The Nature and Importance

of Economics
The Economic Way of Thinking
Principles that guide economic
thinking
• Everything has a cost.
• People choose for good reason.
• Incentives influence people’s choice.
• Economic systems influence people’s incentives
and choices.
• People gain from voluntary trade.
• People’s choices influence the value of a good or
service.
• People’s choices may have unintended
consequences.
• Choices made today influence what happens
tomorrow.
What is economics?
• A social science concerned with
using scarce resources to obtain
the maximum satisfaction of the
unlimited material wants of
society. (Walsad and Bingham)
The study of how societies use
scarce resources to produce
valuable commodities and
distribute them among different
people.”

-Samuelson and Nordhaus-

•“The study of how people use
their limited resources to try
to satisfy unlimited wants.”

-Parkin and Bade-

What the definitions indicate?

•It points out two important

factors:
•A. scarce resources
•B. unlimited wants
What scarcity means?
It refers to the condition wherein
most things that people want are
available only in limited supply.
The imbalance between our
desires and the means of
satisfying those desires.
What Unlimited Wants mean?

•Wants refers to “a person’s

desire or preferences for
specific ways of satisfying a
basic need.
What is Opportunity Cost?
•It is the cost of choosing to use
resources for one purpose
measured by the sacrifice of
the next best alternative for
using those resources.
FUNDAMENTAL ECONOMIC PROBLEM

• What goods and services must be

produced and in what quantities?
• How shall these goods and
services be produced?
• For whom shall these goods and
services be produced?
MODELS OF ECONOMIC SYSTEMS

•Capitalism
•Communism
•Socialism
•Mixed economies
What is capitalism?
•It is an economic system
mainly characterized by
private individuals owning and
operating the majority of
businesses that produce
goods and services.
Forms of Capitalism
•Pure
•Modified
What is Pure Capitalism?
• It is characterized by the following:
1. All economic decisions are made
without government intervention;
2. Competition serves to determine
the goods and services needed by
society;
3. Competition will determine who
will survive in the marketplace.
Rights of Capitalism
•Private property
•Profits
•Business decisions
•Choice
What is Communism?

•It is a society in which the

government owns all the
nation’s resources.
What is Socialism?
•A system in which the
government owns and operates
the basic industries like
telecommunications, water
service, postal service, transport,
banking and selected
manufacturing businesses.
What is Mixed Economies?
•It is a system that has
elements from more than one
economic system. It contains
both private and state
enterprises.
ECONOMIC RESOURCES
•LAND
•LABOR
•CAPITAL
•ENTREPRENEURIAL ABILITY
Functions of an Entrepreneur
• He organizes production by
combining land, labor, and capital
to make goods and services;
• He makes business decisions by
determining what goods or
services to produce and how to
produce them;
•He bears the risk of his
business decisions.
•He innovates by introducing
new products, new technology,
and new ways of organizing
business.
ECONOMIC GOALS
• Economic
• Economic freedom
growth
• An equitable
• Full employment distribution of
• Price level income
stability • Economic
• Economic security
efficiency • Balance of trade
Divisions of Economics
•Microeconomics
•Macroeconomics
What is Microeconomics?
• It is concerned with “the behavior
and activities of specific economic
units – individuals, households,
firms, industries, and resource
owners.
What is Macroeconomics
• It deals with “the behavior of the
economy as a whole with respect
to output, income, price level,
foreign trade, unemployment, and
other aggregate economic
variables.”
Basic Elements of Demand and
Supply
• The fundamental economic
problem calls for making definite
decisions on what goods to
produced, how they shall be
produced, and for whom they
shall be produced. To address
the problem, the market is used
as the principal mechanism.
When does market exist?

•A market exists when “buyers

wishing to exchange money
for a good or service are in
contact with sellers wishing to
exchange goods or services
for money.”
How a Market Functions?

•Markets are strictly made up of

buyers and sellers. The
actions and decisions of
buyers constitute demand for a
product or service, while the
sellers’ decisions and actions
constitute supply.
What is Market Demand?

•It refers to “the buyers’

willingness and ability to pay
a sum of money for some
amount of a particular good
or service.”
What is Law of Demand?
•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

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

•It is “the quantity of a good

or service which sellers
desire to sell at a given
price.”
Non-Price Determinants of Supply

•Cost of production
•Number of suppliers
•Prices of goods and services
related in production
•Taxes and subsidies
•Technology
What is Market Equilibrium?

•It is the individual schedules of

supply and demand are put
together, there will be a price
where the quantity buyers want
to buy exactly equals the
quantity which sellers are
offering for sale.
 Supply and Demand for Mango
Price per Quantity Quantity
Kilo Supplied Demanded
10 5,000 11,000
20 6,000 10,000
30 7,000 9,000
40 8,000 8,000
50 9,000 7,000
MARKET STRUCTURES
What is a market?

•When buyers wishing to

exchange money for a good or
service are in contact with
sellers wishing to exchange
goods and services for money,
a market exists.
Kinds of Market Structures

1. Pure or Perfect types

A. Pure or Perfect competition
B. Pure or Perfect monopoly
2. Imperfect type
A. Monopolistic competition
B. Oligopoly
What is pure or perfect competition

• It is characterized by the
following:
1. the products of the firms in
the industry under consideration
are standardized.
2. the buyer and the seller are
without power to change the
going market price of the product.
 3. the absence of restraints
of any kind is an important
feature.
4. buyers, sellers and
resource owners have perfect
knowledge of market
conditions.
What is pure or perfect monopoly?

•Pure monopoly is that

market structure
characterized by only one
producer of product.
What is Monopolistic Competition?

•It is that type of market

structure “where there are a
large number of sellers that
produce similar products, but
the products are perceived by
buyers as different.”
What is Oligopoly?

•It is that market structure in

which there are a limited
number of firms competing for
a given industry.
•The products of oligopolists
are homogeneous or identical.