APPLIED ECONOMICS to give up money in order to acquire

a product or a service.
the study of economics in world situations
2. The cost of something is what you
as opposed to the theory of economics.
give up to get it
It is the application of economic principles As we have discussed in the previous
and theories to real situations, and trying to lesson, it is the concept of
predict the outcomes. opportunity cost.
3. Rational people think at the margin
is the study of observing how theories work Businesses will always take their
in practice profits into consideration. If the
The discipline may be practiced at marginal benefit (profit) does not
macroeconomic or microeconomic levels. exceed the marginal cost (capital),
then they are losing business and
applied economics prevents making may consider another tactic to bring
situations appear better or worse than they the sales up.
are. 4. People always respond to incentives
We know that economics uses theories to This is a bit psychological, because
help come up with answers when analyzing we will always react to both positive
a certain situation and negative reinforcements. We
will buy more when we something on
It usually deals with numbers in which sale at the mall, or smoke less when
possible outcomes being reviewed are based the government imposes higher taxes
and supported on cigarettes.
For example, when we buy goods and 5. Trade can make everyone better off.
services, we choose which will give us more Trades are actually beneficial for
satisfaction for the price that we are willing both the local and international
to pay. economies. Because of globalization,
we can enjoy products that aren't
For example, the data analyses and native or cannot be produced in the
evaluation of the economic problem are country since we are lacking the
needed to guide policy-makers in the right necessary resources to do so. In
direction. Not only does it review problems, exchange, we increase our exports in
It creates possible solutions for these locally produced consumables.
problems. 6. Markets are usually a good way to
Gregory Mankiw “10 Principles of organize economic activity.
Economics” Mankiw explained that "Adam Smith
made the observation that when
1. People face tradeoffs1. People face households and firms interact in
tradeoffs markets guided by the invisible
This means to acquire something, we hand, they will produce the most
have to give up something that we surpluses for the economy." Markets
own. As an example, we usually have make it easier for the households to
find all of the products they will
 need in a single market place. It will
also be advantageous for these APPLIED ECONOMICS IN
business because they can monitor RELATION TO THE COUNTRY’S
their own products and competitor ECONOMIC PROBLEMS
and adjust it according to the
market. MICROECONOMIC PROBLEM
7. Governments can sometimes 1. The problem of externalities
improve economic outcomes.
An externality is a cost or benefit caused by
They can choose to put restrictions
a producer that is not financially incurred
in a certain market if the resources
or received by that producer.
aren't being allocated properly. This
An externality can be both positive or
is to ensure efficiency and equity.
negative and can stem from either the
8. The standard of living depends on a
production or consumption of a good or
country's production.
service
This is because the more goods and
If we create negative externalities, we don’t
services produced and sold means
take them into account when deciding how
more money is circulating in the
much to consume.
market. This is turn will mean more
Externalities, usually need some kind of
profits for the company, increased
government intervention
salaries for employees and more
For example, taxes on negative
funds for the individual households.
externalities (e.g. sugar tax) or subsidies on
9. Prices rise when the government
positive externalities (e.g. free public
prints too much money.
education) even banning cars in city
This will only increase the money in
centres.
the circulation and will increase
demand for goods and services. This 2. Environmental issues
will cause firms to increase, causing
inflation. If we have over-consumption in this century,
10. Society faces a short-run tradeoff it could cause serious problems for future
between inflation and generations – e.g. global warming, loss of
unemployment non-renewable resources.
The explanation given in the article 3. Monopoly
is as follows: In the short run, when
prices increase, suppliers will want For various reasons firms can gain
to increase their production of goods monopoly power – and therefore the ability
and services. In order to achieve to set high prices to consumers. Given a
this, they need to hire more workers lack of alternatives, monopolies can make
to produce those goods and services. high profits at the expense of consumers,
More hiring means lower causing inequality within society.
unemployment while there is still 4. Inequality/poverty
inflation. However, this is not the
case in the long-run.
Inequality is considered a problem because A current account deficit on the balance of
of normative opinions such as – it is an payments means an economy is importing
unfair distribution of resources. more goods and services than it is
exporting.

5. Volatile Prices
6. Exchange rate volatility
Some agricultural markets can have volatile
prices. A glut in supply can be bad news The exchange rate can cause economic
because the fall in price can lead to lower problems.
revenue for farmers. It could even cause
7. Development economics
some to go out of business because of a bad
year. These volatile markets can cause Developing economies face similar
swings in economic fortunes. economic problems, but any issue is
magnified by low GDP and high levels of
6. Irrational behaviour
poverty. For example, unemployment in a
The consequence of the mortgage bubble – developing economy is more serious
rise in mortgage delinquency. because there is unlikely to be any
In some asset markets, we have seen volatile government insurance to give a minimum
prices exacerbated by irrational standard of living.
exuberance.
MARKET STRUCTURES
Macroeconomic problems refers to the competitive environment which
buyers and sellers operate
1. Unemployment
COMPETITION - rivalry among various
Unemployment has been a major economic
sellers in the market
problem in advanced economies.
Unemployment can also be caused by rapid MARKET-a situation of diffused,
changes in labour markets, for examples, impersonal competition among sellers who
unskilled workers unable to gain compete to sell their goods and among
employment in a high tech economy. buyers who use their purchasing power to
acquire the available goods in the market
2. Recession
Types of market Structure
A recession is a period of negative
economic growth – a decline in the size of Perfect Market
the economy. market situation which consists of a very
large number of buyers and sellers offering
3. Inflation
a homogenous product and no firm can
High inflation can be a serious problem if affect market.
prices rise faster than wages and nominal PRICE TAKER
interest rates. that is the firm is summed to be to be able to
alter its rate of production and sales without
4. Balance of payments/current account any feasible range, without such action
deficit
having a significant effect on the price of the 4. It controls the total supply of raw
product it sells. materials in the industry and has control
over price.
 Characteristics:
5. It owns a patent or copyright.
 1. A large number of small firms
6. Its operations are under the economies
 2. Selling a homogenous product
of scale
 3. No artificial restrictions placed
OLIGOPOLY
upon price and quantity
comes from the Greek word “oligo” means
 4. Easy entry and exit ‘few’ and “polein which means “to sell”.

 5. All buyers has perfect knowledge Characteristics:

of market conditions and any
1. There is a small number of firms in the
changes that occur in the market
market selling differentiated or identical
 6. Firms are price taker, that is they products.
have no control on the price of the
2. The firm has control over price
product. The only thing they can
decide is the level of the output they 3. There is an extreme difficulty for new
can produce. competitors to enter the market.
IMPERFECT MARKET Cartel-a formal agreement among
a market condition wherein the oligopolists to set up a monopoly price,
conditions necessary for the perfect allocate output, and share profit among
competition are not satisfied. themselves
MONOPOLY Collusion-a formal or informal agreement
among oligopolists to adopt policies that
Greek word “monos” which means
will restrict or reduce the level of
‘one’ and “polein” which means ‘to
competition in the market
sell’.
Monopolistic Competition
PRICE MAKER
a market situation in which there are many
a monopolist can influence and has
sellers producing highly differentiated
considerable control over the price
products. There is competition because
Characteristics: many sellers offer products that are close,
but not perfect substitutes for each other.
1. There is only one producer or seller of
goods and only one provider of services in Product differentiation
the market. creates some degree of market power to
monopolistic competitors, since each
2. Difficult entries in the market competitor can somewhat raise price without
3. There is no available substitute so that losing all its customers
the product or service is considered  Characteristics:
unique.
  1. Numerous numbers of large firms the actual exchange, yet they incur benefits
2. There is a limited control on price or advantages.
because of product differentiation
THREE MACROECONOMIC ISSUES
 3. Sellers offer differentiated or similar
products but not identical products Unemployment, inflation and economic
growth tend to change cyclically over time.
 4. New firms can enter the market
easily. However, there is a greater • GDP -7.6%
competition in the sense that new firms
have to offer better features of their • INFLATION-7.7%
product UNEMPLOYMENT-5.3%
 5. Competition in the market focuses
BUSINESS CYCLE
not only on price but also on product
variation, and promotion chart the ups and downs of an economy,
and understanding them can lead to better
Monopsony- a market situation where there
is only one buyer of goods and services in financial decisions
the market is the periodic growth and decline of a
Duopoly-there are two suppliers in the nation's economy, measured mainly by its
market GDP.

Oligopsony-market situation where there is sometimes called a "trade cycle" or

a small number of buyers. "economic cycle," refers to a series of
stages in the economy as it expands and
MARKET FAILURES
contracts.
Occurs when goods and services by a
market become inefficient or no longer primarily measured by the rise and fall of
bring in economic efficiency gross domestic product (GDP) in a country.

EXTERNALITIES What does the GDP tell us?

Are spillover effects of the production and
• If the GDP is larger than last year
consumption of goods and services, wherein
the economy is expanding (getting
those affected by the outcome do not
bigger)
receive proper compensation
• If the GDP is smaller, the economy is
GOOD WITH NEGATIVE EXTERNALITIES
shrinking (getting smaller)
brings a higher cost to society than the
price consumers pay for it. Phases of the Business Cycle
POSITIVE EXTERNALITIES
1. Expansion/Recovery
happen when transactions make use of
common resources that are shared with considered the "normal" — or at least, the
others who are not actually involved with most desirable — state of the economy,
is an up period.
During this period, businesses and
companies are steadily growing their
production and profits, unemployment
remains low, and the stock market is
performing well.
Consumers are buying and investing, and
with this increasing demand for goods and
services, prices begin to rise too.
stock market is a bull market

– Wages increase
– Low unemployment
– People are optimistic and
spending money
– High demand for goods
– Businesses start
– Easy to get a bank loan
– Businesses make profits and
stock prices increase
2. Peak/Prosperity