Applied Economics (Readings 1)

Basic terms in applied economics

Needs – the essentials of life, such as food and shelter

Wants – desires for non-essential items
Economic Problem – the problem of having unlimited wants, but limited resources to satisfy them
Scarcity – the limited nature of resources, which underlies the basic economic problem
Economic Resources – basic items that are used in all types of production, including natural, capital, and
human resources
Natural Resources – the resources 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; also known as
capital
Human Resources – the efforts of people involved in production, including labour and entrepreneurship
Economics – the study of how to distribute scarce resources among alternative ends
Economic Choice-decision one has to make considering economic factors
Utility – the satisfaction gained from any action
Self-interest motive – the assumption that people act to maximize their own welfare
Opportunity Cost – the utility that could have been gained by choosing an action’s best alternative
Free Goods – items that are so plentiful that they do not have any cost
Price - A value that will purchase a finite quantity, weight, or other measure of a good or service.
Economic value – the opportunity cost of product
Consumer product – an item that gratifies people’s needs and wants
Capital good – an item that is used to produce other products
Production Possibilities Schedule – a table that shows the possible output combinations for an economy
Production possibilities curve – a graph that shows the possible output combinations for an economy
Basic economic questions
What to produce?
How to produce?
For whom to produce?
Economic system - the organization of an economy, which represents a country’s distinct set of social customs,
political institutions, and economic practices
Traditional economy – an economic system in which economic decisions are made on the basis of custom
Market economy – an economic system based on private ownership and the use of markets in economic
decision-making
Command economy – an economic system based on public ownership and central planning
Modern mixed economy – an economic system that combines aspects of a market economy and a command
economy
Production decisions are made in both private market and by government
Traditional mixed economies – economic systems in which a traditional sector co-exists with modern sectors
Laissez faire – the principle that governments benefit society the most by not interfering in economic activity
Market – a set of arrangements between buyers and sellers of a certain item
Product markets – markets in which consumer, or final, products are trade
Resource markets – markets in which economic resources are traded
Circular flows – the circulation of money and the circulation of consumer products and economic resources in
the economy
Consumer sovereignty – the effect of consumer needs and wants on production decisions
Invisible hand – the tendency for competitive markets to turn self-interested behaviour into socially beneficial
activity
Private sector – the part of an economy in which private markets dominate
Public sector – the part of an economy in which governments dominate
Traditional sector – the part of an economy in which custom and traditional production techniques dominate
Economic Goals
Economic Efficiency
Income Equity
Price Stability
Full Employment
Viable Balance of Payments
Economic Growth
Environmental Sustainability
Applied Economics (Identify the basic economic problems of the country)

1.1 Introduction to Economics

a. Definition
Economics-the study of the allocation of scarce resources to meet the unlimited demands (needs and wants) of
man
Scarcity- a condition where there is insufficient goods and resources, this is the problem being solved by
economics
Unjust Distribution of Resource- this is the root cause of poverty and has been a global problem
kinds of scarcity
1. Relative scarcity-is when good is scarce compared to its demand
2. Absolute scarcity- is when supply is limited
b. Choices and decision-making-because of scarcity, man has to make decisions in choosing how to maximize the
use of his resources to satisfy his wants and needs.
Opportunity Cost- refers to the value of the best foregone alternative
c. Economic resources-also known as the factors of production, the resources used to produce goods
1. Land- soil and natural resource(rent)
2. Labor- physical and human effort used in production (salaries and wages)
3. Capital-man-made resources (interest)
4. entrepreneur – refers to the manager who decides who, what and how to produce (profit)
d. Economics as a social science-economics deals with the study of man’s life and how lives with other man and is
interdependent with other sciences (geography, history,physics, religion)
Therefore, in order to completely solve the economic problem, we need not only economic solutions but also
political, social, and cultural reforms.
e. Macroeconomics and macroeconomics-two (2) major divisions of economics
1.microeconomics- deals with the economic behavior of individual units
2 macroeconomics- deals with the economic behavior of the whole economy.
The economic problem – the problem of having needs and unlimited wants, but limited resources – that
underlies the definition of economics
 The types of reasoning and investigative methods that economists use
 The production choices an entire economy faces
 The three basic economic questions and how various economic systems answer them
 The main economic goals of Canadian economy and the ways in which they are related
f. Basic economic problems in the society
1. What goods and services to produce
2. How to produce the goods and services
3. For whom are the goods and services are
g. Economic systems-set of economic institutions that dominate in a given economy
Institutions- set of rules of conduct, established ways of thinking or ways of doing things
a. Traditional-decisions are based on tradition
b. Command( communism)-authoritative system, centralized decision-making
c. Market(laissez-faire)-democratic system
h. Why economics is important-to help students understand why there is a need for everybody, to understand why
we have to be rational in spending and to take a look on how the economy operates for the good of the nation.
i. Approaches used in Economics
a. Scientific approach-employs the scientific method of gathering data, and formulating hypothesis
b. Empirical approach- data are obtained through observations and interviews
j. Positive Economics Vs. Normative Economics
Positive economics-deals with what is, things that are actually happening
Normative economics- refers to what should be- it embodies the ideal things
k. Measuring the Economy
GDP-gross domestic product- the value of all the products produced and sold inside the country in a given period
of time
GNP-gross national product-- the value of all the products produced and sold inside and outside the country in a
given period of time
Ways of calculating the National Income
a. Income-wages+rent+interest+profit=national income+indirect taxes-subsidies+depreciation=GNP
b. Expenditure approach
Household expenditure consumption + govt. purchases of goods and services + gross domestic investment of
business firms + net exports = GNP –net national product – indirect taxes from business = national income
1.2 Economics as an Applied Science – is the application of economic theory and econometrics in specific settings with
the goal of analyzing potential outcomes. John Neville Keynes was the first to use the term applied economics
a. In relation to Philippine Economic Problem
Significant problems of the Philippines
1. Unemployment
2. Poverty
3. Population growth
b. ASEAN Icon Lee Kuan Yew- an economic icon and an example how a leader was able to overcome economic
 problems developing his country from underdevelopment to developed country (Singapore)

1.3Basic economic problems and the Philippine socioeconomic development in the 21st century

Explain how applied economics can be used to solve economic problems

Basic Economic Problems Confronting the Development of the Philippines in the 21st Century

 Absolute Poverty .It is the lack of income to buy the basic food and necessities for subsistence
living.
Relative Poverty –it does not necessarily mean they do not have sufficient income to purchase the minimum
requirements for daily survival
Poverty threshold – the income needed to purchase theses minimum nutritional requirements and other basic
necessities for daily survival. Those below threshold are considered poor since they cannot even have the
income to purchase the minimum nutritional requirement for daily subsistence
 Demographic Changes and its Economic Implications
 Low investment in Human Resource Development
 Weak Infrastructure
 Pursuing Food Security
 Slow Adoption of Modern Technology
 Environmental Sustainability and the Country’s Development Thrust