ABM APPLIED ECONOMICS READING MATERIALS

INTRODUCTION TO ECONOMICS

Everbody goes through a day with constraints or limitations: motorists complain of high gasoline
prices or insufficient allowance for a students who needs to buy books and school supplies.
People always complain of about anything not having enough- not enough food on the table, not
enough money to pay one’s debts or not enough income to meet all the family needs. This is in
effect is the existence of what we call scarcity that is insufficiency of resources to meet the wants
of consumers and insufficiency of resources for producers that hamper enough production of
goods and services.

Scarcity is the reason why people have to practice economics. Economics, as a study, is the
social science that involves the use of scarce resources to satisfy unlimited wants. Part of human
behavior is the tendency of man to want to have as many goods and services as he can.
However, his ability to buy goods and services is limited by his income and purchasing power. It
is therefore in this context that man has to practice economics.

Well-known economist Alfred Marshal 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.

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 compare to its demand. For example, coconuts
become scarce when the supply is not sufficient to meet the needs of the people. Relative
scarcity occurs not because the good is scarce per se and is difficult to obtain but because of the
circumstances that surround the availability of the goods.

Absolute Scarcity is when supply is limited. Oil is absolutely scarce in the country since we
have no oil wells from which we can source our petroleum needs, so we rely heavily on imports
from oil-producing countries like Iran and other middle east countries.

CHOICES & DECISION-MAKING

Because of scarcity, there is a need for a man to make decisions in choosing how to maximize
the use of the scarce resources to satisfy as many wants as possible. A homemaker who has a
monthly budget needs to decide on how to utilize it to pay a rent, to buy food, to pay the
children’s tuition fees and to buy new clothes and shoes. She needs to make a choice. If she
decides not to buy new shoes for her children at the start of the school year, then this is the
choice she gave up.

In deciding which wants to satisfy, the decision-makers must reckon with opportunities that will
be lost when a particular choice is made. When we want to have more of a good or service, we

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are actually sacrificing something in exchange. In short, opportunity cost is what a person
sacrifices when they choose one option over another.

THE CONCEPT OF OPPORTUNITY COST

Opportunity Cost is a key concept in economics, and has been described as expressing "the basic
relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in
ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to
monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other
benefit that provides utility should also be considered opportunity costs.

Opportunity Cost – may be defined as the cost of choosing to use resources for one purpose
measured by the sacrifice of the next best alternative for using those resources. In

Opportunity Cost holds true for individuals, businesses, and even a society. In making a choice,
trade-offs are involved.

Opportunity Cost refers to the value of the best foregone alternatives. A manager who quits his
job in order to take up a master’s degree, gives up his salary as a manager. That salary is his
opportunity cost. Without scarcity, a person does not need to make choices since he/she can have
everything he/she wants.

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. Owners
of lands receives a payment known as rent.
2. Labor – Physical and human effort exerted in production. 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.
3. Capital – man-made resources used in the production of goods and services which
include machineries and equipment. The owner of capital earns an income called
interest.

ECONOMICS AS A SOCIAL SCIENCE

Economics is the social science that involves the use of scarce resources to satisfy unlimited
wants. Economics is a social science because it studies human behavior just like Psychology and
Sociology.

Social Science – is the study of society and how people behave and influence the world around
them.

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As a Social Science, Economics studies how individuals make choices in allocating scarce
resources to satisfy their unlimited wants.

BRANCHES OF ECONOMICS

There are two branches of economics. These are macroeconomics and microeconomics.

Macroeconomics – is a division of economics that is concerned with the overall performance of

the entire economy. It studies economic system as a whole rather than the individual economic
units that make up the economy. Macroeconomics is about the nature of economic growth, the
expansion of productive capacity and the growth of national income.

Microeconomics - is concerned with the behavior of individual entities such as the consumer, the
producer, and the resource owner. It is more concerned on how foods flow from the business
firm to the consumer and how resources move from the resource owner to the business firm. It is
also concerned with the process of setting prices of goods that is also known as Price Theory.

Microeconomics studies the decision and choices of the individual units and how these decisions
affects the prices of goods in the market.

BASIC ECONOMIC PROBLEMS OF THE SOCIETY

All societies are faced with basic questions in the economy that have to be answered in order to
cope with constraints and limitations. These are:

What to produce? How much? society must decide what goods and services should be produced
in the economy. Having decided on the nature of goods that will be produced, the quantity to
these foods should also be decided on.

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 production.

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 income
groups?

How these questions are answered depends on the nature of the economic system in place.

ECONOMICS SYSTEMS

The economic system is the means through which society determines the answers to the basic
economic problems mentioned. A country may be under any of the following types or even a
combination of the three economic systems:

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 1. Traditional Economy Decisions are based on traditions practices upheld over the years
and passed on from generation to generation. Methods are stagnant and therefore not
progressive. Traditional societies exist in primitive and backward civilizations.
2. Command Economy This is the authoritative system wherein decision-making
iscentralized in the government or a planning committee, Decisions are imposed on the
people who do not have a say in what goods are to be produced. This economy holds true
in dictatorial, socialist, and communist nations.
3. Market Economy This is the most democratic form of economic system. Based on the
workings 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 producer’s decisions on what goods to produce.

WHY ECONOMICS IS IMPORTANT?

Economics will help the students understand why there is a need for everybody, including the
government, to budget and properly allocate the use of whatever resources are available. It will
help one understand how to make more rational decisions in spending money, saving part of it,
and even investing some of it.

On the national level, economics will enable the students to take a look on how the economy
operates and to decide for themselves if the government officials and leaders are effective in
trying to shape up the economy and formulate policies for the good of the nation.

MEASURING THE ECONOMY

The heart of economy is production whose value measures both resource input and output of
people. The interplay of resources and outputs tells how well the economy has performed.

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GNP vs. GDP

Gross National Product (GNP) is the Market value of final products, both sold and unsold,
produced by the resources of the economy in a given period.

Market Value is determined by supply and demand while the Economy’s Resources are those
belonging to Filipino citizens and corporations.

NOTALL RESOURCES BELONGING TO THE ECONOMY ARE IN THE ECONOMY.

CONVERSELY, NOT ALL RESOURCES IN THE ECONOMY BELONG TO THE
ECONOMY. GNP = C+ I + G+ (X – M) Imports Exports Government Expenditures on Goods
and Services Investments (stocks of values for future use) Consumption (household and
individual)
14. GNP vs. GDP Gross Domestic Product Better indicator of domestic employment
opportunities. Defined as the market value of final products produced within the country. GDP is
net of GNP after deducting NET FACTOR INCOME from abroad or by deducting factor income
from abroad and adding back FACTOR PAYMENTS to other countries. NET FACOR INCOME
from abroad is net export of factor service equal to Factor income from abroad less the factor
payments of other countries. Net Inflow = Inflow - Outflow - Net Inflow = - Inflow + Outflow

ECONOMICS AS AN APPLIED SCIENCE

Applied Economics is the application of economic theory and econometrics in specific settings
with the goal of analyzing potential outcomes. John Neville Keynes is attributed to be the first to
use the phrase “APPLIED ECONOMICS” to designate the application of economic theory to the
interpretation and explanation of particular economic phenomena.

APPLIED ECONOMICS IN RELATION TO PHILIPPINE ECONOMIC PROBLEMS

A solid understanding of economic principles and how they are applied in real life situations can
serve as significant tools to help address the country’s economic problem. Understanding the
existence of scarcity can help Economics students analyze how to maximize the use of available
resources in order to overcome scarcity. Knowledge of economic theories such as the Law of
Supply and Demand can help in analyzing why prices are high and what the government can do
to help bring down prices.

THE PHILIPPINES BASIC ECONOMIC PROBLEMS

Non-inclusive Growth despite of Economic Growth - Millions of Filipinos are claiming they are
experiencing hunger or they still live below the poverty level.
Unemployment despite of Improvements Main problem of the Philippine Economy.
Poverty Socio-economic problem.
Population Growth Basic economic problem that can be connected to the issue of scarcity. When
population becomes too big, economic resources may no longer be enough to support the
growing population. Philippines – one of the highest population in Asia. Represents 1.37% of the
worlds population.

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