TIME FRAME: 2 HOURS

APPLIED ECONOMICS

UNIT 1

LESSON 2
ECONOMICS AS APPLIED SCIENCE

INTRODUCTION

Applied economics is closely tied to public policy and governance, as decision-making often utilizes
economic tools and methods.

OVERVIEW

The primary concern of Applied economics is to address problems and bring about economic
development.

LEARNING COMPETENCY

The learners..

Define the basic terms in applied economics ABM_AE12-Ia-d-1

LESSON OBJECTIVES

At the end of the lesson, the student will be able to:

• Discuss the primary concern of Applied Economics

• Enumerate the Assumptions in Economics and;

• Discuss the fallacies in Economics

PRE-TEST

A. Write true if the statement is true. Write false if the statement is false

_______ 1 Applied economics considers society as similar to the marketplace and uses economic
concepts to understand social processes, relationships, and phenomena.

_______ 2 Economic development is defined by the core values of substance, self esteem, and personal
profit.

_______ 3 Positive economics focuses on describing what exist and how things work.

_______4 Normative Economics evaluates economic behavior and proposes courses of action.

_______ 5 Post hoc fallacy occurs when one considers trait of one part or an aspect of something as true
or applicable for the whole.
 APPLIED ECONOMICS

The application of economic theory and econometrics in real world situation is called applied economics.
This field of economics is concerned with using economic theories and models, as well as related
principles and concepts, to understand contemporary socioeconomic issues.

Applied economics considers society as similar to the marketplace, and many social processesand
phenomenon such as social relationships, migration and social change can be understood in terms of
economic concepts such as demand and supply, exchange, cost and benefits and profit maximization.

ECONOMIC DEVELOPMENT

Todaro (2014) defines economic development as the sustained elevation of an entire society and social
system toward a better and more human life .Development is defined by the following core values:
sustenance, self esteem, and freedom.

Sustenance refers to ensuring that society is able to provide for basics needs like food, shelter, health and
protection. The absence of one will result in underdevelopment, and people who experience a lack on
their basic needs often experience feeling of helplessness and misery.

Self-esteem refers to self-respect, reputation, pride and acknowledgement. Freedom involves providing
for a wide variety of choices for societies as well as minimizing external limitations.

ASPECTS OF ECONOMIC STUDY AND ANALYSIS

Economic study and analysis requires the application of certain economic concept and tools to understand
various economic issues and problems

POSITIVE AND NORMATIVE ECONOMICS

Positive Economics is a principle in economic analysis which describes what exist and how things work.
It strives to give an objective description of the state of things Normative Economics meanwhile, focuses
on the outcome of economic behavior, evaluates and makes judgments and proposes courses of action.

Look at the following examples of positive and normative statements:

These two principles are vital tools in studying Economics. Economics apply them to come up with
conclusions that will be used to design economic politics and theories.

THEORIES AND MODELS

A theory is a proposition about certain related variables that explains a certain phenomenon. It proposes a
general principle or body of principles regarding a phenomenon which is deemed plausible or
scientifically acceptable.

Economic theories seek to explain economic phenomena and processes, and often proposes a model- a
framework or representation of a significant principles and describes how variables are related. Economic
models are used by the economist to determine the relationships among elements in an economy.
 One example of an economic theory is the Population Theory proposed by Thomas Malthus in 1789.
Based on his observations of statistical data on population growth and food supply, Malthus proposed a
principle that population growth proceeds at an exponential or geometric rate while food production
increases at an arithmetical rate.
Based on his population model, growth Malthus predicted that unless checks to population growth are
implemented, population will increase at a rate that will exceed food supply. The results of unchecked
population growth will be catastrophic. Malthus proposed that to avoid possible catastrophe, society must
introduce “preventive” or “positive” checks on population growth such as marrying at a later age or
abstaining from sex.

ASSUMPTIONS IN ECONOMICS

Economist often deal with a lot of information and complicated processes when they study economic
phenomena. Assumptions help them manage information and simplify economic processes so they can be
easily understood and studied.

1. Rationality. Economics assume that individuals act in logical and predictable manner, and pursue
goals which will benefit them.
2. Profit maximization. In analyzing the behavior of individuals and firms in markets, it is assumed
that participants expect to gain something from their transactions. Individuals aim to maximize
utility, while firms intend to maximize their profit.
3. Perfect information. In most markets, it assumed that consumers and producers have complete
and accurate information about products, services, prices utility, quality and production methods.
This assumption enables economist to study market processes and effects of policies on markets
more accurately.
4. Ceteris paribus. This Latin phrase which means “all things being equal” refers to the assumption
which controls the effects of other variables apart from those that are being analyzed in the study.
For example, in determining the relationship between price and consumer demand, the only two
variables being considered are the quantity demanded and the price of the product.

FALLACIES IN ECONOMICS

Fallacy refers to errors in judgments or conclusions due to faulty reasoning. The following are some
fallacies that are encountered in economic analysis.
1. Failure to hold things constant under ceteris paribus. This is an error in analysis commited
when an individual considers other extraneous variables in studying an economic theory or model
being considered.
2. Post hoc fallacy. This fallacy relates to the Latin phrase post hoc ergo propter hoc which
describes how people make the mistaken notion that since a change happened after a event, then
such change was caused by the event that come before it. This fallacy is most evident when
considering certain “superstitious” beliefs. For example, a person picks up a coin on the road on
the way to a job application. When this job application was successful, he attributed it to the
“lucky coin” he found.
3. Fallacy of composition. This fallacy when one considers a trait of one part or aspect of
something as true or applicable for the whole. This also occurs when a person thinks that a
phenomenon, as experienced by an individual or a certain group, can be applied to a larger group
or the general population. One of the significant example of this fallacy is the paradox of saving.
This refers to the observation that if an individual saves more money by saving or reducing
expenses, then it is possible for the whole country to benefit if everyone saves and reduces their
expenses.
4. Sweeping generalization. This fallacy refers to a statement that oversimplifies a specific
scenario presenting it as a general rule. One example of a sweeping generalization is the
statement: “if the University of Santo Tomas is a Catholic School, then all students if this school
must be Catholics”.
 THE PRODUCTION POSSIBILITIES FRONTIER: A
MODEL OF OPPORTUNITY COST AND
DEVELOPMENT

Production is one important factor that contributes to economic development. The Production Possibilities
Frontier (PPF) is a graph that shows the greatest sum of outputs given accessible inputs or resources in an
economy. The PPF is used to show the possible combination of two alternative products, assuming that
the same resources are used to produce these products. For example, a soft drink company can choose to
make a carbonated cola drink or an orange-flavored soft drink. Given the resources of the company, it can
only make limited number of cola or orange-flavored soft drink. The combination of products made is
shown in the table below:

Table 1. Production Schedule for Cola and Orange-Flavored Soft drink

B 30 20

C 25 25

D 10 35
E 0 40

This schedule gives us an idea on the number of soft drinks that can be made at certain times.
Point A shows that when 40 orange-flavored soft drinks are produced, no colas can be made. As we move
to succeeding points we see the trade-off in production as the number of orange-flavored soft drinks
decreases while the colas increases until we reach Point E where 40 colas, the factory cannot produce any
orange-flavored soft drink. We can also calculate the opportunity cost needed to move to the next point of
production. For instance, when we move from Point A to Point B we see that in order to produce 20 colas,
we need to reduce the production of orange-flavored soft drinks by 10 so we only get 30 orange-flavored
soft drinks at Point B. as more colas are produced less and less orange-flavored soft drinks can be made.

COMPARATIVE ADVANTAGE AND

The concept of comparative advantage considers that it is most advantageous for economies to
specialize in industries where they enjoy an advantage in resources and production processes.
For example, a country with vast agricultural lands and whose society has engaged in agricultural
production for centuries would enjoy an advantage if it focuses on agricultural industries.
Going back to our example regarding the soft drinks company, it can choose to specialize in either
producing orange-flavored soft drinks only or colas only. The company therefore, has to weigh which of
these two products they can make and which would give them an advantage not only in production but
also in sales.

International trade is another significant aspect of economic development that has to be considered in
an interconnected global economy. Nations can benefit from the exchange of products and resources. It is
in the context of international trade that an economy’s comparative advantage gains more significance.

A country’s comparative advantage gains added significance in the context of international trade. Any
country that engages in international trade should note its economic strengths and challenges in charting
its development plans.
DISCUSS AND APPLY

1. What are the primary concerns of Applied Economics?

2. List down the 4 Assumptions of Economics used when analyzing economic phenomena and
indicate the primary concept of each Assumption.

3. Discuss how the fallacies in economics, positive and normative economics, comparative
advantage and international trade contribute to a better understanding of economic development.

REFERENCE: APPLIED ECONOMICS FOR SHS, CARLOS L MANAPAT

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