Applied Economics
Week 1 lecture
● This course aims to provide economic
literacy among the students to help them
understand certain economic problems
and its relevance to their lives.
● The course includes topics on the
concept of production, distribution and
consumption of economic resources. It
is also focused on economic decisions
made by households and firms.
● By the end of the course students are
expected to become a better citizen and
take active role in uplifting the current
status of the nation.
John Maynard Keynes - father of Modern
Economics suggests that the government should
allocate a large amount of money purposely for
solving problems of depression.
Adam Smith - a Scottish honored as the Father
of Economics was responsible for the
development of the study of economics. His
book Wealth of the Nations (1776), became the
reference book of different authors in solving
problems.
Economics is a social science concerned with
using scarce resources to obtain the maximum
satisfaction of the unlimited material wants of
society. -Bingham, et al.
ECONOMICS- a social science because it deals
with how he lives his life and of how other men
live. a course so important because of the
natural limitations of what is available and the
unlimited needs of men.
Fundamental Economic Problems
Basic economic problem:
Scarcity of Resources
Involves decision on:
1. What are the goods and services to be
produced?
2. How are the goods and services to be
produced?
3. How much goods and services are to be
produced?
4. For whom are the goods and services to be
produced?
Scope / Division of Economics
● Microeconomics deals with the
economics of the firms. It focuses on the
behavior of a particular unit of economy
such as the consumers, producers, and
specific markets.
● Macroeconomics deals with the
aggregates. It studies the entirety of an
economy whether national or
international and attempts to determine
economic changes.
CHARACTERISTICS OF MICROECONOMICS
1. Microeconomics looks at the decisions of
individual units.
- focused on choices made by individual units
such as households, producers, and firms.
relevant questions:
How efficiently are we using our resources?
Could we obtain more output from the same
resources if we reorganize the ways we use
them?
2. Microeconomics looks at how prices are
determined.
- it is often called "price theory"
relevant questions:
Should a monopolist increase his price? Should
a producer in an oligopolistic market lower his
price? Can a producer under a purely
competitive market increase his price?
3. Microeconomics is concerned with social
welfare.
- examines efficiency, relative desirability, and
choice of alternative methods
relevant questions:
Is it prudent to build a new bridge or to buy
additional arms for the army? Is it wise to
impose price control? Should the government
limit the controlling interest of the media?
4. Microeconomics has a limited focus.
- it is just a part of the economics discipline
-problems dealing with the aggregate economy
are within the domain of macroeconomics
5. Microeconomics develops skills.
a. It helps develop your logical reasoning.
b. It will help you develop skill in the construction
and use of models. ex. supply and demand
relationship
c. It employs optimizing techniques that are
useful for making decisions in a variety of
situations.
d. The concepts are applicable to your personal
resource allocation decisions, such as your
career choices or financial investments.
CONCEPTS OF ECONOMICS (5 PARTS)
WEALTH - any property and assets of a person
that have a useful value.
PRODUCTION - creation of raw materials into
finished products to satisfy human wants.
EXCHANGE - process of trading goods and
services for money.
DISTRIBUTION - allocation of the social or
national income among factors of production
: land, labor, capital and the entrepreneur.
CONSUMPTION - utilization of goods and
services by any individual to satisfy human
wants.
VITAL CRITERIA OF GOOD ECONOMIC
SYSTEM
• Abundance - sufficient goods / services
• Growth - development of infrastructure
• Stability - absence of inflation
• Security - stability of employment
• Efficiency - more quality production of goods
and services
• Justice and Equity - fair distribution of
power, wealth and income
• Economic Freedom - free to choose wants
•
Theories and Models
• Theories are propositions about certain
related variables that scientifically explain
a certain phenomena.
• Models are used to illustrate, demonstrate,
and represent a theory or part of it.
•
Fallacies in Making Models and Theories
•The post hoc fallacy relates two events as if
the first causes the second one to happen.
•Failure to hold other things constant under
the ceteris paribus assumption
•The fallacy of composition states that what
is true for a component is also true for the
entire thing.

Two Kinds of Analysis in Economics
• Positive Economic Analysis describes
what exists and how things work.
Ex. Taxes provide government services to
the people.
• Normative Economic Analysis looks at
the outcome of economic behavior
through judgments and prescriptions for
courses of action.
Ex. Government should impose more
taxes to provide more services to the
people.
COMMON ECONOMIC PROBLEMS
• Unemployment of labor.
• Economic instability that causes highs and
lows in production and investment levels.
• Low levels of growth and development
which make it more difficult for
underdeveloped and developing nations to
rise from their low levels of income and
employment.
• Inequality in income distribution resulting in
the concentration of the nation's wealth in
the hands of the few.
FUNDAMENTAL GOALS OF ECONOMICS
• Growth - increasing capacity of producing
goods and services
• Economic Stability - consistent growth of
changing world
• Economic Freedom - free to choose his
wants and needs
• Economic Equity - equal distribution of
wealth and income
• Economic Security - continued existence
of employment
WAYS IN DETERMINING ECONOMIC
GROWTH
• Expansion of resources available in
producing goods and services - increasing
labor force and larger capital investment.
• Improved skills and technology - managerial
and entrepreneurial skills
•
CONCLUSION : WHY STUDY ECONOMICS
• To understand society better
- past and present economy influence the
character of life of the society
• To understand global affairs
- environmental policies, free trade, immigration,
tourism, etc.
• To be an informed voter
•
What Is Economic Growth?
•Economic growth is an increase in the
production of economic goods and services,
compared from one period of time to
another.
•
Understanding Economic Growth
• In simplest terms, economic growth refers to
an increase in aggregate production in an
economy. Often, but not necessarily,
aggregate gains in production correlate with
increased average marginal productivity.
That leads to an increase in incomes,
inspiring consumers to open up their wallets
and buy more, which means a higher
material quality of life or standard of living.
•
Marginal Productivity refers to the additional
amount produced when you add one additional
unit of a particular factor, such as an additional
man hour of labor.
Ways to Generate Economic Growth: • The last method is to increase human
• The first method is an increase in the capital. This means laborers become more
amount of physical capital goods in the skilled at their crafts, raising their
economy. Adding capital to the economy productivity through skills training, trial and
tends to increase productivity of labor. error, or simply more practice. Savings,
Newer, better, and more tools mean that investment, and specialization are the most
workers can produce more output per time consistent and easily controlled methods.
period. Human capital in this context can also refer
• to social and institutional capital; behavioral
• A second method of producing economic tendencies toward higher social trust and
growth is technological improvement. An reciprocity and political or economic
example of this is the invention of gasoline innovations like improved protections for
fuel; prior to the discovery of the property rights are in effect types of human
energy-generating power of gasoline, the capital that can increase the productivity of
economic value of petroleum was relatively the economy.
low. The use of gasoline became a better •
and more productive method of transporting •
goods in process and distributing final goods
more efficiently.
•
• Improved technology allows workers to
produce more output with the same stock of
capital goods, by combining them in novel
ways that are more productive. Like capital
growth, the rate of technical growth is highly
dependent on the rate of savings and
investment, since savings and investment
are necessary to engage in research and
development.
•
• The third method to generate economic
growth is to grow the labor force. All else
equal, more workers generate more
economic goods and services. During the
19th century, a portion of the robust U.S.
economic growth was due to a high influx of
cheap, productive immigrant labor. Like
capital driven growth however, there are
some key conditions to this process.
•
• Increasing the labor force also necessarily
increases the amount of output that must be
consumed in order to provide for the basic
subsistence of the new workers, so the new
workers need to be at least productive
enough to offset this and not be net
consumers. Also, just like additions to
capital, it is important for the right type of
workers to flow to the right jobs in the right
places in combination with the right types of
complementary capital goods in order to
realize their productive potential.