CONTENTS

CHAPTER 1: INTRODUCTION TO APPLIED ECONOMICS

1.1. INTRODUCTION TO ECONOMICS
1.2. NATURAL RESOURCES
1.3. ECONOMIC AS AN APPLIED SCIENCE

CHAPTER 2: APPLICATION OF DEMAND AND SUPPLY

2.1. THE MARKET
2.2. DEMAND AND SUPPLY IN RELATION TO THE
PRICES OF BASIC COMMODITIES
2.3. ELASTICITIES OF DEMAND AND SUPPLY
2.4. MARKET STUCTURE
2.5. SUPPLY- DEMAND AND THE PHILIPPINE LABOR
MARKET
2.6. SUPPLY – DEMAND AND PHILIPPINE ECONOMIC
PROBLEMS

CHAPTER 3: INDUSTRY AND ENVIRONMENTAL ANALYSIS:

BUSINESS OPPORTUNITY IDENTIFICATION
3.1. PRINCIPLES, TOOLS, AND TECHNIQUES
3.2. TOOLS IN EVALUATING A BUSINESS
3.3. INDUSTRY ANALYSIS
3.4. ENVIRONMENTAL ANALYSIS
3.5. THE CIRCULAR FLOW OF ECONOMIC ACTIVITY
3.6. THE ECONOMY’S PRODUCING SECTOR
3.7 AGRICULTURE
 3.8 INDUSTRY
3.9. LABOR
3.10. COMPETITIVENESS AND EFFICIENCY

CHAPERT 4: SOCIO – ECONOMIC IMPACT STUDY

4.1. THE THEORY OF CONSUMER BEHAVIOR
4.2. THE PRODUCTION THEORY
4.3. SOCIO-ECONOMIC IMPACT OF A BUSINESS
4.4. SOCIO-ECONOMIC AND GOVERNMENT IMPACT ON
BUSINESS
CHAPTER 1: INTRODUCTION TO APPLIED ECONOMICS

1.1 INTRODUCTION TO ECONOMICS

Economics is a field of study that has become increasingly relevant in our

globalized, financialized society. The economy is part of our collective conscious and a
buzzword that links personal finances to big business and international trade deals.
Economics deals with individual choice, but also with money and borrowing, production
and consumption, trade and markets, employment and occupations, asset pricing, taxes
and much more. What then is the definition of economics? One way to think of it is the
study of what constitutes rational human behaviour in the endeavour to fulfil needs
and wants given a world with scarce resources. In other words, economics tries to
explain how and why we get the stuff we want or need to live. How much of it do we
get? Who gets to have more? Who makes all this stuff? How is it made? These are the
questions and decisions that economics concerns itself with.

As an individual, for example, you constantly face the problem of having limited
resources with which to fulfill your wants and needs. As a result, you must make certain
choices with your money – what to spend it on, what not to spend it on, and how much
to save for the future. You'll probably spend part of your pay check on relative
necessities such as rent, electricity, clothing and food. Then you might use the rest to
go to the movies, dine out or buy a Smartphone. Economists are interested in the
choices you make, and investigate why, for instance, you might choose to spend your
money on a new Xbox instead of replacing your old pair of shoes. They would want to
know whether you would still buy a carton of cigarettes if prices increased by $2 per
pack. The underlying essence of economics is trying to understand how individuals,
companies, and nations as a whole behave in response to certain material constraints.

Adam Smith (1723 - 1790), is often considered the "father of modern

economics." His book "An Inquiry into the Nature and Causes of the Wealth of
Nations" (1776) was the first fully elaborated attempt to understand why some nations
prospered while others suffered widespread poverty. He famously argued that
individuals working for their own self-interest could nonetheless create a stable and
well-provisioned society through a mechanism he called the invisible hand of the
market.

Smith, however, was not the first to write on economic matters. Other scholars of
what was then known as political economy wrote prior to "The Wealth of Nations," but
Adam Smith was one of the first to identify the unique economic changes that
accompanied the birth of industrialization and capitalist production. Smith’s work was
followed by David Ricardo’s "Principles of Political Economy and Taxation" (1817) and
later by Karl Marx in "Capital" (1867). Each of these authors sought to explain how
capitalism worked and what it meant for producers and workers in the capitalist system.
In the late 19th century, the discipline of economics became its own distinct field
of study. Alfred Marshall, author of "The Principles Of Economics" (1890) defined
economics as a social science that examines people's behavior according to their
individual self-interests. He wrote, "Thus it is on one side the study of wealth; and on the
other, and more important side, a part of the study of man." In the early 20 th century,
however, there was a push toward legitimizing economics as a rigorous science
alongside the physical sciences like chemistry and physics. As a result, mathematical
models and statistical methods were brought to the forefront along with a number of
strong assumptions that are needed to make those models work. For example, modern
mainstream economics makes the assumption that human beings will always aim to
fulfil their individual self-interests. It also assumes that individuals are rational actors in
their efforts to fulfil their unlimited wants and needs. It also makes the claims that firms
exist to maximize profit and that markets are efficient. This school of economics, which
has come to dominate both the academic field of economics as well as the practical
application of economic theory in policy and business, is known as neoclassical
economics.

What is 'Scarcity'

Scarcity refers to the basic economic problem, the gap between limited – that is,
scarce – resources and theoretically limitless wants. This situation requires people to
make decisions about how to allocate resources efficiently, in order to satisfy basic
needs and as many additional wants at possible. Any resource that has a non-zero cost
to consume is scarce to some degree, but what matters in practice is relative scarcity.
Scarcity is also referred to as "paucity."

Absolute scarcity: First, it may be that there are simply insufficient quantities of
a resource to meet human needs or wants. We call this absolute scarcity. No matter
how much we look or try to find additional sources, there are none to be had. Lack of
food leads to starvation, lack of water leads to drought, thirst, and crop failure – and
starvation. There simply is no food or water to be had, at least in that particular area.

Relative scarcity: Second, there may be physical quantities of a resource

present but scarcity exists because of problems about supply or distribution. Meeting
the demand for that resource might mean exploiting lower quality resources. For
example, food production may require cultivating lands that are poorly suited to farming,
such as on steep slopes or in very arid areas, requiring a greater effort (more labour)
and other inputs (chemical fertilizers, irrigation) in order to meet the demand. Another
example concerns the exploitation of fossil fuels. When the most accessible and best
quality fuels are fully exploited (e.g., sweet crude from the Middle East or other areas)
we may turn to lower quality fuels (tar sands) to meet our needs.

Investors are always faced with options about where they should invest their
money.

Opportunity cost is the cost of a foregone alternative. If you chose one alternative
over another, then the cost of choosing that alternative is an opportunity cost.
 The term opportunity cost is often used in finance and economics when trying to
choose one investment, either financial or capital, over another. It is a measure of any
economic choice as compared to the next best one.

For example, there is an opportunity cost over choosing an investment in bonds

over an investment in stocks.

Economic Resources
There are three fundamental types of economic resources: Land, Labor, and Capital

1. Land
Land is an economic resource that includes all natural physical resources like
gold, iron, silver, oil etc. Some countries have very rich natural resources and by
utilizing these resources they enrich their economy to the peak.

Such as the oil and gas development of North Sea in Norway and Britain or the
very high productivity of vast area of farm lands in the United States and Canada. Some
other developed countries like Japan have smaller economic resources. Japan is the
second largest economy of the world but reliant on imported oil.
2. Labor
The human input in the production or manufacturing process is known as labor.
Workers have different work capacity. The work capacity of each worker is based on his
own training, education and work experience.

This work capacity is matters in the size and quality of work force. To achieve
the economic growth the raise in the quality and size of workforce is very essential.
3. Capital
In economics, Capital is a term that means investment in the capital goods. So,
that can be used to manufacture other goods and services in future.
Following are the factors of capital:
Fixed Capital
It includes new technologies, factories,
Working Capital
It is stock of finished goods or components or semi – finished goods or
components will be utilized in near future.
Capital Productivity
New features of capital building, machinery or technology are commonly used to
improve the productivity of the labor. Such as the new ways of farming helps to enhance
the productivity of the agriculture sector and give more valuable jobs in this sector which
motivates people to come out for work.
Infrastructure
It is a stock of capital that is used to maintain the whole economic
system. Such as roads, railway tracks, airports etc.

ECONOMICS AS A SOCIAL SCIENCE

Economic is a different science from biology and chemistry as these are physical
sciences. Economics is a social science because it studies human behaviour just like
psychology and sociology. A social science is, broadly speaking, the study of society
and how people behave and influence the world around them. As a social science,
economics studies how individuals make choices in allocating scarce resources to
satisfy their unlimited wants.

MACROECONOMICS AND MICROECONOMICS

There are two branches of economics. These are macroeconomics and
microeconomics.
Microeconomics is the study of the behaviour of the individual units (like an
individual firm or an individual consumer) of the economy.
According to these units, we may see these examples:

 Firms:
Demand and Supply of commodities & determination of price by a firm
Study of costs of producing a good by a firm
Study of revenue of a firm
Determining producer's equilibrium (cost & revenue)

 Consumers:
Utility of a consumer : satisfaction from consumption
Consumer's Equilibrium

Now, Macroeconomics studies the behaviour of aggregates of the economy as

a whole, ie it deals with the problems faced by the economy as a whole, and not just by
an individual unit.

 Calculation of National Income : GDP, NNP, GNP, GDP PPP etc. Because it
includes income of all the residents of a country, not just one individual.

 Determination of equilibrium level of output and employment :

Aggregate Demand and Aggregate Supply analysis.
Inflation, deflation and controlling the situation
Employment and unemployment

 Monetary Policy :
Money supply
Interest rates

 Fiscal Policy
Government budget : expenditure and income.
Taxes and subsidies.

 Balance of Payment situation.

Factors that affect u individually are studied in Microeconomics and factors that
generally affect everyone in the economy are studied under Macroeconomics.

The following table would briefly distinguish macroeconomics vs

microeconomics examples;

Microeconomics Macroeconomics

It deals with the decision making of single It deals with averages and aggregates of
economic variables such as the demand, the entire economy such as national
income, aggregate output, aggregate
price, consumer, etc. savings etc.

It is narrow in scope and interprets the It has a wide scope and interprets the
small constituents of the entire economy. economy of a country as a whole.

It is also known as the price theory
because it explains the process of
economic resources allocation on the
foundation of relative prices of several
goods and services.
It is also known as the income theory
because it explains the changing levels of
national income of an economy during a
period of time.

It deals with the flow of various factors It deals with the circular flow of income
of production from a single owner to a and expenditure between different sectors
single user of those resources. of the economy.

It helps in developing policies appropriate It helps in developing policies appropriate

resource distribution at firm level. resource distribution at economy level
such as inflation, unemployment level etc.

BASIC ECONOMIC PROBLEMS OF SOCIETY

1. What to produce ?
Each and every economy must determine what products and services, and what
volume of each, to produce. In some way, these kinds of decisions should be
coordinated in every society. In a few, the govt decides. In others, consumers and
producers decisions act together to find out what the society’s scarce resources will be
utilized for. In a market economy, this ‘what to produce?’ choice is made mainly by
buyers, acting in their own interests to fulfil their needs. Their demands are fulfilled by
organizations looking for profits.

2. How to produce?
This basic economic problem is with regards to the mix of resources to use to
create each good and service. These types of decisions are generally made by
companies which attempt to create their products at lowest cost. By way of example,
banking institutions have substituted the majority of their counter service individuals with
automatic teller machines, phone banking and Net banking. These electronic ways of
moving money, utilizing capital as opposed to labour resources, have decreased the
banks’ production costs.

3. For whom to produce?

This basic economic question is focused on who receives what share of the
products and services which the economy produces. The portion of production which
each person and family can consume is determined by their income. Income is
distributed in line with the value of resources we have to sell.

THREE TYPES OF ECONOMIC SYSTEM

As you probably know, there are countless economies across the world. All of
them are unique in their own way, but they still share a significant number of
characteristics. Thus, we can categorize them into THREE types of economic systems;
traditional economies, command economies, and market economies. All of them rely
on a different set of assumptions and conditions and of course, they all have their own
strengths and weaknesses. We will look at each of them in more detail below.

1. Traditional Economic System

A traditional economic system focuses exclusively on goods and services that

are directly related to its beliefs, customs, and traditions. It relies heavily on individuals
and doesn’t usually show a significant degree of specialization and division of labor. In
other words, traditional economic systems are the most basic and ancient type of
economies.

Large parts of the world still qualify as traditional economies. Especially rural
areas of second- or third-world countries, where most economic activity revolves around
farming and other traditional activities. These economies often suffer from a lack of
resources. Either because those resources don’t naturally occur in the region or
because access to them is highly restricted by other, more powerful economies.

Hence, traditional economies are usually not capable of generating the same
amount of output or surplus that other types of economies can produce. However, the
relatively primitive processes are often much more sustainable and the low output
results in much less waste than we see in any command, market, or mixed economy.

2. Command Economic System

A command economic system is characterized by a dominant centralized power

(usually the government) that controls a large part of all economic activity. This type of
economy is most commonly found in communist countries. It is sometimes also referred
to as a planned economic system, because most production decisons are made by the
government (i.e. planned) and there is no free market at play.

Economies that have access to large amounts of valuable resources are

especially prone to establish a command economic system. In those cases the
government steps in to regulate the resources and most processes surrounding them.
In practice, the centralized control aspect usually only covers the most valuable
resources within the economy (e.g. oil, gold). Other parts, such as agriculture are often
left to be regulated by the general population.

A command economic system can work well in theory, as long as

the government uses its power in the best interest of society. However, this is
unfortunately not always the case. In addition to that, command economies are less
flexible than the other systems and react slower to changes, because of their
centralized nature.

3. Market Economic System

A market economic system relies on free markets and does not allow any kind of
government involvement in the economy. In this system, the government does not
control any resources or other relevant economic segments. Instead, the entire system
is regulated by the people and the law of supply and demand.

The market economic system is a theoretical concept. That means, there is no

real example of a pure market economy in the real world. The reason for this is that all
economies we know of show characteristics of at least some kind of government
interference. For example, many governments pass laws to regulate monopolies or to
ensure fair trade and so on.

In theory, a market economic system enables an economy to experience a high

amount of growth. Arguably the highest among all four economic systems. In addition to
that, it also ensures that the economy and the government remain separate. At the
same time however, a market economy allows private actors to become extremely
powerful, especially those who own valuable resources. Thus, the distribution of wealth
and other positive aspects of the high economic output may not always be beneficial for
society as a whole.

WHY ECONOMIC IS IMPORTANT

Students may ask, “Why do we need to study economics?” To know how
important the subject is, all they need to do is read the front page of the newspapers to
see that the most important news are economic in nature. Watch the news on TV and
for sure, economic news always presents important issues.
Economics will help the students understand why there is a need for everybody,
including the government, to budget and properly allocate the use of whatever
resources are available. It will help one understand how to make more rational
decisions in spending money, saving part of it, and even investing some of it.
On the national level, economics will enable the students to take a look on how
the economy operates and to decide for themselves if the government officials and
leaders are effective in trying to shape up the economy and formulate policies for the
good of the nation.

SCIENTIFIC APPROACH IN THE EMPIRICAL TESTING OF AN ECONOMIC

THEORY
Economic is a study that attempts to explain how an economy operates and how
the consumer attempts to maximize his/her wants within limited means. Using tools
such as logic, mathematics and statistics, the students need to approach the empirical
testing of an economic theory in a scientific manner. This scientific approach involves
the following steps:
1. State the propositions or conditions that are taken as given and do not need
further investigation, as the basic starting point of investigation. These
propositions will serve as the premises upon which the theory is established.
2. Observe facts in connection with the activity that we want to theorize.
3. Apply the rules of logic to the observed facts to determine casual relationships
between observed factors and to eliminate facts that are unnecessary and
irrelevant.
4. Establish a set of principles such that formulated hypothesis may be tested as to
whether they are valid or not.
5. Use statistics and econometrics are empirical proof in testing the hypothesis.
POSITIVE ECONOMIC AND NORMATIVE ECONOMICS
POSITIVE ECONOMICS deals with what is – things that are actually happening
such as the current inflation rate, the number of employed labor, and the level of the
Gross National Product. NORMATIVE ECONOMICS, on the other hand, refers to what
should be – that which embodies that ideal such as the ideal rate of population growth
or the most effective tax system. Positive economics is an overview of what is
happening in the economy that is possibly far from what is ideal. Normative economics
focuses on policy formulation that will help to attain the ideal situation.

MEASURING THE ECONOMY

We always get to read in the newspapers how our economy has grown in recent
years. Before we go into the essence of applied economics, it is beneficial that students
get to learn first how the growth of the economy is actually measured. The national
government is always happy to inform the people that the country’s Gross Domestic
Product (GDP) has grown in rates, much higher than in the previous administration. We
will now go into a short discussion of what the GDP is all about.
The government plans for a better economy from a perspective of what the
economy has been. Shaping the economy’s future is changing past and present
perspectives extended to the future. In particular, looking ahead is grounded on past
and present performance and health of the economy. The heart of the economy is
production whose value measures both resource input and output of people. The
interplay of resources and output tells how well the economy has performed

COUNTING ALL THROUGH GNP

As the mirror of all products, Gross National Product (GNP) is the market value
of final products, both sold and unsold, produced by the resources of the economy in a
given period. Market Value is determined by supply and demand while the economy’s
resources are those belonging to Filipino Citizens and corporations. Not all resources
belonging to the economy are in the economy, like the capital and entrepreneurship that
brought the SM mall to China. Conversely, not all resources in the economy belong to
the economy like the capital and entrepreneurship brought to the country by
multinationals like Nestle and Procter and Gamble (P & G). In addition, the value of final
products already includes the values of its components from the lower production
stages. For example, the price of your leather wallet already includes the value of the
leather that in turn includes the value of animal hide. In the other words, counting the
values of products from the raw material to the intermediate and on to the final
production stages, double counts and overstates the value of the economy’s production.
Likewise, the value of any product in a certain period should no longer be counted in
succeeding periods to avoid double counting and overstatement that can mislead
decision – making.

GNP/GDP: EXPENDITURE APPROACH

Gross national product (GNP) is an estimate of total value of all the final
products and services produced in a given period by the means of production owned by
a country's residents. GNP is commonly calculated by taking the sum of personal
consumption expenditures (C), private domestic investment, government
expenditure(G), net exports (X) and any income earned by residents from
overseas investments (I), minus income earned within the domestic economy by
foreign residents (M). Net exports represent the difference between what a country
exports minus any imports of goods and services.
GNP = C + I + G + X – M
Table 1.1 represents Philippine GNP statistics whose components are classified
by expenditure accounts. Capital Information is Investment by both the private sector
and government that consists of fixed capital and inventory changes. Fixed capital
includes capital goods (buildings, machineries, equipment) while inventory changes are
stocks (unused) for future use from all stages produced in the year. Net Factor Income
from abroad less the factor payments of other countries. Factor payments are for the
direct services of resources like the remittances of our overseas contract workers for
labor export. Likewise, profit remittances to the home countries of multinational
companies like Nestle and Procter and Gamble (P & G) represent our payments for
importing their capital entrepreneurship. These factor payments to other countries
represent additional imports included from our GNP. On the other hand, payments for
non-factor services as part of trade balance are for services using all factors (resources)
of production. Profit brought home by a Filipino construction firm for construction
services in Saudi Arabia is an example of non-factor service export receipt.
Table 1.1 National Product
(by Type of Expenditure)
In Million Pesos
TYPE OF EXPENDITURE 2011 2012
1. Household Final Consumption
Expenditure
1,779,604 1,926,671

2. Government Final Consumption

275,015 309,368
Expenditure

3. Capital Formation 442,871 469,111

 A. Fixed Capital 457,019 511,636
1. Construction 245,819 277,509
2. Durable Equipment 160,781 180,940
3. Breeding Stock &
42,832 44,621
Orchard Dev't
4. Intellectual Property
7,586 8,566
Products
B. Changes in Inventories -14,148 -42,525

4. Exports 776,174 822,900

A. Exports of Goods 521,692 535,173
B. Exports of Services 254,482 287,727

5. Less : Imports 857,624 882,221

A. Imports of Goods 708,655 721,634
B. Imports of Services 148,969 160,587

6. Statistical Discrepancy 16,530 -25,016

GROSS DOMESTIC PRODUCT 2,432,571 2,620,813

Net Primary Income from the rest
792,881 853,682
of the world

GROSS NATIONAL INCOME 3,225,451 3,474,495

However, a better indicator of domestic employment opportunities is Gross

Domestic Product. Gross Domestic Product (GDP) is defined as the market value of
final products produced within a country. The resources in the economy include capital
and entrepreneurship belonging to the other countries brought to the domestic company
by foreign businesses. In Table 1.1, GDP is net of GNP after deducting Net Factor
Income from abroad or by deducting factor income from abroad and adding back Factor
Payments to other countries. In other words, a negative sign to Net Factor Income from
abroad changes the sign of Factor Income from abroad from positive to negative and
Factor Payments to other countries from negative to positive. The tables shows that
Household (74%) followed by capital formation (18%) led by the construction industry.
In other words, our economy mostly produces consumer goods and buildings and other
construction structures. The dominance of household consumption reflects households’
propensity to consume more and save less. On the other hand, construction both
private investments by the rich and public capital spending by government largely
financed by borrowings.
 Net Inflow = Inflow – Outflow to – Net Inflow = - Inflow + outflow
GNP/GDP: INCOME APPROACH
Another way to account GNP and classify its components is by resource uses
and contributions that make the production stages. As basic factors of production,
resources (land, labor, capital and entrepreneurship) add value to products (e.g,
leather) as processed into higher forms (e.g., shoes). If all payments for resource
contributions (rent, wage, interest, and profit) went to resource owners, GNP would
simply be the sum of all factor payments from the raw materials to the final product
stage. In Figure 1.1 the value of, say (P1400) is equal to the intermediate product
(P600) plus the factor contributions (P800) that transformed the latter into its final form.
Following the arrow directions, the value of the intermediate product P(600) is from the
factor contributions at the intermediate stage (P400) and the raw material stage (P200).
In other words, factor contributions made the raw material (P100) and the intermediate
product (P400) trough the value added by factor contributions. The same logic applies
to the final product whose material purchase is a product of factor contributions from the
lower stages. In conclusion, all products and their values are the contributions of these
essential (basic) factors of production.

Figure 1.1. Value Added Flow

 Table 1.2 presents the Philippine GNP statistics whose components are
classified by factor contribution of the economy’s producing sectors. The biggest
contributor of GNP is the Service Sector (48%) serving all industries. Next is the import-
dependent Industrial Sector (44%) providing industrial input across sectors. The
smallest sector is Agriculture, Fishery, and Forestry combined 8%, needing import
complements to provide for the food requirements of the population. Net Factor Income
from the rest of the world is factor income apart from the factor contributions of the
sectors. It includes the OFW remittances and transfer payments from abroad.

Table 1.2 National Product

(by Factor Contribution)
In Million Pesos
Major Industry Group At Current
Prices
2010 2011 2012
Agriculture, hunting, forestry and 1, 108,718 1,235,012 1,250,616
fishery
Agriculture and forestry 928, 88 1,052,167 1,056,964
Fishing 180,130 182,845 193,652

Industry 2, 932, 279 3,042,060 3,284,508

Mining and quarrying 128,727 143,027 121,435
Manufacturing 1,930,779 2,047,718 2,170,918
Construction 551,230 520,969 618,077
Electricity, gas, and water 321,543 330,346 374,077

Services 4,962,483 5,429,196 6,029,763

Transportation, storage and
communication 586,197 627,255 685,251
Trade and repairs of motor
vehicles, motorcycles,
personal and household
goods 1,563,786 1,695,908 1,868,423
Financial intermediation 622,404 684,088 763,669
Real estate, renting, and
business activities 979,129 1,106,120 1,236,489
Public administration and
defense compulsory social
security 372,304 404,323 455,476
Other services 838,480 912,502 1,020,455
Gross domestic product 9,003,480 9,706,268 10,564,886

Net primary income from the rest of

the world 1,848,952 1,891,937 2,043,843

Gross national income 10,582,432 11,598,205 12,608729

Housing includes real estate and ownership of dwellings.

1.2 NATURAL RESOURCES

We often hear or learn in economic discourses that the major social problems
may be rooted in the phenomena of scarcity and shortage. We import rice, for instance,
because of inadequate supply. We intensify our export policies because our country still
does not earn enough from the export of its products to other countries. Prices of
petroleum products will increase because oil production is low. At a glance, we may say
that scarcity and shortage are indeed the roots of our problems. But is this really the
issue?
The Philippines is rich in natural resources. Look at our forest, mountains and
seas. Doesn’t it make us proud to have an abundant environment? Isn’t it that Filipinos
are also naturally creative and resourceful? If so, why then do many of us still live in
extreme poverty? Why are there so many hungry and homeless Filipinos?
We will now take a closer look at the country’s natural resources. Likewise, we
will discuss the state of these resources. We will also try to delve deeper into such
issues as the use, control and ownership of these resources.

Resource
Any object, living or non-living, becomes a resource once people discover its
use. This means that anything or substance can only be considered a resource if it
fulfils a human need. For instance, the wild grass known as “pansit – pansitan” found
in our backyards was discovered to be an effective remedy for various ailments. Nata
de coco, was only valued before as food until it was discovered useful in the
manufacture of electronic products.
It is important for us to realize that the possibilities fro having and discovering
new resources are endless. The need to survive compels people to find new and
different ways and uses for things they see around them. This statement disputes
earlier assumptions that scarcity of resources is the root of our social problems.
Philippines, an Abundant Country
The Philippine is part of the Asian continent. It is an archipelago composed of
almost 7, 107 large and small islands. Our country is bounded in the east by the Pacific
Ocean, South China Sea in the west, the Babuyan Channel in the north and the
Celebes Sea in the south.
The Philippines has a land area of roughly 30, 000, 000 hectares occupying
around 0.2% of the world’s total land area. It has coastline measuring 17, 460
kilometers said to be longer than that of the United States. Because of the country’s
beautiful location, it has earned the labels “Gateway to Asia”, “Pearl of the Orient”,
and others.

Forest
Forest provides several benefits, it is the source for timber that are use in
different wood works such as building houses, bridges, furniture and many else.
The area where the forest is located also serves as natural water reservoir; a
good source of drinking water. There are many animals are found in the forest; the most
are wild, with this, forest is there and serve as shelter for these animals. Forest is also
important as it is part of nature where its existence has a big impact for the ecological
balance.
There are different kinds of forest in the Philippines; these are the Dipterocarp
forest, the Fine forest, the Mangrove forest, the Beach forest and the Mossy forest.
The dipterocarp forest covers the largest forest areas in the Philippines. It is
situated from the coastal flats going up to approximately 800 meters in the altitude. The
dipterocarp forest is the biggest source of lumber supply in the country.
The fine forest is usually developed in the country’s high plateau regions. This is
in the altitude ranging from seven to eight meters above the sea level.
The mangrove forest has trees that have special root formations. The fruits and
the seeds of the mangrove trees can survive; can germinate and can float in the
seawater. This type of forest is tidal and it can be found along the clayed seashore as
well as in the tidal zones in the river estuaries.
The beach forest can be found along the beach; this kind of forest forms a
narrow strip along the sandy coast of the beach.
The Mossy forest can be found along the mountains in about 1200 altitude high.
Most of the mountainous areas have moist climate in which mossy forest mostly
developed.
 However, because of some human activities, several hectares of forest had been
sacrifice for economic development. Some forest areas had been eliminated to give way
for the construction of housing facilities, factories, roads, as well as in many more man-
made expansion. Some trees in the forest were cut through logging activities.
The government, together with some other non-government organization is now
implementing some measures to be able to preserve the forest. Some laws had been
passed to protect the forest and some other programs were established.

Mineral Resources
Minerals are natural substances -- usually comprising "inorganic element or
compound, having an orderly internal structure and characteristics, chemical
composition, crystal form, and physical properties" (NAMRIA-DENR, 1991). Any
concentration of these minerals, with a potential economic value that can be extracted
at a profit, is considered a mineral resource. Despite its small area, the Philippines is
one of the world's richly endowed countries in terms of mineral resources. In 1994, the
estimated levels of metallic and non-metallic mineral reserves stood at 7 billion metric
tons and 50 billion metric tons, respectively. Copper accounted for the bulk of metallic
mineral resources of about 72 percent; while nickel’s share was estimated at 16 percent
(Figure 1). Among the non-metallic minerals, limestone and marble accounted for about
39 and 29 percent, respectively (Figure 2). In terms of chromite resources, the
Philippines is also one of the most endowed countries. In fact, the country's refractory
chromite resource in Zambales is considered as one of the largest in the world.
The mining industry plays a very important role in the country’s economic
development. For one, the industry provides employment opportunities to a significant
portion of the population, directly and indirectly. The launching of a mining project spurs
local and regional economic development as mining firms invest in road infrastructure,
utilities, and other facilities within the mine site. Mining, likewise, contributes to the
country's foreign-exchange earnings through exports. Furthermore, the industry
provides additional revenues for the government through taxes and fees paid on mining
and other related activities. The mining activities involve operations that have significant
impact on the environment. In most facets of the mining activities, there is always the
potential for environmental and ecological problems -- from the construction of mining
facilities, the extraction of ore, to the processing of minerals.
Mineral resources are non-renewable. Once extracted, the ore is gone and will
take a very long time to replenish. Mining activity, therefore, is faced with the
sustainability issue. Serious implications may arise if this issue is not properly
addressed. While the construction of the asset account for the other natural resources is
undoubtedly important, it is more crucial for the minerals because of the exhaustibility of
these resources.
Gold
Gold reserves at the beginning of 1988 was estimated at 101.6 million metric
tons (MT), equivalent to about 240 MT of gold metal. Between 1988 and 1994, a total of
27.7 million MT of gold ore, containing about 36 MT of metal was extracted. On the
average, this is equivalent to an annual extraction of 3.9 million MT of gold ore.

Figure 1.1. Extraction of Gold Reserves in Ore Form

1988-1994
(in Million Metric Tons)

However, actual annual data show that the level of ore extraction dropped by a
hefty 42.9 percent in 1990 and 25.7 percent in 1993 (Figure 1). The slight increase in
the world metal price of gold in 1990 failed to raise the country’s production. During this
year, three major gold mines temporarily ceased operation, evidence of the then
problems which besieged the domestic mining industry.
Copper
The reported stock of copper in ore form increased from 4,106 million MT in 1988
to 4,597 million MT in 1994 (Figure 2). However, copper reserves suffered a setback in
1990, when it declined by 7.2 percent from the previous year’s level before resuming its
increasing trend.
From 1988 to 1994, the extraction of copper ore registered a decreasing trend,
with an annual average decline of 12.1 percent. The same trend was exhibited by the
metal content which declined from 277,746 MT in 1988 to 130,910 MT in 1994. Copper
mining companies slowed down in their production as lower prices of copper metal in
the world market discouraged further expansion of activities.
Other factors which contributed to the low extraction for the years concerned
included power shortages, closure of the Marcopper Mining Corporation in the second
half of 1991, the eruption of Mt. Pinatubo, and the unusual heavy rainfall. During the
seven-year period, a total of 346 million MT of ore was extracted, with a metal content
of 1.3 million MT.
Chromite
From 1988 to 1990 -- on the average -- most of the chromite-producing
companies experienced a relative boom, as reflected by the increases in their
extraction. For the said period, the total chromite ore extraction grew at an annual
average of 30.1 percent, despite the earthquake that jolted Luzon island in July 1990.
However, starting 1991, a downtrend was experienced as a result of the volcanic
eruption. This catastrophe deluged service roads with mudflows thus, affecting the
transport of the output of one of the biggest chromite producers in that location. Power
shortage and other geological factors affected the operations of most chromite mining
companies in the succeeding years.
As a result of reduced extraction and positive other accumulation, the stock of
total chromite ore reserves registered an annual average growth of 1.5 percent for the
period 1988-1994. The corresponding metal content posted an average annual growth
of 0.4 percent for the same period. In contrast with the physical asset accounts for
which estimates were undertaken by type of chromite, the monetary asset account for
chromite was estimated only on an aggregate basis.
Nickel
Beginning in 1991, the stock of ore reserves started to decline. In 1993, the
nickel metal production tremendously dropped, the effect of the slowdown in the
international demand for nickel, coupled with increased production in the earlier years,
which dampened the market price of nickel metal.
Iron
Iron ore, one of the Philippines’ largest mineral deposits, is not being extracted at
present. This was due to the higher cost of production, making the local prices of iron
not competitive to world prices. However, exploration for possible mining sites is still
being done. In 1989, there was an addition of 10.1 million MT in total reserves. Several
mining areas explored in 1992 were found positive with iron, resulting in a huge
increase in ore reserves of 298.6 million MT, with a metal content of 124.0 million MT.
Manganese
 During the period 1988 to 1994, manganese reserves in ore form registered an
annual average growth of 2.7 percent -- from 1.4 million MT in 1988 to 1.6 million MT in
1994. The extraction of manganese ore exhibited fluctuations for the years in review. In
1992, exploration for more possible mining sites in several areas was conducted. This
resulted to an increase of ore reserves by 203,014 MT, with a metal content of 87,843
MT at the end of the year, gross of extraction.

Water Resources
The Philippines has one of the longest coastlines in the world. It runs through 60
provinces and 1, 525 municipalities. Our country is known for its 2, 500 species of fish
and 488 species of corals. Almost all marine species can be found in the country,
including the exotic mollusc corius gloariamaris. There are also 421 rivers, 54 natural
lakes and around 100, 000 hectares of freshwater swamps found in the country.
Water resources provide great benefits necessary for our survival. We get our
drinking water these resources, and also use it to irrigate our fields. These resources
also provide food and raw materials, while maintaining the balance of ecosystems. It is
said that one kilometre of coral reef can yield 210, 000 tons of fish and other marine
species annually. A hectare of mangrove, meanwhile can produce around 12.5 cubic
meters of firewood and 800 kilos of fish, shrimps and other marine delicacies every
year. Aside from these, mangroves also serve to prevent siltation or the build – up of
soil in bodies of water.
Fresh water is a renewable resources, yet the world’s supply of clean fresh
water is steadily decreasing. Water demand already exceeds supply in many parts of
the world and as the world population continues to rise, so too does the water demand.
Awareness of the global importance of preserving water for ecosystem services has
only recently emerged as, during the 20th century, more than half the world’s wetlands
have been lost along with their valuable environmental services for Water Education.
The framework for allocating water resources to water users (where such a framework
exists) is known as water rights.

Human Resources
Aside from the natural resources is one of the basis of economic development.
Its people are the most important resource of any country. It is important to understand
how people utilize and develop natural resources based on their character, diligence,
and creativity. In fact, humans serve as the “driver” of the world since the direction of it
depends on them.
Population means the number of persons living in a certain place. The issue of
population in important in the national government. We already know that rapid
population growth is critical in the rapid depletion of natural resources, and large
population means widespread use of natural resources, meaning, large number of
population is like slow development of a country. Thus, less population is better than a
big number population in a place.

1.3. ECONOMIC AS AN APPLIED SCIENCE

Applied Economics is the application of economic theory and econometrics in
specific setting with the goal of analyzing potential outcomes. As one of the two sets of
fields of economics (the other set being the core), it is typically characterized by the
application of the core, referring to economic theory and econometrics, as a means of
dealing with practical issues in fields that include demographic economics, labor
economics, business economics, agricultural economics, development economics,
education economics, health economics, monetary economics, economic history, and
many others. John Neville Keynes is attributed to be the first to use the phrase “to
designate the application of economic theory to the interpretation and explanation of
particular economic phenomena.
We should to be improved human welfare among Filipinos by the investigation
and analysis of economic problems in the real world. Applying economic theory in our
lives means trying to address actual economic issues and be able to do something
about it. The concept of scarcity and choice should encourage us as individuals to help
in our own way to provide solutions to the country’s economic problems.

APPLIED ECONOMICS IN RELATION TO THE PHILIPPINE ECONOMIC PROBLEMS

A solid understanding of economic principles and how they are applied in real-life
situations can serve as significant tools to help address the country’s economic
problem. For example, understanding the existence of scarcity can help economics
students analyze how to maximize the use of available resources in order to overcome
scarcity. Knowledge of economic theories such as the Law of Supply and Demand can
help in analyzing why prices are high and what the government can do to help bring
down prices.
THE PHILIPPINES’ BASIC ECONOMIC PROBLEMS
Like most other southeast Asian regions, Philippines too has a history of
European colonization. It was a colony of Spain and the USA. The country is now home
to multiple cultures and ethnic groups. It is also looked upon as a perfect example of a
'mixed economy'. Traditionally, the economy stabilized on the agrarian contributions and
the manufacture of garments, pharmaceutical products, and semiconductors. In the last
decade, electronic exports added to the exports, along with various products obtained
by mining. Though Philippines too suffered in terms of exports, remittances from
overseas Filipino workers, and foreign direct investments, during the 2008 global
economic crisis, there has been steady economic growth in the recent years. However,
there are certain economic problems that cannot be ignored. The following sections list
out some of the economic problems of the Philippines.
In 2012, 10 million Filipinos were either unemployed (three million) or
underemployed (seven million). In October 2013, unemployment rate was 6.5% in
comparison to 6.8% in 2012. According to the Labor Force Survey, the unemployment
rate was 6% and 6.6% in October 2014 and January 2015, respectively.
Only one-fourth of the Filipinos that enter the labor force are able to find good
jobs in the country, and the rest of them find jobs overseas, leave the labor force, or end
up becoming unemployed/underemployed. Thus, three-fourth of the workers are
unemployed or informally employed, with lack of opportunities to find good jobs. Though
jobs are being generated, there's a need to generate jobs at a much faster rate, to be
able to bring down the unemployment rate. Many of the unemployed individuals are
college graduates. Many wait for job opportunities abroad, and many families depend
on remittances from family members who are staying abroad.
Despite the talk about economic growth, the poverty rates have not changed
significantly since 2006. As per the National Statistical Coordination Board (NSCB),
poverty incidence of the population improved from 26.3 percent in 2009 to 25.2 percent
in 2012.
Even though Philippines is a fast-growing economy, there's been just a minor
decline in the incidence of poverty. Poverty is very much linked to unemployment.
Unfortunately, the growth is restricted to the BPO, retail, and real estate sector, and a
large number of Filipinos remain without jobs. On top of that, natural calamities further
push people below the poverty line. Thus, economic disparity is a common feature. In
general, the gains from higher economic growth have not really trickled down to the
poor.
Population explosion is considered as one of the undisputable alarming
obstacles that stand on the path of the less developed countries. These countries
produce great numbers in terms of human resources because the birth rate is much
higher than in the rich countries, but the rate of employment and production in the poor
countries is very low. Definitely this is a very serious problem that the government
should never take for granted.

The Philippines belong to the group of these "less developed countries." And as
we all know, the growth of population in our country is unstoppable. In fact, the
Philippine population is one of the fastest growing countries in the world. It is estimated
that 3,000 Filipino babies are born every day, 100,000 every month, or one million a
year to round up the figures. There are more babies being born today than there were in
the 1970s. There will be more babies born 20 years from now than the number of
babies that are born this day. In this lies the problem: at first, the babies need milk,
diapers and vitamins. But the trouble is, babies grow up. And when they do, they need
education, which requires more school structures; they need food, clothing, houses,
jobs, etc. These are basic needs that must be filled. Providing them creates a large
number of problems that demand the fullest utilization of the nation's resources.

ASEAN ICON
Lee Kuan Yew GCMG CH SPMJ (16 September 1923 – 23 March 2015),
commonly referred to by his initials LKY, was the first Prime Minister of Singapore,
governing for three decades. Lee is recognised as the nation's founding father, with the
country described as transitioning from the "third world to first world in a single
generation" under his leadership.
After attending the London School of Economics, Lee graduated from Fitzwilliam
College, Cambridge University, with double starred-first-class honours in law. In 1950,
he became a barrister of the Middle Temple and practised law until 1959. Lee co-
founded the People's Action Party (PAP) in 1954 and was its first secretary-general until
1992, leading the party to eight consecutive victories. After Lee chose to step down as
Prime Minister in 1990, he served as Senior Minister under his successor, Goh Chok
Tong until 2004, then as Minister Mentor (an advisory post) until 2011, under his
son Lee Hsien Loong. In total, Lee held successive ministerial positions for 56 years. He
continued to serve his Tanjong Pagar constituency for nearly 60 years as a Member of
Parliament until his death in 2015. From 1991, he helmed the 5-member Tanjong
Pagar GRC, and was returned unopposed for a record five elections.
Lee campaigned for Britain to relinquish its colonial rule, and eventually attained
through a national referendum to merge with other former British territories to
form Malaysia in 1963. But racial strife and ideological differences led to
its separation to become a sovereign city-state two years later. With overwhelming
parliamentary control at every election, Lee oversaw Singapore's transformation from a
stagnant British crown colony with a natural deep harbour to an Asian Tiger economy.
In the process, he forged a system of meritocratic, highly effective and incorrupt
government and civil service. Many of his policies are now taught at the Lee Kuan Yew
School of Public Policy.
Lee eschewed populist policies in favor of pragmatic long-
term social and economic measures. With meritocracy and multiracialism as governing
principles, Lee made English the common language to integrate its immigrant society
and to facilitate trade with the West, whilst mandating bilingualism in schools to
preserve students' mother tongue and ethnic identity. Lee's rule was criticised, for
curtailing civil liberties (public protests, media control) and bringing libel suits against
political opponents. He argued that such disciplinary measures were necessary for
political stability, which together with rule of law, were essential for economic progress.
 On 23 March 2015, Lee Kuan Yew died of pneumonia, at 91. In a week of
national mourning, 1.7 million residents and guests paid tribute to him at his lying-in-
state at Parliament House and at community tribute sites around the island.

EXERCISES
I. Classify the following topics. Write MI if it falls under Microeconomics; MA, if it falls
under Macroeconomics
1. The inflation rate in the Philippines in the last quarter of 2013 was
4.8%.
2. A P340-billion deficit in the Philippine budget is expected in the year
2015.
3. Price of Toyota vehicles are predicted to go up in December.
4. Garlic prices in the past months have rises because producers hoarded
their suppliers in their bodegas.
5. Unemployment rate has dropped because of the increase in the
number of OFW’s.
6. In the past year, Coca Cola was named the fastest selling product in
the market.
7. Rental on land could not be increased by landowners because of the
Rent Control Law.
8. Prices of apples and grapes tend to increase during the Christmas
season.
9. The Philippine economy grew at the rate of 5.8% in 2013.
10. Philippine congress passed the Value Added Tax Law of strengthen
the Philippine tax system.

II. Describe the type of economic system characterized in each of the following
sentences.
1. Prices are based on demand and supply.
2. The government decides on what goods should be produced.
3. Ancient methods are used in deciding what goods to produce.
4. People enjoy freedom of choice in arriving at decisions on what to buy.
 5. People have no freedom of choice in arriving at decisions on what to
buy.
6. Economy is stagnant, making use of practices in the olden times.
7. Economy is backward because no new technology or production
methods are introduced.
8. It is most democratic form of economic system
9. People’s preferences are reflected in the prices they are willing to pay
in the market.
10. It exists in primitive and backward civilizations.

III. Identify which resources is referred to by the following words.

1. Entertainers 9. Minerals
2. Forests 10. Marine resources
3. Teachers 11. Technology
4. Production equipment 12. Engineers
5. Call center agents 13. Business proprietor
6. Factories 14. Building
7. Lawyer 15. Nurses
8. Doctors

IV. Answer the following questions

1. Whys is economics deeply rooted in the concept of scarcity?
2. In what ways is applied economics important in tackling economic issues or
problems of the country?
3. What are the approaches used in computing the country’s GNP?
4. What is the difference between microeconomics and macroeconomics?
5. .What is economics?
6. What is resource? When does an object become resource?
7. What is natural resource?
V. Activities.
1. Cut out a news item that is related to any economic issue. In the classroom,
guided by your teacher, decide if the issue is related to scarcity. If so, why and
how?
2. On the board, using a pie chart, show your regular allowance for the week and
how you budget this for your school and personal expenses.
3. Talk to the person who prepares the household budget for the family, it could be
your mother or your father. Make a list of all basic expenses for one month. Then
ask the budget in percentage for each of these expenses.
4. If facilities in the school permit, with the teacher go online with the students. Visit
the data.gov.ph and in the space that says search data here, type in Philippine
National Budget for 2015. Print out a copy of the budget. Based on the budget,
determine what expenditure are the government’s top priorities, and then the
expenditures which are the least priorities. Make use of debates, research work,
and panel discussion to deepen understanding of the national budget.
5. If you were to advise the President of the Philippines on how to cope with the
issues on poverty and unemployment to improve the lives of the Filipino people,
what would you know tell him and why?
6. Choose a song (preferably by a local group or artist) that speaks of the
environment. Write the complete lyrics in your notebook and make a short
analysis on this.
7. Conduct a research on the Philippine Fisheries Code. How does this affect small
fisherfolks and the environment? Prepare a short report on this.
8. Conduct a research on the state of migrant Filipino workers. Make a brief report
describing their economics situation. You may use the following guide questions:
a) Why are so many Filipinos compelled to work abroad?
b) What are the problems they experience – before leaving the Philippines,
upon arriving in other countries, with the families they left behind – and
how do they face these challenges
c) What support do our Filipino migrant workers receive from the
government? from non – government?
CHAPTER 2: APPLICATION OF DEMAND AND SUPPLY

2.1. THE MARKET

A market is an interaction between buyers and sellers of trading or exchange. It
is where the consumer buys and the seller sells. The goods market is the most
common type of market because it is where we buy consumers goods. The labor
market is where workers offer services and look for jobs, and where employers look for
workers to hire. There is also the financial market which includes the stock market
where securities of corporations are traded.
The market is important because it is where a person who has excess goods can
dispose them to those who need them. This interaction should lead to an implicit
agreement between buyers and sellers on volume and price. In a purely competitive
market (similar products), the agreed price between a buyer and seller is also the
market price or price for all.

DEMAND
It is logical for people to expect an increase in the demand for bathing suits, ice
cream, suntan lotion, and umbrellas during summer. During the typhoon months, people
may start buying raincoats, boots, and cold medicines. In June, when the school year
starts, demand for textbooks, school supplies, and uniforms normally go up. Valentine’s
day cause demand for flowers and chocolates to surge. We can therefore see that in
various seasons of the year, demand for certain type of goods will increase. On the
other hand, demand for rice, fish, salt, and milk tends to be consistent all year.
Demand is the willingness of a consumer to buy a commodity at a given price. A
demand schedule shows the various prices.
A demand function shows how the quantity demanded of a good depends on its
determinants, the most important of which is the price of the good itself, thus, the
equation:
Qd = f(P)
This signifies that the quantity demanded for a good is dependent on the price of
that good. Presented in Table 2.1 is a hypothetical monthly demand schedule for
vinegar (in bottles) for one individual, Maria. The quantity demanded is determined at
each price with the following demand function:
Qd = 6 – P/2
 Table 2.1 Hypothetical Demand Schedule of Maria for Vinegar (in bottles)
Price per bottle Number of Bottles
P0 6
2 5
4 4
6 3
8 2
10 1

At a price of P10 per bottle, Maria is willing to buy one bottle of vinegar for a
given month. As price goes down to P8, the quantity she is willing to buy goes up to two
bottles. At a price of P2, she will buy five bottles. There is a negative relationships
between the price of a good and the quantity demanded for that good. A lower price
allows the consumer to buy more, but as price increases, the amount the consumer can
afford to buy tends to go down.
The demand curve is a graphical illustration of the demand schedule, with the
price measured on the vertical axis (Y) and the quantity demanded measured on the
horizontal axis (X). The values are plotted on the graph and are represented as
connected dots to derive the demand curve (Figure 2.1). The demand curve slopes
downward indicating the negative relationship between the two variables which are
price and quantity demanded.

Figure 2.1 Hypothetical Demand Curve of Maria for Vinegar (in bottles) for One Month
 The downward slope of the curve indicates that as the price of vinegar increases,
the demand for these good decreases. The negative slope of the demand curve is due
to income and substitution effects.
Income effect is felt when a change in a price of a good changes consumer’s
real income or purchasing power, which is the capacity to buy with a given income. In
other words, purchasing power is the volume of goods and services one can buy with
his/her income. If a good becomes more expensive, real income decreases and the
consumer can only buy less goods and services with the same amount of money
income. The opposite holds with a decrease in the price of a good and increase in real
income.
Substitution effect is felt when a change in the price of a good changes
demand due to alternative consumption of substitute goods. For example, lower price
encourages consumption away from higher-priced substitutes on top of buying more
with the budget (income effect). Conversely higher price of a product encourages the
consumption of its cheaper substitutes further discouraging demand for the former
already limited by less purchasing power (income effect).

THE LAW OF DEMAND

After observing the behaviour of price and quantity demanded in the above
schedule, we can now state the Law of Demand. Using the assumption ceteris
paribus, which means all other related variables except those that are being studied at
the moment and are held constant, There is an inverse relationship between the price of
a good and the quantity demanded for that good. As price increases, the quantity
demanded for that product decreases. The low price of the good motivates the
consumer to buy more. When price increases, the quantity demanded for the good
decreases.

NON-PRICE DETERMINANTS OF DEMAND

The five determinants of demand are:

1. The price of the good or service.

2. Prices of related goods or services. These are either complementary (purchased
along with) or substitutes (purchased instead of).
3. Income of buyers.
4. Tastes or preferences of consumers.
5. Expectations. These are usually about whether the price will go up.

For aggregate demand, the number of buyers in the market is the sixth determinant .
Demand Equation or Function

This equation expresses the relationship between demand and its five determinants:

qD = f (price, income, prices of related goods, tastes, expectations)

It says that the quantity demanded of a product is a function of five

factors: price, income of the buyer, the price of related goods, the tastes of the
consumer and any expectation the consumer has of future supply, prices, etc.
Price. The law of demand states that when prices rise, the quantity of demand falls.
That also means that when prices drop, demand will grow. People base their
purchasing decisions on price if all other things are equal.
The exact quantity bought for each price level is described in the demand
schedule. It's then plotted on a graph to show the demand curve.
If the quantity demanded responds a lot to price, then it's known as elastic
demand. If the volume doesn't change much, regardless of price, that's inelastic
demand.
The demand curve only shows the relationship between the price and quantity. If
one of the other determinants changes, the entire demand curve shifts.

Income
When income rises, so will the quantity demanded. When income falls, so will
demand. But if your income doubles, you won't always buy twice as much of a particular
good or service. There's only so many pints of ice cream you'd want to eat, no matter
how wealthy you are. That's where the concept of marginal utility comes into the
picture. The first pint of ice cream tastes delicious. You might have another. But after
that, the marginal utility starts to decrease to the point where you don't want any more.

Prices of related goods or services

The price of complementary goods or services raises the cost of using the
product you demand, so you'll want less. For example, when gas prices rose to P180 a
gallon in 2008, the demand for Hummers fell.
Gas is a complementary good to Hummers. The cost of driving a Hummer rose
along with gas prices.
The opposite reaction occurs when the price of a substitute rises. When that
happens, people will want more of the good or service and less of its substitute. That's
why Apple continually innovates with its iPhones and iPods. As soon as a substitute,
such as a new Android phone, appears at a lower price, Apple comes out with a better
product. Then the Android is no longer a substitute.

Tastes
When the public’s desires, emotions or preferences change in favor of a product,
so does the quantity demanded. Likewise, when tastes go against it that depresses the
amount demanded. Brand advertising tries to increase the desire for consumer goods.
For example, Buick spent millions to make you think its cars are not only for older
people.

Expectations
When people expect that the value of something will rise, they demand more of
it. That explains the housing asset bubble of 2005. Housing prices rose, but people
bought more because they expected the price to continue to go up. Prices increased
even more until the bubble burst in 2006. Between 2007 and 2011, housing prices fell
30 percent. But the quantity demanded didn't grow. Why? People expected prices to
continue falling. Record levels of foreclosures entered the market due to the subprime
mortgage crisis. Demand didn't increase until people expected future prices would, too.

Number of buyers in the market

The number of consumers affects overall, or “aggregate,” demand. As more
buyers enter the market, demand rises. That's true even if prices don't change. That
was another reason for the housing bubble. Low-cost and sub-prime
mortgages increased the number of people who could afford a house. The total number
of buyers in the market expanded, which increased demand for housing. When housing
prices started to fall, many realized they couldn't afford their mortgages. At that point,
they foreclosed. That reduced the number of buyers, driving down demand.

SHIFTS OF DEMAND CURVE

A shift in demand means at the same price, consumers wish to buy more. A
movement along the demand curve occurs following a change in price.

Movement along the demand curve

A change in price causes a movement along the demand curve.

 Figure 2.2
A shift in the demand curve occurs when the whole demand curve moves to the
right or left. For example, an increase in income would mean people can afford to buy
more widgets even at the same price.
The demand curve could shift to the right for the following reasons:

 The good became more popular (e.g. fashion changes or successful advertising
campaign)
 The price of a substitute good increased.
 The price of a complement good decreased.
 A rise in incomes (assuming the good is a normal good, with positive YED)
 Seasonal factors.

Evaluation higher price causes movement along and later shift

If there is an increase in the price of petrol, there would be a movement along the
demand curve, and a smaller quantity would be bought. However, there is likely to be
only a small fall in demand because demand for petrol tends to be quite price inelastic.
 Figure 2.3
However, in the long term, the demand curve may shift to left as well because
people respond to the higher price by looking for alternatives, for example, they buy an
electric car and so no longer need petrol.

SUPPLY
Demand showed us the side of the consumers and their reactions to changes in
price and other determinants. We now look at the side of the supplier
Supply refers to the of quantity of goods that a seller is willing to offer for sale.
The supply schedule shows the different quantities the seller is willing to sell at various
prices. The supply function shows the dependence of supply on the various
determinants that affect it.
Assuming that the supply function is given as: Qs = 100 + 5P and is used to
determine the quantities supplied at the given prices.
 Table 2.2: Supply Schedule of Domeng for fish in One Week
Price of Fish (per Kilo) Supply (in kilos)
P20 200
40 300
60 400
80 500
100 600

As can be seen in Table 2.2, the relationship between the price of fish and the
quantity that Domeng is willing to sell is direct. The higher the price, the higher the
quantity supplied. When plotted into a graph, we obtain the supply curve

Figure 2.4. Supply Curve of Fish of Domeng for One Week

We derive a supply curve is upward sloping, indicating the direct relationship

between the price of the good and the quantity supplied of that good.

THE LAW OF SUPPPLY

After observing the behaviour of price and quantity supplied in the above
schedule, we can now state the Law of Supply. Using the same assumption of “ceteris
paribus” (other things constant) there is a direct relationship between the price of a good
and the quantity supplied of that good. As the price increases, the quantity supplied of
that product also increases. The high price of the good serves as motivation for the
seller to offer more for sale. Thus, when price increases, the quantity supplied of the
good increases since the seller will take this as an opportunity to increase his/her
income.

NON-PRICE DETERMINANTS OF SUPPLY

In the above analysis (Figure 2.4), the only factors that are vary are price and
quantity demanded. However, in real life, supply is influenced by factors other than
price. These factors are assumed constant for the purpose of simplifying the study of
the relationship between price and the quantity supplied.
If the assumption of ceteris paribus is dropped, non-price variables are now
allowed to influence supply. These non-price factors are cost of production, technology
and availability of raw materials and resources. These non-price determinants can
cause an upward or downward change in the entire supply of the product, and this
change is referred to as a shift of the supply curve.

SHIFTS OF THE SUPPLY CURVE

Just like in the case of demand, there are also movements along and shifts of the
supply curve. In the curve in Figure 2.4, what we see are changes in the quantities
supplied due to different prices of fish. These changes are reflected on a single supply
curve and are changes from one point to another profit on the same curve. This is
referred to as a movement along the supply curve. The reason for a movement along
the supply curve is the change in the price of the good. Once supply increases due to a
non-price determinant, the entire supply curve will shift to the right to reflect an increase,
or to the left to reflect a decrease as shown in Figure 2.5.
The supply function will allow now read: S = f(P,C,T,A,R), where the supply (S)
of a good is a function of the price of that good (P), the cost of production (C),
technology(T), and the availability of raw materials and resources (AR).
As a non-price determinant, the cost of production refers to the expenses
incurred to produce the good. An increase in cost will normally result in a lower supply
of the good even when the price will not change since the producer has to shell out
more money to come up with the same amount of output. With the same budget and a
higher cost, the producer will only produce a smaller amount of the good, and therefore,
the supply of the good in the market will decrease. This is reflected in a rightward shift
of the supply curve from S1 to S2 in Figure 2.5.
 Technology is another significant non-price determinant of demand. The use of
improved technology in the production of a good will result in the increased supply of
that good. On the other hand, the use of obsolete or improper technology in production
will result in a downward shift of the supply curve from S1 to S2.
Another possible non-price determinant supply than can cause an upward shift of
the curve from S1 to S2 is through improved availability of raw materials and
resources. Since more resources can be used to produce a bigger output of the good,
then supply increases.

Figure 2.5. Rightward Shift in the Market Supply Curve for Fish in Quinta Market for
One week

The leftward shift of the curve of fish due to change in a non-price determinant.
For example, the effect of an increase due to an improved technology in catching fish
leads to a rightward shift to the supply curve to S2 which means the suppliers will sell
more fish for the same price.
2.2. DEMAND AND SUPPLY IN RELATION TO THE PRICES OF BASIC
COMMODITIES
MARKET EQUILIBRIUM
If the forces of demand and supply operate together, we can show how price is
determined in a market economy. Alfred Marshall, a British economist, defined the law
of Demand and Supply
Equilibrium is the state of balance when demand is equal to supply. The equality
means that the quantity that sellers are willing to sell is also the quantity that buyers are
willing to buy for a price. As a market experience are willing to transact. The price at
which demand and supply are equal is the equilibrium price. In Figure 2.6 market
equilibrium is attained at the point of intersection of the demand and supply curves.

Figure 2.6.Market Demand and Supply Curves for Fish in the Quinta Market for One
Week

In Figure 2.6, the price of a good in the market is the equilibrium price. It is the
price at which the quantity demanded is equal to the quantity supplied. This is how most
commodities in the market are priced by their producers or sellers.
DETERMINATION OF MARKET EQUILIBRIUM
Market Equilibrium is attained when the quantity demanded is equal to the
quantity supplied.
Assuming that the demand function for Good X is : Qd = 60 – P/2 and the spply
function for Good X is : Qs = 5 + 5P
Applying the equations, we derive the following demand and supply schedules
given the following prices:

Demand Schedule of Price Good X Supply Schedule of Good X

P0 60 5
2 59 15
4 58 25
6 57 35
8 56 45
10 55 55
12 54 65
14 53 75
16 52 85

Equilibrium quantity is attained where Qd = Qs

Equilibrium quantity is 55 since quantity supplied and quantity demanded are
both 55 at the price of P10, which is the equilibrium price.
Example of Determination of Market Equilibrium
Assume a demand and a supply function as the following:
P = 50 – 2Qd (Demand) P = 20 + 4Qs (Supply)
Where:
P = price Qd = demand Qs = Supply in thousands
The demand curve is downward sloping with the negative slope – 2 while the
supply curve is upward sloping with positive slope 4. At equilibrium, the price at which
buyers are willing to buy a certain volume is also the price at which sellers are willing to
sell the same volume. Thus, for the same price, buyers are willing to buy while sellers
are willing to sell the same volume. To compute equilibrium Price (P) and Quantity (Q),
we have to equate the demand and supply functions, as follows:
50 – 2Qd = 20 + 4Qs
At equilibrium, P = 40 and Q = 5 as illustrated by the demand-supply schedule
and graph below.

Figure 2.7.Demand-Supply Graph

Assume a demand and a supply functions, as follows:
P = 50 – 2Qd (Demand) P = 20 + 4Qs (Supply)
P = price Qd = Demand 4Qs = Supply in thousands
Table 2.3 Demand-Supply Schedule
D S P
48 24 1
46 28 2
44 32 3
42 36 4
40 40 5
38 44 6
36 48 7
34 52 8
32 56 9
30 60 10
APPLICATION OF DEMAND AND SUPPLY IN RELATION TO HOUSING
SHORTGAGE
With close to 100 million Filipinos, limited land area, and shortage of funds to
build houses for all the Filipino families, the country continues to suffer from a shortage
in mass housing that is expected to reach 6.5 million units by 2030, Profriends
President and CEO Guillermo Choa told reporters in a briefing in Makati City. (Danesa
O. Rivera, GMA News October 2, 2014). Housing Shortage has been perennial problem
in the country with accumulated backlog of about 3.92 million units from 2001 to 2011.
(Source: Subdivision and Housing Developers Association (SHDA).
Housing in the country is a problem evident because of the rapid growth of
Philippine population (see Figure 2.8). More people will mean a higher demand for
housing. The supply of houses is less than existing demand for them since more and
more Filipinos are added to the population annually. There seemingly a lack of
government priority to build homes for the homeless. Filipinos are see putting up
shanties and makeshift homes in the streets, under bridges, close to the railroad tracks,
and near creeks, which proves to be dangerous since these overflow during typhoons
and inundate the areas, causing risk to the lives of the poor who have no other choice
as to where they should live.
Hardly does housing grow faster than population to decrease the housing
backlog (Figure 2.8). It is the poor who suffer an increasing backlog to decent housing
due to the increasing population.

Figure 2.8.Housing and Population

 There is obviously an excess of demand compared to supply housing even
among ordinary Filipinos. Buying and owning one’s home is always the dream of every
Filipino family but it is expensive to build a house in the country. Since many Filipinos
are middle-or low-income earners, they cannot afford the high cost of housing. Prices or
real estate and construction materials are even on the rise although with a significant
decrease in July, 2017 as shown Figure 2.9.

Figure 2.9 Philippine Average Construction Cost

Other people who dream of owning their own house may opt to borrow money
from financial institutions such as banks. They may apply for what we call real estate
loans to buy their dream houses. They may also borrow from the state-owned Pag-IBIG
Fund if they are regular contributing members of the fund.
Real estate loans are hard to come by for middle- and low-income earners and
have a long process of application. In addition, banks need to charge high interest rate
that is a burden on the borrower. An additional difficulty is that interest on loans is
usually high and even if the first year interest rates are low, these rates are subject to an
upward adjustment usually on the second year and onward, depending on the market
rates.
The option for those who cannot afford to buy houses is to rent them from the
owners paying on a monthly basis. But there are laws on rent such as the one
sponsored by former Senator Joey Lina that tend to protect and favour the renters. This
has led to reluctance on the part of owners to rent out their property, thus further limiting
housing opportunities for the Filipino.
Rent control is a type of intervention that affects prices. Rent control is equivalent
to the setting of a price ceiling on the rent.

Figure 2.10. Demand and Supply Curves for Housing

The ideal situation in Figure 2.10 is at the point where the demand and supply
curves intersect otherwise called market equilibrium. The government can intervene
by setting rent control that is equivalent to a price ceiling. It indicates the homeowners
cannot set the rent higher than the price ceiling. set by the government. However, if
price ceiling is set below this equilibrium point, homeowners will be motivated to rent out
their property such that supply will decrease and this will result in an excess of demand
over the supply of housing, making it even more difficult for people to buy their own
houses.

2.3. ELASTICITIES OF DEMAND AND SUPPLY

Elastic, unitary and inelastic refer to the price elasticity of demand, a calculation
that determines how price sensitive the market is for specific goods. That relationship
between price and demand determines whether the demand for the product is
described as elastic, inelastic or unitary. Inevitably, some products are more price
sensitive than others.
1. Elastic Demand
When a change in demand is greater than the change in price, the demand for
the product or good is said to be elastic. When a product is elastic, slight changes in
price lead to huge changes in the demand for the product. Many goods and services
that not necessity items are usually highly elastic. To determine the elasticity of the
demand for a product, the percent change in quantity is divided by the percent change
in price. When this equation is calculated, the answer reveals a product’s elasticity. If
the answer to the equation is equal to or greater than one, the product is considered
elastic.

2. Inelastic Demand
Inelastic refers to the change in demand being less than the change in price on
the product or good. Products considered inelastic are typically products people
consider necessities. Changes in prices do not change the demand for the product very
much. When the elasticity equation is calculated, goods that are considered inelastic
have an answer that is less than one.

3. Unitary Demand
Goods that are considered unitary in terms of elasticity are goods that result in no
effect in demand even when prices change. There are few goods ever considered
unitary, but products such as medicine or utilities can sometimes reach this point. No
matter what prices are charged, people find a way to purchase the goods, regardless.
Companies selling goods that are unitary often make large profits because people
consider these goods a necessity above all other goods.

Elasticity of Demand
There are three types of elasticity of demand that deal with responses to a
change in the price of the good itself, in income, and in the price of a related good,
which is a substitute or a complement.
Price of Elasticity of Demand

1. Arc price elasticity:

It is slightly different from the price elasticity as defined above. We have seen
that price elasticity is given as

Here, changes in demand and price are taken to be proportionate changes to

their original levels, Q1 and P1 respectively. If the points are separated by a larger
distance on the demand curve, it is customary to express the change in demand and
price as a proportion of their average values rather than of their original values.

2. Point price elasticity:

Point price elasticity refers to the price elasticity at a point on the demand curve.
In other words, it accounts for the price elasticity of demand in the close proximity of the
point, that is, proportionate change in demand in response to an infinitesimally small
change in price at the point.

𝑸𝟐 − 𝑸𝟏 𝑷𝟐 − 𝑷𝟏
𝑬𝒑 = ( )÷( )
𝑸𝟏 𝑷𝟏

Price elasticity is important to the seller since it gauges how far demand can
change relative to price. The price elasticity of demand measures how far consumers
are willing to buy a good especially when its price rises reflective of the economic,
social, and psychological forces shaping consumer preference.

Income Elasticity of Demand

Income Elasticity of Demand (YED) is the responsiveness of demand when a
consumer’s income changes. It is defined as the ratio of the change in quantity demand
over the change in income.

YED is useful for governments and firms to help them decide on what goods to
produce and how a change in overall income in the economy affects the demand for
their products, i.e., whether it’s inelastic or elastic.

Income Elasticity of Demand can be positive or negative. This depends on the

type of good. A normal good has a positive sign, while an inferior good has a negative
sign.
For example, if a person experiences a 20% increase in income, the quantity
demanded for a good increased by 20%, then the income elasticity of demand would be
20%/20% = 1. This would make it a normal good.
Cross Price Elasticity of Demand
Cross Price Elasticity of Demand (XED) is the responsiveness of demand for
one good to the change in the price of another good. It is the ratio of the percentage
change in quantity demanded of good x to the change in the price of Good Y. In
business, Cross Elasticity of Demand is important because it will help determine
whether or not it is a good move to increase or decrease prices or to substitute one
product for another for revenue.
There are three types of cross price elasticity of demand: substitute goods,
complimentary goods and unrelated products.

A. Cross Elasticity of Demand for Substitutes

When the cross elasticity of demand for product A relative to a change in the
price of product B is positive, it means that in response to an increase in the price of
product B, the quantity demanded of product A has increased. An increase in the price
of product B means that more people will consume A instead of B, and this will increase
the quantity demanded of product A.

Substitutes will always have a positive Cross Price Elasticity or greater than zero.

B. Cross Elasticity of Demand for Compliments

When the cross elasticity of demand for product A relative to the change in the
price of product B is negative, it means that the quantity demanded of A has decreased
relative to an increase in the price of product B. An increase in the price of B will reduce
the quantity demanded of A.

Compliments will always have a negative Cross Price Elasticity or less than zero.

C. Cross Elasticity of Demand for Unrelated

These are goods that show no relationship. Unrelated goods will always have a
Cross Price Elasticity of Demand = 0

PRICE ELASTICITY OF SUPPLY

With regard to supply, price elasticity of supply determines whether the supply
curve is steep or flat. A steep curve signifies a high degree of elasticity or ability to
change, while a flat curve indicates an inability to change response to a change in the
price of the good. Goods that are easy to produce have elastic supply while those which
need a long time to produce and which are hard to make have inelastic supply.
2.4. MARKET STUCTURE
After looking at the basic principles of demand and supply, it will be also helpful
to learn about the market structures in which sellers can operate. Each structure will be
described in terms of the nature of the product being sold, the number of buyers and
sellers in the market, and the ease of entering or exiting the market. Market structure
refers to the competitive environment in which buyers and sellers operate.
Competition is rivalry among various sellers in the market. As students, we are
familiar with the word competition. We are exposed to competition in school; spelling
bees, quiz bees, and sports fest. On the television, we watch beautiful girls from all over
the world compete for the Miss Universe of Miss World title. We see how the various
teams of the PBA compete win the championship.
The market is a situation of diffused, impersonal competition among sellers who
compete to sell their goods and among buyers who use their purchasing power to
acquire the available goods in the market.
There are varying degrees of competition in the market depending on the
following factors:
1. Number and size of buyers and sellers
2. Similarity or type of product bought and sold
3. Degree of mobility of resources
4. Entry and exit firms and input owners
5. Degree of knowledge of economic agents regarding prices, costs, demand, and
supply conditions.

PERFECT COMPETITION
Perfect competition describes a market structure where competition is at its
greatest possible level. To make it more clear, a market which exhibits the following
characteristics in its structure is said to show perfect competition:
1. Large number of buyers and sellers
2. Homogenous product is produced by every firm
3. Free entry and exit of firms
4. Zero advertising cost
5. Consumers have perfect knowledge about the market and are well aware of any
changes in the market. Consumers indulge in rational decision making.
6. All the factors of production, viz. labour, capital, etc, have perfect mobility in the
market and are not hindered by any market factors or market forces.
7. No government intervention
8. No transportation costs
9. Each firm earns normal profits and no firms can earn super-normal profits.
 10. Every firm is a price taker. It takes the price as decided by the forces of demand
and supply. No firm can influence the price of the product.

IMPERFECT COMPETITION
Imperfect competition is a competitive market situation where there are many
sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect
competitive market scenario. As the name suggests, competitive markets that are
imperfect in nature.

Imperfect competition is the real world competition. Today some of the industries
and sellers follow it to earn surplus profits. In this market scenario, the seller enjoys the
luxury of influencing the price in order to earn more profits.

If a seller is selling a non identical good in the market, then he can raise the
prices and earn profits. High profits attract other sellers to enter the market and sellers,
who are incurring losses, can very easily exit the market.
We shall discuss:

1. Monopoly
A monopoly exists when a single firm that sells in the market has no close
substitutes. The existence of a monopoly depends on how easy it is for consumers to
substitute the products for those of other sellers.
Consumers tend to have a bad image of a monopoly. The fears that monopolies
tend to jack up prices of their good since consumers have no choice and cannot buy the
good from any other seller. Because of the absence of competition, there is also the
danger that consumers will suffer from poor quality of the good and poor service
delivered by the monopolist.
Monopoly can exist for the following reasons:
 A single seller has control of entire supply of raw materials
 Ownership of patent or copyright is invested in a single seller
 The producer will enjoy economics of scale, which are savings from a large
range of outputs
 Grant a government franchise to a single firm.
While a monopoly enjoys a lot of power in the market, it actually does not have
unlimited market power because it faces indirect competition for consumers’ money for
all goods
Monopolist’s quantity of output will be lower to enable him to set the price higher.
Because of this, to prevent abuses, there is need for stricter government laws.
 A monopoly can easily exist when there are barriers to entry that may cause
other firms to stay out of the market instead of entering and competing with firms
already there. The reason could be due to legal barriers like government restrictions,
patents and copyrights.
Because it is the only supplier in the market, the firm is free to determine is
output level and its price. Once the firm determines its output level, it also determines its
price; it is thus a price setter. Once the firm determines its price, it also determines its
output level that will enable it to maximize its profits.
The monopolist faces a downward-sloping demand curve; meaning, the lower the
price, the higher the quantity that will be bought by the consumer.

2. Monopolistic Competition
Monopolistic competition is a market structure which combines elements of
monopoly and competitive markets. Essentially a monopolistic competitive market is
one with freedom of entry and exit, but firms can differentiate their products. Therefore,
they have an inelastic demand curve and so they can set prices. However, because
there is freedom of entry, supernormal profits will encourage more firms to enter the
market leading to normal profits in the long term.
This market combines some characteristics of perfect competition and monopoly.
Its key characteristics are:
a) a blend of competition and monopoly
b) firms sell differentiated products, which are highly substitutable but are not
perfect substitutes;
c) many sellers offer heterogeneous or differentiated products, similar but not
identical and satisfy the same basic need;
d) changes in product characteristics to increase appeal using brand, flavour,
consistency, and packaging s means to attract customers;
e) there is free entry and exit in the market that enables the existence of many
sellers; and
f) it is similar to a monopoly in that the firm can determine characteristics of product
and has some control over price and quantity.
The firm under monopolistic competition faces a downward-sloping demand
curve. This means that it can sell more by charging less and can raise price without
losing all customers. As such, the firms in this market are given room to set different
prices by their product differences. In other words,, a firm can set a higher price
because it has something different to offer its buyers.
The firm tends therefore to engage in non-price competition. This refers to any
action a firm takes to shift the demand curve for its output to the right without having to
sacrifice its prices. This may include better service, product guarantees, free home
delivery, more attractive packaging, better locations, and advertising. The firm can
either sell more by charging a lower price or it can even raise its price without losing all
of its customers because it has the capacity of developing loyalty among its customers.
Hence, firms in this market structure are price setters. However, the demand curved
faced by the firm is more elastic than the demand curve faced by a monopolist.

3. Oligopoly
An oligopoly is a market structure in which a few firms dominate. When a market
is shared between a few firms, it is said to be highly concentrated. Although only a few
firms dominate, it is possible that many small firms may also operate in the market.
Its characteristic are:
a) action of each firm affects other firms; and
b) interdependence among firms.
These strategically interacting firms try to raise their profits by colluding with each
other raise prices to the detriment of consumers. Just take a look at the oil industry.
Producers of oil from all around the world can manage to raise prices by agreeing with
each other on what prices to charge the consumers. Thus, countries that use a lot of oil
have no choice but to buy from these producers at high prices.
Oligopolies may exist due to the existence of barriers, which may include
economies of scale, reputation of the sellers, and strategic and legal barriers such as
the grant of patents/franchise, loyal following of costumers, huge capital investments
and specialized input, and control of supply of raw materials by a few producers.
Cooperative behaviour on oligopoly usually takes the form of price-fixing or
output-setting agreements such as the one maintained by the OPEC (Organization of
Petroleum Exporting Countries)

SIGNIFICANCE OF THE MARKET STRUCTURE

The type of market in which the business operates will determine the amount of
market power or control the business owner will enjoy. Greater market powder means a
greater ability to control prices, differentiate the products one offers for sale, thus,
leading to opportunities for more profits.
2.5. SUPPLY- DEMAND AND THE PHILIPPINE LABOR MARKET
After learning about the workings of demand and supply and how these forces
affect the market, we will now focus on how the forces of demand and supply, the
theory and principles, can help in analyzing Philippine economic problems.

LABOR SUPPLY, POPULATION GROWTH, AND WAGES

The people of a country are very important as a resource used in the production
of goods and services. Population is the source of labor supply although not all of a
country’s population are part of the labor supply. In the Philippines, the labor supply,
also known as the labor force, refers to the portion of the population, 15 years old and
over who are willing and able to work, including those who are actively seeking work but
have not found work and those who are employed. There are likewise other people who
are excluded from the labor force such as full-time housewives or househusbands, full-
time students, those who are physically and mentally disabled and therefore cannot
work, as well as those who do not wish to work and are not actively seeking for work.
The country’s labor supply is vital to the economy, since their contribution to
production of goods and services determines the value of the country’s Gross Domestic
Product. In 2014, as of April, Philippine labor force was reported at 41.6 million, with an
estimated 38.7 million total employed persons in July 2014, translating into an
employment rate of 93%. Of this number of employed people, 60% were males and the
largest number of employed persons consisted of the age group 25 to 34 years with
26.4% of the total employed. Fifty percent of employed persons were in the services
sector. Laborers and unskilled workers comprised one-third of the employed persons.
Wage and salary workers were registered at 57.5%
Full-time workers are those who work for 40 hours or more while part-time
workers work for less than 40 hours.
In April 2014, full-time workers comprised 59.3 percent of the total employed.
Employment growth in large enterprises in Metro Manila continued to be positive
at 1.02% during the fourth quarter of 2014 but this reflected a marked slowdown
compared with the same quarter of the previous year at 3.22%. The country’s labor
force grew by an average of 2.5% or an addition of 962, 000 persons in 2014. This
placed the total working population in the active workforce at 40.1 million. The figure
corresponds to a higher labor force participation rate (LFPR) of 64.4% than 63.9% in
2013.
The 2014 average annual employment data showed positive note, employment
level grew by 2.8 compared to 2013 – a net gain or employment generation that
exceeded one million. Employment was boosted by robust growth in industry (4.1%)
together with a sustained growth in services (3.1%) and modest recovery in agriculture
(1.7%). Both the rates of unemployment and underemployment eased slightly from the
previous year. Employment growth in 2014 was largely driven by the rise in part-time
employment (9.1%) alongside the increase in the number of self-employed persons and
unpaid family workers. The country’s labor force grew by an average 2.5% or an
addition of 962, 000 persons in 2014. This placed the total working population in the
active workforce at 40.1 million. The figure corresponds to a higher labor force
participation rate (LFPR) of 64.4%. than last year’s 63.9 %.(“Labor Force Survey” NSO
2015)

PHILIPPINE POPULATION
Let us now look at the Philippine population statistics in order to relate population
growth to the growth of our labor supply and to the demand for goods and services. This
will also help us analyze why the prices of basic commodities have been increasing.
The Philippine census is an official account of the population of a certain local
administrative unit in the Philippines. The population is enumerated every 5 years.
The population of the Republic of the Philippines reached more than 100 million
people in 2014, registering an increase of 2.0% versus the previous year. The
population of the Philippines represents 1.38% of the world’s total population. The
distribution of Philippine population among the 3 biggest regions is shown in Figure 2.11

Figure 2.11. Distribution of Philippine Population, (2013)

 Table 2.4. Summary of Projected Population, by Five-Year Interval
Philippines:2000 – 2040(Medium Assumption)
Year Both Sexes Male Female
2000 76,946,500 38,748,500 38,198,000
2005 85,261,000 42,887,300 42,373,700
2010 94,013,200 47,263,600 46,749,600
2015 102,965,300 51,733,400 51,231,900
2020 111,784,600 56,123,600 55,661,000
2025 120,244,500 60,311,700 59,912,800
2030 128,110,000 64,203,600 63,906,400
2035 135,301,100 67,741,300 67,559,800
2040 141,669,900 70,871,100 70,798,800

Let us now look at the population statistics and see how our population growth
over the years has affected the Filipino’s quality of life. We can see that from 2000 to
2005, which are the census years, population increased by approximately 8 million
Filipinos. In 2005 to 2010, the increase was approximately 9 million Filipinos. From
2010 to 2015, it is estimated that the close to 9 million Filipinos will be added to the total
population. It is logically to say that more Filipinos mean more mouths to feed; thus,
demand for products and services will naturally increase. If the supply of these goods
does not increase as fast as the demand, their prices will naturally increase. Housing,
school buildings, health care, and food may no longer be sufficient to meet the needs of
the growing population. In Table 2.5, we see that while population has been increasing,
the rate of growth of population has however been declining, and is expected to decline
further over the next 5 years.

Table 2.5.Average Annual Growth Rates, Philippines: 2000-2040

Year Growth Rate
2000-2005 2.05
2005-2010 1.95
2010-201 1.82
2015-2020 1.64
2020-2025 1.46
2025-2030 1.27
2030-2035 1.09
2035-2040 0.92

Another significant population demography is the age distribution. In Table 2.6, a

comparison is made between sex and age distribution in 2010 and the projections for
2015. A close look at the table shows an almost equal distribution of males and females
in both 2010 and 2015, with males exceeding females by a very small margin.

Table 2.6.Distribution of Philippine Population by Age and Sex, 2010 and 2015
Age Both Sexes 2010 Bothe 2015
Male Female Sexes Male Female
Total 94,013,200 47,263,600 46,749,600 102,965,300 51,733,400 51,231,900
0-9 10,984,800 5,619,400 5,365,400 11,386,600 5,828,500 5,558,100
5-14 10,370,300 5,289,200 5,081,100 10,950,900 5,595,100 5,355,800
10-19 9,801,500 5,006,300 4,795,200 10,343,600 5,269,700 5,073,900
15-24 9,603,300 4,900,900 4,702,400 9,757,800 4,978,600 4,779,200
20-29 8,857,500 4,478,600 4,378,900 9,544,900 4,865,300 4,679,600
25-34 7,892,000 3,940,800 3,951,200 8,795,500 4,439,500 4,356,000
30-39 7,001,500 3,474,900 3,526,600 7,842,700 3,910,200 3,932,500
35-44 6,008,400 3,013,200 2,995,200 6,942,200 3,439,600 3,502,600
40-49 5,442,300 2,737,600 2,704,700 5,924,800 2,962,400 2,962,400
45-54 4,702,100 2,376,700 2,325,400 5,330,100 2,669,800 2,660,300
50-59 3,931,600 1,974,500 1,957,100 4,554,700 2,285,500 2,269,200
55-64 3,050,800 1,521,500 1,529,300 3,747,900 1,860,500 1,887,400
60-69 2,307,800 1,122,800 1,185,000 2,843,700 1,392,700 1,451,000
65-74 1,559,300 735,700 823,600 2,055,900 973,200 1,082,700
70-79 1,189,400 533,700 655,700 1,305,700 593,200 712,500
75-84 700,500 298,500 402,000 904,200 384,000 520,200
80+ 610,100 239,300 370,800 734,100 285,600 -----

What is interesting in this table is how Philippine population is distributed among

age groups. It can be seen that in 2010, more than 21 million of total population fell
under the age group of 0 to 4 and 5 to 9. These are very young children who normally
go to school, do not work, and therefore depend on their parents for their subsistence
and living requirements. This translates to a high dependency ratio on the productive
members of the population. Then we have the older retired age group of 65 year old to
80+ numbering a little over 2 million. These people who may not have adequately
prepared financially for their retirement will add to the dependency burden on the
productive members of the population.
It is thus important to study population in terms of age distribution, to see how
much of the population is made up of the age group that can join labor supply and
therefore contribute to income generation and production of goods. This will mean less
dependency on the part of the very young and the old members of the population.
Relating this to the concept of demand and supply, one can analyze that big proportions
of dependent members of population contribute to increased demand without the
capacity to contribute to supply of goods and services. This can lead to a shortage of
social services, housing, schooling, health care, and transportation. The high demand is
also a reason for increasing commodity prices.

THE PHILIPPINE WAGE SITUATION

Usually, when Labor Day is celebrated in the Philippines on May 1, labor unions
and organizations clamor for wage increases. The government protects the workers
through the imposition of minimum wages. But workers always claim that these
minimum wages are not enough for their substance. Let us take a look at the minimum
wages in the National Capital Region.
Table 2.7.Current Minimum Wage
National Capital Region (NCR)
as of April 4, 2015
(in Pesos)
Sector/Industry Basic Basic New COLA New
Wage Wage Basic Minimum
Increase Wage Wage
Rates
Non-Agriculture P451.00 P15.00 P466.00 P15.00 P481.00
Agriculture(Plantation and P410.00 P15.00 P429.00 P15.00 P444.00
Non Plantation)
Private Hospitals with bed P414.00 P15.00 P429.00 P15.00 P444.00
capacity of 100 or less
Retail/Service P414.00 P15.00 P429.00 P15.00 P444.00
Establishments employing 15
workers or less
Manufacturing P414.00 P15.00 P429.00 P15.00 P444.00
Establishments regularly
employing less than 10
workers

The above minimum wage apply in the NCR. Minimum wages in the other
regions in the Philippines are lower depending on the cost of living in the specific
regions or sector.
The setting of minimum wages by the government assures protection for workers
that they are not underpaid by employers, and gives the guarantee of a sufficient
income to meet their basic needs.
LABOR MIGRATION AND THE OVERSEAS FILIPINO WORKERS
Another distinct feature of Philippine labor is the growth of labourers whom we
call the OFWs or Overseas Filipino Workers. Primarily because of a high unemployment
rate in the country, currently at 6.4%, Filipinos have started to find work in the countries,
In addition to this, migration is also affected by wage gaps among countries: Because
wages are higher in the United States and other more developed economies, Filipino
teachers, engineers, doctors, nurses and other health professionals and technical
workers have opted to migrate. So, even if the supply of doctors in the country may be
limited, because of the higher wages abroad, some doctors prefer to migrate and work
in foreign countries. In 2014, there were 2, 320, 000, registered OFWs.

Table 2.8 Distribution of Overseas Filipino Workers by Sex and Region (2014)
Region Number (In thousands)
Both Sexes Male Female
Philippines 2,320 1,149 1,170
National Capital Region 10.5 12.5 8.6
Cordillera Administrative Region 2.2 1.6 2.91
I - Ilocos Region 8.2 6.4 9.9
II - Cagayan Valley 6.7 3.9 9.5
III - Central Luzon 15.5 18.6 12.4
IVA - CALABARZON 17.9 20.7 15.1
1 IVB - MIMAROPA 2.1 2.5 1.6
V - Bicol Region 3.4 3.3 3.6
VI - Western Visayas 8.6 8.4 8.7
VII - Central Visayas 6.5 8.8 0.4
VIII - Eastern Visayas 1.1 1.2 1.1
IX - Zamboanga Peninsula 2.6 2.3 2.9
X - Northern Mindanao 3.4 3.3 3.6
XI - Davao Region 2.7 1.5 3.9
XII - SOCCSKSARGEN 4.6 2.3 6.9
Caraga 2.0 1.8 2.1
Autonomous Region in Muslim 1.8 1.0 2.7
Mindanao

Scattered all over the world, our overseas Filipino workers have been hailed ad
our modern-day heroes, contributing to the growth of the economy and sending millions
of dollars to their families back home in the Philippines. The lack of jobs in their native
land, and the low wages for whatever jobs are available are the main reasons Filipinos,
both male and female, try to find work in foreign countries. Oversupply of workers has
resulted in low-wage levels. Insufficient jobs in relation to the available labor supply has
also led to these low-wage levels since workers compete among each other for these
limited job openings. Those unwilling to work at these low-wage levels look for greener
pastures, which they find in foreign countries. They do a wide variety of jobs:
professionals, health workers, caregivers, engineers and construction workers,
entertainers, and teachers.

2.6. SUPPLY – DEMAND AND PHILIPPINE ECONOMIC PROBLEMS

THE PHILIPPINE PESO AND FOREIGN CURRENCIES

Trading with other countries is also an important economic activity that impacts
on the economy. Selling locally made products, called exports, means we earn dollars
as payment for these goods bought by foreign buyers. In the same manner, we buy
goods from other countries, and these are imports. When we trade with other countries,
we need a common currency to use to pay for goods we buy from them and for them to
pay us for goods we sell to them. When we travel to foreign countries, we may bring
peso or the US dollar, then convert them into the local currency of the country which we
visit. For example, we convert our dollars into baht when we go spending in Thailand, to
rupees in India, euros in Spain and other European countries, and yen in Japan. This is
why we need conversion rates and these are based on the existing foreign exchange
rates.
The rate of conversion of the Philippine peso to a foreign currency is reflected in
the exchange rate. If we have pesos that we need to convert into dollars, we need to
know the current exchange rate. These rates are dependent on the working of demand
for and supply of the currency in the market. For example, if the US dollar is demand,
the price of the dollar will increase and will be reflected in a higher exchange rate in
favor of the dollar, which means one will need more pesos to buy dollars.

Table 2.9 Peso – Dollar/Euro Exchange Rates

Bangko Sentral ng Pilipinas
Treasury Department

Reference Exchange Rate Bulletin

Country Unit Sym Euro U.S Dollar Phil. Peso
bol Equivalent
I. CONVERTIBLE CURRENCIES WITH BANGKO SENTRAL
1 UNITED STATES DOLLAR USD O.929195 1.000000 44.412000
2 JAPAN YEN JPY 0.007802 0.008396 0.372900
3 UNITED POUND GBP 1.387289 1.493000 66.307100
KINGDOM
 4 HONGKONG DOLLAR HKD 0.119876 0.129011 5.729600
5 SWITZERLAND FRANC CHF 0.971555 1.045588 46.436700
6 CANADA DOLLAR CAD 0.762073 0.820143 36.424200
7 SINGAPORE DOLLAR SGD 0.688344 0.740796 32.900200
8 AUSTRALIA DOLLAR AUD 0.724236 0.779423 34.615700
9 BAHRAIN DINAR BHD 2.465363 2.653224 117.835000
10 KUWAIT DINAR KWD
11 SAUDI ARABIA RIAL SAR 0.247779 0.266660 11.842900
12 BRUNEI DOLLAR BND 0.685804 0.738062 32.778800
13 INDONESIA RUPIAH IDR 0.000072 0.000078 0.003500
14 THAILAND BAHT THB 0.028679 0.030864 1.370700
15 UNITED ARAB DIRHAM AED 0.252980 0.272257 12.091500
EMIRATES
16 CHINA YUAN CNY 0.149950 0.161376 7.167000
17 KOREA WON KRW 0.000855 0.000920 0.040900
18 EUROPEAN EURO EUR 1.000000 1.076200 47.796200
MONETARY
UNION

Table 2.9 lists the various currencies into which the Philippine peso is
convertible. The most commonly traded currency in the world is the US dollar. Before
the United States economy experienced economic recession in 2008 to 2010, the dollar
had a very high value in the market. In the Philippines, the dollar was at its highest
when we needed P55 to buy one dollar. If the exchange down to the level P44 to P45
per dollar. This is likewise the effect of the workings of demand and supply in the
market. When the supply of a currency increases, its value tends to decrease and we
pay a lower price for it. When the demand for a foreign currency increases, its value will
increase and we pay a higher price for it.

HOUSING SHORTAGE AND THE REAL ESTATE BOOM IN THE PHILIPPINES

Demand and supply also play an important role in the Philippine real estate
situation. In the late 1990s, during the Asian financial crisis, construction hit low levels in
the Philippines. Some high profile construction projects were abandoned and demand
for housing was at low level. Some real estate companies even had to close. This was
the effect of decreased demand for construction projects.
However, as soon as the Asian countries recovered from the crisis, the
construction sector also started to recover. High-rise condominium buildings and
townhouses started to bloom in the metropolis. In Metro Manila, we still continue to see
new buildings rising. The real estate boom currently being experienced in the country
may also be traced to the booming Business Process Outsourcing (BPO) sector in the
country. With the rising number of BPOs in the metropolis, there is a need to put up
offices, which also means an increase in the demand for commercial spaces. And with
more employees working in these offices, some moving from the province to Metro
Manila, there is also a rise in the demand for residential spaces.
Table 2.10 shows occupied housing units in order to give us an idea of demand
for housing in the country.

Table 2.10. Total Number Occupied Housing Units

in the Philippines by Census Year, 1960 to 2010
Decennial Census Total Population
(in thousand)
1960 4,435.2
1970 5,668.8
1980 7,919.9
1990 11,161.7
2000 14,891.1
2010 19,715.7

The residential market in the country continues to grow because of Filipinos who
pursue their dream of owning houses. Rich people continue to have more options, with
new housing available at the Fort in the Global City in Taguig, as well as in Alabang, in
Makati, Quezon City and Parańaque.
The increase in residential demand may also be traceable to the OFW sector,
with remittances allowing their families back home to buy more affordable houses.
Office buildings and high-rises to continue sprout all around us. We se numerous
construction sites, developers try to meet the backlog in housing for Filipinos. Promotion
of housing developers is so aggressive, we walk around the malls and their agents
come up to us with beautiful brochures informing us of available condominiums or
townhouses with financing made easy, and with light terms for the buyer.

RENT AND PRICE STRUCTURE

The layman’s concept of rent is payment for the use of land or buildings
belonging to others. It is the compensation made to the owner land or building. From the
point of view of economics, rent refers to a payment made to or for a factor of
production over and above the amount expected by its owner. Economic rent is the
positive difference between the actual payment made for a factor of production (such as
land, labor, or capital) to its owner and the payment level expected by the owner, due to
its exclusivity or scarcity. Economic rent exists due to market imperfections; there would
be no need for payment for rent. Henry George(2014) describes the concept of rent in
economic as follows:
“In the economic meaning of rent, payments for the use of any of the products
of human exertion are excluded, and of lumped payments for the use of
houses, farms, etc., only the part is rent which constitutes the consideration
for the use of the land. The part that is paid for the use of buildings or other
improvements is properly interest as it is consideration for the use of capital.”
In short economic rent is any unearned income.

SAVINGS AND INVESTMENT

Saving and investment are necessary to build the future. Savings is to

investment as food is to the body nourishment process. As food and the nourishment
process sustain body growth, so do savings and investment to the growth of the
economy’s productive capacity. But saving calls for giving up the present in order to
build up and, therefore, invest for a future. Saving and investment are not only the
concern of business but also of households and government.
Investment is defined as building up the capital stock for more future production
and consumption. But the cost of investment is saving is defined postponed
consumption at present. Behind the use of money as exchange medium are the real
activities of savings and investment, which are clearly seen in the households that
produce of their own consumption (e.g., subsistence farmer). Say, a rice farmer wants
to produce a surplus and sell it in the marketplace to provide for his family’s other
needs. To realize this, he builds an irrigation canal from the river (investment) for
planting and harvesting even during the dry months. But this form of investment calls for
giving up some weeks of planting resulting in foregone consumption (savings) in
exchange for greater consumption from the production surplus in the future.
 However, the use of money as exchange and credit medium can maximize
savings and investment. While one constantly saves money for future use, another one
spends on investment even before accumulating savings by borrowing. One can borrow
and repay against future accumulated savings. The credit systems through its
intermediaries, like banks link savers and investors who are not the same persons.
Thus, this access encourages savings to maximize its allocation for investment.
Even government borrows the savings of households and business to spend on
capital accumulation. Capital takes the basic forms of machineries, equipment, and
buildings and construction. While business builds additional factories that also create
employment, households continuously accumulate fixed assets like houses and cars
for more services. On the other hand, government invests in physical infrastructures like
roads and bridges to encourage business activities. All these capital accumulations
redound to bigger productive capacity to sustain household consumption. The
economy’s capital information (investment) has always been greater than savings since
government investment is also financed by taxes and at times, foreign borrowings
(Figure 2.12)

Figure 2.12. Savings and Investment as % Gross Domestic Product (2015)

RENT

The problem of unaffordable decent housing is the problem not so much of the
middle class as the poor due to poverty. Typical middle-class household members pitch
in to afford decent housing rental and eventual ownership. But the poor cannot afford
decent housing at all, let alone they are not convincing enough for housing loans
without formal employment and paying capacity. Lacking skills, they are self-employed
(e.g., construction workers). Thus, they land-to-mouth without employment record that
could otherwise entitle them to the social benefits provided by the government. Thus the
poor squat on other people’s lands or rent squatter housing in subhuman living
condition they can only afford.
The poor spend more than their meagre income to make both ends meet. (Figure
2.13). Nonetheless, they can hardly provide even for their basic needs, which include
housing. A typical poor family spends on food and practically nothing on housing and
other consumer items (Figure 2.14). Thus poverty has isolated the poor to live in slum
areas crowding in shanties they do not even. Even in worst condition are those at the
bottom thirty percent (30%) of family income earners who are the poorest of the poor as
they live below poverty line (Figure 2.14 and 2.15). Much less could they provide even
for food consumption that many live in the streets and other public places. In contrast,
even the middle class can afford some savings and provision for their other needs
(Figure 2.15)
 Figure 2.13. Family Income Expenditure (2012)

Figure 2.14. Family Expenditure Distribution (2009)

(Bottom 30% of Family Income Groups)
 Figure 2.15. Family Expenditure Distribution (2009)
All Family Income Groups

MINIMUM WAGE
The problem of inadequate wage is intertwined with the problem of
unemployment. Both problems stem from the lack of jobs for our large labor force.
Figure 2.16 illustrates the excess labor supply due to lack of jobs at Point A reduces
wage from W 1 to W 0 at point B. Yet, the resulting increase in labor demand (L 0 – L1) is
not enough to employ excess labor (L0 – L1) simply because jobs are not enough.
Therefore, wage is more inadequate and unemployment rate is higher as more and
more people cannot find jobs that have become scarcer; Reconstructing Figure 2.16,
more excess labor decreases wage and increase the number of unemployed even
more.
But the relatively few employers can exploit many who badly need jobs all the
more. For this reason, the government mandates a minimum wage to protect workers.
In Figure 2.16, employers force helpless workers to accept a wage even lower than W 0
at Point C. Thus, government mandates a wage no lower than W 0 at point B to at least
prevent further exploitation of workers. In other words, employers are banned from
paying wages below the minimum standard set by government. Yet, most wages are
still below the minimum standard due to lack of enforcement (Figure 2.17). On other
hand, total enforcement may not be possible with the millions of employers the
government has to watch for violations.

Figure 2.16. Labor Supply-Demand

500
450
400
350
300
250 Average Wage
200 Minimum Wage
150
100
50
0
Agriculture Industry Service

Figure 2.17. Daily Average – Minimum Wage Comparison (2013)

 In the long run, it is creating more jobs that will empower workers to readily find
employment and demand higher wages. In Figure 2.16, a higher demand curve raises
employment beyond L2 and Wage to W 2 at Point D. For after all, minimum wage
legislation is just government’s control tool to prevent further exploitation of workers.
Making it a long-run solution to the wage and unemployment problems will only make
labor more costly resulting in less hiring and more unemployment at Point A.
TAXES

We pay taxes for government to provide public goods and services that empower
and enable individuals and institutions alike (e.g., school, business corporation) to
pursue their dreams. One example of a public good is farm access road for farmers to
transport their produce to the cities for the needed cash income. Another example is the
public school system to educate children of poor families out of poverty. On the other
hand, an example of a public service is resorting peace and order in war-torn areas in
Mindanao by the armed forces and police that all can resume normal life. Another
example is the regulation of business permits by the City Hall to prevent industrial
overcrowding, which can dampen the incentive to do business. In other words, we pay
taxes for government to provide a better place where we can exercise our freedom
securely, and progressively.
But taxes are yet out burden even as we ultimately benefit from the public goods
and services we get in return. Taxes can dampen the incentive to do business for the
benefit of society as they can eat up profit. An example is the usual profit tax that
diverts investment from new and vital products (e.g., cancer drugs) to those who need
less of (restaurants). Pioneering businesses need some tax reliefs in the early stage of
market exposure when profit is still lean. Taxes can also distort saving, investment, and
consumption as income earners shift to substitutes to avoid the tax burden. An example
is the high tax on interest income, which drives income earners to put their savings
instead in individually lucrative but socially unproductive real assets like jewelries, idle
lands, and the like. Ideally, tax benefit is maximized as its burden is minimized.
 The main issue that hobbies the government to maximize tax benefit while
minimizing its burden is the shortfall of tax collections due to corruption. Figure 2.18
shows that the Philippines is one of the lowest in tax collections and thus, government
spending (as % of GDP) even in Asia. As tax collection has even declined through the
years, the budget deficit (spending over tax revenue) has correspondingly worsened as
shown in Figure 2.19. What is worse is the government borrows from the public to make
up for the deficit and stretch government spending. Ultimately, repayment of public
debts by drawing on the government budget only crowds out spending especially on the
more important public goods and services. Shortfalls of tax revenues and government
spending can mean less road maintenance, books for the public schools, medicals
services, and medicines for the poor, to name a few. On top of the shortfalls, corruption
misallocates spending on the not-so-important from the more important public goods
and services (e.g., road beautification instead of free medical services for the poor).

Figure 2.18. Tax Revenues as % of GDP

 Figure 2.19. Government Budget Performance (% of GDP)

EXERCISES
I. A. Using the following demand function, solve for the demand schedule of consumer.
Randy given the following prices for bottled water.
Qd = 60 – P/2
Prices QD
P0
2
4
6
8
10
12
14
16
  Based on this table, construct a demand curve for Randy
B. On the other hand, for Robin, a seller of bottled water in the market, the supply
unction is given as:
Qs = 5 + 5P
Prices Qs
P0
2
4
6
8
10
12
14
16
 Construct the supply curve of Robin and put it in a graph with Randy’s demand
curve
 Assuming that Robin is the only seller and Randy is the only buyer in the market,
identify the equilibrium price and quantity.
II. Answer the following questions
1. What are the key words that contrast savings and investment?
2. What is investment for?
3. How does the government investment complement private investment?
4. What is savings to investment?
5. What condition prevents the poor from affording decent housing?
6. Why do they lack even the credibility to borrow money from lending institutions (e.g.
banks) for housing?
7. Why do the poor spend more than what they earn?
8. What is their spending pattern from the foregoing?
9. What are taxes for?
10. What good are the foregoing for society?
11. What are the distorting effects of taxes and why?
12. What are the distorting effects to society of shortfalls of tax collection?
13. What depresses wages and creates unemployment?
14. What conditions employers to exploit workers even more?
15. What can be a lasting solution to the problems of inadequate wage and
unemployment?
III. Activities
1. The class will be divided into five groups. Each groups will be assigned to get a one
year, month – to – month exchange rates of the Philippines with :
Group 1: The British Pound
Group 2: The Japanese Yen
Group 3: The Euro
Group 4: The Taiwanese dollar
Group 5: The Malaysian ringgit
In class, compare the findings of all the groups. Identify the currencies which had
more or less stable exchange rates and then those whose exchange rates
changed more frequently. For the second group of currencies, find reasons for
the frequent changes in the rates.
2. Research on the dollar to peso exchange rate from the time of the presidency of
Diosdado Macapagal to the presidency of Nonoy Aquino. List down the rates over
the years and try to find reasons for abrupt increases or even decreases in the
exchange rate.
3 . What difference would make if your parents did not save? What consumption have
you sacrificed in terms of consumption in order to save on your weekly allowance?
What were you able to buy with your accumulated savings? What is now the benefit
of savings for and investing in those purchases?
4. Assume that your family’s budget is only P200 a day. Figure out with the help of your
mother what it can buy. How much can you set for a monthly rental or housing loan
 repayment with the foregoing budget? Imagine the kind of house your family can
afford to rent with the amount in the foregoing. How do you compare this house with
what you see in the slum areas?
5. Repeat question 4 assuming this time the daily budget is much less at P100.
6. Assume that your family’s budget is equal to the minimum wage of P490 a day.
Figure out with the help of your mother what it can buy. How much is left for house
rental, medical services, tuition, etc.? is the budget enough to make both ends meet?
is your family better off with its actual budget as compared with the minimum wage?
Again, ask your mother how she allocates your family budget. How much do you
think a family should earn to provide for at least, the most basic needs (e.g. food,
housing)?
7. Ask your parents how much taxes they pay annually. Figure out with their help what
they could otherwise buy with said amount.
8. Enumerate 5 common public goods and services government provides with the
taxes we pay. Are the benefits of these public goods and services worth the taxes
your parents pay? Explain
CHAPTER 3: INDUSTRY AND ENVIRONMENTAL ANALYSIS:
BUSINESS OPPORTUNITY IDENTIFICATION

3.1. PRINCIPLES, TOOLS, AND TECHNIQUES

A business is just a small portion of an industry. It is undertaking by a person or a
group of person who are partners, or a stockholders who own a juridical entity known as
corporation. Its main objective is to earn profit for the owners. An industry, on the other
hand, is the aggregation of the different businesses engaged in the same line of
undertaking. For example, Celine is a business firm that is part of the country’s shoe
industry.
For a reason to put up a business, it is essential that an industry analysis first be
made. Commonly used is a system known as the SWOT analysis, which lists the
strengths, weaknesses, opportunities, and threats that the business faces

BUSINESS ORGANIZATION
From a legal point of view, there are four ways to form a business:

1. Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships. These
firms are owned by one person, usually the individual who has day-to-day responsibility
for running the business. Sole proprietorships own all the assets of the business and
the profits generated by it. They also assume complete responsibility for any of its
liabilities or debts. In the eyes of the law and the public, you are one in the same with
the business.

Advantages of a Sole Proprietorship

 Easiest and least expensive form of ownership to organize.

 Sole proprietors are in complete control, and within the parameters of the law,
may make decisions as they see fit.
 Profits from the business flow-through directly to the owner’s personal tax return
 The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

 Sole proprietors have unlimited liability and are legally responsible for all debts
against the business. Their business and personal assets are at risk.
 May be at a disadvantage in raising funds and are often limited to using funds
from personal savings or consumer loans.
  May have a hard time attracting high-caliber employees, or those that are
motivated by the opportunity to own a part of the business.
 Some employee benefits such as owner’s medical insurance premiums are not
directly deductible from business income (only partially as an adjustment to
income).

2. Partnerships

In a Partnership, two or more people share ownership of a single business. Like

proprietorships, the law does not distinguish between the business and its owners. The
Partners should have a legal agreement that sets forth how decisions will be made,
profits will be shared, disputes will be resolved, how future partners will be admitted to
the partnership, how partners can be bought out, or what steps will be taken to dissolve
the partnership when needed; Yes, its hard to think about a “break-up” when the
business is just getting started, but many partnerships split up at crisis times and unless
there is a defined process, there will be even greater problems. They also must decide
up front how much time and capital each will contribute, etc.

Advantages of a Partnership

 Partnerships are relatively easy to establish; however time should be invested in

developing the partnership agreement.
 With more than one owner, the ability to raise funds may be increased.
 The profits from the business flow directly through to the partners’ personal tax
return.
 Prospective employees may be attracted to the business if given the incentive to
become a partner.
 The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

 Partners are jointly and individually liable for the actions of the other partners.
 Profits must be shared with others.
 Since decisions are shared, disagreements can occur.
 Some employee benefits are not deductible from business income on tax
returns.
 The partnership may have a limited life; it may end upon the withdrawal or death
of a partner.

Types of Partnerships that should be considered:

a. General Partnership
Partners divide responsibility for management and liability, as well as the shares
of profit or loss according to their internal agreement. Equal shares are assumed
unless there is a written agreement that states differently.

b. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of
their investment) as well as limited input regarding management decision, which
generally encourages investors for short term projects, or for investing in capital assets.
This form of ownership is not often used for operating retail or service businesses.
Forming a limited partnership is more complex and formal than that of a general
partnership.

c. Joint Venture

Acts like a general partnership, but is clearly for a limited period of time or a
single project. If the partners in a joint venture repeat the activity, they will be
recognized as an ongoing partnership and will have to file as such, and distribute
accumulated partnership assets upon dissolution of the entity.

3. Corporations

A Corporation, chartered by the state in which it is headquartered, is considered

by law to be a unique entity, separate and apart from those who own it. A Corporation
can be taxed; it can be sued; it can enter into contractual agreements. The owners of a
corporation are its shareholders. The shareholders elect a board of directors to oversee
the major policies and decisions. The corporation has a life of its own and does not
dissolve when ownership changes.

Advantages of a Corporation

 Shareholders have limited liability for the corporation’s debts or judgments

against the corporation.
 Generally, shareholders can only be held accountable for their investment in
stock of the company. (Note however, that officers can be held personally liable
for their actions, such as the failure to withhold and pay employment taxes.
 Corporations can raise additional funds through the sale of stock.
 A Corporation may deduct the cost of benefits it provides to officers and
employees.
 Can elect S Corporation status if certain requirements are met. This election
enables company to be taxed similar to a partnership.

Disadvantages of a Corporation

 The process of incorporation requires more time and money than other forms of
organization.
  Corporations are monitored by federal, state and some local agencies, and as a
result may have more paperwork to comply with regulations.
 Incorporating may result in higher overall taxes. Dividends paid to shareholders
are not deductible from business income; thus this income can be taxed twice.

4. Cooperative
A cooperative is an entity organized by people with similar needs to provide
themselves with goods or services or to jointly use available resources to improve their
income.
Cooperative members have an equal say in decision- making with one vote per
member regardless of number of shares held, there is open and voluntary membership
and surplus earning is returned to the members according to the amount of their
patronage.

SMALL, MEDIUM, AND LARGE SCALE BUSINESS

It is also important to study the classification of business as to the size based on
the worth of the business assets. In the Philippines, total assets for micro business are
worth below P1, 500, 001. For the small business, total assets are from P1, 500, 001 to
P15, 000, 000. Medium business has the total assets from P15, 000, 001 to P60, 000,
000. Any business with assets in excess of P60, 000, 000 is considered large scale.
For any form of business organization, the business must be registered with the
appropriate government agencies. In the case of sole proprietorship and partnerships,
100% must be owned and capitalized by Filipinos. For corporations, at least 60% f the
outstanding capital stocks must be owned by Filipino citizens. Business activity
conducted may be within major sectors of industry, services, practice of profession, or
operation of tourism-related business and agri-business.

3.2. TOOLS IN EVALUATING A BUSINESS

According to guide developed by North Carolina’s Small Business and
Technology Development Center, the key factors that must be considered in analyzing
the industry are the following:
1. The geographic area which your business will cater to. Is it limited to local areas?
Or will it cover a region, the entire country, or even the international market?
2. The size and outlook of the industry. What trends can be indentified?
3. Description of the product.
4. The buyers have to identify. Who are your target customers?
 5. The regulator environment. Are the local, national laws that will restrict the
business? One needs to identify government regulations specific to the chosen
industry.
6. The need to identify the leading businesses in the industry, and to provide
company information on the most successful businesses that you will be up
against.
7. Factors that will affect the growth of the business.

THE SWOT ANALYSIS

SWOT analysis (or SWOT matrix) is a strategic planning technique used to help
a person or organization identify the Strengths, Weaknesses, Opportunities,
and Threats related to business competition or project planning.[1] It is intended to
specify the objectives of the business venture or project and identify the internal and
external factors that are favorable and unfavorable to achieving those objectives. Users
of a SWOT analysis often ask and answer questions to generate meaningful information
for each category to make the tool useful and identify their competitive advantage.
Strengths and Weakness are frequently internally-related, while Opportunities
and Threats commonly focus on environmental placement.

 Strengths: characteristics of the business or project that give it an advantage over

others.
 Weaknesses: characteristics of the business that place the business or project at a
disadvantage relative to others.
 Opportunities: elements in the environment that the business or project could
exploit to its advantage.
 Threats: elements in the environment that could cause trouble for the business or
project.
SWOT analysis aims to identify the key internal and external factors seen as
important to achieving an objective. SWOT analysis groups key pieces of information
into two main categories:

1. Internal forces

The strengths and weaknesses actually refer to the internal forces, and
these are the resources and experiences readily available to the business
proponent. Usually include as internal forcess are:

a) financial resources such as money and sources of funds for

investment;
b) physical resources, such as the company’s location, facilities,
machinery, and equipment
c) human resources consisting of employees;
d) access natural resources, trademarks, patents, and copyrights; and
 e) current processes, such as employee programs, department
hierarchies and software systems ,sales and distribution
capabilities, marketing programs, etc.

2. External forcess — the opportunities and threats presented by the environment

external to the organization. These may include:

a) economic trends including local, national and international financial

trends, developments in the country’s stock market, reforms in the
banking system, growth of the Gross Domestic product;
b) market trends, such as new products or technology or evolving
buyers’ profiles, including changes in tastes and lifestyle behaviour;
c) national and local laws and statutes as well as political,
environment, and economic regulations;
d) demographic characteristics of the target market such as the age,
the gender, the culture of the costumers;
e) relationship with suppliers and co-owners; and
f) competitive threats

Before an owner can plan for its business’ future, he/she must first evaluate the
business by identifying and analyzing internal and external resources and threats. The
SWOT analysis is a tool that can help a proponent by enabling him/her to identify and
assess the internal and external forces that can affect the business. When used
properly and regularly, this can serve as guide for the company to attain success. It is
guide to prepare for a new venture, design business strategies, and identify areas of
change and reform. When used properly, the business owner can anticipate problems,
including possible solutions and take advantage of identified opportunities. The owner
can maximize its strengths and attempt to cut out its weaknesses.
Table 3.1 presents a SWOT analysis template that can be used as a guide to
identify the strengths, weaknesses, opportunities, and threats.

STRENGHTS WEAKNESSES
 Government incentives 
Difficulty of organization
 Low capital requirements 
Costly set-up
 Market acceptance 
Possible pollution problems
 Experienced leaders 
Lack of training of workers
OPPORTUNITIES THREATS
 Project may replace imported good  Entry of competitors
available in the market  Time consuming production
 Will improve employee welfare processes
 Improved company reputation  Opposition from residents in the
community.
Table 3.1 SWOT Analysis Template
PORTER’S FIVE FORCES OF COMPETETIVE POSITION ANALYSIS
Porter's Five Forces of Competitive Position Analysis were developed in 1979 by
Michael E Porter of Harvard Business School as a simple framework for assessing and
evaluating the competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the
competitive intensity and attractiveness of a market. Porter’s five forces help to identify
where power lies in a business situation. This is useful both in understanding the
strength of an organisation’s current competitive position, and the strength of a position
that an organisation may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new
products or services are potentially profitable. By understanding where power lies, the
theory can also be used to identify areas of strength, to improve weaknesses and to
avoid mistakes.

Figure 3.1. Porter’s Five Forces of Competitive Position Analysis

The five forces are:

1. Supplier power
An assessment of how easy it is for suppliers to drive up prices. This is driven by
the: number of suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost of switching from one supplier to
another.
2. Buyer power
An assessment of how easy it is for buyers to drive prices down. This is driven by
the: number of buyers in the market; importance of each individual buyer to the
organisation; and cost to the buyer of switching from one supplier to another. If a
business has just a few powerful buyers, they are often able to dictate terms.
3. Competitive rivalry
The main driver is the number and capability of competitors in the market. Many
competitors, offering undifferentiated products and services, will reduce market
attractiveness.
4. Threat of substitution
Where close substitute products exist in a market, it increases the likelihood of
customers switching to alternatives in response to price increases. This reduces both
the power of suppliers and the attractiveness of the market.
5. Threat of new entry
Profitable markets attract new entrants, which erodes profitability. Unless
incumbents have strong and durable barriers to entry, for example, patents, economies
of scale, capital requirements or government policies, then profitability will decline to a
competitive rate.

IMPORTANCE OF PORTER’S FIVE FORCES ANALAYSIS

The Porter’s Five Forces Analysis is a significant tool for organizations to
understand the factors affecting profitability in a specific industry and can help to form
decisions on whether or not to enter a specific industry, whether or not to increase a
capacity in a specific industry, and also for developing competitive strategies.
Under this theory, a business becomes more attractive, the greater the suppliers
power to drive prices up, the less the buyer’s power to drive prices down, the less the
number of competitors in the market, the more differentiated the product or service is
,the less the substitutability of the products for similar goods, and the more difficult it is
for new entrants to participate in the market. (Chartered Global Management
Accountant 2015)

3.3. INDUSTRY ANALYSIS

In a book published by the Development Academy of the Philippines, How to
Prepare Feasibility Studies, it includes an industry analysis of the following important
factors.
COMPETITION
Who are the major businesses in the industry? Are there locations close to your
proposed business? Have they been long existing or still new entrants? What is the
market share of each of these businesses? It is very important that you know your
competitors and be ready for them. Your aim is to win their costumers, convince them to
buy from you instead, and remain as loyal customers.
CUSTOMERS
Who will you sell your product to? The target market must be identified. Who
exactly will buy your products? What income groups? What age brackets? What
gender? What career groups? What type of people will you cater to, based on their
preferences, lifestyles, and buying habits?
SUPPLIERS
Every retail business suppliers from whom one can source raw materials,
intermediate products, or even the finished goods one intends to resell.
A business may need one or more suppliers. It is important to develop suppliers
who are reliable in terms of the quality of what they supply and their dependability in
coming up with the things you order from them. With modern technology, one can easily
go online and shops for suppliers look at reviews made by the other retailers to
determine who the reliable ones are. The yellow pages of the telephone directories are
also a good source of suppliers’ stores and names. The person intending to put up a
business must ask around for prices in order to be more competitive with other sellers in
the market.
A business owner can buy directly from the manufacturers. This will be the
cheapest source since there are no middlemen involved. However, this is only
recommended if the supplier’s location is convenient and will not involve expensive
delivery costs.
Another alternative is to buy from distributors. They are wholesalers of brokers
who buy in big quantities from manufacturers, add a mark-up to their purchase price
and sell to retailers. Their prices are higher but they can sell in small quantities, which
the manufacturers would not normally do.
 A third source of goods is through imports. Some businessmen go to nearby
countries to buy their goods or raw materials there. There is advisable if the prices
abroad are relatively cheaper and no heavy import duties will raise the prices and make
the goods less competitive in the country and when transport costs are not excessive.
It is important to maintain good relationships with one suppliers; they are the key
to one’s continued access to goods and to raw materials that will be needed for the
business.

SUBSTITUTE
Substitutes are goods that can be in place of another. These are goods that may,
even if partly, satisfy the same needs of a consumer such that the consumer may use
one instead of another. For example, margarine can be a substitute for butter or wheat
bread for white bread. Some goods are close substitutes while others are not. Pepsi
Cola may be a very good substitute for Coca Cola, but not everybody will be willing to
switch brands because they have developed a taste for a particular cola. This is why
manufacturers try to differentiate their products from their competitors so that the
customers will develop product loyalty for their brand. We know that Safeguard and
Dove are both bath soaps, yet we can distinguish one brand from another, and we have
our own preferences.
The more differentiated a products is, the greater the edge of its manufacturer
because this can convince the customers to buy their product instead of that of the
competition.

A GUIDE TO INDUSTRY ANALYSIS

An industry analysis guide developed by North Carolina’s Small Business and
Technology Development Center (SBTDC) can help in making an analysis of one’s
business industry.
The key factors to be considered in analyzing your industry identified by the
SBTDC are:
1. Geographic Area – identify the area whether local, regional, nationwide. or
international.
2. Industry (as to size) – worth in pesos and number of firms, trends and
developments and future outlook.
3. Product – describe the product as to physical attributes and characteristics, and
its uses
4. Buyers – describe target costumers as to age, income group, geographical
locations, and occupations; include consumers demographics such a
population/household size, sex, race, ethnicity, family status, housing status,
 etc., may also include psychographics such as lifestyle information, tastes,
preferences, and buying habits
5. Regulatory Environment – should include government laws and regulations that
apply to the business.
6. Company Information – make a list of the most successful business in the
industry
7. A brief history of the industry – when it started and how it developed
8. Factors that affect growth of the industry – such as migration of population from
rural to urban areas
9. Trends in sales over recent years – show actual sales in the industry over the
past 5 years
10. Current operational/management trends within the industry, which are standard
practices prevalent among the firms
11. The types of marketing strategies prevalent within the industry
12. Competitor information – include the location of competitors and how long have
they been in business and their market share

3.4. ENVIRONMENTAL ANALYSIS

The other analysis that has to be done is an analysis of the environment in which
the business will operate. This means an evaluation of the possible or probable effects
of external forces and conditions on the survival and growth of the business.

ECONOMIC FORCES
This involves a look at economic factors such as income of the people,
specifically the target market, economic conditions such as inflation, recession,
prosperity, demand, and supply in the market.

PHYSICAL ENVIRONMENT
This includes a look at the population size, the geography of the place where
business will be located, land distribution, climate, and in today’s global warming
situation, whether or not the area is prone to flood or earthquake.

POLITICAL FACTORS
The type of government, the stability and strength of the government, and good
leadership are factors that can be an advantage to a business.
CULTURES AND LIFESTYLES
It is important to study cultural practices such as fiestas, celebration of the
Christmas seasons, trends and consumption patterns, as a means to identify the goods
and services that will fit into these celebrations and spending behavior.

COMPETITION’
This is something that needs to be studied. As already mentioned above, the
degree of competition in the market and the extent and strength of competition are all
very vital in determining the success or failure of a business.

3.5. THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

To further guide the students on how the market works, this section describes the
various economic activities that take place in an economy. This is referred to as the
circular flow which is defined as the flow of activities of household and firms in a circular
direction. Let us start with the first illustration.
THE SIMPLE FLOW OF GOODS AND SERVICES
In Figure 3.2, goods and services flow from the firms as producers, to the
households as consumers, in a clockwise direction. On the other hand, households as
resource owners provide firms as producers with resource use such as labor rendered,
capital lent or invested, land rented to producers, and entrepreneurial skills. Figure 3.2,
these resources flow from the households to the firms also in clockwise direction. It is
the use of these resources that enables the firms to produce the goods and services
delivered to the households. The flow of products and resources are the physical flows
in the economy.
The flipside to the physical flow is the money payment flow. Household pay and
firms earns revenues in exchange for the goods and services received and provided,
respectively. In figure 3.2, revenues flow counter clockwise from the households to the
firms as payments for the goods and services received by the former. Likewise, firms
pay and households earn factor income for the use or resources provided to the former.
Factor income payments counter flow from the firms to the households for resources
provided by the latter.
For as long as households are willing to consume, producers continue to produce
goods and services for the households using the resources provided by the latter. As
the physical flow continues, so is the money payment flow in exchange for products and
resources in Figure 3.2, the physical flow continues in clockwise direction in exchange
for money payment flow in the counterclockwise direction.
 Figure 3.2. The Circular Flow
A closer look
Among the firms, there is also the product flow up the production stages, that is
from the raw material to the intermediate good and on to the final good for consumption
(solid arrows, Figure 3.3). Opposite the product flow is the money payment flow in
exchange for product delivery down the production stages from the consumer, that is, to
the final then to the intermediate and on to the raw material stage (broken arrows,
Figure 3.3).
Raw materials are unprocessed goods like raw materials, logs, and wheat,
which are extracted from their sources and do not undergo any process of production.
Intermediate goods are semi-processed goods that are not ready for final use by the
consumer, such as leather, cloth, and steel, which have undergone some processing
but need to go through additional processing before they can be actually used. These
are supplied to final good firms of conversion into goods in their finished stage. Final
goods are goods that are ready for direct consumption such as refrigerators, dresses,
or pants. These final goods are then sold to consumers for their use.
Figure 3.3 magnifies the production side of the circular flow diagram in Figure
3.2. Goods flow up the production stages to the consumers in return for payments
trickling down the production stages for their inter-stage product flows.
 Figure 3.3. Intra-Production Payments Flows
Another form of physical flow is the flow of resources from the households to the
business firms (solid arrows, Figure 3.4). The households is the source of resources
used by the raw material firm, the intermediate good firm, and the final good firm. In the
flow, it can be seen that the household provides resources to the raw material,
intermediate good and the final good firms use in the production of goods.

Figure 3.4. Resource-Production-Payment Flow

 In return for the use of the resources, the three types of producing units make
money payments to households (broken arrows). This is now a financial flow since it
involves the payment of money to the resource owners. Money is now paid by the
various firms to the households as payment for the resources they provide. Figure 3.4
magnifies the flows of resources and payments in exchange between households and
the producers in the circular flow diagram in Figure 3.2

THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two relevant units in the flow: the government and foreign countries.
The government is important because it makes purchases of economic resources from
the households and makes money payments to the resource owners for the use of their
resources. The government also buy goods and services from the producing units for
which it makes money payments
The significance of the global economy cannot be overemphasized in today’s
times. Am economy buys goods from other countries; these are called imports. An
economy sells goods to other countries; these are called exports. A country pays for the
goods imported and earns income from exports.

3.6. THE ECONOMY’S PRODUCING SECTOR

The Three Economic Sectors
According to the three-sector theory, all economic activity can be classified into
one of three sectors: the primary sector, the secondary sector and the tertiary sector. As
a rule of thumb, we say the more advanced an economy is, the more its focus shifts
from the primary, through the secondary to the tertiary sector. In recent years, many
economists have argued that the three-sector theory should be extended to include a
quaternary sector. But before we discuss the reasoning behind this, we will look at each
of the three economic sectors in more detail below.
The three main sectors of the economy are:
1. Primary sector – extraction of raw materials – mining, fishing and agriculture.
2. Secondary / manufacturing sector – concerned with producing finished goods,
e.g. factories making toys, cars, food, and clothes.
3. Service / ‘tertiary’ sector – concerned with offering intangible goods and
services to consumers. This includes retail, tourism, banking, entertainment and
I.T. services.
A primitive economy will primarily be based on the primary sector – with most
people employed in agriculture and the production of food.
 As an economy develops, improved technology enables less labour to be needed
in the primary sector and allows more workers to produce manufactured goods. Further
development enables the growth of the service sector and leisure activities.
Primary sector
The primary sector is sometimes known as the extraction sector – because it
involves taking raw materials. These can be renewable resources, such as fish, wool
and wind power. Or it can be the use of non-renewable resources, such as oil
extraction, mining for coal.
Secondary or manufacturing industry
The manufacturing industry takes raw materials and combines them to produce a
higher value added finished product. For example, local makers of wallet and bags
produce the final products by processing the intermediate product of leather which is
manufactured from the animal hide extracted by agriculture. Within the industrial sector
itself, local cement manufacturers produce the product by heating limestone mixed with
clay from the quarrying industry for use in the construction industry. The lead industries
in resource use and output are manufacturing and construction as they respectively
account for 65% and 20% of sectoral production(NCSB 2009).
SERVICE SECTOR
The Service Sector produces the intangibles supporting and complementing
production in the other sectors as well as among its own industries. For example, the
transport industry brings input and output among the other industries. Reliant on its
activity is the trade industry that takes on the complementary role of marketing their
produce. The single biggest industry in resource use and output is trade as it accounts
for 29% of sectoral production(NCSB 2009).

3.7. AGRICULTURE
The Philippines is a predominantly agricultural country. The country’s economy is
founded on agriculture. Our resources primarily come from the earth’s bounty. The
country’s climate and temperature is best suited for agricultural production. Majority of
the populace also depend on agriculture for their livelihood.
Agricultural development is an important issue. it can be said that the progress of
the sector provides the impetus and accelerates the rate and process of industrialization
in a country like the Philippines. As such, a discussion on industrialization should give
careful consideration to the importance of developing the agricultural sector.
How does the Philippine agricultural sector face?
Our country is faced with serious problems on ensuring an adequate supply of
food. It is quite disconcerting that a country that used to be one of the world’s major
food suppliers now imports food. Isn’t it disturbing that those who nurture the land don’t
have enough to eat? Don’t you ever wonder why for instance, chicken from the United
States is often cheaper than those grown locally? Or why garlic from Taiwan is a lot
cheaper than the ones grown in Ilocos? Why are our markets flooded with imported
agricultural products? What does this say about our agricultural sector?
This lesson will focus on the country’s agricultural sector – its scope and
importance, as well the level of technological advancement and productivity the sector
has attained through time. We shall also take a look at the issues and concerns faced
by the sector and the millions of farmers and agricultural workers.
AGRICULTURE
The word agriculture comes from the Latin phrase “ager cultura” which means
cultivation of fields. Agriculture is a special type of production that generally involves
plant cultivation and raising animals. Its scope has since been expanded to include
fishery and forestry.
The discovery of agriculture in 6 000 BC was a significant even that had a major
impact on the development of civilization.
People who lived before agriculture was discovered substituted by foraging for
food. They managed to survive by hunting, fishing and gathering food wherever they
can come across these. People inhabited areas where they could easily find food.
People then usually moved from place to place in search of food, which is why they
were called “nomads”.
As population increased, it became more difficult to rely on hunting, gathering or
simple fishing for the people’s food requirements. Prompted by the need to ensure their
food supply, people eventually discovered they could cultivate crops and domesticate
animals. This resulted in changes in their way of life. Permanent communities were
formed as people saw it advantageous to cultivate a permanent area than move from
one place to another. They no longer had to worry about what to eat and where to find
food. This ended the people’s nomadic life and signalled the beginning of civilization.
The development of agriculture resulted in significant advancements in the
people’s knowledge and understanding of their environment. Since some members of
the clan or family have been liberated some from the task of looking for food, people
were able to develop other capabilities to further improve their lives. This eventually
paved the way for the invention of different tools and methods useful for farming like
plows as well as the creation of systematic irrigation systems. This is why it is often said
that agriculture is the base for the development of socities.
THE IMPORTANCE OF AGRICUTURE TO THE ECONOMY
Agriculture plays an important role in economic progress. The materials needed
for and in many economic activities come from this sector.
 To begin with, the sector provides food. Aside from rice and corn, our lands are
best suited for such crops as coconut, sugarcane, banana, pineapple, mango, and
many roots crops. Agriculture also supplies us with seafood that provides for our
mineral and protein needs.
Aside from food, the sector is also the main source of raw materials needed to
create other products. Agricultural products serve as input for many manufactured
products. natural materials from the forests, fields, mountains and seas are processed
into many different items.
Another important contributions of the sector is as source of products exported to
other countries. Among the country’s agricultural products brought to other countries are
fruits, seafood, flowers, sugar and many others. The export of agricultural products is an
important source of income for the government. This is why the government places
particular focus on developing the country’s capacity to export more agricultural
products.
Agriculture also provides employment to a great number of Filipinos. Majority of
the country’s population are found in the countryside, and they depend on agriculture for
their livelihood. According to government estimates, almost one – half of all those
employed are found in the sector. They are mostly engaged in farming, fishing and
mining activities.
Those involved in the agricultural sector is also a big potential market of
manufactured products. Because of their number, those involved in the sector are
potential consumers of products made by industries. To ensure the healthy exchange
between the agricultural and industrial sectors, it is necessary to make certain that the
millions of farmers, farm workers, and fisher folk have the capacity to buy.
Agriculture therefore, has a crucial role in the overall objective and effort to
achieve economic progress. A progressive agricultural sector can support other sectors
of the economy like manufacturing, trade and services by supplying the needed raw
materials. That is why a country that dreams of industrialization needs to expand and
improve its agricultural production.
But expanding production alone is not enough to develop the sector. keep in
mind that the sector makes up for a substantial part of the country’s population – and
these are people who are potential consumer of other products and services. This goes
to say that alongside efforts to expand production, developing the sector necessitates
an improvement in the people’s condition in order to strengthen their capacity as
consumers.
Through this, a more vibrant exchange between productive sectors will take
place and progress in both urban and rural areas is expected to follow.
Many of today’s developed economies first strove to strengthen their agriculture
sectors.
 In fact, many of them still provide tremendous financial support to their farmers
and even to scientist and researches who aim to further enhance agricultural
production. And the experience of these industrialized countries proves that agriculture
plays a key role in the industrialization process.

AGRARIAN ECONOMY
The Philippine economy is characterized as predominantly agriculture. Almost
half of the 30 million hectares of Philippines land is reserved for agriculture use. These
are designated for the cultivation of traditional crops (rice and corn) and export crops
like fruits, vegetables and others.

Figure 3.5. Share of Agriculture to Foreign Trade

About twenty percent of the country’s domestic production is form agriculture.

Almost ten million Filipinos, roughly forty percent (40%) of the country’s total labor force,
obtain their livelihood from this sector. In 2001, agricultural products made up for almost
ten percent (10%) of the country’s total exports.
THE STATE OF THE PHILIPPINE AGRICUTURAL SECTOR
There is no refuting agriculture’s importance the national economy. This is why it
is necessary to ensure the sustained progress of this sector.
What is the situation of our agrarian economy? Is it capable of meeting the
country’s ever – growing need for food, raw materials and employment? What is the
situation of the people who depend on agriculture for their livelihood? What are the main
issues confronting the sector?
Figure 3.6 shows the performance of the agriculture sector in the last 15 years.

Figure 3.6. Philippine Agricultural Production (1992 – 2005)

There has been a steady decline in the growth rate in agricultural production, the
sharpest of which occurred in 1998. Instead of attaining a sustained growth in
agriculture, the sector is experiencing the contrary. We can also see from the graph that
after a brief “recovery” in 1999, the growth in agriculture production in 2000 actually
went back to its 1986 level.
 As shown in the Figure 3.6, development in agriculture is slow, if not entirely
stagnant, From the usual average annual growth of 4.6% from 1965 to 1980, growth in
the production of agricultural commodities has gone to as low as 2% in the 1980s. This
slipped further to 1% growth in 1995. The year 1998 recorded the biggest drop in
production, declining by 6.4% because of severe drought. Actually, the registered
growth rate in 2000 was even lower than the 1986 level. For the entire 15 years from
1986 to 2000, the average annual increase in agriculture was only around two percent.
This suggest that there has not been any significant improvement in the level of
agricultural production in the country over a period of 15 years. For a country that is
supposedly gearing up for development, this trend is very alarming.
The slow growth in agricultural production affects not only the economy, but also
all of us who relates with the sector in terms of employment, income from exports, and
in ensuring the country’s food supply.
The slow growth in agricultural production translates to declining revenues from
the sector, as shown in Figure 3.7.

Figure 3.7. Share of Agriculture in Local Production

As production continues to fall, prices of locally produced farm products increase,

affecting consumers in both rural and urban areas. This increase in the prices of
domestically produced agriculture goods also threatens the county’s food security.
Deteriorating production and the resulting price increases also render our agriculture
exports uncompetitive and far behind in the international market.
There many factors that may account for this state of agricultural production. The
most oft – repeated reasons are natural calamities like drought or too much rain that
affect harvest. Some say the decrease in production is due to over and/or improper use
of land. Soil loses its fertility through time and use, so there is an natural tendency for
the harvest to diminish. The widespread use for fertilizers, pesticides, and other
chemicals harms the soil and contributes to the slow growth in production.
While these analyses are valid to a certain extent, these are not enough to
account for the continuing stagnation of the sector. What then, are these the real
reasons for the dismal of agriculture.

BACKWARD AGRICULTURE
The use of modern technology in agriculture accelerates production. It is said
that one of the key elements in improving agricultural production is its modernization.
This means that a relative increase in the use of machinery, modern implements and
methods of farming are necessary for higher productivity. Farming is considered
modern if, instead of plows and the water buffalo (carabao), it employs machines and
tractors to till the land. Modernization of agriculture, however, entails more than the use
of tractors; it also involves scientific methods of planting, efficient irrigation systems,
storage facilities, and others.
The level of technology in the country’s agriculture sector remains backward. In
most parts of the archipelago, farming is chiefly manual, with palay grains dried and
processed through traditional methods, and farms still dependent on rain for irrigation.
Of the 3.1 million hectares of land classified as irrigable, only 43% has been developed
for irrigation. The effects of the El Nińo weather phenomenon and other droughts. could
have been reduced if many local farms have not been solely reliant on the rain for
irrigation. This is why production in agriculture is largely slow, seasonal and inefficient.
Very few farmers can afford to buy tractors and other machines for farming. What
is referred to as mechanized farming is limited to export - oriented plantations of fruits
and vegetable. These are usually owned by wealthy landlords and foreign corporations,
and comprise only a fraction of farmlands in the country.

INADEQUATE SUPPORT SERVICES

As the foundation of the country’s economy, the development of the agriculture
sector must be utmost concern. Programs and projects undertaken primarily agriculture
sector must be of utmost concern. Programs and projects undertaken primarily by the
government must reflect the measures intended to improve both the sector and the lives
of the millions who rely on agriculture.
 The following areas need careful attention in order to develop the sector:
1. The provision of infrastructure such as irrigation in areas where water supply is
scarce will be of great help to farmers, especially during periods of drought.
“Farm – to – market” roads are needed to facilitate the exchange of products and
ease the farmers’ burden of transporting their harvest to the market. In addition,
facilities for processing and storing seeds and grains are needed to keep the
produce fresh and prevent spoilage;

2. Access to credit especially for small farmers to purchase equipment and

necessary farm inputs. Credit agencies that offer minimal interest on loans would
be liberate farmers and fisher folk from usurious interest rates charged by loans
sharks.

3. Subsidies for farm inputs and implements. Aside from lowering production
expenses, the provision of financial assistance is a step towards modernizing
agriculture in the country; and

4. Support for research and the development of modern, scientific and safe
methods and technology for increasing production. Farmers and fisherfolk also
need to be updated of the latest developments affecting the sector so that they
will also know how to cope with these.

As the institution expected to take the lead in developing the sector, the
government has major shortcomings in addressing the problems confronting agriculture.
It moves have so far been contrary to the purpose of supporting and strengthening the
sector.
In terms of funding allocation, government support in agriculture and agrarian
reform has been declining as shown in the table below. It has also removed subsides
given for the purpose of developing the sector.

Year 1998 1999 2000 2001 2002 2003 2004 2005

Percentage 4.66 4.63 4.21 3.09 3.78 3.99 2.93 2.86
Share
Table 3.2. National Budget Allocation for Agriculture and Agrarian Reform
1998 to 2005 (in percent)

This has been mainly due to the government’s commitment to the policy of
globalization. Subsides for farmers are being removed in accordance with the
government’s adherence to the General Agreement on Tariffs and Trade of the World
Trade Organization (GATT – WTO), an international trade body that seeks to dismantle
protectionist policies in different countries to facilitate “borderless” trade. The WTO
hopes to achieve this by requiring countries to remove tariffs on imported agricultural
products and do away with subsidies for their local and export agricultural production.
With the removal of government subsidies, farmers and fisherfolk shoulder the
ever – increasing costs of production. They also have to contend with very low farmgate
prices for their produce, since the government is renouncing its role as provider of farm
support mechanisms such as procurement and price regulation.
The government’s compliance with the with the WTO agreement has also
entailed the dismantling of quantitative restrictions (ORs) on imported productions,
which should have limited the volume of imported agricultural products allowed in the
country. Presently, all agricultural imports are free to enter the country without any
quantitative restrictions.

FLOWED GOVERNMENT PROGRMAS AND FOREIGN CONTROL

The agricultural sector is imperilled under the government’s policies and
programs. The sector remains backward, with both productivity and growth on a decline
as a result of policies implemented through the decades. The hoped – for agricultural
progress was pursued under the different administrations by opening the sector to
foreign products, services and capital.
In the 1970s, the Marcos government adopted the so – called Green Revolution
that set its sight on increasing production by “modernizing” agriculture. With support and
funding from the World Bank, farmers were enticed to use high – yielding varieties of
rice and crops (HYVs and HYCs), which required the purchase and use of imported
pesticides and fertilizers. Farmers were given financial assistance through credit
program called “Masagana 99”. Imported seeds and agrochemical products were sold
to the farmers whose only means of acquiring such expensive inputs was through the
credit program. Although harvest initially improved, soil acidity and crop diseases
increased and eventually affected the farms, animals and the farmers who were left
heavily indebted.
Throughout the 1980s and 1990s, the country relied on the exportation of
agricultural products for much – needed revenues. Agricultural production was aligned
not with the domestic requirements but to the demands of the world market.
Agriculture was restricted in line with the strategy of attracting foreign investors to
the country. This has paved the way for the rampant conversion of agricultural lands
into industrial estates, export – processing zones, residential subdivisions, world – class
resorts and golf courses.
 In 1995, the High Value Crops Development Act was also passed into law. This
encouraged farmers to plant high – value crops (HCVs) such as cut flowers and fruits
instead of staples in the hope of earning more from export. Table 3.3 lists some
example of HCVs.

Vegetables Fruits Flowers Others

Asparagus Cashew Chrysanthemum Cacao
Bellflower Citrus Gadiolus Coffee
Broccoli Durian Orchids Ginger
Cabbage Guava Statice Onion
Carrot Jackfruit Potato
Cauliflower Lanzones Peppercorn
Celery Mangosteen Yam
Garden pea Papaya
Radish Pineapple
Snap beans Pomelo
Tomato Rambutan
Strawberry
Watermelon
Table 3.3. Classification of High Value Crops

Contact growing arrangements is also practiced in many parts of the country.

Contract growing is a system that allows big, foreign – owned agricultural companies to
pass on the burden of production to small farmers. Under contract growing, the
company determines what types of crop to plant, the volume to be produced, and the
price of the harvest. Under this arrangement, the company has the right to reject the
produce that will fail to meet their set quality standards.
Contact growing is rampant in plantations of export crops like fruits and
vegetables. This has allowed companies to minimize their production expenses, ensure
the quality of their products, and pass the risks to small farmers. Table 3.4 shows us
some examples of contract growing in the country.

Crop Company
Cavandish banana Dole Stanfilco
Del Monte Phils

Pineapple T’boli Agro – Industrial Corporation

Dole Phils.

Lakatan Sarmiento Management

Asparagus Dole Tropifresh
Nova Vista (Marsman – Drysdale Group)

Cassava Sarmiento Management

San Miguel Foods

Tomato Bukidnon Resources Corp.

Northern Foods Corp.

Soybean Nestle Philippines

Corn Pioneer Hybrid

Ayala Agri
Asian Hybrid
Cargill
Corn World

Papaya Del Monte

Poultry and Livestock Company

Chicken Swift Foods

Vitarich
San Miguel Foods
Purefoods
General Milling Corp.
First Farmers Food
Table 3.4. Some Examples of Contract in the Philippines

In 1997, still under the Ramos government, the Agriculture and Fisheries
Modernization Act (AFMA) was signed into law. The AFMA presuppose that the sector
needs considerable foreign participation in order to become globally competitive. The
law targets an increase in palay production from the present average of 3.5 metric tons
per hectare to 10 metric tons. The government also aims at generating jobs in the
countryside and reducing poverty in the regions to as much as 24% by 2004.
Agricultural modernization is supposed to result from the privatization of important
agriculture agencies particularly the Food Terminal Inc., Bureau of Animal Industry, and
Bureau of Plant Industry.
However, after nearly six years of implementation, the AFMA has failed to deliver
its promise of agriculture modernization. Instead, it has paved the way for the rapid
conversion of agricultural land into industrial areas, from 118, 000 hectares of land in
1991 to 800, 000 hectares recorded in 1998. In 2000 alone, around 925, 000 hectares
of fishing areas were converted for aquaculture production.
 AFMA has also legitimized the entry of genetically modified (GM) crops in the
country. GM crops are plants that have been genetically spliced with genes borrowed
from animals, viruses and bacteria done either through conventional breeding or
laboratory method. Farmers and consumers groups in many industrialized countries
have lobbied and protested against the proliferation of GM food in the market. This is
because multinational agrochemical and food companies withhold many information
and food companies withhold many information regarding the effects and safety of GM
food to humans and to the environment.
In the Philippines, however, the development in GM food has been an effective
excuse for the government in achieving its target for the modernization of the country’s
agriculture sector. Farmers are being lured with the promise of bigger harvest if they
agree to test and plant GM seeds in their farms, while the possible harmful effects and
legitimate questions on the safety of GM seeds and crops, and more importantly, the
need to purchase seeds and inputs at higher prices, are purposely being kept from
them.
Monsanto, one of the biggest international agrochemical companies, has been
given permission to test Bt – corn, a GM corn variety, in local farms. If successful,
Monsanto will have the exclusive right to sell Bt – corn seeds to local farmers and
commercialize the use of GM corn in the Philippines.
It is evident that all these programs were created to make the agriculture respond
to the demands of the international market. Food production for domestic consumption
is set aside in favour of export crops and the global market; on the other hand,
agricultural crops are imported not because the country cannot produce these but
because of the government’s commitment to the WTO. While the agriculture sector is
export – oriented, the country now depends on imported products to meet the local
demand. We may be enjoying the cheaper imported food now, but this will eventually
erode the country’s self – reliance and sovereignty in food production.

TENURIAL RELATIONS AND EXPLOITATION

The problems facing the sector are but by symptoms of serious concerns that
need to be addressed. The agriculture sector is in critical state because of the unjust
relationship between farmers and landowners.
Landlessness has been a longstanding problem among majority of the farmers
and farmworkers. Seven out of 10 farmers do not have their own land to till.
 Farm Area # of Owners % to Total Land Area % to Total
(hectare) (hectare)
50.1 – above 9, 466 0.46 1, 854, 179 20.79
24.1 – 50 20, 353 0.99 654, 828 7.34
15.1 – 24 38, 376 2.35 912, 790 10.24
12.1 – 15 33, 929 1.64 454, 963 5.10
7.1 – 12 158, 879 7.70 1, 451, 412 16.28
3.1 – 7 414, 209 20.08 1, 934, 289 21.68
3 - below 1, 377, 508 66.78 1, 655, 550 18.56
Total 2, 062, 720 100.00 8, 918, 011 100.00
Table 3.5. Distribution of Land Owners

We can see from the table that only 9, 466 or less than one percent of the total
landowners have control over almost two million hectares of land. This proof of how a
handful of huge landowners control hand holdings of fifty hectares and above. If we
account the number of farmlands sized twelve hectares and above, it would appear that
only 112, 124 owners comprising five percent of total landowners exercise control over
forty – three percent (43%) of the country’s farmlands. Meanwhile, about sixty – seven
percent (67%)of small farmers with less than 3 hectares of farm plot occupy one – fifth
of the total agricultural lands.
The table confirms how a handful of landowners are in command of such vast
resources. These big landlords have no direct participation in production; they do not till
nor plant, but they decide on what to plant, how much to produce and how the harvest is
to be divided between them and their farmers.
Aside from not having their own lands to cultivate, farmers are exploited through
various types of rent and sharing schemes in exchange for permits to till the lands
owned by big landowners. Most prevalent is the “kasama” system in which fifty to
ninety percent (50 – 90%) of the harvest goes directly to the landlord as payment for
land rent. Meanwhile, farmworkers are paid wages for services rendered. But this is
only a contractual arrangement, either during planting or harvesting season, and they
receive very low wages. Often, farmworkers render voluntary services like clearing and
preparing the field just to be assured they will be hired for the next season.
Because of this system, only a small portion of the harvest goes to those who
actually cultivate the land. Farmers are often forced to borrow money and inputs from
usurers, who are usually the landlords themselves to finance other expenses in
production. When the harvest season is over, the payment for these loans is deducted
from the farmers’ incomes. Interest rates go as high as twenty percent (20%) per month,
two hundred percent (200%) per season or two hundred forty percent (240%) per year.
So if an farmer borrows P10, 000 from the landlords – usurers to buy seeds, fertilizers
and pesticides and as payment for those who will help him plant the seeds, by the end
of the year, he will have to pay back the loan at P34, 000. This does not yet include the
rent he has to pay to the landlord. If a farmer fails to give the landlord his share of the
harvest, the farmer will find himself without any land to work on in the next planting
season.
Farmers and farmworkers fall victim to middlemen (again, either the landlords
themselves or their agents) who buy the harvest at very low prices and sell other farm
inputs at a high cost. As such, aside from monopoly over land, landlords and users also
exercise monopoly control over credit, seeds, fertilizers, pesticides, and other farm
implements.

LAND REFORM
Landlessness is the main reason why despite the bountiful natural resources that
we have, majority of Filipinos are poor. It is not that land is scarce, but it is because
ownership over land is concentrated in the hands of a few families and corporations.
What steps have the government carried out to address the problem of
landlessness?
Land reform is a promise often made by politicians aspiring for the public office.
Over time, almost every Philippine President promised to eradicate landlessness.
Former President Magsaysay implemented a land distribution program in the 1950s.
The administration of former President Diosdado Macapagal likewise implemented its
own land distribution program. The Marcos regime enacted the Tenant Emancipation
Degree that supposedly awarded peasants the land they tilled. Former President
Ferdinand Marcos even declared the whole country under land reform. Meanwhile, the
Comprehensive Agrarian Reform Law (CARL) was passed during the term of former
President Corazon Aquino.
After three land reforms, farmers should already have their own lands by now.
Then why is that peasants have remained landless?
Upon analysis, the past land distribution have serious shortcomings. Many laws
have been enacted for the purpose of alleviating farmers’ conditions. But we have yet to
see a law that unconditionally gives to peasants the right to the land they till.

Region Covered by CARP Lands converted

and/or up for
conversion
Ilocos 385, 045 1, 540
Cagayan Valley 537, 218 940
Gitnang Luzon 806, 199 5, 836
Timog Katagalugan 1, 426, 588 17, 421
Bicol 900, 439 392
Kanlurang Visayas 710, 096 35, 129
Gitnang Visayas 589, 029 3, 392
Silangang Visayas 768, 492 627
Kanlurang Mindanao 791, 876 50
Hilagang Mindanao 953, 347 87, 602
Timog Mindanao 1, 025, 366 3, 790
Gitnang Mindanao 1, 114, 109 3, 274
Cordillera Administrative Region 251, 796 54
Total 10, 295, 600 160, 247
Table 3.6. Lands Covered by CARP and Lands Up for Conversion
(June 1988 – March 1994, in hectares)

Take the CARL, for instance, that the Aquino government initiated, and which
was continued by the subsequent administrations. The Aquino Government acclaimed it
as a land program, i.e, the most comprehensive and radical agrarian reform program
ever in the country’s history. The CARL was ratified by the virtue of Republic Act NO.
6657, also known as the “Agrarian Reform Law of 1988,” and signed into law on June
10, 1988. The CARL, however, was widely criticized as pro – landlord and anti-peasant.
Despite fifteen years of CARL’s implementation, only publicly owned lands have
been distributed. Private agricultural lands, a huge portion of which is controlled by the
country’s most influential landlords, have remained largely untouched. Government
officials themselves have admitted that forty – five percent (45%) of the country’s
agricultural lands are still controlled by only five percent (5%) of the land – owning
families.
The CARL has many provisions that are favourable to the landlords. Among
these is the right to convert the land to agribusiness centers and aquaculture farms.
There is also provisions that states that lands covered by the CARL should be paid for
by the farmers according to prevailing prices. This makes the CARL a mere real estate
transaction where farmers can own the land only if they can pay the price demanded by
the landlords.

THE STATE OF FARMERS AND FARMWORKERS

Farmers belong to the poorest sector of society. While they cultivate vast lands,
they are left with barely anything to eat. This unfortunate considering the fact that they
compose the majority of the country’s population.
Filipino farmers live in poverty. More than eighty percent (80%) of the Philippine
population lives below the poverty line, and ninety percent (90%) of them are based in
the countryside. This means that of the 84 million Filipinos, around 73 million are poor
and more than 66 million of them are found in the rural areas. A World Bank study
saying that 77% of the rural population is poor validates this.
Not even one – fourth of the harvest goes to the farming families. The bigger
portion of the harvest goes to the landlords and traders. If the payments for loans and
other expenses are deducted from the farmers’ income, practically nothing is left for
them.
Farm workers, on the other hand, face poor working conditions. They do not
have job security and receive very low wages. This is the reason why many farmers and
farmworkers opt to leave the provinces and go to the cities to look for jobs.

3.9. INDUSTRY
INDUSTRY
Industry primarily refers to a type of production that is beyond subsistence level
or the immediate needs of its producers, to create products and services that are sold in
the market. Any production whose main objective is to make commodities to be sold to
others maybe classified as an industry. This means that it is not the volume of
production that primarily establishes a particular activity as industrial, but the role of the
market in the distribution of the products and services made. Production is considered
industrial if it goes it beyond satisfying immediate and personal needs. “Industry” here
pertains to the production of goods and the provision of varied services that are sold
and paid a specific amount.
Industry also refers to the level of integration or linkages of various economic
sectors. Integration may either be vertical and horizontal, or forward and backward. For
instance this integration may be seen in the garments industry by analyzing if the said
industry is capable of processing raw materials and transform these into finished
clothes. Another consideration in determining the level of integration is an industry’s
capability to produce the equipment or machineries needed to manufacture the finish
product. This means that having a high level of technology alone to manufacture
products is not enough. It is important to look at the whole production process, from
obtaining to look at whole production process, from obtaining raw materials and other
inputs, to the actual production and distribution of such product or services.
The country’s progress may be seen from the contribution of the different
industrial activities to the national economy. The outputs are carefully itemized in order
to identify which sector experienced a growth or a decline in production. These data
would show if a country’s production is robust or weak. As such, it is important that we
consider the general state of our industries in studying the economy’s course. Having
discussed the state of agriculture in the previous section, we will now focus our study on
the state of the country’s industrial sector.
STAGES IN MANUFACTURING
Manufacturing production involves three main stages:
1. The first stage involves the extraction of raw materials from land and water.
These are called primary products, which are used as the main components in
industrial production, especially manufacturing. Included in this classification are
a variety of minerals, plants, marine species and other animals. For example, the
milk that a cow provides is considered a primary product when used as an input
in the production of cheese.
2. Primary products are then processed in the second stage of production, and
transformed into intermediate products. These are products that have
undergone some amount of processing and may either:
 still need additional processing in order to become finished products;
and/or
 be used as an input for other products yet to be created.
Some examples of intermediate products are steel, chemicals and some
machine parts.
3. The third stage involves the transformation of intermediate products into finished
products or goods that have undergone a relatively high level of processing or
manufacturing. In its present form or state, finished goods fulfil a consumer’s
want particular need or want.
Finished products may be classified either as consumer or capital
goods. The first are goods that may already be used by other people for their
everyday needs. Some examples of consumer goods are canned goods,
watches, clothes, shoes and other products we commonly use.
Meanwhile, capital goods refer to product used to manufacture yet other
products. Some examples of capital goods include bulldozers, sewing machines,
generator sets and other objects needed to manufacture yet other products.

Ensuring these three stages of industrial productions is very important for any
country aspiring the development. This means that a country must ensure its own
capability in undertaking all stages of industrial production, from the extraction of
primary products to the manufacture of capital and consumer goods. This shows the
healthy integration or interaction between a country’s agriculture, industry and service
sectors. Agricultural products are effectively utilized by the manufacturing sub – sector
for industrial production. This is what economists refer to as “forward and backward
integration”.
This healthy integration paves the way for the further development of production
methods in the country. It is understandable if a country can only produce mostly
consumer products at the start, since most of these goods are agricultural products that
require a relatively low level of processing. It is expected that in time, a country would
strengthen its industrial capability and eventually learn to make capital goods that in
turn, would further speed up the development of local production.
The extensive use of machineries also increases the value added to manufacture
products created. On the other hand, products that have undergone a higher level of
processing using more advanced technology are said to have higher value added. On
the other hand, products that underwent less processing using mostly manual labor
have lower value added. Products that have gone through mostly the backward manual
system, mainly made through the labor of workers, possess very low value added.

CHARACTERISTICS OF INDUSTRIALIZED AND NON-INDUSTRIALIZED

Industrialized countries are generally capable of the three stages of industrial
production. These countries possess the knowledge and skills to extract resources from
land and sea, and processing these into finished products.
While most industrialized countries have limited natural resources within their
boundaries, there are still able to ensure the supply of primary products from the other
countries. A good example is Japan, which has scarce natural resources but is one of
the leading industrial powers of the world. How such countries as Japan ensure their
source of raw materials and how this affects countries that supply these is an important
and urgent matter, but for our discussion now, it is enough to say that industrialized
countries are capable of ensuring its source of raw materials or primary goods.
Industrialized countries have a highly developed production of intermediate,
capital and consumer goods. There is strong linkage between sectors that produce
primary, intermediate and finished goods in these countries. In other words, developed
countries can process products from their raw form until the final packaged form.
Meanwhile, non – industrialized countries usually rich in natural resources with
functional industries engaged in the production of primary goods. In the main, these
countries are weak and are almost incapable of manufacturing intermediate and
finished products. Should there be any manufacturing taking place this usually involves
the production of goods that have gone through minimal levels processing or have been
produced using a low level of technology.
Relatively high technology and state – of – the – art machineries found in non –
industrialized countries were either imported from other countries or assembled locally
using imported components. As a result, most products created in non – industrialized
countries have very low value added.
CHARACTERISTCS OF LOCAL INDUSTRIAL PRODUCTION
It is important for us to see the kind of production that our local industrial sector
has. Our assessments would enable us to identify whether our country is capable of
undertaking the different stages of industrial production. The following are the main
characteristics of our industrial sector.
a. Petty Production
In the main, small entrepreneurs owning a few small tools and machineries and
who have subsistence livelihoods carry out manufacturing production in the country.
Some examples of this are entrepreneurs offering their services such as dressmakers
and shoemakers, repair shops or small motor shops where the owner also directly
participates in production. It is also a common for the owner who possesses certain
skills to be involved in production and to employ a small number of workers, usually
relatives, friends or acquaintances. Petty production is generally low – level. Owners of
small businesses have limited capital, as it is difficult to get a loan from banks. Small
entrepreneurs usually sell off some of their property just to finance their business.
Whatever little profit they earn are usually spent either to acquire new materials or to
pay for the salaries of their works.
b. Medium to Large-scale Production
This category includes the following industries:
1. Handicrafts
This consists of medium – sized businesses are usually found in the
cottage or home – based industries where production is labor – intensive. Each
worker usually creates the entire product, from start to finish. This also means
that production is usually done manually and is seldom mechanized. Production
in the handicraft business is primarily aimed for export to other countries.
Production in these industries can be described as essentially backward,
although in some cases these businesses also use relatively modern technology
needed for export production.

2. Some manufacturing activities

These refer to businesses considered medium to large – scale in terms of
the level of capital and labor. These industries have a relatively high level of
mechanization in production, but it is common that production here is of the
“assembly line” type. Also included in this category are industries characterized
by the low level processing of raw materials, like the production of banana chips
from banana. This kind of production is geared both for the local and export
markets.
 3. Semi – industrial production
Most industries this category has reached a certain level of integrated
mechanization in production. Workers are often hired to maintain and operate the
machines used in production
However, the production process in these industries is not complete.
Activities commonly found here involve the assembly and repackaging of
imported components and materials. For instance, in an electronics industry,
workers would only assemble disconnected parts (usually imported) to complete
a particular product. Despite a high level of mechanization or technology, our
only contribution in this type of Filipino Workers.

3.10. LABOR

Labor is the amount of physical, mental and social effort used to produce goods
and services in an economy. It is one of the four factors of production that drive supply.
The other three are natural resources or the raw materials, capital or the amount of
money in the society, and entrepreneurship or the drive to profit from innovation. In
a market economy, these components of supply are provided to meet demand from
consumers.

Labor supplies the expertise, manpower, and service needed to turn raw
materials into finished products and services. In return, laborers receive a wage to buy
the goods and services they don't produce themselves. Those without desired skills or
abilities often don't even get paid a living wage. Many countries have a minimum
wage to make sure their workers earn enough to cover the costs of living.

The economy runs most efficiently when all members are working at a job that
uses their best skills. It also helps when they are paid according to the value of the work
produced. The ongoing drive to find the best match between skills, jobs, and pay keeps
the supply of labor very dynamic. That's why there's always some level of natural
unemployment. For example, frictional unemployment allows workers the freedom to
quit a job in search of a better one.
The labor force or labor pool is the number of people in a country who
are employed plus the unemployed.
But not everyone who is jobless is automatically counted as unemployed. Many
are jobless by choice and aren't looking for work. Examples include stay-at-home
moms, the retired or students. Others have given up looking for work. These
are discouraged workers. To be considered part of the labor force, you must be
available, willing to work and have looked for work recently.
Find out how this is calculated in the Unemployment Rate Formula and in
the Labor Force Participation Rate.
 The size of the labor force, therefore, depends not only on the number of adults
but also how likely they feel they can get a job. For this reason, the labor pool shrinks
during and after a recession. That's true even though the number of people who would
like a full-time job if they could get it, may stay the same. This is measured by the real
unemployment rate.
The amount of goods and services that the labor force creates is
called productivity. If a certain amount of labor and a fixed amount of capital creates a
lot, that's high productivity. The higher the productivity, the greater the profit. High
productivity gives the worker, company, industry or country a competitive advantage.

EMPLOYMENT AND EMPLOYEE IN THE PHILIPPINES

Categories of worker
Under Article 294 of the Labour Code, there are four kinds of employment
arrangement. These are:
 Regular employment.
 Project employment.
 Seasonal employment.
 Casual employment.

Regular employment
There are two kinds of regular employees (Labour Code, Article 294):
 Regular employees by nature of work, that is, those who are engaged to perform
activities which are usually necessary or desirable in the usual business or trade of
the employer.
 Regular employees by years of service, that is, those who have rendered at least
one year of service, whether continuous or broken, with respect to the activity in
which they are employed.
 The primary standard to determine regular employment is the reasonable
connection between the particular activity performed by the employee in relation to
the usual business or trade of the employer. The test is whether the activity of the
employee is usually necessary or desirable in the usual business or trade of the
employer.

Project employment
A project employee is one whose employment has been fixed for a specific
project or undertaking, the completion or termination of which has been determined at
the time the employee is engaged (Labour Code, Article 294). It is not sufficient that an
employee is hired for a specific project or phase of work. There must also be a
determination of, or a clear agreement on, the completion or termination of the project at
the time the employee is engaged.
 The services of project employees are coterminous with the project. They can be
terminated upon the end or completion of that project, or a phase of the project, for
which they were hired. The employer has no obligation to pay them separation pay.
The predetermination of the duration of the period of a project employment is
important in resolving if an employee is a project employee or not. For example, in a
previous case, the Court ruled that while the employee was clearly hired for a specific
project, the absence of a definite period of the project led the Court to the conclusion
the employee was regular.
Seasonal employment
Seasonal workers perform work that is seasonal in nature and are employed
only for the duration of one season (Labour Code, Article 294).
Seasonal workers who are rehired every working season are considered to be
regular employees. The nature of their relationship with the employer is such that during
off season they are temporarily laid off, but when their services are needed, they are re-
employed. They are not, strictly speaking, separated from the service but are merely
considered as on a leave of absence without pay until they are re-employed. Their
employment relationship is never severed but only suspended. As a result, these
employees are considered to be in the regular employment of the employer.
However, it is not sufficient that the work performed is seasonal in nature. There
must also be evidence that the employee worked only for the duration of the season.
For example, in a previous case, the fact that the employees repeatedly worked as
sugarcane workers for the employer for several years established the regular
employment.
Casual employment
There is casual employment where an employee is engaged to perform a job,
work or service which is merely incidental to the business of the employer, and that job,
work or service is for a definite period made known to the employee at the time of
engagement (Implementing Rules of the Labour Code, Book VI, Rule I, section 5(b)). A
casual employee is one whose work is neither regular, project or seasonal.
However, if a casual employee has worked for at least one year (whether
continuously or not) he becomes a regular employee but only with respect to the activity
in which he is employed, and his employment will continue while that activity exists.
Even though a casual employee, he is entitled to all the rights and privileges, and is
subject to the same duties and obligations, as is granted by law to regular employees
during the period of his actual employment.
Fixed-period employment
While not specifically mentioned in Article 294, fixed-period employment is
recognised under the Civil Code, pursuant to the freedom of parties to fix the duration of
the contract, whatever its object. These fixed-term employment contracts are not limited
to seasonal work or specific projects with predetermined completion dates; also
contemplated are employment arrangements whereby the parties have assigned a
specific date of termination.
For this employment arrangement to be considered compliant with the
employees’ right to security of tenure, it must:
 Be voluntarily and knowingly agreed upon by the parties, without any force, duress,
or improper pressure being brought to bear upon the employee, absent any vices of
consent.
 Appear that the employer and employee dealt with each other on more or less
equal terms, with no moral dominance whatever being exercised by the former over
the latter.

Article 295 makes express reference to Probationary Employment, which

provides a trial period, during which the employer observes the fitness, propriety and
efficiency of a probationer to decide whether he is qualified for permanent employment,
while the probationer seeks to prove to the employer that he has the qualifications to
meet the reasonable standards for permanent employment. If the employee was
allegedly hired on a probationary basis, but was not informed of the standards that
would qualify him as a regular employee, he is deemed a regular employee from the
very start. Additionally, an employee who is allowed to work beyond the probationary
period shall be deemed regular. This probationary period is usually fixed at six months
or less. However, the parties to an employment contract can agree to a longer period of
probation (for example, when the same is established by company policy or when the
same is required by the nature of work to be performed by the employee).
Employees can also be further classified in terms of position as:
 Managerial.
 Supervisory.
 Rank-and-file.

Managerial employees
This refers to:
 Those whose primary duty consists of the management of the establishment in
which they are employed or of a department or subdivision of that establishment.
 Other members of the managerial staff.

An employee is considered a member of the managerial staff where:

 His primary duty consists of work directly related to the management policies of the
employer.
 He customarily and regularly exercises discretion and independent judgement.
 He does not devote more than 20% of his hours worked in a working week to
activities which are not directly and closely related to the performance of the work
described in the following three bullets:

a) regularly and directly assists a proprietor or a managerial employee whose

primary duty consists of the management of the establishment in which he
is employed, or a subdivision of that establishment; or
b) executes under general supervision work along specialised or technical
lines requiring special training, experience or knowledge; or
c) executes under general supervision special assignments and tasks.

Supervisory employees
These are employees who, in the interest of the employer, effectively
recommend managerial actions, where the exercise of that authority is not merely
routine or clerical in nature but requires the use of independent judgement. Supervisors
are generally considered as members of the managerial staff where the above
conditions are satisfied.
Rank-and-file employees
Employees not falling within any of the above two categories (managerial or
supervisory) are considered rank-and-file employees for the purposes of this chapter.

3.10. COMPETITIVENESS AND EFFICIENCY

The fair ranking of the Philippines in world competitiveness means that the
country’s industries are yet on their way from the factor-driven to the efficiency-driven
stage. In the Global Competitiveness Report 2013 – 2014 of the World Economic Forum
(WE), the country ranked number 58 among the 148 countries on its list. Factors
allowing the free flow of products and resources are already in place such as
institutions, infrastructure, stability, and basic education and health. However, our
industries have yet to attain the efficiency enabled by higher education/skills,
technological readiness, and product/labor market competition. For example, we have
yet to design and produce the first Filipino car (include engine, transmission) following in
the footsteps of countries like Malaysia and China. Much less are we even close to the
innovative stage driven business sophistication and innovative ideas. This stage cuts
across standards to produce sophisticated products like the electric-powered cars of
Japan and the United States. Figure 3.8 outlines what makes a country’s industries
globally competitive and responsive to both local and global needs.
 Figure 3.8. Factors for Global Competitiveness Index

As the country’s industries struggle to attain efficiency toward the government’s

vision of sophisticated innovation, they do so with those in the rest of the world. Figure
3.6 shows that the Philippines still lags behind her neighbors in East Asia in labor
efficiency alone. Reflective for her global competitiveness, much less is the country
attractive to host foreign businesses serving regional markets. According to said
competitiveness report, prominent among the problematic factors for doing business in
the Philippines are inadequate infrastructure, corruption, inefficient government
bureaucracy, policy instability, crime rate, tax rate, and restrictive labor regulations.
 Figure 3.9. Labor Efficiency of ASEAN Countries in 2009

The country’s producing sector also struggle with one another as they
compete for the use of local resources (e.g., labor). The least efficient is Agriculture,
Fishery, and Forestry combined while the most efficient is industry. While Agriculture,
Fishery, and Forestry combined employs one third of local labor for production, it only
contributes one tenth to the country’s total output (Figure 3.10 and 3.11). In contrast,
Industry has almost twice as much share on output (27%) as it has in employment
(16%). In between in Service which has a slightly greater share in output (63%) than in
the employment (53%). Figure 3.12 shows the comparative efficiencies of the country’s
main producing sectors.

Figure 3.10. Sectoral Share Output (2013)

Figure 3.11. Sectoral Shares Employment (2013)

Figure 3.12. Sectoral Productivity (2008)

AGRICULTURE AND FISHERY
In a global setting these industries are the least competitive despite the country’s
natural resources mainly due to human factors affecting efficiency. The uncontrollable
nature (e.g., typhoons, drought, etc.) occasionally disrupts production and causes
damage to crops. But socio-economic and governance factors explain more why the
country’s agriculture lacks the technology, skills, market competition, and even credit
enabling efficiency to be at least self-sufficient in food. Figure 3.13 shows that rice
production – the leading crop of agriculture – is even short of consumption. Unlike
fishery and livestock, agriculture is more exposed to both natural and human factors
with its longer production cycle involving land cultivation and nurturing what nature
grows.

Figure 3.13. Contribution of Local Production to

Local Consumption (2008)( in Percent)

In particular, inadequate socio-economic and public infrastructure coupled with

liberalized trade smother agricultural efficiency of the know-how, resources, and
competitive environment to at least meet local consumption. Small-scale farming – the
foundation of agriculture – is limited to take advantage of size and access to technology,
skills, credit, and marketing networks. Most farms (63%) are micro in scale with an
average size of 2.2 hectares (List of Establishments, NSO 2009). Also, the continuous
conversion of agriculture lands for industrial use and settlement even threatens to
decimate the number of farmlands left. Let alone the almost one-half of irrigable lands
(44%) is not irrigated yet (World Development Indicators, “World Bank 2006”). On top f
the limitations of size, inadequate infrastructures (roads, transport, and storage) hamper
the free flow of products and input between farms and markets. On the other hand,
trade liberalization (e.g., tariffs) has overwhelmed local production that is yet too weak
to stand up to foreign competition as of rice from China, Thailand, and Vietnam. Figures
3.14 and 3.15, respectively, show that we have the lowest yield per hectare of rice land
and per person among ASEAN countries. Thus, we import cheaper rice to supplement
local production although the latter has been accelerating to decrease the former.

Figure 3.14. Average Palay Yield Among

ASEAN Countries
(In Metric Tons Hectare)
 Figure 3.15. Average Palay Production per Person among
ASEAN Countries,
Average from 2008 – 2010 (In Kilogram Per Person

The same socio-economic and governance factors limit efficiency in the fishery
sector that it can hardly produce a surplus for export. Like in agriculture, fishing
activities are micro in scale confined to municipal fishing and aquaculture (List of
Establishments, NSO 2009). Municipal fishing by small shore crafts while aquaculture is
culturing and growing fish in the controlled environment of mostly small fishponds.
These industries jointly and equally account for the bulk (71%) of fishery production
(Bureau of Agricultural Statistics, Department of Agriculture 2013). In contrast,
commercial fishing accounts for a little over one-third of mostly exportable fishery
production (39%) by big corporations using big vessels that are instrument-navigated in
deep sea. On top of size limitations is the inadequacy of road, transport, and storage
facilities to preserve and market the perishable product in order to fetch more
competitive prices. Likewise, industrial and trade policies have even made fuel – a
critical input – more costly especially for the motorized bancas of small municipal
fishermen. Going back to Figure 3.13, fish supply, mostly from the municipal and
aquaculture industries, is just enough to meet local consumption needs (100%). The
weakness of these industries deprives the small fisherman of the income opportunity to
produce a surplus of high-valued species for export.
MANUFACTURING
In spite of the liberalization f foreign investment and trade, the manufacturing
industry is hardly competitive even in the ASEAN region due to limitations of size and
structural support. Likewise, these limitations smother manufacturing efficiency
especially of the technology and skills to grow and complete in a global context. Almost
all (89%) manufacturing establishments are micro in scale with limited access to
competitive opportunities similar to agriculture and fishery (NSO 2008). These light
enterprise produce consumer goods-mostly (86%) food manufacturers – contributing
the bulk (55%) of manufacturing output using low technology and skills (NSCB 2012).
Lacking government support to deepen technology and production, the fewer
enterprises of much larger scale are into the final productions stages of electronics,
machineries, chemicals, petroleum, and garments. In the absence of intermediate
(middle) product industries, they are the most that we can have – import-dependent and
without much need for technology and skills. Thus, they do not contribute much to the
economy in terms of output and jobs. The same lack of government support fails to
challenge micro enterprises to grow toward higher technology and creativity levels. As
in agriculture, even local enterprise of larger scale are still to stand up of foreign
investment and trade competition induced by liberalization policies.

TRADE AND TRANSPORT

In spite of being the top grosser (34%) of the biggest sector that is service, the
trade industry supported by the transport industry is also handicapped by the limited
size of its establishments. Almost all (92%) are micro in scale engaged in retail trade
the contributes almost one – half (46%) to total trade (Census of Philippine Business
and Industry, NSO 2012). However, the transport industry has a fair majority (73%) of
micro business mostly engage in land transport and transport support services (e.g.,
maintenance). Land Transport accounts for almost one – half (46%) of all transport
services while transport support services accounts for bulk (52%) of industry output. On
top of limitation size, thirty percent (30%) of trade establishments crowd in Metro Manila
serving only thirteen percent (13%) of the country’s population. But crowding more in
the same National Capital Region are more than one-half (56%) of transport
establishments in the country. On the other hand, less crowded are thirteen percent
(13%) of trade and eight percent (8%) of transport establishments in nearby
CALABARZON (Cavite, Laguna, Batangas, Rizal, and Quezon) industrial zone serving
fourteen percent (14%) of the country’s population (Census, NSO 2010). At any rate,
even businesses in this industrial zone are near support industries in the Metro Manila
where one-third (30%) of manufacturing establishments are also based.
INTERNATIONAL TRADE
Assembled electronic products top the country’s exports (40%) dominated by
manufacturers reflective of the country’s waning agriculture sector (Philippines Statistics
Authority, Foreign Trade Statistics 2013). The assembled parts are imports from
subsidiaries in the global networks of the same multinational corporations (e.g., Intel,
Texas Instrument). These electronic parts are also the country’s leading imports (22%)
followed by minerals, fuels, machineries and equipment, and the like. Almost all imports
are semi-final and final manufacturers in the absence of intermediate product industries.
As already mentioned, electronics products hardly contribute to local output and
employment being import-dependent and without much need for technology. Unlike
their counterparts in other sectors, their assembly plants are mostly found in the
CALABARZON industrial zone where support industries in manufacturing and trade are
also moving into.

TOURISM
Tourism is an emerging industry as expenditure of foreign tourists on related
services such as hotels and restaurants transport and entertainment grew by twenty –
nine percent (29%) in 2012. Gaining importance as an industry, it contributed six
percent (6%) to the gross output of the economy (NSCB, Tourism Statistics 2012). It is
also figured as the third leading exports of the country after electronics and
miscellaneous services, which include business process outsourcing (26.9%). Most
tourists prefer hotels for accommodation (80%) and cars for transport facilities (42%).
Most also prefer restaurants (68%) and avail of Internet access (51%) in
accommodating establishments. In addition, establishments concentrate operation in
Metro Manila, Western, and Eastern Visayas as most preferred tourist destinations.
However, the industry mostly composed of micro enterprises (90%) is yet to grow to its
fullest potential. The country lags behind even in the ASEAN region as a tourist
destination with a minimum share (5%), in total arrivals contrast to Singapore (16%),
Malaysia (30%), and Thailand (24%). Thus, in Figure 3.16, it is also lags behind in
tourist arrivals per 100 population even in the ASEAN region.
 Figure 3.16. Tourist Arrivals per 100 Population (2011)

SMALL BUSINESS OPPORTUNITIES

Small farmers and fisherman can tap urban consumer markets and distribution
centers with cooperative efforts to minimize the limitations of size and inadequate farm-
to-market facilities. They can engage in the cooperative activities not only of
sharing/collectively owning resources to preserve freshness or delay perishability of
goods at lower cost. Collectively, they can also gain direct and faster access to market
networks to command higher product prices as well as cheaper production input. Let
alone that they can access credit for expansion on collective aredibility. However, more
government provisions of farm-to-market infrastructure like concrete road network can
boost the efficiency of cooperative market activities even of farmers and fishermen in
the hinterland.
The country’s growing population also affords cooperating micro enterprises in
the manufacturing, trade, and transport of new consumer markets for growth and
expansion. More micro manufacturers of light consumer products can find new markets
in growing industrial and urban areas like CALABARZON, away from overcrowded
Metro Manila. Complementary and support industries are already gravitating toward
these growing centers, let alone concentration of government infrastructure and
services promoting market efficiency. Thus, new micro trade and transport enterprises
can complement or support the growing number even of light manufacturers moving to
these growth centers. To minimize limitations of size, micro enterprises can form
associations for inter- industry coordination and timely availability of services. In
addition, manufacturer’s association can improve market access on competitive terms.
But more government provisions of physical infrastructure like concrete road network
can greatly improve said inter-industry coordination and market access.
In the tourism, micro businesses can help to maximize tourist arrivals and
destinations with timely support and substitute services for big establishments
strengthened by cooperative efforts. Can transport services can support hotel
accommodations while loading houses with restaurants can serve as substitutes in the
latter’s absence. Micro enterprises can also form associations for timely coordination
with big establishments and complementation among themselves. For the meantime,
tourism and related services can concentrate operation in major tourist destinations
such as Metro Manila and Western and Eastern Visayas. However, better road
networks can pave the way for the development of other tourist destinations and
services, which include transport.

EXERCISES
I. Answer the following questions.
1. Distinguish between a business and an industry.
2. Why is competition an important factor that has to be studied before putting up a
business?
3. When you decide on putting up a business, how do you choose the market that you
should cater to?
4. What is the level of Philippine industrial development according to the World
Economic Forum (WEF)?
5. Contrast this current stage with the highest development stage that our country can
aim for.
6. Compare a sectoral contributions to output with sectoral shares in employment. How
does the comparison indicate the relative efficiencies of the different sectors
(agriculture, industry, and service)?
7. What are micro establishments constrained to take advantage of in contrast to large
scale establishments?
8. What farm – to – market facilities do small farmers and fishermen need and why?
What would they miss out if these facilities were inadequate?
9. In what way do rice farmers lose to imports from neighboring countries?
10. Why do local manufacturers mostly consisit of consumer items produced without
much need for technology and skills?
11. Why are large scale manufacturers, only engaged in the final stages of the
production?
12. What are the disadvantages of manufacturing establishments operating outside of
Metro Manila and the CALABARZON industrial zone?
13. Why is it disadvantage of trade and transport services to overcrowd in urban
centers like Metro Manila?
14. Why do the country’s electronic exports hardly add value and employment to the
economy?
15. What can micro enterprises collectively do with their cooperative actions and
associations.
16. What is the role of the industrial sector economic development?
17. What are the characteristics of Philippine Industries?
18. What is the implication of the phenomenon of the overseas migration of Filipino
workers?
II. Activities.
1. The class will be divided into five groups. With the teacher’s guide, each
group should suggest a business that they want to put up. Each group should
then justify their choice of business. Each group will discuss among the
members the environment that should be studied in terms of the location they
decided to choose. based on the environmental analysis, the group members
should identify all the factors need to be studied in the specific
environment/location.

2. Think of new product you would want to introduce in the market. It can be a
good already being sold but which you can innovate and improve, or it could
be something really new that you yourself conceptualized. Describe that
 product in terms of design, composition as to materials used, product use or
application, and its attributes which you believe are unique in that product.

3. Observe and talk the small producers/sellers in your barangay (farmers,

fishermen, or vendors cottage industries). What other market opportunities do
they see and for what purpose and what product. What can they collectively
do when they form an association and for what goals? What kinds of
government support do you think they need for what specific activities? What
can your barangay and city/municipal government can do to support these
small producers/sellers and for what specific projects and products. How
would you conduct your business if you were one of the owners of a small –
scale cottage industry?
CHAPERT 4: SOCIO – ECONOMIC IMPACT STUDY

4.1. THE THEORY OF CONSUMER BEHAVIOR

Consumer Theory describes how consumers make decisions on what to buy.
Consumption refers to the use of goods and services to satisfy human wants directly.

THE UTILITY FUNCTION

A consumer aims to maximize the satisfaction he/she derives from the use of a
good or a service. Utility is the term used for satisfaction. Utility is something intangible.
As such, it is not easy to measure. Quantifiable goods are subject to measurement, they
can be expressed in numerical values. In order to make it easy to understand to
concept of utility, we shall assume that it is measurable units, which we shall called
utils. A util is one unit of satisfaction.
The utility function shows the relationship between utility and consumption. In
equation form, it is U = f(C), which simply stated: utility is a function of consumption.
Also, to be more specific, utility for the consumption of goods X and Y can be
expresses as: U = f (X, Y).
Important measures of utility are: Total Utility and Marginal Utility: Total Utility
refers to the combined utility derived from consuming certain units of a good. Marginal
Utility refers to the additional utility derived from consuming an additional unit of the
good.
Let us study the following utility schedule of consumer Marvin.

Table 4.1. Hypothetical Utility Schedule of Marvin for Chocolate Candy

Quantity of Consumption Total Utility Marginal Utility
1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3
7 35 2
8 36 1
9 36 0
10 35 -1
 Let us study Marvin’s utility schedule for chocolate candy. When he eats the first
bar, he gets a utility of 8. The second bar gives him a utility of only 7. We see that while
his total utility increases with each additional chocolate bar, the additional utility
becomes less and less. The satisfaction he derives from each additional unit starts to
diminish. Notice that upon eating his ninth bar, his total utility does not change at all,
which means that there is no additional utility derived from the ninth. That is why
marginal utility at 9 units of consumption is equal to zero. Look at what happens as he
consumes the tenth bar. Instead of increasing, the total declines and marginal utility is
even negative. Are there physical manifestations of a negative marginal utility? Physical
discomforts such as an upset stomach, dizziness, and indigestion are signs that instead
of adding to one’s utility, the consumption of the additional unit of the good has resulted
in the decrease of total utility derived.
The above situation illustrates the Law of Diminishing Marginal Utility. The law
states that as additional units of a good are consumed, the additional utility derived from
each additional unit tends to diminish. The reason for this behaviour is the satiation of
human wants. Man’s wants can be fully satiated at a given time. That is why owners of
Vikings, Dad’s, or Buffet 101, do not lose money even if people are free to eat all they
can. At some point, they will simply give up eating because their wants have been
satisfied.

SIGNIFICANCE OF CONSUMER BAHAVIOR IN BUSINESS

The consumer is the person who buys the product business offers for sale. It is
therefore imperative that we get to please the consumer, so he/she will buy from us
instead of from our competitors and also that once he buys from us he will be loyal to us
and not buy from other sellers of the same product. Knowing how consumer satisfaction
is maximized will help a business in always keeping the consumer’s welfare the topmost
priority.

4.2. THE PRODUCTION THEORY

Production refers to the use of economic resources to create goods and
services that will be used to satisfy human wants. In this chapter, we will focus on the
behavior of the producer in an attempt to maximize output. The theory of production is
an analysis of the input-output relationship. The term input refers to the resources used
to produce goods and services. Output refers to the product created as a result of the
combination of input in the production process.
Production function is an equation showing the maximum output of a commodity
that a firm can produce per period of time with each set of input. Input and output are
measured in physical rather than monetary units.
 Output = f(input)
The production function is represented in the equation:
O = f(i)
Where O stands for output and i stands for input. To be more specific, output
depends on the quantity of land, labor, and capital available. Thus:
O = f(Ld, Lb, C)
The production function contains the functional relationship between output and
the basic factors of land, labor, and capital. These basic factors complement each other
as they are used in the production of goods and services.
Output produced is measured in three forms:
 Total Product (TP) is the combined production of several units of a given
input.
 Marginal Product (MP) is the additional output produce by an additional
unit of the input and is equal to ∆TP/∆i.
 Average Product (AP) refers to the average contribution per unit of input
and is equal to TP/i

Let us illustrate the values of the three forms of output by studying the following
table. Let us assume that the variable input is labor measure in man hours and is
combined with fixed of capital and land.

Table 4.2. Production Schedule for Output X with Variable Labor Input
Quantity of Labor Total Product Marginal Product Average Product
Input
1 10 10 10
2 22 12 11
3 37 15 12.3
4 55 18 13.8
5 69 14 13.8
6 77 8 12.8
7 80 3 11.4
8 81 1 10.1
9 81 0 9
10 90 -1 8

Let us study the behaviour of the different product values as the quantity of labor
input increases. Initially, we see that the addition of additional labor input leads to a
proportionally greater increase in total product or output (TP). This results in increasing
values of MP and AP and corresponds to labor input and from 1 to 4. As more input of
labor are added, Total Product continues to increase but already at a decreasing rate.
This happens from the 5th to the 9th input of labor. Here, the Marginal Product and
Average Product already show decreasing values. Upon the addition of the 10 th input of
labor, the Marginal Product is now negative.
The stage where Total Product is increasing at a fast rate is the stage of
increasing returns. Here, Marginal Product and Average Product are both increasing.
When Total Product is increasing at a slower rate and Marginal Product and
Average Product are both decreasing, we have the stage of diminishing returns.
When Total Product decreases and as a result Marginal Product is negative, we
enter the stage of negative returns.
The production behaviour above leads us to the Law of Diminishing Marginal
Returns. It is in reference to the diminishing values of MP. The law states that
additional output starts to diminish at a certain point as additional units of a variable
input are combined with or more fixed input. The reason for this behavior can be traced
to the constraints faced because of the fixed resources that are used in complement
with the variable input, which in this case, is labor.

SIGNIFICANCE OF PRODUCTION THEORY IN BUSINESS

As we already learned, a business is engaged in providing goods and services to
customers with the goal of making profits. Although some businesses are engaged in
retailing goods that they bought from producers, many businesses produce the goods
that they sell. It is therefore important for the business proprietor to be aware of the
production behaviour that will maximize output with limited quantities of output available
to him/her. This is in turn will help maximize profits for the enterprise.

4.3. SOCIO-ECONOMIC IMPACT OF A BUSINESS

Today, putting up a business is not just all about profits. It is also concerned with
consumer welfare, job creation, environment issues, uplifting the quality of life, and
contributing to the economy. Let us now look at how a business can impact the
consumer, the suppliers and the investors, the government, and households.
IMPACT ON THE CONSUMER
A new business, especially one that is innovative and focused on bringing some
new product or service to the market, is always welcome to the consumer who is
looking value for his money. If the new business is selling a product that ahs close
substitutes in the market, then the owner of the business will try his best to win the
consumers away from the existing sellers by offering something that will benefit the
buyers.
How can the new business accomplish this? One good way is to innovative the
product come up with the new features that are not found in the existing competing
goods. This can be in the form of a better appearance, a new venture feature or
ingredient or a new convenient way of making the product available. A new business
therefore means new products or services available to the buyers, giving them more
choices.
Since the new seller will try to attract buyers, another strategy that could be
adopted is to improve the quality of the good making it a notch higher than those
already being sold in the market. Although this may mean high prices for better quality
goods, this could cater to a market that is more after quality than low price.
Initially, as a business starts, the seller may make the product available at
introductory prices lower than the other substitutes in the market. This will definitely be
an advantage to the price conscious buyers who have limited budgets.
As long as a new business can provide, new goods and services, better quality of
goods and more options, the consumer can benefit from it. But if a business comes up
with a low quality good and does not provide the consumer value for his money, then
this business will have a negative impact on the market.

IMPACT ON SUPPLIERS AND INVESTORS

A new business will also provide opportunities for suppliers and investors. If a
new construction company is set, up, then this opens up opportunities for the other
businesses that will supply them their needs, tools, wood, cement, steel, paints, nails,
screws, and decorators. May suppliers will now get a chance to sell to the newly
established business, which means income for them.
Demand for the goods provided by the suppliers will increase. These suppliers
will now need to produce more of them and they will need to hire more workers who will
earn wages from being employed. More capital will be needed to invest in the
production of these tools and materials, generating again income for the economy.
Investors get to earn returns on their investments, with capital flowed back into more
investments and generating more income for the economy, thus, leading to economic
growth.
IMPACT ON THE GOVERNMENT
The government will also benefit from the establishment of new businesses,
through revenues earned on fees collected from them an on taxes imposed on the
incomes of the businesses.
Before a business can be set up, it has to meet requirements to start opening.
First, the business owner has to apply to start its business. Licenses have to be
obtained. Organizational fees to be paid. On the municipal level the local government
earns revenue from these fees and licenses. This means money added to their local
budget to provide social services to the community, for the development of the
company, to pay salaries of local officials and workers, to maintain peace and order and
to subsidize public schools.
On the national level, the government gets to impose taxes on the incomes
earned by the businesses. Employees hired by these businesses also have to pay
personal income taxes to the Bureau of Internal Revenue (BIR). For employed workers,
these taxes are regularly withheld by their employers and remitted on the BIR.
These taxes revenues fuel development because they are used by the
government for national activities and for budget allocations for its programs. The
national government has revenues to finance its projects, to pay government officials, to
build schools, to improve the military, to promote peace and order all over the country,
to build housing for the poor, and to provide health services and improved welafare
programs for the people.
A more detailed study of the government will follow in the succeeding sections of
this chapter.

IMPACT ON HOUSEHOLDS
New Businesses mean employment opportunities for the Filipinos. Those who
have jobs but are earning low-wages may find better paying jobs with the new
companies. Unemployed workers looking for work may have the chance of being
employed by these companies. The pool of unemployed workers will definitely
decrease. Being employed will enable them to buy their basic needs and even some
luxuries. This means that their quality of life and their standard of living will improve.
Acquisition of wealth and assets can now follow both for the business owners
and the employees they hire. Profits earned by the owners can be invested back into
the business for expansion, or some can be withdrawn by the owners which they can
use to buy new cars or new houses. Success stories on television shows feature rags-
to-riches stories of entrepreneurs who used to be very poor, but with hard work and
persistence, were able to make their businesses succeed, enabling them to send their
children to good expensive schools, building big houses, and buying two or more cars
housed in their garage. The owners, because of their success, manage to acquire
wealth and buy assets which are fruits of their hard work.
With the growing focus on preserving the environment for future generations,
businesses also get to contribute their share. So-called green structures for buildings
are means used to prevent further damage to the environment. Instilling the value of
recycling and reusing of resources among employees and family members may also
become the advocacy of these businesses. Spreading information on the dangers of
global warming may be promoted by the business owners. Thus, businesses become
instruments for society to have a better place to live in.

IMPACT ON THE COMMUNITY

Corporate Social Responsibility (CSR) has become a growing trend among
businesses today. As a result of this, corporations and even small businesses have
increased their focus on projects that provide scholarships to poor but deserving
students, allocating budgets for housing for low-income families such as participation in
programs like the Gawad Kalinga, environmental protection including tree planting,
elimination of pollution, and other environment related programs. Communities benefit
from business-sponsored activities that include sport fests and wellness programs,
livelihood projects, micro financing, and even medical and dental missions

4.4. SOCIO-ECONOMIC AND GOVERNMENT IMPACT ON BUSINESS

GOVERNMENT IMPACT ON BUSINESS

While the government increasingly spends on socio-economic services to
improve business condition (Figure 4.1), size and inadequate infrastructure and support
services limit the growth opportunities of micro enterprises. Declining debt payments to
local and international debtors have given way to more spending on services like road
development and education. On the other hand, size limits business access to
technology, credit and market networks in the absence of government support and
services (Chapter 3). On top of the limitations of size, poor road conditions and
inadequate support industries further limit production and marketing by adding cost to
doing business. Poor road condition increases transport cost and the risk of perishability
especially of agricultural and fishery products. High costs of electricity and real estate
acquisition increase production cost especially of manufacturers. Other difficulties in
doing business in the country are high taxes, costly registration, and bureaucratic
corruption. Foreigners and foreign companies face the same obstacles in developing
local operation and marketing. The Philippines, as well as Indonesia, has the highest
costs of electricity and the real estate acquisition in the ASEAN region (Figure 4.2 and
4.3). It also has the highest tax rate on additional income (Figure 4.4) negating
investment incentives and further increasing cost of registration from bureaucratic red
tape or delay (Figure 4.4). Thus local enterprises especially those of micro scale are yet
weak to face competition from imports and foreign investments from the liberalization
policies of the 1990s.

Figure 4.1. National Budget (2013)

 Figure 4.2 Electricity Cost (US$ per Kilowatt Hour)(2004)

Figure 4.3 Real State Acquisition Cost (US$ per Square Meter)
 Figure 4.4. Tax Rate (%) on Additional Income (1999)

HOUSEHOLD IMPACT ON BUSINESS

Although the country’s population is still young with a majority (68%) aged below
29 years old, it is gradually becoming older with declining fertility and mortality rates
(Figure 4.5). More than one-third (35%) aged 15 to 34 years old are given to
sophisticated consumption. One-third (33%) aged up to 14 years old are children
needing grow up care and only seven percent (7%) aged to 60 years old and above
need elderly support. But as fertility rate (children per woman) is declining, so is the
proportion of children needing growing up care (below 15 years old). For example,
fertility dropped from six (6) in 2000 to three and one-half (3.5) in 2010 while the
percentage of children up to age 15 years old correspondingly dropped from thirty-
seven percent (37%) to just thirty-three percent (33%). Also as mortality rates of all
ages dropped from 2000 to 2010, life expectancy correspondingly increased from 67 to
71 years old with one-half of the population not younger than 23 from 21 years old on
2000. Fast forward, the National Statistics Office (NSO) forecasts elderly population to
increase to almost ten percent (10%) in 2023 from just seven percent (7%) in 2010.
However, the declining purchasing power of wage has marginalized the
consumption of said age groups in at least forty percent (40%) of families. (Figure 4.6).
Coupled with inadequate wage, unemployment has also trapped more than one-fourth
(26%) of families in poverty (Figure 4.7). A typical family hardly saves and spends most
income on food (43%) and housing, utilities, and fuel (21%). Figure 4.8 also shows that
only a pittance (8%) is spent on education and health. Thus, the Philippine has the
lowest rate (% on income) of savings mostly corporations even in the ASEAN region
(Chapter 2). Due to limited purchasing power of income, many Filipino consumers have
become price sensitive and are only able to afford cheap but shoddy items. Low quality
characterizes local products especially manufacturers that are largely food items. Low-
quality consumption can mean inadequate care for the young (below 15 years old). and
the elderly. Also, as non-essentials are crowded out of the budget, so is sophisticated
consumption especially of the youth (15 – 34 years old). In the end, some micro
businesses may be crowded out of the market in view of limited consumer demand due
to inadequate income.

Figure 4.5. Population in 2010 (by Age Group)

 Figure 4.6. Real Wage Index

Figure 4.7. Unemployment and Poverty

 Figure 4.8. Annual Family Expenditure (2012)

TRADE AND CAPITAL MOVEMENTS

The external sector shapes the foreign exchange market (foreign currency inflow-
outflow) through its trade, capital movements, and financial flows. Trade includes factor
payments such as remittances from overseas contract workers and profit remittances of
foreign companies to their home countries. Capital movements include both short- and
long-term foreign investments in the country and Filipino investments abroad. Financial
flows involve international debts and loans and their repayments.
Foreign currency (largely in dollars) inflow less outflow payments define the
Balance of Payment (BOP) of the economy. Foreign currency receipts from abroad
(inflows) eventually sell for pesos while foreign currencies for payments to other
countries (outflows) are brought with pesos. From the viewpoint of the economy, a BOP
surplus means that more foreign currencies are being sold for pesos than those being
bought with pesos. Likewise, a BOP deficit means that less foreign currencies are being
sold for pesos than those being bought with pesos (Figure 4.9)
 Figure 4.9. Foreign Currency Flows and the Economy

As part of its regulatory function, the government through the Central Bank
competitively buys and sells foreign currencies in the foreign exchange market to
balance supply and demand and stabilize the exchange rate. The Central buys foreign
currency surpluses with pesos and sells them for pesos to fill the shortfalls in times of
deficit in order to stabilize the foreign exchange market. In Figure 4.10, from Point A, the
Central Bank buys (demand shift D1 and D2) the excess supply of foreign currency (F1 –
F2 from supply shift S1 to S2). Thus, buying this excess supply maintains exchange rate
E1 and foreign currencies bought and sold (supply = demand) F1 at point A. Conversely,
the Central Bank can sell foreign currency reserves (supply shift S 0 to S1) to fill the
shortage (F1 to F0 from supply shift S1 to S0) to likewise restore equilibrium at point A.
 Figure 4.10. Foreign Exchange Market
The economy’s is yet to go deeper into more technology – based stages that it
imports the capital and final goods even including consumer items that it could
otherwise produce (Figure 4.11). But it only exports raw materials and some consumer
items using low technology (e.g., garments)(Figure 4.12). Local manufacturing which
largely produces light manufactures (low technology) of food and other consumer items
can hardly stand up to imported competitive products. Machineries and electronics
exports are simply products from their imported components assembled locally by
transnational corporations. As mentioned in Chapter 3, electronics exports hardly
contribute to local output and employment being import-dependent and without much
need for technology.
Figure 4.11. Imports by Major Commodity Group Q1 2014 (Percent Share)

Figure 4.12. Exports by Major Commodity Group Q1 2014 (Percent Share)

 As the country exports little but imports much, it spends more but hardly earns
foreign (largely dollars). What buoy the foreign currency market are net capital inflows
(foreign investment, loans) that offset trade deficits (imports exceed exports) resulting in
mostly BOP surpluses (Figure 4.13). Nonetheless, foreign exchange rate (pesos to
foreign currency) is relatively high making peso imports costly while exports are
becoming more competitive with more peso profit margin for the same dollar price.
Unfortunately, local production can hardly fill in for costly imports as handicapped by
limited scale, access to technology and government incentive against the backdrop stiff
import competition. On the other hand, they have to contend with higher cost of doing
business due to costly capital and material products. Thus, local business engage in low
technology production and trade that includes cheap and shoddy imports of consumer
items.

Figure 4.13. Real Exchange Rate

Further stifling the foreign currency market is the decline of its exchange rate
against rising local prices (inflation) that makes the peso overvalued against the dollar in
recent years. The increasing value of the pesos together with the other Asian currencies
against the weakening dollars stems from capital flows avoiding the recession in the
U.S. and Europe and finding opportunities in Asia. The resulting decline of the real
exchange rate (exchange rate divided by price index) has two (2) implications (Figure
4.13). Imports are becoming cheaper relative to local goods while exports are becoming
less competitive with less peso profit margin for the same dollar price. Much less are
exports competitive as our neighbors and rivals (Malaysia, Thailand, and Indonesia)
have successfully reversed their exchange rate conditions to make their exports more
competitive (Figure 4.14). In turn, cheapening imports with less competitive exports
further fans foreign currency demand relative to supply to keep the exchange rate high.
Despite Central Bank’s intervention to minimize fluctuations by buying and selling
dollars, the peso – dollar exchange rate is still above forty (40) pesos. Thus, imports
dependent economy is still costly while exports continue to lose price competitiveness.

Figure 4.14. Year – to – date Appreciation/Depreciation of

Asian Currencies against US Dollar
(in percent, as of end – March 2014)
HERFINDAHL – HIRSCHMAN INDEX (HHI)
As a final note to help guide the proponents of a business proposal in choosing
what type of industry to enter, the use of the Herfindahl – Hirschman Index – HHI would
be useful since it helps the proponent identify markets are highly competitive and
saturated and those markets with high market concentration.
The HHI is a commonly accepted measure of market concentration. It is
calculated by squaring the market share of each firm competing in a market, and then
summing the resulting numbers. Market share is equal to the Revenue of the
Firm/Revenue of the Industry and is actually a percentage. However, the whole
numbers of the market share are used to compute the HHI.
The HHI number can rage from close to zero to 10, 000. The HHI is expressed
as:
HHI = M2 of Firm 1 + MS2 of Firm 2 + MS2 of Firm 3… + MS2 of Firm n.
The closer a market is to being a monopoly, the higher the market’s
concentration (and the lower competition). If, for example, there was only one firm in an
industry, that firm would have 100% market share, and the HHI would equal 10,000
(1002), indicating a monopoly. Or, if there were thousands of firms competing, each
would have nearly 0% market share, and the HHI would be close to zero, indicating
nearly perfect competition. This means the market highly competitive and is
characterized by the existence of numerous competitors.
Results of the HHI would indicate the following:
 HHI below 100 indicates a highly competitive market.
 HHI below 1 000 indicates an unconcentrated market
 HHI between 1 000 to 1 800 indicates moderate market concentration.
 HHI greater than 1 800 indicates high market concentration.
The business proponent should therefore seek to enter an industry where HHI is
greater than 1 800 since the market is not characterized by too many firms.

EXERCISES
I. Answer the following questions.
1. Why are the business still handicapped by inadequate infrastructure services
despite government’s increasing spending on the same?
2. How does size affect business in both the short and long run?
3. How do inadequate infrastructure and industry support services affect business in
 both the short and long run?
4. What are the other obstacles and their specific effects to doing business?
5. What are the indicator(s) that the country’s population is still young? What is the
consumption preference of the young?
6. Yet, why do we say that the country’s population is gradually aging?
7. Why has household consumption been marginalized through the years?
8. How has declining purchasing power changed the household consumption pattern?
9. What is the effect of the foregoing on business competition and why?
10. In our country why do imports usually exceed exports?
II. Activities
1. Discuss how SM impacts positively on the community and the country.

2. Form a group and choose a business whose owners are well known for their
advocacies. Report on these advocacies in the classroom.

3. Interview a typical mother or housewife in a low – income community on how she

budgets the income of her family. Further ask if said family budget can still
provide for some amenities (e.g., cellphone load, DVDs) and if so, how much and
what kind. Look around the said community and find the kind and number of
micro enterprises serving its consumer needs. Identify their market problems and
figure out what you would do if you were in their shoes.

4. Look for successful small business in your neighbourhood. Interview the owner,
find out the reasons for putting up the business, the problems encountered, and
the reasons for putting up the business, the problems encountered, and the
reasons for its success.

5. Observe and talk to the small producers/sellers in your barangay (farmers,

fishermen, and vendors cottage industries). Is there any lack of public
infrastructure facilities that limits their operation? How has this inadequacy limited
their business activities and profit? What support services do they lack and how
has this limited their business activities and profit? Have they experienced
registration and licensing delays and how have they limited their business
activities and profit? What are the possible ways to explore to minimize or even
avoid the aforementioned impact?

6. Identify at least 10 goods that you always consume at home. How many are
imported from our neighbor (e.g. China, Thailand) and produced locally? Find
 locally made consumer goods that compete with these imports. If you can find at
least one or two, compare their prices and quality. What will happen to the peso
price of these imported consumer goods should the exchange rate continue to
decrease in absolute values, that is, if the peso appreciates in value? Explain.
What will happen to the remittances converted to pesos of our overseas contract
workers (OCW) under the scenario of peso depreciation? Explain.

7. Research on business opportunities. Look for a business where the industry is

not yet saturated with so many firms. You can apply the Herfindahl – Hirschman
Index discussed in the chapter. Once you have identified a business, prepare a
business proposal.
The business proposal should include the following.
a) A description of the good or service to be offered;
b) Target market of your product;
c) Proposed location and reason for the choice of this location;
d) Long – term objectives of the business;
e) Estimated capital requirements;
f) Sources of capital
g) Form of business organization: Sole proprietorship, Partnership, or
Corporation;
h) Suggested pricing of the product
i) Mode of promotion or advertising used;
j) Technical requirements: Machine, Building, Tools needed; and
k) Socio – economic Impact: Positive Effects of the Project and Negative
Effects of the Project