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APPLIED ECONOMICS
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APPLIED ECONOMICSTOPIC #1: 3. Capital
Economics as a Social Science and as Applied - It is a man-made factor of production used to create
another product. Examples are machinery and
Science
equipment used in manufacturing companies. The
Economics
payment for capital is interest.
- Refers to the effective management of scarce
4. Entrepreneurship
resources to satisfy unlimited human wants and
- It is a factor of production that integrates land,
needs.
labor, and capital to create new products. An
- It is a social science that studies the means by which
entrepreneur is an individual who makes decisions
individuals, groups and societies produce, distribute,
with regards to production and utilizing the other
and consume products and services.
factors of production. A successful entrepreneur not
only creates new products – he or she also innovates
As the modern economy is primarily defined by
by improving the old ones.
knowledge and technology, the conventional
definition of Economics which focuses on matching
The Basic Economic Questions
scarcity and wants is challenged by the need for
1. What to produce?
better organization to effectively address scarcity and
- A society determines the kind and quantity of
human wants. As such, economists recognize the
products it will produce depending on what the
influence of incentives, choices, and rules in
consumers want to buy or are willing to pay for.
managing an economy.
2. How to produce?
- A society decides who will produce goods and what
Basic Economic Concepts process of production will be used. Goods may be
Scarcity - It is a fundamental concept of economics, produced by corporations, small business-owners, or
which refers to the limitations of resources, the government itself. The process of producing
particularly economic resources such as land, labor, goods may be addressed depending on the costs and
capital, and entrepreneurship. Scarcity results in the availability of resources needed.
challenges with regard to properly allocating these 3. For whom to produce?
resources to all sectors of the economy. - The question revolves around the issue of who will
Needs - Things that are desired which are essential benefit from the goods and services produced.
for human survival. This depends on the distribution of wealth in a
Wants - Are those that are desired but are not particular society. Therefore, a consumer who has the
essential for survival. capacity to pay for certain goods and services is more
likely to benefit than one who could not afford them.
Economic Resources and Factors of
Production Economic System – is characterized by the type of
1. Land institution responsible for the management and
- Refers to all natural resources that exist without allocation of resources used in the production of
man’s intervention. It encompasses all things derived goods and services.
from the forces of nature such as air, water, forests,
vegetation, and minerals. The payment for land is Three Known Economic Systems
called rent. 1. Traditional Economic System – It is where
2. Labor decisions are based on traditions and practices upheld
- Refers to human inputs such as manpower skills over the years and passed on from generation to
that are used in transforming resources into different generation.
products that meet our needs. The payment for labor 2. Market Economic System – it is where all
is called wages or salaries. economic resources are owned by private entities.
3. Command Economic System – it is where all
resources are owned by the government.
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, APPLIED ECONOMICS
Rationality Theory – is a proposition about certain related
- Rationality is defined as the assumption that variables that explains a certain phenomenon. It
individuals are consistent and logical in their proposes a general principle or body of principles
decision-making, and that they seek an outcome that regarding a phenomenon which is deemed plausible
is most beneficial to them. Economics assume that or scientifically acceptable.
individuals make decisions rationally and that is Model – a representation or framework which
possible to predict certain behavioral outcome. presents significant principles and describes how
Opportunity cost and Trade-off variables are related.
- Rationality refers to the cost of giving up an
alternative by selecting the best choice. Economic models are used by economists to
- Trade-off happens when once the choice is made, determine the relationships among elements in an
you abandon all other options where you can no economy, apple principles in varied scenarios, make
longer go back and undo such choice. Trade-offs predictions, and propose solutions. Models also
could result in either the satisfaction of needs or a provide a means visualize variables analysed. Models
failure to meet them. can include graphs, diagrams, or mathematical
formulae.
Applied Economics
- The application of economic theory and Major Assumptions in Economics
econometrics in real-world situations. 1. Rationality – Economists assume that individuals
- A field of economics is concerned with using act in a logical and predictable manner, and pursue
economic theories and models, as well as its related goals which will benefit them.
principles and concepts, to understand contemporary 2. Profit Maximization – It is assumed that
socioeconomic issues. participants expect to gain something from their
transactions. Individuals aim to maximize utility,
Economic Development – (Todaro) defined as the while firms intend to maximize their profit.
sustained elevation of an entire society and social 3. Perfect information – It is assumed that consumers
system toward a better and more humane life. and producers have complete and accurate
Development is defined by the following core values: information about products, services, prices, utility,
1. Sustenance – refers to ensuring that society is able quality, and production methods. This assumption
to provide for basic needs like food, shelter, health, enables economists to study market processes and
and protection. effects of policies on markets more accurately.
2. Self-esteem – refers to self-respect, reputation, 4. Ceteris paribus – Means “all things being equal,”
pride, and acknowledgement. refers to the assumption which controls the effects of
3. Freedom – involves providing for a wide variety of other variable apart from those that are being
choices for societies as well as minimizing external analysed in the study.
limitations.
Fallacies in Economics
Aspects of Economic Study and Analysis 1. Failure to apply ceteris paribus – Error in analysis
1. Positive Economics – is a principle in economic committed when an individual considers other
analysis which focuses on describing what exists and extraneous variables in studying economic
how things work. It strives to give an objective phenomenon.
description of the state of things. 2. Post hoc fallacy – post hoc ergo propter hoc which
2. Normative Economics – focuses on the outcome of describes how people make the mistaken notion that
economic behavior, evaluates and makes judgements, since a change happened after an event, this then
and proposes courses of action. means that such change was caused by the event that
came before it. This fallacy is most evident when
considering certain “superstitious” beliefs.
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