Chapter 1

The Basics of Economics

Learning Outcomes: At the end of this chapter, students are expected to:
1. Define Economics
2. Demonstrate understanding in the basic concepts like scarcity, choice
and opportunity costs
3. Identify the difference between macroeconomics and microeconomics
4. Explain the different economic problems
5. Identify the different economic systems
6. Enumerate and explain the economic goals that a country must attain
to address the basic economic problems
7. Relate the basic economics goals to the Sustainable Development
Goals and AmBisyon Natin 2040

What is Economics all about?

What is the single word that comes up in your mind when you hear the word Economics?
Is it MONEY? Well to some extent it’s true because economics usually pertains to man’s material
welfare. All goods and services needed by mankind have to be paid for, this can’t be taken for
free, that is why these are called economic goods. Free goods or zero price-goods, like air and
rain water, which do not need to be paid for, are not so much of a concern to economics. To
better understand economics which is more than just a study of money, herewith is the definition
of economics adapted from the book, Economics (Sicat, 1983).

Economics is a scientific study which deals with how individuals and society generally
make choices. Individuals and groups in society have innumerable wants. To satisfy those wants,
there are resources that can be used. These resources are not freely available. They are therefore
scarce and they have alternative uses. Such uses may also apply between now (today) and
tomorrow (future). Therefore, a dimension of choice includes present and future use of available
resources. Moreover, the uses of these resources carry with them cost and corresponding benefits.
Concern with cost and benefits requires efficiency in resource use.

Choice and Concept of Opportunity Cost

Economics is a field of social science which deals with how individuals and groups of
people generally make choices. People are never satisfied (insatiable), wants and needs arise
one after another (unlimited) yet those material things that may satisfy wants are limited and have
to be paid for. This a fact of life, so individuals have to make a choice. Choices that individuals
make involve benefits and corresponding sacrifices. One’s decision to wake up early for school
involves benefits – not being late for school, but the decision to wake up early has a corresponding
sacrifice – the supposedly additional hours of sleep that are lost.

Yes, whatever action that people make entails a choice, but are they aware if they made
the right decisions, because the choices that they make involve sacrifices since there are other
things that they could have done instead.

One’s choice to spend money for a movie involves a sacrifice as he/she will instead spend
his/her money to buy a book or to buy a snack for the entire family.
 Opportunity cost measures the things that must be given up when one chooses an
alternative over another. It also measures the foregone opportunity or the alternative benefits
that one could have gained. Opportunity cost is sometimes called the second- best choice.

Resources and the Concept of Scarcity

Resources whether human or non-human are considered scarce, such that goods and
services that can be produced by them are also limited and scarce. Scarcity limits people’s
options to choose because everything has to be paid for. “There is no such thing as a free lunch”
is the core philosophy of economics.

The concept of scarcity poses a reason why we need to study economics. The
fundamental problem in economics is scarcity of resources, take it out, and there may be no need
to study economics. Here are some indicators of scarcity:

1. Products and services have prices.

2. Resources have ownership and as such, there are people who own these and people
who don’t this is the reason why there are rich and poor in society.
3. Man needs to work to earn a living or to maintain a living standard.
4. Natural resources are gifts from God which need to be conserved for a good life.

Two major branches of economics: microeconomics vs macroeconomics

Microeconomics is concerned with the study of the behavior of an consumer, firm or

industry.

Macroeconomics is concerned with the study of the aggregate economy or the economy
as a whole. It includes the study of GNP, the employment level, the general price level, the
exchange rate, etc.

Classifications of Resources

Economists call all the resources that are used to produce other goods and
services as factors of production or simply the inputs of production. These resources are
classified into human and non- human resources and further classified as land, labor,
capital, and the entrepreneur. Since these resources are scarce, the use of these demand
payment. The payments for the factors of production are referred to as factor payments

Land refers to the God-given resources used in production. It includes all

natural resources, such as mineral deposits, water resources, wild animals, and
trees from the forest. Payments for the use of land are called rents.

Labor refers to the physical and mental exertions of man to produce goods and
services. Wages is a general term used for the payment for the use of labor.

Capital are man –made resources used to produce other goods. These include all
types of structures used in the process of production such as buildings, equipment,
machineries, raw materials, land improvements such as the site of the Mall of Asia and
PICC. Interest is the payment for the use of capital.
 The Entrepreneur is the person who combines land, labor, and capital to
produce goods and services. He is also the manager, the supervisor, or the
innovator. He hires employees so he can determine the best person to work
for him. To keep good employees in his company, he has to pay them well so
that they will work well and will not leave their jobs for another that pays them
better. The factor payment for the services of the entrepreneur is called normal
profit.

Terminologies in Economics

To reiterate, economics being a science, is a systematic body of knowledge. It uses

scientific methods in gathering data, analyzing data, and drawing conclusions from these data.
Data may come from primary or secondary sources.

Descriptive economics involves compiling data or gathering of data relevant to a particular

problem. Data may come from primary or secondary sources.

 Primary data are collected for one’s present purposes using direct observation,
surveys, and interviews.

 Secondary data are collected from statistical agencies like data on prices,
employment. Interest, and national income or the Gross Domestic Product.

Economic theory is a generalization based on facts about why or how an economic event occurs.
Theory is a generalization because it explains how economic variables generally behave when
certain conditions exist.

Economic policy is formulated, typically implemented and administered by the government.

Examples of economics policies include decisions made on government spending and taxation.

Positive Economic Analysis attempts to describe the economy in terms of an economic problem,
event or concern based on factual information. This can be tested or confirmed based on facts or
statistical data.

Normative economics involves the use of value judgement to assess economic issues and
policies and therefore cannot be tested or confirmed. What is good or not good depends on
society’s value system and orientation.

The Basic Problems in Economics

The fundamental problem of economics is scarcity of resources, hence, any society is

confronted by the following basic economic problems:

1. What to produce? This is a decision as to the type and kind of goods and services society
desires or needs (consumption).
2. How to produce? This is a question on the technique of production and the manner of
combining resources to come up with the desired output. (production).
3. For whom to produce? This is a question on the allocation of goods and services among
members of society (distribution).
Economic Systems

An economic system is a set of economic institutions that dominates a given economy.

The objective of an economic system is to solve the basic economic problems.

1. Traditional Economic System. In the traditional economic system, economic decisions on

what, how, and for whom to produce, are based on a society’s customs and traditions.
The economy generally repeats the decisions made at an earlier time or by an earlier
generation.
2. Market economy or the Free Enterprise Economy or Capitalism. The basic problems on
what, how, and for whom to produce are decided upon by the market system or simply by
demand and supply conditions. The factors of production and their distribution are owned
and managed by private individuals or corporations. The essential characteristics of this
economic system are private ownership of property and resources, presence of
competition, freedom of enterprise, and a profit- motivated mode of production.
3. Command system or the Centrally Planned Economy or Socialism / Communism. This
economic system relies on the government to decide what to produce, how to produce,
and for whom to [Link] essential characteristics of the command economy is that
resources are owned by the state and therefore there is no private ownership of these
resources, hence there is equal distribution of income among members of society. No
individual competition exists but rather a collective effort among individuals is present.
Production is not profit motivated but is done for the general welfare of society.
4. Mixed System. This economic system is a combination of a market economy and a
command economy. Generally, most countries in the world, like the Philippines, have
adopted a mixed economy. Countries recognize the advantages of a market system
because of competition; competition makes the market efficient while the command
economy recognizes the importance of government interventions in directing the activities
performed in the economy especially at times of emergencies and / or crises, like the one
that the whole world currently faces .

Economic Goals

Economic policies are developed for certain goals which the economy would like to achieve.
The following are the goals or objectives of any society which may minimize economic and social
problems.

1. Economic growth - an increase in the total output produced in the economy as

measured by the country’s Real Gross Domestic Product (RGDP).

2. Equitable distribution of income- is present when no group of people in society is

suffers from extreme poverty while others enjoy abundance and prosperity.

3. Price stability- the avoidance of continuous increases in the general price level known
as inflation, or continuous decreases in the general price level known as deflation.

4. Full employment - the provision of suitable jobs for all citizens who are willing and
able to work.

5. Economic freedom – a guarantee that businesses, workers, and consumers enjoy a

high degree of freedom in their choice of economic activities that will make them earn
a living.
 6. Economic Security- the provision of a secured life or a decent life for everyone
including the disabled, chronically ill, and the aged.

The Millennium Development Goals

At the start of the 21st century, leaders from both developed and developing countries
gathered and agreed to achieve a set of concrete, measurable development objectives by 2015
through the adoption of the Millennium Declaration. These objectives, sknown as the Millennium
Development Goals (MDGs) are associated with the United Nations development agenda.

Source: [Link]

To help attain the MDGs, various government projects in the recent years were initiated
like that of the Pantawid Pamilyang Pilipino Programs (4Ps), the Alternative Learning System
(ALS), projects of the DOH, TESDA, DEPED and many other government agencies to attain the
MDGs.

Sustainable Development Goals (SDGs)

In September 2015, the Philippines, together with 192 other United Nations (UN) member
states, committed to achieving the 17 Sustainable Development Goals (SDGs) and their 169
targets by 2030. The SDGs, also called the Global Goals, have a range of economic, social,
environmental, and governance targets and there was recognition, early on, that these need to
be achieved in order to attain the long-term vision as articulated in AmBisyonNatin 2040.

Source: [Link]
 The SDGs are the blueprint to achieve a better and more sustainable future for all. They
address the global challenges that we face, including those related to poverty, inequality, climate
change, environmental degradation, peace and justice. The 17 Goals are all interconnected, and
in order to leave no one behind, it is important that we achieve them all by 2030.

The SDGs present a bold commitment to finish what has been started through the
Millennium Development Goals (MDGs) in 2015. The Philippines affirms its commitment to
achieve the SDGs by 2030, if not sooner, especially as the Global Goals are in sync with the
country’s development plans and long-term aspirations for 2040.

Goal 1. No Poverty — Donate what you don't use.

Goal 2. Zero Hunger — Avoid throwing away food. Over 1/3 of world's food is wasted.
Goal 3. Good Health and Well-Being — Vaccinate your family to protect them and improve
public health.
Goal 4. Quality Education — Help children in your community to read.
Goal 5. Gender Equality — Call out sexist language and behavior.
Goal 6. Clean Water and Sanitation — Avoid wasting water. Water scarcity affects more than
40% of world's population.
Goal 7. Affordable and Clean Energy — Use energy-efficient appliances and light bulbs.
Goal 8. Decent Work and Economic Growth — Buy from green companies that they are
equal opportunity employers.
Goal 9. Industry, Innovation, and Infrastracture — Think of innovative new ways to
repurpose old materials.
Goal 10. Reduced Inequality — Raise your voice against discrimination.
Goal 11. Sustainable Cities and Community — Bike, walk, or use public transportations
to keep our cities' air clean.
Goal 12. Responsible Consumption and Production — Recycle paper, plastic,
glass, and aluminum.
Goal 13. Climate Action — Educate young people on climate change to put them on a
sustainable path early on.
Goal 14. Life Below Water — Avoid plastic bags to keep the oceans safe and clean.
Goal 15. Life on Land — Plant a tree and help protect environment.
Goal 16. Peace, Justice, and Strong Institutions — Use your right to elect the leaders
in your country and local community.
Goal 17. Partnerships — Revitalize the global partnership for sustainable development
AmBisyon Natin 2040

This represents the collective long-term vision and aspirations of the Filipino people for
themselves and for the country in the next 25 years. It describes the kind of life that people want
to live, and how the country will be by 2040.

Source: [Link]

AmBisyonNatin 2040 is a picture of the future, a set of life goals and goals for the country.
It is different from a plan, which defines the strategies to achieve the goals. It is like a destination
that answers the question “Where do we want to be?”. A plan describes the way to get to the
destination; AmBisyonNatin 2040 is the vision that guides the future and is the anchor of the
country’s plans.
AmBisyonNatin 2040 is the result of a long-term visioning process that began in 2015.
More than 300 citizens participated in focus group discussions and close to 10,000 answered the
national survey. Technical studies were prepared to identify strategic options for realizing the
vision articulated by citizens. The exercise benefitted from the guidance of an Advisory Committee
composed of government, private sector, academe, and civil society.

The life of all Filipinos in 2040: Matatag, Maginhawa at Panatag na Buhay

Course materials:
Read:
Maniego, Norie L. & Sison Nicetas P. (2019). Economics: Principles and Application, Senior
Highschool