MANAGEMENT SERVICES MODULE o Treasurer, on the other hand, is an officer responsible for raising capital,

safeguarding the organization’s assets, managing its investments, credit

1. Management Accounting
policy, and insurance coverage.
o Internal auditor is an officer responsible for reviewing the accounting
A. Objectives, role, and scope of management accounting
procedures, records and reports in both the controller’s and treasurer’s
Difference between Financial Accounting and Managerial Accounting
areas of responsibility.
Financial Accounting Managerial Accounting
User Perspective Primarily for external users Exclusively for internal
• A controller, who is primarily concerned with accounting, must not hold at the
users
same time the position of a treasure, who is primarily concerned with custody of
Types of reports Financial statements Monetary and non-
monetary reports such as funds.
budgets, performance
evaluation Managerial Accounting as a Career
Guiding Principles GAAP What management wants • Certified Management Accountant (CMA) examination - The examination consists
and needs of the following four parts: Economics, Finance, and Management; Financial
Purpose Financial Reporting and Decision-making, planning Accounting and Reporting; Management Reporting, Analysis and Behavioral
Compliance and control Issues; and Decision Analysis and Information Systems.
Nature of Objective, reliable, and Subjective, relevant and • The Certified in Financial Management (CFM) examination is similar to the CMA
information historical future-oriented examination with one major difference: the Financial Accounting and Reporting
Frequency Periodically (monthly, Prepared as needed section is replaced with Corporate Financial Management.
quarterly, annually)
• Professional Ethics - The IMA Statement of Ethical Professional Practice contains
Necessity Mandatory Discretionary or optional
four main standards: (1) competence, (2) confidentiality, (3) integrity, and (4)
credibility/objectivity.
Roles and Activities of Controller and Treasurer
• Controllership is the process by which management assures itself that company
B. Cost terms, concepts, and behavior
resources are obtained and utilized according to plans that are in line with the
Cost terms
company’s set objectives.
• Out-of-Pocket Cost – involves an actual outlay of cash
o A controller is an officer of an organization who is responsible for
• Marginal Costs – the sum of costs necessary to affect a one-unit increase in the
supervising the personnel in the accounting department and for
activity level.
preparing the information and reports used in both managerial and
• Opportunity Cost – the foregone benefit or lost opportunity of the path not taken
financial accounting.
• Cost drivers – a “measure of activity”, such as direct labor hours, machine hours,
beds occupied, miles driven and etc., that is a causal factor in the incurrence of
cost an entity.
 • Direct Cost – can be easily and conveniently traced to a unit of product or other Direct Labor 12
cost object. Variable Overhead 10
• Indirect Cost – costs that cannot be easily and conveniently traced to a unit of Variable Selling and administrative Expenses 18
product or other cost object. Fixed Overhead 220 000
• Controllable Cost – costs that can be affected by the efforts of a manager. Fixed Selling and administrative expenses 88 000
• Committed Costs – those that are required as a result of past decisions.
Required:
• Discretionary Cost – cost that management decides to incur in the current period
to enable the company to achieve objectives • Determine the contribution margin – P450 000
• Manufacturing cost – all cost incurred to produce the physical product • Determine the CM ratio – 45%
• Non-manufacturing cost – all other cost incurred not related to the production of
Formula Breakeven Point
the physical product.
• Relevant cost – has the potential to influence a decision; must be differential and • BEP (units) = FC / CM per unit
incurred in the future • BEP (pesos) = FC/ CMR or BEP (units) x Selling price
• Irrelevant cost – cost that will not influence a decision.
Formula Required SP, Unit and Peso Sales
Cost Behavior
• Sales (units) for target profit
• Variable Cost FC + Desired profit (before tax) / CM per unit
o Total Variable Cost increases as Production increases • Sales (peso) for target profit
o Unit Variable Cost is constant regardless of production FC + Desired Profit (before tax) / CMR
• Fixed Cost • Sales (peso) with target return on sales
o Total Fixed Cost remains constant as Production increases FC / CMR – Return on sales
o Unit fixed cost decreases as Production increases
Problem
C. Cost-volume-profit (CVP) analysis Presented below are the costs incurred during production:

Formula Contribution Margin Ratio (CMR) Direct Materials P50

• CM per Unit/Selling Price Direct Labor 30
Variable Overhead 40
Problem Variable Selling and Admin Exp 30
ABC Company incurred the following cost in the production and sale of 10 000 units of its main Fixed Overhead 400 000
product, product X: Fixed Selling and Admin Exp 280 000
Direct Materials P15
 Problem
The products sell for P200 per unit. ABC Company has the following standards for one unit of product:

Requirement: Direct Material: 96 pounds x P7.20 P691.20

Direct labor: 3.6 hours x P20 72
• Determine the BEP in units. 13 600
Variable Overhead: 1.5 hours (MT) x P60 90
• Determine the BEP in peso sales P2 720 000 Fixed Overhead: 1.5 hours (MT) x P36 54
• Assume that the Company wants to earn a profit of P220 000, how many units
must it sell to earn this profit? 18 000 units The predetermined overhead rates were developed using a capacity of 7 200 units per year.
• Determine the revenue needed in order for the company to have a profit of P184 Production is assumed to occur evenly throughout the year.
000. P3 456 000
• If the company wishes to have a return on sales of 12.50%, determine the target During July 2019, the company produced 630 units. Actual data for the month is as follows:
sales. P 5 440 000 DM purchased – 64 000 @ P7.10
• Determine the number of units to be sold in order for the Company to have a DM used – 60 600 pounds (all from July purchases)
profit after tax of P128 000. Assume that the company is subject to 30% income Total Labor Cost – P29 000 for 1 800 hours
tax rate. 17 280 units Variable OH incurred – P52 500 for 960 hours of machine time
Fixed OH incurred – P27 300 for 960 hours of machine time
D. Standard costing and variance analysis Required:
Direct Materials Direct Labor • Direct Materials Price Variance. P6 400 F
AP x AQ AR x AH • Direct Materials Quantity Variance. P864 UF
SP x AQ SR x AH • Labor Rate Variance. P7 000 F
SP x SQ SR x SH • Labor Efficiency Variances. P9 360 UF
• Variable OH Spending Variance. P5 100 F
Manufacturing Overhead (4 way)
• Variable OH Efficiency Variance. P900 UF
Variable Fixed • Fixed OH Spending Variance. P5 100 F
• Fixed OH Volume Variance. P1 620 F
Actual AVR x AH AFR x AH
BAAH SVR x AH BFC
BASH SVR x SH BFC
Standard SVR x SH SFR x SH
 E. Variable vs. Absorption Costing F. Responsibility accounting and transfer pricing

Production vs Sales Effect on Inventory Difference in Income Problem: Service Cost Allocation
Production > Sales Increases AC Income > VS Income
The SM Cinema has two servicing departments (A and B) and two production departments (X
Production < Sales Decreases AC Income < VC Income
Production = Sales No change AC Income = VC Income and Y). Services performed by A and B and their usage by other departments are presented
below:

Problem Service Department Operating Department

The following data relate to ABC company, a new company: A B X Y
Direct Cost P400 000 600 000
Planned and actual Production 200 000 units Services Performed by 20% 45% 35%
Sales at P48 per unit 170 000 units Dept A
Manufacturing Costs: Services Performed by 20% 60% 20%
Variable P18 per unit Dept B
Fixed P840 000
Selling and Administrative costs: Required: Compute allocated cost to departments X and Y using the following method:
Variable P7 per unit
Fixed 925 000 • Direct method. P675 000 and P325 000
• Step Down method (Cost of Dept A is allocated first). P690 000 and P310 000
There were no variances during the period.
• Step Down method (Cost of Dept B is allocated first). P625 500 and P347 500
Required:
• Reciprocal method. P668 750 and P331 250
• Determine the number of units in the ending finished-goods inventory. 30 000
units G. Relevant costing and differential analysis
• Calculate the cost of the ending finished goods inventory under
Problem: Make or Buy
o Variable Costing. P540 000
o Absorption Costing. P666 000 ABC Manufacturing uses 10 units of Part X each month in the production of Product A. The
• Determine the company’s variable costing income. P2 145 000 unit cost to manufacture 1 unit of Part X is presented below:
• Determine the company’s absorption costing income. P2 271 000
Direct Materials P1 000
Materials Handling (20% of DM cost) 200
Direct Labor 8 000
Manufacturing OH (150% of DL) 12 000
Total Manufacturing cost P 21 200
 • The company has excess capacity. Accept; P33.50
Materials handling represents the direct variable cost of the Receiving Dept. that is applied to • The company is operating at full capacity. Reject; P60
direct materials and purchased components based on their cost. This is a separate charge in
addition to manufacturing overhead. ABC’s annual manufacturing overhead budget is 1/3 Problem: Continue or Shutdown
variable and 2/3 fixed. XYZ Company, one of ABC’s reliable vendors, offered to supply Part X ABC Company currently has three divisions: A, B, and C. The B division does not seem to be
at a unit of P15 000. performing well, and the company's president is considering dropping this line. If it is dropped,
Required: the revenues associated with the B Division will be lost and the related variable costs saved.
Also, 50% of the Division B fixed costs would be eliminated. The income statements, by
• If ABC purchases Part X from XYZ, the capacity ABC used to manufacture these divisions, are as follows:
parts would be idle. By how much would the unit cost of Part X increase or
decrease should ABC decide to purchase the parts from XYZ? Increase by P4 800 Division A Division B Division C Division D
Sales 550 000 850 000 1 000 000 2 400 000
• Assume ABC Manufacturing can rent all idle capacity for P25 000 per month. If
VC (400 000) (720 000) (820 000) (1 940 000)
ABC decides to purchase the 10 units from XYZ Company, by how much would
Contribution 150 000 130 000 180 000 460 000
ABC’s monthly cost for Part X increase or decrease? Increase bP23 000
Margin
Problem: Accept or Reject a Special Order FC (100 000) (200 000) (110 000) (410 000)
Operating profit 50 000 (70 000) 70 000 50 000
Kamikazee Company is selling its product at P60 per unit. The cost of producing and selling (loss)
this product are presented below:

Manufacturing Costs Required: Should the Company discontinue Division B and if it does drop Division B, how much
Direct Materials P26 per unit would profit increase or decrease? No. Decrease by P30 000
Direct Labor 5 per unit
Variable Overhead 1 per unit Problem: Sell or process further – rework or scrap
Fixed Overhead 836 000 per month A company has 7 000 obsolete toys carried in inventory at a manufacturing cost of P6 per unit.
Selling and administrative exp If the toys are reworked for P2 per unit, they could be sold for P3 per unit. If the toys are
Variable P1.50 per unit scrapped, they could be sold for P1.85 per unit.
Fixed 292 000 per month
Required: Which alternative is more desirable and what is the total peso amount of the
An order has been received from a customer for 2 400 units at a special discounted price of advantage of that alternative? Scrap, P5 950.
P45 per unit.

Required: Decide whether the Company should accept or reject the special order and
determine the minimum selling price for each scenario:
2. Financial Management o Quick ratio (Acid-test ratio) = Quick Assets (Cash, Short-term Investments
A. Financial Statement Analysis and AR)/Current Liabilities
i. Vertical analysis (Common-Size Financial Statements) o Cash Ratio = (Cash + Marketable Securities)/ CL
Items are compared vertically, from one account balance against o Receivable turnover = Net credit Sales/Average Receivables
another, and are typically expressed as percentages to reveal the o Average age of receivables or Days’ sales outstanding = Number of days
relative contributions made by each financial statement item. in a year/Receivables’ turnover
o Inventory Turnover = COGS/Average Inventory
ii. Horizontal Analysis o Average Age of Inventory or Days in Inventory = Number of days in a
It compares information horizontally, from one period to the next, year/Inventory Turnover
with the general goal of identifying significant sustained changes. o Days in Operating Cycle = Days in AR + Days in Inventory
Formula = (Current year – Base year)/Base year o AP Turnover = Net credit purchases/average trade payables
o Average age of trade payables or Days in Trade Payables = Number of Days
iii. oFinancial Ratios in a year/TP turnover
• Profitability Ratios o Cash Conversion Cycle = Days in Operating cycle – Ave age of Trade
o Net Profit margin or return on Sales = Net Income/Net Sales Payables
o Return on total sales = Net Income/Average total assets o Current Asset Turnover = (COS + OPEX (exclude non-cash)) /Average
o Return on Equity current assets
▪ Net Income/Average Shareholders’ Equity • Solvency Ratios
▪ Profit Margin (net income/sales) x Total Asset Turnover o Debt to Assets = Total Liabilities/Total Assets
(sales/average total asset) x Equity multiplier (Average total o Times Interest Earned = EBIT/Interest Expense
assets/average total equity) o Debt to equity Ratio = Total Liabilities/Total SHE
o Gross Profit Percentage = (Net Sales – COGS)/Net Sales
o Fixed Asser Turnover = Net sales/Average Net fixed asset B. Working Capital Management
o Earnings per share = Net Income (for common shares)/Ave # of common i. Working capital investment and financing policies
shares outstanding • Financing Policies
o Price/Earnings Ratio = stock Market Price/Earnings per Share o Moderate Approach – Matching Assets and Liabilities maturities
o Dividend Yield = Dividend per share/price per share o Aggressive Approach – Financing of some of its permanent assets (current
o Dividend Pay-out and fixed) with short-term debt.
▪ Common dividend per share/Earnings per share o Conservative Approach – Long-term capital is used to finance all the
▪ Ordinary share dividends/Net Income permanent assets and to meet some of the seasonal needs (temporary
• Liquidity Ratios current assets)
o Current Ratio = CA/CL
 ii. Cash and marketable securities management number of units to be sold so that the total cash inflows would equal total
cash outflows.
Cash and Short-term investments are crucial to a firm’s continuing success. Sufficient
o Baumol Cash Management Model – an EOQ-type model which can be
liquidity must be available to meet payments as they come due. At the same time,
used to determine the optimal cash balance where the costs of
liquid assets are subject to significant control risk. Therefore, liquidity and safety are
maintaining and obtaining cash are at the minimum.
the primary concerns of the treasurer when dealing with highly liquid assets. Cash and
• Marketable Securities Management
short-term investments are held because of their ability to facilitate routine
o Are those short-term money market instruments that can be easily
operations of the company.
converted into cash
• Types of Float o The company may hold marketable securities because
o Positive Float (Disbursement float) – occurs when the bank balance ▪ It would serve as a substitute for cash balances
exceeds the book balance, such as when checks issued by the firm are ▪ It would serve as a temporary investment that yields return while
already delivered to the supplier but the same have not yet been cleared funds are idle
by the bank. ▪ It is need to meet known financial obligations
o Negative Float – occurs when the book balance exceeds the bank balance. o The return on marketable securities is the opportunity cost of idle cash
It shows that there is more cash tied up in the collection cycle. This type i.e., the return that cash could be earning if it were invested at the market
of float should be decreased or if possible, eliminated. rate rather than held in a noninterest bearing account. This return is the
• Cash Management Strategies denominator of the optimal formula provided in the Baumol cash
o Accelerate Cash Collection management model.
▪ Bill customers promptly; Offer cash discounts for prompt o Risks involved:
payment; use of lockbox system; establish local collection office; ▪ Default risk – the risk that the issuer may not be able to pay the
ask customers to make direct payments to the firm’s depository interest or principal on time or at all
bank; use of automatic fund transfer or electronic fund transfer ▪ Interest rate risk – the risk that the price of the securities would
o Control or Slow down cash disbursement fluctuate due to changes in the market interest rates
▪ Stretch payables; maintain zero-balance accounts; less frequent ▪ Inflation risk – the risk that inflation will reduce the “real value”
payroll and schedule issuance of checks to suppliers of the investment
o Reduce the need for precautionary cash balance
▪ More accurate cash budgeting; have ready lines of credit; invest C. Capital Budgeting
idle cash in highly liquid, short-term investments instead of Capital Budgeting is concerned with long-range decisions, such as whether to
holding idle precautionary cash balances add a product line, to build new facilities, or to lease or buy equipment.
• Cash flow management
o Cash Break-even chart – similar to basic knowledge on break-even Two Types of Capital Investment Decision:
analysis. The chart would show the amount of sales in pesos or the
 o Screening Decisions – whether the capital investment meets the - The cost of the machine was P1 488 000, which had a useful life of 10 years and
minimum criteria set by the company. This is often used to narrow down was already used for 7 years;
a set of projects for further consideration - Much-needed repairs amounting to P310 000 will be incurred if the company does
o Preference decision – evaluate and compare more than one capital not sell.
investment alternative since companies may have limited capacity to - If the machine is sold, the proceeds would amount to P446 400. The company is
invest in all the project alternatives. subject to a 30% income tax.
a. What is the Net Cost of Investment for Decision-making purposes?
i. Capital investment decision factors (2 480 000 – [(310 000 – (310 000 x 30%)) + 446 400] = P1 816 600
1. Net Investment – cost or cash outflows less cash inflows or savings incidental to b. Assume that the proceeds from the sale would only amount to P300 000,
the acquisition of the investment projects. determine the net cost of investment for decision making.
2. Cost or Cash inflows: 2 480 000 – [(310 000 – (310 000 x 30%) + [300 000 + ((446 400 – 300
a. Initial cash outlay for all expenses on the project up to the time when it is 000) x 30%)] = P1 919 080
ready for use, such as purchase price and incidental project-related cost D. Risks and leverage
(freight, insurance, taxes, etc) i. Types of risks
b. Working capital requirement to operate the project at the desired level • Business Risk – the risk a firm’s common shareholders would face if the firm had
c. Market Value of an existing, currently idle asset, which will be transferred no debt. It is the risk inherent in the firm’s operations, which arises from
to or be utilized in the operations of the proposed capital investment uncertainty about future operating profits and capital requirements.
project • Financial Risk – the additional risk placed on the common shareholders as a result
3. Savings or cash inflows: of the decision to finance with debt.
a. Trade-in value of old asset (in case of replacement) • Market Risk – the risk that changes in a stock’s price will result from changes in a
b. Proceeds from the sale of the old asset to be disposed of (less applicable stock market as a whole. Commonly referred to as non-diversifiable risk.
tax in case there is a gain on sale, or add tax savings, in case there is a loss • Liquidity risk – the possibility that an asset cannot be sold on a short notice for its
on sale) market value. If an asset must be sold at a high discount, it is said to have a
c. Avoidable cost of immediate repairs on old asset to be replaced, net of substantial amount of liquidity risk.
tax • Political risk – the risk that a foreign government may act in a way that will reduce
4. Cost of Capital – the cost of using funds. It is the weighted average rate the the value of foreign currencies the value of the company’s investment. It may be
company must pay to its long-term creditors for the use of their funds. It is also reduced by making foreign operations dependent on the domestic parent for
known as the hurdle rate. technology, markets and supplies.
Sample Problem – ABC Company is considering purchasing a new machine to replace • Exchange rate risk – the risk of loss because of fluctuations in the relative value of
an old one used in production. The new machine would cost P2 480 000. Details foreign currencies.
regarding the old machine were provided for decision-making: • Security risk – the risk of a single stock, whereas portfolio risk is its risk if it is held
in a large portfolio of diversified securities.
• Company risk – the risk inherent in a particular investment security. Also known • Speculation – involves the assumption of risk in the hope of gaining from price
as unsystematic risk or diversifiable risk. movements.
• Interest rate risk – the risk that an investment security will fluctuate in value due • Hedging – is the process of using offsetting commitments to minimize or avoid the
to changes in interest rates. impact of adverse price movements.

ii. Degree of operating, financial, and total leverage E. Capital Structure

• Leverage – refers to that portion of the fixed costs which represents a risk to the • Capital – refers to investor-supplied funds comprising debt, preferred stock,
firm. common stock, and retained earnings.
• Operating leverage – refers to the fixed operating costs found in the firm’s income • Capital Structure – the percentage of each type of investor-supplied capital, with
statement. The higher the firm’s operating leverage, the higher its business risk, the total being 100%. It is the mix of the long-term sources of funds used by the
and the lower its optimal debt ratio. firm.
Formula: Degree of Operating leverage = Contribution margin/Earnings before • Optimal Capital Structure – the mix of debt, preferred stock, and common equity
interest and taxes that maximizes the stock’s intrinsic value. Note that the capital structure that
• Financial Leverage – refers to financing portion of the firm’s assets, bearing maximizes the intrinsic value also minimizes the WACC.
financing charges in hopes of increasing the return to the common shareholders. • Equity Financing – retained earnings may be used to pay common cash dividends
The higher the financial leverage, the higher the financial risk, and the higher the or be plowed back into the firm in the form of additional capital investment
cost of capital. through stock dividends.
Formula: EBIT/EBIT – interest expense • Hybrid Financing – sources of funds that possess a combination of features; these
• Total Leverage – the measure of total risk include preferred stock, leasing, and option securities such as warrants and
o A decrease in operating leverage would cause an increase in optimal convertibles.
amount of financial leverage
o A decrease in operating leverage would result in a decrease in the optimal 3. Economic Concepts
amount of debt. A. Macroeconomics
o Degree of total leverage = DOL x DFL • Economics – a social science that analyses the most efficient way to use our scarce
resources.
iii. Other terms • Scarcity – revolves around the concept of unlimited wants but with limited
• Forward contract – an executory contract in which the parties involved agree to resources.
the terms of a purchase and a sale, but performance is deferred. • Opportunity cost – most desirable alternative given up when you make a choice
• Futures contract – entered into as either a speculation or a hedge. Prices are
marked to market every day at the close of the day; thus, the market price is i. Three Major Economic Goals
posted at the close of business each day. I. Promote Economic Growth
- The most important concept to answer economic growth is Gross Domestic III. Keep Prices Stable (Limit Inflation)
Product (GDP). GDP is the peso value of all final goods and services produced
• Inflation – rising general level of prices and it reduced the purchasing power of
within a country’s borders in one year,
money.
- GDP Calculation
o Expenditure approach • Causes of Inflation
GDP = Consumption expenditures + Investment + Government Purchases o Demand-Pull Inflation – occurs when aggregate spending exceeds the
+ (Exports – Imports) economy’s normal full-employment output capacity. (example: because
o Income Approach – add up all the income that resulted from selling all labor is short – companies bid up price and inflation occur)
the final goods and services produced in a year o Cost-Pust Inflation – occurs from an increase in the cost of producing
GDP = Rent + Wages + Interest+ Profit goods and services. It is usually characterized by decreases in aggregate
- Real GDP vs Nominal GDP output and unemployment because consumers are not willing to pay
o Real GDP – the price of all goods and services produced by the company inflated prices.
at price level adjusted (constant) prices; adjust for inflation; best measure • Deflation – decrease in price levels.
of economic growth
o Nominal GDP – the price of all goods and services produced by a domestic ii. fiscal and monetary policies
economy for a current market price; measured in current prices hence, • Fiscal Policy – government action, such as taxes, subsidies, and government
does not account for inflation from year to year. setting, designed to achieve economic goals and can either be:
- Net Domestic Product (NDP) = GDP minus depreciation o Expansionary Fiscal Policy – laws that reduce unemployment and increase
- Gross National Product GDP
o Total and final output of land, labor, capital, and entrepreneurial ability o Contractionary Fiscal Policy – laws that reduce inflation and decrease GDP
produced by the country’s citizens, produced whether inside the country • If a government collects more in taxes than it spends, it has a budget surplus; if a
or elsewhere abroad. government spends more than it collects in taxes, it has a budget deficit.
• Monetary Policy
II. Limit Unemployment o Changing interest rates and the amount of money in the economy is called
• Unemployment – workers who are actively looking for a job but are not working. monetary policy; these actions, done to counter inflation, are under the
o Frictional Unemployment – temporary unemployment or being between control of the Bangko Sentral ng Pilipinas.
jobs. This occurs because individuals are forced or voluntarily change jobs. o Contractionary Monetary Policy – decrease in the supply of money causes
money in the nation’s banking system to become more scarce causing the
• Structural Unemployment – changes in the labor force make some skills obsolete.
interest rates in the economy to rise.
These workers do not have transferable skills and these jobs will never come back.
o Expansionary Monetary Policy – an increase in the supply of money puts
• Cyclical Unemployment – caused by a recession. As demand for goods and
downward pressure on the equilibrium interest rate.
services falls, demand for labor falls, and workers are fired.
 iii. foreign exchange rates it. The more goods an individual consumes, the more total utility the
• Factors influencing exchange rates – as with any other market, the exchange rate individual receives. This provides that the marginal utility from consuming
between two currencies is determined by the supply of, and the demand for, each additional unit decreases.
those currencies. In general, the following factors will affect the exchange rate of • Demand Curve shift
a particular currency: o A demand curve shifts when demand variables other than price change.
o Inflation tends to deflate the value of a currency because holding the o Factors that affect the demand other than its price:
currency results in reduced purchasing power ▪ Expectations of price increases
o Interest rates – if interest returns in a particular country are higher ▪ Consumer income and wealth
relative to other countries, individuals and companies will be enticed to ▪ Consumer tastes
invest in that country. ▪ Size of the market
o Balance of Payments – used to refer to a system of accounts that catalogs ▪ Group boycott
the flow of goods between the residents of two countries. • Elasticity – measures the sensitivity of demand to a change in price.
o Government intervention – the central bank of a country may support or o Formula: Elasticity of Demand = Percentage Change in Quantity
depress the value of its currency. Demand/Percentage Change in Price
o Other factors – political and economic stability, extended stock market o Elasticity of demand>1 = sensitive to a change in price
rallies, or significant declines in the demand for major exports. • Price elasticity is an important concept because if demand is elastic, an increase
in sales price results in a decrease in total revenue for all producers.
B. Microeconomics • Income elasticity measures the change in the quantity demanded of a product
i. Concept of and factors affecting demand given a change in income.
• Law of Demand • Marginal propensity to consume – describe how much each additional dollar in
o There is an inverse relationship between price and quantity demanded. personal disposable income a consumer will spend
Demand is the quantity of a good or service that consumers are willing • Marginal propensity to save – percentage of additional income that is saved.
and able to purchase at a range of prices at a particular time. • MPC plus MPS is equal to one.
o Graphically, a demand curve shows an inverse relationship between price
and quantity demanded, i.e., less products are demanded at higher ii. Concept of and factors affecting supply
prices. • Law of Supply
o The substitution effect – refers to the fact that as the price of a good falls, o There is a direct relationship between price and quantity supplied. It is
consumers will use it to replace similar goods. upward sloping. The curve shows the amount of a product that would be
o The income effect – this refers to the fact that as the price of a good falls, supplied at various prices. The higher the price the more products that
consumers can purchase more with a given level of income. would be supplied.
o The law of diminishing marginal utility – an individual demands a • Supply curve shift
particular good because of the utility he or she receives from consuming o Occurs when supply variables other than price change.
 o An increase in the number of producers will cause an increase in the Monopolistic Relatively Large Differentiated Limited Low Barriers
amount of goods supplied at a given price Competition
o As production costs go up fewer products will be supplied at a given price Oligopoly Few (Less than Identical or Limited or Wide High Barriers to
o Government subsidies reduces the production cost of goods and 10) differentiated Entry
therefore, increases the goods supplied at a given price Pure Monopoly One Unique Wide (Price Blocked
• Elasticity of Supply Makers)
o Measures the percentage change in the quantity supplied of a product
resulting from a change in the product price. • In a monopsony, there is only one buyer for all sellers.

iii. market equilibrium

• A product’s equilibrium price is determined by demand and supply. It is the price
at which all the goods offered for sale will be held (i.e., quantity demanded =
quantity supplied). The equilibrium price is the price at which the demand and
supply curve intersect.
• Price Ceiling – a specified maximum price that may be charged for a good. If the
price ceiling is set for a good below the equilibrium price, it will cause a good
shortage because suppliers will devote their production facilities to producing
other goods.
• Price floor – a minimum specified price that may be charged for a good. If the
price floor is set for a good above the equilibrium price, it will cause
overproduction and surpluses will develop.
• The Law of Diminishing Marginal Returns – as variable resources are added to
fixed resources, the additional output produced from each additional worker will
eventually fail.

iv. Market Structures

Market Number of Type of Product Control Over Conditions of

Producers Price Entry

Pure Large Virtually None (Price Very Easy

Competition Identical Takers)