APPLIED ECONOMICS The word ‘Economics’ comes from two old Greek words - ‘oikos’, which means ‘home’ and ‘nomus’ which means ‘management’. Therefore, economics literally means ‘management of the home’. However, the meaning is now much larger, meaning the management of all world resources. Term Associated with Economics          Money is a system of value that facilitates the exchange of goods in an economy. Using money allows buyers and sellers to pay less in transaction costs, compared to barter trading. Businesses rely on economics for product research and development, marketing, purchase and resource allocation, and many other strategic decision-making strategies. Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output. Ideally this output will be a good or service which has value and contributes to the utility of individuals. Distribution is the way total output, income, or wealth is distributed among individuals or among the factors of production (such as labour, land, and capital). Consumption plays an important role in the income and employment theory under Keynesian economics as put forth by John Maynard Keynes. Keynesian theory states that if consuming goods and services does not increase the demand for such goods and services, it leads to a fall in production. Scarcity is the basic and central economic problem confronting every society. It is the heart of the study of economics and the reason behind its establishment. Wealth - Refers to anything that has a functional value (usually in money), which can be traded for goods and services. Wealth, therefore, is the stock of net assets by individuals or households. Exchange - This is the process of trading goods and/or services for money and/or its equivalent. It also includes the buying of goods and services either in the form of barter or through market. Distribution - This is the process of allocating or apportioning scarce resources to be utilized by the household, the business sector, and the rest of the world. 3 Es in Economics Efficiency - Efficiency refers to productivity and proper allocation of economic resources. It also refers to the relationship between scarce factor inputs and outputs of goods and services. This relationship can be measured in physical terms (technological efficiency) or cost terms (economic efficiency). Being efficient in the production and allocation of goods and services saves time, money, and increases a company's output. Equity - Equity means justice and fairness. Thus, while technological advancement may increase production, it can also bear disadvantages to employment of workers. Due to the presence of new equipment and machineries, manual labor may not be necessary, and this can result in the retrenchment or displacement of workers. Effectiveness - Effectiveness means attainment of goals and objectives. Economics is an important and functional tool that can be utilized by other fields. For instance, with the use of both productions (through manual labor or through technology), whatever the output is, it will be useful for the consumption of the society and the rest of the world. Difference of Needs and Wants Need - something that is necessary for survival. Want - something that you desire to have, but is not necessary for survival. In economics, needs are things that are essential for human survival, while wants are things we may desire. Wants may be helpful or make life easier, but unless we would die without them, they are not considered needs. Relation of Scarcity and Economics The problem of scarcity gave birth to the study of economics. Their relationship is such that if there is no scarcity, there is no need for economics. The study of economics was essentially founded in order to address the issue of resource allocation and distribution, in response to scarcity. Positive and Normative Positive Economics is an economic analysis that considers economic conditions “as they are”, and or considers economics“as it is”. It uses objective or scientific explanations in analyzing the different transactions in the economy. It simply answer the question “what is”. Normative Economics is economic analysis which judges economic conditions “as it should be”. It is that aspect of economics that is concerned with human welfare. It deals with ethics, personal value judgements and obligations analyzing economic phenomena. It answers that question “What should be”. It is also referred to as policy economics because it deals with the formulation of policies to regulate economic activities. Four Basic Economic Questions To address the problem of scarcity, the society must answer four basic economic questions. These questions are as follows: - An economy must identify what are the commodities needed to be produced for the utilization of the society in everyday life. A society must also take into account the resources that it possesses before deciding what goods or services to produce. - In a market economy, what gets produced in the society is driven by prices. Resources are allocated to the production of goods and services that have high prices and low input prices relative to one another. - There is a need to identify the different methods and techniques in order to produce commodities. The society must determine whether to employ labor intensive production or capital intensive production.  - This identifies the number of commodities needed to be produced in order to answer the demand of the society. The optimum amount of production must be approximated by producers. Underproduction will result to a failure to meet the needs and wants of the society. On the other hand, overproduction results to goods and services going to waste.   - This question identifies the people or sectors who demand the commodities produced in a society. Economists must determine the "target market" of the goods and services which are to be produced to understand their consumption behaviors and patterns. An understanding of these result to higher sales of goods, and ultimately to increased profits. For those who can pay the highest price is for whom goods and services are produced.   Goods and Services In economics, goods are defined as items that satisfy human wants, provide utility or usefulness, and are scarce (have limited availability). An economic good must also be capable of being transferred from one person to another or produced and consumed. In economics, a service is an intangible commodity. More specifically, services are an intangible equivalent of economic goods. Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased. Some Factors Affecting the Supply   Goods and services are sometimes called commodities - things to buy and sell. Supply and Demand Supply is the amount of a specific good or service that's available in the market. Demand is the amount of the good or service that customers want to buy. Supply and demand are both influenced by the price of goods and services. For every good / service in a free economy there is supply and demand. Companies can choose freely which goods / services to offer, and people can choose freely what to buy. However, the supply and demand for a particular good / service is constantly changing. Often, there is not enough supply to satisfy demand, or not enough demand to satisfy supply. In a free economy, neither supply nor demand would win because the two depend on each other. Without demand there would be no supply. Without supply there would be no demand. If nobody wants to buy shoes, then shops will not offer them for sale. If there are never any shoes in the shops, people will not try to buy them. Some Factors Affecting the Demand  Price of the product - There is an inverse (negative) relationship between the price of a product and the amount of that product consumers are willing and able to buy. Consumers want to buy more of a product at a low price and less of a product at a high price. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The The consumer’s income - The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we're talking about. Price of Related Goods - As with income, the effect that this has on the amount that one is willing and able to buy depends on the type of good we're talking about. Think about two goods that are typically consumed together. Tastes and Preference - This is a less tangible item that still can have a big impact on demand. There are all kinds of things that can change one's tastes or preferences that cause people to want to buy more or less of a product. Consumer’s Expectation - It doesn't just matter what is currently going on - one's expectations for the future can also affect how much of a product one is willing and able to buy. Number of Consumer - As more or fewer consumers enter the market this has a direct effect on the amount of a product that consumers (in general) are willing and able to buy.   Prices of Input - In addition to the price of the product being the main factor as stated in the Law of Supply, the price of production inputs also plays a part. The lowest price at which a firm can sell a good without losing money is the amount of money that it costs to produce it. Producing a good or service involves taking inputs and applying a process to them to produce an output. Technology - Production of a good involves taking inputs, applying a process to them, and producing an output. Well, production technology is involved in the process part. Increases in the level of production technology can make that process more efficient. Producer’s Expectations - It doesn't just matter what is currently going on - one's expectations can also affect how much of a product one is willing and able to sell. Number of Producer in the Market - As more or fewer producers enter the market this has a direct effect on the amount of a product that producers (in general) are willing and able to sell. More competition usually means a reduction in supply, while less competition gives the producer a opportunity to have a bigger market share with a larger supply. Inflation When taking a look at inflation, it is important to also consider money. Inflation deals with the fluctuations in prices which also has to do with the money supply. Money is defined as the assets that one has in order to make transactions. In most economies, the money supply is controlled by a central bank. Sometimes governments print extra money in order to raise revenue. This is known as seigniorage. The government prints money to increase the money supply which will in turn raise the inflation rate. Microeconomics and Macroeconomics Microeconomics - This is the branch of economics which deals with the individual decisions of units of the economy-firms and households, and how their choices deter- mine relative prices of goods and factors of production. The market is the central concept of microeconomics. It  focuses on its two main players the buyer and the seller, and their interaction with one another. Microeconomics operates on the level of the individual business firm, as well as that of the individual consumer. It concerns how a firm maximizes its profits, and how a consumer maximizes his/her satisfaction. Macroeconomics - It is the branch of economics that studies the relationship among broad economic aggregates like national income, national output, money supply, bank deposits, total volumes of savings, investment, consumption expenditure, general price level of commodities, government spending, inflation, recession, employment, and money supply. The term macro, in contrast to micro, implies that it seeks to understand the behavior of the economy as a whole. Macroeconomics focuses on the four specific sectors of the economy: the behavior of the aggregate household (consumption); the decision making of the aggregate business (investment); the policies and projects of the government (government spending); and the behavior of external/foreign economic agents, through trading (export and import). 2. Labor - Labor is any form of human effort exerted in the production of goods and services. Labor covers a wide range of skills, abilities, and characteristics. It includes factory workers who are engaged in manual work.   Because people cannot have everything they want, they are forced to make choices between several options. Opportunity cost refers to the foregone value of the next best alternative. It is the value of what is given-up when one makes a choice. The thing thus given-up is called the opportunity cost of one's choice. Production Production is the process of combining various inputs, both material and immaterial in order to create output. Ideally this output will be a good or service which has value and contributes to the utility of individuals. : Occupational segregation is the distribution of workers across and within occupations, based upon demographic characteristics, most often gender. Other types of occupational segregation include racial and ethnicity segregation, and sexual orientation segregation. 3. Capital - Capital is man-made goods used in the production of other goods and services. It includes buildings, machinery, and other physical facilities used in the production process. Money is not actually considered as capital in economics as it does not produce a good or service but it is rather a form of asset that is used as a medium of exchange. The Concept of Opportunity Cost When one makes choices, there is always an alternative that has to be given up. Opportunity cost is expressed in relative price. This means that the price of one item should be relative to the price of another. Collective ownership - If everybody in a community has equal ownership of natural resources, it can be difficult to get everyone to agree on how they should be used. (Red Village)  is typically cash or liquid assets being held or obtained for expenditures. In a broader sense, the term may be expanded to include all of a company's assets that have monetary value, such as its equipment, real estate, and inventory. are physical assets a company uses to produce goods and services for consumers. Capital goods include fixed assets, such as buildings, machinery, equipment, vehicles, and tools. Capital goods differ from consumer goods, which are the end product of production and manufacturing. 4. Entrepreneurship - An entrepreneur is a person who organizes, manages and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. However, since an entrepreneur performs a special type of work, it should not be considered as part of labor. Entrepreneurs possess managerial skills needed in building, operating, and expanding a business. Factors of Production 1. Land - This broadly refers to all natural resources, which are given by, and found in nature, and are, therefore, not man made. It includes forests, mountains, rivers, oceans, minerals, air, and sunshine, light, etc. Land can sometimes be classified as a fixed resource. The compensation for use of land is called rent.  An enterprise may be a corporation, a quasi- corporation, a nonprofit institution, or an unincorporated enterprise. Enterprises can be classified in different categories according to their size; for this purpose, different criteria may be used, but the most common is number of people employed. Basic Decision Problems    Private ownership - Everybody needs to use land (natural resources) to survive. If too much land is privately owned by a small number of people, then it can be difficult for other people to get access to natural resources. The owner might refuse to allow them to use the land, or charge them a very high price. (Blue Village) Public ownership - Governments don’t always act in the interests of the people, particularly in non-democratic countries. If the government owns most of the natural resources, there is a risk that they will be used for the benefit of the government and its friends only, and not the people. (Green Village) Consumption Members of society, with their individual wants, determine what types of goods or services they want to utilize or consume, and the corresponding amounts thereof that they should purchase and utilize. The choices range from food, to shelter, to clothing, etc. There is also a choice between privately used goods or those supplied by government, such as security and defense, infrastructure, or irrigation. Consumption is the basic decision problem that the consumers must always deal with in their day to day activities. Production Socialism The problem of production is generally a concern of producers. They determine the needs, wants, and demands of consumers, and decide how to allocate their resources to meet these demands. Goods and services may be produced by different methods of production, depending on the firm's technological state, and on the available resources within the society. Distribution  Mixed Economy  This problem is primarily addressed to the government. There must be proper allocation of all the resources for the benefit of the whole society. In a market economy, though, absolute equality of every member, as to the distribution of resources, can never be achieved. Growth over Time This is the last basic decision problem that a society or nation must deal with. Societies continue to live on. They also grow in numbers. On the one hand, people have definite lives, but societies (or nations) have longer, if not infinite lives. All the problems of choice, consumption, production, and distribution have to be seen in the context of how they will affect future events. Economic System An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society Economic globalization refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. Positive and Negative effect of Globalization Globalization has paved the way for new markets, enhanced trade and investment, and fostered cross-border technology and knowledge transfers. These developments have contributed to greater economic growth, improved productivity, and job creation in numerous areas worldwide.  Traditional Economy Traditional economy is basically a subsistence economy. A family produces goods only for its own consumption. The decisions on what, how, how much, and for whom to produce are made by the family head, in accordance with traditional means of production.  Command Economy  Command economy is a type of economy, wherein the manner of production is dictated by the government. The government decides on what, how, how much, and for whom to produce. It is an economic system characterized by collective ownership of most resources. In this system, all productive enterprises are owned by the people and administered by the state. Market Economy  Market economy or capitalism's basic characteristic is that the resources are privately owned, and that the people themselves make the decisions. It is an economic system wherein most economic decisions and means of production are made by the private owners. Under this economic system, factors of production are owned and controlled by individuals, and people are free to produce goods and services to meet the demand of consumers, who, in turn, are also free to choose goods according to their own likes. This economy is a mixture of market system and the command system. The Philippine economy is described as a mixed economy since it applies a mixture of three forms of decision-making. However, it is more market-oriented rather than command or traditional. Economic Globalization Type of Economic System  Socialism is an economic system wherein key enterprises are owned by the state. In this system, private ownership is recognized. However, the state has control over a large portion of capital assets, and is generally responsible for the production and distribution of important goods.   Increases economic growth. By increasing the international exchange of goods, technological advances, and information, globalization increases economic development for any country participating in the global economy. An increase in economic growth means better living standards, higher incomes, more wealth in a country, and, often, less poverty. Makes production more affordable. A global market allows businesses wider access to production opportunities and consumers, there are more goods available at a wider range of price points. Promotes working together. When different countries come together to engage in trade and investments in a global financial market, they become interdependent and often come to rely on one another for certain goods and services. Brings opportunities to poorer countries. Globalization allows companies to move their production from high-cost locations to lower-cost locations abroad—this means bringing jobs, information technology, and other economic opportunities to countries with fewer resources. Not everything about globalization is beneficial. Any change has winners and losers, and the people living in communities that had been dependent on jobs outsourced elsewhere often suffer.  Unequal economic growth. While globalization tends to increase economic growth for many countries, the growth isn’t equal—richer countries often benefit more than developing countries.     Lack of local businesses. The policies permitting globalization tend to advantage companies that have the resources and infrastructure to operate their supply chains or distribution in many different countries, which can hedge out small local businesses. Increases potential global recessions. When many nations’ economic systems become interdependent, the likelihood of a global recession increases dramatically—because if one country’s economy starts to struggle, this can set off a chain reaction that can affect many other countries simultaneously, causing a worldwide financial crisis. Exploits cheaper labor markets. Globalization allows businesses to increase jobs and economic opportunities in developing countries, where the cost of labor is often cheaper. However, overall economic growth in these countries may be slow or stagnant. Causes job displacement. Globalization doesn’t result in an increased number of jobs; rather, it redistributes jobs by moving production from high-cost countries to lower-cost ones. This means that high-cost countries often lose jobs due to globalization, as production goes overseas.