APPLIED ECONOMICS

Introduction to Economics
COPYRIGHT

This is an exclusive and copyrighted property of REX Book Store Inc. All rights reserved.
No part of this material shall be reproduced, distributed, or transmitted in any form or by
any means, including photocopying, recording, or other electronic or mechanical
methods, without the prior written consent of REX Book Store Inc.

Introduction to Economics WWW.REXBOOKSTORE.PH

 CHAPTER 1
Introduction to
Applied Economics

WWW.REXBOOKSTORE.PH
 LESSON 1.1
Introduction to Economics

WWW.REXBOOKSTORE.PH
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

Introduction to Economics WWW.REXBOOKSTORE.PH

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

Introduction to Economics WWW.REXBOOKSTORE.PH

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

Introduction to Economics WWW.REXBOOKSTORE.PH

Terms to Remember in Chapter 1
• Economics • Capital • Gross National Product (GNP)
• Scarcity • Economic system • Gross Domestic Product (GDP)
• Social science • Traditional • Applied economics
• Macroeconomics economy • Unemployment
• • Command • Poverty
Microeconomics
economy • Poverty line
• Opportunity cost
• Market economy
• Economic • Positive
resources
economics
• Land
• Normative
• Labor economics

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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

Introduction to Economics WWW.REXBOOKSTORE.PH

THANK YOU 

WWW.REXBOOKSTORE.PH
WWW.REXBOOKSTORE.PH
WWW.REXBOOKSTORE.PH
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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

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.

Introduction to Economics WWW.REXBOOKSTORE.PH

Measuring the Economy:
GNP/GDP: Income Approach

Value-Added Flow
Introduction to Economics WWW.REXBOOKSTORE.PH
Measuring the Economy:
GNP/GDP: Income Approach

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

Introduction to Economics WWW.REXBOOKSTORE.PH