Applied Economics

CHAPTER 1
Introduction to
Applied Economics
 LESSON 1.1
Introduction to Economics
Chapter Learning Objectives
• To differentiate between economics as a social
science and as an applied science
• To apply the concept of opportunity cost when
evaluating options and making economic decisions
• To make decisions based on how man can satisfy
most of his wants given limited resources
• To differentiate between macroeconomics and
microeconomics
Chapter Learning Objectives
• To describe and state the importance of economic
resources
• To differentiate between positive and normative
economics
• To differentiate between gross national product and
gross domestic product
• To distinguish the different approaches used in
solving for the gross national product
Chapter Learning Objectives
• To identify the basic problems of the Philippine
economy
• To analyze basic economic problems and
propose solutions to the problems using the
principles of applied economics
• To describe the various economic systems
 Terms to Remember in
Chapter 1
• Economics • Traditional economy
• Scarcity
• Social science • Command economy
• Macroeconomics • Market economy
• Microeconomics
• Opportunity cost • Positive economics
• Economic resources
• Normative economics
• Land
• Labor • Gross National Product (GNP)
• Capital
• Gross Domestic Product (GDP)
• Economic system
• Applied economics
• Unemployment
• Poverty
• Poverty line
Scarcity and the Study of Economics
How does ECONOMICS
relate to SCARCITY?

 Scarcity is the reason why people have to practice

economics. Economics, as a study, is the social
science that involves the use of scarce resources to
satisfy unlimited wants.
 Choice and Opportunity Cost

What is OPPORTUNITY COST?

 It refers to the value of the best foregone alternative.

 It holds true for individuals, businesses, and even a

society.
 On Economic Resources

What are the ECONOMIC RESOURCES?

1. Land – soil and natural resources that are found in nature

and are not man-made. Owners of lands receive a payment
known as rent.

2. Labor – physical and human effort exerted in production.

The income received by labors is referred to as wage.

3. Capital – man-made resources used in the production of

goods and services. The owner of capital earns an income
called interest.
 Economics as a Social Science
Why is ECONOMICS considered
as a SOCIAL SCIENCE?

 It is considered a social science in that it studies human

behavior.

 It studies how individuals make choices in allocating scarce

resources to satisfy their unlimited wants.
Macroeconomics Vs. Microeconomics

What is MACROECONOMICS?

 It is a division of economics that is concerned with the

overall performance of the entire economy.
 It studies the economic system as a whole rather than the
individual economic units that make up the economy.
 It focuses on the overall flow of goods and resources and
studies the causes of change in the aggregate flow of
money, the aggregate movement of goods and services,
and the general employment of resources.
 It is about the nature of economic growth, the expansion of
productive capacity, and the growth of national income.
Macroeconomics Vs. Microeconomics

What is MICROECONOMICS?

 It is concerned with the behavior of individual entities such as the

consumer, the producer, and the resource owner.
 It is more concerned on how goods flow from the business firm to
the consumer and how resources move from the resource owner
to the business firm.
 It is also concerned with the process of setting prices of goods
that is also known as Price Theory.
 It studies the decisions and choices of the individual units and
how these decisions affect the prices of goods in the market.
 It examines alternative methods of using resources in order to
alleviate scarcity.
Basic Economic Problems of Society
All societies are faced with basic questions in
the economy that have to be answered in
order to cope with constraints and limitations.
What are these questions?

• What to produce and how much

 the goods and/or services to be produced
 the quantity of goods to be produced
• How to produce
 the production method (resource mix and technology)
• For whom to produce
 the market for the goods and/or services
 Economic Systems
A country may be under any, or even a
combination, of these three types of economic
systems.

1. Traditional Economy
Decisions are based on traditions and practices upheld over the years and
passed on from generation to generation. Methods are stagnant and therefore not
progressive. Traditional societies exist in primitive and backward civilizations.
2. Command Economy
This is the authoritative system wherein decision-making is centralized in the
government or a planning committee. Decisions are imposed on the people who
do not have a say in what goods are to be produced. This economy holds true in
dictatorial, socialist, and communist nations.
3. Market Economy
This is the most democratic form of economic system. Based on the workings of
demand and supply, decisions are made on what goods and services to produce.
People’s preferences are reflected in the prices they are willing to pay in the
market and are therefore the basis of the producers’ decisions on what goods to
produce.
 Why Economics Is Important
Economics will help the
students understand…

 Why there is a need for everybody, including the government, to

budget and properly allocate the use of whatever resources are
available;
 How to make more rational decisions in spending money,
saving part of it, and even investing some of it; and
 On the national level, how the economy operates and to decide
for themselves if government officials and leaders are effective
in trying to shape up the economy and formulate policies for the
good of the nation.
Scientific Approach in the Empirical
Testing of an Economic Theory
This scientific approach
involves these steps.

1. State the propositions or conditions that are taken as given and do

not need further investigation, as the basic starting point of
investigation. These propositions will serve as the premises upon
which the theory is established.
2. Observe facts in connection with the activity that you want to
theorize.
3. Apply the rules of logic to the observed facts to determine causal
relationships between observed factors and to eliminate facts that
are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may
be tested as to whether they are valid or not.
5. Use statistics and econometrics as empirical proof in testing the
hypotheses.
 Positive Economics
Vs. Normative Economics
• Positive Economics
 deals with what is—things that are actually happening such
as the current inflation rate, the number of employed labor,
and the level of the Gross National Product
 an overview of what is happening in the economy that is
possibly far from what is ideal

• Normative Economics
 refers to what should be—that which embodies the ideal
such as the ideal rate of population growth or the most
effective tax system
 focuses on policy formulation that will help to attain the ideal
situation
 Measuring the Economy:
Counting All through GNP
What is Gross National
Product or GNP?

• Gross National Product (GNP) is the market value of final

products, both sold and unsold, produced by the resources of
the economy in a given period. Market value is determined by
supply and demand while the economy’s resources are those
belonging to Filipino citizens and corporations.
 Measuring the Economy:
GNP/GDP: Expenditure Approach
One way to account GNP and classify its
components is by END-USE EXPENDITURE.
Products are final when they have reached the
highest levels of processing in the economy for
different uses in the given period. It can best be
exemplified by the GNP equation.

GNP = C + I + G + (X – M)
C, household and individual consumption
I, investment
G, government expenditure
X, export
M, import
 Measuring the Economy:
GNP/GDP: Expenditure Approach
A better indicator of domestic
employment opportunities is Gross
Domestic Product or GDP.

• Gross Domestic Product (GDP) is defined as the market value

of final products produced within the country. The resources in
the economy include capital and entrepreneurship belonging to
other countries brought to the domestic economy by foreign
businesses.
 Measuring the Economy:
GNP/GDP: Income Approach
Another way to account GNP and classify its
components is by resource uses and contributions
that make up the production stages.

 As basic factors of production, resources (land, labor

capital, and entrepreneurship) add value to products (e.g.
leather) as processed into higher forms (e.g. shoes). If all
payments for resource contributions (rent, wage, interest,
and profit) went to resource owners, GNP would simply be
the sum of all factor payments from the raw material to the
final product stage.
 Measuring the Economy:
GNP/GDP: Income Approach

Value-Added Flow
 Measuring the Economy:
GNP/GDP: Income Approach

National Product
(by Factor Contribution)
In Million pesos
Source:
National Statistical Coordination Board