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  1. 1. What is Economics?  A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society. (Walstad and Bingham)  The study of how societies use scarce resources to produce valuable commodities and distribute them among different people. (Samuelson and Nordhaus)  The study of production, distribution, selling and use of goods and services. (Collin)  A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society. (McConnel and Brue)  The study of how people use their limited resources to try to satisfy unlimited wants. (Parkin and Bade)
  2. 2. Types of Economics System 1. Capitalism – an economic system characterized by private individuals owning and operating the majority of business that produce Rights of Capitalism Right to own private property Right to gain profits Right to make business decisions Right of choice
  3. 3. Types of Economics System 2. Communism – A society in which the Government owns all the nation’s resource. All rights stated in the capitalism are not allowed in communism. 3. Socialism – the government owns and operates the basic industries. Private individuals are allowed, however, to own and operate small business. 4. Mixed Economies – A mixed economy is one that has elements from more than one economic system. It contains both private and state enterprise.
  4. 4. The Economic Resources 1. Land – include land used for agricultural or industrial purposes as well as natural resources taken form above or below the soil. 2. Labor – productive services embodied in human physical effort, skill, intellectual powers, and others. 3. Capital – durable goods produced in order to produce other goods (e.g. machines) 4. Entrepreneurial Ability – An ability to decide on and implement the right combination of the first three factors of production
  5. 5. Economic Goals 1. 2. 3. 4. 5. 6. 7. 8. Economic growth Full employment Economic efficiency Price level stability Economic freedom An equitable distribution of income Economic security Balance of trade
  6. 6. Divisions of Economics 1. Microeconomics – concerned with the behavior and activities of specific economic units – individuals, households, firms, industries and resource owners 2. Macroeconomics – deals with the behavior of the economy as a whole with respect to output, income, price level, foreign trade, unemployment, and other aggregate economic variables.
  7. 7. Stock and Flow • Stock – refers to the measure of quantity at a point of time. (e.g. December 31, 2013) • Flow – refers to the measure of movement of quantity over a period of time. (e.g. Per year)
  8. 8. The Circular Flow of Goods, Services, and Income The Production Process - The process of producing goods and services involves households and firms in a circular flow Land, Labor, Capital (Economic Resources) Firms Households (Organizers and users of economic resources) (Resource Owners) Goods & Services (Outputs)
  9. 9. The Circular Flow of Goods, Services, and Income The Flow of Goods Among Producing Firms - A flow which happen among different types of business firms:  Raw Material Producers – firms produce raw materials such as fish, wood, sugarcane and others.  Intermediate Goods Producers – firms produce goods that are partially processed and still need further processing before they can finally consumed (e.g. flour, steel bars)  Final Good Producers – firms produce goods that are ready for final consumption such as RTW clothing, candies, etc.
  10. 10. The Flow of Output between Firms and Households Raw Material Firms Raw Materials Intermediate Good Firms Intermediate Goods Final Good Firms Final Goods
  11. 11. HOUSEHOLDS The Circular Flow of Goods and Income Among Producers and Households Economic Resources Payment Economic Resources Payment Economic Resources Payment Final Goods Payment Raw Material Firms Final Good Firms Intermediate Good Firms
  12. 12. The Circular Flow of Goods, Services, and Income Income Flow – this created when money is spent by households for consumption and by firms for production. Income takes two distinct circular flows as follows:  Between households and firms  Between firms Raw Material Firms Households Income Flow Income Flow Income Flow (For purchase of intermediate goods) Income Flow (For purchase of raw material) Intermediate Good Firms (Purchase of goods and services) (wages, interest, rents) Final Good Firms Firms Income Flow (For purchase of final goods) Income flow between households and firm Income flow between firms
  13. 13. The Circular Flow of Goods, Services, and Income Equilibrium– happens when the amount received by firms from households is equal to the amount received by households form firms Disequilibrium – happens when either households or firms do not spend their income The Effect of Reduction of Purchases Households Reduced Income Reduced Income (as a result of reduced purchase of economic resources) (as a result of reduced purchase of goods and services) Firms
  14. 14. The Circular Flow of Goods, Services, and Income Savings and Investments Saving – income not spent, or deferred consumption. Happens when households allocate a part of their income for future use. Investments – a way of disposing unsold output. Investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories. When the savings of households are matched by investments expenditures of firms, disequilibrium is negated and the circular flow of income will tend normalize.
  15. 15. The Circular Flow of Goods, Services, and Income CIRCULAR FLOW OF GOODS AND INCOME IN A SIMPLE ECONOMY WITH SAVING AND INVESTMENT Firms Rent Wages Interest Profit Land Labor Capital Goods and Services Households Investments Capital goods Payments
  16. 16. Sources: Medina, Roberto G. (2001), Principles of Economics IMAGES: Image 1: es/airline-hero-banner-380x200/http/ Image 2: Image 3: