The Nature and Importance

of Economics
 OBJECTIVES
• To define Economics
• To explain the basic economic problem
• To discuss the different concerns of economics
• To relate Economics with other Social Sciences
• To identify the two main divisions of Economics
• To enumerate and differentiate economic
systems, resources, and goals
 Economics Defined
• “…a social science concerned with
using scarce resources to obtain
maximum satisfaction.” (Walstad
and Bingham, 1993)
 Economics Defined
• “…the study of production,
distribution, selling, and use of
goods and services.” (Collin, 1997)
 Economics Defined
• “…the study of how people use
their limited resources to try to
satisfy unlimited wants.” (Parkin
and Bade, 1991)
 Question:
• What is the common
ground of the definitions?
 The Common Ground:
•Resources • Human needs
are scarce. and wants are
unlimited.
 More Definitions:
• SCARCITY
– “the imbalance between our desires and
the means of satisfying those desires.”
(Hyman, 1992)

– The condition wherein most things that

people need and want are available only
in limited supply.
 More Definitions:
• WANTS
–“…refer to a person’s desires or
preferences for specific ways for
satisfying a basic need.”
(Bannock, 1974)
 More Definitions:
• OPPORTUNITY COST
–“…the cost of choosing to use
resources for one purpose measured
by the sacrifice of the next best
alternative for using those
resources.” (Hyman, 1992)
 Question:
• From the foregoing
definitions, what do you
find to be the basic
economic problem?
The Fundamental Economic Problem:

SCARCITY
The Decision Questions:
1. What goods and services must be
produced and in what quantities?
• Rice or weapons?
• If rice, how much of what type?
The Decision Questions:
2. How shall these goods and
services be produced?
• Who shall produce them?
• What resources and technologies shall
be used?
 The Decision Questions:
3. For whom shall these
goods and services be
produced?
• Who shall consume them?
• What are the benefits from the results
of economic activities?
The Concerns of Economics:
PRODUCTION, DISTRIBUTION
and CONSUMPTION of
goods and services.
Economics is Concerned with:
• PRODUCTION
– The creation or addition of utility.
– Utility is the economic term for
usefulness. It is the ability of a good or
service to satisfy a want.
• Form Utility
• Place Utility
• Time Utility
• Possession Utility
Economics is Concerned with:
•PRODUCTION
– Factors: (Economic Resources)
• Land – land and natural resources
• Labor – time and effort of human beings
involved in the production process.
• Capital – goods used to produce other goods
• Entrepreneurship – undertaking that
combines the three other factors in the
production process.
Economics is Concerned with:

•DISTRIBUTION
– The allocation of the total product among the
factors of production.
– The distribution of money incomes among the
factors of production.
• Land – RENT
• Labor – WAGES
• Capital – INTEREST
• Entrepreneurship – PROFIT
Economics is Concerned with:

•CONSUMPTION
–The use of a good or a service.
–Without it, there would be no
need for production and
distribution.
Economics is Concerned with:
• GOODS AND SERVICES
–Characteristics of Economic
Goods:
• Material
• Useful
• Scarce
• Transferable
Economics is Concerned with:
• GOODS AND SERVICES
–Economic Services – non-material
activities that are useful, scarce, and
transferable.

–Give examples of economic

services…
Economics and the Social Sciences
Economics is related to: Because:

• Political Science • Government

has a role in the
economy
Economics and the Social Sciences
Economics is related to: Because:

• Sociology • Low standard of

living leads to
social problems.
Photos courtesy of: Mio Cade & Sidney Snoeck
Economics and the Social Sciences
Economics is related to: Because:

• Philosophy • Economic acts

are humans acts
(morality).
Economics and the Social Sciences
Economics is related to: Because:

• History • Economic
development
occurs
through time.
 Divisions of Economics:
MICROECONOMICS MACROECONOMICS
• Concerned with the • Deals with the behavior of
“behavior and activities of economy as a whole w/
specific economic units – respect to output, income,
individuals, households, the price level, foreign
firms, industries and trade, unemployment &
resource owners.” other aggregate economic
• Critical concept variables.
 MARKET
 Economic Goals:
1. Economic Growth
2. Full Employment
3. Economic Efficiency
4. Price Level Stability
5. Economic Freedom
6. Equitable Distribution of Income
7. Economic Security
8. Balance of Trade
 Economic Goals:

1. Economic Growth
–Society desires a higher standard of
living manifested by the production
of more and better quality goods
and services.
http://www.tradingeconomics.com/philippines/infl
ation-cpi
 Economic Goals:
2. Full Employment
–There must be jobs for those
who are willing and able to
work.
 Economic Goals:

3. Economic Efficiency
–The utilization of resources to
derive the maximum benefits for
the society.
 Economic Goals:
4. Price Level Stability
–The economy should be able to
avoid great fluctuations in the
general level of prices.
http://www.tradingeconomics.com/philippin
es/inflation-cpi
 Economic Goals:
5. Economic Freedom
–High degree of freedom to choose
what economic activity to
undertake afforded to various
sectors.
 Economic Goals:
6. Equitable Distribution of
Income
–The condition whereby the rich get
richer and the poor get poorer is
prevented.
 Economic Goals:
7. Economic Security
– Enough provision must be accorded for
those who are not able to earn minimal
income like the aged, the chronically ill,
the disabled, etc.
 Economic Goals:
8. Balance of Trade
–Balance between import
expenditures and export revenues
must be maintained.
Millennium Development Goals
 SUMMARY
•Economics is the study of the production,
allocation, and consumption of limited
resources to satisfy unlimited human needs and
wants.

•The basic economic problem is scarcity.

•Economics is mainly concerned with

production, distribution, consumption, as well
as goods and services.
 SUMMARY
•Economics is related to various discipline in
the Social Sciences.

•Economic goals include economic growth; full

employment; economic efficiency; price level
stability; economic freedom; equitable
distribution of income; economic security; and
balance of trade
 Main Reference:
• Principles of Economics by
Roberto Medina, Chapter 1.