Introduction to Applied

Economics
Chapter 1
Scarcity – insufficiency of resources to meet the wants of consumers and insufficiency
of resources for producers that hamper enough production of goods and services.

Economics, as a study, is the social science that involves the use of scarce resources
to satisfy unlimited wants.

Well known economist Alfred Marshall describe economics as a study of

mankind in the ordinary business life. It examines part of the individual and social
action that is most closely connected with the attainment and use of material
requisites of well-being.
 Scarcity is a condition where there are insufficient resources to siatisfy all the
needs and wants of a population.

• Relative scarcity is when a good is scarce compared to its demand.

For example, coconuts are abundant in the Philippines since the plant easily
grows in our soil and climate. However, coconuts become scarce when the supply is
not sufficient to meet the needs of the people.

• Absolute scarcity is when supply is limited.

For example, oil is absolutely scarce in the country since we have no oil wells
from which we can source our petroleum needs, so we rely heavily on imports from
oil-producing countries like Iran and other Middle Eastern countries.
 Choice and Decision-Making

Because of the presence of scarcity, there is a need for man to make decisions
in choosing how to maximize the use of the scarce resources to satisfy as many wants
as possible.

Opportunity cost refers to the value of the best foregone alternatives. When land is
devoted exclusively to the cultivation of rice, we give up an output of bananas or
mangoes that we could have planted on that land area. The output of bananas or
mangoes are the opportunity cost. Without scarcity, a person does not need to make
choices since he/she can have everything he/she wants.
 The concept of opportunity cost holds true for individuals, businesses, and
even a society. In making a choice, trade-offs are involved. The opportunity cost of
watching a movie in a cinema is the value of other things that you could have bought
with that money such as a pint of ice cream, a combo meal in a fast food, or a simple
t-shirt to be used in a PE class.

Another example would be a business proprietor that withdraws ₱10,000

from his savings account so he can buy materials to be used in his business. He gives
up the interest the savings would have earned but his goal is to earn more money that
would be generated by the business.
 Economic Resources

Economic resources , also known as factors of production, are the resources

used to produce goods and services.

1. Land - soil and natural resources that are found in nature and are not man-made.
Owners of lands receive a payment known as rent.

2. Labor – physical and human effort exerted in production. It covers manual labors
like construction workers, and machine operators, as well as professionals like
doctors. The term also includes jeepney drivers, farmers, and fishermen. The
income received by labors is referred to as wage..
3. Capital – man-made resources used in the production of goods and services,
which include machineries and equipment. The owner of capital earns an
income called interest

Economic as a Social Science

Economics is a social science because it studies human behavior just like

psychology and sociology. As a social science, economics studies how individuals
make choices in allocating scarce resources to satisfy their unlimited wants.
 Macroeconomics and Microeconomics
Two branches of economics: Macroeconomics and Microeconomics.

Macroeconomics is a division of economics that is concerned with the overall

performance of the entire company. It studies the economic system as a whole rather than the
individual and economic units that make up the economy. Macroeconomics is about the nature
of economic growth, the expansion of productive capacity, and the growth of national income.

Microeconomics, on the other hand, is concerned with the behavior of individual

entities such as the consumer, the producer, and the resource owner. It is concerned with the
process of setting prices of goods that is also known as Price Theory. Microeconomics studies
the decisions and choices of the individual units and how these decisions affect the prices of
goods in the market.
 Basic Economic Problems of Society

All societies are faced with basic questions in the economy that have to be answered
in order to cope with constraints and limitations. These are:
1. What to produce or how much – society must decide what goods and services
should be produced in the economy, and the quantity of goods to produced and the
service rendered.

2. How to produce - is a question on the production method that will be used to

produce the goods and services.

3. For whom to produce – is about the market for the good. For whom will the goods
and services be produced?
 Economic Systems

The economic system is the means through which society determines the answers to
the basic economic problems mentioned. A country may be under any of the following types
or even a combination of the three economic systems.

1. Traditional economy. Decisions are based on traditions and practices upheld over the
years and passed on from generation to generation. Methods are stagnant and therefore
not progressive.

2. Command economy. This is the authoritative system wherein decision-making is

centralized in the government or a planning committee. Decisions are imposed on the
people who do not have a say in what goods are to be produced.
3. Market economy. This is the most democratic form of economic system. Based on the
workings of demand and supply, decisions are made on what goods and services to
produce.

Why is Economics is Important?

Economics will help the students understand why there is a need for everybody,
including the government, to budget and properly allocate the use of whatever
resources are available. It will help one understand how to make more rational decisions
in spending money, saving part of it, and even investing some of it.

On the national level, economics will enable the students to take a look on how
the economy operates and to decide for themselves if the government officials and
leaders are effective in trying to shape up the economy and formulate policies for the
good of the nation.
 Scientific Approach in the Empirical Testing of an Economic Theory

Using tools such as logic, mathematics, and statistics, the student needs to approach
the empirical testing of an economic theory in a scientific manner. This scientific approach
involves the following steps:

1. State the propositions or conditions that are taken as given and do not need further
investigation, as the basic starting point of investigation. These propositions will serve as
the premises upon which the theory is established.
2. Observe facts in connection with the activity that we want to theorize.
3. Apply the rules of logic to the observed facts to determine casual relationships between
observed factors and to eliminate facts that are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may be tested as to whether
they are valid or not.
5. Use statistics and econometrics as empirical proof in testing the hypotheses.

Positive Economics vs Normative Economics

Positive economics deals with what is---things that are actually happening such
as the current inflation rate, and the level of the Gross National Product.

Normative economics, on the other hand, refers to what should be---that which
embodies the ideal such as the ideal rate of population growth or the most effective tax
system.
 Measuring the Economy

The government plans for a better economy from a perspective of what the
economy has been. Shaping the economy’s future is changing past and present
perspective extended to the future. In particular, looking ahead is grounded on past
and present performance and health of the economy. The heart of the economy is
production whose value measures both resource input and output of people.
 Gross National Product
(GNP)
The market value of final products, both sold and unsold, produced by the resources of the
economy in a given period.

Aspects about GNP:

• GNP is a flow concept
• GNP measures final output
• GNP is output produced by the citizens of a country
GNP is a flow concept: It is a quantity produced per unit of time. It is the value of final goods
and services produced in a country during a given time period.

GNP measures final output: While calculating GNP, the market value of only final goods and
services produced in a year are added up.

GNP is output produced by the citizens of a country: GNP is the final output of goods and
services produced by the citizens and businesses of a country during a given time period which
is usually a year.
 Components of Expenditures in GNP
i. Consumption Expenditure (C)
ii. Investment (I)
iii. Government expenditures (G)
iv. Net Exports (X – M)

Consumption Expenditure (C) – It includes all personal expenditure incurred by the citizens
of a country on durable and non-durable goods in a period of one year.

Investment (I) – It is the total expenditure incurred by firms or households on capital goods.
Government expenditures (G) – It includes all types of expenditure incurred by Federal,
Provincial, Local councils on the purchases of goods and service such as national defense, law
and order, street lights etc.

Net Exports (X – M) – Net exports of goods and services are value of exports minus the value
of imports.

Formula for Gross National Product

GNP = C + I + G + (X – M)
Where:
C = consumption I = investment
G = Gov’t expenditure X – M = Net exports
 Gross Domestic Product
(GDP)
The total market value at current prices of all final goods and services produced within a year
by the production located within a country.

Formula for Gross Domestic Product

GDP = GNP – (NFIFA)

Where:
GNP = C + I + G + (X – M)
NFIFA = Net Foreign Income From Abroad
 Economics as an Applied Science
Applied economics is the application of economic theory and econometrics in
specific settings with the goal of analyzing potential outcomes. It is typically characterized
by the application of the core, referring to economy theory and econometrics, as a means of
dealing with practical issues in fields that include demographic economics, labor economics,
business economics, and many others.

Applied Economics in Relation to Philippine Economic

Problems
A solid understanding of economic principles and how they are applied in real-life situations
can serve as significant tools to help address the country’s economic problem.
 Basic Economic Problems of the Country

• POPULATION GROWTH

• UNEMPLOYMENT
Population Growth in the Philippines
The booming population growth in the Philippines is another basic economic
problem that can be connected to the issue of scarcity.
The current population in the Philippines is about 110 million people. The annual
population growth rate has decreased significantly since 1960 where it was 3.3% to now
where it is about 1.3%.
The fertility rate in the Philippines has also decreased significantly over the years. In
1969, the fertility rate was 6.4 children per woman. Today, the fertility rate is 2.1 children per
woman.
Based on 2015 census data, the population in 2016 in the Philippines was 100,981,437. Based
on the 2015 census results, the population increased by over 8 million people when compared
to the 2010 census results. The growth rate has slowed slightly from the previous census,
down to 1.72% from 1.89%.
Philippine
Population
2021
Unemployment
The number of jobless Filipinos slightly rose to 3.76 million in June compared to 3.73
million in May, as the Philippines continued to report thousands of COVID-19 cases daily.
The underemployment rate or the percentage of the working population looking for
more hours of work stood at 14.2% in June, equivalent to 6.41 million people. This is higher
than the 12.3% or 5.49 million people in May.

3.73 % 3.76 %
May 2020 June 2021

Labor Force Survey

Unemployment Causes:
• The number of people entering the job market has been greater then the number
of jobs created.
• The rural-urban migration increases due to employment opportunities.
• Limits of job creation’ amid quarantine restrictions.
Another significant socio-economic problem in the country is Poverty.
The Philippines has a fairly high poverty rate with more than 16% of the
population living below the poverty line. Because of the many people reliant on
agriculture for an income and inequality in wealth distribution, about 17.6 million
Filipinos struggle to afford basic necessities. From 2015 to 2020, the rate of poverty
declined from 21.6% to 16.6%. Philippine President Rodrigo Duterte aims to reduce
the rate of poverty to 14% by 2022.