ECONOMIC WAY OF THINKING

Scarcity

Scarcity is the basic and central economic problem confronting every society. It is the heart of
the study of economics and the reason behind its establishment.

Our inability to satisfy all our wants is called scarcity. The ability of each of us to satisfy our
wants is limited by the time we have, the incomes we earn, and the prices we pay for the things we buy.
These limits mean that everyone has unsatisfied wants. The ability of all of us as a society to satisfy our
wants is limited by the productive resources that exist. These resources include the gifts of nature, our
labor and ingenuity, and the tools and equipment that we have made.

Everyone, poor and rich alike, faces scarcity. A student wants Beyonces latest album and a
paperback but has only $10.00 in his pocket. He faces scarcity. Brad Pitt wants to spend a week in
New Orleans discussing plans for his new ecofriendly housing and he also wants to spend the week
promoting his new movie. He faces scarcity. The U.S. government wants to increase defense spending
and cut taxes. It faces scarcity. An entire society wants improved health care, an Internet connection in
every classroom, an ambitious space exploration program, clean lakes and rivers, and so on. Society
faces scarcity.

Faced with scarcity, we must make choices. We must choose among the available alternatives.
The student must choose the album or the paperback. Brad Pitt must choose New Orleans or
promoting his new movie. The government must choose defense or tax cuts. And society must choose
among health care, computers, space exploration, the environment, and so on. Even parrots face
scarcity!

Origin of the term economics

The two Greek roots of the word economics are oikos meaning household, and nomus or
nomia meaning system or management. Oikonomia or oikonomus therefore means management of
the household. With the growth of the Greek society until its development into city-states, the word
became known 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 of economics (Fajardo, 1997).

What is the relationship between Economics and Scarcity?

The problem of scarcity gave birth to the study of economics. Their relationship is such that if
there is no scarcity, there is no need for economics. The study of economics was essentially founded in
order to address the issue of resource allocation and distribution, in response to scarcity.

Ceteris Paribus Assumption

Ceteris paribus means all other things held constant or else equal is important in studying
economics. This assumption is used as a device to analyze the relationship between two variables
while the other factors are held unchanged. It is widely used in economics as an exploratory technique
as it allows economists to isolate the relationship between two variables. For instance, with the
question: what is the impact of a change in the price of diesel fuel on consumption behavior, ceteris
paribus (or other things remaining constant)?

Example of Syllogism: The price of diesel fuel goes up. Public utility jeepneys (PUJs) use
diesel fuel. Therefore, the cost of operating a PUJ will also increase.

Ceteris paribus, the increase in the price of fuel will also lead to an increase in the price of
electricity.

Economics

Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity, the incentives that influence those
choices, and the arrangements that coordinate them. The subject has two broad parts:
Microeconomics, and Macroeconomics.

Microeconomics is the branch of economics which deals with the individual decisions of units
of the economy firms and households, and how their choices determine relative prices of goods and
factors of production. The market is the central concept of microeconomics. It focuses on its two main
players- the buyer and the seller, and their interaction with one another. It operates on the level of the
individual business firm, as well as that of the individual consumer. It concerns how a firm maximizes its
profits, and how a consumer maximizes his/her satisfaction.

Among the topics discussed in microeconomics are the theories of demand and supply,
elasticity of demand and supply, individual decision making, theories of production, output and cost of
firms, a firms profit maximization objective, different types of business organizations, and kinds of
market structures.

Macroeconomics is the branch of economics that studies the relationship the relationship
among broad economic aggregates like national income, national output, money supply, bank deposits,
total volumes of savings, investment, consumption expenditure, general price level of commodities
government spending, inflation, recession, employment, and money supply. The term macro implies
that it seeks to understand the behavior of the economy as a whole.

Macroeconomics focuses on the four specific sectors of the economy: the behavior of the
aggregate household (consumption); the decision-making of the aggregate business (investment); the
policies and projects of the government (government spending); and the behavior of external/foreign
economic agents, trough trading (export and import).

Moreover, macroeconomics also discusses the measurement of gross national product and
gross domestic product, the business cycle, the five macroeconomic goals, money and the economy,
monetary and fiscal policies, and the economic growth and development.

Goods and Services

Goods and services are the objects and actions that people value and produce to satisfy
human wants. Goods are objects that satisfy wants. Running shoes and ketchup are examples.
Services are actions that satisfy wants. Haircuts and rock concerts are examples. We produce a
dazzling array of goods and services that range from necessities such as food, houses, and health
care to leisure items such as Blu-ray players and roller coaster rides.

Positive and Normative Economics

Positive economics is an economic analysis that considers economic conditions as they are,
or considers economics as it is. It uses objective or scientific explanation in analyzing the different
transactions in the economy. It simply answers the question what is.

Examples of positive statements:

1. The economy is now experiencing a slowdown because of too much politicking and
corruption in the government.

2. The economy is now on a slowdown because the world is experiencing a financial and
economic crisis. Other reasons are also due to the financial problem of the US, increase on the prices
of crude oil and lack of investors or capital deficiency.

On the other hand, normative economics is economic analysis which judges economic
conditions as it should be. It is the aspect of economics that is concerned with human welfare. It deals
with ethics, personal value, judgments and obligations analyzing economic phenomena (Kapur 1997). It
answers the question what it should be. It is also referred to as policy economics because it deals with
the formulation of policies to regulate economic activities. (Omas-as 2008).

Examples of normative statements:

The Philippine government should initiate political reforms in order to regain investor
confidence, and consequently uplift the economy.

In order to minimize the lash of global recession, the Philippine government should release a
stimulus package geared towards encouraging economic productivity.

Importance of Studying Economics

1. To understand the Society. Economics seeks to analyze transactions made by the society
and its members, particularly with regards to details on their behavior and decision making (Case
2003).
 2. To understand Global Affairs. Economics seeks to explain the internal operation and trade
policies of countries. It also measures the competitiveness of each country and identifies its
comparative advantage in relation to other states (Case 2003).

3. To be an Informed Voter. An understanding of economics develops individuals to be

wise voters. Knowledge of economics provides with an understanding of economic policies that are apt
for the states current situation. With this in mind, voters have an informed choice in selecting leaders
based on their economic, social, and political platform, rather than on their apparent popularity.

3 Es in Economics

Efficiency refers to productivity and proper allocation of economic resources. It also refers to
the relationship between scarce factor inputs and outputs of goods and services. This relationship can
be measured in physical terms (technological efficiency) or cost terms (economic efficiency). Being
efficient in the production and allocation of goods and services saves time, money, and increases a
companys output.

Equity means justice and fairness. Thus, while technological advancement may increase
production, it can also bear disadvantages to employment of workers. Due to the presence of new
equipment and machineries, manual labor may not be necessary, and this can result in the
retrenchment or displacement of workers.

Effectiveness means attainment of goals and objectives. Economics is an important and

functional tool that can be utilized by other fields. For instance, with the use of both productions
(through manual labor or through technological advancements), whatever the output is, it will be useful
for the consumption of the society and the rest of the world.

Important Economic Terms

1. Wealth refers to anything that has a functional values (usually in money), which can be traded for
goods and services. Wealth, therefore, is the stock of net assets owned by individuals or households.
2. Consumption this refers to the direct utilization or usage of the available goods and services by
the buyer or the consumer sector. It is also the satisfaction obtained by consumers for the use of goods
and services.
3. Production it is defined as the formation by firms of an output (products or services). It is the
combination of land, labor and capital in order to produce outputs of goods and services.
4. Exchange this is the process of trading goods and services for money and its equivalent. It also
includes the buying of goods and services either in the form of barter or through market.
5. Distribution this is the process of allocating or apportioning scarce resources to be utilized by the
household, the business sector, the government, and the rest of the world. In specific term, it refers to
the process of storing and moving products to customers often through intermediaries such as
wholesalers and retailers (Pass and Lowes 1993).

The Concept of Opportunity Cost

Opportunity cost refers to the foregone value of the next best alternative. It is the value of what
is given-up when one makes a choice. The thing thus given-up is called the opportunity cost of ones
choice.

When one makes a choice, there is always an alternative that has to be given up. A producer,
who decides to produce shoes, give up another goods that he could have produced using the same
resources. A student who buys a book with his limited allowance gives up the chance of eating out or
watching movie.

Opportunity cost is expressed in relative price. This means that the price of one item should be
relative to the price of another.

Example:

If the price of Coke is P20.00 pr bottle and one piece of cupcake is P10.00, then the relative
price of Coke is 2 pieces of cupcake. If a consumer only has P20.00 and chooses to buy a bottle of
Coke with it, then we can say that the opportunity cost of that bottle of Coke was the 2 pieces of
cupcake assuming that the cupcake was the next best alternative.