MACROECONOMICS

- deals with the economic behavior of the whole economy or its aggregates such as government, business and
household.
- concerned with the discussion of topics like GNP, level of employment, national income, general level of prices,
total expenditures, etc

THE THREE BASIC ECONOMIC PROBLEMS ARE:

1. What goods and services to produce and how much
2. How to produce the goods and services
3. For whom are the goods and services

PRICE
- the value of a product or service.
- expressed in terms of a monetary unit like peso, dollar, or yen

DEMAND
- the schedule of various quantities of commodities which buyers are willing and able to purchase at a given
price, time and place
- it is determined by factors such as
- income
- population
- taste and preferences
- price expectation
- prices of related goods

Income: People buy more goods and services when their incomes increase
Population: More people means more demand for goods and services
Taste and preferences: Demand for goods and services increases when people like or prefer them
Price expectation: When people expect the prices of goods, especially basic commodities like rice, soap, cooking oil, or
sugar, to increase tomorrow or next week, they buy more of these goods
Prices of related goods. When the price of a certain product increases, people tend to buy a substitute product
(competitor)

LAW OF DEMAND
- Consumers are most likely to buy more goods and services as price decreases, and buy less goods and
services as price rises.

INCOME EFFECT
at lower prices, an individual has a greater purchasing power which means that he can buy
more goods and services

SUBSTITUTION EFFECT
consumers tend to buy goods with lower prices. In case the price of a product that they are
buying increase, they look for substitutes whose prices are lower.

CHANGES IN DEMAND
- refer to changes in the determinants of demand like income, population, price expectation, and so forth.
- example: an increase in population also increases demand for goods and services, or a decrease in income
also reduces demand

CHANGES IN QUANTITY
- indicate the movement from one point to another point (from price-quantity combination to another price-
quantity combination on a fixed demand curve).
- mean the demand curve does not change its position like that of the demand curve in the changes in demand
- the change in quantity demanded is brought about by changes in price
- whenever there is a change in price (increase or decrease), there is a corresponding change in quantity
demanded.
SUPPLY
- the schedule of various quantities of commodities which producers are willing and able to produce and offer at a
given price, place and time.
- its determinants are:
- technology
- cost of production
- number of sellers
- prices of other goods
- price expectations
- taxes and subsidies

technology
refers to the techniques or methods of production
modern technology - which uses modern machines - increases supply of goods
reduces cost of production, and this encourages the producers or sellers to increase their
supply
lower cost of production results in an increase in profit

cost of production
in producing goods, raw materials are needed, together with laborers.
if price of raw materials or the salaries of the laborers increase, it means higher cost of
production

number of sellers
more sellers or more factories mean an increase in supply.
smaller number of sellers or factories means less supply

prices of other goods

changes in the price of goods affect the supply of such goods

price expectations
if producers expect prices to rise very soon, they usually keep their goods and then release
them in the market when the prices are already high
this creates artificial shortage due to hoarding
on the other hand, many factories increase the number of their goods due to expected price
increase.

taxes and subsidies

higher taxes discourage production because it reduces the earnings of businessmen.
tax incentives are granted to foreign investors in order to increase foreign investments in
the Philippines resulting in an increase in production of goods.
subsidies reduce cost of production. it induces the farmers to produce more

LAW OF SUPPLY
- as price increase, quantity supply also increases, and as price decreases, quantity supply also decreases
- direct relationship between price and quantity supplied

CHANGES IN SUPPLY
- pertains to changes in the determinants of supply
- example: a decrease in cost of production increases supply. more subsidies result to more supply

CHANGES IN QUANTITY SUPPLIED

- shows the movements from one point to another point on a constant supply curve
- it is brought above by change in price

LAW OF SUPPLY AND DEMAND

- when supply is greater than demand, price decreases.
- when demanded is greater than supply, price increases.
- when supply is equal to demand, price remains constant.
 - the market price or equilibrium price
- means both sellers and buyers have mutual agreement

ANALYSIS OF PRICE SYSTEM

Price System
- is a mechanism of allocating goods and servies through the rise or fall of prices caused by interplay of supply
and demand foces

Favorable Arguments for the Price System

1. its efficiency in distributing goods and services
- on the part of the producers, they tend to produce those goods which give them maximum
profits.
- on the part of the consumers, they inclined to purchase those goods which provide them
maximum satisfaction
- this makes both producers and consumers to be natural and rational

2. the presence of personal freedom

- producers are free to produce goods and services to satisfy their own economic interests
as long as these do not conflict with legal and moral traditions
- other personal freedoms include the free choice of workers or employees
- the government does not interfere in the operations of the price system

CRITICISMS AGAINST PRICE SYSTEM

1. Free competition does not really exist. Self-interests of businessmen force them to drive away their rivals
through cutthroat competition.

2. Unfair distribution of goods and services

3. Social goods like anti-pollution, rural electrification, irrigation, or highways cannot be allocated efficiently through
the price system.

ROLE OF THE GOVERNMENT

1. The government has to regulate and supervise production, distribution and consumption of goods and services.
2. The government provides incentives in the production of goods and services that greatly contribute to the
socioeconomic development of the country.
3. It interferes in the allocation of goods and services in order to protect and promote the welfare of the poor.

DEMAND ELASTICITY
- refers to the reaction or response of the buyers to changes in price of goods and services

5 types of demand elasticity or reactions of buyers to price changes of goods and services
1. Elastic demand - a change in price results to a greater change in quantity demanded
2. Inelastic demand - a change in price results to a lesser change in quantity demanded
3. Unitary demand - a change in price results to an equal change in quantity demanded
4. Perfectly elastic demand - without change in price, there is an infinite change in quantity demanded
5. Perfectly inelastic demand - a change in price creates no change in quantity demanded

Determinants of Demand Elasticity

1. Number of good substitutes
- an increase in the price of such product induces buyers to look for good substitues

2. Price increase in proportion to income

- if the price increase has very little effect on the income or gudget of the buyers, demand is
inelastic

3. Importance of the product to the consumers

 - examples are rice and gasoline, which make these inelastic

EXAMPLES OF ECONOMIC SIGNIFICANCE OF ELASTICITY OF DEMAND

Wage determination
if the product has elastic demand, a reduction in its price increases quantity demanded
this means more sales and more profits
the company is in the position to raise the wages of its workers.

Farm production guide

measures that are prepared to control production to protect the interests of the farmers

Maximize profits
a reduction in price causes more quantity demanded

Imposition of sales taxes

SUPPLY ELASTICITY
- refers to the reaction or response of the sellers / producers to price change of goods.

5 TYPES OF ELASTICITY OF SUPPLY OR TYPES OF RESPONSES OF PRODUCERS TO PRICE CHANGES

1. Elastic supply - a change in price results to greater change in quantity supplied
2. Inelastic supply - a change in price results to a lesser change in quantity supplied.
3. Unitary supply - a change in price results to an equal change in quantity supplied
4. Perfectly elastic supply - without change in price, there is an infinite (without limit) change in quantity supplied
5. Perfectly inelastic supply - a change in price has no effect on quantity supplied

THEORY OF CONSUMER BEHAVIOR

1. Law of diminishing marginal utility
- consumption of more successive units of the same good increases total utility but at a
decreasing rate because marginal utility diminishes

Utilities means satisfaction

Marginal utility refers to the additional satisfaction of a consumer whenever he consumers one more unit of the same
good

2. Indifference curve
- a curve on a graph (the axes of which represent quantities of two commodities) linking
those combinations of quantities that the consumer regards as of equal value.

3. Budget Line or consumer-possibility line

- indicates the various combinations of two products which can be purchased by the
consumer with his income, given the prices of the products.
- a consumer has a fixed budget, and he has to spend his money wisely to be able to
maximize his satisfaction.

4. The equilibrium of the consumer

- the consumers equilibrium behavior is to choose the combination which maximizes his
satisfaction
- consumer can afford to purchase the products with his fixed income or gudget
ECONOMIC GOODS
- Goods produced by man

FREE GOODS
- Goods produced by nature

FACTORS OF PRODUCTION
1. Land - is an original gift of nature
2. Labor - is an exertion of physical and mental efforts of individuals
3. Capital - is a finished product which is used to produce other goods
4. Entrepreneur - is the organizer and coordinator of the land, labor and capital

PRODUCTION
- is the creation of goods and services to satisfy human wants

Inputs of Production
- the factors of production
- Fixed factor (fixed input)
- remains constant regardless of the volume of
production
- means that whether you produce or not, the factor
of production is unchanged.
- example (land and capital)

- Variable Factor (variable input)

Outputs of Production
- the goods and services that have been created by the inputs

Theory of Production
- The process of transforming both fixed and variable inputs into finished goods and services

Production Function
- technical relationship between the application of inputs (factors of production) and the
resulting maximum obtainable output

LAW OF DIMINISHING RETURNS

- also known as the law of diminishing marginal productivity
- the basic law of economics and technology
- states that when successive units of a variable input (like farmers) work with a fixed input (like one hectare of
land), beyond a certain point the additional product (output) produced by each additional unit of a variable, input
decreases.

MARGINAL PRODUCT
- defined as the additional product brought about by one additional unit of a variable input

ECONOMIC COSTS
1. Total cost
- is also the equivalent of fixed costs plus variable cost
 - the sum total cost of production. Composed of wages, rents, interests, and normal profits.
- also known as factor payments: wage for labor, rent for land, interest for capital, and normal
profit for the entrepreneur
- Normal profit
- part of the total cost of production
- an amount which is sufficient to encourage an entrepreneur to remain
in business
- Pure profit
- an amount which is in excess of the cost of production

2. Fixed cost - a kind of cost which remains constant regardless of the volume of production
3. Variable cost - a kind of cost which changes in proportion to volume of production
4. Average cost - also called unit cost
5. Marginal cost- the additional or extra cost brought about by producing one additional unit
6. Explicit cost - also called expenditure cost
7. Implicit cost - also called non-expenditure cost
8. Opportunity cost - a forgone opportunity or alternative benefit

SHORT RUN
- refers to a period of time which is too short to allow an enterprise to change its plant capacity, yet long enough
to allow a change in its variable resources
LONG RUN
- refers to a period of time which is long enough to permit a firm or enterprise to alter all its resources or inputs
(both fixed and variable factors)

ECONOMIES OF SCALE
1. External economies of scale
- refers to those factors which are outside the firm or enterprise, but they contribute to the
efficiency of the latter in terms of increased output and decreased unit cost of production.

2. Internal economies of scale

- these are the factors inside the firm or enterprise which contribute to the efficiency of the
latter

LABOR-INTENSIVE TECHNOLOGY
- this means more labor inputs and less capital inputs
- the more plentiful resources should be utilized because these are cheaper

REVENUE
- income-side of the firm
TOTAL REVENUE - TOTAL COST = PROFIT

THE RULE: Total Revenue - Total Cost Approach

- if the total revenue is greater than variable cost, OPERATE
- if the total revenue is less than variable cost, SHUT DOWN
-
- Total Revenue (TR) > Total Cost (TC) : PRODUCE MORE
- TR < TC: STOP PRODUCTION
- TR = TC: MAINTAIN PRODUCTION

MARGINAL REVENUE
- the additional income of a firm brought about by producing and selling one additional unit of a product.
MARGINAL COST
- the additional cost of producing additional product

THE RULE: MARGINAL REVENUE - MARGINAL COST APPROACH

- if marginal revenue is greater than marginal cost: INCREASE PRODUCTION
- if marginal revenue is less than marginal cost: DO NOT INCREASE PRODUCTION
ECONOMIC EFFICIENCY
- is the relationship between input (factors of production) and output (goods and services produced by the factors
of production).

SOCIAL EQUITY
- the first and most important goal of the economic system (not economic efficiency)

MARKET SYSTEM
- allocates goods and services through the mechanism of demand and supply

BASIC MARKET MODELS

1. Perfect / pure type
a. perfect or pure competition
b. pure monopoly
2. Imperfect / non-pure type
a. monopolistic competition
b. oligopoly

Pure Competition
- is a market situation where there is a large number of independent sellers offering identical
products
Pure Monopoly
- refers to a market situation where there is only one seller or producer supplying unique
goods and services.
- monopsony means one-buyer market situation
Monopolistic competition
- pertains to a market situation where there is a relatively large number of small producers or
suppliers selling similar but not identical products
Oligopoly
- is associated with a market situation where there are few firms offering standardized or
differentiated goods and services
- it includes a wider rage of market structures than the other three market models
- oligopsony means a few buyer market situation

CHARACTERISTICS OF MARKET MODELS

Pure Competition
1. There is a large number of independent sellers
2. Products are identical or homogeneous
3. No single seller and no single buyer can influence the change in market price of a product
4. It is easy for new firms or sellers to enter the market and for existing firms or sellers to leave the market
5. There is no non-price competition like advertising, sales promotion, or packaging.

Pure Monopoly
1. there is only one producer or seller
2. Products are unique in the sense that there are no good or close substitutes available
3. The monopolist makes the price
4. It is extremely difficult for new firms to enter the market
Natural monopolies - refer to existing goods or services in which competition is not practical or profitable
5. There may be or no extensive advertising or sales promotion depending on the goods or services of the
monopolists

Monopolistic competition
1. There is a large number of sellers acting independently
2. Products are differentiated
3. There is a limited control of price
4. Entry of new firms in the market is relatively easy
5. There is an aggressive non-price competition in product quality, credit terms, services, locations, and physical
appearance of the product
Oligopoly
1. There are very few firms which dominate the market
2. Products are identical or differentiated
3. There is a price agreement among the producers to promote their own economic interests.
4. The entry of new competitors in the market is difficult
5. There is strong advertising among those who produce differentiated products like cars, cigarettes and
applicances.

DETERMINANTS OF MARKET STRUCTURE

1. Government laws and policies
- it controls the degree of competition in the interest of the economy and the consumers

2. Technology
- because of technology, good or better substitutes have been developed.
3. Business policies and practices

4. Economic freedom
- in a free-enterprise economy or free-competition economy, it is the survival of the fittest.

PRICE AND OUTPUT DETERMINATION

Pure competition
- the demand curve of an individual firm under a purely competitive industry is PERFECTLY ELASTIC
- because the decrease or increase of the output of a single seller has no effect on the total
supply and market price

- in the case of MARKET DEMAND CURVE (demand curve of all producers of a particular product), it is
ELASTIC

FACTOR MARKETS AND INCOME DISTRIBUTION

DEMAND FOR LABOR

Marginal product of labor

- is the additional output produced by the employment of an additional man-hour of labor
Marginal revenue product of labor
- the additional revenue (income) obtained by selling the marginal product of labor
Marginal resource cost
- the payment of the additional man-hour of labor and the other productive resources like land and capital

INCOME DISTRIBUTION
- the allocation of income among the owners of the factors of production

TYPES OF INCOME DISTRIBUTION

1. Personal distribution
- the allocation of income among persons or households
2. Functional distribution
- the allocation of income among the factors of production: land, labor, capital and
entrepreneur

CAUSES OF INCOME INEQUALITY

1. Intelligence and talents
- individuals who are more intelligence and talented are more likely to earn more income
 2. Education and training
- those with higher levels of education and training generally gets higher income
3. Unpleasant and risky jobs
- In highly developed countries, employers provide financial incentives to work that is dirty,
unpleasant, difficult, and risky
4. Ownership of productive factors
- only few families own most of the productive factors like land, machines, buildings, and so
forth
5. Luck and connections
- the more experienced old folks claim that it is luck that counts much

THEORIES OF INCOME DISTRIBUTION

1. Marginal productivity
2. Needs
3. Social usefulness
4. Equality

PRICING OF RESOURCES
- refers to payments of the factors of production
WAGES
- the most important price of the productive resources

Determinants of wage rates

1. Supply and demand
2. Minimum wage
3. Labor unions

ECONOMIC RENT
- the payment for the use of land and other natural resources which are completely fixed in total supply

INTEREST
- the payment for using the money of other individuals
- usury - the practice imposed on unreasonably high interest rate on loans condemned by society, then and now
- loan sharks or usurers - those who charge extremely high interest rates

NATIONAL INCOME

The income of the nation is measured by the total earnings of the factors of production owned by its citizens or by the total market
value of all final goods and services produced by its citizens.

NATIONAL INCOME
- the sum of all these factors payments (land, labor, capital and entrepreneurship)

DEFINITIONS OF TERMS

Gross National Product (GNP) - is the total market value of all final goods and services produced by citizens in one year
National Income
- is the total income of the factors of production in one year
- or the total payments received by citizens in one year
- it has greater value than national income because the latter is equivalent to total cost of production

Per capita income (PCI) - is income per head

 PCI = National income
Population

Per capita GNP = Gross national product

Population

Gross Domestic Product

- is the total market value of all final goods and services produced within the territories of a country in one year.
- incomes derived from investments or wealth in foreign countries are excluded
- incomes from filipino citizens abroad are included

Money GNP - is the value of GNP at current price or market price

Real GNP - is the value of GNP in terms of the number of goods and services produced

Real GNP = Money GNP x 100

Price Index

Final goods or services

- are those which are sold for the last time, and these are not for further processing or manufacturing.

Disposable income
- is personal income less personal taxes

Ways of Calculating National Income

Income approach

Wages
+ Rents
+ Interest
+ Profits
-----------------------------------------
= National income
+ Indirect taxes less subsidies
+ Depreciation
-----------------------------------------
= GNP

Product or Expenditure Approach

Household consumption expenditures

+ Government purchases of goods and services
+ Gross domestic investment of business firms
+ Net exports (if value of imports is greater than exports, it is minus)
----------------------------------------------------------------------------------------------
= GNP (Gross National Product)
- Capital consumption allowances (depreciation)
----------------------------------------------------------------------------------------------
= Net national product
- Indirect business taxes
----------------------------------------------------------------------------------------------
= National Income
 Industrial Origin Approach

Agriculture, fishery and forestry

+ Industry
a. mining
b. manufacturing
c. construction
d. electricity, gas and water

+ Service sector
a. transportation
b. trade
c. finance
d. service
---------------------------------------------------------------------------------
= Gross Domestic product
- Factor income from the rest of the world
----------------------------------------------------------------------------------
= Gross National Product
- Net indirect taxes
- Depreciation
----------------------------------------------------------------------------------
= National Income

Depreciation
- is an allowance for capital goods like machines which have been consumed in the process of production

Indirect business taxes

- these include general sales taxes, excises, business property taxes, license fees, and custom duties
- imposed by the government on products sold by businessmen
- the businessmen pass on to the consumers the tax imposed on them by the government

Double Counting
- in social accounting it also refers to a conceptual problem in social accounting practice, when the attempt is
made to estimate the new value added by Gross Output, or the value of total investments.
- to avoid double counting, only the value of the final goods and services are included
- the value of the intermediate goods which constitute the value of the final products is excluded
-
- value added method - an alternative way of estimating the value of the final product

HOW TO COMPUTE REAL GNP

Real GNP = Money GNP

Price Index

Price Index = Price in any given year x 100

Price in base year
Table 1: Money GNP

Year Quantity Price GNP

1 100 P10 P1,000

2 100 20 2,000
3 100 30 3,000
4 100 40 4,000
5 100 50 5,000

Base year
- is the point of reference or benchmark
- is usually a period of normal economic conditions

Year Quantity Price Price Index (%) Money GNP Real GNP

1 100 P10 20 P1,000 P5,000

2 100 25 50 2,500 5,000
3 100 50 100 5,000 5,000
4 100 75 150 7,500 5,000
5 100 100 200 10,000 5,000

Base year - 3

Price index = P50 x 100 = 100%

P50

Price index of year 1 = P10 x 100 = 20%

P50

Price index of year 2 = P25 x 100 = 50%

P50

Real GNP = Money GNP

Price Index

LIMITATIONS OF GNP
1. It does not show the allocation of goods and services among the members of society
2. GNP accounting in less developed countries is understated
3. The evils of economic growth like pollution, congestion and dirty environment are not reflected in the GNP
4. GNP only measures the number of goods and services but not the quality of goods and services
5. Income or products from illegal sources are not included in the GNP

CONSUMPTION
- is the amount of money spent on goods and services which yield direct satisfaction.
SAVING
 - that part of income which is not consumed

Income = Consumption plus saving

Y = C + S
S = Y - C

Factors Influencing Consumption and Savings

1. Distribution of national income
- when there is a very uneven distribution, income is a very uneven distribution, income is
largely concentrated in the hands of a very small portion of the population.
- individuals with big incomes are proportionately big savers

2. Rate of interest
- people tend to save more at a higher interest.
- if income-earning assets yield more incomes then people are encouraged to purchase such
assets. Savings decrease
3. The desire to hold cash
- such needs for cash for personal or business reasons reduce consumption and raise
saving
4. Price level
- when prices are high (inflation), people spend more amount of money. this decreases
saving
5. Population
- more people means more consumption. more people have to buy more goods and services
6. Income
- higher income results to more consumption
7. Taxes
- more taxes reduce disposable income, decreases consumption
8. Attitudes and values
- whether individuals are thrifty or extravagant

CONSUMPTION FUNCTIon
- the functional relationship between income and consumption

APC (Average propensity to consume) = C

Y

MPC (Marginal propensity to consume)

INVESTMENT
- is expenditure on new capital goods
- capital goods - are produced goods which are used to produce other goods
- it plays a very vital role in the economy because it creates more employment, production and consumption

DETERMINANTS OF INVESTMENT
1. Marginal efficiency of investment (MEI) or returns of investment (ROI)
factors
a. population
b. price level
c. technology
d. peace and order
e. government policies

2. Interest rate

MULTIPLIER EFFECT
- the effects of investments on income when investment creates more income several times
Example: An increase of investment of P100 million. This results to an increase of income of P500 million. So, the multiplier is 5.

Multiplier = K = Y = 500 = 5
I 100

ACCELERATOR EFFECT
- the effect of consumption on investment

BUSINESS CYCLE
- refers to fluctuations in the economy

THEORIES OF BUSINESS CYCLES

1. Exogenous theories
- forces outside the economic system create the business cycle
2. Endogenous theories
- forces within the economic system cause the fluctuations in the economy
PHASES OF THE CYCLE
1. Prosperity - the peak of the business cycle
2. Recession - both production and employment fall
3. Depression - both production and employment are at their lowest levels
4. Recovery - both production and employment rise towards full employment

UNEMPLOYMENT

TYPES OF UNEMPLOYMENT
1. Frictional unemployment
2. Structural unemployment
3. Cyclical unemployment
4. Seasonal unemployment

FULL EMPLOYMENT POLICIES

1. Shorter work week
2. Postponement of technological developments
3. Public investment

INFLATION
- rising in general level of prices

TYPES OF INFLATION
1. Demand-pull inflation
2. Cost-push inflation
3. Structural inflation

MONEY
- anything that is commonly used and generally accepted as a medium of exchange or as a standard of value

FUNCTIONS OF MONEY
1. Medium of exchange
- money can be exchange with goods and services
2. Standard of value
- money measures the value of a product or service
3. Store of value
- money which is not spent constitutes savings
MONEY SUPPLY
- refers to money in circulation
- composed of:
1. Currency circulation (paper money and coins issued by the central bank)
2. Demand deposit or checking account
3. savings and time deposits
4. large negotiable certificates of deposits at commercial banks

MONETARY THEORY
- analyzes the role of money in the economic system
- It explains the causes of the rise or fall of prices
- the quantity theory of money

MV = PQ

M is the quantity of money or money supply

Q is the number of goods and services
P is the average price level of goods and services
V is the income velocity of money or the number of times money is spent in one year

3 MAJOR FISCAL FUNCTIONS

1. Allocation function
2. Distribution function
3. Stabilization function

FISCAL POLICY
- refers to the revenue and expenditure measure of the public budget.

OBJECTIVES OF FISCAL POLICY

1. provision for social goods
2. equitable distribution of wealth and income
3. maintain high employment
4. ensure price stability
5. sustain a satisfactory rate of economic growth

TAX STRUCTURES
1. Progressive Tax
- rate increases as income increases
2. Regressive tax
- rate decreases as income increases
3. Proportional tax
- rate remains constant regardless of the size of the income