APPLIED ECONOMICS

Lesson 1: Revisiting Economics as a social science

What is economics?
- derived from Greek word “Oikanomia”

Economics, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants.
Alfred Marshall, well-known economist, described economics as a study of mankind in the 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. While Hall and Loeberman stated that economics is the study of choice under the condition of
scarcity.
Scarcity is the reason why people have to practice economics. Scarcity is a condition where there are insufficient
resources to satisfy all the needs and wants of a population. Scarcity may be relative or absolute. Relative scarcity is when
a good is scarce compared to its demand. It occurs not because the good is scarce per se and is to difficult to obtain but
because of the circumstances that surround the availability of the good. On the other hand, absolute scarcity is when supply
is limited.
Because of the presence of scarcity, there is a need for man to make decisions in choosing how to maximize the use
of scarce resources to satisfy as many wants as possible.
Opportunity cost refers to the value of the best forgone alternative. The concept of opportunity cost holds true for
individuals, businesses, and even a society.
ECONOMIC RESOURCES
Economic resources, also known as factors of production, are the resources used to produce goods and services.
These resources are, by nature, limited and therefore, command a payment that becomes the income of the resource owner.
1. Land – soil and natural resources that are found in nature and are not man-made. Land is considered an economic
resource because it has a price attached to it. Owners of land receive a payment known as rent/lease.

2. Labor – also called “human resources”, refers to all human efforts, be it mental or physical, that help to produce
satisfying goods and services. 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 and salaries.

Labor is a flexible factor of production - workers can be allocated to different areas of the economy for
producing goods and services.
 3. Capital

Two economic definitions of capital:

a. Capital – can represent the monetary resources use to purchase natural resources.
Ex: Companies use capital to buy land and other goods

b. Capital – represents the major physical assets individuals and companies use when producing goods and
services. Ex: buildings, vehicles, equipment

*Income derived from capital is interest.

4. Entrepreneurs - French word which means “enterpriser”

Entrepreneur – organizer and coordinator of other factors of production: land, labor and capital.

He uses his initiative, talent and resourcefulness to create economic goods.

5. Foreign Exchange - refers to the dollar and dollar reserves that the economy has.

Foreign exchange is part of economic resources because we need foreign currency for international trading
and buying materials from other countries

International medium – dollar

ECONOMIC AS A SOCIAL SCIENCE

Economics is a social science because it studies human behavior just like psychology and sociology. A social
science, broadly speaking, the study of how people behave and influence the world around them. Economics, as a social
science, studies how individuals make choices in allocating scarce resources to satisfy their unlimited wants.

Two Branches of Economics

 Divisions of Economics
1. Production – refers to the process of producing or creating goods needed by the households to satisfy their needs. It is
the use of inputs to produce outputs.
Inputs are commodities or services that are used to produce goods and services.
Outputs are the different goods and services which come out of production process.
Society have to decide what outputs will be produced and in what quantity.

Factors of Production
 Goods

 Services
 2. Distribution is the allocation of the total product among members of society. It is related to the problem of for
whom goods and services are to be produced.

3. Exchange – refers to the process of transferring goods and services to a person in return for something present
medium of exchange – money

4. Consumption - is the use of a good or service. Consumption is the ultimate end of economic activity. WHEN
THERE IS NO CONSUMPTION, THERE WILL BE NO NEED FOR PRODUCTION AND
DISTRIBUTION.

- refers to the proper utilization of economic goods. However, goods and services could not be utilized
unless you pay for it. Hence, consumption could also be spending money for goods and services.

5. Public Finance - is concerned with government expenditures and revenues. Economics studies how the
government raises money through taxation and borrowing.

- pertains to the activities of the government regarding taxation, borrowings and expenditures. It deals
with the efficient use and fair distribution of public resources.

Lesson 2: Economics as an Applied Science

ECONOMICS IS A STUDY OF ECONOMIC ACTIVITIES OF A MAN. IT IS ONLY CONCERNED WITH THE

WEALTH-GETTING AND WEALTH-USING ACTIVITIES OF A MAN.

- PROF. MARSHALL

The term “applied economics” is believed to have started 200 years ago in the writings of two economists:

JEAN-BAPTISTE SAY JOHN STUART MILL

(1767-1832) (1806-1873)

Applied economics - is the study of economics in relation to real world situations. It is the application of economic
principles and theories to real situations and trying to predict what the outcomes might be.

SIMPLER DEFINITION

Applied economics – is the study of observing how theories work in practice.

 Dinio and Villasis defined applied economics as the application of economic theory and econometrics in specific
settings with the goal of analyzing potential outcomes. Applying economic theory in our lives means trying to address
actual economic issues and be able to do something about it.

What is the importance of applied economic application?

1. Applying economics to a company, household or a country helps sweep aside all attempts to dress up a situation
so that it will appear worse or better than it actually is.

*applied economics becomes a powerful tool to reveal the true and complete situation in order to come up with
things to do.

Example: Applied economics can assess the profits of a certain company. The result can help the executives to do
some strategies in order to boost its sales.

2. Applied economics acts as a mechanism to determine what steps can reasonably be taken to improve current
economic situation.

*to examine each aspect, one can strengthen areas where performance is weak.

Example:
 Purchase of goods and services
 Usage of raw materials
 Division of labor within entity (e.g. firm, company, agency)

3. Applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation, or at least
minimize the impact.

*to review what steps were taken to improve and correct similar situations and continue good strategies to
keep the economy flowing in a correct direction.

ECONOMETRICS

What is econometrics?

Econometrics – is the application of statistical and mathematical theories to economics for the purpose of:
 Testing hypotheses
 Forecasting future trends

The results of econometric are compared and contrasted against real life examples.
Example:
Real life application of econometrics would be to study the hypothesis that as a person’s income increases, spending
increases.
Basic Economic Problem
Scarcity of means for satisfying various needs is the central problem of our economic life and it is scarcity that creates the
need to make a choice.
Scarcity and choice go hand in hand.

1. What to produce?

The system must determine the desires of the people.

Goods and services must be based on the needs of the consumers
Factors to consider:
 Availability of resources
 Physical environment
 Customs and traditions of people

2. How to produce?

The system must select the proper combination of economic resources in producing the right amount of
output
 The quality of output must come first before the quantity.
3. For whom shall the goods and services be produced?
This has something to do with distribution
 Once the goods are produced, how shall they be distributed?

4. Are the country’s resources being utilized or some of them are lying idle and unemployed?

When resources are scarce, it is absolutely not right to keep some of the available ones idle.
 If resources are not fully utilized, the production system is said to be inefficient.
5. Is the economy’s capacity to produce goods growing or remaining the same overtime?
To achieve a growth is productive capacity is a universal objective.
Lesson 3: Basic Economic Problems and the Philippine Socioeconomic
Development in the 21st Century

1. Unemployment – main problem of the Philippine economy.

COMMON CAUSES
 The number of people entering the job market has been greater than the number of jobs created.
 The rural-urban migration increases due to employment opportunities.
 Many of the unemployed individuals are college graduates.
RURAL TO URBAN MIGRATION

WHAT CAN BE DONE TO SOLVE UNEMPLOYMENT PROBLEM?

Appropriate economic policies for labor-intensive industries.
Improve the educational system of the country especially in the rural areas
Minimize rural-urban migration by improving the economic environment in rural areas.
Proper coordination between government and the private sector to solve the problem of job mismatch.
Slowing population growth. Philippine growth must increase faster than the population. Limit the size of
families.
Provision of more investment opportunities to encourage local and international investment.

2. Poverty
COMMON CAUSES
Increase in population
Increase in the cost of living
Unemployment
Income inequality
 WHAT CAN BE DONE TO SOLVE THE POVERTY PROBLEM?
Reduce unemployment
Appropriate policy on labor income
Provision of unemployment benefits for those who will be unemployed due to natural or man-made calamities.
Ex. Typhoon, Bombing of terrorists, Earthquake
Increase social services like education, health care and food subsidies for sustainable poverty reduction.

Subsistence

Appropriate policy on labor income.

3. Income Inequality
Income is the money that an individual earned from work or business received from investments.
Income inequality – refers to the gap in income that exists between the rich and the poor.
MAJOR CAUSES OF INCOME INEQUALITY
Political culture
 “ palakasan”, “utang na loob”
Ex. Voting for the wrong person during election
Indirect taxes – poor people shoulder this taxes like the Value Added Tax – 12%
WHAT CAN BE DONE TO SOLVE THE PROBLEM OF INCOME INEQUALITY
Policies to enforce progressive rates of direct taxation on high wage earners and wealthy individuals.
Direct money transfers and subsidize food programs for the urban and rural poor.
Direct government policies to keep the price of basic commodities low
Raise minimum wage
Encourage profit sharing

4. Booming population growth in the Philippines.