Topic: BASIC ECONOMIC ENVIRONMENT and CONCEPT 1. What is Economics?

Adam Smith, whose writings An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, formed the basis of classical economics, defined economics as the study of nature and causes of national wealth or simply as the study of wealth. Alfred Marshall, who depicted precise mathematical relationships between economic variables in his textbook Principles of Economics in 1890, defined economics as the study of man in the ordinary business of life. Arthur Cecil Pigou, developed the theory of welfare economics in his textbook The Economics of Welfare in 1919, defined economics as the study of economic welfare which can be brought, directly or indirectly, into relationship with the measuring-rod of money. Lionel Robbins, defined economics as the science which studies human behavior as a relation between ends and scarce means have other alternative uses. Collins dictionary of Economics defined economics as the study of the problems of using available factors of production as efficiently as possible so as to attain the maximum fulfillment of societys unlimited demands for goods and services. While the standpoints of well-known economists and professors of economics to the definition of the subject economics may vary, the main idea remained that in every human activity, in one way another is connected with either money or time or both. In its simplest definition, economics is the wise use both money and time. II. What is Money? Geoffrey Crowther who describes the major functions of money. According to him, money is anything that is generally acceptable as a means of exchange (i.e. as a means of settling debts) and at the same time acts as a measure and a store of value. The money which is now used as a medium of exchange on local, national and international markets has evolved from shells, elephant tusks, animal skins to metallic money (i.e. coins) to paper money after the invention of printing press in 18Th century to finally bank money (i.e. currency) with the development of the banking system. With the currency system a standard unit called monetary unit forms the basis of a countrys domestic money supply. In the Philippines, the monetary unit is peso while dollar and pounds for the United States and United Kingdom, respectively.

The physical form of the money supply (bank notes, coins, etc.), the denomination of the values of monetary units (peso and centavos) and the total size of the money supply of the country are regulated through the policies and guidelines of what is known as the monetary system. Money can fulfill the following functions: A. As a medium of exchange. Goods and services can be exchanged for money, which can be exchanged for other goods and services. B. As a unit of account The units in which money is measured (pesos, dollars, pounds, etc.) are used as the units in which prices, financial assets, debts, accounts, etc. are measured. C. As a store of value. A portion of a persons income may be used for immediate consumption while the rest may be held in some form in order to yield future consumption. Since money grows with time, the money held over a period of time as a store of value or purchasing power. III. WHAT IS ENGINEERING ECONOMY? Engineering economy is the analysis and evaluation of the monetary consequences by using the theories and principles of economics to engineering applications. designs and projects. Engineering economy may also be defined as the study of problem involving economic solutions with the concept of obtaining the maximum productivity or reward at least cost or risk. It is study of the desirability of making an investment. IV. CONSUMER AND PRODUCER GOODS AND SERVICES Good or commodity is defined as any tangible economic product (soap, car, shirts, tools, machines, etc.) that contributes directly or indirectly to the satisfaction of human wants. Service is defined as any tangible economic activity (hairdressing, insurance banking, catering, etc.) that contribute directly or indirectly to the satisfaction of human wants. Economists classify goods and services as either consumer goods and services or producer goods and services. Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Examples of consumer goods are houses, cars, clothes, appliances, food, books, movies, medical and dental services, etc.

Producer goods and services also satisfy human wants but indirectly in as much as they used to produce the consumer goods and services. Examples of producer goods and services are factory buildings, machine tools, airplanes, ships, buses, etc. V. NECESSITIES AND LUXURIES Good and services are divided into two types, necessities and luxuries. Necessities refer to the goods and services that are required to support human life, needs and activities. Necessity product or staple product is defined as any product that has an income elasticity of demand less than one. This means that as income rises, proportionately less income is spent on such products. Examples of necessity products include basic foodstuffs like bread and rice, clothing, etc. Luxuries are those goods and services that are desired by human and will be acquired only after all the necessities have been satisfied. Luxury product is defined as any product that has an income-elasticity of demand greater than one. This means that as income rises, proportionately more income is spent on such products. Examples of luxury products includes consumer durables like electric appliances, expensive cars, holidays and entertainment, etc. Necessities and luxuries are relative terms because there are some goods and services which may be considered by one person as necessity but luxury to another person. For example, a man living in the Metropolis finds a car as an absolute necessity for him to be able to go to his workplace and back to his home. If the same person lived and worked in another city, less populated with adequate means of public transportation available, then a car will become a luxury for him. VI. MARKET SITUATIONS The term market refers to the exchange mechanism that brings together the sellers and the buyers of a product, factor of production or financial security. It may also refer to the place or area in which buyers and sellers exchange a well-defined commodity. Buyer or consumer is defined as the basic consuming or demanding unit of a commodity. It may be an individual purchaser of a good or services, a household (a group of individuals who make joint purchasing decisions), or a government. Seller is defined as an entity which makes product, good or services available to buyer or consumer in exchange of monetary consideration.

The price of any commodity or product will depend largely on the following market situation. 1. Perfect competition 2. Monopoly 3. Monopsony 4. Bilateral monopoly 5. Doupoly 6. Doupsony 7. Oligopoly 8. Oligopsony 9. Bilateral oligopoly VII. DEMAND Demand is need, want or desire for a product backed by the money to purchase it. In economic analysis, demand is always based on willingness and ability to pay for a product, not merely want or need for the product. The demand for a product is inversely proportional to its selling price, i.e as the selling price is increased, there will be less demand for the product; and as the selling price is decreased, the demand will increase. VI SUPPLY Supply is the amount of a product made available for sale. If the selling price for a product is high, more producers will be willing to work harder and risk more capital in order to reap more profit. However if the selling price for a product declines, capitalists will not produce as much because of the smaller profit they can obtain for their labor and risk. Therefore, the relationship between price and supply is that they are directly proportional, i.e. the bigger the selling price, the more the supply; and the smaller the selling price, the less is the supply. VII THE LAW OF SUPPLY AND DEMAND The law of supply and demand may be stated as follows: Under conditions of perfect competition, the price at which any given product will be supplied and purchased is the price that will result in the supply and the demand being equal.