FDNECON

LONG TEST REVIEWER

Topics:
☐ Role of the Government in the Economy
or The Economics of Public Sector
☐ Demand and Supply
MODULE 5: ROLE OF THE
GOVERNMENT IN THE ECONOMY/ THE
ECONOMICS OF PUBLIC SECTOR
2. Market-based Policy 1: Corrective
(Pigovian) Taxes and Subsidies
Private Solutions to Externalities
1. Do unto others as you would have them
do unto you.
2. Charities/foundations for a good cause
3. Contract

Government and the Economy Negative Externalities: Pollution

- Promote inclusive, sustainable,
equitable economic growth
Provide goods Set standards Regulatory
and services framework

Maintain or Redistribute Address

enhance income externalities
competition

Principle #6: Markets are usually a good

way to optimize economic activity.
Principle #7: Government can sometimes
improve market outcomes. Positive Externalities: Education

Market Failure: not optimal distribution of

goods and services in the market
Externalities: the uncompensated impact of
one person’s actions on the well-being of a
bystander

Externalities and Government’s Response

Negative externalities lead markets to

produce a larger quantity than is socially
desirable.
Positive externalities lead markets to
produce a smaller quantity than is socially
desirable.
Government’s Response to Externalities
Government can internalize externalities by
1. Command-and-Control Policies:
imposing taxes on goods or services with
Regulation
negative externalities or subsidizing goods
or services with positive externalities.

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LONG TEST REVIEWER
Coase Theorem: if private parties can Goods in the Economy
bargain over the allocation of resources at - Excludability: property of a good
no cost, then the private market will always whereby a person can be prevented
solve the problem of externalities and from using it
allocate resources efficiently - Rivalry in consumption: property of a
good whereby one’s person’s use
Transaction costs: costs that parties incur in diminishes other people’s use
the process of agreeing to and following
through on a bargain
Private Goods Goods that are both
excludable and rival in
Government Policies and the Economy consumption

Public Goods Goods that are neither

excludable nor rival in
consumption

Common Goods that are rival in

Resources consumption but not
excludable

Club Goods Goods that are excludable

but not rival in consumption

Stock: quantity measured at a point in time

- A person’s wealth
- Number of people with college degrees
- Government debt

Flow: quantity measured per unit in time

- A person’s annual savings
- Number of new college graduates
- Government budget deficit

Fiscal Policies

Monetary Policies
- Promote a low and stable inflation
conducive to a balanced and sustainable
economic growth
- Main goals: stable prices and interest rates

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LONG TEST REVIEWER
Macroeconomics: The economies on a much
larger scale—regional, national, continental, or
even global

Microeconomics: The field of economics that

looks at the economic behaviors of individuals,
households, and companies/businesses
Monetary Tools Ex: individual demand, individual supply, the
theory of the firm, opportunity cost, and
consumer theory
Monetary Tools Contract MS Expand MS

Open Market Sell T-Bills Buyback Wants vs. Needs vs. Demand
Operations T-Bills Wants: product desired by a customer
Needs: basic requirements for human beings to
Foreign Sell dollars Buy dollars
Exchange survive; essentials
Market Demand: requests for specific products that the
Operations buyer is willing to and able to pay for
Reserve Increase RR Reduce RR
Requirements Rate rate Market
(RR) - a situation where supply and demand for a
particular product or service exists (trade,
Rediscount (RD) Increase RD Reduce RD exchange)
Rate rate Rate
- market forces (demand and supply)
determine the price
Trade Policies: refer to a country’s regulations - man as a market: producer and consumer
and agreements that control imports and exports - Price is the “clearing mechanism”
to foreign countries
- tariff (import) Law of Demand (Theory of Consumer
- quantitative restrictions (e.g., quotas) Behavior)
- non-tariff barriers (NTMs) - Inverse relationship
- export taxes - As the price of the product increases,
quantity demanded decreases
Objectives of Trade Policies - As the price of the product decreases,
- reduced protection quantity demanded increases
- outward-oriented trade regime
- increased market access for exports Qd = f (P) Qd = a - b (P) negatively sloped
- greater global integration (economic
efficiency, competitiveness, and export-led
growth)

MODULE 6; DEMAND AND SUPPLY

Economics: a social science that studies the

optimal/efficient allocation and distribution of
scarce resources to satisfy unlimited human
wants and needs

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LONG TEST REVIEWER
Market for Factors of Production

Changes in the Demand and Supply

Equilibrium
Law of Supply (Theory of Firm Behavior)
- Direct relationship Movement Price changes
- As the price of the product increases,
quantity supplied increases Shift Other non-price factors change
- As the price of the product decreases, (Lower withholding tax,
technology, environmental,
quantity supplied decreases incentives)
Movement along the Demand Curve
Qs = f (P) Qs = a + b (P) positively sloped

Movement along the Supply Curve

Equilibrium Point

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LONG TEST REVIEWER

Factors that Shift the Demand Curve (to the

right)

Demand (due to increase in income) and Supply

(due to expansion in production) curves shift to
the right

Factors that Shift the Demand Curve (to the

left)

Elasticity of Demand
- the responsiveness of quantity
demanded because of a change in
price
Factors that Shift the Supply Curve
(to the right)

Factors that Shift the Supply Curve

(to the left)

Perfectly Inelastic: regardless of price, the

Impact on the Equilibrium Price and Quantity
Demand curve (due to increase in income) shifts
to the right
quantity demanded of a good or service
remains constant
Relatively Inelastic: there will be more
change in the price of a good or service
than in the demand for that good or service.
Unitary Elasticity: the percentage change
in demand is exactly equal to the
percentage change in price.

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LONG TEST REVIEWER
Relatively Elastic: there will be more
change in the quantity demanded of a good
or service than in the price of that good or
service
Perfectly Elastic: when the demand for the
product is entirely dependent on the price of
the product
Elasticity and Pricing Strategy
Scenario 1: Inelastic Demand Curve
– It pays for the firm to increase P when it
faces an inelastic demand curve.
Scenario 2: Elastic Demand Curve
– It pays for the firm to decrease P when it
faces an elastic demand curve.
Elastic: non-essential, a change in price
quickly results in a change in the quantity
demanded
Inelastic: essential, there is little change in
the quantity of demand even with the
change of the good's price
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Substitute Goods: items that may replace
each other when used or consumed
Examples: Butter or Margarine, Coke or
Pepsi, Starbucks or Tim Hortons
Complementary Goods: items that are
almost always consumed or used together
Examples: Toothbrush and Toothpaste,
Hotdogs and Buns, Peanut Butter and Jelly
Firm: organizations that produce goods and
services, typically owned and operated by
individuals.
Industry: group of productive enterprises or
organizations that produce or supply goods,
services, or sources of income
Industrial Structure
Industry refers to a group of firms supplying
products (or services) that are close
substitutes to each other (Kotler)
Perfect Competition: many sellers, identical
products, little or no barriers to entry
Ex: Palengke / Farmers Market, Street Food
Monopolistic Competition: many sellers,
differentiated products, minor barriers to
entry
Ex: Shampoo, Softdrinks
Oligopoly: few sellers, firms may produce
identical or differentiated products, may
have considerable barriers to entry and exit
Ex: Telecommunications Companies: Globe,
Smart, and Dito; Airline Companies:
Philippine Airlines, Cebu Pacific, Airasia
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LONG TEST REVIEWER
Monopoly: one seller, unique product, SCP Framework
considerable barriers to entry and exit
Ex: Meralco, Maynilad, Manila Water

Summary: Spectrum of Industry

Structures

The Structure-Conduct-Performance
(SCP) Model

Determining Market Concentration

Herfindahl-Hirschman Index (HHI)
- HHI considers the number of firms in
an industry and their size differences
- HHI = summation of market of share of
firms squared
- The HHI-Index tends towards 1.0 when
there are few firms, tends towards 0.0
when there is a greater degree of
inequality in market shares

HHI Ranges

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