APPLIED ECONOMICS (WEEK 1 – 2)

 Major contributors in the field of Economics:

 John Maynard Keynes - father of Modern Economics suggests that the government
should allocate a large amount of money purposely for solving problems of depression.
 Adam Smith - a Scottish honoured as the Father of Economics was responsible for the
development of the study of economics. His book Wealth of the Nations (1776), became
the reference book of different authors in solving problems.

Economics

 Is a social science concerned with using scarce resources to obtain the maximum satisfaction
of the unlimited material wants of society. (Bingham, et al.)
 Is a social science because it deals with how he lives his life and of how other men live.
 Is a course so important because of the natural limitations of what is available and the
unlimited needs of men.

Fundamental Economic Problems

Basic economic problem:

 Scarcity of Resources Involves decision on:

1. What are the goods and services to be produced?
2. How are the goods and services to be produced?
3. How much goods and services are to be produced?
4. For whom are the goods and services to be produced?

Scope / Division of Economics:

 Microeconomics deals with the economics of the firms. It focuses on the behaviour of a
particular unit of economy such as the consumers, producers, and specific markets.
 Macroeconomics deals with the aggregates. It studies the entirety of an economy whether
national or international and attempts to determine economic changes.

CHARACTERISTICS OF MICROECONOMICS:

1. Microeconomics looks at the decisions of individual units.

 Focused on choices made by individual units such as households, producers, and firms.
 Relevant questions: How efficiently are we using our resources? Could we obtain more
output from the same resources if we reorganize the ways we use them?
2. Microeconomics looks at how prices are determined.
 It is often called "price theory"
 Relevant questions: Should a monopolist increase his price? Should a producer in an
oligopolistic market lower his price? Can a producer under a purely competitive market
increase his price?
3. Microeconomics is concerned with social welfare.
 Examines efficiency, relative desirability, and choice of alternative methods.
  Relevant questions: Is it prudent to build a new bridge or to buy additional arms for the
army? Is it wise to impose price control? Should the government limit the controlling interest
of the media?
4. Microeconomics has a limited focus.
 It is just a part of the economics discipline.
 Problems dealing with the aggregate economy are within the domain of macroeconomics.
5. Microeconomics develops skills.
a. It helps develop your logical reasoning.
b. It will help you develop skill in the construction and use of models. ex. supply and demand
relationship.
c. It employs optimizing techniques that are useful for making decisions in a variety of situations.
d. The concepts are applicable to your personal resource allocation decisions, such as your career
choices or financial investments.

CONCEPTS OF ECONOMICS (5 PARTS):

 WEALTH - any property and assets of a person that have a useful value.
 PRODUCTION - creation of raw materials into finished products to satisfy human wants.
 EXCHANGE - process of trading goods and services for money.
 DISTRIBUTION - allocation of the social or national income among factors of production: land,
labour, capital and the entrepreneur.
 CONSUMPTION - utilization of goods and services by any individual to satisfy human wants.

VITAL CRITERIA OF GOOD ECONOMIC SYSTEM:

 Abundance - sufficient goods / services

 Growth - development of infrastructure
 Stability - absence of inflation
 Security - stability of employment
 Efficiency - more quality production of goods and services
 Justice and Equity - fair distribution of power, wealth and income
 Economic Freedom - free to choose wants

Theories and Models:

 Theories are propositions about certain related variables that scientifically explain a certain
phenomena.
 Models are used to illustrate, demonstrate, and represent a theory or part of it.

Fallacies in Making Models and Theories:

 The post hoc fallacy relates two events as if the first causes the second one to happen.
 Failure to hold other things constant under the ceteris paribus assumption
 The fallacy of composition states that what is true for a component is also true for the entire
thing.
Two Kinds of Analysis in Economics:

 Positive Economic Analysis describes what exists and how things work.
Ex. Taxes provide government services to the people.
 Normative Economic Analysis looks at the outcome of economic behaviour through judgments
and prescriptions for courses of action.
Ex. Government should impose more taxes to provide more services to the people.

COMMON ECONOMIC PROBLEMS:

 Unemployment of labour.
 Economic instability that causes highs and lows in production and investment levels.
 Low levels of growth and development which make it more difficult for underdeveloped and
developing nations to rise from their low levels of income and employment.
 Inequality in income distribution resulting in the concentration of nation’s wealth in the hands of
the few.

FUNDAMENTAL GOALS OF ECONOMICS:

 Economic Growth – increasing capacity of producing goods and services.

 Economic Stability – consistent growth of changing world.
 Economic Freedom – free to choose his wants and needs.
 Economic Equity – equal distribution of wealth and income.
 Economic Security – continued existence of employment.

WAYS IN DETERMINING ECONOMIC GROWTH:

 Expansion of resources available in producing goods and services – increasing labour force and
larger capital investment.
 Improved skills and technology – managerial and entrepreneurial skills

CONCLUSION: WHY STUDY ECONOMICS?

 To understand society better

 Past and present economy influence the character of life of the society
 To understand global affairs
 Environmental policies, free trade, immigration, tourism, etc.
 To be an informed voter
SUPPLEMENTARY LESSON (WEEK 2)

What Is Economic Growth?

 Economic growth is an increase in the production of economic goods and services, compared
from one period of time to another.

Understanding Economic Growth

 In simplest terms, economic growth refers to an increase in aggregate production in an

economy. Often, but not necessarily, aggregate gains in production correlate with increased
average marginal productivity. That leads to an increase in incomes, inspiring consumers to open
up their wallets and buy more, which means a higher material quality of life or standard of living.
 Marginal Productivity refers to the additional amount produced when you add one
additional unit of a particular factor, such as an additional man hour of labour.

Ways to Generate Economic Growth:

 The first method is an increase in the amount of physical capital goods in the economy. Adding
capital to the economy tends to increase productivity of labour. Newer, better, and more tools
mean that workers can produce more output per time period.
 For a simple example, a fisherman with a net will catch more fish per hour than a fisherman
with a pointy stick. However two things are critical to this process. Someone in the economy
must first engage in some form of saving (sacrificing their current consumption) in order to
free up the resources to create the new capital, and the new capital must be the right type, in
the right place, at the right time for workers to actually use it productively.
 A second method of producing economic growth is technological improvement. An example of
this is the invention of gasoline fuel; prior to the discovery of the energy-generating power of
gasoline, the economic value of petroleum was relatively low. The use of gasoline became a
better and more productive method of transporting goods in process and distributing final goods
more efficiently.
 Improved technology allows workers to produce more output with the same stock of capital
goods, by combining them in novel ways that are more productive. Like capital growth, the
rate of technical growth is highly dependent on the rate of savings and investment, since
savings and investment are necessary to engage in research and development.
 The third method is to generate economic growth is to grow the labour force. All else equal,
more workers generate more economic goods and services. During the 19th century, a portion of
the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labour.
Like capital driven growth however, there are some key conditions to this process.
 Increasing the labour force also necessarily increases the amount of output that must be
consumed in order to provide for the basic subsistence of the new workers, so the new
workers need to be at least productive enough to offset this and not be net consumers. Also
just like additions to capital, it is important for the right type of workers to flow to the right
jobs in the right places in combination with the right types of complementary capital goods in
order to realize their productive potential.
 The last method is increases in human capital. This means labourers become more skilled at
their crafts, raising their productivity through skills training, trial and error, or simply more
practice. Savings, investment, and specialization are the most consistent and easily controlled
methods. Human capital in this context can also refer to social and institutional capital;
behavioural tendencies toward higher social trust and reciprocity and political or economic
innovations like improved protections for property rights are in effect types of human capital that
can increase the productivity of the economy.
 APPLIED ECONOMICS (WEEK 3 – 4)

Economics

 Deals with people and is a reflection of how they interact with each other as they go about
making decisions regarding their lives.
 We study economics by observing the principles of decision making of the individuals who make
up the economy, how they interact with one another and how the economy as a whole works.
I. Four Economic Principle of Decision Making
1. People Make Trade-offs - making decision requires trading off one goal against another.
2. When people choose one thing they give up something else - opportunity cost, pertains to
whatever must be given up to obtain some item.
3. Rational People Think at the Margin – rational decision-maker takes an action if and only if the
marginal benefit of the action exceeds the marginal cost.
4. People Respond to Incentive - individuals make decisions by comparing costs or benefits, their
behaviour may change when the costs or benefits change.
II. How people interact
5. Trade can make everyone better off - trade allows countries to specialize in what they do best
and to enjoy a greater variety of goods and services.
6. Markets are usually a good way to organize economic activity - under market economy, firms
decide whom to hire and what to make. Households decide which firms to work for and what
to buy with their incomes. They interact in marketplace where prices guide their decisions.
7. Governments can improve market outcomes - ex. government may impose environmental
regulation, income tax and other welfare system.
III. How the economy works
8. A country's standard of living depends on Its ability to produce goods and services - to boost
living standards, policymakers need to raise productivity by ensuring that workers are well
educated, have the tools needed to produce goods and services, and have access to the
available technology.
9. Price rise when the government prints too much money - inflation is associated with rapid
growth in the quantity of money in the long run circumstances.
10.Society faces a short-run trade-off between inflation and unemployment - when government
reduces the quantity of money in the economy, it reduces the amount that people spend.
Lower spending reduces the quantity of goods and services that firms sell. Lower sales, in turn
cause firm to lay off workers.

ELEMENTS OF ECONOMICS

 GOODS – anything (tangible) that satisfies human wants.

 SERVICES – immaterial or intangible goods rendered by any individual.

Types of Goods

A. According to Use
 1. Consumer goods are finished goods that directly satisfy human wants. It also refers to
goods purchased for use in the household.
2. Industrial goods are goods that are used in the production of other goods and services,
like machineries and equipment. These goods are also referred to as capital goods.
B. According to Purpose
1. Basic goods are goods that satisfy the basic needs of men such as food, clothing and
shelter.
2. Luxury goods are goods that are not strictly necessary for survival but are bought to
enhance the quality of life.
C. According to Availability
1. Economic goods are goods that are scarce and therefore, they command for a higher
price. Goods that are scarce can only be obtained by the exertion of human effort.
2. Free goods are goods, which are abundantly and widely available. These are gifts of
nature.

What is an economic system?

 An economic system, or economic order, is a system of production, resource allocation and

distribution of goods and services within a society or a given geographic area.
 It includes the combination of the various institutions, agencies, entities, decision-making
processes and patterns of consumption that comprise the economic structure of a given
community.
 As such, an economic system is a type of social system.

ECONOMIC SYSTEMS

 Are the ways in which national economics is organized.

Four distinct economic systems are:

1. Traditional
2. Capitalism
3. Communism
4. Socialism

TRADITIONAL OR SUBSISTENCE ECONOMY

 A traditional economy is a system that relies on customs, history, and time-honoured beliefs.
Tradition guides economic decisions such as production and distribution. Societies with traditional
economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They
use barter instead of money.
 Economic decisions are made with great influence from the past where it copy or duplicates
decisions from the past generation.
 Production decisions are based on customs, traditions and beliefs.
 Usually practiced in underdeveloped regions and in mountainous areas.
CHARACTERISTICS OF TRADITIONAL ECONOMY

 communal or shared land ownership

 the leader decides the management of agricultural production which is the basis of economy
 production, distribution and use of eco resources are based on traditional practices
 new technologies are not welcome as it contrast the tradition of their ancestors
 culture and religion are the main priorities

CAPITALISM

 Is an economic system where the means of production are owned and managed by private
individuals or corporation, rather than the state or the workers.
 An economic and political system in which a country's trade and industry are controlled by private
owners for profit, rather than by the state.
 Also known as market economy.

CHARACTERISTICS OF CAPITALISM

 profit motive
 economic freedom
 freedom to compete
 private ownership of property
 limited role of government
 presence of religion

COMMUNISM

 Is the opposite of capitalism where the economic system is based on communal ownership, and
the means of production is owned and managed by the state.
 Is also known as command economy or classless society.

CHARACTERISTICS OF COMMUNISM

 No profit motive
 No economic freedom
 No freedom to compete
 State ownership / No private property
 Controlled by the government
 Absence of religion
 Presence of central planning

SOCIALISM

 Is an economic system where the major industries are owned and managed by the state and the
minor industries are owned by the private sector.
 Is the combination of capitalism and communism.
SUPPLEMENTARY LESSON (WEEK 4)

Trade-offs: The Production Possibilities Frontier

 The PPF illustrates the trade-offs facing an economy that produces only two goods. It shows the
maximum quantity of one good that can be produced for any given quantity produced of the
other.
 The idea behind this model is to improve our understanding of trade-offs by considering a
simplified economy that produces only two goods.

Production Possibility Frontier

 The production possibility curve portrays the cost of society's choice between two different goods.
An economy that operates at the frontier has the highest standard of living it can achieve, as it is
producing as much as it can using the same resources. If the amount produced is inside the
curve, then all of the resources are not being used. On the chart, that is point E.
 One possible reason could be a recession or depression when there is not enough demand for
either good. Layoffs can also occur, resulting in lower levels of labour being used.

Production Possibilities Curve and What It Shows

 A production possibility curve measures the maximum output of two goods using a fixed amount
of input. The input is any combination of the four factors of production: natural resources
(including land), labour, capital goods, and entrepreneurship. The manufacturing of most goods
requires a mix of all four. Each point on the curve shows how much of each good will be produced
when resources shift from making more of one good and less of the other.
 For example, say an economy can produce 20,000 oranges and 120,000 apples. On the chart,
that's point B. If it wants to produce more oranges, it must produce fewer apples. On the chart,
Point C shows that if it produces 35,000 oranges, it can only produce 85,000 apples.
 By describing this trade-off, the curve demonstrates the concept of opportunity cost. Making more
of one good will cost society the opportunity of making more of the other good.
Efficiency

 The production possibility frontier is a good way to illustrate the general economic concept of
efficiency.
 One key element of efficiency is that there are no missed opportunities in production - there is no
way to produce more of one good without producing less of other goods.
 As long as production on the PPF, production is efficient.

Opportunity Cost

 The production possibility frontier is also useful as a reminder of the fundamental point that the
true cost of any good is not just the amount of money it costs to buy, but everything else in
addition to money that must be given up in order to get that good - opportunity cost.
 when only small amount of a good is produced, the opportunity cost of producing that good is
relatively low because the economy needs to use only those resources that are especially well
suited for its production.

REVIEW: How people interact

7. Governments can improve market outcomes - ex. government may impose environmental
regulation, income tax and other welfare system

Macroeconomics Tools:

- Monetary Policy

- Fiscal Policy

ECONOMIC SYSTEMS

 Are the ways in which national economics is organized.

Four distinct economic systems are:

1. Traditional
2. Capitalism
3. Communism
4. Socialism