SHS 12
Module
APPLIED
ECONOMICS
2ND SEMESTER SCHOOL
YEAR 2020-2021
(QUARTER 1:
WEEK 1)
NAME:_______________________________________________________________________
ADDRESS:____________________________________________________________________
CONTACT:____________________________________________________________________
APPLIED ECONOMICS
MS. ASNAIRAH M.
____________________________ _______________
DARAGANGAN, LPT.
Teacher’s signature Student’s signature
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Contents
Title Page
Objectives/ Learning Competencies
CHAPTER 1
WHAT ECONOMICS IS ABOUT
What is Economics?............................................................................................................ 2
Scarcity, Choice, and Trade-offs......................................................................................... 2
Scarcity and the applications of Economics........................................................................ 4
Classifying the Problems Economists Study....................................................................... 5
Theory and Application....................................................................................................... 6
LEARNING ACTIVITIES............................................................................................... 8
EVALUATION.................................................................................................................. 8
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OBJECTIVES:
At the end of the module, the learners are expected to:
A. Classify the problems economists study
B. Define Economics
C. explain the role of scarcity, Choice, and Trade-offs in economics
What is Economics?
Just like other social sciences, such as sociology and political science, economics tries to
understand how people behave and how they interact within a society.What makes economics
different from the other social sciences? To emphasize its differences from other social sciences,
we will use the following definition of economics:
Economics is the study of how individuals, business firms, governments, and societies
as a whole make choices under conditions of scarcity.
The special emphasis economists give to choices that scarcity requires us to make-and what we
give up when we make those choices-distinguishes economics from the other social sciences.
Let's take a closer look at two important concepts in the definition: scarcity and choice.
Scarcity, Choice, and Trade-offs
People want goods and services. Goods are physical objects such as shoes and
computers. Services are work done for people such as shoe repair and computer maintenance.
Scarcity is a situation in which people cannot have everything that they want because of
limited resources. Resources are the most basic elements that people use to produce the goods
and services that they want. A resource is scarce when the available quantity of that resource is
less than its desired uses. Scarce resources have to be divided up or allocated among their
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alternative uses. Because resources are scarce, goods and services are scarce-the available
quantity is limited relative to desires.
When they are faced with scarce resources, people are forced to make choices. Making a
choice means selecting one thing over another. So in a world of scarcity, people face trade-offs a
situations in which they have to choose between two things that cannot be had (or done) at the
same time. You ask, "Do I buy the new dress or two new shirts? Your father asks, "Do we go to
Baguio for a vacation, or do we go to Boracay?
For an individual, a trade-off arises from scarce time or scarce money (that is, spending
power). Time is a scarce resource-you have only 24 hours each day. It means that if you spend
more time updating your Facebook profile, you will have less time preparing for the exam.
Choosing one thing that you want-a high exam score -usually means spending less time for
another thing that you also want-relaxation and entertainment.
Would you like to have a 'new pair of shoes? Buy a new smart phone? If you spend
money buying a smart phone, you cannot spend that money on a new pair of shoes. With limited
amount of money, having a new smart phone probably means not having a new pair of shoes.
For society as a whole, a trade-off arises from the scarcity of resources: land, labor,
capital, and entrepreneurship.
Land refers to resources provided by nature such as fertile soil, forests, water, and
mineral deposits.
Labor is the physical and mental effort human beings use to produce goods and services.
The ultimate source of labor is a more fundamental resource-time. People sell their time as labor
(F or example, working as a carpenter or teacher), or they spend their time sleeping or studying
in college.
Capital is anything that we produce such as factory buildings, skill, and knowledge of
workers-and then use in the production of other goods and services.
Entrepreneurship refers to the ability that some people have for organizing the other
resources--land, labor, and capital-to produce goods and services.
It is important to note that the term resources is part of the more general term, inputs,
which refers to all the things that are used to produce goods and services. Inputs include land,
labor, capital, and entrepreneurship as well as other things made from them (electricity, cement,
plastic) which are, in turn, used to make goods and services. Business firms use resources
directly in production and also use them indirectly, to make the other inputs they use in
production. Resources are the inputs that are the ultimate source of everything that is produced.
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Land, labor, capital, and entrepreneurship are used by business firms, the government,
and other organizations to make goods and services that help society achieve its goals. For
example, the Philippine government uses these resources to build classrooms and train teachers
in order to help our society achieve its goal of providing education to its citizens. These
resources are also used to build hospitals and train doctors in order to provide health care
services.
As a society, we don’t have enough resources to achieve all of our goals. Building more
classrooms and training more teachers require additional land, 1abor, capital, and
entrepreneurship. To build more classrooms and train more teachers, society might have to shift
resources away from building more hospitals and hiring more doctors.
Scarcity and the Applications of Economics
The choices that scarcity forces us to make and the trade-offs that scarcity forces us to
face are the sources of all the applications of economics. We can't have it all. Resources used
for one activity could have been used instead for some other activity. These are the ideas
underlying the use of economics.
Ignoring what is sacrificed to get one thing we want is a common mistake. Talking about
alternative uses of scarce resources can help us make better choices about how to use our
resources.
Let's look at three ways the fundamental lessons of economics can be applied to the world in
which you live.
First, economics provides you with tools for understanding the world around you and for
making sense of the daily news. So much of what you see in the world today is the result
of the choices people make under conditions of scarcity. Consider the observation that, in
many countries, manufacturers of internet technology are expanding their business while
traditional "brick and mortar" retailers-for example, traditional bookstores-are laying off
workers. Economics can help you better understand the choices consumers make and
how their decision to shop online- make their purchases over the Internet-affect the
decisions of business firms to increase production or lay off workers. Economics can rely
young people understand how entrepreneurs appraise Internet-related, business
opportunities.
Second, economics can help you predict the likely effects of events and government
actions. Suppose that, at present, more and more consumers are deciding to make their
purchases over the Internet. We can use economics to predict what is likely to happen
over the next decade: which of the goods and services traded will have higher prices and
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which business firms will expand and hire new workers. And suppose that the national
government is considering to undertake a certain action-for example, to use government
resources in programs that would keep traditional retailers from laying off workers.
Economics gives us the tools and concepts to assess what will be gained and what will
be given up when the government undertakes such actions.
Third, the lessons of economics can be used as a guide in making personal and business
decisions as well as decisions about matters that concern society as a whole. Whenever
there is a limited resource-be it your time, your money, the business owner's building, the
government's land-decisions have to be made about how to use that resource. An
unpleasant fact in a world of scarcity is that the choice to use a resource to do one thing
is, at the same time, a choice not to use that resource to do something else. As you study
economics, you will learn how to do a better job when making economic decisions-
decisions to do one thing instead of another.
Classifying the Problems Economists Study
The field of economics is broken down into major categories based on certain criteria.
There is the microeconomics versus macroeconomics distinction, and the positive economics
versus normative economics. The microeconomics versus macroeconomics distinction is a way
of classifying the different types of problems economists study based on the level of detail we
want to consider. The positive economics versus normative economics distinction is based on the
purpose of analyzing a problem.
Microeconomics is the study of what is likely to happen when individuals make choices
in response to changes in incentives, prices, resources, and or methods of production. It
takes a close-up view of the economy and analyzes individual parts of an economy- a
consumer, a business firm, an industry, a single market rather than the whole economy.
Like what will happen to the cost of desktop computers over the next two years? How
many fast-food industry jobs will open up for high school graduates?
These are microeconomic questions because they get up close and analyze specific markets-the
market for computers and the market for high school graduates.
Macroeconomics, by contrast, stands back from individual parts of an economy and
takes an overall view of the economy. Instead of getting up close and examining the
production of computers, macroeconomics stands back and looks at the economy’s total
output. It stands back from the employment of high school graduates to see the total
employment in the economy. Macroeconomics answers such questions as “What
determines national income and overall production?" and "What might cause
unemployment rate, inflation rate, and interest rates to be low one year and high the
next?"
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Positive economics attempts to determine how the world is. If someone says, "Water is
becoming scarcer," or "Flood irrigation requires vast amounts of water, that person is
making a positive statement. The statement says what the speaker believes about how the
world works. We can test whether it is right or wrong by checking it against the facts.
Normative economics goes beyond how the world is and considers how the world ought
to be. If someone says, "We must try to increase farm production with less water, or
"Water management should move from flood irrigation to sprinkler and drip systems," he
or she is making a normative policy statement.
You may agree or disagree with a policy goal but you cannot prove or disprove it by the
facts alone. Moving from food irrigation to sprinkler and drip systems would benefit some
farmers and harm others. Normative economics requires us to make judgments about different
outcomes and our judgment depends on our values.
It is important to keep in mind that positive and normative economics are closely related
in practice. First, we cannot properly make judgment about whether we must try to increase farm
production with less water unless we know whether water is becoming scarcer and whether the
relatively cheap flood irrigation widely used in the Philippines requires vast amounts of water.
New information on the extent of water scarcity might change one's views on the need to
increase farm production with less water. A positive analysis therefore underlies every normative
analysis. Second, we might have some ideas about how to increase farm production with less
water, but will our ideas work? Would moving from food irrigation to sprinkler and drip systems
allow us to increase farm production with less water? A cause-effect relationship underlies every
normative policy statement. Positive economics is essentially about cause-effect relationships
that can be tested. A positive analysis therefore can shed light on how policy goals might be
achieved.
Theory and Application
The theories that have been developed to answer macroeconomic questions can be
applied to problems and issues in the business world. "Macro variables" such as national income,
inflation rate, and interest rate affect the revenues and costs of business firms. This book,
however, deals mainly with microeconomic theory and applications. We make microeconomics
our focus because an understanding of microeconomics is essential- in understanding the macro-
economy." Besides, in microeconomics we start with the topic of scarcity and the economic
questions of how to deal with it. This topic touches all of us in how we make choices in our
everyday life, how we do business, and how we make decision on matters that affect the entire
society.
For the most part, we discuss how the world is, not how the world ought to be. We will
use the lessons of economics to explain why certain events occur and predict the likely effects of
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events and government actions. We will focus on the way entrepreneurs and managers of
business firms make decisions, not the way someone might think they should make decisions.
A business firm employs resources to produce goods and services to be sold in the
market.
Entrepreneurs seek new business opportunities and develop new ways of doing things.
Economists don’t presume to tell entrepreneurs and managers of business firms what they should
do with their time, money, and other resources. Rather, economics provides guidelines on how
to make economic decisions. For a given goal of entrepreneurs, managers, and bureaucrats,
economics provides the solution that makes the most of the available resources.
Economists are particularly interested about cause-effect relationships that can be tested.
Are traditional "brick and mortar retailers contracting their business because more and more
consumers make their purchases over the Internet? Are cell phones getting cheaper because firms
are producing them in greater quantities?
To answer such questions, economists construct economic theories.
An economic theory is a statement or set of related statements of a presumed
relationship between two or more economic variables-price, quantity demanded, quantity
supplied, and so on. The idea of an economic theory is to capture the most important aspects of
how individuals, business firms, and governments make choices and how these choices shape
'the economic world.
An economic model- often composed of diagrams or equations-is a formal statement of an
economic theory. Sometimes, the term "economic theory suggests a general statement of
cause and effect and the term "economic model suggests a more specific statement of cause
and effect.
Economic models are not detailed enough to capture all aspects of what consumers,
firms, and governments do. They ignore those aspects that are not needed for the purpose at
hand. Because economic models are simplifications of the real world, many people in business
and politics argue that "practical" people should ignore economic theories and models and should
focus instead on applications.
It is important to note however that it is precisely the desire to "apply" economics that makes
economic theories and models necessary. What we call “applied economics" is nothing but the
use of economic theories and models to explain why certain events occur, predict the likely
effects of events and government actions, and recommend courses of action for business and
government to follow.
To see why we can't avoid economic models, recall the observation that more and more
consumers are deciding to do online shopping and make their purchases over the Internet.
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Suppose we want to use 'economics to predict which business firms will expand and hire new
workers over the next decade. Here we are dealing with possible market outcomes that have not
actually occurred. To be able to make a prediction, we need to have a model of how the
interactions among consumers and firms in markets determine the price of the various goods and
services traded and a model of how changes in the market price affect the production and hiring
decisions of firms.
Economic models are like road maps, which are useful precisely because they ignore
many features of the real world and carefully select and present only those features that are
useful for the purpose at hand. Time spent studying economic theories and models is time well
spent!
An economic model is tested by checking its predictions against the facts. To do this,
economists gather data and conduct statistical investigations. These activities allow economists
to establish a causal explanation for an observed event.
LEARNING ACTIVITIES
Did you get it? (Oral recitation)
1. Something is free for you if you can have it without giving up some of your money or
your time. Suppose that walking to school, you noticed a table with hamburger and soft
drink and a sign that reads: “Free lunch here today” But you remember your economics
teacher saying that while you might not have to pay for a lunch,’ there is no such thing as
free lunch.’ Why is the offered lunch not free for you
2. What are the trades-off faced by the Philippine government deciding whether to establish
more national high schools in far away provinces?
EVALUATION
Problems and Applications (long bond paper)
1. How much did you spend on the last item you bought for yourself? What other things could
you have bought with the same amount of money? Why didn't you buy the other items you just
listed?
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2. How much time have you spent reading this chapter? What else could you have done with the
time spent reading this chapter? Why didn't you do the other things you just listed?
3. Explain why scarcity affects both the poorest and the richest persons in the Philippines.
4. How is the preparation of a family budget an exercise in dealing with scarcity? What
adjustments do you think your parents would make if your family income decreased by 25
percent? by 50 percent?
5. Think of a recent case in which a decision by the Philippine government was constrained by
the scarcity of resources. Describe the trade-offs that were involved.
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