APPLIED ECONOMICS

A REFRESHER
At the end of this session, we should be
able 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.
BS Economics – What to expect?
How do financial markets behave?

 Interest rates movement

 Fluctuations in exchange rates
 Changes in stock prices
BS Economics – What to expect?
Why are some countries
poor while others are rich?
 Unemployment
 Inflation
 Hunger/Food Security
 Corruption
 Environmental Protection
DEFINITION
“The study of how society allocates scarce resources for production,
distribution and consumption, both individually and collectively”
(Samuelson & Nordhaus, 2005)

Goods available < Produce the highest

Human wants & quantity & quality
desires given limited resource
Scarcity – the reason
for being of the study
of economics

= problem of
LIMITED RESOURCE

Efficiency – the
objective of
Economics; to
maximize the use of
scarce resource
BS Economics… again!
Microeconomics
It is not from the KEY TERMS:
benevolence of the
butcher, the brewer
or the baker that we Self Interest
expect our dinner,
but from their
Competition
regard to their own Invisible Hand
interest.
BS Economics… again!
Macroeconomics

“In the long run, we’re all dead”

Key Ideas:
Monetary & Fiscal Policy
DEFINITION OF ECONOMICS

Strand 3:
Allocation
Strand 1: Strand 2:
Study of Wealth Study of Making Choices Accepting scarcity
Considering efficiency
Production & Selecting from alternative Decided by society
Consumption as a goods & alternative Forged by power,
way to acquire courses of actions, all value & belief systems
“wealth” with pros/cons
Economics as an applied social science
SOCIAL SCIENCE APPLIED SCIENCE

ULTIMATE GOAL: THE “GOOD” LIFE

Applied Economics - distinctions
POSITIVE ECONOMICS
Applies economics by answering
questions of fact
Bakit ang hirap magka-jowa?
Bakit mas malaki ang sweldo ni Mocha Uson
kaysa sa sweldo ni Mr. Lastimoza?
Ano ang epekto ng 4P’s program sa access to
primary at secondary education ng mga
mahihirap na pamilya?
NORMATIVE ECONOMICS
Applies economics by answering
questions of fairness
Tama ba na ipinagpalit niya ako sa iba
pagkatapos ibigay sa kanya ang lahat?
Ano ba dapat ang sweldo ng ating kaguruan?
May pagkukulang ba ang pamahalaan sa
aspeto ng prioritization sa budget?
Economics as an applied social science
 Economics deals with how people
interact with one another to sustain,
stabilize and develop the limited
resources of society

 Economics follows the scientific

process: identifies problems and
provides informed answers guided by
theory and asumptions of rationality
 Post Hoc Ergo Propter Fallacy
Since Event Y followed Event X, Event X
LOGIC OF caused Event Y
ECONOMICS
FALLACIES to be Ceteris Paribus
cautious of If we do this, all other things remaining
constant… this will happen

Fallacy of Composition
What’s true for one is true for all
Fundamental Questions of Economics

What to How to For whom to

produce? produce? produce?
 Response Model to the 3 Questions
Mixed Economy
1 – highest
demand Market drives Government
2 – cheapest Government deals decides
3 – highest with market failures everything
utility

Laissez Command
Faire Economy
  Difficulty in enforcing contracts
 ↓ Survival of the marginalized
PROBLEMS with  Monopoly instead of competition
Laissez Faire  No Public Goods
 Externalities
 Economic Fluctuations
  Low regard for consumer preferences

PROBLEMS with  Little freedom of choice

Command  Government inefficiency
Economies  Environmental Damage
 Little motivation for entrepreneurship
Inputs and Outputs
Inputs – commodities or services used to produce goods or services
combined with technology
Outputs - useful goods & services consumed or employed for
further production

LAND LABOR CAPITAL

Economic Q’s - restated

What With what For whom

outputs to inputs to should outputs
produce? produce? be distributed?
 Marginal Revenue (MR) – additional benefit
derived from an additional activity
Decision Making Marginal Cost (MC) – additional cost
using Economic incurred from additional production or
Analysis service

Law of MR
Diminishing Returns

MC
Explicit Benefits & Costs
Monetizable – can and should be captured in a
business’ or the country’s general journals
Enables cost & benefit analysis which drives clear &
uncontested business & policy decisions
Implicit Benefits & Costs
Ignored/
Opportunity Costs – what we Overvalued
Devalued
give up in exchange for utility Goods
Goods

Challenges:
Spatial – private over public
Temporal – current over future
Valuation of Opportunity Costs
Efficiency in
Economics

Analysis is simplified
through an either/or
selection of goods:

Guns or butter
Education or security
Beautiful or Smart
Decision Making
using Economic
Analysis Point of
Efficiency
Production
Possibility Frontier
Guns

Butter
 Poverty & Unequal Distribution of Income
At point B, we have
PH Economic very limited
resource, hence
Problems we’re poor

When MR ≠ MC At point A, we are

inefficient – hence
B we are poor
A
 Population Growth - is it good or bad?
At Point Z, MR =
MC but we ignored
PH ECONOMIC At Point Y, MR > the possibility of
PROBLEMS MR MC and yet we improving our
are not pushing plight
When MR ≠ MC Z
our potential
further X

Y At point X, we’ve
already reached
a point where
MR < MC

MC
 1. Ban on provincial busses in EDSA
2. Ban on Single-Driver cars in EDSA
3. No Parking Lot – No Car policy
4. Ban on Imported Rice

Your turn 5. Eviction of Informal Vendors from Divisoria

6. Preferential Option for Indigent Students Admission to
Apply the recent
UP
learning by applying
economic analysis on 7. Decreasing Enrollment of Poor Students to UP
the following PH
problems 8. Eviction of Indigenous People in Kaliwa Dam Area
9. Continued Lack of Rehabilitation in Typhoon Yolanda
area
10. Cutting of Pine Trees in Baguio for SM Mall Expansion
11. Ban on Single-Use Plastics Proposal
 Economics as
Scarcity &
an Applied
Efficiency
Social Science

Marginal Cost
What, How
vs Marginal
and For Whom
Return

Basic
Economic
Analysis