Chapter 1 - Introduction of Economics

Wednesday, June 18, 2014

9:04 AM

The Wealth of Nations (1776) - Adam Smith (Father of Modern Economics)

Economics is the study of how wealth is created and distributed
Political Systems:
1. Totalitarian: One mas has the right to rule the lives of all them in his community
2. Democratic: All men are equal and their leader should be freely chosen by members through free election

Economic systems: evolves when people or the community define the manner by which they want their economic affairs to
function
Politico Economic Systems:
1. Communism:
- Economic goods are owned by the population
- Classless society / Equality
- No free lunch. Work!
- Produce goods according to capacity and need.
- Free education, but strict validation on public schools admission. Private schools are present.
- Totalitarian where rights and privileges of individuals are suppressed
- Activities are collectivized and centralized by the state
- Leader Examples: Gorbachev of USSR, Mao Tse-Tung of China, Karl Marx
- Country Examples: North Korea, Soviet Union
2. Socialism:
- Most businesses are owned by the government
- Private ownership to minor business. Freedom of speech, press and vote.
- Option to choose between private and public schools.
- Free election is allowed.
- Country Examples: Sweden, Denmark, Norway, United Kingdom
3. Capitalism:
- Productive resources are owned, controlled and managed by private citizens with minimum economic intervention by the
government
- Private ownership, speech, press and vote.
- Conduct activities freely.
- Option to choose between private and public schools. Rich citizens --> private schools or public schools, Poor citizens -->
public schools
- Leader Examples: Philippine President Gloria Macapagal-Arroyo, US President George Bush
- Country Examples: Philippines, US, Canada, Japan
4. Fascism:
- Privately owned, but extensive and far reaching, government economic direction is present.
- Certain degree of personal choices
- No free lunch. Work!
- Extreme nationalism, racism, glorification, patriotism and gratification of the head of the state
- Totalitarian
- Free education. Private schools are present
- suppression of civil liberties
- Strict validation on public schools admission
- Leader Examples: Adolf Hitler of Germany, Moussolini of Italy, Franco of Spain, Lenin
- Country Examples: Uganda, Germany, Italy, Spain, Middle Eastern Countries, and some African emerging countries
Because of Scarcity, every society must make a choice on:
1. What to produce
2. How to produce
3. For whom to produce

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Four Types of Economic System that can be adopted:

1. Tradition: Economic choices are decided by the past.
a. Tradition determines the current level of output for a commodity or service produced.
b. Example: Our forefather farmers want their child to be farmers too.
2. Command: Dictatorial system of government
a. An economic commander-in-chief or a group of men determines the goods and services to produce
b. What, how much and for whom to produce are planned and dictated from above to those involved in the production
below. The central government directly or indirectly sets output targets, incomes and prices.
3. Market Economy (Free Enterprise)
a. Characterized by the existence of private ownership of the non-personal means of production and the allocation and
use thereof, motivated by the desire of personal profits.
b. The price of commodity determines what, how much and for whom goods are produced.

Laissez Faire (french word) - "allow them to do"

- individual people and firms pursue their own self-interests without any central directions or regulation from the government
*Goods and services are produced and sold only if the supplier can make a profit.
Consumer Sovereignity - the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to
purchase (and what not to purchase).
4. Mixed Economy - More of a socialist society. Individual enterprise exists and independent choice is exercised even in
economies in which the government plays a major role.
Why study economics?
1. To understand the society better.
2. To understand global affairs.
3. To be an informed voter.
4. To learn a way of thinking
*Economics is anchored to the concept of scarcity. Economics is the wise allocation of scarce resources geared towards
maximization of the available resources. It is a social science because it deals with how he lives his life and that of how other
men live.
*Resources are very limited but the needs/wants of men are unlimited.

Resources: tools that we can use to battle scarcity

1. Natural Materials: forests, land, minerals, rivers, oceans, wildlife, oil
2. Human resources (capital): Knowledge and skills, innovation, ingenuity. Education develops human capital.
3. Physical Capital: Machinery, technology, tools, equipment. These are man-made resources.
Resources (inputs) and economic goods (output)
Eight Guideposts to Economic Thinking
1. The use of scarce resources to produce a good is always costly.
a. Costs may be hidden or non-monetary, or delayed but there's always a cost.
b. Opportunity cost - cost of choosing another or alternative option.
c. Public education is not free, since the government is paying it.
2. Decision makers choose purposefully, therefore, they will economize.
a. It is always our nature to choose something that we can get benefit from.
b. Under what condition may people violate the assumption of rationality? By acting emotionally and
ppppppppppppsentimentally.
3. Incentives matter.
a. Corporate social responsibility is not a good will but done for the government tax credit incentives.
4. Economic thinking is marginal (additional) thinking.
a. It would look like making small changes that command small twists in decision, therefore, we end up not making real
decisions.
5. Informational is costly, but helps us make better choices.
a. We take into account the cost of information when making decisions.
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a. We take into account the cost of information when making decisions.

6. Economic actions generate second effects in addition to immediate effects.
a. We have to be aware of the long-run effects as well as the short-run effects.
7. The value of a good is subjective or personal.
a. A good may cost two individual the same amount but the real value of the good is different to these two individuals.
b. De Gustibus Non Disputandum - Preferences differ between individuals
8. The test of a theory is its ability to predict.
a. Economic thinking is scientific thinking.
Positive Economics: Unbiased, objective, scientific approach to issues.
- It is an analysis when you try to criticize policies and make suggestion to correct certain mistakes.
- It does not tell us what policy is best; it just tells us what will happen if a policy is adapted.
- Example: If the money is supplied by 10%, interest rates will increase by about 10%.
- Uses words like "will, shall"
- Economics of "what is"
Normative Economics:
- Specific policy alternative, because it uses subjective, ethical or moral judgments in addition to positive approach.
- economics of what ought to be.
- uses words like "should", "ought",
Pitfalls to Avoid in Economic Thinking
1. Violation of the ceteris paribus condition.
a. Ceteris Paribus: "All other things are held equal or constant.
b. If the price goes down, but the income also goes down, then we aren't sure what will happen.
2. Association is not causation.
a. Statistical testing only proves association or correlation, not actual causation.
b. Education brings about higher income.
c. What works for others, will not necessarily work for you.
3. Post Hoc, Ergo Propter Hoc (After this, therefore because of this)
a. A common mistake in economic evaluation when you base findings on past occurrences and assume that these have
caused the present situation.
b. Men wearing ties make more money.

Important Terms to Remember

1. Fallacy of Composition: Misconceived assumption on the basis of what is true to one is true to everyone.
2. Opportunity Costs: The best alternative that we forego, or give up, when we make a choice or a decision.
Marginalism and Sunk Costs
1. Sunk Costs: Costs that cannot be avoided, regardless of what is done in the future (e.g. Food)
2. Transfer Payments: Benefits given to retirees in forms of pension, health insurances and others. (e.g SSS)
*Resources are scarce relative to unlimited wants.
Scarcity, Choice and Costs
1. Resources are scarce - not enough to satisfy all wants.
2. Choices have to be made.
3. And any choice involves an opportunity cost - the value of the best alternative foregone.

Three Basic Decisions

1. What to produce
2. How to produce
3. For who to produce
Three main elements of a market
1. Demand
2. Supply
3. Price
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3. Price
Gerardo Sicat (2006) - Economics is a scientific study, which deals with how individuals and societies make choices.
Branches of Economics:
1. Microeconomics: examines the individual industries and the behavior of individual decision-making units - that is, business
firms and households.
2. Macroeconomics: examines the economic behavior of aggregate income, employment, output and so on, on a national
scale.

Income increases? More purchased commodities

Graph - a visual representation of the relationship between two variables or a two dimensional representation of a set of
numbers or data

Cartesian Coordinate Plane - most common method of graphing two variables. Two perpendicular lines that intersect at point 0.
Origin: point of intersection

Slope of a straight line: ratio of the vertical change (the rise or drop) to the horizontal change (the run) between any two points
on the line.
Positive slope: both x and y increases or both x and y a
Negative slope: x and y are opposite to each other
Economic Resources or Factors of Production: the things which are needed to carry on the production of goods
1. Land (natural resources and raw materials that are beneath and above the land)
a. An economic good because it is scarce and a price has to be paid for it
2. Labor (human effort exerted in the production of goods)
a. Human beings who extract the raw materials, process them into finished consumption or investment goods
b. Transport and sell raw materials or finished products
3. Capital (Man-made goods used to produce other goods)
a. Tools, machinery and equipment
4. Entrepreneurial Ability (Business-minded)
a. Bears risks, takes the initiative, innovators and decides what, how much and for whom to produce

Production possibilities schedule or table:

- shows the different combinations of two commodities that society can produce by fully employing all its resources with the best
technology available.
- shows the different combinations of two goods which are possible to produce when there are both full employment and full
production in a hypothetical economy whose resources remain fixed
- the production possibilities frontier tells us that: (1) To produce more commodity A, the economy must use more of its fixed
quantity of resources for commodity A production and (2) the economy must make a choice on which combination to produce
and the cost of producing the goods
- Since resources are not equally efficient in the production of both commodities, for each additional unit of a commodity we
produce, the more we must give up the second commodity.
- Would show a downward, sloping, concave curve, which reflects the opportunity cost of producing a good. Economics goods
are not completely adaptable, hence, concave.

Assumptions in Production possibilities frontier:

1. Efficiency: the economy is operating at full employment and achieving full production
2. Fixed Resources: the available supplies of production are fixed
3. Fixed Technology: the technology does not change at some specific point in time
4. Two Products: There are only two products instead of innumerable goods and services actually produced.
Cost = the sacrifice that must be made (or what must be done without) in order to produce goods.
*To increase the production of food from 2 to 3, we have to decrease the production of clothing by 4. The opportunity cost of 3
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*To increase the production of food from 2 to 3, we have to decrease the production of clothing by 4. The opportunity cost of 3
units of food is 4 units of clothing.
The Law of Diminishing Returns: If more of the same input is employed in the production of a particular good, the corresponding
increase in total output tends to become smaller and smaller, that is, if the amounts of other inputs required in the production
process are kept constant (ceteris paribus).
- Example: The use of fertilizer improves crop production, but at some point, the benefit of adding more and more fertilizer will
as good anymore.

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Chapter 1 (Introduction of Economics)

Wednesday, June 18, 2014

10:10 AM

Political System determines the kind of economic system that a particular society has:
1. Totalitarian - One Man / All decisions are being made by the command-in-chief.
2. Democratic - Exact opposite
Three Powers of the Sovereign State
1. Police Power
2. Taxation
3. Imminent Domain
Politico-Economic System:
1. Communism:
a. In classless society, one won't be judged.
b. Everyone is being given equal opportunity in education. Education is free.
c. Production and consumption are based on needs.
d. Individual rights are suppressed. (Just like Marcos's time)
e. Political and economic actions are controlled by the government
f. Leader Examples: Gorbachev of USSR, Mao Tse Tung of China, Karl Marx
2. Socialism:
a. Right to private ownership but to minor business only.
b. Big industries like MERALCO, PJI, NAWASA were government owned.
c. Freedom to choose between public or private schools.
3. Capitalistic:
a. If you are born rich, you will die rich.
b. Productive resources are operated by private citizens
c. In classful society, we are being judged with the amount of money that you have.
d. Susceptible to make excessive profits
e. Leader Examples: PGMA of Philippines, George Bush of US
f. Countries: Philippines, US
4. Fascistic:
a. "Blind obedience" / Similar to muslims
b. You have to follow the commander-in-chief no matter what
c. Extreme gratification of the head of state
d. Leader Examples: Adolf Hitler to Germany, Moussolini of Italy and Franco of Spain
e. Private ownership is allowed but the government has the full say. You want condominium? No, government says you use it for
agriculture.

Four Economic Systems:

1. Traditional
a. Economic decisions are based on what happened on the past.
b. The production for this year depends on last year. What about population growth? Possible shortage!
2. Command
a. Economic decisions are made by the commander in chief.
b. He decides what, how much and for who to produce.
3. Market
a. Everything is determined by the price.
b. Item is expensive? Not much production. Item is cheap? More!
4. Mixed
a. More than one is being followed.
b. Philippines was a command system before (Martial law). We were also socialism before when the government owns the major
industries like MERALCO, PJI and NAWASA
Why study economics?
1. To help us understand the political systems of the country.
2. To help us better utilize the scarce resources.
3. To know that purchasing counterfeit is bad for the economy.
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3. To know that purchasing counterfeit is bad for the economy.

4. To know how the economy works

Doubling the money but having the resources constant do not make any differences!
- Goods are limited, hence, money should be limited too.
December: economy is doing well. Everyone has more money than usual:
- Due to remittances, 13th month pay, Christmas bonus --> These are irregular :)
Shortage of goods --> import
Excessive money --> Government extracts money out of the economy through treasury bills
Shortage of money --> Government offers loans at a very low interest rate.
For contracts, consider inflation rate, otherwise, lugi ka.

Eight Guideposts to Economic Thinking

1. The use of scarce resources to produce a good is always costly.
a. Choose the ones that benefit you the most.
2. Decision makers choose purposefully, therefore, they will economize.
a. Choose purposefully.
3. Incentives matter.
a. Treat yourself with hard-earned money.
4. Economic thinking is marginal (additional) thinking.
5. Informational is costly, but helps us make better choices.
a. Advertisements, basketball franchises, commercials.
6. Economic actions generate second effects in addition to immediate effects.
7. The value of a good is subjective or personal.
8. The test of a theory is its ability to predict.
Pitfalls to Avoid in Economic Thinking
1. Violation of the ceteris paribus condition.
a. Lower Price, Higher Demand
b. Lower Price but lower income? We don't know anymore.
2. Association is not causation.
a. What works for others, will not necessarily work for you.
3. Post Hoc, Ergo Propter Hoc (After this, therefore because of this)
a. Eyeglasses? Genius
b. Good in english? Rich
c. Men wearing ties make more money.
Opportunity Costs: Cost of choosing an alternative
Sunk Cost: Cost you can't avoid in the future (e.g food)
Transfer Payments: benefits of senior citizens
Positive Economics: telling the truth
Normative Economics: subjective, ideal

Teacher's table or a student's chair?

Student's chair because
(1) learning needs to be comfortable and
(2) a chair will benefit a lot of people in the students.
(3) Teachers can also conduct lesson without a chair.
Three Basic Questions:
1. What to produce
2. How to produce
3. For whom to produce
Inverse proportionality between price and demand
1. Price goes up, demand goes down.
2. Price goes down, demand goes up.

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Direct proportionality between price and supply

1. Price goes up, supply will be up because manufacturers want to earn and make a profit.
2. Price goes down, supply should be kept for the mean time until price stabilizes
Microeconomics: studies individual units, household or companies
Macroeconomics: studies aggregates or totality

Factors of Production
1. Land: not just the soil, but everything in Earth
2. Labor: services
a. Considered most important. You need competent employees!
b. Even if you got the most advanced technology, if you have incompetent employees, it is useless.
3. Capital: man-made goods required to produce other goods. e.g machineries
4. Entrepreneurial Ability (Business-minded)
Assumptions:
1. Efficiency: full employment of people and economic resources
2. Fixed Resources: the available supplies of production are fixed
3. Fixed Technology: no new technology
4. Two Products: There are only two products instead of innumerable goods and services actually produced.

PHP 300 Allowance: a week allowance that a student can spend

Gap: opportunity costs
Point C (beyond the curve) is unattainable since we have fixed resources.
Points A and B (on the curve) means that the economy maximized the resources already.
Within the curve means that the economy has wasted some of the resources. Reason?
1. Government issues
2. Pocketed by officials

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Chapter 2 - Theory of Demand and Supply

Sunday, June 29, 2014

11:57 PM

*In the Philippines, the law of demand and supply bears importance since our system is predominantly market in nature.
Market: interaction between buyers and sellers for trading or exchange. Goods market is the most common market.

Good: a commodity that is socially desirable, gives satisfaction so that the consumers are willing to pay a price to get a
quantity of said commodity.
Service: any assistance extended to by somebody whom we usually repay in monetary terms
Price: value of a product or service expressed in monetary units like peso and dollar.

Demand: set of quantities that buyers are willing and able to buy at a given, price, time and place
* price is the primary determinant of demand
Two Requisites of demand to be effective:
1. Willingness to buy
2. Ability to buy

Non-Price determinants of Demand

1. Income: Increase in income causes an increase in demand
2. Population: Increase in the number of buyers in a market (or increase in population) increases demand and vice versa
a. Baby boomers who once want diapers now wants housing.
3. Taste and Preferences: favorable change in consumer tastes (preferences) for a product - a change that makes the
product more desirable - means that more of it will de demanded at each price and vice versa.
4. Price Expectations: If people expect the prices of goods, especially basic commodities to increase by the coming week,
they buy more of these goods and vice versa.
5. Prices of related goods:
a. Complement Goods: goods that go together
b. Substitute goods - goods that can serve as replacement for another
*The lower the price, the higher becomes your willingness to buy (demand)
Law of Demand: As price increases, quantity demanded decreases and vice versa.
- only valid with Ceteris Paribus (all else equal or all other things remain constant)
- only valid with all the non-price determinants are held constant

Characteristics of Demand Curve

1. Demand curve depicts situation at a given period of time.
2. Demand curve slopes to the negative side.
Reasons Why Demand Curve slopes to the negative side
1. Income Effect. Whenever a good or a service a person buys goes up or down in price, it will affect the person's real
income.
a. During 1960s, ligo and coke are just 10 centavos. You can buy more of them in 1960s with PHP 500 than today.
2. Substitution Effect. Whenever the price of a good or service changes while other prices stay constant, relative prices
are altered. Consumers tend to buy more goods and services with lower prices.
a. People tend to buy better substitutes as their incomes improve. (Raises their standard of living)
b. People tend to look for inferior goods as their income diminishes or if the price of the desired good increases.
c. If the price to Tide detergent increases, they look for alternative like Ajax or Breeze.

Normal goods: demand is directly proportional to income

Inferior goods: demand is inversely proportional to income since individuals are inclined to purchase better quality goods
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Inferior goods: demand is inversely proportional to income since individuals are inclined to purchase better quality goods
and products with higher status symbol as their incomes rise.

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Chapter 3 - Supply, Demand and the Market Process

Monday, June 30, 2014

10:35 PM

*Resources can be allocated through the Market or the Government.

*Opportunity costs can be applied on market and government decisions.
*Fail: failure to achieve efficient or optimal results from the overall viewpoint of society as a whole.
- failure to maximize overall social welfare of society
*An economy can operate the same way even without any government or society interfering.
*Prices are set by market forces and most economic goods and services in the market get allocated by prices.

*Law of Demand: inverse relation between price and quantity demanded

- we want to get as much satisfaction (utility) from our limited income, so we choose to maximize our purchasing power
- tells us that Price Increases result in a reduction of Quantity demanded
Substitutes: similar or competitive products. Part of the reason why we purchase less at higher prices. There are substitutes for everything.
Depending largely on price.
*No butter? We buy more margarine.
*No grapes? We buy more bananas.
*A lot of good substitutes? Demand curve is flat and the demand is elastic.
*A few substitutes? Demand curve is steep and the demand is inelastic.
Steepness / flatness of the demand curve reflects how sensitive consumers are to prices.
*Elasticity of demand: precise measure that tells us how much quantity demanded will fall with a price increase. Consumer responsiveness to
price change.
Consumer Surplus: Difference between the maximum price a consumer is willing to pay and the actual price.
- Market Price
- Musician is willing to purchase a guitar for PHP 5000, but was able to purchase the said commodity with PHP 2000 only. Consumer surplus is
PHP 3000.
Quantity demanded is determined by price only. Movement along the demand curve.
- To the left, decrease. To the right, increase.
Change in Demand is determined by non-price determinants of demand. Shift in the entire demand curve
- To the left, decrease. To the right, increase.
Non-Price Determinants of Demand:
1. Income
a. Increase in income means increase in demand.
2. Number of Consumers in the market / Population
a. Increase in number of consumers means increase in demand
b. Market is expanding if number of consumers is increase. It s
3. Price of Related Goods
a. Complements: products used together like cars and gas.
b. Substitutes: alternative products
c. If the price of complementary good decreases, demand for the product increases.
d. If the price of substitute goods decreases, demand for the product decreases.
4. Price expectations
a. If price will increase tomorrow, demand will increase today.
5. Demographic Changes
a. If changes are favorable to the market, demand will increase.
6. Tastes and Preferences
a. Health conscious demand healthier products.

Producers/suppliers/firms transform raw materials into goods desired by households and sell final products to consumers.
- operates in profit and loss system
- profit: sales revenue exceeds all costs of production
- loss: costs of production exceeds sales revenue.
*Those who profits survive, those who lose money are lost. Profit and loss system guides and directs market activity without any central
control.
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control.

Consumer Sovereignity: consumers are kings and queens of the market

Law of Supply - direct or positive relation between Price and Quantity supplied
- At a higher price, the producer has a greater incentive to supply goods and services.
- Represents two things: (1) the minimum price necessary to induce producers to supply a specific Q and (2) the valuation (opportunity cost of
the resources used in production.

Producer Surplus - Market price - minimum price a seller / supplier is willing to accept.
- Musician is willing to accept PHP 500, but was paid PHP2000. Producer surplus of PHP 1500.
*Elasticity of supply: measure of responsiveness of suppliers to price changes
*All variable cost in the short run becomes fixed cost in the long run.
Change in Quantity Supplied: movement along a supply curve. Price-determined!
Change in Supply: shift of the supply curve to the right (increase) or to the left (decrease). Non-price determined!

Factors that will Shift Supply:

1. Changes in Resource (Input) Prices: Wages, parts, supplies, raw materials, interest rates, etc.
a. Resources prices fall, increase in supply.
2. Changes in Technology: New ways of production.
a. Higher technology means lower cost of production and speed of production, increase in supply.
3. Nature and Politics: Weather, droughts, new laws
a. Favorable weather and favorable political events can increase supply.
4. Changes in Taxes: Tax means additional cost of production.
a. Less tax means more supply.
5. Changes in the number of firms
a. More firms producing the same good means more supply.
*Market: abstract concept describing trade that takes place according to the laws of supply and demand

Equilibrium: when conflicting forces of supply and demand are in balance.

- Natural state of the market or the state that the market is always moving towards
- No shortage, no surplus, market clearing outcome Qs=QD
= Equilibrium = Market efficiency

Efficient Market: outright dismantling of excessive profit is enforced, then market equilibrium is taking its own course.
Invisible Hand Principle
- stated by Adam Smith in 1776
- by trying to make your own life better, you make society better off. When you make your life better, you pursue what you are best at. And by
pursuing your own self-interest, you automatically benefit others.
- The tendency of market prices is to direct individuals pursuing their own self-interests into productive activities that also promote the
economic well-being of society.

Questions:
1. In the same way as the market, a government can also allocate resources.
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1. In the same way as the market, a government can also allocate resources.
Answer: True
2. Market failures means that all the resources in the economy are well and optionally allocated.
Answer: False. Failure to achieve efficient or optimal results is market failure.
3. Not all economic goods have substitutes.
Answer: False. Everything has a substitutes. Some may have a few though.
4. Consumer surplus is the difference between the maximum price a person is willing to pay minus the actual price of the good.
Answer: True
5. Change in demand means that the demand has shifted.
Answer: True
6. The shifting of the demand curve is caused by the change in price.
Answer: False. Change in price equates to movement along the demand curve.
7. If the demand of two products moves in different directions, they are complements.
Answer: False. If they are complements, they move towards the same direction.
8. If the price of a product is expected to go down in the future, a normal consumer will buy today.
Answer: False. If the price of a product will go down in the future, the normal consumer will not do the purchasing yet until the day
the price will go down.
9. Producer's surplus is the difference between the actual price and the minimum price the seller is willing to accept for the good.
Answer: True
10. If a market price of the good decreases, the seller will normally sell all of it.
Answer: False. Law of supply means supply decreases as price decreases.
11. Elastic Goods are those that are sensitive to price changes.
Answer: True
12. Goods may either be _____ and ________ depending on whether they are bough together or in lieu of the other.
Answer: Substitute or complement.
13. These are the factors that can shift the supply curve either to the right or to the left.
Answer: Changes in Resources (Input) Price, Changes in technology, Changes in nature and politics, Changes in Taxes and Changes
in number of firms.
14. The profit made by the seller in a transaction is called in economics as _______.
Answer: Producer surplus
15. Resources can be allocated by ___________ and _________.
Answer: Market and government
16. The inverse relationship of price and quantity demanded is _________.
Answer: Law of demand
17. Most goods are allocated by its __________.
Answer: Price
18. The market mechanism if allowed to function is always __________.
Answer: efficient
19. Ceteris Paribus means ___________.
Answer: Taking everything to be equal.
20. Which products are substitutes __________.
Answer: coffee and tea
21. Which products are complementary?
Answer: coffee and creamer
22. When the price of cellular phone goes up, the demand for prepaid cards will ________.
Answer: go down
23. The shifting of the demand curve may be caused by the following except ________.
Answer: Change in price of a product
24. The shifting of the supply curve may be cause by the following except _________.
Answer: Change in the price of the product being sold.
25. When there is a balance between supply and demand, the market is in __________.
Answer: Equilibrium
26. Higher prices will signal _________.
Answer: scarcity
27. Market equilibrium represents the amount of trade that maximizes.
Answer: net gain to society.
28. The concept of Invisible hand gave rise to the now called ____________
Answer: Free market economy
29. Climate change can affect supply more than demand __________.
Answer: Alwayss

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Chapter 4 - Supply and Demand: Applications

Monday, June 30, 2014

8:02 PM

*Any law, regulations, and price adjustments that disturb the natural forces of market to free flow is deterrent to achieving economic
efficiency.
*Allowing market forces to work ensure market efficiency. Demand adjusting to supply or supply adjusting to demand. The market forces
(when prices are unregulated) will work towards reaching equilibrium!
*Market price continually adjusts up and down to eliminate any shortage or surpluses.
*Market clearing outcome: Qd = Qs. It means equilibrium (no shortages or surpluses).
*Shortage and surpluses are economically inefficient and undesirable
*Market Equilibrium is efficient and socially desirable because it eliminates shortages and surpluses.
*Efficient Market: a market that continually clears. Stock market is close to an ideal efficient market.
Why?
1. Stock market prices continually adjust during trading and the fluctuating prices bring about continual market equilibrium. Stock prices
adjust to clear the market
2. Stock market is more efficient because prices change by the minute to adjust!
Labor Market (very inefficient) because the price (wages) may be fixed for years at a time in a labor union contract. Yet, the market forces
are still in effect to reach equilibrium.

Supply (quantity of goods available for sale)

- NOT the number of goods that are produced. IT HAS TO BE FOR SALE.
- Price is the primary determinant
- Other Determinants of Supply:
1. Technology: techniques or methods or production.
a. Modern machines increases supply. Primitive technology slows it down or decreases supply.
2. Cost of Production: change in price of raw materials or services
a. If price of raw materials or services decreases, it increases supply.
3. Numbers of Resellers: More factories, sellers, producers, more supply!
4. Prices of other goods: changes in the prices of goods have effects in the supply of such goods.
5. Price Expectations: This sometimes influences sellers to hoard their goods or release them to the market depending on the price
expectations.
Supply Schedule: table showing the relationship between price and the corresponding quantity supplied.
Law of Supply: states that as price increases, quantity supplied also increases and vice-versa.
- only valid with Ceteris Paribus and all of the non-price determinants are held constant.
*Change in Quantity Supplied occurs because of a change in price only. The movement is along the line only.

*Change in Supply happens when a supplier of a given commodity/good or service has altered their output through the non-price
determinants. The graph shifts to the left (decrease) or to the right (increases)

Economics Page 22

Market or aggregate demand for a commodity gives the alternative amounts of the commodity demanded per time period, at various
alternative prices, by all individuals in the market.
- achieved by horizontal summation of all the individual's demand curves of the commodity
Market or aggregate supply of a commodity is the sum total of the amount of the commodity supplied per time period at various prices by
all the producers of the commodity in the market.
- achieved by horizontal summation of all the producer's supply curves of the commodity

Elasticity of demand is the degree of responsiveness of price changes to the changes in demand
Questions:
1. It is the microcosm where the market forces of supply and demand efficiently work. Answer: Stock Market
2. The market forces of demand and supply will exert pressure towards equilibrium when they are:
Answer: unregulated
3. It is a general term used to describe the balance of demand and supply in the market.
Answer: equilibrium
4. A market that continually clears is an example of.
Answer: An efficient market
5. Wages normally do not respond immediately to changes in price because of?
Answer: labor union contract
6. A distortion in the market happens when any or all of the following happens, except?
Answer: Supply is unregulated
7. When the price of the commodity is mandated to be lower than its market price, there will be a __________.
Answer: Shortage
8. A general reduction in income tax rate will surely result to a reduced tax revenue by the government.
Answer: False. Through investments, the saved money from tax can be used in investments which may become additional
government revenue.
9. Price and minimum wage law promotes market efficiency.
Answer: False. Any regulation, control or law may slow down market forces.
10. In an efficient market, these phenomena do not occur.
Answer: Shortages and surplus.
11. The curve that shows the relationship of tax rate and tax revenue.
Answer: Laffer curve

Economics Page 23

SONA 2014
Sunday, August 03, 2014

8:37 PM

*5th SONA
*DAP gave PHP 1.6 billion to Training-For-Work Scholarship Program of TESDA. Beneficiaries: 223, 615. (66% Employed, 34%
Still being assisted to look for work. 7,155 / scholar
*TESDA Secretary: Joel Villanueva
*Expanded Conditional Cash Transfer started July 2014 - PHP 12. 3 billion pesos.
*40% additional income of HS grad than grade school grad.
*Poverty Incidence: 27.9% (2012) to 24.9 (2012) = 3% (2.5 Million Filipinos)
*Did not increase tax aside from Reform (to lessen vices)
*Tax collection: 1094 Trillion (2010) to 1.536 Trillion (2013)
*Better tax collection results to:
a. Lower Debt-to-GDP Ratio
b. Funds for Social Services
c. Other obligations answered.
*40B short for BSP was paid.
*Investment Grade Status: Moody's, Fitch and Standard and Poor (credit ratings agency)
*Puhunang pumasok sa Philippine Economic Zone Authority since 1995: 42% (4 years of Pnoy) and 58% (previous 15 years
before Pnoy).
*Lilia de Lima, Director General of PEZA.
*International Civil Aviation Organization (ICAO) removed the significant safety concerns.
*EU permitted PAL to Europe.
*United States Federal Aviation placed the Philippienes back to Category 1.
*William Hotchkiss - Director General of Civil Aviation Authority of the Philippines
*World Economic Forum on East Asia last May.
*Single Entry Approach (SENA) of DOLE prevented 115 notices of strike and lockout to just one labor strike.
*DOLE Secretary Linda Baldoz
*Infrastructure Budget: PHP 200.3B (2011) to PHP 404.3B (2014)
*DPWH Secretary Babes Singson
*Simplification: (1) Removal of Letter of Intent in the Bidding process and (2) Less requirements (from 20 to 5).
*12, 184 kilometers - Made and repaired roads.
*Public-Private Partnerships (PPP): 7 projects (2011) from 6 (of 3 previous administrations)
*DOF Secretary: Cesar Purisima
*Infrastructures made: Mactan-Cebu International Airport Passenger Terminal Building, NAIA Expressway Project Phase 2,
TPLEX, Aluling Bridge, Metro Manila Skyway Stage 3, Ternate-Nasugbu Road, Basilan Circumferential Road
*Water shortage in 2021
*Kaliwa Dam project, Angat Dam repair and Water District Development Sector Project.
*Biggest PPP: Laguna Lakeshore Expressway Dike
*Projects approved by NEDA: Laoag City Bypass Link Project, Cebu Bus Rapid Transit Project and LRT Line 2 South Extension
and Line 2 East Extension, Busuanga Airport, Clark Green City in Tarlac
*Zamboanga Event: 195/197 were saved
*Zamboanga City Roadmap to Recovery and Reconstruction: 7176 kabahayan
*Home Materials Assistance: 1661 pamilya were given 30K to repair their own house
*3.5B to Zamboanga for overall reconstruction
*Earthquake in Bohol: 25 critical bridges fixed, 3.583B for rehabilitation for Bohol and Cebu.
*Yolanda: 1.47M pamilya, 44/81 provinces affected
*Within the day: 3 C130 planes entered, established communications hub.
*2nd Day: Rapid Health Assessment teams, additional soldiers, policemen and BFO personnel, working Leyte Water district
*3rd day: first gasolinahan opened,
*November 22: 1 millionth food pack and cleared 35, 162 cubic meters of debris and 3, 426 kilometers of cleared National
roads.
*December 25: electricity restored
*DTI Secretary: Greg Domingo
Economics Page 24

*DTI Secretary: Greg Domingo

*DOLE Secretary Linda Baldoz
*DOTC Secretary Jun Abaya
*DSWD Secretary Dinky Soliman
*DILG Secretary Mar Roxas
*DND Volts Gazmin
*221, 897: Jobs created due to livelihood interventions
*According to United Nations Development Programme Yuri Afanasiev, it may take one year, but Philippines was able to
recover in 8 months. Build Back Better project
*LGU Rehabilitation and Recovery Plan for Cebu, Iloilo, Samar, Eastern Samar, Leyte at Tacloban
*Rehabilitation secretary Ping Lacson
*Dream-LiDAR Project (Project Noah) - flood early detection system. 19/20 already mapped river system
*Albay Governor Joey Salceda
*New Security: 8 Sokol Combat Utility Helicopters, 3 AugustaWestland-109 helicopters, BRP Tagbanua Landing craft utility
ship, 4 refurbished UH-1 helicopters and 2 navy cutters, 17 FA50 lead-in fighter trainer jets, 8 Bell combat utility helicopters,
2 antisubmarine helicopters,2 light lift aircraft, 3 medium-lift aircraft, radar systems
* 50, 629 M4 rifles
*Command Center of Naval Forces West in Palawan
*1.2B savings of security.
*Kevlar Helmets bought in other countries scandal.
*Chairman and Secretary General of NPA caught.
*250 NPA defeated by 30 policemen of Inspector Charity Galvez (2011)
* 4 new police against Martilyo Gang of SM MOA
*1:1 police to pistol ratio
*Caught of Mayor Ernesto Balolong, Businessman Richard King and Race Car Driver Ferdinand Pastor
* Operation Lambat (NCR) - 862 vehicles and 29 guns confiscated, 587 warrants of arrest, 410 suspects caught
*Result: 31/week to 22/week murders.
*Customs was reset. Customs Commissioner Sunny Sevilla. 22% increased collection. First four months: PHP 117B
*Cadastral Survey (1913) - identified the lands that can be distributed. New Cadastral Survey (2016)
*ARMM Governor Mujiv Hataman
*Comprehensive Agreement on the Bangsamoro (March 2014)
*5.17B allotted for infrastructure in ARMM
*Bangsamoro Basic Law / Bangsamoro Transition Authority
*1.65M new employed Filipinos from April 2013 to April 2014
*K-12, 1:1 pistol ratio, National defense modernization, Mindanao peace.
*Energy issues DOE Secretary Icot Petilla
*Rice and hoarder issues: import! (500, 000, 800, 000 (buffer), 500, 000 (additional) metric tons of Rice)
*Agriculture improvements: 4, 628 production machineries, 11, 362 post-production machineries, and 105 rice mills.
Irrigation improvements.
*DAP replacement? Supplemental budget for 2014. Joint Resolution to clear definitions and principles in legislature.
*PHP 2.606T in 2015 budget

*Alternative Learning System of DepEd

*Jalaur Multi-purpose River project for Iloilo farmers of irigasyon.
*"The Filipino is worth dying for. The Filipino is worth living for. The Filipino is definitely worth fighting for."

Economics Page 25

Chapter 5 - The Economic Role of Government

Tuesday, July 08, 2014

7:36 PM

Three Powers of the Sovereign State

1. Police Power (800 citizens / 1 police)
2. Taxation
3. Imminent Domain
*Market (Private)- a reaction of two parties where one would want to forego of their goods and one is willing to accept the goods at an
agreed amount.
*Collective Action (Public)- when a number of individual or groups or interest groups bind themselves to act as one for a greater impact of
what is designed

Kinds of taxes by households: Income Tax, Taxes (amilyar ng bahay) and Value-added Tax (12%. Ralph Rector (proponent)
Kinds of taxes by business firms: corporate tax, corporate income taxes and Value-Added Tax (VAT)
Taxation: inherent power of the government. Inherent means there's no need to pass the law for tax. Government has the right to collect
taxes.
- higher income, the higher the taxes = progressive
- collected for every income earned
- from "Robin Hood"
- purpose: to provide public good
*Public Goods (Collective) = goods or services for free, not required to pay directly
*jeepneys are owned by private sectors but is designed for public consumption
*exercise ethics when using these public goods (CR, jeepneys)
*public goods cannot be denied from anyone! Public schools should accept everyone, rich or poor!
*public goods cannot be sold (MRT, parks, basketball courts)
Bakit may bayad ang ilang public goods?
- Partnership with private investors: BOT (build, operate, transfer)
- LRT, NLEX, SLEX
Economic Efficiency - we want to maximize net benefits or minimize net costs
- All actions involve costs and benefits and we want to engage in economizing or maximizing behavior for all decisions, both private and
public.
Rules of Economic Efficiency:
1. Engage only in activities where benefits (B) are greater than the costs (C). In doing so, welfare increases. Undertake efficient activities.
Economics Page 26

1. Engage only in activities where benefits (B) are greater than the costs (C). In doing so, welfare increases. Undertake efficient activities.
(e.g. Education)
a. Plantsang naiwang nakasaksak? Nagload ng 20 pesos to call mom. 20 pesos is nowhere near the risk of fire damage.
b. Why is building public schools a priority than feeding people or pabahay? Long term benefits! Feeding program is only short
term fix.
c. Senate session is very costly but is wasted on endless battling and rants.
2. Avoid activities where the costs outweigh the benefits. This leads to counter production. Not engaging in inefficient activities.
Most of the time, a market economy results in economic efficiency because market prices and market forces guide the economy to efficient
outcomes. Government intervention would lead to economic inefficiency.
Government failure happens when it intervened but could not improve on market outcomes.
But in some cases, government can increase efficiency if the market itself is inefficient (e.g. pollution). Government has to take care of
pollution issues.
Three important functions of the government:
1. Protective function - security and peacefulness
a. X - You feel unsafe when going out of the house, while riding public transportation.
2. Productive function - provide and make available the needed goods and services when the existing market hardly had enough to
produce
a. Check - Everything is well provided because of the private sector. It never happened that when you need something, you can't
buy it anywhere.
3. Distributive function - provide necessary infrastructures to facilitate the speedy distribution of goods and services
a. Everyone should be reached by the goods: rich and poor.
Importance of Private Company Intervention
- private sectors can join a government function only on the basis of inviting them to join, while they are allowed to make a profit. Cannot
impose excessive profit!
- moneyed group whose interest is to make profit out of the money available for government to use. They have the logistics and resources
that the government doesn't have.
- sometimes use the government to prevent competition!
- Competition in the market serves as a very effective natural regulator and imposes a strong discipline on sellers. Government intervention
may or may not be able to improve on competitive market outcomes.
Externalities: spillover effect (or side effect) on non-consenting second parties, which can either be positive or negative.
Public goods: anything that comes from the government (roads and bridges, parks and recreation centers, public hospitals, public schools,
municipal halls, sea and air ports, ROROs, cable lines, NLEX, SLEX, SCTEX, government TV and radio stations, LRT, MRT, garbage collection
services and garbage dumpsites.
*The joint consumption and excludability makes something a public good, not because the public, government or private sector provides it.
*Free riders = people who don't pay taxes
*If we relied only on the market to supply all public goods, the optimal amount would not be supplied, especially of things like national
defense due to the free rider problem. Therefore, economic efficiency may be improved if some public goods are supplied by the public
sector.
Potential Information Problems: Lack or unavailability of information to the consumers may mean profit maximization by firms. Hence, the
government may have to intervene!
a. The market does provide tremendous amounts of information and there is also presence of private regulation (Underwriter's
laboratory, Consumer reports), but there may be some cases where the government can increase economic efficiency (FDA).

Tax Cuts: reduction in taxes

*but investments of tax payers can still be additional income for government
*Short term effect: decrease in real income of government but increase in real income of individual tax payers
*Long term effect: loss in government income
*Corporations don't pay taxes, but the individual people do!
- If corporate taxes are raised, the firm will have to either
1. Raise prices for customers
2. Reduce wages
3. Reduce dividends
Economics Page 27

3. Reduce dividends
Laffer Curve -there is an optimum tax rate between 0% and 100% that gives the government the maximum possible revenue.
- theoretical framework of tax collection.
- used to validate the efficacy of Reagan's Supply-Side economics

Economics Page 28

Chapter 6 - The Concept of Public Sector

Friday, July 18, 2014

9:01 AM

Bases that we had better economic well-being during martial law:

1. Peso dollar exchange at that time is 1 dollar to 2 pesos.
2. People are law-abiding citizens
3. There is a cheaper cost of living.
4. Development is vast.
5. Labor strike is at minimum.
6. Political unrest is not present to the majority.
*Kangaroo court
*Knights of Rasputin
When is voting working well for our benefit
*During election season, politicians are very active and present in providing all services one can think of.
*Government provision of many public goods falls into this category: national defense, national highway
systems, etc.
*Government provision of a specific service to consumers, financed by a user fee: government provision
of electricity, water and sewer.
*Voter support of these programs will provide politicians with an incentive to provide these public
services, and the outcome could often be economically efficient.
When voting conflicts with Economic Efficiency
*Special Interest Effects: Public choice analysis predicts that there can be serious problems (economic
inefficiency) when benefits are concentrated on a narrowly focused special interest group.
Special Interest Groups: very organized, concentrated and well informed on issues affecting their group
(e.g. farmers, teachers, etc.)
- seek (demand) legislation that generates substantial benefits on their well-organized small group, while
imposing a very, very small individual cost on the dispersed tax payers.
Public Choice analyses the motives and activities of politicians, civil servants,, and government officials as
people with personal interests that may or may not coincide with the interest of the general public.
*It does not follow that whenever laissez-faire falls short, government interference is expedient; since the
inevitable drawbacks of the latter may be worse than the shortcomings of private enterprises.
Public Choice economics - looks at the public or collective decision making using the economic way of
thinking and an economic frame work and analysis (Supply and demand)
- Decisions in the economy have to be either be made privately (market, individuals, firms) or publicly
(collectively, through government)
Market Failures: market fails to promote the general welfare
Government failures: government fails to serve the public
Government: is an alternative method (to the market) of social organization - an institutional process
through which individuals collectively make decisions and carry out activities
Economists have studied the market (over 200 years) and the public sector (40 years.)
Collective Decision making involves three groups:
1. Voters (Demand) - Consumers, taxpayers and special interest groups.
Economics Page 29

1. Voters (Demand) - Consumers, taxpayers and special interest groups.

2. Politicians (Supply) - Suppliers
3. Bureaucrats - who carry out and administer legislation.

Public choice analysis looks at the Supply and Demand for Legislation
Transfer Payment - part of our national disposable income attributed to the assignment of a certain
amount given to retrieved individuals after rendering considerable number of years in the service of
others.
- monthly pensions received by our older folks.
- Positive: token of recognition of services rendered by the government
- Negative: money spent to a non-functioning sector in the economy like "conditional cash transfer" and
"tulong pantawid". Motivations to tolerate laziness and dependency.

Economics Page 30

Chapter 7 - Unemployment and Inflation

Thursday, August 21, 2014

12:05 PM

Three Main economic variables to assess Health of the economy

1. Output (GDP)
2. Inflation
3. Unemployment
Business Cycle: fluctuations in real GDP growth (some 3%, some 6%, some negative)
*Recession: Two or more consecutive quarters of negative real GDP growth
*Depression: Prolonged and severe recession lasting for years
Direct Investments: category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an
enterprise resident in another economy.
Portfolio Investments: include, in addition to equity securities and debt securities in the form of bonds and notes, money market instruments and financial
derivatives such as options.
Causes of structural unemployment:
1. Technological Change: new products, new industries, new opportunities for some, reduced opportunities for others.
2. Shifts in public sector priorities: reduction on defense spending, base closings.
*Full employment doesnt mean zero unemployment. We don't want zero unemployment because it could be a sign of stagnant economy.
Measurement Problems for Unemployment Rate:
*Full employment / full output = efficient use of labor and resources in the economy, allowing for frictional and structural unemployment
*Natural rate of unemployment = frictional and structural unemployment. It is a long run, sustainable condition due to imperfect information and dynamic
changes, a maximum, sustainable rate of output.
1. Discouraged workers, who have given up looking for a job, are not counted in the labor force, and are not counted in any rate . Only those who are
actively looking for a job are counted in the unemployment rate.
2. Part-time workers are not classified as unemployed.
3. Some unemployed people claim to be actively looking for a job, and are counted as unemployed, when they may not be seriously looking seeking
employment at all.

Costs of Inflation:
1. Inflation distorts long term projects and contracts.
2. Resources get used up trying to avoid the negative effects of inflation. Time attention and energy get diverted away from pro ductive activities to trying
to protect against the effects of inflation. (Changes in menu price)
3. Inflation reduces the information content of prices. Market prices transit information about relative scarcity, supply and de mand conditions, etc.
Inflation distorts the important economic information delivered by prices.
*Main factor causing inflation: excessive growth in the money supply. Too much money, chasing too few goods.
Four Main Markets in the economy:
1. Market for final goods and services
2. Market for resources/inputs (labor market)
3. Market for financial assets (stocks, bonds, credit, loanable funds)
4. Foreign exchange
Basic Concepts:
1. Fiscal policy: Conducted by Congress and the President that involves tax policy, spending policy, regulations, social security, Medicare, as they try to
stabilize and regulate the economy, to promote national goals like economic growth, low unemployment, etc.
2. Monetary policy: Conducted by the Federal Reserve or Central Bank of the country, which controls the money supply and attempts to stabilize th e price
level.
3. Money supply. Most narrow definition of money. Cash, checking accounts and traveller's checks than be used to make final payment of goods a nd
services. (Not savings accounts).
4. Underground economy involve a job or transaction that is hidden from official view.
*If resource prices are low relative to retail prices, output would expand. If resource prices are high relative to retail prices, output would contract.
Four Basic Markets (Circular Flow of Income)
1. AD/AS (GDP)
2. Resource Markets (National Income)
3. Loanable Funds/Credits
4. Foreign Exchange

Three Units of the Economy

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Three Units of the Economy

1. Households (Consume)
2. Businesses (Invest)
3. Governments (Government spending)
*Long run equilibrium - a point that the real economy may never get to. It is always moving towards equilibrium but equilibrium is a moving target. It may
reach equilibrium but doesn't ever stay there very long.

Economics Page 32

Chapter 8 - Business Cycle

Sunday, August 31, 2014

7:27 PM

A supply shock is an event that suddenly changes the price of a commodity or service due to sudden increase or decrease in the supply of a particular good.
*A negative supply shock (sudden supply decrease) will raise prices and shift the aggregate supply curve to the left, can cause stagflation due to a
combination of rising prices and falling output.
*A positive supply shock (an increase in supply) will lower the price of said good and shift the aggregate supply curve to the right, could be due to an
advance in technology (a technology shock) which makes production more efficient, thus increasing output.
Business Cycles happen due to the macro market's inability to adjust instantly to the dynamically changing AD and supply shocks and decision maker's
imperfection in anticipating the price level changes.
*The faster the information flows through the economy, the faster the adjustment and the shorter the fluctuations.
*The economy in Information age should be more stable than Machine Age.

Happens when: Retail prices are low relative to input prices.

Causes:

Retail prices are high relative to input prices.

Profits are temporarily below normal.

Profits are temporarily above normal.

Output to be temporarily below normal.

Output to be temporarily above normal.

1) Decrease in AD (lowers the retail prices)

1) Increase in AD (raises the retail prices)

2) Negative Supply Shock (raises the input prices) like oil shocks. 2) Positive supply shock (lowers the input prices)
Recession

Expansion

*Retail prices: prices in the market for final goods

*Input Prices: Cost of Production
Permanent Income Hypothesis (Milton Friedman) is an economic theory about consumption
*states that present consumption or expenditure actually depends more on the long-run expected lifetime income (or permanent income) than on the
present income (or temporary income).
*A theory of consumer spending which states that people will spend money at a level consistent with their expected long term average income. The level
of expected long term income then becomes thought of as the level of "permanent" income that can be safely spent.
*total expenditure of four sectors of the economy is constant over the business cycle
Self-Correcting Mechanisms
*the economy has sophisticated information feedback loops and at least three built-in self-correcting, self-stabilizing mechanisms:
1. Consumption is relatively stable over the business cycle: 2/3 in GDP, Stable consumption spending stabilizes the economy and potentially prevents
the economy from a prolonged recession.
a. During expansion, temporary income increases yet consumption is still the same, but they save more money. the stability of consumption
helps dampen the growth of AD and keep inflation under control
b. During recession, temporary income decreases yet consumption is still the same, since they borrow money from savings, hence savings
decreases.
2. Real Interest Rates: Lower real interest rates during recession attracts borrowers, which stimulates the economy again. High interest rates during
expansion limits borrowers, which help restrict or slow down the economy.
a. During expansion, there is an increased demand for credit by consumers and businesses putting an upward pressure on interest rates. The
higher interest rates delimits borrowers, which restricts the economy.
b. During recession
3. Resource Prices: Lower resource prices stimulate the economy during recession and higher resource prices restrain the economy during expansion.
a. During expansion, the amount . output will be greater than full employment capacity (or greater than usual) and there is an increased demand
for resources (wages, raw materials, supplies and commodities), hence resource prices tends to go up. This will restrain the economy.
b. During recession, output will be lower than the full employment capacity and there is a decreased demand for resources, hence resource prices
will fall. This will help stimulate the economy.

Economics Page 33

Chapter 9 - Money and the Banking System

Thursday, September 04, 2014

7:40 PM

Fiscal Policy: conducted by the Congress and the President (or Parliament and Prime Minister).
Monetary Policy: conducted by the Central Bank (a quasi-governmental institution that supervises the banking system and regulates the
supply of money in the economy).
Money: what we use to make payments for our debts, goods, services, products and financial assets.
*Has no real value (unlike gold or silver money), but everyone still wants more of it.
Three Important Functions of Money
1. Medium of Exchange: a means to make final payments.
a. Dollar for paying good and services outside the country and pesos for our everyday purchases.
b. Without money, barter! (a system of trading goods for goods or service of goods). Inefficient because it relies on double
coincidence of wants (have to find someone who wants what you have and who have what you want).
c. Money eliminates the double coincidence of wants and makes the economy operate much more efficiently.
d. When is barter efficient? In baseball card conventions, coin/stamp trading, etc.
2. Money is used a unit of account - a measure of economic value of a good.
a. By having a common unit of account, we can compare prices/values easily since economic value is stated in dollars.
3. Store of Value / Wealth:
a. Used as a financial asset to transfer purchasing power from the current period to a period in the future.
b. Used to store wealth in stocks, bonds, mutual funds, real estate.
c. Advantages of Money:
i. Cash is more liquid than any other asset.(Liquidity: the degree to which an asset can be converted to cash quickly
without loss of value.) Stocks and bonds are not as liquid as cash.
ii. Cash has a fixed nominal value. PHP100 will always be worth PHP100 unlike stocks /bonds/real estate which could
fluctuate in value.
iii. Cash is anonymous.
d. Disadvantages of Money:
i. Pays no interest, and will lose value (purchasing power) when inflation is positive.
ii. Cash is anonymous.
*In most cases, the same currency is used a medium of exchange, a unit of account and a store of value, like in the Philippines. However:
1. Israel: Dollars are used as unit of account (to avoid menu costs due to high inflation). Israeli Shekl is used as medium of exchange.
2. Russia, S. America, etc. Local currency is not used as a store of value; people hoard US dollars.
3. Euro, SDRs. Unit of accounts without a medium of exchange. Basket of currencies, which are quoted daily in the WSJ as ex-rates.
Bangko Sentral ng Pilipinas
*Established on July 3, 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993.
*Took over Central Bank of the Philippines, which was established January 3,1949.
*Country's central monetary authority that enjoys fiscal and administrative autonomy from the national government in the pursuit of its
mandated responsibilities.

Philippine Banking System is composed of:

1. Universal and commercial banks: the largest single group, resource-wise, of financial institutions in the country.
a. Commercial Bank: They offer the widest variety of banking services among financial institutions.
b. Universal Bank: Authorized to engage in underwriting and other functions of investment houses, and to invest in equities of
non-allied undertakings.
2. The Thrift Banking System: Composed of savings and mortgage banks, private development banks, stock savings and loan
associations and microfinance thrift banks.
a. Thrift banks: engaged in accumulating savings of depositors and investing them. They also provide short term working
capital and medium and long term financing to businesses engaged in agriculture, services, industry and housing.
3. Rural and Cooperative Banks: The more popular type of banks in the rural communities. Their roles is to promote and expand the
rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial servic es.
a. Help farmers through the states of production from buying seedlings to marketing their produce.
b. Rural banks: privately owned and managed.
c. Cooperative: organized / owned by cooperatives or federation of cooperatives.
*At present, there are 17 universal banks, 21 commercial banks, 80 thrift banks and 726 rural and cooperative banks.
Economics Page 34

*At present, there are 17 universal banks, 21 commercial banks, 80 thrift banks and 726 rural and cooperative banks.

*Plastic Money (Credit Card) is the most convenient comfort zone of people who spend more than what they earn. It is a baggage
because it carries interests!
*Central Bank should be independent from the influence of politicians, so that they can set monetary policy for the best long-term
interest of the economy and also to more effectively control inflation since they are not accountable to the fiscal policy makers.
*Federal Reserve (Fed) can affect the MS (Monetary System) by changing the reserve requirements.
Economics Page 35

*Federal Reserve (Fed) can affect the MS (Monetary System) by changing the reserve requirements.
a. Inverse Proportionality: The lower the Fed requirement, the higher the Monetary system, because banks don't like excess
reserves since they are non-interest bearing assets, hence they would be loaned out and MS would increase.
b. Lower Reserve requirements = Expansionary or an easing of monetary policy.
c. Higher Reserve requirements = Contractionary or restrictive monetary policy
d. Changes in reserve requirements are rarely used a tool of monetary policy.
Open Market Operations:
An open market operation is an activity by a central bank to buy or sell government bonds on the open market, directly to and from
the public. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations
is to manipulate the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money
supply, in effect expanding money or contracting the money supply.
*When BSP buys treasury bills, money supply increases, because BSP gives out money. This money then gets deposited on the
individual's or business' bank account, which may get spend and redeposited again.
*BSP only deals with Banks, not the public. The only instance that it deals with the public is during open market operations.

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Bangko Sentral ng Pilipinas

Friday, September 05, 2014

8:55 AM

Overview of Functions and Operations

Objectives:
The BSPs primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims
to promote and preserve monetary stability and the convertibility of the national currency.
Responsibilities:
1. Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing money supply consistent
with its primary objective to maintain price stability.
2. Currency issue. The BSP has the exclusive power to issue the national currency. All notes and coins issued by the BSP are fully
guaranteed by the Government and are considered legal tender for all private and public debts.
3. Lender of last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes.
4. Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-bank institutions performing quasibanking functions.
5. Management of foreign currency reserves. The BSP seeks to maintain sufficient international reserves to meet any foreseeable
net demands for foreign currencies in order to preserve the international stability and convertibility of the Philippine peso.
6. Determination of exchange rate policy. The BSP determines the exchange rate policy of the Philippines. Currently, the BSP
adheres to a market-oriented foreign exchange rate policy such that the role of Bangko Sentral is principally to ensure orderly
conditions in the market.
7. Other activities. The BSP functions as the banker, financial advisor and official depository of the Government, its political
subdivisions and instrumentalities and government-owned and -controlled corporations.
The Monetary Board
*Its chairman is the BSP Governor, with five full-time members from the private sector and one member from the Cabinet.
*Serves six years.
The Monetary Board meets at least once a week. The Board meets every Thursday but on some occasions, it convenes to discuss
urgent issues.
The major functions of the Monetary Board include the power to:

1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers
vested in it;
2. Direct the management, operations, and administration of Bangko Sentral, organize its personnel and issue such rules and
regulations as it may deem necessary or desirable for this purpose;
3. Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or
dismissal of all personnel;
4. Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the interest of the effective
administration and operations of Bangko Sentral in accordance with applicable laws and regulations; and
5. Indemnify its members and other officials of Bangko Sentral, including personnel of the departments performing supervision
and examination functions, against all costs and expenses reasonably incurred by such persons in connection with any civil or
criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of his functions
or duties, unless such members or other officials is found to be liable for negligence or misconduct.
The BSP Monetary Board
Chairman: Amando M. Tetangco, Jr.
Members:
1. Cesar V. Purisima (Department of Finance)
2. Alfredo C. Antonio
3. Juan D. A Zuiga, Jr.
4. Valentin A. Araneta
5. Felipe M. Medalla
6. Armando L. Suratos
Economics Page 37

6. Armando L. Suratos

Economics Page 38

Chapter 10 - Fundamentals of Taxation

Wednesday, September 10, 2014

10:30 AM

Taxation: refers to the inherent power of the state exercised through legislature to impose or levy a proportionate burden upon persons, property,
rights or transactions to raise revenue to support and maintain government expenditures and for general and economic welfare.
Purpose of Taxation:
1. Raise government revenue to finance the provision of public goods and services.
2. Redistribute wealth between the rich and the poor. For example, progressive tax (the richer, the more tax. The poorer, the less tax)
3. A kind of moral control - "Sin tax" to collect more tax from those who could afford them and to minimize consumption of harmful products.
4. Control of the economy - the tax can be designed so as to adjust the money supply, supply of labor, and all other factor of inputs of production.
Conditions necessary for a successful of taxation, according to Richard Goode.
1. The existence of a predominantly monetary economy - Taxes are in cash, not goods or services.
2. Well-informed payers. Taxes involve form filing, so an element of being able to read and write should exist.
3. The presence of accounting records that maintain hones

Economics Page 39