Economic ThoughtKey Concepts in Economics

Relationship of Econ to Other Science

The Relevance of Studying Economics

Economics

Allocation of scarce resources to satisfy unlimited wants and needs

Progress of Economic Thought

Greeks

“oikonomia”

“management of the household”

Primitive societies where households were both the producers of essential goods and services and the consumers of goods and services

Plato

The Republiccollective state

economic problem – he was concern with development of principles which would guide the operation of the ideal society

proposition: “the individual cannot satisfy all his wants, consequently he must rely on the efforts of other individuals”

division of labor

is necessary

Timean important factor of economic

organization

individual household must produce more than they consume, and if a state is not self-sufficient, means must be found to obtain the necessary goods by importing from another city

in order to make trade between cities possible, one cities must produce an excess of things which another city needs…

Aristotlea follower and critic of Plato

State is prior to the individual

“man is a political being” – a social being

economics of the household vs economic of the state

art of managing the household

art of money-making

PRODUCTION EXCAHNGE/TRANSACTION in the

market - money

Middle Ages

Traders Craftsmen

Merchants

commune

constitution and by-laws

gain considerable political power , protecting themselves with high walls, battlements, independent

statesCORRUPTION

The Physicist and the Economist

• Deal with material object

• Deriving laws that are more or less stable if the conditions under which the laws formulated remains the same

• 2 Hydrogen + Oxygen = H20

• Deal with human being and human behavior

• Human behavior is not always predictable

• The same individual may react to the same conditions differently at different times; or one individual may react differently from the way another individual would react.

Realization:

• Different consumers behave differently.

• Among a large number of consumers a certain kind of reaction maybe more frequent than another kind of reaction.

Observation:

• More individuals prefer more goods to fewer goods than reverse

Statistics

as the number of samples increases, the average of these samples is likely to reach the mean of the whole population

Probability

Law of Large NumbersFinance

as the company grows, its chances of sustaining a large percentage in growth diminish This is because as the company continues to expand, it must grow more and more just to maintain a constant percentage of growth.

Table of Comparison

Company X• P400 B

• increase by P200 B

Company Y• P5 B

• increase by P2.5 B

LLN suggest that it is much more likely that company Y will be able to expand by 50% than company X

Logical Sense

if large company continues to grow at 30% – 50% every year, it would eventually become bigger than the economy itself! Obviously, this can’t happen and eventually growth has to slow down.

Law of Diminishing Returns

if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point

more laborers

harvest wheat field

each additional laborer will add less output than his predecessor

because he has less and less of the fixed amount of land to work with

“increase at a declining rate”

Economic Theory

is a set of general laws governing economic behavior and predictions based on such laws,

which will prove correct more often than incorrect

it is important to understand that today we no longer claim that economic laws have the finality of the laws governing the physical universe

“if quantity of goods and services sold in a certain market rises, prices of these

goods and services tends to fall”

If the supply of money is increased, prices tends to rise

• TRUE

• If there is a fairly high level of employment in the economy

• FALSE

• If your at the bottom recession/depressiontypically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression.

Government and the commercial banks may pumped considerable quantities money into the economy and yet may not be affected until most of the idle workers are called back to works and the plants previously closed and begin populating again.

Economic Hypothesis

observed by economist and attempts to formulate certain hunches/hypothesis concerning the way they would react under a variety of different circumstances

Economic Agents

Consumers

Businessmen

BankersEmployees

Methodology of Science/Scientific Method

Applied Economics

consumers would buy more automobiles if the price of automobile fell by 10%

application of economic theory and analysis

Pure Economics

the basis for specific predictions in applied economics – hypothesis of economic theory

Note: if a certain hypothesis can be shown to hold in a number of instances in real-life situations we tentatively accept the hypothesis as an adequate explanation of facts in the real world and we continue basing predictions on this particular theory.

But…

it does not necessarily mean that the hypothesis is always true! consumers may buy more

goods if prices fall and apply it to automobile industry

if all other determining factors remained unchanged

income

tax

registration

licenseConclusion

…

other things being equal more automobiles will be sold if prices are lowered

Economic Policy

primarily concerned with the selection of means towards the attainment of given ends

government action

the goal which are chosen by the individuals who comprise the society

remember: people who make choices not the economist and the ends which society chooses may differ from one period to another

HIGH LEVEL OF EMPLOYMENT

‘if this is what you want, this is what you should do to get it”

made its choice concerning the end

ECONOMIST

point out the means which will help attain these ends

More government expenditures and

unbalanced budget

Economic Policy

SOCIETY

Political Economy

branch of Economics deals with the relationship between Economics and politics or political theory

the economist cannot operate in a world that is divorced from the real world

the economist in making his recommendations must be aware of their feasibility within a given political system

Communist

Anarchy

Monarchy

Sultanate

Feudal

Theocracy

it would be futile for an economist to recommend complete abandonment of farm support programs/tariffs if dominant political sentiment was against such measures

Normative Economics

the relationship between Economics and Ethics

ETHICS

value Judgments

good/bad

right/wrong

philosophers analyzes the reasons why people consider a particular policy is bad and another policy as good

HEDONIST

STOICSeconomic policy which

yields the greatest good for the greatest number of individual is right

material objects are neither good or bad

Economist

he can help the society/individuals make judgments concerning good and bad economic policies by pointing out the consequences of the policies

consequences of a more equitable distribution of

income

economic policies

concerning taxes

profits

=

large segment of population earning low incomes and a small segment of population earning very high incomes

TAX

sales

places a relatively greater burden on the low and middle income groups than on the high income groups

he may also determine the conditions under which a tax is either evaded or passed on to someone else

determine whether the corporate income tax is paid by the stockholders or by the consumers

but the final judgment concerning whether the consequences of a certain

policy are good or bad is made by society and not by the economist

Assignment

Formulate your own hypothesis/theory in relation to the Philippine Economy. Prove it by following the steps in the Methodology of Science

Quiz

1.How do you apply economics in your household?

2.Why is the basic knowledge of Economics important to an individual’s adjustments to economic crises?

3.Think of two (2) economic problems experienced by Filipinos. As an economist, what kind of Economic Policy would you passed to addressed these problems? Support you answer with concrete details.