INSTRUCTIONAL MATE

2018-2019

Taxation FINANCIAL Marketing STRATEGY Chart THEORY Laws

PLAN Discussion PROGRESS Method ECONOMY Corporate
EDUCATION Data

MARICAR P. RELLON
[email protected]
pRINCIPLES of
ECONOMICS
 PREFACE

Faced with the question of how we can teach Economics as a course, and how the
students’ comprehension will be aided, the authors came up with this book to guide the students
to learn and appreciate the many facets and opportunities. It is a tool to provide the basics in
making a choice and the aftereffects of the same. The challenge of addressing the conflict and
the contrast and congruence of the theories and principles to the real economic environment
with which we base justification were laid manly discussed for better understanding.
Nevertheless, the task of an Economics, teacher requires blending the theory, institutional laws
and its application.

Moreover, it is equally important that students of economics get hold of a basic reference
that could simplify the apparently complicated subject to them, and more importantly, make
them appreciate the significance of the study of economics to their everyday lives. For truly,
until a student appreciates the worthiness of what is being taught to him/her, she will be
motivated to exert more effort to understand the subject, or at least study it.

This module is written in such a way that non-economics major students could very well
understand the basic underlying principles, concepts, and theories behind the study of
economics. It consists of 11 chapters, with topics chosen according to the author’s analysis of
the students’ needs and level of comprehension.

The author hope that this module will greatly help the students in their study of
economics.
 TABLE OF CONTENTS
Preface
Acknowledgment
Lesson 1: Economic Way of Thinking
 Relationship between Economics and Scarcity
 Ceteris Paribus Assumption
 Brief History: The Classical, Keynesian and Modern Economics
 Positive and Normative Economics
 Four Basic Questions of Economics
 Relationship of Economics to other Sciences
 Importance of Studying Economics
 3 E’s in Economics
 Important of Economic Terms
 Microeconomics and Macroeconomics
 The Concept of Opportunity Cost
 Factors of Production
 Basic Decision Problems
 Types of Economic Systems
Activities
Lesson 2: Basic Analysis of Demand and Supply and Concept of Elasticity
 The Market
 The Law Demand
 Demand Schedule and Demand Curve
 Climate
 Impacts of Climate Resources
 Physical Features and Scenery
 Coastal and Ocean Resources
 Natural Vegetation and Wildlife
Activities
Lesson 3: Consumer Choice and Utility Maximization and The Profit Maximizing Firm

Activities
Lesson 4: Business Organization and Market Structures

Appendix A
Appendix B
Appendix C
 LESSON 1

ECONOMIC WAY OF THINKING

Main Topics
 Relationship between Economics and Scarcity
 Positive and Normative Economics
 Relationship of Economics to other Sciences
 3 E’s in Economics
 Microeconomics and Macroeconomics
 Types of Economic Systems

Content

Scarcity

SCARCE
WEALTH OF THE NATIONS RESOURCES

SCARCITY
ECONOMICS: ADAM SMITH

Scarcity is the basic and central economic problem confronting every society. It is the
heart of the study of economics and the reason behind its establishment.
 Authors defined scarcity in various ways;
 One author defines scarcity as a commodity or service being in short supply, relative to its
demand (Kapur 1997), which implies a constant availability of a commodity or economic
resource relative to the demand for them.
 In quantitative terms, scarcity is said to exist when at a zero price there is a unit of demand,
which exceeds the available supply (Kapur 1997). Simply put, scarcity pertains to the limited
availability of economic resources relative to society’s unlimited demand for goods and
services.

Figure 1.1: Problem of Scarcity

Limited Resources Unlimited Wants

Scarcity

This figure illustrates the interaction of limited resources available and the
unlimited wants of the society. If limited resources fall short to meet the unlimited
wants of the society, it will eventually create a problem which is called “scarcity”.

Economics
It is a science that deals with the management of scarce resources. It is also described as
a scientific study on how individuals and the society generally make choices (Fajardo 1977).
Specifically, it is the study of the problem of using available economic resources as
efficiently as possible so as to attain the maximum fulfillment of society’s unlimited demand
for goods and services.
As Slavin (2005) puts it, economics is simply scarcity and choice.

Figure 1.2 Economics

Limited Resources Unlimited Wants

Allocation
 This figure depicts the relationship between available limited resources and the
unlimited wants of the society. This shows that when limited resources fail to
meet the unlimited wants of the society, economics comes into play in order to
effectively allocate resources.

What is the relationship between Economics and Scarcity?

The problem of scarcity gave birth to the study of economics. Their relationship is such
that if there is no scarcity, there is no need for economics. The study of economics was
essentially founded in order to address the issue of resource allocation and distribution, in
response to scarcity.

Origin of the term “economics”

The two Greek roots of the word economics are oikos- meaning household and
nomus-meaning system or management. Oikonomia or oikonomus therefore means the
“management of household”.
Consequently, the term, “management of household” now pertains to the microeconomic
branch of economics, while the phrase “state management” presently refers to the
macroeconomic branch of economics (Fajardo 1977).

Ceteris Paribus Assumption

The assumptions of “Ceteris Paribus” is important in studying economics. Ceteris

Paribus means “all other things held constant or all else equal.’ This assumption is used as a
device to analyze the relationship between two variables while the other factors are held
unchanged. It is widely used in economics as an exploratory technique as it allows economists
to isolate the relationship between two variables.

Brief History: The Classical, Keynesian and Modern Economics

Classical Economics
 Adam Smith- He is considered as the most important personality in the
history of economics- being regarded as the “Father of Economics”. His
book “Wealth of the Nations”, published in 1776, became known as the
“the bible in economics” for a hundred years (Fajardo 1977).
  John Stuart- who developed the analysis of the political economy or the
importance of a state’s role in its national economy. His major “Das
Kapital”, is the centerpiece from which major socialist thought was to
emerge (Sicat 1983).

Neoclassical Economics (1870s)

 Leon Walras- introduced the general economic system, who became the
most influential economist during that time because of his book Principles
in Economics.
Alfred Marshall-developed the analysis of equilibrium in several markets.
-developed the analysis of equilibrium of a particular market and
the concept of ‘marginalism’. (Sicat 1983)

Keynes’ General Theory of Employment, Interest and Money

 John Maynard Keynes- is an English economist who offered an

explanation of mass unemployment and suggestions for government
policy to cure unemployment in his influential book: The General Theory
of Employment, Interest and Money (1936).
- Concern about the extent and duration of the
worldwide interwar depression led him to look
for other explanations of recession. (Pass &
Lowes 1993).
- Argued that classical political economists were
concerned with the relative shares in national
output of the different factors of production,
rather than the forces which determine the level
of general economic activity, so that their
theories of value and distribution related only to
the special case of full employment.

Non-Walrasian Economics (1939)

 John Hicks- was recognized for his analysis of the IS-LM model, which
is considered as an important macroeconomic. IS refers to the goods
market for a given interest rate, while LM means money market for a
given value of aggregate output or income.

Post-Keynesian Economics (1940 and 1950s)

 Paul A. Samuelson, Kenneth J. Arrow, James Tobin and Lawrence
Klein, Joan Robinson; and Michael Kolechi. – whose views are known
as the post Keynesian “mainstream economics”.
 Milton Friedman-introduced liberal market post Keynesians, mainly the
monetarists.

New Classical Economics

  Smith, Ricardo and Malthus- highlighted the importance to adherence
to national expectations hypothesis and analysis, which included various
economic phenomena in formulating different kinds of studies and new
theories in economics.

Positive and Normative Economics

Positive Economics- is an economic analysis that considers economic conditions

“as they are”, or considers economics “as it is”. It uses objective or scientific explanation in
analyzing the different transactions in the economy. It simply answers the question “what is”.
Examples of positive statements:
1. The economy is now experiencing a slowdown because of too much politicking and
corruption in the government.
2. The economy is now on a slowdown because the world is experiencing a financial
and economic crisis. Other reasons are also due to the financial problem of the US,
increase on the prices of crude oil and lack of investors or capital deficiency.
Normative Economics is economic analysis which judges economic conditions
“as it should be”. It is that aspect of economics that is concerned with human welfare. It deals
with ethics, personal value judgments and obligations analyzing economic phenomena (Kapur
1997). It answers the question “what should be”. It is also referred to as policy economics
because it deals with the formulation of policies to regulate economic activities (Omas-as
2008).
Examples of normative economics:
1. The Philippine government should initiate political reforms in order to regain
investor confidence, and consequently uplift the economy.
2. In order to minimize the lash of global recession, the Philippine government should
release a stimulus package geared towards encouraging economic productivity.

Four Basic Economic Questions

To address the problem of scarcity, the society must answer four basic economic
questions. These questions are as follows:
1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?

Relationship of Economics to other Sciences

 Economics is considered the “queen of all sciences because it covers almost every
activity of man in relation to the society. Because of its multifarious applications, various
sciences are loosely related to the study of economics.
1. Business Management- Is an important vehicle in the balance of economic activity.
Its relation to the study of economics is evident in analyzing microeconomic and
macroeconomic behavior.
2. History-provides information regarding theories that can be revisited in order to
evaluate present and future economic issues.
3. Finance- management of money, credit, banking and investment. It is a system that
includes the circulation of money, the granting of credits, making of investments and
the provision of banking facilities. Money and Finance are important in the study of
Economics.
4. Physics- Innovations and output brought about by physics greatly affect the study of
economics. A country’s economic activity speeds up through inventions and
technological advancements in energy, transportation, and communication. These
new creations and discoveries help the society to make the day-to-day activity easier
and accessible.
5. Sociology- is the study of the behavior of the societies. Economics essentially deals
with the behavior of the aggregates of the economy.
6. Psychology- Is the study of the behavior of man. Is primarily useful in the study of
microeconomics, which scrutinizes and focuses on the smallest units of the economy.
Microeconomics also seeks to understand the decision making of individuals.

Importance of Studying Economics

In order to fully understand economics, its importance and practical

in everyday life must be appreciated.
 To Understand the Society
 To Understand Global Affairs
 To be an Informed Voter

3 Es in Economics

1. Efficiency-refers to productivity and proper allocation of economic

resources. It also refers to the relationship between scarce factor
inputs and outputs of goods and services. This relationship can be
measured in physical terms (technological efficiency). (Pass &
Lowes 1993).
 2. Equity- means justice and fairness. Thus, while technological
advancement may increase production, it can also bear disadvantages
and machineries, manual labor may not be necessary, and this can
result in the retrenchment or displacement of workers.

3. Effectiveness- means attainment of goals and objectives. Economics

is an important and functional tool that can be utilized by other
fields.

Important Economic Terms

Economics has its own unique language. Thus, for a student to truly
understand the different concepts and theories in economics, an
understanding of these terms should first be achieved.
1. Wealth- refers to anything that has functional value.

2. Consumption- refers to the direct utilization or usage of the

available goods and services by the buyer or the consumer sector.

3. Production- the formation by firms of an output (products or

services). It is the combination of land, labor and capital in order
to produce outputs of goods and services.

4. Exchange- The process of trading goods and/or services for

money and/or is equivalent. It also includes the buying of goods
and services either in the form of barter or through market.

5. Distribution- the process of allocating or apportioning scarce

resources to be utilized by the household, the business sector, and
the rest of the world. It refers to the process of storing and moving
products to customers often through intermediaries such as
wholesalers and retailers (Pass & Lowes 1993).

Microeconomics and Macroeconomics

Microeconomics- This is the branch of economics which deals with the

individual decisions of units of the economy-firms and households, and how their choices
determine relative prices of goods and factors of production. The market is the central concept
of microeconomics. It focuses on its two main players-the buyer and the seller, and their
interaction with one another.
Among the topics discussed in microeconomics are the theories of demand and supply,
elasticity of demand and supply, elasticity of demand and supply, individual decision making,
theories of production, output and cost of firms, a firm’s profit maximization objective,
different types of business organizations, and kinds of market structures. (Case 2003)
Macroeconomics- It is the branch of economics that studies the
relationship among broad economic aggregates like national income, national output, money
supply, bank deposits, total volumes of savings, investment, consumption expenditure, general
price level of commodities, government spending, inflation, recession, employment, and
money supply (Kapur 1997). The term macro, in contrast to micro, implies that it seeks to
understand the behavior of the economy as a whole.
Macroeconomics focuses on the four specific sectors of the economy: the behavior of the
aggregate household (consumption); the decision making of the aggregate business
(investment); the policies and projects of the government (government spending); and the
behavior of external/foreign economic agents, through trading (export and import).

The Concept of Opportunity Cost

Opportunity Cost- refers to the foregone value of the next best alternative. It is the
value of what is given up when one makes a choice. The thing thus given up is called the
opportunity cost of one’s choice.
It is expressed in relative price. This means that the price of one item should be relative
to the price of another.
Example: If the price of Coke is P 20.00 per bottle and one piece of cupcake is P10.00,
then the relative price of Coke is 2 pieces of the cupcake. If a consumer only has P20.00 and
chooses to buy a bottle of Coke with it, then we can say that the opportunity cost of that bottle
of Coke was the 2 pieces of cupcake, assuming that the cupcake was the next best alternative.

Figure 1.3 Opportunity Cost

Saving (Firm/Individual)

Credit (Interest) Investment (Profit)

This figure illustrates the concept of opportunity cost. The savings of the
firm/individual is subject to two choices between credit and investment. If the savings of
an individual will be put on credit, there is a possibility of earning interest or a bad debt
(not getting the money back), on the other hand, when savings of an individual is
invested, it may earn profit or may be subject to loss. With this in mind, what do you
think is the best choice or next best alternative?
 Factors of Production

There are four factors which serve as inputs in the production process. Specifically, these
are: land, labor, capital, and entrepreneurship. Below is a more comprehensive discussion of
each factor.
Land
This broadly refers to all-natural resources, which are given by, and found in nature, and
are, therefore, not man made. It does not solely mean the soil or the ground surface, but refers
to all things and powers that are given free to mankind by nature. In this sense, land comprises
all the materials and things, which are available beneath the soil or above. The compensation
for use of land is called rent.
Labor
Labor is any form of human effort exerted in the production of goods and services. Labor
covers a wide range of skills, abilities, and characteristics. It includes factory workers who are
engaged in manual work. It can also refer to an accountant, economist, nurse typist, and other
workers and professionals. The reward for labor rendered is salary or wage.
Capital
Capital is man-made goods used in the production of other goods and services. It
includes buildings, machinery, and other physical facilities used in the production process.
Saving refers to that part of a person’s income, which is not spent on consumption. The reward
for the use of capital is called interest.
Money is not actually considered as capital in economics as it does not produce a good or
service but it is rather a form of asset that is used as a medium of exchange.

Entrepreneurship
An entrepreneur is a person who organizes, manages, and assumes the risk of a firm,
taking a new idea or a new product and turning it into a successful business.
Entrepreneur possess managerial skills needed in building, operating, and expanding a
business. He/she decides what combinations of land, labor, and capital are to be used in the
production process. Entrepreneurship is an economic good that commands a price referred to a
profit or loss.
Figure 1.4: The Circular Flow Model

Economic Resources
(Land, Labor, Capital

HOUSEHOLDS FIRMS
(Producers)

Output of Goods and

Services

This figure shows the microeconomic circular flow model. It represents basic relationship
p between households (consumers) and firms (producers). Households primarily provide
basic economic resources (land, labor and capital). These economic resources are
combined so that firms can create goods and services which, are eventually offered back
and consumed by households.

Basic Decision Problems

 Consumption
 Production
 Distribution
 Growth Over time

Types of Economic Systems
 To address economic problems, several economic systems have been created and
applied throughout history. Below is an enumeration of these.

1. Traditional Economy- is basically a subsistence economy.

Command Economy- is a type of economy, wherein the manner of production is

dictated by the government.
2. Market Economy- capitalism’s basic characteristic is that the resources are privately
owned, and that the people themselves make the decisions.
3. Socialism- is an economic system wherein key enterprises are owned by the state.
4. Mixed Economy- is a mixture of market system and the command system. The
Philippine economy is described as a mixed economy since it applies a mixture of
three forms of decision-making.
 LESSON 2

The Basic Analysis of Demand and Supply and The Concept of Elasticity

Main Topics
 Market
 Demand
 Law of Demand
 Forces that cause the demand curve to change
 Supply (Firms/Seller’s side)
 Law of Supply
 Forces that cause the supply curve to change
 Market Equilibrium
 Price Controls
 Elasticity of Demand
 Elasticity of Supply

Learning Outcomes
 Generalize the different most renowned
Destinations in the world according to its
typology of attraction.
 Compile the different attractions of Hongkong
form Natural Environment, Infrastructure, Events,
Recreation and Entertainment Attractions.
 Formulate a video, pictures of 10 famous Tourist
Destinations in the world recommended from
family and friends.

.
 Content

Demand is generally affected by the behavior of consumers, while supply is

usually affected by the conduct of producers. The interplay consumer identifies his/her needs,
wants, and demands, while poducers address these by accordingly producing goods and
services. In the end, the consumer gains satisfaction while the producer gains profit.

Market

A market is where buyers and sellers meet. It is the place where they both trade
or exchange goods or services-in other words, it is where their transaction takes place. There
are different kinds of markets, such as wet and dry. Wet market is where people usually buy
vegetables, meat etc. On the other hand, dry market is where people buy shoes, clothes, or
other dry goods.
.

Demand
Demand pertains as to the quantity of a good or service that people are ready to
buy at given prices within a given time period, when other factors besides price are held
constant.
Demand therefore implies three things:
 Desire to possess a thing;
 The ability to pay for it or means of purchasing it; and
 Willingness in utilizing it.
 Law of Demand

The Law of Demand states that if price goes UP, the quantity demanded will go
DOWN. Conversely, if price goes DOWN, the quantity demand will go UP ceteris paribus.
The reason for this is because consumers always tend to MAXIMIZE SATISFACTION.

Forces that cause the Demand Curve to change

1. Taste or Preferences- pertain to the personal likes or dislikes of consumers for

certain goods and services. If tastes or preferences change so that people want to
buy more of a commodity at a given price, then an increase in demand will result or
vice versa.
2. Changing incomes- Increasing incomes of households raise the demand for certain
goods or services or vice versa. This is because an increase in one’s income
generally raises his or her capacity or power to demand for goods or services which
he/she is not able to purchase at lower income. On the other hand, a decrease in
one’s income reduces his or her purchasing power, and consequently, his/her
demand for some goods or services ultimate declines.

3. Occasional or seasonal products- The various events or seasons in a given year

also year also result to a movement of the demand curve with reference to particular
goods.

4. Population Change- An increasing population leads to an increase in the demand

for some types of goods or services, and vice-versa. More people simply mean that
more goods or services are to be demanded. In particular, increase in population
generally
results to an increase in demand for basic goods, such as food and medicines. On
the other hand, a decrease in population results in a decline in demand.

5. Substitute goods- are goods that are interchanged with another good. In a situation
where the price of a particular good increases a consumer will tend to look for
closely related commodities. Substitute goods are generally offered at cheaper price,
consequently making it more attractive for buyers to purchase.

6. Expectations of future prices- If buyers expect the price of a good or service to

rise (or fall) in the future, it may cause the current demand to increase (or decrease).
Also, expectations about the future may alter demand for a specific commodity.

Supply

Supply is the quantity of goods or services that firms are ready and willing to sell at a
given price within a period of time, other factors being held constant. It is the quantity of goods
or services which a firm is willing to sell at a given price, at a given point in time. Thus, supply
is a product made available for sale by firms. It should be remembered that sellers normally
sell more at a higher price than at a lower price. This is because higher price results to higher
profits.

Law of Supply

The Law of Supply states that if the price of a good or service goes up, the quantity
supplied for such good or service will also go up; if the price goes down the quantity supplied
also goes down, ceteris paribus.

Forces that cause the supply curve to change

1. Optimization in the use of factors of production- An optimization in the utilization

of resources will increase supply, while a failure to achieve such will result to a
decrease in supply. Optimization refers to the process, or methodology of making
something as fully perfect, functional, or effective as possible. Simply put, it is the
efficient use of resources. In business parlance, it could mean maximum production of
output at minimum cost.

2. Technological change- The introduction of cost-reducing innovations in production

technology increases supply on one hand. On the other hand, this can also decrease
supply by means of freezing the production through the problems that the new
technology might encounter, such as technical trouble (Samuelson and Nordhaus 2004).

3. Future Expectations- This factor impacts sellers as much as buyers. If sellers

anticipate a rise in prices, they may choose to hold back the current supply to take
advantage of the future increase in price, thus decreasing market supply. If sellers
however expect a decline in the price for their products, they will increase present
supply.

4. Number of sellers- The number of sellers has a direct impact on quantity supplied.
Simply put, the more sellers there are in the market the greater supply of goods and
services will be available.

5. Weather conditions- Bad weather, such a typhoons, drought or other natural disasters,
reduces supply of agricultural commodities while good weather has an opposite impact.

6. Government policy- Removing quotas and tariffs on imported products also affect
supply. Lower trade restrictions and lower quotas or tariffs boost imports, thereby
adding more supply of goods in the market.

Market Equilibrium
 The meeting of supply and demand results to what is referred to as “market
equilibrium”.
“where buyers and sellers meet”, while equilibrium is generally understood as a
“state of balance”.

Equilibrium

Generally, pertains to a balance that exists when quantity demanded equals quantity
supplied. Equilibrium is the general agreement of the buyer and the seller at a particular price
and at a particular quantity.
For instance, given the price of P10.00 the buyer is willing to purchase 20 units. On the seller
side, he is willing to sell the quantity of 20 units at a price of P10.00. It simply shows that the
buyer and seller agree at one particular price and quantity. This is main concept of equilibrium:
there is a balance between price and quantity of goods bought by consumers and sold by sellers
in the market.

Equilibrium Market Price

Is the price agreed by the seller to offer its good or service for sale and for the buyer to
pay for it. Specifically, it is the price at which quantity demanded of a good is exactly equal to
the quantity supplied.

What happens when there is market disequilibrium?

When there is market disequilibrium, two conditions may happen: a surplus or a

shortage
SURPLUS- is a condition in the market where the quantity supplied is more the quantity
demanded. When there is a surplus, the tendency is for sellers to lower market prices in order
for the goods to be easily disposed from the market. This means that there is a downward
pressure to price when there is a surplus in order to restore equilibrium in the market.

SHORTAGE- is a condition in the market in which quantity demanded is higher than

supplied. When the market is experiencing shortage, there is a possibility of consumers being
abused, while the producers are enjoying imposing higher prices for their own interest.
Shortage exists below the equilibrium point. When there is a shortage, there is an
upward pressure to prices to restore equilibrium in the market.
 Price Controls

Price controls are classified into two types: floor price and price ceiling.
Floor Price-It is the legal minimum price imposed by the government. This is undertaken if a
surplus in the economy persists. It is a form of assistance to producers by the government for
them to survive in their business.
Price Ceiling- It is the legal maximum price imposed by the government. Price ceiling is
utilized by the government if there is a persistent shortage of goods (basic commodities like
food items and oil products) in the economy. Price ceiling is generally imposed by the
government to protect consumers from abusive producers or sellers who take advantage of the
situation.

Elasticity of Demand

In economics however, elasticity means responsiveness. In general, it is the ratio of

the percent change in one variable to the percent change in another variable. It is a tool used by
economists for measuring the reaction of a function to changes in parameters in a relative way.
Demand elasticity, in particular, is a measure of the degree of responsiveness of
quantity demanded of a product to a given change in one of the independent variables which
affect demand for that product. We can classify demand elasticity according to the factors that
cause the change.
Price elasticity of demand is the responsiveness of consumers’ demand to change in
the price of the good sold.
Income elasticity of demand is the responsiveness of consumers’ demand to a change
in their income.
Cross elasticity of demand is the responsiveness of demand for a certain good, in
relation to changes in price of other related goods.
 LESSON 3

Consumer Choice and Utility Maximization and The Profit Maximizing Firm

Main Topics
 Climate
 Impacts of Climate Resources
 Physical Features and Scenery
 Coastal and Ocean Resources
 Natural Vegetation and Wildlife

Learning Outcomes

 Explore and Research the top 10 Natural Wonders of the

World.
 Make a video compilation of about 10 beaches in Asia of
your choice.
 Content

At the end of the lesson, the students will be able to;

Consumer

A consumer is one who demands goods and services. Without consumption (households),
there is no need for production (firm). Consumer is the king in a capitalist or free-market
economy.

Producers, for their own interests, have to satisfy the needs and wants of consumers in
order to earn profits.

Our power to determine what is to be produced since we are the ultimate purchasers of
goods and services is referred to as consumer sovereignty.

Goods and Services

Goods refer to anything that provides satisfaction to the needs, wants, and desires of the
consumer. They can be any tangible economic products (like cars, books, clothes, etc.) that
contribute directly (final goods) or indirectly (intermediate goods) to the satisfaction of human
needs and wants.

Services, on the other hand, are nay intangible economic activities (such as hairdressing,
catering

Tangible goods can be classified according to, but not limited to, the following:

1. Consumer goods-these are goods that yield satisfaction directly to any consumer. Usually,
these are the goods that are easily accessible to consumers.
2. Essential or necessity- are goods are goods that satisfy the basic needs of man. In other
words, these are goods that are necessary in our daily existence as human beings.
3. Luxury goods are those which men may do without, but which are used to contribute to his
comfort and well-being.
4. Economic good- is that which is both useful and scarce. It has value attached to it and a
price has to be paid for its use.
5. Free good- If a good is so abundant that there is enough of it to satisfy everyone’s needs
without anybody paying for it.

Taste and Preferences

Generally, tastes and preferences are determined by age, income, education, gender,
occupation, customs, and traditions as well as culture.
Preferences- are the choices made by us consumers as to which products or services to
consume.

Brand- is the name, term, or symbol given to a product by a supplier in order to distinguish his
offering from that of similar products supplied by the competitors.
Brand names- are used as an afocal point of product differentiation between suppliers.

Maslow’s Hierarchy of Needs

The basic human needs placed by Maslow in an ascending order of importance (like
pyramid) are:

a. Physiological needs- these are the basic needs for sustaining human life itself, such as food,
water, warmth, shelter, sex and sleep.
b. Safety needs- these are the needs to be free of physical danger and the fear of losing one’s
work, property, food, or shelter.
c. Social needs- these needs cover the value of the sense of belongingness, love, care,
acceptance and understanding of family, relatives and friends, and to be accepted by others.
d. Esteem needs- these needs explain the importance of self-esteem, recognition, status of an
individual and the general acceptance of the society to an individual.
e. Self-actualization needs- these needs explain the worth of a person’s self-development,
growth and realization and achievement. According to Maslow, this is the highest need in
the hierarchy.

The Economic of Satisfaction

This is to explain how consumers attain maximum satisfaction level on the many goods
and services available to them for consumption. How consumers are able to attain maximum
level of satisfaction when consuming a particular good or service.

1. Utility Theory- refers to the satisfaction or pleasure that an individual or consumer gets from
the consumption of a good or service that (s)he purchases.
2. Marginal Utility- is defined as the additional satisfaction that an individual derives from
consuming an extra unit of good service.
3. Total utility- is the total satisfaction that a consumer derives from consumption of a given
quantity of a good or service in a particular time period.

Consumer Surplus

-is a measure of the welfare we gain from the consumption of goods and services or a
measure of the benefits that we derive from the exchange of goods.
 - the difference between the total amount that we are willing and able to pay for a good
or service between the total amount that we are willing and able to pay for a good or service
and the total amount that we actually pay for that good or service.

Production

-refers to any economic activity, which combines the four factors of production
(i.e, land, labor, capital, and entrepreneurship) to form an output that will give direct
satisfaction to the consumer. It also includes material goods or provision of any source if it
satisfies the wants of people.
- Is the process of converting inputs into outputs.

Inputs

-these are commodities and services that are used to produce goods and
services (Samuelson and Nordhaus 2005).
-Generally classified into three broad categories: land, labor, and capital

1. Land- or more, generally, natural resources, represents the gift of nature to our productive
processes. It includes those above and under the earth like forest products (e.g. timber) and
mineral ores (e.g. copper and iron one).
2. Labor- is the mental and physical ability used in the production of goods and services.
3. Capital- are the goods that are used in the rpoduction of other goods and services.

Outputs
-are the various useful goods and services that result from the production
process and are either consumed or employed in further production.

Final goods- goods and services that are ultimately consumed.

Intermediate goods-those that are used to produce other goods.

Technology: Labor Intensive or Capital Intensive

Technology- is the body of knowledge applied to how goods are produced (Tucker 2008 p. 36).
 -Can be classified into two broad categories: labor intensive and capital
intensive.

Labor intensive technology- utilizes more labor resources than capital resources. Its usually
employed by economies where labor resources are abundant and cheap.

Capital intensive technology- utilizes more capital resources than labor resources in the
production process. Is employed by industrialized economies since capital resources in these
economies are cheaper than labor.

TWO TYPES OF INPUTS

1. Fixed input- is any resource the quantity of which cannot readily be changed when market
conditions indicate that a change in output is desirable. (e. g. plants and buildings)
2. Variable input- is any economic resource the quantity of which can be readily changed in
response to changes in output. (e. g. managers can hire fewer or more workers during a
given period.)

Long run or Short run

Short run- is a period of time so short that there is at least one fixed input therefore changes in
the output must be accomplished exclusively by changes in the use of variable outputs.

Long run- is a period of time so long that all inputs are considered variable. Is therefore
known as the planning horizon.

Production Function
-Is the functional relationship between quantities of inputs used in production and
outputs to be produced.

For instance, in making a dress, its production function may appear as follows:

O (Dress) = f (Fabrics, Sewing machine, Sewer, Thread, Buttons, etc.)

The Law of Diminishing Returns

-holds that we will get less and less extra output when we add additional amount of an
input while holding other inputs fixed. In other words, the marginal product of each unit of
input will decline as the amount of that input increases, holding all other inputs constant.
(Samuelson and Nordhaus 2005 p. 109)

The Theory of Cost

Cost- refers to the all expenses acquired during the economic activity or the
production of goods or services.
The equation that every business person knows better than anything else in the world is:
Sales- Costs = Profit or
Total Revenue – Total Costs = Profit

The Concept of Profit Maximization

Profit- is simply defined as the difference that arises when a firm’s total revenue is greater than
its total cost.
Economic profit- differs from that used conventionally by businessmen (accounting profit) in
that accounting profit only takes into account explicit cost (refer to out definition earlier).
Economic profit can be viewed in terms of:
a. The return accruing to enterprises owner (entrepreneurs) after the payment of all explicit
costs (payments such as wages to outside factor input suppliers) and all implicit costs
(payment for the use of factor inputs like capital and labor, supplied by the owners
themselves);
b. A residual return to the owner(s) of a firm (an individual entrepreneur or group of
shareholders for providing capital and for risk-bearing;
c. The reward to entrepreneurs for organizing productive activity, for innovating new
products, etc., and for risk-taking; or
d. The prime mover of a private enterprise economy serving to allocate resources between
competing end users in line with consumer demands.

In economics, profit maximization- is the process by which a firm determines the price and
output level that returns the greatest profit.
 LESSON 4

THE BUSINESS ORGANIZATION AND MARKET

STRUCTURES

Main Topics
 Business Organization
Sole Proprietorship
Partnership
Corporation
 By-Laws
 Categories of Shares of Stocks
 Dividends
 The Market Structures
 Monopoly
 Oligopoly
.

Content

The Business Organization

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 Business organization are a major component in the economy. Their main goal
is to attract customers, and to consequently earn profit.
 Businesses have an important partnership with the government.
 Business and government work together for progress and development.
 Pay the necessary taxes to the government, and in return, the
government provides the proper infrastructures, such as electricity,
water, roads and highways, communication, railways, etc.

FORMS OF BUSINESS ENTERPRISES

1. Single or Sole Proprietorship
2. Partnership
3. Corporation
4. Cooperatives

Single or Sole Proprietorship

Single or sole proprietorship is a form of business owned by a single person, known as the
proprietor. Because one person can organize it, it is the easiest enterprise to set up.

Organizing a Sole Proprietorship (Mejorada 1999)

1. Register the business name (Department of Trade & Industry).
2. Pay the municipal licenses to the local government.
3. Apply for VAT or non-VAT number.
4. Register with the BIR the books of accounts (simplified bookkeeping records or journals and
ledger) and the business forms to be used (sales invoices, cash sales invoices, official
receipts, etc.).

Advantages of Sole Proprietorship

The following are the advantages of Sole Proprietorship:

 1. It is easy to organize.
2. Its organization and operation only involves few businesses requirements
3. The single proprietor is the boss.
4. Financial operations are not complicated.
5. The owner acquires all the profits.

Disadvantages of Sole Proprietorship

The following are the disadvantages of sole prorietorship:

1. Limited ability to raise capital.

2. The sole proprietor has unlimited liability.
3. Limited ability to expand.
4. Business is entirely a responsibility of the owner.

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Partnership

-Is a business organization that is an association of at least two or more persons who agree to
place money, property or industry in acommon fund with aim of sharing the profits among
themselves.

Organizing a Partnership (Mejorada 1999)

 Register the business name (Department of Trade & Industry).
 Have the partnership agreement (Articles of Co-partnership) notarized and
registered with the SEC.
 Obtain a tax identification number for the partnership from the BIR.
 Obtain pertinent municipal licenses from the from the local government.
 Obtain the VAT or non-VAT number from the BIR.
 Register books of accounts (simplified bookkeeping records or journals and
ledger) and the business froms to be used (sales invoices, cash sales invoices,
official receipts, etc.) with the BIR.

Contents of Articles of Co-partnership (Mejorada 1999)

The following are the contents of the Articles of Co-partnership

1. Name of the partnership

2. Names of the partners
3. Place of business
 4. Effective date of the partnership
5. Nature of business
6. Investment of each partner and corresponding capital credit.
7. Duration of the contract
8. Rights, powers, and duties of the partners
9. Accounting period
10. Manner of dividing profits and losses
11. Liabilities of the partners for partnership debts
12. Compensation for service offered by partners
13. Treatment of partners’ additional investments and withdrawals
14. Procedures for settlement of partner’s interest upon dissolution of partnership
15. Provision for settlement of disputes

Types of Partners
Partners can be classified according to the following:
1. Based on their contribution
Capitalist partner. Is one that provides assets, such as money and property, to be utilized as
the starting capital of the business.

Industrial partner. Is one that swears to give services or labor to the operation of the
business. He is usually the “hands-on” partner in the business, and he is involved in various
aspects of its operation.

Capitalist-industrial partner. Is one that pledges money and property as the starting capital
of the business, as well as his services. He is the one that provides the money, and at the
same time he is also “hands-on” in the operations of the business.

2. Based on their liability for partnership debts

General partner. Is one who is liable for partnership problems, particularly the debts of the
business.

Limited partner. Is one whose liability for partnership problems (for instances his debts) is
limited.

Advantages of Partnership

1. Easy to form.
2. Flexibility of operations
3. Efficiency in operations.
4. Partners are expected to have great interest in the operation of the partnership.
5. Possibility of bigger resources.
 Disadvantages of Partnership
The following are the disadvantages of partnership

1. Partners have unlimited liability for partnership debts.

2. It has a limited life or it lacks stability. Partnership is unstable.
3. Limited ability to raise capital.
4. Conflicts and quarrels between/among partners.

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Corporation

Section 2 of the Corporation Code defines a corporation as follows:

“A corporation is an artificial being created by operation of law having the right
of succession and the powers, attributes and properties expressly authorized by law or incident
to its existence” (private corporations are governed by the Corporation Code of the
Philippines, per Batas Pambansa Blg. 68).
Corporation- is a form of business organization in which the owners (known as stockholders)
have an undivided ownership share in the assets of the corporation upon its dissolution; and a
share in its profits corresponding to the amount of shares of stock which they own.
Corporation- has specific objectives in carrying out the business, in accordance with a charter
or articles of incorporation. This charter is a written document containing the names of the
original incorporations, their initial share in stockownership, and the objectives and activities of
the corporation.

Organizing a Corporation (Mejorada 1999)

 Verification of corporate of the Articles of Incorporation
 Drafting and execution of the Articles of Incorporation
 Deposit of cash received for subscribed shares of stocks in a banking institution in the
name of the temporary treasurer, in trust for and to the credit of the corporation.
 Filing of the Aticles of Incorporation together with the following:
  Treasurer’s affidavit
 Statement of assets and liabilities of the proposed corporation.
 Authority to verify bank deposits
 Certificate of deposit of cash paid for subcription
 Personal information sheet of the incorporators
 Commitment to change corporate name if it is found similar to
another corporate name

 Payment of filing and publication fees

 Issuance by SEC of the certificate of incorporation.
 Registration of the corporate name with the DTI.
 Obtaining municipal licenses form the local government
 Obtaining the VAT or Non-VAT account number from the BIR
 Registration with BIR of books of accounts and accountable forms.

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By-Laws
 -It may be defined as the rules of action for the internal government of a corporation and for
the government of its officers, stockholders and members. All Corporation Code of the
Philippines are required to adopt a code of by-laws within one month after its corporate charter
from the Securities and Exchange Commission (SEC).

Rights of Stockholders

Stockholders of corporations have the following rights:

 Right to attend and vote in person or by proxy at stockholder’s meetings. (Sec.50)
 Right to receive dividends when declared. (Sec.43)
 Right to inspect corporate books and records and to receive financial report of the
corporation’s operations. (Secs. 74 and 75)
 Right to pre-emption in the issue of shares. (Sec. 39)
 Right to elect and remove directors. (Secs 24 & 28)
 Right to approve certain corporate acts. (Secs 49-53)
 Right to issuance of certificate of stock or other evidence of stock ownership and be
registered as shareholders. (Secs 63)
 Right to participate in the distribution of corporate assets upon dissolution. (Secs 118-
119)
 Rights to adopt and amend or cancel the by-laws or adopt new by-laws. (Secs. 46 &
48)
 Right to compel the calling of meeting of stockholders when for any cause there is no
person authorized to call a meeting. (Sec. 50)
 Right to enter into a voting trust agreement. (Sec. 59)
 Right to recover stock unlawfully sold for delinquency. (Sec.69)
 Right to bring individual and representative or derivative suits.
 Right to demand payment of the value of his shares and withdraw from the corporation
in certain cases. (Secs. 41 & 81)
  Right to have the corporation voluntarily dissolved. (Secs. 118-119)

Advantages of Corporation

The following are the advantages of a corporation:

1. It has legal capacity.
2. It has continued and more or less permanent existence.
3. Management is centralized.
4. It has the most efficient management.
5. Shareholders have limited liability.
6. Shareholders’ freedom.
7. Ability to raise more capital.

Disadvantages of Corporation

The following are the disadvantages of a corporation:

1. Complicated to maintain and not easy to organize.
2. Governmental intervention.
3. Subject to higher tax.
4. It has limited powers.
5. Abuses of corporation officials.
6. Some corporation are engaged in questionable activities.
7. There is a very impersonal or formal relationship between the officers and employees of a
corporation.

Classification of Corporation

1. Based on nature of its capital

a. Stock Corporation
b. Non-stock Corporation
2. Based on purpose
a. Public Corporation
b. Private Corporation
3. Based on relation to another corporation
a. Parent Corporation
b. Subsidiary Corporation
4. Based on situs of incorporation
a. Domestic Corporation
b. Foreign Corporation
5. Based on whether they want to open in public or not
 a. Close Corporation
b. Open Corporation

Voting in a Corporation

Stock Corporation- the manner of voting is called cumulative voting-where a stockholder is

entitled to cast votes equal to the number of shares he owns multiplied by the numbers of
directors or trustees to be elected.

Non-stock Corporation- every member may cast as many votes as there are trustees to be
elected but may not cast more than one vote one candidate, unless cumulative voting is
authorized under the articles of incorporation.

Categories of Shares of Stocks

1. Common Stock
2. Preferred Stock
3. Class A shares
4. Class B shares
5. Par value shares
6. No par value shares
7. Founders’ shares

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Dividends
 It is also called as the distributed profits of the corporation. It represents the corporation’s
profit, which are distributed to stockholders according to the proportionate interest of their
shareholding.

Kinds of Dividends

1. Cash
2. Property
3. Stock
4. Scrip
5. Bond
6. Liquidating

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Cooperatives
Under the Presidential Decree No. 175, a cooperative is defined as follows:
“Only organizations composed primarily of small producers and consumers who voluntarily join
together to from business enterprises which they themselves own, control and patronize”.
The Cooperative Code of the Philippines was created in 1990, by virtue of Republic Act No.
6938, which serves as the legal basis fro the operation of all cooperatives in the country.

Principles of Cooperatives
 Every cooperative shall conduct its affairs in accordance with Filipino culture
and experience and the universally accepted principles of cooperation, which include the
following:
1. Open and voluntary membership.
2. Democratic Control
3. Limited Interest on Capital.
4. Division of net surplus.
5. Cooperative education.
6. Cooperation among cooperatives.

Objectives of a Cooperative

The primary objective of every cooperative is

a. to provide goods and services to its members,
b. and thus enable them to attain increased income and savings, investments, productivity, and
purchasing power and
c. promote among them equitable distribution of net surplus through maximum utilization of
economies of scale,
d. cost-sharing and risk-sharing without, however,
e. conducting the affairs of the cooperative for eleemosynary or charitable purposes.

Similarities between a Cooperative and a Corporation

Factors of production are privately owned and managed. They both depend on business
efficiency to survive in a competitive market. Also, their activities and operations are
 regulated and supervised by the government. Lastly, they both enjoy a reasonable degree of
economic freedom.

Differences between a cooperative and a corporation

A cooperative is primarily organized for service while a corporation’s purpose is

mainly for profit. Membership in a cooperative is open and voluntary, while in a
corporation, membership is restricted. Management of a cooperative is more democratic.
It is one man vote, with no proxy voting. In the case of a corporation, it is one share, one
vote and more shares, more more votes. Moreover, savings or net profits are refunded to
the members of a cooperative on the basis on their individual patronage, while in a
corporation; profits are distributed to stockholders on the basis of the number of shares.

The Market Structures

Market Structure- is a classification system for the key traits of a market, including the
number of firms, the similarity of the products they sell, and the ease of entry into and exit from
the market structure

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Types of Market Structure
1. Perfect Competition
2. Monopoly
3. Monopol;istic Competition
4. Oligopoly

PERFECT COMPETITION

- Perfect, or pure, competition is a market structure characterized by;

1. a large number of small firms, 2. homogeneous product, and 3. very easy entry or
exit form the market.

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Large number of small firms. One of the characteristics of a perfectly competitive

market is that it is composed of many firms and buyers, that is, a large number of
independently-acting firms and buyers, each firm and buyer being sufficiently small to
be unable to influence the price of product transacted in the market.
- In fact, under perfect competition, the exact number cannot be determined.
 Homogeneous product. The products offered by the competing firms are identical not
only in physical attributes but are also regarded as identical by buyers who have no
preference between the rpoducts of various producers.

Very easy entry and exit. This means that there are no barriers to entry or impediments
to the exit of existing sellers. Barriers can be in the form of financial, technical, or
government imposed barriers such as licenses, patents, permits, copyrights, etc.
MONOPOLY

-Is the opposite extreme of perfect competition.

Characterized by 1. A single seller or producer, 2. A unique produce, and 3. Impossible entry
into the market. Unlike perfect competition, there are no close substitutes for the
monopolist’s product.

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Single seller or producer. A monopoly market is comprised of a single supplier

selling to a multitude of small, independently-cating buyers. In other words, a
monopoly means that a single firm is the industry. One firm provides the total supply of
a product in a given market.

Unique product. Means there are no close substitutes for the monopolist’s product. As
such, the monopolist’s faces little or no competition.
Impossible entry. In other words, extremely high barriers make it very difficult or
impossible for new firms to enter an industry. Barriers to entry include 1. Sole
ownershi of a vital resource, 2. Legal barriers like government franchises and licenses,
and 3. Economies of scale.

MONOPOLISTIC COMPETITION
- Characterized by 1. Many small firms, 2. Differentiated products, and 3. Easy market entry
and exit.

Many small sellers. Monopolistically competitive market is comprised of a large

number independently-acting firms and buyers. However, under monopolistic
competition, just like under perfect competition, the exact numbe rof firms cannot be
determined.

Differentiated product. The products offered by competing firms under a

monopolistically competitive market are differentiated from each other in one or more
respects. In fact, this is the key feature of monopolistic competition. Product
differentiation is the process of creating real or apparent differences between goods and
services sold in the market.

Easy entry and exit. In a monopolistically competitive market, there are no barriers to
entry preventing new firms entering the market or obstacles in the way of existing firms
leaving the market. However, entry into a monopolistically competitive market is not
quite as easy as entry into a perfectly competitive market. Because monopolistically
competitive firms sell differentiated products, it is somewhat difficult for new firmsto
become established.

OLIGOPOLY
Characterized by 1. Few sellers, 2. Either a homogeneous or a differentiated product,
and 3. Difficult market entry. Oligopoly, just like monopolistic competition, is found in
a real world industries.

Few Sellers. Under Oligopoly, the bulk of market supply is in the hands of arelatively
few large firms who sell to many small buyers. We can therefore say that oligopoly is
competition “among the few”. Basically, an oligopoly is a consequence of mutual
interderpendence, that is, it is a condition in which an action of one firm may cause a
reaction from other firms.
Homogeneous or differentiated products. In an oligopolistic market, the products
offered by suppliers may be identical or, more commonly, differentiated from each
other in one or more respects.
Difficult entry. Similar to monopoly, there are formidable barriers of entry which make
it difficult for new firms to enter the market. High barriers to entry in an oligopoly
protects firms from new entrants. These barriers include exclusive financial
requirmements, control over essential resource, patent rights, and other legal barriers.
SPECIAL TYPE OF MARKET STRUCTURE
1. Bilateral monopoly- is a market situation comprising one seller(like monopoly) and only
one buyer (like monopsony).
2. Bilateral oligopoly- is a market condition with a significant degree of seller
concentration (like oligopoly) and asignificant degree of buyer concentration (like
oligopsony).
3. Duopsony- is a market situation in which there are only two buyers but many sellers.
4. Duopoly- is a subset of oligopoly describing a market situation in which there are only
two suppliers.
5. Monopsony- is a form of buyer concentration, that is, a market situation in which a
single buyer confronts many small suppliers.
LESSON 5
MACROECONOMIC FUNDAMENTALS AND GROSS DOMESTIC
PRODUCT

Main Topics
 The Role of Government
 The Production Possibilities Frontier
 Reasons for Economic Growth
 The Circular Flow Model
 Important Concept and Definitions
 Gross Domestic Product and Gross National Product
 Approaches in Measuring GDP
 The Income Approach
 GDP Shortcomings
 Content

Macroeconomics

Is the study of how we can best increase our country’s wealth given the available
resources we have like our land, labor, and capital and how these resources are transformed by
entrepreneurs into final goods and services which we ultimately consume to satisfy our needs
and wants.
Wealth- includes tangibles like cars, houses, appliances, condominiums, etc. as well as
intangibles like more leisure time, cleaner air, etc.

The Role of Government

The Philippines is a mixed economy with a substantial amount of government spending,

taxation, regulation, and monetary policies.
Subsequently, the role of government in our country (as well a s in many other countries
in the world) has increased considerably at the end of the war. Central banks, in particular, took
control of the monetary system; labor unions supported by government legislations gained more
influence; social programs, such as social security and health insurance were deemed necessary;
new deal types of government spending to artificially create jobs when the economy is slowing
down became commonplace; and to fund the growing government expenses and the
exponentially growing number of government employees, taxes to income and goods and
services skyrocketed.

The Production Possibilities Frontier

 Usually there is some economic slack, but very so often we do manage to operate at peak
efficiency. When this happens, we say we are operating on our production possibilities frontier
(or production possibilities curve).

The production possibilities frontier represents outcome or production combination that

can be produced with a given amount of resources.

Reasons for Economic Growth

How does a country achieve significant increases in capital goods and advances in
technology? Let us look at increases in capital stock first.

Capital goods (like machinery, equipment, factories, etc.) are produced just like any other
consumer goods such as cars, televisions, and food. At one point in time (that is, given fixed
amounts of resources and technology), assuming full-employment condition, more capital goods
can be produced only at the expense of producing other goods.

Advancing in technology occur because of inventions and innovations in producing

goods and services. Inventions and innovations take place when entrepreneurs have incentives to
produce more efficiently and minimize their costs.

The Circular Flow Model

Circular Flow Model

Wages, and Salaries, rent,

interest, profit RESOURCE
MARKET Labor, land, capital,
entrepreneurial ability

BUSINESSES HOUSEHOLDS

 Buy resources  Sell resources

 Sell products  Buy products
 Goods and Services
PRODUCT MARKET
Consumption
Expenditure

This figure illustrates the flow of resources and payments for their use as well as the flow of goods and services and
payment for them. Thus, the household sector sells resources to and buys products from the business sector while the
business sector buys resources from and sells products to the household sector.

The circular flow model depicts a complex, interrelated web of decision making and

economic activity involving businesses and households. For the economy, it is the circle of life.

Businesses and households are both buyers and sellers. Businesses buy resources and sell products.

Important Concepts and Definitions

Nominal versus real values. Nominal prices, earnings, wages, or interest rates, we refer

to the peso value of the prices, earnings, wages, or the absolute value of the interest rates.

Real values, on the other hand, are always values in comparison, or relative, to the other

related economic variables.

 References

Marcelino et al. 2010. Principles of Economics with Taxation and Agrarian Reform (Simplified).

National Book Store. Manadaluyong City, 2010.

Online Dictionaries
Online links