Applied Economics
• Economics comes from Greek word “oikonomia” which means
management of household.
• .Economics is the study focusing on how to solve the scarcity of
natural resources versus unlimited needs and wants of the
people. It is very significant in our lives to ensure that we are
using the resources we have efficiently since most resources, no
matter how abundant they are now are limited.
• Economics as one of the social sciences subjects is concerned
with varied issues pertaining to the production of goods and
services, money, banking and finance, forecasting business
conditions and other similar topics on business and household
management.
Social sciences are concerned with the study of man as
he/she interacts with other men in society. Economics is
a social science. It is a science because it is a systematic
body of knowledge and utilizes scientific methods
explaining the various events and happenings in the
economy. Studying Economics needs to be holistic.
Philosophy and Economics
• Philosophy: Philosophical and theological principles serve
as our value judgements in choosing among alternative
ways of achieving economics goals. Value judgements in
a particular science are truths that we borrow from other
sciences. Some methods of organizing economic society
need not even considered because they violate the most
fundamental rights of man.
History and Economics
• History: it provides empirical support to some theory of
economic development or another. A study of economic
histories of some countries such as Japan, Taiwan, South
Korea, Mexico, Spain can provide invaluable insights into
the complex process of socio-economic development. In
other words, studying history provides substantial
information needed for thorough understanding of
Economic problems.
Sociology and Economics
• Sociology: It studies the behavior of man in society and
the relationships among special groups. It helps the
economist to understand the forces that motivate man to
work and to apply the advances of science to the
solutions of his/her problems.
Mathematics and Economics
• Mathematics: Economists use statistics and mathematics
to study economic theories. The branch of Economics
specifically about math is called Econometrics. National
Accounting is important for us to determine if the
economy is doing good. Some examples of national
accounting are GNP/GDP, Employment rate, per-capital
income etch. We will discuss the following on the next
lessons.
Psychology and Economics
• Psychology: Economic Psychology is the interdisciplinary
investigation of the interface between Psychology and
Economics. It is concerned with the Psychology basis of
economic behavior of individuals, and the impact of
economic processes on individual’s psychology.
Political Science and Economics
• Political Science and Public Management: Economics is
intimately interwoven with political science and Public
Management. A developing country like Philippines must
use its political system and public administration
strategies as a vehicle for progress. it is a must that
economists are knowledgeable about the structure of the
government in order to formulate efficient and effective
economic policies such as fiscal and monetary policies.
The Economic Resources as
Factors of Production
The economic resources are the country’s main source
of wealth and basically contribute to the increase of the
country’s national revenues. Natural resources as well as
the human resources are essential in the production of
consumer goods and other commodities and services, that
satisfy man’s demands. These economic resources are also
referred to as the factors of production.
1. Land: land as a factor of production is vital in the production process. It is
defined as everything found above and underneath the earth that is used to
produce other goods. These things found above and underneath the earth
may include man, forest, animals, marine life, mineral resources and the
like. Land, therefore, is not limited to the parcel of land where your houses
were built. It is often referred to as natural resources.
• The total land area of the country is approximately 300,000 square
kilometers. Land in the Philippines are divided by regions and provinces.
• Philippines is not a petroleum-rich country, but the land is still full of many
valuable minerals. There are estimated 21.5 billion metric tons of metal
deposits in the Philippines and 19.3 billion metric tons of non-metal
minerals in the ground. Nickel is the most abundant deposits in the
Philippines, while iron and copper are also in significant amounts.
• Philippines some major exports are banana, pineapple and coconut.
2. Labor refers to the physical and mental components of human resources that
contribute to the conversion of all raw materials info finished and consumable
goods. It is the work time and work effort that people devote to product goods
and services. The quality of labor depends on how skilled people are. Human
skills is referred to as human capital in economics. It is the knowledge and skill
that people obtain from education, on-the-job training and work experience.
Labor maybe classified into three sectors:
• Employed: employed people are components of labor force, whose age level
is from 15 years old and above, who are physically and mentally qualified and
are willing to work and contribute to the economy’s production.
• Unemployed: unemployed are members of the labor force who are qualified
and willing to be employed but there’s no demand for their services.
• Underemployed: people who are qualified for a higher employment position
but overqualified for their current employment, thus, are receiving lower salary
than what they should be compensated. Likewise, underemployed are working
less number of hours that resulted also to lower take home pay.
3. Capital: capital as a factor of production, is referred to in
Economics as finished goods used to produce other goods.
Example of these are machines and other equipment and tools
used in industrial firms to process goods and commodities, these
kid of capital in the form of machines are used to convert raw
materials to finished goods, or consumable goods, which is
essential to the country’s growth and development. They are
often referred to as physical capital.
• Capital may also pertain to cash or money which investors or
businessmen use to buy machines, equipment and tools for
production purposes. This kind of capital may also be referred
as financial capital. Financial capital takes care of the
compensations of labor, employees and human resources.
4. Entrepreneurs: the entrepreneurs are part of human
resource who are experts in the management of
production resources. They are the ones responsible in
the proper allocation of the limited production of
resources in order to maximize the production output.
They are usually the managers, the supervisors or
department heads of a production processing unit.
Lesson 2
The 4 Basic Economics Questions
The Different types of Economic Systems
INTRODUCTION
System is an orderly working totality or a group which is
subject to a common plan or serving a common purpose,
joined in regular interaction or interdependence. Systems
are found in every phase in human life. We follow systems
to guide our lives from simple to complex ones. There is
another system, perhaps exercising more influence on our
lives, the economic system.
Economic system attempts to answer the 4 basic economic
questions which are the following:
• [Link] to produce?
• [Link] much to produce?
• [Link] to produce?
• [Link] whom to produce?
What to Produce?
The economic system must discover the desires of the
people it is supposed to serve. It is easy to say that people
need basic needs such as food, shelter and clothing but
difficulty arises when these desires are reduced to specifics.
The desire to produce those goods needed to satisfy the
people’s known wants may be inherently limited by the
country’s available resources.
How much to Produce?
The system must also have some way of knowing how
much of the chosen goods should be produced. This is
more complex than the first task. How much rice to produce
will depend substantially on how much of its people want. It
will not always be sufficient to rely completely on how much
was consumed in the past. People’s taste and preference
can and do change.
How to Produce?
The system needs to analyze the best process,
combination, tools, technology, approach etch in producing
the goods and services in an economy. It must be the most
effective and efficient option. Technology and innovation
extensively increase production process, but government
regulate production method to decrease environment
degradation.
What is the best production
approach in the Philippines?
Labor-intensive or Machine-Intensive
For Whom to Produce?
Once the goods are produced, how shall they be
distributed? The distribution problem has several
interrelated features. the first is purely technical and directly
related to the production problem. It is easy to see that
distribution is no problem if most households are more or
less self-sufficient. Everyone produces what they consume.
Thus, goods do not have to be distributed far and wide. But,
as time passes by, specialization and division of labor make
the distribution process more complex.
Economic Systems
Traditional Economy
The history of civilization begun with small groups of families or
clans who banded together for mutual help and [Link] in
this primitive state some form of economic system is already
present. The question of what to produce is simple since primitive
society revolve mainly around the most basic items like food, shelter
and clothing. The other problem which is how much to produce is
also not hard because they simply produce as much as they can.
Obviously, there is already some source of resource allocation. The
men take care of hunting food while the women handle sewing
clothes and taking care of children. This system is based mainly on
tradition and culture.
Traditional System
The White-collar Mania
The Extended Family
Command Economic System
• North Korea
• Cuba
• Turkmenistan
• Myanmar
• Belarus
• Laos
• Libya
• Iran
The command economic system answers the 4 basic
economic question by conscious selection. The men
managing the economy have to consider the resources in
their assignment of production to different sector of the
economy. Command economy has obvious advantages.
The men at the top can easily make decision for the
betterment of the economy in relation to the production and
distribution of goods and services. But these apparent
advantages lurk some possible shortcomings. The
harmonious movement of the economy depends on the
expertise of the decision-makers. Aside from that the people
on top are placed on a very powerful pedestal.
A Surge of Change
Russia started to adopt a more open economic system around
1990 after an extreme hunger in the mid-80s was experienced
because of decline in agricultural productivity in the farms and
the chronic shortages of manufacturers in the cities. The
restructuring was so far-reaching that it precipitated various
attempts to dismantle the command economy and paved the
way for the establishment of a free market system. Other
countries followed to this reform such as Rumania, Poland and
Yugoslavia. These countries witness how backward their
economies had remained while other countries with market-
oriented system continuously experience progress.
Marxian Philosophy
Karl Marx is a very important person in
relation to socialism and communism. He
was highly critical of the capitalism
system. His economic philosophy is
centered on these two aspects: the
forces that would destroy capitalism and
the system that would emerge to replace
it. He deeply believed to the downfall of
capitalism.
He was referring to the continuous exploitation of the
working class which he called proletariat. He argued that
the desire of the capitalist to increase their profits resulted
in downward pressure on labor wages. On the other hand,
the mass usage of machinery through technological
advancements, displaces many workers and aggravates
the problem of unemployment. According to Marx, these
forces would eventually provoke the proletariat to revolt and
overthrow capitalism.
• In Marxist philosophy, the bourgeoisie is the social class
that came to own the means of production during modern
industrialization and whose societal concerns are the
value of property and the preservation of capital to ensure
the perpetuation of their economic supremacy in society.
• This revolution he envisioned would lead to a socialist
state and eventually to a communist state where
everyone works for the benefit of the state and not for
individual alone. A society where everyone is equal.
exploitation and selfish interest would then be completely
abolished.
Market Economy
If people are willing to buy a specific product,
manufactures will produce more of this. Producers only
have to watch the trend or signals of the market unlike the
command economy wherein the Planning head needs to
make millions of decisions regarding economic issues. This
is considered very practical since there would be no surplus
nor shortages, as long as the economy has ample
resources.
The Concept of Invisible Hand
Adam Smith is a noted 18th century economist. He was
an advocate of market mechanism. He said that it was
completely guided by an invisible hand that guaranteed the
welfare of the masses through the competitive process. he
said that producers will always do what is best for
consumers because they are constantly competing for the
consumers money.
The Limits of the Market
There is no perfect type of economic system. What might
work to one country may not be effective to another country.
Government needs to be mindful about the current situation
of a country and if necessary, do some modifications.
