Applied Economics Chapter 1 PDF

**BME 115: APPLIED ECONOMICS** **CHAPTER 1: INTRODUCTION TO ECONOMICS** **Learning Outcomes** - Explain the principles of economics as social science - Identify the causes of economic problem - Describe how productive systems operate in the economies - Explain economic theories in appl...

**BME 115: APPLIED ECONOMICS** **CHAPTER 1: INTRODUCTION TO ECONOMICS** **Learning Outcomes** - Explain the principles of economics as social science - Identify the causes of economic problem - Describe how productive systems operate in the economies - Explain economic theories in applied economics. 1. **ECONOMICS AS SOCIAL SCIENCE** **SOCIAL SCIENCE**- is one field of study that relates to human behavior and society **ADAM SMITH** \- popularly known as Father of Economics, and he was the author of the book An Inquiry into the Nature and Causes of the Wealth of Nations, which was published in 1776. \- it was Adam Smith who made economics a social science **ECONOMICS** According to Villegas 1988 \- the term economics was coined or derived from Greek word oekonomia, or oeconomicus which is interpreted as the management of the household affairs. \- Economics is commonly defined as a social science that explains how the unlimited demands and desires of man or consumer is given satisfaction by the goods and services produced using limited economic resources available in the country According to Miller, 2003 \- Economics is the study of how people allocate their limited resources in an attempt to satisfy their ultimate wants. As such, he said, economics is the study of how people make choices. Thus, the primary reason why there is a need to study and understand Economics is because the subject Economics deals with issues and concerns pertaining to man's survival as human being, that is, by satisfying his basic need and unlimited demands, using the limited economic resources. **THE ECONOMIC REASOURCES AS FACTORS OF PRODUCTION** The economic resources are the country's main source of wealth and basically contribute to the increase of the country's national revenues. The factors of production include: 1. **LAND** Land as a factor of production is vital in the production process. It is defined as everything found above and underneath the earth that is used to produced other goods. Land is not limited to physical ground but also encompasses all natural resources like minerals, forests, water, and other raw materials found in nature. **Examples:** Agricultural land, oil deposits, forests, rivers, and air. **Characteristics:** Land is a finite resource and cannot be created by human effort. Its availability and quality can significantly impact economic activities, especially in sectors like agriculture, mining, and tourism. 2. **LABOR** Labor refers to the physical and mental components of human resources that contribute to the conversion of all raw materials into finished and consumable goods. According to Bade and Parkin, it is the work time and work effort that people devote to producing goods and services. **Examples**: Factory workers, teachers, doctors, engineers, and service providers. **Characteristics**: Labor is influenced by factors such as education, skills, training, health, and motivation. The productivity of labor can vary based on these factors, affecting overall economic output. Labors as factors of production, maybe classified into three sectors: A. **EMPLOYED** -employed people are components of labor force, whose age is from 15 years old and above, who are physically and mentally qualified and are willing to work and contribute to the economy's production. Labor force pertains to the number of people who may qualify for employment whose age level is from 15 years old and above. B. **UNEMPLOYED** \- considered unemployed are members of the labor force who are qualified to be employed but there are no demands for their services, or themselves are not willing to work. C. **UNDEREMPLOYED** -people who are qualified for a higher employment position but over qualified for their current employment, thus receiving lower salary that that what they should be compensated. Likewise, underemployed are working less number of hours that resulted also to lower take home pay 3. **CAPITAL** Capital, as a factor of production, is referred to in economics as finished goods used to produce other goods. Capital includes all man-made resources used in the production process. It refers to tools, machinery, equipment, and buildings that help in producing goods and services. **Examples**: Factories, machinery, computers, vehicles, and infrastructure. **Characteristics**: Unlike land, capital is not naturally occurring but is created by human effort. It can be increased over time through investment and savings. Capital is essential for enhancing productivity and efficiency in production. 4. **ENTREPRENEURS** The entrepreneurs are part of the human resources who are experts in the management of production resources or the factors of production. Entrepreneurship is the ability to combine the other three factors of production (land, labor, and capital) to create goods and services. It involves risk-taking, innovation, and decision-making. **Examples**: Business owners, startup founders, and innovators who bring new products to market. **Characteristics**: Entrepreneurs drive economic growth by identifying opportunities, creating new businesses, and generating employment. They take on the risks associated with starting and managing a business and are rewarded with profits if successful. **THE ECONOMIC PROBLEM AND THE BASIC ECONOMIC QUESTIONS** **SCARCITY** Scarcity is a condition when unlimited demands of man exceeds the available supply of production resources needed in producing goods. Miller mentioned in his book that scarcity exists because human wants always exceed what can be produced with the limited resources and time that nature makes available. Scarcity means that there are not enough resources (like land, labor, capital, and entrepreneurship) to produce everything that people desire. This applies to both natural resources and man-made resources. **The Basic Economic Questions** To address the economic problem of scarcity, every society, whether it's a small tribe or a large industrial nation, must answer three basic economic questions: 1. **WHAT TO PRODUCE?** This question addresses what kinds of goods and services should be produced and in what quantities. Since resources are limited, societies must decide which needs and wants to satisfy. - - 2. **HOW DO WE PRODUCE?** This question focuses on how to combine resources to produce goods and services efficiently. It involves choosing the production techniques and methods that will be used. - - 3. **FOR WHOM TO PRODUCE?** This question is about determining who will receive the goods and services produced. It involves the distribution of output and wealth within a society. - **Considerations**: The distribution can be based on factors like income, wealth, social status, or need. Decisions here are influenced by economic systems (capitalism, socialism, mixed economies) and government policies. - **Examples**: Should healthcare be provided universally or only to those who can afford it? How should income and wealth be distributed? Should resources be allocated to benefit the rich, the poor, or equally to everyone? **BASIC TYPES OF ECONOMIC SYSTEMS** 1. **CAPITALISM** This system is characterized by private ownership and control of most resources (land and capital) in order to maximize its utilization. It relies on the decisions made in the market between the buyer and the seller with very little or sometimes no government intervention. "**LAISSEZ FAIRE"** - French meaning "leave alone". Under this policy, the transaction between the buyer and the seller is not dictated nor controlled by the government. 2. **SOCIALISM** An economic system which allows the government to manage and control the major and key industries, while the rest are left for the private to manage or acquire. In this type of economy system the administration of resources and decision making are highly centralized, that is, no movement in the economy can be expected unless there are directives or policies coming from the economic authorities, or from the government. 3. **COMMUNISM** Communism was derived from a French term, communisme, which means common. Communism is an economic system in which the government owns and control the factors of productions, including transport products. 4. **TRADITIONAL ECONOMY** This system is very common in developing economies, where decisions are based on customs, beliefs, and practices handed down from one generation to another. People under this economic system are referred to as traditional because they follow the old ways of producing their food and other means of their livelihood. **THE DIFFERENT ECONOMIC ACTIVITIES** Economic activities are specific work done to complete the cycle from the creation or production of goods or services to utilization or consumption of finished goods. **PRODUCTION** Production is defined as the process of creating goods and services, and the conversion of raw materials into finished or consumable goods. **DISTRIBUTION** This activity is referred to as the process to allocate or to apportion the different fruits of production to the owners of the different factors of production, such as land, labor, capital and entrepreneur. **EXCHANGE** This economic activity is also referred to as the delivery of the finished goods from the producer to the end-user. In this activity money is used to facilitate delivery of goods to the consumer, where money is considered as medium of exchange. **CONSUMPTION** This economic activity pertains to the utilization or consumption of goods purchased or bought by the buyer to satisfy his demand. **PUBLIC FINANCE** This activity has to do with the management of the nations monetary or financial resources by the government. It refers to the income and cash outflow of the government in the pursuit of national objectives, such as the delivery of public service. **ECONOMIC PRICIPLES AND THEORIES** Theory is an idea or set of ideas that is suggested or presented as possibility true but that is not known or proven to be true. (Webster's Dictionary, 2001) It is a statement or proposition used to explain and predict behavior in the real world. (R.Sexton, 2012) 1. **THEORY/PRINCPLE OF DEMAND AND SUPPLY**- this theory explains how consumer behaves as regards the quantity to be demanded, i,e. when to buy more and when to buy less goods. 2. **THEORY OF PUBLIC CHOICE**- it refers to the study of collective decision making.(R.Miller, 2003). According to Miller collective decision making involves the actions of voters...and many other groups and individuals 3. **THEORY OF THOMAS MALTHUS ON POPULATION**- this theory discusses the effects of population to the nation's level of production. In this theory, Malthus predicted that population growth or increase in population would, eventually, increase faster than the growth of food production, specifically agricultural.