Lesson 1 Applied Economics

INTRODUCTION TO
APPLIED ECONOMICS
ECONOMIC
S
The allocation and
use of scarce
resources to satisfy
the unlimited needs
and wants of human.
HUMAN WANTS AND
ECONOMIC ANALYSIS
Human wants are differentiated human needs
brought about by differences in income, taste,
environment, socioeconomic status, etc.
Needs - the Wants - desires for

essentials of life, such as non-essential items
food and shelter.
(Luxuries)
(Necessities)
Allocation - Social mechanism of

distributing limited resources to meet
expanding human wants
ECONOMI
CS AS SOCIAL
SCIENCE
Definition of Economics
As Social science
 As a social science, studies how
individuals make choices in
allocating scarce resources to
satisfy their unlimited wants.
 It studies the behavior of people
towards products and services
 These are the various modes and
aspects of human interactions in a
group.
Scarcity
■ Is a condition
where there are
insufficient resources to
satisfy all the needs and
wants of a population.
Scarcity : Classify as
–Relative Scarcity
■Is when a good is scarce
compared to its demand.
■ Ex: coconuts are abundant in the
Philippines since the plant easily grows
in our soil and climate, however, coconut
become scarce when the supply is not
sufficient to meet the needs of the people.
Scarcity : Classify as
–Absolute Scarcity
■is when supply is limited.
■ Ex: Oil is absolutely scarce in our
country since we have no oil wells,
so we rely heavily on imports from
oil-producing countries.
RESOURCES
■Economic Resources - the
problem of having unlimited
wants, but limited resources to
satisfy them
■Natural Resources – came from
nature that are used in production,
including land, raw materials, and
natural process
RESOURCES
■Capital Resources - the
processed materials, equipment,
and buildings used in production
■Human Resources - the efforts
of people involved in
production, including labor and
entrepreneurship
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.
INVOLVE IN CHOICE AND
DECISION MAKING
■ OPPORTUNITY COST
– Refers to the value of the best
foregone alternative.
■ TRADE-OFF
– A situation in which humans have
to choose between two things that
cannot be had at the same time.
Examples of Opportunity cost
1. A manager who quits
job in order to take up a
master’s degree, gives up
his salary as a manager,
the opportunity cost is his
salary.
Examples of Opportunity cost
2. Someone gives up going
to watch a movie to study for
a test in order to get a good
grade, the opportunity cost is
the cost of the movie and the
enjoyment of seeing it.
ECONOMIC RESOURCES
■Also known as Factors

of Production
■They are the resources
used to produce goods
and services .
ECONOMIC RESOURCES
1. LAND (Free Gifts of
nature)
– Soil and natural resources
that are found in nature
and are not manmade.
Owners of lands receive
payment known for rent.
ECONOMIC RESOURCES
2. LABOR (Human Skills)
– Physical and human effort
exerted in production. It covers
manual workers like
construction workers, machine
operators and production
workers, as well as professionals
like nurses, lawyers and doctors.
ECONOMIC RESOURCES
3. CAPITAL (Man-made
resources : assets or money)
– Man-made resources used in
the production of goods and
services which include
machineries and equipment.
The owner of capital earns an
income called interest.
ECONOMIC RESOURCES
4. ENTREPRENEURSHIP (the
brain behind business)
– it is also known as the brain
behind business wherein it
helps the business to use its
resources efficiently and
effectively. It is the ability to
come the other resources.
2 BRANCHES OF
ECONOMICS
a. Macroeconomics
b. Microeconomics
2 BRANCHES OF
ECONOMICS
■Macroeconomics
–is a division of
economics that is
concerned with the
overall performance of
the entire economy.
2 BRANCHES OF
ECONOMICS
■Microeconomics
– Studies the decision and choices
of the individual units and how
these decisions affect the prices of
goods in the market.
– It also concerned with the process
of setting prices of goods that is
also known as Price Theory.
Example:
MACROECONO
MICS
■ INFLATION RATE
■ DEFICIT
■ GNP Gross National Product
■ GDP Gross Domestic Product
■ EMPLOYMENT RATE
■ NATIONAL INCOME
Example:
MICROECONOMIC
S
■ PRICES OF GOODS AND SERVICES
■ INDIVIDUAL UNITS SUCH AS
FIRM, CONSUMER, AND OWNERS
OF FACTORS OF PRODUCTION
BASIC ECONOMIC PROBLEMS
OF SOCIETY(MARKET SYSTEM)
What to produce and how much?
How to produce?
For whom to produce?

What to produce and

how much?
Society must have to decide what goods
and services should be produced in the
economy. Having decided on the nature of
goods that will be produced, the quantity of
these goods should also decide on.
How to produce?
Is a question on the production
method that will be used to
produced the goods and services.
This refers to the resource mix and
technology that will be applied in
production.
For whom to
produce?
Is about the market for goods.
For whom will the goods and
services be produced? The young
or old, the male or female
market, the low-income or the
high-income groups?
ECONOMIC SYSTEMS
■Traditional economy
■Command economy
■Market economy
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.
ECONOMIC SYSTEMS
■ Command economy
– This is the authoritative system
wherein decision-making is centralized
in the government or a planning
committee. Decision 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.
ECONOMIC SYSTEMS
■ 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. People preferences are
reflected in the prices they are willing to
pay in the market and therefore the basis
of the producers' decisions on what
goods to produce.
Definition of Economics
As Applied Science
■The application of
economic theory and
econometrics in specific
settings with the goal of
analyzing potential
outcomes.
■It is the study of
observing how
theories work in real
situation to come up
with actual solutions
ECONOMETRICS
■ The application of statistical and
mathematical theories for the purpose
of testing hypothesis and predicting
future outcome
■ Some of the common econometrics’
models:
– Linear regression
– Generalized linear models
ECONOMIC THEORY
■Used for interpretation
and explanation of
economic
phenomenon.
■ Economic activity is
the activity of making,
providing, purchasing,
or selling goods or
services. Any action
that involves producing,
distributing, or
consuming products or
services is
an economic
activity. Economic
activities exist at all
levels within a society.

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INTRODUCTION TO

Needs - the Wants - desires for

Allocation - Social mechanism of

■Also known as Factors

What to produce and how much?

For whom to produce?

What to produce and

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