HBE 121
APPLIED ECONOMICS-PRELIMS
5.
LESSON 1
Economics- comes from the greek word “oikanomia”
meaning “household management”
 Fajardo- proper allocation and efficient use
of available resources for maximum
satisfaction.
 Samuelson- study of how societies use
scarce resources to produce commodities.
 Nordhaus- it is the science of choice. It
studies how people choose to use scarce
resources to produce and distribute
commodities.
 Sicat- scientific study which deals how
individual and society in general make choices.
 Castillo- how man could best allocate and
utilize the scarce resources of society.
 Webster- a branch of knowledge deals with
the production, distribution and consumption of
goods.
5 Elements of Economics:
1. Social Science- deals with the study of
man’s life with others. Social (society) Science
(systematic/process)
2. Resources/Wealth- anything that we have,
input for production
 Natural Resources- environment
 Human Resources- manpower, labor, skills
 Man-made (physical) resources-
machineries, software, equipments
3. Needs and Wants- depends on the person/
situation (unlimited)
Needs- priority, basic necessity for survival
Wants- desires, expanded needs
4. Scarcity- limited resources (permanent)
Shortage- temporary
Population- exponentially (doubles)
Resources- arithmetically (single)
HOW TO TREAT SCARCITY:
 Slow down needs and wants
 Hasten resources
 Combination of both
SHORTAGE:
 Decrease of supply
 Hoarding
 Increase in demand
Government intervention
5. Allocation- proper distribution of resources
3 Mechanisms of Allocation:
 Market System- business
 Command System- government
 Social System- form of sharing ex.
Christmas
ECONOMICS- branch of social science that
deals with the proper allocation of our
scarce resources to satisfy our unlimited
needs and wants.
2 branches:
 Macroeconomics- dealing with the
whole economy
 Microeconomics- dealing with
individuals
Division of Economics:
1. Production- process of producing or
creating goods needed by
household to satisfy needs.
 Input- factors of production
 Output- goods and services that
have been created.
2. Distribution- marketing of goods and
services to different economic
outlets for allocation.
3. Exchange- process of transferring
goods and services to a person or
persons in return for something.
4. Consumption- proper utilization of
economic goods.
5. Public Finance- activities of the government
regarding taxation, borrowings and
expenditures. Efficient use and distribution of
public resources.
Tools of Economics:
1. Logic- science that deals with sound
thinking and reasoning.
2. Mathematics- science that deals with
numbers and their operation.
Economics is the most quantifiable
discipline among social sciences.
 3. Statistics- branch of mathematics
engages with analysis and
interpretation of numerical data.
Economic Resources
 Land- consists of free gifts of nature (natural
resources), it has a priced attached on it,
limited resource.
 Labor- human resources. Refers to all
human efforts that help to produce want
satisfying goods and services.
 Capital- represent monetary resources
company use to purchase resources, land
and goods, it also represents major physical
assets of individual and companies use.
 Entrepreneurs- French word “enterpriser”.
The organizer and coordinator of other
factors of production: land, labor and capital
 Foreign Exchange- refers to the dollar and
dollar reserves that the economy has.
LESSON 2
Applied Economics- study of economics in relation
to real world situations, as opposed to the theory of
economics.
- Started being used nearly 200 years ago, in
the writings of…
 Jean-Baptiste Say- French economist
and businessman
 John Stuart Mill- British political
economist, philosopher and civil servant
-Principles of political economy with
some of their applications to social philosophy
Adam Smith- Father of Economics
- proposed “the wealth of nations” which focus on
allocation of wealth
Three Economic Ideas:
1. Productivity and Wealth- maximizing
resources we have. Being Effective
(achieving goals) and Efficient (achieving
while maximizing resources w/o washing
effort or time.
-the more productive, the more wealth we
can get
2. Invisible Hand- “let them be”
-competition
3. Laissez-faire- free market
-minimal government intervention
Modern Economic Theories:
1. Consumerism- increase of consumption is
economically beneficial.
2. Keynesianism- John Maynard Keynes
-focus on monetary and fiscal policies
3. Liberalism- free competition and self-
regulating market.
4. Monetarism- focus on pesos, money affects
production, employment, prices
5. Utilitarianism- satisfaction of consumer will
lead to economic growth
Applied Economic Application
 Sweep aside all attempts to dress up
situation
 Determine steps to be taken
 Teach valuable lessons
Econometrics- application of statistical and
mathematical theories to economics for the
purpose of testing hypotheses and forecasting
future trends.
2 Major Categories:
Theoretical- concepts related including
theories, formula, etc.
Applied- numerical data
Scarcity- refers to the tension between our
limited resources and our unlimited wants
and needs.
Basic Economic Problems:
1. What to produce?
- determining desires of people
 Availability of resources
 Physical environment
 Customs and traditions
2. How to produce?
-selecting proper combination
3. For whom shall goods and services be
produced?
-allocation & distribution of final output
 4. Are the country’s resources being -both capitalism and socialist economies are found
utilized, or some of them lying idle -combined market and planned economy
and unemployed? -Countries using mixed economy: USA, Philippines,
5. Is the economy’s capacity to Cuba
produce goods growing or remaining No country strictly uses one economy
the same overtime?

LESSON 3 Adam Smith (1723-1790)- recognized as the founder of

THE ECONOMIC SYSTEM
Traditional Economy
-earlier method of allocating resources consisted of
traditional patterns
-everything is based on what is popular and what is
in demand from the people
Ex. Farmers grazed animals and produced food
-Produce goods and services only for their own
consumption
Barter- method of exchange of goods which is of
equal value
Market Economy
-exchange and trading of goods and services
-“free market economy”, allows for much more
freedom
-what to produce is determine by what the people
demand
-“invisible hand” represents the supply and demand
market forces
- USA has more economy traits than Western
Europe countries
-transactions occur when both seller and buyer
agree on the price of good or service
-government intervening is very minimal
Classical school, constructed an explanation on how
social behaviour is regulated.
-He saw the world where each person sought his
own self-interest but was constrained with morality,
markets and government.
-“The theory of Moral Sentiment” (1759),
-“Wealth of the Nation” (1776)- free market, while
appearing chaotic and unrestrained, is actually guided
to produce the right amount and variety of good by so
called “invisible hand” originally use in his essay “The
History of Astronomy” continuation…
READ P.28-29 AT YOUR OWN RISK! ANG HIRAP
I-EXPLAIN !!
Production Possibility Frontier (PPF)
-under Macroeconomics
-represents the point at which an economy is most
efficiently producing its goods and services, and
therefore allocating its resources in the best way
possible.
-if one economy is not producing quantities indicated
by PPF, resources are being managed inefficiently
Point X- country’s resources are not being used
efficiently.
Point Y- represents output level that is currently
unreachable by this economy.

Planned Economy Importance of PPF

-opposite of market economy
-mostly government controlled with the government
deciding everything (what gets produced, at what
quantity and what price)
-also called as Command Economy
- Countries that have planned economy are China
and former USSR, North Korea, Cuba
Equality- equal chance of resources and equal
distribution
Socialism (Marxism)- in terms of hierarchy, more
effort or work receives more payment or credit
1. illustrates definition of economics as the science of
choosing what goods to produce
2. PPF provides rigorous definition of scarcity. Shows
the outer limit of producible goods dictated by law of
scarcity. Scarcity- reflection of the limitation on our
living standards imposed by the PPF
3. PPF can also illustrate 3 basic problems of
economic life- what, how, for whom
4. Can also illustrate general point that we are always
choosing among limited opportunities

Opportunity Cost
Mixed Economy
-the value of what is foregone in order to have
 something else. vision of the development path of that society”
–determined by his or her needs wants, time and-3 key players: government, business and civil
resources (income) society

Private Sector Participation in Managing the

Environment (PRIME), an effort is being made to
-
formulate a Business Agenda 21, pilot test market-
based instruments (MBIs) in selected industries and
Lesson 4
ensuring compliance to Environmental Management
Socio- Economic Development
Systems (EMS)
Agenda 21- an action plan of the United Nations
7 Dimension of Development
related to sustainable development and was an
1. Spiritual Development
outcome of the United Nations Conference on
2. Human Development- existing measures of human
Environment and Development (UNCED) in Rio de
development, such as the Human Development Index
Janeiro, Brazil, 1992.
(HDI), which are limited to health, education and
-comprehensive blueprint of action to be taken
income, indicate some improvement over time
globally, nationally and locally
3. Social and Cultural Development
-a development vision and framework for the 21st
a. promoting resource access and property rights
century has been formulated under the Long-Term
b. promoting environmental awareness
Philippine Development Plan (LTPDP), 2000-2025
4. Political Development
or Plan 21
a. empowering the people
b. maintaining peace and order
Plan 21
5. Economic Development
-builds on the solid foundations created by the
a. maintaining sustainable population
Medium Term Development Plan (MTPDP)
b. maintaining productivity and profitability
-sets the broad developmental directions of the
6. Ecological Development
country and will serve as the basis for the detailed
a. Adopting environmental management weapons
plans of the sector agencies
b. protecting the environment and natural resources
7. Principle of Sustainable Development (Philippine
Philippine agenda 21 or PA 21
Agenda 21)
-creation of an enabling environment which would
a. Primacy of Developing Full Human Potential-
assist various stakeholders to integrate sustainable
puts man at the center
development.
b. Holistic Science and Appropriate Technology-
-Environmental and Natural Resources Accounting
development of appropriate technology to solve
(ENRA)- management tool for integrating
problems
environment and the economy
c. Cultural, Moral and Spiritual Sensitivity-
-under Ramos Administration, Philippine Council for
considers inherent strengths of local and indigenous
Sustainable Development (PCSD) is created
knowledge while respecting cultural diversity.
d. National Sovereignty- Self-determination at
Philippine Agenda 21 promotes harmony and
national level
achieves sustainability by emphasizing:
e. Gender Sensitivity- recognize roles of both men
1. Primarily area-based
and women in development
2. Island Development
f. Peace, Order and National Unity- right of
3. People and Integrity of nature
everyone to a peaceful and secure existence is
respected
Sustainable Development
g. Social justice, Inter-and Intra-Generational
-meets the needs of the present without
Equity and Spatial Equity- equal distribution of
compromising the ability of future generations to
resources to everyone
meet their own needs.
-derived from “an image of society and a shared
 h. Participatory Democracy- puts value and support
to the participation of all
i. Institutional Viability- joint responsibility, unity250
partnership
j. Viable, Sound and Broad-based Economic
Development- working for development that is based
on stable economy.
k. Sustainable Population- maintaining a
number of people
l. Ecological Soundness- recognize earth as
common heritage
m. Bio-geographical Equity and Community-
based resource management- entrusting to the
people residing near or within the ecosystem
n. Global Cooperation- international solidarity
Philippine Agenda 21 Visions
1. Poverty Reduction- Poverty is a central concern
of sustainable development.
- to create an enabling economic environment for
sustained and broad-based growth improve
employment, productivity and income and attain
food security
2. Social Equity- allocation of resources on the basis
of efficiency and equity to achieve balanced
development. Efficiency and
Equity- channelling of resources to developing areas
where greater economic benefits accumulate
3. Empowerment and Good Governance-
Empowerment- precondition of informal choice
Good Governance- necessary precondition to
empowerment
4. Peace and Solidarity- costs of war escalate in
terms of various kinds of destruction
5. Ecological Integrity- path towards enhancing the
integrity of the country’s ecological domain
LESSON 5
SUPPLY AND DEMAND
Demand- desire for a particular good backed up by
sufficient purchasing power.
-ability or willingness to buy a particular commodity
Market- where buyers and sellers interact
Demand Schedule- reflects the quantities of goods
and services demanded by a consumer at any given
price.
Price of Beef QD in Kilos
P300 20
and 40
200 60
Law of Demand
“ the quantity of a commodity which buyers will buy
at a given time and place will vary inversely with the
price”
*as the price increases, quantity demanded
decreases. And as price decrease, quantity
demanded increase assuming all other things are
constant”
1. Income Effect- at lower prices, individual has
greater purchasing power.
2. Substitution Effect- consumers tend to buy good
with lower prices. They look for substitutes whose
prices are lower.
Demand Curve- graphical illustration between the
relationship of price and quantity demanded
-sloping down, inversely proportional
Determinants of Demand (Non-price factor)
1. Income- when income increases, demand
increases and vise versa
2. Population- more people in an area means more
demand of goods and services
3. Tastes and Preferences- demand increases when
people like or prefer them
4. Price Expectations- when people expect prices of
goods, there will be an increase in demand of goods
tomorrow r next week.
5. Prices of Related Goods- when prices of certain
goods increases, people tend to buy substitute
products. The demand for a certain product will
decrease while the substitute product will increase.
In terms of Complimentary products, when the product
increases in demands, the other one will also increase
Ceteris Paribus- all other things are equal or constant
-assuming that the determinants of demand are
constant, price and QD are inversely proportional to
each other
Changes in Demand- refer to the shift of demand
curve which is brought about by the changes in the
determinants of demand or on-price factor. (shift right-
increase in demand, left- decrease)
 Changes in Quantity Supplied- show the movements
Changes in Quantity Demanded- indicate movement
from one point to another point in a constant supply
from one point to another point. Does not change
curve. Brought by changes in price
position. Changes in QD is brought about the changes
in prices. Equilibrium of Demand and Supply
-introduced by Alfred Marshall, British economists
Supply- quantity of a commodity that is in the market Market Equilibrium- combination of equilibrium
and available for purchase at particular price. price and equilibrium quantity
-ability and willingness of sellers to sell
Quantity Price Quantity
Supply Schedule- shows different quantities that are Supplied Demanded
offered for sale at various price. 6 P6.00 20
9 9.00 16
12 12.00 12
Price of Rice QS 15 15.00 8
P600 300 18 18.00 4
500 250 SURPLUS- above the equilibrium price
400 200 SHORTAGE- below the equilibrium price

Law of Supply Law of Demand and Supply states that

-quantity offered for sale will vary directly with price when supply is greater than demand, price
“price increases, quantity supplied also increases; decreases. When demand is greater than
as price decreases, quantity supplied also supply, price increase
decreases”
READ P.58-59 AT YOUR OWN RISK!
Supply Curve- supply schedule illustrated in graphical
form
-upward slope
-price and quantity supplied are proportional to each
other

Determinants of Supply
INCREASE DECREASE
1. Technology- modern machines increases supply of
goods. IN IN
2. Cost of Production- as the price of raw materials or DEMAND DEMAND
the salaries of labourers increases, it means higher
cost of production which decreases supply
3. Number of sellers- more sellers means increase in
supply
4. Taxes and subsidies- taxes increase cost of
production, it means supply will decrease while
subsidies decrease cost of production, supply will
increase INCREASE DECREASE
5. Weather- production of goods depends on weather. IN SUPPLY IN SUPPLY
Ex. More supply of sweaters during cold season

Changes in Supply- pertains to a shift of supply

curve brought by changes in determinants of supply.
(shift right- increase in supply, left- decrease)
 INCOME ELASTICITY
-measures a product’s percentage change in quantity
Lesson 6 as a ratio of the percentage change in income which
Other Concepts of Elasticity caused the change in quantity.
1.Elasticity- measure used in response to changes in
the determinants of demand and supply. Q 2−Q 1
2.Price Elasticity- used in determining the percentage Q1
ey =
change in quantity against the percentage change in Y 2−Y 1
price. Y1
3.Income Elasticity- percentage change in quantity
compared to the percentage change in income. CROSS ELASTICITY
4.Cross Elasticity- percentage change in quantity of -percentage change in quantity demanded of Good
one good compared to the percentage change in the A in response to a percentage change in the price
price of related goods. of Good B

Types of Elasticity Q2 A−Q1 A

1.Elastic- change in quantity demanded is greater Q1A
ec=
than the change in price P 2 B−P 1 B
- If the answer is more than 1 P1B
2.Inelastic- opposite of elastic
- changes in demand is lesser than changes in price If cross elasticity is positive, they are
- If the answer is less than 1 substitutes
3.Unitary- change in demand is equal to change in
If cross elasticity is negative, they are
price
complements
- If the answer is 1
4.Perfectly Elastic- percentage change in quantity Lesson 7
demanded can change infinitely Prices of Basic Commodities
5.Perfectly Inelastic- percentage change in price -rice consumption and expenditure levels vary
creates no change in quantity demanded significantly across socio-demographic
characteristics and locations of the consumers.
PRICE ELASTICTY OF DEMAND
-change in quantity demanded for rice is due to the
-refers to the degree of reaction or response of the
change in purchasing power or real income caused
buyers to changes in price of goods or services.
by a price change.
Q 2−Q 1 -corn, sweet potato, and cassava are substitutes for
Q1 rice while potato, milkfish, tilapia, banana, mango
ep= and etc. are considered as rice complements.
P 2−P 1
How it works?
P1
-If quantity demanded changes a lot when prices
PRICE ELASTICITY OF SUPPLY change a little, a product is said to be elastic
-response of quantity offered for sale for every change
-Elasticity is important because it describes the
in price
fundamental relationship between the price of a
Qs2−Qs1 good and the demand for that good
Qs 1 -Elastic goods have plenty of substitutes
es= -Inelastic goods have fewer substitutes and price
P 2−P 1
P1 change doesn't affect quantity demanded as much
 economy in the world, with a GDP of USD$216
Billion (2011)

Labor, Supply, Population Growth and Wages

-Labor laws and regulation devised to protect labor
from abuses by employers and improve power of
labor
-Philippine minimum wage policy
-Phils. Government minimum wage mandates have
been high and made to carry the burden of raising
wages for workers
Minimum wage and Employment: The Overall Effect
-minimum wage increase have led to reduction in
employment affecting the most vulnerable groups
like the young, less educated and inexperienced
workers
-"total factor productivity"
-"Jobless growth"- poor quality of performance in
which growth was accompanied by low creation of
quality jobs
-Sicat constructed a table named "full-time
equivalent" low income workers who are either
employed or underemployed
-"under productive workers"- under class of low
income workers from Sicat
-Minimum wage of workers: Php445
Effects of Peso Depreciation against US Dollars
1. higher prices in peso terms for imported goods
amd services
2. weak peso will negate the impact of falling crude
oil prices abroad
3. increase in pump prices of gasoline
4. fuels inflation
5. higher debt on the government
6. domestic tourists find it expensive to visit places
History
-Piloncitos(small pieces of gold) and gold barter
rings used in barter system
-Spanish introduced coins in 1521
-1861, first mint was established to standardized
coinage
-1901, US Dollar was introduced
-World War II, Japan introduced new notes
-1949, Central Bank of the Philippines is established
introduction of Filipino currency

-Underemployment worsened from 17.9% last year

to 19.7% this year. Underemployed persons are
those who are hired but who want more work

Filipino Migrations and OFWs

-Bagong Bayani
-December each year is marked as the month of
overseas filipinos through Proclamation No. 276
signed by former President Cory in 1988
-proportion of female OFWs was higher than male
-highest number of OFWs was deployed in Saudi
Arabia followed by UAE
-"Development Diplomacy" implemented by
President Marcos in 1975 which saw the influx of
Filipinos deployed abroad-mainly middle east OFW
Remittances
-According to World Bank, the cash sent to the
country by OFWs is a "key factor" for the resilience
of the Philippines. Economy
-Philippines is estimated to be the 45th largest
 demand functions but inter-firm information may be
incomplete
LESSON 8
Market Structure- defined as the organizational and
other characteristics of a market.
Four basic types of market structures by traditional
economic analysis:
MONOPOLY
-only one producer/seller for a product (single business)
-entry is restricted due to high costs or other
impediments
-one entity has exclusive rights to a natural resources
-when company has a copyright or patent preventing
others from entering the market
-Monopolists has a tendency to maximize profit
-Two parties involved: Monopolistic Company (desire is
to gain more profit), Consumers (seek help of gov’t)
Characteristics:
1. maximize profit
2. decides price of good or product to be sold
3. other sellers are unable to enter the market
4. only one seller that produces all the output
5. monopolists can change the price and quality of the
product
OLIGOPOLY
-only few firms makes up the industry
-has control over the price, high barriers to entry
-products are nearly identical therefore, competing for
market share, will have an interdependent result
-increase profit margins above what a free market allow
-participants explicitly engage in price fixing is a cartel:
OPEC is one example
Characteristics:
1. maximizes profit
2 .price setters rather then price takers
3. barriers to entry are high; government licenses,
economies of scale, patents, expensive and complex
technology and etc.
4. actions of one firm influences the actions of other
firms
5. can retain long run abnormal profits
6. product may be homogeneous or differentiated
7. have perfect knowledge of their own cost and
PERFECT COMPETITION
-characterized by many buyers and sellers, many
products that are similar in nature and as a result,
many substitutes.
-there are few barriers to entry and prices are
determined by supply and demand
-producers are subject to the prices determined by
the market and do not have any leverage
Characteristics:
1. There is perfect knowledge, with no information
failure or time lags in the flow of information.
2. Producers and consumers make rational decisions
to maximize their self interest—consumers (utility)
producers (profit)
3. No barriers to entry into or exit out
4. Firms produce homogeneous, identical, units of
output that are not branded
5. Each unit of input, such as units of labour are also
homogenous
6. No single firm can influence the market price or
market conditions. The single firm is said to be a
price taker, taking price from the whole industry.
7. There are many firms in the market—too many too
measure
8. No need for government regulation
9. No externalities, no external costs to third parties
not involved in transaction
10. Firms make normal profits in long run and
abnormal profits in the short run
MONOPOLISTIC COMPETITION
-type of imperfect competition such that one or two
producers sell products that are differentiated from
one another as goods but not perfect substitutes
-firm takes the prices charged by its rivals as given
and ignores the impact of its own prices on the prices
of other firms
Characteristics:
1. Many producers and consumers and no business
has total control over the market price
2. Consumers perceive that there are non-price
differences among the competitors product
 3. There are few barriers to entry and exit
4. Producers have a degree of control over price

LESSON 9