APPLIED ECONOMICS

GRADE 11 ( GAS )
PREPARED BY: ANNABELLE L. MANCO

UNIT 1: ECONOMICS AND REAL- WORLD CHALLENGES

MODULE 1
OVERVIEW OF APPLIED ECONOMICS
THE STUDY OF ECONOMICS
Economics is everywhere. You may be unaware of it but of your daily decision- making ----- from choosing between
doing your homework or watching TV to picking adobo over sinigang for lunch----- has the very same foundation as
economics.

THE ECONOMICS AS AN APPLIED SCIENCE

APPLIED ECONOMICS, as the name implies, is the application of economic theories and models in real life. It
consists of learning how choices affect individual decision- making and how the availability of factors aid decision makers
craft sound judgment. Economists have worked to simplify complex social phenomena into laws, frameworks, and models
over the centuries. These models now serve as tools to present- day policymakers so they can make better and informed
decisions in achieving progress and sustainable development.

BASIC ECONOMIC CONCEPTS

SCARCITY, NEEDS, AND WANTS
The study of economics revolves around the concepts of scarcity, needs, and wants. At its very core, economics
means the efficient allocation of available resources. This definition has two underlying assumptions. First is that people have
unlimited needs and wants, and these needs and wants drive consumption. Second is the concept of scarcity which means
resources are limited. This constraint leads to the allocation of available resources in the most efficient way possible.

BASIC ECONOMIC PROBLEMS

Scarcity of available resources and individual’s needs and wants, a nation is faced with three economic problems that
deal with the production, distribution, and consumption of goods and services.
1. What goods to produce and services to provide?
2. How to produce and how much to produce of these goods and services?
3. For whom to produce these goods and services?
“ Goods “ and “ services “ are used extensively in economic discussions that these are sometimes referred to as
economic goods. To distinguish from other uses of the world, economic goods cover goods, services, products, and the like
that have a price and are sold in a market.

What to produce?
This first question relates to resources. If there is an abundant supply of labor in the society, then the society will
consider labor- intensive products or will focus on providing services instead of manufacturing goods. Additionally, the
resources influences the decision on what to produce. Consider two clothes manufacturers for instance. One uses abundant
local fabric, and the other uses imported and hard- to – source materials. The manufacturer that utilizes the readily available
local fabric would incur less cost.

HOW MUCH TO PRODUCE?

This question focuses on the actual production of goods and services and the allocation of resources. In terms of
resources, a business has to decide on certain issues such as how much to invest, how many people to hire to produce the
goods or services, and how much raw materials to obtain. The question, therefore, pertains to the inputs of production.

FOR WHOM TO PRODUCE?

The final question focuses on the distribution and consumption of goods and services. Is the good or service for end
or for other businesses for further production? Does it address a need or a want? These questions are considered along with
other business- related factors such as marketability and pricing.
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FACTORS OF PRODUCTION
There are four main factors of production used to create an output in the economy, namely, land, capital, labor, and
entrepreneurship. They pertain to the term resources and are occasionally referred to as inputs of production is called factor
income.
 1. Land – This represents land and similar natural resources available such as farms and agricultural land. Land is
typically cultivated or improved for use in production. Use of land is paid in the form of rent payment. The factor income
on the use of land is rent.
2. Labor – labor represents human capital such as workers and employees that transform raw material and
regulate equipment to produce goods and services. The return on labor is wage.
3. Capital – capital represents physical assets such as production of goods and services. The term may also refer
to investment capital used in production. The factor income for capital is interest.
4. Entrepreneurship – this is sometimes referred to as enterprise. It represents the factor that decide how much
of and in what way the other factors are to be used in production. The return on entrepreneurship is profit.

MAIN BRANCHES OF ECONOMICS

1. Microeconomics is the branch of economics that examines the individual or company level. It deals with
households and firms, such as the buying behaviour of consumers and profit- maximizing behaviour of sellers.
Microeconomic topics largely focu on the concept of law of supply and demand which deals with consumer and producer
decisions.
2. Macroeconomics- studies the aggregate or country level. This frameworks focus on the effect on a larger scale,
such as the national economy. Major macroeconomic indicators include national income account, GDP, inflation and interest
rate.

TIME- SERIES- means that data are collected for particular element(s) for several time periods. For instance, growth rate
indicators involve the observation of data for more than one period. Crnsus is conducted every five years to gather
information about the population. Observing population growth entails comparison of census data gathered every five years.
Data on the country’s gross domestic product (GDP) growth rate is another example. It involves monitoring the GDP level of
the country on a quarterly basis. To say there is growth means that the rate for the current period is greater than the rate
observed in previous periods.

CROSS- SECTIONAL data include different variables for a single for a single time period. The demographic information of
the Philippines from the most recent census shows an example of cross-sectional data. It compares the age, gender, income
level, and other similar variables of individuals from one period. Rather than growth, cross- sectional data provide insights on
the components. Some questions that are answered using cross-sectional data analysis are: “ Which region has the highest
income? What is the largest age group?

DISPOSABLE INCOME- Is the income after taxes.

DISCRETIONARY INCOME – Is the income left from disposable income after all other necessary (nontax) expenses have
been deducted.

EQUATION 1.1. DISPOSABLE AND DISCRETIONARY INCOMES

DISPOSABLE INCOME = GROSS INCOME - INCOME TAXES
DISCRETIONARY INCOME = DISPOSABLE INCOME - NONTAX EXPENSES

Equation 1.1 summarizes disposable and discretionary incomes. Consider you have a monthly income of
P100,000.00 with tax liability of 32%. Additionally, you pay rent of P10,000.00 and spends P15,000.00 on food,
transportation, gas, and utilities. Given these expenses, your monthly disposable income is P68,000.00 and your discretionary
income is P43,000.00. if you decide to save P20,000.00, then you have P23,000.00 left of your discretionary income available
for spending.

ACTIVITY 1:
Analyze and calculate your average monthly disposal and discretionary incomes. You receive P72,000.00 gross
monthly income. You pay your personal income taxes of 32%. You are living with your parents so you do not pay rent.
However, you settle your family’s utilities such as average monthly electricity bill of P2,300.00, water bill of P550.00, and
cable and internet bill of P1,999.00. You spend an additional P5,000.00 for transportation expenses and allot P10,000.00 per
month for your savings.
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TABLE 1.1 Gross National Income and Gross Domestic Product by Expenditure Shares (2005- 2010, at current prices, in
million pesos )
Type of expenditure 2005 2006 2007 2008 2009 2010

1.household final consumption 4 259 131 4 677 987 5 064 463 5 739 592 5 993 427 6 442 033
expenditure

2.government consumption 513 254 575 717 639 985 681 893 791 403 875 291
3.capital formation 1 223 578 1 129 376 1 195 015 1 489 212 1 331 662 1 849 380

4. exports 2 619 543 2 920 983 2 981 846 2 849 943 2 587 015 3 133 508

5. Less: imports 2 937 757 3 032 905 2 988 588 3 039 737 2 677 363 3 296 732

Gross domestic Product 5 677 749 6 271 157 6 892 721` 7 720 903 8 026 144 9 003 480

Net Primary Income 1 472 565 1 611 931 1 741 410 2 055 282 2 626 323 2 992 597

Gross National Income 7 150 314 7 883 088 8 634 131 9 776 185 10 652 467 11 996 077

TABLE 1.1 shows an example of time –series data. It reflects te Philippines’ gross national income (GNI) and GDP by
expenditure shares for 2005- 2010. Time- series data allow you to compare the performance of the same variable during the
same duration and frequency across several periods. In this example, you can compare the annual expenditure contribution of
each variable such as government consumption to GDP annually for six years.

TABLE 1.1. the national account components for a single year (i.e., 2010) provides an example of cross- sectional
data. By looking at a single period, you can analyse the relative size of contribution of the different variables. Following the
same example, household consumption had the highest contribution to GDP in 2010 accounting for 72% of the total GDP.

EQUATION 1.2 GROSS NATIONAL INCOME

GNI = GDP + NET PRIMARY INCOME

EQUATION 1.3 NATIONAL INCOME ACCOUNT

Y = C + I + G + (X - M) = GDP
WHERE:
Y = NATIONAL INCOME

C = HOUSEHOLD CONSUMPTION EXPENDITURE

I = INVESTMENT EXPENDITURE

G = GOVERNMENT EXPENDITURE

X = EXPORTS OF GOOD AND SERVICES

M = IMPORTS OF GOOD AND SERVICES

*** Xn (net exports) = X -M

ACTIVITY 2:

Solve the problem. Refer to table 1.1.

Y = C + I + G + (X - M)
GDP (2010) =
GDP (2010) =
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MODULE 2:
THE PHILIPPINE ECONOMY AND ITS 21ST CENTURY SOCIOECONOMIC CHALLENGES
ECONOMIC SYSTEMS
Economics across the world are managed differently, but all aim toward answering the three fundamental economic
questions: what to produce, how to produce, and for whom to produce. Nations decide on the best way to allocate their scarce
resources.
ECONOMIC SYSTEMS - Refer to the different ways of managing a nation’s available resources to answer the three
economic questions.
Based on varying degrees of private ownership and government control, economic systems may be classified into
four main types: free market economy, centralized economy, mixed economy, and traditional economy.
 The first two types ---- the free market and the centralized economy---- are considered extremes. Most economics in
st
the 21 century have mixed economic systems with both market mechanism and the government seen working together to
achieve economic goals.

FREE MARKET ECONOMY

A free market economy is a system characterized by competition and a high level of private ownership. Prices are
set by market mechanisms or by the interaction of buyers and sellers in the market. Resources are allocated freely based on
the interaction of market forces (i. e., buyers and sellers). Individuals and entities have the economic freedom to exchange
goods and make decisions, which means that consumers determine what to produce based on their preference, while the
producers have the liberty to decide on how the products will be produced.
Additionally, the government maintains a hands- off role and has a minimal involvement in achieving economic
goals. Nations with a free market economy include New Zealand, Singapore ,and Australia.
The laissez faire system is an example of a free market economy. The French phrase literally translates to “leave
alone” and is used to define an economic system void of government intervention. This economic system rests upon the
assumption that the economy is a self- regulating system and that any form of regulation disrupts the natural interaction of
market forces. This system is an example of a theoretical and extreme case of a free market economy that is not practiced in
the real world.
CENTRALIZED ECONOMY
Another extreme economic system is a centralized economy. It is also sometimes referred to as command economy.
This system is characterized by the heavy involvement of the government in managing the economy. The method of central
planning is employed where the government plans, directs, and decides on how resources will be allocated. Individuals have
no or limited economic freedom and private ownership is very limited. An example of centralized economy is that of North
Korea.
A degree of market mechanism where consumers and sellers have the freedom to exchange goods has its advantages
and there have been nations that have evolved from a command economy. An example of which is the former Soviet Union.
MIXED ECONOMY
An economic systems that combines the features of free market and centralized systems is referred to as a mixed
economy. Free market forces and central planning together determine what to produce, how to produce, and for whom to
produce. There is a balance between private and government accountability in achieving economic goals. Most industrialized
countries have this type of economic system. Examples include the United States, France, and other European countries.
In a mixed economy, government intervention includes the power to impose taxes, set trade limits and restriction, and
implement legislations. In addition to oversight functions, the government can implement policies to promote business and at
the same time can impose sanctions to penalize industries. In return, the government provides services to the public.
TRADITIONAL ECONOMY
A traditional economic system is characterized by customs and habits. Barter is a mechanism where goods are
exchanged for another good. Although not always recognized as a form of economic system in the 21 st century, it is still
worthwhile to know that most economies have evolved from this type of economic system. Currently, the traditional system
is limited to some nations in Africa. In the Philippines , the barter system may still be in use in some rural areas.

ACTIVITY 3:
How will you describe the economic system of the Philippines?
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