Basic Economic Problems

BASIC ECONOMIC PROBLEMS
• 1. What goods to produce and services to provide?
• 2. How to produce and how much to produce of

these goods and services?
• 3. For whom to produce these goods and services?

WHAT TO PRODUCE?
-The question relates to resources.
-How the availability of resources affects what products or services can

be produced or provided at an efficient and effective level.
-A business has to decide what to produce or what service to provide

based on what resource or raw materials are easily and readily available
in the current market.
HOW MUCH TO PRODUCE?
-The question focuses on the actual production of goods and services

and the allocation of resources.
-Focuses on how much to invest, how many people to hire to produce

the goods or services, and how much raw materials to obtain.
-How much of the available resources are to be allocated to different

areas of the business operation.
FOR WHOM TO PRODUCE?
-The question focuses on the distribution of goods and services .
-It is focused on addressing the question “Who is the product for?” and
“Is the product an end product or for further production?”.
FACTORS OF PRODUCTION
-They pertain to the term resources and are occasionally referred to as

inputs of production.
-The return on the use of these factors or inputs are called factor
income.
• Land – This represents land and similar natural resources available such
as farm and agricultural land. Land is typically cultivated or improved
for use in production. Use of land is paid in the form of rent. The factor
income on the use of land is rent.
• Labor – It represents human capital such as workers and employees

that transform raw materials and regulate equipment to produce goods
and services. The return on labor is wage.
• Capital – It represents physical assets such as production facilities,

warehouses, equipment, and technology used in the production of
goods and services. The term may also refer to investment capital used
in production. The factor income for capital is interest.
• Entrepreneurship – This is sometimes referred to as enterprise. It

represents the factor that decides how much of and in what way the
other factors are to be used in production. The return on
entrepreneurship is profit.
CIRCULAR FLOW DIAGRAM
Factor Income
Factor Input
Firms Households
Goods and Services

Payments
PRODUCTION POSSIBILITY FRONTIER
• The production possibility frontier or PPF is an application of the

concept of allocation of resources and factors of production.
• The PPF of the economy is determined by the availability and efficient

use of its inputs of production.
• Points along the frontier signify efficient allocation and use of the
resources in production.
PRODUCTION POSSIBILITY FRONTIER
• Points inside the frontier signify inefficiency or underutilization of

available resources.
• Points outside the frontier correspond to unattainable situations in the

economy because of insufficient resources.
• A shift in the frontier signifies an increase in the factors of production

and implies economic growth.
METHODS USED IN ECONOMIC
ANALYSES
• Qualitative Approach
It is the analytical approach that focuses on directional relationship of
different economic variables. This is often use interchangeably with
descriptive analysis. It shows whether there is correlation between
variables, but does not provide the exact degree of correlation.
• Quantitative Approach
It involves mathematical and statistical analysis of economic data and is
often referred to as econometrics. It complements qualitative analysis by
providing the figures that support descriptive findings.
TOOLS USED IN THE STUDY OF
ECONOMICS
• Economic Variables;
• Functions and Equations;
• Graphs;
ECONOMICS
• Economic Variables
A variable is an element that can both change and remain fixed. In
Economics, variables are used to signify elements in an economic model.
These are commonly the elements in the x- and y- axes of a graph.
ECONOMICS
• Functions and Economic Equations

Functions ( f ) explain the relationship between two or more economic
variables. It illustrates which of the variables are dependent and which
ones are independent.
Economic equations are mathematical expression of an economic

thought or concept. They are often used to further explain economic
theories and models.
ECONOMICS
• Graphs
A graph provides a visual representation on the relationship between
two or more economic variables. It helps break down abstract ideas or
theories through diagrams.
ECONOMIC THEORIES AND MODELS
Economic theories
• simplify economic phenomena.
• These are statements or observations on the relationship of variables.
• They provide a broader understanding of economic concepts through behavioral
observations and research.
Economic models
• are representations of economic theories.
In the formation of economic models and theories, economists often use the
assumption ceteris paribus which in Latin, literally translates to “all else being the
same.”
FORMATS OF ECONOMIC DATA
• Time-series Data
It is data collected for a particular element(s) for several time periods.
• Cross-sectional Data
It is data that includes different variables for a single time period.
NORMATIVE VERSUS POSITIVE
ECONOMICS
In terms of judgement, economics can be categorized into either:

• Normative Economics
It evaluates economic decisions, policies, or outcomes as good or bad. It is based on
opinions and is subjective.
• Positive Economics
It evaluates economic scenarios and policies based on qualitative and quantitative
analysis. This makes it factual and objective.
MAIN BRANCHES OF ECONOMICS
• Microeconomics
It is the branch of economics that examines the individual or company level. It deals
with the households and firms, such as the buying behavior of consumers and profit-
maximizing behavior of sellers. The law of supply and demand is largely focused in this
branch of economics.
• Macroeconomics
It is the branch of economics that deals with the aggregate or country level
economics. It focuses on the effect on a larger scale, such as the national economy.
Major macroeconomic indicators include national income account, GDP, inflation, and
interest rate.
MICROECONOMIC CONCEPTS
• Utility – is the foundation of consumer buying behavior and demand for goods. It
refers to the value or satisfaction derived from the consumption of a good.
• Marginal Utility – is the additional utility or satisfaction derived from the
consumption of an additional unit of good, keeping other things constant.
• Law of Diminishing Marginal Utility - for every additional consumption of a
good, the marginal utility or level of satisfaction is declining.
• Total Utility – As the quantity consumed increases, a consumer’s total utility also
increases but at a declining rate.
• Indifference Curve – The consumer behavior of not being affected by the
quantity consumed of a good in favor of another.
MICROECONOMIC CONCEPTS
• Indifference Map – shows a group of indifference curves.

• Budget Line – is a representation of the income constraints of consumers.
• Equilibrium Position – is the tangency point of the budget line and the highest
indifference curve.
• Disposable Income – is the income after taxes.
[Disposable Income = Gross Income – Income Taxes]
• Discretionary Income – is the income left from disposable income after all
other necessary (non-tax) expenses have been deducted.
[Discretionary Income = Disposable Income – Non-tax Expenses]
MACROECONOMIC CONCEPTS
Gross Domestic Product

It defined as the total value of final goods and services consumed during a given period. It is typically
expressed in Philippines Peso.
GDP Growth is rate at which GDP increases from one period to another and is expressed as a
percentage.
• GDP is the most popular measure of the overall health of an economy.

• “Final” is emphasized in the value of goods and services derivation to avoid double counting.
• All final goods produced within the country are included in the GDP.
• Nonproduction transactions such as transfer payments and secondhand sales are NOT included in
the GDP.

Two ways to measure national income:
• Output approach – looks at output and evaluates what goods and services are factored
in.
• Expenditure approach – considers the value or expenditure associated with the

purchase of goods and services. It derives GDP by getting the sum expenditures of the
different segments of the economy.
The prevailing approach is the expenditure approach. Hence, GDP also means total
expenditure of the economy.
GDP = C + I + G + (X - M)
where
C = Household consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Exports of goods and services
M = Imports of goods and services
Nominal GDP – is derived when the value of goods is expressed in current prices.
Real GDP – is adjusted for inflation and is expressed at constant or base year
prices.
Gross National Product

It is the Gross Domestic Product that factors in outputs or products by Filipinos or
Filipino companies abroad. The income equivalent of GNP is GNI (Gross National
Income).
GNI = GDP + Net Primary Income
*Net Primary Income = Income of Filipinos and Filipino companies abroad.

Inflation
• It refers to the persistent rise in price levels of goods and services. It is measured
through the rise and fall of the purchasing power of the domestic currency.
• The increase in prices of goods and services means a fall in value of money or
conversely, a fall in purchasing power.
Consumer Price Index

• It measures the purchasing power of the peso through regular survey of the price
level of consumer goods and services that are included in a virtual “basket of
goods”.
• The virtual basket contains a fixed sample of goods that best represents the
general price level of the economy.
• Changes in the prices are used as inputs in the computation of CPI and changes in
CPI measure inflation rate.
Consumer Price Index
(𝐶𝑃𝐼𝑐𝑢𝑟𝑟𝑒𝑛𝑡 −𝐶𝑃𝐼𝑏𝑎𝑠𝑒 )
𝜋 = ∆𝑃 = x 100
𝐶𝑃𝐼𝑏𝑎𝑠𝑒
Producer Price Index – is the equivalent of CPI but uses producer input prices.
GDP deflator – uses nominal and real GDP values
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑷𝑫 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 = 𝒙 𝟏𝟎𝟎
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
Hyperinflation – is the case of extremely high and accelerating inflation rate. An

inflation rate of 50% or more is considered hyperinflation.
Interest Rate – It is defined as the factor income for capital. Specifically, it is the
cost of borrowing money or the return on investment.
Types of Interest Rates:

• Nominal Interest Rate – is the interest rate stated in bonds or the rate typically
quoted by banks and lending institutions. Also known as “as-is” or “unadjusted rate”.
• Real Interest Rate – is the rate adjusted for inflation.

( 𝑹𝒆𝒂𝒍 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑹𝒂𝒕𝒆 = 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑹𝒂𝒕𝒆 − 𝑰𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 )
Interest Rate is determined by considering several factors. Below are the common
factors that influence interest rate on loans and investments.
• Type of Financial Institution
• Purpose of the Loan
• Borrower’s Credit Standing
• Term of the Loan
• Flexibility
• Collateral and Guarantee
Type of Financial Institution

The type of institution offering the loan has a big influence on the interest rate. The
interest rates charge by banks for loans may be slightly lower than that charged by
private money lenders.
Purpose of a Loan
Interest rates on auto loans are normally different from interest rate charged on
housing loan even when obtaining the loan in the same period.
Borrowers Credit Standing

Lenders consider the borrower’s default risk. Default risk is the likelihood of a
borrower to “default‘’ or not be able to pay back the loan. The higher the default risk,
the higher the interest rate.
Term of the Loan

Term refers to the length or period of the loan. Short-term loans typically have lower
interest compared to long-term ones. This is due to greater uncertainty associated
with longer period loans.
Flexibility
An interest rate that is fixed for the duration of a loan is different from a floating
interest rate. A floating interest rate has more flexibility because it can be regularly
adjusted to align with prevailing market rate. A floating interest rate is advantageous
to a borrower if the interest rates go down in the future.
Collateral and Guarantee

Loans and debts that have collateral are also referred to sometimes as “secured”
loans. Titles to land and real estate properties are examples of collateral used to
secure loans. In contrast, having another person or entity that “guarantee” the
payback of a loan is the defining characteristic of a guaranteed loan. Collaterals and
guarantees improve the security of a loan being repaid so such loans typically have
lower interest rates.
ECONOMIC SYSTEMS
ECONOMIC SYSTEMS
Economic Systems refer to the different ways of managing a nation’s available

resources to answer the three economic questions.
Based on varying degrees of private ownership and government control, economic
systems may be classified into four main types:
• Free Market Economy
• Centralized Economy
• Mixed Economy
• Traditional Economy
ECONOMIC SYSTEMS
Free Market Economy

• It is a system characterized by competition and a high level of private ownership.
• Prices are set by market mechanisms or by the interaction of buyers and sellers in the market.
Resources are allocated freely based on the interaction of market forces (i.e., buyers and sellers)
• Individuals and entities have the economic freedom to exchange goods and make decisions, which
means that consumers determine what to produce based on their preference, while the producers
have the liberty to decide on how the products will be produced.
ECONOMIC SYSTEMS
Free Market Economy

• The government maintains a hands-off role and has minimal involvement in achieving economic
goals.
• The laissez faire system is an example of a free market economy. The French phrase literally
translates to “leave alone” and is used to define an economic system void of government
intervention. This system is an example of a theoretical and extreme case of free market economy
and is not practiced in the real world.
• Examples of countries that utilize free market economy include New Zealand, Singapore and
Australia.
ECONOMIC SYSTEMS
Centralized Economy
• It is sometimes referred to as command economy
• This system is characterized by the heavy involvement of the government in managing the economy.
The method of central planning is employed where the government plans, directs, and decides on
how resources will be allocated.
• Individuals have no or limited economic freedom and private ownership is very limited.
• Examples of countries that utilize centralized economy include North Korea and the former Soviet
Union.
ECONOMIC SYSTEMS
Mixed Economy
• An economic system that combines the features of free market and centralized systems.
• Free market forces and central planning together determine what to produce, how to produce, and for
whom to produce.
• There is a balance between private and government accountability in achieving economic goals.
• Most industrialized countries such as the United States, France, and other European countries have this
type of economic system.
• In a mixed economy, government intervention includes the power to impose taxes, set trade limits and
restrictions, and implement legislation. In addition to oversight functions, the government can implement
policies to promote business and at the same time can impose sanctions to penalize industries.
ECONOMIC SYSTEMS
Traditional Economy
• It is characterized by customs and habits.
• Barter is a mechanism where goods are exchanged for another good.
• Most economies have evolved from this form of economy.
• Currently, the traditional system is limited to some nations in Africa.

ECONOMIC SYSTEMS
What? How? For Whom?
Determined by consumer Determined by producers Determined by consumer

Free Market choices purchasing power
Determined by the Determined by the Determined by the

Centralized government government government
Influenced by both Influenced by both

consumers and the producers and the Influenced by all sectors of
Mixed government government the economy
MACROECONOMIC GOALS OF A
COUNTRY
Government plays an important role in a mixed economy. As a central decision maker, it has the
responsibility of overseeing and ensuring that efficiency is achieved in the pursuit of economic goals.
There are countless problems in the economy born out of market failures.
There are problems arising from inefficiencies in the allocation of resources. Among the top
socioeconomic problems that most developing counties face are poverty, unemployment, social
inequality, among others.
The government is under a great pressure to eliminate poverty, provide employment, and reduce
inequality in the society.
COUNTRY
As a course of action, the government through various policies and reforms tries to achieve the three
primary macroeconomic goals. These goals are:
• Economic Growth
• Full Employment
• Price Stability
COUNTRY
Economic Growth
Economic growth is typically measured through GDP, a concept which was introduced in the previous
discussion as an example of a macroeconomic indicator.
A sustained growth in GDP is generally taken to mean economic growth.
Business cycle is characterized by the upward and downward trend of the GDP observed over a
period of time, usually years. An increase in GDP signifies growth or expansion while a decline signifies
contraction. Recession is typically a series of decline in GDP.
The highest point following an expansion is called peak, while the lowest point following a recession
is known as the trough.
COUNTRY
Economic Growth
The upward trend in GDP after a trough is sometimes referred to as economic recovery.
Recession means a period of economic downturn characterized by the high or increased

unemployment, slow business, and a decline in consumer purchases, among others.
Expansion on the other hand, features low or decreased unemployment, increased production, and a
rise in consumer spending driven by higher income.
Depression is a prolonged period of recession such as the Great Depression in the 1930’s, with the
US stock market crash in 1929.
COUNTRY
Economic Growth
Economic growth can also be illustrated through the production possibility frontier. An economy
experiencing a number of market failures such as high unemployment will be operating below the PPF.
Two opposing economic schools of thought on the role of technology in achieving economic growth.
First, technology is sees as a predetermined variable in the classical theory of economic; it is assumed
to be a given.
However, the modern theory of economics views technology and innovation as necessary ingredients
in improving production.
COUNTRY
Full Employment
The upward and downward movements in the business cycle lead to unemployment. The economy
slows down during a recession and is characterized by generally low business and consumer activities.
Business that suffer losses during recession may try to stay afloat by trimming down their workforce.
In contrast, once the economy recovers and business is again booming, they will rehire workers and
expand operations.
Cyclical Unemployment is unemployment as a result of the business cycle. Although full

employment is ideally taken to mean zero unemployment, it is technically defined as having zero
cyclical unemployment.
COUNTRY
Price Stability
It is formally the absence of prolonged inflation and deflation.
While low inflation is unavoidable, a continued price increase of goods and services that leads to high
inflation has negative consequences.
Deflation or the continuous decline in prices is also not a good thing because it contracts the money
supply and limits liquidity. People tend to hold on to their money and liquidate assets that are losing value
fast due to deflation. This leads to lower aggregate demand and ultimately to economic instability.
It is the primary responsibility of the central bank to maintain inflation at a reasonable level without
hindering economic activities that spur growth. The central bank uses monetary policy tools to ensure
inflation is within targets.
THE LAW OF DEMAND AND
SUPPLY
THE LAW OF DEMAND
Prices of Basic Commodities

 What is a commodity?
• It is a term in used economics that pertains to a homogenous good that commands a price. Examples would
be grains such as rice, corn and wheat; utilities such as electricity; and other products that are normally
produced in bulk such as oil, sugar, etc.
THE LAW OF DEMAND

 What is a commodity?
• A commodity is characterized by its uniformity across the market. Regardless of the producer of the good,
the output will have more or less the same attributes. For example, you cannot distinguish rice grains that
were harvested by a farmer in Davao, from rice grains that were harvested by a farmer in Leyte.
• Additionally, commodities are often used as raw materials or inputs to produce another good. For example,
wheat is used to make bread and beer, while crude oil is refined to produce petroleum, which in turn is
processed further to create ink, fuel, paint, plastic, among other things.
THE LAW OF DEMAND

 Price a commodity
• Given the characteristics of a commodity, its price is dictated by the quantity available in the market, taken as
a whole. For example, assume that the supply of rice in the country largely comes from Central Luzon. If a
typhoon hits and damages the rice crops in that region, expect the domestic supply of rice to fall. This in turn
cause the price of rice to surge.
THE LAW OF DEMAND
Demand
• Economics is about efficient allocation of available (and limited) resources. With limited resources,
firms can run out of capital; individuals can have their income depleted. This this characteristic is
technically known as Resource Constraint.
• Resource constraints compel firms, governments, and household consumers to find the best
trade off with the least opportunity cost. For example, firms have to decide on how much of a
certain product to manufacture and how much resources such as labor to utilize.
• Considering the individual or micro level, under the same assumption that resources are limited,
consumers must choose how much of a good they will buy. Consumer utility refers to a person’s
willingness and ability to consume a good in reaction to price changes. Consumer utility forms the
basis of the law of demand.
THE LAW OF DEMAND
Demand
The law of demand states that as the price of a good goes up (P↑) the quantity demanded of
that good goes down (𝑸𝒅 ↓), all other things remaining constant (ceteris paribus).
This means that consumers tend to buy more of a certain good at lower prices. Conversely, as this
good becomes more expensive, consumers will tend to buy less.
A demand curve illustrates the linear attribute of the law of demand.
THE LAW OF DEMAND
Determinants of Demand
• Income
• Substitutes
• Complementary Goods
• Consumer Expectations
• Taste and Preference
THE LAW OF DEMAND
Income
The extra spending money of a consumer is referred to in economics as disposable income.
Disposable income refers to the net amount after taxes and other mandatory contributions. This
additional money is what drives a consumer’s desire to buy or purchase more a good.
Typically, as consumer’s income rises, quantity demanded of a good also increases. This is known as
the Income effect. Goods that display this attribute are identified as normal goods.
The Engel curve, named after Ernst Engel, a German statistician from the 19th century, is used to
illustrate the positive relationship between income and quantity demanded.
Engel’s law, also postulated by Ernst Engel, states that food expenditure as part of household income
decreases as income rises.
THE LAW OF DEMAND
Income
The positive relationship between income and quantity demanded generally holds true when referring
to normal goods. However, the opposite or negative relationship can result when referring to
inferior goods.
Goods that exhibit a decline in quantity demanded as consumer income rises are called inferior
goods.
Inferior goods are often of poorer quality than normal goods. This drives consumers to substitute
the inferior good for a better product when their income level improves.
Example:
Buying vegetables instead of meat or choosing a cheaper variety of fish rather than prime cuts of
meat
THE LAW OF DEMAND
Income
In terms of elasticity, there are two further categories of normal goods: Luxury and Necessity.
Income elasticity relates to the change in quantity demanded in response to an adjustment in
income. It is the degree of change in quantity demanded.
Luxury goods – exhibit an increase in demand more than the proportionate increase in income. This
means that a small increase in income generates a large increase in quantity demanded. Examples of
luxury goods are designer bags and one-of-a-kind jewelry.
Necessity goods – show an increase in demand that is less than the proportionate increase in
income. This means that an increase in income generates only a small increase in quantity demanded.
Examples of necessity goods are food staples such as rice or bread, and utilities such as electricity are
examples of necessity goods.
THE LAW OF DEMAND
Income
One contradiction to the law of demand is the case of a Veblen goods, named after Thorstein Veblen,
an American economist who came up with the idea.
The Veblen effect is the propensity of a good, identified as Veblen good, to increase in demand
when its price soars to the point of being extremely overpriced. Like luxury goods, owning Veblen
goods conveys high status.
Unlike luxury goods, Veblen goods are not driven by an increase in income. Rather, the appeal comes
from their expensiveness and exclusivity. The more expensive they get, the higher the demand. Often,
only a handful of people in the world can afford such goods.
THE LAW OF DEMAND
Substitutes
Goods that meet the same requirements or fulfill the same needs as another good are called
substitutes. Assume that good (B) is a substitute for good (A). As the price of good (A) increases,
the quantity demanded of its substitute also increases. The idea of substitutes is basically having
alternatives.
When a good becomes more expensive, its alternatives become relatively cheaper and generally more
appealing.This is know as the Substitute effect.
Example:
Choosing to take the bus to school instead of driving because of an increase in fuel prices.
THE LAW OF DEMAND
Complementary Goods
Another factor that influences the quantity demanded of a products is the presence of a
complementary good for this product. Complimentary goods are generally consumed or used
together. There is interdependence between the two goods.
To illustrate, assume that good (B) is a complementary good of good (A). An increase in price of good
(A) decreases the quantity demanded of a good (A), following the law of demand. Correspondingly,
quantity demanded of its complementary good, good (B), declines.
A classic examples of complementary goods are coffee and creamer. When coffee becomes more
expensive, there will be less demand for coffee. It follows that demand for creamer will also drop,
since creamer is not ordinarily consumed on its own.
THE LAW OF DEMAND
Consumer Expectations
When consumers anticipate the price of a particular product to rise, they will tend to buy more of
that product now before the perceived or scheduled price increase. This is commonly observed in the
case of oil price increases. Motorists anticipating a fuel price increase will likely gas up before the price
adjustment becomes effective.
Another example is when consumers expect the prices of ingredients and canned goods to rise during
Christmas holidays. As a result, consumers tend to buy and stock up on holiday goods way before the
holidays, which drives demand up before a price increase.
THE LAW OF DEMAND
Taste and Preferences

Other considerations such as increased popularity, taste, and personal preference influence the
demand for a specific good. This is more evident in the case of branded products. Some consumers
will be inclined to buy a certain brand because of the perceived status of owning it.
Examples of goods that are largely driven by consumers’ taste and preferences are cars, gadgets, and
mobile phones. In other cases, consumers will be swayed to buy a good because everyone else is
buying it. Downloading a certain smartphone application or mobile game that everyone has is an
example.
In both instances, price has nothing to do with the consumers’ decision to buy the good. Rather, the
rise in demand was driven by factors such as preference and popularity.
THE LAW OF SUPPLY
Supply
• Under the same premise of scarcity and efficient allocation of resources, the quantity supplied of a
product or service is a function of its price. But in contrast to the demand curve, which considers
the consumers’ perspective, understanding changes in the quantity supplied requires appreciating
the standpoint of sellers and producers.
• While quantity demanded is based on consumer’s utility, quantity supplied is based on profit-
maximizing characteristics of firms. How businesses allocate their resources affects the amount of
supply that will be available in the market. This means that there is a positive relationship between
price and quantity supplied.
THE LAW OF SUPPLY
Supply
The law of supply states that, ceteris paribus, an increase in price causes an increase in quantity
supplied. Conversely, a fall in price causes a drop in quantity supplied.
The direct relationship between price and quantity supplied is best explained by looking at the supply
curve.
THE LAW OF SUPPLY
Determinants of Supply
Although producers are assumed to be profit-maximizing and that price directly impacts
quantity supplied, there are other determinants of supply.
• Technology
• Input Prices
• Prices of Other Goods
• Producer Expectations
• Government Policy
THE LAW OF SUPPLY
Technology
Firms nowadays have to keep abreast with the latest innovations in order to compete and stay one
step ahead of their competitors.
For example, advancement in computer technology has enabled firms to be more profitable by
increasing their efficiency and reducing their costs of production.
Another example would be a baker using automated and industry-sized flour mixer to produce more
dough in the same amount of time it takes to mix one manually.
In essence, technology aids manufacturers either by minimizing delays in production or by directly
increasing productivity of labor.
Following the law of supply, new technology tends to improve productivity, which in turn increases
output or quantity supplied.
THE LAW OF SUPPLY
Input Prices
The efficient allocation of the factors of production (Land, Labor, Capital, and
Entrepreneurship) results in more profit from the supplier’s point of view. Firms have
to determine the right balance of inputs to achieve maximum returns.
An increase in input prices drives up costs. Higher costs lead to a decrease in
quantity supplied.
THE LAW OF SUPPLY
Prices of Other Goods

Manufacturers often produce several products in the same or related line. Consider a
manufacturer of office and school supplies that produces paper products and ink
products. As the price of paper products increases, the quantity supplied of said
paper products also increases. Due to the potentially higher profits from paper
products, the manufacturer might decide to transfer some of the resources from
producing ink products to paper products. As a result the supply of ink products will
decrease.
THE LAW OF SUPPLY
Producer Expectations
Producers who anticipate a surge in factor prices (prices of raw materials) tend to
increase production before the higher input prices take effect. This leads to an
increase in quantity supplied.
For example, a cabinet maker who expects the price of wood to increase in the
coming months will use his or her stock of wood now to create as many cabinets as
possible (before the cost of making the cabinet increases). The cabinets what ill be
sold at the higher price level will yield higher returns for the cabinet maker.
THE LAW OF SUPPLY
Government Policy
Taxes, subsidies, and import quotas imposed by the government impact quantity supplied of a good but
in different ways.
Excise tax is a tax imposed on a manufactured good. It is applicable to producers and sellers as
opposed to value-added tax (VAT) that is paid only by consumers or end-users. Excise tax increases
input prices and cost of production, which ultimately leads to a decrease in output or quantity
supplied.
For example, excise tax imposed on steel will increase the cost of steel manufacturers. Assuming that
quality is not compromised, the higher cost should mean being able to produce on 1 ton of steel
products instead of 2.
THE LAW OF SUPPLY
Government Policy
A Subsidy on the other hand, is monetary assistance by the government in support
of target industries or sectors of the economy. The government is in the business of
ensuring that all sectors of the economy are doing well. A subsidy results in lower
costs for recipient producers because the government pays a portion of the costs.
Agriculture subsidy is a popular example.
THE LAW OF SUPPLY
Import Quota
It is a limit to the volume that local producers can bring into the country. Import
quotas are particularly restrictive to manufacturers that rely heavily in imported raw
materials for their production. The limit on raw materials leads to lower quantity
supplied.
For example, local canned milk manufacturers import skim milk and milk powder
ingredients from countries such as New Zealand. A quota on the amount of
powdered milk they can buy abroad means less input to manufacture their products.
Hence, less output produced and less quantity supplied to the market.
MARKET EQUILIBRIUM
A Market is a meeting place for buyers and sellers where the buyer can purchase
goods from a seller for a price that is agreeable to both. In economics, “market” is
not limited to the physical location (e.g., wet market) but also includes contemporary,
online platforms that is typical of the financial market (e.g., stock exchange).
For an exchange of good to happen, the buyer and seller must agree on the price.
This is referred to as the market price or prevailing market price.
The point where the consumer and supplier expectations meet is known as the
market equilibrium.
However, in reality, consumer’s and supplier expectations do not always meet.
MARKET EQUILIBRIUM
What happens when consumer demand is greater than what firms supply to the
market?
Shortage happens in the market when there is excess demand.
What happens when producers supply more than what consumers demand?
Market Surplus happens in the market when there is excess supply.

CONSUMER PROTECTION
To avoid intentional manipulation of supply and other poor business practices that may affect
the market price, the government through the Department of Trade and Industry (DTI)
regularly monitors commodity prices and evaluates production processes to come up with
consumer purchase guides in the form of Suggested Retail Prices (SRP).
Suggested Retail Prices provide a benchmark for consumers with which to compare market
prices.
Additionally, the Consumer Protection Group (CPG) under the management of DTI was
formed, as the name implies, to protect consumer rights and enforce consumer protection
laws.
An example of a consumer protection law is the “no return no exchange” policy.
This policy prohibits businesses from posting “no return no exchange” signs anywhere in
their establishment or on receipts because posting such signs is considered deceptive.
THE PHILIPPINE PRODUCT MARKET
Application of Supply and Demand

THE PHILIPPINE PRODUCT
MARKET
The product market is characterized by the exchange of goods and services.

Businesses provide products that cater to the needs and wants of the consumers.
Households on the other hand receive an income in return for the labor they supply.
CIRCULAR FLOW DIAGRAM
Wages Income
Factor
Markets
Labor Input Labor
Supplied
Firms Households
Products Products
Product
Markets
Profit Profit
THE PHILIPPINE PRODUCT
MARKET
Businesses are assumed to be profit-maximizing entities, and how the corresponding

industry is structured largely impacts the profit potential of businesses. Different
structures have varying degrees of competition, which in turn influence consumer
and producer behaviors in different ways.
THE DIFFERENT MARKET
STRUCTURES
Market structures are classified based on the following aspects:

1) The degree of competition
2) The number of firms
3) The bargaining power of consumers
4) A barrier to entry
STRUCTURES
The degree of competition

It is driven by the number of competing firms in the industry. The higher the number
of firms, the greater the degree of competition.
STRUCTURES
The number of firms

This pertains to the actual number of competitors in the market.
STRUCTURES
The bargaining power of consumers

This refers to the ability of consumers to influence market prices. A high bargaining
power means that consumers are price makers. On the contrary, a low or no
bargaining power implies that suppliers are price makers and that consumers are
price takers.
STRUCTURES
A barrier to entry
This refers to the ease with which new firms can penetrate the industry. A high
barrier to entry is characterized by high setup costs that require entrants to have a
huge amount of initial investment. This is observed in large-scale manufacturing
where machineries and infrastructure need to be built.
Another example is in the case of low-cost products that have to be produced and
sold in high volume in order to recover the investment. This concept of producing in
large quantity to spread the cost per unit is formally known as economies of scale.
Another factor that contributes to a high barrier to entry is exclusivity of resource. For
example, a new technology that is protected by copyright laws discourages
competitors from setting up business.
STRUCTURES
Based on the criteria given, different industries adopt one of the four main market
structures.
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
STRUCTURES
Perfect Competition
A market with perfect competition is characterized by many firms selling
homogenous or identical goods and many buyers who have access to the good.
It is very easy for new sellers to enter the market and put up business in a perfectly
competitive market.This means that there are no or minimal barriers to entry.
Additionally, because of the abundance of sellers and readily available information on
goods, switching costs are low. This signifies that it is very easy for consumers to
compare prices and switch from one seller to another.
Low switching costs imply that consumers have high bargaining power, that is,
consumers influence the price. In a perfectly competitive market, sellers are
considered to be price takers.
STRUCTURES
Examples:
Stalls in the public market that sell staple goods like bread, fruits, and vegetables.
STRUCTURES
Examples:
Gadget retailers in malls.
STRUCTURES
Monopolistic Competition
While perfect competition is considered as the ideal market structure, monopolistic
competition is closer to what occurs in reality.
Monopolistic competition also features many sellers but the sellers typically have less
capability and are smaller in size. Similar to perfect competition, there is low barrier
to entry, which means sellers can come and go.
However, the goods are slightly differentiated in a monopolistic competition. This
means that although competing for the same consumers, monopolistic firms try to
distinguish their products and services through advertising in a niche market.
STRUCTURES
Example:
A salon or spa may differentiate their products and services by creating a certain
ambience in its shop or by having well-trained stylists to justify its higher rates.
STRUCTURES
Example:
In a group of restaurants, one may choose to serve Filipino favorites, while another
would offer Japanese cuisine.
STRUCTURES
Oligopoly
An oligopolistic market structure is characterized by having only a few players in the
industry. Since there are only a handful of players, these firms dominate the market in
terms of market share. Due to their size and consumers having limited choices,
oligopolistic firms are price makers or they dictate the choice of a good.
This means that consumers have no bargaining power.
Moreover, there is a high barrier to entry in an oligopolistic industry. This is driven by
expensive infrastructure prevalent in such industries.
STRUCTURES
Oligopoly
Example:
The telecommunications industry in the Philippines.
STRUCTURES
Oligopoly
Example:
Liquified Petroleum Gas (LPG) producers.
STRUCTURES
Monopoly
Monopoly is a market structure that has a single player that controls the market. In
terms of competitiveness, a monopoly has no competition, making it the least
competitive of the four structures. Being the sole provider of a good or service in
the market means that the firm is the price maker and consumers have no bargaining
power.
Having exclusivity guarantees no entrants to the market, which means barriers to
entry are extremely high.
STRUCTURES
Monopoly
Example:
Electricity and Water in a particular area or city.
STRUCTURES
Monopoly
Example:
App-based ride hailing service.
THE PHILIPPINE LABOR MARKET

Labor Supply and Population Growth

Labor force – refers to the total number of people identified as employed and
unemployed.
The term employed represents those individuals who have a job in either full-time
or part-time capacity.
A bank teller who works from 9:00am to 6:00pm and a service crew member who
works part-time at a fast food chain are both considered employed and are part of
the labor force.
The term unemployed, on the other hand, refers to people who are presently
searching for a job, workers who are temporarily laid off but are waiting to be called
back for a job, and applicants who are about to start a new job.
Finally, underemployed describes those workers who are better skilled than what
their current jobs require. Underemployment happens when there is a mismatch in
skills and capabilities or there is overqualification. A civil engineer doing manual
construction is an example of underemployment.
Population growth – is the increase in the total number of human beings in the
country.
A Census, or the official collection of population information, is locally conducted
once every five years by the Philippine Statistics Authority (PSA). The latest
one was in 2017. Based on the latest census, the Philippine population reached
104.25 million as of July 2017. In comparison to the 2015 figure of 100.98 million,
the population grew by roughly 3% in 2 years. This translates to an additional 3.27
million people.
The United Nations estimates that, based on current growth trends, the population
count of the Philippines as of February 2019 is roughly 107.28 million.
How does population growth affect the labor force? An increase in population
potentially increases the labor supply. However, the impact of population growth
largely depends on the increase in the number of adult population.
To better illustrate the relationship of population growth and labor supply, consider
the formula for labor force participation rate.
𝑳𝒂𝒃𝒐𝒓 𝒇𝒐𝒓𝒄𝒆
𝑳𝒂𝒃𝒐𝒓 𝑭𝒐𝒓𝒄𝒆 𝑷𝒂𝒓𝒕𝒊𝒄𝒊𝒑𝒂𝒕𝒊𝒐𝒏 𝒓𝒂𝒕𝒆 = × 𝟏𝟎𝟎
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒂𝒈𝒆 𝒑𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏
The Labor force participation rate approximates the percentage of the

population that is actually part of the labor pool. A population growth affects the
labor force only in as much as there growth in the working age population. The
working age in the Philippines is 15 to 64 years old.
In essence, the working age population includes people who are part of the labor
force and those who are not.
Unemployment and Wages

Full employment is another macroeconomic goal of a nation. In reality, however, there
are imbalances in the economy (also known as market failures) that make it impossible
to achieve a state of zero unemployment. The unemployment rate measures the
percentage of individuals in the labor force who do not have a job. It is calculated
using the following equation:
𝑼𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕
𝑼𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕 𝒓𝒂𝒕𝒆 = 𝒙𝟏𝟎𝟎
𝑳𝒂𝒃𝒐𝒓 𝒇𝒐𝒓𝒄𝒆
There are four types of unemployment that are considered in deriving the value of
the numerator in the equation.
The first type is frictional unemployment, which is temporary unemployment
that is a result of people being in between jobs or being in transition.
Example:
New college graduates who are looking for jobs or are still deciding which job to
choose from several offers.
These individuals are technically in transition and thus are considered under frictional
unemployment.
The second type is structural unemployment, which is a type of unemployment

that results from technology changes and upgrades that require specialized skills.
This is also driven by location and proximity.
Example:
A company that relocates from Manila to Cebu will potentially cause unemployment
because some employees might not be able to move to Cebu.
The third type of unemployment is cyclical unemployment which is caused by the

upturn and downturn in the business cycle. During expansion, the economy is
generally doing well because firms tend to open new businesses or widen their
operations during this time. The expansion will create more job opportunities and
tend to lower unemployment.
In the case of a recession, business and the economy are in slump. Firms will likely
hold off hiring or even lay off workers during this time. Thus, unemployment goes up
in a recession.
Full employment is technically having zero cyclical unemployment.
The last type is seasonal unemployment, which happens in industries with peak
and lean season.
Example:
Tourism and farming
The peak season for most beach destinations in the country is in the summer during
which time, there is a higher demand for workers in businesses such as hotels, travel,
and restaurants in the tourist areas.
Wage - is what a worker gets as compensation for hours of labor. The factor
income for labor is wage.
More formally, wage measures the amount of return (money) per hour of input
(labor).
In the Philippines, employees are typically paid salaries instead of wages.
Wages measure the hourly or daily rate while salary refers to the aggregate amount
received.
Salaries in the Philippines are normally paid on a monthly or bi-monthly basis.
The difference is in the way of payment or reference calculation.
Minimum wage – is the least possible amount firms must pay their employees as
mandated by the country’s labor laws. Minimum wage in the Philippines varies per
region and across sectors.
The Department of Labor and Employment (DOLE) is responsible for the setup and
regular review of minimum wages in the Philippines.
Wage and profit of a firm are negatively correlated. This means that higher wages
translate to higher operating costs and ultimately, to lower profit for a firm.
The same applies when the government decides to increase minimum wage rates.
In response, firms tend to pass on the higher costs to consumers by making their
goods and services more expensive.
Another typical response of firms is to cut back on the number of employees to
maintain the same level of operating costs.
Some individuals will take below minimum wage pay rather than be forced into
unemployment.
Labor Migration and Overseas Filipino Workers (OFWs)

Filipinos working abroad are formally referred to as overseas Filipino workers
(OFWs).
Choosing to work in a foreign country is the concept of labor migration. Filipino
labor migration is driven by the lack of opportunities locally and encouraged by
better pay abroad.
Globalization is another driver of increased labor migration. It encourages
interdependence of factors of production across the world driven by advances in
technology.
THE PHILIPPINE FINANCIAL
MARKET

MARKET
What is a financial market?

A financial market is a marketplace for the exchange of financial securities such as
stocks and bonds.
Investors or creditors represent the buyers while borrowers or debtors represent
the sellers in the financial market.
Securities trading is conducted in organized institutions such as the Philippine Stock
Exchange (PSE).
MARKET
The most commonly traded securities in the domestic financial market include
stocks and bonds.
Stocks – represent ownership in a company. Stocks of public companies are traded
on a stock exchange such as the PSE. A stockholder, who is also referred to as
shareholder, earns income through dividends and is entitled to vote on company
issues and policies during a company’s shareholder meetings.
MARKET
Bonds – represent debts and these debts are largely traded over-the-counter or
privately through investment brokers. Bondholders are considered creditors who, by
buying bonds, are lending money to the issuer. The issuer is, in effect, the borrower. A
bondholder gets compensated through regular interest payments plus the principal
amount upon the bond’s maturity.
Bonds issued by the government are called treasury bonds or T-bonds.
MARKET
MONEY SUPPLY AND THE CENTRAL
BANK
Money is defined in economics much more broadly than the conventional sense in which it is taken
to refer to cash.
In economic context, money serves three functions.
I. Medium of Exchange – This means that is legal tender or a recognized form of payment for
purchases and transactions.The country’s legal tender is the Philippine peso.
II. Unit of Account – This means that money is used as a standard to measure the value of goods
and services. The existence of countless products and services in the market drives the need for
a single common measure to easily compare the values of different items.
III. Store of Value – This means that you can choose to keep your money now and save it for the
future. It will still be accepted when you decide to spend it five years from now.
BANK
BANK
Liquidity refers to the ease of use of an asset to pay for transactions. For example, real estate needs
to be sold, and gold and other precious metals need to be converted to cash first before they can be
used as payment. In this sense, the closer the form of an asset is to cash, the more liquid it is. High
liquidity facilitates buying and selling in the economy.
BANK
The concept of liquidity forms the basis of money supply in the economy. In the Philippines, money supply
measures are defined by the Bangko Sentral ng Pilipinas (BSP).
• M0 or BM – This is known as base money that includes currency in circulation (e.g., paper bills and coins in the
hands of the public), bank reserves (e.g., money kept in banks’ vaults), and government reserves.
• M1 – This is known as narrow money. This includes M0 or BM plus peso demand deposits (e.g., peso checking
accounts).
• M2 – This is known as broad money.This includes M1 plus savings and time deposits denominated in peso.
• M3 – This is known as broad money liabilities. This measure includes M2 plus money market securities such as
promissory notes and commercial papers.
• M4 – This measure includes M3 plus deposits denominated in foreign currency (e.g., dollar deposits) and
transferable assets (e.g., shares).
BANK
The country’s central bank is the Bangko Sentral ng Pilipinas. While the executive branch of the
government oversees the general state of the economy, the central bank is in charge of the country’s
money supply.
The strategy in which the government manages tax collection and government spending is know as
fiscal policy.
In contrast, BSP’s control of the country’s money supply and liquidity is known as monetary policy.
In terms of governance, the central bank still reports to the executive branch led by the president. But
deciding on the appropriate monetary policy tools to employ is entirely the responsibility of the BSP.
BANK
BANK
In addition to liquidity management through adjustments in the money supply, the central bank also performs
other functions.
I. Supervision – The central bank oversees all commercial banks in the country and ensures that these banks
comply with the set banking standards and requirements. Likewise, the central bank also closely monitors
the credit levels of banks and has the power to regulate the operations of banks.
II. Lender of Last Resort – This means that when banks are running low on funds, they can ask for a loan
from the central bank subject to applicable interest rates (also referred to as bank rates).
III. Printer of Money – The BSP is the exclusive right to print the country’s currency of issue. The banknotes
and coins are presently referred to as new generation currency (NGC).
IV. Manager of the Peso Exchange Rate – The central bank is responsible for managing the Philippine peso
exchange rate and for maintaining the strength of the peso against other currencies.
BANK
Three tools conventionally employed by the BSP in achieving a desired level of money supply.
• Bank rate – This is the central bank’s lending rate to commercial banks. An increase in the bank rate
discourages borrowing by commercial banks. Financial institutions that are running low on funds will likely
decide to reduce their loans to the public instead of borrowing from the central bank and incurring higher
interest rates.
• Open market operations – This refers to the buying and selling of bonds by the central bank in order to
manage the supply of money in the economy. The BSP issues bond securities when it wants to reduce the
money supply and buys bond securities to increase the money supply and to infuse liquidity to the economy.
• Reserve requirement ratio – Philippine commercial banks are required to maintain a minimum cash reserve
with the central bank which may not be used for lending and banks have to deposit a larger amount in the BSP.
This results in less funds being available for lending to the public. Thus, increasing the reserve requirement
lowers money supply.The central bank requirement ratio is presently at 20%.
THE PHILIPPINE PESO AND
FOREIGN EXCHANGE

THE PHILIPPINE PESO AND FOREIGN
EXCHANGE
The Foreign exchange market is the market for the exchange of foreign currencies. The market is also quite
often referred to as forex or FX. The price in the forex market refers to the prevailing exchange rate while the
goods being exchanged are the currencies.
More formally, exchange rate can be defined as the price of a currency in terms of another currency.
Example:
Peso-dollar exchange rate is P52.00
$1.00 for P52.00 or P52.00 for $1.00
EXCHANGE
There are two components of an exchange rate quotation. The first currency quoted is called the base currency,
while the second currency is the counter currency.
Counter currency is also referred to as the quote currency. How to domestic currency is cited in the quotation
determines the type of quotation of the exchange rate.
A direct quote provides the domestic currency as the base currency, while an indirect quote provides the
domestic currency as the counter or quote currency.
EXCHANGE
There are two ways to determine the exchange rate value or price in the forex market. One is through supply
and demand of currencies like in a typical market. This system of letting market forces determine the exchange
rate is called a floating forex regime.
In contrast, a fixed forex regime is when the value of the local currency is pegged to another, usually more
stable, currency such as the US dollar.
The Philippines follows at a floating forex regime, along with the majority of counties in the world. The strength of
the Philippine peso can be measured through its foreign exchange rate.
In the Philippines, maintaining a stable currency is one of the responsibilities of the BSP.
EXCHANGE
Currency depreciation happens when the currency loses value relative to another currency. This is evidenced
by an increase in the nominal value of a directly quoted exchange rate. For example, a peso-dollar exchange rate
increase from P52.00 to P54.00 means that the peso has depreciated and that you will need to exchange more
pesos for a dollar.
In contrast, Currency appreciation occurs when the currency becomes more valuable relative to another
currency. This is evidenced by a decrease in the nominal value of the exchange rate. For example, a peso-dollar
exchange rate decrease from P52.00 to P50.00 means that the peso has appreciated, that is, it has become
stronger because you will need to give up less pesos in exchange for one dollar.
Foreign trade is a major factor that determines exchange rate.
INDUSTRY ANALYSIS AND
COMPETITION
Sectors of the Economy and Related Industries

SECTORS OF THE ECONOMY
Based on similarities in outputs, processes, or other attributes, businesses are grouped into industries. Industries,
on the other hand, are grouped into sectors.
Economic sectors are commonly categorized based on the production process.
 The Primary sector includes industries in the business of extracting raw materials from natural resources.
 The Secondary sector groups industries that process raw materials into goods through manufacturing and
construction.
 The Tertiary sector covers the marketing and selling of raw an manufactured products.
The primary, secondary, and tertiary sectors correspond to agriculture, hunting and forestry, and fishing; industry
sector; and service sector, respectively.
 Agriculture and Fishing

The primary sector in the Philippines includes two main industries: (1) agriculture, hunting, and forestry; and (2) fishing.
The agriculture, hunting, and forestry sector covers farming of rice, vegetables, and other crops, the cultivation of
land resources, livestock poultry, and other agriculture-related activities.
Fishing, on the other hand, includes extraction of marine products from bodies of water.
 Industry Sector
The secondary sector, which is characterized by the transformation of raw materials into other goods, is also referred to as
the industry sector.The industry sector in the Philippines includes four main industries:
I. Mining and quarrying
II. Manufacturing
III. Construction
IV. Electricity, gas, and water supply
 Service Sector
The tertiary sector refers to the service sector. It is characterized by the marketing and selling of products from the primary
and secondary sectors.The Philippines has five main service industries:
1) Transport, storage, and communication;
2) Trade and repair of motor vehicles, motorcycles, and personal and household goods;
3) Financial intermediation;
4) Real estate, renting, and business activities;
5) Public administration, defense, and compulsory social security;
All other industries that cannot be classified under any of the above are lumped under a sixth category labeled “Other
services”. (ex. Education, recreational, cultural, and sporting activities)
 Public Sector vs. Private Sector

While the primary, secondary, and tertiary categorizations of industries relate to the production process and output,
industries may also be classified based on ownership.
In terms of ownership, organizations may fall under either the private sector or the public sector.
 Private sector is composed of institutions that are owned by private individuals or entities.
 Public sector is composed of institutions owned by the government.

Basic Economic Problems

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Basic Economic Problems

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BASIC ECONOMIC PROBLEMS

• 1. What goods to produce and services to provide?

• 2. How to produce and how much to produce of

• 3. For whom to produce these goods and services?

-The question relates to resources.

-How the availability of resources affects what products or services can

-A business has to decide what to produce or what service to provide

-The question focuses on the actual production of goods and services

-Focuses on how much to invest, how many people to hire to produce

-How much of the available resources are to be allocated to different

-The question focuses on the distribution of goods and services .

-They pertain to the term resources and are occasionally referred to as

• Labor – It represents human capital such as workers and employees

• Capital – It represents physical assets such as production facilities,

• Entrepreneurship – This is sometimes referred to as enterprise. It

Goods and Services

• The production possibility frontier or PPF is an application of the

• The PPF of the economy is determined by the availability and efficient

• Points inside the frontier signify inefficiency or underutilization of

• Points outside the frontier correspond to unattainable situations in the

• A shift in the frontier signifies an increase in the factors of production

• Functions and Economic Equations

Economic equations are mathematical expression of an economic

In terms of judgement, economics can be categorized into either:

• Indifference Map – shows a group of indifference curves.

Gross Domestic Product

• GDP is the most popular measure of the overall health of an economy.

Gross Domestic Product

• Expenditure approach – considers the value or expenditure associated with the

Gross Domestic Product

Gross Domestic Product

Gross National Product

GNI = GDP + Net Primary Income

*Net Primary Income = Income of Filipinos and Filipino companies abroad.

Consumer Price Index

Consumer Price Index

GDP deflator – uses nominal and real GDP values

Hyperinflation – is the case of extremely high and accelerating inflation rate. An

Types of Interest Rates:

• Real Interest Rate – is the rate adjusted for inflation.

Type of Financial Institution

Borrowers Credit Standing

Term of the Loan

Collateral and Guarantee

Economic Systems refer to the different ways of managing a nation’s available

Free Market Economy

Free Market Economy

• Barter is a mechanism where goods are exchanged for another good.

• Most economies have evolved from this form of economy.

• Currently, the traditional system is limited to some nations in Africa.

What? How? For Whom?

Determined by consumer Determined by producers Determined by consumer

Determined by the Determined by the Determined by the

Influenced by both Influenced by both

A sustained growth in GDP is generally taken to mean economic growth.

Recession means a period of economic downturn characterized by the high or increased

Cyclical Unemployment is unemployment as a result of the business cycle. Although full

Prices of Basic Commodities

Prices of Basic Commodities

Prices of Basic Commodities

Taste and Preferences

Prices of Other Goods

Market Surplus happens in the market when there is excess supply.

Application of Supply and Demand