ECONOMICS
Economic thoughts of the Greek For Plato: First- it increases output and improves the welfare of the individual in society by producing more goods and services. Second- it is a component of justice.
For Xenophone: (a stuent of Socrates! Viewed division of labor and the allocations of resources within LATF!"#A as a way of self-su$ciency. %e said that with e$cient management of this large estate& it will eventually lead to self-su$ciency. %e termed this 'ind of management as ()*+)"),+!S
For "ristotle: #ivided the concerns into separate /elds0 )1)"),1S- dealt with the production and consumption of goods with the production and consumption of goods. t was an analysis of how decisions were made regarding the mgt. of resources. +%2*,ATST1S- encompassed the activities of money-ma'ing as well as some aspects of production. t studied human activities involved with wealth-getting which could be natural or unnatural.
#$E %ISE OF ME%C"N#I&ISM Mercantilism' an economic theory that holds the prosperity of a nation depends upon its supply of capital and that the global volume of trade is (unchangeable. *conomic assets& or capital are represented by bullion 3gold&silver and trade value4 held by the state& which is best increased through positive balance of trade with other nations 3e5ports minus imports4. -Suggests that the ruling gov6t should advance these goals by playing a protectionist role in the economy by encouraging e5ports and discouraging imports& especially through through the use of tari7s. The economic policy based upon these ideas is often called mercantile system.
#$E P$SIOC%"#S -are groups of economists who believed that the wealth of the nation is derived solely from the value of land agriculture or land development.
#$E &"ISSE)'F"I%E &"ISSE)'F"I%E #$EO% 'is a French phrase which means (let do from the French diction /rst used by the 89th century physiocrats as an injunction against government interference with
trade& it became used as a synonym for strict free mar'et economics during the early and mid 8: th century.
#$E IN*+S#%I"& %E,O&+#ION "N* C&"SSIC"& ECONOMICS -Following Adam6s Smith ;ealth of "ations& classical economists such as #avid 2icardo and
"*"M SMI#$ ' considered as the founder of classical school& constructed an e5planation on how social behavior is regulated. %is view of economics was shaped by the world he observed. %e saw a world where each person sought their own self interest but was constrained by morality& mar'ets and government. *",I* %IC"%*O (#he #heor- of Comparati.e ".antage! 'most notable wor' is his (=rinciples of =olitical *conomy and Ta5ation. %e opens the /rst chapter with a statement of the labor theory of value. n the ne5t chapter& he demonstrated that prices do not correspond to this value. %e retained the theory& however as an appro5imation. %e continued to wor' on his value theory to the end of his life. %e believed that wages should be left to free competition& so there should be no restrictions on the importance of agricultural products from abroad. #$OM"S %O/E%# M"&#$+S "N* #$E P%INCIP&E OF POP+&"#ION ',althus largely developed his view interaction to the optimistic opinions of his father and his associates notably&
ues 2ousseau. n his wor' (An *ssay on the =rinciple of =opulation& he made the famous production that the population would outrun food supply& leading to the decrease in the ?ood per person. M"%GIN"&IS# SC$OO& '+lassical *conomist theori@ed that prices are determined by the cost of production. ,arginalist economists emphasi@ed that prices also depends upon the amount of consumer satisfaction provided by individual goods and services. M"%XIS# ECONOMICS -thought comes from the wor' of erman economist 1arl ,ar5. (The +apital was published in ermany in 89BC. %e focused on the labor theory of value in what he considered to be the e5ploitation of the wor'ers by the capitalists.
,ar5 proclaimed the capitalism was doomed and would soon be followed by the business depressions& revolutionary upheavals and socialism.
#$E NEO C&"SSIC"& ECONOMICS -"eo +lassical *conomist populari@ed the term *+)",1+S as a substitute for the earlier termed (political economy. -Systemati@ed supply and demands as joint determinants of price and >uantity in the mar'et e>uilibrium& a7ecting both the allocation of output and the distribution of income. -t dispensed with the labor theory of value inherited from classical economics in favor of the marginal utility theory of value on the demand side and a more general theory of costs on the supply side.
"&F%E* M"%S$"&& -dominant /gure in Dritish economics from about 89:E until his death in 8:. %is specialty was microeconomics-the study of individual mar'et and industries& as opposed to the study of the whole economy.
0ENESI"N ECONOMICS -published the great wor' (The eneral Theory of *mployment nterests of money -1eynes famously remar'ed (this long run is misleading guide to current a7airs. n the long run we are dead. *conomists set themselves too easy& too useless a tas' if in tempestuous season they can only tell us that when the storm is long past the ocean is ?at again.
#$E 1O%&* OF ECONOMICS "N* I#S SIGNIFIC"NCE
Economics' may appear to be the study of complicate tables and charts& statistics and numbers& but more speci/cally& it is the study of what constitutes rational human behavior in the endeavor to ful/ll needs and wants. -comes from the ree' word ()1A"),A meaning household management. #e/nitions are as follows0 GFajardo& it is the proper allocation and e$cient use of available resources for the ma5imum satisfaction of human wants. G Samuelson& it is the study of how societies use scarce resources to produce valuable commodities and distribute them among di7erent people. G "ordhaus& it is the science of choice. t studies how people choose t use scarce resources or limited productive resources 3labor& e>uipment& technical& 'nowledge4 to produce various commodities and to distribute these commodities to consumption.
GSicat& as a scienti/c study which deals with how individuals and society in general ma'e choices. G+astillo& as the study of how man could best allocate and utili@e the scarce resources of society to satisfy his unlimited want. G;ebster& as a branch of 'nowledge that deals with the production& distribution and consumption of goods and services.
Importance of Economics -*conomics is impEortant in order to understand problems facing the citi@en and the family& to help government promote growth and improve the >uality of life while avoiding depression and in?ation and to analy@e fascinating patterns of social behavior.
#he Nature of Economics G*conomics is a science. A science is a body of systematic 'nowledge built upon by conscious e7orts.& arrived after a long series of observations and e5perimentations. ,ade up of di7erent e5planations& called theory. Facts and events about our material life. G*conomics is classi/ed as a social science because it deals with the study of man6s life and how he lives with other men.. concerned with human beings and his behavior. nterdependent with other sciences li'e =sychology& the science of mind. %istory& the science that records and e5plains past eventsH Sociology& the science that deals with the development of societyH =olitical Science& the science of governmentH eography& the science that determines the main resources of a region. 2eligion& traditions and belief can discourage or encourage economic development.
#he Economic En.ironment an its process Branches of Economics Macroeconomics' deals with the economic behavior of the whole economy or its aggregates such as government& business and household. •
+oncerned with the discussion of topics li'e gross national product& level of employment& national income& general level of prices& total e5penditures&etc. t is also 'nown as employment and income analysis.
Microeconomics' deals with the economic behavior or individual units such as the consumers& /rms and the owners of the factors of production. Divisions of Economics
23 Prouction'refers to the process of producing or creating goods needed by the households to satisfy their needs. The factors of production are called inputs and the goods and services that have been created are called outputs of production. 43 *istri5ution' refers to the mar'eting of goods and services to di7erent economic outlets for allocation to individual consumers. n monetary terms& this is the allocation of income among persons or households. 63 E7change' process of transferring goods and services to a person or persons in return for something. At present& the medium of e5change used in the mar'et is money. 83 Consumption' refers to the proper utili@ation of economic goods. %owever& goods and services could not be utili@ed unless you pay for it. 93 Pu5lic Finance' pertains to the activities of the government regarding ta5ation& borrowings& and e5penditures. #eals with the e$cient use and fair distribution of public resource in order to achieve ma5imum social bene/ts. Tools of Economics 23 &ogic' a science that deals with sound thin'ing and reasoning. Facts and proofs should be presentedH otherwise such reasoning will be clouded by an iota of doubt. ;ith the wise application of logic& one may be able to arrive at a conclusion. 43 Mathematics' a science that deals with numbers and their operations. To >uantify population& income& national product& aggregate number of /rms& etc. 63 Statistics' a branch of ,athematcs dealing with the analysis and interpretation of numerical data. #eals with the process of collectiong& tabulating and analy@ing data to test the validity of a certain hypothesis. #$E INP+#S OF P%O*+C#ION The Economic Resources 23 &an' consist of free gifts of nature which includes all natural resources above& on& and below the ground such as soil& rivers& la'es& oceans& forests& mountains& mineral resources and climate. 43 &a5or' termed as human resources. 2efers to all human e7orts& be it mental or physical that help to produce want satisfying goods and services. 63 Capital' a /nished product& which is used to produce goods. +onsists of all man-made aids to further the production process such as tools& machinery and buildings. Serves as an investment. 83 Entrepreneur' a French word meaning enterpriser. s the organi@er and coordinator of the other factors and production0 land labor and capital. %e is one who is engaged in economic underta'ings and provides society with goods and services it needs. 93 Foreign E7change' refers to the dollar and dollar reserves that the economy has. Classication of Inputs
23 Fi7e Inputs' are inputs that do not change with the volume of production. This means& whether you produce or not& these factors of production are unchanged. *.g Land and capital. 43 ,aria5le Inputs' inputs change in accordance with the volume of production. "o production& no variable inputs. *.g labor and entrepreneur. Production Function -states the relationship between the inputs used and the outputs produced. IJ f354
Signicance of the Production Function Stage 2' there is an increasing rate of production. Stage - there is a decreasing rate of production. Stage K- total output decreases even though inputs continue to increase. This is called the stage of negative production. Law of #iminishing 2eturn.
&a of *iminishing %eturn •
Also 'nown as the Law of #iminishing ,arginal =roductivity. t is a basic law of economics and technology. The law states that0 (when successive units of a variable input 3li'e farmers4 wor' with a /5ed input 3li'e one hectare of land4& beyond a certain point& the additional product 3output4 produced by each additional unit of variable input decreases.
#$E P%O*+C#ION POSSI/I&I# F%ON#IE% (PPF! PPF' represents the point at which an economy is most e$ciently producing its goods and services& and therefore allocating its resources in the best way possible. Importance of PPF t illustrated the de/nition of economics as the science of choosing what goods to produce. t provides a rigorous de/nition of scarcity. t shows the outer limit of producible goods dictated by the law of scarcity. Scarcity is a re?ection of the limitation on our living standards imposed by the ==F. t can also illustrate the three basic problems o economic life- what how and for whom. t can also illustrate the general point that we are always choosing among limited opportunities.
Opportunit- Cost' is the value of what is foregone in order to have something else. #$E ECONOMIC MO*E&S "N* #$E F&O1 OF P%O*+C#ION #he Economic S-stem
-simply means the organi@ation of economic society with reference to the production& e5change& distribution and consumption of wealth -is the way the economic units are organi@ed to ma'e decisions on the economic problems of society
#he /asic Economic Pro5lems Scarcity-refers to the tension between our limited resources and our unlimited wants and needs.
2! 1hat to prouce' the system must determine the desires of the people. oods and services to be produced are based on the needs of the consumers. Factors to consier in proucing goos an ser.ices: Availability of resources =hysical *nvironment +ustoms and traditions of the people 4! $o much to prouce' The system must 'now how much of the chosen goods should be produced. t must determine how many of these buyers are willing to but the goods and services produced by the economy. 6! $o to prouce' *>ually important is the system6s tas' of selecting the proper combination of economic resources in producing the right amount of output. 8! For hom shall goos an ser.ices 5e prouce;' has something to do with the problem of distribution.
Speciali
•
Dy using speciali@ation& a country& instead of dividing up its resources could concentrate on the production of the one thing that relative to itself& it can do best. #etermining how countries e5change goods produced by a comparative advantage. (The best for the best is the bac'bone of international trade theory. This is considered an optimal allocation of resources& whereby economies& in theory would no longer be lac'ing any of their needs.
"5solute ".antage •
A country or an individual can produce more than another country& even though both have the same amount of inputs.
#-pes of Economic S-stem 23 #raitional Econom-' also 'nows as the subsistence economy. n this type of economy& people produce goods and services for their own consumption. #ecisions are based on customs and traditions and the production techni>ues are outmoded and sometimes obsolete.
43 Comman Econom-' under this system& the government ta'es hold of the economy of the State. The gov6t does policy formulation& economic planning and decision-ma'ing. 63 Market S-stem' business enterprises are owned and controlled by private individuals. )ne of the major features of this system is (free enterprise meaning that any individual can engage in any enterprise. 83 Mi7e Econom-' mi5ture of di7erent types of economy. =rivate and overnment.
#he Circular Flo of Economic "cti.ities %elate Economic Concepts: 23 Flo' >uantity measured over a particular period of time. *.g income 43 Stock' >uantity measured at a given point in time. *.g wealth 63 Circular Flo' movement of economic activities that is ta'ing place in the economic system. 83 Market' a place where buyers and sellers interact together and are eventually engaged in e5change. 93 Economic %esources' factor of production or inputs to production 3land& labor& capital4 =3 /asic Nees' needs of a man re>uired for his survival li'e food& clothing and shelter. >3 Goos' yields satisfaction to someone. Tangible in form of material goods& ntangible in form of services. Classi?cation of Goos (accg3 #o use! : Consumer Goos' goods that are ready for consumption Capital Goos' goods that are used in furtherance of production
Essential goos' are goods used to satisfy the basic needs of man &u7ur- goos' are goods that give something or add pleasure and comfort& but not absolutely necessary. n general& goods are classi/ed as0
Economic goos' have values or price attached to it Free goos- need no payment O+#F&O1S "N* INF&O1S OF #$E CI%C+&"% F&O1 #he Out@os an In@os Factors that aAect the ini.iual consumer not to utili
Imports' goods bought by the =hilippines from other countries. An out?ow is a ?ow of income that goes out of the circular ?ow. To bring bac' the funds to the circular ?ow0 In.estment' it constitutes a spending decision that results in the use if output and productive resources. Go.ernment E7penitures' the gov6t. collects ta5es to defray e5penses or its infrastructure projects and other economic development projects. E7ports' products purchased by the country from other countries are reciprocated by foreign countries by buying our products.
*e@ation - too much out?ows of money in our economy In@ation- too much in?ows of money in our economy ECONOMIC S#%"#EGIES O5Becti.es of Monetar- Polic To maintain internal and e5ternal monetary stability in the =hils. And to preserve the international value of the peso and its convertibility to other freely convertible currencies To foster monetary& credit and e5change conditions conducive to a balanced and sustainable growth of the economy. #ools of Monetar- Polic23 %euire %eser.es' lending behavior of commercial ban's 43 %eiscounting' prerogatives from being the ban'ers of ban's. 63 Open Market Operations' participating in the purchase and sale of government securities in active money mar'et. 83 Selecti.e Creit Control' this tool lets the DS= selects the 'ind of credit it will give to clients. t tries to prioriti@e its lending activity either to production or consumption. 93 Moral Suasion' this tool tries to test the persuasive ability of the +hairman of the ,onetary Doard and the overnor of the DS=. Fiscal Polic-Accdg. To Villegas and Abola& /scal policy necessarily concerns itself with the manipulation of the in?ows 3gov6t spending4 and out?ows 3ta5es4 of the government sector. -is an instrument which can push the economy towards e>uilibrium& when there are dise>uilibriating elements operating in the economy.
#a7ation: " #ool of Fiscal Polic#a7ation' referred to as the inherent power of the State& acting through the legislature& to impose and collect revenues for the purpose of supporting the government and its recogni@ed objects.
FO%EIGN #%"*E PO&IC' is a set of activities that tends to manipulate imports and e5ports of the economy. t controls the level of money supply in its desired level through e5port and import. Price eAect of Import an E7port mports tend to bring down domestic prices by bringing into the system more /nished goods or raw materials for processing into /nal goods& at the same time they bring out funds. *5ports- opposite e7ect
#ools of Foreign #rae Polic23 "ministrati.e or E7change Control' a tool that tries to avoid the dollar de/ciency by controlling its sale. 43 E7change rate %egimes' The price of the dollar in terms of pesos is 'nown as the e5change rate. #ollar can be sold or bought in the mar'et at a speci/c price at a given time. #hree t-pes of e7change rate: Fle7i5le e7change rates' e5change rates of dollars to pesos is determined by the demand and supply of dollars. Fi7e e7change rates' a tool where the rate of e5change is /5ed by monetary authorities for e5tended period of time. Multiple e7change rates' another system by which the foreseen balance of payments problems may be solved is to have a multiple e5change rate and have buyers and sellers transact at di7erent e5change rates. 63 #ariAs an Su5siies' Tari7s are ta5es imposed on imports which are based on either the value of the product 3ad valorem4 or on the physical unit of measure. /"SIC OF *EM"N* "N* S+PP& *eman' means the desire for a particular good bac'ed up by su$cient purchasing power. -t is also the schedule of various >uantities of commodities which buyers are willing to purchase at various prices in a given time and place. •
•
=otential #emand- not bac'ed up by the ability to pay or no purchasing power *7ective #emand- bac'ed up by the ability to pay
*eman Scheule' re?ects the >uantities of goods and services demanded at di7erent prices. #he &a of *eman -may be stated as (the >uantity of commodity which buyers will buy at a given time and place will vary inversely with the price. =rice increase& demand decrease. =rice decrease& demand increase.
General tenencies: Income eAect' at lower prices& an individual has a greater purchasing power. ;e can buy more goods and services but at higher prices& we can buy less. Su5stitution eAect' we tend to buy goods with lower prices. n case the price increases& we loo' for substitute whose prices are lower. *eterminants of *eman 23 Income' =eople buy more goods and services when their income increases& but will buy less if their income decreases. +hanges of income will change their demand for goods and services. 43 Population' more people means more demand for goods and services. 63 #astes an Preferences' demand for goods and services increases when people li'e or prefer them. 83 Price e7pectations'when people e5pect the prices of goods& they will buy more of these goods. 93 Prices of relate goos' when the price of a certain good increases& people tends to buy substitute products. #he Ceteris Pari5us "ssumption -(assuming that the determinants of demand are constant& price and >uantity demanded are inversely proportional to each other.
Changes in *eman' refer to the shift of demand curve which is brought about by the changes in the determinants of demand& li'e income& population& price e5pectation and so forth. Changes in Duantit- *emane - indicate the movement from one point to another point. This means& the demand curve does not change its position li'e that of the demand curve in the changes in demand.
#he &a of Suppl'
states that the >uantity o7ered for sale will vary directly with price.
Suppl-' is the schedule of various >uantities of commodities which producers are willing and able to produce and o7er at various prices in a given time and place. -in other words& it is the amount of goods and services available for sale at given prices in a given period of time and place.
Suppl- Scheule' shows the di7erent >uantities that are o7ered for sale at various prices. t may re?ect the individual schedule of only one producer or the mar'et schedule showing the aggregate supply of a group of sellers or producers.
*eterminants of Suppl-
23 #echnolog-' refers to techni>ues or methods of production. 43 Cost of Prouction 63 Num5er of Sellers' more sellers or more factories means an increase in supply. Vice versa 83 #a7es an Su5siies 93 1eather Changes in Suppl-' pertains to a shift of supply curve brought by changes in the determinants of supply. Changes in Duantit- Supplie' show the movements from one point to another point in a constant supply curve.
#$E M"%0E# ED+I&I/%I+M Euili5rium of *eman an SupplElasticit- of *eman an SupplOther concepts of elasticit-: 23 Elasticit-' is a measure used in response to changes in the determinants of demand and supply. 43 Price Elasticit-' a measure used in determining the percentage change in >uantity against the percentage change in price. 63 Income Elasticit-' the percentage change in >uantity compared to the percentage change in income. 83 Cross Elasticit-' the percentage change in >uantity of one good compared to the percentage change in the price of related goods. Price Elasticit- of *eman' refers to the degree of reaction or response of the buyers to changes in price of goods and services. To derive the price elasticity of demand& we use the formula *pJ -8 8 =-=8 =8
#-pes of Elasticit23 Elastic'when a percentage change in price leads to a proportionately greater percentage change in >uantity demanded. 43 Inelastic' when a percentage change in price results a proportionately lesser change in price evo'es less than one percent change in >uantity demanded. 63 +nitar-' when a percentage change in price leads to a proportionately e>ual percentage change in >uantity demanded. The coe$cient of elasticity is e>ual to 8. 83 Perfectl- elastic' at a given price& percentage change in >uantity demanded can change in/nitely.
93 Perfectl- inelastic' a percentage change in price creates no change in >uantity demanded. "o change in the >uantity of demand. The coe$cient is @ero. Price Elasticit- of Suppl-' is also the response of >uantity o7ered for sale for every change in price. Formula0
EAect of Elasticities on Market Euili5rium ' For demand& the more elastic the new demand is& the less will be the increase in price& and the greater will be the e5pansion of >uantity sold. ' For supply& the less elastic the supply is the higher the increase in price and the smaller the >uantity increase will be& while the more elastic supply is& the less will be the increase in price and the greater the increase in >uantity sold. Income Elasticit' The +oe$cient of income elasticity measures a product6s percentage change in >uantity as a ratio of the percentage change in income which caused the change in >uantity. Formula0
Cross Elasticit' The coe$cient of cross elasticity of demand relates a percentage change in >uantity demanded of ood A in response to a percentage change in the price of ood D. Thus& Formula0
