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Health Economics, having been developed as a

distinct discipline of Economics in the 1980s, is a
relatively new field. As the term, it is the
application of economic principles to health.
More specifically, it implies the use of economic
methods to improve health using the most
efficient interventions. Health economics
contributes immensely to health planning. For
deeper understanding of the concepts of health
economics it is best to understand health and
economics separately.
Economics has been defined in different
ways, Samuelson, an authority in
economics, and the author of one of the
most widely read and referred to
textbooks in economics, has a drawn up a
list of definitions:
1. Economics is the study of those activities
that involve the production and exchange of
Economics is the science of choice. It studies
how people choose to use scarce or limited
productive resources ( land, labor,
equipment, and technical knowledge ), to
produce various commodities, and to
distribute these goods to various members
of the society for their consumption.
Economics is the study of money, banking,
capital, and wealth.
Economics is the study of commerce among
nations. It helps explain why nations export
some goods and import others, and analyzes
the effects of putting economic barriers at
national frontiers.
We are facing economic problems such as increase
prices of basic commodities, transportation fares, and
other services particularly education and health care
We are dealing with these present problems through
the proper use of and allocation of available resources
without realizing that this process of prudent use of
resources is actually the key concept of economics.
Therefore , we can define economics as the study of
proper allocation and efficient use of scarce resources
to produce commodities for the satisfaction of
unlimited needs and wants of man.
Determine the proper allocation and efficient use of
health resources.
All medical and n0n- medical goods and services will
not exist without the use of resources.
Resources are scarce and the human needs and wants
are unlimited.
It is essential for the society to make a decisive choice
based on its preferences.
These choices are embedded in the basic economic
Characteristics of Economics
Economic resources will always be scarce
and people will always struggle to work
against scarcity.
Even when resources are abundant, they will
eventually become scarce because of the fact
that more people use the same resources as
time passes. There is scarcity of resources
when people want more of a certain good
than what is available.
2. There is a universal objective of attaining
the maximum output out of a given input.
Because of scarce resources that have alternative
uses, man has the ever present problem of
making choices to produce specific commodities
for distribution and consumption. His objective
is to choose the process or produce the
commodity which will give the maximum
benefit from a given input.
Economic Resources
Man has economic resources which he can use to produce
Man s most important resource aside from himself is land.
All that stems, grows, develops from land
Hunting and fruit and vegetable gathering during the stone
age gave way to farming and domesticating animals
Even the smallest piece of the land are use to produce the
most no of crops and livestock through the most modern
agricultural and farming methods.
2. Labor
Human activity produced a multitude of outputs.
Manual labor that has produced crops and livestock
to a more advance rational thought which produced
teachers, professionals, capitalist, and
Human capital
Specialization for proficient manpower in
producing certain good or service and has
contributed to a better production and distribution
3. Technology
Output of human activity from the stone age to rational
Immensely affected the lives and future of peoples,
improved the quality of life.
Metal age to modern technology genetic engineering
and biotechnology.
Health and medicine has definitely improved the quality
of life and life expectancy of man.
Curing all diseases and controlling aging may become
Technology has had negative effects too eq. Weapons
of mass destruction, demise of millions and million of
Worlds population may end with one stroke.
4. Capital
Money, convenient medium of production and trade.
Trading between individuals and nation ( international
trade )
Has evolved from barter trade , to the use of shells, gold,
silver, and other precious materials to do commerce
among nations.
Different countries adopt different currencies with
different values and purchasing power relative to other

This refers to the people that are combining the other
three ( 3 ) factors of production to create some
products or services to sell. The economist regard
entrepreneurs as specialist form of labor input. The
payment for entrepreneur is profit.
Capital interest
Labor wage
Land - rent

Components of Economics
1. Economics is about making choices. Choices can be
What commodities to produce,
For whom the commodities should be produced,
How to best and most efficiently produce these goods,
What is the best way to distribute the commodities,
How much of the commodities will be produced.
2. Economics is analyzing the different choices and
their cost
Remember that these choices will have cost. Different
alternative choices will have different corresponding
3. The choices and their costs will have an effect on
the future of those who make these decisions, or to the
recipients of the commodities.
Macroeconomics and
Macroeconomics is the study of the functioning as a
whole. Macro means big or grand.
Macroeconomics studies, among other things:
Interest rates and currency exchange rates;
Trends in prices, output, wages, inflation,
unemployment; and
Government economic policies and taxation.
Microeconomics is the study of smaller and individual
entities. It studies the behavior of industries,
companies, and households. Micro means small or
Microeconomics studies among other things;
How industries price the goods they produce and
How taxes affect peoples work effort, consumption,
saving, and allocation; and
How households allocate and use their financial and
other resources.
Terms associated with
Gross National Product ( GNP )
Gross Domestic Product ( GDP )
Aggregate supply and aggregate demand
Employment/ unemployment, wages
Fiscal policy
Government and taxation
Foreign trade / balance of trade
Inflation and deflation
Interest rates
Foreign exchange
Determinants of Health
Health has been defined by the World Health
Organization ( WHO ), as;
The state of mental, physical, and social well being
and does not merely connote the absence of illness.
Health is a multi factorial phenomenon.
An individual who does not experience
any symptoms of disease may not necessarily be
healthy. For example, a person who has an elevated
blood cholesterol or glucose level, may not feel
anything at all even when a disease process is already
Thus the absence of symptoms does not necessarily
connote healthfulness. An individual may not
necessarily feel anything even when a disease process
has already started.
On the other hand, a woman who experiences nausea
and vomiting during the early stages of pregnancy
may still be considered as healthy, as such can be
considered normal during early pregnancy.
Conclusion; the presence of symptoms does not
necessarily connote illness. The reason for such
symptoms has to be investigated.
A 35- year old individual who is able to run ten
kilometers may be considered healthier than
another individual who is only able to climb a few
flights of stairs, all other things being equal.
Conclusion: There are varying degrees or states of
A person who seeks medical care more often than
another may not necessarily be healthier than the
other who does not visit a health facility as frequently.
Truly the state of being healthy or unhealthy can be
expressed in many ways. Health economics deals with
the manipulation of factors that should be able to give
people better health. This poses a problem for
health planners since health is difficult to both quality
and quantity.
How do we manipulate health? To answer this we have
to study and ask: What determine health? Or simply,
what factors influence health?
Determinants of Health: Major
Effects and Intervention Points
Underlying Socioeconomic,
demographic and cultural factors
Individual ( age, sex, education, occupation, health
benefits, attitudes )
Household ( income / wealth , age, sex , composition,
social network )
Community ( ecological climate, markets and prices,
transportation size, structure and distribution, social
structure and organization.

Proximate Factors
Health Care Service Utilization
Environmental Contamination
Nutrient Dietary Intake
Health Outcomes
Nutritional Status
Explicitly shows that health is a multi factorial
phenomenon. It is directly and indirectly affected by a
lot of factors. The diagram shows that health
intervention does not only focus on the individual, but
also on the household and the community
Health outcomes are objective measures of health.
They are the parameters used to measure the health
condition of individuals, communities or countries.
They are standardized measures which are understood
and applied internationally.
Proximate determinants are factors that have a direct
influence on health outcomes. Proximate means
attached, near or direct.
Underlying determinants influence health outcomes
indirectly by their effect on proximate outcomes.
Underlying determinants influence health outcomes.
Underlying means what lies beneath , or the root
Health outcomes. It is important to remember that
economics seeks to maximize the output of any given
input. It means that the more goods should be
produced and distributed for a minimum amount of
resources used. Given this objective, it becomes
imperative that health planners are able to measure
improvements in health. A way to be able to measure
health must be put in place.

For planning purposes, the state of health of
individuals, a community or country is showcased by
health outcomes/ parameters/ indicators. Health
outcomes are objective measurement of health and
disease. They can be
A. Distinct figures eq. Life expectancy ( length in
years ), nutritional status ( weight for age or height );
Ratios eq. Mortality rates, morbidity rates,incidence
and prevalence.

Planners an objective measurement of health status.
While it is very difficult to measure health.These
parameters give health planners a common language
in studying and measuring the health status of
communities and countries. Being internationally
accepted, they should be understood by all health
Examples of Health Outcomes
Fertility Rate measures the reproductive capacity of
Crude Birth Rate ( CBR )= Total no. Of live birth x 1000
midyear population
Mortality Rate measures risk of dying within a specific
group or dying from a cause
Crude Death Rate ( CDR ) = No. Of Deaths, all causes
Midyear population x
Cause Specific Death Rate ( CSDR )
= number of deaths from specific cause x F
Midyear population
Infant Mortality Rate ( IMR )
= Infant Mortality Rate ] 1 year age x 1000
Total no. Of Livebirths
Morbidity Rate measures the frequency of illnesses
within specific population
Prevalence Rate ( PR )
= No. Of New and Old cases within a period x 100
Midyear Population
Incidence Rate ( IR )= Number of New Cases x F
Population at Risk
Health outcomes can also be used for monitoring and
measuring the effectiveness of health activities and
programs that seek to improve health. This can be
done by comparing these health indicators before and
after a program has been implemented.

Health Outcomes before = compare = Health
outcomes after
the health

Proximate Factors
Proximate determinants are factors that directly affect
the health status or outcomes of individual or groups.
These factors may be innate to a person, eq, nutrient
intake and fertility. These are physiological factors
which directly affect the health status of an
individual. Or, these maybe external factors, e,q.,
environmental contamination, injuries, and health
care service utilization which also directly affect the
health status of people or communities.
Physicians, nurses, and other health practitioners in
clinical practice are mostly more concerned with the
health of individuals.
Most healthcare facilities commonly focus on
problems of individual. These are nutrition, survival or
deaths ( mortality ) from illnesses, recovery and
prevention of disabilities from serious illnesses like
strokes or accidents.
Good public health programs focus on the prevention
of such illnesses stated before.
It is important to remember that the treatment of
illnesses should not only be focused on the sick
individual, but also on factors which directly cause
Examples are high intake of dietary fats which results
in high blood cholesterol levels, and environmental
exposure or constant exposure to air pollution which
results in chronic lung disease.
Proximate factors and health
programs developed.
Proximate factors
Human care service OPLAN bakuna with jollibee,
utilization OPLAN alis disease
Environmental Contamination Anti pollution
campaign, worker
health and safety programs

Nutrient Dietary Intake Barangay Day Care Centers, vit A
Fertility Responsible Parenthood Information Drive
Injury Dont Drink and Drive
Underlying Socio Economic,
Demographic, and Cultural Factors
Finally, there are factors which do not directly affect
health outcomes, but have an influence on the
proximate factors which ultimately affect the health
status. These are social , economic, cultural and
demographic factors which seemingly do not affect
health. However, these factors will ultimately
influence the activities, exposures, and attitudes of
individuals, households and communities towards
health. Again, ultimately they will affect health
outcomes in cascading manner.
Underlying factors are those that lie beneath or root
Underlying factors affect proximate factors which
then affect health outcomes.
A. Individual Level
Occupation as a coal miner Exposure to mining
contaminants Increased incidence of workers lung

B. Household level
Low household income Poor nutritional intake
poor nutritional status ( Low weight for height
C. Community level
Poor transportation / Transportation network - poor
health care service utilization more deaths in the
each of the proximate determinants and the
underlying causes affect health outcomes in some way
or another. It is important to remember that these may
all be intervention points which can help improve
health status or outcomes. However, it is also
important to note that not all factors are within the
control of health practitioners and public health
officials. Thus the theoretical wholistic approach to
the treatment of illnesses will require the cooperation
of a lot of sectors which may be easier said than done.
Relationship of Health and
There is a theoretical relationship between health and
economics which operates like a cycle. It goes as
follows; Better economy allows countries to allocate
more financial, technological allocated and used for
health, and manpower resources for health
producing activities and programs. More resources
allocated and used for health lead to improvements in
health status. This assumes that the money and
resources being allocated are used wisely and
effectively. The improvements in health status then
lead to better productivity, more specifically among
workers. This then contributes to a better economy.
Allocation Of Health Care
The economic system has a significant role in
allocating health care resources. An economic system
refers to a set of economic institution that dominates
a given economy with the main objective of solving
the basic economic problems and proper allocation of
health care resources. The economic institution
include: traditional economy, command system, free
market system, and mixed system.
The traditional economy is one whose economic
decision are made with great influence from the past.
It finds answers to the basic economic problems by
duplicating the decisions made by previous
generations. Hence, the traditional economic system ia
a system whose past experiences which are handed
down from generation to generation are used as bases
for economic decisions.

Under the command system, the Factor of production,
distribution and allocation of health resources are
owned and managed by the state. Decision in
answering the basic economic problem and allocation
of health care services are planned, done, and dictated
by the government. There is a presence of central
planning to allocate health care according to some
predetermined criterion such as need. Thus health
care needs by the people are distributed based on
priorities set by the committee. Citizen under this
system have little or no political and economic
Another system that society uses in allocating the
scarce health resources is the free market. The free
market system would allocate health resources
according to consumers purchasing behavior. Hence,
the price of medical goods and services dictates what
health products will be produced, how and for whom
it will be produced. When the one that needs and offer
medical and non medical goods and services come
together to agree on a purchase or sale, the transaction
takes place in what economist call a market.

Another system, mixed system which combine parts of
the command system with the elements of free
market. The problems of allocation and distribution of
health resources are determined through a
combination of the market system and government
laws and policies.
Methodologies of Economics
Positive Economics is an analysis and describes of
economic behavior that uses economic theory and
empirical analysis to explain what is or what
happened. It seeks to predict and explain economic
phenomena and describes facts and data in the
economy. Positive economics does not value economic
Normative economics incorporates ethics and value
judgements about what the economy should be like or
what particular policy actions should be
recommended to achieve a goal. It is concerned with
what one believes ought to be. Hence, it deals with the
appropriateness of an economic outcome or policy. It
seeks to answer the question, what ought to be?
The following statements broaden your understanding
between the two dichotomies of economics to wit:
Positive : In 2004, the countrys total health
expenditure reached 165.2 billion, indicating an 11.2
percent increase from a 14 year high of 25.3 percent
growth registered in 2003 at a current price.
Normative : to regulate health care expenditure of the
country, the Philippine government should implement
the national health program similar to that of
developed countries like the United States, The United
Kingdom, and Canada.
Positive :Environment Protection Agency study shows
that exposure to secondhand smoke causes 3,000 lung
cancer deaths per year in nonsmokers.

Normative : To prevent people from having lung cancer
and stop them from smoking the government should
take rigid action by increasing tax on cigarettes.
The Basic Economic Problems
Because of scarcity society needs to carefully craft an
important decision regarding proper distribution and
allocation of resources as a way of providing answers to
the three basic economic problems, to wit:
1. What medical and non medical goods and services
should be produceed and in what quantities?
2. How should these medical and non medical goods
and services be produced?
3. For whom should these medical and non medical
goods and services be produced?
The first problem deals with allocative efficiency.
Allocative efficiency refers to a condition in which the
optimal amount of output is is produced given the
underlying structure of social benefits and costs.
The second economic problem deals with production
efficiency. Production efficiency refers to a condition
in which one activity either production or
consumption cannot be increased without reduction
on another activity because the maximum amount of
output is produced from a finite amount of inputs.
That is maximum output with a minimum input
without sacrificing the quality.
The third economic problem deals with the problem of
distribution. In this economic question, we tend to
answer the question, who should consume the
produced goods and services?, SHOULD BE FAIRLY
Best way to allocate Health
Efficiency making the optimal or best use of
resources . It was named after Vilfredo Pareto, an
Italian economist who used who used the concept in
his studies of economic efficiency and income
distribution. Hence the economic efficiency of
resources occurs when society is using its scarce
resources to produce the highest possible quantity of
goods and services that consumers wanted to buy.
Two parts of economic efficiency
Productive Efficiency When using the least amount
of health resources to produce certain health care at a
lowest possible cost. It implies that the health care
sectors are using the least costly land, labor, capital
and entrepreneur, the best available technology and
the best production processes
Allocative efficiency is a condition in which the
optimal amount of output is produced given the
underlying structure of social benefits and cost.
Allocative efficiency is manifested in health if there are
no health resources being wasted. The health
resources are being allocated to the production of right
goods and health services needed and valued most by
the society.
Comes from the English word heal which connotes
the totality or the wholeness of a person, the
physical, mental, social, emotional, spiritual and
sexual aspect.
Health should be explained in Holistic approach.
Holistic approach means dealing with the significant
contributions and influences of the six aspects of
health to the wholeness of an individual person.
Aspects of health
Physical Health. This refers to the physical body of
man. It means from head to foot. A regular exercise as
one way of maintaining ones health is a good example.
Mental Health. It refers to the mental capacity of the
man in having positive outlook in ones health like
having perception of being healthy and having positive
outlook in life.

Emotional Health. The capability of an individual to
express his own feelings and develop his personal
relationship with other people. How to get along with
others is the best example.
Social Health. This connotes the ability to show
concern and support to other people at all times.
Constant communication with friends, family
members, and other people in the community is an
Spiritual Health. This refers to an individuals capacity
to express his spiritual maturity and moral integrity.
We should respect the belief of others with regards to
their respective religious practices.
Sexual Health. This refers to the capacity of an
individual to accept his or her sexuality including his
or her sexual preference like being a female or male,
gay or lesbian.s
Sector is a component of integrated system such as an
economy or society in implementing health benefits
and services to its people.
Health sector are the ones that regulate and help the
economy with regard to health services. It5 also
includes the health of the economy as a whole. It has
plans and procedures for the proper regulation and
implementation of health services in all places.
Objective of Health
The main objective of health is to promote the health
welfare as well as the health services of everybody.
Every person is always vigilant on how to protect his
body from any disease or illness that he may acquire
from his environment.
Detrimental factors of health that affect ones health
The society has a significant role in promoting the
health welfare and services to the people.
Dimensions of health
Biological Factors
Environment God given gift to his creatures
Environment and Health
Environment refers to the aggregate of all external and
internal conditions affecting the existence , welfare of
Sum total of all biotic ( living ), abiotic ( nonliving )
factors that surround and potentially influence an
Three Fundamental Components
Of Environment
Physical Component this refers to the energy of one
form or another
Chemical Component. It refers to anything that
occupied space. In short it means matter. Example is a
substance whether natural or man made
Bilogical component. This refers to the living things
including man

Physical Health Hazards and their
adverse Health Effects
Effect of global warming
Long famine and war
Increasing extremes of temperature as a result of
climatic change could also result in increased
Chemical Hazards
General airborne pollution
Combustion of coal and other solid fuels can produce
smoke commonly known as polycyclic aromatic
hydrocarbons ( PAH ) and sulfur dioxide
Combustion of liquid petroleum products can
generate carbon monoxide , oxides of nitrogen
Industry Incinerations
Biological Hazards
It can be divided into two broad categories such as;
1. Biological components which produces health effects
through infection and
2. Non infective ( allergic ) ways.
Income and Health
A person who has a lower income cannot afford all
health services in maintaining health, may somehow
rely on the public health services rendered by the
government and non government organizations like
the barangay centers.
Occupation and health
Occupation employment
Provides income but also a sense of direction, a sense
of purpose, a daily schedule, physical activity, social
contact, and an identity within the society.
Negative and Positive
Private sectors participation to
public health
Big contribution to the government
Construct partnership
Government Expenditure
Poverty and Health are intertwined. Poor countries
tend to have worse health outcomes
A problem on health is often associated with
substantial health care cost and benefits
Philippine Government
Expenditure on Health
In 1999, only 3.4 percent of the countrys GNP
Below 5% minimum standard set by the WHO for
developing countries
108. 3 billion total annual health expenditure in 1999
with per capita health expenditure of estimated at
1,449 Php per person.
13.5 percent of Filipinos had insurance coverage,
according to the Insurance Commission.
Presence of a few modern medical establishments in
Metro Manila, health conditions in the Philippines
remain among the poorest in Asia.
85 million Filipino, about 40 60 % are struggling
against poverty.
Asian Development Bank estimated that there is only
one doctor for every 9,689 Filipinos and one hospital
bed for 909 Filipinos
Other Asian countries that are widely believed to be
less developed than the Philippines like Indonesia,
Vietnam, Myanmar are way ahead of the Philippines in
terms of health indicators.
The health conditions in the Philippines would have
been better if our medical practitioner like doctors,
nurses, and other medical staff will opt to stay in this
US, EUROPE, MIDDLE EAST, where salaries are ten
times higher

Low budget of allocation for health and social services
Confront perennial problems such as outbreak of
Dengue Fever, Cholera, Water borne diseases
Limited access to potable water and sanitation among
the poor aggravated the problem
Unplanned urbanization and industrialization are also
There is no city, modern sewerage system.
Health Economics
Mills and Gilson of the London School of Hygiene Health
economics can be defined broadly as the application of the
theories, concepts and techniques of economics in the
health care sector. Kenneth Arrow, a Nobel Laureate for
Economics once stipulated that a separate discipline of
economics should be devoted to the health sector. He
believed that the health sector behaves peculiarly different
from other economic sectors and that a careful application
of economic concepts and methodology should be
accorded to it.
The allocation of resources between various health
promoting activities;
Quantity of resources used in health care delivery to
improve health;
Organization and funding of health organization;
Efficiency of the allocation and use of resources for
health; and
Assessment of the effects of preventive, curative and
rehabilitative health services on individuals and
Discipline of Health Economics
Maximize output out of the given inputs
Resources on the production of better health
Health should be measured and valued
Improving quality of life, extending life span.
Proper allocation and efficient utilization of health
resources for the improvement of health where
resources are unlimited and wants are potentially
Ex. Medicinal supplies like syringes, gauze; medical
personnel doctors, radiologist, others, ; capital inputs
like blood banks, out patient clinics and the like )
within the context of scarce resources.
Importance of Health Economics
Scarcity health resources a choice must be made on
which particular resources to use for which particular
Most beneficial activities are selected among the
available health resources.
Where there are scarcity and choices, there are costs.
The cost of any choice is the options that a person or
society gives up.
Health Economics provides set of analytical technique
that assist decision-making, promote efficiency and
Concepts of Health Economics
Economic Logic is based on the notion of
Scarcity and choice
Cost efficient, and
Trade off
Health Economics is a logic framework which allows us
to reach conclusions about the best way resources can be

Scarcity and Choice
Undeniably truth that resources are scarce relative to
human wants, limited supply
Resources limited, human wants have no boundaries
Make wise decisions consistent with their limited
All societies face the problem of deciding what to
produce and how to divide the products among their
Life is full of choices
Opportunity Cost and Trade Off
The concept of opportunity cost is fundamental to
health economics
Scarcity implies the need for choice, so choice implies
the need for cost.
A decision to have more of one good thing requires a
decision to have less of something else.
Opportunity cost arises because choosing one health
care activity means giving up something else in return
.Opportunity cost is defined as the benefit that must
be foregone by not allocating the resources to the next
best activity.
Trade off is a situation in which more of one good
thing can be obtained only by giving of another thing.
The Production Possibility Frontier
The Production Possibility Frontier ( PPF ) represents
the point at which an economy is most efficiently
producing its good and services and properly allocate
its resources in the best way possible. The ( PPF )
illustrates the concept of scarcity; choice; and
opportunity cost. It is also the framework of answering
the three basic problems of economics.
1. What medical and non- medical goods and services
should be produced and in what quantities?
2. How should these medical and non-medical goods
and services be produced?
3. For whom should these medical and non-medical
goods and services be produced?
10 20 30 40 50 60 70 80 90 100
Supply and Demand and Health
You can even make a parrot into a learned economist
all it must learn are the two words supply and
- Anonymous
The importance of the central role of the concepts of
supply and demand in understanding basic economy
Concepts of supply and demand are not simple that
even a parrot can understand it.
It implies that they are crucial to the understanding of
Mastery of these concepts is required for us to
appreciate economics.
Ask yourself these simple questions?
Why do raincoats become relatively more expensive during
July, August, and September?
Why do Halo-halo stores sprout during summer?
Why did oil prices increase during the Persian Gulf War in
Why is there a pressure to increase the salaries of nurses in
the Philippines when a lot of Filipino nurses are being
recruited abroad?
Why are firecrackers very expensive days before NEW
YEARS EVE and are almost given away a few hours before
midnight of December 31?

Lechon Manok: a Filipino Example
of Supply and Demand Forces at
During the late eighties, a food product become very
popular lechon manok. It was a new way of preparing
chicken. Lechon manok was tender, juicy, tasty, and
sold at very reasonable price. It was in many ways like
the popular but relatively expensive Filipino food,
litson, - only cheaper. A lot of people started to buy it.
Soon after it was introduced it become a craze. It
became a popular dish in parties, pulutan in drinking
fellowship, and a staple food on the middle class
dinner table.
Putting up a lechon manok business was not difficult. It
required relatively low investments and a simple cooking
formula for the chicken. Soon a lot of lechon manok
stores sprouted. They were found near offices. Along busy
roads, near stores and supermarkets, near public parks, and
even in front of houses. In a way it become a household
business. Other businesses also developed ; lechon manok
oven makers, chicken suppliers, and charcoal suppliers
benefitted from lechon manok industry. S00n, it became
impossible to travel for five to ten minutes without seeing a
lechon manok store. Almost everybody was buying this
lechon manok
Years passed and the lechon manok began to lose
its popularity. Now it is just an ordinary food. Lechon
manok stores are either bringing down prices or
giving special bargains like buy 1 take 1 offer . It is
now relatively difficult to invest in and run a lechon
manok business. Over the years , the number of
lechon manok stores has dwindled. Less and less
people are buying the delicacy and one by one, the
stores closed.
Today only a few stores remain. Most are found only in
busy areas. Only very few lechon manok stores have
recognizable names; Andoks lechon manok; Baliwag
lechon manok,Jonels buy 1 take 1, and a few others.
And today , the lechon manok store in every street
corner is just a memory.
What happened ? Could this case be the same as what
happened to Shawarma sandwiches?
How can you explain this cycle through supply and
demand concepts? Most, if not all of the cycles of
businesses, wages and earnings, prices of goods can be
explained this way!

The Theory of Supply and Demand
Have you ever wondered how businesses
price their products? What do you think will
happen if Shell decides to sell their
unleaded gasoline at 50% lower per litre or
at 25% higher per liter? Are businesses really
the ones who control the price of their
products? Or do they price their buyers will
buy them?
Every purchase made on a certain
commodity may be looked upon as a peso
vote . Meaning a choice ( vote ) has been
made on the specific product and money (
peso ) was exchanged for the specific goo or
service. Then create a market mechanism
wherein buyers of commodities, and the
suppliers ( or producers ) of such
dynamically, and constantly interact.
The relationship between buyers who
demand, and producers who create a supply
of goods, is called law of supply and demand
dynamics. The La of Supply and Demand
shows how peso votes decide the prices and
quantities of goods.
Markets: Interaction Between
Supply and Demand
Demand emanates from consumers. Consumers
demand to be able to satisfy their needs and, more
importantly, wants. At this point, it becomes
important to define the differences between needs,
wants and demand.
Needs are things that individuals must have
to be able to survive ( basic/ physiologic
needs ) or to be in a state of physical, social,
and mental equilibrium.
From an economic perspective or business
perspective , are specific manifestation of
needs. It can in fact be derived from a need.
Therefore they are specific preference or a
choice to be able to satisfy a need.
Is the decision to satisfy a want or need plus
the capability of accessing and paying for
such. To demand, a person must be willing
to buy and be capable of paying for it.

Emanates from producers and sellers. They form the
other side of the demand- supply interaction. Always
remember that producers and sellers ( businesses )
produce and sell to make profits. They prefer a
scenario where they can sell their products at higher
prices simply because it will give them higher profits.
Figure 4. Maslows Hierarchy of
Esteem Needs
Belonging Needs
Safety Needs
Psychological Needs
Low Prices
High Prices
Remember that consumers prefer lower prices, while
producers and sellers prefer higher prices, do you feel
the tug of war between them?
Markets are produced when demand forces from
consumers and producers and sellers interact with
one another. It is a dynamic and constantly changing
Markets are formed from the interaction between
demand coming from consumers to be able to satisfy
their needs and wants, and supply from producers and
sellers to make profits.
The demand schedule represents the relationship
between the price of a certain product and the
quantity that consumers want to buy of such product.
It is graphically represented by the demand curve. The
supply schedule, on the other hand, shows the
relationship between the price of a certain good and
the quantity that producers will be willing to produce
and sell. It is also graphically represented by the supply
Ceteris paribus is a term that means all other things
are being held equal. In showing the relationship of
the price and quantity of goods demanded (demand
schedule), all the other factors that may affect the
relationship do not change, or are held constant. Thus
it isolates the relationship of price and quantity
demanded. The same is true for the supply schedule.
The demand for a certain product emanates from;
* the willingness to buy a certain product, and
* the capacity or ability to buy such product
The demand schedule shows the relationship between the price of a
good and the quantity of the goods that consumers are willing to buy. It
is a common observation that the quantity of a good that people are
willing to buy at any one time depends on its price.

It is likewise observed that generally for most products, the higher the
price or the more expensive a product is, the less quantity people are
willing to buy of the product. Conversely, the lower the price of a
product, the more the consumers demand of such product. Thus, there
is a definite relationship between the market price of a good and the
quantity that consumers are willing to buy. This relationship is known
as the demand schedule which is represented by the demand curve,
when plotted.

The Demand Curve
* The demand curve is a graphical representation of the
demand schedule. It is a download sloping curve. It
shows the inverse relationship between the price and
quantity of goods that consumers are willing to buy.
Figure 6
Q1 Q2
Figure 6
The demanded curve, a downward sloping curve,
shows the relationship between the price of a good and
the quantity demanded. At a lower price (P1), quantity
demanded is higher (Q1). At a higher price (P2),
quantity demanded is lower (Q2).
The Law of Downward and Sloping
When the price of a commodity is increased (all other
things being equal),consumers tend to buy less of the
said commodity. On the other hand, when the price is
decreased (or lowered), all other things being equal,
quantity demanded for that specific product increases.
This is represented by a graph running downwards to
the right showing the inverse relationship between the
price of a good and the quantity demanded of such.
An example for this is the personal computer. When it
was introduced in the market during the late 70s to
early 80s, it was expensive. Therefore, only the rich
people were able to afford it. Most, people still used
calculators and typewriters. With the advent of new
microchip technology, computer companies are now
able to produce faster and cheaper computers.Thus
more people are also able to afford it. Therefore, more
computers are now being bought. Today, the vision of
a computer for every home and office seems possible.
Factors that Affect the Demand
Own Price of the Product
The price of a product is a certain monetary value at
which the product is being sold. A higher own price of
a product decreases the demand for such. A lower
price increases the demand. Thus, there is an inverse
relationship between the price of the product and the
quantity being demanded.
Average Income
As the average income of people and households
increases, the demand for specific goods also
increases. This is because when people have higher
incomes, they have more money to spend for buyings
things. For example we can expect that more people
will buy more cars once the Philippine economy
improves and the income of people increases. Or, as
the income of a certain person increases, he will tend
to buy a more expensive car. Higher incomes make
commodities relatively cheaper simply because people
have more money to buy goods and services.
Figure 7

Income 1

Income 2

Differential 1
Differential 2
Figure 7.
Relationship of Income and Price. With the price of a
theoretical product constant, more of such product
with Income 2 which has a bigger Differential 2,
compared to that of Income 1, with a smaller
Differential 1.
Population Size and Demographics
As the population increases, more people will use
commodities. As more members of the population
enter adulthood, the demand for specific age group
also increases, e.g., cars, cigarettes, watches, among
Shifts in population demographics also affect the
demand for certain products. This may be a rationale
for the launching of the Dockers Line of Levis who
have already aged after 20-30 years, must find wearing
jeans odd. Thus, the Dockers Line-the more
conservative denim shirts and slacks, was introduced
to cater to this specific market.
Remember that an increase in population generally
increase the demand for most products, and changes
or shifts in population demographics will affect the
demand for specific products.
Prices of related goods
Related goods can either be substitute products or
complementary products.
Substitute products:
* are commodities that decrease the use of another
product when more of these other products is used. An
example of this is the Metro Rail Transport system.
When it was introduced, the fare was about twice that
of the fare in airconditioned buses. More people took
the aircon buses, and the MRT system decided to bring
down its fare, closely approximating the fare of aircon
bus. Now , MRT stations are always full of passengers.
Remember that substitute products change and move
in the opposite direction.
Figure 8

Aircon Bus

1. MRT fare decreases
2. Increase Demand for
2. Demand for Aircon
Buses decreases
Figure 8 Relationship of Substitute
Step 1 :Price of MRT fares decrease,
Step 2: Decrease of MRT fare results in increased
demand for MRT
Step 3 : Increase in demand for MRT results in
decrease in demand for aircon buses ( substitute
Complementary Products
Behave in the same direction. These are commodities
that decrease the use of another product when less of
the other complement is used and vice verssa.
Examples of complimentary products are gasoline and
cars. Lower gasoline prices tend to increase the
demand not only for gasoline but also for cars. Greater
use of one leads to more use of the other and vice
Remember that they change in the same direction.
More use of cars will increase the use of gasoline. More
expensive gasoline tends to lead to less use of both
gasoline and cars.



2. Decrease Demand for
2. Decrease Demand
for Cars
1. Prices
Figure 9 Relationship of
Complementary Products
Step 1. price of gasoline increases
Step 2. Gasoline price increase induces a
corresponding decrease in demand for such
Step 3. Decrease in demand for gasoline also affects a
corresponding decrease in demand for cars (
complementary product ).
Taste of Buyers
Influences buying decisions but is more difficult to
assess. Taste more likely than not, differs from person
to person. Taste makes people go to either to
McDonalds or Jollibee, or prefer a Mercedez Benz to a
BMW, drink french wine than an Australian wine.
Different people will have different tastes which
influence buying behavior. An extreme example of
taste is a multimillionaire who spent US $20 million
for a ride in Russian spacecraft, travel into space, and
stay in the Russian space station for a few days. He is
historys first space tourist.
Although difficult to measure, taste is a very important
factor in buying decisions of consumers. It is what
marketing companies try to determine before
launching a certain product in the market by doing
market research . Marketing companies spend a lot of
money on this type of research. Why? Because failure
in determining buyers tastes may lead to disastrous
mistakes in the choice of products to offer to
consumers. Likewise failure in selling or marketing
such products may also lead to enormous amount of
money being wasted.
Other particular factors
Climate and weather affect the demand for umbrellas
and raincoats. Summer increases the demands for
halo-halo and ice cream. Fiestas affect the demand for
lechon, pancit, and beer.
Figure 10.The Demand Shifts
(-) (+)
Decrease in demand
Movement along the
Increase in
Taxation and Tax Admnistration
Governments have the prime responsibility of not only
maintaining peace and order in their respective
countries but also putting up infrastructure like roads
and bridges that would ensure economic development.
Governments also have the responsibility of providing
basic services to their constituents like basic education
and basic health services. These all entail money
which need to be spent for all of these. This gives us an
idea of how taxation becomes important. The taxes
that people pay are a very basic source of revenue (
monetary earned for the government.
Taxation is the act of imposing and collecting a tax. It
is the process or means by which a sovereign entity like
a government, through its law-making body, raises
revenues to defray the necessary expenses of the
government for the public.
Characteristics of Taxes
Taxes are an enforced contribution. Government
should be able to lay down the foundation for their
economies to develop and subsequently make the
citizen earn. Therefore it is only fitting that earners
give a share of their earnings to the government in the
form of taxes. Ultimately and ideally these, these taxes
go back to the public in terms of basic services ,
protection, peace and order from the police and
military, and infrastructure such as public works.
Taxes are generally payable in money. The more you
earn, the more you pay, the more you pay, proportion
to the level of earnings, the value of property, and the
rate of consumption.
Taxes are imposed on persons and property ( the value
of the property.
Taxes are levied by the national or local government
It takes a congressional act to put up taxes.
Taxes are imposed solely for public purposes.
Classification of taxes as to the
subject matter
Personal, poll, or capitation ( residence tax ),fixed
amount )
Property ( real property tax on land, house and lot,
personal property like jewelry and cars
Excise. A cut imposed on consumption ( alcohol tax ).
Engagement in the act or practice of a profession (
physicians PTR )
As to purpose
General, fiscal, or revenue. Generate income or
revenue for the government,ex. Income tax
Special or regulatory like cigarettes, energy
consumption to control consumption
As to scope or authority imposing
the tax
National ( income taxes )
Municipal or local ( vary from locality to the other )
As to determination of account
Specific ( per cartoon of cigarettes, Per liter of gasoline
Ad Valorem ( added into the assessed value of a
taxable entity being taxed , ex.3% real estate property )

As To Graduation or rate
Proportional ( EVAT ) fairly fixed in proportion to
what is being consumed
Progressive or graduated ( earnings 100 k- 10% . 500k
30% )
Regressive ( less tax on motor vehicle as the no. Of
years of use of such increases )
Definition of Different Kind Of
Income tax ( National and progressive )
taxDonors tax Donors and donee )
Estate tax ( inheritance tax ), lawful heirs or
Value added tax ( sale or exchange of goods and
services or lease of goods and real properties, a
percentage tax
Other percentage taxes ( based on selling price
,amusement tax, life insurance, sale of share of tax
Excise tax ( imported goods )
Documentary Stamp Taxes ( all documents as evidence
of transfer, acceptance of right,ownership )
Custom duties and tariffs ( imported and exported
goods )
Travel tax
Energy tax ( petroleum products, aircraft and water
craft tax and electric power to prevent wasteful use of
electricity and fuel

Private motor vehicle tax ( yearly upon renewal of
Tax levying the act of putting taxes on person,
activities and products and determining the amount
Tax assessment the official action of an officer duly
authorized by law,duly prescribed by law.
Tax collection process of getting the taxes
Tax assessment and tax collection is done by the
bureau of Internal Revenue using the internal revenue
code and by the Bureau of Customs through custom