Economics is the study of:

 How societies use scarce resources to produce valuable commodities and distribute them
among different people with various needs
 How individuals within a society generally make choices involving the use of scarce resources
from among alternative wants that need to be satisfied

Scarcity – limited nature of society’s resources

Opportunity Costs – value of the good or service foregone, value of the next best choice that you give up
when you make an economic/rational decision.

Importance of Studying Economics

Economics affects daily life, helps render more informed decisions, makes us more effective citizens

Microeconomics focuses on issues that affect individuals and companies. This could mean studying the
supply and demand for a specific product, the production that an individual or business is capable of, or
the effects of regulations on a business.

There Ain’t No Such Thing As A Free Lunch

Microeconomics – how households and firms make decisions and interact in specific markets

Adam Smith – most popular personality in microeconomics, author of the Wealthy of Nations and
postulated Invisible Hand Concept.

Invisible Hand Concept – as individuals selfishly pursue their personal interests, they unintentionally
bring about effects that are beneficial for the whole community

Macroeconomics focuses on issues that affect the economy as a whole. Some of the most common
focuses of macroeconomics include unemployment rates, the gross domestic product of an economy,
and the effects of exports and imports.

John Maynard Keynes – pioneered the study of macroeconomics in 1996

British economist, his ideas fundamentally changed the theory and practice of macroeconomics and
economic policies of government.
Circular flow of economy model shows how money flows through markets among households and firms

Decision makers: household and firms

Firms produce goods and services using inputs such as the factors of production: labor, land,
capital

Household own factors of production and consume all the goods and services that firms
produce

Types of Markets

For goods and services – households buy, firms sell

For the factors of production – household sell, firms buy

Market is a group of buyers and sellers of a particular good or service. Buyers determine demand, sellers
determine supply.

Demand set of various quantities buyers purchase at various prices during some specified time. Amount
of good that buyers are willing and able to purchase. Determinants:

Price

Taste or level of desire

Income of buyer

Prices of related goods (substitute and complementary)

Future expectations

Ceteris Paribus – all other things being equal. All relevant values are held constant, except for price.
Demand Schedule – show various quantities of a good or service that buyers willing to buy at various
possible prices during some periods in time

Demand curve – graphical representation of demand schedule. Shows relationship between price of
good and quantity demanded

Demand schedule slopes downward because:

High price – buyers who cannot afford to buy back out, Low price - buyers who can afford buy
more good

High rate. It becomes more attractive to buy other goods that are substitutable to it

In fixed income, an increase in price would reduce his available budget for other commodities
Supply is the amount of good or service that sellers are willing and able to sell

Law of supply states that, the higher the price, the larger the quantity supplied and all other things held
constant. Determinants are:

Price

Input prices

Technology

Future expectations

Government policies

Supply Schedule is a table that shows relationship between the price of a good and the quantity
supplied

Supply curve represents relationship between price and the quantity supplied

Non supply factors that affect the shift in supply curve

Price of other goods

Number of sellers

Price of relevant inputs

Technology

Expectations

Market Equilibrium – prices and quantity where the forces of supply and demand are in balance

Economic condition wherein there is no shortage nor surplus

Equilibrium price or the market clearing price – price at which these demand and supply curves cross

Equilibrium quantity – quantity at which these demand and supply curves cross

Surplus quantity supplied > quantity demanded

Shortage quantity demanded > quantity supplied

Law of supply and demand - price adjusts to bring supply and demand into balance

Qd= a + bP, Qs= -w + vP

W. Stanley Jevons- to satisfy our wants to the utmost with the least effort to procure the greatest
amount of what is desirable at the expense of the least that is undesirable

John Stuart Mill - the state of the art being given, doubling the labor does not double the produce

Law of Diminishing Marginal Utility – consumption of a good yields increasing satisfaction (utility) to the
consumer, but the additional satisfaction received become less as more of the good is consumed

Utility – fulfilling one’s satisfaction, extent to which goods and services are preferred by consumers, how
rational consumers divide their limited resources among the commodities that provide them with
satisfaction

Marginal utility – increment to your utility or the added satisfaction upon consuming another amount of
the same good

Law of Diminishing Returns – states that the total output rises with the addition of more of the variable
input, while other inputs are held constant

States that we will get less and less extra output when we add additional doses of an input while holding
other inputs fixed

Law of Comparative Advantage – states that since people face limitations in terms of time and
resources, they are often forced to concentrate their time and effort in what they consider to be is the
most efficient use of their time

Absolute advantage – superior ability compared to others in producing a commodity or in performing

specific tasks
Market Structures

 interconnected characteristics of a market (number and relative strength of buyers and sellers,
degree of collusion among them, level and forms of competition, extent of product
differentiation, ease of entry into and exit from the market)
 collection of factors that determine how buyers and sellers interact in a market, how prices
change and how different levels of the production and selling processes interact

Forms of Market Structures

 Perfect Competition – helps analyze industries with characteristics similar to pure competition
o Many sellers, homogeneous or standardized products, firms are price takers, free entry
and exit
 Monopoly – single firm is the sole producer of a product for which there are no close substitutes
(ex. Public utilities, professional sports leagues)
o Has a single seller, has unique product, the firm is the price maker, entry or exit in the
industry is blocked
 Oligopoly – large firms producing a homogeneous or differentiated product dominate a market
(ex. Automobile and gasoline industries)
o Has few large firms, has standardized or differentiated products, entry in the industry is
hard
 Monopolistic or Imperfect Competition – market situation with a relatively large number of
sellers offering similar but not identical products (ex. Fast food restaurants and clothing stores)
o Has a lot of firms, has differentiated products, fast entry or exit

Forms of Business Organizations

 Proprietorship – only one owner

o Advantages:
 Easy to start
 Little government regulation
 Profits stay with owner
 Pride of ownership
 Complete control
 Lower taxes
o Disadvantages:
 Unlimited liability
 Limited life of the business
 Difficult to raise money
 Partnership – two or more persons combine their resources in a business with a view to make
profit
o Partnership agreement
o General partnership
o Limited Partnership
o Advantages:
 Easy to start
  Little government regulation
 Not difficult to raise funds
 Combination of skills
o Disadvantages:
 Unlimited liability
 Profits are shared
 Limited life of the business
 disagreements
 Corporation – separate from its owners, the shareholders
o Incorporation Documents
 Articles of incorporation
 Charter
 Stock
 Private Corporation
 Public Corporation
o Advantages:
 Easy to raise funds
 Limited liability
 Unlimited life
 Specialized management
 Risks are shared
o Disadvantages:
 Difficult to start
 Less direct control
 Double taxation
 Limited activities
 Merger – company buys another company
o Horizontal mergers
o Vertical mergers (conglomerate)
 Cooperatives – at least 15 persons pool their resources which consist of money, labor or talent
to build capital and work together to raise incomes
o All members have an equal say
o Open and voluntary membership
o Limited interest on share capital
o Surplus is returned to members according to the amount of patronage
o First objective is to maximize the benefits or profits that its members can earn from
their transactions with the cooperative
o Regulated by particular rules of equity and values

Function of Cooperatives

 Marketing – extended control of members’ products through processing, distribution and sale
 Purchasing – provides affordable supplies and goods
 Services – provides needed services
Labor Force Participation Rate

15 or older are economically active

People who supply labor for the production of goods and services during a specified period

Potential Labor Force – refers to individuals whose age are 15 and above

Labor Force – part of PLF who want to work

LFPR = LF/PLF X 100

Employed-those who are with work or job

Wage and salary workers – individuals who receive salary and may be employed a t private or
public firms

Own account workers – individuals who are self-employed and manage their own businesses

Unpaid family workers – workers who help their parents or relatives in their livelihood

Umemployment – those who are actively searching for employment is unable to find work

Demand Deficient Unemployment – occurs in recession or a period of very low growth

Structural unemployment – inefficiencies in the labor market

Occupational immobility

Geographical immobility

Technological change

Frictional unemployment – moving between jobs

Voluntary unemployment – workers choose not to take a job at thegoing wage rate

Underemployed – individuals who are currently employed but still seek fir additional jobs

Visible – less than 40 hours

Invisible – more than 40 hours

Reasons for differences in wage rates among countries

Demand for labor, supply of labor, international trade

Reasons for wage differences among labor groups

Wages of unique/talented individuals, compensating wage differentials, labor-quality/price of

skill, absence of perfect competition.

Labor supply – number of hours population desires to work (Key elements: hours worked, labor-force
participation, immigration)
Labor demand – number of companies or employers that purchase services (factors: output price,
technological change, supply of other production inputs)

Labor and employment issues in the Philippines

Job scarcity

Contractualization

Job sharing

Time rating and piece rating

Task system

Low wages

Child labor

Labor union – organization of laborers

Objectives – increase collective bargaining, reduce monopsonistic power over labor services, support
moves to raise standards of work, including minimum wages

National Income Accounts – bookkeeping system used to measure a country’s economic activity in a
given time period, set of accounts that measures spending, income, and output of the entire nation for a
year

NEDA (National Economic and Development Authority) – government agency responsible for developing
and planning the Philippine economy

NIA measure the ff:

 Level of economic activity for a given time

 Change in level of economic activity in a country over time, economic growth
 Location of economy in business cycle
 Size of output gap
 Distribution of national income between different social groupings and regions, income
inequality
 Compare standards of living between countries

Methods for measuring national incomes

 Product method - flow of goods and services

o Final goods – goods which are directly consumed and not used in further production
process
o Intermediate goods – further used in production process
 Income method – flow of factor incomes
o Labor – wages and salary
o Land - rent
 o Capital – interest
o Entrepreneurship – profits
 Expenditure method – flow of expenditure
o Adding up government consumption expenditure, gross capital formation (government
and private) net exports (export-import)

GNP (Gross National Product) – measures total market value of all final goods produced by permanent
residents of a nation within a given period of time

Components: final goods, intermediate goods, (computation of dollar income of ofw and other filipinos
who have business in other countries, but the income of the crossnational income of the Philippines is
not included) net factor income from abroad

Approaches in computing for GNP

 Expenditure approach – adding personal consumption expenditure, gross private domestic

investment plus stock building, government purchases of goods and services, net exports and
net factor income from abroad together
o GNP factors
 Personal Consumption Expenditure (C)
 Gross Private Domestic Investment Plus Stock building (I) - expenditure by firms,
capital, equipment and building and change in firms’ stocks ex. Household
spending on new residental expenses
 Government purchases of goods and services (G) – central and local
government purchases of goods and services. Transfer payments such as child
benefits are excluded
 Net exports (NX) – exports (x) less imports (M)
 Net factor income from abroad (nfia)
 GNP = C + I + G + NX +nfia
 Income approach – adding together money earned by the factors of production in creating the
year’s output such as:
o Operating surplus – net business income before corporation tax is paid and after
payment has been made for inputs and to workers
o Mixed income – combining wages, salaries and profits of self-employed individuals
o Compensation of Employees – wages and salaries including tax and pension
contributions and any other fringe benefits
 Output or Value-added approach – add up final value of all goods and services produced this
year by firms, money spent on making the goods is taken away from the money received from
the sale of the goods to give each sector’s value added, taking final output or adding up each
sector’s value gives national income.

Gross Domestic Product – measures market value of all final goods and services by permanent
residents of a nation within a given period of time

 Gross – no deduction for the reduction in the stock of plant and equipment due to wear and
tear has been applied to the measurements and survey-based estimates
 Domestic – only production by factors located in the country
 Product – measurement of output at final prices are observed in market transactions or of
the market value of factors used in their creation.

GDP = C + I + G + NX

Contraction – refers to a slowdown in the pace of economic activity

Conditions of economy under this phase:

 Sales are no longer expanding. The economy starts slowing down. The slowdown is mild
at first. As sales stop increasing, inventories pile up.
 Companies adjust to that by reducing orders for raw materials, avoiding overtime and
resorting to sales promotions.
 Suppliers start to feel the pinch and are forced to lay off a few workers. These lay-offs
are seen as a signal of potential hard times ahead.
 Employees prefer to set aside some wages and reduce their consumption. Sales start to
drop as consumer demand shies away.
 Companies are now burdened by the loans they took out to install new equipment.
Their profits shrink with decreasing revenues, still high employee salaries, and a large
overhead.
 The hardest hit are the manufacturers of equipment who see their orders dwindle.
Fewer and fewer businesses are started. Often, plans to open business are cancelled.
Some firms go out of business.

Trough – refers to the lower turning point of a business cycle, where a contraction turns into
and expansion. It also marks the end of a contraction as well as the beginning of possible
recovery.

Conditions

 The recovery starts. Having sold off their inventories, companies start to place orders for
new supplies.
 Consumers have postponed some purchases and made do with cars or appliance by
repairing them. But this has gone long enough it is time to buy at least the
indispensable; moreover credit is cheap.
 Families have saved up in hard times. Bank reserves are plentiful and bankers are eager
to lend anew, even at very low rates.
 Interest rates are indeed so low that some company projects become attractive again.
 New sales are observed in all sectors.
 Companies start rehiring at the low wages first.
 New businesses are started. Bankruptcies are less noticeable. The economy is
approaching expansion.

Expansion – refers to a speed-up in the pace of economic activity.

Conditions
  Businesses experience record sales and profits. They can hardly keep up with demand.
In anticipation of a continued sales growth, inventories are built up and production
facilities are expanded.
 This creates demand for suppliers of raw material and equipment. The equipment takes
time to be built and installed. Banks are willing to lend given the bright predictions of
continued cash flows. A large number of loan applications pushes banks to raise interest
rates which companies can afford to pay.
 Companies find it difficult to hire all the employees they need and are forced to pay
higher wages, for instance, for overtime hours. But, that is not a serious problem in light
of healthy sales and profits.

Peak this refers to the upper turning of a business cycle. It also marks the end of an expansion
and the beginning of recession.

Condition:

 A strong consumer demand justifies raising prices for many products. With higher wages
employees are still able to buy in spite of higher prices; moreover, anticipation of
continued employment encourages them to use consumer credit if their income is
insufficient.
 The overheating of the economy is evident in shortages of employees, materials,
equipment, loanable funds and products.
 These shortages imply inflation. Because of difficulties in obtaining resources, this is no
longer a good time to start a business even if sales appear encouraging. Prices, wages
and interest rates continued rise puts eventually a stop to further expanding product
demand, new hiring and new lending. The economy has reached its peak.

Contagion – the transmission of business cycles thorugh trading partners could have an effect on
domestic economic condtiions.

People power revolution

I accuse you statement

Pork Barrel Scandal 20113 Priority Development Assistance Fund