Chapter 1

Introduction to Applied Economics

Lesson 1.1 Introduction to Economics

Lesson 1.2 Economics as an Applied Science

At the end of the session the learners will be able to:

a. Differentiate Economics as a Social Science and as an Applied Science

b. Give real-life situation in which the Principles of Applied Economics are used.

c. Cite current economic issues that needs to be addressed.

d. Relate the Principles of Applied Economics to current issues using critical

thinking.
Lesson 1.1 Introduction to Economics

Everybody goes through a day faced with constraints or limitations: motorists

complain of high gasoline prices, times when people suffer due to shortage of
chicken in the market, or insufficient allowance of student who needs to buy books
and school supplies.

People always complain about not having enough – not enough food on the table,
not enough money to pay one’s debts, or not enough income to meet all the family’s
needs. This, in effect, is the existence of what we call scarcity, that is, insufficiency
of resources t meet the wants of the customers and insufficiency of resources for
producers that hamper enough production of goods and services.

Scarcity is the reason why people have to practice economics.

Economics – as a study, is the social science that involves the use of scarce
resources to satisfy unlimited wants.

Social Science - The study of society and how people behave

and influence the world around them.
BRANCHES OF ECONOMICS

Macroeconomics
• 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.

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.

Well-known economist Alfred Marshall described economics as a study of mankind

in an ordinary business of life. It examines part of the individual and social action
that is most closely connected with the attainment and use of material requisites
of well-being.
Types of Scarcity:

1. Absolute Scarcity - is when supply is limited. This explains why there are
some products that are very expensive in the Philippines.

Oil is absolutely scarce in the country since we don’t have oil wells from which
we can source our petroleum needs.

Cherries are very expensive in our country because we don’t have the right
climate to grow them.

2. Relative Scarcity - Is when a goods is scarce compared to its demand. This

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.

Bananas are abundant in our country but when a typhoon destroys our
banana plants and the farmer has no bananas to harvest, then bananas are
relatively scarce.

CHOICE AND DECISION MAKING

With the presence of scarcity, there is a need to make decisions in choosing how
to maximize the use of the scarce resources to satisfy as many wants as possible.

Opportunity Cost
Refers to the value of alternative. The concept of OPPORTUNITY COST holds true for
individuals, businesses, and even a society. In making a choice, trade-offs are
involved.

What will happen if there is no SCARCITY?

Without scarcity, a person does not need to make choices since he/she can have
everything he/she wants.
BASIC ECONOMIC PROBLEMS OF THE SOCIETY

LIMITED RESOURCES UNLIMITED WANTS

SCARCITY

DECISION MAKING

WHAT TO PRODUCE? FOR WHOM TO

HOW TO PRODUCE?
HOW MUCH? PRODUCE?

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

1. 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.

2. How to produce?
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.

3. 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?
ECONOMICS SYSTEMS
The economic system is the means through which society determines the answers
to the basic economic problems mentioned.

Traditional Economy
Decisions are based on traditions years and practices upheld over the years and
passed on from generation to generation. Methods are stagnant and therefore not
progressive. Traditional societies exist in primitive and backward civilizations.

Command Economy
This is the authoritative system wherein decision-making centralized in the
government or a planning committee. Decisions are imposed on the people who
do not have a say in what goods are to be produced This economy holds true in
dictatorial, socialist, and communist nations.

Command Economy
This is the most democratic form of economic system. Based on the workings of
demand and supply, decisions are made on what goods and services to produce.
People’s preference are reflected in the prices they are willing to pay in the market
and are therefore the basis of the producer’s decisions on what goods to produce.

Read the front page of the newspapers or watch the news on TV.
WHY DO WE NEED TO STUDY ECONOMICS?
ECONOMICS will help the students understand why there is a need for everybody,
including the government, to budget and properly allocate the use of whatever
resources are available. It will help one understand how to make more rational
decisions in spending money, saving part of it, and even investing some of it.

On the national level, economics will enable the students to take a look on how the
economy operates and to decide for themselves if the government officials and
leaders are effective in trying to shape up the economy and formulate policies for
the good of the nation.
MEASURING THE ECONOMY

The heart of economy is production whose value measures both resource input
and output of people. The interplay of resources and outputs tells how well the
economy has performed.

Economic Resources ---- also known as factors of production, are the resources
used to produce goods and services.

1. Land
Soil and natural resources that are found in nature and are not man-made.
Owners of lands receive a payment known as RENT.

2. Labor
Physical and human effort exerted in production. It covers manual workers like
construction workers, machine operators, and production workers, as well as
professionals like nurses, lawyers and doctors. The term also includes jeepney
drivers, farmers and fisherman. The income received by labors is referred to
as WAGE.

3. Capital
Man-made resources used in production of goods and services, which include
machineries and equipment. The owner of capital earns an income called
INTEREST.
GNP vs. GDP

Gross National Product

Market value of final products, both sold and unsold, produced by the resource
of the economy in a given period.

MARKET VALUE is determined by supply and demand

ECONOMY’S RESOURCES are those belonging to Filipino citizens and corporations.
NOT ALL RESOURCES BELONGING TO THE ECONOMY ARE IN THE ECONOMY.
CONVERSELY, NOT ALL RESOURCES IN THE ECONOMY BELONG TO THE ECONOMY

Gross Domestic Product

Better indicator of domestic employment opportunities.
Defined as the market value of final products produced within the country.

GDP is net of GNP after deducting NET FACTOR INCOME from abroad or
by deducting factor income from abroad and adding back FACTOR PAYMENTS
to other countries.

NET FACOR INCOME from abroad is net export of factor service equal to Factor
income from abroad less the factor payments of other countries.

Net Inflow = Inflow - Outflow

- Net Inflow = - Inflow + Outflow
APPLIED ECONOMICS
Application of economic theory and econometrics in specific settings with the
goal of analyzing potential outcomes.

John Neville Keynes

First to use the phrase “APPLIED ECONOMICS” to designate the application of
economic theory to the interpretation and explanation of particular economic
phenomena.

Applied Economics in Relation to Philippine Economic Problems

Understanding the existence of scarcity can help Economics students analyze
how to maximize the use of available resources in order to overcome scarcity.

Knowledge of economic theories such as the Law of Supply and Demand can
help in analyzing why prices are high and what the government can do to
help bring down prices.
The Philippines Basic Economic Problems

Non-inclusive Growth despite of Economic Growth

Millions of Filipinos are claiming they are experiencing hunger or they still live
below the poverty level.

Unemployment despite of Improvements

Main problem of the Philippine Economy.
Unemployment Ratein the Philippines:
2nd Quarter of 2015 = Decreased to 6.4 % from 7.0% in the previous year
Philippines Unemployment Rate average = 8.85% from 1994 – 2015
Highest = 13.90% 1st quarter of2000 Lowest = 6.0% 4th quarter of2014

Poverty
Socio-economic problem.
Poverty incidence of the population registered at
26.4 %, 26.5%in 2009
25.2% in 2012
28.8 in 1st quarter of2014

Population Growth
Basic economic problem that can be connected to the issue of scarcity.
When population becomes too big, economic resources may no longer be
enough to support the growing population.
2010 = 92.3 M
2014 = 100 M – growing by 2%
Philippines – one of the highest population in Asia.
Represents 1.37% of the worlds population.