Principles on Economics with Taxation and Agrarian
Reform
By: AZARCON, MARZO, NAVARRO, RESURRECCION,
PACA, DEGAY, SISON, ROJO
Introduction to Economics
Economics- is a social science that deals with the
efficient allocation of scarce resources to satisfy mans
unlimited wants and needs.
-It comes from the Greek word oikonomiya or
oikonomos which means management of a household:
oikos (house) + nomos (managing).
-Economists focus on the way in which
individuals, groups, business enterprises, and
governments seek to achieve efficiently any economic
objective they select. Other fields of study also
contribute to this knowledge: Psychology and ethics try
to explain how objectives are formed; history records
changes in human objectives; sociology interprets
human behavior in social contexts.
The Classical School
As a coherent economic theory, classical
economics starts with Smith, continues with the British
economists Thomas Robert Malthus and David Ricardo,
and culminates in the synthesis of John Stuart Mill, who
as a young man was a follower of Ricardo. Although
differences of opinion were numerous among the
classical economists in the three-quarters of a century
between Smith's Wealth of Nations and Mill's Principles
of Political Economy (1848), members of the group
agreed on major principles. All believed in private
property, free markets, and, in Mill's words, that only
through the principle of competition has political
economy any pretension to the character of a science.
They shared Smith's strong suspicion of government
and his ardent confidence in the power of self-interest
represented by his famous invisible hand, which
reconciled public benefit with individual pursuit of
private gain. From Ricardo, classicists derived the notion
of diminishing returns, which held that as more labor
and capital were applied to land, yields after a certain
and not very advanced stage in the progress of
agriculture steadily diminished.
Through Smith's emphasis on consumption, rather
than on production, the scope of economics was
considerably broadened. Smith was optimistic about
the chances of improving general standards of life. He
called attention to the importance of permitting
individuals to follow their self-interest as a means of
promoting national prosperity.
Malthus, on the other hand, in his enormously
influential book An Essay on the Principle of Population
(1798), imparted a tone of gloom to classical
economics, arguing that hopes for prosperity were
fated to founder on the rock of excessive population
growth. Food, he believed, would increase in arithmetic
ratio (2-4-6-8-10 and so on), but population tended to
double in each generation (2-4-8-16-32 and so on)
unless that doubling was checked either by nature or
human prudence. According to Malthus, nature's check
was positive: The power of population is so superior
to the power of the earth to produce subsistence for
man, that premature death must in some shape or
other visit the human race. The shapes it took included
war, epidemics, pestilence and plague, human vices,
and famine, all combining to level the world's
population with the world's food supply.
The only escape from population pressure and the
horrors of the positive check was in voluntary limitation
of population, not by contraception, rejected on
religious grounds by Malthus, but by late marriage and,
consequently, smaller families. These pessimistic
doctrines of classical economists earned for economics
the epithet of the dismal science.
Mill's Principles of Political Economy was the
leading text on the subject until the end of the 19th
century. Although Mill accepted the major theories of
his classical predecessors, he held out more hope than
did Ricardo and Malthus that the working class could be
educated into rational limitation of their own numbers.
Mill was also a reformer who was quite willing to tax
inheritances heavily and even to allow government a
larger role in protecting children and workers. He was
far more critical than other classical economists of
business behavior and favored worker ownership of
factories. Mill thus represents a bridge between
classical laissez-faire economics and an emerging
welfare state.
 The classical economists also accepted Say's Law of
Markets, the doctrine of the French economist Jean
Baptiste Say. Say's law holds that the danger of general
unemployment or glut in a competitive economy is
negligible because supply tends to create its own
matching demand up to the limit of human labor and
the natural resources available for production. Each
enlargement of output adds to the wages and other
incomes that constitute the funds needed to purchase
added output.
1. Adam Smith- Father of Economics.
-Author of the book An Inquiry into the Nature
and Causes of the Wealth of Nations
-Proposes the idea of relationship between
consumers and producers through supply and
demand.
2. John Stuart Mill- In political economy, Mill
advocated those policies that he believed most
consistent with individual liberty, and he
emphasized that liberty could be threatened as
much by social as by political tyranny.
History of Economics
Economic issues have occupied people's minds
throughout the ages. Aristotle and Plato in ancient
Greece wrote about problems of wealth, property, and
trade. Both were prejudiced against commerce, feeling
that to live by trade was undesirable. The Romans
borrowed their economic ideas from the Greeks and
showed the same contempt for trade. During the
Middle Ages the economic ideas of the Roman Catholic
Church were expressed in the canon law, which
condemned usury (the taking of interest for money
loaned) and regarded commerce as inferior to
agriculture.
Economics as a subject of modern study, distinguishable
from moral philosophy and politics, dates from the
work, Inquiry into the Nature and Causes of the Wealth
of Nations (1776), by the Scottish philosopher and
economist Adam Smith. Mercantilism and physiocracy
were precursors of the classical economics of Smith and
his 19th-century successors.
Importance of Studying Economics
1. To understand society
2. To understand global affairs
3. To be an informed voters
Macroeconomics- is the study of the relationship of the
broad economic sectors making up the entire national
or global economy.
- Studies aggregate supply and aggregate
demand and uses average, general absolute price levels.
Microeconomics- studies decision-making of individual
economic units such as one producer or one household.
-studies individual supply and individual
demand and uses relative prices.
Scarcity- it requires a great need for economics to be
studied by everyone. The choices we make on the use
of our scarce resources largely determines what needs
and wants we would be satisfying and how much
satisfaction would we get.
Opportunity cost-the cost of a commercial decision
regarded as the value of the alternative that is forgone.
Basic Economic Questions:
1. What to produce?
2. How many and how much to produce?
3. How to produce?
Overproduction
Underproduction
4. For whom to produce?
5. At what price to produce?
Needs- Natural Essential Elements Designed for Survival
Wants- are things we can live without or those not
necessarily for ones survival.
Factors of Production and Economic Resources
1. Capital- refers to all man-made resources used
in the production process. This includes
machines, buildings and equipment.
2. Entrepreneurship- refers to the skills the owner
or producer applies to combine all the factors of
production to produce goods and services.
 3. Land-Encompasses not only the real estate
property being used in the production process,
but also all natural elements that comes from
above and below land. All raw materials,
especially those found in their natural states,
are considered as part of land.
4. Labor- Encompasses all manpower
requirements of the enterprise. It is needed in
the production process to properly use the
capital and the land, under the supervision or
instruction of the entrepreneur to produce
goods and services.
Economic system- is a mechanism in a country which
deals with the production, distribution, exchange, and
consumption of goods and services.
Five Basic Economic Systems
1. Traditional Economic System
- The decision of the four basic economic
question is based on the head of the family.
- Is one in which peoples economic roles are
the same as those of their parents and
grandparents.
2. Market Economic System
- Owned and controlled by individuals.
- Is one in which a nations economic
decisions are the result of individual
decisions by buyers and sellers in the
market. (CAPITALISM)
3. Command Economic System
- Owned by the government.
- The main decision maker is the
government. (COMMUNISM)
4. Socialism Economic System
- State decides on major and basic products.
- Freedom of Enterprise exists only on non-
basic and non-critical products.
5. Mixed Economic System
- Mixed of market and command economic
system.
Demand- refers to the quantity of goods and services
that people are willing to buy at a given price and within
a given time period when all other factors are held
constant except for the price.
Law of Demand- when prices of products increase, the
tendency of consumers is to buy less of the product,
and when prices of products decrease, the normal
tendency of consumers is to buy more of the product.
Cateris Paribus- ALL OTHER THINGS ARE HELD
CONSTANT EXCEPT FOR THE PRICE.
Supply- refers to the quantity of products that a
producer are willing to sell an item for a given price and
time.
Law of Supply- when prices of commodities tend to
increase, the quantity being supplied by the producer
also tend to increase, and when prices of commodities
in consideration tends to decrease, the corresponding
quantities being supplied also tends to decrease,
Change in Quantity demanded vs. Change in demand
A. Change in Demand
A change in demand of a good means a change of the
whole purchase plan. It is caused by factors other than
the change in the price of the good.
Graphically, a change in demand involves a shift of the
demand curve. This means greater/smaller quantiies
demanded than before at the original prices.
B. Change in quantity demanded
A change in quantity demanded of a good refers to a
change of quantity demanded as a result of price
change of the good.
Graphically, the demand curve remains the same. The
change is only shown by a "movement along the
demand curve" .
A change in quantity demanded - - "a
movement along a demand curve".
Suppose the price falls from $4 to $2, the quantity
demanded will increase from 2 units to 4 units.
CAUSES FOR CHANGE
Changes in Demand can be caused by:
1) Change in price of a compliment good
2) Change in price for substitutes
3) Change in income...for normal goods, a change will
cause an increase in demand
4) Change in the number of consumers
5) Change in information/technology
Changes in Supply can be caused by:
1) Change in imput costs (labor/natural resources/etc.)
2) Change in technology
3) Change in number of suppliesveral reasons for
demand change
Change in quantity supplied vs. Change in Demand
Change in Supply
A change in supply is caused by factors other than the
price of the product.
Graphically, it involves a shift of the supply curve, which
implies greater/smaller quantities supplied than before
at the original prices.
Suppose there is a decrease in supply, shifting the
supply curve from S1 to S1.
At the price P1, the quantity supplied will decrease from
Q1 to Q2.
A decrease in supply
Suppose there is an increase in supply, shifting the
supply curve from S1 to S2.
At the price P1, the quantity supplied will then increase
from Q1 to Q2.
A increase in supply
B. Change in quantity supplied
A change in quantity supplied refers to a change in
quantity offered for sale as a result of a change in the
price of the product.
Graphically, there is no shifting of supply curve, the
change is represented by "a movement along the supply
curve" .
A change in quantity supplied - - "a
movement along a supply curve".
Suppose the price of a good increases from P1
to P2.
The quantity supplied will increase from Q1 to Q2.
Market Equilibrium- when all buyers and all sellers
agree on the same price, we achieve what is termed as
market equilibrium.
Gross Domestic Product (GDP) the total of all goods
and services produced within a country
Gross Domestic Product (GDP), the total value
of goods and services produced in a country over a
period of time. GDP may be calculated in three ways: (1)
by adding up the value of all goods and services
produced, (2) by adding up the expenditure on goods
and services at the time of sale, or (3) by adding up
producers incomes from the sale of goods or services.
However, it is difficult to measure GDP precisely, partly
because every country has an unofficial economy, often
called a black economy that consists of transactions not
reported to government.
Circular flow of Income and Expenditure
The circular flow of income is a theory that describes
the movement of expenditure and income throughout
the economy.
In an economy households provide factors of
production, such as labour, to firms. Firms use these
factors to produce goods and services which they sell to
the households. (This is represented by the red, inner
loop in the diagram below.)
The households then spend money on the goods and
services produced by firms. This money is then used by
firms to pay the households for their work, through Parsing Gross Domestic Product- analyzing the meaning
wages. (This is represented by the green, outer loop in to understand them better
the diagram below.) This process repeats itself and
forms the circular flow of income. Investment and Consumption

As you can see in the diagram above, the expenditure A. Approaches in measuring GDP
on goods and services is equal to the income received a. Expenditure approach meaning and
by households. Therefore in an economy: scope
A method for calculating GDP that
National income = National expenditure totals consumption, investment,
government spending and net exports.
However, not all income generated will be spent on
Although GDP can be calculated
domestically produced goods. Some of the income is through other methods, the
saved, used to pay taxes or spent on imported goods expenditure method is the most
and services. Therefore saving, taxation and imports are common. The formula for its calculation
leakages in the circular flow of income. is often expressed as.

Likewise, sometimes there is extra spending in the GDP = C + G + I + NX

economy,from investment, government expenditure
and spending on exports, which will be added to the This calculation gives us nominal GDP,
circular flow of income. These are called injections. which must then be adjusted for
inflation to give us the real GDP.
Key terms
b. Income approach meaning and scope
" Sum total of incomes of individuals
living in a country during 1 year ."
Consumer expenditure - The amount of money that is
spent by households to purchase goods or services in an Another way of measuring GDP is to
economy. measure total income. If GDP is
calculated this way it is sometimes
called gross domestic income (GDI), or
Factors of production - These are inputs used to create GDP(I). GDI should provide the same
goods and services. The four factors are land, labour, amount as the expenditure method
capital and human enterprise. described below. (By definition, GDI =
GDP. In practice, however,
measurement errors will make the two
figures slightly off when reported by
Injections - Injections increase the demand for
national statistical agencies.)
domestically produced goods and services. Injections
come from investment, government spending and
This method measures GDP by adding
export sales.
incomes that firms pay households for
factors of production they hire- wages
for labour, interest for capital, rent for
Leakages - This is when demand for domestically land and profits for entrepreneurship.
produced goods and services is reduced due to money
being diverted into savings, taxes or imports. The US "National Income and
Expenditure Accounts" divide incomes
into five categories:
Wages, salaries, and supplementary
labour income
Corporate profits
Interest and miscellaneous investment
income
Farmers' incomes
Income from non-farm unincorporated
businesses
These five income components sum to
net domestic income at factor cost.
Two adjustments must be made to get
GDP:
Indirect taxes minus subsidies are
added to get from factor cost to market
prices.
Depreciation (or capital consumption
allowance) is added to get from net
domestic product to gross domestic
product.
Total income can be subdivided
according to various schemes, leading
to various formulae for GDP measured
by the income approach. A common
one is:
GDP = compensation of employees +
gross operating surplus + gross mixed
income + taxes less subsidies on
production and imports
GDP = COE + GOS + GMI + TP & M SP
&M
Compensation of employees (COE)
measures the total remuneration to
employees for work done. It includes
wages and salaries, as well as employer
contributions to social security and
other such programs.
Gross operating surplus (GOS) is the
surplus due to owners of incorporated
businesses. Often called profits,
although only a subset of total costs are
subtracted from gross output to
calculate GOS.
Gross mixed income (GMI) is the same
measure as GOS, but for
unincorporated businesses. This often
includes most small businesses.
The sum of COE, GOS and GMI is called
total factor income; it is the income of
all of the factors of production in
society. It measures the value of GDP at
factor (basic) prices. The difference
between basic prices and final prices
(those used in the expenditure
calculation) is the total taxes and
subsidies that the government has
levied or paid on that production. So
adding taxes less subsidies on
production and imports converts GDP
at factor cost to GDP(I).
Total factor income is also sometimes
expressed as:
Total factor income = employee
compensation + corporate profits +
proprietor's income + rental income +
net interest[8]
Yet another formula for GDP by the
income method is:[citation needed]
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate
income taxes, dividends, undistributed
corporate profits)
W : wages.
c. Industrial approach meaning and scope
Real GDP vs. Nominal GDP
In order to deal with the ambiguity inherent in
the growth rate of GDP, macroeconomists have
created two different types of GDP, nominal
GDP and real GDP.
Nominal GDP is the sum value of all produced
goods and services at current prices. This is the
GDP that is explained in the sections above.
 Nominal GDP is more useful than real GDP
when comparing sheer output, rather than the
value of output, over time.
Real GDP is the sum value of all produced goods
and services at constant prices. The prices used
in the computation of real GDP are gleaned
from a specified base year. By keeping the
prices constant in the computation of real GDP,
it is possible to compare the economic growth
from one year to the next in terms of
production of goods and services rather than
the market value of these goods and services. In
this way, real GDP frees year-to-year
comparisons of output from the effects of
changes in the price level.
The first step to calculating real GDP is choosing
a base year. For example, to calculate the real
GDP for in year 3 using year 1 as the base year,
use the GDP equation with year 3 quantities
and year 1 prices. In this case, real GDP is (10 X
$1) + (9 X $6) = $64. For comparison, the
nominal GDP in year 3 is (10 X $2) + (9 X $6) =
$74. Because the price of bananas increased
from year 1 to year 3, the nominal GDP
increased more than the real GDP over this time
period.
Business Cycle - term used by economists to designate
a periodic increase and decrease in an economys
production and employment.
A business cycle is basically defined in terms of periods
of expansion or recession. During expansions, the
economy is growing in real terms (i.e. excluding
inflation), as evidenced by increases in indicators like
employment, industrial production, sales and personal
incomes. During recessions, the economy is contracting,
as measured by decreases in the above indicators.
Expansion is measured from the trough (or bottom) of
the previous business cycle to the peak of the current
cycle, while recession is measured from the peak to the
trough. In the United States, the National Bureau of
Economic Research (NBER) determines the official dates
for business cycles.
Peak meaning and location in the business cycle
The highest point between the end of an economic
expansion and the start of a contraction in a business
cycle. The peak of the cycle refers to the last month
before several key economic indicators, such as
employment and new housing starts, begin to fall. It is
at this point that real GDP spending in an economy is its
highest level.
Recession and location
A significant decline in activity across the economy,
lasting longer than a few months. It is visible in
industrial production, employment, real income and
wholesale-retail trade. The technical indicator of a
recession is two consecutive quarters of negative
economic growth as measured by a country's gross
domestic product (GDP); although the National Bureau
of Economic Research (NBER) does not necessarily need
to see this occur to call a recession.
Through and location in the business cycle
Inflation- Inflation and Deflation, in economics, terms
used to describe, respectively, a decline or an increase
in the value of money, in relation to the goods and
services it will buy.
Consumer Price Rate Consumption
Theories of Inflation
Demand pull inflation meaning
inflation caused by an increase in demand or in
the supply of money
Cost push inflation meaning
Cost-push inflation is an alleged type of inflation
caused by substantial increases in the cost of important
goods or services where no suitable alternative is
available.
Profit push inflation meaning
Unemployment, enforced idleness of wage earners who
are able and willing to work but cannot find jobs. In
societies in which most people can earn a living only by
working for others, being unable to find a job is a
serious problem. Because of its human costs in
deprivation and a feeling of rejection and personal
failure, the extent of unemployment is widely used as a
measure of workers' welfare. The proportion of workers
unemployed also shows how well a nation's human
resources are used and serves as an index of economic
activity.
2. Partnership-(its meaning and organization and
kind/types of partnership Advantage and
Disadvantage of Partnership)
A business organization in which two or more
individuals manage and operate the business.
Both owners are equally and personally liable
for the debts from the business.
3. Corporation
a. Meaning, Nature and Scope
b. Types of Corporation

Unemployment Rate Computation

The unemployment rate is calculated as: c. Organization of corporation

Unemployed/labor force x 100 (It is expressed as a d. Articles of Incorporation

percentage of the labor force.)

The labor force is:

e. Advantages and Disadvantages of
employed + unemployed Corporation
4. Cooperative
Business Oragnization- a. Meaning, Nature and Scope

Its characteristics and goal

b. Kinds of Cooperative
Forms of Business Enterprises

1. Sole proprietorship(its meaning and c. Organization of Cooperative

organization)
d. Articles of Incorporation
A sole proprietorship is a one-person business that is
e. Advantages and Disadvantages of
perhaps the easiest and simplest business enterprise to
Cooperative
organize in the Philippines. Legally, a sole proprietorship
A. Money and Monetary Policy
in inseparable from its owner.
a. The Significance of Money
Advantages Disadvantages
Relatively low start-up Unlimited liability b. Money Defined
costs
Greatest freedom from Lack of continuity in
government regulation business organization in c. The Functions of Money
the absence of the owner
Minimal working capital Difficulty raising capital d. The Evolution of the Payments System
required
Tax advantages to owner Relative difficulty to
compete with bigger
businesses e. Measures of Money
All profits go to owner All losses borne by the
owner f. The Demand for money
g. The goals of monetary policy
h. Tools of monetary policy
B. International Trade
a. Reasons for International Trade
b. The Basis for International Trade
c. International Trade Barters
d. Balance of International Payments
e. Foreign Exchange
C. Agrarian Reform
a. Events that Paved the way for Agrarian
Reform through the centuries
b. The Comprehensive Agrarian Reform
Program
D. Taxation
a. Meaning of Taxation
b. The Need for Taxation
c. Requisites of a valid taxation
d. Objectives of taxation
e. Classes of Taxes
f. Requisites for ideal tax system