Economics as an Applied Science

Economics
 is a study of economic activities of a person. It is only
concerned with the wealth-getting and wealth-using
activities of a man.
- Prof. Marshall

Applied Economics
 is the application of economic theory and econometric
goal of analyzing potential outcomes.
 The term "applied economics" is believed to have
started 200 years ago in the writings of two economists:
Jean-Baptiste Say (1767-1832) & John Stuart Mill (1806-1873)

 is the study of economics in relation to real world situations.

 It is the application of
economic principles and theories
to real situations, and trying to predict what the outcomes
might be.
 is the study of observing how theories work in practice.
Importance of Applied Economic Application II. It helps determine the steps to be taken to improve the
present economic condition.
Applying economic theories to current economic conditions can
be helpful in the following reasons: Applied economics acts as a mechanism to determine what steps
can reasonably be taken to
1. It enables the true picture of the situation to show.
improve current economic situation
2. It helps determine the steps to be taken to improve the
present economic condition. *To examine each aspect, one can strengthen areas where
3. It helps to avoid the recurrence of a negative situation or at performance is weak
least minimize the effect.

Example
 Purchase of goods and services
 Usage of raw materials
 Division of labor within entity (e.g. firm, company, agency)

I. It enables the true picture of the situation to show.

*Applied economics becomes a powerful tool to III. It helps to avoid the recurrence of a negative situation or
reveal the true and complete situation at least minimize the effect.
in order to come up with things to do (with a solution) Applied economics can teach valuable lessons on how to avoid
Example the recurrence of a negative situation, or at least minimize the
impact.
 Applied economics can assess the profits of a certain company
*To review what steps were taken to improve and correct similar
 The result can help the executives
situations and continue good strategies to keep the economy
to do some strategies in order to boost its sales
flowing in a correct direction
Econometrics
 is the application of statistical and mathematical theories
to economics
for the purpose of:
o Testing hypotheses
o Forecasting future trends
The results of econometric are compared and contrasted against
real life examples.

Example
Real life application of econometrics would be
to study the hypothesis that as
a person's income
increases, spending increases
Basic Economic Problems
 Scarcity of means for satisfying various needs is the
central problem of our economic life and it is
 scarcity that creates the need to make a choice
 Scarcity and choice go hand in hand

Economic problems as obstacles to development

1. Poverty
2. Unemployment
3. Inflation
4. Slow Growth

Scarcity
 refers to the tension between our
limited resources
and our unlimited wants and needs
Basic Economic Problems
1. What to produce?
2. How to produce?
3. For whom shall the goods and services be produced?

I. What to produce?
 The system must determine the desires of the people.

 Goods and services must be based on

the needs of the consumers
Factors to consider:
a. Availability of resources
b. Physical environment
c. Customs and traditions of people

II. How to produce?

 The system must select(ing) the proper combination of
economic resources in producing the right amount of output
 The quality of output must come first before the quantity

III. For whom shall the goods and services be produced?

 This has something to do with distribution
 Once the goods are produced, how shall they be distributed?
Kuznet’s Ratio of Inequality
 Kuznet’s ratio compares the income of
the highest-earning or richest 20% of the population with the
lowest-earning or poorest 40%.
 The ratio of the income between the top 20% and the low 40%
indicates the level of inequality in a population.
 The higher the value of the ratio, the greater the inequality,
and vice versa.