ETA Reviewer Applied Economics PDF

Unit 1 Introduction to Applied Economics Opportunity cost - a fundamental concept in economics that refers to the value of the next best Lesson 1: Revisiting Economics as Social Science alternative that must...

Unit 1 Introduction to Applied Economics Opportunity cost - a fundamental concept in economics that refers to the value of the next best Lesson 1: Revisiting Economics as Social Science alternative that must be foregone when a decision is made to allocate resources or make a choice. Defining Economics Example: If the business is deciding whether to ​ Economics refers to effectively managing purchase two new tractors, the opportunity cost of scarce resources to satisfy unlimited human not doing so would be the potential revenue and wants and needs. profitability lost by not being able to take on another ​ It is a social science that studies how project. individuals, groups, and societies produce, distribute, and consume products and ECONOMIC RESOURCES – FACTORS OF PRODUCTION services. LAND - Refers to all natural resources that exist without ​ The origin of the study of Economics is traced man's intervention. The payment for land is called to Adam Smith who wrote the book An Inquiry RENT. into the Nature and Causes of the Wealth of Nations. LABOR - Refers to human inputs such as manpower skills that are used in transforming resources into Basic Economics Concepts different products that meet our needs. Payment for Scarcity - It refers to the limitation of resources, labor is called WAGES and SALARIES. particularly economic resources such as land, labor, CAPITAL - A man-made factor of production used to capital, and entrepreneurship.It refers to the limitation create another product. That payment for capital is of resources, particularly economic resources such as INTEREST. land, labor, capital, and entrepreneurship. ENTREPRENEURSHIP - Integrates land, labor, and Unlimited Needs and Wants - The concept of scarcity capital to create new products. An ENTREPRENEUR is coupled with the fact that human wants and needs makes decisions with regard to production and are unlimited. utilizing the other factors of production. Rationality Concept - Rationality is a fundamental Basic Economic Questions concept in economics that assumes individuals make choices that maximize their utility, given their 1.​ How to produce preferences and constraints. 2.​ What to produce? 3.​ For whom to produce? Example: A grocery store will place an order for essential items such as bread and milk because it ECONOMIC SYSTEM assumes that customers will choose to buy these essential food items. Free Market Trade-Off - A fundamental concept in economics, ​ a type of economic system that is controlled referring to the situation where you have to give up by the market forces of supply and demand, one thing to gain something else. as opposed to one regulated by government controls. ​ Deciding to prioritize one option over another ​ companies and resources are owned by involves sacrificing the benefits of the option private individuals or entities who are free to not chosen. trade contracts with each other. Example: Spending money on vacation means Characteristics of a Free Market sacrificing the opportunity to save that money for a future purchase or investment.  ​ Private Ownership economics. This field of economics is concerned with ​ Market Forces using economic theories and models as well as ​ Competition related principles and concepts to understand ​ Consumer Choice contemporary socioeconomic issues. ​ Profit Motive ​ Limited Government Intervention Economic Development ​ Laissez-Faire ​ Resource Allocation ​ Todaro (2014) defines economic development ​ Income Inequality as the sustained elevation of an entire society and social system toward a better and more Command System humane life. Development is defined by the following core values: Sustenance, An economic system where key economic decisions, self-esteem, and freedom. including what to produce, how to produce, and for whom to produce, are made by a central authority, Sustenance - Refers to ensuring that society can typically the government. provide for basic needs like food, shelter, health, and protection. Characteristics of a Command Market Self-Esteem - Refers to self-respect, reputation, pride, ​ Central Planning and acknowledgment. ​ Public Ownership ​ Production Targets Freedom - involves providing for a wide variety of ​ Resource Allocation choices for societies as well as minimizing external ​ Price Controls limitations. Freedom also compasses political ​ Limited Consumer Choice freedom, as well as extended leisure and the ability to ​ Equality and Social Goals acquire more goods and services. ​ Lack of Competition ​ Minimal Private Initiative ASPECTS OF ECONOMIC STUDY AND ANALYSIS Mixed System POSITIVE AND NORMATIVE ECONOMICS The government and the private sector coexist, and ​Positive economics describes and explains various both play significant roles in economic economic phenomena in verifiable terms.​​ decision-making and resource allocation Example: The unemployment rate in July 2024 was Characteristics of a Mixed Market estimated at 4.7 percent. This was lower than the reported unemployment rate in July 2023 at 4.9 ​ Private Ownership percent. In April 2024, the unemployment rate was ​ Government Ownership posted at 4.0 percent. ​ Market Forces ​ Regulation Normative economics focuses on the value of ​ Resource Allocation economic fairness, or what the economy "should be" ​ Taxes and Redistribution or "ought to be." ​ Competition ​ Public Services Example: Efforts should be made to sustain or further ​ Public Investment reduce the unemployment rate, as the slight increase from April to July 2024 indicates a potential need for Lesson 2: Economics as Applied Science targeted economic policies. The application of economic theory and econometrics in real-world situations is called applied Note: While positive economics is based on facts, normative economics is based on value judgments. Economic Theory 3.​ Perfect Information - it is assumed that consumers and producers have complete and ​ ​An economic theory is a set of ideas and accurate information about products, principles that outline how different economies services, prices, utility, quality, and production function. methods. ​ Seek to explain economic phenomena and 4.​ Ceteris Paribus - a Latin phrase meaning "with processesm and often propose a model - other things the same" or "other things being framework on representation on significant equal or held constant," is important in principles and describes how variables are determining causation. It helps isolate multiple related. independent variables affecting a dependent variable. Example of an Economic Theory Example: If the price of milk falls, ceteris Keynesian economics consists of multiple paribus, the quantity of milk demanded will macroeconomic theories and models that offer rise. explanations for how aggregate demand—the entirety of an economy's spending—impacts FALLACIES IN ECONOMICS phenomena like economic output and inflation. Failure to Hold Things Constant Under Ceteris Paribus - Malthusian economics refers to the idea that, while This is an error in analysis committed when an population growth may be exponential, the growth of individual considers other extraneous variables in food supply and the supply of other resources is linear. studying an economic phenomenon. This theory states that when a population grows over Example: The new tax policy implemented last month time and outpaces a society's ability to produce has lowered gasoline prices by 10%. resources, its standard of living may reduce and trigger a large depopulation event. Rationale: This claim assumes that the tax policy is the sole reason for the decrease in gasoline prices, Laissez-faire is a theory of free-market capitalism holding all else constant. However, factors like a directly opposed to government intervention such as decrease in global crude oil prices, a seasonal drop in regulation, subsidies, minimum wages, trade demand, or an increase in production could also restrictions and corporate taxes. contribute to the price reduction. This theory states that economic prosperity is more Post Hoc Fallacy - People make the mistaken notion obtainable in systems that governments "leave that since a change happened after an event, then alone"—the direct translation of the French term such change was caused by the event that came laissez-faire. before it. ASSUMPTIONS IN ECONOMICS Example Assumptions - are made to better understand Scenario: A government implements a new minimum consumer and business behavior when making wage law in January. By July, the unemployment rate economic decisions. has decreased. 1.​ Rationality - Economists assume that Claim: The decrease in unemployment was caused individuals act logically and predictably, and by the new minimum wage law. pursue goals which will benefit them. 2.​ Profit Maximization - It is assumed that Rationale: This claim assumes causation simply participants expect to gain something from because the unemployment decrease followed the their transactions. implementation of the minimum wage law. However, other factors could have contributed to the drop in unemployment, such as seasonal hiring, economic Branches of Economics growth, or changes in global market conditions. Macroeconomics - a branch of economics that Fallacy of Composition - Occurs when one considers studies how an overall economy—the markets, a trait of one part or aspect of something as true or businesses, consumers, and governments—behaves. applicable for the whole. ​ It examines economy-wide phenomena such Example: as inflation, price levels, rate of economic growth, national income, gross domestic Scenario: An individual company reduces its prices to product (GDP), and changes in attract more customers, leading to an increase in its unemployment. market share and revenue. Microeconomics - The study of individuals, Claim: If all companies reduce their prices, the entire households, and firms' behavior in decision-making economy will grow, and all companies will experience and allocation of resources. higher revenues. ​ Addresses questions like how consumers make Rationale: What is true for one company is assumed to choices, how businesses determine pricing, be true for the entire economy. While a single and how firms allocate resources to maximize company lowering its prices may attract more profits. customers and increase revenue, if all companies ​ Key concepts in microeconomics include reduce their prices, overall revenue might not supply and demand, market equilibrium, increase because of the reduced price levels. In fact, consumer utility, production costs, and market widespread price cuts could lead to deflation, which structures. can harm the economy by reducing consumer spending and corporate profits. Production Possibilities Frontier (PPF) graphs the combinations for the production of two commodities Sweeping Generalization - Refers to a statement that with which the same amounts are used. oversimplifies a specific scenario presenting it as a general rule. ​ A PPF graph shows the maximum production level for one commodity for any production Example level of the other commodity. ​ If a point on the graph is above the curve it Scenario: A government observes that investing in indicates efficiency, while a point below the high-tech industries has significantly boosted curve signifies inefficiency. economic growth in a neighboring country. ​ The PPF graph shows how resources must be shared among goods during the production Claim: Investing in high-tech industries will lead to process. rapid economic growth in any country. ​ Within an economy, if the capacity to Rationale: This claim assumes that the success of produce both goods increases, it results in high-tech investment in one country will automatically economic growth. replicate in all others. However, the outcome depends on various factors, such as a country's level Example: of infrastructure, education system, labor market Imagine a readiness, and overall economic conditions. Applying national the same policy without considering these contextual economy that differences may lead to suboptimal results or even can produce policy failure. only two things: Wine Lesson 3: Aspect of Economic Studies and Analysis and cotton. If points A, B, and C are plotted on a curve, it represents ​ Economic Focus: Production is largely the economy's most efficient use of resources. agricultural, with low productivity. Lesson 4: Theories of Economic Development 2. The Preconditions for Take-Off FACTORS IN DETERMINING ECONOMIC GROWTH ​ Characteristics: ○​ Emergence of modern economic and Level of Production (Gross Domestic Product) political institutions. ○​ Development of infrastructure (e.g., ​ An economy is measured by the increase in a transportation, communications). country’s Gross Domestic Product (GDP). ○​ Increased investment in education and ​ GDP is the monetary value of all finished technology. goods and services made within a country ○​ Rise of entrepreneurial activities. during a specific period. ​ Trigger: External influences, such as trade or colonization, can initiate change. Quality of Life ​ Economic Focus: Transition from a subsistence ​ It considers significant changes in aspects such economy to one capable of sustained growth. as health, nutrition, education, environment, and income distribution. 3. The Take-Off Sustainable Development ​ Characteristics: ○​ Rapid industrialization and ​ It considers the impact of human activities on urbanization. the environment and believes that ○​ Significant technological innovations. environmental degradation has a significant ○​ Increased investment rates (10–20% of economic impact. national income). ○​ Expansion of key industries, such as THEORIES ON ECONOMIC DEVELOPMENT textiles or manufacturing. ​ Economic Focus: Economic growth becomes Capitalism advocates free trade, private property, self-sustaining. and competition as forces that bring about economic development. 4. The Drive to Maturity Marxism - It focuses on the root cause of inequality. ​ Characteristics: ○​ Diversification of industries. It criticizes capitalism as a contributing factor to ○​ High levels of investment in technology inequality and underdevelopment. and infrastructure. ○​ Economy absorbs new sectors and Linear Stages of Growth (Walt Rostow) adapts to global trends. This model emphasizes that all economies can ​ Economic Focus: Production shifts from heavy advance linearly, provided certain conditions are industry to more advanced sectors, such as met. services. 1.​ The Traditional Society 5. The Age of High Mass Consumption ​ Characteristics: ​ Characteristics: ○​ Subsistence agriculture dominates. ○​ Consumer goods dominate the ○​ Limited technological innovation. economy. ○​ A rigid social structure resistant to ○​ Living standards improve significantly. change.  ○​ A shift towards social welfare and ○​ The process continues, absorbing leisure activities. surplus labor. ​ Economic Focus: Sustained economic growth ​ Tipping Point: with increased focus on consumer services ○​ Once surplus labor is exhausted, wages and durable goods. in the traditional sector begin to rise due to scarcity. Lewis Structural Change Model ○​ The economy moves to a fully industrialized state. It explains the transition of an economy from a traditional agrarian system to a modern industrial 4. Capital Accumulation: economy through structural transformation. ​ Growth in the modern sector depends on 1. Dual Sectors: reinvesting profits. ​ Capital accumulation drives technological ​ Traditional Sector: progress, productivity, and industrial ○​ Predominantly agricultural. expansion. ○​ Characterized by subsistence farming and low productivity. 5. Urbanization and Wage Gap: ○​ Surplus labor (workers whose marginal productivity is near zero). ​ The transition is accompanied by urbanization ​ Modern Sector: as workers migrate from rural areas to cities. ○​ Industrial and urban-based. ​ The wage gap between the two sectors ○​ High productivity and higher wages. gradually narrows. ○​ Growth driven by capital accumulation and technological Comparative Advantage is a foundational economic progress. concept introduced by David Ricardo in the early 19th century. 2. Labor Surplus Assumption: It explains how countries, individuals, or firms can ​ In the traditional sector, there is an excess benefit from trade by specializing in producing goods supply of labor. and services where they have a relative efficiency ​ This surplus labor can be transferred to the advantage, even if they are less efficient in absolute modern sector without reducing agricultural terms compared to others. output. 3. Mechanism of Structural Change: International Dependence refers to a set of economic ​ Initial Stage: theories that explain underdevelopment in less ○​ The modern sector starts small and developed countries (LDCs) as a result of their grows by attracting labor from the dependence on more developed nations. These traditional sector. theories emphasize the structural imbalances in the ○​ Workers in the modern sector are global economy that perpetuate poverty and offered wages slightly higher than in inequality in LDCs. the traditional sector, incentivizing migration. Neoclassical Theory ​ Growth of the Modern Sector: ○​ Profits in the modern sector are ​ Underdevelopment is mainly caused by reinvested, leading to further industrial domestic issues brought about by poor expansion. economic policies, resource allocation, and government corruption.  ​ Development arises due to the promotion of and healthcare. It is measured against a fixed free markets and the reduction of government threshold, often based on the cost of meeting basic control over the economy. needs. Endogenous Growth Theory Example: The World Bank defines absolute poverty as living on less than $2.15 per day (2022 value, adjusted ​ Builds on neoclassical ideas by making for purchasing power parity). technological progress endogenous, explaining how innovation and knowledge Key Features: accumulation drive growth. ○​ Does not vary across countries or time, though the Theory of Coordination Failure is an economic threshold may be adjusted for inflation. concept that explains how multiple agents (such as ○​ Focuses on minimum physical standards required firms, governments, or individuals) fail to achieve for survival. mutually beneficial outcomes due to difficulties in ○​ Common in discussions about poverty in coordinating their actions. developing countries. This theory is particularly relevant in understanding Relative Poverty why economies or sectors may experience persistent underdevelopment or underperformance, even Definition: Relative poverty refers to a condition where though there may be clear benefits to cooperation. individuals or groups have significantly less income or resources compared to others within the same society O-Ring Theory is an economic theory developed by or economy. It is measured in relation to the societal economist Michael Kremer in 1993, which explains the average. importance of high-quality labor and the interconnectedness of tasks in production. Example: A person may be considered relatively poor if their income is less than 50% of the median income The failure of a single small part (the O-ring) caused a of their country. catastrophic failure, demonstrating how small errors in a crucial part of a process can undermine the entire Key Features: system. ○​ Varies by country and over time, depending on Lesson 5: Economic Problems as Obstacles in societal standards and income distribution. Economic Development ○​ Emphasizes inequality and social exclusion. ○​ Common in discussions about poverty in Poverty and Inequality developed countries. Impact: Widespread poverty limits consumption, Interconnection savings, and investment, reducing overall economic activity and development. Both concepts are important for understanding poverty: Explanation: Poor individuals lack the resources to ​ Absolute poverty highlights the severity of invest in education, health, or entrepreneurship, deprivation. perpetuating a cycle of underdevelopment. ​ Relative poverty sheds light on social inequality and its impacts on quality of life. Absolute Poverty Unemployment Definition: Absolute poverty refers to a condition where individuals lack the basic necessities for survival, such as food, clean water, shelter, clothing, Impact: High unemployment leads to underutilization Explanation: Hyperinflation can disrupt markets and of labor resources and reduces household income, deter long-term investment, stifling economic stalling demand and economic progress. development. Explanation: Unemployment erodes skills over time (hysteresis), making it harder for individuals to re-enter the workforce and contribute to growth. Unit 2 Application of Supply and Demand Lesson 1: Introduction and Application of Supply and Demand Demand - The willingness and ability of the consumer to purchase or buy. The determinants of demand are factors that influence the quantity of a good or service consumers Unemployment and underemployment are related are willing and able to purchase at a given price. but distinct economic concepts, reflecting different Understanding these determinants helps explain shifts aspects of labor market inefficiency. Here's a detailed in demand curves and variations in consumer comparison: behavior. Below are the key determinants: Unemployment: Refers to the situation where individuals willing and able to work at prevailing wage rates cannot find a job. Underemployment: Occurs when individuals are employed in jobs that are below their skills, education level, or availability, or when they work fewer hours than they would like. Visible Underemployment: Working fewer hours than desired (e.g., part-time instead of full-time). Example: A mechanical engineer working as a cashier. Invisible Underemployment: Working in roles that underutilize skills or education. Example: A teacher working part-time but wanting a full-time job. Inflation Impact: High inflation erodes purchasing power, discourages savings, and creates uncertainty for businesses and investors. Demand Schedule - Shows an inverse relationship ○​ Rise in the price of substitutes. between price and quantity demanded. ○​ Fall in the price of complementary goods. ○​ Changes in preferences favoring the good. The demand curve is a graphical representation of ○​ Growth in population or target market. the relationship between the price of a good or ○​ Positive future expectations (e.g., price increases service and the quantity demanded by consumers or shortages). over a specific period, holding other factors constant (ceteris paribus). It typically slopes downward from left Example: Demand for electric vehicles increases as to right, reflecting the law of demand, which states governments provide subsidies and promote that as the price of a good decreases, the quantity environmental awareness. demanded increases, and vice versa. Leftward Shift (Decrease in Demand): Occurs when consumers are willing to buy less of a good or service at the same price. Causes: ○​ Decrease in consumer income (for normal goods). ○​ Fall in the price of substitutes. ○​ Rise in the price of complementary goods. ○​ Changes in preferences away from the good. ○​ Decline in population or target market. Change in Demand vs. Change in Quantity ○​ Negative future expectations (e.g., economic Demanded downturns). A change in demand is broader, reflecting shifts in the Example: Demand for DVDs decreases as streaming demand curve due to external factors. platforms become more popular. A change in quantity demanded is specific to price Law of Demand - The higher the price, the lower the changes, leading to movement along the demand quantity that consumers are willing and able to buy or curve. purchase, on the other hand, the lower the price, the higher the quantity that consumers are willing to buy or purchase. Supply - The willingness and the ability of the supplier to supply or sell. Shifts in Demand Curve Rightward Shift (Increase in Demand): Occurs when consumers are willing to buy more of a good or service at the same price. Causes: ○​ Increase in consumer income (for normal goods).