Managerial

Economics
Submitted By:
John Stephen Eusebio
BSA – A2 Room 41
August 5, 2019

Submitted To:
Mr. Remigio Tiambeng
 Table of Contents
Definitions of Economics.............................................................................................................1
The Division of Economics........................................................................................................... 1
Microeconomics....................................................................................................................... 1
Macroeconomics...................................................................................................................... 1
The Basic Economic Problems....................................................................................................1
Examples of the Economic Problem.........................................................................................2
Consumers........................................................................................................................... 2
Workers................................................................................................................................ 2
Producers............................................................................................................................. 2
Government.......................................................................................................................... 2
Factors of Productions.................................................................................................................3
Product Possibilities Frontier.......................................................................................................3
Opportunity Cost.......................................................................................................................... 3
Marginal Benefits and Marginal Costs......................................................................................3
Trade – Off.................................................................................................................................. 4
The Economic System.................................................................................................................4
The Mixed Economy.................................................................................................................... 5
Types of Economic Development................................................................................................5
Command Economy.................................................................................................................5
Market Economy...................................................................................................................... 5
Traditional Economy................................................................................................................5
The Sectors of an Economy.........................................................................................................5
1. Primary sector................................................................................................................... 5
2. Secondary sector.............................................................................................................. 5
3. Tertiary sector................................................................................................................... 6
The Capital Goods and the Consumer Goods.............................................................................6
Capital Goods.......................................................................................................................... 6
Consumer Good....................................................................................................................... 6
The Functions of Prices...............................................................................................................6
The Circular Flow of Economic Activity........................................................................................7
 THE ECONOMIC WAY OF THINGKING

1. Definitions of Economics – Allocation and utilization of scarce resources to satisfy

the needs and wants of the people.
The word economics is derived from the Greek word ‘Oikonomia’; Oikas (a house) and
nemein (to manage) which, in effect, meant managing a household, using the limited
funds available in the most economical manner possible.
 The earlier term for 'economics' was political economy. It is adapted from the
French Mercantilist usage of économie politique, which extended economy from
the ancient Greek term for household management to the national realm as
public administration of the affairs of state.
 The branch of knowledge concerned with the production, consumption, and
transfer of wealth.

2. The Division of Economics - divided into two main branches: microeconomics and
macroeconomics.
These rather inelegant words are derived from the Greek word:
Mikro – Something Small
Makro – Something Large

Microeconomics is the study of individual market interactions. It concentrates

on production and consumption by the individual consumer, the firm and the industry.

Macroeconomics studies the aggregates of an economic system.

Macroeconomics, on the other hand, is the study of a national economy. Some of the
most common focuses of macroeconomics include unemployment rates, the gross
domestic product of an economy, and the effects of exports and imports.

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3. The Basic Economic Problems
What to produce? How to produce? For whom?
Examples of the Economic Problem

Consumers - Households have limited income and they need to decide how to spend
their finite income. For example, with an annual income of £20,000, a household may
need to spend £10,000 a year on rent, council tax and utility bills. This leaves £10,000
for deciding which other food, clothes, transport and other goods to purchase.

Workers - Householders will also face decisions on how much to work. For example,
working overtime at the weekend will give them extra income to spend, but less leisure
time to enjoy it. A worker may also wish to spend more time in learning new skills and
qualifications. This may limit their earning power in the short-term but enable a greater
earning power in the long-term.  For example, at 18 a student could go straight into
work or they could go to university where they will hope to gain a degree and more
earning power in the long-term.

Producers - A producer needs to remain profitable (revenue higher than costs). So it

will need to produce the goods which are in high demand and respond to changing
demands and buying habits of consumers – for example, switching to online sales as
the high street declines. Producers will need to constantly ask the best way of producing
goods. For example, purchasing new machines can increase productivity and enable
the firms to produce the goods at a lower cost. This is important for fast-changing
industries where new technology is frequently reducing costs of production. Without
firms adapting to how they produce, they can become unprofitable.
Firms may also need to make long-term investment decisions to invest in new products
and new means of production.

Government - The government has finite resources and its spending power is limited
by the amount of tax that they can collect. The government needs to decide how they
collect tax and then they need to decide whom they spend money on. For example, the
government may wish to cut benefits to those on low income to increase incentives to
work. However, cutting benefits will increase inequality and relative poverty.

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4. Factors of Productions - Resources required for generation of goods or services,
generally classified into four major groups:
Land (including all-natural resources),
Labor (including all human resources),
Capital (including all man-made resources), and
Enterprise/ (which brings all the previous resources together for production).

5. Product Possibilities Frontier – What Is the Production Possibility Frontier (PPF)? -

In business analysis, the production possibility frontier (PPF) is a curve illustrating the
different possible amounts that two separate goods may be produced when there is a
fixed availability of a certain resource that both items require for their manufacture. The
PPF, which assumes that production is optimally efficient, is alternatively referred to as
the "production possibility curve" or the "transformation curve."

6. Opportunity Cost -Opportunity cost also arises because people face trade-offs. For
example, what to produce or consume with the limited resources? They have to
compare the cost and benefit of their alternative courses of action. The opportunity cost
of any item is the cost of sacrificing. For example, if we want to produce two
commodities viz; X and Y. The opportunity cost of production of commodity X is the
sacrifice production of commodity Y.

Marginal Benefits and Marginal Costs

Economists normally assume that people are rational human being. Rational people
often make decision by comparing marginal benefits and marginal costs. Marginal
decision helps us solving puzzling economic phenomena: Here is a classic question:
Why are diamonds more valuable than water? Human needs water to survive, while
diamonds are unnecessary; but people pay more for diamond and less for water.
People pay more for diamond and less for water because the additional utility gained
from the last gallon of water is less than the utility gained from the last carat of diamond.
This is because a rational decision maker takes an action if and only if the marginal
benefit of the action exceeds the marginal cost.

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7. Trade – Off - Economics is full of Trade-offs. At every step in decisions making we
have to choose between the two alternatives. For example, student of economics has to
allocate number of hours of his study to each subject. If he studies economics for one
hour, he is left with one less hour for other subjects. So, he has to allocate his resource
(that is time, which is limited) according to his preferences.

8. The Economic System - An economic system, or economic order, is

a system of production, resource allocation and distribution of goods and services within
a society or a given geographic area. It includes the combination of the
various institutions, agencies, entities, decision-making processes and patterns
of consumption that comprise the economic structure of a given community. As such, an
economic system is a type of social system. The mode of production is a related
concept. All economic systems have three basic questions to ask: what to produce, how
to produce and in what quantities and who receives the output of production.

(Economic System)
https://marketbusinessnews.com/financia
l-glossary/economic-system-definition

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 9. The Mixed Economy - A mixed economy implies a fair balance between social goals
and individual goals. It implies a concerted or harmonious organization of the public and
private sectors. The sectors must be sore organized as to become mutually
reinforcing rather than mutually obstructive. Similarly, planning arrangement and
market arrangements are so adjusted that each is used for the social goal to which it is
most suited and yet the two mechanisms are not permitted to become mutually
contradictory. Further, social democratic mixed economy implies a balanced
commitment to freedom, to equality, and material progress.

10. Types of Economic Development

Command Economy - an economy in which production, investment, prices, and
incomes are determined centrally by a government.

Market Economy - A market economy is an economic system in which

economic decisions and the pricing of goods and services are guided by the
interactions of a country's individual citizens and businesses.

Traditional Economy - A traditional economy is a system that relies on customs,

history, and time-honored beliefs. Tradition guides economic decisions such as
production and distribution. Traditional economies depend on agriculture, fishing,
hunting, gathering, or some combination of the above.
Each of these kinds of economies answers the three basic economic questions
(What to produce, how to produce it, for whom to produce it) in different ways.

11. The Sectors of an Economy

1. Primary sector extracts natural materials and provides raw materials for secondary
industry.
2. Secondary sector processes raw materials or semi-finished goods into more valuable
products.
3. Tertiary sector is the provision of services.
4. Some economists like to list a Quaternary sector as related to application,
manipulation and transmission of information.

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12. The Capital Goods and the Consumer Goods – Capital goods and consumer
goods are classified based on how they are used. A capital good is any good used to
help increase future production. Consumer goods are any goods used by consumers
and have no future productive use. The same physical good could be a consumer good
or a capital good. It just depends on how it will be used. An apple bought at a grocery
store and immediately eaten is a consumer good. An identical apple bought by a
company to make apple juice is a capital good. The difference, again, lies in its
utilization.

Capital Goods - Capital goods are any tangible assets used by one business to
produce goods or services as an input for other businesses to produce consumer
goods. They are also known as intermediate goods, durable goods, or economic capital.
The most common capital goods are property, plant, and equipment (PPE), or fixed
assets such as buildings, machinery and equipment, tools, and vehicles.

Consumer Good - A consumer good is any good purchased for consumption and not
used later to produce another consumer good. Consumer goods are sometimes called
final goods because they end up in the hands of the consumer or the end user. When
economists and statisticians calculate gross domestic product (GDP), they do so based
off consumer goods. Examples of consumer goods include food, clothing, vehicles,
electronics, and appliances.

13. The Functions of Prices – Rationing and Allocating

The price in a competitive market serves two very important
functions, rationing and allocating. The rationing function relates to the buyers of the
good. Price is used to ration the limited quantity of a good among the various buyers
who would like to purchase it. Consider Figure 3.10 where P 1 is the equilibrium price
and Q1 is the equilibrium quantity. Somehow the quantity available, Q 1, must be rationed
among the buyers. A price of P1 will cause buyers to demand exactly the amount that is
available, Q1. The buyers who are willing to pay that price are the ones who receive
benefits in terms of satisfaction from the good at least equal to P 1, and are the ones who
will get to enjoy the good. If a buyer does not have a use for the good which he or she
values at least equal to P 1, then the buyer will decide not to purchase the good; i.e., the
good is not rationed to that particular buyer. Rationing by price will guarantee that the

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good will be purchased by the buyers who value it most. If the good were to increase in
price, then buyers would re-evaluate their uses of the good and eliminate those uses
with values that are not at least equal to the new, higher price of the good. In summary,
the rationing function of prices has two important functions: first, it guarantees that the
quantity purchased is equal to the quantity available; second, it ensures that the buyers
who consume the good are the ones who value it the most; that is, they get the most
satisfaction from the good.

14. The Circular Flow of Economic Activity - The circular flow of

income or circular flow is a model of the economy in which the major exchanges are
represented as flows of money, goods and services, etc. between economic agents.
The flows of money and goods exchanged in a closed circuit correspond in value but
run in the opposite direction. The circular flow analysis is the basis of national
accounts and hence of macroeconomics.

The idea of the circular flow was already present in the work of Richard Cantillon.
François Quesnay developed and visualized this concept in the so-called Tableau
économique. Important developments of Quesnay's tableau were Karl Marx'
reproduction schemes in the second volume of Capital: Critique of Political Economy,
and John Maynard Keynes' General Theory of Employment, Interest and
Money. Richard Stone further developed the concept for the United Nations (UN) and
the Organization for Economic Co-operation and Development to the system, which is
now used internationally.

The Circular Flow

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Intra-Production Payment Flows

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Resource Production Payment Flow