Basic Economics with Taxation and Agrarian Reform I. INTRODUCTION 1. NATURE OF ECONOMICS a. b. c. d.

It is a social science concerned with the efficient use of scare resources to achieve the maximum satisfaction of economic wants. It is concerned with obtaining maximum satisfaction through the efficient use of scare resources Area study by Economic are the economic behavior and economic relationship The economic perspective stresses: Resources scarcity and the necessity of making choices The assumption of rational behavior Comparisons of marginal benefit and marginal cost Economic wants far exceed the productive capacity of our limited or scarce resources The complete satisfaction of societys economic wants is impossible Rational Behavior it means that the same person may make different choices under different circumstances economics assumes that human behavior reflects rational self-interest individual look for and pursue opportunity to increase their utility- that is pleasure, happiness, or satisfaction it also means that choice will vary greatly among individuals Marginal Analysis Comparison of marginal benefits and marginal cost Marginal means extra, additional or change in

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METHODOLOGY OF ECONOMICS a. b. Economic relies on scientific method It consist of number of elements Observation of facts Based on those facts, the formulation of a possible explanation of cause and effects (hypothesis) The testing of this hypothesis by comparing the outcomes of specific events to the outcome predicted by the hypothesis The acceptance, rejection, or modification of the hypothesis, based on these comparisons The continued testing of the hypothesis against the facts Theoretical Economics It involves formulating theories (or laws and principles ) and using them to understand and explain economic behavior and the company ; Economic principles Expressed as the tendencies of typical or average consumers, workers, or business firms Abstractions Simplifications that omits irrelevant facts and circumstances Leads some people to consider economic theory impractical and unrealistic Policy Economics Recognizes that theories and data can be used to formulate policies-courses of action based on economic principles and intended to resolve a specific economic problem or further an economic goal Involves using the theories to fix economic problems or promote economic goals The instrument that use to attain economic goals and objectives Economic theories are the foundation of economic policy It is normally applied to problems after they arise Economic Policy- the creation of policies to achieve specific goals is no simple matter. Here are the basic steps in policymaking (requires a clear statements of goal, a thorough assessment of option, and an unbiased evaluation of results) State the goal is to make a clear statement of the economic goal the goal must be specific Determine the policy option Formulate alternative policies designed to achieve the goal and determine the possible effects of each policy This requires a detailed assessment of the economic impact, benefits, costs, and political feasibility of the alternative policies Implement and evaluate the policy that was selected Evaluate how well it worked Positive Economics Focuses on facts and cause-and-effect relationship It includes description, theory development, and theory testing (theoretical economics) It avoids value judgments, tries to establish scientific statements about economic behavior and deals with what the economy is actually like Concern what is Normative Economics Incorporates value judgment about economic about what the economy should be like or what particular policy actions should be like or what particular policy actions should be recommended to achieve a desirable goal. It looks at the desirability of certain aspects of the economy Embodies subjective feelings about what ought to be

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Note: Some of societys economic goals are complementary, while others conflict; where conflicts exist, tradeoffs arise. BASIC ECONOMIC PROBLEMS Four Economic Problem What are the products and services to produce?

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How to produce? For whom to produce? Availability of the produce?

Production make of something out of nothing Scarcity and Choice Since human and property resources are scare (limited) It follows that the goods and services we produce must also be limited Scarcity limits our option and necessitates that we make choice Economic Resources Used for the production of economic goods Characteristics of Resources (1) alternative uses and (2) productive uses Factors of Production Land all natural resources. Used in the production process Capital includes all manufactured aids use in producing consumer goods and service 1) Included are all tools, machinery, and distribution facilities 2) The process of producing and purchasing capital goods is known as investment 3) Consumer goods satisfy wants directly, while Capital goods do so indirectly by aiding the production of consumer goods Labor is broad term for all the physical and mental talents of individual available and usable in producing goods and services. Entrepreneurial Ability special human resources, distinct from labor 1) he is the person who combines the other economic resources for the use in the production of goods and service Distribution the transfer of product from one place to another Consumption Growth over time

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BASIC ECONOMIC GOALS If economic policies are designed to achieve certain economic goals, then we need to recognize a number of goals that are widely accepted in the United States and many countries. a. b. c. d. e. f. g. h. Economic growth produce more and better goods and services, or, more simply, develop a higher standard of living Full employment provide suitable jobs for all citizens who are willing and able to work Economic efficiency achieve the maximum fulfillment of wants using the available productive resources Price-level stability avoid large upswings and downswings in the general price level; that is, avoid inflation and deflation Economic freedom guarantees that businesses, workers, and consumers have a high degree of freedom in their economic activities Equitable distribution of income ensure that no group of citizens faces poverty while most others enjoy abundance Economic security provide for those who are chronically ill, disabled, laid off, aged, or otherwise unable to earn minimal levels of income Balance of trade seek a reasonable overall balance with the rest of the world in international trade and financial transactions

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MACROECONOMICS Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors. Aggregate is a collection of specific economic units treated as if they were one unit Using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the structure of the economy and the relationships of its major aggregates It speaks of such economic measure as total output, total employment, total income, aggregate expenditure, and the general level of prices in analyzing various economic problems It examines the beach, not the sand, rocks, shells

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MICROECONOMICS Look at specific economic units It examine the sand ,rocks and shells, not the beach

Note: Both macro and micro distinction does not mean that economics is so highly compartmentalized that every topic can be readily labeled as either macro or micro; many topics and subdivisions of economics are rooted in both. 7. ECONOMIC SYSTEM A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem Economic system is differ as to: a) who owns the factors of production b) the method used to coordinate and direct economic activity market places where buyers and sellers come together Traditional Economy is a very backward type of economy characterized by a system where the production of products, trading and distribution of incomes are sanctioned by custom referring to the traditional manner of doing things makes decisions on what, how and for whom to produce methods of production are carried over by the system of the forefathers religious and cultural values are over and above economic activity Capitalism or Market System Market system refer to capitalism system Resources are privately owned and the people themselves make decisions Also known as market economy

There are many independent buyers and sellers of each product and resources therefore competition arises giving height to consumer sovereignty Price of a good is basis for the producers to know The Command Economy Government owns the means of production Government dictates what, how, and for whom to produce All the capital resources and consumer goods are being divided to its citizenry No private or individual production and consumption Government dictates the price Mixed System There are only few country that has a pure economic system The Philippines applies three form of economic system Pure Competition Also known laissez-faire capitalism Governments role would be limited to protecting private property and establishing an environment appropriate to the operation of the market system and keep government from interfering with the economy

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MARKET MECHANISM Economic Model is a simply representation of economic reality its purpose is to explain economic reality Production Possibilities or Transformation, Frontier, Curve a b F c d d f Production possibilities Economic growth by sacrifies

Production is less when the time is not use efficiency and fully use. More resources improved technologies skills. 2 Relationships a) Master-slave relationship (b) friendly-cooperative relationship Interest of the Capitalist low wages, long time Interest of the worker high wages, short time Thesis vs. Antithesis

contradiction Dialectical idealism and Dialectical Materialism

Market Economy = Market System

Price System consideration for the problem Cost of production (wage of labor, electric wage, raw material, rent and etc.) Price social determine by interaction of buyer and seller

Buyer Market

Seller

Demand consumer behavior

Supply supplier behavior Price E

Q Manifestation of Human Behavior Demand is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of a series of possible prices during a specified period of time Simply a statement of a buyers plans, or intention, with respect to the purchase of a product Law of demand as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls, cheteris paribus There is negative or inverse relationship between price and quantity demanded This inverse relationship is the law of demand Cheteris paribus all other things are constant Price determine by the buyer and seller Obstacle that deters consumer from buyer Higher the obstacle, the less of product they will buy Lower the obstacle, the more of product they will buy Sales evidence of their belief n the law of demand Income effect indicates that a lower prices increase the purchasing power of a buyers money income, enabling the buyer to purchase more of the product than she or he could buy before Demand Curve connected the points with a smooth curve Its downward slope reflects the law of demand Determinants of Demand the other factor can and do affect purchase Price of goods Price of related goods Income Taste/preference Change in demand a change in the demand schedule or graphically a shift in the demand curve is called a change in demand Qx = (Px, Py, Y, T/P, etc) Qx quantity of good Px price of goods Py price of related goods Y income T/P taste or preference Qx = f (Px) Px Px Qx Qx P= stimulus Q= response

Note: end with cheteris paribus Demand Schedule Qx = f (Px) Qx = 11 Px Px 1 2 3 4 5 Qx 10 9 8 7 6

QUANTITY DEMANDED

Py price of related goods x and y 2 kinds of related goods Substitute goods competing goods Complementary goods goods consumes together

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Qx

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Qx