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Contents : Teach : Lesson 2
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Principles of Economy
A. Scarcity and Choice
- Human needs and wants are practically unlimited. They will
never be satisfied.
- Classification of Human Needs
- Basic Needs: a necessity for living, such as
clothing, shelter, food and healthcare.
- Essential Needs: the wants and desires that
constitute the need for a decent living. They come in the form of
education, leisure, light, water, etc…
- Created Needs: The needs brought about by the
influence of advertising and media, thus aggravating the mentality
of consumerism and materialism in society. It becomes more of a
status symbol than an actual need. Brands are more taken into
account than the actual product.
- Luxurious Needs: an offshoot of created needs.
They are extravagant goods that are not important in daily living,
but only for show or status. Although this need is on a
case-to-case basis. One luxurious need for someone may be an
essential need for another. (e.g. cars may seem a luxurious need
for people living in small towns, but essential to those who live
in the big cities)
- Public Needs: the goods and services desired
by the general public as opposed to individual consumers regardless
of status or position. They are the needs for better roads, public
safety, hospitals, schools, etc…Things that can satisfy the
common good.
- There is a limit in the production of goods.
- Resources are needed to produce goods that can satisfy all the
levels of human needs
- There are three basic categories of resources: Land (all
natural resources like land, water, minerals, etc…), Labor
(what human contribute, like manual work, managerial work, etc.),
and Capital (goods that are used to produce more goods, like
machinery, computers, tools, etc…)
- Resources are limited because they get worn out. They must be
replaced periodically for a consistency in service.
- Society faces the problem of scarcity
- Human wants are unlimited, but unfortunately, resources are
not.
- Resources therefore dwindle, and that leads to scarcity.
- Scarcity is the result of unlimited wants versus limited
resources.
- Scarcity leads to choice. The decisions must be wise and fair
in order to fully economize the use of these limited resources.
There are four basic questions fundamental in guiding the use of
such resources.
- (product) What are the goods that have to be produced?
- (quantity) How much of each good should be produced?
- (quality) How should these goods be produced? (through
combinations of various resources)
- (market) For whom should these good be produced?
- We must choose wisely in order to maximize the use of our
resources
- Resources must be used efficiently and productively as much as
possible.
- There is a need to improve, maintain or perhaps increase the
given resource.
B. Opportunity Cost and Trade-off
- When a resource is used to its full extent to a certain end, we
deny ourselves of other uses for the given resource. This benefit
that could have been derived from the alternative forgone is the
opportunity cost.
- To make an economically correct decision, the benefits derived
from the selected alternative should be at least equal to the
opportunity cost.
- Given a choice, a trade-off occurs. A trade-off means giving up
something to gain another thing. (e.g. choosing whether to employ
more people or buy machinery instead)
- The Principle of Economy helps determine whether the trade-off
is worth doing or if the choice made was the correct one.
- According to the principle, among the given alternatives, the
best choice should be the one the follows the Minimax principle.
Minimal costs with maximum benefits.
- If the minimax principle can’t be applied in a particular
case, a careful choice will have to be made between the maximizing
or minimizing, or achieving a good balance. (e.g. a farmer will
have to choose a particular variety of seed that can increase
harvest (maximizing) and/or lowering his overhead cost
(minimizing))
Further Reading
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