MODULE 1

THE STUDY OF ECONOMICS

Overview:

As a scholarly discipline, Economics is two centuries old. It came into existence

when Adam Smith published his path breaking book, “The Wealth of the Nation” in 1776,
a year also notable for the declaration of independence in America. Adam Smith’s
contribution was to analyze the way that markets organized economic life and produced
rapid economic growth.

In 1936, in the trough of the great depression, John Meynard Keynes published the
Great Theory of Employment, Interest and Money. The landmark work described a new
approach to Economics, that is to help the government monetary and fiscal policies tame
the worst ravages of business cycle.

In the 1980’s the capitalist countries of the West and socialist countries of the East
rediscovered the power of the market to produce rapid technological change and high
living standards. The most dramatic development occurred in Eastern Europe when the
successful revolution of 1989 forced the socialist countries to cast off their central planning
apparatus and allow market forces to spring-up. The fundamental insights of Adam Smith
were rediscovered more than two centuries after he wrote the Wealth of the Nation.

Lesson 1: Meaning, Nature and Importance of Economics

Specific Objectives
At the end of the lesson, the students will be able to:
1. Define economics
2. Determine the importance of economics
3. Describe the nature of economics

Overview:

Economics is a broad ranging discipline that uses a variety of techniques and

approaches to address important social questions. Because of the great complexity of
human behaviour, economists are forced to abstract from many details, to make
generalizations that they know are not quite true and to organize what knowledge they
have in terms of some theoretical structure in our economy.

Meaning of Economics

Economics has been defined in many ways. It comes from the Greek word
“oikanomia” meaning “household management”. Some of these definitions are as follows:
 According to Fajardo, Economics is the proper allocation and efficient use of
available resources for the maximum satisfaction of human wants.

Samuelson states that economics is the study of how societies use scarce resources
to produce valuable commodities and distribute them among different people.

Economics, according to Nordhaus, is the science of choice. It studies how people

choose to use scarce resource or limited productive resources (labor, equipment, technical,
knowledge) to produce various commodities and to distribute these commodities for
consumption.

Sicat defined economics as a scientific study which deals with how individuals and
society in general make choices.

Castillo viewed economics as the study of how man could best allocate and utilize
the scarce resources of society to satisfy his unlimited wants.

Webster defined economics as a branch of knowledge that deals with the

production, distribution and consumption of goods and services.

To sum it all, economics covers all kinds of topics, but at the core, it is devoted to
understanding how society allocates its scarce resources. Any country has limited
resources. Since resources are generally scarce and human wants tend to be unlimited,
economics encounters big problems. The biggest is that these resources are not freely
available. At the very core if economics lies the fact of scarcity. Goods are limited, while
wants seem infinite. Because resources are scarce, we need to study how society choose
from the menu of possible goods and services, how different commodities are produced
and priced and who gets to consume the goods that society produce.

Key Concepts

Key Concepts are essential in understanding more complex ideas in the study of
economics. Among these basic economic concepts are scarcity, economic efficiency,
opportunity cost, economic growth and the law of increasing costs.

Every economy, whether market driven or centrally planned, is essentially faced

with the same basic economic problems of what to produce, how to produce and for whom
to produce. Productive inputs, good, and services are finite and scare. At every stage in the
productive process, choices will have to be made and these choices are often subject to
certain constraints.

Importance of Economics

Many individuals have no clear understanding of what economics is. They don’t
even know how it works and how it affects their lives. People just don’t mind what
economics can give to them.
 Actually, every individual cannot isolate himself from economics. This is brought
about by the mere fact that his physical existence in this world depends upon economics.
People cannot live without production and consumption. Almost always, human activities
involve economics. For instance, earning money, buying goods and services, depositing and
withdrawing money in the bank, these are all economic activities.

Clearly, a good knowledge of economics offers many favourable possibilities. It

guides us how to make a living, how to use wisely our money, how to run our business, how
to distribute properly our available scarce resources, and how to maximize our profits and
consumer’s satisfaction, among other things. With appropriate economic decision and
implementation, life for everyone is most likely better.

Furthermore, economics is important in order to understand problems facing the

citizen and the family; to help government promote growth and improve the quality of life
while avoiding depression and inflation and to analyze fascinating patterns of social
behavior. Because economic questions enter into both daily life and national issues, a basic
understanding of economics is vital for sound decision-making by individuals and nation.

An introductory course in economics will not make a student an economist.

Solutions to all society’s economic problems are not found in this book. But students should
learn how to pose questions in ways that will help produce rational answers.

Nature of Economics

Economics is a science. A science is a body of systematic knowledge built upon by

conscious efforts. Like any other science, its laws and principles are arrived at only after a
long series of observations and experimentations. The body of knowledge is made up of
different explanations. An explanation of a certain event is called a theory. A theory may
become a successful theory if its predictions are confirmed by actual observations and
must gain universal acceptance. Economics is, thus, concerned with accurate appraisal of
facts and events about our material life.

Economics is classified as a social science because it deals with the study of man’s
life and how he lives with other men. Economics is concerned with human beings and his
behavior. Obviously, it is interdependent with other sciences like: Psychology, the science
of the mind; History, the science that records and explains past events; Sociology, the
science that deals with the development of society; Political Science, the science of
government; Geography, the science that determines the main resources of a region.
Likewise, Religion is related to Economics. Religious traditions and belief can discourage or
encourage economic development.

Of the social sciences, Economics has more advantages as a scientific discipline for
two major reasons:
1. Economic motives of human beings may be more regular and therefore persistent.
They can be more predictable.
 2. There is more factual information in the form of statistics. This gives a substantial
basis for the verification and formation of alternative economic theories.

Considering the nature of economics, it is not advisable to solve an economic

problem with economic solution alone. Our economic problems are not purely economics
in nature. These are also created by non-economic factors like culture, education, social,
and political.

Activity 1

Oral Class Discussions:

1. Define economics in your own words. Explain to the class your definition.

2. It is said that economics is related to other social sciences discipline. Why?

3. Collect at least five issues (news clippings) pertaining to Philippine economy.

Discuss with your classmates how these issues affect you as a student and as an
individual.

4. What advantages does economics have over the other social sciences that study
human behavior? What does it have in common with the other social sciences?
Elaborate.

5. It is said that we cannot solve economic problems by making economic solutions

alone. If this is so, why and why not?

Activity 2

The Philippine economy at present has so many problems. Identify these problems
and come up with some solutions to solve the problems. How would you go about changing
them?
Lesson 2: Branches, Divisions and Tools of Economics

Specific Objectives

At the end of the lesson, the students will be able to:

1. Describe and compare the two branches of Economics;

2. State and explain the different divisions of Economics;
3. Identify the different tools used in economic analysis; and
4. Present data in statistical form and interpret results.

Overview:

Over hundred of years, Economics has developed into a body of knowledge, sifted
and improved upon by various thinkers, writers, philosophers, and at present, by
economists. In the course of this development, particular economists have built upon a
body of knowledge with specialized techniques of fact-finding, interpretation, and analysis.

In this lesson, focus is geared on the two bodies of knowledge of Economics:

Macroeconomics and Microeconomics. Emphasis is also centered on the different tools
used by economists to arrive at a certain conclusion, fact, principle or theory. Discussion is
also given on the divisions of economics to equip the students with some of the basic
economic concepts.

Branches of Economics

The study of Economics is divided into two branches: Macroeconomics and

Microeconomics.

1. Macroeconomics – It deals with the economic behavior of the whole economy or

its aggregates such as government, business and households. An aggregate is composed of
individual units. The operation of the various aggregates and their interrelationship is
analyzed to provide a profile of the economy as a whole.
Macroeconomics is concerned with the discussion of topics like gross national
product, level of employment, national income, general level of prices, total expenditures,
etc. It is also known as employment and income analysis.

2. Microeconomics – It deals with the economic behavior of individual units such as

the consumers, firms, and the owners of the factors of production. Such specific economic
units constitute a very small segment of the whole economy. Their activities are presented
and discussed in details. For example, the price of rice, the number of workers of a certain
firm, the income of Mr. Ong, the expenditures of PLDT, etc. Microeconomics is also known
as the Price Theory.

When we study the income or expenditure of Bank of the Philippine Islands, we are
dealing with Microeconomics. But when we deal with the total income or total
expenditures of the whole banking industry, then we are involved in the study of
Macroeconomics. When we discuss the individual consumer, we are dealing with
Microeconomics, but when we talk of the aggregate consumers, we are studying
Macroeconomics.

While they focus on different subjects, microeconomics and macroeconomics rely on

virtually identical tools. Both use the supply and demand analysis.

However, what is true in Microeconomics may not be sure in Macroeconomics. For

example, a vegetable farmer gets better harvest. This means more income for him, if all
vegetable farmers have increased their harvests; it is not favorable for them. Because, more
supply reduces the price of vegetables.

Division of Economics

Economics has five major divisions. These divisions are as follows:

1. Production – This refers to the process of producing or creating goods needed by

the households to satisfy their needs. The factors of production are called inputs and the
goods and services that have been created are called outputs of production.

2. Distribution – This refers to the marketing of goods and services to different

economic outlets for allocation to individual consumers. In monetary terms, this is the
allocation of income among persons or household.

3. Exchange – This is a process of transferring goods and services to a person or

persons in return for something. At present, the medium of exchange used in the market is
money. This means, we can exchange our money with goods and services.

4. Consumption – This refers to the proper utilization of economic goods. However,

goods and services could not be utilized unless you pay for it. Hence, we can also say that
consumption is spending money for goods and services in order to yield direct satisfaction.

5. Public Finance – This pertains to the activities of the government regarding

taxation, borrowings, and expenditures. It deals with the efficient use and fair distribution
of public resources in order to achieve maximum social benefits. This means, government
programs and projects which are funded by taxes and loans are properly implemented and
managed to generate maximum and optimum benefits for all members of society.

Tools of Economics

Most economists are engaged in analyzing the present economic situation of the
country. Most of these economists use different scientific approaches and utilize different
tools to be able to formulate theories and principles. Some of the major tools used by these
economists are the following:
 1. Logic – It is a science that deals with sound thinking and reasoning. In the process
of reasoning, facts and proofs should be presented; otherwise, such reasoning will be
clouded by an iota of doubt. With the wise application of logic, one may be able to arrive at
a conclusion.

2. Mathematics – It is a science that deals with numbers and their operations.

Actually, economics is the most quantifiable discipline among social sciences. It can
quantify population, income, national product, aggregate number of firms, etc. besides,
mathematical operations and equations are used in economics in arriving at a conclusion.

The simplest application of mathematics for economic analysis is found in the field
of Geometry, a science that explains relationships.

3. Statistics – It is a branch of mathematics dealing with the analysis and

interpretation of numerical data. It deals with the process of collecting, tabulating and
analyzing data to test the validity of a certain hypothesis. These are facts collected and
arranged in an orderly way for study. Through statistics, one may be able to reject or accept
an assumption made on a certain phenomenon. Statistical inference plays a major role in
modern economic inquiry but economists have to modify standard statistical procedures to
fit the data they analyze.

Activity 1.

What are the uses of logic, mathematics and statistics in the study of economics?
Explain.

Activity 2.

The Philippines has encountered many serious problems most of the time. In view
of this, list down some of these economic problems the country has encountered for this
year. Opposite that problem, give at least three possible solutions that you think will help
solve the problem. Discuss your work in class and listen to their reactions.

Activity 3.

Collect three news clippings or three articles on economics. Identify the divisions of
economics in your news items or articles that are included.
Lesson 3: The Factors of Production

Specific Objectives

At the end of the lesson, the students will be able to:

1. Classify the different factors of production;
2. Examine the role of the factors of production on the economy of our country;
3. Define and explain production functions in our economy; and
4. Give the significance of production function.

Overview

Man cannot produce goods and services without utilizing the different economic
resources or factors of production. These factors are basic in the creation of goods and
services. A nation’s output of goods and services is determined by the resources at its
disposal. In a country like the Philippines whose economic system is predominantly one of
free enterprise, the creation of wealth or economic goods is the task and responsibility of
our economic resources.

A firm’s cost depends on the quantities of machine, labor, raw materials and other
inputs, that it buys and on the price of each. To make it easier to understand, a question is
raised. How does the firm decide how much of each of the various to buy? This lesson
highlights the different economic resources responsibly in the production of goods and
services in our economy as well as production function and its significance.

The Factors of Production

Our economic resources are also known as factors of production or inputs. There
five major factors of production which are utilized in our economy. These are land, labor,
capital, entrepreneur, and foreign exchange.

1. Land – These resources consist of free gifts of nature which includes all natural
resources above, on, and below the ground such as soil, rivers, lakes, oceans, forests,
mountains, mineral resources and climate. Land is considered economic resources because
it has a price attached to it. One cannot utilize this natural resources without paying for it
usually in the form of rent or lease.

2. Labor – This is also termed as human resources. Labor refers to all human efforts,
be it mental or physical, that help to produce want satisfying goods and services. This
applies not only to workers, farmers or laborers, but also to professionals like accountants,
economists or scientists. Labor is an indispensable factor in the production of goods and
services. In return, he earns an income in the form of wages and/or salaries.

3. Capital – It is a finished product which is used to produce goods. It consists of all

man-made aids to further the production process such as tools, machinery and buildings.
Capital also serves as an investment. Income derived from capital is interest.
 4. Entrepreneur – This is a French word meaning enterpriser. An entrepreneur is
the organizer and coordinator of the other factors of production: land, labor, and capital. An
entrepreneur is one who is engaged in economic undertakings and provides society with
goods and services it needs. He utilizes his initiative, talent and resourcefulness in the
creation of economic goods. He is able to compensate himself through the acquisition of
profits.

5. Foreign Exchange – This refers to the dollar and dollar reserves that the economy
has.

Classification of Inputs

The different factors of production are considered as inputs to production. In the

short-run, the factors of production are classified into two: fixed inputs and variable inputs.

1. Fixed Inputs – These are inputs that do not change with the volume of production.
This means, whether you produce or not, these factors of production are unchanged.
Examples are land and capital. For instance, in a one hectare rice field, you can employ even
how many farmers to cultivate the land. One hectare of land is still one hectare whether the
harvest is 20 cavans, 40 cavans or none. In the case of a machine – let us say concrete mixer
– it may mix 30 to 50 kilos of gravel and sand in a day. Still, it is one machine. In fact, even if
there is no production, the land and machine are still there.

2. Variable Inputs – These inputs change in accordance with the volume of

production. No production means no variable inputs, while more production means more
variable inputs. Examples of variable inputs are labor and entrepreneur. More workers are
needed if there is more work to be done. However, no laborers if there are no work to be
done.

The process of transforming both fixed and variable inputs into finished goods and
services is also called production. The quantity and quality of goods and services produced
depends on the quality and quantity of inputs used. Obviously, modern techniques of
production are more efficient than primitive technology. There is a relationship between
the inputs used and the outputs produced.

Production Function

The production function states the relationship between the inputs used and the
outputs produced. It simply states as:

y = f (x)

Where: y = output
x = input

This is read as: y is a “function” (or depends on) of x.

 The production function is a technical relationship between “output and input”, a
physical relationship, and therefore, a non-economic relationship. It is non-economic in the
sense that there are no costs involved. It does not reveal the costs of inputs and outputs,
neither prices of inputs and outputs.

Significance of the Production Function

A producer does not only aim for more outputs. He has to aim for more profits and
in order to have this; he has to minimize his costs of production. Costs of production can be
minimized if inputs are also minimized without necessarily affecting the level of outputs. Of
course, profit can also increase by increasing the price of products with the same cost of
production. But let us set aside the assumption for a while and let us see how inputs are
minimized and the cost of production.

The production function curve reveals three stages of production as shown in the
graph. (See Figure 1).

Figure 1
The Stages of Production Function

Output/Total Product

I II III

Input

In stage I of production, there is an increasing rate of production. As we increase the

level of inputs by the same amount, the level of output also increases at a faster rate than
that of inputs. Stage I is called increasing rate of production.

In stage II of production, there is a decreasing rate of production as shown by

declining slope of the graph. The rate of increase in inputs is greater than the rate of
increase in output. Stage II is called the stage of declining production.

There is a certain level of input where output is maximized. After which, total output
declines.
 In stage III, total output decreases even though inputs continue to increase. This is
called the stage of negative production. In production, this is better known as the Law of
Diminishing Return.

The Law of Diminishing Returns

The Law of Diminishing Returns is also known as the Law of Diminishing Marginal
Productivity. It is a basic law od economics and technology. The law states that when
successive units of a variable input (like farmers) work with a fixed input (like one hectare of
land), beyond a certain point, the additional product (output) produced by each additional
unit of a variable input decreases. This law concerns the relationship between inputs and
outputs in the productive process.

Table 4
The Law of Diminishing Returns

3-Hectare of Rice Fields

Farmers Total Production Marginal Product

1 40 0
2 55 15
3 75 20
4 100 25
5 120 20
6 135 15
7 145 10
8 145 0
9 135 - 10
10 120 - 15

It is noted that in the work combination of variable input and fixed input, total
output and additional output (marginal product) increase up to a certain point. Beyond this
point, the rate of increase of total product declines, and later on total product decreases as
more units of a variable factor are employed. In the case of marginal product, it also
diminishes beyond a certain point until it reaches negative returns as more variable inputs
are added. (See Table 4).

Activity 1

Carefully analyze and solve the problem below:

 A certain economy produces only two consumer goods, X and Y. To manufacture
these goods, it has three kinds of resources: 1) Fixed stock of X resources, useful only in X8s
production; 2) a similar fixed stock of Y resources; 3) a fixed labor force of 100 men
capable of working in either occupation. The table below indicates the amount of X and Y
that can be produced daily when various quantities of labor work with the resources:

No. of Men Daily X Prod. No. of Men Daily Y Prod. X Output Y Output
0 0 0 0
10 40 10 5
20 105 20 12
30 200 30 20
40 300 40 28
50 390 50 36
60 450 60 43
70 500 70 49
80 550 80 54
90 580 90 58
100 600 100 60

1. Fill in the blanks in the extreme right hand column the production output of X and Y.
2. Draw the economy’s daily production possibility curve.
3. According to the table, diminishing returns first appeared in X production when the
total of men employed rises to ___________.
4. The corresponding diminishing returns of Y points to the total number of men at
____________.
5. If you are a producer of any good, what is the importance of the production function
to you? Explain.

Activity 2

What is the law of diminishing return? Can we avoid the effect of the law of
diminishing return? If so, how?
 POST TEST IN MODULE I

Name: _________________________________________ Date: ___________ Score: ___________

Year/Section: __________________________________ Day/Time: _____________________________

MULTIPLE CHOICE: Choose the letter of the correct answer and write it down on the space
provided for in each item:

___________ 1.There is scarcity of resources because:

A. Man’s wants are unlimited
B. Man’s wants are limited
C. Man’s wants are enough
D. Man’s wants are satisfied

___________ 2.An economic resource that includes the natural resources:

A. Land
B. Labor
C. Capital
D. Entrepreneur

___________ 3.In production function, an example of fixed inputs is:

A. Land and labor
B. Land and capital
C. Labor and capital
D. Labor and entrepreneur

___________ 4.Economics is a social science because it deals with:

A. Human nature
B. Natural resources
C. Experimentation
D. Plants and animals

___________ 5.It is a finished product which is used to produce other goods:

A. Land
B. Labor
C. Capital
D. Entrepreneur

___________ 6.It is also termed as human resource:

A. Land
B. Labor
C. Capital
D. Entrepreneur

___________ 7.It refers to the allocation of products among the factors of production:
A. Production
 B. Consumption
C. Distribution
D. Exchange

___________ 8.Macroeconomics deals with the following except:

A. Gross National Product
B. Employment
C. National Income
D. Price of rice

___________ 9.Economics is important so that we may be able to:

A. Understand problems facing the citizens and family
B. Help the government promote growth and improve quality of life
C. Analyze fascinating patterns of social behavior
D. All of the above

___________ 10.The simplest application of mathematics for economic analysis is found in this
field because it explains the relationships:
A. Physics
B. Chemistry
C. Geometry
D. Sociology