LESSON

2 APPLIED ECONOMICS

What I need to know?

After going to this lesson you are expected to:

 Define the concept of Applied Economics.

 To analyze to importance of Applied Economics in everyday lives.

Content
APPLIED ECONOMICS

The term “applied economics” is believed to have started being used nearly 200 years ago, in
the writings of French economist and businessman Jean-Baptiste say (1767-1832) and British political
economist, philosopher and civil servant John Stuart Mill (1806—1873).

Applied economics is the study of economics in relation to real world situations, as opposed
to the theory of economics. It is the application of economic principles and theories to real situations, and
trying to predict what the outcomes might be.

Put simply, applied economics is the study of observing how theories work in practice.
Applied economics may be practiced at macroeconomic (the whole, aggregate economy) or microeconomic
(analyzing individual consumers and companies) levels.

Applying economics to the status of the economy of a country, household or company helps
eliminate all attempts to dress up a situation so that it will seem better or worse than it really is. Only with
applied economics can a true and complete picture of an economic situation or theory emerge, so that
decision-makers can choose what to do in order to move in the right direction from a current position.

Applied economics deals on the application of economic theories and principles to real world
situations with the desired aim of predicting potential outcomes. The use of applied economics is designed
to analytically review potential outcomes without the "fanfare" associated with explanations that are not
backed by numbers. Applied economics can involve the use of econometrics and case studies.

UNDERSTANDING SOCIETY, CULTURE, AND POLITICS 1

Essentially, it is the application of basic assumptions of economics to real-world situations,
both isolated and interrelated with sets of circumstances. Thus, applied economics involves economists
taking generally accepted theory and applying those theories to something that is happening in the real
world, with an eye toward determining what can reasonably be expected to happen next.

APPLIED ECONOMICS APPLICATION

Applying economic theories to current economic conditions can be extremely helpful for three
key reasons.

First, applying economics to the status of the economy of a company, a household or a

country helps to sweep aside all attempts to dress up the situation so that it will appear to be worse or better
than it actually is. From this perspective, applied economics is a powerful tool that enables the true and
complete picture to emerge, so that it becomes possible to decide what to do and where to go from the
current position.

Second, applied economics acts as a mechanism to determine what steps can reasonably be
taken to improve the current economic situation. Each element that is relevant to the contemporary mode of
operation of the entity — including the purchase and sale of goods and services, the usage of raw materials
and the division of labor within the entity— come into play. Examining each aspect of the current economic
condition will often yield sound ideas on ways to maintain aspects that are working at a reasonable rate of
efficiency and strengthen areas where the performance is weak.

Last, applied economics can teach valuable lessons on how to avoid the recurrence of a
negative situation, or at least minimize the impact. Applied economics is all about the application of theory to
real-life situations, so the process can help develop an understanding of why a condition took place. This
includes reviewing what steps were taken to improve or correct similar situations and how those strategies
can be employed to keep the economy flowing in a direction that will preclude a repeat of the undesired
situation.

WHAT IS ECONOMETRICS?
Econometrics is the application of Statistical and mathematical theories to economics for the
purpose of testing hypotheses and forecasting future trends. Econometrics takes economic models and
tests them through statistical trials. The results are then compared and contrasted against real-life
examples.
Econometrics can be subdivided into two major categories: theoretical and applied. Econometrics
uses tools such as frequency distributions„ probability and probability distributions, statistical inference,
simple and multiple regression analysis, simultaneous equations models and time series methods. An
example of a real-life application of econometrics would be to study the hypothesis that as a person's
income increases, spending increases.

UNDERSTANDING SOCIETY, CULTURE, AND POLITICS 2

BASIC ECONOMIC PROBLEM
Scarcity refers to the tension between our limited resources and our unlimited wants and needs. For
an individual, resources include time, money, and skill. For a country, limited resources include natural
resources, capital, labor force, and technology. Scarcity is the fundamental economic problem of having
humans who have wants and needs in a world of limited resources. It states that society has insufficient
productive resources to fulfill all human wants and needs.
Because all our resources are limited in comparison to all our wants and needs, individuals and
nations have to make decisions regarding what goods and services they can buy and which ones they must
forgo. For example, if you chose to buy one DVD as opposed to two videotapes, you must give up owning a
second movie of inferior technology in exchange for the better quality of the one DVD. Of course, each
individual's and nation’s values are different, but people and nations, each having different levels of (scarce)
resources, form some of their values only because they must deal with the problem of scarcity.
So because of scarcity, people and economies must make decisions over how to allocate their
resources. Economics, in turn, aims to study why we make these decisions and how we allocate our
resources most efficiently.
Because of the scarcity of resources, every economic system is faced with the following problems:
1. What to produce?

First of all, the system must determine the desires of the people. Goods and services to be
produced are based on the needs of the consumers. However, there are some factors that should be
taken. into consideration in producing the goods and services the individuals need. These are:

1.1. Availability of resources;

1.2. Physical environment; and
1.3. Customs and traditions of the people.

2. How to produce?

Equally important is the system's task of selecting the proper combination of economic
resources in producing the right amount of output. Through several combinations of resources,
goods are produced. A clear knowledge of manipulating the different factors of production helps a lot
in coming up with the desired output. However, the quality of output must come first before quantity.

3. For whom shall good and services be produced?

The last question has something to goods and services do with the problem ofdistribution.
Once be produced? the goods are produced, how shall they be distributed?
Economists are often. interested in what determines how a nation's total income is distributed
among various groups. They are also interested in knowing how the existing pattern of income
distribution can be changed through government policies.
The first three questions fall within the scope of Microeconomics. Microeconomics concerns
the allocation of resources and distribution of income as they are affected by the workings of the
price system and by some government policies.

UNDERSTANDING SOCIETY, CULTURE, AND POLITICS 3

In addition, one can point out two other problems connected with resource allocation and
economic growth. Thus, altogether there are five closely interrelated problems that are faced by
every economic society.

4. Are the country’s resources being utilized, or some of them are lying idle and unemployed?
When resources are scarce, it is not in the rightness of things to keep some of the available
resources idle. Yet in free market economies, such waste does often occur in reality. There is no
clear cut solution to the problem of unemployment. And if resources are not fully utilized, the
production system is said to be inefficient. The consequence: the national income is sub-optimal,
actual GNP is much below and maximum or potential GNP attainable with existing resources and
technology.

5. Is the economy’s capacity to produce goods growing or remaining the same overtime?
This is essentially a dynamic problem, the problem of growth with cycles. To achieve a
growth in productive capacity is a universal objective. This makes possible a rise in living standards
if the rate of population growth is of very high. And government all over the world are now busy
exploring the possibilities of achieving a satisfactory growth rate.
Problems 4 and 5 fall with what is called Macroeconomics. Macroeconomics is the study of
the determination of economic aggregates such as total output, total employment and the price level.

UNDERSTANDING SOCIETY, CULTURE, AND POLITICS 4

Name: _________________________ Subject Teacher: Mr. Nebochadnezar M. Manzo
Grade/ Track: ___________________

Assessment 1.2 SCORE

A. DIRECTION: Write T if the statement is true. If the statement is false, change the underlined word to
make the statement correct. Write your answer on the space provided.
____________________1. Scarcity refers to the tension between our limited resources and our unlimited
wants and needs.A
____________________2. Because all our resources are unlimited in comparison to all our wants and
needs, individuals and nations have to make decisions regarding what goods and services they can buy and
which ones they must forgo.
____________________3. Econometrics is the application of Statistical and mathematical theories to
economics for the purpose of testing hypotheses and forecasting future trends.
____________________4. Economics is the study of economics in relation to real world situations, as
opposed to the theory of economics.
____________________5. Applied economics deals on the application of economic theories and principles
to real world situations with the desired aim of predicting potential outcomes

B. DIRECTION: Identify the five basic economic problems:

1. ________________________________________________________________________________

2. ________________________________________________________________________________

3. ________________________________________________________________________________

4. ________________________________________________________________________________

5. ________________________________________________________________________________

UNDERSTANDING SOCIETY, CULTURE, AND POLITICS 5