APPLIED ECONOMICS

TOPIC #1: 3. Capital

Economics as a Social Science and as Applied - It is a man-made factor of production used to create
another product. Examples are machinery and
Science
equipment used in manufacturing companies. The
Economics
payment for capital is interest.
- Refers to the effective management of scarce
4. Entrepreneurship
resources to satisfy unlimited human wants and
- It is a factor of production that integrates land,
needs.
labor, and capital to create new products. An
- It is a social science that studies the means by which
entrepreneur is an individual who makes decisions
individuals, groups and societies produce, distribute,
with regards to production and utilizing the other
and consume products and services.
factors of production. A successful entrepreneur not
only creates new products – he or she also innovates
As the modern economy is primarily defined by
by improving the old ones.
knowledge and technology, the conventional
definition of Economics which focuses on matching
The Basic Economic Questions
scarcity and wants is challenged by the need for
1. What to produce?
better organization to effectively address scarcity and
- A society determines the kind and quantity of
human wants. As such, economists recognize the
products it will produce depending on what the
influence of incentives, choices, and rules in
consumers want to buy or are willing to pay for.
managing an economy.
2. How to produce?
- A society decides who will produce goods and what
Basic Economic Concepts process of production will be used. Goods may be
Scarcity - It is a fundamental concept of economics, produced by corporations, small business-owners, or
which refers to the limitations of resources, the government itself. The process of producing
particularly economic resources such as land, labor, goods may be addressed depending on the costs and
capital, and entrepreneurship. Scarcity results in the availability of resources needed.
challenges with regard to properly allocating these 3. For whom to produce?
resources to all sectors of the economy. - The question revolves around the issue of who will
Needs - Things that are desired which are essential benefit from the goods and services produced.
for human survival. This depends on the distribution of wealth in a
Wants - Are those that are desired but are not particular society. Therefore, a consumer who has the
essential for survival. capacity to pay for certain goods and services is more
likely to benefit than one who could not afford them.
Economic Resources and Factors of
Production Economic System – is characterized by the type of
1. Land institution responsible for the management and
- Refers to all natural resources that exist without allocation of resources used in the production of
man’s intervention. It encompasses all things derived goods and services.
from the forces of nature such as air, water, forests,
vegetation, and minerals. The payment for land is Three Known Economic Systems
called rent. 1. Traditional Economic System – It is where
2. Labor decisions are based on traditions and practices upheld
- Refers to human inputs such as manpower skills over the years and passed on from generation to
that are used in transforming resources into different generation.
products that meet our needs. The payment for labor 2. Market Economic System – it is where all
is called wages or salaries. economic resources are owned by private entities.
3. Command Economic System – it is where all
resources are owned by the government.

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Rationality Theory – is a proposition about certain related
- Rationality is defined as the assumption that variables that explains a certain phenomenon. It
individuals are consistent and logical in their proposes a general principle or body of principles
decision-making, and that they seek an outcome that regarding a phenomenon which is deemed plausible
is most beneficial to them. Economics assume that or scientifically acceptable.
individuals make decisions rationally and that is Model – a representation or framework which
possible to predict certain behavioral outcome. presents significant principles and describes how
Opportunity cost and Trade-off variables are related.
- Rationality refers to the cost of giving up an
alternative by selecting the best choice. Economic models are used by economists to
- Trade-off happens when once the choice is made, determine the relationships among elements in an
you abandon all other options where you can no economy, apple principles in varied scenarios, make
longer go back and undo such choice. Trade-offs predictions, and propose solutions. Models also
could result in either the satisfaction of needs or a provide a means visualize variables analysed. Models
failure to meet them. can include graphs, diagrams, or mathematical
formulae.
Applied Economics
- The application of economic theory and Major Assumptions in Economics
econometrics in real-world situations. 1. Rationality – Economists assume that individuals
- A field of economics is concerned with using act in a logical and predictable manner, and pursue
economic theories and models, as well as its related goals which will benefit them.
principles and concepts, to understand contemporary 2. Profit Maximization – It is assumed that
socioeconomic issues. participants expect to gain something from their
transactions. Individuals aim to maximize utility,
Economic Development – (Todaro) defined as the while firms intend to maximize their profit.
sustained elevation of an entire society and social 3. Perfect information – It is assumed that consumers
system toward a better and more humane life. and producers have complete and accurate
Development is defined by the following core values: information about products, services, prices, utility,
1. Sustenance – refers to ensuring that society is able quality, and production methods. This assumption
to provide for basic needs like food, shelter, health, enables economists to study market processes and
and protection. effects of policies on markets more accurately.
2. Self-esteem – refers to self-respect, reputation, 4. Ceteris paribus – Means “all things being equal,”
pride, and acknowledgement. refers to the assumption which controls the effects of
3. Freedom – involves providing for a wide variety of other variable apart from those that are being
choices for societies as well as minimizing external analysed in the study.
limitations.
Fallacies in Economics
Aspects of Economic Study and Analysis 1. Failure to apply ceteris paribus – Error in analysis
1. Positive Economics – is a principle in economic committed when an individual considers other
analysis which focuses on describing what exists and extraneous variables in studying economic
how things work. It strives to give an objective phenomenon.
description of the state of things. 2. Post hoc fallacy – post hoc ergo propter hoc which
2. Normative Economics – focuses on the outcome of describes how people make the mistaken notion that
economic behavior, evaluates and makes judgements, since a change happened after an event, this then
and proposes courses of action. means that such change was caused by the event that
came before it. This fallacy is most evident when
considering certain “superstitious” beliefs.

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3. Fallacy of composition – This fallacy occurs when responsible economic policies can contribute to
one considers a trait of one part or aspect of addressing environmental problems.
something as true or applicable for the whole. This Capitalism – advocated free trade, private property,
also occurs when a person thinks that a phenomenon and competition as forces that will bring about
as experienced by an individual or a certain group economic development.
can be applied to a larger group or the general Marxism – focused on the root causes of economic
population. inequality and criticized capitalism as a contributing
factor to inequality and underdevelopment.
Production – is one important factor that contributes
to economic development. Underdevelopment – an economic condition
The Production Possibilities Frontier (PPF) – is a characterized by low production and standard of
graph that shows the greatest sum of output given living.
accessible inputs or resources in an economy. It is
used to show the possible combinations of two Theories of Economic Development
alternative products, assuming that the same 1. Linear Stages of Growth – Economic development
resources are used to produce these products. is a process which follows a sequence of historical
Comparative Advantage – this concept considers that stages:
it is most advantageous for economics to specialize in 1.) Traditional society;
industries where they enjoy an advantage in resources 2.) Preconditions for take-off;
and production processes. 3.) take-off;
International Trade – another significant aspect of 4.) Maturity;
economic development that has to be considered in 5.) High mass consumption.
an interconnected global economy. 2. Structural Change Models – Development is
defined by the reallocation of labor from agriculture
Factors in determining the state of economic to the industrial sector. A country’s development is
growth: also defined by factors such as income level and
a. Level of Production – economic growth is comparative advantages.
measured by the increase in a country’s GDP, which 3. International Dependence – The dominance of
is often compared with the population. This indicator, developed countries and multinational corporations
however, mainly focuses on material wealth. It has over developing countries leads to dependence and
been noted that an increase in GDP, among other underdevelopment. Dependence can be ended by
indicators of economic growth, does not necessarily abandoning unequal relationships between developed
translate to concrete improvements in the lives of and developing countries.
citizens 4. Neoclassical Theory – Underdevelopment is
b. Quality of Life – this variable considers aspects of mainly caused by domestic issues brought about by
health, nutrition, education, environment, and income poor economic policies and resource allocation, as
distribution in analyzing development. Development well as government corruption. Development arises
is defined as a significant change in the quality of life due to the promotion of free markets and reduction of
of individuals such as less poverty, improved health government control over the country.
and nutrition, better education, clean environment, 5. New Growth Theory (Endogenous Growth)
greater freedoms and more opportunities and a richer - Underdevelopment is due to the slow transmission
culture. of technology to developing countries. Knowledge
c. Sustainable Development – this considers the and technology are vital to development thus,
impact of human activities on the environment and investments in education and research and
believes that environmental degradation has development are encouraged.
significant economic impact. In turn, the 6. Theory of Coordination Failure –
implementation of responsible and environmentally- Underdevelopment is caused by uncoordinated
activities in the market. To foster development, a “big

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push” is implemented wherein a public – led workers experience longer periods of frictional or
investment program focuses on certain economic cyclical unemployment – they find themselves
sectors and coordinates market activities to bring looking for work for a longer time or experience
about growth. irregular periods of employment and unemployment.
7. O-ring Theory – Development is a result of
efficient production wherein similarly-skilled Underemployment – refers to the state of an
workers work together to accomplish tasks. High individual being employed, but his or her talents and
wages and investment in human capital are essential. expertise are underutilized or is not match to the job.
1. Visible underemployment – refers to workers who
Economic Problems as Obstacles to Development work for less than the normal work hours and who
a. Poverty and Inequality look for additional work.
• Poverty is defined by Todaro as the condition where 2. Invisible underemployment – refers to workers who
a population is only able to meet its basic subsistence work normal hours or even more in their jobs, but
needs such as food, clothing, and shelter. their talents are underutilized or they receive
• Economic Inequality, which refers to the unequal inadequate compensation for their work.
access to wealth and income, is a major factor which
brings about poverty. C. Inflation- Refers to the sustained and continual
increase in the prices of goods and services.
The two commonly used measures of inequality Stagflation – a period of high inflation, slow
are: economic growth, and high unemployment.
1. Gini Coefficient – is a ratio which indicated how
much a certain population’s distribution of income In measuring inflation, economists use the Consumer
deviated from a set standard of equality. Price Index (CPI), which is the statistical estimate
2. Kuznets’s Ratio of Inequality – compares the based on the prices of selected commodities regularly
income of the highest-earning or richest 20% of the purchased by households. The inflation rate is then
population with the lowest-earning or poorest 40%. determined by calculating the rate by which the CPI
has changed over time.
Absolute poverty – refers to the severe deprivation of
basic human needs which include food, safe drinking The government seeks to control inflation so that it
water, sanitation facilities, health, shelter, education will not reach unmanageable levels. Controlling
and information. It is not defined merely by low inflation is done through several means such as:
income but also by lack of access. 1. Monetary policies,
2. by imposing taxes on certain products,
B. Unemployment- Refers to the portion of the labor 3. Monitoring the exchange rates of its currency
force who are willing to engage in production against other foreign currency.
activities, yet fail to do so. 4. Imposes controls on the prices of commodities and
A. Frictional Unemployment – occurs when a worker wages.
is “between jobs,” which means that he or she he left
a job and is looking for another. Challenges to Philippine Socioeconomic
B. Cyclical Unemployment – is brought about due to Development
changes in the economy or the business. This is seen 1. Poverty, Inequality, Unemployment
during a downturn in the economy when there is less Poverty and inequality still remain a threat to several
demand for workers. vulnerable groups such as the poor, children, women,
C. Seasonal Unemployment – where people find persons with disabilities, indigenous people, older
themselves unemployed at certain times of the year. persons, overseas Filipinos and their families, and
This is mainly seen in industries such as tourism, workers. Workers in the informal sector often
retail, construction, and agriculture. experience substandard pay and hazardous
D. Structural Unemployment – is related to the first conditions, while workers in the formal sector are
two types. This type of unemployment arises when

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often at risk due to contractualization, retrenchment, business and trade are vulnerable to uncertainties in
and firm closures. The effects of poverty are further the global market. This is because Philippine exports
worsened by global and domestic economic are limited to certain products and markets.
instability, natural disasters, political disruptions, and Competition within markets is limited by the
other unexpected events that cause loss of income or existence of monopolies and the preferential
assets. Underemployment remains high, especially in treatment of government owned and controlled
agriculture. Workers often suffer from inadequate corporations (GOCCSs). Though we have a large
income. Women have low participation in the labor labor force, the labor market is characterized by a
force. Additionally, the limited employment mismatch of skills and the needs of the market. This
opportunities force workers to seek jobs overseas. results in the out-migration of skilled workers,
2. The State of the Agriculture Industry Unemployment, and slow absorption of labor. In
Growth in agriculture, fisheries, and forestry addition, industry and production lags behind in
industries is generally weak. They have low terms of technology and innovation.
productivity compared to other industries and the 4. Infrastructure
services sector. Production in agriculture has been Issues related to infrastructure include
affected by typhoons and the El Niño phenomenon. a. The quality of roads,
However, high-value commodities such as banana, b. Improvements in public transport,
pineapple, and mango prospered. Fisheries was also c. Traffic in urban areas – particularly in Metro
affected by typhoons and declining marine resources. Manila
On the other hand, livestock and poultry experienced d. Limited to no access to safe water
gains due to favourable market conditions. Forestry e. Energy infrastructure
experienced a decline due to laws that provided for a f. Information and Communication Technology (ICT)
moratorium on the cutting and harvesting of timber. infrastructure remain inadequate compared to other
Asian countries, leading to a lack of internet access in
Factors which contributed to the weak many areas and slow internet speeds.
performance of these industries are: 5. Health and Quality of Life
a. Lack of diversification particularly in agriculture – The most significant issues regarding health and
concentrated mainly on three crops – rice, corn, and nutrition in the country involved
coconut. Smaller areas are devoted to high-value (a.) access to health services,
crops such as banana, sugarcane, and rubber. (b.) malnutrition,
b. Farmers and fisher folk limited access to capital. (c.) maternal mortality, and
c. Farm production is affected by inadequate (d.) family planning.
technology and facilities such as postharvest The increasing rate of HIV infections in the country
Equipment – Irrigation remains a challenge. is also a concern. Factors which contribute to these
d. Limited advancement in research and development health concerns are;
which is intended to identify effective farming and (a.) the limited spending on health by local
fishing practices and develop technologies to improve government units,
production. (b.) adequate shelter is an important concern for
e. Inefficient logistics system – The lack of roads many Filipinos,
affects the transport of production from farms to (c.) demographic transition.
market. 6. Education
f. Conversion of large tracts of agricultural land for The major objectives of the current educational
housing and settlement. reforms being implemented is to expand people’s
skills sets, improve people’s awareness of intellectual
3. Competitiveness of Philippine Business property, and fosters research and development in the
Developments in Philippine business are hampered country. However, improving the quality of education
by restrictions on foreign investment and remains a challenge because of the following:
participation, as well as cumbersome requirements (a.) lack of competent teachers,
for business registration and licensing. Philippines (b.) high student-teacher ratios, and

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(c.) lack of facilities and classrooms.
The country’s higher education institutions were
noted to have a lacklustre performance due to a lack
of qualified faculty, lack of accreditation, and low
passing rates in licensure examinations. The course
offerings of these institutions have also been noted to
be mismatched with industry needs. Another major
problem in Philippine higher education is its lack of
focus on innovation and research.
7. Government, Peace and Security
The Philippines attained improvements in various
global indicators related to governance, particularly
in accountability. Corruption, however, still remains
a significant concern in governance. One issue that
needs to be addressed is fostering greater
involvement of the public in governance. The
government has established programs to address this,
including involving the citizens and communities in
planning and budgeting at the local level and citizen
participation in the audit program. Government data
is also made available online, and many government
offices maintain an online presence. The government
seeks to improve financial management in local
government units, address corruption within
bureaucracy, and eliminate red tape. The justice
system suffers from a lack of human resources; there
are not enough judges and public attorneys to handle
cases which results in a large backlog. In addition,
penal facilities throughout the country are congested.
8. Environmental Issues
The government is most concerned with climate
change, particularly its impact on the agricultural
sector and disaster risk reduction. Current disaster
risk reduction and climate change adaptation policies
and programs, however, primarily concentrate on
infrastructure and not on addressing the loss of
livelihood. There is a need to improve the
management of environment and natural resources,
particularly the protection of forests and other critical
habitats. Air and water pollution continue to be
significant problems.

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