Economics

Economics is a social science concerned with the factors that determine the production, distribution,
and consumption of goods and services. The term economics comes from the Ancient
Greek οἰκονομία from οἶκος (oikos, "house") and νόμος (nomos, "custom" or "law"), hence "rules of the house (hold
for good management)".[1]
'Political economy' was the earlier name for the subject, but economists in the late 19th
century suggested "economics" as a shorter term for "economic science" to establish itself as a separate discipline
outside of political science and other social sciences.[2]
Economics focuses on the behaviour and interactions of economic agents and how economies work. Consistent
with this focus, primary textbooks often distinguish between microeconomics and
macroeconomics. Microeconomics examines the behaviour of basic elements in the economy, including individual
agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example,
households, firms, buyers, and sellers. Macroeconomics analyses the entire economy (meaning aggregated
production, consumption, savings, and investment) and issues affecting it, including unemployment of resources
(labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary,
fiscal, and other policies).
Other broad distinctions within economics include those between positive economics, describing "what is",
and normative economics, advocating "what ought to be"; between economic theory and applied economics;
between rational and behavioural economics; and between mainstream economics and heterodoxeconomics.[3]
Besides the traditional concern in production, distribution, and consumption in an economy, economic analysis may
be applied throughout society, as inbusiness, finance, health care, and government. Economic analyses may also
be applied to such diverse subjects as crime,[4]
education,[5]
the family, law, politics, religion,[6]
social institutions,
war,[7]
science,[8]
and the environment.[9]
Education, for example, requires time, effort, and expenses, plus the
foregone income and experience, yet these losses can be weighted against future benefits education may bring to
the agent or the economy. At the turn of the 21st century, the expanding domain of economics in the social sciences
has been described as economic imperialism.[10]
The ultimate goal of economics is to improve the living conditions of
people in their everyday life.[11]
What is the 'Production Possibility Frontier - PPF'
The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods,
given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used
efficiently.
Factors such as labor, capital and technology, among others, will affect the resources available, which will
dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve
or the transformation curve.
BREAKING DOWN'Production Possibility Frontier - PPF'
The PPF indicates the production possibilities of two commodities when resources are fixed. This means that
the production of one commodity can only increase when the production of the other commodity is reduced,
due to the availability of resources. Therefore, the PPF measures the efficiency in which two commodities can
be produced together, helping managers and leaders decide what mix of commodities are most beneficial. The
PPF assumes that technology is constant, resources are used efficiently, and that there is normally only a
choice between two commodities.
Understanding and Interpreting the PPF
The PPF drives home the idea that opportunity costs normally come up when an economic organization with
limited resources must decide between two alternatives. The PPF is depicted graphically as an arc, with one
commodity on the X axis and the other commodity on the Y access. At each point on the arc, there is an
efficient number of the two commodities that can be produced with available resources. Therefore, it's up to the
organization to look at the PPF and decide what number of each commodity should be produced to maximize
the overall benefit to the economy.
If, for example, a government organization is deciding between the production mix of textbooks and computers,
and it can produce either 40 textbooks and 7 computers or 70 text books and 3 computers, it's up to that
organization to determine what it needs more. In this example, the opportunity cost of producing an additional
30 textbooks is 4 computers.
Understanding the Pareto Efficiency
The Pareto Efficiency is a concept named after Italian economist Vilfredo Pareto that measures the efficiency
of the commodity allocation on the PPF. The Pareto Efficiency states that any point within the PPF curve is
considered inefficient because the total output of commodities is below the output capacity. Conversely, any
point outside the PPF curve is considered to be impossible because it represents a mix of commodities that will
take more resources to produce than can be obtained.

Therefore, any mix of two commodities, given limited resources, is only efficient when it lies on the PPF curve,
with one commodity on the X axis and one commodity on the Y axis. Achieving the Pareto Efficiency means
that an economy is operating at maximum potential and lies directly on the PPF.
his poster identifies six basic principles of economics. Students who understand these principles will have a much
better ability to understand the economic and financial world around them, making them better savers, investors,
producers, consumers, and voting citizens.
These basic principles apply to all aspects of economics; however, it is important to show your students the specific
ways they apply to financial literacy and personal economics. Two examples are listed for each basic principle.
Ideas & Standards
Because of Scarcity, People Choose: Economists emphasize that we live in a world of scarcity. By this, they
mean that there are never enough productive resources to provide all the goods and services that people want. The
result is that people must constantly choose among competing alternatives. (This concept is the basis for the oft-
repeated phrase, “There's no such thing as a free lunch!” The idea is that no scarce good or service is ever really
free — someone has to give up something to get it.)
 People must decide whether to spend or save their scarce income.
 Savers must choose between various saving and investing opportunities.
All Choices Have an Opportunity Cost: Every time an investor, saver, consumer, or producer makes a decision,
there is an alternative course of action that could be taken. Economists refer to the best-forgone alternative as the
opportunity cost of a decision. It is very important that students recognize the importance of considering the
opportunity cost when making a decision.
 People decide whether to spend or save their after-taxincome. A person who chooses to save $100 gives up
goods and services now as the opportunity cost of the decision to save.
 The opportunity cost of choosing to put money into a bank savings account instead of purchasing a long-term
government bond is accepting less interest income.
People Respond to Incentives in Predictable Ways: An incentive is something—either positive or negative—that
influences the choices that a person makes. When incentives change, people's actions also change, usually in very
predictable ways.
 When real interest rates rise, there is an incentive to save more and consume less.
 If other things do not change, when the prices of stocks or bonds fall, people will buy more; when the prices rise,
people will buy less.
Market Forces and Economic Systems Influence Choices: People make financial decisions in the context of an
economic system. The type of economic system (market, command, traditional, or some combination) will have a
significant impact on the decisions people make. For example, in a market system, changing prices help guide
decisions, such as where people invest their savings or what type of insurance they purchase.
 The different wages and salaries of certain occupations (e.g. doctor, teacher, store clerk), which are influenced to
a significant degree by supply and demand in the market for human resources, will have an effect on whether or
not a person decides to enter a certain field.
 In a strict command economy, where most property is owned and controlled by the government (e.g. North Korea),
most people do not have the choice to invest in a stock market.
People’s Choices Have Intended and Unintended Consequences Which Lie in the Future:Economists believe
that the costs and benefits of decisions appear in the future since it is only the future that we can influence.
However, sometimes people’s choices can have unintended consequences.
 A person’s choice to become a doctor will have intended consequences – many years of advanced school and
training, hard work, but probably a higher income.
 A government may try to help consumers by putting a cap on gasoline prices; however, this will probably lead to
the unintended consequences of long lines at the pump, black markets, and lots of irritation.
People Gain When They Trade Voluntarily: People do not produce all the goods and services they consume.
Instead, they produce a narrower range of goods and services and then trade (exchange) with others to help satisfy
their economic wants. Both parties expect to benefit from a voluntary trade; there are no “winners” and “losers.” This
is why both buyers and sellers often say “Thank you!” after a purchase.

 When a person agrees to work for a company, the company benefits from the work the person provide s and the
person then benefits from the wage or salary received.
 When a person purchases a shirt, both the shirt producer and the person making the purchase benefit from this
exchange.
Principlesof Economics
Economics deals with people and is a reflection of how they interact with each other as they go about making
decisions regarding their lives. We study economics by observing the principles of decision making of the individuals
who make up the economy, how they interact with one another and how the economy as a whole works.
PRINCIPLES OF DECISION MAKING
HOW PEOPLE INTERACT
HOW THE ECONOMY AS A WHOLE WORKS
I. Principles of Decision Making
There are four economic principles of individual decision making:
1. People Make Tradeoffs
Economic goods and services are limited, while the need to use services of these goods and services seem limitless.
There are simply not enough goods and services to satisfy even a small fraction of everyone's consumption desires.
Thus, societies must decide how to use these limited resources and distribute them among different people. This
means, to get one thing that we like, we usually have to give up another thing that we also like. Making decision
requires trading off one goal against another.
Consider a society that decides to spend more on national defense to protect its shores from foreign aggressors: the
more the society spends on the national defense, the less it can spend on personal goods to raise its standard of living
at home. Or consider the trade-off between a clean air environment and a high level of income. Laws that require firms
to reduce pollution have the cost of reducing the incomes of the firm's owners, workers, and customers, while pollution
regulations give the society the benefit of a cleaner environment and the improved health that comes with it.
Another trade off society faces is between efficiency and equity. Efficiency deals with a society's ability to get the most
effective use o its resources in satisfying people's wants and needs. Equity denotes the fair distribution of benefits of
those resources among society's members.
2. When People Choose One Thing They Give Up Something Else
Scarcity of economic resources forces people to make tradeoffs. That is, people must always consider how to spend
their own limited incomes or time because resources are limited to satisfy their unlimited needs and wants. Tradeoffs
or choosing a one thing means giving up something else. When we give up an item, we lose the benefits of its
services to us or incur costs to obtain the benefits of the thing we decided to choose. Thus, making decisions requires
comparing the costs and benefits of alternative courses of action. In economics, the term used to reflect whatever
must be given up to obtain some item is called opportunity cost.
3. Rational People Think at the Margin
In many situations, decisions in life are made in small incremental or decremental adjustments to the existing plan of
action or status quo. Economists call these marginal changes. Imagine a student who is pondering whether she should
add one more course next semester. She, as a rational decision-maker, will add the extra course as long as her
marginal benefits from carrying one more course exceeds her expected marginal costs. Generally speaking, an
individual can make better decisions by thinking at the margin. Likewise, a rational decision-maker takes an action if
and only if the marginal benefit of the action exceeds the marginal cost.
4. People Respond to Incentive
Since individuals make decisions by comparing costs or benefits, their behavior may change when the costs or
benefits change. That is, people respond to incentives. As an example of this, consider public policy toward seat belts
and auto safety. In the 1960s, Ralph Nader's book (Mr. Nader is a well-known personality as an advocate for a
consumer's interest and a Green Party presidential candidate in 2000 ) Unsafe at Any Speed influenced the Congress
to pass a legislation requiring car companies to make seat belts standard equipment on all cars. The direct effect of
this law is to save lives. It is this direct impact that motivated Congress to require seat belts.

II. HOW PEOPLE INTERACT
It is so obvious that individuals' decisions affect not only themselves but other people as well. The following th ree
principles state how people interact with one another.
5. Trade Can Make Everyone Better Off
Consider a situation in which a family isolates itself from all other families. That particular
family would need to grow its own food, make its own clothes, and build its own home. Clearly
any family gains much from its ability to trade with others. Trade allows each person to
specialize in the activities he or she does best, whether it is farming, sewing, or home building.
By trading with others, people can buy a greater variety of goods and services at lower cost.
Just as a family would not be better off isolating itself from all other families, a country too would not be better off if i t
does not exchange goods and services with the rest of nations. Trade allows countries to specialize in what they do
best and to enjoy a greater variety of goods and services.
6. Markets Are Usually a Good Way to Organize Economic Activity
The market possesses the power of resource allocation. Most nations of the world have adopted the use of the market
power as a tool for allocating resources rather than other alternatives such as central planning. This is because the
market allocates resources through the decentralized decisions of many firms and households as they intera ct in
markets for goods and services.
Under a market economy, firms decide whom to hire and what to make. Households decide which firms to work for
and what to buy with their incomes. These firms and households interact in the marketplace, where prices guide their
decisions. Prices reflect both the values of a good to society and the cost to society of making the good. Because
households and firms look at prices when deciding what to buy and sell, prices guide these individual decision makers
to reach outcomes that, in many cases, promote general economic well-being by allocating resources efficiently.
In a centrally planned economy, for example, prices are not determined in the marketplace, but are gauged by central
planners. Central planners, however, lack the information that effectively reflects either the value of a good to the
society or the cost of the good to the society that gets reflected in prices under market forces. Thus, the pricing
mechanism under a central planning system does not take into account the social benefits and costs when exchanging
goods and services. As a result, resources are not effectively allocated in a way that maximizes the welfare of society
as a whole.
7. Governments Can Improve Market Outcomes
Markets cannot effectively respond to some key societal questions, such as how to protect our precious environment
for future generations, or how much of our resources should be devoted to educating the young, or how to correct the
extreme imbalances and the unfair sharing of national wealth that exists between the rich and the poor, or how to
reduce unemployment in a deep recession.
Due to what is known as market failure, which are the characteristics of the free market system, some times the
market on its own fails to allocate resources efficiently. Under these circumstances, intervention by a government into
the economy becomes both a desirable and an inevitable outcome. Consider three situations of market failures:
externality, market power and unequal distribution of income. A government in a market economy can promote
efficiency and equity eliminating problems unresolved or caused by market failure.
An externality is an activity that affects others for better or worse, without those others paying or being compensated
for the activity. It exists when private costs or benefits do not equal social costs or benefits. The unregulated market
may produce too much air pollution and too little investment in public health or knowledge. Government may use its
influence to control harmful externalities. For example, if a chemical factory does not bear the entire cost of smoke it
emits, the government can raise economic well-being through environmental regulation. Or it can subsidize activities
that are socially beneficial such as education or prenatal care.

The second example of market failure, a market power, reflects the degree of control that a firm or group of firms has
over the price and production decisions in an industry. When monopolies or oligopolies, for example, collude to reduce
rivalry or drive firms out business, government may apply antitrust policies or regulations to enhance economic
efficiency.
The last example refers to the manner in which the total wealth of a nation and income is unfairly and unequally
distributed among individuals. Even when a market works to maintain efficiency, it does not ensure that everyone has
sufficient food, decent clothing, and adequate health care. People end up being rich or poor depending on their
inherited wealth, or on their talents and efforts, and on their gender or the color of their skin. The government can
achieve a more equitable distribution of economic well being through public policies, such as the income tax and the
welfare system.
III. How the Economy Works
All the decisions that are made by individuals and the interactions they make with one another together make up "the
economy". The last three principles reflect the workings of the economy as a whole.
8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
The differences in the living standards around the world are astounding. People in countries with the lowest average
incomes earn only about one-twentieth as much as people in high-income countries. The average life expectancy is
four-fifths that of the average person in an advanced country. Birth rates are high, particularly for the families where
women receive no education, but mortality rates are also much higher there than in countries with good health -care
systems. A typical works with but one-sixtieth the horsepower of a prosperous industrialized worker. The people in the
40 poorest countries constitute 55 percent of the world population but must divide among each other only 4 percent of
the world income.
What explains these large differences in living standards among countries and over time? Almost all variation in living
standards is attributable to differences in countries' productivity. Broadly defined, productivity is the quantity of goods
and services produced from each hour of a worker's time. In nations where workers can produce large quantities of
goods and services per unit of time, most people enjoy a high standard of living; in nations where workers are less
productive, most people must endure a more meager existence. Similarity, the growth rate of a nation's productivity
determines the growth rate of average income.
The relationship between productivity and living standard also has profound implications for public policy. To boost
living standards, policymakers need to raise productivity by ensuring that workers are well educated, have the tools
needed to produce goods and services, and have access to the available technology.
The relationship between productivity and living standard also has profound implications for public policy. To boost
living standards, policymakers need to raise productivity by ensuring that workers are well educated, have the tools
needed to produce goods and services, and have access to the available technology.
9. Price Rise when the Government Prints Too Much Money
When an average price increases consistently for a long period of time in the economy, it causes an inflationary
condition. Average price increases in the economy are mainly affected by growth in the quantity of money in the long
run situation. Therefore, inflation is associated with rapid growth in the quantity of money in the long run
circumstances.
10. Society Faces a Short-Run Tradeoff between Inflation and Unemployment
The tradeoff between inflation and unemployment is called the Phillips curve, after the economist who first examined
this relationship.
The tradeoff arises because in the short run, prices respond to the quantity of money changes very slowly. Suppose,
for example, that the government reduces the quantity of money in the economy. All prices will not be reduced
immediately as a result of this change for many reasons. It may take several years before all firms issue new catalogs
or all unions make wage concessions. That is prices are said to be sticky in the short run. On the other hand, when the
government reduces the quantity of money in the economy, it reduces the amount that people spend. Lower spending,
together with prices that are stuck too high, reduce the quantity of goods and services that firms sell. Lower sales, in
turn, cause firms to lay off workers. Thus, the reduction in the quantity of money raises unemployment in the short run
until prices have fully adjusted to the change.

Policymakers can exploit this tradeoff using various policy instruments. For example, by changing the the amount it
spends, the amount it taxes, and the amount of money it prints, Policymakers can influence the combination of
inflation and unemployment the economy experiences.
DUTERTESONA
In his first State of the Nation Address (SONA) delivered this afternoon, President Rodrigo Roa Duterte laid
down measures his administration plans to implement to push the economy forward, even as he continued to
focus on his campaign against drugs and lawlessness.
He reiterated the need for reforms to ensure competitiveness and promote ease of doing business so that the
country will attract investments in manufacturing, agriculture and tourism that will generate jobs, especially for
the poor and unskilled members of the work force.
He mentioned the need to promote entrepreneurship opportunities in rural neighborhoods, where employment
is not an option.
Other parts of his speech that had to do with the economic agenda include:
Investing in human capital to ensure equal access to economic opportunities.
Retaining the sound macro fundamentals already laid in place.
Addressing the bottlenecks in business registration and processing, streamlining investment applications
process, and integrating the services of various government offices.
Out-of-the box financing packages to capacitate small and medium entrepreneurs.
Construction of more access roads and tourism gateways to service centers and tourist sites, to promote the
tourism industry.
Providing modern agriculture infrastructure, including constructing and improving roads and irrigation,
establishing modern harvest and post-harvest facilities.
Conducting a nationwide soil analysis to determine areas most suitable for rice farming to optimize production
with the use of effective soil rehabilitation and fertilization.
Strict enforcement of fisheries laws, particularly on illegal fishing
Promotion of aquaculture along riverbanks and in backyards.
Tax reforms aimed at reducing personal and corporate taxes.
Speeding up Internet in the country and provision of free wifi access in selected public areas.
Accelerating infrastructure spending by improving national roads and bridges and implementing the Mindanao
Logistics Infrastructure Network and other road network master plans.
President Duterte also underscored the need to enforce the Responsible Parenthood and Reproductive Health
Law so that couples will have freedom of choice on number and spacing of children they can adequate care
and provide for, eventually making them productive members of the labor force.
Meanwhile, he promised clean governance. “This government will be clean, 101 per cent clean.”
The President also announced a unilateral ceasefire with the CPP, NPA and NDF.
Other prominent features of the SONA: measures to ease the traffic situation in Metro Manila, relaxing the
bank secrecy laws, and a call for a federal system of government.
Duterte’s 10-point socioeconomic roadmap includes:
*Continuing and maintaining the current macroeconomic policies, including fiscal, monetary and trade policies
instituting progressive tax reform and more effective tax collection while indexing taxes to inflation, in line with
the plan to submit to Congress a tax reform package by September;
*Increasing competitiveness and the ease of doing business, drawing upon successful models used to attract
business to local cities such as Davao, as well as pursuing the relaxation of the Constitutional restrictions on
foreign ownership, except with regards land ownership, in order to attract foreign direct investments;
*Accelerating annual infrastructure spending to account for 5 percent of the gross domestic product, with
public-private partnerships playing a key role;
*Promoting rural and value chain development toward increasing agricultural and rural enterprise productivity
and rural tourism;
*Ensuring security of land tenure to encourage investments and address bottlenecks in land management and
titling agencies;
*Investing in human capital development, including health and education systems, as well as matching skills
and training to meet the demands of businesses and the private sector;
*Promoting science, technology and the creative arts to enhance innovation and creative capacity towards self-
sustaining and inclusive development;
*Improving social protection programs, including the government’s conditional cash transfer program, in order
to protect the poor against instability and economic shocks; and
*Strengthening the implementation of the Responsible Parenthood and Reproductive Health Law to enable,
especially, poor couples to make informed choices on financial and family planning.

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