Application Software
Application software is sometimes known as applications, and they are sometimes called productivity programs by some people (and some call the end-user programs). They make it possible for the user of the device to do things such as create documents, send e-mails and search the internet. Simply put any application (thing that makes it possible for you to actually do things on the device) has its own software, from the simplest application to the most complicated application. Here's a little quote that explains stuff about application software - 'When you begin creating a document, the word processing software has already set the margins, font style and size, and the line spacing for you. But you can change these settings, and you have many more formatting options available. For example, the word processor application makes it easy to add color, headings, and pictures or delete, copy, move, and change the document's appearance to suit your needs.' - http://education-portal.com/academy/lesson/what-is-application-software-definition-examples-types.html
Referring it to games
Let's think in terms of Microsoft word as an application, and Tekken Tag Tournament 2 (the game) as an application. In word, when you open it up and click in the text area and type the letters 'Hellsweep' you will see the word Hellsweep appear in the rough area that you clicked in the text area assuming that you typed it right. Now if you open up Tekken, go into practice mode and select a Mishima, say Heihachi for example, then pick a stage and are there in practice mode and everything has loaded up, if you input forward (f), neutral (n), down (d), down/forward (d/f) 4, 4, 4 (f, n, d, d/f, 4, 4, 4) then you expect to see a Hellsweep happen, and that's how application software applies to video games; games do the same things as other forms of application software; they interpret your input the way they should depending on the application software (or game).