Chapter 1 Resource Utilization and Economics

Resource Utilization and Economics

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Economics. . . . . . The word economics comes from a Greek word “oikos” – meaning household and “nomus” – meaning system or management. Oikonomia or oikonomus therefore means the management of household.

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Economics. . . • With the growth of the Greek society until its development into city-states, the word became known or was referred to as state management. • Consequently, the term “management of household” now pertains to the microeconomic branch of economics, while the phrase “state management” presently refers to the macroeconomic branch. Copyright © 2004 South-Western/Thomson Learning

Basic Economic Questions • A household and an economy face many decisions: • • • •

What to produce? How to produce? How much to produce? For whom to produce?

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What to produce?

An island nation blessed with agricultural resources can take advantage of natural resources by producing agricultural goods and provide tourism service. It should not opt to produce gadgets because its resources are incapable. Copyright © 2004 South-Western/Thomson Learning

How to produce? Labor-intensive production Uses more human resource or manual labor in producing goods and services than capital resources. This is advisable to a society with large population. (ex. Philippines, China, Indonesia, Thailand)

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How to produce? Capital-intensive production Employs more use of technology and capital goods like machineries and equipment in producing goods and services rather than the use of labor resources. (ex. Japan, Germany, USA)

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How much to produce? • Identify the quantity of goods and services to be produced in order to address the demand of man and society as a whole. • Underproduction (shortage) results to a failure to meet the needs and wants of society. • Overproduction (surplus) results to excess supply of goods and services which may just go to waste.

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How much to produce? • The Philippines faces a looming energy crisis, and general concern for electricity supply (and price) has been a feature in the Philippines for years.

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How much to produce? • More energy-efficient products were produced.

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For whom to produce? Type of Market Segment Demographic Segment Psychographic Segment Use-based Segment Benefit Segment

Geographic Segment

Shared Group Characteristics Measurable statistics such as age, income, occupation, etc. Lifestyle preferences such as music lovers, city or urban dwellers, etc. Frequency of usage such as recreational drinking, travelling, etc. Desire to obtain the same product benefits such as luxury, thriftiness, comfort from food, etc. Location such as home address, business address, etc. Copyright © 2004 South-Western/Thomson Learning

For whom to produce? • Cartoon programs launched on TV for children featuring Spongebob series and Walt Disney animation. (demographic segmentation)

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For whom to produce? • Psychographic segmentation:

luxury

practicality

environment

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SCARCITY Society Societyand andScarce ScarceResources: Resources: The Themanagement managementof of society’s society’s resources resourcesisisimportant importantbecause because resources resourcesare arescarce. scarce. Scarcity. Scarcity... ..means meansthat thatsociety society has haslimited limitedresources resourcesand and therefore thereforecannot cannot produce produceall allthe the goods goodsand andservices servicespeople peoplewish wishto to have. have.

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Interdependence: Solution to Scarcity • Individuals and countries should specialize in producing things in which they have a comparative advantage and then trade with other countries that specialize in something else. This trade is mutually beneficial.

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Samples of Famous Japan Brands

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Samples of Famous U.S.A. Brands

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Samples of Famous Philippines Brands

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TEN PRINCIPLES OF ECONOMICS Economics Economics is is the the study study of of how how society society manages manages its its scarce scarce resources. resources.

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TEN PRINCIPLES OF ECONOMICS • How people make decisions. • People face tradeoffs. • The cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives.

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TEN PRINCIPLES OF ECONOMICS • How people interact with each other. • Trade can make everyone better ex: Make or buy? off. • Markets are usually a good way to organize economic activity. • Governments can sometimes improve economic outcomes.

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TEN PRINCIPLES OF ECONOMICS • The forces and trends that affect how the economy as a whole works. • The standard of living depends on a country’s production. • Prices rise when the government prints too much money. • Society faces a short-run tradeoff between inflation and unemployment. Copyright © 2004 South-Western/Thomson Learning

Principle #1: People Face Tradeoffs.

“There is no such thing as a free lunch!”

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Principle #1: People Face Tradeoffs. To get one thing, we usually have to give up another thing. • Food v. clothing • Leisure time v. work • Efficiency v. equity

Making decisions requires trading off one goal against another. Copyright © 2004 South-Western/Thomson Learning

Principle #1: People Face Tradeoffs • The 3 Es of Economics • Efficiency means society gets the most that it can from its scarce resources. • Equity means the benefits of those resources are distributed fairly among • Effectivenes means the members of society. attainment of goals and objectives. Copyright © 2004 South-Western/Thomson Learning

Principle #1: People Face Tradeoffs • Indicate whether the following examples refer to Efficiency, Equity, or Effectiveness: With the use of both means of production such as manual labor and technological advancement, whatever the output is, the firm is enable to address the consumption needs of society and the rest of the world. EFFECTIVENESS

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Principle #1: People Face Tradeoffs • Indicate whether the following examples refer to Efficiency, Equity, or Effectiveness: Due to the presence of new equipment and machineries, manual labor may no longer be necessary, and this can result in the retrenchment or displacement of workers. EQUITY

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Principle #2: The Cost of Something Is What You Give Up to Get It. • Decisions require comparing costs and benefits of alternatives. • Whether to go to college or to work? • Whether to study or go out on a date? • Whether to go to class or sleep in?

• The opportunity cost of an item is what you give up to obtain that item.

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Principle #2: The Cost of Something Is What You Give Up to Get It. LA Laker basketball star Kobe Bryant chose to skip college and go straight from high school to the pros where he has earned millions of dollars.

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Principle #3: Rational People Think at the Margin. difference • Marginal changes are small, incremental adjustments to an existing plan of action.

People make decisions by comparing costs and benefits at the margin. Copyright © 2004 South-Western/Thomson Learning

Principle #4: People Respond to Incentives. • Marginal changes in costs or benefits motivate people to respond. • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! Copyright © 2004 South-Western/Thomson Learning

Principle #5: Trade Can Make Everyone Better Off. • People gain from their ability to trade with one another. • Competition results in gains from trading. • Trade allows people to specialize in what they do best. Copyright © 2004 South-Western/Thomson Learning

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. • Households decide what to buy and who to work for. • Firms decide who to hire and what to produce. Copyright © 2004 South-Western/Thomson Learning

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. • Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.

As Asaaresult, result,prices pricesguide guidedecision decisionmakers makers to toreach reachoutcomes outcomesthat thattend tendto tomaximize maximize the welfare of society as a whole. the welfare of society as a whole.

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The Invisible Hand

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Principle #7: Governments Can Sometimes Improve Market Outcomes. Market Market failure failure occurs occurs when when the the market market fails fails to to allocate allocate resources resources efficiently. efficiently. When Whenthe themarket marketfails fails (breaks (breaksdown) down) government governmentcan can intervene interveneto topromote promote efficiency efficiencyand andequity. equity. Copyright © 2004 South-Western/Thomson Learning

Principle #7: Governments Can Sometimes Improve Market Outcomes. • Market failure may be caused by • an externality, which is the impact of one person or firm’s actions on the well-being of a bystander. the market responds in accordance with what they observe from other people.

• market power, which is the ability of a single person or firm to unduly influence market prices.

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Principle #8: The Standard of Living Depends on a Country’s Production. • Standard of living may be measured in different ways: •• By Bycomparing comparing personal personalincomes. incomes. •• By Bycomparing comparingthe the total totalmarket marketvalue value of ofaanation’s nation’s production. production.

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Principle #8: The Standard of Living Depends on a Country’s Production. • Almost all variations in living standards are explained by differences in countries’ productivities. • Productivity is the amount of goods and services produced from each hour of a worker’s time.

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Principle #9: Prices Rise When the Government Prints Too Much Money. • Inflation is an increase in the overall level of prices in the economy. • One cause of inflation is the growth in the quantity of money. • When the government creates large quantities of money, the value of the money falls.

CENTRAL BANK

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Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment. • The Phillips Curve illustrates the tradeoff between inflation and unemployment: Inflation  Unemployment It’s It’s aa short-run short-run tradeoff! tradeoff!

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Fundamental Concepts Three Economics Systems are: 1. Traditional Economy 2. Command Economy 3. Market Economy

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Fundamental Concepts • Traditional Economy  Each individual member produces whatever good or service he or his family needs or wants with no or little concern of the needs and wants of the other members of the economy.

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Fundamental Concepts • Traditional Economy

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Fundamental Concepts • Command Economy  The manner of production is dictated by the government. The government decides on what, how, how much, and characterized by collective ownership of all resources.

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Fundamental Concepts • Command Economy

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Fundamental Concepts • Mixed Economy or Capitalism  Resources are privately owned, and that the people themselves make the decisions. The factors of production are owned and controlled by individuals, and people are free to produce goods and services to meet the demand of consumers, who, in turn, are also free to choose goods according to their own likes. Copyright © 2004 South-Western/Thomson Learning

Fundamental Concepts • Mixed Economy or Capitalism Examples are Hong Kong, Singapore, Australia and the United States. In a free market economy, the law of supply and demand, rather than a central government, regulates production and labor.

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Summary • When individuals make decisions, they face tradeoffs among alternative goals. • The cost of any action is measured in terms of foregone opportunities. • Rational people make decisions by comparing marginal costs and marginal benefits. • People change their behavior in response to the incentives they face.

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Summary • Trade can be mutually beneficial. • Markets are usually a good way of coordinating trade among people. • Government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable.

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Summary • Productivity is the ultimate source of living standards. • Money growth is the ultimate source of inflation. • Society faces a short-run tradeoff between inflation and unemployment.

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