CHAPTER 1

Introduction to Applied
Economics
 LEARNING OBJECTIVES:
At the end of the chapter, the students are expected to:

• Define basic terms in applied economics;

• Identify the basic economic problems of the country, and
• Explain how applied economics can be used to solve
economic problems.
 Economics as a Social Science
• One of the popular attempts to define economics suggests that
"economics is the science which studies human behavior as a
relationship between ends and scarce means which have
alternative uses." A definition which has also gained prominence
is that "economics is the study of the ways that individuals and
societies allocate their limited resources to satisfy their unlimited
wants."
 It is important to recognize the following aspects
of economics:

• It is a science concerned with human behavior.

• It is concerned with the choices we make and the consequence of
these choices for ourselves and others. In fact the central focus of
economics is on choice and decision making.
• It is concerned with man's material welfare.
• Economics is by no means the product of the single mind, but probably no one is
more deserving of this title "Father of Economics" than Adam Smith. His book
"An Inquiry Into The Nature and Causes of the Wealth of Nations in 1776
attracted widespread attention and helped establish economics as a scientific
field of study apart from political science and moral philosophy.
• Economics is regarded as a social science because it uses scientific methods to
build theories that can help explain the behavior of individuals, groups and
organizations.
• Economics as a social science has common ground with other social sciences.
Economics borrows freely from the works of psychologists, sociologists,
anthropologists, legal scholars, ecologists, biologists, political scientists and
philosophers, all of whom offers alternatives of the economic way of thinking
about how the world works. But economics has some advantages over the social
sciences. Firstly, the economic motives of human beings are more regular and
therefore predictable. Secondly, there is more available factual information in
the form of economic statistics that can be the basis of theoretical verification.
• The problems of economics arise out of the scarcity of resources to
satisfy human wants. Human wants are unlimited, but the resources
(land, labor, and capital) required to satisfying them are limited. If human
wants are unlimited, but resources to satisfy those wants are limited,
then people in he society face the problem of scarcity.
• Everyone has to make choices. You may see many items that you would
like to have, but you cannot afford to buy them all. Business owners,
managers, team leaders and even governments must make right
decision because they cannot have everything. There will always be
difference between what people want and the resources available to
satisfy those wants.
 Economic Resources
• Economic resources are factors of production used to produce things that
people desire in order to satisfy their wants. The things that people
produces are called commodities. Commodities may be divided into pods
and services. Goods are tangible, like bags or shoes, and services are
tangible, like haircuts or education. The act of making goods and services
called production, and the act of using them to satisfy your wants is called
consumption.
• Ithas been conventional to categorize economic resources (factors of
production) as land, labor, capital and entrepreneurial ability.
 Categories of resources
• Land - It includes all natural resources (gifts of nature) used in the production process. These
include mineral and oil deposits, water, fertile soil, air, climate forest, wildlife, and rain.
➤ Payment for the use of land is called rent. Rent is income to the owner of the land.
• Labor or Human Resources - It refers to the physical and mental talents to produce goods
and services.
➤ Payment for the use of labor is called wage. Wage is income to laborers, who own their
labor.
• Capital - Man-made or manufactured resources or also known as capital goods used in
producing consumer goods. These include buildings, machine, tools, equipment, roads,
highways, bridges and even software.
➤ Payment for the use of capital is called interest.
• Entrepreneurial Ability - Special skills of an individual needed to produce goods and
services like managerial and organizational skills.
➤ Profit. Income of an entrepreneur after deducting the payments from the owners
of land, labor and capital.
Economic as an Applied Science
• Applied Economics involves different ways to achieve practical objectives by applying
economic theory in the real world.
- Economics as an applied science helps students to learn about the relationship of a business and
basic economic theories. It offers many opportunities to measure their academic and personal growth
and improve their educational career planning. It focuses primarily on theoretical business economics. It
focuses on urban problems, the health- care crisis, agricultural problems, poverty, economic growth and
the market. For example, the theories of the behavior of individuals and institutions engaged in the
production, consumption, distribution and exchange of goods and services.

• Economic theory uses different economic models to describe how the people react to a
particular economic situation.
• Economic models may be in the form of verbal expression, numerical tables, and
mathematical equations or diagram used to understand economic events.
• The law of supply and the law of demand are good example of a useful economic model.
The law of supply states that, other things being equal, as price increases, the quantity
supplied increases, and as price decreases, the quantity supplied decreases. The law of
demand states that, other things being equal, as price increases, the quantity
demanded decreases, and as price decreases, the quantity demanded increases.
Why Study Economics?
a. Decision-Making Skills. An exposure to quantitative problem solving techniques is
an important part of economics. The business sector typically rewards employees who
have acquired specific quantitative skills. The study of economics gives you an
opportunity to acquire those necessary skills.
b. Problem Solving Abilities. People with education in economics develop an
appreciation of the social issues-global warming, health care, education and social
security. The issues are complex and the ability to deal with them suggest ways of
improving our standard of living in the broadest sense that requires clear thinking.
C. Job Opportunities. Better job opportunities await the economics graduate.
Business and government are increasingly aware of the need for people who are
trained in economics. They are employed in teaching, government services, banks and
business firms. Their duties may include research, economic analyst, forecasting and
consultants on capital investments.
 Basic Economics Problems

• The fundamental problem of economics is to determine the most efficient

ways to allocate the resources. The decision must be made to transform he
different economic resources into goods and services to satisfy their need
and want.

There are three basic questions to make the right decisions:

• What to produce?
• How to produce?
• For whom to produce?
 What to produce?
• Every economy must determine what goods and services are to be
produced and in what quantities of each, to produce. In some, the buyers
and producers need to produce in order to obtain things and exchange the
things they already own. Since society cannot have everything, they must
decide which goods and services they want now and which one to give up.
- For example, if gadgets are in demand, they need to pay businesses
to produce and sell these gadgets in the market. If no one desires to buy
stereo sets, it is not worth producing them. In case a company produces an
item which buyers don't buy in much quantity, there will likely be inadequate
income. The company will have to enhance the quality and transform the
product to match the taste of the buyer. In some society, government decide
on what goods and services to produce based on the resources available and
demands of the buyers.
 How to produce?
• The company must decide on how to use the resources to produce goods and
services. What combinations of resources and technologies will be used to
produce goods and services at lowest cost? The manufacturer may wish to
maximize profits and minimize production costs. They may combine labor and
capital given the prices of labor and capital and productivity of those
resources.

For whom to produce?

• This question determine the distribution of goods and services. Goods and
services will be distributed to buyers on the basis of their ability and
willingness to pay its existing market price. The ability to pay the prices for
goods and service depends on the amount of income that buyers have, along
with the prices of, and tastes and preferences for various goods and services.
 Basic Economic Problem of the Country
• Unemployment. According to the Labor Force Survey, the
unemployment rate was 6 percent in October 2014 and 6.6 percent in
January 2015. Unemployment remains a persistent problem in the
Philippines because of its increase in population. As reported by the
Bangko Sentral ng Pilipinas, the total population in Philippines was last
recorded at 102.2 million people in 2015 from 26.3 million in 1960. The
number of people entering the job market has been greater than the
number of jobs created. The rural-urban migration increases due to
insufficient employment opportunities. Many of the unemployed
individuals are college graduates.
What Can Be Done to Solve Unemployment
Problem?
• Appropriate economic policies for labor-intensive industries.
• Improvement in the educational system of the country especially in the rural areas.
• Minimize rural-urban migration by improving the economic environment in the
rural areas.
• Provision of more investment opportunities to encourage local and international
investment like tax incentives.
• Proper coordination between the government and the private sector to solve the
problem of job mismatch.
• Decreasing the retirement age from 65 to 60 for public sector to give chance to
younger generation to enter the labor market but providing an attractive well-
defined benefit pensions and retiree health care for retirees.
• Slowing population growth. To improve standard of living of the Filipinos,
Philippine economic growth must increase faster than its population.
 Poverty
• As a fast-growing economy, with 6.3 percent Gross Domestic
Product for the 4th quarter of 2015, still there in a decline in the
incidence of poverty in the Philippines. Poverty remained not
only an economic problem but also a social problem of the
country. Increase in population, increase in the cost of living,
unemployment, inequality in the distribution of income are some
of the reasons why a decline in poverty is very slow.
What Can Be Done To Solve Poverty Problem?
• Reduce unemployment.
• Appropriate policy on labor income.
• Promote economic growth to improve the standard of living.
• Provision of unemployment benefits for those who will be unemployed due
to natural and man-made calamities.
• Increasing social services like education, health care and food subsidies
leads to sustainable poverty reduction.
Quality of Infrastructure
• Based on the Global Competitive- ness Report 2014-2015, the Philippines
ranks 91 out of 144 countries on a World Economic Forum survey of
infrastructure quality. This can be the result of low investment on infra-
structure projects. The budget for infrastructure is consistently below 3
percent of Gross Domestic Product (GDP) and the government spending on
social infrastructure for education and health is only 4 percent of GDP. From
the economist's point of view of poor infrastructure, the 2.2 million vehicles
a day experiencing traffic congestion cost the country Php876 billion a year,
or more than $20 billion, in lost productivity and wasted energy based on
the study conducted by the Ja- pan International Cooperation Agency that
would cost a serious drain on an economy of about $250 billion.
 What Can Be Done to Improve the Quality of Infrastructure?
• Quality infrastructure increases macro-level competitiveness and
encourages investments. In order to ease infrastructure constraints, the
Philippines need to achieve a gradual increase in infrastructure investments
to at least 5 percent of Gross Domestic Product (GDP), and an increase in the
efficiency of spending.
• The government shall implement fiscal reform program.
• Continues reform in key sectors-particularly power, roads, and water-to
improve cost recovery, competition, and institutional credibility, and to
sharply reduce corruption.
• Improving central oversight of the planning and coordination of investments
• Focus on investments through public-private partnerships to ad- dress key
bottlenecks, and achieve quick gains in service delivery.
 Income Inequality
• Income is the money that an individual earned from work or business received from
investments. Income inequality refers to the gap in income that exists between the rich and
the poor.

The following are the major causes of income inequality in the Philippines:
• Political culture can be considered as one of the major causes of income inequality in the
Philippines. The "palakasan" and the "utang na loob" that cannot be avoided especially after
election. If you are a relatives or friends or someone in power they can have all the chances to
get the position even without or less knowledge on the position given to them. "Utang na loob"
is indebtedness to someone who has done someone a favor. It is an obligation of a person to
repay whatever good things they have done to you. It may be in the form of voting for them in
the election or do something for them till the end.
• Indirect taxes also one of the major causes of income inequality. Indirect tax is a regressive tax
that the poor people shoulder the burden of paying higher taxes like the Value Added Tax.
• Income taxes. A Filipino worker receiving minimum wage is exempted in the payment of
income tax, but for those Filipino workers earning more than the minimum wage is taxed 32
percent.
What Can Be Done to Solve the Problem of Income Inequality?

• Policies to enforce progressive rates of direct taxation on income and

wealth, especially at the highest levels.
• Direct money transfers and subsidize food programs for the urban and rural
poor.
• Direct government policies to keep the price of essential products low.
• Reform people's political culture.
• Raise the minimum wage
• Encourage and expand collective bargaining
• Encourage profit sharing.
Philippine Socio-Economic Development
• Socio-economic development is the process of social and economic
development of the people in the community. Socio-economic
development is measured with indicators such as Gross Domestic Product
(GDP), life expectancy, literacy and levels of employment.

A. Economic Development. Economic development is the process of

improving the standard of living of every individual.
B. Social Development. Social development interventions will directly
reduce poverty in its multiple dimensions by increasing the poor's access to
social services and basic facilities.