Chapter 1: THE NATURE AND PROCESS OF ECONOMICS WHY STUDY ECONOMICS?

The nature and process of economics affect all of us every day. From Below are reasons why we need to study economics:
the moment we wake up in the morning till we sleep at night, even
1. To study economics is to learn a way of thinking. A way of thinking
during the time that we are asleep, economic activity is unfolding.
is a process by which you are guided by concepts from which a good
If you are an ordinary worker, or a student, or a professional that decision is derived.
came from the province but is presently living in the city for your
2. A study of economics is also an essential part of the study of the
own purpose, then, you would know that you reached the city by
society where we live in. Changes continue to affect life today. A
taking a plane, a boat, a bus, a train or a private car. Whatever
good view of where we are now and where we are going, what do
means you chose, for sure, you spent for this travel, either by
we have and what else can we have in the future are what
yourself or by somebody else.
determines the character of our society.
While in the city, you will have to look for a place to stay: a bed
3. An understanding of economics is an integral part of
space, a room, or an apartment and pay the rent.
understanding global affairs. All countries are part of the world
You go to the mall, buy the things that you need, go to the movie economy. If one country is producing nuclear weapons, others are
houses and other entertainment centers, these are activities that weary of its effect. If the Philippines decides to reject an offer of the
require payment. You are to pay for your purchases both for goods U.S., it will have an impact on our economic relations with them.
and services
4. A participation in the political process is an issue that is motivated
Did you ever wonder why all these things become possible; that you by economics. If you elected one candidate last May 2010, it can be
don't need to produce nor create the things that you need yourself? thought of that your choice was based on one among the many
You realize that others produced and created these things for you. premises that your life will improve economically because job
Again, this is the question: Why do people produce and create opportunities will be available.
goods and services for other people? What motivates them? How
do all these things reach the mall in a very orderly manner? What
about the prices? Why do prices differ from one brand to another?

The answer to these questions and more are properly addressed

and studied in the field of economics.
As knowledge concerning social relationships is accumulated, it may Ricardo. He began his analysis by means of a sketch of a primitive
be systematically classified into a body of general truths that will society of hunters. If it costs twice the labour to kill a beaver as it
provide a formulation of general laws that must be tested and does a deer, one beaver would be exchanged for two deers. Labor
verified. When a systematic arrangement and analysis of this body was the fundamental measure of value, though actual prices of
of knowledge is accomplished, it becomes a science. When the body commodities were determined by supply and demand on the
of knowledge is concerned with social phenomena, social science market.
results. If the social phenomena in question are concerned with
He suggested that there are two elements in the problem of
relationships of production, consumption and exchange, then that
increasing wealth:
social science is Economies.
1. the skill of the labour force; and
ECONOMICS as a DISTINCT FIELD OF STUDY
2. the proportion of productive to unproductive labour.
Economics is a social science which is commonly defined as a branch
of knowledge that prescribes how limited resources may be Aside from knowing the fundamental concepts and elements
efficiently allocated and utilized to equitably satisfy satisfy the suggested by Smith, it is also important to recognize the different
unlimited human wants and basic needs. In the study of economics, aspects of economics:
decision makers on the production and consumption sectors of
society are guided to make wise choices from the numerous options 1. Itis a social science because it deals with relationships among
that are available to them given certain production and individuals and groups in a society. Thus, it must constantly be
consumption situations. interacted with other social sciences such as sociology, psychology,
and political science. Oftentimes, it has to borrow certain premises
The most fundamental concepts that need to be properly from these other sciences.
understood are: opportunity costs, marginal analysis, and efficient
markets. These concepts will be introduced as the topics are 2. It is concerned with the choices we make. Value judgments
developed throughout this book. regarding the needs of man and of society are completely
indispensable to the task of devising solution to economic problems.
In the Adam Smith's An Inquiry into the Nature and Causes of the As long as value judgments are made clear and explicit, the scientific
Wealth of Nations in 1776, Smith is primarily concerned with the nature to economic inquiry can still be relied upon.
factors which lead to increased wealth in the community, and
rejected the Physiocrats' view of the prominent position of 3. It is concerned with a society's material welfare. In primitive
agriculture in the economy, recognizing the parallel contribution of societies, the economizing habit is part of the instinct of survival.
manufacturing industry. The work of Adam Smith became the But in more complex societies, greater rationality is demanded of
foundation upon which was constructed the whole subsequent individuals if they are to satisfactorily solve their problems in
tradition of English Classical Economics from the time of David scarcity.
We note that the problem of economics arises from very scarce 2. Microeconomics. On the other hand, examines the workings of
resources and the never ending wants and desires of human. The individual industries and the framework of decision-making by
resources of society consist not only of nature's gift, such as land, individual players in the economy, principally, the households and
forest and minerals but also human resources, both mental and the business firms. It also discusses the role of price in the efficient
physical, and all sorts of man-made aids to further production, such allocation of resources.
as tools, machinery and building. Resources are agents of
Microeconomics deals with how an individual consumer spends his
production because the resources of society are to produce those
income to maximize satisfaction, how a business firm combines
things that people desire in order to satisfy their wants. The things
resources or factors of production to maximize profits and minimize
that people produce are called commodities. Commodities may be
losses and how the price of each commodity and each type of
divided into goods and services wherein the former are tangible and
resource is determined by demand and supply. It studies how these
the latter are intangible. Goods and services are therefore a means
individual decisions are affected by different forms of market
by which individuals get satisfied out of their consumption. The
organization.
process of converting raw materials into finished goods is
production. Economics aims to develop theories, principles, and models which
are abstractions and generalizations of reality that can be applied in
IMPORTANCE OF ECONOMICS
resolving or alleviating specific problems and in furthering the
The study of economics can give the student a better view of the realization of society's overall goals. The goal is to develop policies
complexity of society where he lives as well as the conceptual that might prevent or correct such macroeconomic problems as
framework of the important decisions and choices he may wish to inflation and unemployment, and microeconomic problems as
undertake. A moulding process in understanding human survival is poverty, population explosion, pollution and urbanization.
to appreciate the reality that economic resources are scarce, and
When we study the income or expenditure of an individual bank, we
therefore need to be judiciously allocated and properly used.
are dealing with microeconomics. But when we deal with the total
MACROECONOMICS VERSUS MICROECONOMICS income or total expenditures of the whole banking industry, then we
are engaged in the study of macroeconomics. If we discuss specific
The field of economics is generally divided into two major parts:
industry crisis in our country, we are concerned with microeconomic
1. Macroeconomics. Examines the performance of an economy as a analysis. However, what is true in microeconomics may not be true
whole. It focuses on the behavior of economic indicators in in macroeconomics. For example, an eggplant farmer gets better
aggregates, such as national income and output, employment harvest. This means more income for him. But if all eggplant farmers
situation, inflation and general price level; and taxation situation have increased their harvests, it is not favorable to them, because
and the extent of government involvement in the economy. more supply reduces the price of eggplants.