ECONOMICS

• a science concerned with the

process or system by which
goods and services are
produced, sold and bought
ALFRED MARSHALL
• describes economics as a study
of mankind in the ordinary
business of life. It examines part of
the individual and social action
that is most closely connected
with the attainment and use of
material requisites of well being
• SCARCITY– insufficiency of
resources to meet the wants of
consumers and insufficiency of
resources for producers that
hamper enough production of
goods an services
 ECONOMICS AS A SOCIAL
SCIENCE
• Involves
the use of scarce
resources to satisfy unlimited wants
• RelativeScarcity – when a
good is scarce compared to its
demand.
• Absolute Scarcity – when
supply is limited
CHOICE AND DECISION MAKING
• Opportunity Cost – refers to the
value of the best forgone
alternative. This concept holds true
for individuals, businesses and
even a society.
 ECONOMIC RESOURCES
• Also known as factors of production
• Are the resources used to produce
goods and services
1. Land
• soil and natural resources that
are found in nature and are not
manmade. Owners of lands
receive a payment known as
rent.
2. Labor
• Physical and human effort exerted in
production.
• It covers manual workers and
professionals.
• The income received by labor is
referred to as wage.
3. Capital
• A man made resources use in the
production of goods and services,
which include machineries an
equipment. The owner of capital
earns an income called interest
 ECONOMIC AS A SOCIAL
SCIENCE
• It
studies how individuals make
choices in allocating scarce
resources to satisfy their unlimited
wants.
• It studies human behavior
BRANCHES OF
ECONOMICS
1. Macroeconomics
• A division of economics that is concerned
with the overall performance of the
economy
• About the economic growth, expansion of
productive capacity and the growth of
national income
• Focuses on the overall flow of goods and
services, causes of change in the aggregate
flow of money, the movement of goods and
services and the general employment of
resources
2. Microeconomics
• Concerned with the behavior of individual entities
such as the consumer, the producer and the
resource owner
• Concerned with the setting of prices of goods
that is also known as Price Theory
• Studies the decisions and choices of the
individual units and how this decisions affect the
prices of goods in the market. It examines
alternative methods of using resources in order to
alleviate scarcity
 BASIC ECONOMIC
PROBLEMS OF SOCIETY
1. What to produce and how much
2. How to produce
• Refers to the resource mix and
technology that will be applied in the
production
3. For whom to produce
• About the Market for the goods
 ECONOMIC SYSTEMS
• The means through which society
Determines the answers to the
basic economic problem
1. Traditional Economy
• Decisions are made on traditions and
practices upheld over the years and
passed on from generation to generation.
• Methods are stagnant and therefore not
progressive
2. Command Economy
• Authoritative system wherein decision
making is centralized in the government or
a planning committee.
• Decisions are imposed on the people who
do not have a say in what goods are to be
produced
3. MARKET ECONOMY
• The most democratic form of economic
system.
• Based on the workings of demand and
supply, decisions are made on what goods
and services to produce.
• Peoples preference are reflected in the prices
they are willing to pay in the market and are
therefore the basis of the producer’s decision
on what goods to produce
WHY ECONOMICS IS
IMPORTANT?
 EMPIRICAL TESTING OF AN
ECONOMIC THEORY
1. State the propositions or conditions that
are taken as given and do not need
further investigation, as the basic starting
point of investigation.
2. Observed facts in connection with the
activity that we want to theorize.
3. Apply the rules of logic to the observed
facts to determine causal relationships
between observed factors and to eliminate
facts that are unnecessary and irrelevant
4. Establish a set of principles such that
hypotheses may be tested as to whether
they are valid or not
5. Use statistics and econometrics as
empirical proof in testing the hypothesis
 POSITIVE ECONOMICS
VERSUS
NORMATIVE ECONOMICS
 POSITIVE ECONOMICS
• Deals with what is- things that are
actually happening such as the current
inflation rate, the number of employed
labor, and the level of the Gross
National Income
• An overview of what is happening in
the economy that is possibly far from
what is ideal
 NORMATIVE ECONOMICS
• Refers to what should be- that which
embodies the ideal rate of population
growth or the most effective tax system.
• Focuses on policy formulation that will
help to attain the ideal situation
MEASURING THE
ECONOMY
 GDP ( Gross Domestic Product)
• Defined as the market value of final pro
ducts produced within the country
• Shaping the economy’s future is changing the past
and present perspectives extended to the future.
• The heart of the economy is production whose
value measures both resource input and output of
people
• The interplay of resources and outputs tells how
well the economy has performed
 GNP ( GROSS NATIONAL PRODUCT)
• Mirror of all products
• The market value of final products,
both sold and unsold, produced by
the resources of the economy in a
given period
 GNP/GDP: EXPENDITURE
APPROACH
• One way to account GNP and classify
its components is by end-use
expenditure
 EXPENDITURE APPROACH
• Products are final when they have
reached the highest levels of processing
in the economy for different uses in the
given period of time.
GNP = C + I + G + (X – M)
• They are household and individual
consumption (C), and government
expenditure on goods and services
including labor (G) and exports (X).
Products regardless of production
stages, are also considered final when
basically stocked (unused) as capital
goods and inventories of raw
materials
capital inflow
• A net flow of capital, real and/or financial, into a country, in
the form of increased purchases of domestic assets by
foreigners and/or reduced holdings of foreign assets by
domestic residents. Recorded as positive, or a credit, in
the balance on capital account.
• is a stream of revenue that comes from investing, sales or
obtaining financing. Some examples of cash inflow are
collecting payments from customers, receiving donations
or gifts, selling property or machinery, and taking a loan
from a bank or investor.
Capital outflow
• is an economic term describing capital flowing out of (or
leaving) a particular economy. Outflowing capital can be
caused by any number of economic or political reasons but
can often originate from instability in either sphere.
• The total outgoing funds from a company in a
given period of time. Cash outflows include expenses such
as salaries, supplies, and maintenance, as well
as paying dividends or servicing any debt held by the
company. A company may be required to
seek additional financing if cash outflows exceed cash
inflows.
Net Inflow = Inflow – Outflow
to – Net Infolw = -Inflow +
Outflow
 GNP/GDP: INCOME APPROACH
• Resource uses and contribution that make up the
production stages
• As basic factors of production, resources (land,
labor, capital and entrepreneurship) add value to
products (ex. Leather) as processed into higher
forms (shoes). If all payments for reresource
contributions (rent, wage, interest and profit) went to
resource owners, GNP would simply be the sum of
all factor payments from the raw material to the final
product stage
 ACTIVITY
• Using a pie chart, show your
regular allowance for the week
and how you budget this for
your school and personal
expenses
 APPLIED ECONOMICS
• Is the application of economic theory and
econometrics in specific settings with the goal
analyzing potential outcomes
• John Neville Keynes is attributed to be the first
to use the phrase “applied economics” to
designate the application of economic theory
to the interpretation and explanation of a
particular economic phenomena
 QUIZ
(CHAPTER 1)
I. Write MIC if it falls under
Microeconomics; MAC if it falls under
Macroeconomics
1. The inflation rate in the Philippines in the
last quarter of 2013 was 4.8%
2. A P340-billion deficit in the Philippine
budget is expected in the year 2015
3. Prices of Toyota vehicles are predicted to
go up in December
4. Garlic prices in the past months have
risen because producers hoarded their
supplies in their bodegas
5. Unemployment rate has dropped
because of the increase in the number of
OFWs
6. In the past year, Coca Cola was named
the fastest selling product in the market
7. Rental on land could not be increased by
landowners because of the Rent Control
Law
8. Prices of apples and grapes tend to
increase during the Christmas season
9. The Philippine economy grew at the rate
of 5.8% in 2013
10. Philippine congress passed the Value
Added Tax Law to strengthen the Philippine
Tax system
II. Describe the type of economic system
(Traditional, Command, Market)
characterized in each of the following:
1. Prices are based on demand and supply
2. The government decides on what goods
should be produced
3. Ancient methods are used in deciding
what goods to produce
4. People enjoy freedom of choice in
arriving at decisions on what to buy
5. People have no freedom of choice in
arriving at decisions on what to buy
6. Economy is stagnant, making use of
practices in the olden times
7. Economy is backward because no new
technology or production methods are
introduced
8. It is the most democratic form of
economic system
9. People’s preferences are reflected in the
prices they are willing to pay in the market
10. It exists in primitive and backward
civilizations
III. Identify which resource ( Land, Labor,
Capital) is referred to by the following
words:
1. Entertainers
2. Minerals
3. Forest
4. Marine Resources
5. Teachers
6. Technology
7. Production equipment
8. Engineers
9. Call center Agents
10. Business proprietor
IV. Identify the following being referred to
1. Insufficiency
of resources to meet the
wants of consumers and insufficiency of
resources for producers that hamper
enough production of goods an services
2. Refers
to the value of the best forgone
alternative.
3. The income received by labors
4. The earnings of an owner of capital
5. Payment receive by the owners of land
6. The market value of final products, both
sold and unsold, produced by the resources
of the economy in a given period
7. Defined as the market value of final
products produced within the country
8. The heart of the economy
9. Focuses on policy formulation that will
help to attain the ideal situation
10. Concerned with the process or
system by which goods and services are
produced, sold and bought
APPLICATION OF DEMAND AND
SUPPLY
 THE MARKET
• Is an interaction between buyers and
sellers of trading or exchange.
• It is where the consumer buys and
seller sells
Good Market
• The most common type of market
because it is where we buy consumers
goods
Labor Market
• Is where workers offer services and look
for jobs, and where employers look for
workers to hire
Financial Market
• Which includes the stock market where securities of
corporations are traded
 The market is important because it is where a
person who has excess goods can disposed them
to those who need them. This interaction should
lead to an implicit agreement between buyers and
sellers on volume and price.
 In a purely competitive market (similar products),
the agreed price between a buyer and seller is also
the market price or price for all
 DEMAND
• The willingness of a consumer to buy a
commodity at a given price.
• A demand function shows how the
quantity demanded of a good depends
on its determinants, the most important of
which is the price of the good itself, thus,
the equation:
Qd = f(P)
 INCOME EFFECT
• Is felt when a change in the price of a
good changes consumer’s real income or
purchasing power, which is the capacity
to buy with a given income. In other
words it is the volume of goods and
services one can buy with his or her
income
 SUBSTITUTION EFFECT
• Is felt when a change in the price of a
good changes demand due to alternative
consumption of substitute goods
 THE LAW OF DEMAND
As price increases, the quantity
demanded for that product decreases.
“Ceteris paribus”
• which means all other related
variables except those that are
being studied at the moment and
are held constant
 NON-PRICE D
ETERMINANTS OF DEMAND
• Include income, taste, expectations,
prices of related goods, and population
• Can cause an upward or downward
change in the entire demand for the
product and this change is referred to as
a shift of the demand curve

D = f (P, T, Y, E, PR, NC)

 SUPPLY
• Refers to the quantity of goods that a
seller is willing to offer for sale
 LAW OF SUPPLY
• As the price increases, the quantity
supplied of that product also increases
 NON-PRICE DETERMINANTS OF SUPPLY
• Non-price factors are cost of
production, technology, and
availability of raw materials and
resources
 These non-price determinants can
cause an upward or downward
change in the entire supply of the
product
 SHIFT OF THE SUPPLY CURVE
 Supply function:
S = f(P, C, T, AR)
Where the supply (S) of a good is a function
of the price of that good (P), the cost of
production (C), technology (T) and the
availability of raw materials and resources
 COST OF PRODUCTION
• Refers to the expenses incurred to produce
goods
 An increase in cost will normally result in a
lower supply of the good even when price
will not change since the producer has to
shell out more money to come up with the
same amount of output. With the same
budget and a higher cost, the producer will
only produce a smaller amount of the good,
and therefore, the supply of the good in the
market will decrease
 TECHNOLOGY
• Another significant non-price determinant
of demand. The use of improved
technology in the production of a good will
result in the increase supply of that good.
 AVAILABILITY OF RAW MATERIALS AND
RESOURCES
• Improved availability of raw materials and
resources will result to a bigger output of
good, then supply increases
 DEMAND AND SUPPLY IN
RELATION TO THE PRICES OF
BASIC COMMODITIES
 MARKET EQUILIBRIUM
 If the forces of demand and supply
operate together, we can show how
price is determined in a market
economy.
EQUILIBRIUM
• Is a state of balance when demand is
equal to supply
Equality means that the quantity that
sellers are willing to sell is also the quantity
that buyers are willing to buy for a price
• As a market experience, it is an implicit
agreement between how much buyers
and sellers are willing to transact
EQUILIBRIUM PRICE
• The price at which demand and supply
are equal
• The price of good in the market
 Market equilibrium is attained at the point
of intersection of the demand and supply
curves
 Demand Good X Supply Schedule
Schedule of Price of Good X
P2 59 15
4 58 25
6 57 35
8 56 45
10 55 55
12 54 65
14 53 75
•
• Equilibrium quantity is attained where
Qd = Qs
• Equilibrium quantity is 55 since quantity
supplied and quantity demanded are
both 55 at the price of P10, which is the
equilibrium price
EXAMPLE OF DETERMINATION
OF MARKET EQUILIBRIUM
• Assume a demand and a supply function
as the following:
P = 50 – 2Qd (Demand)
P = 20 + 4Qs (Supply)
Where:
P = price Qd = Demand Qs = Supply (Thou)
APPLICATION OF DEMAND
AND SUPPLY IN RELATION
TO HOUSING SHORTAGE
ELASTICITIES OF DEMAND
AND SUPPLY
 ELASTICITY
• The degree of response to change
• Is a measure of how much buyers and
sellers respond to changes in market
conditions
In terms of how responsive demand and supply are,
degrees of elasticity may either be:
1. ELASTIC
• A change in a determinant will lead to a
proportionately greater change in demand or
supply
• The absolute value of the coefficient of elasticity is
greater than 1
 Ex. If the price of LPG increases by 10% and as a
result the quantity demanded goes down by 12% ,
then we say that the demand for LPG is elastic
2. INELASTIC
• A change in determinant will lead to a
proportionately lesser change in demand or
supply
• The absolute value of the coefficient of
elasticity is less than 1
 Ex. Suppose the price of cellphone load goes
up by 5% and the quantity demanded goes
down by 3%, then we can say that demand
for cp load is inelastic
3. UNITARY ELASTIC
• A change in determinant will lead to a
proportionately equal change in demand or
supply.
• The absolute value of the coefficient of
elasticity is equal to 1
 Ex. The price of string beans goes down by
6% and as a result the quantity demanded
goes up by 6% also, we describe the
demand for string beans as unitary elastic
TYPES OF ELASTICITY OF
DEMAND
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Price Elasticity of
Demand
1. PRICE ELASTICITY OF DEMAND
• (PED or Ed) is a measure used in
economics to show the responsiveness,
or elasticity, of the quantity demanded of
a good or service to a change in its price,
ceteris paribus.
 The value of price elasticity may be
measured in two ways:
A. ARC ELASTICITY
• The value of elasticity is computed by
choosing two points on the demand
curve and comparing the percentage
changes in the quantity and the price
on those two points
Ep = {(Q2- Q1)/(Q2 + Q1/ 2)}÷
{(P2 – P1)/P2 + P1 / 2)}
Where:
Q2 = new quantity demanded
Q1 = original quantity demanded
P2 = new price of the good
P1 = original price of the good
B. POINT ELASTICITY
• Measures the degree of elasticity on a
single point on the demand curve.
Changes on a single point are
infinitesimally small.
Ep = {Q2 – Q1)/Q1} ÷ {(P2 – P1)/P1}
• Using the following demand function, solve for the
demand and supply and complete the table:
• Qd = 60 – P/2 Qs = 5 + 5P
Prices 14Qd Qs

P0

10

12

14

16
 Assuming that Robert, a buyer and
Rudolph a seller
A. Construct the supply curve of Rudolph
and put it in a graph with Robert’s
demand curve
B. Assuming that Rudolph is the only seller
and Robert is the only buyer in the
market, identify the equilibrium price and
quantity.
PRICE ELASTICITY OF SUPPLY
• Determines whether the supply curve is
steep or flat. A steep signifies high degree
of elasticity or ability to change, while a
flat curve indicates an inability to change
in response to a change in the price of the
good. Goods that are easy to produce
and which are hard to make have
inelastic supply
 MARKET STRUCTURE
• Refers to the competitive environment
in which buyers and sellers operate
 COMPETITION
• Is a rivalry among various sellers in the
market.
 MARKET
• Is a situation of diffused, impersonal
competition among sellers who
compete to sell their goods and
among buyers who use their
purchasing power to acquire the
available goods in the market
• Factors affecting the degree of competition
in the market:
1. Number and size of buyers and sellers
2. Similarity or type of product bought abd sold
3. Degree of mobility of resources
4. Entry and exit of firms and input owners
5. Degree of knowledge of economic agents
regarding prices, costs, demand and supply
condition
 PERFECT COMPETITION
• Implies an ideal situation for the buyers
and sellers
CHARACTERISTICS O A
PERFECT COMPETITIVE
MARKET
1. There are so many buyers and sellers hat
each has a negligible impact on market
price
2. A homogenous product is sold by sellers,
which means the products are highly
similar in such a way consumers will have
no preference in buying from one seller
another.
3. Perfect mobility of resources refers to the
easy transfer of resources in terms of use or
in terms of geographical mobility
4. There is perfect knowledge of economic
agents of market conditions such as present
and future prices, costs and economic
opportunities
5. Mark price and quantity of output are
determined exclusively by forces of
demand and supply
 IMPERFECT COMPETITION
• When one or more of the assumptions of
perfect competition will not be met
• No individual decision-maker can
significantly affect the price of the
product by changing the quantity it buys
or sell. Thus the seller is a price taker and
has to follow the market price in selling
his/her good
TYPES OF IMPERFECTLY
COMPETITIVE MRKET
1. MONOPOLY
• Exists when a single firm that sells in that
market has no close substitutes.
• Monopoly can exist for the ff. reasons:
1. A single seller has control of entire supply
or raw materials
2. Ownership of patent or copyright is
invested in a single seller
3. The producer will enjoy economies os
scale, which are savings from a large range
of outputs
4. Grant of government franchise to a single
firm
• The firm is free to determine its output
level and its price. Once the firm
determines its output level, it is also
determines its price; it is thus a price setter
 MONOPOLISTIC COMPETITION
• Products are differentiated and entry and
exit are easy
• Allows variety of choices
• Since many firms exist in the market,
consumers also have the freedom to
choose from whom to buy the good
OLIGOPOLY
• Is a market dominated by a small number of
strategically interacting firms
• Few sellers account for most of or total production
since barriers to free entry make it difficult for new
firms to enter
 Oligopolies may enter due to the existence of barriers,
which may include economies of scale, reputation of
the sellers and strategic and legal barriers such as the
grant of patents/franchises, loyal following of
costumers, huge capital investments, and specialized
input and control of supply of raw materials by a few
producers
 SIGNIFICANCE OF THE MARKET
STRUCTURE
• The type of market structure in which the
business operates will determine the
amount of market power or control the
business owner will enjoy. Greater market
power means a greater ability to control
prices, differentiate the products one
offers for sale, thus leading to
opportunities fore more profits
SUPPLY-DEMAND AND THE
PHILIPPINE LABOR MARKET
 LABOR SUPPLY, POPULATION
GROWTH AND WAGES
Population- the source of labor supply
Labor Supply
• Also known as the labor force
• Refers to the portion of the population, 15
year old and over who are willing and able
to work including those who are actively
seeking work but have not found work and
those who are employed
• They are likewise other people who are
excluded from the labor force such as full
time housewives or househusbands,
fulltime students, those who are physically
and mentally disabled and therefore
cannot work, as well as those who do not
wish to work and are not actively seeking
for work
• The country’s labor supply is vital to the economy, since
their contribution to production of goods and services
determines the value of the country’s Gross Domestic
[Link] 2014 as of April, Philippine labor force was
reported at 41.6 million, with an estimated 38.7 million
total employed persons in July 2014, translating to an
employment rate of 93.0%. Of these number of employed
people,60% were males and the largest number of
employed persons consisted of the age group 25 to 34
years with 26.4% of the total employed. Fifty percent of
employed persons were in the services sector. Laborers
and unskilled workers comprised one-third of the
employed persons. Wage and salary workers were
regisyered at 57.5%
• Full time workers are those who are work 40 hours or more
while part-time workers work for less than 40 hours. In
April 2014, full time workers comprised 59.3% of the total
employed. Employment growth in large enterprises in
Metro Manila continued to be positive at 1.02% during the
fourth quarter of 2014 but this reflected a marked
slowdown compared with the same quarter of the
previous year at 3.22%. The country’s labor force grew by
an average of 2.5% or an addition of 962,000 persons in
2014. This placed the total working population in the
active workforce at 40.1 [Link] figure corresponds to
a higher labor force participation rate (LFPR) of 64.4% than
last year’s 63.9%. (Labor Force Survey NSO 2015)
 THE PHILIPPINE POPULATION
• The Philippine census is an official count of
the population of a certain local
administrative unit in the Philippines
• The population of the Republic of the
Philippines reached more than 100 million
people in 2014, registering an increase of
2.0% versus the previous year. The
population of the Philippines represents
1.38% of the worlds total population among
the 3 biggest regions
 SUMMARY OF PROJECTED POPULATION, BY FIVE-YEAR
INTERVAL PHILIPPINES: 2000-2040 (MEDIUM ASSUMPTION
Year Both Sexes Male Female
2000 76, 946, 500 38, 748, 500 38, 198, 000
2005 85, 261, 000 42, 887, 300 42, 373, 700
2010 94, 013, 200 47, 263, 600 46, 749, 600
2015 102, 965, 300 51, 733, 400 51, 231, 900
2020 111, 784, 600 56, 123, 600 55, 661, 000
2025 120, 224, 500 60, 311, 700 59, 912, 800
2030 128, 110, 000 64, 203, 600 63, 906, 400
2035 135, 301, 100 67, 741, 300 67, 559, 800
2040 141, 669, 900 70, 871, 100 70, 798, 800
How population growth over the years affected the
Filipino’s quality of life. Based from the table from 2000
to 2005, which are the census years, population
increase by approximately 8 million Filipinos. In 2005
to 2010, the increase approximately 9 million Filipinos.
From 2010 to 2015, it is estimated that close to 9
million will be added to the total population. It means
that more Filipinos mean more mouth to feed; thus,
demand for products and services will naturally
increase. If the supply of these goods does not
increase as fast as the demand , their prices will
naturally increase.
• Housing, school buildings, healthcare, and
food may no longer be sufficient to meet
the needs of the growing population
AVERAGE ANNUAL GROWTH RATES,
PHILIPPINES: 2000 - 2040
YEAR GROWTH RATE
2000 – 2005 2.05
2005 – 2010 1.95
2010 – 2015 1.82
2015 – 2020 1.64
2020 – 2025 1.46
2025 – 2030 1.27
2030 – 2035 1.09
2035 - 2040 0.92
• While population growth is increasing, the rate
of growth of population has however been
declining, and is expected to decline further
over the next 25 years,
 NCR AS OF APRIL 4, 2015
(IN PESOS)
Sector or Industry Basic Wage Basic Wage New Basic COLA New
Increase Wage Minimum
Wage Rates
Non Agriculture 451.00 15.00 466.00 15.00 481.00

Agriculture (Plantation and Non 414.00 15.00 429.00 15.00 444.00

Plantation

Private Hospitals with bed 414.00 15.00 429.00 15.00 444.00

capacity of 100 or less

Retail/Service Establishments 414.00 15.00 429.00 15.00 444.00

employing 15 workers or less

Manufacturing establishments 414.00 15.00 429.00 15.00 444.00

regularly employing less than 10
workers
1. The willingness of a consumer to buy a commodity
at a given price.
2. Refers to the quantity of goods that a seller is willing
to offer for sale
3. It is where the consumer buys and seller sells
4. Is where workers offer services and look for jobs,
and where employers look for workers to hire
5. The most common type of market because it is
where we buy consumers goods
Characteristics are:
1. Action of each firm affects other firms
and
2. Interdependence among firms
6. which means all other related variables except
those that are being studied at the moment and are
held constant
7. As price increases, the quantity demanded for that
product decreases.
8. As the price increases, the quantity supplied of that
product also increases
9. Refers to the expenses incurred to produce goods
10. Means that the quantity that sellers are willing to
sell is also the quantity that buyers are willing to buy
for a price
11. Is a state of balance when demand is equal to
supply
12. The price at which demand and supply are equal
13. The degree of response to change
14. Measures the degree of elasticity on a single point
on the demand curve
15. The value of elasticity is computed by choosing
two points on the demand curve and comparing the
percentage changes in the quantity and the price on
those two points
16. Attained at the point of intersection of the demand
and supply curves
17. Is a rivalry among various sellers in the market.
18. Refers to the competitive environment in which
buyers and sellers operate
19. Is a situation of diffused, impersonal competition
among sellers who compete to sell their goods and
among buyers who use their purchasing power to
acquire the available goods in the market
20. Implies an ideal situation for the buyers and sellers
QUARTER 2
 INDUSTRY AND
ENVIRONMENTAL
ANALYSIS: BUSINESS
OPPORTUNITY
IDENTIFICATION
 PRINCIPLES, TOOLS AND TECHNIQUES
BUSINESS
• A small portion of an industry
• It is an undertaking by a person or a group of
persons who are partners, or of stockholders
who own a juridical entity known as
corporation
INDUSTRY
• Is the aggregation of the different
businesses engaged in the same line of
undertaking.
• For example:
Celine is a business firm that is a part of
the countrys shoe industry
• For a person to put up a business, it is
essential that an industry analysis first
be made. Commonly used is a system
known as the SWOT analysis, which lists
the strengths, weaknesses,
opportunities and threats that the
business faces
 BUSINESS
ORAGANIZATION
FOUR WAYS TO FORM A
BUSINESS
1. SOLE PROPRIETORSHIP
• Simplest way to set up a business
• Owned by a single individual who is singly
responsible for running the business and is
accountable for all debts and obligations
related to the business.
• Enjoys exclusive control and decision
making as well as gets all the profits earned
but he also shoulders all losses and has
unlimited liability which means payment of
his loans will extend to his personal asstes
2. PARTNERSHIP
• An agreement in which two or more
persons combine their resources in a
business with a view to making profit
• Agreement is drawn up and profits are
divided among the partners according to
the terms of agreement
TWO TYPES OF
PARTNERSHIP
A. THE GENERAL PARTNERSHIP
• All owners share the management of the
business and each is personally
responsible for and must assume the
consequences of the actions of the other
partners
• Have unlimited liability which means loan
payments will extend their personal
property
B. THE LIMITED PARTNERSHIP
• Some members are general partners who
control and manage the business and
may be entitled to a greater share of the
profit while other partners are limited and
contribute only capital, take no part in
control or management, and are liable for
debts to a specific extent only
[Link]
• Is a legal entity that is separate from its
owners, the shareholders.
• No shareholder is personally liable for the
debts, obligations, or acts of the
corporation
• Directors and officers can bear liability for
their involvement with the corporation
• The legal entity of the corporation gives it
an individual identity of its own.
• Normally can exist for a life of 50 years,
which is renewable for another 50 years.
• Owners have limited liabilities, However,
corporations are burdened by heavy
taxes
4. COOPERATIVE
• Is an entity organized by people with similar
needs to provide themselves with goods and
services or to jointly use available resources
to improve their own income
• Members have an equal say in decision-
making with one vote per member
regardless of number of shares held, there is
open and voluntary membership and surplus
earning is returned to the members
according to the amount of their patronage
 SMALL, MEDIUM AND LARGE SCALE
BUSINESS
• It is also important to study classification
of business as to the size based on the
worth of the business assets. In the
Philippines, total assets for micro business
are worth below
P1 500 001. For the small business, total
assets are from P1 500 001 to P15 000 000.
• Medium business has total assets from P15
000 001 to P60 000 000. Any business with
assets in excess of P60 000 000 is
considered large scale
• For any form of business organization, the
business must be registered with the
appropriate government agencies. In the
case of sole proprietorship and partnership,
100% must be owned and capitalized by
Filipinos. For corporations, at least 60% of the
outstanding capital stocks must be owned by
Filipino citizens. Business activity conducted
may be within major sectors of industry,
services, practice of profession or operation of
tourism-related business and agri-business
 TOOLS IN
EVALUATING A
BUSINESS
 FACTORS TO
CONSIDER IN
ANALYSING THE
INDUSTRY
1. The geographic area which your
business will cater to
2. The size and outlook of the industry
3. Description of the product
4. The buyers have to be identified
5. The regulatory environment
6. The need to identify the leading
the business in the industry, and to
provide company information on
the most successful business that
you will be up against
7. Factors that will affect the growth
of the business
 THE SWOT ANALYSIS
S – Strength
W – Weaknesses
O – Opportunities
T - Threats
• Was created in the 1960s by business
gurus, Edmund P. Learned, C. Roland
Christensen, Kenneth Andrews and
William D. Book in their book, Business
Policy, Text and Cases (Irwin)1969)
• Is an analytical framework that can help
a company meet its challenges and
identify new markets. The framework can
help identify the business’s risk and
rewards
INTERNAL FACTORS
OF SWOT ANALYSIS
1. Financial resources such as money and
sources of funds for investment
2. Physical resources, such as the company’s
location, facilities, machinery and equipment
3. Human resources consisting of employees
4. Access to natural resources, trademark,
patents and copyrights
5. Current processes, such as employee
programs, department hierarchies and
software systems, sales and those outside their
control
 EXTERNAL FORCES THAT
AFFECT A COMPANY, AN
ORGANIZATION, AN
INDIVIDUAL AND THOSE
OUTSIDE THEIR CONTROL
1. Economic trends including local,
national and international financial
trends, developments in the country’s
stock market, reforms in the banking
system, growth of the Gross Domestic
Product
2. Market trends, such as new products or
technology or evolving buyers’ profiles,
including changes in tastes and lifestyle
behavior
3. National and local laws and
statutes as well as political,
environmental and economic
regulations
4. Demographic characteristics of
the target market such as the age,
the gender, the culture of the
customers
5. Relationships with suppliers and
co-owners and
6. Competitive threats
• Before an owner can plan for its business’
future, he/she must first evaluate the
business by identifying and analyzing
internal and external resources and
threats. The SWOT analysis is a tool that
can help a proponent by enabling him
/her to identify and assess the internal
and external forces that can affect the
business. When used properly and
regularly, this can serve as guide for the
company to attain success.
• It is a guide to prepare for a new venture,
design business strategies and identify
areas of change and reform. When used
properly, the business owner can
anticipate problems, including possible
solutions and take advantage of identified
opportunities. The owner can maximize its
strengths and attempt to cut its weakness.
1. SWOT ANALYSIS
TEMPLATE
 STRENGTH WEAKNESSES
• Government incentives • Difficulty of organization
• Low capital requirements • Costly set-up
• Market acceptance • Possible pollution problems
• Experienced leaders • Lack of training of workers
OPPORTUNITIES THREATS
• Project may replace • Entry of competitors
imported good • Time consuming production
Available in the market processes
• Will improve employee • Opposition from residents in
welfare the community
• Improved company
reputation
 2. PORTER’S FIVE FORCES OF
COMPETITIVE ANALYSIS
• It was developed in 1979 by Michael E.
Porter of Harvard Business School as a
framework or a guide for assessing and
evaluating the competitive strength and
position of a business organization
Under Porter’s theory, he identifies five forces
that determine the competitiveness of a market
and which seek to locate the power in a
business situation, its current competitive
position and the strength of a position that an
organization may enter into. These five forces
help in identifying if new products or services
are potentially profitable. Once the area where
power lies is identified, then areas of strength
can be pinpointed and exploited, solutions to
weakness may be proposed, and possible
mistakes avoided
 Threat of new entrants

Bargaining power Rivalry among existing Bargaining power

of supplies competitors of buyers

Threat of substitute
Products or services
FIVE FORCES THAT NEED
TO BE EVALUATED
1. SUPPLIER POWER
• A supplier enjoys this power if there are a
few suppliers of an essential input and
they therefore control the supply of that
input.
• Another source of power is how unique
the product or service is. The more unique
the product, the easier it is for the supplier
to drive up the price
• In the same manner, a supplier who has a
relatively bigger size and strength in the
market enjoys the power of driving up
prices. The magnitude of the cost of
switching from one supplier to another is
likewise a factor such that when cost of
switching is high, buyers of suppliers
would prefer to stick it out with one
supplier thus, giving the supplier the
power of raising prices
2. BUYER POWER
• If a supplier can enjoy the power to drive
up, it is also possible for a buyer. An
assessment needs to be made on of how
easy it is for buyers to drive prices down.
• The smaller the number of buyers in the
market, the greater is the power enjoyed
by the buyer. Likewise, the more
important an individual buyer is to the
organization the greater his power is.
• The buyer’s cost of switching from one
supplier to another is also a
determinant of the extent of the
buyers’ power to bring prices down. If
cost is minimal, then it will be easy for
the buyer to switch to another supplier
and bargain on lower prices of the
input.
3. NUMBER OF COMPETITORS
• Will also impact on the attractiveness of
the market
• If competitors are numerous, and offer
basically similar products and services,
the market will be less attractive.
• Low capability of competitors to meet the
market current needs will serve as an
attractive opportunity for the firm
4. POSSIBILITY OF SUBSTITUTION
• When it is easy to substitute products in a
market, it is expected that buyers will
switch to alternatives in case of price
increases. The suppliers will enjoy less
power to drive prices up and the market
will be less attractive.
5. POSSIBILITY OF NEW ENTRANTS
• When investors see that a market is profitable,
they will desire to join the bandwagon and
get a share of the profits. But when new
investors enter a market , the share of the
participants in the market will be divided
among more people and will therefore
decline , thus, eroding profits. However, if
barriers to entry prevent new participants
from entering the market, profits will be
maintained among the existing participants
 IMPORTANCE OF PORTER’S FIVE
FORCES ANALYSIS
• Is a significant tool for organizations to
understands the factors affecting
profitability in a specific and can help to
form decisions on whether or not to enter a
specific industry, whether or not to
increase capacity in a specific industry
and also for developing competitive
strategies
• Under this theory, a business becomes
more attractive, the greater the supplier’s
power to drive prices up, the less the
buyer’s to drive prices down, the less the
number of competitors in the market, the
more differentiated the product or service
is, the less the substitutability of the
products for similar goods and the more
difficult it is for new entrants to participate
in the market. (Chartered Global
Management Accountant 2015)
 FACTORS TO
CONSIDER IN
INDUSTRY ANALYSIS
1. COMPETITION
• Who are the major business in the
industry? Have they been long existing or
still new entrants? What is the market
share of each of these businesses?
• It is very important that you know your
competitors and be ready for them. Your
aim is to win their costumers, convince
them to buy from you and remain as loyal
costumers
2. COSTUMERS
• Who will you sell your product? Who
exactly will buy your product? What
income group? What age brackets? What
gender? What career groups? What type
of people you cater to, based on their
preferences, lifestyles and buying habits?
3. SUPPLIERS
• Whom one can source raw materials,
intermediate products or even the finished
goods one intends to resell
• A business owner can buy directly from the
manufacturers. This will be the cheapest
source, since there are no middlemen
involved. However, this is only the
recommended if the supplier’s location is
convenient and will not involved expensive
delivery costs.
• Another alternative is to buy from
distributors. They are wholesalers or
brokers who buy in big quantities from
manufacturers, add mark-up to their
purchase price and sell to retailers. Their
prices are higher but they can sell in small
quantities, which the manufacturers would
not normally do
• A third source of good is through imports.
Some businessman go to nearby
countries to buy their goods or raw
materials there. This is advisable if the
prices abroad are relatively cheaper and
no heavy import duties will raise the
prices and make the goods less
competitive in the country and when
transport costs are not excessive.
4. SUBSTITUTES
• Are goods that can be used in place of
another. These are goods that may, even
if partly, satisfy the same needs of
consumer such that the consumer may
use one instead of another. For example,
margarine can be a substitute for butter or
wheat bread for white bread.
• The more differentiated a product is,
the greater the edge of its
manufacturer because this can be
convince the costumers to buy their
product instead of that of the
competition
 KEY FACTORS
TO BE CONSIDERED
IN ANALYZING YOUR INDUSTRY
IDENTIFIED BY SMALL BUSINESS AND
TECHNOLOGY DEVELOPMENT
CENTER (SBTDC)
1. Geographic Area
• Identify the area whether local,
regional, nationwide or international
2. Industry (as to size)
• Worth in pesos and number of firms,
trends and development and future
outlook
3. Product
• Describe the product as to physical attributes and
characteristics and its uses
4. Buyers
• Describe target customers as to age, income
group, geographical location and occupations;
include consumer demographics such as
population/household size, sex, race, ethnicity,
family status, etc.; may also include
psychographics such as lifestyle information,
tastes, preferences and buying habits
5. Regulatory Environment
• Should include government laws and
regulations that apply to the business
6. Company Information
• Make a list of the most successful
business in the industry
7. A brief history of the industry
• When it started and how it developed
8. Factors that affect growth of the industry
• Such as migration of population from rural
to urban areas
9. Trends in sales over recent years
• Show actual sales in the industry over the
past 5 years
10. Current operational/management trends
within the industry, which are standard
practices prevalent among the firms
11. The type of marketing strategies
prevalent within the industry
12. Competitor Information
• Include the location of competitors and
how long they been in business and their
market share
 ENVIRONMENTAL ANALYSIS
• This means an evaluation of the possible or
probable effects of external forces and
conditions on the survival and growth of the
business
An environmental analysis of
the environment includes a
thorough study of:
1. ECONOMIC FORCES
• Involves a look at economic factors
such as income of the people,
specifically the target market,
economic conditions such as inflation,
recession, prosperity, demand and
supply in the market
2. PHYSICAL ENVIRONMENT
• This includes a look at the population
size, the geography of the place
where business will be located, land
distribution, climate and in today’s
global warming situation, whether or
not the area is prone to flood or
earthquake
3. POLITICAL FACTORS
• The type of government, stability and
strength of the government, and good
leadership are factors that can be an
advantage to a business
4. CULTURES AND LIFESTYLES
• These are cultural practices such as
fiestas, celebration of the Christmas
season, trends in consumption
patterns, as a means to identify the
goods and services that will fit into
these celebrations and spending
behavior
5. COMPETITION
• The degree of competition in the
market and the extent and strength of
competition are all very vital in
determining the success or failure of a
business
SOCIO ECONOMIC IMPACT
STUDY
 THE THEORY OF CONSUMER
BEHAVIOR
• Describes how consumers make
decisions on what to buy
 CONSUMPTION
• Refers to the use of goods and
services to satisfy human wants
directly
THE CIRCULAR FLOW OF
ECONOMIC ACTIVITY
 CIRCULAR FLOW
• Defined as the flow of activities of
household and firms in a circular
direction.
THE SIMPLE FLOW OF GOODS
AND SERVICES
(FIGURE 3.3 BELOW)
 Business Revenues
Goods and Services
Firms Households
(Producers) (Consumers)
Resources
Land, Labor, Capital, Entrep.

Factor Income Payment

Rent, Wage, Interest, Profit
 Figure 3.4 Intra – Production Payment Flows

Raw Material Firms

Consumer Intermediate
Product Firms

Final Product Firms

Product Flow Money Payments
 RAW MATERIALS
• Are unprocessed goods like
raw minerals, logs, and wheat
which are extracted from their
sources and do not undergo
any process of production
 INTERMEDIATE GOODS
• Are semi-processed goods that are not
ready for final use by the consumer, such
as leather, cloth and steel which have
undergone some processing but need to
go through additional processing before
they can actually used. These are supplied
to final good firms for conversion into
goods in their finished stage
 FINAL GOODS
• Are goods that are ready for direct
consumption such as refrigerators,
dresses, or pants.
• These are then sold to customers for
their use
 FIGURE 3.5
RESOURCES-PRODUCTION-PAYMENT
FLOW
 Raw Materials

Household
(Resource Owners) Resources Intermediate Product
Labor, Capital, Firms
Entrepreneurship

Resources Flow Final Product Firms

Money Payments
 THE UTILITY FUNCTION
• A consumer aims to maximize the
satisfaction he/she derives from
the use of a good or a service.
• Shows the relationship between
utility and consumption
UTILITY
• The term use for satisfaction and is
something intangible
UTILS
• Unit of measure for satisfaction
UTIL
• One unit of satisfaction
 U = f(C) or U = f(X, Y)
Read as: Utility is a function of
consumption or Utility for the
consumption of goods X and Y
IMPORTANT MEASURES
OF UTILITY
1. TOTAL UTILITY
• Refers to the combined utility
derived from consuming a
certain units of a good
2. MARGINAL UILITY
• Refers to the additional utility
derived from consuming an
additional unit of good
Table 4.1. Hypothetical Utility Schedule of Marvin for
Chocolate CAndy