Applied Economics

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

THE CENTRAL CONCEPT OF ECONOMICS

Learning Objectives:
At the end of the module, the students must be able to:
a. explain the concept of scarcity as applied to economic issues.
b. discuss the production possibility curve (PPC).
c. discuss the concept of opportunity cost, comparative advantage, and absolute advantage.
d. solve problems on production possibility curve (PPC).

CONCEPT OF SCARCE RESOURCES

The heart of Economics deals on how to reconcile the scarce/unlimited resources to the
unlimited/infinite needs and wants of the society.

With the emerging population worldwide, the world has been “getting smaller” because of
the unlimited demand sustained by the limited resources.

SCARCITY - caused by the needs, wants and demands of the society

RESOURCES :
A. Land – used as space to create the products or services to satisfy the wants and needs,
and the basic resources within the land, sea, and air that are extracted as inputs for
productive use
B. Labor (human capital) – any mental or physical effort and its compensation are wages and
salaries
Karl Marx – considered labor as the ultimate production factor
C. Capital
a. Physical capital – factory building, machines, equipment and human capital
b. Financial capital – financial resources
D. Entrepreneurial activity – necessary skill to efficiently mix the other three factor
- Profit serve as the entrepreneurial compensation
Successful entrepreneurs:
-Steve Jobs, Bill Gates, Warren Buffet and Mark Zuckerberg

TOTAL PRODUCTION

Total production is an important concept to explain the situation of a firm increasing production in
the short run where land, capital and entrepreneurial skill are fixed and labor is the only factor that
is varied. We can take the example of a small factory (land), with fixed number of machines
(capital), and the owner and the entrepreneur such that the firm increases its output by increasing
the number of the labor force. Supposed that there are five machines such that the additional
increase in labor allows the machine to be more productive to a certain level. Once that level is
reached, the output still increases, but a diminishing rate. Shown on the following table is the
number of workers against the quantity of production. Given the capital and land are fixed, the
addition of the eleventh worker causes a fall in the production.

Number of Workers against the Production Quantity

Number of Workers Quantity of Production

1 15
2 35
3 60
4 85
5 110
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

6 130
7 145
8 155
9 160
10 160
11 155

The worker’s additional contribution to the total product is termed the worker’s marginal product.
Once ten workers are employed, then the machines are in the maximum capacity. Prior to this,
there is an additional marginal output before the workers are increased to a certain level where
the additional labor increase cannot further increase the output. One worker alone can produce
15 units, but an additional worker increases it to 20, then another 25, as shown in the following
graph.

TOTAL PRODUCTION FUNCTION

175
150
Units of production

125
100
75
50
25
0
0 1 2 3 4 5 6 7 8 9 10 11
Workers

DIMINISHING RETURNS
- Decrease in the marginal and incremental output of a production process as the amount of
the single factor of production is incrementally increased, while the amounts of all other
factors of production stay constant.

- The short run expansion reaches its optimum level at ten workers and the addition of worker
results in the fall of production. Employers then seek to employ people to a level where
marginal product equals zero. It will not employ under conditions of diminishing returns.in this
case, several factors such as labor rate, productivity of labor, cost of training and
compulsory welfare benefits are to be considered. Moreover, for expansions the other
factors such as land and capital are to be decided upon.

PRODUCTION FUNCTION

𝑸 = 𝒇(𝑳𝒂 , 𝑳𝒃 , 𝑲, 𝑬)
Where: 𝑄 – quantity production
𝐿𝑎 – Land
𝐿𝑏 – Labor
𝐸 – entrepreneurial skill
PRODUCTION POSSIBILITY FRONTIER (PPF)
The limits to growth of the total production of a firm mirror the limits to growth of the communities,
and this is best reflected in the concept of the production possibility frontier. Some economists call
this the production possibilities curve and that reflects the concave nature of the curve.

The production possibility frontier illustrates the limits that the community can produce from its
available resources. This includes the educational attainment and its existing technology. Shown
below is a two dimensional graph for just two classes of goods. These are the production of capital
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

goods and the price of consumer goods. Capital goods are considered intermediate goods and
these are ultimately used for the production of consumer goods.

 Capital goods - considered intermediate goods and these are ultimately used for the
production of consumer goods
 Consumer goods – products and services personal use. The community can produce a
combination of consumer goods and capital goods, and the more it produces consumer
goods, the less it can produce capital goods. The extreme is that the community produces
only consumer goods or only capital goods.

To establish the use of this economic model, the following assumptions are made;

1. The economy is working at maximum efficiency

2. There are only two goods being produced in the economy. ( This is inherent limitation of the
graphical tool)
3. The same resources are being used in the production of these two goods, and maybe
shifted to produce more of one good, or more of another.
4. Resources and technology are fixed.

Example:
Consider the production possibilities schedule below, as experienced by a farmer in his own farm,
considering he has limited number of hectares of land to cultivate:

Production Sacks of rice Sacks of corn

Combination
A 205 0
B 200 10
C 194 20
D 187 30
E 179 40
F 169 50
G 158 60
H 146 70
I 133 80
J 117 90
K 100 100
L 77 110
M 50 120
N 0 130

Now, try to plot the production possibilities by putting corn production to the horizontal axis, and
sacks of rice on the vertical axis. Plot the production points with the corresponding letter listed in
the table above.

For plotting, students then are required to review their basics in algebra.
Try also practicing the use of Excel by copying the table and insert graphs in scatter
plot.
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

Production Combination
140
A
120 B
C
Sacks of corn
100 D
E
80 F
G
60 H
I
40 J
K
20 L
M
0 N
0 50 100 150 200 250
sacks of rice

Activity 2:
Answer the following questions to further comprehend the mechanics of the PPC.

1. At what production point does the farmer maximize the use of of his land for corn
production? What is his yield at this point?

Production point: N
Yield of rice: 0
Yield of corn: 130 sacks

2. At what production point does the farmer maximize the use his land for rice production?
What is his yield at this point?
Production point: A
Yield of rice: 205 sacks
Yield of corn: 0

3. At what production point does the farmer experience an equal output of rice and corn?
What is his yield at this point?
Production point: K
Yield of rice: 100 sacks
Yield of corn: 100 sacks

4. Suppose the farmer regularly chooses to produce at the point of equal output for rice and
corn. How many sacks of corn will the farmer give up to increase the production of rice and
operate at the next production possibility?

 17 sacks of corn to produce 10 sacks of rice

J 117 90
K 100 100
L 77 110

The concept of trade off or opportunity cost is being shown in this scenario. Seventeen sacks
of corn is foregone to produce 10 sacks of rice.

5. Related to item 4, what if the farmer decides to increase the sacks of corn instead, and
operate at the next production point? How many sacks of rice does he need to give up?

 10 sacks of rice to give up for 23 sacks of corn

 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

6. Suppose now that the farmer wants to increase his production of corn and/ or rice, without
increasing his farm size, by adding more farm inputs like fertilizers or using a better variety of
corn and rice seedlings. Where this additional production would be found in the plotted
production curve?

Production Combination
140
A
120 B
C Beyond the
Sacks of corn

100 D
E PPF or
80 F
G
60 H
I
40 J
K
20 L
M
0 N
0 50 100 150 200 250
sacks of rice

Outputs could still be maximized through:

1. Better inputs 3. Specialization
2. Comparative advantage 4. Technological advancement

7. Let us now study the effect of producing more corn or more rice. Given below is the original
production possibilities schedule. On schedule A, try accomplishing the other columns by
determining the increase in the production of corn and the decrease in the production of
rice in each production possibility. Consider the tables that follow. (10 points)

Production Sacks of rice Sacks of corn Decrease in Increase in

Combination Rice Corn
Production Production
A 205 0 5 10
B 200 10
C 194 20
D 187 30
E 179 40
F 169 50
G 158 60
H 146 70
I 133 80
J 117 90
K 100 100
L 77 110
M 50 120
N 0 130

On schedule B, try accomplishing the other columns by determining the increase in the production
of rice and the decrease in the production of corn in each production possibility. (10 points)

Production Sacks of rice Sacks of corn Decrease in Increase in

Combination Corn Rice
Production Production
A 205 0
B 200 10
C 194 20
D 187 30
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 2 – Applied Economics Subject Teacher:

E 179 40
F 169 50
G 158 60
H 146 70
I 133 80
J 117 90
K 100 100
L 77 110
M 50 120
N 0 130

What do you observe or notice? (Limit your answers to sentences only. Emphasize the key words by
highlighting. (2 points))
________________________________________________________________________________________________
________________________________________________________________________________________________
________________________________________________________________________________________________
________________________________________________________________________________________________

Given these observations, try stating the Trade- Off or Opportunity Cost principle and the Law of
Increasing Opportunity Cost: ( 3 points each, limit the answers in two sentences and highlight the
key words)

1. Trade- Off or Opportunity Cost Principle

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

2. Law of Increasing Opportunity Cost

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

In your own words and understanding, what then is the Production Possibilities Curve (PPC)
and Production Possibilities Frontier (PPF)? Are these two concepts the same?

1. For me, the PPC is

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

2. For me , the PPF is

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

References:
1. Azarcon, et al. (2008). Principles of Economics. Baguio City: Valencia Book team.
2. Caoile, P. V. (2017). Applied Economics. Quezon City: Phoenix Publishing House, Inc.