Batan Academy (A National School)

Hand Outs in Applied Economics Grade 12

Introduction to Applied
Economics
What is economics?
• Economics is the study of scarcity and its implications for the use of resources,
production of goods and services, growth of production and welfare over time, and
a great variety of other complex issues of vital concern to society.

• In economics, goods are defined as items that satisfy human wants, provide utility
or usefulness, and are scarce (have limited availability). An economic good must
also be capable of being transferred from one person to another or produced and
consumed.

Wants
In economics, a want is something that is desired. It is said that every person has
unlimited wants, but limited resources (economics is based on the assumption that only
limited resources are available to us). Thus, people cannot have everything they want
and must look for the most affordable alternatives.

Needs
In economics, needs are things that are essential for human survival, while wants are
things we may desire. Wants may be helpful or make life easier, but unless we would die
without them, they are not considered needs.

Economics as a Social Science

One point in favour of economics being a social science is that it involves the study of
human behaviour and the way that individuals and societies make choices. It looks at the
social, psychological, and political factors that influence economic decision-making and
the ways in which these decisions affect society.

Scarcity
Scarcity explains the basic economic problem that the world has limited—or
scarce—resources to meet seemingly unlimited wants. This reality forces people to make
decisions about how to allocate resources in the most efficient way possible so that as
many of their highest priorities as possible are met.

Application of Supply
and Demand

Law of Supply
• The law of supply in economics states that as the price of a good or service
increases, the quantity of goods or services increases and vice versa.
• It states that an increase in the price of goods or services results in an increase in
their supply.
• Supply is defined as the quantity of goods or services that suppliers are willing
and able to provide to customers.
Demand
Demand is initiated by the needs of the customers. The nature of demand incurs
much to the basic worth that customers discern the goods or services to possess. The
degree of demand for the goods or services is determined by various factors such as
• Price of goods or services
• Price of other goods and services, alternatives, and contingents
• Emoluments
• Tastes and proclivity
• Expectations

Law of Demand
• The law of demand is a fundamental principle of economics that states that at a
higher price, consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that
consumers use economic goods to satisfy their most urgent needs first.
• The quantity demanded by consumers decreases as prices rise, then increases as
prices fall. Explanation: The demand or desire of consumers to buy a certain
product is widely affected by the price of the desired product.

What is the law of supply and demand in simple terms?

• The law of supply and demand is the theory that prices are determined by the
relationship between supply and demand. If the supply of a good or service
outstrips the demand for it, prices will fall. If demand exceeds supply, prices will
rise.
• The prices we pay for things are many times dependent on the intersection of the
forces of supply and demand. Typically, higher demand means higher prices, while
higher supply means lower prices. Higher prices usually decrease demand and
increase supply, whereas lower prices increase demand and lower supply.

The Three Basic Problem of Economics Are:

• What to produce
• How to produce
• For whom to produce

What is microeconomics?
• Microeconomics is a part of economics that contemplates the traits of the decision-
makers within the economy such as households, individuals, and enterprises.
• The term ‘firm’ is usually used to refer to all sorts of trades.

What is macroeconomics?
• Macroeconomics is a branch of economics that depicts a substantial picture. It
scrutinises itself with the economy at a massive scale and several issues of an
economy are considered. The issues confronted by an economy and the headway
 that it makes are measured and apprehended as a part and parcel of
macroeconomics.
• It studies the association between various countries regarding how the policies of
one nation have an upshot on the other. It circumscribes within its scope, analysing
the success and failure of government strategies.
Concepts covered under macroeconomics

• A capitalist nation
A capitalist country is distinguished by sub-urbanised and voluntary conclusions for
economic planning instead of the consolidated political practices. There are a few aspects
of a capitalist financial structure (Economy) mentioned that would provide a better intuition
into the concept. The attributes of a capitalist nation are as follows:

1. Liberty of customers to pick between goods and services.

2. The privilege of individuals to set up a business to supply goods and services.
3. There is a finite interference of the government.
4. Market forces regulate the distribution of goods.

• Investment expenditure
As the name says it all, it is the money consumed towards charges to create investments.
In other words, it is the money that the family circle (households) and enterprises spend
on capital goods. It plays a decisive role in macroeconomic pursuit for business cycles
and economic enhancement in the long run.
In short, the investment expenditure is proficient of creating additional income and fosters
employment in a nation.

The following are the types of investments:

1. Autonomous investment
2. Financial investment
3. Real investment
4. Gross investment
5. Net investment

• Revenue: Revenue is the total income of an entity through sale of goods and
proffering its services to the customers. Revenue can be operating or non-
operating. The significance of revenue and its acknowledgements is better
comprehended if we are well aware of the aspects that are contemplated while
deciding the GDP.

What do you mean commodity?

• A commodity is a basic good used in commerce that is interchangeable with other

goods of the same type. Commodities are most often used as inputs in the
production of other goods or services. Thus, the term usually refers to a raw
material used to manufacture finished goods.
What is an example of a commodity?

• Commodities are raw materials used to create the products consumers buy, from
food to furniture to gasoline or petrol. Commodities include agricultural products
such as wheat and cattle, energy products such as oil and natural gas, and metals
such as gold, silver and aluminum.
What are commodities prices?

• Commodity prices are the prices at which raw materials or basic foodstuffs are
bought and sold. A variety of factors can influence commodity prices, from weather
patterns to political upheaval.

What do commodity prices affect?

• Changes in commodity prices often impact the prices of consumer goods. Whether
directly invested in commodities or not, many investors monitor commodity prices
for trends impacting the broader economy.

Types of Commodities
1. Agricultural
Agricultural commodities are those such as coffee, corn – an important source of food for
livestock and humans, sugar, soybeans – whose oil is used for making crackers, breads,
cakes, and cookies, and wheat – one of the most important food crops in the world.
2. Energy
Energy commodities include crude oil used in transportation activities and production of
plastics, natural gas used for electricity generation, and gasoline, which powers light-duty
trucks and cars.
3. Metals
Metals include gold, used in making jewelry; silver, also used for jewelry and many other
industrial uses as well; and copper, the most widely used form of electrical wiring.
What is the meaning of labor supply?
• Labor Supply - It refers to the number of persons willing to work at different wage
rates. It depends upon the existing wage rate and is measured in terms of man-
days. Labor Force - It refers to the number of persons actually working or willing
to work.
• Labor supply is the total hours that workers or employees are willing to work at a
given wage.
• Labor supply is impacted by changes in preferences, income, population, prices of
related goods and services, and expectations.

How does labor supply affect economic growth?

The balance of demand and supply in the labor market is reflected in the level (or
rate of change) of wages. If demand is high relative to supply, earnings will rise. This will
increase the cost of employing people which in turn will cause demand for human
resources to drop, easing the upward pressure on wages.
Wages
Wages are the payments that assign a monetary value to labor services, also
known as the price of labor. All wages in the economy are expressed in nominal terms.
Nominal wages are wages expressed in current dollars, and many employers have labor
agreements to adjust nominal wages annually to keep pace with inflation.

Population Growth Causes Economic Growth

More people in a country can lead to a larger workforce and easier access to labor.
More labor will lead to more products being produced which will then cause economic
growth. Population growth allows for the expansion of labor and products which then
grows the economy.
How does population growth affect economy?
On the other hand, unchecked population growth can exert immense pressure on
economic, social, and environmental resources. Negative effects of population growth on
economic development may include overpopulation leading to resource depletion,
increased social expenditure, and rising unemployment and poverty rates.
What is the definition of labor migration in economics?
Movement of people from one country to another for employment. In most
countries, labor migration is regulated by national migration legislation. At the same time,
some countries actively participate in the regulation of migration abroad and in creating
favorable conditions for their citizens.

How does labor migration affect the economy?

Migrants contribute to the internationalization of their host economy by promoting
trade flows of their host economy and boost total imports and exports of their host region.

Why is labor migration important?

Migrant workers contribute to growth and development in their countries of destination,
while countries of origin greatly benefit from their remittances and the skills acquired
during their migration experience.

Why labor migration is beneficial to the Philippines?

Migration is a livelihood strategy for millions of Filipinos in search of better
employment opportunities and it is an integral part of the social and economic fabric of
the country. Migration is an agent for development and an important contributor to poverty
reduction.

What are the factors for Labor migration?

Uneven development is the main reason of migration along with factors like
poverty, land holding system, fragmentations of land, lack of employment opportunities,
large family-size and natural calamities.
How does OFWs impact the Economy?

• They contribute big time to the country’s economy because of the remittances they
send back home.
• Obviously, OFW remittances shape the macroscopic economy of the Philippines.
But they offer many far-felt and deep-rooted microscopic benefits too. OFW
remittances still provide the growth that matters most in the lives of Filipinos. The
money goes straight to households, to relatives, families, and friends – who use
them to better their lives to finance food, shelter, education, and entrepreneurial
pursuits.
• Money transferred by Filipinos from all over the world accounts for at least 10
percent of the country’s GDP. It is the second largest source of foreign capital after
value added exports like electronic components, and a major source of private
consumption, which in turn accounts for 75 percent of the GDP.
• The impact of remittances on the Philippine economy goes beyond GDP numbers.
OFW remittances have contributed significantly to the country’s foreign exchange
earnings. In doing so, these remittances have contributed to strengthening the
nation’s position regarding balance of payments, bolstering the surplus on current
accounts.

The Philippine Peso and Foreign Currencies

How is the exchange rate defined?
The exchange rate is the price of a unit of foreign currency in terms of th
e domestic currency. In the Philippines, for instance, the exchange rate is conventional
ly expressed as the value of one US dollar in peso equivalent. For example, US$1 = P5
0.00. In every exchange rate quotation, therefore, there are always two currencies invol
ved.
Why is the exchange rate important?
• It serves as the basic link between the local and the overseas market for various
goods, services and financial assets. Using the exchange rate, we are able to co
mpare prices of goods, services, and assets quoted in different currencies.

• Exchange rate movements can affect actual inflation as well as expectatio

ns about future price movements. Changes in the exchange rate tend to directl
y affect domestic prices of imported goods and services. A stronger peso l
owers the peso prices of imported goods as well as importintensive services s
uch as transport, thereby lowering the rate of inflation. For instance, an increase
in the value of the peso from US$1:P50 to US$1:P40 will lower the price of a $1
per liter gasoline from P50.00 (P50 X $1) to P40.00 (P40X $1).

• Exchange rate movements can affect the country’s external sector through its im
pact on foreign trade. An appreciation of the peso, for instance, could low
er the price competitiveness of our exports versus the products of those c
ompetitor countries whose currencies have not changed in value.
 • The exchange rate affects the cost of servicing (principal and interest payments)
on the country’s foreign debt. A peso appreciation reduces the amount of pesos
needed to buy foreign exchange to pay interest and maturing obligations.

How is the exchange rate determined?

Under the system of freely floating exchange rates, the value of the dollar in terms of
the peso is determined in the interbank foreign exchange market (by the forces of suppl
y and demand just like any commodity or sevice being sold in the market). Under a fixe
d exchange rate system, a par value rate is set between the peso and the dollar by the
central bank. The par value may be adjusted from time to time.

What is the country’s foreign exchange policy?

At present, the country's exchange rate policy supports a freely floating exchang
e rate system whereby the Bangko Sentral ng Pilipinas (BSP) leaves the determi
nation of the exchange rate to market forces. Under a market‐
determined exchange rate framework, the BSP does not set the foreign exchange rate
but instead allows the value of the peso to be determined by the supply of and demand
for foreign exchange. Thus, the BSP’s participation in the foreign exchange market is li
mited to tempering sharp fluctuations in the exchange rate. On such occasions of
excessive movements, the BSP enters the market mainly to maintain order and stabilit
y. When warranted, the BSP also stands ready to provide some liquidity and ensur
e that legitimate demands for foreign currency are satisfied.

The Philippine housing

shortage and the real
estate boom:
Rent and Price structure
Why is there housing shortage in the Philippines?
The Philippines is beset with a huge backlog in providing for land se- curity and
housing for the poor. In the face of high rates of population increase and with urban
areas continuing to be magnets of hope for economic opportunities, the demand for
affordable land and housing remains a huge challenge.

Here's why you might consider investing in real estate in the Philippines:

1. **Economic Growth**: The Philippines has been experiencing steady economic growth
over the years. The country's gross domestic product (GDP) has been consistently
expanding, which generally indicates a growing middle class with increased purchasing
power. This economic growth can lead to higher demand for housing, commercial spaces,
and other real estate properties.

2. **Demographic Advantage**: The Philippines has a young and rapidly growing

population. A large portion of this population is entering the workforce and forming new
households, which creates a continuous demand for housing and real estate. The need
for both residential and commercial properties is expected to remain strong, driving the
real estate market.
3. **Urbanization and Infrastructure Development**: The Philippines is undergoing
significant urbanization and infrastructure development. This includes the development
of new cities, roads, bridges, and public transportation systems. These developments not
only improve the overall quality of life but also create new investment opportunities in
various real estate sectors.

4. **Tourism Industry**: The Philippines is a popular tourist destination known for its
beautiful beaches, natural landscapes, and vibrant culture. The tourism industry
contributes significantly to the economy and drives demand for hospitality-related real
estate, such as hotels, resorts, and vacation rentals.

5. **BPO and Outsourcing Industry**: The country has become a hub for business
process outsourcing (BPO) and outsourcing services. This has led to a rise in demand
for office spaces and commercial properties, especially in major cities like Manila, Cebu,
and Davao.

6. **Favorable Government Policies**: The Philippine government has implemented

various policies to encourage foreign investment in the real estate sector. These policies
aim to simplify the process of property acquisition and ownership by non-residents,
making it easier for international investors to enter the market.

7. **Resilience to Global Economic Fluctuations**: Real estate is often considered a

tangible asset that can provide a level of stability during times of economic uncertainty.
The Philippine real estate market has demonstrated resilience to global economic
fluctuations, making it an appealing option for diversifying investment portfolios.

8. **Affordability**: Compared to real estate markets in many developed countries,

property prices in the Philippines can be relatively affordable. This affordability factor can
attract both local and foreign investors looking for investment opportunities with a
favorable cost-to-potential-return ratio.

9. **Rising Property Values**: Over the past years, many regions in the Philippines have
seen appreciating property values. This capital appreciation potential can lead to
substantial gains for investors who hold onto their properties over the long term.

10. **Diverse Investment Options**: The Philippine real estate market offers a diverse
range of investment options, from residential properties to commercial spaces,
agricultural land, and even mixed-use developments. This diversity allows investors to
tailor their investment strategies to their preferences and risk tolerance.

However, like any investment, real estate carries risks and requires thorough research
and due diligence. It's important to understand the local market dynamics, legal
regulations, and potential challenges before making an investment decision. Consulting
with real estate professionals, legal experts, and financial advisors can help you make
informed choices and navigate the complexities of the Philippine real estate market.

What does rent mean in economics?

Economic rent is an amount of money earned that exceeds that which is
economically or socially necessary. Market inefficiencies or information asymmetries
are usually responsible for creating economic rent.