DEFINITION of Applied Economics

Applied economics is a field that applies of economic theories and principles to real-world situations with the desired aim of predicting potential outcomes. The use of applied economics is designed to analytically review potential outcomes without the "noise" associated with explanations that are not backed by numbers. Applied economics can involve the use of econometrics and case studies.

BREAKING DOWN Applied Economics

Because economics relies on the interpretation of historical events in its theories, applied economics can lead to "to do" lists for steps that can be taken to ensure stability in real-world events. Although applied economics uses economic theory and principles, it is itself not a field of economics, such as neoclassical economics or the Austrian school.

The use of applied economics may first involve exploring economic theories to develop questions about a circumstance or situation, and then draw 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 going circumstances.

What Makes Applied Economics Relevant in the Real World

Applied economics can illustrate the potential outcomes of choices individuals make. For example, if a consumer desires to own a luxury good but has limited financial resources, an assessment of the cost and long-term impact such a purchase would have on assets can help determine if such an expense is worthwhile.

Consumption of wanted goods and their lasting effects can also be framed through applied economics. For instance, if an individual wants to eat comfort food, applied economics can be used to present theories and possible outcomes such consumption would have on that person’s attempts to reach certain weight loss goals.

Something similar can be done in deciding on college studies and career training. A student may want to focus on courses that appeal to personal hobbies and interests; however, they would also need to assess how such an academic path might affect their professional prospects and future salary opportunities.

Through applied economics, and understanding of diminishing returns can be developed. For instance, if a professional takes a job that offers the same pay bonus to all workers regardless of experience or salary, applied economics can show them that the long-term benefits would be limited. If a company gave $50 bonus at the end of each quarter to each employee, this might have a notable influence on a worker earning a low wage. Through applied economics, it can be demonstrated that as the employee gains seniority and a higher regular salary, such a bonus could have a less significant effect on their actual earnings.