;’)
APPLIED ECONOMICS
Economics
-
Resources (economic resources)
-
are used to produce a product (goods and
services)
also known as Factors of Production
-
Factors are:
1. Land
- natural resources (e.g. land, rivers, and
mineral deposits)
2.
-
Labor (Human Capital)
Work and time for which employees are
paid
both quantity and quality
3.
-
Capital (Physical Capital)
Building (plant) and equipment used for
production
4.
Entrepreneurship (technological
knowledge)
The person who sees the opportunity for
new or better products and brings together
the resources for producing the products.
-
-
•
Economics is the study of CHOICE under
scarcity.
The science of making decisions in the
presence of scarce resources.
It is a social study of (how best to allocate)
scarce resources among competing users (
consumer and producer).
It is the efficient allocation of the scarce
means of production toward the
satisfaction of human wants.
resources are limited while our wants are
relatively unlimited
Economic decision
-
means an allocation of scarce resources
that best meets one’s goal, that is, choosing
how to maximize the use of scarce
resources to satisfy as many wants as
possible
EFFICIENCY V.S. EFFECTIVENESS
SCARCITY
-
A condition where there are insufficient
resources to satisfy the needs and wants of
a population.
-
Scarcity is the reason why people have to
practice economics.
-
Scarcity implies that by making one choice,
you give up another.
-
scarcity is the imbalance between desires
and available resources, that forces us to
make economic choices
-
Scarcity may be relative or absolute:
ØRelative scarcity is when there is an abundance
of goods yet the supply is scarce compared to its
demand.
ØAbsolute scarcity is when the supply is limited
due non-availability of resources.
Opportunity Cost
ØThe benefit is that you give up because you
choose to take one action in favor of another.
ØIs what is given up in order to get something
else.
Either:
Ø
Ø
Absolute advantage
Comparative
Economic Systems
1.
Traditional economy – decisions are based
on traditions and practices upheld over the
years and passed on from generation to
generation
2.
Command economy – an authoritative
system wherein decision-making is
centralized in the government or a planning
committee
3.
Market Economy – based on the working of
demand and supply.
People’s preferences are reflected in the
price they are willing to pay in the market
and are therefore the basis of producers’
decisions on what goods to produce or
service to provide.
the invisible hand
ü Profit motive
v The price mechanism
ü Prices sends
signals to
producers and
consumers
v Pure competition
ü Competition
makes the price
system work
v
;’)
Opportunity Cost
of using any resource.
ü It is what a firm’s owners give up
to use resources to produce goods
or services.
Inputs of Resources:
1. Market-supplied resources
• Owned by others & hired, rented,
or leased
2. Owner-supplied resources
• Owned & used by the firm
•
-
Total Economic Cost
sum of opportunity costs of both marketsupplied resources & owner-supplied
resources
•
-
Explicit Costs
Monetary payments to owners of marketsupplied resources
•
-
Implicit Costs
No monetary payments or opportunity
costs for using owner-supplied resources
o
1.
2.
3.
Types of Implicit Costs:
Opportunity cost of cash provided by
owners
- i.e. Equity capital
Opportunity cost of using land or capital
owned by the firm
Opportunity cost of owner’s time spent
managing or working for the firm
Economic profit
= Total revenue – Total economic cost
= Total revenue – (Explicit costs + Implicit costs)
Accounting profit
= Total revenue – Explicit costs
•
•
Accounting profit does not subtract implicit
costs from total revenue.
Firm owners must cover all costs of all
resources used by the firm
• Objective is to maximize economic
profit