Although the term "applied economics" can be utilized in slightly different manners according to different economic theories, it is possible to arrive at a definition that will work in most situations. Essentially, it is the application of basic assumptions of economics to real-world situations, both isolated and interrelated with sets of current circumstances. Thus, applied economics involves economists taking generally accepted theory and applying those theories to something that is happening in the real world, with an eye toward determining what can reasonably be expected to happen next.
True Picture
Applying economic theories to current economic conditions can be extremely helpful for three key reasons. First, applying economics to the status of the economy of a company, a household or a country helps to sweep aside all attempts to dress up the situation so that it will appear to be worse or better than it actually is. From this perspective, applied economics is a powerful tool that enables the true and complete picture to emerge, so that it becomes possible to decide what to do and where to go from the current position.
Sound Ideas
Second, applied economics acts as a mechanism to determine what steps can reasonably be taken to improve the current economic situation. Each element that is relevant to the contemporary mode of operation of the entity — including the purchase and sale of goods and services, the usage of raw materials and the division of labor within the entity — come into play. Examining each aspect of the current economic condition will often yield sound ideas on ways to maintain aspects that are working at a reasonable rate of efficiency and strengthen areas where the performance is weak.
Valuable Lessons
Last, applied economics can teach valuable lessons on how to avoid the recurrence of a negative situation, or at least minimize the impact. Applied economics is all about the application of theory to real-life situations, so the process can help develop an understanding of why a condition took place. This includes reviewing what steps were taken to improve or correct similar situations and how those strategies can be employed to keep the economy flowing in a direction that will preclude a repeat of the undesired situation.
