Lesson 1 Economics as Social

Science and Applied

Science in Terms of
Nature and Scope

ECONOMICS AS A SOCIAL SCIENCE

Social science is defined as the study or discipline that aims to explain human
behavior and society. It is a study of society or parts of it that utilizes the scientific
method of observation, hypothesis formulation, testing and experimentation.
Economics is a social science because it tries to understand how members of
a society behave and organize themselves to meet their individual and communal
material needs and desires. It explains how the unlimited demands and desire of
man or consumer is given satisfaction by the goods and services produced using the
limited economics resources available in the country.

ECONOMICS AS AN APPLIED SCIENCE

Applied science is the discipline that utilizes scientific knowledge to develop
practical solutions to society’s problems.
Economics uses theories in analyzing certain situation to help come up with
answers. Economics is being applied and put into practice once economic principles
and theories are applied to real-life situations, and outcomes are predicted because
of this.
Applied economics is thus the study or economics relative to real-life
situations. This is done by observing how theories work in practice. Applied
economics usually deals with numbers on which possible outcomes being reviewed
are based and supported.

COMMON TERMS IN THE DEFINITION OF ECONOMICS

• Scarcity: is a situation wherein the amount of something available is
insufficient to satisfy the desire for it.
• Resources: labor, capital, land, and entrepreneurship that are used to
produce goods and services also known as factors of production.
• Production: the process of combining inputs to make something for
consumption. It is the act of creating output.
• Output: a good or services which has value and contributes to the utility of
individuals.
• Distribution: the allocation of the total product among members of society.
Consumption: the use of a good or service
WHY STUDY ECONOMICS?
You study economics to learn a way of thinking. This will help you understand
how people make decisions. In economics, there are three fundamental concepts that
you can use to understand how people decide. First is the opportunity cost which is
defined as the best alternative that people forego, or give up, when making a choice
or decision. Second is the concept of Marginalism because rational people think at
the margin. Marginalism is the process of analyzing the additional costs or benefit
arising from a choice or decision. Third is the concept of efficient market. A market
in which profit opportunities are eliminated almost instantaneously.
Another reason why you need to study economics is to understand society.
This will help you understand how people interact with each other. In the society,
people do tradeoff to make everyone better off. Markets are also considered as a good
way to organize economic activity and also, government can sometimes take part to
improve economic outcomes.
Lastly is to understand global affairs and be an informed citizen. This will help
you understand the forces and trends that affect how the economy as a whole. This
includes the idea on why the standard of living depends on a country’s production,
why prices rise when the government print too much money, and why society faces
a short-run tradeoff between inflation and unemployment.

SCOPE OF ECONOMICS
There are two scopes of economics
1. Macroeconomics
− Macroeconomics looks at the economy as a whole and examines the
factors that determine national output or product. It looks at the big
picture such as growth, employment, etc., and choices are made by
large groups (like countries)
2. Microeconomics
− Microeconomics deals with the functioning of individual industries and
the behavior of individual economic decision-making units such as
firms and household. It looks on how do individuals make economic
decisions

METHODS OF ECONOMICS

There are two methods of economics

1. Positive Economics: focuses on causes and effects, behavior relationships,

and facts involved in the evolution and development of economic theories.
Often called “what is” economics.
• Descriptive economics: the compilation of data that describe
phenomena and facts
• Economic theory: set of related statements about cause and effect.
 2. Normative Economics: expresses value or judgements about economic
fairness or what the outcome of the economy ought to be. Often called “what
should be” economics.

Lesson Examining the Utility of Applied

Economics to solve Economic Issues
2 and Problems

Revisiting Economic Issues and Problems in the Philippines

Applied economics is essential to help the Philippine economic issues and problems
dissolve. The basic economic problems like scarcity and the basic problem in society
which are What to produce? How to produce? and For whom to produce? are the
focal point of the society. Economic issues like pollution, inflation, poverty, and
monopoly are also concerned by the government. Likewise, economic growth,
economic stability, anticipated shifts in commodity and resource costs, and
unemployment is part of the economic issues. The booming population of our country
and the health and safety of individuals; especially this pandemic Covid 19. In this
pandemic, the basic economic problem arises from the problem of scarcity, the fact
that consumers have unlimited needs and wants, and we cannot satisfy all these
needs and wants as we have limited resources in foods, medicine and other products.
Economic issues such as the threat of economic recession due to covid 19.
The Importance of Applied Economics to Economic Issues and Problems

The purpose of applied economics to the economic problems can be stated in many
areas like in business management, economics is often used to present a clear
picture of the theoretical principles on the one hand and the behaviour of the
business firm on the other. With the application of applied economics businesses
examine consumer needs and determine what pushes them to make purchases.
Among the items that should be examined are demographics, population growth
rates, age distribution, attitudes toward work, job market trends, religious and
ethical beliefs, lifestyle changes, educational and environmental issues and health
consciousness. By the time management use this concept businesses becomes better
and bigger profit. These are evident to all successful entities.
In business management, economics is often used to present a clear picture of the
theoretical principles on the one hand and the behavior of the business firm. In
managerial economics, economics principles based on simple assumptions are so
adjusted that one can study the behavior of the firm in real life through such
principles. Many concepts such as profits, costs etc. are understood differently by
economics and accountants. For instance, economists do take into consideration
opportunity costs, whereas accountants only consider what are called explicit costs.
But in managerial economics an effort is made to reconcile the viewpoints of
economists and the accountants so that statistics concerning costs and profits can
be appropriately utilized in taking decisions and in future planning of a business
firm. Business economics applying the application like forecasting as it is significant
for a business firm. We have to take help of several estimates concerning mutual
relationship of economic elements for correct forecasting. The elasticity of demand,
cost output relationship, promotional elasticity and similar other concepts of
economic science are of considerable help in any scheme of forecasting. Various
economic quantities such as profits, demand, prices, capital, investment, savings etc.
are of great significance for a business manager, because he accomplishes his task
of decision-making and future planning on the basis of such statistics.
The concept, such as business cycles, national income, economic policies of the
government etc. are considered most useful for a business manager. He has to adjust
his business operations quite often in context of these macro elements. All these
elements help in making his decision-making process more efficient and realistic.
From what has been stated above we can easily understand the various acts of the
application of economic theory to the several problems. Applied economics help
companies, businesses and entire governments evaluate risks to take the proper
measures to ensure stability based on numbers and trends.
Applied economics has a big role particularly the theory of supply and demand; and
the knowledge of efficient pricing and lowering cost. In real world situations
economics is needed to solve the problems in real world scenarios. A solid
understanding can serve as significant tools to help address the country’s economic
problem. As individual we need to understand the existence of scarcity to help us
analyze how to maximize the use of available resources in order to overcome scarcity.
Knowledge of economic theories such as the Law of Supply and Demand can help in
analyzing why prices are high and what the government can do to help bring down
prices. Applied economics can lead to do for steps that can take to ensure stability
in real world.
Applied Economics is Helpful in Three Reasons
a. Helps sweep aside all attempts to dress the situation so that it will appear

to be worse or better than it actually is.

b. Acts as a mechanism to determine what steps can reasonably be taken to

improve the current economic situation.

c. Can teach valuable lessons on how to avoid the recurrence of a negative

situation, or at least minimize the impact.

 LESSON 3 Market Demand,
Supply and Equilibrium

Demand and Supply

If our needs and wants can be backed by our buying power, it becomes
demand. It means that we have the ability and the willingness to buy the product at
a given price within a given time period. On other hand, the supply refers to the
quantity of goods and services that firms are ready and willing to sell at a given price
within a period (Viray and Avila-Bato 2018).

The Law of Demand and Supply

The law of demand states that: all other things remain constant (Ceteris
Paribus), the higher the price of a good the lesser the demand for that good and the
lesser the price the higher the demand.
The relationship between the price and demand is inversely related. It is because
of the substitution effect and income effect. Substitution effect means that if the price of
Product A increases the consumer will look for its substitute and will cause decrease in
quantity demanded for Product A. On the other hand, having the same income, an
increase in price of a product will cause a decrease in quantity demanded because the
consumer may not afford to buy all the things just like before.
The law of supply states that the quantity of products offered to be sold is directly
related with the price. It means that when the price increases the quantity supplied
increases too and if the price decreases the quantity supplied decreases too.

Analyzing Demand
The demand can be analyzed using:
A. Demand Schedule –a table that shows the price of a good and the quantity
demanded for that good at a given price within a given period.
B. Demand Curve – a graphical representation that shows the relationship
between the price of a good and the quantity demanded for that good at a given
price. It usually uses the information in the demand schedule.

Changes in Quantity Demanded compared to Changes in Demand

Changes in quantity demanded happened when there is a change in the
demand for a product because of the change in price. For example, the quantity
demanded for chicken at ₱120.00 was 10 kilos per month but when the price of the
chicken increased by ₱10.00 the quantity demanded decreased to 8 kilos. Another
increase in price of the chicken happened making it ₱140.00 per kilo because of that
the quantity demanded decreased again to 7 kilos.
Table 1: Hypothetical Demand Schedule of Chicken per Month
Without ASF
Price/Kilogram Quantity
Demanded (kg)
₱120.00 10
₱130.00 8

₱140.00 7
 Figure 1: Demand Curve
145
140

135

130

125

120

115

0 2 4 6 8 10 12
Quantity Demanded

Figure 1 shows the graphical representation of the demand schedule in Table 1. It is

negative slope showing that the price and quantity demanded are inversely related.
Table 1 and Figure 1 shows the change in quantity demanded because of the change in
price.

There is a change in demand when there is a change in quantity demanded

because of some factors other than price. For example, the quantity demanded for
chicken at ₱120.00 is 10 kilos per month but because of the issues related to ASF
(African swine flu) the quantity demanded increases to 12 kilos at the same price. When
the price the chicken increases to ₱130.00 the quantity demanded changed to 10 kilos
and 8 kilos at ₱140.00

Table 2: Hypothetical Change in Demand Schedule of Chicken

Price/Kilogram Quantity Demanded (kg)
Without ASF With ASF
10 12

₱120.00
₱130.00 8 10
₱140.00 7 8
 Figure 2: Change in Demand

145

140

135
130 without ASF
with ASF
125

120

115

110
7 8 9 10 11 12 13 14
Quantity Demanded
Figure 2 shows the graphical representation of the demand schedule in Table 2. It
shows the change in demand for chicken because of the African swine flu which
made the consumer to choose chicken meat compared to pork.
The change in demand is not always positive sometimes it falls. The change in
demand may be affected by several factors such as:
• Taste and preferences
• Income
• Seasonal products
• Population change
• Prices of related good (substitute/complementary goods)
• Expected future prices, income and credit

Analyzing Supply
The supply can be analyzed using:
A. Supply Schedule - table that shows the prices of a good and the quantity supplied
at each price at a given point of time
B. Supply Curve - a graphical representation that shows the relationship between the
price of a good and the quantity supplied at a given point of time.

Change in Quantity Supplied compared to Changes in Supply

Changes in quantity supplied happened when there is change in the quantity of

goods produced to be sold because of the change in price. It happens because
businessman or entrepreneurs prepared to sell their goods at a higher price to yield
more profit.
 For instance, an online seller of chicken dishes has following supply schedule that
shows how many packs of chicken dishes he prepares at a different price.
Table 3: Hypothetical Supply Schedule
Selling Price/Pack Quantity supplied
₱100.00 20
₱115.00 25
₱140.00 35
₱150.00 40

Figure 3: Supply Curve

160
140
120
100
Price
80
60
40
20
0
0 5 10 15 20 25 30 35 40 45
Quantity Supplied

Figure 1 shows the graphical representation of the supply schedule in Table 3. It

is positively slope showing that the price and quantity supplied are inversely related.
Table 3 and Figure 3 shows the change in quantity supplied because of the change in
price.

Changes in supply is a shift of supply curve because of some factors other than
price. For example, the quantity supplied in Table 3 changes not because of the change
in price but because of the increase in the number of online sellers offering the same
product. The table below shows the new supply schedule.

Table 4: New Supply Schedule

Selling Price/Pack Quantity supplied
₱100.00 15
₱115.00 20
₱140.00 25
₱150.00 30
 Figure 4: Change in Supply
160
140

120

100

80

60
40

20

15 20 25 30 35 40 45
Quantity Supplied
S S'

Figure 4 shows the blue line which is the same as supply curve shown in Figure
3 and the orange line which shows the changes in supply curve. The entire supply curve
shifts to the left. It means that at the same price the quantity of goods supplied by the
producer decreases not because of the decrease in price but because of the increase in
the number of sellers.

Factors that can Cause Changes in Supply

• Technology
• Cost of production
• Number of sellers
• Government policies (Taxes and subsidies)
• State of nature (weather)
• Prices of related goods produced
• Future expectations (possible increase in price)

Market Equilibrium

QUANTITY DEMANDED = QUANTITY SUPPLIED

As stated in the law and supply and demand, market equilibrium happens when
there is an equal demand and supply causing the price to remain the same. When the
supply is greater than the demand it causes the price to decrease but when the demand
is greater than the supply the price increases.

Equilibrium market price – price agreed by the buyer and seller.

45
40 Figure 5: Market Equilibrium
35
30
25 Equilibrium point

20
15
10
5
0
100 120 130 140 150 160 170
Quantity
Supply Curve Demand Curve

Figure 5 shows the equilibrium between the quantity demanded and quantity
supplied. It is the point of intersection between the supply and the demand curves. It
shows that the Equilibrium price (Pe) is 25 and the equilibrium quantity (Qe) is 140.
It means that if the price and quantity change there will be market disequilibrium
(shortage/surplus).

When the quantity supplied is greater than quantity demanded there will be
surplus. On the other hand, shortage is when the quantity demanded is greater than
quantity supplied.

Change in demand or supply may result to the changes in market equilibrium.

To protect the seller or the buyer when there is market disequilibrium the
government sets the minimum price (floor price) or maximum price (ceiling price) for
some goods, this is what we called price control.