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Applied Economics
Revisiting Economics as a Social Science
What is Economics?
 Economics is the study of the
allocation of scarce resources to
satisfy the commerce of men and
women. There are needs and wants;
economics allows allocation of
scarce human and non human
resources among their alternative
uses to satisfy them.
Adam Smith
 Adam Smith is the father of
economics, He was a well-travelled
man, tutoring royalty of his time
 He conceived a lot of rules, using the
French term laissez faire for free
enterprises and the word
entrepreneur for the skill necessary
to bring the factors of production
into a coherent whole.
What, How and For Whom?
 Good and services are the objects
that people value and produce to
satisfy wants.
 Goods are physical objects such as
cellphones.
 Services are actions performed such
as cutting hair and filling teeth."
 By far the largest part of what people
in the rich industrial countries
produce today are services such as
retail and wholesale services, health
services and education. Goods are a
small and decreasing part of what we
produce.
A. The What? (Allocation Problem)
 What we produced changes over
time. Every year, new technologies
allows us to build better equipped
homes, more powerful sporting
equipment and even deliver more
pleasant experience in the dentist's
chair And technological advance
make us incredibly more productive
at producing food and manufactures.
B. The How? (Production Problem)
 Goods and services get produced by
using productive resources that
economist call factors of production.
Factors of production are grouped
into four categories:
 Land
 Labor
 Capital
 Entrepreneurship
Four Factors of Production
Land
 The "gifts of nature" that we use to
produce goods and services are
called land. In economics, land is
what in everyday language we call
natural resources.
Labor
 The work time and work effort that
people devote to producing goods
and services is called labor.
Capital
 The tools, instruments, machines,
buildings, and other construction that
business now use to produce goods
and services are called capital.
Entrepreneurship
 The human resource that organizes
labor, land and capital is called
entrepreneurship.
C. For Whom? (Distribution Problem)
 Who gets the goods and services?
 The market segmentation decision,
ie, assigning of marketing fields
where products are to be sold.
 Who consumes the goods and
services that are produced depends
on the incomes that people earn
People earn their incomes by selling
the services of factors of production
they own.
a. Land earns rent
b. Labor earns wages.
c. Capital earns interest.
d Entrepreneurship earns profit.
2. Self-interest and Social Interest
 Self-interest: A choice is in your
self-interest if you think that choice
is the best one available to you.
 Choice Rule: People compare the
expected benefit and cost of
available opportunities before they
act and they take the action, which
they think will yield them the largest
net benefit.
 Social- interest: Self-interested
choices promote the social interest if
they lead to an outcome that is the
best for the society as whole - an
outcome that uses resources
efficiently and distributes the goods
and services fairly among individuals
OPPORTUNITY COST. CHOOSING THE
MARGIN AND CETERIS PARIBUS
Opportunity Cost

 "There is no such thing as a free
lunch" is not just a clever one liner.
It expresses the central idea of
economics: every choice involves a
cost.
 The opportunity cost of something is
the highest-valued alternative that we
give up to get it. Opportunity cost is
defined as the cost of the lost
alternative.
Choosing at the Margin
 You can allocate the next hour
between studying and chatting with
your friends in Facebook. But the
choice is not all or nothing. You
must decide how many minutes to
allocate to each activity. To make
this decision, you compare the
benefit of little bit more study time
with its cost you make your choice at
the margin.
 The benefit that arises from an
increase in an activity is called
marginal benefit.
 The cost of an increase in an activity
is called marginal cost.
 To make your decision, you compare
the marginal benefit from an extra
night of study with its marginal cost.
If the marginal benefit exceeds the
marginal cost, you study the extra
night. If the marginal cost exceeds
the marginal benefit, you do not
study the extra night.
 By evaluating marginal benefits and
marginal costs and choosing only
those actions that bring greater
benefit than cost, we use our scarce
resources in the way that makes us as
well off as possible.
Ceteris Paribus
 Ceteris paribus, literally "holding
other things constant," is a Latin
phrase that is commonly translated
into English as "all else being equal."
 A dominant assumption in
mainstream economic thinking, it
acts as a shorthand indication of the
effect of one economic variable on
another, provided all other variables
remain the same.
ECONOMICS AS A SOCIAL SCIENCE
Revisiting Economics as a Social Science
 There a three strands in the
development of the definition of
economics.
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 The first focuses on wealth.
(Economics is defined a science of
wealth-getting and wealth using.)
 The second stresses the decision
making process. (Economics is
defined as a science of making
choices)
 The third concentrates on the
allocation process. (Economics has
been defined as a social science that
deals with the allocation of scorce
resources to meet the unlimited
human wants)
Economics: as a study of Wealth
 The earlier definition of economics
as the science of wealth-getting and
wealth-using implies that the
motivation of the process of wealth
accumulation is the utilization of
wealth for the individual's
satisfaction and society's welfare.
Economics: as a study of Making Choices
 In everything we do, whether we
produce or consume, whether
wealth-getting or wealth-using, we
make decisions and these decisions
are based on alternative choices.
Economics: as a study of Allocation
 The definition of economics as a
social science that deals with the
study of allocation of scarce
resources to answer the unlimited
human wants.
Economics as a Social Science
 Economics is primarily a social
science.
 As a science it utilizes the scientific
method of inquiry from identifying
the problem, proposing alternative
answers, testing alternative answers
to the question or the problem,
gathering and treating the data, and
answering the question through the
conclusion.
 Social Science can be described as
the study of the various modes and
aspects of human interactions in a
group as these people aspire to
preserve their group as a social
science unit, to make it stable, and to
promote its growth, expansion, and
development.
 As a social science, economics
pertains to the study on how society
creates its material wealth, how it
makes this wealth available to its

people with minimum difficulties,
and how it expands its wealth.
 As a social science, economics is
related to the other social sciences
that study other dimensions of a
society.
Concerns Of Economics
 Economics is concerned with
PRODUCTION
 Production is the use of inputs to
produce outputs.
 Inputs are commodities or services
that are used to produce goods and
services.
 Outputs are the different goods and
services which come out of
production process.
 Society have to decide what outputs
will be produced and in what
quantity.
Economics is concerned with
DISTRIBUTION
 Distribution is the allocation of the
total product among members of
society. It is related to the problem of
for whom goods and services are to
be produced.
Economics is concerned with
CONSUMPTION
 Consumption is the use of a good or
service. Consumption is the ultimate
end of economic activity. WHEN
THERE IS NO CONSUMPTION,
THERE WILL BE NO NEED FOR
PRODUCTION AND
DISTRIBUTION.
Economics deals with PUBLIC FINANCE
 Public Finance is concerned with
government expenditures and
revenues. Economics studies how the
government raises money through
taxation and borrowing.
Economic as an Applied Science
WHAT AND HOW ECONOMICS
BECOME AN APPLIED SCIENCE?
What is an Applied Science
 Applied science is a discipline of
science that applies existing
scientific knowledge to develop
more practical applications, like
technology or inventions.
Economics as an Applied Science
 As social science, economics deals
with the analysis on how members of
a society interact with one another on
the creation and utilization of wealth.
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 However, the study of economics has
been perceived as too theoretical
since it deals with the principles,
laws and assumptions governing
human behavior in the allocation
process.
What is Applied Economics?
 Applied Economics is the application
of economic theory and
econometrics in specific settings.
 As one of the two sets of fields of
economics (the other set being the
core), it is typically characterized by
the application of the core,
 i.e. economic theory and
econometrics. The process often
involves a reduction in the level of
abstraction of this core theory.
Two Main Division of Economics
Microeconomic
 Microeconomics aims to give an
understanding and appreciation of
the basic theories and concepts in
economics and their application to
current national and international
economics concerns.
 The focus of the course is on the
economic activities of individual
decision-making units in the society
specifically households and firms.
Macroeconomics
 Macroeconomics - deals with the
bigger picture while the allocation of
resources on the aggregate level.
 Macroeconomics concentrates on the
behavior of entire economies of
nations, no matter how small.
Different Fields of Economics
1 International Economics
 discuss the concepts of globalization,
internationalization, and the
mechanics of the open economy
system.
2 Development Economics
 there are few economists who
believed that there is a need to focus
on poor nations and how they can
avoid the pitfalls of copying
verbatim the development program
of the industrialized countries.
3 History of Economics
 economists are prolific writers so
there is a need to codify their works
and relate the to earlier works.
4. Econometrics
 there is a believed that economics
should rely more on mathematical

equations, instead of just graphs and
logic so there is a branch called
econometrics that uses statistics and
calculus to explain economic
phenomena.
5. Behavioral economics
 that fuses knowledge from both
disciplines psychology and
economics.
6. Financial economics
 is the fusion of finance and
economics.
Positive and normative statement
Positive statement
 These are statements and predictions
that can be tested to see if the
theories from which they were
derived should be accepted or
rejected.
 Concern with "what is".
Normative statement
 Normative statements are based on
value of judgments on "what should
be."
 The normative statement lends itself
to debate.
Positive and Normative Statement
 Consequently, people may agree or
disagree with the statements. Let us
take for example petroleum..
Positive Statement:
 "An increase in the price of
petroleum leads to a reduction in the
sale of petroleum
Normative Statement:
 "The government should subsidize
the price of petroleum to help low-
income people as their safety net
provision."
Types of Economic System
 There are basically three types of
economies the planned, the market
and the mixed types of economies.
Among them, the more predominant
type is the market economy, but
there was a period when planned
economy was equally present
internationally.
1. Planned Economy
 The planned economy is prevalent in
the communist and socialist type of
government. The state provides the
strategic planning guid that will
dictate the product and services of
that would be available to the
communities.
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 Nowadays, North Korea and Cuba
are the only remnants of the planned
economy. Another term for the
planned economy is command
economy.
2. The Market Economy
 The other type of economy is market
economy. Here, the consumers
exercise virtual autonomy on what
they will buy, at what quantities will
they buy, and at what price. The
interaction is among the buyers and
sellers of products and services.
 The United State of America and the
members of the European unions,
and virtually all countries in the
world, are considered market
economy.
3. The Mixed Economy
 The last type is the mixed economy
in which the state dictates and
exercises some control the factors of
production, but the populace exercise
mixed economy.
 The Communist Party in China is
good example of the mixed
economy. The Communist Party of
China owns the land and most of the
capital resources, yet it relies on the
market forces to determine what
products and services gets produced.
Basic Economic Problems and the
Philippine Socioeconomic Development in
the 21st Century
ECONOMIC PROBLEMS IN THE
PHILIPPINES
1. Poverty
 Poverty is a restricting condition
experience by millions of families
that prevents them in attaining the
minimum level of consumption for
subsistence living.
Two Categories of Poverty
1. Absolute Poverty
 is the lack of income to buy the basic
foods and necessities for subsistence
living.
2. Relative Poverty
 refers to the structure on how the
national income is being distributed
among households in an economy.
Demographic Changes and Its Economic
Applications
 The population of the Philippines has
been increasing over several decades.
In 1960, the country has enumerated
27 million people. In 2015 the

population estimate for the country
has reached 102 million people.
Implication
Advantage
 Additional consumer and savers that
can expand the economy
 Additional laborers can be a source
of productivity, creativity and
entrepreneurship.
 Labor force
Disadvantage
 Population growth exerts on limited
resources
 It is a burden to the government to
provide the social services including
education, health and housing to an
expanding population.
 Limited funds to suffice the needs of
the huge population.
 Strain to the environment.
3. Low Investment in Human Resource
Development
 A highly trained workforce is more
productive than a pool of unskilled
workers.
 Skills training and investment in
education can shape human capital of
a nation.
4. Weak Infrastructure
 Physical Infrastructure facilitates the
expands transaction that likewise
fuel economic growth.
 Philippines have weak infrastructure,
meanwhile the limited capacity of
our energy infrastructure has resulted
in daily interruptions of electricity in
many regions in the country The
major reason for this inadequate
expansion is insufficient funds.
5. Pursuing Food Security
 With more than 100 million people
to feed, the concern of the
government is ensure food to
security for all. The food sufficiency
is linked with the development of
agriculture as a major economic
sector of the country contributing
over 11% of GNP.
6. Slow Adaptation of Modern Technology
 Technology is the manner of
processing the raw materials or
intermediate inputs into transformed
outputs through the use of factor
inputs.
 A technology that is biased in the use
of labor is called labor intensive
technology, while the capital
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intensive technology refers to use of
more capital relative to labor in the
productive process.
BUSINESS ENVIRONMENT
 It includes all internal and external
factors that affect the company's
performance and functions. It
includes employees, customers,
management, supply and demand,
business regulations, and
competition.
 Every business organization has an
internal and external environment.
For the organization to be successful,
it is important to study its
environment regularly.
 This is to assess any developments
and understand factors that can
contribute to its success.
Environmental scanning
 is a process used by organizations to
monitor their external and internal
environments. The purpose of the
scan is to identify the opportunities
and threats affecting the business. As
a part of the environmental scanning
process, the organization collects the
information regarding its
environment and analyzes the impact
of changes in the market.
Environmental analysis
 is a strategic tool in assessing the
level of threats or opportunities that
might affect the business. This
eventually helps the management
team to make better decisions.
1. Internal Environment
 The internal environment of the
organization consists of factors that
are controllable by the management.
 As the figure in the previous slide
shows, the internal environment of
an organization consists of various
elements like the value system,
mission/vision/goals/objectives of
the organization, structure, culture,
quality of employees, labor unions,
technological capabilities, etc.
 These elements lie within the
organization and any changes to

them can affect the overall success of
the business.
2. External Environment
 There are two elements in the
external environment: micro and
macro. These environmental factors
are beyond the control of the
business but they still minimize the
impact if the business has an
effective strategic plan
2.a Micro Environment Factors
Suppliers
 Suppliers can control the success of
the business when they hold power.
The supplier holds the power when
they are the only or the largest
supplier of the goods in the market.
Resellers
 Market intermediaries, middleman,
or resellers have a great contribution
to the delivery of products to the
ultimate consumers.
 For example, if the reseller has a
reputable name then this reputation
can be leveraged in marketing the
product.
Customers
 A customer is an individual or
business that purchases goods or
services.
 Customers are important because
they drive revenues. Without them,
businesses have nothing to offer.
Most public-facing businesses
compete with other companies to
attract customers, either by
aggressively advertising their
products or by lowering prices to
expand their customer bases.
Competition
 Those who sell the same or similar
products and services as your
organization is called competitors.
The presence of one or more
competitors can reduce the prices of
goods and services as the companies
attempt to gain a larger market share.
Political factors
 These are about how and to what
degree a government intervenes in
the economy. It includes government
policy, political stability or
instability in overseas markets,
foreign trade policy, tax policy, labor
law, environmental law, and trade
restrictions.
Economic factors
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 Economic factors have a significant
impact on how an organization does
business and also how it is profitable.
These factors include economic
growth, interest rates, exchange
rates, inflation, disposable income of
consumers and businesses.
2.b Macro Environment Factors
Social factors
 These include the shared belief and
attitudes of the population. These
factors are population growth, age.
distribution, health consciousness,
career, attitudes and so on.
Technological factors
 Technological factors affect the
management and marketing in three
ways: new ways of producing goods
and services, new ways of
distributing goods and services, and
new ways of communicating with
target markets.
Environmental factors
 These factors have become important
due to the increasing scarcity of raw
materials, pollution targets, doing
business as an ethical and sustainable
company.
Legal factors
 It includes health and safety, equal
opportunities, advertising standards,
consumer rights and laws, product
labeling, and product safety. It is
clear that companies need to know
what is and what is not legal in order
to trade successfully.
SWOT ANALYSIS
 SWOT (strengths, weaknesses,
opportunities, and threats) analysis is
a framework used to evaluate a
company's competitive position and
to develop strategic planning. SWOT
analysis assesses internal and
external factors, as well as current
and future potential (Grant, 2020).
 SWOT analysis is a technique for
assessing the performance,
competition, risk, and potential of a
business, as well as part of a business
such as a product line or division, an
industry, or other entity.
Internal Factors: Strengths (S) and
Weaknesses (W)
These are the resources and experiences
readily available to the business proponents.
These factors include:

1. financial resources such as money
and source of funds for investment;
2. physical resources such as the
company's location, facilities,
machinery, and equipment;
3. human resources consisting of
employees,
4. access to natural resources,
trademarks, patents, and copyrights,
and
5. current processes, such as employee
programs, sales, and distribution
capabilities, marketing programs,
etc.
SWOT Analysis
Strengths
 describe what an organization excels
at and what separates it from the
competition: a strong brand, loyal
customer base, a strong balance
sheet, unique technology, and more.
Weaknesses
 stop an organization from
performing at its optimum level.
There are areas where the business
needs to improve: lack of raw
materials, personnel attitude, poor
location, and lack of budget for
product promotion, among others.
External Factors: Opportunities (O) and
Threats (T)
These are factors that affect a company, an
organization, an individual, and those
outside their control. These factors include:
1. economic trends such as stock
market, economic performance, and
the like,
2. market trends such as new products
or technology, changes in tastes and
lifestyle of society;
3. national and local laws and
regulations;.
4. relationship with suppliers, and
5. competitive threats.
SWOT Analysis
Opportunities
 refer to favorable external factors
that could give an organization a
competitive advantage. Examples
include larger market, company
expansion, and new customer trends,
among others.
Threats
 refer to factors that have the potential
to harm an organization. For
example, changes in government
policy, changes in consumer tastes
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and preferences, inflation, and
recession, among others.
PORTER'S FIVE FORCES ANALYSIS
What is the Five Force Analysis?
 The five forces model was originally
developed by Michael E. Porter of
Harvard Business School.
 Porter's Five Forces Analysis is a
framework or a guide for assessing
and evaluating the competitive.
strength and position of a business
organization. Porter's theory
identifies the five forces that
determine the competitiveness and
attractiveness of a market and which
seek to locate the power in a business
situation, its current competitive
position, and the strength of a
position that an organization may
enter into.
 According to Porter, the origin of
profitability is identical regardless of
industry. In that light, the industry
structure is what ultimately drives
the competition and profitability and
not on whether an industry produces
a product or service, is emerging or
mature high-tech or low-tech,
regulated or unregulated.
1. Competitive Rivalry
 This force examines how intense the
competition currently is in the
market, which is determined by the
number of existing competitors and
what each is capable of doing.
Rivalry competition is high when
consumers can easily switch to a
competitor offering for little cost.
2. Bargaining Power of Supplier
 This force analyzes how much power
a business' suppliers have and how
much control it has over the potential
to raise its prices, which, in turn,
would lower a business's
profitability. Also, it looks at the
number of suppliers available. The
fewer there are, the more power they
have.
3. Bargaining Powers of Buyers
 This force looks at the power of the
consumer to affect pricing and
quality. Consumers have power
when there aren't many of them, but
lots of sellers, as when it is easy to
switch from one business's products
or services to another. Buying power
is low when consumers purchase
 8

products are small amounts and the

seller's product is very different from
any of its competitors.
4. Threat of New Entrants
 This force examines how easy or
difficult it is for the competition to
join the marketplace in the industry
being examined. The easier it is a
competitor to join the marketplace,
the greater the risk of a business's
market share being depleted.
 Barriers to entry include absolute
cost advantages, access to inputs,
economies of scale, and well-
recognized brands.
5. Threat of Substitute Products or Services
 This force studies how easy it is for
consumers to switch from a
business's product or service to that
of a competitor. It looks at how
many competitors there are, how
their prices and quality compare to
the business being examined, and
how much of a profit those
competitors are earning. which
would determine if they can lower
their costs even more.