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Applied Economics Week1 Introduction to Economics

The document discusses the concept of scarcity in economics, highlighting its impact on resource allocation and the different economic systems: market, command, and mixed economies. It explains the characteristics, advantages, and disadvantages of each system, including the role of rationality, opportunity cost, and trade-offs in decision-making. Additionally, it outlines key assumptions in economic theory, such as profit maximization and perfect information, which help analyze market behaviors and outcomes.

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Lyka Mae Nalda Broñosa
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2 views32 pages

Applied Economics Week1 Introduction to Economics

The document discusses the concept of scarcity in economics, highlighting its impact on resource allocation and the different economic systems: market, command, and mixed economies. It explains the characteristics, advantages, and disadvantages of each system, including the role of rationality, opportunity cost, and trade-offs in decision-making. Additionally, it outlines key assumptions in economic theory, such as profit maximization and perfect information, which help analyze market behaviors and outcomes.

Uploaded by

Lyka Mae Nalda Broñosa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Scarcity is a fundamental concept of economics.
It refers to the limitation of resources particularly
economic resources such as land, labor, capital,
and entrepreneurship.
Scarcity results in challenges to properly
allocating resources to all sectors of the economy.
Economics is the science of scarcity.
1. Market Economic system (Free market system aka Capitalism)

Characteristics of Free Market


• Little government involvement in the economy. (Laissez Faire = Let it be)
• Individuals OWN resources and answer the three economic questions.
• The opportunity to make a profit gives people an incentive to produce
quality items efficiently.
• A wide variety of goods is available to consumers.
• Competition and Self-interest work together to regulate the economy
(keep prices down and quality up).
Example of how the free market regulates itself:
If consumers want computers and only one company is
producing them, other businesses have the INCENTIVE to start
making computers to earn PROFIT. This leads to more competition
which means lower prices, better quality, and more product variety.
We produce the goods and services that society wants because
“resources follow profits”.
End Result: Most efficient production of the goods that
consumers want to be produced at the lowest prices and the
highest quality.
2. Command Economic System
In a centrally planned economy (communism) the
government
• owns all the resources
• decides what to produce, how much to produce, and
who will receive it.
Examples: Cuba, China, and North Korea
Advantages and Disadvantages
❖ What is GOOD about Communism?
1. Low unemployment – everyone has a job
2. Great Job Security – the government doesn’t go out of business
3. Equal incomes mean no extremely poor people
4. Free health care

❖ What is BAD about Communism?


1. No incentive to work harder
2. No incentive to innovate or come up with good ideas
3. No Competition keeps the quality of goods poor.
4. Corrupt leaders
5. Few individual freedoms
3. Mixed Economic System
A mixed economic system is where all three
questions are answered by both the government
and private entities in consideration of their
mutual benefit.
Economic resources are owned by both.
✓ Economics uses the concept of rationality to predict the actions
or behavior of people. Economists assume that individuals make
decisions rationally and that it is possible to predict certain
behavioral outcomes.

For example, if a person prefers rice over bread, and bread over
potato, then it is most likely that he or she prefers rice over potato.
Given this preference, when this person is faced with a choice
between buying suman and mashed potato, he or she would
choose to buy suman.
Opportunity Cost and Trade-off
• Opportunity Cost → is one of the evident effects of scarcity.
When resources are scarce or limited, consumers are compelled
to choose how to manage them efficiently and decide how much
of their wants or needs will be satisfied and how much of them
will be left unsatisfied. Hence, when a need is pursued, all other
alternatives are forgone. And the more we have of a certain
good, the more we sacrifice other things.
• Trade-off → an exchange where you give up one thing to get
something else that you also desire.
→ Economics as an applied science is the application of
economic theories and models, as well as related principles
and concepts, to understand and predict the outcomes of
contemporary socioeconomic issues.
→ In a simple definition, it is observing how theories work
in practice.
→ Economics as an applied science is the formulation of
general theories through testing, mainly using data from the
past.
1. Rationality. Economists assume that individuals act
logically and predictably and pursue goals that will
benefit them.
2. Profit Maximization. In analyzing the behavior of
individuals and firms in markets, it is assumed that
participants expect to gain something from their
transactions. Individuals aim to maximize utility, while
firms intend to maximize their profit.
3. Perfect Information. In most markets, it is assumed that
consumers and producers have complete and accurate information
about products, services, prices, utility, quality, and production
methods. This assumption enables economists to study market
processes and the effects of policies on markets more accurately.

4. Ceteris Paribus. This Latin phrase, which means “all things


being equal”, refers to the assumption which controls the effects of
other variables apart from those that are being analyzed in the
study. The majority of economic theories and models rely on this
assumption since it simplifies scenarios and enables the analysis
of data.
Assumptions aid us in better understanding economic
issues and make sense of the behavior of individuals,
groups, and institutions in an economy.

For example, in determining the relationship between


price and consumer demand, the only two variables being
considered are the quantity demanded and the price of the
product. Other non-price variables are held constant and
would therefore not affect the behavior of consumers.

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