What is Economics?

ECONOMICS is the social science

that is concerned with the efficient use of
scarce resources to achieve the maximum

UNIT 1 and UNIT 2

Introduction to Economics and
Economic Systems

What is Economics?
ECONOMIC RESOURCES

satisfaction of unlimited economic wants

and needs.

What is Economics?
FUNDAMENTAL PROBLEMS IN
ECONOMICS UNDER SCARCITY:
1. What and How much to Produce?
2. How to Produce?
3. For whom to Produce?

Branches of Economics
Macroeconomics is the study of the

Microeconomics is a detailed study of

individual behavior such as household, firm,
and individual owner of production.

Circular Flow Two-Sector Model

Factors of
production

Economic Systems

Spending

Three Economic Questions:

Goods and
services
bought

Labor, land,
MARKETS
and capital
FOR
FACTORS OF PRODUCTION
Households sell
Firms buy

Normative Analysis
refers to the analysis of
what ought to be.

Examples:
Examples:
Minimum wage laws
The government should
contributes to
raise the minimum wage to
unemployment
P14,000 per month.
If the government will
Is the society better off with
increase VAT to 14%, how
free trade among countries
much will be the addition to
or should impose barriers to
its revenues?
free trade?

What and how much to produce?

How are goods produced?
For whom goods are produced?

HOUSEHOLDS
Buy and consume
goods and services
Own and sell factors
of production

FIRMS
Produce and sell
goods and services
Hire and use factors
of production

Wages, rent,
and interest rate

Positive Analysis
refers to statements that
describe the cause and
effect relationship.

aggregate economic behavior.

MARKETS
Revenue
FOR
GOODS AND SERVICES
Firms sell
Goods
Households buy
and services
sold

Positive Analysis vs
Normative Analysis

Command

Mixed

Market

Economy

Economy

Economy

Income
= Flow of inputs
and outputs
= Flow of payments (Peso)

Copyright 2004 South-Western

Ten Principles of Economics

Economic Systems
Command/Planned
Economy
Resource allocation is
done by the
government;
Presence of central
planning of all
economic resources;
No free competition;
Only the government
sets the legal
framework for
production and
distribution of products;
and
The products or the
needs of the people
are distributed based
on the priorities set by
the committee.

Mixed Economy
The combinations of
the best features of
capitalist and
command economies
are observable in the
economy;
The means of
production are owned
and controlled by the
private sector and the
government; and
The people decide on
economic activities
within the economy

(Mankiw, 2012)
Market
The private sector
owns and manages the
means of production;
The price system
applies to determine
how much will be paid
for a certain product;
Minimum government
interference on
decisions pertaining to
the management of the
economy;
Existence of
competition; and
Presence of economic
power

How People Make Decisions

1. People face tradeoffs.

2. The cost of something is what you give
up to get it.
3. Rational people think at the margin.
4. People respond to incentives.

Ten Principles of Economics

Ten Principles of Economics

(Mankiw, 2012)

(Mankiw, 2012)

How People Interact

5. Trade can make everyone better off.
6. Markets are usually a good way to
organize economic activity.
7. Governments can sometimes improve

market outcome.

How The Economy as a Whole Works

8. A countrys standard of living depends
on its ability to produce goods and
services.
9. Prices rise when the government prints
too much money.
10. Society faces a short-term tradeoff
between inflation and unemployment.

World Banks Classification of

Economies based on Income (2015)

World Banks Classification of

Economies based on Income (2015)

Low-income economies ($1,045 or less)

Afghanistan
Bangladesh
Benin

Gambia, The
Guinea
Guinea-Bisau

Nepal
Niger
Rwanda

Burkina Faso

Haiti

Sierra Leone

Burundi
Cambodia

Kenya
Korea, Dem Rep.

Somalia
Tajikistan

Central African Republic

Liberia

Tanzania

Chad
Comoros

Madagascar
Malawi

Togo
Uganda

Congo, Dem. Rep

Mali

Zimbabwe

Eritrea

Mozambique

Ethiopia

Myanmar

World Banks Classification of

Economies based on Income (2015)
Upper-middle-income economies ($4,126 to $12,745)
Angola
Albania
Algeria
American Samoa

Cuba
Dominica
Dominican Republic
Ecuador

Macedonia, FYR
Malaysia
Maldives
Marshall Islands

St. Lucia
St. Vincent and the Grenadines
Suriname
Thailand

Argentina

Fiji

Mauritius

Tonga

Azerbaijan
Belarus
Belize
Bosnia and Herzegovina

Gabon
Grenada
Hungary
Iran, Islamic Rep.

Mexico
Montenegro
Namibia
Palau

Tunisia
Turkey
Turkmenistan
Tuvalu

Botswana
Brazil
Bulgaria

Iraq
Jamaica
Jordan

Panama
Peru
Romania

Venezuela, RB

China
Colombia
Costa Rica

Kazakhstan
Lebanon
Libya

Serbia
Seychelles
South Africa

Lower-middle-income economies ($1,046 to $4,125)

Armenia
Bhutan
Bolivia
Cameroon
Cabo Verde
Congo, Rep.
Cte d'Ivoire
Djibouti
Egypt, Arab Rep.
El Salvador
Georgia
Ghana
Guatemala

Guyana
Honduras
Indonesia
India
Kiribati
Kosovo
Kyrgyz Republic
Lao PDR
Lesotho
Mauritania
Micronesia, Fed. Sts.
Moldova
Mongolia

Morocco
Nicaragua
Nigeria
Pakistan
Papua New Guinea
Paraguay
Philippines
Samoa
So Tom and Principe
Senegal
Solomon Islands
South Sudan
Sri Lanka

Sudan
Swaziland
Syrian Arab Republic
Timor-Leste
Ukraine
Uzbekistan
Vanuatu
Vietnam
West Bank and Gaza
Yemen, Rep.
Zambia

World Banks Classification of

Economies based on Income (2015)
High-income economies ($12,746 or more)
Andorra
Antigua and Barbuda
Aruba
Australia
Austria
Bahamas, The
Bahrain
Barbados
Belgium
Bermuda
Brunei Darussalam
Canada
Cayman Islands
Channel Islands
Chile
Croatia
Curaao
Cyprus
Czech Republic

Denmark
Estonia
Equatorial Guinea
Faeroe Islands
Finland
France
French Polynesia
Germany
Greece
Greenland
Guam
Hong Kong SAR, China
Iceland
Ireland
Isle of Man
Israel
Italy
Japan
Korea, Rep.

Kuwait
Latvia
Liechtenstein
Lithuania
Luxembourg
Macao SAR, China
Malta
Monaco
Netherlands
New Caledonia
New Zealand
Northern Mariana Islands
Norway
Oman
Poland
Portugal
Puerto Rico
Qatar
Russian Federation

San Marino
Saudi Arabia
Singapore
Saint Maarten
Slovak Republic
Slovenia
Spain
St. Kitts and Nevis
St. Martin
Sweden
Switzerland
Trinidad and Tobago
Turks and Caicos Islands
United Arab Emirates
United Kingdom
United States
Uruguay
Virgin Islands (U.S.)

Ten Principles of Economics

Everything has a cost. There is no free lunch. There is always a trade-off.
Cost is what you give up to get something. In particular, opportunity cost is cost of the
tradeoff.

Economic Goals

One More. Rational people make decisions on the basis of the cost of one more
unit (of consumption, of investment, of labor hour, etc.).

1.
2.

iNcentives work. People respond to incentives.

3.

Open for trade. Trade can make all parties better off.

4.

Markets Rock! Usually, markets are the best way to allocate scarce resources
between producers and consumers.

5.
6.

Intervention in free markets is sometimes needed. (But watch out for the law
of unintended effects!)

7.

Concentrate on productivity. A countrys standard of living depends on how

productive its economy is.

8.

Economic Growth
Full Employment
Economic Efficiency
Price-Level Stability
Economic Freedom
Equitable Distribution of Income
Economic Security
Balance of Trade

Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.
!! Caution: In the short run, falling prices may lead to unemployment, and
rising employment may lead to inflation

Defense
Goods
and
services

Social
Goods
and
Services

A1

200

B1

175

75

C1

130

125

D1

70

150

E1

160

F1

130

25

G1

200

75

A1

Production Possibilities
Frontier

G1

Combination

Defense
Goods
and
services

B1

F1

C1

D1

E1

Social Goods and Services (millions of units)

Social
Goods
and
Services

A2

220

B2

200

75

C2

175

125

D2

130

150

E2

70

160

F2

165

A2

Defense Goods and Services (millions of units)

Combination

Defense Goods and Services (millions of units)

Production Possibilities
Frontier

A1

B2

B1

C2

PPF1
C1

D2

PPF2

E2

D1

E1

F2

Social Goods and Services (millions of units)

Human Development Index (HDI)

Human Development Index (HDI)

The Human Development Index was

developed by Mahbub ul Haq and Amartya
Sen and was adopted by the United
Nations
Development
Program
to
emphasize
that
people
and
their
capabilities should be the ultimate criteria
for assessing the development of a country,
not economic growth alone.
The HDI can also be used to question
national policy choices, asking how two
countries with the same level of GNI per
capita can end up with different human
development outcomes.

Human Development Index (HDI)

Human Development Index (HDI)

Human Development Index (HDI)

Human Development Index (HDI)

Cut-off Points for HDI Groupings
Very High Human Development : 0.800
High Human Development : 0.700
Medium Human Development : 0.550
Low Human Development : 0.499 below

Human Development Index (HDI)

2013
HDI rank

Country

HDI 2013

Millennium Development Goals

(MDGs)

Life expectancy Mean years of Expected years

GNI per capita (PPP $)
at birth
schooling
of schooling

1
2
3
4
5
6
7
8
9
10
11
12
13
14

Very high human development

Norway
0.944
Australia
0.933
Switzerland
0.917
Netherlands
0.915
United States
0.914
Germany
0.911
New Zealand
0.910
Canada
0.902
Singapore
0.901
Denmark
0.900
Ireland
0.899
Sweden
0.898
Iceland
0.895
United Kingdom
0.892

81.5
82.5
82.6
81.0
78.9
80.7
81.1
81.5
82.3
79.4
80.7
81.8
82.1
80.5

12.6
12.8
12.2
11.9
12.9
12.9
12.5
12.3
10.2
12.1
11.6
11.7
10.4
12.3

17.6
19.9
15.7
17.9
16.5
16.3
19.4
15.9
15.4
16.9
18.6
15.8
18.7
16.2

63,909
41,524
53,762
42,397
52,308
43,049
32,569
41,887
72,371
42,880
33,414
43,201
35,116
35,002

15
15
17
18
19
20

Hong Kong, China (SAR)

Korea (Republic of)
Japan
Liechtenstein
Israel
France

83.4
81.5
83.6
79.9
81.8
81.8

10.0
11.8
11.5
10.3
12.5
11.1

15.6
17.0
15.3
15.1
15.7
16.0

52,383
30,345
36,747
87,085
29,966
36,629

0.891
0.891
0.890
0.889
0.888
0.884

In 2000, 189 nations made a promise to free people from

extreme poverty and multiple deprivations. This pledge
turned into eight Millennium Development Goals.
These MDGs are concrete and interconnected goals, with
a corresponding set of measurable targets and indicators.
This development framework represents a remarkable
global partnership between poor countries that pledge to
govern better and invest in human development and rich
countries that promise to support them.

Economic Freedom Index

Economic Freedom Index

Worlds Top 10 Freest Economies

The Heritage Foundation measures Economic

Freedom Index based on 10 quantitative and
qualitative factors, grouped into four broad categories,
or pillars, of economic freedom:

Rule of Law (property rights, freedom from corruption);

Limited Government (fiscal freedom, government spending);
Regulatory Efficiency (business freedom, labor freedom,
monetary freedom); and
Open Markets (trade freedom, investment freedom, financial
freedom).

Economic Freedom Index

RANK

COUNTRY

OVERALL

Hong Kong

90.1

Singapore

89.4

Australia

82.0

Switzerland

81.6

New Zealand

81.2

Canada

80.2

Chile

78.7

Mauritius

76.5

Ireland

76.2

10

Denmark

76.1

Economic Freedom Index

FREE (100 80)

MODERATELY FREE (69.9 60)

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

Hong Kong

90.1

Switzerland

81.6

37

Malaysia

69.6

72

Thailand

63.3

Singapore

89.4

New Zealand

81.2

49

Spain

67.2

89

Philippines

60.1

Australia

82.0

Canada

80.2

70

France

63.5

90

Sri Lanka

60

MOSTLY FREE (79.9 70)

MOSTLY UNFREE (59.9 50)

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

12

United States

75.5

25

Japan

72.4

100

Indonesia

58.5

137

China

52.3

14

United Kingdom

74.9

30

UAE

71.4

114

Brazil

56.9

140

Russia

51.9

17

Taiwan

73.9

31

South Korea

71.2

120

India

55.7

151

Ethiopia

50

Economic Freedom Index:

Philippines

Economic Freedom Index

REPRESSED(49.9 0)
RANK

COUNTRY

OVERALL

RANK

COUNTRY

OVERALL

155

Ukraine

49.3

166

Argentina

44.6

160

Angola

47.7

177

Cuba

28.7

173

Iran

40.3

178

North Korea

1.0

Economic Freedom Index:

Philippines

Economic Freedom Index:

Philippines

Economic Freedom Index:

Philippines

Economic Freedom Index:

Philippines

Millennium Development Goals

(MDGs)

Millennium Development Goals

(MDGs)

10

Millennium Development Goals

(MDGs)

Millennium Development Goals

(MDGs)

Civil and political rights: The Philippines is one of

the few countries with a woman President. 4 out of
24 senators are women. Women dominate the civil
service at the technical level (74%), but are still
largely outnumbered by men in decision-making
positions (35%). Women account for only 20
percent of total positions in the judiciary. In the
2004 elections, mean participation rate of women
was 18.2 percent at the national and local levels of
both executive and legislative bodies.

Millennium Development Goals

(MDGs)

Millennium Development Goals

(MDGs)

11

Millennium Development Goals

(MDGs)

Millennium Development Goals

(MDGs)

12