LEARNING MODULE

IN
Applied economics

Module 3

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➢ HUMAN WANTS AND ECONOMIC ANALYSIS

The third dimension of economics pertains to human wants.

• Human wants can be described as differentiated or expanded human needs.

• Human needs can be portrayed as basic necessities for material survival including food,
shelter, and clothing
• Human wants are based on human needs but differentiated by the level of income and the
environment

Families with high levels of income can have different tastes for food compared with poor families. As
a consequence, the composition of food intake of the richer families may be different from the simple
food consumption of poorer families.

▪ another factor that may differentiate food consumption is the environment in the
locality where the consumers aside.
1. Diet rich in starch and carbohydrates may be due to the availability of root
crops in the area
2. Places near river banks and oceans may influence the intake of fish and
other seafood among consumers.

• On the other hand,

1. The simple need to covering our body to protect from the elements and
harsh impact of climate maybe colored by taste, income and the weather.
2. The demand for housing services can also alter because of many
differentiating factors.

We observe a common trend in the emergence of human wants in the provision of human needs. The
same basic human needs can manifest itself in various form of human wants through the
differentiating impacts of various factors. Because of marked differences between human wants from
human needs, people tend to view human wants as luxury or unnecessary compared with human
needs. A more appropriate way of describing human wants is as differentiated human needs rather
than luxuries. These marked differences are accounted for by the differences in the way consumers
will answer their basic needs. What are those differences?

• Taste, income, environment, socioeconomic, status, and other factors among

consumers.

Business enterprises know the impact of these differentiating factors on the consumption habits of
people, they can Influence the taste and behavior of consumers through various form of marketing and
advertising. Since these factors can be influenced intrinsically and externally, it is possible that human
wants can expand and multiply.

❖ This expansion and multiplication of human wants is one of the key reasons why we have an economic
problem. Society has to respond to this ever expanding and multiplying human wants in light of the
limited wealth of society.

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 ➢ SCARCITY AS A SOURCE OF ECONOMIC PROBLEM

The fourth element in the definition of economics is the concept of scarcity.

Scarcity can be considered as a key economic problem because of the limitation of resources and the
expansion of human wants. The limitation of resources arise primarily because of its alternative and
competing uses while human wants are expanding because of internal and external factors that
differentiate simple human needs into human wants. These two features are the main reasons for the
emergence of the problem of scarcity which has to be addressed through production and distribution
activities to attain the material survival, stability, and growth of any society.
Scarcity can be defined as the limitation of resources to answer the expanding human wants.

➢ Why then is scarcity considered a key economic problem?

• Because limitations implies that society has to devise a mechanism of utilizing these
limited resources to answer the human wants of the people that will result in the
highest level of social welfare.

➢ Sometimes people equate scarcity with shortage.

• Scarcity is a general characteristic of resources in the light of its competing uses that
may arise from the rapid expansion of human wants
• Shortage on the other hand, is a condition when the supply of a good, service or
resource is not enough to meet the demand.
• Shortage is a specific manifestation of scarcity.
• A shortage, in economic terms, is a condition where the quantity demanded is greater
than the quantity supplied at the market price

There are three main causes of shortage:

1. Increase in demand (outward shift in the demand curve): For example, a sudden heatwave leads to an
unexpected demand for energy that cannot be met.
2. Decrease in supply (inward shift in supply curve): For example, an unexpected freeze results in the
destruction of orange crops leading to a drastic reduction in the supply of orange juice.
3. Government intervention: Shortages can also be the result of government-imposed price ceilings.

Demand - is the consumer's desire and ability to purchase a good or service

As the price of a good increase, the demand for the product will decrease

Example:
If TVs are sold for the cheap price of $5 each, then a
large number of consumers will purchase them at a
high frequency. Most people would even buy more
TVs than they need, putting one in every room and
perhaps even some in storage.

• If the market price is above the equilibrium value,

there is an excess supply in the market.
o Sellers will tend to reduce the price of their
good or service to clear their inventories.
• If the market price is below the equilibrium value
3 then there is excess in demand
Supply is a fundamental economic concept that describes the total amount of a specific good or service that
is available to consumers

Example:
When prices of a product increase, producers are willing to manufacture more of the product to realize
greater profits.

The Law of Supply and Demand

The law of supply and demand is the basic principles in economic, also the law of supply and demand is a
theory that explains the interaction between the sellers of a resource and the buyers for that resource. The
theory defines what effect the relationship between the availability of a particular product and the desire (or
demand) for that product has on its price. Generally, low supply and high demand increase price and vice
versa.

• The law of demand says that at higher prices, buyers will demand less of an economic good.
• The law of supply says that at higher prices, sellers will supply more of an economic good.
• These two laws interact to determine the actual market prices and volume of goods that are traded on
a market.
• Several independent factors can affect the shape of market supply and demand, influencing both the
prices and quantities that we observe in markets.

Law of Demand vs. Law of Supply

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people
will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of
a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the
opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force
them to forgo the consumption of something else they value more. The chart below shows that the curve is a
downward slope.

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But
unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the
price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher
quantity at a higher price increases revenue.
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Market Equilibrium – market state where the supply in the market is equal to the demand in the market.

Example:
The price of a good or service when the supply of it is equal to the demand for it in the market.

➢ A surplus can also be associated with the problem of scarcity.

❖ What is Economic Surplus?

• The term economic surplus refers to the sum of producer surplus and consumer surplus. It is
the gain that producers and consumers make when they sell or buy products. Economic
surplus is also known as “total welfare” or Marshallian surplus.
o Since resources have alternative uses with corresponding opportunity costs, a
situation when the amount supplied is greater than when the amount demanded can
also be considered an economic problem.
o Wastage of resources in the light of competing uses is an improper way of using
resources.
o Since resources could have been used in the production of other goods and services,
the wastage brought about by a surplus does not lead to maximum benefits and can
lead instead to huge opportunity costs to a society.

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Economic Surplus - The term economic surplus refers to the sum of producer surplus and consumer
surplus. It is the gain that producers and consumers make when they sell or buy products. Economic
surplus is also known as “total welfare” or Marshallian surplus.

Example:
Producer surplus: If a producer of a good is willing to sell each unit at P100, but receives P120 instead, the
difference is the producer surplus. So, if the producer sells 100 units at P120 each, the total producer
surplus is P2,000. (P20 X 100).

Consumer surplus: This term’s meaning is similar to that of the definition of producer surplus. But it is the
surplus from the viewpoint of a consumer.

If a consumer is willing to pay a maximum price of P150 for a good but can buy it for P120 instead, the
consumer surplus is P30. The two surpluses taken together add up to the economic surplus.

Example:
If a consumer is willing to pay a maximum price of P150 for a good but can buy it for P120 instead, the
consumer surplus
Stacey Hurn, theisproprietor
P30. of Pedilux, a shoe store, buys flip-flops from a supplier at P10 a pair. She is willing
to sell each pair at a minimum of P15.
The two surpluses taken together add up to the economic surplus.
In June, Stacy sells 40 pairs of flip-flops at P25 each. Her producer surplus is P10 per pair (P25 – P15), and the
total producer surplus is:

P10 X 40 = P400

Let us assume that each customer who bought the flip-flops was willing to pay a maximum of P30. This means
that the consumer surplus per pair is P5 (P30 – P25) and the total consumer surplus is:

P5 X 40 = P200

Hence, the economic surplus is:

P400 + P200 = P600 6

CONSUMER SURPLUS AND THE DEMAND CURVED
Individual consumer surplus is the net gain to an individual buyer from the purchase of a good. It is equal to
the difference between the buyer’s willingness to pay and the price paid.

Total consumer surplus in a market is the sum of the individual consumer surpluses of all the buyers of a
good.

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CONSUMER SURPLUS

The total consumer surplus generated by purchases of a good at a given price is equal to area below the demand
curved but above that price.

A Fall in the Price of Used Textbooks

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A Fall in the Market Price Increases Consumer Surplus

PRODUCERS SURPLUS AND THE SUPPLY CURVED

A potential seller’s cost is the lowest price at which he or she is willing to sell a good.

Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference
between the price received and the seller’s cost.
t Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers of a good.

The Supply Curved for Used Textbook

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Producer’s Surplus in the Used Textbook Market

A Rise in Price Increases Producer Surplus

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 Producers Surplus

Putting it together: Total Surplus

The total surplus generated in a market is the total net gain to consumers and producers from
trading in the market. It is the sum of the producer and the consumer surplus.
The concepts of consumer surplus and producer surplus can help us understand why markets are an
effective way to organize economic activity.

Total Surplus

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Consumer Surplus, Producer Surplus, Gains from Trade and Efficiency of Markets
Both consumers and producers are better off because there is a market in this good, i.e. there are
gains from trade.
The maximum possible total surplus (highest possible gain to society) is achieved at market
equilibrium.
In the market equilibrium there is no way to make some people better off without making others worse off

✓ markets are efficient .

Activity 4: A

A. “The limitation of resources arise primarily because of its alternative and competing uses while human
wants are expanding because of internal and external factors that differentiate simple human needs
into human wants “.

Task: Explain with your own words the above sentences about scarcity as a source of economic
problem. (essay)

Activity 4: B

B. Present the following data using GRAPH with the Demand curve and indicate how much will be the
CONSUMER SURRPLUS of each potential Buyers.

The Demand Curved for Whitening Beauty Products

Price of Whitening Beauty Products = 90

Potential Buyers Willingness To Pay

Abi P 200
Amy P 180
Dennis P120
Rose P100
Richard P50
Bob P30

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