APPLIED ECONOMICS

3RD QUARTER – WEEK1

Learning Activity Sheet
Lesson 1.1: Economics as An Applied Science

Applied Economics

It is an application of economic theory to analyze and explain the economic

situations. The emphasis of this course is to seek answer and find best possible
solution on the circumstances or economic activity. With the understanding of what is
happening in the real world, people may come up with a better choice. Studying
applied economics, the courses of action of individuals, businesses, and policy makers
are not just simple decision-making activities but they can evaluate the best
alternatives.
Applied economics is the application of core theoretical economics and econometrics
to answer questions in a wide range of fields (Reynold, 2020). Meaning to say, applied
economics is a tool to help solve a certain real world problem based on the economic
theories. Applied economists can apply core economic models to make predictions. For
example, there will be a price drop in petroleum products in the succeeding months,
according to the law of demand—as price decreases, quantity demanded increases,
and people will tend to buy more cars in the future. Policy makers must further
analyze this situation because it may worsen the traffic or additional transportation
crime incident related will be recorded.

Economic Theory - It is composed of principles and concepts in economics to explain

various activities and situations. - A statement that describes the economic
phenomenon. - It analyzes the circumstances for better understanding, and make
possible future decisions.

Here are some economic theories:

1. Law of Demand and Supply
2. Laissez Faire
3. Trilemma (exchange rates, capital flows, and monetary policy)
4. Fisher Theory of Interest Rates
5. Rational Choice Theory

Economic Model - It represents the economic theories through tables, graphs,

mathematical equations, and diagrams to better understand the economic events.

Example of economic model:

Capital Asset Pricing Model (CAPM) is used to evaluate whether a stock is fairly valued
when its risk and the time value of money are compared to its expected return.

ERi=Rf+βi(ERm−Rf)

where: ERi = expected return of investment

Rf = risk-free rate
βi = beta of the investment
(ERm−Rf) = market risk premium

Positive Economics - It describes the economic phenomenon based on the factual

information and evidences. It answers the question, “what is” as an explanation to an
event. Examples:
1. Consumers will tend to buy more if the prices are low. - This is the expected
outcome based on the law of demand—price is inversely proportional to the quantity
demanded.
2. High interest rate will discourage the borrowers to owe money.
3. Improper use of resources will lead to scarcity.
4. Agricultural production has been decreased due to bad weather.
5. The stoppage of economic activity will decline production.

Normative Economics - It describes the economic phenomenon based on the value

judgement or opinions. It answers the question, “what should be” as an explanation to
an event.
Examples:
1. It is better to quarantine the entire country than selected areas.
2. The reduction of unemployment is important than inflation.
3. Building infrastructures in Metro Manila are highly prioritized than in the
provinces.
4. More imports are better than exports.
5. Increasing the budget of Defense Department will ensure the security of the
country.

Lesson 1.2: Economics as A Social Science

Definition of Economics

1. Economics is from the Greek words oikos which means household or family and
nonos meaning management. During the ancient times, family is the most observed
organization. Oikonomos includes the management of wealth and customs of the
family which later on form part of the society.

According to Adam Smith (1723-90), a Scottish economist and father of the classical
economics, economics is concerned on the production and distribution of wealth. The
production and distribution of wealth will happen in a market economy which the
‘invisible hand’ is taking in-charge. This mechanism is like there are unseen forces
who control the activities in the market.
In his book, Inquiry into the Nature and Causes of the Wealth of Nations (1776), he
emphasized the question, “Why some countries are so rich while others are so poor?”
The growth process begins with rising labor productivity, which is a result of
specialization, or the division of labor. The division of labor originates in man’s natural
inclination toward selfinterest. Thus, if the country wants to prosper they need to
divide the task among its specialization. This will result to higher productivity and give
greater overall output, which in turn leads to higher wages and rising consumption.
Finally, if we use our savings to build productive capital, the growth process can
become selfsustaining.

Alfred Marshall (1842-1924) defines economics as a study of human as they live and
move and think in the ordinary business of life. He emphasized the importance of
human involvement and interaction. He claimed that, “Economics is a study of
mankind in the ordinary business of life; it examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of well-being.” For him, wealth is not the end but the human
welfare.
The definition of Lionel Robbins (1898- 1984) is the most favourable definition in
economics. He discussed in his book “An Essay on the Nature and Significance of
Economic Science”, that human welfare cannot be measured by money alone.
According to him, “Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses” He linked
the word “scarcity and human behaviour”. Human welfare would be attained if there
are proper usage of resources and alternatives. In reality we have unlimited wants and
unending satisfaction. It can multiply and most of the time is changing. The means or
resources are limited in nature reason why we are suffering from scarcity and
insufficiency. Human choice and activities are the main factors why there is scarcity
so basically the main focus of economics is making choices. Thus, economics deals
with the efficient use of scarce resources to satisfy the unlimited wants of the society.

Terms Related to Economics

1. Economics is ultimately concerned with why, when, and how human beings trade
with each other in a society.
2. Needs are important for the human being to survive. The basic needs, according to
Abraham Maslow, are the physiological needs such as food, house, water, air, and
clothing. Any type of automobile or transport is a need today especially during this
pandemic or emergency. On the contrary, wants are something that you wish to have,
so as to add comforts in your life. Luxury car, branded shoes, mansion, high-end
mobile phones, traveling abroad are considered as wants.
3. Choice involves selecting and decision-making. It is considered as the ultimate
power of human.
4. Resources are natural, i.e. land, air, water, minerals, and man-made materials, i.e.
capital, machinery and the like.
5. Proper management, distribution and allocation of resources will suffice the welfare
of human and society.

Economic Goals

 Efficiency and Full Employment

Efficiency means the ability to produce a desired result with the least cost possible or
without any waste. It is achieved when society is able to get the greatest amount of
satisfaction from the available resources. Since resources are limited, it is difficult to
convey back all the resources wasted. With efficiency, society cannot change the way
resources are used in any way that would increase the total amount of satisfaction
obtained by society. The scarcity problem will lessen if there is an efficient way of
using the resources.
Same with efficiency, full employment is an economic situation when all available
labor resources are wholly utilized. In reality, full employment is impossible to achieve
because of job mismatch-the available jobs in the market are not suitable to the skills
that they are looking for. However, the economist and policy makers will ensure that
the labor resources are maximized.

 Equity
There’s a confusion between the word equity and equality and sometimes
interchanged. Equity treats a valuable support to achieve fairness and greater
outcomes while equality upholds equal opportunity among others. Both equity and
equality manifest in the government program like Pantawid Pamilyang Pilipino
Program (4Ps) and government subsidies, respectively. In 4Ps, the identified
beneficiaries are receiving financial assistance to meet their basic needs. While this
program is not intended to the households which can cope with the everyday living.
Government subsidies on food, gasoline, and other necessities may enjoy by the
citizens, rich or poor, without any restrictions. Equity is achieved when income and
wealth are fairly distributed within the society. Almost everyone wants a fair
distribution. However, what constitutes a fair and equitable distribution is really
mystifying.

 Stability
Economic stability refers to the strong macroeconomic foundation where employment,
production, and prices are firm and constant. This goal seeks to avoid not only on the
fluctuation of prices in the market but the emphasis is on recessionary declines and
inflationary expansions of business cycles. To determine if the economy achieved
stability, there are certain measures— unemployment rate, inflation rate, and the
overall production (GDP). It is important for the economy to maintain stability because
the households and business can secure their consumption and production,
respectively. This also leads to economic security wherein there are stable income and
the society enjoys the economic freedom.

 Economic Growth
Economic growth refers to the situation wherein there is an increase in the overall
output or production. The economy is able to produce more of the goods and services
in a given time. This can be measured by comparing the GDP of the previous year to
the latest data. Economic growth is also indicated by increases in the quantities of the
resources. If this goal is achieved, there are many products available in the market
and the society has the freedom to choose and to satisfy more wants and needs-people
are better off; living standards rise; and scarcity is less of a problem.

Lesson 1.2: Microeconomics and Macroeconomics

Microeconomics
Microeconomics is a branch of economics that studies the behavior of individuals and
firms in making decisions regarding the allocation of scarce resources and the
interactions among these individuals and firms. Microeconomics seeks to understand
what happens when there are changes in certain conditions in relation to household
preferences and decisions, resource management, individual demand, business
supply, and market activity.
Analyzing business capacity and market forces are the primary concerns of this
branch. For instance, the company wants to know whether their business is still
profitable. With microeconomic analysis, they can determine if the company runs at
the maximum production capacity or in the economies of scale.

These are some of the microeconomics principles:

 Demand, Supply, and Equilibrium: Price is the determinant to consumers and

suppliers according to the law of supply and demand. As prices increases, the
suppliers will produce more products while consumers will buy less.

 Production Theory: An economic theory which relates the creation of product with
the given input materials.

 Consumer Theory: This theory explains how people decide to spend their money
based on their individual preferences and budget constraints.

Macroeconomics
Macroeconomics is a branch of economics that deals with the study of performance,
behavior, and decision-making of the whole economy. It includes aggregate demand
and supply, government policies for the country, national income, international trade
and etc.

John Maynard Keynes (1883-1946) is known for his economic theories (Keynesian
economics) on the causes of prolonged unemployment. His most important work, The
General Theory of Employment, Interest and Money, advocated a remedy for economic
recession based on a government-sponsored policy of full employment. He is
recognized as the father of modern economics and macroeconomics.

These are some of the macroeconomics principles:

1. Gross Domestics Product: It measures the overall performance of the economy
through the aggregate output produced in the country.
2. Philips Curve: It shows the relationship of unemployment with inflation. There’s an
inverse relationship between the unemployment and inflation rate.
3. Fiscal Policy: A tool used by the government to attain economic goals through
taxation and spending.
4. Monetary Policy: A tool used by the central bank to control the interest rate and
money supply in the economy.

ACTIVITIES
I. Directions: Identify what is being described in each statement. Choose the letter of
your answer in the box.

A. Applied Economics
B. Economic Theory
C. Economic Model
D. Positive Economics
E. Normative Economics
1. It describes the economic theory using mathematical equation.
2. It refers to statement based on personal perspective.
3. It is a tool to analyze economic phenomenon.
4. It uses diagrams, tables, and charts to explain the situation.
5. It is composed of principles to explain the realworld scenario.
6. It helps individual, business, and policy maker to make better decisions.
7. It explains and answers the question “what is”.
8. Learning using electronic devices is better than classroom experience.
9. Increasing budget in education will ensure the quality of education.
10. Cutting the price of alcoholic beverages will increase the demand among teenagers.

II. Directions: Read each statement carefully. Write TRUE if the statement is correct,
otherwise, write FALSE.

1. Economics is a science that deals with the household management.

2. The focus of economics is on the choice and decision making.
3. Studying economics does not improve the way of life of the society.
4. Adam Smith is the father of classical economics.
5. Lionel Robbins emphasized the material welfare of human as the focus of
economics.
6. Economics is concerned with the production, distribution, and consumption.
7. Alfred Marshall defines economics as a social science that deals with the
management of resources to satisfy the needs and wants of human.
8. According to Adam Smith, the growth process begins with rising labor productivity
or the division of labor.
9. The physiological needs are the basic needs of human according to Abraham
Maslow.
10. Economic resources are natural and man-made materials.

III. Directions: Write MICRO if the words or phrase refers to microeconomics, MACRO
if the statement is for macroeconomics.

1. Household management 6. Trade agreement among Southeast Asian

countries
2. Rice production 7. Tax Reform for Acceleration and Inclusion Law
3. Inflation rate 8. Rising unemployment rate due to pandemic
4. Decrease in lending rate 9. High demand for flagship mobile phones
5. Public Infrastructure 10. Barter of goods in rural areas
 Published by the Department of Education - Schools Division of Pasig City

Development Team of the Self-Learning Module

Writer: Emmanuel B. Penetrante

Editor: Hedelita B. Calonia
Reviewers:
Content/Language: Hedelita B. Calonia
Technical: Emmanuel B. Penetrante
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Ma. Evalou Concepcion A. Agustin
OIC-Schools Division Superintendent Aurelio G. Alfonso EdD
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Chief, School Governance and Operations Division and OIC-Chief, Curriculum
Implementation Division

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Librada L. Agon EdD (EPP/TLE/TVL/TVE) Liza A. Alvarez (Science/STEM/SSP)
Bernard R. Balitao (AP/HUMSS) Joselito E. Calios (English/SPFL/GAS) Norlyn D.
Conde EdD (MAPEH/SPA/SPS/HOPE/A&D/Sports) Wilma Q. Del Rosario
(LRMS/ADM) Ma. Teresita E. Herrera EdD (Filipino/GAS/Piling Larang) Perlita M.
Ignacio PhD (EsP) Dulce O. Santos PhD (Kindergarten/MTB-MLE) Teresita P.
Tagulao EdD (Mathematics/ABM)