APPLIED ECONOMICS REVIEWER

1. Chapter 1: Economics as Social Science

WHAT IS ECONOMICS?
The term ECONOMICS was coined or derived from the Greek
word oekonomia, or oeconomicus which is interpreted as the management of the household
affairs. (Villegas 1988). Thus, Economics is commonly defined as a social science that explains how
the unlimited demands and desires of man or consumer is given satisfaction by the goods and
services produced using the limited economic resources available in the country.

ECONOMICS AS SOCIAL SCIENCE

Social Sciences is one field of study that relates to human behavior and society. Economics as
one of the social sciences subjects is concerned with varied issues pertaining to the production
of goods and services, money, banking and finance, forecasting business conditions and other
similar topics on business, and household management.

FACTORS OF PRODUCTION

Production is the process of transforming physical inputs into an output. The process of
production is made possible by the four factors of production, namely, land, labor, capital, and
entrepreneurship. The producer or entrepreneur combines the inputs in a technical proportion
to produce an output.

BASIC TYPES OF ECONOMIC SYSTEMS

1. CAPITALISM

• Characterized by private ownership = control of most resources (land, and capital) in

order to maximize its utilization.
• Relies on the decisions made in the market between the buyer and seller with very little
or sometimes no government intervention.
 • “Laissez Faire” = Leave alone policy (Transactions between the buyer and seller is not
dictated nor controlled by the government).

The objective of the capitalist system, generally, is to maximize profit, that is, by selling more
commodities at a higher price, while producing commodities at a lower cost.

This is achieved through efficient management or proper use of productive resources.

2. SOCIALISM

• An economic system which allows the government to manage and control the major key
industries.
• The administration or resources and decision-making are highly centralized. (No
movement in the economy can be expected unless there are directives or policies coming
from the government.)
• Based on the principle: “production for use”
• The produce of the economy are for the consumption and satisfaction and for the
common good of the majority, and not to accumulate excessive wealth or to maximize
profit.

3. COMMUNISM

• Derived from a French term “COMMUNISME” = common

• Inspired by Karl Marx and Friedrich Engels in the mid-1800s.
• Economic system in which the government owns and control the factors of productions,
including transport products.
• No privately owned property. Profit oriented motives have no place in this kind of
system.
• Considered as “CLASSLESS SOCIETY” = it disregards social classes, meaning people
are neither classified rich nor poor, they are equal in all aspects.

4. MIXED ECONOMY
• This system is characterized by the presence of private ownership of the different means
of production and the presence of a government which is in control of the
implementation of the fiscal and monetary policies.

5. TRADITIONAL ECONOMY

• Decisions are based on customs, beliefs, and practices handed down from one
generation to another.
 • This is very common in developing economies.
• People under this economic system are referred to as traditional because they follow the
old ways of producing their food and other means of their livelihood.

THE DIFFERENT ECONOMIC ACTIVITIES

Economic activities are specific work done to complete the cycle from the creation or
production of goods or services to utilization or consumption of finished goods.

1. Production – conversion of raw materials into finished goods

2. Distribution – allocate fruits of production to the owners of the different factors of
production
3. Exchange – money is used to facilitate delivery of goods to consumer. Money is used
as medium of exchange.
4. Consumption – utilization of goods purchased by the buyer to satisfy his needs

ECONOMIC PRINCIPLES AND THEORIES

• It is a statement or proposition used to explain and predict behavior in the real world.
• Economic theories helps us sort and understand the complexities of economic behavior
and guide our analysis.
• It helps us better understand and, ideally, predict human economic behavior.

ECONOMIC THEORIES
1. MALTHUSIAN THEORY

Malthus examined the relationship between population and resources. In 1798 Thomas Malthus
published his views on the effect of population on food supply in his book, called An Essay on
the Principle of Population.

His theory has two basic principles:

Population grows at a geometric rate i.e. 1, 2, 4, 16, 32, etc.Food production increases at an
arithmetic rate i.e. 1, 2, 3, 4, etc.
From this, we can conclude that populations will grow faster than the supply of food. This will
lead to a shortage of food.

Malthus then argued that because there will be higher population than the availability of food,
many people will die from the shortage of food.

He theorized that this correction will take place in the form of Positive Checks (or Natural
Checks) and Preventative Checks.

These checks would lead to MALTHUSIAN CATASTROPHE or also known as Malthusian Check or
Malthusian Spectre.

It is a prediction of a forced return to subsistence-level conditions once population growth has

outpaced agricultural production.

ECONOMIC IDEAS OF ADAM SMITH

Adam Smith is the pioneer of political economy and a thinker of modern economics.

He is considered as the FATHER OF MODERN ECONOMICS and the most influential thinkers
of modern economics due to his extensive work in economics.

In 1776, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of
Nations, which is really five books. It became known as The Wealth of Nations.

1. PRODUCTIVITY AND WEALTH

Labor becomes more productive as each worker becomes more skilled at a single job. He said
that new machinery, division and specialization of labor would lead to an increase in production
and wealth for the nation.

2. INVISIBLE HAND

One of his most important contributions. He argued that competition, together with the free
market system would act as an invisible hand that guided resources to their most productive use.

3. LAISSEZ-FAIRE
It is from a French phrase that means to "leave alone". No government intervention in economic
affairs/hands-off in economic affairs. (FREE MARKET).
It is a doctrine that claims that an economic system should be free from government
intervention or moderation, and be driven only by the market forces.
It is centered on the belief that human beings are naturally motivated by self-interest and when
they are not interfered-within their economic activities, a balanced system of production and
exchange based on mutual benefit emerges.

Basic Economic Problems and the Socioeconomic Development in the 21st

Century

BASIC ECONOMIC PROBLEMS

Basic economic problems here would refer to a person's inability to satisfy the basic needs of
man in order to live a normal life, namely, food, shelter, clothing, and education. The limited
resources, as well as the improper management of the economy's resources, often results to
economic problem. This problem is commonly observed and experienced by people situated in
emerging market and developing economies. The International Monetary Fund classifies the 175
countries in the world into three broad groups of economies, the Advanced economies, the
Emerging market and Developing economies.

1. POVERTY

A situation where people encounters difficulty in satisfying their basic need on a regular basis.

2. UNEMPLOYMENT

A condition where people, physically and mentally qualified, and are willing to work, cannot find
a job aligned with their educational attainment.

There are four (4) sources or causes of unemployment, and these are enumerated and explained
as:

3. POPULATION HIGH GROWTH RATE

This means that the rate of growth in population is higher than the set rate by the government.

High growth rate in population with no corresponding increase in economic growth and
productivity would result to unemployment.

The rate of population growth could reduce the growth rate of output and capita per person,
thus reduces the economy's standard of living (Gordon 2012).

. HIGH COST OF EDUCATION

This problem is related to the total expenses incurred in earning a degree wherein the cost is
beyond the income level capacity of the family.

Majority of the Filipino students cannot afford financially to pursue tertiary education even in
government funded higher educational institutions due to high tuition fees, and cost of living,
especially in urban areas. Basic education, though, is subsidized by the government, however,
cost related to compliance with school requirements and other miscellaneous expenses are not
readily available to most students whose parents are poor. For this reason, students drop out
from school.

5. HIGH COST OF HEALTH CARE SERVICES

The problem pertains to the high costs of medication and consultation that deprives someone
of proper treatment of a disease.

Several reasons may justify the risen cost of availing health care services. Nonetheless, with the
issuance of Senior Citizen privileges, Filipinos age 60 and above enjoy the discounted rates for
their purchases not only for health care related services but also on selected food bought.

6. HIGH DEPENDENCE ON REMITTANCES

Family members of OFWs are solely dependent on their remittances that, in most cases, has
developed among OFWs family members the attitude of laziness, dependency and extravagant
lifestyle.

These negative attitudes are counter-productive which would eventually results to poverty when
remittances are no longer sustained. Majority of the Filipinos employed overseas are
construction/technical workers and domestic help. A small percentage are in the field of their
profession.

7. GRAFT AND CORRUPTION

Graft is the acquisition of money or wealth in dishonest or illegal ways. An illegal transactions
mostly committed or involving government officials. Corruption or illegal behavior leads to
mismanagement of resources resulting to inefficient delivery of public services.
These economic problems are barriers or hindrance to a nation's growth and development. For
this reason, these economic problems and issues must be acted upon by the government, by
the economic experts and financial managers.

SOCIOECONOMIC DEVELOPMENT

Is a process that seeks to identify both the social and the economic needs within a community,
and seeks to create strategies that will address those needs in ways that are practical and in
the best interests of the community over the long period of time.
The government in his capacity as the country's resources manager and administrator, prepares
and draft a development program to determine the best solution to its economic problems. This
plan is called the socioeconomic development plan, which utilizes the social and economic
factors that are involved in the country's development process.