Applied Economics PDF

**INTRODUCTION OF APPLIED ECONOMICS** Every man of any distinction makes an economics decision every day. Deciding on how much to spend and save, the kind of food to buy, the type of school to enroll, the amount of time for work and leisure, and may more be only some situations where one applies ec...

**INTRODUCTION OF APPLIED ECONOMICS** Every man of any distinction makes an economics decision every day. Deciding on how much to spend and save, the kind of food to buy, the type of school to enroll, the amount of time for work and leisure, and may more be only some situations where one applies economics. Thus, it is very important to understand the various issues and intricacies concerning economics. (Silon et.al 2009) - **Economics as Defined** From the Greek words: - OIKOS = household - NOMOS = management "HOUSEHOLD MANAGEMENT" **Definition:** The wise production and use of wealth to meet demands or needs of the people. - A social science that deals with how individuals organize themselves in order to distribute scarce resources to create products and services that meet man's infinite and multiplying desire and needs. Economics as a **SCIENCE** - It is a science because, in relation to those general laws and principles, it is an organized body of facts, orchestrated, structured and systematized. (Observation, hypothesis formulation, knowledge set, experimentation, inference, generalization) - Using some kind of logic based on a collection of systematic relations, economic analysis attempts to describe economic events. - It is social science since individuals or societies and their actions, unpredictable in nature, are the subject of economics. - **SCOPE OF ECONOMICS** 1. **Microeconomics** (from the Greek word *mikros,* meaning "small"). - Takes a closer view on the behavior of individual markets work. - It focuses on how individual households, firms and industries make their choices, and the interaction of such decisions in the particular market. **Example:** Determine the price of rice and how much of it is produced and sold. It would also look at how regulations and taxes affect the price and supply of rice. 2. **Macroeconomics** (from the Greek word *makros*, meaning, "Large") - Deals with the problem of the economy as a whole. It looks at the aggregate prices, production and income. **Example:** The study of the Philippine economy would analyze the gross national income and total employment. - **Concerns of Economics** 1\. **Production**- is the use of inputs for generating output. **\* Inputs** are commodities or services that are used to produce goods and services. **\* Output** are the different goods and services which come out of the production process. \*Society has to decide what outputs will be produced and in what quantity. 2**. Distribution**- Distribution is the total product distribution by members of society. - It is linked to the issue of for whom goods and services are to be produced. 3**. Consumption-** is the use of products or services. Consumption is the final conclusion of economic operation. 4\. **Public finance**- is concerned with government spending and revenue. Economics studies how the government collects money by taxes and its borrowing. - **Types of Economics** 1. **Household Economics** - The family is the most popular use of economics. At this stage, someone who knows the economic principles would be able to improve the functioning of the household. 2. **Business Economics** - When an individual or a group of people starts to work, they are part of the business economy system in their workplace. In this form, you\'re dealing with rent, salaries, income, and others. 3. **National Economics** - Economic factors that influence the country as a whole. Deals with the control of a nation\'s revenue, spending, wealth or capital. 4. **International Economics** - The highest stage of economic operation concerning the industry of one country with other countries such as trade, tourism, exchange rates. 1. **Consumers** - are individuals or companies purchasing goods or services. They are individuals or other economic organizations making use of a good or service. In addition, they don\'t sell the item they purchased. 2. **Producers** - Firms who produce goods and services. They may be individual entrepreneurs (self-employed) or large multinational companies. 3. **Government/ the public sectors** - Attempt to maximize the well-being of society **BASIC TERMS TO BETTER UNDERSTAND ECONOMICS** - **Goods**- anything used to satisfy your needs and wants. **\*Tangible goods**- a physical object or product that can be touch **\*Intangible goods**- a product that cannot be touch, like insurance policy **Classification of Goods** **according to use:** 1. **Consumer goods** Examples: Soda, bread, juices, water, etc. 2. **Capital/ industrial goods** Examples: Machinery, buildings, equipment 3. **Essential goods** - goods that are consumed to satisfy the basic needs of Man Example: Medicine 4. **Economic goods** 1. **Scarcity** - is a condition where there is an insufficient amount of what is accessible to fulfill the demand for it. - There are problems that economics will face in the development of products and services: - for **land** -- insufficient land and natural resources; contaminated areas; overcrowded spaces. - for **labor** -- unqualified workforce; insufficient workforce; - for capital -- low equipment/machines; inadequate fund/**capital**; and - for **entrepreneurship** --inadequate training of entrepreneurs; inadequate timely training; limited opportunity; scarcity of great ideas but many competitors in the market. 2. **Multiple Usage** - there can be more than one potential use of resources. A plot of land can be used, for example, to plant coffee or to build a factory. 3. **Partially replaceable** - in the production of a good or service one resource may replace another (e.g. replaces manual labor with technology). **Choice and Decision- Making** - **Opportunity Cost** - There is a need for a man to make choices in choosing how to optimize the use of finite resources to fulfill as many wants as possible due to the existence of scarcity. - For instance, a homemaker who has a monthly budget has to determine how to use it to pay the rent, buy food, pay tuition fees for children, and buy new clothes and shoes. - If the budget isn\'t adequate, then some of these items have to be given up by the homemaker. She has a decision to make. If at the beginning of school, she chooses not to buy new shoes for her kids, then this is the option she gave up on. - When you hear the phrase **\"opportunity cost**,\" you hear a fancy word for \"trade-off.\" There is a trade-off to consider each time you make a choice. You have to consider what you get as well as what you might give up. - The most fundamental definition of opportunity cost is the cost of the next best thing you might have done if you hadn\'t made your first option. The costs of the opportunity include both overt and implicit costs. **Importance of Economics in our daily lives** - Both visible and subtle ways, economics impacts our everyday lives. Economics frames several decisions that we have to make about employment, leisure, consumption and how much to invest from an individual perspective. Macroeconomic patterns, such as inflation, interest rates and economic growth, also affect our lives UTILITY AND APPLICATION OF APPLIED ECONOMICS - **BASIC CONCERNS** 1\. WHAT TO PRODUCE AND HOW MUCH? 2\. HOW TO PRODUCE? 3\. FOR WHOM TO PRODUCE? - ECONOMIC SYSTEMS - These are the means or process system through which society determines the solutions to the basic economic concerns mentioned previously in short, it is how a society decides what to produce, how to produce it, and for whom. ***Types of Economic Systems:*** **1. TRADITIONAL** \- Decisions are based on long-standing customs and traditions. These economies are often found in small, undeveloped societies and rarely change over time. **2. COMMAND** \- The government makes all economic decisions, controlling what goods and services are produced. \- This system is common in communist and socialist countries. **3. MARKET** \- Businesses and individuals decide what to produce based on supply and demand. \- Prices reflect what people are willing to pay, making this system more flexible and consumer-driven. **IMPORTANCE OF ECONOMICS** - Resource - Management - Teaches Budgeting - Smart Spending - Saving - Investing ***SCIENTIFIC APPROACH IN ECONOMICS*** 1\. State 2\. Observe 3\. Apply 4\. Establish 5\. Test the Hypothesis **POSITIVE ECONOMICS VS. NORMATIVE ECONOMICS** - **POSITIVE ECONOMICS** - Focuses on facts and what is happening in the economy. It looks at things like inflation, employment rates, or GDP. It describes the current situation, even if it\'s far from ideal. - **Example:** The inflation rate is currently 5%. - **NORMATIVE ECONOMICS** - Focuses on what should be or what is ideal. It suggests how things could be improved through policies. - **Example:** The government should aim for a 2%inflation rate to ensure stability. **MEASURING THE ECONOMY** Shaping an economy's future lies upon changing past and present perspectives to the future. As anticipating future events are based on past and present performances as well as the health of the economy. - ***GROSS DOMESTIC PRODUCT (GDP) & GROSS NATIONALPRODUCT (GNP)*** - **GROSS DOMESTIC PRODUCT (GDP)** - This is the total money or market value of all of the finished products produced inside a country within a certain period of time. - **GROSS NATIONALPRODUCT (GNP)** - This is an estimated total value of all of the products and services in a period of time by means that are owned by a country's own residents. **TWO APPROACHES IN ORDER TO CALCULATE GNP AND CLASSIFY THEIR RESOURCES ARE:** 1\. Expenditure Approach 2\. Income Approach - **GNP/GDP: EXPENDITURE APPROACH** - Using the end-use expenditure means that products stated in the GNP equation are final when they have reached the highest level of processing in the economy for multiple uses in a given time period. The GNP equation states that GNP=C+I+G+(X-M). C stands for household and individual consumption. I stand for investments. G stands for government expenditure on goods and services including labor. X stands for exports. M stands for import components. - **GNP/GDP: INCOME APPROACH** - Another approach is by resource uses and contributions that make up the production stage. As basic factors or materials get processed into higher forms. **APPLICATION OFAPPLIED ECONOMICS TO SOLVE ECONOMIC ISSUES** ***Economic Issues*** 1\. Poverty 2\. Unemployment 3\. Inflation 4\. Income Inequality **[DEFINITIONS:]** 1. **Poverty** - refers to the state or condition in which people or communities lack the financial resources and other essentials for a minimum standard of living. ***Common Causes of Poverty*** - Increase in Population - Increase in Cost of Living - Unemployment - Income Inequality **WHAT CAN BEDONE TO SOLVETHE PROBLEM OF POVERTY?** ***Solutions for Poverty*** - Reduce Unemployment - Appropriate Policy on labor income - Increase social services like education, health care and food subsidies for sustainable poverty reduction 2. **Unemployment** - is the proportion of people above a specified age not being in paid employment or self-employment but currently available for work during the reference period. ***Common Causes of Unemployment*** - The number of people entering the job market has been greater than the number of jobs being created. - The rural-urban migration increases due to employment opportunities - Many of the unemployed individuals are college graduates. **WHAT CAN BE DONE TO SOLVETHE PROBLEM OF UNEMPLOYMENT?** ***Solutions for Unemployment*** - Appropriate economic policies for labor-intensive industries - Improve the educational system of the country especially in rural areas - Minimize rural-urban migration by improving the economic environment in rural areas - Proper coordination between government and the private sector to solve the problem of job mismatch - Provision of more investment opportunities to encourage local and international investment 3. **Inflation** - is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. ***Effects of Inflation*** - Cost of borrowines by businesses and individuals will increase as lenders tend to raise interest to increased prices - Lowers value of currency - Consumers income will not be sufficient to meet their needs - Rapidly increasing prices of commodities will affect the purchasing power of consumers **WHAT CAN BE DONE TO SOLVE THE PROBLEM OF INFLATION?** ***Solutions for Inflation*** - Governments cut spending to reduce demand in the economy - Companies can optimize production costs, reduce waste, and improve efficiency to avoid passing high costs to consumers. - Central banks (e.g., Bangko Sentral ng Pilipinas) can raise interest rates to slow down borrowing and spending, reducing inflation. 4. **Income inequality** - is the uneven distribution of income among people in a society. It can also be referred to as the gap between the rich and poor ***Common Causes of Income Inequality*** - Political Culture - Indirect taxes - poor people shoulder this tax like the 12% value added tax - Income Taxes **WHAT CAN BE DONE TO SOLVE THE PROBLEM OF INCOME INEQUALITY?** ***Solutions for Income Inequality*** - Policies to enforce progressive rates of direct taxation on high wage earners and the wealthy individuals - Direct money transfers and subsidize food program for the urban and rural poor. - Direct policies to keep the low prices of basic commodities - Raise minimum wage - Encourage profit sharing **HINDSIGHTS** Economics is crucial for making smart financial decisions and shaping government policies. It helps solve real-world problems by understanding how economies work, guiding both individual choices and national strategies for growth and stability. MARKET DEMAND, MARKET SUPPLY, AND MARKET EQUILIBRIUM - **Market** is an interaction between the buyers and sellers of trading or exchange. It is where the consumer buys, and the seller sells. - **Demand** is the willingness of a consumer to buy a commodity at a given price. - **Supply** refers to the quantity of goods that a seller is willing to offer for sale. - **Equilibrium** is the state in which market supply and demand balance each other, and as a result, prices become stable. - Generally, an over-supply of goods or services causes prices to go down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium. - **Market system** is a powerful tool for the allocation because the changes in price from market transactions create incentives and disincentives on buyers and sellers to address disparities between demand and supply. - The instrument of allocation is the market price determined by the interactions of the buyers and the seller in the market. - Economists use the term **demand** to refer to the amount of some good or service consumers are willing to purchase at each price. - **Demand** is based on needs and wants--- a consumer may be able to differentiate between a need and a want, but from an economist's perspective, they are the same. - What a buyer pays for a unit of the specific good or service is called **price.** - The total number of units purchased at that price is called the **quantity demanded.** - A table that shows the quantity demanded at each price is called a **demand schedule.** - A **demand curve** shows the relationship between price and quantity demanded on a graph. **[THE LAW OF SUPPLY AND DEMAND]** The law of supply and demand explains the interaction between the sellers of a product and the buyers. It shows the relationship between the availability of a particular product and the demand for that product has on its price. - **Demand** - is the willingness of a consumer to buy a commodity at a given price. - A demand schedule shows the various quantities the consumer is willing to buy at different prices. - A **Demand function** shows how the quantity demanded of a good depends on its determinants, the most important of which is the price of the good, thus the equation: - **Qd = f (P).** This signifies that the quantity demanded good is dependent on the price of that good. EXAMPLE: - The quantity demanded is determined at each price with the following demand functions: Qd -- 6-P/2. - At a price of Php 10per bottle, Ana is willing to buy one bottle of vinegar for a given month. As the price goes down to Php 8, the quantity she is willing to buy goes up to two bottles. - At a price of Php 2, she will buy five bottles. There is a negative relationship between the price of a good, and the quantity demanded that good. - A lower price allows the consumer to buy more, but as price increases, the amount the consumer can afford to buy tends to go down. - The **demand curve** is a graphical illustration of the demand schedule with the price measured on the vertical axis (Y), and the quantity demanded measured on the horizontal axis (X). - The value is plotted in the graph and is represented as connected dots to derive the demand curve (Figure 1). - The demand curve slopes downward, indicating the negative relationship between the two variables: price and quantity demanded. - The **downward slope** of the curve indicates that as the price of vinegar increases, the demand for the sound decreases. The negative slope at the demand curve is due to the income and substitution effect. - The **income effect** is felt when a change in the price of a good changes consumers\' real income or purchasing power, which is the capacity to buy with a given income. - **Purchasing power** is the volume of goods and services one can buy with his/her income. - The **substitution effect** is felt when a change in the price of a good changes demands due to alternative consumption of substitute goods. For example, lower prices encourage consumption away from higher-priced substitutes on top of buying more with the budget (income effect). The higher price of a product encourages cheaper substitutes, further discouraging demand for the former already limited by less purchasing power (income effect). - **THE LAW OF DEMAND** - Using the assumption of **"ceteris paribus"**, which means all other related variables except those that are being studied at the moment and are held constant, there is an inverse relationship between the price of a good and the quantity demanded good. - "The higher the price, the lower the quantity demanded, and vice versa." - The amount of a good that buyers purchase at a higher price is fewer because as the price of goods goes up, the opportunity cost of buying the good is less. Consumers will avoid buying the product. - For example, if the price of video game drops, the demand for the games may increase as more as people want the games. The demand curve is always downward sloping due to the law of diminishing marginal utility. **FACTORS AFFECTING DEMAND OF A COMMODITY** - **Income** - The willingness of a consumer to buy a commodity is influenced by the price of the commodity & his/her taste for the commodity. - The capacity to purchase the commodity is influenced by his/her income of the consumer. - A higher level of income will give him/her higher capacity to consume while a lower-income will give him limited purchasing power. - **Price of other commodities** -Prices of other goods and services may influence the demand for goods and services. - The prices on commodities may affect the demand of a particular good; the influence of related goods is more palpable. - For example, if the other good is a substitute, the increase in the price of the substitute goods may increase the demand for the commodity at hand. - Thus, when the price of beef increases, the demand for chicken will increase. If the other goods are a complementary good, a decrease in its price will impact positively on demand for the goods being investigated. - For instance, when the price of bread decreases, the demand for butter may increase since butter and bread may be considered as complementary goods. - **Tastes or preferences** - The formation of taste is influenced by several factors like cultural values, peer pressure, or the power of advertising. - For example, on the celebration of New Year's Eve, it is customary for families to have round fruits at their fruit plate to attract good luck. This tradition increased the demand for fruits during this season. - **Consumer expectations --** The expectation or prospect of what will happen to the price can influence the demand for the commodity. - For example, if you believe that rice prices will increase tomorrow, there is a tendency for consumers to increase their consumption today. - **Market** -- The size and characteristics of the market can also be influencing the demand for a commodity. - An increasing population can contribute to the expansion of existing markets for various commodities. - A lower birth rate, coupled with an aging population, may alter the composition of demand by shifting the demand toward the needs of the elderly and away from goods and services that target the youth. - **SUPPLY** - Supply refers to the quantity of goods that the seller is willing to offer for sale. - The supply schedule shows the different quantities the seller is willing to offer for sale. - The supply schedule shows the different quantities the seller is willing to sell to different prices. - The supply function shows the dependence of supply on the various determinants that affect it. - Assuming that the supply function is given as Qs: 100 + 5Pand is used to determine the quantities supplied at the given prices. Supply can be illustrated using a table or a graph. - A supply schedule is a table, like Table 2, that shows the quantity supplied at a range of different prices. A supply curve is a graphic illustration of the relationship between price, the vertical axis (Y), and quantity supplied, shown on the horizontal axis (X). - The supply schedule and the supply curve are just two different ways of showing the same information NOTE: As shown in Table 2, the relationship between the price of fish and the quantity that Jose is willing to sell is direct. The higher the price, the higher the quantity supplied. When plotted into a graph, we obtain the supply curve. **THE LAW OF SUPPLY** - The law of supply demonstrates the quantities that will be sold at given price. The higher the price, the higher the quantity supplied and vice versa. - Producers supply more at a higher price because selling at a higher quantity at a higher price increases revenue. **FACTORS AFFECTING SUPPLYOF A COMMODITY** - **Price of production inputs** -- The production of any commodity will require two major inputs- intermediate inputs or raw materials and factor inputs. - Intermediate inputs refer to the materials, including raw materials that are still going to be processed or transformed into higher levels of outputs. - The factor inputs are the processing or transforming inputs. Some examples of factor inputs are labor, capital, land, and entrepreneurship. - These factors inputs are the ones adding value to the raw materials through the process of production. When the price of these production inputs increases, there will be an increase in the cost of production at every level of production. - With the cost of production increased at a given price level, sellers will reduce the quantity supplied at alternative prices. - **Taxes** -- Business establishments are required to pay a number of taxes to various levels of government. - It is a monetary expense on the part of the firms, the payment of taxes can be considered as a part of the cost of production, although taxes are not factor inputs nor raw materials; they are still considered as part of operating a business. - Thus, an increase in sales tax, real estate tax, and other business taxes can increase the cost of supplying a commodity. This may discourage the sellers from increasing their supply of a commodity in the market. - **Technology** -- Some firms may use labor-intensive technology if the cost of labor is relatively cheap. - On the other hand, firms may use capital-intensive technology if wages are very high. - Improvements in the technology used by some firms can lower their production costs and make their firm more competitive. - A lower-cost may encourage these firms to supply more of the commodity since they can sell it at a reduced price. - **Expectation** -- The expectation or anticipation of what will happen on the price of the commodity can also influence the amount supplied in the market. - If there is an expectation that rice prices will increase next season, this may encourage farmers to plant more rice next season. The expectation of a higher price next season can discourage the rice dealers from selling the rice currently. Some of them will hoard so they can sell in the future with higher returns. **HOW DO SUPPLY AND DEMAND CREATE AN EQUILIBRIUM PRICE?** - **Equilibrium price, or market-clearing price,** is the price at which the producer can sell all the units he wants to produce, and the buyer can buy all the units he wants. - Supply and demand are balanced or in equilibrium. The demand curve is downward sloping. This is due to the law of diminishing marginal utility. - The **supply curve** is a vertical line; over time, the supply curve slopes upward; the more supplier expects to be able to charge, the more they will be willing to produce and bring to market. - In the equilibrium point, the two slopes will intersect. The market price is sufficient to induce suppliers to bring to market that same quantity of goods that consumers will be willing to pay for at that price. **MARKET EQUILIBRIUM** - When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and the quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price; the quantity is the equilibrium quantity. - The intersection of supply and demand determines the equilibrium price and quantity. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. - If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. - Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. - Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level. - A change in supply, demand, or both, will necessarily change the equilibrium price, quantity, or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same. - Quantity supplied is equal to quantity demanded (Qs = Qd).