LECTURE SLIDES FOR

APPLIED ECONOMICS

Prepared by:
GAS STRAND
Vahnizza Kayel Errika R. Aguas, LPT
Vahnizza kayel errika r. aguas, lpt

Iloilo National High School

 Choose a photo from
the screen and describe
why it is significant to
you.
At the end of the lesson, the students will be able to:
a. Differentiate between economics as a social science and as an applied
science.
b. Apply the concept of opportunity cost when evaluating options and
making economic decisions.
c. Solve for the opportunity cost.
d. Distinguish the division of economics.
e. Know the definition of economy.
f. Identify the four factors of production.
g. Differentiate normative and positive economics.
Prepared by:

h. Learn the 3 economic questions.

Vahnizza kayel errika r. aguas, lpt

i. Elaborate on the different economic theories.

 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.
Prepared by:
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.
Prepared by:
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.

Prepared by:
Vahnizza kayel errika r. aguas, lpt

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.

Prepared by:
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
Prepared by:

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
 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 Concepts
The concept of utility is the foundation of
consumer buying behavior and demand for
goods.
Utility refers to the value or satisfaction derived
from consumption of a good.
Marginal utility, therefore, is the additional utility
or satisfaction from the consumption of an
additional unit of good, keeping other things
constant.
Table A. Total and Marginal Utility
Imagine eating a hamburger. The
first column, Quantity (Q), gives the QUANTITY MARGINAL TOTAL UTILITY
number of hamburgers consumed. The (Q) UTILITY (MQ) (TU)
Marginal Utility (MU) column reflects the
price that you are willing to pay for the 1 220 220
consumption of the given number or
hamburger. For instance, you are willing
to pay P220 for the first hamburger. 2 200 420
For the second hamburger, you are
willing to pay only P200 because you are 3 160 580
already starting to feel full. For the third
hamburgers, you are willing to pay P160, 4 100 680
and so on until the fifth hamburger when
you are not willing to pay anymore since 5 0 680
you cannot eat another piece.
Figure A. Law of diminishing marginal utility
Marginal Utility

Figure A. illustrates the relationship

of quantity consumed and marginal
utility.

Marginal Utility
As you consume an additional unit
of a good, the marginal utility
derived from it declines. This
concept is formally known as the
law of diminishing marginal utility.
Quantity
Macroeconomics Concepts
The most common macroeconomic concepts
are those that measure the national income of
the economy. Typical national income indicators
include the GDP, GNP and GNI.

Equation A. Gross National Income

GNI = GDP + Net Primary income
What is an
economy?
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).
Economic Resources also known as 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- 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
Through your understanding of illustration 1.1, explain the following: “Consumption drives the economy.”

Illustration 1.1
RUBRICS: 20pts
Features 4 3 2 1

EXPERT ACCOMPLISHED CAPABLE BEGINNER

Piece was written Piece was written

Peace had little Piece had no style
in an in an interesting
style or voice. or voice. Gives no
extraordinary style style and voice.
Quality of Writing Gives some new new information
and voice. Very Somewhat
information but and very poorly
informative and informative and
poorly organized. organized.
well-organized organized.

So many spelling
Virtually no Few spelling and A number of
punctuation and
spelling, punctuation spelling,
Grammar, usage, & grammatical
punctuation or errors, minor punctuation or
Mechanics errors that it
grammatical grammatical grammatical
interferes with the
errors errors. errors.
meaning.
 What are Economic theories?
- Economic Theories are ideas and principles that aim to
describe how economies work.

- Economic Theories are the statements of a presumed

relationship between two or more variables such as the
relationship of price to demand, price to supply, and so on.

- In principle, the approach to economic theory is divided into

positive and normative.
- Purpose- This comprehensive system assumption, hypotheses,
definition and instructions try to explain economic phenomena,
interpret why and how the economy behaves, and propose the best
solution/s to economic problems.
Positive and Normative Economics
Positive Economics
Describes and explains various
economic phenomenon or the
“what is” scenario. Positive
economics is based on facts.
It describes what exists and how
it works.
Ex. “Public healthcare increases
government expenditures.”
Normative Economics
Focuses on the value of the
economic fairness, or what the
economy “should be”. In other
words, normative economics is
based on opinions.
Evaluate economic behavior as
good or bad.
Ex. “Best healthcare must be free
to all citizens.”
Examples of Positive and Normative Economics

Positive Economics Normative Economics

• The school should not

• The school implements implement this online
online class. class.

• The student spends his • You shouldn’t have spent

allowance playing your money on the
computer games. computer games.
Examples of Economic theories?
❑ Supply and Demand (Invisible Hand)
❑ Marginal Utility Theory
❑ Keynesian Economics
❑ Neoclassical Economics
❑ Neo-Malthusian (Resource Scarcity)
❑ Marxism
❑Laissez Faire Capitalism
 What are Economic models?
- Economic Models are generally representation
of reality. Specifically, economic models are the
representation of economic and social
phenomena are analyzed using research,
observation, and testing.

The Production Possibility Frontier and Circular

Flow Diagram are examples of an economics.
Examples of Economic models?

Production Possibility Frontier Circular Flow Model

Therefore…..
A theory is a more abstract
representation, while a model is
a more applied or empirical
representation.
 In formulating models and theories,
economists often use assumptions.
The most popular being the ceteris
paribus assumption.

Ceteris paribus is a Latin term that

literally translates to “ all else being the
same.”
Ceteris Paribus All other
things being equal

For example, in
economics, we may
say that an increase
in the price of beef
will decrease the
quantity demanded
for beef.
SHORT QUIZ: 20 items Part II. Identify which economic resources is
Part I. Classify the following topics. Write MIC if it referred to by the following words.
falls under Microeconomics; MAC, if it falls under (LAND, LABOR, CAPITAL, AND
Macroeconomics. ENTREPRENEURSHIP)

___1. Gross National Income ___11. Entertainers

___2. Poverty ___12. Minerals
___3. Consumer Equilibrium ___13. Forests
___4. Price determination of a particular ___14. Machineries
commodity. ___15. Teachers
___5. General price level. ___16. Technology
___6. Personal income and savings. ___17. Equipment
___7. Rate of unemployment ___18. Engineers
___8. Prices of apples and grapes increase ___19. Call center agents
during Christmas season. ___20. Business Proprietor.
___9. Number of students in INHS
___10. Inflation
Production Possibility Frontier also called Production Possibility Curve
- 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.
• Scarcity and Choice
• Opportunity Cost and Trade off
• Unemployment and Inefficiency
• Efficiency and Economic Growth
 Production Possibility Schedule for
Total Consumer Goods and Capital Goods
Production
Possibility
Frontier
Scarcity, and
Choice
The economy has to choose
how to use its scarce resources
to produce different goods and
services.
How much consumer goods
will it produce? How much
capital goods will it produce?
.
Production Possibility
Frontier- Opportunity
Cost, and Trade Off
The PPF illustrates a number of
economic concepts. One of the
most important is opportunity
cost. How much will society
give up of one good to gain
more of another good?
The opportunity cost of
producing more capital goods
is fewer consumer goods.
Moving from E to F, the number
of capital goods increases from
550 to 800, but the number of
consumer goods decreases
from 1,300 to 1,100.
.
Production Possibility Production Possibility Frontier (potential);
Frontier- Points of Points of Efficiency (Pts. A, F, E, and B)

Efficiency

Points on the PPF show

efficiency. The economy
is producing all it can
given its resources.
 Unemployment and
Production Possibility inefficiency (below potential)

Frontier- Unemployment,
and Inefficiency

Points inside the PPF

show inefficiency and
unemployment. These
two conditions imply
that the economy is not
producing all it can.
.
Production Possibility
Frontier-
Technologically Beyond potential
Impossible Production
Point, and Increasing
Efficiency

Point G is technologically
impossible to attain.
Moving from a point of
Moving from Pt. D to Pt. E inefficiency (Pt. D) to a
represents increasing point of efficiency (Pt. E)
efficiency or moving from
inefficiency to efficiency.
.
 Production Economic Growth Shifts the PPF
Possibility Frontier - Up and to the Right
Economic Growth

• Economic growth is the

increase in the total output
of an economy.
• Economic growth occurs
when a society acquires
new resources or when it
learns to produce more
using existing resources.
• Growth shifts the PPF up
and to the right. Productivity increases have enhanced the ability
of the economy to produce both good X and good Y.
 Production Possibility Firm ABC
Frontier Combination/
Points Bread (Y-Axis) Butter X-Axis
A
10 0
B 8 1
Unattainable
A C 6 2
H
D 4 3
Y-Axis (Bread)

B
Scarcity E 0 4
C

D
Inefficient

F
E

X-Axis (Butter)
 POSSIBILITY
Figure 1.1 Presented in the table
below is the production possibilities
schedule for a hypothetical economy. It Goods A B C D E F
is assumed that the economy that the (Y-AXIS)
economy produces only two goods:
movies and steaks. It is also assumed STEAKS 15 14 12 9 5 0
that all the resources are employed in
the production of either movies or (X-AXIS)
steaks. The table shows six alternative MOVIES 0 1 2 3 4 5
output possibilities.

Figure 1-1 shows the six production possibilities for movies and steaks.

a. Connect the six possibilities and label your curve PPF.

b. If society is (on/below/beyond)______ PPF, the economy is producing efficiently, but any
point (on/below/beyond) ______ PPF shows that resources are being wasted.

c. Suppose that the economy was producing 3 movies but only 5 steaks. Find the point which
represents this combination of goods and label it point G.
d. At point G, society is producing (efficiently/inefficiently)________ because it could produce
_______ units of steaks and 3 movies or 5 units of steak and _______ movies.
 Three Great Economist

➢Adam Smith
➢KARL MARX
➢JOHN MAYNARD
Adam Smith and the
“Invisible Hand”
• Scottish philosopher and an economist
who was born in 1723.
• Father of Economics and Father of
Capitalism
• The Wealth of Nations published
in1776. – “The Invisible Hand” (Self
regulation of economy) became basic
idea of free-market economy or
capitalism.
• He believed that all individuals act in
their self-interest, can produce and
purchase by themselves.
• Late during the 1900s, the doctrine of
Laissez Faire, anchored with Smith’s
idea, was coined.
 KARL MARX and
“Class Struggle”
• A German philosopher born in 1818.
• Contrary to the ides of Smith, Marx saw instability,
struggle, and the decline of a free market
economy.
• “Das Kapital” (1867)- He explained that capitalists
(the bourgeoisie/the rich/the ruling class) make
profit by exploiting the labor of the workers
(proletariat/the poor/the ruled class).
• He said that the workers were exploited/underpaid
for the value that they worked for.
• He believed that this struggle eventually
intensifies and would lead to the fall of capitalism.
• To him, this situation later leads to the movement
of society towards communism wherein
everybody, through government intervention,
owns the means of production.
 JOHN MAYNARD and
“Government Intervention”
• A British economist born in 1883.
• In 1936, he published his work General
Theory of Employment, Interest, and Money.

• His most significant work is about the role of

the government in a capitalist economy.
• His works were written during the Great
Depression (1930S) in the US which
questioned the validity and applicability of
Smith’s invisible hand (no government
intervention).
• Keynes strongly believed that the only
solution is government intervention through
government spending by creating massive
public works program to employ the idle
workforce (unemployed). This way the money
is put back to the economy, ignite demand for
goods and services, and pump the economy
again.
ECONOMIC SYSTEMS
• An economic system is a means by which society
determines the answer to the basic economic
questions.
• Economic systems control the factors of production
and the distribution of goods and services.

REMEMBER THE FACTORS OF PRODUCTION?

LAND, LABOR, CAPITAL AND ENTREPRENEURSHIP
4 TYPES OF ECONOMIC SYSTEMS
• Traditional Economy (subsistence economy)
• Command Economy (centralized economy)
• Free Market Economy (market economy)
• Mixed Economy (combination of command and
market economy)
1. Traditional Economy
➢Economic decisions are based on
custom and historical precedent.
➢Resources are owned and
controlled by individuals.
➢There is very little division of labor
and specialization.
➢Barter is a mechanism where
goods are exchange for another
good.
➢Currently, the traditional system is
limited to some nations in Africa. In
the Philippines, the barter system
may still be in use in some rural
areas.
➢Example: Africa and Haiti
2. Command Economy
➢It is also sometimes referred
to as centralized economy.
➢This system is characterized
by the heavy involvement of
the government in managing
the economy.
➢Individuals have no or limited
economic freedom and
private ownership is very
limited.
➢Socialism
➢Example: North Korea, Cuba,
and former Soviet Union
3. Free Market Economy
➢There is very little government
interference on economic
activities.
➢In a market economy, economic
decisions are guided by the
changes in prices that occur as
individual buyers and sellers
interact in the marketplace. As
such, this type of economy is
often referred to as a price
system.
➢Other names for the market
system are free enterprise,
capitalism, and laissez-faire.
➢Example: US, Singapore, Japan
and Australia.
 What is laissez-faire?
➢ Laissez-faire- a French phrase that
translates as “leave alone” and is
used to define an economic system
to void of government intervention.
4. Mixed Economy
➢A mixed economic system is a system
that combines aspects of both
capitalism (market) and socialism
(command).
➢There is balance between private and
government accountability in
achieving economic goals.
➢Government intervention includes the
power to impose taxes, set trade limits
and restrictions, and implement
legislations.
➢Government provides services to the
public.
➢Example: US, France, Sweden,
China, and Russia
ASSIGNMENT:
How will you describe
the economic system of
the Philippines? Is it
effective in achieving the
country’s economic goal?
Discuss your thoughts
about this.