1. Introduction to the Principles of
Economics
Lesson 1. Fundamentals of Economics
Prepared by: R.A. Liwanag

2. What is Economics?
• Economics is a social science that deals with the
proper utilization of the available scarce
resources, through allocation, production,
distribution, and consumption, to meet the
insatiable needs and wants of man and the
society.
• 4 aspects of UTILIZATION:
– Allocation- priority
– Production- quality and quantity
– Distribution- equity
– Consumption- utility

3. 2 branches of Economics:
Microeconomics is the branch of economics that deals with the
personal decisions of consumers and entrepreneurs. Its
primary concern is to help consumers and investors make
their lives better by increasing their earnings and satisfying
their needs despite limited resources. Also included in its
study are the consumers' decisions on what products to buy
and how the cost of commodities is determined.
– Microeconomics- deals with the study of the fragmented
units of the economy like:
• individual demand and supply,
• price of g/s,
• costs of production, etc.

4. 2 branches of Economics:
Macroeconomics deals with the larger aspects of a nation's economy,
such as the sectors of agriculture, industry, and service. It aims to (a)
speed up the economy's growth rate and increase total production;
(b) increase the rate of employment; (c) keep the prices of
commodities stable so that they remain affordable; and (d) have
sufficient reserves for foreign exchange for importing goods and
paying off loans. Economists help in solving problems like unfair
wages, rapid population growth, people migration to city centers,
high crime incidence, and loss of human resources due to overseas
migration.
– Macroeconomics- deals with the study of the economy as a whole.
Macroeconomic issues are:
• inflation,
• unemployment,
• aggregate demand and supply,
• GNP,
• GDP, etc.

5. Problem can arise between
Microeconomics and
Macroeconomics:
• Both branches of economics can help members of the
society make better economic decisions, however,
there are instances that a microeconomic decision can
be in conflict with the rest of the economy, and vice
versa.
• Sometimes what is good for one, may not be good for
the entire society, and at times, what is good for the
majority, may entail a sacrifice on some of the
members of the economy.

6. 2 Views in Economics:
• Positive View- also known as descriptive economics.
Positive economics is the branch of economics that
concerns the description and explanation of economic
phenomena. It focuses on facts and cause-and-effect
behavioral relationships and includes the development
and testing of economics theories.
– Make good use of statistics and other mathematical tools
in describing the workings of a certain economy. It tells us
if an economy is sick or it is well through the different
economic indicators such as:
• poverty rate
• Unemployment rate
• Income per capita
• GNP/GDP growth rate, etc.

7. 2 Views in Economics:
• Normative economics is that part of economics that
expresses value judgments (normative judgments) about
economic fairness or what the economy ought to be like
or what goals of public policy ought to be.
– Normative View- also known as prescriptive economics.
Through the aid provided by the positive view, Normative
economics would be able to provide for resolution on how to
answer economic problems. It is like prescribing medication
to a sick economy. Medication that is based from an
understanding of what the economy is undergoing.
Prescriptions will be in terms of ECONOMIC POLICIES such as:
• Fiscal policies
• Monetary policies

8. Assumptions in the study of
Economics:
• Indeed our resources are limited, or at least those
which are referred as ECONOMIC RESOURCES.
• Indeed our needs and wants are unlimited, or at
least those which are referred as ECONOMIC
WANTS.
• All economic decisions entails TRADE-OFFS.
• What are non-economic resources?
– Free-goods (air, sunlight, family, friendship, health)
• What are non-economic wants?
– Security needs, Esteem needs, need for love and belongingness,
self-actualization

9. A Brief History of Economic Theory
• Ancient Period
– Plato.
• Theory of Money. Money is anything that is used as a
medium of exchange.
• Theory of Market. Market is a place where income and
employment takes place.
– Aristotle.
• The difference between use value and exchange value.
– Xenophon.
• He wrote the book Oikonomikos, where the term economics
was coined from.

10. A Brief History of Economic Theory
• Medieval Period
– St. Thomas Aquinas. Theorized on lending and
interest. He does not approve of putting interest in
lending money. He called it USURY.
• Classical Period
– Mercantilist Theory.
• A set of economist who proposed that the measure of
economic wealth is the accumulation of gold and silver. They
proposed that the government, as much as possible should
limit importation of goods to limit the outflow of gold and
silver in the economy.
– Physiocrats.
• Agriculture is an important basis of economic wealth.

11. A Brief History of Economic Theory
• Classical School of Economics.
• Adam Smith. An Inquiry into the Nature and Causes of The
Wealth of Nations.
– Father of Modern Economics
– Emphasizes the natural economic order in is concept of the a Laissez
Faire (CAPITALISM or FREE MARKET)
– INVISIBLE HAND – the aggregate of individual self-interest.
• Jean-Baptiste Say
– Say’s Law : “SUPPLY CREATES ITS OWN DEMAND”.
• David Ricardo . Principles of Political Economy and Taxation.
– He focused on the trade-off between rent and prices of corn in the
market.
– He coined the term COMPARATIVE ADVANTAGE

12. A Brief History of Economic Theory
• Thomas Robert Malthus.
– Population Theory. He suggested that there is no need for
government intervention in terms of regulating the population,
stating that nature has its own capacity to regulate itself.
• John Stuart Mill.
– 2 Roles of the Market.
» Allocation of resources
» Distribution of income
In summary the Classical School suggest this Main
Theorem:
P = f(COP)

13. A Brief History of Economic Theory
• Neo-Classical School/ Marginalist School
– Suggested that Price is not only affected by the Costs of
Production, but also the utility provided by the commodity, as
well as the quantity demand.
• Marxist School
– Turned away from capitalism as the best type of economic
system and suggested a Command Economy (COMMUNISM)
– According to the Marxists, capitalism leads to economic
alienation, especially of the working class or the laborers. “Man
is alienated by his own production, by private property”.
– In a COMMAND ECONOMY, all aspect of allocation, production,
and distribution is controlled by the state or the government.
– No private property, everything is communally owned, with the
government as the guardian of this communal property.

14. A Brief History of Economic Theory
• Institutionalist School
– The Circular Flow of Economic Activity

15. Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold services
bought
FIRMS HOUSEHOLDS
Land, labor
Inputs for
and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Income (=GDP)
Wages, rent,
interest and
profit (=GDP)
Flow of goods & services
Flow of money: pesos
THE CIRCULAR FLOW DIAGRAM

16. A Brief History of Economic Theory
• Keynesian School of Economics
– John Maynard Keynes. The General Theory of
Employment, Interest, and Money.
• One of the economic advisers of the then US president
Franklin Delano Roosevelt. He was behind the
economic policy that was labelled as “the New Deal”.
• The West, at that time was experiencing a very long
recession period, history refer to it as the Great
Depression.
• He suggested a new type of economic system called the
MIXED ECONOMY.

17. The Three Basic Economic Problems
• What goods and services should be produced and in
what quantity?
– Allocation
• How should these goods and services be produced?
– Production
• For whom should these goods and services be
produced?
– Distribution
• These all leads to Consumption of the goods and services towards
attainment of Utility or satisfaction.

18. Economic Wants
• Economic wants- goods that require trade off or sacrifice before they can be
attained.
• Non-Economic wants- also known as free goods.
– such as air, family, time.
• Basic wants- goods that are necessary for our basic survival.
– Air, water, food, clothing, shelter.
• Created wants
– Toothpaste, cars, cellphones.
• Public wants – goods that are non-rival and non exclusive.
– Roads, bridges, park, schools.
• Private wants
– Clothes, houses.

19. Society’s Technological Possibilities
Every gun that is made, every warship launched,
every rocket fired signifies, in the final sense, a
theft from those who hunger and are not fed.
- Pres. Eisenhower

20. Inputs and Outputs
• Inputs- are commodities or services that are
used to produced goods and services.
Also known as factors of production.
• Outputs- are the various useful goods and
services that result from the production
process and are either consumed or employed
further in production.

21. 3 Major Economic Resources:
RESOURCES are anything that can be used to satisfy a need or want.
• Land- also known as natural resources. Resources that are provided to us by
nature such as woods from trees, cotton, minerals, such as gold, lead, copper,
etc. Animals are also considered as land resources.
• Labor- also known as manpower or human resources. Labor refers to the time
spend by man for work. Land resources are made available by nature, but they
still need to be processed to be useful, and that will be the role of labor as a
resource.
– Labor Supply
– Labor Force
– Manpower
• Capital- capital refers to any man-made good that can produce other goods,
or that can help man become more productive. Capital can be in the form of
technology such as computers, cellphones, or fixed capital such as buildings,
infrastructures, vehicles, etc.

22. The Entrepreneur
• The entrepreneur is a special type of resource. It can be under Labor as a
capital, however because of the very important role of the entrepreneur in
the production process, we are going to give it special attention.
• The entrepreneur serves as the brains of the production process.
• Characteristics of a SUCCESSFUL entrepreneur:
– INITIATIVE. He initiates the production process. He brings together all
the major factors of production, Land, labor, and capital.
– IDEALIST. He is the origin of ideas for production. He thinks of
strategies and solutions to problems. Remember that all great things
started as ideas.
– INNOVATIVE. Non-traditional & non-conventional. Thinks out of the
box.
– RISK-TAKER. You have to spend money to earn money, better, YOU
HAVE TO SPEND BIG MONEY, TO EARN BIG MONEY. But with risk, it
entails good strategies, and great and innovative ideas.
• Examples of great entrepreneurs are STEVE JOBS, MARK ZUCKERBERG, HENRY SY.

23. TRADE-OFFs
• Due to the law of Scarcity, all Economic Decision
entails a TRADE-OFF, every decision has a
opportunity cost.
• TRADE-OFF is the condition of attaining things,
but requiring a sacrifice at the same time.
• OPPORTUNITY COSTS is the value of the
alternative that is lost

24. The PPF
The Transformation Curve
Production-Possibility Frontier -shows the
maximum amounts of production that can be
obtained by an economy, given its
technological knowledge and quantity of
inputs available.
The PPF represents the menu of goods and
services available to society.

25. Alternative Production Possibilities
Possibilities Butter (millions of pounds) Guns (Thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Table 1. Limitation of scarece resources implies the Guns-Butter tradeoff

26. The Production-Possibility Frontier
16
14
12
Guns (Thousands)
10
8 Series1
6
4
2
0
0 1 2 3 4 5 6
Butter (million of pounds)

27. Points within the transformation
curve is a situation called
Productive Efficiency, wherein you
can not produce more of a good
without curtailing the production
of other goods.
Examples are Point A, B, and C.
Points at the left of the
transformation curve are within
the area of inefficiency, where
resources are mostly idle and not
optimally used.
Example is Point X.
Points at the right of the
transformation curve are within
the non-feasible region, meaning
the combination is not within the
productive capacity of the
economy.
Example is Point Y

28. Opportunity Cost and Efficiency
In a world of scarcity, choosing one thing means
giving up something else. The opportunity cost of
a decision is the value of the good or service
forgone.
Productive Efficiency occurs when an economy
cannot produce more of one good without
producing less of another good; this implies that
the economy is on its production-possibility
frontier.