SOCSTUD 109 : MICROECONOMICS

CHAPTER 1 : The Science of Microeconomics

What is Economics?
Economics is a social science concerned with the production, distribution, and consumption of
goods and services. It studies how individuals, businesses, governments, and nations make choices on
allocating resources to satisfy their wants and needs, trying to determine how these groups should organize
and coordinate efforts to achieve maximum output.
Economics comes from Greek word “oikonomia”, which in turn is composed of two words: oikos,
which is usually translated as “household”; and nomos, which is best translated as “management or
distribute.” In short, the term oikonomia referred to “household management” and it was termed by Greek
philosopher Aristotle.
Economics can generally be broken down into macroeconomics, which concentrates on the
behavior of the aggregate economy, and microeconomics, which focuses on individual consumers and
business.
TAKE AWAYS
 Economics is the study of how people allocate scarce resources for production, distribution, and
consumption, both individually and collectively.
 Two major types economics are microeconomics, which focuses on the behavior of individual
consumers and producers, and macroeconomics, which examine overall economies on a regional,
national, or international scale.
 Economics is especially concerned with efficiency in production and exchange and uses models and
assumptions to understand how to create incentives and policies that will maximize efficiency.
 Economics formulate and publish numerous economic indicators, such as Gross Domestic Product
(GDP) and the Consumer Price Index (CPI).
 Capitalism, socialism, and communism are types of economic systems.

UNDERSTANDING ECONOMICS
One of the earliest recorded economic thinkers was the 8th-century B. C. Greek farmer/poet Hesiod,
who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity. But the
founding of modern Western economics occurred much later, generally credited to the publication of
Scottish philosopher Adam Smith's 1776 book, An Inquiry Into the Nature and Causes of the Wealth of
Nations.
The principle (and problem) of economics is that human beings have unlimited wants and occupy a
world of limited means. For this reason, the concepts of efficiency and productivity are held paramount by
economists. Increased productivity and a more efficient use of resources, they argue, could lead to a higher
standard of living.
Despite this view, economics has been pejoratively known as the "dismal science", a term coined by
Scottish historian Thomas Carlyle in 1849. He used it to criticize the liberal views on race and social equity
of contemporary economists like John Stuart Mill, though some resource suggest Carlyle was actually
describing the gloomy predictions by Thomas Robert Malthus that population would always outstrip the
food supply.
TYPES OF ECONOMICS
The study of economics is generally broken down into two disciplines:
 Microeconomics focuses on how individual consumers and firm make decisions; these individuals
can be a single person, household, a business/organization or a government agency. Analyzing certain
aspects of human behavior, Microeconomics tries to explain they respond to changes in price and why
they demand why they do at particular price levels. Microeconomics tries to explain how and why
different goods are valued differently, how individuals make financial decisions, and how individuals
best trade, coordinate and cooperate with one another.
 Microeconomics' topic range from the dynamics of supply and demand to the efficiency and costs
associated with producing goods and services; they also include how labor is divided and allocated,
uncertainty, risk, and strategic game theory.
 Macroeconomics studies an overall economy on both a national and international level. Its focus
can include a distinct geographical region, a country, a continent, or even in the world. Topics studied
include foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation
and interest rates, the growth of total production output as reflected by changes in the Gross Domestic
Product (GDP),and business cycles that result in expansions, booms, recession, and depression.

Micro and macroeconomics are intertwined: as economists gain an understanding of certain

phenomena, they can help us make more informed decisions when allocating resources. Many believe
that microeconomics' foundations of individuals and firms acting in aggregate constitute
macroeconomics phenomena.

SCHOOLS FOR ECONOMIC THEORY

There are also schools of economic thought. Two of the most common are Monetarist and
Keynesian. Monetarists have generally favorable views on free markets as best way to allocate resources
and argue that stable monetary policy is the best course for managing the economy. In the contrast, the
Keynesian approach believes that markets often don't work well at allocating resources on their own and
favors fiscal policy by an activist government in order to manage irrational market swings and recessions.
Economic analysis often progresses through deductive processes including mathematical logic,
where the implications of specific human activities are considered in a "means-ends" framework. Some
branches of economic thought emphasize empiricism, rather than formal logic- specifically,
macroeconomics or Marshallian microeconomics, which attempt to use the procedural observations and
falsifiable tests associated with the natural sciences.
Since true experiments cannot be created in economics, empirical economists rely on simplifying
assumptions and retroactive data analysis. However, some economists argue economics is not well suited to
empirical testing, and that such methods often generate incorrect or inconsistent answers.

ECONOMIC RESOURCES

There are four fundamental types of economic resources:

Land, Labor, Capital, and Entrepreneurship

Economic resource 1: Land

Land is an economic resource that includes all natural physical resources like gold, iron, silver, oil, etc.
Some countries have very rich natural resources and by utilizing theses resources they enrich their
economy to the peak.
Such as the oil and gas development of North Sea in Norway and Britain or the very high
productivity of vast area of farm lands in the United States and Canada. Some other developed countries
like Japan have smaller economic resources. Japan is the second largest economy of the world but
reliant on imported oil.
Economic resource 2: Labor
The human input in the production of manufacturing is known as labor. Workers have
different work capacity. The work capacity of each worker is based on his own training, education and work
experience.
This work capacity is matters in the size and quality of work force. To achieve the economic
growth the raise in the quality and size of workforce is very essential.
Economic resource 3: Capital
In economics, capital is a term that means investment in the capital goods. So, that can be used to
manufacture other goods and services in the future. The following are the factors of the capital:
💰 Fixed Capital
It includes new technologies, factories, buildings, machinery and other equipment.
💰 Working Capital
It is the stock of finished goods or components or semi-finished goods or components. These goods
or components will be utilized in the near future.
💰 Capital Productivity
New features of capital building, machinery or technology are commonly used to improve the
productivity of the labor. Such as the new ways of farming helps to enhance the productivity of the
agriculture sector and give more valuable jobs in this sector which motivates people to come for
work.
💰 Infrastructure
It is a stock capital that is used to maintain the whole economic system. Such as roads, railway
tracks, airports, etc.

Economic resource 4: Entrepreneurship

The Entrepreneurship is person or individual who wants to supply the product to the market, in
order to make profit. Entrepreneurs usually invest their own capital in their business. This financial capital
is generally based on their savings and they take rinks linked to their investments. This risk-taking can be
rewarded by the profit of the business. Entrepreneurship is, thus, an important economic resource.

Types of Economic Systems

The way scarce resources get distributed within an economy determines the type off economic system.
There are four different types of Economic Systems; a traditional economy, a market economy, a command
economy, and a mixed economy. Each type of economy has its own strengths and weaknesses.

 Traditional Economic System

The traditional economic system is the most traditional and ancient types of economies in the
world. Vast portions of the world still function under a traditional economic system. These areas tend to
be rural, second- or third-world, and closely tied to the land, usually through farming.
In general, in a traditional economic system, a surplus would be rare. Each member of a
traditional economy has a more specific and pronounced role, and these societies tend to be very close-
knit and socially satisfied. However, controlled they do lack access to technology and advanced
medicine.
 Command Economic System
In a command economic system, a large part of the economic system is controlled by a
centralized power. For example, in the USSR most decisions were made by the central government.
This type of economy was the core of the communist philosophy.
Since the government is such a central feature of the economy, it is often involved in everything
from planning to redistributing resources. A command economy is capable of creating a healthy supply
of its resources, and it rewards its people with affordable prices. This capability also means that the
government usually owns all the critical industries like utilities, aviation, and railroad.
In a command economy, it is theoretically possible for the government to create enough jobs and
provide goods and services at an affordable rate. However, in reality, most command economies tend to
focus on the most valuable resources like oil,
China or D.P.R.K. (North Korea) are examples of command economies.
Advantages of Command Economic Systems
 If executed correctly, the government can mobilize resources on a massive scale. This mobility can
provide jobs for almost all of the citizens.
 The government can focus on the good of society rather than an individual, This focus could lead to
more efficient use of resources.

Disadvantages of Command Economic Systems

× It is hard for central planners to provide for everyone’s needs. This challenge forces the government to
ration because it cannot calculate demand since it sets prices.
× There is a lack of innovation since there is no need to take any risk. Workers are also forced to pursue jobs
the government deems fit.

 Market Economic System

In a free-market economy, firms and households act in self-interest to determine how resources get
allocated, what goods get produced and who buys the goods. This is opposite to how a command
economy works, where the central government gets to keep the profits.
There is do government intervention in a pure market economy (“laisses-faire”). However, no truly
free market economy exists in the world. For example, while America is a capitalist nation, our
government still regulates (or attempts to control) fair trade, government programs, honest business,
monopolies, etc.
In this type of economy, there is a separation between the government and the market. This
separation prevents the government from becoming too powerful and keeps their interests aligned with
that of the markets.
Historically, Hong Kong is considered an example of a free market society.

Advantages of a Free Market Economy

✓ Consumers pay the highest price they want to, and businesses only produce profitable goods and services.
There is a lot of incentive for entrepreneurship.
✓ This competition for resources leads to the most efficient use of the factors of production since
businesses are very competitive.
✓Businesses invest heavily in research and development. There is an incentive for constant innovation as
companies compete to provide better products for consumers.

Disadvantages of a Free Market Economy

× Due to the fiercely competitive nature of a free market, businesses will not care for the disadvantages like
the elderly or disabled. This lack of focus on societal benefit leads to higher income inequality.
× Since the market is driven solely by self-interest, economic needs have a priority over social and human
needs like providing healthcare for the poor. Consumers can also be exploited by monopolies.

 Mixed Economic System

A mixed economy is a combination of different types of economic systems. This economic system
is a cross between a market economy and command economy. In the most common types of mixed
economies, the market is more or less free of government ownership except for a few key areas like
transportation or Sensitive industries like defense and railroad.
However, the government is also usually involved in the regulation of private businesses. The idea
behind a mixed economy was to use the best of both worlds – incorporate policies that are socialist and
capitalist.
 To a certain extent, most countries have a mixed economic system. For example, India and France
are mixed economies.

Advantages of Mixed Economies

✓ There is less government intervention than a command economy. This results in private businesses that
can run more efficiently and cut costs down than a government entity might.
✓ The government can intervene to correct market failures. For example, most governments will come in
and break- up large companies if they abuse monopoly power. Another example could be the taxation of
harmful! Products like cigarettes to reduce a negative externality of consumption.
✓ Governments can create safety net programs like healthcare or social security.
✓ In a mixed economy, governments can use taxation policies to redistribute income and reduce inequality.

Disadvantages of Mixed Economies

× There are criticisms from both sides arguing that sometimes there is too much government intervention,
and sometimes there isn’t enough.
× A common problem is that the state run industries are often subsidized by the government and run into
large debts because they are uncompetitive.

Microeconomics and Macroeconomics

Economics is divided into two different categories: microeconomics and macroeconomics.

Microeconomics is the study of individuals and business decisions, while macroeconomics looks at
the decisions of countries and governments.
While these two branches of economics appear to be different, they are actually interdependent and
complement one another. Many overlapping issues exist between the two fields.

KEY TAKEAWAYS
• Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions
made by countries and governments.
• Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a
bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its
course and nature.
• Investors can use microeconomics in their investment decisions, while macroeconomics is an analytical
tool mainly used to craft economic and fiscal policy.

Microeconomics
Microeconomics is the study of decisions made by people and businesses regarding the allocation of
resources and prices of goods and services. It also takes into account taxes, regulations, and government
legislation.
Microeconomics focuses on supply and demand and other forces that determine the price levels in the
economy, It takes what is referred to as a bottom-up approach to analyzing the economy. In other words.
microeconomics tries to understand human choices, decisions, and the allocation of resources.
Having said that, microeconomics does not try to answer or explain what forces should take place in a
market. Rather, it tries to explain what happens when there are changes in certain conditions.
For example, microeconomics examines how a company could maximize its production and capacity so
that it could lower prices and better compete in its industry.
A lot of microeconomics information can be gleaned from the financial statements.
Macroeconomics
Macroeconomics, on the other hand, studies the behavior of a country and how its policies affect the
economy as a whole, It analyzes entire industries and economies, rather than individuals or specific
companies, which is why it’s a top-down approach. It tries to answer questions like “What should the rate of
inflation be?” or “What stimulates economic growth?”
Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how
it is affected by changes in unemployment, national income, rate of growth, and price levels.
Macroeconomics analyzes how an increase or decrease in net exports affects a nation’s capital account,
or how GDP would be affected by the unemployment rate.
Macroeconomics focuses on aggregates and econometric correlations, which is why it is used by
governments and their agencies to construct economic and fiscal policy. Investors of mutual funds or
interest-rate-sensitive securities should keep an eye on monetary and fiscal policy. Outside of a few
meaningful and measurable impacts, macroeconomics doesn’t offer much for specific investments.
John Maynard Keynes is often credited as the founder of macroeconomics, as he initiated the use of
monetary aggregates to study broad phenomena. Some economists dispute his theory, while many of those
who use it disagree on how to interpret it.

Chapter 2 : Economic History of the Philippines

In the 70's and in the 80's, the Philippines was an economic powerhouse - second only to Japan. The
Philippines used to produce essential raw materials as well as chemical to be used in the production process.
Few years later, the country declined and became one of the poorest countries in South East Asia.
According to The Economist: "What distinguishes Manila from other South-East Asian capitals is the
ubiquitous jeepney, the loud rickety bus used by the city's poorer inhabitants. Once modified American
Jeeps, nowadays most jeepneys are cobbled together from second-hand Japanese lorries. They have become
a metaphor for the Philippine economy: inefficient and easily overtaken. In the 1970s the Philippines was
richer than its neighbors. Yet while it chugged along at growth rates of around 2 percent, other countries
stepped on the gas: it was passed by Singapore, Malaysia, Thailand and, more recently, by China. A former
American colony, it could have made more of its cultural affinities with the United States, including the
widespread use of English. The incompetent and crooked rule of Ferdinand Marcos from 1965 to 1986 bears
some of the blame for its failure to do so. A sluggish economy combined with a fast-growing population has
forced some 8m Filipinos- equivalent to almost a tenth of the resident population-to seek jobs abroad.

Economic Development in the Philippines in the Early 20th Century

In the mid-nineteenth century, a Filipino landowning elite developed on the basis of the export of
abaca (Manila hemp), sugar, and other agricultural products. At the onset of the United States power in the
Philippines in 1898- 99, this planter group was cultivated as part of the United States military and political
pacification program. The democratic process imposed on the Philippines during the American colonial
period remained under the control of this elite.
Access to political power required an economic basis, and in turn provided the means for enhancing
economic power. The landowning class was able to use its privileged position directly to further its
economic interests as well as to secure a flow of resources to garner political support and ensure its position
as the political elite. Otherwise, the state played a minimal role in the economy, so that no powerful
bureaucratic group arose landowning class. This situation remained basically unchanged in the early 1990s.
At the time of independence in 1946, and in the aftermath of a destructive wartime occupation by
Japan, Philippine reliance on the United States became more apparent. To gain access to reconstruction
assistance exchange from the United States, the Philippines agreed to maintain its prewar exchange rate with
the United States dollar and not to restrict imports from the United States.
For a while the aid inflow from the United States offset the negative balance of trade, but by 1949, the
economy had entered a crisis. The Philippine government responded by instituting import and foreign-
exchange controls that lasted until the early 1960s.
Economic Development in the Philippines in the 1950s and 60s
Import section stimulated the manufacturing sector. Manufacturing net domestic product (NDP) at
first grew rapidly, averaging 12 percent growth per annum in real terms during the first half of the 1950s,
contributing to an average 7.7 percent growth in the GNP, a higher rate than in any subsequent five-year
period. The Philippines had entered an import- substitution stage of industrialization, largely as the
unintended consequence of a policy response to balance-of-payments pressures. In the second half of the
1950s, the growth rate of manufacturing fell by about a third to an average of 7.7 percent, and real GNP
growth was down to 4.9 percent. Import demand outpaced exports, and the allocation of foreign exchange
was subject to corruption. Pressure mounted for a change of policy.
In 1962 the government devalued the peso and abolished import controls and exchange licensing.
The peso fell by half to P3.90 to the dollar. Traditional exports of agricultural and mineral products
increased; however, the growth rate of manufacturing declined even further. Substantial tariffs had been put
in place in the late 1950s, but they apparently provided insufficient protection. Pressure from industrialists,
combined with renewed balance of payments problems, resulted in the reimposition of exchange controls in
1968. Manufacturing recovered slightly, growing an average of 6.1 percent per year in the second half of the
decade. However, the sector was no longer the engine of development that it had been in the early 1950s.
Overall real GNP growth was mediocre, averaging somewhat under 5 percent in the second half of decade;
growth of agriculture was more than a percentage point lower. The limited impact of manufacturing also
affected employment. The sector's share of the employed labor force, which had risen rapidly during the
1950s to over 12 percent, plateaued. Import substitution had run its course.
To stimulate industrialization, technocrats within the government worked to rationalize and improve
incentive structures, to move the country away from import substitution, and to reduce tariffs. Movements to
reduce tariffs, however, met stiff resistance from industrialists, and government efforts to liberalize the
economy and emphasize export-led industrialization were largely unsuccessful.
Philippine Economy under Marcos
The Philippine economy grew at a relatively high average annual rate of 6.4 percent during the
1970s, financed in large part by foreign- currency borrowing. External indebtedness grew from $2.3 billion
in 1970 to $24.4 billion in 1983, much of which was owed to transnational commercial banks. In the 1980s
the Philippine economy was hurt by political instability, authoritarianism, increasing foreign debt, falling
commodity prices, corporate mismanagement and vast unemployment.
The Philippines found itself in an economic crisis in early 1970, in large part the consequence of the
profligate spending of government funds by President Marcos in his reelection bid. The government, unable
to meet payments on its US$2.3 billion international debt, worked out a US$27.5 million standby credit
arrangement with the International Monetary Fund (IMF) that involved renegotiating the country's external
debt and devaluing the Philippine currency to P6.40 to the United States dollar. The government, unwilling
and unable to take the necessary steps to deal with economic difficulties on its own, submitted to the
external dictates of the IMF. It was a pattern that would be repeated with increasing frequency in the next
twenty years.
In the early 1980s, the economy began to run into difficulty because of the declining world market of
Philippine exports, trouble in borrowing on the international capital market, and a domestic financial
scandal. The problem was compounded by the excesses of President Ferdinand E. Marcos' regime and the
bailing out by government-owned financial institutions of firms owned by those close to the president and
encountered financial difficulties. In 1983 the country descended in the aftermath of the assassination of
Marcos' chief rival, former Senator Benigno Aquino, and circumstances had not improved when Marcos fled
the country in February 1986.
Impact of Martial Law on the Philippine Economy in the 1970s and 80s
In September 1972, Marcos declared martial law, claiming that the country was faced with
revolutions from both the left and the right. He gathered around him a group of businessmen, used
presidential decrees and letters of instruction to provide them with monopoly positions within the economy,
and began channeling resources to himself and his associates, instituting what came to be called "crony
capitalism." By the time Marcos fled the Philippines in February 1986, monopolization and corruption had
severely crippled the economy.
In the beginning, this tendency was not so obvious. Marcos' efforts to create a "New Society" were
supported widely by the business community, both Filipino and foreign, by Washington, and, de facto, by
the multilateral institutions. Foreign investment was encouraged: an export-processing zone was opened; a
range of additional investment incentives was created, and the Philippines projected itself onto the world
economy as a country of low wages and industrial peace. The inflow of international capital increased
dramatically.
A general rise in world raw material prices in the early 1970s helped boost the performance of the economy;
real GNP grew at an of almost 7 percent per year in the five years after the declaration of martial law, as
compared with approximately 5 percent annually in the five preceding years. Agriculture performed better
that it did in the 1960s. New rice technologies introduced in the late 1960s were widely adopted.
Manufacturing was able to maintain the 6 percent growth rate it achieved in the late 1960s, a rate,
however, that was below that of the economy as a whole. Manufactured exports, on the other hand, did quite
well, growing at a rate twice of a country's traditional agricultural exports. The public sector played a much
larger role in the 1970s, with the extent of government expenditures in GNP rising by 40 percent in the
decade after 1972. To finance the boom, the government extensively resorted to international debt, hence the
characterization of the economy of the Marcos era as "debt driven."
After martial law was declared Marcos' cronies amassed huge fortunes while the Philippines ran up a
huge national debt that brought the economy to edge of collapse. Real incomes declined by half between
1956 and 1985 as the wealth of richest 10 percent rose from 27 percent to 37 percent. In the latter half of the
1970s, heavy borrowing from transnational commercial banks, multilateral organizations, and the United
States and other countries masked problems that had begun to appear on the economic horizon with the
slowdown of the world economy. By 1976 the Philippines was among the top 100 recipients of loans from
the World Bank and was considered a "country of concentration." Its balance of payments problem was
solved and growth facilitated, at least temporarily, but at the cost of having to service an external debt that
rose from US$2.3 billion in 1970 to more than US$17.2 billion in 1980.
There were internal problems as well, particularly in respect of the increasingly visible
mismanagement of crony enterprises. A financial scandal in January 1981 in which a businessman fled the
country with debts of an estimated P700 million required massive amounts of emergency loans from the
Central Bank of the Philippines and other government-owned financial institutions to some eighty firms.
The growth rate of GNP fell dramatically, and from then the economic ills of the Philippines proliferated. In
1980 there was an abrupt change in economic policy, related to the changing world economy and
deteriorating internal conditions, with the Philippine government agreeing to reduce the average level and
dispersion of tariff rates and to eliminate most quantitative restrictions on trade, in exchange for a US$200
million structural adjustment loan from the World Bank. Whatever the merits of the policy shift, the timing
was miserable. Exports did not increase substantially, while imports increased dramatically. The result was
growing debt-service payments; emergency loans were forthcoming, but the hemorrhaging did not cease.
It was in this environment in August 1983 that President Marcos' foremost critic, former Senator
Benigno Aquino, returned from exile and was assassinated. The country was thrown into an economic and
political crisis that resulted eventually, in February 1986, in the ending of Marcos' twenty-one-year rule and
his flight from the Philippines.
In the meantime, debt repayment had ceased. Real GNP fell more than 11 percent before turning back up in
1986, and real GNP per capita fell 17 percent from its high point in 1981. In 1990 per capita real GNP was
still 7 percent below the 1981 level.
Impact of U.S. Military Bases on the Philippine Economy
The economy of the Philippines in the Marcos years in many ways was propped by the Subic and
Clark American military bases, trade with the United States and income from overseas workers. The World
Bank played a major role in planning and running the Filipino economy under martial law.
In early 1991, the Philippine government was in ongoing negotiations with the United States on the future
status of United States naval and air facilities at Subic Bay and Clark Air Base. What would normally be an
issue of foreign policy and national security became a major domestic political issue and took on an
economic dimension of considerable importance. At the domestic level, the conflict was between those who
argued that the continuing presence of the United States bases was an infringement on Philippine
sovereignty and a continuation of a neocolonial relationship and those who, for a combination of internal
security, foreign relations, and economic reasons, saw the need for maintaining the presence of the bases.
President Aquino, through 1990, refused to publicly commit herself to a position; however, it was clear that
her government was working to reach accommodation with the United States. As negotiations progressed,
the economic issue became prominent.
There were three economic considerations from the point of view of the Philippine government.
First, the proportion of the Philippine budget allocated for its armed forces was the smallest in the region, a
fact linked to the presence of United States air and naval forces in the Philippines, as well as direct military
assistance. Second, in the latter half of the 1980s, the bases directly employed between 42,000 and 68,000
Filipinos and contracted for goods and services from Filipino businesses. During this period, yearly base
purchase of goods and services in the Philippine economy (when corrected range for the estimated import
content of goods purchase) was in the range of P6.0 billion to P8.3 billion.
A third and politically very important consideration, was the sum given to the Philippines by the
United States in connection with presence of the bases, referred to as aid by United States 'officials and as
rent by the Filipinos. Base-related payments were first agreed to in 1979 when United States president
Jimmy Carter made a "best effort" pledge to secure US$500 million for the Philippines from the United
States Congress over a five-year period. In 1983 another five-year commitment was made, this time for
US$900 million. In October 1988, the Philippines' Secretary of Foreign Affairs Raul Manglapus and United
States' Secretary of State George Schultz signed a two-year agreement for US$962 million, an amount
double the previous compensation but substantially less than the US$2.4 billion that the Philippines initially
demanded. In 1991 talks over the future of the bases and the size and terms of the aid or rent that would be
given in consideration for continued United States access to military facilities in the Philippines was the
most important unresolved issue. The decision of the Philippine administration to bring Secretary of Finance
Jesus Estanislao into the negotiations in March 1991 was a further indication of the economic importance of
the bases to the Philippine government.

Philippine Economy under Cory Aquino

The Philippine economy floundered under Corazon Aquino. Power shortages and brownouts were common.
The American military bases were closed down. Economic growth revived in 1986 under Aquino, reaching
6.7 percent in 1988. But in 1988 the economy once again began to encounter difficulties. The trade deficit
and the government budget deficit were of particular concern. In 1990 the economy continued to experience
difficulties, a situation exacerbated by several natural disasters, and growth declined to 3 percent.
The Philippine economy experienced considerable difficulty in the 1980s. Real gross national product
(GNP) grew at an annual average of only 1.8 percent, less than the 2.5 percent rate of population increase.
The US$668 GNP per capita income in 1990 was below the 1978 level, and approximately 50 percent of the
population lived below the poverty line.
The 1988 unemployment rate of 8.3 percent (12.3 percent in urban areas) peaked at 11.4 percent in early
1989, and the underemployment rate, particularly acute for poor, less-educated, and elderly people, was
approximately twice that of unemployment. In 1988, about 470,000 Filipinos left the country to work abroad
in contract jobs or as merchant seamen.
In 1990 the Philippines had not yet recovered from the economic and political crisis of the first half
of the 1980s. At P18, 419 or US$668, per capita. GNP in 1990 remained, in real terms, below the level of
1978. A major thrust of Aquino's 1986 People Power Revolution was to address the needs of impoverished
Filipinos. One of the four principles of her "Policy Agenda for People-Powered Development," was
promotion of social justice and poverty alleviation. Government programs launched in 1986 and 1987 to
generate employment met with some success, reversing the decline of the first half of the decade, but these
efforts did little to alleviate the more chronic aspects of Philippine poverty. Ecoomic growth was low (1.9
percent), but it was positive. For the next two years, growth was more respectable--5.9 and 6.7 percent,
respectively. In 1986 and 1987, consumption led the growth process, but then investment began to increase.
In 1985 industrial capacity utilization had been as low as 40 percent, but by mid-1988 industries were
working at near full capacity. Investment in durable goods grew almost 30 percent in both 1988 and 1989,
reflecting the buoyant atmosphere. The international community was supportive. Like domestic investment,
foreign investment did not respond immediately after Aquino took office, but in 1987 it began to pick up.
The economy also was helped by foreign aid. The 1989 and 1991 meetings of the aid plan called the
Multilateral Aid Initiative, also known as the Philippine Assistance Plan, a multinational initiative to provide
assistance to the Philippines, pledged a total of US$6.7 billion.
Economic successes, however, generated their own problems. The trade deficit rose rapidly, as both
consumers and investors attempted to regain what had been lost in the depressed atmosphere of the 1983-85
period. Although debt-service payments on external debt were declining as a proportion of the country's
exports, they remained above 25 percent. And the government budget deficit ballooned, hitting 5.2 percent
of GNP in 1990.

The 1988 GNP grew 6.7 percent, slightly more than the government plan target. Growth fell off to 5.7
percent in 1989, then plummeted in 1990 to just over 3 percent. Many factors contributed to the 1990
decline. The country was subjected to a prolonged drought, which resulted in the increased need to import
rice. In July a major earthquake hit Northern Luzon, causing extensive destruction, and in November a
typhoon did considerable damage in the Visayas. There were other, more human, troubles also. The country
was attempting to regain a semblance of order in the aftermath of the December 1989 coup attempt.
Brownouts became a daily occurrence, as the government struggled to overcome the deficient power-
generating capacity in the Luzon grid, a deficiency that in the worst period was below peak demand by more
than 300 megawatts and resulted in outages of four hours and more. Residents of Manila suffered both from
a lack of public transportation and clogged and overcrowded roadways; garbage removal was woefully
inadequate; and, in general, the city's infrastructure was in decline. Industrial growth fell from 6.9 percent in
1989 to 1.9 percent in 1990; growth investment in 1990 in both fixed capital and durable equipment declined
by half when compared with the previous year. Government construction, which grew at 10 percent in 1989,
declined by 1 percent in 1990.

Economic Policy under Cory Aquino

In 1986 Corazon Aquino focused her presidential campaign on the misdeeds of Marcos and his
cronies. The economic correctives that she proposed emphasized a central role for private enterprise and the
moral imperative of reaching out to the poor and meeting their needs. Reducing unemployment, encouraging
small-scale enterprise, and developing the neglected rural areas were the themes.
Aquino entered the presidency with a mandate to undertake a new direction in economic policy. Her
initial cabinet contained individuals from across the political spectrum. Over time, however, the cabinet
became increasingly homogeneous, particularly with respect to economic perspective, reflecting the strong
influence of the powerful business community and international creditors.
The businesspeople and technocrats who directed the Central Bank and headed the departments of finance
and trade and industry became the decisive voices in economic decision making. Foreign policy also
reflected this power relationship, focusing on attracting more foreign loans, aid, trade, investment, and
tourists. It soon became clear that the plight of the people had been subordinated largely to the requirements
of private enterprise and the world economy. As the president noted in her state-of-the-nation address in
June 1989, the poor had not benefited from the economic recovery that had taken place since 1986. The gap
between the rich and poor had widened, and the proportion of malnourished preschool children had grown.

The most pressing problem in the Philippine international political economy at the time Aquino took office
was country's US$28 billion external debt. It was also one of the most vexatious issues in her administration,
Economists within the economic planning agency, the National Economic and Development Authority
(NEDA), argued that economic recovery would be difficult, if not impossible, to achieve in a relatively short
period if the country did not reduce the size of the resource outflows associated with its external debt. Large
debt-service payments and moderate growth (on the order of 6.5 percent per year) were thought to be
incompatible. A two-year moratorium on debt servicing and selective repudiation of loans where fraud or
corruption could be shown was recommended. Business-oriented groups and their representatives in the
president's cabinet vehemently objected to taking unilateral action on the debt, arguing that it was essential
that the Philippines not break with its major creditors in the international community. Ultimately, the
president rejected repudiation; the Philippines would honor all its debts.

Domestically, land reform was a highly contentious issue, involving economics as well as equity. NEDA
economists argued that broad-based spending increases were necessary to get the economy going again;
more purchasing power had to be put in the hands of the masses. Achieving this objective required a
redistribution of wealth downward, primarily through land reform. Given Aquino's campaign promises, there
were high expectations that a meaningful program would be implemented. Prior to the opening session of
the first Congress under the country's 1987 constitution, the president had the power and the opportunity to
proclaim a substantive land reform program. Waiting until the last moment before making an announcement,
she chose to provide only a broad framework. Specifics were left to the new Congress, which she knew was
heavily represented by landowning interests. The result--a foregone conclusion--was the enactment of a
weak,
Loophole-ridden piece of legislation.

The Aquino administration appeared to be unable to work with the Congress to enact an economic package
to overcome the country's economic difficulties. In July, as the government deficit soared Secretary of
Finance Jesus Estanislao introduced a package of new tax measures. Then in October, stalemated with
Congress, Aquino agreed to seek a reduction in the budget gap without new taxes. The agreement met with
resistance f t met with resistance from the Congress for being an onerous imposition on an economy in
crisis, growth would be stifled and the poor would be impacted negatively. The willingness of the Congress
to pass the tax package called for in the IMF agreement was in doubt. In 1990 Congress placed a 9 percent
levy on all imports to provide revenues until an agreement could be reached with the administration on a tax
package. In February 1991, however, it was learned that in its agreement with the IMF for new standby
credits, the government had promised that it would indeed implement new taxes.

Accusations were widespread in Manila's press about the 1990-91 impasse. On the one hand, it was claimed
that Aquino and her advisers had no economic plan; on the other hand, the Congress was said to be
unwilling to work with the president.
Traditional political patterns appeared to be reasserting themselves, and the technocrats had little ultimate
influence. One study of the first Congress elected under the 1987 constitution showed that only 31 out of
200 members of the House of Representatives, were not previously elected officials or directly related to the
leader of a traditional political clan. Business interests directly influenced the president to overrule already
established policies, as in the 1990 program to simplify the tariff structure. Business and politics have
always been deeply interwoven in the Philippines; crony capitalism was not a deviant model, but rather the
logical extreme of a traditional pattern.
As the Philippines entered the 1990s, the crucial question for the economy was whether the elite would limit
its political activities to jockeying for economic advantage or would forge its economic and political
interests in a fashion that would create a dynamic economy.

Economy under Ramos

President Fidel Ramos (1992-1998) was given high marks for handling the economy. By breaking
apart monopolies, liberalizing foreign investment laws and privatizing business and industries by controlled
powerful families, Ramos was crediting with transforming the Philippines from a country with a history of
poverty, corruption, rebellion, foreign ineptness and tax evasion into an economic powerhouse that was not
yet an Asian tiger but was sometimes referred to as Asian tiger cub.
Oliver Teves of Associated Press wrote: "For a brief period of the 1990s, the Philippines under the
presidency of Fidel Ramos registered high growth rates and was touted as the next Asian "tiger" economy.
But the ingrained poverty, corruption and crime rate, and the abiding threat of another popular uprising
conspire to scare away investors and drain the country of its best brains and hardest workers. [Source: Jim
Gomez and Oliver Teves Associated Press, February 25, 2006].
The Philippine economy showed some improvement in early 1992, spurred by increases in
agricultural production and in consumer and government spending. Budget deficits were well within IMF
guidelines- -P3.2 billion in the first two months. At the end of April, the treasury posted a P5.5 billion
surplus as a result of higher than programmed revenue receipts, mainly from the sale of Philippine Airlines.
The increased revenue permitted the early repeal of the 5 percent import surcharge, stimulating both import
spending and export growth. The money supply grew more rapidly than desired, but was kept under control.
Treasury bill rates fell to 17.3 percent in March 1992 from 23 percent in November 1991, and inflation was
down to 9.4 percent for the first quarter of 1992, from 18.7 percent in 1991.
One of the greatest threats to the Philippine economy in 1992 was the power shortage. The fall in the
water level in Lake Lanao caused a 50 percent reduction in the power supply to Mindanao in December
1991, and the resumption of full power was not expected until almost the end of 1992. The power shortage
in Luzon continued to be chronic. Power cuts of four to five hours per day have been common; in May they
reached six hours on some days in Manila, the country's industrial hub. To help to meet this chronic
shortage, the government reactivated the contract with Westinghouse Corporation to restart construction on a
620 megawatt nuclear power plant on the Bataan Peninsula that had been abandoned in 1986. This plant
however was not scheduled to go on
until 1995.
To get the Philippine economy going, Ramos and the Philippine Congress abolished tariffs and pre
preferential terms that enriched the rich families. He reformed the banking system and drove down interest
rates. He overhauled the electricity infrastructure so that energy shortages and brown outs became a thing of
the past.
The growth rate during the Ramos years was a robust 5 percent a year and inflation was in the single digits,
down from 25 percent in 1990. Under his leadership, fiber optic lines were installed, property values soared,
five star hotels and condominiums were built, the stock market showed big gains, overseas workers began
returning home and the former American military bases at Subic and Clark became thriving trade and
industrial centers.
Foreign investment increased. Companies like Acer (a Taiwanese company) and Intel moved into the
Philippines Much of the prosperity was linked to investments from Hong Kong by tycoons like Gordon Wu,
who shipped their money to Manila before the reunification with China. In the early 1990s, the Philippines
was regarded as an economic rival of Thailand and Malaysia now it lags far behind them.

Asian Economic Crisis in the Philippines in 1997-98

During the Asian Economic Crisis in 1997-98, the Philippines the stock market declined by 32 percent
and the currency against the dollar had the depreciated by as much as 48 percent and later level off at 30
percent at end of December 1997. Because many of its exports went to Europe it was not hurt that badly by a
lack of demand from crisis-hit Asia. The level of bad loans never got that high. Money sent home by
Filipino workers abroad helped stabilized the currency. Most currency speculators were Filipinos.
 The IMF offered some help. Foreigners were not allowed to sell pesos. Business responded to the crisis
in a favorable way. They reduced debt, closed money losing factories, and agreed to mergers and joint
ventures with foreigners. Even so the Philippines recovered more slowly after the crisis than some other
Asian countries that were much harder hit.
Economy under Estrada
There was a sense of optimism when Joseph Estrada was elected. Investors shared this sense of hope and
initially poured money into the Philippines but it didn’t take long for this optimism to evaporate. Foreign
investors were turned off by cronyism, scandals and favoritism towards Philippines companies.
Estrada moved to tighten securities regulations, liberalized the trade the trade of grains and privatized the
electricity industry. His effort to change laws limiting foreign ownership of businesses to 40 percent was
halted by his impeachment trial.
In the end Estrada proved to be a friend of big business. He revived the culture of corruption and was
plagued by charges of cronyism. This was on top of inconsistent monetary policy, slow economic growth,
and uncertainty brought about by terrorist and insurgencies. He said he was a friend of the poor yet he failed
to launch one meaningful anti-poverty program. Most of his efforts consisted of parading around with movie
stars that were reminiscent of what Imelda Marcos did. There also wasn’t much of an effort to pave roads,
set up irrigations projects or build school or collect taxes to pay for them.
As Estrada became embroiled in scandal, the peso, the stock markets and confidence in the Philippines as a
place to invest dropped as did his approval ratings dropped. Foreign companies like Philips Electronics and
Johnson & Johnson pulled out of the Philippines. After his ouster in 2001 he left behind a huge budget
deficit and debt payments that were double what the country sent on health, education and agriculture
combined. The sick man of Asia was sicker than ever.
Economy under Arroyo
Gloria Macapagal-Arroyo was welcomed with great fanfare when she became president in 2001. The day
she was sworn in, the stock market surge 30 percent and businessmen praised her skills and abilities, Arroyo
launched free market and anti-corruption policies that were welcomed by both the local and international
business communities. Again there was a sense of hope.
But again the sense of optimism didn’t last long. Investment dried up as a result of global slowdowns and
security concerns. Direct foreign investment was only $319 million in 2001 compared to $1.8 billion in
1992.
Growth was 3.4 percent in 2001, 4.3 percent in 2002 and 4.5 percent in 2003. In 2004 the economy was
hurt by high oil prices. Still more growth was needed just to keep pace with 2.36 percent population growth
rate. Inflation was less than 6 percent but the deficit grew at an alarming rate as the government spending
increased and tax revenues fell. Raising revenues became one of the main problems. In 2003, the deficit
reached $3.6 billion and debt was estimated to be over $100 billion. The government’s debt burden reached
its peak in 2004 when it settled at 74 percent of GDP.
Arroyo began her second term in 2004 with promises of “austerity and simplicity” and the announcement
of the reform package to fight corruption, attract foreign investment, and make the Philippines less
dependent on foreign energy. She promise to create 10 million jobs by 2010 and announce that power rates
would be doubled to avert an energy crisis, she also promised to provide clean water and electricity to every
village in the Philippines and build 3,000 schools. The called for the seemingly impossible combination of
increase spending, higher taxes and a balanced budget in five years.
Arroyo’s economic drive quickly lost momentum. She was unable to overcome political opposition to
privatizing companies like the National Power Corporation, which lost $1.8 billion in 2003. Instead an effort
was made to make them efficient. By the end of her term of her time was spent responding to charges that
she rigged the 2004 elections and her husband was involved in kickback scheme with a Chinese company
involving millions of dollars.
Growth in 2003 and 2004 was around 5 percent due in part to rising demand for Philippines electronic
exports. Growth occurred despite continued hikes in oil and consumer prices on top of typhoons and floods.
Growth was 4.7 percent in 2005. That year exports amounted to 40percent of GDP. Many of the export items
were electronics. Two-thirds of Philippine imports are used to build exported computer parts, disk and other
electronic products made by local units of companies such as Texas Instruments Inc. and Toshiba Corp.
Philippine Economy Picks Up in the Mid-2000s
Arroyo was an economics professor after all and not everything that happened under her watch was a
failure. In fact she had many good ideas and policy schemes but they were overshadowed by her political
troubles and bogged down in Congress. In 2007, before the global economic crisis took hold, The Economist
reported: Things are looking up. The economy had grown by at least 5 percent in each of the past three
years, for the first time since the 1970s. In the first quarter of this year, growth was 6.9 percent, year-on-
year. Soaring remittances from Filipinos overseas help. Last year they added up to $12.8 billion, equivalent
to 11 percent of GDP. Exports especially to China and most particularly of microchips are also booming.
“Better economic management also helps. Inflation is now 2.6 percent, down from 8.6 percent in 2004.
Changes made in 2005 have increased tax revenues without hurting growth. Despite recent wobbles, the
government should still come close to balancing the budget next year, compared with a deficit of over 5
percent of GDP in 2002. The country’s banks, hurt badly in the 1997 Asian financial crisis, have been slow
to recover, but now they are starting to lend again. Foreign direct investment is picking up from a low base.
Texas instrument recently chose the Philippines over China for a $1billion electronics factory, while Hanjin,
a South Korean shipbuilder, will spend $1.7 billion on its Philippines yard. Foreign mining firms have
started to develop huge untapped mineral reserves.
“The Philippines has rapidly emerged as India’s main rival in business process outsourcing (BPO) and
now hosts the call-centres of many American firms. A recent study by the Asian Development Bank
reckoned that BPO could provide jobs for up to11 percent of those joining the Philippines’ labor force
between now and 2010.
All good news but worries remain. However welcome the growth in call-centre jobs, it is engineering and
business graduates who are queueing to take them. A recent International Labor Organization study noted
that the country’s average annual productivity growth between 2000 and 2005 was just 0.9 percent,
compared with 10.3 percent in China and 4.9 percent in India, suggesting that “many new job entrants are
underemployed”.
“A chief problem, despite foreign interest, is a rate of investment that is at 20-year lows as a share of
GDP. Poor infrastructure, especially roads, hampers businesses of all sorts. Gil Beltran, a senior finance-
ministry official, says the government intends to increase annual infrastructure spending from 2.8 percent of
GDP to 5 percent. Successive administrations have had a poor record of keeping such promises. The public
finances still need a lot of fixing. Tax revenues as a share of GDP are still below pre-1997 levels, while
public debt is high, at around 75 percent of GDP. The next big job, says Mr. Beltran, is to simplify the mess
of illogical tax breaks that cost a fortune in lost revenues. Efforts to drag big-business tax dodgers to court
have so far got nowhere. A swinging tax rise on jeepney owners looks like squeezing the poor to spare the
rich.
Perhaps a virtuous cycle will develop. The government might boost revenues and spend them on sensible
works, so encouraging business, which would boost tax revenues further. It is easier to imagine the
Philippines slipping back into complacency, relaxing its efforts and letting this golden opportunity pass by.
Philippines and the Global Economic Crisis in 2008 and 2009
The Philippines was affected by global economic crisis in 2008 and 2009 as was nearly everywhere.
Clarissa Batino of Bloomberg wrote in December 2008: “The Philippine peso headed for its worst year since
2000 and stocks had their biggest annual loss in at least two decades on signs the global slowdown is hurting
sales of the nation’s exports”. A “drop in trade flows is a bad sign that the economy will be slowing pretty
rapidly,” said Simon Wong, an economist at Standard Chartered Plc in Hong Kong. “The global downturn
puts pressure on Asian economies and currencies, including the peso.”
“The currency is poised for a 13.4 percent loss this year, the most since shortly before former President
Joseph Estrada was ousted in a revolt. The Philippine Stock Exchange Index slumped 48 percent this year to
1,872.85, the biggest annual drop since Bloomberg started tracking the data in 1998. Overseas sales account
for the third of the $144 billion economy. The Philippines imports electronics components and exports
mobile-phone chips and computer parts. Gross domestic product may expand 0.7 percent next year,
compared with an estimated 3.8 percent this year, Wong said, citing contractions in exports and remittances
in 2009. The expects growth of as little as 4.1 percent this year and 3.7 percent in 2009, versus last year’s
three-decade high of 7.2 percent.”
“The World Bank expects global trade to shrink in 2009 for the first time in more than 25 years,
threatening export-reliant economies in Asia. The Philippines last week cut interest rates to support growth
as the global slump weakened demand for Intel Corp’s computer chips and other electronics goods, which
account for two-thirds of the nation’s overseas sales.”
Philippine Economy Picks Up in the 2010s under Benigno Aquino III
The Philippine economy picks up in the 200s under Benigno Aquino III. The Philippine economy
expanded by 7.2 percent in 2013, 6.8 percent in 2012, 3.7 percent in 2011 and 7.6 percent in 2010. In 2012,
gross domestic product surpassed the government’s forecast for growth of 5 percent to 6 percent. The
Philippines had the second-highest growth rate in the world 2012, after China, according to Reuters.
Government expenditure in the Philippines jumped nearly 12 percent in 2012, while private spending, which
was bolstered by remittances from abroad, was up 6.1 percent, Reuters reported.
In 2012, Floyd Whaley wrote in the New York Times, “With $70 billion in reserves and lower interest
payments on its debt after recent credit rating upgrades, the Philippines pledge $1 billion to the International
Monetary Fund to help shore up the struggling economies of Europe. “This is the same rescue fund that
saved the Philippines when our country was in deep financial trouble in the early ‘80s,” said Representative
Mel Senen Sarmiento, a congressman from Western Samar.
“The Philippines has certainly had a steady flow of positive economic news recently. On July 4, 2012,
Standard & Poor’s raised the country’s debt rating to just below investment grade, the highest rating for the
country since 2003 and equivalent to that of Indonesia. The Philippines is the 44 th largest economy in the
world today, according to HSBC estimates. But if current trends hold, it can leap to the No. 16 spot by 2050.
The Philippine stock market, one of the best performers in the region, closed at a record high after the recent
S.&P. rating upgrade, and the country’s currency, the peso, reached a four-year high against the dollar at
about the same time.”
“The gross domestic product of the Philippines grew 6.4 percent in the first quarter, according to the
country’s central bank, outperforming all other growth rates in the region except China’s. Economists expect
similarly strong growth in the second quarter. “We have made a very bold forecast for the Philippines, but I
think justifiably so,” said Frederic Neumann, a senior economist at HSBC in Hong Kong.”
“Trinh D. Nguyen, an economist with HSBC in Hong Kong, said the Philippines had benefited from an
increase in government efficiency and revenue collection, as well as aggressive actions to address
corruption, like the impeachment of the chief justice of the Supreme Court and the arrest of former President
Gloria Macapagal Arroyo on suspicion of accepting kickbacks and of misusing government lottery money.
“It is not only short term growth that draws investors to the Philippines,” Ms. Nguyen said.” The
fundamentals are there.”
“But there are also real weaknesses in the country. Recent flooding, which by some estimates submerged
50 percent of Manila, illustrates a shortage of modern infrastructure that makes the Philippines highly
vulnerable to disasters. “The Philippines is hit with several deadly and devastating natural disasters every
year,” Ms. Nguyen said. But government officials have said that the recent flooding might actually help
economic growth, because reconstruction will require an increase in public spending and the country will
have to put into place programs to make it more resistant to the effects of natural disasters.”
 “Another hurdle is the fact that the Philippines has traditionally underexploited its natural resources. The
government estimates that there are 21.5 billion tons of metal deposits in the country, including large
deposits of nickel, iron, copper and gold. But they have never been a significant driver of economic growth
because extraction has been mismanaged” Mr. Neumann said. In the shorter term, there are concerns that the
country’s newfound prosperity has not sufficiently eradicated poverty.
Philippine Economy Improves but does not Create so many Jobs
Floyd Whaley wrote in the New York Times, “At his vegetable stand on a busy street in the Philippine
capital, Lamberto Tagarro is surrounded by gleaming, modern skyscrapers, between which a river of luxury
vehicles flows. “The Philippines is the rising tiger economy of Asia,” Mr. Tagarro said. “But only the rich
people are going up and up. I’m not feeling it.” Mr. Tagarro earns the equivalent of about $5 a day working
before dawn and after dark, battling petty corruption to maintain his improvised sidewalk stand and dealing
with rising wholesale prices for the onions and tomatoes he sells. [Source: Floyd Whaley, New York Times,
June 19, 2013*] “The Philippines, with a 7.8 percent expansion of gross domestic product in the first quarter
of 2013, has the fastest-growing economy in East Asia, surpassing even China’s. The country has a red-hot
stock market, a strong currency and a steady stream of accolades and upgrades from international ratings
agencies. But Mr. Tagarro’s experience of being left behind by the country’s newfound prosperity – mirrors
that of many Filipinos, according to the latest government poverty and employment data.”
“An estimated seven million Filipinos, about 17 percent of the work force, have gone overseas in search of
jobs, according to the Asian Development Bank. For those who stay home, options are few. Despite the
rapidly expanding economy, the country’s unemployment rate increased to 7.5 percent in April, from 6.9
percent at the same time a year earlier. About three million Filipinos who want to work are unemployed.
“Higher rates Of economic growth over recent years have not made a serious dent in the employment
problem in the Philippines,” the Asian Development Bank reported in its recent Asian Development Outlook
report.”
In some cases the number of unemployed has risen as the economy has grown. Earlier Whaley wrote in New
York Times, “The robust growth in the Philippines in 2012 has not translated into significant job growth,
according to government figures. Unemployment was at 6.8 percent in October, up from 6.4 percent a year
earlier, and the number of unemployed in the country rose to 2.76 million from 2.64 million.”
Philippines Gets First-Ever Investment Grade Rating
In March 2013, the Philippines achieved its first-ever investment grade rating after international debt
watcher Fitch raised the country’s rating to BBB- from BB+. Daxim L. Lucas wrote in the Philippine Daily
Inquirer, “Fitch Ratings the first of the three major international debt watchers to upgrade the Philippines –
also assigned a stable outlook for the country’s credit rating. Fitch cited the country’s sovereign balance
sheet as being comparable to those of ‘A’-rated nations, while a “persistent current account surplus,
underpinned by remittance inflows” has made the country a “net creditor” from its previous deficit position.
Fitch also noted the economy’s 6.6-percent economic growth for 2012 and the expected strong growth for
2013, both of which are “stronger and less volatile” that BBB-rated peers over the last five years.
“Improvements in fiscal management begun under President Arroyo have made general government debt
dynamics more resilient to shocks,” Fitch said. [Source: Daxim L. Lucas, Philippine Daily Inquirer, March
27, 2013*]
In May 2013, Standard & Poor’ increased the Philippines a long-term sovereign credit rating of “BBB” from
“BBB-“, and upgraded its short-term rating to “A-2” from “A-3”. “The outlook is stable. “We raised the
ratings because we now believe the ongoing reforms to address shortcomings in structural, administrative,
institutional, and governance areas will endure beyond the current administration,” Standard & Poor’s credit
analyst Agost Benard noted in an e-mailed statement to reporters. [Source: Danessa O. Rivera, GMA News,
May 8, 2014*]
GMA News reported: “The debt watcher also noted the upgrade “reflects the country’s strong external
liquidity and international investment position, combined with an effective monetary policy framework
relative to the country’s income level,” while maintaining low inflation and interest rates. Malacañang said it
was “gratified” by the latest credit rating upgrade from S&P.
“And we are hopeful that this will eventually translate into increased investments, and accelerated jobs
generation,” Presidential Communications Operations Office head Herminio Coloma Jr. said. The Aquino
administration is ”committed to strengthen public institutions, and build increased capacity among citizens
and communities, and thereby promote the attainment of inclusive growth. This is the path that leads to
sustained economic development and the raising of the Filipino people’s quality of life,” Coloma added.
“The Philippines remains as one of the best performing economies in the Asian region in the fourth quarter
of 2013, second only to China, which grew by 7.7 percent, Balisacan said. On the supply side, the services
and industry sectors continued to be the drivers of economic growth, expanding by 7.1 percent and 9.5
percent in 2013, respectively. “The services sector contributed 3.6 percentage points of the real GDP growth
in the fourth quarter of 2013. This was followed by the industry sector with 2.8 percentage points and
agriculture with 0.1 percentage point. Fourth-quarter growth on the supply side was mainly propelled by
manufacturing, trade, finance and Real estate,” Balisacan said.
“Meanwhile, on the demand side, growth was boosted by household consumption, which contributed 4.2
percentage points, and net exports, which contributed 1.6 percentage points. Despite the better-than-
expected growth, however, some sectors tamed overall growth for 2013, Balisacan said. “Construction had
the biggest setback in the fourth quarter. The subsector contracted by 0.8 percent due to stricter rules
imposed on real estate lending in compliance with prudential regulations. The Board of Investments has also
tightened mass housing incentives. The rule requiring developers to allot 20 percent of their total housing
investment for low-cost mass housing units is now being closely monitored and enforced.”
“Government spending also slowed down by 5.2 percent, dipping from the 9.5 percent growth posted in the
fourth quarter of 2012. The deceleration was due to lower disbursements in personnel services and
maintenance and other operating expenditures. For the full year, however, government spending jumped by
8.6 percent. Imports also slowed down by 1.9 percent during the last quarter of 2013 from the 8 percent
posted in the same period in 2012.”
“Aside from slowdowns in certain sectors, the combined impact of typhoons and other disasters may have
also reduced the full year real GDP growth by at least 0.1 percentage point, Balisacan said. Looking
forward, Balisacan said the agriculture and industry sectors are expected to be vibrant this year, as the
government promotes linkages between the two sectors to increase value added as a key strategy identified
in the Philippine Development Plan midterm update. Major infrastructure projects, especially in the
transport sector are also expected to boost growth this year and beyond. We are optimistic that the Philippine
economy will remain strong in 2014, especially that the outlook on the global economy is becoming more
favorable and as the domestic economy remains robust,” he said.
Philippine Economy Grows 7.2 Percent in 2013
Beating government expectations, the Philippine economy expanded by 7.2 percent in 2013. Combined with
2012 Philippines experiences its strongest two years of growth since the 1950s. Karl Lester M. Yap and
Cecilia Yap of Bloomberg wrote: “Gross domestic product rose 7.2 percent in 2013, the Philippine Statistics
Authority said, after gaining 6.8 percent in the previous year. That was the fastest two-year pace since 1954-
1955, data compiled by Bloomberg show. A recovery in advanced economies may help President Benigno
Aquino achieve his goal of bolstering growth to as much as 8.5 percent by 2016 as he transforms the country
into a manufacturing hub. Rising exports have helped counter the impact of Super Typhoon Haiyan, and the
central bank said today it will act if needed to contain inflation expectations. “The Philippine economy
clearly still has strong momentum despite the typhoon,” said Edward Teather, an economist at UBS AG who
covers Southeast Asian markets from Singapore. “That sort of strength in the context of an acceleration in
developed nations increases the risk of overheating, something policy makers should keep an eye on.”
[Source: Karl Lester M. Yap and Cecilia Yap, Bloomberg, January 29, 2014]
“The Philippines won its first investment-grade scores from Moody’s
Investors Service, Fitch Ratings and Standard and Poor’s last year. Aquino’s pledge to curb corruption and
spur faster growth has seen foreign direct investment almost double to $2.8 billion in 2012 from 2008,
World Bank data show. Consumer spending rose 5.6 percent last quarter from a year earlier, according to
today’s report. Investment gained 5.7 percent, while manufacturing increased 12.3 percent. [Ibid]
Jovan Cerda wrote in philstar.com: “Socioeconomic Planning Secretary Arsenio Balisacan said the
economy grew better than the government’s official target of 6 to 7 percent for 2013, but added that it could
have been higher had the country not been affected by various disasters. “Indeed, growth could have been
better, had we not been perturbed by various disasters that hit the country such as the Bohol earthquake, the
Zamboanga siege and typhoon Yolanda,” he said. [Source: Jovan Cerda, philstar.com, January 30, 2014.
In November 2013, Haiyan killed around 6,300 people in the Philippines and destroyed $2 billion worth of
crops and infrastructure. In October, a 7.2-magnitude earthquake struck the province of Bohol, also in
central Philippines, causing widespread devastation. Balisacan said the effects of Haiyan are “expected to
diminish” while reconstruction efforts in typhoon affected areas should also prop up the economy in the
coming quarters. “We remain confident that we will meet the growth target of 6.5-7.5 percent for 2014,” he
said, pointing out that the Philippines is still poised to become Southeast Asia’s fastest growing economy a
position it held last year.
“S&P gave the Philippines an investment grade rating on May 2, 2013. It was the second upgrade from
practically junk status since Fitch Ratings gave the Southeast Asian country its first ever investment grade
status in March 2013. In a statement Friday, Budget Secretary Florencio Abad said S&P basically validated
the progress in good governance reforms under the Aquino administration. “For one, this credit upgrade
recognizes the gains brought about by the public financial management reforms we have instituted,” Abad
noted “We are on the right track in terms of continuously improving our public spending efficiency,
primarily in ramping up investments for infrastructure projects, among other key priority and substantial
programs and projects,” he added.
Philippine Economy in 2014
Karl Lester M. Yap and Cecilia Yap of Bloomberg wrote: “Aquino plans to increase spending to a record this
year while seeking more than $8 billion of investments in highways and airports to improve infrastructure
and create jobs. San Miguel Corp., Ayala Corp. (AC) and Megawide Construction Corp. are among
companies building schools, power plants and roads. The government estimates reconstruction of the
typhoon-affected areas will cost 361 billion pesos ($8 billion). [Source: Karl Lester M. Yap and Cecilia Yap,
Bloomberg, January 29, 2014]
Disasters slowed the Philippine economic growth down to 5.7 percent in 1 st quarter of 2014. Cliff Venzon of
Nikkei wrote: “Philippine economic growth slowed a year-on-year to 5.7 percent in the first quarter of 2014,
as natural disasters weighed on production, the government reported. This makes the Philippines the third-
fastest growing economy in Asia after China (7.4 percent) and Malaysia (6.2 percent), National Economic
and Development Authority Secretary Arsenio Balisacan said in a briefing. The growth, the slowest since the
fourth quarter of 2011, was also below market and government expectations. Meanwhile, the January-March
expansion was driven by the services and industry sectors, which climbed 6.8 percent and 5.5 percent,
respectively, the Philippine Statistics Authority said. Balisacan said natural disasters that hit the country late
last year –particularly typhoon Haiyan – pulled economic growth down. “The effects of the typhoon went
beyond the Yolanda-affected areas through the supply chain,” Balisacan said, using the local name for
Haiyan. “That affected investment plans of companies and individuals…so private construction suffered in
the first Quarter,” he added.
 Chapter 3: RESOURCE UTILIZATION

Economics
Economics has been discussed and described by scholars in number of satisfying ways:
...studies the efficient allocation of the scarce means of production toward the satisfaction of human wants.
(Slavin)
…a social science concerned with using Scarce resources to obtain maximum satisfaction. (Walstad and
Bingham, 1993)
...the study of how societies use scarce scarce resources to produce valuable commodities and distribute
them among different people. (Samuelson and Norhaus, 1992)
...the study of production, distribution, selling, and use of goods and services. (Collin, 1997)
...the study of how people use their limited resources to try to satisfy unlimited wants. (Parkin and Bade,
1991)
Economics is the study of how society uses its scarce resources to satisfy unlimited wants and needs.
According to The Economist website, the most concise definition of Economics is: the study of how society
uses its scarce resources defined by Thomas Carlyle, a 19th-century Scottish philosopher and writer.
Economics, thus, lay emphasis on the need to take full advantage of our material output given an amount of
resources, crucial truth however, these resources are only limited suffering from SCARCITY-- the
imbalance between human needs and wants, and the means of satisfying those, considering this as the
central economic problem.
Human desires are never ending whether it is a need or a want, especially now where different
innovations has been taking the spot of everyone’s attention. Nobody could deny the fact that the world is on
a fast-pacing regime due to the advent of new technologies. The primary problem is, there are never ever
enough resources to produce all of the goods and services that people want. This is where economy plays its
role.
An economy relates the study of human action and how people should make choices. It is a system
for organizing the allocation of resources to produce and distribute the goods and services to satisfy human
wants. The more proficient and flexible the economy is, the more wants we can satisfy.
The Concerns of Economics
Since economics emphasizes on maximizing the scarce resources, it concerns the production,
distribution and consumption of goods and services. This is vital because once re-sources have improperly
managed, people had lost their opportunity to enjoy one’s benefit. In a market economy, each of these
resources is traded in exchange for a type of income. We sell these resources to make income with the very
purpose of satisfying our wants.
Production
Production is the creation or addition of utility – total satisfaction received from consuming a good
or service. In order to create production, there must be usage of economic resources. Economic resources
are the goods or services available to produce valuable end user products, also called factors of production.
Land, in economic term, is not just the mere land we thought it was. It includes natural resources
such as minerals, oil, coal, soil, water and the ground in which these resources are found. This is
used in the economy through extraction (mining) and agriculture. It also provides site for factories,
office, hospitals, schools and universities, homes, etc. Moreover, owners of land receive rentals
through leasing of their properties. Economic rent is money received from something that is given by
nature, rather than produced by human effort.

Labor is the work, time and human effort included in the production. For instance, a manufacturing
plant would hire their own production team as well as staffs and supervisors, etc. so that they could
generate revenue through processing raw materials to finished products. This people are being paid
for their work rendered via wages and/or salaries.
 o Wage is a compensation based on the number of hours worked multiplied by an hourly rate
of pay. A factory worker might work 40 hours during the work week and has a rate pay of
Php37 per hour. Thus, he will receive a paycheck showing gross wages of Php1, 480 (40 x
Php37). If the worker had rendered only 30 hours during that week, his paycheck will show
gross wages of Php 1,110 (30 x Php 37).
o Salary, however, is compensation quoted on a monthly or annual basis. The manager of the
factory might earn a salary of Php 420,000per year. If the manager is paid semi- monthly his
paycheck will show gross salary of Php17,500 for the half-month. Generally, the hourly-paid
employees will earn wages: at a quoted rate for the hours in excess of 40/week (25% for
Normal Day: 30% for Holidays/ Rest Day). The salaried employees in high pay positions are
not likely to receive additional pay for the hours in excess of 40/week.

Capital, in layman’s term, is the money used by entrepreneurs to run their business. However, in
economics, it is defined as – human-made’ goods used to produce other goods or services. A
productive asset such as office buildings, stores, factories, equipment, and software that unlike the
natural resources is man-made and employed to generate income. The income owners of capital
receive what is called interest. The purchase of new capital software is financed through loans, so the
lender earns interest from its productivity.

Entrepreneurial ability is the effort to organize the production process. The entrepreneurs are the
people who are responsible in combining the three other economic resources. They occupy a central
position in the economy because they are the one who stimulates all economic activity to earn profit.

Distribution
Distribution is the allocation of the total product (money incomes) among factors of production. In
general theory, each unit of output corresponds to a unit of income.
Land– RENT
Labor- WAGES
Capital – INTEREST
Entrepreneurship – PROFIT
The idea of distribution is concerned with the assessment of the services of the factors of production.
In this sense, the theory of distribution is most likely could be understood as a theory of value. We
determine the prices not of the factors of production but of their services. For instance, it is not size of the
land which is traded, but rather the services it could offer. Thus, rent is not the price of land but the value of
service or use of land; wages/salaries, the value of the service of labor; interest, the value of the use of
capital, and profit, the return of entrepreneur’s services.
Consumption
Consumption is the utilization of a good or a service for one's very own satisfaction. Without it,
there would be no need for production and distribution since the goal of economics is to suffice the
consumer wants and needs. It deals with the concept of destroying utility.
For instance, when a student has eaten his packed lunch, he has changed the form of the product
(food). In economic sense, he has destroyed its utility by eating it, thus the food has been consumed.
However, not all destruction of utility implies consumption. When a house was destroyed due to negligence,
it is not consumed economically because one's satisfaction was not sufficed. Thus, the emphasis of
consumption is the satisfaction of human wants rather on the destruction of utility.
Opportunity Costs
Our economic drawback is that we merely have limited resources to satisfy relatively unlimited
wants. There are never enough resources to suffice everything that everyone wants. Therefore, humans must
make a choice. Opportunity cost is the foregone value of the next best alternative -- the value of things we
give up.
 If we prefer to hang out with our friends over staying at home to study, the opportunity cost would be
the value of the benefit we might get for studying at home. We weigh the costs and benefits of various
options, including opportunity costs, though sometimes, this cost cannot be expressed in terms of money.
Economists assume that we pick the choice we find more of value. In the economic world, both is
not applicable because we only have limited resources, as so as with time. Whichever option is chosen, you
will miss the value of the other options.

Production Possibilities Curve

Production Possibilities Curve is a curve that illustrates the production possibilities for the economy.
A production possibilities curve represents the frontier of the economy's production abilities. As a frontier, it
is the maximum production possible given obtainable resources and technology.
Illustration:
Suppose that a company that produces candies and chocolates uses the given schedule.
Production Schedule for Two Product Economy
Candies Chocolates
15 0
14 1
12 2
9 3
5 4
0 5

16

14

12

Candies 10

4
Chocolates
2

0 Plotting the
0 1 2 3 4 5 6
values in the PPC, we will
be able to understand the relationship between the production variables.
Producing on the PPC means that resources are fully employed, while producing inside the curve
means resources are unemployed. The law of increasing opportunity cost is what gives the curve its
distinctive bowed shape. The Production Possibilities Curve represents our economy at full employment and
full production.
Prepared by: Rhia Joy C. Lope
(BSED- SS 2)

Full Employment and Full Production

Full Employment
Full employment is when a society’s available human resources are being maximized efficiently. It is a
condition of an economy in which all qualified people who want to work can find employment at customary
wage rates.
However, it does not imply 100 percent employment since allowances must be made for frictional
unemployment and seasonal factors. Generally, a 4 to 6% unemployment rate is considered full
employment. There will always be a small percent-age of the labor force who are between jobs. In the
Philippines, the rate of unemployment has lowered to 5.8% from 6.6% last year (2015).

Full Production
Full production is when resources are being allocated in the most efficient manner. All employed
resources are used so that they provide the maximum possible satisfaction of our material wants. Full
production can include physical resources (land and capital) and human re-sources (labor and
entrepreneurial ability). Generally, an 85-90% capacity utilization rate is considered full production of a

nation's capital.

Underemployment of resources lowers the productive output of the nation as a whole.

Unemployment and low capacity utilization mean that society is not allocating its resources efficiently in
order to maximize output. An unemployment rate greater than 5% is considered under-employment of our
labor resources.
A capacity utilization rate less than 85% is considered underemployment of our capital resources.
Employment discrimination excludes members of particular groups from particular jobs. Society loses out
when people are kept from being fully productive.
Productive Efficiency
Productive efficiency occurs only when we are operating on the production possibilities curve. It
means that the output of one good cannot be attained without reducing the output of some other good.
Productive Efficiency is an economic level at which the economy can no longer produce additional amounts
of a good without lowering the production level of another product. It is the ability to produce a good using
the fewest resource possible. Thus, this is concerned with production of a particular mix of goods. And
services most wanted by society.
 Low of Increasing Cost -As the output of one goods expands, the opportunity cost of producing
additional units of this good increases. Example, you give up fewer units of candies to get 1 unit of
chocolates up top.

Economic Growth
Economic growth is an increase in the capacity of an economy to produce goods and services, compared
from one period of time to another. Economic growth can be measured in nominal terms which include
inflation or in real terms which are adjusted for inflation. For comparing one country's economic growth to
another, GDP or GNP should be used as these take into account the population differences between two

countries.
SUMMARY
Resources utilization is a system of economics where the basic inputs to production are equitably
utilized. The objective to take full advantage of the scarce resources or supply from which benefit is
produced.
Economic resources (factors of production) may be classified as either physical resources (land and
capital) or human resources (labor and entrepreneurial activity). These factors are produced distributed and
consumed mainly for the purpose of human satisfaction. However, despite the desire to suffice all human
wants and needs, this would not be possible. Thus, people must make a choice over the things he's after.
The value of the foregone alternative is what we call the opportunity cost. This cost could be best
demonstrated through Production Possibilities Curve (PPC) which shows how available resources could
maximized and how choices affect our consumption. The curve also demonstrates full employment and full
production. As long as we operate along the curve, productive efficiency is met.

Chapter 5: DEMAND, SUPPLY, AND EQUILIBRIUM

Demand
Demand is an economic principle that refers to a consumer's desire and willingness to pay for a specific
good or service. It is the relationship between the quantities of a good or service consumers will purchase
and the price charged for that good.
Demand is not simply a quantity consumers wish to purchase such as '15 chocolates' or '7 books',
because demand represents the entire relationship between quantities desired of a good and all possible price
charged for that good.
The specific quantity desired for a good at a given price is known as the quantity demanded.
The law of demand states that, the quantity demanded for a good rises as the price falls
The law of demand states that, ceteribus paribus (latin for 'assuming all else is held constant'), the
quantity demanded for a good rises as the price falls. In other words, the quantity demanded and prices are
inversely proportionate.
Examples of Quantity Demanded:
 When the price of a chocolate is Php80 the quantity demanded is 300 chocolates a week; if the
price of a chocolate falls from Php80 to Php50, the quantity demanded will rise from 300 to 400
chocolates.
Demand Schedule:
A demand schedule is a table that shows the relationship between product prices and quantity demanded.

Demand Curve:
A demand curve is simply a demand schedule presented in graphical form. It shows the quantity
demanded at different prices.
Demand curves are drawn as ‘downward sloping’ due to this inverse relationship be-tween price and
quantity demanded. When there is a change in quantity demanded there has a movement along the curve.
The X-axis represents the quantity buyers are willing and able to pay at a given price. Further, the Y-axis
represents the maximum price the buyers are willing to pay for a given unit.

Individual Demand
The individual demand is the demand of an individual or any entity considered as one. It is the quantity
of a good that a specific consumer would purchase at a specific price point at a specific point in time.

Market Demand
Market demand supports the total quantity demanded by all consumers. It is an important economic
indicator because it displays the one’s market competitiveness, a purchaser’s willingness to buy certain
products, and the ability of an entity to leverage in a competitive environment. If market demand is low, it
signals to a company that they should lay off a product or service or consider redesigning it.

Change in Demand
There is a change in demand when the change alters the quantity demanded in a given price, vice versa.
When it happens, there is a shift in the entire demand curve. The following are considered as demand
shifters:

1. Consumer Income - Generally, when the price of a good falls demand also decreases because the
consumer can maintain the same consumption for less expenditure, providing that the good is
normal. However, when the good is considered inferior the demand for this good increases as the
price falls.

2. Prices of Related Goods - When the price of a good falls because the product is now relatively
cheaper than an alternative item and some consumers switch their spending from the alternative good
or service the demand for substitute increases. Conversely, when the good is considered as a
complement of the good which the price has fallen, the demand for this good also falls.

3. Population - Basically, demand changes when the number of buyers changes.

 4. Expectations - higher price for a good in the future increases current demand for that good.
Consumers will adjust their current spending in anticipation of the direction of future prices in order to
obtain the lowest possible price.

 Alfred Marshall
A great English economist who came up with the idea of the law of demand and supply. According to
him, prices are set through the forces of demand and supply as same as the cutting done by two blade s of
scissors. Just as you need two blades in order for the scissor to function, as so as to

Prepared by: Christy A. De Asong

(BSED Social Studies-2)
Supply

Supply is the total quantity of a good that is available for purchase at a given price. It is the
relationship between the quantities of a good or service consumers will offer for sale and the price charged
for that good.
Supply is not simply the number of an item available in the market, such as '5 chocolates' or '17
books', because supply represents the entire relationship between the quantity available for sale and all
possible prices charged for that good. The specific quantity desired to sell of a good at a given price is
known as the quantity supplied.
The law of supply states that, ceteribus paribus (latin for 'assuming all else is held constant'), the
quantity supplied for a good rises as the price rises. In other words, the quantity demanded and price are
directly proportionate.

Examples of Quantity Supplied:

 When the price of a chocolate is Php80 the quantity supplied is 300 chocolates a week.
 If the price of a chocolate falls from Php80 to Php50, the quantity supplied will fall from 400 to 300
chocolates.

Supply Schedule:
A supply schedule is a table that shows the relationship between product prices and quantity
supplied.

Price Quantity Supplied

Php 140 500
Php 110 400
Php 80 300
Php 50 200
Php 20 100

Supply Curve:
A supply curve is simply a supply schedule presented in graphical form. It shows the quantity
supplied at different prices.
Supply curves are drawn as 'upward sloping' due to this positive relationship between price and
quantity supplied. When there is a change in quantity supplied there has a movement along the curve.
 The X-axis represents the quantity sellers are willing and able to sell at a given price. On the other
hand, the Y-axis represents the maximum price the sellers are willing to sell for a given quantity.
Change in Supply:
There is a change in supply when the change alters the quantity supplied in a given price, vice versa.
When it happens, there is a shift in the entire supply curve. The following are considered as supply shifters:

1. Technological Innovation - lowers costs and increases supply which means that sellers are willing
to supply greater quantity at a given price or equivalently they are willing to sell a given quantity at a
lower price.
2. Input Prices- an increase in the price of input decreases supply because of higher costs incurred.
3. Taxes and Subsidies - Tax increases cost and also considered as an input price. Subsidy is
equivalent to a decrease in the firms cost and therefore increases supply.
4. Expectation - higher price of a good in the future increases the cost of supplying now and thus
decreases current supply.
5. Entry/Exit of Producers - as producers enter or exit the market, the number of sellers' changes,
directly influencing supply.
6. Opportunity Cost - inputs in production have opportunity cost and sellers will choose to employ
those inputs in the production of the highest priced goods.
7.
Price Floor and Price Ceilings

Price Floors and Price Ceilings are examples of regulations established by government intervention
to avoid loss and taking advantage of opportunity in the market.

Price Floor

Price Floor is the minimum market price set for a certain

commodity established to prevent manufacturers in instituting
prices that would ruin the market economic system.

For instance, different rates of mini-mum wages are

implemented in different geographic area in accordance to the
lifestyle of the household in the location. This is settled to
assure that the individuals are able to suffice one's staple and
afford provision of needs. When a city establishes a wage lower
than the minimum, the tendency is that businessmen would
invest more in that city because of lower cost of labor.
 Thus, taking away the opportunity from other cities to be competitive in terms of their labor market.
Moreover, if minimum wages are fixed all throughout the country the tendency is households would transfer
to the area that has lower cost of lifestyle to increase their wealth and savings.

Price floor is only an issue when they are set above market clearing price because once it is set
beyond the market price; there is a chance of excess supply (surplus). When it occurs, manufacturers might
produce more quantity unknowingly, customers might not buy those goods at the higher price and thus,
those goods will remain unsold.
Price Ceiling

Price Ceiling is the minimum market price set for a certain

commodity and services that is believed to be sold at an
unreasonable high price. It only becomes a problem when they are
set below the market equilibrium price because there would be
excess demand or a supply shortage. Manufacturers won't produce
as much and consumers will demand more.

Equilibrium
Equilibrium refers to a situation in which the price has reached
the level where quantity supplied equals quantity demanded.
Surplus exists when there is an excess in supply. In this case,
suppliers should lower the price to increase sales, thereby moving to
the equilibrium.

SUMMARY

Demand and supply are the market forces that affect prices in the market. Demand represents the
standpoint of consumers while supply represents the standpoint of manufacturers. To better understand the
concepts, we must also have an understanding of its law through analyzing the schedule and its curve. Also,
we must also understand that there are other factors affecting the quantity demanded and quantity supplied.
We must also take into consideration the price ceilings and price floors established by law, because it also
affects our decision in settling with prices. Moreover, to compare supply and demand, and be able to suffice
ones needs without any excess, we must also understand their equilibrium relationship.

CHAPTER 6: ELASTICITY

Elasticity
What is Elasticity?
Elasticity is the amount of a variable’s sensitivity upon change of a further variable. Economically,
elasticity refers to the degree of change of individual demands in reaction to price or income changes.

The formula for computing elasticity of demand is:

Percentage change∈quantity demanded

Ep=
Percentage change ∈ price

If the elasticity is greater than 1, the demand is elastic. It means that quantity changes faster than the
price. If the elasticity is less than 1, demand is inelastic – quantity changes slower than the price. If the
elasticity is equal to 1, elasticity of demand is unitary where quantity changes at the same rate as price.
Elasticity of demand is a significant variation on the concept of demand and can be classified as elastic,
inelastic, or unitary.
Elastic Demand
Quantity demanded extremely reacts when there is a change in price. An example of products with
an elastic demand is those goods not frequently purchased, such as appliances and furniture and can be
deferred if price rises.
Substitutes of a product affect the elasticity of demand. If a product can be easily substituted
certainly by another product, consumers will merely shift purchases when there is a price increase/decrease
for both goods. For example, poultry and fish are both meat products. When there is a diminishing price of
poultry, consumers will shift in buying fish to save costs. So products with close substitutes tend to have
elastic demand.
When the price increases from Php8 per unit to Php10 per unit, the quantity sold decreases from 50
units to 30 units. The elasticity coefficient is 1.6.
Inelastic Demand
A change in price results in only a small change in quantity demanded. Simply, the quantity
demanded is not very responsive to price changes. Examples of this are daily necessities such as food. When
the price of food increases, consumers will not reduce their food purchases, granting there may be shifts in
the types of food they purchase.
When the price increases from Php8 per unit to Php10 per unit, the quantity sold decreases from 50
units to 45 units. The elasticity coefficient is0.4.
Unitary Elasticity
A change in price will result to an equal percentage of change in quantity demanded. Thus, the
elasticity coefficient is equal to one.
When the price decreases from Php8 per unit to Php4 per unit, the quantity sold increases from 20
units to 40 units. The elasticity coefficient is 1.
Total Revenue
The total revenue a firm obtains is the price of the good multiplied by the quantity sold.
Total Revenue = Price x Quantity Sold
Assume that a firm increases the price of its good, there would be a price or quantity effect. When
price increases, each unit sold sells for higher price, which tends to raise revenue.
However, there is no assurance that the consumers will patronize the goods as same as before. Thus,
after a price increase, fewer units might be sold, which tends to lower revenue.
 The price elasticity of demand illustrates what happens to total revenue when prices changes.
Example:
Suppose the current price of a fish is Php50.00, but that the vendors must raise extra money for
market rent. Will raising the price of the fish toPhp55.00 increase or decrease total revenue?
Suppose 1,000 individuals buy every day at the current price, So total revenue is:
Total revenue=Php50.00x1000=Php50,000.00
Let's look at three cases. The Price Elasticity of Demand is
 Inelastic, Ep = 0.5
 Elastic, Ep = 2.0
 Unit-Elastic, Ep = 1.0
Case I: Inelastic Demand
Suppose the price elasticity of demand is 0.5. What effect will the 10%increase in the fish on total
revenue?
We need to solve for the fish at Php55.00.
We know Ep = 0.5 and Php50.00 = 1000.
So QPhp55 = 950 and total revenue at the higher price of fish is
Total revenue = Php55 x 950 = Php52,250.
Case II: Elastic Demand
Suppose the price elasticity of demand is 2. What effect will the 10% increase in the fish on total
revenue?
In this case, QPhp55 = 800 and total revenue at the higher toll would be
Total revenue – Php55 x 800 = Php44,000.

Case III: Unit-Elastic Demand

Suppose the price elasticity of demand is 1. What effect will the 10% increase in the fish on total
revenue?
A price elasticity of demand of 1 means that an increase in the price leads to an equal percent
decrease in quantity demanded. Thus, if the price
increases by 10%, quantity sold will decrease by 10
percent too. Needless to say, quantity sold at Php55
will be 900 and total revenue will be:
Total revenue – Php55 x 900 = Php49,500.
Elasticity
According to the law of demand, when a
seller decreases his price, he will be able to sell more
goods. However, when the price decreases, it is
lessen for each unit of goods.
 Total Revenue = Price x Output
Php18 = 9 x 2
24 = 8 x 3
28 = 7 x 4
30 = 6 x 5
30 = 5 x 6
28 = 4 x 7
24 = 3 x 8

As we move down the demand curve, elasticity drops while total revenue increases. However, the
increase lasts only until the total revenue reach the maximum. Afterwards, as prices continually drops,
demand becomes inelastic and total revenue decreases.

Income Elasticity of Demand

Income elasticity of demand measures the relationship between a change in quantity demanded for
good and a change in income.
The formula for calculating income elasticity is:
Income Elasticity = % change in demand
% change in income

 Normal Goods
Normal goods are goods that have proportionate response on its demand as income changes. These
goods have positive income elasticity. Example might be luxury items; as the in-come level increases, more
people buy or demand them.
 Inferior Goods
Inferior goods are the goods that have inverse response on its demand as income changes. Thus, it
has negative income elasticity. Typically, inferior goods exist when high class or superior goods are
available in the market. An example of an inferior good is public transportation. When consumers have less
wealth, they may forgo using their own forms of private transportation in order to cut down costs.

How do businesses make use of estimates of income elasticity of demand?

Luxury items with high income elasticity has greater sales impulsiveness over the business cycle
compared to necessities where demand from consumers is less sensitive to changes in the cycle. Thus,
enough understanding of income elasticity of demand helps firms predict the effect of an economic cycle on
sales.
As one’s wealth become better, they can afford increase in spending on various goods and services.
Cross Elasticity of Demand
Most of the times, the demand for one good is influenced by price changes of other goods. It is
calculated by taking the percentage change in the quantity demanded of one good over the percentage
change in price of the substitute good. Thus, cross elasticity of demand is an economic concept that
determines the degree of sensitivity in the quantity demanded of one good when a change in price takes
place in another good.
 Cross elasticity of demand is an economic concept that determines the degree of sensitivity in the
quantity demanded of one good when a change in price takes place in another good.
EAB = Percentage change in quantity of A demanded
Percentage change in price of B

Since the demand for a substitute good will always increase when the price for the other good
increases, the cross elasticity of demand for these goods will always be positive.
Let’s take coffee and a substitute drink tea as an example. All other things equal, when the price of
coffee increases, the quantity demanded for tea will increase as consumers switch to an alternative.
On the other hand, the coefficient for compliments will be negative. At this point of time, let’s use
coffee and creamer as an example. When the price of coffee increases the quantity demanded for creamer
will drop as consumers will purchase fewer. If the coefficient is 0, then the two goods are not related.
Elasticity of Supply
The analysis and calculation of elasticity of supply is similar to elasticity of demand, except that the
quantities used refer to quantities supplied instead of quantities demanded.
Supply elasticity is the ratio between change in quantity supplied and the percentage change in price.
= Percentage change in quantity supplied
Percentage change in price

Ability to switch to production of other goods, ability to go out of business, ability to use other
resource inputs and the amount of time available to respond to a price change are the factors that influence
the elasticity of supply.
SUMMARY
Elasticity refers to the degree of sensitivity of individual demands in reaction to price or income
changes. This is important so that we know how demand would react in times of price/income change.
Elasticity may be elastic, inelastic or unitary depending to the coefficient that we calculate from certain
formula. The total revenue is also a related concept to elasticity. It is the amount a firm obtains on its
production. Elasticity would help manufacturers decide in their operations since it would help them calculate
the amount of return they could get along with a specific change. Moreover, income elasticity helps
businesses predict the effect of an economic cycle on sales. Cross elasticity, however, focuses on the
influence of change of price of other goods to determine the change in demand. Elasticity of supply uses the
same concept with demand with mere variations in the kind of quantity.