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Contents : Teach
: Lesson 2
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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