ECONONE LONG EXAM 1 REVIEWER (1, 2, of 3) I.

. CHAPTER 1 VALUE OF STUDYING ECONOMICS Definition of Economics As allocation of wealth o A social science that deals with the allocation of scarce resources to satisfy unlimited human needs and wants o Allocation Mechanism of distribution used by society to address needs and wants of citizens o Price system of allocation Uses market forces to determine the value of goods and services o Traditional system of wealth allocation Based on social consensus and tradition handed down from generations o Command system of allocation Based on the dictates of the governments central planning agency As creation and consumption of wealth o Science of wealth-getting and wealth-using o There is a need to expand or create wealth in order to have goods and services that can be consumed or utilized by the members of a society now and in the future o Process of production Employment of resources as productive inputs Role of technology in the process of transforming raw materials into new products o Process of distribution Payments for the use of productive inputs based on their productivities and contributions As a science of choice o We have to make choices because our resources are finite and there are numerous alternatives available. o The primary guideline is to get the best from the limited resources (optimization) Consumers maximize their satisfaction subject to the limitations of their income Firms maximize their profits subject to the limitations of the available resources for production ECONOMICS IS ALL ABOUT WEALTH. Problems of Material Survival and Progress Social survival and social progress Culture o Dignity of the people or their communal sense of worth o Cultural development Giving the citizens an expanded capacity to enjoy the dignity of their lives, actions and beliefs Politics o Power and freedom to maintain order o Political development Giving as many individuals as possible greater capacity to use freedoms and opportunities in asserting the life they want Economics o Wealth as a means of material survival and growth o Economic development

Not only for the expansion of wealth, but also the equitable distribution of the fruits of this wealth.

Basic Economic Questions What goods to produce? o There should be a social mechanism for ranking the relative importance of human needs and wants o Market system = mechanism is determined by the price that people attach to these goods and services Increasing price indicator that there is a huge demand for a product, and it should be produced o Planning system mechanism for setting priorities is made by the central planning agency o Traditional society mechanism for ranking is based on social norms How many will be produced? o Based on human wants, extent of wealth, and technology used o Market system price of commodity will dictate the number to be produced How will it be produced? o Technology refers to the intensity of use of a resource relative with another resource o Market system evaluates the relative cost of productive inputs and their productivities For whom will it be produced? o The end of production is consumption o Market system the portion allocated to various citizens will depend on their relative contributions in the production process The relative productivities of their participation will likewise determine how much a citizen will get o Planning system Social equity, etc. II. METHODS OF ECONOMICS Scientific Method Five major tasks o Formulation of the problem May arise from existing issues or limitations or previous studies in answering economic or social problems o Establishing possible answer or hypothesis Intelligent guess o Gathering data and information Approach depends on the objectives of the study o Treatment and analysis of data Arranging, manipulating and testing data in order to make it suitable for analysis o Interpretation of data and conclusion Accept or reject the hypothesis Relationship of Economics with Other Fields of Knowledge Economics is more closely related with other fields of social studies Has indirect connections with other fields of knowledge Commercial sciences are practical, specific and detailed in terms of level of analysis Positive and Normative Economics Positive Economics o Descriptive in approach in the sense that it illustrates what is happening to the various actors, sectors, and institutions within and outside the economy o Uses logic and philosophy

Aims at explaining how economic processes are conducted or how economic agents behave Normative Economics o Prescriptive in approach in the sense that it directs us on what ought to be done o Intention is to give a recommendation on what economic processes should be implemented or what behavior should economic agents undertake to attain an ideal state of economy o

Microeconomics and Macroeconomics Microeconomics o Deals with the analysis on how the allocation of scarce resources is conducted b small economic units, sectors, and institutions in the economy. o Studies the preference of consumers, producers, enterprises and government agencies in the allocation of scarce resources o Price as a mechanism of allocation Macroeconomics o Allocation of scarce resources but takes the analysis at the perspective of the entire economy o The behavior of all consumers is being studied o Main concern is the stability of the economy o Features imbalances between aggregates like savings and investment, government expenditures, and taxes, and how these imbalances can affect national income, inflation, and unemployment Use of Mathematics Widely used in positive economics Language of mathematics and of logic becomes very convenient for its simplicity and precision. Using Models Models are used to illustrate the economists hypothesis, theories, and estimates on what is happening in a particular economy A way of representing complicated realities by eliminating unimportant specific traits but without losing the general trend or perspective Using Graphs Graphical representations of economic models Using Statistical Analysis To measure whether economic relationships are true in reality Econometrics used to empirically test the statistical significance of these economic relationships Prediction and Ceteris Paribus In creating predictions, many things and factors that affect a certain thing. If we want to single out the effect of price on the demand of the product, we have to make an assumption that other factors are not changing while the price of the commodity is changing (ceteris paribus all else held constant) III. MARKET SYSTEM Concept of Scarcity A reality we have to face not only because resources are limited, but more so because these resources have many competing uses The more complicated the human wants become, the more resources are needed to fulfill them, and the problem of scarcity becomes intense

Price as an Index for Scarcity The problem of scarcity can be addressed by looking into the needs and wants of the consumers of society o Wants continue to expand o Controlling these wants can tackle the problem of scarcity Using the market system or the price system The market system o Uses the forces of demand and supply to determine the price of a commodity o Price becomes an indicator of scarcity Increasing price = commodity is become relatively scarce Decreasing price = commodity is abundant Market System: Answering the Problems of Production and Distribution Can answer what goods to be produced o As the price of a certain commodity increases, the product is relatively scarce and the demand for commodity is high, thus the producer will expand the production (vice-versa for decreasing price) Can answer the problems of distribution o Those with factor inputs with higher productivities will receive higher returns or compensation for the use of their resources Setting the Market Price: Interaction of Demand and Supply The price of a commodity will depend on the interaction between buyers and sellers To the buyers, their wants and preferences are the factors that shape their demand for various goods and services o This value is reflected in the price of the good or service they are willing to purchase o There is an indirect relationship between the price of the commodity and the amount the buyers are willing to pay for the commodity At a high price, they have to relate this value with a high level of additional satisfaction (marginal utility) which is only attained when they consume less of the commodity At a lower price, buyers are willing to purchase more off the commodity because they attach a lower value of additional satisfaction with a relatively abundant commodity To the producers, their willingness to supply a commodity will depend on their cost of production o At a lower price, there are very few sellers who are efficient in production that can produce the commodity at a lower cost o As the price is increased, there will be more firms who can match the higher price with their higher costs Despite the disparity of orientation of consumers and producers in the market, there will be a situation when both will agree on the price and the amount of goods to be consumed and supplied o If the price is high, consumers will demand less while producers will supply more resulting in a surplus. In turn, the suppliers will compete among each other by lowering their price to expand their sales Surplus will continue to be eliminated if the forces of competition among sellers continue until reaching the equilibrium point