Economics as Applied Science -PDF ( GRADE 11 LESSON.2)

grade 11- lesson 2

1. Lesson 2:
Economics as an Applied Science

2. Specific Objectives:
At the end of the lesson, the learners will be
able to:
1. Discuss why economics is an applied science;
2. Explain the basic economic problems; and
3. Understand how applied economics work.

3. Applied Economics:
Bridging Theory and Practice

4. What is Applied Economics?

5. Applied economics is the practical application of economic
theories and principles to real-world situations and problems.
It involves taking abstract economic concepts, models, and data
and use them to analyze specific issues, develop effective policies,
make informed decisions, solve practical problems in various
sectors such as business, finance, public policy, healthcare, and
more.
In essence, it's about using economics to solve problems.

6. The Concept of Applied Economics

7. The concept of applied economics centers on the idea
that economic theories and models are not just abstract
concepts but tools that can be used to understand and
address real-world issues.
It is about taking the foundational theories from
economics, such as supply and demand, market
structures, and economic growth, and applying them to
specific scenarios to analyze outcomes, make
predictions, and guide decision-making.

8. For example, applied economics might involve:
➢Policy Analysis: Evaluating the potential impact of new taxes,
subsidies, or regulations on the economy.
➢Market Analysis: Assessing how changes in consumer
preferences might affect the demand for a product.
➢Financial Economics: Applying economic principles to understand
financial markets, risk management, and investment strategies.
➢Environmental Economics: Analyzing the economic impact of
environmental policies or the costs and benefits of sustainable
practices.

9. Importance of Studying Applied Economics

10. Studying applied economics is crucial for several
reasons:
1. Informed Decision-Making: It equips individuals
and organizations with the tools to make informed
decisions based on economic data and analysis.
This can lead to more efficient allocation of
resources, better policy design, and improved
business strategies.

11. 2. Policy Development and Evaluation: Applied
economics plays a vital role in public policy by
helping policymakers understand the potential
outcomes of their decisions. It aids in designing
policies that promote economic growth, reduce
inequality, and address issues like unemployment
and inflation.

12. 3. Problem-Solving: Applied economics provides a
framework for addressing practical problems in
various fields. Whether it’s optimizing production
processes in a business or designing a healthcare
system that balances cost and accessibility,
applied economics offers solutions grounded in
economic theory.

13. 4. Understanding Economic Impacts: It helps in
understanding the broader economic impacts of
various actions, from corporate decisions to
government interventions. This understanding is
essential for anticipating potential consequences
and mitigating risks.

14. 5. Bridging Theory and Practice: By linking
theoretical concepts to real-world applications,
applied economics ensures that economic theory
remains relevant and useful in addressing
contemporary challenges.

15. In summary,
➢Applied economics is essential for
understanding how economic theories
translate into real-world actions and their
consequences.

16. ➢By studying applied economics, you develop
the skills to analyze complex problems, make
data-driven decisions, and contribute to the
improvement of economic conditions.

17. ➢Applied economics is a vital field that
transforms theoretical economic knowledge
into actionable insights, enabling individuals,
businesses, and governments to make better
decisions and solve complex economic
problems.

18. Econometrics:
The Language of Economic Data

19. ➢Econometrics is a branch of economics that uses
statistical and mathematical methods to analyze
economic data, test economic theories, and forecast
future economic trends.
➢Econometrics bridges the gap between economic
theory and real-world observations, allowing
economists to quantify economic phenomena and
make more informed decisions.

20. ➢The word "econometrics" combines "economics" and
"metrics," reflecting its focus on measuring and
quantifying economic relationships.
➢In simpler terms, it is the art and science of using
numbers to understand the economy.

21. The Concept of Econometrics

22. At its core, econometrics aims to translate qualitative
economic concepts into quantifiable information.
It does this by employing statistical tools and
techniques to analyze economic data,
test hypotheses, and build models that can predict
future economic behavior.

23. Econometrics relies on a combination of:
➢economic theory
➢mathematics, and
➢statistics
It starts with a hypothesis derived from economic theory,
then uses statistical methods to test this hypothesis using
real-world data. The results of this analysis can then be used
to refine the economic theory, make predictions, or inform
policy decisions.

24. Importance of Econometrics in Economics
1.Testing Economic Theories
2.Quantifying Economic Relationships
3.Forecasting Economic Trends
4.Evaluating Policy Effectiveness

25. Econometrics plays a crucial role in modern economics
for several reasons:
1. Testing Economic Theories: Econometrics provides a
rigorous framework for testing economic theories and
hypotheses using real-world data. This allows
economists to determine whether theoretical models
accurately reflect reality and identify areas where the
theory needs to be revised.

26. Examples of how econometrics is used to test economic theories:
1. Testing the Law of Demand:
Theory:The law of demand states that as the price of a good increases, the
quantity demanded decreases, holding all other factors constant.
Econometric Test:Economists can use regression analysis to study the
relationship between the price of a good and the quantity demanded. They
would collect data on the price and quantity of a good over time,
controlling for other factors that might affect demand, such as income,
consumer preferences, and the prices of related goods. If the regression
analysis shows a negative relationship between price and quantity
demanded, it supports the law of demand.

27. 2. Testing the Impact of Minimum Wage Laws:
Theory: There are two opposing theories about the impact of minimum
wage laws on employment. One theory suggests that raising the minimum
wage will lead to job losses as businesses reduce their labor costs. The
other theory suggests that raising the minimum wage will lead to higher
wages for low-wage workers without significant job losses.
Econometric Test: Economists can use econometric models to study the
relationship between minimum wage laws and employment levels. They
would collect data on minimum wage laws and employment rates across
different regions or time periods. By controlling for other factors that
might affect employment, they can estimate the causal impact of
minimum wage laws on employment.

28. 2. Quantifying Economic Relationships: Econometrics
helps economists quantify the relationships between
different economic variables. This allows them to
understand the magnitude and direction of these
relationships, which is essential for making informed
policy decisions.

29. 1. Measure the Strength and Direction of Relationships:
Example: Economic theory suggests a positive relationship between
education and income.
Econometrics can quantify this relationship, showing not just that
more education leads to higher income, but by how much income
increases for each additional year of education. This provides a
much clearer picture than simply saying "education is good for
your income."

30. 2. Provide Evidence for Policy Decisions:
Example: Should the government raise the minimum wage?
Econometrics can quantify the potential impact on employment,
wages, and overall economic outcomes. This evidence helps
policymakers make informed decisions about minimum wage
policy.

31. 3. Forecasting Economic Trends: Econometrics is used to
develop models that can predict future economic
trends. This helps policymakers anticipate economic
shocks and implement policies that can mitigate their
impact. It also enables businesses to make more
informed decisions about investment, production, and
pricing.

32. Examples of Economic Forecasting Using Econometrics:
➢Predicting GDP Growth:Economists use time series models and
regression analysis to forecast GDP growth based on historical data
and current economic indicators.
➢Forecasting Inflation:Econometric models can predict inflation rates
based on factors like commodity prices, wage growth, and monetary
policy.
➢Analyzing the Impact of Policy Changes:Econometrics can be used to
estimate the effects of government policies, such as tax cuts or
spending programs, on economic growth, employment, and inflation.

33. 4. Evaluating Policy Effectiveness: Econometrics can be
used to evaluate the effectiveness of government
policies. By comparing economic outcomes before and
after a policy change, economists can determine
whether the policy achieved its intended goals and
identify any unintended consequences.

34. Examples of Policy Evaluation Using Econometrics:
➢Evaluating the Impact of Tax Cuts: Econometric models can estimate
the effects of tax cuts on economic growth, investment, and
employment.
➢Assessing the Effectiveness of Job Training Programs:Econometric
studies can evaluate the impact of job training programs on
employment rates, wages, and labor market participation.
➢Analyzing the Effects of Minimum Wage Laws:Econometrics can be
used to estimate the impact of minimum wage laws on employment,
wages, and overall economic outcomes.

35. The Basic Economic Problems:
Scarcity and Choice

36. The basic economic problems arise from the fundamental
concept of scarcity. This means that human wants are
unlimited, but the resources available to satisfy those wants
are limited. This creates a fundamental conflict that every
economy must address.
The scarcity of resources forces societies to make choices
about how to allocate those resources, leading to three
central economic problems:

37. 1. What to Produce?
2. How to Produce?
3. For Whom to Produce?

38. 1. What to Produce?
The first problem is deciding what goods and
services to produce and in what quantities. This
involves allocating scarce resources to different
sectors of the economy. Since resources are
limited, a society cannot produce everything it
desires. It must prioritize certain goods and
services over others.

39. Example:
1. Guns vs. Butter:
This classic example illustrates the trade-off between
producing goods for defense (guns) and goods for civilian
consumption (butter). A society must decide how much of its
resources to allocate to each sector. More spending on
defense means less spending on education, healthcare, or
infrastructure. This decision reflects a society's priorities and
values.

40. 2. Renewable vs. Non-Renewable Energy:
With growing concerns about climate change, societies face
a critical decision about energy production. Should they
prioritize renewable energy sources like solar and wind
power, even if they are more expensive in the short term? Or
should they continue relying on cheaper but polluting non-
renewable sources like fossil fuels? This decision involves
weighing environmental costs against economic costs and
considering long-term sustainability.

41. 2. How to Produce?
The second problem is deciding how to
produce the chosen goods and services. This
involves selecting the best production
techniques, considering the availability of
resources and their relative costs.

42. 1. Labor-Intensive vs. Capital-Intensive Production:
This is a classic dilemma. A society can choose to produce
goods using a lot of manual labor (labor-intensive) or rely
heavily on machinery and automation (capital-intensive).
•Labor-intensive: This often means lower initial investment
costs but potentially higher ongoing labor costs. It can
also be beneficial in areas with high unemployment.
•Capital-intensive: This often means higher initial
investment but potentially lower ongoing costs per unit
produced. It can lead to higher productivity and efficiency.

43. The choice depends on factors like the cost of labor, the cost
of capital, the availability of skilled labor, and the nature of
the goods being produced. For example, a developing country
with abundant cheap labor might choose labor-intensive
agriculture, while a developed country with high wages
might opt for capital-intensive manufacturing.

44. 2. Public vs. Private Production:
Societies must decide whether certain goods and services
should be produced by the government (public sector) or by
private companies (private sector).
Public Sector: This can be used to provide essential services
like healthcare, education, and infrastructure, ensuring
access for all citizens. However, public sector production can
be inefficient and subject to political influence.

45. Private Sector: This is driven by profit motives and can be
more efficient in allocating resources. However, private
sector production can lead to market failures, where goods
and services are under-provided or overpriced.
The choice depends on factors like the nature of the good or
service, the potential for market failure, and the
government's ability to efficiently provide the good or
service.

46. 3. For Whom to Produce?
The third problem is deciding how to distribute the
produced goods and services among the members of
society. This involves determining who gets what share
of the national output. The distribution of income and
wealth plays a significant role in determining who has
access to goods and services. Societies must consider
issues of fairness, equality, and efficiency in deciding
how to allocate resources.

47. 1. Income Inequality and Access to Goods:
A significant economic problem is the unequal distribution of
income and wealth. This leads to disparities in access to
essential goods and services.
Example:In many countries, a small percentage of the
population holds a disproportionate share of wealth, while a
large segment struggles to meet basic needs. This can lead
to situations where luxury goods are readily available for the
wealthy, while essential goods like healthcare and education
are scarce for the poor.

48. 2. Government Subsidies and Targeted Assistance:
Governments often use subsidies or targeted assistance programs
to support specific groups or sectors of the economy. This raises
questions about the fairness and efficiency of these programs.
Example: Should a government provide subsidies to farmers to
support agricultural production, even if it leads to higher food
prices for consumers? Or should it focus on providing direct
assistance to low-income families? These decisions involve
balancing the needs of different groups and considering the
potential unintended consequences of government intervention.

49. Opportunity Cost:
The Value of What You Give Up

50. Opportunity Cost
Is the value of the next best alternative that
you give up when making a choice.
In simpler terms, it's the cost of choosing
one option over another.

51. Understanding the Concept
Every decision involves a trade-off. When
you choose one option, you automatically
give up the opportunity to choose something
else. The value of that something else is the
opportunity cost.

52. Example:
You have Php1,000 to spend. You can either
buy a new pair of shoes or save the money
for a concert ticket of Bini. If you choose to
buy the shoes, the opportunity cost is the
enjoyment you would have gotten from the
concert.

53. Examples:
➢Education vs. Job: Choosing to pursue higher
education means giving up potential earnings from a
job.
➢Leisure vs. Work: Deciding to spend a day relaxing
means forgoing the opportunity to earn money.
➢Investment choices: Investing in stocks might mean
giving up the opportunity to invest in real estate.

54. Key Points
✓Scarcity is the root: Opportunity cost arises due to scarcity,
meaning limited resources and unlimited wants.
✓Not just money:Opportunity cost isn't always about money. It
can be time, resources, or anything valuable.
✓Decision making tool: Understanding opportunity cost helps in
making informed decisions by weighing the benefits of different
options.
✓Relative, not absolute:The opportunity cost depends on the
alternatives available. What you give up depends on your
options.

55. Opportunity cost is a powerful concept that
helps us understand the true cost of making
choices. By considering the value of the best
alternative we give up, we can make more
informed decisions and allocate our
resources more efficiently.

56. End