MANAGERIAL ECONOMICS ⮚ Describes the world as it should be (opinion-based,

subjective).
Economics - is the study of the allocation of resources and
the choices made by economic agents (families, companies, The four types of factors of production:
government). Land – Includes all-natural resources on and below the earth.
 Non-renewable resources (e.g., oil, coal) cannot be replaced
An economy is a system that attempts to solve this basic once used.
economic problem: scarcity.
 Renewable resources (e.g., wind, solar energy) can be
replenished and are not depleted by use.
The Three Economic Questions Labor – The workforce of an economy.
The value of a worker is referred to as human capital.
⮚ What to produce? – Determines the kind and quantity of products to Capital – Includes:
be produced.  Working capital – Used in day-to-day production.
 Fixed capital – Includes assets that do not transform into final
⮚ How to produce? – Determines who will produce the goods and what products.
production process will be used Entrepreneurship – Individuals who organize production and take risks
to create goods and services.
⮚ For whom to produce? – Determines who will benefit from the goods
and services produced and how they will be distributed. Demand and Supply Analysis

Economic Systems - Economic systems are characterized by the type

DEMAND
of institutions responsible for managing and allocating resources used in
the production of goods and services. - The willingness of the buyer or consumer to pay for a certain
good.
Quantity Demanded
 Command Economic System
 Market Economic System - The amount of goods and services consumers are willing to
purchase given a certain price.
 Mixed Economic System
Law of Demand
Goods and Services - As economic resources combine, they produce
- As the price increases, the quantity demanded decreases, and
two essential elements of economics: goods and services. vice versa.

A Good is anything that provides satisfaction and is used to meet a

Example: demand schedule for bread
person’s wants and desires.
Bread Price Quantity
Classification of Goods According to:
FORM - Tangible Goods A 4 10
Intangible Goods
Use: B 3 20
Consumer Goods – Goods that provide immediate satisfaction (e.g.,
food, beverages). C 2 30
Capital Goods – Goods used in the production of other goods and
services (e.g., buildings, equipment).
D 1 40

Necessity:
Basic Goods – Goods that fulfill essential human needs (e.g., food,
shelter).
rise (change in y) (P2 -P1)
Luxury Goods – Non-essential goods that enhance comfort and well-
Slope= run (change in x) (Q2 -Q1)
being (e.g., perfumes, gadgets).

Why do demand curves slope downward?

Economic Value:
Economic Goods – Goods that are both useful and scarce, requiring  Income effects
payment (e.g., land, labor, electricity). As the price of goods decreases, our purchasing
Free Goods – Goods that are abundant and do not require payment power increases.
(e.g., air). We tend to buy more if the purchasing power
increases.
Economic Decisions  Substitution effects
- Economic decisions involve allocating scarce resources to As the price of the goods decreases, some of the
best meet managerial goals. customers will buy this product as a substitute for something else.

Managerial Economics Factors that affect the quantity of demand other than the change of
Managerial Economics is economics applied in decision- price:
making.  Change in average income
 Change in the size of the population
●It serves as a link between economic theory and managerial practice.  Change in taste and preference
●It involves analyzing resource allocation within a firm or management
unit.
 Changes in consumers’ speculations
●It is goal-oriented and prescriptive, focusing on achieving maximum
The general rule of law of demand is as price increases, quantity
demanded decreases, but there’s always an exception to the rule.
Division of Economics
1. Giffen goods - a product that seems to defy the established
Microeconomics
conventions as dictated by the law of demand in terms of the relationship
-Analyzes details of the economy, focusing on the behavior of
between its price and quantity of demand. - (Robert Giffen)
individual units (e.g., consumers, firms).

Staple goods - when the prices goes down, consumers prefer

Macroeconomics
to buy less and more of superior substitutes for consumption.
-Studies the economy as a whole, including employment,
inflation, and monetary policy.
Inferior goods - are those goods the demand for which falls
with increase in income of the consumer
Positive Economic Analysis
⮚ Describes the world as it is (fact-based, objective)..
Experience goods - the viability, utility and characteristics of
Normative Economic Analysis certain goods and services can be observed and decided after using
those products and services.
 Q - Quantity
P - Price
a - intercept value
2. Veblen goods - a group of commodities for which people’ preference m - slope
for buying them as their price increases. - (Thorstein Veblen)
Snob effect - preference for goods because they are different
DEMAND ESTIMATION AND FORECASTING
from those commonly preferred (price is quality).
-Predicting future demand for the product under given
Bandwagon effect - demand increases as the number of
conditions
people buying increases.
Demand estimating - The manager attempts to quantify the links
between the level of demand and the variables which determine it.
3. Price expectations - consumers expect a further rise in the price of a
particular commodity. Demand forecasting - It tells the expected level of demand at some
future date on the basis of the past and present information.
4. Ignorance of the consumers - consumers' ignorance about the rise
of price of goods will tend the consumer to buy these goods. Determinants of Demand Forecasting
● Capital goods - Have derived demand as demand of these
goods depend on demand on consumer goods industry growth rate.
SUPPLY
-The willingness of the seller to produce goods to sell at
various possible prices. ● Durable goods - Demand on this goods depend upon social
status
● Non-durable goods - Their demand is affected by disposable
Quantity Supplied
income or purchasing power of the household.
-The amount of producers would be willing to sell at a given
price.
NON -STATISTICAL METHODS
Law of supply
-As price increases, the quantity supplied would be willing to ● Survey Method - Generally used in short run and estimating the
sell will also be higher. demand for new product
Types of survey method
1. Consumers Survey Method - efforts are made to collect the relevant
Bread Price Quantity information directly from the consumers with regard to their future
purchase plans.
A 1 10 a. Complete enumeration survey - all potential customers
contacted in the market are surveyed.
b. Sample survey - only selected customers from the relevant
B 2 20
market through some sampling method are interviewed.
2. Collective Opinion Method – Experts opinions about the volume of
C 3 30 sales expected in the future.
3. Expert Opinion Method or Delphi Method - Under this method,
D 4 40 outside experts are appointed.

● Market Experiments - can help to overcome the survey problems as

rise (change in y) (P2 -P1)
they generate data before introducing a product or implementing a policy
Slope= run (change in x) (Q2 -Q1)
1. Simulated Marketing -testing where customers are exposed to a
simulated market situation to gauge the consumers’ reactions to a
Supply curves slope upward product, service or marketing mix variations.
As the price becomes more expensive, producers tend to 2. Test Marketing -aims to explore consumer response to a product or
supply more. marketing campaign by making it available on a limited basis before a
As the price becomes cheaper, producers tend to supply less. wider release.

Other factors that influence supply STATISTICAL METHODS

 Changes in the number of seller
 Changes in the cost of production Barometric Method - forecasting follows the method adopted by
meteorologists in weather forecasting.
 Changes in technology
Trend Projection - past data about the dependent and independent
 Changes in government analysis variable is used to project the sales in the coming

MARKET EQUILIBRIUM Secular Trend - also known as long term trend indicates general
 A condition when the quantity of supply and demand tendency and direction in which graphs of the time series move over a
are balanced or equal to a given price level. long period of time.
 Price is stable under the existing market condition.  Seasonal Trend - this trend reflects the changes in sales of
the company due to change in various seasons or climates.
Surplus  Cyclical Trend - these trends reflect the change in the
-The price of a good is above the equilibrium point. demand for a product during a diverse phase of the business
-Quantity supplied of a good in a market exceeds its quantity cycle.
demanded.  Random or Irregular Trend - these changes arise randomly
or irregularly to unforeseen events. This trend cannot be
Shortage predicted.
-The price of a good is below the equilibrium point.
-The quantity demanded of a good in a market exceeds its Types of Trend Method
quantity supplied.
1. Graphical Method - Simplest method of trend projection. periodical
Ways to illustrate equilibrium conditions sales data is plotted on a graph paper and a line drawn through the
Schedule approach - combining the demand and supply plotted points.
schedules
Graphical approach - plotting the figures in graph. 2. Semi-Average Method - all the time series data of sale is divided into
Algebraic approach - using mathematical equations using two equal parts and thereafter, a separate average sale is calculated on
demand and supply function. each half.

Demand curve 3. Moving Average Method - moving average is calculated (3 year, 5

Q = a - mP year, or 7 year) should be taken up and it depends upon the periodicity of
Supply curve the data.
Q = a + mP
Inverse Demand curve
P = a - mQ 4. Least Square Method - a scientific, formal and popular method of
Inverse Supply curve projecting the trend line.
P = a - mQ
Where: Y = a + bX
where; Y = annual sales; X = time; a & b = constants ● Services – intangible products or things that people buy but do not
The coefficients a & b can be calculated by solving these equation involve the production of physical items
● Fixed capital equipment – long-term (more than 1 year) physical
Ʃy = Na + bƩx assets used to produce goods or services
Ʃxy = aƩx + bƩx2 ● Residential investments - expenditures by households and firms on
new houses and apartment buildings
● Nonresidential investments - expenditures by firms for machine,
Ʃy = sum of total sales of N years
tools, plans, factories,etc.
Ʃx = sum of deviations of the years taken from the central period
Ʃxy = sum of the product of the deviation and corresponding sales ● Government expenditures -
Ʃx2 = sum of the squared deviations of x value ⮚ expenditures on non-capital goods used to maintain the
operations of the government Government infrastructures
National Income Accounting (roads, bridges)
● It measures the economic activities of a country (production, labor,
employment, inflation, distribution and others). ▪ X - M - net exports (exports - imports)
● Measuring the production, income, spending, of nations. ▪ NFY - net factor income from abroad
● GDP and GNP- one of the measurements commonly used to ⮚ difference between the aggregate flow of factor payments from
determine if a country is improving in terms of its economic and to the rest of the world
activities and showing economic growth. ⮚ Inflows - payments for the use of economy’s resources in other
Microeconomics – Is the study of individual economic units, such as countries such as salary remittances of OFWs
households, firms, and markets, and how they make decisions about allocation ⮚ Outflows - payments for the economy’s use of foreign
of scarce resources. resources such as profit remittances of foreign companies
to their mother countries for their investments in the
Macroeconomics – Studies the economy as a whole, focusing on total output, Philippines
total income, employment, inflation, and overall economic growth
▪ C + I + G + (X - M) = GDP
▪ GDP +- NFY = GNP
Gross Domestic Product – summation of all goods and services produced in a
specific country within a specific period of time.
Income approach - the total income earned by the households in a nation
during a year
Microeconomics – Is the study of individual economic units, such as
households, firms, and markets, and how they make decisions about allocation
of scarce resources. Formula:

▪ GNP = PY + CY + GY + IT - S + DA
Macroeconomics – Studies the economy as a whole, focusing on total output, ▪ PY - personal income
total income, employment, inflation, and overall economic growth
Formula:
Gross Domestic Product – summation of all goods and services produced in a
specific country within a specific period of time. ⮚ PI = NI - (S + T + GI) + TP
⮚ S - undistributed profits or corporate savings
Included in GDP: ⮚ T - corporate taxes
⮚ GI - government income
 All goods and services produced in a specific country within a ⮚ TP - transfer payments
specific period of time ⮚ PI = W + D + E + TP
 GDP is the total value of all final goods and services produced ⮚ W - wages and salaries
within a country during a specific period. ⮚ D - dividends or distributed profits
 Focuses on where production occurs, not who produces it. ⮚ E - entrepreneurial and property income of persons
 Only final goods are counted to avoid double counting. ▪ CY - corporate income
▪ GY - government income
Excluded in GDP (Non-economic Income): ▪ IT - indirect tax - are always included in goods (VAT, custom duties)
▪ S - subsidies - excluded for they only bloat profits and don’t have
⮚ Transactions for which nothing was produced or a service performed production and factor contributions
⮚ Productive activities that can’t be measured ▪ DA - depreciation allowance/ capital consumption allowance
⮚ Production activities that would result in double counting ▪ PY + CY + GY = NI (National Income) - total income earned by factors
⮚ Private transfer payments of production owned by country’s citizen (individuals, companies,
⮚ Government transfer payments to the people and they do not render corporations, government)
services to government ▪ NI + IT - S = NNP (net national product)
▪ NNP + DA = GNP (gross national product)
Gross National Product
Value added or production approach - measures the economy based on the
● Country’s GDP plus net factor income from abroad contribution of industries and sectors to the value of the final goods.
● Market value of all final products produced by the resources of the
economy during a specified period of time The Value-Added Approach measures GDP by adding the value added at each
stage of production.
Includes:
Formula:
⮚ those products that can no longer be used for higher stages of
production (have reached the highest level of transformation) ● GNP = A+ I + S +- NFY
● A - agricultural sector (all products produced in agriculture, fishery,
Excludes: forestry)
● I - industrial sector (mining, quarry, construction, etc.)
⮚ products not produced by the resources of the economy
● S - service sector (transportation, communication, real estate,
(IMPORTS)
private services, government services, etc.)
⮚ products not produced by the economy within the period of time
● A + I + S = GDP
accounted
● GDP +- NFY = GNP

Types of measuring GDP/GNP

Real GDP - GDP is the total value of goods and services a country produces. It
measures economic output using constant prices to show true economic
Expenditure approach - the total amount spent on goods and services growth without the effect of inflation (Uses base year prices).
produced in a nation.
⮚ Real GDP = base price x current quantity
Formula:
Nominal (current) GDP – shows how much output is worth at today’s prices.
▪ GNP = C + I + G + (X - M) +- NFY
▪ C - personal expenditures ⮚ Current GDP = current price x current quantity
⮚ biggest component of DGP spending by households
⮚ Non-durables - used up or replaced in less than 3 years Price Index / GDP deflator
⮚ Durables – goods lasting more than at least 3 years
⮚ is a price index that measures the overall change in prices of all final ● What will the household do with their wages and salaries?
goods and services included in GDP.
⮚ It shows the level of inflation in the economy.
⮚ level of prices of current year over level of prices of base year
Price Index = current price over base price
⮚ nominal GDP / real GDP x 100

Real GDP = current GDP over price index

Other Formulas:

Sample Problem:

GDP Y 2006 = 6,648,244; Y2005 = 6,032,835; growth rate = ?

6,648,244 - 6,032,835 / 6,032,835 x 100 = growth rate

615, 409 / 6,032,835 x 100 = growth rate

10.20 = growth rate

Example an increase in national income of 100M: there's also an increase
in consumption spending but by only 80M..... the 20M difference will be
Per Capita GNP / GDP
savings.
● Per Capita GDP is the average output (or income) per person ● As GENERAL RULE: What is not spent is save.
● Per Capita GNP (GDP) = GNP(GDP) / Total Population
● Per Capita GNP is the average national income per person, including Aggregate Demand -is the total quantity of goods and services that all buyers
income earned from abroad. (households, businesses, government, and foreigners) in an economy are
willing and able to buy at different price levels, during a given period.
Sample: Aggregate Supply
Is the total output of goods and services that producers are willing
GNP = 7,227,312 and able to supply at different price levels during a specific period.

Population = 89 Consumption Function

● Shows the relationship between consumption spending and income;
Per capita = 7,227,312 / 89 ● Formula: C=a+ bY
● In the formula... Consumption function is the summation of two
= 81,205 consumption
● a (autonomous consumption)
Consumption, Savings, Investment, and Governance Spending Function o autonomous means independent
✔ The circular flow model of national income consists of five sectors. o any consumption that's independent of our income
o even a household has no income there still be some basic
✔ These five sector circular flow model, which can be described as a consumption (rent, clothes, bills, food)
model based on income flows from one sector of the economy to o consumption that takes place even if income is ZERO
another in a circular flow motion ● bY (induced consumption)
o consumption that is dependent in income
o an increase in income Y causes an increase in
The main sectors of the economy include households and firms.
consumption b but an increase in consumption is less
than the rise in income
⮚ In the two sector model consisting only of households and firms, the ● b (marginal propensity to consume)
economy is always at equilibrium. That is Income (Y) is always equal o always < 1 for consumption spending increases but less
to consumption (C). than an income
⮚ However, the economy cannot be limited only to these two sectors.
● The effects of banks, government and international trade must
be taken into consideration. Example: if MPC is 0.9 it means that for every Phpl.00 increase in income;
● These three sectors bring about withdrawals and injections. household will increase their spending by 0.90 cents
o The financial sector mobilizes savings (S) from
households and makes investments (I) to firms.  the portion of additional income that is spent; the fraction of an
o The government sector collects taxes (T) from extra peso of income that is spent on consumption
households and makes expenditure (G) on firms.
o Finally, in the balance of payments sector, part of o Formula: change in consumption over change in
household income is spent on imports (M) while some disposable income
revenue is received as exports (X).
[Link] [Link] MPC APC
Consumption is the act of using goods and services to satisfy human needs 1,000 950 30/50=0.60 0.95
and wants 1,050 980 30/50=0.60 0.93
1,100 1,010 30/50=0.60 0.92
1,150 1,040 30/50=0.60 0.90
1,200 1,070 30/50=0.60 0.89
1,250 1,100 30/50=0.60 0.88
1,300 1,130 30/50=0.60 0.87

Average Propensity to Consume (APC)

● Proportion of total disposable income that is consumed
● Formula: personal consumption over disposable income
o As we all know... C = Y (consumption is equal to income)
..... income has a direct relationship to consumption; under ceteris paribus assumption
o And based on the consumption function formula.... C = a
..... means to say that as income increase, consumption also increase and vice + bY;
versa o o therefore Y = a + By
Example: assuming that autonomous consumption is 50B and MPC is 75%; at ✔ if individuals don't use their disposable income to personal
what point would consumption be equal to income? Or will reach its consumption expenditure.... They save.
equilibrium point? ✔ Savings is the unspent portion of income during the period
intended for spending
Solution:
Example: a salary earner who sets aside a portion of his half-month pay for the
C = 50 + .75Y Y = 50 + .75Y next 15 days.

Y = 50 + .75Y Formula: Savings = Income - consumption

Y - .75Y = 50 (S = Y - C)

.25Y=50 Dissavings

Y=50/.25 ⮚ spending an amount of money greater than available income

Y = 200B (the point where Consumption = Income) MPS

o means that any income lower than 200B would yield ⮚ the proportion of additional income that is saved.
dissaving’s; and any income higher than 200B will realize ⮚ Formula: change in savings over change in disposable income
savings
See table below:
● sample problem: based on table below; compute for consumption
[Link] [Link] SAVINGS MPC APC
1,000 950 50 20/40=0.40 0.5
1,050 980 70 20/40=0.40 0.07
1,100 1,010 90 20/40=0.40 0.08
1,150 1,040 110 20/40=0.40 0.10
1,200 1,070 130 20/40=0.40 0.11

Average Propensity to Save (APS)

● Proportion of total disposable income that is saved.

● Formula: (personal) savings over disposable income.
Note: a = 50; b = 0.75
❖ Investment Function
Engel's Law of Consumption
⮚ Depicts that when our income is increased, we spend less on
Two Types of Investment
food but spend more on durable goods, and when our income
decreased, we spend more to fill our primary needs
1. Autonomous Investment - Investment that is not dependent on the
Further Explanation: current level of production or profit level. Examples: investment in
When income increases: public utilities such as railways, roads, electricity, posts.
•People spend a smaller % of income on food. 2. Induced Investment - Investment that is dependent on the current
•Extra income goes to durable goods (appliances, gadgets, vehicles) level of production or profit level
and luxury items (travel, education, services)
When income decreases: Fixed capital equipment
•Households focus on basic needs like food.
•Higher % of income goes to necessities. ⮚ consists of spending on construction, durable equipment, factories
(expenditures on capital goods)
Other factors. that influence the consumption of individuals ● Residential investments - expenditures by households
and firms on new houses and apartment buildings
⮚ Taste and preferences ● Non-residential investments - expenditures by firms for
● Depends on how the product satisfies one's desires machine, tools, plants, etc.
Several reasons that affects taste and preferences: ⮚ Increase in stocks / inventories (produced by firms that produce
o Racial, ethnic, age, occupational groups - A person’s now with the intentions to sell afterwards.
culture, age, and job influence what products they prefer
to consume. Determinants of investment spending
o Gaya-gaya system - People buy or use products because
others around them are using it. ● Expected rate of return from capital
o Colonial mentality - Preferring foreign products over local ● an ROR of 10% means that for every peso invested, an annual profit
ones because they are believed to be better or more of 10 cents is obtained Interest rate
high-class. o The cost of borrowing money; the annual amount that a
⮚ Population borrower must pay for the use of a peso for a year
 If population increases while income remains constant o If the interest rate is 8%,
 If population and income both increase.
⮚ Income Investment decision - to determine whether to invest in a particular project....
● An increase in income may tend to increase the consumption A firm must compare the expected rate of return from the project with the
⮚ Price level interest rate
● A change in price level will affect the individuals purchasing power
o Income effects ● note: if the expected rate of return is less than the interest rate, the
o Substitution effects firm will lose money if it borrows to carry out the project
If prices go up, your money can buy less(income effect), so you might
choose a cheaper items instead (substitution effect)
Other investment determinants
● Innovation and promotions
o Can expand the line of consumers' choice and extend Depreciation - if depreciation occurs in a faster way, businesses will be inclined
influence of demand factors on consumption to buy more replacement on this capital items o accelerated depreciation
o Introduction of new products can create demand and
increase consumption Technological progress - old equipment is obsolete, business likely to buy new
o Promotions and advertising serve as a medium of capital items to update their machineries and equipment
introducing new products in the market which create
demand and consumption Government policies
❖ Saving Function
✔ it describes the total amount of saving at each level of disposable ⮚ tax credit - a sum deducted from the total amount a taxpayer owes
income to the government (encourages investment)
Example: you'll be given tax credit if you make an export in return you need not o spending less would mean that the aggregate demand
to pay duties and taxes would become less
o less demand for goods and services would eventually
● where S = Y - C; we already pointed out that an income not arrest price increases until they lowered to reasonable
consumed is saved price levels
o we saved because we are expecting/preparing for a o also government can resort to TAX INCREASES
larger consumption or [investment] in the future. ▪ reasonable tax increases would mean less
o we likely to assume that Y = C + I; that an income after incomes in the hands of consumers and
deducting consumption will also yield to investment business firms
o therefore.... S = 1 ▪ With these measures, government
o as explained in the circular flow of income, goods and expenditures shifts the AE® to AE' (downward)
resources: a leakage [savings] will come back as an and reach its potential income and creating
injection [investment] new equilibrium to 100B ..... from E' to E'
1. What goes out will then come in of the circular flow
2. The savings-investment equilibrium simply maintains the level of Multiplier Concept
income under ceteris paribus assumption
o Also, we can assume that Y = a + bY + 1 ● It explains how income is created as money circulates between
1. sample problem: assuming that autonomous consumption is SOB households and firms in the economy
and MPC is 75%; ● It measures how many times one peso is spent and re-spent in the
2. How much additional income will be generated with SOB additional system, and how much total income is generated from each peso of
investment? Total income? new money added to the economy.
Formula:
❖ Government Spending and Equilibrium ● M = 1/1 - MPC (marginal propensity to consume)
✔ Includes all government consumption and investment excluding ● M - 1 / MPS (marginal propensity to save)
transfer payments made by a state ● MPS + MPC – 1
✔ Government acquisition of goods and services for current use to ● Propensity - likelihood, tendency
directly satisfy individual of the members of the community
✔ Government acquisition of goods and services intended to create Example:
future benefits such as infrastructures investment or research
spending
✔ Represent transfers of money, such as social security payments, o MPC = 0.9; multiplier = 10 (1/0.1)
financial aid, subsidies given to business firms, are called transfer o MPC = 0.8: multiplier = 5 (1/0.2)
payments are NOT INCLUDED as government expenditure if use to o MPC = 0.5: multiplier = 2 (1/0.5)
calculate the GDP/GNP o MPC - 0; multiplier = 1 (1/1)
● When the MPC gets smaller; multiplier will also get small
● MPC is Zero, there is no ripple effect
Inflationary and Deflationary Gaps

Formula: Income Generated

● The equilibrium level of national income coincides with full
employment equilibrium
● The equilibrium level of income is determined by the Aggregate ⮚ Investment or Government Multiplier (Yg - 1 or G x M)
Demand (AD) and Aggregate Supply
● (AS): and if AD and AS is not equal to the level of full employment.... ECONOMIC DEVELOPMENT
An inflationary and deflationary gaps occur
Poverty and Inequality
What is poverty?
Deflationary Gap
 It is a state where people lack essential commodities needed for life.
 It also means a person cannot maintain a living standard adequate
● Also known as Recessionary Gap, There's an insufficient demand for for physical and mental efficiency.
goods and services in the economy Absolute poverty:
● The equilibrium will occur at the lower level of full employment
 A condition where an individual cannot meet the most basic needs
income and to the left of full employment line
such as food, shelter, and clothing.
● Occurs when the aggregate demand is not sufficient to create
 It is caused by low national income relative to the population size.
conditions of full employment
Relative poverty:
Line OX = national income; Line OY = aggregate expenditures
 It refers to living standards compared to others in society.
Remedies:
 It can be caused by unequal distribution of income and wealth.
● Government uses its power thru fiscal policy
Measures of Poverty
● During this period (deflation or recession), government dictates
⮚ Poverty Line – the minimum level of income needed to meet basic
deficit budget
needs.
● Deficit budget
⮚ Poverty Rate – the percentage of the population living below the
o means government should spend more than what it
poverty line.
collects thru taxes
⮚ Poverty Gap – measures how far the poor are from the poverty line.
o Government can resort to TAX CUTS (means that taxes
imposed on persons and on businesses are cut)
What is inequality?
effects of tax cuts would have greater disposable income
Economic inequality, also known as income inequality and wealth
inequality (among individuals in a group, among groups in a population, or
Inflationary Gap
among countries).
● opposite of deflationary gap
Causes of Economic Inequality
● exists when equilibrium income exceeds full employment income
● Wages are determined by labor market
● excess demand pulls up prices and inflation comes next
● Education affects wages
● further explanation thru graph
● Growth in technology wides income gap
o Line OX = national income; Line OY = aggregate
● Gender does matter
expenditures
● Personal factors
● Assumptions:
o AE" intercepts the 45° line @ point E'; right of potential
Gini Coefficient
income (full employment line)
A statistical measure used to determine the level of income
o The economy is operating at equilibrium income of
inequality in a country.
200B which is more than 100B potential income
The value ranges from 0 (perfect equality) to 1 (perfect inequality).
o There's a excess of 100B in aggregate expenditure: this
excess at the right of potential income or full
employment line is called inflationary gap

Economic Growth
Remedies:
Economic growth is a positive change in the output or production of a
● During this period (inflation), government dictates surplus or country’s economy.
balanced budget
● Surplus or balanced budget Positive economic growth
o means government should spend less than its budget  It signals a wealthier economy and increased prosperity.
  Increased production leads to higher profits for production 4. Distribution within the family – unequal sharing of income,
companies. education, or attention.
 It also increases government tax collection, reduces unemployment, 5. Differences in relational perspectives – influence of local customs
and improves economic prospects. and traditions.
Key contributors to economic growth are: Human “well-being” → Development and Happiness
 Technology – improves production and increases wages and profits. Three Core Values of Development
 Globalization – expands markets and creates more employment and 1. Sustenance – basic needs like food, clothing, and shelter for
investment opportunities. minimum living.
However, economic growth also has adverse effects. 2. Freedom – having choices and opportunities to satisfy needs.
One effect is environmental degradation. 3. Self-esteem – feeling valued through respect, dignity, and integrity.

Cycles in Economic Growth Role of Women in Development

The overall goal of government economic policy is to promote economic ● Plays a central role
stability. ● Has primary responsibility for child raising
o means an unemployment rate at or near the natural rate ● Transmits values to the next generation
o price stability with a low inflation rate, and
o steady growth in economic output. Three Objectives of Development
The short-term fluctuations in economic activity are called business cycles. 1. To increase the availability and widen the distribution of basic life-
Business cycles are recurring patterns of sustaining goods.
o economic expansion (increasing economic growth and price 2. To raise levels of living.
inflation), 3. To expand the range of economic and social choices.
o then contraction (declining economic growth and growing
unemployment), then expansion again Economic Development
● Refers to the sustained, concerted actions of policymakers and
Two phases of business cycles: communities
● Implies the process of higher productivity in all economic sectors.
1. Contractionary Phase ● Involves improving the overall health, well-being, and education of
o a period in which real GDP is declining. Also associated with the general population.
declining inflation rates and increasing unemployment rates
⮚ often called recession Economic Development Factors
⮚ it is generally described as a significant decline in economic activity. Economic
⮚ A severe recession is called a depression ● Traditional approach – Defines development strictly in economic
2. Expansionary Phase - a period in which real GDP is growing. Also terms (rapid industrialization at the expense of agriculture).
associated with increasing inflation rates and declining ● Growing economy approach – Focuses on improvements in material
unemployment rates welfare, eradicating mass poverty, and placing human beings at the
center of economic development.
Four Phases of the Business Cycle
1. Expansion – economic growth, rising employment, and increased Non-Economic
production. ● Factors that have economic impacts but are not directly tied to the
2. Peak – the highest point of economic activity. economy, such as religion, ethnicity, social activities, and political
3. Contraction (Recession) – economic slowdown, falling production, elements.
and rising unemployment.
4. Trough – the lowest point before the economy begins to recover. Millennium Development Goals
● Adopted in September 2000
Factors Affected in Business Cycle ● 189 member countries of the United Nations
● The strongest statement of international commitment to ending
● Real GDP global poverty
ο The primary measure of the health and welfare of an
economy is the growth rate of real GDP or the total Sustainable Development Goals (SDGs)
physical output of the economy Introduced in 2015 by the United Nations as a global development
ο aspects to be considered to expect growth in real GDP agenda with 17 goals, including:
● Unemployment  No Poverty
o In business cycle contractions the unemployment rate  Zero Hunger
rises and during expansions the unemployment rate falls.  Good Health and Well-being
o The low point in the unemployment rate usually occurs  Quality Education
just before the peak.  Gender Equality
o The high point usually occurs just after the trough.  Clean Water and Sanitation
o The increase in the unemployment rate is usually faster
than the decline. Defining the Developing World
● Inflation ● The most common way to define the developing world is by per
ο In times of economic contractions, when output is falling, capita income.
the inflation rate also declines.
Income Classifications
ο And in recoveries, when the economy nears the peak of
the business cycle, the rate of inflation increases. ● Low-income countries: $1,025 and less
● Lower-middle-income countries: $1,026 to $4,035
Economic Development ● Upper-middle-income countries: $4,036 to $12,475
● High-income countries: $12,476 and more
Development
Underdevelopment
Traditionally meant achieving sustained rates of growth of income
● Occurs when resources are not used to their full socio-economic
per capita to enable a nation to expand its output at a rate faster than the
potential.
growth rate of its population.
● Exists alongside unutilized and underutilized manpower and
unexploited natural resources.
Capability Approach (Amartya Sen)
Developing Economy
● Defined by its focus on the moral significance of individuals’
● Countries showing high growth rates are termed developing
capability of achieving the kind of lives they have reason to value.
economies. Examples: Philippines, Vietnam, Indonesia, Brazil.
● Focuses directly on the quality of life that individuals are actually
able to achieve ‘functionings’ and ‘capability’. Economic Growth vs Economic Development
● Capability set of valuable functionings that a person has effective
access to. Economic Growth Economic Development
● Functionings - ‘being and doing’ such as being well-nourished, Increase in GDP Improvement in quality of life
having shelter. Quantitative measurement Qualitative improvement
Five Sources of Disparity Focus on production Focus on human welfare
1. Personal heterogeneities – differences due to disability, illness, age, Short-term economic expansion Long-term social progress
or gender. .
2. Environmental diversities – effects of pollution and diseases. Features of Economic Development
3. Variations in social climate – presence of crime and violence. ● Literacy rate
 ● Infrastructure ⮚ Is a relationship between a borrower and a lender. The borrower
● Internet access borrow money from the lender nor credit is neither capital nor its
● Academic level creates capital.
● Access to good-quality housing
● Standard of living
● Access to good-quality healthcare Nature of credit
● Transition from agriculture to industry and service sectors ⮚ Is the ability to obtain a thing of value in exchange for a promise to
pay a definite sum of money, on demand, or future determinable
Indicators of Development time.
Development may be assessed through:
Importance of Credit in the Economic Development
● Per capita income ● Purchase of Goods.
● Life expectancy ● Emergency of a New Businessman
● Education ● Increases Saving Rate
● Extent of poverty ● Shifting of Capital to Productive Purposes
● Provision of Working Capital
The Human Development Index (HDI)
● Introduced in 1990 by the United Nations Development Ex. of Savings
Programme (UNDP). If a household earns ₱20,000 per month and spends ₱18,000, the remaining
● Measures economic development in three broad areas: ₱2,000 is considered savings.
1. Per capita income Ex. of Credit
2. Health A business owner borrows money from a bank to buy equipment for expanding
3. Education the business.
● Tracks changes in development levels over time.
World Bank Organization - An international development organization owned
HDI Main Features by 187 countries. Its role is to reduce poverty by lending money to the
● A scale from 0 (no development) to 1 (complete development). governments of its poorer members to improve their economies and to
● An index based on three equally weighted components. improve the standard of living of their people.

HDI Categories Asian Development Bank (ADB)

ADB supports projects in developing member countries that create
● Very High Development: 0.8 and above
economic and development impact
● High Development: 0.7 – 0.79
● Medium Development: 0.5 – 0.69
● Low Development: 0 – 0.49 AGRICULTURE AND INDUSTRIALIZATION

AGRICULTURE - lays the foundation for economic development by supplying

HDI Dimensions & Indicators essential resources and livelihoods

INDUSTRIALIZATION

⮚ builds upon this base, adding value, efficient, and innovation. It

transforms them into finished goods, driving economic growth,
employment, and technological advancement.
⮚ efficient transportation is needed to avoid spoilage of agricultural
products especially the perishables such as fruits and vegetables.

Importance of Industrialization

 Increases productivity through the use of machines and technology

HDI Calculation  Creates employment opportunities
● HDI Dimension Indexes: Life Expectancy Index, Education Index, GNI  Raises national income and economic growth
Index  Promotes technological innovation
● Formula for Health & Education Index  Improves the standard of living of people
● Formula for Income Index (using a logarithm)
● Aggregation Formula for HDI
INDUSTRIALIZATION IN AGRICULTURE- Agricultural development and
Limitations of HDI industrialization depend on each other.
 It does not measure income inequality.
 It does not include environmental sustainability. Challenges of Industrialization
 It does not reflect political freedom and human rights.
 Environmental pollution
Because of these limits, the UNDP also created related indices such as:
 Rapid urbanization and overcrowding
 Inequality-adjusted HDI (IHDI)
 Depletion of natural resources
 Gender Development Index (GDI)
 Income inequality between urban and rural areas
SAVINGS AND CREDITS
Savings INDUSTRIALIZATION AND THE PHILIPPINES
⮚ Whatever is remaining of the national income after deducting its
total consumption. Industrialization in the Philippines includes the development of
National Savings Rate manufacturing industries such as electronics, food processing, and garment
⮚ Determines how much new wealth that nation is creating during a production.
year.

Importance of Savings to the Economy

1. Savings are important to economic growth and wealth preservation.

2. Government and individuals value savings for new investments,
capital goods production, and sustained growth.
3. Saving habits help individuals prepare for future risk and reduce
income volatility.
4. overcapacity borrowing and reliance on foreign financial resources
pose significant challenges in financing real sector investments.
5. Household savings are determined by income level,

Credit