Applied Economics

MODULE
Module No. 2: Week 2: First Quarter
TOPIC: Identify Economic Problems of the Country

Learning Competency
1. Examine the utility and application of applied economics to solve economic
issues and problems.
Code: ABM_AE12-Ia-d-2-3

Objectives
After reading this module, the learners will be able to:
1. identify the basic economic problems of the country
2. to understand sciences related to economics
3. to understand difference of economics to other social sciences
4. to understand economic problems of the Philippines
5. to understand applied economics used to solve economic problems

Let’s Recall

Modified True or False. Write True if the statement is true and False if the statement
is false.
1. Economists also look at realms. There is big-picture macroeconomics, which is
concerned with how the overall economy works.
2. Little-picture microeconomics is concerned with how supply and demand interact in
individual markets for goods and services.
3. In macroeconomics, the subject is typically a nation-how all markets interact to generate
big phenomena that economists call aggregate variables.
4. In the realm of microeconomics, the object of analysis is a single market- for example,
whether price rises in the automobile or oil industries are driven by supply or demand
changes.
5. Economists commonly consider themselves macroeconomists or microeconomists.

Let’s Understand
Identify Economic Problems of the Country
A theory that scarcity exists in the sense that only finite and insufficient resources are available to satisfy
the needs and desires of all human beings. The fundamental economic problem then faced by human
society and business operators is how to allocate scarce resources to the provision of various goods and
services within the company.
➢ Economic Problem of Scarcity
Why do we have to make choices and trade-offs? Why does it cost money to produce and consume the
goods society wants? The answer is scarcity. Through this lesson, you will gain a better understanding
of the concept of scarcity and why it forces us to make decisions and trade-offs everyday.

Scarcity

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Scarcity, or limited resources, is one of the most basic economic problems we face. We run into scarcity
because while resources are limited, we are a society with unlimited wants. Therefore, we have to
choose. We have to make trade-offs. We have to efficiently allocate resources. We have to do those
things because resources are limited and cannot meet our own unlimited demands.
Without scarcity, the science of economics would not exist. Economics is the study of
production, distribution, and consumption of goods and services. If society did not have to make choices
about what to produce, distribute, and consume, the study of those actions would be relatively boring.
Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited
wants and needs of humans. Everyone would get everything they wanted, and it would all be free. But
we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what
economists’ study. Why are certain decisions made and what is the next best alternative that was
forgone?
Scarce Goods and Services
As noted, if scarcity did not exist, all goods and services would be free. A good is considered scarce if
it has a non-zero cost to consume. In other words, it costs something. Almost every good we consume
as individuals, or as a society, costs something and is scarce. By consuming one good, another good is
foregone. Therefore, scarcity creates a need for decisions and trade-offs to be made.
Why are some scarce goods more expensive than other scarce goods? The cost of a good is a
signal of its scarcity. One good may be scarcer than another, either because of limited resources or
higher want (demand) for that good.
Let's take two scarce goods - shark meat and chicken. Both have a non-zero cost/price, but we
would all agree shark meat is much more expensive to buy than chicken. Why is that? The resources to
produce shark meat are largely limited by the labor and capital it takes to catch a shark, while the labor
and capital required to produce chickens is less limiting. Even though the resources to produce both are
limited, there is much more labor and capital available to produce chicken meat than shark meat. Not
to mention the quantity of sharks is also much more limited than that of chickens. Factors like
production costs and labor affect the cost of scarce items.
Three Basic Economic Problems
All modern economies have certain fundamental or basic economic problems to deal with. In every
single economy, including the so-called “affluent society”, resources are limited. As a result, decisions
regarding the resource use have to be made together by individuals, by business corporations, and by
society. It is the social choice and community preferences which give substance to the question of
macro-economic decisions.
The following are the 3 fundamental economic problems faced by all societies worldwide:
1. What to produce: - This has to do with the problem of allocation of resources among different
goods and services. It involves selection of what should be produced and in what quantity in order
to satisfy consumer wants as best as possible using the available resources. The society has to
choose among different kinds of goods and decide on how to allocate resources among them, for
instance whether to produce capital goods or consumer goods. The society also needs to determine
the specific quantity of each type of good to be produced. In a market economy, the choice of what
to produce is made by the buyers in other to fulfill their needs. Government can through its laws
determine what to produce in a given economy. But the production of one good means a reduction
in the production of another.
2. How to Produce: -This problem refers to selection of appropriate technique of production, that is,
how to combine resources in other to produce goods and service in a more efficient way and at a
minimum cost. A combination of resources (factors) implies a technique of production. The
technique of using a combination which involves less capital and more labor is known as labor-
intensive mode of production while a combination of more capital and less labor is capital-intensive
mode of production. The decision on which resource combination to use depends on availability of
factors and their relative prices. Therefore, it is in the interest of the society that factors should be
combined in a manner that maximum output can be produced at minimum cost, using least possible
scarce resources.

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3. For whom to produce: - This economic problem focuses on how the national product is to be
distributed among the members of the society, that is, how the consumer goods and capital goods
will be distributed. The society has to decide who receives the outputs produced in the economy
because human wants are unlimited. Should the economy produce goods for those with high
incomes or for those with low income? What demographic group should production be targeted at?
The money income of the people determines the distribution of output in the society. The greater
one’s money income, the greater the quantity of goods the person will purchase from the market.
Sometimes the supply of goods are in short supply leading to government intervention through price
legislation, rationing or through quotas.
Sciences Related to Economics
Economics, the study of the production and transfer of wealth, is a science in and of itself. However,
additional fields of science often influence how economics studies are carried out. Ranging from
biology to physics, the field of economics is host to equations and theories that cut across many
disciplines. These disciplines blend together to create a more accurate picture of how money and goods
work in a society.
Physics and Economics – have developed such close ties that a whole new subfield has formed termed
econophysics. Econophysics uses statistical modeling developed by physicists to analyze various
aspects of finance, including market behavior and wealth distribution. By using such statistical models,
economists are able to isolate and study specific factors within a market’s behavior, determining how
important certain elements are to short- and long- term stability.
Biology and Economics – many theories from biology have also been applied to economics. Chief
among these is natural selection, in which it is thought that evolution favors individuals who are best
adapted to a situation. For biologists, evolutionary game theory helps determine what factors affect
evolution. For economists, similar game theories help delineate which factors might affect market
stability.
Chemistry and Economics – Chemistry often affects economics on a particular level. In particular,
green chemistry, the development of renewable or nontoxic materials and energy sources, drives
changes in economics and commerce. The cost-benefit analysis of these new materials includes
elements of both chemistry and economics. How much a particular material may affect the environment
chemically is weighed against its monetary cost. In this way, the rise of tax incentives and grants for
economics is carried out at both the state and federal levels.
Ecology and Economics – Ecology is the study of how organisms and environments interact. Ecological
economics, as the name suggests, is aimed at understanding the interaction between ecology and human
economics. Specifically, this field relates to how economics and ecology have evolved together in a
particular environment. Ecological economics may focus on questions of sustainability, but its primary
concern is that of fair and efficient allocation of resources, for both humans and the environments they
inhabit.
Difference of Economics to Other Social Sciences
The term "social science" refers to one or more branches of study on human activity. Branches of social
sciences include anthropology, history, political science, sociology and economics. All of the social
sciences seek to understand and establish causal relationships between actions, behaviors and events in
human existence. Political science, sociology, psychology and economics are social science branches
that seek to anticipate, understand and explain current human activity rather than past activity.
Scarcity of Resources
The study of economics is based on the premise that all resources are limited not only in available
quantity but also in practical utility. Resources include fertile soil, water, crop yields, fossil fuels and
mineral rock. Economic activity reveals the human adaptation to the real and perceived limitations on
available resources. Humans may place a high price on a resource because the good is perceived to be
rare and of great value. Scarcity of resources will have an impact on communities and demographics.
Other social sciences study the social, political and psychological impact that scarcity has on a
community, such as an increase in divorce rates or crime due to high unemployment in an area, but do
not focus study on the economic reasons for the impact.
Rational Choice

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Both economics and political science include the study of rational choice in human behavior. While
rational choice presumes that all actors have full information when making a decision, the reality is that
full information is available to all actors only in special circumstances. In politics, the manipulation of
information and knowledge contributes to political influence. Economic theory presumes that
individuals think and behave rationally when making economic decisions. Although human behavior is
not this simple, economic theory uses this simplicity to establish laws and principles that generally
explain shifts in economic events. For example, the law of supply and demand dictates that when supply
increases, price decreases. When price decreases, demand increases, but only to a point.
Institutions
The institutions studied by economics are different than other social sciences, although there is great
overlap with regard to the government. Economics studies the impact of businesses, government
legislation and treasuries, banks and the stock market. These institutions influence the human ability or
willingness to conduct business for the purpose of obtaining wealth. Government legislation works to
protect consumers from producers for better or worse. In some countries, government legislation
severely restricts entrance of new businesses to the marketplace.
Resemblance to Natural Science
Economics resembles natural science more than other social science disciplines. The "understanding"
of economic forces and events provided by the study of economics is based on theorems and principles,
many of which have proven sustainable even as economists have been forced to develop new
understandings of economic events. A Nobel Prize is also offered in economics for advancements in
research. No other social science is awarded its own Nobel Prize.
Economic Problems of the Philippines
Though a fast-growing economy, Philippines still needs to address the issues of poverty,
unemployment, and poor infrastructure.
1. Unemployment
- is defined as a situation where someone of working age is not able to get a job but
would like to be in full-time employment. Many of the unemployed individuals are college graduates.
Many waits for job opportunities abroad and many families depend on remittances from family
members who are staying abroad
Types of Unemployment:
-Demand Deficient Unemployment -Structural Unemployment
-Real Wage Unemployment -Frictional unemployment -Voluntary Unemployment
2. Poverty
- is very much linked to unemployment. Unfortunately, the growth is restricted to the BPO, retail, and
real estate sector, and a large number of Filipinos remain without job. On top of that, natural calamities
further push people below the poverty line. Thus, economic disparity is a common feature. In general,
the gains from higher economic growth have not really trickled down to the poor. It is the scarcity or
the lack of a certain amount of material possessions or money.
The main causes of poverty in the country include the following:
- Weakness in employment generation and quality of jobs generated
Failure to fully develop the agriculture sectors;
High inflation during crisis periods;
High levels of population growth
3. Poor Infrastructure
- is the basic physical systems of a business or nation; transportation, communication, sewage, water
and electric systems are all examples of infrastructure. One of the biggest challenges in order to host
global companies, Philippines will have to pay more attention to enhancing the infrastructure. A well-
developed transportation (roads, railroads, ports, and air transport) and communication system is
extremely essential for economic activities.
4. Heavy Dependence on Remittances

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- The country heavily relies on these funds. Their economic growth can primarily be associated to the
remittances from the overseas Filipino workers, as well as the growth in the Business Process
Outsourcing (BPO) sector. Also, one cannot rule out that the growth is connected to the global economy.
In the event of any crisis, economic growth is bound to suffer. Thus, greater attention has to be paid to
addressing to the internal problems of the economy and enhancing domestic-oriented growth. A policy
of removing structural impediments to growth has to be adopted, with lesser focus on foreign investors
and exporters.
Applied Economics Used to Solve Economic Problems
Definition of Nationalism
Nationalism is the foundation of one’s citizenship, can be traced down to the sense of patriotism,
belonging and loyalty. It could manifest one’s action, beliefs and values that form a collective behavior.
These characteristics could build a foundation and identification of a certain citizenry. Patronizing our
own products is one of the real essences of being a nationalist.
From free trade, anti-industrialization, to growing debts
- As an agricultural state less dependent on industry, the Philippines exports raw materials, foreign
countries. In exchange, from these materials to foreign countries which are heavily industrialized,
manufacture goods and trade them back to the Philippines with no tariff (free trade). Given this
scenario, the Philippines should limit the import of foreign products in order to protect its national
economy or better yet, should produce/manufacture its own products and industrialize.
Tracing history
- We need to trace the background history of the Philippines to find where we start to have a big problem
here at present time to find the best solution and not just alternative but solution wherein all Filipinos
will feel. In 1945to 1946, when the country was going to become independent from the U.S. and needed
aid to rebuild our country from the devastation of the World War II, America’s officials made war
damage payments conditional. This implied that the Philippine Republic first had to agree that we would
continue the colonial terms of free trade. In order to receive their assistance, our industries were slowly
put down and slowly until we became mere packagers for the U.S principals.
Following Others’ Footsteps
- The Philippines is rich in natural resources as much as agricultural lands. Then again, it is not yet the
end for Filipinos to embrace the world of industrialization. Take for instance Japan followed the
mercantilism philosophy wherein it protected the local market from the abusive foreign investors and
made a rule to import little and at the same time export as much as possible. If the Philippines would
only follow the footsteps of Japan like what Taiwan and South Korea did when they adhered to the
mercantilism principle, we would not be facing much economic instability in the present.
Fiscal Policy Lags
Fiscal policy lags are the result of delays in recognizing problems with the economy and applying
solutions. Governments employ fiscal policy to lower unemployment, limit inflation, reduce the impact
of business cycles, and facilitate economic growth. Expansionary fiscal policy stimulates the economy
by lowering taxes, increasing government spending, and providing more transfer payments to
businesses in order to combat unemployment and increase aggregate demand. Contractionary fiscal
policy involves a government decreasing its spending and raising taxes in order to prevent inflation by
slowing economic growth.
There are time delays between the development of an economic issue requiring expansionary or
contractionary fiscal policy and government’s recognition and institution of a solution to the problem.
These delays are known as fiscal policy lags.

Let’s Apply
I. Modified True or False. Write True if the statement is true and False if the statement is false.

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1. We run into scarcity because while resources are limited, we are a society with unlimited wants.
2. Without scarcity, the science of economics would not exist.
3. The decisions and trade-offs society makes due to scarcity is what economists’ study.
4. A good is considered scarce if it has a non-zero cost to consume.
5. Scarcity does not create a need for decisions and trade-offs to be made.
II. Multiple Choice. Choose the letter of the best answer. Write A for What to produce, write B for
How to produce, and write C For whom to produce.
1. These types of decisions are generally made by companies which attempt to create their products at
a lowest cost.
2. Consumers and producers decisions act together to find out what the society’s scarce resources will
be utilized for.
3. Focused on who receives what share of the products and services which the economy produces.
4. All societies need to make a decision regarding the perfect combination of factors to produce the
desired output of services or products.
5. Each and every manufacturer has to offer what buyers want so that they can compete effectively
against other manufacturers.

Let’s Analyze
Identification. Please provide the word/term being asked or defined. Write it on
the space provided.

1. __________________
The study of the production and transfer of wealth is a science in and of itself.
2. __________________
Shared game theory, in which the many variables of a particular situation may be modeled.
3. __________________
The rise of tax incentives and grants for green chemistry research and development has fundamentally
changed the way in which economics is carried out at both the state and federal levels.
4. __________________
Have developed such close ties that a whole new subfield has formed termed econophysics.
5. __________________
Focus on questions of sustainability, but its primary concern is that of fair and efficient allocation of
resources, for both humans and the environments they inhabit.

Let’s Try
Multiple Choice. Choose the letter of the best answer.

1. The "understanding" of economic forces and events provided by the study of

economics is based on theorems and principles, many of which have proven sustainable even as
economists have been forced to develop new understandings of economic events.
A. Scarcity of Resources C. Institutions
B. Rational Choice D. Resemblance to Natural Science
2. The study of economics is based on the premise that all resources are limited not only in available
quantity but also in practical utility.
A. Scarcity of Resources C. Institutions
B. Rational Choice D. Resemblance to Natural Science
3. While _________ presumes that all actors have full information when making a decision, the reality
is that full information is available to all actors only in special circumstances.

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 A. Scarcity of Resources C. Institutions
B. Rational Choice D. Resemblance to Natural Science
4. These institutions influence the human ability or willingness to conduct business for the purpose of
obtaining wealth.
A. Scarcity of Resources C. Institutions
B. Rational Choice D. Resemblance to Natural Science
5. The country heavily relies on these funds.
A. Unemployment C. Poor Infrastructure
B. Poverty D. Heavy Dependence on Remittances
6. Very much linked to unemployment.
A. Unemployment C. Poor Infrastructure
B. Poverty D. Heavy Dependence on Remittances
7. Defined as a situation where someone of working age is not able to get a job but would like to be
in full-time employment.
A. Unemployment C. Poor Infrastructure
B. Poverty D. Heavy Dependence on Remittances
8. The basic physical systems of a business or nation; transportation, communication, sewage, water
and electric systems are all examples of infrastructure.
A. Unemployment C. Poor Infrastructure
B. Poverty D. Heavy Dependence on Remittances
9. The foundation of one’s citizenship, can be traced down to the sense of patriotism, belonging and
loyalty, and could manifest one’s action, beliefs and values that form a collective behavior.
A. Nationalism Defined
B. From Free Trade, Anti-Industrialization, to Growing Debts
C. Following Others’ Footsteps
D. Fiscal Policy Lags
10. The Philippines should limit the import of foreign products in order to protect its national economy
or better yet, should produce/manufacture its own products and industrialize.
A. Nationalism Defined
B. From Free Trade, Anti-Industrialization, to Growing Debts
C. Following Others’ Footsteps
D. Fiscal Policy Lags