SS4 LT1 Reviewer

SS4 LT1 Reviewer Ferdinand B. Sta. Ana, Jr. IV - Electron

Significance of Economic Study • • • •

Questions to ponder: Why study economics? Advantages of economic knowledge? Is economic knowledge a necessity? What is the role of economics in day-to-day life in the context of the next century?

//As you have may noticed, these are just questions from the course outline :D

Economics • is the social science dealing with the optimal allocation of scarce resources with alternative uses for the production of goods or services, its distribution and eventual consumption by society for its welfare

Macroeconomics • Economic growth and stability • Economy as a whole

Microeconomics • Consumer and firm behavior • Individual people and individual firms

As a social science • Economics is a social science in the sense that it analyzes the behavior and organization of the members of society to sustain their individual and collective material needs and wants

Approaches? Scientific? • The use of scientific method

//research more. Sorry! 

Limiting unsound economic reasoning • By identifying pitfalls in economic reasoning, so that we will not be trapped in them: – Post hoc fallacy: the fallacy of confusing sequence with causation (ex. Event A – election of someone, Event B – recession; A few months after Event A, Event B happens. Next election, new candidate uses political propaganda that Event A caused Event B without sound proof/reason)

– Fallacy of composition: incorrect assumption that what is true for one is true for all (ex. Standing up in a concert to get a better view) – Failure of ceteris paribus: making conclusions without taking into consideration changes in other factors that may have had an effect on your supposed claim. – Subjectivity

Why do economists disagree? • •

Economists may disagree about the validity of alternative positive theories about how the world works. Economists may have different values and, therefore, different normative views about what policy should try to accomplish.

Positive Economics

Normative Economics

• •

• •

describe the world as it is Resolved by reference to analysis and empirical evidence

prescribe how the world should be Involves ethics and values rather than facts

Efficiency • The proper use of resources resulting in the maximization of benefit to society • Absence of waste • Shortcuts • Pareto optimum: “You cannot produce more of something without decreasing the production of something else” • Inefficiencies: – Underutilized resources – Inefficient organization (ex. PH government)

Efficiency VS Effectiveness Efficiency • Shortcuts • Process-oriented

Effectiveness • Character building • Goal-oriented

Law of Scarcity • Limited supply of goods/services, unlimited wants • Note: low accessibility –x> scarcity Needs vs Wants vs Demands

Need/want: • Willingness to buy • Ability to buy

𝑙𝑖𝑚𝑖𝑡𝑒𝑑 𝑔𝑜𝑜𝑑𝑠 + 𝑢𝑛𝑙𝑖𝑚𝑖𝑡𝑒𝑑 𝑤𝑎𝑛𝑡𝑠 = 𝑠𝑐𝑎𝑟𝑐𝑖𝑡𝑦 *Opportunity cost – cost of best alternative forgone

Factors of Production

sources of competitive advantage input

output

Production process

Old

New

• Natural Resource/Land • Labor • Kapital – produced goods used for further production of another good

• Entreprenuership – Innovative • “not the presence of a certain resource, but the absence of it” – pushes people to make use of available resources in unconventional ways • It doesn’t matter if you have a lot of resources. What matters more is what you do with them

– Risk takers

• Knowledged worker – Professionalism, rather than # of workers

• Technology – Kapital is easily replicated while Technology is difficult to replicate

Goods VS Services Goods • Tangible *Some believe that good = a bundled service ** bundled = physical manifestation of the intangible service

Services • intangible

Alternative Economic Systems • • • •

Custom – tradition Command – government Market – private sector (firms and buyers) Mixed

*Answer the problems of economic organization using each AES -> What to produce and in what quantities? -> How are they going to be produce? -> For whom are they produced?

Production-Possibility Frontier • graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

The Market Economy

An arrangement in which buyers & sellers interact to determine prices & quantity of goods/services that are either bought/sold

• • • • •

Run by invisible hand (Adam Smith, 1776 in “An Inquiry Into the Nature and Causes of the Wealth of Nations”) Pursuing/following self-interest inevitably leads to the creation of common good Common good out of selfish motives “to do good, don’t intend to do good” Only works under a particular context -> Perfect Competition = no buyer/seller is large enough to significantly effect market prices. – –

Fixed prices competition No competition -> uncontrollable price

Answering the problems of economic organization using Market Economy • What are produced and in what quantity? – money votes – Limited by Natural resources and especially, technology

• How are they produced? – Most efficient; least waste possible as firms are driven by profit (Profit = Total Revenue – Total Cost)

• For whom are they produced? – Supply and demand interaction in the goods & labor market – Ganito lang isipin niyo. Kung mas mataas yung price ng goods/services kesa dun sa wages ng mga tao sa labor market, sino pang bibili? So, yung certain good na may ganitong price, ibebenta lang nila sa mga tao sa labor markets na may enough wages.

3 Functions of government *in a way, this can be attributed to command economy

• Efficiency: – The market does fail, so the government intervenes – Market failures: • Imperfect competition: – loss of Perfect competition, meaning one buyer/seller can significantly affect prices of good/service

– Why a failure? -> loss of price regulation – Monopoly -> tends to crush sprouting competitions prematurely; public has accepted their produce by virtue of branding – Monopolistic competition -> niche markets (e.g. cars) – Examples of solutions : antitrust laws

• Externality – Imposing cost/benefit on people w/o those people receiving/paying proper compensation (e.g. airplane noise, dynamite fishing, open-toeveryone bridge) – FAIL because externalities don’t have a price, and the market doesn’t understand anything that doesn’t have a price  – Examples of solution: imposing price on externalities

• Public good: Club good

– – – – –

Neither excludable nor rival Unprofitable goods Inefficient if left to firms because firms want profit ($_$) Problem: Free-rider problem Solution: the government provides (e.g. national defense)

Equity • Market produces based on money votes, not on needs. This leads to inequity(unacceptable distribution of income and wealth) • Equity != equality (former: fairness, latter: sameness) Need -based Effort centric

Equity

Performancebased Output centric

Sol’n.: redistribute income (e.g. progressive taxation of income and wealth & income-support or transfer programs*)

*efficiency vs equity -why would they receive something they didn’t work for? -complacency due to reward w/o effort/output done

Stability • Efficient market ->responsive • Responsive -> turbulent prices • Government stabilizes price increase/decrease

Macroeconomic objectives of government *Di ko alam kung kasama to kaya di ko ididiscuss in-depth • Output/Economic growth • Employment • Price stability • Foreign balance • Economic freedom

Government failures *Di ko alam kung kasama to kaya di ko ididiscuss in-depth • Governments can create monopolies • High taxes distort the allocation of resources • Social security threatens to overload workers • Environmental regulation dulls spirit of enterprise • Government attempts in stabilization of economy can lead to inflation

References: • Samuelson, P. A. (2005). Economics. Singapore: McGraw-Hill Education(Asia) • Economics for Dummies, 2nd ed. • MIT Open Courseware: Principle of Microeconomics, Fall 2007 • Mankiw, N. G. (2009). Principle of Economics. Mason, OH: South-Western Cengage Learning