SS4 LT1 Reviewer

Ferdinand B. Sta. Ana, Jr. IV - Electron

Significance of Economic Study

Questions to ponder: Why study economics? Advantages of economic knowledge? Is economic knowledge a necessity? What is the role of economics in day-to-day life in the context of the next century?

//As you have may noticed, these are just questions from the course outline :D

Economics
is the social science dealing with the optimal allocation of scarce resources with alternative uses for the production of goods or services, its distribution and eventual consumption by society for its welfare

Macroeconomics Economic growth and stability Economy as a whole

Microeconomics Consumer and firm behavior Individual people and individual firms

As a social science
Economics is a social science in the sense that it analyzes the behavior and organization of the members of society to sustain their individual and collective material needs and wants

Approaches? Scientific?
The use of scientific method

//research more. Sorry!

Limiting unsound economic reasoning

By identifying pitfalls in economic reasoning, so that we will not be trapped in them: Post hoc fallacy: the fallacy of confusing sequence with causation (ex.
Event A election of someone, Event B recession; A few months after Event A, Event B happens. Next election, new candidate uses political propaganda that Event A caused Event B without sound proof/reason)

Fallacy of composition: incorrect assumption that what is true for one is true for all (ex. Standing up in a concert to get a better view) Failure of ceteris paribus: making conclusions without taking into consideration changes in other factors that may have had an effect on your supposed claim. Subjectivity

Why do economists disagree?

Economists may disagree about the validity of alternative positive theories about how the world works. Economists may have different values and, therefore, different normative views about what policy should try to accomplish.

Positive Economics
describe the world as it is Resolved by reference to analysis and empirical evidence

Normative Economics
prescribe how the world should be Involves ethics and values rather than facts

Efficiency
The proper use of resources resulting in the maximization of benefit to society Absence of waste Shortcuts Pareto optimum: You cannot produce more of something without decreasing the production of something else Inefficiencies:
Underutilized resources Inefficient organization (ex. PH government)

Efficiency VS Effectiveness
Efficiency Shortcuts Process-oriented Effectiveness Character building Goal-oriented

Law of Scarcity
Limited supply of goods/services, unlimited wants Note: low accessibility x> scarcity
Needs vs Wants vs Demands Need/want: Willingness to buy Ability to buy

+ = *Opportunity cost cost of best alternative forgone

sources of competitive advantage

input Production process output

Factors of Production

Old

New
Entreprenuership
Innovative
not the presence of a certain resource, but the absence of it pushes people to make use of available resources in unconventional ways It doesnt matter if you have a lot of resources. What matters more is what you do with them

Natural Resource/Land Labor Kapital produced goods used for further production of another good

Risk takers

Knowledged worker
Professionalism, rather than # of workers

Technology
Kapital is easily replicated while Technology is difficult to replicate

Goods VS Services
Goods Tangible *Some believe that good = a bundled service ** bundled = physical manifestation of the intangible service Services intangible

Alternative Economic Systems

Custom tradition Command government Market private sector (firms and buyers) Mixed

*Answer the problems of economic organization using each AES -> What to produce and in what quantities? -> How are they going to be produce? -> For whom are they produced?

Production-Possibility Frontier
graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

An arrangement in which buyers & sellers interact to determine prices & quantity of goods/services that are either bought/sold

The Market Economy

Run by invisible hand (Adam Smith, 1776 in An Inquiry Into the Nature and Causes of the Wealth of Nations) Pursuing/following self-interest inevitably leads to the creation of common good Common good out of selfish motives to do good, dont intend to do good Only works under a particular context -> Perfect Competition = no buyer/seller is large enough to significantly effect market prices.
Fixed prices <-> competition No competition -> uncontrollable price

Answering the problems of economic organization using Market Economy

What are produced and in what quantity?
money votes Limited by Natural resources and especially, technology

How are they produced?

Most efficient; least waste possible as firms are driven by profit (Profit = Total Revenue Total Cost)

For whom are they produced?

Supply and demand interaction in the goods & labor market Ganito lang isipin niyo. Kung mas mataas yung price ng goods/services kesa dun sa wages ng mga tao sa labor market, sino pang bibili? So, yung certain good na may ganitong price, ibebenta lang nila sa mga tao sa labor markets na may enough wages.

3 Functions of government
*in a way, this can be attributed to command economy

Efficiency:
The market does fail, so the government intervenes Market failures:
Imperfect competition:
loss of Perfect competition, meaning one buyer/seller can significantly affect prices of good/service

Why a failure? -> loss of price regulation Monopoly -> tends to crush sprouting competitions prematurely; public has accepted their produce by virtue of branding Monopolistic competition -> niche markets (e.g. cars) Examples of solutions : antitrust laws

 Externality
Imposing cost/benefit on people w/o those people receiving/paying proper compensation (e.g. airplane noise, dynamite fishing, open-toeveryone bridge) FAIL because externalities dont have a price, and the market doesnt understand anything that doesnt have a price Examples of solution: imposing price on externalities

 Public good:
Club good

Neither excludable nor rival Unprofitable goods Inefficient if left to firms because firms want profit ($_$) Problem: Free-rider problem Solution: the government provides (e.g. national defense)

Equity
Market produces based on money votes, not on needs. This leads to inequity(unacceptable distribution of income and wealth) Equity != equality (former: fairness, latter: sameness)
Need -based Effort centric

Equity

Performancebased Output centric

Soln.: redistribute income (e.g. progressive taxation of income and wealth & income-support or transfer programs*)

*efficiency vs equity -why would they receive something they didnt work for? -complacency due to reward w/o effort/output done

Stability
Efficient market ->responsive Responsive -> turbulent prices Government stabilizes price increase/decrease

Macroeconomic objectives of government

*Di ko alam kung kasama to kaya di ko ididiscuss in-depth Output/Economic growth Employment Price stability Foreign balance Economic freedom

Government failures
*Di ko alam kung kasama to kaya di ko ididiscuss in-depth Governments can create monopolies High taxes distort the allocation of resources Social security threatens to overload workers Environmental regulation dulls spirit of enterprise Government attempts in stabilization of economy can lead to inflation

References:
Samuelson, P. A. (2005). Economics. Singapore: McGraw-Hill Education(Asia) Economics for Dummies, 2nd ed. MIT Open Courseware: Principle of Microeconomics, Fall 2007 Mankiw, N. G. (2009). Principle of Economics. Mason, OH: South-Western Cengage Learning