San Pablo Diocesan Catholic Schools System

Diocese of San Pablo

Liceo de Calauan
Calauan, Laguna
Tel. No. 566-0783/568-0046
S.Y. 2021-2022

APPLIED ECONOMICS
MODULE

LESSON 1: ECONOMIC AS SOCIAL AND APPLIED SCIENCE

Most Essential Learning Competencies
At the end of this module, the learner will be able to:
 Differentiate economics as social science and applied science in terms of nature and scope
 Examine the utility and application of applied economic to solve economic issues and problems
 Analyze market demand, market supply, and market equilibrium.
 Determine the implications of market pricing on economic decision making

Introduction to Economic
Economics is the study of the allocation of scarce resources to satisfy the commerce of men and
women. Part of human behavior is the tendency of man to want to have as many goods and services as he
can. However, his ability to buy goods and services is limited by his income and purchasing power. It is
therefore in this context that man has to practice economics.

Scarcity is a condition where there are insufficient resources to satisfy all the needs and wants of
a population. It may be relative or absolute.
∙ Relative scarcity is when a good is scarce compared to its demand.
∙ Absolute scarcity is when supply is limited.

Because of the presence of the 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. Opportunity cost refers
to the value of the best forgone alternative. The concept of opportunity cost holds true for individuals,
businesses, and even a society. In making a choice, trade-offs are involved.

Economic Resources
Economic resources, also known as factors of production, are the resources used to produce goods
and services. These resources are, by nature, limited and therefore, command a payment that becomes the
income of the resource owner.
1. Land – soil and natural resource that are found in nature and are not man-made.
2. Labor – physical and human effort exerted in production.
3. Capital – man-made resources used in the production of goods and services.

Economic as a Social Science

Economic is a social science because it studies human behavior just like psychology and
sociology. As a social science, economics studies how individuals make choices in allocating scarce to
satisfy their unlimited. Two Branches of Economics
1. Macroeconomic is a division of economic that is concerned with the overall performance of the
 entire economy. It studies the economic system as a whole rather than the individual economic
units that make up
the economy. It is about the nature of economic growth, the expansion of productive capacity,
and the growth of national income.
2. Microeconomic, on the other hand, is concerned with the behavior of individual entities such as the
customer, the producer, and the resource owner. It is concerned with the process of setting prices
of goods that is also known as Price Theory. It examines alternative methods of using resources in
order to alleviate scarcity.

Basic Economic Problems of Society

All society are faced with basic questions in the economy that have to be answered in order to
cope with constraints and limitations. These are:
1. What to produce and how much – society must decide what goods and services should be
produced in the economy.
2. How to produce – is a question on the production method that will be used to produce the goods
and services.
3. For whom to produce – is about the market for the goods.

How these questions are answered depends on the nature of the economic system in place. The
economic system is the means by which society answers the basic economic problems.

Economic System
The economic system is the means through which society determines the answer to the basic
economic problems mentioned. A country may be under any of the following types or even a combination
of the three economic systems:
1. Traditional economy. Decisions are based on traditions and practices upheld over the years and
passed on from generation to generation. Methods are stagnant and therefore not progressive.
Traditional societies exist in primitive and backward civilizations.
2. Command economy. This is the authoritative system wherein decision-making is centralized in the
government or a planning committee. Decisions are imposed on the people who do not have say
in what goods are to be produced.
3. Market economy. This is the most democratic form of economic system. Based on the workings
of demand and supply, decisions are made on what goods and services to produce.

Positive Economics versus Normative Economics

Positive economics deals with what is – things that are actually happening such as current inflation
rate, the number of employed labors, and the level of the Gross National Product. Normative economics,
on the other hand, refers to what should be – that which embodies the ideal such as the ideal rate of
population growth or the most effective tax system.

Economic as an Applied Science

Applied Economics is the application of economic theory ad econometrics in specific settings with
the goal of analyzing potential outcomes. John Neville Keynes is attributed to be the first to use the phrase
“applied economics” to designate the application of economic theory to the interpretation and explanation
of particular economic phenomena. The use of applied economics may first involve exploring economic
theories to develop questions about a circumstance or situation and then draw upon data resources and
other frames of reference to form a plausible answer to that question. The idea is to establish a hypothetical
outcome based on the specific ongoing circumstances, drawn from the known implications of general
economic laws and models.
Applied economics can illustrate the potential outcomes of financial choices made by individuals.
This can help determine if such an expense is worthwhile. Beyond finances, understanding the meaning
of the economic theories of rational choice, game theory, or the findings of behavioral economics and
evolutionary economics can help a person make better decisions and plan for success in their personal life
and even relationships. Applied economics can also help businesses make better decisions. Understanding
the implications of economic laws of supply and demand combined with past sales data and marketing
research regarding their target market can help a business with pricing and production decisions.
Awareness of economic leading indicators and their relationship to a firm's industry and markets can help
with operational planning and business strategy.

Application of Demand and Supply

The Market
A market is an interaction between buyers and sellers of trading or exchange.
 Good Market – is the most common type of market because it is where we buy consumers
goods.
 Labor Market – is where workers offer services and look for jobs, and where employers look
for workers to hire.
 Financial Market – includes the stock market where securities of corporation are traded.

Demand
Demand refers to the willingness of a consumer to buy commodity at a given price. A demand
schedule shows the various quantities the consumer is willing to buy at various prices. A demand function
shows how the quantity demanded of a good depends on its determinants, the most important of which is
the price of the good itself, thus, the equation: Qd = f(P)
This signifies that the quantity demanded for a good is dependent on the price of that good.
Presented in table is a hypothetical monthly demand schedule for vinegar (in bottles) for one individual.
The quantity demanded is determined at each price with the following demand function:
Qd = 6 – P/2
Hypothetical Demand Schedule of Vinegar (in bottle)
Price per bottle Number of bottles

₱0 6

2 5

4 4

6 3

8 2

10 1

There is a negative relationship between the price of a good and the quantity demanded for that
good. A lower price allows the consumer to buy more, but as price increases, the amount the consumer
can afford to buy tends to go down. The demand curve 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). The values are plotted on the graph and are represented as connected dots to derive demand
curve. The demand curve slopes downward indicating the negative relationship between the two variables
which are price and quantity demanded.

3
The Law of Demand
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 the price
of a good and the quantity demanded for that good. As price increases, the quantity demanded for that
product decreases. The low price of the good motivates the consumer to buy more. When price increases,
the quantity demanded for the good decreases. Consumers tend to anticipate changes in the price of a
good. Prices of related goods as substitutes or complements also determine demand. Substitute goods are
those that are used in place of each other. In the case of substitute goods, an increase in the demand for
one good leads to a decrease in the demand for the other good. Complements are goods that are used
together. For complementary goods, and increase in the demand for a good will lead to an increase in the
demand for the complement since they are used together.
The number of consumers is also an important determinant that will affect market demand for a
good. The population makes up the group of consumers who will buy the product. The higher the
population, the more consumers and the higher will be the demand for the good.

Supply
Supply refers to the quantity of goods that a seller is willing to offer for sale. The supply schedule
shows the different quantities the seller is willing to sell at a various price. The supply function shows
the dependence of supply on the various determinants that affect it.
Assuming that the supply function is given as: Qs = 100 + 5P and is used to determine the
quantities supplied as the given prices.

Supply Schedule of Fish in One Week

Price of Fish (per kilo) Supply (in kilos)

₱ 20 200

40 300

60 400
 80 500

100 600

The relationship between the price and the quantity is direct. The higher the price, the higher the
quantity is supplied. When plotted into graph, we obtain the supply curve.

4
The Law of Supply
Using the same assumption of “ceteris paribus,” there is a 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. The high price of the good serves as motivation for the seller to offer more for sale. Thus,
when the price increases, then quantity supplied of the good increases since the seller will take this as an
opportunity to increase his/her income.
We can see the changes in quantities supplied due to different prices. These changes are reflected
on a single supply curve and are changes from one point to another point in the same curve. This is referred
to as a movement along the supply curve.
As a non-price determinant, the cost of production refers to the expenses incurred to produce a
good. An increase in cost will normally result in lower supply of the good even when price will not change
since the producer has to shell out more money to come up with the same amount of output.

Demand and Supply in Relation to the Prices of Basic Commodities

Market Equilibrium
If the forces of the demand and supply operate together, we can show how price is determined in
a market economy. Equilibrium is a state of balance when demand is equal to supply, the equality means
that the quantity that sellers are willing to sell is also the quantity that buyers are willing to buy for a price.
As a market experience, equilibrium is an implicit agreement between how much buyers and sellers are
willing to transact. The price at which demand and supply are equal is the equilibrium price.
Determination of Market Equilibrium

Market equilibrium is attained when the quantity demanded is equal to the quantity supplied. Assuming
that the demand function for Good X is: Qd = 60 – P/2 and the supply function for Good X is: Qs = 5 +
5P Applying the equations, we derive the following demand and supply schedules given the following
prices:
Price Demand Schedule of Supply Schedule
Good X of Good X

₱0 60 5

2 59 15

4 58 25

6 57 35

8 56 45

10 55 55

12 54 65

14 53 75

16 52 85

5
Equilibrium quantity is attained where Qd = Qs. Equilibrium quantity is 55 since quantity
supplied and quantity demanded are both 55 at a price of ₱10, which is the equilibrium price.

Elasticities of Demand and Supply

Goods differ in terms of how demand and supply respond to changes in these determinants. The
degree of their response to a change is referred to as elasticity. Elasticity is a measure of how much buyers
 and sellers respond to changes in market condition. The coefficient of elasticity is the number obtained
when the percentage changes demand is divided by the percentage change in the determinant.
In terms of how responsive demand and supply are, degrees of elasticity:
1. Elastic – a change in determinant will lead to a proportionately greater change in demand and
supply.
2. Inelastic – a change in a determinant will lead to a proportionately lesser change in demand and
supply.
3. Unitary Elastic – a change in determinant will lead to a proportionately equal change in demand
and supply.

Elasticity in Demand
There are three types of elasticity of demand that deal with the responses to a change in the price
of the good itself, in income, and in the price of related good, which is a substitute or a complement.

Price Elasticity of Demand

This measures the responsiveness of demand to a change in the price of the good. The concept of
elasticity is measured in percentage changes. The value of price elasticity may be measures in two ways:

Income Elasticity od Demand

This measures how the quantity demanded changes as consumer income changes. Income
Elasticity of Demand is equal to (% changes in quantity demanded) / (%change in income).

Cross Price Elasticity of Demand

This measures how quantity demanded changes as the price of a related good changes. Cross
elasticity (CE) measures the responsiveness of the demand for a good to the change in the price of
substitute good or a complement.

Price Elasticity of Supply

With regard to supply, price elasticity of supply determines whether the supply curve is steep or
flat. A steep curve signifies a high degree of elasticity or ability to change, while a flat curve indicate an
inability to change in response to a change in the price of the good.
LESSON 2: MARKET STRUCTURE
Most Essential Learning Competencies
At the end of this module, the learner will be able to:
 Differentiate various market structure in terms of:
a. Number of sellers
b. Types of Products
c. Entry/exit to market
d. Pricing power
 Analyze the effect of contemporary economic issues affecting the Filipino entrepreneur.

Market Structures
After looking at the basic principles of demand and supply, it will also be helpful to learn about
the market structures in which sellers can operate. Each structure will be described in terms of the nature
of the product being sold, the number of buyers and sellers in the market, and the ease of entering or
existing or exiting the market. Market structure refers to the competitive environment in which buyers
and sellers operate.
Competition is rivalry among various sellers in the market. The market is a situation of diffused,
impersonal competition among sellers who compete to sell their goods and among buyers who use their
purchasing power to acquire the available goods in the market.
There are varying degrees of competition in the market depending on the following factors: ∙
 Number and size of buyers and sellers
 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and input owners
 Degree of knowledge of economic agents regarding prices, costs, demand, and supply conditions.

Perfect Competition
As the term suggests, perfect competition implies an ideal situation for the buyers and sellers.
The following are characteristics of a perfectly competitive market:
∙ There are so many buyers and sellers that each has a negligible impact on market price. Change in
output of a single firm will not perceptibly affect market price.
∙ A homogenous product is sold by sellers, which means the products are highly similar in such a
way consumers will have no preference in buying from one seller over another.
∙ Perfect mobility of resources refers to the easy transfer of resources in terms of use or in terms of
geographical mobility.
∙ There is perfect knowledge of economic agents of market conditions such as present and future
price, costs, and economic opportunities.
∙ Market prices and quantity of output are determined exclusively by forces of demand and supply.

8
Imperfect Competition
In other markets, one or more of the assumptions of perfect competition will not be met; thus, the
market becomes imperfectly competitive. We shall the different types of imperfectly competitive market,
which are monopoly, monopolistic competition, and oligopoly.
 A. Monopoly
A monopoly exists when a single firm that sells in that market has no close substitutes. The
existence of a monopoly depends on how easy it is for consumers to substitute the product for
those of other sellers. Monopoly can exist for the following reasons:
 A single seller has control of entire supply or raw material.
 Ownership of patent or copyright is invested in a single seller.
 The producer will enjoy economies of scale, which are savings from a large range of outputs.
 Grant of a government franchise to a single firm.

B. Monopolistic Competition
One imperfectly competitive market is monopolistic competition wherein products are
differentiated and entry and exit are easy. Monopolistic competition allows such variety of choices.
Since many firms exist in the market, consumers also have the freedom to choose to buy the good.
This market combines some characteristics of perfect competition and monopoly. Its key
characteristics are:
 A blend of competition and monopoly;
 Firms sell differentiated products, which are highly substitutable but are not perfect
substitute. ∙ Many sellers offer heterogeneous or differentiated products, similar but
identical and satisfy the same basic need.
 Changes in product characteristics to increase appeal using brand, flavor, consistency,
and packaging as means or attract customers;
 There is free entry and exit in the market that enables the existence of many sellers;
and
 It is similar to a monopoly in that the firm can determine characteristics of product
and has some control over price and quantity.
C. Oligopoly
An oligopoly is a market dominated by a small number of strategically interacting firms.
Few sellers account for most of or total production since barriers to free entry make it difficult for
new firms to enter. Its characteristics are:
∙ action of each firm affects other firms; and
∙ Interdependence among firms.

Significance of Market Structure

The type of market structure in which the business operates will determine the amount of
market power control the business owner will enjoy. Greater market power means a greater ability
to control prices, differentiate the products one offers for sale, thus, leading to opportunities for
more profit.

The Philippine Peso and Foreign Currencies

Trading with other countries is also an important economic activity that impacts on the economy.
Selling locally made products, called export, means we earn dollars as payment for these goods bought by
foreign buyers. In the same manner, we buy goods from other countries, and these are our imports. When
we trade with other countries, we need common currency to use to pay for goods we buy from them and
for them to pay for goods we sell to them.
The rate of conversion of the Philippine peso to a foreign currency is reflected in the exchange
rate. These rates are dependent on the working of demand for and supply of the currency in the market.
Rent and Price Structure
The layman’s concept of rent is payment for the use of land and buildings belonging to others. It
is the compensation made to the owner of such land or building. From the point of view of economics,
rent refers to a payment made to or for a factor of production over and above the amount expected by its
owner. Economic rent is the positive difference between the actual payment made for a factor of
production to its owner and the payment level expected by the owner, due to its exclusivity or scarcity. In
short, economic rent is any unearned income.

Savings and Investment

Savings and investment are necessary to build a future. Savings is to investment as food is to the
body nourishment process. As food and the nourishment process sustain body growth, so do savings an
investment to the growth of the economy’s productive capacity. But savings call for giving up the present
in order to build and, therefore, invest for the future.
Investment is defined as building up the capital stock for more future production and
consumption. But the cost of investment is saving defined as postponed consumption at present.

Housing Rental
The problem of unaffordable decent housing is the problem not so much of the middle class as the
poor due to poverty. Typical middle-class household members pitch in to afford decent housing rental and
eventual ownership. But the poor cannot afford decent housing at all, let alone they are not convincing
enough for loans without formal employment and paying capacity.

Minimum Wage
The problem of inadequate wage is intertwined with the problem of unemployment. Both problems
stem from the lack of jobs for our large labor force. Wage is more inadequate and unemployment rate is
higher a more and more people cannot find jobs that have become scarcer.

Taxes
We pay taxes for government to provide public goods and services that empower and enable
individuals and institution alike to pursue their dreams and to provide a better place where we can exercise
our freedom securely, fairly, and progressively.
LESSON 3: INDUSTRY AND ENVIRONMENTAL ANALYSIS
At the end of this module, the learner will be able to:
 Identify the principles and tools in creating a business;
 Analyze activities in the circular flow of economic activity in an effort to relate the concept to the
putting up of a business.
 Describe the economy’s three main producing sectors and show how important they are in making a
choice of what business to establish.
 State the importance of competitiveness and efficiency in the economy

Tools in Evaluating a Business

The key factor that must be considered in analyzing the industry are the following:
1. The geographic area which your business will cater to.
2. The size and outlook of the industry.
3. Description of the product.
4. The buyers have to be identified.
5. The regularity employment.
6. The need to identify the leading businesses in the industry and to provide company information on
the most successful business that you will be up against.
7. Factors that will affect the growth of the business.

The SWOT Analysis

The SWOT analysis was created in the 1960s by business gurus, Edmund Learned, Roland
Christensen, Kenneth Andrews, and William Book in their book, Business Policy, Text, and Concept.
SWOT, which stands for Strength, Weakness, Opportunities, and Threats, is an analytical framework
that can help the company meet its challenges and identify new market. The framework can help identify
the business’s risk and rewards. It is also very helpful in assessing new ventures. It is means in
identifying the internal and external factors that may affect the business. The internal factors include:
 Financial resources such as money and source of funds for investment.
 Physical resource, such as the company’s location, facilities, machinery, and equipment.
 Human resource consisting of employees.
 Access to natural resources, trademarks, patents, and copyrights; and
 Current processes such as employees’ programs, department hierarchies and software system.

On the other hand, the external factor is those that affect a company, an organization, an individual, and
those outside their control. These may include:
o Economic trends including local, national and international financial trends, development in
the country’s stock market, reforms in the banking system, growth of the Gross Domestic
Product;
o Market trends, such as new products or technology or evolving buyer’s profiles, including
changes in tastes and lifestyle behavior;
o National and local law and statues as well as political, environmental, and
economic regulations;
o Demographic characteristics of the target market;
o Relationship with supplier and co-workers; and
o Competitive threats.
Industry Analysis
A. Competition
It is very important that you know your competitors and be ready for them. Your aim is to
win their customers, convince them to buy from you instead and remain as loyal customers.
B. Customers
The target must be identified. You must know what type of people you will cater to, based on
their preferences, lifestyles, and buying habits.
C. Suppliers
It is important to develop suppliers who are reliable in terms of the quality of what they supply
and their dependability in coming up with the things you order from them.
D. Substitutes
Substitute are goods that can be used in place of another. These are goods that may satisfy the
same needs of a consumer such that consumer may use one instead of another.

Environmental Analysis
This means an evaluation of the possible or probable effects of external forces and condition on
the survival and growth of the business. An environmental analysis includes a thorough study of:
A. Economic Forces
This involves a look at economic factors such as income of the people, specifically the target
market, economic conditions such as inflation, recession, prosperity, demand, and supply in the
market. B. Physical Environment
This includes a look at the population size, the geography of the place where business will be
located, land distribution, climate, and in today’s global warming situation, whether or not the area is
prone to flood or earthquake.
C. Political Factors
The type of government, the stability and strength of the government, and good leadership are
factors that can be an advantage to a business.
D. Cultures and Lifestyles
It is important to study cultural practices as means of identify the goods and services that will fit
into their celebration and spending behavior.
E. Competition
The degree of the competition in the market and the extent and strength of competition are all
very vital in determining the success or failure of a business.

The Government Sector and the Global Economy

The government is important because it makes purchases of economic resources from the
household and makes money payments to the resource owners for the use of their resources. The
government also buys goods and services from the producing units or which it makes money payments.

13
The significance of the global economy cannot be overemphasized in today’s times. An economy
buys goods from other countries; these are called imports. An economy sells goods to their countries; these
are called exports. A country pays for the goods imported and earns income from exports.
The Economic Producing Sector
A. Agriculture, Fishery, and Forestry
They reap the fruit of natural resources like the soil, water and forest. However, these
environmental resources are vulnerable to climate change affecting production such as long dry
spells and frequent devastating typhoons due to day, El Niño phenomenon.

B. Industrial Sector
They supposedly process raw materials from agriculture, fishery, and forestry into
intermediate products that are further processed into final products.

C. Service Sector
They produce the intangibles supporting and complementing production in other sectors
as well as among its own industries.

References:

Books:
Applied Economics: Rex Bookstore First Edition; Rosemary P. Dinio, PhD, George A. Villasis
Applied Economics: Phoenix Publishing House; Patrick V. Caoile, PhD & Erlinda C. Pefianco, Ed.D
Applied Economics (Gr. 11/12): Don Bosco Press; Mr. Rocky K. Laurel & Ms. Suzanne Zambrano

Websites:
https://www.economicsonline.co.uk/Competitive_markets/What_is_economics.html#:~:text=Economics
%20is%20regarded%20as%20a,when%20scarce%20resources%20are%20exchanged.
https://www.slideshare.net/HannahCullen/lesson-2-economics-as-an-applied-science
https://sosgurus.com/what-is-the-difference-between-social-sciences-and-applied-sciences/
https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/firm-market-
structures#:~:text=Economic%20market%20structures%20can%20be,oligopoly%2C%20and%20one%2
0in%20monopoly.
https://online.aurora.edu/types-of-market-structures/
https://www.westga.edu/~bquest/1997/ecnmkt.html