Foundations and Methodologies of Economic Theory

The Principles of Economic Decision-Making and Opportunity Cost

Economic decision-making is fundamentally characterized as the result of weighing benefits against costs or trade-offs. This is formally known as the principle of Opportunity Cost. This process involves evaluating the advantages (kapakinabangan) and the associated payments or replacements (kabayaran o kapalit) for every action or step a person takes. It is important to note that value is not always immediately apparent and the concept of cost or value is not always strictly tied to monetary currency.

A practical example of this principle is the decision regarding whether to pursue a college education. A student may choose to continue their studies in college even though they have the immediate option to enter the workforce and earn a living right after graduating from senior high school. In this scenario, the student weighs the long-term benefits of a degree against the immediate financial gain of employment, acknowledging the opportunity cost of the wages foregone during the years of study.

Branches of Economics: Microeconomics and Macroeconomics

Economics is divided into two primary branches that analyze different scales of economic activity. The first branch is Microeconomics, which is the study of the behaviors and actions of small, individual units within the economy. This includes consumers, producers, and specific markets. Microeconomics delves into concepts such as demand, supply, and the business operations of individual actors within various different market structures.

The second branch is Macroeconomics, which examines the economy in its entirety as a whole system. Its scope covers studies at the national level, specifically focusing on employment rates, the movement of prices (inflation), and the various policies or regulations implemented by the government to manage the national financial landscape.

Major Figures in the History of Economic Thought

Several key economists have shaped the foundations of modern economic theory. Adam Smith is widely recognized as the Father of Economics and the Father of Capitalism. He authored the seminal book titled "An Inquiry to the Nature and Causes of the Wealth of Nations" and is famous for introducing the concept of the "Invisible Hand." Additionally, he wrote "The Theory of Moral Sentiments" in $1759$ and "The Wealth of Nations" in $1776$.

John Maynard Keynes is celebrated as the Father of Macroeconomics. He is the author of "The General Theory of Employment, Interest, and Money." His work introduced the Keynesian model and the concept of disequilibrium economics, focusing on how government intervention can stabilize an economy.

David Ricardo was a British political economist known for his Theory of Comparative Advantage, which explains how countries can benefit from trade by specializing in goods where they have a lower opportunity cost. David Hume, a Scottish philosopher and economist, focused on the significance of external or foreign trade as a bridge to overall economic development.

Milton Friedman was an American economist and statistician who was awarded the Nobel Memorial Prize in Economic Sciences in $1976$. He is well-known for his contributions to monetarism, price theory, the permanent income hypothesis, floating exchange rates, and applied macroeconomics.

Karl Marx, a German philosopher and sociologist, authored "Das Kapital" and the "Communist Manifesto." His work expressed a profound dislike for capitalism and advocated for the expansion of communist principles. Thomas Malthus, a demographer and political economist, is known for the Malthusian growth model. Irving Fisher was an American political economist known for the Fisher Equation and the Fisher Separation theory.

Methodologies of Economic Analysis: Positive Economics

Positive Economics is a methodology in the study of economics that seeks to answer the question "What is?" (kung ano?). This approach presents economic events as they are, without providing suggestions, making value judgments, or offering criticisms. It is divided into two main categories: Descriptive Economics and Economic Theory.

Descriptive Economics is the method of providing simple descriptions and explanations of economic events. This often involves the use of statistics regarding the economic condition of a country. For example, the PSA (Philippine Statistics Authority), which is a bureau under NEDA (National Economic Development Authority), gathers data that describes the national economy. This data is used to assess whether the economy is progressing over time, providing a concrete basis for future planning.

Economic Theory is a technique that attempts to build generalizations, interpretations, or future plans based on gathered data and assumptions. While it may seem simple to state that as prices rise, consumers will buy less or stop buying altogether, there are times when price is not the primary factor in a purchase decision. To correct for this, all developed theories must be grounded in data, which serves as the basis for truths that can be accepted as generalizations for specific situations and time periods.

Normative Economics and Econometrics

Normative Economics refers to the analysis of the effects or outcomes of economic actions to evaluate them as right or wrong, or to determine if those outcomes can be improved. Unlike positive economics, it involves value judgments. Typical questions in this approach include: "Should the wages of skilled and non-skilled workers be equal?" or "Should the $4Ps$ (Conditional Cash Transfer or CCT) program be abolished?"

Econometrics is considered the newest approach to economic analysis. it involves the inclusion of mathematical and statistical methods to make economic analysis more concrete. Econometrics is a significant tool that helps clarify explanations within economic analysis. The following data points represent the type of statistical inclusion found in this field: $15;9$, $20;13$, $N/A;16$, $24;6$, $60;3$, $40;9$, $36;3$, and $30;41$.

Stages of Industrial Activity and Development

The development of industrial activity is categorized into specific stages. The Pre-industrial stage refers to the period before industrialization occurred, during which the economy did not yet utilize machinery for production. Industrialization itself is defined as the capability of an economy to create all of its own needs through developed production means.

Another specific economic state is the Subsistence level. In this state, the creation of necessary goods is performed by a family solely for the consumption and needs of that specific family, with no surplus intended for external trade or wider market distribution.