Applied Economics

Economics and the Real-world Challenges

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Vahnizza kayel errika r. aguas, lpt

Prepared by:
Vahnizza Kayel Errika R. Aguas, LPT
 Choose a photo from
the screen and describe
why it is significant to
you.
 People cannot have everything
they want. Consumers are limited
by their income while producers
are limited by the factors of
production. Prepared by:
Vahnizza kayel errika r. aguas, lpt
Is Economics a
Social Science?
Yes!
Economics is considered a Social Science- is the
social science because it branch of science devoted
tries to understand how
Prepared by: to the study of societies
people behave and interact
Vahnizza kayel errika r. aguas, lpt
and their relationships
with a society. among individuals within
those societies.
Economics as an Applied Science

APPLIED ECONOMICS
- It is the application of economic theories and
models in real life.
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Vahnizza kayel errika r. aguas, lpt
Ẁhat is Economics?
- It is the study of how individuals and societies
choose to use scarce resources that have
alternative uses to produce goods and services
that satisfy unlimited human needs and wants.
It’s all about CHOICES.
Scarcity- is the insufficiency of economic
resources and as a result, we have to decide
and choose.
Needs- necessary for survival.
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Vahnizza kayel errika r. aguas, lpt

Wants- something a person desires to have.

 Human Needs and Wants
POINTS OF COMPARISON AND NEEDS WANTS
CONTRAST
Definition Refers to an individual’s basic Refers to goods and services
requirement that must be that individual like to have
fulfilled in order to survive

Nature Limited Unlimited

Something you must have Something you wish to have
Essential for survival Inessential for survival
Represents Necessity Desire

Changes over time May remain constant over time May change over time
Since there is scarcity, we have to choose….
Trade-off- is the exchange or choosing between
alternatives. It is a reality of life that getting one thing
would mean giving up another thing.

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House renovation Buying a car

Since there is scarcity, we have to choose….

Opportunity Cost- is the value or cost of the next best forgone

choice/alternative.
In other words, it represents the benefits that could have been gained
by taking a different decision.

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Vahnizza kayel errika r. aguas, lpt

Working mother Full-time mother

For instance, given a weekly allowance of Php 500, how
will you spend it? How much will you spend on the
food and how much for the transportation?
How about entertainment?
Food- Php 250
Transpo- Php 250 You decided to just walk
home and save your
transportation budget Transpo Food
for a movie ticket.
P250 P250
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Opportunity Cost: The benefit of getting home

Vahnizza kayel errika r. aguas, lpt

faster by taking a jeep/taxi is the opportunity

cost of seeing a movie.
Opportunity cost is also used to explain the Principle of Comparative Advantage

Consider two nations, country ABC and country Country Y-Axis X-Axis
XYZ, that produce only two goods (Wine and Wine (Barrel) Coffee (Bag)
Coffee). Note that in making a graphical Country ABC 9 barrels 3 bags
representation of two goods, you may plot either
good in whichever axis. In this case, wine may be Country XYZ 8 barrels 2 bags
your y-axis while coffee is your x-axis.
Country ABC Country XYZ

Y-AXIS (WINE)
Y-AXIS (WINE)

X-AXIS (COFFEE) X-AXIS (COFFEE)

Since country ABC has a greater production of both goods, it can be said that country ABC has absolute
advantage over country XYZ.

ABSOLUTE ADVANTAGE- capacity to produce more output compared to another entity.

COMPARATIVE ADVANTAGE- having lower opportunity cost.
Calculation of opportunity cost for each country if the countries have to specialize in the production of only one good.

1. What is the opportunity cost for each country in producing only WINE?
SPECIALIZATION:
Wine ABC= = or 0.333 bag of coffee
Given the comparative advantages,
Comparative Advantage
Wine XYZ = = or 0.25 bag of coffee country ABC should specialize in the
production of coffee while country XYZ
should specialize in the production of
2. What is the opportunity cost for each country in producing only COFFEE? wine.
Coffee ABC= = 3 barrels of wine Country ABC -------- production of coffee
Comparative Advantage Country XYZ --------- production of wine
Coffee XYZ= = 4 barrels of wine
ACTIVITY#1 / QUIZ
Analyze the output schedule provided below. Plot the corresponding graphs of the outputs of
` countries. Calculate the opportunity costs. Then find out which product each country
the two
should specialize in. Write your answers on the space provided.
Output Schedule before Specialization A. Graphs B. Opportunity Costs
Country Dried Mango Chocolate
(kg) (kg)
Philippines 200 150
Indonesia 120 130

C. Specialization
 Country Y- AXIS X- AXIS
Dried Mango Chocolate
(kg) (kg)
Philippines 200 150
Indonesia 120 130
A. GRAPH
Philippines Indonesia

y- axis (Dried Mango)

y- axis (Dried Mango)

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x- axis (Chocolate) x- axis (Chocolate)

 Country Y- AXIS X- AXIS
Dried Mango Chocolate
(kg) (kg)
Philippines 200 150
B. OPPORTUNITY COST Indonesia 120 130

1. What is the opportunity cost for each country in producing only Dried Mangoes?
Dried Mangoes Philippines = 150/200= ¾ or 0.75 kgs of chocolate
Dried Mangoes Indonesia = 130/120= 13/12 or 1.08 kgs of chocolate

2. What is the opportunity cost for each country in producing only Chocolates?
Chocolates Philippines = 200/150= 4/3 or 1.33 kgs dried mango
Chocolates Indonesia = 120/130= 12/13 or 0.92 kgs of dried mango
 Previous illustration

B. SPECIALIZATION
Based on the previous illustration, comparative
advantage means having a lower opportunity
cost. Given the comparative advantages,
PHILIPPINES should specialize in the
production of Dried Mango.
1. What is the opportunity cost for each country in producing only
Dried Mangoes?
Dried Mangoes Philippines = 150/200= ¾ or 0.75 kgs of
chocolate
Dried Mangoes Indonesia = 130/120= 13/12 or 1.08 kgs of
chocolate
2. What is the opportunity cost for each country in producing only
Chocolates?
Chocolates Philippines = 200/150= 4/3 or 1.33 kgs dried
mango
Chocolates Indonesia = 120/130= 12/13 or 0.92 kgs of dried
mango

Indonesia should specialize in the

production of Chocolate.
 Major Divisions of Economics
MICROECONOMICS MACROECONOMICS
Microeconomics is concerned with Macroeconomics is concerned with
the behavior of individual entities the overall performance of the entire
such as the consumer, the economy.
producer, and the resource owner.
Macroeconomics is about the
Microeconomics studies the nature of economic growth, the
decisions and choices of the expansion of productive capacity,
individual units and how these and the growth of national income.
decisions affect the prices of goods
in the market.
 Microeconomics vs. Macroeconomics
MICROECONOMICS
• Studies individual income
• Analyzes demand and supply
of labor
• Deals with households and
firms
• Studies individual prices
• Analyzes demand and supply
of goods
MACROECONOMICS
• Studies national income
• Analyzes total employment in
the economy
• Deals with aggregate decisions
• Studies overall price level
• Analyzes aggregate demand
and aggregate supply
What is an
economy?
 What is an economy?
- ORGANIZATION OF RESOURCES in terms of the
production, distribution, and consumption of goods and
services.
- SYSTEM OF FUNCTIONAL AND MATERIAL
RELATIONSHIPS involved in the transformation of raw
materials into goods and services for production,
distribution, and consumption.
Foundations of an economy
INDIVIDUAL
RESOURCES TECHNOLOGY PREFERENCES INSTITUTIONS
 DO WE NEED
WHY TO UNDERSTAND
THE ECONOMY?
1 WE are all part of the economy.
Everything that happens within the
2 economy affects our daily lives.
.These happenings affect OUR decision-
3
making process and decisions.
Changes in the economy affect OUR key
4 concerns.
WHAT are the basic economic
questions/ problems?

HOW does society solve

them?
 Three (3) Basic Economics Questions
1. What goods to produce and services to
provide?
- Involves choice and allocation of scarce resources.
2. How to produce and how much to produce these
goods and services?
- Involves combining resources or inputs to produce
the desired quantity of goods and services
3. For whom to produce these goods and services?
- Involves the distribution of output
 Goods vs Services
POINTS OF COMPARISON GOODS SERVICES

Definition Material items that can be Amenities, facilities, benefits,

seen, touched or felt and are or help provided by other
ready for sale to customers people
Nature Tangible Intangible
Can be owned and ownership Cannot be owned and
can be transferred; Can be transferred; Cannot be
separated from the seller separated from the service
provider
Return Can be returned Cannot be returned once
services are provided
Storage and Variability Can be stored; Identical Cannot be stored; Diversified
Production and Consumption Time lag between production Production and consumption
and consumption occur simultaneously
How does society solve the three basic economic problems?

Every society has some system or process that allocates and transforms its
scarce resources into useful goods and services.
The primary resources of the system or process are land, labor, and capital
(FACTORS OF PRODUCTION).
Factors of Production
There are four main factors of production used to create an output in the economy,
namely, land, capital, labor and entrepreneurship. They pertain to the term resources and
are occasionally referred to as inputs of production.
The return on the use of these inputs of production is called factor income.
1.LAND-
-This represents land and similar natural resources available such as farms and
agricultural land. Land is typically cultivated or improved for use of production.
- The factor income on the use of land is rent.
2. LABOR
- Labor represents human capital such as workers and employees that transform raw
material and regulate equipment to produce goods and services.
- The factor return on labor is wage.
3. CAPITAL
- Capital represents physical asset such as production facilities,
warehouses, equipment, and technology used in the production of goods
and services. The term may also refer to investment capital used in
production.
- The factor income for capital is interest.

4. ENTREPRENEURSHIP
-This is sometimes referred to as enterprise. It represents the factor that
decides how much of and in what way the other factors are used to be used
in production.
- The return on entrepreneurship is profit.
RETURNS OF FACTORS OF PRODUCTION

❑RENT for land

❑WAGE for labor
❑INTEREST for capital
❑PROFIT for entrepreneurship
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
QUALITATIVE APPROACH- to economic data analysis
focuses on directional relationship of different economic
variables. This is often used with descriptive analysis.

QUANTITATIVE APPROACH-involves mathematical and

statistical analysis of economic data. It complements
qualitative analysis by providing the figures that support
the descriptive findings.
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Econometrics- the mathematical and statistical analysis of
economic data.

Other quantitative and qualitative tools used in the study of economics are:
• Variables-
• Equation
• Functions
• Graphs
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Econometrics- the mathematical and statistical analysis of
economic data.

Other quantitative and qualitative tools used in the study of economics are:
• Variables-
• Equation
• Functions
• Graphs
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Variable- a variable is an element that can change, in contrast to
a fixed one. In economics, variable are used to signify elements
in an economic model. These are the commonly the elements in
the x- and y-axis of a graph.
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Function - (f) explain the relationship between two or more
economic variables. Functions illustrate which of the variables are
dependent and which ones are independent. Take, for example,
the expression below where D stands for demand and P stands
for price.

D= f (P)
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Equation- is a mathematical expression of an economic thought
or concept.
Consider the expression below, which pertain to the national
income formula where:

Y- stands for national income

C- consumption
I- Investments Y= C + I + G + (X-M)
G- Government expenditures
X- exports
M- imports
 Methods Used in Economic Analysis
Qualitative versus Quantitative Analysis
Graph- provides visual representation of the relationship
between two or more economic variables.
Reflect Upon
Through your understanding of
illustration 1.1, explain the following:
“Consumption drives the economy.”
Activity 2: Essay Writing

Illustration 1.1
 Production Possibility Frontier
- A graph that shows all the combinations of goods and
services that can be produced if all of society’s
resources are used efficiently.
- It is the most basic graph that students of economics
need to understand because it shows several
important economic concepts.