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