APPLIED ECON INTRO
consumption. The intent of producing
Revisiting Economics as a Social Science
There are three strands in the development
of the definition of economics:
The first focuses on wealth
— In previous decades, economics has
been defined as a science of wealth,
getting-wealth and wealth-using.
The second stresses the decision-making
process
— Currently, economics is defined as the
science of making choices.
The third, concentrates on the allocation
process
— In many textbooks, economics has been
defined as a social science that deals with
the allocation of scarce resources to meet
the unlimited human wants.
Economics as a Study of Wealth
The earlier definition of economics
as the science of wealth-getting and
wealth-using implies that the motivation of
the process of wealth accumulation is the
utilization of wealth for individual’s
satisfaction and society’s welfare.
Although the focus is on wealth,
this initial definition pertains to activities
answering the two major economic
problems in any society-production and
give us additional benefits that are at least
goods and services meant for consumption
and other forms of disposition of these
produced goods and services.
Thus, economics is all about
wealth and how this wealth is being used
by individuals and society at large for
material survival, stability, and
development.
Economics as a Study of Making
Choices
The more current definition of
economics as a science of making choices
is consistent with the previous definition.
In everything that we do, whether
we produce or consume, whether it is
wealth-getting or wealth-using, we make
decisions and these decisions are based on
alternative choices.
In the study of economics, when
we make a choice from among these
alternatives, it implies that we are
foregoing or sacrificing the benefits that
would have been derived from alternatives
that were not selected. Opportunity Cost*
Thus, making a decision, we have
to consider a major concept in the study of
economics – opportunity cost.
In everything that we do, there are
costs and sacrifices that we have to carry.
This means that our choice must
equal to or more than the additional
benefits derived from the foregone
alternatives.
Economics as a study of Allocation
Consistent with the process of
wealth-getting and wealth-using and the
process of making choices is the process of
allocation.
In this section, the definition of
economics will be explained further as a
social science that deals with the study of
allocation of scarce resources to answer
the unlimited human wants.
There are five elements in the definition of
economics- social science, resources,
human wants, scarcity and allocation.
1. ECONOMICS AS A SOCIAL
SCIENCE
As a science it utilizes the
scientific method of inquiry from
identifying the problem, proposing
alternative tentative answers and
hypotheses, testing the tentative answers to
the question or the problem at hand,
gathering and treating the data, and
answering the question through the
conclusion.
As a social science, this systematic
or scientific method is being used in the
study of society and its components. Thus,
social science can be described as the
study of various modes and aspects of
human interactions in a group as these
people aspire to preserve their group as a
social unit, to make it stable, and promote
its growth, expansion and development.
As a social science, economics
pertains to the study on how society creates
its material wealth, how it makes this
wealth available to its people with
minimum difficulties and how it expands
its wealth.
2. Resources and the Study of
Economics
The second dimension of the
definition of economics is resources. This
element is linked with the previous
definition of economics as the process of
wealth creation and wealth utilization.
As mentioned earlier, economics is
about resources or wealth. Resources or
wealth can be defined as products of
nature, qualities of individuals, and
man-made things which are used in
producing goods or services. Inputs of
Production*
3. Human wants and Economic
Analysis
The third dimension of economics
pertains to the focus of economics is on
wealth or resources, this wealth is
expanded not only for their own intrinsic
value but because of their impact in
enhancing human welfare.
Resources are used to answer human needs
and human wants of a society.
Human wants can be described as
differentiated or expanded human needs.
Human needs can be portrayed as
necessities for material survival including
food, shelter, clothing among others.
4. Scarcity as a Source of Economic
Problem
The fourth element in the
definition of economics is the concept of
scarcity.
Scarcity can be considered as a
key economic problem because of the
limitations of resources, on the one hand,
and the expansion of human wants, on the
other hand.
The limitation of resources arises
primarily because of its alternative and
competing uses while human wants are
expanding because of internal and external
factors that differentiate simple human
needs into wants.
These two features are the main
reasons for the emergence of the problem
of scarcity which has to be addressed
through the production and distribution
activities to attain the material survival,
stability, and growth of any society.
5. Allocation and the Act of
Economizing
The fifth element in the definition
of economics is the concept of allocation.
Because of the problem of scarcity, there is
a need for a mechanism of distributing
limited resources to meet the expanding
human wants.
Thus, allocation can be defined as
social mechanism to respond to the
economic problem of scarcity.
There are various ways of treating the
problem of scarcity.
● For one, individuals may have to
temper or slow down the
expansion of their human wants in
the light of limited resources.
● The second option is to hasten the
expansion of limited resources in
the light of expanding human
wants.
● The third choice is the combination
of the two alternatives. These
options are integrated in the three
major mechanisms of allocation:
market system, command and
tradition.
MARKET
(Price in the Market System)
● The means of production in this
economic system is controlled by
private enterprises.
● Free trade is evident. Here, the the
government does not directly
control the market forces.
● The role of of the government is to
regulate economic activities and
provide the society what the
market does not offer, such as
infrastructure, health, education,
and defense.
● Countries that apply capitalism
like the US, UK, France, and
many others strongly adhere to this
economic system.
● An appropriate description of a
market is a state when buyers and
sellers transact on the purchase or
sale of a good or service. The
agreement among the players is to
set the amount of good or service
to be rendered and most
importantly, the price that the
output is going to be sold and
brought.
● The price of a commodity is both
an index of cost or sacrifice (for
producers) and benefit or
satisfaction (for buyers).
● This information that the price
signals to the consumers and
producers, the price can be an
instrument for the allocation of
resources through the mechanism
of the market system. The problem
of scarcity is addressed through the
changes in prices and the
corresponding responses of the
buyers and sellers.
● The market system operating on
the price mechanism provides
incentives and disincentives to
consumers and producers that
respond to the problem of scarcity.
● These automatic price adjustments
are not only meant to answer the
problem of shortages and surpluses
but to answer the three basic
economic questions: what to
produce, how to produce and for
whom to produce.
COMMAND
(Power in Command System)
In this economic system, the
means of production is owned and
controlled by the government. The
government decides what, how much,
and whom to produce.
This particular system is seen in
countries like North Korea, Russia, and
China, because their governments do not
only regulate but also direct control over
the economy.
● In a command system, the state or
agency of the government may be
in charge in the allocation of
resources by using its political
power in answering the basic
economic problems of production
and distribution.
● In times of natural calamities,
disasters, or national emergencies,
the command system may be more
orderly than the market system.
● The command system has been
useful as a temporary alternative
mechanism in abnormal times
when the market system cannot
fully operate of the price
mechanism is inadequate for
allocation.
● However, it has been used even in
normal times by several totalitarian
and socialist states in the past to
pursue national goals including
industrialization and self-reliance.
TRADITION
(Culture in Tradition System)
This is the economic system
whereby the means of production is based
on traditions, practices and even beliefs of
the people. In this kind of economy, the
people employ the same practices which
were also applied by the forefathers.
Take for instance farming rice and
corn. The conventional or the manual way
of farming rice and corn is still widely used
in some parts of the country. Another
example is turning coconut and sugar cane
juices to vinegar through natural
fermentation.
● The third alternative allocation
mechanism is done through
tradition.
● The use of tradition may be useful
in situations where the operation of
the market may not be appropriate,
or the power of an organized state
has no control over a certain
community.
● This was normally observed and
practiced in indigenous
communities in the past, where life
was less complicated and simple
needs of the members of the
society can be provided by the
society itself.
The Economic System Prevalent in the
Philippines
The Philippines has a mixed
economic system because the three
economic systems are seen in the country.
However, the one that is prevalent is the
market economy.
It is so evident that you do not
have to conduct researches for you to prove
it. All you have to do is look around and
see the various kinds of businesses
operating. These businesses are owned by
private entities and not by the state.
What does the government do with the
market if it does not directly control it?
The government regulates the
different aspects of the market by enacting
laws, issuing licenses before a business
could actually operate, and imposing
different taxes not only upon goods and
services but also upon the income of the
entrepreneurs. Furthermore, it is the
government that provides infrastructure,
security, education, and other services,
needed by the society, but are not provided
by the market.
ECONOMICS AS AN APPLIED
SCIENCE
As a social science, economics
deals with the analysis on how members
of a society interact with one another on
the creation and utilization of wealth.
In addition, economics has been
described as the allocation of resources to
meet human wants.
Thus, economics is a science of
choosing an activity from alternative
options that will yield the highest benefits
to society in the context of competing uses
of opportunity costs.
● The study of economics has been
perceived as too theoretical since
it deals with principles, laws and
assumptions governing human
behavior in the allocation process.
● In addition, the treatment in many
textbooks is made through the use
of graphs, mathematics, and
statistics that many students do
not appreciate.
Economics is a social science and
it deals with people and how they interact
with one another to sustain, stabilize and
develop the material dimension of a
society.
Many of the principles, laws and
theories developed in economics can be
applied in a number of fields. It has
several applications in commercial
sciences.
ACCOUNTANCY!
In the field of Accountancy, the
information generated in the recording
and analysis of transactions on the state
of assets of any establishment can be
useful in
making business decisions pertaining to
wealth accumulation and wealth
utilization.
MARKETING
In marketing, understanding the behavior
of consumers can be useful to firms in
expanding their market share.
FINANCE
In finance, the formation of excess funds
for investment purposes can be understood
through the concept of saving which is
rooted on the opportunity cost of present
consumption.
MANAGEMENT
In management, the optimal combination
of human and physical resources to be
used in production will require
understanding of benefit and cost
expressed in terms of factor productivities
and factor prices.
ANALYSIS OF DEMAND
Demand
● The willingness and ability to
purchase a commodity or service
● The quantity of a commodity or
service wanted at a specified price
and time.
WHAT IS YOUR CONCEPT OF
PRICE?
a. Price is the monetary value of a unit of
commodity.
b. From the point of view of consumers,
price is payment for the purchase of a
commodity whose value reflects the
satisfaction or utility derived from the
consumption of a good or service.
c. From the point of view of producers,
price is revenue earned for a commodity
sold whose value reflects the cost of
producing a unit of good or service.
Factors affecting demand
● What are the factors that may
affect an individual’s demand for a
particular good?
● A demand curve is a graph that
shows the amount of commodity
that consumers are willing and able
to buy at alternative prices at a
given point in time other things
held constant.
● What are the factors affecting
demand and why is the demand
curve a relationship between price
of the commodity and the quantity
demanded?
Qd = a-bP
Qd - Quantity demand
a - Intercept
b - Slope
P - Price
OTHER FACTORS AFFECTING THE
DEMAND OF A COMMODITY
1. Income – As indicated in the
concept of demand, it is the
willingness and capacity of a
consumer to buy at alternative
prices. Although the willingness
may be influenced by the price of
the commodity as well as the taste
for the commodity, the capacity to
purchase on the other hand is
influenced by the income of the
consumer.
2. Prices of other commodities –
Aside from the price of the
commodity being sold, the demand
for a good or service may also be
influenced by prices of other
goods and services.
For example, if the other good is a
substitute, the increase in the price
of the substitute good may increase
the demand for the commodity at
hand.
3. Expectation – In addition to the
price of the commodity, the
 expectation or prospect on what is
going to happen to the price can
influence the demand for the
commodity.
For example, if you
believe that the price of the
gasoline will increase tomorrow,
there is a tendency for consumers
to increase their consumption
today.
4. Taste – Taste or preference is
another important factor that may
influence the demand for a
commodity. The formation of taste
is influence by several factors.
Some of them can be shaped by
cultural values, others through peer
pressure or the power of
advertising.
5. Market – The size and
characteristic of the market can
also influence the demand for a
commodity. An increasing
population can contribute to the
expansion of existing markets for
various commodities.
Demand curve
a. The demand curve focuses on the
relationship between the quantity
demand and the price of the
commodity at a given point in time
other things held constant.
b. Law of Demand — As the price
of a commodity declines, the
quantity increases and when the
price increases, the quantity
demand declines.
c. Substitution Effect and Income
Effect – The inverse or negative
relationship between price of the
commodity and the quantity
demand shown in the demand
curve can be explained through the
substitution effect and income
effect of a price change.
Concepts explaining law of demand
Income effect – refers to the modification
of the consumption of a commodity due to
change in the purchasing power of the
consumer resulting from a price change.
Principle of Diminishing Marginal
Utility – it implies that the additional
satisfaction provided by an additional
commodity consumed is lower than the
additional satisfaction given by the
previous level of consumption of the
commodity.
Supply Analysis
Why is the supply curve upward sloping?
The supply curve shows a
positive or direct relationship between
the price of the commodity and the and the
quantity supplied in the market.
The main motivation to supply
goods is to gain profit, which is based on
the costs of production of a firm and the
price of commodity.
Principle of Diminishing Marginal
Productivity and Increasing Marginal
Cost
● A more theoretical explanation
developed by economists is based
on the increasing marginal cost
of production.
● According to this perspective, as
the total production of good
increase not only does its total cost
increases but the additional or
marginal cost increases as well.
● This means that the additional cost
of an additional unit of production
is higher than the previous unit of
production.
● This increase in marginal cost is
due to the principle of diminishing
marginal productivity of resources.
 ● According to this principle, as a
fixed factor input, capital or land,
is mixed with a variable factor
input, labor, the employment of
additional laborers will increase
total production but will increase it
at a decreasing rate.
● This means that although total
production is increasing, the
additional or marginal contribution
of the additional labor to total
production is declining.
● This is because the productivity of
the variable input is constrained by
a fixed input, capital or land.
As the firm employs the additional
variable inputs to increase its production,
its total cost of production will likewise
increase. Total costs will not only increase
but it will increase rapidly because the
additional variable factor inputs are
becoming less and less productive.
Since these variable inputs are
becoming less productive than the previous
ones, it implies that they are becoming
costlier to employ. This is the implication
of increasing marginal costs with the
increase in production of output.
Changes in the Supply Curve
● There are two major categories in
the changes in the supply curve-
movement along the supply curve
and shifts in the supply curve.
These changes are influenced by
the changes in the factors affecting
the supply of a commodity.
● The movement along the supply
curve is brought about by changes
in the price of the commodity. An
increase in price will increase the
quantity supplied as shown by the
movement towards northeast along
the supply curve.
● On the other hand, a decrease in
the price of the commodity will
cause a decrease in quantity
supplied as shown by the
movement to the southwest along
the supply curve.
The shift in the curve, on the one
hand, is caused by changes in the other
factors affecting supply except the price of
the commodity.
For example, an increase in
minimum wage can increase the cost of
production and will shift the supply curve
to the left. As the supply curve shifts to the
left, the supply declined since all possible
quantities to be supplied decreases at all
alternative prices.
- Similarly, an imposition of an additional
business tax by the government will
likewise lower the supply as the supply
curve shifts to the left.
Equilibrium Price
When buyers and sellers transact in the
market they agree on the price of the
commodity and the amount to be sold and
bought. This agreed price is called
equilibrium price.
● In the demand and supply analysis,
this market agreement shown by
the intersection of the demand
curve with the supply curve.
● From a graphical perspective, the
equilibrium price implies that
buyers and sellers in agreement to
buy and sell the same amount of
commodity at the equilibrium
price.
● Since the equilibrium price is an
agreed price, it is also a stable
price since there no pressure from
the buyers and sellers to alter the
amount, they want to buy or sell.
Disequilibrium
● There are cases when there are
disagreements among buyers and
sellers on the price and quantity. In
such cases disequilibrium
situations can occur.
 ● An example of disequilibrium
condition is when the amount
buyers are willing to buy is not the
same as the amount the producers
are willing to sell at a given price.
● Another example of disequilibrium
situation is when at a given level of
quantity, the price that buyers are
willing to purchase the commodity
is different from the price the
producers are willing sell. This
means the demand price is
different from the supply price.
Because disequilibrium situations create
differences in the amount of commodity
being bought and sold, the market price is
not stable and can bring economic
problems. If the market is efficient, these
differences create pressures through price
changes to remove the disequilibrium.
The analysis of supply and demand
is a simple yet powerful economic
framework that can be used in
understanding contemporary issues facing
the Philippine economy.
Concept of Price Ceiling and Price Floor
● Price Ceiling – As a measure to stabilize
prices of basic commodities during these
unusual periods the government may
impose a price control measures on basic
commodities. This means that the price
cannot go higher than the mandated price Characteristics of MONOPOLY
ceiling. 1. Maximizes profits;
● Price Floor – Another government 2. Decides the price of the good or
measure to arrest the price adjustments in product to be sold, but does so by
the market is the imposition of a price determining the quantity in order
floor. This means that the government sets to demand the price desired by the
the price of a commodity and it cannot go firm;
lower than the set price. The imposition of 3. Other sellers are unable to enter
price floor measure is meant to protect the market of monopoly;
certain actors in the market. 4. In a monopoly, there is one seller
of the good that produces all the
MARKET STRUCTURES output. The whole market is being
served by a single company, and
for practical purposes, the
MONOPOLY
company is the same as the
● A monopoly is a market structure in
industry.
which there is only one producer/seller
5. A monopolist can change the price
for a product. In other words, the single
and quality of the product. He or
business is the industry.
she sells high quantities, charging
● Entry into such a market is restricted
a lower price for the product, in a
due to high costs or other impediments,
very elastic market and sells lower
which may be economic, social or political.
quantities, charging a higher price,
● For instance, a government can create a
in a less elastic market.
monopoly over an industry that it wants to
control, such as electricity.
OLIGOPOLY
● One entity has exclusive rights to a
● In an oligopoly, there are only a few
natural resources or it may also form when
firms that make up an industry. This
a company has a copyright or patent that
select group of firms has control over the
prevents others from entering the market.
price and, like a monopoly, an oligopoly
has barriers to entry.
● The products that the oligopolistic
firms produce are often nearly identical
and, therefore, the companies, which are
competing for market share, are
interdependent as a result of market
forces.
Assume for example, that an economy
needs only 100 components. Company X
produces 50 components and its
competitor, Company Y produces the other
50. The prices of the two brands will be
interdependent and, therefore, similar. So,
if Company X starts selling the
components at a lower price, it will get a
greater market share, thereby forcing
Company Y to lower its price as well.
● This example shows that participants in
oligopolies are often able to take them
rather than set prices.
● Oligopoly situations usually invite
collusion or a secret agreement between
two or more persons or institutions to
achieve certain objectives among the
industry’s firms.
● An oligopoly in which participants
explicitly engage in price fixing is a cartel.
Characteristics of OLIGOPOLY
1. An oligopoly maximizes profits;
2. Oligopolies are price takers than
price setters;
3. Barriers to entry are high. The
most important barriers are
government licenses, economies of
scale, patents, access to expensive
and complex technology, and
strategic actions by incumbent
firms designed to discourage or
destroy promising firms.
4. Additional sources of barriers to
entry often result from government
regulation favoring existing firms
making it difficult for new firms to
enter the market.
5. There are so few firms that the
actions of one firm can influence
the actions of the other firms;
6. Oligopolies can retain long run
abnormal profits. High barriers to
entry prevent sideline firms from
entering market to capture excess
profits;
7. Product may be homogenous;
8. Oligopolies have perfect
knowledge of their own cost and
demand functions but their
inter-firm information may be
incomplete. Buyers have only
imperfect knowledge as to price,
cost and product quality.
PERFECT COMPETITION
● Perfect competition is characterized by
many buyers and sellers, many products
that are similar in nature and, as a result,
many substitutes.
● Perfect competition means there are few,
if any, barriers to entry for new
companies, and prices are determined by
supply and demand.
● Thus, producers in a perfectly
competitive market are subject to the prices
determined by the market and do not have
any leverage.
Characteristics of Perfect Competition
1. There is a perfect knowledge, with
no information failure or time lags
in the flow of information.
Knowledge is freely available to
all participants, which means that
risk-taking is minimal and the role
of the entrepreneur is limited;
2. Given that producers and
consumers have perfect
knowledge, it is assumed that they
make rational decisions to
maximize their self-interest -
consumers look to maximize
their utility, and producers look
to maximize their profits.
3. There are no barriers into or exit
out of the market.
4. Firms produce homogeneous,
identical units of output that are
not branded.
5. Each unit of input, such as unit of
labor, are also homogeneous.
 6. No single firm can influence the
market price, or market conditions.
The single firm is said to be a price
taker, taking its price from the
whole industry.
7. There are many firms in the
market- too many to measure. This
is a result of having no barriers to
entry.
8. There is no need for government
regulation, except to make markets
more competitive.
9. Firms can make normal profits in
the long run, although they can
make abnormal (super-normal)
profits in the short run.
and no business has control over
the market price.
2. Consumers perceive that there are
non-price differences among the
competitors’ products;
3. There are few barriers to entry and
exit;
4. Producers have a degree of
control over price.
__________________________________

MONOPOLISTIC COMPETITION
● Monopolistic competition is a type of
imperfect competition such that one or two
producers sells products that are
differentiated from one another as goods
but not perfect substitutes (such as
branding, quality or location).
● In a monopolistic competition, a firm
takes the prices charged by its rivals as
given and ignores the impact of its own
prices on the prices of other firms.
Characteristics of MONOPOLISTIC
COMPETITION
1. There are many producers and
many consumers in the market,