GESS 015

ECONOMICS WITH
LAND REFORM,
TAXATION AND
COOPERATIVES
Jesusa Aguda Manalo, MSEco
1st trimester, 2015-2016

Scarcity
-the most basic concept in Economics
-fact of life
-relative concept
-gave rise to Economics as a science
-there are two factors that cause scarcity:
limited resources, unlimited wants and
needs
-because of scarcity, all economies face
three basic economic problems: what to
produce, how to produce, for whom to
produce

Economics:
-social science
-study of wealth getting, wealth using
activities of men;
-efficient utilization or allocation of scarce
resources in order to satisfy wants and
needs of men;
-study of how to cope up scarcity;
-science of choice

Divisions of Economics
-Production
-Consumption
-Distribution
-Exchange
-Public Finance

Branches of Economics
-Macroeconomics
-Microeconomics

Examples:
1. Macroeconomics
-Drug addiction situation in the
Philippines
-The national price level
2. Microeconomics
- your family income and expenses
- Drug addiction situation in Mindanao

Tools of Economics:
1. Logic the art of reasoning
2. Mathematics study of numbers and
equations
3.
Statistics study of collecting,
organizing,
tabulating, analyzing and
evaluation of
data in order to come up
with conclusion
and recommendation to a
given situation or problem.

Father of Economics

Adam Smith

Adam Smith is often touted as the world's

first free-market capitalist.
Smith's place in history as the father of
modern economics and a major proponent
of laissez-faire economic policies is quite
secure.

Some ideas of Adam Smith:

Invisible Hand Theory

"An Inquiry Into the Nature and Causes of the Wealth

of Nations," also shortened as "The Wealth of
Nations," documented industrial development in
Europe. While critics note that Smith didn't invent
many of the ideas that he wrote about, he was the
first person to compile and publish them in a format
designed to explain them to the average reader of the
day. As a result, he is responsible for popularizing
many of the ideas that underpin the school of thought
that
became
known
as
classical economics.

Goals of Economics
-to strengthen economic freedom
-to promote economic efficiency
to promote economic stability
-to promote economic security
-to attain a high level of growth in the
economy

Approaches of coping up Scarcity:

(Economic approaches to come up
with decisions)

I. PRODUCTION we have to produce the goods and services

with the given limited resources.
Production is combining inputs together to come up with
outputs; therefore it is important to look at the relationship
between input and output.

- A. The Production Function (PF) of Total

Product (TP)

(shows the technical, mathematical, engineering, noneconomic relationship of inputs used in production and
outputs produced).

The Production Function (PF) or

Total Product (TP) Graph:

The Production Possibility

Frontier

So, what does the PPF imply?

Why is it downward sloping?
Why bowed out?

1. There is trade of

(giving up the resources of one good, in

order to produce more of the other good: i.
e. to produce more consumption goods, we
give up some labour to work on capital
goods, in order to produce more capital
goods)

2. There is an Opportunity Cost (OC)

-cost foregone, or benefit derived for

choosing the best alternative use of the
resource.
i.e. in Activity #1 the assumption is
the economy produces only capital and
consumption goods with only 1,800
labour available to work on the goods.

With the given the production functions of

the goods- if the economy wants to produce
more of consumption goods, it has to give
up some number of labour in producing
capital goods if it does, the opportunity of
the decision is: the income that it should
have received for selling capital goods; or
the cost foregone is the amount of money
that should have been spent for labour in
producing consumption goods.

3. The PPF has diminishing slope.

Why?
What is the slope?

To answer this, lets understand

the concept of marginalism:

-the Marginal Product (MP)

computation of the MP is demonstrated
in your Activity # 2.
so, a MP=40, means, there are 40
additional units produced for every
additional labour employed.

The concept of Average Product (AP) is

also demonstrated in your activity # 2.

What is the difference of MP and AP?

If AP = 40, this means that there are 40

units of the good produced by every unit of
labor.

Given the three concepts:

PF, MP, AP-what then are
their importance in coming
up with economic
decision?

Graph of PF, MP and AP

Based on the relationship of PF

or TP, MP & AP:

There are three stages of production:

Stage 1. Stage of increasing return/or
stage of positive return:
PF/TP, MP and AP are all increasing
Stage 2. Stage of decreasing return /or
stage of diminishing return:
PF/TP increasing, MP and AP are
decreasing.
MP=0 at PF/TP is maximum.
Stage 3. Stage of negative returns:
PF/TP decreasing, MP is negative, AP
is decreasing (doesnt reach 0)

What then is the meaning of the

relationship?
-that it demonstrates the three stages of
production
-that an economist can give a decision of up
to what level of labour can be employed
-in that case, the entrepreneur can more or
less determine when to stop hiring
labourers and how much to spend on
labour (given prices of inputs and outputs)
and how much income generated, thus
even profit can be predicted.

It clearly demonstrates the LAW OF

DIMINISHING MARGINAL RETURNS (LDMR)

-LDMR states that: as more and more of

the variable input (other inputs are held
constant) is employed in the production of a
certain good, the TP increases; but as we
increase the variable input further, the TP
still increase but the additional product
decreases.

To summarize the first

approach:

I. Production

PF/TP
Production Possibilties
PPF
Trade-off
Opportunity Cost
Diminishing Returns (Marginalism)
The Law of Diminishing Returns (LDMR)

The Circular Flow Model of the Economy:

Second Approach

The second approach to coping up scarcity is to

understand how the economy works using the
simple circular flow model.

In the economy, following are the economic

units:
-the households
-the firms
-the government
-the rest of the world

 How

are these units related?

What is the role of each unit in the
economy?

Let us identify the role of each

unit in the economy:
The households are the consumers,
buyers, taxpayers, also producers
The firms are the producers, also
consumers/ buyers, taxpayers
The government is also a consumer, a
producer, law maker/regulates activities of
the economy.
The rest of the world also producers,
consumers, taxpayers, exporters, importers.

What is the circular flow model?

-it shows the interrelationship between the
households and the firms.
1. households provide the resources to the
firms so that firms continue to produce
goods and services (the households are the
owners of the resources).
2. firms convert/combine resources together
to come up with goods and services.

3. government provides goods and services

to households and firms
4. households and firms pay taxes to the
government.
5. rest of the world exports/imports goods
and services to and from the country.

The Economic Systems: Third

Approach

An economic system is a system of

production
and
exchange
of
goods and services
as
well
as
allocation of resources in a society. It
includes the combination of the various
institutions, agencies, entities (or even
sectors as described by some authors) and
consumers that comprise the economic
structure of a given community.

 The

study of economic systems

includes how these various agencies
and institutions are linked to one
another, how information flows
between them, and the social
relations within the system (including
property rights and the structure of
management).