Lecture Notes in Economics with LRT

Economics is the efficient allocation of the means of production for the satisfaction of human
wants and needs.
- a discipline of social sciences which concerns production, distribution and use of material
goods and services.
- is a set of tools that enables us to use our resources efficiently.
The Need to Economize
The basic reason why people need to economize is because there will always be scarcity
or shortage on our resources to produce goods, to satisfy our unlimited wants. It is the perpetual
problem of not enough resources while our wants are limitless. We could print all the money that
we want, and still there is scarcity.
Divisions of Economics
1. Macroeconomics is the division of economics that studies and analyzes the economys
aggregates. It delves into employment, national output, financial sector, bank deposits
and government spending; and how to deal with inflation and recession.
2. Microeconomics operates on the level of the individual business firm, as well as that of
the individual consumer.
Factors of Production
We need four resources, often referred to as the means of production, to produce an
output of goods and services. Every society, from a tiny island nation in the Pacific to the most
complex industrial giants, needs these resources: land, labor, capital and entrepreneurial ability.
1. Land it includes natural resources as well as the ground by which these resources are
found.
2. Labor is the work and time for which employees are paid. About two-thirds of the
total resource costs are paid to labor in the form of wages an salaries.
3. Capital is man-made goods used to produce other goods or services. It consists mainly
of plants and equipment.
4. Entrepreneural ability it is the entrepreneur that sets up a business, assembles the
needed resources, risk his or her own money, and reaps the profits or absorbs the losses of
his enterprise.
Elements of Economics:
1. goods are items designed to bring utility. It is also known as tangible goods or material
goods
2. services are intangible goods rendered by individual or groups.

Lecture Notes in Economics with LRT

According to uses:
1. consumer goods are finished products that give direct satisfaction to those who avail
them.
2. producer goods are goods used in the production of other goods and services. Also
known as capital goods.
According to purpose:
1. luxury goods are items that are not directly needed but bought for the prestige or status
symbol they represent.
2. basic goods are goods that seek to satisfy the gut-level needs of men such as food,
shelter and clothing.
Economic System:
An economy is efficient whenever it is producing the maximum output allowed by a
given level of technology and resources. Productive efficiency is attained when the maximum
possible output of any one good is produced, given the output of other goods.
Mixed economy is the combination of private and public sectors of the economy.
Invisible hand in economics the invisible hand in economics is the profit motives or economic
self interest which guides people and motivates them to do good by helping people to do well. It
is the practice of free enterprise system.
The price mechanism this is based on the law of supple and demand. It is the price of goods
and services that triggers producers of goods and services to produce more of produce less.
Furthermore, the price is dependent on the supply and demand of the goods or services.
Competition is considered to be rivalry of business firms in order to have choices for the
consumers and a distributed income for the business firms. Competition should be between
many business firms; as this to avoid a single or few firms to have any influence over price.
Furthermore, it is also dependent on the law of supple and demand which affects the price
mechanisms.
Equity and Efficiency is the proper an fair allocation of income from the rich people, towards
the middle class and finally to the poor.
Capitalism is an economic system characterized by private ownership of most of the means of
production that is, land, labor, capital, and entrepreneurial ability. Individuals are moved to
produce by the profit motive. Production is also guided by the price system.

Economic Role of the government in a Free Enterprise system or Capitalism:

1. Collection of taxes for the construction of infrastructure, security, welfare of the people
and protection of the environment.
2. Enforcement of legal systems by which there could be a healthy economic activity for the
people and organizations.
3. Maintenance of free competitive system and ensures unrestricted operation of the law of
supply and demand.
4. Imposes restrictions on prohibited goods like, drugs and pirated goods.
5. Regulation of labor laws.
6. Provides jobs in terms of public projects.
7. Prevention of barriers to competition.
Communism the theory of the communists may be summed up in the single sentence:
abolition of private property, declared by Karl Marx and Friedrich Engels in communist
manifesto.
- the state has total control on the means of production. Economic planning by the state dictates
and implements what to produce and how much to produce, unlike in a capitalist economy, the
market forces of supply and demand, dictate what gets produced and how much of it gets
produced.
Fascism the problem with describing the fascist economic model is that there really is no
model. The means of production are left in private hands, with varying degrees of government
interference. In Nazi Germany, the ownership of resources was in private hands, while the
government dictated what was to be produced.
Socialism is an economic model wherein there is a mixture of private and public ownership. It
is also known as mixed economy, wherein the state owns the major industries of the country,
while the private sectors own minor industries.
In general, socialist countries have three characteristics:
1. government ownership of some of the means of production
2. A substantial degree of government planning, and,
3. A large-scale redistribution of income from the wealthy and the well-to-do to the middle
class, working class, and the poor.

Circular Flow of Economic Activities

Circular Flow Model this is the model by which illustrates how the economy is moving from
the products and services being produced, to its consumption by the households or consumers
and the return of money spent by consumers to the producers of goods and services. It traces the
flow of money, resources, goods and services from the business firms (producers) towards the
households (labor/consumers) and back towards the business firms in form of consumption
expenditures.

Figure 1 The flow of resources and payments for the business firms and households:

Business Firms

Households

Fig 2 The flow of goods and services, and payments for the business firms and households.

Business Firms

Households

Fig. 3 The circular flow

Business Firms

Households