APPLIED ECONOMICS Module 1 :
Economics as a Social Science and Applied Science in Terms of Nature and Scope
THE NATURE AND SCOPE OF ECONOMICS
According to Molina, J. A. & Nadal, G. J I (2020), economics is a SOCIAL SCIENCE
concerned with the explanation and prediction of observed phenomena in the society.
Economics studies the way in the societies solve the fundamental problems of
reconciling the unlimited desires of individuals with scarcity of resources, susceptible
to numerous alternative uses. Economics is also an APPLIED SCIENCE because it
uses the scientific method in its explanations, which consists of observing reality and
presenting questions and problems to arrive at the formulation of theories and models. As an
applied science, it follows a systematic procedure to solve issues and problems of the society.
THE FIELDS OF ECONOMICS
Microeconomics
focuses on the behavior of individual economic units and the functioning of
markets. Its perspective focuses on parts of the economy: individuals, firms, and
industries.
Macroeconomics
studies the functioning of economics as an aggregate (production, employment).
Its perspective looks at the economy as a whole, focusing on goals like production,
the standard of living, unemployment and inflation. Macroeconomics has two
types of policies for pursuing these goals: monetary policy and fiscal policy.
BASIC TERMS TO UNDERSTAND ECONOMICS
GOODS
anything that is used to satisfy your needs and wants.
Tangible Goods
material, goods, or commodities
Intangible Goods
when they are in the form of services rendered by professionals, like doctors, lawyers,
accountants, etc.
CONSUMERS GOODS
goods for the ultimate consumption of the consumers. Ex.: toothpaste, bath soap, etc.
CAPITAL GOODS or
INDUSTRIAL GOODS
used in the
production of
other goods and
services.
Ex.: buildings,
machinery,
equipment
CAPITAL GOODS or INDUSTRIAL GOODS
are used in the production of other goods and services. Ex.: buildings, machinery,
equipment.
ESSENTIAL GOODS
used to satisfy the basic needs of man.
LUXURY GOODS
goods man may do without but may give comfort and satisfaction. Ex., perfume,
cakes; chocolate.
ECONOMIC GOODS
goods which are useful and scarce; with value attached to them and a price must be
paid for their use. If a good is so abundant and it can satisfy everyone’s needs without
anybody paying for it, then, that good is free. The air is free, but the air from an aircon
is an economic good.
ECONOMIC RESOURCES OR FACTORS
In the article of Nowaczyk , J (2020) on Identifying the Factors of Production, he defined
economic resources as the factors of production for goods and services. The factors of
production are inputs combinations in the production of goods and services to make an
economic profit for the firms. These factors of production are land, labor, capital, and
entrepreneurship. Resources are limited in nature, but human wants and needs are
unlimited, thus, an efficient allocation of these resources or factors of production is a
big challenge for every economy. Economics also helps the entrepreneurs and the
economy to allocate resources in the production of supplies to meet the demands of the
consumers.
Land as a Factor of Production
Land is the natural resources available to create supply such as raw materials that comes
from the ground. It can be a non-renewable resource; commodities such as oil and
gold; and renewable resource, such as timber. Oil is a natural resource, but petroleum
gas is a capital good. Farmland is a natural resource, but a shopping center is a capital
good.
Labor as a Factor of Production
Labor is the work done by people- education, skills, and motivation and productivity.
Productivity measures how much each hour of worker time produces in output.
Workforce receives wage for his labor.
Capital as a Factor of Production
Capital or capital goods refers to the money that companies used to buy resources; man-
made objects like machinery, equipment, and chemicals that are used in production.
For example, capital goods include industrial and commercial buildings. A commercial
aircraft is example of a capital good.
Entrepreneurship as a Factor of Production
Entrepreneurship develops an idea into a business. An entrepreneur combines the
other three factors of production to add to supply. The most successful entrepreneurs
are innovative and risk-takers. The income entrepreneurs earn is profits.
CHARACTERISTICS OF RESOURCES
Scarcity
insufficient resources to supply all the desires and needs of individuals. In the
production of goods and services; there are issues that economics may encounter:
these include: for Land – inadequate land and natural resources; polluted areas;
overcrowded spaces; for Labor – unskilled workforce; mismatch of jobs; for
capital - low quality of equipment/machines; insufficient fund/capital; and for
entrepreneurship – Inadequate training of entrepreneurs; limited opportunity;
scarcity of great ideas but many competitors in the market.
Multiple use
Resources can have more than one possible use. For example, a plot of land can be
used to plant coffee or to build a factory.
Partially replaceable
one resource can replace another in the production of a good or service (e.g., replace
manual labor with technology).
BASIC ECONOMIC PROBLEMS AND HOW TO SOLVE IT-2
The Four Basic
Economic
Problems
In the article of Guru, S.
(2020) Basic Central
Problems Faced by an
Economy, there are
basic problems
common to all
economies. In terms of
production, common to
all countries is the
problem on scarcity.
This arises
because the resources
are limited and have
alternative uses. This
problem gives
rise to four basic
problems of an
economy.
The Four Basic Economic Problems
In the article of Guru, S. (2020) Basic Central Problems Faced by an Economy, there are
basic problems common to all economies. In terms of production, common to all
countries is the problem on scarcity. This arises because the resources are limited and have
alternative uses. This problem gives rise to four basic problems of an economy.
What to Produce?
If there is scarcity of goods in a society, the firms have to make wise decision on what
goods/service should be produced and determine the quantity to produced. For example,
which do we produce more, masks or canned goods? But we need capital goods like
machines, or consumer goods like laptops. The society must decide the type and
quantity of good/service to be produced to meet the immediate needs of the society.
How to Produce?
The production of goods or services needs effective methods and processes. For example,
you can produce PPEs using sewing machines; sardines using aqua resources like fish and
land resources like tomatoes. The production requires more labor and capital investment.
For whom to Produce?
What provision/laws should be The society would always made for economic growth? A
society uses all its resources for consider the immidiate beneficiary of the goods. For current
consumption. If a society example when we produce uses all its resources, then its masks and
PPEs we suppose to production capacity will not produce first these for the increase. The
standard of living of frontliners of COVID Pandemic the people and the income of the fight.
A society decides on the workforce remain constant until distribution of the goods the
standard of living will decline in and services among the the future. The society must decide
members of society who need also on the part of the resources to them the most
What provision/laws should be
The society would always made for economic growth? A society uses all its resources for
consider the immidiate beneficiary of the goods. For current consumption. If a society
example when we produce uses all its resources, then its masks and PPEs we suppose to
production capacity will not produce first these for the increase. The standard of living of
frontliners of COVID Pandemic the people and the income of the fight. A society decides on
the workforce remain constant until distribution of the goods the standard of living will
decline in and services among the the future. The society must decide members of society
who need also on the part of the resources to them the most. be saved for future progress
APPLIED ECONOMICS ON BASIC ISSUES AND PROBLEMS
Applied Economics seeks to solve the problems on scarcity. This happens when human
wants for goods and services exceed the available supply. In a modern economy, it is
evident that a division of labor happens when people earn income by specializing in
what they produce. They will use that income to purchase the products they need or want
every day (BC Campus 2020). Also, in the division of labor, it allows workers and
firms to produce more. This is because: a) agents focus on areas of advantage due to
natural factors and skill levels; b) the agents learn and invent; c) the agents take
advantage of economies of scale. Division and specialization of labor only work when
individuals can purchase what they do not produce in markets.
LAW OF SUPPLY AND DEMAND-3
In economics, there are terms that you must learn to understand the better market situations.
A demand or the amount of good or service consumers are willing to purchase at each
price. If customers cannot pay for it, there is no effective demand. Price is what a buyer
pays for a unit of the specific good or service. The total number of units purchased at
that price is called the quantity demanded.
The higher the price, the lower the quantity demanded” and vice versa.
The amount of a good that buyers purchase at a higher price is fewer because as the
price of a good goes up, the opportunity cost of buying the good also is less.
Consumers will avoid buying a product.
Factors Affecting Demand
a) income of buyers b) a number of potential buyers c) preferences d)
complementary products. The demand curve is always downward sloping due to the
law of diminishing marginal utility.
LAW OF SUPPLY
The higher the price, the higher The quantity supplied and vice versa. Producers supply more
at a higher price because selling at higher quantity at a higher pricincreases revenue.
Factors Affecting Supply
a) Production capacity,
b) production costs such as labor and materials
c) the number of competitors
d) Ancillary factors such as
e) material availability,
f) weather, and
g) reliability of supply chains
The law of supply says ………………. ―as the price of a product increases,
companies will produce more of the product. When graphing the supply vs. the
price,, the slope rises.
How Do Supply and Demand Create an Equilibrium Price?
Equilibrium price or market-clearing price
is the price at which the producer can sell all the units he wants to produce and
the buyer can buy all the units he wants.
Supply and demand are balanced, or in equilibrium,
the demand curve is downward sloping. This is due to the law of diminishing
marginal utility.
The supply curve is a vertical line; overtime, the supply curve slopes upward; the
more suppliers expect to be able to charge, the more they will be willing to produce
and bring to market.
In the Equilibrium point, the two slopes will intersect. The market price is
sufficient to induce suppliers to bring to market that same quantity of goods
that consumers will be willing to pay for at that price.
IMPLICATIONS OF MARKET PRICING IN MAKING ECONOMIC DECISIONS-4
The Marketing Price System
It provides signals to buyers and sellers about what goods and services should be
produced, how much of them should be produced, and how much they should cost.
Shortage
an excess demand for the quantity supplied.
Surplus
is excess in supply.
Price System in a Market Economy
In economics, the willingness to buy goods and services should be accompanied by
the ability to buy, also called “purchasing power”. This is referred to as an effective
demand.