Applied Economics
First Semester - Prelims
General Academic Strand | Ms.
Jhonalyn Villaram
Applied economics
● Investigating both consumer and
producer behavior
● Uses economic theories, models,
and data to solve real world issues
● Study of observing how theories
work on preface
Economics
● Concerned with using scarce
resources to obtain the maximum
limited wants of society
● Study of production, distribution,
selling, and use of goods and
services
● Involves the use of scarce resources
to satisfy unlimited wants
Macroeconomics
● Division that deals with the
investment-saving gap of an
economy
Microeconomics
● Division that deals with the
purchasing behavior of consumers
Scarcity
● Limited use of nature resources
which underlies the economic
problems
● An insufficient resources condition
● The reason why people have to
practice economics
● Forces us to make choices
Economic resources
● Problem of having unlimited wants
but limited resources to satisfy them
Natural resources
● Came from nature that are used in
production including land, raw
materials, and natural process
Capital resources
● The processed materials,
equipment, and buildings used in
production
Human resources
● The efforts of people involved in
production including labor and
entrepreneurship
Needs
● The essentials of life such as food
and shelter
Wants
● Desires for non-essential items
Alfred Marshall
● Described economics as a study of
mankind in the ordinary business life
Free enterprise system
● Private citizens own and operate
most of the businesses and
industries
● Producers determine supply.
Consumers determine demand.
Companies seek profits
Relative scarcity
● A good is scarce compared to its
demand
Absolute scarcity
● Supply is limited
Enterprise
● To make decisions and take risks
Choice and decision making
● A man needs to make decisions
because of the presence of scarcity
Opportunity cost
● The value of the best foregone
alternative
● Once one rout has been chosen, all
the benefits from the other choices
are lost
● The option not chosen is the
opportunity cost of that choice
Trade offs
● Making decisions requires choosing
one time against another
Economic Resources
Land
● Soil and natural resources that are
found in nature
● Examples are earth, sky, forest,
field, or water
● Owner of lands receive payment
known as rent
Labor
● Physical and mental human effort
exerted in production
● Income earned are called wages
● Covers manual work like
construction, machine operation, as
well as professionals
Factors of Production
Capital
● Man-made resources used in the
production of goods and services
which include machinery and
equipment
Physical capital
● Human-made resource used to
produce goods and services
● Includes machinery, tools,
transportation, and office equipment
Human capital
● The knowledge, skills, and training a
worker gains through experience
and education
● Income earned are called interest
● Not considered scarce because
humans can always learn and
become skilled
Overall poverty
● Poverty that factors participation in
decision making either in civil and
political life
Poverty
● One of the basic economic problems
of the country
● Low productivity and unequal
distribution of income and wealth
Entrepreneurship
● Ambitious leadership of a person
who combines land and capital to
create a market goods and services
● Income earned are called profit
Economic goods
● Resources which are scarce
Free goods
● Resources which are not scarce
● Example is air
● Have no opportunity cost
Production Possibility Curve (PFP)
● Opportunity cost can be illustrated
here
● Shows the maximum quantities of
different combinations of output of
two products
● Slope of curve determines
opportunity cost
● All points on the curve are
attainable and efficient
● Any point inside the curve is
inefficient (recession or high
unemployment)
● Point outside the curve is not yet
attainable
Capital goods
● Purchased physical goods that are
used in production firms to produce
other goods for consumers
● Buildings, machine, equipment
Consumer goods
● Goods purchased and used by
consumers and not used for future
production
● Automobiles, clothing, pizza
Shifters of the PPC
1) Change in the quantity of resources -
population increase, massive immigration
2) Change in the quality of resources -
education
3) Change in technology - technological
breakthroughs
4) Specialization - workers focusing on their
best skill
Sunk costs
● Types of cost that have happened
and can never be recovered
Full employment
● Everyone in society is willing and
able to find a job
Full production
● All goods and services are being
produced at the best level (optimal)
Interdependence
● Being dependent on one another
Marginal benefit
● Additional benefit gained from doing
anything one more time
Marginal cost
● Additional cost you receive from
doing anything one more time
Absolute advantage
● Ability of a country or individual to
produce goods and services more
efficiently than another
Comparative advantage
● Ability of a country or individual to
produce goods and services at a
lower opportunity cost than its
competitor
Total utility
● Amount of satisfaction from
consuming a specific quantity
Marginal utility Positive economics
● Extra satisfaction from an additional ● Describes the way the economy
unit of a product works
● Example is unemployment is at 4%

Economic Systems Normative economics

● Makes prescription about the way
A particular set of institutional arrangements the economy should work
and a coordinating mechanism. ● Example is the government should
raise the minimum wage to $15 per
Capitalism hour
● Free market system - government
leaves the free market alone Preferences
● Private ownership, no government ● Personal needs, wants, and desires
involvement
● Competition and freedom of choice Free market economy
and self interest ● A system that consults with the
majority
Communism (market economy)
● Command system - government Abraham Maslow
plans everything for society ● Hierarchy of Needs
● Public ownership
● No competition Rational
● Government control and planned ● Most important assumption that
economic decision economics makes
● They act consistently to get what
Laissez faire they want or what is best for them.
● The doctrine that government
generally should not intervene in the Efficiency
marketplace ● Maximizing the benefits from the use
of scarce resources

Economic Questions Absolute poverty

● Severe deprivation of basic human
● What to produce? needs
- Consumer decides what they want
Incentives
● How to produce it? ● Reward or punishment that motivate
- Producers find low cost ways to choices in our lives whether to
produce pursue or not pursue our needs,
wants, and desire
● For whom to produce? ● Example is you want wealth. You are
- Price affects who will consume the motivated to work because you will
good or service be paid enough which helps you
 achieve your preference of
accumulating wealth.

Economic resources
● Factors used in producing goods or
providing services
● Inputs used to create things or help
provide a service

Economic System

Traditional
● How it was done in the past
● Same as always from the custom of
past generations

Command
● Central authority
● Government makes all decisions

Market
● Interactions with buyers and sellers
● Consumers and producers decide
based on what consumer will buy
and how much profit the producer
will make

Mixed
● Producers and consumers decide
with some government help
● Government steps to limit, tax, place
rules, and provide public goods