LEARNING MODULE

in

APPLIED ECONOMICS

(Module 1)

S.Y. 2021-2022

Prepared by:

FLORENTINO P. GARCIA JR., BA Pol Sci, CHRA

Instructor

BASIC ECONOMIC CONCEPTS

A. Basic Terms

 Needs – basic requirements for survival like food, water, and shelter. In recent years, we
have seen a shift of certain items from wants to needs like telephone services, motor
vehicles, and education.
 Wants – the various desires of man that must be satisfied with goods and services.
 Goods – things (tangible or intangible) that are produced, sold, bought, and utilized
which satisfy a person’s needs and wants.
 Services – the efforts rendered by someone for a price such as haircuts, doctor’s visits,
legal consulting, etc. which also satisfy human needs and wants.
 Consumer Goods – goods that are intended for final use by the consumer like milk, soft
drinks, and food.
 Capital Goods – goods that are used in the creation or production of other goods like
buildings, machinery, and equipment.
 Essential or Necessity Goods – goods that are used to satisfy the basic needs of man
such as food, clothing, shelter, and medicine.
 Luxury Goods – goods that man may do without but are used to contribute to his
comfort and well-being, such as chocolates, perfumes, and expensive cars.
 Durable Goods – goods that last more than 3 years when used on a regular basis.
 Non-durable Goods – goods that last less than 3 years when used on a regular basis.

B. Scarcity and Trade-off

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  Scarce – means very small in amount.
 Scarcity – a situation that arises from the assumption of unlimited needs and wants and
the fact that resources to obtain goods and services are limited.
o It implies that we cannot have all that we want; hence, we need to make the best
use of scarce resources to satisfy our wants as much as possible.
o It limits our options and forces us to make hard choices which mean that in order
to get something, we must give up something else. There is always a trade-off to
be able to satisfy unlimited wants with limited resources.
o Trade-off will not only apply to individuals, families, and businesses but also to
governments or societies.
o Scarcity is the reason why people must “economize”.

C. Economics: Defined

 Economics is a study of how we manage our scarce resources.

 Economics is the proper allocation and efficient use of available resources for the
maximum satisfaction of human needs wants.
 Economics is concerned with production, distribution, and use of material goods and
services, and the study of human efforts to satisfy unlimited needs and wants with limited
resources.
 Economics helps us understand and predict price changes, and how the economy as a
whole works.

D. Reasons for Studying Economics

1. Economics helps us understand the marketplace and economic system.
2. Whether we are workers, employers, or the owners of a firm, economics is relevant to us.
3. As ordinary citizens, we can influence the public sector to make intelligent decisions
about how much money should be spent on basic services like education or health
services.

E. Fundamental Economic Activities

1. Production – the process of transforming raw materials to a finished product.

2. Distribution – the physical apportionment of goods and services from the producers to
the consumers; it is simply called marketing distribution or trade.
3. Exchange – the transfer of ownership over goods and services from one person to
another and this is usually accomplished using money or credit.
4. Consumption – the process of using goods and services in the direct satisfaction of
human needs and wants; it is regarded as the most important function in economics

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 because it is the ultimate end of economic activity; without consumption, there would be
no need for production and distribution.

F. Factors of Production

1. Land – includes all the natural resources, including mineral deposits, water, air, trees,
poultry, livestock, and all other forms of these raw materials used in production of goods
and services.
2. Labor – any form of human effort like physical or mental, which is exerted in the
production of goods and services.
3. Capital – refers to the machinery, tools, equipment, and structures used in the production
of goods and services.
4. Entrepreneurship – the ability of an individual to provide the right kind of good or
service at the right place and time, to the right people at the right price.
 Entrepreneur – the person who puts together or organizes the other factors of
production (land, labor, capital) to create goods and services which can satisfy the
needs and wants of man. He is innovative and a risk taker.

G. Divisions of Economics

1. Microeconomics:
 It studies the economy in parts. It deals with the economic behavior of individual
units such as the consumers, firms, and owners of the factors of production.
 It studies the decisions of individuals and businesses and the interaction of those
decisions.
 It explains the prices and quantities of goods and services, how market system
works and the effect of government regulations and taxes to individuals.
 It is concerned primarily with the market activities on individual economic units.
2. Macroeconomics:
 It deals with the economic behavior of the whole economy or its aggregates such
as government, business, and household, and how they grow and fluctuate.
 It is the division of economics that deals with aggregates. It presents pictures of
totals: income, output, employment, spending, and price level. It studies the
economy as a whole.
 It is concerned with the discussion of topics like gross national product, level of
employment, national income, general level of prices, total expenditures, and total
consumption.
 It treats the economic system as a whole rather than individual economic units of
which it is composed.

FUNDAMENTAL ECONOMIC PROBLEMS AND

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ECONOMIC SYSTEMS
A. Why Economic Problems Exist?

1. Economic problems exist because of two fundamental facts:

1. resources are limited; and
2. human wants are unlimited.
2. Human wants cannot all be possibly satisfied because resources are scarce.

B. The Four Fundamental Economic Problems

All nations, big or small, developed or underdeveloped, must find answers to the following
fundamental economic problems:

 What goods or services are to be produced?

o Explanation:
 This refers to the choice of goods or services that the economy should
produce.
 Will a country produce rice, coconuts, bananas, or manufacture bags,
shoes, and garments? Or if a country is preparing for war, should it
concentrate on the manufacture of ammunitions, rocket ships, nuclear
weapons, and the like?
 Since resources are scarce, no economy can produce every product desired
by the members of society.
 Basic needs of the people are given top priority.
 The decision of what goods and services are to be produced would depend
on what is needed and what is wanted. It also depends on culture,
availability of resources, and climate.

 How many goods or services are to be produced?

o Explanation:
 This refers to the quantity of each good or service that the economy will
have to produce to make up the total output.
 Suppose that a country has decided to manufacture shoes. How many pairs
should be manufactures? Or, if rice production is decided on, how much
should be the total output?
 No economy can produce goods and services enough to satisfy all
members of the economy.

 How are the goods or services produced?

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 o Explanation:
 This refers to the choice of technique of production and the manner of
combining resources to come up with the desired output.
 Since a good can be produced with different techniques, the problem is
which of these to use.
 The economy that decides on the production of shoes will also have to
come up with the decision on how the shoes will be manufactured. What
materials will be used? Will production involve the use of more labor or
the use of more machinery? How will the available resources be combined
to come up with the most efficient output of shoes?
 The least costly but efficient method must be chosen in order to save
resources. This means maximum output with minimum input without
sacrificing quality of the goods and services.
 A labor-intensive technology makes use of more labor than capital while a
capital-intensive technology makes use of more capital than labor.

 For whom are the goods or services produced?

o Explanation:
 This refers to the choice of who will benefit from the production of goods
and services.
 In other words, this refers to the target market which the producers will
sell their products.
 Will the shoes be sold to high income buyers or to low income buyers?
Will the target market be males, females, or children? Will the shoes
manufactured be sold to domestic consumers or to the foreign markets?

C. The Economic Systems

 Economic System – comprised of the various processes of organizing and motivating

labor, producing, distributing, and circulating of the fruits of human labor, including
products and services, consumer goods, machines, tools, and other technology used as
inputs to future production, and the infrastructure within and through which production,
distribution, and circulation occurs in a particular society; OR SIMPLY, this is the
framework in which society decides on its economic problems.
 The principal objective of an economic system is to solve the fundamental economic
problems. It has varied concepts, strategies, and ways of improving the living conditions
of people. However, all economic systems have one common goal: a high standard of
living for all the citizens.

D. The Types of Economic System

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 1. Traditional Economy – an economic system that answers the four fundamental
economic problems based on social customs and on how the society has dealt with these
questions in the past.

 Decisions on what, how, and for whom to produce are made by referring to the
traditional manner of doing things.
 Production is carried in the methods used by the forefathers and is therefore very
primitive. Example: A farmer engaged in the production of rice does exactly what
his father did when he planted rice more than 50 years ago.
 This type of economic system is very backward since it does not allow for
change.
 This is usually practiced in underdeveloped regions and in mountainous areas
where transportation and communication are practically non-existent.
 A country’s customs can differ greatly from that of a neighboring country so
traditional economies vary from one another.

2. Command Economy – an economic system where the means of production are owned
and controlled by the government and the answers to the four fundamental economic
problems are dictated by the government through the head of the nation or a group of
men designated by the head to make decisions.

 Its decisions are arrived at by planners or government men who dictate what,
how, and for whom to produce.
 This system works under the principle that “the interests of the society should
prevail over that of the individuals.”

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  The government decides how to answer the four fundamental economic problems
for the country rather than by giving individuals the chance to decide what they
want or need.
 The government plans what to produce and how resources should be allocated.
Individual preferences are not considered at all. Consumers buy what is available
and may have to do without what they want or what they need.
 The consumer’s freedom of choice is curtailed, and the system does not enable
him to participate in the decision-making process regarding the answers to the
society’s fundamental economic problems.
 This type of economy is difficult for the individual because it is impossible for the
government to know exactly what is best for every citizen.

3. Market Economy – an economic system wherein the means of production are privately-
owned and answers the fundamental economic problems by considering consumer’s
choice.

 The four fundamental economic problems are answered in the marketplace by the
interaction of buyers and sellers. For example, the question of what to produce
may be based on what trend is popular right now. The producer would create a
product that he thinks would sell well to the public in hopes of making a profit.
The question of how to produce is usually based on the producer’s choice. A
product may be produced with more workers or more machines and computers to
save on labor costs. For whom to produce is based on the buyers who decide what
they want or need and what price they are willing to pay for the products.

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  Competition is supreme, there is consumer sovereignty, and the price of the goods
is the guiding factor for producers to know what and how much to produce.
 The market prices serve as signals to the producers about what goods to produce
and how much of these goods should be produced. High prices indicate that goods
are in demand and serve as go signals for production. However, prices tend to fall
when goods are not in good demand and serve as a red light to decrease or limit
production. The problem of production is therefore solved by the price
mechanism.

4. Mixed Economy – a blend of the different types of economic system.

 It is seldom that an economic system exists in its pure form.

 While the economy of United States is basically market-oriented, there exist
forms of government regulation and control. On the other hand, the People’s
Republic of China’s economy is basically command-oriented in nature, yet it
cannot be said that it does not use the price system at all.
 The Philippine economy is a mixture of the three forms of economic systems
discussed above. In the mountains and isolated barrios, most farmers are still
traditional in their production methods. While most buyers and sellers are
influenced by the price system, it cannot be denied that the government plays a
significant role in decision-making with regards to production, business, and
industry. The existence of price control, strict government regulations,
government support, and subsidy programs are proofs of the importance of
government participation in decision-making in the country’s production
activities.

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  In a mixed economy like ours, the questions of what to produce and how to
produce, answered predominantly through the price mechanism, are modified
through government intervention in the form of direct controls, taxes, and
subsidies.
 The problem of for whom to produce is also solved by the price mechanism
coupled with different forms of government regulation. The economy will
produce those goods or services that will satisfy the wants of those people who
have the money to pay for them.
 Predominantly, the Philippine economy is market economy in nature but the best
way to describe its economic system is mixed economy.

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 THE CIRCULAR FLOW MODEL

A. The Interrelationship Between the Household Sector and Business Sector

Economic activities take place through the interrelationship that exists between two
economic units:

1. The household, which is the basic consuming unit; and

2. the business firm, which is the basic producing unit.

B. The Circular Flow Model

• The Circular Flow Model is a model that is used to show the flow of resources and
income through an economy. It is a simple economic model showing the relationship
between money income and spending for the economy.

• The circular flow model is only a model, a simplification of a complex reality.

However, it is necessary to be understood in order to have a clear understanding of the
complexities that are encountered in the economic activities of a nation.

• The upper portion of the loop shows the movement of resources like labor, land and
capital inputs from the household to be used by the business firm for producing goods
and services. In return, the business firm pays the household wages for the labor, rent for
the land, and profit for the capital. The payments represent the income of the household.
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 • The lower portion of the loop presents the movement of goods produced and services
provided by the business firm to the household. Similarly, the household pays the price of
the goods and services to the business firm. The payments represent the income received
by the business firm.

THE CONCEPT OF DEMAND AND DEMAND

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ANALYSIS
 A. The Theory of Supply and Demand and the Market

Theory of Supply and Demand – this theory shows how consumer preferences determine
consumer demand for goods and services and how business costs determine supply of the
product in the market. It is a basic and important tool in explaining changes in a
predominantly market economy like the Philippine economy.

Generally, a market is defined as an institution or mechanism that brings together buyers

(demanders) and sellers (suppliers) of goods and services.

B. Demand

- The demand for a product (or simply, demand) is the amount of the good or services that
buyers in a specific market are willing and able to buy per unit of time, ceteris paribus or
“other things held constant”.

- Demand can be measured and presented as a demand schedule or a demand curve:

Demand Schedule – shows, in tabular form, the various quantities of the product that will be
bought at various prices at a specific time and place. Example:

Vigan City Market Demand Schedule for Mangoes per Week

Price of Mangoes (per Quantity Demanded (in

kilo) kilo)
Php 45 100
Php 40 150
Php 35 200
Php 30 250
Php 25 300
Php 20 350

Demand Curve – it is a graphical representation of the demand schedule.

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 Example:

Vigan City Market Demand Curve for Mangoes per Week

Law of Demand – When the price of a product is increased, and the “other things” are kept
constant, buyers tend to buy less of the product. On the other hand, when the price decreases,
buyers tend to buy more of the product.

 Hence, the law of demand explains the inverse relationship of price and quantity
demanded, quantity demanded goes down as price goes up, and vice versa.

 The two factors below explain why a consumer tends to buy more of a product or service
if its price falls.

1. Income Effect – as price falls, the purchasing power of the consumers is

enhanced because they can buy more of a product.
2. Substitution Effect – as price falls, the product becomes less expensive
compared to similar products so that the consumers tend to buy more of that
product and less of the similar product.

Non-Price Determinants of Demand

In the discussions above, price is assumed as the most important factor affecting demand.
Observations show however that there are other factors that can and do affect demand.
The “other factors” that influence demand, known as Non-Price Determinants of
Demand, are as follows:

1. Tastes and preferences

 Explanation: A favorable change in consumer tastes and preferences – a change

that makes the good or service more desirable – would increase demand.

 Examples:

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  Consumers prefer appliances that have higher electrical consumption
efficiency, thus, increasing demand for these appliances.
 Conversely, the fashion craze for the green color may soon pass, so the
demand for green clothes will decrease.
2. Number of buyers
 Explanation: An increase in the number of buyers in a specific market results in
greater demand, and vice versa.

Examples:
 Concern for health has increased the number of consumers who prefer
organically grown fruits and vegetables and thus increased their demand.
 Conversely, education on the benefits of breastfeeding has decreased the
number of mothers buying infant milk formula for babies and thus
decreased the demand for the milk formula.
3. Income
 Explanation: For most products, a rise in income causes increase in demand.
 Example:
 As consumers earn more, they tend to buy more beef, clothes, and
electronic equipment.
 Additional Discussion:
 Products whose demand varies directly with income are called normal or
superior goods.
 On the other hand, there are products whose demand decline as money
income rise and are called inferior goods.
 Example of inferior goods: dried fish and second-hand clothes.
4. Prices of related goods
 Explanation: Changes in prices and availability of related goods may increase or
decrease the demand for a product or service depend on whether the good is a
substitute or a complement:
 Substitute Good – something that can be used in place of another good.
 Complementary Good – something which is used together with another
good.
 Example:
 Tea is a substitute for coffee while creamer is a complement of coffee.
 If the price of coffee rises, consumers will tend to buy less coffee,
and switch to buying tea which becomes relatively cheaper.
 On the other hand, if the price of the coffee rises, the demand for
coffee decreases as well as that of the creamer.

5. Expectations
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  Explanation: The expectations of consumers on future market situations, such as
future price or future availability of a product, affect demand.
 Example:
 If consumers expect that the price of fruit cocktail will rise during the
Christmas season, they will buy the product early, thus increasing current
demand for fruit cocktail.

Changes in The Demand Schedule and Movements along the Demand Curve
 A change in one or more non-price determinants of demand changes the demand
schedule and therefore changes the location of the demand curve in the graph.
 An increase in demand will shift the demand curve from its original location to the
right while decrease in demand will shift the demand curve to the left.
 Thus, the non-price determinants of demand are sometimes called demand shifters.
 Examples:
Change in the Demand Schedule
(i.e. consumer’s income increased)

Legend: d1 = original demand | d2 = new demand after the increase in income

Movement Along the Demand Curve

(i.e. consumer’s income increased)

Legend: d1 = original demand | d2 = new demand after the increase in income

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 Worksheet No. 1

Name: ______________________________________________ Score_____________

Year/Strand: _____________________________

Direction: Choose 3 products. Using the template below, outline the Factors of Production
(Land, Capital, Labor) that were used in the creation of that product. (30pts)

Sample Template:
PRODUCT NAME: Product Y

LAND (What are the raw materials used?)

CAPITAL (What are the machinery, tools, equipment, and structures used?)

LABOR (What are the specific human efforts used?)

Activity

PRODUCT NAME:

LAND

CAPITAL

LABOR

PRODUCT NAME:

LAND

CAPITAL

LABOR

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 PRODUCT NAME:

LAND

CAPITAL

LABOR

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 Worksheet No. 2

Name: ______________________________________________ Score_____________

Year/Strand: _____________________________

Direction: Using the template below, compare the four types of economic systems. (40pts)

ECONOMIC Who/what determines How open is the economy Are the preferences of the
SYSTEMS decisions for the economy? to accept new trends? people being considered?

Traditional

Command

Market

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Mixed

Worksheet No. 3

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Name: ______________________________________________ Score_____________
Year/Strand: _____________________________

Direction: Make/draw a graph or demand curve based on the data presented below. (20pts)

San Juan Market Demand Schedule for Eggplant per Week

Price of Eggplant Increase in Demand
Initial Demand
(per kilo)
Php 50 150 200
Php 45 200 250
Php 40 250 300
Php 35 300 350
Php 30 350 400
Php 25 400 450

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 MODULE OUTPUT

Instructions: Research about the type of economic system mainly advocated by the following
countries and write a short essay describing their economy: (50pts)
a. USA,
b. South Korea,
c. Russia,
d. China and
e. North Korea

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References:
Dinio R.P., et al; 2017. Applied Economics

https://www.masterclass.com/articles/understanding-the-circular-flow-model-in-
economics

https://courses.lumenlearning.com/boundless-marketing/chapter/demand-analysis/

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