Part 1:

Overview of Applied Economics

 In this lesson, you will be able to:

• Define applied economics and understand the

basic terms connected to applied economics;
 The Study of Economics

Economics is everywhere. You may be

unaware of it but most of our daily decision-
making from choosing between doing your
homework or watching TV, picking adobo over
sinigang for lunch, has the very same foundation
as economics.
 The actions you take involve some sort of
analysis where you weigh the pros and cons,
which is formally referred to as cost and benefit
analysis. This behavior underlies the study of
economics.
 Economic as an Applied Science

Applied economics, as the name implies, is

the application of economic theories and
models in real life. It consists of learning how
choices affect individual decision-making and
how the availability of factors aid decision
makers craft sound judgement.
The significance of the Scientific Method in
Economics

There are many economic issues or

problems that affect the economy as a whole.
These are the never-ending oil price increases,
floods, unemployment, criminality, heavy traffic,
inflation, disagreement among politicians and
many more.
 Ethics

History Political Science

Mathe-
Sociology Economics matics

Chemistry Biology

Physics
 Economics and Sociology

Sociology is the science that studies the

composition of society, social relationships and
social institutions.
 Economics and Ethics

The morality of man is one of the most

important elements in the progress of a country.
People must exercise self-discipline because it is
needed in the proper implementation of
projects and economic activities.
 Economics and Political Science

The study of government structure, functions,

responsibilities, and laws set by the government
is vital because all these affect and influence our
lives and the economy as a whole.
 Economics and Physics

Physics is the study of matter and energy.

Through the use of modern technology, the
economy is able to sustain and provide the
needs of people.
 Economics and Chemistry

Chemistry centers its study in the

composition of chemicals for the creation of
variety of goods which are needed in the
economy.
 Economics and Biology

Biology is the study of the living things like

humans, animals and plants. These livings things
are necessary in the development of the
economy.
 Economics and Mathematics

Mathematics is the science of numbers

and their operations. The study of economics is
facilitated by the use of numbers, statisticians,
mathematical equations, formula and graph.
 Economists have worked to simplify
complex social phenomena into laws,
frameworks, and models over the centuries.
These models now serve as tools to present-day
policy makers so they can make better and
informed decisions in achieving progress and
sustainable development.
 Basic Economic Concepts
The study of economics can be better
appreciated by first having a clear grasp of the
fundamental concepts that are considered
building blocks of more advanced and complex
economic theories.
 Scarcity, Needs and Wants
The study of economics revolves around
the concepts of scarcity, needs and wants. At its
very core, economics means the efficient
allocation of available resources. This definition
has two underlying assumptions. First is that
people have unlimited needs and wants, and
these needs and wants drive consumption.
Second is the concept of scarcity which means
resources are limited.
 Opportunity Cost

Opportunity cost is defined as the benefit

you give up because you choose to take one
action in favor of another.

Example, assume that your P1,000.00 is

enough only to cover food and transportation.
 Basic Economic Problems

Following up on the discussion of scarcity

of available resources and individuals’ needs and
wants, a nation is faced three economic
problems that deal with the production,
distribution, and consumption of goods and
services.
What goods to produce and services
to provide?

How to produce and how much to

produce of these goods and services?

For whom to produce these goods

and services?
 What to produce?

This first question relates to resources. If

there is an abundant supply of labor in the
society will consider labor-intensive products or
will focus on providing services instead of
manufacturing goods.
 What to produce?

Additionally, the availability of resources

influences the decision on what to produce.
 How much to produce?
This question focuses on the actual
production of goods and services and the
allocation of the resources. In terms of
resources, a business has to decide on certain
issues such as how much to invest, how many
people to hire to produce the goods or services,
and how much raw materials to obtain.
 For whom to Produce?
The final question focuses on the
distribution and consumption of goods and
services. Is the goods or service for end
consumers or for the other businesses for
further production? These questions are
considered a long with other business-related
factors such as marketability and pricing.
 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 productions. The return on the use of
these inputs of production is called factor
income.
Factors of Production
Land Labor

Entre
Capital preneur
ship
 Economic Stages of Man

According to many, the only permanent

thing on earth is change. As a human beings, we
always look forward for a better life
 Hunting and Fishing Stage

The first stage in the economic activities of

man has a little labor and less capital. This stage
is also called direct appropriation stage.
 Pastoral Stage

People learned to produce, but consume

the raw materials that they get from nature.
 Agricultural Stage

After knowing how to manage and tame

the animals, people learned to manage plants.
 Handicraft Stage

Hand manufacturing is the foundation

stage. People used simple tools for their
economic activities.
 Industrial Stage

It was a great transformation of society

when people learned manufacture by the used
of machineries
 Industrial Stage

It was a great transformation of society

when people learned manufacture by the used
of machineries
 Absolute Advantage

It is defined as having the ability or

capacity to produce more output compared to
another entity.
 Comparative Advantage

It means having a lower opportunity

cost.
 Trade Practice
You need to be able to do three things:
A. Determine which country has an ABSOLUTE
ADVANTAGE in producing each product.
B. Calculate the opportunity cost for producing
one of each product.
C. Identify which country has a COMPARATIVE
ADVANTAGE in producing each product.
 A. Determine which country has an ABSOLUTE
ADVANTAGE in producing each product.

1. Japan can produce 20 submarines

China can produce 10 submarines

2. US can produce 3 cars and/or 9 motorcycles

Germany can produce 4 cars and/or 8 motorcycles

3. Korea can produce 4 laptops and/or 12 phones

Brazil can produce 1 laptop and/or 5 phones
 B. Calculate the opportunity cost for
producing one of each product.
2. US can produce 3 cars and/or 9 motorcycles
Germany can produce 4 cars and/or 8 motorcycles
COUNTRY CARS MOTORCYCLE
US 3 9
GERMANY 4 8

• What is the opportunity cost for producing one of

each product?

C. Who has a comparative advantage?

 B. Calculate the opportunity cost for
producing one of each product.
1. Japan can produce 20 submarines
China can produce 10 submarines

• What is the opportunity cost for producing one

of each product?
• Who has a comparative advantage?