Chapter 1 Introduction to Applied Economics

Module1: Economics as Social Science and Applied Science

In this module, learners will be able to:

 Define applied economics and understand the basic terms in applied

economic
 Identify the basic economic problems of a country
 Identify tools and methods in economics
 Differentiate economics as social science and applied science in terms
of nature and scope

Lesson 1

The study of Economics

Economics is a way of life. Some say economics is everywhere. You
may be unaware but most of your daily decision – making from choosing
between doing homework or playing mobile legend on your mobile phone, or
choosing sinigang over menudo for lunch – has the very same foundation as
economics. The actions you take involve some sort of analysis where you
can weigh the pros and cons, which is formally referred to as cost and
benefit analysis. This behavior underlies the study of economics.
There are three strands in the development of the definition of
economics. First focuses on wealth. Years ago, economics has been defined
as a science of wealth- getting and wealth – using. Second it tackles about
decision – making process. Economics is defined as a science of making
choices. Third, economics concentrates on allocation process.

What do you think?

 What decisions have you made since waking up this morning? For instance,
did you choose to get up as soon as the alarm went off or to sleep some more? Did
you wonder what to do after school today?

Economics as social science

Economics is primarily a social science. As a science it utilizes the

scientific method of inquiry from identifying the problem, proposing
alternative tentative answers or hypothesis, testing the tentative answers to
the question or the problem at hand, gathering and treating data, and
answering question through the conclusion.

As a social science, this systematic or scientific method is being used

in the study of the society and its components. Social science can be
described as the study of various modes and aspects of human interactions
in a group as these people aspire to preserve their group as a social unit, to
make it stable, and to promote its growth, expansion, and development.

As a social science, economics pertains to the study on how society

creates its wealth, how it makes this wealth available to its people with
minimum difficulties, and how it expands its wealth.

As a social science, economics is related to other social sciences that

study other dimensions of the society. For example, in political science, the
creation and utilization of power is being studied for the preservation,
stability, and growth of the society as a political unit. In a similar manner,
individual behavior, peoples’ beliefs, and society’s value system are
systematically examined in behavior sciences including sociology,
anthropology and psychology for the preservation, stability and growth of
the society’s cultural identity. Lastly, the recording and analysis on how
this goal of societal preservation, stability, and development are achieved
over time are concerns of the study of history.

Economics as Applied Science

As the name implies, is the application of economic theories and
models in real life. It consists of learning how choices affect individual
decision – making and how the availability of factors aid decision makers
craft sound judgement. Economist have worked to simplify complex social
phenomenon into laws, frameworks and models over the centuries. These
models serve as tools to present–day policymakers so they can make better
and informed decisions in achieving progress and sustainable development.
Applied economics is about concepts and principles central to the
discipline of economics and how they are used to understand world around
us.
Applied economics the study of how economic theories and models are
used to explain why certain events occurs, predict the likely effects of events
and government actions, and recommend courses of action for business and
government to follow.

Basic Economic Concepts

The study of economics can be better appreciated by having a clear
grasp of the fundamental concepts that are considered as the building
blocks of more advanced and complex economic theories. The basic
economic concepts of scarcity, needs, and wants.
Scarcity – is the insufficiency of resources to meet the needs and wants of
consumers and insufficiency of resources for products that hamper enough
production of goods and services.
It is the reason why people have to practice economics. Economics as
a study, is the social science that involves the use of scarce resources to
satisfy unlimited needs and wants.
It is a condition where there are insufficient resources to satisfy all the
needs and wants of a population. Scarcity may be relative or absolute.

Relative versus Absolute Scarcity

Relative scarcity is when a good is scarce compared to its demand.

For example, coconuts are abundant in the Philippines since the plant is
easily grows in our soil and climate. However, coconuts become scarce
when the supply is not sufficient to meet the needs of the people. 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. Example, Banana are abundant in our country but when typhoon
hits banana plantations, then banana become relatively scarce.

Absolute scarcity is when supply is limited. Oil is absolutely scarce

in the country since we have no oil wells from which we can source our
petroleum needs, so we rely heavily on imports from oil-producing countries.

Key points
Society’s needs and wants, being greater than available economic
resources, lead to allocation of resources.

Needs and wants – drives consumption. People have unlimited needs

and wants that is why proper allocation is important to avoid scarcity.

What do you think?

In your own words, how would you differentiate needs from wants?
What are your examples of needs? What are your examples of wants?
Opportunity Cost and Comparative Cost
Opportunity Cost is defined as the benefit you give up because you
choose to take one action in favor of another. It is important in the study of
economics because individuals, firms, and the government are always faced
with choices. Given that resources are limited, individuals have to decide
which to prioritize. It is also used to explain the principle of comparative
advantage. Example, assume that your P1,000 .00 is enough only to cover
food and transportation. You have to decide to cut back either food or
transportation if you want to spend on entertainment. If you choose to cut
down your transportation you just have to walk home and save your
transportation budget for a movie ticket. The benefit of getting home faster
by taking a jeep or riding a train is the opportunity cost of seeing a movie.

Comparative Advantage the ability of an individual or group to carry

out a particular economic activity (such as making a specific product) more
than another activity. It is an economic term that refers to an economy’s
ability to produce goods and services at a lower opportunity cost than that
of trade partners. A comparative advantage gives a company the ability to
sell goods and services at a lower price than its competitors and realize
stronger sales margin.

What do you think?

In your own words, share your own experience regarding decision –
making and the concept of opportunity cost.
Lesson 2: Basic Economic Problems

What to produce?
This first question relates to resources. If there is an abundant
supply of labor in the society, then the society will consider labor – intensive
products or will focus on providing services instead of manufacturing goods.
The availability of resources influences the decision on what to produce.

How much to produce?

This question focuses on the actual production of goods and services
and the allocation of resources. In terms of resources, business has to
decide on certain issues such as how much to invest, how many people to
hire to produce goods and services and how much raw materials to obtain.
The question, therefore, pertains to the inputs of production.

For whom to produce?

This question focuses on the distribution and consumption of goods
and services. Is the good or service for the end consumers or for other
businesses for further production? Does it address a need or a want? These
questions are considered along with other business – related factors such as
marketability and pricing.
Application to Real Life
You are an event coordinator and your sister asked you to organize
your nephew’s upcoming birthday party. You were given a budget of only
P10,000.00. At least 30 friends and family members are expected to attend
the party. How are you going to use the money? What food do you plan to
serve? What activities do you plan to include? List the activities and the
budget allocation. You will present it on class through PPP.
Rubric for scoring:
Content (meet the expectation (sister)------------ 15 points
Creativity (presentation)---------------------------- 10 points
Total-----------------------------------------------------------------25 points

Factor of Production
Land- this represents land and similar natural resources available
such as farms, and agricultural land. Land is typically cultivated or
improved for use in production. Use of land is paid in the form of rent
payment. The factor income on the use of land is rent.

Labor – human capital such as workers and employees that transform

raw material and regulate equipment to produce goods and services. The
return on labor is wage.

Capital - physical assets such as production facilities, warehouses,

equipment, and technology used in the production of goods and services.
The term may also refer to investment capital used in production. The
factor income for capital is interest.

Entrepreneurship – this is sometimes referred to as enterprise. It

represents the factor that decides how much of and in what way the other
factors are too be used in production. The return on entrepreneurship is
profit.

Circular flow diagram – is an economic model that illustrates the

flow of factors of production in the economy. A circular flow diagram has
many versions, the simplest form it shows the flow of goods and factors of
production in the economy through household and firms. Households
represent end consumers while firms represent producers. Households
provide labor to firms. Firms hire labor to produce goods and services and
labor is compensated in the form of wages. Wage represents the
households’ income from labor, which will be used to purchase goods and
services from firm. Consequently, the payments from households become
the firms’ profit, which may be used to increase factors of production.

What do you think?

Through your understanding of the circular flow diagram, explain the
following:
“Consumption drives the economy”

Production Possibility Frontier

The production possibility frontier or PPF (also called production
possibility curve) is an application of the concept of allocation of resources
and factors of production. The PPF of the economy is determined by the
availability and efficient use of its inputs of production. Points along the
frontier signify efficient allocation and use of resources in production. These
efficient positions are represented by point A and point B in the diagram.
On the other hand, any point inside the frontier signifies inefficiency and
underutilization of available resources. This is represented by point C in the
diagram. Finally, points outside the frontier, such as point D in the
diagram, correspond to unattainable situation in the economy because of
insufficient resources.
Key points
Countries strive to shift their production possibility frontiers outward
in the form of economic growth.

Methods Used in Economic Analyses

Economics is a social science. Economic frameworks and theories are
founded on research on how the different elements in the society behave.
Research largely entails gathering of data, observations, and analysis. Data
are processed using various tools to recognize patterns or discover new
facts, or derive relevant information.

Qualitative approach to economic data analysis focuses on

directional relationship of different economic variables. This is often
interchangeably with descriptive analysis. An example is interest and price
relationship. When economist say that interest rate is inversely related to
price, they are citing an example of descriptive analysis. The statement
shows whether there is correlation between variables, but it does not provide
the exact degree of correlation. The statement: “Money supply is positively
correlated to price” is another example.

Quantitative approach involves mathematical and statistical analysis

of economic data. It complements qualitative analysis by providing the
figures that support the descriptive findings. For instance, what is the
corresponding increase to national income account if the government
increases spending by a certain amount? By using a formula and balance of
payment, one can calculate the effect on the national income.

Normative versus Positive Economics

 Normative economics – evaluates economic decisions, policies, or
outcomes as good or bad. It is based on opinions and is subjective. For
example, asking you to provide your opinion on whether the Philippine
economy is doing good or not is normative economics.

Positive economics – evaluates economic scenarios and policies

based on qualitative and quantitative analysis. This makes positive factual
and objective. An example is observing Philippine economic growth based
on data for the past three quarters.

What do you think?

Analyze and evaluate the statements below and identify if the statement is
positive or normative economics.
1. Low income class should receive free hospital care.
2. Lowering the cost of borrowing will encourage people to borrow.
3. Employees should pay less in taxes.

Main Branches of Economics

Microeconomics branch of economics that examines the individual or
company level. It deals with households and firms, such as buying behavior
of consumers and profit-maximizing behavior of sellers.

Macroeconomics framework focus on the effect on a larger scale,

such as the national economy. Major macroeconomic indicators include
national income account, GDP, inflation rate, interest rate.

What do you think?

Analyze and categorize each of the following scenarios into either
microeconomics or macroeconomics.
1. Household weekly budget
2. Government budget on Covid – 19
3. Total Philippine export to the United States of America
4. A manufacturer’s operating expense for the past year
5. Current unemployment rate of the country increase