Basic Economic Concepts PDF

BASIC ECONOMIC CONCEPTS Ten Principles of Economics source of image: https://online.hbs.edu/blog/post/5-reasons-why-you-should-study-economics BASIC ECONOMIC CONCEPTS What is ECONOMICS? BASIC ECONOMIC CONCEPTS What is ECONOMI...

BASIC ECONOMIC CONCEPTS Ten Principles of Economics source of image: https://online.hbs.edu/blog/post/5-reasons-why-you-should-study-economics BASIC ECONOMIC CONCEPTS What is ECONOMICS? BASIC ECONOMIC CONCEPTS What is ECONOMICS? Economic Beings Needs / Wants / Desires HAPPINESS BASIC ECONOMIC CONCEPTS What is ECONOMICS? Economic Beings Needs / Wants / Desires HAPPINESS Happiness = Satisfaction BASIC ECONOMIC CONCEPTS What is ECONOMICS? Economic Beings HAPPINESS = SATISFACTION Who needs these items? BASIC ECONOMIC CONCEPTS What is ECONOMICS? How do we create SATISFACTION?  BASIC ECONOMIC CONCEPTS What is ECONOMICS? How do we create SATISFACTION? Through the existence of UTILS (UTILITY) BASIC ECONOMIC CONCEPTS What is ECONOMICS? SATISFACTION is UTILITY  BASIC ECONOMIC CONCEPTS What is ECONOMICS? But how do we create UTILS or UTILITY?  BASIC ECONOMIC CONCEPTS What is ECONOMICS? But how do we create UTILS or UTILITY? Factors of Production LAND LABOR CAPITAL ENTREPRENUERSHIP “...of scarce RESOURCES…” What are economic resources? Economic resources are sometimes called FACTORS OF PRODUCTION or inputs (Inputs are required to produce an output/products) Economic resources are natural, human and manufactured inputs used to produce goods and services Economic resources include 4 categories: a. LAND RESOURCES - natural resources (not man-made) E.g. minerals, river, mountain, air b. LABOR RESOURCES - human resources, which include physical and mental abilities used in production Note that a person who is incapable of producing is not considered a labor resource c. CAPITAL RESOURCES - investment goods which are all manufactured aids to production E.g. equipment, tools, factories, transportation, etc. Note that in Economics, money is not a capital resource, but a MEDIUM OF EXCHANGE. We use money to acquire resources (land,labor,capital) d. ENTREPRENEURIAL ABILITY - combines resources (land, labor, capital) needed in production; makes business policy decisions; an innovator for new products, production techniques, organizational forms; bears the risk of time, effort and funds Quantities of resources are limited relative to the total amount of goods and services desired  BASIC ECONOMIC CONCEPTS What is ECONOMICS? In a nutshell: A scientific way of allocating scarce resources to satisfy the insatiable needs of economic man (Sicat, 1985)  BASIC ECONOMIC CONCEPTS What is ECONOMICS? In a nutshell: A social science that study how society manages its scarce resources, how people make decisions, how much they work, what they buy, how much they save, and how much they invest their savings (Mankiw, 2018) What is Scarcity? Unlimited wants; Limited resource Human wants are unlimited, but the means to satisfy the wants are limited Resources can only be used for one purpose at a time Hence, it is important to study Economics The term “economics” came from from two Greek words, 'eco' meaning home/household and 'nomos' meaning accounts/management; hence, it means management of household (how do your parents manage the household? They have limited resources right? And you have unlimited wants. Hence, they should efficiently allocate whatever is available). The subject has developed from being about how to keep the family accounts into the wide-ranging subject of today.  “A social science…” Economics is a social science (society) because it deals with the behavior of people (note that scarcity requires that choices be made) People are RATIONAL BEINGS: human beings always pursue their self- interest ○ HEDONISM: pursuit of pleasure and avoidance of pain ○ Rational self-interest entails making decisions to achieve maximum satisfaction ○ Different preferences and circumstances lead to different choices ○ Rational self-interest is not the same as selfishness “...human economic needs and wants.” Economics wants are desires of people to use goods and services that provide utility The term “economic” means something that can be bought/produced Economic wants and needs can be satisfied by PRODUCTS/OUTPUTS (produced from the INPUTS/FACTORS OF PRODUCTION) PRODUCTS are sometimes classified as luxuries (WANTS-something you can live without) or necessities (NEEDS-something you can not live without), but the division is subjective to a person PRODUCTS can be in the form of a GOOD (something tangible) or a SERVICE (something intangible) ○ A bottle of wine is a GOOD; it is tangible ○ A plane ticket to Korea from Philippine Airlines is a SERVICE; it is something intangible. You are not paying for the paper where the ticket was printed, you do not bring home the airplane either. Because you are paying for the service. Just like a haircut--you dont bring home the hairdresser’s scissors! Consumers have needs and wants, but so do businesses and governments Overtime, wants change and multiply  BASIC ECONOMIC CONCEPTS What happens if scarce resources are not allocated well?  TEN PRINCIPLES OF ECONOMICS A. How People Make Decisions Principle 1. People Face Trade-Offs Principle 2. The Cost of Something Is What You Give Up to Get It Principle 3. Rational People Think at the Margin Principle 4. People Respond to Incentives  TEN PRINCIPLES OF ECONOMICS B. How People Interact Principle 5. Trade Can Make Everyone Better Off Principle 6. Markets Are Usually a Good Way to Organize Economic Activity Principle 7. Governments Can Sometimes Improve Market Outcomes  TEN PRINCIPLES OF ECONOMICS C. How the Economy as a Whole Works Principle 8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Principle 9. Prices Rise When the Government Prints Too Much Money Principle 10. Society Faces a Short-Run Trade-Off between Inflation and Unemployment  How People Make Decisions: Principle 1, People FaceTrade-Offs An economy is just a group of people dealing with one another as they go about their lives Because the behavior of of an economy reflects the behavior of the individuals who make up the economy......individual decision making  How People Make Decisions: Principle 1, People FaceTrade-Offs Efficiency- the property of society getting the most (maximum benefits) it can from its scarce resources Equality - the property of distributing economic prosperity uniformly among the members of the society  BASIC ECONOMIC CONCEPTS Common to Efficiency and Equality: Market Equilibrium = Market Cleared (what does this mean?) Rationing Function of Prices  EFFICIENCY vs. EQUALITY How do we scientifically allocate scarce resources to avoid social and economic problems? EFFICIENCY = ALLOCATION: Productive or Allocative EQUALITY = TAXES and WELFARE “...that deals with EFFICIENT ALLOCATION…” What is Efficiency? Economics is a science of efficiency in the use of scarce resources. EFFICIENCY refers to optimal (best) use of resources Efficiency requires FULL EMPLOYMENT of available resources and FULL PRODUCTION ○ FULL EMPLOYMENT - means all available resources should be employed (used) ○ FULL PRODUCTION - means that employed resources are providing maximum satisfaction of our economic wants; producing the RIGHT GOODS in the RIGHT WAY. Full production implies 2 kinds of efficiency PRODUCTIVE EFFICIENCY - means that least costly production techniques are used to produce any particular mix of goods and services (producing in the RIGHT WAY) ALLOCATIVE EFFICIENCY - means that resources are used for producing the combination of goods and services most wanted by the society (producing the RIGHT GOODS) ○ Productive efficiency may occur without allocative efficiency. Goods can be produced at the least costly method without being the most wanted by the society. Allocative efficiency requires that there be productive efficiency to be considered an efficient production  EFFICIENCY FARM 1: FARM 2: Corn for sale at Php. 30.00 per kilo Corn for sale at Php. 50.00 per kilo Which farm enjoys the productive efficiency? Why?  EQUALITY Vertical Equity Horizontal Equity The idea that taxpayers The idea that taxpayers with a greater ability to pay with similar abilities to pay taxes should pay larger taxes should pay the same amounts amount  EQUALITY Vertical Equity: Three Tax Systems ❑ Proportional Tax – a tax for which high-income and low- income taxpayers pay the same fraction of their income than do low-income taxpayers ❑ Regressive Tax – a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers ❑ Progressive Tax – a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers  EQUALITY Vertical Equity: Proportional Tax System Income Amount of Tax Percent of Income Php. 50,000.00 Php. 12,500.00 25% Php. 100,000.00 Php. 25,000.00 25% Php. 200,000.00 Php. 50,000.00 25%  EQUALITY Vertical Equity: Regressive Tax System Income Amount of Tax Percent of Income Php. 50,000.00 Php. 15,000.00 30% Php. 100,000.00 Php. 25,000.00 25% Php. 200,000.00 Php. 40,000.00 20%  EQUALITY Vertical Equity: Progressive Tax System Income Amount of Tax Percent of Income Php. 50,000.00 Php. 10,000.00 20% Php. 100,000.00 Php. 25,000.00 25% Php. 200,000.00 Php. 60,000.00 30%  How People Make Decisions: Principle 2, The Cost of Something Is What You Give Up to Get It Opportunity Cost whatever must be given up to obtain some item when making decisions, decision makers should be aware of the opportunity costs that accompany each possible action  How People Make Decisions: Principle 3, Rational People Think at the Margin Rational People People who are systematically and purposefully do the best they can to achieve their objectives Marginal Change A small incremental adjustment to a plan of action MARGINAL BENEFITS vs. MARGINAL COSTS  How People Make Decisions: Principle 4, People Respond to Incentives Incentives An incentive is something (such as the prospect of a punishment of reward) that induces a person to act Because a rational people make decision by comparing costs and benefits, they respond to incentives  How People Interact: Principle 5, Trade Can Make Everyone Better Off Countries benefit from the ability to trade with one another, trade allows countries to specialize in what they do and to enjoy a greater variety of goods and services  How People Interact: Principle 6, Markets Are Usually a Good Way to Organize Economic Activity Market Economy An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services  How People Interact: Principle 7, Governments Can Sometimes Improve Market Outcomes Property Rights the ability of an individual to own and exercise control over scarce resources  How People Interact: Principle 7, Governments Can Sometimes Improve Market Outcomes Market Failure a situation in which a market left on its own fails to allocate resources efficiently  How People Interact: Principle 7, Governments Can Sometimes Improve Market Outcomes Externality the impact of one person's actions on the well-being of a bystander  How People Interact: Principle 7, Governments Can Sometimes Improve Market Outcomes Market Power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices  How the Economy as Whole Works: Principle 8, A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Productivity the quantity of goods and services produced from each unit of labor input  How the Economy as a Whole Works: Principle 9, Prices Rise When the Government Prints Too Much Money Inflation an increase in the overall level of prices in the economy  How the Economy as a Whole Works: Principle 10, Society Faces a Short-Run Trade-Off between Inflation and Unemployment Business Cycle fluctuations in economic activity, such as employment and production  References Mankiw, N. Gregory. (2024). Principles of microeconomics. (10th ed.). Cengage Learning Asia Pte Ltd. (call# HB172.M314 2024) Perloff, Jeffrey M. (2024). Microeconomics. (9th ed.). Pearson. (call# HB172.P422 2024) Arnold, Roger A. (2023). Microeconomics. (14th ed.). Cengage. (call# HB172.Ar65 2023) Tucker, Irvin B. (2023). Microeconomics for today. (11th ed.). South-Western. ((call# HB172.T796 2023) McConnell, Campbell R. (2021). Microeconomics. (22nd ed.). McGraw-Hill Education. (call# HB172.M134 2021) Stevenson, Betsy, (2023). Principles of microeconomics. (2nd ed.). Worth Publishers, Macmillan Learning. (call# HB172.St48 2023) Gwartney, Jameds D. (2022). Microeconomics private and public choice. (17th ed.). (call# HB172.G995 2022) Thank you for the KIND attention!!! source of the image: https://www.dreamstime.com/clasped-hands-prayer-hands-man-shirt-man-praying-clasped-hands-prayer- asks-god-hands-man-shirt-image177560489