Applied Economics: Utility & Application – Comprehensive Notes

Economic Resources (Factors of Production)

  • Definition

    • Resources used to produce goods & services; inherently scarce → command a payment that becomes the owner’s income (Dinio & Villasis, 2017).

  • LAND

    • Natural, non-man-made gifts of nature.

    • Owners receive rent.

    • Specific resources:

    • Soil, rivers, lakes, oceans

    • Forests, mountains

    • Mineral deposits

    • Considered economic because every parcel carries a price tag.

  • LABOR

    • All human effort (mental & physical) devoted to production; aka “human resources.”

    • Manual examples: construction workers, machine operators, production workers.

    • Professional examples: nurses, lawyers, doctors.

    • Other included groups: jeepney drivers, farmers, fishermen.

    • Payment: wages & salaries.

  • CAPITAL

    • Man-made resources that aid production (machinery, equipment, buildings, vehicles, tools).

    • Two economic perspectives:

    1. Monetary capital → money used to purchase natural/other resources.

      • e.g., a firm uses cash to buy land.

    2. Physical capital → produced means of production themselves.

      • e.g., factory, delivery trucks.

  • ENTREPRENEURS

    • Organize & coordinate land, labor, capital.

    • Exercise initiative, talent, risk-taking to create goods & services.

  • FOREIGN EXCHANGE

    • Dollar holdings & reserves owned by the economy.

    • Serves as international purchasing medium to import materials.

Four Basic Economic Problems (arising from scarcity)

  1. WHAT TO PRODUCE?

    • Limited resources force society to choose product mix & quantities (e.g., “guns vs. butter,” capital goods vs. consumer goods).

  2. HOW TO PRODUCE?

    • Choice among alternative techniques (handloom, power-loom, automatic-loom for cloth).

    • Depends on relative availability & prices of factors; objective → least-cost/best-use.

  3. FOR WHOM TO PRODUCE?

    • Allocation of total output among members; determines distribution of income & consumption.

  4. WHAT PROVISION FOR ECONOMIC GROWTH?

    • Decide share of resources set aside for future (investment) vs. current consumption.

    • All-consumption today ⇒ stagnant/declining future living standards.

Illustrative Micro-Level Economic Problems

  • CONSUMERS

    • Budget constraint: Household with yearly Php 84 000 must pay Php 30 000 rent + Php 10 000 electricity ⇒ Php 44 000 (≈ Php 3 667 / month) left for food, clothing, transport, etc.

  • WORKERS

    • Labor-leisure trade-off: Overtime ↑ income ↓ leisure. Investing time in education now ↓ short-run earnings → ↑ long-run potential.

  • PRODUCERS

    • Must keep revenue > costs. Need to anticipate demand shifts (e-commerce, tech upgrades). Buying new machinery lowers unit cost; failure to adapt ⇒ losses.

  • GOVERNMENT

    • Revenue-limited; must choose tax structure & spending priorities. E.g., cutting welfare may boost work incentives but widens inequality.

Opportunity Cost (Next-Best Alternative Forgone)

  • Land planted solely with rice sacrifices bananas/mangoes.

  • Leather used only for shoes sacrifices leather bags.

  • Teacher chooses school job over bank salary.

  • Government allocates funds to military → fewer resources for health care.

Economic Systems (mechanisms for solving the four problems)

  1. TRADITIONAL ECONOMY

    • Decisions rooted in customs, rituals passed generations.

    • Reliant on agriculture, fishing, hunting, gathering; barter dominates.

    • Found in both primitive & some advanced rural pockets; methods largely unchanging → slow progress.

  2. COMMAND ECONOMY

    • Centralized authority (government/planning committee) dictates production & distribution.

    • Citizens have minimal choice; typical of authoritarian, socialist, communist states.

  3. MARKET ECONOMY

    • Most democratic; prices from demand & supply signal what & how much to produce.

    • Producers respond to consumers’ willingness to pay.

  4. MIXED ECONOMY

    • Blend of market, command, traditional traits; seeks advantages of each with fewer downsides.

    • Key market features upheld:

    1. Protection of private property.

    2. Prices set by free market forces.

    3. Activities motivated by individual self-interest.

Economic Utility (Form–Time–Place–Possession)

  • Measures satisfaction or value a consumer derives from a product/service amidst resource scarcity.

  • Four dimensions guide firms/governments assessing what drives purchase decisions.

Measuring the Economy: GDP vs. GNP

  • Gross Domestic Product (GDP)

    • Value of all finished goods & services produced within a nation’s borders during a specific period.

  • Gross National Product (GNP)

    • Value of all finished goods & services owned by a nation’s citizens/firms, regardless of production location.

    • Captures residents’ global income.

Official GNP Formula

Y = C + I + G + (X - M) + Z

  • C = Consumption expenditure

  • I = Investment

  • G = Government expenditure

  • X - M = Net exports (exports − imports)

  • Z = Net income inflow from abroad − net outflow to foreign countries

(Notational note: original text labels net exports as M and net income as Z; keep conceptual structure above.)

Alternative Relationship

\text{GNP} = \text{GDP} + \text{Net Income Inflow from Overseas} - \text{Net Income Outflow to Foreign Countries}

with
\text{GDP} = C + I + G + X - M

Components & Treatment

  • Includes production of tangibles (cars, crops, machinery) & services (healthcare, consulting, education).

  • Taxes & depreciation are counted.

  • Intermediate goods’ value excluded to prevent double counting.

Adjustments & Practical Issues

  • Convert to real GNP (inflation-adjusted) for year-to-year comparisons.

  • Express per capita for cross-country welfare comparisons.

  • Dual citizenship complicates allocation: a dual-national’s output may be counted by two countries → potential double counting.

Importance of GNP

  • Core indicator for policymakers; supplies data on production, savings, investment, employment.

  • Guides legislation tackling inflation, poverty, etc.

  • More reliable than GDP when citizens earn significant overseas income.

  • Assists in analyzing balance of payments:

    • Deficit → imports > exports.

    • Surplus → exports > imports.

  • In a fully domestic-income scenario, \text{GNP} = \text{GDP}, reducing GNP’s incremental informational value.