ss4 lt1 reviewer

8/6/2019 SS4 LT1 Reviewer

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SS4 LT1 Reviewer

Ferdinand B. Sta. Ana, Jr.

IV - Electron


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Significance of Economic Study

Questions to ponder: Why study economics?

Advantages of economic knowledge?

Is economic knowledge a necessity?

What is the role of economics in day-to-day

life in the context of the next century?

//As you have may noticed, these are just

questions from the course outline :D


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Economics

is the social science dealing with the optimal

allocation of scarce resources with alternative

uses for the production of goods or services,

its distribution and eventual consumption bysociety for its welfare


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Macroeconomics

Economic growth and

stability

Economy as a whole

Microeconomics

Consumer and firmbehavior

Individual people and

individual firms


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As a social science

Economics is a social science in the sense thatit analyzes the behavior and organization of

the members of society to sustain their

individual and collective material needs andwants


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Approaches? Scientific?

The use of scientific method

//research more. Sorry!


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Limiting unsound economic reasoning

By identifying pitfalls in economic reasoning, so that we will not be

trapped in them:

Post hoc fallacy: the fallacy of confusing sequence with causation (ex.Event A election of someone, Event B recession; A few months after Event A, Event B happens.

Next election, new candidate uses political propaganda that Event A caused Event B without sound

proof/reason) Fallacy of composition: incorrect assumption that what is true for one

is true for all (ex. Standing up in a concert to get a better view)

Failure of ceteris paribus: making conclusions without taking into

consideration changes in other factors that may have had an effect on

your supposed claim. Subjectivity


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Why do economists disagree?

Positive Economics

describe the world as it is

Resolved by reference to analysis and

empirical evidence

Normative Economics

prescribe how the world should be

Involves ethics and values rather than

facts

Economists may disagree about the validity of alternative positive theories about howthe world works.

Economists may have different values and, therefore, different normative views about

what policy should try to accomplish.


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Efficiency

The proper use of resources resulting in themaximization of benefit to society

Absence of waste

Shortcuts Pareto optimum: You cannot produce more of

something without decreasing the production ofsomething else

Inefficiencies: Underutilized resources

Inefficient organization (ex. PH government)


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Efficiency VS Effectiveness

Efficiency

Shortcuts

Process-oriented

Effectiveness

Character building

Goal-oriented


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Law of Scarcity

Limited supply of goods/services, unlimited

wants

Note: low accessibility x> scarcity

Needs vs Wants vs Demands Need/want: Willingness to buy

Ability to buy

+ =

*Opportunity cost cost of best alternative forgone


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Factors of Production

Old

Natural Resource/Land

Labor

Kapital produced goods

used for further production

of another good

New

Entreprenuership Innovative

not the presence of a certainresource, but the absence of it pushes people to make use ofavailable resources inunconventional ways

It doesnt matter if you have a lotof resources. What matters moreis what you do with them

Risk takers Knowledged worker

Professionalism, rather than # ofworkers

Technology Kapital is easily replicated while

Technology is difficult to replicate

sources of competitive advantageinput Production

process

output


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Alternative Economic Systems Custom tradition

Command government Market private sector (firms and buyers)

Mixed

*Answer the problems of economic organization using each AES

-> What to produce and in what quantities?

-> How are they going to be produce?

-> For whom are they produced?


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Production-Possibility Frontier graph that shows the combinations of output that the economy can

possibly produce given the available factors of production and the

available production technology


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The Market Economy

Run by invisible hand (Adam Smith, 1776 in An Inquiry Into the Nature and Causes

of the Wealth of Nations)

Pursuing/following self-interest inevitably leads to the creation of common good

Common good out of selfish motives

to do good, dont intend to do good

Only works under a particular context -> Perfect Competition = no buyer/seller is

large enough to significantly effect market prices.

Fixed prices competition

No competition -> uncontrollable price

An arrangement in which buyers & sellers interact to determine prices & quantity of goods/services thatare either bought/sold


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Answering the problems of economic

organization using Market Economy What are produced and in what quantity?

money votes

Limited by Natural resources and especially, technology

How are they produced?

Most efficient; least waste possible as firms are driven by profit(Profit = Total Revenue Total Cost)

For whom are they produced? Supply and demand interaction in the goods & labor market

Ganito lang isipin niyo. Kung mas mataas yung price ng

goods/services kesa dun sa wages ng mga tao sa labor market,sino pang bibili? So, yung certain good na may ganitong price,ibebenta lang nila sa mga tao sa labor markets na may enoughwages.


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3 Functions of government*in a way, this can be attributed to command economy

Efficiency:

The market does fail, so the government intervenes

Market failures:

Imperfect competition: loss of Perfect competition, meaning one buyer/seller can significantly affect prices of good/service

Why a failure? -> loss of price regulation

Monopoly -> tends to crush sprouting competitions prematurely; public has accepted their produce by

virtue of branding

Monopolistic competition -> niche markets (e.g. cars)

Examples of solutions : antitrust laws


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Externality

Imposing cost/benefit on people w/o those

people receiving/paying proper compensation(e.g. airplane noise, dynamite fishing, open-to-

everyone bridge)

FAIL because externalities dont have a price, and

the market doesnt understand anything that

doesnt have a price

Examples of solution: imposing price on

externalities


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Equity

Market produces based on money votes, not on

needs. This leads to inequity(unacceptabledistribution of income and wealth)

Equity != equality (former: fairness, latter:

sameness)

Equity

Soln.: redistribute income (e.g. progressive taxation of

income and wealth & income-support or transfer programs*)

Need -based

Performance-

based

Effort centric

Output centric


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*efficiency vs equity

-why would they receive something they

didnt work for?

-complacency due to reward w/o

effort/output done


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Stability

Efficient market ->responsive

Responsive -> turbulent prices

Government stabilizes price increase/decrease


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Macroeconomic objectives of

government

*Di ko alam kung kasama to kaya di ko ididiscuss

in-depth

Output/Economic growth

Employment

Price stability

Foreign balance Economic freedom


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Government failures*Di ko alam kung kasama to kaya di ko ididiscuss

in-depth Governments can create monopolies

High taxes distort the allocation of resources

Social security threatens to overload workers

Environmental regulation dulls spirit of

enterprise

Government attempts in stabilization of

economy can lead to inflation


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References:

Samuelson, P. A. (2005). Economics.

Singapore: McGraw-Hill Education(Asia) Economics for Dummies, 2nd ed.

MIT Open Courseware: Principle of

Microeconomics, Fall 2007

Mankiw, N. G. (2009). Principle of Economics.

Mason, OH: South-Western Cengage Learning

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