Applied Economics

INTRODUCTION TO ECONOMICS
MODULE 1
I.E. Dela Cruz

LEARNING OBJECTIVE: At the end of the lesson the student will: Define basic terms in economics; Understand how
scarcity affects the choices and decision making; Identify the difference between market versus command economy;
Identify the difference between marginal cost versus marginal benefits.
INTRODUCTION TO ECONOMICS
MODULE 1

What is Economics?
Economics is about making choices. We make all kinds of choices every day. How much should I spend on gas? What’s the best
route to work? Where should we go for dinner? Which job or career should I go for? What are the pros and cons of finishing college
versus taking a job or inventing the next, best Internet startup? Which roommate should take care of washing the dishes? Can I get
that dog as a pet? Should I get married, have children, and if so, when? Which politician should I vote for when they all claim they can
improve the economy or make my life better? What is “the economy,” anyway? What if my personal or religious principles conflict
with what people tell me is in my best economic interest?
Many people hear the word “economics” and think it is all about money. Economics is not just about money. It is about weighing
different choices or alternatives. Some of those important choices involve money, but most do not. Most of your daily, monthly, or
life choices have nothing to do with money, yet they are still the subject of economics. For example, your decisions about whether it
should be you or your roommate who should be the one to clean up or do the dishes, whether you should spend an hour a week
volunteering for a worthy charity or send them a little money via your cell phone, or whether you should take a job so you can help
support your siblings or parents or save for your future are all economic decisions. In many cases, money is merely a helpful tool or
just a veil, standing in for a partial way to evaluate some of the goals you really care about and how you make choices about those
goals.

You might also think economics is all about “economizing” or being efficient–not making foolish or wasteful choices about how you
spend or budget your time and money. That is certainly part of what economics is about. However, that’s just the tip of the iceberg.
We all know that we can save money or time by being more efficient in our planning. A trip to the supermarket can be coordinated
with a trip to take your child to school or to deposit a check at the bank across the street to save on gas. But we sometimes don’t
choose the most efficient options. Why not? Economics is also about plumbing the depths of why we sometimes do and sometimes
don’t make what seem like the most economizing or economical choices.
Is economics a science (like physics), or is it a social science, or even an art? What is the difference, and what do we know about what
we can’t or don’t know for now? Can economic problems be solved by better government, more experts, bigger computers, more
engineering, better education, less government, more dispersed knowledge, more markets? How can we make informed choices?

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
You’ve probably heard that economists disagree about a lot of things. Actually, what economists disagree about is politics or
public policy, not economics. Exploring the interface between politics and economics is part of the fun.

Unlimited Human
Limited Resources Wants

Scarcity

Choice and Decision

Making

Economics as a Social Science

Is the social science that involves the use of scarce resources to satisfy unlimited wants. It uses the scientific method to study
how society creates its material wealth, how it makes this wealth available to its people with minimum difficulties and it expands its
wealth. Economics is a social science because it deals with the study human behavior just like Psychology and Sociology.
Social Science is the study of society and how people behave and influence the world around them.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
Branches of economics
There are 2 branches of economics:
1. Macroeconomics
2. Microeconomics
Macroeconomics is a division of Economics that is concerned with the overall performance of the entire company. It studies
economic system as a whole rather than the individual economic units that make up the economy. Macroeconomics is about the
nature of economic growth, the expansion of productive capacity and the growth of national income.
Moreover, microeconomics is concerned with the behavior of individual entities such as the consumer, the producer, and the
resource owner. It is more concerned on how foods flow from the business firm to the consumer and how resources move from the
resource owner to the business firm.
It is also concerned with the process of setting prices of goods that is also known as price theory. Microeconomics studies the
decision and choices of the individual units and how these decisions affect the prices of goods in the market.

Scarcity
Is a condition where there are insufficient resources to satisfy all the need and wants of a population. There are two types of
scarcity, one is relative Scarcity, relative scarcity occurs when a goods is scarce compared to its demand. relative scarcity occurs not
because the good is scarce per se and is difficult to obtain but because of the circumstances that surround the availability of the good.
Second is absolute scarcity, it is when supply is limited. absolute scarcity explains why there are some products that are very expensive
in the Philippines.

What Is Opportunity Cost?

Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one
alternative over another. The idea of opportunity costs is a major concept in economics.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. Understanding the
potential missed opportunities foregone by choosing one investment over another allows for better decision-making.

Opportunity Cost = FO – CO
Where:
FO = Return on best foregone
option
CO = Return of chosen option

Basic Economic Problems of the Society

All societies are faced with basic questions in the economy that have to be answered in order to cope with constraints and
limitations.

What to produce? How much?

Society must decide what goods and services should be produced in the economy. Having decided on the nature of goods that
will be produced, the quantity to these foods should also be decided on.

How to produce?
It is a question on the production method that will be used to produce the goods and services. This refers to the resource mix and
technology that will be applied in production.

For whom to produce?

is about the market for the goods. For whom will the goods and services be produced? The young or old, the male or female market,
the low- income or the income groups?

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1

Unlimited Human
Limited Resources Wants

Scarcity

Choice and Decision

Making

What to produce? How to produce? For whom to

How much? produce?

Market Economy
The two fundamental aspects of market economies are private ownership of the means of production and voluntary exchanges
or contracts.
The most common title associated with a market economy is capitalism. Individuals and businesses own the resources and are
free to exchange and contract with each other without a decree from government authority. The collective term for these
uncoordinated exchanges is the "market." Essentially, Prices arise naturally in a market economy based on supply and demand.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
Consumer preferences and resource scarcity determine which goods are produced and in what quantity; the prices in a market
economy act as signals to producers and consumers who use these price signals to help make decisions. Governments play a minor
role in the direction of economic activity.
Businesses in a market economy are expected to regulate their behavior, while consumers are expected to look out for their
own best interests and protect themselves from fraud and abuse. Market economies are not concerned with ensuring that less
fortunate people have access to essential goods and services or opportunities.
Karl Marx, a German philosopher, argued that a market economy was inherently unequal and unjust because power would be
concentrated in the hands of the owners of capital. Marx is credited with coining the term capitalism.
John Maynard Keynes, an English economist, believed that pure market economies were unable to effectively respond to major
recessions and instead advocated for major government intervention to regulate business cycles.

Command Economy
Under a command economy, governments own the factors of production such as land, capital, and resources, and government
officials determine when, where, and how much is produced. This is also sometimes referred to as a planned economy. The most
famous contemporary example of a command economy was that of the former Soviet Union, which operated under a communist
system.
Since decision-making is centralized in a command economy, the government controls all of the supply and sets all of the
demand. Prices cannot arise naturally like in a market economy, so prices in the economy must be set by government officials.
In a command economy, macroeconomic and political considerations determine resource allocation, whereas, in a market
economy, the profits and losses of individuals and firms determine resource allocation. Command economies are concerned with
providing basic necessities and opportunities to all members.
Ludwig von Mises, an Austrian economist, argued that command economies were untenable and doomed to fail because no
rational prices could emerge without competing, private ownership of the means of production. This would lead to massive shortages
and surpluses.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
Milton Friedman, an American economist, noted that command economies must limit individual freedom to operate. He also
believed that economic decisions in a command economy would be made based on the political self-interest of government officials
and not promote economic growth.

Market Economy vs. Command Economy

Market economies and command economies occupy two polar extremes in the organization of economic activity. The primary
differences lie in the division of labor, or factors of production, and the mechanisms that determine prices. The activity in a market
economy is unplanned; it is not organized by any central authority but is determined by the supply and demand of goods and services.
The United States, England, and Japan are all examples of market economies.
Alternatively, a command economy is organized by a centralized government that owns most, if not all, businesses and whose
officials direct all the factors of production. China, North Korea, and the former Soviet Union are all examples of command economies.
In reality, all economies blend some combination of market and command economies.
Most market economies and command economies today function with elements of both. For example, Cuba has traditionally
been a command economy but has made significant economic reforms to improve the condition of the nation. Many businesses have
been privatized and no longer operate under the authority of the government, which is a characteristic of a market economy.
Conversely, the United States, which is a market economy, switched to a planned economy to mobilize during World War II.
The U.S. also has command economy elements, such as in medical services provided to seniors.
Traditionally, the type of economy has also determined the political and social landscape of a nation. Command economies
have been associated with authoritarian regimes that limit personal freedoms, as Milton Friedman stated. Market economies tend to
be democracies that allow for almost total personal freedom.
Marginal Benefit
A marginal benefit is a small, but measurable, change in a consumer's advantage if they use an additional unit of a good or
service. A marginal benefit usually declines as a consumer decides to consume more of a single good. For example, imagine that a
consumer decides she needs a new piece of jewelry for her right hand, and she heads to the mall to purchase a ring. She spends ₱100
for the perfect ring, and then she spots another. Since she does not need two rings, she would be unwilling to spend another ₱100 on

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
a second one. She might, however, be convinced to purchase that second ring at ₱50. Therefore, her marginal benefit reduces from
₱100 to ₱50 from the first to the second good.
Another way to think of marginal benefit is to consider the satisfaction that a consumer gets from each subsequent addition.
One ring would make the consumer very happy, while a second ring would still make her happy, just not as much. The lessening of
appeal for additional consumption is known as diminishing marginal utility.
Marginal benefit is often expressed as the peso amount the consumer is willing to pay for each purchase. It is the motivation
behind such deals offered by stores that include "buy one, get one half off" promotions.
Prescription drugs and necessities such as electricity are goods and services that are not subject to the effect of marginal benefits.

Marginal Cost
On the opposite side of the equation lies the producer of the good or service. Producers consider marginal cost, which is the
small but measurable change in the expense to the business if it produces one additional unit.
If a company captures economies of scale, the cost to produce a product decline as the company produces more of it. For
example, imagine a company makes shoes. Each shoe requires ₱500 worth of leather, rubber, thread, and other materials to create.
The shoes also require a factory, which, for simplicity's sake, let us say is a one-time ₱100,000 expense. If the company makes 100
shoes, each shoe costs ₱1,500 to make: ₱100,000 ÷ 100 + ₱500.
The workers learn how to move from one task to the next quickly, and the factory can produce more shoes per hour. As more
footwear is made in the same specified period, the cost of the factory is further distributed over more shoes, and the cost per unit
falls. The cost of materials may go down as well, as more shoes are made and the materials are purchased in bulk, therefore, decreasing
the marginal cost.
The cost-benefit from this approach has a ceiling. Buying materials in bulk can only push the price down so far, and production
in a factory can only go up so far before machines and workers are exhausted. This means a new factory must be built or new workers
hired. Building a new factory is only profitable if the consumer demand continues to rise for the new product.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022

INTRODUCTION TO ECONOMICS
MODULE 1
Marginal Benefit vs. Marginal Cost
Marginal benefit and marginal cost are two measures of how the cost or value of a product changes. While the former is a
measurement from the consumer side of the equation, the latter is a measurement from the producer side. Companies need to take
both concepts into consideration when manufacturing, pricing, and marketing a product.
A marginal benefit is the maximum amount of money a consumer is willing to pay for an additional good or service. The
consumer's satisfaction tends to decrease as consumption increases. The marginal cost, which is directly felt by the producer, is the
change in cost when an additional unit of a good or service is produced.

Assessment no. 1

Instructions: Write your answers in a one sheet of pad paper, take a clear picture of it and upload it to our google
classroom.

1. Is economics a study of wealth? Explain.

2. Is economics a study of making choices? Explain.
3. What will happen if there is no scarcity? Explain.

Applied Economics | I.E. Dela Cruz | S.Y. 2021-2022