How Does Applied Economics Work?

Applied economics, as the name suggests, deals with the application of theoretical
aspects of the subject. This area of study does not rely on any one principle of
economics

. Instead, it takes into consideration all the principles of the subject. It applies them in
respective sectors to understand the effect of chosen alternatives on the decisions that
individuals, policy-makers, and businessmen make.

Some of the concepts and principles that make the applied version of economics
effective include econometrics

, marginal principle, opportunity cost

, the principle of voluntary returns, the law of diminishing marginal utility.

, and the real/nominal principle.

The studies of applied economics have shown how effective the implementation of the
theoretical principles has been in dealing with a particular cause, issue, or situation. It
also indicates how it uses economics as more than just a hub of theories. Instead, the
application of the subject is used as a tool to extend the scope of economics from
books to real-world scenarios.

As economics is studied as microeconomics

and macroeconomics

, the applied version of the subject is also implemented at two levels: micro and macro.
While the application at the micro-level tries to use theoretical economics to solve
issues at the individual level, the macro-level application helps deal with problems at a
city, state, or national level.
Relevance

Applied economics marks the utilization of the knowledge and skills acquired by
professionals during their theoretical economics lessons. The leaders, policy-makers,
and decision-makers use it in any context to figure out how their choices would impact
their decisions. However, they can approve or disapprove a strategy, initiative, or step
after proper analysis and validation.

The field of study makes individuals apply theories and knowledge to solve their
problems. It, therefore, finds relevance in different theories, concepts, and industries,
including the game theory.

With applied economics, finding answers to questions related to the environmental

sector, human behavior, market situations, legal aspects, etc., becomes easier. From
helping environmentalists determine the cost of carbon emissions to framing legal
market strategies with respect to economics, this applied form of the subject lets
individuals and entities find answers to the queries they have. For example, the applied
field of economics helps utilize analytical tools to assess consumer behavior and
accordingly target a market.

Recently, COVID-19 led to the heavy use of resources, which the healthcare sector was
unprepared for. The application of economics helped healthcare administration or
authorities to conduct predictive analysis, initiate resource allocation, and boost policies
to support the sector to tackle the health care turmoil. It shows how applied economics
and management remain interrelated no matter which industry professionals work in.

Applied Economics Example

Let us consider an applied economics example to understand the concept better:

Customers usually look forward to buying things with big discounts or those sold for
free. So, the marketers use this behavior to inflate their products’ prices and denote the
actual price.

For example, brand A sells a T-shirt for $30, whose actual worth is $20. However, it
introduces a year-end sale during Christmas and announces a $10 discount on the
same T-shirt. As a result, even after giving discounts, the brand sells the T-shirt at its
actual rate, while consumers are happy to get it at a big discount.

The instance above shows how to utilize the pricing strategy based on the applied form
of economics to determine consumer behavior in the market.