WELCOME TO THE REVIEW

SESSION ON ECONOMICS:
Microeconomics,
Macroeconomics, &
International Economics

Jo-Dann “JD” N. Darong

Senior Lecturer II
ECO 01 | Managerial Economics

University of Makati
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 Project Development Officer II Junior Financial Analyst Group Head & Training Manager Senior Planning Officer Supervisor & Economist
Office of the Secretary Metrobank Group Development of Academy Insurance Commission Securities &Exchange Commission
Department of Education of the Philippines Department of Finance

BSC Economics (2007) M.A. Economics (2012) Diploma in OD Graduate School Assistant Professorial Lecturer
Foundation University PUP Graduate School College of Saint Benilde Professorial Lecturer Decision Sciences & Innovation
University of Makati De La Salle University

Doctor of Philosophy (Ph.D.) Visiting Ph.D. Scholar Visiting Ph.D. Scholar Economics & Financial Consultant to the Secretary
De La Salle University - Manila Norwegian Business School Norwegian School of Economics Department of Science and Technology
 ECO 01 Memory Lane
10 = I completely remember the major lessons

07 = Considerably remembered the selected lessons

05 = Remember the important lessons

03 – Barely Remember what happened

01 = I could no longer remember what happened

 ECO 02 Memory Lane
10 = I completely remember the major lessons

07 = Considerably remembered the selected lessons

05 = Remember the important lessons

03 – Barely Remember what happened

01 = I could no longer remember what happened

YOUR ECON LIFE (ECO 1 and ECO 2)

Basic International
Economics Microeconomics Macroeconomics Economics

Managerial Economics
Microeconomics
International Economics

Microeconomics

Macroeconomics
 LEARNING TEAM
ACTIVITY
• Go to the TBL Hub and Assess your Activity
Document
• Room 1 is Learning Team 1, Room 2 is Learning
Team 2 and so on.
• A Learning Team must elect a rapporteur and a
documenter of the discussion and the
presentation.
• Prepare for a 5 –minute Plenary Discussion.

CHALLENGE: What are the main issues discussed?

 PRINCIPLES OF ECONOMICS

Principle #1 People face trade-offs

Principle #2 The cost of something is

what you give up to get it

Principle #3 Rational people think at the

margin.

Principle #4 People respond to incentives

Would you prefer to buy a new car, to have more leisure time, or
to be able to retire early? Can you afford to do all three?

TRADEOFF INCENTIVES
But incentives are not just economic in nature – incentives come in three flavors:

ECONOMIC SOCIAL MORAL

INCENTIVES INCENTIVES INCENTIVES
Monetary gain/loss Reputational gain/loss Conscience gain/loss
(getting what's best) (being seen to belong) (doing the right thing)
However, by prioritizing, by trading-off, and
by choosing incentives, consequences arise….
POSITIVE NEGATIVE
EXTERNALITIES EXTERNALITIES
Externalities are effects of an action, be it in the form of
costs or benefits, that spill over to others or unrelated
parties; whether directly or indirectly on a given period,
be it in the short-run or in the long-run.
Is innovation always beneficial? Do technologies produce desired outcomes?
Individuals &
organisations
have to make
decisions.
ECONOMICS
provides the
framework of
analysis.
Individuals satisfy wants through Follow this logic,
the choices they make regarding
scarce resources. ABILITY = state of being able
INABILITY = not able
Economists term this satisfaction
of want as UTILITY or the
measure of relative satisfaction.

UTIL = the unit of measurement

of the satisfaction derived from Applying the same logic,
consuming goods or services or
the usefulness of the consumer UTIL = something of use
goods or services. INUTIL = not useful, not satisfying
 LAW OF DIMINISHING
MARGINAL UTILITY

The marginal
(additional)
satisfaction
derived from an
additional unit
of a product
decreases as more
of the product
For example, the satisfaction a consumer gets from eating each additional
is consumed. slice of pizza diminishes as the total amount eaten increases.
 LAW OF DEMAND
When economists refer to
demand, they mean the Quantity demanded and price of a
desire for a product or service product are usually inversely related.
coupled with the ability and
willingness to pay a given
price for it. Consumers will
demand and pay for a
product as long as the
perceived benefit is greater It is logical that if the price of a
product goes up, consumers will
than its cost or price.
normally buy less of the product.
The law of demand can be
represented on a graph, with
quantity demanded on the
horizontal axis and price of
the product on the vertical
axis.

The curve that shows the

quantity demanded at
different prices is the demand
curve.
 D1 D2
Same Price P1

Increase

Q1 Q2
 Factor #1 Income
FACTORS (Normal Goods vs Inferior Goods)
THAT
INFLUENCE Factor #2 Tastes & Preferences
DEMAND (Personal or Market-Driven)

Factor #3 Price Expectations

(Determinants (Current vs Future)
of Demand)
Factor #4 Price of Substitutes
(Complementary vs Unrelated Goods)
When economists refer to
supply, they mean the desire
to produce product or service
coupled with the ability and
willingness to supply for a LAW OF
given price. Producers will SUPPLY
supply for a product as long
as the perceived benefit is
greater than the cost of
producing and supplying.
FACTORS Factor #1 Technology
THAT
INFLUENCE Factor #2 Cost of Inputs
SUPPLY

(Determinants Factor #3 Cost of Delivery

of Supply)
Factor #4 Price Expectations
 PRINCIPLES OF ECONOMICS

Principle #6 Markets are usually a good way to

organize economic activity.
 Less More
Demand Supply

SURPLUS
EP = Equilibrium Price
(Market Equilibrium)
Less More
Supply SHORTAGE Demand
PRICE &
INCOME
ELASTICITIES

In Economics, elasticity refers to how the quantity

demanded or supplied changes in response to small
changes in a related factor, such as price, income,
expectations.
P1 = Php 1,000,000.00 Q 1 = 100 Cars
P2 = Php 850,00.00 Q 2 = 110 Cars

P1 = Php 10,000.00 Q 1 = 10 overnight stay

P2 = Php 12,000.00 Q 2 = 9 overnight stay
 CAR
Price (P) Decrease is 15% and
Quantity Demanded (Q) Increase is 10%

HOTEL ROOM
Price Decrease is 20% and
Quantity Demanded Increase is 10%

Elasticity Demand
for Car and Hotel Rooms is
INELASTIC
Change in Q is less than the Change in P

So what?
I. Economic Analyses
• Incentives, Tradeoffs, and
Externalities
• Demand, Supply, and Market
Conditions
• Price and Income Elasticities
• Gross Domestic Product (GDP)
and Gross National Product (GNP)
• Fiscal, Monetary, and Trade
Policies
• Cost-Benefit Analysis
 PRINCIPLES OF ECONOMICS

Principle #7 Governments can sometimes

improve market outcomes.

Principle #8 A country’s standard of living

depends on its ability to produce goods and
services.
 Gross National Product Gross Domestic Product
(GNP) (GDP)
“Gawa ng Pinoy” “Gawa Dito Sa Pinas”
Meaning Total of all economic activities by citizens of the Total production and output taking place within
country, irrespective of the country they are the country, irrespective with who makes it.
living in.

Fundamentals Citizenship Location/Country/Local Economy

Includes Production and services by citizens of a country. All economic activities inside the country by
nationals and foreigners.

Economic activities by foreigners within the Economic activities of the citizens outside the
Excludes
country. country.

Calculation GNP = GDP + Net income earned by domestic GDP = Consumption + Investment + Government
residents from overseas investments minus net Spending + (Export – Imports)
income earned by foreign residents from
domestic investments)

Context of To gauge the contribution by the residents of To understand the overall economic health of the
calculation the country country.

Application Reflects the overall economic strength of the To measure the size of the local economy.
country.
 PRINCIPLES OF ECONOMICS

Principle #9 Prices rise when the government

prints too much money.

Principle #10 Society faces a short-run trade-off

between inflation and unemployment
GDP = Consumption + Investment + Government Spending + (Export – Imports)

= C + I + G + (X - M)

MONETARY POLICY TRADE POLICY

(Interest + Money Supply) (Tariff + Quotas)

FISCAL POLICY
(Government Expenditures + Taxes)
MONETARY POLICY
(Interest + Money Supply)

Expansionary Contractionary
Monetary Policy Monetary Policy
 FISCAL POLICY
(Government Spending + Taxes)

Expansionary Contractionary
Fiscal Policy Fiscal Policy
 PRINCIPLES OF ECONOMICS

Principle #5 Trade can make everyone better off.

What is a duty?
 TRADE POLICY
(Tariff + Import/Export Quotas)

Protectionism Liberalization
The Cost-Benefit Analysis (CBA)
• is a method to consider all costs and benefits (monetary
and non-monetary, including externalities) over the life
of a project.
• requires a substantial amount of generated or inferred
data and determination of the comparative ranking of
alternative projects – usually those that are supported in
some manner by the public sector.
• is a decision procedure that allows decision makers to
understand the trade-off between the full costs and
benefits of alternative actions.
• is based on the utilitarian proposition that decision
makers should maximize collective good. Its goal is to
provide a neutral and comprehensive method of
evaluating policy proposals, a way of aligning the diverse
consequences and values implied by collective choices
along a single quantitative metric.
(Vanelslander et al., 2015; Harrington et al., 2010; Sinden et al., 2009).
The Cost-Effectiveness Analysis (CEA)
• is appropriate for the evaluation of actions in which
expected outcomes are clearly identified and whose
direct or indirect costs are easily measurable.
• as an economic study in which consequences of
different interventions are measured using a single
outcome, usually in natural units.
• If the outcome of a project cannot be clearly defined,
or if homogeneous and quantifiable units cannot be
determined, the use of cost-effectiveness analysis
should be avoided.
• For example, when an investment aims at reducing the
amount of air pollutants which are released in the
atmosphere, the effectiveness criteria for that
investment could be the decrease in the daily average
of the air pollutants emitted.
(Jiang, L., Kronbak, J., & Christensen, L., 2012; Sieber, N., & Kummer, U. ,2013; Guiliano et al, 2019).
 Research Consortium of Harvard University and University of South California

CEA and CBA on Technology and Innovation

• The availability of public grant funds to support
the innovation sometimes triggered the
requirement to collect cost-benefit and cost-
effectiveness data.
• Both cost-benefit analysis and cost-effectiveness
analysis are tools for assessing whether the costs of
an activity can be justified or not by its outcomes.

Inquiry Benefit-cost analysis Cost-effectiveness analysis

How will you use enables you to compare strategies that do not is useful for comparing strategies that are trying
the results? have the same outcomes, or to compare strategies to achieve the same objective (e.g., increased
across different areas of public expenditure (e.g., manufacturing outputs with lesser inputs).
welfare brought by the technology)
Economic and Accounting Profits
Although accountants and economists agree that profit is the difference between the revenues generated from selling
products and services and the cost of producing them, they disagree about how to measure profit, primarily because
they do not necessarily consider the same types of costs.

The accounting profit considers

only the explicit costs

Economists, however, take a broader view

of costs and deduct implicit costs from
revenues and explicit costs to arrive at
economic profit.

An opportunity cost is the value forgone

by choosing a particular course of action
relative to the best alternative that is not
chosen
You completed the Review Session on Economics .
Market
Analyses
Industry Economics ~ Market Analyses

3 tools (1) Value Chain Analysis

Framework
for studying (2) Porter’s Five Forces
the economic Classification Framework
characteristics of
an industry are:
(3) Economic Attributes
Framework.
 Value Chain for the Value Chain for the Soft
Pharmaceutical Industry Drink/Beverage Industry

Approval of Drugs
Research to New Beverage Product Manufacture of
by Governments Development Concentrate
Discover Drugs
Regulators

Mixing of Concentrate, Containerizing

Manufacture of Creation of Water, and Sweetener Beverage or Syrup in
Drugs Demand for Drugs to Produce Beverage Bottles, Cans, or Other
or Syrup Containers

Distribution to Distribution to Retail

Consumers Outlets
1 st Value Chain Analysis
(VCA) Framework
• The value chain for an industry sets forth the
sequence or chain of activities involved in
the creation, manufacture, and distribution
of its products and services.
• To the extent prices are available for
products or services at each stage in the value
chain, you can study where value is added
within an industry.
• Use the value chain to identify the strategic
positioning of a particular firm within the
industry.
The Philippines in the Shipbuilding Global Value Chain

Center on Globalization, Governance & Competitiveness, Duke University (2017)

Supply Chain Analysis within the Value Chain
Supply Chain Analysis within the Value Chain
Supply Chain Analysis within the Value Chain
2 nd Porter’s Five Forces Classification
(PFCC) Framework
• Porter suggests that five forces influence the level of
competition and the profitability of firms in an
industry.
• Three of the forces—rivalry among existing firms,
potential entry, and substitutes—represent horizontal
competition among current or potential future firms
in the industry and closely related products and
services.
• The other two forces— buyer power and supplier
power—depict vertical competition in the value
chain, from the suppliers through the existing rivals
to the buyers.
Michael E. Porter, Competitive Strategy: Techniques for Analyzing
Industries and Competitors (New York: Free Press), 1998.
 AS A BACKGROUND

The Philippine Standard Industrial Classification is a

detailed classification of industries prevailing in the country
PSIC according to the kind of productive activities undertaken by
establishments.
• Agriculture, forestry and fishing § Real estate activities
• Mining and quarrying § Professional, scientific and technical services
• Manufacturing § Administrative and support service activities
• Electricity, gas, steam and air-conditioning § Public administrative and defense; compulsory
• Water supply, sewerage, waste management social security
and remediation activities § Education
• Construction § Human health and social work activities
• Wholesale and retail trade; repair of motor § Arts, entertainment and recreation
vehicles and motorcycles § Other service activities
• Transportation and storage § Activities of private households as employers an
• Accommodation and food service activities undifferentiated goods and services and producing
• Information and communication activities of households for own use
• Financial and insurance activities § Activities of extraterritorial organizations and
bodies
The PFFC Framework
HORIZONTAL COMPETITION
(Force 1)
Rivalry among Existing Firms Threat to New Entrants
ü Direct rivalry among existing
firms is often the first order
of competition in an
industry.
ü Some industries can be
characterized by
concentrated rivalry (such as
a monopoly, a duopoly, or an
oligopoly), whereas others
have diffuse rivalry across
many firms.
ü Economists often assess the
level of competition with
industry concentration ratios
(Force 2)
ü How easily can new firms
enter a market?
ü Are there entry barriers such
as large capital investment,
technological expertise,
patents, or regulations that
inhibit new entrants?
ü Do the existing rivals have
distinct competitive
advantages (such as brand
names) that will make it
difficult for other firms to
enter and compete
successfully?
VERTICAL COMPETITION
(Force 4)
Buyer Power
ü Buyer power relates to the relative number of buyers
and sellers in an industry and the leverage buyers
(Force 3) have with respect to price.
Threat to Substitutes ü Are the buyers price takers or price setters? If there
are many sellers of a product and a small number of
ü How easily can buyers making very large purchase decisions, the
buyer can exert significant downward pressure on
customers switch to prices and therefore on the profitability of suppliers.
substitute products or ü If there are few sellers and many buyers, the sellers
services? have more bargaining power.
ü How likely are they to
switch?
ü When there are close (Force 5)
substitutes in a market, Supplier Power
competition increases,
and profitability ü A similar set of factors with respect to leverage in
diminishes. negotiating prices applies on the input side as well.
ü If an industry is comprised of many potential buyers
ü Unique products with
of inputs that are produced by relatively few
few substitutes enhance suppliers, the suppliers will have greater power in
profitability. setting prices and generating profits.
 Case: Porter’s Five Forces in the Soft Drink/Beverage Industry

Supplier Power: LOW

Soft drink/beverage industry utilizes primarily commodity ingredients.

Potential Entry: LOW Existing Rivalry: MODERATE Substitutes: LOW

No barriers to entry, but major
players (PepsiCo and Coca-Cola)
have strong competitive advantages,
such as brand names and access to
distribution channels, to deter
potential entrants.
Industry is oligopolistic with
several very large players. PepsiCo
and Coca-Cola control large
market shares of the soft
drink/beverage industry.
Major players offer beverages that
span the entire soft drink/beverage
industry. Primary substitute
competition is from alcoholic
beverages such as beer and wine and
from coffee-based beverages.

Buyer Power: MODERATE

Individual consumers of beverages have diffuse power because there are relatively few suppliers, consumers
exhibit low price sensitivity due to brand loyalty, and beverage purchases are small expenditures. Certain
buyers, particularly large retail chains and restaurant chains, do have some buyer power.
The P.E.S.T.L.E. Factor Analysis Framework

Oxford University (2012), Harvard University (2013), INSEAD (2014), MIIT (2016)
3 rd Economic Attributes Framework

First Attribute: DEMAND

• Are customers highly price-sensitive, as in the case of automobiles, or
are they relatively insensitive, as in the case of soft drinks?
• Is demand growing rapidly, as in the case of long-term health care, or
is the industry relatively mature, as in the case of grocery stores?
• Does demand move with the economic cycle, as in the case of
construction of new homes and offices, or is demand insensitive to
business cycles, as in the case of food products and medical care?
• Does demand vary with the seasons, as in the case of summer clothing
and raincoats, or is demand relatively stable throughout the year, as
in the case of most grocery store products?
3 rd Economic Attributes Framework

Second Attribute: SUPPLY

• Are many suppliers offering similar products, or
are a few suppliers offering unique products?
• Are there high barriers to entry, or can new
entrants gain easy access?
• Are there high barriers to exit, as in the case of
firms that face substantial environment cleanup
costs?
• How complex is the supply chain?
3 rd Economic Attributes Framework
Third Attribute: MANUFACTURING
• Is the manufacturing process capital-intensive, as in the
case of electric power generation; labor-intensive, as in the
case of advertising, investment banking, auditing, and other
professional services; or a combination of the two, as in
the case of automobile manufacturing and airline
transportation?
• Is the manufacturing process complex with low
tolerance for error, as in the case of heart pacemakers and
microchips, or relatively simple with ranges of products
that are of acceptable quality, as in the case of apparel and
nonmechanized toys?
3 rd Economic Attributes Framework
Fourth Attribute: MARKETING
• Is the product promoted to other
businesses, in which case a marketing
arm plays a key role, or is it marketed to
consumers, so that advertising and sales
tactics serve as principal promotion
mechanisms?
• Does steady demand pulls products
through distribution channels, or must
firms continually create demand?
3 rd Economic Attributes Framework
Fifth Attribute: INVESTING & FINANCING
• Are the assets of firms in the industry relatively short-term,
as in the case of commercial banks, which require short-term
sources of funds to finance them? Or are assets relatively
long-term, as in the case of electric utilities, which require
primarily long-term financing?
• Is there relatively little risk in the assets of firms in the
industry, such as from technological obsolescence, so that
firms can carry high proportions of debt financing?
Alternatively, are there high risks resulting from short
product life cycles or product liability concerns that dictate
low debt and high shareholders’ equity financing?
• Is the industry relatively profitable and mature, generating
more cash flow from operations than is needed for
acquisitions of property, plant, and equipment?
 Case: Economic Attributes of the Soft Drink/Beverage Industry

DEMAND SUPPLY MARKETING

o Demand is relatively
insensitive to price.
o There is low growth in the
Philippines, but more rapid
growth opportunities are
available in other countries.
o Demand is not cyclical.
o Two principal suppliers (PepsiCo o Brand recognition and established
and Coca-Cola) sell branded demand pulls products through
products. distribution channels, but
o Branded products and domination advertising can stimulate demand
of distribution channels by two to some extent.
principal suppliers create significant o Use almost the same market and
competitive advantages. sales strategies.

MANUFACTURING INVESTING AND FINANCING

o Manufacturing process for concentrate/syrup is not
capital-intensive.
o Bottling and distribution of final product are
capital-intensive.
o Manufacturing process is simple (essentially a
mixing operation) with some tolerance for quality
variation.
o Bottling operations and delivery of products to retailers
require long-term financing.
o Profitability is relatively high, and growth is slow in the
Philippines leading to excess cash flow generation.
Growth markets in other countries require financing
from internal domestic cash flow or from external
sources.
You completed the session.