Economics

Economics Economics – a social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society. It deals with the two extremes: scarce resources and unlimited human wants. Scarcity – the condition wherein most things that people want are available only in limited supply Economic Goods – anything either a physical commodity or a service which yields utility and which can command a price if bought or sold in the market Opportunity Cost – the cost of choosing to use resources for one purpose measured by the sacrifice of the next best alternative for using these resources Fundamental Economic Problems 1. What and how much to produce 2. How goods and services shall be produced 3. How the goods and services shall be distributed Types of Economic Systems 1. Capitalism – mainly characterized by private individuals owning and operating the majority of business that produce goods and services and buy and sell goods; solutions to economic problems are determined by competition and consumer demand a. Characteristics: i. All economic decisions are made with no government intervention ii. Competition serves to determine the goods and services needed by society iii. Competition determines who will survive in the market place b. Rights: i. Right to private property ii. Right to earn profit iii. Right to engage in business iv. Freedom to choose 2. Communism – the government owns ALL nation’s resources; opposite of capitalism 3. Socialism – government owns and operates the basic industries; citizens are allowed to operate small business 4. Mixed Economy – one that has elements of two or more economic systems Economic Resources 1. 2. 3. 4.

Land Labor Capital Entrepreneurial ability

Task of the Entrepreneur 1. Organize production

Economics 2. Make business decisions 3. Bear the risk of decisions 4. Innovates Economic Goals 1. 2. 3. 4. 5.

Economic growth Full employment Economic efficiency Price level stability Economic freedom

Circular Flow of Economic Activity Two Basic Activities: 1. Production 2. Consumption Stock and Flow Concepts 1. Stock – the measure of quantity at a point in time. It is an accumulation of a commodity like gasoline in a fuel tank 2. Flow – the measure of movement of quantity over a period of time. (Income represents money earned per year and is also a flow) The Circular Flow Goods and Services

Expenditures Business es

Individ uals Income

Labor The basic aspects of economy which include production and consumption are subject to the stock and flow concepts which are circular in nature as shown. Production Process Economic resources of land, labor and capital are provided by the household and used by the firms and produced returned to the household for consumption. Business firms have the same circular flow.

Economics Flow Between Households and Firms Good and Services Consumer expenditures Firm

Househol Wages, rents, Dividents Factors for production

According to Type of Goods Produces 1. Raw materials producers (Agri products, fish, wood, sugarcane) 2. Intermediate goods producers (construction materials, food seasoning, guitar string, etc.) 3. Final goods producers (chocolate bars, coffee, refrigerators, TV, bicycles, etc.) Income Flow When money is spent by households for consumption and by firms for production, a circular flow of income created. Concept of Equilibrium If the amount received by firms from households is equal to the amount received by households from firms. Disequilibrium happens when either household or firms do not spend all their income. Basic Elements of Supply and Demand Market – exists when buyer wishing to exchange money for a good or service are in contact with sellers wishing to exchange goods and services for money; place for transactions Market Demand – buyer’s willingness and ability to pay a sum of money for some amount of a particular good or service Market Made Up Of: 1. Sellers 2. Buyers The action and decision of buyers dictates demand for a product or service Quantity Demanded Depends On: 1. 2. 3. 4. 5.

Needs Preferences Income level Expectations Prices of related commodities

Economics 6. Buyer’s situation But all the mentioned factors, the most important to consider is PRICE. The relationship between price and quantity demanded is the subject of the law of demand. In simple term, The law of demand indicates that “the quantity of any good which buyers are ready to purchase varies inversely with the price of the good.” Non-Price Determinants of Demand 1. 2. 3. 4. 5. 6.

Average income of consumers Size of the market Price and availability of related goods Preference or taste Special influences Expectations about future economic conditions

Demand Curve

Increa

Price

Decrea

Quantity Supply Curve

Price

Decrea Increa

Quantity Non-Price Determinants of Supply 1. 2. 3. 4. 5.

Cost of production Number of suppliers Prices of goods and services related in production Taxes and subsidies Technology

Market Equilibrium -

Suppl

Supply and demand are opposing forces Pric that must be considered Dema Quantit