Republic of the Philippines

Department of Education
Region IV-A CALABARZON
St. Ignatius Technical Institute of Business and Arts

Applied Economics
SENIOR HIGH SCHOOL

Prepared by: Deemple L. Marcellana

 CONTENTS

I. Introduction to Applied Economics

A. Revisiting Economics as a social science

B. Economics as an applied science
C. Basic economic problems and the Philippine socioeconomic development in the 21st century

II. Applied Economics

A. Application of Supply and Demand

1. Prices of basic commodities
2. Labor supply, population growth, and wages
3. Labor migration and the Overseas Filipino Worker (OFW)phenomenon
4. The Philippine peso and foreign currencies
5. The Philippine housing shortage and the real estate boom: Rent and Price structure
B. Contemporary Economic Issues Facing the Filipino Entrepreneur
1. Investment and interest rate
2. Rentals
3. Minimum wage
4. Taxes
 I. INTRODUCTION TO APPLIED ECONOMICS

OBJECTIVES

After studying this module, the learner will be able to:

1. Define basic terms in applied economics

2. Identify the basic economic problems of the country

3. Explain how applied economics can be used to solve economic problems

A. REVISITING ECONOMICS AS A SOCIAL SCIENCE

ECONOMICS

- Is a social science concerned with using scarce resources to obtain the maximum of the unlimited
wants of society.
- Is the study of how societies use scarce resources to produce commodities and distribute them among
different people.
- Is the study of production, distribution, selling and use of goods and services.
- Is the study of how people use their limited resources to try to satisfy unlimited wants.

SCARCITY

- The limited nature of resources, which underlies the basic economic problem.
- Is a condition where there are insufficient resources to satisfy all the needs and wants of a
population.

 Relative scarcity – is when a good is scarce compared to its demand

 Absolute scarcity – is when supply is limited.

Choice and Decision – Making

- Because of the presence of scarcity, there is a need for man to make decision is choosing how
to maximize the use of the scarce resources to satisfy as many wants as possible.

Opportunity Cost

- Refers to the value of the best foregone alternative.

ECONOMIC RESOURCES

- The problem of having unlimited wants, but limited resources to satisfy them.
 Land – Soil and natural resources that are found in nature and are not manmade. Owners
of lands receive payment known for rent.
  Labor – Physical and human effort exerted in production. It covers manual workers like
construction workers, machine operators and production workers, as well as professionals like
nurses, lawyers ans doctors.
 Capital – Man-made resources used in the production of goods and services which include
machineries and equipment. The owner of the capital earns an income called interest.
 Entrepreneurship – Investing time, natural resources, labor and capital are all risks associated
with production.

Production

- Production is how much stuff an individual, business, country, even the world makes.
 Stuff – goods and services
 Goods – tangible products we can buy
 Services – work that is performed for others

3 Parts to the Production Process

 Factors of Production
 Producer
 Consumer

Factors of Production

- What we need to make goods and services

Producer

- Company that makes goods and/or delivers services

Consumer

- People who buy goods and services

PRODUCTION PROCESS

Land
Goods

Labor
Production/Manufac-
turing Consumers
Capital “Factory”

Services
Entrepre- neurship
Capital Goods and Consumer goods

Capital Goods – are used to make other goods.

Consumer Goods – final products that are purchased directly by the consumer.

Changes in Production

Specialization – dividing up production so that Goods are produced efficiently.

Division of Labor – different people perform different jobs to achieve greater efficiency (assembly line)

Consumption – how much we buy (consumer sovereignty)

*if we increase land, labor, capital we increase production

*if we decrease land, labor, capital we decrease production

Cost and Revenues

Cost – the total amount of money it takes to produce an item.

Revenues – the total amount of peso a company or the government takes in.

Fixed costs – the amount of money a business must pay each month or year.

Variable cost – the amount of money a business pays that changes over time.

Total costs – Fixed Costs + Variable Costs

Marginal costs – the additional cost of the next unit produced.

Profit – the difference between Total costs and Revenues.

Cost benefit analysis – weighing the Marginal costs vs. the Marginal benefits of producing an item or making
any economic decision.. If the benefit is greater than the cost, then business does it.

NATURAL RESOURCES

- Came from nature that are used in production, including land, raw materials, and natural processes.

CAPITAL RESOURCES

- The processed materials, equipment, and buildings used in production.

HUMAN RESOURCES

- The efforts of people involved in production, including labor and entrepreneurship.

NEEDS

- The essentials of life, such as food and shelter

WANTS

- The desires for non-essential items.

GNP vs. GDP

Gross National Product

- Market value of final products, both sold and unsold, produced by the resources of the economy in a
given period.
- Market value is determined by the supply and demand
- Economy’s resources are those belonging to Filipino citizens and corporations.

*not all resources belonging to the economy are in the economy, conversely, not all resources in the
economy belong to the economy.

GNP = C (Consumption) + I (Investments) + G (Government expenditures on goods and services) + (X(Exports) – M (Imports)

Gross Domestic Product

- Better indicator of domestic employment opportunities.

- The market value of final products produced within the country.
- GDP is net of GNP after deducting Net Factor Income from abroad or by deducting factor income from
abroad and adding back Factor Payments to other countries.

*Net Factor Income from abroad is net export of factor service equal to Factor income from abroad less
the factor payments of other countries.

Net inflow = Inflow – Outflow

Net inflow = -Inflow + Outflow

B. ECONOMICS AS AN APPLIED SCIENCE

APPLIED ECONOMICS

- Application of economic theory and econometrics in specific settings with the goal of analyzing
potential outcomes.

ECONOMICS AS SOCIAL SCIENCE

- As a social science, economics studies how individuals make choices in allocating scarce resources to
satisfy their unlimited wants.
2 BRANCHES OF ECONOMICS

MACROECONOMICS

- Is a division of economics that is concerned with the overall performance of the entire economy.

MICROECONOMICS

- Studies the decision and choices of the individual units and how these decisions affect the prices of
goods in the market.
- It is also concerned with the process of setting prices of goods that is also known as Price Theory.

C. BASIC ECONOMIC PROBLEMS AND THE PHILIPPINE SOCIOECONOMIC DEVELOPMENT IN THE

21ST CENTURY

Non-Inclusive growth despite of Economic Growth

- Millions of Filipinos are claiming they are experiencing hunger or they still live below the poverty level.

Unemployment despite of improvements

- Main problem of the Philippine Economy.

- Unemployment Rate in the Philippines:
2nd Quarter of 2015 – decreased to 6.4% from 7.0% in the previous year.
Philippine unemployment rate average – 8.85% from 1994 - 2015
Highest – 13.990% 1st Quarter of 2000
Lowest – 6.0% 4th Quarter of 2014

Poverty

- Socio-economic problem.
- Poverty incidence of the population registered at 26.4%, 26.5% in 2009, 25.2% in 2012, 28.8% in 1st
Quarter of 2014

Population growth

- Basic economic problem that can be connected to the issue of scarcity.

- When population becomes too big, economic resources may no longer be enough to support the
growing population
2010-92.4M
2014-100M – growing by 2%
*Philippines – one of the highest populations in Asia.
Represents 1.37% of the world’s population

 What to produce? and how much?

 How to produce?
 For whom to produce?
WHAT TO PRODUCE AND HOW MUCH?

- Society must have to decide what goods and services should be produced in the economy. Having
decided on the nature of goods that will be produced, the quantity of these goods should also decide
on.

HOW TO PRODUCE?

- Is a question on the production method that will be used to produce the goods and services. This refers
to the resource mix and technology that will be applied in production.

FOR WHOM TO PRODUCE?

- Is about the market for goods. For whom will the goods and services be produced? The young or old,
the male or female market, the low-income or the high income groups?

ECONOMIC SYSTEMS

- The institutional framework of formal and informal rules that a society uses to determine what to
produce, How to produce and how to distribute goods and services.
- Means through with society determines the answers to the basic economic problems mentioned.

 Traditional Economy
 Command Economy
 Market Economy
 Mixed Economy

TRADITIONAL ECONOMY

- Decisions are based on traditions and practices upheld over the years and passed on from generation
to generation. Methods are stagnant and therefore not progressive.

Advantages:

- No competition
- Living in togetherness
- Low rate of unemployment
- Significant decrease in the rates of crime

Disadvantages

- No gain or profit
- Underdeveloped mindset
- Efficiency and use of resources
- Needs of living alone
COMMAND ECONOMY

- This is the authoritative system wherein decision-making is centralized in the government or a planning
committee. Decision are imposed on the people who do not have a say in what goods are to be
produced. This economy holds true in dictatorial, socialist, and communist nations.

Advantages:

- Public goods and services provided by the state (e.i. healthcare, education, housing)
- Wasteful competition is avoided
- Peaceful labor conditions
- Welfare of citizens is the primary goal of the state
- Business cannot act against the interest of the

people Disadvantages:

- Poor quality goods and services

- Failure to meet set ideals/consumer needs.
- Lack of innovation
- Expensive and inflexible government
- Sacrifice of individual freedoms for society

MARKET ECONOMY

- This is the most democratic form of economic system. Based on the working of demand and supply,
decisions are made on what goods and services to produce. People preferences are reflected I the
prices they are willing to pay in the market and therefore the basis of the producers decisions on
what good to produce.

Advantages:

- Prices determine by market forces( supply and demand); competition brings down prices
- Consumers can buy whatever they like in whatever amounts they want.
- Adjust to change easily
- Little government intervention
- Great variety of goods and services

Disadvantages:

- Does not always provide basic needs of everyone in society, which can lead people to slip into poverty.
- May make it difficult for government to provide adequate social services
- There are occasionally market failures
- People can make choices which are harmful to themselves and to others
MIXED ECONOMY

- Economic System is which both the state and private sector direct the economy, reflecting
characteristics of both market economies and planned economics.

Advantages:

- State provides the essential services

- Private sectors encouraged for profits
- Competition keeps prices low
- Consumer choice
- Inefficient business behavior controlled

Disadvantages

- Heavy taxes reduce incentives to work hard or make profits

- Less efficient than private sector
- Excessive control over business activity can add costs and discourage enterprise

Answers:

COMMAND ECONOMY MARKET ECONOMY TRADITIONAL ECONOMY

What to produce? What to produce? What to produce?

Whatever the government decides. What people want to buy and sell What people need to survive.
(if people are willing to buy it then
businesses will make it?).
How to produce? How to produce? How to produce?

However the government to Laws of supply and demand. Hunting, farming and
decides. gathering(social roles determine
who does what)
For whom to produce? For whom to produce? For whom to produce?

Class reward system Determined by how much Make their own products (what
Waiting in line someone is willing to pay for it. they have always made)

CHARATERISTICS TRADITIONAL PLANNED FREE-MARKET MIXED ECONOMY

ECONOMY ECONOMY ECONOMY
Role of government No formal Decides all Little or no role of Government
government other economic activities government creates laws and
than a sovereign or regulates business
feudal lord activities
Freedom of choice Freedom of choice No freedom of Consumers and Limited freedom of
in so far as choice producers have choice given
resources available freedom of choice government
 to produce controls
Ownership of Sovereign or feudal State/public sector Private sector Both public and
natural resources lord private sector
Price Barter was the main Government sets Price mechanism Price mechanism
determination form of trade price system determine system but
price regulated by
government
Which sector Traditions and State/public sector Private sector Both public and
answers the basic customs private sector
economic
question?

Activity 1:

Describe the type of Economic system characterized in each of the following sentences.

1. Refers to the value of the best foregone alternative.

2. Market value of final products, both sold and unsold, produced by the resources of
the economy in a given period.

3. Studies the decision and choices of the individual units and how these decisions affect
the prices of goods in the market.

4. The efforts of people involved in production, including labor and entrepreneurship.

5. Is the study of how people use their limited resources to try to satisfy unlimited wants.

6. The limited nature of resources, which underlies the basic economic problem.

7. The amount of money a business must pay each month or year.

8. The essentials of life, such as food and shelter.

9. The market value of final products produced within the country.

10. Economic System is which both the state and private sector direct the
economy, reflecting characteristics of both market economies and planned economics.

Activity 2:

Answer the following:

1. What is the difference between macroeconomics and microeconomics?

2. What are the main factors that businesses need to consider when deciding what and how much to
produce?
 II. APPLIED ECONOMICS

OBJECTIVES

After studying this module, the learner will be able to:

1. Explain the law of supply and demand, and how equilibrium price and quantity are determined

2. Discuss and explain factors affecting demand and supply

3. Compare the prices of commodities and analyze the impact on consumers

4. Explain market structures (perfect competition, monopoly, oligopoly, and monopolistic competition)

5. Analyze the effects of contemporary issues such as migration, fluctuations in the exchange rate, oil price
increases, unemployment, peace and order, etc. on the purchasing power of the people

A. APPLICATION OF SUPPLY AND DEMAND

The law of supply and demand is an economic theory that explains how supply and demand are related to
each other and how that relationship affects the price of goods and services. It's a fundamental economic
principle that when supply exceeds demand for a good or service, prices fall. When demand exceeds supply,
prices tend to rise.

There is an inverse relationship between the supply and prices of goods and services when demand is
unchanged. If there is an increase in supply for goods and services while demand remains the same, prices
tend to fall to a lower equilibrium price and a higher equilibrium quantity of goods and services. If there is a
decrease in supply of goods and services while demand remains the same, prices tend to rise to a higher
equilibrium price and a lower quantity of goods and services.

The same inverse relationship holds for the demand for goods and services. However, when demand increases
and supply remains the same, the higher demand leads to a higher equilibrium price and vice versa.

Supply and demand rise and fall until an equilibrium price is reached. For example, suppose a luxury car
company sets the price of its new car model at $200,000. While the initial demand may be high, due to the
company hyping and creating buzz for the car, most consumers are not willing to spend $200,000 for an auto.
As a result, the sales of the new model quickly fall, creating an oversupply and driving down demand for the
car. In response, the company reduces the price of the car to $150,000 to balance the supply and the demand
for the car to reach an equilibrium price ultimately.
DEMAND

Law of Demand

- The higher the price of the product, the lower the quantity demanded and the lower the price, the
higher the quantity demanded.

Demand Schedule

- A list of the quantity that a buyer is willing to buy at different prices at one particular time.
- Shows a functional relationship between price and quantity.
- Assumptions: income, preferences and price related goods are constant.

Demand Curve

- A line on a graph that illustrate a demand schedule; slopes downward because of the
inverse relationship between price and quantity demanded.

Individual demand and Market Demand

Individual Demand – is the relationship between the quantities of goods demanded by a single buyer and their
price.

Market Demand – is the relationship between the total quantities of good demanded by all consumers in the
market and its price.

Example: Let’s assume there are only two buyers in the market, Fira and Farad in the market demand.
 QUANTITY DEMANDED (units)

PRICE FIRA FARA MARKET

5 2 3

4 4 6

3 6 8

2 8 10

1 10 12
Changes in Quantity Demanded

- The movement along the demand curve due to change in price while other factors remain constant.

Changes in Demand

- A shift of the demand curve when other factors change while price remains the same.
- Changes due to: increase in income, fashion and taste, future price, price of substitute and
complementary products.

Determinants of Demand

- The demand curve shifts when there are changes in other factors.

1. Income
- Income of consumer can influence the purchasing decisions of an individual.
- When income increases the consumers will demand for more goods and services, other things being
equal – normal goods (house, cars, bag, etc.)
- When income increases, the demand decreases- inferior (giffen goods) – lowgrade rice, salted fish, etc.
- When the income of the poor consumers rise, they can afford to buy better goods and thus demand
decreases for giffen goods.

2. Price of related goods

a. Substitute goods
 Goods that can be used in place of other goods. E.g. margarine and butter
 Demand of a good if price of substitute goods
 Demand of a good if price of substitute goods
b. Complementary goods
 Goods that are used together with another good. E.g. car and petrol
 Demand of a good if price of substitute goods
 Demand of a good if price of substitute goods
 3. Tastes and fashion
- Changes in tastes and fashion can bring significant changes in the demand of good.
E.g. Iphone 5 become the popular gadget among the teenagers thus, make the demand of this gadgets
increase.

4. Population or Number of buyers

- Demand depends on the size of the total population or number of buyers in the market.
- A larger population will bring out an increase in demand.

5. Expectation
- Expectation of consumers on future events would give an impact on current demand.
- When consumers expect the price to increase in the future, they will increase their demand now.

6. Advertisement
- Advertised goods normally have higher demand.
- Consumers will only buy goods and services when they are aware of existence of those products
.
7. Festive seasons
- Festive seasons can influence the demand of a good greatly.

Exceptional Demand

- As price increases the quantity demanded will also increase.

- It’s against the law of demand.

a. Inferior goods
 Consumed by people in the lower income group.
 Price increase quantity increase when the price of grade C is high, consumers have no
choice and continue buying because they need rice
b. Status symbol Goods
 Products purchased by people in the higher income group to show their status.
 Price increase quantity increase when the price of diamond high, consumers will buy
more to show they can afford it.
 c. Speculation
 The future price of the product. E.g. cars
d. Emergencies
 War/natural disasters. E.g. rice, salt, oil, sugar
e. Highly Price Goods
 Consumers feel a product si of superior quality if it’s priced is very high. E/\.g. gadget for
example Iphone 5

Interrelated Demand

- The law of demand assumes that only price and quantity changes and other factors remain constant.
There are some demands which are interrelated to one another.
a. Cross Demand – Relationship between the price of complementary or substitute goods and
quantity of a good.
1. Joint Demand
 Complementary goods- e.g. fuel and car

2. Competitive Demand
 Substitute goods – e.g. butter and margarine
SUPPLY

- Quantity of goods that a producer is able and willing to sell at a certain price in a given period of time.

Law of Supply

- The higher the price of a good, the higher the quantity supplied and vice versa.

Supply Schedule

- A list of the amounts of a product that a seller would offer for sale at different prices in a defined time
period when all non-price factors are held constant.

Supply curve

Supply function

The supply function is Qs = 15 + 3P. Calculate the quantity of goods to be supplied at different price levels by
completing the table:

Determinants of Supply

1. Price of Related Goods

a. Substitute goods
 When the price goods if the price of substitute goods will
Therefore, the manufacturer will reduce the supply of substitute goods.
 b. Complementary goods
 When the price of cars , producers will increase the production of cars. So, the supply
of card will . Since cars and petrol are complementary, the supply of petrol also will

2. Level of Technology
- Supply will when the technology

3. Production Costs
- Increase in production cost (labor, raw material, capital) will the numbers of supplies.

4. Speculation
- If the price will , producers will the current supply.

Price Elasticity

Increased prices typically result in lower demand, and demand increases generally lead to increased supply.
However, the supply of different products responds to demand differently, with some products' demand being
less sensitive to prices than others. Economists describe this sensitivity as price elasticity of demand; products
with pricing sensitive to demand are said to be price elastic. Inelastic pricing indicates a weak price influence
on demand. The law of demand still applies, but pricing is less forceful and therefore has a weaker impact on
supply.

Price inelasticity of a product may be caused by the presence of more affordable alternatives in the market, or
it may mean the product is considered nonessential by consumers. Rising prices will reduce demand if
consumers are able to find substitutions, but have less of an impact on demand when alternatives are not
available. Health care services, for example, have few substitutions, and demand remains strong even when
prices increase.

Exceptions to the Rule

While the laws of supply and demand act as a general guide to free markets, they are not the sole factors that
affect conditions such as pricing and availability. These principles are merely spokes of a much larger wheel
and, while extremely influential, they assume certain things: that consumers are fully educated on a product,
and that there are no regulatory barriers in getting that product to them.

Public Perception

If consumer information about available supply is skewed, the resulting demand is affected as well. One
example occurred immediately after the terrorist attacks in New York City on September 11, 2001. The public
immediately became concerned about the future availability of oil. Some companies took advantage of this
and temporarily raised their gas prices.
1. There was no actual shortage, but the perception of one artificially increased the demand for gasoline,
resulting in stations suddenly charging up to $5 a gallon for gas when the price had been less than $2 a day
earlier.

2. Likewise, there may be a very high demand for a benefit that a particular product provides, but if the
general public does not know about that item, the demand for the benefit does not impact the product's
sales. If a product is struggling, the company that sells it often chooses to lower its price. The laws of supply
and demand indicate that sales typically increase as a result of a price reduction – unless consumers are not
aware of the reduction. The invisible hand of supply and demand economics does not function properly when
public perception is incorrect.

Fettered Markets

Supply and demand also do not affect markets nearly as much when a monopoly exists. The U.S. government
has passed laws to try to prevent a monopoly system, but there are still examples that show how a monopoly
can negate supply and demand principles.3 For example, movie houses typically do not allow patrons to bring
outside food and beverages into the theater. This gives that business a temporary monopoly on food services,
which is why popcorn and other concessions are so much more expensive than they would be outside of the
theater. Traditional supply and demand theories rely on a competitive business environment, trusting the
market to correct itself.

Planned economies, in contrast, use central planning by governments instead of consumer behavior to create
demand. In a sense, then, planned economies represent an exception to the law of demand in that consumer
desire for goods and services may be irrelevant to actual production.

Price controls can also distort the effect of supply and demand on a market. Governments sometimes set a
maximum or a minimum price for a product or service, and this results in either the supply or the demand
being artificially inflated or deflated. This was evident in the 1970s when the U.S. temporarily capped the price
of gasoline around under $1 per gallon. Demand increased because the price was artificially low, making it
more difficult for the supply to keep pace. This resulted in much longer wait times and people making side
deals with stations to get gas.

Supply and Demand and Monetary Policy

While we've mainly been discussing consumer goods, the law of supply and demand affects more abstract
things as well, including a nation's monetary policy. This happens through the adjustment of interest rates.
Interest rates are the cost of money: They are the preferred tool for central banks to expand or decrease the
money supply.

When interest rates are lower, more people are borrowing money. This expands the money supply; there is
more money circulating in the economy, which translates to more hiring, increased economic activity, and
spending, and a tailwind for asset prices. Raising interest rates leads people to take their money out of the
economy to put in the bank, taking advantage of an increase in the risk-free rate of return; it also often
discourages borrowing and activities or purchases that require financing. This tends to decrease economic
activity and put a damper on asset prices.

In the United States, the Federal Reserve increases the money supply when it wants to stimulate the
economy, prevent deflation, boost asset prices, and increase employment. When it wants to reduce
inflationary pressures, it raises interest rates and decreases the money supply. Basically, when it anticipates a
recession, it begins to lower interest rates, and it raises rates when the economy is overheating.

The law of supply and demand is also reflected in how changes in the money supply affect asset prices. Cutting
interest rates increases the money supply. However, the amount of assets in the economy remains the same
but demand for these assets increases, driving up prices. More dollars are chasing a fixed amount of assets.
Decreasing the money supply works in the same way. Assets remain fixed, but the number of dollars in
circulation decreases, putting downward pressure on prices, as fewer dollars are chasing these assets.

How Supply and Demand Determine Commodities Market Prices

Price is derived by the interaction of supply and demand. The resultant market price is dependent upon both
of these fundamental components of a market. An exchange of goods or services will occur whenever buyers
and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium
price", or a "market clearing price". This can be graphically illustrated as follows: ( Figure 3)

In figure 3, both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At this point
supply and demand are in balance or "equilibrium". At any price below P, the quantity demanded is greater
than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is
unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to
pay a higher price in order to get the product they want; while producers would demand a higher price in
order to bring more product on to the market. The end result is a rise in prices to the point P, where supply
and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in
surplus - too much supply relative to the demand. Producers would have to lower their prices in order to clear
the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases.
Prices will fall until supply and demand are again in equilibrium at point P.

A market price is not a fair price to all participants in the marketplace. It does not guarantee total satisfaction
on the part of both buyer and seller or all buyers and all sellers. This will depend on their individual
competitive positions within the market. Buyers will attempt to maximize their individual well being within
certain competitive constraints. Too low a price will result in excess profits for the buyer attracting
competition. Likewise sellers are also considered to be profit maximizers. Too high a price will likewise attract
additional producer competition within the market. Therefore, there will exist different price levels where
individual buyers and sellers are satisfied and the sum total will create a market or equilibrium price.

When either demand or supply changes, the equilibrium price will change. For example, good weather
normally increases the supply of grains and oilseeds, with more product being made available over a range of
prices. With no increase in the quantity of product demanded, there will be movement along the demand
curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more
but only at a lower price. This can be illustrated graphically as follows: (see Figure 4.)

Likewise a shift in demand due to changing consumer preferences will also influence the market price. In
recent years there has been a shift in demand on the part of overseas Canadian wheat buyers toward the
Canada Prairie Spring varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard
Red Spring wheat shifts the demand curve inward, to the left, as illustrated in figure 5.

With no reduction in supply, the effect on price results from a movement along the supply curve to a lower
equilibrium price where supply and demand is once again in balance. In order for prices to increase producers
will have to reduce the quantity of hard red spring wheat brought to the market place or find new sources of
demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift
in demand.

Changes in supply and demand can be short run or long run in nature. Weather tends to influence market
prices generally in the short run. Changes in consumer preferences can have either a short run or long run
effect on prices depending upon the goods or services, for example whether they are luxuries or necessities. A
luxury good may enjoy a short term shift in demand due to changing styles or snob appeal while necessities
tend to have stable or long run demand curves. Another major factor influencing market prices is technology.
A major effect of technology in agriculture is to shift out the supply curve rapidly by reducing the costs of
production on a per unit basis. At the same time if total demand does not increase sufficiently to absorb the
excess goods produced at lower costs, the long run impact of technology on the market place will be to lower
prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally
contributed to lower prices for agricultural output when compared to prices for industrial products.

Assumption of Supply and Demand Analysis

- Appropriate to use when competition exists among buyers and sellers.

- The interaction of buyers and sellers covers all types of prices and goods for which a market exists.
- Interaction of supply and demand solves two major economic problems simultaneously – the quantity
sold and the price.
- Forces affecting supply and demand could come from any number of influences

Effects of a change in Demand during an immediate period emergency

Figure shows what happens in the immediate period (during the typhoon), as consumers brace for emergency.
Supplies are fixed and demand is fairly inelastic. An increase in demand could lead to a shift of the demand
schedule – more goods are bought as long as these are available. The ensuing price increase could be steep as
shelves are emptied.

The initial equilibrium price is P0 and Quantity is Q0. After the increase in demand, when all supplies are being
bought, the price shifts to P1, but quantity stays the same ( in the immediate period the supplies are fixed).

Supply and Demand for Fish during the typhoon

Figure indicates the short-run setting of a typhoon period for a particular commodity-fish.

Fish catch will fall because fishermen will not go to the sea. The decline in fish supply will cause the new
equilibrium at P1 and Q1. The price of fish will rise and quantity bought will fall.

Interplay of Demand Supply

Will the price of Bangus rise or fall after a typhoon?

Normal equilibrium is P0 and Q0 during typhoon, fish pond owners attempt to harvest bangus for fear of
losing fish if the ponds over flooded and the fish got out. If flooding occurs, there will be free bangus harvests
in main estuaries caught by people in the area.

On the other hand, people who normally eat other types of fish will experience ad short period rise of fish
prices. Other fishes will have fewer harvests because fishermen go back to safety during a typhoon and they
have no catch. These people will likely cause the demand for bangus to increase.

1. PRICES OF BASIC COMMODITIES

- Price stabilization is best undertaken through indirect approaches by managing the supply of the
commodity.
- It could mean influencing only the market conditions, mainly through the supply side, to avoid extreme
swings of prices.
- Includes setting the prices of commodities that are being stabilized.

Stabilizing Rice Prices

Price Stabilization

Price of grain could rise and fall during the year without price stabilization. During normal times, P0 and Q0 are
equilibrium price and quantity. The price of grain could go to Pp during times when supply is getting depleted.
But during harvest time when supply is increasing, the price could go to PH. The objective of stabilization is to
set the price towards P0.

2. LABOR SUPPLY, POPULATION GROWTH, AND WAGES

- The wage rate, which represents the incomes of workers, provides some indication of the standard of
living.
- High wages result from the interaction of the demand and supply of labor.
- In countries where the supply of labor is very abundant, many workers are willing to accept low wages
in exchange for their services.
The Wage rate and the Supply and Demand for Labor

The wage rate is determined by the balance of supply and demand for labor. The supply of labor could be
available at a given wage, W*, if the supply of labor is infinitely elastic at that wage rate. But beyond a given
point such as point a, when the labor available at that wage is fully employed, at point L*, the supply schedule
of labor could rise as shown in the figure.

Unequal Population Growth

Population Growth

Assume two countries identical in all aspects including their initial level of population. But A has 1.0% per
annum growth of population; B has 2.0%. What happens 10 years later?

In country A, with a lower population growth, the supply curve of labor turns up more quickly than S. 10 years
later A has higher wages than B because the labor supply is greater in B where the population growth is
higher.

Unequal Output Growth

Growth in Demand for Labor

The two countries are identical in all aspects, except that country T has a stronger demand for labor than
country P 10 years later. Policies in T encourage a growth demand for labor that is faster tha in P.

Initially the two countries have an identical demand for labor. 10 years later, because of sound economic
policies and growth of business investment and productivity, the demand for labor is higher in T than in P.

The result, T is securely on a rising portion of the S schedule for labor. Also, amount of new employment is
more than in P. L 10 years later in T is higher than in P, as important, W 10 years later in T is much higher than
in P.
3. LABOR MIGRATION AND THE OVERSEAS FILIPINO WORKER

(OFW)PHENOMENON Migration

- Refers to the movement of people from one place to another.

2 types of Migration:

Internal Migration – refers to the movement of people within one country i.e. rural to urban migration.

International Migration – refers to the movement of people from one country to another.

Causes of Migration

- Poverty
- Unemployment
- Victims of natural calamities
- Improve standard of living
- Better education
- Better environment
- Economic security

Effects of Migration

POSITIVE EFFECTS NEGATIVE EFFECTS

Increase labor supply Overcrowding
Cheap labor Lack of housing facilities
Traffic congestion
Heavy pollution in air, water, noise
Unemployment
Occurrence of squatter areas

Labor Migration

- Is the process of shifting a labor force from one physical location to another.
- Labor migration takes place with the support of labor force.
Labor migration within a country

Labor Migration and Wages

At equilibrium before immigration, Urbanya has a higher wage than Probinsya which will induce labor to move
to Urbanya. Suppose this movement is about 100 thousand man-years for a given year. The labor supply in
Probinsya gfalls from Sp to S’p by the amount equal to 100 thousand man-years. But the labor supply schedule
for Urbanya rises from Su to S’u. In Probinsya, equilibrium wage goes up from wp to W’p while in Urbanya,
wage goes down from Wu to W’u.

Commodity Taxation: Price and Quantity after Tax

Effects of a Commodity Tax

The supply schedule before tax is S and after tax is Stax. A commodity tax has the effect of raising the price of
the good and reducing the quantity sold. The extent of the changes in price and quantity depends on the
elasticity of Supply and Demand.

Equilibrium before tax is P0 and Q0, the supply schedule after tax, Stax, intersect the demand curve at a new
equilibrium price, Ptax. The new equilibrium quantity after tax is Qtax. It is clear from this thar new price is
higher than the old price and the quantity after tax is smaller than the quantity before tax.

Exchange Rate of the Peso: The Value of Foreign Money

Foreign Exchange – is the term used to denote the value of the foreign money in terms of local money.

- The exchange rate for the US dollar is the peso cost of buying a US dollar.
- The peso appreciates in value when the amount of pesos to acquire a US dollar becomes smaller
which makes peso more valuable.
- Peso depreciates when the price of the US dollar increases in terms of pesos.
- It is important to value foreign currency because the country earns dollars when it imports and spends
dollars when it buys foreign goods.
- Devaluation indicates an official action of the government to reduce the value of the currency.
- Foreign Exchange Market consist of the interaction of countries to buy or to sell foreign currencies.
- Principal currencies are US dollar, Japanese yen and Europe’s Euro.

Supply of Foreign Exchange

- Consists of the receipts of dollars that the country earns of receives.

- The following activities contribute to supply of dollars.
 Export earnings
 Foreign tourism in the country
 Use of Services sold by Philippine companies: transport, telecommunications and others.
 Remittances of OFW
 Proceed from foreign loans
 Short-term inflows of foreign capital for investment in the country or deposit of foreign money
in any Philippine-based bank.

Demand for Foreign Exchange

- Consists of the payments for the volume of imports that the country buys to support the needs of
businesses and citizens during a given period.
- These payment include:
 Imports of goods for consumption and for investment.
 Filipinos travel abroad for tourism or for business.
 Filipinos and Philippine institutions use service of foreign companies.
 Interaction of Supply and Demand

Foreign Exchange market and Effects of Capital Flow

At a , the supply schedule is positively sloped which is a typical supply schedule. When the peso price of the
dollar is low, suppliers are not willing to sell their dollars for they get fewer pesos for their dollars. But when
the peso price of the dollar is high, then suppliers will receive more peso for every dollar they sell.

In b, “good” developments dominate among the transitory factors, capitalizing flow increase so an upward
shift of the supply schedule for dollars happens.

In c, “bad” developments dominate capital inflows decrease, so a downward shift of the supply schedule for
dollars happens.

What are OFWs?

- Overseas Filipino Workers – are Filipinos who are presently and temporarily working outside the country.
They may be land-based of sea-based workers.

In 2014, there are 1, 832, 668 OFWs

Land-based – 1, 430, 842

Sea-based – 401, 862

Reasons behind the OFW Phenomenon

 High Unemployment Rate

- Newly graduates join the labor force that increases the competition in the labor market. Instead of waiting
for them to be hired locally, Filipinos seek employment overseas.

 Low Salary offered by employers in the Philippines

- Filipinos are willing to work abroad due to low salary. Even professionals like nurses, engineers and
teachers would prefer to work abroad as household help or office workers because of the higher salaries
offered overseas.

 Discrimination in job hiring in the Philippines

- Local employers tend to hire candidates even of they’re not the most qualified for jobs. The qualified and
average applicants who were not able to find jobs decide to work abroad.

 High Withholding Tax

- The Philippines has a high income tax rates for workers. Workers’ take home pay decreases after deducting
the withholding tax, GSIS/SSS premium, Pag-ibig and Philhealth and other mandatory deductions.

4. THE PHILIPPINE PESO AND FOREIGN

CURRENCIES Determining the Value of Peso

Exchange rate

- What is Exchange Rate?

- The exchange rate is the price of a unit of foreign currency in terms of the domestic currency.

- Importance?
- It serves as the basic link between the local and the overseas market for various goods, services
and financial assets.
- Exchange rate movements can affect actual inflation as well as expectations about future price
movements.
- Exchange rate movements can affect the country’s external sector through its impact on foreign
trade.
- The exchange rate affects the cost of servicing (principal and interest payments) on the country’s
foreign debt.

- How does it change?

 - Fixed Rates-the value of the currency is determined by the nation's central bank and held in place
by central bank actions, mainly the purchase and sale of the currency.
- Floating Rates- Market forces: Supply and demand.
- Managed Rates- A mix of both fixed and floating rates.

5. THE PHILIPPINE HOUSING SHORTAGE AND THE REAL ESTATE BOOM: RENT AND PRICE

STRUCTURE House as a basic commodity

Housing shortage

- Housing is unaffordable for those who need it.

- Indications of housing shortage:
- Presence of homeless people
- Slums and squatter settlements

The Philippines housing market reveals a tremendous gap between the demand and supply of housing. At
theroot of this housing shortage is the fact that the majority of households are unable to pay for the cost of
housing and land.

The global financial turmoil and high inflation have slowed down the Philippines raging real estate boom.
Although luxury condominium prices continue to rise, the residential sector is definitely slowing.

The average price of a luxury 3 bedroom condominium in Metro Manila rose 13.35% to Q2 2008 from a year
earlier. Adjusted for inflation, residential prices increased only 3.3% over the year.

The minimum housing cost of P150 thousand per unit is 3.8 times the yearly wages of an unskilled laborer in
1997. Likewise, a P250 thousand unit housing is 3.1 times the annual income of an employed earning a median
income of P6,700 per month.
This ratio is expected to be on the rise given the high rate of increase of housing prices in the country. Average
annual housing price appreciation in the Philippines (i.e. Manila is 32 percent per year, the highest among
other major cities in Asia.

Philippines does not publish official house price statistics. Colliers International has quarterly data of capital
values in the Makati-CBD. Economics statistics are available from government agencies- Bangko Sentral ng
Pilipinas, National Statistical Coordination Board and National Economic Development Agency.

The construction and real estate sectors make up around 20% of the Philippine economy, slightly ahead of
manufacturing. Over the past few years, construction in the Philippines has been flourishing amid a climate of
political stability and upbeat business sentiment, spurred by growth in overseas foreign worker remittances,
inbound investments into business process outsourcing, rising numbers.

Final results of the 2010 Annual Survey of Philippine Business and Industry (ASPBI) showed that a total of
2,873 establishments were engaged in real estate activities. About 86.8 % (2,493) were establishments with
total employment of less than 20 while 13.2% (380) were establishments with total employment of 20 and
over.

About 8 out of 10 establishments were engaged in real estate activities with own or leased property. Figure 1
shows the percentage distribution for all real estate activities establishments by industry group.

B. CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO ENTREPRENEUR

1. INVESTMENT AND INTEREST RATE

INVESTMENT: A DETERMINANT OF INCOME

Investment

- Is a process of building up a capital stock, or the expenditure which determines the income and
production in the economy.
 - Also refers to the value of machinery, plants, and buildings that are bought by firms for production
purposes.
- Investment is the capital expenditure on the purchase of physical assets such as plant, machinery,
and equipment (also known as fixed investment) and stocks (also known as inventory investments)

Investment Expenditure

- Investment expenditure means capital spending.

- It is mainly derived from accumulated savings and other sources external to the circular flow; it does
not come from current income and consumption.

Why is investment essential to the Economy?

- Current business income serves current business needs.

- The surplus may not be sufficient to finance even a fraction of investment spending. Instead, a
business may borrow the savings of the economy, which households likewise do (i.e. for housing
construction).
- Investment, therefore, requires that a portion of current consumption be forgone (i.e. saved) to free
up resources which can be used to finance investment.

Investment is classified into two types:

Fixed income investment

- Investors are aware that there are risky investment options. For investors who are averse to risk fixed
income investments are the best option since these investments are guaranteed to have a lower risk of
losses.
- Fixed income investments (FIIs) are investments that provide fixed pero=iodic sources of income over a
certain period of time.
Examples:
1. Government securities like treasury bonds, treasury bills and notes
2. Corporate bonds (which have higher interests compared to government securities)
3. Special deposit accounts offered by the Bangko Sentral ng Pilipinas (BSP)
4. Foreign currency time deposits

Variable income investment

- Are forms of investment that are suitable for risk tolerant individuals.
- In VIIs, returns are not fully guaranteed and money or resources invested may also not be fully
recovered. The reason for this is that the returns from variable income investments are strongly
influenced by economic situations and the behavior or financial markets.
Examples:
1. Business ownerships in the form of equities
2. Company stocks
3. Investment fund shares that have high level of liquidity since they can be easily converted to cash
Investment and Interest Rate

- Interest rates play a key role in increasing capital stock, which in turn affect investments.
- There is a negative or inverse relationship between investment and interest rate.
*the higher the interest rate, the lower the quantity of investments; the lower the interest rate, the
higher the quantity of investments.

What is Interest Rate? What is its Role in Investments?

In Economics, interest is used in two ways:

1. It can be the price of the credit, which is often referred to as loanable funds.
2. It can also be the return that the capital earns as an input in the production process.
 Interest rate represents the cost of using or borrowing money.
 Loanable funds refer to the amount of money lent out by a lender to a borrower, for which the
borrower will pay an interest rate to the lender for the use of that fund.
 Interest as the return on capital can be illustrated in the case of a printing press owner who decides to
buy additional equipment which costs Php 10,000.
- After a year, he earns PHP 1,000 for using the equipment in his business. The Php 1,000 is equivalent to
a 10-percent interest rate on the capital which is the equipment.
- In this case, interest is the return earned by the capital as an input in the production process.

Market for Loanable Funds

- Figure 5.1 shows the market for loanable funds where the demand is the amount of funds that firms
and individuals will borrow at a given interest rate.
- A downward sloping demand curve indicates low interest rates, which means that borrowing money is
quite cheap. When the cost of borrowing is low; more people are encouraged to avail of loans.
- The supply curve is the amount that individuals wish to save. It is upward sloping since individuals get
a higher return on their money when interest rates are high and they are thus willing to save more.
Investment Demand Curve

- Interest rates affect the level of production of investment goods. A change in interest rates results in a
change in investment demand.
- The rate at which a borrower pays for the money that is borrowed is usually influenced by
macroeconomic conditions such as inflation – which reduces the purchasing power of capital and
money supply. This relationship is best described by the investment demand curve.
- A change in the interest rate causes a movement along the investment demand curve as shown
in Figure 5.2.

Determinants of Investments

- Fluctuations and changes in interest rates have a significant influence on investments.

Determinants of Investments

1. Future Expectations – reflect plans to change production capacity. As expectations change, anticipating
future returns from investments, the investment demand curve shifts to the right. On the other hand,
if there are expectations of lower profits, the investment demand curve shifts to the left.
2. Level of Economy Activity – When GDP is high, the level of production increases. This bossts demand
for capital and encourages higher investments. When household income increase, consumption also
goes up, which further leads to a rise in aggregate demand.
3. Technological change – With changes in technology, demand for capital will have to increase in order
to keep up with these important developments.
4. Public Policy – Public policies in the form of granting incentives to firms can significantly affect demand
for capital, thereby increasing investments. Investment tax credits and tax holidays can encourage
investment in a country.
2. RENTALS

Rent

- It is typically refers to the use of property for a certain amount.

- It is the price paid for the use of land and other natural resources or factors of production that is in
fixed supply.
- Rent has been traditionally associated with land, which is a fixed factor of production.

The concept of economic rent applies to economic factors, not just land.

Economic Rent

- Is a payment in excess of opportunity cost. According to David Ricardo, an influential British classical
economist in early 1800s, rent is a surplus of revenue over cost, which arise due to differences in the
level of usability of the land.
- The scarcity of land becomes the concept of rent.

Rent on Land

- Land is one of the most common type of investments aside from owning shares, cash, and securities.
- In order to analyze how the price for the use of land is determined, we must look at the
supply of land an bd its level of demand.
- Since the supply of land is perfectly inelastic, the level of demand is what determines the rent on land.
- Since the supply of land is fixed, demand becomes the determinant of rent.
- Aside from renting the land out, the owner of the land can also opt to sell the land at a higher price to
earn a profit.

How is the demand for Land determined?

- Economic rent also relies on productivity differences.

- Several determinants indicate the productiveness of the land:
a. Products grown on the land
 The location attribute of the land can also be considered for its demand.
b. Prices of other resources which are combined with the land
 City areas have higher land rents than remote areas with difficult access to transportation and
communication.

*A person keen on investing on land must realize that there are also risks to watch out for. For one,
it takes a long time to sell sech property, which means money is not easily realized.
3. MINIMUM WAGE

- Minimum wage is the lowest allowed wage paid to workers by virtue of legislation and government
policies.
- This is a form of government intervention to alleviate poverty and income inequality in terms of
rendering job services.
- The effects of minimum wages may in principle differ between industries in which employers do and
do not have control over the wage rates they pay for the labor of a given skill and application.
*Minimum wage is set primarily to protect workers from abusive employment practices.
*A decent minimum wage is actually a useful tool in addressing wide disparities in wage distribution.

WAGES

Determinants of Market Wage Rates

- A basic principle of economics is the notion that the price or value of goods, services, and even
resources, such as labor, is determined by the behavior of demand and supply.

Labor Demand

- The demand for labor is similar to the demand for a good, and thus generally follows the law of
demand.
- The wage, which is the price of labor, is plotted in the y-axis of the graph, and the quantity of labor,
which can be expressed by the number of employment available in the market, is plotted in the x-axis.
- Similar to the law of demand, when the price if labor increase, the related quantity of labor decreases,
which makes the price of labor inversely related to the quantity of labor. This means that employers
will hire more people when wages go down.
Labor Supply

- It follows the principle of the law of supply, which says that if the price of labor increases, then the
supply of labor also increases, and vice versa.
- As wage increases, more people will enter the labor market and compete for higher-paying jobs. But if
wages decline, there will be fewer people looking for jobs and competing for these lower wages.

What is Market Clearing?

- When the labor demand and supply meet at a certain wage and quantity of workers, an equilibrium is
reached. This point of equilibrium is called Market Clearing.
- It is where firms may hire an employee at the existing wage rate and people who would like to have
that wage rate would be able to do so.
- However, as this is a competitive labor market, even though there is an identified market clearing,
employers and employees may leave the labor market, as firms may to pay lower wages or workers
may wish to earn higher wages.

Equilibrium Wages

- When jobs are safe and easy, we can assume that the wages they pay are average. Most people
want to have such jobs.
- As the job becomes more difficult and dangerous, workers natural require a higher wage to do such
work.

Compensating Differential

- Is the difference in wages that arise to offset the non-monetary characteristics of different jobs.
*People who work in coal mines or on high shifts usually receive a compensating differential to make
up for the unpleasant nature of the job.

Equilibrium in a Competitive Labor Market

 - In a perfectly competitive labor market, firms and workers are free to enter and exit the market. This
makes the equilibrium allocation of workers to firms efficient.
- How the workers fit the firm maximizes the total gains that workers and firms accumulate by trading
with each other.
- A competitive equilibrium leads to an efficient allocation of resources.
- Figure 5.3 shows the intersection of the labor supply and the labor demand in a competitive market.
- The x-axis represents the employee hours while the y-axis represents the wage level.
- The demand curve gives the total number of employee hours that firms in the market demand at that
wage, while the supply curve shows the total number of working hours of the agents in the economy
allocate to the market at any given wage level.

4. TAXES

Taxes are the lifeblood of the government.

- Without taxes the government will not be able to provide services to its people, such as public works,
health, education, defense and police protection, and social services.
- Hence, taxation is necessary for the government to be able to finance its expenditures.

Taxation

- Is the act of levying so that the sovereign, through its law-making body, can raise income to defray the
necessary expenses of the government.
- It is an inherent power of the state to demand enforced contributions from the people for public
purposes.
- Hence, tax is a levy imposed by the government on the income, wealth, and capital gains of persong or
businesses, on spending on goods and services, and on properties.

Taxes are used by the government for a variety of purposes

a. Raising revenue to cover government expenditures on the provision of social services such as
education, health, and public infrastructure as well as the salaries and benefits of public servants;
b. As an instrument of fiscal policy in regulating the level of total spending (or aggregate demand) to
stabilize the economy;
c. Altering the distribution of income and wealth;
d. Controlling the volume of imports into, and sometimes exports of certain goods out of the country.

Types of Taxes

1. Direct Taxes are taxes levied by government on the income and wealth received by households
and businesses to raise government revenue and to act as an instrument of fiscal policy.
a. Individual income taxes - are taxes that are levied on households. These are taxes on particular
persons.
b. Corporate income taxes - are taxes on businesses. Take note that corporations are legal entities
that assume an independent personality. Thus, if a corporation earns a profit, it must pay a
corporate income tax. This is considered direct tax.
 2. Indirect Taxes are taxes levied by the government of goods and services to raise revenue and to act as
an instrument of fiscal policy. Observe that these are not taxes on people but on goods and services
that people purchase and consume.
a. Value-added tax (VAT) – are taxes included on goods and services
b. Excise taxes – are taxes included on certain products.

3. Progressive taxes are taxes that place a greater burden on those best able to pay and put little to no
burden on the poor.:
 The best example of a progressive tax is the individual income tax
 For most taxpayers today, the more they earn, the higher percentage they pay for tax
 In terms of the average tax rate, people in higher income brackets pay a substantially higher
average tax rate than those in the lower brackets.

4. Proportional Taxes are taxes that place and equal burden on the rich, the middle class, and the poor.
In other words, taxes are levied at a decreasing rate as income rises.

5. Regressive Taxes are taxes that fall more on the poor than on the rich. Under this taxation structure,
taxes are levied at a decreasing rate as income rises.

 This form of taxation takes a greater proportion of tax from a low-income taxpayer than from a
high income taxpayer.
 Indirect taxes such as VAT or excise taxes on certain products are regressive when taken as a
proportion of total net income.

Basic Principles of Taxation

- The basic principles of taxation refer to key concepts that guide governments in designing and
implementing an equitable taxation regime. These basic principles are generally referred to as Adam
Smith’s Canon of Taxation. These include:
1. Adequacy. Taxes should just be enough to generate revenue required for the provision of essential
public services like health, education, and national defense and police protection.
2. Broadcasting. Taxes should be spread over as wide as possible to all sectors of the population or
economy to minimize individual tax burden.
3. Compatibility. Taxes should be coordinated to ensure tax neutrality and meet the overall objectives of
good governance.
4. Convenience. Taxes should be enforced in a manner that facilities voluntary compliance to the
maximum extent possible.
5. Earmarking. Tax revenue from a specific source should be dedicated to a specific purpose only when
there is a direct cost-and-benefit link between the tax source and their expenditure, such as the
allocation of motor users’ tax for road maintenance.
6. Efficiency. Tax collection efforts of the government should not cost an inordinately high percentage of
tax revenues.
 7. Equity. Taxes should equally burden all individual and entities in similar economic circumstances.
8. Neutrality. Taxes should not favor any one group or sector over another and should not be designed to
interfere with or influence individual decision-making.
9. Predictability. The collection of taxes should reinforce their inevitability and regularity.
10. Restricted Exemptions. Tax exemptions must only be done for specific purposes (e.g. to encourage
investment) and within a limited period.
11. Simplicity. Tax assessment and determination should be easily understood by an average taxpayer.

Activity 1:

Imagine yourself as entrepreneurs, consider building a business.

Guided Questions:

1. What kind of enterprise do I need to build?

2. What risks and sacrifices does such and enterprise demand?
3. Can I accept those risk and sacrifices?
4. Setting strategy: How will I get there?
5. Is the strategy well defined?

Activity 2:

1. As a businessman, write a message to the government on your platforms to improve and somehow to
lessen the housing problem in our country.
2. Describe the advantages and disadvantages of the housing system in the country (at least 10
sentences).