APPLIED ECONOMICS

Lesson 1 – Economics as a Social Science

Economics is a social science concerned with the production, distribution, and consumption of
goods and services. It studies how individuals, businesses, governments, and nations make
choices on allocating resources to satisfy their wants and needs, trying to determine how these
groups should organize and coordinate efforts to achieve maximum output.

Scarcity is a condition where there are insufficient resources to satisfy all the needs and wants
of a population.

Absolute scarcity is when a good is scarce compared to its demand. For example, coconuts are
abundant in the Philippines since the plant easily grows in our soil and climate. However,
coconuts become scarce when the supply is not sufficient to meet the needs of the people.
Relative scarcity occurs not because the good is scarce per se and is difficult to obtain but
because of the circumstances that surround the availability of the good. But when a typhoon
destroys coconut trees and the farmer has no coconuts to harvest, then coconuts become
relatively scarce.

Relative scarcity is when supply is limited. Oil is absolutely scarce in the Philippines since we
have no oil wells from which we can source our petroleum needs, so we rely heavily on imports
from oil-producing countries like Iran and other Middle Eastern countries. For example, cherries
are absolutely scarce in our country since we do not have the right climate to grow them and
we have to rely on imports for our supply of cherries. This explains why cherries are very
expensive in the Philippines.

WHY ECONOMICS IS IMPORTANT

Many individuals may ask, “Why do we need to study economics?” They don’t even
know how it works and how it affects their lives. People just don’t mind what economics can
give to them. To know how important the subject is, all they need to do is read the front page
of the newspaper to see that the most important news is economic in nature. Watch the news
on TV and for sure, economic news always present important issues.

Economics will help the students understand why there is a need for everybody and
cannot isolate himself from economics. It guides us how to make a living, how to use our
money wisely, how to run a business and how to budget and properly allocate or distribute our
available scarce resources. It will also help one to understand how to make more rational or
appropriate decisions and implementation.

Furthermore, economics is important in order to understand problems facing the citizen

and the family; to help government promote growth and improve the quality of life while
avoiding depression and inflation and to analyze fascinating patterns of social behavior.
Because economics is vital for shaping the economy and formulate policies for the good nation.

ECONOMICS AS A SOCIAL SCIENCE

Economics is a social science concerned with the production, distribution, and

consumption of goods and services. It studies how individuals, businesses, governments, and
nations make choices on allocating resources to satisfy their wants and needs, trying to
determine how these groups should organize and coordinate efforts to achieve maximum
output.

It is the study of the relations between people during the production, distribution, how
people behave, influence the world around them and consumption of wealth in human society.
As a social science, economics studies how individuals make choices in allocating scarce
resources to satisfy their unlimited wants or how people interact within markets to get what
they want or accomplish certain goals.

TWO BRANCHES OF ECONOMICS

The study of economics is divided into two branches: Macroeconomics and

Microeconomics.

Macroeconomics is a division of economics that is concerned with the overall performance of

the whole economy. It focuses as a whole rather than goods and resources and studies the
causes of change in the aggregate flow of money, the aggregate movement of goods and
services, and the general employment of resources. Macroeconomics is about the nature of
economic growth, gross national product, the expansion of productive capacity, and the growth
of national income.

Microeconomics deals with the economic behavior individual entities such as the consumer,
the producer and the owners of the factors of production. It is more concerned on how goods
flow from the business firm to the consumer and how resources move from the resource owner
to the business firm. It is concerned with the process of setting prices of goods that is also
known as Price Theory. For example, the price of rice, the number of workers of a certain firm,
the income of Mr. Morales, the expenditures of PLDT.

TOOLS OF ECONOMICS

Most economists are engaged in analyzing the present economic situation of the
country. Most of these economists use different scientific approaches and utilize different tools
to be able to formulate theories and principles.

1. Logic – it is a science that deals with sound thinking and reasoning. In the process of reasoning,
facts and proofs should be presented; otherwise, such reasoning will be clouded by an iota of doubt.
With the wise application of logic, one may be able to arrive at a conclusion.

2. Mathematics – it is a science that deals with numbers and their operations. Actually, economics
is the most quantifiable discipline among social sciences. It can quantify population, income, national
product, aggregate number of firms, etc. Besides, mathematical operations and equations are used in
economics in arriving at a conclusion. Mathematics comes hand in hand with economics.

3. Statistics – it is a branch of mathematics engages with the analysis and interpretation of

numerical data. It deals with the process of collecting, tabulating and analyzing data to test the validity
of a certain hypothesis. These are facts collected and arranged in an orderly way of study.

SCIENTIFIC APPROACH IN THE EMPIRICAL TESTING OF AN ECONOMIC THEORY

Using tools such as logic, mathematics, and statistics, the student needs to approach the
empirical testing of an economic theory in a scientific manner. This scientific approach involves the
following steps:

1. State the propositions or conditions that are taken as given and do not need further
investigation, as the basic starting point of investigation. These propositions will serve as the premises
upon which the theory is established.

2. Observe facts in connection with the activity that we want to theorize.

3. Apply the rules of logic to the observed facts to determine causal relationships between
observed factors and to eliminate facts that are unnecessary and irrelevant.

4. Establish a set of principles such that formulated hypotheses may be tested as to whether they
are valid or not.

5. Use statistics and econometrics as empirical proof in testing the hypotheses.

ECONOMIC RESOURCES

Economic resources are also known as factors of production or inputs, are the resources used to
produce goods and services.

1. Land – these resources consist of soil and natural resources that are found in nature which includes
all-natural resources above, on, and below the ground such as soil, rivers, lakes, oceans, forests,
mountains, mineral resources and climate. It is considered economic resources because it has a price
attached to it. One cannot utilize this natural resource without paying for it usually in the form of rent or
lease.

2. Labor – this is also termed as human resources. It refers to all physical and human efforts exerted in
production of goods and services. It covers manual workers like construction workers, machine
operators, and production workers, as well as professionals like nurses, lawyers, and doctors. In return,
he earns an income in the form of wages and/or salaries.

3. Capital – this is the man-made resources used in the production of goods and services, which include
machineries and equipment. These assets include buildings, production facilities, equipment, vehicles
and other similar items.

4. Entrepreneur – he/she is the organizer and coordinator of the other factors of production: land, labor
and capital. An entrepreneur is one who is engaged in economic undertakings and provides society with
goods and services it needs.

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