Applied Economics
Module 1— Overview of Applied Economics
The Study of Economics
Economics is everywhere. The actions you take involve some sort of analysis where
you weigh the pros and cons, which is formally referred to as cost and benefit analysis.
This behavior underlies the study of economics.
Economics means the efficient allocation of available resources.
Economics as Social Science
are the ones responsible for making theories
Economics as an Applied Science
focuses on applying these theories to real-life situations
Basic Economic Concepts
The study of economics revolves around the concepts of scarcity, needs, and wants. The
fundamental concepts are considered building blocks of more advanced and complex
economic theories.
Scarcity means resources are limited.
Needs something that is necessary to live and function.
Wants something that can improve your quality of life
Opportunity Cost and Comparative Advantage
Opportunity Cost is defined as the benefit you give up because you choose to take
one action in favor of another. OC is also used to explain the principles of comparative
advantage.
Comparative Advantage means having a lower opportunity cost. In terms of CA,
there's a need to calculate the opportunity cost for each country if the countries have to
specialize in the production of only one good.
Fig. 1.1 Country ABC has an absolute advantage in the production of both goods, but
country XYZ has a comparative advantage in the production of wine. Country ABC should
specialize in the production of coffee while country XYZ should specialize in the production
of wine.
Absolute Advantage is defined as having the ability or capacity to produce more
output compared to another entity.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT
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Three (3) Basic Economic Problems
● What to produce
● How to produce
● For whom
Economic goods cover goods, services, products, and the like that have a price
and are sold in a market.
Four (4) Factors of Production
● Land – the factor income use of land is rent
● Labor – represents human capital such as workers and employees that
transform raw materials and regulate equipment to produce goods and services.
The return on labor is the wage
● Capital – represents physical assets used in the production of goods and
services. The factor income is interest
● Entrepreneurship – sometimes referred to as enterprise. Represents the factor
that decides how much of and in what way the other factors are to be used in
production. The return on entrepreneurship is profit
Circular Flow Diagram is an economic model that illustrates the flow of factors of
production in the economy
Production Possibility Frontier or PPF (also called production possibility curve)
is an application of the concept of allocation of resources and factors of production.
Methods Used in Economic Analyses
Qualitative approach to economic data analysis focuses on the directional
relationship of different economic variables. Qualitative analysis also describes how
one variable affects the other.
Quantitative approach involves mathematical and statistical analysis of economic
data. Quantitative analysis used in different disciplines such as physics and finance.
Economic variables are important in explaining and understanding economic
theories or models
Variable cost changes depending on the quantity or volume of output
Fixed cost is constant regardless of the increase or decrease in quantity
Functions (f) explain the relationship between two or more economic variables.
Economic equation is a mathematical expression of an economic thought or
concept.
Graph provides a visual representation of the relationship between two or more
economic variables.
Economic Theories and Models
Economic theories simplify economic phenomena. These are statements or
observations on the relationship of variables.
Models are generally representations of reality
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT
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Economic models make the study of economics easier by serving as guides and
by simplifying concepts and ideas.
Time Series means that data are collected for particular elements for several time
periods.
In formulating models and theories, economists often use assumptions. The most
popular is the ceteris paribus assumption. Ceteris paribus is a Latin term that literally
translates to "all else being the same."
Cross-sectional data include different variables for a single time period
Normative VS. Positive Economics
— in terms of judgement
Normative economics evaluates economic decisions, policies as good or bad.
It is based on options and is subjective.
Positive economics evaluates economic scenarios and policies based on
qualitative and quantitative analysis; factual and objective
Main/Major Branches of Economics
There are two main branches of the study of economics in terms of scope:
Microeconomics is the branch of economics that examines the individual or
company level. It deals with households and firms, such as the buying behavior of
consumers and profit-maximizing behavior of sellers. Microeconomic topics largely focus
on the concept of law of supply and demand which deals with consumer and producer
decisions.
Macroeconomics studies the aggregate or country level. The frameworks focus
on the effect on a larger scale, such as the national economy. Major macroeconomic
indicators include national income accounts, GDP, inflation, and interest rate.
Microeconomic Concepts
Utility refers to the value or satisfaction derived from the consumption of a good.
Marginal Utility, therefore, is the additional utility or satisfaction from the
consumption of an additional unit of good, keeping other things constant.
Total Utility is the total satisfaction received from consuming a particular quantity
of good.
Budget is a plan of financial terms or non-financial term
Disposable income is the income after taxes.
Discretionary income is the income left from disposable income after all other
necessary (nontax) expenses have been deducted.
Macroeconomic Concepts
Gross National Product (GNP) value of all goods & services made by a country's
residents and businesses regardless of production location.
Gross Domestic Product (GDP) the total value of final goods and services
consumed during a given period. This is typically expressed in Philippine peso (P or
Php). GDP measures production inside of a country, no matter who makes it.
Nominal GDP is derived when the value of goods is expressed in current prices
while Real GDP is adjusted for inflation and is expressed at constant or base year prices.
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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT
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Inflation refers to the persistent rise in price levels of goods and services. It is
measured through the rise and fall of the purchasing power of the domestic currency.
The increase in prices of goods and services means a fall in value of money or
conversely, a fall in the purchasing power.
Consumer Price Index (CPI) measures the purchasing power of the peso through
regular survey of the price level of consumer goods and services
Interest Rate is the cost of borrowing or the return on investment.
Nominal Interest Rate is the rate stated in bonds or the rate typically quoted by
banks and lending institutions. It is sometimes referred to as the "as-is" or "unadjusted"
Real Interest Rate is the rate adjusted for inflation.
