Unit 1 Foundation And Scope Of Economics PDF

UNIT 1 Foundation and Scope of ECONOMICS  What is Economics? Why study economics?  Foundation of Economics: 1. Unlimited Wants 2. Limited Resources INSATIABLE WANTS + FINITE RESOURCES = ECONOMISE  The most practical reason why one needs to understand econom...

UNIT 1 Foundation and Scope of ECONOMICS  What is Economics? Why study economics?  Foundation of Economics: 1. Unlimited Wants 2. Limited Resources INSATIABLE WANTS + FINITE RESOURCES = ECONOMISE  The most practical reason why one needs to understand economics is for SELF- INTEREST.  Everyday we face a number of problems because of our limited resources say time and money.  Shall we go to school or work?  At the household level, every family is facing the various kinds of problems due to limited income.  Economics is a field that is very much applied by all decision-making units.  It is a broad ranging discipline that uses a variety of techniques and approaches to address important social questions. 1.2 DEFINITION OF ECONOMICS AND OTHER KEY CONCEPTS  “oikonomia”- Greek word which means “household management”. According to Fajardo: It is a proper allocation and efficient use of available resources for the maximum satisfaction of human wants. Samuelson: It is a study of how societies use scarce resources to produce valuable commodities and distribute them among different people.  Nordhaus: It is a science of choice. It studies how people choose to use scarce resources or limited productive resources to produce various commodities and distribute for consumption.  Sicat: A scientific study which deals with how individuals and society in general make choices. Castillo: - viewed economics as the study of how man could best allocate and utilized the scarce resources of society to satisfy his unlimited wants. Webster: - a branch of knowledge that deals with the production, distribution, and consumption of goods and services. The study of how people use their limited resources to try to satisfy unlimited wants. Important terms in the definition: 1. Social Science Economics is considered a social science since it deals with individual or group behavior. 2. Choice Refers to the action made by an individual as a rational being. 3. Opportunity Cost. The cost of choosing to use resources for one purpose measured by the sacrifice of the next best foregone alternative for using the resources. PRINCIPLE #1: PEOPLE FACE TRADEOFFS. “There is no such thing as a free lunch!”  PRINCIPLE #1: PEOPLE FACE To get one thing, we usually have to give up TRADEOFFS another. thing.  Guns v. butter  Food v. clothing  Leisure time v. work  Efficiency v. equity Making decisions requires trading off one goal against another. Acknowledging life’s tradeoffs is important because people are likely to make good decisions only if they understand the options they have available. 4. Allocation Refers to the idea of putting resources into their best use. 5. Scarcity Refers to the availability of goods and services in limited amount. 6. Resources These refer to the raw materials or ingredients to be used in the production of goods and services. 1. Natural Resources or LAND God-given gifts of nature. 2. CAPITAL or Manufactured Resources -resources made by man – machinery/equipment for manufacturing other G&S’s 3. Human Resources or LABOR -mental and physical efforts of man 4. Management or Entrepreneurial Ability - decision-making of the firm RESOURCE PAYMENTS/REMUNNERATIONS: 1. Land = rents/rental 2. Labor = wages/salaries 3. Capital = interests 4. Management = profits 8. Goods -Tangible things that satisfy human wants. Types of Goods: 1. Economic Goods 2. Free Goods 3. Public Goods 9. Services Intangible things which also satisfy human wants. 10. Wants Desires of man which may not be necessary for the human body to function normally. 11. Needs Basic necessities of man required to for the body to function to normally. 1.4 DIVISIONS OF ECONOMICS 1. Microeconomics- concerned with the behavior and activities of specific economic units-individuals, households, firms, industries, and resource owners. Ex. Determination of the price of a single product, behavior of a single consumer  MARKET- is the central concept 2. Macroeconomics- deals with the behavior of the economy as a whole with respect to output, income, the price level, foreign trade, unemployment, and other aggregate variables. 1.5 METHODOLOGY OF ECONOMICS 1. Positive Economics -making statements about ‘what is’ or predictions about ‘what will happen’ when a certain action that has implications on the allocation of scarce resources is proposed. -descriptive in nature and statistical Ex. Inflation rate soars high at 3%. 2. Normative Economics -concerned with “what should be” -include value judgement and prescriptive in nature -often identified with policy prescriptions. 1.6. FUNDAMENTAL OR BASIC ECONOMIC PROBLEMS OF EVERY SOCIETY 3 Economic Activities of Man 1. Production = is the process of creating goods and services 2.Distribution = is making the products/goods or services at the right time and at the right place. 3. Consumption = is the process of using economic goods and services with the objective of satisfying human wants and needs. FUNDAMENTAL OR BASIC ECONOMIC PROBLEMS OF EVERY SOCIETY… 1. What to produce and in what quantity be produced? ▪ Which of the so many alternative goods and services to produce first and in what quantity? 2. How shall goods be produced? -concerned with WHO is going to produce and with what resources or technological manner should the goods be produced. 3. For whom shall goods be produced? -concerned with DISTRIBUTION -Who are to enjoy and get the benefits of the goods and services produced? PRODUCTION POSSIBILITY FRONTIER ❑ PPF-represents the point at which an economy is most efficiently producing its goods and services and therefore allocating its resources in the best way possible. ❑ It shows that there are limits to production. PPF Y X POINTS IN THE PPF  Points A, B, C- most efficient use of resources  Point X- inefficient use  Point Y- Unattainable Points 1.7 COMMON ECONOMIC GOALS OF COUNTRIES  Economic Goals provide a sense of direction to any economic system. 1. Economic Growth- what is desired by society is a higher standard of living which is translated into the production of more and better quality goods and services. 2. Full Employment –There must be jobs for those who are willing and able to work. 3. Economic Efficiency- this is a goal that requires resources to derive maximum benefit for the society. 4. Price Level Stability- The economy should be able to avoid great fluctuations in the general level of prices. 5. Economic Freedom- A high degree of freedom to choose what economic activity to undertake should be afforded the various sectors consisting of executives, workers and consumers. 6. An equitable distribution of income- The economy must not be made up of a certain group that is so poor and destitute while other groups wallow in great luxury. 7. Economic Security – There should be enough provision for those who are not able to earn minimal income like the aged, the chronically ill, the disabled, etc. 8. Balance of Trade – A balance of trade that is reasonable must be maintained. 1.8 T YPES OF ECONOMIC SYSTEM Economic System- a set of customs, laws, rules and regulations which deal with the manner by which goods and services are produced, distributed or consumed. 1. Traditional Economy ▪ Subsistence Economy ▪ A family produces everything that it consumes. ▪ Decisions on what, how, and for whom to produce are made by referring to traditional manner of doing things. ▪ Production is very primitive. 2. The Command Economy ❑ The means of production are owned by the governemnt. ❑ Its decisions are arrived at by the planners or government men who dictate what, how, and for whom to produce. 3. Market Economy. ❑Resources are privately owned and decisions are made by the people themselves. ❑The prices depends on prices set by conditions of demand and supply. 4. Mixed Economy – combination of the above economic system Ex. Philippines ECONOMIC IDEOLOGIES Capitalism is centered on the idea that governments should refrain from involvement in business and the economy.  Capitalists believe that economic markets should be privately controlled and driven strictly by profits. ECONOMIC IDEOLOGIES Socialism follows an idea that government should regulate economic concerns and that all citizens should have an equal opportunity to share in the benefits.  Other rarer types of economic ideology include anarchism and communism.