INTRODUCTION TO

MACROECONOMICS
CHAPTER 1
 INTRODUCTION

It is essential that the student be familiar with

the terms that will be used in the study. A
knowledge of these terms shall facilitate his
understanding of economic analysis.
 Basic Terms in Economics
• Good – is anything which yields satisfaction to someone. It is anything used
to satisfy a person's wants and desires.
• Goods may be tangible when they are in the form of material goods or
commodities.
• They may also be intangible in the form of services
• Tangible goods like shoes, books, and umbrellas, and intangible services
like those rendered by the doctor, the teacher, or the painter are all used in
the satisfaction of human wants and needs.
 MACROECONOMICS AND
MICROECONOMICS
• Macroeconomics is the division of Economics that deals with
aggregates. It presents pictures of totals: income, output, employment,
spending, and price level. It studies the economy as a whole.
• Microeconomics is the division of Economics that studies the
economy in parts. It is a study of the price system, the individual
consumer, the individual firm.
Goods may also be classified according to use:

• Consumer goods – goods which yield satisfaction

directly, just like soft drinks and food.
• Capital goods – Goods used in the production of other
goods and services are. Examples of these are buildings,
machinery, and equipment.
Goods may also be classified according to use:

• Essentials goods – if they are used to satisfy the basic needs

of man such as food, shelter, and medicine.
• Luxury goods – are those goods man may do without, but
are used to contribute to his comfort and well-being.
Perfume, chocolates, and expensive cars are luxury items that
are purchased only by those who can afford.
 Goods may also be classified as
ECONOMIC or FREE GOODS:

• Economic good – is a good which is both useful and scarce.

It has a value attached to it and a price has to be paid for its
use.
• Free good – if a good is so abundant that there is enough of
it to satisfy everyone's needs without anybody paying for it.
Air is free, but air from the electric fan is an economic good.
Goods are created by means of production. It may involve the physical
transformation of a commodity such as the conversion of leather into
shoes. This type of production takes place in the factory and is referred
to as manufacturing or industry.

Production may also take place in the farm. Planting and harvesting of
rice, corn, coconuts and sugar are agriculture production Even
exploration for oil, mineral, and, precious metals is production. All these
activities are carried out to provide goods and services for use in the
satisfaction of man's wants and needs.
 ECONOMIC RESOURCES

• Economic Resources/Factors Of Production - The things

which are needed to carry on the production of goods and
services. These resources are land, labor, capital, and
entrepreneur. They are the basic resources because they constitute
the basic needs in production. They are the most basic tools used
in the production of goods and services
Land
Strictly speaking, land refers to all natural resources, which are given
by and found in nature, and are, therefore, not man-made. This
term includes the soil, river, forests, and mineral deposits. Land is an
economic good because it is scarce and a price has to be paid for it.
Thus, people who own land and offer it to others for their use, earn
an income called rent. The less the supply of land available for
man's use, the higher is the rent that has to be paid for it.
Labor
Labor is any form of human effort exerted in the production of
goods and services. Labor covers a wide range of skills, abilities, and
characteristics. It includes factory workers who are engaged in
manual work. It also includes the accountant, economist, nurse,
typist, and other numerous people who leave their homes in
the morning to be in time for their 8-hour work.
• The supply of labor in a country is dependent on its production and
on the percentage of its population that is willing to join the labor force.
Naturally, a country with a high population growth rate is expected to
come up with a bigger labor supply. Still, its number of workers will
depend on factors like the age distribution of the population, the age at
which young people finish school and start work, and the age at which
people retire. The labor supply is also highly dependent on the people's
social and cultural practices. Are women workers discriminated against?
Are married girls liberated enough to work despite marriage, instead of
being plain housewives?
• The country's supply of labor is also affected by the
migratory tendencies of its population and by the influx of
workers from other countries. While we lose hundreds of
workers yearly to Saudi Arabia, Libya, the USA, and other
highly paying countries, our labor supply is also expand by
the foreigners who come here and get employed in jobs
which otherwise should be held by Filipinos
Capital
Capital refers to man-made goods used in the production of goods and
services. Capital does not only include money; it also includes buildings,
machinery, raw materials, and other physical necessities for use in production.
Entrepreneur
• Oftentimes, the entrepreneur is not presented as a separate factor of
production, but is classified as part of labor. However, the entrepreneur does
a special type of work and is, therefore, not ordinary labor. He is the person
who combines the other economic resources for use in the production of
goods and services. He decides on the combination of land, labor, and
capital to be used in production. Since not everybody had the managerial and
organizational abilities to be an entrepreneur, entrepreneurship is an
economic good that commands a price.
 THE NEED TO CHOOSE

• Scarcity is the reason why people economize. Scarcity refers

to the limitations that exist in obtaining all the goods and services
that people want. It gives rise to economic problems and it is the
reason why man has to make a choice.
Because of scarcity, any society must confront three fundamental and
interdependent economic problems:

1. What to produce and how much? This is a decision on what goods and services to
produce and their quantities. This would depend on what is needed, what is wanted,
and what has to be produced.
2. How shall goods be produced?
This is decision of what resources are to be a used in production, by whom the goods
will be produced, the technological manner in which production will take place. A
country with an abundant labor supply would be expected to use a larger amount of
that resources in its production of goods and services.
3. For whom shall goods be produced?
This question is now on the problem of distribution. Who will benefit from the
production of goods and services? How much of total production will each consumer
get? Will the goods be bought by the rich or by the poor?
These three questions are basic to all economies. However, the
manners in which these economies answer the problems differ. The
country's economic organization has a lot to do with how the
decisions to these fundamental problems are arrived at. In the same
manner, the way a nation answers the problems determines the type
of economic system it adopts.
 TYPES OF ECONOMIC SYSTEM

1. The Traditional Economy

This is basically a subsistence economy. A family produces everything that it
consumes. Decisions on what, how, for whom to produce are made by
referring to the traditional manner of doing things. Production is carried on in
the methods used by the forefathers, and therefore very primitive. This type of
economic system is very backward since it does not allow for change
2. The Command Economy
In this type of economy, the means of production are owned by
the government. Its decisions are arrived at by planners or
government men who dictate what, how, and for whom to produce.
3.The Market Economy
The basic characteristic of this economy is that resources are privately owned
and decisions are made by the people themselves. Since every consumer arrives
at his own decision, the system is coordinated through an interlocking network
of markets and prices. The system depends on prices set by the conditions of
demand and supply.
Competition is supreme; there is consumer sovereignty, and the price of the
good is the guiding factor for producers to know what and how much to
produce.
The Mixed Economy
It is seldom that an economic system exists in pure form. The United States
economy is predominantly market, but it cannot be denied that there exists
some form of government control. Cuba can best be described as command
since its decisions are planned by the government; however the price system is
also used, even if only minimally

The Philippine economy is a mixed economy since it applies a mixture of the

three forms of decision-making. However, it is more market-oriented rather
than command or traditional.
Opportunity Cost
When one makes a choice, there is always an alternative that has to be given up.
A producer who decides to produce shoes, gives up other goods that could be
produced with the same resources. A student who buys a book with his limited
allowance gives up the chance of eating out or watching a movie. An M.A.
graduate who decides to teach, gives up the salary he would have earned had he
worked in a big firm like San Miguel Corporation. The values of these
alternatives given up are referred to as opportunity costs.
 Society's Technological Possibilities
Since a nation has limited resources, it has to cope by choosing
different potential bundles of goods. It also has to choose among
the different production techniques and who will consume the
goods and services it decides to produce. These decisions involve
choices on inputs to be used and the outputs to be produced.
Inputs refer to the commodities or services used to produce the
good or the service. Existing technology is used to combine these
different inputs. Inputs consist of land, labor, and capital.
• Land refers to gifts of nature to our productive process. It is a term
that covers natural resources including minerals, forests, oceans, and
soil.
• Labor refers to the human resource used in production. Labor
includes farmers, doctors, factory workers, drivers, or teachers.
• Capital consists of man-made durable goods which are used to
produce other goods. They include machinery, equipment, and other
tools.
• Outputs refer to useful goods and services resulting from the
production process. These are goods that are either consumed like
shoes, or used in further production like machines.
 The Production Possibilities Frontier

Since society is faced by limitations due to scarcity of resources, decisions have

to be made on combinations of goods that are to be produced using a given
amount of input.
 THE TOOLS OF ECONOMICS
• Economics is a positive science that means it deals with what it is. This is in
contrast to normative economics which deals with what should be.
Economics is, therefore, a study that attempts to explain how an economy
operates. To be able to understand and explain economic events and
economic theories, the student of economics must learn how to use the basic
tools of Economics. Firstly, he has to learn how to apply logic in order to
enable him to reason out properly and to draw conclusions. Secondly, the use
of mathematics will enable him to conceptualize and quantify economic
principles. Thirdly, he uses statistics to describe quantitatively human
behaviors and to serve as empirical evidence in the testing of hypothesis.
These tools equip the economist or even the student of Economics to
approach the subject in a scientific manner. This scientific approach can
be outlined in the following stages:

1. Observation - An analyst should be able to recognize conditions, behaviors,

and events in the environment. By simply looking around, he shall be able to
obtain information necessary to analyze an economic principle.
2. Definitions and Assumptions – The analyst should describe the specific
uses of the study and the peripheral conditions which affect the economic
behaviors which are being studied.
• 3. Deductions - These are hypotheses or theories presented for empirical
validation. They are temporary conclusions made based on one's
observations and are still subject to the presentation of evidence
• 4. Empirical Testing - Deductions have to be tested as to their validity and
correctness. The presentation of the empirical evidence will be the basis of
rejecting or accepting a hypothesis. The evidence gathered consists of
statistics which is used to verify one's guesses.