Chapter I

ECONOMICS AND THE REAL WORLD

We cannot isolate ourselves from economics because our physical existence depends on it.
We cannot live without production and consumption.
A good knowledge of economics offers many favorable possibilities:
-it guides us how to make a living
-how to use our money wisely
-how to run a business
-how to distribute properly our available scarce resources
-how to maximize our profits and consumer satisfaction
BASIC ECONOMIC CONCEPTS
Scarcity - the part of human existence which makes mans material wants never fully satisfied because the
resources that he has were limited. Existed because of two reasons:
Limited resources available
Unlimited human needs and wants
Economics - the proper allocation and efficient use of available resources for the maximum satisfaction of
human wants
NATURE OF ECONOMICS

Economics is classified as a social science because it deals the study of mans life and how he
lives with other men.
Economics is interdependent with other sciences like sociology, political science, history,
geography, physics and religion.

Economics and Sociology

A jobless man is likely to create a social crime like stealing.
Economics and Political Science
The policies of the government influence economic activities.
Economics and History
The solution of economic problems or economic planning may rely on past events or historical
developments.
Economics and Geography
The geography of a nation determines the main sources of incomes of the people, like fishing or
farming.
Economics and Physics
It produces machines and electricity. These are very useful in the production of goods and
services.
Economics and Religion
Religious traditions and beliefs can discourage or encourage economic development.
Some tribes in Africa feed wild crocodiles with pigs or chickens in the hope of increasing their
farm harvest. Crocodiles are one of their gods.
CONSIDERING THE NATURE OF ECONOMICS
It is not advisable to solve an economic problem with economic solution alone.

METHODS OF ECONOMICS
Economics, being a science, is a systematic body of knowledge. It uses scientific methods in
gathering data, analyzing the data, and making conclusions.
Data are obtained through observations and interviews. This is the empirical method.
Data are properly organized for analysis. Out of this economic analysis, economic principles and
theories are formulated or derived.
Economic principles are generalizations. This means they do not apply to all people. They tend to
be true to a large number of people under certain assumptions.
LIMITATIONS OF ECONOMIC METHODS
There are limitations to economic methods such as the biases and values of those who get the
facts, who make the analysis, and who make the conclusion.
Biases and values (what is desirable or undesirable) are naturally formed by the political, social,
cultural, and economic background of individual.
DIVISIONS OF ECONOMICS
Microeconomics- deals with the economic behavior of individual units such as the consumers, firms and
the owners of the factors of production.
Example: the price of rice, the number of workers of San Miguel Corp., the income of
Mr. Cruz, the expenditures of MERALCO
Macroeconomics- deals with the economic behavior of the whole economy or its aggregates such as
government, business, and household.
Example: general level of prices, level of employment, national income, total
expenditures
HISTORY OF ECONOMICS
Economics has started to be known when Adam Smiths book Wealth of Nations was published
in 1776. This book became the bible of economics for more than a century. Because of the economic
contributions of Smith in the field of science, he has been considered the Father of Economics.
However, the ideas and practices of economics have been as old as mankind. These economic thoughts
appeared in biblical teachings, philosophy and politics. The primitive people were resourceful. They
invented ways and means of gathering and hunting. Such art of making a living among ancient tribes
represented a form of economics.
During the biblical times, economic ideas and activities were influenced by biblical teachings and
wisdom of the great prophets. Even the Babylonian code of Hammurabi contains detailed regulation for
economic practices. Justice, charity and honesty were the rules in economic dealings. Usury was
prohibited. Profits were despised.
The Babylonians had clear ideas about interests and mortgages. The Phoenicians had good
knowledge about commerce and money. The Hebrews and the Hindus stressed the virtues of industry,
temperance and economy.
The word economics was derived from an ancient Greek word oikonomos which means household
management. The housekeeper had to see to it that there was enough food, clothing and shelter; that the
house was kept in order; that the necessary duties and responsibilities were performed by the members of
the household.
To the ancient Greeks, however, the term oikonomos applied more on the proper management of
city-states.

The Greek philosopher PLATO, recommended division of labor to improve production

Another Greek philosopher, ARISTOTLE, explained the functions of money.
In the case of the ROMANS, they believed that agriculture was the only honorable industry.
During the early days of the Roman Republic, were taught to be good soldiers and farmers by their fathers.
During the middle ages, the Church under ST. THOMAS AQUINAS crusaded for distributive justice and
compensatory justice.
THE BASIC ECONOMIC PROBLEMS
All countries have economic problems, including the richest countries. The three basic economic problems
are:
1. What goods and services to produce and how much?
Society must determine and find out the needs of its people. A feasibility study determines
whether certain goods or services become profitable or not in a given market.
In poor countries, there is no need to conduct a survey to determine the real needs of the people. It
is very obvious that they lack food, clothing and shelter.

2. How to produce the goods and services?

This is a problem of production technology or methods of production. As a general rule, goods
and services must be produced in the most efficient manner. This means maximum output with minimum
input without sacrificing quality.
3. For whom are the goods and services?
This is a problem of distribution. Who gets the goods like rice, clothes, shoes, and the services
such as education, Medicare, etc.? In a pure market economy or capitalism, goods and services are
definitely for those who have money and are willing to purchase them.
ECONOMIC SYSTEMS
An economic system is a set of economic institutions that dominates a given economy.
The principal objective of an economic system is to solve the basic economic problems.
ECONOMIC SYSTEM MODELS
Capitalism the factors of production and distribution are owned and managed by private individuals or
corporations. It has been known by similar terms like market economy, free-enterprise economy, or laissez
faire economy.
Essential Characteristics of Capitalism;
-private property
-economic freedom
-free competition
-profit motive
Communism the exact opposite of Capitalism; the factors of production and distribution are owned and
managed by the state. It is also called a command economy or classless society.
Essential Characteristics of Communism;
-no private property
-no economic freedoms
-no free competition (the govt is the only seller)
-no profit motive
-presence of central planning
Socialism a combination of capitalism and communism; the major and strategic industries are owned and
managed by the state while the minor industries belong to the private sector. Its essential characteristics
therefore constitute both those of capitalism and communism.

PREVAILING ECONOMIC SYSTEMS

At present, there are no more pure economic systems like pure capitalism, pure socialism, or pure
communism. These are just theories or models. Both capitalist and communist countries tend to move
towards socialism.
HOW TO JUDGE AN ECONOMIC SYSTEM
There are vital criteria to judge the performance of the various economic systems. These are:
Abundance refers to goods and services that individual members of the society have received. Are these
sufficient and are the people satisfied?
Growth the growth of the economy is tangible, and is measurable in terms of the number of buildings,
houses, schools, cars, hospitals, factories, or machines made in a given year.
Stability refers to the absence of inflation and unemployment. However, if the ups and downs of
economic activities like production, consumption, and saving, among other things, are minimal, there is
still economic stability.
Security economic security generally depends on economic stability. Workers and employees do not lose
their jobs if there is prosperity in the economy.
Efficiency- It means productivity. It is measured in terms of unit cost or average cost.
Justice and Equity is the distribution of wealth, income, and power among the members of society fair?
Is there no big gap between the rich and the poor? If the answer to both questions is no, then there is no
justice and equity.
Economic Freedom if a consumer is free to choose his food, style of his house, any kind of appliances,
his recreation or his education, then, there is economic freedom. If a businessman is free to invest his
money to put up any business, then there is economic freedom.
WHICH IS THE BEST ECONOMIC SYSTEM?
The best economic system depends on particular economic interest, cultural, social and political
orientation. An extremely poor man is most likely in favor of communism because under capitalism he is
starving, and his children cannot go to school.
Under communism, the land of the landlord belongs to the state while the businessman has to
surrender his business to the state. On the other hand, a big landlord or businessman prefers capitalism
because this is the most suitable economic system for him.
There are people who enjoy economic freedom. They, too, have their own concept of the best
economic system.
SOCIAL JUSTICE THE GOAL OF ECONOMICS
Economics is basically concerned with the fair distribution of goods and services, and the efficient
use of available scarce resources. The reason is to obtain both optimum and maximum benefits for the
satisfaction of all members of the society. This is social justice.
Social justice could be attained through the following objectives;
-economic growth
-full employment
-price stability
-economic freedom
-equitable distribution of wealth and income
-economic security