Applied Economics Module 6 Weeks

CVE Colleges, Inc.
T.R. Alvarez Subd. Brgy, Del Carmen, Pagbilao, Quezon

Tel No.: (042)797 1692 Email: [email protected]
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TABLE OF CONTENTS
Preface ……………………………………………………………………………………………………………………………………VII
Chapter 1 INTRODUCTION TO APPLIED ECONOMICS

Revisiting Economics as a Social Science
Economics as Applied Science
Basic Economic Problems and Philippine Socioeconomic
Development in the 21st Century
Chapter 2 Application of Supply and Demand Analysis,

Analysis of Demand and Supply
Determination of Prices of Commodities
Contemporary Economic Issues Facing the Filipino Entrepreneur
Chapter 1
INTRODUCTION TO APPLIED ECONOMICS
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 LESSON 1 REVISITING ECONOMICS AS A SOCIAL SCIENCE

 LESSON 2 ECONOMICS AS APPLIED SCIENCE
 LESSON 3 BASIC ECONOMICS PROBLEMS AND PHILIPPINE SOCIOECONOMIC
DEVELOPMENT IN THE 21ST CENTURY
Lesson 1
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REVISITING ECONOMICS AS A SOCIAL SCIENCE

INTRODUCTORY ACTIVITY
Many people have the notion that Economics is unrelated to daily life. Studying Economics in your high
school years, however, has opened your eyes to the fact that Economics is everywhere and that its many
concepts and ideas are applicable in various situations.
Let's try and apply our knowledge of Economics to one significant issue we encounter daily. How can we
relate traffic to what we have learned about Economics? Use the table below as a guide in your analysis'
List down the economic concepts and theories which you think relate to traffic.
List down the economic concept and theories which you think can relate to traffic.
Choose one of these concept or theories and discuss how this explain the occurrence of traffic.
Can you choose concept or theory also help you identify a possible problem solution to traffic? If yes,
discuss your ideas below. If no, choose another concept or theory from your list and discuss.
DISCUSSION
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DEFINING ECONOMICS
Economics refers to the effective management of scarce resources to satisfy unlimited human
wants and needs. It is a social science that studies the means by which individuals, groups, and societies
produce, distribute, and consume products and services.
The origin of the study of Economics is traced to Adam Smith who wrote the book An Inquiry
into the Nature and Causes of the Wealth of Nations in 1776 and started the id. of Economics as a
separate source of knowledge from Philosophy. He outlined the thought that society is based on
interdependence among people. The underlying interconnection, according to Smith, is the movement
of goods and services in relation to the needs and wants of people. Individuals have needs and wants
that they have to fufill, and these ultimately influence their decisions and actions as well as other
aspects of human life such as professions, lifestyles, and social interactions.
As the modern economy is primarily defined by knowledge and technology, the conventional
definition of Economics which focuses on matching scarcity and wants is challenged by the need for
better organization to effectively address scarcity and human wants. As such, economists recognize the
infuence of incentives, choices, and rules in managing an economy. This requires the free flow of
information which will give way to effective decision-making and organization.
Applying this perspective on the issue of traffic, we can see various ways that Economics can
help us understand and address it. For one, the mismatch between the availability of paved roads and
the need for additional roads brought about by the increased number of vehicles is one factor which
brings about traffic. Another aspect of traffic is road management and traffic rules. The inconsistent
implementation of traffic rules and the lack of information regarding road rules are also contributing
factors to traffic. One possible solution PO entice motorists to comply with traffic rules is giving
incentives to motorists who have not committed traffic violations in a year such as discounts on vehicle
registration fees.
Basic Economic Concepts

Scarcity is a fundamental concept of economics. It refers to the limitation of resources,
particularly economic resources such as land, labor, capital and entrepreneurship. if we experience the
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reality of scarcity in various situations, p r lives, our and services. You may have noticed that certain
fruits are only available in the market during certain months. In the months that these fruits are in
season," they are considered abundant; but in the months that they are not in season, they are
considered scarce. You would have loved to wait for several minutes before you can all be seated.
Scarcity results in challenges w' h out. You and your friends may find it difficult to get a table in a
crowded restaurant, thus, you have watch your favorite band perform live but when you went to buy
the tickets, this have sold you out . you and your friends may find in difficult to get in table in a crowded
restaurant, thus you have a several minutes before you can all be seated . Scarcity result in challenge s
with regard to properly allocating these resources to all sectors of the economy.
Unlimited Human Wants and Needs

The concept of scarcity is coupled with the fact that human wants and needs are unlimited.
Economics defines needs as things that are desired which are essential for human survival, while wants
are those that are desired but are not essential for survival.
If you were to list the things that you want to buy, own, and do in life, that list would be endless.
As we fulfill or meet one need or want, we immediately look to meet another need or want, and so on.
For example, waking up in the morning you immediately think of what you want to have for breakfast.
After taking your breakfast, you begin to think of what you want to have for lunch. While eating lunch,
you are already thinking of what you want to have for dessert. Then you start thinking of afternoon
snacks, and eventually, dinner. All of our daily actions are defined by meeting a series of needs and
wants. Another aspect of human wants and needs is the rapidly changing tastes and preferences which
are actually the result of the equally rapidly developing technology. You may have bought a new shirt
this week, but after a month, you start to think of buying a new one because you no longer like the color
or design of the shirt you have bought. You may consider your smartphone to be functional and
attractive, but as soon as a new model is released in the market, you begin to think of replacing your
phone with the new model.
Economic Resources and Factors of Production

Land refers to all natural resources that exist without man's intervention. It encompasses all
things derived from the forces of nature such as air, water, forests, vegetation, and minerals. The
payment for land is called rent.
Labor refers to human inputs such as manpower skills that are used in transforming resources
into different products that meet our needs. The payment for labor is called wages and salaries.
Capital is a man-made factor of production used to create another product. Examples are
machinery and equipment used in manufacturing companies. The payment for capital is interest.
Entrepreneurship is the factor of production that integrates land, labor, and capital to create
new products. An entrepreneur is an individual who makes the decisions with regard to production and
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utilizing the other factors of production. A successful entrepreneur not only creates new products — he
or she also innovates by improving on old ones. These four factors of production are considered to be
scarce or limited. It does not mean we cannot produce more of these; rather, the availability of these
resources is defined by our unlimited needs and wants. For example, despite having numerous
agricultural farms in our country, their production cannot adequately keep up with the demands of a
growing population. This creates a scarcity of resources, particularly in agricultural and food items. The
finite nature of land, labor, capital, and entrepreneurship consequently makes their scarcity, on top of
our unlimited human wants and needs, a universal and perpetual phenomenon.
The Basic Economic Questions and Economic Systems
Since the scarcity of resources is central to the study of economics, it is necessary to properly
allocate these resources to meet people's unlimited wants. This process of allocation answers three
economic questions: What to produce? How to produce? For whom to produce?
1. What to produce?
A society determines the kind and quantity of products it will produce depending on what
the consumers want to buy or are willing to pay for.
2. How to produce?
A society decides who will produce goods and what process of production will be used.
Goods may be produced by corporations, small business-owners, or the government itself.
The process of producing goods may be addressed depending on the costs and the
availability of resources needed.
3. For whom to produce?
The question revolves around the issue of who will benefit from the goods and services
produced. This depends on the distribution of wealth in a particular society. Therefore, a
consumer who has the capacity to pay for certain goods and services is more likely to
benefit than one who cannot afford them.
The answers for what, how, and for whom to produce are influenced by the structure of a
society's economic system. An economic system is characterized by the type of institution responsible
for the management and allocation of resources used in the production of goods and services.
Generally, there are three known economic systems, namely, market economic system, command
economic system, and mixed economic system.
A market economic system is where all economic resources are owned by private entities. Thi
system proposes the following answers to the three economic questions: 1) produce goods that yield
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high profits; 2) produce at maximum efficiency with minimum costs; and 3) distribute the goods to those
who can afford to buy them.
A command economic system is where all resources are owned by the government. The public
question "What to produce?" is answered by producing more public goods like roads, schools, and
public hospitals. The question "How to produce?" is answered by employing all possible laborers and
using available machinery and equipment. The government answers the final question by producing for
the public. Lastly,
The mixed economic system is where all three questions are answered by both the government
and private entities in consideration of their mutual benefit. Economic resources are owned by both.
Today, most countries apply this type of economy but in different proportions some countries employ
an economic system which is more command-oriented than market-oriented, while others have a more
market-oriented economic system.
Decision-making and Rationality

The reality of scarcity means that people have to make choices with regard to the resources that
they wish to use or avail of. Decision making, therefore, is an important aspect of economics. An
important part of economic study is determining how individuals or groups of individuals will behave
given certain changes in the economy. Economics uses the concept of rationality top redict the actions
of people. Rationality is defined as the assumption that individuals are consistent and logical in their
decision-making, and that they seek an outcome that is most beneficial to them. Economists assume
that individuals make decisions rationally and that it is possible to predict certain behavioral outcomes.
The rationality test is one means of illustrating the concept of rationality. For example, if a person
prefers mango over banana, and banana over guava, then it is highly likely that he or she prefers mango
over guava. Given this preference, when this person is faced with a choice between buying a guava
shake and a mango shake, he or she would choose to buy the mango shake.
Opportunity Cost and Trade-off
Refers to the cost are compelled to choose how to manage them efficiently and decide how an
alternative by selecting the second best choice. When resources are scarce or limited. One of the
evident effects of scarcity is opportunity cost. This them will be left unsatisfied. d all the other
alternatives are forgone. And the move we have or a particular good, a particular the more we sacrifice
other things.
One example is when you buy a can of soda. The opportunity cost of buying corresponds to all other
items that can be bought it with the same amount. Let us say that a can of soda cost 30 pesos. With 30
pesos you can buy other equivalent products such as a can of fruit juice or a bottle of mineral water
you can also buy a combination of other items whose prices total 30 pesos. However, once you have
made the decision to buy a can of soda, you have made the choice to abandon all other options. Once
the choice is made, you can no longer go back and undo such choice. This is called a trade-off. Trade-offs
could result in either the satisfaction of needs or a failure to meet them. For instance, you bought that
can of soda and was immediately relieved of thirst upon drinking it. In this scenario, you consider your
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30 pesos well-spent. However, if you were to find the taste of the soda unsatisfactory, you would regret
spending your 30 pesos and wish that you could have made a different choice.
Remember the last time you made a decision from several alternatives? Did you make a good
choice? How will you know that what you have is the second best choice? Opportunity cost encourages
us to be aware of the things that we give up as well as the consequences of our choices in order to make
a good decision when we purchase or avail of a certain product or service.
KEY POINTS TO REMEMBER

 Economics is a social science which studies the production, distribution, and consumption of goods
and services. It is concerned with the effective management of scarce resources to satisfy unlimited
human wants and needs.
 Economics originally focused on studying the interdependence among people, and how society is
defined by the movement of goods and services in relation to the needs and wants of people.
Modern economics, on the other hand, focuses on how information and technology define decision-
making and organization in an economy.
 Scarcity and unlimited human wants and needs are fundamental concepts in Economics. Reconciling
the reality of scarcity with unlimited wants and needs is central to the study of Economics.
 Economic resources and factors of production include land, labor, capital, and entrepreneurship.
These resources or factors must be properly allocated to effectively address scarcity. The process of
allocation is defined by the three economic questions.
 Economic systems are characterized by organized institutions that manage and allocate resources
for production. There are three economic systems, namely, market economic system, command
economic system, and mixed economic system.
 Decision-making is a vital aspect of Economics. Economists use the concept of rationality to analyze
and predict the behavior of people given changes and developments in the economy.
 Opportunity cost refers to the cost of giving up an alternative when making a choice. individual has
made a choice, thereby sacrificing all other alternative choices.
Discuss and Apply
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1. Discuss a personal experience regarding scarcity. What factors brought about this problem and
how were you able to address it?
2. Classify your belongings as either need or wants. List them in a the table below and include an
explanation why you consider them to be needs and wants.
3. What was the most significant “trade-off” or opportunity cost you have incurred in your life?
What lessons have you learned from this experience?
Object Need Want
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PEDERFORMANCE TASK
A. Look for a news article discussing an issue related to scarcity. Discuss the factors that brought about
scarcity based on the article. Conduct research to gain more insight into the issue. Report your findings
in class.
B. Identify examples of the economic systems in Philippine society. Describe how each system addresses
the economic questions.
C. Make a journal detailing how you use your knowledge of economics to address simple problems in
your life. Detail your experiences over a period of one week. Present and discuss highlights of your
experience in class.
D. Identify a significant problem being experienced by your family, community, or school. Use your
knowledge of Economics to explain how this problem came about, and what can be done to address it
Use the table below as a guide.
Problems/Issues
Related Economics
Concept
What gave rise to this

problem?
What are the possible

solution to this problem?
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Lesson 2 ECONOMICS AS APPLIED SCIENCE

INTRODUCTORY ACTIVITY
In October 2016, President Rodrigo Duterte outlined a long-term economic development plan entitled
AmBisyon Natin 2040. This plan outlines a vision of the country's economic development in the year
2040, and is the basis for the Philippine Development Plan (POP) 2017-2022 drafted by the National
Economic and Development Authority (NEDA). It is expected to be the guiding template for succeeding
development plans until 2040. The following are the main goals for economic development from the
POP 2017-2022.
The Filipinos' vision for the Philippines in 2040 is a prosperous, predominantly middle-class
society where there is equality of opportunities and poverty has been eradicated. It will be a society
where people live long and healthy lives with a higher life expectancy at birth of 80 years, Longevity will
be enhanced by the ability of individuals and communities to withstand natural as well as man-made
shocks and disasters. With smarter and more innovative people, the country in 2040 is also envisioned
to be a major player in the global knowledge economy. producing innovative products and processes
that are used to make high-quality goods and services at competitive prices. The Philippines will be a
high trust, more caring, and peaceful society where human security is assured and government enjoys
the people's trust because it is clean, efficient, and service-oriented. High trust will also prevail between
the private sector and the government, as well as between and among peoples, Overall, a high-trust
society will facilitate official and business transactions, and smooth interpersonal relations.
On the kind of life they want for themselves, Filipinos want a life that is strongly rooted,
comfortable, and secure: =Wag, maginhawa, at panatag. The terms "strongly rooted, comfortable, and
secure" used to describe the life envisioned by Filipinos by 2040 reveal middile-class aspirations. They
include home ownership, a steady source of income to support family and self, college education for the
children, a motor vehicle, stable finances to cover daily needs and contingencies, savings for retirement,
and time for vacation and travel. There is also a strong family orientation that underlies the preferences
as reflected in the choice of living and working in the same locality, the desire for adequate spaces that
allow for activities with family and friends, and the desire for access to convenient and affordable
transportation for occasional visits to family and friends, among other reasons. The same value is
reflected in the importance attached to education. Nearly every Filipino family considers college
education a requisite to a decent job and so aspires to have the children complete a college degree. The
desired lifestyle requires a monthly family income of at least P120.000 for a family of four valued in
2015 prices in the National Capital Region. With the right policies, improvements in productivity and
efficiency can more than triple the gross national income per capita of the country in 25 years. This will
allow the majority of Filipinos to enjoy a middle-class standard of living. Without reforms, however, per
capita income can only double over a period of 25 years.
Form a discussion group with three members and discuss the following questions.
1. What are the major goals of the PDP 2017-2022?
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2. Do you believe that these goals are attainable? Which of these goals do you consider to be
attainable by 2022? By 2040? Explain.
3. What economic concepts or theories, in your view, are the bases in formulating these goals?
4. Make a list of economic terms used in the text. How are these terms significant to
development?
DISCUSSION
APPLIED ECONOMICS
The application of economic theory and econometrics in real-world situations is called applied
economics. This field of economics is concerned with using economic theories and models, as well as
related principles and concepts, to understand contemporary socioeconomic issues. Applied economics
considers society as similar to the marketplace, and many social processes and phenomenon such as
social relationships, migration, and social change can be understood in terms of economic concepts such
as demand and supply, exchange, cost and benefits, and profit maximization. Applied economics is
closely tied to public policy and governance, as decision-making often utilizes economic tools and
methods. The primary concern of applied economics is to address problems and bring about economic
development.
Economic Development
Torado (2014) defines economic development as the sustained elevation of an entire society
shelter, health and protection. The absence of one will result in underdevelopment, and people who
experience a lack in their basic needs often experience feeling of helpless and misery.
Self-esteem refers to self-respect. reputation. pride. and acknowledgment. Freedom involves

Freedom also encompass. political freedom, as well . extended leisure and the ability to acquire more
goods and services. In the Philippines, NEDA defines economic development ba.sed on a framework of
include growth. the generation of cm employment, and reduction of poverty. The eradication of
unemployment and poverty is vital in improving the economic condition of the country and ensuring
economic development.
inclusive growth means, first of all. growth that is rapid enough to matter. given the count, large
population, geographical differences, and social comple,ty. It is sustained growth that creates jobs.
draws the majority into the economic and social mainstream, and continuous, reduces mass poverty.
This is an ideal which the country has perennially faller, short of, and this failure has had the most far-
reaching consequences, from mass misery and marginalization. tO an overseas exodus of skill and talent
to political disaffection and alienation. lead, final, to threats to the constitution of the state itself.
(NED, Philippine development 2011-2016
ASPECTS OF ECONOMIC STUDY AND ANALYSIS
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Economic study and analysis requires the application of certain economic concepts anti tools to
understand various economic issues and problems.
Positive and Normative Economics Positive Economics is a principle in economic analysis which
describes what exists and how things work. It strives to give an objective description of the state of
things. Normative Economic, meanwhile, focuses on the outcome of economic behavior, evaluates and
makes judgments... proposes courses of action.
Look at the following examples of positive and normative statements:
Positive: “Taxes enable the government to provide services to the people
Normative: “The government should levy more taxes so it can provide more services to the people”
These two principles are vital tools in studying Economics. ECM..sts apply them to come ”p with
conclusions that will be used to design economic policies and theories.
Theories and Models
A theory is a proposition about certain related variables that explains a certain phenomenon. It
proposes a general principle or body of principles regarding a phenomenon which is deemed
plausible or scientifically acceptable.
Theories and Models
A theory is a proposition about certain related variables that explains a certain phenomenon. It
proposes a general principle or body of principles regarding a phenomenon which is deemed plausible
or scientifically acceptable.
Economic theories seek to explain economic phenomena and processes, and often propose at Model —
a framework or representation of significant principles and describes how variables are related.
Economic models are used by economists to determine the relationships among elements in an
economy, apply principles in varied scenarios, make predictions, and propose solutions. Models also
provide a means to visualize the variables being analyzed. Models
can include graphs, diagrams, or mathematical formulae.
One example of an economic theory is the Population Theory

proposed by Thomas Malthus in 1789. Based on his observations
of statistical data on population growth and food supply, Malthus
proposed a principle that population growth proceeds at an
exponential or geometric rate while food production increases at

an
arithmetical rate. This means that while food production merely

adds to its
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stock, the population multiplies itself at a much larger rate.
Based on this principle, Malthus came up with a model of population
growth representing the relationship between the growing population and the increase in food supply.
Based on his population model, growth Malthus predicted that unless checks to population growth are
implemented, population will increase at a rate that will exceed food supply. The results of unchecked
population growth will be catastrophic. Malthus proposed that to avoid possible catastrophe, society
must introduce "preventive" or "positive" checks on population growth, such as marrying at a later age
or abstaining from sex.
Assumptions in Economics Economists often deal with a lot of information and complicated processes
when they study economic phenomena. Assumptions help them manage information and simplify
economic processes so they could be easily understood and studied. Assumptions aid us in better
understanding economic issues and make sense of the behavior of individuals, groups, and institutions
in an economy. The following are the major assumptions used when analyzing economic phenomena. I.
Rationality. Economists assume that individuals act in a logical and predictable manner, and pursue
goals which will benefit them. 2. Profit maximization. In analyzing the behavior of individuals and firms
in markets, it is assumed that participants expect to gain something from their transactions. Individuals
aim to maximize utility, while firms intend to maximize their profit. 3. Perfect information. In most
markets, it is assumed that consumers and producers have complete and accurate information about
products, services, prices, utility, quality, and production methods. This assumption enables economists
to study market processes and effects of policies on markets more accurately. 4. Ceteris paribus. This
Latin phrase, which means "all things being equal," refers to the assumption which controls the effects
of other variables apart from those that are being analyzed in the study. For example, in determining the
relationship between price and consumer demand, the only two variables being considered are the
quantity demanded and the price of the product. Other non-price variables arc considered to be held
constant and would therefore not affect the behavior of consumers. Majority of economic theories and
models rely on this assumption since it simplifies scenarios and enables the analysis of data.
Assumptions in Economics
Economists often deal with a lot of information and complicated processes when they study
economic phenomena. Assumptions help them manage information and simplify economic processes so
they could be easily understood and studied. Assumptions aid us in better understanding economic
issues and make sense of the behavior of individuals, groups, and institutions in an economy. The
following are the major assumptions used when analyzing economic phenomena.
I. Rationality. Economists assume that individuals act in a logical and predictable manner, and pursue
goals which will benefit them.
2. Profit maximization. In analyzing the behavior of individuals and firms in markets, it is assumed that
participants expect to gain something from their transactions. Individuals aim to maximize utility, while
firms intend to maximize their profit.
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3. Perfect information. In most markets, it is assumed that consumers and producers have complete
and accurate information about products, services, prices, utility, quality, and production methods. This
assumption enables economists to study market processes and effects of policies on markets more
accurately.
4. Ceteris paribus This Latin phrase, which means "all things being equal," refers to the assumption
which controls the effects of other variables apart from those that are being analyzed in the study. For
example, in determining the relationship between price and consumer demand, the only two variables
being considered are the quantity demanded and the price of the product. Other non-price variables arc
considered to be held constant and would therefore not affect the behavior of consumers. Majority of
economic theories and models rely on this assumption since it simplifies scenarios and enables the
analysis of data.
Fallacies in Economics
Fallacy refers to errors in judgment or conclusions due to faulty reasoning. The following arc sin i e
fallacies that are encountered n economic analysis.
1. Failure to hold things constant under ceteris paribus. This is an error in analysis committed when an
individual considers other extraneous variables in studying an economic phenomenon. This results in
invalid conclusions since they are no longer in keeping with the economic theory or model being
considered.
2. Post Fine fallacy. This fallacy relates to the Loin phrase post hoc ergo propter ho which describes how
people make the mistaken notion that since a change happened after a event, then such change was
caused by the event that came before it. This fallacy is most evident when considering certain
"superstitious" beliefs. For example, a person picks up a coin on the road on the way to a job
application. When his job application was successful, he attributed it to the "lucky coin" he found. A
more objective evaluation of the events would reveal that there is no causal relationship between
picking up a coin and being accepted in a job; the sequence of events was merely a coincidence. In the
same vein, economists on careful no CO immediately assign a cause-effect relationship between two
events that follow each other. When the value of the peso vs. the dollar falls a day after the President
utters a controversial statement in his speech, analysts do not commit the fallacy of immediately
concluding that the President's words caused the change in the value of the peso against the dollar. In
economics, events and changes are often the product of unseen forces, and an event is often a product
of underlying changes occurring over a long period.
3. Fallacy of composition. This fallacy occurs when one considers a trait of one part or aspect of
something o true or applicable for the whole. This also occurs when a person thinks that a phenomenon,
as experienced by an individual or a certain group, can be applied to a larger group or the general
population. One significant example of this fallacy is the paradox of saving. This refers to the observation
that if an individual saves more money by saving or reducing expenses, then it is possible for the whole
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country to benefit if everyone saves and reduces their expenses. This, however, is untrue since the
economy relics on a steady flow of money in markets and among institutions to maintain a certain level
of economic growth. Should the entire population of the country decide to reduce spending, these
would result in reduced demand and higher prices, which would bring about reduced profit for
businesses and lower wages for workers.
4.Sweeping generalization. This fallacy refers to a statement that oversimplifies a specific scenario
presenting it as a general rule. One example of a sweeping generalization is the statement: "lithe
University of Santo Tomas is a Catholic School, then all students of this school must be Catholics."
The Production Possibilities Frontier:

A Model of Opportunity Cost and Development Production is one important factor that contributes to
economic development. The Production Possibilities Frontier (PPF) is a graph that shows the greatest
sum of outputs given accessible inputs or resources in an economy. The PPF is used to show the possible
combinations of two alternative products, assuming that the same resources are used to produce these
products. For example, a soft drink company can choose to make a carbonated cola drink or an orange-
flavored soft drink. Given the resources of the company, it can only make a limited number of cola or
orange-flavored soft drink. The combination of products made is shown in the Video below.
https://www.youtube.com/watch?v=O6XL__2CDPU
Comparative Advantage and international Trade

The concept of comparative advantage consider that it is the most advantageous for economies to
specialize in industries where they enjoy an advantage in resources and production processes.
For example, a country with vast agricultural lands and has society has engaged in agricultural
production for centuries would enjoy an advantage if it focuses on agricultural industries. Going back to
our example regarding the all drinks company, it can choose to specialize in either producing orange-
flavored soft drinks only or colas only. The company, therefore, has to weigh which of these two
products they can make and which would give them an advantage not only in production but also in
sales. For larger economies, however, specialization entails a number of challenges. Most significant
among these is that the economy needs other products apart from what they are producing. For
instance, a country which specializes in agricultural products would still need manufactured products
that will be used by its industries and households. To fill this gap, the country trades with another
country which specializes in manufactured goods.
B International trade is another significant aspect of economic development that has to be considered in
an interconnected global economy. Nations can benefit from the exchange of products and resources. It
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is in the context of international trade that an economy's comparative advantage gains more
significance. For instance, the Philippines has a perceived comparative advantage in skilled labor, hence
the large number of overseas Filipino workers (OFWs) who find work in many countries overseas. Our
country's comparative advantage in tarns of overseas workers results in both benefits and challenges.
One important benefit of having an overseas labor force is that it results in remittances which replenish
our dollar supply. This enables our country to retain a certain stability with regard to changes in our
foreign exchange rate since we are assured of a steady supply of dollars from overseas. One challenge
brought about by the OFW phenomenon is that it rakes away skilled labor which should have been used
to benefit our own economy. Skilled workers such as nurses, teachers, engineers, and scientists often
find better-paying jobs in other countries and are therefore enticed to work there. The opportunity cost
to this is that Filipinos do not benefit from their services and expertise. Given this, the government
should consider the aspects of overseas labor as well as its effects on both the local and international
economy in making its development plans. The economic strengths and weaknesses of a country should
be considered in planning for development, and the impact of international trade should also be taken
into account in whatever decisions regarding the course of the country's economic development.
DISCUSS AND APPLY

1. What are the primary concern of Applied Economics?
2. How can Economics help guide country toward development?
3. What is inclusive growth? What charges should be implemented in our country so that inclusive
growth is achieved?
Performance Task
A. Look up the Philippine Development Plan 2017-2022 at the NEDA Website
(http://pdp.neda.gov.ph/). Select a chapter and analyze its contents. Identify significant
economic theories and models which are the bases of the plans and discussions outlined.
B. Look for a news article discussing an economic problem or issue. Identify an economic theory,
model, or concept that can be used in analyzing the problem. Discuss how you can use these to
come up with a solution to the problem.
C. Choose one of the concepts or models discussed in this lesson and write an essay discussing
how it can help you make significant changes for your own personal development.
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Lesson 3
BASIC ECONOMIC PROBLEM AND
PHILIPPINE SOCIOECONOMIC
DEVELOPMENT IN THE 21ST CENTURY
The drive toward economic development means that our country has to confront various
obstacles to economic development as well as social, political, and economic issues that ham,
our country's growth. The various theories and models of economic development can help you
get a better sense of what defines economic development as well as is challenges.
THEORIES OF ECONOMIC DEVELOPMENT

The theories of economic development discuss the nature of development and describe tools
and strategies that lead to development. These theories focus on the following factors in
&terming the state of economic growth:
Level of Production — Economic growth is measured by the increase in a country's Gross
Domestic Product (GDP), which is often juxtaposed with the population. This indicator,
however, mainly focuses on material wealth. It has been noted that an increase in GDP, among
other indicators of economic growth, does not necessarily translate to concrete improvements
in the lives of citizens.
Quality of Life — This variable considers aspects such as health, nutrition, education,
environment, and income distribution in analyzing development. Development is defined as a
significant change in the quality, of life of individuals such as less poverty, improved health and
nutrition, better education, clean environment, greater freedoms and more oppommities, and a
richer culture. 110 economic development. later theories emerged as critiques of the capitalist
notion of development.
Sustainable Development — This factor considers the impact of hum. activities on the
environment and believes that environmental degradation has significant economic impact. In
turn, the implementation of sound and environmentally responsible economic policies can
contribute to addressing environmental problems.
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The earliest economic theories equated economic development with prosperity. Capitalism,
in particular, advocated free trade, private property, and competition as forces that will bring
about In particular, Marxism focused on the root causes of economic inequality and criticized
capitalism as a contributing factor to inequality and underdevelopment. Contemporary
economics emerged at the end of the Second World War and tackled the role of governments
in spurring economic growth. More recent economic theories on development emphasize the
role of technology and skills in improving economic processes and overall production.
The theories of economic development propose various models of economic development.
which identify the ideal conditions that make development possible and outline the stages an
economy goes through as is achieves development. These theories also pay close attention to
underdevelopment. Which in an economic condition characterized by low production and
standard of living.
Table 2. Theories of Economic Development
Economic development is a process which follows a sequence of
Linear Stages of Growth historical stages:
(1) traditional society, (2) preconditions for take of( (3) take-off, (4) maturity, and (5) high
mass consumption.
Structural Change Models Development is defined by the reallocation of labor from
agriculture to the industrial sector. A country's development is also defined by factors
such as income level and comparative advantages. International Dependence The
dominance of developed countries and multinational corporations over developing
countries leads to dependence and underdevelopment Dependence can be ended by
abandoning unequal relationships between developed and developing countries
Neoclassical Theory Underdevelopment is mainly caused by domestic issues brought
about by poor economic policies and resource allocation, as well as government
corruption. Development arises due to the promotion of free markets and reduction of
government control over the economy. New Growth Theory Underdevelopment is due
to the slow transmission of technology (Endogenous Growth) to developing countries.
Knowledge and technology are vital to development thus, investments in education and
research and development are encouraged. Theory of Coordination Underdevelopment
is caused by uncoordinated activities in the market. Failure To foster development, a
"big push" is implemented wherein a public-led investment program focuses on certain
economic sectors and coordinates market activities to bring about growth. Development
is a result of efficient production wherein similarly skilled workers work together to
accomplish tasks. High wages and investment in human capital are essential.
0-ring Theory
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ECONOMIC PROBLEMS AS OBSTACLES TO DEVELOPMENT The models of economic

development not only chart the most ideal course for economic growth and prosperity, they
also propose solutions to address significant economic problems which serve as hindrances to
development. Among the major obstacles to development are poverty and inequality,
unemployment, and inflation.
Table 2. Theories of economic Development
Theory Concept of Development
Linear Stages of (1) traditional society, (2) preconditions for take of( (3) take-off, (4)
Growth stages maturity, and (5) high mass consumption.
Structural Change Development is defined by the reallocation of labor from agriculture to

Models the industrial sector. A country's development is also defined by factors
such as income level and comparative advantages.
International The dominance of developed countries and multinational corporations

Dependence over developing countries leads to dependence and underdevelopment
Dependence can be ended by abandoning unequal relationships between
developed and developing countries
Neoclassical Theory Underdevelopment is mainly caused by domestic issues brought about by

poor economic policies and resource allocation, as well as government
corruption. Development arises due to the promotion of free markets and
reduction of government control over the economy. New Growth Theory.
New Growth Theory Underdevelopment is due to the slow transmission of technology

(endogenous (Endogenous Growth) to developing countries. Knowledge and technology
growth) are vital to development thus, investments in education and research and
development are encouraged.
Theory of Underdevelopment is caused by uncoordinated activities in the market.

Coordination Failure To foster development, a "big push" is implemented wherein a
public-led investment program focuses on certain economic sectors and
coordinates market activities to bring about growth.
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O-ring Theory Development is a result of efficient production wherein similarly skilled

workers work together to accomplish tasks. High wages and investment in
human capital are essential.
ECONOMIC PROBLEMS AS OBSTACLES TO DEVELOPMENT

The models of economic development not only chart the most ideal course for economic
growth and prosperity, they also propose solutions to address significant economic problems
which serve as hindrances to development. Among the major obstacles to development are
poverty and inequality, unemployment, and inflation.
CHALLENGES TO PHILIPPINE SOCIOECONOMIC DEVELOPMENT

The Philippine Development Plan 2017 outlines several challenges to the economic
development in the Philippines. The following are the most significant issues that impact
Philippine development.
Poverty, Inequality, Unemployment

Though it has been observed that poverty rates have been declining, from 26 percent in 2009
to 21 percent in 2015, poverty and inequality still remain a threat to several vulnerable groups
such as the poor, children, women, persons with disabilities, indigenous people, older persons,
overseas Filipinos and their families, and workers. Workers in the informal sector often
experience substandard pay and hazardous conditions, while workers in the formal sector are
often at risk due to contractualization, retrenchment, and firm closures. The effects of poverty
are further worsened by global and domestic economic instability, natural disasters, political
disruptions, and other unexpected events that cause loss of income or assets.
Underemployment remains high, especially in agriculture. Workers often suffer from
inadequate income. Women have low participation in the labor force. Additionally, the limited
employment opportunities force workers to seek jobs overseas.
The State of the Agriculture Industry

Them is primary concern regarding the state of the agriculture, fisheries, and fore, industries.
Growth in these industries is generally weak. Agriculture, forestry, and fisheries have low
productivity compared to other industries and the services sector. Production in agriculture has
been affected by typhoons and the El Nino phenomenon. However, high-value commodities
such as banana, pineapple, and mango prosper. Fisheries was also affected by typhoons and
declining marine resources. On the other hand, livestock and poultry experience gains due to
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favorable market conditions. Forest, experienced a decline due to laws that provided for a
moratorium on the cutting and harvesting of timber.
One factor which contributed to the weak performance of these industries is lack of
diversification, particularly in agriculture. This industry concentrates mainly on three crops —
rice, tom, and coconut. Smaller areas are devoted to high-value crops such as banana,
sugarcane, and rubber. Farmers and fisher folk also have limited access to capital. They cannot
easily access loans and they are not provided insurance to safeguard their production in case of
loss due to disasters. Farm production is also affected by inadequate technology and facilities
such as postharvest equipment. Adequate irrigation also remains a challenge. As of 2015, only
57 percent of agricultural land is irrigated. There is also balked advancement in research and
development which is intended to identify effective farming and fishing practices and develop
technologic to improve production. Agriculture is also affected by an inefficient logistics system.
The lack of roads affects the transport of products from farms to markets, while the inefficient
transport of agricultural exports often lead to these products being rejected by the importing
countries. The growing population is expected to put pressure on agricultural production.
Another significant challenge is the conversion of large tracts of agricultural land for housing
and settlement.
Competitiveness of Philippine Business

Developments in Philippine business are hampered by restrictions on foreign investment and
participation, as well as cumbersome requirements for business registration and licensing. Also,
the Philippine banking sector is characterized by low savings, with the BSP estimating that only
22 percent of adults have a formal savings account.
Philippine business and trade are vulnerable to uncertainties in the global market. This is
because Philippine exports are limited to certain products and markets. Competition within
markets is limited by the existence of monopolies and the preferential treatment of
government-owned-and-controlled corporations (GOCCs). Though we have a large labor force,
the labor market is characterized by a mismatch of skills and the needs of the market. This
results in the out-migration of skilled workers, unemployment, and slow absorption of labor. In
addition, industry and production lag behind in terms of technology and innovation. The
country's weakness in innovation and competitiveness could be traced to the general lack of
awareness and interest in science, technology, and research. There is only a small number of
professionals engaged in research and development, research facilities are inadequate, and the
government gives little support for innovation.
Infrastructure
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Issues related to infrastructure include the quality of roads, improvements in public transport,
and traffic in urban areas — particularly in Metro Manila. The water resources in the country
aim need improvement. About three million families still have no access to safe water, and six
percent of households do not have basic sanitary toilet facilities. The energy infrastructure of
the country is still unable to meet growing demand as it relies heavily on coal-fired power
plants for enter production. This results in some parts of the country still lacking sufficient
electricity. In particular, the electrification rate in Mindanao is only at 72.38 percent. Among the
countries in Asia, the Philippines has one of the highest electricity rates. The country's
Information and Communication Technology (ICT) infrastructure remains inadequate compared
to other Asian countries, leading to a lack of Internet access in many areas and slow Internet
speeds.
Health and Quality of Life

The most significant issues regarding health and nutrition in the country involve access to
health services, malnutrition, maternal mortality, and family planning. The increasing rate of
HIV infections in the country is also a concern. One factor which contributes to these health
concerns is the limited spending on health by local government units.
Adequate shelter is another important concern for many Filipinos. There are approximately 1.5
million informal settler families nationwide, with 39 percent of them living in Metro Manila. As
of 2016, the government has a housing backlog of 2.02 million. The country also has a steadily
increasing rate of urbanization, with 44 percent of the country's population currently living in
urban areas. This rate is expected to increase to 56 percent by 2050.
The Philippines is considered to be in the first phase of demographic transition which means
that a large portion of the population is below 15 years old, giving rise to households with a
large dependency burden. Fertility rates in the country are among the highest in Southeast
Asia, with poor and less-educated women having more children.
Education
The major objectives of the current educational reforms being implemented are to expand
People's skill sets, improve people's awareness of intellectual property, and foster research and
development in the country. The 2017 development report notes that there was increased
enrolment in basic education. However, improving the quality of education remains a challenge
because of the lack of competent teachers, high student-teacher ratios, and a lack of facilities
and classrooms. Dropout rates have declined overall, but boys are still more likely to stop
attending school than girls. In particular, out-of-school youths are most prevalent in regions in
Mindanao such as the ARMM, SOCCSKSARGEN, and Davao Region. The country's higher
education institutions are noted to have a lackluster performance due to lack of qualified
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faculty, lack of accreditation, and low passing rates in licensure examinations. The course
offerings of these institutions have also been noted to be mismatched with industry needs.
Another major problem in Philippine higher education is its lack of focus on innovation and
research.
Government, Peace and Security

The Philippines attained improvements in various global indicators related to governance,
particularly in accountability. Corruption, however, still remains a significant concern in
governance. One issue that needs to be addressed is fostering greater involvement of the
public in governance. The government has established programs to address this, including
involving the citizens and communities in planning and budgeting at the local level and citizen
participation in the audit program. Government data is also made available online, and many
government offices maintain an online presence. The government seeks to improve financial
management in local government units, address corruption within the bureaucracy, and
eliminate red tape. The justice system suffers from a lack of human resources; there are not
enough judges and public attorneys to handle cases which results in a large backlog. In addition,
penal facilities throughout the country are congested.
The government has taken various steps to ensure peace and security in the country. It has
concluded peace agreements with the MILF, and is in negotiations with communist rebel
groups such as the New People's Army. Other threat groups, however, need to be addressed.
Another concern is addressing the needs of communities affected by conflict. With regard to
external security, the issue regarding the Spratly Islands is a major concern. Crime in urban
areas, the illegal drug trade, and human trafficking are major concerns for the police force.
Environmental Issues
The government is most concerned with climate change, particularly its impact on the
agricultural sector and disaster risk reduction. Current disaster risk reduction and climate
change adaptation policies and programs, however, primarily concentrate on infrastructure and
not on addressing the loss of livelihood. There is a need to improve the management of
environment and natural resources, particularly the protection of forests and other critical
habitats. Air and water pollution continue to be significant problems.
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DISCUSS AND APPLY

1.
 Significant factors considered in determining economic growth include the level of
production. quality of life, and sustainable development.
 The theories of economic development discuss the nature of development and describe
tools and strategies that lead to development. These theories propose models of economic
development which identify the ideal conditions that make development possible and
outlines the stages an economy goes through as it achieves development.
 Economic problems are hindrances to developrnent . The major obstacles to development

include poverty and inequality, unemployment, and inflation.
 Poverty refers to the condition where a population is only able to meet its basic subsistence
needs. Absolute poverty refers to severe deprivation of basic human needs. Economic
inequality, which refers to unequal access to wealth and income, is a major factor that
brings about poverty. The two commonly used measures of economic inequality are the
Gini coefficient and Kuznet's ratio of inequality.
 Unemployment refers to the portion of the labor force who is willing to engage in
productive activities yet fails to do so. Unemployment can hinder economic development
since the human resources of a country are not efficiently utilized.
 Inflation is the sustained and continual increase in the prices of goods and services
Hyperinflation or very high inflation has negative effects on the economy, therefore inflation
must be controlled. Rapidly increasing prices affect the ability to purchase goods and
services and give rise to economic uncertainty. A period of high inflation, slow economic
growth and high unemployment is called stagflation.
 The Philippines has experienced steady economic growth since 2013, which was driven
largely by the performances of the manufacturing and services sector, increased private
consumption.,increased tax revenue, and government spending on infrastructure.
 Among the significant issues related to Philippine economic development are poverty,
inequality, unemployment, low agricultural production competitiveness, infrastructure,
health and quality of life, education, government, peace and security, and the environment.
1. How do theories of economic development guide us in determining economic growth?
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2. Choose one theory of economic development and discuss how it relates to the growth
of the Philippine economy through the years.
3. How do poverty, unemployment, and inflation affect the growth of an economy?
4. Describe your own personal experiences with poverty, unemployment, and inflation.
How did these economic phenomena affect you and your family?
5. How was the Philippines able to achieve a positive and steady economic growth? What
do you think is needed to sustain this level of development?
PERFORMANCE TASK
A. Analyze one of the economic problems discussed using a related statistical measure.
Present a chart showing how this problem has affected our country over a certain
period. Present and discuss your work in class.
B. Form groups of three members each and choose one of the economic issues related
to Philippine development. Research on your chosen issue and come up with five
proposals that will address this. Present and discuss your work in class.
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Chapter 2
Application of Supply and Demand Analysis
INTRODUCTION
In the previous chapter, we have investigated the various components of economics as a social science
and have analyzed economic decisions from the perspective of benefits and costs. The framework
developed has shown its usefulness in understanding various contemporary social, economic, and
business issues. In this chapter, the analysis of supply and demand, which is a simplified version of the
analysis of benefits and costs, will be developed. This simple model of demand and supply analysis is
also a persuasive tool in understanding economic and business realities, issues, and problems.
ANALYSIS OF DEMAND AND SUPPLY
Consistent with the framework developed in the previous chapter we will analyze demand and
supply in terms of marginal benefits and marginal costs. The demand curve is a schedule that • shows
the level of consumption at alternative prices at a given point in time. The demand curve of a
commodity . - summarizes the benefits derive by the consumers from the purchase of a good or •
service. On the other hand, the supply curve shows the amount of output producers are willing to sell at
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alternative prices at a given point in time. The supply curve incorporates the sacrifices and costs
incurred by the seller in producing a commodity.
To the buyer the price is his payment for the purchase of a commodity. His willingness to
purchase the commodity at the market price implies that the additional satisfaction he derives from the
consumption of the commodity is equivalent to the market price. Similarly, when the supplier accepts
the price as payment for the sale of a commodity it implies that the price can compensate for the
additional costs incurred in producing a unit of a commodity. Thus, the price agreed upon in the market
is indicator of marginal benefits to the buyers and at the same time marginal costs to sellers.
In succeeding sections we will analyze the elements of the two major components of the
demand and supply analysis.
WHAT IS A DEMAND CURVE?

The major actor in a market is the consumer whose primary objective is to purchase a
commodity because it can give him/her benefits. His/Her inclination to purchase is indicated by the
demand curve.
A demand curve is a schedule of the willingness and capacity of a consumer to buy a commodity
at alternative prices at a given point in time other things held constant. In the construction of the
demand curve it is important to consider not only the willingness to buy but also the capacity to buy.
Everyone wants or willing to buy a good but not all is able to buy because some do not have the capacity
to buy the good. the demand curve is derived from the demand for a commodity since it only reflects
the relationship between quantity demand and the price of the commodity. When we say other things
held constant or ceteris paribus, the other factors that may affect the demand for the commodity are
not changing. The only ,factor that influences the level of demand or consumption is the price of the
commodity itself.
Price, P
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Quantity, Q
OTHER FACTORS AFFECTING THE DEMAND OF A COMMODITY

To be more realistic in our discussion on the demand for a commodity there is a need to
consider other factors aside from its own price that may influence individuals in the purchase of a
commodity. At this point is may be instructive to identify and discuss these other factors that may affect
the demand for a commodity aside from the price of the commodity.
Income
As indicated in the concept of demand, it is the willingness and capacity of a consumer to buy a
commodity at alternative prices. Although the willingness may be influenced by the price of the
commodity as well the taste for the commodity, the capacity to purchase on the other hand is
influenced by the income of the consumer. A higher level of income will give him higher capacity to
consume while a lower income will give him limited purchasing power. As a result, we observe that
richer families have higher levels of consumption while poorer families have lower and lii-inited
consumption basket.
Prices of Other Commodities

Aside from the price of the commodity being sold, the demand for a good or service may also be
influenced by prices of other goods and services. Although the prices of many commodities may have an
effect on the demand of a particular good, the influence of related goods is more pronounced. For
example, if the other good is a substitute, the increase in the price of the substitute good may increase
the demand for the commodity at hand. Thus, when the price of beef increases, the demand for chicken
will increase since beef and chicken may be considered as substitute goods. On the other hand, if the
other good is a complementary good, a decrease in its price will impact positively on the demand of the
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good being investigated For instance, when the price of bread decreases the demand for butter may
increase since butter and bread may be considered as complementary goods.
Expectation
In addition to the price of the commodity, the expectation or prosEect on what is going to happen to the
price can influence the demand for the commodity. For example, if' you believe that the price of
gasoline will increase tomorrow, there is a tendency for consumer; to increase their Consumption today
Similarly if there is a prospect that the price of US dollar will decline tomorrow, people will postpone
their purchase of US dollars. They will buy Us dollars the following day when its price is expected to be
lower.
Taste
Taste or preference is another important factor that may_ influence the demand for a commodity. The
formation of taste is influenced by several factors. Some of them can be shaped by cultural values
others through peer pressure of advertising. For example, on the celebration of New Year's Eve, it is
customary for families to have round fruits at their fruit plate to attract good luck. This tradition which
was influenced by Chinese Filipinos has increased the demand for fruits during this season. On the other
hand, advertising that shows that cigarette is bad for your health has to some extent decreased the
demand for cigarette.
Market
The size and characteristic of the market can also influence thedemauct for a commodity. An increasing
population can contribute to the expansion of existing markets for various commddities. A lower birth
rate, on the other hand, coupled with an ageing population may alter the cdmposition of demand by
shifting the demand toward the needs, of the elderly and away from goods and services that target the
youth.
WHY IS THE DEMAND CURVE DOWNWARD SLOPING?

As mentioned earlier, the demand curve focuses on the relationship between the quantity
demand and the price of the commodity at a given point in time other things held constant. The demand
curve shows a negative relationship between the price of the goals and the quantity demand.
Specifically, as the price 01 a commodity declines, the quantity demand increases and w an the price US
the quantity demand declines. It may be interesting to explore the reason behind why the relationship
between price and quantity demand inverse or why the demand curve is downward sloping.
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Substitution and Income Effects
The inverse or negative relationship between the price of the commodity and the quantity
demand shown in the demand curve can be explained through the substitution effect and income effect
of a price change. The substitution effect describes the decision of a consumer to substitute an
expensive good with cheaper goods when there is a price change. Thus, as the price of t mangoes
increases, the consumer will make a choice of consuming cheaper papayas and bananas to substitute for
mangoes which have become ma expensive. As a consequence of the substitution effect, there will be a
decrease in the consumption of mangoes as the price of mangoes increases.
PRINCIPLE OF DIMINISHING MARGINAL UTILITY

A more interesting but theoretical explanation On the downward sloping demand curve is
derived from the principle of diminishing marginal utility. According this major economic principle as a
buyer continues to consume a good his total satisfaction or utility increases; however, the additional or
marginal satisfaction decreases as a buyer consumes an additional unit of good. This reduction in
marginal satisfaction is attributed to the fact that consumers can have a feeling of satiation when they
continuously increase the consumption of a particular commodity. Diminishing marginal utility implies
that the additional satisfaction provided by an additional commodity consumed is lower than the
additional satisfaction given by the previous level of consumption of the commodity.
CHANGES IN DEMAND CURVE

As discussed earlier, there are several factors that may affect the demand for a commodity. As a
consequence, changes in these factors can alter the demand curve depending on their impact on the
demand for a commodity. There are two major categories of changes in demand curve-movement along
the demand carve and shill in the demand carve.
Movement along the demand carve refers to the change in quantity demand resulting from the
change in the price of the commodity Thus, as the price of the commodity decreases, the movement
along the curve will lead to an increase in the quantity demand of the commodity. Similarly, an increase
in the price will result in the decrease in quantity demand as shown in the movement along the demand
curve.
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Graph 2.2 shows a movement along the demand curve when a change in the price of a
commodity results in a change in quantity demand. At price P, the coordinate a along the demand curve
D will give' us the quantity demand which is denoted by (.4. If the price decreases to P, (coordinate 1,
along the demand curve) quantity demand increases to Q. Thus, as the price of the commodity decrease
the account of quality demand increase as shown by the movement of along demand curve D from a to
point b.
Movement along the demand curve
Shifts in demand curve, on the

other hand, are changes in demand
curve caused by any of the other factors beside the price of the commodity. Taste, price of other goods,
income, and other factors may affect the demand of a commodity positively or negatively. A positive
effect will shift the demand curve to the right. This means that in each price point there is an increase in
the demand for a commodity. On the other hand, a negative impact of these other factors on the
demand for a commodity will shift the demand curve to the left implying a decrease in the demand for
the commodity in each point.
The positive or negative impacts of these other factors do not alter the negative relationship
between the price of the commodity and the quantity demand. An increase in income will shift the
downward sloping demand curve to the right since it increases the level of quantity demand at all
alternative prices. On the other hand, the risk of being poisoned by eating shellfish contaminated during
red tide season can shift the downward sloping demand curve for shellfish to the left as it decreases the
level of quantity demand at all alternative prices.
WHAT IS THE SUPPLY CURVE?

The second major actor in a market is the supplier whose primary purpose in selling is to
maximize profit. This inclination to sell is summarized in the shape of the supply curve.
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The supply curve is defined as a schedule showing a direct or positive relationship between the
price of a commodity and level of output that the seller is willing to supply at a given point in time other
things held constant. This direct relationship means that as the price of the commodity increases there
will be more sellers that will be induced to supply the good. In the same light, as the price of the
commodity decreases, there will be lesser sellers that are willing to supply the good in the market.
OTHER FACTORS
AFFECTING
SUPPLY OF A COMMODITY
As the definition implies, aside from the price of the commodity, there are other things that
may influence the sellers to supply the commodity. At this point we will discuss and analyze how various
factors or reasons can influence the sellers to sell the commodity.
Price of Production Inputs
The production of any commodity will require the use of two major inputs-intermediate inputs
or raw materials and factor inputs. Intermediate inputs refer to materials including raw materials that
are still going to be processed or transformed into higher level of outputs. On the other hand, factor
inputs are the processing or transforming inputs. Some examples of factor inputs are labor, capital, land,
and entrepreneurship. These factors inputs are the ones adding value to the raw materials through the
process of production.
Taxes
Business establishments are required to pay a number of taxes to various levels of government
Since it is a monetary expense on the part of the firms, the payment of taxes can be considered as part
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of cost of production., Although, taxes are not factor inputs nor raw materials they are still considered!
part of the costs of operating a business. Thus, an increase in sales tax, real, estate tax, and other
business taxes can increase the costs of supplying a commodity. This in turn may discourage the sellers
to increase their supply of the commodity in the market.
Technology
The manner in which various factor inputs process the raw materials done through the use of
technology. Some firms may use labor-intensive technology if the cost of labor is relatively cheap. On
the other hand, fir may use capital-intensive technology if wages are very high. Improvement in
technology used by some firms can lower their production costs and c make these firms more
competitive. A lower cost may encourage these firms to supply more of the commodity since they can
sell it at reduced price.
Expectation
The expectation or anticipation on what is going to happen on.the of the commodity can also
influence the amount supplied in the market. I there is an expectation that the price of the rice will
increase next season, thl may encourage farmers to plant more rice now in anticipation of the higher
price in the near future. This expectation of higher price next season can also discourage rice dealers to
sell rice currently. Some of them will keep a higher inventory of rice currently so they can sell it in the
future with higher returns.
WHY IS THE SUPPLY CURVE UPWARD SLOPING?

The supply curve shows a positive or direct relationship between the price of the commodity
and the quantity supplied in the market. The main motivation to supply goods is to gain profit which is
based on the costs of production of a firm and the price of the commodity. There are several
interpretations on the reasons why suppliers respond positively with price changes.
Variations in the Unit GAO of Production
The simplest reason for the direct relationship between price and quantity, supplied is due to
variation of the costs of production among producers. Let take an example of five, producers A, B, D,
and E with different unit costs of production. Producer A is the most efficient with the least cost of PHP
per unit cost. Producer B has PI-IP 7 unit cost, producer C has PHP 10 unit cost, while producer D incurs
PHP 13 per -unit. Lastly, producer E is the most inefficient with PHP 15 unit cost.
Suppose the market price is set at PHP 6 per unit; at this price only producer A can supply the
good in the market while the rest of the producers are inefficient or not competitive. On the other hand
if the price is increased and set at PHP 12 per unit, the number of producers that can supply the market
has also increased. Producers A, B, and C can now supply the market. Because of the price increase
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formerly inefficient producers B and C have become n. competitive since their unit cost of production
are now lower than the s is also increased to five current market price.
PRINCIPLE OF DIMINISHING MARGINAL PRODUCTIVITY AND INCREASING MARGINAL COSTS

A more theoretical explanation developed by economists is based on the increasing marginal
cost of production. According to this perspective, as the production of a good increase not only does its
total cost increases but the additional or marginal cost increases as well. This means that the additional
cost of an additional unit of production is higher than the previous unit of production. This increase in
marginal cost is due to the principle of diminishing marginal productivity of resources. According to this
principle, as a fixed factor input, capital or land, is mixed with a variable factor input, labor, the
employment of additional laborers will increase total production but will increase it at a decreasing rate.
This means that although total production is increasing, the additional or marginal contribution of the
additional labor to total production is declining. This is because the productivity of the variable input is
constrained by a fixed input, capital or land.
As the firm employs additional variable inputs to increase its production, its total cost of
production will likewise increase. Total costs will not only increase but it will increase rapidly because
the additional variable factor inputs are becoming less and less productive. Since these variable inputs
are becoming less productive than the previous ones, it implies that they are becoming costlier to
employ. This is the implication of increasing marginal costs with the increase in production of output.
CHANGES IN THE SUPPLY CURVE

There are two major categories in the changes in the supply curve movement along the supply
curve and shifts in the supply curve. These changes are influenced by the changes in the factors affecting
the supply of a commodity .The movement along the supply curve is brought about by changes in the
price of the commodity. An increase in price will increase the quantity supplied as shown by movement
towards northeast along the supply curve. On the other hand, a decrease in the price of the commodity
will cause a decrease in quantity supplied as shown by the movement toward the southwest along the
supply curve.
Graph 2.5 shows the movement along the supply curve brought about by an increase in the
price of the commodity At price P coordinate g along the supply curve S will give us the quantity supply
which is denoted by Q. If the price increases to P,„ coordinate h along the supply curve will give us the
increased quantity supply at 22. Thus, as the price of the commodity increases the amount, of quantity
supplied increases as well as shown by the movement of along supply curve S from point g to point h.
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The shift in the supply curve, on the other hand, is caused by changes in the other factors
affecting supply except the price of the commodity. For example, an increase in the minimum wage can
increase the cost of production and will shift the supply curve to the left. As the supply curve shifts to
the left, the supply \611. declined since all possible quantities to be supplied decreases at all alternative
prices. Similarly, an imposition of an additional business tax by the government will likewise lower the
supply as the supply curve shifts to the left.
On the other hand, a bountiful harvest can shift the supply curve to the right. At alternative
prices the firm can now produce and supply at higher levels of output. in both examples, the initial
positive and direct relationship between the price of the commodity and the quantity supplied is
maintained. However, the positive or negative effects of the other factors on the supply are illustrated
by shifting the supply curve to the right or to left, respectively.
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DETERMINATION OF PRICES OF COMMODITIES

EQUILIBRIUM PRICE
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When buyers and sellers transact in a market they agree on the price of the commodity and the
amount to be sold and bought. This agreed price is called the equilibrium price. In our demand and
supply analysis this market agreement is shown by the intersection of the demand curve with the supply
curve. From a graphical perspective, the equilibrium price implies that buyers and sellers are in
agreement to buy and sell the same amount of commodity at the equilibrium price. Since the
equilibrium price is an agreed price it is also a stable price since there no pressure from the buyers and
sellers to alter the amount they want to buy and sell.
CHANGES IN EQUILIBRIUM PRICE AND OUTPUT

The impact of changes in demand and in supply brought about by various factors on the
equilibrium price and quantity can be analyzed through price mechanism in the market system. Through
changes in the price, suppliers and consumers adjust to attain a new equilibrium situation. These
adjustments are very useful in understanding price changes in some commodities. Shift in the Demand
Curve to the Right We have discussed earlier the shifts in the demand curve. Let us apply this change on
the demand of a particular good. We can use this concept in explaining why the price of fruits increases
during the Christmas and Ness Year Holiday An increase in income- received from bonuses and
thirteenth month pay increases the purchasing power of the consumers. This will shift the demand curve
to the right. Similarly, a shift in the demand curve to the right can be caused by a change in taste
brought about by the need to have fruits during the midnight supper on New Year eve. Graph 2.9
illustrates the effect of a shill in the demand for fruits to the right brought about by an increase in
income. Given the shift of the demand from Do to Di brought about by an increase in income with no
shift in the supply curve remaining at So, the equilibrium price will have to change. At the previous
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equilibrium price, P and the new demand curve, there will be an excess demand amounting to e.013
since the quantity supply has not changed. To eliminate this excess demand, the consumers will
compete for the limited supply. This competition will put a pressure on the price to increase to P. With
an increase in price, the consumers will lower their quantity demand by AB. With this adjustment by the
consumers a portion of the excess demand has been eliminated. The other component of the excess
demand is removed by an increase in supply by e,,4 brought about by the increase in price. This shift in
the demand curve is one of the explanations why we observe an increase in price of fruits during the
Christmas season.
Shift the Demand Curve to the Left
The decrease in the price of shellfish during red tide season is another application of these
changes in demand. We can explain this phenomenon through a shift in demand curve. As consumers
fear being poisoned by contaminated shellfish, they alter their taste fbr shellfish and reduce their
consumption at all alternative prices. This in effect will shift the demand curve to the left brought about
by this fear and a change in taste.
Graph 2.10 will assist us in understanding the effects of a shift in demand' curve to the left. With
the supply curve not shifting and remaining at S, the shift of the demand curve to the left from D( to Di
will result in a new equilibrium using demand and supply analysis. At the initial equilibrium pri P. there is
an excess supply denoted by Me) since the quantity supply has not changed but the quantity demand
has significantly been reduced. To eliminate this excess supply the suppliers will compete among each
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other by offer lower prices. With the reduction in price to P,, some consumers will be enticed to
consume more which will reduce the excess supply by Ac. On the the', hand, a decrease in price will
discourage some suppliers to sell at a much reduced price. This reduced quantity supplied amounting to
MA will partially eliminate the excess supply. Thus, the excess supply was eliminated by a hand
reduction in supply, on the one hand, and the increase in demand, on the other hand, brought about by
a price decrease. As a result, we observe that the price of shellfish declines when a red tide alert is
announced by the government.
SHIFTS IN THE SUPPLY CURVE
After understanding the impact of the shifts in demand, let us analyze the applications of shifts
in the supply curve. As discussed in the previous section, there are several factors other than its own
price that may affect producers in supplying a commodity. Changes in these factors can shift the supply
curve can also influence the changes in the equilibrium price.
Shift of the Supply Curve to the Right
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One application of this change in supply is the significant reduction of the price of mobile
phones in the past several years. There was a time that the price of mobile phones was so-prohibitive
that only the rich can afford these electronic gadgets. Now, almost everyone from all walks of life has a
cell phone or two with them. What are the reasons that brought about the expansion of this market?
This can be explained by rapid improvements in information technology that substantially lowered the
cost of producing mobile phones.
Graph 2.11 will help in understanding the implications of a shift in the supply curve to the right.
The improvements in technology have shifted the supply curve to the right from S„ to Si. This means
that at the same level of alternative outputs, producers will now incur much lower costs. Alternatively,
at the same alternative prices, sellers can supply more mobile phones. With the demand curve not
shifting remaining at Do, a shift in the supply cure to the right will cause an excess supply e.11 at the
prevailing initial equilibrium price. P„ This excess supply can be eliminated by the market mechanism
though-price competition among sellers. This will have a pressure for the price to decrease.
Shift supply Curve to the Left

Have you observed the price of vegetables becoming very expensive immediately after a strong
typhoon that hit the country? This phenomenon an be formally explained through supply and demand
analysis using the shifts in supply. Graph 2.12 will aid us in understanding the impacts of a shift in the
supply curve to the left. After a strong storm, many of the agricultural products are damaged, if not
totally destroyed, by strong winds and heavy rains. As such, the supply curve for vegetables will shift to
the left. That means that at alternative prices, there will be less sellers that will be willing to supply
because they may find it difficult securing the vegetables. Another way of looking at it, at alternative
outputs, the sellers will now incur higher costs because of the struggle of securing the vegetables.
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SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY

In the preceding sections, the applications of supply and demand analysis in understanding
current economic situations were made by Hulking the changes to either demand changes or supply
changes. But to be more realistic, the changes in the equilibrium price are usually caused by concurrent
changes in the demand and supply. This can be illustrated when both the demand curve and the supply
curve are changing at the same time.
Shift of the Demand Curve to the Right and Shift of the Supply, Curve to the Right (Equal
Proportion)
Have you observed that the price of chicken remains stable during the Christmas season despite
the increase in demand brought about by increase in income and the need to celebrate during the
holidays? A possible explanation is the increase in supply as producers of chicken anticipate the increase
in demand during the holiday season. Since the increase in demand is equally matched by an increase in
supply, the price of chicken does not change.
Graph 2.13 shows the shift in demand in chicken to the right is matched by a proportional shift
in the supply of chicken to the right. With the need, to celebrate dining the Christmas season coupled
with increased income of households with the receipt of their thirteenth month salary and other
bonuses, the demand for chicken increases. This will shift the demand for chicken to the right from D„.to
D,. If the supply of chicken is not changed and remains at S, this will create an excess demand eue, at the
prevailing price P.
However, this does not happen because suppliers have prepared for this expansion of demand
by increasing their supply of chicken during the Christmas season and the supply of chicken shifts to the
right to S. In such a 4se the increase in the demand for chicken is matched by an increase in the supply.
As result the price of chicken does not change and goes back to P.
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Shift of the Demand Curve to the Right and Shift of the Supply Curve to Left (Unequal Proportion).
During times of major natural calamities, we often observe that prices of basic commodities
increase very fast. This is not caused by the reduction in the supply alone as shown in Graph 2.12 but it
can be accompanied by an increase in the demand of the consumers as they expect the price of basic
increase in the near future. Graph 2.14 will assist us in understanding the shifts in the supply to the left
and a shift in the demand to the right. Let us assume that the change in supply has a greater magnitude
than the change in demand.
At normal times, the price of the commodity is set at P which was determined by the initial
demand curve, Do and initial supply curve So. With a strong typhoon hitting the region, the supply of the
commodity is drastically reduced and the supply curve shifts to S. With no change in demand, the price
will settle at a uglier price Pi. However, as consumers expect the price of this basic commodity to
increase in the future their current demand increases. As a result the demand curve shifts to the right at
Di. With reduced supply and increased demand the price further increases to P .
This rapid increase in the price of the basic commodity from P to P during times of natural
calamities forces the government to impose price control measures and even rationing.
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OTHER APPLICATIONS OF SUPPLY AND DEMAND ANALYSIS

The analysis of supply and demand is a simple yet powerful economic framework that can used
in understanding and demand in understanding contemporary issues facing the Philippine economy,
previous section, facing the seasonal increases yin. the goods, the decline of prices of electronic
gadgets, price decrease of shellfish during red tide season, and the rapid increases in the prices of basic
commodities after a natural disaster. In this section we will use the supply and price in understanding
the effects of an imposition of price ceiling ice as applied in the goods market, labor market, factor
markets, and the 'market for foreign exchange.
Price Ceiling In the previous section we have discussed the impact of an increase in demand and
decrease in the supply of commodity on the supply of a basic commodity after the damage of a typhoon.
As a measure to stabilize prices of basic commodities during these unusual periods the government may
impose a price control measures on basic commodities. This means that the price cannot h gher than
the mandated price ceiling.
Graph 2.15 will provide us with. the effects of a curve Do 12,.frwe the natural calamity, the
interaction of the demand supply curve So determines price of sugar at Po. After the calamity, the
supply of the commodity is drastically reduced and the supply curve shifts to S,. With no change in
demand, the price will settle at a higher price P,. However, as consumers expect the price of this basic
commodity to increase in the future their current demand increases and shifts their demand curve shifts
to the right to demand curve Di. With reduced supply and increased demand the price further increases
to P.
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Since the new equilibrium price, Pa is significantly higher that the initiai price, I the government
may impose a price ceiling since the new equilibrium price is too prohibitive. Many consumers may not
be able to afford to buy sugar at this price. With the imposition of price ceiling, Pc which is lower than
the Pa , a disequilibrium situation can occur described as excess demand. At this lower price, the buyers
will increase their demand to Qsc, from Q while suppliers will reduce their quantity supply to Qdc from
Q2. The gap between quantity demand and quantity supply Qs (AB) is the amount of excess demand.
This excess demand cannot be removed through price increase because it is not allowed by the price
control measure. An alternative measure is for the government to ration the limited supply of sugar to
consumers.
Price Floor
Another government measure to arrest the price adjustments the market is the imposition of price floor.
This means that the price of a commodity measure cannot go lower than the set price' The imposition of
price floor m to protect certain ac ors in the market. For example, to support tobacco planters tin
achieving a reasonable income, the government may set a floor price of tobacco in the market. Although
this may favor the tobacco planters it may have some economic consequences:
Graph 2.16 will assist us in understanding the economic effects of a price floor in the tobacco industry.
Without the price floor, the equilibrium price P and quantity in the tobacco market is determined by the
intersection of the demand curve D and supply curve S. At this price, tobacco farmers may find it too low
to provide them with income to have a decent living. Tobacco farmers may convince the government for
support in terms of a imposition of a price floor. If the government agrees it can set the price of tobacco
ar which is higher than the equilibrium price P.
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Applications in the Labor Market
The analysis of demand and supply can also be used in the determination of the wage rate in the labor
market. As in any market, the labor makers composed of those that demand labor ser vices. an indicated
by the demand, curve for labor, and those that supply labor services, as indicated by the supply curve of
labor. These major actors in the labor market are motivated by the changes in the price of labor which is
indicated by the wage rate.
Similar to other demand curves, the demand curve for labor is downward sloping. This means that there
is an indirect relationship between the wage rate and the quantity of labor services that will bought in
the market. Note that labor services are bought in the labor market and not the laborer, The ones
buying the labor services are firms that use these labor services as factor inputs in production. With the
objective of maximizing their profits, firms will equate marginal benefits with marginal cost as discussed
in the previous chapter. Thu, firms will hire laborers if the monetary value of the labor productivity
(marginal benefit) is equal to the wage rate (marginal cost). S.nce the value of marginal productivity
decreases based on the diminishing marginal productivity, firms will hire additional laborer services if
wage rate is decreased in order to maximize profit. Thu, the demand for labor services is downward
sloping. At a high wage rate, the demand for labor is low while at the low wage rate the demand for
labor is high.
On the other hand, the supply of labor is also influenced by the wage rare The laborers are the ones
supplying the labor services in the labor market. To them, the wage rate is the opportunity cost of
having leisure. It is assumed that individuals use their time by choosing having leisure or devoting. it
work. Given this, if the wage rate is very low, very few laborers are willing to work since they would
rather have leisure because the price of Leisure low. At this low wage rate, the foregone income not
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working a very low On the other hand. if the wage rate is high, the demand for leisure decrease since
the opportunity cost of not working is a very high. as they devote less time for leisure, they will be
willing to offer more time for work. Thus, we deserve a positive relationship between wage rate and the
supply of labor services.
Minimum Wages as Price Floor

If the equilibrium price at Graph 0.17 is considered too low by the labor, they may demand the
government to impose a price floor or a minimum wage. In Graph 2.18, we show the effects of the
imposition of the government of a floor price or minimum wage Wm higher than the equilibrium wage
rate. With this regulation, the reaction of the firms is to demand less labor services, L as the value of
marginal productivity of the last worker L, is now lower than the minimum wage Wm. Hiring additional
workers beyond L, i mean the net returns to firms is negative implying that their profit may decline as a
consequence.
From the point of view of the suppliers of labor services, they may find the minimum wage attractive
and they offer more hours for work up to L., With demand for labor decreasing while the supply of labor
increasing with the minimum wage will result in an excess supply of workers seeking work but cannot be
hired because of the strict requirements of higher value of marginal products by the firms. This excess
supply of labor services amounting to Ldm,, Lsm„ ends up as unemployed workers.
Although the objective of the government in setting the minimum wage is to provide a decent life for
workers, this policy may be considered counterproductive because it creates unemployed workers.
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Application in the Foreign Exchange Market

Another application of the demand supply analysis is the determination el the exchange rate. The
exchange rate is the price of a foreign currency. For example, the exchange rate between Philippine
peso and US dollar is PHP it per US dollar. This means that the price of one US dollar is 45 Philippine
pesos. This price of US Dollar or exchange rate (ER) can be determined by the interaction of the demand
for US dollars and the supply of US dollars in the market for foreign exchange.
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The demand for US dollars in the Philippines is influenced primarily by its demand for imports since the
country needs US dollars to pay for our imports. Just like the demand curve developed earlier, the
demand for US dollars has an indirect relationship with the exchange rate in this case the price of a. US
dollar. The higher price of a US dollar imports become expensive. As imports become expensive our
quantity demand for US dollars *decreases. This is denoted by the downward sloping demand curve,
D„.. The supply of US dollars, on the other hand, is based. on the inflows of US dollars into the country
brought by export receipts, remittances and capital inflows. The supply of US dollars has a positive
relationship with the exchange rate. As the exchange increases from PHP 40 to PHP 50 per US dollar, it
can motivate exporters to export more and Filipinos to work overseas and send remittances. When the
exchange rate decreases or the peso appreciate from PHP 40 to 30 per US dollar, there is disincentive to
export and for workers to works overseas.
CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO ENTREPRENEUR

STRUCTURES
The interaction of demand and supply with consequent determination of - is set in an
environment called a market. More than a place or state transactions are made between sellers and
buyers, what is more important in this setting is the power being exercised by any of the actors in the
market. Market power is defined as the ability of any actor of group in the market to significantly
influence the price in the market and the quantity to be produced or sold. The aim of every actor is to
enhance its market power in order to increase its profit for producers, and satisfaction, for consumers.
The ability to have market power and enhance the interest of actors will depend on the structure of the
market.
Filipino who wants to engage in any business or become an entrepreneur should know the
characteristics of the market he is trying to enter. He should know wether the structure of the market
can provide him reasonable profit and Environment for growth. There are four major classifications of
market structures depending on the market power of the actors in any transaction perfect competition,
monopoly, oligopoly, and monopolistic competition.
Perfect Competition
Perfect competition is described as a market structure where no single seller or single buyer has
power to determine the price and the level of output in the market. Although buyers and sellers
compete, but since no one has market power, meaning, they have equal influence, the price is entirely
determined by the price mechanism in the market system./ The reasons behind the absence of market
power in this market structure are also the key characteristics of a perfectly competitive market. For
one, there are numerous firms and buyers supplying and buying the product. Because of the huge
number of sellers and buyers, not a single one can have a significant influence on the price and quantity
in an equally huge market.
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Monopoly
Monopoly is a market structure characterized by market. If there is only one buyer in the market, the
market is called a monopsony. A monopoly is the exact Opposite of perfect competition. Because there
is only seller or one buyer, this single seller or single buyer has enormous market power. As a single
seller, a monopolist can set a lower output and a high price in the market that will maximize his profit.
On the other hand, as a single buyer a monopolist can set a higher output and low price that give him
the highest level of utility or satisfaction. The presence of the huge market power in a monopolistic
market is due to the key characteristics of the market. In a monopoly, there is only one seller and as
such there is no competition in the production of a highly differentiated product that the monopolist
alone can produce. The uniqueness of the product gives the monopolist market power since consumers
respond to his production The decisions through price changes along consumer demand curve.
Oligopoly
Oligopoly, on the other hand, is a market structure characterized by few sellers producing similar and
differentiated products. Large scale cement and steel companies usually have the characteristics of firms
in an oligopolistic market. An oligopolistic market is described as an imperfect competition since it has
some elements of a competitive market. Although there is competition among the few sellers in the
market, their competition is imperfect since the excess or abnormal profit in the industry is only reduced
but not totally eliminated. I More than the competition among the .few sellers, what is significant in the
determination of price and output in the industry is the way these few sellers interact with one another.
Since they are only few sellers, they can ignore each other or cooperate or react with one another or
follow the dominant company.
Monopolistic Competition
Monopolistic Competition Monopolistic competition is another example of imperfect
competition. This market structure has the elements of both Competitive and monopolistic markets. It is
competitive because it has numerous sellers and buyers in the market that can freely enter and leave
the marker, however, it has a monopolistic element since the product being sold in the market although
similar can be differentiated by the seller through various means of advertising and numerous ways of
packaging. This product differentiation is accepted by buyers as they patronize a particular brand. Such
brand loyalty in turn, provides some degree of market power to the sellers since their products are
faced with individual demand curves that are responsive to price and output changes. Some of the
products sold in a monopolistically competitive market are shampoos, soaps, detergents, and other
household items.
Because of free entry and exit in the market, the excess profit is eliminated with the price level
equivalent to the average cost of production. However, with this equality firms in this market structure
experience excess capacity as they set their production levels below the output that gives the minimum
cost of production.
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MARKET STRUCTURES AND IMPLICATIONS FOR ENTREPRENEURS

An entrepreneur with limited resources and productive capacity may situate his business in a
perfectly competitive market. Entry is easy and for a small enterprise with limited resources it can easily
move into a market. But the firm will be faced with numerous competitors, actual and potential that can
limit the profitability of the firm. With profit approximating the normal rate of return and difficulties in
differentiating the product, the ability to expand and find a niche in the market is very limited.
Investment and Interest Rate

Besides knowing the market where he/she can establish his/her business, an entrepreneur is
also faced with various issues affecting the costs of operating a business enterprise. One of the major
costs in conducting a commercial organization is the interest payments on borrowed funds. In
establishing a business, an entrepreneur will need funds to finance its initial operation as well as the
acquisition of tools, machinery, and other capital equipment in building his factory and physical plant.
Because internal resources coming from the entrepreneur and his business partners may not be
sufficient to finance these investment needs, the entrepreneur or his company may have to borrow
externally.
Rentals and the Cost of Business Operation

We have discussed the previous section how rent or the price of the use of land is determined.
We also explored the reason why the rental office space in commercial districts in Makati, Taguig, and
Ortigas in Metro Manila are very expensive. Since companies spent hundred millions of pesos to buy or
lease real estate in these locations and disbursed probably billions of pesos to construct high rises or
condominiums, they expect favorable return on their investments. This can only be done by charging
very high rental rates in office spaces.
Minimum Wage
The determination of the wage rate has also been discussed in an earlier section of this chapter.
A wage rate imposed by the government which is higher than the equilibrium wage rate can have
consequences on the labor market as well as on firms. A minimum wage is an example of a floor price
that prevents' the market to seek its equilibrium condition because of a government policy or
legislation. For labor intensive industries, the imposition of a floor price on the wage rate can discourage
firms to hire additional workers since the wage rate has become prohibitive. With labor services
becoming more expensive, the comparative advantage of these firms is compromised. As a result, some
of these firms locate their manufacturing plants in regions or countries where labor is relatively
inexpensive.
Taxes
Various levels of government units impose a number of taxes including business permits, real estate
taxes, sales taxes, value added taxes, income taxes, and taxes on traded goods and services. These taxes
can increase the cost of business operations and can threaten the profitability of business enterprises at
their initial stage of operations.
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To attract pioneer and foreign and local enterprises to establish their presence in the country, the
government has crafted a program of tax incentives to locate their business in the country. Income tax
holidays are given to firms so they can be more profitable at their initial years since they are exempted
from paying their income tax for a certain period of time.
STUDY GUIDES
1. What are the economic reasons why the demand curve is downward sloping?
2. What are the economic reasons why the supply curve is upward sloping?
3. Samsung announced they will be having a sale on their phones. Explain what will happen to the
market of Samsung phone case?
4. Explain why an imposition of minimum wage will lead to a disequilibrium situation?
5. Coca-Cola has been producing more advertisements to increase awareness about their products.
Graph the effects of increased marketing and state the effects on quantity and price.
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Make a News article on the price of basic commodities including rice, sugar, and chicken. Make
a video presentation on what happening to their prices using demand and supply analysis. You will be
graded according to criteria given.
Criterion Description
-logically presentation
Content 40% -clarity of topic
-technical content
-Originality
Creativity 30% -technical source
-the length of the video does not exceed 5

Setting the Expected time 15% minutes
Submission with the specified time 15% -the final submission is made on time
Total of 100%
54

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Applied Economics Module 6 Weeks

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CVE Colleges, Inc.

T.R. Alvarez Subd. Brgy, Del Carmen, Pagbilao, Quezon

Chapter 1 INTRODUCTION TO APPLIED ECONOMICS

Economics as Applied Science

Basic Economic Problems and Philippine Socioeconomic

Development in the 21st Century

Chapter 2 Application of Supply and Demand Analysis,

Determination of Prices of Commodities

Contemporary Economic Issues Facing the Filipino Entrepreneur

 LESSON 1 REVISITING ECONOMICS AS A SOCIAL SCIENCE

REVISITING ECONOMICS AS A SOCIAL SCIENCE

Basic Economic Concepts

Unlimited Human Wants and Needs

Economic Resources and Factors of Production

The Basic Economic Questions and Economic Systems

3. For whom to produce?

economic system, and mixed economic system.

Decision-making and Rationality

Opportunity Cost and Trade-off

KEY POINTS TO REMEMBER

Discuss and Apply

Object Need Want

What gave rise to this

What are the possible

Lesson 2 ECONOMICS AS APPLIED SCIENCE

1. What are the major goals of the PDP 2017-2022?

Self-esteem refers to self-respect. reputation. pride. and acknowledgment. Freedom involves

(NED, Philippine development 2011-2016

ASPECTS OF ECONOMIC STUDY AND ANALYSIS

Look at the following examples of positive and normative statements:

Positive: “Taxes enable the government to provide services to the people

Theories and Models

Theories and Models

One example of an economic theory is the Population Theory

exponential or geometric rate while food production increases at

arithmetical rate. This means that while food production merely

stock, the population multiplies itself at a much larger rate.

Based on this principle, Malthus came up with a model of population

The Production Possibilities Frontier:

Comparative Advantage and international Trade

DISCUSS AND APPLY

2. How can Economics help guide country toward development?

THEORIES OF ECONOMIC DEVELOPMENT

ECONOMIC PROBLEMS AS OBSTACLES TO DEVELOPMENT The models of economic

Theory Concept of Development

Structural Change Development is defined by the reallocation of labor from agriculture to

International The dominance of developed countries and multinational corporations

Neoclassical Theory Underdevelopment is mainly caused by domestic issues brought about by

New Growth Theory Underdevelopment is due to the slow transmission of technology

Theory of Underdevelopment is caused by uncoordinated activities in the market.

O-ring Theory Development is a result of efficient production wherein similarly skilled

ECONOMIC PROBLEMS AS OBSTACLES TO DEVELOPMENT

CHALLENGES TO PHILIPPINE SOCIOECONOMIC DEVELOPMENT

Poverty, Inequality, Unemployment

The State of the Agriculture Industry

Competitiveness of Philippine Business

Health and Quality of Life

Government, Peace and Security

DISCUSS AND APPLY

 Economic problems are hindrances to developrnent . The major obstacles to development

1. How do theories of economic development guide us in determining economic growth?

3. How do poverty, unemployment, and inflation affect the growth of an economy?

ANALYSIS OF DEMAND AND SUPPLY