Applied Economics Reviewer (1st Quarter) PDF

Reviewer in Applied Economics (1st Quarter) Economics as SOCIAL SCIENCE Economics is classified as a social LESSON 1 science because it studies th...

Reviewer in Applied Economics (1st Quarter) Economics as SOCIAL SCIENCE Economics is classified as a social LESSON 1 science because it studies the way in which societies solve the fundamental NATURE AND SCOPE OF ECONOMICS AS A problem of reconciling unlimited wants of SOCIAL SCIENCE AND APPLIED SCIENCE individuals with limited resources. It uses scientific method by observing What is Economics? reality and addressing questions and problems to explain and arrive at the Definition of Economics formulation of theories and models. Economics is the study of social behavior Concepts to remember: guiding in the allocation of scarce resources to meet the unlimited needs Unlimited Human Wants and Needs and desires of the individual members of a - the concept of scarcity is coupled with the given society. fact that human wants, and needs are Adam Smith - Father of Modern unlimited. Because of scarcity, every Economics person must learn how to make decisions in choosing how to maximize the use of Other definitions of Economics scarce resources to satisfy as many wants and needs as possible. Paul Samuelson (Economics) - the study of how people and society end Economic Resources and Factors of up choosing, with or without use of money, Production to employ scarce resources that could - Land refers to natural resources that exist have alternative uses to produce various without man’s intervention. It commodities among various persons and encompasses all things derived from the groups in society. forces of nature such as air, water, forests, vegetation, and minerals. Roger Le Roy Miller (Economics, Today and - Labor refers to human inputs such as Tomorrow) manpower skills that are used in - “economics concerns situations in which transforming resources from different choices must be made about how to use products that meet our needs. limited resources, when to use them and - Capital is a man-made factor of production for what purposes. Resources can be used to create another product. defined as the things people use to make - Entrepreneurship is the factor of the commodities they want.” production that integrates land, labor, and capital to create new products. Feliciano R. Fajardo - Economics is the study of the proper allocation and efficient use of available scarce resources in the production of goods and services for the maximum satisfaction of human needs and wants. Hall and Loeberman (Macroeconomics: Principle and Applications) - the study of choice under the condition of scarcity. The answers for what, how, and for whom to ❖ Economists assume that produce are influenced by the structure of a individuals make decisions society’s economic system. rationally and that it is possible to predict certain behavioral Economic System outcomes. Characteristics of Free Market Opportunity Cost is one of the evident ❖ Little government involvement in the effects of scarcity. When resources are economy. (Laissez Faire = Let it be ) scarce or limited, consumers are ❖ Individuals OWN resources and answer compelled to choose how to manage them the three economic questions. efficiently and decide how much of their ❖ The opportunity to make profit gives wants or needs will be satisfied and how people incentive to produce quality items much of them will be left unsatisfied. efficiently. ❖ Hence, when a need is pursued, all ❖ Wide variety of goods available to other alternatives are forgone. And consumers. the more we have of a certain ❖ Competition and Self-interest work good, the more we sacrifice other together to regulate the economy (keep things. prices down and quality up). ❖ An exchange where you give up one thing in order to get something Command Economic System else that you also desire is called ❖ In a centrally planned economy trade-off. (communism) the government ❖ owns all the resources Economics as APPLIED SCIENCE ❖ decides what to produce, how much to produce, and who will receive it. Economics as applied science is the ❖ Examples: Cuba, China and North Korea application of economic theories and models, as well as related principles and Mixed economic system concepts, to understand and predict the ❖ is where all three questions are answered outcomes of contemporary socioeconomic by both the government and private issues. In simple definition it is observing entities in consideration of their mutual how theories work in practice. benefit. Economic resources are owned by Economics as an applied science is the both. Today, most countries apply this type formulation of general theories through of economy but in different proportions testing, mainly using data from the past. –some countries employ economic system which is more command-oriented than Application of Economics as Applied Science market-oriented, while others have a more market-oriented economic system. ❖ Economics as applied science becomes a powerful tool to reveal the true and Decision Making and Rationality complete situation in order to come with things to do. Scarcity requires that people should ❖ Economics as applied science acts as a make choices when choosing the mechanism to determine what steps can resources that they wish to own or utilize. reasonably taken to improve current ❖ Determining how each individual or economic situation groups of individuals will behave ❖ Economics as applied science can teach given certain changes in the valuable lessons in order to avoid the economy is an important part of recurrence of a negative situation, or at economic study. least minimize the impact to review that ❖ Economics uses the concept of steps were taken to improve and correct rationality to predict the actions or similar situations and continue good behavior of people.  strategies to keep the economy flowing in a correct direction. Fallacy refers to errors in judgement or conclusions due to faulty reasoning. The following Approaches of Economics as Applied Science are some fallacies that are encountered in economic analysis. Uses econometrics Input-output analysis 1. Failure to hold things constant under Historical analogy ceteris paribus. This is an error in Common-sense or vernacular analysis committed when an individual considers other extraneous variables in studying an economic phenomenon. This results in invalid conclusions since they are no longer in keeping with the economic theory or model being considered. 2. Post hoc fallacy. This fallacy relates to the Latin phrase post hoc (false cause) ergo propter hoc which describes how people make the mistaken notion that since a change happened after an event, then such change was caused by the event that came before it. ASSUMPTIONS in Economics 3. Fallacy of composition. This fallacy occurs when one considers a trait of one 1. Rationality. Economists assume that part or aspect of something as true or individuals act in a logical and predictable applicable for the whole. This also occurs manner and pursue goals which will when a person thinks that a phenomenon, benefit them. as experienced by an individual or a 2. Profit Maximization. In analyzing the certain group, can be applied to a larger behavior of individuals and firms in group or the general population. markets, it is assumed that participants 4. Sweeping generalization. This fallacy expect to gain something from their refers to a statement that oversimplifies a transactions. Individuals aim to maximize specific scenario presenting it as a general utility, while firms intend to maximize their rule. profit. 3. Perfect information. In most markets, it is Economics as SOCIAL AND APPLIED SCIENCE assumed that consumers and producers have complete and accurate information Economics as an applied scene is both qualitative about products, services, prices, utility, and quantitative in nature and formulates general quality and production methods. This theories through testing mainly using data from assumption enables economists to study the past. It studies the factors that determine a market processes and effects of policies country’s national income, savings, investment, on markets more accurately. output and employment which promotes 4. Ceteris Paribus. This latin phrase, which economic growth. Economics as applied science means “all things being equal”, refers to uses econometrics and analyse theories and the assumption which controls the effects models to predict outcomes of socioeconomic of other variables apart from those that are issues and likewise propose solutions to being analyzed in the study. Majority of economic problems. economic theories and models rely on this assumption since it simplifies scenarios LESSON 2 and enables the analysis of data. FALLACIES in Economics UTILITY AND APPLICATION OF APPLIED ECONOMICS TO ECONOMIC PROBLEMS AND ISSUES The Production Possibilities and Frontier: A Model of Opportunity Cost and Development A Production Possibilities Graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources. This model graphically demonstrates scarcity, trade - offs, opportunity costs, and efficiency. The Product Possibilities Frontier is an illustration that is best used to highlight the economic problem because if an economy moves from one point on the Production Possibilities Frontier to another, it involves an opportunity cost as limited and scarce resources to be diverted from one industry to another. This increases the production of one good but decreases the production of the other. The decrease in production represents the opportunity cost and its quantified by the slope of the Production Possibilities Frontier at any one point. 4 key assumptions of Production Possibilities Graph (PPG) Only two goods can be produced Full employment of resources Fixed resources (Ceteris Paribus) Fixed Technology Comparative Advantage Is the ability of a country to produce a good or service for a lower opportunity cost than other countries. Comparative advantage is what you do best while also giving up at the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. The concept of comparative advantage was developed in the early 1800s by the economist David Ricardo. He argued that  a country boosts its economic growth the most by focusing on the industry in which LESSON 3 it has the most substantial comparative advantage. LAW OF SUPPLY AND DEMAND IN ECONOMICS: HOW IT WORKS (Analyze Competitive Advantage market demand, market supply, and market Competitive advantage is what a country, equilibrium.) business, or individual does that provides a better value to consumers than its Law of Supply and Demand competitors. There are three strategies companies use to gain a competitive ❖ A theory that explains the interaction advantage. First, they could be the between the sellers of a resource and the low-cost provider. Second, they could offer buyers for that resource. a better product or service. Third, they could focus on one type of customer. Market Competitive advantage is what makes you Market is one of the many varieties of more attractive to consumers than your systems, institutions, procedures, social competitors. relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers. Demand Demand refers to the amount of goods and services consumers are willing and able to purchase given a certain price. Absolute advantage Supply Is anything a country does more efficiently Supply refers to the willingness of sellers than other countries. Nations that are to produce and sell good at various blessed with an abundance of farmland, possible prices. fresh water, and oil reserves have an absolute advantage in agriculture, Surplus gasoline, and petrochemicals. Surplus is experienced when the price of a Just because a country has an absolute good is above the equilibrium price. It may advantage in an industry, though, doesn’t also be experienced when government mean that it will be its comparative sets a price floor above the equilibrium advantage. That depends on what the price. trading opportunity costs are. Suppose its neighbor has no oil but lots of farmland Shortage and freshwater. The neighbor is willing to Shortage occurs when the quantity trade a lot of food in exchange for oil. Now demanded exceeds the quantity supplied. the first country has a comparative This happens when the price is below the advantage in oil. It can get more food from equilibrium level. its neighbor by trading it for oil than it could produce on its own. Price Ceiling/Floor A price ceiling is the maximum price set by such imposition while a price floor is the minimum price set by imposition.  British economist Alfred Marshall Law of Demand (1842-1924), a specialist in A fundamental principle of economics that microeconomics, contributed significantly states that at a higher price consumers will to supply theory, especially in his demand a lower quantity of goods. pioneering use of the supply curve. He emphasized that the price and output of a ❖ Demand is derived from the law of good are determined by both supply and diminishing marginal utility, the fact that demand: The two curves are like scissor consumers use economic goods to satisfy blades that intersect at equilibrium. their most urgent needs first. ❖ A market demand curve expresses the sum of quantity demanded at each price LESSON 4 across all consumers in the market. ❖ Changes in price can be reflected in THE LAW OF DEMAND AND SUPPLY movement along a demand curve, but they do not by themselves increase or Quantity Demanded decrease demand. It is the number of units that a buyer is ❖ The shape and magnitude of demand willing to purchase at any given price. shifts in response to changes in consumer preferences, incomes, or related economic Demand goods, NOT to changes in price. It is the set of all quantities demanded at different price levels. What Is the Law of Supply? The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the number of items for sale. Driven by profits, suppliers will sell more ❖ The law of supply says that a higher price with higher prices and less at lower prices. will induce producers to supply a higher quantity to the market. ❖ Because businesses seek to increase revenue, when they expect to receive a higher price for something, they will produce more of it. ❖ Meanwhile, if prices fall, suppliers are disincentivized from producing as much. ❖ Supply in a market can be depicted as an upward-sloping supply curve that shows how the quantity supplied will respond to various prices over a period of time. ❖ Together with demand, it forms half of the law of supply and demand. ❖ When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. (N. Gregory Mankiw) Market equilibrium is the point where the quantity demanded is equal to the quantity supplied. The price where the quantity demanded is equal to the quantity supplied is called the equilibrium price or the market clearing price. There are two market systems, free market or capitalism, and command economy or communism or socialism. Many countries adopt a mixed market system where it adopts both capitalist and socialist ideas. The law of supply states that as price increases, quantity supplied increases; as price decreases, quantity supplied also decreases. The law of demand states that as price increases, quantity demanded decreases; as price decreases, quantity demanded increases. Quantity demanded and quantity supplied reflects buyers' willingness and ability to purchase and sellers' willingness and ability to produce goods and services. Market equilibrium is the point where quantity supplied is equal to quantity demanded.