ELE EIT Prelims

economics

• study of how people use their limited resources to fulfill our unlimited wants and needs

• a social science essential for managing scarce resources

economists

they study the choices we make and also the consequences of these choices

malthus theory

revolves around the idea that population tends to grow faster than the ability of a society to provide enough resources to sustain said population

circular flow

helps us understand how different components of the economy are interconnected in a continuous flow of economic activity

positive economic analysis

• describes what exist and how things work

• ex: taxes provide government service to the people

normative economic analysis

• looks at the outcome of economic behavior through judgments and perceptions of courses of action

• ex: the government should raise the minimum wage

microeconomics

examines how individual consumers make choices, how businesses decide on prices and production levels, and how markets function at a smaller, more detailed level

macroeconomics

• deals with issues on a national or global scale

• studies the aggregate behavior of the entire economy

economic resources

• sometimes called factors of production

• used in the production of goods (tangible) and services (intangible)

limited resources

there are not enough resources to produce all the goods and services that consumers want

land

• natural resource

• refers to everything on earth that is in its natural state

• free gifts of nature

labor

• human resource

• refers to all the people who work in the economy

• any human effort (manual or mental)

capital

• man-made resource

• includes money needed to start and operate a business

• used to produce goods or services

enterprise

• intellectual resource

• refers to the skills of people who are willing to risk their time and money to run a business

unlimited wants

individuals, businesses, and governments always want more; their wants are insatiable

asset

resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit

liability

• something a person or company owes, usually a sum of money

• settled over time through the transfer of economic benefits

consumer needs

those things necessary to human survival; things we cannot live without

consumer wants

goods or services desired by the consumer; ‘pag nagiging excessive na

investment

when capital good are bought and helps businesses make more or better products in the long run

alpha minds

another term for talented entrepreneurs

industrial capital

used by firms (ex: factories, offices, plant and machinery, tools, etc.)

social capital

belongs to the whole community (ex: schools, hospitals, roads)

private capital

belongs to individuals (ex: houses)

financial capital

money waiting to be used to buy capital goods

renewable resources

quickly replenished by natural processes

non-renewable resources

not replaced naturally

scarcity

• the difference between wants and needs and available resources

• economic resources are limited compared to wants which are unlimited

• a universal problem; always exists and cannot be eliminated, only reduced

rational choices

• uses the available resources to most effectively satisfy the wants of the person making the choice

• making a decision that does not make you worse off → the highest-valued alternative forgone

choice

• because of scarcity, we cannot fulfill all our wants and must choose from the available alternatives

• necessary because resources can be used in lots of ways to make different goods and services

individuals [choice]

• must choose what to buy out of their limited incomes

• consumers decide how to spend their income in a way which gives them the greatest level of satisfaction

producers [choice]

• must choose what to produce with their limited resources

• motivated by the desire to maximize profit

governments [choices]

• must choose what services to provide out of their limited tax revenues

• spending tax revenue in a way that they think will maximize society welfare

opportunity cost

• it is a direct result of scarcity and occurs every time a choice is made

• every choices involves a sacrifice or trade-off

• cost of giving up an alternative by selecting the next best choice

trade-off

• often expressed as opportunity cost

• a sacrifice that must be made to obtain a desired product or experience

• helps ensure that you are using your resources wisely

marginal benefit

benefit that a person receives from consuming one more unity of a good or service

marginal cost

opportunity cost of producing one more unit of a good or service

individual [opp. cost]

choosing a product is the next item on their scale of preference

firm [opp. cost]

producing a good is the next most profitable product which could have been produced with the resources used

government [opp. cost]

providing a service is the next best service which it could have provided with the resources used

econometrics

the application of statistical and mathematical theories to economics for the purpose of testing hypotheses and forecasting future trends

adam smith

father of economics

economic systems

characterized by the type of institutions responsible for the management and allocation of resources used in the production of goods and services

• what to produce? → choosing the mix of goods and services

• how to produce? → who will do the production and which method will be used

• for whom to produce? → who will consume the goods and service

invisible hand

means what is produced, what quantity, and to what price

planned economic system (command)

• all decisions about resource allocation are made by the government or government-owned

• based on the principle of equity

• used to exist in communist countries of eastern europe

free economic system (market)

no government involvement in economic decisions (similar to laissez-faire)

private enterprise

resources are owned by private individuals

competition

exists between producers and between consumers

consumer sovereignty

consumers are the king and rule the market

price mechanism

price acts as a signal to producers. consumers buy particular goods and are, in effect, casting a vote.

traditional economic system

economy is shaped largely by custom or religion; they determine the who, what, and how

privatization

a common aspect of transition from a command economy to free enterprise system; means state-owned industries are sold to private individuals and companies

mixed economic system

• there is a private sector (households) and a public sector (government)

• most economies in the world practice this economic system

capitalism

trade and industry are controlled by private owners for profit, rather than the government

socialism

economic and political system based on the means of production

production possibilities frontier

it is the point at which the economy is most efficiently producing its good and services in a given time period, and therefore allocating its resources in the best way possible

ceteris paribus

• all things being equal or held constant

• isang variable lang ang cinoconsider; everything is constant except for one variable

inside the curve

inefficient combinations; not all resources are fully utilized or used in the best possible way

on the curve

efficient output combinations

outside the curbe

an output combination that is not yet attainable

economic growth

the ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve

comparative advantage

• ability of a person to perform an activity or produce a good or service at a lower opportunity cost than someone else

• a foundational principle in the theory of international trade

• looks at who’s better at doing something in relation to another activity

absolute advantage

• when one person is more productive than another person in several or even all activities

• looks at who's better at doing something overall

post hoc ergo propter hoc

a logical fallacy that assumes that because one event happened after another, the first event must have caused the second

fallacy of composition

states that what is true for a component is also true for the entire being

sweeping generalization fallacy

committed when a statement wraps up everything with no exemptions to the rule, as if making it a general statute