Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE-PRESIDENT FOR BRANCHES AND CAMPUSES
SANTA ROSA CAMPUS
City of Santa Rosa, Laguna

_______________________________________________________________________________________________________

INSTRUCTIONAL MATERIAL

Managerial Economics
(ECON 351)

COMPILED BY:

JOSEFINA T. COLCOL

September 2023
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 UNIT 1 – INTRODUCTION OF ECONOMICS THEORY

OVERVIEW:

Every human being whether a child, a student, mother, teacher, entrepreneur and politicians
have been closely related to Economics. Decisions on how to use time, money and efforts to
maximize satisfaction is a daily experience and can be crucial in every transaction. A mother will
not be able to cook breakfast without gas for the stove, wash a laundry without electricity and
even go to her errands if she has no money. In the office, a manager cannot run the firm’s
operation without a secretary, production supervisor and workers. The workers will not be able to
do their work without tools, materials and technology to produce the goods and deliver on time.
How much more, if a firm has no investors and no capital to operate. In the market, people are
waiting to satisfy their wants. This is the reason why we need to know what are those resources
that makes the production complete. Human wants has to be satisfied base on the attributes of
goods and services.
Economics will help the students understand the significance of Greek Economist theories in
the early development of World economy. It will inculcate studies base on the two branches of
economics.
LEARNING OUTCOMES: After the completion of this unit, the students will be able to:

1. Distinguish free resources from economic resources.

2. Explain the importance of an economic activity.
3. Determine the relationship of economic activity with type of market.
4. Explain why we are experiencing scarcity.
5. Identify the elements of human wants

COURSE MATERIAL:
The growth of the Greek society from 200 to 1200BC caused the development of various
theories significant to its development into city-estates. Economics originated from the Greek word
Oikonomia which means household management. Greek personalities contributed greatly in the
field of economics and became the pattern of economic activity. In the History of Economics
Adam Smith, the Father of Economics” inspired in his first book entitled “The Theory of Moral
Sentiments”, 1976 the theories of famous Greek Economist during the ancient times such as
Plato, Socrates and Aristotle.
Plato's (428 B.C.- 348 B.C.) theory on specialization is an aid to social organization. He also
stated that man’s primary need was for food, shelter, and clothing. the origin of society is found in
the inability of men to be self-sufficient; they lack the ability to serve all their own needs through
their own labor. Each man possesses certain inherent qualities that make him better at some
things than at others. By and through specialization of tasks the members of a community can
improve their material conditions by producing that commodity at which they are most skilled and
trade quantities of it away for the other things that they need from others who are doing the same.
Xenophone (430-354 B.C.E) Xenophone or Xenophon was a Greek philosopher, soldier,
historian, memoirist, and the author of numerous practical treatises on subjects ranging from
horsemanship to taxation. Xenophon’s contribution to Economics include ideas related to the
division of labor and productivity, the efficiency of production, the notion of diminishing and
constant return to scale and the efficiency of management.

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 Aristotle (384-322 B.C.) Aristotle's economic criticisms are directed at wealth-getting in the
sense of money-making. He disregards the fact that men were able to search for unlimited wealth
even before money came into existence. Although he realized that wanting too much leads to
human failure. he placed a great deal of blame on money because it had no natural terminus.
Aristotle taught that when a man pursues wealth in the form of exchange value he would
undermine the proper and moral use of his human capacities. He failed to mention that men of
commerce provide useful public service and make money only if they do so. In addition, Aristotle
declared the three types of exchange as follows:

• First, Barter, the direct non-monetary exchange of commodities, is natural because it

satisfies the natural requirement of sufficiency. After direct working of the land, barter
between households is the next most natural means of wealth acquisition. For Aristotle,
natural exchange is based on the right to property being determined by the capacity for its
proper use. He sees barter as natural but inadequate because of the difficulty of matching
households with complementary surpluses and deficiencies. The concepts of surplus and
deficiency are normative and derive from the right of property.

• Second, Transferring of goods between households but mediated by money. Here each
participant starts and ends with use value which he approves of but the item is not being
used in its natural aim or function because it was not made to be exchanged. Aristotle
observes that what is natural is better than what is acquired and that an item that is final
is superior to another thing that is wanted for the sake of this item.

• Third is retail trade. A person buys in order to sell at a profit. Retail trade is concerned with
getting a sum of money rather than acquiring something that is needed and therefore
consumed. Whereas Aristotle views household management as praiseworthy and as
having a natural terminus, he is skeptical about retail trade because it has no natural
terminus and is only concerned with getting a sum of money.

When money becomes an intermediate element in exchange, the natural limits on

physical wants no longer exercise restraints on a person's desires. The lack of effective
natural restraints leads to the unlimited desire for wealth. There exist no natural conditions
restricting a person's desire to acquire money wealth. Usury is a form of trade which is
known as the begetting of money from money. Aristotle says that the usurer is the most
unnatural of all practitioners of the art of money-making. The lending of money at interest
is condemned as the most unnatural mode of acquisition.

Aristotle's economic criticisms are directed at wealth-getting in the sense of money-making.

He disregards the fact that men were able to search for unlimited wealth even before money came
into existence. Although he realized that wanting too much is a human failure, he placed a great
deal of blame on money because it had no natural terminus. Aristotle taught that when a man
pursues wealth in the form of exchange value he would undermine the proper and moral use of
his human capacities. He fails to mention that men of commerce provide useful public service and
make money only if they do so.

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READINGS:

Please read Genesis 3:17-19 of the Holy Bible (New International Version or English
Standard Version). Find out the reason why we experience scarcity.

MEASUREMENT:

1. The students will make a product sample adapting the concept of basic economic
problems found in Lesson 3.

REFERENCES:

https://www.fff.org/explore-freedom/article/economic-ideas-plato-aristotle-ancient-greeks-part-1/

https://www.newworldencyclopedia.org/entry/Ancient_economic_thought

http://www.quebecoislibre.org/05/05091511.htm#:~:text=Aristotle%20was%20the%20first%20to
%20draw%20a%20distinction%

http://www.quebecoislibre.org/05/050915-
11.htm#:~:text=Aristotle%20was%20the%20first%20to%20draw%20a%20distinction%20betwe
en%20value,many%20of%20the%20classical%20economists.&text=Nevertheless%2C%20Arist
otle%20is%20one%20of,the%20history%20of%20economic%20thought.

http://www.quebecoislibre.org/05/050915-11.htm

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Lesson 1 - Economic Activity

LEARNING MATERIAL:
The field of economics is generally divided into two (2) major parts also known as branches of
economics:
1. Macroeconomics. This part examines the performance of an economy as a whole. It
focuses on the behavior of economic indicators in aggregates, such as national income
and output, employment situation, inflation and general price level; and taxation situation
and the extent of government involvement in the economy.
2. Microeconomics. This part examines the workings of individual industries and the
framework of decision making by individual players in the economy, principally, the
households and the business firms. It also discusses the role of price in the efficient
allocation of resources. (Click https://bit.ly/2DNXnzb)

Elements of Human Satisfaction:

1. Human Wants - It is anything that satisfies human being. Its characteristics are unlimited,
varied and insatiable. Good is anything that satisfies human being.

2. Use of Resources - The basic economic resources of a nation consist of land, labor, capital
and entrepreneurship. In the beginning, these are free but over the years man’s population
out-numbered these resources. A limited resource has its equivalent cost, so man has to
learn to allocate them properly in order to maximize the number of wants that can be satisfied.
The economy should pay the owners of these basic factor of production for the use of their
resources such as rent for land, wage or salary for labor, interest for capital and profit for
entrepreneurship. Resources maybe free or economic.

3. Technique of Production – this shows how resources are used and combined in production.
This is employed to reach higher rate of productivity to serve a greater demand. However,
production is described as capital-intensive or labor-intensive depending on what factor is
predominantly used. Below are examples of advancement in production caused by the
acquisition of technology.

What are Resources?

Resources refer to the factors of production as illustrated below namely
 Land - refers to God’s creation above, both water and land forms
 Labor - it refers t physical and mental labor
 Capital - goods use to produce other useful goods including money
 Entrepreneur – anyone experience in the productive process when combining the above

There are two categories of resources, free and economic resources. It is free when it’s
abundant while economic when you pay for it. A good example is air and water where people in
the early day can just get from river. This are utilized either for drinking washing and bathing but
never will these be free anymore. When resource are scarce we have to pay for it.

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What is consumption?
It will be defined as:
• using up of a resource
• the process of buying or using goods and services
• in economics, the use of goods and services by households.
The household is the basic consuming unit in the economics. Since human wants
are said to be unlimited, they maximize their satisfaction through the proper allocation
or mix of expenditures within the context of budget limitation.

For example, a wife who has P2000.00 weekly budget for the food of her husband and child goes to chicken, pork, fish,
oil, onion, garlic, and fruits.
However, a decision to buy a blouse would mean giving up any of the above. The opportunity foregone is called
opportunity cost.

• it concludes that the price demanded by consumers is the same supplied by producers.
That results in economic equilibrium.

LEARNING ACTIVITY:
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 1. What is a resource based economy? (To answer in your template)

2. Watch Jacque Fresco’s “THE VENUS PROJECT” and write a reaction paper in 15
minutes. Upload I n Lesson 1 Folder in your google drive.

MEASUREMENT:
Quiz is based on the Work Plan schedule.

REFERENCES:
https://youtu.be/T9c821s9mjw
Jacque Fresco’s Resource Based Economy

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Lesson 2 - Price Theory And Economic Theory

What is Microeconomics?

Microeconomics describes the pricing of products and money, causes of different prices to
different people, how can provide more or less benefit to producers, consumers and others, and
how individuals best coordinate and cooperate. This is the reason why microeconomics is also
known as a price theory. Generally speaking, microeconomics provides a more complete and
detailed understanding than macroeconomics.

Basic Concepts of Microeconomics

Display the slide to present the study of microeconomics involves several key concepts,
including (but not limited to):

• Incentives and behaviors: How people, as individuals or in firms, react to the situations
with which they are confronted.
• Utility theory: Consumers will choose to purchase and consume a combination of goods
that will maximize their happiness or “utility,” subject to the constraint of how much income
they have available to spend.
• Production theory: This is the study of production—or the process of converting inputs
into outputs. Producers seek to choose the combination of inputs and methods of
combining them that will minimize cost in order to maximize their profits.
• Price theory: Utility and production theory interact to produce the theory of supply and
demand, which determine prices in a competitive market. In a perfectly competitive market,
it concludes that the price demanded by consumers is the same supplied by producers.
That results in economic equilibrium.

In this study, the students will realize that resources are limited and because they have a
price, therefore, microeconomics is known as a price theory.

Economic Analysis/Economic Theory

According to Maconnell, economic theory is a body of economic principles built up as a result

of logical reasoning. We can call it a “base of tools” with which the economists analyze economic
problems. Economic theory derives principles from facts which are systematically arranged and
interpreted. “The task of economic theory is to systematically arrange, interpret and generalizes
upon facts”.

Economic theory thus is a statement or a set of related statements about cause and effect,
action and reaction.

Steps for Making an Economic Theory:

The main steps involved in constructing theory of economics are as under:

(i) Selecting the problem. The first step involved in the formulation of a theory is the
selection of problem which is related to the real world.

9
(ii) Formulation of hypothesis. The second step is to formulate hypothesis of the economic
problem to be analyzed.

(iii) Predictions. The third step required in the construction of a theory is to draw implications
from the assumptions by way of logical reasoning.

(iv) Testing of predictions. Finally, the predictions are tested by the process of observation
and statistical analysis of the data.

The economic theory is extremely valuable in explaining economic phenomenon, predicting

economic events, judging performance of the economy and in formulating economic policies.

The functions of Economic Theory

The principal functions of economic theory falls into 2 categories:
(1) to explain the nature of economic activity and
(2) to predict what will happen to the economy as facts change.

What is an Economic Policy:

Economic policy is an attempt to devise government actions and to design institutions that might
improve economic performance.

The creation of specific policies for achieving economic goals of the society is not simple and easy
matter. The main steps in policy formulation are as under:

Steps for Making an Economic Policy:

(i) Clear statement of goals. There should be clear statement of economic goals to be achieved.

(ii) Effects of alternative policies. The second step is to examine and consider the possible
effects of alternative policies designed to achieve the economic goal. For example, while
considering the merits and demerits of fiscal policy in the achievement of desired level
employment, the altering monetary policy must remain under examination.

(iii) Evaluation. The third step is to evaluate the effectiveness of the policies. The process of
evaluation should be continuous. If any drawback is found in it at any stage, it should he
improved.

What is an Economic Model

According to Pagoso, Microeconomics is composed of a series of statements of assumptions

or given and statements of implications or deductions. The statement described the essential
features of an item or process and the interrelationships between factors or variables model.

According to Khan, Economic models are a way of taking complicated ideas and events and
breaking them down into their most important characteristics. We use models in economics so
that we can focus our attention on a few things instead of getting bogged down a lot of details. In
this video, learn more about the role that models play in economics, and the importance of the
assumptions that underlie those models.
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 An economic model is a simplified version of reality that allows us to observe,
understand, and make predictions about economic behavior. The purpose of a model is
to take a complex, real-world situation and pare it down to the essentials. If designed well,
a model can give the analyst a better understanding of the situation and any related
problems. A good model is simple enough to be understood while complex enough to
capture key information. Sometimes economists use the term theory instead of model.
Strictly speaking, a theory is a more abstract representation, while a model is a more
applied or empirical representation. Often, models are used to test theories. In this course,
however, we will use the terms interchangeably.

The examples of economic theory as follows:

• Circular flow of income and expenditures
• Multiplier Effect
• Ceteris Paribus Assumption of Demand
• Theory of Consumer Behavior
• Theory of Cost and Profit

REFERENCES:
Introductory Microeconomics (Third Edition) by Pagoso, Dinio and Villasis, 2006 Introduction
to Microeconomics by Paraiso, Larano and Cuevas. 2011
https://www.khanacademy.org/search?referer=%2Feconomics-finance-
domain%2Fapmacroeconomics%2Fbasic-economics-concepts-macro%2Fintroduction-to-the-
economic- http://www.economicsconcepts.com/economic_analysis_and_economic_policy.htm
https://www.google.com/search?sxsrf=ALeKk00zn51x-
D0M6Z9KOmI9LKfLnsNzZw%3A1597247168412&ei=wA40X-7kGMfbhwOE0rToBA&q=eco

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Lesson 3 - An Overview of the Economy

The students shall understand the relationship of this two in order to give credit on their
functions and how they affect the flow of goods and services in the economy.
The Circular Flow of Economic Activity

Fig.3.1
Households supply labor to firms and are paid wages in return. Firms use that labor to produce
pizzas and sell those pizzas to households. There is a flow of goods (pizzas) from firms to
households and a flow of labor services (worker hours) from households to firms.

Basic Economic Problems

Display the slide to allow the students understand that it is not easy to determine the most
efficient and effective way of resource allocation. This means that a decision must be made on
how the resources will be used to produce the goods and services which people in the society
need and want. This clarifies that
1. What to produce? This question would answer the decision regarding the type of goods
and services the society desires. It is also important to know whether the goods to be
produced is for consumption or investment.
2. How to produce? This answers the question on the techniques of production and the
manner of combining resources to come up with the desired output.
3. For whom to produce? This question would help the firm to determine the gender of
consumers to answer the problem of distribution. It is the determination of how output is
to be divided or allocated among members of the society.
Types of Economic System
Set the slide and discuss the economic systems which may be classified as traditional,
command or market systems.
1. Traditional Economic Systems. The decisions are made based on customs and
traditions. The basic problems of what, how and for whom to produce are decided by
customs and traditions.
2. Market economy or Free Enterprise Economy or Capitalism. The basic problems of
what, how and for whom to produce are decided by the market system or simply the
demand and supply condition. The factors of production are managed and owned by
private individuals or corporation.

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 3. Command System or the Centrally Planned Economy or Socialism/Communism. The
economic system here relies on the government to decide how the country’s resources
would be best allocated.
4. Mixed System or Mixed Economy. This economic system is a combination of market
economy and command economy. Like the Philippines, there is a private and public
ownership of resources.

LEARNING ACTIVITY:
A group Project to be presented on the fourth week of November 2023, based on the basic
economic problems. For BSIE, they are expected to present without group duplication any
consumer products including beverages and food.
A format for this simple outcome and rubric will be used on the presentation of the said
project.

MEASUREMENT:
A ten (10) point quiz on the scheduled date in the work plan.

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