Applied-Economics-Q1-Module-1.docx

 Scarcity is the reason why people have to practice economics. Economics, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants. Economics will help the students understand why there is a need for everybody, including the govern...

 Scarcity is the reason why people have to practice economics. Economics, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants. 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 of both agents Macroeconomics and Microeconomics. In this module, we will focus economics as social science and applied science by differentiating it, understanding how an economic theory puts in application and the importance of econometrics for new policies. It covers many different learning situations where you can relate your personal experiences to different practical scenarios about Applied Economics. Everybody goes through a day faced with constraints or limitations: motorists complain of high gasoline prices, times when people suffer due to a shortage of chicken in the market, or insufficient allowance for a student who needs to buy books and school supplies. People always complain about not having enough-not enough food on the table, not enough money to pay one's debts, or not enough income to meet all the family's needs. This, in effect, is the existence of what we call ***scarcity,*** that is, insufficiency of resources to meet the wants of consumers and insufficiency of resources for producers that hamper enough production of goods and services. Scarcity is the reason why people have to practice economics. ***Economics***, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants. Part of human behavior is the tendency of man to want to have as many goods and services as he can. However, his ability to buy goods and services is limited by his income and purchasing power. It is therefore in this context that man has to practice economics. Economics is derived from the ancient Greek word ***oikonomia***---meaning the management of a family or a household. Well-known economist Alfred Marshall described economics as a study of mankind in the ordinary business of 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. 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. A homemaker who has a monthly budget needs to decide on how to utilize it to pay the rent, to buy food, to pay the children's tuition fees, and to buy new clothes and shoes. If the budget is not enough, then the homemaker has to give up some of these things. She needs to make a choice. If she decides not to buy new shoes for her children at the start of the school year, then this is the choice to give up. **Economics** is defined as the social science that deals with the production, distribution, and consumption of goods and services. Evolved in the 19th century, the economic studies have become one of the most significant studies of modern days. From a small shop to a country, Economics plays a crucial role in the efficient running of both. No business can flourish without applying the principles of economics. The study of economics is extensive and varied. The nature and scope of economics depend upon the interaction of economic agents and how economies work. Let's analyze the nature and scope of economics deeply. ### Nature of Economics The nature of economics deals with the question that whether economics falls into the category of science or arts. Various economists have given their arguments in favour of science while others have their reservations for arts. **Economics is treated as a social science because of the following features:** - It involves a systematic collection of facts and figures. - Like in science, it is based on the formulation of theories and laws. ▪ It deals with the cause and effect relationship. These points validate that the nature of economics is correlated with science. Just as in science, various economic theories are also based on logical reasoning. ### Scope of Economics Economists use different economic theories to solve various economic problems in society. Its applicability is very vast. From a small organization to a multinational firm, economic laws come into play. The scope of economics can be understood under two subheads: **Microeconomics** and **Macroeconomics.** ### ### Economics as a Social Science Economics is a social science because it studies human behavior just like psychology and sociology. Social science is, broadly speaking, the study of society and how people behave and influence the world around them. As a social science, economics studies how individuals make choices in allocating scarce resources to satisfy their unlimited wants. So, to define Economics as a Social Science, it is a science concerned with using scarce resources to obtain the maximum of the unlimited wants of society -- ------------------------------------------------------------------------------------ *We use real-life scenarios to build models upon, with which assumptions are made* -- ------------------------------------------------------------------------------------ Economics is a social science. This means that economics has two important attributes. Economics studies human activities and constructions in environments with scarce resources and uses the scientific method and empirical evidence to build its base of knowledge. The evaluation of human interactions as it relates to preferences, decision making, and constraints is a significant foundation of economic theory. The complexity of the dynamics of human motivation and systems has led to the establishment of assumptions that form the basis of the theory of consumer and firm behavior, both of which are used to model circular flow interactions within the economy. #### Circular Flow of the Economy Economics provides an accessible foundation for understanding the complexity of the interactions in the world. For example, the circular flow diagram displays the economic framework related to the dynamic interconnectedness of economic agents. In the graph above the display is limited to households and firms but other depictions of circular flow incorporate the government and international trading partners. Economics provides distilled frameworks to analyze complex societal interactions, as in the case of consumer and firm behavior. An understanding of how wages and consumption flow between consumers and producers provide agents with an ability to understand the symbiosis of the relationship rather than fixating on the contentious components that surface from time to time. By developing an understanding of the foundations of economics, individuals can become better decision makers with respect to their own lives and maintain a balance with respect to an externality that has the potential to supplement or deter their plans. Since economic theories are a basis of decision making and regulatory policy, being knowledgeable about economics foundations allows an individual to be an active and aware participant rather than a passive economic agent. Economics is a social science that assesses the relationship between the consumption and production of goods and services in an environment of finite resources. A focus of the subject is how economic agents behave or interact both individually (microeconomics) and in aggregate (macroeconomics). **Microeconomics** examines the behavior of individual entities such as the consumer, the producer, and the resource owner or firms within the market. It is more concerned with how goods flow from the business firm to the consumer and how the resources move from the resource owner to the business firm. It is also concerned with the process of setting prices of goods that are also known as Price Theory. Microeconomics examines individual economic activity, industries, and their interaction. It has the following characteristics: - **Elasticity:** It determines the ratio of change in the proportion of one variable to another variable. For example- the income elasticity of demand, the price elasticity of demand, the price elasticity of supply, etc. - **Theory of Production:** It involves an efficient conversion of input into an output. For example- packaging, shipping, storing, and manufacturing. - **Cost of Production:** With the help of this theory, the object price is evaluated by the price of resources. - **Monopoly:** Under this theory, the dominance of a single entity is studied in a particular field. - **Oligopoly:** It corresponds to the dominance of small entities in a market. **Macroeconomics** analyzes the entire economy and the issues affecting it. Primary focus areas are unemployment, inflation, economic growth, and monetary and fiscal policy. Macroeconomics is about the nature of economic growth, the expansion of productive capacity, and the growth of national income. It is the study of an economy as a whole. It explains broad aggregates and their interactions "top down." Macroeconomics has the following characteristics: - **Growth:** It studies the factors which explain economic growth such as the increase in output per capita of a country over a long period of time. - **Business Cycle:** It advocates the involvement of the central bank and the government to formulate monetary and fiscal policies to monitor the output over the business cycle. - **Unemployment:** It is measured by the unemployment rate. It is caused by various factors like rising in wages, a shortfall in vacancies, and more. - **Inflation and Deflation:** Inflation corresponds to an increase in the price of a commodity, while deflation corresponds to a decrease in the price of a commodity. These indicators are valuable to evaluate the status of the economy of a country. ### Economics as an Applied Science **Applied Economics** - is the study of economics in world situations as opposed to the theory of economics. It is the application of economic principles and theories to real situations and trying to predict the outcomes. Put simply; applied economics is the study of observing how theories work in practice. The discipline may be practiced at macroeconomic or microeconomic levels. *Macroeconomics' refers the whole aggregate economy, while Microeconomics' looks at economics at the individual consumer company level.*  \- is the application of economic theory and econometrics in specific settings with the goal of analyzing potential outcomes. As one of the two sets of fields of economics (the other set being the core), it is typically characterized by the application of the core, referring to economic theory and econometrics, as a means of dealing with practical issues in fields that include demographic economics, labor economics, business economics, agricultural economics, development economics, education economics, health economics, monetary economics, economic history, and many others. John Neville Keynes is attributed to be the first to use the phrase "applied economics" to designate the application of economic theory to the interpretation and explanation of particular economic phenomena. **What is Econometrics?** Econometrics -- is the application of statistical and mathematical theories to economics for the purpose of: - Testing hypotheses - Forecasting future trends - The results of econometric are compared and contrasted against real life examples. *Part of Econometrics is converting economic theories into data that policy makers can use* Econometrics Example: Real life application of econometrics would be to study the hypothesis that as a person's income increases, spending increases **What is the Importance of Applied Economic Application?** 1\. Applying economics to a company, household or a country helps sweep aside all attempts to dress up a situation so that it will appear worse or better than it actually is.  applied economics becomes a powerful tool to reveal the true and complete situation in order to come up with things to do Example: Applied economics can assess the profits of a certain company. The result can help the executives to do some strategies in order to boost its sales. 2\. Applied economics acts as a mechanism to determine what steps can reasonably be taken to improve the current economic situation  to examine each aspect, one can strengthen areas where performance is weak Example: - Purchase of goods and services - Usage of raw materials - Division of labor within the entity (e.g. firm, company, agency) 3\. Applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation, or at least minimize the impact.  to review what steps were taken to improve and correct similar situations and continue good strategies to keep the economy flowing in a correct direction We should be able to improve human welfare among Filipinos by the investigation and analysis of economic problems in the real world. Applying economic theory in our lives means trying to address actual economic issues and be able to do something about it. The concept of scarcity and choice should encourage us as individuals to help in our own way to provide solutions to the country's economic problems.