LESSON 1
ECONOMICS
• study of the choices people makes to satisfy their
wants and needs with a limited supply of resources
• the concept of economics also involves the study of
production, distribution, and consumption of goods
and services that means how many goods and
services need to be produced, how will they produce
them, and who will use them
WANT – something people desire or need to have
GOOD – physical product we can hold and touch like
books and phones
SERVICE – an action provided to us not something that
can be held or touched
RESOURCE – anything used to get or create goods and
service that people want
SCARCITY – means having limited supply of resources to
meet the needs and wants of society
POSITIVE ECONOMICS
• What Is
• No value judgements
NORMATIVE ECONOMICS
• What ought to be
• Has value judgements
TWO KINDS OF COST
• EXPLICIT COST
o involves monetary payment
o these costs have a definite, readily, identifiable
value
o employee wages, utility and equipment are
examples
o an easy way to remember explicit cost is there’s
probably a receipt for the item
• IMPLICIT COST
o an opportunity cost that occurs from allocation of
resources for a specific purpose, which cannot
easily be assigned a monetary value
o for example, the time required to train new
employee, maintenance activities such as robot
offline for routine services
TWO BRANCHES OF ECONOMICS
• MICROECONOMICS
o came from Greek word “mikros” meaning small
o deals with the behavior of individual actors in the
economy
• MACROECONOMICS
o came from Greek word “makro” meaning large
o interested in the economy as a whole
Macroeconomics is focused on three key indicators of
the economy’s performance and the underlying
explanations for their behavior. The indicators are:
1. The rate of growth of real national income.
2. The rate of inflation.
3. The rate of unemployment.
Three key dimensions of macroeconomic activity
1. Output
o A measure of the total quantity of goods and
services produced in the economy. It is also a
measure of the incomes generated by that
production.
2. Price
o The weighted average of the market prices of all
final goods and services produced. The price
level reflects the costs of production in the
economy.
3. Employment
o A measure of the number of jobs involved in the
production of goods and services, or, in more
refined terms, the number of hours of labor input
required to produce the economy’s output.
Definition of Terms
• Real Gross Domestic Product – the quantity of final
goods and services produced by the economy in a
specified time period.
• Economic growth – an increase in real GDP
• Price level – a measure of the average prices of all
goods and services produced in the economy.
• Price index – a measure of the price level in one year
compared with prices in a base year.
• Consumer Price Index (CPI) – a measure of the cost
of living in any one year compared to the cost of
living in a base year.
• Inflation – a persistent rise in the general price level.
• Labour force – adults employed plus those not
employed but actively looking for work.
• Employment – number of adults employed full-time
and part-time and self-employed.
• Unemployment – number of adults not working but
actively looking for work.
• Cyclical unemployment – would be eliminated by
higher levels of economic activity.
• Frictional unemployment – a result of the time
involved in adjusting to changing labour force and
employment opportunities.
• Structural unemployment – caused by changes in
economic structure relative to labour characteristics.
• Recession – a decline in economic activity, often
defined as two consecutive quarters of negative
growth in real GDP.
SUPPLY AND DEMAND ON MACROECONOMICS
Non-economists frequently describe microeconomics by
saying “it’s all about supply and demand.”
What is supply and demand?
• Demand is the quantity of a good or service that
buyers wish to purchase at each possible price, with
all other influences on demand remaining
unchanged.
• Supply is the quantity of a good or service that sellers
are willing to sell at each possible price, with all other
influences on supply remaining unchanged.
The Law of Demand
• states that "the higher the price (P) of the good, the
lesser the quantity demanded (Q)," or alternatively
stated, "the lower the price, the higher the quantity
demanded all other thing held equal or constant.
The equilibrium price equates demand and supply – it
clears the market. At higher prices there is an excess
supply— suppliers wish to sell more than buyers wish to
buy. Conversely, at lower prices there is an excess
demand. Only at the equilibrium price is the quantity
supplied equal to the quantity demanded.
Demand and supply curves
• Demand curve – reflects the relationship between
price and quantity demanded, but price is not the
only variable or factor can influence the consumer's
demand. Other non-price determinants of demand
or the other factors that may affect demand are as
follows:
1. INCOME has direct relation for normal goods but if
the product is an inferior good, its relationship to
demand is inverse.
2. TASTES AND PREFERENCES have direct relation to
demand. if one’s taste is in favor of the product, the
higher will be the demand for it.
3. PRICES OF RELATED GOODS AND SERVICES for
substitute goods like nice and bread, if price of rice
increases, demand of bread increases, so relation is
direct but inverse for complementary goods like
bread and butter. if price of bread increases, other
things constant, the demand for butter declines.
4. BUYER'S EXPECTATIONS ABOUT FUTURE PRICES has
direct relation to demand. if price is expected to
increase, people tend to panic buy, hence, demand
increases.
5. NUMBER OF BUYERS has direct relation to demand.
the more the number of buyers the higher.
The Law of Supply – demonstrates the quantities that
will be sold at certain prices. But unlike the law of
demand, the supply curve shows an upward slope. This
means that the higher the price, the higher the quantity
supplied. Produces supply more at a higher price because
it will mean higher revenue.
Supply Curve – locus of points that shows the inverse
relations between price and quantity suppy all other
things constant or equal.
Determinants of Supply
1. Production costs has an inverse relation to supply.
High production cost discourages sellers hence there
will be a decrease in supply
2. Technology has a direct relation to supply. An
improved technology encourages producers hence
there will be an increase in supply.
3. The price of related goods or price of competing
products has an inverse relation to supply. For
farmers, palay and corn are competing products, if
the price of palay increases farmers will plant palay
rather than corn its competing product to take
advantage of higher price of palay.
4. Firm's expectations about future prices has an
inverse relation to supply. If the price of rice is
expected to increase, traders tend to hoard, hence,
there will be a decrease in present supply.
5. Number of suppliers has a direct relation to supply.
The more number of sellers, the higher the supply.
 receive. It is therefore natural to use total surplus
as a measure of society’s economic well-being.
• An allocation of resources is efficient if it maximizes
total surplus. Efficiency means:
o The goods are consumed by the buyers who value
them most highly.
o The goods are produced by the producers with
the lowest costs.
o Raising or lowering the quantity of a good would
not increase total surplus.
• Efficiency means that total surplus is maximized, that
the goods are produced by sellers with lowest cost,
and that they are consumed by buyers who most
value them.
INTERNATIONAL TRADE
• concept of this exchange of goods or services
between people or entities in two or more different
countries. Both the parties benefit from the
exchange because there is a need or want of goods
or services. Although sounds simple, there is a great
deal of theory, policy, and business strategy that
constitutes international trade.
• Trade – the activity of buying and selling, or
exchanging, goods and/or services between people
or countries
• International trade – referred to as the exchange or
trade of goods and services between different
nations.
2 Components of International Trade:
• IMPORT – good or service that is manufactured in a
foreign country and sold in the domestic market.
• EXPORT – good or service that is manufactured
domestically and sold in foreign markets.
Philippines major IMPORTS:
• Electronic products
• Industrial Machinery
• Mineral fuels
• Transport equipment
• Construction Materials
Philippines major EXPORTS:
• Coconut Oil
• Electronic products
• Manufactures
• Woodcrafts and furniture
• Agricultural Products
Philippines' Specialization on International Trade:
• Agriculture
• Business Process Outsourcing (BPO)
• Tourism
• Furniture and Handicrafts
• Natural Resources
• Garments and Textiles
• Automotive Parts and Components
• Aquaculture and Fishery Products
• Export of Labor (OFW's)
International Trade Organizations:
• The GATT, USMCA, the EU, MERCOSUR, and WTO are
responsible for overseeing the foundation of
international trade, which is the exchange of goods
between national borders.
• GATT (General Agreement on Tariffs and Trade)
• EU (European Union)
• USMCA (United States - Mexico - Canada Agreement)
• MERCOSUR
• WTO (World Trade Organization)
LESSON 3
GDP measures two things at once:
• the total income of everyone in the economy
• the total expenditure on the economy’s output of
goods and services
Gross Domestic Product (GDP)
• market value of all final goods and services produced
within a country in each period
• measure of the total income or total output in the
economy
• since income equals expenditure, GDP can be
measured by adding up the income earned in the
economy (wages, rent and profit) or the expenditure
on goods and services produced in the economy
• income equals expenditure equals GDP
Gross National Product (GNP)
• measures the total market value of all final goods and
services produced by nationals or permanent
residents of a country during a given a year
• this is regardless of where the income for the final
goods and services was earned
Nominal Gross Domestic Product
• values the production of goods and services at
current prices
• it is the sum total of the economic output produced
in a year valued at the current market price
• also known as a “current dollar GDP” or “chained
dollar GDP”
Real Gross Domestic Product
• values the production of goods and services at
constant prices
• is the sum-total economic output produced in a
year's values at a predetermined base market price
improvements done to a product they have been
using or the invention of a new product are not
considered
Correcting Economic Variables for the Effects of Inflation
Inflation is the rate of increase in price over a given
period of time. It is typically broad measure, such as the
overall increase in prices or the increase in the cost of
living in a country.
• Indexation
• Nominal interest Rate

Gross Domestic Product Deflator – is a measure of the • Real interest rate

price level calculated as the ratio of nominal GDP to real
GDP times 100. It tells us what portion of the rise in
nominal GDP that is attributable to a rise in prices rather LESSON 4
than a rise in the quantities produced
THE CONCEPT OF PRODUCTION
Consumer’s Price Index – the consumer’s price index is a
• Production
more comprehensive measure of the change in prices
from one year to the next. o process of converting inputs into outputs
o process by which different inputs, including
GDP DEFLATOR vs. CONSUMER’S INDEX PRICE capital, labor, and land, are used to create
outputs in the form of products or services
The main difference between the GDP deflator and the
o any human initiative that creates a good for use
CPI is their scope and purpose. The GDP deflator is a
• Inputs – any resources used to create goods and
broader measure of inflation used to assess overall price
services.
changes in an economy, while the CPI is a more specific
• Outputs – quantity of goods or services produced in
measure that focuses on the cost of living for a typical
a specific time period.
consumer. Both indicators have their respective uses and
• Production can result in output in the form of goods
provide valuable insights into inflation trends, but they
and services.
serve different analytical purposes.
• Goods – are products we can view and touch with
Problems on Measuring Cost of Living our hands.
• Services – are what we cannot see but we can feel
• Substitution Bias – in the consumer price index is
their use or presence.
weak as it fails to justify the substitution effect. At
times, individual consumers substitute the goods Three Types of Production Processes Primary
they have been using for another after a cheaper Production
price.
• Introduction of a new product - an increase in the • Primary production
value of a dollar is expected when a new product is o processes tap or harness natural resources
introduced in the market as it can buy greater o it is related to obtaining natural resources in the
varieties. However, the consumer price index fails to form of raw materials
reflect the increase in purchasing power for the • Secondary Production
dollar, thus making it a problem to calculate the cost o this type of production converts primary
of living. resources, such as raw materials into finished
• Unmeasured quality changes - quality bias occurs goods.
when there are changes in quality for the existing • Tertiary Production
product that a consumer has been using. While o this type of production concept is related to the
calculating the cost of living for a consumer, the services.
Growth accounting measures the sources of growth in
real GDP. From the production function, it follows that:
Growth in Real GDP = Effect of Growth in TFP + Effect of
Growth in Labor Inputs + Effect of Growth in Capital
Inputs
Solow Residual is the growth in real GDP or per capita
real GDP not caused by growth in factor inputs, but
attributed to improved technology.
The general formula often the takes form of the
following:
TFP = Y / (K α * (L * H) (1-α) )
Y = total output or GDP.
K = capital input.
L = labor input.
H = human capital input.
α (alpha) = output elasticity of capital, which measures
the share of output attributed to capital.
• Endogenous Growth Theory
o implies that the steady-state growth rate is
affected by economic behavior and economic
policy
o it provides an outlook of what engineers
economic growth; arguing that a persistent rate of
prosperity is influenced by internal processes
such as human capital, innovation, and
investment capital, rather than external,
uncontrollable forces, challenging the view of
neoclassical economics
GROWTH IN REAL GDP PER CAPITA
Gross domestic product per capita measures a country's
economic output per person and is calculated by dividing
the GDP of a country by its population.
Growth accounting can be used to uncover the sources
of past growth in per capita GDP.
Consider the same production function we have used for
total GDP: Y = A × F(N,K)
* Technology (A) is constant, real GDP (Y) will grow of the
growth in labor input and the growth in capital input. If
labor force growth increases employment, with fixed
capital stock (K), and technology (A), GDP will increase. A
similar calculation shows the effects of growth in the
capital stock. The elasticities of output with respect to
the inputs of labor and capital based on factor income
shares in national accounts.
Factors Contribution
• Marginal product: the change in total output caused
by a change of one unit in the input of that factor to
production.
• Constant returns to scale: equal percentage
increases in inputs of labor and capital increase
output by the same percentage.
• Sustained growth in per capita real GDP:
improvements in technology overcome the
diminishing returns to increases in the capital to
labor ratio
ECONOMIC GROWTH
• an increase in the amount of economic goods and
services produced during one time period compared
with the previous period
• an increase in the capacity of an economy to produce
goods and services
• it occurs when a society acquires new resources or
when it learns to produce more by using existing
resources.
ECONOMIC GROWTH RATE
• a measure of economic growth from one period to
another
• it is expressed in percentage
Formula:
GDP (Gross Domestic Product)
• the total or monetary measure of all the final or
finished goods and services produced in a specific
time period by a country
• GDP is made up of goods and services produced for
market consumption as well as some nonmarket
production, like government-provided defense or
educational services
• GDP is significant because it provides information on
the size and health of an economy.
• Real GDP expansion is frequently used as an
indicator of the condition of the economy as a whole.
 In general, an increase in real GDP is seen as a
positive indicator of the health of the economy.
• According to the Philippine Statistics Authority, the
Philippines' gross domestic product (GDP) expanded
by 4.3 percent in the second quarter of 2023, a
slower rate than the first quarter's 6.4 percent
growth and the same period last year's 7.5% growth.
Three things that contribute to economic growth:
1. The labor supply grows as the population expands.
2. The stock of capital grows as spending by business
and government on buildings, machinery,
information technology, and so forth increases.
3. Labor force productivity grows as a result of
experience, the development of scientific knowledge
combined with product and process innovations, and
advances in the technology of production.
Productivity of labor – the output of goods and services
per worker
BENEFITS OF ECONOMIC GROWTH
• Lower unemployment
• Improved public service
• Money can be spent on protecting the environment
Investment
COSTS OF ECONOMIC GROWTH
• Higher Inflation
• Damaging effects on the environment
FINANCIAL SYSTEMS
Financial Systems
• a network of organizations, markets, tools, and
services that makes it easier for investors, borrowers,
and lenders to transfer money
• it can be set up according to market principles,
centralized planning, or a combination of the two.
The financial system consists of a variety of
institutions, such as banks, stock exchanges, and
government treasuries.
Understanding Financial Systems
• the financial system can be structured utilizing
markets, central planning, or a combination of the
two, much like any other sector of the economy.
• financial markets involve loan negotiations between
borrowers, lenders, and investors. In these markets,
money in one of its forms—current money (cash),
claims on future money (credit), or claims on the
future earning potential or market value of real
assets (equity)—is typically the economic good that
is exchanged on both sides. Derivative instruments
are also included in these. Financial instruments
known as derivatives are those that depend on the
performance of an underlying real or financial asset,
such as commodities futures or stock options. These
are all traded in financial markets between investors,
lenders, and borrowers in accordance with the
standard laws of supply and demand.
Components of Financial Systems
Market-based principles, centralized planning, or a
combination of the two can be used to organize financial
institutions. The essential elements of a financial system
are as follows:
1. Financial Institutions: Institutions that offer financial
services to clients are known as financial institutions.
They consist of financial intermediaries like banks
and credit unions as well as firms that provide
insurance, investments, and other financial services.
2. Financial Markets: These are marketplaces where
traders can transact in financial instruments like
stocks, bonds, currencies, and commodities. Stock
exchanges, bond markets, currency exchange
markets, and commodities markets are among
examples.
3. Financial Instruments: These are contracts,
agreements, or records that stand in for a financial
asset. Stocks, bonds, options, futures contracts, and
other derivatives are some examples.
4. Financial Services: These are the services that
financial institutions offer to their clients. Loans,
credit cards, insurance plans, investment counsel,
and other financial items are a few examples.
5. Currency (Money): This is a medium of exchange that
is widely accepted in transactions. It might appear as
real money like coins and banknotes or as digital
money like cryptocurrencies.
Functions of Financial Systems
A financial system enables its users to grow and get
advantages.
1. Payment System - Businesses and merchants can
collect money in exchange for their goods or services
thanks to an effective payment system. Cash,
2. Cyclical unemployment refers to the year-to-year
fluctuations in unemployment around its natural
rate, and it is closely associated with the short-run
ups and downs of economic activity.
Alternatively, we can think about the natural rate of
unemployment as the economy’s long--run rate of
unemployment and cyclical unemployment as the
shorter run fluctuations around the natural rate.
Types of Unemployment
1. Frictional Unemployment
o when workers move from one job to another job
o at any given time, some workers are “between
jobs.”
o some of them will be moving voluntarily from one
job to another
o others will have been fired and will be seeking
reemployment
o still others will have been laid off temporarily
because of seasonal demand
o many young workers will be searching for their
first jobs
o frictional unemployment is inevitable and, at least
in part, desirable
o many workers who are voluntarily between jobs
are moving from low-paying, low-productivity
jobs to higher-paying, higher-productivity
positions
o that means greater income for the workers, a
better allocation of labor resources, and a larger
real GDP for the economy.
1. Structural Unemployment
o occurs when the qualification of a person is not
enough to meet his job responsibilities
o changes over time in consumer demand and in
technology alter the “structure” of the total
demand for labor, both occupationally and
geographically
o occupationally, the demand for certain skills (for
example, sewing clothes or working on farms)
may decline or even vanish. The demand for
other skills (for example, designing software or
maintaining computer systems) will intensify.
Unemployment results because the composition
of the labor force does not respond immediately
or completely to the new structure of job
opportunities. Workers who find that their skills
and experience have become obsolete or
unneeded thus find that they have no
marketable talents. They are structurally
unemployed until they adapt or develop skills
that employers want
o geographically, the demand for labor also
changes over time. An example: the migration of
industry and thus of employment opportunities
from the Snowbelt to the Sunbelt over the past
few decades.
2. Cyclical Unemployment
o occurs when the economy is in needed of lower
workforce that is caused by a decline in total
spending
o typically begins in the recession phase of the
business cycle
o as the demand for goods and services decreases,
employment falls and unemployment rise.
o results from insufficient demand for goods and
services.
Causes of Unemployment
• High population growth.
• Absence of employment opportunities.
• Seasonal employment.
• Joint family system.
• Increasing turnout of students from universities.
• Slow developing industries.
• Insufficient rate of economic growth.
Common Impacts of Unemployment
• Loss of Income
• Negative Multiplier Effects
• Loss of National Output
• Fiscal Costs
• Social Costs
Measurement of Employment
• Measuring unemployment is the job of the Bureau
of Labor Statistics (BLS), which is part of the
Department of Labor
o the BLS produces data on unemployment and
on other aspects of the labor market, including
types of employment, length of the average
workweek, and the duration of unemployment.
Based on the data from the BLS measuring
unemployment is divided into one of three categories:
• Employed