_________WEEK 1-Monday_____________ Law of Diminishing Margin of Utility- as a

Economics- study of allocation of scarce person consumes this products, the

resources to satisfy men and women’s marginal utility decreases.
insatiable wants and needs.
Scarce Resources- insufficient resources __________WEEK 1- Tuesday___________
Insatiable- never satisfied
Needs- necessities
Importance and Fields of Economics
-Finance forecasting
-Accounting balancing
-Economics

Branches of Economics Laissez-Faire is not proposed by Adam Smith

-Micro Economics small scale (consumers, but only developed it. Oppose to any type of
small businesses, spending patterns) federal interventions such as legal
-Macro Economics large scale (government implication that would trade minimum
and international economies) wage.

GDP (Gross Domestic Products) – measure

of economics’ growth whether it is
increasing or decreasing.
GNI (Gross National Income) - takes account
Inflation.
Inflation- increase in rice.
OFW Remittances- the money they earn Monopoly was used to expose Capitalism.
gets remitted in the PH.

Money Supply- money in circulation.

4 Market Structure:
-Perfect Competition FACTORS OF PRODUCTION
-Monopolistic Competition 1. Land (La) - actual space used to create
-Oligopoly products. Basic resources within land,
-Monopoly sea, and air.
2. Labor (Lb) - any mental or physical
Horizontal Living Spaces- subdivisions. effort. Age is 16 years old and above.
Vertical Living Spaces- condominiums and Compensated with either wage or
apartments. salary. Referred as human capital.
 Wage- set per hour or per day.
Depended on the productivity and
commonly given to blue collar jobs
(unskilled worker/ physical effort).
Minimum wage in the PH: 500- 537
Salary- paid on an annual basis and is
fixed. Given to white collar jobs (mental
effort/skilled worker).
3. Capital (K) - man made goods used to
further transform products, commodities,
and services. The income from the product
is called interest.
-Physical Capital (buildings, factories,
machines, equipment, and human capital)
-Financial Capital (debts, equities,
loans, and company incurs)
4. Entrepreneurial Ability (E) – necessary
skill to efficiently mix the other 3
factors. Income from entrepreneur is
called Profit.
These four factors are inputs to make
economic profit.
Income – Expense from Production = Economic Profit
Economic Dilemma: Allocation of 4; limited
nature vs. unlimited human wants.
Opportunity Cost- The Actual Price
Trade-Off- The Actual Commodity
Economic Goods- bring out general progress
and commerce in a country.
”The Bads”- negative externalities
(pollution) and natural imperfection.
Free-Rider Problem- market failure because
there is an insufficient distribution of
resources. This is because some people are
consuming more than their fair share and
aren’t paying anything at all.
Main Objective of Commerce: MAXIMIZE
PROFIT
________WEEK 1- Wednesday_______
Main Branches of Economics
Bottom-up approach- starts specifically to a
broader concept.
Top-down approach- looks at the economy
in a wider perspective before narrowing
down.
Different Fields of Economics
1. International Economics-
globalization, internalization, open
economy system (a particular country
trades with the outside country)
2. Development Economics- focus on
poor nations.
3. History of Economics- economists
codify their works.
4. Econometrics- reliance on
mathematical equations.
 5. Behavioral Economics- spending TOTAL PRODUCTION
patterns, everything that deals with Important concept to explain a firm
thinking that affects their decision in increasing production in the short run when
buying. La, K, E, are FIXED and Lb is VARIED.
6. Financial Economics- finance +
economics Example:
Small factor (La), fixed number of machies
Positive and Normative Statements (K), entrepreneur
- Positive statement Firm INCREASES output by INCREASING
Can be proven the number of Labor Force.
Seen in papers with evidences.
“What is”
Does not evoke emotions
- Normative Statement
Based on value judgement
Opinions of professionals
“What should be?”
Lends itself to debate
Example:
Petroleum
Positive: An increase in the price leads to a
reduction in the sake of petroleum.

Negative: The government should subsidize

the price of petroleum to help low-income The workers’ additional contribution to the
people. total production is termd the worker’s
Marginal Product

Law of Diminishing Marginal Return

After some level of capacity is reached,
adding an additional factor of production
PRODUCTION FUNCTION will result in smaller increase in output.
Shows the combination of the four
factors of production.
Can be mathematically expressed as
Q = f (La, Lb, K, E)
Total Product (TP) the computation part. Answer:
AP MP
0 0
10 10
12 14
13.33 16
12.5 10
11.2 6
9.6 1

Average Product (AP) output per unit of X axis- number of workers

variable input. Y axis- marginal product

TOTAL PRODUCTION FUNCTION

You now have to expand by looking at
you 4 factors of production. Study which
Output: TP
Input: L (Labor)
**x per y = x/y**

Marginal Product (MP) change in output

per unit of change in input ceteris paribus.

factor can be increased.

**Triangle like symbol = Delta meaning
subtract** E.g: Acquire more land to build more
factories.

Employees seek to employ people to a

level where MP=0
It will not employ people under
condition of diminishing return.

Factors to Consider
- Labor Rate
*USE THE FORMULAS ABOVE* - Productivity of labor
- Cost of training
MP = 10 – 0 / 1 – 0 - Compulsory welfare benefits.
**old value minus present value**
Contractualization
- Short term employment of wage
workers
- Rich supply of unskilled workers
- Vs. hiring skilled workers
________WEEK 1- Friday_________
Production Possibilities Curve (PPC)
Combination of two products, the
combination of two goods that a firm is able
to produce given the amount of resources
that they have.
Can also be called Production
Possibilities Frontier (PPF)
3 Key Concepts of PPC
 Scarcity
 Trade-Off- the product you chose to
forego in order to choose another
product.
 Opportunity Cost- actual value.
30 – 15 = 15
**The hats decrease in order to
accommodate the sweaters.**
25 – 29 = 4 hats
Production Possibilities Curve
Efficient
- Points ON the curve.
- All resources has been used to the
fullest.
Inefficient
- Points BELOW the curve.
- A firm is not using all resources.
Impossible
- Points OUTSIDE the curve
- A firm does not have enough
resources.
-
PPC Shifters
1. Change in quantity and quality.
2. Change in technology
Economies of Scale
1. Short Run- 1 year; consider 1
input/resource is fixed.
2. Long Run- longer span; all resources
are variable.
3 Possibilities of Output
1. More than double- increasing return
to scale.
2. Double- constant returns to scale.
 3. Less than double- decreasing returns
to scale.
“When input increases, output decreases.”
Economies of Scale
- Happens usually in a large firms like
SM.
- Large scale production and buy
resources in bulk.
- Bigger firms have lower cost.
- Total Cost (TC) ↑ increases when a
company decides to buy a machine
that would help the production more
efficient. This machine will have a
higher cost. It may be be expensive at
first but in the long run, Average Total
Cost (ATC) ↓ decreases. If the price is
right.
TYPES OF ECONOMY
1. Planned Economy- prevalent in
communist and socialist types of
government. The states provide
guidelines that will dictate the
product and services available in the
market. The government controls.
(Ex. North Korea, Cuba)
2. Market Economy- more predominant.
More countries adopt this kind of
economy. The consumers exercise
virtual autonomy on the products
that they want to avail. The
government is not dictating what is
available. (Ex. USA, Europe)
3. Mixed Economy- mixture of two
economy. State dictates some control
over the resources they have but it’s
still the consumers’ decision to buy
the goods. (China—used to employ
planned system and then employed
market economy., Singapore)
Assumptions about market economy
1. Consumer Sovereignty- market
economy operates on the assumption
that consumer demand is dominant.
The supply will adjust to the demand.
Profit = driving force in the system.
2. Forces of Supply and Demand-
products are produced because there
is demand and because we have
insatiable needs.
3. People are rational and consistent-
consumers by nature and rational
beings. (Ex. A family will choose
products with discounts).
Normal Goods = as the income
increases, the demand on a normal
good increases.
Inferior Goods = as the income
decreases, the demand normal goods
decreases.
4. Trading and Commerce are always
good- both stimulates competition.
Firms outdo each other by developing
their product or services.
 5. International Trade is always good-
countries trade with other countries.
6. Mercantilism is the Anti-thesis of
Globalization and International Trade-
Mercantilism is the enemy of
globalization and international trade.
It happened back 16th and 18th
Century in Europe wherein the
government would limit its imports.
They want to patronize more the local
products.
___________WEEK 2- Tuesday__________
Gross Domestic Product
- Economic Indicator that measures the
health of a country’s economy
whether it is progressing.
2 Ways:
Nominal GDP- takes current market price
into account WITHOUT factoring in
INFLATION or DEFLATION.
Real GDP- factors in INFLATION; preferred
more by economics.
2 Ways of Measuring GDP
1. Income Approach- considers wage,
salary—labor, rental income, interest
rate, and profit.
2. Expenditure Approach- more
common (GDP = C + G + I + NX)
Gross National Income
- Includes all income earned by a
country’s residents, business, earnings
from foreign sources.
- Purpose: determine country’s
standard of living.
 Purchasing Power Party
 Per Capita Method
Foreign Direct Investments (FDI)
 Investments made by firm/indi in 1
country into business interests
located in another country.
 Takes place when an investor
establishes foreign business
operations or acquires foreign
business assets in foreign company.
Green Field Investment- the investment of
new factory/land in another country.
Difference
GDP- within the country
GNI- plus wages, salaries, and property
income of country’s residents earned
abroad.
How does FDI works?
 - Open economies
- Skilled workforce
- Above average growth propects
_________WEEK 2- Friday_______
Law of Demand
- Quantity purchased varies INVERSELY
with price. As the price increases, the
quantity of demand decreases.
Demand Curve
- Downward sloping.
Quantity demanded- x axis
Price- y axis
Shifts in the Demand Curve
-Shift to the RIGHT- increase in
DEMAND of the given price.
-Shift to the LEFT- decrease in DEMAND
of the given price.
Factors that produce shifts
1. Consumer Income- as consumer
income increases, the quantity
demand of a good increases.
2. Population- increase in population,
quantity demand of goods increases.
3. Consumer Preference- if the consumer
preference changes of a product,
demand increases.
4. Price availability of related goods-
complimentary goods (pair. Ex. Tennis
racket and ball) and substitute goods
(produce similar utility and
satisfaction. Ex. butter and
margarine).
Elasticity of Demand (E)
- Responsiveness and the sensitivity of
the quantity demanded to an
independent variables (prices,
consumer preference, advertising,
etc)
***the answer must be decimal.***
5 Categories of Elasticity
 1. Perfect Inelastic- the change in price
don’t affect the quantity demand and the
expenditure is stable.
E=0
5. Perfectly Elastic- a very small change
in price can cause the quantity
demand to become 0 or ∞, depeding
on the direction of the price change.
E>∞

2. Inelastic- when a price increases, the

quantity demand and expenditure will
decrease.
E<1

3. Unitary Elastic- the increase in price

leads to the decrease of the quantity demand
while the expenditure is stable.
E=1

Income Elasticity of Demand

- Responsiveness of the quantity
demanded of an item to the changes
in the income.

4. Elastic- when the price increase, the

expenditure and quantity demand decrease.
E>1 _________WEEK 3- Monday_________
Nature of Demand
The amount of a good that
consumers are willing and able to buy a
given point in time.
Law of Demand
States that there’s a negative, or
inverse, relationship between price and
the quantity of a good demanded and its
price.
__________WEEK 3- Tuesday________
Elastic Supply
Factors that produce the Shift in Supply
Curve
1. Industry Size- when the
industry size increases, it will shift to the
right, and the supply goods will increase.
2. Technological Progress- any
technological progress will lead to an
increase in supply of goods.
3. Education- as the level and
quality of the education improves, the
supply increases.
4. Price of Inputs- when the price
increases, it will shift to the left, and the
supply decreases. While if the price
decreases, it will shift to the right, and the
supply will increase.
5. Price of Related Outputs- the
increase in price leads to the shift to the
right, and the supply increases.
________WEEK 3-Wednesday_________
Free Goods
It is a goods with zero opportunity
cost. This means it can be consumed in
as much quantity as needed without
reducing its availability to others.
Economic Goods
It is when a goods or services that has
a benefit to society. Also, economic
goods have a degree of scarcity and
therefore an opportunity cost.
_________WEEK 3- Friday________
Supply Curve- depicts the relationship
between the quantity supplies of a good
at different price.
Y axis- price
X axis- quantity
Categories of Elasticity Supply
1. Perfectly Inelastic- change in the
quantity supply of the product do not
vary compare to the changes in the price.
Qs = 0
2. Inelastic- when the changes in the
quantity supply do not vary significantly
with the changes of its price.
Qs < 1
3. Unitary Elastic- a corresponding
change in the quantity being supplied
differs directly proportioned to the
changes of its price.
Qs = 1

4. Elastic- when the quantity being
supplies is highly sensitive to the
change of its price.
Qs > 1
5. Perfectly Elastic- the changes in
quantity supplied vary no change in
price
____________WEEK 4- Monday_______
Influences of Demand
1. Flow of Demand- customer-driven
rather than forecast-driven. Instead of
producing large quantity and just storing
the excess, goods are produced on a
daily basis according to specific customer
needs.
Household- (1) Labor Payments 
business (2) Taxes Labor government
Business- (1) Income Goods and Services
(2) Taxes Goods and Services
Government- (1) Services and Income 
households (2) Services/Payment 
businesses
2. Price of the Product- most important
factor that affects the demand. When the
price increases, the demand decreases and
vice versa. All things being constant, people
will always pay for a lower price of a same
quality.
3. Prices of Other Prices- can either be
complements or substitutes. If it is
complementary, a price increase will reduce
consumption of the complement as well.
4. Income Availability for Spending-
(Income – Tax = Disposable Income)
Meanwhile, (Disposable Income –
Household Expenses = Discretionary Income
 available for spending)
5. Price and Availability of Money and
Credit- in consumer-oriented society, credit
influences demand aside from income
factor. If interest rate increase, then the
cost of credit rises that will lead to reduction
in demand, especially luxury and services.
6. Market Size- number of individual in a
market segment who are potential buyers.
7. Market Efforts and Consumer Taste-
changes may be a result of improperly
identifying a target audience, which is a
group of people who are most likely to use a
product.
Influences of Supply
1. Cost of Factors and other Inputs-
changes in cost with constant price will
change the profit expectations and will
certainly influence decisions regarding
supply. An increase in factors (land, labor,
entrepreneurial skill) will affect the prices of
intermediate product.
2. Changes in Taxes- any change in the
tax rate will affect the profits anticipated
from supply/supply intention. An increase in
production tax has similar effect to the
increase in factor costs.
3. Changes in Technology- an
improvement in technology allows a given
level of production that can be achieved
with fewer factor inputs.
4. Efficiency and Effectiveness-
Efficiency means producing the product at
the least possible cost. Effectiveness means
doing it right the first time like the starting
of a car. A repetition means you have used
twice the amount of resources and energy.
5. Changes in Relative Profitability of
Products- profit is the money a business
pulls in after accounting for all expenses.
__________WEEK 4-Tuesday___________
Price Regulation
Imposition of either a minimum or a
maximum price by government decree or
law. The price that will be imposed will base
on the type of economy by which the
country is classified.
Imposition by a good government or
international organizations like the
Organization of Petroleum Exporting
Countries (OPEC).
Price Ceiling
The maximum price set by imposition.
Price Floor
Minimum price set by imposistion.
-Minimum wage regulation, maximum
prices for food items, fuels, and rent control
are important applications of such Price
Ceiling and Price Floor that contradicts the
free market and work against the market
force.
Price Control
A concept which applies on a situational
basis.
These are government-mandated either
minimum or maximum prices set for a
specific good to manage affordability.
Over the long term, price controls may
lead to shortage, rationing, inferior product
quality, and black markets.
Example:
(1) Food shortage may happen after a
calamity that’s why food control is imposed
to establish food distribution.
Minimum Wage
Defined as “the minimum amount of
remuneration that an employer is required
to pay wage earners for the work performed
during a given period, which cannot be
reduced by collective agreement/contract”.
Binding nature of minimum wage. It can
be set by statute, competent authority,
wage board/council, or by industrial/ labor
courts/tribunals.
Philippines; 55M labor force.
Unemployment rate hovers around 6% to
7.5% and the current minimum wage for
MM is P420 a day.
Minimum Wage Law
Republic Act No. 602 (April 6, 1951)—
an act to establish a minimum wage law.
Repealed by Presidential Decree No. 442I.
SECTION 1. Short title of Act—this Act
shall be known as the Minimum Wage Law.
SECTION 2.—concept of wage.
SECTION 3. – (a) every employer shall pay to
each of his employee. (1) Four Peso a day
for employees of an establishment located
in Manila. (3) Three pesos a day for
employees outside Manila. This does not
apply to retail/service that regularly employ
more than 5 employees.
(b) Every employer who operates a
farm enterprise more than 12 hectares shall
pay to each employees. (1) P1.75 a day with
no allowance on board and lodging shal
reduce below P1.50 in cash. (2) P2 a day
with no allowance for b&l shall reduce
below P1.75 in cash. (3) P2.50 a day with no
allowance for b&l shall reduce below P2.25.
(c) Minimum wage rates for
Government employees shall be produced
in subsections.
(d) This Act shall not apply to
domestic servants.
(e) The crew of vessels in Manila
shall be subjected to minimum wage of non-
agricultural workers in Manila.
Shortage
It is a condition where the quantity
demand is greater than the quantity
supplied at the market price.
Causes: (1) increase in demand (2)
Decrease in supply (3) Government
intervention.
Surplus
Describes a level of an asset that
exceeds the proportion used.
Inventory Surplus- occurs when product
that remained unsold.
Budgetary Surplus- income earn exceeds
expenses paid
A surplus results from a disconnect between
supply and demand for a product or when
some people are willing to pay more than
other consumers.
Unemployment
Occurs when workers who want to
work are unable to find jobs, which lowers
economic output, however, yhey still
require subsistence.
- High rates of unemployment are a
signal of economic distress.
- Extremely low rates of unemployment
signal an overheated economy.
Classification:
 Frictional- people voluntarily change
job in an economy.
 Cyclical- variation in the number of
workers over the course of economic
up/down turn.
 Structural- technological change
 Institutional- result of long term or
permanent institutional factor in the
economy.
Sticky Wage
The sticky wage theory hypothesizes
that employee pay tends to respond slowly
to changes in company performance or the
economy.
When unemployment rises, the wage of
those workers that remain employes tend to
stay the same or grow at a slower rate
rather than falling with the decrease in
demand for labor.
Wages are said to be sticky-down, they
can move up easily but move down only
with difficulty.
_________WEEK 4- Wednesday_________
Philip’s Curve
Two Time Frame:
 (1) Long-run—tracks the relationship
between inflation and unemployment.
(2) Short-run—inverse relationship
between inflation and unemployment.
- Philip’s Curve Model is a graphical
model showing the relationship between
unemployment and inflation.
- Short-run Philip’s Curve (SPRC) -
curve illustrating the inverse short-run
relationship between the unemployment
rate and the inflation rate.
- Long-run Philip’s Curve (LRPC) –
curve illustrating that there is no
relationship between unemployment rate
and inflation rate. It is a vertical at the
natural rate of unemployment.
Downsizing
It is a common organizational
practice. Cutting jobs is the fastest way
to cut costs.
It is the permanent reduction
wherein the unproductive workers or
division are being removed.
Karl Marx
- Philosopher and economist who was
influenced by Georg Wilhelm Friedrich
Hegel, another German philosopher.
- Used the Hegelian logic of thesis,
antithesis, and synthesis. This were
contained in Das Capital that portrayed the
inequalities of the capitalist system.
- Friedrich Engels published Das Capital
after the death of Karl Marx.
- He saw capitalism as thesis,
communism as antithesis, and socialism as
synthesis.
- Marxian Economics only focus on
labor as the main factor input.
- In Das Capital (Capital: A Critique of
Political Economy), society is composed of
two main classes; Capitalist are the business
owners. Proletariat are composed of
labourer who only works to earn money.
- Das Capital is a critique of capitalism.
- The word “capitalism” was first used
by William Thackeray in 1854, in his novel,
“The Newcome”. It is about the sense of
concern about the personal possession of
money.
___________WEEK 4- Friday____________
Poverty
- It is a state in which a person or
community lacks the financial resources.
- Poverty-stricken people and families
might go without proper housing, clean
water, healthy food, and medical attention.
Employment
 - It is an agreement between an
individual and entities that stipulates the
responsibilities, payment terms, rule of
workplace that is recognized by the
government.
- Laymen’s term, employment refers to
the idea that an individual has entered some
form of verbal or written commitment with
an entity, known as employer.
Poverty and Employment
- Shows the effect of employment to
poverty of an individual.
Population rate and Economic growth
- Study that indicates the existence of a
long-run equilibrium relationship between
economic performance and population
growth.
- The impact of population growth
often measured through impact on the
growth per capita income/output.
Thomas Robert Malthus and his Theory
- Known for the population growth
philosophies outlined in his 1798 book “An
Essay on the Principle of Population”.
- He theorized that populations would
continue expanding until growth is stopped
or reversed by crisis or calamities.
- He is also known for his exponential
formula used to forecast population growth,
which is currently known as Malthusian
Growth Model.
Interrelationship of Poverty,
Unemployment, Population Growth
 Poverty means that the income level
from employment is so low that basic
human needs can’t be met.
 Unemployment means when a person
who is actively searching for employment is
unable to find work. It is often used to
measure the health of the economy.
 Population Growth is the increase in
the number of individuals in a population.
__________WEEK 5- Monday_________
Money
- From Latin word ‘moneto’, defined as
commodity that is generally accepted as a
medium of exchange.
- Bartering was one way that people
exchanged goods for other goods before
money was created.
- Like gold, money has worth because
people represent it to be valuable.
- Economic rely on the exchange of
money for products and services.
Functions of Money
 Primary- medium of exchange;
measure of value.
 Secondary- store of value; deferred
payments; transfer value.
 Contingent- basis of credit; income
distribution; equalize marginal utility.
Fiscal Policy
- Concerning the use of state treasury or
the government finances to achieve the
macro-economic goals.
- Government policy of changing its
taxation and public expenditure programs
intended to achieve its objective.
 - Government uses its expenditure and
revenue program to produce desirable
effects on National Income, production and
employment.
Objectives of Fiscal Policy
 To achieve equal distribution of wealth
 Increase in savings
 Degree of inflation
 To achieve economic stability
 Price stability
Instrument of Fiscal Policy
 Deficit Policy- financing the budgetary
deficit. Tools used to have loans.
 Public Expenditure- development of
state enterprises and infrastructure.
 Taxation Policy- tax itself will serve as
the revenue of the government.
 Public Depth- government needs a lot
of funds for economic development.
Monetary Policy
- Refers to the use of instruments under
the control of the central bank (RBI) to
regulate the availability, cost and use of
money and credit.
- According to Johnson, “Monetary
policy is defined as policy employing central
bank’s control of the supply of money as an
instrument for achieving the objectives of
general economic policy.”
Expansionary and Contractionary Monetary
Policy
- Expansionary Monetary Policy, the
monetary authority often lowers the
interest rates through various measures that
makes money saving unfavourable and
promote spending.
- Leads to increases in money supply.
- Contractionary Monetary Policy, driven
by increase in the various bas interest rates
controlled by modern central banks or other
means producing growth in money supply.
Objective of Monetary Policy
- Full employment
- Price stability
- Economic growth
- Balance of payments
Instruments of Monetary Policy
 Bank Rate- imposed by bank within
the money.
 Cash Reserve Ratio (CRR) Statutory-
percentage of bank deposit which bank are
required to keep within the bank.
 Liquidity Ratio (SLR) Repo Rate &
Reserve- used to keep the bank’s liquid
assets.
 Repo Rate Open Market Operation-
bank control the credit through the sales. To
help commercial bank to gain money at a
cheaper rate.
Banking
- Can be defined as the business
activity of accepting and safeguarding
money owned by other individuals and
entities, and then leading out this money in
order to earn profit.
- Means transacting business with a
bank; depositing or withdrawing.
- Funds or requesting loans.
History
- Refers to the development of banks.
- Begins with the first prototype banks
of merchants of the ancient world.

Financial Institutions
- Act as intermediaries between saver
and borrowers and are differentiated by the
way they obtain their funds.
- Government agency that collects
funds from the public and invest those
funds in financial institutions such as loans,
securities, bank deposits, and income
generating property.
Roles of banks
- Intermediation- transfer of funds
from the savers to entrepreneurs.
- Payment System- paying of
transactions.
- Financial Service- between investor
and borrower.
Roles of Financial Institution
- Regulate monetary supply
- Investment Advice
- Insurance Services
- Banking Services
Bank Liabilities
Anything that bank owns automatically
makes it owned by the consumer. Deposits
are liabilities of institutions.
Major Types:
1. Sight deposits
2. Time deposits
3. Certificates of deposits and sales
4. Repurchase agreements
Bank Assets
- Short-term loans that has three kinds
market loans primarily to other bank
- Banks make investment partly in
government bonds and these are the special
types of types of banks that can make direct
investments to private companies.
_________WEEK 5- Tuesday___________
Types of Banks
 Universal Banks- function is to have
deposit, investment, and credit.
 Commercial Banks- only investment
in banks related activity unlike universal
bank.
 Development Bank- help private
sectors or people that are not high in
finances.
 Smaller Banks (Saving, Thrift, Rural
Banks) - help workers that does not have
high income.
 Investment Banks- helps the
businessman to have a better production.
Universal- 40.20%
Rural- 23.50%
Development- 3.30%
Stock Saving- 1.60%
Types of Financial Institutions
 Depository Financial Institution-
(commercial, saving banks) type of group
that can help to lessen the expenses, have
loans and savings.
 Non-Depository- (life insurance) we
do not deposit but stores money with a
great purpose.
 Other Types (Credit Union, Stock
Brokerages Firm, and Asset Management
Firms- they have specific firms that they
help.
Bangko Sentral ng Pilipinas
 - Philippine Commission Act 32 of 1900
placed all banks under Bureau of Treasury.
- Then placed under supervision of
Department of Finance (DOH in 1929).
- Republic Act 265 of1948 established
the Central Bank of the Philippines on
January 3, 1949 under Miguel Cuaderno.
- A powerful entity was established by
RA 7653 that created Bangko Sentral on July
3, 1993 under a long-time lawyer, Gabriel
Singson.
- M1- refers to the narrow definition of
money which consists of currency (e.g.,
paper bills) + demand.
- M2- refers to M1 + savings/small time
deposits
- M3- refers to money supply, peso
savings, time deposits + deposit substitutes
of money-generating banks.
- RM- reserve money which represents
liabilities of the BSP to the public sector in
form of currency.

Responsibilities Creation of Credit

 Provides policy directions in the areas - Separates a bank from other financial
of money, banking, and credit. Supervises institutions.
the operations of banks and exercises - Expansion of deposits. Banks can
regulatory powers over non-bank financial expand their demand deposit as a multiple
institution with quasi-banking function. cash reserves because demand deposits
serve as the principal medium of exchange.
Roles and Functions - Two important aspects—Liquidity and
1. Liquidity management through the Profitability.
control of the money supply. Primary Cash Credit
2. Currency issues Deposits Reserves Customer
3. Lender of last resort R= 20%
4. Financial supervision Person A 1000 200 800
5. Regulatory powers over banks and B 800 160 640
C 640 128 512
quasi banks
D 512 102 410
6. Management of the international
reserves, determine the exchange rate
Multiplier Effect
policy (whether fixed, floating, or a
- Factor by which money supply will
combination).
change given a change in monetary base
7. Financial adviser to the government
given a change or deposit.
and its GOCCs.
- MM = 1/rr
- Change in MM; M = mm x MB
Money Supply
It is determined by the behaviour of
Causes of Money Supply Rise
the three principal actors—public, ban. And
 Surplus Liquidity- appears when cash
BSP.
flow in the bank persistently exceed
withdrawals.
  Inflow of Funds- reflects to all the
cash that is flowing in and out.
 Budget Deficit- occur when expenses
exceed the income reserves thru standard
operation.
_________WEEK 5-Wednesday__________
Relationship between Money Supply and
Rate of Interest
 Money Supply- is all the currency and
other liquid instrument in a country’s
economy on the date measured. It roughly
include both cash and deposits that can be
used easily as cash.
 Interest rate- is the amount a lender
charges for the use of assets expressed as a
percentage of the principal. It is typically
noted on an annual basis known as annual
percentage (APR).
 Relationship- when there is a
shortage of money in bank, the interest rate
will then change.
 Crowding out effect; the government
is crowding out the private businesses. But if
the bans have surplus liquidity, there will be
a way on how the crowding out effect will
be dismissed.
Equilibrium in Money Market
- Money market is the interaction
among institutions through which money is
supplied to individuals, firms, and other that
demand money.
- Money Market Equilibrium occurs at
the interest rate at which the quantity of
money demanded is equal to the quantity of
money supplied.
- It shifts when demand for money is
equal to supply of money.
Quantity Theory of Money
- It is one of the primary research for
the branch of economic referred to as
monetary economic.
- General Price level is proportioned to
the money supply in an economy.
- M (V) = P (T)
- M (Money Supply) - all the money in
the economy.
- V (Velocity of Circulation) – how
many times a dollar, euro, etc. is spent
purchasing finished goods and services.
- P (Price Level) – price level of all
goods and services in an economy.
- T (All Transactions) – all the goods
and services sold within an economy.
- The quantity of money in an economy
has a large influence on its economic
activity.
- Change in money supply = either a
change in price level or change in the supply
of goods or both.
- An increase in the money supply
result to decrease in the value of money
because an increase in money supply causes
the rate in inflation to increase.
Equilibrium in the Foreign Exchange
Market
- Foreign Exchange Market- a market in
which one currency is exchanged for
another currency. For example, the euro is
being bought and sold, and is being paid for
using another currency.
- It requires interest party. In
exchanging, there is an involvement of
interest.
- The equilibrium rate is the interaction
of the supply of currency in the demand for
the currency.
- As for the market, the foreign
exchange market will be in the equilibrium
when the quantity supply of a currency is
equal to the quantity of demanded of the
currency.
__________WEEK 5- Friday___________
Balance Payments
• It is accounts are an accounting record of all
monetary transactions between a country
and the rest of the world. These
transactions include payments for the
country's exports and imports of goods &
services, financial capital ,and financial
transfers.
A country has to deal with other countries in
respect of 3 items:
• Visible items which include all types of
physical goods exported and imported.
• Invisible items which include all those
services whose export and import are not
visible. e.g. transport services, medical
services etc.
• Capital transfers which are concerned with
capital receipts and capital payment.
Components of Balance Payments
1. Current Account Balance
o Account statements of other country
that serves as receipt and payment in
a short period of time
2. Capital Account Balance
o Refers to all financial transactions
3. Overall BOP
o Total of a country’s current and
capital account
o Includes errors and omissions
Causes of Disequilibrium of BOP
1. Natural causes – e.g. floods, earthquake
etc.
2. Economic causes –e.g. Cyclical
Fluctuations, Inflation, Demonstration Effect
etc.
3. Political causes –e.g. international relation,
political instability, etc.
4. Social factors –e.g. change in taste and
preferences etc.
Exchange Rate
- Value of one currency for the purpose of
conversion to another
Example: 1 Philippine peso equals =
0.021 United States Dollar
Factors Resulting in an Appreciation or in
an Appreciation or in a Depreciation of
Currency
1. Rise in Domestic Interest
2. Lower Domestic Inflation
3. Rise in Domestic Income
4. Speculation that the exchange rate will fall
Exchange- Rate Regime
• This is a system that determines the value Depending on the ratio, the currency could
of a domestic currency in terms of foreign be considered over or undervalued.
currencies.
• Importance of Foreign exchange regime:
Stock market Trading, Regime Durability,
Symbolizes growth, Indicates Demand and
Position in world

Types of Currency Exchange Regime

1. Dollarization
 Normally occurs when the local currency
has become unstable and begun to lose
its usefulness as a medium of exchange
for market transactions.
2. Currency Boards
 generally required to maintain reserves
of the underlying foreign currency
3. Monetary Union
 an exchange rate regime where two or
more countries use the same currency
4. Float with discretionary intervention
5. Pure Float / Independent floating
6. Traditional Peg/Fixed exchange rate system

Purchasing Power Theory

• Purchasing power is the amount of goods or
services that a unit of currency can buy at a
given point in time.
• Inflation tends to erode the purchasing
power of a currency over time.
• Central banks try to keep prices stable
through maintaining the purchasing power
of the currency by setting interest rates and
other mechanisms.
• 2 TYPES OF PPP:
1.) Absolute Parity
o Predicts that price levels will be
the same across countries.
2.) Relative Parity
o an economic theory that states
that exchange rates and inflation
rates in two countries should
equal out over time

Big Mac PPP

• The Big Mac PPP is an informal index used
to compare the purchasing power between
currencies as compared to the price of a
McDonald's Big Mac.
• Another name for the Big Mac PPP is the
Big Mac Index.
• Currencies are compared against the local
price of a Big Mac in that nation's currency.