● Xx

jAPPLIED ECONOMICS

CHAPTER 1-INTRODUCTION TO ECONOMICS

ECONOMICS-SOCIAL SCIENCE THAT DEALS WITH THE EFFICIENT AND EFFECTIVE ALLOCATION OF
LIMITED RESOURCES OF GOVERNMENT.

SCARCITY-THE STATE OF BEING SHORT ON RESOURCES IN ORDER TO SATISFY THE LIMITLESS NEEDS AND
DESIRE OF A CITIZEN

• RELATIVE SCARCITY- A RESOURCE THAT ARE LIMITED TO SATISFY INFINITE DEMAND

• ABSOLUTE SCARCITY-WHEN RESOURCES ARE SHORT IN SUPPLY

NEEDS-SOMETHING THAT YOU MUST HAVE IN ORDER TO SURVIVE

WANTS-SOMETHING WE DESIRE BUT UNIMPORTANT IN DAILY LIFE

OPPURTUNITY COST- FOREGONE BENEFIT OR VALUE THAT WOULD HAVE BEEN OBTAINED BY CHOOSING
AN ALTERNATIVE OVER ANOTHER

ECONOMIC RESOURCES- THE RESOURCES CONSUMED IN PRODUCTION IN ORDER TO MAKE PRODUCTS

AND SERVICES

LAND-THE REAL ESTATE AND PROPERTY.PAYMENT RENT

LABOR-HPYSICAL AND HUMAN EFFORT EXERTED TO USED IN MAKING PRODUCT.PAYMENT WAGE

CAPITAL-HUMAN CREATED ASSETS UTILIZED IN PRODUCING COMMODITIES. PAYMENT INTEREST

ENTREPRENEURSHIP- PAYMENT HOUSEHOLD RECEIVED FOR OPERATING ITS BUSINESS, PAYMENT

PROFIT

SOCIAL SCIENCE- STUDY OF PEOPLE IN THE ORGANIZATION OR SOCIETY

ECONOMICS AS SOCIAL SCIENCE-PRINCIPLES IN ECONOMICS WHICH ANALYZE HOW PEOPLE CREATE

AND EXECUTE CHOICES

APPLIED SCIENCE -USE OF SCIENTIFIC METHOD AND KNOWLEDGE IN ORDER TO ACHIEVE PRACTICAL OR
EFFECTIVE RESULT TO BE USED IN DECISION MAKING

ECONOMICS AS APPLIED SCIENCE- THE USE OF ECONOMIC CONCEPTS AND THEORIES AND THEIR
APPLICATION IN REAL LIFE SCENARIOS AND CONDITIONS

MACROECONOMICS-DIVISION OF ECONOMICS THAT STUDIES HOW AN OVERALL PERFORMANCE OF THE

ENTIRE ECONOMY BEHAVES

LMICROECONOMICS- DIVISION OF ECONOMICS THAT STUDIES THE IMPLICATION OF DECISION OF EACH

INDIVIDUAL AND FIRM

BASIC PROBLEM OF ECONOMICS-FUNDAMENTAL PROBLEM IN ECONOMICS IS THE SATISFACTION OF

LIMITLESS WANTS AND NEEDS AND DEALING WITH THE LIMITED AND SCARCE RESOURCES.
 ● Xx

BASIC PROBLEM OF SOCIETY

● WHAT T0 PRODUCE AND HOW MUCH

-SOCIETY SHOULD ARRIVE TO A DECISION ON THE KINDS OF PRODUCTS TO BE CREATED
● HOW TO PRODUCE

-REFERS TO SELECTION OF TECHNIQUE THAT WILL EMPLOYED BY THE FIRM TO CREATE PRODUCTS

● FOR WHOM TO PRODUCE

- REFERS TO THE TARGET OF MARKET OF THE FIRM AS TO WHO WILL BUY OR USE THE GOODS
AND SERVICES

ECONOMIC SYSTEM-HOW SOCIETY RESPONDS TO THE BASIC ECONOMIC PROBLEMS.

TRADITIONAL ECONOMY-SYSTEM DECISION RELIES ON CONVENTIONS,OBSERVENCES,HISTORY AND

PRACTICE OF BELIEFS.

COMMAND ECONOMY- KIND OF SYSTEM WHERE THE BASIC ECONOMIC PROBLEMS ARE WEIGHED
ON THE SHOULDER OF THE GOVERNMENT. U

MARKET ECONOMY-KIND OF SYSTEM WHERE THE CHOICES ON WHAT TO PRODUCE

CHAPTER 2

APPLIED ECONOMICS-REFERS TO ECONOMIC PRINCIPLES, THEORIES AND ITS APPLICATION IN REAL

EVENTS AND AN ATTEMPT TO FORECAST WHATEVER THE OUTCOMES.

SCIENTIFIC METHOD- METHOD OF INQUIRY FROM IDENTIFYING A PROBLEM,PROPOSING

ALTERNATIVE TENTATIVE ANSWERS

POSITIVE ECONOMICS- STATEMENT THAT ANSWERS WHAT IS IN ECONOMIC.IT ALLOWS US TO TEST

THE STATEMENT WITH THE DATA

NORMATIVE ECONOMICS-REFERS TO WHAT OUGHT TO BE OR WHAT SHOULD BE IT CONVEYS

VALUE,OPINIONS AND JUDGEMENT ABOUT THE EFFECTS BROUGHT BY ECONOMICS PRACTICES IT
THERE ARE MODIFCATIONS IN THE PUBLIC POLICIES

GROSS NATIONAL PRODUCT(GNP)-IT CALCULATES THE OUTPUT OF A COUNTRY’S RESIDENTS

WHEREVER THE LOCATION OF THE ACTUAL UNDERLYING BUSINESS ACTIVITY

GNP=C+I+G+(X-M)

C= HOUSEHOLD AND INDIVIDUAL CONSUMPTION

I= INVESTMENT

G= GOVERNMENT EXPENDITURE ON GOODS AND SERVICES INCLUDING LABOR

X= EXPORT

M= IMPORTS, IT IS EXCLUDED BECAUSE IMPORT ARE PRODUCED IN OTHER ECONOMICS

● Xx

GROSS DOMESTIC PRODUCT(GDP)- THE AGGREGATE MONETARY OR MARKET VALUE OF ALL THE
FINAL GOODS AND SERVICES CREATED WITHIN A NATION BORDERLINE IN A CERTAIN PERIOD

EXPENDITURE APPROACH- ONE OF THE APPROACHES FOR QUANTIFYING GROSS DOMESTIC

PRODUCT THAT SUMS UP CONSUMPTION OF EVERY HOUSEHOLDS

INCOME APPROACH- TO ESTIMATING GROSS DOMESTIC PRODUCT IS ESTABLISHED ON THE

ACCOUNTING METHOD THAT ALL SPENDING IN AN ECONOMY

EXPENDITURE APPROACH VS INCOME APPROACH-THE PRIMARY DISTINCTION THE TWO

APPROACHES IS THEIR BEGINNING PERIOD

FACTORS PAYMENT- IDENTIFIED AS THE EARNINGS THAT PEOPLE OBTAIN FOR PROVIDING FACTORS
OF PRODUCTION NAMELY LAND, LABOR, CAPITAL OR ENTREPRENEURSHIP

CIRCULAR FLOW MODEL

HOUSEHOLDS- WHEN CONSUMER BUY GOODS AND SERCVICES THIS IS KNOWN TO BE

CONSUMPTION. THIS RETURN TO FIRM IN THE FORM OF CONSUMPTION IN THE PRODUCT MARKET

FIRMS-WHEN THE FIRMS SPENDS MONEY ON CAPITAL GOODS, IT REFERS TO THE PROPERTY
EQUIPMENT AND TECHNOLOGY USED TO PRODUCE GOODS AND SERVICES THIS WE CALLED
INVESTMENT

GOVERNMENT-WHEN THE GOVERNMENT SPEND MONEY THAT PROVIDES GOODS AND SAFETY

FOREIGNERS-MONEY SPENT BY FOREIGNERS ON OUR COUNTRY’S GOODS AND SERVICES

CHAPTER 3 ANALYZE MARKET DEMAND, MARKET SUPPLY AND MARKET EQUILIBRIUM

● Xx

MARKET- IS COMPOSED OF CONSUMER AND SUPPLIERS OF A SPECIFIC PRODUCT. THE

BUYERS/CONSUMERS DETERMINE THE DEMAND AND THE SUPPLIERS/SELLERS DETERMINE THE
SUPPLY OF GOODS AND SERVICES

● AN INTERACTION OR TRADING BETWEEN BUYERS AND SELLERS

● ANY MARKET PLACE OR VENUE FOR BUYING AND SELLING OF PRODUCTS

TYPES OF MARKET

MARKETS ARE COMMONLY KNOWN AS FACTOR MARKETS OR GOODS MARKETS

● FACTOR MARKETS – REFERS TO THE PURCHASING AND SELLING OF FACTORS OF

PRODUCTION. IN FREE MARKET OR MARKET ECONOMY, HOUSEHILD ARE THE OWNERS AND
THEREFORE COULD BE THE PROVIDERS OF THE FACTORS OF PRODUCTION ( LIKE LAND,
LABOR, CAPITAL)
● GOODS MARKETS-WHERE WE BUYS CONSUMER GOODS. MARKET FOR THE OUTPUT OF
PRODUCTION
● LABOR MARKET- THE VENUE FOR POTENTIAL EMPLOYEES LOOKING FOR A JOB AND READY
TO PROVIDE SERVICES IN THE SAME WAY, IT IS A VENUE FOR EMPLOYERS WHO ARE HIRING
WORKERS FOR PARTICULAR JOBS
● FINANCIAL MARKET- WHERE SECURITIES OF CORPORATIONS SRE TRADED

BASIC PRINCIPLES OF DEMAND

● DEMAND- THE WILLINGNESS AND ABILITY OF CONSUMERS TO BUY A CERTAIN QUANTITY OF

GOODS AND SERVICES AT A CERTAIN PRICE
● MARKET DEMAND- IS THE AGGREGATE DEMAND OF ALL CONSUMERS, WHO BUY THE
GOODS IN THE MARKET
● LAW OF DEMAND
● AS PRICE INCREASES THE QUANTITY DEMAND FOR THE PRODUCTS DECREASES, OTHER
THINGS HELD CONSTANT(CETER PARIBUS)
● THERE IS AN OPPOSITE RELATIONSHIP BETWEEEN THE PRICE OF A PRODUCT AND THE
QUANTITY DEMANDED
● IT STATES THAT QUANTITY DEMANDED VARIES INVERSELY WITH PRICE OTHER THINGS HELD
CONSTANT THUS THE HIGHER PRICE(p)THE SMALLER THE QUANTITY DEMANDED THE
LOWER THE PRICE(P) THE GREATER THE QUANTITY DEMAND
● CONDITIONS AND ASSUMPTIONS OF LAW OF DEMANDS
● THERE IS NO VARIATION OR CHANGE IN THE CONSUMER’S INCOME OF THERE IS AN
INCREASE OR DECREASE ON THIS FACTOR, THE LAW MIGHT NOT BE APPLICABLE
● THE CONSUMER’S TASTE AND PREFERENCE DO NOT CHANGE
● THE PRICE OF SUBSTITUTE GOODS OR COMPLEMENT GOODS DO NOT INCREASE NOR
DECREASE
● THE LAW OF DEMAND CAN BE EXPRESSED THROUGH DEMAND SCHEDULE AND DEMAND
CURVE

CETERUS PARIBUS
● Xx

● ALL OTHER ARE HELD CONSTANT EXCEPT THE ONE THAT IS UNDER STUFY
( EXAMPLE PRICE ONLY)
● THE VARIABLES THAT MIGHT INFLUENCE THE DEMAND FOR THE PRODUCT DO NOT
VARY OR CHANGE AND THE ONLY THING THAT AFFECTS THE QUANTITY DEMAND IS
ONLY THE PRICE
DEMAND SCHEDULE
● IT INDICATES THE DIFFERENT AMOUNT OR QUANTITY THAT THE CONSUMER IS
WILLING TO BUY AT DIFFERENT GIVEN PRICES

DEMAND CURVE

● IT ILLUSTRATES THE DEMAND SCHEDULE GRAPHICALLY WITH THE PRICE OF A GOOD

ON Y AXIS AND THE QUANTITY DEMANDED ON X AXIS
DEMAND FUNCTION
● IT ILLUSTRATE HOW THE DETERMINANTS AFFECT THE QUANTITY DEMANDED FOR A
PRODUCT, MOST IMPORTANLY, HOW THE PRICE DETERMINES THE DEMAND FOR
THE COMMODITY
Qd=F(P)
INCOME EFFFECTS
● WHEN THE PRICE OF A GOODS INCREASES OR DECREASES THE CONSUMER REAL
INCOME OR PURCHASING POWER ALSO CHANGES
● IT SHOWS THAT WHEN A COMMODITY’S PRICE INCREASES REAL INCOME
DECREASES AND THE BUYERS TEND TO DECREASE THE AMOUNT OF GOODS THEY
BUY
SUBSTITUTION EFFECTS
● IT IS FELT WHEN A CHANGE IN THE PRICE OF A GOOD CHANGES DEMAND DUE TO
ALTERNATIVE OF SUBSTITUTE GOODS; CONSUMERS SUBSTITUTE EXPENSIVE GOODS
WITH CHEAPER GOODS
CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND
THERE IS A DIFFERENCE BETWEEN THE CHANGE IN DEMAND AND THE CHANGE IN
QUALITY DEMANDED THIS IS SHOWN BY A SHIFT IN THE DEMAND CURVE OR A
MOVEMENT ALONG THE DEMAND CURVE
● CHANGE IN QUANTITY DEMAND MOVEMENT ALONG DEMAND CURVE
● CHANGE IN DEMAND SHIFTING IN DEMAND CURVE
CHANGE IN QUANTITY DEMANDED
● CHANGES IN THE QUANTITY DEMANDED REFERS TO THE MOVEMENTS ALONG A
‘’FIXED’’ DEMAND CURVE AS A RESPONSE TO A CHANGE IN THE GOOD’S OWN PRICE
CATERIS PARIBUS
● AN INCREASE IN QUANTITY DEMANDED AS CAUSED BY A DECREASE IN PRICE WHILE
A DECREASE IN QUANTITY DEMANDED IS CAUSED BY AN INCREASED IN PRICE
NON PRICE DETERMINANTS OF DEMAND
● IF CETERIS PARIBUS IS DISREGARDED OR DROPPED THE VARIABLES OTHER THAN
PRICE WHICH ALSO INFLUENCE DEMAND CAN NOW AFFECT
DEMAND(INCOME,TASTE , EXPECTATION , PRICES OF RELATED GOODS AND
POPULATION )
 ● Xx

● DEMAND FUNCTION WILL BE: D=F(P,Y,Y,E,PR,NC) WHICH MEANS THAT DEMAND

FOR A COMMODITY IS A FUNCTION OF PRICE(P), TASTE(T), INCOME(Y),
EXPECTATIONS, PRICE OF RELATED GOODS(PR) AND THE NUMBER OF
CONSUMER(NC)
● THE DEMAND CURVE WILL MOVE OR SHIFT RIGHTWARD TO REFLECT RISE IN
DEMAND AND IT WILL MOVE OR SHIFT LEFTWARD TO SHOW A DECLINE IN DEMAND
DUE TO NON-PRICE DETERMINANTS OR VARIABLES
INCOME
● THE INCOME OF THE CONSUMERS INFLUENCES THE CAPACITY TO PURCHASE
INCOME↑QUANTITY DEMAND↑- SHIFT TO THE RIGHT
INCOME ↓QUANTITY DEMAND↓ SHIFT TO THE LEFT
● THE EFFECTS OF COMSUMER’S INCOME ON DEMAND RELIES ON THE TYPES OF
GOODS( NORMAL OR INFERIOR GOOD)
● NORMAL GOOD- IF THE HIGHER INCOME OF CONSUMERS RAISE THE DEMAND FOR
THE COMMODITY IN THIS CASE THE DEMAND CURVE WILL SHIFT TO THE
RIGHT(EXAMPLES INCLUDE CLOTHES, CARS, VACATIONS)
● INFERIOR GOOD- IF A HIGHER INCOME CAUSES DEMAND FOR THE GOOD TO
DECLINE IN THIS CASE THE DEMAND CURVE WILL SHIFT TO THE LEFT( EXAMPLE
USED CARS OR USED FURNITURE)
PRICE OF RELATED GOODS
● COMMODITIES CAN BE RELATED OR UNRELATED
● IF THE TWO COMMODITIES ARE UNRELATED THEN THE CHANGE IN THE PRICE OF
ONE ITEM WILL HAVE NO EFFECT ON THE DEMAND FOR THE OTHER GOODS FOR
EXAMPLE THE CHANGE IN THE PRICE OF TOMATOES WILL HAVE NO INFLUENCE ON
THE DEMAND FOR CARS
● AS FOR RELATED GOODS THEIR MARKET PRICE AND AVAILABILITY MAY HAVE AN
EFFECT TO THE LEVEL OF DEMAND FOR ANOTHER GOOD THIS DEPENDS ON
WHETHER THE GOODS ARE COMPLEMENT OR SUBSTITUTE GOODS
SUBSTITUTE GOODS
THESE ARE GOODS THAT ARE CONSUMED AS A REPALCEMENT FOR THE OTHER GOOD FOR EXAMPLE
BEEF AND CHICKEN, BROCCOLI AND CAILUFLOWER, ETC
● FOR THESE GOODS AN INCREASE IN THE PRICE OF ONE GOOD WILL INCREASES
DEMAND(SHIFT DEMAND CURVE RIGHTWARD) FOR THE OTHER GOOD AND THE
OPPOSITE IS TRUE FOR THE DECREASE IN THE PRICE OF THE FIRST GOOD
COMPLEMENTARY GOODS
● THERE ARE GOODS USUALLY CONSUMED TOGETHER. FOR EXAMPLE CARS AND
GASOLINE, DVDS AND DVD PLAYERS, SUGAR AND TEA, ETC
● FOR THESE GOODS, AN INCREASE IN THE PRICE OF ONE OF THE GOODS WILL
DECREASE THE DEMAND FOR THE OTHER GOOD AND THE OPPOSITE IS TRUE FOR
EXAMPLE THE DEMAND FOR COFFEE CREAMER WOULD INCREASE AND THE
DEMAND CURVE WILL SHIFT TO THE RIGHT IF THE PRICE OFF COFFEE DECREASES
EXPECTATION
● PROSPECT OF WHAT IS GOING TO HAPPEN TO THE PRICE CAN INFLUENCE THE
DEMAND OF A COMMODITY
● Xx

● WHEN THERE IS AN EXPECTATION THAT THE PRICE OF THE COMMODITY WILL

INCREASE THEN THE THEN THE PRESENT DEMAND WILL RISE AND THE DEMAND
CURVE WILL SHIFT TO THE RIGHT
● WHEN THERE IS AN EXPECTATION THAT THE INCOME OF CONSUMER WILL
INCREASE THEN THE PRESENT DEMAND WILL RISE AND THE DEMAND CURVE WILL
SHIFT TO THE RIGHT
TASTES
● PREFERENCE THAT MAY INFLUENCE THE DEMAND FOR A COMMODITY FACTORS
AFFECTING TASTE:
A. CULTURAL VALUES
B. PEER PRESSURE
C. POWER OF ADVERTISING
● CONSUMERS WITH SIMILAR INCOME MAY STILL DIFFER IN THEIR DEMANDS
DEPENDING ON THEIR PREFERENCE TO THE GOODS AND SERVICES
NUMBER OF CONSUMERS
● SIZE AND CHARACTERISTIC OF THE POPULATION
● THE GREATER THE NUMBER OF THE CONSUMERS OF THE GOOD, THE HIGHER WILL
BE THE DEMAND FOR THE COMMODITY
BASIC PRINCIPLES OF SUPPLY
SUPPLY- IT IS THE WILLINGNESS OF SELLERS TO OFFER A GIVEN QUANTITY OF A
GOOD OR SERVICE FOR A GIVEN PRICE
QUANTITY SUPPLIED- IT REFERS TO THE AMOUNT OF GOODS THAT A SELLER IS
WILLING TO OFFER FOR SALE
LAW OF SUPPLY
● WITH THE PREMISES OF CETERIS PARIBUS, THERE IS DIRECT RELATIONSHIP
BETWEEN THE PRICE OF A GOOD AND THE QUANTITY SUPPLIED OF THAT GOOD
● AS THE PRICE INCREASES THE QUANTITY SUPPLIED OF THAT PRODUCT ALSO
INCREASES
SUPPLY CURVE- IT ILLUSTRATES THE SUPPLY SCHEDULE GRAPHICALLY; IT HAS
UPWARD SLOPE WHICH SIGNIFIES THE DIRECT RELATIONSHIP BETWEEN THE PRICE
AND QUANTITY SUPPLIED FOR THE COMMODITY
SUPPLY FUNCTION- IT PRESENTS HOW THE SUPPLY FOR A CERTAIN COMMODITY IS
AFFECTED BY DIFFERENT DETERMINANTS OR VARIABLES
CHANGE IN QUANTITY SUPPLIED VS CHANGE IN SUPPLY -CHANGE IN QUANTITY
SUPPLIED: MOVEMENT ALONG THE SAME SUPPLY CURVE CHANGE IN SUPPLY :
SHIFTING SUPPLY CURVE
NON PRICE DETERMINANTS OF SUPPLY- IT PRESENTS HOW THE SUPPLY FOR A
CERTAIN COMMODITY IS AFFECTED BY DIFFERENT DETERMINANTS OR VARIABLES
PRICE OF PRODUCTION INPUT
● VALUE ADDED TO RAW MATERIALS THROUGH THE PROCESS OF PRODUCTION
● INTERMEDIATE INPUT- RAW MATERIALS ; THESE ARE STILL GOING TO BE
PROCESSED OR TRANFORMED INTO HIGHER LEVELS OF OUTPUT EXAMPLES;
LUMBER ,OIL,WATER
● Xx

● FACTOR INPUT -PROCESSING OR TRANSFORMING INPUT EXAMPLES: LABOR,

CAPITAL, LAND
TAXES-MONETARY EXPENSE PAID TO THE GOVERNMENT
TECHNOLOGY- THE MANNER IN WHICH FACTOR INPUTS PROCESS INTERMEDIATE
INPUTS IS DONE THROUGH TECHNOLOGY
NUMBERS OF SELLERS
● THE MORE SELLERS OF A GOOD, HIGHER IS THE SUPPLY
● MORE SUPPLIERS OF A COMMODITY WILL SHIFT THE SUPPLY CURVE OF THAT GOOD
TO THE RIGHT
NOTE: IF A NON-PRICE DETERMINANT CAUSES HIGHER SUPPLY OF GOODS THEN
THE ENTIRE SUPPLY CURVE WILL SHIFT RIGHTWARD; ON THE OTHER HAND A
DECLINE IN SUPPLY OF A GOOD WILL MAKE THE SUPPLY CURVE TO SHIFT LEFTWARD
MARKET EQUILIBRIUM
● A STATE OF BEING BALANCE BETWEEN DEMAND AND SUPPLY
● THE QUANTITY THAT SELLERS ARE WILLING TO SELL AND THE QUANTITY THAT
BUYERS ARE WILLING TO BUY FOR A PRICE
● THE EQUILIBRIUM PRICE IS THE GIVEN PRICE IN WHICH THE QUANTITY DEMANDED
AND THE QUANTITY SUPPLIED ARE EQUAL AT THIS PRICE BYUERS ARE BUYING ALL
THE GOODS THEY DESIRE SELLERS ARE SELLING ALL THE GOODS THEY DESIRE AND
THERE IS NO PRESSURE FOR THE MARKET PRICE TO CHANGE