Introduction to Applied Economics Module 1

Lesson 1: Revisiting Economics as a Social Science

The word economy comes from two Greek words, 'eco' meaning home and 'nomos' meaning
accounts for “one who manages the household”. At first the origin might seem peculiar. But in fact,
household and economies have much in common. A household faces many decisions such as: Who
cooks dinner? Who gets the extra rice at dinner? Who washes the dishes after? In short, the
household must allocate its scarce resources among its various members considering each
member’s abilities, efforts and desires. Like a household, a society must decide what jobs will be
done and will do them. It needs some people to grow food, other people to make clothing and still
others to design a computer software.

1. According to Mankiw, Economics is the study of how society manages its resources.
2. Hall and Leiberman states that economics is the study of choice under the conditions of
scarcity.
3. Castillo viewed economics as study of how man could best allocate and utilize the scarce
resources of society to satisfy his unlimited want.

Key points:

• Economics also allows individual agents to balance expectations.

• Economics provides distilled frameworks to analyze complex societal interactions, as in
the case of consumer and firm behavior.

ECO105-Applied Economics
Introduction to Applied Economics Module 1

• Being knowledgeable about economics foundations allows an individual to be an active

and aware participant rather than a passive economic agent.

• economics is about the study of scarcity and choice

• economics finds ways of reconciling unlimited wants with limited resources
• economics explains the problems of living in communities in terms of the underlying
resource costs and consumer benefits
• economics is about the co-ordination of activities which result from specialization

Economics provides distilled frameworks to analyze complex societal interactions, as in the case
of consumer and firm behavior. An understanding of how wages and consumption flow between
consumers and producers provides agents with an ability to understand the symbiosis of the
relationship rather than fixating on the contentious components that surface from time to time.

Economics also allows individual agents to balance expectations. An understanding of the ebb and
flow of the economy through the boom and bust of the business cycles, creates the potential for
emotional balance by reminding agents to limit desperation in downturns and exuberance in
expansions.

By developing an understanding of the foundations of economics, individuals can become better

decision makers with respect to their own lives and maintain a balance with respect to an
externality that has the potential to supplement or deter their plans. Since economic theories are
a basis of decision making and regulatory policy, being knowledgeable about economics
foundations allows an individual to be an active and aware participant rather than a passive
economic agent.

Essential Questions:

1. Why studying of economics necessary?

2. Why is scarcity an economics problem that every country faces?
3. How understanding of economics can help you as a consumer and as an economic
stakeholder?

Microeconomics is the study of economy-wide phenomena that examines the behavior individual
consumers and firms within the market, including assessment of the role of preferences and
constraints.

ECO105-Applied Economics
Introduction to Applied Economics Module 1

Macroeconomics is the study of how households and firms make decisions and how they interact
in markets. It analyzes the entire economy and the issues affecting it. Primary focus areas are
unemployment, inflation, economic growth, and monetary and fiscal policy.

Economics as Social Science

Economics is a social science. This means that economics has two important attributes. Economics
studies human activities and constructions in environments with scarce resources, and uses the
scientific method and empirical evidence to build its base of knowledge.

The evaluation of human interactions as it relates to preferences, decision making, and constraints
is a significant foundation of economic theory. The complexity of the dynamics of human
motivation and systems has led to the establishment of assumptions that form the basis of the
theory of consumer and firm behavior, both of which are used to model circular flow interactions
within the economy.

Economics is a social science that assesses the relationship between the consumption and
production of goods and services in an environment of finite resources. A focus of the subject is
how economic agents behave or interact both individually (microeconomics) and in aggregate
(macroeconomics).

Division of Economics

Economics has 5 major divisions. These divisions are as follows:

1. Production- This refers to the process of producing or creating goods needed by the
households to satisfy their needs and wants. The factors of production are called inputs and
goods and services that have been created are called outputs of production.

2. Distribution- This refers to the marketing of goods and services to different economic outlets
for allocation to individual consumers. In monetary terms, this is the allocation of income
among persons or household.

3. Exchange- This is the process of transferring good and services to a person or persons in return
for something. At present, the medium of exchange used in the market is money.

4. Consumption- This refers to the proper utilization of economic goods. Since goods and
services could not be consumed unless paid for, then we can also say that consumption is
spending money for goods and services for direct satisfaction.

5. Public Finance- This pertains to activities of the government regarding taxation, borrowings,
and expenditures. It deals with the different use and fair distribution of public resources in
order to achieve maximum social benefits.

ECO105-Applied Economics
Introduction to Applied Economics Module 1

The Economic Resources

Economic resources are also known as factors of production. There are four of production which
are utilized in our economy. They are as follows:

1. Land-The physical space on which production takes place, as well as useful materials- natural
resource like crude oil, iron, coal or fertile soil.

2. Labor- This also termed as human resources. It refers to the time and effort, both physical and
mental, spent in producing goods and services.

3. Capital
Physical Capital- consist of things like machinery and equipment, factory buildings, computers
and even hand tools like hammers and screwdrivers.
Human Capital- the skills and knowledge possessed by workers.

4. Entrepreneurship- the ability and willingness to combine the other resources-land, labor and
capital into productive enterprise.

ECO105-Applied Economics