APPLIED ECONOMICS

Lesson 1: Revisiting Economics as a social science

What is economics?
- derived from Greek word “Oikanomia”

Economics, as a study, is the social science that involves the use of scarce resources to satisfy unlimited wants.
Alfred Marshall, well-known economist, described economics as a study of mankind in the ordinary business of life. It
examines part of the individual and social action that is most closely connected with the attainment and use of material
requisites of well-being. While Hall and Loeberman stated that economics is the study of choice under the condition of
scarcity.
Economic is the study of how individuals manages its scarce resources.
Scarcity is the reason why people have to practice economics. Scarcity is a condition where there are insufficient
resources to satisfy all the needs and wants of a population. Scarcity may be relative or absolute. Relative scarcity is when
a good is scarce compared to its demand. It occurs not because the good is scarce per se and is to difficult to obtain but
because of the circumstances that surround the availability of the good. On the other hand, absolute scarcity is when supply
is limited.
Because of the presence of scarcity, there is a need for man to make decisions in choosing how to maximize the use
of scarce resources to satisfy as many wants as possible.
Scarcity of means for satisfying various needs is the central problem of our economic life and it is scarcity that
creates the need to make a choice. Scarcity and choice go hand in hand.
Opportunity cost refers to the value of the best forgone alternative. The concept of opportunity cost holds true for
individuals, businesses, and even a society.
ECONOMIC RESOURCES
Economic resources, also known as factors of production, are the resources used to produce goods and services.
These resources are, by nature, limited and therefore, command a payment that becomes the income of the resource owner.
1. Land – soil and natural resources that are found in nature and are not man-made. Land is considered an economic
resource because it has a price attached to it. Owners of land receive a payment known as rent/lease.

2. Labor – also called “human resources”, refers to all human efforts, be it mental or physical, that help to produce
satisfying goods and services. It covers manual workers like construction workers, machine operators, and
production workers, as well as professionals like nurses, lawyers, and doctors. The term also includes jeepney
drivers, farmers, and fisherman. The income received by labors is referred to as wage and salaries.
 Labor is a flexible factor of production - workers can be allocated to different areas of the economy for
producing goods and services.

3. Capital

Two economic definitions of capital:

a. Capital – can represent the monetary resources use to purchase natural resources.
Ex: Companies use capital to buy land and other goods

b. Capital – represents the major physical assets individuals and companies use when producing goods and
services. Ex: buildings, vehicles, equipment

*Income derived from capital is interest.

4. Entrepreneurs - French word which means “enterpriser”

Entrepreneur – organizer and coordinator of other factors of production: land, labor and capital.

He uses his initiative, talent and resourcefulness to create economic goods.

5. Foreign Exchange - refers to the dollar and dollar reserves that the economy has.

Foreign exchange is part of economic resources because we need foreign currency for international trading
and buying materials from other countries

International medium – dollar

ECONOMIC AS A SOCIAL SCIENCE

Economics is a social science because it studies human behavior just like psychology and sociology. A social
science, broadly speaking, the study of how people behave and influence the world around them. Economics, as a social
science, studies how individuals make choices in allocating scarce resources to satisfy their unlimited wants.
Two Branches of Economics
 Divisions of Economics
1. Production – refers to the process of producing or creating goods needed by the households to satisfy their needs. It is
the use of inputs to produce outputs.
Inputs are commodities or services that are used to produce goods and services.
Outputs are the different goods and services which come out of production process.
Society have to decide what outputs will be produced and in what quantity.

Factors of Production
 Goods

 Services
 2. Distribution is the allocation of the total product among members of society. It is related to the problem of for
whom goods and services are to be produced.

3. Exchange – refers to the process of transferring goods and services to a person in return for something present
medium of exchange – money

4. Consumption - is the use of a good or service. Consumption is the ultimate end of economic activity. WHEN
THERE IS NO CONSUMPTION, THERE WILL BE NO NEED FOR PRODUCTION AND
DISTRIBUTION.

- refers to the proper utilization of economic goods. However, goods and services could not be utilized
unless you pay for it. Hence, consumption could also be spending money for goods and services.

5. Public Finance - is concerned with government expenditures and revenues. Economics studies how the
government raises money through taxation and borrowing.

- pertains to the activities of the government regarding taxation, borrowings and expenditures. It deals
with the efficient use and fair distribution of public resources.

Lesson 2: Economics as an Applied Science

Economics is a study of economic activities of a man. It is only concerned with the wealth-getting and wealth-using
activities of a man.
- PROF. MARSHALL

The term “applied economics” is believed to have started 200 years ago in the writings of two economists:

JEAN-BAPTISTE SAY JOHN STUART MILL

(1767-1832) (1806-1873)

Applied economics - is the study of economics in relation to real world situations. It is the application of economic
principles and theories to real situations and trying to predict what the outcomes might be.

SIMPLER DEFINITION

Applied economics – is the study of observing how theories work in practice.

Dinio and Villasis defined applied economics as the application of economic theory and econometrics in specific
settings with the goal of analyzing potential outcomes. Applying economic theory in our lives means trying to address
actual economic issues and be able to do something about it.
What is econometrics?

Econometrics – is the application of statistical and mathematical theories to economics for the purpose of:
• Testing hypotheses
• Forecasting future trends

The results of econometric are compared and contrasted against real life examples.

Example: Real life application of econometrics would be to study the hypothesis that as a person’s income increases,
spending increases.

What is the importance of applied economic application?

1. Applying economics to a company, household or a country helps sweep aside all attempts to dress up a situation
so that it will appear worse or better than it actually is.

*applied economics becomes a powerful tool to reveal the true and complete situation in order to come up with
things to do.

Example: Applied economics can assess the profits of a certain company. The result can help the executives to do
some strategies in order to boost its sales.

2. Applied economics acts as a mechanism to determine what steps can reasonably be taken to improve current
economic situation.

*to examine each aspect, one can strengthen areas where performance is weak.

Example:
 Purchase of goods and services
 Usage of raw materials
 Division of labor within entity (e.g. firm, company, agency)

3. Applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation, or at least
minimize the impact.

*to review what steps were taken to improve and correct similar situations and continue good strategies to
keep the economy flowing in a correct direction.

Lesson 3: Basic Economic Problems and the Philippine

Socioeconomic Development in the 21st Century

1. Unemployment – main problem of the Philippine economy.

COMMON CAUSES
 The number of people entering the job market has been greater than the number of jobs created.
 The rural-urban migration increases due to employment opportunities.
 Many of the unemployed individuals are college graduates.
 RURAL TO URBAN MIGRATION

WHAT CAN BE DONE TO SOLVE UNEMPLOYMENT PROBLEM?

Appropriate economic policies for labor-intensive industries.
Improve the educational system of the country especially in the rural areas.
Minimize rural-urban migration by improving the economic environment in rural areas.
Proper coordination between government and the private sector to solve the problem of job mismatch.
Slowing population growth. Philippine growth must increase faster than the population. Limit the size of
families.
Provision of more investment opportunities to encourage local and international investment.

2. Poverty
COMMON CAUSES
Increase in population
Increase in the cost of living
Unemployment
Income inequality
WHAT CAN BE DONE TO SOLVE THE POVERTY PROBLEM?
Reduce unemployment
Appropriate policy on labor income
Provision of unemployment benefits for those who will be unemployed due to natural or man-made calamities.
Ex. Typhoon, Bombing of terrorists, Earthquake
Increase social services like education, health care and food subsidies for sustainable poverty reduction
Appropriate policy on labor income.

3. Income Inequality
Income is the money that an individual earned from work or business received from investments.
Income inequality – refers to the gap in income that exists between the rich and the poor.
MAJOR CAUSES OF INCOME INEQUALITY
Political culture
 “ palakasan”, “utang na loob”
Ex. Voting for the wrong person during election
Indirect taxes – poor people shoulder this taxes like the Value Added Tax – 12%
WHAT CAN BE DONE TO SOLVE THE PROBLEM OF INCOME INEQUALITY
Policies to enforce progressive rates of direct taxation on high wage earners and wealthy individuals.
Direct money transfers and subsidize food programs for the urban and rural poor.
Direct government policies to keep the price of basic commodities low
Raise minimum wage
Encourage profit sharing

4. Booming population growth in the Philippines.

Lesson 4: Application of Demand and Supply

4.1 Basic Principles of Demand and Supply

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone
of a market economy.
DEMAND
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded
is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity
demanded is known as the demand relationship.
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.
2 concepts of increasing demand
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.
Concept of Demand
1. Demand Schedule - refers to the amount (quantity) of a good that buyers are willing to purchase at alternative
prices for a given period.
Presented in Table 1 is a hypothetical monthly demand schedule for ice cream for one individual, Martha.
The quantity demanded is determined at each price with the following demand function:
Qd = 6 – P/2
Table 1. Hypothetical Demand Schedule of Martha for Ice Cream (per cone)
Price of ice cream (per cone) Daily Quantity per day
Php 0 6
2 5
4 4
6 3
8 2
10 1

At a price of Php 10, Martha is willing to buy one ice cream a day. As a price goes down to Php 8, the quantity
she is willing to buy goes up to two ice cream. At a price of Php 2, she will buy five ice cream. There is a negative
relationship between the price of a good and the quantity demanded for that good. A lower price allows the consumer
to buy more, but as price increases, the amount the consumer can afford to buy tends to decrease.
2. Demand Curve

The demand curve is a graphical illustration of the demand schedule.

Table 1.1. Hypothetical Demand Curve of Martha for Vinegar (in bottles) for One Month
 12

10

8
Price

0
1 2 3 4 5

Quantity Demanded

The values are plotted on the graph and are represented as connected dots to derive the demand curve (Table
1.1). The demand curve slopes downward indicating the negative relationship between the two variables which are price
and quantity demanded.
The downward slope of the curve indicates that as the price of vinegar increases, the demand for the good
decreases. The negative slope of the demand curve is due to income and substitution effects.
3. Demand Function
A demand function shows how the quantity demanded of a good depends on its determinants, the most important
of which is the price of the good itself, thus the equation:
Factors Affecting the Shifting in Demand Curve
The individual demand curve illustrates the price people are willing to pay for a particular quantity of a good.

The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan
to buy at different prices.

Shifts in the demand curve

This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods.
 Table 1.2 Diagram to show shift in demand

A shift to the right in the demand curve can occur for a number of reasons:

1. Price of the Given Commodity. It is the most important factor affecting demand for the given commodity. Generally,
there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded
falls due to decrease in the satisfaction level of consumers.

2. Income. An increase in disposable income enabling consumers to be able to afford more goods. Higher income
could occur for a variety of reasons, such as higher wages and lower taxes.

3. Price of related goods – demand for the given commodity is also affected by change in prices of the related goods.
Related goods are of two types:

Substitute goods – are those goods which can be used in place of one another for satisfaction of a particular
want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given
commodity and vice-versa.

For example, if price of a substitute good (say, coffee) increases, then demand for given commodity
(say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given
commodity is directly affected by change in price of substitute good.

Complements goods - are those goods which are used together to satisfy a particular want, like coffee and
sugar. An increase in the price of complementary good leads to a decrease in the demand for given
commodity and vice-versa.

For example, if price of a complementary good (say, sugar) increases, then demand for given commodity
(say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given
commodity is inversely affected by change in price of complementary goods.

4. Tastes and Preferences

Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in
fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a
commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.
 5. Expectations of future price increases.

If the price of a certain commodity is expected to increase in near future, then people will buy more of that
commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period.

*These non-price determinants can cause an upward or downward change in the entire demand for the product and this
change is referred to as a shift of the demand curve.

Law of Demand
Using the assumption “ceteris peribus”, a Latin phrase which means all other things remained equal or held
constant, there is an inverse (negative) relationship between price and quantity demanded. Therefore:

 consumers will buy more quantity of a good when price decreases.

 consumers will buy less quantity of a good when price increases.
Economist call this inverse relationship between price and quantity demanded the law of demand.
SUPPLY
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good
producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or
service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the allocation of resources. In market
economy theories, demand and supply theory will allocate resources in the most efficient way possible.
Concept of Supply
1. Quantity Supplied - refers to the amount (quantity) of a good that sellers are willing to make available for sale at
alternative prices for a given period.
Supply fuction: Qs = 100 + 5P – used to determine the quantities supplied at a given prices.
Table 2. Supply schedule of Martha for Ice Cream in One Week
Price of Ice Cream (per 1 liter) Supply (in liter/s)
Php 20 200
40 300
60 400
80 500
100 600

As can be seen in Table 2, the relationship between the price of ice cream and the quantity that Martha is willing
to sell is direct. The higher the price, the higher the quantity supplied.
 Table 2.1. Supply Curve of Ice Cream of Martha for One Week

120
Price of Carabao Milk (Per Bottle)

100

80

60

40

20

0
200 300 400 500 600

Quantity Supplied (in hundred bottles)

Factors Affecting the Shifting of Supply Curve

 Price of the good

 Cost of Production
 Technology
 Number of Producers

Law of Supply
The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of
demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity
supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases
revenue.
Lesson 4.1. How Equilibrium Price and Quantity are Determined
Market Equilibrium
Equilibrium is a 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. In market, equilibrium is an
explicit agreement between how much buyers and sellers are willing to transact. The price at which demand and supply are
equal is the equilibrium price.
Market equilibrium is a market state where the supply in the market is equal to the demand in the market.
If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results
in a disruption of the equilibrium.

If a market is not at equilibrium, market forces tend to move it to equilibrium. If the market price is above
the equilibrium value, there is an excess supply in the market (a surplus), which means there is more supply than demand.
In this situation, sellers will tend to reduce the price of their good or service to clear their inventories. They probably will
also slow down their production or stop ordering new inventory. The lower price entices more people to buy, which will
reduce the supply further. This process will result in demand increasing and supply decreasing until the market price equals
the equilibrium price.

If the market price is below the equilibrium value, then there is excess in demand (supply shortage). In this
case, buyers will bid up the price of the good or service in order to obtain the good or service in short supply. As the price
goes up, some buyers will quit trying because they don't want to, or can't, pay the higher price. Additionally, sellers, more
than happy to see the demand, will start to supply more of it. Eventually, the upward pressure on price and supply will
stabilize at market equilibrium.

DETERMINATION OF MARKET EQUILIBRIUM

Market Equilibrium is attained when the quantity demanded is equal to the quantity supplied.
Assuming that the demand function for Good X is: Qd = 60 – P/2 and the supply function for Good X is: Qs = 5 +
5P.
Applying the equations, we derive the following demand and supply schedules given the following prices:
Price Demand Schedule of Good X Supply Schedule of Good X
Ᵽ0 60 5
2 59 15
4 58 25
6 57 35
8 56 45
10 55 55
12 54 65
14 53 75
16 52 85

Equilibrium quantity is attained where Qd = Qs

 16

14

12

10

8
Price

0
52 53 54 55 56 57 58 59 60 Qs
85 75 65 55 45 35 25 15 5
Qd

Quantity Demanded and Supplied of Good X

Lesson 4.2 Market Structures
A market is an interaction between buyers and sellers of trading or exchange. It is where the consumer buys and the
seller sell. The market is a situation of diffused, impersonal competition among sellers who compete to sell their goods and
among buyers who use their purchasing power to acquire the available goods in the market.
A good market is the most common type of market because it is where we buy consumers good. The labor market is
where workers offer services and look for jobs, and where employers look for workers to hire. There is also financial market
which includes the stock market where securities of corporations are traded.
Market structure refers to the competitive environment in which buyers and sellers operate.
Factors 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
As the term suggests, perfect competition implies an ideal situation for the buyers and sellers.

Characteristics of a Perfectly Competitive Market

 There are so m any 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 homogenous product is sold by sellers, which means the products are highly similar in such a way
consumer 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.
IMPERFECT COMPETITION
In other markets, one or more of the assumptions of perfect competition will not be met; thus, the market becomes
imperfectly competitive.
Different Types of Imperfectly Competition
a. Monopoly. It 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 sellers.
Monopoly can exist for the following reasons:

 A single seller has control of entire supply of raw materials.

 Ownership of patent or copyright is invested in a single seller.
 The producer will enjoy economies of scale, which are savings from a large range of outputs.
 Grant of a government franchise to a single firm.
When monopoly enjoys a lot of power in the market, it actually does not have unlimited market power because it
faces indirect competition for consumer’s money for all goods.
The monopolist faces a downward-sloping demand curve; meaning, the lower the price, the higher the quantity that
will be bought by the consumer.
b. Monopolistic Competition. It is imperfectly competitive market wherein products are differentiated and entry and exit
are easy. It allows such variety of choices. Since many firms exist in the market, consumers also have the freedom to choose
from whom to buy the good. It combines some characteristics of perfect competition and monopoly. It’s key characteristics
are:

 A blend of competition and monopoly;

 Firms sells differentiated products, which are highly substitutable but are not perfect substitutes;
 Many sellers offer heterogeneous or differentiated products, similar but not identical and satisfy the same basic
need;
 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 sellers; and
 It is similar to a monopoly in that the firm can determine characteristics of product and has some control over price
and quantity.
The firm under monopolistic competition faces a downward-sloping demand curve. This means that it can sell more by
charging less and can raise price without losing all customers. As such, the firms in this market are given room to set
different prices by their product differences. In other words, a firm can set a higher price because it has something
different to offer its buyers.
The firm tends therefore to engage in non-price competition. This refers to any action a firm takes to shift the demand
curve for its output to the right without having to sacrifice its prices. This may include better service, product guarantees,
free home delivery, more attractive packaging, better locations, and advertising.
c. Oligopoly. It 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 firm too enter.
Its characteristics are:
  Action of each firm affects other firms; and
 Interdependence among firms.
These strategically interacting firms try to raise their profits by colluding with each other to raise prices to the
detriment of consumers. Oligopolies may exist due to the existence of barriers, which may include economies of
scale, reputation of the sellers, and strategic and legal barriers such as the grant of patents/franchises, loyal following
of customers, huge capital investments and specialized input, and control of supply of raw materials by a few
producers.
Cooperative behavior in oligopoly usually takes the form of price-fixing or output-setting agreements such as the
one maintained by the OPEC (Organization of Petroleum Exporting Countries).
Labor Migration and the Overseas Filipino Worker (OFW)
Phenomenon

What is migration?
Migration – refers to the movement of people from one place to another.
2 Types of Migration:
 Internal Migration – refers to the movement of people within one country i.e. rural to urban migration.
 International Migration – refers to the movement of people from one country to another.
Causes of Migration:
 Poverty
 Unemployment
 Victims of natural calamities
 Improve standard of living
 Better education
 Better environment
 Economic Security
EFFECTS OF MIGRATION

What is labor migration?

Labor migration – is the process of shifting a labor force from one physical location to another. Labor migration
takes place with the support of labor force.
Causes of labor migration
 The desire of job seekers to increase income and to improve the standard of living
 The emergence of new industries
 The relocation of production facilities of a given business to a new area.
What are OFWs?
Overseas Filipino Workers (OFWs) – are Filipinos who are presently and temporarily working outside the country. They
may be land-based of sea-based workers. Ex. Domestic Helpers, Teachers, Seamen, Nurses
According to POEA (Philippine Overseas Employment Administration) In 2014, there are 1,832,668 OFWs.
 Land-based – 1,430,842
 Sea-based – 401, 862
REASONS BEHIND THE OFW PHENOMENON
1. High Unemployment Rate
- Newly graduates join the labor force that increases the competition in the labor market. Instead of waiting for them
to be hired locally, Filipinos seek employment overseas.
2. Low Salary offered by employers in the Philippines
- Filipinos are willing to work abroad due to low salary. Even professionals like nurses, engineers and teachers would prefer
to work abroad as household help or office workers because of the higher salary offered overseas.
3. Discrimination in job hiring in the Philippines
- local employers tend to hire candidates even if they’re not the most qualified for jobs. The qualified and overage applicants
who were not able to find jobs decide to work abroad.
4. High Withholding Tax
- The Philippines has a high income tax rates for workers. Workers’ take home pay decreases after deducting the withholding
tax, GSIS/SSS premium, Pag-ibig and Philhealth and other mandatory deductions.

What is the equilibrium quantity?

What is the equilibrium price?
How do we attain market equilibrium?