INTRODUCTION TO

APPLIED ECONOMICS
 LEARNING OBJECTIVES
• DIFFERENTIATE BETWEEN ECONOMICS AS A SOCIAL SCIENCE AND AS 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

• DIFFERENTIATE GROSS NATIONAL PRODUCT AND GROSS DOMESTIC PRODUCT

 Economics 

The word "economics" is from the ancient Greek oikos,

"family, household, estate", and nomos, "custom, law", and
hence means "household management" or "management of
the state".
 ECONOMICS AS SOCIAL SCIENCE
ECONOMICS, AS A STUDY IS THE SOCIAL SCIENCE THAT INVOLVES THE USE OF
SCARCE RESOURCES TO SATISFY UNLIMITED WANTS.

PART OF HUMAN BEHAVIOR IS THE TENDENCY OF MAN TO WANT AS MANY GOODS

AND SERVICES AS HE CAN. HOWEVER, HIS ABILITY TO BUY GOODS AND SERVICES
IS LIMITED BY HIS INCOME AND PURCHASING POWER: IT IS THEREFORE IN THIS
CONTEXT THAT MAN HAS TO PRACTICE ECONOMICS.

ALFRED MARSHALL – A WELL KNOWN ECONOMIST DESCRIBED ECONOMICS

AS A STUDY OF MANKIND IN THE ORDINARY BUSINESS OF LIFE.

IT EXAMINES PART OF INDIVIDUAL AND SOCIAL ACTION THAT IS MOST

CLOSELY CONNECTED WITH THE ATTAINMENT AND USE OF MATERIAL REQUISITES
OF WELL-BEING.
 ECONOMICS AS SOCIAL SCIENCE
ECONOMICS IS A DIFFERENT SCIENCE FROM BIOLOGY AND
CHEMISTRY AS THESE ARE PHYSICAL SCIENCES.

ECONOMICS IS A SOCIAL SCIENCE BECAUSE IT STUDIES HUMAN

BEHAVIOR JUST LIKE PSYCHOLOGY AND SOCIOLOGY.

A SOCIAL SCIENCE IS, BROADLY SPEAKING, THE STUDY OF SOCIETY

AND HOW PEOPLE BEHAVE AND INFLUENCE THE WORLD AROUND
THEM.

“AS A SOCIAL SCIENCE, ECONOMICS STUDIES HOW

INDIVIDUALS MAKE CHOICES IN ALLOCATING SCARCE
 INTRODUCTION TO ECONOMICS
EVERYBODY GOES THROUGH A DAY FACED WITH CONSTRAINTS OR
LIMITATIONS: MOTORISTS COMPLAIN OF HIGH GASOLINE PRICES, TIMES
WHEN PEOPLE SUFFER DUE TO SHORTAGE OF CHICKEN IN THE MARKET, OR
INSIFICIENT ALLOWANCE FOR STUDENTS WHO NEEDS TO BUY BOOKS AND
SCHOOL SUPPLIES. PEOPLE ALWAYS COMPLAIN ABOUT NOT HAVING
ENOUGH – NOT ENOUGH FOOD ON THE TABLE, NOT ENOUGH MONEY TO
PAY FOR ONE’S DEBTS, OR NOT EOUGH INCOME TO MEET ALL THE
FAMILY’S NEEDS.

THIS IN EFFECT, IS THE EXISTENCE OF WHAT WE CALL SCARCITY, THAT IS,

INSUFFICIENCY OF RESOURCES TO MEET THE WANTS OF CONSUMERS AND
INSUFFICIENCY OF RESOURCES FOR PRODUCERS THAT HAMPER
PRODUCTION OF GOODS AND SERVICES.
 SCARCITY
IS A CONDITION WHERE THERE ARE INSUFFICIENT RESOURCES TO
SATISFY ALL THE NEEDS AND WANTS OF A POPULATION.

SCARCITY MAYBE RELATIVE OR ABSOLUTE

RELATIVE SCARCITY – IS WHEN A GOOD IS SCARCE COMPARED TO

ITS DEMAND.
- RELATIVE SCARCITY OCCURS NOT BECAUSE THE GOOD IS
SCARCE PER SE AND IS DIFFICULT TO OBTAIN, BUT BECAUSE OF THE
CIRCUMSTANCES THAT SURROUND THE AVAILABILITY OF THE GOOD.

ABSOLUTE SCARCITY – IS WHEN SUPPLY IS LIMITED.

 CHOICE AND DECISION MAKING

BECAUSE OF THE PRESENCE OF SCARCITY, THERE IS A NEED FOR MAN TO MAKE

DECISIONS IN CHOOSING HOW TO MAXIMIZE THE USE OF THE SCARCE RESOURCES
TO SATISFY AS MANY WANTS AS POSSIBLE.

A HOMEMAKER WHO HAS A MONTHLY BUDGET NEEDS TO DECIDE ON HOW TO

UTILIZE IT TO PAY THE RENT, TO BUY FOOD, TO PAY FOR CHILDRENS TUITION FEES,
AND HOW TO BUY NEW CLOTHES AND SHOES.

IF THE BUDGET IS NOT ENOUGH, THEN THE HOMEMAKER HAS TO GIVE UP SOME OF
THESE THINGS. SHE NEEDS TO MAKE A CHOICE. IF SHE DECIDES NOT TO BUY NEW
SHOES FOR HER CHILDREN AT THE START OF THE SCHOOL YEAR, THEN THIS IS THE
CHOICE SHE GAVE UP.
 OPPORTUNITY COST
OPPORTUNITY COST REFERS TO THE VALUE OF THE BEST FORGONE ALTERNATIVE.

WHEN LAND IS DEVOTED EXCLUSIVELY TO THE CULTIVATION OF RICE, WE GIVE UP AN

OUTPUT OF BANANAS OR MANGOES THAT WE COULD HAVE PLANTED ON THAT AREA

A PRODUCER WHO DECIDES TO TRANSFORM ALL HIS LEATHER INTO SHOES, GIVES UP THE
CHANCE TO PRODUCE BAGS WITH THAT LEATHER.

A TEACHER WHO COULD HAVE WORKED IN A BANK, GIVES UP THE SALARY THAT SHE
WOULD HAVE EARNED AS A BANK EMPLOYEE.

A MANAGER WHO QUITS HIS JOB IN ORDER TO TAKE UP A MASTERS DEGREE, GIVES UP HIS
SALARY AS A MANAGER. THAT SALARY IS HIS OPPORTUNITY COST.

WITHOUT SCARCITY, A PERSON DOES NOT NEED TO MAKE CHOICES SINCE HE/SHE CAN
HAVE EVERYTHING HE/SHE WANTS.

THE CONCEPT OF OPPORTUNITY COST HOLDS TRUE FOR INDIVIDUALS, BUSINESSES, AND
EVEN A SOCIETY. IN MAKING A CHOICE, TRADE-OFFS ARE INVOLVED.
 ECONOMIC RESOURCES

ECONOMIC RESOURCES, ALSO KNOWN AS FACTORS OF PRODUCTION, ARE THE RESOUCES

USED TO PRODUCE GOODS AND SERVICES. THESE RESOURCES ARE, BY NATURE, LIMITED AND
THERFORE, COMMAND A PAYMENT THAT BECOMES THE INCOME OF THE RESOURCE OWNER.

LAND – SOIL AND NATURAL RESOURCES THAT ARE FOUND IN NATURE AND ARE NOT
MANMADE. OWNERS OF LANDS RECEIVE A PAYMENT KNOWN AS RENT.

LABOR – PHYSICAL AND HUMAN EFFORT EXERTED IN PRODUCTION. IT COVERS

MNUALWORKERS LIKE CONSTRUCTION WORKERS, MACHINE OPERATORS, AND PRODUCTION
WORKERS, AS WELL AS PROFESSIONALS LIKE NURSES, LAWYERS, AND DCTORS. THE TERM
ALSO INCLUDES JEEPNEY DRIVERS, FARMES, AND FISHERMEN. THE INCOME RECEIVE BY
LABORS IS REFERRED TO AS WAGE.

CAPITAL – MA-MADE RESOURCES USED IN THE PRODUCTION OF GOODS AND SERVICES, WHICH
INCLUDE MACHINERIES AND EQUIPMENT. THE OWNER OF THE CAPITAL EARNS AN INCOME
CALLED INTEREST.
2 BRANCHES OF ECONOMICS
 MACROECONOMICS

IS 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 AGGREGATEFLOW 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 SUC AS THE CONSUMER,

THE PRODUCER, AND THE RESOURCE OWNER.

IT IS MORE CONCERNED ON HOW GOODS FLOWS 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

KNOWN AS PRICE THEORY.

MICROECONOMICS STUDIES THE DECISIONS AND CHOICES OF THE

INDIVIDUAL UNITS AND HOW THESE DECISIONS AFFECT THE PRICES OF
GOODS IN THE MARKET. LIKEWISE, IT EXAMINES ALTERNATIVE
METHODS OF USING RESOURCES IN ORDER TO ALLEVIATE SCARCITY.
 BASIC ECONOMIC PROBLEMS OF SOCIETY

ALL SOCIETIES ARE FACED WITH BASIC QUESTIONS IN THE ECONOMY THAT
HAVE TO BE ANSWERED IN ORDER TO COPE WITH CONSTRAINTS AND
LIMITATIONS. THESE ARE:

1.WHAT TO PRODUCE AND HOW MUCH

2.HOW TO PRODUCE
3.FOR WHOM TO PRODUCE
HOW THESE QQUESTONS ARE ANSWERED DEPENDS ON THE NATURE OF THE
ECONOMIC SYSTEM IN PLACE. THE ECONOMIC SYSTEMIS THE MEANS BY
WHICH SOCIETY ANSWERS THE BASIC ECONOMIC PROBLEMS
 ECONOMIC SYSTEMS
TRADITIONAL ECONOMY – DECISIONS ARE BASED ON TRADITIONS AND
PRACTICES UPHELD OVER THE YEARS AND PASSED ON FROM GENERATION TO
GENERATION. METHODS ARE STAGNANT AND THEREFORE NOT PROGRESSIVE.
THE TRADITIONAL SOCIETIES EXIST IN PRIMITIVE AND BACKWARD
CIVILIZATIONS.

COMMAND ECONOMY – THIS IS THE AUTHORITATIVE SYSTEM WHEREIN

DECISION-MAKING IS CENTRALIZED IN THE GOVERNMENT OR A PLANNING
COMMITTEE. DECISIONS ARE IMPOSED ON THE PEOPLE WHO DO NOT HAVE A
SAY IN WHAT GOODS ARE TO BE PRODUCED. THIS ECONOMY HOLDS TRUE IN
DICTATORIAL, SOCIALIST, AND COMMUNIST NATIONS.

MARKET ECONOMY – THIS IS THE MOST DEMOCRATIC FORM OF

ECONOMIC SYSTEM. BASED ON THE WORKINGS OF DEMAND AND SUPPLY,
DECISIONS ARE MADE ON WHAT GOODS AND SERVICES TO PRODUCE.
PEOPLES PREFERENCES ARE REFLECTED IN THE PRICES THEY ARE WILLING
TO PAYIN THE MARKETAND ARE THEREFORE THE BASIS OF THE PRODUCERS
WHY IS ECONOMICS
IMPORTANT?
 POSITIVE ECONOMICS
POSITIVE ECONOMICS DEALS WITH WHAT IS - THINGS THAT ARE ACTUALLY
HAPPENING SUCH AS THE CURRENT INFLATION RATE, THE NUMBER OF EMPLOYED
LABOR, AND THE LEVEL OF THE GROSS NATIONAL PRODUCT.

POSITIVE ECONOMICS IS AN OVERVIEW OF WHAT IS HAPPENING IN THE ECONOMY THAT

IS POSSIBLY FAR FROM WHAT IS IDEAL.

NORMATIVE ECONOMICS
NORMATIVE ECONOMICS REFERS TO WHAT SHOULD BE – THAT WHICH EMBODIES THE
IDEAL SUCH AS THE IDEAL RATE OF POPULATION GROWTH OR THE MOST EFFECTIVE
TAX SYSEM.

NORMATIVE ECONMICS FOCUSES ON POLICY FORMULATION THAT WILL HELP ATTAIN

THE IDEAL SITUATION.
 MEASURING THE ECONOMY

GROSS DOMESTIC PRODUCT

GROSS NATIONAL PRODUCT

GNP/GDP : EXPENDITURE APPROACH

GNP/ GDP : INCOME APPROACH

 GROSS DOMESTIC PRODUCT
GDP – IS DEFINED AS THE MARKET VALUE OF FINAL PRODUCTS PRODUCED WITHIN
THE COUNTRY. IT IS A BROAD MEASUREMENT OF NATIONS OVERALL ECONOMIC
ACTIVITY.
GDP – IS THE MONETARY VALUE OF LL THE FINISHED GOODS AND SERVICES
PRODUCED WITHIN A COUNTRY’S BORDERS IN A SPECIFIC TIME PERIOD.

THE GOVERNMENT PLANS FOR A BETTER 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. IN PARTICULAR,
LOOKING AHEAD IS GROUNDED ON PAST AND PRESENT PERFORMANCE AND
HEALTH OF THE ECONOMY.

THE HEART OF THE ECONOMY IS PRODUCTION WHOSE VAALUE MEASURES

BOTHRESOURCE INPUT AND OUTPUT OF PEOPLE.

THE INTERPLAY OF RESOURCES AND OUTPUTS TELLS HOW WELL THE ECONOMY
 GROSS NATIONAL PRODUCT
GNP IS THE MARKET VALUE OF FINAL PRODUCTS, BOTH SOLD AND UNSOLD, PRODUCED BY
THE RESOURCES OF THE ECONOMY IN A GIVEN PERIOD..

MARKET VALUE IS DETERMINED BY SUPPLY AND DEMAND WHILE THE ECONOMYS

RESOURCES ARE THOSEBELONGING TO FILIPINO CITIZENS AND CORPORATIONS.

NOT ALL THE RESOURCES BELONGING TO THE ECONOMY ARE IN THE ECONOMY, LIKE THE
CAPITAL AND ENTREPRENEURHIP THAT BROUGHT THE SM MALL TO CHINA.

CONVERSELY, NOT ALL RESOURCES IN THE ECONOMY BELONG TO THE ECONOMY LIKE THE
CAPITAL AND ENTREPRENEURSHIP BROUGHT TO THE COUNTRY BY ULTINATIONALS LIKE
NESTLE AND PROCTER AND GAMBLE (P&G). In addition, the value of final products already includes
the values of its components FROM THE LOWER PRODUCTION STAGES.
 GNP / GDP : EXPENDITURE APPROACH
ONE WAY TO ACCOUNT GNP AND CLASSIFY ITS COMPONENTS IS BY END-USE EXPENDITURE.

EXPENDITURE – THE ACT OF SPENDING FUNDS / AN AMOUNT OF MONEY SPEND

THE EXPENDITURE METHOD IS THE MOST COMMONLY USED APPROACH FOR ESTIMATING GDP,
WHICH IS A MEASURE OF ECONOMY’S OUTPUT TO PRODUCE WITHIN A COUNTRY’S BORDERS
IRRESPECTIVE OF WHO OWNS THE MEANS TO PRODUCTION. THE GDP UNDER THIS PRODUCTION IS
CALCULATED BY SUMMING UP ALL THE EXPENDITURES MADE ON FINA GOODS AND SERVICESS.

PRODUCTS ARE FINAL WHEN THEY HAVE REACHED THE HIGHEST LEVELS OF PROCESSING IN THE
ECONOMY FOR DIFFERENT ISES IN THE GIVEN PERIOD. THEY ARE

HOUSEHOLD AND INDIVIDUL CONSUMPTIONS (C)

GOVERNMENT EXPENDITURE ON GOODS AND SERVICES INCLUDING LABOR (G)
EXPORTS ( X )

PRODUCTS, REGARDLESS OF PRODUCTION STAGES, ARE ALSO CONSIDERED AS RAW MATERIALS AND
INTERMEDIATE PRODUCTS AS CAPITAL GOODS AND INVENTORIES OF RAW MATERIALS AND
INTERMEDIATE PRODUCTS CLASSIFIED AS

INVESTMENT (I)
IMPORT COMPONENTS ( M )
PRODUCTS ARE FINAL WHEN THEY HAVE REACHED THE HIGHEST LEVELS OF PROCESSING IN
THE ECONOMY FOR DIFFERENT ISES IN THE GIVEN PERIOD. THEY ARE

HOUSEHOLD AND INDIVIDUL CONSUMPTIONS (C)

GOVERNMENT EXPENDITURE ON GOODS AND SERVICES INCLUDING LABOR (G)
EXPORTS ( X )

PRODUCTS, REGARDLESS OF PRODUCTION STAGES, ARE ALSO CONSIDERED AS RAW

MATERIALS AND INTERMEDIATE PRODUCTS AS CAPITAL GOODS AND INVENTORIES OF RAW
MATERIALS AND INTERMEDIATE PRODUCTS CLASSIFIED AS

INVESTMENT ( I )
IMPORT COMPONENTS ( M )

TO RESTATE THE GNP EQUATION:

GNP = C + G + ( X – M )