LESSON 2.

ECONOMICS AS AN APPLIED SCIENCE

Specific Objectives:

 Discuss why economics is an applied science

 Explain the basic economic problems
 Understand how applied economics work
"Economics is a study of economic activities of a man. It is only concerned with the wealth-
getting and wealth-using activities of a man". -Prof. Marshall

The term "applied economics" is believed to have started 200 years ago in the writings of two
economists: -Jean-Baptiste Say (1767-1832) and John Stuart Mill (1806-1873)

Applied economics - is the study of economics in relation to real world situations. It is the
application of economic principles and theories to real situations, and trying to predict what
the outcomes might be.

Simpler definition: Applied economics – is the study of observing how theories work in
practice.

What is the importance of applied economic application?

1. Applying economics to a company, household or a country helps sweep aside all attempts
to dress up a situation so that it will appear worse or better than it actually is.
*applied economics becomes a powerful tool to reveal the true and complete situation in
order to come up with things to do
Example:
Applied economics can assess the profits of a certain company
The result can help the executives to do some strategies in order to boost its sales

2. Applied economics acts as a mechanism to determine what steps can reasonably be taken
to improve current economic situation
*to examine each aspect, one can strengthen areas where performance is weak

Example
• Purchase of goods and services
• Usage of raw materials
• Division of labor within entity (e.g. firm, company, agency)

3. Applied economics can teach valuable lessons on how to avoid the recurrence of a
negative situation, or at least minimize the impact.
*to review what steps were taken to improve and correct similar situations and continue
good strategies to keep the economy flowing in a correct direction.

What is econometrics?

Econometrics -is the application of statistical and mathematical theories to economics for the
purpose of:
 Testing hypotheses
 Forecasting future trends
The results of econometric are compared and contrasted against real life examples.

Theoretical Applied Economics

Econometrics example
Real life application of econometrics would be to study the hypothesis that as a person's income
increases, spending increases.

Basic economic problems

 Scarcity of means for satisfying various needs is the central problem of our economic life
and it is scarcity that creates the need to make a choice.
 Scarcity and choice go hand in hand.

Poverty

Inflation Applied Unemployment

Slow Growth

Scarcity-refers to the tension between our limited resources and our unlimited wants and needs.

1. What to produce?
- The system must determine the desires of the people.
- Goods and services must be based on the needs of the consumers

Factors to consider:
a. Availability of resources
b. Physical environment
c. Customs and traditions of people
2. How to produce?
The system must select the proper combination of economic resources in producing the right
amount of output
- The quality of output must come first before the quantity

3. For whom shall the goods and services be produced?

- This has something to do with distribution
- Once the goods are produced, how shall they be distributed?

4. Are the country's resources being utilized or some of them are lying idle and
unemployed?
- When resources are scarce, it is absolutely not right to keep some of the available ones idle.
- If resources are not fully utilized, the production system is said to be inefficient

5. Is the economy's capacity to produce goods growing or remaining the same overtime?
- To achieve a growth is productive capacity is a universal objective.

ACTIVITY: Answer the following questions.

1. In your own perspective what are the solutions to economic problems?

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2. How should economies around the world be structured to meet the needs and wants of its
citizens?
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3. What is the difference between needs and wants?
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Type of Economic Systems: (to address economic problems)

1. Free Market Economy

A free market economy is a system characterized by competition and a high level of private
ownership. Prices are set by market mechanism or by the interaction of buyers and sellers in the
market. Resources are allocated freely based on the interaction of market forces (i.c.., buyer and
seller). Individuals and entities have the economic freedom to exchange goods and make
decisions, which means that consumers determine what to produce based on their preference,
while the producers have the liberty to decide on how the products will be produced.

Additionally, the government maintains a hands-off role and has minimal involvement in
achieving economic goals. Nations with a free market economy include New Zealand,
Singapore, and Australia.

2. Centralize Economy
Another extreme economic system is a centralized economy. It is also sometimes referred to as
command economy. This system is characterized by the heavy involvement of the government in
managing the economy. The method of central planning is employed where the government
plans, directs, and decides on how resources will be allocated. Individuals have no or limited
economic freedom and private ownership is very limited. An examples of a centralize economy
is that of North Korea.

3. Mixed Economy
An economic system that combines the features of free market and centralized systems is
referred to as a mixed economy. Free market forces and central planning together determine
what to produce, how to produce, and for how to produce. There is a balance between private
and government accountability in achieving economic goals. Most industrialized countries have
this type of economic system. Examples include the United States France and Other European
countries.

In a mixed economy, government intervention includes the power to impose taxes, set
trade limits and restriction, and implement legislations. In addition to oversight functions, the
government can implement policies to promote business and at the same time can impose
sanctions to penalize industries. In return, the government provides services to the public.

4. Traditional Economy
A traditional economic system is characterized by customs and habits. Barter is a mechanism
where goods are exchanged for another good. Although not always recognized as a form of
economic system in the 21" century, it is still worthwhile to know that most economies have
evolved from this type of economic system. Currently, the traditional system is limited to some
nations in Africa. In the Philippines, the barter system may still be in a use in some rural areas.

Philippines Basic Economic problems:

1. Non – inclusive growth despite of Economic Growth
2. Unemployed despite of Improvements
3. Poverty
4. Population growth

ACTIVITY: Answer the following questions.

1. How does scarcity influence all economic decisions?

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2. Why is scarcity an economics problem that every country faces?

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3. How do the Fundamental Questions of Economics help us to understand the world of economics?
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4. What is the difference between needs and wants?

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5. How should economies around the world be structured to meet the needs and wants of its citizens?
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