2ND QUARTER ECONOMICS

MARKET
A market is an interaction between buyers and sellers of trading or exchange. It is where the consumer
buys and the seller sells.

Types of Markets in Economics

1. Product Market
○ it is the most common type of market because it is the place where finished goods and services
are bought and sold.
○ Example: Farmer’s market selling vegetables direct to the public; Fish Market; Supermarkets
selling a range of goods in a convenient place; and eCommerce Market
2. Factor Market
○ a place where factors of production (land, labour, capital) are bought and sold.
○ Example: Labour exchange where firms post available jobs and where job seekers can apply for
jobs and commercial real estate agents, making available office space torent
3. Financial Market
○ Financial markets facilitate the interaction between those who need capital with those who have
capital to invest.
○ Example: Banks, Non banks financial institutions, Bond Market, and Stock Market
Consumers Producers
→ maximize utility → maximize profits
→ lower prices → higher prices

DEMAND
An economic principle referring to a consumer's desire and ability to purchase goods and services and
willingness to pay a price for a specific good or service.

Demand Schedule
-a table that shows the quantity demanded at each price. A demand curve is a graph that shows the
quantity demanded at each price.

The Demand Curve

-The graphical representation of the demand schedule.
 -The demand curve is downward sloping.
-The quantity demanded varies inversely with price. In other words, the higher the price, the lower the
quantity demanded.

Demand Function
A demand function shows how the quantity demanded of a good depends on its determinants, the most
important of which is the price of the good itself, thus, the equation: 𝑄𝑑 = 𝑓(𝑃)

Law of Demand
The law of demand states that the quantity demanded varies inversely with price, ceteris paribus

Non-price determinants of demand

I Income
● If consumer income decreases, the capacity to buy decreases and the demand will also
decrease even when price does remain constant.
● If consumer income increases, the capacity to buy increases and the demand will also
increase even when price does remain constant.
F Future price expectations
● If a buyer expects the price of a good to go down in the future, they hold off buying it
today, so the demand for that good today decreases. On the other hand, if a buyer
expects the price to go up in the future, the demand for the good today increases.
T Changes in tastes and preferences
● A positive change in tastes or preferences increases demand (shifts it right/up). A
negative change in tastes and preferences will decrease demand (shift it left/down).
S Changes in the price of substitute goods
● The demand for a good increases, if the price of one of its substitutes rises. The demand
for a good decreases, if the price of one of its substitutes falls.
C Changes in the price of complementary goods
● The demand for a good decreases, if the price of one of its complements rises. The
demand for a normal good increases if income increases.
C Changes in the number of consumers
● The greater the number of buyers in a market, the larger is the demand for any good.
● The demand curve will shift towards the right thereby increasing the quantity demanded
and price of the product.

SUPPLY
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market
at a given price in a given time.
Note: Producers buy goods and services and transform them into a sellable product, which they sell to their
customers for the purpose of making a profit.

The Basic Law of Supply

The law of supply states that an increase in price results in an increase in quantity supplied, ceteris paribus.\

The Supply Curve

● It shows the relationship between market price and how much a firm is willing and able to sell
● The supply curve is upward sloping from left to right.
● The price and quantity supplied is directly related to each other

Other Determinants of Supply

● Subsidies and Taxes
○ Government regulation/increase in taxes results to a decreases supply. Deregulation/increase of
subsidies from the government will increase the supply.
● Technology
○ Additional Technology will increase production and supply.
● Other Related Goods
○ An increase in the price of other related goods will cause a decrease in supply.
○ A decrease in the price of other related goods will cause an increase in supply.
● Resource Cost
○ Increase in cost of resources will decrease the supply. Decrease in cost of resources will
increase the supply.
● Expectation
○ If producers expect prices to increase, supply will increase. If producers expect prices to
decrease, supply will also decrease
● Size of the Market
○ If number of sellers in the market increases, the supply will increase. If number of sellers in the
market decreases, the supply will also decrease.

SHIFTS IN THE CURVE SUPPLY

Market Equilibrium
● An equilibrium exists in a market when there is no pressure for the market price to change.

Shortage in Supply Surplus

Demand Equation Qd = quantity demanded

P = a+bQd Supply Equation

P = Price P = a+bQs
a = intercept (price at which demand is zero)

b=
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 P = Price
ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
a = price at which demand is zero
b=
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 Qs = quantity supplied
ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Lesson 2.2 Supply and Demand in Relation to the Prices of Basic Commodities

MARKET EQUILIBRIUM
Equilibrium is a state of balance when demand is equal to supply. The quality means that the quantity
that sellers are willing to sell is also the quantity that buyers are willing to buy for a price. As a market
experience, equilibrium is an implicit agreement between how much buyers and sellers are willing to transact.

EQUILIBRIUM PRICE
● the price of a good or service when the supply of it is equal to the demand for it in the market.
● If a market is at equilibrium, the price will not change unless an external factor changes the supply or
demand, which results in a disruption of the equilibrium.
● If a market is not at equilibrium, market forces tend to move it to equilibrium.

DETERMINATION OF MARKET EQUILIBRIUM

Market equilibrium is attained when the quantity demanded is equal to the quantity supplied

Application of supply and demand in relation to HOUSING SHORTAGE

With close to 100 million Filipinos, limited land area, and shortage of funds, the country continues to
suffer from shortage in mass housing that is expected to reach 6.5 million units by 2030. More people will
mean a higher demand for housing. The supply of houses is less than the existing demand for them since
more and more Filipinos are added to the population annually. There is seemingly a lack of government priority
to build homes for the homeless.
Hardly does housing grow faster than population to decrease the housing backlog (Figure 2.7) it is the
poor who suffer an increasing backlog of descent housing due to the increasing population. There is obviously
an excess of demand compared to the supply of housing even among ordinary Filipinos. Buying and owning
one's home is always the dream of every Filipino family but it is expensive to build a house in the country.
An option who cannot afford to buy houses or avail loans is to rent them from the owners by paying on
a monthly basis. But there are laws on rent such as the R.A. 7279 "Urban Development and Housing Act of
1992" which is sponsored by former senator Joey Lina that tends to protect and favor the renters. This has led
to reluctance on the part of owners to rent out their property, thus, further limiting housing opportunities for the
Filipino.

RENT CONTROL
Rent control is a type of intervention that affects prices. Rent control is equivalent to the setting of a
price ceiling for rent. It indicates that homeowners cannot set the rent higher than the price ceilling set by the
government.
Lesson 2.3 Elasticities of Supply and Demand
ELASTICITY
- Is a measure of how much buyers and sellers respond to changes in market conditions.
The coefficient of elasticity is the number obtained when the percentage change in demand is divided by the
percentage change in the determinant.

DEGREES OF ELASTICITY
● Elastic
● Inelastic
● Unitary elastic
Elastic
- A change in a determinant will lead to a proportionately greater change in demand or supply.
- The absolute value of the coefficient of elasticity is greater than 1.
Inelastic
- A change in a determinant will lead to a proportionately lesser change in demand or supply.
- The absolute value of the coefficient of elasticity is less than 1.
Unitary Elastic
- A change in a determinant will lead to a proportionately equal change in demand or supply.
- The absolute value of the coefficient of elasticity is equal to 1.

ELASTICITY OF DEMAND
- There are 3 types that deals with the responses to a change in price of the good itself, income, and the
price of a related good which may be a substitute or a complement
3 types:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross price elasticity of demand
Price Elasticity of Demand
- Price elasticity of demand measures the responsiveness of demand to a change in the price of a good.
- It measures through percentage change
may be measured in 2 ways, namely:
● Arc elasticity
● Point elasticity

Arc elasticity
 - Arc elasticity measures the responsiveness of demand to price changes over a range of values. The
magnitude of change in price and demand is divided by its midpoint to arrive at a measure of change
over a curve rather than at a point.
Point elasticity
- Point elasticity measures the degree of elasticity on a single point on the demand curve.
- Changes on a single point are infinitesimally small

IMPORTANCE OF PRICE ELASTICITY

- Price elasticity is important because it gauges how far demand can change relative to price.
- It also measures how far consumers are willing to buy for a good especially when the good’s price
increases.

Income Elasticity of Demand

- Measures how the quantity demanded changes as consumer income changes.
● A positive (+) sign for income elasticity signifies that the good demanded is a "normal good"
● A negative (-) sign for income elasticity indicates the demand for "inferior goods"

Cross Price Elasticity of Demand

- The cross price elasticity of demand measures how quantity demanded changes as the price of a
related good changes.
● (+) sign for cross elasticity means that the two goods involved are substitute goods.
● (-) sign for cross elasticity means that two goods are complements.

Price Elasticity of Supply

- The price elasticity of supply determines whether the supply curve is steep or flat.
Goods that are easy to produce have elastic supply while those which need a long time to produce and which
are hard to make have inelastic supply.

Lesson 2.4 Market Structures

Lesson 3.1 Principles, Tools, and Technique

BUSINESS ORGANIZATION

From a legal point of view, there are 4 ways to form a business

1. Sole Proprietorship
○ The simplest way to start a business
2. Partnership
○ An agreement in which two or more persons combine their resources
3. Company
○ A legal entity that is separate from its owners, the stakeholders
4. Corporation
○ An entity organized by people with similar needs to provide themselves

SOLE PROPRIETORSHIP
○ The simplest way to start a business
○ Owned by a single individual who is solely responsible for running the business and is
accountable for all debts and obligations related to the business.
○ A sole proprietor enjoys exclusize control and decision-making as well as gets all the profits
earned but he also shoulders all the losses and has unlimited which means payment of his
loans extends to his personal assets.
○ ADVANTAGES
■ Easy to set up
■ Controlled solely by the owner
■ Tax incentives
○ DISADVANTAGES
■ Unlimited liability
■ Difficult to raise capital
 ■ Limited life
PARTNERSHIP
○ An agreement in which two or more persons combine their resources in a business with a view
to making a profit
○ GENERAL PARTNERSHIP
■ All owners share the management of the business and each is personally responsible for
and must assume the consequences of the actions of their partners
○ LIMITED PARTNERSHIP
■ Some members are general partners who control and manage the business and may be
entitled to a greater share of the profits while other partners are limited and contribute
only capital, take no part in control or management, and are liable for the debts to a
specified extent only.
○ ADVANTAGES
■ Easy to set up
■ More resources
■ Shared control
■ Tax advantage
○ DISADVANTAGES
■ Unlimited liability
■ Difficult to raise capital
■ Responsible for partner decisions
CORPORATION
○ A legal entity that is separate from its owners and stakeholders
○ No shareholder is personally liable for debts, obligations, or acts of the corporations
○ Directors and Officers can bear liabilty for their involvement with the corporation
○ The legal entity of the corporation gives it an identity of its own
○ Normally can exist for a life of 50 years, which is renewable for another 50 years
○ ADVANTAGES
■ Easy to raise capital
■ No personal liabilty
■ Transfer ownership
■ Unlimited life
○ DISADVANTAGES
■ Harder to set up
■ Higher tax
COOPERATIVE
○ An entity organized by people with similar needs to provide themselves with goods or services
or to jointly use available resources to improve their income
 ○ Regardless of shares held, there is open and voluntary membership, and surplus earning is
returned to the members according to the amount of their patronage

SMALL, MEDIUM, AND LARGE SCALE BUSINESS

MICROBUSINESSES:
SMALL BUSINESSES:
MEDIUM BUSINESSES:
LARGE SCALE BUSINESSES:

For any for of business organization, the business must be registered with the appropriate government
agencies. In the case of sole proprietorship and partnership, 100% must be owned and capitalized by Filipinos.
For corporations, at least 60% of the outstanding capitalstocks must be owned by Filipino citizens.

Lesson 3.2. Tools in Evaluating a Business

1. THE GEOGRAPHIC AREA WHICH YOUR

2. BUSINESS WILL CATER TO.
3. THE SIZE AND OUTLOOK OF THE
4. INDUSTRY.
5. DESCRIPTION OF THE PRODUCT
6. THE BUYERS HAVE TO BE IDENTIFIED.
7. THE REGULATORY ENVIRONMENT.
8. THE NEED TO IDENTIFY THE LEADING
9. BUSINESSES IN THE INDUSTRY.
10. FACTORS THAT WILL AFFECTS THE
11. GROWTH OF THE BUSINESS

SWOT ANALYSIS
● created in the 1960s
● S.W.O.T (Strengths, Weakness, Opportunities, and Threats)
● S.W.O.T Analysis or S.W.O.T Matrix is a structured planning method used to evaluate the strengths,
weaknesses, opportunities and threats involved in a project or in a business venture.

S.W.O.T. ANALYSIS
IDENTIFYING THE INTERNAL AND EXTERNAL FORCES
 ● STRENGTHS & WEAKNESSES
○ usually included as internal factors are:
■ financial resources
■ physical resources
■ human resources
■ access to natural resources, trademarks
■ patents, and copyrights; and
■ current process, such as employee programs
■ department hierarchies and
■ software systems, sales and distribution
■ capabilities, marketing programs, etc.
● OPPORTUNITIES & THREATS
○ external forces:
■ economic trends
■ market trends
■ national and local laws and statutes as well as political, environmental, and economic
regulation.
■ demographic characteristics of the target market
■ relationships with suppliers and co-owners; and
■ competitive threats.

PORTER’S FIVE FORCES OF COMPETITIVE POSITION ANALYSIS

1. a framework or a guide for assessing and evaluating the competitive strength and position of a
business organization
2. these five forces help identifying if new product s or services are potentially profitable
1. SUPPLIER POWER
○ is influenced by
■ uniqueness of the product
■ relative size and strength of supplier in the market
■ the magnitude of the cost switching from one supplier to another
2. BUYER POWER
○ is influenced by
■ number of buyers in the market
■ importance of an individual buyer is to the organization
■ buyers cost of switching from one supplier to another
3. RIVALRY AMONG COMPETITORS
○ is influenced by
■ number and capability of competitors in themarket
■ note: if competitors are numerous and offer basically similar products and services, the
markets current needs will serve as an attractive opportunity for the firm
4. POSSIBILITY OF SUBSTITUTION
○ is influenced by
■ the ease of substituting products in a market
■ note: it is expected that buyers will switch to alternatives in case of price increases
5. POSSIBILITY OF NEW ENTRANTS
○ is influenced by
 ■ new investors and competitors entering a market
■ note: the share of the participants in the market will be divided among more people and
will therefore decline, thus, eroding profits

ONCE THE FORCES ARE IDENTIFIED

● areas of strength can be pinpointed
● solutions to weakness may be proposed
● possible mistakes avoided

Lesson 3.3 Industry Analysis

What is Industry Analysis?

Industry analysis is a critical responsibility for any business analyst. It is an examination of a specific industry in
order to comprehend its future prospects based on past trends and demand-supply mechanics.

Did you know?

In a book published by the Development Academy of the Philippines, How to Prepare Project Feasibility
Studies, it includes an industry analysis of the following important factors.

COMPETITION
● Who are the major businesses in the industry?
● Are there locations close to your proposed business?
● Have they been long-existing or still new entrants?
● What is the market share of each of these businesses?

CUSTOMERS
● Who will you sell your product to? The target market must be identified.
● Who exactly will buy your products?
● What income groups?
● What age brackets?
● What gender?
● What career groups?
● What type of people will you cater to, based on their preferences, lifestyles, and buying habits?

SUPPLIERS
Every retail business needs suppliers from whom one can source raw materials, intermediate products, or
even the finished goods one intends to resell.
A business may need one or more suppliers. It is important to develop suppliers who are reliable in
terms of the quality of what they supply and their dependability in coming up with the things you order from
them. With modern technology, one can easily go online and shop for suppliers, look at reviews made by other
retailers to determine who the reliable ones are. The yellow pages of the telephone directories are also a good
source of suppliers' stores and names. The person intending to put up a business must ask around for prices in
order to be more competitive with other sellers in the market.
A business owner can buy directly from the manufacturers. This will be the cheapest source since
there are no middlemen involved. However, this is only recommended if the supplier's location is convenient
and will not involve expensive delivery costs. Another alternative is to buy from distributors. They are
wholesalers or brokers who buy in big quantities from manufacturers, add a mark-up to their purchase price,
and sell to retailers. Their prices are higher but they can sell in small quantities, which the manufacturers would
not normally do.
A third source of goods is through imports. Some businessmen go to nearby countries to buy their
goods or raw materials there. This is advisable if the prices abroad are relatively cheaper and no heavy import
duties will raise the prices and make the goods less competitive in the country and when transport costs are
not excessive.
It is important to maintain good relationships with one's suppliers; they are the key to one's continued
access to goods and to raw materials that will be needed for the business.

SUBSTITUTES
Substitutes are goods that can be used in place of another. These are goods that may, even if partly
satisfy the same needs of a consumer such that the consumer may use one instead of another. For example,
margarine can be a substitute for butter or wheat bread for white bread. Some goods are close substitutes
while others are not. Pepsi Cola may be a very good substitute for Coca Cola, but not everybody will be willing
to switch brands because they have developed a taste for a particular cola. This is why manufacturers try to
differentiate their products from their competitors so that the customers will develop product loyalty for their
brand. We know that Safeguard and Dove are both bath soaps, yet we can distinguish one brand from another,
and we have our own preferences.
The more differentiated a product is, the greater the edge of its manufacturer because this can convince the
customers to buy their product instead of that of the competition.

A GUIDE TO INDUSTRY ANALYSIS

An industry analysis guide developed by North Carolina's Small Business and Technology Development Center
(SBTDC) can help in making an analysis of one's business Industry.
The key factors to be considered in analyzing your industry identified by the SBTDC are:

1. Geographic Area - identify the area whether local, regional, nationwide, or international

2. Industry (as to size) - worth in pesos and number of firms, trends, and developments and future outlook

3. Product - describe the product as to physical attributes and characteristics and its uses

4. Buyers - describe target customers as to age, income group, geographical location, and occupations;
include consumer demographics such as population/ household size, sex, race, ethnicity, family status,
housing status, etc.; may also include psychographics such as lifestyle information, tastes, preferences, and
buying habits

5. Regulatory Environment - should include government laws and regulations that apply to the business

6. Company Information - make a list of the most successful businesses in the industry

7. A brief history of the industry- when it started and how it developed

8. Factors that affect the growth of the industry

● External factors affecting an industry’s growth include macroeconomic, technological, demographic,
governmental, and social influences.
● such as the migration of the population from rural to urban areas

9. Trends in sales over recent years - show actual sales in the industry over the past 5 years

10. Current operational/management trends within the industry, which are standard practices prevalent
among the firms
11. The types of marketing strategies prevalent within the industry

12. Competitor information - include the location of competitors and how long have they been in business
and their market share

Lesson 3.4 Environmental Analysis

The other analysis that has to be done is an analysis of the environment in which the business will operate.
This means an evaluation of the poscible of portable effects of the external forces and conditions on the
survival and growth of the business.
An environmental analysis includes a thorough study of:

ECONOMIC FORCES
This involves a look at economic factors such as income of the people, specifically the target market,
economic conditions such as inflation, recession, prosperity, demand, and supply in the market.

PHYSICAL ENVIRONMENT
This includes a look at the population size, the geography of the place where business wll be located,
land distribution, climate, and in today’s global warming situation, whether or not the area is prone to flood or
earthquake.

POLITICAL FACTORS
The type of government, the stability and strength of the government, and good leadership are factors
that can be an advantage to a business.

CULTURES AND LIFESTYLES

It is important to study cultural practices such as fiestas, celebration of the Christmas season, trends in
consumption patterns, as a means to identify the goods and services that will fit into these celebrations and
spending behavior.

COMPETITION
This is something that needs to be studied. As already mentioned above, the degree of competition in
the market and the extent and strength of competition are all very vital in determining the success or failure of
a business.

Lesson 3.5 The Circular Flow of Economic Activity

Further guide on how the market works. This section describes the various economic activities that take place
in an economy. This is referred to as the circular flow which is defined as the flow of activities of households
and firms in a circular direction.

THE SIMPLE FLOW OF GOODS AND SERVICES

In Figure 3.3, goods and services flow from the firms as produces to the households consumers, in a
clockwise direction. On the other hand, households as resource owners provide firms as producers with
resource use such as labor rendered, capital lent or invested, land rented to producers, and entrepreneurial
skills. In Figure 3.3, these resources flow from the households to the firms also in a clockwise direction. It is
the use of these resources that enables the firms to produce the goods and services delivered to the
households. The flow of products and resources are the physical flows in the economy.
 The flipside to the physical flow is the money payment flow. Household pay and firms earn revenues
in exchange for the goods and services received and provided, respectively. In Figure 3.3, revenues flow
counterclockwise from the households to the firms as payments for the goods and services received by the
former. Likewise, firms pay and households earn factor income for the use of resources provided to the former.
Factor income payments counter flow from the firms to the households for resources provided by the latter.

For as long as households are willing to consume, producers continue to produce goods and services
for the households using the resources provided by the latter. As the physical flow continues, so is the money
payment flow in exchange for products and resources. In Figure 3.3, the physical flow continues in a clockwise
direction in exchange for money payment flow in the counterclockwise direction.

A Closer Look
 Among the firms, there is also the product flow up the production stages, that is, from the raw material
to the intermediate good and on to the final good stage for consumption (solid arrows, Figure 3.4). Opposite
the product flow is the money payment flow in exchange for product delivery down the production stages
from the consumer, that is, to the final then to the intermediate and on to the raw material stage (broken
arrows, Figure 3.4).

Raw materials are unprocessed goods like raw minerals, logs, and wheat, which are extracted from
their sources and do not undergo any process of production. Intermediate goods are semi-processed goods
that are not ready for final use by the consumer, such as leather, cloth, and steel, which have undergone some
processing but need to go through additional processing before they can be actually used. These are supplied
to final good firms for conversion into goods in their finished stage. Final goods are goods that are ready for
direct consumption such as refrigerators, dresses, or pants. These final goods are then sold to customers for
their use.

Figure 3.4 magnifies the production side of the circular flow diagram in Figure 3.3. Goods flow up the
production stages to the consumers in return for payments trickling down the production stages in return for the
inter-stage product flows.
 Another form of physical flow is the flow of resources from the households to the business firms (solid
arrows, Figure 3.5). The household is the source of resources used by the raw material firm, the intermediate
good firm, and the final good firm. In the flow, it can be seen that the household provides resources to the raw
material, intermediate good and the final good firms for use in the production of goods.
In return for the use of the resources, the three types of producing units make money payments to households
(broken arrows). This is now a financial flow since it involves the payment of money to the resource owners.
Money is now paid by the various firms to the households as payment for the resources they provide. Figure
3.5 magnifies the flows of resources and payments in exchange between households and the producers in the
circular flow diagram in Figure 3.3.

THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two other relevant units in the flow: the government and foreign countries. The
government is important because it makes purchases of economic resources from the household and makes
money payments to the resource owners for the use of their resources. The government also buys goods and
services from the producing units for which it makes money payments.

The significance of the global economy cannot be overemphasized in today's times. An economy buys
goods from other countries; these are called imports. An economy sells goods to other countries; these are
called exports. A country pays for the goods imported and earns income from exports.

Lesson 3.6 The Economy’s Producing Sectors

The Economy has three main producing sectors:

AGRICULTURE, FISHERY, AND FORESTRY

● reaps the fruits of natural resources like the soil, water, and forests.
● these environmental resources are vulnerable to climate change affecting production such as
long dry spells and frequent devastating typhoons due to say, the El Niño phenomenon.
● From this sector comes the food we cook a home and the raw materials processed or used by
other economic sectors (e.g., cotton for making pillows and mattresses).
● Agriculture accounts for most (84%, NEDA) of sectoral production as fishery lags far behind
despite the country's big fishing grounds.
● Much less does forestry contribute to output as it will take decades to revegetate our vastly
denuded forests.

INDUSTRIAL SECTOR (INDUSTRY)

● supposedly processes raw materials from agriculture, fishery and forestry into intermediate
products that are further processed into final products.
● Within the industrial sector itself, local cement manufacturers produce the product by heating
limestone mixed with clay from the quarrying industry for use in the construction industry.
● The lead industries in resource use and output are manufacturing and construction as they
respectively account for 65% and 20% of sectoral production (NSCB 2009).
● Examples:
○ Manufacturing
○ Construction
○ Electricity, Gas and Water
○ Mining and Quarrying

SERVICE SECTOR
● produces the intangibles supporting and complementing production in the other sectors as well
as among its own industries.
● For example, the transport industry brings input and output among the other industries. Reliant
on its activity is the trade industry that takes on the complementary role of marketing their
produce.
● The single biggest industry in resource use and output is trade as it accounts for 29% of
sectoral production (NSCB 2009).
● Examples
○ Trade
○ Transportation, Communication and Storage
○ Banking and Finance
 ○ Public Service (Government)
○ Real Estate
○ Private Services

Lesson 3.7. Competitiveness and Efficiency

The fair ranking of the Philippines in world competitiveness means that the country's industries are yet
on their way from the factor-driven to the efficiency-driven stage. In The Global Competitiveness Report
2013-2014 of The World Economic Forum (WE), the country ranked number 58 among the 148 countries on its
list. Factors allowing the free flow of products and resources are already in place such as institutions,
infrastructure, stability, and basic education and health. However, our industries have yet to attain the efficiency
enabled by higher education/skills, technological readiness, and product/labor market competition. For
example, we have yet to design and produce the first Filipino car (includes engine, transmission) following in
the footsteps of countries like Malaysia and China. Much less are we even close to the innovative stage driven
by business sophistication and innovative ideas. This stage cuts across standards to produce sophisticated
products like the electric-powered cars of Japan and the United States.
Figure 3.6 outlines what makes a country's industries globally competitive and responsive to both local
and global needs.
 As the country's industries struggle to attain efficiency toward the government's vision of sophisticated
innovation, they do so with those in the rest of the world. Figure 3.7 shows that the Philippines still lags behind
her neighbors in East Asia in labor efficiency alone. Reflective of her global competitiveness, much less is the
country attractive to host foreign businesses serving regional markets. According to said competitiveness
report, prominent among the problematic factors for doing business in the Philippines are inadequate
infrastructure, corruption, inefficient government bureaucracy, policy instability, crime rate, tax rate, and
restrictive labor regulations.

The country's producing sectors also struggle with one another as they compete for the use of local
resources (e.g., labor). The least efficient is Agriculture, Fishery, and Forestry combined while the most
efficient is Industry. While Agriculture, Fishery, and Forestry combined employs one third of local labor for
production, it only contributes one-tenth to the country's total output (Figures 3.8 and 3.9). In contrast, Industry
has almost twice as much share in output (27%) as it has in employment (16%). In between is Service which
has a slightly greater share in output (63%) than in employment (53%). Figure 3.10 shows the comparative
efficiencies of the country's main producing sectors.
 In particular, inadequate socio-economic and public infrastructures coupled with liberalized trade
smother agricultural efficiency of the know-how, resources, and competitive environment to at least meet local
consumption. Small-scale farming-the foundation of agriculture-is limited to take advantage of size and access
to technology, skills, credit, and marketing networks. Most farms (63%) are micro in scale with an average size
of 2.2 hectares (List of Establishments, NSO 2009). Also, the continuous conversion of agricultural lands for
industrial use and settlement even threatens to decimate the number of farmlands left. Let alone that almost
one-half of irrigable lands (44%) is not irrigated yet (World Development Indicators, World Bank 2006). On top
of the limitations of size, inadequate infrastructures (roads, transport, and storage) hamper the free flow of
products and input between farms and markets. On the other hand, trade liberalization (e.g., tariffs) has
overwhelmed local production that is yet too weak to stand up to foreign competition as of rice from China,
Thailand, and Vietnam. Figures 3.12 and 3.13, respectively, show that we have the lowest yield per hectare of
rice land and per person among ASEAN countries. Thus, we import cheaper rice to supplement local
production although the latter has been accelerating to decrease the former.

The same socio-economic and governance factors limit efficiency in the fishery sector that it can hardly
produce a surplus for export. Like in agriculture, fishing activities are micro in scale confined to municipal
fishing and aquaculture (List of Establishments, NSO 2009). Municipal fishing is fishing by small shore crafts
while aquaculture is culturing and growing fish in the controlled environment of mostly small fishponds. These
industries jointly and equally account for the bulk (71%) of fishery production (Bureau of Agricultural Statistics,
Department of Agriculture 2013). In contrast, commercial fishing accounts for a little over one-third of mostly
exportable fishery production (39%) by big corporations using big vessels that are instrument-navigated in
deep sea. On top of size limitations is the inadequacy of road, transport, and storage facilities to preserve and
market the perishable product in order to fetch more competitive prices. Likewise, industrial and trade policies
have even made fuel-a critical input-more costly especially for the motorized bancas of small municipal
fishermen. Going back to Figure 3.16, fish supply, mostly from the municipal and aquaculture industries, is just
enough to meet local consumption needs (100%). The weakness of these industries deprives the small
fishermen of the income opportunity to produce a surplus of high-valued species for export.

MANUFACTURING
In spite of the liberalization of foreign investment and trade, the manufacturing industry is hardly
competitive even in the ASEAN region due to limitations of size and structural support. Likewise, these
limitations smother manufacturing efficiency especially of the technology and skills to grow and compete in a
global context. Almost all (89%) manufacturing establishments are micro in scale with limited access to
competitive opportunities similar to agriculture and fishery (NSO 2008). These light enterprises produce
consumer goods-mostly (86%) food manufactures-contributing the bulk (55%) of manufacturing output
using low technology and skills (NSCB 2012). Lacking government support to deepen technology and
production, the fewer enterprises of much larger scale are into the final production stages of electronics,
machineries, chemicals, petroleum, and garments. In the absence of intermediate (middle) product
industries, they are the most that we can have-import-dependent and without much need for technology and
skills. Thus, they do not contribute much to the economy in terms of output and jobs. The same lack of
government support fails to challenge micro enterprises to grow toward higher technology and creativity levels.
As in agriculture, even local enterprises of larger scale are still to stand up to foreign investment and trade
competition induced by liberalization policies.

TRADE AND TRANSPORT

In spite of being the top grosser (34%) of the biggest sector that is service, the trade industry supported
by the transport industry is also handicapped by the limited size of its establishments. Almost all (92%) are
micro in scale engaged in retail trade that contributes almost one-half (46%) to total trade (Census of Philippine
Business and Industry, NSO 2012). However, the transport industry has a fair majority (73%) of micro
businesses mostly engaged in land transport and transport support services (e.g., maintenance). Land
transport accounts for almost one-half (46%) of all transport services while transport support services accounts
for the bulk (52%) of industry output. On top of the limitation of size, thirty percent (30%) of trade
establishments crowd in Metro Manila serving only thirteen percent (13%) of the country's population. But
crowding more in the same National Capital Region are more than one-half (56%) of transport establishments
in the country. On the other hand, less crowded are thirteen percent (13%) of trade and eight percent (8%) of
transport establishments in nearby CALABARZON (Cavite, Laguna, Batangas, Rizal, and Quezon) industrial
zone serving fourteen percent (14%) of the country's population (Census, NSO 2010). At any rate, even
businesses in this industrial zone are near support industries in the Metro Manila where almost one-third (30%)
of manufacturing establishments are also based.

INTERNATIONAL TRADE
Assembled electronic products top the country's exports (40%) dominated by manufactures reflective of
the country's waning agricultural sector (Philippines Statistics Authority, Foreign Trade Statistics 2013). The
assembled parts are imports from subsidiaries in the global networks of the same multinational corporations
(e.g., Intel, Texas Instrument). These electronic parts are also the country's leading imports (22%) followed
by minerals, fuels, machineries and equipment, and the like. Almost all imports are semi-final and final
manufactures in the absence of intermediate product industries. As already mentioned, electronics products
hardly contribute to local output and employment being import-dependent and without much need for
technology. Unlike their counterparts in other sectors, their assembly plants are mostly found in the
CALABARZON industrial zone where support industries in manufacturing and trade are also moving into.

TOURISM
Tourism is an emerging industry as expenditures of foreign tourists on related services such as hotels
and restaurants, transport and entertainment grew by twenty- nine percent (29%) in 2012. Gaining
importance as an industry, it contributed six percent (6%) to the gross output of the economy (NSCB, Tourism
Statistics 2012). It also figured as the third leading export of the country after electronics and miscellaneous
services, which include business process outsourcing (26.9%). Most tourists prefer hotels for accommodation
(80%) and cars for transport facilities (42%). Most also prefer restaurants (68%) and avail of Internet access
(51%) in accommodating establishments. In addition, establishments concentrate operation in Metro
Manila, Western, and Eastern Visayas as most preferred tourist destinations. However, the industry mostly
composed of micro enterprises (90%) is yet to grow to its fullest potential. The country lags behind even in the
ASEAN region as a tourist destination with a minimal share (5%) in total arrivals in contrast to Singapore
(16%), Malaysia (30%), and Thailand (24%). Thus, in Figure 3.14, it also lags behind in tourist arrivals per 100
population even in the ASEAN region.
SMALL BUSINESS OPPORTUNITIES
Small farmers and fishermen can tap urban consumer markets and distribution centers with cooperative
efforts to minimize the limitations of size and inadequate farm-to-market facilities. They can engage in the
cooperative activities not only of sharing/ collectively owning resources to preserve freshness or delay
perishability of goods at lower cost. Collectively, they can also gain direct and faster access to market networks
to command higher product prices as well as cheaper production input. Let alone that they can access credit
for expansion on collective credibility. However, more government provisions of farm-to-market infrastructure
like concrete road network can boost the efficiency of cooperative market activities even of farmers and
fishermen in the hinterland.
The country's growing population also affords cooperating micro enterprises in the manufacturing,
trade, and transport of new consumer markets for growth and expansion. More micro manufacturers of light
consumer products can find new markets in growing industrial and urban areas like CALABARZON, away from
overcrowded Metro Manila. Complementary and support industries are already gravitating toward these
growing centers, let alone the concentration of government infrastructures and services promoting market
efficiency. Thus, new micro trade and transport enterprises can complement or support the growing number
even of light manufacturers moving to these growth centers. To minimize the limitation of size, micro
enterprises can form associations for inter-industry coordination and timely availability of services. In addition,
manufacturer's association can improve market access on competitive terms. But more government provisions
of physical infrastructure like concrete road network can greatly improve said inter-industry coordination and
market access.

In the tourism industry, micro businesses can help to maximize tourist arrivals and destinations with
timely support and substitute services for big establishments strengthened by cooperative efforts. Car transport
services can support hotel accommodations while lodging houses with restaurants can serve as substitutes in
the latter's absence. Micro enterprises can also form associations for timely coordination with big
establishments and complementation among themselves. For the meantime, tourism and related services can
 concentrate operation in major tourist destinations such as Metro Manila and Western and Eastern Visayas.
However, better road networks can pave the way for the development of other tourist destinations and
services, which include transport.

TERMS TO REMEMBER

BUSINESS
Business refers to an enterprising entity or organization that carries out professional activities.
INDUSTRY

COMPETITION
In economics, competition is a scenario where different economic firms are in contention to obtain goods that are limited
by varying the elements of the marketing mix: price, product, promotion and place.
TARGET MARKET
the end consumer to which the company wants to sell its end products to

SUPPLIERS
➔ whom one can source raw materials, intermediate products, or even the finished goods one intends to
resell.
DISTRIBUTORS
an intermediary entity between a producer of a product, or manufacturer, and a downstream entity in the distribution
channel or supply chain.
EXPORTS
➔ An economy sells goods to other countries; a country earns income from exports
IMPORTS
➔ an economy buys goods from other countries; a country pays for the goods imported
SOLE PROPRIETORSHIP
➔ The simplest way to set up a business.
PARTNERSHIP
➔ An agreement in which two or more persons combine their resources.
CORPORATION
➔ A legal entity that is separate from it's owners, the stakeholders.
COOPERATIVE
➔ An entity organized by people with similar needs to provide themselves.
MICRO BUSINESS

SMALL SCALE BUSINESS

MEDIUM SCALE BUSINESS

 LARGE SCALE BUSINESS

PHYSICAL FLOW
➔ The flow of products and resources
FINANCIAL FLOW
➔ it involves the payment of money
HOUSEHOLD
➔ source of resources used by the raw material firm, the intermediate good firm, and the final good firm
BUSINESS FIRMS
a for-profit business, usually formed as a partnership that provides professional services, such as legal or accounting
services
RAW MATERIALS
➔ unprocessed goods like raw minerals, logs, and wheat, which are extracted from their sources and do
not undergo any process of production.
INTERMEDIATE GOODS
➔ are semi-processed goods that are not ready for final use by the consumer, such as leather, cloth, and
steel, which have undergone some processing but need to go through additional processing before
they can be actually used.
FINAL GOODS
➔ goods that are ready for direct consumption such as refrigerators, dresses, or pants. These final goods
are then sold to customers for their use.
ASEAN
ASEAN, officially the Association of Southeast Asian Nations, is a political and economic union of 10 member states in
Southeast Asia
LIBERALIZATION POLICIES
Economic liberalization encompasses the processes, including government policies, that promote free trade, deregulation,
elimination of subsidies, price controls and rationing systems, and, often, the downsizing or privatization of public services
PRODUCTIVITY/EFFICIENCY
While productivity is a measurement of output, normally expressed as some units per amount of time, production efficiency
reflects the costs per unit of production.
GLOBAL COMPETITIVENESS
"the ability of a country to achieve sustained high rates of growth in gross domestic product (GDP) per capita."

TOURISM
➔ Tourism is an emerging industry as expenditures of foreign tourists on related services such as hotels
and restaurants, transport and entertainment
MARKET
➔ A market is an interaction between buyers and sellers of trading or exchange. It is where the consumer
buys and the seller sells.
FACTOR MARKET
➔ a place where factors of production (land, labour, capital) are bought and sold.
PRODUCT MARKET
 ➔ it is the most common type of market because it is the place where finished goods and services are
bought and sold.
FINANCIAL MARKET
➔ Financial markets facilitate the interaction between those who need capital with those who have capital
to invest.
DEMAND
➔ Demand is an economic principle referring to a consumer's desire and ability to purchase goods and
services and willingness to pay a price for a specific good or service.
DEMAND SCHEDULE
➔ a table that shows the quantity demanded at each price. A demand curve is a graph that shows the
quantity demanded at each price.
DEMAND FUNCTION
➔ shows how the quantity demanded of a good depends on its determinants, the most important of which
is the price of the good itself (𝑄𝑑 = 𝑓(𝑃))
DEMAND CURVE
➔ The graphical representation of the demand schedule.
INCOME EFFECT
is the resultant change in demand for a good or service caused by an increase or decrease in a consumer's purchasing
power or real income
SUBSTITUTION EFFECT
the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price
rises
CETERIS PARIBUS
"holding other things constant" or "all else being equal."

SUBSTITUTE GOODS
➔ (+) sign for cross elasticity means that the two goods involved are substitute goods.
COMPLEMENTARY GOODS
➔ (-) sign for cross elasticity means that two goods are complements.
NORMAL GOODS
➔ A positive (+) sign for income elasticity signifies that the good demanded is a “normals good”
INFERIOR GOODS
➔ A negative (-) sign for income elasticity indicates the demand for "inferior goods"
INCOME
➔ If consumer income decreases, the capacity to buy decreases and the demand will also decrease even
when price does remain constant.(and vice versa)
EXPECTATION
➔ If a buyer expects the price of a good to go down in the future, they hold off buying it today, so the
demand for that good today decreases. On the other hand, if a buyer expects the price to go up in the
future, the demand for the good today increases.
TASTE AND PREFERENCES
 ➔ A positive change in tastes or preferences increases demand (shifts it right/up). A negative change in
tastes and preferences will decrease demand (shift it left/down).
SHIFTS OF THE CURVE
SUPPLY
➔ the quantity of a good or service that a producer is willing and able to supply onto the market at a given
price in a given time.
SUPPLY CURVE
➔ It shows the relationship between market price and how much a firm is willing and able to sell
COST OF PRODUCTION

MARKET EQUILIBRIUM
➔ An equilibrium exists in a market when there is no pressure for the market price to change.
EQUILIBRIUM PRICE
the price of a good or service when the supply of it is equal to the demand for it in the market
EQUILIBRIUM QUANTITY
when there is no shortage or surplus of a product in the market

RENT

PRICE CEILING
➔ This is a government mandated price which is normally set below equilibrium price. The government
uses this pricing policy if it sees the need to protect the buyers from higher prices.
TAXES

INVESTMENT

SAVINGS

BUSINESS PROCESS OUTSOURCING

LABOR MIGRATION
Movement of persons from one state to another, or within their own country of residence, for the purpose of employment.
MINIMUM WAGE
“the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a
given period, which cannot be reduced by collective agreement or an individual contract”
FOREIGN EXCHANGE RATE 1 Peso = 0.019 United States Dollar
An exchange rate is the value of a nation's currency in terms of the currency of another nation or economic zone.

REAL ESTATE BOOM

ECONOMIES OF SCALE
cost reductions that occur when companies increase production
REGRESSIVE
➔ requires high income earners to pay a smaller fraction of their income than those with a lower income.
PROGRESSIVE
➔ requires high income earners to pay a larger fraction of their income than taxpayers with a lower
income.
PROPORTIONAL
➔ it requires all taxpayers to pay the same fraction of their income, regardless of how much money they
earn.
TAX AVOIDANCE
➔ Tax avoidance is any legal method used by a taxpayer to minimize the amount of income tax owed.
TAX EVASION
➔ Tax evasion is the illegal non-payment or under-payment of taxes, usually by deliberately making a
false declaration or no declaration to tax authorities.
SERVICE SECTOR

OVERSEAS FILIPINO WORKERS