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ST. MARY’S COLLEGE BAGANGA, INC.
Poblacion, Baganga, Davao Oriental
MODULE OF
INSTRUCTIONS
HRAC 104
MICROECONOMICS
(FINAL)
S.Y. 2021-2022 | 2nd Sem, 1st Term | HRAC 104 – Microeconomics| BSBA Program Page 1 of 36
Rationale
With the advent of the COVID19 pandemic, learning thru residential modality is not feasible.
The school opted to use print material through Modular approach per competency. The Module
serves as the lecture phase for each topic using simplified approach for the students to
understand the topic.
The discussions of each topic tailored for the self-paced learning in Distance Education
modality. The student then should possess the dual virtues such as responsibility and
accountability. Responsibility would mean, you are responsible for mastering the lessons and
answering the self-check and completing the Performance Task sheet. Accountability means,
you are accountable of your own performance, checking out your work carefully, noting areas in
which you need to improve or need to ask assistance from your facilitator by any means. Your
own determination is a key ingredient of learning otherwise, your investment would be in futile.
The HRAC 104 - Microeconomics has three modules. First Module tackles the Introduction to
Microeconomics. Each Module, consist of different chapter lessons with the following
components.
Component Description
Learning Each chapter begins with learning objectives.
Objectives
Introduction The brief description of the totality of the chapter
Lesson The main body of the lesson per chapter or Information Sheet
Learning At the end of the chapter, Self-check will help you determine if you
Activities comprehend the topic.
Summary Each chapters end with a brief review of what you just learned
Assignment At the end of the Module there are Performance Task Sheet which
serve as graded exercises for the Module
Module Workbook Where the Performance Task Sheets are found.
Wordbook The list of identified key words are defined in the last portion of the
Modules
RALPH H. CELESTE, DBM

Instructor
How to Use the Module
In this module, you are required to go through a series of learning activities in order to complete
each learning outcome. In each learning outcome are Information Sheets, Self-checks and
Performance Task Exercises Sheet. Follow and perform the activities on your own. If you have
questions, do not hesitate to ask for assistance from your facilitator thru call with this number
+639091914949/+639356521482, email add ralphceleste23@gmail.com or group chat.
Remember to:
Affix your signature and date received in the received card from the Mobile Module distributor.
1.) Carefully read all Information Sheets and complete the Self-Checks.
2.) Follow all the directions in answering all the Performance Task Exercises.
3.) Submit outputs of the Self-Checks and all Performance Task Exercises Sheets to your
facilitator see the timeline completion after receiving the Module for evaluation and
recording in the Class Record.
4.) Be sure to keep the returned submitted Self-checks, Performance Task Exercises Sheets and
per Module and label them Module 1 if it belongs to Module 1 until the end of the Module 3
as these will be your ―Portfolio‖.
5.) During scheduled exams (see the schedule below) students will come to their respective
barangays but will observe health protocols such as Wearing face mask, physical distancing,
and using alcohol.
For the schedule of module distribution/submission and date of examination, refer to the TIMELINE
below.
INFORMATION SHEET 7
CHAPTER 7 : Key Measures and Relationships
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
 Define revenue, cost and profit

 Differentiate economic versus accounting and profit
 Revenue, cost, and profit functions
 Discuss breakeven analysis
 Understand the impact of price changes
 Discuss the Shutdown Rule
INTRODUCTION
A Simple Business Venture
In this chapter we will be covering some of the key measures and relationships of a business operation.
To help illustrate these concepts, we will consider the following simple business venture opportunity.
Suppose three students like spending time at the beach. They have pondered whether they could work
and live at the beach during their summer break and learned that they could lease a small building by the
beach with existing freezer capacity and apply for a local license to sell ice cream bars.
Revenue, Cost, and Profit
Most businesses sell something—either a physical commodity like an ice cream bar or a service like a car
repair. In a modern economy, that sale is made in return for money or at least is evaluated in monetary
terms. The total monetary value of the goods or services sold is called revenue.
Few businesses are able to sell something without incurring expenses to make the sale possible. The
collective expenses incurred to generate revenue over a period of time, expressed in terms of monetary
value, are the cost. Some cost elements are related to the volume of sales; that is, as sales go up, the
expenses go up. These costs are called variable costs. The cost of raw materials used to make an item of
clothing would be an example of a variable cost. Other costs are largely invariant to the volume of sales,
at least within a certain range of sales volumes. These costs are called fixed costs. The cost of a machine
for cutting cloth to make an item of clothing would be a fixed cost.
Businesses are viable on a sustained basis only when the revenue generated by the business generally
exceeds the cost incurred in operating the business. The difference between the revenue and cost (found
by subtracting the cost from the revenue) is called the profit. When costs exceed revenue, there is a
negative profit, or loss.
The students in our simple venture realize they need to determine whether they can make a profit from a
summer ice cream bar business. They met the person who operated an ice cream bar business in this
building the previous summer. He told them last summer he charged $1.50 per ice cream bar and sold
36,000 ice cream bars. He said the cost of the ice cream bars—wholesale purchase, delivery, storage,
and so on—comes to about $0.30 per bar. He indicated his other main costs—leasing the building,
license, local business association fee, and insurance—came to about $16,000.
Based on this limited information, the students could determine a rough estimate of the revenue, costs,
and profit they would have if they were to repeat the outcomes for the prior operator. The revenue
would be $1.50 per ice cream bar times 36,000 ice cream bars, or $54,000. The variable cost would be
$0.30 per ice cream bar times 36,000 ice cream bars, or $10,800. The fixed cost would be $16,000,
making the total cost $26,800. The profit would be $54,000 minus $26,800, or $27,200.
Based on this analysis, the students are confident the summer business venture can make money. They
approach the owner of the building and learn that if they want to reserve the right of first option to lease
the building over the summer, they will need to make a non-refundable $6000 deposit that will be applied
to the lease. They proceeded to make that deposit.
A few weeks later, all three students were unexpectedly offered summer business internships at a large
corporation. Each student would earn $10,000. However, the work site for the internships is far from the
beach and they would be in an office all day. They now must decide whether to accept the internships
and terminate their plan to run a business at the beach or turn down the internships.
Economic Versus Accounting Measures of Cost and Profit
The discipline of accounting provides guidelines for the measurement of revenue, cost, and profit. Having
analyses based on generally accepted principles is important for making exchanges in our economy. For
example, corporations must produce financial statements to help investors and creditors assess the
health of the corporation. Individuals and businesses must produce tax returns to determine a fair
measurement of income for taxation purposes.
Costs as measured according to accounting principles are not necessarily the relevant measurements for
decisions related to operating or acquiring a business. For example, accounting standards dictate that
businesses depreciate long-lived assets, like buildings, by spreading the cost over the life of the asset.
The particulars on depreciation can be found in any financial accounting text. However, from the
perspective of the business, the entire expense was incurred when the asset was acquired, even if
borrowing was necessary to make the purchase and there will be the opportunity to take increased tax
deductions in future years.
Likewise, there are other business costs relevant to decision making that may not be considered as costs
from the perspective of accounting standards. For example, the owner/operator of a proprietorship
invests time and effort in operating a business. These would typically not be treated as expenses on the
proprietorship’s tax return but are certainly relevant to the owner in deciding how to manage his self-run
business.
Based on these differences in perspective, it is useful to distinguish accounting costs from economic
costs. In turn, since profit is the residue of revenue minus costs, we also distinguish accounting
profit from economic profit.
Consider our three students who are now in a quandary about whether to sell ice cream bars on the
beach or accept the summer internships, and let us see how distinguishing the economic cost/profit from
the accounting cost/profit helps to clarify their decision.
There is the matter of the students’ time and energy, which is not reflected in the projection of the
$27,200 profit based on last year’s operation. One way to measure that cost is based on how much they
will forfeit by not using their time in the next best alternative, which in this case is the summer
internship. We can consider this forfeited income as being equivalent to a charge against the operation of
the ice cream business, a measurement commonly referred to as an opportunity cost. The students’ time
has an opportunity cost of $30,000. This should be added to the earlier fixed cost of $16,000, making an
economic fixed cost of $46,000, a total economic cost of $56,800, and an economic loss of $2800. So
maybe the ice cream business would not be a good idea after all.
However, recall that the students have already made a $6000 non-refundable deposit. This money is
spent whether the students proceed to run the summer business or not. It is an example of what is called
a sunk cost. Assuming the fixed cost of the business was the same as for the prior operator, the students
would have a $16,000 accounting fixed cost to report on a tax return. Yet, from the perspective of
economic costs, only $10,000 is really still avoidable by not operating the business. The remaining $6000
is gone regardless of what the students decide. So, from an economic cost/profit perspective, viewed
after the non-refundable deposit but before the students declined the summer internships, if the
students’ other costs and revenue were identical to the previous year, they would have economic costs of
just $50,800 and an economic profit of $3200.
If a business properly measures costs from an economic perspective, ignoring sunk costs and including
opportunity costs, you can conclude that a venture is worth pursuing if it results in an economic profit of
zero or better. However, this is generally not a valid principle if you measure performance in terms of
accounting profit. Most stockholders in a corporation would not be satisfied if the corporation only
managed a zero accounting profit because this means there is no residual from the business to reward
them with either dividends or increased stock value. From an economic cost perspective, stockholder
capital is an asset that can be redeployed, and thus it has an opportunity cost—namely, what the investor
could earn elsewhere with their share of the corporation in a different investment of equivalent risk.
Readers interested in estimating the opportunity cost of investment capital are encouraged to consult a
general text in financial analysis, such as Brigham and Ehrhardt (2010). This opportunity cost could be
estimated and included in the economic cost. If the resulting profit is zero or positive after netting out the
opportunity cost of capital, the investor’s participation is worthwhile.
Revenue, Cost, and Profit Functions
In the preceding projections for the proposed ice cream bar venture, the assumption was that 36,000 ice
cream bars would be sold based on the volume in the prior summer. However, the actual volume for a
future venture might be higher or lower. And with an economic profit so close to zero, our students
should consider the impact of any such differences.
There is a relationship between the volume or quantity created and sold and the resulting impact on
revenue, cost, and profit. These relationships are called the revenue function, cost function, and profit
function. These relationships can be expressed in terms of tables, graphs, or algebraic equations.
In a case where a business sells one kind of product or service, revenue is the product of the price per
unit times the number of units sold. If we assume ice cream bars will be sold for $1.50 apiece, the
equation for the revenue function will be
R = $1.5 Q,
where R is the revenue and Q is the number of units sold.
The cost function for the ice cream bar venture has two components: the fixed cost component of
$40,000 that remains the same regardless of the volume of units and the variable cost component of
$0.30 times the number of items. The equation for the cost function is
C = $40,000 + $0.3 Q,
where C is the total cost. Note we are measuring economic cost, not accounting cost.
Since profit is the difference between revenue and cost, the profit functions will be
π = R − C = $1.2 Q − $40,000.
Here π is used as the symbol for profit. (The letter P is reserved for use later as a symbol for price.)
Table 2.1 "Revenue, Cost, and Profit for Selected Sales Volumes for Ice Cream Bar Venture" provides
actual values for revenue, cost, and profit for selected values of the volume quantity Q. Figure 2.1
"Graphs of Revenue, Cost, and Profit Functions for Ice Cream Bar Business at Price of $1.50", provides
graphs of the revenue, cost, and profit functions.
The average cost is another interesting measure to track. This is calculated by dividing the total cost by
the quantity. The relationship between average cost and quantity is the average cost function. For the ice
cream bar venture, the equation for this function would be
AC = C/Q = ($40,000 + $0.3 Q)/Q = $0.3 + $40,000/Q.
Figure 2.2 "Graph of Average Cost Function for Ice Cream Bar Venture" shows a graph of the average
cost function. Note that the average cost function starts out very high but drops quickly and levels off.
Table 2.1 Revenue, Cost, and Profit for Selected Sales Volumes for Ice Cream Bar Venture
Units Revenue Cost Profit
0 $0 $40,000 –$40,000
10,000 $15,000 $43,000 –$28,000
20,000 $30,000 $46,000 –$16,000
30,000 $45,000 $49,000 –$4,000
40,000 $60,000 $52,000 $8,000
50,000 $75,000 $55,000 $20,000
60,000 $90,000 $58,000 $32,000
Figure 2.1 Graphs of Revenue, Cost, and Profit Functions for Ice Cream Bar Business at Price of $1.50
Essentially the average cost function is the variable cost per unit of $0.30 plus a portion of the fixed cost
allocated across all units. For low volumes, there are few units to spread the fixed cost, so the average
cost is very high. However, as the volume gets large, the fixed cost impact on average cost becomes
small and is dominated by the variable cost component.
Figure 2.2 Graph of Average Cost Function for Ice Cream Bar Venture
Breakeven Analysis
A scan of Figure 2.1 "Graphs of Revenue, Cost, and Profit Functions for Ice Cream Bar Business at Price
of $1.50" shows that the ice cream bar venture could result in an economic profit or loss depending on
the volume of business. As the sales volume increases, revenue and cost increase and profit becomes
progressively less negative, turns positive, and then becomes increasingly positive. There is a zone of
lower volume levels where economic costs exceed revenues and a zone on the higher volume levels
where revenues exceed economic costs.
One important consideration for our three students is whether they are confident that the sales volume
will be high enough to fall in the range of positive economic profits. The volume level that separates the
range with economic loss from the range with economic profit is called the breakeven point. From the
graph we can see the breakeven point is slightly less than 35,000 units. If the students can sell above
that level, which the prior operator did, it will be worthwhile to proceed with the venture. If they are
doubtful of reaching that level, they should abandon the venture now, even if that means losing their
non-refundable deposit.
There are a number of ways to determine a precise value for the breakeven level algebraically. One is to
solve for the value of Q that makes the economic profit function equal to zero:
0 = $1.2 Q − $40,000 or Q = $40,000/$1.2 = 33,334 units.
An equivalent approach is to find the value of Q where the revenue function and cost function have
identical values.
Another way to assess the breakeven point is to find how large the volume must be before the average
cost drops to the price level. In this case, we need to find the value of Q where AC is equal to $1.50. This
occurs at the breakeven level calculated earlier.
A fourth approach to solving for the breakeven level is to consider how profit changes as the volume level
increases. Each additional item sold incurs a variable cost per unit of $0.30 and is sold for a price of
$1.50. The difference, called the unit contribution margin, would be $1.20. For each additional unit of
volume, the profit increases by $1.20. In order to make an overall economic profit, the business would
need to accrue a sufficient number of unit contribution margins to cover the economic fixed cost of
$40,000. So the breakeven level would be
Q = fixed cost/(price per unit − variable cost per unit) = $40,000/($1.50 − $0.30) = 33,333.3 or 33,334
units.
Once the operating volume crosses the breakeven threshold, each additional unit contribution margin
results in additional profit.
We get an interesting insight into the nature of a business by comparing the unit contribution margin
with the price. In the case of the ice cream business, the unit contribution margin is 80% of the price.
When the price and unit contribution margins are close, most of the revenue generated from additional
sales turns into profit once you get above the breakeven level. However, if you fall below the breakeven
level, the loss will grow equally dramatically as the volume level drops. Businesses like software
providers, which tend have mostly fixed costs, see a close correlation between revenue and profit.
Businesses of this type tend to be high risk and high reward.
On the other hand, businesses that have predominantly variable costs, such as a retail grocery outlet,
tend to have relatively modest changes in profit relative to changes in revenue. If business level falls off,
they can scale down their variable costs and profit will not decline so much. At the same time, large
increases in volume levels beyond the breakeven level can achieve only modest profit gains because most
of the additional revenue is offset by additional variable costs.
The Impact of Price Changes
In the preceding analyses of the ice cream venture, we assumed ice cream bars would be priced at $1.50
per unit based on the price that was charged in the previous summer. The students can change the price
and should evaluate whether there is a better price for them to charge. However, if the price is lowered,
the breakeven level will increase and if the price is raised, the breakeven level will drop, but then so may
the customer demand.
To examine the impact of price and determine a best price, we need to estimate the relationship between
the price charged and the maximum unit quantity that could be sold. This relationship is called a demand
curve. Demand curves generally follow a pattern called the law of demand, whereby increases in price
result in decreases in the maximum quantity that can be sold.
We will consider a simple demand curve for the ice cream venture. We will assume that since the
operator of the business last year sold 36,000 units at a price of $1.50 that we could sell up to 36,000
units at the same price this coming summer. Next, suppose the students had asked the prior operator
how many ice cream bars he believes he would have sold at a price of $2.00 and the prior operator
responds that he probably would have sold 10,000 fewer ice cream bars. In other words, he estimates his
sales would have been 26,000 at a price of $2.00 per ice cream bar.
To develop a demand curve from the prior operator’s estimates, the students assume that the
relationship between price and quantity is linear, meaning that the change in quantity will be proportional
to the change in price. Graphically, you can infer this relationship by plotting the two price-quantity pairs
on a graph and connecting them with a straight line. Using intermediate algebra, you can derive an
equation for the linear demand curve
P = 3.3 − 0.00005 Q,
where P is price in dollars and Q is the maximum number of ice cream bars that will sell at this
price. Figure 2.3 "Linear Demand Curve for Ice Cream Bar Venture" presents a graph of the demand
curve.
Figure 2.3 Linear Demand Curve for Ice Cream Bar Venture
It may seem awkward to express the demand curve in a manner that you use the quantity Q to solve for
the price P. After all, in a fixed price market, the seller decides a price and the buyers respond with the
volume of demand. Mathematically, the relationship for ice cream bars could be written
Q = 66,000 − 20,000 P.
However, in economics, the common practice is to describe the demand curve as the highest price that
could be charged and still sell a quantity Q.
The linear demand curve in Figure 2.3 "Linear Demand Curve for Ice Cream Bar Venture" probably
stretches credibility as you move to points where either the price is zero or demand is zero. In actuality,
demand curves are usually curved such that demand will get very high as the price approaches zero and
small amounts would still sell at very high prices, similar to the pattern in Figure 2.4 "Common Pattern for
Demand Curves". However, linear demand curves can be reasonably good estimates of behavior if they
are used within limited zone of possible prices.
Figure 2.4 Common Pattern for Demand Curves
We can use the stated relationship in the demand curve to examine the impact of price changes on the
revenue and profit functions. (The cost function is unaffected by the demand curve.) Again, with a single
type of product or service, revenue is equal to price times quantity. By using the expression for price in
terms of quantity rather than a fixed price, we can find the resulting revenue function
R = P Q = (3.3 − 0.00005 Q) Q = 3.3 Q − 0.00005 Q2.
By subtracting the expression for the cost function from the revenue function, we get the revised profit
function
π = (3.3 Q − 0.00005 Q2) − (40,000 + $0.3 Q) = –0.00005 Q2 + 3 Q − 40,000.
Graphs for the revised revenue, cost, and profit functions appear in Figure 2.5 "Graphs of Revenue, Cost,
and Profit Functions for Ice Cream Bar Venture for Linear Demand Curve". Note that the revenue and
profit functions are curved since they are quadratic functions. From the graph of the profit function, it can
be seen that it is possible to earn an economic profit with a quantity as low as 20,000 units; however, the
price would need to be increased according to the demand curve for this profit to materialize.
Additionally, it appears a higher profit is possible than at the previously planned operation of 36,000 units
at a price of $1.50. The highest profitability appears to be at a volume of about 30,000 units. The
presumed price at this volume based on the demand curve would be around $1.80.
Figure 2.5 Graphs of Revenue, Cost, and Profit Functions for Ice Cream Bar Venture for Linear Demand
Curve
The Shutdown Rule
You may recall earlier in this lesson that, before deciding to disregard the $6000 non-refundable down
payment (to hold the option to operate the ice cream business) as a relevant economic cost, the total
cost of operating the business under a plan to sell 36,000 ice cream bars at a price of $1.50 per item
would have exceeded the expected revenue. Even after further analysis indicated that the students could
improve profit by planning to sell 30,000 ice cream bars at a price of $1.80 each, if the $6000 deposit
had not been a sunk cost, there would have been no planned production level and associated price on
the demand curve that would have resulted in positive economic profit. So the students would have
determined the ice cream venture to be not quite viable if they had known prior to making the deposit
that they could instead each have a summer corporate internship. However, having committed the $6000
deposit already, they will gain going forward by proceeding to run the ice cream bar business.
A similar situation can occur in on-going business concerns. A struggling business may appear to
generate insufficient revenue to cover costs yet continue to operate, at least for a while. Such a practice
may be rational when a sizeable portion of the fixed costs in the near term are effectively sunk, and the
revenue generated is enough to offset the remaining fixed costs and variable costs that are still not firmly
committed.
Earlier in the chapter, we cited one condition for reaching a breakeven production level where revenue
would equal or exceed costs as the point where average cost per unit is equal to the price. However, if
some of the costs are already sunk, these should be disregarded in determining the relevant average
cost. In a circumstance where a business regards all fixed costs as effectively sunk for the next
production period, this condition becomes a statement of a principle known as the shutdown rule: If the
selling price per unit is at least as large as the average variable cost per unit, the firm should continue to
operate for at least a while; otherwise, the firm would be better to shut down operations immediately.
Two observations about the shutdown rule are in order: In a circumstance where a firm’s revenue is
sufficient to meet variable costs but not total costs (including the sunk costs), although the firm may
operate for a period of time because the additional revenue generated will cover the additional costs,
eventually the fixed costs will need to be refreshed and those will be relevant economic costs prior to
commitment to continue operating beyond the near term. If a business does not see circumstances
changing whereby revenue will be getting better or costs will be going down, although it may be a net
gain to operate for some additional time, such a firm should eventually decide to close down its business.
Sometimes, it is appropriate to shut down a business for a period of time, but not to close the business
permanently. This may happen if temporary unfavorable circumstances mean even uncommitted costs
cannot be covered by revenue in the near term, but the business expects favorable conditions to resume
later. An example of this would be the owner of an oil drilling operation. If crude oil prices drop very low,
the operator may be unable to cover variable costs and it would be best to shut down until petroleum
prices climb back and operations will be profitable again. In other cases, the opportunity cost of
resources may be temporarily high, so the economic profit is negative even if the accounting profit would
be positive. An example would be a farmer selling his water rights for the upcoming season because he is
offered more for the water rights than he could net using the water and farming.
A Final Word on Business Objectives
In the example used in this chapter, we assumed the students’ goal in how to operate the ice cream
business was to maximize their profit—more specifically, to maximize their economic profit. Is this an
appropriate overall objective for most businesses?
Generally speaking, the answer is yes. If a business is not able to generate enough revenue to at least
cover their economic costs, the business is losing in the net. In addition to the business owners having to
cover the loss out of their wealth (or out of society’s largesse for a bankruptcy), there is an inefficiency
from a societal perspective in that the resources used by the business could be more productive
elsewhere.
The ice cream business analyzed here was simple in many respects, including that it was intended to
operate for only a short period of time. Most businesses are intended to operate for long periods of time.
Some businesses, especially newly formed businesses, will intentionally operate businesses at a loss or
operate at volumes higher than would generate the maximum profit in the next production period. This
decision is rational if the business expects to realize larger profits in future periods in exchange for
enduring a loss in the near future. There are quantitative techniques, such as discounting, Many
accounting and economics texts discuss the concept of discounting of profits over time. One good
discussion can be found in an appendix in Hirschey and Pappas (1996). that allow a business decision
maker to make these trade-offs between profit now and profit later. These techniques will not be covered
in this text.
Economists refer to a measure called the value of the firm, which is the collective value of all economic
profits into the future and approximately the amount the owners should expect to receive if they sold the
business to a different set of owners. For a corporation, in theory this would roughly equate to the value
of the equity on a company’s balance sheet, although due to several factors like sunk costs, is probably
not really that value. Economists would say that a business should make decisions that maximize the
value of the firm, meaning the best decisions will result in larger economic profits either now or later.
One response to the principle that the overall goal of a firm is to maximize its value is that, although that
goal may be best for those who own the business, it is not the optimal objective for the overall society in
which the business operates. One specific objection is that those who work for the business may not be
the same as those who own the business and maximizing the value for the owners can mean exploiting
the non-owner employees. The common response to this objection is that it will be in the owners’ best
interest in the long run (several periods of operation) to treat their employees fairly. Businesses that
exploit their employees will lose their good employees and fail to motivate those employees who remain.
The collective result will be lower profits and a lower value of the firm.
A second objection to the appropriateness of operating a business to maximize the value for the owners
is that this invites businesses to exploit their customers, suppliers, and the society in which they operate
to make more money. Firms may be able to take advantage of outside parties for a while, but eventually
the customers and suppliers will wise up and stop interacting with the business. With a high level of
distrust, there will be a decline in profits in future periods that will more than offset any immediate gain.
If a business tries to exploit the overall society by ruining the environment or causing an increase in costs
to the public, the business can expect governmental authorities to take actions to punish the firm or limit
its operations, again resulting in a net loss over time. So maximizing the value of the firm for the owners
does not imply more profit for the owners at the expense of everyone else. Rather, a rational pursuit of
maximal value will respect the other stakeholders of a business.
In the case of non-profit organizations, maximizing the value of the organization will be different than
with for-profit businesses like our ice cream example. A non-profit organization may be given a budget
that sets an upper limit on its costs and is expected to provide the most value to the people it serves.
Since most non-profit organizations do not charge their ―customers‖ in the same way as for-profit
businesses, the determination of value will be different than estimating sales revenue. Techniques such
as cost-benefit analysis.A classic text in cost-benefit analysis was written by E. J. Mishan (1976). have
been developed for this purpose.
CHAPTER SUMMARY
Economists refer to a measure called the value of the firm, which is the collective value of all economic
profits into the future and approximately the amount the owners should expect to receive if they sold the
business to a different set of owners. For a corporation, in theory this would roughly equate to the value
of the equity on a company’s balance sheet, although due to several factors like sunk costs, is probably
not really that value. Economists would say that a business should make decisions that maximize the
value of the firm, meaning the best decisions will result in larger economic profits either now or later.
SELF-CHECK
NAME: ________________________________________________ SCORE:__________
A. Direction. Write TRUE if the statement is correct, False if it is wrong.

_______1. The impact of price changes in the demand where increase of price of the quantity will
result a maximum increase of quantity sold.
_______2. There is a relationship between the volume or quantity created and sold and the resulting
impact on revenue, cost, and profit
_______3. The difference between the revenue and cost is called the expenditure.
_______4. Costs as measured according to accounting principles that does not necessarily bear relevant
measurements for decisions related to operating or acquiring a business.
_______5. One condition for reaching a breakeven production level where revenue would equal or
exceed costs as the point where average cost per unit is equal to the price.
_______6. The opportunity cost of resources is temporarily high, so the economic profit is negative
even if the accounting profit would be positive.
_______7. Demand curve will help to examine the impact of price and determine a best price, we need
to estimate the relationship between the price charged and the maximum unit quantity that could
be sold.
_______8. From an accounting cost perspective, stockholder capital is an asset that can be redeployed,
and thus it has an opportunity cost—namely, what the investor could earn elsewhere with their
share of the corporation in a different investment of equivalent risk
_______9. Businesses are viable on a sustained basis only when the revenue generated by the business
generally exceeds the cost incurred in operating the business.
_______10. The volume level that separates the range with economic loss from the range with economic
profit is called the breakeven analysis.
B. Direction: Read the questions carefully. Identify the term/concept describe in the statement. Use
separate paper for your answer.
1. Expenses incurred in production that tend to change directly as production quantity changes are called
A. fixed costs B. marginal costs. C. variable costs. D. opportunity costs.
2. Expenses that do not change or vary with production quantities are generally termed as
A. fixed costs B. marginal costs C. variable costs D. opportunity costs.
3. This term refers to the sales generated by an enterprise.

A. revenues B. cost C. price D. expenditure
4. The corresponding amount of sales associated with the breakeven production point is called the
A. breakeven production point. C. breakeven amount.
B. breakeven price. D. breakeven cost.
5. To determine the total costs, we have to get the sum of

A total variable costs and total revenues. C. total variable costs and total fixed costs.
B. total fixed costs and total revenues. D. total costs and total revenues.
6. To determine the breakeven, we usually equate

A. total variable costs and total revenues C. total variable costs and total fixed costs
B. total fixed costs and total revenues D. total costs and total revenues
B. Problem Solving Consider the following table for answering items 7 to 10
Analyze the table carefully and answer the questions that follow:
Production Total Fixed Total Variable Total Costs Total Revenue Total Profits (in
(in units) Costs (in Php) Costs (in Php) (in Php) (in Php) Php)
5000 150,000 250,000 400,000 375,000 (25,000)
8000 150,000 400,000 550,000 600,000 50,000
7. The breakeven production point is

A. 5000 units C. 7000 units.
B. 6000 units D. 8000 units
8. The breakeven amount in

A. Php 375.00D 00 C. Php 450 000.00
B. Php 400,000.00 D Php 500,000 00
9. The profit condition at 5500 units of production is expected to be

A a profit C. a breakeven
B. a loss D. hard to determine
10. The profit condition at 6500 units of production is expected to be

A. a profit C. a break even.
B. a loss D. hard to determine
10.
INFORMATION SHEET 8
Chapter 8 : Welfare Economics I: General Equilibrium
LEARNING OBJECTIVES
 Concept of welfare and equilibrium

 Different approaches to welfare and equilibrium
INTRODUCTION
The Concept of Welfare and Equilibrium
Welfare and equilibrium are different concepts, although they are frequently confused with each other.
We have defined welfare as the state of well-being of the persons comprising an economic system, we
have defined equilibrium as a state of rest, a position from which there no incentive or no opportunity to
move. We shall look at some of the principal aspects of each concepts.
A market system is in competitive equilibrium when prices are set in such a way that the market clears,
or in other words, demand and supply are equalised. At this competitive equilibrium, firms’ profits will
necessarily have to be zero, because otherwise there will be new firms that, attracted by the profits,
would enter the market increasing supply and pushing prices down. Following the first fundamental
theorem of welfare economics, this equilibrium must be Pareto efficient. Both will have a fundamental
relation as a mechanism for determining optimal production, consumption and exchange.
Initial approach:
Let’s consider an economy where there are:
Two factors of production: capital (K) and labour (L).
Two goods: good X and good Y.
Two agents: A and B
The economic problem that is faced needs to find the most adequate allocation of factors of production in
order to produce goods X and Y and how these goods will be distributed amongst consumers A and B.
This configuration will be such that there will be no other feasible configuration that will allow an increase
in any individual’s welfare without decreasing the other individual’s welfare.
In order to achieve Pareto optimality, a certain set of assumptions need to be held.
 The production function needs to be continuous, differentiable, and strictly concave. This will
result in a convex set of production possibilities, also known as production possibility frontier Its
shape shows an increasing opportunity cost as we need to use a higher number of resources in
order to produce a larger amount of a certain good.
 Consumers’ preferences need to be monotonic, convex and continuous, showing how individuals’
welfare increases with a greater amount of goods, but with a decreasing marginal utility.
 Perfect and free availability of information.
 There has to be an absence of externalities and public goods so the utility of individuals depends
directly and uniquely from their possession of goods X and Y.
Production optimisation
The optimisation problem in production relies in the maximisation of total output production taking into
consideration that it is subject to a limited amount of capital and labour. Analytically,
We can start by looking at the production of goods X and Y as two different optimisation problems. The
firm will have to decide what quantity of capital and labour allocate to the production of good X, as
shown on the left side of the diagram below, but also what quantity of capital and labour assign to the
production of good Y, as shown on the right. These curves are the isoquants corresponding to each
production process.
These two diagrams can be plotted together using what is known as the Edgeworth box, which makes it
easier to compare quantities of capital and labour used, while also comparing quantities of goods X and Y
being produced. Indeed, it’s not only easier to analyse, but also makes more sense, since the total
available quantities of capital and labour are given.
The solution to this problem is related to the marginal rate of technical substitution (MRTS). A higher
efficiency will be achieved if the reallocation of a unit of labour or capital from one good to another leads
to a higher production of the former. When the marginal rate of technical substitution is equal for both
goods, it means that all available inputs are being used, which translates into a purely efficient production
process.
Graphically, if we plot all these points we construct what is known as the contract curve (blue curve in
the Edgeworth box). These represent all Pareto efficient distributions, such as F, G or H. I is not Pareto
efficient, since going from I to either G or H would result in an increase in the production of one of the
goods without giving up the production of the other. From this curve we can derive the production
possibility frontier, which shows the quantities of goods X and Y being produced, as shown in the
following diagram. It must be noted that both the contract curve and its derivative, the production
possibility frontier, show all the solutions that are Pareto efficient from the firm’s point of view. Only
when considering input and output prices will we be able to determine a unique solution (because of the
concavity of the production possibility frontier).
Consumption optimisation
Bundles of goods cannot be ranked in a reliable way without knowledge of the distribution of the
products, especially if a bundle has different amounts of each good. There may be some bundles that
have more products of a good but less of another. The optimisation problem will be to maximise the
utility of individuals A and B subject to a limited total amount of goods X and Y. Analytically,
In this case we have to achieve the optimal distribution of two, already produced goods (X and Y)
between two individuals (A and B). We can follow the same step by step method used before. Here, we’ll
plot indifference curves corresponding to the amounts of goods X and Y consumed by A (on the left), and
the amounts of goods consumed by B (on the right).
Again, we use the Edgeworth box to graph the different distributions that can be given between two
individuals, A and B, and two goods, X and Y. The further the indifference curve is from the origin, the
higher the level of utility enjoyed by the consumer.
Although all the points in the graphic are feasible, not all are efficient, given the utilities and preferences
of consumers. The indifference curves join all the points that give consumers the same level of utility. By
connecting all points of tangency between the indifference curves of both individuals, the contract curve
is constructed and represents all Pareto efficient allocations. The tangency between indifference curves is
the point where both consumers have an equal marginal rate of substitution for goods X and Y, and are
therefore not willing to trade between them, as it would result in a lower utility.
Global optimum
Until now we have only considered different parts of the economy, and not the economy as a whole. The
optimisation problem faced this time is similar to the previous one, although this time an additional
restriction is added, since we are here considering both production and consumption: the production level
also needs to be efficient.
As this optimisation problem is based on the previous one, we have the same marginal rate of
substitution equalisation, but also these two must be equal to the marginal rate of transformation, the
PPF’s slope,
These solutions are multiple, since there are various points where the condition holds. However, if we
consider output prices (given by the consideration of input prices mentioned before), we are able to
consider a unique solution. In the adjacent diagram, if output prices were to be P X and PY, the equilibrium
would be point E. However, if output prices were instead P’X and P’Y, the equilibrium would be point E’.
Let’s say that prices are set at PX and PY, and that the equilibrium point is E, as seen in the diagram
below. Consumers A and B will consume both goods X and Y in different amounts. These amounts are
given by the equilibrium in consumption, point E on the contract curve. We have also equilibrium in the
production process, given by point E on the production possibility frontier. We know this is a general
equilibrium because the marginal rate of substitution is equal to the marginal rate of transformation; or,
in other words, the slopes of the indifference curves are equal to the slopes of the production possibility
frontier.
Competitive markets result in an equilibrium position such that it is not possible to make a change in the
allocation without making someone else worse-off. In reality there are many Pareto optimums and we
cannot state that one is better than the other. Even if one consumer got all of the production and the
other one none, we cannot say it is an inefficient distribution if all resources are being used efficiently.
This is the reason why some economists believe it is an incomplete criterion. However, there are others,
such as Milton Friedman and the advocates of the Chicago School, for whom this proves that the
economy will act efficiently without the need of government intervention.
There are two fundamental theorems of welfare economics.
 First fundamental theorem of welfare economics (also known as the “Invisible Hand
Theorem”):
any competitive equilibrium leads to a Pareto efficient allocation of resources.
The main idea here is that markets lead to social optimum. Thus, no intervention of the government is
required, and it should adopt only ―laissez faire‖ policies. However, those who support government
intervention say that the assumptions needed in order for this theorem to work, are rarely seen in real
life.
It must be noted that a situation where someone holds every good and the rest of the population holds
none, is a Pareto efficient distribution. However, this situation can hardly be considered as perfect under
any welfare definition. The second theorem allows a more reliable definition of welfare
 Second fundamental theorem of welfare economics:
any efficient allocation can be attained by a competitive equilibrium, given the market mechanisms
leading to redistribution.
This theorem is important because it allows for a separation of efficiency and distribution matters. Those
supporting government intervention will ask for wealth redistribution policies.
CHAPTER SUMMARY
Welfare economics analyses different states in which markets or the economy can be. Its
main objective is to find an indicator or measure in order to guarantee that markets are
behaving optimally, thus also guaranteeing that consumer welfare is as high as possible.
In this Learning Path, we learn about the basics of welfare economics.
SELF-CHECKS
NAME: ______________________________________________________________ SCORE: _________
A. Direction. Choose the letter of the correct answer.
1. In a purely competitive market, a seller is a price taker because:

A. there are few buyers C. the size of every seller is small
B. there are many buyers D. none of these
2. A monopolistic competitor can sell at a price higher than the others because of:
A. competitive factors other than price C. non-price factors
B. price D. none of these
3. The difference between pure competition and monopolistic competition is in:

A. number of sellers C. plurality
B. Product Homogeneity D. any of these
4. In an oligopoly, equilibrium output is where:

A. MC = MC <P C. MR = MC = P
B. MR = MC = ATC D. none of these
5. The market that allows choice of goods for consumers:

A. Monopoly C. Monopolistic Competition
B. Oligopoly D. Pure Competition
6. Given the same unit cost, a monopolistic producer will:

A. charge a higher price and produce a smaller output than a purely competitive firm.
B. charge a lower price and then produce a large output than a purely competitive firm.
C. charge a higher price and produce a larger output than a purely competitive firm.
D. the same price is charged and produce the same output than a purely competitive firm.
7. In ceteris paribus, if the prices of variable inputs where to fall:

A. MC would fall, AVC would be the same C. AVC would fall, MC would be the same
B. MC, AVC, and ATC would all fall D. One cannot predict how unit costs would be
affected
8. Characteristics of a monopolistic market:
A. Barriers to entry are weak C. Firms will operate at the minimum of the ATC
B. Both produce differentiated products D. None of these
9. A monopolistic competitor advertises to:

A. shift the supply curve to the right C. shift the demand curve to the right
B. shift the supply curve to the left D. shift the demand curve to the left
10. The vertical distance between the ATC and AVC
A. AFC C. MC
B. Selling Price D. none of these
10.
INFORMATION SHEET 9
Chapter 9 : INTRODUCTION TO MACRECONOMICS AND
NATIONAL ACCOUNTING
LEARNING OBJECTIVES
 Concept of welfare and equilibrium

 Different approaches to welfare and equilibrium
INTRODUCTION
A. MACROECONOMICS & MICROECONOMICS
Macroeconomics in the study of the relationship of the broad economic Sectors which make of
the entire national or global economy. Microeconomics on the other hand, studies decision making of
individual economic units, such as one producer or one household. Macroeconomics studies aggregate
supply and aggregate demand and uses average, general absolute price levels, while microeconomics
studies individual supply and individual demand and uses relative prices
Unlike Microeconomies that deals more with the decision and behavior of an individual firm,
macroeconomics is more of a concern of the individual, the firm, the industry, the economy and
international entities that have a stake in a overall economic performance of a country.
This section presents macroeconomics some of the major issues tackled
B. COMMON ECONOMIC GOALS AND MAJOR ISSUES OF COUNTRIES

Most common economic goals of countries
1) Economic Growth - increase in the number of goods and services produced in the country
2) Economic Development - improvement in the quality of life of the people.
3) Full Employment - the presence and availability of jobs for those who are able and willing to work,
4) Economic Efficiency - achieving the maximum fulfillment of wants using the available productive
resources
5) Price Stability - absence of wide fluctuations in prices.
6) Economic Freedom - the freedom to do economic activities within the legal framework of the economy.
7) Economic Security - the assurance of the fulfillment of economic needs of every member of society,
including the handicapped.
On the other hand, the major issues continuously trying to resolve are the following: that many
countries are
1) Inflation
2) Deflation
3) Unemployment
4) Economic Productivity & Development
These issues are discussed in detail in this module. To address these issues, the government
formulates these policies:
1) Fiscal Policies - policies governing government revenues and spending, including but not limited to,
taxation laws.
2) Monetary Policies - policies governing banks, financial institutions, and various financial markets.
3) Trade Policies - policies governing international trade such as exports and imports.
C. INFLATION
Inflation may be defined as a sustained increase in the price level of most, if not all of the goods
and services offered in the market. It is usually associated with rising price conditions. To be accurate, it
can be defined as a situation under which general level of prices shows tendency of cumulative and
continuous upward rise. Consumers and producers, goods, raw materials, interest rate, wages, imports
and exports prices should all contain an element of inflationary pressure. Besides internal causes, even
international trade activities cause spread of inflation through the imports of goods and services:
Measures, can be introduced to contain inflation and to restrict price levels, such as controlling
money supply and public spending, regulating prices, improving supply conditions, restricting wage and
cost increases.
Origins of Inflation
Inflation has external and internal origins in an economy. External this could originate from a
change in the financial transactions of a nation the daily fluctuation of the exchange rate emanating from
these transactions naturally affects prices of commodities.
Internally, inflation may originate from a change in the aggregate demand structure of an
economy, a change in the desire for profits of enterprise owners, and increases in the costs of production
of a firm
Types of Inflation
Inflation emanating from internal origins may be classified as follows:
1) Demand pull inflation. This type of inflation occurs when consumers suddenly or seasonally demand
some products, thereby allowing suppliers to increase prices to maximize their profits. These include
holiday products such as those sold during Christmas, All Souls Day, Valentine's Day, and the like.
2) Cost-push inflation. This type of inflation occurs due to increasing costs of production on the part of
the producers or sellers. These increased costs may be the result of increased wages, increased prices of
raw materials or even an increased desire of the firm to carn more profits. If increases in wage push
prices of commodities up, this is known as wage-push inflation. If raw materials increase in prices, this is
termed as commodity-push inflation Profit-push inflation is what happens when firms have a drive to
increase their profit levels to meet certain management or financial demands in the company
Effects of Inflation
Inflation directly relates to unemployment. Demand-pull inflation tends to increase employment while
cost-push inflation tends to increase unemployment due to higher costs of operation
Inflation also has varied effects on people. Fixed income earners and pension owners. creditors and
savers tend to lose out during inflation while wage earners, and debtors gain in these periods
D. DEFLATION
Deflation occurs when prices are observably declining over time. This is the opposite of inflation. In
economics, deflation is a decrease in the general Price level, or a rise in the purchasing power of money
with respect to a large class of goods or services. Deflation should not be confused with disinflation which
is a slowing in the rate of inflation that is, the general level of prices are increasing at a decreasing rate:
Theoretically, the general price level" is comprised of the price of wages, goods and services, so while
consumers can buy more with the same amount of money, they also have less money coming in as
wages. Consumers and producers who are in debt, such as home mortgage holders, also suffer because
while their income drops, their payments remain constant. Central bankers worry about deflation,
because many of the tools of monetary policy become ineffective as the inflation rate drops to zero or
turns negative, and deflation can set off a deflationary spiral, where businesses refuse to invest, because
the risk of adjusted returns of investing are lower than holding currency.
Causes of Deflation
From a monetary perspective, deflation is caused by a reduction in the velocity of money, and the
amount of money supply per person.
In modern credit-based economies, a deflationary spiral is caused by the collapse of equities or shares of
enterprise owners, or the collapse of a command economy which had run at a higher level of production
than it could actually support
Capitalism is also an engine of deflation: as capital stocks improve and there are more competitors, the
supply of goods goes up, which means prices must fall until they balance demand. Capitalism also drives
efficiency and innovation, which cause a downward pull on prices. When demand falls, prices fall, as a
supply gap tends to develop. This becomes a deflationary spiral when prices fall below the costs of
financing.
This cycle has been traced out on a broad scale during the Great Depression that started in the United
States in the late 1920's, specifically when the collapse of the global trading system dramatically dropped
demand, thus, idling a great deal of capacity and setting a string of bank failures.
Effects of Deflation
Deflation is a general decrease in the level of prices. Deflation should not be confused with temporarily
falling prices, instead, it is a sustained fall in general prices
Deflation is generally viewed in a negative way. In this sense it is the opposite of hyperinflation, which is
a tax on currency holders and lenders in borrowers and short-term consumption. In modern times,
deflation is caused by a collapse in the demanded quantity by consumers, and is associated with the
economic phenomena of recessions and long-term economic depressions.
Most economists agree that the effects of long-term deflation hurt the economy more than those of
inflation, Deflation tends to raise real wages, which are both difficult and costly for management to lower
down given ordinary circumstances. This may later on lead to layoffs and make employers reluctant to
hire new workers, thus increasing unemployment.
In contrast to inflation, fixed income earners and pension owners, creditors and savers tend to gain
during deflation while wage earners, and debtors tend to lose out in these periods.
E. LABOR FORCE AND UNEMPLOYMENT
The labor force of the Philippines refers to that part of our population whose age ranges from 15 to 64
years old. The members of the labor force are those who are willing and able to work. Those who are
actually working and contributing positively to the economy constitute what we call the participating labor
force, while those who are not working but belong to this age range from what we call as the non-
participating labor force.
Unemployment is the absence of available jobs for those who belong to the participating labor force.
Underemployment, on the other hand, refers to that part of the labor force who are gainfully employed,
but receive low compensation as shown by their need for additional jobs or additional working hours.
Usually the underemployed are significantly underpaid (based on their commensurate remuneration)
and/or those who work longer hours for the same pay.
Types of Unemployment
1. Frictional Unemployment. This type of unemployment occurs when there are some maladjustments in
economic and productive activities. The frictions are caused by a variety of factors. These include
changes in the technical conditions of work, shift in the site of an industrial unit, market
imperfections and want of adequate information failure of adjustments in the supply and demand
conditions, and the like.
Normally, frictional unemployment is partial and temporary. It is partial in the sense that only a part
of the labor force in certain sections of the economy is rendered unemployed. It is temporary in the
sense that once the frictional forces are located and corrected, the level of employment can be
restored. A very good example of this is the friction caused by changing and emerging industries (like
shifting from being mechanical to computerized).
2. Structural Unemployment. When an economy undergoes basic structural changes, there always
remains a possibility that some part of the labor force will be unemployed. This often happens in the
long term, rather than in the short-term changes in the economy, The long-term process of economic
development and growth gives rise to many structural changes in the economy.
Very good examples of these structural changes include trends towards traditional agriculture to
modern industry, transformation of rural sectors into urban units replacement of small scale and
cottage industries by large scale manufacturing units, and introduction of electricity or other sources
of commercial energy in place of manual labor
Some workers are likely to become jobless during the process of these transitions and changes.
Moreover, the duration of such unemployment may also be fairly long depending upon the extent of
corrective and restorative measures introduced by government to limit the period of unemployment.
3. Disguised Unemployment Disguised unemployment is a situation where the productivity of the

working force is very low because the number of workers is more than what is optimally desirable. If
a small plot of land has a maximum capacity to employ six workers but the actual number of workers
attached to land exceeds this limit, some of the workers will be disgustedly unemployed. It implies
that though some of the workers attached to land appear to be employed their service is not being
utilized to the optimum. Their productivity is very low and even if they are detached from the land,
the total output will remain unaffected. Disguised unemployment usually exists in developing
countries, which are characterized by large populations and consequently a surplus labor force.
4. Seasonal Unemployment. This condition is likely to exist in such productive activities, which can be
undertaken only during a specific season. Traditional agrarian economies provide work to agricultural
labor mainly during the harvest season. Similarity, there are certain industries or trade activities that
flourish only during festival or other seasons which eventually cause job opportunities to fluctuate
and reduce dung so-called of seasons. However, such instances of unemployment do not cause
problems since workers are aware and prepared for the situation,
Rate of Unemployment
One of the important functions of the government is to reduce unemployment. This requires public
spending on employment promotion schemes and investments that generate jobs. It is important that the
information about unemployment conditions should be readily available. This becomes possible by
determining the rate of unemployment which can be computed as follows
No. of unemploved x 100
Total labor force 1
If we have a total labor force of 40 million workers with 4.5 million unemployed, then the rate of
unemployment will be 11.25 percent. This is derived following this computation:
4.5 M x 100
40.0 M 1
= 11.25%
Usually, in every society there is a small percentage of labor force which is always unemployed. These
may be people who are either seeking jobs or are voluntarily unemployed (such as those who are
naturally wealthy). Such a percentage of the total labor force is known to be natural rate of
unemployment
Effects of Unemployment
When the demand for labor is less than the supply of labor, the effects of unemployment and
underemployment can be seen from different perspectives, Psychological, social, political, cultural and
economic. From an economic perspective, unemployment/underemployment results to poverty waste of
human resources, both in number and in skills. These effects lead to other effects.
GROSS NATIONAL PRODUCT & NATIONAL INCOME ACCOUNTS
What Is National Income Accounting?
National income accounting is a bookkeeping system that a government uses to measure the level of the
country's economic activity in a given time period. Accounting records of this nature include data
regarding total revenues earned by domestic corporations, wages paid to foreign and domestic workers,
and the amount spent on sales and income taxes by corporations and individuals residing in the country.
Understanding National Income Accounting
Although national income accounting is not an exact science, it provides useful insight into how well an
economy is functioning, and where monies are being generated and spent. When combined with
information regarding the associated population, data regarding per capita income and growth can be
examined over a period of time.
Some of the metrics calculated by using national income accounting include the gross domestic product
(GDP), gross national product (GNP), and gross national income (GNI). The GDP is widely used for
economic analysis on the domestic level and represents the total market value of the goods and services
produced within a specific nation over a selected period of time.
The Gross National Product (GNP) or Gross National Income (as per IMF/WB) is the sum of all the final
market values of goods and services in a given economy during a given period. This is the quantitative
summary all transactions of final goods and services transacted in an economy in a year. It being a total
market value makes it a monetary measure.
Final market value is the monetary amount by which a product would have been sold in the market.
Final goods and services refer to goods and services produced within the year for final use of consumers.
These goods and services are sold or they remain unsold. All non-produced transactions are therefore not
included. Non produced transactions are either secondhand sales or purely financial transactions like
private transfer of payments, public transfer payments and buy and sell of securities.
It must be emphasized that the GNP only measures legal and registered final good and service
transactions. The GNP data is represented either as level (monetary unit) or a rate of change (in %
increase or decrease).
The starting premise of National Income Accounting is the fundamental equation which we have below:
Total Production = Total Income = Total Expenditure
Given this premise, the GNP is measured by using three approaches:

1) Expenditures Approach
2) Incomes Approach
3) Industrial Origin Approach
Expenditure Approach
This approach takes into consideration or sums up the expenditure of the four sectors in the economy,
thus:
1) Personal consumption expenditures or household spending or household purchases which includes all
household final purchases of:
 durable consumer goods
 non-durable consumer goods
 services
2) Gross private domestic investments or capital formation or business spending which includes the
following:
 Inventories
 all final purchases of machinery, tools and equipment
 all construction including residential construction
3) Government spending or government purchases which includes the following:

 national government spending
 local spending
 government payroll
 payment of debts
4) Net exports which can be either favorable ( XM) or unfavorable ( MX] or balanced X-M); where X
represents exports and M represents imports. Exports refer to products produced domestically but so
abroad. Imports refer to products produced abroad, but are bought and consumed domestically.
 Private consumption of goods and services(C)
 investment goods (I)
 government consumption of goods and services (G)
 net exports, or exports (X) minus imports (M) (X-M)
Under this approach, GNP may be determined with the equation:
Y=C+I+G+ (X-M)
where: Y = National Income

C = Household Consumption
I = Investments
G = Government X = Exports
M = Imports Spending
Income Approach
This approach takes into account the incomes of all sectors, which are the following:
1) rent income representing the money income payments by the suppliers of various resources;
2) interest income or the money income payment that flows from the business enterprises to owners of
the monetary capital;
3) wages, salaries and the like, referring to the money income payments for the services rendered by
labor including those required by law, and those that are a direct result from labor management
negotiations which do not represent payments for actual services rendered,
4) profits that are rightfully categorized as proprietors' income or corporate profit. Proprietors' incomes
should include profits earned by business organizations such as sole proprietorships, partnerships,
cooperative movements and other unincorporated businesses. Corporate profit is composed of corporate
income, and taxes, which flow to the national or local government, while dividends flow to the
stockholders and retained corporate earnings or are declared as undistributed corporate profits:
5) indirect business taxes are levied on businesses in the government. These include the following:
 general sales tax excise tax
 customs duties
 license fees
 business property taxes
6) capital consumption allowance is a summation of all depreciation allowances of all businesses.

Depreciation is the allowance for wear and tear of machinery tools and equipment. This is included in the
income account especially by the business with the idea that production cannot occur without impairing
the quality and usefulness of the aforementioned items.
Industrial Origin Approach
The industrial origin approach, unlike the first approach, does not emanate directly from the money flow
of the four - sector model discussed in an earlier section of this module. It is more closely related to the
income approach where sectors are classified according to the nature of their processes of production.
This approach, particularly used in the Philippines includes the incomes of the following sectors:
1) the primary sector of an economy which includes agriculture, fishery and forestry:
2) the secondary sector of an economy or the industry sector including the following: mining and
quarrying, manufacturing, construction, electricity, gas and water;
3) the tertiary sec or service sector of an economy, which includes transportation, communication and
storage, trade finance, real estate and dwellings, private and government services; and
4) net factor income from the rest of the world, including the foreign exchange remittance and other
earnings from government assets abroad.
Measuring GNP
We can measure GNP by using the current or constant prices. GNP, when measured using current prices,
is also called Money GNP or Nominal GNP (in name only). With this, GNP is measured by multiplying the
quantity of goods and services produced during the year by the prevailing prices during the given year
When GNP is measured at constant prices, it is called Real GNP This is done by multiplying the quantity
of goods and services produced during the year by the prices of a chosen base year. The formula of
computing Real GNP is:
Money GNP X 100

Price Index
Computation of Price Indices
Year Current Price Price Index Base Year Price
2001 1000/1000 x 100 100
2002 1200/1000 x 100 120

2003 1300/1000 x 100 130
Computation of the % Real Change By Using The Price Index
Year Value Current Prices (Php) Price Index Real Output (Php) % Change
2001 2,700,000.00 100 2,700,000.00 0.00

2002 3,750,000.00 120 3,125,000.00 16.67
2003 5,000,000.00 130 3,846,153.80 23.08
The following are other National Income Accounts aside from the GNP:
1. Net National Product (NNP)
This measures the total amount of a domestic economy's output which the entire economy consumes in a
given year. NNP is determined by
NNP = GNP - Capital Consumption Allowances
2. National Income (NT)
This pertains to the total income earned by those who supply the resources used to produce GNP. It
represents the sum of all income components discussed earlier, such as compensation, rent, interest,
excise tax, business property taxes, license fees and custom duties.
3. Personal Income (PI)
Personal income is the total income received by the households. It is equal to national income minus
income that is earned but not yet received, plus income that is received but not yet earned. Its formula
is:
PI = NI - corporate taxes, undistributed corporate profits and social security contributions +
transfer payments
4. Disposable Income (DI)
This refers to an income which is either spent or saved just after deducting taxes that have to be paid. It
is computed as:
DI PI - personal taxes
5. Gross Domestic Product (GDP)
GNP and GDP are similar in the sense that both of them are useful in measuring the productivity of an
economy in a given year. The main difference between the two is that GDP only measures the total
production of goods and services inside an economy or domestically, while GNP includes the income
earned by an economy from abroad. From this perspective, we have the following formula:
GNP = GDP + Net Factor Income From Abroad
GDP = GNP - Net Factor Income From Abroad
Net Income Factor From Abroad (NFIA) is the difference between the factor income received from the
rest of the world and the payments to factors of production abroad for their investments in the
Philippines. This includes remittances of Overseas Filipino Workers (OFW's) and Overseas Contract
Workers (OCW's), interest incomes and dividends received by Filipino individuals and/or entities from
their investments outside the local economy,
Interest paid on foreign loans, royalties on foreign brands/technical assistance, dividends of local
corporations paid to investors outside of the Philippines represent deductions from the Net Factor Income
from Abroad
Value Added Approach
In a modern economy, production occurs in stages, and cach stage is supposed to contribute some
added value to the final value of a product to be produced and sold. These added values may come from
wages given to workers, costs involved in the production process, profits of the business firm, and even
depreciation of the cost of equipment for the period. This approach allows economists to break down the
contribution of industries or sectors to the value of final goods and services
Let us consider the illustration below to understand this approach:
THE VALUE-ADDED APPROACH
Value Added By Raw

Material Producing Firm
STAGE 1
Php100.00
Value Of Output of The Raw Value Added-By

Material Producing Firm Intermediate → Good-
STAGE 2
Producing Firm
Php 100.00
Php 50.00
Value Of Output Of Intermediate Good Producing Firm
STAGE 3 Php 150.00 Value Added By Final

Good Producing Firm
Php 50.00
Value Of Output
Price = Php 200.00
National Income Accounting
Special Considerations
The information collected through national income accounting can be used for a variety of purposes, such
as assessing the current standard of living or the distribution of income within a population. Additionally,
national income accounting provides a method for comparing activities within different sectors in an
economy, as well as changes within those sectors over time. A thorough analysis can assist in
determining overall economic stability within a nation.
For example, the U.S. uses information regarding the current GDP in the formation of various policies.
During the financial crisis of 2008, the GDP began to suffer as increased market volatility and shifting
supply and demand affected consumer spending and employment levels. As a result, President Barack
Obama, after taking office in 2009, instituted an economic stimulus package in response.
As an example, the basic accounting identity for GDP, sometimes known as the national income identity,
is computed using the following formula:
GDP = consumption + investment + government spending + (exports − imports)
National Income Accounting vs. Economic Policy
The quantitative information associated with national income accounting can be used to determine the
effect of various economic policies. Considered an aggregate of the economic activity within a nation,
national income accounting provides economists and statisticians with detailed information that can be
used to track the health of an economy and to forecast future growth and development.
The data can provide guidance regarding inflation policy and can be especially useful in the transitioning
economies of developing nations, as well as statistics regarding production levels as related to shifting
labor forces.
This data is also used by central banks to set and adjust monetary policy and affect the risk-free rate of
interest that they set. Governments also look at figures such as GDP growth and unemployment to set
fiscal policy in terms of tax rates and infrastructure spending.
Criticism of National Income Accounting
The accuracy of analysis relating to national income accounting is only as accurate as the data collected.
Failure to provide the data in a timely fashion can render it useless in regard to policy analysis and
creation.
Additionally, certain data points are not examined, such as the impact of the underground economy and
illegal production. This means the activities are not reflected in the analysis even if their effect on the
economy is strong. As a result, certain national accounts such as GDP or the consumer price index (CPI)
of inflation have been criticized on the grounds that they do not accurately capture the real economic
condition of the economy.
CHAPTER SUMMARY
National income accounting is a government bookkeeping system that measures a country's economic
activity—offering insight into how an economy is performing.
Such a system will include total revenues by domestic corporations, wages paid, and sales and income
tax data for companies.
National income accounting systems allow countries to assess the current standard of living or the
distribution of income within a population, as well as assess the effects of various economic policies.
However, the accuracy of analysis relating to national income accounting is only as accurate as the data
collected.
SELF-CHECK
Name: __________________________________________________ Score: __________________
A. Direction: Read the questions below. Choose the letter of the correct answer. Use separate
Paper
1. The labor force in the Philippines is comprised of those who are willing and able to work from
the age range of
A 10 - 60 years old. C. 15- 60 years old.

B. 10-64 years old D. 15 - 64 years old.
2. Consumer spending is accounted for in the

A. Household Sector C. Investment Sector
B. Business Sector D. Government Sector
3. Insurance and Lending companies are categorized under the

A Household Sector C. Investment Sector
B. Business Sector D. Government Sector
4. Export Management Company transactions will be accounted for under the

A Household Sector C. Investment Sector
B. Business Sector D. Government Sector.
5. The national account that considers the market price of a fixed good or service that has been
produced by a country's factors of production within the country and the returns to investments
and other income from abroad derived by its nationals, is called the
A. Gross National Product C. Net Factor Income from Abroad
B. Gross Domestic Product D. Net Exports.
6. It measures the value of output produced within the country regardless of whether the factor
of production used belongs to a Filipino national or a foreigner
A. Gross National Product C. Net Factor Income from Abroad.
B. Gross Domestic Product. D. Net Exports
7. In GNP Accounting, we consider all of the following to determine productivity except
A. Total Expenditures. C. Total Production.

B. Total Income D. Total Taxes
8. Overseas Filipino Workers' Incomes are included in

A. Personal Consumption Expenditures C. Net Factor Income from Abroad
B Bank Transfer Payments D. Net exports
9. This approach breaks down the contribution of industries or sectors to the value of fixed
goods. This is known as the
A. Expenditure Approach C. Industrial Origin Approach
B. Income Approach D. Value - Added Approach,
10. The leakage & injection brought about by the Investment Sector are
A. savings and investments. C. exports and imports
B, taxes and government spending. D. none of the above.
MODULE
WORKBOOK
OF
PERFORMANCE
TASK SHEET AND
JOB SHEET
PERFORMANCE TASK SHEETS
TASK SHEET 1
Name/GROUP Date
Title Reflection Paper
Performance Write a case analysis
Objective
1. Choose a particular problem experienced in the country in this time of pandemic.

2. Submit a Report using the format below:
I. Rationale (State here the overview or short description of your report)
II. Problem (Identify the problem and the urgency to solve it)
III. Alternative Courses of Action (atleast three (3) possible solutions. Cite the advantages
and disadvantages of the action)
IV. Recommendations (elaborate in detail the identified solution and action to be taken to
addressed the problem)
TASK SHEET 2
Name Date
Title Memeconomics
Performance Make a memes of any concept of economics
Objective
1. Choose any concept in economics

2. Create any memes out of the concept
3. Put in letter size.
TASK SHEET 2
Name Date
Title Business Implementation
Performance Prepare a Financial Statement of a business
Objective
1. Submit a Financial Statement of the business.
REFERENCES
Book/s:
Pagosa, Dino & Villasis (2006). Introductory to Microeconomics.856 Nicanor Reyes, Sr. St., Rex Book
Store, Inc.
Azarcon , et al. (2008). Principles of Economics with TAXATION and AGRARIAN REFORM (a Modular
Approach). Baguio City. Valencia Educational Suppy
Websites:
https://policonomics.com/lp-welfare-economics1-general-equilibrium/
https://policonomics.com/lp-welfare-economics1-fundamental-theorems-of-welfare-economics/
https://www.investopedia.com/terms/n/national_income_accounting.asp
https://saylordotorg.github.io/text_principles-of-managerial-economics/s02-01-revenue-cost-and-
profit.html
https://saylordotorg.github.io/text_principles-of-managerial-economics/s02-02-economic-versus-
accounting-mea.html
https://saylordotorg.github.io/text_principles-of-managerial-economics/s02-03-revenue-cost-and-profit-
functi.html
https://saylordotorg.github.io/text_principles-of-managerial-economics/s02-05-the-impact-of-price-
changes.html

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ST. MARY’S COLLEGE BAGANGA, INC.

Poblacion, Baganga, Davao Oriental

RALPH H. CELESTE, DBM

After studying this chapter, you should be able to:

 Define revenue, cost and profit

A Simple Business Venture

Revenue, Cost, and Profit

Economic Versus Accounting Measures of Cost and Profit

Revenue, Cost, and Profit Functions

where R is the revenue and Q is the number of units sold.

Units Revenue Cost Profit

10,000 $15,000 $43,000 –$28,000

20,000 $30,000 $46,000 –$16,000

30,000 $45,000 $49,000 –$4,000

40,000 $60,000 $52,000 $8,000

50,000 $75,000 $55,000 $20,000

60,000 $90,000 $58,000 $32,000

The Impact of Price Changes

A Final Word on Business Objectives

NAME: ________________________________________________ SCORE:__________

A. Direction. Write TRUE if the statement is correct, False if it is wrong.

3. This term refers to the sales generated by an enterprise.

5. To determine the total costs, we have to get the sum of

6. To determine the breakeven, we usually equate

8000 150,000 400,000 550,000 600,000 50,000

7. The breakeven production point is

8. The breakeven amount in

9. The profit condition at 5500 units of production is expected to be

10. The profit condition at 6500 units of production is expected to be

After studying this chapter, you should be able to:

 Concept of welfare and equilibrium

The Concept of Welfare and Equilibrium

There are two fundamental theorems of welfare economics.

any competitive equilibrium leads to a Pareto efficient allocation of resources.

 Second fundamental theorem of welfare economics:

NAME: ______________________________________________________________ SCORE: _________

A. Direction. Choose the letter of the correct answer.

1. In a purely competitive market, a seller is a price taker because:

3. The difference between pure competition and monopolistic competition is in:

4. In an oligopoly, equilibrium output is where:

5. The market that allows choice of goods for consumers:

6. Given the same unit cost, a monopolistic producer will:

7. In ceteris paribus, if the prices of variable inputs where to fall:

9. A monopolistic competitor advertises to:

10. The vertical distance between the ATC and AVC

After studying this chapter, you should be able to:

 Concept of welfare and equilibrium

A. MACROECONOMICS & MICROECONOMICS

This section presents macroeconomics some of the major issues tackled

B. COMMON ECONOMIC GOALS AND MAJOR ISSUES OF COUNTRIES

Inflation emanating from internal origins may be classified as follows:

E. LABOR FORCE AND UNEMPLOYMENT

3. Disguised Unemployment Disguised unemployment is a situation where the productivity of the

GROSS NATIONAL PRODUCT & NATIONAL INCOME ACCOUNTS

What Is National Income Accounting?

Understanding National Income Accounting

Total Production = Total Income = Total Expenditure

Given this premise, the GNP is measured by using three approaches:

3) Government spending or government purchases which includes the following:

Under this approach, GNP may be determined with the equation:

where: Y = National Income

6) capital consumption allowance is a summation of all depreciation allowances of all businesses.

Industrial Origin Approach

NAME: ______________________________________ SCORE:

NAME: ______________________________________________________ SCORE: _

Name: ________________________________ Score: