Market Equilibrium

A situation, at which a given price, quantity demanded and quantity supplied are equal.
Market - a place where potential buyers and potential sellers meet. An organized form of contract
using an accepted exchange of means.
Equilibrium - a state which is balance that came from the Latin words aequus which means equal and
libra which means balance

Shortage - when there is more demand than supply. Consumers are willing to buy more than what is
supplied. Price needs to be increased so that the suppliers will be more motivated to increase supply.
Some consumers will not be able to afford the new price so they will look for substitute products
instead

Surplus - when there is more supply than demand. Price needs to be decreased until it will reach
market equilibrium so that consumers could afford and would want to buy the products. Sellers would
rather decrease the price than having the products left unsold

Shifts in the demand curve - when there is an increase in demand, the demand curve will shift to the
right. When the curve will shift to the right, equilibrium price and equilibrium quantity will increase as
well. An example is holiday season because the demand will increase because consumers will be
buying gifts. So the shift will be to the right and equilibrium price and equilibrium quantity will
increase as well

Shifts in the supply curve - when the supply curve will shift to the left, price will increase and quantity
will decrease while if it shifts to the left, price will decrease and quantity will increase. An example
would be when there is an increase in cost of inputs

Shifts in the demand curve and supply curve at the same time - There is an increase in minimum
wage
Consumers POV: Consumers will have an increased salary so demand will increase as well. The
demand curve will shift to the right and so equilibrium price and equilibrium quantity will increase as
well. Point 1 to Point 2.
Suppliers POV: The cost of inputs will increase and so they will supply less. The supply curve will shift
to the left and so price will increase and quantity will decrease. Point 2 to Point 3

Price Regulation
SRP (Suggested Retail Price) - a guide for consumers and sellers to address the issue of information
disparity
Sin Taxes - the government imposes to increase the price of products that may be harmful to health
and well-being to discourage consumers from buying them

Legislation - a ban or reduction of the use of products to control. This is typical in the case of goods
taht do not pass quality checks especially in the cases of medicines and food.
Number Coding Scheme - in Metro Manila, this was imposed to control the use of cars on certain days

Monitoring and Forecasting - the government monitors the supply of some products
NFA (National Food Authority) - monitors the supply of rice to make sure that there is enough supply
of goods in state of calamities

Market
A place where buyers and sellers meet to exchange goods and services using an accepted medium of
exchange

Traditional Market - distinguished by the presence of a physical location. Example: public market that
is often seen in communities around the country
Virtual Market - characterized by the absence of a physical location. Transactions may be settled
online and face-to-face meeting of buyer and seller is not a requirement because items are usually
shipped via third party logistics provider. Payments may be done online via debit cards, bank transfer,
or credit card. An example is online shopping like shoppee.

Stock exchange - a place where publicly listed companies sell ownership of their company through the
issuance of shares of stock. It is where financial transactions involving stocks are conducted.

Markets satisfy the need for a common ground where customers’ demands are met by the producers.
Businesses may have different objectives in achieving profit maximization

Public Companies’ main objective is to increase shareholder value. The higher the share price, the
higher the shareholder value. They have stocks issued to the public. They are accountable to its
shareholders
Private Companies are answerable to its owners.
Business aim is to increase market share which is a percentage of a market’s total sales that is
attributable to a certain brand, product, or company.

Revenue - price x quantity

Fixed Costs - costs that are not dependent on the quantity of output

Average Fixed Costs - Fixed Costs/Quantity

Variable Costs - costs that depend on the quantity of output

Average Variable Costs - Variable Costs/Quantity

Total Costs - Fixed Costs + Variable Costs

Average Total Costs - revenue earned per unit of output sold. Total Costs/Quantity

Marginal Costs - change in total cost/change in quantity

Q TC MC
1 350 -
2 450 100
3 500 50
Total Revenue - Price x Quantity

Average Revenue - revenue earned per unit of output sold. Total Revenue/Quantity

Marginal Revenue - additional revenue earned for every additional unit of quantity sold.
Change in total revenue/change in quantity

Q TR MR
1 50 -
2 200 150
3 450 250

Market Structures
A form or organization of firms in an industry. Distinction of market structures are based on the level
of competition. There is a certain criteria:
Number of Firms - the number of firms influence the level of competition. One firm - no competition.
Few firms - few competitions. Many firms - many competitions

Product Differentiation - refers to the degree of similarity or homogeneity of a product offered by

firms in the industry. Products such as corns, rice, and wheat are examples of homogenous products.
Phones, electronic gadgets, beauty services are considered differentiated.

Firm’s Influence on Price - Market Power is the ability of firms to increase the price of a product. Price
takers are those that don’t have market power so they just follow the prices. Price Makers are those
who have market power. Most firms that are price makers have differentiated products

Barriers to Entry - factors that affect the ease of setting up a business. Low barriers attract more firms
to get into the industry, which means that there is more competition. Economies of Scale are
associated with high-scale production. This means that if high capital is needed, then the barriers are
high.

Barriers to Exit - factors that affect the ease of exiting a business. If the ext costs are high, the barriers
are high. The exit cost may be monetary or many be in the form of goodwill (advantages against
competitors)

Types of Market Structures

Perfect Competition
Number of Firms: Many
Product Differentiation: Homogenous
Firm’s Influence on Price - Price Takers
Barriers: Low
Examples: engaged in the production of selling agricultural products and poultry, grocery stores

Monopolistic Competition
Number of Firms: Many
Product Differentiation: Differentiated
Firm’s Influence on Price: Price Makers
Barriers: Low
If you are successful in differentiating your products, you could possibly capture a larger scale of the
market.
Human Capital Differentiation - when the skills and expertise of the firm’s manpower become the
selling point of the product or service
Examples: spas, salons, facial centers

Oligopoly
Number of Firms: Few
Product Differentiation: Differentiated or Homogenous
Firm’s Influence on Price: Price Makers
Barriers: High
Example: Car Industry
Duopoly - another form of oligopoly that only has two firms in the industry
Example: Telecom Industry

Monopoly
Number of Firms: Single/One
Product Differentiation: Price Makers
Barriers: High
Example: Water industry, Electricity
There is an absence of a close substitute. There is no substitute
Government’s Role in Different Market Structures
Perfect Competition
In theory, there is no need to have government intervention. In reality, there is no market that is left
freely by the government. There is minimal government intervention only. They just monitor and
track for shortage and overpricing. They inspect wet markets, grocery stores, supermarkets, and other
retail outlets.

Monopolistic Competition
Product differentiation is a key figure in a monopolistic competition. Advertising and marketing is how
they communicate and reach out to capture a large market. There is a need to monitor and regulate
firms to ensure accurate product information and avoid misleading advertisements. The Consumer
Act of the Philippines or RA 7394 has the aim to uphold consumer protection. They need to make sure
that accurate information is being disseminated to the public. Food and beverages industries need to
follow proper sanitation and hazard prevention. Construction industries need to follow the
regulations of the National Building Code of the Philippines. Food, Drug, Cosmetics need to follow the
Food and Drug Administration

Oligopoly
A common problem is collusion. Collusion is when competitors conspire to manipulate prices to
achieve higher profit

Price Fixing - when rival firms agree to set prices for similar products or when a firm works with its
retailers to raise prices. Another form of collusion is when two or more firms collude to stop another
firm from entering the industry to prevent having more competition. Collusion also happens in
bidding. Bidding is rigged when a competitor sets an unusually high price to let another firm to be
selected. Suppliers will present to the government their prices but they all agree to set prices higher
for one firm to be selected as the supplier.

Monopsony Pricing - retailers collude to reduce the amount due to suppliers. Mining industries and
then since miners don’t have another source of employment they have to accept what is offered to
them by the industry.

Formal Collusion - there is a formal agreement between rival firms to adhere high pricing. An example
is the Organization of Petroleum Exporting Countries (OPEC). Cartel is an organized group that
influences the price of a good.

Tacit Collusion - involves implicit agreement between competitors. No personal interactions.

Objective is to set prices higher without getting caught.

Price War - when competitors compete with one another to capture market share. When a firm cuts
back prices and then another firm reduces the prices even lower.

Monopoly
Higher prices and limited choices. Heavily regulated by the government.

Price Control Strategies.

Price ceiling - maximum price for a good and service that sellers are compelled to adopt. Imposed by
the government to achieve productive efficiency. Also known as price cap.

Government Subsidy - considered a price control strategy that may be used by the government to
achieve allocative and productive efficiencies in a monopoly.
Price Discrimination - pricing is influenced. Example is when price is discounted based ont he number
of purchases

Nonprice Control Strategies

Price Unbundling - when splitting a product into two separate components. This is to offer choices to
consumers by allowing them to choose only the good they want to buy.

Nationalization - taking over a private company and publicly operating it. The Philippine National
Railways (PNR) is an example.

Philippine Consumer Act - aims to protect consumers by upholding market competition, promoting
free trade, and supporting fair competition

Circular Flow of Economy

An economic model that illustrates the flow of goods and finances among economic agents
Economic agents - market participants or institution that influence the flow of the resources in the
economy. Households, firms, government, and foreign trading partners

Simple Economy - result of a free interaction between the households and firms.
People work for firms - firms produce goods and services - goods and services will be purchased by
firms
Firms pay wages to people - people gain income - people use income as payment to the firms - firms
will get revenue from the payment

The upper section shows the flow of goods and services in the product market while the lower shows
the exchange of factors of production and income called the factor market

Simple Economy with Government Intervention - extended version of the simple economy. Taxes are
mandatory contributions of firms and households to the government. Transfer payments refer to
government benefits, and welfare payments

Same as simple economy but:

Households and firms pay taxes to the government
Government gives government subsidies and transfer payments to firms
Government gives public goods and transfer payments to households

Open Economy - extended version of simple economy with government intervention. Domestic firms
export local and import foreign ones.

Same with simple economy with government intervention but:

Foreign trading partners will offer good and services to circulate in the economy. Foreign entities can
only own 40% of a corporation

Measuring the national economy through the use of various macroeconomic indicators are important
because it provides valuable insight to investors and policy makers. A stable or growing economy
attracts more investments.

Gross Domestic Product (GDP) - aggregate value of output produced within the country for a given
period of time.
Inflation
Continuous rise in the general price level of goods and services. Continuous is an increase in price for
two or more consecutive periods under study.

Inflation = value of money

If there is inflation, the value of money will decrease

Consumer Price Index - cost of basket of goods normally purchased bu consumers. The commodities
included in this virtual basket are selected through a survey of households from different income
brackets.

CPI = cost of market basket in given year/ base year

Inflation = (CPI1 - CPI / CPI) 100

Producer Price Index - equivalent of the CPI on the supplier side. The PPI pertains to the use of inputs
by producers.

GDP Deflator - inflation formula that uses the GDP.

GDP = (nominal GDP/Real GDP) 100

Nominal GDP = [(Cost of Product A x Quantity) + (Cost of Product B x Quantity)… ]

Real GDP = [(Cost of Product A in base year x Quantity) + (Cost of Product B in base year)]

Causes of Inflation
Demand-pull inflation - increase in general price level of goods primarily driven by high demand.
Demand is so high that supply cannot keep up. Sellers tend to increase prices to take advantage of
the high demand. This is often observed when the economy is growing. Uses the AS-AD model.

Cost-push Inflation - persistent increase in prices is a result of the rise in the cost of production.
Producers adjust supply which leads to lower equilibrium output and higher prices. Cost of
production increases, so price increases, but supply decreases.

Factors that cause higher cost of production

Higher prices of raw materials and commodities - a rise in the costs of inputs like raw materials
increases the cost of production and leads AS curve to the left

Higher food prices - supplies of the supermarket items typically become temporarily limited due to
interruption of production.

Higher taxes - a bump in the taxes imposed on producers may also lead to lower income for firms.
Some taxes may be passed on to consumers. Examples: VAT

Higher wages - this directly affects the firms’ cost of production. Firms tend to adjust either by
reducing labor requirements to maintain current production or reduce production to save on cost.

Effects of Inflation
Effects of inflation are tied to the causes of inflation.

Purchasing Power - inflation erodes the purchasing power of consumers. This is equivalent to saying
that the value of money declines during inflation. When inflation increases, value of money
decreases

Cost of Borrowing - inflation makes the cost of borrowing cheaper. The value of real interest rate
goes down when inflation rate goes up. This encourages borrowing because interest rate is low.

Consumer Spending - inflation encourages consumer spending. Inflation is negatively related to

interest rate, high inflation means low interest rate. Purchasing power is falling in times of inflation
makes people want to spend their cash now before the value goes down further.

Unemployment - as economy experiences growth, it produces more output. This is equivalent to a

shift in the AD curve to the right which corresponds to an increase in the real GDP and an increase in
prices. But the higher the real GDP encourages firms to employ more workers.
Economic growth - inflation may spur economic growth. Low and manageable inflation encourages
investment, and investments supports economic growth in the long run.

Managing Inflation
Keeping track of inflation is the role of the central bank
BSP - Banko Sentral ng Pilipinas

Hyperinflation - situation of very high and ever-increasing inflation rates. The acceleration happens in
a short period of time and there is a rapid fall in the value of money that people are hurrying to spend
them before the value goes down further.

Managing inflation involves the manipulation of interest rates and the level of money supply in the
economy this is also known as monetary policy.

Unemployment
Working age population - nation’s adult population who may be employed. Ages 15 to 64.
Employment - individuals who are currently holding a job.
Unemployed - those who are part of the working age population who are currently not working but
are looking for one.
Underemployed - individuals holding a job that does not match their skills, knowledge, or
qualifications.

Labor Force - economically active individuals who are currently working or are presently working for a
job.
Labor Force Participation Rate - part of the working age population that belongs to the labor force.

Labor Force = employed + unemployed

Labor Force Participation Rate = labor force/working age population

Unemployment Rate - unemployed persons to the total labor force.

Employment Rate - percentage of labor force made up of employed individuals

Unemployment Rate Equation - unemployed/labor force

Employment rate Equation - employed/labor force

Types of Unemployment
Demand-side Unemployment - refers to the unemployment driven by the decrease in aggregate
demand for goods and services which leads to a decline in economic growth.
Cyclical Unemployment - specific type of demand deficient unemployment. The unemployment is
due to the fall in demand for certain jobs during the recession phase of the business cycle. When
firms lay off people to decrease cost operations
Supply-side Unemployment - largely driven by disequilibrium in the labor market.
Frictional Unemployment - refers to the situation in which individuals are in between jobs.
Structural Unemployment - caused by job or skills mismatch. May be occupational, geographical, or
technological.
Occupational Structural Unemployment - a former nurse who wishes to be a physical therapist would
have to learn new skills and qualifications.
Geographical - an individual being transferred to a different location and may not be able to afford
the location.
Technological structural unemployment - advances in technology replace jobs
Classical Unemployment - a real wage increase leads to disequilibrium in which supply of labor is
greater than demand.

Relationship of Unemployment and Inflation

Unemployment is inversely related to inflation. The negative relationship between these two
economic indicators is also known as the Philips Curve.

Stagflation - there is increasing inflation and rising unemployment. Rising unemployment during
stagflation is primarily driven by a decline in output.