APPLIED ECONOMICS 1-3

The Study of Economics

• Definition of Economics:

  • Economics is a science that analyzes how people use their limited resources to meet their never-ending needs and wants.

  • Involves cost and benefit analysis when making decisions.

Economics as an Applied Science

• Application of Theories:

  • Economic theories and models are applied to real-life situations to understand individual decision-making.

  • Economists simplify complex social phenomena into frameworks and models.

Scarcity, Needs and Wants

• Core Principles:

  • Scarcity indicates that resources are limited while needs and wants are unlimited.

Opportunity Cost and Comparative Advantage

• Opportunity Cost:

  • The benefit foregone when choosing one action over another,

• Comparative Advantage:

  • Entails having lower opportunity costs when producing a specific good compared to others.

  • Absolute Advantage: The ability to produce more than another entity.

  • Example calculations:

    • Wine Opportunity Cost:

      • Country A: 0.333 bags of coffee per unit of wine.

      • Country B: 0.25 bags of coffee per unit of wine.

    • Coffee Opportunity Cost:

      • Country A: 3 barrels of wine per unit of coffee.

      • Country B: 4 barrels of wine per unit of coffee.

  • Country B has a comparative advantage in wine, while Country A has it in coffee.

Basic Economic Problems

• Three Economic Problems:

  1. What to produce? (Resource allocation)

  2. How much to produce? (Production allocation)

  3. For whom to produce? (Distribution and consumption)

• Considerations:

  • Availability of labor influences the focus on labor-intensive products or services.

• Factors of Production:

  • Land: Natural resources, returns as rent.

  • Labor: Human capital, returns as wages.

  • Capital: Physical assets, returns as interest.

  • Entrepreneurship: Decision-making in production, returns as profit.

Methods Used in Economic Analyses

Qualitative Approach

• Focuses on directional relationships between economic variables.

• Used in descriptive analysis to show correlations (e.g., interest rate inversely related to price).

Quantitative Approach

• Uses mathematical and statistical analyses of economic data.

• Employs variables, equations, functions, and graphs to support economic models and theories.

Economic Theories and Models

• Models: Representations of economic and social phenomena.

• Simplify concepts for clearer understanding.

• Types of Data:

  • Time-series: Collected over several time periods.

  • Cross-sectional: Different variables for a single time period.

Normative versus Positive Economics

• Normative Economics: Evaluates economic decisions based on opinions, subjective.

• Positive Economics: Evaluates based on facts through qualitative and quantitative analysis.

Main Branches of Economics

• Microeconomics: Examines individual or company level behaviors.

• Macroeconomics: Focuses on aggregate economic relationships and national economy.

Microeconomic Concepts

• Utility: Satisfaction from consumption of goods.

• Marginal Utility: Additional satisfaction from consuming one more unit.

• Law of Diminishing Marginal Utility: More consumption leads to lower additional satisfaction.

Disposable and Discretionary Income

• Disposable Income: Income available after taxes.

• Discretionary Income: Income after necessary non-tax expenses.

Macroeconomic Concepts

• Gross Domestic Product (GDP): Total value of final goods consumed in a time period.

  • Emphasizes "final" to avoid double counting.

• Nominal vs. Real GDP:

  • Nominal GDP at current prices; Real GDP adjusted for inflation.

• Consumer Price Index (CPI): Measures purchasing power through price surveys.

Economic Systems

• Various ways of managing resources to answer economic questions:

  • Free Market Economy: Characterized by competition and private ownership.

  • Centralized Economy: Government heavily involved in resource management.

  • Mixed Economy: Combines features of both free market and centralized systems.

  • Traditional Economy: Based on customs and barter systems.

Macroeconomic Goals of a Country

• Government's role in ensuring efficiency to achieve economic objectives.

• Economic Growth: Measured by GDP growth and represented in business cycles.

The State of the Philippine Economy

• Experiencing growth since 1999, driven mainly by household consumption.

The Philippines’ 21st Century Socioeconomic Challenges

Global Issues

• War and Terrorism: Impact of global conflicts on economies.

• Political Instability in Europe: Effects of Brexit on global markets.

Domestic Issues

• Territorial Disputes: Tension with China over maritime territories.

• Ongoing Conflicts: Long standing issues in Mindanao affecting national stability.