What Is Applied Economics?
Let me tell you directly: the aim of applied economics is to inform your economic decisions and predict possible outcomes. It takes the conclusions from economic theories and empirical studies and relates them to real-world situations you might face.
The purpose here is to improve the quality of practice in business, public policy, and your daily life by thinking rigorously about costs versus benefits, incentives, and human behavior. This can involve case studies and econometrics, where you apply real-world data to statistical models and compare results against the theories being tested.
Key Takeaways
- Applied economics is the use of insights from economic theory and research to make better decisions and solve real-world problems.
- Applied economics is a popular tool in business planning and for public policy analysis and evaluation.
- You as an individual can also benefit from applying economic thinking and insights to personal and financial decisions.
Understanding Applied Economics
Applied economics is the application of economic theory to determine the likely outcomes associated with various possible courses of action in the real world. By better understanding the likely consequences of choices made by individuals, businesses, and policymakers, we can help them make better choices.
If economics is the science of studying how people use various, limited means available to them to achieve given ends, then applied economics is the tool to help choose the best means to reach those ends. As a result, applied economics can inform a 'to-do' list identifying steps that can be taken to increase the probability of positive outcomes in real-world events.
The use of applied economics may first involve exploring economic theories to develop questions about a circumstance or situation and then drawing upon data resources and other frames of reference to form a plausible answer to that question. The idea is to establish a hypothetical outcome based on the specific ongoing circumstances drawn from the known implications of general economic laws and models.
Applied Economics Relevance in Financial Choices
Applied economics can illustrate the potential outcomes of financial choices you make as an individual. For example, if you desire to own a luxury good but have limited financial resources, an assessment of the cost and long-term impact such a purchase would have on your assets can compare them to the expected benefit of the good. This can help you determine if such an expense is worthwhile.
Beyond finances, understanding the meaning of economic theories like rational choice, game theory, or the findings of behavioral economics and evolutionary economics can help you make better decisions and plan for success in your personal life and relationships.
For instance, if you want to quit smoking, you might recognize that you're prone to hyperbolic discounting and choose to employ precommitment strategies to support your long-term preference to quit over more powerful short-term preferences to smoke. Or if you're in a group of friends sharing a large bowl of popcorn, you might explicitly or implicitly agree to limits or shares for how much popcorn each will take to avoid a tragedy of the commons situation.
Making Better Business Decisions
Applied economics can also help businesses make better decisions. Understanding the implications of economic laws of supply and demand combined with past sales data and marketing research regarding their target market can help a business with pricing and production decisions.
Awareness of economic leading indicators and their relationship to a firm's industry and markets can help with operational planning and business strategy. Understanding economic ideas such as principal-agent problems, transaction costs, and the theory of the firm can help businesses design better compensation schemes, contracts, and corporate strategies.
Bottom Line
Applied economics is an invaluable tool for public policymakers. Many economists are employed to predict both the macro- and microeconomic consequences of various policy proposals or to evaluate the effects of ongoing policy.
Applied macroeconomic modeling is routinely used to project changes in unemployment, economic growth, and inflation at the national, regional, and state levels. Understanding the way the economic incentives and compensating behaviors created by public policy impact real-world trends in things like job growth, migration, and crime rates is critical to implementing effective policy and avoiding unintended consequences.
For example, understanding what the application of the laws of supply and demand implies about the effects of price floors, along with case studies and empirical research, can inform better policy regarding minimum wage laws.
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