is the study of price system, the individual consumer and Division of the individual firm. Macroeconomics – delas Economics  with aggregates. It presents pictures of totals; income, output, employment, spending, and price level. It studies economy as a whole. Relationship Between Economics and Scarcity The problem of scarcity gave birth to the study of economics Their relationship is such that if there is no scarcity, there is no need for economics Origin of the term “Economics”  Greekwords – “oikos” – meaning household and “nomus” – meaning system or management  “Oikonomia” or “oikonomus” – means management of household   “ceteris paribus” means “all other things held constant or else Ceteris equal” Paribus  Thisassumption is used Assumpti as a device to analyze on the relationship between two variables while the other factors are held unchanged Circular Flow of Economic Activity Historical Background Economic Theory: Classical Economics  1700s-1800s saw the birth of economic theory  Adam Smith of Scotland – considered the most important personality in the history of economics; regarded as the “Father of Economics”  He was responsible for the recognition of economics as a separate body of knowledge  His book, “Wealth of the Nations” published in 1778, became known as the “bible in economics” for a hundred years Adam Smith (1723-1790)  Adam Smith’s contributions: his analysis of the relationship between consumers and producers through demand and supply, which ultimately explained how the market works through the invisible hand  John Stuart (1806-1876) and David Ricardo – developed the basic analysis of the political economy or the importance of a state’s role in its national economy  David Ricardo - Theory of comparative Advantage, based on this nations should export the goods which they enjoy the greatest advantage, and should import the goods which they have the greatest disadvantage John Stuart (1806-1876) David Ricardo (1772- 1823) Karl Marx (1818-1883)  Emphasized that labor must be socially necessary.  Maintained that workers are the real producers of goods. Keynes’ General Theory of Employment, Interest and Money (1936)  John Maynard Keynes – argued that inadequate overall demand could lead to prolonged periods of high unemployment  an English economist who offered an explanation of mass unemployment and suggestions for government policy to cure unemployment Non-Walrasian Economics (1939)  JohnHicks was recognized for his analysis of the IS-LM model  The IS-LM model is a theoretical construction that integrates the real IS (investment-saving), and monetary , LM (demand for, and supply for money) Positive and Normative Economics Positive economics  is an economic analysis that considers economic conditions “as they are” , or considers economics ‘as it is”  It uses objective or scientific explanation in analyzing the different transactions in the economy  It simply answers the question ‘what is’ Normative Economics  Is economic analysis which judges economic conditions “as it should be”  It is the aspect of economics that is concerned with human welfare. It deals with ethics, personal value judgments and obligations analyzing economic phenomena  It answers the question ‘what should be’  Also referred to as policy economics because it deals with the formulation of policies to regulate economic activities Four Basic Economic Questions What to How to produce? produce? How For much to whom to produce? produce?   An economy must identify what are the commodities needed to be produced for the utilization of the society What to in everyday life. A produce? society must also take into account the resources that it possesses before deciding what goods or services to produce.   There is a need to identify the different methods and techniques in order to produce commodities. The society must determine whether to employ labor intensive production or capital intensive production. Labor intensive production - How to uses more of the human resource or manual labor in producing goods produce? and services than capital resources Capital intensive production – employs more technology and capital goods like machineries and equipment in producing goods and services than labor resources   Identifies the number of commodities needed to be produced in order to answer the demand of the society. How Underproduction – will result much to to a failure to meet the needs and wants of the society. produce? Overproduction – results to excess goods and services going to waste For whom  Identifies the people or sectors who demand to the commodities produce? produced in a society Relationship of Economics to other Sciences 1. Business management Business basically provides employment opportunities to members of the society, and is an important vehicle in the balance of economic activity 2. History The history of economic ideas provides information regarding theories that can be revisited in order to evaluate present and future economic issues. 3. Finance Money and finance are important in the study of economics. 4. Physics Innovations and output brought about by physics greatly affect the study of economics. 5. Sociology The study of the behavior of societies and economics essentially deals with the behavior of economic subjects. 6. Psychology psychology is primarily useful in the study of microeconomics, which scrutinizes and focuses on the smallest units of the economy. Importance of Studying Economics 1. To understand the Society Economics seeks to analyze transactions made by the society and its members, particularly with regards to details on their behavior and decision making. 2. To understand Global Affairs Economics seeks to explain the internal operation and trade policies of countries, measures the competitiveness of each country, and identifies its comparative advantage in relation to other states. 3. To be an informed Voter An understanding of economics develops individuals to be wise voters by providing individuals with an understanding of economic policies. 3 Es in Economics EFFICIENCY EQUITY EFFECTIVENE SS   Refers to productivity and proper allocation of economic resources  Refers to the relationship between scarce factor inputs and outputs of goods and services which can be measured in Efficiency physical terms (technological efficiency) or cost terms (economic efficiency)  Being efficient in the production and allocation of goods and services saves time, money, and increases a company’s output   Equitymeans justice and fairness  Whiletechnological advancement may Equity increase production, it can also bear disadvantages to employment or workers   Effectiveness means attainment of goals and objectives  Economics is an Effectiveness important and functional tool that can be utilized by other fields. Important Economic Terms WEALTH CONSUMPTION PRODUCTION EXCHANGE DISTRIBUTION   Refers to anything that has a functional values (usually in money), which can be traded for goods and services.  Is the stock of net assets Wealth owned by individuals or households  Nation’s total stock of wealth (marketable wealth), that is physical and financial assets which are relatively liquid   Refers to direct utilization or usage of the available goods and services by the buyer Consumption or the consumer sector  Itis also the satisfaction obtained by consumers for the use of goods and services   Defined as the formation by firms of an output (products or services) Production  Itis the combination of land, labor, capital in order to produce outputs of goods and services   The process of trading goods and/or services for money and/or its equivalent Exchange  Italso includes the buying of goods and services either in the form of barter or through market   The process of allocating or apportioning scarce resources to be utilized by the household, the business sector, and Distributio the rest of the world n  Itrefers to the process of storing and moving products to customers often through intermediaries such as wholesalers and retailers