2. What is Economics?
A social science concerned with using scarce resources
to obtain the maximum satisfaction of the unlimited
material wants of 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)
A social science concerned with using scarce resources
to obtain the maximum satisfaction of the unlimited
material wants of society. (McConnel and Brue)
The study of how people use their limited resources to
try to satisfy unlimited wants. (Parkin and Bade)
3. Types of Economics System
1. Capitalism – an economic system
characterized by private individuals
owning and operating the majority of
business that produce
Rights of Capitalism
Right to own private property
Right to gain profits
Right to make business decisions
Right of choice
4. Types of Economics System
2. Communism – A society in which the
Government owns all the nation’s
resource.
All rights stated in the capitalism are not
allowed in communism.
3. Socialism – the government owns and
operates the basic industries. Private
individuals are allowed, however, to own
and operate small business.
4. Mixed Economies – A mixed economy
is one that has elements from more than
one economic system. It contains both
private and state enterprise.
5. The Economic Resources
1. Land – include land used for agricultural
or industrial purposes as well as natural
resources taken form above or below the
soil.
2. Labor – productive services embodied
in human physical effort, skill, intellectual
powers, and others.
3. Capital – durable goods produced in
order to produce other goods (e.g.
machines)
4. Entrepreneurial Ability – An ability to
decide on and implement the right
combination of the first three factors of
production
7. Divisions of Economics
1. Microeconomics – concerned with the
behavior and activities of specific economic
units – individuals, households, firms,
industries and resource owners
2. Macroeconomics – deals with the
behavior of the economy as a whole with
respect to output, income, price level,
foreign trade, unemployment, and other
aggregate economic variables.
8. Stock and Flow
• Stock – refers to the measure of quantity at
a point of time. (e.g. December 31, 2013)
• Flow – refers to the measure of movement
of quantity over a period of time. (e.g. Per
year)
9. The Circular Flow of Goods, Services, and
Income
The Production Process
- The process of producing goods and
services involves households and firms in a
circular flow
Land, Labor, Capital
(Economic Resources)
Firms
Households
(Organizers and users of
economic resources)
(Resource Owners)
Goods & Services
(Outputs)
10. The Circular Flow of Goods, Services, and
Income
The Flow of Goods Among Producing
Firms
- A flow which happen among different
types of business firms:
Raw Material Producers – firms produce
raw materials such as fish, wood, sugarcane
and others.
Intermediate Goods Producers – firms
produce goods that are partially processed
and still need further processing before they
can finally consumed (e.g. flour, steel bars)
Final Good Producers – firms produce
goods that are ready for final consumption
such as RTW clothing, candies, etc.
11. The Flow of Output between Firms and
Households
Raw Material
Firms
Raw Materials
Intermediate
Good Firms
Intermediate
Goods
Final
Good Firms
Final Goods
12. HOUSEHOLDS
The Circular Flow of Goods and Income Among
Producers and Households
Economic Resources
Payment
Economic Resources
Payment
Economic Resources
Payment
Final Goods
Payment
Raw Material
Firms
Final
Good Firms
Intermediate
Good Firms
13. The Circular Flow of Goods, Services, and
Income
Income Flow – this created when money is spent by
households for consumption and by firms for
production. Income takes two distinct circular flows as
follows:
Between households and firms
Between firms
Raw Material
Firms
Households
Income Flow
Income Flow
Income Flow
(For purchase of
intermediate goods)
Income Flow
(For purchase of raw
material)
Intermediate
Good Firms
(Purchase of goods and
services)
(wages, interest, rents)
Final
Good Firms
Firms
Income Flow
(For purchase of final
goods)
Income flow between
households and firm
Income flow between firms
14. The Circular Flow of Goods, Services, and
Income
Equilibrium– happens when the amount received by
firms from households is equal to the amount
received by households form firms
Disequilibrium – happens when either households or
firms do not spend their income
The Effect of
Reduction of
Purchases
Households
Reduced Income
Reduced Income
(as a result of reduced
purchase of economic
resources)
(as a result of reduced
purchase of goods and
services)
Firms
15. The Circular Flow of Goods, Services, and
Income
Savings and Investments
Saving – income not spent, or deferred consumption.
Happens when households allocate a part of their
income for future use.
Investments – a way of disposing unsold output.
Investment is the accumulation of newly produced
physical entities, such as factories, machinery,
houses, and goods inventories.
When the savings of households are matched by
investments expenditures of firms, disequilibrium is
negated and the circular flow of income will tend
normalize.
16. The Circular Flow of Goods, Services, and
Income
CIRCULAR FLOW OF GOODS AND INCOME IN A SIMPLE
ECONOMY WITH SAVING AND INVESTMENT
Firms
Rent
Wages
Interest
Profit
Land
Labor
Capital
Goods
and
Services
Households
Investments
Capital goods
Payments
