`UNIVERSITY OF CAGAYAN VALLEY

Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Name of Student:________________________ Year/Section:_____________

Subject: Basic Economics Teacher: MRS. LEANIEZEL E. LARA
CP09360464102
email address: Leanizelermitanio@yahoo.com
FB account name: Leaniezel Ermitanio-Lara
MODULE No. 01 (MIDTERMS)

TITLE: BUSINESS ORGANIZATION

OVERVIEW This course focuses chiefly on the fundamental principles of economics;
theories and concepts that is important to the analysis of our country’s
economic problems and the life of the people. Furthermore, it includes
discussion on Agrarian Reform Program and Taxation in the Philippines.

INTRODUCTION Students develop a basic understanding of economic principles, which

allows for and encourages informed discussion of media-covered issues.
Topics include contrasting macroeconomics and microeconomics; gross
domestic product; economic growth and business cycles; unemployment
and inflation; aggregate supply and demand; scarcity, opportunity costs,
and trade; law of supply and demand; accounting versus economic
profits; money and exchange rates; government choices, markets,
efficiency, and equity; monopoly and competition; externalities, public
goods, and free riders; and globalization and trade policy.
LEARNING The student should be able to give an example of a situation in their own
OUTCOMES life on how to apply economics.
LEARNING After studying this module, the student should be able to :
OBJECTIVES
1.present some of the advantages/ disadvantages of each of the form of
business organization.
2.define demand and supply
3.graph reaction of buyers/sellers with price changes
4.graph the interaction of demand and supply
5.identify surpluses, shortages and market equilibrium
6.critique consumption, savings and investment in the Philippines

A.BUSINESS ORGANIZATION

Business organization is the single-most important choice you’ll make regarding your company.
What form your business adopts will affect a multitude of factors, many of which will decide
your company’s future. Aligning your goals to your business organization type is an important
step, so understanding the pros and cons of each type is crucial.

Your company’s form will affect:

 How you are taxed

 Your legal liability

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

 Costs of formation
 Operational costs

There are 4 main types of business organization: sole proprietorship, partnership, corporation,
and Limited Liability Company, or LLC. Below, we give an explanation of each of these and
how they are used in the scope of business law.

SOLE PROPRIETORSHIP

The simplest and most common form of business ownership, sole proprietorship is a business
owned and run by someone for their own benefit. The business’ existence is entirely dependent
on the owner’s decisions, so when the owner dies, so does the business.

ADVANTAGES OF SOLE PROPRIETORSHIP:

 All profits are subject to the owner

 There is very little regulation for proprietorships
 Owners have total flexibility when running the business
 Very few requirements for starting—often only a business license

Disadvantages:

 Owner is 100% liable for business debts

 Equity is limited to the owner’s personal resources
 Ownership of proprietorship is difficult to transfer
 No distinction between personal and business income

PARTNERSHIP

These come in two types: general and limited. In general partnerships, both owners invest their
money, property, labor, etc. to the business and are both 100% liable for business debts. In other
words, even if you invest a little into a general partnership, you are still potentially responsible
for all its debt. General partnerships do not require a formal agreement—partnerships can be
verbal or even implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a
certificate of partnership with the state. Limited partnerships allow partners to limit their own
liability for business debts according to their portion of ownership or investment.

Advantages of partnerships:

 Shared resources provides more capital for the business

 Each partner shares the total profits of the company

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

 Similar flexibility and simple design of a proprietorship

 Inexpensive to establish a business partnership, formal or informal

Disadvantages:

 Each partner is 100% responsible for debts and losses

 Selling the business is difficult—requires finding new partner
 Partnership ends when any partner decides to end it

CORPORATION

Corporations are, for tax purposes, separate entities and are considered a legal person. This
means, among other things, that the profits generated by a corporation are taxed as the “personal
income” of the company. Then, any income distributed to the shareholders as dividends or
profits are taxed again as the personal income of the owners.

Advantages of a corporation:

 Limits liability of the owner to debts or losses

 Profits and losses belong to the corporation
 Can be transferred to new owners fairly easily
 Personal assets cannot be seized to pay for business debts

Disadvantages:

 Corporate operations are costly

 Establishing a corporation is costly
 Start a corporate business requires complex paperwork
 With some exceptions, corporate income is taxed twice

Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing
some of the income advantages of a partnership. Essentially, the advantages of partnerships and
corporations are combined in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

 Limits liability to the company owners for debts or losses

 The profits of the LLC are shared by the owners without double-taxation

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 `UNIVERSITY OF CAGAYAN VALLEY
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SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Disadvantages:

 Ownership is limited by certain state laws

 Agreements must be comprehensive and complex
 Beginning an LLC has high costs due to legal and filing fees

DEMAND
Refers to the number or amount of goods and services desired by the consumers at various
prices in a particular period of time.

DEMAND FOR GOODS AND SERVICES

Economists use the term demand to refer to the amount of some good or service consumers are
willing and able to purchase at each price. Demand is based on needs and wants—a consumer
may be able to differentiate between a need and a want, but from an economist’s perspective
they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you
have no effective demand.

What a buyer pays for a unit of the specific good or service is called price. The total number of
units purchased at that price is called the quantity demanded. A rise in price of a good or
service almost always decreases the quantity demanded of that good or service. Conversely, a
fall in price will increase the quantity demanded. When the price of a gallon of gasoline goes up,
for example, people look for ways to reduce their consumption by combining several errands,
commuting by carpool or mass transit, or taking weekend or vacation trips closer to home.
Economists call this inverse relationship between price and quantity demanded the law of
demand. The law of demand assumes that all other variables that affect demand (to be explained
in the next module) are held constant.

The negative slope of the demand curve shows that price and quantity are inversely related. The
lower the commodity price, the greater the quantity demanded per unit of time. This conforms to
our everyday experience as consumers and is the result of the substitutes this commodity for
another in consumption (substitution effect),or he is liable to buy more of it with the same money
income (income effect).

Is demand the same as quantity demanded?

In economic terminology, demand is not the same as quantity demanded. When economists talk
about demand, they mean the relationship between a range of prices and the quantities demanded
at those prices, as illustrated by a demand curve or a demand schedule. When economists talk
about quantity demanded, they mean only a certain point on the demand curve, or one quantity

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the
(specific) point on the curve.

Example of a Demand Schedule

Price per kilo Qd by 1 Qd in the Alternative or

individual (kls market (kilos Point
per month) per mo.)
20 7 700 A

18 7.5 750 B

16 8.5 850 C

14 10 1000 D

12 12 1200 E

SUPPLY OF GOODS AND SERVICES

When economists talk about supply, they mean the amount of some good or service a producer
is willing to supply at each price. Price is what the producer receives for selling one unit of
a good or service. A rise in price almost always leads to an increase in the quantity supplied of
that good or service, while a fall in price will decrease the quantity supplied. When the price of
gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand
exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring
the oil to plants where it can be refined into gasoline; build new oil refineries; purchase
additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or
keep existing gas stations open longer hours. Economists call this positive relationship between
price and quantity supplied—that a higher price leads to a higher quantity supplied and a lower
price leads to a lower quantity supplied—the law of supply.

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

COMBINATION OF DEMAND SCHEDULE AND SUPPLY SCHEDULE

Price per Qd in the Qs in the Surplus Pressure

kilo market kl market kl Shortage on price
per per moth
month)
20 700 1300 600 Downward
18 750 1050 300 Downward
16 850 850 0 Equilibrium
14 1000 700 300 Upward
12 1200 600 600 Upward

The equilibrium price and equilibrium quantity of a commodity are determined by the market
demand and supply of the commodity. The equilibrium price is the price at which the quantity of
the commodity that consumers are willing to purchase over a given period of time exactly equals
the quantity producers are willing to supply.

Market Equilibrium- a market reaches an equilibrium when quantity demanded equals the
quantity supplied and there are no internal forces to precipitate change. Equilibrium will occur
where the demand and supply curves intersect, that is, where the buying intentions of consumers
are consistent with the selling intentions of the sellers.

SUPPLY THE SAME AS QUANTITY SUPPLIED?

In economic terminology, supply is not the same as quantity supplied. When economists refer to
supply, they mean the relationship between a range of prices and the quantities supplied at those
prices, a relationship that can be illustrated with a supply curve or a supply schedule. When
economists refer to quantity supplied, they mean only a certain point on the supply curve, or one
quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers
to the (specific) point on the curve.

A supply schedule is a table, , that shows the quantity supplied at a range of different prices.
Again, price is measured in dollars per gallon of gasoline and quantity supplied is measured in
millions of gallons.

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

A supply curve is a graphic illustration of the relationship between price, shown on the vertical
axis, and quantity, shown on the horizontal axis. The supply schedule and the supply curve are
just two different ways of showing the same information. Notice that the horizontal and vertical
axes on the graph for the supply curve are the same as for the demand curve.

EQUILIBRIUM—WHERE DEMAND AND SUPPLY INTERSECT

Because the graphs for demand and supply curves both have price on the vertical axis and
quantity on the horizontal axis, the demand curve and supply curve for a particular good or
service can appear on the same graph. Together, demand and supply determine the price and the
quantity that will be bought and sold in a market.

Understanding the Law of Supply and Demand

The law of supply and demand, one of the most basic economic laws, ties into almost all
economic principles in some way. In practice, supply and demand pull against each other until
the market finds an equilibrium price. However, multiple factors can affect both supply and
demand, causing them to increase or decrease in various ways. It was extensively studied
by Murray N. Rothbard.

Law of Demand vs. Law of Supply

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

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at higher price increases revenue.

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

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

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Shifts vs. Movement 

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

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

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

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

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1
to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift
in the supply curve implies that the original supply curve has changed, meaning that the quantity
supplied is effected by a factor other than price. A shift in the supply curve would occur if, for
instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced
to supply less beer for the same price.

How Do Supply and Demand Create an Equilibrium Price?

Also called a market-clearing price, the equilibrium price is the price at which the producer can
sell all the units he wants to produce and the buyer can buy all the units he wants.

At any given point in time, the supply of a good brought to market is fixed. In other words the
supply curve in this case is a vertical line, while the demand curve is always downward sloping
due to the law of diminishing marginal utility. Sellers can charge no more than the market will
bear based on consumer demand at that point in time. Over time however, suppliers can increase
or decrease the quantity they supply to the market based on the price they expect to be able to

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

charge. So over time the supply curve slopes upward; the more suppliers expect to be able to
charge, the more they will be willing to produce and bring to market.

With an upward sloping supply curve and a downward sloping demand curve it is easy to
visualize that at some point the two will intersect. At this point, the market price is sufficient to
induce suppliers to bring to market that same quantity of goods that consumers will be willing to
pay for at that price. Supply and demand are balanced, or in equilibrium. The precise price and
quantity where this occurs depends on the shape and position of the respective supply and
demand curves, each of which can be influenced by a number of factors. 

FACTORS AFFECTING SUPPLY

Production capacity, production costs such as labor and materials, and the number of competitors
directly affect how much supply businesses can create. Ancillary factors such as material
availability, weather, and the reliability of supply chains also can affect supply.

FACTORS AFFECTING DEMAND

The number of available substitutes, consumer preferences, and the shifts in the price of
complementary products affect demand. For example, if the price of video game consoles drops,
the demand for games for that console may increase as more people buy the console and want
games for it.

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.

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

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

Shifts vs. Movement 

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

A movement refers to a change along a curve. On the demand curve, a movement denotes a
change in both price and quantity demanded from one point to another on the curve. The

9
 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

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

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

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

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1
to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift
in the supply curve implies that the original supply curve has changed, meaning that the quantity
supplied is effected by a factor other than price. A shift in the supply curve would occur if, for
instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced
to supply less beer for the same price.

How Do Supply and Demand Create an Equilibrium Price?

Also called a market-clearing price, the equilibrium price is the price at which the producer can
sell all the units he wants to produce and the buyer can buy all the units he wants.

At any given point in time, the supply of a good brought to market is fixed. In other words the
supply curve in this case is a vertical line, while the demand curve is always downward sloping
due to the law of diminishing marginal utility. Sellers can charge no more than the market will
bear based on consumer demand at that point in time. Over time however, suppliers can increase
or decrease the quantity they supply to the market based on the price they expect to be able to
charge. So over time the supply curve slopes upward; the more suppliers expect to be able to
charge, the more they will be willing to produce and bring to market.

With an upward sloping supply curve and a downward sloping demand curve it is easy to
visualize that at some point the two will intersect. At this point, the market price is sufficient to
induce suppliers to bring to market that same quantity of goods that consumers will be willing to

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

pay for at that price. Supply and demand are balanced, or in equilibrium. The precise price and
quantity where this occurs depends on the shape and position of the respective supply and
demand curves, each of which can be influenced by a number of factors. 

Factors Affecting Supply

Production capacity, production costs such as labor and materials, and the number of competitors
directly affect how much supply businesses can create. Ancillary factors such as material
availability, weather, and the reliability of supply chains also can affect supply.

Factors Affecting Demand

The number of available substitutes, consumer preferences, and the shifts in the price of
complementary products affect demand. For example, if the price of video game consoles drops,
the demand for games for that console may increase as more people buy the console and want
games for it.

Diagrams for Supply and Demand

.

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Supply Shifts to the left

In this diagram the supply curve shifts to the left. It leads to a higher price and fall in quantity
demand. The supply curve may shift to the left because of:

 Higher costs of production

 Higher taxes
 Fall in productivity

Elastic Demand

When the elasticity of demand is greater than one, indicating a high responsiveness of quantity
demanded or supplied to changes in price

Elastic Supply

when the elasticity of either supply is greater than one, indicating a high responsiveness
of quantity demanded or supplied to changes in price.

Elasticity

an economics concept that measures responsiveness of one variable to changes in another

variable

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Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Inelastic Demand

when the elasticity of demand is less than one, indicating that a 1 percent increase in
price paid by the consumer leads to less than a 1 percent change in purchases (and vice
versa); this indicates a low responsiveness by consumers to price changes

Inelastic Supply

when the elasticity of supply is less than one, indicating that a 1 percent increase in price
paid to the firm will result in a less than 1 percent increase in production by the firm; this
indicates a low responsiveness of the firm to price increases (and vice versa if prices
drop)

Price Elasticity

the relationship between the percent change in price resulting in a corresponding

percentage change in the quantity demanded or supplied

Price Elasticity Of Demand

percentage change in the quantity demanded of a good or service divided the percentage

change in price

Price Elasticity Of Supply

percentage change in the quantity supplied divided by the percentage change in price

Unitary Elasticity

when the calculated elasticity is equal to one indicating that a change in the price of the
good or service results in a proportional change in the quantity demanded or supplied

CONSUMPTION, SAVINGS AND INVESTMENT

Consumption

The main hypothesis of Keynes suggested that our disposable income which can be arrived at by
deducing tax liabilities from gross income influences our level of real consumption. Further
explanation on this is

C = f (Y) where C stands for consumption and Y stands for disposable income.

Keynes also held the view that people tend to enhance their consumption level along with a rise in
their disposable income.

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SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

However, the increase in disposable income is greater than the increase in consumption. This
hypothesis can be termed as our marginal propensity to consume and indicates a
positive correlation between these two variables.

This, if our income increases by one unit, our marginal propensity to consume increases by 0.8
units. Hence the remaining 0.2 units are used for savings.

Y = C + S where Y stands for disposable income, C stands for consumption and S stands for
savings.

It is also imperative to note here that propensity to consume and desire to consume are not similar in
nature as the former means effective consumption.

Both objective and subjective factors influence our consumption function. Tax policy, interest rate,
windfall profit or loss and holding of assets are some objective functions whereas subjective ones
relate to motives of foresight, precaution, avarice, and improvement amongst individuals.

SAVINGS

In plain words, savings refer to the excess of disposable income over consumption expenditure.

From a national level, the unconsumed part of the entire nation’s income comprising of all its
members can be termed as National Savings.

Total domestic savings, on the other hand, can be defined as the summation of savings of the
government, the business sector, and households.

Some of the biggest determinants of savings are

 Income, as saving income ratio holds a proportionate relation with the rise in income.

People also have a tendency of saving the excess part of their income but not the entire bulk.

 Distribution of income as the savings process is helped to a great extent by inequality of

income distribution. Our desire to showcase a superior standard of living in comparison to
our neighbors often steers us towards purchasing expensive goods which in turn declines the
level of savings.

 Psychological or subjective factors such as savings to safeguard ourselves from future

insecurity and uncertainty. The ultimate attitude of people is driven towards savings by their
farsightedness. This, in turn, boosts them up to enjoy a better standard of living both for
themselves and their loved ones.

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SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

 Prevalent financial instruments and rate of interest as a higher rate motivates greater
savings.

Investment

Definition of Investment is:

 Change in capital stocks or inventories pertaining to a business venture between two

different periods

 Production of fresh capital goods such as plants and equipment.

Relation Between Savings and Investment In Classical System

According to this theory, Savings (S) gets equated with Investment (I) automatically which
otherwise alters the interest rate. If savings exceeds investment, the excess supply of funds brings
down the rate of interest.

This, in turn, reduces savings and increases investment for maintaining equilibrium.

LAW OF KEYNESIAN ANALYSIS OF CONSUMPTION AND SAVING

John Meynard Keynes (1936)- there are many reasons why household might not consume:

a. they save to accumulate funds

b. to make future purchases

Disposable income is the most important determinant of consumption (DI)

Saving- is viewed as a residual (an amount not consumed) (S)

CONSUMPTION- the main component of aggregate expenditures

- the most important determinants of consumption is disposable income
- this assumes the relationship that households spending depends on household income.
When people have more income, they tend to spend more; when they have less
income, they tend to spend less.

CONSUMPTION SCHEDULE- reflects the consumption- disposable income relationship

- it shows the various amounts households plan to consume at various level of
disposable income which might conceivably prevail at some specific point in time.
- The relationship is direct

Economists say that CONSUMPTION is a function of (or depends on) INCOME C=f(Y). But he
assumes that consumption is a simple linear equation

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SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

C= a + By
Where: a= intercept and always more than 0
B= slope and greater than 0 but less than 1.

SAVING- is the part of disposable income which is not consumed

Disposable Income is also the basic determinant of personal savings

Saving Schedule- shows the various amounts households plan to hold back from consumption at
various possible level of income.

S= Y – C
Average and Marginal Propensity to Consume

APC and APS (Average propensity to consume and save)

Income

APS = Saving
Income

Note: the sum of APC and APS must always be 1.

MPC and MPS – the fraction/ proportion of any change in income which is consumed or saved
MPC= C
Y

MPS= S
Y
- a fraction or percentage of any total income which is consumed and saved

the market holds good when the entire amount of savings is invested.

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SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

Name___________________________ Year/Section____________
Subject________________________ Teacher_________________

MODULE 1 EXERCISE
True or False. Write T if the statement is True and F if the statement is incorrect.

______1.When population increases demand increase, population decreases demand decreases.

______2. An increase in consumer income will mean an increase in demand.

______3. Market equilibrium is reach when the quantity supplied is equal to quantity demanded.

______4. When quantity supplied is less than the quantity demanded there is surplus.

______5. When quantity supplied is greater than the quantity demanded there is shortage.

______6. In a partnership business, there is a combination of resources and ability of partners

which serves as the source of strength of the business.

______7. Death and insanity of a partner will not dissolve the partnership agreement.

______8. A sole proprietorship can be easily formulated and terminated.

______9. Bonds are certificate of ownership in a corporate business.

______10. Stocks are certificate of indebtedness.

______11.The fraction of any change in income which is saved is called marginal propensity to
consume.

______12. The sum of the MPC and the MPS for any given change in disposable income must
always be 1.

______13. Say’s law assumed that individuals work to buy goods and services.

______14. C = a + bS

______15.Savings is viewed as an amount not consumed

Answer the following questions:

1. Discuss five fundamental differences between a Partnership and Corporation.

2. Explain one reason why people go to business. If you were to put up your own
business, what would be your reason?

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 `UNIVERSITY OF CAGAYAN VALLEY
Tuguegarao City

SCHOOL OF BUSINESS ADMINISTRATION & HOSPITALITY MANAGEMENT

3. What qualities of an individual are needed to ensure his business success?

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