Economics

A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society. (Walstad and Bingham)

The study of how societies use scarce resources to produce valuable commodities and distribute them among different people. (Samuelson and Nordhaus)

The study of production, distribution, selling and use of goods and services. (Collin)

A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society. (McConnel and Brue)

The study of how people use their limited resources to try to satisfy unlimited wants. (Parkin and Bade)

What is Economics?

Types of Economics System 1. Capitalism – an economic system

characterized by private individuals owning and operating the majority of business that produce

Rights of Capitalism

Right to own private property

Right to gain profits

Right to make business decisions

Right of choice

Types of Economics System 2. Communism – A society in which the

Government owns all the nation’s resource.

All rights stated in the capitalism are not allowed in communism.

3. Socialism – the government owns and operates the basic industries. Private individuals are allowed, however, to own and operate small business.

4. Mixed Economies – A mixed economy is one that has elements from more than one economic system. It contains both private and state enterprise.

The Economic Resources 1. Land – include land used for agricultural

or industrial purposes as well as natural resources taken form above or below the soil.

2. Labor – productive services embodied in human physical effort, skill, intellectual powers, and others.

3. Capital – durable goods produced in order to produce other goods (e.g. machines)

4. Entrepreneurial Ability – An ability to decide on and implement the right combination of the first three factors of production

1. Economic growth

2. Full employment

3. Economic efficiency

4. Price level stability

5. Economic freedom

6. An equitable distribution of income

7. Economic security

8. Balance of trade

Economic Goals

1. Microeconomics – concerned with the behavior and activities of specific economic units – individuals, households, firms, industries and resource owners

2. Macroeconomics – deals with the behavior of the economy as a whole with respect to output, income, price level, foreign trade, unemployment, and other aggregate economic variables.

Divisions of Economics

• Stock – refers to the measure of quantity at a point of time. (e.g. December 31, 2013)

• Flow – refers to the measure of movement of quantity over a period of time. (e.g. Per year)

Stock and Flow

The Circular Flow of Goods, Services, and

Income

The Production Process

- The process of producing goods and services involves households and firms in a circular flow

Households (Resource Owners)

Firms (Organizers and users of

economic resources)

Land, Labor, Capital (Economic Resources)

Goods & Services (Outputs)

The Circular Flow of Goods, Services, and

Income

The Flow of Goods Among Producing Firms

- A flow which happen among different types of business firms:

Raw Material Producers – firms produce raw materials such as fish, wood, sugarcane and others.

Intermediate Goods Producers – firms produce goods that are partially processed and still need further processing before they can finally consumed (e.g. flour, steel bars)

Final Good Producers – firms produce goods that are ready for final consumption such as RTW clothing, candies, etc.

The Flow of Output between Firms and

Households

Raw Material

Firms

Intermediate

Good Firms

Final

Good Firms

Raw Materials

Intermediate

Goods

Final Goods

The Circular Flow of Goods and Income Among

Producers and Households

Raw Material

Firms

Intermediate

Good Firms

Final

Good Firms

Payment

Economic Resources

Payment

Economic Resources

Payment

Economic Resources

HO

US

EH

OL

DS

Final Goods

Payment

The Circular Flow of Goods, Services, and

Income

Income Flow – this created when money is spent by households for consumption and by firms for production. Income takes two distinct circular flows as follows:

Between households and firms

Between firms

Firms

Households

Income Flow (Purchase of goods and

services)

Income Flow (wages, interest, rents)

Raw Material

Firms

Intermediate

Good Firms

Final

Good Firms

Income Flow (For purchase of raw

material)

Income Flow (For purchase of

intermediate goods)

Income Flow (For purchase of final

goods)

Income flow between

households and firm Income flow between firms

The Circular Flow of Goods, Services, and

Income

Equilibrium– happens when the amount received by firms from households is equal to the amount received by households form firms

Disequilibrium – happens when either households or firms do not spend their income

Firms

Households

Reduced Income (as a result of reduced

purchase of goods and

services)

Reduced Income (as a result of reduced

purchase of economic

resources)

The Effect of

Reduction of

Purchases

The Circular Flow of Goods, Services, and

Income

Savings and Investments

Saving – income not spent, or deferred consumption. Happens when households allocate a part of their income for future use.

Investments – a way of disposing unsold output. Investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories.

When the savings of households are matched by investments expenditures of firms, disequilibrium is negated and the circular flow of income will tend normalize.

The Circular Flow of Goods, Services, and

Income

Firms

Households

Goods

and

Services

Land

Labor

Capital Payments

Rent

Wages

Interest

Profit

Investments

Capital goods

CIRCULAR FLOW OF GOODS AND INCOME IN A SIMPLE

ECONOMY WITH SAVING AND INVESTMENT

Sources: Medina, Roberto G. (2001), Principles of Economics

http://en.wikipedia.org/wiki/Saving

http://en.wikipedia.org/wiki/Investment

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Image 3: http://en.wikipedia.org/wiki/File:StockFlow.gif