LESSON FOR APPLIED ECONOMICS

Chapter I
WEEK 1-2
LEARNING OBJECTIVES-1

1. Define economics
2. Identify economics as an applied and social science
3. Answer basic economic question
4. Identify the factors of production
5. Understand the importance of the production possibilities frontier (PPF)

LESSON I-II

Economics-as the efficient allocation of the scarce means of production toward

the production toward the satisfaction of human needs and wants.

Scarce –means of production refers to our economic resources such as land,

labor and capital, which we use to produce all the goods and services that we
need and want.

Origin of the word Economics:

OIKOS- means household

NOMUS- means system or management

OIKONOMIA or OIKONOMUS therefore means the management household

Economics as Social Science

There are three types of science distinguished by modern

thought. These are natural science, life science, and social science.

1. Natural science tackles physical and chemical processes of the other groups of
sciences to describe and explain the human environment
2. Life science on the other hand, studies chemical processes with living bodies
and the behavior plants and animals.
3. Social sciences analyzes human behavior, while using the results of the other
groups of sciences to describe and explain the human environment

Relationship of Economics to other Sciences

Economics is considered the queen of all sciences because it covers almost
every activity of an individual in relation to the society.
Business management basically provides employment opportunities to
members of society,
and it is an important vehicle in the balance of economic activity.
History – the history of the economic ideas provides information regarding
theories that can be revisited in order to evaluate present and future economic
issues.
Finance is defined as the management of money, credit banking, and
investment.
Physics- innovations and output brought about by physics greatly affect the
study of economics.
Sociology- is the study of behavior of societies.
Psychology- is the study of human behavior.
Economics as an Applied Science
Applied Science is the discipline that utilizes scientific knowledge to develop
practical solutions to society’s problem.
SCARCITY: The Central Problem of Economics
Scarcity is the basic and central economic problem confronting every
person and society.
What is the Relationship between Economics and Scarcity?
The relationship between the two is such that if there is no scarcity, then
there is no need for economics. The study of economics is therefore essential in
addressing the issue of resource allocation and distribution in response to
scarcity.
MICROECONOMICS and MACROECONOMICS
Microeconomics-
 Is the branch of economics that deals with the individual decisions of the
units of the economy and how their choices determine relative prices of goods
and factors of production.
Macroeconomics
Focuses on four sectors of the economy
a. The behavior of the aggregate household (consumption)
b. The decision-making of the aggregate business (investment)
c. The policies and projects of the government (government spending)
d. The behavior of external/foreign economic agents through trading (export and
import)

BASIC ECONOMIC QUESTIONS

In order to address the problem of scarcity and to serve as guide in decision-
making, society must answer the following basic economic questions:
a. What to produce- tells us that an economy must identify which goods and
services should be produce for the utilization of society.
b. How to produce- tells us that there is a need to identify the different methods
and techniques needed to produce goods and services.
c. How much to produce- tells us how much to produce identifies the volume of
goods and services needed for production to meet the demand of individuals
and society.
d. For whom to produce- tells us to identifies the people or sectors that demand
the commodities produced in a society.

FACTORS OF PRODUCTION

Four economic resources serve as an input in the production process:

1. Land- broadly refers to to all resources found in nature and are, therefore, not
man-made.
2. Labor- - refers to any form of human effort exerted in the production of goods
and services
3. Capital- refers to man-made goods used in the production of other goods and
services.
4. Entrepreneurship- is a person who organizes, manage, and assumes the risks of
a firm, and develops a new idea or product and turns into a successful business.
THE CIRCULAR FLOW MODEL
The Production Possibilities Frontier
What is the production possibilities frontier?
-It represents an outcome that can be produced with a given amount of
resources.
The Concept of Opportunity Cost
In Economics, Opportunity Cost-refers to the foregone value of the next
best alternative. In particular, it is the value of what is given up when one
makes a choice. The thing that is given upis called the opportunity cost of one’s
choice.

BASIC DECISION PROBLEMS

Here are some decision problems that households, firms, the government,
and society must think about to properly manage their resources
a. Consumption- members of society, w/ their individual wants, determine the
types of goods and services they want to utilize or consume and the
corresponding amount that they should purchase and utilize.
b. Production- the problem of the production is generally a concern of producers.
They determine the needs, wants, and demands of consumers, and decide how
to allocate their resources to meet these demands.
c. Distribution- this problem is primarily addressed by the government.
d. Growth over time- this is the last basic decision problem that a society must
deal with.
THE THREE E’s of ECONOMICS
There are 3E’s in the production of goods and services that need to be
considered.
1. Efficiency- refers to the productivity and proper allocation of economic
resources
2. Effectiveness- means the attainment of goals and objectives
3. Equity- means justice and fairness
POSITIVE AND NORMATIVE ECONOMICS
 Positive Economics- is an economic analysis that considers economic conditions
“as they are”, or considers economics “as it is”. It simply answer the question
“What is?”.
Normative Economics- is an economic analysis that judges economic conditions
“as it should be”. It answers the question “What should be?” .
CETERIS PARIBUS ASSUMPTION
Ceteris paribus- is a Greek term that means “all other things held constant” or “
“all else equal”. These assumption analyze the relationship between two
variables while the other factors are unchanged.

CHAPTER SUMMARY
 Scarcity-is the basic and central economic problem confronting every society.
 Economics –is the science that deals with the management of scarce resources.
 Social Science- analyzes human behavior while taking the results of the other
groups of sciences as a description and explanation on human environment.
 Applied Science-is the discipline dealing with the application of scientific
knowledge to problems in order to develop practical solutions.
 Applied Economics- is the study of economics relative to real-life situations by
observing how theories work in practice. This usually deals with the numbers on
which possible outcomes being reviewed are based and supported.
 Ceteris Paribus- means “ all things held constant” or all else equal.
 Positive Economics- is an economic analysis that considers economic conditions
“ as they are” while Normative Economics- is an economic analysis which judges
economic conditions “as these should be”.
 The four basic questions are:
1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?
 Economics- is the queen of all sciences. It is closely related to other sciences like
business management, history, finance, physics, sociology, and effectiveness.
 The three important E’s in economics:
1. Efficiency
2. Equity
3. Effectiveness
 Microeconomics- is the branch of economics that deals with the individual
decisions of the units of the economy- firms and households- and how their
choices determine relative prices of goods and factors of production.
 Macroeconomics- is the branch of economics that studies the relationship
between broad and economic aggregates.
 Opportunity Cost- refers to the foregone value of the next best alternative. It is
the value of what is given yp when one makes a choice.
 The factors of production:
1. Land
2. Labor
3. Capital
4. Entrepreneurship
 Production possibilities Frontier- represents an outcome or production
combination that can be produced with a given amount of resources.

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ACTIVITIES
ACTIVITY I
Identification
Directions: Fill in the blanks with the correct answers.
1. ____is the branch of economics that studies the behavior of the economy as a
whole.
2. ____is the science that studies the chemical and physical processes.
3. ____refers to the creation of utility.
4. ____is the study or discipline that aims to explain human behavior.
5. _____is the study of economics relative to real-life situations.
6. _____represents an outcome or production combination that can be produced
with a given amount of resources.
7. If there is no scarcity, there should also be no ____?
8. A society must also take into account the resources that it possesses before
deciding what goods or services to____?
9. Positive economics simply answers the question____?
10. The greek word oikos means_____?
11. _____refers to the scarce resources in demand.
12. Economics come from the Greek term_____?
13._____refers to economics “as it should be”.
14._____is the science that manages limited resources in demand.
15._____refers to man-made goods used in the production of other goods and
services.

ACTIVITY II

ENUMERATION
1. What are the four basic economic questions?
2. What are the four major sectors of macroeconomics?

ACTIVITY III

Research Analysis:
Directions:
1. Based on your personal observation, briefly discuss the current status of the
Philippine economy.
2. How can you apply economics in your daily life?
 END

WEEK-3
THE MARKET
Chapter -2
DEMAND, SUPPLY and EQUILIBRIUM
LEARNING OBJECTIVES
1. Describe the market concept
2. Define demand and supply
3. Learn the law of demand and supply
4. Categorize the forces that affect the level of demand and supply
5. Define equilibrium
6. Explain how surplus and shortage affect the market

DEMAND (Household/Buyer’s Guide)

Demand- pertains to the quantity of a good or service that people are ready to
buy a given price within a given time period, when other factors besides price
are held constant.
Demand, therefore, implies three things:
1. The desire to possess a thing (good or service)
2. The ability to pay for it or the means of purchasing it and
3. The willingness to utilize it
The Market

When there is a demand for a good service, there is a market.

Market- is where buyers and sellers meet. It is the place

where they trade or exchange goods and services.

There are different kinds of markets, such as wet market and dry market,
 A wet market- is where people usually buy vegetables,
meat, fish, and other wet products. On the other hand, a dry market is where
people buy shoes, clothes, and other dry goods.

In economic parlance, the term “market” does not necessarily refer to a tangible
are or location where buyers and sellers could transact. It can also represent an
intangible domain where goods and services are traded, such as the stock
market, real estate and market, or labor market- where workers offer their
services and employers look for workers to hire.

METHODS of DEMAND ANALYSIS

Demand Schedule- is a table that shows the relationship of prices and

specific quantities demanded at each of these prices. Generally, the information
provided by a demand schedule can be used to construct a demand curve
showing the price-quantity demanded relationship in graphical form.

Demand Curve- is a graphical representation showing the relationship

between the prices and quantities demanded per time.

Demand Function- can be analyzed mathematically through a demand

function. It shows the relationship between the demand for a commodity and
the factors that determine or influence this demand.

CHANGE in QUANTITY DEMAND versus CHANGE in DEMAND

Change in Quantity Demand- if there is a movement from one point to

another- or from one price-quantity combination to another- along the same
demand curve. A change in quantity demand is brought about mainly by an
increase or a decrease in the product’s own price. The direction of the
movement is inverse, considering the Law of Demand.

Change in Demand- there is a change in demand if the entire curve

shifts to the right (or left), resulting in an increase (or decrease) in demand
because of other factors other than the price of the good sold.

FORCES that CAUSES the DEMAND CURVE to CHANGE

 TASTE or PREFERENCE- pertains to the personal likes or dislikes of
consumers for certain goods and services.

CHANGING INCOMES- raises the demand for certain goods or services and
vice versa.

OCCASIONAL or SEASONAL PRODUCTS- various events or reasons in a given

year may also cause a movement on the demand curve with reference to
particular goods.

POPULATION CHANGE- an increasing population leads to an increase in the

demand for some types of good or service.

SUBSTITUTE and COMPLEMENTARY GOODS-are goods that are

interchanged with another good.

EXPECTATIONS of FUTURE PRICES- if buyers expect the price of a good or

service to rise (or fall) in the future, it may cause the current demand to
increase (or decrease).

METHODS in SUPPLY ANALYSIS

SUPPLY SCHEDULE- is a table listing the various prices of a product and the
specific quantities supplied at each of these prices at a given point in time.

SUPPLY CURVE- is a graphical representation showing the relationship

between the price of the product sold or the factor of production (labor) and
the quantity supplied per time period.

SUPPLY FUNCTION- is a form of mathematical notation that links the

dependent variable quantity supplied with various independent variables that
determine quantity supplied.

CHANGE IN QUANTITY SUPPLIED versus CHANGE IN SUPPLY

Change in Quantity Supplied- occurs if there is a movement form one point

to another along the same supply curve.
 Change in Supply- happens when the entire supply curve shifts leftward or
rightward.

FORCES THAT CAUSE THE SUPPLY CURVE TO CHANGE

Optimization in the Use of Factors of Production- resources will increase in

supply, while a failure to achieve such will result in a decrease in supply.

Technological Change- the introduction of cost-reducing innovations in

the production technology increases supply.

Future Expectations- this factor impacts sellers as much as buyers.

Number of Sellers- has a direct impact on the quantity supplied.

Weather Conditions- natural disasters-typhoons, drought, and others-

reduce the supply of agricultural commodities while good weather has an
opposite impact.

Government Policy- removing quotas and tariffs on import products also

affects supply. Lower trade restrictions and lower quotas tariffs boost imports,
thereby boosting the supply of goods in the market.

MARKET EQUILIBRIUM

Equilibrium- market equilibrium generally pertains to a balance that exists

when quantity demnded equals quantity supplied. Market equilibrium is the
general agreement of the buyer and the seller in the exchange of goods and
services at a particular price and at a particular quantity.

Equilibrium Market Price- is the price agreed by the seller to offer his good or
service for sale and for the buyer to pay for it.

MARKET DISEQUILIBRIUM

Surplus- is a condition in the market where the quantity supplied is more

than the quantity demanded.
 Shortage- the reverse happens when shortage occurs in the market. It is
basically a condition in which the quantity demanded is higher than the
quantity supplied at a given price.

CHANGES IN DEMAND, SUPPLY, AND EQUILIBRIUM

 Changes in demand
 Changes in supply
 Complex cases

PRICE CONTROLS
Price Controls are classified into two types:
1. FLOOR PRICE- is the legal minimum price imposed by the government on certain
goods and services.
2. PRICE CEILING- is the legal maximum price imposed by the government.

SUMMARY
 DEMAND-pertains to the quantity of a good or service that people are ready to
buy at given prices within a given time period, when other factors besides price
are held constant (ceteris paribus).
 Market- is where buyers and sellers meet.
 The Law of demand- states that if the price goes up, the quantity demande goes
down. Conversely, if the price goes down, the quantity demanded goes up,
(ceteris paribus).
 Demand Schedule- is a table that shows the relationship of prices and the
specific quantities demanded at each of these prices.
 Forces that Cause the Demand Curve to Change- are taste or reference, change
in income, occasional or seasonal products, population change, substitute
goods, and expectation of future prices.
 Supply- is the quantity of goods or services that firms are ready and willing to
sell at a given price within a period of time, other factors being held constant.
 The Law of Supply- states that if the price of a good or service goes up, the
quantity supplied for such good or service will also go up. If the price goes
down, the quantity supplied also goes down, (ceteris paribus).
 Supply Curve- is a graphical representation showing the relationship between
the price of the product or the product of the production (labor) and the
quantity supplied per time period.
 Forces that Cause the Supply curve to Change- are the optimization in the use of
factors of production, technological change, future expectation, number of
sellers, weather conditions, and government policy.
 Equilibrium- generally pertains to a balance to balance when quantitydemanded
equals quantity demanded.
 Surplus- is a condition in the market where the quantity supplied is greater than
the quantity demanded.
 Shortage- is a condition in the market in which demand is higher than supply.
 Floor Price- is the legal minimum price imposed by the government.
 Price ceiling- is the legal maximum price imposed by the government

ACTIVITY IV
Multiple Choice
Directions: Choose the letter that corresponds the best answer.
1. It pertains to the quantity of a good or service that people are ready to buy at a
given prices within a given time period, when other factors besides are held
constant
a. Supply
b. Market
c. Demand
d. Quantiy
2. It refers to graphical representation showing the relationship between price and
quantities demanded per time period.
a. Demand
b. Demand curve
c. Supply curve
d. Demand function
3. It shows the relationship between demand for a commodity and the factors that
determine or influence this demand.
a. Demand schedule
b. Demand curve
c. Demand function
d. Demand
4. It is generally a state of balance
a. Market
b. Products
c. Equilibrium
d. Supply
5. It refers to goods that are interchanged with another good.
a. Complementary goods
b. Substitute goods
c. Public goods
d. Giffen goods
6. The goods that are complement each other are known as___?
a. Substitute goods
b. Merit goods
c. Public goods
d. Complementary goods
7. What do you call the condition in the market where the quantity supplied is
more than the quantity demanded?
a. Shortage
b. Surplus
c. Demand
d. Supply
8. It is a graphical representation showing the relationship between the prices of
the product sold or the factor of production and the quantity supplied per time
period.
a. Demand curve
b. Supply schedule
c. Supply curve
d. Supply function
9. It pertains to a balance that exists when quantity demanded equals quantity
supplied.
a. Market equilibrium
b. Equilibrium
c. Demand function
d. Shortage
10. The quantity of goods and services that firms are ready and willing to sell at a
given price within a period of time, other factors being held constant is called?
a. Demand
b. Supply
c. Demand curve
d. Supply curve
11. It is a condition in the market where the quantity demanded is higher than the
quantity supplied at a given price.
a. Demand
b. Surplus
c. Shortage
d. Supply
12.What do you call the legal minimum price imposed by the government on
certain goods and services?
a. Floor price
b. Price controls
c. Floor price
d. Surplus
13.The legal maximum price imposed by the government is called?
a. Price controls
b. Floor price
c. Price ceiling
d. Shortage
14.This is the specification by the government of minimum or maximum prices for
certain goods and services., when the government considers existing prices
disadvantageous to the producer or consumer.
a. Floor price
b. Price controls
c. Price ceilings
d. Surplus
15. States that if the price goes up, the quantity demanded goes down. Conversely,
if the price goes down , the quantity demanded goes up, ceteris paribus.
a. The Law of Supply
b. The Law of Demand
c. Equilibrium
d. Market

ACTIVITY V
Discuss and Explain:
1. Describe the difference between demand and supply
2. How does equilibrium occur in the market?
3. What are the price controls of the government?

END

WEEK 4
LEARNING OBJECTIVES

1. Define elasticity
2. Learn about demand elasticity
3. Describe elastic, inelastic, and unitary demands
4. Learn about supply elasticity
5. Differentiate elastic from inelastic supply
 PRICE DETERMINATION
Chapter 3
ELASTICITY of DEMAND-
The Law of Demand- tells us that we will buy or avail more of a good or
service if the price declines, and we will buy less if the price goes up.

Demand Elasticity-is a measure of the degree of responsiveness of

quantity demanded of a product to given change in one of the independent
variables that affect demand for the product.

Price Elasticity of Demand is the responsiveness of consumers demand to

change in the price of the good sold.

Income Elasticity of demand is the responsiveness of consumers demand

to a change in their income.

Cross Price Elasticity of demand is the responsiveness of demand for a

certain good, in relation to changes in the price of related goods.

MARKET STRUCTURE

-Is a classification system for the key traits of a market, including

the number of terms, the similarity of the products they sell, and the ease of
entry into and exit from the market structure.

TYPES of MARKET STRUCTURE

There are four major types of market structures namely:

1. Perfect Competition-or pure competition is a market structure characterized by

a. A large number of small firms
b. Having a homogenous product
c. A very easy entry or exit from the market
2. Monopoly- is the extreme opposite of perfect competition. Monopoly is a
market structure characterized by:
a. A single seller or producer
b. A unique product
c. Impossible entry to the market
3. Monopolistic Competition-is a type of market structure characterized by:
a. Many small firms
b. Differentiated products
c. Easy market entry and exit
4. Oligopoly-is a market structure characterized by:
a. Few sellers
b. Either a homogenous or a differentiated product
c. A difficult market entry

SPECIAL TYPES OF MARKET STRUCTURES

The special types of market structures include:
a. Bilateral monopoly-is a market situation comprising one sellerand only one
buyer
b. Bilateral oligopoly- is a market condition with a significant degree of
sellerconcentration and a significant degree of buyer concentration
c. Duopsony-is a market situation in which there are only two buyers but many
sellers.
d. Duopoly- is a subset of an oligopoly where a market situationhas only two
suppliers.
e. Monopsony –is a form of buyer concentration, that, is a market situation in
which a single buyer confronts many small suppliers.

MARKET FAILURES-
occur when goods and services in a market become inefficient or no longer bring
in economic efficiency. Market failures present an important economic case
since markets may not always allocate scarce resources in the most efficient
manner to provide maximum social welfare.
 HOW DOES MARKET FAILURE HAPPEN?
Since the structures of the markets largely differ, it becomes impossible for
them to be entirely perfect. There are several reasons as to why market forces
may not lead to economic efficiency and may result in market failures. Because
of market failures, government interventions are needed to arbitrate of goods
and services.

EXTERNALITIES
Are spillover effects of the production and consumption of goods and
services without properly compensating those affected by the outcome.
A good with negative externalities brings a higher cost to society than the
price consumers pay for it. One common example of negative externality is
pollution.
Positive Externalities can also happen. These take place where transactions
make use of common resources that are shared with others who are not
involved with the actual exchange, yet incur benefits in a positive or good way.

CHAPTER SUMMARY
 Elasticity-means responsiveness or action
 Demand Elasticity- is a measure of the degree of responsiveness of the quantity
demand of a product to a given change in one of the independent variables that
affect the demand for that product
 Price Elasticity- of demand is the responsiveness of consumers demand to
change in the price of the good sold.
 Income Elasticity- of demand is the responsiveness of consumers demand to a
change in their income.
 Cross Elasticity- of demand is the responsiveness of demand for a certain good,
in relation to changes in price of other related goods.
 The demand for a good is inelastic when the change in quantity demanded is
less than the change in price.
 The demand for a good is elastic if the change in quantity demanded is greater
than the change in price.
 The demand for a good is unitary if the change in quantity demanded is equal to
the change in price.
 The demand can be perfectly price inelastic, that is, any amount will be
demanded at the prevailing price.
 The demand can be perfectly price elastic, that is, any amount will be demanded
at the prevailing price.
 Supply elasticity refers to the reaction or response of sellers or producers to
price changes of goods sold
 The supply for elastic is inelastic when the change in quantity supplied is less
than the change in price.
 The supply for a good is elastic if the change in quantity supplied is greater than
the change in price.
 The supply for a good is unitary if the change in quantity supplied is equal to the
change in price.
 The supply can be perfectly price inelastic, that is, price changes have
no effect at all on quantity supplied.
 The supply can be perfectly price elastic, that is, any good will be
supplied at the prevailing price.

ACTIVITY-VI
MULTIPLE CHOICE
Directions: Choose the letter with the correct answer
1. It is the responsiveness of consumer’s demand to a change in the price of the
good sold
a. Income elasticity
b. Price elasticity
c. Cross price elasticity
d. Demand elasticity
2. It is the responsiveness of demand for a certain good in relation to changes in
the price of other related goods.
a. Demand elasticity
b. Price elasticity
c. Income elasticity
d. Demand
3. ____demand means that consumers are sensitive to the price at which product
is sold and will not buy it if the price rises by what they consider to be too much.
a. Inelastic
b. Elastic
c. Income elasticity
d. Cross price elasticity
4. Below are the major types of market structures, except:
a. Perfect competition
b. Monopolistic competition
c. Oligopoly
d. Profit
5. This market structure is characterized by a large number of small firms, a
homogenous product, and a very easy entry or exit from the market
a. Monopolistic competition
b. Oligopoly
c. Monopoly
d. Perfect competition
6. This is a type of market structure characterized by many small firms,
differentiated products, and easy market entry and exit.
a. Monopolistic competition
b. Oligopoly
c. Monopoly
d. Perfect competition
7. It is a market structure characterized by few sellers, either a homogenous or a
differentiated product, and difficult market entry
a. Duopoly
b. Oligopoly
c. Monopoly
d. Perfect competition
8. _____is the extreme opposite of a perfect competition
a. Perfect competition
b. Monopoly
c. Duopoly
d. Oligopoly
9. It is a market situation comprising of one seller and only one buyer
a. It is a market situation comprising of one seller and only one buyer
a. Monopoly
b. Duopsony
c. Bilateral monopoly
d. Bilateral oligopoly
10.It is a form of buyer concentration, that is, a market situation in which a single
buyer confronts many small suppliers.
a. Bilateral monopoly
b. Monopoly
c. Duopoly
d. Monopsony

11. A market situation in which there are only two buyers but many sellers is called
a. Duopsony
b. Duopoly
c. Monopsony
d. Monopoly
12. It is a subset of oligopoly describing a market situation in which there are only
two suppliers.
a. Monopoly
b. Duopsony
c. Bilateral monopoly
d. Duopoly
13.It is a market condition with a significant degree of seller concentration and a
significant degree of buyer concentration.
a. Market
b. Duopsony
c. Bilateral monopoly
d. Bilateral oligopoly
14.It is comprised of a large number of independently acting firms and buyers
a. Many small sellers
b. Differentiated products
c. Easy entry and exit
d. Few sellers
15. The bulk of market supply is in the hands of relatively few large firms who sell
to many small buyers. It is known as ______
a. Homogenous
b. Differentiated products
c. Few sellers
d. Difficult entry

ACTIVITY VII
Directions: Discuss positive and negative externalities that affect the Philippine
economy. Give examples of each.
A. POSITIVE EXTERNALITIES
Discuss and example
B. NEGATIVE EXTERNALITIES
Discuss and example