Table of Contents
Chapter 1: INTRODUCTION TO APPLIED ECONOMICS
Revisiting Economics as a Social Science………………………………………….2
Economics as an Applied Science ………………………………………………….4
A framework in Understanding Decisions using Economic Analysis ………….....4
Variations in Benefits and Costs Due to Differences in Valuation ………………..4
Basic Economic Problems Confronting the Development of the
Philippines in the 21st Century …………………………………………………….5
SUMMATIVE ASSESSMENT……………………………..………………………6
Chapter 2: APPLICATION OF SUPPLY AND DEMAND ANALYSIS
Analysis of Demand and Supply ……………………………………………..…….7
Determination of the Prices of Commodities ………………………………………10
Contemporary Economic Issues Facing the Filipino Entrepreneur………………....15
SUMMATIVE ASSESSMENT………………………………………..…………..16
Chapter 3: INDUSTRY AND ENVIRONMENTAL ANALYSIS: BUSINESS
OPPORTUNITY IDENTIFICATION
Principles, Tools, and Techniques ……………………………………………….…17
Business organization …………………………………………………………….…17
Small, Medium, and Large Scale …………………………………………………...17
Tools in Evaluating a Business ………………………………………………….….18
The SWOT Analysis ………………………………………………………….….….18
Porter’s Five Forces of Competitive Position Analysis ……………………….……19
Importance of Porter’s Five Forces Analysis …………………………………...…..19
Industry Analysis …………………………………………………………………….19
Competition ………………………………………………………………………….19
Customers ………………………………………………………………………...….19
Suppliers ……………………………………………………………………………..19
Substitutes ……………………………………………………………………………20
A Guide to Industry Analysis …………………………………………………….....20
Environment analysis …………………………………………………………….....20
Economic Forces ……………………………………………………………….…...20
Physical Environment …………………………………………………………...….20
Political Factors ……………………………………………………………………..20
Cultures and Lifestyles ……………………………………………………………21
Competition ……………………………………………………………………….21
The Circular Flow Economic Activity …………………………………………….21
The Simple Flow of Goods and Services ……………………………………………21
A Closer Look …………………………………………………………………..21
The Government Sector and Global Economy ……………………………………...22
The Economy’s Producing Sectors …………………………………………………..22
Agriculture, Fishery and Forestry …………………………………………………….22
Service Sector …………………………………………………………………………22
Competitiveness and Efficiency …………………………………………………….22
Agriculture and Fishery ………………………………………………………….22
Manufacturing ……………………………………………………………………….24
Trade and Transport …………………………………………………………………24
International Trade ………………………………………………………………….24
Tourism …………………………………………………………………………..24
Small Business Opportunities …………………………………………………………25
SUMMATIVE ASSESSMENT ……………………………………………………..25
Chapter 4: SOCIO – ECONOMIC IMPACT STUDY
The Theory of Consumer Behavior …………………………………………………….25
The Utility Function …………………………………………………………………25
Significance of Consumer Behavior in Business………………………………………26
The Production Theory ……………………………………………………………26
Significance of Production Theory ………………………………………………….27
Socio – Economic Impact of a Business …………………………………………….27
Impact on the Consumer ……………………………………………………………..27
Impact on suppliers and Investors ……………………………………………………..27
Impact on the Government …………………………………………………………..27
Impact on the Households …………………………………………………………27
Impact on the Community ………………………………………………………….27
Scio –Economic and Government Impact on Business ………………………………27
Government Impact on Business ………………………………………………………27
Household Impact on Business ………………………………………………………28
Trade and Capital Movements ……………………………………………………29
Herfindahl – Hirschman Index HHI …………………………………………………..31
Business Icons ………………………………………………………………………31
SUMMATIVE ASSESSMENT ………………………………………………………32
REFERENCES ………………………………………………………………………32
1

APPLIED ECONOMICS
FIRST QUARTER
WEEK 1& 2
OBJECTIVES:
 To define basic terms in applied economics;
 Describe and state the importance of economic resources;
 Describe the various economic systems;
 Make decisions based on how man can satisfy most of his wants given limited
resources; and
 Analyze basic economic problems and propose solutions to the problem using the
principles of applied economics.
CHAPTER 1: INTRODUCTION TO APPLIED ECONOMICS
Lesson 1.1 Revisiting Economics as a Social Science
There are three strands in the development of the definition of economics:
1. Wealth. Economics is defined as a science of wealth getting and wealth using.
2. Decision-making process. Economics is defined as a science of making choices.
3. Allocation process. Economics has been defined as a social science that deals
with the allocation of scarce resources to meet the unlimited human wants.
ECONOMICS AS A STUDY OF WEALTH
The earlier definition of economics as the science of wealth-getting and wealth-using
implies that the motivation of the process of wealth accumulation is the utilization of
wealth for the individual’s satisfaction and welfare. This initial definition pertains to
activities answering the two major economics in any society – production and
consumption. Thus economics is all about wealth and how wealth is being used by
individuals and society at large for material survival, stability and development.
ECONOMICS AS STUDY OF MAKING CHOICES
Economics has been defined as a science of making choices.
In everything we do, whether we produce or consume, whether it is wealth-getting or
wealth-using, we make decisions and theses decisions are based on alternative choices.
Thus, in making a decision, we have to consider a major concept in the study of economics
– opportunity cost. In everything that we do, there are costs and sacrifices that we have to
carry.
ECONOMICS AS STUDY OF ALLOCATION
In this section, the definition of economics will be explained further as a social science
that deals with the study of allocation of scarce resources to answer the unlimited human
wants. Although the third definition concentrates on the allocation process, economics can
be analyzed comprehensively in terms of its five key elements – social science, resources,
human wants, scarcity, and allocation.
1. Economics as a Social science
Economics is primarily a social science. As a science it utilizes the scientific
method of inquiry from identifying the problem, proposing alternative tentative
answer or hypotheses, testing the tentative answers to the question or the problem
at hand, gathering and treating the data, and answering the question through the
conclusion. As a social science, economics can be described as the study of the
various modes and aspects of human interaction. It also pertains to the study on
how society creates its material wealth, how it makes this wealth available to its
people with minimum difficulties, and how it expands its wealth. As a social
science, economics is related to the other social sciences that study other
dimensions of a society.
BRANCHES OF ECONOMICS
 Macroeconomics– is a division of economics that is concerned with the overall
performance of the entire economy. It studies the economic system as a whole
rather than the individual economic units that make up the economy.
 Microeconomics – is concerned with the behavior of individual entities such as the
consumer, the producer, and the resource owner.
ECONOMIC SYSTEM
The economic system is the means through which society determines to answers to the
basic economic problems.
 Traditional economy. Decisions are based on traditions and practices upheld over
the years and passed from generation to generation. Methods are stagnant and
therefore not progressive. Traditional society exist in primitive and backward
civilizations.
 Command economy. This is the authoritative system wherein decision-making is
centralized in the government or a planning committee.
 Market economy. This is the most democratic form of economic system. Based on
the workings of demand and supply, decisions are made on what goods and
services to produce. People’s preferences are reflected in the prices they are
willing to pay in the market and are therefore the basis of the producer’s decisions
on what goods to produce.
2. Resources and the Study of Economics
The second dimension of the definition of economics is resources. This element
is linked with the definition of economics as the process of wealth creation and
wealth utilization. Resources or wealth can be defined as a products of nature,
qualities of individuals, and man-made things which are used in producing
goods or services.
2
 Included in the coverage of resources are natural resources like marine
resources drawn from the wealth of ocean, timber obtained from forest resources,
agricultural lands that yield grains and other food crops, and mineral resources
extracted from various mining sites, among other.
Economic resources also known as factors of production, are the resources
used to produce goods and services. These resources are by nature limited and
therefore, command a payment that becomes the income of the resource owner.
1. Land– soil and natural resources that are found in nature and are not man-
made. Owners of lands receive a payment known as rent.
2. 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 and doctors.
3. Capital– man-made resources used in production of goods and services, which
include machineries and equipment. The owner of capital earns an income
called interest.
Human resources are qualities of human beings that may include labor,
intelligence, creativity, health, education, talents, and many more. These various
characteristics of people give them the capacity to create value directly through the
provision of services and indirectly by becoming factor inputs of production.
Physical resources or man-made resources that include various types of buildings,
equipment, technology, bridges, airports, factory plants and other physical
infrastructure that can be used to provide present and future satisfaction.
One of the key characteristics of resources is that they are limited. The limitation
of resources stems from two major factors:
 It pertains to the length of time as well as the difficulties in producing
these resources.
 More than the difficulties in producing these resources, the limitation is
further intensified by the competing uses for these resources. Resources
are very prolific since they can be used in various productive and
distributive activities.
3. Human Wants and Economic Analysis
The third dimension of economics pertains to human wants. Resources are
used to answer the human needs and human wants of a society. Human wants can
be described as differentiated or expanded human needs. Human needs can be
portrayed as basic necessities for material survival including food, shelter and
clothing, among others. Human wants are based on human needs but differentiated
or expanded by the influence of various factors. For example, food can be
differentiated by the level of income and the environment.
4. Scarcity as a Source of Economic Problem
The fourth element in the definition of economics is the concept of scarcity.
Scarcity can be considered as a key economic problem because of the limitations
of resources and expansion of human wants. Thus, scarcity can be defined as the
limitation of resources to answer the expanding human wants.
Sometimes people equate scarcity with shortage. Scarcity is a general
characteristic of resources in the light of its competing uses that may arise from the
rapid expansion of human wants. Shortage is a condition when the supply of a
good, services, or resources is not enough to meet the demand.
5. Allocation and the Act of Economizing
The fifth element in the definition of economics is the concept of allocation.
Allocation can be defined as a social mechanism to respond to the economic
problem of scarcity. There are various ways of treating the problem of scarcity:
 Individuals may have to temper or slowdown the expansion of their human
wants in the light of limited resources.
 To hasten the expansion of limited resources in the light of expanding
human wants.
 The third choice is the combination of the two alternatives.
These options are integrated in the three major mechanisms of allocation: market
system, command and tradition.
 Market system as a Mechanism for allocation
The market can beconsidered not only a place but a state when transactions
are made. But sometimes transactions can be done via telephone or now the
Internet or what they call e-commerce or electronic commerce. Market is a state
when buyers and sellers transact on the purchase or sale of a good or service. The
price of a commodity is both an index of cost or sacrifice (for producers) and
benefit or satisfaction (for buyers).
The market system operating the on the price mechanism provides incentives
and disincentives to consumers and producers that respond to the problem of
scarcity. These automatic price adjustments are not only meant to answer the
problem of shortages and surpluses but to answer the three basic economic
questions: what to produce, how to produce, and for whom to produce.
 What to produce. Normally, commodities that are needed or wanted by
consumers are the ones to be produced.
 How to produce. This reflects the manner of production or technology
that will be used by firms in producing those commodities with high
demand.
 For whom to produce. The market system can likewise answer for whom
the commodities will be produced by allocating a higher proportion of
output to members of a society with high purchasing power.
3
  Command as an Allocation Mechanism
In a command system, the state or an agency of the government may be in
charge in the allocation of resources by using its political power in answering the basic
economic problems of production and distribution. In times of natural calamities,
disasters or national emergencies, the command system may be more orderly than the
market system. The command system has been useful as a temporary alternative
mechanism in abnormal times when the market system cannot fully operate or the
price mechanism is inadequate for allocation.
 Tradition in the Process of allocation
The third alternative allocation mechanism is done through tradition. The use
of tradition may be useful in situations where the operation of the market may not
be appropriate, or the power of an organized state has no control over certain
community. This was normally observed and practiced in indigenous communities
in the past where life was less complicated and the simple needs of the members of
the society can be provided by the society itself. What differentiates this
alternative allocation mechanism is the role of social structure, norms, belief and
value system in shaping the behavior of members of society including
accumulation and utilization of wealth.
ECONOMICS AS AN APPLIED SCIENCE
In this section, we will discuss the application of economics in various fields
particularly in understanding economic, business and social issues confronting our country
today.
As a social science economics deals with the analysis on how members of a society
interact with one another on the creation and utilization of wealth. In addition, economics
has been described as the allocation of resources to meet human wants. Thus, economics is
a science of choosing an activity from alternative options that yield the highest benefits to
society in the context of competing uses and opportunity costs.
A FRAMEWORK IN UNDERSTANDING DECISIONS USING ECONOMIC
ANALYSIS
To understand how economic principles can be applied in several fields, let me propose a
framework of analysis. This structure is based on the analysis of benefits and costs in
decision-making. In making any decision, economic and otherwise, an individual is
influenced by a number of motivations. Pursuing any choice implies that there are costs
accompanying the benefits arising from his behavior. This cost can be expressed in terms
of money, time, resources and other goods and activities sacrificed or foregone.
Since the decision or costs are always prospective, what is important is not the absolute
value of benefits and costs but the additional or marginal benefits and marginal cost. The
marginal analysis of benefits and costs is also useful in setting the condition for an optimal
decision.
VARIATIONS IN BENEFITS AND COSTS DUE TO STAGE OF RECOGNITION
We have seen the importance of marginal benefits and marginal costs in the process of
decision – making. However, economics, business and social problems may arise when the
marginal benefits are not equal with marginal costs. Thus, there is a need to inquire what
may cause the variations between the marginal benefits and marginal costs.
The initial factor that may influence the difference is the recognition of what is
considered as benefits and costs. Some benefits and costs may be recognized or not by a
decision maker because some of them are explicit or some are implicit or hidden. Explicit
costs are easily recognized since they are expressed in monetary terms and may involve
actual financial outlays. While recognition of implicit costs is more difficult since the
decision maker does not have to incur any monetary expense in the course of his action.
An example of implicit cost is opportunity cost, which is a basic concept in economics.
 Spatial Dimensions in the Issue of Recognition
Although explicit costs and benefits are easier to spot, implicit benefits and costs are
harder to recognize because of the spatial consideration of the decision maker. If the
decision maker is the individual, he may not be aware of the social or public effects of his
actions.
The implicit benefits and costs are hidden from individual because the level of his
awareness on the benefits and costs of his decision are more pronounced on private
benefits and private costs. These private benefits are explicit to him because he is able to
experience direct satisfaction.
On the other hand, social benefits and social costs are not internalized by individual the
decision maker.These social benefits are spillover effects of individual decisions that the
entire community may enjoy.
 Temporal Dimension in the Issue of Recognition
Aside from the spatial considerations, the temporal dimension of a decision-making
process can also contribute to the nonrecognition of implicit costs. Usually, an individual
action is decided on the basis of present benefits and present costs. This is because present
benefits and present costs are explicit to the individual decision maker as his level of
awareness is dictated by the proximity of the benefits and costs in terms of time.
VARIATIONS IN BENEFITS AND COSTS DUE TO DIFFERENCES IN
VALUATION
Even if the decision maker recognizes the implicit benefits and implicit costs of his
action, the differences between marginal benefits and marginal costa can still persist. The
differences may be due to the way an individual decision maker values or measures these
implicit benefits and implicit costs.
The proper pricing and valuation of these implicit costs may have an effect on the
optimal decision. This may explain why children in poor families have lower school
attendance compared with children in well-to-do families.
4

 Spatial Dimension in the Issue of Variation
The valuation of implicit cost may also differ because of spatial considerations. Even if
the decision maker has recognized the social benefits and social costs of his action,
various individuals may have different valuation of these social impacts.
 Temporal Dimension in the Issue of Valuation
The issue of valuation can also affect the temporal dimension of benefits and costs.
Because present benefits are currently and directly enjoyed by the decision maker, they are
more significant and have higher values than benefits that are yet to be realized and
enjoyed in the distant future. In this case the decision maker can assign a discount rate on
future benefits to make them comparable with present benefits. The discount rate is a rate
which a stream of future values is reduced to make them comparable with the present
values. If the future benefits are considered not as valuable, the decision maker can assign
a higher discount rate on the stream of future benefits to reduce its present value.
ECONOMICS IS AN APPLIED SCIENCE
As seen the discussion above, these social, economic and business issues do arise because
of the differences marginal cost and marginal benefits. These imbalances result in the
improper allocation of resources and manifest in various problems and issues in society.
BASIC ECONOMIC PROBLEMS CONFRONTING THE DEVELOPMENT OF
THE PHILIPPINES I N THE 21ST CENTURY
Typical of a growing economy, the Philippines is confronted with several issues and
problems which prevent its citizen from realizing a meaningful life, on the one hand, and
in pushing its socioeconomic development, on the other. A sizable proportion of its people
have insufficient resources to afford the basic goods and services, limited freedom in their
choices of employment and consumption, and a low self-esteem that weakens its people.
 Poverty and Unequal Distribution of Income
Foremost among these problems is the extent of poverty in the country. Poverty is a
restricting condition experienced by millions of families that prevents them in attaining the
minimum level of consumption for subsistence living. Families with limited or without
resources cannot earn sufficient income that can provide the minimum nutritional
requirements for daily living and the basic necessities of clothing and shelter. Related with
the limitation and absence of resources, poor families are faced with limited economic
opportunities. Because they are limited schooling, they are often unskilled and cannot find
the decent and sustained employment.
TWO CATEGORIES OF POVERTY
1. Absolute Poverty–is the lack of income to buy the basic food and necessities for
subsistence living. This is measured in terms of poverty threshold and poverty
incidence.
 Poverty Threshold – is the income needed to purchase these minimum nutritional
requirements and other basic necessities for daily survival.
 Poverty Incidence – is the proportion of households in the country with family
income lower than the poverty threshold or poverty line.
2. Relative Poverty– refers to the structure on how the national income is being
distributed among households in an economy. This is measured by the Lorenz
curve and the Gini coefficient.
 Lorenz Curve – shows the share of various household groups (ranked from the
poorest to the richest) on the total national income.
 Gini Coefficient – is a measure of income inequality derived from the Lorenz
curve.
Perfect equality is indicated by the value 0 and perfect inequality has a value 1. There
are various interventions being implemented by various economies including the
Philippines in addressing the problem of poverty. For absolute poverty, the immediate
intervention is to provide free meals, housing, and adequate clothing. But these measures
are temporary gap measures and do not provide long term solutions to the problem of
poverty.
To this end, some economists, (see Banerjee and Duflo, 2015) have suggested that
there is a need to provide resources including credit, skills and entrepreneurial training, and
cash transfers. All these measures have to be implemented together if we want households
to graduates from their poverty status.
 Demographic Changes and Its Economic Implications
The population of the Philippines has been increasing over several decades. In 1960, the
country has enumerated 27 million people. In 2015, the population estimate for the country
has reached 102 million people. After 65 years, we have increased our population by 75
million. Because of this demographic change, the country is now considered the twelfth
(12th) largest country in the world. Although the population growth rate has fallen to 1.9 %
between 2000 and 2010, the rate is still one of the highest in the region.
 Low Investment in Human Resource Development
The economic transformation of any country can be traced to a certain extent on its
human resource. Although the size of the labor force can have positive distributions on
economic growth, the quality of human resource has a greater growth impact. A highly
trained workforce is more productive than a pool of unskilled workers. Skills training and
investment in education can shape human capital of a nation. Knowledge capital is formed
5
through heavy investments in higher education, science and technology, and research and
development.
 Weak Infrastructure
Similar to role of human capital on economic growth, physical infrastructure facilitates
and expands transactions that likewise fuel economic growth. We need roads, bridges and
other networks in transportation and communication because these grids link economic
sectors tightly.
Although there is recognition on the vital contributions of a strong infrastructure on the
economy, many low-income countries including the Philippines have weak infrastructure.
The inadequate infrastructure of a country has debilitating effects on the individuals,
households, business firms, and economy. Take the case of transportation in Metro Manila.
Meanwhile, the limited capacity of our energy infrastructure has resulted in daily
interruptions of electricity in many regions in the country.
 Pursuing Food Security
With more than 100 million to feed, the concern of the government is to ensure food
security for all. This goal has been interpreted, however, as food self-sufficiency in the
light of the huge amount of arable and devoted to production of food grains – rice and
corn.
The importance of agriculture in our economy emanates from its role as the main
supplier of food grains to the growing population. But to equate food security with self-
sufficiency is problematic. Thus, enhancing the productivity of the agricultural sector can
contribute to the achievement of food security. This is not done through the food
sufficiency but in increasing the income of farmers through various means and cultivating
a variety of agricultural crops as well as the income of workers in other economic sectors
that will provide sufficient resources.
 Slow Adoption of Modern Technology
One common feature that prevents these economic sectors in realizing their growth
potentials is the slow adoption of modern technology in their processes of production and
distribution. Technology is the manner of processing raw materials or intermediate inputs
into transformed outputs through the use of factor inputs.
 Labor - intensive technology – is a technology that is biased in the use of labor.
 Capital – intensive technology – refers to use of more capital relative to labor in
the production process.
 Environmental Sustainability and the County’s Development Thrust
The capacity of our economy to maintain its productive capacity and pursue its
development goals will be constrained by the prudent use of natural resources for
sustainable development. The environment is part of natural resources where we derive
income from the utilization of its wealth. However, excessive use of our natural resources
may compromise its ability to provide income and other benefits in the future. In the
agricultural sector the cultivation of lands for crop production, the use of water and marine
resources and the harvesting the fruits of the forests can put pressures on the capacity of
our natural resources generating income.
EXERCISES
A. Study Guides
 Describe the type of economic system characterized in each of the following
sentences. (Traditional economy, Command economy, or Market economy)
__________ 1. Prices are based on demand and supply.
__________ 2. The government decides on what goods should be produced.
__________ 3. Ancient methods are used in deciding what goods to produce.
__________ 4.People enjoy freedom of choice in arriving at decisions on what to buy.
__________ 5. People have no freedom of choice in arriving at decisions on what to
buy.
__________ 6. Economy is stagnant, making use of practices in the olden times.
__________ 7. Economy is backward because no new technology or production
methods are introduced.
__________ 8. It is the most democratic form of economic system.
__________ 9. People’s preferences are reflected in the prices they are willing to pay
in the market.
__________ 10. It exists in primitive and backward civilizations.
 Identify which resource is referred by the following words. (Land, Labor or
Capital)
__________ 1.Entertainers _________ 6. Technology
__________ 2.Minerals _________ 7. Production Equipment
__________ 3.Forests ________ 8. Engineers
__________ 4.Marine resources _________ 9. Call center agents
__________ 5.Teachers _________ 10. Business proprietor
 Answer the following questions.
1. Compare the similarities and differences of the three major strands in the definition
of economics.
2. Compare how the three economic systems of allocation (market, command, and
tradition) answer the basic questions of production and distribution?
3. Compare absolute poverty from relative poverty on how they are measured. What
policies should be implemented to address these two types of poverty?

6
B. Students Activities
APPLIED ECONOMICS
1. Write a short essay arguing on why the government should pursue a policy of food WEEK 3 & 4
security instead of food – sufficiency.
2. Write a letter to the editor on the causes of traffic in your locality and how the OBJECTIVES:
government should address this problem.  Explain the law of supply and demand, and how equilibrium price and quantity are
3. If you were to advise the President of the Philippines on how to cope with the determined;
issues on poverty and unemployment to improve the lives of the Filipino people,  Discuss and explain factors affecting demand and supply;
what would you tell him and why?  Compare the prices of commodities and analyze the impact on consumers; and
 Explain market structures (perfect competition, monopoly, oligopoly, and
monopolistic competition)

CHAPTER 2: APPLICATION OF SUPPLY AND DEMAND ANALYSIS

Lesson 2.1 Analysis of Demand and Supply

Consistent with the framework developed in the previous chapter we will analyze demand
and supply in terms of marginal benefits and marginal costs.
 Demand curve – is a schedule that shows the level of consumption at alternative
prices at a given point in time. The demand curve of a commodity summarizes the
benefits derive by the consumers from the purchase of a good or service.
 Supply curve – shows the amount of output producers are willing to sell at
alternative prices at a given point in time. The supply curve incorporates the
sacrifices and costs incurred by the seller in producing a commodity.
What is a Demand Curve?
The first major actor in a market is the consumer whose primary objective is to
purchase a commodity because it can give him/her benefits. His/her inclination to
purchase is indicated by the demand curve.

A demand curve is a schedule of the willingness and capacity of a consumer to

buy a commodity at alternative prices at a given point in time other things held
constant. In the construction of the demand curve it is important to consider not
only the willingness to buy but also the capacity to buy. The demand curve is
derived from the demand and the price of the commodity. When we say other
things held constant or ceteris paribus, the other factors that may affect the
demand for the commodity are not changing. The only factor that influences the
level of demand or consumption is the price of the commodity itself.

7

Graph 2.1 The Demand Curve
OTHER FACTORS AFFECTING THE DEMAND OF A COMMODITY
To be more realistic in our discussion on the demand for a commodity, there is a
need to consider other factors aside from its own price that may influence individuals
in the purchase of a commodity.
1. Income– it is the willingness and capacity of a consumer to buy a commodity at
alternative prices. Although the willingness may be influenced by the price of the
commodity as well the taste for the commodity, the capacity to purchase on the
other hand is influenced by the income of the consumer.
2. Prices of Other Commodities– aside from the price of the commodity being sold,
the demand for a good or service may also be influenced by prices of other goods
and services. Although the prices of many commodities may have an effect on the
demand of a particular good, the influence of related goods is more pronounced.
3. Expectation– the expectation or prospect on what is going to happen to the price
can influence the demand for the commodity.
4. Taste– taste or preference is another important factor that may influence the
demand for a commodity. The formation of taste is influenced by several factors.
Some of them can be shaped by cultural values, others through peer pressure or the
power of advertising.
5. Market – the size and characteristics of the market can also influence the demand
for a commodity. An increasing population can contribute to the expansion of
existing markets various commodities.
WHY IS THE DEMAND CURVE DOWNWARD SLOPING?
As mentioned earlier, the demand curve focuses on the relationship between the
quantity demand and the price of the commodity at a given point in time, other things held
constant. The demand curve shows a negative relationship between the price of the goods
and the quantity demand. Specifically, as the price of a commodity declines, the quantity
demand increases and when the price increases, the quantity demand declines.
 Substitution and Income Effects – the inverse or negative relationship between
the price of the commodity and the quantity demand shown in the demand curve
can be explained through the substitution effect and income effect of a price
change. The substitution effect describes the decision of a consumer to substitute
an expensive good with cheaper good when there is a price change.
On the other hand, income effect refers to the modification of the consumption of
a commodity due to the change in the purchasing power of the consumer resulting
from a price change. An increase in the purchasing power will enable the
consumer to buy more of the good while a reduction in purchasing power will
reduce its capacity to purchase.
PRINCIPLE OF DIMINISHING MARGINAL UTILITY
A more interesting but theoretical explanation on the downward sloping demand curve is
derived from the principle of diminishing marginal utility. According to this major
economic principle as a buyer continues to consume a good his total satisfaction or utility
increases; however, the additional or marginal satisfaction decreases as a buyer consumes
an additional unit of a good. This reduction in marginal satisfaction is attributed to the fact
that consumers can have a feeling of satiation when they continuously increase the
consumption of a particular commodity. Diminishing marginal utility implies that the
additional satisfaction provided by an additional commodity consumed is lower than the
additional satisfaction given by the previous level of consumption of the commodity.
CHANGES IN DEMAND CURVE
As discussed earlier, there are several factors that may affect the demand for a
commodity. As a consequence, changes in these factors can alter the demand curve
depending on their impact on the demand for a commodity.
TWO MAJOR CATEGORIES OF CHANGES IN DEMAND CURVE
 Movement along the Demand Curve– refers to the change in quantity demand
resulting from the change in the price of the commodity. Thus, as the price of the
commodity decreases, the movement along the curve will lead to an increase in the
quantity demand of the commodity. Similarly, an increase in the price will result in
the decrease in quantity demand as shown in the movement along the demand
curve.
8

Graph 2.2 Movement along the Demand Curve
 Shifts in Demand Curve – are changes in demand curve caused by any of
other factors beside the price of the commodity. Taste, price of other goods,
income, and other factors may affect the demand of a commodity positively or
negatively. A positive effect will shift the demand curve to the right. This
means that in each price point there is an increase in the demand for a
commodity. On other hand, a negative impact of these other factors on the
demand for a commodity will shift the demand curve to the left implying a
decrease in the demand for the commodity in each point.
Graph 2.3 Shift in the Demand Curve Due to an Increase in the Prize of a Substitute
Good
WHAT IS A SUPPLY CURVE?
The second major actor in a market is the supplier whose primary purpose in selling is
to maximize profit. This inclination to sell is summarized in the shape of the supply curve.
The supply curve is defined as a schedule showing a direct or positive relationship
between the price of a commodity and level of output that the seller is willing to supply at
a given point in time other things held constant. This direct relationship means that as the
price of the commodity increases there will be more sellers that will be induced to supply
the good. In the same light, as the price of the commodity decreases, there will be lesser
sellers that are willing to supply the good in the market.
OTHER FACTORS AFFECTING SUPPLY OF A COMMODITY
As the definition implies, aside from the price of the commodity, there are other thing
that may influence the sellers to supply the commodity.
 Price of production Inputs–the production of any commodity will require the use
of two major inputs – intermediate inputs or raw materials and factor inputs.
Intermediate inputs refer to raw materials that are still going to be processed or
transformed into higher level of outputs. Factor inputs are the processing or
transforming inputs. Some examples of factor inputs are labor, capital, land and
entrepreneurship. These factors inputs are the ones adding value to the raw
materials through the process of production.
 Taxes– business establishments are required to pay a number of taxes to various
levels of government. Since it is monetary expense on the part of the firms, the
payment of taxes can considered as part of cost of production.
 Technology – the manner in which various factor inputs process the raw materials
is done through the use of technology. Some firms may use labor-intensive
technology if the cost of labor is relatively cheap. On the other hand, firms may
use capital – intensive technology if wages are very high.
 Expectation– the expectation or anticipation on what is going to happen on the
price of the commodity can also influence the amount supplied in the market. If
there is an expectation that the price of the rice will increase next season, this may
encourage farmers to plant more rice now in anticipation of the higher price in the
near future.
WHY IS THE SUPPLY CURVE UPWARD SLOPING?
The supply curve shows a positive or direct relationship between the price of the
commodity and the quantity supplied in the market. The main motivation to supply goods
is to grain profit which is based on the costs of production of a firm and the price of the
commodity.
9
 by movement towards northeast along the supply curve. On the other hand, a
decrease in the price of the commodity will cause a decrease in quantity supplied
as shown by the movement toward the southwest along the supply curve.

Graph 2.4 The Supply Curve

Variations in the Unit Cost of Production
The simplest reason for the direct relationship between price and quantity supplied is
due to variation of the costs of production among producers. Let us take an example of five
producers A, B, C, D and E with different unit costs of productio
n. Producer A is the most efficient with the least cost of PHP 5 per unit cost. Producer B
has PHP 7 unit cost; producer C has PHP 10 unit cost, while producer D incurs PHP 13 per
unit. Lastly, producer E is the most inefficient with PHP 15 unit cost.
Graph 2.5 Movement along the Supply Curve
 Shift in the Supply Curve – is caused by changes in the other factors affecting
supply except the price of the commodity. For example, an increase in the
minimum wage can increase the cost of production and will shift the supply curve
to the left. As the supply curve shifts to the left, the supply will declined since all
possible quantities to be supplied decreases at all alternative prices. On the hand, a

PRINCIPLE OF DIMINISHING MARGINAL PRODUCTIVITY AND

INCREASING MARGINAL COST
A more theoretical explanation developed by economists is based on the increasing
marginal cost of production. According to this perspective, as the production of a good
increase not only does its total cost increases but the additional or marginal cost increase as
well. This means that the additional cost of an additional unit of production is higher than
the previous unit of production. This increase in marginal cost is due to the principle of
diminishing marginal productivity of resources. As mention earlier, the main motivation
for firms in producing goods and services is to earn a profit. A rational firm usually target
reaching maximum profit in its production.

CHANGES IN THE SUPPLY CURVE bountiful harvest can shift the supply curve to the right. At alternative prices the
TWO MAJOR CATEGORIES IN THE CHANGES IN THE SUPPLY CURVE firm can now produce and supply at higher levels of output.

 Movement along the Supply Curve – is brought about by changes in the price of Graph 2.6 Shift in the Supply Curve due to an Imposition of Additional Tax
the commodity. An increase in price will increase the quantity supplied as shown

10
 DETERMINATION OF PRICES OF COMMODITIES
EQUILIBRIUM PRICE
When buyers and sellers transact in a market they agree on the price of the
commodity and the amount to be sold and bought. This agreed price is called the
equilibrium price. In our demand and supply analysis this market agreement is
shown by the intersection of the demand curve with the supply curve. From a
geographical perspective, the equilibrium price implies that buyers and sellers are in
agreement to buy and sell the same amount of commodity at the equilibrium price.
Graph 2.7 Market Equilibrium
CHANGES IN EQUILIBRIUM PRICE AND OUTPUT
The impact of changes in demand and in supply brought by various factors on the
equilibrium price and quantity can be analyzed through price mechanism in the market
system. Through changes in the price, suppliers and consumers adjust to attain a new
equilibrium situation. These adjustments are very useful in understanding price
changes in some commodities.
Shift in the Demand Curve to the Right
We can use this concept in explaining why the price of fruits increases during
Christmas and New Year Holiday. An increased in income received from bonuses and
thirteenth month pay increases the purchasing power of the consumers. This will shift
the demand curve to the right. Similarly, a shift in the demand curve to the right can
be caused by a change in taste brought about by the need to have the fruits during the
midnight supper on New Year eve.
Graph 2.9 Market Equilibrium with a Shift in Demand to the Right Due to an Increase in
Income
Shift in the Demand Curve to the Left
The decrease in the price of shellfish during the red tide season is another
application of these changes in demand. We can explain this phenomenon through a
shift in demand curve. As consumers fear being poisoned by contaminated shellfish,
they alter their taste for shellfish and reduce their consumption at all alternative prices.
This in effect will shift the demand curve to the left brought about by this fear and a
change in taste.
Graph 2.10 Market Equilibrium with a Shift in Demand to the left due to a Change in
Preferences
SHIFTS IN THE SUPPLYCURVE
As discussed in the previous section, there are several factors other than its own price
that may affect producers in supplying a commodity. Changes in these factors can
shift the supply curve can also influence the changes in the equilibrium price.
Shift of the Supply Curve to the Right
One application of this change in supply is the significant reduction of the price of
mobile phones in the past several years. There was a time that the price of mobile
phones was so prohibitive that only the rich can afford these electronic gadgets. Now,
almost everyone from all works of life has a cell phone or two with them. What are
the reasons that brought about the expansion of this market? This can be explained by
rapid improvements in information technology that substantially lowered the cost of
producing mobile phones.
11
 need to celebrate during the holidays? A possible explanation is the increase in supply
as producers of chicken anticipate the increase in demand during the holiday season.
Since the increase in demand is equally matched by an increase in supply, the price of
chicken does not change.

Graph 2.11 Market Equilibrium with a Shift in Supply to the Right due to
Technological Improvement

Shifts in the Supply Curve to the Left

Have you observed the price of vegetables becoming very expensive immediately
after a strong typhoon that hit the country? This phenomenon can be formally Graph 2.13 Market Equilibrium with a Shift in Demand to the Right and a Supply
Shift to the Right (Equal Proportion)

Shift of the Demand Curve to the Right and Shift of the supply Curve to Left
(Unequal Proportion)
During the times of major natural calamities, we often observe the prices of basic
commodities increases very fast. This is not caused by the reduction in the supply
alone as shown Graph 2.12 but it can be accompanied by an increase in the demand of
the consumers as they expect the price of basic increase in the near future. Graph 2.14
will assist us in understanding the shifts in the supply to the left and shift in the
demand to the right.

explained through supply and demand analysis using the shifts in supply.
Graph 2.12 Market Equilibrium with a Shift in Supply to the Left due to the
Effects of Typhoon

SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY

Shift of the Demand Curve to the Right and Shift of the Supply Curve to the Right
(Equal Proportion)
Have you observed that the price of chicken remains stable during the Christmas
season despite the increase in demand brought about by increase in income and the
12
Graph 2.14 Market Equilibrium with a Demand Shift to the Right and a Supply Shift
to the Left (Unequal Proportion)

OTHER APPLICATION OF SUPPLY AND DEMAND ANALYSIS

The analysis of supply and demand is a simple yet powerful economic firework
that can be used in understanding contemporary issues facing the Philippine economy.
In the previous section, we used it in understanding seasonal increases in the price of
goods, the decline of prices of electronic gadgets, price decrease of shellfish during
red tide season, and the rapid increases in the prices of basic commodities after a
natural disaster. In this section, we will use the supply and demand framework in
understanding the effects of an imposition of price ceiling and price floor, as applied
in the goods market, labor market, factor markets, and the market of foreign exchange.

Price Ceiling
In the previous section, we have discussed the impact of an increase in demand and
decrease in supply of commodity on the supply of a basic commodity after the damage
of a typhoon. As a measure to stabilize prices of basic commodities during these
unusual periods government may impose a price control measures on basic
commodities. This means that the price cannot go higher than the mandated price
Graph 2.16 Effects of a Price Floor on Tobacco
ceiling. Graph 2.15 will provide us with the effects of a price ceiling on the market for
sugar.
Application in the Labor Market
The analysis of demand and supply can also be used in the determination of the
wage in the labor market. As in any market, the labor market is composed of those
that demand labor services, an indicated by the demand curve of labor, and those that
supply labor services, as indicated by the supply curve of labor. These major actors in
the labor market are motivated by the changes in the price of labor which is indicated
by the wage rate.

Graph 2.15 Effects of a Price Ceiling after a Typhoon

Price floor
Another government measure to arrest the price adjustments in the market is the
composition of a price floor. This means that the government sets the price of a
commodity and it cannot go lower than the set price. Graph 2.16 will assist us in
understanding the economic effects of a price floor in the tobacco industry.

13
 Graph 2.17 Determination of the Wage Rate in the Labor Market
Minimum Wage as Price Floor
If the equilibrium price at Graph 2.17 is considered too low by the laborers they may
demand the government to impose a price floor or a minimum wage. In Graph 2.18,
we show the effects of the imposition of the government of a floor price or minimum
wage higher than the equilibrium wage rate.
Graph 2.18 Imposition of the Minimum Wage in the Labor Market
Application in the Foreign Exchange Market
Another application of the demand supply analysis is the determination of the
exchange rate. The exchange rate is the price of a foreign currency. For example, the
exchange rate between Philippine peso and US dollar is PHP 45 per US dollar. Graph
2.19 will assist us in the determination of the exchange rate in the foreign exchange
market.
Graph 2.19 Determination of the Exchange Rate
Labor Migration and the Overseas Filipino Workers (OFWs)
Currently, there are millions of Filipino working abroad. The push and pull factors
have often been utilized to explain the temporary labor migration of Filipinos.
However, the demand and supply analysis can also be used to describe the
phenomenon of Overseas Filipino Workers (OFWs). Similar to the market for labor
services in Graph 2.17, temporary labor migration of Filipinos can be analyzed in
terms of demand for OFWs and supply for OFWs in the international labor market.
Graph 2.20 can help understand why many Filipino workers want to become OFWs
even at low foreign wage and decreasing foreign wage rate.
Graph 2.20 Market for the Services of Overseas Filipino Workers (OFWs)
Determination of Rent
Another application of the demand supply analysis is the determination of the rent
which is the price for a fixed factor input. Typically, rent refers to the price of using
land, a fixed input, in the process of production. Consider the Graph 2.21 where the
market for land is shown.
14

Graph 2.21 Determination of Rent
CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO
ENTREPRENEUR
MARKET STRUCTURES
The interaction of demand supply with the consequent determination of the price
is set in an environment called a market. More than a place or state where
transactions are made between sellers and buyers, what is more important in this
setting is the power being exercised by any of the actors in the market. Market power
is defined as the ability of any actor or group of actors in the market to significantly
influence the price in the market and the quantity to be produced or sold.
FOUR MAJOR CLASSIFICATIONS OF MARKET STRUCTURES
DEPENDING ON THE MARKET POWER OF ANY ACTORS IN ANY
TRANSACTION
 Perfect Competition – is described as a market structure where no single seller or
no single buyer has power to determine the price and level of output in the market.
Although buyers and sellers compete, but since no one has a power market,
meaning, they have equal influence. A competitive market also is characterized by
free entry and free exit. This means that there are no restrictions on the entry and
exit of new players. The last characteristic of a perfect competition is perfect
information. This means that actor in the market are adequately equipped with
information to make rational decisions.
 Monopoly– is a market structure characterized by a single seller in the market. If
there is only buyer in the market, the market is called a monopsony. A monopoly
is the exact opposite of perfect competition. Because there is only seller or one
buyer, this single seller or single buyer has enormous market power. As a single
seller, a monopolist can set a lower output and a high price in the market that will
maximize his profit. On the other hand, as a single buyer a monopsonist can set a
higher output and low price that give him the highest level of utility or
satisfaction.
 Oligopoly – is a market structure characterized by few sellers producing similar
and differentiated products. Large scale cement and steel companies usually have
characteristics of firms in an oligopolistic market. An oligopolistic market is
described as an imperfect competition since it has some elements of a competitive
market.
 Monopolistic Competition - is another example of imperfect competition. This
market structure has the elements of both competitive and monopolistic markets.
It is competitive because it has numerous sellers and buyers in the market that can
freely enter and leave the market. However, it has a monopolistic element since
the product being sold in the market although similar can be differentiated by the
seller through various means of advertising and numerous ways of packaging.
MARKET STRUCTURES AND IMPLICATIONS FOR ENTREPRENEUR
An entrepreneur with limited resources and productive capacity may situate his
business in a perfectly competitive market.
Investment and Interest Rate
Besides knowing he market where he /she can establish his/her business, an
entrepreneur is also faced with various issues affecting the costs of operating a business
enterprise. One of the major conducting a commercial organization is the interest payments
on borrowed funds.
Rentals and the Cost of Business Operations
Since companies spent hundreds of millions of pesos to buy or lease real estate in these
locations and disbursed probably billions of pesos to construct high rises or condominiums,
they expect favorable returns on their investments. These can be done by charging very
high rental rates in office spaces.
Minimum Wage
The determination of the wage rate has also been discussed in an earlier section of this
chapter. A wage rate imposed by the government which is higher than the equilibrium
wage rate can have consequences on the labor market as well as on firms. A minimum
15
wage is an example of a floor price that prevents the market to seek its equilibrium
condition because of a government policy or legislation. 5. Increase in death rates due to calamities
Demand for basic commodities ______________________________
Taxes Supply of basic commodities ______________________________
Various levels of government units impose a number of taxes including business permits, 6. Migration of Filipinos to first world countries
real estate taxes, sales taxes, value added taxes, income taxes and taxes on traded goods Demand for basic commodities ______________________________
and services. These taxes can increase the cost of business operations and can threaten the Supply of basic commodities _____________________________
profitability of business enterprises at their initial stage of operations.
7. New investments in the manufacturing of shoes
Demand for shoes ______________________________
Supply of shoes ______________________________

8. New discovery of gold mines in the country

Demand for gold ______________________________
Supply of gold ______________________________

9. Entry of sellers in the market for electronic gadgets

Demand for electronic gadgets _______________________________
Supply of electronic gadgets _____________________________
EXERCSES
A. Study Guides 10. Improved technology in the manufacture of appliances
 Indicate the effects of the given statements on the demand and supply of a Demand for appliances _______________________________
good based on the following outcomes. Write the phrase of your choice on Supply of appliances ______________________________
the space provided after each demand and supply.
a. Shift to the right  Answer the following questions.
b. Shift to the left
c. No change 1. What is the economic reason why the demand curve is downward sloping and the
supply curve is upward sloping?
1. Well – received market innovation of a new cellphone
Demand for cell phones ________________________________ 2. Samsung announced they will be having a sale on their phones. Explain what will
Supply of cell phones _______________________________ happen to the market of Samsung phone case?

2. Decrease in the price of good X

Demand for good X _________________________________ B. Students activities
Supply of good X ________________________________

3. Anticipated increase in general price level of basic commodities 1. Gather news articles on the price of basic commodities including rice, sugar and
Demand for basic commodities _________________________________ chicken. Make a presentation on what is happening to their prices using demand
Supply of basic commodities _________________________________ and supply analysis.

4. Government increases worker’s wages 2. Collate information about a company in the Philippines. Based on its market
Demand for basic commodities _______________________________ power, determine the market structure it can be categorized in.
Supply of basic commodities _______________________________

16
 For a person to put up a business, it is essential that an industry analysis first be made.
Commonly used is a system known as the SWOT analysis, which lists the strengths,
weaknesses, opportunities and threats that the business faces.

BUSINESS ORGANIZATION
FOUR WAYS TO FORM A BUSINESS

1. Sole Proprietorship – this is generally the simplest way to set up a business. A

sole proprietorship is owned by a single individual who is singly responsible for
running a business and is accountable for all debts and obligations related to the
business. The sole proprietor enjoys exclusive control and decision-making as
well as gets all the profits earned but he also shoulders all losses and has unlimited
liability which means payment of his loans will extend to his personal assets.

2. Partnership – is an agreement in which two or more persons combine their

resources in a business with a view to making profit. A partnershipagreement is
drawn up and profits are divided among the partners according to the terms of
agreement. There are two types of partnership:

APPLIED ECONOMICS  Thegeneral partnership – all owners share the management of the
SECOND QUARTER business and each is personally responsible for and must assume the
WEEK 1& 2 consequences of the actions of the other partners. All general partners have
unlimited liability which means loan payments will extend to their
personal property.
OBJECTIVES:
 Identify and explain different principles, tools and techniques in creating a  The limited partnership – some members are general partners who control
business; and manage the business and may be entitled to a greater share of the
 Distinguish the different services/products of business and industry in the locality; profit while other partners are limited and contribute only capital, take no
and part in control or management, and are liable for debts to a specific extent
 Apply a SWOT analysis as a tool in evaluating a business. only.

CHAPTER 3: INDUSTRY AND ENVIRONMENT ANALYSIS: BUSINESS
OPPORTUNITIES IDENTIFICATION
Lesson 3.1 Principles, Tools, and Techniques
A business is just a small portion of an industry. It is an undertaking by a person or a
group of persons who are partners, or stockholders who own a juridical entity known as
corporation. Its main objective is to earn profit for the owners. An industry is the
aggregation of the different businesses engaged in the same line undertaking. For example,
Celine is a business firm that is part of the country’s shoe industry.
3. Corporation – is a legal entity that is separate from its owners, the shareholders.
No shareholder is personally liable for debts, obligations, or acts of the
corporation. Directors and officers can bear liability for their involvement with the
corporation. The legal entity of the corporation gives it years, which is renewable
for another 50 years. Owners have limited liabilities. However, corporations are
burdened by heavy taxes.
4. Cooperative – is an entity organizes by people with similar needs to provide
themselves with goods and services or to jointly use available resources to improve
their income. Cooperative members have an equal say in decision-making with
one vote per member regardless of number of shares held, there is open and
voluntary membership and surplus earning is returned to the members according to
the amount of their patronage.
17

SMALL, MEDIUM, AND LARGE SCALE BUSINESS
It is also important to study the classification of businesses as to the size based on the
worth of the business assets. In the Philippines, total assets for micro business are worth
below ₱1,500,001. For the small business, total assets are from ₱1,500,001 to ₱15,000,001.
Medium business has total assets from ₱15,000,001 to ₱60,000,000. Any business with
assets in excess of ₱60,000,000 is considered large scale.
For any form of business organization, the business must be registered with the
appropriate government agencies. In the case of sole proprietorships and partnerships,
100% must be owned and capitalized by Filipinos. For corporations, at least 60% of the
outstanding capital stocks must be owned by Filipino citizens. Business activity conducted
may be within major sectors of industry, services, practice of profession, or operation of
tourism – related businesses and agri – business.
Lesson 3.2 Tools in Evaluating a Business
According to a guide developed by North Carolina’s Small Business and Technology
Development Center, the key factors that must be considered in analyzing the industry are
the following:
1. The geographic area which your business will cater to. Is it limited to local areas?
Or will it cover a region, the entire country, or even the international market?
2. The size and outlook of the industry. What trends can be identified?
3. Description of the product.
4. The buyers have to be identified. Who are your target customers?
5. The regulatory environment. Are the local, national laws that will restrict the
business? One needs to identify government regulations specific to the chosen
industry.
6. The need to identify the leading businesses in the industry, and to provide
company information on the most successful businesses that you will be up
against.
7. Factors that will affect the growth of the business.
THE SWOT ANALYSIS
The SWOT analysis was created in the 1960s by business gurus, Edmund P. Learned,
C. Roland Christensen, Kenneth Andrews, and William D. Book in their book,
Business Policy, Text and Cases (Irwin 1969)
SWOT, which stands for Strengths, Weaknesses, Opportunities, and Threats, is analytical
frameworks that can help a company meet its challenges and identify new markets. The
framework can help identify the business’s risks and rewards. It is also a means to
identifying the internal and external forces that may affect the business. Strengths and
Weaknesses actually refer to the internal factors, and these are the resources and
experiences readily available to the business proponent. Usually included as internal
factors are:
1. Financial resources such as money and sources of funds for investment;
2. Physical resources such as the company’s location, facilities, machinery and
equipment
3. Human resources consisting of employees;
4. Access to natural resources, trademarks, patents and copyrights; and
5. Current processes such as employee programs, department hierarchies and
software systems, sales and distribution capabilities, marketing programs, etc.
On the other hand, when we speak of external forces, these are those that affect a
company, an organization, and individual, and those outside their control. These may
include:
 Economic trends- including local, national and international financial trends,
developments in the country’s stock market, reforms in the banking system,
growth of the Gross Domestic product;
 Market trends – such as new products or technology or evolving buyer’s profiles,
including changes in tastes and lifestyle behavior;
 National and local laws and statutes as well as political, environmental and
economic regulations;
 Demographic characteristics of the target market such as the age, the gender, the
culture of the customers;
 Relationships with suppliers and co-owners; and
 Competitive threats.
Before an owner can plan for its business’ future, he/she must first evaluate the business
by identifying and analyzing internal and external resources and threats. The SWOT
analysis is a tool that can help a proponent by enabling him/her to identify and assess the
internal and external forces that can affect the business.
18
 Analytical tool that can be used to assess a business is Porter’s Five Forces of
Competitive position Analysis. It was developed in 1979 by Michael E. Porter of Harvard
Business School as a framework or a guide for assessing and evaluating the competitive
strength and position of a business organization.

Table for SWOT ANALYSIS

When drafting a SWOT analysis, what is created is a table split up into four columns to
list each element side by side, for comparison. Most of the time, the business’ strengths Figure 3.2 Porter’s Five Forces of Competitive Position
and weaknesses will not match the listed opportunities and threats, and this is where the
owner should attempt to somehow make them meet. Let us discuss these five forces that need to be evaluated:

Strengths weaknesses  Supplier power – it is important to assess how much power the supplier has in his
ability to drive up prices. A supplier enjoys this power if there are a few suppliers
 Government incentives  Difficulty of organization of an essential input and they therefore control the supply of that input. Another
 Low capital requirements  Costly set – up source of power is how unique the product or service is.
 Market acceptance  Possible pollution problems  Buyer power – if a supplier can enjoy the power to drive prices up, it is also
 Experienced leaders  Lack of training of workers possible for a buyer to drive prices down. An assessments need to be made on of
Opportunities Threats how easy it is for buyers to drive prices down.
 Number of competitors – the number and capability of competitors in the market
 Project may replace imported good  Entry of competitors will also impact on the attractiveness of the market. If competitors are numerous
available in the market  Time consuming production and offer basically similar products and services, the market will be less attractive.
 Will improve employee welfare processes Low capability of competitors to meet the market’s current needs will serve as an
 Improved company reputation  Opposition from residents in the attractive opportunity for the firm.
community
 Possibility of Substitution – when it is easy to substitute a product in a market, it is
Figure 3.1 SWOT Analysis Templates expected that buyers will switch to alternatives in case of price increases. The
suppliers will enjoy less power to drive prices up and the market will be less
PORTER’S FIVE FORCES COMPETITIVE POSITION ANALYSIS
attractive.
19
  Possibility of new entrants – when investors see that a market is profitable, they
will desire to join the bandwagon and get a share of the profits. But when new
investors enter a market, the share of the participants in the market will be divided
among more people and more people will therefore decline, thus, eroding profits.
IMPORTANCE OF PORTER’S FIVE FORCES ANALYSIS
The Porter’s Five Forces Analysis is a significant tool for organizations to understand
the factors affecting profitability in a specific industry and can help to form decisions on
whether or not to enter a specific industry, whether or not to increase capacity in a specific
industry, and also for developing competitive strategies.
Lesson 3.3 Industry Analysis
In a book published by the Development academy of the Philippines, How to Prepare
Project Feasibility Studies, it includes an industry analysis of the following important
factors:
 Competition – it is very important that you know your competitors and be ready
for them your aim is to win their customers, convince them to buy from you
instead, and remain as loyal customers.
 Customers – who will you sell your product to? The target market must be
identified. Who exactly will buy your products? What income groups? What age
brackets? What gender? What career groups? What type of people will you cater
to, based on their preferences, lifestyles, and buying habits?
 Suppliers – every retail business needs suppliers from whom one can source raw
materials, intermediate products, or even the finished goods one intends to resell.
A business may need one or more suppliers. It is important to develop suppliers
who are reliable in terms of the quality of what they supply and their dependability
in coming up with the things you order from them.
A business owner can buy directly from the manufacturers. This will be the
cheapest source since there are no middlemen involved
Another alternative is to buy from distributors. They are wholesalers or brokers
who buy in big quantities from manufacturers, add mark-up to their purchase price,
and sell to retailers.
A third source of goods is through imports. Some businessmen go to nearby
countries to buy their goods or raw materials there.
 Substitutes – are goods that can be used in of another. These are goods that may.
Even if partly, satisfy the same needs of a customer such that consumer may use
one instead of another.
A GUIDE TO INDUSTRY ANALYSIS
An industry analysis guide developed by North Carolina’s Small Business and
Technology Development Center (SBTDC) can help in making analysis of one’s business
industry.
The key factors to be considered in analyzing your industry identified by SBTDC are:
1. Geographic area – identify the area whether local, regional, nationwide, or
international
2. Industry (as to size) – worth in pesos and number of firms, trends, and
developments and future outlook.
3. Product – describe the product as to physical attributes and characteristics, and its
uses.
4. Buyers – describe target customers as to age, income group, geographical location,
and occupations; include consumer demographics such as population/household
size, sex, race, ethnicity, family status, housing status, etc. may also include
psychographics such as lifestyle information, tastes, preferences and buying habits
5. Regulatory Environment – should include environment laws and regulations that
apply to the business
6. Company information – make a list of the most successful businesses in the
industry
7. A brief history of the industry – when it started and how it developed
8. Factors that affect growth of the industry – such as migration of population from
rural to urban areas
9. Trends in sales over recent years – show actual sales in the industry over the past
5 years
10. Current operational/management within the industry – which are standard
practices prevalent among the firms
11. The types of marketing strategies prevalent within the country
12. Competitor information – include the location of competitors and how long have
they been in business and their market share
Lesson 3.4 Environmental Analysis
20
 The other analysis that has to be done is an analysis of the environment in which the
business will operate. This means an evaluation of the possible or probable effects of
external forces and conditions on the survival and growth of the business.
An environmental analysis includes a thorough study of:
 Economic forces – this involves a look at economic factors such as income of
the people, specifically the target market, economic conditions such as inflation,
recession, prosperity, demand, and supply in the market.
 Physical environment – this includes a look at the population size, the
geography of the place where the business will be located, land distribution,
climate, and in today’s global warming situation, whether or not the area is prone
to flood or earthquake.
 Political factors – the type of government, the stability and strength of the
government, and the good leadership are factors that can be an advantage to a
business.
 Culture and Lifestyles – it is important to study cultural practices such as fiestas,
celebration of the Christmas season, trends in consumption patterns, as a means
to identify the goods and service what will fit into these celebrations and
spending behavior.
 Competition – this is something that needs to be studied. As already mentioned
above, the degree of competition in the market and the extent and strength of
competition are all very vital in determining the success or failure of a business.
Lesson 3.5 The Circular Flow of Economic Activity
To further guide the students on how the market works, this section describes the
various economic activities that the place in an economy. This is referred to as the circular
flowwhich is defined as the flow of activities of household and firms in a circular direction.
THE SIMPLE FLOW OF GOODS AND SERVICES
Another form of physical flow is the flow of resources from the households to the business
the household provides resources to the raw material, intermediate good and then the final
Figure 3.3 The Circular Flow
A Closer Look
Among the firms, there is also the product flow up the production stages, that
is, from the raw material to the intermediate good and on to the final good stage
for consumption (solid arrows, Figure 3.4). Opposite the product flow is the
money payment flow in exchange for product delivery down the production stages
from the consumer that is to the final then to the intermediate and on to the raw
material stage. (Broken arrows, Figure 3.4)
 Raw materials – are unprocessed goods like raw minerals, logs, and wheat, which
are extracted from their sources and do not undergo any process of production.
 Intermediate goods – are semi-processed goods that are not ready for final use by
consumer, such as leather, cloth, and steel, which have undergone some processing
but need to go through additional processing before they can be actually used. These
are supplied to final good firms for conversion into goods in their finished stage.
 Final goods – are goods that are ready for direct consumption such as refrigerators,
dresses, or pants. These final goods are then sold to customers for their use.
Figure 3.4 Intra-Production Payment Flows
firms (solid arrows, Figure 3.5). The household is the resources used by the raw material
firm, the intermediate good firm, and the final good firm. In the flow, it can be seen that
21
 good firms for use in the production of goods.
Figure 3.5 Resource – Production – Payment Flow
THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY
There are two other relevant units in the flow: the government and foreign countries. The
government is important because it makes purchase of economic resources from the
household and makes money payments to the resource owners for the use of their
resources. The government also buys goods and services from the producing units for
which it makes money payments.
 Imports – when an economy buys goods from other countries.
 Exports – when an economy sell goods to other countries.
The country pays for goods imported and earns income from exports.
Lesson 3.6 The Economy’s Producing Sectors
materials processed or used by other economic sectors (e.g., cotton for making pillows
and mattresses).
 INDUSTRIAL SECTOR - The Industrial Sector supposedly processes raw materials
from agriculture, fishery and forestry into intermediate products that are further
processed into final products.
 SERVICE SECTOR – the Service Sector produces the intangibles supporting and
complementing production in the other sectors as well as among its own industries.
Lesson 3.7 Competitiveness and efficiency
The fair ranking of the Philippines in world competitiveness means that the country’s
industries are yet on their way from the factor-driven to the efficiency –driven stage. In
The Global competitiveness Report 2013-2014 of The World Economic Forum (WEF), the
country ranked number 58 among the 148 countries on its list.
Figure 3.6 Factors for Global Competitiveness Index
As the country’s industries struggle to attain efficiency toward the government’s

The Economy has three main producing sectors:

1. Agriculture, Fishery and forestry

2. Industry
 Manufacturing
 Construction
 Electricity, Gas and Water
 Mining and Quarrying
3. Service
 Trade
 Transportation, Communication and Storage
 Banking and Finance
 Public Service ( Government )
 Private Services vision of sophisticated innovation, they do so with those in the rest of the world. Figure 3.7
 shows that the Philippines still lags behind her neighbors in the East Asia in labor
 AGRICULTURE, FISHERY, AND FORESTRY - The Agriculture, Fishery and efficiency alone.
Forestry Sector reaps the fruits of natural resources like soil, water and forests.
However, these environmental resources are vulnerable to climate change affecting
production such as long dry spells and frequent devastating typhoons due to say, the El
Nino phenomenon. From this sector come the food we cook at home and the raw
22
 Figure 3.7 Labor Efficiency of ASEAN Countries in 2009

The county’s producing sectors also struggle with one another as they compete for

the use of local resources (e.g., labor). The least efficient is Agriculture, Fishery, and
Forestry combined while the efficient is industry.

Figure 3.8 Sectoral Shares Output 2013

23
 Figure 3.11 Contribution of Local Production to Local Consumption 2008 ()
In Percent

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

liberalized trade smother agricultural efficiency of the know-how, resources, and
competitive environment to the least meet local consumption.

Figure 3.9 Sectoral Shares Employment 2013

Figure 3.10 Sectoral Productivity 2008

 AGRICULTURE AND FISHERY

In a global setting, these industries are the least competitive despite the country’s
natural resources mainly due to human factors affecting efficiency. The uncontrollable
Nature (e.g. typhoons, drought etc.) occasionally disrupts production and cause damage to
crops. Figure 3.12 Average Palay Yield among ASEAN Countries
(In Metric Tons per Hectare)

Figure 3.13 Average Palay Productions per Person among ASEAN Countries,
Average for 2008-2010 (In Kilogram per Person)
 MANUFACTURING

In spite of the liberalization of foreign investment and trade, the manufacturing industry is
hardly competitive even in the ASEAN region due to limitations of size and structural
support. Likewise, these limitations smother manufacturing efficiency especially of the
technology and skills to grow and compete in a global context.

 TRADE AND TRANSPORT

24
In spite of being the top grosser (34%) of the biggest sector that is service, the trade
industry supported by the transport industry is also handicapped by the limited size its
establishments.
 INTERNATIONAL TRADE
Assembled electronic products top the country’s exports (40%) dominated by
manufactures reflective of the country’s waning agricultural sector (Philippine Statistics
Authority, Foreign Trade 2013). The assembled parts are imports from subsidiaries in the
global networks of the same multinational corporations (e.g. Intel, Texas Instrument)
 TOURISM
Tourism is an emerging industry as expenditures of foreign tourists on related services
such as hotel and restaurants, transport and entertainment grew by twenty – nine percent
(29%) in 2012.
Figure 3.14 Tourist Arrivals per 100 Populations 2011
 SMALL BUSINESS OPPORTUNITIES
Small farmers and fishermen can tap urban customer markets and distribution centers with
cooperative efforts to minimize the limitations of size and inadequate farm-to-market
facilities. They can engage in the cooperative activities not only of sharing/collectively
owning resources to preserve freshness or delay perish ability of goods at lower cost.
EXERCISES
A. Study Guides
 Answer the following questions:
1. Distinguish between a business and industry.
2. Why is competition an important factor that has to be studied before putting up a
business?
3. When you decide on putting up a business, how do you choose the market that you
should care to?
4. What is the level of Philippine industrial development according to the World
Economic Forum (WEF)?
5. What is the importance of knowing government regulations in your business
enterprise?
B. Students Activities
 Do the following:
1. Think of a new product you would want to introduce in the
market. It can be a good already being sold but which you can
innovate and improve, or it could be something really knew that
you yourself conceptualized. Describe that product in terms of
design, composition as to materials used, product use or
application, and its attributes which you believe are unique in that
product.
2. In SWOT analysis what are the similarities and differences
between strengths and opportunities? Weaknesses and threats?
Show these using Venn diagram.
3. Choose an industry in agriculture, industry, or services sector and
prepare a SWOT analysis of the chosen industry.
APPLIED ECONOMICS
WEEK 3 & 4
OBJECTIVES:
 Identify and explain the various socioeconomic factors affecting the business and
industry;
 Analyze and evaluate the variability of a business and its impact on the
community; and
25
  Formulate recommendations and strategies on how to minimize and maximize a 3 21 6
business’s negative impact and positive impact respectively. 4 26 5
5 30 4
CHAPTER 4: SOCIO-ECONOMIC IMPACT STUDY 6 33 3
7 35 2
Lesson 4.1 the Theory of Consumer Behavior 8 36 1
Consumer Theory describes how consumers make decisions on what to buy. 9 36 0
Consumption refers to the use of foods anomic d services to satisfy human wants directly. 10 35 -1

The above situation illustrates the Law of diminishing Marginal Utility. The law states that
THE UTILITY FUNCTION
as additional units of good are consumed, the additional utility derived from each
A consumer aims to maximize the satisfaction he/she derives from the use of a
additional unit tends to diminish. The reason for this behavior is the satiation of human
good or a service. Utility is the same term used for satisfaction. Utility is something
wants. Man’s wants can be fully satiated at a given time.
intangible. As such, it is not easy to measure .Qualification goods are subject to
measurement; they can be expressed in numerical values. In order to make it easy to
SIGNIFICANCE OF CONSUMER BEHAVIOR IN BUSINESS
understand the concept of utility, we shall assume that it is measurable in units, which we
shall call utils, is one unit of satisfaction.
The consumer is the person who buys the product business offers for sale. It is therefore
imperative that we get to please the consumers, so he/she will buy from us instead of from
The utility function shows the relationship between utility and consumption. In equation
our competitors and also that once he buys from us he will be loyal to us and not buy from
form, it is: U= F(c), which simply stated is: utility is a function of consumption. Also, to be
the sellers of the same product.
more specific, utility for the consumption of goods X and Y can be expressed as:
U= f(X, Y).
Lesson 4.2 The Production Theory
Production refers to the use of economic resources to create goods and services that will
Important measurement of utility are: Total Utility and Marginal Utility. Total
be used to satisfy human wants. The theory of production is an analysis of the input-output
Utilityrefers to the combined utility derived from consuming certain units of a good.
relationship.
Marginal Utility refers to the additional utility derived from consuming an additional unit
 Input – refers to the resources used to produce goods and services.
of the good.
 Output – refers to the product created as a result of the combination of input in the
production process.
Production function is an equation showing the minimum output of a commodity that a
firm can produce per period of time which each set of input. Input and output are measured
in physical rather than monetary units:
Output ═ f (input)
Let us study the following utility schedule of consumer Marvin.
The production function is represented in the equation:
Table 4.1 Hypothetical Utility Schedule of Marvin for Chocolate Candy
O ═ f (i)
Where O stands for output and i stands for input. To be more specific, output depends on
Quality of Total Utility Marginal Utility
consumption the quantity of land, labor, and capital available. Thus:
1 8 8 O ═ f (Ld, Lb, C)
2 15 7

26
The production function contains the functional relationship between output and the basic output within limited quantities of output available to him/her. This in turn will help
factors of land, labor, and capital. These basics factors complement each other as they are maximize profits for the enterprise.
used in production of goods and services.
Lesson 4.3 Socio-Economic Impact of a Business
Output produced is measured in three forms:
 Total Product (TP) – is combined production of several units of a given input. Today, putting up a business is not just all about the profits. It is also concerned with
 Marginal Product (MP) – is the additional output produced by an additional unit of consumer welfare, job creation, environmental issues, uplifting the quality of life, and
the input and is equal ∆ TP/∆i. contributing to the economy.
 Average Product (AP) – refers to the average contribution per unit of input and is
equal to TP/i. IMPACT ON THE CONSUMER
Let us study us illustrate the values of the three forms of output by studying the following A new business, especially one that is innovative and focused on bringing some new
table. product or service to the market, is always welcome to the consumer who is looking value
Table 4.2 Production Schedule for Output X with Variable Labor Input for his money. If the new business is selling a product that has close substitutes in the
market, then the owner of the business will try his best to win the consumers away from
Quantity of Labor Total Product Marginal Product Average Product the existing sellers by offering something that will benefit the buyers.
Input One good way is to innovate the product; come up with the new features that are not
1 10 10 10 found in the existing competing goods.
2 22 12 11 Since the new seller will try to attract buyers, another strategy that could be adopted is
3 37 15 12.3 to improve the quality of the good making it notch higher than those already being sold in
4 55 18 13.8
the market.
5 69 14 13.8
6 77 8 12.8 Initially, as a business starts, the seller may make the product available at introductory
7 80 3 11.4 prices lower than the other substitutes in the market.
8 81 1 10.1 As long as new business can provide new goods and services, better quality of goods are
9 81 0 9 more options, the consumer can benefit from it.
10 80 -1 8
IMPACT ON THE SUPPLIERS AAND INVESTORS
This production behavior above leads us to the Law of Diminishing Marginal Returns. It is A new business will also provide opportunities for suppliers and investors. If a new
in reference to the diminishing values of MP. The Law states that additional output starts to construction company is set up, then this opens up opportunities for the other businesses
diminish at a certain point as additional units of a variable input are combined with one or that will supply them their needs, tools, wood, cement, steel, paints, nails, screws, and
more fixed input. The reason for this behavior can be traced to the constraints faced decorators. Many suppliers will now get a chance to sell the newly established business,
because of the fixed resources that are used in complement with the variable input, which which means income for them.
in this case, is labor.

SIGNIFICANCE OF PROUCTION THEORY IN BUSINESS IMPACT ON THE GOVERNMENT

A business is engaged in providing goods and services to customers with the goal of The government will also benefit from the establishment of new business, through
making profits. Although some businesses are engaged in retailing goods that they bought revenues earned on fees collected from them and on taxes imposed on the incomes of the
from producers, many businesses produce the goods that they sell. It is therefore important businesses.
for the business proprietor to be aware of the production behavior that will maximize
27
 Before a business can be set up, it has to meet requirements to start operating. First, the
business owner has to apply to start its business. Licenses have to be obtained.
Organization feels have to be paid. On the municipal level, the local government earns
revenue from these fees and licenses. This means money added to their local to provide
social services to the community, for the development of the company, to pay salaries of
local officials and workers, to maintain peace and order and to subsidize public schools.

IMPACT ON HOUSEHOLDS
New businesses mean employment opportunities for the Filipinos. Those who have jobs Figure 4.1 National Budget 2013
but are earning low-wages may find better paying jobs with the new companies.
Unemployed workers looking for work may have the chance of being employed by these The Philippines, as well as Indonesia, has the highest costs of electricity and real
companies. The pool of unemployed workers will definitely decrease. Being employed will estate acquisition in the ASEAN region (Figure 4.2 and 43.3).
enable them to buy their basic needs and even some luxuries. This means that their quality
of life and their standard of living will improve.

IMPACT ON THE COMMUNITY

Corporate Social Responsibility (CSR) has become a growing trend among businesses
today. As a result of this, corporations and even small businesses have increased their
focus on projects that provide scholarship to poor but deserving students, allocating
budgets for housing for low-income families such as a participation in program like the
GawadKalinga, environmental protection including tree planting, elimination of pollution,
and other environment related programs. Communities benefit from business- sponsored
activities that include sports fests and wellness programs, livelihood projects, micro
financing, and even medical and dental missions.
Figure 4.2 Electricity Cost (US$ per Kilowatt Hour) 2004
Lesson 4.4 Socio – Economic and Government Impact on Business

GOVERNMENT IMPACT ON BUSINESS

While the government increasingly spends socio-economic services to improve business
condition (Figure 4.1), size and inadequate infrastructure and support services limit the
growth opportunities of micro enterprise.

Figure 4.3 Real Estate Acquisition Cost (US$ per Square Meter) 2004

28
It also has the highest tax rate on additional income (Figure 4.4) negating investment
incentives and further increasing cost of registration from bureaucratic red tape or delay.

Figure 4.4 Tax Rate (%) on Additional Income 1999

Figure 4.6 Real Wage Index

 HOUSEHOLD IMPACT ON BUSINESS Coupled with inadequate wage, unemployment has also trapped more than one-fourth
Although the country’s population is still young with a majority (68%) aged below 29 (26%) of families in poverty (Figure 4.7).
years old, it is gradually becoming older with declining fertility and mortality rates (Figure
4.5). also

Figure 4.7 Unemployment and Poverty

Figure 4.5 Populations in 2010 (by Age Group)

However the declining purchasing power of wage has marginalized the consumption Figure 4.8 also shows that only a pittance (8%) is spent on education and health.
of said age groups in at least forty percent (40%) of families (Figure 4.6).
Figure 4.8 Annual Family Expenditure 2012
29
TRADE AND CAPITAL MOVEMENTS
The external sector shapes the foreign exchange market (foreign currency inflow-
outflow) through its trade, capital, capital movements, and financial flows.
 Trade includes factor payments such as remittances of foreign companies to their
home countries.
 Capital movements include both short- and long –term foreign investments in the
country and Filipino investments abroad.
Foreign currency (largely in dollars) inflow less outflow payments define the Balance
of Payment (BOP) of the economy. Foreign currency receipts from abroad (inflows)
eventually sell for pesos while foreign currencies for payments to other countries
(outflows) are bought with pesos.
Likewise, a BOP deficit means that less foreign currencies are being sold for pesos than
those being bought with pesos (Figure 4.9).

Figure 4.9 Foreign Currency Flows and the Economy

As a part of its regulatory function, the government through the Central Bank
competitively buys and sells foreign currencies in the foreign exchange market to balance
supply and demand and stabilize the exchange rate.

Figure 4.10 Foreign Exchange Market

The economy’s production is yet to go deeper into more technology-based stages that it
imports the capital goods and final goods even including consumer items that it could
otherwise produce (Figure 4.11).

30
 Figure 4.13 Rea Exchange Rate

Further stifling the foreign currency market is the decline of its change rate against
Figure 4.11 Imports by Major Commodity Group Q1 2014 (Percent Share)
rising local prices (inflation) that makes the peso overvalued against the dollar in recent
years. The increasing value of pesos together with the other Asian currencies against the
But it only exports raw materials and some consumer items using low technology (e.g.
weakening dollar stems from capital flows avoiding the recession in the U.S. and Europe
garments) (Figure 4.12).
and finding opportunities in Asia. The resulting decline of the real exchange rate (exchange
rate divided by price index) has two (2) implications (Figure 4.13).

Figure 4.12 Exports by Major Commodity Group Q2 2014 (Percent Share)

As the country exports like little but imports much, it spends more but hardly earns
foreign currencies (largely dollars). What buy the foreign currency market are net capital
inflows (foreign investment, loans) that offset trade deficits (imports exceed exports) Figure 4.14 Year-to-date Appreciation/Depteciation of Asian Currencies against US
resulting in mostly BOP surpluses (Figure 4.13). dollar (in percent, as of end –March 2014)
HERFINDAHL – HIRSCHMAN INDEX (HHI)
As a final note to help guide the proponents of a business proposal in choosing what
type of industry to enter, the use of the Herfindahl-Hirschman Index – HHI would be
useful since it helps the proponent identify markets are highly competitive and saturated
and those markets with high market concentration.

31
 The HHI is commonly accepted measure of market concentration. It is calculated by
squaring the market share of each firm competing in a market, and then summing the
resulting numbers. Market share is equal to the Revenue of the Firm/Revenue of the
Industry and is actually a percentage. However, the whole numbers of the market share are
used to compute the HHI.
The HHI number can range from close to zero to 10,000. The HHI is expressed as:
HHI ═ MS2 of Firm 1 + MS2 of Firm 2 + MS2 of Firm 3… + MS2 of Firm n.
The results of HHI would indicate the following:
 HHI below 100 indicates a highly competitive market.
 HHI below 1000 indicates an unconcentrated market.
 HHI between 1000 to 1800 indicates moderate market concentration.
 HHI greater than 1800 indicates high market concentration.
BUSINESS ICONS
Philippine Business Icon: Manuel V. Pangilinan
th
In 2008, he was the 39 richest man in the Philippines with a net worth of US$ 39
million. Now 68 years old, Pangilinan was not born with the literal golden spoon in his
mouth, but he worked his way to what he is today. Graduating from the Ateneo de Manila
with a degree of Bachelor of Arts in Economics, cum laude, he proceeded to earn an MBA
degree in 1968 from the Wharton school of Finance and Commerce at the University of
Pennsylvania, as a Procter & Gamble Fellow. He subsequently worked with the PINMA
group, Bancom International Limited, American Express Bank, and the First Pacific
Company.
His contribution to the Philippines business and industry is outstanding. (Excerpts from
http://ateneansusa.camp8.org/).
Global Business Icon: Bill Gates
Born in 1955, relatively young entrepreneur Bill Gates founded the world’s largest
software business, Microsoft, with Paul Allen, and subsequently became one of the richest
men the world.
Source: www.biography.com Retrieved Dec. 7, 22014.
EXERCISES
A. Study Guides
 Answer the following questions:
1. What are the other obstacles and their specific effects to doing business?
2. How has declining purchasing power changed the household consumption pattern?
3. What is the effect of the foregoing on business competition and why?
4. Explain the meaning and cause of the recent overvaluing of the peso against the
dollar.
5. What are the indicator(s) that the country’s population is still young? What is the
consumption preference of the young?
B. Student’s Activities
 Do the following”
1. Discuss how SM impacts positively on the community and the country.
2. Look for a successful small business in your neighborhood. Interview the owner;
find out the reasons for putting up a business, the problems encountered, and the
reason for its success.
3. Choose a business whose owners are well known for their advocacies. Report on
these advocacies in the class.
4. Identify at least 10 goods that you always consume at home. How many are
imported from our neighbors (e.g. China, Thailand) and produced locally? Find
locally made consumer goods that compete with these imports. If you can find at
least two, compare their prices and quality. What will happen to the peso prize of
these imported consumer goods should the exchange rate continue to decrease in
absolute values, that is, if the peso appreciates in value? Explain. What will happen
to the remittances converted to pesos of our overseas contract workers (CW) under
the scenario of a peso depreciation? Explain.
REFERENCES
 APPLIED ECONOMICS TEXT BOOK BY GEORGE A. VILLASIS
 APPPLIED ECONOMICS TEXTBOOK FOR A PROGRESSIVE PHILIPPINES
BY TERESO S. TULLAO JR. PhD.
32
33