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BASIC ECONOMICS,

TAXATION AND AGRARIAN


REFORM
SS 105
CHAPTER I

INTRODUCTION
ECONOMICS – is a social science essential for dealing with two extremes – scarce
resources and unlimited human demands.

FACTORS OF PRODUCTION
1. LAND – factor of production which covers all natural resources that exist without
man’s intervention
2. LABOR – simply refers to human inputs, such as manpower skills that are used in
transforming resources into different products that meet our needs.
3. CAPITAL – is the man-made factor of production used to create another product.
4. ENTREPRENEURSHIP – integrates land, labor, and capital to create new
products.

NEEDS – are things we cannot live without

WANTS – are the non-essential things we can live without


FACTORS AFFECTING UNLIMITED HUMAN WANTS
1. Increase In Population
2. Changing Tastes and Preferences
3. Increases in Income

SCOPE OF ECONOMICS
1. MICROECONOMICS – deals with the economics of the firms. It focuses on the
behavior of a particular unit of the economy such as the consumers, producers,
and specific markets.
2. MACROECONOMICS – deals with the aggregates. Its scope is wider as it studies
the entirety of an economy, whether national or international, and attempts to
determine economic changes.
THE METHODS OF ECONOMICS

1. POSITIVE ECONOMIC ANALYSIS – simply describes what exists and how things
work
2. NORMATIVE ECONOMIC ANALYSIS – which looks at the outcome of economic
behavior through judgments and prescriptions for courses of action

THEORIES – are prepositions about certain related variables that scientifically explain
a certain phenomena

MODELS – are used to illustrate, demonstrate, and represent a theory or parts of it. It
simplifies an explanation or description or a certain economic phenomenon, often
employing graphs, diagrams, or mathematical formulae.
FALLACIES IN MAKING MODELS AND THEORIES

1. THE POST HOC FALLACY – The post hoc ergo propter hoc fallacy relates two
events as if the first event causes the second one to happen. It is commonly
constructed in this form: A occurred immediately before B. Therefore, A caused B.

2. FAILURE TO HOLD OTHER THINGS CONSTANT UNDER THE CETERIS


PARIBUS ASSUMPTION – when you are generalizing events as if it they were all
the same and all the results were predictable, you are actually committing this
second fallacy. (ceteris paribus – meaning “all things being equal or constant” is
one of the frequent assumptions in economics)

3. THE FALLACY OF COMPOSITION – states that what is true for a component is


also true for the entire thing.
THE ECONOMIC SYSTEMS AND THE BASIC ECONOMIC QUESTIONS

1. What to produce?
2. How to produce?
3. For whom to produce?

ECONOMIC SYSTEM - characterized by the type of institutions responsible for the


management and allocation of resources used in the production of goods and services

3 ECONOMIC SYSTEMS
1. Market Economic System – the questions are answered by the aggregate
interaction of a country’s individual citizens and businesses.
2. Command Economic System – the government answers the final question by
producing for the public
3. Mixed Economic System – all three questions are answered by both the
government and private entities in consideration of their mutual benefit.
MARKET SYSTEM – also known as capitalism. The market system fosters
competition that generally produces the most efficient allocation of resources. In pure
capitalism, also known as laissez-faire capitalism, the government's role is
restricted to providing and enforcing the rules of law by which the economy operates,
but it does not interfere with the market. (Laissez-faire means "let it be.")

The essential characteristics of capitalism are that:


• the factors of production are privately owned;
• economic transactions take place in markets, where buyers and sellers interact;
• businesses and employees are free to pursue their own self-interest;

Because consumers are free to buy what they want, the competition for their funds will
require businesses to satisfy their needs, or else they will cease to exist due to lack of
sales. This consumer sovereignty is what effects the efficient allocation of resources.

COMMUNISM – also known as a command system, is an economic system where


the government owns most of the factors of production and decides the allocation of
resources and what products and services will be provided. The end goal of
communism was to eliminate class distinctions among people, where everyone shared
equally in the proceeds of society, when government would no longer be needed.
• The most important originators of communist doctrine were Karl
Marx and Frederick Engels. Like the socialists before them, they wanted to end
the exploitation of the masses by the few. The capitalist system at that time
required workers to work under harsh and dangerous conditions for little pay.

• Marx and Engels believed that there was a class struggle between the masses,
which Marx referred to as the proletariat, who could only offer their labor, and the
owners of the means of production, which included land, raw materials, tools and
machines, and especially money. Karl Marx called these members of the ruling
class the bourgeoisie.

• Although Marx and Engels believed that property should belong to society, they did not
really give much thought to how economic decisions would be made. Communist
countries, particularly Russia and China, decided on a centrally planned
economy (aka command economy). The centrally planned economy had the following
major attributes:
1. The government owns all means of production, which is managed by employees of
the state.
2. These employees operated under party-appointed economic planners, who set
output targets in prices and frequently interfered with the operations to satisfy
personal or party desires.
3. And because communist economies are not efficient and because of the
Communist Party's desire to retain power, most economic resources were devoted
to industrialization and to the military, depriving consumers of food and other
necessary products, causing intense competition for these limited necessities,
where many people had to wait in long lines for common consumer goods, such as
toilet paper.

OPPORTUNITY COST AND TRADE-OFF

Opportunity Cost – refers to the cost of giving up an alternative by selecting the next
best choice

Trade-off – the good things we have to give up in order to get another

PRODUCTION POSSIBILITY FRONTIER AND OPPORTUNITY COST- Production


Possibility Frontier (PPF) shows the maximum possible output combinations of two
goods or services an economy can achieve when all resources are fully and efficiently
employed. Ex: Production of orange soda and cola
OPPORTUNITY COST AND COMPARATIVE ADVANTAGE – In international trade,
the comparative advantage is a principle which states that if a nation decides to
specialize in production of a certain good in which it has the largest advantage over
other nations, the amount of output will increase.
LAW OF SCARCITY – In essence, Scarcity is just as it’s name implies: It is a limited
supply of resources, which can not possibly meet the wants for those limited
resources. This law is based around the assumption that, as human beings, our
wants are infinite: That it is the human condition to never be wholly satisfied with our
current condition; that there will always be -something- we want. Of course, not all of
those wants can be met, because there are simply not enough “things” for everyone to
have everything that they want.
CHAPTER II

DEMAND AND SUPPLY


MARKET – is the place where buyers and sellers meet and trade

DEMAND – the willingness of the buyer or customer to pay for a certain goods

SUPPLY – Sellers or producers, who are willing to produce goods that the consumers
look for, settle in the market in the hope of gaining profits. This willingness to produce
is called supply.

THE DEMAND CURVE AND THE DEMAND SCHEDULE

Quantity Demanded is the amount of goods and services consumers are willing to
purchase given a certain price. There is an inverse relationship between price and
quantity due to the fact that price decreases are attractive to consumers
POINT PRICE IN QUANTITY 4.5

PHP 4

3.5
A 4 0 3

B 3 10 2.5

PRICE
2
C 2 20
1.5
D 1 30 1

E 0 40 0.5

0
0 10 20 30 40
Table 2.1
QUANTITY
The Demand Schedule for Bread
Figure 2.1 Demand Curve
Law of Demand – as price increases quantity demanded or the willingness to buy the
products decreases, holding all other factors constant

Getting the Slope of the Demand Curve


In order to compute for the slope of the demand curve, economist use the
formula below:
𝑃2 − 𝑃1
𝑠𝑙𝑜𝑝𝑒 =
𝑄2 − 𝑄1

Where: P1 and Q1 stand for initial price and quantity of the product respectively; and
P2 and Q2 are the final price of the quantity of the product, respectively

Given the figures in Table 2.1 as an example, let us try to get the slope of
demand for bread. Using points A and B, we get:

3−4 1
𝑠𝑙𝑜𝑝𝑒 = =−
10 − 0 10

The negative value of the slope explains the inverse relationship of price and
quantity demanded.
SHIFTS IN DEMAND AND THEIR DETERMINANTS
1. Changes in the average income
2. Changes in the size of population
3. Changes in tastes and preferences
4. Changes in consumers’ population

D1 D2
Price

P0

Q0 Q1
Quantity
Figure 2.2 Shift in Demand
THE SUPPLY CURVE AND THE SUPPLY SCHEDULE

Supply – is the willingness of sellers to produce and sell a good at various possible
prices

Law of Supply – as price increases quantity supplied or the willingness to supply the
products increases, holding all other factors constant
POINT PRICE IN QUANTITY 4.5

PHP 4

3.5
A 0 0 3

B 1 10 2.5

PRICE
2
C 2 20
1.5
D 3 30 1

E 4 40 0.5

0
0 10 20 30 40
Table 2.2
QUANTITY
The Supply Schedule for Bread
Figure 2.3 Supply Curve
Getting the Slope of the Supply Curve
In order to compute for the slope of the supply curve, economist use the
formula below:
𝑃2 − 𝑃1
𝑠𝑙𝑜𝑝𝑒 =
𝑄2 − 𝑄1

Where: P1 and Q1 stand for initial price and quantity of the product respectively; and
P2 and Q2 are the final price of the quantity of the product, respectively

Given the figures in Table 2.1 as an example, let us try to get the slope of
demand for bread. Using points A and B, we get:

1−0 1
𝑠𝑙𝑜𝑝𝑒 = =
10 − 0 10
S1 S2

Price
P0

Q0 Q1
Quantity
Figure 2.4 Shift in Supply

OTHER FACTORS THAT INFLUENCE SUPPLY

1. Changes in the number of sellers


2. Changes in cost of production
3. Changes in technology
4. Changes in government policies
MARKET EQUILIBRIUM
• A condition of equilibrium is reached when the quantity of supply and
demand are balance or equal at a given price level
• At a particular price, the buyers are able to purchase the quantity they are
willing to buy and the sellers are also able to trade the quantity they are
willing to sell.
• Price is stable under the existing market conditions

Getting the Equilibrium via Schedule Approach

Table 2.3 Demand and Supply Schedule for Bread


Point Price in PhP Quantity Demanded Quantity Supplied
A 4 0 40
B 3 10 30
C 2 20 20
D 1 30 10
E 0 40 0
The Graphical Approach
Figure 2.5 Market Equilibrium
45
40 40
40

35
30 30
30

25
20
20

15
10 10
10

5
0 0
0
A B C D E
Series 2 Series 3
To solve for the equilibrium price using mathematical equations, consider the
given demand function and supply function:

𝑃 = 𝑎 − 𝑚𝑑 𝑄𝑑
𝑃 = 𝑎 + 𝑚𝑠 𝑄𝑠
Where: 𝑸𝒅 is the quantity demanded; 𝑸𝒔 is the quantity supplied; P is the price.
-𝒎𝒅 is the slope of the demand curve; a is the intercept value if 𝑸𝒅 is zero.
𝒎𝒔 is the slope of the supply curve; a is the intercept value if 𝑸𝒔 is zero.

From the date in Table 2.3 or Figure 2.5, we can solve for the slope of the
demand and supply curves.

∆𝑃 𝑃2 − 𝑃1 4 −0 1
𝑚𝑑 = = = = − = −0.1
∆𝑄𝑑 𝑄𝑑2 − 𝑄𝑑1 0 − 40 10

∆𝑃 𝑃2 − 𝑃1 4 −0 1
𝑚𝑠 = = = = = 0.1
∆𝑄𝑠 𝑄𝑠2 − 𝑄𝑠1 40 − 0 10

Again referring to Table 2.3 or Figure 2.5, we can substitute the values of the
slopes and the intercepts.
𝑃 = 𝑎 − 𝑚𝑑 𝑄𝑑 ֜ 𝑃 = 4 − 0.1𝑄𝑑
𝑃 = 𝑎 + 𝑚𝑠 𝑄𝑠 ֜ 𝑃 = 0 + 0.1𝑄𝑠
Since we already know that the equilibrium is the condition in the market
where quantity demanded equals quantity supplied (𝑄𝑑 = 𝑄𝑠 ), we can simply express
the equation as:
𝑃 = 4 − 0.1𝑄𝑑 (demand function)
𝑃 = 0.1𝑄 (supply function)

Using the equations above, we can now solve for 𝑄.


4 − 0.1 𝑄 = 0.1 𝑄
4 = 0.2𝑄
𝑄 = 20
Based on the table and figure, 20 is the equilibrium quantity.

To solve for P or price, we simply substitute values in either the demand


function or the supply function.
𝑃 = 4 − 0.1 𝑄 𝑃 = 0.1𝑄
= 4 − 0.1 20 = 0.1 (20)
=4−2 = 20
=2
SURPLUS AND SHORTAGE

Surplus – is experienced when the price of a good is above the equilibrium


point. This leads to quantity supplied in the market exceeding its quantity
demanded.

Shortage – occurs when the quantity demanded exceeds the quantity


supplied. This happens when the price is below its equilibrium level.

To understand further, let us use the example where price is equal to


6 or P = 6, as seen in Figure 2.6. The quantity supplied at P = 6 is 12 and the
quantity demanded is 8.
Thus, 𝑄𝑠 = 12 and 𝑄𝑑 = 8 at P = 6. A condition of surplus exists
because 𝑄𝑠 is greater than 𝑄𝑑 . If we subtract 𝑄𝑑 from 𝑄𝑠 , the amount of
surplus is equal to 4 or (𝑄𝑠 − 𝑄𝑑 = 12).
At 𝑃 = 2, 𝑄𝑑 is equal to 16 and 𝑄𝑠 is equal to 4. Since 𝑄𝑑 is greater
than 𝑄𝑠 , a condition of shortage is experienced. The amount of shortage is
equal to 12 (𝑄𝑑 − 𝑄𝑠 = 12).
Hence, if 𝑄𝑠 > 𝑄𝑑 , there is surplus, and if > , there is shortage
in the market.
Figure 2.6 Shortage and Surplus

5 Equilibrium Point

2
Shortage
1

0 2 4 6 8 10 12 14 16 18
ELASTICITY
Elasticity refers the degree to which individuals, consumers or
producers change their demand or the amount supplied in response to price
or income changes.

Price elasticity is the degree of responsiveness of quantity demanded


to a change in price.

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑄𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑃
Table 3.1
Price Elasticity if Demand Interpretation
=1 Unitary elastic
>1 Elastic
<1 Inelastic
Elastic Demand – it reacts proportionately higher to changes in other
economic factors

Inelastic Demand – demand reacts proportionately lower to changes in


another variable

Unitary Elastic – change in demand is proportionately the same as that for


another variable

Importance of Total Revenue in Pricing Decisions

We refer total revenue as the total sale of products by the producer or


seller. This is expressed as:

𝑇𝑅 = 𝑃 𝑥 𝑄

where: TR is the total revenue; P is the price; and Q is the Quantity


Example 1:
Cecilia sells bangus for Php 100 and her Qd1 = 500. When she
decides to sell it for Php 125, her Qd2 becomes 450. Should Cecilia sell her
bangus at Php 100 or at Php 125? Is Qd elastic of inelastic?

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑 450 − 500


%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑 = = = −0.11
𝑎𝑣𝑒𝑟𝑔𝑎𝑒 𝑄𝑑 500 + 450
2
Then, apply the same formula in getting the percentage
change in price.
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 125 − 100 25
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 = = = = 0.22
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑃 100 + 125 112.50
2
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
−0.11
=
0.22
= −0.5 𝑜𝑟 0.5
Example 1:
Now, compare the old TR with the new TR and select which price is
better:

TR1 = P1 x Q1 TR2 = P2 x Q2
= 100 x 500 = 125 x 450
= 50,000 = 56,250

TR2 is higher than TR1, hence, the new TR is better. Cecilia should
sell her bangus at Php 125.

From the above solution, we can conclude that when Cecilia


increases her price while demand is inelastic, she gets a bigger total
revenue. She will then maximize her profit by raising her price to Php
125.
Sample Problems:

1. If Theresa sells tilapia for Php 80 per kilo, the demand for it is 200. When
she raises it by Php 20, the quantity demanded diminishes to 100. At
what price will Theresa maximize her profit? Is the demand elastic or
inelastic?
2. Mina sells tuyo for Php 20 per pack and gets 200 packs quantity
demanded. However, if she lowers her price to Php 15, quantity demand
doubles. Is the demand for tuyo elastic or inelastic? At what price will
Mina get a bigger revenue?
3. Claire sells daing for Php 50. At this price, she is able to sell 200 units of
daing. When she decided to cut its price by half, she noticed that she is
able to sell 220 units. By selling 220 units, did Claire raise her profit?
Compute for the elasticity of demand for the daing.