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ECONOMICS: its concepts and principles
By: BKG Gabay
RM Remotin, Jr.
GREGAR DONAVEN E. VALDEHUEZA, MBA
Lourdes College Instructor
This chapter examines the subject that many
economists consider to be the fundamental
problems of economics, different economic
system and its significance, law of scarcity,
and production possibility frontier.
The three basic economic problems
1. What goods and services should be produced
and in what quantities?
2. How should these goods and services be
3. For whom should these goods and services
What goods and services to be
It is not always possible to produce all goods and
services that people want because resources are
From the available resources can only be produced a
limited quantity of goods and services, and when the
maximum combinations of goods and services that
can be produced has been reached, an increase in the
quantity of the said product connotes a decrease in
quantity of another.
How should these goods and services
As a rule of thumb, goods and services must
be developed or produced at its optimum level
– that is maximum output with a minimum
input without sacrificing the quality.
For whom should these goods and
services be produced?
“who should consume the produced goods and
With this regard to this question, we should
think also whose generation will receive these
goods and services: the present or the future
Four (4) factors of production
Land. Land is not only the soil for growing
agricultural products. It is also the source of
all materials and food whether in liquid, solid,
or gaseous form, in or above the earth.
Labor. It refers to human effort, when the
effort is rewarded by some kind of pay. This
refers also to the available physical and mental
talents of the people who have to produce
goods and services.
Capital. The word comes from the Latin
‘caput’ which means ‘head’. It refers to the
tangible, physical good (a capital good) that a
person or society creates in the expectation
that its use will improve or increase future
production. That is the reason why this term
also connotes the facilities of goods.
Entrepreneurship. Entrepreneurship means
that people are combining the other three
factors of production to create some products
or services to sell. They hope for profit, but
take risk loss or bankruptcy.
The process of creating a capital good is called
capital formation. A common term for capital
formation economics is investment. Notice again
that we are not talking about money. Outside of
economics, the purchase of assets such as stocks and
bonds is sometimes called financial investments.
This term should be distinguished from investment
as economists use the term. When a group of
fishermen, the labor factor, takes time to make a
boat, it is creating capital. The fisherman is investing
in the hope that in the future the boat will increase
the number of fish the fisherman catches, the
increase in fish caught representing the fisherman’s
return on his investment. The fisherman’s capital
formation (investment) is measured by sacrifice
consumption (the fish that weren’t caught for food or
According to Starr in his book, for a nation as
a whole, however, money represents only a
claim on the resources owned by that nation –
the real things like buildings, roads, dams, TV
sets, automobiles, and raw materials. If we
are going to count a nation’s supply of money
plus its supply of real things, we would be
guilty of what all economists call double
accounting. Although money is a means to
acquire factors of production and is also a
measure of wealth, it is not in itself a factor of
The Economic System
Refers to a set of economic institutions that
dominate a given economy with the main
objective of solving the basic economic
Four economic systems or
Communal land ownership;
The leader decides on the management of agricultural
production which is the basis of the economy;
The production, distribution, and use of economic
resources are based on traditional practices;
New technologies are not welcomed since they are in
contrast with the traditional practices of their ancestors;
The economy is only its third priority while culture and
religion are its foremost priorities;
Mines are used to gather raw materials for production.
Resource allocation is done by government;
Presence of central planning of all economic
There is no free competition (the government is only
Only the government plays the role in setting legal
framework for economic life production and
distribution of goods and services;
The products or needs of the people are distributed
based on priorities set by the committee.
The private sector owns and manages the means of
The price system in a market structure applies to
determine how much will be paid for a certain
commodity or service;
It is also known as laissez-faire or free enterprise;
There is minimum government interference on
decisions pertaining to the management of the
economy (protection of the society against internal
and external aggression);
Existence of competition often results to monopoly;
There is presence of economic power.
The means of production are owned and controlled
by the private sector as well as the government;
The people decide on economic activities within the
The combinations of the best features of capitalist
and command economies are observable in the
The problem of distribution of goods and services
and allocation of economic resources are determined
through a combination of the market and
governmental laws and policies.
In the real situation, economic systems are rarely 100
percent examples of any one system. At present, there
is no economy today applying a pure economic
system. Majority, if not all, of these economic
systems are present in varying degrees in any
economy. The Philippines, for example, is best
described as a market system but it contains many
command elements like regulatory agencies and
executive orders issued by the president. Traditional
system elements are quietly observed, like in the way
many young people choose their parents’ occupation.
But in a way, most economic systems are mixed,
although they are usually identifiable as being
predominantly of one type or another.
The three ISMS:
Capitalism, Communism, and Socialism
The classification of different societies into traditional,
command, market and mixed economic systems spans the
entire course of history, but in the last century the world has
been divided into great economic and political systems
representing socialism and capitalism.
- is an economic system in which most resources are
privately owned, people are free to choose their
occupation, the kind and amount of production is
determined by price and people searching for a profit,
and there is substantial amount of competition.
Three aspects of Capitalism:
The institution of private ownership is generally
accepted. Factories, land, goods, and services are
privately owned by individuals or group of
individuals like stockholders and shareholders.
Most people are free to pursue their own economic
self-interests, that is, to work for personal gain. For
this reason, capitalism is often called the free-
enterprise system; most people are free to choose
their own occupations.
Because people are motivated by self-interest, they
compete with one another to get ahead, to make a
better product, to control markets in order to
maintain or obtain a large profit. There is always a
struggle for larger profit lead (usually, but by no
means always) to a high degree of competition
- holds that the people themselves, not the government,
own the means of production. In a communist state, everyone
works at what he or she can do best. There is no system of
wages or profits needed to spur people to work. Everyone
simply takes from what is produced whatever he or she needs
to live comfortably. No government or bureaucracy
supervises what the people do.
- is an economic system in which the government
owns and operates the major industries of the
country. It means also that the government also
decides in those major industries the answers to the
three economic questions. Socialism does not
imply dictatorship. Spcialism can exist in
democratic countries as well as authoritarian ones.
The main reason for socialism’s existence is that
socialists hope to overcome capitalism’s two
1. The unequal distribution of income and wealth
2. The uneven course of economic growth with
periods of boom or bust.
The circular flow of economy
Goods and Services
Factors of Production
(land, labor, capital, entrepreneur)
Payments of Factors
(rent, wages, interest, profit)
Payment of Purchase
of goods and services.
The law of scarcity
- refers to the condition that all resources
are available only in limited supply.
Law of Scarcity
- states that goods are scarce because there
are not enough resources to produce all the
goods that the people want to consume.
Types of resources:
Manufacture Aids to Production
- things produced
Types of Commodities
Goods (tangibles e.g. cars, clothes, shoes)
Services (intangibles e.g. haircut, massage, education)
- the act of making goods and services
- the act of using them to satisfy human wants
Social Costs of Individual Decisions
- a personal decision may impose costs, not
just to oneself, but also on others.
Consequently, the total cost to society – social
cost – is measured by the opportunity costs
borne by individuals for their own decisions
plus additional costs that may be borne by
Production Possibilities Frontier
PPF illustrates three concepts:
Scarcity – indicated by the unattainable
combination above the boundary
Choice – can be seen by the need to choose
among the alternative attainable points along the
boundary and opportunity cost
Opportunity cost – refers to the cost of using
them in their best alternatives.
Production Possibility Boundary/Frontier
Service for Education boundary
The reason why PPF is downward sloping
because of Opportunity cost. Due to the
opportunity cost, trade-off arises.
- a situation in which more of one good
thing can be obtained only by giving off
Two factors why available goods and services
are not enough to satisfy the human’s material
Unlimited human wants
Limited quantity of goods
If none, then you may go.