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THE NATURE AND

IMPORTANCE OF ECONOMICS

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 1


Objectives:
• At the conclusion of the session, you must
have been able to:
– Compare the various definitions of
economics and identify their common
ground.
– Identify the basic economic problem
addressed by the concerns of economics.
– Relate economics with the other social
sciences.
By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 2
Objectives:
• At the conclusion of the session, you must
have been able to:
– Differentiate macroeconomics from
microeconomics as the two main divisions
of economics.
– Enumerate and discuss the significance of
the following: economic systems,
economic resources, and economic goals.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 3


Economics Defined

• “…a social science concerned


with using scarce resources to
obtain maximum satisfaction.”
(Walstad and Bingham, 1993)

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 4


Economics Defined

• “…the study of how societies


use scarce resources to produce
valuable commodities and
distribute them among different
people.” (Samuelson and
Norhaus, 1992)

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 5


Economics Defined

• “…the study of how people use


their limited resources to try to
satisfy unlimited wants.” (Parkin
and Bade, 1991)

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 6


Question:

• What is the common


ground of the
definitions?

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 7


The Common Ground:

• Resources • Human
are scarce. needs and
wants are
unlimited.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 8


Question:

• From the common ground,


what can you infer to be
the basic economic
problem?

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 9


The Basic Economic Problem:

SCARCITY

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 10


Definitions:

• SCARCITY
– “the imbalance between our desires and
the means of satisfying those desires.”
(Hyman, 1992)
– The condition wherein most things that
people need and want are available only
in limited supply.”

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 11


More Definitions:

• WANTS
–“…refer to a person’s desires or
preferences for specific ways for
satisfying a basic need.” (Bannock,
1974)

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 12


More Definitions:

• OPPORTUNITY COST
–“…the cost of choosing to use
resources for one purpose measured
by the sacrifice of the next best
alternative for using those
resources.” (Hyman, 1992)

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 13


The Decision Questions:

1. What goods and services must


be produced and in what
quantities?
• Rice or weapons?
• If rice, how much of what type?

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 14


The Decision Questions:

2. How shall these goods and


services be produced?
• Who shall produce them?
• What resources and technologies shall
be used?

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 15


The Decision Questions:

3. For whom shall these goods


and services be produced?
• Who shall consume them?
• What benefits from the results of
the economic activities?

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 16


The Concerns of Economics:

• The PRODUCTION, DISTRIBUTION


and CONSUMPTION of goods and
services.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 17


Economics is Concerned with:

• PRODUCTION
– The creation or addition of utility.
– Utility is the economic term for usefulness. It
is the ability of a good or service to satisfy a
want.
• Form Utility
• Place Utility
• Time Utility
• Possession Utility
By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 18
Economics is Concerned with:

• PRODUCTION
– Factors: (Economic Resources)
• Land – land and natural resources
• Labor – time and effort of human beings
involved in the production process.
• Capital – goods used to produce other goods
• Entrepreneurship – undertaking that
combines the three other factors in the
production process.
By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 19
Economics is Concerned with:

• DISTRIBUTION
– The allocation of the total product among the
factors of production.
– The distribution of money incomes among the
factors of production.
• Land – RENT
• Labor – WAGES
• Capital – INTEREST
• Entrepreneurship – PROFIT.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 20


Economics is Concerned with:

• CONSUMPTION
–The use of a good or a service.
–Without it, there would be no need for
production and distribution.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 21


Economics is Concerned with:

• GOODS AND SERVICES


–Characteristics of Economic
Goods:
• Material
• Useful
• Scarce
• Transferable

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 22


Economics is Concerned with:

• GOODS AND SERVICES


–Economic Services – non-material
activities that are useful, scarce, and
transferable.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 23


Economics and the Social Sciences

Economics is related to: Because:


• POLITICAL • Government has
SCIENCE a role in the
economy.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 24


Economics and the Social Sciences

Economics is related to: Because:


• SOCIOLOGY • Low standard
of living leads
to social
problems.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 25


Economics and the Social Sciences

Economics is related to: Because:


• PHILOSOPHY • Economic acts
are humans
acts (morality).

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 26


Economics and the Social Sciences

Economics is related to: Because:


• HISTORY • Economic
development
occurs through
time.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 27


Divisions of Economics:

MICROECONOMICS MACROECONOMICS
• Concerned with the • Deals with the behavior
“behavior and activities of the economy as a
of specific economic whole with respect to
units – individuals, output, income, the
households, firms, price level, foreign
industries and resource trade, unemployment
owners.” and other aggregate
• Critical concept – economic variables.
MARKET

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 28


Economic Goals:
1. Economic Growth
2. Full Employment
3. Economic Efficiency
4. Price Level Stability
5. Economic Freedom
6. Equitable Distribution of Income
7. Economic Security
8. Balance of Trade

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 29


Economic Goals:

1. Economic Growth
– Society desires a higher standard of
living manifested by the production of
more and better quality goods and
services.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 30


Economic Goals:

2. Full Employment
–There must be jobs for those who
are willing and able to work.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 31


Economic Goals:

3. Economic Efficiency
– The utilization of resources to derive the
maximum benefits for the society.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 32


Economic Goals:

4. Price Level Stability


– The economy should be able to avoid
great fluctuations in the general level of
prices.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 33


Economic Goals:

5. Economic Freedom
– High degree of freedom to choose what
economic activity to undertake afforded
to various sectors.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 34


Economic Goals:

6. Equitable Distribution of
Income
–The condition whereby the rich get
richer and the poor get poorer is
prevented.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 35


Economic Goals:

7. Economic Security
– Enough provision must be accorded for
those who are not able to earn minimal
income like the aged, the chronically ill,
the disabled, etc.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 36


Economic Goals:

8. Balance of Trade
–Balance between import
expenditures and export revenues
must be maintained.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 37


Main Reference:
• Principles of Economics by Roberto Medina,
Chapter 1.

By: Angelito D. Platino THE NATURE AND IMPORTANCE OF ECONOMICS 38