Principles of Economics with Agrarian Reform and Taxation

Chapter I: Fundamental Concepts of Economics

1.1 Definition and Significance

The word “economics” come from the Greek word “oikonomia, “management of a
household, administration”) from oikos, “house”) + (nomos, “custom” or “law”), hence
“rules of the household. A household faces many decisions. It must decide which
members of the household do which tasks and what each member gets in return. The
household must allocate its scarce resources among its various members, with the taking
into considerations the factors such as abilities, efforts and desires of the member of the
household.

Like household, the society faces many decisions, like what jobs will be done and who
will do them. It needs some people to grow food, other people to make clothing, and still
others to design computer. After the societies have been allocated people to various jobs,
it must allocate their output of goods and services.

A good knowledge of economics offers many favorable possibilities: It guides us how to

make a living, how to use wisely our money, how to run our business, how to distribute
properly our available scare resources and how maximize our profits and consumer
satisfaction.

Economics defined as follows:

- It is the proper allocation and efficient use of available resources for the
maximum satisfaction of human wants. The biggest problem is not the limited
resources instead are the unjust distribution of productive resources among the
members of the society. Our available resources are in the hands of very few
families.
- It is the study of how human beings go about the business of organizing
consumption and production activities. These are the major activities of
economics, among other things. While the production and use of wealth is the
subject matter of economics. The economic conditions and policies of other
countries can affect the direction and nature of our economic development. (Ex: If
the oil producing countries do not like to sell oil to us, then transportation
companies and other industries which use oil can not continue their operations
unless good substitutes for oil are discovered.
- It is the study how to improve society and make human civilized as possible.
- It is the study of how societies manage its scarce resources.
- It provides valuable insights into how societies make decisions about their needs
and wants and allocate the resources to achieve them.
- It is classified as social science because it deals with the study of man’s life and
how he lives with other men. It is also deals with the activities of people in
making their living.
- It is use scientific methods in gathering data, analyzing data and in making
conclusions (the empirical method of economics). Data are mostly obtained
through observations and interviews. Conclusions are based on generalizations
(Principles of Economics) within the limits of certain specific assumptions.
- “ceteris paribus” the assumption of economics which means “other things being
equal or constant. Ex One fundamental principle of economics is the law of
demand. It states that individuals tend to purchase more quantity of goods when
price decreases, and when price rises, lesser number of goods are bought. This
principle is true if other things are constant, like income. Refer to demand
determinants (income, population, tastes and preferences, price expectation, prices
of related goods) and supply determinants technology, cost of production, number
of sellers, prices of other goods, price expectation and taxes and subsidies.

Basic Terms in Economics

Goods – Anything that satisfies human wants and yield satisfaction to someone. It
is anything used to satisfy a person’s wants and desires. As used in economics, the
term “goods” has a broad meaning and includes not only material but also
immaterial things. Goods may be tangible when they are in the form of material
goods or commodities. They may also be intangible in the form of services.
Classification of Goods according to use: Consumer Goods – goods which
yield satisfaction directly. Example: Shoes, House and Furniture. Producer’s
Goods or Capital – is the goods that satisfy human wants indirectly or goods used
in the production of other goods and services. This is also defined as produced
goods utilized for further production. Example: cows, carabaos, harrows, and
seeds for farmers. Why land is not considered as capital for the fact that capital is
produced equipment while land is a gift of nature. Land is not the product of
man’s effort. Goods may also be essentials, if they are used to satisfy the basic
needs of man such as food, shelter, and medicine. Luxury goods are those goods
man may do without, but are used to contribute to his comport and well being
such as perfume, cars and diamonds. Economic goods – is a good which is both
useful and scarce. The principal concern in the study of economics. Free goods –
these things are the gift of nature and anybody can enjoy them in almost any
quantity. Imports – goods produced abroad and sold domestically while Exports –
goods produced domestically and sold abroad. Goods are created by production it
may involved the physical transformation of a commodity such a leather
converted into shoes. These types of production take place in the factory and are
referred to as manufacturing or industry, while in the farm such as planting and
harvesting of rice, corn, coconuts, and sugar are agricultural production. All
these things are carried out to provide goods and services for use in the
satisfactions of man’s wants and needs.

Utility – the quality of a thing that satisfies desire. Utility is not inherent in the
object which it makes desirable. The capacity of goods (services) to satisfy a
wants. It comes into existence when the desires disappear or die out. A thing not
wanted by man has no utility. The utility of an object depends upon the person
 whose desires are gratified; the utility of any particular object differs with
different individuals. But if the utility of alcohol to the non alcoholic is not direct
but they may have great utility if he could use them in exchange for something
else that he greatly desires.

All things that have utility and scarce are called Wealth. This is synonymous with
economic goods. The most important quality of a thing in order to be called
wealth is the (1) possession of utility. A thing must be useful and satisfy some one
or other of our wants. Harmful or prohibited goods must not disqualify to consider
as wealth. Opium is a harmful drug, but the fact that some persons desire it and
are willing to pay a price for it would make opium wealth. (2) Wealth must be
transferable. Ocean current could provide power, but it could not be appropriated
and therefore does not form a part of the wealth of society. (3) Wealth must be
material and external to man. The intelligence, skill and good health of man are
not wealth, but they aid in the production of wealth. (4) Wealth must be scarce;
they must not exist in abundant quantities to satisfy everybody’s wants for them.
(Wealthy Man and Wealthy Nation) the wealth of nation would consist of the sum
total of the wealth citizens and as well as all public real property and other things
that have value. The wealth of the nation would also include some goods which
our nationals own in foreign countries. Wealth and money then are not
synonymous. Wealth measured in terms of money is not the same at all times
although the things that constitute wealth may not have changed in quantity or
quality. The changes in the purchasing power of money also change the estimated
wealth of individuals or nations.

1.2 History

Old view of Economics

People saw national wealth in terms of stock of gold and silver. Importing goods from
abroad was seen as damaging because it meant that this wealth must be given up to pay
for them. Exporting goods was seen as good because these precious metals came back.

Mercantilism or commercialism – economic nationalism for the purpose of building a

wealthy and powerful state. Enrich the country by restraining imports and encouraging
exports. Protectionism, promoted governmental regulation of a nations economy for the
purpose of augmenting state power at the expense of naval national power.

It has started to be known when Adam Smith's book An Inquiry into the Nature and
Causes of the Wealth of Nations was published in 1776. This book became the bible of
economics for more than a century. He also considered as the Father of Modern
Economics. Other book of the Smith is Theory of Moral Sentiments. He argued that free
exchange both sides became better off – social freedom.

The Greek philosopher Plato recommended division of labor in order to improve

production.
Another Greek philosopher, Aristotle, explained the functions of money. Provide
philosophical analysis of human ends and means. He explain that means or instruments of
production are valuable because their end products are useful to people. The more useful
or desirable a good is the higher the value of the means of production is.

In the case of the Romans, they believed that agriculture was the only honorable industry.
During the early days of the Roman Republic, the boys were taught to be good soldiers
and farmers by their fathers. During the middle Ages, the Church under St. Thomas
Aquinas crusaded for distributive justice (fair distribution of goods), and compensatory
justice (fair exchange of goods and services).

1.3 Basic Economic Problems

Three Basic Economic Problems are:

- What goods and services to produce and how much (Production). Feasibility
study determines whether certain goods or services become profitable or not in a
given market. Investors are only willing to produce goods and services which give
them good surplus. However it is not always possible to produce all the goods and
services that people need, because resources are limited. Therefore there is need
for the human to set their priorities.
- How to produce the goods and services. As a general rule, goods and services
must be produced in the most efficient manner. More output with minimum input
without sacrificing quality. The application of modern technology has increased
output and decreased cost of production. Such production efficiency has greatly
contributed to the high standard of living of the industrial countries. In the case of
poor countries, they can not afford to apply modern technology because of the
financial capabilities and oversupply of idle labor force.
- For whom are the goods and services (Distribution and Consumption of goods
and services). Problem for distribution, who gets the goods. In a pure market
economy or capitalism, goods and services are definitely for those who have
money and are willing to purchase them. Unlike in poor countries they can only
acquire goods and services depending on their purchasing power.
The government interferes in the distribution of goods and services in order to
protect the welfare of the poor like in Middle East, Canada, Japan, Europe and US
by providing them free education, pensions, social programs, housing assistance
and other utilities aid.

1.4 Economic System and Models

Economic System is a set of economic institutions that dominates a given economy. The
principal objective of an economic system is to solve the basic economic problems. They
have varied concepts, ideas, conclusions, strategies and ways of improving the standard
of living of people.
3 models of economic system

- Capitalism the factors of production and distribution are owned and managed by
private individuals or corporations. It has been known by similar terms like
market economy or free enterprise economy or laissez faire economy. This model
is under the leadership of Adam Smith “The wealth of nations in 1776”. meaning
no government intervention in economic affairs.
The essential characteristics of capitalism are: privately own, free competition,
economic freedom and profit motive. However the believed of Adam Smith that
free competition and other natural laws of economics would promote the welfare
of the individuals as well as that of society did not happen during the Industrial
Revolution in England, the capitalists exploited their workers. They were forced
to work for 18 hours a day. Even the aged and the children worked in mines and
factories in order to survive economic difficulties.
- Communism (the opposite of capitalism) the factors of production and
distribution are owned and managed by the state. Also known a command
economy or classless society.
The essential characteristics of communism are: no private property, no free
competition (the government is the only seller), no economic freedoms, no profit
motive and presence of central planning.
- Socialism is a combination of capitalism and communism. The major and
strategic industries are owned and managed by the state while the minor
industries belong to the private sector. (Major Industries like Transportation,
Utilities, Mining and Production of essential product. Minor Industries like
production and marketing of candies, toys and etc) (Karl Marx the father of
modern socialism)

Types of economic system

- The traditional economy the basic subsistence economy. A family produces

everything that it consumes. Decisions on what, how, and for whom to produce
are made referring to the traditional manner of doing things. This type of
economic system is very backward since it does not allow for change.
- The command economy the means of production are owned by the government.
Its decisions are arrived at by planners or government men who dictate what, how
and for whom to produce.
- The market economy the resources are privately owned and decisions are made by
the people themselves. Prices set by the conditions of demand and supply and also
are the guiding factor for the producers to know what and how much to produce.

Criteria to judge the performance of the various economic systems.

- Abundance refers to goods and services that individual members of society have
received.
 - Growth it is measurable in terms of the number of infrastructure in a given
country, however the mere question is the destructive results like pollution, drug
abuse and sex crimes.
- Stability refers to the absence of inflation and unemployment. When prices are
abnormally high, the purchasing power of the consumers decreases.
- Security it is generally depends on economic stability.
- Efficiency/Productivity
- Justice and equity Is the distribution of wealth, income and power among the
members of society fair? Just distribution of wealth, income and power stimulates
economic activities like innovation, investment and production. The reason why
progressive countries become more progressive.
- Economic freedom if the consumer is free to choose and buy commodities, if the
businessman is free to invest and put up his money in any business he wants.
However, moral and legal values must not violate.

Four Possible reasons for economic success

- Economic freedom
- Profit motive
- ownership of private property
- And favorable government policies.

The Goal of Economics

- Economic freedom
- Economic growth
- full employment
- price stability
- equitable distribution of wealth and income
- And economic security.

Reference: Economics 3rd Edition by Feliciano R. Fajardo, Philippine Economics 2000

Edition by Cristobal M. Pagoso Et., al, Principles of Economics by Andres V. Castillo
and Principles of Economics 2nd Edition by Gregory N. Mankiw.
 AMA Computer College
Principles of Economics with Agrarian Reform and Taxation

Chapter II: The Theory of Want

2.1 Demand and Consumer Behavior

The Market

A market – is an interaction between buyers and sellers for trading or exchange. The
consumer buys and the seller sells. The most common type of market is the goods
market. It may be wet market like in the Divisoria, Balintawak, Nepa Q and Mega Q
where people buy pork, chicken or fish. It may also consist of a dry market wherein
people buy shoes or clothes. There is also a labor market where workers offer their
services and employers look for workers to hire. We also hear of a stock market where
commodities traded consist of securities of corporations. The market is important because
through it, a person who has excess goods can dispose of them, and a person who feels a
need for goods obtains them. It is through the market that price is determined through
interaction between the buyers and sellers.

Consumer behavior is the study of when, why, how, and where people do or do not buy
a product. It attempts to understand the buyer decision making process, both individually
and in groups. It studies characteristics of individual consumers such as demographic
(Commonly used demographics include gender, race, age, income, disabilities, mobility
(in terms of travel time to work or number of vehicles available), educational attainment,
home ownership, employment status, and even location.) and behavioral variables in an
attempt to understand people's wants. It also tries to assess influences on the consumer
from groups such as family, friends, reference groups, and society in general.

Theory of Consumer Behavior

The law of diminishing marginal utility – the utility of a good diminishes as additional
units of the good are consumed. Utility means satisfaction. Marginal utility refers to the
additional satisfaction of a consumer whenever he consumes one more unit of the same
good or the marginal utility of any good to an individual is the utility of the last added or
the least wanted unit of his stock of the good. Provided the law applies only to similar
goods and services consumed or enjoyed at a given time. A pair of shoes is very
necessary to a person and the utility of the shoes is infinite. A second pair of the same
kind of shoes will not yield as great utility as the first pair and a third pair of the same
kind will give less utility than the second pair. (If a man has acquired successively five
pairs of shoes added to our possession of this commodity, the utility of the last pair of
shoes acquired is the marginal utility. Suppose he loses one pair, the utility of the 4 th pair
is the marginal utility. In the example that the five shoes acquired at once, which would
be the marginal pair? The answer is that any one of the pairs may be regarded as marginal
in the sense that the loss of it would cause a decrease in the satisfaction afforded by the
stock.

Indifference curve – means showing no bias or neutral. This is also a curve which shows
different combinations of two goods which yield the same level of satisfaction.
Supposing there are five combinations of two products (meat and fish): the first
combination constitutes 5 kilos of meat and 1 kilo of fish and soon. Since all
combinations give the same level of satisfaction or utility, the consumer would be
indifferent as to which combination he receives. This means any combination would be
desirable for him. He has no particular choice.

Demand – is the schedule of various quantities of commodities which buyers are willing
and able to purchase at a given price, time and place. A demand schedule shows the
different quantities that will be bought of a good, given various prices. This demand
schedule may reflect an individual schedule of a consumer, or a market schedule of a
group of consumers. A demand function shows how the quantity demanded of a good is
dependent on its determinants, the most important of which is the price of the goods
itself. The demand curve is the graphical presentation of the demand schedule.

Table 1: Individual demand schedule showing the inverse relationship between

price and quantity.

Table 2: Individual demand curve showing a down sloping curve. The position of
the demand curve indicates the inverse relationship between price and quantity
demanded.

Law of Demand

“Consumers are most likely to buy more goods and services as price decreases, and buy
less goods and services as price rises”
The reasons for the downward slope of the demand curve are 1). Real Income or Income
effect refers to the buyer’s purchasing power obtained from his money income. It
represents the amount of goods and services he can buy. If a good becomes more
expensive, the income of the consumer suffers because it goes down. To cope with this
price increase, the consumer buys less. The opposite happens when the price of the good
decrease. The consumer’s income increases and he can buy more of the goods. (Before
the price of one pandesal was only 50 centavos. So a peso then could buy 2 pcs of
pandesal. At present, the same one peso can not even purchase one pc of pandesal
(provided the current price of pandesal is 1.50 pesos. 2). Substitution effect consumers
tend to buy goods with lower prices. In case the price of a product that they are buying
increase, they look for substitutes whose price are lower. (From Pop cola to RC Cola)
When the price of a commodity changes while other prices remain constant, the
consumer would tend to substitute a lower prices commodity for the more expensive one.
Thus the demand for the higher priced good will decrease.

Validity of the Law of Demand

The Law of Demand is only true if the assumption of ceteris paribus is applied. It means
“all other things equal or constant”. The law of demand is correct if the determinants of
demand are held constant. Example, if the price of beef increases by 10% then the
quantity demanded for such good decreases. This is true if the determinants of demand
are constant.

Determinants of Demand (Non Price Determinant)

Income – People buy more goods and services when their incomes increase while if their
income decrease, demand for such goods and services also declines. Thus, a change in
income brings about a change in the demand for goods and services; either an increase or
decrease which is directly related to change in income.

Population or the size of population – An increase in population results in a greater

demand since there will be more consumers. There are more consumers in an urban
community than in a rural community.

Tastes and preferences – a greater preference of the consumer for the good will lead him
to buy more of it even if price is unchanged. However a consumer, who develops less
taste for the good, tends to buy less of it at the same price.
Price and Income expectation – a consumer, who expects a future increase in income or
a future increase in prices, tends to buy more at the present time. Meanwhile, a consumer
who expects his income or the price of a good to decrease in the future tends to purchase
less at the present time. When people expect the prices of goods, especially basic
commodities like rice, soap, cooking oil, or sugar, to increase tomorrow or next week,
they buy more of these goods. In the same manner, they decrease their demand for such
products if they expect prices to decline tomorrow or in a few days. The reason for such
consumer’s behavior is to economize.
Price of related goods – when the price of a certain product increases, people tend to buy
substitute product (competitors) For example, if the price of Tide increases, consumers
buy less of Tide and more of the other close substitutes like champion. While if the Price
of Tide decreases the demand for the substitute product decreases.

A complementary good, in contrast to a substitute good, is a good with a negative cross

elasticity of demand. This means a good's demand is increased when the price of another
good is decreased. Conversely, the demand for a good is decreased when the price of
another good is increased. Example: hotdog and hotdog bun, peanut butter and jelly,
printers and ink cartridges, DVD players and DVDs and Computer hardware and
computer software.
A perfect complement is a good that has to be consumed with another good. Few goods
in the real world will behave as perfect complements. One example is a left shoe and a
right; shoes are naturally sold in pairs, and the ratio between sales of left and right shoes
will never shift noticeably from 1:1 - even if, for example, someone is missing a leg and
buys just one shoe.

The degree of complementarity, however, does not have to be mutual; it can be measured
by cross price elasticity of demand. In the case of video games, a specific video game
(the complement good) has to be consumed with a video game console (the base good). It
does not work the other way: a video game console does not have to be consumed with
that game. Example A classic example of mutually perfect complements is the case of
pencils and erasers. Imagine an accountant who will need to prepare financial statements,
but in doing so he or she must use pencils to make all calculations and an eraser to correct
errors. The accountant knows that for every 3 pencils, 1 eraser will be needed. Any more
pencils will serve no purpose, because he or she will not be able to erase the calculations.
Any more erasers will not be useful either, because there will not be enough pencils for
him or her to make a large enough mess with in order to require more erasers. In this case
the utility would be given by an increasing function of: min (number of pencils, 3 ×
number of erasers)
2.2 Supply and Pricing in Competitive Markets

Supply

The supply of a product is the quantity of goods that sellers are willing to sell. It is also
the schedule of various quantities of commodities which producers are willing and able to
produce and offer at a given price, place and time. The supply schedule shows the
difference quantities that will be offered for sale at various prices. This supply schedule
may reflect an individual schedule of only one producer, or the market schedule showing
the aggregate supply of a group of sellers or producers. A supply function shows how the
quantity offered for sale of a good is dependent on its determinants, the most important of
which is the price of the good itself. The supply curve is the graphical presentation of the
supply schedule.

Table 3: Individual supply schedule showing the direct relationship between price
and quantity

Table 4: Individual supply curve showing an upward slope, the position of the
supply curve indicates the direct relationship between price and quantity supplied.

Law of Supply

“As price increases, quantity supply also increases and as price decreases, quantity supply
also decreases. This direct relationship between price and quantity supplied is law of
supply. Producers are willing and able to produce and offer more goods at a higher price
than at a lower price. This law is only true if the assumption of ceteris paribus is applied.
It means “all other things equal or constant”. The law of supply is correct if the
determinants of supply are held constant.

Determinants of Supply (Non Price Determinant)

Technology – refers to the techniques or method of production. Modern technology

which uses modern machines increase supply of goods while primitive technology which
uses animals and people is very slow in producing goods. In addition, technology reduces
cost of production, and this encourages the producers or sellers to increase their supply.
Lower cost of production results in an increase in profit.

Cost of production – cost refers to all expenses incurred to produce the good. An increase
in cost will normally result in a lower supply of the good since the producer has to come
up with outlay. Thus, even with price of the good unchanged, the producer will be
offering for sale a smaller amount of the good. On the other hand, a decrease in cost will
enable the producer to increase production. Availability of raw materials and resources

Number of sellers – more sellers or more factories mean an increase in supply. Smaller
number of sellers or factories means less supply. This situation is very evident in rich or
industrial countries. They have many manufacturing firms and services industries like
those in the United States and Japan. Hence, they have also plenty of goods and services
for sale. In fact, their industrial goods are being exported to other parts of the world.

Prices of other goods – Changes in the price of goods affect the supply of such goods.
For example, a decrease in the price of rice may likely encourage a rice farmer to produce
more corn if this gives him more profit.

Price expectations – if producers expect prices to rise very soon, they usually keep their
goods and then release them in the market when the prices are already high. This creates
artificial shortage or hoarding. It has been experienced that whatever the government
announces the increase in prices gasoline, rice, and milk or cooking oil, such goods
immediately disappear in the market.

Taxes and subsidies – certain taxes increase cost of production, higher taxes discourage
production because it reduces the earnings of businessman. That is why the government
extends tax exemptions to a number of new and necessary industries to stimulate their
growth.

Highly competitive markets are characterized by intense price competition. Typically,

these are markets where any number of competitors are capable of providing products or
services that are more than 'good enough' for their customers. It's not that there isn't
differentiation between suppliers; it's just that the points of differentiation aren't strong
enough to justify a difference in price. As a result, buyers have a tendency to focus on
price as the ultimate criteria when choosing a supplier.

Prices in these markets have a tendency to stagnate. They seldom go up over time and
can quite often decrease if competitors are able to incorporate cost reductions through the
adoption of new technology or other cost saving mechanisms. Whatever happens to price,
margins remain thin in most cases. Many managers in these markets believe there is little
they can do about price or margins. 

That attitude has developed over the years because they continue to think about pricing in
terms of raising prices. But there are many things you can do to improve margins even
when you can't raise prices. And in these markets, that's where you have to focus.

Some markets, such as those for agricultural commodities and gasoline, seem to have just
one price at any given time. All producers in the market charge the same or very similar
prices. Typically, with many firms selling essentially the same product, these markets are
highly competitive.

In highly competitive markets, the collective actions of many buyers and sellers drive the
price of goods and the total quantity of goods that firms produce.

This topic looks first at an overall market equilibrium and then considers the output
decisions of individual firms operating in competitive markets.

A competitive market is in equilibrium if, at the current market price, the number of units
that consumers wish to buy equals the number of units’ producers wished to sell. In other
words, market equilibrium occurs where quantity demanded equals quantity supplied. At
the equilibrium price, P*, the equilibrium quantity is Qd=Qs=Q*, where Qd is the quantity
demanded and Qs is the quantity supplied. The asterisk indicates equilibrium.

You can show an equilibrium market price on a graph by plotting supply and demand
curves on a single set of axes. When you look at the graph below, notice that equilibrium
price and quantity occur at the point where the demand and supply curves cross. P* and
Q* indicate equilibrium price and quantity, respectively.
The Law of Supply and Demand

The law of supply and demand states that when supply is greater than demand, price
decreases. When demand is greater than supply; price increases. When supply is equal to
demand, price remains constant. This is the market price or equilibrium price. It means
both sellers and buyers have mutual agreement. That is, producers are able and willing
and able to purchase at a given price. Equilibrium price established by interaction
between demand and supply. Above the equilibrium price is surplus, below is shortage.
In the process of interaction between buyers and sellers, price tends to move towards the
equilibrium price.
Supply is represented by producers or sellers while demand is represented by buyers.
Producers are willing and able to offer more goods at higher prices. This is the law of
supply. On the other hand, buyers are willing and able to purchase at lower prices. This is
the law of demand. There is therefore a contradiction between the two parties. One likes
high price while the other likes low price. When the price is high, sellers offer more
goods because they are encouraged. But the buyers are able to purchase fewer goods. The
result is a surplus of goods. This means quantity supplied is greater than quantity
demanded. To sell the surplus goods, sellers compete with one another in decreasing their
price. Buyers can take more goods at a lower price. But producers are discouraged to
produce and offer goods at a very low price. The result is shortage of goods. This means
quantity demanded is greater than quantity supplied. In the process of interaction between
the buyers and sellers, an equilibrium price (meaning in balance or at rest) is established.
This is situation where quantity supplied and quantity demanded are equal. There is
neither surplus nor shortage

2.3 Practical Applications

Reference: Economics 3rd Edition by Feliciano R. Fajardo, Philippine Economics 2000

Edition by Cristobal M. Pagoso Et., al, Principles of Economics by Andres V. Castillo
and Principles of Economics 2nd Edition by Gregory N. Mankiw.
 AMA Computer College
Principles of Economics with Agrarian Reform and Taxation

Chapter III: The Price System

3.1 Analysis of the Price System

What is Price?

Price – is the value of a product or service. It is expressed in terms of monetary unit like
peso, dollar or yen. The price system is very important in the economy. It determines the
allocation of goods and services among the member of society. This simply means the
goods and services are being acquired by the people by paying them with their money.
Naturally, more money means more goods and services.
Buyers’ View – For those making a purchase, such as final customers, price refers to
what must be given up to obtain benefits. In most cases what is given up is financial
consideration (e.g., money) in exchange for acquiring access to a good or service. But
financial consideration is not always what the buyer gives up. Sometimes in a barter
situation a buyer may acquire a product by giving up their own product. For instance,
two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may
also give up other things to acquire the benefits of a product that are not direct
financial payments (e.g., time to learn to use the product).
Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each
product sold and, thus, is an important factor in determining profit. For marketing
organizations price also serves as a marketing tool and is a key element in marketing
 promotions. For example, most retailers highlight product pricing in their advertising
campaigns.

A value that will purchase a definite quantity, weight, or other measure of a good or
service. As the consideration given in exchange for transfer of ownership, price forms the
essential basis of commercial, transactions. It may be fixed by a contract, left to be
determined by an agreed upon formula at a future date, or discovered or negotiated
during the course of dealings between the parties involved. In commerce, price is
determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3)
the competition is allowing to be charged. With product, promotion, and place of
marketing mix, it is one of the business variables over which organizations can exercise
some degree of control. It is a criminal offense to manipulate prices (see price fixing) in
collusion with other suppliers, and to give a misleading indication of price such as
charging for items that are reasonably expected to be included in the advertised, list,
or quoted price. Also called sale price and selling price.
A price system – is a mechanism of allocating goods and services through the rise or fall
of prices caused by interplay of supply and demand forces. One favorable argument for
the price system is its efficiency in distributing goods and services. On the part of the
producers, they tend to produce those goods which give them maximum profits. On the
other hand, consumers are inclined to purchase those goods which provide them
maximum satisfaction. Another argument in favor of the price system is the presence of
personal freedom. Producers are free to produce goods and services to satisfy their own
economic interest as long as these do not conflict with legal and moral traditions. Other
personal freedoms include the free choice of workers or employees. Likewise the
employees are free to choose their employers. A price system in economics serves the
function of regulating the production and consumption of goods by determining their
monetary or trade value.
In economics, a price system is any economic system that effects its distribution of
goods and services with prices and employing any form of money or debt tokens. Except
for possible remote and primitive communities, all modern societies use price systems to
allocate resources. However, price systems are not used for all resource allocation
decisions today.

A price system may be either a fixed price system where prices are set by a government
(A regulated market or controlled market, is the provision of goods or services that is
regulated by a government appointed body. The regulation may cover the terms and
conditions of supplying the goods and services and in particular the price allowed to be
charged and/or to whom they are distributed. It is common for a regulated market to
control natural monopolies such as aspects of telecommunications, water, gas and
electricity supply. Often regulated markets are established during the partial privatization
of government controlled utility assets.

A variety of forms of regulations exist in a regulated market. These include controls,

oversights, anti-discrimination, environmental protection, taxation and labor laws.

In a regulated market, the government regulatory agency may legislative regulations that
privilege special interests, known as regulatory capture.) Or it may be a free price system
where (A free price system or free price mechanism (informally called the price system
or the price mechanism) is an economic system where prices are set by the interchange of
supply and demand, with the resulting prices being understood as signals that are
communicated between producers and consumers which serve to guide the production
and distribution of resources. Through the free price system, supplies are rationed,
income is distributed, and resources are allocated. A free price system contrasts with a
controlled or fixed price system where prices are set by government, within a controlled
market or planned economy.) Prices are left to float freely as determined by unregulated
supply and demand or it may be a combination of both with a mixed price system.
3.2 Criticisms against the Price System

Free competition does not really exist long enough. Self interests of businessmen force
them to drive away their rival through cut-throat competition. Another Strategy is to
merge their companies for market advantage. The small ones find it difficult to compete
with the big ones. In the process of competition, it is the big companies that become the
price leaders- no longer the free interplay of demand and supply. Unfair distribution of
goods and services only the very few rich can have a decent life under the price system.
Goods and services are allocated on the basis of the ability and willingness of individuals.
Moreover, social goods like anti-pollution, rural electrification, irrigation. Or highway
can not be allocated efficiently through the price system. Many investors have been
reluctant to put up such projects. Usually, these require huge financing, and yet the
returns of investment take a long time and profits may not be attractive. Hence only the
government is willing to undertake such social projects. Only those who have the money,
and who are willing to pay for such goods, get them.

3.3 Free Competition

Free-competition means freedom from physical force to produce for ones own profit.

Free competition is the freedom to produce, and the freedom to trade what one has
produced, for ones own self-interest, i.e., in the pursuit of ones own happiness.

What is the foundation of free-competition?

Politically, free-competition is a consequence of the political right to life, liberty,
property and the pursuit of happiness applied to the economic sphere of production and
trade.

Morally, competition among producers is founded not on service to consumers -- which

is a result; but, upon the pursuit of rational self-interest, i.e. the profit motive.
Economically, its result is a free-market, i.e. free trade.

Observe that free-market competition presupposes a social system based on individual

rights-- and cannot exist without the protection of rights by government, e.g. what good is
the right to produce (right to liberty) if one does not have the right to keep what one has
created (right to property), the right to advertise what one has produced (right to free
speech), the right to trade ones goods one ones own terms (right to property) and the right
to benefit from what one has produced (right to the pursuit of happiness)?

Free-competition without individual rights is a contradiction in terms, it is an oxymoron.

Of course, if one is a communist, fascist or socialist (all are different forms of a single
evil principle: collectivism) and does not believe in individual rights then competition has
an entirely different meaning.

The Philippines’ Department of Trade and Industry (Filipino: Kagawaran ng

Kalakalan at Industriya), abbreviated as DTI is the executive department of the
Philippine Government tasked to expand Philippine trade and industry as the means to
generate jobs and raise incomes for Filipinos.
History

The Department of Trade and Industry had its beginnings on June 23, 1898 when
President [Aguinaldo] formed three government agencies, the Departments of Navy,
Commerce, Agriculture and Manufacturing.

On September 6, 1901, the Philippine Commission established the Department of

Commerce (and Police). After World War II, President Carlo Alolod issued Executive
Order (EO) No. 94 on October 4, 1947 creating the Department of Commerce and
Industry (DCI). Cornelio Balmaceda, a much sought-after professor of economics and
director of the Bureau of Commerce (BOC), was appointed acting secretary of the newly
created Department of Commerce and Industry.

Prior to EO 94, the Bureau of Commerce was tasked to develop and promote the
country's trade and industry, under the overall supervision of the Department of
Agriculture and Commerce, as stipulated by Act 4007 by the Philippine Legislature,
enacted on December 5, 1932.
By 1972, the DCI had grown into a big organization with 10 regular bureaus and 22
agencies under its direct supervision. The DCI was mandated to promote, develop,
expand, regulate and control of foreign and domestic trade and industry, as well as
tourism.

To have closer supervision and to ensure more effective delivery of services, President
Ferdinand E. Marcos issued Presidential Decree (PD) 189 on May 11, 1973 creating the
Department of Tourism to handle all tourism-related matters. A year later on June 21,
1974, Marcos issued PD 488 creating the Department of Industry whose principal
function was to promote and enhance the growth of the country's existing and thriving
industries.

On June 2, 1975, the Department of Trade was created under PD 721 to pursue efforts of
the government toward strengthening the country's socio-economic development,
particularly in the area of commercial activities. A key strategy of the new department
was vigorous export promotion to generate much needed foreign exchange. A Bureau of
Foreign Trade was also particularly established to push for domestic trade and marketing
programs.

In the early 1980s, the Marcos government's goal of national economic development
required the need to hew industrial promotion efforts with the expansion of Philippine
trade overseas. This result in the creation of the Ministry of Trade and Industry (MOTI)
on July 27, 1981, which took over the functions of the subsequently abolished
Departments of Trade and of Industry.

Drastic changes followed after the 1986 EDSA Revolution. President Corazon

Aquino signed Executive Order No. 133 on February 27, 1987 effectively reorganizing
the Ministry of Trade and Industry and renaming it the Department of Trade and Industry
(DTI). This was further strengthened by the issuance of Executive Order 292
(Administrative Code of 1987). Other latter legislations have also amended its functions
and structures.

Gregory L. Domingo 2010 present Benigno Aquino III

STARTING this week, the Department of Agriculture (DA) vowed to strictly implement
suggested price bands for sugar, pork and chicken to keep the retail costs of these
commodities stable, especially during the coming holiday season.
Agriculture Undersecretary Salvador Salacup said the price band is a guide to
stakeholders, including farmers, viajeros, slaughterhouse operators, meat dealers,
 wholesalers, retailers and consumers.
“This [price band] is the most reasonable price levels of the respective commodities for a
given period,” he said.
The suggested retail price (SRP) for the three commodities are: for refined white sugar,
P41 to P43 a kilo; whole dressed chicken, P135 to P145 a kilo; pork kasim, P160 to P165
a kilo; and pork liempo, P170 to P175 a kilo.
Salacup said these SRPs were drawn up in consultation with hog and chicken
stakeholders in a meeting with agriculture officials at the DA central office on  November
26.
“The DA’s Agricultural Marketing Assistance Service [Amas], Bureau of Agricultural
Statistics [BAS] and the DTI [Department of Trade and Industry] will regularly make the
rounds of retail outlets every morning to ensure that sellers follow the SRPs,” he said.
“We will conduct a weekly review to find out whether we should lower or raise the SRPs,
or whether it is already time to lift them considering several factors affect the volatility of
agricultural commodity prices,” he added.
Salacup said these review teams consist of representatives from BAS, Bureau of Animal
Industry (BAI), Amas, the DTI, livestock and poultry producers, meat dealers, retailers,
and market administrators and consumer groups.
The DA has also assured the public that adequate imports of pork and chicken will be
arriving this month up to end of January 2010.
All of these foreign-sourced augmentation action plans were derived from extensive
discussions with major pork and chicken stakeholders as early as August 2009, he said.
Salacup said that 8,000 metric tons (MT) of chicken would arrive starting this weekend
up to January 31, 2010, and another 8,000 MT of pork also this December through
imports coming from the United States, Canada and other Asian sources.
Traditionally, there is a spike in consumer demand for pork and chicken products during
the holidays.
“These import volumes were approved by the private sector, which saw the need to
import the commodities to ensure enough supply this Christmas season,” said Salacup.
Prices of pork and chicken have remained stable, with pork cuts like liempo ranging from
P160 to P175, and chicken costing P130 to P145 a kilo. Salacup earlier said the DA has
been carrying out a two-pronged approach involving the procurement of pork and
chicken from both domestic and overseas sources to ensure the stable supply of these
commodities in Metro Manila this coming holiday season and the first quarter of 2010.
He said the DA had implemented a similar approach by suggesting a reference price band
for pork before the onset of the Christmas season last year —when retail prices shot up to
as high as P180 to P190 per kilo of choice cuts—a move that was welcomed by major
stakeholders, particularly the hog producers, wholesalers and retailers of the commodity.
Retail prices eventually stabilized at P155 to P170 per kilo.

The Philippines is a nation heavily dependent on foreign oil. Rising market prices and
growing national debt made price regulation by the government increasingly difficult.
Ultimately, the Congress ruled to deregulate oil trade within the Philippines in favor
of free market competition. There has been a great deal of reaction to this law, much
of it oppositional. Thus far, all proposals to amend or repeal the law have been denied.
 Republic Act No. 8180
Struggling with a dwindling power supply and the increasing toll of the Oil Price
Stabilization Fund on the country's economic stability, President Ramos elected
deregulation as the solution to a rising national deficit. Amid protest and heavy lobby
ing by oil companies, the Downstream Oil Industry Deregulation Act of 1996 (RA
8180) was passed. In 1997, the law was declared unconstitutional for violating anti-
trust laws. The law was quickly revised and passed again, this time as the Downstream
Oil Industry Deregulation Act of 1998 (RA 8479).
Republic Act No. 8479
The 1998 law's stated aim is to "ensure a truly competitive market under a regime of
fair prices, adequate and continuous supply of environmentally-clean and high quality
petroleum products." RA 8479 prohibited government interference with any market
aspect of the oil industry, including pricing, import and export processes and facilities
and the establishment of retailers and refineries. The law also established a 3 percent
tariff on oil and entrusted the Department of Energy, in conjunction with the Depart
ment of Trade and Industry, to monitor the oil industry for any violations of fair trade
practice, safety requirements, or environmental law.
Consequences
Despite stated intentions, the deregulation of the Philippines' oil industry has not
achieved its aims. Without limitations on pricing, the cost of petroleum products in
creased by more than 500 percent within the first 10 years of the law's enactment. Large
companies are still in control of the market, as smaller retailers must purchase their oil
supplies from them. With many wealthy nations in financial crisis, instabil ity in the
international market has contributed to rising crude prices, as well.
Opposition
Policy makers, think tanks, labor groups and other non-governmental organizations
have voiced their opposition to the oil deregulation law. Those who suggest its
amendment want to strengthen the DOE, encourage true competition and make pricing
more transparent to law makers and the public. More radical voices demand the re
peal of the law and reestablishment of the Oil Price Stabilization Fund, while
others want the value- added tax removed. Some have suggested a country-to-
country alliance establishing fair prices at least a year in advance, to avoid the crunch
of last-minute purchases at peak cost. Still others point out that legislation re
garding the oil industry will not solve the crisis of foreign oil dependence. They suggest
seeking out alternative energy solutions, including, but not limited to, in vestment in
the reestablishment of the Bataan Nuclear Power Plant as a source of cheap, clean power
3.4 The Role of Government

In view of the limitation of the price system, the government has to (1) Regulate and
supervise production, distribution and consumption of goods and services. The
government provides (2) incentives in the production of goods and services that greatly
contribute to the socioeconomic development of the country. It (3) interferes in the
allocation of goods and services in order to protect and promote the welfare of the poor.
And last (4) it has to control the consumption of goods and services which are wasteful
and detrimental to the growth of the economy. For example, our government discourages
importation of luxury goods and pleasure trips abroad due to the scarcity of our dollar
reserves. Instead, we are being encouraged to be more self reliant and productive for our
own good and that of the whole economy. Economic Growth means more employment,
production and income. This situation leads to a high standard of living only if the
productive resources belong to the need citizens. Therefore the most important role of
government is to redistribute fairly wealth and income. If there is an equitable
distribution of resources, then the price system can allocate efficiently and fairly goods
and services. The government just takes good care of the needs of the very few
unfortunates, and check capitalistic abuses.

Reference: Economics 3rd Edition by Feliciano R. Fajardo, Philippine Economics 2000

Edition by Cristobal M. Pagoso Et., al, Principles of Economics by Andres V. Castillo
and Principles of Economics 2nd Edition by Gregory N. Mankiw.

The theory of consumer choice

when you walk into a store, you are confronted with thousands of goods that you might
buy. Of course, because your financial resources are limited, you cannot buy everything
that you want. You therefore consider the prices of the various goods being offered for
sale and buy a bundle of goods that, given your resources, best suits your needs and
desires. We develop the theory that describes how consumers make decision about what
to buy. The demand curve for a good reflects consumers’ willingness to pay for it. When
the price of good rises, consumers are willing to pay for fewer units, so the quantity
demanded falls. We now look more deeply at the decisions that lie behind the demand
curve. The theory of consumer buys more of one good; he can afford less of other goods.
This theory examines how consumers facing these tradeoffs make decisions and how they
respond to changes in their environment.

1. The consumer’s budget constraint: what the consumer can afford – most people
would like to increase the quantity or quality of the goods they consume. People
consume less than they desire because their spending is constrained, or limited,
by their income. (The relation between income and spending) To keep things
simple, we examine the decision facing a consumer who buys only two goods: ice
cream and donut. We first consider how the consumer’s income constrains the
amount he spends on ice cream and donut. Suppose that the consumer has an
income of 1,000.00 per day and that he spends his entire income each day on ice
cream and donut. The price of ice cream is 2.00 and donut is 10.00. (Ice cream 0,
donut 100, spending 0, donut 1,000 total spending 1,000; 50, 90, 100, 900, 1,000;
100, 80, 200, 800, 1,000; soon) the budget constraint show the various bundles of
goods that the consumer can afford for a given income. Here the consumer buys
bundles of ice cream and donut. The ice cream he buys, the less donut he can
afford. The limit on the consumption bundles that a consumer can afford. The
slope of the budget constraint measures the rate at which the consumer can trade
 one good for the other. This analysis shows what combination of goods the
consumer can afford given his income and the pieces of the goods.
2. Indifference curve – a curve that shows consumption bundles that give the
consumer the same level of satisfaction or equally happy. (Preferences: what the
consumer wants) to see how consumers make choices. The consumer’s choices,
however, depend not only on his budget constraint but also on his preferences
regarding the two goods. The consumer’s preference allows him to choose among
different bundles of ice cream and donut. If you offer the consumer two different
bundles, he chooses the bundle that best suits his tastes. If the two bundles suit his
tastes equally well, we say that the consumer is indifferent between the two
bundles. Supposing there are five combinations of two products (like meat and
fish): the first combination constitutes 5 kilos of meat and 1 kilo of fish while
another combination is composed 5 kilos of fish and I kilo of meat, and so on.
Since all the combinations give the same level of satisfaction or utility, the
consumer would be indifferent as to which combination he receives. This means
any combination would be desirable for him. He has no particular choice.
(indifference curve is a curve which shows different combinations of two goods
which yield the same level of satisfaction)
Generally, a consumer refers to individuals who buy for themselves or their family (hence the
term 'consumerism' in economics and politics), whereas a customer can also mean the
retailer or person who buys from the manufacturer, etc. for ultimate sale to others. 
The one who buys the product is called a customer and the who uses the product is called a
consumer. A customer is who, buys the things but a consumer is the person who finally
utilizes it.

A consumer: One that consumes, especially one that acquires goods or services for direct
use or ownership rather than for resale or use in production and manufacturing. A
consumer is an end user.
A customer: One that buys goods or services. A customer can in turn resell to a
consumer. 
For example, the customer can be a toy store who buys from a major brand manufacturer
of toy products. The toy store sells to a consumer - the end user.
Another example: When you buy a car, you are a customer of the dealership you buy
from. But you are a consumer of the seatbelt or air bag that is installed in the vehicle (you
didn't purchase them separately)

The difference between a consumer and a customer is a very thin line. Aside from
both terms being used frequently in the field of business, these words are often
used in a similar context, which adds up to the confusion.
By definition, a customer is someone who buys services or goods from someone
else while a consumer is someone that consumes a certain product or commodity.
In the concept of Economics, a consumer can either be a single person or an entire
organization, that uses a certain type of service. Consumers can also be any form
of organism, that devours or eats something, as in the field of Science and
Ecology.
For example, a customer is best exemplified by a coffee shop, that buys a coffee
maker, from a coffee maker manufacturer. This means that the restaurant buys the
said equipment, for the benefit of its patrons or guests. In this connection, the
restaurant is clearly pictured as a customer and not the actual consumer. However,
in a similar scenario wherein you directly go to the coffee maker manufacturer and
buy their product so that you can bring it home for your family’s use at home, then
you are the real consumer.
Simply said, if you are going to use a particular product for purposes other than
your own consumption, like for commercial usage, then you are considered a
customer.
However, according to the Consumer Protection Act of India in 1986, the term,
‘consumer’ has a broader, meaning to include those who use a product or
commodity for a living. And so, if you are the sole proprietor of your company
and you purchased the coffee maker under your name, then you can still be
considered a consumer according to this Act.
Furthermore, the Act expands the consumer definition even more by stating that a
consumer does not need to buy products for personal usage to be considered as
one, rather the mere thought or intent of buying already turns you into a consumer.

These definitions were actually drafted with the aim of consumer protection, especially when businesses
turn a little bit sour.

A consumer is someone who actually consumes the goods and not just purchases it.
A costumer is someone who buys the goods for more commercial purposes.
According to the 1986 Consumer Protections Act of India, a consumer can also be somebody who uses
goods and services for a living. In addition, the mere intent of buying goods makes you a consumer,
nonetheless.

Customer is the person he or she who did use the product for its self or for the selling purpose to other while
consumer is the person he or she who use the product for there personal consumption’s from its it is clear
that customer may me consumer but consumer may not be the customer. 

A client, customer, and patron can be used interchangeably in almost any place

that sells services.
A customer or a shopper is more often used in the places that sell goods (stores).
I have never heard the store customers being called clients. 
A guest is more often used in hotels, spas, and restaurants. (hospitality services)
A consumer is one that acquires goods or services for direct use or ownership
rather than for resale or use in production and manufacturing. A consumer is an end
user. 
A customer, IMHO, is the most general term.