CHAPTER 1

THE NATURE
AND IMPORTANCE
OF ECONOMICS
ECONOMICS
-a social science concerned with using scarce resources to obtain the
maximum satisfaction of the unlimited materials wants of society.

SCARCITY
Refers to the condition wherein most things that people want are
available only in limited supply.

ECONOMIC GOOD
Is anything either a physical commodity or a service, which yields utility
and which could command a price if bought or sold in the market.

UNLIMITED WANTS
A persons desires or preferences for specific ways of satisfying a basic
need.
 THE NATURE OF ECONOMIC CHOICE

SCARCITY – the imbalance between our

desires and the means of satisfying those
desires.

OPPORTUNITY COST – the cost of choosing

to use resources for one purpose measured
by the sacrifice of the next best alternative
for using those resources.
 THE FUNDAMENTAL
ECONOMIC PROBLEM
Since resources are not sufficient to satisfy the
unlimited wants of people, decisions must be made
with the said constraints in mind. As such, the
following questions must be considered:
• What goods and services must be produced and
in what quantities?
• How shall these goods and services be produced?
• Form whom shall these goods and services be
produced?
TYPES OF ECONOMIC SYSTEMS
The distribution of goods and services will depend partly on the availability of
resources, the laws , customs and traditions prevalent in a given society.
Economic systems are classified as follows:
1. CAPITALISM
- Is an economic system mainly characterized by private individuals
owning and operating the majority of businesses that produced
goods and services.

Forms of Capitalism:
• Pure Capitalism
• Modified Capitalism

Rights of capitalism:
• PRIVATE PROPERTY – people have the right to own property
• PROFITS – people have the rights to earn profits
• BUSINESS DECISIONS – people have the right to engage in
business
• CHOICE – people have the freedom to choose what occupation
to undertake
2. COMMUNISM
Society in which the government owns all the nation’s
resources

3. SOCIALISM
Government owns and operates the basic industries
such as telecommunications, water service, postal
service, transport, banking and selected
manufacturing business. Private individuals are
allowed, however, to own and operate small
businesses.

4. MIXED ECONOMICS
Is one that has elements from more than one economic
system. It contains both private and state enterprises.
THE ECONOMIC RESOURCES
 Land
 Labor
 Capital
 Entrepreneurial Ability

ECONOMIC GOALS
 Economic Growth
 Fall Employment
 Economic Efficiency
 Price level Stability
 Economic freedom
 An equitable distribution of income
 Economic security
 Balance of Trade
 DIVISIONS OF ECONOMICS
• MICROECONOMICS – the behavior and
activities of specific economic units –
individuals, households, firms, industries,
and resource owners
• MACROECONOMICS – the behavior of the
economy as a whole with respect to
output, income, the price level, foreign
trade, unemployment, and other
aggregate economic variables.
CHAPTER 2
THE CIRCULAR
FLOW OF
ECONOMIC
ACTIVITY
Two basic activities undertaken in any economy:
 Production
 Consumption
The firms perform the production function while
households undertaken consumption.

STOCK AND FLOW CONCEPT

 STOCK – refers to the measure of quantity at a

given point of time
 FLOW – refers to measure of movement of
quantity over a period of time.
THE CIRCULAR FLOW OF GOODS, SERVICES, AND
INCOME
The circular flow covers the production
process, exchanges of commodities, income between
households and firms and between firms and
exchanges between firms, households to the
government, and foreign countries. The circular flow is
affected by savings and investments.
THE PRODUCTION PROCESS – process of producing
goods and services involves households and firms in a
circular flow
THE FLOW OF GOODS AMONG PRODUCING FIRMS –
within the circular flow of the production process in
another floe which happens among different types of
business firms
• THE CONCEPT OF EQUILIBRIUM – the
economy will be in equilibrium if the amount
received by firms from households is equal to
the amount received by households from
firms… Market Equilibrium

• THE EFFECT OF SAVINGS AND

INVESTMENTS – if the total output of firms
are purchased by the households and the
total economic resources are bought by
firms , there is equilibrium in the market.
CHAPTER 3
BASIC ELEMENTS
OF DEMAND
AND SUPPLY
THE MARKET
• Exist when buyers wishing to exchange money for a
good or service are in contact with sellers wishing to
exchange goods or services for money

HOW A MARKET FUNCTIONS

• Markets are strictly made up of buyers and sellers.
The actions and decisions of buyers constitute
demand for a product or service, while the seller’s
decisions and actions constitute supply.

MARKET DEMAND
• Refers to the buyer’s willingness and ability to pay a
sum of money for some amount of a particular good or
service.
DEMAND CURVE – the demand schedule may be
presented in graphic form.
NON PRICE DETERMINANTS OF DEMAND
As much as price is a determinant of demand,
these are other factors that affect demand as well.
They are briefly described as follows:
• Average income of consumers
• Size of the market
• Price and availability of related goods
• Preferences or taste
• Special influences
• Expectations about future economic conditions
MARKET SUPPLY

The quantity of a good or service which sellers

desire to sell at a given price.

The supply situation may be presented in two ways:

1. The supply schedule

- Is the tabular presentation showing the
relationship between a commodities
market price and the amount of that
commodity that producers are willing to
produce and sell , other things held equal.
2.The supply curve
– Graphical illustration of the supply schedule
NONPRICE DETERMINANTS OF SUPPLY
Price is not the only factor affecting supply .These are
nonprice determinant which are as follows:
• Cost of production
• Number of suppliers
• Prices of goods and services related in production
• Taxes and subsidies
• Technology

EFFECTS OF CHANGES IN THE NONPRICE DETERMINANTS

OF SUPPLY
Price will determine the quantity that firms will be willing to
sell in the market. The nonprice determinants, however, also
have some effects in the quantity supplied.
MARKET EQUILIBRIUM
– Supply and demand are opposing forces that
must be considered in the determination of
prices of commodities in the market.

EQUILIBRIUM PRICE
– Is the price at which demand and supply are
equal. A price above or below the equilibrium
price will create a shortage or a surplus.
CHAPTER 4
Consumer
Behavior
 The Concept of Utility
Utility
- is defined as the power of goods and services
to satisfy wants. It refers to the pleasure or
satisfaction associated with having, using,
consuming, or benefiting from goods and
services.
Two ways in measuring utility:
1. Cardinal Utility Approach
2. Ordinal Utility Approach
Cardinal Utility Approach
- refers to the measurement of utility by
assigning numerical values, referred to as utils,
such as 1 util, 12 utils, 140 utils or -35 utils.

Ordinal Utility Approach

- measures utility in terms of ranks, such
as those indicating levels from most satisfying,
to least satisfying, best to worst, and highest
to lowest.
The Concept of Marginal Utility

Marginal Utility
- the satisfaction an individual
receives from consuming one
additional unit of good or service.
 Table 6
SCHEDULE OF TOTAL AND MARGINAL UTILITY
FOR MARIA SUNGA
Guavas Consumed Total Utility Marginal Utility
(in pieces) (in utils) (in utils)

1 50 50

2 80 30(or 80-50)

3 100 20(or 100-80)

4 110 10(or 110-100)

5 90 -20(or 90-110)

6 20 -70(or 20-90)
 Figure 14
TOTAL UTILITY CURVE
120

100

80
Total Utility
60
(In Utils)
40

20

0
1 2 3 4 5 6
Quantity
(in pieces)
 Figure 15
MARGINAL UTILITY CURVE
60
40
Marginal Utility

20
(In Utils)

0
-20
-40
-60
-80
1 2 3 4 5 6
Series 1 50 30 20 10 -20 -70
Quantity
(in pieces)
 Consumer Equilibrium
The consumer is faced with the following realities:

1. The varying prices of goods competing for his

attention, and
2. The limited income of purchasing power he has.

The most preferred combination of

goods to buy is referred to as consumer
equilibrium.
Utility Maximization
It is expected that the rational consumer will
attempt to choose an option that will offer him
maximized utility. Let us assume that Maria
Sunga is determining what combination of two
goods, ice cream and chocolate bar, must she
purchase for her to obtain maximum satisfaction
with her limited fund of one hundred pesos. Maria
is confronted with the price of ice cream at P
20.00 per cone and
P 15.00 for a bar of chocolate, regardless of how
many are bought. From Maria’s point of view, the
utility of the two items in various quantities are
shown in Table 7.
 Table 7
THE UTILITY OF TWO GOODS

Amount of Utility
(in utils)

Quantity From Ice Cream From Chocolate Bars

Consumed
Total Marginal Total Marginal

0 0 0 0 0

1 14 14 9 9

2 22 8 17 8

3 24 2 24 7

4 24 0 27 3

5 21 -3 29 2

6 10 -11 30 1
Utility Maximization

With the budget constraint of P100.00,

only six combinations of ice cream and
chocolate bars are possible. Shown in Table
8 are the various combinations. The
maximum utility that Maria can derive
from spending her P100.00 is with
Combination 2, i.e., 2 conefuls of ice cream
and 4 bars of chocolate.
 Table 8
SCHEDULE OF COMBINATIONS FOR
MARIA SUNGA’S UTILITY MAXIMIZATION

Combination Quantity Total Total

Ice Cream + Choco Bars Price Utils

1 1 5 P 95 43
2 2 4 100 49

3 3 2 90 41
4 4 1 95 33
5 5 0 100 21
6 0 6 90 30
 Indifference Analysis
- is a technique used in the
analysis of consumer demand which is
based on the notion of ordinal utility.
This means that when the consumer is
faced with a set of alternative
“bundles” of goods, he is able to rank
them all in order of preferences.
 Table 9
INDIFFERENCE SHEDULE
Combination Mangoes Guavas
(in pieces) (in pieces)
1 12 2
2 10 4
3 8 6
4 6 8
5 4 10
6 2 12
 The Indifference Curve
-When the indifference schedule is
plotted on a graph, the line joining all
points is referred to as the indifference
curve. All points in the curve indicate
their respective combinations of goods
and services which yield equal levels of
satisfaction. A sample indifference curve
is shown in Figure 16.
 Figure 16
INDIFFERENCE CURVE
14

12
Indifference
Curve
10
(in pieces)

8
Mango

0
1 2 3 4 5 6 7 8 9 10 11 12
Guavas
(in pieces)
 Substitution

- The substitution option is exercised

by the consumer when there are
available goods and services which yields
the same level of satisfaction but at a
lower costs.

- Commodities which can be used or

consumed in place of other goods are
referred to as substitute goods.
Types of Substitutes
Substitutes may be classified as:
Close substitutes
- provides an almost or equal level of
satisfaction as that of the substituted good or
service. For example, pineapple may be
considered a close substitute for mangoes.
Weak substitutes
- provides a lower level of satisfaction
than the substituted good or service. An
example of a weak substitute for mangoes is
rice cake when used as dessert during meals.
 The Budget Line
- It is defined as “the line on a diagram that
shows the various combinations of commodities
that can be bought with a given income at a
given set prices.”

- The budget line is a useful tool in determining

the combinations of goods and services that will
satisfy the consumer with a limited income or
budget to spare. Figure 17 shows the budget line
for two goods under consideration by Maria and
which is specified in Table 8.
 The Budget Line
Figure 17
THE BUDGET LINE FOR TWO GOODS
6
A
5
B
4
Ice Cream

C
3
Budget D
2
Line
E
1
F
0
0 1 2 3 4 5 6 7
Chocolate Bar
 CHAPTER 5
THE CONCEPT
OF
ELASTICITY
ELASTICITY – it is the measure of the sensitivity or
responsiveness of quantity demanded or quantity
supplied to changes in price (or other factors)

ELASTICITY OF DEMAND
Indicates the extent to which changed in price (or
other factors) causes changes in the quantity
demanded.
Demand elasticity may be classified as follows:
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
IMPLICATIONS OF PRICE ELASTICITY OF
DEMAND

If the price elasticity of demand is greater

than one, the price should be lowered; if
less than one, the price should be
increased
INCOME ELASTICITY OF DEMAND
Refers to the determination of the responsiveness of
demand to a change in consumer income.

When elasticity is greater than 1, demand id said to

be income elastic; when less than 1 , it is income
elastic and when equal to 1, it is unitary elastic.
CROSS ELASTICTY OF DEMAND
The responsiveness of the quality demanded of a
particular good to changes in the price of another
good.

If cross elasticity is positive, the goods are substitutes.

If the cross elasticity is negative, the goods are
complements.
DETERMINANTS OF DEMAND ELASTICITY
The demand elasticity of goods and services are
not similar some are elastic , some are inelastic.
• The price of the good in relation to the
consumer’s budget
• The availability of substitutes
• The type of good
• The time under consideration
ELASTICITY OF SUPPLY
Refers to the responsiveness of the sellers to a
change in price.
Classification of Supply Elasticity
• Elastic supply
• Inelastic supply
• Unitary elastic supply
DETERMINANTS OF SUPPLY ELASTICITY
Supply is either elastic or inelastic depending
whether or not the sellers are able to respond
effectively to changes in price.

• The feasibility and cost of storage

• The ability of producers to respond to price
changes
• Time
CHAPTER 6
PRODUCTION
AND COST
 THE CONCEPT OF PRODUCTION

Production – is a creation of any good

or service for the purpose of selling to
buyers.
Example:
• The farmer producing vegetables
• The songwriter producing a song
• A mother producing meals for her children
 TRANSFORMING INPUTS INTO OUTPUTS
Production is an activity where inputs are
transformed into outputs.
1. Assembling the necessary inputs
2. Transforming the inputs through a recipe
and technological process into outputs of goods
and services
The various inputs consists of:
– Capital
– Labor
– Land
– Entrepreneurial or managerial talent
 CATEGORIES OF PRODUCTION ACTIVITIES
UNIQUE- PRODUCT PRODUCTION
- Has as its output “made to order” products and
services.
RIGID MASS PRODUCTION
Involves the manufacture of uniform products in
large quantity using a well-defined, proven and
usually inflexible technology.

FLEXIBLE MASS PRODUCTION

Processing done in two stages:
Involve mass production of standardized components
The components are assembled into final products that
appear different from one another

PROCESS OR FLOW PRODUCTION

Continuous flow of output
PRODUCTION FUNCTION
The output of a production process will
depend on the quality and quantity of inputs
used.
ANALYSIS OF THE PRODUCTION PROCESS
- The classes of inputs
-The time frame references
PRODUCTION WITH VARIABLE INPUT
The number of inputs in any production
process varies from one to above a hundred.
 TOTAL, AVERAGE, AND MARGINAL
PRODUCTS

TOTAL OUTPUT (OR TOTAL PRODDUCT)

• Refers to the total amount of output produced in
physical units
AVERAGE PRODUCT
• Refers to the total output divided by the quantity
of the variable inputs under consideration.
MARGINAL PRODUCT
• The additional output attributed to the increase in
the quantity of the variable inputs under
consideration.
COST OF PRODUCTION
The total, average and the marginal products
are useful concepts in decision making.
SHORT-RUN COST
•Producing the output requires a
combination of fixed and variable cost.
LONG RUN COST

Fixed input that cannot be change in the

short run can be increased (or decreased)
in the long run. To increase capacity,
additions to building, land, machinery,
or even managerial talents may be
made.
PRODUCTION WITH TWO VARIABLE
INPUTS

When there are two variable inputs, a useful

analytical tools is the production isoquant.

ISOQUANT – a curve or locus of points

showing all possible combinations if inputs
physically capable of producing a given
level of output.
 Market
Structure
 What is Market?
• When buyers wishing to exchange money
for a good or services are in contact with
sellers wishing to exchange goods and
services for a money, a market exists.
• A market may be confined to a specific
geographical area, like a certain town
where buyers and sellers meet.
 Kinds of Market Structures
1. Pure or Perfect types
a. pure or perfect competition
b. pure or perfect monopoly
2. Imperfect types
a. monopolistic competition
b. oligopoly
 Pure or Perfect Competition
• describes a market structure whose
assumptions are strong and therefore
unlikely to exist in most real-world markets.
Characterized by:
 The products of firms in the industry under
consideration are standardized.
 The buyers and the sellers are without power to
change the ongoing market price of the product.
 The absence of restraints of any kind is an
important feature.
 Buyers, sellers, and resources owners have
perfect knowledge of market conditions.
 Pure or Perfect Monopoly
• a market scenario where there is an absolute
domination of an enterprise or person or
more precisely an economic entity has utter
ascendancy over the production or supply of
certain good or provision of some specific
service.
• Is that market structure characterized by
only one producer of product.
• The price is set by the seller or the
monopolist.
 Monopolistic Competition

• Market structure “where there are a large

number of sellers that produce similar
products, but the products are perceived
by buyers as different.”
• The products of many sellers are identical
and even interchangeable like rice and
tomatoes.
 Oligopoly
• Market structure in which there are a limited
number of firms competing for a given industry.
• The products of oligopolists are homogeneous or
identical.
Output and Price under Pure
Competition

• Cannot be influenced by any seller or

buyer. Because the quantity held by any
individual seller is only a small fraction of
the total quantity produced, changing his
price will not be a cause for retaliation
from competitors.
NATIONAL INCOME
 National Income - a measure of the money value
of the total flow of goods and services produced in
an economy over a specified period of time.
NATIONAL INCOME CONSISTS OF:
• Wage or salary
- those generated by labor
• Interest
- those generated by lenders of funds
• Rent
-those generated by owners of real estate
• Profit
- those generated by the entrepreneurs
• Net factor
- income from abroad
I. Gross Domestic product - measure of the total
flow of goods and services produced by the
economy over a particular time period.
II. Gross National Product - measure of the market
value of the final goods and services produced
by nationals or citizens of a country in a
particular time period.
 Nonproductive transactions consist of:
1. Purely financial transactions and
2. secondhand sales
 Purely Financial transactions consist of:
1. Public transfer payments.
2. Private transfer payments.
3. Buying and selling of securities.
III. Market Value - current price of goods and
services produced in the economy.
IV. Value Added - difference between the value of
goods produced and the cost of material and
supplies used in producing them.

V. Consumption - expenditure by consumers on

final goods and services.

VI. Investment - activity that uses resources now

in such a way that they allow for greater
production in the future, and, hence, greater
consumption in the future.
VII. Consumer Durables - consumer goods, such as
appliances and furniture, that usually last for
several years.
VIII. Government Expenditures - the sum of
government payrolls and purchases, which is the
cost of government output.
IX. Net Factor Income from Abroad - the
difference between the income earned by
citizens who own resources used in the
production process abroad and the income of
foreigners who own resources used in the
production process here in the Philippines.
• Approaches to estimating national income as
follows:
1. industrial origin approach ( also referred
to as value added approach)
2. product approach (also expenditure
approach)
3. income approach.
• GNP – (consisting of private expenditures, gross
domestic investment, government current
expenditures, and net factor income from abroad)
less:
capital consumption allowances
(consisting of depreciation, obsolescence, and
accidental damage)
equals:
Net National product (NNP)
less:
Indirect taxes
Plus:
Subsidies
Equals:
National Income
 Private Consumption Expenditures
• This term refers to the spending by households
on the following types of goods:

1. Durable consumer goods

2. Nondurable consumer goods
3. services

Gross Domestic Investment

• These are expenditures for newly produced

capital goods like machinery, equipment, tools,
buildings, and additional inventory.
Depreciation

• This term refers to the reduction in value of an

asset through wear and tear.

Net National Product

• This refers to the GNP less the part of the output

needed to replace the capital goods worn out in
producing the output.
Indirect Taxes
• These are taxes such as sales, excise, and business
property taxes, license fees and tariffs which
firms treat as costs of producing a product or
service and pass on to buyers by charging them
high prices.

Subsidies

• This is the payment of funds, goods, or services

by a government, business, or household for
which it receives no good or service in return.
 GNP = C + I + G + (X-M)
• Where:
GNP= Gross National Product
C= Consumption(personal consumption
expenditure)
I= Investment(gross domestic capital formation)
G= Government Expenditure
X= Exports
M= Imports
Income Approach

• Current production is made possible

through the use of economic resources of
land, labour , capital, and
entrepreneurship.
 Estimating Disposable Income
• Disposable income - part of the national
income that is available to households for
consumption or saving.
Formula in Estimating Disposable Income

DI= GNP – (TBD)+(GTP+GIP)

Where:
DI= disposable income
GNP= gross national product
TBD= all taxes, business saving, and depreciation
GTP= government and other transfer payments
GIP= government interest payments
What is Consumption?
Is the total expenditure in an
economy on goods and services by
individuals or a nation during a given
period.
CONSUMPTION FUNCTION
“the relationship between total
consumption expenditure in the economy,
and total consumer’s income.”
CONSUMPTION PATTERNS
Consumption Categories:
1. Durable goods 3. Services
a) Motor vehicles a) housing
b) Household equipment b) Medical care
c) others c) Recreation
d) Education
2. Nondurable goods
e) others
a) food
b) Clothing and apparel
c) Energy
d) others

SAVING
The amount that he decides not to spend.
Some reasons for saving:
1. To provide for old age
2. To provide for children’s education
3. To accumulate funds for acquisition of capital goods
4. To accumulate wealth
Total Savings and It’s Components
Total savings is composed of the following:
1. Personal savings – are those made of individual
households for the purpose of future consumption.
2. Business savings – consists of depreciation allowances
And retained earnings.
3. Government savings – achieved when any government
Unit runs a budget surplus.
4. Foreign savings – the net inflow of foreign funds is an
Important source of savings.
SAVING FUNCTION
- refers to the relationship between savings and
income. The saving function shows the amount of saving
that households or a nation will undertake at each level
of income.
Average Propensity to Consume (APC)
- refers to the proportion of income
devoted to consumption.
FORMULA :
APC = CE / DI
Where APC = average propensity to consume
CE = Consumption expenditures
DI = disposable income
Average Propensity to Save ( APS )

- Is the proportion of income (of an

individual or the whole economy) which is not
spent on the consumption of goods and services.
FORMULA :

APS = S / DI
Where APS = average propensity to save
S = savings
DI = disposable income
MARGINAL PROPENSITY TO CONSUME
- refers to the proportion of a small
increase in income which will be devoted to
increased consumption expenditure.
FORMULA

change in consumption/ change in disposable income

Thus, if disposable income increased to P1,500 billion from

P1,000 billion and consumption to P1,800 billion from P1,500
billion.
MPC is calculated as follows:

MPC = P1,800 billion – P1,500 billion

P1,500 billion – P1,000 billion

= 300/500
= 0.60
MPC is expected to be less than one, i.e.,
when there is an increase in income, there will
be a smaller increase in consumption.
MARGINAL PROPENSITY TO SAVE
- the proportion of An increase in
income that is saved.
FORMULA

change in savings / change in disposable income

If for example, disposable income increased from

P1,000 billion to P1,500 billion and dissaving's decreased
from P500 billion to P300 billion.
MPs is calculated as follows:

MPS = (-P300 billion )– (-P500 billion)

P1,500 billion – P1,000 billion

= 200/500
= 0.40
A series of hypothetical MPS and
incomes is depicted in a schedule in Table 30.
This is followed by the graphical
representation(figure 43) of the same
schedule.
DETERMINANTS OF THE LEVEL OF CONSUMPTION

FACTORS :

1. distribution of national income

2. rate of interest
3. the desire to hold cash
4. price levels
5. population
6. income
7. taxes
8. attitudes and values
CHAPTER 10
INVESTMENT
FUNCTION
 Sources and Uses
of Investment Funds
1. the public sector - refers to
government units whether
national or local.
2. the private sector – consists of
private individuals and
organizations.
 Investment fund is a result of
any or both of the ff:
1. savings – are made regularly for
some years, enough funds maybe
accumulated to take care of the
funding requirements of capital
projects.
2. borrowings – may be made
through banks or from abroad.
Investments are undertaken
by the ff:

1. the government
2. business firms
3. private individuals
 ROLE OF INVESTMENTS
1. Investment constitutes a major
portion of aggregate demand.
2. Investment paves the way for
increasing the nation’s output
as well as promoting long run
economic growth.
 INVESTMENT AND
MULTIPLIER EFFECT
•The ratio of a change in income
to a change in investment is
called the MULTIPLIER.
 Types of Investment
1. Tangible capital – structures,
equipment and inventories.
2. Intangible investments –
human capital, research and
development and health.
 Determinants of Investment
1. interest rate – When interest rate is high,
investments tend to be low.
2. innovations – When the prospect of
innovation has good financial potentials,
investment on it will be pushed through.
3.profit – When cost are high and revenues
are low, profits will also be low.
4. expectations – When particular segment of
the market is unserved underserved, the
management of a concerned business firm
may decide in favor of investment.
REAL AND NOMINAL INTEREST RATE
CHAPTER 11:
The Business
Firm
 Describing the Business Firm
• Business Firm - basic feature of the capitalist economy
• A business firm may engaged in any of the following:
– Production
– Manufacturing’
– Trading
– Provision
– Service

• Business firms that undertake production:

– Poultry
– Farming
– Vegetable and fruit farming
– Fishpond business
• Manufacturing firms – produce goods in large quantities
with the use of machines. Example of these are those firms
that produce industrial and consumer products like cars,
toothbrushes, radios, sugar, computers, and many more
• Trading firms – those that are engaged in production or
manufacturing but with buying and selling goods that are
produced/manufactured by other firms.

• Service firms:
– Beauty parlors
– Barber shops
– Dental clinics
– Universities
– Bus companies, etc.
 Describing the Business Firm
• Vertical integration - firms attempt to make
their positions stronger by acquiring firms that
supply them with their needs.
• Horizontal integration – firms acquiring
competing firm to make its position stronger.
• Conglomerate – a business firm that operates
various plants that produces various types of
goods and services
 Forms of Business
Organizations
• Business firms are organized in the following three distinct forms:
– The major forms
– The minor forms
– The modified corporate forms
 Major Forms of Business
Organizations
• The major forms of business organization are the
most common and consists of the following:

Sole proprietorship
Partnership
Corporation
 Sole Proprietorship
– a business firm owned and operated by a single person.
The sole proprietor hires other people to help him in
operating the business; thus the owner acts as a general
manager though sometimes this is not the case. It is the
most popular form of business organization.
• Advantages:
1. It is easy to organize and the cost of organization is minimal.
2. The owner can keep his moves unknown to the competitors.
3. The sole owner is the sole beneficiary of whatever profits the
business firm makes.
4. The sole owner has the exclusive power to control the business.
5. Government requirements and restrictions on sole proprietorship are
less stringent when compared with other forms of business
organization.
6. The net income of the sole proprietorship is taxed as personal
income of the sole owner.
7. The owner has the option of terminating his business anytime he
wants.
 Sole Proprietorship
• Disadvantages:
1. The sole owner may lack the necessary ability and experience.
2. There is difficulty in attracting and keeping quality employees.
3. It is difficult for the sole proprietor to raise bigger amounts of
capital.
4. The business firm’s life is limited.
5. The sole proprietor has an unlimited liability.
 Partnership
– form of business organization owned and
operated by two or more persons.

• Types of Partnership:
– General Partnership – an association of two or more
persons who are actively involved in the business and
all of which have unlimited liabilities.
– Limited Partnership – an agreement whereby the
liability of one or more partners is limited to the
amount invested in the business. It is requirement,
however, that there must be at least one partner with
unlimited liability.
 Partnership
• Advantages:
1. Partnerships are also easy to organize.
2. The knowledge and skills of the partners may be pooled
together to the advantage of the firm.
3. The combined resources of the partners provide a bigger source
of funding.
4. The partnership is in better position to attract and retain
quality employees.
5. The income of the partners derived from the partnership is not
taxed separately from the net income of the partnership.

• Disadvantages:
1. Unlimited liability is also a disadvantage.
2. The life of partnership is limited.
3. Conflict among partners is always a possibility.
4. Dissolving a partnership is difficult.
 Corporation
• Corporation – a business firm owned by individuals or other
corporations.
• Stockholders – owners of the corporation having limited liability.
• Advantages:
– The liability of the owners are limited.
– Expansion is easily facilitated in corporation.
– The ownership of a corporation is easily transferable.
– Corporations are more stable.
– Corporation has greater ability to hire specialized managers.
• Disadvantages:
– Corporations are more expensive and complicated to organize.
– Incomes derived from corporations are taxed twice.
– Corporations are subject to more extensive government
restrictions and reporting requirements.
– Employees lack personal identification and commitment with
the company.
 Minor Forms of Business
Organization

• Joint Stock Company

• Joint Venture
• Business Trust
 Joint Stock Company
• Joint Stock Company – a form of business wherein the
capital is divided into small units permitting a number of
investors to contribute varying amounts to the total profits
being divided between stockholders in proportion to the
number of shares they own.
• It may be regarded as a cross between partnership and
corporation.
– Like an expanded partnership as in the case of the
common law form joint stock company
– Similar to a corporation as in the case of the statutory
form joint stock company

Two Forms:
Common Law Form
Statutory Form
• Common Law Form:
– Capital is divided into shares which may be
transferred by the owner to other persons without the
consent of the other members.
– The company is managed by a board of directors
– Death or incapacity of any member does not dissolve
the company
– It has more members than partnership, not
necessarily acquainted with one another, and
membership can change without the consent of the
members.
• Statutory Form:
– No legal personality
– Mutual agreement governs the relationship between
the members
– Liability of members is unlimited unless otherwise
authorized by statute
 Joint Venture
– A partnership established for a specific project
or for a limited time.
– Formed when a foreign company finds a local
partner to share the costs and operation of
the business.
– Prevalent among business engaged in
producing movies or concerts, marketing of
cars, oil and mining exploration, construction
of major projects like dams or airports and
even the underwriting and selling of
securities.
 Business Trust
– Legal form of business organization where a
trustee is appointed to manage the business
and its operations through a trust
relationship.
– If a person or a company is not capable of
managing a property, securities, or other
assets, these are assets to a trustee and a
business trust is formed.
– The trust company can be a trustee, receiver
guardian, or executor of property or estate.
 Modified Corporate Form
• The corporate form of ownership was modified to suit
special requirements.
• Two Forms:
–Cooperatives is a firm owned by a group of
people who have a common objective and who
collectively bear the risks of the enterprise and share
its profits. These are formed to make their members
individually profitable or to save money.
–Mutual Companies a financial service firm
(such as an insurance company or a savings and loan
association) owned by its policyholders and
depositors.
 Cooperatives
• Kinds of Cooperatives:
– Credit union – one that accepts deposits from its
members and lends money, also to its members, at
reasonable rates.
– Producer’s Cooperative – organized by members to
mutually assist one another in the procurement of
raw materials, machinery, equipment, and other
needs of the producers.
– Marketing Cooperative – organized to assist its
members in the marketing of their products
– Consumer’s Cooperative – purpose of this firm is to
provide members with quality goods and services at
reasonable prices.
– Service cooperative – this firm is organized to make
services readily available to its members at a lower
cost.
 Mutual Companies
Two types:
– Mutual savings bank – firms owned by
depositors and which specialize in savings and
mortgage loans. Profits are remitted to
depositors.
– Mutual insurance company – cooperative
corporation organized and owned by the
policyholders. Voting control is in the hands of
the insured. Profits can be used to pay policy
dividends to policyholders and to strengthen the
company by building its surplus.
Financing the Business Firm
 Corporate Stock
• The total capital stock of a corporation is
divided into shares and are sold to the public.
• Stock certificate – proof of ownership of a
corporation
• Classes of Corporate Stock
– Common stocks – entitles its holder to vote at
stockholders meetings and to participate in the
election of directors
– Preferred Stocks – conveys no voting rights but gives
a prior claim on dividends at a fixed rate, regardless
of the profit level.
 Classes of Debt Instruments
• Classes of Debt Instruments
Bonds – are long-term debts of a firm set
forth in writing and made under seal.
Promissory note – a document stating that
someone promises to pay an amount of
money on a certain date.
 It is very important to know the
role played by human resources in the
development of the economy. Natural
resources cannot be made to
contribute their share unless people
with right skills tap them.
Example:
• Fishes in the waters will
remain potential commodities
until enterprising people bring
them to the market.
 Labor – refers to the exertion
of human effort to acquire an
income.
Human effort includes:
(1.) Physical
(2.) Mental exertion
 Many people use their brawn and
muscles to earn a living. These people
sell an important resource they have:
labor.
However, the physical effort
expended in exercising does not
contribute labor, but when a person is
exercising in front of a television
camera and is paid for doing it, he is
performing labor.
 In the same light, the mental effort
exerted in solving a crossword puzzle does not
contribute labor. When a person, however,
creates crossword puzzles and receives weekly
payments for the effort, he is actually
performing labor.

No labor is one hundred percent

physical or mental. Although the job of
construction worker is mostly physical,
a small part of it is mental like
deciding which tool to use.
Labor is said to possess certain characteristics
different from the other factors of production.
The following are the characteristics of labor:
1. Labor is perishable.
-Labor that is wasted is lost forever.
2. Labor and the individual are inseparable.
- A man working for wages cannot separate
his physical self from his labor if he wants to
enjoy the comforts of another room.
3. Labor supply does not change quickly.
- The supply of labor increase steadily as
population grows. However, when there is great
demand of labor in a particular year, labor cannot
be made to increase abruptly.
4. Most employable persons do not like to move.
- Even if the demand for labor is higher in some
places, many people still prefer to remain
unemployed. The following reasons are often cited:
a.) They want to stay close with their families;
b.) They are not aware of the demand for
their services elsewhere;
c.) They lack the required skill;
d.) They cannot afford to the cost of moving
from one place to another.
 1. Manual Labor
– This type of labor mostly involve the exertion of
physical effort specifically the use of brawn and
muscles.
Example:
- Construction workers, dishwashers, farm
workers, and many others.
2. Clerical Labor
– This type is considered as next higher in order
to than manual labor. Although most of the
parts of clerical works are done with physical
effort, exertion is not as great as that in manual
labor.
3. Professional Labor
– The professions include the following: physicians,
lawyers, engineers, chemists, teachers, nurses, and
other. The job of the professional requires a
higher degree of intelligence than those of clerks.
4. The Labor of Management
– Managers of all kinds and types perform
functions which may be referred to as labor of
management. Included under this class are :
 Front Line Managers
(Supervisors and Foremen )
 Middle Managers
(Branch and Area Managers)
 Top Managers
(Presidents and Vice Presidents)
5. The Labor of the Entrepreneur
– The one who organizes the business and
sees to it that the business becomes stable
is the entrepreneur. What the entrepreneur
thinks is best for the business is relayed to
the managers for the executions.
6. The Labor of the Inventors
– A very important ingredient of the
economic development is the output
of the inventors. Without them, our
world will be a dull place to live.
 In the production of goods and services,
the supply of labor is the very important
concern.
Suppliers of the labor (the households)
spend their time on the following activities :
(1.) Market activity
(2.) Nonmarket activity
Households make an allocation decision on how
much time to spend on the two activities. Their
decision will be based on how they regard the
returns they get from each. Shown in the table,
are the types of returns they get when engaged
on market and nonmarket activities.
-Immediate return in the
form of income.

-Goods and services

produced in the home.
-Higher future income.
-Leisure.
The Effect of Wages on the Quality of Labor Supplied
– Households regard nonmarket activity as a basic
requirement for wholesome living. If income is not a
problem, they would rather spend their time on it.

Households, however, will not just supply labor

at any wage levels. Instead, they are only willing
to start doing so if a certain wage rate is offered
by the market. This rate is called the reservation
of wage.

At rate below the reservation wage, households

will not supply labor. But when labor is
supplied, the quantity will be different at
various levels above the reservation wage.
 The quantity of labor supplied by households is
modified by two offsetting effects of a higher
wage rate :
1. The Substitution Effect
– Households will naturally provide some time for
nonmarket activities. If there is an increase in wage
rates and they feel that the returns they get from doing
nonmarket activities are lower, they will tend to switch
over some hours to market activity.

2. The Income Effect

– When the households wage rate is higher, more
income will be available to the household for
spending. When the households decide to spend its
money on leisure or other nonmarket activity,
The Backward-Bending Labor Supply Curve
– The supply curved discussed in a previous
chapter is applicable to labor supply only up to a
certain point. As described, labor supply tends to
increase a wage rates rise, and that is very
typical of the supply curve.
 Labor, is a factor of production that is
required by business firms. Business firms, then,
are the sources of demand for labor. The
quantity of labor demanded is the total number
of man hours (or man days) hired by all firms in
an economy. The demand for labor, however,
will depend on the real wage rate.
The Real Wage Rate
– It refers to the purchasing power of given
nominal (or money) wage. The nominal wage
rate is the amount in pesos paid to a worker for
a unit of work.
 The nominal wage rate is in the year 2000 was P200 per
day and P210 in 2001. If prices of commodities increased by
5% from 2000 to 2001, the real wage rate remain unchanged
if year 2000 was used as base year.
The real wage rate may be determined by using the
following the formula:

nominal wage

Real Wage Rate =

index number of the overall price level

Thus, if the nominal wage rate is P210 per day and index
number is 1.05 (or 1.0 plus inflation rate)
Then,
Real Wage Rate = P210/1.05 = P200
The Labor Demand Curve
Labor is a factor that is bought just
like any commodity. It has a price, and
the quantity demanded depends on the
price. To the business firms buying this
factor, the price is the real wage. When
the real wage increase. The quantity
demanded of labor decreases, and vice
versa.
 Real Wage Quantity of
Rate Labor
(1995 pesos Demanded
per day) (millions of
days per year)
a 250 1
b 220 1.25
c 190 1.5
d 160 1.75
e 130 2
f 100 2.25
Table 37
 a
250
225 b
200 c
175 d
150 e
125 f
100

1.0 1.25 1.5 1.75 2.0 2.25

Figure 51
 Labor is a very important factor of
production, but is affected by some
problems that deserve serious
consideration. The problem area
concerning labor as follows:
1. unemployment and underemployment
2. inadequate wages
3. industrial and labor-management conflict
4. economic insecurities
Unemployment
Unemployment occurs when a person who is of
working age (at least 15 years old), is willing and able
to work but cannot find work. Willingness to work is an
important requisite for unemployment to be properly
recognized. This is so because the are some persons who
would not want to work even if jobs are offered to
them.
Unemployment is an economic problem with
undesirable social consequences. When unemployment
is high, society prays a high price in the form of the
following:
1. lost output and income
2. depreciation of human capital
3. increases in crime
4. loss of human dignity
 Output and Income Lost
When willing and able workers do not find
employment, they are deprived of income and the
economy does not benefit from the output they could
have produced. This is especially disturbing when there
are available jobs, and business firms could hardly cope
with the demand for their product.

 Depreciation of Human Capital.

The capability to work is referred to a person’s
human capital. Education and acquired skills
constitute human capital. The mechanical and
mental skills, work habits, and concentration ability
are acquired in the school and in the job.
 Increase in crime
Unemployed persons who have families to feed or just
plainly have nothing else to do sometimes turn to crime
as a way of having a money or something to do. It is
not hard to understand, therefore, that high
unemployment results to high crime rate.

 Human Dignity
When persons suffer loss of employment for long
periods, most of them lost their self-esteem as well.
When this happens, it will be very hard for the person to
do anything productive even given the opportunity.
Most often, he becomes bitter and very hard to relate
with. They become real burdens to the society.
 Underemployment
Underemployment occurs when a person works either
part-time or full-time but which of both cases receive
very little pay. Underemployed persons are not fully
utilized by the society.
Causes of unemployment
1. rapid growth of population
2. slow growth of economy
3. technology used
4. lack of skills

Types of Unemployment
Unemployment may be classified into the following types:
1. seasonal unemployment
2. frictional unemployment
3. structural unemployment
4. cyclical unemployment
 Inadequate Wages
Inadequate wages have become a perennial
problem of labor. Wage is inadequate if it
fails to meet the basic needs of the worker’s
family.
The possible causes of inadequate wages are
as follows:
1. inflation
2. lack of skills
3. too many dependents
 Industrial and Labor
Management Conflict
Strikes and lockouts are actions that bring misery
to both the employer and workers. In both cases,
the worker is deprived of wages and employers
of profits.
Economic Insecurities
Workers worry about having a permanent
source of income. They are much concerned
about layoffs and dismissals, illness, accidents
and even death. They need funds to take care
of their need when such things happen to
them and their family.
 To attain acceptable levels of employment,
efforts are undertaken to improve human
capital. This is done in two ways:
 education
training

Education is provided to the individual

usually before employment.

Training is done when the person is

already working.
Figure 52
CHAPTER
13
Business Cycles
and Inflation
The Nature Of Business Cycles
Cycles are important features of
nature. Trade activities are not exempt
from the clutches of cycles.
Business Cycle is the expansion and
contraction of activities in many sectors of
the economy betrays the existence.
PHASES OF BUSINESS CYCLES
The business cycle consists of the
following phases:

1. prosperity phase
2. crisis (or contraction or recession)
3. depression phase
4. recovery (or expansion) phase
 Prosperity Phase
The prosperity phase is that part of the business
cycle characterized by the following:
1. high prices and great business activity
2. large profits for business firms
3. production is at full capacity
4. increasing demand for many commodities
5. increasing demand for labor
6. increasing volume of sales
7. increasing volume of credit extensions by
lenders
8. large demand for credit
9. rising interest rates
 Figure 53
THE PROSPERITY PHASE
Higher Outputs
Great Business Higher Sales
resulting to Higher Profits
Activity

Business
Firms
Higher Wages
Higher Rent
Higher Interest
Rates
Great Higher prices of
Demand resulting to Materials and
Supplies

Raw Materials
Labor and other Capital Land
commodities
 Crisis or Recession Phase
This phase has the following features:
1. the demand for goods decreases;
2. the margin of profits gradually shrinks;
3. the volume of sales decreases;
4. trading slows down;
5. the production of goods is reduced;
6. the demand for labor, capital, and land
decreases;
7. prices go down;
8. the ability of business firms to meet their
financial obligations is impaired;
9. unemployment begins to bother labor;
10. no further extensions of credit or renewals of
old loans are made by banks
 Depression Phase
This phase is characterized by the following:
1. many business have ceased operations;
2. profits are minimal, if it is still possible to
make some;
3. banks have plenty of idle funds;
4. banks gradually reduce interest rates;
5. credit starts to become available;
6. unemployment is at the highest level;
7.many unemployed persons are willing to
work at lower wages;
8. the prices of raw materials and supplies are
low
 Figure 54
THE CRISIS OR RECESSION PHASE
Reduced decreasing outputs
Business resulting to Sales, and profits
Activity

Business
Firms

decreasing wages,
rent, interest rates,
prices of raw
Reduced materials and
Demand resulting to supplies

Raw Materials
Labor and other
commodities
Capital Land
 Figure 55
THE DEPRESSION PHASE
Greatly
Reduced Minimal output,
resulting to sales, and profits
Business
Activity

Reduced
Number of
Firms Still
Operating
low wages, rent,
interest rates; low
Very prices of raw
Low materials and
Deman resulting to supplies
d

Raw Materials
Labor and other
commodities
Capital Land
 Recovery Phase
As the prices of the various economic resources
are low, some business firms that have previously
ceased operations will attempt to operate again.
As this happens, the following will be noted:
1. as the supply of commodities in the
market gets exhausted, demand for these begin to
be felt;
2. optimism among businessmen slowly develops,
prodding them to increase business activity;
3. the demand for labor increases, resulting to a
decrease in unemployment;
4. the purchasing power of the people rises;
5. the low rates of interest will attract business
borrowings;
2. optimism among businessmen slowly
develops, prodding them to increase
business activity;
3. the demand for labor increases,
resulting to a decrease in unemployment;
4. the purchasing power of the people
rises;
5. the low rates of interest will attract
business borrowings;
6. prices slowly rise;
7.there is an increase in production
output;
8.idle plants are used and plans for
construction of new ones are
considered.
 Figure 56
THE RECOVERY PHASE
Increasing increased
outputs,
Business resulting to Sales, and
Activity profits

Business
Firms

increased
wages, rent
interest rates,
Increasing
prices of
Demand resulting to
materials and
supplies

Raw
Materials
Labor and other Capital Land
commodities
 THE BUSINESS CYCLE CURVE
When the phases of the business cycle are
plotted in a graph, the business cycle curve
takes shape.
the highest point in the cycle is the prosperity
phase.

the lowest point is the depression phase.

the descending line represents the recession

phase.

the ascending line represents the recovery

phase.
 Figure 57
THE BUSINESS CYCLE CURVE
Prosperity

Trend Line

Prosperity
Real GNP

Depression
Depression

Time
DIFFERENCES BETWEEN BUSINESS CYCLES
Business cycles, as has been mentioned, are
only similar on matters of the various phases
and their characteristics, otherwise, business
cycles are different from one another.

EFFECTS OF BUSINESS CYCLES

Business cycles affect individual and business
firms. It is easier for resource owners to earn
incomes during times of prosperity. In times of
depression, many people are out of work.
Owners of land and capital find that there is
lower demand for their resources.
CONTROL OF BUSINESS CYCLES
The following are some of the common
measures suggested:

1. the stabilization of business

2. control of credit
3. control of public works
4. business forecasting
5. monetary readjustment
6. payment of high wages
7. economic planning
 Stabilization of Business
To attain business stability, production
must match consumption.
Control of Credit
The real objective of controlling credit
is to grant it only to those who are really
qualified to use it.
Control of Public Works
Expenditures on public works, however, are
best undertaken during stack seasons and more
so during depression. As such, the government
must be concerned with observing the best
timing for such expenditures.
 Business Forecasting
This involves “collection of past and
current information to make about the future”
The aim of the business forecasting is “to
reduce risk in decision making”

Monetary Readjustment
To effectively implement the plan of readjusting the
monetary standard, the following requisites must be
present:
1. a mechanism that provides a reliable index
number of prices;
2. the gold standard is used where the
monetary unit contains a fixed weight in gold.
 Payment of High Wages
Only a business firm that is well managed can
afford to pay high wages and maintain its
workforce even during times of emergency.

Economic Planning
Economic planning refers to “planning the
future financial state of the country for the
government”
BASIC TERMS RELATED TO INFLATION
• price level – used to indicate how high or low
prices are in certain year compared to the
average of prices in a certain base period
• market basket – representative group of goods
and services
• price index – the index number that shows the
average price of a bundle of goods has
changed over a period of time
• inflation – refers to a rise in the average level of
prices
• deflation – refers to a decline in the average
level of prices
TYPES OF INFLATION
Cost-push inflation is one characterized
by continual decrease in the aggregate
supply, resulting to increases in the cost
of production.
Demand pull inflation is one caused by
increases in aggregate demand.
Inertial inflation is that “steady inflation
that occurs when inflation is expected to
persist and the ongoing rate of inflation is
built into contracts and people’s
expectations”.
MEASURING INFLATION
The formula is as follows:

Inflation rate CPI in year X – CPI in year Y

= CPI in year Y
X 100 %
for year x

where:
CPI = consumer price index
year X = year under consideration
year Y= year immediately preceding year X
 Thus, if CPI for year X = 130; and
CPI for year Y = 120;

Therefore:

Inflation 130 – 120 =

rate = 120 X 100 %
for year x
8.33%
 Table 38
INFLATION RATE FOR THE LAST TEN YEARS
(A Hypothetical Sample)

Year CPI Inflation Rate

(in percent)
1990 100 0
1991 105 5
1992 110 4.76
1993 115 4.5
1994 120 4.3
1995 125 4.1
1996 130 4.0
1997 135 3.8
1998 140 3.7
1999 145 3.57
LOSERS AND GAINERS IN INFLATION

The traditional losers in an inflation are the following:

1. Fixed income earners - those who receive fixed

income like salaries, and rentals are at a big
disadvantage. When prices go up, the quantity of goods
they are able to buy is reduced.
2. Pensioners - the monthly pensions paid to retired
employees are fixed, and inflation reduces the
purchasing power they have.
3. Creditors - those who lend money or extend credit
to others lose out during times of inflation. A creditor
who earns 10% interest on loaned money will instead lose
value when the inflation rate is higher, say 25%.
The gainers in an inflation are the following:

1. Businessmen - these people will make big profits if

they produce goods using inputs at pre-inflation prices,
then sell them later at inflation prices.
2. Speculators - these people buy goods at low prices
before inflation sets in. When prices go up, they sell the
goods and make big profits. Land is a common object of
speculation.
3. Debtors - The losses borne by creditors in an
inflation become the gains of the debtors. The value of
the money borrowed becomes lower than when it was
borrowed.
 CONTROLLING INFLATION
• Inflation reduces the real value of the
incomes of most people. Since this is so, it is desirable
for the government to institute measures to curb
inflation.
Monetary policy
refers to the
government’s policy relating to finance which
includes money supply, bank interest rates,
government expenditures and borrowings.

Fiscal policy refers to the government’s

policy on taxes or government revenues.
CHAPTER 14
Money and
Monetary Policy
 Is a very
important
means used in
the conduct of
economic
activities.

Money
SIGNIFICANCE OF MONEY
The exchange of goods became faster and as a
result, the people were provided with the right
environment to specialize.
“Anything that is generally accepted as payments of goods
and services.”
HYMAN DEFINES MONEY:
“Anything used to make payment, for a good, a service or
a debt obligation.”
ACCORDING TO CARGILL:
“A generally acceptable medium of exchange.”
FROM KIDWELL AND
PETERSON:
 FROM KIDWELL AND
PETERSON:

“A generally acceptable medium of exchange.”

FUNCTIONS OF MONEY
1. As a unit of account
2. As a unit of exchange
3. As a store of wealth
 THE EVOLUTION OF
PAYMENT SYSTEM
OBJECTS USED AS MONEY THROUGHOUT
HISTORY
DISADVANTAGES OF USING MONEY AS OBJECTS
1. Objects are perishables.
2. Objects are indivisible.
3. Objects are not easily portable.
THE USE OF PRECIOUS METALS
As early as 2000 B.C., gold and silver were used as money by
ancient civilization. As late as 1933, gold coins were still used as money in
the United States.

When used as money, metals were made to appear alike and in

uniform sizes. The first to do so was the Greek city-state of Lydia in the
7th Century B.C. The Lydian coins were made of electrum (an alloy of
gold and silver), of specific weight, and bore the royal emblem of a lion’s
head.
By 535 B.C., the Etruscann coastal city of Populania minted gold
coins . In the Philippines, gold was used as a medium of exchange before
the 14th Century.
DISADVANTAGES OF USING PRECIOUS METALS
When precious metals are used as money, a problem
is brought about two values inherent in them:
1. Their monetary or exchange value
2. Their intrinsic value

NEW FORMS OF MONEY INTRODUCED

IN THE PAYMENT SYSTEM:
1. Fiat Money
2. Credit Money
FIAT MONEY
Refers to paper currency decreed by a
government as legal tender but not convertible into
coins or precious metal. It is backed by a
government promise that is legally acceptable as a
means of exchange of products.

CREDIT MONEY
Refers to a money that is backed by a
promised to pay. Its worth as a commodity is
negligible resulting to its very little intrinsic
value.
MEASURES OF MONEY
DETERMINING MONEY SUPPLY
The money supplied may be determined by using four
alternative means.
M1
Consisting of currency, demand deposits at
commercial banks, other checkable deposits at banks,
credit unions, and thrift institutions (negotiable order of
withdrawal, automatic transfer from savings, and share-
draft accounts), and traveler’s check outstanding.
M2
M1 plus non-checkable savings accounts and
small demonition time deposits at depository
institutions, money-market deposit accounts , shares
in money market mutual funds, and retail repurchase
agreements.
 M3
M2 plus large – demonition time deposits at
depository institution, shares in institutions-only money
market funds, and large demonition repurchase
agreements.
L
M3 plus other liquid financial assets such as
banker’s acceptances, commercial paper, short-term
treasury securities, and savings bonds.

THE DEMAND FOR MONEY

Cash is generally acceptable as a means of
payments.
 The sum of the money that people would
want to hold to take care of expenses is referred
to as transaction demand for money.
Making withdrawals (or converting
alternative assets into cash) involves some expenses
called transaction cost.
FACTORS AFFECTING DEMAND FOR MONEY
1. The level of nominal interest rates in the economy;
2. The degree to which payments and receipts can be
synchronized in the economy.
3. Expectations about future levels of interest rates;
4. Stock and bond prices;
5. Inflation;
6. The level of nominal GNP.
THE MONEY DEMAND CURVE
The relationship between the level of interest rates in the
economy and the stock of money demanded at a given point in
time may be illustrated with the use of a graph.
GOALS OF MONETARY POLICY

1. High employment
2. Economic growth
3. Stable prices
4. Interest rate stability
5. Stability of financial markets
6. Stability in foreign exchange markets.
TOOLS OF MONETARY POLICY
1. Open market operations
 Refers to the central bank’s activity of buying or selling of
government securities in the open market.
2. Discount policy
 The central bank lends money to depository institutions.
The interest rate charged to the borrowers is called the
discount policy.

THE VOLUME OF DISCOUNT LOANS GRANTED MAY BE

ACHIEVED BY THE CENTRAL BANK THROUGH ANY OF THE
FOLLOWING MEASURES:

1. By affecting the discount rate

2. By affecting the quantity of the loans.
3. RESERVE REQUIREMENTS
Refers to the regulation that makes it
obligatory to depository institutions (i.e. those
accepting deposits) to keep a certain fraction of
their deposits in accounts with the central bank (the
Bangko Sentral ng Pilipinas, in the case of the
Philippines). This requirement helps the central
bank to exercise more precise control over the
money supply.
CHAPTER 15
INTERNATIONAL
TRADE
 The basis of international trade

1. Specialization
2. Absolute advantage
3. Comparative advantage

Specialization

Quantity and quality are important

consideration in the production of goods and
services.
 MR. LORENZO DE GUZMAN
PRODUCTIVE CAPACITY
Product Cost Of Units Cost/Unit
Produced Production Produced

Product A P500 200 P2.50

Product B P500 150 P3.33

 MR. FROILAN PASCUAL’S
PRODUCTIVE CAPACITY
Product Cost Of Units Cost/Unit
Produced Production Produced

Product A P500 150 P3.33

Product B P500 200 P2.50

The principle of absolute
advantage
A nation, just like any individual , can
sometimes produce a product or two
better than any other nation. A country
that can produce a good with fewer
resources than can other has an absolute
advantage over these other countries.
 Illustration of Absolute Advantage
Hypothetical Output per Set of Inputs
Philippines and Australia
Country Clothing Canned Meat

Philippines 10 units 2 units

Australia 4 units 8 units

TOTAL 14 units 10 units

 ILLUSTRATION OF OUTPUT AS A
RESULT OF SPECIALIZATION

Country Clothing Canned Meat

Philippines 20 units -----

Australia ----- 16 units

TOTAL 20 units 16 units

The principle of
comparative advantages

A country that can produce a

product or service at lower
opportunity costs than another
country is said to have comparative
advantage over that other country in
that particular good or service.
 ILLUSTRATION OF HYPOTHETICAL
OUTPUTS OF TWO COUNTRIES GIVEN
SETS OF INPUTS
Country Cement Fertilizer

Philippines 100 bags 50 bags

Pakistan 20 bags 40 bags

TOTAL 120 bags 90 bags

 TOTAL OUTPUT WHEN COMPARATIVE
ADVANTAGE IS APPLIED

Country Cement Fertilizer

Philippines 200 bags -----

Pakistan ----- 80 bags

TOTAL 120 bags 90 bags

 GOODS AVIALABLE FOR ONSUMPTION
PHILIPPINES AND PAKISTAN WITH
TRADE
Country Cement Fertilizer

Philippines 150 bags 50 bags

Pakistan 50 bags 30 bags

TOTAL 200 bags 80 bags

International Trade Barriers
Trade restrictions are imposed by
nations

1. Tarrifs
2. Nontarrifs barriers
a. direct price influence
1. subsidies
2. customs valuation
3. other direct price influence
b. Quantity controls
1. quotas
2. “buy-local” legislation
3. standards
4. specific permission
requirements
5. administrative delay
6. reciprocal requirements
7. restrictions or services
Tariffs
A tariff is a tax to be paid for importing or
exporting goods.
It may be classified into three types:
1. Export tariff
2. Transit tariff
3. Import tariff
A tariff may be assessed using an of the following
bases:

1. Specific duty
2. Ad valorem duty
3. Compound duty
Important tariff are imposed for the following
purposes:
1. For raising revenue
2. To reduce overall level of imports by making them
more expensive than the locally produced substitute,
with the aim of eliminating a balance of payments
deficit
3. To counter dumping by raising the price of the
dumped commodity
4. To retaliate against restrictive measures imposed
by other countries

5. To protect an “infant” industry until it has “grown”

and is able to compete with the more developed industry
of other countries

6. To protect vital industries such as agriculture

Direct Price Influences
Subsidies are direct or indirect
government assistance to companies,
to make their goods more
competitive with imports.
Custom valuation refers to the
authority granted to custom officials
in determining the value of an
imported commodity.
Other direct price influences include
the following:
1. Special fees like those that apply to
consular, customs clearance, and
documentation
2. Requiring the advanced placement
of customs deposit before shipment is
made
3. Requiring minimum selling prices
of goods after customs clearance is
obtained
Quantity Controls

Quotas are limits placed on

the quantity of specified
products allowed to imported
into or exported out of a
country
Export quotas are aimed at achieving
any or all of the following:
1. To make sure that local
consumers will have a sufficient
supply of goods at a low price
2. To prevent depletion of natural
resources
3. To attempt to raise an export
price by restricting supply in
foreign markets.
“Buy local” legislations are those
designed by the government to give
preference to locally made goods.

Standards refer to classifications,

labeling, and testing set by a country
in a manner that allows the sale of
domestic products but restricts the
sale of imported goods.
Specific permission
requirements are forms of
controlling trade whereby the
country requires potential
importers or exporters to
secure permission from the
government before engaging
foreign trade.
Administrative delays are
sometimes intended to make it
hard for importers and exporters
to engage in international trade.
Reciprocal arrangement refer to
ones that require exporters to
accept merchandise as payment
for the exported goods.
Restriction on services refers to
the arrangements whereby an
importer or exporter is required
to use the services of domestic
companies in moving the goods
from country to country.
Balance of International
Payments
The Balance of International
payments is a systematic statement of
all economic transactions between
that country and the rest of the
world; it forms an overall measure of
the flow of goods, services and
capital between a country and the
rest of the world.
Balance of International Payments
contains the following:
I. Current account
Export
Import
Services
II. Capital account
Private
Government
III. Statistical discrepancy
IV. Official settlement
Capital account consists of
loans, private foreign
investment, grants and debt
payments to international
lenders.
Statisstical discrepancy refers
to the net sum of all unrecorded
transactions which cover
unrecorded funds entering a
country.
Official settlement refers to accounts
intended to discharge a country’s
international obligations through the old
practice or gold shipment, or the current
practice of buying or selling U.S
government securities.

Foreign exchange refers to “the

money of one nation held by citizens
of another nation either as currency
or as deposit in banks”.
CHAPTER 16
AGRARIAN REFORM
AND TAXATION
Meaning of land reform
Reform implies the existence of a defect that
something is deformed or malformed and does not suit
existing conditions. In broad sense, land reform refers to the
full range of measures that may or should be taken to
improve or remedy the defects in the relations among men
e.g., between the tiller and owner of land, employee and
employer in a farm, with respect to their rights in land.
Land reform thus involves the “transformation of agrarian
structure” or what is sometimes called “structural reforms”

“Land Reform” is often used interchangeably with

“agrarian reform” but in actuality, the latter is more
broader than the former.
Land tenure structure is a concept which refers to
one or more types of land tenure system regulating
the rights to ownership and control and usage of
land and the duties accompanying such rights.
Land tenure reforms measures would include the following:
1. Redistribution of private lands
2. Distribution of lands in the public domain
sometimes referred to as resettlement or
colonization
3. Regulation of tenancy
4. Regulation of agricultural labor contracts and
wages
5. Elimination of absentee landlordism and transfer of
land ownership to the actual tillers.
Production structure is a concept which relates to
the nature, type and modus operandi as well as
the actual process of production or farm
operation.
The following would fall under production reform measures:

1. Consolidation of small, uneconomic holdings to insure

optimum utilization
2. Imposition of a floor on holdings of uneconomic size
beyond which subdivision is to be prevented
3. Promotion of cooperative or compact farming among
sub-marginal farmers
4. Imposition of a ceiling on holdings of non-cultivating
owners
5. organization of crop rotation system
 The structure of supporting services is a concept
which involve matters like credit, marketing, the
supplying of agricultural requisites, processing,
storage.

Agrarian reform is considered wider than land

reform. It comprises not only land reform but also
the reform and development of complimentary
institutional framework such administrative
agencies of the national government created to
undertake land reform, local governments, rural
educational and social welfare institutions and
voluntary associations, particularly farmers
organizations.
Agrarian reform would also cover the following :

1. public health programs

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, roads irrigation and
electricity
7. organization of various types of voluntary association,
cooperatives youth organization etc. as a means of insuring
popular support or overcoming opposition to the reform
8. providing employment opportunities to underemployed or
surplus rural labor
9. other services of a community development nature
 Taxation is the act of laying a tax, i.e., the
process or means by which the sovereign, through
its law making body raises revenue to defray the
necessary expenses of the government. Expressed in
another way, it is a method of apportioning the cost
of government among those who in some measure
are privileged to enjoy its benefits and must
therefore, bear its burdens.
Taxes are enforced proportional contributions
from persons and property levied by the law-
making body of the state by virtue of its
sovereignty for the support of the government and
all public needs.
Essential characteristics of tax:
1. It is an enforced contribution – a tax is not a voluntary
payment or donation and its imposition is in no way
dependent upon the will or assent of the person taxed.
2. It is generally payable in money – unless qualified by law,
the term taxes or tax is usually understood to be pecuniary
burden – an exaction to be discharged alone in money which
must be in legal tender.

3. It is proportionate in character – a tax is laid by some rule of

apportionment according to which the persons or property
share the public burden. it is based on the ability to pay.
4. It is levied on persons or property – a tax may also be
imposed on acts or transactions. In each case, however it is
only the person who pays the tax.
5. It is levied by the state which has jurisdiction over persons or
property – the persons or property must be subject to the
jurisdiction of the taxing state. This is necessary in order that the
tax can be enforced. The taxing power of a state necessary stops
at its boundary lines.

6. It is levied by the law-making body of the state – the power

to tax is a legislative power which only the legislative body
(national or local) can exercise through the enactment of
statutes or ordinances. The power to tax is also granted to
local governments but the power of the latter is subject to
such limitations as may provided by law.

6. It is levied for public purpose – taxation involves and a tax

constitutes a charge or burden impose to provide income for
public purposes - the support of the government.
Administration of law, or the payment for public expenses.
Theory and Basis
The power of taxation proceeds upon the
theory that the existence of a government is a
necessity; that it cannot continue without means
to pay its expenses; and that for these means it
has a right to compel all its citizens and property
within its limits to contribute.
The basis of taxation is found in the reciprocal
duties of protection and support between the state
and its inhabitants. In return for his contribution,
the taxpayer receives benefits and protection from
the government.
Nature of power of taxation
1. It is inherent in sovereignty – the power of taxation is
inherent in sovereignty being essential to the
existence of every government. Hence, the state can
still exercise the power, even if the constitution had
not mentioned anything about taxation.
2. It is legislative in character – the power to tax is
legislative. It cannot be exercise by the executive or
judicial branch of the government. Under the
constitution only the legislative body and impose
taxes. The power to tax is also granted by the
constitution to local governments subject to such
guidelines and limitations as may be provided by
law.
3. It is subject to constitutional and inherent limitations
– the power of taxation is subject to certain
limitations. Most of these limitations are specifically
provided in the fundamental law or implied there
from while rest springs from the nature of the taxing
power itself.
4. It is levied by the state which has jurisdiction over
persons or property – the persons or property must
be subject to the jurisdiction of the taxing state.
This is necessary in order that the tax can be
enforced. The taxing power of a state necessary
stops at its boundary lines.
Aspects of taxation
1. Levying or imposition of the tax which is legislative
act, and;
2. Collection of the tax levied which essentially
administrative in character.
Basic principles of a sound tax system:
1. Fiscal adequacy – which means that the sources of revenue
should be sufficient to meet the demands of public
expenditure.
2. Equality or theoretical justice – which means that the tax
burden should be proportionate to the taxpayer’s ability to
pay.
3. Administrative feasibility – which mean that tax laws should
be capable of convenient, just and effective administration.
Classification of taxes are:
1. As to subject matter or object:
a. Personal, poll or capitation – tax of a fixed amount
imposed on individuals residing within a specified
territory, whether citizens or not, without regard to their
property or the occupation in which they maybe
engaged.
b. Property – tax imposed on property, whether real or
personal, in proportion either to its value, or in
accordance with same other reasonable method of
apportionment.
c. Excise – any tax which does not fall within the
classification of a poll tax or property tax. It is charge
upon the performance of an act, the enjoyment of a
privileged, or the engaging in an occupation.
2. As to purpose :
a. General, fiscal or revenue – tax imposed for the
general purpose of the government. i.e. to raise revenues
for governmental needs. Example: Income tax and almost
all taxes.
b. Special or regulatory – tax imposed for a special
purpose, i.e. to achieve some kind of economic ends
irrespective of whether revenue is actually collected or not.
Example: Protective tariffs or customs duties on imports, to
protect local industries against foreign competition.
3. As to scope
a. National - tax imposed by the national government.
Examples: national revenues taxes, customs duties and
national taxes imposed by special laws.
b. Municipal or local – tax imposed by the municipal
corporations. Examples: real property taxes.
4. As to determination of amount
a. Specific – tax of a fixed amount imposed by the number, or
by some standard of weight or measurement; it requires no
assessment other than listing or classification of the subject
to be taxed. It is imposed on certain articles specified by
law. Example: excise tax on distilled wines, lubricating oils
and other.
b. Ad valorem – tax of a fixed proportion of the value of the
property with respect to which the tax is assessed; it
requires the intervention of assessors or appraisers to
estimate the value of such property before the amount due
from each taxpayer can be determined. The phrase “ad
valorem” means literally, “according to value” examples:
real estate tax, percentage taxes, excise tax on cigars and
cigarettes, and other.
5. As to who bears the burden
a. Direct – tax which is demanded from the person who
also shoulders the burden of the tax; or tax which the
taxpayer cannot shift to another. Example: community
taxes, corporate and individual income taxes.

b. Indirect – tax which demanded from one person in the

expectation and intention that he should indemnify
himself at the expense of the another or tax imposed
on goods before they reach the customer who
ultimately pays for them not as a tax but as part of the
purchase price to which it is added. Examples: all
business taxes, such as value-added tax, percentage
taxes and others customs duties
6. As to graduation or rate:
a. Proportional – tax based on a fixed percentage
of the amount of the property, income or other
basis to be taxed. Example: real property tax;
all percentage taxes
b. Progressive or graduated – tax the rate of
which increases as the tax base or bracket
increases. Examples: income tax; estate tax;
donor’s tax.
c. Regressive – tax the rate of which decreases as
the tax base or bracket increases.
Taxes distinguished from other terms:
1. Revenue – it refers to all funds or income derived by the
government, whether from tax or any other source. In another
sense, it refers to the amount collected, while tax refers to the
amount imposed
2. Internal revenue – it refers to taxes imposed by the legislature
other than duties on imports and exports
3. Customs duties – they are taxes imposed on goods exported
from and imported into a country
4. Debt – a tax is not a debt and the two are distinguished as
follows:
a. A debt is based on contract while tax is based on laws;
b. A debt is assignable while tax cannot be assigned;
c. A debt may be paid in kind but tax is generally payable with money; and
d. A person cannot be imprisoned for non-payment of debt while
imprisonment is a sanction for non-payment of tax. A tax however, like a
debt, is an obligation
5. Penalty – it is any sanction imposed as a
punishment for violation of law or acts deemed
injurious. Thus, the violation of tax laws may give
rise to imposition of penalty.
a. A penalty is designed to regulate conduct, while a
tax is primarily aimed at raising revenue; and
b. A penalty may be imposed by either government or
private entities, while a tax can only be imposed by
the government.