APPLIED ECONOMICS

Chapter 1

Introduction to Economics
Chapter 1

Introduction to Economics

Introduction
This chapter introduces the fundamental problem of economic scarcity and the need
to maximize scarce resources. It begins with an overview of different resources as the
foundation of production. It then challenges you to concretely identify the scarcity problem
in their environments. As you grasp the problem, the chapter further explores the
fundamental economic decisions for resource maximization in the context of the different
economic systems. Overarching these core topics are the distinction of economics as a
social science, its different branches, and the scientific approach to establishing facts in
supporting economic decisions. Finally, the chapter discusses in detail the measurement of
economic activities, which is an integral part of the scientific approach and economic
decision-making.

Specific Objectives
At the end of the lesson, the students should be able to:

1. distinguish between economics as a social science and as an applied

science;
 2. apply the concept of opportunity cost when evaluating options and making
economic decisions based on how a man can satisfy the most wants given
limited resources;
3. differentiate macroeconomics from microeconomics and positive
economics from normative economics;
4. describe and state the importance of economic resources;
5. differentiate the gross national product from the gross domestic product and
use their different computational approaches;
6. identify, analyze, and propose solutions to the basic problems of the
Philippine economy using the principles of applied economics and provide
innovative ways in putting the proposed solutions into action;
7. describe the various economic systems; and
8. apply the scientific approach in analyzing economic theory.

Duration

Chapter 1: Introduction to Economics [5 Hours]

Introduction to Economics

Economics as a Social Science

Social science is, broadly speaking, the study of society and how people
collectively behave and influence the world around us. Economics, as a social science,
studies human behavior, just like psychology and sociology. Specifically, economics
studies how individuals, governments, firms, and nations make choices in allocating scarce
resources to satisfy man's unlimited wants.

Macroeconomics and Microeconomics

Economics has two branches—macroeconomics and microeconomics.

Macroeconomics is a division of economics that deals with the overall performance
of national and international economies. It studies the aggregates of the economic system
instead of its economic components or units. It focuses on the overall flow of goods and
resources and studies the causes of change in the aggregate flow of money, the aggregate
movement of goods and services, and the general employment of resources. It also inquires
into the nature of economic growth, the expansion of productive capacity, and the growth of
national income. Some examples of macroeconomic problems that need to be addressed are
the increasing unemployment and poverty rates, slower national production growth, and
lower labor force participation rate (willingness of workers to work). Another example is
the steep rise of commodity prices (inflation), which calls for some restraints on the money
supply or government spending.
Macroeconomic topics include national income determination, inflation,
employment, monetary and fiscal policy, and international trade.
 Microeconomics, on the other hand, is concerned about the behavior of the
individual units of the economic system such as the consumer, producer, and households as
resource owners. It is more concerned about how goods flow from the business firm to the
consumer and how resources move from the resource owner to the business firm. It is also
concerned about the process of setting the prices of goods, also known as Price Theory.
Microeconomics studies the decisions and choices of the individual units and how these
decisions affect the prices of goods in the market. Likewise, it examines the alternative
method of using resources to alleviate scarcity. It does not focus on aggregate levels of
production, employment, income. Some examples of microeconomic concerns are company
plant relocation, the use of '' technology, and changing of marketing product mix.
Microeconomic topics include supply and demand, consumer and producer choices,
market system and pricing, individual wages, and competition.
A seller who has an excess supply of goods and is unable to dispose of his/her
surplus goods is facing a microeconomic issue.
Everybody goes through a day faced with constraints or limitations—motorists
complain of high gasoline prices, people suffer a shortage of chicken in the market, or
students troubled by their insufficient allowance to buy hooks and school supplies. People
always complain about not having enough—not enough food on the table, not enough
money to pay debts, or not enough income to meet all their h family's needs. This, in effect,
is the existence of what scarcity—the insufficiency of resources to meet the needs and
wants of consumers and the insufficiency of resources for producers that hamper the
production of enough goods and services.
Scarcity is the reason why people need to study economics. Economics, as a social
science, deals with the allocation of scarce resources to satisfy unlimited needs and wants.
Well-known economist Alfred
Marshall described economics as a study of mankind in the ordinary business of life. It
examines part of the individual and social action, which are most closely connected to the
attainment and use of material requisites of the well-being.
Part of human behavior is the tendency of man to want as many goods and services
as possible. However, his/her ability to buy goods and services is limited by his/her income
and purchasing power. It is in this context that the fundamental problem of scarcity is
identified.
Scarcity is the condition of resource insufficiency to satisfy all the needs and wants
of a population. Scarcity Is relative because It Is a choice between what comes first and
second with the given resources. Thus, even the rich face the problem of scarcity, like
choosing between buying a new house or several cars with five million pesos because they
cannot buy them all. For a poor family, it can be choosing between sending their children to
school or work, given their available time and effort.
For example, coconut is potentially abundant in the Philippines because the plant
easily grows in our soil and climate. However, it can be scarce relative to mangoes when
more of the same lands are planted with the latter. Rice used to be abundantly grown in the
countryside but not anymore as more rice lands were converted to subdivisions. One can
infer from the examples that scarcity is due to resource misallocation. In the latter example,
the misallocation of land in favor of housing forces us to import rice.
This means scarcity is everybody's problem, and the only difference is that some
people have more while others are struggling to even have basic life sustenance. As scarcity
is a reality, we might as well make the best of what we have to maximize our well-being
according to the relative importance of our needs. Economists call this balancing act the
correct allocation of resources to solve the problem of relative scarcity. When electricity
cost spikes, for example, parents prioritize food over hours of air conditioning luxury with a
stretched budget. The same balancing act applies when cutting the spiraling cost of text
messaging so as not to sacrifice school supplies with the same daily budget. In the
foregoing examples, prudent spending avoids the relative scarcities of food and school
supplies against the costs of electricity and text messaging, respectively. Thus, the less
important but more costly are given up for the more basic and important to maximize
satisfaction.
On the other hand, a shortage exists when the available supply of a good is not
enough to meet its demand, Shortage is not scarcity, but it can lead to one. A shortage of
rice jacks up its free market price, making the staple scarce relative to other staples.
Consumers may adjust consumption by mixing rice with corn as a substitute to minimize
lost satisfaction with the same buying power (budget).
A shortage can happen by intention or collective reaction. Unscrupulous rice traders
can create an artificial shortage to scoop up additional profit by hoarding. If foreseen, the
government can forestall the shortage by law enforcement or rice import. On the other hand,
the migration of rural workers to cities where industrial wages are higher causes a shortage
of farm workers. Thus, farm labor is scarce relative to industrial labor. The government can
stem rural—urban migration by creating rural infrastructure and facilities supported by laws
that will spawn agricultural opportunities that are attractive to both entrepreneurs and
workers.
Finally, a shortage problem can also be solved by trade. For example, our country
exports fish from our abundant fishing grounds to import oil because we have no oil wells
from which we can source our petroleum needs. Our country imports cherries from
countries such as the United States because they do not thrive in our tropical climate. In
exchange, we export products made only from tropical crops like coconut oil. By trading
with us, the United States not only forestalls the shortage of this fruit but also the shortage
of this product that it cannot just produce.

Factors of Production

Land – refers to natural resources that are found in nature.

- these resources consist of free gifts of nature which includes all natural
resources above, on, and below the ground such as soil, rivers, lakes, oceans,
forests, mountains, mineral resources and climate.

Labor - refers to the human effort exerted in production which includes manual workers
(like construction workers and machine operators) and professionals (like nurses, lawyers,
and doctors).

Capital – refers to man-made goods used to produce other goods and services which
includes machines, equipment, buildings and construction.

Entrepreneurship – is the factor of production involved in combining the different

resources/inputs used to produce goods and services.

Basic Economic Problems of Society

 1. What to produce?
Society must decide what goods and services to produce in the
economy, i.e, the nature and quantity that society will consume. Thus,
decision on whether to devote agricultural and to grow rice, coconuts, sugar
canes, or bananas have to be made.

2. How to produce?
This is the question on the production method of goods and services.
This refers to the resource mix and technology that will be applied in
production.

3. For whom shall goods and services be produced?

This is about the market for the goods, Who will buy the goods? Are
they the young or old generation, the male or female market, or the law-
income or high-income groups?

Economic Systems

1. Traditional Economy
Decisions are based on traditions and practices upheld over the years
and passed on from generation to generation. Methods are stagnant and are,
therefore, not progressive. Traditional societies exist in primitive and
backward civilizations.

2. Command Economy
This is the authoritative system wherein decision-making is
centralized in the government or planning committee. Decisions are imposed
on the people who have no say in what goods are to be produced. This
economy holds true in dictatorship and socialist states.

3. Market Economy
This is the most democratic economic system. Based on the
workings of demand and supply, decisions are made on what goods and
services to produce. Producers and consumers decide what, how, and for
whom to produce collectively guided by the prices system determined by
supple and demand.

4. Mixed Economy
As the term implies, it is a combination of the three basic types of the
economic systems. As an economic system cannot exist in its pure form,
what normally happens is that it adopts a mixture of the three systems with
the dominance of one.
Importance of Economics

High school students may ask, "Why do we need to study economics?" To know
how important the subject is, all they need to do is read the daily newspapers or watch the
evening news on TV to see that the most important items are economic in nature. To
illustrate, the news about Filipino fishermen being harassed in the West Philippine Sea by
Chinese fishermen is also an economic issue because their inability to fish in our shores will
limit the income, they take home to their families.
Economics will help the students understand why there is a need for everybody,
including the government, to allocate given resources to meet society's needs according to
priorities. It will help one understand how to make more rational decisions in spending
money, saving part of it, and even investing some of it. On the national level, economics
enables the students to first take a look at how the economy operates. Then, they can figure
out if the government is doing a good job in inducing the correct allocation of resources for
society's well-being with appropriate growth and regulatory policies.

Positive Economics versus Normative Economics

Positive Economics – analyzes the cause -effect and interrelationship among factors and
events. This is the study of what is actually happening in the economy like current inflation
rates, national income and employment.

Normative Economics – passes judgment on economic decisions by their outcome (as

established by economics) determining if they conform to some desired standard of what is
economically good or sound.

APPLIED ECONOMICS

Chapter 2
 Economics as an
Applied Science
Chapter 2

Economics as an Applied Science

Introduction
A pure science furnishes tools and applied science works with these tools.
Economics as a pure science, formulates various laws and applied economics applies them
in practice in solving various problems. Before economics has been treated as a pure
positive science. But recently, applied economics assumed greater importance. As pure
science and applied science go hand-in-hand, so Economics is also pure as applied science.
The scope of economics means the limits of boundaries of Economics.

Specific Objectives
At the end of the lesson, the students should be able to:

1. Discuss why economics is an applied science;

2. Explain the basic economic problems;
3. Understand how applied economics work.

Duration

Chapter 2: Economics as an Applied Science [3 Hours]

Economics as an Applied Science

Applied economics is the application of economic theory and quantitative tools

(econometrics and statistics) to analyze specific economic problems and other inquiries
(positive economics) with the end of providing solutions and new directions (normative
economics). As one of the two sets of fields of economics (the other being the core), it is
typically characterized by the application of the core, referring to economic theory and
econometrics, as a foundation to deal with practical issues in fields that include
demographic economics, labor economics, business economics, agricultural economics,
development economics, education economics, health economics, monetary economics,
economic history, and many others. John Neville Keynes is attributed to be the first to use
the phrase "applied economics" to designate the application of economic theory to the
interpretation and explanation of particular economic phenomena.
We can improve human welfare among Filipinos through the investigation and
analysis of economic problems in the real world. Applying economic theory in our lives
means trying to address actual economic issues and doing something about it. The concept
of scarcity and choice should encourage us as individuals to help in our own way to provide
solutions to the country's economic problems.

Applied Economics in Relation to Philippine Economic Problems

A solid understanding of economic principles and how they are applied in real-life
situations can serve as significant tools in helping address the country's economic problem.
For example, understanding the existence of scarcity can help an economics student analyze
how to maximize the use of available resources in overcoming scarcity. Knowledge of
economic theories such as the law of supply and demand can help in analyzing why prices
are high and what the government can do to help bring down prices.

Economic Growth

The Philippine economy grew significantly during President Benigno Simeon

Aquino's administration, with a growth rate of the country's GDP of 6.8% in 2012
improving to 7.2% in 2013. However, the rate at which the economy grew slowed down to
5.7% in May 2014.
Even as our growth rates went up at a slower pace, we were better off than in
previous years because these rates were higher than those in the preceding. Likewise, we
fared better than our ASEAN neighbors such as Malaysia, Thailand, and Indonesia. (CIA
World Factbook, 2013).
The Philippine economy also grew by 6.8% in the first quarter of 2018, following a
revision of the expected rate of 6.5% in the previous quarter.
Even with global and local uncertainties, the Philippines was projected to grow at
6.4% in 2019 and 6.5% in 2020 and 2021. These estimates were based on a projection made
in the Philippines Economic Update (PEU) released by the World Bank (April 2019). In
actuality, the Philippine GDP increased by 35.9% in 2019, which was lower than the
projected rate of the Philippine Statistics Authority's (PSA) released data.
 Despite this admirable growth, many are still poor and excluded from economic
progress (noninclusive growth). Millions of Filipinos claim they are still living in hunger
below the poverty level. In short, there is no trickle effect on the lowest income groups,
who continue to be excluded from the benefits of the growth of the economy.
Forecasts for growth rates in 2020 seem farfetched, considering the negative impact
of the spread of COVID-19 in the country and worldwide.

Poverty

Another significant socioeconomic problem in the country is poverty. The poverty

incidences of the population, as reported by the National Statistics Coordination Board,
registered at 26.4% in 2006, 26.5% in 2009, and 25.2% in 2012. However, the proportion of
Filipino families living below the poverty line fell to 16.1% from January to June 2018
from 22.2% during the same period in 2015.

Unemployment and Underemployment

Unemployment is still a main problem of the Philippine economy, despite

improvements reported by the National Statistics Office (NSO).
According to the PSA, the unemployment rate in the Philippines dropped to 5.1% in
the June quarter of 2019 from 5.5% a year ago. Among the regions, the National Capital
Region (NCR) (6.4%), Autonomous Region in Muslim Mindanao (ARMM) (6.3%), and
Southern Tagalog Mainland (CALABARZON) (6.1%) have the highest unemployment
rates. Among the unemployed persons in January 2019, 64.4% were males, while 35.6% are
females.

Population Growth

The booming population growth in the Philippines is another basic economic

problem that can be connected to the issue of scarcity. When the population becomes too
big, economic resources may no longer be enough to support the growing population. The
current population of the Philippines is relatively young at 109.12 million, growing by
1.72% annually from 2010 to 2015 (RSA). A booming and young population is a reason for
the shortage of classrooms in public schools. This could also be why government hospitals
are crowded with sick people and women giving birth beyond the number of hospital beds
to accommodate them. The population issue increased.
 APPLIED ECONOMICS

Chapter 3

Supply and Demand

Chapter 3

Supply and Demand

Introduction
Many individuals do not really understand how prices of goods and services are
determined. Many think that prices are determined by the government. This is true in some
basic goods and services like rice, gasoline, sugar or rent of apartment. In a market
economy like ours, prices of goods are determined by the interaction between demand and
supply of goods are determined by the interaction between demand and supply of goods and
services. The government does not interfere.
It is a common fact that supply also affects the prices of goods and services in the
market. An understanding of the law of supply will give the individual an insight why there
is scarcity and surplus of goods and services in the market.

Specific Objectives
At the end of the lesson, the students should be able to:

1. Explain the law of demand and supply;

 2. Discuss the different factors affecting demand and supply; and
3. Explain how equilibrium price are determined.

Duration

Chapter 3: Supply and Demand [6 Hours]

Meaning of Demand of Supply

Demand is the willingness of a consumer to buy a commodity at a given price. It is

the quantity of a good that a person will buy at a given time (e.g., weekly), given the price
of that good. It means the desire of a consumer to buy goods and services and his/her
willingness to pay a certain price for a good or service.

It is logical for people to expect an increase in sales of bathing suits, ice cream,
suntan lotion, and umbrellas during summer. During the typhoon months, more and more
people may be buying raincoats, boots, and medicines for colds and fever. In June, when a
new school year starts, sales of books, school supplies, and uniforms are up. On Valentine’s
Day, sellers of flowers and chocolates may not be able to cope with surging demand. We
can see that the various seasons of the year increase the demand for certain types of goods.
On the other hand, the demand for rice, fish, salt, and milk is consistent throughout the year.

Supply refers to the quantity of goods that a seller is willing to offer for sale. It is
the amount of a specific good or service that is made available to the consumers at a
specific price.

Demand and Supply Schedule

 A market is not a place but a medium of interaction between buyers and sellers of
products. Products can be both tangible (goods), like food, and intangible (service), like a
haircut. On the market platform, buyers and sellers meet to exchange products and
purchasing power (money) guided by the market price. The consumer market is most
visible to us consumers as we also partake in its activities. For example, we have the public
wet market for fresh fish and vegetables and the department store for consumer dry goods,
like shoes and clothes. On the other hand, producer markets enable raw material and
intermediate product producers to sell their products to final product producers who are
now the market buyers. Likewise, the resource market enables resource owners to sell the
basic services of labor (skill), land (occupancy), and capital (money use) to producers of
goods and services. For example, the labor market provides worker with the means to offer
the use of their skills to producers who are the employers and resource buyers.
The market, as an interactive medium, is important because it enables those with
excess goods to sell them to those who need them at a price that gives everyone the best
deal. It is such an interaction between buyers and sellers that determines the market price.

A demand schedule - is a of demand for goods and services as part of economic

analysis. The demand schedule refers to a table depicting the demand in quantity terms for
goods or services at varying price levels.
-reflects the quantities of goods and services demanded by a consumer or an
aggregate of consumers at any given price.

A supply schedule shows the different quantities that are offered for sale at various
prices. The supply schedule may reflect the individual schedule of only one producer or the
market schedule showing the aggregate supply of a group of seller or producers.

The Law of Demand and Supply

The law of demand may be stated as "the quantity of a commodity which buyers
will buy at a given time and place will vary inversely with the price.” This means that as
price increases, quantity demanded decreases, and as price decreases, quantity demanded
increases other things are constant. Such general tendencies of consumers can be explained
by two reasons.
1. Income effect - At lower prices, an individual has a greater purchasing
power. This means, he can buy more goods and services. But at higher
prices, naturally, he can buy less.
2. Substitution effect - Consumers tend to buy goods with lower prices In
case the price of a product that they are buying increases, they look for
substitutes whose prices are lower. Thus, the demand for higher priced
goods will decrease.
The law of supply states that the quantity offered for sale will vary directly with
price. This means that as price increases quantity supplied also increases; and as price
decreases, quantity supplied also decreases. This direct relationship between price and
quantity supplied is the law supply. Producers are willing and able to produce and offer
more goods at a higher price than at a lower price Obviously, sellers offer more goods at
higher prices because they make more profits. Such behavior of sellers or producers is a
natural inclination. No businessman is willing to produce goods if he makes no profit.
 Demand and Supply Curve
The demand schedule shown in Table 1 can also be understood through graphical
illustration known as the demand curve. In many instances, it is more convenient to express
the relation between prices and quantity demanded by means of a demand curve.
Figure 1 shows the translation of Table 1 into a graphical illustration.
The supply schedule as shown in Table 2 can also be illustrated in graphical form
known as the supply curve. This is shown in Figure 2.

Figure 1 Graphic Illustration of Figure 2 Graphic illustration of

Supply curve Demand Curve

Determinants of Demand
Hereunder are the determinants of demand also known as non-price factor that also
affect a buyer's willingness or ability to buy a good. These are
1. Income People buy more goods and services when their income increases, but will
buy less if their income decreases, thus, affecting the demand for goods and services,
Changes of incomes of people will change their demand for goods and services. An
increase in income will either increase or decrease demand depending upon the kind of
commodity
2. Population More people means more demand for goods and services That is why; we
can observe that there are more buyers in the city stores than in the barrio stores,
Conversely, less population means less demand for goods and services Obviously, business
is poor in the rural areas compared to business in the urban areas.
3. Tastes and Preferences. Demand for goods and services increases when people like or
prefer them. Such tastes or preferences are greatly influenced by advertisement or fashion.
On the other hand, if a certain product is out of fashion, the demand for it decreases.
4. Price Expectations. When people expect the prices of goods, especially basic
commodities like rice, soap, cooking oil or sugar to increase tomorrow or next week, they
will buy more of these goods. In the same manner, they decrease their demand for each
product if they expect price to decline tomorrow or in a few days. The reason for such
consumer's behavior is to economize. This is a general tendency of buyers.
5. Prices of Related Goods When the price of a certain good increases, people tend to
buy substitute products. For example, if the price of Colgate increases, consumers buy less
of Colgate and more of the close substitute like Close-up or Hapee.

Determinants of Supply
Just like demand, supply has also its own determinants. These are as follows:
1. Technology This refers to techniques or methods of production. Modern technology
which uses modern machines increases supply of goods. In contrast, traditional tech nology
which uses animal and people is very slow in producing goods. In addition, technology
reduces cost of production, and this encourages the producers to increase their supply.
2. Cost of Production. When we speak of the cost of production, we take into
consideration the price of raw materials which are needed together with the cost of labor.
As the price of raw materials or the salaries of laborers increases, it means higher cost of
production. Higher cost of production decreases supply because the viability or profitability
of the business decreases.
3. Number of sellers More seller or more factories means an increase in Sellers supply.
On the other hand, less sellers or factories mean less supply.
4 Taxes and Subsidies Certain taxes increase cost of production. Higher taxes discourage
production because it reduces the earnings are of businessmen. That is why the government
extends tax exemptions to some new and necessary industries to stimulate their growth.
Similarly, tax incentives granted to foreign investors in order to increase foreign investment
in the Philippines.
In the case of subsidies, there are financial grants or financial assistance to producers.
Clearly, subsidies reduce cost of production. This induces businessman to produce more.
5. Weather Production of goods also depends on weather conditions. A businessman will
produce more sweaters during cold season, more umbrellas during rainy season and light
clothing materials and walking shorts during summer.

The Ceteris Paribus Assumption

The law of demand states that as price increases, quantity demanded decreases, and
as price decreases, quantity demanded increases. Such theory is true if we apply the Ceteris
Paribus assumption wherein it assumes that "all other things equal or constant."
Meaning, the determinants of demand are constant and are not considered as factors that
will affect demand in the market. Thus, the law of demand, using the Ceteris Paribus, can
be restated as "assuming that the determinants of demand are constant, price and
quantity demanded are inversely proportional to each other."
 The law of supply is only correct if we apply the assumption of ceteris paribus. This
means the law of supply is valid if the determinants of supply like cost of production,
technology, number of sellers and so forth, are held constant.

Changes in Demand and Supply

Changes in demand refer to the shift of demand curve which is brought about by
the changes in the determinants of demand, like income, population, price expectation and
so forth.
Changes in Supply pertains to a shift of supply curve brought by changes in the
determinants of supply. Through graphical presentation, an increase in supply shifts the
supply curve to the right, while a decrease in supply shifts the supply curve to the left.

Changes in Quantity Demanded/Quantity Supplied

Changes in the quantity demanded indicate the movement from one point to
another point. This means, the demand curve does not change its position like that of the
demand curve in the changes in demand. The change in quantity demanded is brought about
by changes in prices. Whenever there is a change in price, there is a corresponding change
in quantity demanded.
Changes in quantity supplied show the movements from one point to another point
in a constant supply curve. Change in quantity supplied is brought about by a change in
price.

Equilibrium of Demand and Supply

Alfred Marshall, a British economist, introduced a kind of pricing scheme by
combining the law of demand and the law of supply. With this combination, an equilibrium
price and equilibrium quantity is formulated. This is known as the market equilibrium.
In the market, supply and demand interact freely. Supply is represented by
producers or sellers while demand is represented by the buyers. In the process of interaction
between buyers and sellers, an equilibrium price and equilibrium quantity or market
equilibrium is established.
The market equilibrium comes at that price and quantity where the supply and
demand forces are in balance. This is the situation where quantity supplied and quantity
demanded are equal. This means that the amount that buyers want to pay is just equal to the
amount that sellers want to sell.
In Figure 3, an illustration through graph of demand and supply can be seen.
 Fig. 3 Equilibrium price and equilibrium quantity established by interaction between demand and
supply
Effect of Equilibrium of a Shift in Supply and Demand
The point of sum is stayect to change. This is due to a shift of either the supply cany
alone or the demand curve alone, or both. Shifting of either the demand or supply curves
are cand dumps of their repetive determinants Let un ar that the demand came is constant
and the supply curve shifted to der right, which was nog aut by the prodao's use of modern
technology This is rated in Figure when the supply cure, S1 shifted to S2.

Fig. 4 Shift in supply came changes equilibrium

The supply curve shifts to the right to indicate increase in supply brought about by
the adoption of modem technology.

Price and Equilibrium Quantity

Increase in income, one of the determinants of demand, increases demand for goods
and services. Demand curve shifts to the right to show an increase in demand. With a
constant supply, an increase in demand also increases market equilibrium price. However,
with the increase in price for a commodity, supply increased from 10 to 12.
Assuming there is an equal increase in the demand for cooking oil and the supply
of cooking oil as shown in Fig. 5, what will be the equilibrium price and equilibrium
quantity?
 In the above graph, both the demand and supply curves show a rightward shift.
Since the increase in demand is proportional to the increase in supply, the equilibrium price
is maintained. However, the equilibrium quantity has increased. from Qe1 to Qe2.

The Law of Demand and Supply

The law of supply and demand states that when supply is greater than demand,
price decreases. When demand is greater than supply, price increases. When supply is equal
to demand, price remains constant. This is the market equilibrium.

Chapter 4
Elasticity of Supply and
Demand
Chapter 4

Elasticity of Supply and Demand

Introduction
Based on the law of demand, buyers are willing and able to purchase more goods
and services at lower prices than at higher prices. This is a natural reaction or an inclination
of buyers. However, the degree of responsiveness varies greatly. Such varying reactions of
consumers can be measured by price elasticity of demand.
In the case of producers or sellers, they also have their reactions to price changes.
Clearly, they tend to sell more goods and services when prices are higher. Their reactions
also vary depending on their ability to produce at a given time. Such varying reactions of
producers can be measured by price elasticities of supply. Spain Specific Objectives

Specific Objectives
At the end of the lesson, the students should be able to:
1. Define elasticity;
2. Identify the different kinds of elasticity; and
3. Explain and cite examples of the different types of elasticity.

Duration

Chapter 4: Elasticity of Supply and Demand [6 Hours]

Other Concepts of Elasticity

1. Elasticity - It is a measure used in response to changes of demand and supply.
2. Price elasticity - A measure used in determining the percentage change in quantity
against the percentage change in price.
3. Income elasticity - The percentage change in quantity compared to the percentage change
in income.
4. Cross elasticity - The percentage change in quantity of one good compared to the
percentage change in the price of related goods.
Price Elasticity of Demand
Price elasticity of demand refers to the degree of reaction or response of the buyers
to changes in price of goods and services. Buyers tend to reduce their purchases as price
increases and tend to increase their purchases as price falls These are logical reactions to
price changes.
To get an idea of the nature of elasticity, consider this example.
The price of rice of P16.00 per kilogram at retail, leads to daily total sales among all
markets in a given region of 100,000 kilos. The price then rises to P16.50 per kilo which
leads to sales of 97,000 kilos, or a reduction in amount of 3,000. What is the response of
quantity sold to the change in the price of rice?
The price of rice rises by P0.50 (new price minus old price = P2 - P1 = P=P16.50-
P16.00 = P0.50) and the quantity bought falls by 3000 kilos (new quantity minus old
quantity = Q2-Q1-Q=97,000-100,000= -3,000). It is desirable to know the percentage
magnitude of these changes. The price 50 increase is by .03 = 50/16.00 = (change in price
divided by old price), or by 3 percent (to convert to percent, the fraction is divided by
100). And the quantity sold decreases by 3 percent (=change in quantity divided by old
quantity= 3,000/100,000 = -.03).
The response of quantity demanded to change in price is the ratio of the percent
change in quantity to the percent change in price, which is 1 ( = -3% / 3%), in this case. This
is the measure of elasticity of demand.

Interpretation of Elasticity
What is the meaning of elasticity measure of 0.20 or 1.6? The value of elasticity
reflects the magnitude of quantity response to a price change along a given demand curve.
An elasticity value of 0.20 means that a one percent decrease in price leads to a 0.20 percent
increase in quantity sold. Similarly, a 1.6 percent change is interpreted as 1.6 percent
decrease in quantity sold for every one percent increase in price.
When an elasticity value is less than one, as in the case of 0.20, the demand is
inelastic. When the elasticity is equal to 1 it is unitary. When it exceeds 1, as in the case of
1.6, it is elastic.
To derive the price elasticity of demand, we use the formula:

ep = Percentage change in quantity

demanded Percentage change in price

Where: Percentage change in quantity. demanded = Q2 - Q1

Q1
Percentage change in price = P2 – P1
P1

Therefore: Q2-Q1
Q1__
ep = P2 – P1
P2
 Types of Elasticity
1. Elastic - Demand may be elastic when a percentage change in price leads to a
proportionately greater percentage change in quantity demanded.
2. Inelastic - Demand is described as inelastic when a percentage change in price results in
a proportionately lesser change in price evokes less than one percent change in quantity
demanded, it is inelastic. The coefficient of elasticity is less than 1.
3. Unitary – Demand is unitary when a percentage change in price leads to proportionately
equal percentage change in quantity demanded.
4. Perfectly Elastic - At a given price, percentage change in quantity demanded can
change infinitely.
5. Perfectly Inelastic – A percentage change in price creates no change in quantity
demanded.

Figure 1 Demand Curves and their Elasticity

Assuming the same price and quantity measurements, the demand curve shown in
A) is inelastic in B) it is elastic and C) unitary. Note the larger quantity response in case B)
compared to case A). In unitary, the proportionate gains (or losses) in quantity sold is the
same as the decrease (or increase) in price.

Price Elasticity of Supply

The elasticity of supply is also the response of quantity offered for sale for every
change in price. Like the consumers, the suppliers also respond to price changes.
It is computed with the formula as
 Note: The coefficient of price elasticity of supply is positive unlike the price
elasticity of demand. This is so because of the direct proportionality of price and quantity
supplied. What does 0.62 means? This means that for every one percent (1%) increase in
the price, quantity supplied will increase by 0.62 or sixty-two percent (62%). Supply curve
also exhibits different elasticities depending upon its price elasticity coefficients. If it is
greater than one (1), it is an elastic supply curve. If it is less than one (1), it is inelastic.

Figure 2 Types of Supply Curve

Effect of Elasticities on Market Equilibrium
Hereunder are some useful principles recorded for several situations:
1. For demand, the more elastic the new demand is, the less will be the increase
in price, and the greater will be the expansion of quantity sold.
 2. On the other hand, the less elastic the new demand is, the steeper the rise in
price and the less the increase in quantity sold.
3. For supply, the less elastic supply is, the higher the increase in price and the
smaller the quantity increase will be, while the more elastic supply is, the less will be the
increase in price and the greater the increase in quantity sold.

Figure 3 Elasticities and shifts in supply and demand

In case A, the original price determined by the intersection of supply (S) and
demand (D) at A is Pa. Quantity is Qa. In the relevant range, a more elastic demand curve
(D1) is shown. Assuming that there is no change in supply, the new price is Pb and the
quantity is Qb. There is an increase in price but if the same situation is related to case B, it is
seen that the increase in price is not as much as in B. With the shift also of supply into a
more elastic one (S1) in case A, the [price in relation to Pa is relatively less. Comparing the
results with case B shows a steeper character in price increases and less increase in quantity
sold.
Income Elasticity
The coefficient of income elasticity measures a product's percentage change in
quantity as a ratio of the percentage change in income which caused the change in quantity.
The formula of income elasticity is:
ey = Percentage change in quantity/ Percentage change in
income

Example:
Income Quantity Demanded

₱1000.00 200
 ₱2000.00 800
Let:
Q2 = 800 Y2 = 2000
Q1 = 200 Y1 = 1000

Solution:

Why is ey = 3? This means that for every one percent (1%) increase in income,
quantity demanded will increase by three percent (3%).
The absolute value of the coefficient of income elasticity is also a measure of how
responsive demand is to change in income. If quantity demanded is greater than one (1),
income is elastic and the good is superior. If quantity demanded is lesser than one (1),
income is inelastic and the good is inferior; and If it is equal to one (1), it is unitary and the
good is normal.
Cross Elasticity
The coefficient of cross elasticity of demand relates a percentage change in quantity
demanded of Good A in response to a percentage change in the price of Good B. Thus:
Ec = Percentage change in QD of Good A / Percentage change in price
of Good B

Where: QA = Quantity demanded of Good A

PB = Price of Good B

Example:
QA1 = 500 PB1 = ₱10.00
QA2 = 600 PB2 = ₱15.00
Solution:

What is ec = 0.4? This means that for every one percent (1%) increase in the price
of Good B, there is an increase in the QD of Good A by 0.4 percent.
 Goods A and B may be related in two ways: as substitutes and as complements. If
the coefficient of cross elasticity is positive, Goods A and B are substitutes. An increase in
the price of Good B will cause consumers to purchase more of Good A, the substitute good,
thus causing the quantity of Good A to increase.
On the other hand, if cross elasticity is negative, Goods A and B are complements
and are used together. If the price of Good B increases, the demand for B and A decreases.
Elasticity is a measure of how much the quantity demanded of a service/ good
changes in relation to its price, income or supply.

Chapter 5

Application of Supply
and Demand
Chapter 5

Application of Supply and Demand

Introduction

Two important considerations arise in all applications of supply and

demand analysis. First, the shapes of the supply and demand curves must be
established within the context of the problem being analyzed. Second, the forces
leading to shifts in the supply and demand curves must be determined in the case
at hand. The effects of the forces shifting the supply and demand on the
equilibrium price and quantity can then be obtained. It is useful to begin with some
simple applications that follow directly from supply and demand relationships that
have been developed earlier In this lesson. Then we can proceed to more complex
situations.
Specific Objectives
At the end of the lesson, the students should be able to:

1. Discuss and explain factors affecting demand and supply;

2. Compare the prices of commodities and analyze the impact on consumers;
and
3. Discuss the overall effects of minimum wage and employment.

Duration

Chapter 5: Application of Supply and Demand [6 Hours]

Prices of Basic Commodities

Rice remains the most important food item in the daily meals of Filipino It
comprises the bulk of their total volume of consumption and amount expenditures for the 15
most commonly consumed agricultural food commodities in the Philippines. However, at
the individual level, rice consumption and expenditure levels vary significantly across
socio-demographic characteristics and locations of the consumers.
However, the sensitivity of quantity demanded for rice to the change in price of rice
is not only explained solely by the change in its price itself (substitution effect) but also by
the change in the real income (income effect) of consumers. About a quarter of the change
in quantity demanded for rice is due to the change in their purchasing power or real income
caused by a price change. Hence, if the purchasing power of the consumers is adjusted to
remain at the same level after a price increase, a smaller rate of change in quantity
demanded for rice for every percentage change in the price of rice could be expected.
Among the other selected commodities, the estimated cross-price elasticities
indicate that corn, sweet potato, and cassava are substitutes for rice, of which cassava and
corn are the most substitutable. On the other hand, potato, taro, milkfish, tilapia, pork,
chicken, banana, mango, pineapple, eggplant, and bitter gourd are all considered rice
complements. However, if the effect of the changes in commodity prices à real income is
ignored, all these commodities mentioned above are found to be potential substitutes for
rice, wherein milkfish is found to be the most substitutable. Nonetheless, the degree of
responsiveness of quantity demanded for rice to the changes in prices of these related
commodities remains quite inelastic.
If ever prices of basic commodities in the market increases, naturally, the tendency
of the consumers is to look for substitute products which are lesser in price. For example, if
price of meat increases in the market, the consumers will look for a cheaper price substitute.
Meat can be substituted by fish or chicken or vegetables. Always, the consumers tend to
look for cheaper substitute of commodities in the market. If ever Colgate toothpaste
increases its price, substitutes of toothpaste abound in the market.
 For complementary products such as coffee and sugar or bread and butter, an
increase in price of any complementary product will decrease the demand for the
complementary item and vice-versa.

How it Works

If the quantity demanded changes a lot when prices change a little, a product is said
to be elastic. This often is the case for products or services for which there are many
alternatives, or for which consumers are relatively price sensitive. For example, if the price
of Cola A doubles, the quantity demanded for Cola A will fall when consumers switch to
less-expensive Cola B.
When there is a small change in demand when prices change a lot, the product is
said to be inelastic. The most famous example of relatively inelastic demand is that for
gasoline. As the price of gasoline increases, the quantity demanded doesn’t decrease all that
much. This is because there are very few good substitutes for gasoline and consumers are
still willing to buy it even at relatively high prices.

Why it Matters

Elasticity is important because it describes the fundamental relationship between the

price of a good and the demand for that good.
Elastic goods and services generally have plenty of substitutes. As an elastic
service/good's price increases, the quantity demanded of that good can drop fast. Example
of elastic goods and services include furniture, motor vehicles, instrument engineering
products, professional services, and transportation services.
Inelastic goods have fewer substitutes and price change doesn't affect quantity
demanded as much. Some inelastic goods include gas, electricity, drinks, clothing, tobacco,
food, and oil.

Labor Supply, Population Growth, and Wages

Labor laws and regulations have been devised to protect labor from abuses by
employers and to improve the power of labor to bargain for decent wages and working
conditions. Practices and regulations in the labor market are focused on minimum wage
mandates, labor regulations concerning hiring and firing of workers.
Such practices have their costs. They render the labor market less flexible. For
instance, long conflict resolution processes raise the cost of employment. Potential negative
effects of these policies could defeat the objectives of improving labor welfare.
Philippine minimum wage policy has been the object of a lot of attention because,
from the very start, government minimum wage mandates have been "high." They were
made to carry the burden of raising wages for workers."
Because of the critical role played by minimum wage policy in setting wages for
workers in the country, the first order of business of the study was to focus on the evidence
concerning minimum wages.

Minimum Wage and Employment: The Overall Effects

 Aggressive minimum wage rates increases have led to reduction in employment,
making households dependent on wage incomes suffer significant drops in their welfare,
some falling into poverty.
Based on studies conducted, when minimum wages are raised, business enterprises
reduce their hiring of labor. The study finds a significant negative relationship between
minimum wage and the number of production worker employed. Thus, minimum wage
changes reduce employment.
In addition, further investigation on the impact on production workers have shown
that the most vulnerable groups - the young, less educated an inexperienced workers - suffer
most from these observed relationships.
Minimum wages have aggravated the adverse income shocks to poor families and
have contributed to the increase in poverty among the already poor. This outcome is true for
families dependent on industrial incomes and also for those o agricultural wage incomes.
The study finds that rapid increases in either industrial or agricultural minimum wage leads
to a reduction of household income.
The results of the study validate many early findings associated with high minimum
wage policy on employment and on labor welfare. These have been stated more or less in
terms of other policy issues affecting employment and incomes
Low employment creation is associated with Philippine economic growth This poor
performance is related to economic policies that promoted protection and import
substitution in the past. Past industrial policies led to uncompetitive industries and to the
allocation of labor and capital in highly protected policies with low productivity.
One way of interpreting such an outcome is through poor "total factor productivity”
of Philippine growth performance compared to those of many East Asian neighbors.
"Jobless growth" is also as much a description of this poor quality of performance in which
growth was accompanied by low creation of quality jobs.
At the outset of the study, Sicat constructed a table of "full-time equivalent" low
income workers who are either employed or underemployed, who receive very low incomes
or who are unemployed. Most of these work in the informal sector of the economy where
income is very low.
Such workers constitute what Sicat call "under-productive workers" and they turn
out to be very significant. This under-class of low income workers grew from 13.9 million
in 2001 to 20.7 million workers in 2011. He calls this the labor surplus that cannot be
absorbed into gainful jobs that support a decent living standard.
What is more significant is that this class of low income workers has been growing
at an average of 4.5 percent based on the numbers that they have calculated, even more than
twice the growth of the Philippine population.
The implication of this is massive. The country's job creation program has been
falling behind. The reason is that we are stuck with a wrong policy that fails to promote
employment! (Sicat, 2014).
The labor market of Philippines relative to other countries of the region is
characterized by three basic facts: a higher participation rate and a higher level of
unemployment and underemployment.
At present, the prevailing minimum wage of workers is P445.00 daily multiplied by
24 days (the number of working days in the private sector excluding Sundays) will give the
workers a gross monthly income of P10,680.00. This does not include deductions made on
SSS, Philhealth and so on. This monthly income s way below the income threshold set by
NEDA.
 As of January, 2016, the Philippine Statistics Authority (PSA), based on the test
Labor Force Survey (LFS), the country's employment rate grew from 93.4% in January
2015 to 94.2% in January 2016. The figure is equivalent to about 39.2 million employed
Filipinos, with an estimated 752,000 additional jobs generated in between the survey period.

Underemployment, Labor Force Participation

The labor survey showed that underemployment, however, worsened from 17s last
year to 197% this year, Underemployed persons are those who are hired but who want more
work. NEDA said there are about 77 million underemployed Filipinos, most of whom were
wage and salary workers in private establishments.
Esguerra stated that despite the increase in underemployment, positive results in
indicators of quality of work, such as the mean hours of work, class of workers and the full-
time employment, signal that efforts to foster more remunerative employment are gaining
traction.
There was also a slight decline in labor force participation rate "partly due to the
decision among the youth to opt out of the labor force to attend school and become full-
time students." Labor force participation rate was 63.8% in January 2015, before slightly
dipping to 63.3% the year after.
Esguerra said the government should "focus efforts on equipping students with
industry-relevant competencies and skills, and increasing opportunities for work
experience” to improve the employment situation in the country.
While employment rate is steadily increasing under Aquino's term, labor groups
have criticized him for his failure to address other labor concerns, including widespread
contractualization, companies' compliance with labor laws, and an increase in the minimum
wage.

Filipino Migrations and OFWs

The sacrifices overseas Filipino workers (OFWs) make just to provide a better life
for their families earned them the title of the nation's bagong bayani (new heroes). In recent
years, the improvement of the economy often attributed to their remittances further
cemented their mark in the Philippines. To recognize their invaluable contribution to the
Philippines, December each year is marked as the Month of Overseas Filipinos through
Proclamation No. 276 signed by former President Corazon Aquino in 1988.
According to Philippine Statistics Authority (PSA) the number of Overseas Filipino
Workers (OFWs) who worked abroad at any time during the period April to September
2015 was estimated at 2.4 million. Overseas Contract Workers (OCWs) or those with
existing work contract comprised 97.1 percent of the total OFWs during the period April to
September 2015. The rest (2.9%) worked overseas without contract.
The proportion of female OFWs (51.1%) was higher than male OFWS (48.9%). The
largest proportion of OFWs belonged to age group 25 to 29 years comprising 25.8 percent
of all OFWs, followed by those aged 30 to 34 years with 23.2 percent. Female OFWs were
younger compared to male OFWs. About seven percent of female OFWs were in the age
group 15 to 24 years and 29.5 percent were in the age group 25 to 29 years while the
corresponding percentage OFWs in the age groups were 6.8 percent and 21.9 percent,
respectively were more male OFWs (49.3%) than female OFWs (394%) in age group35 and
over.
 POEA data show that for over 5 years, the highest number of OFWIS deployed in
Saudi Arabia, followed by the United Arab Emirates.
In 2014, most of the countries belonging to the top 10 destinations of O were in the
Middle East and Southeast Asia.
The start of migration to the Middle East dates back to the early 1970s when
countries rich in oil resorted to recruiting "guest workers" from other countries including the
Philippines to work on infrastructure projects, among others.
In 1975, President Ferdinand Marcos implemented the so-calles "Development
Diplomacy" which saw the influx of Filipinos deployed abroad mainly to the Middle East.
Decades later, countries located in this region still belong the list of destinations.

OFWS Remittances

The National Economic and Development Authority (NEDA) in 22 said that the
Philippines cannot do without the cash remittances from OFW This is true as cash sent to
the country by OFWs, according to the World Bank, is a "key factor for the resilience of the
Philippines. It has been able to withstand recession amid the economic crises of the previous
years.
According to the Bangko Sentral ng Pilipinas (BSP), OFW cash remittances from
January to August in 2015 reached $16.21 billion (1764 billion).
In 2014, personal remittances from OFWs hit almost $24 billion (P1.17 trillion).
The major sources were the United States, Saudi Arabia, the United Ara Emirates, the
United Kingdom, Singapore, Canada, Japan, and Hong Kong.
The results of the PSA survey found that 64% of OFWs send money through banks,
while the rest prefer their own agencies, door-to-door delivery, or friends or co-workers
vacationing in the Philippines.
The same survey said the average cash remittance per OFW is P65,000 (51,378)
Two in every 5 OFWs are still able to have savings beyond the money they send back to
their families.
Beyond these figures, however, lies the undeniable truth that Filipinos face a lot of
challenges as they seek a better opportunity abroad.
Some were exposed to violence from abusive employers, exploitation incarceration
which sometimes leads to death sentences, and worst, death itself.
But amid hardships are the efforts to make things better: OFWs helping each other,
several nongovernmental organizations acting as support groups, and an entire nation
seeking to save a fellow Filipino.
As the country continues to laud its citizens who seek greener pastures abroad,
overseas Filipino workers should be prioritized through policies and programs that can
adequately protect them.
Rich-country policies expanding employment opportunities for workers from
overseas can stimulate human capital investment and entrepreneurship in poor-country
households. By contrast, increasing enforcement against illegal immigrants or eliminating
temporary work permissions for overseas migrants should have the opposite effect. As such,
the specific channels through which immigration and other policies in developed countries
can help or hinder the economic development of poorer nations.

The Philippine Peso and Foreign Currencies

 The Philippine Peso is the currency of Philippines. Our currency rankings show that
the most popular Philippines Peso exchange rate is the PHP to USD rate. The currency code
for Pesos is PHP, and the currency symbol is ₱.

Economy

The Philippines is estimated to be the 45th largest economy in the world, with a
GDP of USD$216 billion (2011). Major exports include semiconductors and other electrical
components, transport equipment, clothing, copper and petroleum products and fruits.
In recent times, the Philippines has been transitioning from agricultural based
economy to one that increasingly relies on services and manufacturing. Agriculture now
only accounts for roughly 30% of the workforce and about 14% of GDP.
The economy of the Philippines was the second largest in East Asia after World
War II. However, the economy stagnated until the 1990s, based on economic policies and
political volatility, and other Asian countries surpassed the Philippines in terms of GDP
growth.
In the 1990s, a new program of economic liberalization was introduced, leading to
economic
recovery until the 1997 Asian Financial Crisis.

Effects of Peso Depreciation against US Dollars

The E Rent The impact of Philippine peso against US dollars varies. The
strengthening, 4 the US dollars against the peso is brought about by the raising of interest
rates by the US Federal Reserve Board. This boost the demand for greenbacks as investors
start buying US treasuries in anticipation of higher US interest rate.
Some of the effects of peso depreciation are:
1. Higher prices in peso terms for imported goods and services;
2. A weak peso will negate the impact of falling crude oil prices abroad;
3. Increase in the pump-prices of gasoline and other petroleum product;
4. It fuels inflation due to increase in the price of imported goods;
5. Higher debt servicing on the part of the government;
6. Domestic tourists find it expensive to visit places abroad because they
will need more pesos to buy dollars.

However, with the depreciation of the peso, there are also positive effects Some
of them are:
1. Exporters and overseas Filipino workers and their dependents now receive
more pesos for every dollar they exchange;
2. Foreign tourists find it attractive to visit the Philippines with their dollars
buying more pesos

History

Prior to the introduction of a formal currency, trade in the Philippines was

performed using a barter system, and later on "piloncitos" (small pieces of gold) and gold
barter rings.
 The Spanish introduced coins to the Philippines when they colonized the country in
1521. However, the coins used by Filipino people were minted in various Spanish countries
around the world, leading to major inconsistencies in purity and weight.
In 1861, the first mint was established in order to standardized coinage. After the
Philippines gained independence in 1898, the country's first local currency was introduced,
replacing the Spanish with Filipino Peso.
The United States captured the Philippines in 1901, and established a new unit of
currency that was pegged to exactly half of a US Dollar in 1903.
During World War II, the Philippines was occupied by Japan, and new notes were
introduced yet again.
The Central Bank of the Philippines was established in 1949, leading to the
reintroduction of a
formal Filipino currency.

The Philippine Housing Shortage and the Real Estate Boom: Rent and Prices

Housing demand in the Philippines has been mainly dictated by housing

affordability, which refers not only to a household's ability to pay but also to the price of
housing in the market and the financing schemes available. Housing affordability is low in
the country. This is attributed to several factors: first, the ratio of unit housing cost to
income is rapidly rising. Housing price appreciation is highest in the Philippines among
countries in Asia and this is mainly due to rising land prices. Second, there are few lowcost
alter among countries natives to homeownership in the formal market. Many households
cannot afford homeownership. Only about 50 percent of households in the country can
afford to buy a home in the formal market. The situation can be worse in some areas.
Moreover, the rental market, specifically lowcost rental housing, is limited, thus, households
engage in various informal housing arrangements (e.g. rent free occupation, squatting) and
multi-occupancy dwelling has become common. Third, innovative housing finance is
limited and the microfinance schemes available suffer from liquidity problems and
bureaucratic delays.
The above conditions are reflected in the consumption pattern of households. The
path toward acceptable housing has been very slow and housing adjustments have been
confined to home improvements with minimal changes Government has to address the
problems of housing in a broader context. The tenure. issues are not only confined in
providing households income transfers through subsidies or in giving access to housing and
security of tenure but also in looking at the larger issue of urban development. Within the
households' microenvironment, government may consider the development of the rental
housing market, the provision of alternative financing schemes that takes into account the
households 'capacity to pay (e.g. rent to own schemes, "balloon" payment on amortization,
microfinance, etc.), or encourage the development of "cheap" housing technologies. These
actions should, however, be supported by ways to effectively reduce the high cost of
housing in the country. Such move calls for institutional strengthening specifically in the
areas of land management and administration as well as in local governance.
According to the Philippine Housing and Land Use Regulatory Board, 452,198
condominium units were built in Metro Manila from January 2001 to March 2014. There
are around 807,496 families or 27.5% of the NCR population who have a dispensable
income greater than PHP 34,962 (US$ 783), which is the required monthly income to be
able to afford the monthly amortization of PHP 10,500 (US$ 235). PHP 10,500 (US$ 235) is
the minimum monthly amortization for a housing loan of PHP 2 million (US$ 44,801), with
accommodating loan rates of 90% LTV, with an annual interest rate of 5.7%, and a loan
tenor of 30 years.
So for all these newly-built condominiums to be occupied by those who could
afford to rent or buy, 56% of locals who have the financial capacity to occupy them would
need to do so, i.e., 56% of the 807,496 families with the financial capacity to do so, should
purchase or rent a unit, for the available supply of condominium units to be taken up.
These are problematic numbers given that many of these families already have
houses in the first place. The World Bank assumes only 10% of these capable end-users as
prospective end-users, indicating a gross oversupply.
In terms of affordability, property developers are building more mid-end
condominium units than locally-based Filipinos can afford to occupy. Many buyers are
OFWs, causing a mismatch between demand and supply.
Average annual growth of remittances was only 6.7% from 2009 to 2014 compared
to 16.8% annually from 2004 to 2009.
The World Bank believes the slowdown in remittances is due to:
1. Stricter Implementation of the migrant
workers' bill of rights; 2. Political uncertainties
in host countries; and 3. The slowdown in the
advanced economies.

Affordable Housing

The Philippines has a huge housing need at the low end. There are as much as
300,000 households in Metro Manila residing in informal and uninhabitable housing units
which composes 8.7% of the total Metro Manila population. These people live in appalling
conditions. Many others live in very poor conditions.
To meet the needs of these families, the government embarked on the National
Shelter Program to provide housing for informal settlers and other families who do not have
enough income to rent nor buy houses in the prevailing markets rates.
Socialized housing units, or those which cost less than PHP 450,000 (US$ 10,800)
can be purchased with a monthly amortization of PHP 2,302 (US$ 56). The Pag-Ibig Fund,
(which is the Filipino word for love), the country's state owned and subsidized housing loan
provider, provides a fixed rate of 4.5% for 30 years for socialized housing units. The
problem is that these low-end housing units are usually far from work.
An aggressive public mass housing program built on more realistic and accessible
financing mechanisms, including provision of government subsidies, is needed to close the
huge backlogs in mass housing and new housing needs, estimated at almost six million units
by 2016.315 Aside from being directly beneficial to the poor, mass housing has high and
widely dispersed multiplier effects. An aggressive program would result in a surge in
construction activities, and create a significant number of jobs in the construction sector,
which would benefit many poor and low income households.