BMSH2007

Introduction to Applied Economics

I. Economics Defined

The word economics came from oikanomia or oikonomus, a Greek word meaning household management
(Leaño Jr., 2016) or management of the household (Viray Jr. & Avila-Bato, 2018).

The definitions of economics are as follows:

1. It is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants
or the study that attempts to explain how an economy operates and how the consumer attempts to
maximize his/her wants within limited needs (Leaño Jr., 2016).
2. It studies how people use scarce resources to satisfy their unlimited wants (McEachern & Burrow,
2017).
3. It is the efficient allocation of scarce means of production toward satisfying human needs and wants
and the science that deals with managing scarce resources (Viray Jr. & Avila-Bato, 2018).

THE THREE (3) E'S OF ECONOMICS (Viray Jr. & Avila-Bato, 2018)

1. Efficiency. It is the productivity and proper allocation of economic resources and the relationship
between scarce factor input and output of goods and services.
Example: These funds can be used to buy the necessary goods and equipment that will aid the
government officials in helping the affected families – i.e., boats, life-vest, relief goods, clothing, etc.
2. Effectiveness. It is the attainment of goals and objectives.
Example: The government needs to properly allocate the capital (monetary resources and capital
goods), manpower, and available locations so they can bring the affected families to safety.
3. Equity. It refers to justice and fairness.
Example: Everyone must be given sufficient help for the time being.

II. Economics as a Social Science

Social Science is the study or discipline that aims to explain human behavior. Economics, like social
science, uses the scientific method in formulating models based on theories to help address arising issues
because of human interactions. Such models and theories aim to explain the behavior of people, groups,
and organizations. (Viray, Jr. and Avila-Bato, 2018)

Economics is a social science because it studies human behavior and how people make decisions to satisfy
their unlimited wants by allocating limited resources (Dinio & Villasis, 2017).

TWO (2) BRANCHES OF ECONOMICS

1. Macroeconomics
• It is the study of the economic behavior of the economy as a whole, especially the national
economy. It focuses on the aggregate flow of goods and resources. It examines the causes of
change in the overall flow of money, the overall movement of goods and services, and the general
use of resources. (Dinio & Villasis, 2017)
• It is known as the analysis of employment and income.

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• Topics discussed in macroeconomics: Gross national product, employment level, national income,
gross domestic product, general price level, and economic growth and development.
2. Microeconomics
• It is the study of economic behavior in particular markets, such as the market for computers or
unskilled labor. It focuses on the economic behavior of people and businesses, deciding what to
buy and sell, how much to work and play, and how much to borrow and save. It also studies factors
influencing individual economic choices and how markets coordinate decision-makers' choices.
(McEachern & Burrow, 2017)
• It focuses on the behavior of individual entities – the consumer, the producer, and the resource
owner. It is also more focused on how products move from the business to the customer and how
resources flow from the resource owner to the business. It is known as the Price Theory –
concerned with the process of setting prices of goods. (Dinio & Villasis, 2017)
• Topics discussed in microeconomics: Principles and elasticity of demand and supply, individual
decision-making, and firm's costs and outputs.

BASIC DECISION PROBLEMS (Viray Jr. & Avila-Bato, 2018)

1. Consumption. It is a problem that people have to deal with in their day-to-day activities. Having their
individual wants, people decide the types of products and services they want to use or consume and
the corresponding amount that they should use and buy. Their choices, for instance, are food,
clothing, technological gadgets, and whether supplied by the government (such as health and
education) or privately produced goods.
2. Production. Producers are generally concerned about the production of goods and services. They
determine the consumers' needs, wants, and demands and also decide how to distribute their
resources to meet customer demands.
3. Distribution. The government primarily addresses it. There must be an appropriate allocation of all
resources benefiting all members of society.
4. Growth over Time. As societies grow in number, they continue to live on. The problems of choice,
consumption, production, and distribution must be perceived in the context of how they will affect
future events.

TOOLS OF ECONOMICS (Leaño Jr., 2016)

Economists utilize various tools and scientific methods to formulate theories and principles. Here are
some of the major tools:
1. Logic is a science that deals with sound thinking and reasoning. Facts and evidence should be
provided; otherwise, uncertainty will cloud the logic. One could come up with a conclusion with a wise
application of logic.
2. Mathematics is a science that deals with numbers and operations. It helps economists answer
concrete problems involving numbers. To arrive at a conclusion, mathematical equations and
operations are used. Among the social sciences, the most quantifiable discipline is economics.
3. Statistics is a branch of mathematics that engages with the analysis and interpretation of numerical
data. The method of gathering, tabulating, and analyzing data leads to the validity of specific
hypotheses. Someone may be able to accept or dismiss (reject) an assumption made on a particular
phenomenon.

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ECONOMIC/PRODUCTION RESOURCES

Economic/production resources are the resources or inputs used to produce the goods and services that
people want.

1. Land is categorized as fixed resources – finite, exhaustible, and depletable. It is all that nature freely
provides. Rent serves as payment to landowners.
2. Labor is the exerted effort of individuals when producing goods and services. It covers a wide variety
of abilities, characteristics, and skills. In a nation, the labor supply depends on its population's growth
and the percentage of the population willing to join the labor force. Salary or wage is given to an
individual in exchange for the rendered labor. According to Leaño, Jr. (2016), labor is also known as
human resources. It reflects the human capital to turn raw or national resources into consumer
products. Human capital comprises all able-bodied people capable of working in the nation's
economy and offering other individuals or businesses different services.
3. Capital is the man-made goods (resources) used when producing other goods and services. It is a form
of an asset used mainly as a medium of exchange. Interest is the income that the owner of the capital
is earning. Capital signifies the monetary resources businesses use to buy natural resources, land, and
other capital goods. Monetary resources move a nation's economy as people purchase and sell
resources to people and businesses. Capital also signifies the most important physical assets used in
producing products and services by individuals and businesses. The capital stock of a nation depends
on its savings level. Savings is part of the person or economy's income, not spent on consumption.
4. Entrepreneurship is an economic activity that might earn the entrepreneur a profit or incur a loss. An
entrepreneur is an individual that organizes, manages, and assumes business risks, develops a new
product or idea, and turns it into a successful business. Having skills in management is necessary to
develop, run, and expand the business.
5. Foreign Exchange is the dollar and the dollar reserves that the economy has. We use foreign currency,
mainly dollars, for international trade and the procurement of raw materials from other nations.

OPPORTUNITY COST

Scarcity is a condition facing all societies because insufficient productive resources satisfy people's
unlimited wants (McEachern & Burrow, 2017). It is a condition where there are insufficient resources to
satisfy a population's needs and wants. As such, it becomes a resource allocation dilemma.

Since scarcity is evident, people need to decide how to maximize the use of limited resources to satisfy
their unlimited wants. Opportunity cost is the value of the best-foregone alternative or what is given up
when one chooses (Viray Jr. & Avila-Bato, 2018).

Opportunity cost is perceived in the relative price – one item's price should be relative to another item's
price. For example, the price of one (1) 250ml alcohol is priced at P50, and one (1) 55g instant noodle is
priced at P10; therefore, the relative price of one (1) 250ml alcohol bottle is equal to five (5) 55g instant
noodles pouches.

NO FREE LUNCH

In economics, the phrase There is no such thing as a free lunch (TINSTAAFL) explains the notion of
opportunity costs. Decision-making involves trade-offs and suggests that there are no real free offers in

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society. For instance, the person giving the gift pays for goods and services presented as a gift (free) to
individuals. Even if there is no one to shoulder the direct costs, society, as in the case of adverse
environmental impacts such as pollution, assumes the responsibility. (Twin, 2020)

POSITIVE AND NORMATIVE ECONOMICS (Viray Jr. & Avila-Bato, 2018)

Positive Economics is an economic analysis that considers economic conditions 'as they are' or considers
economics 'as it is'. Objective and scientific explanations are used in the study of different transactions in
the economy.
✓ Example of positive statements:
o The country's unemployment rate stayed at 5.3 percent in January 2020, and underemployment
hit its lowest level at 14.8 percent in a decade. (Philippines Economic Update June 2020 Edition:
Braving the New Normal, 2020)
o The economy is now experiencing a slowdown because of too much politicking and corruption in
the government.

Normative Economics is an economic analysis that judges economic conditions 'as these should be'. It also
focuses on policymaking to achieve the ideal situation (Dinio & Villasis, 2017).
✓ Examples of normative statements:
o The Philippine government should initiate political reforms to regain investor confidence and
boost the economy.
o To minimize the effect of the global recession, the Philippine government should release a
stimulus package geared toward encouraging economic productivity.

CETERIS PARIBUS ASSUMPTION (Viray Jr. & Avila-Bato, 2018)

Ceteris Paribus, a Greek term meaning all other things held constant or all else equal, is an assumption
used in analyzing the relationship between two variables as the other factors are unchanged.

Economic analysis does not consider all factors affecting economic situations (phenomena). In simplifying
complex economic phenomena, economists devised a way – the ceteris paribus assumption.

III. Economics as an Applied Science

Applied Science deals with applying scientific knowledge to problems to develop practical solutions.
Applied Economics is the study of economics relative to real-life situations by observing how theories
work in practice. It typically deals with numbers that are focused and backed by potential results being
reviewed (Viray Jr. & Avila-Bato, 2018).

Applied Economics is the application of economic theory and econometrics in specific settings to analyze
potential outcomes.
• Economic Theory (Economic Model) simplifies economic reality used to make predictions about the
real world (McEachern & Burrow, 2017).
• Econometrics is the application of statistical and mathematical theories to economics for testing
hypotheses and future forecasting trends (Leaño Jr., 2016).

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APPLIED ECONOMICS APPLICATION (Leaño Jr., 2016)

1. It is a powerful tool that allows the real and full picture to unfold so that from the current position, it
becomes possible to determine what to do and where to go.
2. It serves as a mechanism to decide what steps to enhance the current economic situation could
logically be pursued.
3. It can also teach useful lessons about preventing a negative situation from repeating, or at least
mitigating the impact.

ECONOMIC SYSTEMS

Economic System is the set of mechanisms and institutions that resolve questions of what, how, and for
whom. It is how society responds to basic economic questions.

The standards used in differentiating between economic systems:

a. The owner/s of the resources
b. The process used in decision-making in the allocation of goods and resources
c. The types of incentives directing the economic decision-makers

The economic systems are as follows:

1. Pure Market Economy is an economic system in which private firms account for all production.
• Market Economy describes an economic system where markets play a relatively significant role.
It Is also known as the free market economy. It is the most democratic form of an economic
system.
2. Pure Command Economy is an economic system in which all resources are government-owned, and
the central plans of the government direct all production.
• Command Economy is the authoritative system wherein decision-making is centralized in the
government or a planning committee.
• Planned Economy is primarily government-controlled, with the government deciding what is
produced, its quantity, and its price.
3. Mixed Economy is an economic system that mixes central planning with competitive markets. It is a
mix of a rather free economy, such as a market combined with a planned economy, and avoiding the
issues with capitalism and socialist economies (Leaño Jr., 2016).
4. Transitional Economy is an economic system in the process of shifting from central planning to
competitive markets.
5. Traditional Economy is an economic system shaped largely by custom or religion. Decisions are based
on traditions and practices that have been preserved and transferred from generation to generation
over the years (Dinio & Villasis, 2017).

BASIC ECONOMIC PROBLEMS

Scarcity – limited productive resources cause economic problems; thus, people cannot have all the
products and services they want; they have to pick certain things and give up things (McEachern and
Burrow, 2017). Individuals must answer the following basic economic questions to solve the issue of
scarcity and to act as a guide in decision-making (Viray Jr. & Avila-Bato, 2018).

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1. What to produce and How Much

• Factors to consider when producing products and services that people need: (1) availability of
resources, (2) the physical environment, and (3) people's customs and traditions.
• Society decides the quantity and quality of products and services that should be produced in the
economy.
• These must be answered to avoid issues of overproduction and underproduction.
2. How to Produce
• Before quantity, the quality of the production must come first.
• It corresponds to the combination of resources and technology used in production. (Dinio &
Villasis, 2017)
3. For Whom to Produce
• This question identifies the individuals or sectors which demand the produced goods. Also, to
determine their consumption behaviors and patterns, economists should identify the target
market of the goods and services. (Viray Jr. & Avila-Bato, 2018)
4. Are the country's resources being utilized, or are some lying idle and unemployed?
• The production system is considered inefficient if resources are not completely utilized.
5. Is the capacity of the economy to produce goods growing or just remaining the same over time?
• It is a universal goal to attain growth in a productive capacity. It allows for an improvement in
living standards if the population growth rate is not satisfactory.

APPLIED ECONOMICS IN RELATION TO THE ECONOMIC PROBLEMS OF THE PHILIPPINES

A clear understanding of economic principles and how they are applied in real-life circumstances can serve
as useful tools to help tackle the country's economic problems. To solve scarcity, understanding the nature
of scarcity will help us evaluate how to optimize the use of limited resources. To analyze why prices are
high and what the government can do to help lower prices, an understanding of economic theories, such
as the Law of Supply and Demand, is helpful. (Dinio & Villasis, 2017)

Here are some of the country's economic problems:

1. Poverty Level. Based on the middle-income poverty line of $3.20/day in 2020, poverty is expected
to rise to 21.5 percent. In 2019, this equaled 1.2 million more Filipinos falling from the estimated
poor to poverty. Based on simulated projections from the Family Income and Expenditure Survey,
the poverty rate may have risen by at least 3.3 percentage points if there were no preventive
initiatives in place. It implies that the interruption of jobs due to Enhanced Community Quarantine
(ECQ) in 2020 leads to a 16.7 percent reduction in household incomes from seasonal wages and
business operations, which is equal to a loss of income of two (2) months. (Philippines Economic
Update June 2020 Edition: Braving the New Normal, 2020)
2. Employment, Unemployment, and Underemployment. The implemented ECQ, which started in
mid-March of 2020, has cut off sources of income from seasonal wages and business operations.
Annual revenue losses of at least 16.7 percent are likely to be seen by employees depending on
these sources of revenue. The country's unemployment rate stayed at 5.3 percent in January
2020, and underemployment hit its lowest level at 14.8 percent in a decade.

In March, the enforced ECQ in Luzon caused economic activity to be disrupted, affecting the 7.4
million daily wage earners in particular. These workers are concentrated in the construction and
manufacturing sectors, which, as early as January 2020, were already shedding labor. Although

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the crisis affects all economic sectors, the tourism and hospitality, aviation, automotive, and
consumer goods sectors are likely to be particularly struck by the pandemic. (Philippines Economic
Update June 2020 Edition: Braving the New Normal, 2020)
3. Population Growth. There has been a steady increase in the population from 2015 to 2019. The
following population data for 2015 to 2019 in the Philippines: (FocusEconomics | Economic
Forecasts from the World's Leading Economists, n.d.)
• 2015: 102 million • 2018: 107 million
• 2016: 103 million • 2019: 108 million
• 2017: 105 million

Economics can be perceived and applied every day. For instance, people prefer to choose what will give
them the highest satisfaction (or utility, in economics) for the prices they are willing to pay when
purchasing products and services. (Viray Jr. & Avila-Bato, 2018)

How do we use economics as applied science to deal with some of a country's economic issues or
problems?

Given the extensive viewpoints on applying economic theories to the real world, there are several ways
to address such a question. For example, when it comes to decision-making that will assist policymakers
in stepping in the precise path, sound data analyses and economic problem assessment must first be
carried out. Economists are more confident in their evaluations of the economic effects of policy decisions
when they can analyze specific data and apply economic theories. These assessments turn out to be a
form of applied activities or answers to a circumstance, creating solutions for the problems.

References:

Dinio, R. P., & Villasis, G. A. (2017). Applied Economics. Manila, Philippines: Rex Book Store, Inc.
FocusEconomics | Economic Forecasts from the World's Leading Economists. (n.d.). Retrieved from
FocusEconomics | Economic Forecasts from the World's Leading Economists:
https://www.focus-economics.com/country-indicator/philippines/population
Leaño Jr., R. D. (2016). Applied Economics For Senior High School. Intramuros, Manila: Mindshapers Co.,
Inc.
McEachern, W. A., & Burrow, J. L. (2017). Applied Economics: An Introduction (Philippine Edition).
Quezon City, Philippines: Abiva Publishing House, Inc.
(2020). Philippines Economic Update June 2020 Edition: Braving the New Normal. Washington D.C.:
International Bank for Reconstruction and Development / The World Bank. Retrieved from
https://www.worldbank.org/en/country/philippines/publication/philippine-economic-updates
Twin, A. (2020, August 25). Investopedia. Retrieved from Investopedia:
www.investopedia.com/terms/t/tanstaafl.asp
Viray Jr., E. B., & Avila-Bato, M. J. (2018). Applied Economics. Mandaluyong City, Philippines: Anvil
Publishing, Inc.

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