CHAPTER 1:

The Nature and

Importance of
Economics
 What is Economics?

The Nature of Economic Choice

The Fundamental Economic Problem

Types of Economic Systems

The Economic Resources

Economic Goals

Divisions of Economics
 What is Economics?
a social science concerned with using scarce resources
to obtain maximum satisfaction of the unlimited material
wants of the society
(Walstad 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 production, distribution, selling, and use of goods and services
(Collin)

the study of how people use their limited resources to try to satisfy
unlimited wants
(Parkin and Bade)
Economists agree on all the three aspects:

Scarce Resources
Unlimited Wants
Maximum Satisfaction

What Scarcity Means. Scarcity refers to the
condition wherein most things that people
want are available only in limited supply.
Economic Goods. Anything, either a physical
commodity or a service, which yields utility and
which could command a price if bought or sold in the
market.
Unlimited Wants. Wants refer to a persons
desires or preferences for specific ways of
satisfying a basic need.

 The Nature of Economic Choice
REAL PROBLEM: SCARCITY

the imbalance between our desires and the means of

satisfying those desires
*No society is so rich to satisfy all the wants of its people.

OPPORTUNITY COST. Cost of choosing to use resources

for one purpose measured by the sacrifice of the next best
alternative for using those resources.
 The Fundamental Economic Problem
1. What goods and services must be produced and in
what quantities ?
2. How shall these goods and services be produced ?
3. For whom shall these goods and services be
produced?

DECISIONS ON WHAT AND HOW MUCH TO PRODUCE.

DECISIONS ON HOW GOODS AND SERVICES SHALL BE
PRODUCED.
DECISIONS ON HOW THE GOODS AND SERVICES SHALL BE
DISTRIBUTED.
Types of Economic Systems

CAPITALISM
COMMUNISM
SOCIALISM
MIXED ECONOMIES
 - Economic system mainly characterized by private
1. CAPITALISM individuals owning and operating the majority of
businesses that produce goods and services.
1. All economic decisions are
FORMS: made without government
1. PURE CAPITALISM interventions;
2. Competition serves to
2. MODIFIED CAPITALISM
determine the goods and
services needed by the
1. The government intervenes society;
and regulates business to 3. Competition will determine
a certain extent. who will survive in the
marketplace.
 - Economic system mainly characterized by private
1. CAPITALISM individuals owning and operating the majority of
businesses that produce goods and services.
RIGHTS. People have the right to own
1. PRIVATE PROPERTY property, and their heirs have the
right of inheritance.
2. PROFITS
3. BUSINESS DECISIONS People have the right to earn
profits and dispose them as
4. CHOICE
they wish.
People have the freedom to
choose what occupation to
People have the right to engage in
undertake, where to establish business and determine how their
their residences, what to buy, etc. business will operate.
2. COMMUNISM
- A society in which the government owns all the nations
resources
- Directly the opposite of capitalism
- The decision on what goods and services to produce, how
they will be produced and how will be distributed are
determined by central government planning
3. SOCIALISM
- The government owns and operates the basic industries like
telecommunications, water service, postal service, transport,
banking, selected manufacturing businesses. Private
individuals are allowed, however, to own and operate small
businesses.
- The government still decides on what goods and services to
produce, how they will be produced and how will be
distributed. Those are not produced by the govt are
provided by private individuals depending on consumer
demand and resource availability.
4. MIXED ECONOMIES

- Is one that has elements from more than

one economic system. It contains both
private and state enterprises.
The Economic Resources
The aim of any economic system is to PRODUCE THE REQUIRED
OUTPUT OF GOODS AND SERVICES.

LAND
LABOR
CAPITAL
ENTREPRENEURIAL ABILITY
 1. LAND

- Include land for agricultural or industrial

purposes as well as natural resources taken
from above or below the soil.
Consist of energy resources like fossil fuel, and
geothermal emissions, non-energy resources like
gold, diamond, and limestone, air, water, and
many other.
 2. LABOR

- Refers to that basic factor of production

which are productive services embodied
in human physical effort, skill, intellectual
powers, and others. It consist human time
spent in production like driving buses,
feeding cattle, singing in night clubs,
acting in movies, etc.
 3. CAPITAL

- Refers to durable goods produced in order

to produce other goods such as buildings,
plant and machinery, roads, computers,
ships, electric guitars, tennis balls, etc.
4. ENTREPRENEURIAL ABILITY

- Land, labor and capital will remain as they

are until someone taps them to produce the
required goods and services.
 4. ENTREPRENEURIAL ABILITY

The entrepreneur performs the following functions:

1. He organizes production by combining land, labor, and
capital to make goods and services;
2. He make business decisions by determining what goods or
services to produce and how to produce them;
3. He bears the risk of his business decisions; and
4. He innovates by introducing new products, new technology,
and new ways of organizing business.
Economic Goals
Every system invented by man presupposes some goals.
1. ECONOMIC GROWTH
2. FULL EMPLOYMENT
3. ECONOMIC EFFICIENCY
4. PRICE LEVEL STABILITY
5. ECONOMIC FREEDOM
6. AN EQUITABLE DISTRIBUTION OF INCOME
7. ECONOMIC SECURITY
8. BALANCE OF TRADE
Division of Economics
MICROECONOMICS
Concerned with the behavior and
activities of specific economic units
individuals, households, firms,
industries, and resource owners.
EXAMPLES: determination of price
of a single product, or behaviour of a
single customer or business firm.
MACROECONOMICS
Deals with the behavior of the
economy as a whole with respect to
output , income, price level, foreign
trade, unemployment, and other
economic aggregate economic
variables.
THE END!