LESSON 1 - INTRODUCTION TO APPLIED ECONOMICS

Economics as a Social Science

One of the popular attempts to define economics suggests that “economics is the science
which studies human behavior as a relationship between ends and scarce means which
have alternative uses”. A definition which has also gained prominence is that “economics
is the study of the ways that individuals and societies allocate their limited resources to
satisfy their unlimited wants.
It is important to recognize the following aspects of economics:
1. It is science concerned with human behavior.
2. It is concerned with the choices we make and the consequence of these choices for
ourselves and others. In fact, the central focus of economics is on choice and decision
making.
3. It is concerned with the man’s material welfare.
Economics is by no means the product of the single mind, but probably no one is more
deserving of this title “Father of Economics” than Adam Smith. His book “An Inquiry Into
The Nature and Causes of the Wealth of Nations” in 1776 attracted widespread attention
and helped establish economics as a scientific field of study apart from the political
science and mortal philosophy.
Economics is regarded as a social science because it uses scientific methods to build
theories that can help explain the behavior of the individuals, groups and organization.
Economics as a social science has common ground with other social sciences.
Economics borrows freely from the works of psychologists, sociologist, anthropologist,
legal scholars, ecologists, biologists, political scientists and philosophers, all of whom
offers alternatives of the economic way of thinking about how the world works. But
economics has some advantages over the social sciences. Firstly, the economic motives
of human beings are more regular and therefore predictable. Secondly, there is more
available factual information in the form of economic statistics that can be the basis of
theoretical verification.
The problems of economics arise out of the scarcity of resources to satisfy human wants.
Human wants are unlimited, but the resources (land, labor, and capital) required to
satisfying them are limited. If human wants are unlimited, but resources to satisfy those
wants are limited, then people in the society face the problem of the scarcity.
Everyone has to make choices. You may see many items that you would like to have, but
you cannot afford to buy them all. Business owners, managers, team leaders and even
governments must make right decision because they cannot have everything. There will
always be difference between what people want and the resources available to satisfy
those wants.

Economic Resources
Economic resources are factors of production used to produce things that people desire
in order to satisfy their wants. The things that people produce are called commodities.
Commodities may be divided into goods and services. Goods are tangible, like bags or
shoes, and services are intangible, like haircuts or education. The act of making goods
and services is called production, and the act of using them to satisfy your wants is called
consumption.
It has been conventional to categorize economic resources (factors of production) as
land, labor, capital, and entrepreneurial ability.

Categories and Resources

Land
- It includes all natural resources (gifts of nature) used in the production process. These
include mineral and oil deposits, water, fertile soil, air, climate forest, wildlife, and rain.
- Payment for the use of land is called rent. Rent is income to the owner of the land.
Labor of Human Resources
- It refers to the physical and mental talents to produce goods and services.
- Payment for the use of labor is called wage. Wage is income to laborers, who own their
labor.
Capital
- Man-made or manufactured resources or also known as capital goods used in producing
consumer goods. These include buildings, machine, tools, equipment, roads, highways,
bridges and even software.
- Payment for the use of capital is called interest.
Entrepreneurial Ability
- Special skills of an individual needed to produce goods and services like managerial
and organizational skills.
- Profit. Income of an entrepreneur after deducting the payments from the owners of land,
labor, and capital.
Economics as an Applied Science
Applied economics involves different ways to achieve practical objectives by applying
economic theory in the real world.
Economics as an applied science helps students to learn about the relationship of a
business and basic economic theory. It offers many opportunities to measure their
academic and personal growth and improve their educational career planning. It focuses
primarily on theoretical business economics. It focuses on urban problems, the health-
care crisis, agricultural problems, poverty, economic growth, and the environment.
Economic theory is a broad concept for the explanation and understanding of the
movement of goods and services in the market. For example, the theories of the behavior
of individuals and institutions engaged in the production, consumption, distribution and
exchange of goods and services.
Economic theory uses different economic models to describe how the people react to a
particular economic situation.
Economic models may be in the form of verbal expression, numerical tables, and
mathematical equations or diagram used to understand economic events.
The law of supply and the law of demand are good example of a useful economic model.
The law of supply states that, other things being equal, as price increases, the quantity
supplied increases, and as price decreases, the quantity supplied decreases. The law of
demand states that, other things being equal, as price increases, the quantity demanded
decreases, and as price decreases, the quantity demanded increases.

Why Study Economics?

a. Decision-Makings skills. An exposure to quantitative problem-solving techniques is an
important part of economics. The business sector typically rewards employees who have
acquired specific quantitative skills. The study of economics gives you an opportunity to
acquire those necessary skills.
b. Problem Solving Abilities. People with education in economics develop an appreciation
of the social issues – global warming, health care, education, and social security. The
issues are complex and the ability to deal with them suggest ways of improving our
standard of living in the broadest sense that requires clear thinking.
c. Job Opportunities. Better job opportunities await the economics graduate. Business
and government are increasingly aware of the need for people who are trained in
economics. They are employed in teaching, government services, banks, and business
firms. Their duties may include research, economic analyst, forecasting and consultants
on capital investments.
Basic Economic Problems
The fundamental problems of economics is to determine the most efficient ways to
allocate the resources. The decision must be made to transform the different economic
resources into goods and services to satisfy their needs and wants.
There are three basic questions to make the right decisions:
- What to produce?
- How to produce?
- For whom to produce?

What to produce?
Every economy must determine what goods and services are to be produced and in what
quantities of each. In some, the buyers and producers need to produce in order to obtain
things and exchange the things they already own. Since society cannot have everything,
they must decide which goods and services they want now and which one to give up.
For example, if gadgets are in demand, they need to pay business to produce and sell
these gadgets in the market. If no one desires to buy stereo sets, it is not worth producing
them. In case a company produces an item, which buyers do not buy in much quantity,
there will likely be inadequate income. The company will have to enhance the quality and
transform the product to match the taste of the buyer. In some society, government decide
on what goods and services to produce based on the resources available and demands
of the buyers.

How to produce?
The company must decide on how to use the resources to produce goods and services.
What combination of resources and technologies will be used to produce goods and
services at lowest cost? The manufacturer may wish to maximize profits and minimize
production cost. They may combine labor and capital given the prices of labor and capital
and productivity of those resources.

For whom to produce?

This question determines the distribution of goods and services. Goods and services will
be distributed to buyers on the bases of their ability and willingness to pay its existing
market price. The ability to pay the prices for goods and services depend on the amount
of income that buyers have, along with the prices of, and tastes and preferences for
various goods and services.
Basic Economic Problems of the Country
Philippines appeared to be one of the fastest growing economies of Asia. As reported by
the Philippines National Statistical Coordination Board, the Philippines economy grew an
annual 6.3 percent in the December quarter of 2015. According to the Philippines National
Statistics Office, Philippines annual inflation rate slowed to 1.3 percent in January 2016
from 1.5 percent in December, recorded a Current Account surplus of 88.41 US$ Million
in September of 2015 as reported by the Bangko Sentral ng Pilipinas but still need to
address different economic problems to achieve economic growth.

- Unemployment. According to the Labor Force Survey, the unemployment rate was 6
percent in October 2014 and 6.6 percent in January 2015, Unemployment remains a
persistent problem in the Philippines because of its increase in population. As reported
by the Bangko Sentral ng Pilipinas, the total population in the Philippines was late
recorded at 102.2 million people in 2015 from 26.3 million in 1960. The number of people
entering the job market has been greater than the number of jobs created. The rural-
urban migration increases due to insufficient employment opportunities. Many of the
unemployed individuals are college graduates.
What Can Be Done to Solve unemployment Problem?
1. Appropriate economic policies for labor-insensitive industries.
2. Improvement in the educational system of the country specially in the rural areas.
3. Minimize rural-urban migration by improving the economic environment in the rural
areas.
4. Provision of more investment opportunities to encourage local and international
investment like tax incentives.
5. Proper coordination between the government and the private sector to solve the
problem of job mismatch.
6. Decreasing the retirement age from 65 to 60 for public sector to give chance to younger
generation to enter the labor market but providing an attractive well-defined pensions and
retiree health care for retirees.
7. Slowing population growth. To improve standard of living of the Filipinos, Philippine
economic growth must increase faster that its population. If the country’s output over a
period of time increased by 5 percent, while its population increased by 20 percent,
standard of living is better in the beginning of the period but difficult in the end. If
population increased by 5 percent, while output increased by 20 percent, standard of
living would have been improved. The government must encourage people to limit the
size of their families and at the same time increasing economic growth.
- Poverty. As a fast-growing economy, with 6.3 percent Gross Domestic Product for the
4th quarter of 2015, still there is a declined in the incidence of poverty in the Philippines.
Poverty remained not only an economic problem but also a social problem of the country.
Increase in population, increase in the cost of living, unemployment, inequality in the
distribution of income are some of the reasons why a decline in poverty is very slow.
What Can Be Done To Solve Poverty Problem?
1. Reduce unemployment.
2. Appropriate policy on labor income.
3. Promote economic growth to improve the standard of living.
4. Provision of unemployment benefits for those who will be unemployed due to natural
and man-made calamities.
5. Increasing social services like education, health care and food subsidies leads to
sustainable poverty reduction.

- Quality of Infrastructure. Based on the Global Competitiveness Report 2014-2015, the

Philippines ranks 91st out of 144 countries on a World Economic Forum survey of
infrastructure quality. This can be the result of low investment on infrastructure projects.
The budget for infrastructure is consistently below 3 percent of Gross Domestic Product
(GDP) and the government spending on social infrastructure for education and health is
only 4 percent of GDP. From the economist’s point of view of poor infrastructure, the 2.2
million vehicles a day experiencing traffic congestion cost the country Php876 billion a
year, or more than $20 billion, in lost productivity and wasted energy based on the study
conducted by the japan International Cooperation Agency that would cost a serious drain
on an economy of about $250 billion.
What can Be Done to Improve the Quality Of Infrastructure
1. Quality infrastructure increases macro-level competitiveness and encourages
investments. In order to ease infrastructure constraints, the Philippines need to achieve
a gradual increase in infrastructure investments to at least 5 percent of Gross Domestic
Product (GDP), and an increase in the efficiency of spending.
2. The government shall implement fiscal reform program.
3. Continues reform in key sectors-particularly power, roads, and water-to improve cost
recovery, competition, and institutional credibility, and to sharply reduce corruption.
4. Improving central oversight of the planning and coordination of investment
5. Focus in investments through public-private partnerships to address key bottlenecks
and achieve quick gains in service delivery.
- 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.
The following are the major causes of income inequality in the Philippines:
1. Political culture can be considered as one of the major causes of income inequality in
the Philippines. The “palakasan” and the “utang na loob” that cannot be avoided
especially after election. If you are a relatives or friends or someone in power, they can
have all the chances to get the position even without or less knowledge on the position
given to them. “Utang na loob” is indebtedness to someone who has done someone a
favor. It is an obligation of a person to repay whatever good things they have done to you.
It may be in the form of voting for them in the election or do something for them till the
end.
2. Indirect taxes also one of the major causes of income inequality. Indirect tax is a
regressive tax that the poor shoulder the burden of paying higher taxes like the Value
Added Tax.
3. Income taxes. A Filipino worker receiving minimum wage is exempted in the payment
of income tax, but for those Filipino workers earning more than the minimum wage is
taxed 32 percent.
What Can Be Done to Solve the Problem of Income Inequality?
1. Policies to enforce progressive rates of direct taxation on income and wealth, especially
at the highest levels.
2. Direct money transfers and subsidize food programs for the urban and rural poor.
3. Direct government policies to keep the price of essential products low.
4. Reform people’s political culture.
5. Raise the minimum wage
6. Encourage and expand collective bargaining
7. Encourage profit sharing.

Philippine Socio-Economic Development

Socio-economic development is the process of social and economic development of the
people in the community. Socio-economic development is measured with indicators such
as Gross Domestic Product (GDP), life expectancy, literacy, and levels of employment.
Philippine Development Plan: 2011-2016 MIDTERM UPDATE TARGETS
Based on the NEDA Philippine Development Plan: 2011-2016, the following are the
Midterm Update Targets:

A. Economic Development. Economic development is the process of improving the

standard of living of every individual.
- Gross Domestic Product (GDP) is targeted to grow by 6.5 to 7.5 percent in 2014 7.0 to
8.0 percent in 2015, and 7.5 to 8.5 percent in 2016.
- Employment rate is expected to increase to 93.3 – 93.5 percent and incidence of income
poverty to be reduced to 18.0 – 20.0 percent.
- Reduction of multidimensional poverty incidence from 28.2 percent in 2008 to 16.0 –
18.0 percent by 2016.
- Private construction and manufacturing are expected to gain momentum beginning late
2014 up until the end of the Plan period.
- The employment rate is expected to decrease from 7.0 percent in 2012 to 6.5 to 6.7
percent by 2016. Assuming a labor force growth rate between 1.7 to 1.9 percent, these
targets translate to an additional 740,000 employed persons per year.
- Reduce the underemployment rat from the current 20.0 percent to 17.0 percent by 2016
to improve the quality of employment.
- Decrease the incidence of poor individuals to 18.0 to 20.0 percent by 2016.

B. Social Development. Social development interventions will directly reduce poverty in

its multiple dimensions by increasing the poor’s access to social services and basic
facilities.
- The government is committed to improve the delivery of health services to reduce
maternal mortality HIV (Human immunodeficiency virus).
- Investment in education will be increased and improve the quality of public investments.
-Social protection programs will be developed to address the different hazards faced by
different localities like, increasing the Philippines Health Insurance (PhilHealth) coverage
and benefits.
- The community -Based Employment program will be re-designed to function as a social
protection mechanism that replaces lost income in times of calamity. It represents all
projects of government that employed unskilled workers.
- The government will also be developed housing options/assistance based on the needs
and affordability of intended housing beneficiaries. The beneficiaries included informal
settler families, victims of calamities such as typhoons, Earthquakes, fire and armed
conflict, and low-salaried employees.

Source:
Macalinao, E. (2016). Applied Economics For Senior High School. Unlimited Books
Library Services & Publishing Inc.