Lesson 1: Introduction to economics

FOCUS QUESTIONS

1. What is Economics?

It has been define in many ways. It come from the Greek word “oikanomia” meaning
“household management”.
- Define as the study of proper allocation and efficient use of scarce resources to produce
commodities for the maximum satisfaction of unlimited human needs and wants.

2. Differentiate microeconomics from macroeconomics by citing example.

Microeconomics is the study of individuals and business decisions, while macroeconomics looks
at the decisions of countries and governments. Though these two branches of economics appear
different, they are actually interdependent and complement one another.
Example of microeconomics are individual Demand, Price of a product. while
Macroeconomics A Capitalist Nation, Investment expenditure, Revenue

3. Give examples of normative and positive statements.

An increase in the minimum wage increases unemployment among teenagers sample of positive
statements.
The study of physics is more valuable than that of sociology, but both should be studied by all
college students.

LEARNING ACTIVITIES
1. Cite an example on how you can use economics in real-life situation.
It’s hard to know what to say, but to get people excited about economics it’s good to try and
think how economics can be applied in everyday life. Some of this is just common sense, but
economics can help put a theory behind our everyday actions.
For example :
Buying goods which give the highest satisfaction for the price
This is common sense, but in economics, we give it the term of marginal utility theory. The idea
is that a rational person will be evaluating how much utility (satisfaction) goods and services give
him compared to the price. To maximize your overall welfare, you will consume a quantity of
goods where total utility is maximized given your budget
Opportunity Cost-
The first lesson of economics is the issue of scarcity and limited resources. If we use our limited
budget for buying one type of good (food), there is an opportunity cost – we cannot spend that
money on other goods such as entertainment. Opportunity cost is an intrinsic aspect of most
economic choices. We may like the idea of lower income tax, but there will be an opportunity
cost – in this case, less government revenue to spend on health care and education.

2. Collect at least two issues (news clippings) pertaining to Philippine Economy and assess how
This issues affects you as a student and as an individual.
How to deal with external costs/pollution, e.g. pollution from production.
 One of the most frequent problems is that economic decisions can have external effects on other
people not involved in the transaction. For example, if you produce power from coal, the pollution
affects people all over the world (acid rain, global warming). This is a particular problem because we
cannot rely on the free market to provide the most efficient outcome. If we create negative
externalities, we don’t take them into account when deciding how much to consume. This is why we can
get overconsumption of driving a car into a city Centre at peak hour. If everyone maximizes their utility,
it doesn’t lead to the most efficient outcome – but gridlock and wasted resources.

Externalities, usually need some kind of government intervention. For example, taxes on negative
externalities (e.g. sugar tax) or subsidies on positive externalities (e.g. free public education) even
banning cars in city centres.

But, even the solution to market failure (e.g. taxes), creates its own potential problems, such as how
much to tax? will there be tax evasion? The administration costs of collecting tax.

Environmental issues

Economics is traditionally concerned with utility maximisation – allowing individuals to aim at increasing
their economic welfare. However, this can ignore long-term considerations of environmental
sustainability. If we have over-consumption in this century, it could cause serious problems for future
generations – e.g. global warming, loss of non-renewable resources. The difficulty is that the price
mechanism doesn’t take into account these future costs, and policies to reduce consumption may prove
politically unpopular.

ASSESSMENT
Short Quiz
Direction:
Identify: Normative Statement or Positive Statement.

Positive a). Country residents below the poverty level should not pay taxes.
Positive b). A car is a luxury for a poor individual.
Normative c). The government should increase the budget on education to curve the poverty problem.
Normative d). An increase in salaries and wages will result to unemployment
Normative e). Free trade policy will help the economic stability of the people.
Enumerate and Define:
a.) 3 kinds of Needs
Essential for human survival like food, clothing, and shelter
1.) Basic Needs
2.) Essentials needs for descent and comfortable living
3.) Needs for luxury goods.
b.) 2 branches of Economics
Macroeconomics and Microeconomics
ASSIGNMENT
Assignment No. 1
Answer with your own self-assessment:
The Philippines has encountered many serious problems as of now. In view of this, list down some of
these economic problems the country has encountered for this year. Opposite that problem, give at
least three possible solutions that you think will help solve the problem.
Problems in a Capitalistic Economy: ...
Basic Problems in a Socialistic Economy: ...
to Basic Problems in a Mixed Economy:

Uneven distribution of natural resources, lack of human specialization and technological advancement
etc., hinders the production of goods and services in an economy. Every economy has to face the
problems of what to produce, how to produce and for whom to produce. More or less, all the
economies use two important methods to solve these basic problems.

Solution ofProblems in a Capitalistic Economy:

Under capitalistic economy, allocation of various resources takes place with the help of market
mechanism. Price of various goods and services including the price of factors of production are
determined with help of the forces of demand and supply. Free price mechanism helps producers to
decide what to produce.

The goods which are more in demand and on which consumers can afford to spend more, are produced
in larger quantity than those goods or services which have lower demand. The price of various factors of
production including technology helps to decide production techniques or methods of production.
Rational producer intends to use those factors or techniques which has relatively lower price in the
market

2. Solution to Basic Problems in a Socialistic Economy:

Under socialistic economy, the government plays an important role in decision making. The government
undertakes to plan, control and regulate all the major economic activities to solve the basic economic
problems. All the major economic policies are formulated and implemented by the Central Planning
Authority.

3. Solution to Basic Problems in a Mixed Economy:

Practically, neither capitalistic economy nor socialistic economy exists in totality. Both the economic
systems have limitations. Consequently, a new system of economy has emerged as a blend of the above
two systems called mixed economy. Therefore, mixed economy is defined as a system of economy
where private sectors and public sectors co-exist and work side by side for the welfare of the country.

Under such economies, all economic problems are solved with the help of free price mechanism and
controlled price mechanism (economic planning).