MICRO ECONOMICS
- is the branch of economics concerned with
the process of resource allocation of
individual decision units or markets and the
efficiency with which resources are
allocated.
- “we could make predictions about the
economy if we study theories”
ECONOMICS
- The branch of knowledge concerned with the
production, consumption, and transferof
wealth.
- is the study of how people institutions,
andsociety make choices under conditions
ofscarcity.
- assumes that individuals act rationally and in
their own self-interest.
MACROECONOMICS
- The part of economics concerned with large
scale or general economic factors, such as
interest rates and national productivity.
THEORY
- is an abstraction, a way of simplifying
things.The real world is a complicated place.
CHARACTERISTICS OF MICROECONOMICS:
- Microeconomics looks at the decision of
individual units - it focuses on the choices
made by individual decision units such as
households, producers and firms.
- Microeconomics looks at how prices are
determined - it is concerned with how
prices are determined in various types of
market structures such as pure
competition, monopoly, monopolistic
competition, and oligopoly.
Microeconomics is often called "price
theory’’
- Microeconomics is concerned with
social welfare - it also examines the
efficiency, relative desirability, and
choice of alternative methods by which
resources are utilized to alleviate scarcity.
- Microeconomics has a limited - focus it
is just a part of the economics
development.
- Microeconomic develop skills:
a. Helps you develop your logical
reasoning.
b. Will help you develop skill in the
construction and use of models.
c. Employs optimizing techniques that
are useful for making decisions in a
variety of situations.
d. Are applicable to your personal
resource allocation decision such as
your career choices or financial
investments.
THREE TYPES OF MODELS.
a. Models to explain the resource allocation or
choice decisions of individual households,
producers and firms.
b. Models to explain how price and quantities
exchanged are determined in various type
of market structures
c. Models to examine the market economy as
an inter-related system.
SUPPLY AND DEMAND
▸ MARKET - a place where buyer and sellers
interact and engage in exchange.
› DEMAND - reflects the consumer's desire for
a commodity.
▸ QUANTITY DEMANDED the amount of
goods or services consumers are willing and
able to buy/purchase at a given price, place,
and at a given period of time.
▸ SUPPLY defined as the maximum
units/quantity of goods or services producers
can offer.
▸ QUANTITY SUPPLIED refers to the amount
of quantity of goods and services producers
are willing and able to supply at a given price,
at a given period of time.
▸ AGGREGATE DEMAND the totality of a
group of consumer's demand. › AGGREGATE
SUPPLY the totality of a group of producer's
supply.
 ‣ DEMAND SCHEDULE the quantities
consumers are willing to buy of a good at
various prices.
‣SUPPLY SCHEDULE - the quantities
producers are willing to offer for sale at various
prices.
‣ DEMAND CURVE - a graph showing how
the demand for a commodity or service varies
with changes in its price.
> SUPPLY CURVE - is a graphic
representation of the correlation between the
cost of a good or service and the quantity
supplied for a given period.
› MOVEMENT ALONG THE CURVE - a
change from one point to another on the same
curve.
‣SHIFT OF THE CURVE - a change in the
entire curve caused by a change in the entire
demand or supply schedule.
▸ NON-PRICE FACTORS also known as
parameters, are factors other than price that
also affect demand or supply.
‣DEMAND FUNCTION shows how quantity
demanded is dependent on its determinants.
‣ SUPPLY FUNCTION shows how quantity
supplied is dependent on its determinants.
‣EQUILIBRIUM - condition of balance or
equality.
DETERMINANTS OF DEMAND
‣Price of the good itself.
‣Consumers income or Average income of
consumers - consumers tend to buy more goods
and acquire more services when their income
increases.
RESPONCE TO A CHANGE IN INCOME
DEPENDS ON THE TYPE OF GOODS:
d. A. NORMAL GOODS
refers to a good for which quantity demand
at every price increases when income rises.
e. B. INFERIOR GOODS
refers to a good for which quantity demand
falls when income rises
‣Consumers expectation of future prices. -
when someone expects higher prices in the future
especially for basic commodities, the tendency is to
buy more of these goods today.
‣Prices of related commodities/goods or Price
& availability of related goods- changes in the
prices of alternative goods such as pork and
chicken will affect the quantity of fish demanded.
‣SUBSTITUTE GOODS- are goods that can be
used in place of other goods. Example coffee
substitutes for tea.
‣COMPLEMENTARY GOODS are gods that go
together. -they are related in such a way that an
incresco in the price of one good will cause a
decrease in the other good. For example: car and
gasoline
‣Consumers tastes and preferences.
‣Population or size of market- an increase in the
population means more demand for goods and
services.
‣Special influences - there are certain
developments that influence demand for certain
goods and services. Heat and humidity, for
instance, contribute to the demand for air-
conditioning equipment and light clothing.
DETERMINANTS OF SUPPLY
‣CHANGE IN TECHNOLOGY state of the art
technology that uses high-tech machines increases
the quantity supply of goods which causes the
reduction of cost of production.
‣COST OF INPUTS USED OR COST OF
PRODUCTION - an increase in the price of an input
or the cost of production decreases the quantity
supplied because the profitability of certain
business decreases.
‣EXPECTATION OF FUTURE PRICE - when
producers expect higher prices in the future
commodities, the tendency is to keep their goods
and release them when the price rises.
‣ CHANGE IS THE PRICE OF RELATED
GOODS
‣GOVERNMENT REGULATION AND TAXES -it is
expected that taxes imposed by the government
increases cost of production which in turn
discourages production because it reduces
producers' earnings and will translate to lower
supply in the market.
‣GOVERNMENT SUBSIDIES - or the financial
aids/assistance given by the government reduces
cost of production which encourages more supply.
‣ NUMBER OF FIRMS IN THE MARKET OR
NUMBER OF SUPPLIERS.
THEORY OF CONSUMER BEHAVIOR
UTILITY
Is the term for satisfaction in economics. It is the
objective of every consumer.
Utility theory
UTILITY THEORY
Assumes that satisfaction is measurable in units
called utils. It supposes that people while
purchasing or consuming goods and services are
subconsciously estimating the satisfaction they
derived out consumption. of the said
Each of the consumers may have their own scale to
measure utility. A person has the liberty to make
his own scale in measuring his own
satisfaction.
MARGINAL UTILITY
Is the additional satisfaction derives from
consuming an extra piece.
TOTAL UTILITY
Is the sum of all the marginal utility he gets
from consuming succesive amount of the said
food
UTILITY SCHEDULE OF JASON FOR CHICKEN
NUGGETS AND SHANGHAI ROLLS
In concrete terms, total utility will continue to
increase so long as the marginal utility is positive.
At the point of satisfaction, where the marginal
utility is equal to zero, total utility remains the same.
When the consumer begins to feel disutility or
dissatisfaction, total utility Beyond this point, any
declines. additional consumption will lead to lesser
and lesser total utility.
LAW OF DIMINISHING MARGINAL UTILITY
Explain why people don't consume more
than what can satisfy them. It suggests he that
a person's additional satisfaction or his
marginal utility declines as consumes more
and more of a particular commodity during
some specified period of time.
However, any addiction, obsession to a good
or service or set completion cases are
exception to the law.
THE EQUI-MARGINAL PRINCIPLE
■ Aside from taste and preferences that the utility
schedule already reflects prices of the goods or
service as well as the consumer's budget for that
commodity serve as important elements that are
involved in the process of making a rational choice.
■ Consumer balance their selection of goods and
services in order to achieve equilibrium.
INDIFFERENCE CURVE
- Approach stressed that ordinal ranking of
preference among the goods and services
consumers buy.
- Shows a set of consumption choices, each
of which yields the same amount of utility.
CHARACTERISTICS OF INDIFFERENCE CURVE
1. It is normally negatively sloped. A
downward sloping indifference curve
suggests that the consumer is indifferent
between two combinations of goods, where
one combination may contain more units of
X, but fewer units of Y and the other
containing fewer units of X but more units
ofY.
2. It is convex to the point of origin due to the
influence of the Law of diminishing marginal
utility. The more of a commodity a
consumer has the less valuable an
additional unit becomes, therefore, marginal
utility declines. A person who has 4
sandwiches and only 1 drink might be
willing to trade 2 sandwiches for an
additional drink.
 3. Indifference curve are not-intersecting.
Rational consumers are consistent with their
preferences. If a consumer prefer A to B
and B to C, then he also prefer A to C.

MARGINAL RATE OF SUBSTITUTION (MRS)

 In food consumption
 In clothing consumption

BUDGET LINE

Contains infinite points of combinations in the

consumption of two commodity items that the same
budget can buy at constant prices.

CONSUMER'S SURPLUS

The peso value that the consumer is willing to pay

for a certain volume of a cor 17-18/201 is less than
the peso value of the benefit from its consumption.

PARADOX OF VALUE

■ The paradox of value answers on How is it that

water, which is very useful, that life is impossible
without it, has such a low price; where as diamond
which are not quite necessary

BASIC MICRO ECONOMICS
Production input
 Are what is used in the production process to
produce output – that is, finished goods and
services.
 Involved utilizing inputs to produce a desired
product.
Production function
 Contains the functional relationship between
output and a basic factor in the form of land,
labor or capital, assuming the other factors of
fixed size.
Productivity
 Is the ratio of output to inputor the average
product yield of the inputs.
Profits
 Can be attained by organizing the business
according to the owners objectives and
resources.
 Is the positive net effect or thepositive
difference between revenue and cost.
 With the revenue earned, the firm can recover
what it foregoes in the process of production
and the excess is simply the profit created.
Loss
 The negative difference between revenue and
cost.
SOLE PROPRIETORSHIP – is an enterprise owned by a
single individual who alone benefits from the profits or
suffers the losses.
 PARTNERSHIP – is the agreement of two or more
persons who bind themselves to contribute money,
property, or business know-how to a common fund with
the intention of dividing profits or losses among
themselves.
CORPORATION – is an artificialbeing created by
operation of law, having the right ofsuccession and the
powers, attributes, and propertiesexpressly authorized
by law or incidents to its existence.
COOPERATIVE ASSOCIATION – is a non-profit
enterprise, owned and democratically controlled on a
mutual basis by the members who participate in the
savings generated by the cooperative in proportion to
the patronage given by the individual member to the
association.
Business syndicate
 Is organized by several corporations to carry out
a particularly large project.
Real assets
 Is an investment asset class that covers
investments in physical assets such as real
estate, energy, and infrastructure. Are
machineries, buildings, materials and supplies.
Monetary assets
 Is in the form of money and near money part of
which the firm transforms into real assets
through purchases or acquisition.
Inventories
 The utilized resources are simply transformed
into these unsold goods which become part of
the firm’s stock of assets.
Imputed cost
 Is the value imputed or assigned to any
costitem that is not recorded in the book.
 Also known as a hidden or implicit cost, is the
price of production factors that a firm owns and
utilizes. It is called “imputed” because the firm
does not report it on its financial statements as
a separate cost.
Oppurtunity cost
  This is the best opportunity that an
entrepreneur foregoes among the other
alternate endeavor.
Modified profit or loss
  Is simply the comparative gain in shifting from
one alternative to the other.
TWO BASIC COMPONENTS OF TOTAL COST
 Fixed cost- are costs that does not depend on
the firms’ level of output
 Variable cost – A cost whose amount does
change according to output level. Ex. Labor,
supplies/inventory.
TOTAL COST
 All of the money you are spending to produce
all of your output.
 TFC + AVC = Total cost
AVERAGE FIXED COST (AFC)
 Is the fixed costs of production (FC) divided by
the quantity (Q) of output produced.
 TFC / Q = Average Fixed Cost
AVERAGE VARIABLE COST
 Is the total variable cost per unit of output. This
is found by dividing total variable cost (TVC) by
total output (Q).
 TVC/Q =Average Variable Cost
AVERAGE TOTAL COST
 Average Total cost = AFC+AVC/Q
MARGINAL COST
 Is the change in the total cost that arises when
the quantity produced is incremented by one
unit; that is, it is the cost of producing one
more unit of a good.
 ∆TC/∆Q = Marginal Cost
EQUATION TFC + AVC = Total cost
TFC / Q = Average Fixed Cost
TVC/Q =Average Variable Cost
AFC/AVC=Average Total cost
∆TC/∆Q = Marginal Cost
CHARACTERISTICS OF PURE OR PERFECT COMPETITION
 PRODUCTS OF FIRMS IN THEINDUSTRY UNDER
CONSIDERATION ARE STANDARDIZED – means
that they are identical or at least so much alike
that buyers do not mind buying from any firm.
However, buyers will not buy from a firm whose
price is higher that the rival firm.
 BUYER AND SELLER ARE WITHOUT POWER TO
CHANGE THE GOING MARKET PRICE OF THE
PRODUCT (Price taker) – purchases made by the
individual buyer constitute only a very small
fraction of the total purchases made by all
buyers. Therefore, the buyers cannot ask for a
reduced price from the seller because of the
existence of many other alternative buyers.
Seller cannot affect changes in the market price
because of the very limited quantity of products
he holds.
 ABSENCE OR RESTRAINTS OF ANY KIND IS AN
IMPORTANT FEATURE – no artificial obstacles
bar the entry and exit of firms. Examples of
obstacles are permits and licenses required by
the government, as well as price ceilings
imposed on commodities.
 BUYERS, SELLERS AND RESOURCE OWNERS
HAVE PERFECT KNOWLEDGE OF MARKET
CONDITIONS – business firms have knowledge
of their revenues and cost functions. They are
also awae of the prices of all resource inputs
and of the various technologies available for
producing their outputs. Buyers possess
information on the prices charged by all firms.
Resource owners know the prices of inputs
bought by all firms.

PERFECT KNOWLEDGE
 Means that a person knows the price of a
commodity being charged in different markets.
MARKET IS PERFECTLY COMPETITIVE
IF IT CONTAINS ALL THE CHARACTERISTICS OF PURE
COMPETITION.
SHORT-RUN EQUILIBRIUM
 Referring to a time period in which a firm can
vary its output but does not have time to
change its plant size.
LONG-RUN EQUILIBRIUM
 We are referring to the situation toward which
the market price and output and the short-run
equilibrium price and output tend in a period of
time long enough to allow the following things:
1. The completion of firms of all desired adjustments.
2. The entry of new firms.
3. The departure of old ones.
ECONOMIC PROFITS
 Are a pure surplus or an excess of total receipts
over all costs of production incurred by the
firm.
  tr – Expenses = Net Income or Profit –
Average dividends = ECONOMIC PROFITS.
COSTS
  Are obligations incurred for all resources used
which includes the opportunity cost.
  Is the combination of losses of any goods that
have a value attached to them by any one
individual.
PRODUCER IN A COMPETITIVE MARKET IS FACED WITH
THE FF. QUESTIONS:
Should I produce?
What will I produce and How much?
Will I realize a profit (or loss)?
How much profit?
BREAK-EVEN POINT
  Is arrived at when total revenue just equals
today cost.
  The point at which total cost and total
revenue are equal.
PURE OR PERFECT MONOPOLY
 Is market structure characterized by only one
producer of a product.
  Since there is no competing seller, the buyer
has no choice but to buy the product of the
monopolist.
  Refers to the form of market organization in
which there is a single firm producing a
commodity or a service for which there are no
close substitutes.
MONOPOLIST IS FACED WITH THE QUESTIONS:
At what point would I be losing?
At what point would I break even?
At what point would I maximize profit?
MONOPOLIST ADVERTISE FORSEVERAL REASONS:
1. To enlarge their respective markets.
2. To promote goodwill or good public relations with
the consumers.
3. To make the public aware that their companies exist
and is doing good service to the public.
MONOPOLISTIC COMPETITION
 Type of market structure where there are a
large number of sellers that produce similar
products, but the products are perceived by
buyers as different.
 The individual firms, make it appear that their
products are different from one another.
Include wristwatches, milk, shoes, clothes and
fast food.
 Refers to the market organization in which a
relatively large number of small producersor
suppliers are offering similar but not identical
products.
PRODUCT DIFFERENTIATION
  Aim is to convince buyers that a certain
product is different from another in terms like
quality and style.
PRODUCT DIFFERENTIATION HAS SEVERAL
DIMENSIONS:
REAL DIFFERENCES – can exist when functional
features, material, design are important aspects of
product differentiation.
IMAGINARY DIFFERENCES – can exist through
effective use of advertising,packaging, trademarks, and
brand names.
OTHER CONDITIONS WHERE DIFFERENTIATION EXIST:
The location of the store.
The reputation of the firm marketing the product.
The courteousness of the sales staff.
The availability of credit and others.
OLIGOPOLY
 Is that market structure in which there are a
limited number of firms competing for a given
industry.
 Products of oligopolist are homogeneous or
identical. Example of these products are
gasoline, cement, steel, automobiles and
cigarettes.
 Market are barred by high initial investment.
 When an oligopolist sets his price, he
mustconsider the reactions of the other sellers.
 A market structure characterized by a small
number firms and a great deal of
interdependence among them.
PURE OLIGOPOLY – if the products produced by the
various firms are identical.
 This model is found in some of the capital
goods industries such as the cement and oil
industry.
 Any price or output change by one firm is
certain to produce substantial effects upon the
sales of competitors that would force them to
alter their policies.
DIFFERENTIATED OLIGOPOLY – this models is found
in most manufactured consumer goods.
 The car industry and the appliance industry and
the appliance industry are examples of
differentiated oligopoly. Consumers can choose
from several car models, different stereo or
refrigerator brands. Price changes will have a
less direct effect upon competitors because of
the partial isolation of the market for each firm.
REVENUE OF A COMPETITIVE FIRM
TOTAL REVENUE for a firm is the selling price times the
quantity i.
 TR = (P x Q)
MARGINAL REVENUE is the change in total revenue
from an additional unit sold.
 MR = ∆TR / ∆Q
  AR = TR/Q
 A firm will enter the industry if such an action would
be profitable.

Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC

SHUTDOWN MONOPOLY

Refers to a short-run decision not to produce anything While a competitive firm is a price taker, a monopoly
during a specific period of time because of current firm is a price maker.
market conditions.
It is a sole seller of its product.
EXIT
Its product does not have close substitutes.
Refers to a long-run decision to leave the market.

The firm considers its sunk costs when deciding to exit,

WHY MONOPOLIST ARISE
but ignores them when deciding whether to shut down.
The fundamental cause of monopoly is barriers
to entry.
SUNK COSTS
BARRIERS TO ENTRY HAVE THREE
Are costs that have already been committed and
SOURCES:
cannot be recovered.
1. Ownership of a key resource.
2. The government gives a single firm the
exclusive right to produce some good. –
THE FIRM’S SHORT-RUN DECISION TO SHUT DOWN Patent, copyrights and government
licensing.
3. Cost of production make a single producer
The firm shut down if the revenue it gets from more efficient than a large number of
producing is less than the variable cost of production. producers. – natural monopolies
Shut down if TR < VC

Shut down if TR / Q < VC / Q NATURAL MONOPOLY

Shut down if P < AVC Is when a single firm can supply goods
or services to an entire market at a
smaller cost than could two or more
firms.
THE FIRM’S LONG-RUN DECISION TO EXIT

In the long-run, the firm exits if the revenue it would

get from producing is less than its total cost. PROBLEMS OF MONOPOLY

Exit if TR < TC  Consumers may pay higher prices due to the

lack
Exit if TR/Q < TC/Q of competition.
Exit if P < ATC  Consumers may have less choice.
 Firms may not be very efficient with their
resources because there is no need to reduce
THE FIRM’S LONG-RUN DECISION TO ENTER A MARKET costs.
 Less innovation (new products)
BENEFITS OF MONOPOLY
The firm should make higher profits.
The firm may use these to invest in new
products or improve existing products.
EXTERNALITIES OF ENTRY INCLUDES:
1. Product variety externalities
2.Business stealing
Externalities
1. PRODUCT VARIETYEXTERNALITIES
Because consumers gets some
consumer surplus from the
introduction of a new product,
entry of a new firm convey a
positive externalities on
consumers.
2. BUSINESS STEALING EXTERNALITIES
Because other firms lose customers and
profits from the entry of a new
competitor, entry of a new firm impose
a negative externalities on existing
firms.
A MONOPOLY’S MARGINAL REVENUE
When a monopoly increases the amount it
sells, it has two effects on total revenue (P x
Q).
1. The output effect – more output is sold, so
Q is higher.
2. The price effect – price falls, so P is lower.
THE MONOPOLIST’S PROFIT
The monopolist will receive economic
profits as long as price is greater than
average total cost.
PUBLIC POLICY TOWARD MONOPOLIST
 Government responds to the problem of
monopoly
in one of four ways:
1. Making monopolized industries more
competitive.
2. Regulating the behavior of monopolist.
3. Turning some private monopolist into
public enterprises.
4. Doing nothing at all.
PRICE DISCRIMINATION
Is the practice of selling the same good
at different prices to different
customers, even though the costs for
producing for the two customers are
the same. In order to do this, the firm
mush have market power.
TWO IMPORTANT EFFFECTS OF PRICE
DISCRIMINATION:
1. It can increase the monopolist’s
profits.
2. It can reduce deadweight loss.
But in order to Price Discriminate, the firm must:
1. Be able to separate the customers
on the basis of willingness to pay.
2. Prevent the customers from
reselling the product.
OUTPUT AND PRICE UNDER PURE COMPETITION
The price of the product in a pure
competition cannot be influenced by any
seller or buyer. Because the quantity held by
any individual seller is only a small fraction
of the total quantity produced, changing his
price will not be a cause for retaliation from
competitors.
PRICE AND OUTPUT DETERMINATION UNDER
MONOPOLY

Since the monopolist is the sole seller

in the market, his demand curve is also
the industry’s demand curve. When he
raises his prices, the quantity he
disposes will be reduced. When he
lowers his price, the reverse happens.

FIXING THE MONOPOLY PRICE

 Monopolist faces three possible cost

situations.
1. CONSTANT COSTS – indicate that the per unit
cost of the monopolist remains unchanged even
if the quantity sold is increased or decreased.
2. INCREASING COSTS – means that the cost of
production increases as quantity produced is
increased.
3. DECREASING COSTS – the monopolist’s cost of
production decreases as the quantity produced
is increased.

PRICE AND OUTPUT DETERMINATION UNDER

OLIGOPOLY

1. If he cuts his price, competitors will

retaliate and he will not gain anything, but
short-term profits from his initial move.
His long run profits (and that of his
competitors) will be reduced.
2. If he raises his price, his customers will
move to his competitors. His sales volume
and consequently, his sales revenue will
decline.

PRICE DETERMINATION UNDER MONOPOLISTIC

COMPETITION

Strives to differentiate its

products from that of its
competitors.

MEASURING NATIONAL OUTPUT AND INCOME
In determining the capabilities of an economy, the
national income level is used as a basis.
NATIONAL INCOME
Defined as a measure of the money value of the tatal
flow of goods and services produced in an economy
over a specified period of time.
NATIONAL INCOME CONSIST OF FOLLOWING:
WAGE OR SALARY – those generated by labor.
INTEREST – those generated b lenders of funds.
RENT – those generated by owners of real estate.
PROFIT – those generated by the entrepreneur
NET FACTOR – income from abroad.
IMPORTANT TERM USED IN MEASURING NATIONAL
INCOME
GROSS DOMESTIC PRODUCT
 Is a measure of the total flow of goods and
services produced by the economy over a
particular time period.
 The factors of production must be located in
the domestic economy regardless of who owns
these factors. The owners of the factors of
production consist of citizens of the local
economy and those of foreign countries.
GROSS NATIONAL PRODUCT
 Is a measure of the market value of the final
goods and services produced by nationals or
citizens of a country in a particular time period.
 Includes production within and outside of the
country under consideration.
 (nonproductive transactions are excluded in
GNP)
NON PRODUCTIVE TRANSACTIONS
PURELY FINANCIAL TRANSACTION
Public transfer payment – are those given by the
government to individuals or households but which do
not contribute to current production in return for them.
Examples: old age pensions, welfare payments and
widows pensions.
Private transfer payment – involve the
transfer of funds from one private
individual to another and which does not
entail production. Ex: gift checks.
Buying and selling of securities – do not directly
involve current production.
MARKET VALUE
Refers to the current price of goods and services
produced in the economy.
VALUE ADDED
Refers to the difference between the value of goods
produced and the cost of materials and supplies used in
producing them.
CONSUMPTION
Refers to expenditure by consumers on final goods and
services.
INVESTMENT
Is an activity that uses resources now in such a way that
they allow for greater production in the future and
greater consumption in the future.
TYPES OF INVESTMENTS
FIXED INVESTMENT – a good that is purchased to be
used in order to make other goods and services. Ex.
Equipment.
INVENTORY INVESTMENT – are those used to increase
the amount of inventories of finished products.
CONSUMER DURABLES
Are consumer goods such as appliances and furniture,
which usually last for several years. Expenditures on
consumer durables are meant not for current but for
future satisfactions.
GOVERNMENT EXPENDITURES
Refer to the sum of government payrolls and purchases,
which is the cost of government output.
NET FACTOR INCOME FROM ABROAD
 This is the difference between the income
earned by citizens who own resources used in
the production process abroad and the income
of foreigners who own resources used in the
production process here in the Philippines.
  If the difference is positive, it means the
residents of this country earn more from their
transactions overseas compared to what
foreigners earn from their transactions in the
country.
APPROACHES TO ESTIMATING NATIONAL INCOME
 Industrial origin approach (also referred to as
value added approach)
  Product approach (also expenditure
approach)
  Income approach
INDUSTRIAL ORIGIN APPROACH
Measures national income by determining the sum of
the market value of the total production of all the major
industries comprising the economy.
MAJOR INDUSTRIES CONSIST OF THE FOLLOWING:
 Agriculture, fisheries and forestry.
  Industrial sector
  Service sector
PRODUCT APPROACH
It involves calculating the sum of all expenditures on
final goods.
PRIVATE ( OR PERSONAL) CONSUMPTION
EXPENDITURES
Refers to the spending by households on the following
types of goods.
1. Durable consumer goods.
2. Nondurable consumer goods such as candies,
newspapers, toilet papers, soft drinks, and ball pen.
3. Services such as those provided by teachers,
architects, interior decorators, and electrician.
INCOME APPROACH
The owners of these resources receive earnings in the
form of rent, wages and salaries, interest and dividends
and profit.
GROSS DOMESTIC INVESTMENT  Includes not only the use of consumer goods
and services but also the use of raw materials
These are expenditures for newly produced capital
and other inputs in the production process.
goods like machinery, equipment, tools, buildings and
additional inventories.

DEPRECIATION CONSUMPTION FUNCTION

Refers to the reduction in value of an asset through Refers to the relationship between total consumption
wear and tear. expenditure in the economy, and total consumer’s
income.

NET NATIONAL PRODUCT

This refers to the GNP less the part of the output
needed to replace the capital goods worn out in
producing the output.
INDIRECT TAXES
These are taxes such as sales, excise, and business
property taxes, license fees and tariffs which firms treat
as costs of producing a product or service and pass on
(full or partial) to buyers by charging them high prices.
CONSUMPTION PATTERNS
When there is a change in income, there is also a
change in consumption behavior. An income increases,
the consumption of lower priority goods is felt but only
after basic necessities are sufficiently covered. With
lower income, expenditures for necessities like food
predominate. When there is an increase in income
expenditures on certain goods like automobiles and
transportation begin to appear. Further increases in
income give way to spending in medical care, education,
recreation and others.

SUBSIDIES CATEGORIZED INTO FOLLOWING

This is the payment of funds, goods or services by 1. DURABLE GOODS
agovernment, business or household for which it
receives no good or service in return. a. Motor vehicles

b. Household equipment

DISPOSABLE INCOME c. others

 Part of the national income that is available to 1. NONDURABLE GOODS

households for consumption or saving.
a. Food
 Is estimated by deducting from GNP all taxes,
business saving, and depreciation; then adding b. Clothing and apparel
government and other transfer payments and
c. Energy
government interest payments.
d. Others

SERVICES
CONSUMPTION AND SAVINGS
a. Housing
CONSUMPTION
b. Medical care
 Is the total expenditure in an economy of goods
and services by individuals or a nation during a c. Recreation
given period.
 Refers to direct satisfaction of human wants. d. Education

e. others

SAVING
 When the consumer decides not to spend all or
part of his income, he is exercising his option of
saving. The amount that he decides not to
spend is regarded are savings.
  Is simply a postponement of consumption.
WHY PEOPLE SAVE
1. To provide for old age.
2. To provide for children’s education.
3. To accumulate funds for acquisition of capital goods.
4. To accumulate wealth.
COMPOSED OF THE FOLLOWING
PERSONAL SAVING – those made by individual
households for the purpose of future consumption.
BUSINESS SAVING – consist of depreciation allowances
and retained earnings.
DEPRECIATION ALLOWANCES – are used to replace
wornout and obsolete plant and equipment.
GOVERNMENT SAVINGS – is achieved whenany
government units runs a budget surplus. Means the
government unit spend less than its income.
FOREIGN SAVINGS – when foreign
investments in our country are bigger than
our country’s investments abroad, we have
an investment surplus.
SAVING FUNCTION
 Refers to the relationship between savings and
income.
 Shows the amount of saving that households or
a nation will undertake at each level of income.
AVERAGE PROPENSITY TO CONSUME ( APC)
Refers to the proportion of income devoted to
consumption.
  If APC for the entire economy is to be
determined, the total value of expenditure on
consumption of goods and services is divided by
the value of national income
  FORMULA FOR APC=CE/DI
  CE = Consumption Expenditures
  DI = Disposable income
AVERAGE PROPENSITY TO SAVE
(APS)
 Is the proportion of income (of an individual or
the whole economy) which is not spent on
consumption of goods and services.
  FORMULA FOR APS = S/DI
  S = SAVINGS
  DI = DISPOSABLE INCOME
MARGINAL PROPENSITY TO CONSUME
 Refers to the proportion of a small increase in
income which will be devoted to increased
consumption expenditure.
  FORMULA FOR MPC =
 ∆ in Consumption DEVIDE in Disposable income
MARGINAL PROPENSITY TO SAVE ( MPS)
Is the proportion of an increase in income that is saved.
  FORMULA FOR MPS
  ∆ in Savings / in Disposable income
3 OPTIONS OF THOSE WHO RECEIVE ADDITIONAL
INCOME
To spend the entire amount of consumption.
To save the entire amount.
To spend a part for consumption and to save
the remaining amount.
DETERMINANTS OF THE LEVEL OF THE CONSUMPTION
DISTRIBUTION OF NATIONAL INCOME
When a large portion of the national income goes to a
small segment of the entire population, there is an
uneven distribution of purchasing power. The
consumption needs of that privileged segment are
limited and these affect the total consumption for the
economy. The small income of the less privileged
segments of society severely limits their consumption.
On the contrary, total consumption will tend to be
larger if national income is evenly distributed.
RATE OF INTEREST
 Is a calculation of interest that doesn’t take into
account the effect of compounding.
  When interest rates are high, people are
motivated to save more and thus, to consume
less. However, when interest rates are lower
than the earning capacity of some assets, these
assets are acquired thereby reducing savings.
I=PxRxT
P = principal amount
R = interest rate
T = no. of Periods
DESIRED TO HOLD CASH
Some persons anticipate future needs that will require
some amounts of cash. Because of this, they will hold
on to whatever cash they have; and if this is not
enough, save a part of their current incomes.
 The demand for money arise to desire of people
to hold money that is to store their wealth in
the form of money rather than spending it on
goods and services.
PRICE LEVEL
Refers to the price or cost of a good, service, or security
in the economy.
 The prices of goods and services sometimes
move upward and sometimes downward.
Where there is an increase in the price level,
consumption tends to decrease, and when
there is a decrease, consumption tends to
increase.
POPULATION
 May refer to an entire group of people, objects,
events, hospital visits, or measurements. A
population can thus be said to be an aggregate
observation of subjects grouped together by a
common feature.
 When everything is equal, a bigger number of
people will consume more than a smaller
number of people. When a country’s population
is increasing, it is expected that consumption
will also increase.
INCOME
 Income is regarded as a major factor in
consumption. People with higher incomes tend
to consume more than those with lower
incomes.
 Income is money (or some equivalent value)
that an individual or business receives, usually
in exchange for providing a good or service or
through investing capital.
 Income is used to fund day-to-day
expenditures.
TAXES
 Taxes reduce the money available for
consumption. Less taxes means more money for
consumption and more taxes means less money
for consumption.
 Are levied in almost every country of theworld,
primarily to raise revenue for government
expenditures , although they serve other
purposes as well.
ATTITUDES AND VALUES
People’s attitudes and values differ. These reflect on
their consumption expenditures. Ex. Some people
consider grooming as very important and must take
precedence over other concerns.

ATTITUDE

A settled way of thinking or feeling aboutsomeone or

something, typically one that is reflected in a person’s
behavior.

VALUES

A person’s principles or standards ofbehavior; one’s

judgment of what is important in life