APPLIED ECONOMICS REVIEWER

What is economics?
The word ‘Economics’ comes from two old Greek words - ‘oikon’, which means ‘home’ and
‘nomos’ which means ‘management’. Therefore, economics literally means ‘management of the
home’. However, the meaning is now much larger, meaning the management of all world resources.

According to Richard Lipsey, “Economics is the use or allocation of scarce resources to meet man’s ulimited wants and
needs.”

(People cannot have everything they want. Consumers are limited by their income while producers are limited by the
factors of production)

Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both
individually and collectively. The study of how to allocate resources in conditions to scarcity.
 It is the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants
and needs.
Branches of Economics
Microeconomics vs Macroeconomics
Microeconomics is the close-up view of the economy, studying individual and business decisions. It also called bottom-
up approach that focuses on supply and demand, and other forces that determine price levels. It is the study of how
individuals and companies make decisions to allocate scarce resources. It studies the decision and choices of the
individual units and how these decisions affects the prices of goods in the market.
(Porter’s five forces of analysis)
*Bottom-up approach

 Bottom-up investing is an investment approach that focuses on analyzing individual stocks and de-emphasizes
the significance of macroeconomic and market cycles.
 Bottom-up investors focus on a specific company and its fundamentals, whereas top-down investors focus on
the industry and economy.
 The bottom-up approach assumes individual companies can do well even in an underperforming industry.

“According to Kotler and Armstrong, the microenvironment consists of the components close to the company that
directly affect its ability to maintain its position in the market.”

1. Suppliers
2. Intermediaries
3. Customers
4. Competitors
5. Public

Macroeconomics is the overall view of the economy looking at the decisions of countries and governments. It takes a
top-down approach that tries to determine the course of the economy as a whole. It focuses on the aggregate supply
and demand. Consists of bigger factors that are beyond the control of the management. It includes fiscal policy, GDP,
GNP, unemployment, government spending, etc. It studies economic system as a whole rather than the individual
economic units that make up the economy.

(PEST Analysis)
*Top-down approach

 Top-down usually encompasses a vast universe of macro variables while bottom-up is more narrowly focused.
 Top-down investing strategies typically focus on exploiting opportunities that follow market cycles while
bottom-up approaches are more fundamental in nature.
  While top-down and bottom-up can be very distinctly different they are often each used in all types of financial
approaches like checks and balances.
 Demographic
 Economic
 Natural
 Technological
 Political
 Cultural

MICROECONOMICS MACROECONOMICS
 Studies individual income  Studies national income
 Analyzes demand and supply of labor  Analyzes total employment in the economy
 Deals with households and firms decisions  Deals with aggregate decisions
 Studies individual prices  Studies overall price level
 Analyzes demand and supply of goods  Analyzes aggregate demand and aggregate
supply
Basic Economic Problem of the Society
To solve the SCARCITY AND RESOURCE ALLOCATION
1. what to produce and how much
 society must decide what goods and services should be produced in the economy and the quantity.
 Given limited resources of labor, materials and time, economic agents have to decide what to produce
 Primitive economics focuses on basic necessities
 Modern economics focuses on leisure and education
2. how to produce
 is a question on the production method that will be used to produce the goods and services. This refers to
the resource mix and technology that will be applied in productions.
 The method of production with the highest efficiency and yield the highest output shall be employed/used.
 Application of the right combination of resources and technology
 Least amount of inputs yields Highest Output
 Capital intensive requires more budget for the product
 Labor intensive requires more work for the product
3. for whom to produce
 is about the market for the goods. For whom will the goods and services be produced? The young or old, the
male or female market, the low income or the higher income groups?
 Producers must consider the target market to know the demands in the economy
 This includes how to distribute those goods and services among the population
Summarized:
1. “WHAT” to produce?
(to make)
2. “HOW MUCH” to produce? (quantity)
3. “HOW TO” produce?
(manufacture)
4. “FOR WHOM” to produce?
(who gets what)
Economic Systems is a mean by which society determines the answer to the basic economic questions. It controls the
factors of production and distribution of goods and services.

Market economics is defined as "Individual are free to exchange their labor for wages or start a business."

4 Types of Economic Systems

1. Traditional economy (subsistence economy)- decisions are based on the traditions and practices upheld over
the years and passed on from generation to generation. Methods are stagnant and therefore not progressive.
 Traditional societies exists in primitive and backward civilizations. Is based on goods, services, and work, all of
which follow certain established trends. It is the very basic and most ancient type.
 It centers on family or tribe that exists in hunter-gatherer or nomadic society.
 Resources are owned and controlled by individuals
 This system lacks the potential to generate surplus
 Economic decisions are made by the basic principles of demand and supply
 There is very little division of labor or specialization
 Trade relies heavier on barter
 Some form of currency for trade evolve
 Men and women are given different roles and tasks
2. Market Economy (free-market economy)- the most democratic form of economic system. Based on the working
of demand and supply, decisions are made on what goods and services to produce. People's preferences are
reflected in the prices they are willing to pay in the market and are therefore the basis of the producers’
decisions of what goods to produce. It is the most democratic form of economic system. It is based on the
workings of demand and supply, decisions are made on what goods and services to produce. 
 There is very little government interference on economic activities
 People have the control to produce and/or consume in any way and in any amount they want
 Most economic decision is done through voluntary transactions according to the law of supply and
demand
 Arguably, growth is highest under this economic system
 The distribution of resources is not equitable because those who succeeded economically control
most of them and amass a lot of economic power
 However, a pure market system does not exist
Characteristics of Free Market:
1. free to set prices
2. free to buy, own, use, and sell private property
3. free to compete
4. free to earn profits
5. free to create capital formation
6. free to be an entrepreneur
7. free to be an investor
8. free to choose your work
9. free to cooperative and peaceful process
3. Command Economy (planned economy)- the authoritative system wherein decision making is centralized in the
government or a planning commitee. Decisions are imposed on the people who do not have to say in what

goods are to be produced. This economy holds true in dictatorial, socialist and communist nations. There is a
dominant centralized authority - usually the government that controls a significant portion of the economic
structure.
 The government (or any centralized authority) answers basic economic questions and controls the
production and distribution of goods & services.
 People do not have the power to decide on what, how and for whom to produce.
 This type is common in communist societies where power is centralized.
 Society is vulnerable to economic crises or emergencies, as they cannot quickly adjust to changed
conditions
 In theory, this system works well if the central authority exercises control for the public’s best
interest, which is rarely the case.
4. Mixed economy (combination of command & market economy)- a market system of resource allocation,
commerce, and trade in which free markets coexist with government intervention. A mixed economy may
emerge when a government intervenes to disrupt free markets by introducing state-owned enterprises (such as
public health or education systems), regulations, subsidies, tariffs, and tax policies.
 Combines both aspect of capitalism (market) and socialism (command)
  It protects private property and allows a level of economic freedom in the use of capital, but also
allows for governments to interfere in economic activities
 Most industries are privately owned but still under regulation, however, industries that provide
essential services are under the control of government
 The economic questions are partly determined and answered by the government and the producers
and the consumers. The challenge is finding the right balance between free markets and
government control
 Governments tend to exert much more control than is necessary
Scarcity is the insufficiency or inadequacy of economic resources and as a result, we have to decide and choose. It is a
condition of why people study and practice economics. Is a condition where there are insufficient resources to satisfy
all the needs and wants of a population.
 Consumers cannot spend twice
 Producers cannot use resources again once they are used up

Types of Scarcity:
a. Relative Scarcity- Is when a good is scarce compared to its demand. It occurs when goods are lesser than its
demand because of the circumstances that surround the availability of the goods. e.g Bananas are abundant in
the Phils. And are being grown in a lot of regions around the country. But when a typhoon destroys banana
plants and the framer has no bananas to harvest, then bananas become relatively scarce.
b. Absolute Scarcity- Is when supply is limited. It occurs when goods are lesser than its demand because of the
circumstances that surround the availability of the goods. e.g oil and cherries.

Law of Scarcity:
Unlimited needs and wants>Limited Economic Resources
 An economic system cannot produce all goods and services that consumers want, and most consumers do not
have the resources to purchase everything they want.
Since there is scarcity, we have to choose…
a. Trade-off – the exchange or choosing between alternatives. It is a reality of life that getting one thing would
mean giving up another thing.
b. Opportunity cost- is the value or cost of the next best forgone choice/ alternative. In other words, opportunity
cost represents the benefits that could have been gained by taking a different decision. It represent the
potential benefits an individual, investor, or business misses out on when choosing one alternative over
another. 
 Refers to the value of the best foregone alternative.
 In making a choice, trade-offs are involved.
c. Choice and Decision Making- Because of the presence of scarcity, there is a need for man to make decisions in
choosing how to maximize the use of the scarce resources to satisfy as many wants as possible.

Measuring the Economy

a. GDP- total value of goods and services provided in a country during one year. It measures the economic size of
a country by calculating the monetary value of all the finished goods and services created within that country
for a given period, most often annually or quarterly.
b. GNP- total value of goods and services provided by a country during one year, equal to the GDP plus the net

income from the foreign investments. It is an estimate of the total value of all the final products and services
turned out in a given period by the means of production owned by a country's residents.

Divisions of Economics
1. PRODUCTION - refers to the process of producing or creating goods needed by the households to satisfy their
needs.
2. INPUTS (Resources)
3. OUTPUTS (Goods and services)
4. DISTRIBUTION - refers to the marketing of goods and services to different economic outlets.
 5. EXCHANGE - refers to the process of transferring goods and services to a person in return for something
(Money).
6. CONSUMPTION - refers to the proper utilization of economic goods.
7. PUBLIC FINANCE - pertains to the activities of the government regarding taxation, borrowings, and
expenditures.

Economic Problem
It asserts that an economy’s finite resources are insufficient to satisfy all human wants and needs.
5 Basic Economic Problems:
1. Scarcity
2. Inflation
3. Unemployment
4. Pollution
5. Shortage

Is Economics a Social Science?

Social Science is the branch of science devoted to the study of societies and the relationships among individuals within
those societies.

Economics is a social science because it tries to understand how people behave and interact within a society.

Positive and Normative Economics

1. Positive Economics describes and explains various economic phenomena or the “what is” scenario. Positive
economics is based on facts. Deals with what things are actually happening such as the current inflation rate, the
number of employed labor, and the level of GNP. Ex: “Public healthcare increases government expenditures”
 2. Normative economics focuses on the value of economic fairness, or what the economy “should be”. In other
words, normative economics is based on value judgments. Refers to what should be that which embodies the
ideal such as the ideal rate of population growth or the most effective tax system. Ex: “Best healthcare must be
free to all citizens”
Factors of Production
In the economics, the factors of production (sometimes called economic resources or inputs) are essential to produce
goods and services. These are…
a. Land- includes all the natural resources such as fertile soil, trees, minerals, and water which can be sources of
raw materials to produce goods or products.
b. Labor- refers to the physical and mental talents of individuals used to produce goods/ services.
c. Capital- refers to anything that people produce and later used in the production of other goods and services
such as manufactured aids, tools, machines, equipment, and factories
d. Entrepreneurship- ability to organize the other resources (land, labor, and capital) to produce goods and
services. It is the ability to establish and operate a business and establish relationships with suppliers,
customers, lenders, investors, and others.
Returns of Factors of Production
a. Rent for land
b. Wages for labor
c. Interest for capital
d. Profit for entrepreneurship

Lesson 2
Is Economics Applied Science?
Applied Science is a discipline applying existing scientific knowledge to develop more practical applications, like
technology and inventions. Applied science can also apply formal science, such as statistics and probability.

Economics deals with the analysis on how members of society interacts with each other on the creation and utilization
of wealth. It formulates general theories through testing, mainly using data from the past.
 It is the use or application of economic theories, researches, and econometrics to real life situations to make
informed economic decisions and of predicting possible outcomes.
 The purpose is to improve the quality of life of people, the practices in business, and the implementation of
public policies by considering the costs and benefits, and human behavior.
 It may be practiced at microeconomic and macroeconomic problems
 Econometrics is the application of statistical methods to economic data and is described as the branch of
economics that aims to give empirical content to economic relations.
Applied Economics is the application of economic theories, principles, and econometrics to the real world situations
with the desired aims of predicting potential outcomes and to address practical issues. Applied economics can involve
the use of econometrics and case studies.
 Demographic
 Labor
 Business
 Industrial Organization
 Agricultural
 Development
 Education
 Engineering
 Financial
 Health
 Monetary
 Public
 Economic History

 Most pressing and recurring problems of countries and governments are actually economic in nature
  If people have deeper and better understanding of economic principles, they become wise decision makers and
may help addressing national economic problems.
 Example applying Law of Supply and Demand to understand why quantity supplied or demanded is high or low,
why prices are high and what the government can do about it.

Economic resources is the ingredients of production

 Can be:
a.) Natural (raw materials)
b.) Human (entrepreneurs & workers)
c.) Capital (the machinery and tools of production)

What are Economic Theories?

 Are ideas and principles that describes how economies work
 Are statements of a presumed relationship between two or more variables, such as the relationship of price to
demand, price to supply and so on.
 The approach to economic theory is divided into positive and normative
 Purpose: The comprehensive system of assumptions, hypotheses, definitions and instructions, try to explain
economic phenomena, interpret why and how the economic behaves, and propose the best solution/s to
economic problems.
Examples of Economic Theory
1. Supply and Demand (Invisible Hand)
2. Classical Economics
3. Keynesian Economics
4. Neoclassical Economics
5. Neo-Malthusian (Resource Scarcity)
6. Marxism
7. Laissez Faire Capitalism

What are Economic Models?

 May represent economic theories in simplified ways that are composed of diagrams or equations. Through a
model, a complex, real situation is paired down/ summarized to the essentials.
 A good economic model is simple enough to be understood while complex enough to capture key information.
 Production Possibility Frontier Circular Flow Model

Therefore, a theory is a more abstract representation, while a model is a more applied or empirical representation.

The Three Great Economists

1. Adam Smith
 “Invisible Hand”
 Scottish philosopher and economist born in 1723
 The Father of Economics or The Father of Capitalism
 The Wealth of the Nation published in 1776- “the invisible hand” (self-regulation of economy) >became
basic idea of free market economy or capitalism
 He believed that all individuals act in their self-interest, and can produce and purchase by themselves
 He also emphasized that new machinery, division of labor, and specialization would lead to a higher
production and wealth of the nation
 In the 1990s, the doctrine of Laissez Faire anchored with Smith’s idea.
2. Karl Marx
 “Class Struggle”
 German philosopher born in 1818
 Contrary to the idea of Smith, Marx saw instability, and a decline of a free market economy.
 “Das Kapital” (1867) – He explained that the capitalist (the bourgeoisie/ the rich/ the ruling class) make
profit by exploiting the labor of the workers (the proletariat/ the poor/ the ruled class). He said that thw
workers were exploited, or underpaid for the value that they worked for.
 Marx believed that this struggle eventually intensifies and would lead to the fall of capitalism
 To him, this situation later leads to the movement of society toward communism, wherein everybody
through government intervention, owns the means of production.
3. John Maynard Keynes
 “Government Intervention”
 In 1936, he published his work General Theory of Employment, Interest, and Money.
 His most significant work is about the role of the government in a capitalist economy.
 His works were written in the Great Depression (1930s) in the US which questioned the validity and
applicability of Smith’s invisible hand (no government intervention)
 Keynes strongly believed that the only solution is government intervention through government
spending by creating massive public works program to employ the idle workforce (unemployed). This
way the money is put back to the economy and into private sector pockets, ignite demand for goods and
services, and pump the economy again.
The Philippines Basic economic Problems
 Unemployment
 Poverty
 Population growth

Lee Kuan Yew ( 1923 - 2015 )

 Is an economic icon and an example of how a leader of a previously undeveloped country can lead to overcome
its country's basic economic problems and move toward economic growth.
 He was the prime minister of Singapore from 1959 to 1990, making him a the longest-serving prime minister in
history. During his long rule, Singapore became the most prosperous nation in Southeast Asia.

Market Structure
 Refers to the competitive environment in which buyers and sellers operate.
 Is best defined as the organizational and other characteristics of a market.
 Focuses on those characteristics which affect the nature of competition and pricing.

What is competition?
 Is the activity or condition of competing.
 An event or contest in which people compete.

Economic Competition is rivalry among various sellers in the market.

Degrees of competition in the market

 Number and size of buyers and sellers
 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and input owners
 Degree of knowledge of economic agents regarding prices, costs, demand, and supply conditions.

Perfect Competition implies an ideal situation for the buyers and sellers. An industry made up of a large number of small
firms, each selling homogeneous ( identical ) products to a large number of buyers.
a. all firms sell an identical product
b. all firms are price takers - they cannot control the market price of their product
c. all firms have a relatively small market share
d. buyers have complete information about the product.

Characteristics of a perfectly competitive market

 There are so many buyers and sellers that each has a negligible impact on market price. Change in output of a
single firm will not perceptibly affect market price of the good. No single buyer can influence the price since
he/she purchases only a small amount. Buyer cannot extract quantity discounts and credit terms.

 A homogeneous product is sold by sellers, which means the products are highly similar in such a way consumers
will have no preference in buying from one seller over another. The goods offered for sale are all exactly the
same or are perfectly standardized.

 Perfect mobility of resources refers to the easy transfer of resources in terms of use or in terms of geographical
mobility.

 There is perfect knowledge of economic agents of market conditions such as present and future prices, costs,
and economic opportunities.

 Market price and quantity of output are determined exclusively by forces of demand and supply.
Is perfect competition realistic?
Yes, because the model of perfect competition is powerful and many markets.

Imperfect Competition
 Is a type of market structure showing some but not all features of competitive markets.
 A market where information is not quickly disclosed to all participants in it and where the matching of buyers
and sellers isn't immediate.
 It is a market that does not adhere rigidly to perfect information flow and provide instantly available buyers and
sellers.

Types of Imperfectly competitive market

1. Monopoly
 Exists when a single firm that sells in the market has no close substitutes. The existence of a monopoly depends
on how easy it is for consumers to substitute the products for those of other sellers.
 The monopolist faces a downward-sloping demand curve, the lower the price, the higher the quantity that will
be bought by the consumer.
2. Monopolistic competition
 One imperfectly competitive market wherein products are differentiated and entry and exit are easy.
 Changes in product characteristics to increase appeal using brand, flavor, consistency, and packaging as means
to attract customers.
 There is free entry and exit in the market that enables the existence of many seller.
 It is similar to a monopoly in the firm can determine characteristics of product and has some control over price
and quantity.
e.g
a) The restaurant business
b) Hotels and pubs.
c) General specialist retailing
d) Consumer services, such as hairdressing
3. Oligopoly
 Is a market dominated by a small number of strategically interacting firms. Few sellers account for most of or
total production since barriers to free entry make it difficult for new firms to enter.
 A state of limited competition, in which a market is shared by a small number of producers or sellers.
e.g
a) Pepsi/Coke
b) Fuel
c) Apple/Samsung

Significance of the market structure

The type of market structure in which the business operates will determine the amount of market power or control the
business owner will enjoy. Greater market power means a greater ability to control prices, differentiate the products
one offers for sale, thus, leading to opportunities for more profits.

Market
 Is an interaction between buyers and sellers of trading or exchange
 It is where the consumer buys and the sellers sells.

Types of Market
a) The goods market
 is the most common type of market because it is where we buy consumers goods.
b) The labor market
 is where workers offer services and look for jobs, and where employers look for workers to hire.
c) The financial market
 which includes the stock market where securities of corporations are traded.
Why is it that the market is important?
 Because it is where a person who has excess goods can dispose them to those who need them.
 This interaction should lead to an implicit agreement between buyers and sellers on volume and price.

Income effect
is felt when a change in the price of a good changes consumer's real income or purchasing power, which is the capacity
to buy with a given income.

Substitution effect
is felt when a change in the price of a good changes demand due to alternative consumption of substitute goods.

Demand
 Is the willingness of a consumer to buy a commodity at a given price.
 A demand schedule shows the various quantities the consumer is willing to buy at various prices.
The Law of Demand
 an inverse relationship between the price of a good and the quantity demanded for that good.
 As price increases, the quantity demanded for the product decreases. The low price of the good motivates the
consumer to buy more. When price increases, the quantity demanded for the good decreases.
Non-Price Determinants of Demand
 Income
 Taste
 Expectations
 Prices of related goods
 population

Supply
 Refers to the quantity of goods that a seller is willing to offer for sale
 The supply function shows the dependence of supply on the various determinants that affect it.
The Law of Supply
 a direct relationship between the price of a good and the quantity supplied of that good.
 As the price increases, the quantity supplied of that product also increases.
Non-Price Determinants of Supply
 Cost of production
 Technology
 Availability of raw materials and resources

Cost of production refers to the expenses incurred to produce the good.

Equilibrium
 is the state of balance when demand is equal to supply.
 The equality means that the quantity that sellers are willing to sell is also the quantity that buyers are willing to
buy for a price.

Application of Demand and Supply

Housing in the country is a problem evident because of the rapid growth of Philippine population.

Elasticity is a measure of how much buyers and seller respond to changes in market conditions.
Degrees of elasticity
 Elastic
 Inelastic
 Unitary elastic
Elastic is a change in a determinant will lead to a proportionately greater change in demand or supply.
 The absolute value of the coefficient of elasticity is greater than 1.

Inelastic is a change in a determinant will lead to a proportionately lesser change in demand or supply.
 The absolute value of the coefficient of elasticity is less than 1.

Unitary Elastic is a change in a determinant will lead to a proportionately equal change in demand or supply.
 The absolute value of the coefficient of elasticity is equal to 1.

Labor Supply also known as the labor force, refers to the portion of the population, 15 years old and over who are
willing and able to work, including those who are actively seeking work but have not found work and those who are
employed.

Philippine Population
 census is an official count of the population of a certain local administrative unit in the Philippines.

The Philippine Wage Situation

 The government protects the worker through the imposition of minimum wages. But workers always claim that
these minimum wages are not enough for their subsistence.

Contemporary Economic Issues Facing the Filipino Entrepreneur

1. Investment and interest rate
2. Rentals
3. Minimum wage
4. Taxes
Investment defines as building up the capital stocks for more future production and consumption. But the cost of
investment is savings.
"Savings and investment are necessary to build the future."
Savings defined as postponed consumption at present.

Rentals
 The amount of money paid or collected as rent.
 Refers to the payment made to or for a factor of production over and above the amount expected by its owner.

Minimum wage is an amount of money that is the least amount per hour that workers must be paid according to the
law.

Taxes is the amount paid by individual for the government to provide public goods and services that empower and
enable individuals and institutions to pursue their dreams.

Stock Exchange which includes the stock market where securities of corporations are traded.