Applied
Economics
Introduction to Applied Economics:
Revisiting Economics as a Social Science
and Economics as an Applied Science
Lesson Objectives:
 Define applied economics and understand the basic terms in applied
economics
 Identify the basic economic problems of a country
 Differentiate the main branches of economics
 Explain the common microeconomics and macroeconomics concepts
“Economics can be seen everywhere”
Revisiting Economics
as a Social Science
ECONOMICS …
• Adam Smith – Economics
is concerned with
production and distribution
of wealth
ECONOMICS …
• Lionel Robbins – Economics
studies human behavior as a
relationship between human
wants and scarce resources
which alternative uses.
ECONOMICS …
• Alfred Marshall– Economics
is the study of mankind in the
ordinary business of life.
Economics as Social Science
Economics is a social
science concerned with
the efficient allocation of
scarce resources that
have alternative uses in
order to achieved the
maximum satisfaction of
individuals’ unlimited
needs and wants.
Economics can be
also define as a Study
of Wealth
Economics can be
define as Study of
Making Choices
Basic Concepts of Economics
Basic Concepts of Economics
• Needs and wants
• Opportunity Cost and Trade-off
• Comparative and Absolute Advantage
• Scarcity
• Absolute Scarcity – when supply is limited
• Relative Scarcity – it is when a good is scarce compared to its
demand.
Basic Concepts of Economics
• Needs and wants
Basic Concepts of Economics
• Opportunity Cost and Trade-off
Basic Concepts of Economics
• Opportunity Cost and Trade-off (Comparative and Absolute
Advantage)
Basic Economic Problems
Basic Economic Problems
• What goods to produce and services to provide?
• How to produce and how much to produce of these goods
and services?
• For whom to produce these goods and services?
“Goods and services are used extensively in
economic discussions that these are
sometimes referred to as economic goods.
To distinguish the term from its other uses,
economic goods cover goods, services,
products, and the like that have a price and
are sold in a market”
Factors of Production
Factors of Production
• Land – similar to natural resources available such as farms and
agricultural land. It is typically cultivated or improved for use in
production. Use of land is paid in the form of rent payment. Factor
income-RENT
• Labor – represents human capital such as workers and employees
that transform raw material and regulate equipment to produce
goods and services. Factor income-WAGE
Factors of Production
• Capital – represents physical assets such as production facilities,
warehouses, equipment and technology used in the production of
good and services. It may refer to investment capital used in
production. Factor income-INTEREST
• Entrepreneurship – sometimes referred to as enterprise. It
represents the factors that decides how much of and in what way
the other factors are to be used in production. Factor incomePROFIT
Branches of Economics
Branches of Economics
•Microeconomics
•Macroeconomics
Microeconomics Concepts
Utility
• It is the value of satisfaction derived from the consumption
of a good
Marginal Utility
• It is the additional satisfaction obtained from the
consumption of an additional unit of goods and services
Total Utility
• The total amount of satisfaction obtained from the
consumption of goods and services.
Law of Diminishing Marginal Utility
• States that the successive consumption of the same good
or service increases the total utility, but at some point, the
total utility will reach a maximum and beyond this point,
the total utility diminishes.
In real life, allocating a budget would require
consideration of more than two goods, that includes
rent, food, transportation and entertainment, among
others. In economics, more specific terms in
discussion of income include disposable income and
discretionary income.
Disposable Income
•
Discretionary Income
•
Macroeconomics
Concepts
Macroeconomics Concepts
• Gross Domestic
• Gross National Income
Product
• Output approach
• Gross Domestic
• Expenditure approach
Product Growth
• Inflation
• Gross National Product • Interest rate
Gross Domestic Product & GDP
Growth
• It is the total value of final goods and services consumed
during a given period – usually one year
• “Final” is emphasized in order to avoid double counting.
• GDP Growth is the rate of increase in the Gross Domestic
Product
Gross National Product and Gross
National Income
•
Inflation
• It is the decline of purchasing power of a given currency over time.
• The persistent rise in price levels of goods and services.
Interest Rate
• The cost of borrowing or the return on investment.
Factors Affecting the Interest Rate
• Type of financial institution
• Purpose of the loan
• Borrower’s credit standing
• Term of the loan
• Flexibility
• Collateral and guarantee