APPLIED ECONOMICS

Why do we need to practice Economics?

● SCARCITY- is the reason why people practice economics
● Economics as a study is the social science that involves the use scarce resources to satisfy
unlimited wants

Alfred Marshall
-described as economics as a study of mankind in the ordinary business life

Scarcity
>a condition where there are insufficient resources to satisfy all the needs and wants of a population
>it may be relative or absolute
● Relative Scarcity- when a good is scarce compared to its demand
● Absolute Scarcity- when supply is limited

Choice and Decision-Making

● Opportunity Cost- refers to the value of the best foregone alternative
>The concept of opportunity cost holds true for individuals, businesses, and even a
society

Economic Resources
>Also known as factors of production, are the resources used to produce goods and services
1. Land- soil and natural resources that are found in nature and are not man-made. Owners of
lands receive payments known as rent.
2. Labor- physical and human effort exerted in production. The income received by laborers is
referred to as wage.
3. Capital- man-made resources used in the production of goods and services, which includes
machineries and equipment. The owner of capital earns an income called interest.

Economics as Social Science

● Economics is a social science because it studies human behavior just like psychology and
sociology
● As a social science, economics studies how individuals make choices in allocating scarce
resources to satisfy their unlimited wants.
>Social Science- the study of society and how people behave and influence the world
around them

2 Branches of Economics
1. Macroeconomics
>concerned with the overall performance of the entire economy
>focuses on the overall flow of goods and resources and studies the causes of change in the
aggregate flow of money, the aggregate movement of goods and services, and the general
employment of resources.
>is about the nature economic growth, the expansion of productive capacity, and the growth of
national income
2. Microeconomic
>concerned with the behavior of individual entities such as consumer, the producer, and the
resource owner
>more concerned on how goods flow from business firm to the consumer and how resources
move from the resource owner to the business firm
>also concerned with the process of setting prices of goods that is also known as Price Theory
>studies the decisions and choices of the individual units and how these decisions affect the
prices of goods in the market
>it examines alternative methods of using resource in order to alleviate scarcity

Basic Economic Problems of Society

● What to produce and how much
● How to produce
● For whom to produce
Economic Systems
1. Traditional Economy- decisions are based on traditions and practices upheld over the years
and passed on from generation to generation.
2. Command Economy- the authoritative system wherein decision-making is centralized in the
government or planning committee.
3. Market Economy- the most democratic form of economic system. Based on the workings of
demand are made on what goods and services to produce.

Scientific Approach in the Empirical Testing of an Economic Theory

● State the propositions or conditions that are taken as given and do not need further
investigation, as the basic starting point of investigation.
● Observe facts in connection with the activity that we want to theorize.
● Apply the rules of logic t the observed facts to determine causal relationships between
observed actors and to eliminate facts that are unnecessary and irrelevant
● Establish a set of principles such that formulated hypotheses may be tested as to whether
they are valid or not.
● Use statistics and econometrics as empirical proof in testing the hypotheses.

Positive Economics vs. Normative Economics

>Positive Economics
-deals with what is- things are actually happening such as the current inflation rate, the number of
employed labor, and the level of the Gross National Product (GNP)
>Normative Economics
-refers to what should be- that which embodies the ideals such as the ideal rate of population
growth or the most effective tax system.

Counting all through GNP

GNP/GDP: Expenditure Approach
● One way to account GNP and classify its components is by end-use expenditure.
● GNP= C + I +G + (X-M) + SD + NFIFA

○ C- household and individual consumption

○ G- government expenditure on goods and services including labor
○ X- exports
○ I- investments
○ M- import components
○ SD- statistical discrepancy
○ NFIFA- net factor income from abroad

GDP (Gross Domestic Product)

➢ Defined as the market value of final products produced within the country.
➢ The resources on the economy include capital and entrepreneurship belonging to other
countries brought to the domestic economy by foreign businesses.

GNP/GDP: Income Approach

➢ Another way to account GNP and classify its components is by its resource uses and
contributions that make up the production stages.
➢ GNP would simply be the sum of all factor payments from the raw materials to the final product
stage

Economics as an Applied Science

● Applied Economics is the application of economic theory and econometrics in the specific
settings with the goal of analyzing potential outcomes.
○ Typically characterized by the application of the core, referring to economic theory and
econometrics as a means of dealing with practical issues in the fields that include
demographic economics, labor economics, business economics, agricultural
economics, development economics, education economics, health economics,
monetory economics, economic history, and many others.
 ■ John Neville Keynes
-attributed to be the first to use the phrase “Applied Economics” to
designate the application of economic theory to the interpretation and
explanation of particular economic phenomena.

THE PHILIPPINES’ BASIC ECONOMIC PROBLEMS

➢ What to produce
➢ When to produce
➢ How to produce
➢ For whom to produce

● Lee Kuan Yew (1923-2015)

○ ASEAN Icon
○ An economic icon and an example of how a leader of previously undeveloped country
can lead to overcome is country’s basic economic problems and move toward
economic growth.
○ Was the prime minister of Singapore from 1959-1990, making him the longest-serving
prime minister in history.
○ Born in Singapore on September 16, 1923.

1959 1990 1962 2004 March 23, 2015

He introduced a five-year He resigned He led Singapore His son Lee Kuan Yew
long plan calling for urban as prime into a merger with became the died.
renewal and construction minister. Malaysia but three prime minister
of new public housing, years later,
greater rights for women, Singapore left the
educational reform, and union for good.
industrialization.

Chapter 2: Application of Demand and Supply

The Market
● Market is an interaction between buyers and sellers of trading or exchange.
● It is where the consumer buys and the seller sells.

1. Goods Market
-the most common type of market because it is where we buy the consumer goods.
2. Labor Market
-is where workers offer services and look for jobs, and where employers look for
workers to hire
3. Financial Market
-includes the stock market where securities of corporations are traded

Demand
>is the willingness of consumer to buy a commodity at a given price.

Law of Demand
>states that other things being constant, an increase in the price good lowers the quantity
demanded of that good while decrease in the price of good raises the quantity demanded.
>the price and quantity demanded move in opposite directions. (Inverse Relationship)
Ceteris Paribus
>all things remain constant except price
>all other related variables except those that are being studied at the moment are held constant.

Demand Function
● Shows how the quantity demanded of a good depends on its determinants, the most important
of which is the price of the good itself.
● Qd= F(P)
○ Qd (Quantity Demanded)- dependent variable
○ P (Presyo)- independent variable

Demand Schedule
● Shows the various quantities the consumer is willing to buy at various prices.

Demand Curve
● A graphical illustration of the demand schedule, with the price measured on the vertical axis
(Y) and the quantity demanded measured on the horizontal axis (X).

Income Effect
● Felt when a change in the price of good changes consumer’s real income or purchasing
power, which is the capacity to buy with a given income.

Substitution Effect
● Felt when a change in the price of a good changes demand due to alternative consumption of
substitute goods.

Non-Price Determinants of Demand

1. Income
2. Expectations of Future Price and Income
3. Prices of Related Goods
a. Complementary Goods
b. Substitute Goods
4. Population
5. Bandwagon Effect

Sources of Ideas for Entrepreneurial Ventures

➢ From existing products or service
○ Annoyance-Driven Innovation
○ Karl Ulrich

➢ From the process

○ Production and Distribution

➢ From the person

○ Examines his/her interests, hobbies, skills, dreams, and even his/her travels.
 Application of Supply
Supply
>refers to the quantity of goods that a seller is willing to offer for sale.

Law of Supply
>there is a direct relationships between the price of a good and the quantity supplied of that good
>states that the quantity supplied of a good per period of time rises when the price of the good rises
and the quantity supplied per period of time falls when the price falls.

Supply Function
● A mathematical expression of the relationship between supply and those factors that affect the
willingness and ability of a suppliers to offer goods for sale.
● Qs= F(P)
○ Qs (Quantity Supplied)- dependent variable
○ P (Price)- independent variable

Supply Schedule
● A table that shows the relationship between the price of a good or service and the quantity
supplied.

Supply Curve
● A graph of the relationship between the price of a good or service and the quantity supplied.

Non-Price Determinants of Supply

1. Cost of Production
-refers to the expenses incurred to produce the good.
2. Technology
3. Availability of Raw Material
4. Change in the number of suppliers
5. Expectation