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Economics, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants.
Alfred Marshall, well-known economist, described economics as a study of mankind in the ordinary business of life. It
examines part of the individual and social action that is most closely connected with the attainment and use of material
requisites of well-being. While Hall and Loeberman stated that economics is the study of choice under the condition of
scarcity.
Economic is the study of how individuals manages its scarce resources.
Scarcity is the reason why people have to practice economics. Scarcity is a condition where there are insufficient
resources to satisfy all the needs and wants of a population. Scarcity may be relative or absolute. Relative scarcity is when
a good is scarce compared to its demand. It occurs not because the good is scarce per se and is to difficult to obtain but
because of the circumstances that surround the availability of the good. On the other hand, absolute scarcity is when supply
is limited.
Because of the presence of scarcity, there is a need for man to make decisions in choosing how to maximize the use
of scarce resources to satisfy as many wants as possible.
Scarcity of means for satisfying various needs is the central problem of our economic life and it is scarcity that
creates the need to make a choice. Scarcity and choice go hand in hand.
Opportunity cost refers to the value of the best forgone alternative. The concept of opportunity cost holds true for
individuals, businesses, and even a society.
ECONOMIC RESOURCES
Economic resources, also known as factors of production, are the resources used to produce goods and services.
These resources are, by nature, limited and therefore, command a payment that becomes the income of the resource owner.
1. Land – soil and natural resources that are found in nature and are not man-made. Land is considered an economic
resource because it has a price attached to it. Owners of land receive a payment known as rent/lease.
2. Labor – also called “human resources”, refers to all human efforts, be it mental or physical, that help to produce
satisfying goods and services. It covers manual workers like construction workers, machine operators, and
production workers, as well as professionals like nurses, lawyers, and doctors. The term also includes jeepney
drivers, farmers, and fisherman. The income received by labors is referred to as wage and salaries.
Labor is a flexible factor of production - workers can be allocated to different areas of the economy for
producing goods and services.
3. Capital
a. Capital – can represent the monetary resources use to purchase natural resources.
Ex: Companies use capital to buy land and other goods
b. Capital – represents the major physical assets individuals and companies use when producing goods and
services. Ex: buildings, vehicles, equipment
Entrepreneur – organizer and coordinator of other factors of production: land, labor and capital.
5. Foreign Exchange - refers to the dollar and dollar reserves that the economy has.
Foreign exchange is part of economic resources because we need foreign currency for international trading
and buying materials from other countries
Factors of Production
Goods
Services
2. Distribution is the allocation of the total product among members of society. It is related to the problem of for
whom goods and services are to be produced.
3. Exchange – refers to the process of transferring goods and services to a person in return for something present
medium of exchange – money
4. Consumption - is the use of a good or service. Consumption is the ultimate end of economic activity. WHEN
THERE IS NO CONSUMPTION, THERE WILL BE NO NEED FOR PRODUCTION AND
DISTRIBUTION.
- refers to the proper utilization of economic goods. However, goods and services could not be utilized
unless you pay for it. Hence, consumption could also be spending money for goods and services.
5. Public Finance - is concerned with government expenditures and revenues. Economics studies how the
government raises money through taxation and borrowing.
- pertains to the activities of the government regarding taxation, borrowings and expenditures. It deals
with the efficient use and fair distribution of public resources.
Economics is a study of economic activities of a man. It is only concerned with the wealth-getting and wealth-using
activities of a man.
- PROF. MARSHALL
The term “applied economics” is believed to have started 200 years ago in the writings of two economists:
Applied economics - is the study of economics in relation to real world situations. It is the application of economic
principles and theories to real situations and trying to predict what the outcomes might be.
SIMPLER DEFINITION
Dinio and Villasis defined applied economics as the application of economic theory and econometrics in specific
settings with the goal of analyzing potential outcomes. Applying economic theory in our lives means trying to address
actual economic issues and be able to do something about it.
What is econometrics?
Econometrics – is the application of statistical and mathematical theories to economics for the purpose of:
• Testing hypotheses
• Forecasting future trends
The results of econometric are compared and contrasted against real life examples.
Example: Real life application of econometrics would be to study the hypothesis that as a person’s income increases,
spending increases.
1. Applying economics to a company, household or a country helps sweep aside all attempts to dress up a situation
so that it will appear worse or better than it actually is.
*applied economics becomes a powerful tool to reveal the true and complete situation in order to come up with
things to do.
Example: Applied economics can assess the profits of a certain company. The result can help the executives to do
some strategies in order to boost its sales.
2. Applied economics acts as a mechanism to determine what steps can reasonably be taken to improve current
economic situation.
*to examine each aspect, one can strengthen areas where performance is weak.
Example:
Purchase of goods and services
Usage of raw materials
Division of labor within entity (e.g. firm, company, agency)
3. Applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation, or at least
minimize the impact.
*to review what steps were taken to improve and correct similar situations and continue good strategies to
keep the economy flowing in a correct direction.
2. Poverty
COMMON CAUSES
Increase in population
Increase in the cost of living
Unemployment
Income inequality
WHAT CAN BE DONE TO SOLVE THE POVERTY PROBLEM?
Reduce unemployment
Appropriate policy on labor income
Provision of unemployment benefits for those who will be unemployed due to natural or man-made calamities.
Ex. Typhoon, Bombing of terrorists, Earthquake
Increase social services like education, health care and food subsidies for sustainable poverty reduction
Appropriate policy on labor income.
3. Income Inequality
Income is the money that an individual earned from work or business received from investments.
Income inequality – refers to the gap in income that exists between the rich and the poor.
MAJOR CAUSES OF INCOME INEQUALITY
Political culture
“ palakasan”, “utang na loob”
Ex. Voting for the wrong person during election
Indirect taxes – poor people shoulder this taxes like the Value Added Tax – 12%
WHAT CAN BE DONE TO SOLVE THE PROBLEM OF INCOME INEQUALITY
Policies to enforce progressive rates of direct taxation on high wage earners and wealthy individuals.
Direct money transfers and subsidize food programs for the urban and rural poor.
Direct government policies to keep the price of basic commodities low
Raise minimum wage
Encourage profit sharing
At a price of Php 10, Martha is willing to buy one ice cream a day. As a price goes down to Php 8, the quantity
she is willing to buy goes up to two ice cream. At a price of Php 2, she will buy five ice cream. There is a negative
relationship between the price of a good and the quantity demanded for that good. A lower price allows the consumer
to buy more, but as price increases, the amount the consumer can afford to buy tends to decrease.
2. Demand Curve
Table 1.1. Hypothetical Demand Curve of Martha for Vinegar (in bottles) for One Month
12
10
8
Price
0
1 2 3 4 5
Quantity Demanded
The values are plotted on the graph and are represented as connected dots to derive the demand curve (Table
1.1). The demand curve slopes downward indicating the negative relationship between the two variables which are price
and quantity demanded.
The downward slope of the curve indicates that as the price of vinegar increases, the demand for the good
decreases. The negative slope of the demand curve is due to income and substitution effects.
3. Demand Function
A demand function shows how the quantity demanded of a good depends on its determinants, the most important
of which is the price of the good itself, thus the equation:
Factors Affecting the Shifting in Demand Curve
The individual demand curve illustrates the price people are willing to pay for a particular quantity of a good.
The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan
to buy at different prices.
This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods.
Table 1.2 Diagram to show shift in demand
A shift to the right in the demand curve can occur for a number of reasons:
1. Price of the Given Commodity. It is the most important factor affecting demand for the given commodity. Generally,
there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded
falls due to decrease in the satisfaction level of consumers.
2. Income. An increase in disposable income enabling consumers to be able to afford more goods. Higher income
could occur for a variety of reasons, such as higher wages and lower taxes.
3. Price of related goods – demand for the given commodity is also affected by change in prices of the related goods.
Related goods are of two types:
Substitute goods – are those goods which can be used in place of one another for satisfaction of a particular
want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given
commodity and vice-versa.
For example, if price of a substitute good (say, coffee) increases, then demand for given commodity
(say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given
commodity is directly affected by change in price of substitute good.
Complements goods - are those goods which are used together to satisfy a particular want, like coffee and
sugar. An increase in the price of complementary good leads to a decrease in the demand for given
commodity and vice-versa.
For example, if price of a complementary good (say, sugar) increases, then demand for given commodity
(say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given
commodity is inversely affected by change in price of complementary goods.
Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in
fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a
commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.
5. Expectations of future price increases.
If the price of a certain commodity is expected to increase in near future, then people will buy more of that
commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period.
*These non-price determinants can cause an upward or downward change in the entire demand for the product and this
change is referred to as a shift of the demand curve.
Law of Demand
Using the assumption “ceteris peribus”, a Latin phrase which means all other things remained equal or held
constant, there is an inverse (negative) relationship between price and quantity demanded. Therefore:
As can be seen in Table 2, the relationship between the price of ice cream and the quantity that Martha is willing
to sell is direct. The higher the price, the higher the quantity supplied.
Table 2.1. Supply Curve of Ice Cream of Martha for One Week
120
Price of Carabao Milk (Per Bottle)
100
80
60
40
20
0
200 300 400 500 600
Law of Supply
The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of
demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity
supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases
revenue.
Lesson 4.1. How Equilibrium Price and Quantity are Determined
Market Equilibrium
Equilibrium is a state of balance when demand is equal to supply. The equality means that the quantity
that sellers are willing to sell is also the quantity that buyers are willing to buy for a price. In market, equilibrium is an
explicit agreement between how much buyers and sellers are willing to transact. The price at which demand and supply are
equal is the equilibrium price.
Market equilibrium is a market state where the supply in the market is equal to the demand in the market.
If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results
in a disruption of the equilibrium.
If a market is not at equilibrium, market forces tend to move it to equilibrium. If the market price is above
the equilibrium value, there is an excess supply in the market (a surplus), which means there is more supply than demand.
In this situation, sellers will tend to reduce the price of their good or service to clear their inventories. They probably will
also slow down their production or stop ordering new inventory. The lower price entices more people to buy, which will
reduce the supply further. This process will result in demand increasing and supply decreasing until the market price equals
the equilibrium price.
If the market price is below the equilibrium value, then there is excess in demand (supply shortage). In this
case, buyers will bid up the price of the good or service in order to obtain the good or service in short supply. As the price
goes up, some buyers will quit trying because they don't want to, or can't, pay the higher price. Additionally, sellers, more
than happy to see the demand, will start to supply more of it. Eventually, the upward pressure on price and supply will
stabilize at market equilibrium.
14
12
10
8
Price
0
52 53 54 55 56 57 58 59 60 Qs
85 75 65 55 45 35 25 15 5
Qd
What is migration?
Migration – refers to the movement of people from one place to another.
2 Types of Migration:
Internal Migration – refers to the movement of people within one country i.e. rural to urban migration.
International Migration – refers to the movement of people from one country to another.
Causes of Migration:
Poverty
Unemployment
Victims of natural calamities
Improve standard of living
Better education
Better environment
Economic Security
EFFECTS OF MIGRATION