LEARNER’S ACTIVITY SHEET

APPLIED ECONOMICS

Name: ____________________________________________________________ Grade Level: _________________

LEARNING COMPETENCY
Analyze the effects of contemporary economic issues affecting the Filipino entrepreneur
Subject Matter: Contemporary Economic Issues Affecting the Filipino Entrepreneur
In this lesson, the learners shall be able to analyze the effects of contemporary economic issues affecting the Filipino
entrepreneur. This will also test their critical thinking ability as they answer all the activities given as they go deeper to the
lesson.
Motivational Question:
Directions: Answer what is being asked. Write your answer on the space provided after the question.
1. How does economic issues affects the Filipino entrepreneurs?
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2. What do you think are the economic issues affecting the Filipino entrepreneurs?
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Pre-Assessment:
Directions: Give your own definition of the following words.
1. Investment- __________________________________________________________________________________
2. Interest Rate - _________________________________________________________________________________
3. Rentals - ________________________________________________________________________________________
4. Wage - _______________________________________________________________________________________
5. Taxes- ___________________________________________________________________________

INVESTMENT AND INTEREST RATE

INVESTMENT: A Determinant of Income
Investment
– is a process of building up capital stock, or the expenditure which determines the income and production in the economy.
– also refers to the value of machinery, plants, and buildings that are bought by firms for production purposes
– investment is the capital expenditure on the purchase of physical assets such as plant, machinery, and equipment (also
known
as fixed investment) and stocks (also known as inventory investments)
Investment Expenditure
– investment expenditure means capital spending.
– it is mainly derived from accumulated savings and other sources external to the circular flow; it does not come from
current
income and consumption.
WHY IS INVESTMENT ESSENTIAL TO THE ECONOMY?
– Current business income serves current business needs.
– The surplus may not be sufficient to finance even a fraction of investment spending. Instead, a business may borrow the
savings of the economy, which households likewise do, e.g., for housing construction.
– Investment, therefore, requires that a portion of current consumption be forgone (i.e., saved) to free up resources which
can be used to finance investment.
INVESTMENT IS CLASSIFIED INTO TWO TYPES:
1. FIXED INCOME INVESTMENT – Investors are aware that there are risky investment options. For investors who are
averse to risk fixed income investments are the best option since these investments are guaranteed to have a lower risk of
losses.

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 – Fixed income investments (FIIs) are investments that provide fixed periodic sources of income over a certain period of
time.
Examples:
1. government securities like treasury bonds, treasury bills and notes
2. corporate bonds (which have higher interests compared to government securities)
3. special deposit accounts offered by the Bangko Sentral ng Pilipinas (BSP)
4. foreign currency time deposits
2. VARIABLE INCOME INVESTMENT – are forms of investment that are suitable for risk tolerant individuals. – in
VIIs,
returns are not fully guaranteed and money or resources invested may also not be fully recovered. The reason for this is
that the returns from variable income investments are strongly influenced by economic situations and the behavior of
financial markets.
Examples:
1. business ownerships in the form of equities
2. company stocks
3. investment fund shares that have a high level of liquidity since they can be easily converted to cash
INVESTMENT AND INTEREST RATES
Investments and Interest Rates
– interest rates play a key role in increasing capital stock, which in turn affect investments.
– there is a negative or inverse relationship between investment and interest rate.

the higher the interest rate, the lower the quantity of investments; the lower the interest rate, the higher the
quantity of investments

WHAT IS INTEREST RATE? WHAT IS ITS ROLE IN INVESTMENTS?

In economics, interest is used in two ways.
1. It can be the price of the credit, which is often referred to as loanable funds
2. It can also be the return that the capital earns as an input in the production process
Interest rate represents the cost of using or borrowing money.
Loanable funds refer to the amount of money lent out by a lender to a borrower, for which the borrower will pay an
interest rate to the lender for the use of that fund.
Interest as the return on capital can be illustrated in the case of a printing press owner who decides to buy additional
equipment which costs Php10, 000.
– After a year, he earns Php1, 000 for using the equipment in his business. The Php1, 000 is equivalent to a 10-percent
interest rate on the capital which is the equipment.
– In this case, interest is the return earned by the capital as an input in the production process.
DETERMINANTS OF INVESTMENTS
Fluctuations and changes in interest rates have a significant influence on investments.
Determinants of investments
1. Future expectations – reflect plans to change production capacity. As expectations change, anticipating future returns
from investments, the investment demand curve shifts to the right. On the other hand, if there are expectations of lower
profits, the investment demand curve shifts to the left.
2. Level of Economic Activity – When GDP is high, the level of production increases. This boosts demand for capital and
encourages higher investments. When household incomes increase, consumption also goes up, which further leads to rise
in aggregate demand.
3. Technological Change – With changes in technology, demand for capital will have to increase in order to keep up with
these important developments.
4. Public Policy – Public policies in the form of granting incentives to firms can significantly affect the demand for capital,
thereby increasing investments. Investment tax credits and tax holidays can encourage investments in a country.
RENTALS
Rent
– It is typically refers to the use of property for a certain amount
– It is the price paid for the use of land and other natural resources or factors of production that is in fixed supply.
– Rent has been traditionally associated with land, which is a fixed factor of production.
The concept of economic rent applies to economic factors, not just land.
Economic rent is a payment in excess of opportunity costs. According to David Ricardo, an influential British classical
economist in early 1800s, rent is a surplus of revenue over cost, which arises due to differences in the level of usability
of the land.

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 The scarcity of land becomes the concept of rent.
WHAT IS RENT ON LAND?
Rent on Land
– Land is one of the most common type of investments aside from owning shares, cash, and securities.
– In order to analyze how the price for the use of land is determined, we must look at the supply of land and its level of
demand.
– Since the supply of land is perfectly inelastic, the level of demand is what determines the rent on land.
– Since supply of land is fixed, demand becomes the determinant of rent.
– Aside from renting the land out, the owner of the land can also opt to sell the land at a higher price to earn a profit.
HOW IS THE DEMAND FOR LAND DETERMINED?
Economic rent also relies on productivity differences.
Several determinants indicate the productiveness of the land:
a. Products grown on the land
 The location attribute of the land can also be considered for its demand
b. Prices of other resources which are combined with the land
 City areas have higher land rents than remote areas with difficult access to transportation and communication.

Note: A person keen on investing on land must realize that there are also risks to watch out for. For one, it takes a long
time to sell such property, which means money is not easily realized.
WAGES
DETERMINANTS OF MARKET WAGE RATES
A basic principle of economics is the notion that the price or value of goods, services, and even resources, such as labor,
is determined by the behavior of demand and supply.
Labor Demand
– The demand for labor is similar to the demand for a good, and thus generally follows the law of demand.
– The wage, which is the price of labor, is plotted in the y-axis of the graph, and the quantity of labor, which can be
expressed by the number of employment available in the market, is plotted in the x-axis.
– Similar to the law of demand, when the price if labor increases, the related quantity of labor decreases, which makes the
price of labor inversely related to the quantity of labor. This means that employers will hire more people when wages go
down.
Labor Supply
– It follows the principle of the law of supply, which says that if the price of labor increases, then the supply of labor also
increases, and vice versa.
– As wage increases, more people will enter the labor market and compete for higher-paying jobs. But if wages decline,
there will be fewer people looking for jobs and competing for these lower wages.
WHAT IS MARKET CLEARING?
When the labor demand and supply meet at a certain wage and quantity of workers, an equilibrium is reached. This point
of equilibrium is called the market clearing.
It is where firms may hire an employee at the existing wage rate and people who would like to have that wage rate would
be able to do so.
However, as this is a competitive labor market, even though there is an identified market clearing, employers and
employees may leave the labor market, as firms may want to pay lower wages or workers may wish to earn higher wages.
EQUILIBRIUM WAGES
When jobs are safe and easy, we can assume that the wages they pay are average. Most People want to have such jobs.
As the job becomes more difficult and dangerous, workers naturally require a higher wage to do such work.
Compensating Differential is the difference in wages that arise to offset the nonmonetary characteristics of different
jobs.
 People who work in coal mines or on night shifts usually receive a compensating differential to make up for the
unpleasant nature of the job.

EQUILIBRIUM IN A COMPETITIVE LABOR MARKET

In a perfectly competitive labor market, firms and workers are free to enter and exit the market. This makes the
equilibrium allocation of workers to firms efficient.
How the workers fit the firm maximizes the total gains that workers and firms accumulate by trading with each other.
A competitive equilibrium leads to an efficient allocation of resources.
MINIMUM WAGE
Minimum wage is the lowest allowed wage paid to workers by virtue of legislation and government policies.
This is a form of government intervention to alleviate poverty and income inequality in terms of rendering job services.

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 The effects of minimum wages may in principle differ between industries in which employers do and do not have control
over the wage rates they pay for the labor of a given skill and application
Minimum wage is set primarily to protect workers from abusive employment practices.
A decent minimum wage is actually a useful tool in addressing wide disparities in wage distribution.
TAXES
Taxes are the lifeblood of the government.
– Without taxes, the government will not be able to provide services to its people, such as public works, health, education,
defense and police protection, and social services.
– Hence, taxation is necessary for the government to be able to finance its expenditures.
Taxation is the act of levying tax so that the sovereign, through its law-making body, can raise income to defray the
necessary expenses of the government.
– It is an inherent power of the state to demand enforced contributions from the people for public purposes.
– Hence, tax is a levy imposed by the government on the income, wealth, and capital gains of persons or businesses, on
spending on goods and services, and on properties.
Taxes are used by the government for a variety of purposes
a. raising revenue to cover government expenditures on the provision of social services such as education, health, and
public infrastructure as well as the salaries and benefits of public servants;
b. as an instrument of fiscal policy in regulating the level of total spending (or aggregate demand) to stabilize the
economy; c. altering the distribution of income and wealth;
d. controlling the volume of imports into, and sometimes exports of certain goods out of, the country.
TYPES OF TAXES
1. Direct taxes are taxes levied by government on the income and wealth received by households and businesses to raise
government revenue and to act as an instrument of fiscal policy.
a. Individual income taxes are taxes that are levied on households. These are taxes on particular persons
b. Corporate income taxes are taxes on businesses. Take note that corporations are legal entities that assume
an independent personality. Thus, if a corporation earns a profit, it must pay a corporate income tax. This is
considered direct tax.
2. Indirect taxes are taxes levied by government on goods and services to raise revenue and to act as an instrument of fiscal
policy. Observe that these are not taxes on people but on goods and services that people purchase and consume.
a. Value added tax (VAT) are taxes included on goods and services.
b. Excise taxes are taxes included on certain products.
3. Progressive taxes are taxes that place greater burden on those best able to pay and put little to no burden on the poor.
 The best example of a progressive tax is the individual income tax
 For most taxpayers today, the more they earn, the higher percentage they pay for tax
 In terms of the average tax rate, people in higher income brackets pay a substantially higher average tax rate than
those in the lower brackets.
4. Proportional taxes are taxes that place an equal burden on the rich, the middle class, and the poor. In other words, taxes
are levied at a constant rate as income rises.
5. Regressive taxes are taxes that fall more heavily on the poor than on the rich. Under this taxation structure, taxes are
levied at a decreasing rate as income rises.
 This form of taxation takes a greater proportion of tax from a low-income taxpayer than from a high-income
taxpayer.
 Indirect taxes such as the VAT or excise taxes on certain products are regressive when taken as a proportion of total
net income.
BASIC PRINCIPLES OF TAXATION
The basic principles of taxation refer to key concepts that guide governments in designing and implementing an equitable
taxation regime. These basic principles are generally referred to as Adam Smith's Canons of Taxation. These include:
1. Adequacy - Taxes should be just enough to generate revenue required for the provision of essential public services like
health, education, and national defense and police protection.
2. Broad basing - Taxes should be spread over as wide as possible to all sectors of the population or economy to
minimize
individual tax burden.
3. Compatibility - Taxes should be coordinated to ensure tax neutrality and meet the overall objectives of good
governance.
4. Convenience - Taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent
possible.
Basic principles are generally referred to as Adam Smith's Canons of Taxation.
5. Earmarking - Tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct

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 cost-and-benefit link between the tax source and the expenditure, such as the allocation of motor users’ tax for road
maintenance.
6. Efficiency - Tax collection efforts of the government should not cost an inordinately high percentage of tax revenues.
7. Equity - Taxes should equally burden all individuals and entities in similar economic circumstances.
8. Neutrality - Taxes should not favor any one group or sector over another and should not be designed to interfere with
or influence individual decision-making.
9. Predictability - The collection of taxes should reinforce their inevitability and regularity
10. Restricted exemptions - Tax exemptions must only be done for specific purposes (e.g., to encourage investment) and
within a limited period.
11. Simplicity - Tax assessment and determination should be easily understood by an average taxpayer

Directions: Imagine yourself as an entrepreneurs, consider building a business.

Guided Questions:
1. What kind of enterprise do I need to build?
2. What risks and sacrifices does such an enterprise demand?
3. Can I accept those risk and sacrifices?
4. Setting a strategy: How will I get there?
5. Is the strategy well defined?

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