INTRODUCTORY TO ECONOMICS

FIRST SEMESTER

BASIC ECONOMIC PROBLEMS • Many countries in the developed

western hemisphere follow a
WHAT IS AN ECONOMIC SYSTEM? mixed system. Most industries are
private, while the rest, composed
• “An economic system is a means by primarily of public services, are
which societies or governments under the control of the
organize and distribute available government..
resources, services, and goods across
a geographic region or country. G7 (GROUP OF 7)
• Canada
• Economic systems regulate the factors • France
of production, including land, • Germany
capital, labor, and physical resources. • Italy
• Japan
• An economic system encompasses • United Kingdom
many institutions, agencies, entities, • United States
decision-making processes and
patterns of consumption that comprise
the economics structure of a given
community.

TYPES OF ECONOMIC SYSTEMS

1. TRADITIONAL ECONOMIC SYSTEM

• It is commonly found in rural
settings on developing nations,
where economic activities are
predominantly farming or other
traditional income-generating
activities.
10 PRINCIPLES IN ECONOMICS
2. COMMAND ECONOMIC SYSTEM
• In a command system, there is a PRINCIPLE 1: PEOPLE FACE TRADEOFFS
dominant centralized authority –
usually the government – that • Having more money to buy stuff
controls a significant portion of the requires working longer hours
economic structure. which leaves less time for personal
development and leisure.
3. MARKET ECONOMIC SYSTEM
• Market economic systems are • Protecting the environment
based on the concept of free requires resources that could
markets. In other words, there is otherwise be used for COVID-19
very little government interference. vaccine.
The government exercises little no
control over resources, and it does SOCIETY FACES AN IMPORTANT TRADE
not interfere with important OFF: EFFICIENCY VS. TRADEOFF
segments of the economy.
EFFICIENCY – When society gets the most from
4. MIXED SYSTEM its scarce resources.
• Mixed systems combine the
characteristics of the market and EQUALITY – When prosperity is distributed
command economic systems. For uniformly among society’s members.
this reason, mixed systems are
also known as dual systems. TRADEOFFS – To achieve greater equality,
Sometimes the term is used to could redistribute income from wealthy to poor.
describe a market system under But this reduces incentives to work and produce
strict regulatory control. and shrinks the size of economic pie.
PRINCIPLE 2: THE COST OF SOMETHING IS, • Get a better price abroad for goods they
WHAT YOU GIVE UPP TO GET IT produce.

• Making decisions requires • Buy other goods more cheaply

comparing the costs and benefits from abroad than could be produced
of alternative choices. at home.

• The opportunity Cost of any item is PRINCIPLE 6: MARKETS ARE USUALLY A

whatever must be given up to GOOD WAY TO ORGANIZE ECONOMIC
obtain it. ACTIVITY

• It is the relevant cost for decision • Invisible hand of Adam Smith.

making.
• “Organize Economic Activity” means
Examples: Opportunity cost of going to college determining:
not just the books, tuitions, but also the forgone
wages. • What goods to produce
• How to produce them
PRINCIPLE 3: RATIONAL PEOPLE THINK AT • How much of each to produce
THE MARGIN • Who gets them
• How to grow those resources
• Systematically and purposely do overtime
the best they can to achieve their
objectives. PRINCIPLE 7: GOVERNMENT CAN IMPROVE
ECONOMIC OUTCOMES
• Make decisions by evaluating
costs and benefits of • Important role of government: enforce
marginal changes- incremental property rights with police and courts
adjustments to an existing plan.
• Market Failures: when the markets
Example: When a manager considers whether to fails to allocate society’s resources
↑↑ output, she compares the cost of the needed
labor and materials to the extra revenue. CAUSES:

PRINCIPLE 4: PEOPLE RESPONDS TO • Externalities: when the production

INCENTIVES and consumption of a good affect
bystanders. (e.g., pollution).
Incentives – something that induces a person to
act, (i.e., the prospect of a reward or punishment) • Market Power: a single buyer or seller
has substantial influence on market
• Rational people respond to incentives. price (e.g., monopoly).

Example: • In such cases, public policy may

• When gas prices rise, consumers buy promote efficiency.
more hybrid cars and fewer gas
guzzling SUVs. PRINCIPLE 8: A COUNTRY’S STANDARD OF
LIVING DEPENDS ON ITS ABILITY TO
• When cigarette taxes increases, teen PRODUCE GOODS AND SERVICES
smoking falls.
• High variations of living standards
PRINCIPLE 5: TRADE CAN MAKE across countries and overtime.
EVERYONE BETTER OFF
• Average income of rich countries is
• Rather than being self-sufficient, more than ten times the average
people can specialize in producing one income in poor countries.
good or service and exchange it for
other goods. • Most important determinant of Living
Standard is PRODUCTIVITY; amount
• Countries also benefit from trade of goods and services produce per unit
& specialization: of labor.
PRINCIPLE 9: MONEY GROWTH IS THE
ULTIMATE SOURCE OF INFLATION WAYS TO SPUR ECONOMIC GROWTH:
FISCAL POLICY AND MONETARY POLICY
PRINCIPLE 10: SOCIETY FACES A SHORT-
RUN TRADEOFF BETWEEN INFLATION AND FISCAL POLICY
UNEMPLOYMENT
• The government stimulates growth with
• In the short-run (1-2 years) many expansive fiscal policy. It either spends
economic policies push more cut taxes, or both. They use of
inflation and employment in opposite expansive fiscal policy stimulate the
directions. economy.

• Other factors can make this trade-off • If the government keeps spending more
more or less favorable, but the trade and taxing less, it leads to deficit
off will always be PRESENT. spending. It works for a while but
eventually leads to higher debt levels.
In time, increasing debt-to-GDP ratio
BASIC ECONOMIC GOALS slows economic growth.
1. ECONOMIC GROWTH
IMPORTANT POINT!
• Economic growth is the increase in the
value of an economy's goods and Governments should then be careful with the
services. expasive fiscal policy and should only use it
when the economy is in contradiction or
• Economic growth creates more profit recession. When the economy is growing, it
for businesses. As a result, stock prices should cut back spending and raise taxes. The
rise. That gives companies capital to conservative fiscal policy ensures that economic
invest and hire more employees. growth will remain sustainable.

MONETARY POLICY
• As more jobs are created, incomes rise.
Consumers have more money to buy • A nation’s central bank can also spur
additional products and services, growth with monetary policy. It can
and purchases drive higher growth. increase the money supply by lowering
interest rates. Banks loans for auto,
Gross domestic product is the best way to school, and home less expensive. They
measure economic growth because it takes into also reduce credit card interest rates.
account the country’s entire economic output. All of these boost consumer spending
and economic growth.
GDP includes all goods and services that
businesses in the country produce for sale. It 2. FULL EMPLOYMENT
doesn’t matter whether they are sold
domestically or overseas. • From the economic point of view, it
represents a waste of society’s scarce
THE PHASES OF ECONOMIC GROWTH (and valuable) resources. It thus lends
to a permanent loss of society’s
potential output (GDP).

• If there is unemployment, society’s

actual output or GDP is less than
society’s potential output. This is why,
most modern governments seek to
pursue a policy of full employment.

MEANING OF FULL EMPLOYMENT

• A situation in which people who are

willing to work at existing wages are
able to get jobs readily and
quickly move from one job to another if
he so wishes.
 • According to Keynes, a situation of full aggregate demand could be increased
employment is said to exist if there is by raising the volume of investment of
no involuntary unemployment. the public sector enterprises, but,
again, these measures would not take
• In a broad sense it refers to the full effect immediately.
utilization of all available labor (and
other resources) so that the economy is
able to produce its potential output
(GDP).

ACHIEVING FULL EMPLOYMENT

Full employment can be achieved by using

expansionary demand-management: monetary
and fiscal policies.

Monetary policy works through changes in the

rates of interest and availability of bank credit. 3. PRICE STABILITY

For securing full employment it is necessary to • The Bangko Sentral ng Pilipinas is to

encourage private investment and formulate and implement policy in the
consumption spending by relaxing any areas of money, banking and credit with
restrictions on the commercial banks’ lending the primary objective of reserving price
activities and the central bank, on behalf of the stability. Price stability refers to a
government, will take steps to bring about a fall condition of low and stable inflation. By
in the rate of interest. keeping price stable, the BSP helps
ensure strong and sustainable
Fiscal policy works through a change in economic growth and better living
government expenditure or a change in taxes or standards.
in both at the same time.
PRICE STABILITY – INFLATION TARGETING:
• To create jobs, the government can act THE BSP’S APPROACH TO MONETARY
in a direct manner by increasing in POLICY
own expenditures on goods and
services while leaving taxation • The primary objective of the BSP's
unchanged. monetary policy is “to promote price
stability conducive to a balanced
• Alternatively, it might stimulate private and sustainable growth of the
spending (both consumption and economy” (Republic Act 7653). The
investment) by cutting taxes. Since adoption of inflation targeting
the workers have a high propensity to framework of monetary policy in
consume, an increase January 2002 is aimed at achieving
in unemployment compensation ma this objective.
y be an effective way of bringing about
an increase in consumption spending. • Inflation targeting is focused mainly on
achieving a low and stable inflation,
• Private investment may be encouraged supportive of the economy’s growth
by offering incentives to investors such objective. This approach entails the
as investment allowances or announcement of an explicit
accelerated depreciation (so that the inflation target that the BSP promises to
entire benefits of depreciation can achieve over a given time period.
be enjoyed in the very first year).
• To achieve the inflation target, the BSP
• The government should budget for a uses a suite of monetary policy
deficit to create jobs. The government instruments in implementing the
could start road construction or slum desired monetary policy stance,
clearance programs. But, fiscal policy depending on its assessment of the
often operates with a time outlook for inflation. If the BSP
lag. However, in an economy like our perceives the inflation forecast to
own, with a fairly large public sector, exceed the target, then
 it implements contractionary of the economy to have the
monetary policy to bring down same opportunity to accumulate
inflation to its target path. On the other wealth.
hand, if the BSP sees the inflation
forecast to be lower than the • The Government redistributes tax
target or there is need to increase revenue to ensure equitable distribution
liquidity in the financial system, then it of wealth. Low-income earners should
can receive an adequate amount of support
implement expansionary monetary that assists in cost-of-living pressures
policy. The reverse repurchase (RRP) but does not compromise on
or borrowing rate is the primary reducing the incentive to work and
monetary policy instrument of the BSP. accumulate wealth.

4. ECONOMIC FREEDOM WHAT IS THE TARGET?

• Economic freedom is a characteristic The Gini coefficient measures the percentage of

that a particular economic system might wealth that is owned by a percentage of the
posses or not. population.

• Example: capitalist systems are A Gini Coefficient of 0 results in erfect income

normally the ones that promote more equality which discourages the incentive to work.
economic freedom, compared with Why work more when you’ll be taxed into the
communist or socialist systems. This same income as someone who works less.
freedom can be practiced through free
markets with a low level of government A Gini Coefficient of 1 results in perfect income
participation, free trade and adequate inequality, where 1 person owns all resources
private property protection. On the and income. Typically seen in communist
other hand, economic freedom can also governments wher all resources are state owns
be guaranteed by having a diversified and distributed by government. A Gini Coefficent
market where consumers have many of 1 goes against capitalist ideology and does not
options to choose from to fulfill a let resources to be allocated according to the
particular need. free market.

WHY IS IT IMPORTANT?
WHAT IS ECONOMIC FREEDOM?
Equitable distribution of income allows for
Economic freedom is the indepency experienced social harmony and cohesion. If wealth is too
by individuals within a given society to pursue unevenly distributed, then majority members of
their interests. It is the liberty to engage and an economy will be disadvantaged at the
make choices about economic activities and expense of very few who are well off. Equitable
endeavors. distribution of income also allows low income
earners ability to access opportunities to grow
WHAT ARE THE BENEFITS OF ECONOMIC wealth. For example, the Australia Government
FREEDOM? has a New Enterprise Incentive Scheme allowing
the unemployed to access capital to start their
Economic freedom brings greater prosperity. own business.
The Index of Economic Freedom documents the
positive relationship between economic freedom HOW CAN THE GOVERNMENT ACHIEVE A
and variety of positive social and economic MORE EQUITABLE DISTRIBUTION OF
goals. The ideals of economic freedom are INCOME?
strongly associated with the healthier societies,
cleaner environments, greater per capita PROGRESSIVE TAX SYSTEM - Those who can
wealth, human development, democracy, and earn more income pay a larger amount of tax;
poverty elimination. Educational grants, subsidies and low-interest
loans; Welfare and income support for low-
5. AN EQUITABLE DISTRIBUTION OF income earners; Compensation for low-income
INCOME earners; wealth taxes.

• Equitable distribution of
income ensures distributing welfare to
ensure fairness and allowing members
 6. ECONOMIC SECURITY represents the types and quantity of
opportunities. Furthermore, it has a
• Economic security is composed of cognitive side, as it also features
basic basic socialsecurity, defined by to expectations that opportunities are
access to basic needs infrastructure or will become adequate. Policies
pertaining to health, education, dwelling aimed at enhancing this form of
information, and social protection, as security have included full-employment
well as work-related security. oriented macro-economic policies,
the creation of employment agencies,
and other placing services.

EMPLOYMENT SECURITY

• Employment security is protection

INCOME SECURITY against loss of income-earning work.
For wage and salary workers,
• Income security denotes adequate employment security exists in
actual, perceived and organizations and countries, in which
expected income, either earned or in there is strong protection against unfair
the form of social security and other or arbitrary dismissal and where
benefits. It encompasses the level of workers can redress unfair dismissal.
income (absolute and relative to For the self-employed, it means
needs), assurance of receipt, protection against sudden loss of
expectation of current and future independent work, and/or business
income, both during working life and in failure. Typical forms of enhancing
old age or disability retirement. Classic employment security have been
income security protection protection against arbitrary dismissal,
mechanisms include a minimum wage regulations on hiring and firing, and
machinery, wage indexation, imposition of costs on employers for
comprehensive social security, and failing to adhere to rules.
progressive taxation.
JOB SECURITY
REPRESENTATION SECURITY
• Job security signifies the presence of
• Representation security refers to niches in organizations
both individual representation and across labour markets allowing the
and collective representation. workers some control over the content
Individual representation is about of a job and the opportunity to build a
individual rights enshrined in laws as career. Whereas employment security
well as the individuals’ access to refers to the opportunity of a worker to
institutions. Collective representation continue working in an enterprise, job
means the right of any individual or security refers to the worker’s ability
group to be represented by a body that to pursue a line of work in conjunction
can bargain on their behalf and which is with his or her interests, training and
sufficiently large, sufficiently skills. Protection mechanisms have
independent and sufficiently competent consisted of barriers to skill dilution
to do so. Independent trade unions with such as craft boundaries, job
the right to collectively bargain over qualifications, restrictive practices, craft
wages, benefits, and working unions, etc.
conditions as well as to monitor working
practices and strike have been typical WORK SECURITY
forms of granting representation
security. • Work security denotes working
conditions in organizations that are
LABOUR MARKET SECURITY safe and promote workers’ well being.
Classic “occupational health
• Labour market security arises when and safety” provisions shielding
there are ample opportunities workers from occupational
for adequate income-earning activities. hazards, diseases, and injuries are an
It has a structural component; in that it integral part. Work security goes
 beyond this, though, in addressing the DEMAND, SUPPLY, AND MARKET
modern scourges of stress, EQUILIBRIUM
overwork, absenteeism, and
harassment. Protection devices for THE BASIC DECISION-MAKING UNITS
work security include provisions and
insurance against accidents and illness • A firm is an organization that
at work, and limits on working time. transforms resources (inputs) into
products (outputs). Firms are the
SKILL REPRODUCTION SECURITY primary producing units in a market
economy.
• Skill reproduction security denotes
workers’ access to basic education as • An entrepreneur is a person who
well as vocational training to develop organizes, manages, and assumes the
capacities and acquire the risk of a firm, taking a new idea or a new
qualifications needed for socially product and turning it into a successful
and economically valuable business.
occupations. Ways to further
skill reproduction security include • Households are the consuming units in
policies to generate an economy
widespread opportunities to gain and
retain skills through THE CIRCULAR FLOW OF ECONOMIC
education, apprenticeships, and ACTIVITY
employment training.

BALANCE OF TRADE

WHAT IS THE BALANCE OF TRADE (BOT)?

Balance of trade (BOT) is the differemce

between the value of a country’s imports and
exports for a given period and is the largest
component of a country’s balance of payments
(BOP).

A country that imports more goods and services • Payments flow in the opposite direction
than it exports in terms of value has a trade as the physical flow of resources,
deficit while a country that exports more goods goods, and services
and services than it imports has a trade surplus. (counterclockwise).

SUMMARY OF EXTERNAL TRADE INPUT MARKETS AND OUTPUT MARKETS

PERFORMANCE SEPTEMBER 2020,
AUGUST 2021r, AND SEPTEMBER 2021p • Output, or product, markets are the
markets in which goods and services
are exchanged.

• Input markets are the markets in which

resources – labor, capital, and land –
used to produce products, are
exchanged.

INPUT MARKETS

Input markets include:

• The labor market, in which households

supply work for wages to firms that
demand labor.
 • The capital market, in which THE DEMAND CURVE
households supply their savings, for
interest or for claims to future profits, to • The demand curve is a graph
firms that demand funds to buy capital illustrating how much of a given product
goods. a household would be willing to buy at
different prices.
• The land market, in which households
supply land or other real property in
exchange for rent.

DETERMINANTS OF HOUSEHOLD
DEMAND

A household’s decision about the quantity of a

particular output to demand depends on:

• The price of the product in question.

• The income available to the household
• The household’s amount of THE LAW OF DEMAND
accumulated wealth.
• The prices of related products • The law of demand states that there is
available to the household. a negative, or inverse, relationship
• The household’s tastes and between price and the quantity of a
preferences. good demanded and its price.
• The household’s expectations about
future income, wealth, and prices. • This means that demand curves slope
downward.
QUALITY DEMANDED

• Quantity demanded is the amount

(number of units) of a product that a
household would buy in a given time
period if it could buy all it wanted at the
current market price.

DEMAND IN OUTPUT MARKETS

• A demand schedule is a table showing

how much of a given product a OTHER PROPERTIES OF DEMAND CURVES
household would be willing to buy at
different prices. • Demand curves intersect the quantity
(X)-axis, as a result of time limitations
• Demand curves are usually derived and diminishing marginal utility.
from demand schedules.
• Demand curves intersect the (Y)-axis,
as a result of limited incomes and
wealth.

INCOME AND WEALTH

• Income is the sum of all households

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is
a flow measure.

• Wealth, or net worth, is the total value

of what a household owns minus what
it owes. It is a stock measure.
 RELATED GOODS AND SERVICES

• Normal Goods are gods for which

demand goes up when income is
higher and for which demand goes
down when income is lower.

• Inferior Goods are goods for

which demand falls when income
arises.

To summarize:
• Substitutes are goods that can
serve as replacements for one
another; when the price of one
increases, demand for the other
goes up. Perfect substitutes are
identical products.

• Complements are goods that “go

together”; a decrease in the pric of
one results in an increase in
demand for the other and vice
versa.
THE IMPACT OF A CHANGE IN INCOME
SHIFT OF DEMAND VERSUS MOVEMENT
ALONG A DEMAND CURVE

• A change in demand is not the same as

a change in quantity demanded.

• In this example, a higher price causes

lower quantity demanded.

• Changes in determinants of demand,

other than price, cause a change in
demand, or a shift of the entire
demand curve Da to Db.

A CHANGE IN DEMAND VERSUS A CHANGE

IN QUANTITY DEMANDED
FROM HOUSEHOLD TO MARKET DEMAND
• When demand shifts to the right,
demand increases. This causes • Demand for a good or service can be
quantity demanded to be greater than defined for individual household, or
it was prior to the shift, for each and for a group of households that make up
every price level. a market.

• Market demand is the sum of all the

quantities of a good or service
 demanded per period by all the
households buying in the market for
that good or service.

• Assuming there are only two

households in the market, market
demand is derives as follows.

THE LAW OF SUPPLY

• The law of supply states that there is a

positive relationship between price and
quantity of a good supplied.

• This means that supply curves typically

• have a positive slope.

SUPPLY IN OUTPUT MARKETS

• A supply schedule is a table showing

how much of a product firms will supply
at different prices.

• Quantity supplied represents the DETERMINANTS OF SUPPLY

number of units of a product that a firm
would be willing and able to offer for • The price of the good or service.
sale at a particular price during a given
time period. • The cost of producing the good, which
in turn, depends on:

• The price of required inputs

(labor, capital, and land)

• The technologies that can be

used to produced to produce
the products.

• The prices of related products.

A CHANGE IN SUPPLY VERSUS A CHANGE

IN QUANTITY SUPPLIED

THE SUPPLY CURVE AND THE SUPPLY • A change in supply is not the same as
SCHEDULE a change in quantity supplied.

• A supply curve is a graph illustrating • In this example, a higher price causes

how much of a product a firm will supply higher quantity supplied, and a move
at different prices. along the demand curve.
 • In this example, changes in • Market supply is the sum of all the
determinants of supply, other than quantities of a good or service supplied
price, cause an increase in supply, or per period by all the firms selling in the
a shift of the entire supply curve, from market for that good or service.
Sa to Sb
MARKET SUPPLY

• As with market demand, market

supply is the horizontal summation of
individual firms’ supply curves.

MARKET EQUILIBRIUM
• When supply shifts to the right, this
increases. This causes quantity • The operation of the market depends
supplied to be greater than it was prior on the interaction between buyers and
to the shift, for each and every price seller.
level.
• The equilibrium is the condition that
exists when quantity supplied and
quantity demanded are equal.

• At equilibrium, there is no tendency for

the market price to change.

• Only in equilibrium is quantity supplied

equal to quantity demanded.

• At any price level other than Po, the

wishes of buyers and sellers do not
To summarize: coincide

FROM INDIVIDUAL SUPPLY TO MARKET

SUPPLY MARKET DISEQUILIBRIA

• The supply of a good or service can be • Excess demand, or shortage, is the

defined for an individual firm, or for a condition that exists when quantity
group of firms that make up a market or demanded exceeds quantity supplied
an industry. at the current price.
 • When quantity demanded exceeds
quantity supplied, price tends to rise
until equilibrium is restored

• When supply and demand both

increase, quantity will increase, but
price may go up or down.

INCREASES IN DEMAND AND SUPPLY

RELATIVE MAGNITUDES OF CHANGE

• The relative magnitudes of change in

supply and demand determine the
outcome of market equilibrium.