APPLIED ECONOMICS

Is Economics an Applied Science?

Applied Science – is a discipline that applies existing scientific

knowledge to develop more practical applications like technology and
inventions. Applied science can also apply formal science, such as
statistics and probability theory.

Answer:
Yes, because economics deals with the analysis on how members of
society interacts with each other on the creation and utilization of
wealth.
 What is Applied Economics?
Applied Economics is the use of application of economic theories, researches, and
econometrics to real-life situations to make informed economic decisions and predicting
possible outcomes

The purpose is to improve the quality of life of people, the practices in business, and the
implementation of public policies by considering the cost and benefits, and human
behavior.

It may be practiced at macroeconomic and microeconomic levels.

Note: Econometrics is the application of statistical and mathematical models using data
 What is Applied Economics?
Applied economics is characterized by the application of economic theory
and econometrics to address practical issues in a range of fields including:
Demographic Economics Engineering Economics
Labor Economics Financial Economics
Business Economics Health Economics
Industrial Economics Monetary Economics
Agricultural Economics Public Economics
Development Economics Economic History
Education Economics
Three Basic Economic Questions

To provide for the needs of people and to cope with

constraints and limitations, societies must answer these basic
questions.

1. What to produce?
2. How to produce?
3. For whom to produce?
 Why do we need to answer
these Economic questions?

Answer:

T o answer solve the fundamental problems…

SCARCITY AND RESOURCE ALLOCATION
Economic Resource

Are all of the ingredients needed for production, including;

Natural Resources (Raw Materials/Land)

Human Resources (Entrepreneurs & Workers/Laborers)
Capital Resources (The machinery and tools of production)
What to Produce?

Since resources are limited, societies must decide and prioritize what
goods and services should be produced and later followed by
determining the quantity (how many/how much).

PRIMITIVE ECONOMIES MODERN ECONOMIES

BASIC NECESSITIES LEISURES&EDUCATION

How to Produce?

The method of production that has highest efficiency and yield to the
highest output shall be employed/used.

This should be the right combination of resources and technology to be

applied.

LEAST AMMOUNT OF INPUTS HIGHEST OUTPUT

CAPITAL INTENSIVE VS LABOR INTENSIVE

FOR WHOM TO
PRODUCE
Producers must also consider the target market (target consumers) to
know the demand in the economy.

This includes how to distribute those goods and services among the
population.
ECONOMIC SYSTEMS

An economic system is a means by which a society

determines the answers to basic economic questions.

Economic system control the factors of production and the

distribution of goods and services.

Remember the factors of production?

(land, labor, capital, and entrepreneurship)
4 TYPES ECONOMIC SYSTEMS

 Traditional Economy (Subsistence Economy)

 Command Economy (Planned Economy)
 Market Economy (Free-Market Economy)
 Mixed Economy (Combination of Command and
Market Economy)
 Traditional Economy

 It centers around the family or tribe that exist in a hunter-

gatherer and nomadic society
 Resources are owned and controlled by individuals
 This system lacks the potential to generate surplus
 Economic decisions are made by basic principles of demand
and supply
 There are very little division of labor or specialization
 Trade relies heavily on barter
 Some form of currency for trade eventually evolve
 Men and women are given different economic roles and tasks
 Command Economy
 The government (or any centralized authority) answers
basic economic questions and controls the production
and distribution of goods and services.
 People do not have the power to decide on what, how,
and from whom to produce.
 This type is common in communist societies where
power is centralized
 Society is vulnerable to economic crises or
emergencies, as they cannot quickly adjust to changed
conditions.
 In theory, this system works well if the central
authority exercises control for public’s best interest,
 Market Economy
 There is very little government interference on economic
activities
 People have the freedom to produce and/or consume in
any way and in any amount they want
 Most economic decision making is done through
voluntary transaction according to the laws of supply and
demand
 Arguably, growth is highest under this economic system
 The distribution of resources is not equitable because
those who succeed economically controls most of them
and amass a lot of economic power
 However, a pure market system does not really exist.
Laissez-faire

 A French phrase that translates as “leave alone”

 The less the government is engaged in the economy, the better off
society will be. Private individuals are unrestrained. They may
determine where to invest, what to produce or sell, and at which
prices to exchange goods and services.
 The laissez-faire marketplace operates without checks or
controls

 Note: Pure market economy does not exist anymore. Government

intervention is inevitable
 Mixed Economy
 A mixed economic system is a system that combines aspects
of both capitalism (market) and socialism (command)
 It protects private property and allows a level of economic
freedom in the use of capital, but also allows for governments
to interfere in economic activities.
 Most industries are privately-owned but still under regulation,
however industries that provide essential services are under
the control of the government.
 The economic questions are partly determined and answered
by the government and the producers and consumers. The
challenge is finding the right balance between free markets
and government control.
 Governments tend to exert much more control that is
necessary.
Economic Theories

 Economic Theories are ideas and principles that aim to describe

economies work.
 Economic theories are statements of a presumed relationship between two
or more variables, such as the relationship of price to demand, price to
supply, and so on.
 In principles, the approach to economic theory is divided into positive
and normative
 Purpose: This comprehensive system of assumptions, hypotheses,
definitions and instruction try to explain economic phenomena, interpret
why and how the economy behaves, and propose the best solution/s to
economic problems.
Examples of Economic Theories

 Supply and Demand (Invisible Hand)

 Classical Economics
 Keynesian Economics
 Neoclassical Economics
 Neo-Malthusian (Resource Scarcity)
 Marxism
 Laissez Faire Capitalism
Economic Models
May represent economic theories in
simplified ways that are composed of
diagrams or equations. Through a model,
a complex, real situation is pared
down/summarized to the essentials.
A good economic model is simple
enough to be understood while complex
enough to capture key information.
Therefore…
A theory is more abstract representation, while a
model is a more applied or empirical
representation.
Adam Smith and the
“Invisible Hand”
Scottish philosopher and economist who
was born in 1723
“The Father of Economics” or “The
Father of Capitalism”
The Wealth of Nation published in 1726 –
“the invisible hand” (self-regulation of
economy) became the basic idea of free-
market economy or capitalism
Adam Smith and the
“Invisible Hand”
He believed that all individuals act I their
self-interest, and can produce and
purchase by themselves.
Smith also emphasized that new
machinery, division of labor, and
specialization would lead to higher
production and greater wealth to a nation.
Later during the 1900s, the doctrine of
laissez faire, anchored with Smith’s idea,
was coined.
Karl Marx and “Class
Struggle”
A German philosopher born in 1818
Contrary to the idea of Smith, Marx saw
instability, struggle, and the decline of a free-
market economy.
“Das Kapital” (1867) – He explained that the
capitalists (the bourgeoisie/the rich/the ruling
class) make profit by exploiting the labor of
the workers (the proletariat/the poor/ the
ruled class). He said that the workers were
exploited/underpaid for the value that they
worked for.
Karl Marx and “Class
Struggle”
Marx believed that the struggle eventually
intensifies and would lead to the fall of
capitalism.
To him, this situation later leads to the
movement of society toward communism
wherein everybody, through government
intervention, owns the means of production.
John Maynard Keynes and
Government Intervention
A British economist born in 1883
In 1936, he published his work General
Theory of Employment, Interest, and Money.
His most significant work is about the role of
the government in a capitalism economy.
John Maynard Keynes and
Government Intervention
His works were written during the Great
Depression (1930s) in the US which questioned
the validity and applicability of Smith’s invisible
hand (no government intervention)
Keynes strongly believed that the only solution is
government intervention through government
spending by creating massive public works
program to employ the idle workforce
(unemployed). This way the money is put back to
the economy and into private-sector pockets,
ignite demand for goods and services, and pump
the economy again.