APPLIED ECONOMICS PRELIM Microeconomics vs Macroeconomics

ECONOMICS MICROECONOMICS MACROECONOMICS

Studies individual Studies national
Economics is classified as a social science income income
because it deals with the study of human's life Analyzes demand and Analyzes total
and how he lives with other men. supply of labor employment in the
APPLIED ECONOMICS economy
Deals with households Deals with aggregate
Applied economics - is the study of economics in and firms decisions decisions
relation to real world situations. It is the Studies individual Studies overall price
application of economic principles and theories prices level
to real situations, and trying to predict what the Analyzes demand and Analyzes aggregate
outcomes might be. supply of goods demand and aggregate
supply
SIMPLER DEFINITION

- Applied economics- is the study of observing The Law of Supply

how theories work in practice.
• According to the law of supply, the higher the
Importance of Applied Economics price, the larger the quantity produced.
•Mechanism to determine what steps can Price: As price Price: As quality falls
reasonably be taken to improve current increases
economic situation Supply: quantity Supply: quantity
supplied increases supplied falls
•Powerful tool to reveal the true and complete
situation in order to come up with things to do
Law Of Demand
•Teach valuable lessons on how to avoid the
occurrence of a negative situation or at least When the price goes up, the quantity
minimize the impact demanded goes down.
NOTE: The relationship between price and
What's the difference between quantity is inverse.
Microeconomics & Macroeconomics? When the price goes down, the quantity
demanded goes up
Microeconomics examines small economic
units, the components of the economy.
The four basic laws of supply and demand:
For example: individuals, households, firms,
industries 1. If demand increases and supply remains
unchanged, a shortage will result, leading to a
Macroeconomics looks at aggregates.
higher equilibrium price.
For example: national output, overall price level,
2. If demand decreases and supply remains
aggregate unemployment
unchanged, a surplus will result, thus leads to a
lower equilibrium price.
3. If demand remains unchanged and supply • Sound indicator of financial well-being of
increases, a surplus will result, leading to a lower Americans & U.S.-based multi-national
equilibrium price. corporations
4. If demand remains unchanged and supply GDP
decreases, a shortage will result, leading to a
higher equilibrium price. • Measures production inside of a
country. no matter who makes it
Inflation • Sound indicator of health of U.S.
economy
Inflation is a rise in general level of prices of
goods & service in an economy over a period of LABOR FORCE
time.
The Labor Force
Definition;
Economics define the labor force as all
Crowther- defines inflation as "a state in which nonmilitary people who are employed or
the clause of money is falling i.e., prices are unemployed.
rising.
EMPLOYMENT
Prof.Coulbourn- defines inflation as "too much
of money chasing too few goods" Employment

How does Inflation work? - is a contract between two parties, one being
the employer and the other being the employee
Inflation represents the rate at which the cost of
goods and services increase over a period of - In a commercial setting, the employer
time. conceives of a productive activity, generally with
the intention of creating profits, and the
Demand Pull employee contributes labor to the enterprise,
usually in return for payment of wages.
-When demand for goods/service exceeds
production capacity. - To the extent that employment or the
economic equivalent is not universal,
Cost Push
unemployment exists.
-When production costs increase prices.
Basic Economic Problems
Built In
•UNEMPLOYMENT
-When prices rise, wages rise too, in order to
•POVERTY
maintain living costs
•POOR QUALITY OF INFRASTRUCTURE
GNP vs. GDP
•INCOME INEQUALITY
GNP
Tourism and Hospitality as Solutions
• Value of all goods & services made by a
country's residents & businesses, 11 issues accompanying the increase in tourists
regardless of production location. from overseas

Non-physical measures
1. Improvement of strengthening of multilingual
support
2. Improvement of tourism information locations
for foreigners, etc.
3. Improvement of communications
environment
4. Support during emergencies and disasters
5. Road congestion mitigation/traffic jam
countermeasures
6. Improvement of transportation convenience
7. Securing and improving the environment for
lodging facilities
8. Improvement of payment environment
Physical measures
9. Measures for expansion of airport functions
and mitigation of congestion
10. Improvement of environment for receiving
large cruise ships
11. Infrared development, and tourism
promotion that leverages infrastructure
LESSON 2: Understanding Market and Its
Structure
1. Market
Ordinarily, the term “market” refers to a place
where goods are purchased and sold. But, in
economics, market is used in a wide perspective.
In economics, the term “market” does not mean
a place but the whole area where the buyers and
sellers of a product are spread.
A market is, in its general sense, the group of
suppliers and buyers who are insufficiently close
contact for market transactions to take place and
for those transactions to effect the terms of
trade (the price). The structure of the markets
indicates the relative number of buyers and
sellers in the market and therefore the nature of
competition that will take place.
2. Market Structure
It refers to the nature and degree of competition
in the market for goods and services.
It is the characteristics of the market either
organizational or competitive , that describes the
nature of competition and the pricing policy
followed in the market.
Determinants of Market Structure
There are several determinants of market
structure for a particular good. These are:
(1) The number and nature of sellers - The
market structures are influenced by the number
and nature of sellers in the market. They range
from large number of sellers in perfect
competition to a single seller in pure monopoly,
to two sellers in duopoly, to a few sellers in
oligopoly, and to many sellers of differentiated
products.
(2) The number and nature of buyers - The
market structures are also influenced by the
number and nature of buyers in the market. If
there is a single buyer in the market, this is
buyer’s monopoly and is called monopsony
market. Such markets exist for local labor
employed by one large employer. There may be
two buyers who act jointly in the market. This is
called duopoly market. They may also be a few
organized buyers of a product.
(3) The nature of the product - It is the nature of
product that determines the market structure. If
there is product differentiation, products are
close substitutes and the market is characterized
by monopolistic competition. On the other hand,
in case of no product differentiation, the market
is characterized by perfect competition. And if a
product is completely different from other
products, it has no close substitutes and there is
pure monopoly in the market.
(4) The conditions of entry into and exit from
the market - The conditions for entry and exit of
firms in a market depend upon profitability or
loss in a particular market. Profits in a market will
attract the entry of new firms and losses lead to
the exit of weak firms from the market. In a
perfect competition market, there is freedom of
entry or exit of firms.
(5) Economies of scale - Firms that achieve large
economies of scale in production grow large in
comparison to others in an industry. They tend
to weed out the other firms with the result that
a few firms are left to compete with each other.
This leads to the emergency of oligopoly. If only
one firm attains economies of scale to such a
large extent that it is able to meet the entire
market demand, there is monopoly.
Why look at Market Structure
• Not every business operates in the same kind
of market
• Each market has its own set of characteristics
- The number of sellers
- The good/service they produce
- Difficulty of entering or leaving the market
• The type of market determines price
3. Types of Market and Its Characteristics
• Monopolistic Competition
• Oligopoly
• Monopoly
• Perfect Competition
3.1. Perfect Competition
1. A very large number of sellers
• Hundreds or thousands
• Usually agriculture products or things
that are not man-made
2. They are selling identical products
• Each “market” sells the same thing
• There is no reason for non-price
competition (advertising) since its all the
same
3. No Price Controls
• Too many producers and consumers
• No one seller controls price
• Prices are set by the market, not the firm
4. No or very few barriers to entry
• Very few barriers to keeping new sellers
out – very easy to enter and exit the
market
5. Examples:
· Farmers / Agriculture Producers – orange
growers, rice grain growers, vegetable growers,
wheat growers
· Fisheries – bass, trout, salmon, milkfish
3.2. Monopolistic Competition
1. Many buyers and sellers exist
• About 100
• Firms act independently, and no single
firm is large enough to change the
market alone
2. Firms sell slightly differentiated products
• Each seller is trying to make its product
a little bit unique
• Even virtually identical products are
differentiated by brand name,
packaging, design – but still are similar
3. Sellers have some control over price
• No one seller has enough power to
change the price.
• Buyers are well-informed about the
differences in products.
 • Use of non-price competition to gain
customer like advertising, improved
service, and reliance on reputation
4. Some barriers to entry
• Fairly east to enter and exit the market
5. Examples:
Toothpaste (Colgate, Close-Up, Pepsodent,
Sensodine, Crest, Happee)
Laundry detergent (Tide, Ariel, Surf, Champion,
Wings, Breeze)
Fast Food Chains (Jollibee, McDonald’s, Burger
King, Tropical Hut, KFC)
6. Tools of Competition:
• Product Differentiation creates buyer
loyalty
• Buyer loyalty allows firms to slowly
increase price
- Not too much or they will switch brands
• Most common market structures
3.3. Oligopolies
1. Small Number of firms control the market
• 3-5 firms controlling at least 70% of the
market
• Many other firms exists, but with little
influence
2. Selling similar product
• Sometimes more similar product; soda,
oil
• Sometimes more different products;
cars, movie production
3. Price is significantly controlled by firms
• This is possible because of brand loyalty
and ease of access
• Product information is easily available
• Use non-price competition (advertising)
4. High barriers to entry
• It is hard to get into the group
• They have their own patents and raw
materials, making it hard to compete
5. Examples
• TV Network (ABS-CBN, GMA, TV5)
• Car Companies (Toyota, Mitsubishi,
Nissan, Ford, General Motors)
• Oil (Petron, Shell, Caltex, Unioil)
• Internet Providers (Globe, SMART-PLDT,
Sky, Converge)
6. Tools of Competition
• Price Leadership – When one firm offers
a new product at a certain price, the
others must follow for fear of losing
customers.
• Cartels – Organizations in which
agreements are made to cooperate and
reduce competition among the firms
3.4. Monopolies
1. One firm controls the market
• The only seller that consumers have
access to
• Sometimes on purpose, sometimes by
chance
2. Product is completely unique
• There are no close substitutes – the only
one its kind around.
3. Almost complete control of price
• Because they are the only seller
 • Sometimes the government
requires/provides some regulations
4. Barriers to enter are extremely high
• Nearly impossible to become a income for those who are sick and
monopoly
• Very few monopolies exist
Are monopolies legal?
4 types of Legal Monopolies
1. Natural Monopoly
In sectors where competition would be chaotic
or impractical, or costs are lowest when only one
firm exists
Ex: Utility Companies (gas, electric, trash)
2. Government Monopoly
Deal mostly with economic products needed for
public welfare
Ex: interstate highway system, public schools,
post office
3.Geographic Monopoly
When a firm is the only seller of a good in a
specific location- by chance
Ex: The only general store in a small town
4. Technological Monopoly
Usually, the result of a patent on a new invention
or technology
Ex: Polaroid Camera
4. Benefits of Market Intervention
These are the following benefits of Government
Intervention
• Equality. In a free market, there is likely
to be significant inequality and poverty.
This is not due to a meritocracy, but it
could be due to unfair advantages of
circumstances (inherited wealth,
superior education). Governments can
intervene to provide a basic security net
– unemployment benefit, minimum
disabled. This increases net economic
welfare and enables individuals to
escape the worst poverty. This
government intervention can also
prevent social unrest from extremes of
inequality.
• Public goods. Public goods tend not to
be provided in a free market because
there is no financial incentive for firms to
provide goods that people can enjoy for
free. Governments can provide national
defense, law and order and pay for it out
of general taxation. Looking after the
environment is also a public good, there
are an increasing number of areas,
where a government is needed to deal
with issues such as forest fires, rising sea
levels and pressure on water supplies.
• Education. Merit goods are under-
consumed in free-market because
people underestimate the personal
benefits and/or ignore the external
benefits. This leads to an underprovision
of health care and education.
Government intervention to provide
free education can lead to a significant
improvement in the quality of life for
people who are educated. There are also
many positive externalities to the rest of
society. A well-educated society can
improve labour productivity and
economic growth.
• Shift consumer behaviour. The
consumption of demerit goods like
alcohol, tobacco and opiates can cause
personal costs and significant social
costs (e.g. crime). If the government
identifies damaging goods, they can
 slowly change consumer behaviour –
such as using higher tax, advertising
campaigns and behavioural economics,
e.g. making cigarettes difficult to buy
with unappealing packets. Long-term
government campaigns to reduce
smoking in the UK and US have been
effective in reducing smoking rates –
something that has helped to increase
life-expectancy.
• Environment. The environment is an
area with a significant need of
government intervention. The free
market ignores external costs of
business on the environment. It also fails
to consider long-term considerations.
For example, market forces may lead to
the burning of fossil fuels, which cause
increasing environmental problems
around the world – which will get worse
in the future. Given the potential costs
to future generations, there needs to be
government action to shift behaviour to
renewable energy which doesn’t cause
these environmental costs. Also, the
environment involves many issues
where private ownership does not apply.
If pollution causes a worsening air
quality, then this affects everyone on the
planet, but market mechanisms do not
provide an opportunity to deal with the
issue. (If someone pollutes your back-
garden, you can sue them. But, if air
quality deteriorates, who takes action?
• Monopoly power. In a free market,
firms can gain monopoly power to
charge high prices to consumers and
monopsony power to pay lower wages
to workers. This increases inequality
and deadweight welfare loss.
Government intervention to limit
mergers and monopoly power can lead
to increased economic welfare.
• Strategic planning on infrastructure.
Another limitation of the free market is
to underinvest in quasi-public goods like
roads and railways. This can lead to
transport bottlenecks. Governments can
plan for future transport trends and
invest in the roads and railways which
are needed for the future.
Pros
•Provide public goods (e.g. law and order) not
supplied in free market.
•Provide merit goods (education, health)
underprovided in free market
•Reduce inequality and poverty through tax and
benefit system.
•Gov't regulations can protect environment,
workers and consumers.
•Protect long-term interests of environment.
•Limit monopoly power.
5. Problems of Market Intervention
The following discusses the disadvantages of
Government interventions in the market
• Government failure. Government
failure is a term to describe how
government intervention can cause its
own problems. For example, the
government may take decisions for
short-term political consideration which
lead to an inefficient outcome. For
example, government tariffs to protect
domestic industry spark off a trade war,
where the economy contracts.
• Lack of incentives. In the free market,
individuals have a profit incentive to
innovate and cut costs, but in the public
sector, this incentive is not there.
Therefore, it can lead to inefficient
 production. For example, state-owned •Lack of incentives to be efficient in the public
industries have frequently been sector.
inefficient, overstaffed and produce
•Government influenced by powerful pressure
goods not demanded by consumers.
groups.
• Political pressure groups. Milton
•Disincentive effects of higher taxes.
Friedman once quipped ‘There is
nothing as permanent as a temporary •Disincentive effects of welfare programs.
government bailout.’ He was referring to
farming subsidies. Introduced in the •Government ownership may lead to less
1930s during the Great Depression to choices
alleviate a farming recession. After the
Second World War, no government
dared to remove subsidies because
farmers were a powerful pressure group
who wanted to keep the subsidies.

• Less choice. Often government

intervention in the economy (e.g.
nationalization of industries) has been
associated with less choice. Government
produced services have a monopoly.
Command economies, often had very
little choice as government decided
what to produce. Choice is an important
element of economic freedom and being
able to maximize individual welfare. (Not
all government intervention leads to less
choice.

• Impact of personal freedom. An

increasing aspect of government
intervention is through efforts to shift
consumer behaviour – e.g. reduce
congestion, improve health through
reducing smoking rates and a healthier
lifestyle. This includes taxes, behavioural
influences and regulations. Sometimes
people can feel this is overbearing on
their individual choice.

Cons

•Government failure- poor information, time

lags