Introduction to Applied Economics

Overview of Applied Economics

Economics is a broad-ranging discipline that utilizes various techniques and approaches to address significant social questions. Due to the inherent complexity of human behavior, economists utilize abstraction to simplify details and make generalizations that, while not perfectly true, allow for the organization of knowledge into theoretical structures.

• Importance of Economics:
  • Understanding problems faced by citizens and families.
  • Assisting governments in promoting growth and improving the quality of life.
  • Avoiding economic depressions and inflation.
  • Analyzing fascinating patterns of social behavior.
  • Facilitating sound decision-making for individuals and nations because economic questions permeate daily life and national issues.

Key Terminologies and Definitions

• Applied Economics: The application of economic theory and econometrics in specific settings to analyze potential outcomes.
• Demand Schedule: Reflects the quantities of goods and services demanded at different prices.
• Economics: A social science dealing with the allocation of scarce resources to satisfy unlimited human wants.
• Economic Resources: Also known as factors of production; the resources used to produce goods and services.
• Economic System: The framework in which a society decides how to solve its economic problems.
• Equilibrium Price: A condition of balance or equality in the market.
• Law of Demand: States that the quantity of a commodity buyers will purchase at a given time and place varies inversely with the price.
• Law of Supply: States that the quantity offered for sale varies directly with prices.
• Macroeconomics: The branch of economics studying the economy as a whole; also known as National Income Analysis.
• Market: A place where buyers and sellers interact and exchange takes place.
• Microeconomics: The branch of economics dealing with specific parts of the economy, such as households and business firms; also known as Price Theory.
• Monopolistic Competition: An imperfectly competitive market where products are differentiated and entry/exit is easy.
• Monopoly: A market where a single firm sells a product with no close substitutes.
• Oligopoly: A market dominated by a small number of strategically interacting firms.
• Perfect Competition: An ideal situation for both buyers and sellers.
• Scarcity: A condition where resources are insufficient to satisfy all needs and wants of a population.
• Supply Schedule: A table showing different quantities offered for sale at various prices.

Economics as a Social Science

Economics is classified as a social science because it studies man's life and how individuals live and interact with others. It is highly interdependent with other social sciences, including sociology, political science, geography, and religion.

• The Concept of Scarcity:
  • Scarcity is the fundamental reason for the practice of economics.
  • Human nature involves a tendency to want as many goods and services as possible.
  • Man's material wants are never fully satisfied because resources are finite while wants are almost unlimited.
  • Purchasing power and income limit the ability to satisfy these wants.
• The Root Problem: While many define economics as the study of efficient allocation, the underlying real problem is the unjust distribution of productive resources among members of society. This results in a global phenomenon where a very small number of people are rich while many are poor.

The Economic Resources (Factors of Production)

There are five major inputs utilized in the economy:

1. Land: Includes all natural resources (above, on, and below the ground) such as soil, rivers, lakes, oceans, forests, mountains, mineral resources, and climate. It is considered an economic resource because it carries a price, often paid as rent or lease.
2. Labor: Also called human resources. It refers to all mental and physical human efforts used to produce want-satisfying goods and services. This includes laborers, farmers, and professionals like scientists or accountants. The return for labor is wages and/or salaries.
3. Capital: Finished products used to produce other goods (e.g., tools, machinery, buildings). It serves as an investment. The income derived from capital is interest.
4. Entrepreneur: The coordinator and organizer of the other factors (land, labor, and capital). An entrepreneur utilizes talent and resourcefulness to create economic goods. The compensation for this role is profit.
5. Foreign Exchange: Refers to the dollar reserves and foreign currency available to the economy.

Branches of Economics

1. Microeconomics (Price Theory): Focuses on the behavior of individual units, such as consumers, firms, and owners of production factors. Examples include the price of rice, the income of a specific person (e.g., Mr. Cruz), or the expenditures of a specific company (e.g., PLDT).
2. Macroeconomics (Employment and Income Analysis): Focuses on the economy as a whole or its aggregates (government, business, and households). It covers topics such as Gross National Product (GNP), national income, total expenditures, and general price levels.

The Basic Economic Problems

Every society must answer four basic questions to manage constraints:

1. What to Produce? Determined by consumer desires and needs. Factors include resource availability, physical environment, and the customs/traditions of the people.
2. How Much to Produce? The system must determine the quantity buyers are willing to purchase. People’s tastes and preferences are major factors.
3. How to Produce? Focuses on efficiency and quality. The goal is to find the cheapest production method that maintains high quality.
4. For Whom Shall Goods and Services be Produced? Relates to the problem of distribution. Ultimately, those with money and purchasing power determine who gets what. The poor cannot access the same goods as the rich due to limited purchasing power.

Economic Systems

Societies use different frameworks to answer the basic economic problems:

• Traditional Economy (Subsistence Economy): Goods are produced for personal consumption based on customs. Techniques are often obsolete.
• Command Economy: The government owns resources and handles all planning and decision-making. It dictates production based on national interest rather than individual choice.
• Market System (Capitalism/Laissez-faire): Characterized by private ownership and "free enterprise." Decisions are made by private firms. "Laissez-faire" means "let alone" or freedom from government control.
• Mixed Economy: A combination of private enterprise and government regulation. The government sets rules, provides services (education, police), and regulates issues like pollution.

Methods of Economics

Economics utilizes the empirical method—studying facts, using mathematics, and ordering data into tables or lists.

• Generalizations: Since every detail cannot be studied, economists make generalizations deemed true in most cases.
• Ceteris Paribus: A Latin term meaning "all other things held constant." For example, the Law of Demand (price increases, demand decreases) holds true only if variables like income remain unchanged.
• Impact of Income: If a person's income increases more than the price of a good, they may still buy the good despite the price hike, rendering the simple Law of Demand void in that instance.
• Theories and Policies: Theories explain why people act certain ways. When these beliefs are applied to real-life issues, it is called applied economics or economic policy.

Applied Economics and Philippine Socioeconomic Issues

John Neville Keynes was the first to use the phrase "applied economics" to describe the application of theory to explain specific economic phenomena.

Philippine Economic Growth Stats

During President Benigno Simeon Aquino's administration, the Gross Domestic Product (GDP) showed significant growth:

• $2012$: $6.8\%$ growth rate.
• $2013$: $7.2\%$ growth rate.
• $2014$: $6.1\%$ growth rate. These rates were higher than several Asian neighbors, including Malaysia, Thailand, South Korea, Hong Kong, India, and Indonesia (CIA World Factbook, 2013).

Unemployment in the Philippines

Despite GDP growth, "non-inclusive growth" remains a complaint, with millions experiencing hunger. Significant unemployment spikes were recorded due to $COVID-19$:

• Unemployment Rate (April 2020): $17.7\%$ (approximately $7.3$ million Filipinos).
• Employment Rate (April 2020): Fell to $82.3\%$ from $94.7\%$ in January $2020$.
• Regional Unemployment (April 2020):
  • Bangsamoro Autonomous Region in Muslim Mindanao (BARRM): $29.8\%$
  • Region III (Central Luzon): $27.3\%$
  • Cordillera Administrative Region (CAR): $25.3\%$

Poverty and Population Issues

• Poverty Threshold (First Semester 2018):
  • Basic food needs for a family of five: $P7,337$ per month.
  • Basic food and non-food needs for a family of five: $P10,481$ per month.
  • These thresholds increased by $10.9\%$ compared to the first semester of $2015$.
• Population Growth:
  • $2014$ census: $100$ million people.
  • $2020$ estimate: $110$ million people.
  • Impact: Oversaturated schoolrooms, crowded government hospitals, and insufficient maternity ward beds.