Applied Economics

DEFINITION of Applied Economics Applied economics is a field that applies of economic theories and principles to real-world situations
with the desired aim of predicting potential outcomes. The use of applied economics is designed to analytically review potential outcomes without the
"noise" associated with explanations that are not backed by numbers. Applied economics can involve the use of econometrics and case studies.
What Is Econometrics? Econometrics is the quantitative application of statistical and mathematical models using data to develop theories or test
existing hypotheses in economics and to forecast future trends from historical data. It subjects real-world data to statistical trials and then compares
and contrasts the results against the theory or theories being tested. Because economics relies on the interpretation of historical events in its theories,
applied economics can lead to "to do" lists for steps that can be taken to ensure stability in real-world events. The use of applied economics may first
involve exploring economic theories to develop questions about a circumstance or situation, and then draw upon data resources and other frames of
reference to form a plausible answer to that question. The idea is to establish a hypothetical outcome based on the going circumstances.
What Makes Applied Economics Relevant in the Real World Applied economics can illustrate the potential outcomes of choices individuals
make. For example, if a consumer desires to own a luxury good but has limited financial resources, an assessment of the cost and long-term impact
such a purchase would have on assets can help determine if such an expense is worthwhile. Consumption of wanted goods and their lasting effects can
also be framed through applied economics. For instance, if an individual wants to eat comfort food, applied economics can be used to present theories
and possible outcomes such consumption would have on that person’s attempts to reach certain weight loss goals. Something similar can be done in
deciding on college studies and career training. A student may want to focus on courses that appeal to personal hobbies and interests; however, they
would also need to assess how such an academic path might affect their professional prospects and future salary opportunities. Through applied
economics, and understanding of diminishing returns can be developed. For instance, if a professional takes a job that offers the same pay bonus to
all workers regardless of experience or salary, applied economics can show them that the long-term benefits would be limited. If a company gave
P50,000 bonus at the end of each quarter to each employee, this might have a notable influence on a worker earning a low wage. Through applied
economics, it can be demonstrated that as the employee gains seniority and a higher regular salary, such a bonus could have a less significant effect
on their actual earnings.
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Absolute scarcity: First, it may be that there are simply insufficient quantities of a resource to meet human needs or wants. We call this absolute
scarcity. No matter how much we look or try to find additional sources, there are none to be had. Lack of food leads to starvation, lack of water leads
to drought, thirst, and crop failure – and starvation. There simply is no food or water to be had, at least in that particular area.

Relative scarcity: Second, there may be physical quantities of a resource present but scarcity exists because of problems about supply or distribution.
Meeting the demand for that resource might mean exploiting lower quality resources. For example, food production may require cultivating lands that
are poorly suited to farming, such as on steep slopes or in very arid areas, requiring a greater effort (more labour) and other inputs (chemical fertilizers,
irrigation) in order to meet the demand. Another example concerns the exploitation of fossil fuels. When the most accessible and best quality fuels are
fully exploited (e.g., sweet crude from the Middle East or other areas) we may turn to lower quality fuels (tar sands) to meet our needs.

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The Economic problem ,"There are infinite wants but finite resources", –sometimes called basic or central economic problem – asserts that an
economy's finite resources are insufficient to satisfy all human wants and needs.

Basic Problems Of An Economy If there is a central economic problem that is present across all countries, without any exception, then it is the
problem of scarcity. This problem arises because the resources of all types are limited and have alternative uses. If the resources were unlimited or if
a resource only had one single use, then the economic problem would probably not arise. However, be it natural productive resources or man-made
capital/consumer goods or money or time, scarcity of resources is the central problem. This central problem gives rise to four basic problems of an
economy. In this article, we will look at these basic problems in detail.

The Four Basic Problems of an Economy

The central economic problem of scarcity of resources is broken down into four basic problems of an economy. Let’s look at each of them
separately.
1 – What to Produce?
What does a society do when the resources are limited? It decides which goods/service it wants to produce. Further, it also determines the quantity
required. For example, should we produce more guns or more butter? Do we opt for capital goods like machines, equipment, etc. or consumer goods
like cell phones, etc.? While it sounds elementary, society must decide the type and quantity of every single good/service to be produced.

2 – How to Produce?
The production of a good is possible by various methods. For example, you can produce cotton cloth using handlooms, power looms or automatic
looms. While handlooms require more labour, automatic looms need higher power and capital investment.
Hence, society must choose between the techniques to produce the commodity. Similarly, for all goods and/or services, similar decisions are
necessary. Further, the choice depends on the availability of different factors of production and their prices. Usually, a society opts for a technique
that optimally utilizes its available resources.

3 – For whom to Produce?

Think about it – can a society satisfy each and every human wants? Certainly not. Therefore, it has to decide on who gets what share of the total
output of goods and services produced. In other words, society decides on the distribution of the goods and services among the members of society.

4 – What provision should be made for economic growth?

Can a society use all its resources for current consumption? Yes, it can. However, it is not likely to do so. The reason is simple. If a society uses all
its resources for current consumption, then its production capacity would never increase.
Therefore, the standard of living and the income of a member of the society will remain constant. Subsequently, in the future, the standard of living
will decline. Hence, society must decide on the part of the resources that it wants to save for future progress.