APPLIED I

ECONOMICS
Introduc ti on to A p p l i e d
Economics
AT E N E O D E Z A M B O A N G A U N I V E R S I T Y
SENIOR HIGH SCHOOL
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 CONTENTS
Lesson Revisiting Economics as a Social Science
What is Economics?’
Macroeconomics and Microeconomics
Divisions of Economics
The Economic Resources

Lesson Economics as an Applied Science

Applied Economics
Econometrics
Basic Economic
Problems
Lesson
The Economic
Models
The Economic Models
Circular Flow Diagram

Production Possibility Frontier

Opportunity Cost
Lesson The Law of Increasing
Opportunity Cost

The Philippines Socioeconomic Development in the 21st

Century
Agenda 21

Quizzer
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LESSON 1: Revisiting Economics as a Social Science

T he word economy comes from the Greek word for “one who manages the household.” At first the origin
might seem peculiar. But, in fact, households and economies have much in common. A household faces
many decisions such as: Who cooks dinner? Who gets the extra rice at dinner? Who washes the dishes
after? In short, the household must allocate its scarce resources among its various members considering
each member’s abilities, efforts and desires. Like a household, a society must decide what jobs will be done
and who will do them. It needs some people to grow food, other people to make clothing, and still others to
design a computer software.

WHAT IS ECONOMICS?

Economics has been defined in many ways. Some of these definitions are as follows:

(1) According to Mankiw, Economics is the study of how society manages its resources.
(2) Hall and Leiberman states that economics is the study of choice under the conditions of scarcity
(3) Castillo viewed economics as the study of how man could best allocate and utilize the scarce
resources of society to satisfy his unlimited want.
(4) Webster defined economics as a branch of knowledge that deals with the production, distribution
and consumption of goods and services.
(5) Economics, according to Sicat, is a scientific study which deals with how individuals and society in
general makes choices.

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In summary, economics covers all kinds of topics, but at the core, it is devoted to understanding how
society allocates its resources under the condition of scarcity. Scarcity is defined as the limited nature
of society’s resources. Since resources are generally scarce and human wants and needs tend to
be unlimited, we need to study how society choose from the menu of possible goods and services,
how different commodities are produced, priced and who gets to consume the goods that society
produce.

MACROECONOMICS AND MICROECONOMICS

The field of economics is traditionally divided into two (2) broad subfields: Macroeconomics and
Microeconomics.

Macroeconomics is the study of economy-wide phenomena dealing with economics behavior of

the whole economy or its aggregates such as the government and businesses. It is concerned
with the discussion of topics like gross domestic product (GDP) inflation, unemployment, and
economic growth. Economist – and society at large – agree on three important
macroeconomic goals: economic growth, high employment, and stable prices.

Microeconomics is the study of how households and firms make decisions and how they interact
in markets. It deals with the economic behavior of individual units such as consumers, firms, and
the owners of the factors of production. It looks at the choices they make and how they interact
with each other when they come together to trade specific goods and services.

Micro and macroeconomics are intertwined, so as economists gain understanding of certain phenomena,
they can help nations and individuals make more informed decisions when allocating resources.
However, we must note that what is true in Microeconomics may not be true in Macroeconomics. For
instance, a farmer gets better harvest. This means more income for him, if all farmers have increased
their harvest; it is not favorable for them. It is because, increasing the supply reduces the prices of
goods.

DIVISIONS OF ECONOMICS

Economics has five (5) major divisions. These divisions are as follows:

(1) Production – This refers to the process of producing or creating goods needed by the
households to satisfy their needs and wants. The factors of production are called inputs and the
goods and services that have been created are called outputs of production.
(2) Distribution – This refers to the marketing of goods and services to different economic outlets
for allocation to individual consumers. In monetary terms, this is the allocation of income among
persons or household.
(3) Exchange – This is a process of transferring goods and services to a person or persons in return
for something. At present, the medium of exchange used in the market is money.
(4) Consumption – This refers to the proper utilization of economic goods. Since goods and services
could not be consumed unless paid for, then we can also say that consumption is spending
money for goods and services for direct satisfaction
(5) Public Finance – This pertains to the activities of the government regarding taxation, borrowings,
and expenditures. It deals with the efficient use and fair distribution of public resources in order
to achieve maximum social benefits.

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THE ECONOMIC RESOURCES

Economic resources are also known as factors of production. There are four major factors of
production, which are utilized in our economy. They are as follows:

(1) Land – The physical space on which production takes place, as well as useful materials – natural
resources – found under it or in it, such as crude oil, iron, coal, or fertile soil.
(2) Labor – This is also termed as human resources. Labor refers to the time and effort, both
physical and mental, spent in producing goods or services.
(3) Capital – Capital has two economic types as a factor of production. Physical Capital consists of
things like machinery and equipment, factory buildings, computers and even hand tools like
hammers and screwdrivers. Another type is Human Capital – the skills and knowledge possessed
by workers,
(4) Entrepreneurship – The ability and willingness to combine the other resources – land, labor, and
capital – into a productive enterprise.

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LESSON 2: Economics as an Applied Science

A pure science furnishes tools and applied science works with these tools. Economics as pure science,
formulates various laws and applied economics applies them in practice in solving various problems.
Before economics has been treated as a pure positive science. But recently, applied economics assumed
greater importance. As pure science and applied science go together, so Economics is also pure as applied
science.

APPLIED ECONOMICS

Applied Economics is the study of observing how economics theories work in real world-situations. It is
the application of economic principles and theories to real situations and trying to predict what the
outcomes might be. Applying economics to the status of the economy of a country, household or
company helps eliminate all attempts to dress up a situation so that it will seem better or worse than it
really is.

Applied Economics deals on the application of economic theories and principles to real-world situations
with the desired aim to analytically review potential outcomes.

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ECONOMETRICS

Econometrics is the application of statistical and mathematical theories to economics for the purpose of
testing hypotheses and forecasting future trends. Econometrics takes economic models and test them
through statistical trials. The results are then compared against real-life examples.

Some of the common econometric models are:

o Linear regression o ARIMA
o Generalized linear models o Vector Autoregression
o Probit, Logit, and Tobit o Cointegration
o Hazard

BASIC ECONOMIC PROBLEMS

In today’s world, it is commonly believed that scarcity is the root cause of all economic problems. Scarcity
of means for satisfying various needs is the central problem of our economic life and it is scarcity that
creates the need to make a choice. All the problems like poverty, unemployment, inflation, balance of
payments, slow growth, etc. that a modern economy faces originates from the scarcity of resources. It
is because of scarcity, people and economies must make decisions over how to allocate their resources.

Due to scarcity of resources, every economic system is faced with the following problems:

(1) What to produce? (Microeconomics)

(2) How to produce? (Microeconomics)
(3) For whom shall goods and services be produced? (Microeconomics)
(4) Are the country’s resources being utilized, or some of them are lying idle and unemployed?
(Macroeconomics)
(5) Is the economy’s capacity to produce goods growing or remaining the same overtime?
(Macroeconomics)

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LESSON 3: The Economic Models

E very field of study has its own language and its own ways of thinking. Mathematicians talk about
axioms, integrals, and vector spaces. Psychologists talk about ego, id, and superego. Economics is no
different. Supply demand, elasticity, consumer surplus etc. – these terms are part of an economist’s
language. At first this language may seem needlessly arcane but, as you will see, its value lies in its ability
to provide you new and useful way of thinking about the world in which you live.

THE ECONOMIC MODELS

Economists use models to learn about the world, but instead of actual physical models, they most often
composed of diagrams and equations. These models omit many details to allow us to see what is truly
important. However, due to certain limitations, an economist’s model does not include every feature of
the economy. There are several economic models in existence but to simplify things for now, we will first
discuss the Circular Flow Diagram and Production Possibility Frontier.

CIRCULAR FLOW DIAGRAM

This diagram is a schematic representation of the organization of the economy. Households and firms
interact in two types of markets. In the markets for goods and services, households are buyers and firms
are sellers. Households buy the output of goods and services that firms produce. In the markets for the
factors of production, households are sellers and firms are buyers. In these markets, households provide
firms the inputs that the firms use to produce goods and services. The circular-flow diagram offers a

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simple way of organizing all the economic transactions that occur between households and firms in the
economy.

The inner loop of the circular-flow diagram represents the flows of goods and services between
households and firms. The households sell the use of their labor, land, and capital to the firms in the
markets for the factors of production. The firms then use these factors to produce goods and services,
which in turn are sold to households in the markets for goods and services. Hence, the factors of
production flow from households to firms, and goods and services flow from firms to households.

The outer loop of the circular-flow diagram represents the corresponding flow of dollars. The households
spend money to buy goods and services from the firms. The firms use some of the revenue from these
sales to pay for the factors of production, such as the wages of their workers. What’s left is the profit of
the firm owners, who themselves are members of households. Hence, spending on goods and services
flows from households to firms, and income in the form of wages, rent, and profit flows from firms to
households.

This circular-flow diagram is one simple model of the economy. It dispenses with details that, for some
purposes, are significant. A more complex and realistic circular-flow model would include, for instance,
the roles of government and international trade. Yet these details are not crucial for a basic
understanding of how the economy is organized. Because of its simplicity, this circular-flow diagram is
useful to keep in mind when thinking about how the pieces of the economy fit together.

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PRODUCTION POSSIBILITY FRONTEIR

The Production Possibilities Frontier is a graph that shows the various combinations of output—in this
case, cars and computers—that the economy can possibly produce given the available factors of
production and the available production technology that firms can use to turn these factors into output.
Below is an example of a production possibilities frontier. In this economy, if all resources were used in
the car industry, the economy would produce 1,000 cars and no computers. If all resources were used in
the computer industry, the economy would produce 3,000 computers and no cars. The two end points
of the production possibilities frontier represent these extreme possibilities. If the economy were to
divide its resources between the two industries, it could produce 700 cars and 2,000 computers, shown
in the figure by point A. By contrast, the outcome at point D is not possible because resources are
scarce: The economy does not have enough of the factors of production to support that level of
output. In other words, the economy can produce at any point on or inside the production
possibilities frontier, but it cannot produce at points outside the frontier.

An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has
available. Points on (rather than inside) the production possibilities frontier represent efficient levels of
production. When the economy is producing at such a point, say point A, there is no way to produce
more of one good without producing less of the other. Point B represents an inefficient outcome. For
some reason, perhaps widespread unemployment, the economy is producing less than it could
from the resources it has available: It is producing only 300 cars and 1,000 computers. If the
source of the inefficiency were eliminated, the economy could move from point B to point A,
increasing production of both cars (to 700) and computers (to 2,000). Notice as we move from point to
point, trade off between production quantities differ. This is due to the law of increasing opportunity
cost.

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OPPORTUNITY COST

The opportunity cost of any choice is what we must forego when we make a choice. When making any
decision, such as whether to attend college, decisionmakers should be aware of the opportunity costs
that accompany each possible action. In fact, they usually are. College-age athletes who can earn millions
if they drop out of school and play professional sports understand their opportunity cost of college is very
high. It is not surprising that they often decide that the benefit is not worth the cost.

LAW OF INCREASING OPPORUNITY COST

The law of increasing opportunity cost states that the more of something we produce, the greater the
opportunity cost of producing even more of it

Why does opportunity cost increase as we move along the PPF? It is because most resources – by their
very nature – are better suited to some purposes than others. If the economy were using all its
resources on the production of computers, even those that are much better suited at making cars will be
producing computers. As we move along the curve, we will shift our resources out of computer
production and into car production. But we would first shift those resources best suited to car
production – and least suited for computer production.

The principle of increasing opportunity cost applies to most of society’s production choices, not just
between computers and cars. If we look at society’s choice between food and oil, we would find that
some land is better suited at growing food and other land best suited for drilling oil. As we continue to
drill for more oil, we would find ourselves drilling on land that is less and less suited to producing oil, but
better and better for producing food. The opportunity cost of producing additional oil will therefore
increase.

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LESSON 4: Basic Economic Problems and the

Philippine Socioeconomic Development in the 21st
Century

A development vision and framework for the 21 st Century has been formulated under the Long-Term
Philippine Development Plan (LTPDP), 2000-2025 or Plan 21. The LTPDP framework recognizes that
the new millennium will increasingly call for economic development to become less ecologically destructive.
Plan 21 sets broad developmental directions of the country and will serve as the basis for the detailed plans
of sector agencies.

AGENDA 21

Agenda 21 is an action plan of the United Nations (UN) related to sustainable development and was an
outcome of the United Nations Conference on Environment and Development (UNCED) held in Rio de
Janeiro, Brazil, in 1992. It is a comprehensive blueprint of action to be taken globally, nationally and
locally by organizations of the UN, governments, and major groups in every area which humans directly
affect the environment. The Philippines also established an agenda called the Philippine Agenda 21.

The Philippine Agenda 21 is the nation’s blueprint for sustainable development. In concreting the vision,
it describes a path for individuals, families, households, and communities; an action plan for each
ecosystem in consideration of the various landscapes and life forms found therein.

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The Philippine Agenda 21 advocates fundamental shift in development, thinking, and approach. It
departs from traditional conceptual frameworks that emphasizes sector-based and macro concerns.
Philippine Agenda 21 promotes harmony and achieves sustainability by emphasizing the following:

(1) A scale of intervention that is primarily area-based. The national and global policy environment
builds upon and supports area-based initiatives
(2) Integrated island development approaches where applicable. This recognizes the archipelagic
character of the Philippines which includes many small island provinces.
(3) People and integrity of nature at the center of the development. This implies the
strengthening
of roles, relationships, and interactions between and among stakeholders in government, civil,
society, labor, and business. Basic sectors have an important role to play in achieving equity and
managing the ecosystems that sustain life.

The Philippine Agenda 21 envisions the following for a better quality of life among Filipinos:

(4) Poverty Reduction – This includes measures to create an enabling economic environment for
sustained and broad-based growth
(5) Social Equity – It should mean allocation of resources based on efficiency and equity to achieve
balanced development
(6) Empowerment and Good Governance – Each is a necessary precondition to each other. These
to are a defining element of each other
(7) Peace and Solidarity – The cycle of poverty and conflict goes on as cost of war escalate in
terms of various kinds of destruction while withholding funds for basic services, resulting in
more poverty and underdevelopment
(8) Ecological Integrity – The involvement of heightened and sustained implementation of
environmental laws, as well as the continued pursuit of resource conservation.

REFERENCES
Leańo, R (2016). Applied Economics for Senior High School. Intramuros, Manila: Mindshapers Co., Inc.

Leibermann, M & Hall, R. (2010). Principles & Applications of Economics. USA: South-Western Cenage

Learning Mankin, G (2002). Principles of Economics. USA: Harcourt, Inc.

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QUIZZER

Multiple Choice: Choose the letter of the correct answer and write it down on the space provided for in
each item.

1. Once the goods are produced, how shall they be distributed?

A. What to produce?
B. How to Produce?
C. For whom to produce?
D. How much to produce?

2. Goods and services to be produced are based on the needs of the consumers?
A. What to produce?
B. How to produce?
C. For whom to produce?
D. How much to produce?

3. It is the study of economics in relation to real world situations as opposed to the theory
of economics.
A. Economics
B. Applied Economics
C. Pure Economics
D. Macroeconomics

4. What does Scarcity mean?

A. Infinite resources
B. Finite resources
C. Definite Resources
D. Unlimited Resources

5. PPF provides a rigorous definition of:

A.
B. Production
C. Scarcity
D. Distribution
E. Exchange

6. It is also termed as human resource.

A. Land
B. Labor
C. Capital
D. Entrepreneurship

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7. Macroeconomics deals with the following except:

A. Gross National Product
B. Employment Rate
C. National Income
D. Price of Titay Rice

8. Economics is a social science because it deals with:

A. Human Nature
B. Natural Resources
C. Experimentation
D. Plants and Animals

9. Agenda 21 is an action plan of the:

A. Philippine government
B. United Nations
C. Local government
D. All of the above

10. It is the value of what is foregone in order to have something else:

A. Production Possibility Frontier
B. Invisible Hand
C. Opportunity Cost
D. Labor

ESSAY

If given the power and opportunity, how are you going to address the current economic problems that
the Philippines is currently facing?

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