San Vicente St.

, Bogo City, Cebu

6010 Philippines
Tel Nos. (032)-434-8458, 434-8488
Telefax No. (032)-434-8488

Center for Educational Measurement (CEM)

SENIOR HIGH SCHOOL

Learning Modules in
APPLIED ECONOMICS

Grade 11

Student’s Name : ____________________________________

Grade Level : ____________________________________
Section : ____________________________________

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 SCHOOL’s PVMGO
WORKING PHILOSOPHY
CRMC as an educational institution is guided by
the observance of the following philosophies:
 Update teacher and staff capabilities through
training.
 Update facilities needed.
 Adopt continuous improvements in teaching
methods and techniques, while keeping
education costs at affordable levels.
 Undertake community outreach work through
relevant research and projects designed for
skills and livelihood upliftment.
VISION
A premier institution in Northern Cebu that
produces highly competent graduates in their fields of
specialization through the accomplishment of the
following strategies:
 Demand-driven outcomes-based programs.
 Efficient monitoring to improve student
performance.
 Adequate and well-maintained facilities.
 Establishing a realistic merit review system.
 Espousing professional upliftment.
 Implementing sustainable extension services and
research programs.
 Instituting monitoring measures to maintain the
competitive advantage in our area of influence.
MISSION
The Cebu Roosevelt Memorial Colleges, an
established educational institution in Northern Cebu
province since 1947, tasks itself with continually
enhanced efforts in preparing its student in their
chosen professions, thereby satisfying the intellectual
and educational preferences of its surrounding
communities while aligning with national goals and
development.
CORE VALUES
CRMC believes that its people are its
primary assets. They are living models of the
aspirations of CRMC. They all treasure and are
continually guided by the following core values:
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integrity, resourcefulness, loyalty, leadership, and
sense of urgency.
INSTITUTIONAL OBJECTIVES
CRMC CULTURE
 To uphold the name CRMC as synonymous with
quality and good values.
 To make the defined core values and good citizenship
as the bedrock of the institution’s culture.
ACADEMICS (commitment to students)
 To continuously develop the academic edge of
producing graduates of distinction for them to be
competitive locally and globally.
PROFITABILITY (commitment to stockholders)
 To sustain a decent level of financial capability to
manage costs and enable a realistic growth to
support the changing academic output requirements
responsive to the growing labor market.
EMPLOYEE CAREER (commitment to employees)
 To pursue the faculty development program to help
build in-service career and professional growth of
personnel, thereby ensuring attainment of the
school’s academic goals.
COMMUNITY OUTREACH (commitment to
community)
 To provide community extension services to open
and sustain avenues for the economic and skills
growth in neighboring communities.
RESEARCH (commitment for growth in knowledge)
 To pursue research studies and projects aimed mainly
at expanding knowledge for academic enhancement
as well as initiating community development,
prioritizing them according to need.
 COURSE OUTLINE

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 Transfer: Unit Performance Task’
APPLIED ECONOMICS

GOAL: As an employee of the Department of Tourism. The department aims to drive

tourism figures and contribute to the growth of the economy.Given the present global and
regional challenges, how will you promote the Philippines t o tourist

ROLE: Secretary and Spokesperson of the Department of Tourism.

AUDIENCE: Teachers and Students

SITUATION: You will promote the Philippine to tourists during the Pintos Festival in
Bogo City.

PRODUCT: Create a skit or an advertising material that makes use of the data to
highlight good things about the country. Create your advertising material for the
campaign

STANDARDS AND CRITERIA:

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recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
All rights reserved. No part of this paper may be reproduced, distributed, or transmitted in any form or by any means, including photocopying,
recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
LESSON 1
Industry and Environmental Analysis:
Business Opportunity Identification
1
INTRODUCTION:
A business is just a small portion of an industry. It is undertaking by a person or a group of person
who are partners, or a stockholder who own a juridical entity known as corporation. Its main
objective is to earn profit for the owners. An industry, on the other hand, is the aggregation of the
different businesses engaged in the same line of undertaking. For example, Celine is a business
2
firm that is part of the country’s shoe industry. For a reason 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

OBJECTIVES/LEARNING COMPETENCIES
____________________________________________________________________________

LEARNING COMPETENCIES:

Identify and explain different principles, tools, and techniques in creating a business. ABM_AE12-
IIa-d9

OBJECTIVES:
At the end of this lesson, the students should be able to:

1.Identify principles and tools in creating a business.

2.Apply SWOT analysis as tool in evaluating a business opportunity.

3. Apply porter’s five forces of competitive position analysis can be applied as tool in evaluating a business
opportunity.

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recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
 EXPLORE
Let’s Explore!

Discussions:
BUSINESS ORGANIZATION
From a legal point of view, there are four ways to form a business:

1. Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person,
usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own
all the assets of the business by the profits generated by it. They also assume for any of complete
responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one e public,
you are one in the same with the business.
Advantages of a Sole Proprietorship

 Easiest and least expensive form of ownership to organize.

 Sole proprietors are in complete control, and within the parameters of the law, may make decisions
as they see fit.
 Profits from the business flow-through directly to the owner’s personal tax return
 The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
 Sole proprietors have unlimited liability and are legally responsible for all debts
 against the business. Their business and personal assets are at assets are at risk.
 May be at a disadvantage in raising funds and are often limited to using funds
 from personal savings or consumer loans.

 May have a hard time attracting high-caliber employees, or those that are
 motivated by the opportunity to own a part of the business.
 Some employee benefits such as owner’s medical insurance premiums are not
 directly deductible from business income (only partially as an adjustment to
 income).

2. Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law
proprietorships, the law does not distinguish between the business and its owners. The Partners should have
a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be
resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what
steps will be taken to dissolve the partnership when needed; Yes, it’s hard to think about a “break-up” when
the business is just getting started, but many partnerships split up at crisis times and unless there is a defined
process, there will need process, there will be even greater problems. They also must decide up front how
much time and capital each will contribute, etc.
Advantages of a Partnership

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recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
  Partnerships are relatively easy to establish; establish; however, time should be invested in
developing the partnership agreement.
 With more than one owner, the ability to raise funds may be increased.
 The profits from the business flow directly through to the partners’ personal tax
 return.
 Prospective employees may be attracted to the business if given the incentive become a partner.
 The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership
 Partners are jointly and individually liable for the actions of the other partners.
 Profits must be shared with others.
 Since decisions are shared, disagreements can occur.
 Some employee benefits are not deductible from business income on tax returns.
 The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

a. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according
to their internal agreement. Equal shares are assumed unless there is a written agreement that states
differently.
b. Limited Partnership and Partnership with limited liability
“Limited” means that most of the partners have limited liability (to the extent of
their investment) as well as limited input regarding management decision, which generally encourages
investors for short term projects, or for investing in capital assets.
This form of ownership is not often used for operating retail or service businesses.
Forming a limited partnership is more complex and formal than that of a general
partnership.
c. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a
single project. If the partners in a joint venture repeat activity, they will be
recognized as an ongoing partnership and will have to file as such, and distribute
accumulated partnership assets upon dissolution of the entity.

3. Corporations
A Corporation, chartered ration, chartered by the state in which it is headquartered, is considered by law to
be a unique entity, separate and apart unique entity, from those who own it. A Corporation can be taxed; it
can be taxed; it can be sued; it can enter into contractual agreement into contractual agreements. The owners
of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major
policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
 Shareholders have limited liability for the corpora against the corporation. Action’s debts or
judgments
 Generally, shareholders can only be held accountable for their investment in stock of the the
company. (Note however, that officers can be held personally liable for their actions, such as the
failure to withhold and pay employment taxes.
 Corporations can raise additional funds through the sale of stock.
 A Corporation may deduct the cost of benefits it provides to officers and employees.
 Corporation status if certain requirements are met. This election enables company to be taxed
similar to a partnership.

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 Disadvantages of a Corporation
 The process of incorporation requires more time and money than other forms of organization.
 Corporations are monitored by federal, state federal, state and some local agencies, and as a
 result may have more paperwork to comply with regulations.
 Incorporating may result in higher overall taxes. Dividends paid to shareholders
 are not deductible from business income; thus this income can be taxed twice.

4. Cooperative
A cooperative is an entity organized by people with similar needs to provide themselves with goods or
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.

SMALL, MEDIUM, AND LARGE SCALE BUSINESS

It is also important to study the classification of business as to the size based on the worth of the business
assets. In the Philippines, total assets for micro business are worth below P1, 500, 001. For the small
business, total assets are from P1, 500, 001 to P15, 000, 000. Medium business has the total assets from
P15, 000, 001 to P60, 000,000. Any business with assets in excess of P60, 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 proprietorship 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, profession, operation of tourism-related business and agri-business.

3.2. TOOLS IN EVALUATING A BUSINESS

According to 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 identify. Who are your target customers?
5. The regulator 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

SWOT analysis (or SWOT matrix) is a strategic planning technique used to help a person or organization
identify the Strengths, Weaknesses, Opportunities, and Threats related to business competition or project
planning. [1] It is intended to specify the objectives of the business venture or project and identify the
internal and external factors that are favorable and unfavorable to achieving those objectives. Users of a
SWOT analysis often ask and answer questions to generate meaningful information for each category to
make the tool useful and identify their competitive advantage. Strengths and Weakness are frequently
internally-related, while Opportunities and Threats commonly focus on environmental placement.

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 Strengths: characteristics of the business or project that give it an advantage over others.
Weaknesses: characteristics of the business that place the business or project at a disadvantage relative to
others.
Opportunities: elements in the environment that the business or project could exploit to its advantage.
Threats: elements in the environment that could cause trouble for the business or project.

SWOT analysis aims to identify the key internal and external factors seen as important to achieving an
objective. SWOT analysis groups key pieces of information into two main categories:

1. Internal forces
The strengths and weaknesses actually refer to the internal forces, and these are the resources and
experiences readily available to the business proponent. Usually include as internal forces are:

a) financial resources such as money and sources of funds for investment;

b) physical resources, such as the company’s location, facilities, machinery, and equipment
c) human resources consisting of employees;
d) access natural resources, trademarks, patents, and copyrights; and
e) current processes, such as employee programs, department hierarchies and software systems, sales and
distribution capabilities, marketing programs, etc.

2. External forces — the opportunities and threats presented by the environment

external to the organization.
These may include:
a) economic trends including, national and local, national and international financial trends, developments
in the country’s stock market, reforms in the banking system, growth of the Gross Domestic product;
b) market trends, such as new products or technology or evolving buyers’ profiles, including changes in
tastes and lifestyle behavior;
c) national and local laws and statutes as well as political, environment, and economic regulations;
d) demographic characteristics of the target market such as the age, the gender, the culture of the costumers;
e) relationship with suppliers and co-owners; and
f) 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. When
used properly and regularly, this can serve as guide for the company to attain success. It is guide to prepare
for a new venture, design business strategies, and identify areas of change and reform. When used properly,
the business owner can anticipate problems, including possible solutions and take advantage of identified
opportunities. The owner can maximize its strengths and attempt to cut out its weaknesses.

Table 3.1 presents a SWOT analysis template that can be used as a guide to
identify the strengths, weaknesses, opportunities, and threats.

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PORTER’S FIVE FORCES OF COMPETETIVE POSITION ANALYSIS
Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of
Harvard Business School as a simple framework for assessing and evaluating the competitive strength and
position of a business organization. This theory is based on the concept that there are five forces that
determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify
where power lies in a business situation. This is useful both in understanding the strength of an
organization’s current competitive position, and the strength of a position that an organization may look to
that an organization may look to move into. Strategic analysts often use Porter’s five forces to understand
whether new products or services are potentially profitable. By understanding where power lies, the theory
can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

The five forces are:

1. Supplier power
An assessment of how easy it is for suppliers to drive up suppliers. This is driving up prices. This is driven
by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and
strength of the supplier; and cost of switching from one supplier to another.

2. Buyer power

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An assessment of how easy it is for buyers to drive prices down. This is driven by the: number of buyers in
the market; importance of each individual buyer to the organization; and cost to the buyer of switching from
one supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms.

3. Competitive rivalry
The main driver is the number and capability of competitors in the market. Many competitors, offering
undifferentiated products and services, will reduce market
attractiveness.

4. Threat of substitution
Where close substitute products exist in a market, it increases the likelihood of customers switching to
alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness
of the market.
5. Threat of new entry
Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and
durable barriers to entry, for example, patents, economies of scale, capital requirements or government
policies, then profitability will decline to a competitive rate.

IMPORTANCE OF PORTER’S FIVE FORCES ANALAYSIS

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 a capacity in a specific industry, and also for developing competitive
strategies. Under this theory, a business becomes more attractive, the greater the suppliers power to drive
prices up, the less the buyer’s power to drive prices down, the less the number of competitors in the market,
the more differentiated the product or service is the less the substitutability of the products for similar goods,
and the more difficult it is for new entrants to participate in the market. (Chartered Global Management
Accountant 2015)

3.3. INDUSTRY ANALYSIS

In a book published by the Development Academy of the Philippines, how to Prepare Feasibility Studies,
it includes an industry analysis of the following important factors.

COMPETITION
Who are the major businesses in the industry? Are there locations close to your proposed business? Have
they been long existing or still new entrants? What is the market share of each of these businesses? It is
very important that you know your competitors and be ready for them. Your aim is to win their costumers,
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 need supplier 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. With modern technology, one can easily go online and shops for suppliers look at reviews made by
the other retailers to determine who the reliable ones are. The yellow pages of the telephone directories are

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also a good source of suppliers’ stores and names. The person intending to put up a business must ask
around for prices in order to be more competitive with other sellers in the market.

A business owner can buy directly from the manufacturers. This will be the cheapest source since there are
no middlemen involved. However, this is only recommended if the supplier’s location is convenient and
will not involve expensive delivery costs. Another alternative is to buy from distributors. They are
wholesaler’s brokers who buy in big quantities from manufacturers, add a mark-up to their purchase price
and sell to retailers. Their prices are higher but they can sell in small quantities, which the manufacturers
would not normally do.

A third source of goods is through imports. Some businessmen go to nearby countries to buy their goods or
raw materials there. There is advisable if the prices abroad are relatively cheaper and no heavy import duties
will raise the prices and make the goods less competitive in the country and when transport costs are not
excessive. It is important to maintain good relationships with one suppliers; they are the key to one’s
continued access to goods and to raw materials that will be needed for the business.

SUBSTITUTE
Substitutes are goods that can be in place of another. These are goods that may, even if partly, satisfy the
same needs of a consumer such that the consumer may use one instead of another. For example, margarine
can be a substitute for butter or wheat bread for white bread. Some goods are close substitutes while others
are not. Pepsi Cola may be a very good substitute for Coca Cola, but not everybody will be willing to switch
brands because they have developed a taste for a particular cola. This is why manufacturers try to
differentiate their products from their competitors so that the customers will develop product loyalty for
their brand. We know that Safeguard and Dove are both bath soaps, yet we can distinguish one brand from
another, and we have our own preferences. The more differentiated a product is, the greater the edge of its
manufacturer because this can convince the customers to buy their product instead of that of the
competition.

A GUIDE TO INDUSTRY ANALYSIS

An industry analysis guide developed by North Carolina Carolina’s Small Business and Technology
Development Center (SBTDC) can help in making an analysis of one’s business industry.
The key factors to be considered in analyzing your industry identified by the 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 costumers as to age, income group, geographical locations, occupations; include
consumer’s demographics such a 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 government laws and regulations that apply to the business.
6. Company Information – make a list of the most successful business 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 Current operational/management trends within the in
trends within the industry, which are standard industry, which are standard practices prevalent among the
firms
11. The types of mark The types of marketing strategies prevalent within strategies in the industry

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12. Competitor information – include the location of competitors and how long have they been in business
and their market share

3.4. ENVIRONMENTAL ANALYSIS

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.

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 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 good leadership are factors that
can be an advantage to a business.

CULTURES AND LIFESTYLES

It is important to study cultural practices such as fiestas, celebration of the Christmas seasons, trends and
consumption patterns, as a means to identify the goods and services that 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 fa very
vital in determining the success or failure of if a business.

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 take place in an economy. This is referred to as the circular flow which is defined as the flow
of activities of household and firms in a circular direction.
Let us start with the first illustration.
THE SIMPLE FLOW OF GOODS AND SERVICES

In Figure 3.2, goods and services flow from the firms as producers, to the households as consumers, in a
clockwise direction. On the other hand, households as resource owners provide firms as producers with
resource use such as labor rendered, capital lent or invested, land rented to producers, and entrepreneurial
skills. Figure 3.2, these resources flow from the households to the firms also in clockwise direction. It is
the use of these resources that enables the firms to produce the goods and services delivered to the
households. The flow of products and resources are the physical flows in the economy.

The flipside to the physical flow is the money payment flow. Household pay and firms earns revenues in
exchange for the goods and services received and provided, respectively. In figure 3.2, revenues flow
counter clockwise from the households to the firms as payments for the goods and services received by the
former. Likewise, firms pay and households earn factor income for the use or resources provided to the

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former. Factor income payments counter flow from the firms to the households for resources provided by
the latter.
For as long as households are willing to consume, producers continue to produce goods and services for the
households using the resources provided by the latter. As the physical flow continues, so is the money
payment flow in exchange for products and resources in Figure 3.2, the physical flow continues in clockwise
direction in exchange for money payment flow in the counterclockwise direction.

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 for consumption (solidarrows, Figure 3.3). 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 3.3).
Raw materials are unprocessed goods like raw materials, 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 the
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 of 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 consumers for their use. Figure 3.3
magnifies the production side of the circular flow diagram in Figure 3.2. Goods flow up the production
stages to the consumers in return for payments trickling down the production stages for their inter-stage
product flows.

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Another form of physical flow is the flow of resources from the households to the business firms (solid
arrows, Figure 3.4). The households are the source of resources used by the raw material firm, the
intermediate good firm, and the final good firm. In the flow, it can be seen that the household provides
resources to the raw material, intermediate good and the final good firms use in the production of goods.

In return for the use of the resources, the three types of producing units’ make money payments to
households (broken arrows). This is now a financial flow since it involves the payment of money to the
resource owners. Money is now paid by the various firms to the households as payment for the resources
they provide. Figure 3.4 magnifies the flows of resources and payments in exchange between households
and the producers in the circular flow he circular flow diagram in Figure 3.2.

FIRM UP

Venn Diagram

Distinguish between a business and an industry.

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 DEEPEN

REFLECTION PAPER

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SUMMATIVE ASSESSMENT
DISCUSSION QUESTION
I. Answer the follow the following questions. questions.

1. Write the advantages and disadvantages of the different types of the business.

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2. Why is competition an important factor that has to be studied before putting up

business?
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3. When you decide on putting up a business, how do you choose the market that you
should cater to?
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 _______________________________________________________________________
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4. What is the level of Philippine industrial development according to the World Economic
Forum (WEF)?
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5. Contrast this current stage with the highest development stage that our country can
aim for.

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 MODULE 2
APPLIED ECONOMICS IN RELATION
TO PHILIPPINE ECONOMIC PROBLEMS 2
INTRODUCTION:

OBJECTIVES/LEARNING COMPETENCIES
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LEARNING COMPETENCIES:

 Distinguish the different services/products of business and industry in the locality

ABM_AE12II-a-d10

OBJECTIVES:
1.Create a simple industry analysis.
2.Identify the factors which are taken into account bin an environmental analysis.
3.Describe the economy’s three main producing sectors and show important they are
making a choice of what business to establish.

EXPLORE
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.
THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two relevant units in the flow: the government and foreign countries. The government is important
because it makes purchases of economic resources. From the households and makes money payments to
the resource owners for the use of their resources. The government also buy goods and services from the
producing units for which it makes money payments. The significance of the global economy cannot be
overemphasized in today’s times. Am economy buys goods from other countries; these are called imports.
An economy sells goods to other countries; these are called exports. A country pays for the goods imported
and earns income from exports.

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3.6. THE ECONOMY’S PRODUCING SECTOR

The Three Economic Sectors According to the three-sector theory, all economic activity can be classified
into one of three sectors: the primary sector, the secondary sector and the tertiary sector. As a rule of thumb,
we say the more advanced an economy is, the more its focus shifts from the primary, through the secondary
to the tertiary sector. In recent years, many economists have argued that the three-sector theory should be
extended to include a quaternary sector. But before we discuss the reasoning behind this, we will look at
each of the three economic sectors in more detail below.

The three main sectors of the economy are:

1. Primary sector – extraction of raw materials – mining, fishing and agriculture.

2. Secondary / manufacturing sector – concerned with producing finished goods ,e.g. factories making
toys, cars, food, and clothes.
3. Service / ‘tertiary’ sector – concerned with offering intangible goods and services to consumers. This
includes retail, tourism, banking, entertainment an I.T. services.

A primitive economy will primarily be based on the primary sector – with most people employed in
agriculture and the production of food. As an economy develops, improved technology enables less labor
to be needed in the primary sector and allows more workers to produce manufactured goods. Further
development enables the growth of the service sector and leisure activities.

Primary sector

The primary sector is sometimes known as the extraction sector – because it involves taking raw materials.
These can be renewable resources, such as fish, wool and wind power. Or it can be the use of non-renewable
resources, such as oil extraction, mining for coal.

Secondary or manufacturing industry

The manufacturing industry takes raw materials and combines them to produce a higher value added
finished product. For example, local makers of wallet and bags produce the final products by processing
the intermediate product of leather which is manufactured from the animal hide extracted by agriculture.
Within the industrial sector itself, local cement manufacturers produce the product by heating limestone
mixed with clay from the quarrying industry for use in the construction industry. The lead industries in
resource use and output are manufacturing and construction as they respectively account for 65% and 20%
of sectoral production (NCSB 2009).

SERVICE SECTOR

The Service Sector produces the intangibles supporting and complementing

production in the other sectors as well as among its own industries. For example, the transport industry
brings input and output among the other industries. Reliant on its activity is the trade industry that takes on
the complementary role of marketing their produce. The single biggest industry in resource use and output
is trade as it accounts for 29% of sectoral production (NCSB 2009).

3.7. AGRICULTURE

The Philippines is a predominantly agricultural country. The country’s economy is founded on agriculture.
Our resources primarily come from the earth’s bounty. The country’s climate and temperature is best suited
for agricultural production. Majority of the populate also depend on agriculture for their livelihood.

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Agricultural development is an important issue. it can be said that be said that the progress of the progress
of the sector provides the impetus and accelerates the rate and process of industrialization in a country like
the Philippines. As such, a discussion on industrialization should give careful consideration to the
importance of developing the agricultural sector.

How does the Philippine agricultural sector face?

Our country is faced with serious problems on ensuring an adequate supply of food. It is quite disconcerting
that a country that used to be one of the world’s major food suppliers now imports food. Isn’t it disturbing
that those who nurture the land don’t have enough to eat? Don’t you ever wonder why for instance, chicken
from the United States is often cheaper than those grown locally? Or why garlic from Taiwan is a lot cheaper
than the ones grown in Ilocos ? Why are our markets flooded with imported agricultural products? What
does this say about our agricultural sector.

This lesson will focus on the country’s agricultural sector – its scope and importance, as well the level of
technological advancement and productivity the sector has attained through time. We shall also take a look
at the issues and concerns faced by the sector and the millions of farmers and agricultural workers.

AGRICULTURE

The word agriculture comes from the Latin phrase “ager cultura” which means cultivation of fields.
Agriculture is a special type of production that generally involves plant cultivation and raising animals. Its
scope has since been expanded to include fishery and forestry. The discovery of agriculture in 6 000 BC
was a significant even that had a major impact on the development of civilization.
People who lived before agriculture was discovered substituted by foraging for food. They managed to
survive by hunting, fishing and gathering food wherever they can come across these. People inhabited areas
where they could easily find food. People then usually People then usually moved from place moved from
place to place in to place in search of food, search of food, which is which is why they were called
“nomads”. As population increased, it became more difficult to rely on hunting, gathering hunting,
gathering or simple fishing for the people’s food requirements. Prompted by the need to ensure their food
supply, people eventually discovered they could cultivate crops and domesticate animals. This resulted in
changes in their way of life. Permanent communities were formed as people saw it advantageous to cultivate
a permanent area than move from one place to another. They no longer had to worry about what to eat and
where to find food. This ended the people’s nomadic life and signaled the beginning of civilization. The
development of agriculture resulted in significant advancements in the people’s knowledge and
understanding of their environment. Since some members of the clan or family have been liberated some
from the task of looking for food, people were able to develop other capabilities to further improve their
lives. This eventually paved the way for the invention of different tools and methods useful for farming like
plows as well as the creation of systematic irrigation systems. This is why it is often said that agriculture is
the agriculture is the base for the base for the development of societies.

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 FIRM UP

Reflection Paper
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deadline.
For Online Class- You can send your answers on our Google Classroom or via
Gmail- michelmandaguit@gmail.com

1. Think of 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 new 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.
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2.What are the role of the Philippine sector in economic development.?

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 DEEPEN
Reflection paper
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deadline.
For Online Class- You can capture a picture of your work and send it on us
Google Classroom or via Gmail- michelmandaguit@gmail.com

Observe and talk the small producers/sellers in your barangay (farmers, fishermen, or vendors cottage
industries). What other market opportunities do they see and for what purpose and what product. What
can they collectively do when they form an association and for what goals? What kinds of government
support do you think they need for what specific activities? What can your barangay and city/municipal
government can do to support these small producers/sellers and for what specific projects and products.
How would you conduct your business if you were one of the owners of a small –scale cottage industry?

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 MODULE 3
SOCIO – ECONOMIC IMPACT STUDY

3
INTRODUCTION:

OBJECTIVES/LEARNING COMPETENCIES
____________________________________________________________________________

LEARNING COMPETENCIES:
1.Identify and explain the various socioeconomic factors affecting business and industry. ABM_AE12II-
e-g11.

2.Analyze and evaluate the viability of a business and its impact on the community . ABM_AE12II-e-g12
3

3.Formulate recommendations and strategies on how to minimize and maximize a business’s negative
impact and positive impact, respectively. ABM_AE12II-e-g13

OBJECTIVES:
1.Identify and explain the various determinants of business and industry.
2.Describe the role of government in the economy.
3.Create a recommendations and strategies on how to maximize a business positive impact on society.
4.Draft a business proposal using the lessons studied in previous chapters.

EXPLORE
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deadline.
For Online Class- You can capture a picture of your work and send it on us
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THE THEORY OF CONSUMER BEHAVIOR
Consumer Theory describes how consumers make decisions on what to buy. Consumption refers
to the use of goods and services to satisfy human wants directly.

THE UTILITY FUNCTION

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A consumer aims to maximize the satisfaction he/she satisfaction he/she derives from the use of a
good or a service. Utility is the term used for satisfaction. Utility is something intangible.
As such, it is not easy to measure. Quantifiable goods are subject to measurement, they
can be expressed in numerical values. In order to make it easy to understand to concept of utility,
we shall assume that it is measurable units, which we shall called
utility. A utility is one unit of satisfaction. The utility function shows the relationship between
utility and consumption. In equation form, it is U = f(C), which simply stated: utility is a function
of consumption. Also, to be more specific, utility for the consumption of goods X and Y can be
expresses as: U = f (X, Y).
Important measures of utility are: Total Utility and Marginal Utility: Total Utility refers to the
combined utility derived from consuming certain units of a good. Marginal Utility refers to the
additional utility derived from consuming an additional unit of the good.
Let us study the following utility schedule of consumer Marvin.

Let us study Marvin’s utility schedule for chocolate candy. When he eats the first bar, he gets a
utility of 8. The second bar gives him a utility of only 7. We see that while his total utility increases
with each additional chocolate bar, the additional utility becomes less and less. The satisfaction he
derives from each additional unit starts to diminish. Notice that upon eating his ninth bar, his total
utility does not change at all, which means that there is no additional utility der marginal utility at
9 units of consumption is equal lived from the ninth. That is why to zero. Look at what happens as
he consumes the tenth bar. Instead of increasing, the total declines and marginal utility is even
negative. Are there physical manifestations of a negative marginal utility? Physical discomforts
such as an upset stomach, dizziness, and indigestion are signs that instead of adding to one’s utility,
the consumption of the additional unit of the good has resulted in the decrease of total utility
derived. The above situation illustrates the Law of Diminishing Marginal Utility. The law states
that as additional units of a good are consumed, the additional utility derived from each additional
unit tends to diminish. The reason for this behavior is the satiation of human wants. Man’s wants
can be fully satiated at a given time. That is why owners of Vikings, Dad’s, or Buffet 101, do not
lose money even if people are free to eat all they can. At some point, they will simply give up
eating because their wants have been satisfied.

SIGNIFICANCE OF CONSUMER BAHAVIOR IN BUSINESS

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The consumer is the person who buys the product business offers for sale . It is therefore imperative
that we get to please the consumer, so he/she will buy from us instead of from our competitors and
also that once he buys from us he will be loyal to us and not buy from other sellers of the same
product. Knowing how consumer satisfaction is maximized will help a business in always keeping
the consumer’s welfare the topmost priority.

4.2. THE PRODUCTION THEORY

Production refers to the use of economic resources to create goods and services that will be used
to satisfy human wants. In this chapter, we will focus on the behavior of the producer in an attempt
to maximize output. The theory of production is an analysis of the input-output relationship. The
term input refers to the resources used to produce goods and services. 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 maximum output of a commodity that a firm can produce per period of time
with each measured in physical rather than monetary units. h set of input. Input and output are

Output = f(input)

The production function is represented in the equation:

O = f (i)

Where O stands for output and i stands for input. To be more specific, output depends on the
quantity of land, labor, and capital available. Thus:

O = f (Ld , Lb, C)

The production function contains the functional relationship between output and the basic factors
of land, labor, and capital. These basic factors complement each other as they are used in the
production of goods and services. Output produced is measured in three forms:
Total Product (TP) is the combined production of several units of a given input.
Marginal Product (MP) is the additional output produce by an additional
unit of the input and is equal to ∆ TP/∆ i.
Average Product (AP) refers to the average contribution per unit of input and is equal to TP/i.

Let us illustrate the values of the three forms of output by studying the following table. Let us
table. Let us assume that the variable is assume that the variable input is labor measure in input is
labor measure in man hours and is man hours and is combined with fixed of capital and land.

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Let us study the behavior of the different product values as the quantity of labor input increases.
Initially, we see that the addition of additional labor input leads to a proportionally greater increase
in total product or output (TP). This results in increasing values of MP and AP and corresponds to
labor input and from 1 to 4. As more input of labor are added, Total Product continues to increase
but already at a decreasing rate. This happens from the 5th to the 9th input of labor. Here, the
Marginal Product and Average Product Average Product already show de already show decreasing
values. Upon creasing values. Upon the addition of the addition of the 10th input of labor, the
Marginal Product is now negative. The stage where Total Product is increasing at a fast rate is the
stage of increasing returns. Here, Marginal Product and Average Product are both increasing.
When Total Product is increasing at a slower rate and Marginal Product and Average Product are
both decreasing, we have the stage of diminishing returns. When Total Product decreases and as a
result Marginal Product is negative, we enter the stage of negative returns. The production
behavior above leads us to the Law of Diminishing Marginal Returns. It is in reference to the
diminishing values of MP. The law states that additional output starts to diminish at a certain point
as additional units of a variable input are combined with or more fixed input. The reason for this
behavior can be traced to the constraints faced because of the fixed resources that are used in
complement with the variable input, which in this case, is labor.

SIGNIFICANCE OF PRODUCTION THEORY IN BUSINESS

As we already learned, As we already learned, a business is engaged in p business is engaged in
providing goods and services providing goods and services to customers with the goal of making
profits. Although some businesses are engaged in retailing goods that they bought from producers,
many businesses produce the goods that they sell. It is therefore important for the business
proprietor to be aware of the production behavior that will behavior that will maximize output
with maximize output with limited quantities of output limited quantities of output available
to him/her. This is in turn will help maximize profits for the enterprise.

4.3. SOCIO-ECONOMIC IMPACT OF A BUSINESS

Today, putting up a business is not just all about profits. It is also concerned with consumer
welfare, job creation, environment issues, uplifting the quality of life, and contributing to the

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economy. Let us now look at how a business can impact the consumer, the suppliers and the
investors, the government, and households.
IMPACT ON THE CONSUMER
A new business, w business, especially one especially one that is that is innovative and innovative
and focused f on bringing on bringing some new product or service to the market, is always
welcome to the consumer who is looking value 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 substitutes in the market, then the owner of the business will try his best to win the
consumers away from the existing sellers by offering something that will benefit the buyers.
How can the new business accomplish this? One good way is to innovative the product come up
with the new features that are not found in the existing competing goods. This can be in the form
of a better appearance, a new venture feature or ingredient or a new convenient way of making the
product available. A new business therefore means new products or services available to the
buyers, giving them more choices. Since the new seller will try to attract buyers, another strategy
that could be adopted is to improve the quality of the good making it a notch higher than those
already being sold in the market. Although this may mean high prices for better quality goods, this
could cater to a market that is more after quality than low price. Initially, as a business starts, the
seller may make the product available an introductory prices lower than the other substitutes in the
market. This will definitely be an advantage to the price conscious buyers who have limited
budgets. As long as a new business can provide, new goods and services, better quality of goods
and more options, the consumer can benefit from it. But if a business comes up with a low quality
good and does not provide the consumer value for his money, then this business will have a
negative impact on the market.

IMPACT ON SUPPLIERS AND INVESTORS

a new business will also provide opportunities for suppliers and investors. investors. If a new
construction company is set, up, then this opens up opportunities for the other businesses that will
supply them their needs, tools, wood, cement, steel, paints, nails, screws, and decorators. May
suppliers will now get a chance to sell to the newly established business, which means income for
them. Demand for the goods provided by the suppliers will increase. These suppliers will now
need to produce more of them and they will need to hire more workers who will earn wages from
being employed. More capital will be needed to invest in the production of these tools and
materials, generating again income for the economy. Investors get to earn returns on their
investments, with capital flowed back into more investments and generating more income for the
economy, thus, leading to economic growth.

IMPACT ON THE GOVERNMENT

The government will also benefit from the establishment of new businesses, through revenues
earned on fees collected from them an on taxes imposed on the incomes of the businesses.
Before a business can be set up, it has to meet requirements to start opening. First, the business
owner has to apply to start its business. Licenses have to be obtained. Organizational fees to be
paid. On the municipal level the local government earns revenue from these fees and licenses. This
means money added to their local budget 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. On the national level, the government gets to impose taxes
on the incomes

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earned by the businesses. Employees hired by these businesses also have to pay personal income
taxes to the Bureau of Internal Revenue (BIR). For employed workers, these taxes are regularly
withheld by these taxes are regularly withheld by their employers and remitted to the BIR. and
remitted on the BIR. These taxes revenues fuel development because they are used by the
government for national activities and for budget allocations for its programs. The national
government has revenues to finance its projects, to pay government officials, to build schools, to
improve the military, to promote peace and order all over the country, to build housing for the
poor, and to provide health services and improved welfare programs for the people.
A more detailed A more detailed study of the study of the government will follow in the
government will follow in the succeeding section succeeding sections of this chapter.

IMPACT ON HOUSEHOLDS
New Businesses mean employment opportunities for the Filipinos. Those who have jobs 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 companies. The pool of
unemployed workers will definitely decrease. Being employed will enable them to buy their basic
needs and even some luxuries. This means that their quality of life and their standard their standard
of living will improve. of living will improve. Acquisition of wealth and assets can now follow
both for the business owners and the employees they hire. Profits earned by the owners can be
invested back into the business for expansion, or some can be withdrawn by the owners which they
can use to buy new cars or new houses. Success stories on television shows feature rags- to-riches
stories of entrepreneurs who used to be very poor, but with hard work and persistence, were able
to make their businesses succeed, enabling them to send their children to good expensive schools,
building big houses, and buying two or more cars housed in their garage. The owners, because of
their success, manage to acquire wealth and buy assets which are fruits of their hard work.
With the growing focus on preserving the environment for future generations, businesses also get
to contribute their share. So-called green structures for buildings are means used to prevent further
damage to the environment. Instilling the value of recycling and reusing of resources among
employees and family members may also become the advocacy of these businesses. Spreading
information on the dangers of global warming may be promoted by the business owners. Thus,
businesses become instruments for society to have a better place to live in.

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 scholarships to poor but deserving students, allocating budgets for housing for low-income
families such as participation in programs like the Gawad Kalinga, environmental protection
including tree planting, elimination of pollution, and other environment related programs.
Communities benefit from business-sponsored activities that include sport fests and wellness
programs, livelihood projects, micro financing, and even medical and dental missions

4.4. SOCIO-ECONOMIC AND GOVERNMENT IMPACT ON BUSINESS

GOVERNMENT IMPACT ON BUSINESS

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

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recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
opportunities of micro enterprises. Declining debt payments to local and international debtors have
given way to more spending on services like road development and education. On the other hand,
size limits business access to technology, credit and market networks in the absence of government
support and services (Chapter 3). On top of the limitations of size, poor road conditions and
inadequate support industries further limit production and marketing by adding cost to doing
business. Poor road condition increases transport cost and the risk of perishability especially of
agricultural and fishery products. High costs of electricity and real estate acquisition increase
acquisition increase production cost production cost especially of manufacturers. of
manufacturers. Other difficulties in doing business in the country are high taxes, costly
registration, and bureaucratic corruption. Foreigners and foreign companies face the same
obstacles in developing local operation and marketing. The Philippines, as well as Indonesia, has
the highest costs of electricity and the real estate acquisition in the ASEAN region (Figure 4.2 and

4.3). 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). Thus local enterprises especially those of micro scale are yet weak to face competition from
imports and foreign investments from the liberalization policies of the 1990s.

HOUSEHOLD IMPACT ON BUSINESS

Although the country’s population is still young with a n is still young with a majority (68%) aged
below majority (68%) aged below 29 years old, it is gradually becoming older with declining
fertility and mortality rates (Figure 4.5). More than one-third (35%) aged 15 to 34 years old are
given to sophisticated consumption. One-third (33%) aged up to 14 years old are children needing
grow up needing grow up care and only care and only seven percent (7%) seven percent (7%) aged
to 60 aged to 60 years old and years old and above need elderly support. But as fertility rate
(children per woman) is declining, so is the proportion of children needing growing up care (below
15 years old). For example, fertility dropped from six (6) in 2000 to three and one-half (3.5) in
2010 while the percentage of children up to age 15 years old correspondingly dropped from thirty-
seven percent (37%) to just thirty-three percent (33%). Also as mortality rates of all ages dropped
from 2000 to 2010, life expectancy correspondingly increased from 67 to 71 years old with one-
half of the population not younger than 23 from 21 years old on 2000. Fast forward, the National
Statistics Office (NSO) forecasts elderly population to increase to almost ten percent (10%) in
2023 from just seven percent (7%) in 2010.
However, the declining purchasing power of wage has marginalized the consumption of said age
groups in at least forty percent (40%) of families. (Figure 4.6). Coupled with inadequate wage,
unemployment has also trapped more than one-fourth (26%) of families in poverty (Figure 4.7). A
typical family hardly saves and spends most income on food (43%) and housing, utilities, and fuel
(21%). Figure 4.8 also shows that income on food (43%) and housing, utilities, and fuel (21%).
Figure 4.8 also shows that only a pittance (8%) is spent on education and health. Thus, the
Philippine has the lowest rate (% on income) of savings mostly corporations even in the ASEAN
region (Chapter 2). Due to limited purchasing power of income, many Filipino consumers have
become price sensitive and are only able to afford cheap but shoddy items. Low quality
characterizes local products especially manufacturers that are largely food items. Low-
quality consumption can mean inadequate care for the young (below 15 years old). and the elderly.
Also, as non-essentials are crowded out of the budget, so is sophisticated

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consumption especially of the youth (15 – 34 years old). In the end, some micro businesses may
be crowded out of the market in view of limited consumer demand due to inadequate income.

TRADE AND CAPITAL MOVEMENTS

The external sector shapes the foreign exchange market (foreign currency inflow-outflow) through
its trade, capital movements, and financial flows. Trade includes factor payments such as
remittances from overseas contract workers and profit 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. Financial flows involve international debts and loans and
their repayments. 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
brought with pesos. From the viewpoint of the economy, a BOP surplus means that more foreign
currencies are being sold for pesos than those being bought with pesos. Likewise, a BOP deficit
means that less foreign currencies are being sold for pesos than those being bought with pesos.

FIRM UP

Reflection Paper
*Note: For Modular Class- You can submit your work every end of the week or during
deadline.
For Online Class- You can send your answers on our Google Classroom or via
Gmail- michelmandaguit@gmail.com

Interview a typical mother or housewife in a low-income community on how she budgets the income of her
family. Further ask her if said family budget can still provide for some amenities (e.g. Cellphone load,
DVDs,) and if so, how much and what kind. Look around the said community and find the kind and number
of micro enterprises serving its consumer needs. Identify their market problems and figure out would do if
you were in their shoes.

DEEPEN
Reflection paper
*Note: For Modular Class- You can submit your work every end of the week or during
deadline.
For Online Class- You can capture a picture of your work and send it on us
Google Classroom or via Gmail- michelmandaguit@gmail.com

Identify at least 10 goods that you always consume at home. How many are imported from our neighbor
(e.g. China, Thailand) and produced locally? Find locally made consumer goods that compete with these

All rights reserved. No part of this paper may be reproduced, distributed, or transmitted in any form or by any means, including photocopying,
recording, or other electronic or mechanical methods, without the prior written permission of the HS department.
imports. If you can find at least one or two, compare their prices and quality. What will happen to the peso
price 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 (OCW) under the scenario of peso depreciation? Explain.

All rights reserved. No part of this paper may be reproduced, distributed, or transmitted in any form or by any means, including photocopying,
recording, or other electronic or mechanical methods, without the prior written permission of the HS department.