Mater Dei College

Tubigon, Bohol

BA 101 - BASIC MICRO ECONOMICS

Compiled Notes

Lesson 1: RESOURCE UTILIZATION AND ECONOMICS

Introduction to Economics

Definitions:

 Economics comes from two Greek word “oikos” – meaning household and “nomus”
meaning system or management. “Oikanomia” or “oikonomus” means the “management
of household.”

 “Economics is concerned with humanity’s well-being or welfare. It encompasses the

social relationships or social organizations involved in allocating scarce resources among
alternative human wants and in using those resources toward the end of satisfying wants
as fully as possible.” (Richard Leftwich)

 “Economics is the study of how people make their living, how they acquire the food,
shelter, clothing and other material necessities and comfort of this world. It is a study of
the problems they encounter and of the ways in which these problems can be reduced.”
(Paul Wonnacott and Ronald Wonnacott)

 “Economics is a scientific study which deals with how individuals and society generally
make choices. Individuals and groups in society have innumerable wants. To satisfy
those wants, there resources that can be used. These resources, however, are not freely
available. They are scarce and furthermore have other alternative uses. Dimensions of
choice include present and future use of available resources. Moreover, the uses of these
resources carry with them costs and corresponding benefits. Concerns with costs and
benefits require efficiency in resources use.” (Gerardo Sicat)

 “Economics is the study of how societies use scarce resources to produce valuable
commodities and distributes them among different groups.” (Paul Samuelson and William
Nordhaus)

 Generally, “economics can be defined as a social science which deals with the proper
allocation and efficient use of available resources for the maximum satisfaction of human
wants.” (Fajardo)
SCARSITY: The Central Problem of Economics

Scarcity refers to the condition wherein most things that people want are available only in
limited supply. These things, called economic goods, are generally scarce and must
somehow be rationed, whether by price or by some other means.
Refers also as the limited availability of economic resources relative to man’s or
society’s unlimited demand for goods and services.

Figure 1 Problem of Scarcity

An economic good is anything, either a physical commodity or a service, which yields utility
and which could command a price if bought or sold in the market.

Goods and services – those that yield satisfaction. It may be tangible or intangible.
Classification of goods:
1. Consumer goods vs. capital goods
Consumer goods – those that yield direct satisfaction
Capital goods – those that are used in the production of other goods (and services)
2. Essential goods vs. luxury goods
Essential goods – these are the “basic” needs of man
Luxury goods – these are those that contribute to man’s comfort and well-being

Needs are essential for human survival like food, clothing, and shelter. The absence of these
needs could mean an early demise of humans in this world.

Want refers to “a person’s desires or preferences for specific ways of satisfying a basic need.”

Origins of wants:
1. Survival. People want food, clothing, and shelter because they are needed to survive.
2. Dictated by culture. The desire to have appliances such as television, refrigerators and
gas stoves are dictated by the culture where one lives.
3. Generated by activity necessary to satisfy other wants. The desire to complete college
education is not because one really wishes to spend and sacrifice in coming to school
but this activity is needed because it is essential to satisfy the ultimate desire of getting a
better job in the future.

Allocation of Fund - It refers to economic and judicious disbursement of funds. Economics

assists individuals and societies in making proper choices, that is the allocation and utilization of
economic resources, with the end in view of satisfying human wants for goods and services.
Figure 2, illustrates the relationship between available limited resources and unlimited wants of
man and society and the role of allocating these resources.

Figure 2 Limited Resources Unlimited Wants

Economics

ALLOCATION

Resources – refers to the factors or inputs of production. They are those which are needed to
produce goods and services.
1. Economic resources – those with price tag because they are scarce
2. Free resources – those that has no price (because they are abundant)

Classification of economic resources:

a. Land – pertains to the natural resources, not man-made.
b. Labor – consists of labor power or the capacity for human being, both physically and
mentally, used in producing goods and services.
c. Capital – anything that is used to produce other goods and services
d. Entrepreneurship – the ability to organize and coordinate land, labor, and capital.

Entrepreneur – person who organizes, manages, and assume the risks of a firm, taking
a new idea or a new product and turning it into a successful business.
e. Foreign exchange – refers to the dollar and dollar reserves that the economy has.

THE CIRCULAR FLOW MODEL

Figure 3. Illustrates the flow of resources and output from households to businesses, and vice
versa.

The figure illustrates the flow of resources and payments for their use as well as the flow of
goods and services and payments for them. Thus the household sector sells resources to and
buys products from the business sector while the business sector buys resources and sells
products to the household sector
WHAT IS THE RELATIONSHIP BETWEEN ECONOMICS AND SCARCITY

Their relationship is such that if there is no scarcity, there is no need for economics. The study
of economics is therefore essential in order to address the issue of resource allocation and
distribution, in response to scarcity, In the allocation of our limited resources however, we have
to give up something in order to get what we want.

This brings us now to the concept of opportunity cost, one of the most important economic
concepts that you need to know and understand very well since all of us try to apply this
concept everyday of our lives

The Concept of Opportunity Cost

In economics, opportunity cost refers to the foregone value of the next best alternative In
particular, it is the value of what is given up when one makes a choice. The thing thus given-up
is called the opportunity cost of one's choice.

When you make choices, there is always an alternative that you have to give up. Moreover, a
producer, who decides to produce shoes, gives up other goods that he could have produced like
bags using the same resources. If you bought a book with your limited allowance, you gave up
the chance of eating out or watching movie o playing computer games.

Opportunity cost however is expressed in relative price.

Example:
If the price of Coke is P15.00 per bottle and one piece of cupcake is P5.00, the the relative price
of Coke is 3 pieces of cupcake. Therefore, if a consumer has only P15.00 and chooses to buy a
bottle of Coke with it, then we can say that the opportunity cost of that bottle of Coke was the 3
pieces of cupcake, assuming that the cupcakes were the next best alternative.
Figure 1.4 below further illustrates the concept of opportunity cost

SAVINGS (Firm/Individual)

Figure 4

Opportunity Cost

Credit(Interest) Investment (Profit)

This figure illustrates the concept of opportunity cost. The savings of the firm/individual is
subject to two choices between credit and investment. If the savings of an individual will be put
on credit, there is a possibility of earning interest or a bad debt (not gaining the money back), on
the other hand, when savings of an individual is invested, it may earn profit or may be subject to
loss, With this in mind, what do you think is the best choice or next best alternative?

Basic Decision Problems

Consumption

Members of society, with their individual wants, determine what types of goods and services
they want to utilize or consume, and the corresponding amounts thereof that they should
purchase and utilize. The choices range from food, to shelter, to clothing. etc. Consumption is
the basic decision problem that the consumers must always deal with in their day to day
activities.

Production

The problem of production is generally a concern of producers. They determine the needs,
wants, and demands of consumers, and decide how to allocate their resources to meet these
demands. Goods and services may be produced by different methods of production, depending
on the firm's technological state, and on the available resources within the society.

Distribution

This problem is primarily addressed to the government. There must be proper allocation of all
the resources for the benefit of the whole society.

Growth over Time

This is the last basic decision problem that a society or nation must deal with. Societies continue
to live on. They also grow in numbers. On the one hand, people have definite lives, but societies
(or nations) have longer, if not infinite lives. All the problems of choice, consumption, production,
and distribution have to be seen in the context of how they will affect future events.

FOUR BASIC ECONOMIC QUESTIONS

To address the problem of scarcity and solve the basic decision problems, the society must
answer the four basic economic questions of What to produce? How to produce? For whom to
produce? and How much to produce?

1. What to produce?

The question of what to produce tells us that an economy must identify what are the goods and
services needed to be produced for the utilization of the society in the everyday life of man. A
society must also take into account the resources that it possesses before deciding what goods
or services to produce.

For example, an island nation, blessed with agricultural resources, and which does not possess
advanced technology should not opt to produce space shuttles or satellites because its
resources are incapable of producing these outputs. However, it can take advantage of its
natural resources and it can produce agricultural goods and tourism services.

In a market economy, what gets produced in the society is driven by prices. Resources are
allocated to the production of goods and services that have high prices and low input prices
relative to one another.

2. How to produce?

This question tells us that there is a need to identify the different methods and techniques in
order to produce goods and services. In other words, the society must determine whether to
employ labor intensive production or capital intensive production.

Labor intensive production uses more of the human resource or manual labor in
producing goods and services than capital resources. Generally, this kind of production is
advisable to a society with large population. In countries where labor resources are abundant
and therefore there is high supply of labor, the cost of labor is usually cheap for instance the
Philippines, Vietnam, and China.

Capital intensive production employs more technology and capital goods like machineries
and equipment in producing goods and services rather than using labor resources. This type of
production is generally utilized by with high level of capital stock and technology, and with
scarce labor rests, Japan, Germany, and the USA. The decision of what form of technology is to
be employed depends more on the availability of cheaper resources and less of more expensive
inputs. Thus, if there is abundant supply of labor (capital) then this resource will be cheaper and
will cost less to production will be labor (capital) intensive.

3. How much to produce?

The question of how much to produce identifies the number of goods and services needed to be
produced in order to answer the demand of man and society. The optimum amount of
production must be approximated by producers, Underproduction (shortage) results to a failure
to meet the needs and wants of the society. On the other hand, overproduction results to excess
(surplus) goods and services going to waste.

4. For whom to produce?

This question identifies the people or sectors who demand the commodities produced in a
society. Economists must determine the "target market" of the goods and services which are to
be produced to understand their consumption behaviors and patterns. An understanding of
these results to higher sales of goods, and ultimately to increased profits. We can therefore say
that for those who can pay the highest price is for whom goods and services are produced.

3 E’s IN ECONOMICS

Figure 5
BRANCHES OF ECONOMICS

Microeconomics and Macroeconomics

Microeconomics

Microeconomics is the branch of economics which deals with the individual decisions of units of
the economy-firms and households, and how their choices determine relative prices of goods
and factors of production. In a capitalist economy, the market is the central concept of
microeconomics. It focuses on its two main players-the buyer and the seller, and their
interaction with one another.

Microeconomics operates on the level of the individual business firm, as well as that of the
individual consumer. It concerns how a firm maximizes its profits, and how a consumer
maximizes his satisfaction.

Among the topics discussed in microeconomics are the principles of demand and supply,
elasticity of demand and supply, individual decision making, theories of production, output and
cost of firms, a firm's profit maximization objective, different types of business organizations,
and kinds of market structures (Cave 2003)

Macroeconomics

Macroeconomics is the branch of economics that studies the relationship among broad
economic aggregates like national income, national output, money supply, bank deposits, total
volumes of savings, investment, consumption expenditure, general price level of commodities,
government spending, inflation, recession, employment, and money supply (Kapur 1997) The
term macro, in contrast to micro implies that it seeks to understand the behavior of the economy
as a whole.

Macroeconomics focuses on the four specific sectors of the economy; the behavior of the
aggregate household (consumption), the decision making of the aggregate business
(investment), the policies and projects of the government (government spending), and the
behavior of external/foreign economic agents, through trading (export and import)

Moreover, macroeconomics also discusses the measurement of gross national product and
gross domestic product, the business cycle, the five macroeconomic goals, the general price
level, employment, money and the financial markets, monetary and fiscal policies, and
economic growth and development

Important Economic Terms

Wealth

Wealth refers to anything that has a functional value (usually in money), which can be traded for
goods and services. Accordingly, wealth is the stock of net assets owned by individuals or
households. In aggregate terms, one widely used measure of the nation's total stock of wealth is
that of the 'marketable wealth', that is, physical and financial assets which are in the main
relatively liquid. (Pass & Lowes 1993)

Consumption

Consumption refers to the direct utilization or usage of the available goods and services by the
buyer (individual) or the consumer (household) sector. It is also the satisfaction obtained by
consumers for the use of goods and services (Pass & Lowes 1993)

Production

Production is defined as the formation or creation by firms of an output (products or services). It

is basically the process by which land, labor and capital are combined in order to produce
outputs of goods and services.

Exchange

This is the process of trading or buying and selling of goods and/or services for money and/or its
equivalent. It also includes the buying of goods and services either in the form of barter or
through market.

Distribution

This is the process of allocating or apportioning scarce resources to be utilized by the

household, the business sector, and the rest of the world. In specific term, however, it refers to
the process of storing and moving products to customers often through intermediaries such as
wholesalers and retailers (Pass & Lowes 1993).

SELF-ASSESSMENT [APPLICATION QUESTIONS]:

Briefly explain how you can apply economics in your daily life.
Guidelines:
a. Daily or weekly allowance
b. Time management
c. Chosen school and academic strand