1st Yr BAC 102 Study Guide Module 1 PDF

Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics STUDY GUIDE FOR MODULE NO. 1 NATURE AND SCOPE OF ECONOMICS AND MICROECONOMICS MODULE OVERVIEW Economics is everywhere. When you tur...

Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics STUDY GUIDE FOR MODULE NO. 1 NATURE AND SCOPE OF ECONOMICS AND MICROECONOMICS MODULE OVERVIEW Economics is everywhere. When you turn on the TV, you will be faced with a variety of news headlines concerning economic activities. The same goes with reading a printed newspaper or online news, topics are mainly about economics—price fluctuations, healthcare, environmental issues, employment, trade, globalization, and so on. In real-life situations, consumers are buying a plethora of goods or services. Companies are always busy doing business. The government makes so many decisions pertaining to issues and the state of the economy. Countries across the world trade with one another to sustain every nation’s needs. These members of the economy have something in common—economics affects their interactions. In fact, economics dictates how they live and function. They face economic problems and they make economic decisions. This module is designed to give you an overview of economics, particularly microeconomics, a good starting point to understand and appreciate the course. Before this study guide delves into a detailed analysis, this module is important as it presents the nature and scope of economics. The module presents the meaning of economics, in particular microeconomics, the core ideas economic way of thinking, which include scarcity, choice, opportunity cost, marginal analysis, and incentives. It also examines essential concepts like wants and needs, goods and services, and economic resources. LEARNING OBJECTIVES After studying and completing this module, you should be able to ▪ Describe economics as a social science. ▪ Outline the different definitions of economics. ▪ Discuss the relevance of studying economics. ▪ Describe microeconomics and contrast it with another branch of economics, the macroeconomics. ▪ Enumerate the four principles that underlie the economics of individual choice. ▪ Explain the concept of scarcity and choice by giving real-life examples. ▪ Analyze how opportunity cost takes place and relate it to particular circumstances. ▪ Examine the rational economic decision making through marginal analysis. ▪ Explain the concept of incentives and recognize some examples. ▪ Distinguish the difference between wants and needs. ▪ List and describe the categories of goods. ▪ Differentiate goods from services. ▪ Identify the four broad categories of economic resources. LEARNING CONTENTS Economics as a Social Science The discipline of Economics is social science as it seeks to explain the relationships between people and societies. As a matter of fact, it is the “queen of the social sciences,” as cited by Paul Samuelson. Like other social sciences such as sociology, psychology, and political science, economics is also concerned about human behavior. Although economics has similarities with other fields, it is viewed from a different perspective. Economics is unique in analyzing various areas of human behavior. Economists answer different questions and solve problems using tools and methodologies, which are far-reaching that other social scientists find overwhelming. PANGASINAN STATE UNIVERSITY 1 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics Economics Defined Etymologically, the word economics comes from the ancient Greek word ‘oikonomia”—which literally means the management of a family or a household. A household has inadequate resources, and managing these resources will require certain decision-making skills. There are numerous definitions of economics. Different economists have advanced more or less the meaning of the term. Some of the commonly used specific and general definitions are as follows: 1. Wealth definition. Adam Smith, a Scottish economist, regarded as the father of economics, laid out in his magnum opus, “Wealth of Nations,” the definition of economics focused on wealth creation. Smith defined economics as an inquiry into the nature and causes of the wealth of the nation. 2. Welfare definition. This definition of Economics was explained in the influential book of Alfred Marshall, “Principles of Economics,” which focused on welfare and human activities instead of wealth accumulation. To Marshall, economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material required for well-being. 3. Scarcity definition. This definition is credited to Lionel Robbins, a British Economist, and emphasized scarcity, which is central in the definition of economics. According to his book, “An Essay on the Nature and Significance of Economic Science,” economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. His famous definition was the most accepted definition of economics and still generally used today. 4. Growth-Oriented Definition. The definition was credited to Paul Samuelson, called by the New York Times as the "foremost academic economist of the 20th century". According to him, “economics is a study of how people and society choose, with or without the use of money to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society.” The meaning of the word economics has developed over time. Today, many books and other reference materials define economics in similar ways—a science that deals with the allocation of limited resources to satisfy unlimited human wants. Mankiw (2010) defined economics as a science that studies how society manages its scarce resources. Krugman (2008) defined economics as the study of the production, distribution, and consumption of goods and services. Importance of Studying Economics Economics governs many aspects of life. Individuals whether rich or poor are always faced with making choices because scarcity indeed exists. It is where proper knowledge in Economics is of greater importance. Studying economics will not only help us become wiser in making everyday life decisions but will also make us aware of our interconnectedness with other people, organizations, and the environment we live in to contribute to society and the economy. Basically, the following are the reasons why there is a need to study Economics. 1. Understand how goods or resources are produced and properly allocated to society. 2. Understand the behavior and roles of the different individual decision-makers: the households, firms, and the government. 3. Explain how the national or global economy operates. 4. Know the forces that affect the dynamics of any market. 5. Understand economic issues and trends. PANGASINAN STATE UNIVERSITY 2 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics Scope of Microeconomics Microeconomics, as a major theoretical division of economics, focuses on the interaction between households and firms. The two-sector economy model maps the flow of factors of production and goods and services. In the market for factors of production, the household (producer) provides factors i.e. labor, land, and raw materials in exchange for income while the firm (consumer) uses these factors to produce final goods and services to generate revenue. On the other hand, the market for goods and services allows the firm (producer) to sell final goods and services in exchange for profit to the household (consumer) to satisfy consumption needs. Hence, both household and firm have their demand and supply depending on their role in either of the two markets. All these exchanges in the market for factors of production and market for good and services are influenced by a common denominator, the price. When price is set to a level where demand meets supply then an equilibrium is in effect. Hence, changes in equilibrium is possible whenever price changes. Further, Microeconomics explains why consumers and producers behave the way they do using theoretical foundation from classic economists Alfred Marshall, Adam Smith, and Wilfredo Pareto. Budget, preference, utility, choice, technology, profit, and costs are some of the topics in Microeconomics leading to optimal choice. Market structures such as perfect competition, monopoly, oligopoly, and combination of these are also salient concepts in understanding more complex microeconomic activities. Branches of Economics Economists develop economic principles and models at two levels. These two levels are the branches of Economics: Microeconomics and Macroeconomics. Microeconomics is concerned with the behavior and decision-making of the individual players in the economy, such as the consumers, businesses, and the government. Microeconomics studies the prices, markets, buying decisions of consumers, selling decisions of firms, costs of production, profit maximization, market failure, etc. On the contrary, macroeconomics is focused on the overall structure and performance of the national or global economy. It is concerned with the analysis of aggregates. Macroeconomics studies the determination of national income, price level, employment, economic growth, money, economic policies, international trade, among others. The comparison of topics of interest for microeconomics and macroeconomics is depicted in Table 1.1. Microeconomics (Topics of Interest) Macroeconomics (Topics of Interest) Supply and demand for goods and services in Aggregate demand and aggregate supply the market Worker’s decision, employment in an industry Employment and unemployment Price of a product General price level and inflation Commodity market, labor market, etc. Financial market, Stock exchange Domestic trade International trade Firm’s profit, household income National Income, GDP Mortgage loan interest General Interest rate Government regulations, government failure Government economic policies – fiscal and monetary policies Table 1.1 – Matrix of Comparison of Topics between Microeconomics and Macroeconomics PANGASINAN STATE UNIVERSITY 3 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics Four Core Principles of Economic Way of Thinking People are engaged in various activities—selling, distributing, exchanging, consuming, and so on. These activities, at any rate, involve individual choice. According to Krugman (2008), four economic principles describe the economic way of thinking and underlie the economics of individual choice. These are: 1. Rational choice. Choices are necessary because resources are scarce 2. Opportunity cost. The true value of something is its opportunity cost. 3. Choosing at the margin. “How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of activity versus doing a little bit less 4. Responding to incentives. People usually respond to incentives, exploiting opportunities to make themselves better off. These four principles will be more covered in detail in the following topics. Scarcity and Choice Central in Lionel Robbins’s definition of economics is the term scarcity. Scarcity is a situation where there is an insufficient or limited amount of resources available. All people and economies experience it; it is every everywhere. It happens because individuals’ wants are more than what can be produced. In fact, scarcity is considered the most fundamental economic problem. Because resources are scarce, and people have unlimited wants, choices have to be made among alternatives. Economics is a study of decision-making. It studies what choices people make, how they are made, and what happens as a result. The choice is the ability of an individual to make a decision. Thus, choice always involves decision making. An old adage that can sum up somehow the matter of choice in economics is “There is no such thing as a free lunch.”. It means that whatever goods and services are given, they must be paid for by someone— that is, one cannot get something for nothing. This also implies that every choice entails costs. These costs may take in the form of time, money, or something that is valued. Since resources are scarce and a choice has to be made, one has to give up something he already has to get something he desires. In economics literature, the act of giving up one thing in order to get something else is called trade-off. It is the alternative a person gives up when he makes a decision. Opportunity Cost The concept of opportunity cost is one of the core ideas in the economic way of thinking and is vital to understanding individual choice. If an individual chooses something, he gives up the other thing. This is the opportunity cost of a decision. Boyes (2008) defined opportunity cost as the highest-valued alternative that must be forgone when a choice is made. For example, a student chooses to review his lessons in Economics today. This means he gives up doing other activities—he chooses not to watch a series, do household chores, or surf the internet. If reviewing lessons in Economics is his best alternative to a full day of other activities, then the opportunity cost of doing activities like watching a series or surfing the internet is the value of reviewing his Economics lessons. It’s the cost of the lost opportunity. Other examples of opportunity costs are presented in Table 1.2 PANGASINAN STATE UNIVERSITY 4 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics Alternative (What to do) Choice (What was Opportunity cost chosen) Buy a new gadget Save money in a bank The opportunity cost of buying a new gadget is saving money in a bank Produce a digital camera Manufacture a smartphone The opportunity cost of buying a new gadget is saving money in a bank Spend on public works Spend on healthcare The opportunity cost of spending on public works is spending on healthcare Resign from a job Put up a business The opportunity cost of resigning from a job is putting up a business. The cost of this decision is the lost wages for a year Eat adobo Eat kare-kare The opportunity cost of choosing adobo is eating kare-kare. When kare-kare- is chosen, then the opportunity cost in the satisfaction derived from eating adobo Table 1.2 – Opportunity Cost Examples Marginal Analysis Choices are not instantly made. Rational people always decide by carefully analyzing the benefits they would get and the cost they would incur from their decisions. To put it another way, they compare their marginal benefits and marginal costs. Marginal cost is the extra cost of using one more unit of a good or service. In comparison, a marginal benefit is an additional satisfaction derived from consuming one more unit of a good or service. The study of weighing the benefits and costs usually for decision making is called cost-benefit or marginal analysis. Many activities in economics involve marginal decisions. Consumers choose how many goods and services to purchase with the available budget to achieve the maximum level of satisfaction. Likewise, firms decide how many workers to employ to minimize cost or how many goods to produce to maximize profit. When consumers and firms practice such decisions, they think at the margin. Incentives Scarcity requires everyone to choose and one thing that drives one person to make a decision involves incentives. In the most general terms, incentive is a benefit or reward that encourages someone to behave in certain ways. Salary increase and bonuses paid to workers, recognition awards for students, price discounts given to customers, and tax deductions to businesses are all forms of incentives. Krugman (2008) points out that people usually respond to incentives, exploiting opportunities to make themselves better off. Wants versus Needs When making purchases, people from time to time have difficulty recognizing the distinction between what they want and what they need. People are full of economic wants. They tend to have more, no matter how much they owe already. The economic fact of life stresses that wants are unlimited, but the resources available to satisfy them are scarce. Wants are desires or unnecessary things that can be fulfilled by consuming a good or service. A CEO who has several cars and desires to have a new sports car is a representation of want. Things like jewelry, designer clothing, upscale dining, expensive wine, yachts, and other luxurious goods are all representations of wants. Some things that people desire, like nutritious food or housing, are more important than other things, like a luxurious watch or gadget. Things such as food, housing, and clothing that are vital for survival are called needs. Needs are things that people have to have in order to live a healthy and happy life. Education, transportation, medical care, and job security are just some examples of needs. PANGASINAN STATE UNIVERSITY 5 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics Economic Resources Society has scarce economic resources. This includes all the natural, human, and capital resources that are used in the production of goods and services. Economic resources are the inputs or resources used in the production of goods and services. Another terms used for economic resources are inputs or factors of production. Economics resources have four broad categories. These are: 1. Land. This is the physical space or area on which production takes place. It also includes all the economy’s natural resources such as land, water, and minerals used in the production process. Lot, farmland, trees, forests, river, mineral, and oil deposits are examples of land resources. 2. Labor. It refers to the time, physical and mental skills that people contribute in producing goods and services. For example, a nurse working in a hospital is considered to be a labor resource. The services rendered by a teacher and an economist are also examples of labor resources. 3. Capital. This covers the tools and other productive equipment utilized in producing consumer goods and services. The assembly plant, factory building, distribution facilities, computers as well as human and financial capital fall in this resource category. 4. Entrepreneurship. This is the human resource responsible for combining or organizing the land, labor, and capital resources into a good or service. The entrepreneurs are skilled at making strategic business decisions. They are creative, innovative, and future-oriented. The entrepreneurial functions performed by company leaders or CEOs like Tim Cook of Apple and Jeff Bezos of Amazon and CEOs are examples entrepreneurship. Goods and Services Economics resources or inputs of production are primarily used to produce a final output. These outputs are the goods and services that result from the production process, which are either consumed by people or employed in further production by businesses. A good is a tangible commodity that is used to satisfy human wants, which can be purchased and consumed. A t-shirt that is bought by a consumer that yields satisfaction to him is an example of a good. In economics literature, goods have a plethora of categories. They include: ▪ Economic Good and Free Good ▪ Durable Good and Non-durable Good ▪ Intermediate Good and Final Good ▪ Consumer Good and Capital Good On the other hand, service is an intangible equivalent of a good that also brings satisfaction to human wants. Services are activities or tasks that people provide for others’ demands. The works performed by doctors, engineers, tourists, and sales clerks are examples of service. LEARNING POINTS ▪ The discipline of Economics is a social science as it seeks to explain the relationships between people and societies. ▪ There are numerous definitions of economics. This includes the wealth definition, welfare definition, scarcity definition, and growth-oriented definition. Economics is a science that deals with the allocation of scarce resources to satisfy unlimited human wants. ▪ Microeconomics, as a major theoretical division of economics, focuses on the interaction between households and firms. The two-sector economy model maps the flow of factors of production and goods and services. ▪ Microeconomics explains why consumers and producers behave the way they do using theoretical foundation from classic economists Alfred Marshall, Adam Smith, and Wilfredo Pareto. Budget, preference, utility, choice, technology, profit, and costs are some of the topics in Microeconomics PANGASINAN STATE UNIVERSITY 6 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics leading to optimal choice. ▪ Economics has two branches—microeconomics and macroeconomics. Microeconomics is concerned with the behavior and decision-making of the individual players in the economy, such as the consumers, businesses, and the government Macroeconomics focuses on the overall structure and performance of the national or global economy. ▪ The four economic principles that underlie the economic way of thinking include rational choice, opportunity cost, choosing at the margin, and responding to incentives. ▪ Scarcity is a situation where there is an insufficient or limited amount of resources available. It is considered the most fundamental economic problem. Choice is the ability of an individual to make a decision. Because resources are scarce, and people have unlimited wants, choices have to be made among alternatives. ▪ Opportunity cost is the value of the best alternative that must be forgone when a choice is made. ▪ Rational people always decide by carefully analyzing the benefits they would get and the cost they would incur from their choices. They always think at the margin. ▪ The incentive is a benefit or reward that encourages someone to behave in certain ways. ▪ Wants are desires or unnecessary things that can be fulfilled by consuming a good or service while needs are things such as food, housing, and clothing that are vital for survival ▪ Economists categorize economic resources or inputs of production into four— land, labor, capital, and entrepreneurship. ▪ A good is a tangible commodity that is used to satisfy human wants, which can be purchased, and service is an intangible equivalent of a good which are tasks and activities performed for others. LEARNING ACTIVITIES ACTIVITY A True or False. Write true if the statement is correct. Write false if otherwise. 1. Economics is a natural science that studies the allocation of scarce resources. ______________ 2. Studying economics will not help us become wiser in making decisions. ______________ 3. Microeconomics views the performance of the economy as a whole. ______________ 4. Irrational people always think at the margin. ______________ 5. Because scarcity does not exist, people can easily make decisions. ______________ 6. Economic resources are limitless. ______________ 7. A free good has a price attached to it. ______________ 8. Trade-off is the alternative a person gives up when he makes a decision. ______________ 9. Labor is a human resource while land is a material resource. ______________ 10. The entrepreneur organizes the factors of production. ______________ ACTIVITY B Categorization. Determine if each of these questions applies to microeconomics or macroeconomics. Write MI for Microeconomics or MA for Macroeconomics in the blank space provided. 36. How many people in the world are unemployed during the COVID-19 pandemic? ______________ 37. How many workers in the assembly plant should be hired? ______________ 38. Why do CEOs earn more than rank and file employees? ___________ 39. Why did the price of hand sanitizers skyrocket in the past months? ______________ 40. What are the economic activities of an individual firm? ______________ 41. What are the viewing habits of Filipinos when they watch TV shows? ______________ 42. How much is the budget deficit of the Philippines? ______________ 43. What economic policies must be adopted to promote the economy’s price stability? ____________ 44. How much is the price per kilo of beef in the supermarket? ______________ 45. Why the value of Philippine peso depreciates over U.S dollars? ______________ PANGASINAN STATE UNIVERSITY 7 Study Guide in BAC 102 BASIC MICROECONOMICS Module 1 – Nature and Scope of Economics and Microeconomics ACTIVITY C Categorization. Determine if each of the following cases is a representation of a want or a need. Write W for want or N for need in the blank space provided. 56. A scientific calculator to be used in a Statistics quiz ______________ 57. An expensive condominium for a four-member family ______________ 58. A cosmetic product for a beauty queen ______________ 59. Job security of a mall employee ______________ 60. 1-million worth of medicine for a cancer patient ______________ 61. A 7-kilometer taxi ride of a Grab service ______________ 62. A cruise trip for a holiday vacation ______________ 63. A high-end PC for video-editing tasks of a client ______________ 64. McDonald's meals for children ______________ 65. A branded jean for a celebrity ______________ REFERENCES Altares, P. et al. (2007). Mathematical Analysis for Business and Economics. Rex Book Store Inc.: Quezon City. Arnold, R. A. (2016). Economics, 12th Edition. Melbourne, Australia: Cengage Learning Estrada, J.N. (2017) Microeconomics Worktext. Lingayen, Pangasinan: Pangasinan State University Estrada, J.N. (2020) The Contemporary World Workbook. Lingayen, Pangasinan: Pangasinan State University Krugman, et al. (2014) Essentials of Economics, 3rd Edition. New York, NY: Worth Publishers Larson, R. (2011). Algebra and Trigonometry. Cengage Learning: USA. Mankiw, N. G. (2015). Principles of Economics. Melbourne, Australia: Cengage Learning Mankiw, N.G. (2012). Principles of Economics, 6e. Cengage Learning: USA. McConnell, C. R. (2015) Economics: Principles, Problems, and Policies. New York, USA: McGraw-Hill Education Pagoso, C. et al. (2014). Introductory Microeconomics. Rex Book Store Inc.: Quezon City. Salazar, E. M. (2013) General Economics, Taxation and Land Reform. Bulacan, Philippines: IPM Publishing Schiller, B. (2016). The Economy Today, 14 the Edition. USA: McGraw-Hill PANGASINAN STATE UNIVERSITY 8