Applied Economics Reviewer • Economics is classified as a Social

Science
Lesson I: Revisiting Economics as a
! Deals with the study of
Social Science
man’s life and how he lives
Economics- from Greek word ‘Oikanomia’ with others.
meaning ‘household management’: ! Study of relations between
people and the production,
1. Proper allocation and efficient use of distribution and consumption
available resources (Fajardo). of wealth in human society.
2. Study of how societies use scarce ! How people interact within
resources to produce valuable markets.
commodities (Samuelson).
3. Science of choice (Nordhaus). Scientific Discipline for Two Major
4. Scientific study which deals with Reasons:
how individuals and society in
1. Economic motives of human beings
general makes choices (Sicat).
may be more regular and therefore
5. Study of how man could best
persistent. They can be more
allocate and utilize the scarce
predictable.
resources (Castillo).
2. There is more factual information in
6. Branch of knowledge that deals with
the form of statistics. This gives a
the production, distribution and
substantial basis for the verification
consumption of goods and services
and formation of alternative
(Webster).
economic theories.
Economic Activities:
Non-Economic Factor:
• Earning money
• Culture
• Buying goods and services
• Education
• Depositing and withdrawing money
• Social
from the bank
• Political
Nature of Economics:
Two Branches of Economics:
• Economics is a Science
1. Macroeconomics (Employment
! Body of systematic
and income analysis)
knowledge
! deals with economic
! Laws and principle
behavior of the whole
! Theory and explanation of
economy.
certain events
! Business, government and
! Concerned with accurate
household
appraisal of facts and events
about our material life.
 ! GNP, level of Tools of Economics:
employment, national
income, general level of 1. Logic- science that deals with
prices, total expenditures. reasoning and sound thinking.
! unspecific -logic is presented with facts
2. Microeconomics (Price theory) and proofs for support of claim.
! Deals with economic behavior 2. Mathematics- science that deals
of individual units such as the with their numbers and operations.
consumers, firms and the 3. Statistics- branch of mathematics
owners of the factors of engages with the analysis and
production. interpretation of numerical data.
! Specific economic theory The Economic Resources (Factor of
! Specific Production)
Divisions of Economics: 1. Land- natural resources
1. Production (creating)- process of -limited resources
producing or creating goods needed -considered as one because it
by the households to satisfy the has a value attached to it.
needs. 2. Labor- human resources
3. Capital- monetary resources and
• Input- process
major physical assets
• Output- product
4. Entrepreneur- French word
2. Distribution (allocation)- marketing
meaning ‘enterpriser’
goods and services to different
-organizer and
economic outlets for allocation for
coordinator of the other factors of
different individual consumers.
productions.
3. Exchange (transfer)- transferring
5. Foreign Exchange (currency)- for
goods and services to a person in
international tradings and buying of
return for something.
raw materials from other countries.
4. Consumption (using)- proper
• Dollar- international medium
utilization of economic goods.
of currency
5. Public Finance- pertains to the
activities of the government Lesson II: Economics as an Applied
regarding taxation, borrowing, and Science
expenditures.
-deals with the Applied Economics
efficient use and fair distribution of
• Used nearly 200 years ago by:
public resources in order to achieve
! Jean Baptiste-Say (1767-1832)-
maximum social benefits.
French economist and businessman
 ! John Stuart Mill (1806-1873)- • Two Major Categories:
British political economist, ! Theoretical
philosopher and civil servant ! Applied
• Study of economics in relation to real
world situation as opposed to the theory Basic Economic Problems
of economics. • Scarcity
• Observing how theories work in practice. ! root of all economic
• Application of economic theories and problems but was neglected
principles to real world situations with by Alfred Marshall but in
the desired aim of predicting potential 1932, Lionel Robbins offered
outcomes. a new definition that was
accepted by most economists.
Applied Economic Application:
! Tension between limited
1. Helps to sweep aside all attempts to resources and unlimited
dress up the situation so that it will wants and needs of
appear better or worse that it really is. individuals.
2. Acts as a mechanism to determine
Economic Problems due to Scarcity:
what steps can reasonably be taken
to improve the current economic Microeconomics- concerns the allocation
situation. of resources and distribution of income as
3. Can teach valuable lessons on how to they are affected by the workings of the
avoid the recurrence of a negative price system and and by some government
situation, or at least minimize the policies.
impact.
1. What to produce? (Common
Econometrics- application of statistical and consumer)- Identify what people
mathematical theories to economics for the wants and needs. Considerations are:
purpose of testing hypotheses and • Availability of Resources
forecasting future trends. • Physical Environment
• Econometric tools • Customs and traditions
! Frequency distributions 2. How to produce? (factors of
! Probability and production)- selecting proper
probability distributions combination of economic resources
! Statistical inference in producing the right amount of
! Simple and multiple output.
regression analysis 3. For whom shall goods and services
! Simultaneous equation be produced? (distribution)- who is
models and time series the consumer and how the
methods good/services will be distributed.
 Macroeconomics- study of the produced, at what quantity and what
determination of economic aggregates such price. (ex. China & North Korea)
as total output, loyal employment and the D. Mixed Economy- includes both
price level. capitalist and socialist. A mix of both
free market (market economy) and
4. Are the country’s resources being planned market to avoid issues with
utilized, or some of them are lying capitalism. (ex. U.S.A., Philippines,
idle and unemployed? & Cuba)
5. Is the economy’s capacity to
produce goods growing or Invisible Hand- represents supply and
remaining the same over time? demand market forces which defines what is
produces, in what quantity and at what price.
Lesson III: The Economic System
Adam Smith (1723-1790)- founder of
Economic Systems: Classical School and constructed how social
A. Traditional Economy- economy behavior is regulated. He developed an
bounded by tradition or customs, analysis of the moral system through his
young people followed the footsteps book entitled, “The Theory of Moral
of their ancestors in the choice of Sentiment (1759)” and “Wealth of the
occupation. What to produce, how to Nation (1776)”.
produce and for whom to produce Production Possibility Frontier (PPF)-
were all governed by the past represents the point at which an economy is
behavioral patterns. most efficient.
B. Market Economy- exchange and
trading of goods is what happens in
the market economy. This is a form
of free market hence also being
called the ‘free market economy’. In
this market, what to produce is
determined by what the people
demands. In terms of how to produce,
this economy is opposite from the
Planned economy. Transaction
happen when both buyers and sellers
agree on the price of a given good or
service. Government intervention is
Considerations where to plot:
minimal and confines itself more on
regulation. (ex. U.S.A.) ! Needs
C. Planned Economy- in a planned ! Wants
economy, it is controlled by the ! Time
government which decides what gets ! Resources
Movements: demanded decreases and
vice versa.
! Right (>)- economy is growing o Reasons:
! Left (<)- economy is shrinking a. Income Effect
Plots: b. Substitution Effect
• Demand Curve- slopped
! In line- efficient down showing the price and
! Below the line- inefficient QD are inversely
! Above the line- impossible proportional producing
negative relationship.
Opportunity Cost- value foregone in order
to have something else.

Lesson V: Supply & Demand

Market- a place where buyer and seller

interact with each other and that exchange
takes place among them. • Determinants of Demand
1. Income
A. Demand- Desire for a particular I = QD
good backed up with sufficient I = QD
purchasing power. 2. Population
• Demand Schedule- reflects P = QD
the quantities of goods and P = QD
services demanded by a 3. Taste & Preferences
consumer or an aggregate of TP = QD
consumers at any given price. TP = QD
(P D ) 4. Price Expectations
PE = QD
PE = QD
5. Prices of related goods
PRG = QD
PRG = QD
6. Complimentary
products
CP = QD
CP = QD

• Law of Demand
! Inversely Proportional
(indirect)- as price
increases, quantity
B. Supply- Quantity of a commodity • Determinants of Supply
that is in the market and available for 1. Technology
purchase at a particular price. T = QS
T = QS
-Implies the ability and
2. Cost of Production
willingness of the seller to sell.
COP = QS
• Supply Schedule- shows the COP = QS
different quantities that’s are 3. Number of Seller
offered for sale at various NS = QS
prices. NS = QS
4. Taxes
(P D ) T = QS
T = QS
5. Subsidies
S = QS
S = QS
6. Weather
W = QS
W = QS

Ceteris Paribus Assumption- assumes that

‘all other things equal or constant.’

• Law of Supply • In Demand: the determinants

! Directly Proportional- of demand are constant and
as price increase, quantity are not considered as factors
supply also increases and that will affect the demand in
vice versa. the market.
• Supply Curve- is shown in • In Supply: the Law of
an upward slope showing that Supply is only valid if the
price and quantity are directly determinants of supply (COP,
proportional to each other. T, NS), are held constant.

Changes in Demand and Supply Curve

• Changes in Price- movement along

the curve.
• Changes in Determinants-
movement of the curve.
• Change in Demand- refers to the
shift of demand curve which is
ME= Pe + Qe
brought about by the changes in the
determinants of demand. QS=QD ME

QD>QS Shortage

QD<QS Surplus

Plotting

D Movement either left ( ) for decrease

S or right ( ) for increase

• Changes in Supply- shift of supply
curve brought by changes in the P Decrease ( ) or Increase ( ) based on
determinants of supply.
Q what is the nearest to 0, nearest to 0 is

lower.

Constant (-)- no movement

How:

1. Identify the change of what

determinant (demand or supply)
2. Plot the movement if it is increasing
or decreasing.
• Changes in QD/SD- movement
from one point to another point. Example:

• Equilibrium of Demand and Market for Fruits

Supply
The employees have just received their 13th
-Market Equilibrium by Alfred month pay.
Marshall

! Above equilibrium price

is surplus
! Below equilibrium price
is shortage
Practice: 3. Market for Chicken. The substitute
product for chicken is beef and the
1. Market for Fruits. The employees price of beef increase.
have just received their 13th month
pay.

4. Market for Bread. The government

decided to remove the cash subsidies
2. Market for Sugar. The
previously enjoyed by all small and
complimentary goods for sugar is
medium manufacturers of bread. As
coffee. The price of coffee increased.
it happens, the price of butter is
The government decreased the tax on
expected to increase next week.
sugar.
5. Market for Peanut Butter. To
increase productivity, the farmers of
peanuts shifted from labor intensive 7. Market for Pomade. Nowadays,
to technology intensive method. more men prefer to use pomade to
Price of strawberry jam decreased. style their hair and look good.

8. Market for Umbrella. This month

6. Market for Smartphones. Due to
is a rainy season.
newly enacted tax law in the country,
the tax on income of individuals
decreased while the tax on business
enterprises increased.