MANAGEMENT SERVICES NOTES

INTRODUCTION TO MS SP
Process
Management useful decision ↓ cost
information managers
Management Accounting (MA) relevant making new product
Services (MS) Financial new branch
Management

Characteristics of Management Accounting (MA) Vs. Financial Accounting (FA)

1. User  Managers (internal users) 1. External users
2. No accounting standards (only as needed) 2. PFRS  FS (quarterly/annually)
3. Relates to the future 3. Past transactions

Stockholder

Line – directly involved in revenue-generating activities BOD

Staff – supports the line position (IT dept, payroll, legal)

CEO

VP VP VP VP (HR) Managers
(Marketing)
Line Function
(Finance)
Line Function (Operations) Staff Function
Line Function

Internal
Treasurer Controller
Audit

COST CONCEPTS

Cost  SP  Demand  Net Income  Stock Price

↑ ↑ ↑

factory
office
Example: Calculator
(cost object)

CLASSIFICATION
DM
1. Type Product – incurred to manufacture a product
DL
- ex. Manufacturing/inventoriable cost
OH  rent, utilities, taxes, depreciation, insurance of factory
BS: Inventory  I/S: COGS

Period – non-manufacturing cost

Selling  sales commission, advertisement, delivery
- Operating Expenses
Admin  salaries to officers, R&D, BDE, depreciation (OFFICE)
Expensed as incurred  I/S

2. Traceability Direct  DM, DL

Indirect  OH Total Per Unit Assumption: valid within the relevant range

VC
Variable Cost
3. Behavior Direct Constant Total Cost
(Mixed)
FC
Fixed Cost Inverse
Constant

COST SEGREGATION TECHNIQUES

Cost Function (linear equation) FORMULA (COGS)
1. High-Low Method  basis is cost drivers not cost Slope (VC/u)
∆𝑌 𝑌𝐻 − 𝑌𝐿 DM used
VC/u = b= = Y = a + bx DL
∆𝑋 𝑋𝐻 − 𝑋𝐿 Independent variable
(units sold) OH
2. Scattergraph  plots data points TMC
TC Fixed Cost/
WIP, beg
Y-intercept
(WIP, end)
Units COGM
Total Cost
3. Least Squares / Regression  most accurate FG, beg
a. Y = a + bx (FG, end)
COGS
b. Σ𝑦 = 𝑛𝑎 + 𝑏Σ𝑥
c. Σx𝑦 = 𝑎Σ𝑥 + 𝑏Σ𝑥 2

Goodness of Fit  accuracy/reliability of cost function

-1 negative correlation
1. Coefficient of Correlation (r) – measures the degree of relationship between two variables 0 no correlation
+1 positive correlation
0
2. Coefficient of Determination (𝑟 2 ) – strength of the cost function 1
The closer to one, the better
CVP ANALYSIS
Contribution Margin (I/S)  focuses on the behavior of cost

Sales xx
Manufacturing Cost (DM, DL, VOH)
- Variable Cost (xx) Variable S&A
Contribution Margin xx
Fixed OH
- Fixed Cost (xx) Fixed S&A
Profit / NI / OI xx

Formulas: 𝐹𝐶 If Multiple products

Analysis: BEP
Units = ↓ Favorable
𝐶𝑀/𝑢
 Sales mix ↑ Unfavorable
1. Break-even point (BEP)
𝐹𝐶  Composite BEP
 Sales = TC (VC + FC) Pesos =
𝐶𝑀𝑅  WACM
- The lower, the better

 Profits = 0
 CM = FC 𝐶𝑀
𝑆𝑎𝑙𝑒𝑠

2. Target/Desired Profits (TP)

𝐹𝐶 + 𝑃𝑟𝑜𝑓𝑖𝑡
𝑈𝑛𝑖𝑡𝑠 =
𝐶𝑀/𝑢 Before tax
TP 𝐹𝐶 + 𝑃𝑟𝑜𝑓𝑖𝑡
𝑃𝑒𝑠𝑜𝑠 =
𝐶𝑀𝑅

 the lower the better

3. Margin of Safety Extent to which sales can decrease before incurring a loss
The higher, the better
Units = 𝑆𝑎𝑙𝑒𝑠𝑈𝑛𝑖𝑡𝑠 (actual/planned) – BEP in units
MOS Pesos = 𝑆𝑎𝑙𝑒𝑠𝑃𝑒𝑠𝑜𝑠 – BEP in pesos
𝑀𝑂𝑆
Ratio =
𝑆𝑎𝑙𝑒𝑠

𝐶𝑀
=
𝑃𝑟𝑜𝑓𝑖𝑡
4. Degree of Operating Leverage (DOL)
 % ∆ in Sales  effects in profit 1
= 𝑀𝑂𝑆
Example: DOL= 5
↑ 10% Sales x 5  ↑50% Profit

5. Sensitivity Analysis
∆ in SP, VC, FC  effect on profit
ABSORPTION VS. VARIABLE COSTING

Income Statement: Absorption Costing (AC) Variable Costing (VC)

DM DM
Sales Sales
DL DL
- COGS (product) V - COGS
OH OH  V
GP F GP
-OPEX (period) S&A V -OPEX
FOH
Profit F S&A V
Profit
F

 Absorption costing  normal accounting

 accepted for external reporting
 compliance with GAAP/PFRS
 Variable Costing  use only internally, for management purposes

AC = Product Cost  Inventory (B/S)  COGS (I/S)

Fixed OH
VC = Period Cost OPEX (I/S)

Summary:

AC VC In short:
= NI = NI
P = S (10,000 sold) P > S = AC NI > VC NI
↓ 10,000 COGS ↓ 10,000 OPEX
P < S = AC NI < VC NI
↑ NI ↓NI
Produced P = S = AC NI = VC NI
P > S (8,000 sold) ↓2,000 EI ↓10,000 OPEX
10,000
↓ 8,000 COGS
↑ NI
↓NI
P < S (14,000 sold) ↓4,000 OPEX last year
↓14,000 COGS
↓ 8,000 OPEX this year

Reconciliation
Inventory
VC NI ADD : ↑ in inventory Beg. xx
± (∆ in inventory x FOH/unit DEDUCT : ↓ in inventory Produced xx xx Sold
AC NI End xx

 whenever there’s sales, increase in income is equal to contribution margin

STANDARD COSTING AND VARIANCE ANALYSIS
Ideal, benchmark, Comparison between
measure of performance actual and standard
Uses:
Should be cost
Standard Cost
best estimate of the management 1. Evaluate performance of management
2. Simplify costing 12/31
1/1
Direct Materials (DM) @ Standard cost
AP x AQ Point of Purchase (if silent)
Materials Price Variance (MPV) Point of Production
SP x AQ
Materials Usage/Quantity Variance (MUV)  ALWAYS Point of Production
SP x SQ

Direct Labor (DL)

AR x AH
Labor Rate Variance (LRV)
SR x AH
Labor Efficiency Variance
SR x SH
(LEV)

OVERHEAD (OH)

Variable Spending Fixed Spending

Variable Fixed
Actual AVR x AH + AFR x AH
Spending
BAAH SVR x AH + BFC Controllable
BASH SVR x SH + BFC Efficiency Total
Standard SVR x SH + SFR x SH Volume Uncontrollable

- Budget  Internal; Totals

- Standard  External; Per unit
- There’s no such thing as Fixed Efficiency Variance
- Fixed cost is uncontrollable

MIX AND YIELD

 Two types of Materials and Labor

 Only applicable to DM and DL

DM:
AP x AQ x AM
Total Materials Price Variance
SP x AQ x AM
SP x SQ x SM
Materials Mix Variance
SP x AQ x SM = Materials Usage
SP x SQ x SM Materials Yield Variance Variance

DL:

AR x AH x AM Labor Rate Variance

SR x AH x AM
SR x SH x SM Labor Mix Variance
= Labor Efficiency Variance
SR x AH x AM
Labor Yield Variance
SR x SH x SM
BUDGETING
goals
in order to achieve the
 Planning tool used by management to set targets
objectives of the organization
performance
reviews
 Spearheaded by the Budget Committee  overall responsible for budget preparation
 composed of the President, Treasurer, Controller and Managers
of different departments
 head by the Budget Director

Types of Budget Short-term  1 year

Long-term  >1 year (Capital Budgeting)

Operating  Sales, DM, DL, OH, COGS, S&A budget  Budgeted I/S
Master Budget  production and sale
FS
 end goal of
Financial Beg. Bal Budgeted SCF,
budgeting
 cash + Receipts B/S
- Disbursements
- Minimum cash balance
+ -
Bank loans
excess financing
Shares
End Bal. End bal.

Techniques:
1. T-accounts
2. Follow instructions
INCREMENTAL ANALYSIS / RELEVANT COSTING

 method of choosing the best option among alternatives

Future General Rule:

Relevant Cost - All variable cost are relevant. (DM, DL, VOH, VS&A)
- FC are relevant if avoidable, otherwise, irrelevant
Incremental/Differential
 cost must differ among alternatives

Types:

1. Make or Buy w/ excess capacity  for relevant cost, apply General Rule
2. Accept or Reject Special Order
3. Retain or replace equipment w/o excess capacity  General Rule + Opportunity Cost (lost CM)

4. Retain or Eliminate unprofitable segment/product  Sales

- VC
- FC (avoidable)
+ retain
5. Sell immediately or Process Further Segment Margin
- eliminate
Split-off point

Joint Cost A
(DM, DL, OH) B Further processing cost (FPC)
C
common

Rule: Process further of incremental revenue > incremental cost

↑ in SP (FPC)

6. Which products to produce given scarce resources?

 ranking of products
 basis: CM per scarce resource limited
RESPONSIBILITY ACCOUNTING
Objective: proper evaluation of responsibility centers  Divisions, departments, branches, segments
 Headed by managers (controllability)

Types of Responsibility Centers:

1. Cost Center  Maintenance, IT, HR, Payroll, Production  Variance Analysis

 cost (actual vs. standard)
2. Revenue Center  Sales Department, Marketing Department  Variance Analysis
 revenue (actual revenue vs. target revenue)
3. Profit Center  SM Department Store, supermarket, cinema  Sales
 revenue - VC
 cost CM
- Controllable FC
Controllable Profit Margin
4. Investment Center  Head office of SM
 revenue
 cost
 investment
IBIT

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
1. Return on Investment (ROI) = Invested asset/capital
𝐴𝑣𝑒.𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡
at BV
𝐵𝐵 + 𝐸𝐵
2

Performance 2. Residual Income (RI) = Operating Income – (Ave. Operating Asset x

Measure Minimum Rate of Return)
 the higher, Required/acceptable
the better return

3. Economic Value Added (EVA) = Op Inc after Tax – (Ave. Op Asset x WACC)
 focus is more on LT
capital at MV Required/
TA - CL acceptable
DuPont Formula: return
𝑁𝐼
ROS x ATO = ROA 𝑅𝑂𝐼 =
𝐴𝑠𝑠𝑒𝑡𝑠
or𝑁𝐼
𝑆𝑎𝑙𝑒𝑠 𝑁𝐼
𝑥 =
𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠 𝐴𝑠𝑠𝑒𝑡

Service Allocation Method

1. Direct Method : Service Department  Production Department

2. Step Method : Service Department & Production Department
3. Reciprocal/Algebraic Method : Considers the reciprocal services among the Service Department

Balance Scorecard
- financial & non-financial
- more holistic; basis for future performance of managers

1. Financial  ROI, RI, EVA  Internal  Monetary

2. Customer  Pricing, quality, customer service  External
3. Internal  Production, bottlenecks, breakdowns, delivery  Internal
Process  Customer focus Non-monetary
4. Learning &  Development of employees, trainings,  Internal
Growth compensated, monetized sick leave
 Employee focus
TRANSFER PRICING ABC Company

Transfer Price  price charged by one division to another SP 100 Selling Buying
VC (40)
Objective: to set transfer price to achieve goal congruence CM 60 Ink Marker Supplier
2,000 units
End Goal: to maximize the NI of the whole company Capacity: 120/u
10,000 units
Customer
Maximum Transfer Market Price
Price
Rules
w/ excess capacity  variable cost
Minimum Transfer Price
w/o excess capacity  VC + CM (opportunity cost)

Other Types of Transfer Pricing

1. Cost plus (cost + markup)

2. Variable Cost (DM, DL, VOH, VS&A)
3. Full production cost (DM, DL, OH)
4. Negotiated Price
CAPITAL BUDGETING

 Involves long-term investment decision

 Top management/BOD are involved  accept/reject

Payback Period
Non-discounting
Accounting Rate of Return
Techniques
Net Present Value (NPV)
Discounting Profitability Index (PI)
Internal Rate of Return (IRR)
Non-Discounting

1. Payback Period 0 1 2 3 4 5 6 7
 Time it takes to recover the initial investment (years) Even (10M) 2M 2M 2M 2M 2M 2M 2M
 Advantage: Easy to compute and understand
 Disadvantage: Uneven (10M) 2M 3M 5M 4M 2M 1M 6M
1. Ignores Time Value of Money (TVM)
2. Ignores performance beyond the payback period Formula:
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
𝑷𝑩𝑷 =
𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘

2. Accounting Rate of Return (ARR) / ROI

 Measures the profitability of project based on income
 Disadvantage: Does not consider TVM

Formula: 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡+𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒

𝑨𝒏𝒏𝒖𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 w/ salvage value  average 
𝑨𝑹𝑹 = 2
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
w/o salvage value  Initial Investment (simple)
Discounting

 Uses discounted CF
PV  considers TVM

1. Net Present Value (NPV)

Even (equal)  ordinary annuity or annuity due
Formula: Cashflow
PVCI  PV of Cash Inflow Uneven (unequal)  PV of 1
-PVCO  PV of Cash Outflow (initial investment)
NPV 0 1 2 3 4 5
+ accept (1M) 300k 300k 300k 300k 200k
- reject
Discount Rate
2. Profitability Index (PI)
 Used in mutually exclusive project
Limited resource; only choose one project

Formula:
𝑷𝑽𝑪𝑰
𝑷𝑰 = ; the ↑, the better
𝑷𝑽𝑪𝑶
3. Internal Rate of Return (IRR)
 The interest rate that makes the PVCI = PVCO (NPV = 0)
 Trial and error
 Technique: start in the middle rate

Decision guide: Inverse:

IRR > Cost of Capital  accept ↑ discount rate, ↓ NPV
IRR < Cost of Capital  reject ↓ discount rate, ↑ NPV

 If positive NPV; always TRUE that IRR > Cost of Capital

 ↑ risk, ↑ discount rate, ↓ NPV

Remember:
1. To convert NI to CF
Net Income
+ Depreciation Expense (100%)
CF

2. Tax shield/savings
↑ Deduction, ↑ Taxable Income, ↓ Tax

Depreciation Expense x Tax Rate = Tax

 Loss
Shield
 Gain
COST OF CAPITAL

 Discount rate, required return, minimum rate of return, hurdle rate

Capital 10% IRR

8%
ABC Co. Projects

Tax shield
Sources Cost Formula
1. Creditors (bank loans) Interest (cost of debt) Interest Rate x (1 – tax rate)
𝐷
PS 
𝑃0
2. Shareholders (issue shares) Dividends (cost of equity)

Dividends OS*
Income
RE
0 1 2 3 4 5

𝑃0 𝐷1
* (1) (2)
RE OS

1. Dividend Discount Model (DDM) 𝐷1 𝐷1 Stock issuance cost

+𝑔 +𝑔
(Gordon Growth Model) 𝑃0 𝑃0
(gross of flotation costs) (net of flotation costs)

2. Capital Asset Pricing Model (CAPM) same RF +  (MR – RF)

Market risk premium

 RF – Risk Free Rate (Treasury Bond)

  - Beta (Volatility Risk)
 MR – Market Returns (average
returns of PSE)

Weighted Average Cost of Capital (WACC)

 More than one source of capital

 Considers capital structure of the company

1. Debt
2. PS
3. RE
4. OS
FINANCIAL STATEMENT ANALYSIS
ABC Co.
Users FS Decision making

Tools:
2025 2026 𝑌2
1. Horizontal Analysis
Sales 1M 1.4M −1
 Evaluate FS items over a period of time 𝑌1
 Changes as % ∆ 1.4𝑀
− 1 = 40%↑
1𝑀

2. Vertical (common size) Analysis 2025 2026

 Evaluate items w/n the FS as a percentage Sales 1M 2M
of a base amount  BS  Total Assets COGS (400K) 40% (1M) 50%
 IS  Sales GP 600K 60% 1M 50%
 Used when comparing the companies EXP (200K) 20% (600K) 30%
(intercompany analysis) NI 400K 40% 400K 20%

3. Ratio Analysis
 Evaluate relationships among FS items

Characteristics:

a. Liquidity – ability to pay short-term obligations (suppliers)

b. Solvency – ability to pay long-term obligations (banks)
c. Profitability – analyze performance of a company

Patterns:

1. Return  NI (numerator)
2. Turnover  Sales (numerator)
3. Margin  Sales (denominator)

𝐼𝑆
2 years BS  Average 
𝐵𝑆

- Operating Cycle = Days in AR + Days in Inventory

- Cash Conversion Cycle = Operating Cycle – Days in AP
WORKING CAPITAL MANAGEMENT

Working Capital  resources of the business used in everyday operations

 Objective: To achieve balance between risk and return (income)

Matching  CL  CA; NCL  NCA

 Policies Conservative  ↑ WC
Aggressive  ↓ WC
Working Capital = Current Assets – Current Liabilities
(Cash, AR, Inventory) (AP, Short-term Loans)
Operating Cycle = Days in AR + Days in Inventory
360 360
(𝐴𝑅𝑇𝑂) (𝐼𝑇𝑂)

Cash Conversion Cycle = Days in AR + Days in Inventory – Days in AP

360 360 360
( ) (𝐼𝑇𝑂) ( )
𝐴𝑅𝑇𝑂 𝐴𝑃𝑇𝑂

1. Cash Management to meet cash requirements

 to maintain optimal level of cash
to avoid idle cash
Where:
Baumol 2 𝑥 𝐷 𝑥 𝑇𝐶
D = demand / annual cash requirements
Optimal Cash Balance (OCB) = √
Model 𝐶𝐶
TC = transaction cost
CC = carrying cost / opportunity cost (%)

Positive  bank > book  OC (Buyer)  Maximize

 Manage float (delay)
Negative  bank < book  DIT (Seller)  Minimize
1. Mail Float – check not yet received
2. Processing Float – received but not yet deposited
3. Clearing Float – deposited but not yet cleared
 To prepare Cash Budget Beg. Bal
+ Cash Receipts
- Cash Disbursements
- Minimum cash balance
+ -
excess financing
End Bal. End bal.

2. Inventory Management to meet customer demands

 To maintain optimal level of inventory
minimize cost
How many units to order? EOQ Model
 2 issues to resolve:
When to order? Re-Order Point (ROP)

Where:
Economic Order Quantity (EOQ) = √
2 𝑥 𝐷 𝑥 𝑇𝐶 D = annual sales demand
𝐶𝐶 TC = ordering cost, shipping cost, setup cost
CC = freight, insurance, storage cost, obsolescence
Mon Wed
w/o safety stock (SS)  normal lead time
Re-Order Point
3 days
(ROP) w/ safety stock (SS)  normal lead time + SS
3 days x 100 = 300 units
Mon Wed Thu
SS
4 days

4 days x 100 = 400 units

3. Accounts Receivable Management Conservative (2/10, n/30)  ↓ Credit Sales, ↓ AR, ↓ Bad Debts
 To use effective credit policy
 Credit terms (n/30) Aggressive (relaxed) 5/10, n/60  ↑Credit Sales, ↑ AR, ↑ Bad Debts
 Cash Discounts (2/10)

Credit period
 Accelerate collections
Disc period
4. Accounts Payable Management
 Maximize the positive float 0 10 30
 Delay payment 2%

Cost of Giving up Cash Discounts:  pay existing loan

𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 360 investment opportunity
= 𝑥
100% − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑛
Credit period – discount period

 How to know if we have to forgo cash discounts?

 Compare % of cost of giving up cash discounts to % of other alternative using the money for
investment or payment of loans.
 Decision Guide: Greater benefit.

5. Short-Term Loans Management

 Usual questions: What is the annual effective interest rate?

𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 Interest expense + other fees - savings

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 (𝐸𝐼𝑅) =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 Usable amount
annual
QUANTITATIVE ANALYSIS

 Application of mathematics in solving business problems

Techniques:

1. Linear Programming
 Optimization Model
 Goal: To find the optimal/best solution in business operation
 Best possible combination

Maximize Income
Objective Subject to constraints
Minimize Cost (limited/scarce resource)

Note:
 If only two products  use trial and error (based on the choices)
 If more than two products  apply incremental analysis/relevant costing (CM/scarce resource)

2. Decision Tree Analysis

 Calculate the expected monetary value (EMV) of each outcome based on the decision.

(1) Alternative Couse of Action  (2) Apply probabilities (%)  (3) Computation of EMV  (4) Decision

Under Certainty Difference: Expected Value of Perfect Information (EVPI)

EMV
Under Uncertainty price to pay to get access to perfect information

3. Project Evaluation Review Techniques – Critical Path Method (PERT-CPM)

 Used in project management (scheduling/monitoring)
 Applicable to large scale projects Example:
 Similar to Gantt Chart
Steps: Activities Time Required
1. List of Activities A. Planning 1 month Parallel activities
2. Time Required Longest path B. Excavation 3 months (can be done at the same time)
3. Identify the critical path C. Structuring 6 months Immediate predecessor
Minimum time to complete D. Finishing 5 months (can’t proceed until the
the project previous steps are done)
1 6
Crashing  to speed up the process A C 5
Year 1
Jan A B
 behind schedule (delay) Start 6 D
3 Feb B
 Decision guide: Cost to crash > Penalty for Delay B C Mar B
Apr C C
A – C – D = 12 months May C C
B – C – D = 14 months  critical path June C C
4. Learning Curve July C C
 Process is improved over time due to learning & efficiencies Aug C C
 Requires ↓ time & ↓ resources as we produce additional unit Sept C C
Oct D D
 % of decrease takes effect every doubling of units
Nov D D
Time/unit Example: 80% Learning Curve (10 hrs) Dec D D
X2 X2 X2 Year 2
1  2  4  8 Jan D D
Hours 10 8 6.4 5.12 Feb D D
T# of units Total 14 months

5. Forecasting
 Use if mathematics to predict future behavior
Time Series: Example: Coffee Shop
1. Trend ↑, ↓, ↑, ↓ Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

2. Seasonal summer ↑, rainy ↓

3. Cyclical Christmas ↑, Jan ↓ ↑ ↓
↑ ↓
4. Irregular random
 ECONOMICS
Market
Demand (Buyer) Buyer
Microeconomics – individual, businesses Supply (Seller &
Branches
Macroeconomics – entire economy of a country Seller

MICROECONOMICS

DEMAND Law of Demand:

↑ Price, ↓ Demand
50
40 1. Movement along the demand curve  always because of Price (P)
P 2
30
1 2. 2. Shift in demand  other factors (ex. Facemask)  same Price, ↑ Demand
20
10
D
1 2 3 4 5 (quantity demanded)

Downward Sloping: If Price increases, the buyer will look for Substitutes.
1. Substitution Effect ex. ↑ Price of chicken, ↓ Demand

If Price of Complementary goods/product increases, Demand will decrease.

ex. ↑ Price of sugar, ↓ Demand of Coke
↑ Price of Gas, ↓ Demand of Cars

If Price ↓ (given same income), Demand ↑ Law of Diminishing Marginal

Ex. Monthly Income P50k x 10% = P5k Utility:
Jan. T-shirt P1k  5 The more we consume, the
2. Income Effect ↑ Demand
Feb. T-shirt P500  10 less marginal utility we
receive.
As Income ↑, Demand for normal goods ↑
Marginal: Additional
As Income ↑, Demand for inferior goods ↓
Utility: Satisfaction

Elasticity of Demand

 Sensitivity of demand due to price change

∆ 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
 Formula:
∆ 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

> 1  Elastic  sensitive (luxury; w/ close substitute)  Ex. Fortuner, Coke, Airline Ticket
Types = 1  Unitary Elastic  ∆ in Price = ∆ in Demand  Ex. Electronic Products; Gadgets

< 1  Inelastic  not sensitive (necessities; no close substitute)  Ex. Rice, electricity, cigarettes

 Perfectly Elastic  Price ↑ = no more Demand

 Perfectly Inelastic  Price ↑ = no change in Demand  Ex. Insulin

SUPPLY

50 ↑ Price, ↑ Supply S>D

Price Ceiling
40 Surplus
P 30
20
10
Equilibrium Price (perfect/optimal)

1 2 3 4 5 Shortage Price Floor

Supply
 Upward Sloping

1. Number of Sellers  as the number of sellers ↑, supply ↑

 Ex. Apple, Samsung  Oppo, Vivo, Realme (more suppliers, more supplies)

Substitutes  the supplies will produce goods w/ higher returns.

2. Closely Related Goods
Complementary  if the price of complementary goods ↑, supply ↑
 Ex. ↑ Price of Ink, ↑ Price of Marker, ↑ Supply of Marker

Law of Diminishing Returns

 Adding an additional input result in a smaller increase in output

Ex. Workers: 10 hours  5 units/hr
11 hours  4 units/hr

Elasticity of Supply:

 Sensitivity of supply due to price change

∆ 𝑖𝑛 𝑆𝑢𝑝𝑝𝑙𝑦
 Formula:
∆ 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
> 1 Elastic
Types = 1 Unitary Elastic Same concept w/ Elasticity of Demand

< 1 Inelastic

Short-run vs Long-run
1-5 years 6 years onwards

Variable Cost  Variable

Cost
Fixed
 Economies of Scale
Produce:  Average Cost ↓
As long as Price = Marginal Cost
P = MC; CM = 0

Market Structure # of Sellers Products Control to Price Example

1. Perfect/Pure Competition Large Identical None Divisorial
2. Monopolistic Competition Many Differentiated Limited Jollibee, McDonalds
3. Oligopoly Few Standardized Huge PLDT, Globe; Shell, Petron
4. Monopoly One Unique Huge Meralco

MACROECONOMICS

Gross Domestic Product (GDP)

 Measure of income and output of a country

 Primary measure of wealth in a country (national income) Where:
C = Consumption
Expenditure Approach  GDP = C + I + G + X I = Investment
G = Government Spending
How to measure GDP? X = Net Exports (Export – Import)
Income Approach  Individuals  Salaries & Wages
Business  profit, rent, interest
Less: Income earned
Natural Resources  Depreciation (Depletion)
Gross National Product (GNP) = GDP + Income Abroad abroad (OFW)
Government  Taxes
 Ex. Output Price Nominal Real
Year 1 1,000 x 100 100,000 100,000
Nominal  measure using current prices Year 2 1,500 x 120 180,000 150,000
GDP (1,500 x 100)
Real  measure is adjusted for inflation 𝑁𝑜𝑚𝑖𝑛𝑎𝑙
Real GDP =
(remove the effects of inflation) 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 (𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟)

Inflation: general increases in price of goods/services

Demand Pull  Demand > Supply Ex. Face Mask

1. Types (excessive) (demand)

Cost Push  ↑ Price of Sugar (supply)

↑ Price of Coke

2. Inverse Relationship w/ Unemployment

Philips Curve
(↑GDP, ↓Unemployment, ↑Income, ↑Consumption, ↑Price)

Frictional – mismatch between workers & jobs

Unemployment Structural – changes of structure in a company (ex. Automation)
Cyclical – business cycle
Peak
2019 2022
Recession 2022
Recovery

Trough
2021
Role of Government: (Goal: ↑ GDP)
↓ taxes, ↑ Disposable Income, ↑ Consumption, ↑ GDP, ↑ Price
Taxes
1. Fiscal Policy ↑ taxes, ↑ Government Spending, ↓ Disposable Income, ↓ Consumption, ↓ GDP, ↓ Price

Government Spending  Government Projects

Ex. Infrastructure, ↑ employment, ↑ income, ↑ Consumption, ↑ GDP

2. Monetary Policy
 Money supply
 Control: Bangko Sentral ng Pilipinas (BSP)
Money Supply

1. Discount Rate ↑ ↓ *Bank Reserve Requirement:

2. Bank Reserve Requirement* ↑ ↓ - % of deposits the bank are
BSP not allowed to lend
Buy ↑
3. Open Market Operations Sell ↓
T-bills Household
BSP (BTr) Public
Cash
Money
Equivalent in Accounting Income Spending
Supply
M1 Cash in Bank
Money Supply M2 Cash and Cash Equivalent Business
M3 CCE & Short-term Investment

Money Multiplier (mm)

 effect of the release of money in
Marginal Propensity to Consume (MPC) %  Spend the economy
Income 1
Marginal Propensity to Save (MPS) %  Save Formula:
𝑅𝑒𝑠𝑒𝑟𝑣𝑒 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡