APPLIED ECONOMICS

Economics as a Social Science and Applied Science in Terms of Nature

and Scope

Prepared by: Mrs. Rowena S. Leoligao

THE NATURE AND SCOPE
OF ECONOMICS
 Definition of Economics

Economics from the Greek word

“Oikanomia” which means “household
management”
Richard Leftwich
Paul Samuelson and Willian Nordhaus
Paul Wonnacott and Ronald Wonnacott
Gerardo Sicat
Fajardo

Economics – is the proper allocation and

efficient use of available resources for the
maximum satisfaction of human wants
Economics is the allocation and
use of scarce resources to satisfy
the unlimited needs and wants
of human.
SOCIAL SCIENCE APPLIED SCIENCE

ECONOMICS AS:
Economics, as a social science,
- studies how individuals make
choices in allocating scarce
resources to satisfy their
unlimited wants.
For example, Maria is a Senior High School Student at Mayap
High School. Her daily allowance is P50.00 covering her meals
and other school expenses. In order for her to pay her school
project, she has to give up (skip) her lunch (opportunity cost).
In this scenario, three things can be derived and proved that
Economics is a social science and these arescarcity, trade-off
and opportunity cost.
Economics as an applied (economics/science) -
- is the application of economic theory and econometrics
in specific settings with the goal of analyzing potential outcomes.

- because it uses the scientificmethod in its explanations,

which consists of observing reality and presenting questions
andproblems to arrive at the formulation of theories and
models.
For example, a student received bigger allowance;
does it mean her spending behavior also changes?
The prediction will be, “Yes, once a person has more
money, she intends to buy more”.
 Economics in a process

Unlimited human wants ---- Scarcity ----- Decision Making

Economics activities
• Earning money
• Buying goods and services
• Depositing and withdrawing money in bank
 REVISITING ECONOMICS AS A SOCIAL
SCIENCE
(There are three strands in the development of the
definition of economics)
Economics as 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 the individual’s satisfaction and
society’s welfare.
 The two major economic problem in any
society – production and consumption

Production- is a process of combining various materials

inputs and immaterial inputs in order to make something for
consumption (output)

Consumption – is the process in which consumer purchase

items on the market
Economics as Study of Making Decision
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 making
decision, we have to consider a major concept in the study of
economics – opportunity cost. In everything that we do, there are
cost and sacrifices that we have to carry.
Economics as Study of Allocation
It is the study of allocation of scarce resources to answer
the unlimited human wants.
FIELDS OF ECONOMICS
- MICROECONOMICS
-MACROECONOMICS
*Microeconomics: focuses on the behavior of
individual economic units and the functioning of
markets. Its perspective focuses on parts of the
economy: individuals, firms, and industries.
 Microeconomics
 Studies of markets ofgood and services
 Focuses of the behaviour of individual in the
market
 Explains how and why theseunits make economic
*Macroeconomics:
- studies the functioning of economics as an
aggregate (production, employment). Its perspective
looks at the economy as a whole, focusing on goals
like production, the standard of living, unemployment
and inflation.
 Macroeconomics
•Studies the economy as a whole
•Focuses on aggregate indicators
(such as production, employment,etc.)
The Economic Agents/Stakeholders:
1.Consumers
• Consume goods and services /offer production factors
2.Producers
• Produce goods / demand productive factors
3.The public sectors
• Attempt to maximize the well-being of society

*The agents interact among themselves in a specific territorial,

social, natural and/or cultural framework that determines their
relationships → Market
HUMAN WANTS AND ECONOMIC ANALYSIS
HUMAN NEEDS

- Can be portrayed as a basic necessities for

material survival including food, shelter and
clothing, among others.
- Are basic requirements of life, things
necessary for survival
HUMAN WANTS
-Can be described as differentiated or expanded
human needs.
-Are based on human needs but differentiated by
the influence of various factors
- Are things that are desirable but not necessary in
order to survive
Factors that affects the wants and needs of the people or
the differences:

1.Income
2.Environment
3.Taste
4.Socioeconomic status
 Maslow’s Hierarchy of Needs
-developed in 1954 by Abraham Maslow
-hierarchy ranks needs in order of importance
-not everything in the hierarchy is necessary for survival
-needs at the bottom need to be meet first
Maslow’s Hierarchy of Needs

1.Physiological needs
2.Safety needs
3.Social needs
4.Esteem needs
5.Self-actualization
 RESOURCES -Are used to answer the human
needs and human wants of society
Characteristics of Resources:

1.Scarcity/Limited: insufficient resources to supply all the

desires and needs of individuals. In the production of
goods and services; there are issues that economics may
encounter:
 these include:
for Land – inadequate land and natural resources; polluted areas;
overcrowded spaces;

for Labor – unskilled workforce; mismatch of jobs;

for capital - low quality of equipment/machines; insufficient

fund/capital;

and for entrepreneurship – Inadequate training of entrepreneurs;

limited opportunity; scarcity of great ideas but many competitors in
the market.
2.Multiple use/Versatile: Resources can have more than one
possible use. For example, a plot of land can be used to plant coffee
or to build a factory.

3.Partially replaceable: one resource can replace another in the

production of a good or service (e.g., replace manual labor with
technology).
Economic resources – also known as factors of production, are the
resources used to produce goods and services.
Factors of production:
 Land
 Labor
 Capital
 Entrepreneurship
 Land - natural resources available to create supply such as raw
materials thatcomes from the ground. It can be a nonrenewable
resource; commodities such as oil and gold; and renewable resource,
such as timber. Oil is a natural resource, but petroleum gas is a
capital good. Farmland is a natural resource, but a shopping center is
a capital good.
 Labor is the work done by people- education, skills, and
motivation and productivity. Productivity measures how much each
hour of worker time produces in output. Workforce receives wage
for his labor.
 Capital or capital goods are – the money that companies used
to buy resources; manmade objects like machinery, equipment, and
chemicals that are used in production. For example, capital goods
include industrial and commercial buildings. A commercial aircraft is
example of a capital good.
 Entrepreneurship develops an idea into a business. An
entrepreneur combines the other three factors of production to add
to supply. The most successful entrepreneurs are innovative and risk
takers. The income entrepreneurs earn is profits.
Scarce resources and unlimited desires → Scarcity
Scarcity and alternative uses → Choice
Choice → Opportunity cost
SCARCITY AS A SOURCE OF ECONOMIC
PROBLEM
SCARCITY
- -Defined as the limitation of resources to answer
the expanding human wants.
- Means “of limited availability”

Scarcity is a fundamental economic problem of having

humans who have unlimited wants & needs in world of
limited resources.
When will a resource be consider as ‘SCARCE’?
A resource is considered scarce when its availability is
not enough to meet its demand .
Examples:

When supply of onion in market is not enough to meet the

demand, that condition can be referred as Scarcity of Onions.

In arid areas, like Rajasthan, there is lack of water i.e. supply of

water≠ its demand. This condition is called scarcity of water
Scarcity equate shortage = NO

Scarcity – is a general characteristic of resources in the light of its

competing uses that may arises form the rapid expansion of
human wants

Shortage – is a condition when the supply of good, service, or

resource is not enough to meet the demand.
Choices & Decision-Making – because of scarcity, there is a need
for a man to make decisions in choosing how to maximize the
use of the scarce resources to satisfy as many wants as possible.
 BASIC TERMS TO UNDERSTAND ECONOMICS

It is essential that you familiarize yourself with the study of

economics. This will facilitate your understanding of economic
analysis. Specifically you meet GOODS – which yields to your
satisfaction. It is anything used to satisfy your wants and needs.
TANGIBLE GOODS
–material goods or commodities.

INTANGIBLE GOODS
– when they are in the form of services. Those rendered by
doctors, engineers, doctors and other professionals
Goods may also be classified according to use.
CONSUMERS GOODS
– goods for the ultimate consumption of the consumers.
Ex.: toothpaste, bath soap, etc.

CAPITAL GOODS or INDUSTRIAL GOODS

- used in the production of other goods and services.
Ex.: buildings, machinery, equipment.
ESSENTIAL GOODS
- used to satisfy the basic needs of man
Example: foods and medicine.

LUXURY GOODS
– goods man may do without, but may give comfort and
satisfaction.
Ex., perfume, cakes; chocolates, expensive cars.
ECONOMIC GOODS
–goods which are useful and scarce; with value attached to
them and a price has to be paid for their use. If a good is so
abundant and it can satisfy everyone’s needs without anybody
paying for it, then, that good is free. The air is free, but the air
from an aircon is an economic good.
DIVISION OF ECONOMICS
1.Production
- Refers to the process of producing or creating
goods needed by the households to satisfy their needs.

Factors of production – inputs

Goods and services – outputs
Goods – a good is something you can see and feel. It is something
you can use. Something that can be used and consumed.

Service – something done for someone else. Sometimes people

are paid for their service, sometimes they are not.

Producer – is a person or business that makes goods or provides

services.

Consumer – is a person or business that buys or uses goods or

services.
2.Distribution - Refers to the marketing of goods and services to
different economic outlets.

3.Exchange - Refers to the process of transferring goods and

services to a person in return for something present medium of
exchange – money.
4.Consumption - Refers to the proper utilization of economics goods.
However, goods and services could not be utilized unless you pay for it. Hence,
consumption could also be spending money for goods and services.

5.Public finance - Pertains to the activities of the government regarding

taxation borrowings and expenditures. It deals with the efficient use and fair
distribution of public resources.
4.Consumption - Refers to the proper utilization of economics goods.
However, goods and services could not be utilized unless you pay for it. Hence,
consumption could also be spending money for goods and services.

5.Public finance - Pertains to the activities of the government regarding

taxation borrowings and expenditures. It deals with the efficient use and fair
distribution of public resources.
THANK YOU