MACROECONOMICS

CHAPTER 2
EVERY DAY APPLICATION OF ECONOMICS
CHAPTER 2: EVERY DAY APPLICATION OF ECONOMICS

Economic models and theories

 In economics, just like in the natural sciences, theories are well substantiated statements about
certain related variables that scientifically explain a specific phenomenon.
 An example is the population theory of Thomas Malthus, an English cleric and scholar,
influential in the fields of political economy and demography, 1766 – 1834.
 He observed that population grow faster than food supplies, and recommended that population
be controlled.
 Although Malthus’ theory was true during his time, he failed to observe this phenomenon in
other countries like in the U.S. where food production is faster than population growth.
 Economics uses a lot of models. These models are used to illustrate, demonstrate, and
represent a theory or parts of it (Microeconomics: Principles and Policy by Baumol & Blinder,
2012).
 Economics simplify an explanation or description of a certain phenomenon, often thru graphs,
diagrams, or mathematical formulas.
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Circular flow model

 The circular flow model involves two participants, namely households and firms.
 Both are buyers and sellers.
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 In Figure 2.1, the households are sellers of economic resources also known as factors of
production.
 Since these resources are inputs for the firms which are considered as buyers in the process.
 After receiving payment for the resources, the households are then seen as buyers of goods and
services produced by the firms.
 In the same manner, the firms become sellers.
 As an example, Mr. Bayani, a part of the household, has a parcel of commercial space for lease
along EDSA near Monumento in Caloocan City.
 A well known restaurant decided to rent the place. Since his land is rented by a restaurant
business, Mr. Bayani is considered a seller. The restaurant owner is a buyer because the land is
part of the business firm’s input.
 After some time, Mr. Bayani celebrated his 50th birthday in the said restaurant. In this occasion,
Mr. Bayani became the buyer and the restaurant became the seller.
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Trade-off
 The concept of trade-off is illustrated in economics by the production possibilities frontier (PPF).
 It is a graph which shows the greatest sum of outputs given accessible inputs or factors of
production in an economy.
 For example, a firm needs to produce two types of soda drinks. Table 2.1 shows all the possible
production combinations of drinks that a manufacturer can produce in a given time.
 Using a fixed amount of inputs (resources), a manufacturer can produce 40 units of orange soda
and no cola in one hour, 30 units of orange soda and 20 units of cola in two hours, and so on.
 The trade-off is illustrated by showing how much of the cola is not produced as the
manufacturer chooses to spend more time in producing orange sodas.
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 It can be observed that at point A, 40 units of orange sodas but no cola will be produced.
 At point B, two hours will be consumed to make 30 units of orange soda and 20 units of cola.
 At point C, three hours will yield 25 orange sodas and 25 colas.
 At point D, four hours will result in 10 orange sodas and 35 colas.
 At point E, five hours will have an output of no orange soda and 40 colas.
 Therefore , the opportunity cost of producing cola drinks is the amount of orange soda that the
manufacturer has to give up. To produce 20 units of cola (from point A to point B), 10 units of
orange soda has to be given up.
CHAPTER 2: EVERY DAY APPLICATION OF ECONOMICS
Scope of economics:
Microeconomics and Macroeconomics
 Economics is divided into two main branches: microeconomics and macroeconomics.
 Microeconomics analyzes the market behavior of the firms. It focuses on the decision making
process of a particular unit of the economy, such as consumers, producers, and specific markets.
 In microeconomics, terms like consumer behavior, production theory, cot and profit, and market
structures are often encountered.
 In contrast, macroeconomics deals with the aggregates. Its scope is wider as it studies the
entirety of an economy, whether national or international, and determines economic changes.
 In macroeconomics, the initial discussions begin with how growth and output are measured and
how multipliers work.
 Labor, employment, and inflation are examined, as well as monetary and trade policies.
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Methods of economic analysis
 Two kinds of analysis are used in economics: Positive and Normative.
 Positive economic analysis simply describes what exists and how things work.
 It has a more objective orientation that distinguishes it from normative economic analysis which
looks at the outcome of economic behaviors through judgments and prescriptions for courses of
actions.
 Illustration: The statement “Taxes provide government services to the people.” is considered as
a positive statement since it only describes the existence of something. The context of the
statement may be wrong, yet positive economics in not concerned with right or wrong
statements. Instead, it only tells what is.

To transform the given example into a normative statement, an expression of opinion or value
judgment is simply added like in “The government should levy more taxes to provide more
services to the people.”
 These two approaches are vital tools for studying economics. Economists utilize them to come
up with systematized conclusions that will be used to formulate economic policies and theories.
CHAPTER 2: EVERY DAY APPLICATION OF ECONOMICS
True or False:
1. If you are working as a nurse in a hospital and you get sick before you receive your salary which is
delayed, you can offset your hospital costs from your wage.
2. There is no trade-off if there are three participants.
3. Payment for a land is called interest.
4. The delivery of goods and services in the circular flow model includes those items bought using credit
cards.
5. Trade-off eliminates opportunity cost.
6. Trade-off minimizes opportunity cost.
7. The Malthusian model refers to the use of preventive and positive checks.
8. The Malthusian model is the basis of the country’s health law.
9. The Philips curve is a trade-off between inflation and unemployment.
10. A decrease in unemployment leads to an increase in inflation.
Short answer:
Why can’t the Malthusian population theory be used today?