INTRODUCTION

ECONOMICS

Chapter Objectives
Economics defined
Microeconomics vs. macroeconomics
Positive vs normative economic statements

Resource scarcity and the economizing problem

Production possibilities model

1-2

 Economics
A social science that studies about human
behavior in how they produce, distribute, and
consume goods and services in the world of
scarce resources to satisfy human unlimited
wants.

Production?
Distribution?
Consumption?
Resources? Scarce?
Human wants? Unlimited human wants?

Branches of Economics
Microeconomics
A study of economics at specific economic
units.
Examples: household, firms, government,
sector of economy, industry.

Macroeconomics
A study of economics as a whole or in
aggregate.
Examples: inflation, GDP, unemployment,
income distribution

Economic methodology

The study of economics relies on scientific methods which consist of

several elements:
observation of facts(real-world data)
Establish hypothesis (possible explanation of cause and effect) is
developed.
Running a test by comparing the outcomes of specific events to the
outcome of predicted by hypothesis.
The acceptance, rejection or modification of the hypothesis based on
these comparisons.
The continued testing of the hypothesis against facts.

The final results transformthe hypothesinto a theory.

A well tested and accepted theory will be referred to as Laws or principles.
These Laws and Principles are incorporated in models.
Combinations of laws, principles and models enable economists to understand
and explain reality and to predict various outcomes of particular action.

Laws and Principles are incorporated into

model, which combinations of all three will
enhance understanding and explanations to
scientists.

Well accepted theory is referred

as Laws or Principles
Favorable results of hypothesis
evolves into theory
Accept, reject and
modified hypothesis
Run tests:
Hypothesis Testing

Developing hypothesis
Observing and collecting
real-world data

Theoretical economics

POLICY ECONOMICS

Induction
- The process where
theories are established
after data are collected
or proven by facts.

THEORIES

FACTS

Deduction
- The process where
theories are established
prior/earlier to data
collection.

Terminologies
Generalizations
all theories, principles and laws are generalizations
relating to economic behavior.

Or
Abstractions
all theories, principles and laws are abstractions or
simplifications that omit irrelevant facts and
circumstances. behavior.

ceteris paribus - Other-things-equal assumption

Is used to construct generalizations, which inturn will
formulate theories, laws and principles.

Positive vs. Normative Economics

Positive economics
Focuses on facts, and cause-and-effect relationships.
Concern with what is.
Includes description, theory development, and theory
testing.
Tries to establish scientific statements about economic
behavior and it deals with what economy is actually like.
It does not involve value judgments.

Normative Economics
Looks at the desirability of certain aspects of the economy.
Concer with what ought/should be.
It underlies expressions of support for particular economic
policies.
It involves value judgment.

Examples
POSITIVE

NORMATIVE

1. The unemployment rate in

several European countries
are higher than that in the
United States.

The European Nations ought

The market price for petrol is

$1.80 per liter.

The government should fixed

to undertake policies to
reduce the unemployment
problem.

the oil price lower than $1.80

per liter.

Pitfalls (problems) to Sound Reasoning

Biases - may cloud thinking and interfere with the
objective of the analysis
Loaded terminology: overemphasizing actual situations.
Definitions: technical vs common usage.

Fallacy of Composition (Overgeneralization)

Assuming what is true for one individual or part of a whole is necessarily
true for a group of individuals or the whole society .
Example: reckless driver in an area.

Causation Fallacies
Post Hoc Fallacy or after this, therefore because of this fallacy
Thinking that; event A precedes event B, or A is the cause of B.
Example: Education level and Y-level.

Correlation vs. Causation

Thinking that correlations means causation, while both are different type
of relationship.
Correlation: shows degree of association between variables.
Causation: a relation ship which cause one variable to change when the
other changes.

Economics
Economics:
Is a social sc. that studies about human behavior in how they
produce, distribute and consume goods and services in a world of
scarce resource.

Economic wants exceed economic resources (productive

capacity).

Social science concerned with making optimal choices under

conditions of scarcity.

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Scarcity
What is Scarcity?
An economizing problem in which resources are
limited (scarce) while human wants are unlimited.
Scarce (limited) resources/Factors of production
Land
Labor
Capital
Entrepreneurial Ability

1-14

Discussion
Is it true resources are scarce?
YES? NO?
Provide your justification

 Why resources are considered as scarce?

resources are considered gifts of nature and are
subject to depletion. i.e. Oil.
Rapid cycles of modernization and economic growth
have damage the ecological system and disturb the
reproduction process and the re-generation of new
resources.

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Due to scarcity problem; people could not get everything

they want, and due to that;
Choices must be made
Referring to choosing the best of all available
alternatives.
Opportunity cost
Is referring to the next best alternative that has to
be forgone/sacrificed.
the concept of scarcity, choice and opportunity costs are
illustrated through the concept of the Production
Possibilities Model.

Production Possibilities Model (PPM)

PPM Illustrates production choices
Assumptions:
Fixed (limited) resources
Full employment (optimum production level)
Fixed technology
Two goods

1-18

Production Possibilities Table

Production Alternatives
Type of Product

Pizzas

(in hundred thousands)

Machines (in thousands)

10

Plot Points to Create Graph

1-19

Industrial Robots

Production Possibilities Curve

14
13
12
11
10
9
8
7
6
5
4
3
2
1

The Production Possibilities Curve:

Alternatives/choices of optimum production
points (production at economic efficiency).

A
B

Unattainable
Production point outside the
PPC: is unattainable due to
limited resources and production
capacity.

Attainable
Production point below the PPC:
is attainable but is considered as
Under or Unemployment

X
E
0

8 9

Pizzas
Q: What are the Consequences of unemployment?

1-20

Growth of Production Possibilities Curve:

Industrial Robots

- referring to the movement of the PPC to the right.

A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

B
A
B

Factors that contribute to

economic growth:
- More resources available
- Better quality resources
-Technological advances
D
- International Trade

C
C

Attainable
D

E
0

8 9

Pizzas
1-21

Production Possibilities Curve

Industrial Robots

the issues of: i. Law of Increasing Opportunity Cost

ii. Shape of the Curve
A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

B
A
B

C
C
D

Attainable
D

E
0

8 9

Pizzas
1-22

The Future Economy

Consequences of unemployment
Economic growth
More resources
Better quality resources
Technological advances

1-23

Future
Curve

Current
Curve

Goods for the Present

Presentville

Goods for the Future

Goods for the Future

Future Possibilities

Future
Curve
F

Current
Curve

Goods for the Present

Futureville
1-24

EXERCISES

Below are six statements. Indicate whether each one pertains to

microeconomics (MIC) or macroeconomics (MAC).

(a) The inflation rate in the United States hit its lowest level in the
last twenty years.
(b) The profits of Microsoft rose 20 percent during the past quarter.
(c) Rains from El Nino again hit the California region causing severe
flooding in farms. The prices for citrus and produce are expected to
rise sharply.
(d) The nations economy grew at an annual rate of 3.7 percent in
the final quarter of the year.
(e) The trade deficit in the United States was $20 billion last month.
(f) General Motors plans to spend $800 million on a new
automobile plant.

Below are six statements. Identify whether each is a positive or

normative statement.
(a) The national economy grew at a 6.2 percentage rate in the last
quarter as the economy continues to recovers from the past
recession.
(b) The unemployment rate fell to 5.7 percent this month, and is
expected to fall to 5.5 percent next month.
(c) The rate of inflation should be reduced to zero to maintain the
value of the U.S. dollar.
(d) The government should take action to reduce the prices of
prescription drugs charged by drug companies.
(e) Interest rates for home mortgages are at their lowest rate in
thirty years.
(f) The Federal government should increase income taxes on the
wealthy to reduce the budget deficit.

Below are six statements. Identify whether each is a positive or

normative statement.
(a)The minimum wage would be increased so low-income workers can
earn a living wage.
(b)The unemployment rate is too high and should be reduced through
government actions.
(c)The rate of inflation was about 2 percent last year, an all time low for
the past decade.
(d)The government should take action to break up the monopoly power
of Microsoft.
(e)Interest rates should be lower in the United States so that people can
afford to build a home.
(f) The Federal government achieved a budget surplus for the first time
in thirty years.

Grain
(metric tons)

Airplanes
(1,000s)

B
C
D
E
F
G
H

14
26
36
44
50
54
56

6
5
4
3
2
1
0

Combination

a. construct a production possibilities curve from this information placing grain

on the vertical axis and airplanes on the horizontal axis.
b. What is the opportunity cost of producing the first unit of airplanes?
c. The marginal opportunity cost of producing the fourth unit of airplanes?

ANSWERS:

(a) See graph.

(b)Two units of grain (56 54) are sacrificed if one unit of planes is
produced.
(c)When the fourth unit of planes is produced the marginal opportunity
cost is eight units of grain (44 36).
[text: E pp. 11-12; MA pp. 11-12; MI pp. 11-12]

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