Economics Economics as an Applied Science

- study of how people choose to use scarce or -an applied science, it is a discipline that is used
limited resources to produce commodities and to apply existing scientific knowledge to
distribute these goods to various units of the develop more practical applications
society for their consumption.
-formulation of general theories through
-study how people make decision testing, mainly using data from the past
-social science involves the use of scare Choice and Decision-Making
resources to satisfy unlimited wants
-there is a need for man to make decisions in
Positive Economics choosing how to maximize the use of scarce
resources to satisfy as many wants as possible
It is an area of economics that is concerned with
facts and the relationship among them. It is
concerned with “what is.
Opportunity Cost- refers to the value of
Normative Economics the best-foregone alternative. In
making a choice, trade-offs are
It is an area of economics that deals with value involved. For example: Giving up work
judgments; about whether economics policies in favor of a recreational activity, say
for conditions are good or bad. It is concerned you go on a week’s stay in Boracay on
with “what should be” or “what ought to be.” leave without pay.
Scarcity -value you sacrifice
It is a condition where there are insufficient Walstand & Bingham
resources to satisfy all the needs and wants of a
population. - social science concerned with using scarce
resource to obtain the maximum satisfaction of
Relative Scarcity the unlimited
It happens when a good is scarce compared to -wants are unlimited
its demand. It occurs not because the good is
scarce per se and is difficult to obtain but Collin
because of the circumstances that surround the
availability of the good. “The study of production, distribution selling
and use of goods and services”
Absolute Scarcity
Parkin & Bade
It occurs when supply is limited
-as the study of how people use their limited
Economics as a Social Science resources try satisfy the unlimited wants
-social science that involves the use of scarce -proper allocation of income
resources to satisfy unlimited wants
-expenditures consumption of every
-his ability to buy goods and services is limited department
by his income and purchasing power
Economics
-economics studies how individuals make
choices in allocating scarce resources to satisfy -Household management
their unlimited wants.
Social science  For whom shall these goods be
produced?
-study relationship, behavior
-Distribution of output in a private
Economic Resources- known factors of economy is accomplished
production simultaneously with the determination
of what/how much to produce, and
Economic Good- anything physical how the goods shall be produced. Also,
-tangible -farm of service Distribution of output depends on
personal income.
Utility and Application of Applied
Economics to Solve Issues and Problem Economic Resources
Land: All the natural resources for
Why scarcity exists? producing goods and services. Examples
-exists because goods and services are not are rivers, forests, minerals, etc.
enough in supply for those who want them. This Labor: The physical and mental
situation gives rise for man to decide, thus contribution of any human towards
facing the economic problems production. Examples are laborers,
workers, etc.
Economic Problem Capital: Man-made resources used for
producing goods and services. Examples
-The problem of deciding or choosing how to
are machinery, buildings, computers,
satisfy unlimited wants with limited resources
etc.
What goods and services to produce? Entrepreneur: Any person who takes
the risk by employing other resources
Nature of the goods to produce to produce goods and services.
Preferences and priorities of the goods Examples are a businessman, head of
the shop, head of the factory, etc
How to produce the best services?
For whom to produce these services Microeconomics
 What, and how much should be -small -household
produced?
The economic problem is in choosing -behavior of an individual
the unlimited wants that are most -individual consumer (how they transfer goods)
important, or in setting up an
acceptable hierarchy of values for Macroeconomics
different goods and services.
-study as whole
 How shall the goods be produced?
-This is the determination of how -rate
resources are to be organized in
producing adequate quantities of the -bank, government
desired goods. -overall economic performance
-This is the decision on which resources
or technology is to be used in the -result
production of the highly-desired goods.
-gross national products are involve
Traditional Economy Market Demand, Market Supply, and Market
Equilibrium
-practices, tradition
Demand
-slow increase of economy
-It is the willingness of a consumer to buy a
Command Economy commodity at a given price
-president decides - It is a schedule, which shows the various
Market Economy amounts of a product that consumers are
willing and able to purchase at each specific
-open to public price, in a series of possible prices during a
-negation specified period of time.

-“Ph under market economy” Demand Function

The Circular Flow Model -It shows how the quantity demanded of a good
depends on its determinants, the most
-It implies a complex, interrelated web of important of which is the price of the good
decision-making and economic activity. itself.
-The equation is: Qd = f (P)
-This signifies that the quantity demanded for a
good is dependent on the price of that good.
Sample demand function: Qd = 6 – P/2
Demand Schedule
-It shows the various quantities the consumer is
willing to buy at various prices

Demand Curve
-It is a graphical illustration of the demand
schedule, with the price measured on the
vertical axis (Y) and the quantity demanded
measured on the horizontal axis (X).
-It has downward slope and negative slope.
Types of Effect in Demand Curve  Price of Related Goods (PR) – It pertains to
the substitutes or complements that also
 Income Effect-It is felt when a change in determine demand. Substitute goods are those
the price of a good changes consumer’s that are used in place of each other.
real income or purchasing power, which Complements are goods that are used together.
is the capacity to buy with a given
 Number of Consumers (NC) – It refers to the
income.
population that makes up the group of
 Substitution Effect-– It is felt when a consumers who will buy the product.
change in the price of a good changes
demand due to alternative Change in Demand
consumption of substitute goods.
-It refers to a shift in the entire demand curve,
Law of Demand to the right or to the left. The consumer’s
purchasing decision has been altered by a
In any market, other things being equal, an change in one or more of the determinants of
inverse relationship exists between the price of demand.
goods and quantity of goods demanded. The
quantity demanded tends to increase as the Changes in the Quantity Demanded
price of goods decreases, and the quantity
demanded decreases as the price of goods -t is a movement from one point to another or
increases. from one price-quantity combination to another
(at a fixed demand curve). The change in
Ceteris Paribus quantity demanded is caused by a change in the
price of a product.
-Using the assumption “ceteris paribus,” which
means all other related variables except those
that are being studied at the moment and are
held constant, there is an inverse relationship
between price of a good and the quantity
demanded for that good.
-the ceteris paribus is dropped, non-price
variables are now allowed to influence the
demand.
Demand Function will now read as: D = f (P, T,
Y, E, PR, NC) Market

Non-Price Determinants -It is defined as an institution or mechanism,

which brings together buyers and sellers
 Income (Y) – It is the capacity to buy (suppliers) or particular goods and services.
decreases and the demand will also decrease
even when the price does remain the same. -Considering only one consumer is to refer to
individual demand.
 Taste (T) – It is the improved taste for a
product that will cause a consumer to buy more -The process of adding quantities demanded by
of that good even its price does not change. each consumer at various possible prices is
called market demand.
 Expectation (E) – It refers to the consumers
who tend to anticipate changes in the price of a
good.
Supply producers are willing to produce and sell more
of their product at a high price.
-The quantity of goods that a seller is willing to
offer for sale. Non-Price Determinants
-It is a schedule of the quantities of a good or  Resources Prices – There is a positive
service that people are willing to sell at various relationship between production costs and
prices. As price rises, they are willing to sell supply. It follows that a decrease in resource
more. prices will lower production costs and increase
supply.
-There is a positive or direct relationship
between price and quantity – as price rises, the  Technology – Technological innovation or
quantity of supplied rises; as price falls, the advancement allows the producer to
quantity supplied falls. manufacture more efficiently, and with fewer
resources.
Supply Function
 Taxes and Subsidies – If the government
-It shows the dependence of supply on the
subsidized some taxes to produce some goods,
various determinants that affect it Sample
it lowers production expense and increase
supply function: Qs = 100 + 5P
supply of goods.
Supply Schedule
 Prices of Other Goods – It is a decline in the
-It shows the different quantities the seller is price of a good/product such as wheat that may
willing to sell at various prices. cause a farmer to produce and offer more corn
at each possible price.
 Future Price Expectation – Suppliers may
withhold some of their outputs in anticipation
of an increase in price at a future time.
 Number of Sellers – As more firms enter the
market, the greater the market supply will
become, causing the supply curve to shift to the
right
Supply Curve
Individual Supply
-It is the graphical representation of the supply
schedule. It is the supply schedule of a single firm. The
higher the price, the greater the quantity of
-It assumes that price is the most significant
output supplied by an individual firm.
determinant of the quantity supplied for any
product.
-It assumes that “other things are held equal,”
those non-price determinants of supply change,
and that the location of the supply curve will be
altered.
Law of Supply
t states, “as price rises, the corresponding
quantity supplied rises; as price falls, the
quantity supplied also fall.” This reveals that
Market Supply
It is the sum of the supply schedules of all
individual firms in the industry.

Changes in Supply
A change in supply and in quantity supplied is
similar with the concepts of change in demand
and in quantity demanded. A change in supply
happens when the entire supply shifts the curve
to the left or to the right. The cause of a change
in supply is a change in one or more
determinants of supply, causing the entire
schedule to change, and the whole supply curve
to shift.
Market Equilibrium
-The interaction of buying decision of
households and the selling decisions of
producers will determine the price of the
product and the actual quantity bought and
sold in the market

Equilibrium Quantity
is attained where: Qd = Qs
Implications of Market Pricing on Economic
Decision-making
Price
-Price is both the money someone charges for a
good or service and what the consumer is
willing to give up receiving a good or service.
-Price is a momentary consensus of value of all
participants.
Market Price
-It is the current price at which an asset or
service can be bought or sold. The economic
theory contends that the market price
converges at a point where the forces of supply
and demand meet.
-Prices measure market conditions and price
changes affect and reflect market conditions.
3 Groups of Traders
BUYERS – They pay as little as possible. Buyers
wait until prices drop or pay a higher price.
SELLERS – They charge as much as possible.
Sellers wait until prices rise or accept a lower
offer.
UNDECIDED – It may step in at any time.
Market Economy
-A market economy is an economic system in
which economic decisions and the pricing of
goods and services are guided by the
interactions of a country's individual citizens
and businesses
-most economic decision-making is done
through voluntary transactions according to the
laws of supply and demand
-fundamentally one where entrepreneurs are
free to control and coordinate productive
resources to pursue profit
The Importance of Price to Marketers