Week 1 & 2

Introduction to Applied Economics

Lesson 1:1 What is 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 for a 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’s
one’s debt, or not enough income to meet all the family needs. This, in effect, is the existence of
what we call scarcity, that is, insufficiency of resources to meet the wants of consumers and
insufficiency of resources for producers that hamper enough production of goods and services.
Needs and Wants Defined
Needs are based on physionlogical, personal, or socio-economic requirements necessary
for you to function and live. Transportation is a need for modern, urban person because work,
food, and other necessities of daily life are too far from where he lives
Wants on the other hand, are a means of fulfilling our needs. You may bike to work, use
public transportation, or drive your own vehicle. While any of the choices will work, you want a
car to fulfill your need for transporation.
Economic Interpretation of Needs and Wants
The economic interpretation of needs and wants utilizes the imaginary concept of the
economic man, who acts rationally to maximize his potential to consume goods and services that
offer him the highest degree of utility or satisfaction. Our economic man’s quest is limitless.
While you needs may eventually be satisfied for a while, according to economic theory, wants
never are.
SCARCITY – the insufficiency of resources to meet the wants of consumers and insufficiency
of resources for producers that hamper enough production of goods and services.

Two types of Scarcity:

1. Relative scarcity is when a good is scarce compared to its demand.
2. Absolute scarcity is when supply is limited.

ECONOMICS as a Social Science

 Is a social science because it deals with the behavior of people as they deal with the issue
of scarcity.

RESOURCES – are the most basic elements that people use to produce the goods and services
that they want.

Four types of Economic Resources:

1. Land – refers to resources provided by nature such as fertile soil, forests, water, and
mineral deposits.
2. Labor – is the physical and mental effort of human being use to produce goods and
services.
3. Capital – a man-made resources used in the production of goods and services.
4. Entrepreneur – refers to the ability that some people have for organizing the other
resources (land, labor and capital) to produce goods and services.

MACROECONOMICS AND MICROECONOMICS

Macroeconomics is a division of economics that concerned with the overall performance

of the entire economy (ex. nature of economic growth, the expansion of productive capacity, and
the growth of national income).
Microeconomics, on the other hand, is concerned with the behavior of individual entities such as
the consumer, the producer, and the resource owner. It is more concerned on how goods flow
from the business firm to the consumer and how resources move from resource owner to the
business firm also known as Price Theory.
Three Economic Questions:

 What should we produce?

 How should we produce it?
 For whom should we produce it?
What it Means – In order to meet the needs of its people, every society must answer these three basic
economic questions.

How these questions are answered depends on the nature of the economic system in place. The
economic system is the means by which society answers the basic economic questions.

ECONOMIC SYSTEMS
1. Traditional economy – decisions are based on traditions and practices upheld over the
years and passed on from generation to generation. Methods are stagnant and not
progressive. Traditional societies exist in primitive and backward civilizations.
2. Command economy – this is the authoritative system wherein decision-making is
centralized in the government or a planning committee. This economy holds true in
dictatorial, socialist, and communist nations.
3. Market 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.

POSITIVE ECONOMICS VERSUS NORMATIVE ECONOMICS

Positive economics deals with what is — things that are actually happening such as the
current inflation rate, the number of employed labors, and the level of the gross national product.
Normative economics, on the other hand, refers to what should be — that which embodies the
ideal such as the ideal rate of population growth or the most effective tax system.
Positive economics is an overview of what is happening in the economy that is possibly far from
what is ideal. Normative economics focuses on policy formulation that will help to attain the
ideal situation.

Lesson 1:2 SCARCITY, CHOICE and TRADE-OFFS

People wants goods and services. Goods are physical objects such as school uniform and android
cellular phones. Services are work done for people such as office machine repair and computer
maintenance. Scarcity can be caused by many things including:
Lack of natural resources: Some countries do not have many resources (land, water, oil etc.).
Climate problems: Weather can cause scarcity. Crops can be flooded, or affected by drought.
War: In war, crops are often destroyed, people displaced, transport and trade disrupted, etc.
Bad economic management: corrupt/inefficient governments often create scarcity
Bad transport infrastructure: Inadequate road, rail and air networks can cause scarcity.
Government policy: some governments make laws that create scarcity (e.g. Personal Protective
Equipment (PPE) of front liners in the Philippines).
 Resources are the most basic elements that people use to produce the goods and services
that they want. Because resources are scarce, goods and services are scare—the available
quantity is limited relative to desires.
Once we faced with scarce resources, people are enforced to make choices. Making a
choice means selecting one thing over another. Thus, in the world of scarceness, people face
trade-offs—situations in which they have to choose between two things that cannot be had at the
same time.
WHY ECONOMICS IS IMPORTANT
 Economics will help the students understand why there is a need for everybody, including
the government, to budget properly and properly allocate the use of whatever resources
are available.
 It will help one understand how to make 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 look on how the economy
operates and to decide for themselves of the government official and leaders are effective
in trying to shape up the economy and formulate policies for the food of the nation.

Lesson 1:3 PHILIPPINE ECONOMIC PROBLEMS

The revised estimates for January 2019 key employment indicators using the 2015
POPCEN-based population projection for population 15 years old and over (71.9 million) and
those in the labor force (43.3 million), employed (41.0 million), unemployed (2.3 million) and
population 15 years old and over who were not in the labor force (28.6 million) were lower than
the estimates computed using the 2010 CPH-based population projection (as shown in the table).
The 2015 POPCEN-Based population projection will be used in the LFS effective
January 2020. (Source: Philippine Statistics Authority, Reference No.: 2020-050, Release Date:
Wednesday, March 4, 2020)

The Fundamental Economic Problems

The fundamental economic problem is the issue of scarcity but unlimited wants. Scarcity implies
there is only a limited quantity of resources, example- finite fossil fuels. Because of scarcity,
there is a constant opportunity cost – if you use resources to consume one good, you cannot
consume another. Therefore, an underlying feature of economics is concerned with dealing how
to allocate resources in society to make the most efficient and fair use of resources. The main
issues are:
 What to produce?
 How to produce?
 For whom to produce?

Examples of economic problems include:

 How to deal with external costs/pollution- ex. pollution from production.

 How to redistribute income to reduce poverty without causing loss of economic
incentives.
 How to provide public goods (ex. street-lighting) which are usually not provided in a
free market.
 How should we measure economic welfare? Is it wrong to focus on output and income?
(as economics has in the past) – New measures of economic welfare try to include
broader range of factors, such as environment, education, health care.

Economics Problem of the Philippines

Microeconomic Problems
1. The problem of externalities
2. Environmental Issues
3. Monopoly
4. Income Inequality
5. Volatile/Unstable prices
Macroeconomic Problems
1. Unemployment
2. Recession
3. Inflation
4. Poverty
5. Poor quality of Infrastructure
6. Pandemic Worldwide