LESSON 5 ECONOMICS TWO CATEGORIES OF POVERTY

INTRODUCTION TO APPLIED ECONOMICS ABSOLUTE POVERTY

BASIC ECONOMIC PROBLEMS CONFRONTING It is the lack of income to buy the basic food
THE DEVELOPMENT OF THE PHILIPPINES IN and necessities for subsistence living and can
THE 21ST CENTURY be measured in terms of POVERTY
THRESHOLD and POVERTY
The PHILIPPINES is confronted with several issues
INCIDENCE.
and problems which prevent its citizens in realizing
a meaningful life and pushing its socioeconomic
 POVERTY THRESHOLD
development.
It is the income needed to purchase the
Its people have insufficient resources to afford the minimum nutritional requirements and
basic goods and services, limited freedom in their other basic necessities for daily survival.
choices of employment and consumption and low self-
esteem that weakens them.
During the first semester of 2014, the per capita food
NOTE: The quality of human resources as well as its threshold was estimated at PHP 10, 534 per year or
inadequate infrastructure is constraining the approximately PHP 29 per day. This means that an
economy to grow faster. individual needs PHP 29 daily to meet the minimum
food intake for survival. Those below this threshold
The Pantawid Pamilyang Pilipino Program (4Ps) is a are considered poor since they cannot even have the
conditional cash transfer program that aims to income to purchase the minimum nutritional
alleviate poverty. Discuss the positive and negative requirement for daily subsistence.
sides of the policy in a class forum.
 POVERTY INCIDENCE
It is the proportion of households in the
POVERTY AND UNEQUAL DISTRIBUTION OF country with family income lower that the
INCOME poverty threshold or poverty line.

POVERTY During the first semester of 2014, the poverty

incidence was estimated at 20% of all families and
It is a restricting condition experienced by 25.8% of all population. These proportion show a
millions of families that prevents them in slight decline from the poverty incidence recorded in
attaining the minimum level of consumption previous years as shown in Table 1.1.
for subsistence living.
NOTE: Families with limited or without resources
cannot earn sufficient income that can provide the
minimum nutritional requirements for daily living
and the basic necessities of clothing and shelter.
For Example …
POOR FAMILY
1. Faced with limited economic opportunities.
2. They have limited schooling and they are RELATIVE POVERTY
often unskilled and cannot find decent and
- It refers to the structure on how the national
sustained employment.
income is being distributed among
3. They have no funds and cannot have access
households in an economy.
to credit.
4. They cannot even start a small livelihood
project.
 NATIONAL INCOME
5. Not properly trained and monitored in
It is the total value a country’s final output
managing these resources they end up
of all new goods and services produced in one
consuming the resources that were supposed
year.
to give them continued income in the future.
 HOUSEHOLD
All persons living under one roof or
NOTE: There are various interventions being
occupying a separate housing unit, having
implemented by various economies including the
either direct access to the outside (or to a
Philippines in addressing the problem of poverty.
public area) or a separate cooking facility.
Where the members of a household are For Absolute Poverty …
related by blood or law, they constitute a
family. The immediate intervention is to provide
free meals, housing and adequate clothing.
NOTE: Poor households from the perspective of
relative poverty do not necessarily mean that they do But these measures are temporary gap
not have sufficient income to purchase the minimum measures and do not provide long terms
requirements for daily survival. solutions to the problem of poverty,
NOTE: Some economists have suggested that there is
need to provide resources including credit, skills and
RELATIVE POVERTY is measured by the entrepreneurial training and cash transfers and all
LORENZ CURVE and GINI COEFFICIENT. these measures have to be implemented together if we
want households to graduate from their poverty
LORENZ CURVE
status.
Shows the share of the various household
For Example …
groups (ranked from the poorest to the richest)
on the total income. A poor household is given a resource like a
livestock or a sari-sari store without the other
interventions, there is a chance that the resource
enhancing program may not succeed.

For Relative Poverty …

Measures like progressive taxation, income
transfers and other programs meant to
improve the income distribution can be
implemented.
For Example…

INCOME DECILE  Senior Citizen Discount

Discounts given to senior citizens in their
It shows the average income for different purchase of goods who are mostly retired
income groups in society. A decile splits the individuals.
population (by households) into 10 equal
parts.  Subsidies and grants given to students from
GINI COEFFCIENT poor households so they can enroll in state

A measure of income inequality derived

from the Lorenz Curve. Perfect equality is
indicated by the value 0 and perfect
inequality has a value of 1.

universities and colleges.

 temporarily or permanently to countries
experiencing slow population growth and
deficiency in labor services.
NOTE: The optimist also view that population
growth is not the cause of environmental
degradation but the excessive demand of people in
 The non-payment of income tax below a highly developed countries.
certain income threshold is another initiative
meant to improve income distribution and There are several explanations on the growth of the
mitigate relative poverty. population of a country but the economic perspective
uses the economics of childbirth as a basis of
analysis. This interpretation looks at the benefits and
NOTE: As the country makes the most of the costs of having a child.
opportunities offered by the 21st century, the
Philippines need to reduce absolute poverty
significantly and craft distribution of income. Only POOR FAMILIES VS. RICH FAMILIES
then can we say that fruits of economic prosperity
POOR FAMILIES tend to have large families
have been shared and growth has been inclusive.
because they consider additional children as
investments that can assist them in the future.

DEMOGRAPHIC CHANGES AND ITS RICH FAMILIES do not consider children as

ECONOMIC IMPLICATIONS investments that can enhance family income in the
future. Instead, they derive intrinsic joy in having
Note: The Population of the Philippines has been children not because they can help in the future but
increasing over several decades. In 1960, the country they give meaning to family life.
has enumerated 27 million people. In 2015, the
population estimate for the country has reached 102 • One of the implications of an expanded
million people. After 65 years we have an increased population is the enlargement of the labor
our population by 75 million and considered the 12th force in the future. If the economy is growing
largest country in the world. very fast, the increase in the labor may not be
an issue.
• However, if the economy is not growing as
ECONOMIC IMPLICATIONS OF fast as the growth of the labor force, the
DEMOGRAPHIC CHANGES problem of unemployment may occur.
1. Given the limited arable land in the country, it
has been argued that rapid population growth will
reduce the available land per person and can put LOW INVESTMENT IN HUMAN RESOURCE
toll on productivity of the agricultural sector. DEVELOPMENT

2. It can reduce the capital-labor ratio and can “The size of the labor force can have positive
limit the growth potentials of the economy. contributions on economic growth and the quality of
human resources has greater growth impact that
3. It puts burden on the government to provide the yields to economic transformation of any country.”
social services including education, health and
housing to an expanding population. NOTE: A highly trained workforce is more
productive than a pool of unskilled workers that can
NOTE: On the other hand, there are those who have be shape by skills training and investment in
an optimistic view on an expanding population. Education.
• Increases in population imply additional
consumers and savers that can expand the
economy while additional laborers can be the ROLE OF THE GOVERNMENT
source of productivity, creativity and
HOW CAN WE DO THAT?
entrepreneurship.
 In modern economies, they pursue the
• Some countries with surplus labor brought
development of knowledge capital rather
about by rapid population growth can move
 than human capital in pushing their  It makes workers less productive
economies forward.
 Reduced national income
 delayed deliveries
Knowledge Capital - is formed through heavy
investments in higher education, science and  missed business opportunities
technology, and research and development
 huge energy consumption
“Even if education and skills training have effects
on the future income streams of individuals and Another example of weak infrastructure…
the government allots billions of pesos in the LIMITED CAPACITY OF ENERGY
provision of education, millions of Filipino youth INFRASTRUCTURE
are still out of school and have limited education
and training.” Consequence: INTERRUPTIONS OF ELECTRICITY

Due to huge opportunity costs of school EFFECT

attendance.
 A negative impact on the performance of the
Another problem of having a limited investment in enterprise.
the formation of knowledge capital…
 Increase the costs of doing business.
Quantity/Quality
MAJOR REASON…
EXAMPLE: The concern of public investment in
 Insufficient funds to finance a huge cost of
higher education is to expand access rather than to
construction.
improve the quality and make universities that
 Construction costs of energy plants to
contribute to the establishment of research and
supply electricity are also very prohibitive.
development for the country.
 Subway for a mass transit in metropolis is
• As long as the government does not recognize very costly.
of the human resource development in
The construction of these infrastructure projects should
economic growth, the Philippines will lag
be done by government because of their function to
behind.
provide public goods and their gestation period.
• Other countries will easily overtake us in
 However, the government has limited funds
developing new products and innovative
for capital expenditures including
processes that will make a more efficient and
infrastructure projects because the large
competitive production and distribution of
portion of the budget is for the operation of
goods and services.
the government agencies and in the
WEAK INFRASTRUCTURE provision of social services.

Similar to the role of human capital on OPTIONS…

economic growth, physical infrastructure
 Borrow from external donors.
facilitates and expands transactions that
 Public and Private Partnership
likewise fuel economic growth.
“Given the current state, there is a need to entice
- There is recognition on the vital contributions
more private sector participation in improving our air
of a strong infrastructure on the economy,
and marine port facilities, enhancing urban
many low income countries including the
transport system and expanding energy production
Philippines have weak infrastructure.
capacity.”
EXAMPLE:
CASE OF THE TRANSPORTATION SYSTEM
With more than 12 million people, there is no
efficient mass transit system in the megacity.
SERIOUS TRAFFIC PROBLEM IN MAJOR
THOROUGHFARES
EFFECT
 NOTE: We buy products for their utility- the
pleasure, usefulness, or satisfaction they give us.

EXAMPLE:

 If a student has PHP 60 to buy a notebook and

the price of the notebook is PHP 15 each, how
many notebooks can he buy?
LESSON 6 – DEMAND
If the price goes up to PHP 20 each, how many
 DEMAND notebooks can he buy for PHP 60?
-Refers to the quantity of a product or service that a
HOW IS THE DEMAND SHOWN?
consumer wants and can afford to buy at a given
price and particular time.  DEMAND FUNCTION
 DEMAND SCHEDULE
 DESIRED + PURCHASING POWER =  DEMAND CURVE
DEMAND

 PRICE  DEMAND FUNCTION

-Most important determinant of the quantity - It shows the relationship of demand and
demanded. price that is said to be contradictory or
-It refers to the amount to be paid for the unit of indirect.
output.
 Quantity demanded is expressed as a
 LAW OF DEMAND "mathematical function" of price.
-It describes consumer’s behavior in response to price
Qd = a - bP
changes.
WHERE IN:
“…when the price of a product or service increases,  Qd - quantity demanded or the dependent
the quantity demand for it decreases. Meanwhile, variable
when the price of a product and service falls, the
amount of demand for it increases…”  a - quantity demand if the price is zero (0) or
horizontal intercept.

 CETERIS PARIBUS
- Latin word meaning all other things remain
constant or no other factor changes except
price.
- Inverse relationship

 (-b) - slope ng demand function.

 - - “The coefficient b is negative to illustrate the
inverse relationship between price and
quantity demanded.”

- P - price (independent variable)

• The demand curve slopes downward.

• This shows that people are normally willing to

buy less of a product at a high price and
more at a low price.

• According to the law of demand, quantity

demanded and price move in opposite
directions.

 DEMAND SCHEDULE
- It is a table showing how many products or
services a consumer wants to buy at different  CHANGES IN DEMAND CURVE
prices in a particular time period.
Change in the quantity demanded due to a price
change occurs ALONG the demand curve.

There is a way to make sure the price is right, if Qd

is to be used. Demand Curves can also shift in response to the
following factors:
P = a – Qd
 BUYERS (# of): changes in the number of
B
consumers
 DEMAND CURVE
- A graphic illustration of the indirect  INCOME: changes in consumers’ income
relationship of price and quantity of the
product to be purchased.
 TASTES : changes in preference or
NOTE: The graph lists prices on the vertical axis and popularity of product/ service.
quantities demanded on the horizontal axis.

Each point on the graph shows how many units of  EXPECTATIONS: changes in what
the product or service an individual will buy at a consumers expect to happen in the future.
particular price.
  RELATED GOODS: compliments and
substitutes.

Changes in any of the factors other than price causes

the demand curve to shift either:

 Decrease in Demand shifts to the Left

(Less demanded at each price).
 Increase in Demand shifts to the Right
(More demanded at each price)

RIGHT:

LEFT:

SHIFT OF DEMAND CURVE PRACTICE

1. The income of the Pago-Pagans declines after a

typhoon hits the island.