Economics as Applied Science

Lesson 2
 Applied Science
• The application of economic theories and
econometrics in real-world situation.
• Related principles and concepts
• To understand Contemporary Socioeconomics
issues
• To address problems and bring about
economic development.
 Economic Development
• Todaro (2014)
• Sustained elevation of an entire society and
social system toward a better and more
humane life.
• Development is defined by the core values
– Sustenance
– Self-esteem
– freedom
 Sustenance
• Ensuring that society is able to provide for
basic needs like food, shelter, health and
protection.
 Self-esteem
• Self-respect, reputation, pride and
acknowledgement
 Freedom
• Providing for a wide variety of choices for
societies as well as minimizing external
limitations.
Positive and Normative Economics
• Positive Economics
– Principle in Economic analysis which describes
what exist and how things work.
– It strives to give an objective description of the
state of things.
• Normative Economics
– Focuses on the outcome of economic behavior,
evaluates and makes judgments and proposes
courses of actions.
 Theory
• A position about certain related variables that
explains a certain phenomenon.
• It proposes a general principle or body of
principles regarding a phenomenon which is
deemed plausible or scientifically acceptable.
 Economic Model
• Framework or representation of significant
principles and describes how variables are
related.
• Determine the relationships among elements
in an economy, apply principles in varied
scenarios, make predictions, and propose
solutions
• Example- Population Theory by Thomas
Malthus
 Assumptions
1. Rationality
– Economists assume that individuals act in a
logical and predictable manner and pursue goals
which will benefit them.
2. Profit Maximation
– Assumed that individuals and firms in markets
expect to gain something from their transactions.
– Individuals aim to maximize utility while firms
intend to maximize their profit
3. Perfect Information
– In most markets, it is assumed that consumers
and producers have a complete and accurate
information about products, services, prices,
utility, quality and production methods.
4. Ceteris Paribus
– Holding other things equal (latin)
 Fallacies in Economics
1. Failure to hold things constant
2. Post Hoc Fallacy
3. Fallacy of composition
4. Sweeping Generalization
 Comparative Advantage
• Relates to opportunity cost and trade
• Maximize resources and production potential
• Specialization in industries where they enjoy
an advantage in resources and production
process
• Significant aspect in economic development
that has to be considered in an interconnected
global economy
• Nations can benefit from the exchange of
products and resources