LESSON MANUSCRIPT

TOPIC 1: INTRODUCTION TO ECONOMICS

1. DEFINITION OF ECONOMICS
What is economics, and why do we have to learn it?
Many people hear the word "economy" and assume it solely refers to money.
However, economics entails more than just economics; it entails weighing several
options and alternatives. While some of these options entail money, the majority do not.
In fact, economics investigates scarcity and its impact on resource use, the production of
products and services, the increase of output and well-being over time, and a variety of
other complicated and significant societal issues.
The primary goal of economics is to determine the most reasonable and efficient
allocation of resources to achieve individual and societal goals. Nobody has ever
succeeded in precisely delineating the bounds of economics. Despite this, many people
agree with Alfred Marshall, a prominent English economist from the nineteenth century,
who defined economics as "the study of humanity in its everyday activities; it examines
the portion of individual and social behavior most intimately linked to acquiring and
utilizing the necessary material prerequisites for well-being." This definition ignores the
fact that sociologists, psychologists, and anthropologists frequently investigate the same
topics.
In contrast, English economist Lionel Robbins defined economics during the
twentieth century as "the science that investigates human behavior in the context of
choosing between given ends and scarce means with alternative applications." In other
words, Robbins proposed that economics is the science of resource optimization. While
his description reflects one of the distinguishing elements of economists' mental
processes, it is both too wide (including activities such as chess) and too restricted
(excluding the analysis of national income or price levels). Perhaps the only unambiguous
definition is that of Canadian-born economist Jacob Viner: economics is what economists
do.
The year 1776 marked the effective birth of economics as a separate science,
when the Scottish philosopher Adam Smith published An Inquiry into the Nature and
Causes of the Wealth of Nations. There was, of course, economics before Smith: the
Greeks, medieval scholastics, and an enormous amount of pamphlet literature from the
15th to the 18th centuries discussed and developed the implications of economic
nationalism (a body of thought now known as mercantilism). Smith, on the other hand,
wrote the first full-scale treatise on economics and, through his magisterial impact,
established what succeeding generations would refer to as the "English school of
classical political economy," now known as classical economics.
In general, the term "economics" conjures up images of money, but economics
involves a larger range of topics. We all make decisions in the face of shortage. Individual
decisions, family decisions, corporate decisions, and society decisions are all possible. If
you take a close look around, you will notice that scarcity is a fact of life. While
economics is complicated and prone to several interpretations, its essence stays
consistent— analyzing and comprehending the production, allocation, and consumption

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 of goods and services in society.
Microeconomics vs. Macroeconomics
Microeconomics and macroeconomics are the two subfields of economics.
Microeconomics is the study of decisions made by individuals and enterprises on
resource allocation and the pricing at which they trade goods and services. It considers
taxes, regulations, and government legislation. Also focuses on supply and demand, as
well as other economic dynamics that influence price levels. Macroeconomics, on the
other hand, investigates a country's behavior and how its policies affect the economy in
its entirety. Furthermore, it requires taking into consideration the performance of the
economy’s four sectors: home, business, government, and foreign.

2. IMPORTANCE OF ECONOMICS
Economics plays a part in our daily lives since it influences how we make decisions and
socialize around the world, and it allows each country's engagement to flow. Our economy is
deemed to be in terrible condition in the Philippines. With the current problems caused by
poverty, corruption, politics, and, of course, government institutions. In line with this, it is
critical that everyone takes responsibility for understanding the relevance of economics in our
society. The following are some examples of how economics affects our daily lives:
1. Budgeting: Economics assists individuals and families in making sound financial
decisions, such as how much to save, spend, and invest.
2. Purchasing: Economics influences the prices of goods we buy, such as how much
goods cost, due to factors such as supply and demand, inflation, and levying taxes.
3. Employment: Economics influences job prospects, such as how many jobs are
available, how much people are paid, and what kind of benefits they receive. It also
demonstrates how to negotiate the employment market.
4. Investment: Economics informs people how to make wise investment decisions by
teaching them how financial markets work and the risks and benefits of various sorts
of investments.
5. Globalization: Economics explains how globalization, such as international trade,
people moving around, and the global economy, affects people's daily life.
6. Public policy: Economics plays a significant part in the formulation of public rules
and decisions, such as taxes, government expenditures, and regulations that affect
both ordinary citizens and enterprises.
Overall, a thorough knowledge of economics provides us with the tools we need to
investigate and address ongoing issues. It gives us the information we need to make informed
judgments in a variety of situations. Economics is a useful compass for navigating the
complexities of modern life, whether it's managing personal money, responding to economic
trends, or developing public policy. This sort of information is extremely valuable when dealing
with unforeseen events or emergencies. Understanding economic principles, for example, can
assist individuals and policymakers in devising measures to mitigate the effects of a financial
downturn, whether by targeted government interventions, cautious financial planning, or
strategic investments.

3. ECONOMICS AND OTHER SOCIAL SCIENCES

What is Social Science?
Although social sciences are as diverse as humankind's interests, they are all concerned

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with people and groups of people. Humans have used a variety of systems to structure their
communities from the beginning of written history, including political, religious, economic, and
social ones. As we examine the present and draw lessons from the past, those organizational
structures as well as our comprehension of human behavior develop.

Economics as Social Science

Economics focuses on human behavior within a structured group or society, particularly
when it comes to issues of scarcity, choice, and exchange or the creation and use of money.
Therefore, it is believed that economics is a subfield of sociology, which is the study of the
development and character of society. As a result, we see that economics shares a tight
relationship with other social disciplines including ethics, political science, history, and so forth.

Economics in relation to other social sciences

· Economics and Sociology
Sociology encompasses the study of society, including its details and regulations, while politics
and economics are subfields. Sociology examines the aspects of society, whereas economics
specifically focuses on economic components, analyzing how people navigate demands and
resources.
· Economics and Political Sciences
Political science addresses social behavior and aids in effective governance. Political leaders
require knowledge of political science to navigate government operations. Economics informs
about national economic situations and helps solve economic issues. A well-designed political
system contributes to an economy, and conversely, a strong economy reinforces a stable
political system. This shows the close and direct relationship between economics and politics.
· Economics and History
Economics and history are closely connected, with history serving as a record of past events,
including economic, political, and social conditions. For history students, details like royal affairs
and murders are essential, such as the murder of Julius Caesar in Roman history or the religious
policies of Mughal emperors. However, the interest in history is primarily to understand past
economic problems. In economics, historical data, particularly on taxation, revenue sources, and
living standards, is used to formulate economic laws. This intersection of economics and history
is formalized in the field of 'Economic History.'
· Economics and Psychology
Psychology, the study of human behavior, spans areas like child, mob, industrial, and criminal
psychology. Economics, on the other hand, focuses on behavior concerning unlimited wants and
limited means. Recently, psychology has gained importance in analyzing economic issues, such
as understanding industrial psychology for labor problems. In business, grasping buyer
psychology is crucial, impacting pricing decisions. Key economic principles, like the law of
diminishing marginal utility, are rooted in psychological insights, stating that the more of
something you have, the less you desire it.
· Economics and Geography
Geography studies the distribution of a nation's natural resources, both economic and non-
economic. This information shapes economic policies, highlighting the close connection
between geography and economics.

4. HUMAN WANTS AND RESOURCES

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 Humans want to encompass the various aspirations and needs that individual strive to
fulfill. The wants in question are boundless and constantly changing, shaped by cultural, social,
and personal inclinations. Concurrently, the available resources to meet these wants are
constrained, encompassing natural resources, human labor, capital, and entrepreneurial
aptitude. Davis (1990) explains that economic activities and institutions require a thorough
understanding of the interplay between unlimited human wants and constrained resources.
Human wants span from basic needs like food and shelter to more ethereal desires like
recognition and personal contentment. Insatiable human demands drive economic activity by
encouraging people to work, trade, innovate, and manage resources to meet their requirements
(Kenton, 2023). However, limited resources mean a lack of production elements to suit human
demands. Economic research on prioritization and allocation techniques must bridge the gap
between people's needs and limited resources (Hayes, 2023).
Understanding human desires requires utility, which evaluates consumer satisfaction. To
maximize utility, consumers purchase products depending on tastes, income, and market prices.
Declining marginal utility states that as a person consumes more of a commodity, their
contentment declines. This theory serves as a guiding factor for consumers when making
decisions regarding the allocation of their resources among different wants.
In addition, the wide range and intricate nature of human wants have led to the
development of various economic theories and models, each aiming to clarify the underlying
principles that drive human behavior in the quest for fulfillment. One area of study within the
field of economics is behavioral economics, which focuses on the psychological factors that
affect decision-making processes. This field investigates the impact of cognitive biases and
heuristics on consumer decisions and market outcomes (Kahneman & Tversky, 1979).
Furthermore, the pivotal responsibilities of technology and innovation can be observed
in their ability to mitigate the disparity between boundless wants and finite resources. The
progress made in production technology, resource management, and information distribution
has significantly improved societies' capacity to meet the increasing and changing human wants.
This has resulted in significant changes to the dynamics of supply, demand, and resource
allocation (Solow, 1957).
To reconcile the incongruity arising from the existence of boundless wants and restricted
resources, economies are compelled to make determinations regarding the allocation of
resources, the methods of production, and the beneficiaries of the produced goods and
services. The organization of economic systems, namely market, mixed, or command
economies, is determined by a set of fundamental economic questions. The economic system in
operation has an impact on the distribution of resources, decisions about production, and the
allocation of goods and services, thereby reflecting the values and priorities of society (Hayek,
2005).
The intricate and mutually dependent relationship that exists between human wants and
the resources that they have access to has enormous repercussions for the conceptual
frameworks and aspirations of society. The economic climate and the availability of resources
have a substantial influence on many areas of society, including social conventions, legislation,
political institutions, and the development of cultural traditions. These components are subject
to the influences of as well as contributors to the choices and preferences of society, and as a
result, they both reflect and contribute to the evolution of the social order.
In addition, the interaction between human wants and finite resources sheds light on
the central relevance of public policy and governance in the process of overcoming economic

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challenges. The issue for policymakers is to find a solution to the inherent tension that exists
between the desires and objectives of individuals and the general welfare of society. They
intend to accomplish this through fostering economic growth that is accessible to all,
guaranteeing an equitable allocation of resources, and preserving the viability of the natural
environment. Policy frameworks and institutions play an essential part in minimizing the
adverse effects of scarcity, fostering equitable sharing of the benefits of economic progress, and
protecting the environment for future generations. Therefore, economics functions not only as a
framework for comprehending the concepts of scarcity and choice, but also as a tool for
formulating policies that effectively manage this intricate equilibrium.
Overall, the dynamic relationship between boundless human wants and limited
resources constitutes the fundamental concept of economics, governing economic behaviors,
choices, and changing human wants drives economic advancement, innovation, and
advancement, but the inherent limitation of resources requires effective distribution,
prioritization, and decision-making.

5. SCARCITY AND CHOICES

Scarcity is a phenomenon that occurs when the available resources are inadequate to
meet the diverse range of human demands and needs thoroughly. The underlying notion in
economics pertains to the inherent tension that arises from the disparity between our
boundless needs and the finite nature of our resources. According to the renowned economists
Samuelson and Nordhaus (2010), economics examines how societies use limited resources to
generate valuable goods and distribute them among diverse individuals. This topic underscores
the necessity of making decisions, prioritizing tasks, and engaging in decision-making processes
across all levels of society, ranging from small families to the most prominent governmental
entities.
In economics, resources, sometimes called production components, encompass land,
labor, capital, and entrepreneurship. Finite resources possess limited quantities and can be
allocated for various purposes. The concept of scarcity necessitates that society, organizations,
and individuals engage in decision-making processes to distribute their limited resources
effectively. As Robbins (1984) posited, the fundamental essence of all economic endeavors is
resolving the challenge of allocating limited resources to satisfy boundless human wants.
The scarcity principle posits that selecting one choice inherently involves relinquishing
another, hence introducing the notion of opportunity cost, which pertains to the value of the
most favorable alternative foregone. An illustrative scenario is a farmer deciding between
planting wheat or barley, necessitating careful consideration of the advantages of not selecting
barley. According to Mankiw (2000), every decision made in the context of scarcity involves a
trade-off, which entails surrendering one objective to gain another.
Economists utilize the notion of a production possibility frontier (PPF) to examine
decision-making in the context of limited resources. The PPF visually represents the maximum
attainable quantity of two items a nation can create, considering its technological capabilities
and available inputs. The Production Possibility Frontier (PPF) highlights the inherent economic
challenge of scarcity by demonstrating the necessary trade-offs and opportunity costs
associated with producing products and services (Khan Academy, 2023).
Moreover, the ramifications of shortage encompass socio economic systems and
development programs. The concept of scarcity compels society to develop organized
methodologies for effectively distributing limited resources to address the most pressing needs

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and wants. The phenomenon exerts influence over social norms, laws, and institutions, molding
the trajectory of society's progress society's development. According to Stanley (1968),
organizations with efficient systems for managing scarcity can attain a more equitable allocation
of resources and elevated levels of human development, promoting social cohesiveness and
stability.
Furthermore, the various approaches employed by distinct economic systems in
addressing shortage highlight the heterogeneity in values, objectives, and social frameworks.
Market economies utilize market mechanisms as a means of resource allocation, relying on the
decisions and preferences of individuals. Conversely, planned economies rely on centralized
planning to allocate resources by social priorities. Mixed economies incorporate aspects from
both market-based and designed economic systems. The numerous methods of addressing
shortage exemplify the range of tactics that communities utilize to reconcile individual liberties
with communal well-being, influencing nations' economic and social structure.
Also, the limited availability of resources and the subsequent need to make decisions
significantly impact determining prices and allocating resources. The principles of supply and
demand demonstrate the mechanisms by which prices are established within a market,
effectively reconciling the wants of consumers with the expenses incurred by producers. In
circumstances characterized by a decrease in resource availability, it is common for prices to
increase. This price increase signals producers, indicating the need to commit additional
resources towards producing goods or services. Simultaneously, it acts as a deterrent against
excessive consumption (Malinvaud, 1999).
Overall, scarcity is the fundamental principle in economics, encapsulating the inherent
tension between boundless human wants and finite available resources. The limited availability
of resources gives rise to the need for individuals and societies to make decisions, resulting in
opportunity costs and trade-offs. Using mechanisms to address scarcity, such as the market
pricing system and production possibility frontiers (PPFs), constitutes fundamental components
of economic analysis. These mechanisms play a crucial role in facilitating the effective allocation
of resources and enabling individuals, firms, and governments to make rational decisions. To
gain a more comprehensive understanding, scarcity catalyzes ongoing innovation and progress,
compelling societies to pursue more effective and fair methods of using their limited resources.
It facilitates economic dynamism and the development of clear economies to adjust and
reorganize in response to shifting demands and wants. The enduring existence of limited
resources necessitates an ongoing pursuit of balance, wherein the needs of society and the
availability of resources are aligned, effectively managing productivity while ensuring
sustainability. Moreover, the discourse about scarcity emphasizes the ethical implications and
principles that underlie the distribution of resources, thereby reflecting the societal decisions
and preferences towards fairness, impartiality, and the overall welfare of individuals. Hence,
examining scarcity enhances comprehension of economic mechanisms and delves into societal
advancement and growth's moral and ethical aspects.

6. OPPORTUNITY COST
The fundamental connection between scarcity and choice is expressed through the
concept of opportunity cost, also known as alternative cost. If there is no scarcity of any product
or activity that holds value for individuals, it would be possible to fulfill all desires of all
individuals throughout all periods. There is no necessity to select among distinct possibilities
that hold independent values; there is no requirement for social coordinating mechanisms that

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efficiently ascertain the prioritization of wants. In this hypothetical scenario characterized by an
absence of scarcity, the absence of lost, foregone, or sacrificed opportunities or alternatives is
seen.
Once scarcity is imposed, it becomes impossible to satisfy all wants. In the absence of
inherent limitations that predefine the distribution of valuable end-objects, such as the
availability of sunshine in Scotland during February, the concept of scarcity necessitates making
choices. These choices can be made directly among different end objects or indirectly among
various institutions or procedural frameworks for social interaction, subsequently leading to the
selection of ultimate end objects.
The concept of choice encompasses the selection of one alternative and the rejection of
others. Opportunity cost refers to the assessment assigned to the alternative or opportunity
with the highest value among those not chosen. The concept referred to is the relinquishment
or sacrifice of a particular value to get the more excellent value represented by the selection of
the preferred object.
The concept of opportunity cost and decision-making. Opportunity cost refers to the
expected value of other options that may have been chosen instead. It is essential to
acknowledge that "that which might have been" lacks significance unless accompanied by a
reference to making choices. When options are limited or nonexistent, it can be worthwhile to
discuss the values associated with hypothetical occurrences that could have occurred but did
not. Characterizing these values as opportunity costs lacks significance, as the alternative
situation does not embody a foregone or relinquished opportunity. Several ramifications ensue
once the fundamental connection between choice and opportunity cost is recognized.
In selecting between distinct and valued alternatives, an individual must assume the
responsibility of making the choice. In other words, a decision-maker is necessary, one
responsible for making choices. The second inference can be inferred from this. The
determination of the opportunity cost, which refers to the value attributed to the unselected
choice, is contingent upon the subjective perception of the decision-maker. No alternative
location can be found. Therefore, the decision-maker must solely shoulder the cost burden,
with no possibility of transferring it to any other party. Another essential implication is that the
concept of opportunity cost is inherently subjective. The locus of choice resides within the
cognitive domain of the individual, rendering it impervious to external objectification or
quantification. It is not easily convertible into a resource, commodity, or monetary form.
Opportunity cost is a concept that is applicable solely during the moment of decision-making
when an option is ultimately selected. It disappears quickly after that. Consequently, cost is
inherently unrealizable, as what is rejected or foregone cannot be subsequently experienced or
enjoyed.
The primary significance of the connection between choice and opportunity cost lies in
this framework's ex-ante or prospective cost nature. Opportunity cost refers to the value
attributed to the option not chosen by the decision-maker. It is the hurdle that must be
considered, assessed, and ultimately disregarded to select the desired alternative. Previous
decisions influence the opportunity cost associated with a specific option. However, with the
current choice being considered, the opportunity cost is a factor that influences decision-making
rather than being influenced by it.
Alternative Perspectives on Cost. The elucidation of the differentiation between
opportunity cost and alternative conceptions or notions of cost is most effectively explicated
within the framework of this classification that encompasses both choice-influencing and choice

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influenced factors. Once an individual makes a decision, subsequent implications may result in
utility losses for either the decision-maker or other individuals involved. From a particular
perspective, it may appear advantageous to designate these losses, whether expected or
experienced, as costs. However, it is essential to acknowledge that these costs, defined by
choices, cannot, by definition, impact the decision-making process itself.
One illustrative instance may elucidate this assertion. An individual decides to acquire a
motor vehicle using a payment arrangement involving three-year installment loans. The
decision-making process is shaped by the opportunity cost, which refers to the value attributed
by the buyer to the alternative option that is not chosen. In this context, it pertains to the
expected value of the items that may be acquired using the funds allocated for loan
repayments. After carefully evaluating the potential benefits of this alternative and deciding to
proceed with the purchase, it is crucial to examine the implications of adhering to the loan
repayment schedule. Regular monthly payments are required; it is customary to refer to them
as the "expenses” associated with the vehicle. The individual will likely experience a reduced
perceived usefulness when the installments become due and require payment. However, these
"costs" are inconsequential as factors that influence decision-making. The lack of capitalization
of post choice repercussions in a utility dimension is a significant cause of confusion.

Economists acknowledge the distinction being delineated in this context. Economists

recognize that "sunk costs are irrelevant," implying that the outcomes of previous decisions
should not impact future decision-making. In contrast, economists’ separate cost from the
decision-making process by utilizing formalized cost schedules and functions, which inherently
require costs to be measurable and objective.
When looking at opportunity costs, economists consider two categories: explicit and
implicit. Consider the query, "How much does it cost to attend college for a year?" One such
approach is aggregating explicit expenses, such as tuition fees, textbooks, and educational
materials. The following instances illustrate explicit costs, which necessitate a monetary
payment. Nevertheless, the expenses incurred are insignificant when juxtaposed with the
intrinsic worth of the temporal investment required for attending lectures, completing
assignments, and engaging in related academic activities. The implicit cost of attending college
refers to the potential earnings that a student may have obtained if they had chosen to work
instead of pursuing their education.
"Explicit costs are those that are incurred when taking a specific course of action," says
Dr. Bob Castaneda, program director of Walden University's College of Management of
Technology.
Wages, supplies, stock purchases, rent, utilities, and other tangible costs are examples of
the explicit opportunity costs connected with a decision. The explicit costs encompass whatever
monetary value is necessary to make a decision.
There are various reasons why explicit cost is crucial, including:
Calculating profit: The profit is the remaining dollar amount on the general ledger after a
company has paid all its stated costs.
Making long-term strategic plans: Explicit cost is a tool for determining a company’s
profitability. The statistic in question holds significant importance in long-term strategic
planning, enabling a corporation to make projections regarding its anticipated profits within a
specific timeframe.
On the other hand, "implicit costs may or may not have been incurred by forgoing a

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specific action," says Castaneda.
Implicit costs are indirect and sometimes challenging to determine. These alternatives
symbolize the potential earnings or additional advantages that may have been obtained if an
alternate decision had been made. Implicit costs are frequent resources provided by business
owners or direct expenses, such as the cost of using a building for operations rather than
renting

it out for a profit. Furthermore, implicit costs encompass the devaluation of assets or
merchandise, as well as the expenses associated with necessary supplies and equipment for the
operational activities of the business. Implicit costs refer to the expenditures that would not
arise if a company were to allocate its resources toward creating income.
A company's total economic success may be significantly influenced by implicit cost. This
phenomenon can be attributed to the inclusion of implicit costs, which encompasses the
underutilization of resources and the potential loss a corporation sustains when it decides not
to utilize its resources to generate additional money.
Due to the potential difficulty in quantifying these costs, experts frequently refer to
implicit costs as implied, notional, or assumed costs. Not including implicit costs in corporate
accounting is because these costs do not involve direct monetary transactions. Moreover,
implicit costs might be seen as a prospective reduction in revenue rather than a specific increase
in profit. An organization should incorporate implicit costs into calculating its operational
expenses as they can also indicate potential foregone revenue streams.
The formula for calculating opportunity cost is very straightforward. Determining an
opportunity cost involves quantifying the disparity in anticipated returns between choices.
Opportunity Cost= FO−CO
where:
FO=Return on best forgone option
CO=Return on chosen option

7. ECONOMIC PROBLEMS AND ANSWERS (in the Philippines)

Problems Answers

Unemployment rate increases to 4.5% According to the Department of Labor

in June 2023 while the number of and Employment, government agencies
unpaid workers (underemployed) are should work hand in hand to provide job
still rising. opportunities for Filipinos. DOLE
launched job programs for unemployed
One of the causes why Filipinos say Filipinos. For example, Marikina City had
they are poor is because of unstable its first Job and
incomes and having no job security. Business Fair called “Trabaho, Negosyo,
Kabuhayan” (TNK) where 11.4% of the
registered applicants are hired on the
spot.

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 DTI also held a session with aspiring
entrepreneurs with the themes of “How
to Start and Grow a Business” and
“Business Start-Ups with Minimum
Capital."

Social expenditure, and an increase Furthermore, the Philippine Responsible

in unemployment and poverty Parenthood policy, often referred to as the
rates. Reproductive Health Law, underwent
revisions to emphasize the importance of
natural family planning, breastfeeding,
and birth spacing in support of the
government’s population policy.
Additionally, it ensures widespread and
free availability of modern contraceptive
techniques, enforces the inclusion of
reproductive health education that is
suitable for individuals' age and
development in public educational
institutions, and acknowledges a woman’s
entitlement to post abortion care within
the framework of reproductive healthcare
rights in the Philippines.

Environmental issues or Natural disasters The National Calamity Fund is allocated for
According to PAG-ASA, around 20 the purpose of providing assistance, relief,
typhoons enter the Philippine Area of and rehabilitation services to regions that
Responsibility and 5 of them are often have been impacted by both human-
destructive which causes casualties and induced and natural disasters. Additionally,
property loss. it is utilized for the purpose of repairing and
reconstructing permanent infrastructure.
The allocation of funds with limited
resources made the National Disaster Risk
Reduction and Management Council to
implement a rationalization strategy. This
strategy aims to prioritize critical and
immediate requirements in the impacted

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 areas.

On the other hand, these are the existing problems in the Philippines that are not solved
yet by the government:
1. Rising national debt could reduce business investments in the country, slow economic
growth, and increase the expectations of higher rates of inflation.
2. Corrupt government
3. Increase of imports
4. inflation

8. TOOLS OF ECONOMICS
Economic analysis is performed to determine the strengths and weaknesses of an
economy, as well as the underlying causes of economic problems. It also includes the
identification, evaluation, and comparison of costs and benefits that will help check the
feasibility of any given economic issue. Economic tools are essential for conducting economic
analysis since they play a big part in the decision-making process. There are numerous
mathematical tools used for economic analysis. In fact, for economics students, Mathematics is
their second language due to its extensive utilization in their field. These applications of
mathematics have helped economic analysis to be more concise, precise, and comprehensible.
How to do an economic analysis? By Wall Street Mojo
1. Identify the problem.
2. Define objectives or goals and figure out its consequences.
3. Study or find alternatives to solve the problems by considering the objectives
4. Ascertain the critical need for economic analysis
5. Choose the tools of economic analysis.
6. Compute and compare economic performance and consequences.
Examples of Economic Tools:
∙ Economic Variables
It is a defined and measured economic quantity that is represented by a symbol
in mathematical equations or identities. It changes as its determinants and
economic activities change. The examples of economic variables are income,
expenditure, saving, interest, profit, investment, consumption, imports, exports,
demand, supply, prices, production cost, capital, etc.
Types of Variables:
∙ Dependent variables are affected by a change in the value of another variable and
depend on the independent variable.
∙ Independent variables are not affected by a change in the value of other variables.
∙ Endogenous variables are variables whose value can be obtained within the
model.
∙ Exogenous variables exist outside the model. Its value is obtained from the factors
outside the economic model.
* The model can predict the value of endogenous variables but not the
exogenous variable. However, both of them can influence economic models and
business cycles.

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 Note: Constant variables are variables that do not change or vary.
∙ Equations
It is when economic theory is transformed into algebraic form. It is also a
statement of equality of two expressions which can also be used to calculate the
value of an unknown variable.
∙ Identities
It is an equilibrium condition which explains that two alternative expressions
have exactly the same meaning. It is denoted by a three-bar sign (≡).
It is different from an equation because an identity shows that the relation is true
for all the values of the variables and no values can contradict it.
Examples of Identities:
Total Profit ≡ Total Revenue - Total Cost
Saving ≡ Income - Consumption Expenditure
∙ Tables, Charts, and Graphs
These tools present functional relationships of sets of data or variables that are
related to each other. It is used for accuracy and precision.
Tables state the summary of events with titles and units, provide easy
understanding and interpretation, and help in calculating derived quantities.
“All graphs are a type of a chart but not all charts are graphs.”
Charts are graphical representations of data that may or may not be related. It
shows vivid presentations of economic results. Examples: pie chart, pictorial
chart, bar chart, statistical chart
Graphs help in illustrating basic concepts, indicate the association of variables,
and represent numerical data by showing the relationship between numeric
variables and how one number affects another. It is used for strengthening
points. Examples: pictograph, bar graph, line graphs.
∙ Lines and Curves show relationships between variables, but it only indicates
the location of various points.
∙ Slope is a change in one variable due to a change in another variable. It is also
known as “rise over run”. Slope on a non-linear curve is measured at a given
point by drawing a tangent at the given point. If it is a straight line, the slope is
constant throughout the curve. If the slope is steeper, the relationship is weak.
Positive slope - line moves upward from left to right.
Negative slope - line moves down from left to right.
If the slope is negative then it indicates inverse relationship
between the two variables and if the slope is positive, it indicates direct
relationship.
∙ Optimization
It is used to determine the value of an independent variable that maximizes or
minimizes the value of a dependent variable. It is useful in managerial decisions.
It determines the level of output that would minimize the cost of production or
maximize the profits which is done by studying the change in dependent variable
and considering the records and trends that can be used again to predict future
market turns.
∙ Linear Programming
It refers to a mathematical technique used for optimization problems (including

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 variables that have linear relationships). It provides the best solution for the
allocation of resources.

Major References:
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