KEY TERMS IN ECONOMICS 2

MARKET - the interaction between buyers and sellers for trading or exchange. In this interaction, buyers buy and the
sellers sell what the former wants.
- the potential buyer /buyer of the products/services.
- the place wherein the products and services are sold

STOCK MARKET - is for trading corporate business ownership.

LABOR MARKET - is an interactive platform for workers to offer their services and look for jobs and for employers to look
for workers to hire.

CONSUMER GOODS - are tangibles that satisfy the consumers’ needs and want directly.

GOODS MARKET - is the most common type of market in which consumer goods are bought and sold.

DEMAND – is a willingness of a consumer to buy a commodity at a given price. It is a quantity of a good that a person will
buy in a given period (e.g., weekly) for a given price of a good.

DEMAND SCHEDULE – lists the specific number of units that the consumer will buy at different prices. It is a tabulation of
various quantities that will be bought at given prices.

DEMAND FUNCTION – expressed in an equation, indicates how the quantity demanded for a good (the dependent
variable) depends on its determinants, the most important of which is the price of the good itself. For example, Qd=f(P)
means that the quantity demanded of a good is dependent on the price of that good.

DEMAND CURVE - is a graphical illustration of the demand schedule, with the price measured on the vertical axis Y and
the quantity demanded measured on the horizontal axis X.

NONPRICE VARIABLES - are factors other than price that can also influence the demand and supply of a good.

INCOME EFFECT - refers to the situation in which the price of good changes the consumers purchasing power or real
income. Real income is the volume of goods and services the money income can buy. This volume is otherwise called the
purchasing power of income.

SUBSTITUTION EFFECT - is the situation in which the price of good changes and the price of the substitute good remains
constant, and the consumer substitutes the cheaper commodity for the costlier one.

CETERIS PARIBUS ASSUMPTION - means all other related variables, except those that are being considered are held
constant.

SUBSTITUTE GOODS – means all other related variables, except those that are being considered are held constant.

COMPLEMENT GOODS - are those that are used together. Ex. Coffee and Cream

SUPPLY - refers to the quantity of goods that a seller is willing to offer for sale for a specified price in a given period (e.g.,
monthly).

SUPPLY SCHEDULE - lists the specific number of units that the producer/seller will offer for sale at different prices in a
given period of time.

SUPPLY CURVE - is a graphical illustration of the supply schedule, with the price measured on the vertical axis Y and the
quantity supplied measured on the horizontal axis X.

COST OF PRODUCTION - refers to the expenses incurred to produce the goods.

TECHNOLOGY - is the application of scientific knowledge in the methods of production.

MARKET EQUILIBRIUM - is the state wherein the quantity demanded is equal to the quantity supplied at a given price.

RENT - is the payment for the use of land belonging to a landowner.

PRICE CEILING - is the highest price that the seller can charge for the goods being sold, normally set by the government.

ELASTICITY - refers to the degree of response of demand and supply to a change in price or nonprice determinant.

ELASTICITY DEMAND/SUPPLY - is when a change in a determinant will lead to a proportionately greater change in
demand or supply. The coefficient of elasticity is greater than 1.

INELASTIC DEMAND/SUPPLY - is when a change in a determinant will lead to a proportionately lesser change in demand
or supply. The coefficient of elasticity is less than 1.

UNITARY DEMAND/SUPPLY - is when a change in a determinant will lead to a proportionately equal change in demand
or supply. The coefficient of elasticity is equal to 1.

MARKET STRUCTURE - refers to the competitive environment in which buyers and sellers operate.

PERFECT COMPETITION - exists when there are many buyers and sellers who are too small to individually affect the price
and offer homogenous or highly similar goods in the market.

IMPERFECT COMPETITION - exists when at least one of the requirements for perfect competition is absent in the
market.

MONOPOLY - is a market where a sole producer of a product for which there are no close substitutes.

MONOPOLISTIC COMPETITION - is also a market of many but selling differentiated products that are highly substitutable
although not perfect substitutes.

OLIGOPOLY - is a market where a few sellers account for most of or total production. Products are offered for sale may
be similar or differentiated, and barriers to free entry make it difficult for new firms to enter.

LABOR FORCE - refers to the portion of the population, 15 years old and over, who are willing and able to work,
including those who are actively seeking work but have not found work and those who are employed.

POPULATION - includes all the inhabitants of a particular town, area, or country.

WAGE - is a fixed regular payment, typically paid on a daily or weekly basis made by an employer to an employee.

MINIMUM WAGE - refers to the lowest wage permitted by law. Paying any amount below it will subject an employer to
penalties from the government.

FOREIGN EXCHANGE RATE - is the rate of conversion of the Philippine peso to a foreign currency such as the United
States dollar.

SAVINGS - is the portion of income earned that is not spent on consumption or taxes.

INVESTMENT - is building up the capital stock for more future production at the cost of savings, which postpone present
consumption.
APPLIED ECONOMICS

WHAT IS ECONOMICS?

► Economics is the use or allocation of scarce resources to meet man’s unlimited needs and wants. Richard Lipsey

► People cannot have everything they want. Consumers are limited by their income while producers are limited by the
factors of production.

► Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both
individually and collectively.

Is economics a social science?

► Social science is the branch of science devoted to the study of societies and the relationships among individuals within
those societies.

► Yes! Economics is considered a social science because it tries to understand how people behave and interact within a
society.

Why do we have to choose?

► Consumers cannot spend money twice.

► Ex. Money spent on a cell phone cannot be spent again on buying a load.

► Producers cannot use resources again once they are used up.

► Ex. A farmer who decides to use his land for producing corn gives up the opportunity to produce rice.

► It is all about choices…

► Scarcity is the insufficiency or inadequacy of economic resources as a result, we have to decide and choose.

► Note : Scarcity is a condition of why people study and practice economics.

LAW OF SCARCITY
► An economic system cannot produce all goods and services that consumers want, and most consumers do not have
the resources to purchase everything they want.

Since there is scarcity, we have to choose……..

► OPPORTUNITY COST is the value or cost of the next forgone choice/alternative.

► In other words, opportunity cost represents the benefits that could have been gained by taking different decisions.

► Ex. Working mother decided to become a full-time mother

► The Opportunity cost is the SALARY

POSITIVE AND NORMATIVE ECONOMICS

► Positive economics describes and explains various economic phenomena or the “what is” scenario. Positive economics
is based on facts.

► Ex. “Public healthcare increases government expenditures”.

► Normative economics focuses on the value of economic fairness, or what the economy “should be”. In other words,
normative economics is based on value judgments.

► Ex.” Best health care must be free to all citizens”.

MAJOR DIVISIONS OF ECONOMICS

► MICROECONOMICS is the close-up view of the economy,

► Studying individual and business decisions. It is also called the

► Bottom-up approach that focuses on supply and demand, and other

► Forced that determine price levels.

► MACROECONOMICS is the overall view of the economy looking at he decisions of countries and governments. It takes
a top-down approach that tries to determine the course of the economy as a whole. It focuses on the aggregate supply
and demand.

MICROECONOMICS VS MACROECONOMICS

MICROECONOMICS MACROECONOMICS

Studies individual income Studies national income

Analyzes demand and supply of labor Analyzes total employment in the
economy
Deals with households and firms’ Deals with aggregate decisions
decisions
Studies individual prices Studies overall price level
Analyzes demand and supply of Analyzes demand and aggregate
goods supply
FACTORS OF PRODUCTION

► In economics, the factors of production (sometimes called economic resources or inputs) are essential to produce
goods and services. These are…

► LAND

► LABOR

► CAPITAL

► ENTREPRENEURSHIP

LAND includes all the natural resources such as fertile soil, trees, minerals, and water which can be sources of raw
materials to produce goods or products.

CAPITAL refers to anything that people produce and later used in the production of other goods and services such as
manufactured aids, tools, machines, equipment, and factories.

LABOR refers to the physical and mental talents of individuals used to produce goods/services.

ENTREPRENEURSHIP is the ability to organize the other resources (land, labor, and capital) to produce goods and
services. It is the ability to establish and operate a business and establish relationships with suppliers, customers,
lenders, investors, and others.

RETURNS OF FACTORS OF PRODUCTION

► The returns to these factors are often described as:

► Rent for land

► Wage/salary for labor

► Interest for capital

► Profit for entrepreneurship

Is economics applied science?

► Applied science is a discipline that applies existing scientific knowledge to develop more practical applications, like
technology and inventions. Applied science can also apply formal science, such as statistics and probability theory.

► Answer:

► Yes, because economics deals with the analysis of how members of society interact with each other on the creation
and utilization of wealth.

► What makes economics an applied science is the formulation of general theories through testing, mainly using data
from the past.

What is applied economics?

► Applied economics is the use or application of economic theories, researches, and econometrics to real-life situations
to make informed economic decisions and of predicting possible outcomes.
► The purpose is to improve the quality of life of people, the practices in business, and the implementation of public
policies by considering the costs and benefits, and human behavior.

► It may be practiced at macroeconomic or microeconomic levels

► Note.(econometrics is the application of statistical and mathematical models using data)

What is Applied Economics?

► Applied economics is characterized by the application of economic theory and econometrics to address practical
issues in a range of fields including:

► Demographic economics Engineering Economics

► Labor economics financial economics

► Business economics health economics

► Industrial organization monetary economics

► Agricultural economics public economics

► Development economics economic history

► Education economics

- Most pressing and recurring problems of countries and governments are actually economic in nature.
- If people have a deeper and better understanding of economic principles, they become wise makers and may
help in addressing national economic problems.
- For example, we may apply the law of supply and demand to understand why quantity supplied or quantity
demanded is high or low, or why prices are high and eventually what the government can do to stabilize the
prices.
- On the level of the students, knowing the inevitable existence or scarcity may help them to realize how to
maximize their allowances.

Three Basic Economic Questions

► To provide for the needs of the people and to cope with constraints and limitations, societies must answer these basic
questions.

1. What to produce
2. How to produce
3. For whom to produce
► Why do we need to answer these economic questions?
► To answer or solve the fundamental problems….

► SCARCITY & RESOURCE ALLOCATION

∙ Economic resources are all of the ingredients needed for production, including:

► NATURAL RESOURCES (raw materials)

► HUMAN RESOURCES (entrepreneurs and workers)

► CAPITAL RESOURCES (the machineries and tools of production)

1.What to produce?

► Since resources are limited, societies must decide and prioritize what goods and services should be produced and
later followed by determining the quantity (how many/how much).

► Ex. Basic commodities ex. Leisure and education

► Given limited resources of labor, raw materials and time, economic agents have to decide what to produce.

2. How to produce?

The method of production that has the highest efficiency and yield the highest output shall be employed/used. This
should be the right combination of resources and technology to be applied.

3. For whom to produce?

► Producers must also consider the target market (target consumers) to know the demand in the economy.

► This includes how to distribute those goods and services among the population.

Economic systems

► An economic system is a means by which a society determines the answers to the basic economic questions.

► Economic systems control the factors of production and the distribution of goods and services.

4 TYPES OF ECONOMIC SYSTEMS

1. Traditional economy (subsistence economy)

2. Command economy (planned economy)
3. Market economy (free-market economy
4. Mixed economy (combination of command and market economy)

1. TRADITIONAL ECONOMY
- It centers around family or tribe that exists in a hunter-gatherer and nomadic society.
- Resources are owned and controlled by individuals.
- This system lacks the potential to generate surplus.
- Economic decisions are made by the basic principles of demand and supply.
- There is very little decision of labor or specialization.
- Trade relies heavily on barter.
- Some form of currency for trade eventually evolves.
- Men and women are given different economic roles and tasks.

2. COMMAMD ECONOMY
- The government (or any centralized authority) answers basic economic questions and controls the production
and distribution of goods and services.
- People do not have the power to decide on what, how, and for whom to produce.
 - This type is common in communist societies where power is centralized.
- Society is vulnerable to economic crisis or emergencies, as they cannot quickly adjust to changed conditions.
- In theory, this system works well if the central authority exercises control for the public’s best interests, which is
rarely the case.

3. MARKET ECONOMY
- There is very little government interference in economic activities.
- People have the freedom to produce and/or consume in any way and in any amount they want.
- Most economic decision-making is done through voluntary transactions according to the laws of supply and
demand
- Arguably, growth is highest under this economic system.
- The distribution of resources is not equitable because those who succeed economically control most of them
and has a lot of economic power.
- However, a pure market system does not really exist.

4. MIXED ECONOMY
- A mixed economic system is a system that combines aspects of both capitalism (market) and
socialism(command).
- It protects private property and allows a level of economic freedom in the use of capital, but also allows for the
government to interfere in economic activities.
- Most industries are privately owned but still under regulation, however, industries that provide essential
services are under the control of the government.
- Government tends to exert more control than necessary.

What are economic theories?

Economic theories are ideas and principles that aim to describe how economies wok.
Economic theories are statements of a presumed relationship between two or more variables, such as the
relationship of price to demand, price to supply, and so on.
In principle, the approach to economic theory is divided into positive and normative.
Purpose: This comprehensive system of assumptions, hypotheses, definitions, and instructions try to explain
economic phenomena, interpret why and how the economy behaves, and propose the best solution/s to
economic problems.

What are economic models?

► Economic models may represent economic theories in simplified ways that are composed of diagrams or equations.
Through a model, a complex, real situation

► is paired down/summarized to the essentials.

► A good economic model is simple enough to be understood while complex enough to capture key information.
THEREFORE……

► A theory is a more abstract representation, while a model is a more applied or empirical representation.

Three great economists

- Adam Smith
- Karl Marx
- John Maynard Keynes

ADAM SMITH and the “Invisible Hand”.

Scottish philosopher and economist who was born in 1723.

“The father of Economics or the Father of Capitalism”.

The wealth of nations published in 1776- the” invisible hand” (self-regulation of economy)-became the basic idea of a
free market economy or capitalism.

He believed that all individuals act in their self-interest, and can produce and purchase by themselves.

Emphasized that new machinery, division of labor, and specialization would lead to higher production and greater
wealth of nation.

Later during 1900s, the doctrine of laissez-faire, anchored with Smith’s idea, was coined.

KARL MARX and “class struggle”

A German philosopher born in 1818.

Contrary to the ideas of Smith, Marx saw instability, struggle, and the decline of a free market economy.

“das kapital”(1867)- he explained that the capitalists,(the bourgeoisie/the rich/the ruling class) make a profit by
exploiting the labor of the workers ( the proletariat/the poor/underpaid/the ruled class).he said that the workers were
exploited/underpaid for the value that they worked for.

Marx believed that this struggle eventually intensifies and would lead to the fall of capitalism.

To him, this situation later leads to the movement of society toward communism wherein everybody, through
government intervention, owns the means of production.

JOHN MAYNARD KEYNES and Government Intervention

A British economist born in 1883.

In 1936, he published his work General theory of employment, interest, and money.

His most significant work is about the role of the government in a capitalist economy.

His works were written during the great depression (1930s) in the US which questioned the validity and applicability of
Smith’s invisible hand(no government intervention)

Keynes strongly believed that the solution is government intervention through government spending by creating
massive public works programs to employ the idle workforce(unemployed). This way the money is put back into the
economy and into private-sector pockets, igniting the demand for goods and services, and pumping the economy again.