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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