ANCIENT PERIOD

1. Plato (427 347)

Plato, a Greek Philosopher, was one of the most creative and influential
thinkers in Western Philosophy. Son of wealthy and influential Athenian
parents, he began his political career as a student of Socrates. When
Socrates died, Plato traveled to Egypt and Italy, and spent several years
advising the ruling family of Syracuse. Eventually, he returned to Athens and
established his own school of Philosophy at The Academy, where he tried to
pass on the heritage of a Socratic style of thinking and to guide their
progress through mathematical learning to the achievement of abstract
philosophical truth.
2. Aristotle (384 -322 B.C.)
Aristotle was born in the small Greek city Stageira, on the Northern Coast
of the Aegan Sea. At the age of 17, after the early death of his father, he was
sent to Athens, the intellectual center of the Greek World, where he stayed
for 20 years as a student of Plato and then as a teacher at Platos Academy.
Aristotle left Athens soon after Platos nephew as the new head of the
academy. Whether or not academic rivalry was a factor in this departure,
within a few years Aristotle had acquired a lucrative post in the royal court of
the Northern Greek Kingdom of Macedonia as a personal tutor to a thirteen
year old prince, the future Alexander the Great. Once Aristotle left his
position, he was able to use the monetary proceeds to return to Athens and
set up his own school, the Lyceum, as a rival to the Academy.
3. Xenophon (430 B.C. 354 B.C.)
Xenophon, a Greek historian and philosophical essayist, the son of Gryllus,
was born at Athens about 430 B.C.

MEDIEVAL PERIOD

1. Thomas Aquinas (1225 1274)

Thomas Aquinas was born in the Italian town of Aquino. He joined the
Dominican Order which along the Franciscan Order represented a
revolutionary challenge to the well-established clerical system of early
Medieval Europe. He taught first at the University of Paris.

CLASSICAL PERIOD

1. Adam Smith (1723-1790)

Adam Smith was born in Kirkcaldy, Fife, Scotland and was educated at the
universities of Glasgow and Oxford. Smith was Scottish political economist
and philosopher who became famous FOR HIS INFLUENCIAL BOOK, The
Wealth of Nations, written in 1776 and which is generally regarded as the
beginning of the classical period in the development of economic theory.
2. David Ricardo (1772-1823)
David Ricardo, a British economist, was born in London, the third among
the 17 children of a Dutch Jewish banker. He had little formal education
because he was forced to join his parents business at the age of 14.
3. John Stuart Mill (1806-1873)
John Stuart Mill, a British philosopher and political economist was born in
Pentonville, London and was educated entirely by his father, James Mill. From
his earliest years, he was subjected to a rigid system of intellectual
discipline.

NEO-CLASSICAL PERIOD

1. Willam Jevons (1835-1882)

An English economist and logican, Willam Jevons was born in Liverpool.
He expounded in his book The Theory of Political Economy (1871), the final
(marginal) utility theory of value.
2. Alfred Marshall (1842 -1941)
Founder of the Cambridge School of the Economics
3. Carl Menger (1840-1921)
Carl Menger was born in Galacia, a part of Austria-Hungary (Now
Southern Poland) on February 28, 1840. Carl studied economics at the
University of Prague and also in the university of Vienna from 1859-1863.
Menger became extremely interested in political economics and began
compiling essays that made up his influential writings, Principles, which

was published in 1871. Carl Menger considered as the father of Austrian

Economics. He has influenced Austrian and worldwide economic study in
many ways.

MODERN PERIOD

1. John Maynard Keynes

Keynes was the son of an economist, John Neville Keynes. He studied
Economics and Mathematics at Eton College and the University of
Cambridge. Keynes was the most influential as well as the most controversial
economist of the first half of the 20 th century. During the worldwide
depression in the 1930s, he argued that preservation of capitalism required
a greater economic role for governments, including large public work
programs financed by deficit spending.
2. Milton Friedman
Milton Friedman is the 20th centuries most prominent economist
advocate of free markets. His landmark work of 1957, A Theory of the
Consumption Function, took on the Keynesian view that individuals and
households adjust their expenditures on consumption to reflect their current
income. Friedman is popularly recognized for monetarism.
BASIC CONCEPTS IN ECONOMICS
Economics is the study of proper and efficient use of scarce resources
to produce commodities for the satisfaction of human wants. It is related to
other social sciences discipline such as Anthropology, Political Science,
Sociology, Psychology, and History for its deals with the individual and how
he interacts with a group.
Economics
is
divided
into
two
branches:
Microeconomics
and
Macroeconomics. Microeconomics deals with the behavior of individual
component. In contrast, macroeconomics deals with the behavior of
economy as a whole.
Other dichotomies of economics are: Normative economics and positive
economics. Normative economics involves ethics and value judgments. It
has something to do with what ought to be. On the other hand, positive
economics describes facts and data, and has something to do with what
is.
The three basic Economic Problems

The partial satisfaction of the material wants of an economys populace

entails three basic economic problems that should be answered every
economic system. That is reason why all systems, from primitive to advance,
face these three questions: What, How, For whom should these goods
and services be produced.
There is also the question on how to undertake the choosing of some
combination of labor, equipment, buildings, and land to produce the goods
and services people want. All these components of production are called
resources or production, which have an important role in answering the
three economic questions.
An economist divides all these resources into four categories called the
factors of production. They are 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
mean head. It refers to a 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 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.
An Economic System refers to a set of economic institutions that dominate
a given economy with the main objective of solving the basic economic
problems. The four economic systems or categories are traditional, is one
whose economic decisions are made with great influence from the past.
Command Economy, the factors of production and distribution are owned
by managed by the state. Market Economy, individual consumers and
businesses interact to solve the economic problem. Mixed Economy, the
private sector works through the market mechanism, and minor industries
such as production and distribution of candies or cigarettes belong to them.
One of the central concepts in economics is scarcity, a condition which all
resources are available only in limited supply. In the world of scarcity, every
decisions to have more of one good thing require a decision to have less of
something else, and in every decision, opportunity cost arises. The idea of
opportunity cost is one of the central insights of economics. The
opportunity cost of a decision measure what has been given up by taking

that decision rather that the best alternative decision. Another economic
term that we use in discussing opportunity cost is trade-off. It is a situation
in which more of one good thing can be obtained only by giving up some of
another good thing.
Demand refers to the number or amount of goods and services desired by
the consumers. The quantity demanded is the amount of goods or services
consumers are willing and able to buy/purchase at a given price, place, and
at a given period of time.
Law of demand
The law of demand states that as price increases, quantity demanded
decreases; and as prices decreases, quantity demanded increases, if other
factors remain constant.
Supply is defined as the maximum units/quantity of goods or services
producers can offer. The quantity supplied refers to the amount or quantity of
goods and services producers are willing and able to supply at given price, at
a given period of time.
Law of Supply
The law of supply states that as price increases, quantity supplied also
increases; and as price decreases, quantity supplied also decreases. This
means that the higher the price of a certain good and service, the higher the
quantity supplied. This is because producers tend to supply more at a higher
price because it could give them more profit.
Market Equilibrium
It is a state which implies a balance between the opposing forces, a situation
in which quantity demanded and quantity supplied are equal.
Elasticity measures the percentage change in one variable in relation to the
percentage change in another variable. Types of elasticity include price
elasticity, income elasticity and cross elasticity.
Price elasticity of demand measures the change in quantity demand that
occurs with respect to a percentage change in price. Its value ranges from
zero to infinity and is categorized depending upon the response of quantity
demanded to a change in price, that is D> or elastic, D< 1 or inelastic,

D=1

or unitary elastic,

D=

or perfectly elastic and

D=0

or

perfectly inelastic. Price elasticity involves percentage change and should

not be confused with the slope which depends solely on the absolute change.
The responsiveness on quantity demanded in response to a change in
income is referred to as income elasticity of demand. Its numerical
coefficient is defined as the percentage change in quantity demanded
divided by the percentage change in income. Products with positive income
elasticity are normal goods, and those with negative income elasticity are
inferior goods.
Price Elasticity of Supply measures the responsiveness of quantity
supplied in response to a percentage change in price.
The marginalist revolution in the 19 th century developed the concept of
utility. This concept facilitates the derivation of the demand curve. Utility or
satisfaction refers to a subjective pleasure that an individual can derive from
consuming a good or service. In economics, it explains how individuals
maximize their limited resources among the commodities that provide
satisfaction.
There are two ways to measure utility. These are cardinal ranking of
preferences and the ordinal ranking of preferences. In the cardinal ranking of
preferences, utility or satisfaction is measurable by attaching specific
number to each level, while ordinal ranking of preferences rank or order his
preferences.
The law of diminishing marginal utility states that when an individual
consume more units of commodity per unit of time, his total utility increase
reaches its maximum and starts to decrease. It means that as more goods
are consumed, the extra satisfaction or marginal utility received decreases.
Consumers equilibrium achieved when the ratio of marginal utility og Good
X to its price is equal to the ratio of marginal utility of Good Y to its price
subject to its income constraint.
There are three assumptions of rational
completeness, non-satiation, and transitivity.

preferences;

these

are

An indifference curve shows the different combinations of Good X and Good

Y which yield the same level of utility. It has three characteristics: negatively
sloped, convex to the origin, and indifference curves do not interest.

Consumers equilibrium is attained when there is a tangency between the

budget line and the indifference curve, or if the slope of the budget line is
equal to the slope of the indifference curve of the MRSxy.
Income consumption curve is a collection of consumers equilibrium
resulting from varying income. By changing the income while holding the
tastes and the prices of both Good X and Good Y constant, the Engel curve is
derived. Price consumption curve is drawn when there is a change in the
price of Good X, whereas price of Good Y and income are held constant.
Production is a process of combining two inputs to come up with an output.
Capital and labor are two important factors of production. The quantity of an
output will depend on the number of available resources.
Production function is a mathematical equation to find out the different
variables in computing or solving production function. In production function,
Q = f (K,L); where Q stands for output, K stands for capital, and L stands for
labor.
Production is classified into two: the short-run and the long-run analyses.
Short-run analysis is using one factor variable of production that cannot be
changed and employing fixed inputs, while the long-run analysis connotes
that all factors can be changed. To determine, the total cost of production,
total fixed costs and total variable costs are added. To determine the average
fixed costs, total fixed cost is divided by output, and to find the average
variable cost, total variable cost is also divided by output.
Production is divided into two types: production with one variable input and
production with the two variable inputs. Production with one variable
input is a mathematical computation in getting the total production (TP) by
using land and labor. In using labor we can solve the average production of
labor or APL, by means of dividing the TP by the number of labor. In getting
the marginal product of labor or MPL, just get the difference of the two
consecutive values of total product with its corresponding labor used.
Production with two variable inputs is a process of determining the
output by employing the two variable such as capital and labor. In this
process we can see the downward sloping curve which is commonly known
as isoquant. Another concept in employing two variables is the isocost.
Isocost is the combination of capital and labor which the producer employed
to come up with an output.

Production has three stages: Stage I shows the production starts at the
origin until the highest portion of APL; Stage II starts from the highest portion
of APL until the MPL reaches zero; and the Stage III of production begins at
MPL until it goes down to negative zero.
Economic costs are in tune with future costs that have major repercussions
on potential profitability of the firm. It gives emphasize on the cost that are
incurred by not putting the resources to optimum use. Whereas, accounting
costs are costs properly recorded on a journal or ledger.
Explicit costs refer to the actual expenses of the firm in purchasing or
having the inputs it needs while Implicit costs refer to the value of inputs
being owned by the firm and used in its production process.
Short- run is a time horizon during which one input is held constant. Shortrun costs include:
a. Total Cost. The sum of fixed cost and variable cost.
b. Fixed Cost. Cost that do not vary with output.
c. Variable Cost. Cost that vary with output.
d. Average Fixed Cost. Total fixed cost divided by the number of output
produced;
e. Average Variable Cost. Total variable cost divided by the number of
output produced
f. average Total cost. Total Costs divided by the number of output
produce
g. Marginal Cost. It refers to changes in total costs divided by the
change in output produced
Long-run is a time horizon wherein all fixed factors can be variable.
Long-run average total cost of producing a given level of output is always
the lowest point of the short-run average total cost of producing that output.
The long-run marginal cost measures the change in long-run total cost
from a given change in output.
Business profit refers to the difference between total revenue and
explicit cost,
while economic cost refers to the difference between total
revenue and both
explicit and implicit costs.

The Gross National Income (GNI) is a comprehensive measure of nations

production of goods and services. It is the sum of market value of all the final
goods and services produced by the citizens in a given period of time.
Strictly defined, it is the sum of the money value of consumption,
investment, government purchases of goods and services, and net exports.
Gross National Income should not be confused with National Income.
The latter refers to the sum of all factor payments. To proceed from
National Income to
GNP, indirect taxes should be added less subsidies
and depreciation allowance.
Similarly, Gross National Income should not be confused with Gross
Domestic Product (GDP). The distinction rests on differences in counting
production by
foreigners in a country and by the citizens outside of a
country. Gross Domestic
Product is the some of the market value of all
final goods and services produced within a country.
Gross National Income is categorized in to nominal GNI and real GNI.
Nominal
GNI is the sum of all goods and services at a current price while
real GNI is the
sum of all goods and services at a constant price using a
specified base year.
Nominal GNI can be deflated to arrive into real GNI
through the use of Price
Index or GNI deflator.
GNI is measured through several approaches: expenditure approach
reflects the sum of all components of GNI. These components include
household or personal expenditure, investment, government purchase of
goods and services and net exports. Industrial origin approach sum up all
the industrys contribution to the countrys income.
Consumption refers to using up of resources. In Keynesian economics, it is
theshort-hand for personal consumption expenditure it is determined by
consumption function.
Consumption function shows the relationship between consumption level
and household disposable income. The 45 degrees line signifies that at using
point on this, consumption equals income.
Determinants of consumption include: income, wealth, price level, consumer
expectation, and interest rate.
The Marginal Propensity to Consume (MPC) explains how consumption
can change. MPC is the percentage change of the additional disposable
income that is consumed. Geometrically defined, MPC is the numerical

measure of the slope of the consumption function that measures the change
in consumption per peso change in disposable income. Average Propensity to
Consume (APC) refers to the proportion of income that is consumed.
Part of income which is not consumed is saving. Marginal Propensity to
Save (MPS) is the fraction of disposable income that is saved. Average
Propensity to Save (APS) is the proportion of income that is saved.
The sum of MPC and MPS is always 1. This is because the fraction of
any income
that is not consumed is saved. Like MPC and MPS the sum
of APC and APS is
also 1, because disposable income itself is devoted
to either consumption or
saving. Then, it follows that the two ratios, if
we are going to add, the answer is 1.
The multiplier principle status in autonomous spending will cause GNI
to increase by a multiple of the initial increase.
John Maynard Keynes rejected the theory of classical economics that
there will be an automatic adjustment in the economy when there is
deviation in the economy from full employment. Keynes added that the
government should
intervene in the economy by spending more to
induce the income and spending
of the people.
Consumption has a positive relationship with income; consumption
spending increases as income increases. Consumption depends on other
things aside from
income, and these are wealth, price level, consumer
expectations, and interest
rate.
The additional of gross investment (also known as planned investment) to
the model induces the equilibrium GDP. However, the level of gross
investment is dependent on expected rate of return of the project against
other uses of funds, or when the expected return exceeds the opportunity
cost of investing the capital, which is the market rate of the interest.
Government spending is first introduced in the model without the imposition
of a lump-sum tax; an increased in the level of government spending
augments the equilibrium GDP. But when a lump-sum tax is imposed,
consumption, savings and GDP decrease.
A positive net export increases the equilibrium GDP and a negative net
export reduces the equilibrium level GDP. Exports depends on there factors:
1. Income of other countries 2. Trading restrictions, and exchange rate.

Inflationary gap is the excess of the amount of aggregate expenditures at

the full employment GDP over those necessary to realize full employment. A
recessionary gap exists when aggregate expenditures at full employment
GDP is less than the required level to attain the full employment GDP, or
when the aggregate expenditures fall below the 45 degrees line.
Business cycle is the fluctuation in overall economic activity, characterized
by the simultaneous expansion on contraction of output. In most sectors
phases of business cycle include: peak, recession, trough and expansion.
Selected theories that cause business cycle are as follows: sunspot theory,
innovation theory and self-generating theory.
Unemployment is a condition of people who are able and willing to work
but cannot find jobs. Types of unavoidable unemployment include frictional
unemployment, structural unemployment, and cyclical unemployment. Full
employment does not mean that unemployment is zero rather it is
unavoidable unemployment if cyclical unemployment is zero.
Inflation is a sustained increase in the average price level. Demand full
inflation and cost push and supply shock inflation are among the causes of
inflation. Losers of inflation include holders of securities, pension holders,
and fixed income earners while winners of employment include windfall to
fixed asset owners and producers.
Deflation refers to a sustained decrease in the average price level.
Hyperinflation refers to a period of extremely high inflation. Stagflation
means that the economy is experiencing increasing inflation and
unemployment at the same time.
Arthur Okun develop the relationship between GDP and unemployment
known as Okuns Law.
Phillips
curve
unemployment.

shows

the

relationship

between

inflation

and

Mercantilism was the prevailing idea from the 16th up to the 18th century in
England. Thomas Munn, who was the most influential mercantilist, argued
that for a country to become powerful there should be an intensification of
exports while reducing the importation of goods from other countries.
There are four types of trade restrictions: Tarrif, Quota, Government
regulations and Exchange control. These restrictions are needed by

developing nations to protect themselves from the exploitative tendencies of

developed nations.
Foreign exchange market is the organizational framework wherein
individuals, business, and banks buy and sell foreign exchange.
Foreign exchange rate is the price of the domestic currency (Philippine
peso) versus other currencies.
There are two types of exchange rates: the floating exchange rate and the
fixed exchange rate. Floating exchange rate is market driven,
determined by the interaction of the demand for dollars and the supply for
dollars. On the other hand, in the fixed exchange rate, the CB allows the
exchange rate to move within a range values, and permits that rate to
fluctuate in that range.
Under manage float, the BSP will intervene in the market to smooth out
short-run fluctuation in the foreign exchange market without affecting longrun movement of exchange rate. While in the dirty float, a country will
artificially keep their currency low to induce exports.
The determination of the equilibrium price (which is the exchange rate) is the
interaction of the demand and supply for foreign currencies such as the
dollars, and there are forces that lie behind the demand and supply curves.
Within the foreign exchange market, people buy moneys for various reasons
such as trading of goods and services, or people engage in financial
transitions of buying and selling assets in which they need to convert from
one currency to another.
Monetary policy is the deliberate control of money supply and in some
cases, credits conditions for the purpose of achieving macroeconomic goals.
Monetary policy has three targets to achieve the inflation rate on GNI growth.
These are: monetary aggregate, interest rates and inflation trading.
Banko Sentral ng Pilipinas (BSP) is the central monetary authority which
provides policy direction in the areas of money, credit and banking.
The monetary tools of Centarl Bank of the Philippines include: open market
operations, reserve requirements, discount rate, moral suasion, buying and
selling of foreign exchange and selective audit.
Fiscal policy refers to the government actions that affect total government
spending activities, tax rates, and revenues. It is an instrument which can

push the economy towards equilibrium, when there are destabilizing

elements operating in the economy. Two types of fiscal policy are automatic
stabilizers and discretionary fiscal policies. Components of fiscal policy
include: taxation, government borrowing, and government spending. Fiscal
policy has traditionally been assigned with three major functions, as follows:
allocational function, distributional function, and stabilization function.

Prepared by:
Mikee F. Quiambao