Chapter 1.pptx

Nature, Scope and Methodology of Economics Chapter 1 Objectives 1 The Origin of Economics 2 Definition of The students should:...

Nature, Scope and Methodology of Economics Chapter 1 Objectives 1 The Origin of Economics 2 Definition of The students should: Economics be able to define economics and distinguish between microeconomics 3 Importance of and macroeconomics; Economics be able to explain the importance of economics; 4 Macroeconomics vs. be able to explain the key ideas that Microeconomics define the economic way of thinking; be able to describe the economic 5 Economic Methodology methodology  The Origin of Economics Economics came from the Greek word Oikonomia which means household management.  Definition of Economics Economics is getting wealth and getting wealth using activities of man. Economics deals on how human beings go about the business of organizing consumption and production activities. Economics is the study of people’s way of earning and enjoying life such that it improves societies and makes human possible. Economics is a social science which deals with the production, exchange, distribution, and consumption of goods and services. Economics is a social science that deals with efficient allocation of scarce resources in order to satisfy unlimited and in satiable human wants.  Economics as a Science Economics is a science because like any other science it is a systematized body of knowledge that follows a scientific approach in dealing with economic issues. It uses or employs scientific method in coming up with economic decisions and generalizations. This method consists of the following step-by-step processes. 1. Know and Understand the problem. 2. Formulate the hypothesis. 3. Gather real-world data or facts that are relevant to the problem. 4. Based on the gathered facts, observe, analyze and make interpretations. 5. Make generalizations and recommendation as whether to accept, reject or modify the hypothesis. Economics as a Social Science A social science is the study of human behavior. It is about how society and individuals generally make CHOICES. Economics deals with choices and opportunity cost. A choice entails sacrifices. The more budget allotted for an out-of- town vacation a family, the lesser budget they can give for charity. In other word choice involves sacrifice of its alternative uses which is also known opportunity cost. Opportunity cost can also refer to an alternative action that should have been undertaken instead. Hence, opportunity cost measures things that must be given up or sacrificed when one chooses one alternative over the other. This cost of a decision arises because choosing one thing in a world of scarcity means giving up something else. Before we go! What will you choose from the following situations. 1. To help a friend fix his bike or run to school because you’re late. 2. Go to church or go swimming with your classmates. 3. Work part time before studying or study while working part time. 4. Eat healthy but costly or cheap but unhealthy foods. 5. Pursue your dream career or the dream of others for you. Economics and Human Wants People are never satisfied. Human wants are unlimited, insatiable, and innumerable. They are infinite and may only be limited by people's imagination. For us to satisfy these wants, we need resources which are said to be scarce. The study of economics helps us to make decisions on how to maximize the use of our resources to satisfy most of our wants. Economics and the Concept of Scarcity. Resources whether human (labor and entrepreneurial abilities) or non-human (land and capital) are considered scarce, such that goods and services that can be produced are also limited and scarce. Scarcity is the fundamental problem in any society. It limits our options to choose. Since we can not have it all, we must decide what we must forgo in order to obtain what we should have. Importance of Economics Economics is considered as the "Queen of the Social Sciences” because among the social sciences, it determines our ability to meet and satisfy our human wants and needs. Here are some of the few reasons why economics is a an important subject:  Importance of Economics Economics is also very Economics places important in business such greater emphasis on that business managers and precise and systematic executives with full analysis. Studying understanding of basic economics helps economic decision making students improve their principles and operation of the analytical skills which business systems will be able can be very useful in to maximize the return of their future jobs. their investments and profit.  Importance of Economics Having a keen knowledge of Economics helps economics makes one more employees and buyers efficient in financial make better investment decisions both for employment and personal finance or running a buying decisions, business. Basic understanding respectively. of economics is essential for well informed citizenship.  Macroeconomics vs. Microeconomics There are two big branches in the study of economics namely, macroeconomics and microeconomics. The prefix macro means large. Hence, macroeconomics is concerned with the study of the aggregate economy or the economy of one's country as a whole. The prefix micro means small. Hence, microeconomics is concerned with the study of the behavior of individual consumer and firm or industry in the economy or it looks only at specific economic units of a country. This branch of economics deals with the price of a specific product, the number of employees employed in a specific firm, or the expenditures of a specific firm. Microeconomics also explains how the demand and supply of certain product determine equilibrium price in the market.  Macroeconomics vs. Microeconomics Branch of Economics Production Prices Income Employment Production/ Output Price of Goods and Microeconomics of the firm Distribution of Income Services Employment in the and wealth Company -Medical care prices -Camba’s textile in the Philippines -Jobs in the steel production -Prices of gasoline -wage rate in the auto industry -Rudy;s rice -Apartment rental in industry -Number of employees production in a year Sta. Mesa in Tellus Call center National Aggregate Price Macroeconomics Production/Output level National income Employment and Unemployment rate -Consumer Price -Philippines total index Industrial Output -Number of employed -Producer price -Total wages and salaries -Gross Domestic and underemployed in index -Total corporate profits Product the Philippines -Inflation Rate  Wrap Up! Identify whether the following is considered under Macroeconomics or Microeconomics. 1. Romblon State University has 1920 employees. 2. The minimum wage in Romblon is P380. 3. First-time homebuyers shopping for the best loan interest rates. 4. Inflation has become a problem since the post period of pandemic. 5. The importation of rice from other countries reached about 4.1 metric tons. Economic Methodology  Primary data are collected for one's Economics being a science, is present purpose using direct a systematized body of knowledge. It uses the observation, surveys, and scientific method in gathering interviews. and analyzing data and making in conclusions. Descriptive economics Secondary data are collected from involves compiling or gathering data relevant to a statistical agencies like data on particular problem. Data may prices, employment, interest and come from primary or national income or the Gross secondary sources. Domestic Product.  An economic theory or principle The facts are then studied, which is put into action becomes an arranged and generalized to come up with an economic theory, economic policy. principle or law. Theoretical economics is the process of deriving theories and principles. An economic theory is a generalization based on a variety Policies are courses of action based of facts about why or how an on economic principles and are economic event occurs. intended to solve a specific economic problem and to achieve economic goals. 1 2 3 Descriptive Economic Policy Economics Economic Theory Figure 1.1 Process of Economic Policy Formulation Positive and Normative Economics The effectiveness of economic policies can be assessed in either of two ways, known as positive and normative economics. Positive economics attempts to describe how the economy and economic policies work without resorting to value judgments. The distinguishing feature of positive economics is that it can be tested and either confirmed or rejected based on facts. Normative economics involves the use of value judgments to assess the performance of the economy and economic policies. For a country to attain growth, agriculture must be the top priority over the industry. This statement belongs to the realm of normative economics because it is based on a value judgment and therefore cannot be tested, confirmed, or refuted. Inductive vs. Deductive Method Inductive or empirical method is applied when researches are conducted from facts to theory or from specific observations to making generalized explanations about the observed phenomenon. In the inductive method, economic generalizations are derived on the basis of experiences and observations. It consists of examination of facts and development of general principles. Deductive method precedes from general behavior to particular behavior or from theory to facts. Economics Approaches Using a Function, Schedule and a Graph Economics among other social sciences has immense use of quantitative measurements in the form of mathematical functions schedules or even in the form of graphs and curves. When studying problems in economics, a search for factors that may affect the variable under study is an important consideration. This can be written as Y = f (x) read, "y equals f of x" or " y is a function of x.“ A function is a quantitative relationship expressed in the form of an equation in which one or more independent variables uniquely determine the values of the dependent variable. Consider a common functional relationship in economics: Economics Approaches Using a Function Y=a+bx Y is the dependent variable; X is the independent variable while a and b are parameters, where "a" is the constant term "a" which measures the value of the dependent variable when the independent variable is equal to zero. The parameter "b" represents the slope of the line which shows the rate of change in the dependent variable per unit change in the independent variable. When b is positive, it shows that there is a direct relation between the dependent and independent variable that is, when X increases, Y increases. On the other hand, when b is negative, it shows an inverse relation between them, that is, as X increases, Y decreases. Economics Approaches Using a Schedule For illustration, below is a mathematical equation for a demand function in a hypothetical market: Qd=90-5 P Where Qd is quantity demanded P is the price The above function can be shown in the form of schedule. Demand schedule is a tabular presentation of Q and its corresponding price. Economics Approaches Using a Schedule Price Quantity Demanded (Qd) 0 90 5 65 15 15 18 0 Figure 1.2 Demand Schedule The above schedule can be presented in the form of a graph. A graph is a locus of points that generally depicts the relation between two variables by means of a curve. The numerical value of one variable is measured along the vertical axis starting from the origin and the other variable along the horizontal axis also starting from the point of origin. The lower left-hand corner of a graph where the two axes meet is called the origin. In economics, the variable Q is drawn on the horizontal axis while the price is on the vertical axis Y. Economics Approaches Using a Graph 25 20 20 Qd=90-5P 15 15 Price 10 10 5 5 0 0 0 15 45 65 90 Quantity demanded Figure 1.3 Demand Curve Take note that demand curve passes the vertical axis at P = 1 and Q = 0. This just shows that the commodity can only be bought a price below 18.00. On the other hand, the maximum quantity demanded is 90 a shown by its line that passes the horizontal axis at Qd = 90. This mean that at price zero or if the product is free, quantity demanded is 90 units. In economics, our interest is on positive quadrant only for demand & supply analysis since there exist no negative quantity demanded supplied nor no negative price.