LAS 1: Economics as a Social and Applied Science

Economics - is a social science that deals with the proper allocation of scarce resources to satisfy unlimited human
wants. Economics is classified as a social science because it deals with the study of a man’s life and how he lives with
other men. Obviously, economics is interdependent with other sciences like sociology, political science, geography,
religion, and other social sciences. As a social science, economics studies how individuals make choices in allocating
scarce resources to satisfy their unlimited wants.

Scarcity - is a condition where there are insufficient resources to satisfy all the needs and wants of a population.
Scarcity is the reason why people have to practice economics. Scarcity is that fact of life that makes man’s material
wants never fully satisfied because the resources he has are limited while his wants are almost unlimited. However,
his ability to buy goods and services is limited by his income and purchasing power. It is therefore in this context that
man has to practice economics.

Thus, in a broad sense, economics can be defined as a social science that studies and seeks to allocate scarce human
and non-human resources among their alternative uses in order to satisfy unlimited human wants and desires.

THE ECONOMIC RESOURCES

Our economic resources are also known as factors of production or inputs. There are five major factors of
production, which are utilized in our economy. These are land, labor, capital, entrepreneur, and foreign exchange.
1. Land - These resources consist of free gifts of nature which include all natural resources above, on, and
below the ground such as soil, rivers, lakes, oceans, forests, mountains, mineral resources, and climate. Land
is considered an economic resource because it has a price attached to it. One cannot utilize this natural
resource without paying for it usually in the form of rent or lease.
2. Labor - This is also termed human resources. Labor refers to all human efforts, be they mental or physical,
that help to produce want satisfying goods and services. This applies not only to workers, farmers, or
laborers but also to professionals like accountants, economists, or scientists. Labor is an indispensable factor
in the production of goods and services. In return, he earns an income in the form of wages and/or salaries.
3. Capital - It is a finished product, which is used to produce goods. It consists of all man-made aids to further
the production process such as tools, machinery, and buildings. Capital also serves as an investment. Income
derived from capital is interest.
4. Entrepreneur - An entrepreneur is the organizer and coordinator of the other factors of production: land,
labor, and capital. An entrepreneur is one who is engaged in economic undertakings and provides society
with the goods and services it needs. He utilizes his initiative, talent, and resourcefulness in the creation of
economic goods. He is able to compensate himself through the acquisition of profits.
5. Foreign Exchange - This refers to the dollar and dollar reserves that the economy has. This is mostly affecting
the national economy in terms of import and export transactions, and in the case of Philippine Overseas
Filipino Workers (OFW), is affecting their remittances of money to their families back home.

BRANCHES OF ECONOMICS
The study of Economics is divided into two branches: Microeconomics and macroeconomics.
1. Microeconomics - It deals with the economic behavior of individual units such as the consumers, firms, and
the owners of the factors of production. Such specific economic units constitute a very small segment of the
whole economy. For example, the price of rice, the number of workers of a certain firm, the income of Mr.
Cruz, the expenditures of PLDT, etc. Microeconomics is also known as the Price Theory.
2. Macroeconomics - It deals with the economic behavior of the whole economy or its aggregates such as
government, business, and households. An aggregate is composed of individual units. The operation of the
various aggregates and their interrelationship is analyzed to provide a profile of the economy as a whole.
Macroeconomics is concerned with the discussion of topics like the gross national product, level of
employment, national income, the general level of prices, total expenditures, etc. It is also known as
employment and income analysis.
THE BASIC ECONOMIC PROBLEMS
All societies are faced with basic questions in the economy that have to be answered in order to cope with
constraints and limitations. These are:
1. What to Produce? - First of all, the system must determine the desires of the people. Goods and services to
be produced are based on the needs of the consumers. However, there are some factors that should be
taken into consideration in producing the goods and services the individuals need. These are:
1.1. Availability of resources;
1.2. Physical environment; and
1.3. Customs and traditions of the people.
2. How much to Produce? - Knowing what to produce is not enough. The system must know how much of the
chosen goods should be produced. It must determine how many of these buyers are willing to buy the goods
and services produced by the economy. Here, people’s taste and preference plays a major factor in
determining production.
3. How to Produce? - When producing goods and services, one has to think of how best to do it. The best way
to make goods is not to spend too much. This also means you have to make goods with quality. To make
goods like these, one has to know the best way of making goods. You have to choose the cheapest way. But
this way must also let you make something with good quality.
4. For Whom Shall Goods and Services Produce? - The last question has something to do with the problem of
distribution. Once the goods are produced, how shall they be distributed? Thinking about this problem
means asking, “Who gets what?” on a bigger scale. In this case, this means whatever is being sold can be
bought. But only those who have money and who want it can buy what is being sold. The poor cannot buy
the same goods and services as rich people. When you have money, you have purchasing power. It means
you have the power to buy things.

ECONOMIC SYSTEMS
The term economic system simply means the organization of economic society with reference to the production,
exchange, distribution, and consumption of wealth (Leańo, et al., 2012). The economic system is the means through
which society determines the answers to the basic economic problems mentioned. There are four commonly used
economic systems. These are:
1. Traditional Economy - It is also known as the subsistence economy. In this type of economy, people produce
goods and services for their own consumption. Decisions are based on customs and traditions and the
production techniques are outmoded and sometimes obsolete.
2. Command Economy - Under this system, the government takes hold of the economy of the State. The
government does policy formulation, economic planning and decision-making. It dictates on what to
produce, how to produce and for whom to produce. The system works based on the interest of the country
and not on the individual. In this case, the consumer could not choose the goods and services he wanted.
The government answers the major economic questions through its ownership of resources and its power to
enforce decisions.
3. Market System - In a capitalistic system, business enterprises are owned and controlled by private
individuals. One of the major features of this system is “free enterprise” meaning that any individual can
engage in any enterprise, which he thinks will yield him a profit in competition with other businesses.
Inherent in a market economy is individualism or “laissez-faire” which means “let alone” or freedom from
government control of business enterprise. Private firms make the major decisions about production and
consumption.
4. Mixed Economy - This is a system which is a mixture of the different types of economy. The private capitalist
and the government play a major role in solving the basic problems of the economy for the benefits of the
consumers. The government sets laws and rules that regulate economic life, produces educational and police
services, and regulates pollution and business.
METHODS OF ECONOMICS
Because economics is a science, there is a right way of answering its questions. To get the answers, we use what is
called the empirical method. Here, “empirical” means we get answers by studying things carefully. We study what is
given. If we can, we do the math to get answers. We study facts with care. How? To do this, we have to put facts in
order. We can make a list or a table of what we know. It can also help if we study what causes things to happen. But
since we cannot study every little fact, we can make guesses. However, these guesses come from what we know for
sure. We may call them generalizations. A generalization is something we think of as true in most cases. This helps
because we cannot always study everything. To make things simple, we already guess how some people will act in
the economy.
As a science, economics demands a way of answering questions. For instance, the law of demand tells us that if the
price of a good goes up, people will not buy it as much. This will happen, ceteris paribus. In this example, ceteris
paribus is a generalization. It means the demand law will be true if nothing but the price changes. It means
everything else will stay the same. If something aside from the price changes, the demand law will be false. For
example, what if the money a person earns goes up? What if it goes up more than the price of the good goes up?
This means the person still has more money to spend. So he will still buy the goods even if the price is higher.
Economics has what we call theories. Theories are ideas. They tell us why people act a certain way. They also tell us
why things are the way they are. Theories can be shown using tables or graphs, too. When we apply economic
beliefs in real life, we call them applied economics or economic policy.

ECONOMICS AS AN APPLIED SCIENCE

Applied Economics is the application of economic theory and econometrics in specific settings with the goal of
analyzing potential outcomes. John Neville Keynes is attributed to be the first to use the phrase “applied economics”
to designate the application of economic theory to the interpretation and explanation of particular economic
phenomena (Dinio, et al., 2017).
We should be able to improve human welfare among Filipinos by investigating and analysis of economic problems in
the real world. Applying economic theory in our lives means trying to address actual economic issues and be able to
do something about it. The concept of scarcity and choice should encourage us as individuals to help in our own way
to provide solutions to the country’s economic problems.
Econometrics - the use of statistical techniques to understand economic issues and test theories. Without evidence,
economic theories are abstract and might have no bearing on reality (even if they are completely rigorous).
Econometrics is a set of tools we can use to confront theory with real-world data.
LAS 2
BASIC ECONOMIC PROBLEMS OF SOCIETY
All societies are faced with basic questions in the economy that must be answered to cope with constraints and
limitations. These are:
1. What to produce and how much – society must decide what goods and services should be produced in the
economy. Having decided on the nature of goods that will be produced, the quantity of these goods should
also be decided.
2. How to produce – is a question on the production method that will be used to produce goods and services.
This refers to the resource mix and technology that will be applied in production.
3. For whom to produce – is about the market for goods and services. For whom will the goods and services be
produced? The young or old, the male or female market, the low-income or the high-income groups?

WHY IS ECONOMICS IMPORTANT?

Economics will help you understand why there is a need for everybody, including the government, to budget and
properly allocate the use of whatever resources are available. It will help one understand how to make more rational
decisions in spending money, saving part of it, and even investing it. On the national level, economics will enable you
to look at how the economy operates, and if leaders are effective in trying to shape up the economy.

SCIENTIFIC APPROACH IN THE EMPIRICAL TESTING OF ECONOMIC THEORY

Economics is a study that attempts to explain how an economy operates and how the consumer attempts to
maximize his/her wants within limited means. Using tools such as logic, math, and statistics, you need to approach
the empirical testing of an economic theory in a scientific manner. This scientific approach involves the ff. steps:
1. State the propositions or conditions that are taken as given and do not need further investigation, as the
basic starting point of investigation.
2. Observe facts in connection with the activity that you want to theorize.
3. Apply the rules of logic to the observed facts to determine causal relationships between observed factors
and to eliminate facts that are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may be tested as to whether they are valid or
not.
5. Use statistics and econometrics as empirical proof in testing the hypotheses.

POSITIVE ECONOMICS VERSUS NORMATIVE ECONOMICS

Positive economics deals with “what is” - things that are happening such as the current inflation rate, the number of
employed laborers, and the level of the Gross National Product (GNP). Positive economics is an overview of what is
happening in the economy that is possibly far from what is ideal.
Normative economics refers to “what should be” – that which embodies the ideal rate of population growth or the
most effective tax system. In other words, it focuses on policy formulation that will help to attain the ideal situation.

MEASURING THE ECONOMY

The heart of the economy is a product whose value measures both the resource input and output of people. The
interplay of resources and outputs tells how well the economy has performed.
Gross Domestic Product (GDP) - the total monetary or market value of all the finished products produced within a
country’s borders within a period. As a broad measure of overall domestic production, it functions as a
comprehensive scorecard of a given country’s economic health.
Gross National Product (GNP) - is an estimate of the total value of all the final products and services turned out in
each period by means of production owned by a country’s residents. It is commonly calculated by taking the sum of
personal consumption expenditures, private domestic investment, government expenditure, net exports, and any
income earned by residents from overseas investments, minus income earned within the domestic economy by
foreign residents. Net exports represent the difference between what a country exports minus imports of goods and
services.
GNP/GDP: Expenditure Approach - To account GNP and classify its components, one way is by enduse expenditure.
Products are final when they have reached the highest levels of processing in the economy for different uses in the
given period. They are household and individual consumption (C), and government expenditure on goods and
services including labor (G) and exports (X). Products, regardless of production stages, are also considered final when
basically stocked (unused) as capital goods and inventories of raw materials and intermediate products. Classified as
investments (I), they are stock of values for future use and therefore, have reached the highest possible production
stages for the given period. On the other hand, their import components (M) are excluded since import products are
produced in other economies. To restate the GNP equation: GNP=C+I+G+(X-M)
GNP/GDP: Income Approach - Another way to account GNP and classify components is by resource uses and
contributions that make up the production stages. As basic factors (e.g., leather) as processed into higher forms (e.g.,
shoes). If all payments for resource contributions (rent, wage, interest, and profit) went to resource owners, GNP
would simple (simply) be the sum of all factor payments from the raw material to the final product stage.

THE PHILIPPINES' BASIC ECONOMIC PROBLEMS

The Philippine economy has grown significantly during President Benigno Simeon Aquino’s administration. With a
growth rate of the country’s GDP of 6.8% in 2012, improving to 7.2% in 2013, and slowing down to 6.1% in 2014,
these rates are improved past rates preceding President Aquino’s term. It is also higher than its Asian neighbors such
as Malaysia, Thailand, South Korea, Hong Kong, India, and Indonesia (CIA World Factbook 2013).
Despite this admirable growth, people have been complaining of non-inclusive growth. Millions of Filipinos are
claiming they still live below the poverty level.
Unemployment is still a main problem of the Philippine economy despite improvements reported by the National
Statistic office. In July 2015, the Labor Force Survey (LFS) released by the Philippine Statistic Authority (PSA) showed
the country’s unemployment rate at 6.4% or an estimated 2.68 million individuals.
Poverty is another significant socio-economic problem in the country. As reported by the National Statistics
Coordination Board, in 2006, the poverty incidence of the population registered at 26.4%, 26.5% in 2009, 25.2% in
2012, and 28.8% in the first semester of 2014.
The booming population growth in the Philippines is undeniably another basic economic problem that can be
connected to the issue of scarcity. When the population becomes too big, economic resources may no longer be
enough to support the growing population. According to the 2010 census, the Philippine population stood at 92.3
million. As of 2014, it has reached more than 100 million-growing by 2% from the previous year and one of the
highest in Asia. The population of Philippines represents 1.3% of the world’s total population.