Lesson I.

Introduction to Applied Economics

1. Introduction

Economics – comes from the Greek word “oikos” meaning household and “nomos” meaning management, so
economics is household management.

- Is the wise production and use of wealth to meet the demands or needs of the people.

The Father of Economics

1. Adam Smith – “An Inquiry Into the Nature and Causes of Wealth of Nation”, in 1776 attracted widespread
attention and helped establish economics as scientific field of study apart from political science (the branch of
knowledge that deals with systems of government; the analysis of political activity and behavior) and moral
philosophy (the branch of philosophy concerned with ethics).

Economics as defined by authors of Economics books

1. Paul Samuelson (Economics) - “the study of how people and society end up choosing, with or without use of
money, to employ scarce resources that could have alternative uses to produce various commodities among
various persons and groups in society.”
2. Roger Le Roy Miller (Economics, Today and Tomorrow) - “Economics concerns situations in which choices must
be made about how to use limited resources, when to use them and for what purposes. Resources can be
defined as the things people use to make the commodities they want.”
3. Hall and Loeberman (Macroeconomics: Principles and Applications) - “The study of choice under the condition of
scarcity”
4. Bernardo Villegas (Guide to Economics for Filipinos) - “A social science that studies and seeks to allocate scarce
human and non-human resources among alternatives in order to satisfy unlimited human wants and desires.”
5. Gerardo Sicat (Economics) - “a scientific study which deals with how individuals and society make choices,”

Common words among definitions…

 Scarcity - a situation wherein the amount of something available is insufficient to satisfy the desire for it.
 Resources - The labor, capital, land and natural resources and entrepreneurship that are used to produce goods
and services.
 Unlimited – without limits, infinite
 Wants –desires

Finally…

 ECONOMICS – is a social science that deals with how people organize themselves in order to allocate scarce
resources in order to produce goods and services that will satisfy the unlimited and multiplying wants and needs
of man.

Economics as a Science (Is Economics a science? Explain why if “yes” or why not if “no”)

 Is a science because it is an organized body of truth, coordinated, arranged and systematized with reference to
certain general laws and principles. (Observation, Formulation of theories, Gathering of data, Experimentation,
Conclusion, Generalization)
 Economic analysis seeks to explain economic events using some kind of logic based on a set of systematic
relations.
 It is a social science because the subject matter of economics is people or societies and their behavior,
unpredictable in nature.
1.1 Economics as a Social Science
Economic 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.
As a Social Science, Economics studies how individuals make choices in allocating scarce/limited resources to
satisfy their unlimited wants.
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
If human wants are unlimited but the resources required to satisfy them are limited, then, what is the
problem of society? SCARCITY.
In diagram,
Limited Resources Unlimited Human Wants

SCARCITY

Choices & Decision-making

Scarcity - Is a condition where there are insufficient resources to satisfy all the need and wants of a population.
Relative Scarcity Is when a goods is scarce compared to its demand. RELATIVE SCARCITY occurs not because the
good is scarce per se and is difficult to obtain but because of the circumstances that surround the availability of
the good.
Absolute Scarcity - is when supply is limited. It explains why there are some products that are very expensive in
the Philippines.
Choices And Decision Making - With the presence of scarcity, there is a need to make decisions in choosing how to
maximize the use of the scarce resources to satisfy as many wants as possible.
Opportunity Cost - Refers to the value of alternative. The concept of OPPORTUNITY COST holds true for
individuals, businesses, and even a society. In making a choice, trade-offs are involved.
What will happen if there is no SCARCITY? - Without scarcity, a person does not need to make choices since
he/she can have everything he/she wants.

Concerns of Economics
All societies are faced with basic questions in the economy that have to be answered into with constraints and
limitations.
1. Economics is concerned with PRODUCTION
 Production is the use of inputs to produce outputs.
 Inputs are commodities or services that are used to produce goods and services.
 Outputs are the different goods and services which come out of production process.
 Society have to decide what outputs will be produced and in what quantity
Basic Economic Questions Society must answer
1) WHAT to produce? (make)
2) HOW MUCH to produce? (quantity)
3) HOW to produce? (manufacture)
4) FOR WHOM to produce? (who gets what)
5) WHO gets to make these? Decision?
 2. Economics is concerned with DISTRIBUTION
 Distribution is the allocation of the total product among members of society. It is related to the problem
of for whom goods and services are to be produced. (For Whom to produce)
3. Economics is concerned with CONSUMPTION
 Consumption is the use of a good or service. Consumption is the ultimate end of economic activity.
WHEN THERE IS NO CONSUMPTION, THERE WILL BE NO NEED FOR PRODUCTION AND DISTRIBUTION.
4. Economics deals with PUBLIC FINANCE
 Public Finance is concerned with government expenditures and revenues. Economics studies how the
government raises money through taxation and borrowing.
ECONOMIC SYSTEMS
The economic system is the means through which society determines the answers to the basic economic problems
mentioned.
1. Traditional Economy - Decisions are based on traditions years and passed on and practices upheld over the from
generation to generation. Methods are stagnant progressive. Therefore, Traditional societies exist in primitive
and backward civilizations.
2. Command Economy - This is the authoritative system wherein decision-making centralized is in the government
or a planning committee. Decisions are imposed on the people who do not have a say in producing goods. 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 preference are reflected in the
prices they are willing to pay in the market and are therefore the basis of the producer’s decisions on what
goods to produce.

DIVISION/BRANCHES OF ECONOMICS
A. MICROECONOMICS - (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that
studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce
resources and the interactions among these individuals and firms.
- Deals with the economic behavior of the individual units of an economy such as consumers, firms, the
owners of factors of productions
B. MACROECONOMICS - Deals with the economic behavior of the whole economy or its aggregate such as
government, business, unemployment, inflation and the like.
- Refers to management of income, expenditures, wealth or resources of a nation.
- studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national
income, gross domestic product (GDP), and changes in unemployment.
TYPES OF ECONOMICS
1. Household Economics - most common use of economics is for the family. At this level, anyone who knows the
economic principles will be able to improve the running of the household.
2. Business Economics – when a person or group of persons begins to work, they come under the system of
business economics in their workplace. In this type, you deal with the rent, salary, profits and others.
3. National Economics – Economic factors of problems affecting the whole nation. Deals with the management of
income, expenditures, wealth or resources of a nation.
4. International Economics – The highest stage of economic activities involving the business of one country with
other countries like trade, tourism, exchange rates.
ESSENCE OF STUDYING ECONOMICS
 To understand the world better - Applying the tools of economics can help you understand global and
cataclysmic events such as wars, famines, epidemics, and depressions. Economics has the power to help us
understand these phenomena because they result from the choices we make under the condition of scarcity.
 To gain self-confidence and become wise decisions makers - Mastery of economics will help you to understand
how things work in your society thereby “feeling equipped”
  To achieve social change and contribute to National Development - Economics can help us understand the
origins of serious social problems such as: unemployment, hunger, poverty, disease, child abuse, drug addiction,
violent crime. It will also explain why previous efforts to solve these problems have failed, and help us to design
new, more effective solutions.
 To help prepare for other careers - Economics has long been a popular college major for individuals who are
intending to work in business. But it has also been popular among those planning careers in politics, international
relations, law, medicines, engineering, etc. This is for good reason because practitioners in each of these fields
often find themselves confronting economic issues.
MEASURING THE ECONOMY
The heart of economy is production whose value measures both resource input and output of people. The
interplay of resources and outputs tells how well the economy has performed.
Economic Resources - Are factors of production used to produce things (Commodities) that people desire in
order to satisfy their wants.
Commodities - something that is bought and sold”, that is useful and valued. Things that people produce. It can
be goods (tangible) and services (intangible).
Categories of Resources
1. Land - gift of nature used in production (Mineral and oil deposits, water. Ferile soil, air, climate forest, wildlife,
and rain).
2. Labor or Human Resurces - physical and mental talents to produce goods and services
3. Capital - man-made or manufactures resources or also known as capital goods used in producing consumer
goods. Ex. Buildings, machine, tools, equipments, roads, highways, bridges, softwares, etc.
4. Entreprenuerial 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.

GNP vs. GDP

Gross National Product
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
ECONOMY’S RESOURCES are those belonging to Filipino citizens and corporations.
NOT ALL RESOURCES BELONGING TO THE ECONOMY ARE IN THE ECONOMY. CONVERSELY,
NOT ALL RESOURCES IN THE ECONOMY BELONG TO THEECONOMY.
GNP = C + I + G + (X – M)
Where C = Consumption (household and individual)
I = Investment (stocks of values for future use)
G = Government expenditures on goods and services
X = Exports
M = Imports
Gross Domestic Product
Better indicator of domestic employment opportunities. Defined as the market value of final products produced within
the country.
GDP is net of GNP after deducting NET FACTOR INCOME from abroad or by deducting factor income from abroad and
adding back FACTOR PAYMENTS to other countries.
NET FACTOR INCOME from abroad is net export of factor service equal to Factor income from abroad less the factor
payments of other countries.
Net Inflow = Inflow – Outflow
-Net Inflow = -Inflow + Outflow
1.2 Economics as an Applied Science
Applied Economics – involves economists taking generally accepted theory and applying these theories to something
that is happening in the real world, with an eye toward determining what can reasonably be expected to happen next.
3 Reasons why applying economic theories to current economic conditions can be useful
1. Applied Economics gives us True Picture.
- Applying economics to the status of the economy of a company, household or a country helps to avoid
attempts to dress up the situation so that it will appear to be worse or better than it actually is.
- Applied Economics is a powerful tool that enables the true and complete picture to emerge, so that it
becomes possible to decide what to do and where to go from current position.
2. Applied Economics gives us Sound Ideas.
- Applied economics as a mechanism to determine what steps can reasonably be taken to improve the
current economic situation. Each element that is relevant to the contempory mode of operation of the
entity – including the purchase and sale of goods and services, the usage of raw materials and the
division of labor within the entity – come into play.
- Examining each aspect of the current economic condition will often yield sound ideas on how to
maintain aspects that are working at the reasonable rate of efficiency and strengthen areas where the
performance is weak.
3. Applied Economics gives us Valuable Lessons.
- Applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation,
or at least minimize the impact.
- Applied economics is all about the application of theory to real-life situations, so the process can help
develop an understanding of why a condition took place. This includes reviewing what steps were taken
to improve or correct similar situations and how those strategies can be employed to keep the
economy flowing in a direction that will preclude a repeat of the undesired situation.
Business Economics/Managerial Economics – Business economics (also called managerial economics). Is a field of
applied economics that applies microeconomics analysis to specific business decisions. As such, it bridges economic
theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and
correlation, Lagrangian calculus(linear). If there is a unifying theme that runs through most of the business economics, it
is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for
example through the use of operations research and programming.
Common Features of Business Economics
 It is concerned with economic decision making-this implies that it deals with identification of economic choices
and allocation of scarce resources.
 It is goal oriented and prescriptive –it deals with how decisions should be made by business economists to
achieve organizational goals.
 It is pragmatic –it deals with those analytic tools which help in improving decisions.
 It provides a link between microeconomics and decision making –using economic theory, in many
ways, analogous to using a road map.
 a road map abstracts away from non-essential characteristics and concentrates on what is relevant for the task
at hand.
Nature of Business Economics
 It is micro-economics in nature where the unit of study is a firm.
 It is concerned with normative micro-economics and not with positive micro economics.
 It utilizes an understandingof macro-economics to analyze the external conditions which are relevant to the
business.
  It concentrates on making economic theory more application oriented. While economic theory tries to
solve the complicated theoretical issues, business economics tries to introduce complications which the
economists ignore by assuming them to be constant.
 It is both conceptual and metrical. An intelligent application of quantitative techniques to business
presupposes careful judgment and thinking about the nature of the particular problem to be solves.
Business economics provides the necessary conceptual tools to achieve this.
 It helps in making rational choices. Business economics continues to face the problem of scarcities and,
consequently, must continue to make choices. Business economics is goal-oriented and aims at achieving
maximum objectives.

Application of Business Economics

Opportunity Cost - is the cost of alternative opportunity given. When a choice is made in favor of a particular
alternative that appears to be most desirable of all the given alternatives, then the next best alternative has
been given up. The benefit of the next best alternative which has been sacrificed due to choices of the best
alternative is known as the opportunity cost of the best alternative.
• The foregone benefit of the next best alternative when resources are used for one purpose rather than another
• Opportunity cost is the term used to represent the true cost of an economic decision and can be defined as the
value of the next best alternative foregone.
• Production of one good means foregoing the production of another good. Similarly, consuming one good or
service reduces our purchasing power and prevents us from consuming another good or service
• What you are missing out on because of the activity you chose to partake in
Example: You (or most of you) are seniors about to graduate. When August hits you will be faced with the
decision to attend college or enter the workforce. You could either a) spend the $30k a year to attend a
University, or b) take a job working retail in the KOP mall for $30k/ year. What is your opportunity cost?
• For example, $ 20 spent on a CD could have been used to buy a T-shirt. The monetary cost is $ 20 but the
opportunity cost is the T-shirt.
• LeBron James is a Master Opportunity Cost. Attending any college in the country on scholarship to play
basketball Vs. $13 million contract with Cleveland Cavaliers/sponsorship with Nike and Coke

Time value of money

The basic valuation of investment models are based on the concept that ‘money has a time value’i.e., P100
received today has higher value than P100 received after 5 years.

The following are reasons behind it –

1. Compensation for uncertainty.

2. Preference for present consumption.
3. The re-investment opportunity.

1.3 Basic Economics problems and the Philippine socioeconomic development in the 21st century
1. Unemployment – According to the Labor Force Survey, the Philippine rate was 6% in Oct 2014 and 66% in January
2015. The number of people entering in the job market has been far greater than the number of jobs created.
What can be done?
1. Economic policies for labor intensive industries
2. Improve the educational system of the country
3. Minimize rural urban migration
4. Provision of investment opportunities
5. Coordination between the government and private sector to solve the problem of job mismatch
6. Decreasing the retirement age from 65 to 60
7. Slowing population growth
2. Poverty – increase in population, increase in cost of living, unemployment, inequality in the distribution of
income
What can be done?
1. Reduce unemployment
2. Appropriate labor policy
3. Promote economic growth to improve the standard of living
4. Provision of unemployment benefits for those who will be unemployed due to natural and man-made
calamities
5. Increasing social services like education, health care and food subsidies leads to sustainable poverty
reduction

3. Quality of Infrastructure – Based on the Global Competitiveness Report 2014-2015, the Phil ranks 91 out of 144
countries on a World Forum Survey of infrastructure quality resulted from the low investment on infrastructure.
The budget of this is consistently below 3% of GDP. Budget for social infrastructure for education and health is
only 4%.

What can be done?

1. Gradual increase in infrastructure investment to at least 5% of GDP and increase in the efficiency of
spending
2. Implement Fiscal reform program
3. Reform in key sectors – particularly power, roads, and water, to improve cost recovery, competition and
institutional credibility and sharply reduce corruption
4. Focus on investment through public-private partnership to address bottlenecks and achieve service and
delivery.

4. Income Inequality – Refers to gap in income that exist between the rich and the poor
Causes: 1. Politial Culture (palakasan, utang na loob)
2. Indirect Taxes – regressive tax that the poor people shoulder at burden of paying higher tax like VAT
3. Income Tax – a Filipino worker receiving a minimum wage is exempted in the payment of income tax,
but for those Filipinos workers earning more than the minimum wage is taxed 32%.

What can be done?

1. Policies to enforce progressive rates of direct taxation on income and wealth especially at a highest level
2. Direct money transfer and subsidies food programs for the urban and rural poor
3. Direct government policies to keep the price of essential products low
4. Reform people’s political culture
5. Raise the minimum wage
6. Encourage and expand collective bargaining (wage/salary, number of hours, etc)
7. Encourage profit sharing