CHAPTER 1

INTRODUCTION TO APPLIED
ECONOMICS
OBJECTIVES FOR THIS WEEK
 Define economics as a social science and
applied science
 Define basic terms in applied economics
 Identify the basic economic problems of
the country, and
 Explain how applied economics can be
used to solve economic problems.
WHO IS THE FATHER OF ECONOMICS?

“An Inquiry Into the Nature and Causes of the Wealth of

Nations”
ECONOMICS AS A SOCIAL SCIENCE

 “Economics is the science which studies human

behavior as a relationship between ends and
scarce means which have alternative uses”

 Economics is the study of the ways that

individuals and societies allocate their limited
resources to satisfy their unlimited wants”
IT IS IMPORTANT TO RECOGNIZE THE
FOLLOWING ASPECTS OF ECONOMICS:

 It is a science concerned with human behavior.

 Itis concerned with the choices we make and the

consequences of these choices for ourselves and others.
In fact the central focus of economics is on choice and
decision making.

 It is concerned with man’s material welfare.

ECONOMIC RESOURCES
 are factors of production used to produce
things that people desire in order to satisfy
their wants.
 categorized as:
ECONOMICS AS APPLIED SCIENCE

 Economics as an applied science helps students to learn

about the relationship of a business and basic economic
resources.
 It focuses primarily on theoretical business economics. It
focuses on urban problems, the health-care crisis,
agricultural problems, poverty, economic growth and the
environment.
BASIC ECONOMIC CONCEPTS
 Economic theory is a broad concept for
the explanation and understanding of the
movement of goods and services in the
market.

-For example, the theories of behavior of

individuals and institutions engaged in the
production, consumption, distribution and
exchange of goods and services.
BASIC ECONOMIC CONCEPTS
 Economic models - may be in the form of verbal
expression, numerical tables, and mathematical equations
or diagram used to understand economic events.

 thelaw of demand and the law of supply are good

example of a useful economic model. The law of supply
states that, other things being equal (ceteris paribus), as
price increases, the quantity supplied decreases.
BASIC ECONOMIC CONCEPTS
 Scarcity
– limitation of resources particularly economic
resources such as land, labor, capital, and
entrepreneurship

 Needs
– things that are desired which are essential for
human survival

 Wants - desired but are not essential for survival

BASIC ECONOMIC CONCEPTS

Commodities- things that people

produces. These maybe divided into
goods or services. Goods are tangible
while services are intangible.
BASIC ECONOMIC CONCEPTS

Production- the act of making goods

and services

Consumption- the act of using the

commodities to satisfy your wants
ACTIVITY
 Opportunity Cost
 Scarcity

 Social Science

 Applied Science

 Adam Smith

 Title of Adam Smith’s book

 Economics

 Capital resources

 Land resources

 Entrepreneurial resources

 Labor resources

 Rent

 Commodity

 Production

 Consumption

 Ceteris Paribus
WHY STUDY ECONOMICS?
 Decision-making skills

 Problem Solving Abilities

People with education in economics develop an
appreciation of the social issues such as global
warming, health care, education and social security
 Job opportunities.

Business and government are increasingly aware of the

need for people who are trained in economics. Their
duties may include research, economic analyst,
forecasting and consultants on capital investments
BASIC ECONOMIC PROBLEMS

 The fundamental problem of economics is to

determine the most efficient ways to allocate the
resources. The decision must be made to
transform the different economic resources into
goods and services to satisfy their needs and
wants.
THREE BASIC QUESTIONS
 What to produce?
Since society cannot have everything, they must decide which goods
and services they want now and which one to give up.

 How to produce?
What combinations of resources and technologies will be used to
produced goods and services at lowest cost?

 For whom to produce?

The ability to pay the prices for goods and service depends on the
amount of income that buyers have, along with the prices of, and tastes
and preferences for various goods and services.
THE PHILIPPINE ECONOMY TODAY
 THE Philippines’ Gross Domestic Product
(GDP) expanded by 6.9 percent in the third
quarter (July-August-September) of 2017,
second only to Vietnam’s 7.5 percent, and better
than China’s 6.8 percent and Indonesia’s 5.1
percent.
 First Metro president Rabboni Francis Arjonillo
said on Thursday, January 4 that the
Philippine gross domestic product (GDP) is
expected to grow by 7% to 7.5% this 2018,
fueled by heightened private capital spending,
rising government infrastructure spending,
rebound in exports, revival in manufacturing,
stable remittances from overseas Filipinos and
tourism boom.
 Philippineinflation, meanwhile, is expected to
increase to 3.5% to 4% in 2018, as a result of
higher-than-expected oil prices and impact of
TRAIN law.

 Ofthe 3.5% to 4% inflation forecast, Abola said

0.6% of which is because of the TRAIN law.
BASIC ECONOMIC PROBLEMS OF THE
PHILIPPINES
 UNEMPLOYMENT

Unemployment remains persistent

problem in the Philippine because of its
increase in population.
WHAT CAN BE DONE TO SOLVE
UNEMPLOYMENT PROBLEM?
 Proper coordination between the government and the private sector
to solve the problem of job mismatch.

 Decreasing the retirement age from 65-60 for public sector to give
chance to younger generation to enter the labor market but
providing an attractive well-defined benefit pensions and retiree
health care for retirees.

 Slowing population growth. Philippine economic growth must

increase faster than its population. The government must
encourage people to limit the size of their families and the same
time increasing economic growth.
UNEMPLOYMENT AND
INFLATION
UNEMPLOYMENT

Three questions concerning the overall unemployment

rate:
 What does the overall unemployment rate measure?

 What are the sources of overall unemployment?

 How does overall unemployment change over time?

MEASURING UNEMPLOYMENT
Labor Force
All noninstitutionalized civilians 16
years of age and older who are either
working or actively looking for work
THREE GROUPS OF INDIVIDUALS:
 Thenumber of unemployed individuals
expressed as a percentage of the labor force
 Employed individuals - Individuals are considered
employed if they have full time or part time jobs.
 Unemployed individuals - Individuals that are not
working, but have been seeking work within the
past 4 weeks.
 Individuals not included in the labor force
SOURCES OF UNEMPLOYMENT

Question:

How do people become unemployed?

SOURCES OF UNEMPLOYMENT

Four Types of Unemployment:

Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
FRICTIONAL UNEMPLOYMENT

 Frictional
unemployment is temporary for
an individual, but it is ongoing within the
economy as a whole.
STRUCTURAL UNEMPLOYMENT

Structural unemployment arises for

reasons:
geographical Immobility's
 Occupational immobility
 Technological Change

Structural change in the economy

SEASONAL
UNEMPLOYMENT
 Seasonal unemployment is
caused by seasonal shifts in
the labor supply and demand
CYCLICAL UNEMPLOYMENT

 Cyclicalunemployment occurs because

of fluctuations in the business cycle.
UNEMPLOYMENT OVERTIME
INFLATION OVER TIME
PROBLEMS WITH OFFICIAL UNEMPLOYMENT
FIGURES
 Underestimation of Unemployment Rate
 Doesn’t include discouraged workers
 Doesn’t include underemployment
 Part-time workers
 Overqualified workers

 Overestimation of Unemployment Rate

 Unemployment benefits
 Individuals that work and don’t report their income
 Individuals that work a lot of overtime
WHAT CAN BE DONE TO SOLVE
UNEMPLOYMENT
 Appropriate economic policies for labor-intensive
industries.

 Improvement in the educational system of the country

especially in the rural areas.

 Minimize rural-urban migration by improving the

economic environment in the rural areas.
 Proper coordination between the government and the
private sector to solve the problem of job mismatch.

 Decreasing the retirement age from 65-60 for public

sector to give chance to younger generation to enter the
labor market but providing an attractive well-defined
benefit pensions and retiree health care for retirees.

 Slowing population growth. Philippine economic growth

must increase faster than its population. The government
POVERTY

 As a fast growing economy, with 6.9% Gross Domestic

Product for the 4th quarter of 2017, still there is a decline
in the incidence of poverty in the Philippines. Poverty
remained not only an economic problem but also a social
problem. Increase in population, increase in cost of
living unemployment, inequality in the distribution of
income are some of the reasons why a decline in poverty
is very slow.
COMMON SLOGANS
OF THIRD WORLD GOVERNMENTS
 The eradication of poverty
 Better income distribution

 People's participation

 Better quality of life

WHAT CAN BE DONE TO SOLVE POVERTY
PROBLEM?

 Reduce unemployment.
 Appropriate policy on labor income.

 Promote economic growth to improve the standard of living

 Provision of unemployment benefits for those who will be

unemployed due to natural and man-made calamities.
 Increasing social services like education, health care and food
subsidies leads to sustainable poverty reduction.
INCOME INEQUALITY

 Income is the one that an individual earned from work or

business received from investments. Income inequality refers to
the gap in income that exists between the rich and the poor.
THE FOLLOWING ARE THE MAJOR CAUSES OF
INCOME INEQUALITY IN THE PHILIPPINES:

 Political Culture: Palakasan, utang na loob.

 Indirect taxes- Indirect tax is a tax that the people shoulder

the burden of paying higher taxes like Value added tax.

 Income tax.
WHAT CAN BE DONE TO SOLVE THE PROBLEM
OF INCOME INEQUALITY?

 Policies to enforce progressive rates of direct taxation on

income and wealth, especially at the highest levels.
 Direct money transfers and subsidize food programs for the
urban and rural poor.
 Direct government policies to keep the price of essential
products low.
 Reform people’s political culture.

 Raise the minimum wage.

 Encourage and expand collective bargaining.

 Encourage profit sharing.

QUALITY OF INFRASTRUCTURE
 The world economic Forum’s Global Competitiveness Index for
2017-2018 underscores that slow infrastructure development is
hampering the Philippines’ economy.

 The Philippines underinvested in infrastructure – it was ranked

97th/137 nations in the WEF report for 2017-2018. Its score of
3.4 out of 7 is the same as Rwanda and even lower than that of
Kenya, Cape Verde, and Albania.
What can be done to improve the quality of infrastructure?
 Quality of infrastructure increases macro-level competitiveness
and encourages investments. In order to ease infrastructure
constraints, the Philippines need to achieve a gradual increase in
infrastructure investments to at least 5% of the GDP, and
increase in the efficiency of spending.
 The government shall implement fiscal reform program.

 Continues reform in key-sectors-particularly power, roads, and

water-to improve cost of recovery, competition, and institutional
credibility, and to sharply reduce corruption.
 Improving central oversight of the planning and coordination of
investments
 Focus on investments through public-private partnerships to
address key bottlenecks, and achieve quick gains in service
delivery.
ECONOMIC SYSTEM
ECONOMIC SYSTEM
 Basis for the “what, how, for whom” to produce.

 Type of institution responsible for the management and

allocation of resources used in the production of goods
and services.

 Three economic systems…..

MARKET ECONOMIC SYSTEM
 All economic countries are owned by private entities.

 This system proposes the following answers to the three

economic questions:
1. goods that yield high profits
2. producing at maximum efficiency with minimum costs;
3. distributing the goods to those who can afford to buy
them
 Hong Kong, with a score of 88.6 out of a possible total of 100
(down from 2015 -1.0); Singapore, with a score of 87.8 (down
-1.6); New Zealand, with a score of 81.6 (down -0.5);
Switzerland, with a score of 81.0 (up +0.5); and Australia,
with a score of 80.3 (down -1.1)
COMMAND ECONOMIC SYSTEM
 All resources are owned by the government.
 “what to produce?”- producing more public goods like
roads, public schools, and public hospitals.
 “how to produce?” – “employing all possible laborers
and using available machinery and equipment
 “for whom to produce?”- for the public
MIXED ECONOMIC SYSTEM
All three questions are answered by
both the government and private
entities in consideration of their
mutual benefit.

Economic resources are owned b

both.
 Some governments spend much more money in
proportion to GDP, while others spend much less.
Iceland's government spending is 57 percent of the
country's GDP. That means the other 43 percent is private
industry. Sweden's government spending is 52 percent of
its GDP. The United Kingdom features 47.3 percent
government funding, and the United States is 38.9
percent, as of 2014. Most countries feature mixed
economies, which makes it easier to trade and do
business on a global scale.