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APPLIED ECONOMICS
SUPPLY – the quantity of goods that a seller is willing to offer for sale

SUPPLY SCHEDULE – shows the different quantities the seller is willing to sell at various prices.

SUPPLY FUNCTION – shows the dependence of supply on the various determinants that affect it.

- The relationship between the price and supply is direct. The higher the price, the higher the quantity
supplied.

LAW OF SUPPLY – using the same assumption of “CETERIS PARIBUS” (other things constant), there is direct relationship between
the price of a good and the quantity supplied of that good.

NON-PRICE DETERMINANTS OF SUPPLY

1. COST OF PRODUDCTION
2. TECHNOLOGY
3. AVAILABILITY OF RAW MATERIALS AND RESOURCES

SHIFT OF THE SUPPLY CURVE

- Upward or downward change in the entire supply of the product caused by the non-price determinants
- The reason for a movement along the supply curve is the change in the price of the good.

SUPPLY FUNCTION: S=f (P, C, T, AR)

- The supply of good is a function of the price of the good, the cost of production, technology, and the
availability of raw materials and resources.
1. COST OF PRODUCTION – expenses incurred to produce the good. Increase in cost = lower of the supply of the good
even when price will not change since the producer has to shall 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. As reflected in the rightward shift of the supply curve.
2. TECHNOLOGY – the use of improved technology in the production of a good will result in the increased supply of that
good. The use of absolute or improper technology in production will result in a downward shift of the supply curve.
3. AVAILABILITY OF RAW MATERIALS AND RESOURCES – there’s an upward shift of the curve through improved
availability of raw materials and resources, more resources more supply produce

DEMAND ND SUPPLY IN RELATION TO THE PRICE OF BASIC COMMODITIES

MARKET EQUILIBRIUM

ALFRED MARSHALL – A British economist, defined the law of supply and demand

EQUILIBRIUM - 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 market experience, equilibrium is an implicit agreement between how much buyers and sellers are
willing to transact.
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APPLIED ECONOMICS
EQUILIBRIUM PRICE – the price at which demand and supply are equal

MARKET EQUILIBRIUM – attained at the point of intersection of the demand and supply curve

DETERMINATION OF MARKET EQUILIBRIUM

- M.E. – attained when the quantity demanded is equal to the quantity supplied

APPLICATION OF DEMAND AND SUPPLY IN RELATION TO HOUSING SHORTAGE

Pro-friends president and CEO Guillermo Choa

- the country continues supper from a shortage in mass housing that is expected to reach 6.5 million
units by 2030

Subdivision and Housing developers association (SHDA)

- Housing shortage has been a perennial problem in the country with accumulated backlog of about 3.92
million units from 2001 to 2011.
- Housing in the country is a problem of the rapid growth of the Philippine population more people will
mean a high demand for housing. The supply of houses is less than the existing demand for them since
more and more Filipinos are added in the population annually.
- There is obviously an excess of demand compared to the supply of housing even among ordinary
Filipino’s
- Since many Filipinos are middle or low income earners, they cannot afford the high cost of housing
- Other people who dream of owning their own house may opt to borrow money from financial
institution such as bank

REAL STATE LOANS

- Hard to come by for middle and low income earners and has a long process of application
- High interest rate so others rent houses
- But there are laws on rent such as the one sponsored by former Senator Jovy Lina that tend to protect
and favor the renters. This had led to reluctance on the part of owners to rent out their property thus,
further limiting housing opportunities for the Filipinos

RENT CONTROL

- Type of intervention that affects prices

- Equivalent to the setting of a price ceiling on the rent
- The government can intervene by setting rent control that is equivalent to a price ceiling it indicates
that homeowners cannot set the rent higher than the price ceiling set by the government
- However, if price ceiling in set below this equilibrium point, homeowners will be demotivated to rent
out their property such that supply will decrease and this will result in an excess of demand over the
supply of housing, making it ever more difficult for people to buy their own houses

ELASTICITIES OF DEMAND AND SUPPLY

ELASTICITY – degree of their response to a change

- Measure of how much buyers and sellers respond to changes in market condition

COEFFICIENT OF ELASTICITY
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APPLIED ECONOMICS
- Number obtained when the percentage in demand is divided by the percentage change in the
determinants will lead to a proportionally equal change in demand or supply. The absolute value of the
coefficient of elasticity is equal to one.

THREE TYPES OF ELASTICITY OF DEMAND

1. Price elasticity of demand – responsiveness of demand to a change in the price of the good. The concept of elasticity
is measured in percentage change. The value of price elasticity is measured in two way
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 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

Normally, coefficient of the price elasticity of demand has a negative sign because it reflect the inverse relationship between
price and the quantity demanded.

B. Point elasticity – measures the degree of elasticity on a single point on the demand curve. Changes on a
single point are in finitesimally small
Ep = {(Q2 – Q1) / Q1 } ÷ {(P2 – P1) / P1)

Price elasticity is important to the seller since it gauges far demand can change relative to price. The price elasticity of demand
measures how far consumers are willing to buy a good especially when its price rises reflective of the economic, social, and
psychological forces shaping consumer preference.

2. Income elasticity of demand

- Measures how the quantity demanded changes as consumer’s income changes. Income elasticity of
demand is equal to (percent change in quantity demanded) / (percent change in income)
- A positive sign for IE signifies that the good demanded is a normal good, which is what a consumer
tends to buy more when hi income increase.
- Negative sign indicates the demand for inferior goods, which are goods are bought when incomes are
low because low incomes prevent the consumers from buying higher priced goods.
3. Cross price elasticity of demand
- Measures how quantity demanded changes as the price of related good changes.
- CROSS ELASTICITY (CE) – measures the responsiveness of the demand for a good to the change in the
price of a substitute good or complement
- Positive CE signifies that the two goods involved are substitute goods with means that as the price of
the substitute good increase, the demand for the other good will increase (example: rice and bread .
price of bread increase, rice will substitute bread, demand for rice increase).
- Negative CE indicates that the two goods are complements, which means that the demand for a good
will increase when the price of the complement decreases (example: cellphone and cellphone loads,
price of the CP loads increase, demand of the CP decrease)

PRINCIPLES, TOOLS AND TECHNIQUE

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APPLIED ECONOMICS
BUSINESS – just a small portion of the industry

INDUSTRY – aggregation of the different business engage in the same line of undertaking

BUSINESS ORGANIZATION

1. Sole proprietorship – owned by a single individual who is singly responsible for running the business and is countable
for all debts and obligation related to the business
2. Partnership – agreement in which two or more person combine their resources in a business with a view to making
profit.
Two types
A. General partnership – all owner share the management of the business and each is personally responsible for
and must assume the consequences of the actions of the other partners
B. Limited partnership – some members are general partners who control and manage the business and maybe
entitled to a greater share of the profit while other partners are limited and contribute only capital.
3. Corporation – legal entity that is separate from its owner, the shareholders. No shareholders is personally liable for
the debts, obligation, and involvement with the corporation.
4. Cooperative – entity organized by people with similar needs to provide themselves with goods or services or to jointly
use available resources to improve their income.

SMALL, MEDIUM AND LARGE SCALE BUSINESS

 Philippines total assets for micro business are worth below 1,500,001 pesos
 Philippines for the small business, total assets are from 15,000,001 to 60,000,000 pesos
 Philippines for the large business, total assets excess of 60,000,000 pesos
 Business must be registered with the appropriate government agencies
 Sole proprietorship and partnership in this case 100% must be owned and capitalized by Filipino’s.
 Corporation in this case, at least 60% of the outstanding capital stocks must be owned by Filipino citizen

Business activity conducted within:

1. Major sector industry

2. Services
3. Practices of profession
4. Operation of tourism-related business and agri-business

Tools in evaluating business

- According to guide developed by North Carolina’s Small Business and Technology Development Center, the key factor
that must be considered in analyzing the industry are the following:
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 business in the industry and provide company on the most successful that
you will be up against
7. Factor that will affect the growth of the business

SWOT ANALYSIS

- Created 1950 by business Gurus)

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APPLIED ECONOMICS
- Edmund P. Learned
- C. Roland Christenson
- Kenneth Andrews
- William D. Book

(STRENGHT, WEAKNESS, OPPORTUNITIES, THREATS)

- It is an analytical framework that can help a company meet its challenges and identify new market

STRENGHT AND WEAKNESSES – actually referring to the internal factors and these are the resources and experiences readily
available to business proponents. It includes financial resources, physical resources, human resources, natural resources,
trademarks, patents and copyright, current processes, such as employee programs, department hierarchies and etc.

OPPORTUNITIES AND THREATS – are the external factors where in these are those that affect a company, an organization, an
individual, and those outside their control. This may include economic trends, market, national and local laws and states as well
as political, environmental, and economic regulations, demographic characteristics of the target market, relationship with
supplier and co-owners, and competitive threats.

SWOT ANALYSIS

- Tools that can help a proponents by enabling him or her to identify and asses the internal and external forces that can
affect the business.
- Can serve as a guide for the company to attain success
- Guide to prepare a new venture design, business strategies, and identify areas of change and reform.

SWOT ANALYSI TEMPLATE

STRENGHT

 Government incentives
 Low capital requirements
 Market acceptance
 Experience leaders

WEAKNESSES

 Difficulty of organization
 Costly set-up
 Possible pollution problems
 Lack of training of workers

OPPORTUNITIES

 Project may replace imported good available in the market

 Will improve employee welfare
 Improve company reputation

THREATS

 Entry of competition
 Time consuming production processes
 Opposition from resident in the community

PORTERS FIVE FORCES OF COMPETITIVE POSITION ANALYSIS

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APPLIED ECONOMICS
- Another analytical tool that can be used to assess a business
- It was developed in 1979 by Michael E. Porter of Harvard Business School as a framework or guide for assessing and
evaluating the competitive strength and position of business organization
- Under Michael’s theory, he identifies five forces that determine the competitiveness and attractiveness of a market
and which seek to locate the power in a business situation its current competitive position that an organization may
enter into.

FIVE FORCES

1. Supplier forces – important to assess how much power the supplier has in his ability to drive up prices. 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 services.
2. Buyer power – if a supplier can enjoy the power to drive prices up, it is also possible for a buyers in the market, the
greater is the power enjoyed by the buyer. Likewise, the more important an individual buyer is to organization, the
greater his power is.
3. Number of competitors – the number in capability of competitors in the market 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.
4. Possibility of substitution – when it easy to substitute product in the market, it is expected that buyers will switch to
alternative in case of price increases. The supplier will enjoy less power to drive price up on the market will be less
alternative.
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 profit.

IMPORTANCE OF PORTERS FIVE FORCES ANALYSIS

- The porter’s five forces analysis is a significant tool for organization to understand the factors affecting probability in a
specific industry and can help to form decisions on whether or not to enter as a specific industry, whether or not to
increase capacity in specific industry and also for developing competitive industry and also for the developing
competitive strategies.
- Under the theory, a business became more attractive, the greater the supplier to drive prices up the less buyer power
to drive prices down the less the buyer power to drive prices down; the less the number of competitors in the market.

INDUSTRY ANALYSIS

- In a book published by the DEVELOPMENT ACADEMY OF THE PHILIPPINES, how to prepare project feasibility studies, it
includes in industry analysis of the following important factors

COMPETITION

- Very important that you know your competitors and be for them
- Your aim is to win your customers, convince them to buy from you and remain as loyal customers

CUSTOMERS

- Type of people whom you will sell or cater your product, based or their preferences, lifestyle and buying habits. The
target must be identified.

SUPPLIERS
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APPLIED ECONOMICS
- Every retail business need suppliers from whom one can source raw materials, intermediate product and deliver the
finished goods one intend to resell
- A business may need one or more suppliers. Business owners can buy directly from the manufacturers. It will be the
cheapest source since there are no middle men involved.
- Another alternative is to buy from distributors. They are wholesaler or brokers who buy in big quantities from
manufacturers and their prices or higher
- Third source of good through imports. Some businessmen go to nearby counties to buy their goods or raw materials
there.

SUBSTITUTE

- Goods that can be used in place of another. These are goods that may even if partly satisfy the same needs as a
consumers such that the consumer may be use one instead of another

INDUSTRY ANALYSIS

- Report that guide companies in their business strategy. Its concept includes reviewing the economics, political and
market factors influencing the manner in which the industry develops. It is an important elements of a business plan.

A GUIDE TO INDUSTRY ANALYSIS

- An industry analysis guide develop by MORTH CAROLINA’S SMALL BUSINESS AND TECHNOLOGY DEVELOPMENT
CENTER, can help in making an analysis of one’s business industry
- The key factors to be considered in analyzing your industry identified by the SBTDC are:
1. Geographic area – identify the area whether local, regional, national or international
2. Industry (as to size) – worth in pesos and number of firms, trends and developments and future outlooks.
3. Product – describe the product as to physical attributes and characteristics and its user
4. Buyers – describe your target consumer as to their demographic profile
5. Regulatory environment – should include government and regulations that apply to business
6. Company information – test of the most successful business in the industry
7. A brief history of the industry – when it started and how it develop
8. Factors that affect growth of the industry – immigration of population from rural and urban areas
9. Trends in sale over recent years – show actual sales in the industry over the past
10. Current operational or management trends – within the industry which are standard practices prevalent among
the firms
11. The type of marketing strategies prevalent within the industry
12. Competitors information – includes the location of competitors and how long have they been in business and
their market space

ENVIRONMENTAL ANALYSIS

- It’s an analysis of the environment in which the business will operate. This means an evaluation of possible or
probable effect of external forces and conditions on the survival and growth of the business.
- An environment analysis includes a thorough study

ECONOMIC FORCES

- This includes a look at the population size, the geographic at 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

POLITICAL FACTORS
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APPLIED ECONOMICS
- The type of government, the stability practices such as fiesta, celebration of the Christmas season, trends in
consumption patterns, as means to identify the goods and services that will fit into this celebration and spending
behaviors

COMPETITION

- This is something that needs to be studied. As already above, the degree of competition in the market and extent and
strength of competitions are all very vital in determining success or failure of the business
- This sample flow of goods and services

Business revenues

Good and services

C C

Firms (producer) Household (consumer)

C C
Resources land, labor capital entrep.

Factors income payment, rent, wage, interest,

Profit

- Goods and services flow the firms also in clockwise direction. It is the use of these resources that enables the firm to
produce the goods and services delivered to the household. The flow of products and resources are the physical flow
in the economy
- The flipside to the physical flow is the money payment. Household play and firms’ even revenues in exchange for the
goods and services received and provided respectively. In figure 3.3 revenues flow counterclockwise from the
household to the firms as payment for good and services received by the former
- Likewise, firm pay and household earn factor income for the use of resource provided by the former. Factor income
payment counter flow from the firms to the household for resources provided by the latter.
- For as long as household are willing to consume. Producer continue to produce goods and services for the household
using the resources provided by the latter. As the physical flow continue, so is the money payment flow in exchange
for product and resources.
- In figure 3.3 the physical flow continues in a clockwise direction in exchange for money payment flow in the
counterclockwise

A CLOSTER LOOK

- Among the firms, there is also the product flow up the production stages that is form the raw materials to the
intermediate goods and on the final stage for consumption
- Opposite the product flow is the money payment flow in exchange for product delivery down in production stages
from the consumers that is to the final then the intermediate and on to the raw materials stage
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APPLIED ECONOMICS
raw materials firm

intermediate product
consumer
firm

final product firm

- product flow
- money payment

RAW MATERIALS

- Unprocessed goods like raw materials, logs, and wheat which are extracted from their sources and do not undergo any
sources of production

NTERMEDIATE GGODS

- Semi-processed goods that are not ready for final use by the consumer, such as leather, cloth, and steel which
undergone same processing but need to go through additional processing before they can be actually used.

FINAL GOODS

- Goods that are ready for direct consumption such as refrigerators, dresses or parts. These final goods are they sold to
customers for the use

Another form of physical flow is the flow of resources from the household to the business firms. The household is the source of
resources used by the raw materials firms its intermediate goods firm and the final good firm

Raw materials firm

Household (resource
owner), labor, capital, Resource Intermediate product firm
entrepreneurship
Final product firm

- In return for the use of the resource the three types of producing units make money payment to households. This is
how a financial flow since it involves the payment of money to the resource owners. Money is now paid by the various
firms to the household as payment for the source firm to the household as payment for the source they provide.

THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

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APPLIED ECONOMICS
Two relevant units in the flow

- The government and foreign countries. The government is important because it makes purchases of economic
resources from the household and makes money payment to the resource owners for the use of their resources.
- The government also buys goods and services from the producing units for which it makes money payments.

THE ECONOMY’S PRODUCING SECTORS

Economy has three main producing sectors

1. Agriculture, fishery and forestry

- The sector reaps the fruits of natural resources like the soil, water, and forest. However, these environmental
resources are vulnerable to climate change affecting product such as long dry spells and frequent devastating
typhoons due to say the El Niño phenomenon. From this sector come the food we cook at home and the raw
materials processed are used by other economic sector. ( e. g. cotton for making pillows and mattresses)
- Agriculture account for most 84% NEDA of sectorial production as fishery lags far behind despite the country’s big
fishing grounds. Much less does forestry contribute to output as it will take decades to vegetate our vastly denuded
forest
2. INDUSTRIAL SECTOR
- The sector supposedly proceeds raw materials from agriculture, fishery, and forestry into intermediate products that
are further processed into final product.
- Example: local makers of wallet and bags produce the final product by processing the intermediate product of leather
which is manufactured from the animal bide extracted by agriculture
- Within the industrial sector itself, local cement manufacturers produce the product by locating limestone mixed with
clay from the quarrying industry for use in the construction industry. The lead industries in resources use and output
are manufacturing and construction as they respectively account for 65% and 20% of sectional production (NSCB
2009).
 MANUFACTURING
 CONSTRUCTION
 ELECTICITY, GAS AND WATER
 MINING AND QUARRYING
3. SERVICE SECTOR
- This sector produces the intangibles supporting are complementing production in the other sectors as well as among
its own industries. For example, the transport industry brings input and output among the other industries.
- Reliant on its activity is the trade industry that takes on the complementary role of marketing their produce. The
single biggest industry in resources use and output is trade as it accounts for 29% of sectorial production (NSCB 2009)
 TRADE
 TRANSPORTATION COMMUNICATION AND STORAGE
 BANKING AND FINANCE
 PUBLIC SERVICE (GOVERNMENT)
 REAL STATE
 PRIVATE SERVICES

COMPETITIVENESS AND EFFICIENCY

- The fair ranking of the Philippines in world competitiveness means that the country’s industries are yet on their way
from the factor driven stage. In the global competitiveness report 2013 – 2014 of the world economic forum (WE), the
country ranked number 58 among the 148 countries on its list. Factors allowing the free flow of products and
resources are already in place such as institution, infrastructures, stability and basic education and health. However,
our industries have yet to attain the efficiency enable by higher education or skills, technological readiness and
product or labor market competition.
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APPLIED ECONOMICS
Example: we have yet design and produce the first Filipino car (includes engine, transmission) following in the footstep
of countries like Malaysia and China. Much less are we even close to the innovative stage cuts across standards to
produce sophisticated products like the electric processed cars of Japan and the United State.

GLOBAL COMPETITIVE INDEX

Basic requirements sub index Efficiency enhancer sub index Innovation and sophistication sub index
Pillar 1 Pillar 5 Pillar 11
Institution Higher education and training Business sophistication
Pillar 2 Pillar6 Pillar 12
Infrastructure Goods market and efficiency innovation
Pillar 3 Pillar 7
Macroeconomic environment Labor market efficiency Key for innovation driven economies
Pillar 4 Pillar 8
Health and primary education Financial market development
Pillar9
Key for factor driven economies Technological readiness
Pillar 10
Market size

Key for efficiency driven economies

FACTORS FOR GLOBAL COMPETITIVENESS INDEX

- As the country’s industries struggle to attain efficiency toward the government’s vision of sophisticated innovation,
they do so with those in the rest of the world. According to said competitiveness report, prominent among the
problematic factors for doing business in the Philippines are inadequate infrastructure, corruption, inefficient
government bureaucracy, policy instability, crime state, tax rate, and restrictive labor regulations

LABOR EFFICIENCY OF ASEAN COUNTRIES IN 2009

- The country’s producing sectors also struggle with another as they compete for the use of local resources (e. g. labor).
The least efficient is agriculture, fishery, and forestry. Combined while the most efficient is industry. While agriculture,
fishery and forestry combined employs one third of local labor for production, it only contributes one tenth to the
country’s total output. In contrast, industry has almost twice share in output (27%) as it has in employment (16%) in
between is service which has a slightly greater share in output (63%) than in employment (53%)

Figure 3.8 sectorial shares output (2013)

 Service – 63%
 Industrial – 27%
 Agricultural – 10%

Figure 3.9 sectorial share employment (2013)

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APPLIED ECONOMICS
 Service – 53%
 Agriculture – 31%
 Industrial – 16%

Sectorial productive (2008)

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Category 2

AGRICULTURE AND FISHERY