(Chapter 1)

Introduction to
Applied
Economics
Learning Objectives

At the of the chapter, the learner shall be able to:

– Define basic terms in applied economics
– Identify the basic economic problems of the
country
– Explain how applied economics can be used to
solve economic problems
Food for Thought
What is economics?
 What is economics?

Walstad and Bingham- “a social science concerned with using scarce resources
to obtain the maximun satisfaction of the unlimited material wants of society.”

Collin-”the study of production, distribution, selling, and use of goods and

services.”

McConnel and Brue “a social science concerned with using scarce resources to
obtain the maximum satisfaction of the unlimited materials wants of society.”
 What is economics?

Samuelson and Nordhaus- “the study of how societies use scarce

resources to produce valuable commodities and distribute them
among different people.”

Parkin and Bade “ the study of how people use their limited
resources to try to satisfy unlimited wants.”
 Lesson 1.1 Introduction to Economics

ECONOMICS-
- is the social science that involves the use of scarce resources to
satisfy unlimited wants.
- is about making choices
- study of how societies use scarce to produce valuable
commodities and distribute them among different people.
(Samuelson and Nordhaus, 1995)
 Lesson 1.1 Introduction to Economics

– The study of the proper allocation and efficient use of available

scarce resources in the production of goods and services for the
maximum satisfaction of human needs and wants. -(Feliciano R.
Fajardo)

– Economics- is a battle against scarcity.

 Lesson 1.1 Introduction to Economics

-the word “economics” comes from 2 Greek words:

oikos means “household” and nomus which means “ system or
management” “oikonomia or oikonomus”, which literally means
management of household.
 Lesson 1.1 Introduction to Economics

SCARCITY-
- insufficiency of resources to meet the wants of consumers and
insufficiency of producers that hamper enough production of goods
and services.
- is a condition where there are insufficient resources to satisfy all
the needs and wants of a population.
Economics as Social
Science
 Lesson 1.1 Introduction to Economics

ECONOMICS AS A SOCIAL SCIENCE

-because it studies human behavior

Economics as a social science studies how individuals make

choices in allocating scarce resources to satisfy their
unlimited wants.
 Lesson 1.1 Introduction to Economics

OPPORTUNITY COST-
-refers to the value of the best foregone alternative.
EXAMPLE:
-When land is cultivated for rice, we give up an output of bananas
or mangoes that could have planted on that land area.
- A manager who quits his job in order to take up Master’s Degree,
gives up his salary as a manager. The salary is the opportunity cost.
Aspects of economics

1. It is a science concerned with human behavior.

2. It is concerned with the choices we make and the
consequence of these choices for ourselves and others. In
fact the central focus of economics is on choice and decision
making.
3. It is concerned with man’s material welfare.
Father of Economics

Adam Smith is the father of modern Economics. His book “An

Inquiry Into The Nature and Causes of the Wealth of Nations” in
1776 attracted widespread attention and helped establish
economics as a scientific field of study apart from political
science and moral philosophy
Problems of Economics

“Scarcity of resources to satisfy human wants.”

– If human wants are unlimited, but resources to satisfy those

wants are limited, then people in the society face the problem
of scarcity.
Problems of Economics

Solution:

– Everyone has to make choices.

– Business owners, managers, team leaders and even
governments must make right decision because they cannot
have everything.
Example
Economic Resources
What is production?
PRODUCTION-

- is the conversion of scarce resources into desired

goods and services

- the act of making goods and services

What are the resources needed to
produce goods and services?
Economic Resources

-also called factors of production

-these are :
-land
-labor or human resources
-capital
-entrepreneurship
Land
– includes all natural resources (gifts of
nature) used in the production
process.
– It also refers to everything that nature
gives freely. These include mineral oil
deposits, water, fertile soil, air, climate
forest, wildlife, sunlight, and rain.
– Payment for the use of land is called
rent
Labor or Human Resources
– It refers to the physical and mental
talents to produce goods and services.
– It covers manual workers like
construction workers, machine
operators, and production workers,
jeepney drivers, farmers and
fishermen as well as professionals like
nurses, lawyers, and doctors.
– Payment for the use of labor is called
wage.
Capital
– Man-made or manufactured
resources or also known as capital
goods used in producing
consumer goods. These include
buildings, machine, tools,
equipment, roads, highways,
bridges and even software.
– Payment for the use of capital is
called interest.
Entrepreneurial Ability/ Entrepreneur
– Special skills of an individual
needed to produce goods and
services like managerial and
organizational skills.
– Profit. Income of an entrepreneur
after deducting the payments
from the owners of land, labor
and capital.
Economics as an Applied
Science
 Applied Economics
-application of economic theories and principles to real-life
situations.
-the study of economics relative to real-life situations. This is
done by observing how theories work in practice
Examples of economic theories/models are:

• Law of Supply
• Law of Demand
Difference
between
economic theory
and applied
economics
Basic Economic Problems
 The fundamental problem of economics is to determine the
most efficient ways to allocate the resources. The decision
must be made to transform the different economic resources
into goods and services to satisfy their need and want.
Four basic questions to make the right
decisions:
• What to produce?
• How to produce?
• For whom to produce?
• How much to produce?
What to produce? And How much?

Every economy must

determine what goods and
services are to be produced
and in what quantities of
each to produce.
What to produce?

Producers Consumers

Needs money Needs goods & services

What to produce?

• Market Economy – It’s up to them

• Command Economy – It’s up to the government
• Traditional Economy – It’s up to grandma
How to produce?

– The company must decide on how to use the resources to produce goods and
services.
– They may use combination of resources and technologies at lowest cost.
– The manufacturer may wish to maximize profits and minimize production costs.
For whom to produce?

Goods and services will be

distributed to buyers on the
basis of their ability and
willingness to pay its existing
market price.
Branches of Economics
MICROECONOMICS
 MICROECONOMICS
-branch of economics that deals with the individual decisions of the units of
economy: e.g.
household
consumer
worker
firm and
individual owners of production (producer)
-refers to the study of choices by individuals, like how someone decides on
the budget.
 MICROECONOMICS Applications:
- Measure the link between health and economic-well being
- Study the impact of micro loans in poor countries
- Understand why people never seem to save as much for retirement
- Decisions and choices of individual units and how these decisions affect
the prices of goods in the market.
MACROECONOMICS
 MACROECONOMICS
- Is concerned with the over-all performance of the entire economy.
-deals with the behavior of economy as a whole with the view to understand
the interaction between economic aggregates such as:
employment
inflation, and
national income/ country’s gross national product (GNP)
-deals with the study of governments, industries, central banking, and the
boom and bust of the business cycle.
 MACROECONOMICS Application
-it can help us to answer how and why recessions occur
- how surges in immigration or gas prices will affect the
economy
- what the aging of the Baby Boomer generation could do to
national debt.
-focuses on four sectors of the economy: the behavior of the aggregate
huosehold( consumption), the decision-making of aggregate business
(investment), the policies and projects of the government (government
spending), and the behavior of external/foreign economic agents
ECONOMIC
SYSTEMS
ECONOMIC SYSTEMS

- Is the means through which society determines the answers to

the basic economic problems mentioned.
1. TRADITIONAL ECONOMY

-decisions are based on traditions and practices upheld over the

years and passed on from generation to generation.
-methods are stagnant and therefore not progressive.
2. COMMAND ECONOMY

- This is the authoritative system wherein decision-making is

centralized in the government or a planning committee.
- This economy holds true in dictatorial, socialist, and
communist nations.
3. MARKET ECONOMY

- Based on the workings of demand and supply, decisions are

made on what goods and services to produce.
- The price of commodity dictates what goods and services will
be produced, for whom and how it will be produced.
Basic Economic Problems
of the Country
Basic Economic Problems of the Country

• Unemployment
• Quality of Infrastructure
• Poverty
• Income Inequality
• Housing shortages
• Scarcity of resources