Ten Principles of Economics Module 2 Economics Economics is the study of how society manages its scarce resources. or the study of how society meets its unlimited wants and needs with its limited resources. Scarcity Economic resources Land Labor The fact that there is a limited amount of resources to satisfy unlimited wants Things that are inputs to production of goods and services. There are four economic resources: land, labor, capital, and technology. Technology is sometimes referred to as entrepreneurship. Natural resources that are used in the production of goods and services. Some examples of land are lumber, raw materials, fish, soil, minerals, and energy resources. Work effort used in the production of goods and services. Some examples are the number of workers and number of hours worked. Capital Technology Physical goods that are produced and used to produce other goods. Examples of capital would be machinery, technology, and tools such as computers; hammers; factories; robots; trucks, and trains used to transport goods; and other equipment employed in the production of a good or service. (sometimes called entrepreneurship) The ability to combine the other productive resources into goods and services How People Make Decisions 1. People face tradeoffs. “There is no such thing as a free lunch!” Everything includes tradeoff • Studying in Lyceum means you gave up the chance in studying in other university’s and vice versa. • Having more money to buy stuff requires working longer hours, which leaves less time for leisure. • Protecting the environment requires resources that could otherwise be used to produce consumer goods. The trade off in society • Efficiency – When society gets the most from its scarce resources • Equality – When prosperity is distributed uniformly among society’s members. • Tradeoff: To achieve greater equality, society could distribute the resources evenly with everyone, but this reduces incentive to work and produce. 2. The cost of something is what you give up to get it. The opportunity cost of an item is the next best alternative choice that you give up to obtain that item. • Making decisions requires comparing the costs and benefits of alternative choices. • The opportunity cost of an item is what you have given up to obtain it. • This theory is a relevant cost in the decision making process. Opportunity cost • The opportunity cost of working abroad is the time of your life that you spend away from your family to be able to earn bigger to satisfy their needs and wants. • The opportunity cost of going to college is time away with friends and endless party, instead, you are studying to get yourself a degree. 3. Rational people think at the margin. People make decisions by comparing costs and benefits at the margin. Marginal changes are small, incremental adjustments to an existing plan of action. Rational people • Systematically and purposefully do the best that they can to achieve their objectives. • Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan Examples • When an individual pursue further studies (Masters or PhD) he/she will compare the fees it will incur versus the benefits he will get from getting a further degree. • When an Industrial Engineer is planning to increase the output, he/she will compare the marginal cost versus the marginal revenue. 4. People respond to incentives. LA Laker basketball star Kobe Bryant chose to skip college and go straight to the NBA from high school when offered a $10 million contract. Module 2: Learning Activity 1 You are now selling your old Huawei Laptop. You have already spent P10,000 to upgrade it. At the last minute, the hard drive dies. You can pay P6,000 to have it repaired, or sell the laptop “as is.” In the scenario below, will you opt to have the hard drive repair? a. Selling price is P25,000 if the drive works and P17,000 if it doesn’t. b. Selling price is P20,000 of the drive works and P15,000 if it doesn’t. Answer Cost of fixing the hard drive = P6,000 a. Selling price of P25,000 if the drive works, and P17,000 if it doesn’t. Benefit of replacing the hard drive = P8,000 (P25,000 – P17,000). Thus, get a new hard drive. Answer Cost of fixing the hard drive = P6,000 b. Selling price is P20,000 if the drive works and P15,000 if it doesn’t. Benefit of replacing the hard drive = P5,000 (P20,000 – P15,000). Thus, sell it “as is.” Observations The P10,000 you previously spent on upgrade is actually irrelevant. What matters is the cost and benefit of the marginal repair. b. The change of “incentive” from scenario a to b caused your decisions to change. How People Interact 5. Trade can make everyone better off. Trade allows people to specialize in what they do best. Trade increases the variety of goods and services available. Trade lowers costs for consumers • Rather than being self sufficient, people can specialize in producing one good or service and exchange it for the other goods. • Countries also specialization: benefit from trade and Get a better price abroad for goods they produce. Buy other goods more cheaply than abroad than could be produced at home. 6. Markets are usually a good way to organize economic activity. In a market economy, households freely decide what to buy and who to work for and firms freely decide who to hire and what to produce. Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” • Market - Group of buyers and sellers which doesn’t have to be in a single location. • Organizing an economic activity means: What goods to produce How to produce them How much of each to produce Who gets them 7. Governments can sometimes improve market outcomes. When the market fails, government can intervene to promote efficiency and equity. Market failure occurs when the market fails to allocate resources efficiently. • Market Failure – When the market fails to allocate society’s resources efficiently. • Causes of market failure Externalities – When the production of consumption of a good affects bystanders (example – pollution) Market Power – A single buyer or seller has substantial influence on market price How the Economy as a Whole Works 8. A country’s standard of living depends on its ability to produce goods & services. Standard of living may be measured in different ways: By comparing personal incomes. By comparing the total market value of a nation’s production. Therefore, how much each worker can produce per hour of work determines overall living standards within a nation. 9. Prices rise when the government prints too much money. Inflation is an increase in the overall level of prices in the economy. • The more money there is available within an economy, the more people are willing to pay for goods and services (inflation), therefore each PESO is buying less and less. 10. Society faces a short-run tradeoff between inflation and unemployment. The Phillips Curve illustrates the tradeoff between inflation and unemployment: Lower prices are the result of high unemployment and Higher prices are the result of low unemployment.
