Applied Economics
Economic Concepts, Market Dynamics, and Philippine Economy
In This Lesson
Basic Economic Concepts
What is Economics?
The study of how individuals, businesses, and societies allocate scarce resources to satisfy unlimited wants and needs. It examines choices and their consequences.
Scarcity
The fundamental economic problem: limited resources vs. unlimited wants.
- Resources are finite (land, labor, capital)
- Human wants are unlimited
- Forces us to make choices
- Leads to opportunity cost
Opportunity Cost
The value of the next best alternative given up when making a choice.
Example: If you choose to study instead of working, the opportunity cost is the wages you could have earned.
Factors of Production
- Land: Natural resources (soil, water, minerals)
- Labor: Human effort (physical and mental)
- Capital: Tools, machines, buildings
- Entrepreneurship: Risk-taking, innovation
Microeconomics
Studies individual economic units.
- Consumer behavior
- Firm decisions
- Market prices
Macroeconomics
Studies the economy as a whole.
- National income
- Inflation, unemployment
- Economic growth
Supply & Demand
Law of Demand
As price increases, quantity demanded decreases (inverse relationship).
Ceteris paribus: All other factors held constant
Price ↑ → Quantity Demanded ↓
Law of Supply
As price increases, quantity supplied increases (direct relationship).
Producers: Higher prices = more profit incentive
Price ↑ → Quantity Supplied ↑
Market Equilibrium
The point where supply and demand curves intersect. Quantity demanded equals quantity supplied.
Surplus: Price above equilibrium → excess supply
Shortage: Price below equilibrium → excess demand
Demand Shifters
- Income: Higher income → more demand (normal goods)
- Tastes: Preferences change demand
- Substitutes: Price of alternative goods
- Complements: Price of related goods
- Population: More buyers → more demand
- Expectations: Future price expectations
Supply Shifters
- Input Costs: Higher costs → less supply
- Technology: Better tech → more supply
- Number of Sellers: More firms → more supply
- Taxes/Subsidies: Affect production costs
- Weather: Affects agricultural supply
GDP & National Income
Gross Domestic Product (GDP)
The total market value of all final goods and services produced within a country in a given period.
GDP = C + I + G + (X - M)
- C = Consumer Spending
- I = Business Investment
- G = Government Spending
- X - M = Net Exports (Exports - Imports)
Nominal GDP
GDP measured at current market prices. Can be misleading due to inflation.
Real GDP
GDP adjusted for inflation using constant base year prices. Better for comparison.
GDP Per Capita
GDP Per Capita = GDP ÷ Population
Average economic output per person; indicator of standard of living
Philippine GDP (2023)
- Nominal GDP: ~$400+ billion (USD)
- GDP Growth Rate: ~5-6% annually
- Major Sectors: Services (60%), Industry (30%), Agriculture (10%)
- Global Rank: Top 40 economies
Economic Indicators
Inflation
General increase in price levels over time, reducing purchasing power.
Inflation Rate = [(CPI₂ - CPI₁) / CPI₁] × 100
- CPI: Consumer Price Index (basket of goods)
- Causes: Demand-pull, cost-push, money supply
- Effects: Hurts savers, fixed-income earners
- BSP Target: 2-4% inflation in Philippines
Unemployment
People willing and able to work but cannot find employment.
Unemployment Rate = (Unemployed / Labor Force) × 100
- Frictional: Between jobs
- Structural: Skills mismatch
- Cyclical: Due to recession
- Seasonal: Weather-based
Business Cycle
Recurring pattern of economic expansion and contraction.
Interest Rates
The cost of borrowing money. Set by central banks (BSP in Philippines).
- Higher rates → Less borrowing → Slower growth (controls inflation)
- Lower rates → More borrowing → Faster growth (stimulates economy)
Exchange Rate
The value of one currency in terms of another.
- Appreciation: Peso strengthens vs dollar (₱50 → ₱48)
- Depreciation: Peso weakens vs dollar (₱50 → ₱55)
- Floating Rate: Determined by market forces