Applied Economics

Course Overview

This course deals with the basic principles of applied

economics, and its application to contemporary
economic issues facing the Filipino entrepreneur such
as prices of commodities, minimum wage, rent, and
taxes. It covers an analysis of industries for
identification of potential business opportunities. The
main output of the course is the preparation of a
socioeconomic impact study of a business venture.
BASIC TERMS IN ECONOMICS
It is essential that the student
familiarizes himself with the terms
that will be used in the study. This
will facilitate his understanding of
economic analysis.
 TERMS IN ECONOMICS

GOOD – is anything which yields satisfaction to

someone. It is anything used to satisfy a
person’s wants and desires.
TANGIBLE GOODS – when they are in the form
of material goods or commodities. Ex. Bags,
books, clothes
INTANGIBLE GOODS – when they are in the
form of services. Those rendered by doctors,
teachers, dentists – all are used in the
satisfaction of human needs and wants
Classification of Goods
According to Use
CONSUMERS GOODS - When it is for the ultimate
consumption of the consumers. o Ex.: food, soft
drinks, toothpaste, bath soap, etc.
CAPITAL GOODS or INDUSTRIAL GOODS - When it
used in the production of other goods and
services. o Ex.: buildings, machinery, equipment.
ESSENTIAL GOODS- if they are used to satisfy the
basic needs of man, such as food, shelter and
medicine.
LUXURY GOODS – are those goods man may do
without, but are used to contribute to his
comfort and well-being. o Ex., perfume,
chocolates, expensive cars. Goods may also be
classified as economic or free
ECONOMIC GOOD – is a good which is both
useful and scarce. It has a value attached to it
and a price has to be paid for its use. If a good is
so abundant and it can satisfy everyone’s needs
without anybody paying for it, then, that good is
free. The air is free, but the air from an electric
fan is an economic good.
ECONOMIC RESOURCES – these are also called the
factors of production. These are needed for the
production of goods and services.
 LAND – refers to all natural resources, which are
given by and found in nature, and are, therefore,
not manmade.
 LABOR – it is any form of human effort exerted in
the production of goods and services.
 CAPITAL – refers to manmade goods used in the
production of goods and services. It does not only
include money, it also includes building,
machineries, equipment’s, raw materials used in
production.
 ENTREPRENEUR – often, an entrepreneur is not
presented as a separate factor of production, but is
classified as part of labor.
CONTRIBUTIONS OF AN ENTREPRENEUR
1. Develop new markets – entrepreneurs are creative,
innovative and very resourceful so they are able to
create customers and buyers.
2. Discover new sources of materials – entrepreneurs
are never satisfied with the traditional sources of
materials.
3. Mobilize capital resources – entrepreneurs
assemble all factors of production, mix them to
create goods and services.
4. Introduce new technologies, new industries and
new products – because they are innovators, they
take advantage of business opportunities and
transform these into profits.
5. Create employment – they are great job creators.
TYPES OF ECONOMIC SYSTEM

1. The Traditional Economy – is basically a

subsistence economy. It produces everything
that it consumes. Very backward since it does
not allow for change.
2. The Command Economy – the government
has the sole authority to plan and control
production and consumption activities, as well.
3. The Market Economy – resources are privately
owned and decisions are made by the people
themselves.
4. The Mixed Economy – when a country applies
a mixture of the 3 forms of decision making
 GOALS OF THE ECONOMY
1. Full Employment – is a situation where people who are able and
willing to work can get jobs. Under full employment, all available
productive resources are fully utilized. When more people are
employed, more goods and services are produced. There will be an
increase in GDP (Gross Domestic Product) which is the total market
value of the final goods and services produced by citizens in one
year. GDP is also the barometer of economic growth of a country
from year to year.
2. Economic Growth – is the product of economic development. This
represents the goods and services produced in a certain year, such
as cars, houses, roads, schools, buildings, college graduates and
others. In other words, it represents the outputs. While economic
development refers to the inputs. The best input of economic
growth is people. People are developed through education and
training.
3. Price Stability – is a situation where price fluctuations are smooth.
 4. Balance of Payments and Exchange Rate
Stability – Balance of payment refers to the
accounting record of a country’s financial
transactions with other countries.
 A country has Surplus balance of payments
when inflows (export of goods and services) are
greater than outflows (imports).
 Deficit balance of payments is when outflows
(imports) are greater than the inflows.
5. Economic Efficiency – Efficiency is
productivity. The more you produced, the more
you are efficient.
 Rich countries which produce more goods and
services are considered efficient producers used
modern technology, depend largely on
machines or the so-called capital-intensive
technology.
 Labor-intensive technology is a technique of
production which requires the use of more
workers than machines.
6. Equitable distribution of wealth and income –
Equitable means fair or just distribution of
wealth and income.
Economic Problems in the
Philippines
1. UNEMPLOYMENT COMMON CAUSES • The
number of people entering the job market has been
greater than the number of jobs created.
• The rural-urban migration increases due to
employment opportunities.
• May of the unemployed individuals are
college graduates.
2. RURAL TO URBAN MIGRATION-
WHAT CAN BE DONE TO SOLVE
UNEMPLOYMENT PROBLEM?
 Appropriate economic policies for labor-intensive industries.
 Improve the educational system of the country especially in
the rural areas
 Minimize rural-urban migration by improving the economic
environment in rural areas.
 Proper coordination between government and the private
sector to solve the problem of job mismatch.
 Slowing population growth. Philippine growth must increase
faster than the population. Limit the size of families.
 Provision of more investment opportunities to encourage
local and international investment.
Economic Problems in the
Philippines
3. POVERTY COMMON CAUSES
•Increase in population
•Increase in the cost of living
•Unemployment
•Income inequality
WHAT CAN BE DONE TO SOLVE
THE POVERTY PROBLEM?
 Reduce unemployment
 Appropriate policy on labor income
 Provision of unemployment benefits for those
who will be unemployed due to natural or man
made calamities. Ex. Typhoon, Bombing of
terrorists, Earthquake
 Increase social services like education, health
care and food subsidies for sustainable poverty
reduction
 Appropriate policy on labor income.
Economic Problems in the
Philippines
4. POOR QUALITY OF INFRASTRUCTURE
WHAT CAN BE DONE TO IMPROVE THE QUALITY
OF INFRASTRUCTURE?
 The government shall implement fiscal reform
program
 Continue reform in key sectors- particularly
power, roads and water – to improve cost
recovery, competition, and institutional
credibility and to sharply reduce corruption.
Economic Problems in the
Philippines
5. INCOME INEQUALITY
•Income is the money that an individual earned from work or business
received from investments.
•Income inequality – refers to the gap in income that exists between
the rich and the poor

MAJOR CAUSES OF INCOME INEQUALITY

 Political culture “ palakasan” “utang na loob” Ex. Voting for the
wrong person during election
 Indirect taxes – poor people shoulder this taxes like the Value
Added Tax – 12%
 Income Taxes Minimum Wage – No Tax A little more than minimum
wage – 32% TAX
WHAT CAN BE DONE TO SOLVE THE PROBLEM
OF INCOME INEQUALITY
 Policies to enforce progressive rates of direct
taxation on high wage earners and wealthy
individuals.
 Direct money transfers and subsidize food
programs for the urban and rural poor
SOLUTIONS TO INCOME INEQUALITY
• Direct government policies to keep the price
of basic commodities low
• Raise minimum wage
• Encourage profit sharing
End of Chapter 1
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