Economics

Introduction to Applied Economics

Learning Objectives:
• Differentiate between economics as a social science and as an applied
science
• Apply the concept of opportunity cost when evaluating options and
making economic decisions
• Make decisions based on how man can satisfy most of his wants given
limited resources
• Differentiate macroeconomics and microeconomics
• Describe and state the importance of economic resources
• Differentiate positive and normative economics
Learning Objectives: Continued
• Differentiate gross national product and gross domestic product
• Distinguish the different approaches used in solving for the gross
national product
• Identify the basic problems of the Philippine economy
• Analyze basic economic problems and propose solutions to the
problems using the principles of applied economics
• Describe the various economic system
 Terms to remember
Economics Traditional Economy
Scarcity Command Economy
Social Science Market Economy
Macroeconomics Positive Economics
Microeconomics Normative Economics
Opportunity Cost Gross National Product
Economic Resources Gross Domestic
Land Product
Labor Applied Economics
Capital Unemployment
Economic System Poverty
Poverty Line
What is Economics?
 A study of man in the ordinary
business of life. It enquires how he
gets his income and how he uses it.
Thus, it is on the one side, the study
of wealth and on the other and more
important side a part of the study of
man.

Alfred Marshall
Scarcity is a condition where there are
insufficient resources to satisfy all the needs and
wants of a population. (relative and absolute)

Choice and Decision-Making

Opportunity cost refers to the value Economics

of the best foregone alternative
 Economic resources, also kown
as factors of production, are the
resources used to produce goods
Economic and services. These resource are,
Resources by nature, limited and therefore,
command a payment that
becomes the income of the
resource owner.
Economic •Land
Resource •Labor
s •Capital
 Economics is a different science from
biology and chemistry as these are
physical science. Economics is a social
science because it studies human behavior
Economics as just like psychology and sociology. A social
science is, broadly speaking, the study of
a Social society and how people behave and
Science influence the world around them. As a
social science, economics studies how
individuals make choices in allocating
scarce resources to satisfy their unlimited
wants.
 Two
branches • Macroeconomics
of • Microeconomics
economics
Macroeconomics
A division of economics that is concerned with the overall
performance of the entire economy. It studies the economic system
as a whole rather than the individual economic units that make up
the economy.

It focuses on the overall flow of goods and resources and studies

the causes of change in the aggregate flow of money, the aggregate
movement of goods and services, and the general employment of
resources.

Macroeconomics is about the nature of economic growth, the

expansion of productive capacity, and the growth of national
income.
Microeconomics
Is concerned with the behavior of individual entities such as the consumer,
the producer, and the resource owner. It is more concerned on how goods
flow from the business firm to the consumer and how resources move
from the resource owner to the business firm.

It is also concerned with the process of setting prices of goods that is also
known as the Price Theory. Microeconomics studies the decision and
choices of the individual units and how these decisions affect the prices of
goods in the market.

It examines alternative methods of using resources in order to alleviate

scarcity. It does not focus on aggregate levels of production, employment,
and income.
BASIC ECONOMIC PROBLEMS OF
SOCIETY

WHAT TO PRODUCE HOW TO PRODUCE? FOR WHOM TO

AND HOW MUCH? PRODUCE?
 • Traditional economy
Economic • Command economy
Systems • Market economy
 • Economics will help you to
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
Why make more rational decisions in
Economics is spending money, saving part of it, and
even investing some of it.
Important? • On the national level, economics will
enable one to take look on how the
economy operates and to decide for
themselves if the government and
leaders are effective in trying to shape
up the economy and formulate
policies for the good of the nation.
 SCIENTIFIC APPROACH IN THE EMPIRICAL
TESTING OF AN ECONOMIC THEORY
• State the propositions or conditions that are taken as given and do not need
further investigation, as the basic starting point of investigation. These
propositions will serve as the premise upon which the theory is established.
• Observe facts in connection with the activity that we want to theorize.
• 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.
• Establish a set of principles such that formulated hypotheses may be tested
as to whether they are valid of not.
• Use statistics and econometrics as empirical proof in testing the
hypotheses.
Positive Economics vs Normative
Economics
• Positive Economics deals with what is–things that is actually
happening such as the current inflation rate, the number of employed
labor, and the level of the GNP/GDP.
• Normative Economics, on the other hand, refers to what should be—
that which embodies the ideal such as the ideal rate of population
growth or the most effective tax system.
• Positive economics is an overview of what is happening in the
economy that is possibly far from what is ideal.
• Normative economics focuses on policy formulation that will help to
attain the ideal situation.
Measuring the The government plans for a better
Economy economy from a perspective of what
the economy has been. Shaping the
economy’s future is changing past and
present perspectives extended to the
future. Looking ahead is grounded on
past and present performance and
health of the economy.
Counting All through GNP
• As the mirror of all products, Gross National Product (GNP) is the
market value of final products, both sold and unsold, produced by the
resources of the economy in each period.
• The economy’s resources are those belonging to Filipino citizens and
corporations. Not all resources belonging to the economy are in the
economy and not all resources in the economy belong to the
economy.
• Value of final products already includes the values of its components
from the lower production stages.
 • Income Approach
o The total income earned by the
Measuring households in a nation during a year.
• Expenditure Approach
GDP o The total amount spent on goods and
services produced in a nation by
households, firms, government, and
foreigners.