Applied Economics

The study of economic principles when they are applied to specific scenarios or situations

What is Applied Economics?

Applied economics is generally considered to be the study of economic principles when they are applied to specific scenarios or situations. In the study and research of economics, there exist two fundamental areas of distinction. The first being “core,” and the second being “applied.”

 

Applied Economics

 

When something is a part of applied economics, one is taking academic principles discussed on the core side of economics and applying them to real-life and practical examples. It helps to better contextualize and exemplify the theoretical, and often abstract, concepts that are put forth within the core field of economic study.

 

Understanding Applied Economics

Applied economics reduces abstract concepts into examples that can be discussed and related to the business community at large. However, depending on whom you ask, what constitutes applied economics versus what constitutes core economics is open to interpretation.

A popular philosophy taught in many business schools as to what constitutes the field of economics more broadly is that economics is the study of whatever economists themselves do. For simplicity’s sake, the mainstream view of applied economics is generally thought of as consisting of the below:

  1. Labeling variables as core-specific
  2. Providing numerical estimates
  3. Interpreting real-world events
  4. Providing a structure to draw conclusions

 

Why is Mainstream Economics Important?

Understanding the world in which we live is pivotal to many economic theories. Economics helps explain market phenomena, such as corrections and recessions, or even why we as consumers are more inclined to purchase one product or another. Applied economics is at the center of everything we do, and it is pivotal to explaining and conveying market principles.

Business leaders and managers can draw on the lessons in applied economics in order to better avoid potential pitfalls and make stronger decisions as managers. Even everyday consumers can better understand the prices they are paying at the grocery store. It can help explain why certain prices rise and fall and why sales occur.

 

Variability in the Usage of the Term

Historically, the term applied economics is often applied to different areas of study. It is important to understand that the term is fluid and can depend on what period it is referencing or which author is writing about it.

The definition of the term is not fixed, and thus, the reader must also understand its possible wide range of uses and contextualization that may present themselves. The list below represents some classical uses of the term from the latter part of the 20th century:

  1. Economic areas that are more specified and require more detail
  2. Demographics
  3. Accounting, actuarial science, and insurance

 

Real-World Problems Understood: The Value of Applied Economics

Applied economics helps us deal with real-world problems by making the abstract tangible. Understanding abstract theory is often not enough, and it must be tested and put into practice in order to effectively understand and critique economic concepts. Consumers, economists, and scholars alike can use applied economic theories to test existing concepts or even come up with new ones.

 

Understanding Applied Economics: A Summary

  • In the study of economics, there exist two fundamental areas of distinction – core and applied.
  • Applied economics is at the center of everything we do, and it helps explain economic theory and apply it to our everyday lives.
  • Applied economics can help us understand more about the prices we pay, how delivery charges work, and why things may go on sale.
  • Business leaders and managers can draw on the lessons from applied economics to make them better managers.
  • Applied economic theories allow us to test and formulate hypotheses.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Keynesian Economic Theory
  • Government Stimulus Package
  • Monetary Policy
  • Quantity Theory of Money

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Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!