LESSON 3: Economics as an Applied Science

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.

Economics as an Applied Science

Opportunity Cost

Each time you choose to do something, you also choose not to do something else.

The opportunity cost of any choice we make is the value we place on the best opportunity
that will have to be given up if that action is taken. Opportunity Cost is the one we must consider
when making our own decisions.

opportunity cost of the choice – you give up the opportunity to obtain other things that you value

Marginal Opportunity Cost

Economist use the word marginal as a substitute for additional.

RESOURCE ALLOCATION

Opportunity costs arise because resources are scarce.

Economic System

Economic System describes the rules that guide economic agents in allocating scarce
resources. It acts as a framework in answering the three basic economic problems:

1. What should be produced with society’s resources?

2. How should they be produced?
3. Who should get what is produced?

Tradition

Goods and services are governed by traditional principles of fairness

A traditional economy is an economic system where the resources are allocated through
inheritance based on primitive methods and tools, which have strong social support. It is strongly
connected to subsistence farming.
LESSON 3: Economics as an Applied Science

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.

Command

It is an economic system in which the state of worker’s councils manages the economy. It
is an economic system in which the central government makes all decisions on the production
and consumption of goods and services.

Capitalist Economic System

This is also known as laissez-faire, market economy, free enterprise, price mechanism, or free
market economy. Individuals own the resources and the means of production in the economy.
No government intervention in the economic activities of the economy.

Market is the interaction between buyers and sellers for trading and exchange.

Market structure can be classified according to the number of firms in the industry and the
types of product produced.
LESSON 3: Economics as an Applied Science

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.

Mixed Economy

Note that, in reality, all economies are, to some extend mixed. It is just a matter of degree
of intervention. There are both public and private sectors working in hand so as to ensure
economic growth of the country.

How Each Economic System Answers the Basic Economic Question?

Capitalist Economic Command Mixed Economic

System Economic System System
What to produce? What the people want Essentials Essentials/what the
people want
How and by whom will Entrepreneurs Government Government and
it be produce? Entrepreneurs
For whom to People who can Citizens Citizens/ People who
produce? afford it can afford it
LESSON 3: Economics as an Applied Science

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.

Circular Flows in the Market

Economy

A visual model of “free” market in

which allocation of resources
occurs without government
intervention. In this model, the
economy is simplified to include
only two types of decision
makers—households and
business firms.

Types of Markets

Product markets and resource

markets—flows through these
markets that result from the
choices of households and
business firms.

Business Firms

Business firms are economic units formed by profit-seeking entrepreneurs who organize land,
labor, and capital to produce goods and services.

Sole proprietorship

Owned by individual who makes all the business decisions

Partnership

Owned by two or more individuals.

Corporation

Owned by shareholders who own stock in the firm

LESSON 3: Economics as an Applied Science

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.

Market Price and Opportunity Cost

In a well-functioning market, goods and services whose production have high opportunity costs
will also have high prices. In turn, goods and services whose production have low opportunity
costs will also have low prices.

Resource Allocation in the Philippines

The market is the dominant method of resource allocation in the Philippines.

The items stocked in our grocery stores and the services provided in the malls are those that
consumers want to buy.

Most markets where Filipinos do most of their trading are

unorganized collections of buyers and sellers.

Market for rice

There are many examples of resource allocation by command. The government plays a major
role in allocating resources. Various levels of government collect a part of our incomes as taxes
and then spend the tax revenue to provide services—educational, health, and police.

Philippine economy is a mixed economy, in which markets allocate resources in most individual
sectors while the government plays a major role in determining which goods and services are
produced.

Reference/s: Applied Economics – Carnaje, Gideon P. (p12-20)

Prepared by:

Ms. Khryssia Mae Crespo