APPLIED ECONOMICS

Chapter 1 - Economics as a Social Science

Economics is a social science that deals with the efficient allocation of scarce or limited
resources to satisfy unlimited human wants and needs.

Economics is the study of human efforts to satisfy what appears to be unlimited and
competing wants through the careful use of relatively Scarce resources. It is a social
science because it deals with the behavior of people as they cope with the fundamental
problem of scarcity.

Economics deals with the description of economic activity. It is concerned with what is
produced and who gets how much, as well as topics such as unemployment inflation,
international trade, the interaction of business and labor, and the effects of government
spending and takes. Description, however, is not enough because description alone leaves
many important "why’ and how" questions unanswered (Clayton 1995).

Normative and Positive Economics

Economists usually try to explain how the economy works. Sometimes they concern
themselves not with how the economy works but how it should work.

Compare these two statements:

The country's unemployment rate is 5.1 percent.
The present unemployment rate should be lower.

The first is called positive economic Statement. Positive economic statement is a

statement about realities that can be proved or disproved, supported, or rejected by
 reference to facts. The second statement is called a normative economic statement.
Normative economic statement is a statement that represents an opinion which cannot
be proved or disproved, nor shown to be true or false by reference to facts.

A positive statement is concerned with what is while a normative statement concerns

what, in someone's opinion. should be. A positive statement need not be necessarily true,
but it must be to verification or refutation by reference to the expressed as positive
statements such the price then the quantity demanded will decrease." Most of the
disagreements among economist involve normative debates, for example, the
appropriate role of government, rather than statements of positive analysis. Many
theoretical issues remain unresolved, but economists largely agree on fundamental
theoretical principles, or positive economic analysis. Their purpose is to better understand
economics because one must first know about economic facts before he or she can insist
an opinion on whether an economic policy is good or bad (McEachern 2000).

Major Divisions of Economics

According to McEachern (2000), the two major divisions of economics are the following
microeconomics and macroeconomics.

Microeconomics is the study of your economic behavior and the economic behavior of
others Who make choices about such matters as what to buy and what to sell; how much
time to devote to work and how much time for play; how much to borrow and how much
to save. Microeconomics examines the factors that influence individual economic choices
and how the choices of various decision makers are coordinated by markets. example.
microeconomics explains how and output are determined in individual markets, such as
that for breakfast cereals, or for sports equipment.

Examples of microeconomics are individual market and individual consumer behavior.

Macroeconomics is the study of the performance of the economy as a whole. Whereas
microeconomics studies the individual of the economic puzzle as reflected in particular
markets, macroeconomics puts all the pieces together to focus on the bigger picture. You
probably give little thought to the factors that influence your own economic choices. You
may even likely give less thought about how your choices link up with those made by
hundreds of millions of others in the economy. Macroeconomics deals with economy-
wide sum such as total production.

Examples of macroeconomics are monetary policy, economic growth, inflation,

unemployment, and government borrowing.

Needs and Wants

Need is a basic requirement for survival. People have basic needs such as food, clothing,
and shelter. People also have higher-level needs such as communication, love,
acceptance, knowledge. hope, and These needs are part of the makeup of each reason.

Want is a means of expressing a need. Food, for example, is a basic need related to
survival. To satisfy this need, a person may "want" a pizza, hamburger, taco, or other
favorite food. Any number of goods will satisfy the basic need for nourishment. Given a
person's budget, some choices might reasonable while Others might not. The point is that
the range of things represented by the term want is much broader (hart that represented
by the term need.

Goods and Services

Economics is concerned with economic products — goods and services — that are useful,
relatively scarce. to others. Economic products are scarce in an economic sense. This
means that enough to satisfy his/her wants and needs. Because of characteristics.
economic products on demand a price. The term goods and services are used to describe
the many things’ people desire.

Good a tangible commodity like a book, car, or DVD player. A consumer good is intended
for final use by individuals. A manufactured good used to produce other goods and
services is called a capital good. An example of a capital would a sewing machine in a
factory or a computer in a school. Any good that Lasts three years or more when it is used
on a regular basis is called a durable good.

There are also goods considered as public goods, or goods that are provided for public
use. These goods may be provided by the government or by private companies. Examples
of public goods are public libraries and public museums.

Service is a work that is performed for someone. Services include haircuts, home repairs,
and forms of entertainment such as concerts. They also include the work that doctors.
lawyers. and teachers perform. The difference between a good and a service is that a
service is something that cannot be touched or felt (Clayton, 1995).

Examples of Goods and Services

Goods are items that are tangible, such as ball, newspaper, or dress while services are
activities provided by other people such as call center services and health services.

Factors of Production

1. Land, in economics, refers to the gift of nature or natural resources not created by
human effort. Land includes deserts, fertile lands, fertile fields, forests, mineral deposits,
cattle, whales, sunshine, and the climate necessary to grow crops. Because only so many
natural resources are available at any given time, economists tend to think of land as being
 fixed or in limited supply. There is not enough good farmland available to feed all of the
earth’s population, nor enough sandy beaches for everyone to enjoy, nor enough
materials to meet our expanding and indefinite energy needs.

2. Capital includes tools, equipment, and machineries used in the production of goods and
services. Such items are also called capital goods to distinguish them from financial
capital, the money used to buy the tools and equipment used in production. Capital is
unique in that it is the result of production. A bulldozer, for example, is a capital good
used in construction. It is built in a factory. however, which makes it the result of earlier
production. Like the bulldozer, the cash register in a neighborhood store is a capital good.
It, too, is the result of earlier production and is used for record keeping associated with
the sale of goods and services.

3. Labor refers to all people with all their efforts, abilities, and skills, except for a unique
group of individuals called entrepreneur, which we single out because of their special role
in the economy. Unlike land, labor is a resource that may vary in size over time.
Historically, factors such as population growth, immigration, famine, war, pandemic and
diseases have had dramatic impacts on both the quantity and quality of labor.

4. Entrepreneurs are those workers who have a special Status because they are the
innovators responsible for much of the change in our economy. An entrepreneur is a risk-
taker in search of profits. Entrepreneurs are often thought of as the driving force in the
economy because they exhibit a knack for starting a new business or bringing new
products to the market. Their initiatives combine the resources of land, labor, and capital
and turn them into new products.

Basic Economizing Questions

Clayton (1995) states that to provide for the needs of its people. a society must answer the
basic economizing questions. In doing so, it makes decisions about the ways its limited
resources are going to be used.

I. What to Produce? is the first question. Should a society devote most of its resources to
producing military equipment or to other item' such as food. clothing, or housing? Suppose
the decision is to produce housing. Should its limited resources then be used for low-
income? middle income, or upper income housing? How many of each will be needed?
society cannot have everything its people want. so, it must decide what to produce.

2. How to Produce? is the second question. Should factory owners use assembly-line
methods that require little labor. or should they use less equipment and more workers? If
an arca has many unemployed people, the second method might be better. On the other
hand, assembly-line method in countries where capital is widely available usually have lower
production costs. Lower Costs make many less expensive manufactured items and.
therefore, available to more people.

3. How Much to Produce? Is the third question. It is necessary to identify how many products
should be manufactured to avoid shortage or over production.

4. For Whom to Produce? is the last question. After a society decides what to produce and
how to produce them, the items produced must be allocated to someone. If society decides
to produce housing, should it be distributed to workers, professional people. or government
employees? perhaps another group is more deserving. Who decides? In the end, the result
is the same. If not, enough houses exist for everyone, a choice must be made as to who will
receive existing supply.

Economic Systems
Traditional is a type of economic system where what is being practiced in the past, such as
satisfying man’s need, is being handed from generation to another.

Command is a type of economic system where the decision on how to address the problem
of satisfying people’s need emanates from a select group or groups of people and is being
cascaded down to its people.

Market Is a type of economic system where there is the absence of government

intervention. Buyers and sellers use price as a mechanism derived from the market supply
and demand.

Mixed is a type of economic system where any of the above-mentioned systems can be
combined.

REFERENCE
APPLIED ECONOMICS FOR SENIOR HIGH SCHOOL