Introduction Page 1 of 9 Mr. Louie Samson (7/12/10) HUMAN WANTS AND RESOURCES
The study of economics must start with the recognition of two undisputed facts of life, multiplicity of human wants and scarcity of economic resources. Human wants are unlimited. As they become completely satisfied, other wants start to arise. Thus, many a times, individuals must seek ways of achieving goods and objectives with a minimum outlay of resources. DEFINITION OF ECONOMICS • Adam Smith , considered the father of Economics, defines it as an inquiry about the nature and causes of the wealth of the nation. Feliciano Fajardo define • Feliciano definess it as the proper and effici efficient ent use of availa available ble resour resources ces for the maximu maximum m satisfaction of human wants.
• Ronan and Amores view it as a science that allocates scarce resources to satisfy unlimited human wants. • Pagaso and his co-authors define it as a discipline that concerns with the production, distribution and use of material goods and services. • Sociologists look at it as a social science because it deals with how individuals and how the society generally makes choices. From these definitions, Economics is defined as a social science that is concerned with the efficient utilization or management of limited (scarce) productive resources for the purpose of attaining the satisfaction of unlimited human wants and needs. Needs – basic necessities that man cannot live without Wants – luxuries of man above basic needs Goods/Services – anything that satisfies human wants and need s. Services are non-tangible goods
TENETS COMMON TO ALL AREAS OF ECONOMICS 1. SCARCITY SCARCITY – we do not live live in the the world of plenty. plenty. Most Most goods goods and services services as well well as the the inputs used used in the production of goods are limited within a given span of time. There are not enough goods to satisfy the nearly insatiable wants of all the people. If there were no scarcity, individuals would not be concerned about the use of resources.
2. ALLOCATION ALLOCATION – this this concerns concerns with putting putting the best best alternati alternative ve use of some resource resources. s. This must must be consistent among objectives and individuals. Allocation implies that scarce resources must be distributed among competing uses. e.g. allocation of time between study and play allocation of allowance among all expenses 3. GOAL GOAL – indivi individual dual desire desiress or wants wants often appear appear to be unlimi unlimited ted.. Thus, Thus, wants wants compete compete for scarce scarce resources. Because of this competition, we must decide upon a priority system to order our competing wants and attempt to attain the most satisfaction from those chosen.
Introduction Page 2 of 9 Mr. Louie Samson (7/12/10) WHY DO WE NEED TO STUDY ECONOMICS?
1. There are many economic problems arising such as poverty, unemployment and inequality. Fundamentally, these problems arise from the fact that human beings have many wants or should we say, unlimited wants. The problems of economics arise because human wants can only be satisfied only at a sacrifice. It is possible to have something only if effort is spent on having it. 2. Nature has given us free goods; the air we breathe is an example. But also, most goods are scarce. An effort or a price has to be exchanged for their use. 3. To produce goods requires that inputs or factors of production be used. These are the resources applied to production. 4. Some goods are directly used up for satisfaction (CONSUMER GOODS) . They are consumed directly. Others are used to produce other goods for the satisfaction of other needs (CAPITAL or PRODUCER GOODS). And since goods are scarce, the problem of choice enters. The element of choice is related to the concept of how one values the satisfaction of present wants for future wants. We must decide upon a priority system to order our competing wants and attempt to attain the most satisfaction from those chosen. 5. As individuals and as member of the family, we must work to earn a living, purchase goods, pay taxes, save money, buy insurances, etc. We do not live as individual alone. Directly or indirectly, we are affected by economic forces. Free Goods – resources that are unlimited in amount like the gift of nature. Examples are sunlight, the clean air we breathe, water, etc. Economic Goods – resources that are scarce or limited in amount ECONOMICS AS A SCIENCE
Science is a systematic body of knowledge. It follows an orderly procedure of gathering data, analyzing facts, experimentations and drawing conclusions from those existing phenomena. e.g. How many molecules are present in water? Ans. There are two molecules of hydrogen and one molecule of oxygen But unlike Chemistry, Economics is an applied, not an exact science. It is often been disputed because the phenomena that it treats of are subject to individual decisions, whims and prejudices and would not be capable of scientific treatment. Its conclusion lacks the precision that characterized those of Chemistry and Physics. While chemists and physicists could handle their experiments’ subject in their own way, the economists cannot do the same thing for he is dealing with individual or human being with divergent thoughts, desires and feelings; the personal element is a very inconsistent and elusive thing. The economists cannot experiment freely with human being and his laboratory is the many motivated world of business. e.g. when the price of the commodity increases, the demand decreases and the supply increases. But for smokers, if the price of cigarette increases, the demand for other brand increases (an increase in the price of the brand Marlboro leads to an increase in the demand for Winston)
Introduction Page 3 of 9 Mr. Louie Samson (7/12/10) In Chemistry, at constant pressure, if the volume of liquid increases, the Temperature also increases (Charles’ Law) The marks of a science are classification, generalization and logical arrangement of facts. Economics is an accurate description of relationships among phenomena and of the principles and laws that concerns the relationship between man and wealth. ECONOMICS AS A SOCIAL SCIENCE
Like Psychology, it deals with people’s interaction with others, an interaction that affects the utilization of material resources. It will be of an advantage then to a student of economics to look at the field as it relates to other fields of science such as sociology, anthropology an d others. BRANCHES OF ECONOMICS
1. Microeconomics is the study of specific economic units that make up an economic sector. It studies the economic behavior of individual decision-making units such as consumers, resource owners, producers and business firms among others. e.g. a. how an individual consumer spends his income to maximize satisfaction b. how business firms combine resources to maximize profits c. how the price of each commodity and each type of resources are determined by supply and demand 2. Macroeconomics is concerned with the economy as a whole. It examines the functioning of an economic system as it copes with problems such as inflation, depression, unemployment, money supply, the general price level of commodities and the level of output of goods and services of the economy. It studies the aggregate level of economic activity such as: a. b. c. d. e. f. g. h.
total level of output the level of national income the total level of unemployment general price level of the economy total private expenditures total investment total government expenditures total imports and exports of goods and services
Macroeconomics seeks the cause and cure for economic problems like unemployment, inflation and balance of payments. Among the economic goals of a country are: a.economic growth – produce more and better goods and services and develop a high standard of living b. full employment – provide suitable jobs for all citizens who are willing and able to work c.economic efficiency – achieve the maximum fulfillment of wants using the available productive resources d. price-level stability – avoid inflation and deflation
Introduction Page 4 of 9 Mr. Louie Samson (7/12/10) e.equitable distribution of income – ensure that no group of citizens faces stark poverty while others enjoy extreme luxury f. economic freedom – guarantee a high degree of freedom to do everything that will benefit each individual g. economic security – assurance of availability of goods in the market h. balance of trade – maintain at least an equal amount of export and import MAJOR DIVISIONS OF ECONOMICS
1. PRODUCTION – deals with the creation of economic goods, invariably termed as wealth. WEALTH refers to material goods that are useful, scarce, valuable and transferable. Production also referred to as the addition or creation of utility. UTILITY is the quality present in a good which renders it the capability to satisfy human wants and needs. This division of economics deals with decision making of managers and owners of business regarding the efficient use of resources to attain profit.
a. b. c. d.
Characteristics of A Good To Be Considered A Wealth it should possess utility it must be transferable it must be material and external to man it must be scarce
Capital or Producer Goods – are goods used to produce other goods. It is also termed as inputs or resources. TYPES OF UTILITY a. Elementary utility – it is the want-satisfying quality of a good in its natural state, as for instance, fruits and vegetables. b. Form utility – there are things in which in their natural state give little or no satisfaction to human wants; yet when processed into finished products or even in semi-finished products, yield tremendous satisfaction to their users. c. Place utility – many goods would give greater satisfaction if moved from place of abundance to place of scarcity. d. Time utility – it occurs when a commodity or service is more useful at one time than at another. (e.g. a raincoat has no use during summer but becomes very useful during the rainy season) e. Ownership utility – it results when the ownership of a good or service is transferred from one person to another thereby adding utility to that good or service (e.g. a carabao would prove very valuable and useful to a farmer in his occupation that it would be to a businessman or teacher). FACTORS OF PRODUCTION
a. Land – refers to all natural resources, which are usable in the productive process such as arable land, mineral deposits, forests and water resources. b. Labor – refers to all physical and mental talents and efforts of men and women which can be used to produce goods and services. c. Capital – are man-made goods used in production such as tools, machineries, inputs, buildings and networks. The term capital being defined does not refer to money which is available for use in the purchase of machinery, equipment and other productive facilities. Because money produces nothing, hence, it is not to be considered as an economic resource. Real capital – tools, machinery and equipment – is an economic resource; money or financial capital is not.
Introduction Page 5 of 9 Mr. Louie Samson (7/12/10) d. Entrepreneur – a person who sets up a business by combining land, labor and capital to supply a good or service that he thinks society wants.
FACTOR PAYMENTS OF PRODUCTION
The suppliers of the factors of production receive factor payments or money income. The owner of the land receives rental income from the user of the land. Labor receives wages and salaries for their effort. The factor payment for capital is interest income. Entrepreneur hopes to make profit – normal profit – which is the amount left behind after all allocations to the other economic resources have been made. 2. CONSUMPTION – the direct satisfaction of human wants by the enjoyment of the utility of goods. It deals with the utilization of goods and services for the satisfaction of human wants. It also deals with how the finished goods are utilized by the ultimate consumers. 3. DISTRIBUTION – the manner in which the society divides the allocated goods produced. It deals with how outputs are divided into the various owners of production means. This constitutes the subject matters like rents, wages, interest and profit and the distributive shares of the different factors of production. 4. EXCHANGE – this is chiefly devoted to the consideration of value and prices. The determination of prices of commodities under different conditions is being discussed in this area. The principles of money, credit and banking and their relation to price and the exchange of goods are subjects also included in this division. MONEY is defined as the medium of exchange. FUNDAMENTAL PROBLEMS OF THE ECONOMY
Scarcity of resources is a problem that always confronts the production of goods and services. But while the availability of resources is limited, the human wants are insatiable. That is when economics comes in to harmonize human wants with what he has. There are five fundamental economic questions that a society is confronted. Each society is faced with these basic problems upon which the answers depend upon the type of economic system that it is using. 1. “What is to be produced?” – refers to the kinds of goods and services that a society need to produce. 2. “How much is to be produced?” – refers to the level or degree the available resources should be utilized in the process. 3. “How is it to be produced?” – refers to the combination of various resources and the techniques to be used in production. 4. “Who is to receive it?”/”For whom is it to be produced?” – refers to how to divide up what has been produced among consumers of an economy. 5. “How should the system adapt to change?” – refers to how the economic system can make the significant reallocations of resources in order to preserve efficiency in their use. These questions arise because resources, goods and services are scarce. BASIC ECCONOMICS SYSTEM MODELS
Introduction Page 6 of 9 Mr. Louie Samson (7/12/10) Economic System A method or manner by which an economy is provided with the goods and services which are distributed to the people. It is a group of economic institution regarded as a unit. Economic institutions are social organizations, relationships and arrangements which determine in a given society the manner in which scarce resources are utilized to satisfy human wants. Functions of Economic System 1. It facilitates and controls the use of resources;
2.
It determines the manner in which resources are harnessed and used to satisfy human wants;
3. It must provide incentives to production. The economic system must see to it that people produce goods which do not directly satisfy human wants. Even the factor owners must be made to supply these factors to the producers. If the economic system does not do this, a particular sector may disrupt the flow of goods and thereby create problems for the society; and 4.
The economic system must coordinate and control the economic activities of the people. TYPES OF ECONOMIC SYSTEM
A. CAPITALISM/MARKET ECONOMY – In this system, the factors of production and distribution are owned and managed by private individuals or corporations. It is also known as free-enterprise economy or competitive market system or price-market economy and it follows the “laissez faire policy.” Laissez faire is a french term which means “let alone policy or leave it alone policy”. There is no government intervention in the market. The existence of this system is based on the “Theory of the Invisible Hand.” The primary driving force of capitalism is self-interest. Each economic unit attempts to do what is best for itself: • Entrepreneurs – aim to maximize profits (minimize loss) • Property owners – attempt to get the highest price for the sale or rent of their resources • workers – attempt to maximize their utility by finding jobs which offer the best combination of wages, fringe benefits and working conditions • Consumers – in purchasing a specific product, seek to obtain it at the lowest possible price. Principal Features/Characteristics of Capitalism 1. Absence of central planning commission – the government satisfies collective desires and may interfere in the process to some degree but does not plan the whole economic process. The efficient operation of market system allegedly makes significant government intervention unnecessary.
2. Private ownership of property/private enterprise – consumption goods and factors of production are privately owned and the conduct of production is carried out by privately-owned enterprises. It also allows private persons or businesses to obtain, control, employ and dispose of property resources as they see it. Private ownership of the means of production is based on two important considerations: a. in as mush as ownership of productive property means power over the lives of other people, it is perhaps necessary to state that such power should be better diffused among the number of individuals
Introduction Page 7 of 9 Mr. Louie Samson (7/12/10) b. technological progress would thrive best under a soil of freedom, the economic freedom enjoyed by individuals, that is, the right to make basic economic decisions for themselves without interference from external sources 3. Operation of the pricing process or pricing system – prices are determined and established by competing buyers and sellers in both the product and resource markets. 4. Competitive conditions – the prices of goods and services are determined by competition; the struggle of individual to enhance their own economic welfare. 5. Profit motive – in the process of competition, the different members of the economic system are guided by the profit motive, and their success or failure is measured in terms of income, profit and loss. 6. Presence of essential economic freedom – this relates to free choice of consumption, occupation, freedom to save, to invest, to own private property, individual initiative and such other freedoms as the limited role of the government permits. 7. Presence of religion Criticisms • It is unplanned and such is wasteful. It operates without a comprehensive plan. The total of its production is the result of decisions made by millions of persons who wish to gain livelihood by the production of goods and services, usually for sale.
• The lure for profits results in ills. Businessmen in their desire to gain as much profits as the could resort to unfair business practices like adulteration, manufacturing inferior quality products on purpose and others which results in the exploitation of the consumers. • There is lack of security on the part of the workers. The wages are often times insufficient to provide the needs of his family commensurate with a decent standard of living. • It is unjust in the distribution of wealth. It is pointed out that while there are too many idle rich living in their incomes from land and other investments, yet at the same time, there are too many idle poor who cannot find profitable employment. • Business cycle seems characteristics of capitalism. Since the rise of the modern industrial system, there are noted frequent recurring cycles of prosperities followed by depression with its attendant hardships. B. COMMUNISM/COMMAND ECONOMY – Sometimes called a “classless economy”, the factors of production and distribution are virtually owned and managed by the state or government. It is the exact opposite of capitalism. The government determines the aim of the economy directs production and regulates distribution and consumption of outputs. The state determines the type, quality and quantity of commodities to be produced and arbitrarily allocates the output of production. The state also regulates the prices of goods and services. Karl Marx is the father of Communism. Essential Characteristics of Communism 1. Presence of central planning commission 2. Absence of religion
Introduction Page 8 of 9 Mr. Louie Samson (7/12/10) 3. No profit motive 4. No competition 5. No private ownership of property 6. No economic freedom 7. Prices are determined by the state Criticisms • The inducement to greater productivity does not take the form of monetary rewards or privileges. Rather they are in form of threats or severe punishments.
• Those who express bitter denunciations or criticisms against communist ideas, policies or actions are likely to get their due solitary confinement, if not execution. Marxism It is a body of social, political and economic thought derived from the writings of Karl Marx and his collaborator, Friedrich Engels. At the center of Marx’s work in his analysis of capitalism; how it arose, how it works (for whom it works better and for whom worse), and where it is likely to lead. Concentrating on the social and economic relations in which people earn their livings, Marx saw behind capitalism’s legal façade, a struggle of two main classes; the capitalists, who owned the productive resources, and the workers or proletariat, who must work for wages in order to survive. Communism vs. Religion “The Essence of Christianity” by Ludwig Feuerbach argued that:
• God has been invented by humans as a projection of their own ideals. He wrote that man, however, in creating God in His own image, had “alienated himself from himself.” He had created another being in contrast to himself, reducing himself to a lowly, evil creature who needed both church and government to guide and control him. • If religion was abolished, Feuerbach claimed that human beings would overcome their alienation • Marx applied this idea of alienation to private property, which he said caused humans to work only for themselves, not for the good of their species. • He called for a communist society to overcome the dehumanizing effect of private property C. SOCIALISM/MIXED ECONOMY – This is the combination of capitalism and communism. The major and strategic industries are owned and managed by the state while minor industries belong to the private sector. Examples of major industries are mining, power, transportation, and production of essential products. Minor industries include production of nonessential products such as toys, toothbrush, cakes, chocolates, candies, etc. Features of Socialism • It is not opposed to capital; it is only opposed to private ownership It seeks to abolish private capitalists “who thrive by collecting interests, rents and profits” • It maintains the capitalistic features:
a.
the use of pricing process to direct production through the allocation of its factors
Introduction Page 9 of 9 Mr. Louie Samson (7/12/10) b. freedom of choice in consumption and in the pursuit of occupation c. a private sector of small producing units d. a public sector which oversees the fulfillment of collective objectives • Social economic aims are consciously set and there is a central economic authority as well as central economic plan to which processes are geared • The major means of production are publicly-owned, though firms and small plants are allowed to remain in private hands Advantages of Socialism 1. High standard of living 2. Working day would be shortened 3. Social welfare would be increased 4. People would enjoy economic security Disadvantages of Socialism 1. It would stifle initiative and incentive (profit motive is absent) 2. Individual freedom is lost 3. Evils are bound to result from the operation of industry D. TRADITIONAL ECONOMIC SYSTEM – One in which people’s economic roles are the same as those of their parents and grandparents. The means of economic activities are based on customs, traditions and beliefs. Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia and Africa. There, people living in an agricultural village still plant and harvest their own food in their own land. And the ways they produce clothing and shelter are exactly the same as those used in the past. Tradition decides what these people do for living and how their work is performed.
In some parts of the Philippines, this type of economic system still pervades, wherein families or some tribes are still self-sufficient and need very little interaction and intervention from highly populated and urbanized societies.
