12

APPLIED ECONOMICS
QUARTER 2 – Module 4
SOCIO-ECONOMIC FACTORS

1
INTRODUCTION (What I Need to Know)

Socio-economic factors are important characteristics which mostly influence consumers.

These factors are associated with the quality of life and determine the behaviors, tastes,
preferences, attitudes and lifestyles of people living within a society. Socio-economic factors have
a high impact on businesses, whether big or small. This is because the consumers are often at the
heart of businesses and tend to affect growth of all ventures. There are many socio-economic
factors that business persons need to look out for in order to excel and compete effectively in an
ever-changing market.

(MELC) Most Essential Learning Competency

Explain the effects of the various socio-economic factors affecting business and industry.

At the end of this module, you should be able to:

a. identify the various determinants of business and industry;
b. interpret production theory as a basis for putting up business;
c. relate the benefits of business on consumers.

DISCUSSIONS AND ACTIVITIES (What is It)

THE THEORY OF CONSUMER BEHAVIOR

Consumer Theory describes how consumers make decisions on what to buy. Consumption
refers to the use of goods and services to satisfy human wants directly.

The Utility Function

A consumer aims to maximize the satisfaction he/ she derives from the use of good or a
service. Utility is the term used for satisfaction. Utility is something intangible. As such, it is not
easy to measure. Quantifiable goods are subject to measurement; they can be expressed in
numerical values. In order to make it easy to understand the concept of utility, we shall assume
that it is measurable in units, which we shall call utils. A util is one unit of satisfaction.
The utility function shows that the relationship between utility and consumption. In equation
form, it is: U = f(C), which simply stated is: utility is a function of consumption. Also, to be more
specific, utility for the consumption of goods X and Y can be expressed as: U = f(X, Y).
Important measures of utility are: Total Utility and Marginal Utility. Total Utility refers to
the combined utility derived from consuming certain units of a good. Marginal Utility refers to the
additional utility derived from consuming an additional unit of the good. ( Dinio, Villasis 2017)

2
 Table 4.1 Hypothetical Utility Schedule of Marvin for Chocolate Candy

Quantity of Consumption Total Utility Marginal Utility

1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3
7 35 2
8 36 1
9 36 0
10 35 -1

Let us study Marvin’s utility schedule for chocolate candy. When he eats the first bar, he
gets a utility of 8. The second bar gives him a utility of only 7. We see that while his total utility
increases with each additional chocolate bar, the additional utility becomes less and less. The
satisfaction he derives from each additional unit starts to diminish. Notice that upon eating his
ninth bar, his total utility does not change at all, which means that there is no additional utility
derived from the ninth unit. That is why marginal utility at 9 units of consumption is equal to
zero. Look at what happens as he consumes the tenth bar. Instead of increasing, the total utility
declines and marginal utility is even negative. Are there physical manifestations of a negative
marginal utility? Physical discomforts such as an upset stomach, dizziness, and indigestion are
signs that instead of adding to one’s utility, the consumption of the additional unit of the good has
resulted in the decrease of total utility derived.
The above situation illustrates the Law of Diminishing Marginal Utility. The law states that
as additional units of a good are consumed, the additional utility derived from each additional unit
tends to diminish. The reason for this behavior is the satiation of human wants. Man’s wants can
be fully satiated at a given time. That is why owners of Vikings, Dad’s, or Buffet 101, do not lose
money even if people are free to eat all they can. At some point, they will simply give up eating
because their wants have been satisfied.

Significance of Consumer Behavior in Business

The consumer is the person who buys the product business offers for sale. It is therefore
imperative that we get to please the customer, so he/ she will buy from us instead of from our
competitors and also that once he buys from us he will be loyal to us and not buy from other
sellers of the same product. Knowing how consumer satisfaction is maximized will help a business
in always keeping the consumer’s welfare the topmost priority.

THE PRODUCTION THEORY

Production refers to the use of economic resources to create goods and services that will be
used to satisfy human wants. In this module, we will focus on the behavior of the producer in an
attempt to maximize output. The theory of production is an analysis of the input output
relationship. The term input refers to the resources used to produce goods and services. Output
refers to the product created as a result of the combination of the input in the production process.
Production function is an equation showing the maximum output of a commodity that a
firm can produce per period of time with each set of input. Input and output are measured in
physical rather than monetary units. (Dinio, Villasis 2017)
3
 Output = f (input)
The production process is represented in the equation:
O = f (i)
where O stands for the output and i stands for input. To be more specific, output depends
on the quantity of land, labor, and capital available. Thus,
O = f (Ld, Lb, C)
The production function contains the functional relationship between output and the basic
factors of land, labor, and capital. These basic factors complement each other as they are used in
the production of goods and services.
Output produced is measured in three forms:
Total Product (TP) is the combined production of several units of a given input.
 Marginal Product (MP) is the additional output produced by an additional unit of the input
and is equal to ∆TP/∆i
 Average Product (AP) refers to the average contribution per unit of input and is equal to TP/i

Table 4.2 Production Schedule for Output X with Variable Labor Input
Quantity of Labor Output Total Product Marginal Product Average Product
1 10 10 10
2 22 12 11
3 37 12 12.3
4 55 18 13.8
5 69 14 13.8
6 77 8 12.8
7 80 3 11.4
8 81 1 10.1
9 81 0 9
10 80 -1 8

The stage where Total Product is increasing at a fast rate is the stage of increasing returns.
Here, Marginal Product and Average Product are both increasing.
When Total Product is increasing at a slower rate and Marginal Product and Average
Product are both decreasing, we have the stage of diminishing returns.
When Total Product decreases and as a result Marginal Product is negative, we enter the
stage of negative returns.
The production behavior above leads us to the Law of Diminishing Marginal Returns. It is in
reference to the diminishing values of MP. The law states that additional output starts to diminish
at a certain point as additional units of a variable input are combined with one or more fixed input.
The reason for this behavior can be traced to the constraints faced because of the fixed resources
that are used in complement with the variable input, which is the labor.

Significance of Production Theory in Business

A business is engaged in providing goods and services to customers with the goal of making
profits. Although some businesses are engaged in retailing goods that they bought from producers,
many businesses produce the goods that they sell. It is therefore important for the business
proprietor to be aware of the production behavior that will maximize output within limited
quantities of output available to him/her. This in turn will help maximize profits for the enterprise.
(Dinio, Villasis 2017)

4
ACTIVITY 1. ARRANGE ME!

Directions: Write in your answer sheet the correct word/s on socio-economic factors that you will
get from the properly arranged jumbled letters guided by the description given in each number.

1. _________________(LUITTIY) – satisfaction
2. _________________(RCONSUEM) – person who buys product offer for sale.
3. _________________(ORPUCTDOIN) – economic resources to create goods and services use to
satisfy human wants.
4. _________________(TTOUUP) – product created as a result in the production process.
5. _________________(TINUP) – resources to produce goods and services.
6. _________________(VERNOGMNET) – will benefit from businesses through revenues.
7. _________________(PPLSUIER) – provides products or services.
8. _________________(HHOUSELOD) – group of people who live together.
9. _________________(TERNINTIOAANL AETRD) – exports and imports of goods and services.
10. _________________(DDMEAN) – desire to purchase goods and services and willingness to pay a
price.

ACTIVITY 2. FILL IT RIGHT!

Directions: Conduct an interview within your family member on how he/she budgets the
combined income of the family. Write your answer in your answer sheet.

Guide Questions:
1. How much is the combined income of the family?
2. Why do you need to budget the income of the family?
3. How do you budget when you have irregular income?
4. How much do you spend?
5. How much do you save?

Name of family member: _______________________________

Notes during the interview
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

ACTIVITY 3. WRITE IT UP!

Directions: Write a meaningful and well-thought explanation to answer the given question guided
by rubrics below.

 As a member of the family, how can you help to manage the financial status of your family?
Write your answer in your answer sheet.

_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

5
 Rubrics

Criteria Description Points

Organization The concepts are clearly and creatively
5
conveyed.
Content The contents are clearly discussed. 5
Presentation The ideas are clearly presented based on the
5
words used
Total: 15

ASSESSMENT

I. Directions: Write TRUE in your answer sheet if the statement is correct and FALSE if
the statement is incorrect.

_______ 1. Utility is a measure of the satisfaction that we get from consuming a good or service.
_______ 2. Marginal utility diminishes as consumption of a good decreases.
_______ 3. As a person consumes more and more slices of pizza, the marginal utility of each extra
slice diminishes.
_______ 4. Production refers to the use of economic resources to create goods and services that will
be used to satisfy human wants.
_______ 5. An increase in total production due to an increase of one unit of variable input is known
as Average Product.

II. Directions: Complete the table to show the Law of Diminishing Marginal Utility.

Paul is extremely hungry and goes to a restaurant that offers a buffet. He loads up his plate
with food and starts eating. The amount of satisfaction gained by Paul from a plate of food is
directly proportional to Paul’s hunger level. When he eats 1 plate of food, he gets a utility of 10.

Amount of Food Consumed Total Utility Marginal Utility

1 plate 10 ___
2 plates ___ 9
3 plates 27 8
4 plates 34 ___
5 plates 40 6
6 plates ___ 5
7 plates 49 ___

III. Directions: Write a meaningful and well-thought explanation to answer the given question
guided by the essay rubrics below.

Explain the law of diminishing marginal returns. Give an example.

_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

6
 Rubrics

Skill 4 3 2 1 Score
Content Applied all Applied most Applied few Business
business business business principles, tools
principles, principles, principles, and techniques
tools, tools, tools, are not applied.
techniques. techniques. techniques.

Use of Time Learner uses Learners uses Learners uses Learners does
their time to the most of the some of not use their
work their time to their time to time to work
productively work work productively
and efficiently. productively productively and efficiently.
and efficiently. and efficiently.

Pictures Pictures and Most pictures Few pictures The learner’s

and graphics are and graphics and graphics pictures and
Graphics clear and are clear and are clear and graphics are
relevant. relevant. relevant. not clear and
relevant.
Required All of the Most of the Few of the Missing most
Elements required required required or all of the
elements are elements are elements are required
clearly visible, clearly visible, clearly visible, elements.
organized and organized and organized and
well placed. well placed. well placed.

Visual The poster has The poster has The poster The poster
Clarity and an excellent a nice design needs needs
Appeal design and and layout. It improvement in significant
layout. It is is neat and design, layout improvement in
neat and easy easy to read. or neatness. design, layout
to understand and neatness.
the content.

ANSWER KEY FOR ACTIVITIES

10. DEMAND
Answers may vary Refer to rubrics
INTERNATIONAL TRADE 9.
ACTIVITY 2 ACTIVITY 3
HOUSEHOLD 8.
SUPPLIER 7.
GOVERNMENT 6.
INPUT 5.
OUTPUT 4.
PRODUCTION 3.
CONSUMER 2.
UTILITY 1.
ACTIVITY 1
7
References:
A. Books:

Dinio, Rosemary P., PhD & Villasis, George A. 2017. Applied Economics. Manila
Philippines. REX Book Store. P. 84-87

DIVISION QUALITY ASSURANCE TEAM IN HUMANITIES AND SOCIAL SCIENCE

WRITER:

BENJAMIN G. BIAGTAN

VALIDATORS:

DR. MARILEX A. TERCIAS ZOSIMO IRENE H. FERNANDEZ

DR. EUGENE M. TORALBA MA. JOCELYN J. SOTONG
DR. ALBERTO O. RABANG DANILO T. SIBLAG
DR. VIRGINIA B. FREGILLANA VICTOR B. ABAN
JEANNEROSE M. ACOSTA JAMILIE M. CRISPINO

COSULTANTS:

DR. MAYBELENE C. BAUTISTA

DR. JEROME S. PARAS
DR. CORNELIO R. AQUINO
DR. TEODORA V. NABOR
DR. DANILO C. SISON

ANSWER KEY FOR ASSESSMENT

FALSE 5. 4 49 7 plates
TRUE 4. 5 45 6 plates
TRUE 3. 6 40 5 plates
7 34 4 plates
FALSE 2.
8 27 3 plates
TRUE 1. 9 19 2 plates
I. 10 10 1 plate
Consumed
Marginal Utility Total Utility Amount of Food
II.

Refer to rubrics
III.