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Applied Economics Lesson 2

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4 views29 pages

Applied Economics Lesson 2

Uploaded by

Donnie Vigo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LESSON 2

Economics as
Applied
Science
Applied Economics
Definition: the application of economic theory and
econometrics in real-world situations.
Concepts:
 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 processes and
phenomenon such as social relationships, migration,
and social change can be understood in terms of
economic concepts such as demand and supply,
exchange, costs and benefits, and profit maximization.
Applied Economics
 Applied economics is closely tied to public policy and
governance, as decision-making often utilizes
economic tools and methods.
 The primary concern of applied economics is to
address problems and bring about economic
development.
Economic Development
Definition: the sustained elevation of an entire society and
social system toward a better and more humane life.
Development is defined by the following core values:
 Sustenance refers to ensuring that society is able to provide
for basic needs like food, shelter, health, and protection. The
absence of one will result in underdevelopment, and people
who experience a lack in their basic needs often experience
feeling of helpless 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.
Kinds of Economic Analysis

 Positive Economics is a principle in economic analysis


which describes what exists and how things work.
Ex. “Taxes enable the government to provide services to
the people.”
 Normative Economics is s principle in economic
analysis which focuses on the outcome of economic
behavior, evaluates and makes judgements, and
proposes courses of action.
Ex. “The government should levy more taxes so it can provide
more services to the people.”
This two principles are vital tools in studying
Economics. Economists apply them to come up with
conclusions that will be used to design economic policies
and theories.
Theories and Models

 Theory is a proposition about certain related


variables that explain a certain phenomenon. It
proposes a general principle or body of
principles regarding a phenomenon which is
deemed plausible or scientifically acceptable.

 Model is a framework or representation of


significant principles and describes how
variables are related.
Population Theory
• Proposed by Thomas Malthus in 1789.
Based on his observation of statistical data
on population growth and food supply.
• A principle that population growth
proceeds at an exponential or geometric
rate while food production increases at an
arithmetical rate. This means that while
food production merely adds to its stock,
the population multiplies itself at a much
larger rate.
Malthusian Population Growth Model
Assumptions in Economics

 Rationality
Profit maximization
Perfect information
Ceteris paribus
Rationality
• Economics assume that individuals act in
a logical and predictable manner, and
pursue goals which will benefit them.
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 intended to
maximize their profit.
Perfect Information
• In most markets, it is assumed that
consumers and producers have complete
and accurate information about products,
services, prices, utility, quality, and
production methods. This assumption
enables economists to study market
processes and effects of policies on
markets more accurately.
Ceteris Paribus
• Latin phrase, which means “all things being
equal,” refes to the assumption which control
the effects of other variables apart from those
are being analyzed in the study.
For example, in determining the relationship
between price and consumers demand, the only two
variables being considered are the quantity demanded
and the price of the product. Other non-price variables
are considered to be held constant and would
therefore not affect the behavior of consumers.
Fallacies in Economics

refers to errors in judgement or


conclusions due to faulty reasoning.

Failure to hold things constant


under ceteris paribus.
Post hoc fallacy
Fallacy of composition
Sweeping generalization
Fallacy to hold things constant under ceteris paribus

• This is an error in analysis commited when


an individual considers other extraneous
variable in studying an economic
phenomenon. This results in invalid
conclusions since they are no longer in
keeping with the economic theory or
model being considered.
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 cause by the event
that came before it. This fallacy is most
evident when considering certain
“supertitious” beliefs.
Fallacy of Composition
• this fallacy occurs when one considers a
trait of one part or aspect of something as
true or applicable or 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.
Sweeping Generalization
• this fallacy refers to a statement that
oversimplifies a specific scenario
presenting it as a general rule.
The Production Possibilities Frontier:
A model of opportunity Cost and
Development

PPF is a graph that shows the greatest


sum of outputs goven 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.
The Production Possibilities Frontier
A
B
Consumer goods 50 C Unattainable
48
(millions of units per
43 D
U

34
30
year)

Inefficient E
20
I
10
F
0
10 20 30 40 50
Capital goods
(millions of units per year)
What is the law of increasing
opportunity?
As more of a good is
produced, larger quantities of
another good must be
sacrificed if resources are
already used efficiently
What can shift the production
possibilities frontier?

 Changes in resources
 Increase in the capital stock
 Technological change
Shifts in the Economy’s PPF

Panel A: Increase in available resources


Consumer goods

A'
A

F F'
Capital goods
Shifts in the Economy’s PPF
Panel B: Decrease in available resources
Consumer goods

A
A''

F'' F
Capital goods
Shifts in the Economy’s PPF
Panel C: Increase in resources or technology
that benefits consumer goods
Consumer goods

A'
A

F
Capital goods
Shifts in the Economy’s PPF
Panel D: Increase in resources or technology
that benefits capital goods
Consumer goods

F F'

Capital goods
Comparative Advantage

The concept of comparative


advantage considers that it is most
advanategeous 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 is it
focuses on agricultural industries.
International Trade

International trade is another


significant aspect of economic development
that has to be considered in an
interconnected global economy. Nation can
benefit from the exchange of products and
resources. Any country that engages in
international trade should note its economic
strengths and challenges in charting its
development plans.
Thank You!

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