APECO REVIEWER naturally skilled at?

Or should they instead allocate their

Lesson 1.1: Economic as Social Science resources toward gaining experience by producing a good that
might have future utility? This question also forces societies to
Social science deals with humans, their activities (choices, consider which of their members’ needs they will prioritize.
consumption, etc.), and their environment (governments,
nations, etc.). This characteristic, along with the subject’s use How Should We Produce It?
of empirical tools and evidence, qualifies economics. This economic question asks how the economy will produce
these goods and services. Will they focus on manual labor or
Basic Economic Concepts will they shift to modern technology to improve workflow?

Scarcity For Whom Should We Produce It?

In economics, scarcity is defined as the limited availability of a The last economic question asks for whom the final goods and
resource, good, or service. services should be given. Should goods and services be
produced for everyone equally, or should it instead be given to
Choice those who are capable of paying for them? How about
Because of the conflict between infinite human wants and equitably providing these to those who need them most?
scarce resources, people are forced to choose which personal
needs and wants they will satisfy. They have to decide how Resource allocation or the process of assigning limited
they will allocate their scarce resources to fulfill the never- resources to specific uses.
ending list of wants they might have.
Factors of Production
Choices are made by identifying the amount of utility we can From a macro perspective, there are four particular resources
gain from selecting one option over another. Utility is a that societies must decide on how to allocate. These are land,
measure that economics uses to weigh the satisfaction or labor, capital, and entrepreneurship.
usefulness a consumer can receive when using a product.
Land
Economists evaluate decisions primarily by identifying the Land refers to resources that can conceivably be attributed to
corresponding costs or consequences that accompany these the land or the sea. It consists of all-natural resources
choices. available to us such as clean water, physical land, and even
the trees and plant life around us. Some raw materials are also
Opportunity Cost classified under land, such as coal, oil, solar energy, and wind
This lost option or opportunity cost is the value of the next energy.
best alternative. It is what we give up by choosing something
else. Labor
Labor is the tangible human element that is involved in the
Production Possibilities Frontier production of goods and services. It is the contributions made
production possibilities frontier (PPF) - This diagram serves by the workforce, whether physical or mental.
as the primary model that shows scarcity, choice, and
opportunity cost. Capital
Capital is investments made to improve production.
 Efficient - maximize all of the available resources.
They are considered efficient because there is no Form of Capital
wastage.  Physical capital which is best represented by the
different tools and equipment used to make goods.
 Inefficient leaves some resources unused Hammers, heavy machinery, and transportation
vehicles are all example.
Microeconomics - a subset that focuses on smaller agents'
decisions and how they might react in certain situations.  Human capital, which are investments made toward
improving the human element of production. This can
Some examples of microeconomic decisions would be come in the form of education to better equip the
choosing which strand to take in senior high school or studying workforce with the skills and knowledge needed to be
how a company decided to allocate its resources or budget. productive, or even a well-designed healthcare
system.
Macroeconomics - refers to a broader perspective. In using
this more general scope, economists look at aggregates and Entrepreneurship
collectives rather than individual players in the market. This resource refers to the intellectual capacity to organize and
put together with other factors of production (land, labor, and
An example of this would be trying to understand Luzon's capital) to produce goods and services the society needs. It is
entire student population’s decision on their tracks for senior the vaguest of the four factors, but it is also arguably the most
high school. On an even larger scale, macroeconomics is important.
applied in generating economic decisions by states and
nations around the world. Economic Growth vs. Economic Development

Lesson 1.2: Economics as an Applied Science Economic Growth

Economic growth is the overall expansion of an economy.
The Three Economic Questions This is seen through an increase in gross domestic product
The main economic problem we face is that human wants are (GDP). In essence, economic growth looks at how wealthy an
unlimited, but resources are scarce. This is the driving force economy is by considering the value of goods and services
behind the discipline of economics itself, and it is easy for an being produced, measured in monetary units.
individual or a small group of people to visualize this problem.
Gross domestic product (GDP) is a statistical measure of
What Should We Produce? total value of goods and services produced within a country
This question asks what products and services an economy during a specific period of time, usually annually.
should focus on producing. Should they focus on what they are
Economic Development Market economies benefit from high levels of personal
Economic development is the measure of the welfare and incentives for each individual. Because there is an opportunity
well-being of the economy’s members. In measuring to profit at a high rate, people are inclined to work harder and
development, a wider range of statistics is taken into longer hours to earn more.
consideration.
Mixed Economic System
Economic development does not only look at how much In reality, there is no such thing as a purely traditional,
money the economy is making. Oftentimes, the goal of command, or market economy. Instead, what we might find in
economic development moves toward the idea of equity being modern economies is a mixed economic system that takes
more important than efficiency. This concept argues that the all the best characteristics from each of the three economic
focus should shift from just being able to produce all that we systems to form a balance between the free market and
are capable of producing, and instead look toward providing to government intervention.
those who need more in an effort to make life as fair and as
comfortable to all involved. Macroeconomic Goals

Sustainable Development Low Unemployment

The concept of sustainable development is defined by the Unemployment is defined as the state wherein a person is
International Institute of Sustainable Development (IISD) as actively seeking but unable to find work.
“development that meets the needs of the present without
compromising the ability of future generations to meet their Unemployment rate, which is the number of people who are
own needs.” This idea asks us to consider not just how to unemployed expressed as a percentage of the total labor
properly allocate resources for current use, but also to take force.
into consideration the world we will leave for later generations.
Economically active population or the population of
Inclusive Growth individuals who are capable of contributing to the economy of
Inclusive growth is characterized by a growth that not only the country. Those who are not looking for work for reasons
benefits the elite few but makes equitable provisions for such as schooling, disabilities, or housekeeping are excluded
everyone in society. This is growth that helps eliminate from the labor force.
poverty, improves the living standards of the majority, and
provides opportunities for people to live meaningful lives in a Stable Inflation Rate
sustainable and environmentally responsible manner. Another target that governments set is maintaining a stable
inflation rate.
Why Study Economics?
You will be given an opportunity to learn how to discern the Inflation refers to an increase in the average price levels of an
actions and policies of local governments and entire. economy’s basket of goods over a period of time. This basket
of goods refers to goods and services that are typically
Understanding economics enables you to form well-informed consumed by a household.
opinions and decisions of your own that represent who you are
and what principles you believe in. Having stable price levels brings about a number of benefits to
an economy. Having minimal changes in the prices of
Lesson 1.3: Philippine Socioeconomic Development in the commodities allows households to properly plan their
21st Century spending, as well as safeguard them from sudden spikes in
prices that might disrupt their budget.
Economic Systems
Economic Growth
Traditional Economic System Along with the two macroeconomic goals is the pursuit of
In a traditional economic system, the three economic economic growth. We had earlier defined economic growth
questions are answered through traditions and established as an increase in gross domestic product or GDP.
trends. In this system, there is very little division of labor, and it
is commonplace for sons and daughters to take up their Gross domestic product (GDP) is the measure of the value
parents' professions. For example, if Jon was a farmer and of all final goods and services produced in a country over a
had a son named Rick, then under a traditional system, Rick given period of time, usually one calendar year.
will eventually inherit the farm and work as a farmer himself.
GDP can be measured in three ways, namely the expenditure
Command Economic System approach, the income approach, and the output approach.
In a command economic system, there is a central authority
that provides the answers to the three economic questions. Solving for GDP using the Expenditure Approach
The role of this authority is typically filled by the government. In When solving for the GDP using the expenditure approach, it
this type of system, the government solely decides how to is important to recognize the different components that make
allocate resources such as labor (who works which kind of up the measure. These include consumption, investments,
jobs) and food (rations). government spending, and net exports.

a command economy is susceptible to problems with Consumption (C) refers to the purchase of final goods and
innovation and motivation. services by individuals and households. These can range from
durable goods such as refrigerators, vehicles, and gadgets, to
Market Economic System non-durable goods that are typically consumed quickly such as
A market economic system is characterized by an economy food, hygiene products, and the like.
that has little to no government intervention. In this system, the
interactions in the free market provide the answers to the Investments (I) refer to spending by firms and households on
three economic questions. Goods and services are produced certain capital and long-term goods. Firms can consider
depending on the level of demand and are typically produced spending on capital goods such as equipment, buildings, and
in the most efficient manner. Resources are allocated based machinery as an investment, while households are more likely
on the consumers’ willingness and ability to pay.
to consider a purchase of a house, land, or apartment units as Interest (I) is the increase in the value of capital goods. This
an example of personal investment. also represents the income generated by this factor of
production.
Government spending (G) refers to all government Profit (P) is the income generated by firms operating in the
purchases and spending, which include salaries for employees country. This is the income attributed to the factor of
on government payrolls as well as purchases for government production of entrepreneurship.
projects such as infrastructure.
As such, the formula for GDP under the income approach is
Net exports (NX) is a measure of the value of all exports GDP = W + R + I + P. Assuming you are provided with the
subtracted from the value of all imports. Exports can be necessary information, you can compute the value of GDP.
defined as goods produced in the country and sold abroad,
while imports are goods entering the country from producers Step 1: Identify the different sources of income of an
elsewhere. When exports are greater than imports, there is a economy as well as their respective monetary gains.
trade surplus. Meanwhile, when exports are smaller than Step 2: Multiply each source of income by its respective
imports, there is a trade deficit. monetary gain.
Step 3: Add all of the income to find the gross domestic
As such, the formula for GDP under the expenditure approach product.
is GDP = C + I + G + NX.
Example 2
Step 1: Identify the different expenses incurred by the Assume that the economy only has the following factors of
economy as well as their respective monetary costs. production: In a given year, the economy has 15 hairstylists
Step 2: Multiply each expenditure by its respective who earn ₱ 180,000 each, with 5 of them earning additional
monetary cost. income through the rental of apartment units they own which
Step 3: Add together all of the expenses to find the gross amounts to ₱ 120,000 each. The economy also has 4 salons
domestic product. that report profits of ₱ 250,000 each. What is the GDP of the
economy for that year?
Example 1
Assume that the economy only has the following goods and Solution
services. In a given year, the economy produces 35 books that Step 1: Identify the different sources of income of an economy
cost ₱ 450 each, 12 factory machines that cost ₱ 7,500 each, as well as their respective monetary gains.
4 road repair projects that cost ₱ 94,000 each, and finally ₱
22,500 in net exports. What is the GDP of the economy for that In the aforementioned economy there are:
year? 1. 15 hairstylists earning ₱ 180,000 each in wages.
2. 5 hairstylists earning ₱ 120,000 each in rent.
Solution 3. 4 salons who report profits of ₱ 250,000 each
Step 1: Identify the different expenses incurred by the
economy as well as their respective monetary costs. Step 2: Multiply each source of income by its respective
monetary gain.
In the aforementioned economy there are:
1. 35 books worth ₱ 450 each Hairstylists’ wages: 15 x ₱ 180,000 = ₱ 2,700,000
2. 12 factory machines worth ₱ 7,500 each Hairstylists ‘ rental income: 5 x ₱ 120,000 = ₱ 600,000
3. 4 road repair projects worth ₱ 94,000 each Profit of salons: 4 x ₱ 250,000 = ₱ 1,000,000
4. Net exports worth a total of ₱ 22,500
Step 3: Add together all of the income to find the gross
Step 2: Multiply each expenditure by its respective monetary domestic product.
cost.
₱2,700,000 + ₱600,000 + ₱1,000,000 = ₱4,300,000
Books: 35 x ₱ 450 = ₱ 15,750 GDP = ₱4,300,000
Factory machines: 12 x ₱ 7,500 = ₱ 90,000
Road repair projects: 4 x ₱ 94,000 = ₱ 376,000 Nominal vs. Real GDP
Net exports: 1 x ₱ 22,500 = ₱ 22,500 There are two types of GDP, namely the nominal GDP and
real GDP.
Step 3: Add together all of the expenses to find the gross
domestic product. Nominal GDP refers to the value of the gross domestic
product that is not adjusted for inflation. This measure takes
₱ 15,750 + ₱ 90,000 + ₱ 376,000 + ₱ 22,500 = ₱ 504,250 the overall value of goods and services produced in a given
GDP = ₱ 504,250 period with respect to current prices.

Solving for GDP using the Income Approach Real GDP focuses on the value of goods and services
When solving for the GDP using the income approach, we produced within a given time period with constant prices. The
can understand the total to be equal to the value of total use of constant prices means that the measure is computed
national income (TNI). using the prices of a specific year called the base year.

Total national income (TNI) refers to the income generated Step 1: Identify the different expenses incurred by the
by the different factors of production, including all wages, rent, economy in a given year.
interest, and profits earned by members of the economy in a Step 2: Identify the monetary cost for each expense for
given period. These refer to the income generated by the the given base year.
different factors of production. Step 3: Multiply each expenditure by its monetary cost in
the given base year.
Wages (W) are the income generated by the labor force. Step 4: Add together all of the expenses to find the real
These are income earned from jobs and self-employment. gross domestic product.
Rent (R) is the income that comes from ownership of land.
Example 3
Assume that an economy only consumes the following goods:
rice, fish, and beef. The data on expenses over the past three Former President Corazon Aquino’s administration inherited
years are shown in the table below: a debt-ridden economy that was in a very tough situation. The
first agenda that the Aquino administration laid out towards the
goal of a more stable economy were efforts and programs to
pay off the almost $28 billion in debt the Philippines owed to
different countries and international organizations. The unpaid
large amount of debt was the first major hurdle the country had
to overcome in its pursuit of economic growth. Despite efforts
made by the government to reduce the amount of debt, by the
end of Aquino’s term it moved in the opposite direction as the
Using 2017 as the base year, what is the real GDP of the debt had slightly increased.
economy in 2019?
Despite being unable to lessen our foreign debt, the Philippine
Solution economy experienced positive growth for the first time in
Step 1: Identify the different expenses incurred by the years.
economy in a given year.
Programs and legislation towards the alleviation of poverty and
Since we are being asked to solve for real GDP in 2019, we the equitable distribution of wealth and income were ineffective
can identify the following expenses for that year: and full of loopholes. One of the most prominent examples of
1. 59,000 units of rice this would be the Comprehensive Agrarian Reform Program
2. 31,000 units of fish (CARP) of 1988. The land reform acts aimed to provide
3. 13,500 units of beef farmers with an opportunity to legally own the land they
worked on, giving them a better foundation from which to rise
Step 2: Identify the monetary cost for each expense for the out of poverty. However, these programs and laws were poorly
given base year. Take note that the base year is 2017. With designed and implemented as the bodies in charge of
that in mind the costs for each expense in 2017 are: executing them had an interest in keeping these resources for
1. Rice costs ₱ 11 per unit a small group of people.
2. Fish costs ₱ 18 per unit
3. Beef costs ₱ 27 per unit The Rest of the 1990s: The Ramos and Estrada
Administrations
Step 3: Multiply each expenditure by its monetary cost in the Former president Fidel V. Ramos succeeded former president
given base year. Corazon Aquino as the next president of the Philippines, and it
was under his administration that the country became more
Since we are solving for the real GDP in 2019, we will use the open to the global economy. One of the main highlights of his
quantity consumed for each expense in 2019 but multiply them administration was the country’s participation in the World
against the prices of 2017 or our base year. Trade Organization (WTO) which brought more opportunities
Rice: 59,000 units x ₱ 11 = ₱ 649,000 for international trade and economic growth. The
Fish: 31,000 units x ₱ 18 = ₱ 558,000 administration also put a staunch emphasis on addressing the
Beef: 13,500 units x ₱ 27 = ₱ 364,500 widespread issue of corruption in the country.
Step 4: Add together all of the expenses to find the real gross The Ramos administration also faced serious problems, such
domestic product. as the 1997 Asian Financial Crisis and the national power
₱ 649,000 + ₱ 558,000 + ₱ 364,500 = ₱ 1,571,500 crisis of the early 1990s. The Asian Financial Crisis was the
Real GDP in 2019 = ₱ 1,571,500 widespread devaluation of currencies throughout Asia that
started with the Thailand Baht. The national power crisis of the
Gross national product consists of similar components to Philippines began in 1990 wherein Metro Manila and 33
GDP, plus net income from abroad. By taking this into account, provinces in Luzon experienced brownouts of up to 4 hours
GNP effectively represents the value of goods and services per day. Both of these instances significantly halted the
produced by all of the citizens of a country wherever they are country's ability to grow at a rapid pace, which held back our
located. As such, an overseas Filipino worker (OFW) working economic growth.
in the United States would contribute to the GNP of the
Philippines but an American working in the Philippines would Following former president Fidel V. Ramos was the incumbent
be contributing to the GNP of the United States. vice president Joseph Estrada. The famous actor was able to
convert his mainstream popularity into a successful political
Equity in Income Distribution career on both the local and national stage. His campaign
Equality focuses on providing the same type and amount of promised a “pro-poor” stance, and this made him a popular
resources to everyone. choice among voters. However, his administration was marred
by accusations of widespread corruption and cronyism.
Equity focuses on fairness. This would mean redistributing
resources towards those who are in need to make the While the administration did have bright spots in its pursuit of
allocation fair to everyone. poverty alleviation as well as increasing the poor’s access to
basic social services, the overwhelming reports of corruption
Income distribution talks about how the output of a country is led to the early end of Estrada’s presidency There were
distributed or shared with the population. Having an equal reports of misuse of public funds as well as reported payouts
distribution of income would mean that every single person in received by the administration for protecting different jueteng
an economy would earn an equal amount of income. As some lords in the late 1990s. In January 2001, the second EDSA
people earn significantly more while others are barely earning revolution brought an end to the Estrada administration and
anything, income inequality rises. This can lead to a situation the start of the nine-year term of former President Gloria
wherein some live extremely exorbitant lifestyles while others Macapagal Arroyo.
are unable to fulfill even their most basic needs.
Modern Economic Problems of the Philippines
The late 1980s and early 1990s: The Aquino
Administration Poverty
One of the main problems that every administration faces is Law of Demand
widespread poverty. Poverty is defined as the condition The law of demand states that as the price of goods
wherein individuals lack the financial and material resources to increases, quantity demanded decreases. Conversely, when
meet their basic needs. In the Philippines, poverty is measured the price of goods decreases, quantity demanded increases.
using a poverty threshold or an estimated monthly figure that Keeping all other factors constant ( ceteris paribus ), buyers
allows a household of five to meet their basic food and will purchase more with lower prices and less with higher
non-food needs. prices. Hence, there is an inverse relationship between price
and quantity demanded.
Corruption
The overwhelming reason behind the failure of implementation The law of demand can be expressed as the demand function
of some of the aforementioned projects was due to the Qd = a - b(P) , where Qd is quantity demanded, a represents
corruption happening in both the local and national other factors affecting demand aside from price, b is the slope
government. Corruption refers to the misuse of public power of the demand curve, and P is price.
in the pursuit of private gain, usually at the expense of the
people and society. Quantity Demanded and Demand
Quantity demanded is the number of units that a buyer is
Sustainable and Inclusive Economic Growth willing and able to purchase at a given price at a given time
The pursuit of economic growth is something that the period.
Philippines consistently has been able to achieve year in and
year out. In recent years the country has been able to maintain Meanwhile, demand is the set of all quantities the buyer is
GDP growth rates of about 6 to7%, buoyed primarily by a willing to purchase at different price levels at a given time
stronger agricultural industry, as well as continuous growth in period.
the industrial and service sectors. Despite the 2008 Global
Financial Crisis which caused a dip in the economy’s growth, demand curve is the graphical representation of the demand
the Philippines has done well to be the 36th largest economy schedule.
in 2019.
Example 1
The pursuit of this sustainable and inclusive growth is one of Juan is a school principal who plans to purchase notepads. His
the main rationales behind AmBisyon 2040 which serves as willingness and capacity to buy can be described by the
the long-term vision for the Philippines’ socioeconomic demand function Qd = 150 - 3 P . Create a demand schedule
development. and plot the demand curve showing the different prices of a
notepad which are ₱ 20, ₱ 30, and ₱ 40.
UNIT 2
Lesson 1.1: Law of Demand and Supply Solution
Step 1: Applying the rule of substitution, solve for Qd using the
Market demand function Qd = 150 - 3 P , when the price is ₱20 .
Market is where buyers and sellers meet to exchange goods Substitute 20 to P .
and services. It is in the market where demand and supply are Qd = 150 - 3 P
determined. In economics, a market may be classified based Qd = 150 - [3(20)]
on the number of buyers and sellers. Qd = 150 - 60
Qd = 90
Market Systems
The economy can be classified into two market systems, the Step 2: Repeat Step 1 for price levels ₱ 30 and ₱ 40.
free market economy and the command economy. When the price is ₱30, substitute 30 to P .
Qd = 150 - 3 P
1. Free market economy Qd = 150 - [3(30)]
A free market economy is also known as a capitalist market. Qd = 150 - 90
This type of market system adopts a laissez-faire approach or Qd = 60
the idea that the government should not interfere with
industries or businesses. There is a government presence but When the price is ₱40, substitute 40 to P.
with limited capacity. Qd = 150 - 3P
Qd = 150 - [3(40)]
In a free market economy, economic players are guided by Qd = 150 - 120
their self-interest and incentives. This economy is also Qd = 30
characterized by a market force called the invisible hand
wherein the market is presumed to automatically reach Step 3: Create the demand schedule.
equilibrium in the absence of government intervention.

Other characteristics of a free market economy include private

ownership, freedom of enterprise and choice, and competition.

2. Command economy
Command economy is also known as socialism or
communism . In this system, the government owns most Step 4: Plot the points in a graph. Note that different price
properties and resources, and economic decisions are made levels are points on the y-axis while quantity demanded are
through a central economic plan. The government decides on points on the x-axis.
the use of resources and the composition, distribution, and
organization of production.

Most countries adopt a mixed market economy wherein

socialist and capitalist elements both exist. An excellent
implementation of a mixed market economy is the Nordic
model. It combines both features of socialism and capitalism.
Law of Supply
The law of supply states that as the price of goods increases, Market Equilibrium
quantity supplied also increases. Meanwhile, when the price of Market equilibrium is the point where quantity demanded is
goods decreases, quantity supplied decreases. The law of equal to quantity supplied.
supply can be expressed as the supply function Qs = a + b(P)
, where Qs is quantity supplied, a represents other factors equilibrium price or the market clearing price is the price
affecting the supply aside from price, b is the slope of the where quantity demanded is equal to quantity supplied
supply curve, and P is the price. Variable a is also the value of
quantity supplied when the price is equal to zero. Lesson 2.2: Market Equilibrium

Quantity Supplied and Supply Market Equilibrium

The quantity supplied is the number of units a seller is willing In context, the word equilibrium is from the base word equal.
and able to sell at a given price at a given time period, while Market equilibrium describes a situation where the market
supply is the set of all quantities supplied at different price forces are moving equally.
levels at a given time period.

A supply schedule is a table that summarizes the quantity

supplied for every price level.

Example 2
Rey sells notepads. His willingness and capacity to sell
notepads can be described by the supply function Qs = 150 +
2P. Create a supply schedule and plot the supply curve
showing the different price levels of notepads at ₱ 20, ₱ 30,
and ₱ 40.

Solution
Step 1: Applying the rule of substitution, solve for Qs using the In a graph, a market equilibrium is the point at which demand
supply function Qs=150+ 2P, when the price is ₱20 . and supply curves intersect. Equilibrium price and quantity
Substitute 20 to P. could be observed when market equilibrium is reached.
Qs = 150 + 2P
Qs = 150 + [2(20)] Equilibrium quantity is when the quantity demanded is equal
Qs = 150 + 40 to the quantity supplied in a competitive market. The
Qs = 190 willingness and ability for buyers to purchase are the same as
sellers' willingness and ability to produce for the market.
Step 2: Repeat Step 1 for price levels ₱ 30 and ₱ 40. When
the price is ₱30, substitute 30 to P. Equilibrium price , also called market clearing price , is the
Qs = 150 + 2P price level by which buyers can purchase all of the goods and
Qs = 150 + [2(30)] services, and the producers can sell all of their goods and
Qs = 150 + 60 services. There is no pressure among both players to move;
Qs = 210 the market is at rest.

When the price is ₱40, substitute 40 to P. Steps in Determining Market Equilibrium

Qs = 150 + 2P Another way of finding the market equilibrium can be through
Qs = 150 + [2(40)] solving for it using the demand and supply functions. Here is
Qs = 150 + 80 an example:
Qs = 230
Suppose that the market demand (Qd) for tomatoes is at Qd =
Step 3: Create a supply schedule. 500 - 2P, while market supply (Qs) is at Qs = 50 + 2P, where P
is the price of tomatoes expressed in pesos per kilo and the
quantity is in thousands of kilos per year.

In order to obtain the market equilibrium, it is necessary to

determine both equilibrium quantity and price. In the example,
what can be calculated first is the equilibrium price (Ep).
Remember that in a market equilibrium, quantity demanded is
always equal to quantity supplied. As such, the equation
should be like this: Qd = Qs

Step 4: Plot the points in a graph. Note that different price Using either the demand or supply function, substitute
levels are points on the y-axis while the quantity supplied are equilibrium price to get equilibrium quantity (Eq).
points on the x-axis.
Qd= Qs
 500 - 2P= 100+ 2P
500 - 2(100)= 100 + 2(100)
300= 300

Substitute price P with both the demand and supply function to

complete both the demand and supply schedule. Notice that in
the example, the quantity demanded is equal to the quantity
supplied at 300, using the equilibrium price P of 100.

It is the anniversary of her shop since it opened. She decides

to sell her mugs at ₱20. What would happen to the overall
market and by how much?

Solution
Step 1: Search for the quantities demanded and supplied at
₱20. According to the table, at ₱20, quantity demanded is 450
and quantity supplied is 320.

Step 2: If Qd > Qs, then there is a shortage. Subtract Qs from

Qd to determine how much is the shortage.
Changes in Market Equilibrium Q shortage= Qd - Qs
So far, we have talked about the definition of market Q shortage= 450 - 320
equilibrium and how to determine the equilibrium price and Q shortage= 130
quantity. It is important to remember that the market
equilibrium is not a singular number and it is not fixed. The Alli needs to produce 130 units more to be able to sell at
economy continues to adjust and recalibrate if ever there are ₱20.
changes in either the demand or supply.
Surplus
When the demand or supply changes, the price and quantity A surplus , on the other hand, is where quantity supplied is
change, resulting in a new equilibrium price and quantity. greater than quantity demanded (Qs > Qd) . In a surplus, there
is excess supply. A surplus happens for the following reasons:
In analyzing how some events can result in a shift in market there is less demand for the product and there are too many
equilibrium, there are three processes to: produced goods.
1. Determine if the event causes a shift on the supply
curve, the demand curve, or both.
2. Study if these events cause a shift to the left or the
right. It is possible that both the demand and supply
shifts in the same direction or in the opposite way.
3. Analyze how these shifts create a movement to the
equilibrium price and quantity.

Disequilibrium
Classical economists believe in the innate ability of markets to
correct and repair itself. They should take their course, as
economists call it laissez-faire. They can create new
equilibriums over time. However, there are some events where Example 1
the markets fail, and market equilibrium is not reached. The Hubert owns a small scale doll making shop. According to his
economy is out of balance, and it cannot repair itself in the annual data, these are the number of units he can produce
short run. This situation is called disequilibrium . and sell at different prices:
Many events in our world history are examples of market
disequilibrium. These events can be generally categorized into
two causes:

Shortage
A shortage is a situation where the quantity demanded is
greater than the quantity supplied ( Qd > Qs ). In a shortage,
there is excess demand. There are two reasons why there is a
shortage: there are so few produced goods and too much
demand. With the cost of raw materials increasing, he has no other
choice but to pass the cost to his dolls' price. How many units
can’t he potentially sell if he increases the price to ₱230?

Solution
Step 1: Search for the quantities demanded and supplied at
₱230. According to the table, at ₱230, quantity demanded is
2,227 and quantity supplied is 2,696.

Step 2: If Qd < Qs, then there is a surplus. Subtract Qd from

Qd to determine how much is the surplus.
Q surplus = Qs - Qd
Example 3 Q surplus = 2,696 - 2,227
Alli makes ceramics for a living. According to her sources and Q surplus = 469
research, this is the market data for mugs:
Hubert can’t potentially sell 469 units of dolls if he
increases his price to ₱230.

Price Controls
When the government is stepping in and reining in the
economy, they impose mandatory price controls to manage
the affordability of different goods and services. These
interventions are made to protect buyers or sellers. When
there is either a shortage or a surplus, they will either impose a
price ceiling or a price floor.

Price Ceiling
A price ceiling is the maximum legal price a seller may
charge for a product or service. The seller can charge below it
but not above it. The government creates a price ceiling below
equilibrium prices to help consumers or buyers.
The same movement is observed in the supply curve when
there are changes in price. In Figure 2, the quantity supplied
increased from 55 to 75 when the price increased from 16 to
22. Similar to the demand curve, the supply curve did not shift;
instead, the change in price was reflected through an upward
movement of the data point along the curve.

An excellent example of a price ceiling is when the

government regulates the suggested retail price of different
commodities and services. When the government imposes a
price ceiling on a competitive market, a shortage of that good
arises. Sellers must then allocate scarce goods among a large
number of buyers.

Price Floor
The price floor is the minimum price a buyer can purchase for
a product or service. The buyers can purchase above the
minimum price but not below it. The government creates a
price floor as help to the sellers or producers.

Market supply and demand are influenced by various factors

other than price, which are known as non-price factors.
These other factors can cause the demand or supply to
increase or decrease. Changes in demand or supply are
reflected through shifts in the curve. In a shift, the quantity
demanded or supplied changes with every price.

Determinants of Demand
Consumers’ Tastes and Preferences Preference is the
order of an individual’s choices and alternatives based on their
Some good examples of price floors are when the government relative utility (satisfaction).
sets minimum prices for agricultural products or sets the
minimum wage for labor. If there is a price floor, most likely, a For example, when an individual decides to buy a new phone,
surplus will occur. Quantity supplied will exceed the quantity he or she will have to choose from a range of options. In
demanded. choosing which phone to buy, the individual may decide based
on brand, functionality, or popularity. Mobile phones that were
Lesson 2.3: Affecting Demand and Supply released in early 2000 had features such as a numeric keypad
and a long battery life. The screen was small and the display
Movement versus Shift was in monochrome.

A movement along the curve shows the change in quantity Number of Buyers
given a change in price. As shown in Figure 1, the quantity Demand can also be influenced by the number of buyers. An
demanded moved from 55 to 40 when the price increased from increase in the number of buyers in the market causes the
10 to 12. The demand curve did not shift but instead, the demand to increase, shifting the demand curve to the right. On
change in price was reflected through a downward movement the other hand, a reduction in the number of buyers in the
of the data point along the curve. market causes demand to decrease, shifting the demand
curve to the left.

An example is people's mobility. When people immigrate to the

cities from towns, demand will go up in the cities as there are
more people now buying goods and services. But in the
towns from which they emigrated, demand will go down.

Income
Is money earned in exchange for providing goods or services.
Individuals can earn income through providing labor or through
selling goods. An increase in income results in the increased
purchasing power of the individual. Conversely, when
individuals are earning less, they tend to consume less.

normal good If demand for a good increases as income

increases.

inferior good if demand for a good decreases as income When the demand curve shifts to the left (from D to D*), the
increases. equilibrium quantity decreases (from Q to Q*). When the
equilibrium quantity decreases, but the level of supply is the
Prices of Related Goods same, the equilibrium price of the good will decrease (from P
When the price of a good changes, the demand for other to P*) to keep the market in equilibrium. If the price in the
goods may increase or decrease. market stays at P then there will be a surplus.

 Substitutes are goods that are demanded or

consumed in place of another good. If people find it Determinants of Supply
costly to consume fried chicken, they may find a
substitute such as grilled fish. Cost of Input
In producing different goods or services, businesses use
When the price of one good increases, the various resources or input
demand for another good increases. And when
the price of one good decreases, the demand for Technology
another good decreases. Improvements in technology or techniques in production
enable firms to produce more. The ability to produce more
 Complements are goods that are demanded or lowers the cost of producing goods, which in turn increases
consumed along with other goods. One complement profit. Given the improvement in technology or production
for fried chicken would be gravy. When the price of techniques, producers may want to increase their supply.
fried chicken increases, the demand for gravy Examples of improvement in technology or production
decreases. This is because the cost of the chicken techniques include the automation of production lines in
could make it more difficult for consumers to manufacturing and the modification of rice grains for increased
purchase gravy. resilience towards bad weather conditions.

When the price of one good increases, the Taxes and Subsidies
demand for another good decreases. When the The level of supply is also affected by the government through
price of one good decreases, the demand for taxes imposed or subsidies given.
another good increases.
Taxes are compulsory contributions to the government.
 Unrelated goods are goods where the demand is
independent of the price of other goods. For example, Subsidies are special grants by the government in the form of
even when the demand for shampoo increases, the financial aid, tax exemptions, or privileges.
price of chicken or grilled fish would not change, and
vice versa. Prices of Other Goods
When a firm produces, for example, basketballs, they can also
When the price of one good increases or use their resources to make alternative goods such as
decreases, it does not affect the demand for the volleyballs. If the price of volleyballs increases, producers of
other good. basketballs may switch to producing volleyballs to increase
profits. The firm's substitution in production results in a
Consumer Expectations decline in the supply of basketballs, which causes a shift to the
Expectations on future price increase may influence the left. Alternatively, when the costs of producing volleyballs
demand for goods and services today. increase relative to the cost of producing basketballs,
producers may decide to create more basketballs instead,
The Effect of Changes in Demand to Market Equilibrium making the supply shift to the left.
Different factors of demand can cause changes in the market
equilibrium. Changes in demand are reflected through shifts in Number of Producers
the demand curve. Supply is also influenced by the number of producers in the
market. For example, when there is only one rice dealer in a
community, the community's rice supply depends on how
much the rice dealer can provide. In this case, the supply is
very limited. However, if there are more rice dealers in the
community, the overall rice supply will increase. The increase
in the number of rice dealers will cause the supply curve to
shift to the right. When rice dealers move out of the
community, the community's rice supply will decrease, causing
the curve to shift to the left.

When the demand curve shifts to the right (from D to D*), the Producers’ Expectations
equilibrium quantity increases (from Q to Q*). When the Expectations about a product's future price affect the
equilibrium quantity rises, but the level of supply is the same, willingness and ability of a producer to supply a product.
the equilibrium price of the good will increase (from P to P*) to However, it is not easy to predict how producers will react to
keep the market in equilibrium. If the price in the market stays an increase in the future price.
at P, then there will be a shortage.
The Effect of Changes in Supply to Market Equilibrium
When the supply curve shifts to the right (from S to S*), the
The amount of labor that is being hired at the equilibrium wage
equilibrium quantity increases (from Q to Q*). But when the
is called equilibrium employment. It is also the number of
equilibrium quantity rises and the level of demand is the same,
workers at labor market equilibrium. The equilibrium wage (w*)
the equilibrium price of the good decreases (from P to P*) to
is also called the market-clearing wage. It is the level where
keep the market in equilibrium. There will be a surplus if the
any upward or downward wage pressures would cause a labor
market price stays at P.
surplus or a labor shortage.

When the supply curve shifts to the left (from S to S*), the
A labor shortage happens when labor demand is greater than
equilibrium quantity decreases (from Q to Q*). But when the
labor supply. Labor shortage occurs when the prevailing wage
equilibrium quantity falls and the level of demand is the same,
is lower than the equilibrium wage. Lower wages encourage
the equilibrium price of the good increases (from P to P*) to
employers to hire more workers.
keep the market in equilibrium. If the price in the market stays
at P then there will be a shortage.

The Labor Market

Just like goods, the labor market consists of labor demand and
labor supply. Labor demand is the number of labor employers
seek to hire over a period of time. The labor demand is
graphically shown through the labor demand curve. The
downward sloping curve of demand represents the inverse
relationship between wage and quantity or labor demanded.
When wages, the price of labor, increase, employers will
demand lesser labor. When wages are low, employers will
demand more labor.

Labor surplus is when labor supply is greater than labor

demand. It also happens when the prevailing wage is higher
than the equilibrium wage. Higher wages discourage
employers from hiring more workers.
Labor supply is the amount of labor offered for hire over a
Minimum wages are price floors for labor wages. These are
particular period. Labor supply is graphically shown through
imposed based on the required level of income in order to
the labor supply curve. The upward sloping curve of supply
support daily living. Wages are also known to be “sticky” or
describes the positive relationship between wage and quantity
resistant to a decline or an increase.
or labor supplied. When wages are lower, fewer people are
willing to work. When it is higher, more people are willing to
Shifts in Labor Demand
work.
1. Demand for output. When the demand for the goods
produced (output) increases, given that price is still
the same, profitability increases. As a result,
producers are encouraged to produce more and
increase demand for labor in order to expand
production. When this happens, the demand curve
shifts to the right.
 Furthermore, when the demand for goods decreases, Labor supply is defined as the amount of labor offered for hire
given that price is still the same, profitability within a given period. It is measured by the total number of
decreases. Producers are discouraged from hours they are willing to work at a given wage rate.
producing more, decreasing demand for labor. In this
case, the labor demand curve shifts to the left. Labor supply curve. It shows the positive relationship
between the wage rate and labor quantity. More people are
2. Technology. Technology changes can either willing to work when the wage rate is high, and fewer people
complement or replace existing labor. For example, are willing to work if the wage rate is low.
digital marketing is gradually replacing print
advertising. If this is so, demand for laborers involved The labor market equilibrium is the point at which labor
in paper printing such as print masters, etc. will demand and labor supply converge and intersect.
decrease.
Wages are the opportunity costs of doing leisure. It is known
3. The number of companies. When more companies that people use their time by either engaging in leisure or
are producing a given product, it increases labor devoting time to work. Based on this, fewer people will work if
demand. the wage rate is low.

4. Government regulations. Government regulations

can increase or decrease labor demand. In the
education sector, government regulation requires Basic Commodities
colleges and universities to hire professors with, at According to R.A. 7581 or The Price Act, basic commodities
least, a master's degree. It increases the need for are products that serve as important needs for the consumers'
master's degree holders, causing a rightward shift in lives and survival.
the labor demand curve. Professionals with fewer
qualifications are less likely to be hired, and the labor Prime commodities are products that are not considered to
demand for these workers shifts to the left. be basic necessities but are necessary to consumers.

5. Price and availability of other input. Labor is only Employment and Unemployment Factors in the Prices of
one of the types of production input. As the amount of Basic Commodities
other input increases, labor demand will also Unemployment occurs when people are in between jobs or, if
increase. they do not have work, are actively seeking it. There are two
reasons why unemployment persists. First, unemployment
Shifts in Labor Supply happens when there are more prospective workers than there
are jobs, and second, when workers are laid off from their jobs.
1. The number of workers. An increased number of If people cannot find work or are laid off, they will gradually
workers will cause a rightward shift to the supply change their consumption patterns to save money.
curve. The increase in labor supply can be caused by
immigration, an increasing population size, an aging If unemployment rises, more people will not have the
population, and changing demographics. purchasing power to afford basic commodities.

2. Required education. When people are required to Employment is defined as an arrangement wherein the
have more education, training, and skills, it can cause employee will provide services for the employer. In return, the
a decrease in labor supply. For example, if employers employer will give benefits and compensation for the work
will require a college degree for manual labor work, done by the employee.
there will be a lower number of laborers available
given a higher educational requirement. Population as a Factor in Prices of Basic Commodities
According to the Malthusian Theory, the population grows at
3. Government policies. Government policies can also a faster rate than commodities. Therefore, as the population
influence labor supply. The government may support, rises, the resulting increase in demand creates a strain on
or even require, rules that set high qualifications for supply growth.
certain jobs, such as academic training, certificates or
licenses, or experience. When these qualifications Wage as a Factor in Prices of Basic Commodities
are made more challenging, labor supply will Wage push inflation is an average spike in the price of
decrease at any given wage. commodities due to an increase in income. As companies
increase their salaries, the increase must be compensated
UNIT 3 through their products’ prices to retain a desirable income
Lesson 3.1: The Impact of Labor Supply, Population, and level. The high rise in the cost of goods and services has a
Wages on Prices of Basic Commodities circular impact on wages.

The Labor Market Lesson 3.2: The Impact of Labor Migration on the Prices
The labor market is a major component of every economy of Basic Commodities
and it is present in both the commodities and services
markets. It consists of the supply and demand for labor, in Migration
which the labor supply is provided by workers and the labor Migration is the movement of individuals from one place to
demand is made by the employers. another. Migrants constitute a potentially wider community
comprising individuals entering a state to carry out economic
Labor demand is defined as the amount of labor that activities or traveling for employment purposes. They include,
employers wish to hire at a given time. It is illustrated by the but are not limited to, business travelers, contract migrant
labor demand curve. workers, existing migrant workers, highly qualified migrant
workers, migrant investors, project-related workers, seasonal
Labor demand curve shows the negative relationship migrant workers, and temporary migrant workers.
between wage rate and labor quantity.
Individuals are considered to be migrants regardless of the
following:
 1. legal status of the individual
2. Whether it is a voluntary or involuntary movement Differentials in Interest Rates
3. reasons for the movement Interest rates, exchange rates, and inflation are also closely
4. duration of the stay correlated. Financial institutions exercise control on both
inflation and exchange rates by controlling interest rates, and
Emigrants are people who leave one country or region to inflation and currency prices are affected by shifting interest
settle in another. rates. Higher interest rates give a higher yield to lenders in an
economy similar to other nations.
Immigrants enter and settle in a foreign country, leaving a
past home. Current Account Deficits
The current account is the trade surplus between a
Refugees are people who, because of a problem in their government and its trading partners, representing all payments
former home, have immigrated to a new country or region. for commodities, services, interest, and dividends between
nations.
Overseas Filipino Workers (OFWs)
Overseas Filipino Workers (OFWs) are people from the A current account deficit means that the government spends
Philippines who live and work in another country temporarily. more on international trade than it receives and that it borrows
money from foreign sources to make up the deficit.
Different types of OFWs can be classified as white-collar and
blue-collar workers. Public Debt
Countries may resort to large-scale deficit financing to pay for
● White-collar workers are known as suit-and-tie public sector programs and government funding. While such
workers who do professional, desk, managerial, and activity boosts the domestic economy, foreign investors find
administrative work. These workers often avoid physical nations with high public deficits and debts less attractive. This
and manual labor. Examples of white-collar workers can is because big loans promote inflation and if inflation is high,
include office and clerical workers. the debt will be serviced and eventually paid off with cheaper
actual dollars.
● Blue-collar workers refer to any worker who engages
in hard manual labor. This group can include people Terms of Trade
working in construction, mining, and maintenance. The ratio of export rates and import prices, the terms of
exchange and current accounts, and the balance of payments
Push and Pull Factors are linked. When the export price of a nation grows at a higher
There are several reasons why individuals migrate, and these rate than its imports, its terms of exchange have changed
can be classified into push and pull factors. favorably.

Push factors are negative reasons that cause people to leave Strong Economic Performance
their homes, Inevitably, global investors search for prosperous countries
with high economic results to spend their money in. Investment
Pull factors are positive aspects that attract people to move to capital would be drawn away from other countries considered
another region or location. to be at greater political and economic risk by a nation with
such positive qualities. For instance, political instability will
Lesson 3.3: Impact of Philippine and Foreign Currencies lead to a lack of confidence in a currency and a transfer of
on the Prices of Basic Commodities capital to more prosperous countries' currencies.

Exchange rate is the price of every unit of a foreign currency Lesson 3.4: The Impact of Increase of Prices of Basic
valued in the domestic currency. Commodities to Housing Shortage, Rent and Housing
Price Structure
Types of Exchange Rate Systems
Employment and Housing
A fixed exchange rate is a system applied by a government The high demand for housing in growing cities creates a
or a central bank that sets the nation's currency exchange rate shortage of it. Because the quantity demanded for housing is
against another country's currency. Under this system, a par higher than the quantity supplied, prices are pushed upward.
value is set between the domestic and the foreign currency by At the same time, these prices attract property developers to
the central bank. build more houses, apartments, or condominiums, thus
increasing the supply of housing.
A floating exchange rate is a system in which a nation's
currency price is determined based on the supply and demand Meanwhile, in shrinking cities or cities with weak economies,
of other currencies in the forex market. If more dollars are there will be a housing surplus because of inadequate
requested than provided, the floating exchange rate housing demand, causing the abandonment of houses or
mechanism will begin to increase the dollar's price in terms of apartment buildings. If there is more available housing than
the peso; that is, purchasing one dollar will cost more pesos. there is a need for it, it will result in a price decrease.

Bangko Sentral ng Pilipinas (BSP) uses a floating exchange Income and Basic Commodities
rate; this leaves the exchange rate determination to market Economic growth causes an increase in personal income.
powers. The BSP does not set foreign exchange rates but Cities with higher income also have higher prices for their
instead requires the peso's value to be determined by the basic commodities.
supply and demand for
foreign exchange. If there is a high demand for commodities, it will increase the
need for shops or business spaces, therefore increasing the
Factors Affecting Exchange Rate demand for rental spaces for business use.
Differentials in Inflation
When its buying capacity grows compared to other currencies Taxation on Housing
a nation with a consistently lower inflation rate usually exhibits Housing and rental spaces are final goods, while the input
a rising currency value. needed to create them are intermediate goods.
 A perfectly inelastic demand curve ( 𝝐 = 0) is where the
● Real property taxes in the Philippines are fixed by the price elasticity of demand is equal to zero and shows a vertical
local government. demand curve.
● The Local Government Code of 1991 gives the
taxing authority to the local government to prevent There are a number of factors that affect the elasticity of
double or multiple taxation. demand, including the following:

If the general location has a low property tax rate, more people 1. Number and availability of substitutes - the more
are encouraged to buy and rent properties. and better substitutes available for a good, the greater its
price elasticity will be at a given set price.
● Another factor that can affect housing demand is the
interest rate or mortgage rate, in real property 2. Necessity or luxury - necessities tend to be inelastic
terms. while luxury goods have elastic demand. Demand for
● A low interest rate can shift the demand curve to the necessities such as food and medicines tend to be
right (increase) since most housing is bought using inelastic, while designer clothes and bags have elastic
borrowed funds. demand.

3. Definition of the market - drawing boundaries in the

Lesson 3.5: Elasticities of Demand and Supply market affects the price elasticity of demand. For
example, clothing, which is a broader category, is
Price Elasticity of Demand inelastic because there are no close substitutes, while
The elasticity of demand or the own price elasticity of peasant blouses are a narrower category and, therefore,
demand is the percentage change in quantity demanded in have an elastic demand.
response to a given percentage change in price. Note that
price 4. Length of time - in the short run, the elasticity of
and quantity are inversely related, and a negative sign is used demand tends to be inelastic while in the long run, it is
in the calculation of elasticity to make the coefficient positive. elastic. For example, an increase in the price of gasoline

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 = − 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛

in the short run is inelastic since people still need to buy

𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 / 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐e

gasoline for their cars. In the long run, demand for
gasoline is elastic because if prices continue to rise,
people may shift to fuel-efficient or electric cars to reduce

𝝐 = − %Δ 𝑜𝑓 𝑄𝑑 / % Δ 𝑃
Another way of writing the formula can be something like this: their reliance on gasoline.

Where the symbol for elasticity is 𝝐 or epsilon and change is

symbolized by Δ or delta.

To compute for elasticity we will be using the arc formula:

Since both sides of the formula are divided by 2, it can be

cancelled, giving us the formula
below:
Example 1: Price Elasticity of Demand
An increase in the price of Good A from ₱10 to ₱15 caused
the quantity demanded for good A to decrease from 80 units to

𝝐 = price elasticity of demand

Where: 60 units. Compute the price elasticity of demand and
determine whether demand is elastic or inelastic.
x1 = current quantity demanded
x0 = previous quantity demanded Step 1: Use the formula of the price elasticity of demand
p1 = current price
p0 = previous price

To know the meaning of the values, the following categories

Step 2: Substitute the values in the formula
are used:

a. rice elastic demand ( 𝝐 > 1) - a 1% change in price

will result in a more than 1% change in quantity Step 3: Solve for the price elasticity of demand.
demanded. Goods that have elastic demand are

Price inelastic demand ( 𝝐 < 1) - a 1% change in

sensitive to price change.
b.
price will result in less than 1% change in quantity
demanded. Goods that have inelastic demand are

Unit elastic demand ( 𝝐 = 1) - a 1% change in price

less sensitive to price change.
c.

𝝐< 1, Good A is inelastic.

will result in exactly the same change in quantity The price elasticity of demand of Good A is 0.7142. Since
demanded.

A perfectly elastic demand ( 𝝐 = ∞) is where the price Price Elasticity of Supply

elasticity of demand is equal to infinity and exhibits a horizontal Price elasticity of supply is the percentage change in
demand curve. quantity supplied in response to a given percentage change in
price.
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑆𝑢𝑝𝑝𝑙𝑦 = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛
𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 / 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

You can also write the formula for price elasticity of supply this Step 2: Substitute the values in the formula
way:

Step 3: Solve for the price elasticity of supply

𝝐s = price elasticity of supply

Where:

x1 = current quantity supplied ϵ𝑠 = 1

x0 = previous quantity supplied Since the price elasticity of supply is 1, then the milk
p1 = current price supply is unit elastic.
p0 = previous price
Income Elasticity of Demand
To know the meaning of the values, the following categories The income elasticity of demand measures the relative
are used: responsiveness of quantity demanded when income changes.

a. Price elastic supply ( 𝝐s > 1) - a 1% To calculate the income elasticity of demand, we use this
change in price will result in a more than 1% formula:
change in quantity supplied. Goods that
have elastic supply are sensitive to price
change.

b. Price inelastic supply ( 𝝐s < 1) - a 1%

𝝐I = income elasticity of demand

change in price will result in a less than 1% Where:
change in quantity supplied. Goods that
have inelastic supply are less sensitive to x1 = current quantity demanded
price change. x0 = previous quantity demanded

Unit elastic supply ( 𝝐s = 1) - a 1% change

Y1 = current income
c. Y0 = previous income

If 𝝐I is positive, then the good is a normal good. But if 𝝐I is

in price will result in exactly the same
change in quantity supply.

A perfectly elastic supply ( 𝝐s = ∞) is where the price

negative, then the good is an inferior good.

elasticity of supply is equal to infinity and exhibits a horizontal Example 3: Income Elasticity
supply curve. An increase in Jose’s income from ₱30,000 to ₱35,000 causes

Perfectly inelastic supply curve ( 𝝐s = 0) is where the price

his demand for the steak to increase from 5 kilos to 6 kilos per
month. Compute for the income elasticity. Is steak a normal or
elasticity of supply is equal to zero and shows a vertical supply an inferior good?
curve.
Step 1: Use the formula of the income elasticity of demand
There are a number of factors that affect the price elasticity of
supply, including the following:

1. Ease of production - if a commodity can be Step 2: Substitute the values in the formula
produced easily, an increase in price will result in a
significant increase in quantity supplied, meaning
supply is elastic. If the production is limited, a price
increase has an insignificant influence over the
Step 3: Solve for the income elasticity of demand
good’s production, hence, supply is inelastic. Land
has an inelastic supply since you cannot produce
more of it. Meanwhile, cars, books, and clothes have
𝝐I = 0.0909 ÷ 0.0769
an elastic supply, since manufacturing plants can
𝝐I = 1.1821
produce more if their prices increase.

2. Length of time - in the short run, supply is inelastic, The income elasticity of demand is 1.1821. Therefore,
but in the long run, it will become elastic. In the short steak is a normal good.
run, if the commodity price increases, manufacturing
plants cannot increase their production immediately Cross Price Elasticity of Demand
because of production constraints. However, The cross price elasticity of demand measures the relative
companies will become adaptive in the long run by responsiveness of quantity demanded of one good to changes
building more factories in response to a price in the price of another good.
increase, so that they can produce more goods.

Example 2: Price Elasticity of Supply

𝝐XY = cross elasticity of demand for goods x and y
Where:
Suppose that a price increase of milk from ₱105 to ₱120 per
liter raises the amount milk companies produce from 10,000 x1 = current quantity demanded of good x
liters to 12,000 liters. Calculate the price elasticity of supply. Is x0 = previous quantity demanded of good x
the price elasticity of supply elastic, inelastic, or unit elastic? py1 = current price of good y
py0 = previous price of good y
Step 1: Use the formula of the price elasticity of supply.
When 𝝐XY is positive, then the goods are substitutes. When
𝝐XY is negative, the goods are complements.
the investment's worth, there is an appreciation in the
investment.

Example 4: Cross Price Elasticity of Demand Benefits of Investing

Consider the following variables: 1. Stay ahead of inflation
x0 = 500 units py0 = 10 Inflation is the general rise in prices that decreases money's
x1 = 600 units py1 = 15 purchasing power. Investments help maintain value by offering
profits that equal or surpass the inflation rate.
Compute the cross price elasticity of demand for good x and
good y. Are good x and y complements or substitutes? 2. Investment as a form of retirement account
There is a distinction between individuals who are just saving
Step 1: Use the formula of the cross elasticity of demand money in the bank and those who are allowing their money to
circulate in the market. Any new way of making money
encourages you to increase your net worth. It makes you more
prepared for any emergency and retirement.
Step 2: Substitute the values in the formula
3. Money making money
Investing for the long term provides more options for your
Step 3: Solve for the cross elasticity of demand income to grow—your earnings compound with time. Your
money works hard to save you from having to work.

𝝐xy = 0.0909 ÷ 0.20

𝝐xy = +0.4545
4. Meet other financial goals
Sourcing other methods of earning allows you to accumulate
cash easier. Because of that, you will accomplish your
The cross price elasticity is 0.4545. Therefore goods x and objectives faster instead of focusing on one revenue source.
y are substitutes. You need to develop an investment package that fits your
needs if you want to build financial security, grow your capital,
Lesson 3.6: Market Structures and Its Competitive and prepare for retirement.
Environment
Interest Rate
Perfect Competition The interest is the amount a lender charges for the use of
Perfect competition, also known as a competitive market, is assets expressed as a percentage of the principal. It is usually
a market structure with many buyers and sellers trading calculated annually, also known as the annual percentage
identical products. The buyers and sellers have no control over rate (APR) . Investors or borrowers can loan cash,
prices and output, and prices are determined by the price commodities, or non-current assets like vehicles or buildings.
mechanism in the market system.
Interest works in two ways: it is the cost of borrowing money
Monopoly and the amount of earnings generated by an investment or a
A monopoly is a market structure where there is a single deposit account. It does not account for inflation. The inflation
seller of a particular product or type of product in the market. In rate is the rate at which the prices of goods and services rise.
a monopoly, products are highly differentiated. The firm is
considered to be a price maker. Below are the different ways to calculate interest.

Monopolistic Competition Nominal Interest

A monopolistic competitive market possesses the features Commonly known as the fixed interest rate , it is used mostly
of both monopoly and perfect competition. It is competitive by commercial banks. To compute for nominal interest, use the
because it has many sellers and buyers that can freely enter following formulas:
and exit the market. It is referred to as monopolistic because
the product being sold in the market, although similar, can be 1. Interest
differentiated by the seller through market positioning.

Oligopoly
The last market structure is an oligopolistic market that is
characterized by a few sellers producing similar or
differentiated products. Firms in oligopolistic markets can The principal amount refers to the original sum of money
either ignore or cooperate with each other. Although illegal, borrowed into a loan. Interest is the charge of using cash, and
most oligopolists may collude with one another to set prices time is the duration until the loan matures.
and output levels to benefit them all.
2. Monthly payment without interest
UNIT 4
Lesson 4.1: Investments, Interest Rate, and Rental
Concerns of Filipino Entrepreneurs

An investment is an asset or commodity purchased to 3. Monthly payment with interest

produce sales or appreciation.

Appreciation refers to an increase in an object's value over

time.
Effective Interest
Investments may depend on the exchange rate of a country. This is the interest rate received or charged on an investment,
The exchange rate is the value of a nation's currency against loan, or other financial transaction owing to the compounding
another nation's currency. If the exchange rate is higher than result for a defined period of time.
 rent. A larger population increases the chance of attracting a
larger and more diverse market.

4. Risk
Any form of risk, big or small, should be considered in deciding
to proceed with a rental. In the business setting, higher capital
translates to higher risk because potential losses become
greater should the business fail.

Lesson 4.2: Minimum Wages and Taxes Concerns of

Filipino Entrepreneurs

Minimum Wage
Minimum wage is the minimum amount of compensation an
Floating Rate
employer is required to pay its workers for work performed
This interest rate does not have a set rate for a commodity.
within a particular time. Minimum wages are fixed by law. It
Instead, a floating rate is based on a benchmark such as a
can be set through a responsible body regulation like a wage
forex or the Philippine Stock Exchange.
commission, a salary committee, court, or a tribunal. It may be
fixed through labor term agreements.
Flat rate
The flat rate is a predefined fee or payment on top of the
History of Minimum Wage in the Philippines
value of the purchase. It merely charges a single fixed fee for a
Presidential Decree No. 390
service. The amount of time may not depend on this type of
It states that all employers from the private sector, including
interest rate.
non-profit institutions and organizations, are urged to grant
Rent
monthly emergency allowances to their employees. These
Rent is revenue arising from land ownership and other gifts
allowances are given in the form of additional monetary
from nature. Rent is also represented as the difference
benefits to provide a short-term solution for everyday
between the net return of a producing factor (land, labor, or
expenses. This allowance is called Cost-Of-Living
capital) and its supply price, i.e., the minimum value required
Allowances (COLA). During that time, employees who
to purchase its services. Engaging in a rental business in the
received less than ₱600 monthly were prioritized.
Philippines could also be a good investment opportunity
because of the following reasons:

1. High demand for rentals

From budget rooms to mid to high-end condominium units and
houses , the country is witnessing a rental market growth for
both domestic and international tenants.

2. High occupancy rates

The high demand for rental properties has driven vacancy
rates downward. It suggests that lessors will not have a hard
time finding tenants. Properties for lease or rent will not be
Republic Act No. 6727
unoccupied for long.
This law, also known as the Wage Rationalization Act , aims
to support the establishment of minimum wages and
3. Affordable property price
encourage productivity improvement and profit-sharing to
In Southeast Asia, land prices are one of the lowest. It would
ensure a good quality of life for workers and their families. It
be economical to buy property and to put it up for lease or rent.
also guarantees workers' rights to a fair share of the fruits of
production, enhances job opportunities in the countryside, and
4. Growth potential
enables appropriate inventory returns for business and
There is an ongoing trend of renting out properties regardless
industry. Through this law, the National Wages and
of size and use. Gone are the days that the only properties
Productivity Commission (NWPC) and the Tripartite
available for rent are business establishments and vacant lots.
Regional Wages and Productivity Boards were established
In addition, the real estate industry has also migrated online. In
.
recent years, even home rentals could be arranged online.
In Article 124 of RA 6727, the standards or criteria for
This setup promotes increased economic gains by targeting a
minimum wage fixing stated the following factors to be
larger market.
considered:
Rental Concerns
 The demand for living wages;
1. Big capital investment
 Wage adjustment vis-à-vis the consumer price index;
Renting a property might be less costly than purchasing a
 The cost of living and changes or increases therein;
property; however, rentals would also require a large capital
 The needs of workers and their families;
investment because there are payment terms and conditions
 The need to induce industries to invest in the
that vary from property to property.
countryside;
 Improvements in the standard of living;
2. Location
 The prevailing wage levels;
Considering the location of your business is essential if you
want to attract a good number of tenants. Peace and order,  Fair returns of the capital invested and the capacity to
which translate to safety and security of the business, is also a pay of employers;
consideration in choosing a location.  Effects on employment generation and family income;
and
3. Population  The equitable distribution of income and wealth along
Looking at a location's demographics is critical for businesses with the imperatives of economic and social
because it creates a target market for people who are willing to development.

Minimum Wages in the Philippines per Region

The two-tiered pay structure (2TWS) was adopted in 2012 4. Estate tax - a tax on the right of a deceased person to
by the Department of Labor and Employment (DOLE) and the transfer their estate at the time of death to their rightful
NWPC. As an economic adjustment initiative, the two-tiered heirs and recipients.
pay aims to minimize the adverse effects of compulsory
minimum wages, enhance disadvantaged markets' reach, and 5. Income tax - a tax on personal income. This is usually
foster improvement in efficiency and profit-sharing. levied to employees and entities and is based on
respective profit or income.
This system is a reform that maintains the mandatory minimum
wage as the first tier. It is complemented by a voluntary 6. Percentage tax - a corporate tax levied on individuals or
productivity-based pay scheme as the second tier. companies selling or leasing goods, property, or services
in the context of a transaction or undertaking whose total
annual profits or receipts are not more than ₱ 550,000
and not subject to VAT.

7. Value-added tax - a sales tax levied on the consumption

of the sale of goods, services, properties, and imported
goods.

8. Compensation withholding tax - the tax withheld by

The Wage Rationalization Act (RA 6727) states that there persons earning taxes solely from compensation.
should be different minimum wage rates per region for
agricultural and non-agricultural workers. Two agencies will Types of withholding tax:
create these. One is the NPWC where it prescribes the rules  Expanded withholding tax - a type of tax prescribed
and guidelines to determine the appropriate minimum wage on certain income payments, creditable against the
and productivity measures. The second is the Regional payee’s income tax.
Tripartite Wages and Productivity Boards that will decide the
minimum wage rate per province and sector.  Final withholding tax - a type of withholding tax that
is considered as the full and final payment of the
The difference in regional minimum wage rates may raise the income tax due of the payee.
following concerns:
 Government money payments withholding tax - a
1. Migration to urban areas kind of tax withheld by National Government
High minimum wage rates in urban areas can create Agencies (NGAs), government-controlled and owned
an influx of job seekers from neighboring cities who corporations (GOCCs), and local government units
are seeking opportunities to have a higher paying job. (LGUs) before payment is made to non-VAT
This creates crowding in cities, leaving fewer people registered entities.
in other small towns.
9. Excise tax - a tax levied on the production, distribution, or
2. Fewer businesses in other regions use of a good in a country. These are goods that are
A higher minimum wage rate attracts not only job manufactured or produced for domestic sale or use or imports.
seekers but also business owners. Big businesses
would rather be located in a big city where many Comprehensive Tax Reform Program (TRAIN Law)
people are working and earning than be in other On December 19, 2017, President Rodrigo Duterte signed into
regional municipalities with fewer people. law Republic Act No. 10963 (RA 10963) or the Tax Reform for
Acceleration and Inclusion (TRAIN). The law's goal is to make
Taxes the Philippine tax system faster, fairer, and more effective in
Taxes are compulsory charges by the government used to encouraging employment, generating employment, and
fund its different operations. These are levied on individuals, decreasing poverty. The TRAIN law also seeks to increase
companies, and the goods people consume. Taxes are revenues to support the government's programs and finance
imposed for different purposes. It can be through the income investments for the people through better education, health,
earned by individuals and businesses. Taxes with fixed rates and social services.
can also be imposed on goods.
One of the highlights of the TRAIN Law is the change in
Nevertheless, all taxes are collected and forwarded to the personal income tax rates. The law restructures personal
central government. Collecting taxes is necessary, and income tax schedules with different schedules for earners of
anybody who fails to pay mandated taxes is held accountable salary income and self-employed professionals.
by law.
Benefits of the TRAIN Law
Types of Taxes Let us look at how some sectors benefit from the TRAIN law.
1. Capital gains tax - a tax levied on earnings that the
purchaser believed to have been earned on the sale, 1. Education
swap, or other disposals of the Philippine-based capital The government aims to create a more conducive learning
assets, including retro sales and different types of environment that will implement the ideal teacher-to-student
conditional transactions. ratio. In the next 5 years, taxes can fund 629,120 public school
classrooms or 2,685,101 public school teachers.
2. Documentary stamp tax - a tax on papers, instruments,
loan agreements, and documentation showing the 2. Healthcare services
approval, assignment, settlement, or change of a contract The tax reform aims to build 60,483 rural health units, 484,326
or right. barangay health stations, or 1,324 provincial hospitals that are
essential to the improvement of the Philippine healthcare
3. Donor's tax - a tax on a donation or gift and is imposed system.
on the free transfer of property between two or more
persons living at the time of the transfer. 3. Infrastructure programs
The government’s current infrastructure programs target the Annual basic income = Monthly basic income x 12
creation of major highways, expressways, and flood control Annual basic income = ₱ 21,000 x 12
projects in the next five years. Annual basic income = ₱ 252,000

Concerns with the TRAIN Law Step 2: Compute for net taxable income. Note that the 13th-
Even though there are benefits to the TRAIN law, there are still month pay is generally not taxable.
some areas of concern. According to economists, these are
some of the observable effects of the TRAIN law: Net taxable income = Annual basic income – deductions
Net taxable income = ₱ 252,000 – ₱ 15,166
1. Increase in fuel prices Net taxable income = ₱ 236,834
Transportation and logistics businesses may suffer
from high fuel prices. The increased costs will be Step 3: Refer to the latest tax rate schedule for the income tax
passed onto consumers through their goods and rate.
services.
Since the annual net taxable income is below ₱250,000,
2. Increased costs in labor transition the income tax rate of Mika is 0%. This means that Mika
The shock experienced by some businesses will does not have to pay any income tax.
direct workers from working in the industries to
agriculture. However, work transition and linking may Example 2
require additional infrastructure and other training A public school teacher earns a monthly income of ₱26,494
programs. and earns the same amount in additional compensation. In a
year, the compulsory annual deduction is around ₱34,185
3. Increase in poverty rate through GSIS, PhilHealth, and Pag-IBIG. Determine the
There will be an increase in poverty among income tax due to the public school teacher.
households because the price increase in
commodities will offset the rise in income. Solution
Step 1: Compute for the annual basic income.

Tax Computation Annual basic income = Monthly basic income x 12

In the Philippines, computing for taxes is not common Annual basic income = ₱ 26,494 x 12
knowledge. Some people are content with just earning enough Annual basic income = ₱ 317,928
money. Some people will use a tax calculator and other tools
to check if their taxes are correct. Step 2: Compute for the net taxable income.

For the individual income taxpayer, how is taxable income Net taxable income = Annual basic income − deductions
computed? Taxable income is determined by subtracting total Net taxable income = ₱ 317,928 − ₱ 34,185
contributions (SSS/GSIS, PhilHealth, and Pag-IBIG) and other Net taxable income = ₱ 283,743
deductions to basic income.
Step 3: Refer to the latest tax rate schedule for the income tax
Taxable income = Monthly basic pay – (SSS/GSIS + rate and compute for
PhilHealth + Pag-IBIG + other deductions) income tax due.

Examples of different compulsory contributions are the According to the latest income tax rate: From ₱ 250,000 to ₱
following: 400,000 = 20% of excess over ₱ 250,000

1. Social Security System (SSS) - a government-run social Tax due = (Net taxable income − ₱250,000) x 20%
institution that caters to private, professional, and informal Tax due = (₱283,743 − ₱250,000) x 20%
sectors. Tax due = ₱ 33,743 x 20%
Tax due = ₱6,748.60
2. Government Service Insurance System (GSIS) - a
government-run social institution that caters to the public Example 3
sector, including government employees and uniformed King is an excellent employee who has perfect attendance with
personnel. the company. He is earning around ₱24,000 a month.
Considering deductions from SSS, PhilHealth, and Pag-IBIG,
3. PhilHealth - a government-controlled corporation that seeks how much is King’s tax due for the year?
to provide universal health care in the Philippines.
Solution:
4. Pag-IBIG - a state-run social institution that provides Step 1: Refer to the SSS contribution table to look for the
affordable housing and loan schemes for Filipinos. When amount.
collecting fees, the agency would utilize a table showing the
contribution schedule for both employed and self-employed Since King’s monthly income of ₱24,000 is over ₱19,749.99,
members. his contribution as an employee will be ₱800 .

Example 1 Step 2: Compute for the monthly PhilHealth premium.

Mika, a customer service representative, earns a monthly
income of ₱ 21,000. She also gets to receive an additional ₱ According to the latest report, the premium rate for PhilHealth
21,000 through her 13th-month pay and other benefits. members is at 3%. We will use this as the basis for calculating
However, her annual income was deducted by ₱ 15,166 from the monthly premium for PhilHealth.
her SSS, PhilHealth, and Pag-IBIG payments. Compute for her
income tax. Monthly premium = Basic monthly income x premium rate
Monthly premium = ₱24,000 x 3%
Solution Monthly premium = ₱720
Step 1: Compute for the annual basic income.
Step 3: Compute for the Pag-IBIG contribution.
According to the latest report, the premium rate for PhilHealth
members is at 2%. We will use this as the basis for calculating
the monthly premium for Pag-IBIG.

Monthly Pag-IBIG contribution = Basic monthly income x 2%

Monthly Pag-IBIG contribution = ₱24,000 x 2%
Monthly Pag-IBIG contribution = ₱480

Step 4: Compute for the annual net taxable income.

Net taxable income = [Monthly basic pay − (SSS/GSIS +

PhilHealth + Pag-IBIG + other deductions)] x 12 months
Net taxable income = [₱24,000 − (₱800 + ₱720 + ₱480)] x 12
Net taxable income = (₱24,000 − ₱2,000) x 12
Net taxable income = ₱22,000 x 12
Net taxable income = ₱264,000

Step 5: Refer to the latest tax rate schedule for the income tax
rate and compute for income tax due.

According to the latest income tax table, the income tax rate
for incomes ₱250,000 to ₱400,000 is 20% in excess of
₱250,000.

Tax due = (Net taxable income − ₱250,000) x 20%

Tax due = (₱264,000 − ₱250,000) x 20%
Tax due = ₱ 14,000 x 20%
Tax due = ₱2,800