Applied Economics Lesson 1

WEEK 1 Lesson 1
TABLE OF CONTENTS
APPLIED ECONOMICS
UNIT 1: INTRODUCTION TO APPLIED ECONOMICS
LESSON 1: REVISITING ECONOMICS AS A SOCIAL

SCIENCE
LESSON 2: ECONOMICS AS AN APPLIED SCIENCE
LESSON 3: A FRAMEWORK IN UNDERSTANDING
DECISIONS USING ECONOMIC ANALYSIS
LESSON 4: VARIATION IN BENEFITS AND COSTS DUE TO
DIFFERENCES IN VALUATION
LESSON 5: BASIC ECONOMIC PROBLEMS
CONFRONTING THE DEVELOPMENT OF THE
PHILIPPINES IN THE 21ST CENTURY
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WEEK 1 Lesson 1
TABLE OF CONTENTS............................................................................................................. i
GRADE LEVEL STANDARD ...............................................................................................iii
UNIT 1 .......................................................................................................................................... 1
LESSON 1: REVISITING ECONOMICS AS A SOCIAL SCIENCE ........................................... 1
LESSON 2: ECONOMICS AS APPLIED SCIENCE .................................................................... 1
LESSON 3: A FRAMEWORK IN UNDERSTANDING.............................................................. 1
DECISIONS USING ECONOMIC ANALYSIS ............................................................................ 1
LESSON 4: VARIATION IN BENEFITS AND COSTS DUE TO ............................................... 1
DIFFERENCES IN VALUATION .................................................................................................. 1
LESSON 5: BASIC ECONOMIC PROBLEMS CONFRONTING ............................................. 1
THE DEVELOPMENT OF THE PHILIPPINES IN ...................................................................... 1
THE 21ST CENTURY ...................................................................................................................... 1
INTRODUCTION ...................................................................................................................... 1
DEVELOPMENT ........................................................................................................................ 4
ASSIMILATION/ASSESMENT ......................................................................................... 36
REFLECTION ........................................................................................................................... 37
The things I learned from the lesson: .................................................................. 37
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QUARTER
WEEK 1 1 Lesson 1
GRADE LEVEL STANDARD: This course deals with the basic principles of applied
economics and its application to contemporary economic issues facing the Filipino
entrepreneur such as prices of commodities, minimum wage, rent and taxes. It covers an
analysis of industries for identification of potential business opportunities. The main output
of the course is the preparation of a socioeconomic impact study of a business venture.
Content Standards: Learning Competencies:
The learner will be able to differentiate

The learners demonstrate an
economics as social science and
understanding of economics as an
applied science in terms of nature and
applied science and its utility in
scope
addressing the economic problems of
the country
Performance Standards:
The learners will be able analyze and

propose solution/s to the economic
problem using the principles of applied
economics
Values Integration:
1. Interaction
2. Communication
3. Engagement
4. Respect
5. Community involvement and service towards Nation-building
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Performance Task: Goal – the learner will be able to write

The learner will an essay
Role – the learner will write their own
1. Write a short essay arguing on why
the government should pursue a essay
policy on food security instead of
Audience – co-learners
food self-sufficiency.
Situation – learner will present to the
2. Read Article XII of the Philippine
class
Constitution. Identify provisions
that need to be Product – any
strengthened/changed. If none,
Standard – Assess the performance
explain why the economic
provisions should not be changed. task using the following criteria:
Essay content - 60%
Group Effort – 20%
Class Presentation (Reporting) – 20%
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WEEK 1 Lesson 1
UNIT 1
LESSON 1: REVISITING ECONOMICS AS A SOCIAL SCIENCE

LESSON 2: ECONOMICS AS APPLIED SCIENCE
LESSON 4: VARIATION IN BENEFITS AND COSTS DUE TO
DIFFERENCES IN VALUATION
LESSON 5: BASIC ECONOMIC PROBLEMS CONFRONTING
THE DEVELOPMENT OF THE PHILIPPINES IN
THE 21ST CENTURY
INTRODUCTION
In any society we live, a number of things are undertaken for ourselves, our family,
our community and our country for various reasons including among others
material survival, stability and development. For example, we get our food from
various sources and through different means. There are families that secure their
food grains and vegetables from their farms or gardens. But majority of the families
purchase their food in various markets. In addition, the composition of our food
intake and the way we prepare them are meant to sustain us, strengthen or bodies
and keep us healthy. Similarly, many of us purchase our clothes and wear them not
only to cover our bodies but also to show our comfort and express our tastes and
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prosperity. Meanwhile, when a family constructs a nipa hut or rents a room or

acquires a condominium or purchase a house its intention is not only to have a
place where they can be protected from the harsh elements of the environment
but more so to enhance their level of enjoyment as they eat, entertain, interact
with family members and sleep.
All these activities that are intent for the material survival of people and its
community as well as in strengthening and developing its material capacity are
the purview of economics. Since economics covers many aspects of human life
we cannot escape the economic implications of human actions, behavior and
decisions from the time we are born until death. It is in this light that economics is
being taught in schools to prepare our young citizens on their roles as member of
a society in responding toward the goal of material survival, stability and growth.
Specific Learning Objectives
1. The learner will be able to gain an understanding of core economic principles

and how they apply to a wide range of real-world issues.
2. The learner will be able to master the theoretical and applied tools necessary to
critique and create economic research.
3. The learner will be able to learn how to articulate pragmatic, principles-based
policies to enhance economic well-being and promote social justice.
4. The learner will be able to become familiar with salient developments in the world
economy, in both present-day and historical contexts.
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Key Understandings
1. Economics is a social science concerned with the production, distribution, and

consumption of goods and services.
2. Microeconomics focuses on how individual consumers and firm make decisions;

these individuals can be a single person, a household, a business/organization
or a government agency.
3. Macroeconomics is a study of an overall economy on both a national and

international level.
Essential Questions
1. Compare the similarities and differences of the three major strands in the
definition of economics.
2. Explain why profit or net surplus is not maximized when marginal benefit is
lower than marginal cost?
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DEVELOPMENT
LESSON 1: REVISITING ECONOMICS AS A SOCIAL

SCIENCE
Revisiting Economics as a Social Science
There are three strands in the development of the definition of economics.
1. It focuses on wealth.
In the previous decades, economics has been defined as a science of wealth-
getting and wealth-using.
2. It stresses the decision-making process.

Currently, economics is defined as a science of making choices.
3. It concentrates on the allocation process.

In many textbooks, economics has been defined as a social science that deals
with the allocation of scare resources to meet the unlimited human wants.
What is Economics?
Economics is a social science concerned with the production, distribution, and

consumption of goods and services.
Economics studies how individuals, businesses, governments, and nations make choices
on allocating resources to satisfy their wants and needs, trying to determine how these
groups should organize and coordinate efforts to achieve maximum output.
Types of Economics
1. Microeconomics
2. Macroeconomics
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Microeconomics - focuses on how individual consumers and firm make decisions; these
individuals can be a single person, a household, a business/organization or a government
agency.
Microeconomics explain how and why different goods are valued differently, how
individuals make financial decisions, and how individuals best trade, coordinate and
cooperate with one another.
Macroeconomics - studies an overall economy on both a national and international

level. Its focus can include a distinct geographical region, a country, a continent, or even
the whole world. Topics studied include foreign trade, government fiscal and monetary
policy, unemployment rates, the level of inflation and interest rates, the growth of total
production output as reflected by changes in the Gross Domestic Product (GDP), and
business cycles that result in expansions, booms, recessions, and depressions.
Economics as Study of Wealth
Economics as the science of wealth-getting and wealth-using implies that the motivation
of the process of wealth accumulation is the utilization of wealth for the individual’s
satisfaction and society’s welfare. Although the focus is on wealth, this initial definition
pertains to activities answering the two major economic problems in any society –
production and consumption. The intent of producing goods and services is meant for
consumption and the other forms of disposition of these produced goods and services.
Thus, economics is all about wealth and how this wealth is being used by individuals and
society at large for material survival, stability and development.
Two Major Economic Problem in any Society
1. Production
2. Consumption
Economics as Study of Making Choices
The more current definition of economics as a science of making choices is consistent. In

everything that we do, whether we produce or consume, whether it is wealth – getting
or wealth – using, we make decisions and these decisions are based on alternative
choices. In the study of economics, when we make a choice from among these
alternatives, it implies that we are foregoing or sacrificing the benefits that would have
been derived from alternatives that were not selected. Thus, in m making a decision, we
have to consider a major concept in the study of economics – opportunity cost. In
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everything that we do, there are costs and sacrifices that we have to carry. As such, there
is no free lunch in any activity that we execute. In addition, in making a decision, the
choice that we pursue must be based on a valuation of costs and benefits. This means
that our choice must give us additional benefits that are at least equal to or more than
the additional benefits derived from the foregone alternatives.
What is Opportunity Cost?
Opportunity cost is the price of the next best thing you could have done had you not
made your first choice. Opportunity costs include both explicit and implicit costs.
Economics as Study of Allocation
Consistent with the process of wealth-getting and wealth-using and the process of
making choices is the process of allocation. The definition of economics will be explained
further as a social science that deals with the study of allocation of scare resources to
answer the unlimited human wants. Although the third definition concentrates on the
allocation process, economics can be analyzed comprehensively in terms of its five key
elements in the definition of economics – social science, resources, human wants,
scarcity and allocation.
What is Allocation?
Allocation is the process by which economic resources get allotted (apportioned,

assigned) to their particular uses for directly or indirectly satisfying human wants.
The allocation process in a particular society’s economy is the process by which the three
fundamental economic questions get answered in that society:
1. What goods and services are produced (and in what quantities)?

2. By which of the various available technological means and recipes are each
of these goods and services to be produced from the available land, labor and
capital?
3. For whom are each of these goods and services produced? (Which specific
individuals get to use/consume each unit of each good or service produced?)
Economics as a Social Science
Economics is primarily a social science. As a science it utilizes the scientific method of

inquiry from identifying the problem, proposing alternative tentative answers or
hypotheses, testing the tentative answers to the question or the problem at hand,
gathering and treating the data and answering the question through the conclusion. As
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a social science, this systematic or scientific method is being used in the study of the
various modes and aspects of human interaction in a group as these people aspire to
preserve their group as a social unit, to make is stable and to promote its growth,
expansion and development. As a social science, economics pertains to the study on
how society creates its materials wealth, how it makes this wealth available to its people
with minimum difficulties and how it expands its wealth.
As a social science, economics is related to the other social sciences that study other
dimensions of a society. For example, in political science the creation and utilization of
power is being studied for the preservation, stability and growth of a society as a political
unit. In a similar manner, individual behavior, peoples’ beliefs and society’s value system
are systematically examined in behavioral sciences including sociology, anthropology
and psychology for the preservation, stability and growth of society’s cultural identity.
Lastly, the recording and analysis on how these goals of societal preservation, stability
and development are achieved over time are the concern in the study of history.
Economics as a social science it utilizes the scientific method of inquiry from identifying
the problem, proposing alternative tentative answers or hypotheses, testing the tentative
answers to the question or the problem at hand, gathering and treating the data and
answering the question through conclusion.
Resources and the Study of Economics
The second dimension of the definition of economics in resources. This element is linked
with the previous definition of economics as the process of wealth creation and wealth
utilization. Economics is about resources or wealth. Resources or wealth can be defined
as products of nature, qualities of individuals, and man-made things which are used in
producing goods or services.
Included in the coverage of resources are natural resources like marine resources drawn
from the wealth of oceans, timber obtained from forest resources, agricultural lands that
yield grains and other food crops and mineral resources extracted from various mining
sites, among others. These various forms of natural resources can directly provide goods
for current consumption like food grains and other agricultural products. On the other
hand, most of the yield of natural resources are used as raw materials or intermediate
inputs for the production of other goods. These intermediate goods still require further
processing and refinement before becoming final out put in the future.
Human resources, on the other hand, are qualities of human beings that may include,
labor intelligence, creativity, health, education, talents and many more. These various
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characteristics of people give them the capacity to create value directly through the
provision of services and indirectly by becoming factor inputs of production.
Lastly, we have physical resources or man-made resources that include various types of
building, equipment, technology, bridges, airport, factory plants and other physical
infrastructure that can be used to provide present and future satisfaction. Physical
resources can also be used all over again in the future since their capacity to create
value does not disappear with their current consumption. With the current consumption
of the services of physical resources, their productive capacity is reduced through the
process of depreciation but not totally eliminated. The depreciation of these physical
resources is due to normal wear and tear are more readily observed in equipment,
buildings and other man-made resources.
Normally, several fruits of natural resources are used as raw materials in the process of
production while agricultural lands, human resources and physical resources or capital
are used as factor inputs or productive inputs of production. The raw materials are inputs
of production that are subject to further processing and transformation while factor inputs
are transforming inputs that process these raw materials and intermediate inputs into final
products and services.
One of the key characteristics of resources is that they are limited. The limitation of
resources stems from two major factors. First, it pertains to the length of time as well as the
difficulties in producing these resources. The time-consuming processes, natural and
man-made, can contribute to the limitation of resources.
Second, more than the difficulties in producing these resources, the limitation is further
intensified by the competing uses of these resources. Resources are very prolific since
they can be used in various productive and distributive activities. This quality also implies
that various resources can be combined in different proportions for these activities.
Because of these physical limitations and alternative uses of resources, the concept of
opportunity cost becomes prominent in the study of economics. The choice in the use of
resources in a particular activity should take into consideration the benefits foregone
from other alternatives which were not chosen. Thus, there are sacrifices or opportunity
costs in everything that we do.
Human Wants and Economic Analysis
The third dimension of economics pertains to human wants. Although the focus of
economics is on wealth or resources these wealth are expanded not only for their own
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intrinsic value but because of their impact in enhancing human welfare. Resources are
used to answer the human needs and human wants of a society. Human wants can be
described as differentiated or expanded human needs. Human needs can be portrayed
as basic necessities for material survival including food, shelter and clothing among
others. Human wants are based on human needs but differentiated or expanded by the
influence of various factors.
This expansion and multiplication of human wants is one of the key reasons why we have
an economic problem. Society has to respond to this ever expanding and multiplying
human wants
Scarcity as a Source of Economic Problem
The fourth element in the definition of economics is the concept of scarcity. Scarcity can
be considered as a key economic problem because of the limitations of resources, on
the one hand, and the expansion of human wants, on the other hand. The limitation of
resources arise primarily because of its alternative and competing uses while human
wants are expanding because of internal and external factors that differentiate simple
human needs into human wants. These two features are the main reasons for the
emergence of the problem of scarcity which has to be addressed through production
and distribution activities to attain the material survival, stability and growth of any
scarcity.
Scarcity can be defined as the limitation of resources to answer the expanding human
wants. Why then is scarcity considered a key economic problem? Members of a society
has to survive materially but because resources are limited in the light of several
alternative uses, this limitation implies that society has to devise a mechanism of utilizing
these limited resources to answer the human wants of the people that will result in the
highest level of social welfare. As such, the proper use of resources becomes a societal
problem. In the light of the limitations of resources and the expansion of human wants,
resources should be properly utilized. Since the economic goals of a society are material
survival, stability and growth, a society has to achieve these goals through the proper use
of these resources. As a consequence the proper use of resources implies the need to
maximize the benefits from these resources and minimize its corresponding opportunity
costs.
Scarcity is a general characteristic of resources in the light of its competing uses that may
arise from the rapid expansion of human wants. Shortage, on the other hand, is s
condition when the supply of a good, service or resource is not enough to meet the
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demand. Thus, shortage is a specific manifestation of scarcity. This specific manifestation

of scarcity is brought about by a shortfall in supply due to external forces. It can also be
brought about by an immediate increase in demand which cannot be addressed
because the increase in supply is lagging behind. However, whether there is a shortage
or not, the problem of scarcity still prevails because resources have competing uses.
A surplus can also be associated with the problem of scarcity. Since resources have
alternative uses with corresponding opportunity costs, a situation when the amount
supplied is greater than the amount demanded can also be considered an economic
problem. Wastage of resources in the light of competing uses is an improper way of using
resources. Since resources could have been used in the production of other goods and
services, the wastage brought about by a surplus does not lead to maximum benefits
and can lead instead to huge opportunity cost to a society.
Allocation and the Act of Economics
The fifth element in the definition of economics is the concept of allocation. Because of
the problem of scarcity, there is a need for a mechanism of distributing limited resources
to meet the expanding human wants. Thus allocation can be defined as a social
mechanism to respond to the economic problem of scarcity.
There are various ways of treating the problem of scarcity. For one, individuals may have
to temper or slowdown the expansion of their human wants in the light of limited
resources. The second option is to hasten the expansion of limited resources in the light
of expanding human wants. The third choice is the combination of the two alternatives.
These options are integrated in the three major mechanism of allocations: Market system,
command and tradition.
Market System as Mechanism for Allocation
The normal process of allocation utilized in many societies today is through the market
system. The market can be considered not only a place but a state when transactions
are made. We normally see a market as a physical place like a public market or
supermarket or the stock market. But sometimes transactions can be done via telephone
or now the Internet or what they call e-commerce or electronic commerce. Thus, an
appropriate description of a market is a state when buyers and sellers transact on the
purchase or sale of a good or service. The agreement among the players is to set the
amount of good or service to be rendered and most importantly, the price that the
output is going to be sold and bought.
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The price of a commodity is both an index of cost or sacrifice (for producers) and benefits
or satisfaction (for buyers). To the consumer, it reflects the cost or expense that the
producer has to pay to acquire the good or service being sold in the market. At the same
time, the consumer considers the price as an indicator of his satisfaction or benefit or
utility in the purchase of a particular good or service. A higher price reflects a higher value
or utility or benefit that the consumer can derive from the commodity while a lower price
implies lower value or utility or benefit.
Similarly, to the seller, the price can signal costs and benefits. It is a cost since the price is
a summary of the unit cost of producing the good or service. The price incorporates the
value of the inputs, intermediate and factor, which were used in the production of the
good or service. On the other side of the coin, the price is also an indicator of benefit to
the seller. The price indicates the amount of money that the seller will receive as payment
from the consumer that bought the good or service.
Because of this information that the price signals to the consumers and producers, the
price can be an instrument for the allocation of resources through the mechanism of the
market system. The problem of scarcity is addressed through the changes in price and
the corresponding responses of the buyers and sellers.
The mechanism of the market system can also address the problem of a surplus or relative
abundance. This wastage can be eliminated by reducing the supply of the commodity
and increasing the demand. Under this situation, the market system adjusts by lowering
the price. A decline in the price is an indicator of relative abundance and as a
consequence, consumers will increase in consumption is brought about by making the
commodity cheap implying lower opportunity cost in foregoing other goods. On the
other hand, given abundance of a commodity, suppliers will decide to reduce their
production. In addition, a lower price also means lower returns and lower revenues thus
discouraging them to produce. In both cases, the relative abundance of a commodity
as indicated by a decrease in price creates adjustments among consumers and sellers
to eliminate the excess supply.
The market system operating on the price mechanism provides incentives and
disincentives to consumers and producers that respond to the problem of scarcity. These
automatic price adjustments are not only meant to answer the problem of shortages and
surpluses but to answer the three basic economic questions: what to produce, how to
produce and for whom to produce.
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On the first problem, normally, commodities that are needed or wanted by consumers
are the ones to be produced. Since the price of a commodity is a reflection of relative
scarcity, commodities whose prices are increasing imply that these commodities are in
need or wanted by consumers are the ones to be produced. Since the price of a
commodity is a reflection of relative scarcity, commodities whose prices are increasing
imply that these commodities are in need or with high demand. On the other hand,
commodities that are relatively abundant are those whose prices are declining and
should not be further produced.
The second economic question reflects the manner of production or technology that will
be used by firms in producing those commodities with high demand. Since producers are
motivated by earning higher profits, they can maximize their profit by decreasing their
costs given the prices of the commodities that they are producing. The price system can
also answer this question by selecting factor inputs and raw materials that will give the
lowest cost of production. Technologies that will give the lowest cost will be chosen
because they will give higher returns to producers.
The third question, the market system can likewise answer from whom the commodities
will be produced by allocating a higher proportion of output to members of a society
with high purchasing power.
Command as an Allocation Mechanism
Aside from market system there are other ways devised by societies currently and in the
past in allocating limited resources in the light of expanding human wants. There are
societies or situations when the market mechanism is not available or sometimes fails in
properly allocating resources. In these case, the command system may be a more
effective alternative social mechanism for allocation. In a command system, the state or
an agency of the government may be in charge in the allocation of resources by using
its political power in answering the basic economic problem of production and
distribution. In times of natural calamities, disasters or national emergencies, the
command system may be more orderly than then market system.
The command system has been useful as a temporary alternative mechanism in

abnormal times when the market system cannot fully operate or the price mechanism is
inadequate for allocation. However, it has been used even in normal times by several
totalitarian and socialist states in the past to purse national goals including
industrialization and self-reliance. In such cases the power of the planning agency of the
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government is the one dictating in answering the basic economic problems of

production and distribution.
Tradition in the Process of Allocation
The third alternative allocation mechanism is done through tradition. The use of tradition
may be useful in situations where the operation of the market may not be appropriate,
or the power of an organized state has no control over a certain community. This was
normally observed and practiced in indigenous communities in the past where life was
less complicated and the simple needs of the needs of the members of the society can
be provided by the society itself. As a self-reliant community, its members engaged in
limited transactions outside the community. What differentiates this alternative allocation
mechanism is the role of social structure, norms, belief and value system in shaping the
behavior of members of society including the accumulation and utilization of wealth. If
the market is operating on price changes as incentive and disincentive signals while the
command system operates under rule of power and force, tradition uses culture, social
norms to temper wants and encourages producers to expand production in the light of
the problem of scarcity.
Although the market system is the most prevalent mechanism for allocation in many
societies today, the command system as well and the system of tradition have been
utilized with some value and effectiveness in several instances. The choice of allocation
mechanism will depend on the situation at hand and the effectiveness of the alternative
in answering the needs of the people, tempering human wants and in the proper use of
resources.
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LESSON 2: ECONOMICS AS AN APPLIED SCIENCE

As a social science economics deals with the analysis on how members of a society
interact with one another on the creation and utilization of wealth. In addition,
economics has been described as the allocation of resources to meet human wants.
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Thus, economics is a science of choosing an activity from alternative options that will yield
the highest benefits to society in the context of competing uses and opportunity costs.
However, the study of economics has been perceived as too theoretical since it deals
with principles, laws and assumptions governing human behavior in the allocation
process. In addition, the treatment in many textbooks is made through the use of graphs,
mathematics and statistics that many students do not appreciate. This treatment,
however, is meant to strengthen the scientific dimension of economics through a more
rigorous analysis of its principles, theory formation and empirical verification. This
theoretical treatment may look as if economics id devoid of applications.
But that perspective is farther from the true concept and intent of economics. First and
foremost, economics is a social science and it deals with people and how they interact
with one other to sustain, stabilize and develop the material dimension of a society. Many
of the principles, laws and theories developed in economics can be applied in a number
of fields. For instance, it has several applications in commercial sciences. In the field of
accountancy, the information generated in the recording and analysis of transactions
on the state of assets of any establishment can be useful in making business decision
pertaining to wealth accumulation and wealth utilization. In marketing, understanding
the behavior of consumers can be useful to firms in expanding their market share. In
finance, the formation of excess funds for investment purposes can be understood
through the concept of saving which is rooted on the opportunity cost of present
consumption. In management, the optimal combination of human and physical
resources to be used in production will require understanding of benefit and cost
expressed in terms of factor productivities and factor prices.

To understand how economics principles can be applied in several fields, let me propose
a framework of analysis. This structure is based on the analysis of benefits and costs in
decision-making. In making any decision, economic and otherwise, an individual is
influenced by a number of motivations. Most of these motivations are based on the
benefits that he can derive from the chosen options or behavior. Once the individual
purses his chosen option he will obtain an additional level of satisfaction. However,
pursuing any choice implies that there are costs accompanying the benefits arising from
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his behavior. This cost can be expressed in terms of money, time, resources and other
goods and activities being sacrificed or foregone.
Thus, in making any decision, we have to weigh and compare the benefits derived and
the costs incurred. Not only are we making a comparison, we want to make sure that out
net benefits be positive and as much as possible will yield the highest net returns. These
net benefits may be expressed in terms of surplus, net satisfaction, net returns or profit
depending on the decision maker. Aspiring to have the maximum net returns is meant to
address the problem scarcity as reflected in opportunity costs and the need to
economize on the use of limited resources.
Since a decision or choice made is always prospective, what is important is not the
absolute value of benefits and costs but the additional or marginal benefits and marginal
cost. The previous costs and benefits are no longer relevant in the current decision-
making process. What is important on whether to continue or not on whatever you are
currently doing are the marginal benefits and marginal costs.
The marginal analysis of benefits and costs is also useful in setting the condition for an
optimal decision. In economic analysis, the condition for the attainment of maximum net
benefit is set when the marginal benefit is equal to the marginal cost. Suppose you are
consuming a particular commodity and at the current level of consumption the marginal
benefit is higher than marginal cost. This means that the marginal net benefit is positive
implying that the marginal net benefit has a positive contribution to total net benefits. This
further implies that total net benefit can still be increased through increase in
consumption. However, if the marginal benefit is lower than the marginal cost, the
marginal net benefit is negative, implying the marginal net benefit has a negative
contribution on total net benefits which further implies that total net returns is declining.
Thus, when the total net benefits are no longer increasing it has reached its maximum
level. This means that the difference between marginal benefits and marginal cost is zero.
Thus, when marginal benefits equal marginal costs, the total of the net benefits is at its
maximum level. This condition has been very useful in understanding economic behavior
of individuals, families and business establishments in making decisions.
Although the condition for attaining maximum net benefit may appear very simple, this
straightforward equation is altered by many factors. These differentiating factors may be
the source of economic and business problems including excess consumption,
inadequate investment, unemployment, excess production capacity and many more.
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These factors pertain to the recognition and the valuation of benefits and costs by
economic factors.
LESSON 4: VARIATIONS IN BENEFITS AND COSTS DUE

TO STAGE OF RECOGNITION
We have seen the importance of marginal benefits and marginal costs in the process of
decision-making. However, economic, business and social problems may arise when
marginal benefits are not equal with marginal costs. Thus, there is a need to inquire what
may cause the variation between marginal benefits and marginal costs.
The initial factor that may influence the difference is the recognition of what is considered
as benefits and costs. Some benefits and costs may be recognized or not by a decision
maker because maker because some of them are explicit or obvious while some are
implicit or hidden. Explicit costs for example are easily recognized since they are
expressed in monetary terms and may involve actual financial outlays. On the other
hand, recognition of implicit costs is more difficult since the decision maker does not have
to incur any monetary expense in the course of his action.
Explicit benefits can be measured in monetary terms of levels of satisfaction or utility to

the decision maker.
Spatial Dimensions in the Issue of Recognition
Although explicit costs and benefits are easier to spot, implicit benefits and costs are
harder to recognize because of the spatial consideration of the decision maker. If the
decision maker is the individual he may not be aware of the social or public effects of his
actions.
The implicit benefits and costs are hidden from the individual because the level of his
awareness on the benefits and costs of his decision are more pronounced on private
benefits and private costs. These private costs. These private benefits are explicit to him
because he is able to experience direct satisfaction. In addition, private costs are explicit
because the decision maker carries these observable sacrifices involved including the
terms of payment. Thus, these private benefits and private costs are recognized and
become explicit because the individual decision maker is able to internalize them.
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On the other hand, social benefits and social benefits and social costs are not internalized
by the individual decision maker. These social benefits are spillover effects of individual
decisions that the entire community may enjoy.
Social costs are spillover effects of individual decisions that put a burden on the
community at large.
Whether the individuals or firms are aware of the public impacts of their decisions, the
fact remains that their decisions have social effects, positive and negative. The exclusion
of these implicit social benefits and implicit social costs in the analysis of benefits and
costs may lead to improper allocation of resources that manifest in various social,
economic and business problems.
Temporal Dimension in the Issue of Recognition
Aside from the spatial considerations, the temporal dimension of a decision-making

process can also contribute to the non-recognition of implicit costs. Usually, an individual
action is decided on the basis of present benefits and present costs. This is because
present benefits and present costs are explicit to the individual decision maker as his level
of awareness is dictated by the proximity of these benefits and costs in terms of time.
Present benefits and present costs are realized while future benefits and future costs are
too distant in time to affect the awareness of the decision maker. Thus, from the temporal
dimension, the implicit benefits and implicit costs consists of future benefits and future
costs. When these future benefits and future costs are not recognized and not included
in the analysis of benefits and costs of any decision, it may lead to misallocation of
resources with its accompanying social, economic and business consequences.
Variations in Benefits and Costs Due to Differences in Valuation
Even if the decision maker recognizes the implicit benefits and implicit costs of his action,
the differences between marginal benefits and marginal costs can still persist. The
differences may be due to the way an individual decision maker values or measures
these implicit benefits and implicit costs. The proper pricing and valuation of these implicit
costs may have an effect on the optimal decision.
Spatial Dimension in the Issue of Valuation
The valuation of implicit cost may also differ because of spatial considerations. Even if the
decision maker has recognized the social benefits and social costs of his action, various
individuals may have different valuation of these social impacts. There are individuals
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whose valuation of social benefits is low. Similarly, some decision makers may have low
valuation of social costs.
Temporal Dimension in the Issue of Valuation
The issue of valuation can also affect the temporal dimension of benefits and costs.
Because present benefits are currently and directly enjoyed by the decision maker, they
are more significant and have higher values than benefits that are yet to be realized and
enjoyed in the distant future. In this case the decision maker can assign a discount rate
on future benefits to make them comparable with present benefits. The discount rate is
a rate which a stream of future values is reduced to make them comparable with present
values. If the future benefits are considered not as valuable, the decision maker can
assign a higher discount rate in the stream of future benefits to reduce its present value.
Economics is an Applied Science
Although economics have been perceived as too abstract with the use of seemingly
theoretical constructs and models, these frameworks do have their applications. The
numerous real-life examples cited above of the benefit-cost framework developed are
confirmation that indeed economics is an applied science. The analysis of marginal
benefits and marginal costs has been valuable in understanding contemporary issues in
the sphere of social life, economics and business.
Social, economic and business issues do arise because of the differences marginal costs
and marginal benefits. These imbalances result in the improper allocation of resources
and manifest in various problems and issues in society. Further investigation of the disparity
brings us to the conclusion that it is due to the non-recognition as well as the differences
in valuing the implicit component of the benefits and costs. These implicit components
are not easily observable and we refer to them as opportunity costs, social benefits and
social costs in the case of the spatial dimension and future benefits and future costs in
reference with the time perspective in any decision.
Aside from giving us perspective in understanding social, economic and business issues,
the cost-benefit framework is also effective in providing responses to these issues. This
reinforces the fact that economics is and applied science. The simple demand and
supply analysis is a powerful tool in economic analysis while the SWOT analysis used in
making decisions can enrich the benefit and costs analysis developed earlier.
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A SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a planning process

that helps your company overcome challenges and determine what new leads to
pursue.
LESSON 5: Basic Economic Problems Confronting the

Development of the Philippines in the 21st Century
Typical of a growing economy, the Philippines is confronted with several issues and
problems which prevent its citizens from realizing a meaningful life, on the one hand and
in pushing its socioeconomic development, on the other. A sizable proportion of its
people have insufficient resources to afford the basic goods and services, limited
freedom in their choices of employment and consumption and a low self-esteem that
weakens its people. Meanwhile, the quality of human resources as well as its inadequate
infrastructure are constraining the economy to grow faster.
Poverty and Unequal Distribution of Income
Foremost among these problems is the extent of poverty in the country. Poverty is a
restricting condition experienced by millions of families that prevents them in attaining
the minimum level of consumption for subsistence living. Families with limited or without
resources cannot earn sufficient income that can provide the minimum nutritional
requirements for daily living and the basic necessities of clothing and shelter. Related with
the limitation or absence of resources, poor families are faced with limited economic
opportunities. Because they have limited schooling, they are often unskilled and cannot
find decent and sustained employment. Since they have no funds and cannot have
access to credit, they cannot even start a small livelihood project. But even if they are
given resources but are not properly trained and monitored in managing these resources,
they end up consuming the resources that were supposed to give them continued
income in the future.
There are two categories of poverty --- absolute poverty and relative poverty. Absolute
poverty is the lack of income to buy the basic food and necessities for subsistence living.
This is measured in terms of poverty threshold and poverty incidence. Poverty threshold is
the income needed to purchased these minimum nutritional requirements and other
basic necessities for daily survival. During the first semester of 2014, the per capita food
threshold was estimated at PHP 10,534 per year or approximately PHP 29 per day. This
means that an individual needs PHP 29 daily to meet the minimum food intake for survival.
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Those below this threshold are considered poor since they cannot even have the income
to purchase the minimum nutritional requirement for daily subsistence. Poverty incidence,
on the other hand, is the proportion of household in the country with family income lower
than the poverty threshold or poverty line. These poor families belong to households
below the poverty line. During the first semester of 2014, the poverty incidence was
estimated at 20% of all the families and 25.8% of all the population. These proportions
show a slight decline from the poverty incidence recorded in previous years as shown in
the Table 1.
Table 1.1
Poverty Incidence in the Philippines, Selected Years
Poverty Incidence
Among Population Among Families
2006 28.8% 23.4%
2009 28.6% 22.9%
2012 27.9% 22.3%
Source: 2013 Philippine Statistical Yearbook, National Statistical

Coordination Board
Relative poverty, on the hand, refers to the structure on how the national income is being
distributed among households in an economy. The poor household are poor because
their income and other resources are lower than the income and resources of other
households. Poor households from the perspective of relative poverty do not necessary
means that they do not have sufficient income to purchase the minimum requirements
for daily survival.
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Relative poverty is measured by the Lorenz curve and the Gini coefficient. Lorenz curve
shows the share of the various household group (ranked from the poorest to the richest)
on the total national income. Gini coefficient on the other hand, is a measure of income
inequality derived from the Lorenz curve. Perfect equality is indicated by the value 0 and
perfect inequality has a value 1. The Gini coefficient for the Philippines was estimated by
the World Bank at 0.43 in 2012. The coefficient has declined slightly from the estimated
0.4484 in 2009 implying minimal improvement in the income distribution in the country.
Table 1.2
Percentage Distribution of Total Family Income by Income Deciles
Income Decile 1991 1994 1997 2000 2003 2009
First Decile 1.8 1.9 1.7 1.7 1.8 2.0
Second Decile 2.9 3.0 2.7 2.7 2.9 3.1
Third Decile 3.8 3.9 3.5 3.5 3.8 3.9
Fourth Decile 4.7 4.9 4.3 4.4 4.7 4.8
Fifth Decile 5.7 6.0 5.4 5.5 5.8 5.9
Sixth Decile 7.0 7.4 6.8 6.9 7.2 7.3
Seventh Decile 8.7 9.1 8.7 8.8 9.1 9.2
Eight Decile 11.4 11.8 11.5 11.7 11.9 11.9
Ninth Decile 16.1 16.4 16.2 16.4 16.6 16.6
Tenth Decile 37.9 35.5 39.3 38.4 36.3 35.3
Source: 2013 Philippine Statistical Yearbook, National Statistical

Coordination Board.
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Table 1.3
Gini Coefficient Through the Years in the Philippines
Gini Coefficient for the Philippines from 1956 to 2009
Year Gini Coefficient
1956 0.04540
1961 0.4644
1965 0.4632
1971 0.4536
1975 0.4220
1980 III 0.5033
1980 IV 0.4653
1981 III 0.5032
2000 0.4822
2003 0.4605
2009 0.4484
SOURCE OF DATA FROM 1956 TO 1981 : J. Dowling, “Income Distribution

and Poverty in Selected Asian Countries, “Asian Development Bank Staff
Paper. 1993
*2013 Philippine Statistical Yearbook, National Statistical Coordination

Board.
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There are various interventions being implemented by various economies including the
Philippines in addressing the problem of poverty. For absolute poverty, the immediate
intervention is to provide free meals, housing and adequate clothing. But these measures
are temporary gap measures and do not provide long term solutions to the problem of
poverty. To this end, some economists (see Banerjee and Duflo, 2015) have suggested
that there is a need to provide resources including credit, skills and entrepreneurial
training and cash transfers. All these measures have to be implemented together if we
want household to graduate from their poverty status.
For example, if poor households are given a resource like a livestock or a sari-sari store
without the other interventions there is a chance that the resource-enhancing program
may not succeed. Poor household tend to have high discount rate on future goods. This
implies that they attach low valuation on the benefits of future consumption, gains and
benefits and prefer the benefits of current consumption. Poor household with limited
income may not appreciate the future value of a livestock or a sari-sari store and may
be tempted to exploit their current values by consuming them. As a result, poor families
may be tempted to sell or eat the livestock and consume the contents of the store
because they have limited income to support the family. Thus, a cash transfer program
may be introduced to ensure that the resources-enhancing program will become
effective as poor households realize the future value of their livestock and sari-sari store.
In addition, to sustain the resource-enhancing program, poor families should be trained
on how to expand their livestock and sustain their sari-sari store.
In addressing the issue of relative poverty, on the other hand, measures like progressive
taxation, income transfers and other programs meant to improve the income distribution
can be implemented. For example, discounts given to senior citizens in their purchase of
goods and services is a program meant to alleviate the limited income of senior citizens
who are mostly retired individuals. Meanwhile, subsidies and grants given to students from
poor households so they can enroll in state universities and colleges are also practical
measures of addressing relative poverty. The nonpayment of income tax below a certain
income threshold is another initiative meant to improve income distribution and mitigate
relative poverty.
As the country makes the most of the opportunities offered by the 21st century, the
Philippines need to reduce absolute poverty significantly and craft a more equitable
distribution of income. Only then can we say that the fruits of economic prosperity have
been shared and growth has been inclusive.
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Demographic Changes and its Economic Implications
The population of the Philippines has been increasing over several decades. In 1960, the
country has enumerated 27 million people. In 2015, the population estimate for the
country has reached 102 million people. After 65 years, we have increased our
population by 75 million. Because of this demographic change, the country is now
considered the twelfth (12th) largest country in the world. Although the population growth
rate has fallen to 1.9% between 2000 and 2010, the rate is still one of the highest in the
region.
Measures in managing the population growth has been hotly debated in the country in
recent years because it has implications on the growth of the economy, on the one hand
and can infringe on the religious beliefs of many individuals, on the other hand. Those
who favor tempering the growth stress the pressures of population growth exerts on
limited resources. Given the limited arable land in the country, it has been argued that
rapid population growth will reduce the available land per person and can put a toll on
productivity of the agricultural sector. Similarly, it can reduce the capital-labor ratio and
can limit the growth potentials of the economy.
More than the pressure on land and capital, it puts a burden on the government to
provide the social services including education, health and housing to an expanding
population. With the government allocating a larger proportion of its budget for social
services it is left with limited funds for other investments and infrastructure development.
Lastly, rapid population growth can strain the environment as the expansion of people
demands more land for housing and other economic activities,
On the other hand, there are those who have optimistic view on an expanding
population. Increase in population imply additional consumers and savers that can
expand the economy while additional laborers can be the source of productivity,
creativity, creativity and entrepreneurship. In additional, in a more interdependent world,
countries with surplus labor brought about by rapid population growth can move
temporarily or permanently to countries experiencing slow population growth and
deficiency in labor services. The optimist also views the population growth is not the cause
of environmental degradation but the excessive demand of people in highly developed
countries.
There are several explanations on the growth of the population of a country but the
economic perspective uses the economics of childbirth as a basis of analysis. This
interpretation looks at the benefits and costs of having a child. The cost-benefit analysis
can explain why fertility rate among women in poor household is higher compared with
better-off households. Poor families tend to have large families because they consider
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additional children as investment that can assist them in the future. They attach a higher
value on the future contribution of these children on household welfare. In terms of cost,
the opportunity cost of having children is low since women in poor households are usually
not working. With low cost and high benefits, there is an incentive to have more children
in these households.
On the other hand, well-to-do families do not consider children as investments that can
enhance family income in the future. Instead they derive intrinsic joy in having children
not because they can help them in the future but they give meaning to family life.
Meanwhile, with more women employed in affluent household the opportunity cost of
having a child is high which is further augmented by the high cost of rearing and
educating a child. Thus, with huge costs of having a child relative to its benefits, women
in richer household are discouraged to have more children.
One of the implications of an expanded population is the enlargement of the labor force
in the future. If the economy is growing very fast, this increase in labor may not be an
issue. However, if the economy is not growing as fast as the growth of the labor force, the
problem of unemployment may ensure. In addition, if the expanded labor force is not
well-trained due to limited resources of the family and the government, this may end up
as unemployed manpower. An expanded labor force set in an environment with limited
employment opportunities in the locality may push people to migrate internally and
externally.
Internal migration can reduce the labor force in sending regions which can exacerbate
their already sluggish economic performance. On the other hand, receiving regions of
internal migrants may experience urban congestion, formation of informal settlers and
other social problems. Although vibrant economically, these receiving regions may not
be able to absorb all these internal migrants especially those that are unskilled. Thus, they
end up unemployed and may contribute to urban poverty.
Those who are more able but cannot be absorb by other regions in the domestic
economy may end up migrating abroad. Millions of Filipinos are now working in hundreds
of countries and territories around the world. This may sound good as they send
remittances to the country. However, there are accompanying economic, social and
cultural costs in the external migration of workers. For the highly trained professionals and
technical workers, it can result in brain drain and can exert talent strain industries.
Meanwhile, overseas migration may also have an impact on the school participation of
children as well on their health development as absent mothers work abroad. Moreover,
external migration may engender a culture of dependency as recipients of remittances
may be content with the external income transfer rather than work.
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Given the positive and negative consequences an expanded population brings to the
family, economy and society at large, a more tempered view on population growth
should be an acceptable stance.
Low Investment in Human Resource Development
The economic transformation of any country can be traced to a curtain extent on its
human resources. Although the size of the labor force can have positive contributions on
economic growth, the quality of human resources ha greater growth impact. A highly
trained workforce is more productive than a pool of unskilled workers. Skills training and
investment in education can shape human capital of a nation. But modern economies
go beyond formation of human capital and pursue the development of knowledge
capital in pushing their economies forward. Knowledge capital is formed through heavy
investments in higher education, science and technology and research and
development.
Even if education and skills training have positive effect on the future income streams of
individual and the government allots billions of pesos in the provision of education, millions
of Filipino youth are still out of school and have limited education and training. As
explained in an earlier section this may be due to the huge opportunity costs of school
attendance. Even if public provision of basic education is almost free, poor households
still incur sacrifices or opportunity costs as their children are taken away from home chores
and farm duties to attend school. As a consequence, school attendance and retention
among children in poor households tend to be low. With love school participation, many
of these unschooled children end up with limited employable skills which in turn can
contribute to the problem of unemployment when they become adults.
Meanwhile, the problem of limited investments in the formation of knowledge capital

may be due to the due to the huge cost of such initiative relative to their private returns.
The returns to these investments are more public and accrue to society at large more
often in the future as they build the research and development infrastructure of the
country. However, if these human resource development initiative are left with the private
sector, there will be limited investments particularly in research and development.
Unfortunately, the government which is supposed to undertake these investments may
not appreciate its future social value because it has other more pressing current
concerns. For example, the concern of public investment in higher education is to
expand access rather than improve quality and make universities contribute to the
establishment of a research and development infrastructure for the country.
However, the government should be reminded that the economic transformation of

South Korea, Singapore and Taiwan in recent decades can be traced to their initial
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substantial investments in schooling and later in higher education and research and
development. As long as the government does not recognize the importance of human
resource development in economic growth, the Philippines will lag behind. Other
economies in the region can easily overtake us as their scientists, technologies and
engineers develop new products and innovative processes that will make them more
efficient and competitive in the production and distribution of goods and services.
Weak Infrastructure
Similar to the role of human capital on economic growth, physical infrastructure facilities
and expands transactions that likewise fuel economic growth. We need, bridges and
other networks in transportation and communication because these grids link economic
sectors tightly. In addition, a well-developed energy infrastructure can be relied in
supplying cheap electric power to households, businesses and other sectors. With these
efficient linkages transaction costs of many sectors is lowered thus creating greater
income that brings about faster economic expansion.
Although there is recognition on the vital contributions of a strong infrastructure on the

economy, many low-income countries including the Philippines have weak infrastructure.
The inadequate infrastructure of a country has debilitating effects on the individuals,
household, business firms and economy. Take the case of the transportation system in
Metro Manila. With more than 12 million people there is no efficient mass transit system in
the megacity. As a consequence, we have a serious traffic problem in major
thoroughfares. The huge traffic problem is very wasteful as it makes workers less
productive since they spend more time on the road commuting. Aside from reducing the
productivity of workers, congestion in our roads has also reduced national income
measured in terms of delayed deliveries, missed business opportunities and huge energy
consumption.
Meanwhile, the limited capacity of our energy infrastructure has resulted in daily
interruptions of electricity in many regions in the country. This in turn, has created a
negative impact on performance of the enterprise and has increased the costs of doing
business. With no reliable supply of electricity service industries including business process
outsourcing (BPO) can put their operations at risk. However, companies that adapted to
these daily brownouts have resorted to the use of generators to produce power for their
establishments. Although this option has supplied electricity and continued the operation
of their enterprise it has, however, increased the cost of business operations.
The major reason for this inadequate expansion of the infrastructure is the insufficient
funds to finance the huge costs of constructing these networks. Billions of pesos are
needed to construct road projects and highways. Construction costs of energy plants to
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supply electricity are also very prohibitive. Putting up a subway for a mass transit system
in a metropolis in just like constructing several tall buildings below the ground for a
distance of several kilometers which is very costly.
The construction of these infrastructure projects should be done by government because

of their function to provide public goods and their long gestation period. However, the
government has limited finds for capital expenditures including infrastructure projects. A
large portion of the budget is intended for the operations of the government agencies
and in the provision of social services. In this light, one of the options open for the
government is to borrow from external donors. Several highway projects in the country
were funded by Japanese, US and European Union government agencies as well as the
World Bank and other international development agencies. Even this option will require
a substantial amount of counterpart funds from the Philippine government. However, this
ability of the government to provide the financing counterpart is grounded on the ability
of government to raise revenues through taxation.
Another option for the government is to allow the private sector to engage in the
construction and management of infrastructure projects through a public-private
partnership. Since projects are long term investments whose return are reaped in the
future while the huge costs have to be incurred currently, there must be reasonable
returns to their investments within a reasonable period of time. Thus, pricing of the services
from the infrastructure projects should be attractive enough to encourage private sector
participation. For example, in the provision of water services in Metro Manila and
neighboring provinces, Maynilad and the Manila Water are given reasonable price
adjustments for them to reap their investments within a realistic period. Similarly, the
Manila North Tollways Corporation (MNTC) was given a concession up to 2037 for the
rehabilitation, expansion, operation and maintenance of the North Luzon Expressway
(NLEX).
Given the current state of infrastructure of the economy, on the one hand, and the
limited funds of the government, on the other, there is a need to entice more private
sector participation in improving our air and marine port facilities, expanding our energy
production capacity and enhancing our urban transport system. But private sector will
only participate if the price is right and if there is an environment that will ensure returns
to their huge investments.
Pursuing Food Security
With more than 100 million people to feed, the concern of the government is to ensure
food security for all. This goal has been interpreted, however, as food self-sufficiency in
the light of the huge amount of arable land devoted to the production of food grains-
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rice and corn. In addition, food sufficiency is intimately linked with the development of
agriculture as a major economic sector of the country contributing over 11% to gross
domestic product and absorbing almost a third of labor force.
The importance of agriculture in our economy emanates from its role as the main supplier
of food grains to the growing population. More than 50% of the more than 13 million
hectares of lands for agricultural crops is devoted to the planting of rice and corn. In
addition, a substantial portion of our people, many of them poor, is dependent on this
sector. Hence, the aim of uplifting the productivity of the sector and the income of the
farmers and fisher folk is an important social objective. A sluggish agriculture may result
an unstable society with the spread of poverty while insufficiency in food may invite
inflationary pressures or dependence on imports. On the other hand, a vibrant agriculture
has implications on the poverty reduction and the development of other economic
sectors.
But to equate food security with food self-sufficiency is problematic. We know that food
self-sufficiency may benefit the millions of rice and corn farmers as well as traders in the
country but at the expense of the consumers and other economic sectors. Pursuing food
self-sufficiency by securing food grains domestically may result in high prices for food
grains in the light of the lower prices in other countries in the region including Vietnam
and Thailand. Since food is the leading component of household expenditure, higher
food prices may inflict harm on the industrial and services sector whose worker will
demand higher wages as a result of higher food prices.
However, the development of agriculture is nor meant to make us self-sufficient in the

production of food grains alone but primarily in increasing the productivity of the sector.
Thus, food security implies that the country and its people should have enough income
to purchase food grains at the cheapest price anywhere in the world. This means that for
the country to have enough income it should use its limited resources efficiently.
Aside from the efficient use of resources there are other initiatives that can increase the
productivity of the agricultural sector. There is a need to invest in irrigation facilities,
provide cheap fertilizer and inputs and organize farmers with small lands so they can reap
the benefits of economies of scale through the mechanism of cooperatives. In addition,
the construction of farm – to – market roads, expansion of agricultural extension programs
and development of post – harvest facilities can contribute to agricultural productivity.
Thus, enhancing the productivity of the agricultural sector can contribute to the
achievement of food security. This is not done through the food self-sufficiency but in
increasing the income of farmers through various means and cultivating a variety of
agricultural crops as well as the income of workers in other economic sectors that will
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provide sufficient resources so they can purchase cheaper food grains sourced
anywhere in the region and the world.
Slow Adoption on Modern Technology
In the previous section we stressed the need to develop the agricultural sector to attain
food security more than food-sufficiency. But aside from the agricultural sector the
development of the industrial sector particularly manufacturing and the services sector
should be likewise pursued to push the rapid development of the Philippines economy.
One common feature that prevents these economic sectors in realizing their growth
potentials is the slow adoption of modern technology in their processes of production
and distribution. Technology is the manner of processing raw materials or intermediate
inputs to transformed outputs through the use of factor inputs. A technology that is biased
in the use of labor id called a labor-intensive technology while a capital-intensive
technology refers to use of more capital relative to labor in the production process.
In agriculture, many of our farmers are still using traditional farming techniques instead of
advanced ones because of cheap labor brought about by the surplus of manpower in
the sector. Conventional seeds are still utilized that are low yielding instead of the high
yielding improved seeds. Information on various ways of expanding nonfarm agricultural
activities that can enhance farm income is limited and not fully exploited. Aside from the
cost of implementing modern technology in the farm, these productivity impairing
features of agriculture can be attributed to very low research and development in the
sector and the limited agricultural extension services given to the farmers.
In the industrial sector, the share of value added of the industrial sector has remained a
third of the gross domestic product of the country for the past four decades. Similarly, the
share of manufacturing, the biggest component of the industrial sector, has stagnated
at around 23 to 25% of GDP during the same period. This record pales in comparison with
the economies in the region like Thailand and China that have economically transformed
characterized by substantial increase in the share of manufacturing in the GDP of their
economies over time.
This stagnation of our manufacturing sector has been attributed to a certain extent to
the limited investment in capita equipment. With limited capacity expansion, labor
productivity has likewise stagnated. There are number of reasons why in the
manufacturing sector are reluctant to expand their productive capacity through
investment in modern equipment. One, it is too expensive to overhaul the physical plant
with modern technologies. Second, it is very risky to expand through investment and
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introduction of innovations in the light of the head start of other economies in the region
and the production of cheap manufactures in China.
However, there are some manufacturing industries in the country like electronics and car
manufacturing that were able to expand and improve their productive capacities
through heavy investments in modern equipment. The secret to success of these
industries is that they are linked with global networks of production. Domestic companies
produce some parts of electronics equipment and major components of cars and these
parts are exported to other members of the production network in the region. In the case
of the automotive industry, a local car manufacturer like Toyota Philippines is a member
of a regional production network of Toyota automotive manufacturers. Aside from
producing a major component of a car, Toyota Philippines manufacture cars by
assembling domestically produced components together with other major components
imported from other Toyota companies in the region. As members of global production
networks these companies in electronics and automotive industries in the Philippines are
assisted by their mother companies in their investment plans. The risks are also mitigated
with the improvements in their production and huge regional market for electronics and
automotive components.
The development of the services sector is also hinged on massive investments in modern
technology. The services sector has been the most vibrant sector of the economy in the
last few years and the major source of economic growth. The sector accounts for 55% of
the GDP of the Philippines in recent years and absorbs a little more than 50% of the labor
force in the same period. One of the most vibrant industries in the services sector is the
Business Process Outsourcing (BPO) which is one of the leading contributors of foreign
exchange in the country and provides employment of millions of Filipinos workforce.
The problem with the services sector is the variability of productivities among a huge
number of industries in the sector. For example, the biggest industry in the sector is retail
and wholesale trade which absorbs almost 20% of the labor force but contributes only
16% of the GDP. Meanwhile, hotel and restaurant services has absorbed only 3% of the
labor force but has contributed almost 6% of the gross domestic product of the country.
This shows that this sector is relatively more productive than retail and wholesale trade.
Transportation and communication services, meanwhile, has exhibited neutral
productivity by contributing 7.5% of GDP and providing employment to 7.4% of the labor
force.
The relative productivities of these industries reflect their performance in investing in

modern equipment and adopt modern technologies. Because of its limited utilization of
innovation the average labor contribution to GDP of retail and wholesale industry is the
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WEEK 1 Lesson 1
lowest among the services sector. This is reflected in the quality of service provided by
numerous ambulant vendors, sari-sari stores, and other retailers in the formal sector. On
the other hand, the services that our hotels provide are comparable with some of the
best hotels in the region because they are part of a chain of hotels. Because they are
part of global chain of hotels, they can adopt sate-of-the-art technologies in food
preparation and other hotel services. In transportation services, meanwhile, productivities
of various models of transportation are mixed. Because of limited investments in bus, rail
and marine transport the quality of their service suffers. However, in the aviation industry,
our airlines are competitive globally because they have to expand their fleet of airplanes
and improve their services regularly to complete with international airlines.
The country needs efficient and productive services because these industries are strongly
linked with the agricultural and industrial sectors. For example, farm products and
industrial manufactures will need the services of transportation industry to transfer these
commodities from the production sites to various ports and finally to the major markets.
In addition these transported agricultural and industrial commodities have be to sold and
delivered to final users through retail and wholesale industry. The services sector is the
major connection between agricultural and industrial suppliers and their buyers. Thus, a
more efficient and productive services will translate to a more efficient and productive
agricultural and industrial sectors.
With the adoption of modern technology, the agriculture, manufacturing and services
sectors are able to realize their growth potentials. Realization will mean investment in
modern equipment and technology. This can be done through opening the economy to
foreign players as shown in the success of the electronics and automotive industry and
the BPOs. But as long as the industries in various economic sectors are inward looking,
focused on the domestic market and protected by domestic regulations, there is no
incentive for them to improve. As a consequence they may be reluctant to undertake
very expensive investments in modern equipment and technologies. In the longer run this
will make these industries uncompetitive while the current market players enjoy their
market power at the expense of the consumers’ welfare.
Environmental Sustainability and the Country’s Development Thrust
The capacity of our economy to maintain its productivity capacity and pursue its
development goals will be constrained by the prudent use of natural resources for
sustainable development. The environment is part of natural resources where we derive
from utilization of its wealth. However, excessive use of our natural resources may
compromise its ability to provide income and other benefits in the future. In the
agricultural sector the cultivation of lands for crop production, the use of water and
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WEEK 1 Lesson 1
marine resources and the harvesting the fruits of the forests can put pressures on the
capacity of our natural resources in generating income. Because various types of natural
resources are difficult to expand, the proper use of land, sea and forest should be
undertaken in order to achieve a long term life for agricultural as a source of income and
employment for the country.
For example, the capacity of land resources to be productive rests on the proper use of
fertilizer and pesticides. Too much use of commercially manufactured chemicals as
fertilizers and pesticides can reduce the productivity of lands for crop production.
Meanwhile, overfishing can drastically reduce marine resources that can be harvested
in the future. Excessive logging, on the other hand, accompanied by forest clearings,
forest fire and excessive pasturing can reduced our rain forest. With this reduction, a
number of endangered mammals and bird faunas can threaten our ecological balance.
In addition, forest degradation is one of the causes of increasing floods and droughts in
the country as well as massive erosion and groundwater depletion.
Aside from overutilization of our natural resources, a sustainable environment is

threatened by wastes discharges by productive and distributive activities of various
sectors. In the industrial sector, the extraction of minerals done by the mining industry can
have the same environmental effects similar to excessive logging. In addition, it can
destroy the productivity of the water and marine resources nearby as it disposes its
wastes. Similarly, many manufacturing industries including cement and energy
generating plants can pollute the rivers and air with the disposal of its wastes.
Given the consequences of agricultural and industrial production on the environment,

what is the optimal government policy to pursue? This policy should be tempered by the
marginal benefits and marginal costs accompanying these agricultural and industrial
activities. For example, a total log ban may preserve our trees in the forests for a longer
period of time but it can also deny employment and income to thousands of workers in
the forestry industry. Aside from the adverse effects on families dependent on logging like
those in the furniture and construction industries, a total log ban may affect agricultural
and industrial production since wood products are used as inputs in these economic
sectors. In this light a more reasoned selective log ban may be beneficial to society as it
balances the benefits and costs of logging.
Similarly, a total ban on mining is too extreme since it does not consider the positive
contributions of mining to our economy. Total ban on mining may secure our mineral
resources intact for the future and protect our environment. But its opportunity cost in
such policy is also very high. It can deny the country of the needed foreign exchange
derived from the exports of our leading minerals including gold, copper and nickel. The
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WEEK 1 Lesson 1
employment and income of mining engineers and workers are also at risk with this ban.
Thus, selective ban on mining can be pursued in the light of the uneven spatial distribution
of mineral resources in the country. In areas where the social costs are higher than the
social benefits the government may impose a mining ban. In areas where social costs
are manageable and the social benefits are high, mining can proceed provided their
environmental impacts are properly mitigated.
In light of these positive and negative impacts of economic activities on the environment,
there is a need to mitigate the negative consequences and enhance the positive
marginal benefits of these economic activities. Measures like pollution tax, pollution limits
and management plan for environmental impact of these economic activities may be
required to ensure that the environment is protected and at the same time reap the
contribution of these activities in generating income, employment and foreign exchange
for the country.
WORDS TO REMEMBER
Economics Explicit Cost

Implicit Benefits Explicit Benefits
Allocation Marginal Cost
Social Science Marginal Benefits
Page 35
WEEK 1 Lesson 1
ENGAGEMENT
The learner will be able to write an essay after understanding the definitions of
Applied Economics
ASSIMILATION/ASSESMENT
I. Write an essay on the topic below:

The good things in life brought about by Economics
_______________________________________________________________________________
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_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
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Page 36
WEEK 1 Lesson 1
REFLECTION
The things I learned from the lesson:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Questions I want to ask from the lesson:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Things I realized from the lesson:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
REFERENCES:
For additional information, refer to the following website:
Applied Economics for A Progressive Philippines

Tereso S. Tullao Jr., PhD
Phoenix Publishing House, Inc.
927 Quezon City
https://www.thebalance.com/what-is-opportunity-cost-357200
http://webhome.auburn.edu/~johnspm/gloss/allocation.phtml
Page 37

Applied Economics Lesson 1

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WEEK 1 Lesson 1

UNIT 1: INTRODUCTION TO APPLIED ECONOMICS

LESSON 1: REVISITING ECONOMICS AS A SOCIAL

Content Standards: Learning Competencies:

The learner will be able to differentiate

The learners will be able analyze and

Performance Task: Goal – the learner will be able to write

LESSON 1: REVISITING ECONOMICS AS A SOCIAL SCIENCE

prosperity. Meanwhile, when a family constructs a nipa hut or rents a room or

Specific Learning Objectives

1. The learner will be able to gain an understanding of core economic principles

1. Economics is a social science concerned with the production, distribution, and

2. Microeconomics focuses on how individual consumers and firm make decisions;

3. Macroeconomics is a study of an overall economy on both a national and

LESSON 1: REVISITING ECONOMICS AS A SOCIAL

2. It stresses the decision-making process.

3. It concentrates on the allocation process.

Economics is a social science concerned with the production, distribution, and

Macroeconomics - studies an overall economy on both a national and international

The more current definition of economics as a science of making choices is consistent. In

Allocation is the process by which economic resources get allotted (apportioned,

1. What goods and services are produced (and in what quantities)?

Economics is primarily a social science. As a science it utilizes the scientific method of

demand. Thus, shortage is a specific manifestation of scarcity. This specific manifestation

The command system has been useful as a temporary alternative mechanism in

government is the one dictating in answering the basic economic problems of

LESSON 2: ECONOMICS AS AN APPLIED SCIENCE

LESSON 3: A FRAMEWORK IN UNDERSTANDING

LESSON 4: VARIATIONS IN BENEFITS AND COSTS DUE

Explicit benefits can be measured in monetary terms of levels of satisfaction or utility to

Aside from the spatial considerations, the temporal dimension of a decision-making

A SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a planning process

LESSON 5: Basic Economic Problems Confronting the

Poverty and Unequal Distribution of Income

Poverty Incidence in the Philippines, Selected Years

Among Population Among Families

2006 28.8% 23.4%

2009 28.6% 22.9%

2012 27.9% 22.3%

Source: 2013 Philippine Statistical Yearbook, National Statistical

Percentage Distribution of Total Family Income by Income Deciles

Income Decile 1991 1994 1997 2000 2003 2009

First Decile 1.8 1.9 1.7 1.7 1.8 2.0

Second Decile 2.9 3.0 2.7 2.7 2.9 3.1

Third Decile 3.8 3.9 3.5 3.5 3.8 3.9

Fourth Decile 4.7 4.9 4.3 4.4 4.7 4.8

Fifth Decile 5.7 6.0 5.4 5.5 5.8 5.9

Sixth Decile 7.0 7.4 6.8 6.9 7.2 7.3

Seventh Decile 8.7 9.1 8.7 8.8 9.1 9.2

Eight Decile 11.4 11.8 11.5 11.7 11.9 11.9

Ninth Decile 16.1 16.4 16.2 16.4 16.6 16.6

Tenth Decile 37.9 35.5 39.3 38.4 36.3 35.3

Source: 2013 Philippine Statistical Yearbook, National Statistical

Gini Coefficient Through the Years in the Philippines

Gini Coefficient for the Philippines from 1956 to 2009

Year Gini Coefficient

1980 III 0.5033

1981 III 0.5032

SOURCE OF DATA FROM 1956 TO 1981 : J. Dowling, “Income Distribution

*2013 Philippine Statistical Yearbook, National Statistical Coordination

Demographic Changes and its Economic Implications

Low Investment in Human Resource Development