INTRODUCTORY TO APPLIED ECONOMICS

ECONOMICS AS AN APPLIED SCIENCE

The previous weeks we have been introduced to various concepts which will be useful in discussing the application of
economics in various fields, particularly in understanding economic, business, and social issues confronting our country
today.

As a social science, economics deals with the analysis on how members of a society interact with one another on the
creation and utilization of wealth. Thus, economics is a science of choosing an activity from alternative options that will
yield the highest benefits to society in the context of competing uses and opportunity costs.

The study of economics has been perceived as too theoretical since it deals with principles, laws, and assumptions
governing human behavior in the allocation process. This treatment is meant to strengthen the scientific dimension of
economics through a more rigorous analysis of its principles, theory formation, and empirical verification. This
theoretical treatment may look as if economics is devoid of applications.

But that perspective is farther from the true concept and intent of economics as many of the principles, laws and
theories developed in economics can be applied in a number of fields.

Economic theories and principles can also find several applications in commercial sciences (finance, accountancy),
education, international trade, labor, health, transportation, and analysis of environmental problems (pollution, crimes,
overfishing).

Before we proceed with the discussion on the applications of economics on these fields, issues, and problems, we need
to have a framework that will provide us a basis for the analysis.

ANALYSIS FRAMEWORK: ANALYSIS OF BENEFITS AND COSTS IN DECISION-MAKING

In making any decision, economic and otherwise, an individual is influenced by a number of motivations. Most of these
motivations are based on the benefits that he can derive from the chosen option or behavior. However, pursuing any
choice implies that there are costs accompanying the benefits arising from his behavior. This cost can be expressed in
terms of money, time, resources and other goods and activities being sacrificed or foregone. Thus, in making any
decision, we have to weigh and compare the benefits derived and the costs incurred. Not only are we making a
comparison, we want to make sure that our net benefits be positive and as much as possible will yield the highest net
returns. Aspiring to have the maximum net returns is meant to address the problem on scarcity as reflected in
opportunity costs and the need to economize on the use of limited resources.

Since a decision or choice made is always prospective, what is important is not the absolute value of benefits and costs
but the additional or marginal benefits and marginal costs. Thus, decision to pursue an option will be based on marginal
benefits and marginal costs. The marginal analysis of benefits and costs is also useful in setting the condition for an
optimal decision.

In economic analysis, the condition for the attainment of maximum net benefit is set when the marginal benefit is equal
to the marginal cost. When the total net benefits are no longer increasing it has reached its maximum level. This means
that the difference between marginal benefits and marginal costs is zero. The simple demand and supply analysis is a
classic example of marginal analysis of benefits and costs.

Although the condition for attaining maximum net benefit may appear very simple, this straightforward equation is
altered by many factors. These differentiating factors may be the source of economic and business problems including
excess consumption, inadequate investment, unemployment, excess production capacity, and many more. These factors
pertain to the recognition and the valuation of benefits and costs by economic actors.
VARIATIONS IN BENEFITS AND COSTS DUE TO STAGE OF RECOGNITION

The initial factor that may influence the difference is the recognition of what is considered as benefits and costs. Some
benefits and costs may be recognized or not by a decision maker because some of them are explicit or obvious while
some are implicit or hidden.

Explicit Costs – easily recognizable since they are expressed in monetary terms and may involve actual financial outlays

Implicit Costs – more difficult to recognize since the decision maker does not have to incur any monetary expense in the
course of his action

Explicit Benefits – can be measured in monetary terms or levels of satisfaction or utility to the decision maker

Implicit Benefits – that which can impact the decision maker unaware due to nonmeasurability

Recognizing these implicit benefits and costs is hard because of -

Spatial Dimensions in the Issue of Recognition – decision maker may only be aware of the explicit benefits and costs due
to its direct satisfaction impact (considered private) compared to implicit benefits and costs which are not internalized
by the individual as these are spillover effects from him to the entire community.

Temporal Dimensions in the Issue of Recognition – decisions are based on present benefits and costs. These are explicit
to the individual because his level of awareness is dictated by the proximity of these benefits and costs to the present
time, hence, is readily realized. Compared to future benefits and costs which are not easily recognized.

VARIATIONS IN BENEFITS AND COSTS DUE TO DIFFERENCES IN VALUATION

Even if the decision maker recognizes the implicit benefits and implicit costs of his action, the differences between
marginal benefits and marginal costs can still persist. The differences may be due to the way an individual decision
maker values or measures these implicit benefits and costs. The proper pricing and valuation of these implicit costs may
have an effect on the optimal decision.

Spatial Dimension in the Issue of Valuation – the valuation of implicit benefits and costs may also differ because various
individuals may have different valuation of these social impacts.

Temporal Dimension in the Issue of Valuation – because present benefits and costs are currently and directly enjoyed by
the decision maker, they are more significant and have higher values than benefits and costs that are yet to be realized
and enjoyed in the distant future.

BASIC ECONOMIC PROBLEMS CONFRONTING THE DEVELOPMENT OF THE PHILIPPINES IN THE 21ST CENTURY

Typical of a growing economy, the Philippines is confronted with several issues and problems which prevent its citizens
from realizing a meaningful life, on the one hand, and in pushing its socioeconomic development, on the other.

1. Poverty and unequal distribution of income

2. Demographic changes and its economic implications
3. Low investment in human resource development
4. Weak infrastructure
5. Pursuing food security
6. Slow adoption of modern technology
7. Environmental sustainability and the country’s development thrust
POVERTY AND UNEQUAL DISTRIBUTION OF INCOME

Poverty is a restricting condition experienced by millions of families that prevent them in attaining the minimum level of
consumption for subsistence living. Related with the limitation or absence of resources, poor families are faced with
limited economic opportunities – even to start a small livelihood project. But even if they are given resources but are not
properly trained and monitored in managing these resources, they end up consuming the resources that were supposed
to give them continued income in the future.

Two categories of poverty –

1. Absolute Poverty – the lack of income to buy the basic food and necessities for subsistence living. This is
measured in terms of poverty threshold and poverty incidence.

Poverty Threshold is the income needed to purchase these minimum nutritional requirements and other
basic necessities for daily survival.

Poverty Incidence is the proportion of households in the country with family income lower than the
poverty threshold or poverty line.

2. Relative Poverty – refers to the structure on how the national income is being distributed among households in
an economy. The poor households are poor because their income and other resources are lower than the
income and resources of other households. Poor households from the perspective of relative poverty do not
necessarily mean that they do not have sufficient income to purchase the minimum requirements for daily
survival. This is measured by the Lorenz curve and the Gini coefficient.

Lorenz Curve shows the share of the various household groups (ranked from the poorest to the richest)
on the total national income.

Gini coefficient is a measure of income inequality derived from the Lorenz curve. Perfect equality is
indicated by the value 0 and perfect inequality has a value 1.

There are various interventions being implemented by various economies including the Philippines in addressing the
problem of poverty.

For absolute poverty, the immediate intervention is to provide free meals, housing, and adequate clothing. But these
measures are temporary gap measures and do not provide long term solutions to the problem of poverty. To this end,
some economists have suggested that there is a need to provide resources including credit, skills, and entrepreneurial
training, and cash transfers. All these measures have to be implemented together if we want households to graduate
from their poverty status.

In addressing the issue of relative poverty, measures like progressive taxation, income transfers and other programs
meant to improve the income distribution can be implemented.

As the country makes the most of the opportunities offered by the 21st century, the Philippines need to reduce absolute
poverty significantly and craft a more equitable distribution of income.

DEMOGRAPHIC CHANGES AND ITS ECONOMIC IMPLICATIONS

Measures in managing the population growth has been hotly debated in the country in recent years because it has
implications on the growth of the economy, on the one hand, and can infringe on the religious beliefs of many
individuals, on the other hand. Those who favor tempering the growth stress the pressures of population growth exerts
on limited resources. On the other hand, there are those who have an optimistic view on an expanding population as it
can imply additional consumers and savers that can expand the economy while additional laborers can be the source of
productivity, creativity, and entrepreneurship. The optimist also views that population growth is not the cause of
environmental degradation but the excessive demand of people in highly developed countries.

There are several explanations on the growth of the population of a country but the economic perspective uses the
economics of childbirth as a basis of analysis.

LOW INVESTMENT IN HUMAN RESOURCE DEVELOPMENT

The economic transformation of any country can be traced to a certain extent on its human resources. Although the size
of the labor force can have positive contributions on economic growth, the quality of human resources has greater
growth impact.

But modern economies go beyond formation of human capital and pursue the development of knowledge capital in
pushing their economies forward. Knowledge capital is formed through heavy investments in higher education, science
and technology, and research and development. Examples of which are South Korea, Singapore and Taiwan.

WEAK INFRASTRUCTURE

Similar to the role of human capital on economic growth, physical infrastructure facilitates and expands transactions
that likewise fuel economic growth.

The inadequate infrastructure of a country has debilitating effects on the individuals, households, business firms, and
economy. The major reason for this inadequate expansion of the infrastructure is the insufficient funds to finance the
huge costs of constructing these networks.

One of the options open for the government is to borrow from external donors – countries like Japan, US, and European
Union, as well as the World Bank and other international development agencies.

Another option is to allow the private sector to engage in the construction and management of infrastructure projects
through a public-private partnership.

PURSUING FOOD SECURITY

With more than 100 million people to feed, the concern of the government is to ensure food security for all. This goal
has been interpreted, however, as food self-sufficiency in the light of the huge amount of arable land devoted to the
production of food grains – rice and corn.

Food sufficiency is intimately linked with the development of agriculture as a major economic sector of the country
contributing over 11% to gross domestic product and absorbing almost a third of labor force.

The importance of agriculture in our economy emanates from its role as the main supplier of food grains to the growing
population. The aim of uplifting the productivity of the sector and the income of the farmers and fisherfolk is an
important social objective. A sluggish agriculture may result an unstable society with the spread of poverty while
insufficiency in food may invite inflationary pressures or dependence on imports. On the other hand, a vibrant
agriculture has implications on the poverty reduction and the development of other economic sectors.

However, the development of agriculture is not meant to make us self-sufficient in the production of food grains alone
but primarily in increasing the productivity of the sector.
Aside from the efficient use of resources there are other initiatives that can increase the productivity of the agricultural
sector: invest in irrigation facilities, provide cheap fertilizers and inputs, and organize farmers with small farm lands so
they can reap the benefits of economies of scale through the mechanism of cooperatives. In addition, the construction
of farm-to-market roads, expansion of agricultural extension programs, and development of post-harvest facilities can
contribute to agricultural productivity.

SLOW ADOPTION OF MODERN TECHNOLOGY

Aside from the agricultural sector, the development of the industrial sector particularly manufacturing and the services
sector should be likewise pursued to push the rapid development of the Philippine economy. One common feature that
prevents these economic sectors in realizing their growth potentials is the slow adoption of modern technology in their
processes of production and distribution.

With the adoption of modern technology, the agriculture, manufacturing and services sectors are able to realize their
growth potentials. But as long as the industries in various economic sectors are inward looking, focused on the domestic
market, and protected by domestic regulations, there is no incentive for them to improve. As a consequence, they may
be reluctant to undertake very expensive investments in modern equipment and technologies. In the longer run this will
make these industries uncompetitive while the current market players enjoy their market power at the expense of the
consumers’ welfare.

ENVIRONMENTAL SUSTAINABILITY AND THE COUNTRY’S DEVELOPMENT THRUST

The capacity of our economy to maintain its productive capacity and pursue its development goals will be constrained by
the prudent use of natural resources for sustainable development. The environment is part of natural resources where
we derive income from the utilization of its wealth. However, excessive use of our natural resources may compromise its
ability to provide income and other benefits in the future.

Aside from overutilization of our natural resources, a sustainable environment is threatened by wastes discharges by
productive and distributive activities of various sectors.

Given the consequences of agricultural and industrial production on the environment, what is the optimal government
policy to pursue? This policy should be tempered by the marginal benefits and marginal costs accompanying these
agricultural and industrial activities. Measures like pollution tax, pollution limits, and management plan for
environmental impact of these economic activities may be required to ensure that the environment is protected and at
the same time reap the contributions of these activities in generating income, employment, and foreign exchange for
the country.

Resource:

Tullao, Tereso S. Jr. (2016). Applied Economics for A Progressive Philippines. Quezon City. Phoenix Publishing House, Inc.