INTRODUCTION

MACROECONOMICS
ECONOMICS

• Root of the word ‘economics comes from the

Greek word ‘Oikonomia’ (management of
household or household rules)
• The study of the use of scarce resources to satisfy
unlimited human needs and wants.
BASIC TERMS
GOOD
• Anything which yields satisfaction to someone.
• Can be classified to use – consumer goods and
capital goods.
• Can be also – essential goods and luxury goods
• Can also be classified as economic goods or free
goods.
TYPES OF PRODUCTION
•Manufacturing or Industry
•Agricultural Production
ECONOMIC RESOURCES
•Things which are needed to carry
on the production of goods and
services.
•Land, Labor, Capital and
Entrepreneur.
LAND
•Refers to the natural resources which are
given by and found in nature, and are,
therefore not man-made.
•Why is it an economic resource?
•Rent – people who own land and offer it to
others for their use, earn this income.
LABOR
•Any form of human effort exerted in the
production of goods and services.
•The supply of labor in a country is dependent
on its production and on the percentage of its
population that is willing to join the labor
force.
•Income earned by workers are called wage.
CAPITAL
•Man – made goods used in the production
of goods and services.
•Savings – part of person’s income which is
not spent in consumption.
•Income earned from capital is Interest.
ENTREPRENEUR
•Person who combines the other economic
resources for use in the production of
goods and services.
•He decides on the combination of land,
labor and capital.
•Income earned by entrepreneur – profit.
THE NEED TO CHOOSE
SCARCITY
•Refers to the limitations that exist in
obtaining all the goods and services that
people want.
•It gives rise to economic problems and it is
the reason why man has to make a choice.
•If all goods are free, there is no need to
economize.
 FUNDAMENTAL
ECONOMIC PROBLEMS
WHAT TO PRODUCE AND HOW
MUCH?
•Decision on what goods and services to
produce and their quantities.
•This would depend on what is needed,
what is wanted, and what has to be
produced.
HOW SHALL GOODS BE
PRODUCED?
•Decision of what resources are to be used
in production, by whom the goods will be
produced, the technological manner in
which production will take place.
FOR WHOM SHALL GOODS BE
PRODUCED?
•Problem of distribution.
•Who will benefit from the production of
goods and services?
•How much of the total production will
each consumer get?
TYPES OF ECONOMIC
SYSTEMS
TYPES OF ECONOMIC SYSTEM

•Traditional
•Command
•Market
•Mixed
THE TRADITIONAL ECONOMY
•This is basically a subsistence economy.
•Most traditional and ancient types of
economies in the world.
THE COMMAND ECONOMY
• In a command economic system, a large part of the economic
system is controlled by a centralized power.
• This type of economy was the core of the communist
philosophy.
• A command economy is capable of creating a healthy supply of
its resources, and it rewards its people with affordable prices.
• This capability also means that the government usually owns all
the significant industries like utilities, aviation, and railroad.
THE MARKET ECONOMY
• In a free market economy, firms and households act in self-
interest to determine how resources get allocated, what goods
get produced and who buys the goods. This is opposite to how a
command economy works, where the central government gets
to keep the profits.
• There is no government intervention in a pure market economy
(“laissez-faire“).
• In this type of economy, there is a separation of the government
and the market.
THE MIXED ECONOMY
•A mixed economy is a combination of different types of economic
systems. This economic system is a cross between a market economy and
command economy.
• Inthe most common types of mixed economies, the market is more or
less free of government ownership except for a few key areas like
transportation or sensitive industries like defense and railroad.
• However, the government is also usually involved in the regulation of
private businesses. The idea behind a mixed economy was to use the best
of both worlds – incorporate policies that are socialist and capitalist.
PRICE SYSTEM AND ITS ROLE IN THE BASIC
ECONOMIC PROBLEMS
OPPORTUNITY COST
•Benefit forgone.
OPPORTUNITY COST
Number of Colas Number of Chicken
Sandwiches
0 10
3 9
6 8
9 7
12 6
15 5
18 4
21 3
24 2
27 1
30 0
PRODUCTION POSSIBILITIES
FRONTIER
Goods X Goods Y
0 15
1 14
2 12
3 9
4 5
5 0
TOOLS OF ECONOMICS
TOOLS
•Observation
•Definitions and Assumptions
•Deductions
•Empirical Testing
OBSERVATION
•An analyst should be able to recognize
conditions, behaviors, and events in the
environment.
DEFINITIONS AND
ASSUMPTIONS
•The analyst should describe the specific
uses of the study and the peripheral
conditions which affect the economic
behaviors which are being studied.
DEDUCTIONS
•These are hypotheses or theories
presented for empirical validation.
EMPIRICAL TESTING
•Deductions have to be tested as to their
validity and correctness. The presentation
of empirical evidence will be the basis of
rejecting or accepting hypothesis.
MICROECONOMICS VS.
MACROECONOMICS
MACROECONOMICS
•Division of economics that deal with
aggregates.
•It presents pictures of totals: income,
output, employment, spending, and price
level.
•It studies economy as a whole.
MICROECONOMICS
•Division of economics that studies the
economy in parts.
•It is the study of the price system, the
individual consumer, the individual firm.