BA 101 – BASIC MICROECONOMICS

POSITIVE AND NORMATIVE ECONOMICS

Positive economics - is an economic analysis that considers economic conditions “as they are”, or consider economics “as it
is”. This simply answer the question “what is”.
Ex. The economy is now experiencing a slowdown because of too much politicking and corruption in the
government.

Normative economics – is an economic analysis which judges economic conditions “as it should be”. It answer the question
“what should be”
Ex. The Philippine government should initiate political reforms in order to regain investor confidence, and
consequently uplift the economy.

TYPES OF ECONOMIC SYSTEMS

To address economic problems, several economic system have been created and applied throughout history.

1. Traditional economy – is basically a subsistence economy. A family produces goods only for its own consumption.
The decisions on what, how, how much, and for whom to produce are made by the family head, in accordance with
traditional means of production.

2. Command economy - is a type of economy, wherein the manner of production is dictated by the government. The
government decides on what, how, how much, and for whom to produce.

3. Market economy or capitalism’s basic characteristic - is that the resources are privately owned, and that the people
themselves make the decisions. It is an economic system wherein most economic decisions and means of
production are made by the private owners. Under this economic system, factors of production are owned and
controlled by individuals, and people are free to produce goods and services to meet the demand of consumers,
who, in turn, are also free to choose goods according to their own likes.

4. Socialism - is an economic system wherein key enterprise are owned by the state. In this system, private ownership
is recognized. However, the state has control over a large portion of capital assets, and is generally responsible for
the production and distribution of important goods.

5. Mixed economy – this economy is a mixture of market system and the command system

IMPORTANT ECONOMIC TERMS

1. Wealth – refers to anything that has a functional value (usually money), which can be traded for goods and services.
Accordingly, wealth is the stock of net assets owned by individuals or households.

2. Consumption – refers to the direct utilization or usage of the available goods and services by the buyer (individual) or
the consumer (household) sector. It is also the satisfaction obtained by consumers for the use of goods and services.

3. Production – is defined as the formation or creation by firms of an output (products or services). It is basically the
process by which land, labor and capital are combined in order to produce outputs of goods and services.

4. Exchange – this is the process of trading or buying and selling of goods and/or services for money and/or its
equivalent. It also includes the buying of goods and services either in the form of barter or through market.

5. Distribution – this is the process of allocating or apportioning scarce resources to be utilized by the household, the
business sector, and the rest of the world. It also refers to the process of storing and moving products to customers
often through intermediaries such as wholesaler and retailers.

CHAPTER - THE BASIC ANALYSIS OF DEMAND AND SUPPLY

Demand - pertains to the quantity of a good or service that people are ready to buy at a given prices within a given time
period, when other factors besides price are held constant.

Demand for product – is the quantity of a good or service that buyers are willing to buy given its price at a particular time.

Demand implies 3 things:

1. Desire to possess a thing (good or service)
2. The ability to pay for it or means of purchasing it (price)
3. Willingness in utilizing it.

(Take note that when there is a demand for a good or service, there is market)

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.

Kinds of market

1. Wet market – is where people usually buy vegetables, meat and fish.
2. Dry market – is where people buy shoes, clothes, or other dry goods.
3. Labor market – where workers offer their services and employers look for workers to hire

Methods of Demand Analysis

1. Demand schedule
2. Demand curve
3. Demand function

Demand schedule – is a table shows the relationship of prices and the specific quantities demanded at each of these prices.
Generally, the information provided by a demand schedule can be used to construct a demand curve showing the price-
quantity demanded relationship in graphical form.

Demand Schedule for Rice Per Month

Situation Price (P)kg. Quantity (kg)

A 35 8
B 24 13
C 13 20
D 12 30
E 11 45

Take note that as the price goes UP (DOWN) the quantity of rice being purchased by the consumer goes DOWN (UP). This
implies that quantity demanded is inversely related with price. In other words, consumers are not willing to purchase more
rice at higher prices but will consume more if prices are low.

Demand Curve – is a graphical representation showing the relationship between price and quantities demanded per time
period. A demand curve has negative slope thus it slopes downward from left to right. The downward slope indicates the
inverse relationship between price and quantity demanded. (drawing @ppt)

Law of Demand

“If the price goes UP, the quantity demanded of a good will go DOWN”. Conversely, “if the price goes DOWN, the quantity
demanded of a good will go UP ceteris paribus (other things being equal)”.

Example of Demand Function

QD = a – bP
Where:
QD = quantity demanded at a particular price
a = intercept of the demand curve
b = slope of the demand curve
P = price of the good at a particular time period

Assume that the current price of good A is P5.00. The intercept of the demand curve is 3 while the slope is 0.25. Determine
how much of good A will be demanded by consumer X.
QD = 3 – 0.25 (5)
= 3 – 1.25
= 1.75 units of good A

Change in Quantity Demanded vs. Change in Demand

There is change in quantity demanded (symbolized as Q D) if there is a movement from one point to another point –
or from one price-quantity combination to another. – along the same demand curve. A change in quantity demanded is
mainly brought about by an increase (a decrease) in the product’s own price. The direction of the movement however is
inverse considering the Law of Demand.
Change in Quantity Demanded (example)

PO a

P1 b

QD
0 Q0 Q1

Change in Demand

There is a change in demand if the entire demand curve shift to the right (left) resulting to an increase (decrease) in demand
due to other factors other than the price of the good sold.

Increase (decrease) in demand is brought about by factors other than price of the good itself such as tastes and preferences,
price of substituting goods, resulting in the shift of the entire demand curve either upward or downward.

Change in Demand (example)

Increase in Demand Decrease in Demand

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.
2. Changing in income – increasing of incomes of household raise the demand for certain goods or services or vice
versa.
3. Occasional or seasonal products – various events or seasons in a given year also result to a movement of the demand
curve with reference to particular goods.
4. Population change – means that more goods or services are to be demanded because of rising population.
5. Substitute and complementary goods – substitute goods are goods that are interchanged with another good.
6. Expectation of future prices

SUPPLY (Firms/Seller’s side)

Supply – is the quantity of goods and 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 and services which a firm is willing to sell at a given price, at a given point in time.

Methods of Supply Analysis

1. Supply schedule – is a table listing the various prices of a product and the specific quantities supplied at each of
these prices at a given point in time.

Supply schedule for rice per month

Situation Price/kg Qty. (kg)

A 35 48
B 24 41
C 13 30
D 12 17
E 11 5

2. Supply curve - is a graphical representation showing the relationship between the price of the product sold or factor
of production (e.g. labor) and the quantity supplied per time period.
 S

3. Supply function – is a form of mathematical notation that links the dependent variable, quantity supplied (Q S), with
various independent variables which determine quantity supplied.

QS = f (product’s own price, number of sellers, price of factor inputs, technology, etc.)

QS = a + bP

Where: QS = qty. supplied at a particular price

a = intercept of the supply curve
b = slope of the supply curve
p = price of the good sold

QS = 3 + 0.25 (5)
= 3 + 1.25
= 4.25 units

Change in Quantity Supplied vs. Change in Supply

Change in Quantity Supplied

A change in qty. supplied occurs if there is a movement from one point to another point along the same supply curve. A
change in quantity supplied is brought about by an increase (decrease) in the product’s own price. The direction of the
movement however is positive considering the Law of Supply.

Change in Supply

A change in supply happens when the entire supply curve shifts leftward or rightward. At the same price, less (more)
amounts of a good or service is supplied by producers or sellers.

Increase (decrease) in supply is caused by factors other than the price of the good itself such as change in technology,
business goals, etc. resulting to the movement of the entire supply curve rightward (leftward).

S S S S

Increase in Supply Decrease in Supply

Law of Supply
‘if the price of a good or service goes UP, the quantity supplied for such good or service will also goes UP; if the price goes
down the quantity supplied will also go down, ceteris paribus’.

Forces that cause the supply curve to change

1. Optimization in the use of factors of production – it is the efficient use of the resources.
2. Technological change
3. Future expectations
4. Number of sellers
5. Weather conditions
6. Government policy

Market Equilibrium

Market Equilibrium – generally pertains to a balance that exists when quantity demanded equals quantity supplied.
- Is the general agreement of the buyer and seller in the exchange of goods and services at a particular price and
at a particular quantity. At equilibrium point, there are always two sides of the story, the side of buyer and that
of the side of the seller.

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.
- It is the price at which quantity demanded of a good is exactly equal to quantity supplied of the same good.

What happens when there is market disequilibrium?

1. Surplus – is a condition in the market where the quantity supplied is more the quantity demanded.
2. Shortage – a condition in the market in which quantity demanded is higher than quantity supplied at a given price.

Changes in Demand, Supply, and Equilibrium

Changes in Demand

Change in Supply
Price controls – is the specification by the government of minimum or maximum prices for certain goods and services, when
the government considers its disadvantageous to the certain producer or consumer.

Classification of price controls

1. Floor price – is the legal minimum price imposed by the government on certain goods and services. A price at or
above the price floor is legal; a price below it is not.

2. Price ceiling –is the legal maximum price imposed by the government. A price ceiling is usually below the
equilibrium price and is utilized by the government if there is a persistent shortage of goods in the economy. A price
ceiling therefore is imposed by government to protect consumers from abusive producers or sellers who take
advantage of the situation.

Market Equilibrium: A Mathematical Approach

 Demand equation: QD = a – b(P)
Supply equation: QS = a + b(P)
Equilibrium condition: QD = QS

There are 3 unknown variables: QD, QS and P where QD is quantity demanded, QS is quantity supplied, and P is price.

Ex. Look for the PE and QE given the following information:

QD = 68 – 6P
QS = 33 + 10P

BA 101/SS 004 - BASIC MICROECONOMICS WITH TAXATION AND LAND REFORM

MIDTERM LECTURE

THE CONCEPT OF ELASTICITY

ELASTICITY OF DEMAND

Elasticity (Physics) – refers to the expansion of or contraction of physical mater. Ex. Rubber band.
Elasticity (economics) – means responsiveness or sensitivity.

Demand elasticity – 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.

Classification of demand elasticity (according to factors that cause the change)

1. Price elasticity of demand – is the responsiveness of consumers’ demand to change in price of the good sold.
2. Income elasticity of demand – is the responsiveness of consumers’ demand to a change in their income.
3. Cross price elasticity of demand – is the responsiveness of demand for a certain good, in relation to changes in price
of other related goods.

Price Elasticity of Demand

When we speak of the price elasticity of demand, we are dealing with the sensitivity of quantities bought by a consumer to a
change in the product price. Meaning the producer’s is in control of the price.

We can therefore define elasticity of demand as the percentage in quantity demanded caused by a 1 percentage change in
price. We can now derive price elasticity of demand using the following equation:

percentage change in quantity demanded

Ed =-----------------------------------------------------------
percentage change in price

The most common method used by economics textbooks in the measurement of price elasticity demand is the arc elasticity.
The formula for this indicator is:

Q2 – Q1 P2 – P1
EP = ----------------------- ÷ ---------------------
( Q1 + Q2)/2 (P1 + P2)/2

Where: EP = Coefficient of arc price elasticity (Elasticity Coefficient)

Q1 = Original quantity demanded
Q2 = New quantity demanded
P1 = Original price
P2 = New price

The numerator of this coefficient (Q 2 - Q1)/ ( Q1 + Q2)/2], indicates the percentage change in the quantity demanded. The
denominator, (P2 – P1)/[(P1 + P2)/2], indicates the percentage change in the price.

Ex. Suppose the following price and quantity schedule for good A.

P Q
6 0
4 10
2 20
0 30

Solve for the elasticity coefficient.

10 – 0 4–6
EP = ----------------------- ÷ ---------------------
( 0 + 10)/2 (6 + 4)/2

= 10 ÷ (-2)
5 5

= 50
(-10)
= -5

Interpretation of the Elasticity Coefficient

Demand for a product is sad to be inelastic if consumers will pay almost any price for the product, while demand for a product
may be elastic if consumers will only pay a certain price, or a narrow range of prices, for the product.

Inelastic demand – means that a producer or seller can raise prices without much hurting demand for its product.

Elastic demand- means that consumers are sensitive to the price at which a product is sold and will only buy it if the price
rises by what they consider too much.

The demand for a good is inelastic when the change in quantity demanded is less than the change in price. So, the demand is
inelastic if the computed elasticity coefficient is less than 1 (E P<1). Goods and services for which there are no close substitute
are inelastic. (ex. of goods that are inelastics Rice, pork, beef, vegetables, medicines (antibiotics)

The demand for a good is elastic if the change in quantity demanded is greater than the change in price. So, the demand is
elastic if the computed elasticity coefficient is greater than (E P>1). Goods and services that have many substitutes which
consumers may switch to as elastic. (clothes, appliances, cars)

GRAPHICAL ILLUSTRATION

The price elasticity of demand can also be analyzed graphically.

Elastic Demand Curve

The figure illustrate an elastic demand curve. An elastic demand curve is flatter than a typical demand curve. This is because
a smaller change in price (broken line ab) calls forth a greater percentage change in quantity demanded (broken line bc)

Important Factors that Influence Demand Elasticity

1. Ease of substitution
2. Proportion of total expenditures
3. Durability of product which may include:
- Possibility of postponing purchase
- Possibility of repair
- Used product market
4. Length of time period

Inelastic Demand Curve

The figure illustrates an inelastic demand curve. An elastic demand curve is steeper than a typical demand curve. This is
because a large change in price (broken line ab) calls forth a smaller change in quantity demanded (broken line bc).

Extreme Types of Demand Elasticity

 Perfectly Inelastic Perfectly Elastic

The figures above are the two extreme types of demand elasticity.

Income elasticity of demand

Income elasticity of demand measures the degree to which consumers respond to a change in their incomes buy purchasing
more or less of a particular good. The coefficient of income elasticity of demand E i is determined with the formula:

percentage change in quantity demanded

Ei = ------------------------------------------------------------
percentage change in income

In discussing income elasticity of demand, we have to distinguish a normal good from an inferior good.

A good is considered a normal good if a rise in income brings an increase in demand and a fall in income brings a decrease in
demand. On the other hand, a good is an inferior good if a rise in income brings a decrease in demand and a fall in income
brings an increase in demand. In other words, the consumption of other products decreases (increases) as income increase
(decrease).

Cross price elasticity of demand

Cross price elasticity of demand measures the responsiveness of demand to changes in the prices of other goods, indicating
how much more or less of a particular product is purchased as other prices change.

Cross elasticity –is the percentage change in quantity demanded of one good (X) divided by the percentage change in the
price of a related good (y). Thus, the formula for cross price elasticity of demand is:

percentage change in quantity demanded of X

Exy = ------------------------------------------------------------
percentage change in the price of Y

Elasticity of Supply

Supply elasticity refers to the reaction or response of the sellers or producers to price changes of goods sold. In other words,
it is a measure of the degree of responsiveness of supply to a given change in price. Moreover, it is the percentage change in
quantity supplied given a percentage change in price. Thus,

percentage change in quantity supplied

Es = ------------------------------------------------------------
percentage change in price

If a percentage change in price results in a more proportionate change in quantity supplied then quantity supplied is said to
be price elastic.

Supply Elastic

0 Q
5 10 15 20 25 30

The figure illustrates an elastic supply curve. An elastic supply curve is flatter than a normal supply curve. This is because a
smaller change in price (broken line ba) calls for a greater change in quantity supplied (broken line cb)
Supply Inelastic

If a change in price produces a less than proportionate change in the quantity supplied then supply is considered price
inelastic.

0 Q
5 10 15 20 25 30

The figure illustrates an inelastic supply curve. An inelastic supply curve is more vertical than a normal supply curve. This is
because a smaller change in price (broken line ba) calls forth a smaller change in quantity supplied (broken line cb).

Supply Elasticity Determinants

1. Time – is a determinant of supply elasticity as producers respond to changes in prices from time to time, given a
certain period.
2. Time horizon involved with which production can be increased – the degree of responsiveness of supply to changes
in price.

Extreme Types of Supply Elasticity

Perfectly Inelastic Perfectly Elastic

CONSUMER CHOICE AND UTILITY MAXIMIZATION

Consumer – is one who demands and consumes goods and services.

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.

Services – are any intangible economic activities, that likewise contribute directly or indirectly to the satisfaction of human
wants.

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

1. Consumer goods – these are the goods that yield satisfaction directly to any consumer. These goods are primarily
sold for consumption, and not to be used for further processing or as an input or raw material needed in producing
another good. Usually, these are the goods that are easily accessible to consumers (ex. soft drinks, bread, crackers,
cellular phone loads, clothes)
2. Essential or necessity 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. These are also goods that we cannot live without such as food,
water, shelter, clothing, electricity, medicine).
3. Luxury goods are those which men may do without, but which are used to contribute to his comfort and well being.
Ex. private jet, yacht, luxury cars, perfumes, jewelry.
4. Economic and free good - is that which is both useful and scarce. If a good is so abundant that there is enough of it
to satisfy everyone’s needs without anybody paying for it, that good is free.

Tastes and Preferences

 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.

Maslow’s Hierarchy of Needs (Abraham Harold Maslow 1908 – 1970)

Maslow’s hierarchy of needs identifies the basic priorities of every consumer. Maslow saw human needs in the form of a
hierarchy, ascending from the lowest to the highest. He concluded that when one set of needs is satisfied, this kind of need
ceases. The basic human needs placed by Maslow in an ascending order of importance are (like a pyramid): a. physiological
needs; b) security or safety needs; c) social needs; d) esteem needs; and e) self-actualization needs.

Physiological needs – these are the basic needs for sustaining human life itself.

Safety needs – these are the needs to be free of physical danger and the fear of losing one’s work, property, food or shelter.

Social needs - these needs cover the value of the sense of belongings, love, care, acceptance and understanding of family,
relatives and friends, and to be accepted by others.

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. This kind of need produces such satisfaction as power, prestige, status, and self-
confidence.

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. It is the desire to become what is capable of
becoming – to maximize one’s potential and to accomplish something.

THE UTILITY THEORY

Utility (economics) – refers to the satisfaction or pleasure that an individual or consumer gets from the consumption of a good
or service that she/he purchases. For purposes of economic analysis, utility is also measured by how much a consumer is
willing to pay for a good/service.

Important Concepts on Utility Theory

1. Marginal utility – is the additional satisfaction that an individual derives from consuming an extra unit of a good or
service. Marginal means “additional” or “extra”. The marginal utility of a commodity is the increase in total utility or
satisfaction derived from the consumption of an additional or extra unit of such commodity; it is the loss of utility or
satisfaction if one unit less is consumed.
2. Total utility - is the total satisfaction that a consumer derives from the consumption of a given quantity of a good or
service in a particular time period. It is also the total benefit that a person gets from the consumption of a good or
service.

Hypothetical Demand Schedule for Siopao

Price (P) Quantity Demanded (QD)

15.00 1
12.75 2
10.50 3
8.25 4

The table shows that as you continue to buy siopao, your willingness to pay for it continuously declines because your
satisfaction from the good declines as you consume more of it.

Law of Diminishing Marginal Utility

As a consumer gets more satisfaction in the long-run, he/she experiences a decline in his satisfaction for goods and services.

Hypothetical Utility Schedule for Siopao

 Unit Purchased Total Utility Marginal Utility
1 40 40
2 90 50
3 170 80
4 270 90
5 350 80

The table shows the various units purchased, the total utility for each unit purchased, and the corresponding marginal utility.

Mathematical derivation of marginal utility

Marginal utility is simply the change in total utility divided by the change in quantity. Thus,

∆TU
MU = ----------
∆Q

Expanding our equation, we can solve for marginal utility using the following equation:

TU2 – TU1
MU = ----------------
Q2 – Q1
Where:
TU2 = the new total utility
TU1 = the original utility
Q2 = the new quantity consumed
Q1 = the original quantity consumed

Applying the formula, determine the marginal utility from the consumption of 2 pieces of siopao to 3 pieces using the total
utility presented in the table above.

Utility Maximization Rule

1. Allocate the entire available budget

2. Make the marginal utility per peso spent the same for all goods.

Consumer Surplus

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.

Consumer surplus – is the difference 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.

Consumer Surplus

The Indifference Curve

Another important concept used in explaining consumer behavior is the indifference curve. An indifference curve is a line
that shows combinations of goods among which a consumer is indifferent.

Hypothetical Table for Consumption of Meat and Fish

Combination Meat (kg)
A 5
B 4
C 3
D 2
E 1
Price of Meat (P) Fish (kg) Price of Fish (P)
500 1 100
400 2 200
300 3 300
200 4 400
100 5 500

The Table shows the various combinations of kilos of meat and fish consumed with corresponding prices that eventually yield
equal satisfaction to consumer. Regardless of the combinations chosen, all of them shall provide an equal amount of
satisfaction to the consumer.

Marginal Rate of Substitution (MRS)

The concept of the marginal rate of substitution is the key to “reading” a preference map. The marginal rate of substitution is
the rate at which a person will give up good Y (the good measured on the y-axis) to get more of good X (the good measures on
the x-axis) and at the same time remain indifferent (remain on the same indifference curve). The MRS is measured by the
magnitude of the slope of an indifference curve.

If the indifference curve is steep, the MRS is high. This implies that the person is willing to give up a large quantity of good Y,
to get a small quantity of good X, while the remaining indifferent. But if the indifference curve is flat, the MRS is low. In other
words, the person is willing to give up only a small quantity of good Y to get a large amount of good X to remain indifferent.

Budget Line

A budget or consumption-possibility line shows the various combination of two products that can be purchased by the
consumer with his income, given the prices of the products. In other words, a consumer, given his fixed budget, must spend
wisely and efficiently in order to maximize his satisfaction.

Hypothetical table for Budget Line

Unit A Units B
(Beans in kg) Price A (Onions in kg) Price B Budget
5 125 1 25 150
4 100 2 50 150
3 75 3 75 150
2 50 4 100 150
1 25 5 125 150

The table shows the budget given for various combinations of the consumption of beans and onions with corresponding
prices. Given the various combinations, each combination equals the budget of P150.00, which will eventually provide equal
satisfaction to the consumer.

Purpose of Budget

The purpose of budget is to not spend more than what you have. It tracks the incoming and outgoing monies.

PRODUCTION AND COST

Production – refers to an economic activity, which combines the four factors of production to form an output that will give
direct satisfaction to consumers. It includes material goods or provision of any services that satisfy the wants of people.

- Is the act of combining the factors of production by firms or institutions in order to produce outputs of goods
and services.
- Is the process of converting inputs into outputs.

Inputs – these are commodities that are used to produce goods and services

Broad categories of inputs

1. Land – natural resources, represents the gift of nature to our productive processes.
2. Labor – is the mental and physical ability used in the production of goods and services.
3. Capital resources - are the goods that are used in the production of other goods and services.

Technology: Labor Intensive or Capital Intensive

Technology – is the body of knowledge applied to how goods are produced. In other words, technology is the production
process employed by firms in creating goods and services.

Broad Categories of Technology

1. Labor intensive technology - utilizes more labor resources than capital resources. Labor intensive technology is
usually employed by economics where labor resources are abundant and cheap.
2. Capital intensive technology - utilizes more capital resources that labor resources in the production process. Capital
intensive technology is employed by industrialized economies since capital resources in these economics ar cheaper
than labor.

Short Run vs. Long Run

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

Long run - is a period of time so long that all inputs are considered variable. The long run is therefore known as the planning
horizon. (why planning? This is bec. In the long run, the firm can already build new plants or purchase new machinery instead
of just hiring additional labor or increase the purchase of raw materials.

Classification of Production Inputs

 1. Fixed inputs – is any resource the quantity of which cannot readily be changed when market conditions indicate that
a change in output is desirable.- is any economic resource the quantity of which can be easily changed in reaction to
changes in output level.
2. Variables inputs

The Production Function

Production function – is the functional relationship between quantities of inputs used in production and outputs to be
produced. In other words, production function specifies the maximum output that can be produced with a given quantity of
inputs given the existing technology of a firm.

For instance, in order to produce a t-shirt, its production function may appear as follows:

Ot-shirt = f (fabrics, Sewing machine, sewer, thread, button, etc)

Total, Average, and Marginal Products

3 Important Production Concepts

1. Total product – refers to the total output produced after utilizing the fixed and variable inputs in the production
process.
2. Average product (total product divided by total units of input used)
3. Marginal product – is the extra output produced by 1 additional unit of that input while other inputs are held
constant.

Marginal Product Equation

∆TP
MP =------
∆IL

TP2 – TP1
MP = -------------
IL2 – IL1

Hypothetical Production Schedule of T-shirts

Input (labor) TP MP AP
0 0 0 0
1 8 8 8
2 20 12 10
3 37 17 12
4 57 20 14
5 72 15 14
6 80 8 13
7 85 5 12
8 88 3 11
9 86 -2 10
10 82 -4 8

The table shows the total amount of t-shirts that can be produced for different inputs of labor when other inputs and the
state of technical knowledge are held constant. From total product, we can derive important production concepts like the
marginal and average products.

The Law of Diminishing Returns

The Law of Diminishing Returns holds that we will get less and less extra output when we add additional doses of an input
while holding other input 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.

Increasing marginal returns

Increasing marginal returns happen when the marginal product of an additional worker exceeds the marginal product of the
previous worker. Or there is increasing marginal returns when a small number of workers are employed and arise from
increased specialization and division of labor in the production process.

Decreasing marginal returns

Decreasing marginal returns occur when the marginal product of an additional worker is less than the marginal product of the
previous worker hired to do the same task. Decreasing marginal returns arise from the fact that more and more workers use
the same equipment and work space. Thus, as more and more workers are employed, there is less and less production for
the additional worker to do.

Returns to Scale

3 Important Cases under the Return to Scale

1. Constant returns to scale - indicates a case where a change in all inputs leads to a proportional change in output.
2. Increasing returns to scale (also called economies of scale) –happen when an increase in all inputs leads to a more-
than-proportional increase in the level of output.
3. Decreasing returns to scale – occur when a balanced increase in all inputs leads to a less-than-proportional increase
in total output.

The Theory of Cost

Cost – refers to all expenses acquired during the economic activity or the production of goods or services. It includes
expenditures incurred for the utilization of the various factors of production in the creation of goods.

Sales – Costs = Profit or

Profit = Total Revenue – Total Costs

Explicit and Implicit Cost

The amount that a firm pays to attract resources from their best alternative use is either an explicit cost or implicit cost.
Explicit costs are payments to non-owners of a firm for their resources such as labor, or the use of a building. Implicit costs
are the opportunity costs of using resources owned by the firm.

Economic Profit

A firm’s economic profit equals total revenue minus total cost. Total revenue is the amount received from the sale of the
product. It is the price of the output multiplied by the quantity sold. Total cost is the sum of the explicit costs and implicit
costs and is the opportunity cost of production.

Fixed Costs and Variable Costs

Fixed cost or overhead or supplementary cost are those expenses which are spent for the use of fixed factors of production.
These expenses do not change regardless of a change in quantity of output produced. In other words, fixed costs stay the
same no matter how much output changes. These costs are such expenses that a firm has to incur or bear even if production
has stopped temporarily.

Fixed costs are sometimes call sunk costs because once we have obligated ourselves to pay them, that money has been sunk
into our business firm. Fixed costs are the firm’s overhead.

Variable costs or prime or operating costs are those expenses which change as a consequence of a change in quantity of
output produced. In other words, variable costs are those costs which are incurred on variable factors inputs.

Total Fixed Cost, Total Variable Cost and Total Cost

Total Fixed Cost (TFC) consists of costs that do not vary as output varies and that must be paid even if output is zero. These
are payments that the firm must take in the short run, regardless of the level of output. This implies that even a firm does not
produce any output, still it must pay rent, property taxes. Total Variable Cost (TVC) consists of costs that are zero when output
is zero and vary as output increases (decreases). These costs relate to the costs of variable inputs. Total Cost is the sum of
total fixed cost and total variable cost at each level of output. Thus;
TC = TFC + TVC
Short Run Cost Schedule (in peso)

Q FC VC TC MC AFC AVC ATC

0 100 0 100 - - - -
1 100 40 140 40 100 40 140
2 100 68 168 28 50 34 84
3 100 90 190 22 33 30 63
4 100 115 215 25 25 29 54
5 100 148 248 33 20 30 50
6 100 195 295 47 17 33 50
7 100 260 360 65 14 37 51
8 100 350 450 90 13 44 57
9 100 460 560 110 11 51 62
10 100 600 700 140 10 60 70
Average Costs: Average Fixed Cost, Average Variable Cost and Average Total Cost
In addition to total cost, firms are interested in the per-unit cost, or average costs. Thus, average costs are stated on a per-unit
basis. Average costs include average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC).

Average fixed cost is total fixed cost divided by the quantity of output produced. You will note that as output increases,
average fixed cost falls continuously. This is because we are dividing a larger and larger denominator into a numerator that is
constant.

AFC = FC/Q

Unlike average fixed cost, average variable cost rises with output. Average variable cost is total variable cost divided by the
quantity of output produced. Usually it declines for a while as output increase, but eventually it levels off and then begins to
rise as more outputs are produced.

AVC = VC/Q

Average total cost is total cost divided by the quantity of output produced. It is also the sum of the average fixed cost and
average variable cost. Average total cost is sometimes referred to as per-unit cost. Like AVC, ATC declines with output for a
while but eventually levels off and then begins to rise as more and more outputs are produced.
ATC = TC/Q or ATC = AFC +AVC

Marginal Cost

Marginal cost is the cost of producing one additional unit of output. Marginal cost is the change in total cost when one
additional unit of output is produced. Marginal cost is the ration of the change in total cost to a one-unit change in output.

∆TC
MC = -----------
∆Q

∆TVC
MC = -----------
∆Q

BA 101/SS 004 - BASIC MICROECONOMICS WITH TAXATION AND LAND REFORM

FINAL LECTURE
PROFIT, LOSS, AND PERFECT COMPETITION

THE CONCEPT OF PROFIT MAXIMIZATION

Profit - is simply the difference that arises when a firm’s total revenue is greater than its total cost.

Profit maximization - is the process by which a firm determines the price and output level that returns the greatest profit.

There are several approaches to this problem. The total revenue - total cost (TR-TC) method relies on the fact that profit
equals revenue minus cost, that is;

Profit = TR - TC

On the other hand, the marginal revenue - marginal cost (MR - MC) method is based on the fact that total profit in a perfectly
competitive market reaches its maximum profit where marginal revenue equals marginal cost, that is:

MR = MC

TR = (P) (TQs) or Price x Total quantity of output sold

Rule of Profit Maximization

A firm will maximize its profit or minimize its loss at the output where the marginal cost is equal to marginal revenue (MC =
MR)

Total profit = Output (Price - ATC)

Cost and Revenue Schedule

Output Price (P) TR (P) MR (P) TC (P) ATC (P) MC (P) TPr (P)
1 500 500 500 1,000 1,000 - -500
2 500 1,000 500 1,500 750 500 -500
3 500 1,500 500 1,800 600 300 -300
4 500 2,000 500 2,000 500 200 0
5 500 2,500 500 2,300 460 300 200
6 500 3,000 500 2,850 475 550 150
7 500 3,500 500 3,710 530 860 -210

The table depicts the cost ans revenue schedule of a hypothetical firm selling t-shirts. The last column shows the total profit
(TPr) that the firm obtains after selling outputs of t-shirts. The output at which the firm maximizes its total profit is five (TPr =
P200)

So substituting our figures and solving the total profit, we get:

Total profit = 5 (500 - 460)

= 5 (40)
= P200

MARKET STRUCTURES

Types of Market Structure

1. Perfect or pure competition - is a market structure characterized by a large number of small firms, homogeneous product,
and very easy entry or exit from the market.

- is a market structure with many well-informed sellers and buyers of an identical product and no barriers to
entering or leaving the market.

large number of small firms - it 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.

homogeneous or identical product - is a 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 products of various producers. In other
words, all firms produce a standardized or homogeneous product.

Very easy entry and exit - this means that there are no barriers to entry of new sellers or impediments to the exit of existing
sellers.

The Perfect Competitor’s Demand Curve

The perfect competitor faces a horizontal, or perfectly elastic, demand curve.

The Perfect Competitor: A Price Taker, Not a Price Maker

Ex. If you own a store, you get to decide how much to charge your customers. But if you happen to be a perfect competitor,
you do not have that privilege; you are a price taker, not a price maker. What price do you take? You take the market price.

2. Monopoly - is a market structure characterized by a single seller or producer, a unique product, and impossible entry into
the market.
- refers to a market situation where there is only one seller or producer supplying unique goods and
services. It is a single seller who has a complete control over a specific industry.

single seller or producer - comprised of a single supplier selling to a multitude of small independently-acting buyers. In other
word, a monopoly means that a single firms is the industry.

unique product - means that there are no close substitutes for the monopolist’s product.

impossible entry - barriers to entry are so severe in a monopoly so that it is impossible for new firms to enter an industry.
Barriers to entry include (1) sole ownership of a vital resource, (2) legal barriers like government franchises and licenses, and
(3) economies of scale.

Monopolist definitely makes the price for his products or services. In other words it is the monopolist who dictates the price
of his commodities because the products or services offered are unique and have no close substitute in the market.

Monopolist are price makers yet they are still subject to the law of demand. Thus, the higher the price they set on their
product, the lower the amount that is bought by consumers.

Calculating the monopolist’s profit

Total profit = (Price - ATC) x Output

Output Price (P) TR (P) MR (P) TC (P) ATC (P) MC (P)

1 16 16 16 20 20.00 -
2 15 30 14 30 15.00 10
3 14 42 12 36 12.00 6
4 13 52 10 42 10.50 6
5 12 60 8 50 10.00 8
6 11 66 6 63 10.60 13
7 10 70 4 84 12.00 21

Solve for the monopolist’s total profit at P12.

TP = (P12 - P10) x 5
=2x5
= P10

Natural Monopoly and Economies of Scale

Natural monopoly - is a situation where economies of scale are no significant that costs are only minimized when the entire
output of an industry is supplied by a single producer so that supply costs are lower under monopoly than under conditions of
perfect competition and oligopoly.

Natural monopoly exist when there is a great scope for economies of scale to be exploited over a very large range of output.

Determinants of Monopoly
a. Government laws and policies -
b. Technology
c. Business policies and practices
d. Economic freedom

3. Monopolistic competition - is a type of market structure characterized by many small firms, differentiated product, and
easy market entry and exit.

Many small sellers - comprised of a large number of independently-acting firms and buyers.

Differentiated product - these products is offered by competing firms under a monopolistically competitive market are
differentiated from each other in one or more respect.

Easy entry and exit - there are no barriers to entry preventing new firms entering the market or obstacle in the way of existing
firms leaving the market. So in monopolistically competitive market there are barriers to entry, but these barriers are
relatively small.
Arguments for advertisements
a. Advertising is informative;
b. Advertising increases sales and permits economies of scale;
c. Advertising increases sales and contributes to economic growth;
d. Advertising support the media; and
e. Advertising increases competition and lowers prices.

Arguments against advertisement

a. Advertising is not informative but competitive;
b. The economies of scale are illusory;
c. Advertising raises the cost curve;
d. Advertisers may use their influence to bias the media;
e. Advertising is used as an entry barrier; and
f. Advertising is not a productive activity.

4. Oligopoly - is a market structure or an industry characterized by few sellers, either a homogeneous or a differentiated
product, and difficult market entry.

Few sellers - the bulk of market supply is in the hands of a relatively few large firms who sell their products to many small
buyers. (ex. Petron, shell)

homogeneous or a differentiated product - the products offered by suppliers may be identical or, more commonly,
differentiated from each other in one or more respects.

Features of oligopoly

1. Product branding - each fir in the market is selling a branded (differentiated) product.
2. Entry barriers - significant entry barriers into the market prevent the dilution of competition in the long run which
maintains super normal profits for the dominant firms.
3. Interdependent decision-making - interdependence means that firms must take into account likely reactions of their rivals
to any change in price, output or forms of non-price competition.
4. Non-price competition - is a consistent feature of the competitive strategies of oligopolistic firms.. Ex. Free deliveries and
installation, extended warranties, longer opening hours (supermarket, petron station)

Importance of non-price competition under oligopoly

1. Better quality of service

2. Longer opening hours for retailers
3. Extended warranties on new products
4. Discounts on product upgrades.
5. Contractual relationships with suppliers

Price leadership - tacit collusion

Price leadership - this is happen when one firm has a clear dominant position in the market and the firms with lower market
shares follow the pricing changes prompted by the dominant firm.

Tacit collusion - occurs when firms undertake actions that are likely to minimize a competitive response. Ex. Avoiding price
cutting or not attacking each other’s market

Possible break-down of cartels

1. Enforcement problem
2. Falling market demand
3. Successful entry of non-cartel firms into the industry

Important Development of Market Structure

1. Increasingly most innovation is done by smaller firms

2. Innovation is now a continuous process
3. Innovation is not something left to chance
4. Demand innovation is becoming more important
5. Globalization - is driving innovation and not just in manufactured goods but across a vast range of household and business
services.

BA 101/SS 004 - BASIC MICROECONOMICS WITH TAXATION AND LAND REFORM

FINAL LECTURE
THE BUSINESS ORGANIZATION

FORMS OF BUSINESS ORGANIZATION

1. Single or sole proprietorship - is a form of business owned by a single person, known as the proprietor.
2. 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 a common fund with the aim of sharing the profits among themselves.
3. 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 is governed by the Corporation Code
of the Philippines, per Batasang Pambansa Blg. 68)
4. Cooperative - only organization composed primarily of small producers and consumers who voluntarily join together to
form business enterprises which they themselves own, control, and patronize.

Organizing a Sole Proprietorship (Mej orada 1999)

1. Register the business name with the DTI

2. Pay the municipal licenses to the local government
3. Apply for VAt or non-VAT number with the BIR
4. Register with the BIR the book of accounts (journal and ledger) and the business form to be used (sales invoices, cash sales
invoices, official receipt)

Advantages of Single or Sole Proprietorship

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

Disadvantages of Single or Sole Proprietorship

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.

Organizing a Partnership (Mejorada 1999)

1. Register the name with the DTI

2. Have the partnership agreement (Articles of Co-partnership) notarized and registered with the SEC.
3. Obtain a tax identification number for the partnership from the BIR
4. Obtain pertinent municipal licenses from the local government
5. Apply for VAt or non-VAT number with the BIR
6. Register with the BIR the book of accounts (journal and ledger) and the business form to be used (sales invoices, cash sales
invoices, official receipt).

Types of Partners

1. General partner - is one who is liable for partnership problems, particularly the debts of the business. His liability for
business debts extends to his personal property after partnership assets are exhausted.
2. Limited partner - is one whose liability for partnership problems is limited. His liability is only limited to the extent of his
capital contribution.

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

1. Partners have unlimited liability for partnership debts.

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

Organizing a Corporation
1. Verification of corporate name with SEC
2. Drafting and execution of the Articles of Incorporation
3. 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.
4. Filing the Articles of Incorporation together with the following;
a. Treasurer’s affidavit
b. Statement of assets and liabilities of the proposed corporation
c. Authority to verify bank deposits
d. Personal information sheet of the incorporators
e. Commitment to change corporate name if it is found similar to another corporate name
5. Payment of filing and publication fees.
6. Issuance by SEC of the certificate of incorporation
7. Registration of the corporate name with the DTI
8. Obtaining municipal licenses from the local government
9. Obtaining the VAT or Non-VAT account number from the BIR,
10. Registration with BIR books of accounts and accounting forms

Contents of Articles of Incorporation (Section 14 of the Corporation Code)

1. Name of the corporation

2. The specific purpose or purpose for which the corporation is being incorporated
3. The place where the principal office of the corporation is to be located
4. The term for which the corporation is to exist
5. The names, nationalities and residences of the incorporators
6. The number of directors or trustees, which shall not less than five (5) nor more than fifteen (15)
7. The names, nationalities and residences of the directors or trustees.
8. If it is a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of
shares into which it is divided together with its values on par
9. If it is a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and
the amount contributed by each, and
10. Such other matters that are not inconsistent with law and which the incorporators may deem necessary and convenient.

Rights of Stockholders

1. Right to attend and vote in person or by proxy at stockholder’s meetings.

2. Right to received dividend when declared
3. Right to inspect corporate books and records and to receive financial report of the corporation’s operations
4. Right to preemption in the issue of shares
5. Right to elect and remove directors
6. Right to approve certain corporate acts
7. Right to issuance of certificate of stock or other evidence of stock ownership and be registered as shareholders
8. Right to transfer of stock on the corporate books
9. Right to participate in the distribution of corporate assets upon dissolution
10. Right to adopt and amend or cancel the by-laws or adopt new by-laws
11. Right to compel the calling of meeting of stockholders when for any cause there is no person authorized to call a meeting.
12. Right to enter into a voting trust agreement
13. Right to recover stock unlawfully sold for delinquency
14. Right to bring individual and representative or derivative suits
15. Right to demand payment of the value of his shares and withdraw from the corporation in certain cases.
16. Right to have the corporation voluntarily dissolved.

Advantages of Corporation

1. It has a 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

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 corporations 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 - is one wherein the capital is in the form of shares of stock.
b. Non-stock corporation - is a corporation which is open to all interested.
2. Based on purpose
a. Public corporation is owned, formed, and organized by the government.
b. Private corporation is owned, formed and organized by private owners or businesses.
3. Based on relation to another corporation
a. Parent corporation is one which has controlling interest (more than 50%) on another corporation so that it has the
power either, directly or indirectly, to elect the majority of the directors of such other corporation.
b. Subsidiary corporation is the investor corporation in which the parent corporation has controlling interest.
4. Based on situs of incorporation
a. Domestic corporation is a corporation created under Philippine Law
b. Foreign corporation is one that is formed, organized or existing under the laws of another country.
5. Based on whether they want to open in public or not
a. Close corporation is limited to selected persons or members of a family
b. Open corporation is open to any person who may wish to become a stockholder or member thereof.

Categories of Shares of Stocks

1. Common stock - represents the basic issue of shares, and has all the basic rights of a share of stock so that it is often
referred to as the basic ownership in a corporation.
2. Preferred stock - is a type of stock having certain preferences over common stock.
3. Class A shares - these are the available stock offered to Filipino shareholders
4. Class B shares - these are the available stock offered to foreign investors
5. Par Value shares - this refers to shares of capital stock that have been assigned a definite or fixed value in the articles of
incorporation, so as to fix its minimum subscription or original issue price.
6. No Par Value shares - are shares which have not been assigned a definite or fixed value.
7. Founders’ shares - are those classified as such in the articles of incorporation and may be given certain rights and privileges
not enjoyed by other stockholders.

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 - this is paid in cash to the stockholders

2. Property - this is in the form of non-cash assets of corporation.
3. Stock - this is the dividend in the form of stocks of the issuing corporation
4. Scrip - a dividend in the form of promissory notes indicating the kind of benefits the stockholders shall be entitled to
receive in the future (cash, non cash, stock or some other form of dividend)
5. Bond - this is in the form of bonds of the company
6. Liquidating - this refers to return of capital by a corporation.

Cooperatives

Principles of Cooperative

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.

BA 101/SS 004 - BASIC MICROECONOMICS WITH TAXATION AND LAND REFORM

FINAL LECTURE
PRINCIPLES OF TAXATION

Taxation - is an inherent power of the state to demand enforced contributions from the people for public purposes. Hence, a
tax is levy imposed by government on the income, wealth and capital gains of persons or businesses, on spending on goods
and services, and on properties.

Government Purposes on taxes

1. To raise revenue for the government to cover its own expenditure on the provision of social services such as education,
health, public infrastructure, as well as the salaries and benefits of public servants.
2. As an instrument of fiscal policy in regulating the level of total spending (or aggregate demand in the economy so as to
stabilize the economy.
3. To alter the distribution of income and wealth (redistribution of income and wealth).
4. To control the volume of imports (and sometimes exports of certain goods) into the country.

Types of Taxes

1. Direct taxes - are taxes levied by government on the income and wealth received by households and businesses in order to
raise government revenue and as an instrument of fiscal policy. Taxes that are levied on household are called individual
income taxes. Taxes on businesses are called corporate income tax.
2. Indirect taxes - are taxes levied by the government on goods and services in order to raise revenue and as an instrument of
fiscal policy.

PROGRESSIVE, PROPORTIONAL, AND REGRESSIVE TAXES

Progressive taxes - are taxes that a place a greater burden on those best able to pay and little or no burden on the poor. (ex.
Individual tax payer)

Proportional taxes - are taxes that place an equal burden on the rich, the middle class, and the poor. In other words, taxes are
levied at a constant rate as income rises.

Regressive taxes - are taxes that fall heavily on the poor than on the rich.
- it is a structure of taxation in which taxes are levied at a decreasing rate as income rises.

BASIC PRINCIPLES OF TAXATION

1. Adequacy, that is, taxes should be just enough to generate revenue required for provision of essential public services like
health, education, and national defense and police protection.
2. Broad basing, meaning that taxes should be spread over as wide as possible to all sectors of the population or economy so
as to minimize the individual tax burden.
3. Compatibility, that is, taxes should be coordinated to ensure tax neutrality and overall objectives of good governance.
4. Convenience, meaning taxes should be enforced in a manner that facilities voluntary compliance to the maximum extent
possible.
5. Earmarking - meaning that tax revenue from a specific source should be dedicated to a specific purpose only when there is
a direct cost-and-benefit link between the tax source and the expenditure.
6. Efficiency - meaning that tax collection efforts of government should not cost an inordinately high percentage of tax
revenues.
7. Equity - taxes should equally burden all individuals and entities in similar economic circumstances.
8. Neutrality - taxes should not favor any one group or sector over another, and should not be designed to enterfere with or
influence individual decision making.
9. Predictability - collection of taxes should reinforce their inevitability and regularity.
10. Restricted exemption - tax exemption must only be for specific purposes (such as to encourage investment) and for a
limited period.
11. Simplicity - tax assessment and determination should be easy to understand by an average taxpayer.

APPROACHES TO TAXATION

1. The Ability to pay principle state that taxation should be levied according to an individual’s ability to pay. This approach to
taxation is usually the basis for progressive taxation.
2. The Benefit approach proposes that taxation should be levied broadly in relation to the benefits that people receiv in public
services.
3. The tax incident approach - proposes that the major duty of a tax system is to analyze the effect of a particular tax on the
distribution of tax welfare.

Structure of Tax System

1. A tax is proportional. A proportional tax means that the government takes an amount of money from a person which is
indirect proportion to his income. Ex. Juan salary is P10,000 and the government is deducting 10% of his salary for tax. After
a year, his income increases to P15,000 and the government now deducts 12% of his salary for tax.
2. A tax is regressive. A regressive tax means that the government takes a larger percentage of a person’s income for tax,
while he is receiving a lower income. Ex. Juan salary is P10,000 and the government is asking him to pay 15% of his salary for
tax which is contrary to our ex. No.1
3. A tax is progressive. A progressive tax means that the government takes a larger percentage of his salary for tax due to his
high salary. Ex. Juan has a monthly income of P30,000 and the government deducted 20% of his salary for tax. Here, the tax
amount is proportionately equal to someone’s status in the society. A rich man should pay more than a poor man.

Classification of Taxes

1. As to subject matter
a. Personal, Poll or Capitation Tax. This tax means that there is a fixed amount upon all persons residing within a specified
territory without regard to their property or the occupation in which they may be engaged. Ex. Residence tax
b. Property tax - this tax refers to one assessed on all property located within a certain territory on a specified date in
proportion to its value, or in accordance with some other reasonable methods of apportionment, the obligation to pay which
is absolute and unavoidable and is not based upon any voluntary action of an individual’s assessment. Ex. Real estate tax
c. Excise tax - this refers to any tax which does not fall within the classification of a poll tax or a property tax and embraces
every form of burden not laid directly upon a person or property. Ex. Revised VAT
VAT means a tax on value, added by every seller to his purchases of goods and services.

2. As to who bears the burden

a. Direct tax. This is a tax which demanded from a person whom it is intended or desired for a particular good or service. Ex.
Income tax
b. Indirect tax. This refers to a tax paid primarily by a person who can shift the burden upon someone else, or who is under no
legal obligation to pay him. Ex. Buying of goods and services (RVAT)

3. As to determination of account
a. Specific tax.this tax is a fixed or determinate sum imposed by the head or number or some standard of weight or
measurement, and requires no assessment beyond a listing and classification of the object to be taxed. Ex. Taxes on wines.
b. Ad Valorem Tax. It is a tax of a fixed proportion of the value of the property with respect to which the tax is assessed, and
requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each
taxpayer can be determined. Ex. Tax according to value such as Real Estate tax.

4. As to purpose
a. General tax. It refers to a tax levied to an individual for a general public purposes.
b. Special tax. This is a tax levied to an individual for a particular or specific purpose.

5. As to scope
a. National tax. This tax is imposed by the state itself and is effective within the entire jurisdiction thereof. Ex. National
revenue taxes
b. Local tax. This tax is imposed by a political subdivision of the state and is effective only within the territorial boundaries
thereof.

Forms of Escape from Taxation

1. Shifting - is one way of passing the burden of tax from one person to another. Ex. Tax of manufacturer shifted consumers
2. Capitalization this refers to the reduction in the price of the taxed object to the capitalized value of future taxes which the
purchaser expects to be called upon to pay.
3. Transformation - occurs when the manufacturer or producer upon whom the tax has been imposed pays the tax and
endeavor to “recoup” himself by improving his process of production.
4. Tax evasion -is the practice by the taxpayer thorough illegal or fraudulent means of defeat or lessen the amount for tax.
This is also known as “tax dodging”.
5. Tax avoidance - is the exploitation by the taxpayer of legally permissible methods in order to avoid or reduce tax liability.this
is also known as “tax minimization”.
6. Tax exemption - is the grant of immunity or freedom from a financial charge or obligation or burden to which others are
subjected

Classification of Taxpayers

1. Individual taxpayer (resident citizens, non-resident citizens resident aliens, non-resident aliens)
2. Corporate taxpayer (domestic corp., foreign corp,, resident corp, non-resident corp.
3. General professional partnership ((CPA, Lawyer)
4. Estates and Trusts

INCOME TAXATION
Income refers to all wealth which flows into the taxpayer other than as mere return on capital.
Capital - refers to the investment made which is the source of income.
Income tax - refers to the tax imposed on the net income or on the entire income received by a taxpayer in one taxable
period.

Classification of Income Tax

1. Taxable income. This is the pertinent items of gross income specified in the tax code less deduction of personal and/or
additional exemption.
2. Passive income- this refers to income such as interest on banks, deposits, dividends, royalties, prizes, and other winnings.
3. Net income. It refers to gross income less allowable deductions.
4. Deductions. These refer to all items or amounts which the law allows to be deducted from the gross income.

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

1. Single it refers to an individual who is a single or unmarried.

2. Head of the family - it refers to an unmarried or legally separated man or woman with one or both parents, or one or more
brothers, sisters, or with one or more legitimate, recognized natural or legally adopted children living with.
3. Married - it refers to a persons who is legally and lawfully married with or without children, natural or legally adopted
child/children solemnized by religious or state authority.

AGRARIAN REFORM

Agrarian reform - is defined as the rectification of the whole system of agriculture.

Land reform - refers to the full range of measures that may or should be taken to improve or remedy the defect in the
relations among men with respect to the rights in the use of land. In other words, it is a set of integrated measures designed
to eliminate obstacles to economic and social development arising out of defects in the agrarian structure.

Effects of Agrarian Reform on the Economy

1. On agricultural productivity. Agrarian reform may decrease the agricultural productivity if collectivization and land
fragmentation are introduced.
2. On poverty. Agrarian reform can minimize the extent of poverty and also improve the real per capita income of rural
workers.
3. Income and living standards. Agrarian reform measures increase the productivity and thus result to rice in income of rural
farmers which will in turn improve the living standard of rural people.
4. Employment. Agrarian reform measures result in better employment.
5. Investment and capital formation. Agrarian reform can change the labor-capital ratio that is needed for any economic
development
6. Impartiality in rural population. Agrarian reform has a significant influence in the economic and political structure of the
rural areas.

MEASURES OF THE AGRARIAN REFORM

1. Public health provisions

2. Family planning
3. Education and training of farmers
4. Reorganization of land reform agencies
5. Application of labor laws to agricultural workers
6. Construction of infrastructure facilities (feeder roads)
7. Organization of various types of voluntary associations (farmer’s cooperative)
8. Provide employment opportunities for underemployed or surplus rural labor (dev.t of sme’s)
9. Other services which are community development in nature.