1.

0 Introduction

When you hear the word economics, what usually comes to your mind? Do you
simply think of the price of food or of your favorite clothes? Or do you relate
economics
with money. jobs, the information revolution, or even taxes? If you subscribe to the
second option, you are on the right track; however, there is more to economics than
these. In fact, the decisions you have to make every day already involve
economics.

Think of a day at a mall, where you have to stick to a budget of P500 for school
supplies. There are two shops to choose from- Pencil Stop and Eraser Junction.
Pencil Stop offers goods of better quality; but the merchandise at Eraser Junction is
cheaper. Which one will you choose?

The decision-making process you have to go through is already considered part of

economics. You will learn more about this in later chapters. Other examples would
include deciding whether to continue studying after high school graduation or to
look for a job, or simply choosing what to eat for dinner.

This chapter will discuss the following concepts:

1.1 Definition of Economics

1.2 Economics as a social science

1.3 Economic methods

1.4 Important concepts in Economics

1.4.1 Scarcity
1.4.2 Choice

1.4.3 Opportunity costs

1.5 Divisions of Economics

1.6 Economics in the Philippines

1.1 Definition of Economics

First let us trace where the term economics came from. The term economics came from
the ancient Greek word oikonomia, meaning "management" or "'administration of a
household. Oikonomnia was derived from oikos ("house)+ nomos ('custom or"law"),
hence "rules of the house (hold)". In Byzantine times the term was used as a title of a
manager or treasurer of an organization.

Economics, therefore, was initially regarded as "household management. This should

not be surprising, since even a household needs some management. It does not imply
however, that Economics merely pertains to the activities in the household. But
household management is parallel with running the affairs of a nation. A household is
composed of different members with varied needs to be met with a given budget.
A nation also has several sectors with an array of needs to be provided out of the
limited resources.

The meaning of economics, however, has evolved over the centuries. Some of the more
notable definitions are:

"Economics is a study of how individuals and society generally make choices that
involve the use of scarce resources trom among alternative wants that need to be
satisfied." (Sicat, 2003)

Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people. (Samuelson,Nordhaus, 2001)

"Economics is the study of how a society chooses to allocate scarce resources to

meet virtually unlimited wants in order to maximize benefits to society and
distribute rewards according to effort. (Niemi Jr)

1.2 Methods of Economics

Economist Alfred Marshall states that: "Economic science is but the working of common
sense aided by the appliance of organized analysis and general reasoning, which
facilitate the task of collecting, arranging and drawing inferences from particular facts.

Economics uses the scientific approach in dealing with economic phenomena. The
problem is identified by observation seeking elements and then a proposition is formed
and stated including possible solutions. Data are gathered using interviews,
questionnaires and collection from public and private agencies. These are organized
and presented as records, manuscripts, graphs or mathematical equations. After
analysis a theory is formed and become an economic model. These are abstract
representations of economic realities. An example is the consumption theory, which
represents consumption patterns ot buyers like you. lt answers questions such as what
to buy, where to buy, how much to spend, what factors affect one’s decisions, etc.

Economic theories are used to formulate policies designed to correct or resolve

economics problems. They also serve as a basis for predicting future events. The
application of economic theories is known as policy or applied economics. Theories are
tested by observing occurrences in the economy and are recorded. For example, the
following data are gathered: statistics on unemployment. prices of prime commodities,
share of workers in earnings from production, household income and such others.

Economics attempts to eliminate the possibility ot chance in explaining the occurrence

of certain events. It is ultimately interested with cause-and-effect relationships.However,
even when economists rely on the scientific method, the findings or propositions it
generates cannot be as exact as those of the physical sciences. This is because it deals
with the behavior of individuals or groups whose responses to certain events are
uncertain and unpredictable.

1.3 Economics as a Social Science

Economics was once known as "political economy because it used to answer

economic questions that were politically relevant. Over the centuries, economics
evolved until it became a Social Science.

Social Science is a branch of knowledge that deals with human beings and their
relationship with society. It encompasses the social, political, economic, and cultural
relationships that bind people in a civilization. In the academe, it covers several subjects
like history, psychology, economics, political science, and sociology.

More specifically, economics as a social science deals with the economic activities
of man. These include consumption, production, distribution, and exchange of goods
and services, which will all be discussed in later chapters.

Economics is related to other social sciences like history, sociology, and political
science. Sociology deals with human benav1Or and social institutions that are relevant
to economic analysis. Religious Beliefs, Culture, and norms, for example, are important
factors in analyzing consumption patterns. Family relationships also affect the
productivity of workers.

Political science deals with principles, methods, and organizations of government, which
are all major determinants or human economic activity. Government policies and
programs, without a doubt, affect consumption, investments, and international trade.

History on the other hand, deals with the past, especially with significant events.
Historical records are needed for economic analysis. Economists should also have an
adequate command of history in order to understand economic phenomena.
1.4 Important Concepts in Economics

1.4.1 Scarcity

Economic scarcity, as briefly discussed above, refers to the basic fact of life that there
exists only a limited amount of resources relative to society's wants or desires.So far,
nowhere on the globe is the supply of goods so plentiful or tastes so limited that the
average family can have more than enough of everything it may fancy.

Scarcity is the most important consideration in the study of economics. Once the
condition of scarcity is removed, less interest will be left in the study of economics.
Had goods abounded in limitless supply, there would be no need to economize on
consumption, and economics would no longer be an important science. All goods
would be had for free, like sand in the desert or water at the beach or even sunlight and
air. These goods that can be had for free and which seem to be available in limitless
supply are called free goods. Resources that are not free because they are scarce and
therefore command a price in the market are called economic goods.

What economics attempts to do is describe and analyze how man, who is confronted
with the fact that goods relative to wants are scarce, copes with limited resources. More
simply put, economics is a science that deals with the study of the ways by which
individuals and nations solve the problem of scarcity. It is concerned with how man can
put available limited resources to maximum use in order to satisfy innumerable or
unlimited human wants. Thus, efficiency in production activities ought to be realized
because men cannot afford to waste scarce resources.

 1.4.2 Choice

Choice and scarcity naturally come together in the study of economics. Every economic
agent- household, individual, enterprise, or government makes economic choices.
Every day, buyers or consumers choose what to buy or not to buy; sellers or producers
decide what to produce or not to produce; and the government decides what the best
economic policy for the country will be. lt is important that intelligent choices be made;
otherwise, scarce resources will be wasted.

1.4.3 Opportunity Costs

On the issue of choice, every action undertaken has a so-called opportunity cost. The
opportunity cost of a particular action is the alternative action that should have been
undertaken instead. Example suppose Julienne has I00.00 pesos. She deliberates on
whether to buy a bestselling pocketbook or to eat at a hamburger stand. Any of the two
alternatives will cost her P100. She is forced to choose only one of them. If she chooses
to buy the pocketbook, she gains the pleasure of reading an entertaining story but
sacrifices the enjoyment of eating a hamburger sandwich. The sacrifice of foregoing the
treat at the hamburger stand is equivalent to the opportunity cost of buying the
pocketbook.
The same thing applies to any society. If a nation wants to produce 400 tons of rice and
500 tons of corn but resources are sufficient to produce only one choice, then it must
give up one in favor of the other. The opportunity cost of 400 tons of rice is 500 tons of
corn that will not be produced.

Technically, opportunity cost is defined as a measure of what must be given up or

sacrificed when one chooses one alternative over another. The opportunity cost of a
decision arises because choosing one thing in a world of scarcity means giving up
something else. The opportunity cost is the value of the goods given up.

1.5 Divisions of Economics

The study of economics is divided into two broad parts: microeconomics and
macroeconomics.

Macroeconomics is the study of the behavior of the economy as a whole. It is the

study of the sum total of a country's economic activities. It focuses on the behavior of
the general price level. It explains production levels and why they fluctuate. It
encompasses concepts such as national income and outputs measured in terms of the
Gross National Product (GNP), inflation or continuous increase in prices, employment,
business cycles, and foreign trade.

Microeconomics is the study of the small units making up the economy. It deals
with the study of market decisions made by sellers or firms, consumer behavior, and
determination of market prices and output. lt also analyzes variables such as price,
demand, and supply of a particular product.

Microeconomics and macroeconomics are studied separately. This is because what

is true for an individual firm and consumer does not necessarily apply to the whole
economy. For instance, a decline in sales and, eventually, in the profit of Firm A does
not mean a lower national economic growth. But if amost all firms have shut down
operations due to an unfavorable business environment, it becomes a macroeconomic
concern because this will result in mass layoffs or a higher unemployment rate.

Another example is household A buying less pork due to the increase in pork prices.
This does not automatically mean a reduction in the total demand for pork. Household A
will probably shift to chicken or fish, and its decision will not necessarily apply to all
households.
Chapter Summary
1. Economics is a discipline of social science that deals with how man allocates
scarce resources to produce goods and services and distribute them efficiently
to individuals, according to their effort.

2. Economics as a social science is related to other sciences like sociology.

psychology, political science, and history.

.3. Economics encompasses all of the economic activities of man, namely:

consumption, production, distribution, and exchange.

4. Economics provides a framework within which reality can be understood. It

also serves as a guide in decision-making.

5. Economics uses scientific methods in analyzing economic trends.

6. Economics, relying on the scientific method, identifies the problem, gathers

and analyzes data, then formulates economic theories which are tested and
become the bases of policies designed to correct or resolve economic problems.

7. Scarcity, choice, and opportunity costs are key concepts in the study of
economics.

8. Scarcity is the most important consideration in the study of economics.

9. Macroeconomics is the study of the behavior ot the economy as a whole.

Microeconomics is the study of decision-making by individual consumers and producers
in the market.
Chapter Review

A. True or False?

________1. In general terms, the study of economics arises because economic

resources are scarce while human wants are unlimited.

________2. Air, sunlight, and water in an isolated beach are all examples of free
goods.

________3. Conclusions arrived at through scientific methods in economics are

called theories, principles, or laws.

________4. Resources have opportunity costs because they are scarce.

________5. Firms, individual consumers, markets, and prices of particular goods

are subjects of macroeconomics.

________6. The study of the entire economy is called microeconomics.

________7. Economic theories are useful in providing solutions to problems like

inflation, unemployment, and slow economic growth.

________8. All economic resources are scarce.

________9. Chemistry, physics, biology, and botany are examples of social sciences.

_______10. Human behavior is so predictable that economics, which is a social

science, is regarded as "exact."

Activity (Essay)
1.Explain the importance od economics in your everyday life.

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
___________________________________________.
 ________________________________________________________________
________________________________________________________________.