Review of Basic Economic Concepts ✓ If demand remains unchanged and supply decreases, a

shortage will result, leading to a higher equilibrium price.

Economics is classified as a social science because it deals with
the study of human's life and how he lives with other men.
Applied economics - is the study of economics in relation to real
world situations. It is the application of economic principles and
theories to real situations, and trying to predict what the
outcomes might be.
Applied economics - is thy study of observing how theories work
in practice.
Inflation
• Inflation is a rise in general level of prices of goods &
service in an economy over a period of time.
• Crowther- defines inflation as "a state in which the clause of
money is falling i.e., prices are rising.
• Prof.Coulbourn- defines inflation as "too much of money
chasing too few goods"

Importance of Applied Economics

• Mechanism to determine what steps can reasonably be
taken to improve current economic situation
• Powerful tool to reveal the true and complete situation in
order to come up with things to do
• Teach valuable lessons on how to avoid the recurrence of a
negative situation or at least minimize the impact

What's the difference between Microeconomics &

Macroeconomics?
• Microeconomics examines small economic units, the
components of the economy.
✓ For example: individuals, households, firms, industries
• Macroeconomics looks at aggregates.
✓ For example: national output, overall price level,
aggregate unemployment
GNP VS GDP

The Law of Supply

• According to the law of supply, the higher the price, the larger
the quantity produced.

Labor Force
• Economics define the labor force as all nonmilitary people who
are employed or unemployed.

Employment
✓ is a contract between two parties, one bein employer and
the other being the employee
✓ In a commercial setting, the employer conceives of a
productive activity, generally with the intention of creating
profits, and the employee contributes labor to the enterprise,
usually in return for pavment of wages.
✓ To the extent that employment or the economic equivalent
is not universal, unemployment exists.

The four basic laws of supply and demand:

✓ If demand increases and supply remains unchanged, a
shortage will result, leading to a higher equilibrium price.
✓ If demand decreases and supply remains unchanged, a
surplus will resuit, thus leads to a lower equilibrium price.
✓ If demand remains unchanged and supply increases, a
surplus will result, leading to a lower equilibrium price.
Basic Economic Problems
✓ UNEMPLOYMENT
✓ POVERTY
✓ POOR QUALITY OF INFRASTUCTURE
✓ INCOME INEQUALITY
• Issues and problems that confront contemporary
Philippine economy include the following:
• Defects in the economic structure, such as great disparity
in the distribution of wealth and material goods; gross
inefficiency and lack of dynamism of the manufacturing
sector and the subsequent persistent balance of payments
deficits and recurrent huge public sector deficits as a
major problem.
• Slow economic growth and rapidly rising population make
it difficult to expand education and health services and
improve their quality.
• Government reliance on and support of foreign investors,
MNC’s and foreign debts and foreign aid.
• Lack of political will on the part of government to support
local entrepreneurs and develop local industries as well as
to assert its self-determination by promoting Filipino First
and protectionism policy
• Low real wages and little job opportunities
• Huge foreign and domestic debts
• Bureaucracy and massive graft and corruption in
government.
• Inefficient tax collection, tax evasion, tax credits and tax
holidays given to foreign investors rob the nation of
needed revenues.
• Colonial mentality of the people to patronize foreign goods
rather than their locally made products.
• Economic instability brought about by peso devaluation,
political instability, and high cost of gasoline and crude oil
products, military threats, coups d’ etat, and unstable
peace and order situation in the country.
• Unemployment and underemployment.
Understanding Market and Its Structure
Market
• Ordinarily, the term “market” refers to a place
where goods are purchased and sold. But, in
economics, market is used in a wide
perspective. In economics, the term “market”
does not mean a place but the whole area
where the buyers and sellers of a product are
spread.
• A market is, in its general sense, the group of
suppliers and buyers who are insufficiently
close contact for market transactions to take
place and for those transactions to effect the
terms of trade (the price). The structure of the
markets indicates the relative number of buyers
and sellers in the market and therefore the
nature of competition that will take place
2. Market Structure
• It refers to the nature and degree of competition in the
market for goods and services.
• It is the characteristics of the market either
organizational or competitive , that describes the nature
of competition and the pricing policy followed in the
market.
Determinants of Market Structure
There are several determinants of market structure for a
particular good. These are:
(1) The number and nature of sellers - The market
structures are influenced by the number and nature of
sellers in the market. They range from large number of
sellers in perfect competition to a single seller in pure
monopoly, to two sellers in duopoly, to a few sellers in
oligopoly, and to many sellers of differentiated products.
(2) The number and nature of buyers - The market
structures are also influenced by the number and nature
of buyers in the market. If there is a single buyer in the
market, this is buyer’s monopoly and is called
monopsony market. Such markets exist for local labor
employed by one large employer. There may be two
buyers who act jointly in the market. This is called
duopoly market. They may also be a few organized
buyers of a product.
(3) The nature of the product - It is the nature of
product that determines the market structure. If there is
product differentiation, products are close substitutes
and the market is characterized by monopolistic
competition. On the other hand, in case of no product
differentiation, the market is characterized by perfect
competition. And if a product is completely different from
other products, it has no close substitutes and there is
pure monopoly in the market.
(4) The conditions of entry into and exit from the
market - The conditions for entry and exit of firms in a
market depend upon profitability or loss in a particular
market. Profits in a market will attract the entry of new
firms and losses lead to the exit of weak firms from the
market. In a perfect competition market, there is
freedom of entry or exit of firms.
• Hundreds or thousands
• Usually agriculture products or things that are not man-
made
2. They are selling identical products
• Each “market” sells the same thing
• There is no reason for non-price competition
(advertising) since its all the same
3. No Price Controls
• Too many producers and consumers
• No one seller controls price
• Prices are set by the market, not the firm

(5) Economies of scale - Firms that achieve large 4. No or very few barriers to entry
economies of scale in production grow large in
comparison to others in an industry. They tend to weed
out the other firms with the result that a few firms are left • Very few barriers to keeping new sellers out – very easy
to compete with each other. This leads to the to enter and exit the market
emergency of oligopoly. If only one firm attains
economies of scale to such a large extent that it is able 5. Examples:
to meet the entire market demand, there is monopoly.
· Farmers / Agriculture Producers – orange
Why look at Market Structure growers, rice grain growers, vegetable growers, wheat
growers
• Not every business operates in the same kind of
market · Fisheries – bass, trout, salmon, milkfish
• Each market has its own set of characteristics
6. No Tools of Competition
✓ The number of sellers
✓ The good/service they produce
✓ Difficulty of entering or leaving the market

• The type of market determines price

3. Types of Market and Its Characterisitics

3.2. Monopolistic Competition

3.1. Perfect Competition

1. Many buyers and sellers exist

• About 100
• Firms act independently, and no single firm is large
enough to change the market alone

2. Firms sell slightly differentiated products

1. A very large number of sellers
 • Each seller is trying to make its product a little bit
unique
• Even virtually identical products are differentiated by
brand name, packaging, design – but still are similar
3. Sellers have some control over price
3. Price is significantly controlled by firms
• This is possible because of brand loyalty
and ease of access
• Product information is easily available
• Use non-price competition (advertising)

• No one seller has enough power to change the price. 4. High barriers to entry
• Buyers are well-informed about the differences in
products. • It is hard to get into the group
• Use of non-price competition to gain customer like • They have their own patents and raw materials,
advertising, improved service, and reliance on reputation making it hard to compete

4. Some barriers to entry 5. Examples

• Fairly east to enter and exit the market • TV Network (ABS-CBN, GMA, TV5)
• Car Companies (Toyota, Mitsubishi, Nissan,
5. Examples: Ford, General Motors)
• Oil (Petron, Shell, Caltex, Unioil)
Toothpaste (Colgate, Close-Up, Pepsodent, Sensodine, • Internet Providers (Globe, SMART-PLDT, Sky,
Crest, Happee) Converge)

Laundry detergent (Tide, Ariel, Surf, Champion, Wings, 6. Tools of Competition

Breeze)
• Price Leadership – When one firm offers a
Fast Food Chains (Jollibee, McDonald’s, Burger King, new product at a certain price, the others must
Tropical Hut, KFC) follow for fear of losing customers.
• Cartels – Organizations in which agreements
6. Tools of Competition: are made to cooperate and reduce competition
among the firms
• Product Differentiation creates buyer loyalty
• Buyer loyalty allows firms to slowly increase price

- Not too much or they will switch brands

• Most common market structure

3.3. Oligopolies 3.4. Monopolies

1. Small Number of firms control the market 1. One firm controls the market

• 3-5 firms controlling at least 70% of the market • The only seller that consumers have access to
• Many other firms exists, but with little influence • Sometimes on purpose, sometimes by chance

2. Selling similar product 2. Product is completely unique

• Sometimes more similar product; soda, oil • There are no close substitutes – the only one its kind
• Sometimes more different products; cars, around.
movie production
3. Almost complete control of price
 • Because they are the only seller cause personal costs and significant social costs (e.g.
• Sometimes the government requires/provides some crime). If the government identifies damaging goods,
regulations they can slowly change consumer behaviour – such as
using higher tax, advertising campaigns and behavioural
economics, e.g. making cigarettes difficult to buy with
4. Barriers to enter are extremely high unappealing packets. Long-term government campaigns
to reduce smoking in the UK and US have been
• Nearly impossible to become a monopoly effective in reducing smoking rates – something that has
• Very few monopolies exist helped to increase life-expectancy.
• Environment. The environment is an area with a
significant need of government intervention. The free
market ignores external costs of business on the
environment. It also fails to consider long-term
considerations. For example, market forces may lead to
the burning of fossil fuels, which cause increasing
environmental problems around the world – which will
get worse in the future. Given the potential costs to
future generations, there needs to be government action
to shift behaviour to renewable energy which doesn’t
cause these environmental costs. Also, the environment
involves many issues where private ownership does not
apply. If pollution causes a worsening air quality, then
this affects everyone on the planet, but market
mechanisms do not provide an opportunity to deal with
the issue. (If someone pollutes your back-garden, you
can sue them. But, if air quality deteriorates, who takes
action?

• Monopoly power. In a free market, firms can gain

monopoly power to charge high prices to consumers
and monopsony power to pay lower wages to workers.
4. Benefits of Market Intervention This increases inequality and deadweight welfare loss.
Government intervention to limit mergers and monopoly
These are the following benefits of Government power can lead to increased economic welfare.
Intervention • Strategic planning on infrastructure. Another
limitation of the free market is to underinvest in quasi-
public goods like roads and railways. This can lead to
• Equality. In a free market, there is likely to be significant transport bottlenecks. Governments can plan for future
inequality and poverty. This is not due to a meritocracy, transport trends and invest in the roads and railways
but it could be due to unfair advantages of which are needed for the future.
circumstances (inherited wealth, superior education).
Governments can intervene to provide a basic security
net – unemployment benefit, minimum income for those
who are sick and disabled. This increases net economic
welfare and enables individuals to escape the worst
poverty. This government intervention can also prevent
social unrest from extremes of inequality.
• Public goods. Public goods tend not to be provided in a
free market because there is no financial incentive for
firms to provide goods that people can enjoy for free.
Governments can provide national defence, law and
order and pay for it out of general taxation. Looking after
the environment is also a public good, there are an
increasing number of areas, where a government is
needed to deal with issues such as forest fires, rising
sea levels and pressure on water supplies.
• Education. Merit goods are under-consumed in free- 5. Problems of Market Intervention
market because people underestimate the personal The following discusses the disadvantages of
benefits and/or ignore the external benefits. This leads Government interventions in the market
to an underprovision of health care and education.
Government intervention to provide free education can
• Government failure. Government failure is a term to
lead to a significant improvement in the quality of life for
describe how government intervention can cause its
people who are educated. There are also many positive
own problems. For example, the government may take
externalities to the rest of society. A well-educated
decisions for short-term political consideration which
society can improve labour productivity and economic
lead to an inefficient outcome. For example, government
growth.
tariffs to protect domestic industry spark off a trade war,
• Shift consumer behaviour. The consumption where the economy contracts.
of demerit goods like alcohol, tobacco and opiates can
 • Lack of incentives. In the free market, individuals have 2. Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness &
a profit incentive to innovate and cut costs, but in the Globalization.10th ed. 2013
public sector, this incentive is not there. Therefore, it can
lead to inefficient production. For example, state-owned
industries have frequently been inefficient, overstaffed
and produce goods not demanded by consumers.
• Political pressure groups. Milton Friedman once
quipped ‘There is nothing as permanent as a temporary
government bailout.’ He was referring to farming
subsidies. Introduced in the 1930s during the Great
Depression to alleviate a farming recession. After the
Second World War, no government dared to remove
subsidies because farmers were a powerful pressure Remote Environment
group who wanted to keep the subsidies.
• Less choice. Often government intervention in the
economy (e.g. nationalisation of industries) has been
▪ Economic, social, political, technological, and ecological
factors that originate beyond, and usually irrespective of,
associated with less choice. Government produced
any single firm’s operating situation.
services have a monopoly. Command economies, often
had very little choice as government decided what to
produce. Choice is an important element of economic 1. Economic Factors
freedom and being able to maximise individual welfare.
(Not all government intervention leads to less choice. • This segment refers to the nature and direction of the
• Impact of personal freedom. An increasing aspect of economy in which a firm competes or may compete. Firms
government intervention is through efforts to shift generally seek to compete in relatively stable economies
consumer behaviour – e.g. reduce congestion, improve with strong growth potential. With globalization and the
health through reducing smoking rates and a healthier interconnectedness of nations, firms must scan, monitor,
lifestyle. This includes taxes, behavioural influences and forecast, and assess the health of their host nation and the
regulations. Sometimes people can feel this is health of the economies outside their host nation.
overbearing on their individual choice. Examples:

✓ Inflation rates
✓ Interest rates
✓ Trade deficits or surpluses
✓ Budget deficits or surpluses
✓ Personal savings rate
✓ Business savings rates
✓ Gross domestic product

2. Sociocultural Factors
• The sociocultural factor is concerned with a society’s
attitudes and cultural values. Because attitudes and values
form the cornerstone of a society, they often drive
demographic, economic, political/legal, and technological
conditions and changes.
EXTERNAL ENVIRONMENT
Sociocultural Factor includes:
✓ Women in the workforce
External Environment
✓ Workforce
✓ Diversity attitudes about the quality of work life
▪ The factors beyond the control of the firm that influence
its choice of direction and action, organizational 3. Political Factors
structure, and internal processes.
• This segment represents how organizations and
Comprised of following Components: governments mutually try to influence each other, and
how firms try to understand these influences (current
▪ Remote environment and projected) on their strategic actions
▪ Industry environment This includes:
▪ Operating environment
✓ Antitrust laws
✓ Taxation laws
✓ Deregulation philosophies
✓ Labor training laws
✓ Educational philosophies and policies

4. Technological Factors
• Technological changes occur through new products, Porter’s well-defined analytic framework helps
processes, and materials. The technological strategic managers to link remote factors to
segment includes the activities involved in creating new their effects on a firm’s operating environment.
knowledge and translating that knowledge into new outputs,
products, processes, and materials. Given the rapid pace of An industry’s profit potential is a function of the
technological change and risk of disruption, it is vital for firms five forces of competition:
to study this segment.
• Technological forecasting helps protect and improve the
profitability of firms in growing industries. ✓ The threats posed by new entrants
✓ The power of suppliers
• It alerts strategic managers to impending challenges and
✓ The power of buyers
promising opportunities.
✓ Product substitutes
• The key to beneficial forecasting of technological
✓ The intensity of rivalry among
advancement lies in accurately predicting future technological
competitors
capabilities and their probable impacts.
This includes:
✓ Product innovations
✓ New communication technologies
✓ Applications of knowledge
✓ Focus of private and government-supported R&D
expenditures

5. Environment / Ecological Factor

• Concerned with trends oriented to sustaining the world’s

physical environment, firms recognize that ecological,
social, and economic systems interactively influence what
happens in this particular segment. This segment refers to
potential and actual changes in the physical environment
and business practices that are intended to positively
respond to and deal with those changes.
This includes:
✓ Energy consumption
✓ Practices used to develop energy
sources
✓ Renewable energy efforts
✓ Minimizing a firm’s environmental
footprint
✓ Availability of water as a resource
✓ Producing environmentally friendly
products
✓ Reacting to natural or man-made
disasters
1. THREAT OF NEW ENTRANTS
• Can threaten market share of existing
competitors
• May stimulate additional production
capacity
• New competitors may force existing firms
to be more efficient and to learn how to
compete on new dimensions
• Entry barriers make it difficult for new
firms to enter an industry and often place
them at a competitive disadvantage even
when they are able to enter
This may include:

✓ Economies of Scale
✓ Product Differentiation
✓ Capital Requirements
✓ Cost Disadvantages Independent of
Size
✓ Access to Distribution Channels
✓ Government Policy

2. BARGAINING POWER OF SUPPLIERS

An INDUSTRY is a group of firms that produce SUPPLIER POWER INCREASES WHEN:

similar products or offer similar services that
are close substitutes.
Harvard professor Michael E. Porter propelled
the concept of industry environment into the
foreground of strategic thought and business
planning.
• Suppliers are large and few in number
• Suitable substitute products are not
available
• Industry firms are not a significant
customer for the suppliers
• Suppliers’ goods are critical to buyers’
marketplace success
• Suppliers’ products create high switching
costs
• Suppliers have substantial resources and
provide a highly differentiated product
• Suppliers pose a credible threat to
integrate forward into the buyers’ industry
3. BARGAINING POWER OF BUYERS
BUYER POWER INCREASES WHEN:
• Buyers purchase a large portion of an
industry’s total output
• Buyers’ purchases are a significant
portion of a seller’s annual revenues
• Switching costs are low (to other industry
product)
• The industry’s products are
undifferentiated or standardized
• Buyers pose a credible threat to integrate
backward into the sellers’ industry
4. THREAT OF SUBSTITUTE PRODUCTS
THREAT OF SUBSTITUTE PRODUCTS
INCREASES WHEN:
• Buyers face few switching costs
• The substitute product’s price is lower
• Substitute product’s quality and
performance are equal to or greater
than the existing product
• Differentiated industry products that
are valued by customers reduce this
threat
5. INTENSITY OF RIVALRY AMONG
COMPETITORS
Intense rivalry occurs when:
• Competitors are numerous or are roughly
equal
• Industry growth is slow, precipitating
fights for market share that involve
expansion
• The product or service lacks
differentiation or switching costs
• Fixed costs are high or the product is
perishable, creating strong temptation to
cut prices
• Capacity normally is augmented in large
increments
• Exit barriers are high
• Rivals are diverse in strategy, origin, and
personality
OPERATING ENVIRONMENT
· This includes competitors, suppliers,
creditors, customers, labor.
COMPETITOR ANALYSIS: COMPETITOR
INTELLIGENCE
· Set of data and information the firm
gathers to better understand and anticipate
competitors' objectives, strategies,
assumptions, and capabilities
· The ethical and legal gathering of
needed information and data that provides
insight into:
● What drives competitors (Shown by
organization's future objectives)
● What the competitor is doing and can
do (Revealed in organization's current strategy)
● What the competitor believes about
the industry (Shown in organization's
assumptions)
● What the competitor’s capabilities are
(Shown by organization's strengths and
weaknesses)
EXTERNAL ENVIRONMENT ANALYSIS
• Firms engage in external environmental
analysis to better understand and cope with
their environments.
• This analysis has four parts: scanning,
monitoring, forecasting, and assessing.
Identifying opportunities and threats is an
important objective of studying the general
environment.
• OPPORTUNITY is a condition in the
general environment that if exploited
effectively, helps a company achieve strategic
competitiveness.
EXAMPLE: Procter & Gamble (P&G) is
reorienting beauty products to better serve both
men and women.
· THREAT is a condition in the general EXTERNAL ENVIRONMENT ANALYSIS:
environment that may hinder a company’s ASSESSING
efforts to achieve strategic competitiveness.

EXAMPLE: Microsoft is experiencing a severe

external threat as smartphones are expected to
surpass personal computer (PC) sales in the
near future.

Economic growth is the most powerful

instrument for reducing poverty and improving
the quality of life in developing countries. Both
EXTERNAL ENVIRONMENT ANALYSIS:
cross-country research and country case
SCANNING
studies provide overwhelming evidence that
rapid and sustained growth is critical to making
faster progress towards the Millennium
Development Goals

Growth can generate virtuous circles of

prosperity and opportunity. Strong growth and
employment opportunities improve incentives
for parents to invest in their children’s
education by sending them to school. This may
lead to the emergence of a strong and growing
group of entrepreneurs, which should generate
pressure for improved governance. Strong
economic growth therefore advances human
EXTERNAL ENVIRONMENT ANALYSIS: development, which, in turn, promotes
MONITORING economic growth.

Future growth will need to be based on an

increasingly globalised world that offers new
opportunities but also new challenges. New
technologies offer not only ‘catch-up’ potential
but also ‘leapfrogging’ possibilities. New
science offers better prospects across both
productive and service sectors. Future growth
will also need to be environmentally
sustainable. Improved management of water
and other natural resources is required,
together with movement towards low carbon
technologies by both developed and
developing countries. With the proper
EXTERNAL ENVIRONMENT ANALYSIS: institutions, growth and environmental
FORECASTING sustainability may be seen as complements,
not substitutes.

Determinants of Economic Growth

Growth helps people move out of poverty -

Research that compares the experiences of a
wide range of developing countries finds
consistently strong evidence that rapid and
sustained growth is the single most important
way to reduce poverty

Growth transforms society - The positive link

between growth and poverty reduction is clear.
The impact of the distribution of income on this
relationship – in particular, whether higher
inequality lessens the reduction in poverty
generated by growth – is less clear. Initial
levels of income inequality are important in
determining how powerful an effect growth has
in reducing poverty

Growth creates jobs - Economic growth

generates job opportunities and hence stronger
demand for labour, the main and often the sole
asset of the poor. In turn, increasing
employment has been crucial in delivering
higher growth.

Growth drives human development - Growth

generates virtuous circles of prosperity and
opportunity. Strong growth and employment
opportunities improve incentives for families to
invest in education by sending their children to
school. This may lead to the emergence of a
strong and growing group of entrepreneurs,
which will generate pressure for improved
governance. Strong economic growth therefore
advances human development, which, in turn,
promotes economic growth.

Improved health and education through

growth - There is overwhelming evidence that
higher incomes lead to a better quality of life.
Higher levels of income reduce infant mortality,
Primary and secondary school enrolment rates
are positively associated with higher levels of
per capita income, there is usually less disease
in wealthier countries, life expectancy is clearly
positively related to the level of per capita
income, etc.

TOURISM AND HOSPITALITY

CONTRIBUTION TO ECONOMIC GROWTH