Introduction to Applied Economics

Learning Objectives:

At the end of the chapter, the students are expected 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.

Economics as a Social Science

Once of the popular attempts to define economics suggests that “economics is the science
which studies human behavior as a relationship between ends and scarce means which have alternative
uses.” A definition which has also gained prominence is that “economics is the study of the ways that
individuals and societies allocate their limited resources to satisfy their unlimited wants.”

It is important to recognize the following aspects of economics:

1. It is a science concerned with human behavior.

2. 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.
3. It is concerned with man’s material welfare.

Economics is by no means the product of the single mind, but probably no one is more
deserving of this title “Father of Economics” than Adam Smith. His book “An Inquiry Into The
Nature and Causes of the Wealth of Nations” in 1776 attracted widespread attention and helped
establish economics as a scientific field of study apart from political science and moral
philosophy.

Economics 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.

Economics as a social science has common ground with other social sciences. Economics
borrows freely from the works of psychologists, sociologists, anthropologists, legal scholars,
ecologists, biologists, political scientists and philosophers, all of whom offers alternatives of the
economic way of thinking about how the world works. But economics has some advantages over
the social sciences. Firstly, the economic motives of human beings are more regular and
therefore predictable. Secondly, there is more available factual information in the form of
economic statistics that can be the basis of theoretical verification.

The problems of economics arise out of the scarcity of resources to satisfy human
wants. Human wants are unlimited, but the resources (land, labor, and capital) required to
satisfying them are limited. If human wants are unlimited, but resources to satisfy those wants
are limited, then people in the society face the problem of scarcity.
 Everyone has to make choices. You may see many items that you would like to have, but
you cannot afford to buy them all. Business owners, managers, team leaders and even
governments, must take right decision because they cannot have everything. There will always
be difference between what people want and the resources available to satisfy those wants.

Economic Resources

Economic resources are factors of production used to produce things that people desire in order
to satisfy their wants. The things that people produces are called commodities. Commodities may be
divided into goods and services. Goods are tangible, like bags or shoes, and services are intangible, like
haircuts or education. The act of making goods and services is called production, and the act of using
them to satisfy your wants is called consumption.

It has been conventional to categorize economic resources (factors of production) as land, labor,
capital and entrepreneurial ability.

Categories of Resources

Land – It includes all natural resources (gifts of nature) used in the production process. These include
mineral and oil deposits, water, fertile soil, air, climate forest, wildlife, and rain.

 Payment for the use of land is called rent. Rent is income to the owner of the land.

Labor or Human Resources – its refers to the physical and mental talents to produce goods and services.

 Payment for the use of labor is called wage. Wage is income to laborers, who own their labor.

Capital – Man-made or manufactured resources or also known as capital goods used in producing
consumer goods. These include buildings, machine, tools, equipment, roads, highways, bridges and even
software.

 Payment for the use of capital is called interest.

Entrepreneurial 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.

Economics as an Applied Science

Applied Economics involves different ways to achieve practical objectives by applying economic
theory in the real world.

Economics as an applied science helps students to learn about the relationship of a business and
basic economic theories. It offers many opportunities to measure their academic and personal growth
and improve their educational career planning. It focuses primarily on theoretical business economics. It
focuses on urban problems, the health-care crisis, agricultural problems, poverty, economic growth and
the environment.

Economic Theory is a broad concept for the explanation and understanding of the movement of
goods and services in the market. For example, the theories of the behavior of individuals and
institutions engaged in the production, consumption, distribution and exchange of goods and services.

Economic theory uses different economic models to describe how the people react to a
particular economic situation.

Economic models may be in the form of verbal expression, numerical tables, and mathematical
equations or diagram used to understand economic events.

The law of supply and the law of demand are good example of a useful economic model. The
law supply states that, other things being equal, as price increases, the quantity supplied decreases. The
law of demand states that, other things being equal, as a price increases, the quantity demanded
decreases, and as price decreases, the quantity demanded increases.

Why Study Economics?

a) Decision- Making Skills. An exposure to quantitative problem solving technique is an important

part of economics. The business sector typically rewards employees who have acquired specific
quantitative skills. Study of economics gives you an opportunity to acquire those necessary
skills.

b) Problem Solving Abilities. People with education in economics develop an appreciation of the
social issues – global warming, health care, education and social security. The issues are complex
and the ability to deal with them suggest ways of improving our standard of living in the
broadest sense that requires clear thinking.

c) Job Opportunities. Better job opportunities await the economics graduate. Business and
government are increasingly aware of the need for people who are trained in economics. They
are employed in teaching, government services, banks and business firms. Their duties may
include research, economic analyst, forecasting and consultants on capital investments.

Basic Economic Problems

The fundamental problem of economics is to determine the most efficient ways to allocate the
resources. The decision must be made to transform the different economic resources into goods and
services to satisfy their need and want.

There are three basic questions to make the right decisions:

 What to produce?
 How to produce?
 For whom to produce?
What to produce?

Every economy must determine what goods and services are to be produced and in what
quantities of each, to produce. In some, the buyers and producers need to produce in order to obtain
things and exchange the things they already own. Since society cannot have everything they must
decide which goods and services they want now and which one to give up.

For example, if gadgets are in demand, they need pay businesses to produce and sell these
gadgets in the market. If no one desires to buy stereo sets, it is not worth producing them. In case a
company produces an item which buyers don’t buy stereo sets, it is not worth producing them. In case a
company produces an item which buyers don’t buy in much quantity, there will likely be inadequate
income. The company will have to enhance the quality and transform the product to match the taste of
the buyer. In some society, government decide on what goods and services to produce based on the
resources available and demands of the buyers.

How to produce?

The company must decide on how to use the resources to produce goods and services. What
combinations of resources and technologies will be used to produce goods and services at lowest cost?
The manufacturer may wish to maximize profits and minimize production costs. They may combine
labor and capital and productivity of those resources.

For whom to produce?

This question determine the distribution of goods and services. Goods and services will be
distributed to buyers on the basis of their ability and willingness to pay its existing market price. The
ability to pay the prices for goods and services depends on the amount of income that buyers have,
along with the prices of, and tastes and preferences for various goods and services.

Basic Economic Problems of the Country

Philippine appeared to be one of the fastest growing economies of Asia. As reported by the
Philippine National Statistical Coordination Board, the Philippines economy grew an annual 6.3 percent
in the December quarter of 2015. According to the Philippine National Statistics Office, Philippines
annual inflation rate slowed to 1.3 percent in January 2016 from 1.5 percent in December, recorded a
Current Account surplus of 88.41 US$ Million in September of 2015 as reported by the Bangko Sentral
ng Pilipinas but still need to address different economic problems to achieve economic growth.

 Unemployment. According to the Labor Force Survey, the unemployment rate was 6 percent in
October 2014 and 6.6 percent in January 2015.Unemployment remains a persistent problem in
the Philippines because of its increase in population. As reported by the Bangko Sentral ng
Pilipinas, the total population in Philippines was last recorded at 102.2 million people in 2015
from 26.3 million in 1960. The number of people entering the job market has been greater than
 the number of jobs created. The rural-urban migration increases due to insufficient employment
opportunities. Many of the unemployed individuals are college graduates.

What Can Be Done to Solve Unemployment Problem?

1. Appropriate economic policies for labor-intensive industries.

2. Improvement in the educational system of the country especially in the rural areas.
3. Minimize rural-urban migration by improving the economic environment in the rural areas.
4. Provision of more investment opportunities to encourage local and international investment like
tax incentives.
5. Proper coordination between the government and the private sector to solve the problem of job
mismatch.
6. Decreasing the retirement age from 65 to 60 for public sector to give chance to younger
generation to enter the labor market but providing an attractive well-defined benefit pensions
and retiree health care for retirees.
7. Slowing population growth. To improve standard of living of the Filipinos, Philippine economic
growth must increase faster than its population. If the country's output over a period of time
increase by 5 percent, while its population increased by 20 percent, standard of living is better in
the beginning of the period but difficult in the end. It population increased by 5 percent, while
output increase by 20 percent, standard of living would have been improved. The government
must encourage people to limit the size of their families and at the same time increasing
economic growth.
 Poverty. As a fast-growing economy, with 6.3 percent Gross Domestic Product for the 4 th
quarter of 2015, there is a decline in the incidence of poverty in the Philippines. Poverty
remained not only an economic problem but also a social problem of the country. Increase in
population, increase in the cost of living, unemployment, inequality in the distribution of income
are some of the reasons why a decline in poverty is very slow.

What Can Be Done To Solve Poverty Problem?

1. Reduce unemployment.
2. Appropriate policy on labor income.
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.

 Quality of Infrastructure. Based on the Global Competitiveness Report 2014-2015, the

Philippines ranks 91st out of 144 countries on a World Economic Forum survey of infrastructure
quality. This can be the result of low investment on infra-structure projects. The budget for
infrastructure is consistently below 3 percent of Gross Domestic Product (GDP) and the
8overnment spending on social infrastructure for education and health is only 4 percent of GDP.
From the economist’s point of view of poor infrastructure, the 2.2 million vehicles a day
 experiencing traffic congestion cost the country Php876 billion a year, or more than $20 billion,
in lost productivity and wasted energy based on the study conducted by the Japan international
Cooperation Agency that would cost a serious drain on an economy of about $250 billion.

What Can Be Done to Improve the Quality of Infrastructure?

1. Quality infrastructure increases macro-level competitiveness and encourages investments. In

order to ease infrastructure constraints, the Philippines need to achieve a gradual increase in
infrastructure investments to at least 5 percent of Gross Domestic Product (GDP), and an
increase in the efficiency of spending.
2. The government shall implement fiscal reform program.
3. Continues reform in key sectors-particularly power, roads, and water-to improve cost recovery,
competition, and institutional credibility, and to sharply reduce corruption.
4. Improving central oversight of the planning and coordination of investments
5. Focus on investments through public-private partnerships to ad-dress key bottlenecks, and
achieve quick gains in service delivery.

 Income Inequality. Income is the money that an individual earned from work or business
received from investments. Income inequality refers to the gap in income that exists between
the rich and the poor.

The following are the major causes of income inequality in the Philippines:

1. Political culture can be considered as one of the major causes of income inequality in the
Philippines. The "palakasan" and the "utang na loob that cannot be avoided especially after
election. If you are a relatives or friends or someone in power they can have all the chances to
get the position even without or less knowledge on the position given to them. "utang na loob is
indebtedness to someone who has done someone a favor. It is an obligation of a person to
repay whatever good things they have done to you. may be in the form of voting for them in the
election or do something tor them till the end.
2. Indirect taxes also one of the major causes of income inequality. Indirect tax is a regressive tax
that the poor people shoulder the burden of paying higher taxes like the Value Added Tax.
3. Income taxes. A Filipino worker receiving minimum wage is exempted in the payment of income
tax, but for those Filipino workers earning more than the minimum wage is taxed 32 percent.

What Can Be Done to Solve the Problem of Income Inequality?

1. Polices to entorce progressive rates of direct taxation on income and wealth, especially at the
highest levels.
2. Direct money transfers and subsidize 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
7. Encourage profit sharing.
Philippine Socio-Economic Development

Socio-economic development is the process of social and economic development of the people in
the community. Socio-economic development is measured with indicators such as Gross Domestic
Product (GDP), life expectancy, literacy and levels of employment.

Philippine Development Plan: 2011-2016 MIDTERM UPDATE TARGETS

Based on the NEDA Philippine Development Plan: 2011-2016, the following are the Midterm
Update Targets:

A. Economic Development. Economic development is the process of improving the standard of

living of every individual.
 Gross Domestic Product (GDP) is targeted to grow by 6.5 to 7.5 percent in 2014, 7.0 to 8.0
percent in 2015, and 7.5 to 8.5 percent in 2016.
 Employment rate is expected to increase to 93.3-93.5 percent and incidence of income poverty
to be reduced to 18.0-20.0 percent.
 Reduction of multidimensional poverty incidence from 28.2 percent in 2008 to 16.0-18.0
percent by 2016.
 Private construction and manufacturing are expected to gain momentum beginning late 2014 up
until the end of the Plan period.
 The employment rate is expected to decrease from 7.0 percent in 2012 to 6.5 to 6.7 percent by
2016. Assuming a labor force growth rate of between 1.7 to 1.9 percent, these targets translate
to an additional 740,000 employed persons per year.
 Reduce the underemployment rate from the current 20.0 percent to 17.0 percent by 2016 to
improve the quality of employment.
 Decrease the incidence of poor individuals to 18.0 to 20.0 percent by 2016.

B. Social Development. Social development interventions will directly reduce poverty in its
multiple dimensions by increasing the poor's access to social services and basic facilities.
 The government is committed to improve the delivery of health services to reduce maternal
mortality HIV (human immunodeffiency virus).
 Investment in education will be increased and improve the quality of public investments.
 Social protection programs will be developed to address the different hazards faced by
different localities like, increasing the Philippine Health Insurance (PhilHealth) coverage and
benefits.
 The Community-Based Employment Program will be re-designed to function as a social
protection mechanism that replaces lost income in times ot calamities. It represents all
projects of government that employ unskilled workers.
 The government will also developed housing options/assistance based on the needs and
affordability of intended housing beneficiaries. The beneficiaries included informal settler
families, victims of calamities such as typhoons, earthquakes, fire and armed conflict, and
low-salaried employees.

SUMMARY
 Economics is the study of the ways that individuals and societies allocate their limited resources
to satisfy unlimited wants.

Economics is a social science because it uses scientific methods to build theories that can help
explain the behavior of individuals, groups and organizations.

Economic resources are factors of production used to produce things that people desire in order to
satisfy their wants. It includes land or natural resources, labor or human resources, capital and
entrepreneurial ability.

Applied Economics involves different ways to achieve practical objectives by applying economic
theory in the real world.

Economic theory uses different economic models to describe how the people react to a
particular economic situation.

Economic models may be in the form of verbal expression, numerical tables, and mathematical
equations or can be expressed graphically.

Basic Economic Problems

1. What to produce?
2. How to produce?
3. For whom to produce?

Basic Economic Problems of the Country

1. Unemployment
2. Poverty
3. Quality of Infrastructure
4. Income Inequality

Midterm Update Targets of the Philippine Development Plan

1. Economics Development
2. Social Development

KEY CONCEPTS

Applied Economics Goods Profit

Capital Income Rent

Commodities Income inequality Scarcity

Consumption Infrastructure Services

Economic development Interest Social development

Economic resources Labor Social science

Economic theory Land Unemployment

Economic Political culture Wage

Entrepreneurial ability Production Unlimited wants

REVIEW EXERCISES

CHAPTER 1

EXERCISE No. 1

Name: Score:

Year/Section: Date:

If you're planning to buy at nearby sari-sari store, grocery, or mall, it's hard to believe that
scarcity is a problem. Are laundry detergents scarce? You will notice that even the stores have enough
stocks of commodities to sell you probably cannot afford to buy all you want, and so you have to make
choices on how to use your limited resources (money, time, energy)

Given Php500.00 as your allowance for the whole week. How will you allocate your budget for
your expenses for the week?

List your choices and describe the advantages and disadvantages of each choice.

Choice 1 Choice 2 Choice 3

Advantages Disadvantages Advantages Disadvantages Advantages Disadvantages

 EXERCICES No. 2

Name: Score:

Year/Section: Date:

Questions for Understanding:

1. Define Economics

2. What are the different economic resources and their resource payments?

3. How is production differ from consumption? Give examples for each.

 EXERCISES No. 3

Name: Score:

Year/Section: Date:

The product that you buy in store, grocery or supermarket involves the use of different
economic resources or factors of production like land natural resources, labor, capital and
entrepreneurial ability. Think of a product that you are familiar and list the resources needed to produce
it and sell it to ultimate consumers.

Land/ natural Labor/ human Capital resources Entrepreneurial

resources resources ability
 EXERCISES No. 4

Name: Score:

Year/Section: Date:

Write the letter of the correct answer on the space provided before each number. You can use
the table below for your answer.

A Services I Wages
B Entrepreneur J Capital
C Profit K Labor
D Land L Interest
E Not enough of everything to M Land, labor, capital,
Satisfy everybody’s wants Entrepreneurial ability
F Goods N Production
G Rent O Consumption
H Economics

1. Factors of production value. 10. Machinery and tools are examples

2. Scarcity of which factors of production.

3. Natural Resources 11. Tangible items of value.

4. Capital 12. The return for land

5. Entrepreneurial ability 13. Social science that describes how

6. Human resources society chooses from among

scarce

7.Intagible items of value. resources.

8. Risk taker. 14. The acts of making goods and

9. Price paid for the use of labor. services.

15. The acts of using the goods

produced.