LEARNING MODULE

IN
Applied economics

Module 1 (Week 1)

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 SAINT ROSE OF LIMA
(LAS PIÑAS) SCHOOL
917 Tramo Street, Daniel Fajardo, Las Piñas City ● 829-1240 ● srllps@yahoo.com

FIRST QUARTER MODULE

WEEK DAY/DATE CONTENT OBJECTIVE/S

Objective:
At the end of this chapter, the student should be
able to:
➢ Understanding the current issues
1 Introduction to Applied Economics confronting contemporary Philippines
society and economy.
➢ Examined in terms of the differences in the
recognition and valuation between marginal
costs and marginal benefits.

What is Economics?

Economics – is a social science that involved the use of scarce Social Science – the study of
resources to satisfy unlimited wants. society and how people
Economics is a social science because it studies human behavior just behave and influence the
like Psychology and Sociology. world around them.

Scarce – deficient with

quantity in number compared
with the demand.

ECONOMICS AS A SOCIAL SCIENCE

The following are three strands in the development of the definition of economics.

1. Wealth
2. Decision- making process
3. Allocation process

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 A. Economics as STUDY OF WEALTH

-Economics as the science of wealth- getting and

wealth using, this implies that the motivation of the
process of wealth accumulation is the utilization of
wealth for the individual’s satisfaction and society’s
welfare.

It pertains to activities answering the major economics

problems in any society…PRODUCTION and CONSUMPTION.

The primary function of the economy is to provide goods and services for satisfying wants of the people.
The act of satisfying wants by the use of goods and services is called consumption. Production and
consumption are, therefore, essential economic activities which must go on in an economy continually.
But if the economy wants to maintain its existing productivity or increase its future productive capacity,
it must consume less than what it currently produces.

Production:
For an economy to exist, production of goods and services is very essential. The standard of
living or the consumption standard of the people depends, in the ultimate analysis, on the
volume and variety of production. In fact, performance of an economy is judged by the
level of its production. Richness or poverty of a country is dependent upon the amount of
goods and services it is able to produce. The process of growth or development consists in
increasing the level of production in the economy

Example: Comparing economy status

The United States of America is the richest country in the world and its people enjoy the highest
living standards because its level of production is the highest. India is a poor country because its
level of production is very low. In order to make India rich, we shall have to step up the rate of
production in the, economy.

In Economics, by production we mean any economic activity which is directed to the satisfaction of the wants of
the people. Whether it is the making of material goods or the provision of any service, it is included in
production, provided it satisfies the wants of some people. Thus, in Economics, if making of cloth by industrial
workers is production, the service of the retailer, who delivers it to the consumer, is also production. This is so
because the service done by the retailer is a part of the process of satisfying consumers’ wants just as much as
the work done by the factory worker. Similarly, the work of doctors, lawyers, teachers, actors, dancers, etc., is
productive, since the services provided by them satisfy the wants of those who pay for them.

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Two types of Good that are produced:

Consumers Good - are those goods which are used by the consumers for direct satisfaction of their
wants. Bread, clothes, shoes, tea, coca-cola, etc., are all examples of consumers’ goods.

Producers Good - are those goods which help in producing further goods. The producers’ goods do not
satisfy the wants of the people directly but they satisfy their wants indirectly by helping in producing
consumer goods.

Consumption:

It is the quantity and quality of consumption which constitutes the standard of living of the people.
Consumption is the act of satisfying one’s wants. That consumption is an essential process of an
economy is obvious. Producers make goods in order to satisfy the consumption wants of the people. If
no one consumes, no one will produce. Consumption is thus the end of all productive activity.
Moreover, consumption along with investment determines the level of income and employment in the
economy.

Economic processes:
Those activities, actions, and operations that
involve the production and sale of goods and
services. This includes the extraction of raw
materials and natural resources. This framework
element serves as a broad placeholder for all
economic processes.

ECONOMIC PROCESS

Thus, economics is all about wealth and hoe this wealth is being used by individuals and society at large for
material survival, stability and development.

B. Economics as STUDY OF MAKING CHOICES

OR

NIGHT LIFE with FRIENDS STUDY HARD with a lot of STRESS

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In everything that we do, whether we produce or consume, whether it is wealth – getting or wealth – using, we
make decisions and this decision are based on alternative choices. Consider some of the choices you face. Would
you like better grades? More time to relax? More time watching movies? Getting better grades probably
requires more time studying, and perhaps less relaxation and entertainment. Not only must we make choices as
individuals, we must make choices as a society. Do we want a cleaner environment? Faster economic growth?
Both may be desirable, but efforts to clean up the environment may conflict with faster economic growth.
Society must make choices.

All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas
central to economics: scarcity, choice, and opportunity cost.

• Scarcity
Our resources are limited. At any one time, we have only so much land, so many factories, so much
oil, so many people. But our wants, our desires for the things that we can produce with those
resources, are unlimited. We would always like more and better housing, more and better
education—more and better of practically everything. If our resources were also unlimited, we
could say yes to each of our wants—and there would be no economics. Because our resources are
limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another.
Whether we like it or not, we must make choices. Scarcity is the condition of having to choose
among alternatives. A scarce good is one for which the choice of one alternative use of the good
requires that another be given up.

Ex. A parcel of land

Represents us with several alternative usage:

• Build a house on it
• Put a gas station on it
• Create a small park on it or
• Leave the land undeveloped in order to be able to make a decision later as to how it should be
used.

Suppose we have decided the land should be used for housing. Should it be a large and expensive house or
several modest ones? Suppose it is to be a large and expensive house. Who should live in the house? If the Lees
live in it, the Perez cannot. There are alternative uses of the land both in the sense of the type of use and also in
the sense of who gets to use it. The fact that land is scarce means that society must make choices concerning its
use.

Scarcity and the Fundamental Economic Questions

The choices we confront as a result of scarcity raise three sets of issues. Every economy must answer the
following questions:

• What should be produced? Using the economy’s scarce resources to produce one thing requires giving
up another. Producing better education, for example, may require cutting back on other services, such
as health care. A decision to preserve a wilderness area requires giving up other uses of the land. Every
society must decide what it will produce with its scarce resources.

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 • How should goods and services be produced? There are all sorts of choices to be made in determining
how goods and services should be produced. Should a firm employ a few skilled or a lot of unskilled
workers? Should it produce in its own country or should it use foreign plants? Should manufacturing
firms use new or recycled raw materials to make their products?
• For whom should goods and services be produced? If a good or service is produced, a decision must be
made about who will get it. A decision to have one person or group receive a good or service usually
means it will not be available to someone else. For example, representatives of the poorest nations on
earth often complain that energy consumption per person in the United States is many times greater
than energy consumption per person in the world’s scores of poorest countries. Critics argue that the
world’s energy should be more evenly allocated. Should it? That is a “for whom” question.

Every economy must determine what should be produced, how it should be produced, and for whom it should
be produced. We shall return to these questions again and again.

• Opportunity cost is the value of the best alternative forgone in making any choice.

Ex.

If you choose to spend $20 on a potted plant, you have

simultaneously chosen to give up the benefits of spending the $20
on pizzas or a paperback book or a night at the movies. If the book is
the most valuable of those alternatives, then the opportunity cost of
the plant is the value of the enjoyment you otherwise expected to
receive from the book.

The concept of opportunity cost must not be confused with the

purchase price of an item. Consider the cost of a college or
university education. That includes the value of the best alternative
use of money spent for tuition, fees, and books. But the most
important cost of a college education is the value of the forgone alternative uses of time spent studying and
attending class instead of using the time in some other endeavor. Students sacrifice that time in hopes of even
greater earnings in the future or because they place a value on the opportunity to learn.

Example Illustration

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The concepts of scarcity, choice, and opportunity cost are at the heart of economics. A good is scarce if the
choice of one alternative requires that another be given up. The existence of alternative uses forces us to make
choices. The opportunity cost of any choice is the value of the best alternative forgone in making it.

❖ Key takeaways
• Economics is a social science that examines how people choose among the alternatives available
to them.
• Scarcity implies that we must give up one alternative in selecting another. A good that is not
scarce is a free good.
• The three fundamental economic questions are: What should be produced? How should goods
and services be produced? For whom should goods and services be produced?
• Every choice has an opportunity cost and opportunity costs affect the choices people make. The
opportunity cost of any choice is the value of the best alternative that had to be forgone in making
that choice.

Activity 1: Identify the elements of scarcity, choice, and opportunity cost in each of the following and
explain your answer on a sheet of paper.
1. The Environmental Protection Agency is considering an order that a 500-acre area on the
outskirts of a large city be preserved in its natural state, because the area is home to a rodent
that is considered an endangered species. Developers had planned to build a housing
development on the land.

2. The manager of an automobile assembly plant is considering whether to produce cars or sport
utility vehicles (SUVs) next month. Assume that the quantities of labor and other materials
required would be the same for either type of production.

3. A young man who went to work as a nurses’ aide after graduating from high school leaves his
job to go to college, where he will obtain training as a registered nurse.

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 4. Activity 2: Analyzing

A student has P60.00 allowance. He will

spend the money for his snack and playing
computer games. Assuming the biscuits for
snack cost P5.00 while playing computer
game is P15.00 per hour

Task:

1. Explain the best alternative.

2. What will be the opportunity cost and
opportunity benefit of the best
alternative.

C. Economics as STUDY OF ALLOCATION

The division of things into shares or portions. In economics, the term refers primarily to the “allocation
of resources,” the process by which economic resources get allotted (apportioned, assigned) to their
particular uses for directly or indirectly satisfying human wants. Although the third definition
concentrates on the allocation process, economics can be analyzed comprehensively in terms of its five
key elements. There are five elements in the definition of economics – social science, resources, human
wants, and allocation.