Applied Economics
What is Applied Economics?
Applied economics is the field of study that deals with applying economic theories in real-world scenarios. In the applied version of economics, the conclusions derived from the theoretical analysis are utilized to make complex economic terms and situations easy to understand for the information seekers or recipients.
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Applied economics aims to implement the theoretical facts and enhance the quality of business, adopt the best practices in carrying out daily activities, improve human behavior, etc. In addition, it helps figure out to what extent the choices made by an individual or entity would impact a business or individual decision.
Key Takeaways Applied economics refers to the field of study where the knowledge gained from the theoretical economics lessons can be used to assess what will work well in a particular situation.
It generally uses the basics of economics as the seed to ascribe relevant solutions to real-life problems.
The application of economics makes finding answers to questions related to the environmental sector, human behavior, market situations, legal aspects, etc., easier.
It works for both micro (individual-level) and macro-level (community, business, or national-level) problems.
How Does Applied Economics Work?
Applied economics, as the name suggests, deals with the application of theoretical aspects of the subject. This area of study does not rely on any one principle of economicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a more. Instead, it takes into consideration all the principles of the subject. It applies them in respective sectors to understand the effect of chosen alternatives on the decisions that individuals, policy-makers, and businessmen make.
Some of the concepts and principles that make the applied version of economics effective include econometricsEconometricsEconometrics refer to applying economic theories, statistical inference and mathematics for the economic policymaking and forecasting the future trends. It analyzes the historical and real-world data to conduct statistical tests and more, marginal principle, opportunity costOpportunity CostThe difference between the chosen plan of action and the next best plan is known as the opportunity cost. It's essentially the cost of the next best alternative that has been more, the principle of voluntary returns, the law of diminishing marginal utility.Law Of Diminishing Marginal Utility.The law of diminishing marginal utility states that the amount of satisfaction provided by consuming every additional unit of goods decreases as we increase that goods consumption. Marginal utility is the change in the contentment derived from consuming an extra unit of more, and the real/nominal principle.
The studies of applied economics have shown how effective the implementation of the theoretical principles has been in dealing with a particular cause, issue, or situation. It also indicates how it uses economics as more than just a hub of theories. Instead, the application of the subject is used as a tool to extend the scope of economics from books to real-world scenarios.
As economics is studied as microeconomicsMicroeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and more and macroeconomicsMacroeconomicsMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment more, the applied version of the subject is also implemented at two levels: micro and macro. While the application at the micro-level tries to use theoretical economics to solve issues at the individual level, the macro-level application helps deal with problems at a city, state, or national level.
Relevance
Applied economics marks the utilization of the knowledge and skills acquired by professionals during their theoretical economics lessons. The leaders, policy-makers, and decision-makers use it in any context to figure out how their choices would impact their decisions. However, they can approve or disapprove a strategy, initiative, or step after proper analysis and validation.
The field of study makes individuals apply theories and knowledge to solve their problems. It, therefore, finds relevance in different theories, concepts, and industries, including the game theory.
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With applied economics, finding answers to questions related to the environmental sector, human behavior, market situations, legal aspects, etc., becomes easier. From helping environmentalists determine the cost of carbon emissions to framing legal market strategies with respect to economics, this applied form of the subject lets individuals and entities find answers to the queries they have. For example, the applied field of economics helps utilize analytical tools to assess consumer behavior and accordingly target a market.
Recently, COVID-19 led to the heavy use of resources, which the healthcare sector was unprepared for. The application of economics helped healthcare administration or authorities to conduct predictive analysis, initiate resource allocation, and boost policies to support the sector to tackle the health care turmoil. It shows how applied economics and management remain interrelated no matter which industry professionals work in.
Applied Economics Example
Let us consider an applied economics example to understand the concept better:
Customers usually look forward to buying things with big discounts or those sold for free. So, the marketers use this behavior to inflate their products’ prices and denote the actual price.
For example, brand A sells a T-shirt for $30, whose actual worth is $20. However, it introduces a year-end sale during Christmas and announces a $10 discount on the same T-shirt. As a result, even after giving discounts, the brand sells the T-shirt at its actual rate, while consumers are happy to get it at a big discount.
The instance above shows how to utilize the pricing strategy based on the applied form of economics to determine consumer behavior in the market.
Advantages & Disadvantages
Applied economics helps make business decisions, whether it is the decision to purchase an asset or fixing the price at which they should sell their products/services to customers. This field of study plays a significant role in resolving issues that applied mathematics and accountancy cannot solve.
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However, this applied version of the subject works on certain assumptions. Conducting analysis using the application of economics is normally for a general group. Thus, such generalized principles might not work for individual cases, including certain places or markets.
Frequently Asked Questions (FAQs)
What is applied economics? It deals with the implementation of theoretical principles to deal with a particular cause, issue, or situation. It uses economics as a tool rather than just describing the theory and extends the scope of economics from the text to the real world. What are the primary concerns of applied economics? The primary concern is to ensure the knowledge of economics helps people make relevant decisions based on proper assessment and analysis of different factors. In addition, it intends to improve the quality of business by implementing standard ethical practices, bettering daily life, framing public-friendly policies, and making relevant decisions keeping the same in mind. Why is it important to study applied economics? It is important to study the field as it helps business leaders, policy-makers, and decision-makers understand the effect of their choices on the decisions they make. As a result, they carefully determine the right and not-so-right ways of proceeding with it.
Recommended Articles
This is a guide to what is Applied Economics and its meaning. Here we explain how does it work along with its importance, pros and cons, and examples. You can learn more about economics from the following articles –
Economics vs. Applied Economics
When we hear news reports about monetary policy, GDP, job reports, consumer spending, etc., we think about economics. While these are all important elements of economics, they don’t tell the whole story. By considering economics vs. applied economics, we begin to see its broad scope in society, as well as in our daily lives.
Economics is the theoretical model of how societies function. Applied economics is the implementation of that model broadly and in a myriad of specific circumstances.
Whereas we often think of economics as an esoteric discipline removed from our everyday experience, we see applied economics applying that discipline to real-world issues that affect us all.
Applied Economics: The Science of the Possible
Politics is, according to a well-worn aphorism, the “art of the possible.” Put another way, politics is the art of governance, how we structure and organize our social life. If politics is the art of social organization, applied economics is the tangible science of social organization.
Dr. Aleksandar (Sasha) Tomic, Program Director of Master of Science in Applied Economics at Boston College’s Woods College of Advancing Studies, says applied economics is “thinking about the way things fit together.”
“Economists do not have to be tied to what we think of as the traditional economist career.” In fact, through applied economics, we have the analytical tools to glean insight from data. Applied economics informs policy and decision-making across all sectors of society, public and private.
Five Examples of Applied Economics
Let’s look at five ways we use applied economics in our modern world.
Environmental Economics : What is the cost of command-and-control environmental regulation vs. market-based incentives? How do we put a price on carbon emissions? Should we? Applied economics helps frame solutions for these questions.
: What is the cost of command-and-control environmental regulation vs. market-based incentives? How do we put a price on carbon emissions? Should we? Applied economics helps frame solutions for these questions. Behavioral Economics: How do we employ economic insights and analysis with cognitive psychology to predict how people behave in specific contexts? Applied economics shows us how.
How do we employ economic insights and analysis with cognitive psychology to predict how people behave in specific contexts? Applied economics shows us how. Law and Economics: The two are inexorably intertwined. Laws codify ethics and markets, and human behavior. Applied economics predicts how those laws are best implemented.
The two are inexorably intertwined. Laws codify ethics and markets, and human behavior. Applied economics predicts how those laws are best implemented. Marketing and Economics: Effective marketing relied on informed, evidence-based decision-making. Consumer behavior, policy and ethics, market analysis, and projecting profit-and-loss determine any marketing initiative’s success. Applied economics offers the analytical tools to incorporate each element into an integrated whole.
Effective marketing relied on informed, evidence-based decision-making. Consumer behavior, policy and ethics, market analysis, and projecting profit-and-loss determine any marketing initiative’s success. Applied economics offers the analytical tools to incorporate each element into an integrated whole. Healthcare Economics: Even before COVID-19 gripped the world, healthcare was an industry in rapid transition and under severe stress. Predictive analysis, resource allocation, and determining policy initiatives that support public health are critical roles for applied economics in healthcare.
The fact is, all social factors working together for the shared benefit of all is the purview of applied economics. In a sense, we are all economists now.
Applied Economics and The T-Shaped Professional
The practical knowledge and skills gained from applied economics are relevant for leaders and decision-makers in any context. Based on core economic principles, applied economics focuses on implementation more than theory. It comes down from the tower and gets into the nitty-gritty details of how things work.
Learning how to apply these concepts creates a breadth of knowledge complementing the depth of expertise in any specific field. This results in the “T-shaped professional,” someone able to apply broad analytical, ethically sound, collaborative skills to the issues at hand. These are the people who understand the challenges, know how to collect and analyze the pertinent data to find a solution, and then communicate their insight to their peers.
Graduate studies in applied economics develop what Dr. Tomic calls the “economic intuition” organizations of all types seek in a complex world. The T-shaped professional who understands how things fit together.
Online Master’s in Economics
The online Master of Science in Applied Economics program from Boston College is your path to more significant influence as you help shape a better world.
Students entering the program join a global network of over 180,000 alumni, sharing their insight as they hone their analytical and leadership skills solving real-world problems.
The MSAE program curriculum provides students the skills necessary to analyze and interpret data across various fields, contexts, and disciplines. With these skills, graduates can play key roles in mapping solutions and informing crucial technical and policy decisions.
Some of the areas of study in this wide-ranging (think “T-shaped”) program include:
Fundamental theory : Examine the theoretical principles of micro and macroeconomic theory.
: Examine the theoretical principles of micro and macroeconomic theory. Data analysis : Learn the tools and methods of data analysis, interpretation, forecasting, and predictive analysis: study Big Data Econometrics and the rapid advance of machine learning.
: Learn the tools and methods of data analysis, interpretation, forecasting, and predictive analysis: study Big Data Econometrics and the rapid advance of machine learning. Law and economics : Explore how markets function. Analyze how firms relate to markets. Consider market regulation and its influence on competition, innovation, pricing, and organizational strategy.
: Explore how markets function. Analyze how firms relate to markets. Consider market regulation and its influence on competition, innovation, pricing, and organizational strategy. Ethics and public policy : The art and science of the possible. Investigate how public policy is made and implemented. Evaluate when it’s best to regulate or legislate. Assess the role (or lack thereof) that ethical consideration plays in how policy is formed.
: The art and science of the possible. Investigate how public policy is made and implemented. Evaluate when it’s best to regulate or legislate. Assess the role (or lack thereof) that ethical consideration plays in how policy is formed. Behavioral economics: The intersection of economic and cognitive sciences. A fascinating look at why people do what they do and what influences lead to better individual decisions.
The program entails five required core courses and over two dozen electives. With a wide variety of elective study areas, students can tailor the program to their needs and interests. Ten courses are needed to earn a Master of Science in Applied Economics degree.
If you are ready to advance your career influencing policy and decision-making in the private or public sphere, earning an MSAE degree at Boston College is an excellent first step.
Everyday Economics
Watch our economists share their everyday economic perspectives on video.
For those who aren’t trained economists, hearing the word “economics” might give you pause or make you run the other direction. But using an economic way of thinking is something you’re probably doing every day to help you make decisions, even if you’re not consciously aware of it. Our economists share some of the economic concepts they use in their everyday lives below. We bet you’ve likely made similar decisions (even if you didn’t realize you were considering the price elasticity of various goods).
Opportunity cost
Cortney Cowley, senior economist, uses trips to her favorite bookstore to teach her twin preschoolers about economics.
“Scarlett and Ryder really like to go to one of our local bookstores, and it has a toy section, book section and a coffee shop. When we go, the kids can choose something in the $5-$10 range – a book, small toy or food treat,” she said.
Cowley said her daughter always chooses a book – and her son always chooses a toy. As for herself? She chooses the coffee.
When we choose our items, we are considering the opportunity cost – whatever we give up to get something else.
“When we choose our items, we are considering the opportunity cost – whatever we give up to get something else. So Scarlett’s opportunity cost is the treat and toy, and Ryder’s is the book and the treat.”
While Cowley might be less concerned about her opportunity cost of a book or toy, she did say that her daughter has learned that with her love of books she can go to the library instead and get many more books that are free.
“She gives up the ability to make an investment in a book and keep it long term, but she gains more books to enjoy short-term and gets to spend the money on something else!”
Specialization
Are there economic decisions to make when it comes to outdoor and yard work? Absolutely, according to senior research and policy advisor Brent Bundick.
“A storm hit this year and the high wind caused clogged gutters at my house. Some gutters I could easily reach with my ladder, but others were much higher and would’ve required a longer ladder and taking the risk that I could injure myself.”
Bundick said his choices were to take the day off and purchase a larger ladder or specialize and hire a professional gutter cleaning service.
“Specialization basically means the whole economy is better off when people do the types of things they’re naturally good at and let others do the things they aren’t naturally good at,” he said. “So I decided to specialize and do what I was good at – being an economist! I didn’t take a day off work and I hired a professional service to clean the gutters.”
He notes that specialization can happen at the micro level – like hiring someone to clean gutters or wash windows – or at the macro level, where a country decides to specialize in producing the goods and services that they naturally have or are good at.
Sunk Costs
Is economics for the birds? Nate Kauffman, economist and Omaha Branch Executive, thinks that some economic concepts just might be.
“Last year we decided to invest in a backyard chicken flock as a birthday present for my daughter Leia, and this made her very happy,” he said. “Sometimes though, chickens can be a pain and they cost money to take care of. And even though we sell some of our eggs, we have to pay for chicken feed. The chicken coop we built cost a lot of money too.”
Kauffman said that they could decide to get rid of their chickens because they cost a lot of money to take care of, but that doesn’t consider the economic concept of sunk costs.
Sunk costs are something you’ve already paid for where the costs can’t be recovered. These costs shouldn’t be factored into how you make decisions about the future.
“Sunk costs are something you’ve already paid for where the costs can’t be recovered. These costs shouldn’t be factored into how you make decisions about the future,” he said.
When it comes to the chickens, Kauffman said they shouldn’t make decisions for the future based on the cost of the chicken coop because that is a sunk cost. Plus – getting rid of the chickens would make Leia sad.
“We should consider only those costs that are not already sunk – and we’ll decide to keep the chickens and keep Leia happy.”
Price elasticity and inelasticity of demand
Filling up your car at the gas station can cause sticker shock when the price for a gallon of gas goes up by twenty cents overnight. But research associate Chaitri Gulati explains that you have an everyday economic decision to make as you face the pump.
“What can I do if the price goes up? I still need gas to get to work and back, so I still buy the gas. This is a classic example of price inelastic demand. An increase or decrease to a certain extent in the price of a gallon of gasoline won’t change the quantity I buy for everyday use.”
In contrast, there are times we are willing to make the tradeoff and not purchase something at its advertised price. Those lovely new shoes you see advertised for over $100 a pair? You might be willing to live with what you have until that sleek new pair goes on sale, Gulati contends.
“Unlike gasoline and other inelastic products, I don’t need brand new shoes right away – I can wait for a better price. This is an example of price elastic demand; the changes in the price of an elastic good can lead to large changes in the quantity demanded,” she said.
When it comes to inelastic goods – like fuel, basic food products and medications – the demand for those products will remain steady no matter the price. But the demand for elastic goods can snap like a rubber band – we’re likely to buy fewer of or search the sales for those luxury goods, brand-name clothes and other electronics if the prices rise too high.
Selection
You may have learned about natural selection in biology class – the survival of the fittest. But research and policy officer José Mustre-del-Río said the economic concept of selection focuses on human behavior in the real world and the conclusions we can draw from that behavior. A great example to illustrate the concept? NFL quarterbacks.
“Arguably two of the most impressive quarterbacks in the NFL right now are the Chiefs’ Patrick Mahomes and Russell Wilson of the Seattle Seahawks. One trait that these two quarterbacks share is that they both played college football and baseball,” he said.
The economic concept of selection focuses on human behavior in the real world and the conclusions we can draw from that behavior.
Mustre-del-Río notes that you could infer that all quarterbacks should play baseball and then they’d turn into amazing professionals in the NFL. He said, however, that this is where the concept of selection comes into play.
“It’s very likely they both selected into playing baseball and football because to begin with they were amazing athletes with amazing athletic backgrounds. So this is really where human behavior and decision making can change inference,” he said. “Here this rather suggests that playing baseball and football is an indicator of being a good athlete – not that playing college baseball is a good indicator of future success in the NFL.”
Selection can be a powerful tool to apply in your daily life and decision-making, Mustre-del-Río says, helping you ensure that when you make an inference you are considering all of the factors at play.