Basic Micro-Economics Module PDF, PSU-Alaminos City Campus

PANGASINAN STATE UNIVERSITY ALAMINOS CITY CAMPUS Alaminos City, Pangasinan, Philippines MODULE IN BAC 102 BASIC MICRO- ECONOMICS Potenciano D. Conte, Jr., DBA...

PANGASINAN STATE UNIVERSITY ALAMINOS CITY CAMPUS Alaminos City, Pangasinan, Philippines MODULE IN BAC 102 BASIC MICRO- ECONOMICS Potenciano D. Conte, Jr., DBA Associate Professor V Faculty, PSU-Alaminos City Campus 1st Semester School Year 2024 - 2025  MICRO AND MACROECONOMICS I. What is the course all about? This module of the Micro and Macroeconomics course presents economic theories, principles, laws, models and concepts which provide practical importance to students to their day-to-day living. As a social science, economics is designed to help students realize the working of economics in their lives, in the local, national and international economy where they are part of. It tries to inculcate on their minds the important interaction between and among economic actors to make the economy become stable, grow or to develop. Economic concepts, the beginning of Economics, the economic activities, fundamental questions as well as the problems besetting the country such as unemployment, poverty and the like are presented in this module. Data on unemployment, OFW remittances, poverty incidence, gross domestic product, and export values as reported by the Philippine Statistics Authority are presented in the module in order to give students a clear thought on what is really happening in the Philippine economy. This course aims to orient or educate students on how economics works in shaping a better economy and how taxation and agrarian reform programs are used to achieve equity in the economy. Economic analysis on understanding how demand and supply interact to reach equilibrium level, which is the central idea of economics is presented with emphasis in this module. Production and Consumption, national accounting measures, money and banking and international trade are discussed in the module. II. What do you expect from the course? At the end of the course, you shall have acquired knowledge on Basic Economics with Land Reform and Taxation. 2 Module Chapter Title Lesson No. Topic/s Objectives 1. Explain what makes Economics Defined Lesson 1 economics as a social Ten Principles of science; Lesson 2 Economics 2. Define basic terms in Lesson 3 Microeconomics vs. economics; Macroeconomics 3. Explain how the Methods of Analysis economic resources and Lesson 4 income flow in the Introduction and Scientific I to Economics Method economy; Lesson 5 Economic Models 4. Determine the role of Lesson 6 Descriptive and government in the Analytical Models economy; Ceteris Paribus 5. Differentiate the branches Lesson 7 of economics; Assumption Lesson 8 Circular Flow Model 6. Explain how positive or Positive vs. normative economic Lesson 9 analysis is used in policy Normative Analysis Graphs in Economic 1. Explain the law of supply Lesson 1 Analysis and demand, and how Forms of Graphs equilibrium price and Lesson 2 equilibrium quantity are Variables and determined; Lesson 3 Constant 2. Discuss and explain Dependent and factors affecting demand Lesson 4 Independent Variable and supply; Direct and Inverse 3. Solve equilibrium to Lesson 5 Relationship determine the Slope of a Line equilibrium price and Lesson 6 equilibrium quantity; Graphical Supply Schedule and 4. Determine how demand II Analysis Lesson 7 Curve or supply determinants Movements along the affect the market of good Lesson 8 Supply Curve or service; Change in Supply Vs. 5. Determine the two types Lesson 9 price control; Change in Supplied Curve 6. Apply the concept of equilibrium to labor Lesson 10 Supply Function market and rental rates; Determining the Price 7. Explain the economic Lesson 11 of Commodities: cause of labor migration Equilibrium Price of OFW; and Shortages and 8. Increase awareness on Lesson 12 the economic issues Surpluses 3  faced by Filipino Changing Economic Lesson 13 entrepreneurs. Conditions Quantitative Demand Lesson 14 and Supply Analysis Lesson 15 Price Control Application of Lesson 16 Demand and Supply in the Labor Market Labor Migration and Lesson 17 Overseas Filipino Workers Application of Lesson 18 Demand and Supply to Rental Rates Contemporary Economic Issues Lesson 19 Facing the Filipino Entrepreneur 1. To enumerate the various Production Lesson 1 economic concepts Possibility Frontiers involved in the PPF; 2. To illustrated cost curves Lesson 2 Cost Curves of a firm in its Total Product and production; Understandi Lesson 3 Marginal Product 3. To show the cause of ng Business decreasing marginal and Types of Cost and product III Production: Lesson 4 Cost Function 4. Identify and explain the A Major types of costs of the Economic Accounting Profit firm’s production; Lesson 5 5. Differentiate accounting Activity and Economic Profit profit from economic profit; and 6. Name the four market Lesson 6 Market Structures structures and explain how each maximizes profit. Macroecono Lesson 1 The Business Cycle 1. Enumerate the phases of Lesson 2 Measuring GDP a business cycle; mics, Lesson 3 Approaches in 2. Calculate the value of Taxation gross domestic product; IV Measuring GDP and 3. Differentiate the different Lesson 4 Philippine Peso and Agrarian Foreign Currencies approaches to GDP; Reform Lesson 5 Determinants of 4. Explain the how forex 4  Foreign Exchange determinants affect Investment and foreign exchange rates; Lesson 6 Interest Rate: The 5. Enumerate the factors Market for Loanable affecting the market for Funds loanable funds; Lesson 7 Bonds and Stock 6. Differentiate bonds from Investment stocks; The Philippine Stock 7. Appreciate the role of Lesson 8 Philippine Stocks Market Unemployment, Exchange in the country; Lesson 9 8. Name the types of Inflation Rate & CPI Principles, unemployment, compute Lesson 10 Characteristics and unemployment rate, Stages of Taxation compute CPI and Computation of inflation rate; Lesson 11 9. Define taxation, name Income Tax Comprehensive stages of taxation and its Agrarian Reform in kinds, compute income Lesson 12 tax; and the Philippines 10. Understand CARP. Module 1 INTRODUCTION TO ECONOMICS I. What is the lecture all about? The lecture introduces Economics as a field of Social Science. The etymology and historical background of Economics are presented in order to enhance appreciation and understanding of students. The economic schools of thoughts supporting the beliefs and theories of the pre-classical period are also presented for wider understanding. The basic concepts of applied economics as used in economic analysis are explained to provide understanding as they are aided with examples. As a Science, economic models and any interpretation of empirical research on economics follow a scientific method to arrive at a sound economic analysis. Flaws on economic analysis are also discussed in this lecture. The basic circular flow model shows the various economic activities in the economy perform by economic actors. The important role of the government in the model is emphasized. The fundamental economic questions, economic system and production possibility frontiers are also discussed to provide the readers a wider perspective on how a government achieves economic growth. The vicious cycle of poverty is illustrated and the basic economic problems in the country are identified in this chapter. 5 II. What do you expect from the lecture? The lecture will enable you to understand Economics in a wider perspective. It will provide you an insight on the important role of the government to the two main actors of the economy, i.e. households and firms as they interact as economic activities are performed. Specifically, you will be able to: a. Explain what makes economics a social science; b. Define basic terms in applied economics; c. Identify the basic economic problems of the country; and d. Explain how applied economics can be used to solve economic problems. III. What are the contents of the lecture? 1. Introduction to Economics 1.1. Economics as a Social Science 1.2 Economic Resources 1.3 Circular Flow Model 1.4 The Role of the Government in the Economy 1.5 Branches of Economics 1.6 Positive and Normative Economics 1.7 The Scientific Method in Economics 6 Module 1 INTRODUCTION TO ECONOMICS Scarcity is a universal problem. Every country might be blessed with various resources, yet each needs other countries for they depend on some other resources their country does not or cannot offer. In a micro level, an individual or a family has numerous needs and wants. But with their available resources at hand, their happiness or satisfaction is constrained with scarcity, too. A student’s time to study is limited as well. Constrained with his time to work, to play or to rest, effective time management in studying or reviewing his lessons should be done that might result to good school performance. Amidst scarcity, a good news is that, insatiable human needs or wants can still be maximized. While different goods and services compete on your limited income, it’s up to you which or what to choose. Proper allocation of your limited resources can provide you the happiness or utility you desire. The Philippine government provides a conditional cash transfer known as the 4Ps or the Pantawid Pamilya Pilipino Program. Identified Filipino families who are below the poverty threshold are chosen and given cash to augment their very limited budget for food, medicine and other basic needs. With this good intention of the government, issues are raised concerning the partiality of the selection of beneficiaries. Some families who are extremely poor were not given the grant. The point is, as much as the government desires to provide grants to all the poor Filipino families, the national budget available given to poor families through the Department of Social Welfare and Development is not enough. In terms of economic infrastructure, national budget for the construction of public roads and bridges to bring farm products to the markets is not enough as proven by the undeveloped roads we still have in many remote and far flung places. Scholarship grants to deserving but poor college students are still desired by many out-of-school youths, yet are limited as illustrated in Figure 1.1. Scholarship grants among figure 1.1. Health services remain scarce in towns and college Filipino students are limited. remote places in the country. Millions of Filipinos remain to be unemployed. Incidents of unscrupulous acts like holdup, car nap, or stealing are still high. In the micro level, we experience lack of classrooms 7 and teachers, lighting and ventilation and many more. A businessman complains of the shortage of capital or lack of workers. These are just few of the problems we face in the country brought by scarcity. Thanks to economics analysis we can utilize our limited resources to provide greater satisfaction. Thanks to Applied Economics, policies are formulated and implemented to benefit the Filipinos, and individuals can utilize their limited resources efficiently and enjoy maximum utility or satisfaction. 1.1. Economics as a Social Science Sciences dealing with how people think or behave are considered as social sciences. Social sciences include psychology, political science, sociology and of course economics. Economics is the study of how people choose to allocate their scarce resources in order to produce, exchange and consume goods and services in an attempt to satisfy their unlimited wants. In earlier decades, Economics is said to be the science of wealth-getting. In the process of determining how to gain wealth, choice has to be made. Economics then, is a science of making choices. As a social science, Economics is based on studying the actions of individuals in terms of decision-making not only in the field of business but in every context of their lives. Scarcity is a universal problem faced by anyone, by any business or by any country. As a science of wealth- getting, every economic actor has to utilize its resources in order to benefit him, his society for survival, for growth and development. As resources are scarce, choices have to be made in order to utilize these and provide the highest satisfaction for himself, for the business or for the economy. As an option is made, other option is being forgone. This is the concept of opportunity cost or the forgone value for choosing the best alternative. More books in economics defined the field using ‘proper allocation’. Because resources are scarce and are not adequate to suffice the need of people, these are allocated properly in order to provide satisfaction to human needs or wants. Economists define Economics differently as follows: “Economics is the science that studies how scarce resources are allocated to meet competing and unlimited wants and how human beings satisfy their Figure 1.2. Wants material wants and needs.” –Benjamin Davis are competing. “Economics is the study of how best to allocate scarce resources among competing uses.”— 8  Bradely R. Schiller “Economics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants.”—Jackson and Mclver With the three definitions given by economists, all three agreed on the ‘competing human wants’ connoting scarcity among resources. And to attain the maximum satisfaction of human wants, these resources are to be allocated properly and efficiently. Out of the definitions, we can see two reasons on why economics exists: 1) scarcity and 2) unlimited human wants. Economics can be defined as ‘human life in action’. In the barrios, we can see farmers busily planting rice during planting season. There are the fisher folks pulling their nets of fish. In the cities, we can find workers manually cutting clothes at the clothing factory, sewing pants with their machines, packing goods in boxes and many more. The policemen maintaining peace and order or the educator mentoring students is ‘life in action’. Economics too, is an art of making a living. In a more systematic places, banks accommodate their depositors, stock brokers convince investors. These are economic activities performed by people ‘in action’. Paying your meal at a fast food or eating them is an economic activity performed by people ‘in action’. Receiving your salary for your office work is an economic action. Economics is a science of production, consumption and distribution of goods and services. The government allocating budget for public services such as health and education services, the provision of parks, roads and bridges, sea ports and airports, are regarded to be as ‘life in action’. Economics then, studies how people find ways to improve their lives and the society as well. As a social science, through the economics discipline, people are guided on how they will have utilized best their limited resources in order for them to achieve the highest possible utility, satisfaction. The limitation of resources makes people think of the best ways to allocate their scarce resources. Strategic construction of public roads and bridges to facilitate accessibility of more people in the rural-urban or cities is given higher consideration. Efficient classroom and teacher scheduling is a possible answer to the lack of school facilities or teachers. Scholarship grants are given to the most deserving as effective intellectual investment. The government develops the Filipinos to become skillful through SUCs and TESDA and make them marketable both in the local and foreign labor market. 9  Filipinos are naturally good at using the limited resources that we have. We are always taught by our grandparent and parents with the famous adage: “Kung maiksi ang kumot, matutong mamaluktot”. 1.2. Economic Resources Resources refer to the inputs used by firms to produce the goods and services that they need or want. A bakeshop, for example, is where breads, cakes or muffins are baked. The bakery owner utilizes inputs in the process of baking loaves of bread. First, the owner needs all the ingredients such as flour, egg, milk, sugar, baking powder, etc. Machines such as the oven, electric stirrer, LPG gas and baking machines are used for processing and cooking. But who will bake? The bakeshop owner hires bakers and workers. And finally, where is the bakeshop located? The owner secures a place where to build the bakeshop or rent space in the market to start his business. There are four broad categories of resources: land, labor, capital and entrepreneurship. Land is where the bakeshop is located. Land is where the raw materials are derived from. Flour came from plants which grow on land. In economics, all natural resources are considered as ‘land’ resource including bodies of water or mountain ranges and minerals. The bakers and workers represent the ‘labor’ resource. They are in-charged of the production process. Human effort, both physical and mental is utilized in order to perform the economic activity of product or the process of transforming inputs to outputs. What about time? Time is considered as the ultimate raw material of life. Time is a fundamental resource provided by the resource ‘labor’. People can sell time as workers or spend it to other things such as leisure. ‘Capital’ refers to the creations used to produce goods and services. In the case of the bakeshop, the oven, LPG, stirring and baking machines, etc. are considered capital. For a business to become profitable, the accessibility of the business to customers is given high consideration. Roads, bridges or ports are classified as physical capital. Human capital, on the other hand, pertains to the knowledge and skills people acquire to enhance their labor productivity. On the part of the baker, his Figure 1.3. Philippine firms Plato Wraps, Jollibee knowledge on baking a and Sarao. Aisa Mijeno with U.S.A. former President Barack Obama and Alibaba founder, Jack Ma during the APEC 2015 held in the Philippines. 10 better-tasting loaf of breads is considered as human capital. Entrepreneurial activity is a special kind of human skill. Entrepreneurs are innovators. They have the rare talent required to introduce new products or find better ways to improve an existing good or service. Companies like Ford, IBM or Microsoft and Facebook, each began as an idea in the mind of an individual entrepreneur. In the Philippines, we have Sarao, Jollibee, Plato Wraps, among others as examples as shown in figure 1. Aisa Mijeno, a Filipina engineer invented a salt lamp, a lamp lighted by saltwater. Her creation is made known not only in the Philippines but across the globe. Her energy-saving and environment-friendly invention has made her to receive various local and international awards. 1.3.Circular Flow Model With economic resources and economic actors mentioned in the preceding paragraphs, the basic circular flow model is used by economists to explain how economic activities take place, it shows the flow of inputs and outputs, as well as the flow of income in the economy. The figure below shows these actors and activities. (d) (a) 4. 2. (b) (c) Figure 1.4. The Circular Flow Model showing the flow of goods and services as well as sources payment in the economy. The Circular Flow Model illustrated in figure 1.4 is a basic economic model showing the flow of goods and services and income in the economy. It shows how the economic actors, the household and the firms or businesses complement each other in making the economy flow. 11  Considered as the main actor in the economy, the household provides the inputs or economic resources such as land, labor, capital and entrepreneur to the firm as indicated by arrow (a). Once these are gathered or organized, the first economic activity called ‘production’, as indicated in (1), can take place. Production is the process of transforming inputs to outputs in the form of goods and services, as indicated by arrow (b). These outputs such as the loaf of bread we buy at the bakeshop or the movie we watch in the movie-house are availed of or consumed by the people in the households. This is the economic activity called consumption indicated in (2). However, one of the concepts in economics is that: “there is no free lunch”. Prior or after consuming the goods or availing of the service a firm provides, the consumer needs to pay, as indicated by the arrow (c). This is economic activity called ‘exchange’. The households’ income goes to the firm as payment for the goods and services the firm produced. Now, when all the households’ incomes went to the firm, then the household has nothing to spend the next time, and so this money called revenue must be given back to the household in order for the economy to flow. This is the economic activity called (4) ‘distribution’. The factors of production are compensated or paid off through distribution. Rent is paid to land, wages or salaries to labor, interest for the capital and profit goes to the entrepreneur. And as an economic model, there are assumptions to make it true. In the circular flow model, it is assumed that: (1) only the firm does production (In real life, even the households produce something that is sold in the market such as home-made cookies, kilograms of mangoes or meat); (2) the households only consume and spend all their income (In reality, the firm needs goods produced by other firms such as computers, papers and other office supplies, tractors and other machines for haciendas or farms); (3) there are only two sectors involved in the economy—the households and firms (The financial institutions, government sector or the rest of the world are also not included). 1.4. The Role of the Government in the Economy It can be noted that without the government, the economy still flows as explained in the Circular Flow Model. The economy can self-adjust without the government intervention. In an example given by Adam Smith, the father of classical Economics, a sudden increase of price of a particular good can be brought back to a state of normalcy where the high price turns back to its original low price. Smith used the cotton clothing as a case in point. When there was a sudden 12 interest of cotton clothing among consumers, the market was not ready to address the demand of people to cotton clothing. Because of this, competition among buyers took place. Desperate to have garments made of cotton, some offered to pay doubled in order to avail one. This increase the price of that good. Price went up. The seller enjoyed higher profit. And because the sellers enjoyed higher profit due to the high demand of cotton clothing, producers increased their production. Other clothing producers shifted to cotton and cannibalize their linen or seda clothing. This increased the production of cotton clothing. The market was oversupplied with the product. This time, there’s no sense of competing to buy among the consumers. The demand fell down, and so with the price. The example above shows that government intervention is not necessary to keep the economy moving. However, the government plays an essential role in the economy, i.e. it monitors and protects the actors in the economy. It serves as a watchdog in promoting the welfare of both the households and the firms. The firms feel protected against terrorism acts that may burn down their factories. Their manufactured products are made accessible to the people in the households because of the roads and bridges and transport system provided by the government. On the other hand, workers are secured against abuses of employers. They are guarded against illegal activities such as kidnapping, car napping and the like because of the police powers. They are compensated well, otherwise their employers will be sued in the court of laws. Laws or ordinances are enacted by the government to maintain peace and order. Fiscal and monetary policies are formulated and implemented in order to maintain stability in the economy. This leads to security among the actors in the economy. The government is considered as the public sector. It is tasked to deliver public services that provides a level playing field in which people can exchange and contract and foster economic activity, productivity, growth, and economic prosperity. To perform these for the whole country, decision is collective, meaning, decision making is not leaf in the hands of the few. Aside from the regulatory role of the government as it implements the policies and laws of the land to protect the consumers from the threat of unhealthy goods and services, or the injustice of usury or overpricing, to secure the firms from terrorism acts or from illegal activities, the government also performs its allocative role, distributive and stabilization role. 13  Scarcity of resources is also faced by the government. In order to utilize this limitation, it has to allocate its resources in order to maximize economic welfare. The national budget is allocated to education, health services, army and debt payment, among others. The identification of rough roads to be concretized, the government considers priority projects where more people in the economy can be benefit from it. Similarly, limited scholarship grants are given to those deserving but poor students. Budget is distributed where it benefits more people. This is the distributive role of the government. Criterions are set by the government to equitably use the resources among the people in the economy. The government stabilizes the economy through its agencies like the Bangko Sentral ng Pilipinas, National Food Authority and similar agencies. Stable inflation rate is the first of the three pillars of the BSP. With lower inflation rate, people feels secure that their hardly-earned income can store its value in longer period. The fluctuation of US dollar and Philippine Peso exchange rate is also stabilize with BSP’s action. Sudden increase or decrease of the USD and PhP foreign exchange rate may harm the economy. In the market for rice, the price is regulated by the government through NFA. As the basic staple food among Filipinos, rice price is a basic indication if there is a high increase in the price level. The NFA regulates the price of rice through buying palay if there is an oversupply in the economy or by importing rice when there is a limited local rice supply. To perform all its functions, the government has its tools: taxation, spending, borrowing, regulating and providing subsidies. Tax is considered as the lifeblood of any economy. Government revenues are mostly derived from the taxes it collects among the households, firms, rest of the world or from financial institutions. Taxes are levied also to private properties by the government. Tax policies are enacted by the government congress and are implemented by the executive branch of the government. Government revenues generally generated from the taxes are spend for social services, debt payment, armed forces development, cash transfer, etc. Public spending is divided to three broad areas: a) current government spending such as the salary of government employees or debt payments; b)transfer payments such as retirement fees, cash transfer (4Ps); and capital spending such as investment on economic infrastructures such as roads, bridges, school buildings, hospitals, ports or parks. 14  In case of running budget deficits, the government can augment its funds to defray public spending through borrowing internally or externally through selling of public bonds or government securities to private individuals or investors. It can also take loans from external sources such as the Asian Development Bank (ADB), the International Monetary Fund (IMF) or the World Bank (WB). On the other hand, the government may regulate the entry of foreign businesses in the local economy to protect local or infant firms. Entry of foreign-produced goods are also regulated to control the supply and the price of these goods in the economy. Price control is also included in the regulatory tool of the government. Finally, subsidies are support provided by the government to individuals or firms which contribute significantly in the economy. Subsidies may be given as cash or tax exemption in order to give motivation for the beneficiaries to improve their products or services, that in the long run will help the economy grow. Review of some concepts in Economics 1.5. Branches of Economics Economics is divided into two branches—the microeconomics and the macroeconomics. In biology, micro refers to something that we cannot see with our eyes naked. In economics, however economic actors can be seen. What made them included in the first branch is that they are small units of the economy. They perform economic activities as individual just like any firm, a household, a consumer or any producer. The level of production of Business X, the taxes paid by Worker Y, or the consumption of Household Z speaks about microeconomics. Pricing a new product manufactured by a firm is dealt in a micro-level. Macroeconomics on the other hand, concerns with the aggregates—the collective performance of industry in the economy, the aggregate demand of consumers or aggregate supply of the producers. It deals with the study of the economy as a whole. Inflation rate or increase in price level, unemployment rate, poverty incidence, gross domestic product, aggregate demand or supply, total value of import or export are topics in Macroeconomics. Tax policies, monetary and fiscal policies are under the macroeconomic analysis. Microeconomics and macroeconomics are clearly related with each other. Individual economic actors make up the aggregate. 15  Likened to anatomy, the entire body parts represent macroeconomics. The organs and individual parts represent the micro. We hear from our peers the Filipino saying: “Ang sakit ng kalingkingan ay dama ng buong katawan”. This is true not only to the body with different systems interconnected but also to clans protecting each member. With one organ malfunctioning, say the heart, it makes the whole body futile to perform. This is not the case in economics. If one worker (microeconomic actor) receives his salary double-fold as he is promoted, this is good to him because he can purchase more goods and services. Will it affect the whole economy? The answer is no. Even if his demand is doubled, his capacity to purchase goods relative to the entire purchase of people in the economy is significantly small, making the market of those goods he purchased unchanged. But when all the workers in the economy receive salary increase, surely prices of goods and services will increase as they now possess a stronger purchasing power. If more money circulates in the economy, the value of that money declines. This was witnessed by our Filipino forefathers during the Japanese invasion. When Japan had established an empire in the country, Japanese government had injected millions of Japanese money known today as “mickey mouse” money. Any Filipino who refused to use it as a medium of exchange or a unit of account or store of value, was subjected to punishment. It was called mickey mouse money because in the end, its value vanished, and just like a play money, the Japanese money in the country turned to be useless. In Brazil in the late 90s experience a hyperinflation of thousand percent. In Germany, after WW I, the economy experienced hyperinflation reaching million times. In Zimbabwe, their currency was trashed in 2009 because it finally lost its value and people in the country refused to accept Zimbabwean dollars as medium for exchange. World economists have even concluded that the value of U.S. dollar has declined by 95 percent since the great depression. All this, is caused by overprinting and over circulation of money in the economy. The figure below illustrates the case of hyperinflation. Initially, the weighing balance instrument shows a balanced money supply in the economy with the price level (figure 1.5.a). However, when more money is injected in the economy, the left part of the weighing scale will become heavier relative to the price level (figure 1.5.b). This makes average prices of goods and services higher (inflation or hyperinflation), while the value of currency declines. 16  (a) (b) Figure 1.5.a shows a stable price level given the amount of money circulating in the economy. Too much money in circulation leads to higher price level as shown in figure b. So, clearly, with an increased salary of the over-all population, price level will rise as people demand for more goods and services. Similar to the explanation on the demand of the cotton clothing, prices will go up or sky rocket. Figure 1.7 Zimbabwe experienced a hyperinflation due to too much printing of money. It has even printed paper bill (figure 1.6) with very high denomination. In 2009, they became useless Figure 1.6 and can be found in trash cans (figure 1.7). 1.6. Positive and Normative Economics Economists use the positive and normative economic analysis in order to improve existing conditions which do not result to economic growth or economic development. Positive economics refers to a statement that can be proven by reference to facts. It is an assertion about economic reality supported by factual data. Normative economics refers to the statement that represents an opinion, and this cannot be proven by facts. In 2013, the Philippines has recorded 7.3% unemployment rate, the highest in the South East Asia (See table at the right). Exhibit 1.1. The table shows that the Philippines has the lowest unemployment rate in 2013 among the ASEAN economies. 17  This statement is positive. Out of this sad fact which equates to more than 2 million Filipinos who were able to work but find no work suited for them, comes the normative economic analysis. Unemployment rate in the country should be lower. Government efforts to increase employment rate are put in action. The serious and intensified anti-illegal drugs campaign of the government is a clear manifestation that the level of drug addiction in the country was high. Because of the alarming cases of drug-related violence, the Operation Tokhang of President Duterte is a way to end drug-related crimes. 1.7. The Scientific Method in Economics As a science or body of knowledge, Economics also follows steps in order to validate theories with empirical proofs. The scientific method starts with the identification of key variables that are relevant to the economic problem under consideration. Variable is a measure that can take on different values such as price, cost, revenue, number of hours, population, etc. Next, assumptions are specified under which a theory is applied. In the law of demand, we are aware that only two variables are considered—the price and quantity demanded. Although there are other factors contributing to an increase in demand, i.e. non price determinants such as income, taste and preferences, number of buyers or price of related goods. The assumption in the law of demand is ‘ceteris paribus’ which means ‘other things remain constant. Here, only the price and quantity demanded are considered. The non- price determinants are ignored. The third step is to formulate a hypothesis. Hypothesis refers to the relationship between or among variables. In the law of demand, how are the price and quantity demanded related? Are they directly or inversely related? We know that they are inversely related. As price goes up, quantity demanded decreases, ceteris paribus; or, as price goes down, quantity demanded goes up, ceteris paribus. And finally, testing the validity of a theory is done by confronting the predictions with evidence. Long before the Economics as a discipline was recognized, people were not aware of the law of demand. But because it was analyzed and soon tested with evidences, the law of demand that we know today provides guidance not only to the consumers or the households, but more importantly to the producers or the firms. 18 1.8. Ignoring the Secondary Effects and other Pitfalls in Economic Analysis In the science of economic analysis, economic choice is an important concept applied to many things. Economic choice is based on a comparison of expected marginal cost and marginal benefit of the change under consideration. As human makes a choice, the possible benefits are given high consideration. The advantages and disadvantages are weighed in order to arrive at a more sensible option. Economic models are used as guide. These models are simplification of the reality used to make predictions about the real world. The seller may cleverly utilize the law of demand to outsmart competitors. To increase units of sales, the seller may lower its price relative to his competitors. This decision may lead to an opportunity cost, i.e. loss of revenue per unit sold, but is compensated more with the increased number of units sold. Saving income is a lesson of thriftiness taught to us in our household. To save is good but this has to be limited. If many people saved their money, then demand of goods and services will fall. In the process, firms cannot sell as they projected. There will be an increased in inventory of units unsold. With this, the employer lay-offs workers, or entrenchment will take place in order for the firm to recuperate. Many will lose their jobs. Productivity will dwindle, then the economy will enter to recession phase. This is the fallacy of composition or the incorrect belief that what is true for an individual part, must be necessarily true for the group or whole. It is not because some of the students in a premier University are competent, means all students there are competent. Some flunked in board exams. It’s not because a machine is durable means all its parts are durable as well. Who ignores secondary effects? Do they act on purpose or unknowingly consider the unintended consequences for their actions? The mistake of ignoring the secondary effects refers to the unintentional results or costs that develop slowly over time as people reacts to events. A certain state regulated the rental fee for apartment and lowered it through a decree by fifty percent for example. This action will benefit more families; for, they can now avail cheaper apartment with lower rent. This sounds good for the consumers. However, in the long run, dissatisfaction among the occupants will be raised. The maintenance of the building will be sacrificed because, with lower rent, landlords or landladies can receive lower profit; thus, lower amount or none at all will be allotted for maintenance of the apartments. A businessman may enjoy earning high revenue because of a very high mark up for the product he bought from a manufacturer and sold it as a retailer. At first, he enjoys high profit. However, as the consumers discovers the greediness of the seller, the buyers will simply turn their back and look for another seller who can provide them the lower price they can afford. 19  1.9. The Production Possibility Frontier Production possibility frontier (PPF) is another economic model sometimes referred to as production possibility curve. In an economy’s production decision, PPF or PPC illustrates trade off; thus, it helps show the benefits of specialization in gains of trade. As an economic model, it is assumed that the economy only produces two kinds of goods. For a better understanding of the concept PPF, take this example: An economy with 50 workers labor for eight (8) hours a day producing either a gun or packed of bread. A unit of gun can be produce in two hours, while 4 packs of bread can be produced in an hour. The schedule and graph below show the total production of the 50 workers in that economy and the PPF, respectively. a) Frontier of an economy with 50 workers working 8 hours a day and producing Exhibit 1.2.Production Possibility guns and pack of breads. No. of hours in No. of hours Total units of Total packs The result in the table can be gun making/ in bread guns of bread interpreted by selecting a point. At worker making/ produced produced point (b): If the economy is producing worker 150 guns, the same economy can a. produce a maximum of 400 packs of 8 0 200 0 b. bread; or, if the economy is producing 6 2 150 400 400 packs of bread, the same economy c. can produce a maximum of 150 units 4 4 100 800 of guns. d. 2 6 50 1200 e. 0 8 0 1600 To make the PPF curve, the gun and bread production are plotted in the graph below: b) All the points in the PPF are level of production at which all the resources of production were efficiently used. Points below the PPF are feasible points, however, economic resources were inefficiently used. Points above the PPF are infeasible points due to scarcity. Producing more goods means giving up other goods, i.e. the concept of opportunity cost and choice. Reducing a unit of gun will result to 8 packs of bread, two guns to 16 packs of bread, i.e. the concept of the law of increasing opportunity cost. Every economy or business aims to increase productivity, i.e. the concept of Figure 7. Production Possibility Frontier economic growth. Point to ponder: Without increasing the number of workers, number of hours to work, or adding machines in the economy producing guns and 20 packs of bread, how will the PPF expand or shift to the right? 1.10. Three Fundamental Economic Questions As peoples wake up each day throughout the world, they face a new day with different circumstances. Some live in comfort—with nice homes, luxury of food, well clothed and healthy. Others struggle to buy the food they need, no shelter or financially unsecured. Every economy is blessed geographically with resources, they do have leaders, political and economic institutions to assure that the people in their economy are secured with their life necessities. However, nearly half the world’s population live on less than $2 per day. In North America, an average annual income of $50,000 reveals a big difference in global living standards (Todaro and Smith, 2006). There are three fundamental economic problems every country or economy has to answer. First: What goods and services are to be produced? The answer lies on the resources that a country is rich at. Comparative advantage or the ability for a country to produce something at a lower opportunity cost than other producing countries face is what every country should practice. As an archipelago, Philippines is blessed with fertile land and bodies of water. The country is known for its agricultural economy as it exports coconut oil (18%), banana fresh (17%), tuna (7%) and pineapple and products (7%), the Philippine major export agricultural commodities. As reported by the Philippine Statistics Authority, a total value of $ 6,546 million agricultural products was exported by the country in 2016. Philippines is also blessed with long white sand beaches expanding its tourism industry. Tourism industry had contributed a total of P1.43 trillion to the local economy in 2015, equivalent to about 10.6 percent of the country’s gross domestic product, according to the latest report by the World Travel and Tourism Council (WTTC). The government also invests to human capital. The TESDA offers more and more scholarship in order to equip Filipino students the technical skills they are interested at with the end in mind of working abroad. Based on the data of the Philippine Statistics Authority, there are 2.4 million Overseas Filipinos Workers (OFW) during the period of April to September 2015. 97.1% Overseas Contract Workers (OCW), according to PSA have their existing work contracts, while the remaining 2.9% don’t have their contracts. Part of the OCW were TESDA trained. For countries like the Middle East or those members of the Oil and Petroleum Exporting Countries, their resources are mainly focused on the extraction of oil resources. For their other 21 needs such as agricultural products, they do import. These countries do what they do best, and trade for the rest—a concept of the law of comparative advantage. Rich economies like the U.S.A, Canada, U.K., Japan or that of South Korea are good at technology. They produce computers, microchips, appliances, gadgets, automobiles and machines and import to other countries. Clearly, it is impossible for a country to produce all the things it need to satisfy its people. A system of priority therefore is a remedy to the problem. The second fundamental question is “How and how much goods and services are to be produced?” There are two technologies to answer the question ‘how’. Developing economies like the Philippines utilizes the labor-intensive technology. When you try to observe the farmland in the country, you can see Filipinos lining up as they transplant or harvest palay together. In the city, you can see factories full of workers manually cutting cloths or sewing garments. Labor intensive technology is encouraged by the government to benefit from the human resources that the country has to provide jobs for the unemployed people. This in effect benefit the economy as these people hired receive their salary which will be used to purchase their needs. For rich economies, they use the capital-intensive technology. They use their high-caliber and state of the arts machines. For the question ‘how much’, economies produce based on the demand locally or abroad. Excess quantity supplied may be sold outside the country through exportation. The bottom line is, production, therefore is based on the most efficient method involving other human resources, machines, technology, management or skills. The third question, ‘For whom the goods and services are produced?’ refers to the distribution of goods and services. This can be answered by the economic system a country has. For a market-oriented economy, those who can afford and willing to purchase get the good. Unfortunate for those below the poverty threshold, for they can’t afford to buy most of those goods the rich ones enjoy. 1.11. Economics Systems An economic system is designed to address the three fundamental questions of what, how & how much, and for whom the goods and services are to be produced. In pure capitalism the economy is market-oriented. This means that the rules of the game include private ownership of resources. Coordination of economic activity which based on 22 price is generated in free, unrestricted markets. In his book “The Wealth of Nations”, Smith (1776) states that individuals pursue self-interest, a way by which the invisible hand promotes the general welfare. In this system, consumers are free to purchase whatever goods or services they can afford. Producers are free to make and sell any goods and services they can produce. Economic actors are free to pursue their self-interest. They are given the freedom of enterprise of their choice. However, pure capitalism has its defects. People with no resources to sell may starve. Producers may try to monopolize by eliminating competition. Public goods such as police power, roads and bridges will not be produced by private firms. Property rights are not surely protected; contracts will not be enforced because there is no central authority which is tasked to govern the economy. In a command economy, there is a central economic planning, and whose resources are publicly-owned. Instead of the market, it is the government in command. The government determines how to produce goods and services, how much and for whom are these goods or services are distributed. Command economies possess the following flaws: 1) Resources are utilized inefficiently because running an entire economy is so complicated; 2) People are not encouraged to maximize their potentials. Since they do not own the resources they managed, they have less incentives to do their best. The planners in the government may reflect more their preferences than that of the society. People have less personal freedom in pursuing their goals in life or in making economic choices. Mixed economic system is practiced in the U.S.A., U.K., Japan or in the Philippines. These countries have their government actively regulating the private sector in different ways. In the U.S., the government accounts one-third of all economic activities (McEachern, 1997). Economies Based on Custom or Religion are Traditional Economies. These are shaped mainly by people’s custom or religion. A case in point is the Muslim religion limiting the rate of interest that can be earned on certain investment. Occupation is restricted for the Caste System in India. In traditional societies, women are limited to work. Subsistent economic systems are traditional as well. They produce what they consumed and they consume what they produced. 23 1.12. Economics and its Early Beginnings The word Economics is derived from the Greek word “Oikonomia” which means household management or the management of house affairs. Remembering history, we learned the development of the nomads up to time they settled down. They built their houses and raised their families. Thriving to live with their new settlement was done through allocating their resources to produce food, do a household chore, what to produce, how to do it and how much will be consumed. With the community getting more modern, money was introduced, many professions and jobs have emerged, people earn income. How to spend this income for their necessities in the family is what “Oikonomia” was all about. But with the passage of time, the meaning of economics was used for an economy as a whole, i.e. how a nation takes steps to fulfill its desires and preferences with the help of scarce means. In its infancy, economics was called political economy. Greeks contributed the concept of state, whose bedrock was founded to individual rights to choose and own a property. Plato, conceived that any “state” arises out of the needs of mankind. As people have many wants, many persons are needed to provide those wants. Plato was right when he said, “no one is self-sufficing”. A professional needs non-professional to do the tasks he is not good at. A country, though blessed with some resources, still needs other country for the resources unavailable domestically. Plato considered partners important and in an instance that these people or partners are gathered together in one habitation, this body of inhabitants is what he called “state”. With the idea that exchange is good in the state, as one gives, another receives. This makes life better because trading makes anyone better off. Concerning with state and political economy, Aristotle, Plato’s student, described man as social animal. He held that the foundation of the state lies in a family or in a household. Because man is enable to exist independently, the association of man and woman forms a family—the basic unit of the state. Groups of households form the village and villages form the state. With Aristotle’s perspective, state independence is a paramount goal to be attained. The world is indebted to the Greeks for coining the term economics. Greece is known in world history as the cradle of democracy. They had Plato who made an analysis on the division of labor of the key persons and workers in their government. Records of the revenues of Athens were kept as bases for economic activities in the Greek economy. Greece had produced the first 24 economist in the person of Aristotle (384-322 BC), who discussed about money, exchange and values. His discussion delineates the role and functions of money in his book Republic, how relevant exchange in the attainment of the economy’s goals and the relative values of commodities. Along with the development in Greece was that of the Romans. However, the development of economic activities for Romans was slow. Anchored on biblical teachings, businessmen were not motivated to trade due to lack of incentives. It was abided by the Romans that selling a commodity or thing more than its worth, is in itself unjust and unlawful. On the other hand, taking payment for the money lent was very unlawful. Expansion of trade and commerce was too slow with the system obeyed in an economy founded with values and beliefs. People were encouraged to act with the Christian teachings which is against greediness. With this however, very limited businessmen were willing to lend their money for they were impeded to receive interest in return. Less traders were willing to buy and sell commodities as they were discouraged by the law to put mark up for the goods they’re selling. 1.13. Modern Beginnings As the Europeans began the early development of Economics, the modern beginnings also took place in the region. A more detailed economic analysis was needed in the European nations as growth was inevitable. Population grew, ways of production changes, needs of the people changed. The modern period had paved the age of great discoveries and commercial revolution. Mercantile and colonial rivalries were the result of the commercialization as various nations rose to power. Conflicts arose and the growth of centralized states did come to age. Thomas Munn, led the Mercantilism school of thought. Three themes were evident for the mercantile-believers. As there was a raise to power, state intervention was very necessary in deciding economic activities. From production of goods to distribution of these, the government had directly influenced economic activities. From recruitment of workers for the growing industries, to the number of hours to work, level of wages distributed to exportation of manufactured products were planned by the government. The second theme of mercantilism was that, the wealth of a nation is determined by earnings of precious metals known as specie or the gold and silver. The more specie a country has, the wealthier and more powerful it becomes. 25 With much gold or silver earned, a country has to strengthen its military power, lest their wealth will be taken away by pirates or bandits and become poor in the process. With domestic species extracted, nations searched at colonies or other countries as important sources of gold and silver, exploration and discovery of lands were held. The third theme was the creation of a favorable balance of trade. More export value than import value should be earned. Making their commodity price lower relative to their competitors make trade favorable. Further, the colonial expansion of powerful nations made them avail of the raw materials, food stuffs and the species of the colonies. Colonies served as market for the mother country’s finished products. To make their products very competitive, direct intervention of their government was put in place. Cheap labor cost was implemented at the expense of the poor workers. This in turn created a paradox: A rich nation with poor working class. The working class felt abused and the popularity of mercantilism waned. Although mercantilists were very active to world economic affairs, their contribution was not recognized as the founder of economics. They had no systematic economic structure and ways of analysis. All the supporters craved for was to create a favorable balance of trade and accumulate gold and silver the best ways they could as nations. Schools of thoughts emerged on the need of thinkers and people. Of course, their need is anchored on their desire to satisfy the existing condition or phenomenon which affects the lives of the people. With the abusive acts and unfavorable consequences of mercantilism to working class, a new economic school of thought toppled the old. In the 18 th century, Francois Quesnay championed the physiocratic thought. Physiocratic thoughts gave emphasis on the rule of nature over industry and trade. Everything is derived from the nature, from the land, from the seas. The food we eat, the garments we wear, or the machines we used are all from nature. Improving the system of agriculture, of mining or fishing will spell economic growth rather than production in factories or industries. The new school of thought restricted mercantilism and feudalism. The feudal lords enjoyed the benefits of income derived from farming without really participating in the plantation. But with physiocracy, this was banned. More rights were given to tenants who till the land. Government intervention was significantly minimized in economic activities like production. Bullionism was discouraged. Laissez faire was the new name of the game. Government intervention was focused on peace and order, rather than on production. The 26 government did not dictate what to produce, how much to produce or who to produce. The producers were given the prerogative to decide on those economic activities. The third theme of physiocracy was that: Self-interest of individual will lead to the best interest of all. With self- interest the economy will regulate itself without government intervention. In his book, Adam Smith describes “self-interest” as the key to productivity and growth. He used the market for cotton clothing as a classic example (Exhibit 1.2). His story started: When there was a sudden interest of cotton clothing by the consumers and the market was not ready to address the high demand, competition among buyers increased. Buyers queued early to avail of what they crave for. Exhibit 1.2. Demand and supply of cotton clothing shows a self-regulating economy without government intervention However, everyone had lined up early to buy one. Due to an increased competition among buyers and higher demand, the seller adjust the price higher. Natural price increased and the seller gained higher profit. And because profit was good in cotton clothing, clothing manufacturers had increased their cotton clothing production. Non-cotton producers entered the cotton clothing industry and in the process, production of cotton clothing significantly increased. Consequently, supply of the good in the market also increased. With cotton clothing flooding in the market, there was no essence to compete among the buyers. This will make the price of cotton clothing lower and goes back to its original price. This shows how the market or the economy regulates itself without the intervention of the government. With government dictating how much to produce, say ban non-cotton producers to manufacture cotton clothing, the price will remain high. Classical writers also challenged mercantilists’ views. During the early 18 th century, bullionism became naïve, national political units emerged, and kingly conquest and peasants’ war befell. The onset of technological advancement, profits were strengthened and merchants were widespread. 27