economic way of thinking chapter1

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Economic Way of

Thinking


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Economics and Scarcity

Economics

A science that deals with the

management of scarce resources

Describes how individuals and thesociety generally make choices

From two Greek root words oikos

(household) and nomus

(management), jointly Oikonomia or

Oikonomus meaning Management

of Household


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Scarcity

The basic and central economic

problem confronting every society

a commodity or service being in shortsupply relative to its demand


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Limited resources Unlimited wants

Allocation

This shows that when limited resources fail to

meet the unlimited wants of the society,

economics comes into play in order to

effectively and efficiently allocate resources.


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Ceteris Paribus Assumption

Ceteris paribus means all other

things held constant or all else

equal

-this assumption is used as a deviceto analyze the relationship between

two variables while the other

factors are held unchanged.


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Contributors in Economics

Adam Smith

-He is being regarded as the Father

of Economics

-The author of the bible of

economics: Wealth of the Nations

John Stuart Mill

- He developed the basic analysis of

political economy


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Karl Marx

-the author of Das Kapital, thecenterpiece from which major socialistthought was to emerge

Leon Walras

-he introduced the general economicsystem

Alfred Marshall

-he developed the analysis ofequilibrium of a particular market and

the concept of marginalism



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John Maynard Keynes

-The author of the influential book in

economics: The General Theory of

Employment, Interest, and Money John Hicks

-was recognized for his analysis of the

IS-LM model


* IS-LM IS refers to the goods market for a given

interest rate; while LM means money market for a

theoretical construct.


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Positive and Normative Economics

Positive economics

-is an economic analysis that

considers economic conditions as

they are, or considers economicsas it is

Normative Economics

- is an economic analysis which

judges economic conditions as it

should be


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Four Basic Economic Questions

1. What to produce?

2. How to produce?

3. How much to produce?

4. For whom to produce?


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Relationship of Economics to other Sciences

Business Management Business provides employment, which

is an important factor in economics.

History History provides information regarding

theories

Finance

Finance is a system which includes thecirculation of money, granting ofcredits, making of investments andprovision of banking facilities


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Physics Innovations and outputs brought by

physics greatly affect the study ofeconomics.

Sociology

The study of behavior of societies,helpful in the study of

macroeconomics Psychology

The study of behavior of man, useful inthe study of microeconomics

Relationship of Economics to other Sciences


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Branches of Economics

Microeconomics

This is the branch of economics which

deals with the individual decisions of

units of economy-firms, andhouseholds, and how their choices

determine relative prices of goods and

factors of production.

The market is the central focus ofmicroeconomics.


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Macroeconomics

This is the branch of economics that

studies the relationship among broad

economic aggregates like nationalincome, national output, money

supply, bank deposits, total volume of

savings, investment, consumption

expenditure, general price level ofcommodities, government spending,

inflation, recession, and employment.

Branches of Economics


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Opportunity Cost

Opportunity cost It refers to the foregone value of the

next best alternative.

e.g. If the price of an ice cream on stickis P20 and a piece of bread costs P5, ifthe consumer chose to buy 4 pieces of

bread, then the opportunity cost ofthe 4 pcs. of bread was the ice creamon stick, assuming that the ice creamwas the next best alternative.


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Factors of Production

1. Land- this broadly refers to natural resources

2. Labor

- refers to any form of human effort in the

production3. Capital

- are man-made goods used in theproduction process

4. Entrepreneurship- refers to a person who uses his skills andthe other factors of production to giveemployment and acquire profit


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Types of Economic Systems

1. Traditional economy-is basically a subsistence economy;where a family produces goods for itsown consumption.

2. Command economy-a type of economy, wherein themanner of production is dictated by thegovernment

3. Market economy (Capitalism)

-its basic characteristic is that theresources used for production areprivately-owned, and that peoplethemselves make the decision


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4. Socialism

-an economic system wherein

key enterprises are owned by the

state. But in this system, privateownership are also recognized.

5. Mixed economy

-an economic system which is a

mixture of market system and

command system.

Types of Economic Systems


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economic way of thinking chapter1

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