Social Science Reviewer - Introduction to Economics.pdf

Introduces Economics

1. SocSci Rev
First Quarter


Introduction to Economics
-​Social Science - the study of society or parts
of it by utilizing the scientific methods of
observation, hypothesis formulation, testing,
and experimentation
Economics
-​A social science that deals with the study of
the allocation of scarce resources among
unlimited and competing uses of such
resources to satisfy human needs and wants
-​“Oikonomia” = Household management
-​Household management essentially
encompasses the principles and
practices involved in running a
household efficiently

Behind the Science of Economics
●​Economist uses simplified modeling to easily
create a factual and clear explanation of
concepts, the flow of processes, and the
correlation and relationship between causes
and effects
●​Economics makes use of statistical tools to
make rational and quantitative projections on
certain phenomena and to validate
subjecting assumptions.
●​Economists use scientific mathematical tools
to explain changes, developments, or cycles
●​Economists use generalized assumptions to
varying situations for them to systematically
observe and analyze data

●​The Circular Flow of Income - ensures that
resources are utilized efficiently
○​Households - both consumers and
suppliers
○​Firms - producers and employers
○​The government - regulator,
redistributor, and consumer
■​Considered the most
influential economic agent
○​The repeats continuously, keeping
the economy active and balanced
Economics is a social science that uses a scientific
approach
1.​Economics uses simplified modeling
-​Easily create a factual and clear
explanation of concepts

2.​Economics makes use of statistical tools
-​To make rational and quantitative
projections
3.​Economics uses mathematical models
-​To quantitatively explain an
economic event
Importance of Economics as a Social Science
-​“Economics is concerned with the optimal
distribution of resources in society” - Tejvan
Pettinger
-​“Economic growth without investment in
human development is unsustainable and
unethical.” - Amartya Sen
-​A country’s progress should not be
measured solely by its GDP growth
but by how it improves the lives of
its people.


Some Reasons Why Economics is Important
1.​It teaches us the importance of valuing the
things around us
-​Resources are scarce, wastage is
not an option
2.​It provides us with options or choices
-​We are allowed to consider the
costs and benefits of making
choices
3.​It gives us an overall knowledge and
perspective of the economy
4.​It provides the government with the right
balance in formulating economic policies.
-​The principal job of the government
is to provide the people with its
general social welfare to help them
improve their living standard
5.​It can correct market failures
-​Over and underproduction of
commodities are economic

2. inefficiencies that might result in
hyperinflation or hyperdeflation.
-​Economics provides efficient ways
to prevent these forms of market
failure

Divisions/Branches of Economics
●​Microeconomics - the branch of economics
that deals with the study of the behaviour of
individual units in the economy
●​Macroeconomics - the branch of economics
that deals with the economy as a whole in the
aggregate economy
Economic Goals
1.​Full Employment
2.​Economic efficiency
3.​Price-level stability
4.​Economic freedom - the freedom to buy or
sell goods and services with little or no
interference from the government
5.​Equitable distribution of income
6.​Economic security
7.​Balance of trade
Economics and Other Sciences
1.​Historiography - the field of study that
records and analyzes man’s past
2.​Sociology - the science that analyzes
interpersonal and group relations
3.​Finance
4.​Statistics
5.​Mathematics
6.​Political Science
7.​Management
8.​Production
9.​Psychology
10.​Biology
11.​Chemistry
12.​Ethics
13.​Physics
Categories of Economics
●​Positive Economics - describes, analyzes,
and explains what is happening in the
economy
○​It is based on facts or theory
●​Normative Economics - analyzes a situation
based on what ought to be or what is good
for the greater community
○​It is based on value
judgment/opinion
●​Applied Economics - combines positive and
normative economics

Pitfalls in Economic Thinking
●​Post hoc Fallacy - “after the event”
○​Occurs when we assume that an
event was caused by another event
just because the first event
occurred before the second event
●​Fallacy of Composition - what is true for a
part is not necessarily true for the whole
○​When we assume that what is true
for one individual will be true for all
others
●​Ceteris paribus - failure to hold other things
constant/equal
○​Occurs when we analyze the effect
of a variable on another variable
without holding other things
constant
●​Subjectivity - confusing normative
statements with positive statements
○​occurs whenever you cannot
distinguish between objective and
subjective statements
How do individuals make decisions?
1.​People face trade-offs.
-​Since resources are limited, people
need to make a choice
2.​People economize.
-​ Individuals choose the alternative
that they perceive will give the
greatest excess benefit over costs.
3.​All choices involve costs.
-​Opportunity cost - the forgone best
alternative that was given up
4.​Rational decisions occur at the margin.
-​Comparing and weighing the
expected benefits over the
expected costs of the next best
choice
5.​People respond to incentives.
6.​Prices are compelling incentives.
-​The changing prices change
people’s opportunity costs,
affecting the choices they will make.
7.​A trade-off can make everyone better off.
-​Trade happens when all parties
involved benefit from the exchange.
8.​Markets are usually a good way to
organize economic activity.
9.​Governments can sometimes improve the
market outcomes.
-​Economic functions of the
government are sometimes needed
to produce better economic
outcomes.
10.​Individual and national standard of living
depend on the ability to produce goods
and services
-​Increasing productivity = increasing
income and standards of living

Basic Economics Concepts
●​Scarcity - the condition in which our wants
are greater than the limited resources
available to satisfy them
○​The fundamental economic
problem

3. ○​Great imbalance between limited
resources and unlimited wants
○​Dealing with scarcity:
■​Efficiency
■​Choices
■​Opportunity cost

○​Thinking in terms of Scarcity:
■​Chocies
■​Need for a rationing device
●​Rationing device
- a means of
deciding who gets
what
■​Scarcity and competition



●​Opportunity cost - the value or worth of one
alternative given up for another
○​The most highly valued alternative
forfeited
○​Marginal Benefit - the benefits
connected with consuming an
additional unit of a good or service
○​Marginal Cost - the costs
connected with consuming an
additional unit of a good or service
​
●​Production Possibilities Frontier (PPF) - a
curve that shows the maximum production
combinations of two products given the
available resources and technology
○​Shows the possible combinations an
economy can produce given the
available factors of production
○​Assumptions in PPF:
■​Full employment and
productive efficiency
■​Fixed resources
■​Fixed technology
■​Two goods
○​Also used to illustrate economic
concepts
■​Scarcity
■​Choice
■​opportunity cost
■​Productive efficiency
■​Productive inefficiency
■​Unemployed resources
■​Economic growth
○​Graph and Meaning:
​​
-​Point A, B, and C =
efficient production (all
resources are fully
utilized)
-​Point D = inefficient
-​Point E = future
possibilities if resources
increases
-​As the economy moves
along the curve, it
experiences
opportunity cost.
●​Needs and Wants
○​Needs - goods and services
essential for human survival
○​Wants - wants that pertain to bodily
needs and interests
○​Abraham Harold Maslow -
developed the Hierarchy of Needs

-​Civil Engagement
-​Vanity
○​Factors that affect your wants:
■​Demonstration effect

4. ■​Increased financial
capacity
■​Changing taste
○​Basic Social Concerns of Filipinos
■​Health and nutrition
■​Learning
■​Income and consumption
■​Employment
■​Non-human productive
resources
■​Housing, utilities, and
environment
■​Public safety and justice
■​Political value
■​Social mobility

Factors of Production, Resources &
Government
Factors of Production/Production Factors-
resources that we use to produce goods and services
-​Anything produced in the economy must
come from a combination of these resources
1.​Land - consists of the physical space where
production takes place
-​This includes the resources found
under it or on it
2.​Labor - the period of time human beings
spend or the number of people needed to
produce goods and services
3.​Capital - forms the durable goods of an
economy, produced to produce other goods
-​Physical Capital - building,
machinery, and equipment
-​Human Capital - the skills and
training that workers possess
4.​Entrepreneur - a person who has
determined the right amounts of land, labor,
and capital to produce goods and services
efficiently
-​Considered innovators in the
economy
Three Major Resources Categories
●​Natural Resources - derived form the
environment
○​Land Resources - Forest lands &
Agricultural Lands
○​Fisheries and aquatic resources -
fishing is a major source of
livelihood among Filipinos
○​Mineral resources -
-​The government regulates the use of these
resources for sustainability and meets the
needs of society.
-​The government imposed taxes to protect
the environment
-​Pigouvian tax - the most efficient
and effective way to correct
negative externalities
-​Negative externalities =
social costs
●​Human Resources - the power of humans to
produce goods and services
○​The labor components in the
production process
●​Physical Resources - all man-made
structures
○​The tangible, material assets that a
business or organization utilizes
■​encourage responsible
production
Externalities, Public and Private Goods
Externalities
●​Externalities - activities that generate costs
or benefits that accrue to people not directly
involved in the production
●​External Cost - Negative Cost
-​The cost of an activity that falls on
people other than those who pursue
the activity
●​External Benefit - Positive Externality
-​A benefit of an activity received by
people other than those who pursue
the activity
Beneficial Externalities
-​The relationship between two firms may be
beneficial
-​Most examples of such positive externalities
are bucolic in nature
-​When production of one good (X) impacts
another good (Y):
-​Negative externality: ∂y/∂x < 0 →
production of X decreases
production of Y.
-​Positive externality: ∂y/∂x > 0 →
production of X increases
production of Y.
Externalities also occur in consumption
-​ where an individual’s actions affect the
well-being or satisfaction of another.
Externalities in utility
-​It occurs if the activities of an economic
actor directly affect an individual’s utility
-​Utility - the state of being useful, profitable,
or beneficial
Public Goods Externalities
-​Goods that are “public” or “collective” in
nature
-​Nonexclusion - once the goods are
produced, they provide benefits to everyone
Externalities and Allocative Inefficiency
-​Externalities lead to inefficient allocations of
resources because market prices do not
accurately reflect the additional costs
imposed on or benefits to third parties

5. Correction to Externalities
1.​Coasian Bargaining
-​Private negotiation between
affected parties to resolve
externalities
-​Works best with clearly defined
property rights and low transaction
costs
2.​Pigouvian Corrective Taxation
-​A special tax imposed on activities
causing negative externalities
-​Purpose: Align private costs with
social costs
3.​Permits (cap-and-trade)
-​The government issues permits to
limit total pollution
-​Firms can buy and sell permits,
creating an incentive to reduce
emissions
Attributes of Goods
●​Exclusive - easy to exclude individuals from
benefiting from the good once it is produced
●​Rival - may be used one at a time or perish
after consumption
Types of Goods

1.​Private Goods - a product that must be
purchased to be consumed
-​There is competition between
individuals to obtain the good, and
consuming the good prevents
someone else from consuming it
2.​Public Goods - not produced by the
government or the public sector
-​Nonexcludable and nonrival goods
3.​Common-Pool Goods - common with many
environmental goods
-​Each consumer maximizes the
value they get from the good by
consuming as much as they can
before others deplete the resource
4.​Club Goods - can be consumed or possessed
by multiple users at the same time
-​Excludable but non-rival

Tragedy of the Commons
-​A problem in economics that occurs when
individuals neglect the well-being of society
in the pursuit of personal gain
-​Coined by Garret Hardin to describe the
problem of a common-pool resource
-​Hardin’s point was that if humans
faced the same issues, each person
would act in his own self-interest
and consume as much of the
commonly accessible scarce
resource as possible, making the
resource even harder to find
1.​Free Rider Problem - the burden on a shared
resource that is created by its use or overuse
by people who aren’t paying their fair share
-​The phenomenon of the
conventional free-market system
-​All non-excludable goods suffer
from the free-rider problem
-​When people fail to contribute, =
resource becomes economically
infeasible to produce
Some Solutions to the Tragedy of the Commons
1.​The government collects and distributes tax
dollars to subsidize public services
2.​Communities turning their public resource
into a private or club resource
3.​Communities imposing a small fee on
everyone
Additional Information
●​Adam Smith - The Father of Economics
3 Players in the Economy
1.​Buyer
2.​Seller
3.​Government
4 Types of Income
1.​Salaries/Wages
2.​Rent
3.​Profit
4.​Interes
3 Economic Goals
1.​Stable Prices/Low Inflation Rate
2.​High Employment
3.​Economic Growth