Applied Economics

MODULE 1
INTRODUCTION TO APPLIED ECONOMICS
ECONOMICS

 It is the study of the ways that individual and the societies allocate their limited
resources to satisfy their unlimited wants and needs.
 Difference of wants and needs. WANTS: things that you desire to have and can live
without. NEEDS: things that are necessary in one’s life.

SCARCITY

 It is the reason why people need to practice economics.

 Fundamental economic problem of the society.
 A condition where there are insufficient resources to satisfy all the needs and wants of a
population.

ECONOMIC CHOICES
Choice and decision making

 TRADE OFF. Occurs when a choice is made between two or more options.
 OPPORTUNITY COST. Is everything you gave up by choosing one option instead of
another.
LIMITED RESOURCES

 Land
 Labor
 Capital
 Entrepreneurship
UNLIMITED HUMAN WANTS

 Food
 Clothing
 Shelter
 Security
ECONOMICS AS A SOCIAL SCIENCE

 Study of human behavior just like psychology and sociology, just to have the things they
want and need.
 Study how individual make choices in allocating scarce resources to satisfy their
unlimited events.

ECONOMIC AS APPLIED SCIENCE

 Helps students to learn about the relationship of a business and basic economic theory.
 Focuses on: Urban problems, health-care crisis, agricultural problems, poverty,
economic growth, and environment.

DIVISION OF ECONOMICS

 MICROECONOMICS
o Studies individual income
o Analyzes demand and supply of labor
o Deals with households and firm decisions
o Studies individual prices
o Analyzes demand and supply of goods

TOPICS UNDER MICROECONOMICS

 Individual markets
 Effect on price of a good
 Individual consumer behavior
 Supply of good

 MACROECONOMICS
o Studies national income
o Analyzes total employment in the economy
o Deals with aggregate decision
o Studies overall price level
o Analyzes aggregate demand and aggregate supply

TOPICS UNDER MACROECONOMICS

 Whole company (GDP)
 Inflation (general price level)
  Employment/Unemployment
 Aggregate Demand (AD)
 Productivity Capacity of Economy

BASIC ECONOMIC PROBLEMS OF SOCIETY

 What to produce?
 How to produce?
 For whom to produce?

ECONOMIC SYSTEM

 The means through which society determines the answers to the basic economic
problems mentioned.

ECONOMIC SYSTEMS

 TRADITIONAL
Based on culture and tradition
o Feudalism
o Mercantilism

 MARKET
Private individuals take their own decisions with less government intervention.
o Capitalism

 COMMAND
Government plays an important role.
o Socialism
o Communism
o Fascism

 MIXED
Both public and private individuals make decisions. Government manages major
industries (transportations, electricity, water, etc.)
ECONOMIES

 MIXED ECONOMY
 Federal government can safeguard people and markets
 Government has large role in military and international trade

 COMMAND ECONOMY
 Federal government can safeguard people and markets
 Government may own some key industries
 Government can manage social welfare programs

 MARKET ECONOMY
 Private property
 Supply x Demand = Price
 Driven by self-interest

 BASIC ECONOMIC PROBLEMS OF THE COUNTRY

 Unemployment
o COMMON CAUSES
 The number of people entering a job market is greater than the
number of jobs created
 Rural-urban migration increases due to employment
opportunities
 Most of the unemployed people are college graduates

 Poverty
o Condition where a community lacks financial sources
o COMMON CAUSES
 Increase in population
 Increase in the cost of living
 Unemployment
 Income inequality

 Poor quality of infrastructure

  Income inequality
o The less equal distribution, the higher the income inequality is
o Income is the money that an individual earned from work or business
received from investments.
o Refers to the gap of income between the rich and the poor

POSTIVE vs. NORMATIVE ECONOMICS

 POSITIVE ECONOMICS
o Based on facts, and cannot be approved or disapproved

 NORMATIVE ECONOMICS
o Based on value judgement
o Focuses on value economic fairness, or what economic should be or ought to be

MODULE 2
APPLIED ECONOMICS IN RELATION TO PHILIPPINE ECONOMIC PROBLEMS

ECONOMICS AS AN APPLIED ECONOMICS

Application of economic theory and econometrics in specific settings with the goal of analyzing
potential outcomes.

APPLIED ECONOMICS IN RELATION TO PHILIPPINE ECONOMIC PROBLEMS

Solid understanding of economic principles and how they are applied in real-life situations that
can serve as a significant tool to address the country’s economic problems.

THE PHILIPPINE’S BASIC ECONOMIC PROBLEMS

 UNEMPLOYMENT
 Still a main problem of the Philippine economy despite improvements reported
by the NSO and NEDA.
  POVERTY
 (Political, social, economic, …) Means that the income level from employment is
low that basic human needs can’t be met. The booming population growth is an
economic problem; issue of scarcity

ASEAN ICON
AIMS AND PURPOSES
1. To accelerate the economic growth, social progress, and cultural development.
2. To promote regional peace and stability.
3. To promote active collaboration and mutual assistance in economic, social, cultural,
technical, scientific, and administrative fields.

LEE KUAN YEW (1923-2015)

He is an economic icon and was a prime minister of Singapore.

MODULE 3
DEMAND, SUPPLY, & MARKET EQUILIBRIUM
MARKETS
An institution or mechanism which brings together buyers and sellers.
 Markets are competitive
 Markets may be:
 Local
 National
 International
 Price is determined in the interactions of buyers and sellers.

DEMAND

The desire, willingness, and ability to buy a good or service.

 Demand is different from a need

 If you demand something:
o Want it
o Can afford it
o Made a definite decision or plan to buy it
 Schedule (table), Curve (graph)
 Shows the amount consumers are willing and able to purchase at each price level
 Other things equal (ceteris paribus)
  Individual demand
 Market demand

DEMAND CURVE

 The intervals should be equal

 P = price; is in the y-axis
 Q= quantity; is in the x-axis

LAW OF DEMAND

 Other things equal

o As price falls, quantity demand rises
o As price rises, quantity demand falls
 Reasons: Common sense, Law of diminishing marginal utility, Income effect and
substitution effect.
 INCOME EFFECT
o When the price of a good increases, purchasing power decreases.
o Buy less, vice versa
 SUBSTITUTION EFFECT
o When the price of a good increases
o Buy less of the goods with the higher price or don’t buy at all;
o Shift to lower-priced substitute

EXCEPTIONS OF THE LAW OF DEMAND

1. People judge the quantity as a basis of price

 The higher the price, the better the quantity

2. Snob-appeal
 Advertising one’s wealth; conspicuous consumption
 To show the other people they can buy or afford even if it is in a higher
price.

OTHER DETERMINANTS OF DEMAND

 TEST AND DEMAND — T

o Quality, advertising, brand, fashion changes, etc.

 INCOME – I
o Normal Goods: goods where demand increases, income increases.
 o Inferior Goods: goods where demand decreases as income increases.

 PRICE OF RELATED GOODS – R

o Substitute: can be used in place of another. (Ex.: Coke vs. Pepsi)
o Complements: two goods that are used together. (Ex.: Sugar and Coffee)

 NUMBER OF BUYERS — N
o the more buyers, the greater the demand

 PRICE EXPECTATIONS — E
o Expect P  , Current Demand 
o Expect P  , Current Demand 

DEMAND FUNCTION

COMPLETE DF

Qd = f(P, T, I, R, N, E)

LAW OF DEMAND FUNCTION

Qd= f(P), c.p.

c.p. = ceteris paribus: all other things are equal