Applied Economics Lesson 1 PDF

APPLIED ECONOMICS  WHAT IS ECONOMICS? Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants. Economic is comes from...

APPLIED ECONOMICS  WHAT IS ECONOMICS? Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants. Economic is comes from the GREEK word “OIKONOMIA” meaning “household management”  Economics have been defined in many ways. Some of these definitions are follows: According to Fajardo; Economics is the proper allocation and efficient use of available resources for the maximum satisfaction of human wants Samuelson: States that economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Nordhaus; Science of Choice. It studies how people choose to use scarce resources to produce various commodities and distribute these commodities for consumption.  Economics have been defined in many ways. Some of these definitions are follows: Sicat; as a scientific study which deals with how individuals and society in general make choices. Castillo; study of how man could best allocate and utilize the scarce resources of society to satisfy his unlimited wants. Webster; a branch of knowledge that deals with production, distribution, and consumption of goods and services. Economics is devoted to understanding how society allocates its scarce resources. Because resources are scarce, we need to study how society choose from the menu of possible goods and services, how different commodities are produced and priced and who gets to consume the goods that society produce. Importance of Economics Guides us how to make a living, how to run a business, how to distribute properly our available scarce resources, and how to maximize our profits and consumer satisfaction. Economic is important in order to understand problem facing the citizen and the family. Help government promote growth and improve the quality of life while avoiding depression and inflation and to analyze fascinating patterns of social behavior. The Nature of Economics Economics is a Science: Like any other science, its laws and principles are arrived at only after a long series of observation and experimentations. The body of knowledge is made up of different explanations. An explanation of a certain event is called THEORY. A theory may become successful theory if its predictions are confirmed by actual observations and must gain universal acceptance. The Nature of Economics Economics, classified Social Science because it deals with the study of man’s life and how he lives with other men. It is concerned with human being and his behavior. The study of the relations between people during production, distribution and consumption of wealth in human society. In other words, economics, is the study of relationship established in the production and consumption of goods and the transfer of wealth to produce and obtain those goods among people. Economics explains how people interact within markets to get what they want or accomplish certain goals Described all aspects of country’s economy, such as how a country uses its resources, how much time laborer devote to work and leisure, the outcome of investing in industries or financial product, the effects of taxes on a population, and why businesses succeed or fail. Obviously, Economics is interdependent to other social sciences like; Psychology, History, Sociology, Political Science, Geography, and Religion. Of other Social sciences, Economics has more advantages as a scientific discipline for two major reasons: 1. Economic motives of human beings may be more regular and therefore persistent. They can be more predictable. Economic motives refer to the reasons behind individuals' decisions regarding the allocation of their resources, such as time, money, and effort. Understanding these motives is crucial for analyzing human behavior in economic contexts Economic motives are a fundamental aspect of human behavior that can be analyzed and predicted, providing valuable information for understanding economic dynamics. 2. There is more factual information in the form of statistics. This gives a substantial basis for verification and formation of alternatives economic theories. Factual information in the form of statistics is essential for understanding and interpreting the world around us. By relying on objective data, we can make informed decisions, identify trends, and gain insights into various fields such as economics, health, and social sciences. Statistics transform raw data into meaningful information, allowing us to draw conclusions and make predictions based on empirical evidence. The study of Economics is divided into two Branches; MACROECONOMICS AND MICROECONOMICS 1. Macroeconomics is a branch of economics that studies the behavior and performance of an economy as a whole. It focuses on aggregate changes and trends rather than individual markets. Understanding macroeconomics is essential for analyzing the economic health of a nation and making informed decisions regarding fiscal and monetary policies. Key Concepts in Macroeconomics 1. Gross Domestic Product (GDP)  GDP is the total monetary value of all finished goods and services produced within a country's borders in a specific time period. It serves as a broad measure of overall economic activity and is used to gauge the economic performance of a nation. 2. Unemployment Rate  The unemployment rate measures the percentage of the labor force that is unemployed and actively seeking employment. It is an important indicator of economic health, as high unemployment can signal economic distress. 3. Inflation  Inflation refers to the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks often aim to control inflation to maintain economic stability. 4. Fiscal Policy Fiscal policy involves government spending and tax policies to influence economic conditions. It can be used to stimulate a struggling economy or cool down an overheating one. Key Components of Fiscal Policy 1. Government Spending: This includes all government expenditures on goods and services, such as infrastructure projects, education, healthcare, and defense. Increased spending can lead to job creation and economic growth. 2. Taxation: This involves the government's ability to collect revenue through taxes. Changes in tax rates can affect consumer spending and investment. Lower taxes can encourage spending, while higher taxes may help to reduce inflation. Examples of Fiscal Policy 1. Stimulus Packages: During economic recessions, governments may implement stimulus packages that include increased government spending and tax cuts to boost economic activity. For example, in response to the 2008 financial crisis, the U.S. government enacted the American Recovery and Reinvestment Act, which included tax rebates and increased spending on infrastructure. 2. Infrastructure Investment: A government may decide to invest heavily in infrastructure projects, such as building roads, bridges, and schools. This not only creates jobs but also enhances productivity in the long run. 3. Tax Cuts: A government might reduce income tax rates to increase disposable income for consumers. This can lead to increased consumer spending, which can help stimulate economic growth. 4. Social Welfare Programs: Expanding social welfare programs, such as unemployment benefits or food assistance, can help support individuals during economic downturns, thereby stabilizing the economy. 5. Countercyclical Policies: During periods of high inflation, a government may decide to reduce spending or increase taxes to cool down the economy and bring inflation under control. 5. Monetary Policy Monetary policy is conducted by a nation's central bank and involves managing the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity. Key Components of Monetary Policy 1. Interest Rates: Central banks set benchmark interest rates, which influence the rates that banks charge each other for loans. Lowering interest rates makes borrowing cheaper, encouraging spending and investment, while raising rates can help cool down an overheated economy. 2. Money Supply: This involves controlling the amount of money circulating in the economy. Central banks can increase the money supply through various mechanisms, such as purchasing government securities, or decrease it by selling securities. 3. Open Market Operations: This is the buying and selling of government bonds in the open market to regulate the money supply. When a central bank buys bonds, it injects money into the economy, while selling bonds takes money out of circulation. 4. Reserve Requirements: Central banks can set the minimum reserves each bank must hold. Lowering reserve requirements allows banks to lend more, increasing the money supply, while raising them restricts lending. Examples of Monetary Policy 1. Lowering Interest Rates: During an economic recession, a central bank may lower interest rates to stimulate borrowing and spending. For example, in response to the 2008 financial crisis, the U.S. Federal Reserve lowered interest rates to near zero to encourage economic recovery. 2. Quantitative Easing: This is a non-traditional monetary policy where a central bank purchases longer- term securities to increase the money supply and encourage lending and investment. The Federal Reserve implemented quantitative easing after the 2008 crisis to support the economy. 3. Raising Interest Rates: If inflation is rising too quickly, a central bank may decide to increase interest rates to reduce spending and borrowing. For instance, in 2021, many central banks began signaling potential interest rate hikes to combat rising inflation. 4. Open Market Operations: A central bank might buy government bonds to inject liquidity into the economy, or sell them to absorb excess money. This was seen during the COVID-19 pandemic when central banks engaged in extensive bond-buying programs. 5. Forward Guidance: Central banks may communicate their future policy intentions to influence expectations and economic behavior. For example, if a central bank indicates that it plans to keep interest rates low for an extended period, it can encourage businesses and consumers to spend and invest Importance of Macroeconomics Understanding macroeconomics is crucial for several reasons: - Policy Formulation: Governments and policymakers use macroeconomic indicators to formulate policies that promote economic growth and stability. - Investment Decisions: Businesses and investors analyze macroeconomic trends to make informed decisions about investments and resource allocation. - Global Economic Interactions: Macroeconomics helps in understanding how economies interact on a global scale, influencing trade, investment, and economic development. The study of Economics is divided into two Branches; MACROECONOMICS AND MICROECONOMICS 2. Microeconomics is a branch of economics that focuses on the behavior of individuals and firms in making decisions regarding the allocation of limited resources. It examines how these entities interact within markets, how they respond to changes in prices, and how they make choices that affect supply and demand. Key Concepts in Microeconomics 1. **Supply and Demand** - Supply refers to the quantity of a good or service that producers are willing to sell at various prices. - Demand refers to the quantity of a good or service that consumers are willing to purchase at various prices. - The interaction between supply and demand determines the market price and quantity of goods sold. 2. **Elasticity - Elasticity measures how much the quantity demanded or supplied of a good responds to changes in price. - Price Elasticity of Demand indicates how sensitive consumers are to price changes. - Price Elasticity of Supply indicates how sensitive producers are to price changes.  Key Concepts in Microeconomics 3. **Market Structures** - Microeconomics studies different types of market structures, including: - Perfect Competition: Many firms, identical products, and no barriers to entry. - Monopoly: A single firm controls the entire market. - Oligopoly: A few firms dominate the market, often leading to collusion. - Monopolistic Competition: Many firms sell similar but not identical products. 4. **Consumer Behavior** - Microeconomics analyzes how consumers make decisions based on their preferences, income, and the prices of goods and services. - Concepts such as utility, which measures satisfaction, and the budget constraint, which represents the limits of consumer spending, are essential. 5. **Production and Costs** - Firms must decide how to produce goods efficiently and at what cost. - Understanding fixed and variable costs, as well as economies of scale, is crucial for firms to maximize profits.