MICROECONOMICS

SIMPLIFIED

Edilberto B. Viray, Jr. MAE

Ma. Jesusa Avila – Bato, MAE
Lucky Raymundo M. Malveda, MAE
MODULE I
RESOURCE
UTILIZATION &
ECONOMICS

ANVIL PUBLISHING INC., 2016

Learning Objectives

After reading and studying this chapter, you should be able to:

• Define economics
• Define scarcity
• Identify the factors of production
• Understand the concept of opportunity cost
• Identify the four basic economic questions
• Describe the three Es in economics
• Differentiate microeconomics from macroeconomics
• Categorize the different types of economic systems
 Define Economics  The Three E’s in Economics
 Scarcity  Economic Analysis: Positive and
Normative Economics
 Factors of Production
 Ceteris Paribus
 Circular Flow of Model
 Microeconomics and
 The Concept of Opportunity Macroeconomics
Cost  Types of Economic Systems
 Basic Decision Problems  Important Economic Terms
 Origin and Foundation of  Distribution
Economics  Brief History of Economics:
 Four Basic Economic  The Classical, Keynesian and
Questions Modern Economics
What is ECONOMICS?
 A science that deals with the management of scarce
resources. It is also described as a scientific study on how
individuals and the society generally make choices .
 It should be noted that individuals and groups within the
society have innumerable wants, and to satisfy these
wants, there are available resources that can be utilized.
However, since these resources are finite, they are not
freely available. Economics steps in to assist individuals
and societies in making proper choices – that is, the
allocation and utilization of economic resources, with the
end in view of satisfying human wants for goods and
services.
Origin of the term “economics”
 
The two Greek roots of the word economics are oikos –
meaning household – and nomus – meaning system or
management. Oikonomia or oikonomus therefore means
the “management of household.”
 
With the growth of the Greek society until its development
into city-states, the word became known or was referred to
as “state management”.
Scarcity
 The basic and central economic problem
confronting every society.
 It is also “limited resources in Demand.”
 The heart of the study of economics, and the
reason behind its reality.
Factors of Production

1. Land --------------------- Rent

2. Labor -------------------- Salary/Wages
3. Capital ------------------- Interest
4. Entrepreneurship ------- Profit
The Circular Flow Model
The Concept of Opportunity Cost
 
Because people cannot have everything they want, they are forced to
make choices between several options. Opportunity cost refers to the
foregone value of the next best alternative. It is the value of what is
given-up when one makes a choice. The thing thus given-up is called the
opportunity cost of one’s choice.
 
When one makes choices, there is always an alternative that has to be
given up. A producer, who decides to produce shoes, gives up other
goods that he could have produced using the same resources. A
student, who buys a book with his limited allowance, gives up the
chance of eating out or watching movie.
Basic Decision Problems

•Consumption ------------- Consumers

•Production ---------------- Producers
•Distribution ---------------- Government
•Growth Over Time -- Society & the rest of the World
Four Basic Economic Questions
1.What to produce?

2. How to produce?

3. How much to produce?

4. For whom to produce?
 3 Es in Economics

1. Efficiency refers to productivity and proper allocation

of economic resources

2. Equity means justice and fairness

3. Effectiveness means attainment of goals and objectives.

Positive and Normative Economics
 
Positive economics is an economic analysis that considers economic
conditions “as they are”, or considers economics “as it is”. It uses
objective or scientific explanation in analyzing the different transactions
in the economy. It simply answers that question ‘what is’.

Normative economics is economic analysis which judges economic

conditions “as it should be”. It is that aspect of economics that is
concerned with human welfare. It deals with ethics, personal value
judgments and obligations analyzing economic phenomena. It answers
the question ‘what should be’. It is also referred to as policy economics
because it deals with the formulation of policies to regulate economic
activities.
Ceteris Paribus Assumption
 
•The assumption of “Ceteris Paribus” is important in
studying economics. Ceteris paribus means “all other things
held constant or all else equal.”

•This assumption is used as a device to analyze the

relationship between two variables while the other factors
are held unchanged. It is widely used in economics as an
exploratory technique as it allows economists to isolate the
relationship between two variables.
 Economics has two major branches:
Microeconomics
 Deals with the individual decisions of units of the economy
—firms and households, and how their choices determine
relative prices of goods and factors of production.
 The market is the central concept of microeconomics. It
focuses on its two main players—the buyer and the seller,
and their interaction with one another.
 Microeconomics operates on the level of the individual
business firm, as well as that of the individual consumer. It
concerns how a firm maximizes its profits, and how a
consumer maximizes his/her satisfaction.
Macroeconomics
 Studies the relationship among broad economic
aggregates like national income, national output, money
supply, bank deposits, total volume of savings, investment,
consumption expenditure, general price level of
commodities, government spending, inflation, recession,
and employment.
 Macroeconomics focuses on the four specific sectors of the
economy: the behavior of the aggregate household
(consumption); the decision making of the aggregate
business (investment); the policies and projects of the
government (government spending); and the behavior of
external/foreign economic agents, through trading (export
and import).
Types of Economic Systems

Traditional Economy
It is basically a subsistence economy. A family produces goods only for
its own consumption.

Command Economy
It is a type of economy, wherein the manner of production is dictated by
the government. The government decides on what, how, how much,
and for whom to produce.

Market Economy
or capitalism’s basic characteristic is that the resources are privately
owned, and that the people themselves make the decisions. It is an
economic system wherein most economic decisions and means of
production are made by the private owners.
Types of Economic Systems

Socialism
It is an economic system wherein key enterprises are owned by the state. In
this system, private ownership is recognized.

Mixed Economy
This economy is a mixture of market system and the command system. The
Philippine economy is described as a mixed economy since it applies a
mixture of three forms of decision-making.
Important Economic Terms

•Wealth
•Consumption
•Production
•Exchange
•Distribution
Brief History: The Classical, Keynesian and
Modern Economics

David Ricardo, 1772-1823

John Maynard Keynes, 1883-1946

Adam Smith, 1723-1790

Birth of Economic Theory: Classical Economics
 
Adam Smith, 1723-1790
•He is considered the most important personality in the history of
economics—being regarded as the “Father of Economics”.
•He was responsible for the recognition of economics as a separate
body of knowledge. His book, “Wealth of the Nations”, published in
1776, became known as “the bible in economics” for a hundred years.
•One of his major contributions was his analysis of the relationship
between consumers and producers through demand and supply, which
ultimately explained how the market works through the invisible hand.

David Ricardo
•He developed the basic analysis of the political economy or the
importance of a state’s role in its national economy.
Karl Marx
•A German, who is influenced by the conditions brought about by the
industrial revolution upon the working classes. His major work, Das
Kapital, is the centerpiece from which major socialist thought was to
emerge.

Neoclassical Economics (1870s)

 
Leon Walras, who introduced the general economic system, and Alfred
Marshall, who became the most influential economist during that time
because of his book Principles in Economics.
•Walras developed the analysis of equilibrium in several markets. On the
other hand, Marshall developed the analysis of equilibrium of a
particular market and the concept of “marginalism”.
Keynes’ General Theory of Employment, Interest and Money
 
John Maynard Keynes

•An English economist who offered an explanation of mass unemployment

and suggestions for government policy to cure unemployment in his
influential book: The General Theory of Employment, Interest and Money
(1936). Keynes’ concern about the extent and duration of the worldwide
interwar depression led him to look for other explanations of recession.
•Furthermore, he argues that investment depends primarily on business
confidence which would be low during a depression so the investment would
be unlikely to rise even if interest rate fell. Finally, he argued that the wage
rate would be unlikely to fall much during a depression given its ‘stickiness’,
and even if it did fall, this would merely exacerbate the depression by
reducing consumption.
Non-Walrasian Economics (1939)
 John Hicks was recognized for his analysis of the IS–LM model, which is an
important macroeconomic model. IS refers to the goods market for a given
interest rate, while LM means money market for a given value of aggregate
output or income.

Post-Keynesian Economics (1940 and 1950s)

This Era saw the development of rules and regulations of different private
and public institutions. This period introduced major post-Keynesian,
neoclassical economists, whose views are known as the post-Keynesian
“mainstream economics”.
This period welcomed various economists like Paul A. Samuelson, Kenneth
J. Arrow, James Tobin and Lawrence Klein, to mention some recognized
leaders; and others are Joan Robinson; and Michael Kolechi. Another
stream of thought was introduced by liberal market post-Keynesians,
mainly the monetarists, led by Milton Friedman.
New Classical Economics
 
•New Classical Economics highlighted the importance of adherence to
national expectations hypothesis and analysis, which included various
economic phenomena in formulating different kinds of studies and new
theories in economics.

•This development in economics is applicable to concerns of developing

countries, and was largely an outcome of concern for the growth of
developed countries. The great economists like Smith, Ricardo and
Malthus addressed this problem.
Discussion Questions

1.Describe how scarcity affects the economic system of a

certain country.

2. Differentiate positive from normative economics by utilizing

simple examples.

3. Identify distinguish economist and the importance of their

works.

4. Differentiate microeconomics from macroeconomics.

5. Explain opportunity cost using you own example/experience.

End of Module I