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Economics - a social science concerned chiefly with description and analysis of the

production, distribution, and consumption of goods and services

What is 'Economics'
Economics is a social science concerned with the production, distribution and
consumption of goods and services. It studies how individuals, businesses,
governments and nations make choices on allocating resources to satisfy their wants
and needs, and tries to determine how these groups should organize and coordinate
efforts to achieve maximum output.

Economic analysis often progresses through deductive processes, much like

mathematical logic, where the implications of specific human activities are considered in
a "means-ends" framework.

Economics can generally be broken down into macroeconomics, which concentrates on

the behavior of the aggregate economy, and microeconomics, which focuses on
individual consumers.

The theories, principles, and models that deal with how the market process works. It attempts
to explain how wealth is created and distributed in communities, how people allocate
resources that are scarce and have many alternative uses, and other such matters that arise
in dealing with human wants and their satisfaction.

Economics Basics: Supply

and Demand
By Adam Hayes, CFA

1. Economics Basics: Introduction
2. Economics Basics: What Is Economics?
3. Economics Basics: Supply and Demand
4. Economics Basics: Utility
5. Economics Basics: Elasticity
6. Economic Basics: Competition, Monopoly and Oligopoly
7. Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade
8. Economic Basics: Measuring Economic Activity
9. Economics Basics: Alternatives to Neoclassical Economics
10. Economics Basics: Conclusion

Supply and demand is perhaps one of the most fundamental concepts of

economics and it is the backbone of a market economy. Demand refers to how
much (quantity) of a product or service is desired by buyers. The quantity
demanded is the amount of a product people are willing to buy at a certain price;
the relationship between price and quantity demanded is known as the demand
relationship. Supply represents how much the market can offer. The quantity
supplied refers to the amount of a certain good producers are willing to supply
when receiving a certain price. The correlation between price and how much of a
good or service is supplied to the market is known as the supply relationship.
Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the
allocation of resources. In market economy theories, demand and supply theory
will allocate resources in the most efficient way possible. How? Let us take a
closer look at the law of demand and the law of supply.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the
price of a good, the less people will demand that good. In other words, the higher
the price, the lower the quantity demanded. The amount of a good that buyers
purchase at a higher price is less because as the price of a good goes up, so
does the opportunity cost of buying that good. As a result, people will naturally
avoid buying a product that will force them to forgo the consumption of something
else they value more. The chart below shows that the curve is a downward slope.

A, B and C are points on the demand curve. Each point on the curve reflects a
direct correlation between quantity demanded (Q) and price (P). So, at point A,
the quantity demanded will be Q1 and the price will be P1, and so on. The
demand relationship curve illustrates the negative relationship between price and
quantity demanded. The higher the price of a good the lower the quantity
demanded (A), and the lower the price, the more the good will be in demand (C).

B. The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be
sold at a certain price. But unlike the law of demand, the supply relationship
shows an upward slope. This means that the higher the price, the higher the
quantity supplied. Producers supply more at a higher price because selling a
higher quantity at a higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a
direct correlation between quantity supplied (Q) and price (P). At point B, the
quantity supplied will be Q2 and the price will be P2, and so on. (To learn how
economic factors are used in currency trading, read Forex Walkthrough:

Time and Supply

Unlike the demand relationship, however, the supply relationship is a factor of
time. Time is important to supply because suppliers must, but cannot always,
react quickly to a change in demand or price. So it is important to try and
determine whether a price change that is caused by demand will be temporary or

Let's say there's a sudden increase in the demand and price for umbrellas in an
unexpected rainy season; suppliers may simply accommodate demand by using
their production equipment more intensively. If, however, there is a climate
change, and the population will need umbrellas year-round, the change in
demand and price will be expected to be long term; suppliers will have to change
their equipment and production facilities in order to meet the long-term levels of

C. Supply and Demand Relationship

Now that we know the laws of supply and demand, let's turn to an example to
show how supply and demand affect price.
Imagine that a special edition CD of your favorite band is released for $20.
Because the record company's previous analysis showed that consumers will not
demand CDs at a price higher than $20, only ten CDs were released because
the opportunity cost is too high for suppliers to produce more. If, however, the ten
CDs are demanded by 20 people, the price will subsequently rise because,
according to the demand relationship, as demand increases, so does the price.
Consequently, the rise in price should prompt more CDs to be supplied as the
supply relationship shows that the higher the price, the higher the quantity

If, however, there are 30 CDs produced and demand is still at 20, the price will
not be pushed up because the supply more than accommodates demand. In fact
after the 20 consumers have been satisfied with their CD purchases, the price of
the leftover CDs may drop as CD producers attempt to sell the remaining ten
CDs. The lower price will then make the CD more available to people who had
previously decided that the opportunity cost of buying the CD at $20 was too

D. Equilibrium
When supply and demand are equal (i.e. when the supply function and demand
function intersect) the economy is said to be at equilibrium. At this point, the
allocation of goods is at its most efficient because the amount of goods being
supplied is exactly the same as the amount of goods being demanded. Thus,
everyone (individuals, firms, or countries) is satisfied with the current economic
condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the intersection of the demand
and supply curve, which indicates no allocative inefficiency. At this point, the
price of the goods will be P* and the quantity will be Q*. These figures are
referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the
prices of goods and services are constantly changing in relation to fluctuations in
demand and supply.

E. Disequilibrium

Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.

1. Excess Supply
If the price is set too high, excess supply will be created within the economy and
there will be allocative inefficiency.
At price P1 the quantity of goods that the producers wish to supply is indicated by
Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a
quantity much less than Q2. Because Q2 is greater than Q1, too much is being
produced and too little is being consumed. The suppliers are trying to produce
more goods, which they hope to sell to increase profits, but those consuming the
goods will find the product less attractive and purchase less because the price is
too high.

2. Excess Demand
Excess demand is created when price is set below the equilibrium price.
Because the price is so low, too many consumers want the good while producers
are not making enough of it.
In this situation, at price P1, the quantity of goods demanded by consumers at
this price is Q2. Conversely, the quantity of goods that producers are willing to
produce at this price is Q1. Thus, there are too few goods being produced to
satisfy the wants (demand) of the consumers. However, as consumers have to
compete with one other to buy the good at this price, the demand will push the
price up, making suppliers want to supply more and bringing the price closer to
its equilibrium.

F. Shifts vs. Movement

For economics, the "movements" and "shifts" in relation to the supply and
demand curves represent very different market phenomena:

1. Movements
A movement refers to a change along a curve. On the demand curve, a
movement denotes a change in both price and quantity demanded from one
point to another on the curve. The movement implies that the demand
relationship remains consistent. Therefore, a movement along the demand curve
will occur when the price of the good changes and the quantity demanded
changes in accordance to the original demand relationship. In other words, a
movement occurs when a change in the quantity demanded is caused only by a
change in price, and vice versa.

Like a movement along the demand curve, a movement along the supply curve
means that the supply relationship remains consistent. Therefore, a movement
along the supply curve will occur when the price of the good changes and the
quantity supplied changes in accordance to the original supply relationship. In
other words, a movement occurs when a change in quantity supplied is caused
only by a change in price, and vice versa.

2. Shifts
A shift in a demand or supply curve occurs when a good's quantity demanded or
supplied changes even though price remains the same. For instance, if the price
for a bottle of beer was $2 and the quantity of beer demanded increased from Q1
to Q2, then there would be a shift in the demand for beer. Shifts in the demand
curve imply that the original demand relationship has changed, meaning that
quantity demand is affected by a factor other than price. A shift in the demand
relationship would occur if, for instance, beer suddenly became the only type of
alcohol available for consumption.
Conversely, if the price for a bottle of beer was $2 and the quantity supplied
decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like
a shift in the demand curve, a shift in the supply curve implies that the original
supply curve has changed, meaning that the quantity supplied is effected by a
factor other than price. A shift in the supply curve would occur if, for instance, a
natural disaster caused a mass shortage of hops; beer manufacturers would be
forced to supply less beer for the same price.

Economy - The economy has been relatively resilient to global

overview economic shocks due to less exposure to troubled
international securities, lower dependence on exports,
relatively resilient domestic consumption, large
remittances from about 10 million overseas Filipino
workers and migrants, and a rapidly expanding
outsourcing industry. During 2016 the current account
balance narrowed to its lowest level since the 2008
global financial crisis, but nevertheless mustered a
surplus for a fourteenth consecutive year. International
reserves remain at comfortable levels and the banking
system is stable.

Efforts to improve tax administration and expenditures

management have helped ease the Philippines' debt
burden and tight fiscal situation. The Philippines
received investment-grade credit ratings on its
sovereign debt under the former AQUINO
administration and has had little difficulty financing its
budget deficits. However, weak absorptive capacity and
implementation bottlenecks have prevented the
government from maximizing its expenditure plans.
Although it has improved, the low tax-to-GDP ratio
remains a constraint to supporting increasingly higher
spending levels and sustaining high and inclusive
growth over the longer term.

Economic growth has accelerated, averaging 6.1% per

year from 2011 to 2016, compared with 4.5% under the
MACAPAGAL-ARROYO government; and
competitiveness rankings have improved. Although
2016 saw a record year for net foreign direct investment
inflows, FDI to the Philippines has continued to lag
regional peers, in part because the Philippine
Constitution and other laws restrict foreign ownership in
important activities/sectors - such as land ownership
and public utilities.

Although the economy grew at a faster pace under the

AQUINO government, challenges to achieving more
inclusive growth remain. Wealth is concentrated in the
hands of the rich. The unemployment rate declined from
7.3% to 5.5% between 2010 and 2016 but the jobs are
low paying and tedious. Underemployment hovers at
around 18% to 19% of the employed. At least 40% of
the employed work in the informal sector. Poverty
afflicts more than a fifth of the population. More than
60% of the poor reside in rural areas, where the
incidence of poverty (about 30%) is more severe - a
challenge to raising rural farm and non-farm incomes.
Continued efforts are needed to improve governance,
the judicial system, the regulatory environment, the
weak state of infrastructure, and the overall ease of
doing business.

2016 saw the election of President Rodrigo DUTERTE,

who has pledged to make inclusive growth and poverty
reduction his top priority. DUTERTE believes that illegal
drug use, crime and corruption are key barriers to
economic development among the lower income class.
This administration wants to reduce the poverty rate to
14% and graduate the economy to upper-middle
income status by the end of President DUTERTEs term
in 2022. Key themes under the governments Ten-Point
Socioeconomic Agenda include continuity of
macroeconomic policy, tax reform, higher investments
in infrastructure and human capital development, and
improving competitiveness and the overall ease of
doing business. The administration has vowed to
address spending bottlenecks and is pushing for
congressional passage of a Comprehensive Tax
Reform Program to help finance more aggressive
infrastructure and social spending, starting in 2018. The
government also supports relaxing restrictions on
foreign ownership, except for land.

GDP (purchasing $807.1 billion (2016 est.)

power parity) $755 billion (2015 est.)
$711.6 billion (2014 est.)
note: data are in 2016 dollars

GDP (official $311.7 billion (2016 est.)

exchange rate)

GDP - real growth 6.9% (2016 est.)

rate 6.1% (2015 est.)
6.1% (2014 est.)

GDP - per capita $7,700 (2016 est.)

(PPP) $7,400 (2015 est.)
$7,100 (2014 est.)
note: data are in 2016 dollars

Gross national 25.5% of GDP (2016 est.)

saving 23.4% of GDP (2015 est.)
24.3% of GDP (2014 est.)

GDP - composition, household consumption: 73.6%

by end use government consumption: 11.1%
investment in fixed capital: 24.6%
investment in inventories: -0.4%
exports of goods and services: 28%
imports of goods and services: -36.9% (2016 est.)

GDP - composition agriculture: 9.7%

by sector industry: 30.8%
services: 59.5% (2016 est.)

Population below 21.6% (2015 est.)

poverty line

Labor force 43.19 million (2016 est.)

Labor force - by agriculture: 26.9%

occupation industry: 17.5%
services: 55.6% (2016 est.)

Unemployment rate 5.5% (2016 est.)

6.3% (2015 est.)

Unemployment, total: 16.2%

youth ages 15-24 male: 15.1%
female: 17.8% (2013 est.)

Household income lowest 10%: 3.2%

or consumption by highest 10%: 29.5% (2015 est.)
percentage share

Distribution of 44.4 (2015 est.)

family income - Gini 46 (2012 est.)

Budget revenues: $46.2 billion

expenditures: $53.68 billion (2016 est.)

Taxes and other 14.8% of GDP (2016 est.)


Budget surplus (+) -2.4% of GDP (2016 est.)

or deficit (-)
Public debt 42.1% of GDP (2016 est.)
44.8% of GDP (2015 est.)
note: data cover debt issued by the national
government, and excludes debt instruments issued by
government entities other than the treasury; the data
include treasury debt held by foreign entities; the data
exclude debt issued by social security institutions,
government-owned and controlled corporations, the
Central Bank, and local government units

Inflation rate 1.8% (2016 est.)

(consumer prices) 1.4% (2015 est.)

Central bank 3.56% (31 December 2016)

discount rate 6.19% (31 December 2015)

Commercial bank 4.09% (31 December 2016 est.)

prime lending rate 4.4% (31 December 2015 est.)

Stock of narrow $61.74 billion (31 December 2016 est.)

money $56.69 billion (31 December 2015 est.)

Stock of broad $191 billion (31 December 2016 est.)

money $179.1 billion (31 December 2015 est.)

Stock of domestic $184.9 billion (31 December 2016 est.)

credit $167 billion (31 December 2015 est.)

Market value of $290.4 billion (31 December 2016 est.)

publicly traded $286.1 billion (31 December 2015 est.)
shares $318 billion (31 December 2014 est.)

Agriculture - rice, fish, livestock, poultry, bananas, coconut/copra,

products corn, sugarcane, mangoes, pineapple, cassava

Industries semiconductors and electronics assembly, food and

beverage manufacturing, construction,
electric/gas/water supply, chemical products,
radio/television/communications equipment and
apparatus, petroleum and fuel, textile and garments,
non-metallic minerals, basic metal industries, transport
Industrial 8.4% (2016 est.)
production growth

Current Account $601 million (2016 est.)

Balance $7.266 billion (2015 est.)

Exports $43.44 billion (2016 est.)

$43.2 billion (2015 est.)

Exports - semiconductors and electronic products, machinery and

commodities transport equipment, wood manufactures, chemicals,
processed food and beverages, garments, coconut oil,
copper concentrates, seafood, bananas/fruits

Exports - partners Japan 21.1%, US 15%, China 10.9%, Hong Kong

10.6%, Singapore 6.2%, Germany 4.5%, South Korea
4.3% (2015)

Imports $77.52 billion (2016 est.)

$66.51 billion (2015 est.)

Imports - electronic products, mineral fuels, machinery and

commodities transport equipment, iron and steel, textile fabrics,
grains, chemicals, plastic

Imports - partners China 16.2%, US 10.8%, Japan 9.6%, Singapore 7%,

South Korea 6.5%, Thailand 6.4%, Malaysia 4.8%,
Indonesia 4.4% (2015)

Reserves of foreign $80.69 billion (31 December 2016 est.)

exchange and gold $80.67 billion (31 December 2015 est.)

Debt - external $77.47 billion (31 December 2016 est.)

$74.76 billion (31 December 2015 est.)

Stock of direct $64.25 billion (31 December 2016 est.)

foreign investment - $58.52 billion (31 December 2015 est.)
at home

Stock of direct $45.38 billion (31 December 2016 est.)

foreign investment - $41.02 billion (31 December 2015 est.)

Exchange rates Philippine pesos (PHP) per US dollar -

47.08 (2016 est.)
45.503 (2015 est.)
45.503 (2014 est.)
44.395 (2013 est.)
42.23 (2012 est.)

Fiscal year calendar year