Applied Economics

Updated on April 9, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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. 

what is applied economics

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Applied Economics (wallstreetmojo.com)

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 society.read 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 hypothesis.read 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 forgiven.read 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 goods.read 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 supply.read 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 rates.read 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.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

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.

applied economics relevance

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Applied Economics (wallstreetmojo.com)

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. 

Applied Economics Pros & Cons

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Applied Economics (wallstreetmojo.com)

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.

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 –