FOUR FACTORS OF PRODUCTION

 Anytime used to produce a good or service.

 4 broad categories of factors of production(land, labor, capital, entrepreneur/entrepreneurship)
 Factors can be divided into sub-categories, depending on the situation

1. Land--- broad measure representing all the basic natural resources that contribute to production and all free gifts
of nature . Tagaytay Farm, Mine in Mindanao, Strawberry Field in Baguio, Davao Durian Plantation . The economic
return or payment for this is rent.
2. Labor--- the human factor of production . Includes both physical or blue-collar jobs; mental or white-collar jobs.
Truck drivers, nurses, basketball players, teachers, and authors . The job and skills are very different .The economic
return for this is wage. The effort or manpower that people exert to make something. One sells ones own labor
to a business in exchange for income. One is free to sell or use labor in the way one chooses. Wages –payments
people receive when they sell their labor. Wage rate is the price of a unit of labor.
3. Capital--- previously produced durable goods that aid in producing still other goods. Includes all the inputs except
labor and land. All man - made inputs. Office buildings, schools, factories, automobiles, tractors, and computers
are all forms of capital equipment or capital goods. Labor specifically productive labor is also a human capital.
Most common in terms of money is cash capital. The economic return is interest. Three requirements:
 It is any form of wealth
 It is a product of man or man-made
 It is used to further produce more wealth
4. Entrepreneurship/Entrepreneur--- captain of industry because he manages and assumes all the risks in
production. Entrepreneurship includes managerial ability, innovation, and risk-taking that contribute to
productive economy. The economic return is not profit.
Note: Some contemporary experts say that in modern times there are 5 factors of production because they included the
government , because it regulates the four factors.
PRODUCTION PERIOD (The Short Run vs. The Long Run)
2 Distinct Time Frames
1. Short Run Period--- any period during which the usable amount of at least one input is fixed.
2. Long Run Period --- during which the amount of all inputs used can be changed.
3 Measures of Production / Productivity
1. Total Product—the total output that is generated from the factors of production employed (business)
2. Average Product--- total output divided by the number of units the variable factor of production employed (e.g.
output per worker employed or output per unit of capital employed)
3. Marginal Product—change in total product when an additional unit of the variable production is
employed.(Marginal product measure the change in output increasing the employment of labor or by adding one
more machine to short -run production of a firm)
EQUILIBRIUM
 A condition or situation in which economic forces are so balanced that there is no tendency to change, one way
or another
MARKET EQUILIBRIUM
 Situation in which buyers can buy the quantities they want and seller can sell the quantities they want at the
prevailing price. The equilibrium price and total quantity bought and sold at the price is the equilibrium quantity.
 Involves both price and quantity.
 Total market is in equilibrium if sellers can sell what they want to sell at the going market price and buyers can
buy what they want at that price.
 In equilibrium the market price and quantity remain unchanged. If the supply and demand conditions changed,
the market will adjust toward a new equilibrium price and equilibrium quantity
 When economic conditions change, it may take only a few minutes for a market to adjust a new equilibrium , or
it may take a long time. Equilibrium in one market is often connected with equilibrium in one or more of her
markets. The effect of one market adjusting toward equilibrium may be to move another market away from
equilibrium . Connections across markets often make economic analysis rather complicated.
PRODUCTION GENERATES COSTS
 One problem is the increasing costs. Costs are incurred through and in production. They are driven by production
Costs Represent Payments to Factors of Production
 The costs that a company incurs represent payments to factors of production or to the supplier of some
intermediate good such as steel used in making car.
 Pesos spent for intermediate goods are used for the factors of production. Thus all costs are related to the factors
of production at some stage in the production process.
COSTS CONDITIONS
 Average costs or unit costs
 When average costs remains at the same level as output is increased, the industry is said to be operating under
constant costs conditions. An industry is under Constant Cost Conditions when the supply price remains the same
for all levels of outputs and also as one in which the prices of factor inputs do not change as output changes.
 If average costs goes up as output increases, Increasing Costs Conditions are predominant. An Increasing Cost
Industry happens when the supply price increases as the output is increased and where the prices of the factor
inputs vary directly as the output varies. Increasing Costs Conditions also mean Decreasing Returns which can be
attributed to increases in the price of factor inputs as more units of productive factors are used, or some other
 causes which are outside or external to the industry itself or known as Internal and External Economies or
Diseconomies of Scale.
 In Decreasing Cost Industries , the supply price behaves inversely with output that is, as output increases
(decreases) the supply price decreases(increases). Decreasing Costs industries also known as industries operating
under Increasing Returns. These industries enjoy the benefits of economies of large-scale production. These cost
conditions are significant to the industry because they determine the quantity of goods that will be supplied at
given market price.
PRODUCTION FUNCTION
 In microeconomics , production Function affirms that the maximum output of a technologically- determined
production process is a mathematical function of input factors of production.
 Deals with the specification of the minimum input requirements needed to produce designated quantities of
output given available technology
 The word “function” used in a mathematical sense of a one-to-one correspondence between the maximum
output(what is produced) and inputs (the producers)
 Technical relationship showing the maximum amount of output capable of being produced by each and every set
of specified factors of production or factor inputs. The quantity of output goods depends on the quantities of
input
 Describes technology not economic behavior. Main goal of producer to maximize his profits, he utilizes technology
which is geared towards efficient production. A firm may maximize it’s profits given it’s production function.
PROFIT MAXIMIZATION
 Goal of producer maximize profits they use the formula MC=MR( Marginal Costs or additional costs incurred per
unit of production) is equal to (Marginal Revenue or additional revenue earned per unit of production).
Cost Side
TC=FC+VC (Total Cost is Fixed Cost plus Variable Cost)
AFC= FC|Q (Fixed Cost divided by Quantity)
AVC=VC|Q ( Variable Cost divided by Quantity)
ATC or AC= TC|Q ( Total Cost divided by Quantity or AFC +AVC)
MC= TC1-TC2|Q1-Q2 (Difference of Total Costs divided by Difference in Quantities)
Revenue Side
TR= PxQ ( Price multiplied by Quantity)
AR=Price= TR|Q ( Total Revenue divided by Quantity)
MR = TR1-TR2| Q1-Q2 ( Difference in Total Revenue divided by Difference in Quantities)
Note: Equal (minimum requirement for profit Maximization) or the MR is greater than MC but never MC is greater than
MR.
LAW OF DIMINISHING RETURNS OR LAW OF MARGINAL RETURN PRODUCTIVITY
 More and more units of a variable factor of production (labor) are added to a fixed factor of production (capital
equipment) , there will come a point at which the output for each additional unit of the variable factor will start
to decline (or to be more technical, “Increase at a Diminishing Rate)
 Significance of this law is that it serves as a key or instrument which detects at which point to stop increasing
inputs so as to be more productive yet cost efficient
ECONOMIES OF SCALE
 Economies of Scale and Diseconomies of Scale refer to an economic property of production that affects cost if
quantity of all input factors is increased by some amount.
 Economies of Scale or Increasing Returns to Scale or Economies of Mass Production are reductions in unit costs
resulting from increase size of operations. It can be the result of increases in productivity of input caused by
increased specialization and division of labor as the firm builds more or bigger factories. It is the result from the
fact that a larger scale of operations does not require a proportionate increase in all inputs.
 A firm may purchase certain inputs at lower prices per unit when it buys in greater volume. Helps reduce average
costs of production
 Extended in the long run. As firm become larger, it encounters Diseconomies Scale or Decreasing Returns resulting
from problems in managing large scale enterprises. Difficult to tell the exact time.
FORMS OF BUSINESS ORGANIZATIONS
A.Sole or Single Proprietorship
 Firm owned and managed by single individual or one person (PROPRIETOR)-makes all decisions about the business
 The owner is the manager ; oldest and simpliest business organization; owner furnishes his own capital (borrows
from bank or lending institutions) land, labor, lays down the plan of his own business
 Also called as individual Enterprise
 Best adapted to economic activities (production is limited)
Advantages:
1.Open to all that have the initiative and savings
2.Can hire one’s own employees and can directly supervise their work
3.Very easy to start and sto and does not involve the grant of special power(government)
4.Great Flexibility
5.One can make decisions without delay or interference
6.The owner will have personal relationship with his employees and customers
Disadvantages:
1.Owner will be responsible for all debts of the firm. If the business fails he stands to lose his entire fortune.
 2.Relative instability (if the owner get sick or incapacitated, there is none most likely to carry the business.This
could mean a temporary closure of the business
3.Obligations of the business are obligations of the individual in whose name the business is carried on
4.The debts incurred are the debts of the business. If the proprietor cannot pay his debt out of the assets of
business, he is bound to lose not only the money he invested but also his personal property.
B.Partnership
 Can overcome some of the limitations of Sole Proprietorship. Involves two or more people who pool their
resources to develop business. Have more owners, have greater financial resources than Sole Proprietorship.
Owner share responsibility for financing and managing business and are liable for the debts.
Elements of Partnership
1.There must be a valid contract , whether oral or written.
2.A partnership must be put up by persons having legal capacity to contract.
3.Contributions must be in the form of money, property or service.
Articles of Co-Partnership
1.Name of Partnership
2.Principal place of business
3.Date of effectivity and life of the Partnership
4.Purpose of the Partnership
5.Names, addresses and contributions of the Partners
6.Agreement as to the manner of management of the Partnership
7.Manner of dividing the profits among the Partners
8.Manner of liquidating the Partnership with the rights and duties of the partners
9. Arbitration of dispute
Advantages
1.Partnership resources often allow a firm to enhance both sales and efficiency
2.A system of intrafirm referrals can develop and so a larger pool of clients
3.Larger capital and pooling of resources for the firm
Disadvantages
1.Problems with liability and decision making. Like Proprietorship ordinary partnerships retain unlimited liability
of the individual partners
2.Lack clear-cut decision making Procedural or a chain of command
3.Achieving the degree of consensus in decision – making can be difficult and time-consuming
4.Limited life.
Corporation
 Artificial being expressly considered juridical person, created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to the existence. It is a legal
entity , distinct and separate from the individuals (stockholders/stakeholders) who own it. The attributes of a
corporation are artificial being legal personality, rights of succession, corporate ownership, limited liability and
transferability of interest.
Characteristics of Corporation’s
1.Owners of a Corporation are called members, share holders, or stockholders
Corporator/Incorporator --- those who compose a corporation, whether stockholders or members
Members--- corporators in a non-stock corporation
Stockholder--- corporators in a stock corporation
2.Like a limited partner in a partnership, a shareholder has a limited liability.This means that he is liable to
corporate creditors only up to the extent of his subscription , in case of liquidation.
3.Management of the Corporations is delegated to a board of directors duly elected by the shareholders
4.Unlike a Partnership whose life is limited or which is dissolved upon death , withdrawal or in capacity of any
partner, a corporation, because of it’s right of succession has a stable life.
5.Ownership is transferable
6.A corporation has a juridical personality separate and distinct from that of each shareholder.
Types of Corporation:
1.Public Corporation—one organized for the government as a portion of a state like a province , city or town
Ex. GSIS, SSS, NAPOCOR
2.Private Corporation--- one that is owned by private citizens
Non-stock corporation --- generally non-profit in nature like religious and the charitable institutions
Stock Corporation--- organized for the purpose of engaging into business
3.Close Corporation --- family corporation or one in which stocks are held by a selected group and not open to the
public
4.Open Corporation--- one where the stocks are available for purchase or subscription by any person such as those
listed in the stock market
Advantages:
1.There is maximum flexibility
2. There is limited liability of individual store
3.There is greater room for professionalism
4.Dissolution is least likely to occur
5.It can involve a wide range of people in business including employees
6.There is reduced tax burden on owners
Disadvantages:
 1.Setting -up process is complex
2.There is limited influence on management by individual stockholders
3.There is a tendency to institutionalize bureaucracy
Note: 3 forms of organization ; 4th is cooperatives.
INTERDEPENDENT PRICES
 In actual market (competitive, oligopolistic, monopolistic ) the price of the commodity is related to the prices of
other goods or services. Prices of most commodities are highly interrelated and interdependent
 Reasons why one should know the price behavior:
1.Provides insights into the interrelationship of the prices of various commodities
2.Furnishes the government an analytical tool of reference
2 Classification
1.Positive Interdependence--- gasoline increase and basic necessities like rice(household commodities) also increases
2.Negative Interdependence--- detergent soap like Ariel and Tide increase then prices of other soap decrease to compete
JOINT DEMAND ( COMPLEMENTARY GOODS)
 Acquiring or using one commodity would require or use other commodity. If goods and services are seldom
demanded and independently, then we can speak of primary as well as derived demands
 The price of commodities tends to behave in accordance with their demand and supply conditions, the production
and production cost
SUBSTITUTE GOODS
 Two or more substitutes are available, the consumers tend to choose the cheapest, provided such would give
more or less the same utility as the original
1.Complete Substitution--- one commodity is entirely substituted by another commodity. Occurs when there is
commodity which possess almost the same characteristics /features possess by the original
2.Partial Substitution--- two or more commodities can replace the use of an original commodity
3.Potential Substitution--- when a commodity may not have suitable substitute for the present , but there may
be materials which can be developed in it’s place in the future, if circumstances warrant it’s production
MARKET
 Place or situation where buyers and sellers meet. Can be market of goods and services. Where consumers meet
suppliers of a market to which suppliers come and bid for the factors of production. For Classical Model to work
as planned, conditions must be meet:
1.There is a large number of buyers and sellers acting independently such that no one buyer or seller will affect
the price.
2.The products offered for sale should be sufficiently alike or homogeneous for buyers to feel free to choose the
products offered by sellers.
3.There is a freedom of entry and exit to the market
4.There is knowledge of market conditions for both buyers and sellers in terms of prices, quantities or quality.
Note: This four conditions signify that economists call a purely competitive market or pure competition.
MONOPOLY
 Type of market organization or market structure in which a single large producer is selling a product which is
perfectly differentiated from all other products
2 Characteristics:
1.One big seller--- The firm is not the only seller in the particular industry but instead the firm is the No. 1 in the
industry; unless the firm is the only one in the industry
2.The product is unique--- product of monopolists is unique which makes it No. 1 in the industry
Note: Can the monopolists peg the price it wants?
Answer: No because there is the existence of substitutes, or competition and buyers may shift to them,
governments regulation of prices via Price Stabilization Council or Price Regulatory Board and other related
agencies. And of course , the fear of the markets low demand of their products.
MONOPOLISTIC COMPETITION
 There are enough sellers that act independently of the others and it applies the analysis of differentiated products
The theory of Monopolistic Competition is most useful in analyzing 2 situations: Product Differentiation and
Geographic Differentiation
Characteristics of Monopolistic Competition
1.These firms sell differentiated products.
2.There is freedom of entry and exit to the market. New firms can enter freely and established firms can exit.
3.Firms exert a limited degree of control over their price
OLIGOPOLY
 Market situation where there are few firms offering standardized or differentiated goods and services. A market
structure in which few sellers dominate the sales of a product and where entry of new sellers is difficult or
impossible. The product sold by oligopolistic firms can be either differentiated or standardized
 Exists when few sellers have sufficient control over the market for a product so that changes in price by one will
affect all other sellers.
 Oligopoly arise in two ways just like Monopoly:naturally and by regulation. With regulation , a limited number of
firms is licensed to produce a particular product so by definition , the number of firms in the market are restricted
 Industrial Organization agree that steel, cigarettes, gasoline, and drugs are oligopolies.
 Oligopolies are types in which large scale production is required and it is difficult for small firm to enter the
industry.
Oligopoly an industry characterized by:
1.The relativity small number of firms in their industry
 2.Moderate to high barriers entry or in other words, obstacles to entry are large and foreboding
3.The production can be either homogeneous (aluminum or steel) or differentiated products (automobile or
breakfast cereals)
4.Price researching since oligopolies are able to exercise some control over price
5.Recognize mutual Interdependence---
Pure or Perfect Oligopoly
 Exists when the product is homogeneous or identical, so that when one firm lowers it’s price by a certain amount,
the other firms follow suit
Imperfect or Different Oligopoly
 Market situation where the products are so differentiated that a price cut by one firm does not necessarily extract
a price cut by the other competitors
Complete Oligopoly
 Exists when mutual interdependence is complete because the products of the competing firms are identical
Partial Oligopoly
 Mutual interdependence among the business firms is not strong enough for the group to maximize profits.
Note: From one point of view of the buyer on the other hand, there is Monopoly (one big buyer) and Oligopoly (few big
buyers).
COOPERATIVES
 Organization owned, controlled and operated by consumers. Organized to meet certain needs of the consumers
which are not satisfied by the ordinary business organization
 Webster International Dictionary-(Cooperative is marked by working together or joining efforts toward a common
end; it is not motivated by an individuals selfish ends).
 The Cooperative Movement originated from ideas by Robert Owen, Saint Simon, Louis Blanc, and Fourier.
 Robert Owen—born in Newton Wales ( May 14,1771) ; Father of Cooperative; he emphasize the need for
cooperation movement. He become a reformer and owing to the economic turmoil that followed the Peace of
1815.He proposed a system of cooperation in the village to cure the existing social ills. It was his anti-religious
views which alienated him from his supporters and later on caused the failure of many of his projects.
 On 1844, a successful cooperative was launched in Rochdale, England (14 pounds of flour, butter, oatmeal and
sugar after pooling their saving of 28 pounds). They succeeded an this started cooperative movement spread
throughout the world
 Republic Act 6938 -Cooperative Code of the Philippines
Basic Principles of Cooperatives
1.Open and Voluntary Member
 In Consumers Cooperative , membership is open to all who can qualify in accordance with it’s by laws
 “Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the
responsibilities of membership, without gender, social, political, racial, or religious discrimination.” Inherent in
the principle is the idea that cooperatives must allow , tolerate a free exchange of diverse opinions and ideas.
When discussion is complete , the members vote and the majority opinion becomes policy.
2.Democratic Control
 Consumers cooperative operates on democratic principles. The individual is the subject of consideration and not
his investments.
 Cooperatives are sometimes called “economic democracy in action”. Pioneers movement hoped their co-op would
begin a reconstructing society , and that included the idea that each person should have a vote regardless of the
amount of money a person controlled.
3.Limited Returns on Capital
 Any business Enterprise, returns on the capital is expected. In a Consumers Cooperative, As provided in R.A. No.
2023, no capital investment shall be allowed to earn more than 8 percent per annum
4.Patronage Dividends
 The net savings (profits) of Consumers Cooperative after deducting the necessary reserves and the interest on
capital investment which would not exceed 8 percent per annum, are returned to the members in proportion to
their purchases. This profit is called “Patronage Dividends”
5.Cash Trading at Prevailing Market Prices
 Cash trading is economical because it eliminates unnecessary bookkeeping work.
6.Religious and Political Neutrality
 Cooperative is composed of members of diverse beliefs , forces which may tend to divide them or weaken stability
of the organization are avoided. For this reason, the Consumers Cooperative is open to all regardless of religious
beliefs or political party affiliations of members.
Autonomy and Interdependence--- Cooperatives are autonomous, self-help organizations controlled by their
members. If they enter into agreement with other organizations or raise capital from external sources, they do so
on terms that ensure democratic control by the members and maintain their cooperative independence.
7.Member Economic Participation
 Members contribute equitably to and control the capital of their Cooperative. At least part of that capital is usually
the common property of the Cooperative . Members usually receive limited compensation, if any, on capital
subscribed as a condition of membership. Members allocate surpluses for any or all the following purposes:
a.Developing their Cooperative, possibly by setting up reserves, part of which at least would be invisible.
b.Benefiting members in proportion to their transactions with the Cooperative
c.Supporting other activities as approved by the membership
8.Education, Training and Information
  Cooperatives provide education and training for their membership, elected representatives, managers, and
employees so that they can contribute effectively to the development of their Cooperatives.
Continuous Education Program--- members of the Consumers Cooperative are themselves the consumers , it
follows that the success of the cooperative would be their success as well.
9. Cooperation Among Cooperatives
 Cooperatives serve their members more effectively and strengthen the cooperative movement by working
together through local, national, and international structures.
10. Concern for the Community
 Cooperatives work for the sustainable development of their communities through policies approved by their
members.
Types of Cooperatives
1.Agricultural Cooperative---class of Cooperative is exemplified by the FAMOCA(Farmers Cooperative Marketing
Association)
2. Non-agricultural Cooperative
a. Consumers Cooperative
--- most common in the Philippines; (Example: UST Cooperative and UMEMPC or University of Makati Employees
Multi-Purpose Cooperative
b.Credit Cooperative or Credit Union
--- composed of persons who have a common bond of interest . It protest the virtue of thrift among it’s members
by pooling their savings into a common fund, out of which they may secure loans for production at only bormal
rates of interest.(First Credit Union organized in 1960)
C. Industrial Cooperative
---- composed of skilled workers and craftsmen engaged in a small scale industry who have pooled their economic
resources together in undertaking productions
D. Service Cooperative
---- established by members who are motivated by the common desire to provide themselves with certain
important services which would help improve their life, such as medical care, hospitalization, and housing
Various Cooperative Referents/Types of Cooperatives /Cooperative of Governance
1.Advocacy Cooperatives
 Primary cooperative promotes and advocates Cooperatives among it’s members and the public through socially-
oriented projects , education, and training, research and communication, and other similar activities to reach out
to it’s intended beneficiaries
2.Agrarian Reform Cooperative
 Organized by marginal farmers majority of which are Agrarian reform beneficiaries for the purpose of developing
an appropriate system of land tenure , land development, land consolidation or land management in areas
covered by Agrarian Reform
3.Business and Employment Cooperatives (BECS)
 Subset of Worker Cooperatives that represent a new approach to providing support to the creation of new
businesses
 Enables budding entrepreneurs to experiment with their business idea while benefiting from a secure income.
4.Consumer Cooperative
 With primary purpose of which is to procure and distribute commodities to members and non-members.
5.Cooperative Bank
 Organized for the primary purpose of providing a wide range of financial services to Cooperatives and their
members
6.Credit Cooperative
 One promotes and undertakes savings and lending services among it’s members. Generates a common pool of
funds in order to provide financial assistance and other related financial services to it’s members for productive
and provident purposes.
7. Credit Union
 Cooperative financial institution that are owned and controlled by their members. Provide the same financial
services as banks but are considered non for profit organization and adhere to cooperative principles.
8. Dairy Cooperative
 Members are engaged in the production of fresh milk which may be processed and marketed as dairy products
9. Education Cooperative
 Organized for primary purpose of owning and operating licensed educational institutions , notwithstanding the
provisions of Republic Act No. 9155, otherwise known as the Governance of Basic Education Act of 2001
10. Electric Cooperative
 Organized for primary purpose of undertaking power generation , utilizing renewable sources, including hybrid
systems , acquisition and operation of sub transmission or distribution to it’s household members
11. Financial Service Cooperative
 Organized for primary purpose of engaging in savings and credit services and other financial services
12. Fishermen Cooperative
 Organized by marginalized fishermen in localities whose products are marketed either as fresh or processed
products
13.Health Services Cooperative
 Organized for primary purpose of providing medical, dental, and other health services
14. Housing Cooperative
 Legal mechanism for ownership of housing where residents either own shares reflecting their equity in the
Cooperatives real estate, or have membership and occupancy rights in a not-for-profit cooperative and they
underwrite their housing through their laying subscriptions or rent
15.Insurance Cooperative
 One engaged in the business of insuring life and property of Cooperatives and their members
16.Marketing Cooperative
 One which engages in the supply of production inputs to members and markets their products
17.Service Cooperative
 Engages in medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and
power, communication, professional and other services
18.Multi-Purpose Cooperative
 Two or more business activities of these different types of Cooperatives (Consumers Cooperative, Service
Cooperative, and Credit Union)
19.New Generation Cooperative
 Adaptation of traditional cooperative structure to modern, capital intensive industries. Describe as hybrid
between traditional co-ops and limited liability companies.First developed in California . Operate primarily in
agricultural and food services , where their primary purpose is to add value to primary products. Producing ethanol
from corn, pasta, wheat and etc
Other Types of Cooperative Determined by Authority
1.Producers Cooperative
 Undertakes joint production whether agricultural or industrial. Formed and operated by it’s members to
undertake the production and processing of raw materials. The end product or derivative arising from the raw
materials produced, sold in the name of and for account of Cooperative, shall be deemed a product of the
Cooperative and it’s members
2.Retailers Cooperative
 Also known as Secondary or Marketing Cooperative
 Organization employs Economies of Scale on behalf of it’s members to get discounts from manufacturers and to
pool marketing. Common for locally owned grocery stores, hardware stores and pharmacies . Members of the
cooperative are businesses rather than individuals.
3.Social Cooperative
 Successful form of multi-stakeholder cooperative such as the Italian “Social Cooperative”. Bring together
permanent workers and previously unemployed people who wish to integrate into the labor market.
4.Transport Cooperative
 Include land and sea transportation, limited to small vessels as defined or classified under the Philippines Maritime
Laws organized under provisions of R.A. 9520.
5.Utility Cooperative
 Type of Consumers Cooperative that is tasked with delivery of a public utility such as electricity, water or
telecommunication services, Profits are either reinvested into infrastructure or distributed to members in the
form of “Patronage” or “Capital Credits” which are essentially dividends paid on a members investment into the
Cooperative
6.Volunteer Cooperative
 Run by and for a network of volunteers, for the benefit of a defined membership or the general public , to achieve
some goal. Depending on the structure it may end a collective or mutual organization, operated according to
principles of Cooperative Governance. Most basic form of volunteer run cooperative is a volunteer associations.A
lodge or social club. A volunteer- run co-op is distinguished from a worker cooperative.
7.Water Service Cooperative
 Organized to own , operate and manage water systems for the provision and distribution of potable water
8.Worker Cooperative or Producer Cooperative
 Owned and democratically controlled by it’s “worker-owners”. No outside owners in a pure workers Cooperative.,
Only the workers own shares of the business. Majority of shares are owned by the workforce. Membership is not
always compulsory for employees but generally only employees can become members either directly or indirectly
through membership of a trust that owns the company.
CAUSE OF FAILURE COOPERATIVES
1.Lack of Capital or Inadequate Capital or Inability to Meet Competition
 Members of societies are poor and they cannot provide the capital on a large scale.External resources of the
society are also limited so it faces the shortage of capital problem.
2.Lack of Experience
 Lack of business experience from among the members this may be a problem. Another problem may be that a
society cannot hire the services of the experts due to it’s limited resources.
3.Absence of Discipline
 Any member whether a Board Director or simply a Cooperator, if without discipline, can affect the organization
or Cooperative.
4.Lack of Sincere Management or Mismanagement or Incompetent Management
  Management remains in the hands of the selfish and dishonest members and they take undue advantages of their
powers

5.Lack of Profit Incentive

 The cooperative society is not a profit earning institution. The absence of profit incentive is an obstacle in the way
of it’s progress
6.Delay in Decisions
 Delay in making various decisions about the business may become the cause of failure
7.No legal Pressure
 The Cooperative Societies Act 1925 is not comprehensive and contracts are not legally enforceable. It is also the
demerit of the cooperative society.
8.No use of New Technology
 The Cooperative society cannot use the latest technology in producing the goods due to limited sources . So
demand and profit remains low.
9.Limited Scale
 Cooperative society cannot start it’s business on large scale due to many reasons.Produces the goods on small
scale and it’s costs of production remains high. Limited scale of production becomes the cause of loss.
10.Instability
 Frequent changes takes place daily in the members of the Cooperative .Makes the business unstable.
11.Absence of Co-operation
 Observed that there is a lack of cooperation spirit among the members which may then become the cause of
business failure.
12.Lack of Knowledge or Proper Understanding
 Members do not know the principles and rules of the Cooperative society. This can create problem.
INCOME INEQUALITY
 Income depends entirely on what productive inputs you have to sell and for how much they sell.
PAYMENTS FOR FACTORS OF PRODUCTION
 Something is to be made or produced , some inputs are required. These inputs are called the factors of production.
 Kinds of factors of production – everything from the electricity that runs the machines to the paper that packages
the products
DISTRIBUTION—apportionment or allotment of wealth or income to the various factors of production
1.Personal Distribution --- use the graph Lorenz Curve ; incomes received by by different persons or households regardless
of the property or productive factors they own and the incomes they earn from such property.
 Lorenz Curve ( Max Otto – 1880 – 1962) – American economist to describe income inequalities.
 Shows the actual quantitative relationship between the percentage of income recepients and the
percentage of the total income in a year
 The more it veer way from the Line of Perfect Equality the greater the degree of inequality is represented.
 The extreme case if Perfect Inequality would be represented with the bottom horizontal and the right
hand vertical axis
 X or horizontal axis – not in absolute terms but in cumulative percentages ; Y or vertical axis – share of total income
received by each axes
 The diagonal line ( Line of Perfect Equality) drawn on lower left hand corner ( the origin) .Because of the diagonal
line , the percentage of income received is exactly equal to the percentage of household income recepients.

2.Functional Distribution – according to one’s function or role in the society.Meaning if you have more roles as an
landowner, capitalist, employee on the side of the partner of the business, you would either have the payments or rent,
and capital, wages or profits.
 The allowance allocation of the national input resulting from the apportionment of the social dividend
Note: If personal distribution based on the percentage income received functional distribution is the distribution of
income among persons or households as downers , wage earners, capitalist, or even entrepreneurs.
FACTORS PAYMENTS AND ITS RELATED CONCEPTS
RENT --- payment for the use of superior land or payment for the use of buildings, land , machinery or any durable good
--- in term of money undertaken by ascribing a monetary value or putting a price on the products of different grades
of land (Peso) ; In determining the different produce of land, one should include the aspects of both the extensive
and intensive margins of cultivation
WAGE – price paid for human exertion or effort ; payment for manual labor usually paid in money. Price Labor – per hour,
per week or for some other period of time.
Classifications:
1.Time wages – basis the length of time during which the laborer renders his services
2.Piece wages ( piecewor) – paid according to the amount of work labor performs
3.Fees – paid to professionals like lawyer and doctors
4.Commissions – the percentage of the total sales of products by members of the labor force ( sales representative or
sales and marketing agents
5. Extra wages – wages in addition to the regular salaries and income of workers ( 13 month and fringe benefit)
6.Wages in Kind – no monetary wages paid to labor ( rice,canned goods)
Note: Wages may classified into : kinds of labor (physical labor and mental labor)
Physical Labor – divided into skilled, semi-skilled and unskilled labor while mental labor ( professional labor, labor of
administration and supervision, and labor of invention and creation .
 Generic term wages – payment to the laborers of blue collar jobs while salaries – payment made in white collar
jobs ( given every 15th and 30th of the month)
NOMINAL WAGES (money wages) – wages labor receives when he gets paid for her service
REAL WAGES – Wages in form of goods , amount of goods and services he can get with his money wages ; good measure
in terms of purchasing power of money
THEORIES OF WAGES
1.The subsistence theory of wages – The remuneration of labor is determined by cost of subsistence of the laborers . The
cost of necessities of the laborer, food, clothing, and shelter , enough to maintain his productive power and the labor
supply , measures the income that labor receives . Based on cost of production of the labor supply.
2.Minimum wages theory – government imposed minimum wage rates for various workers like those in industrial and
agricultural sectors. Objective is the desire of the government to protect the interests of the low-income workers in
relation to the increasing cost of living
3.Wage Fund Doctrine – rate wages depend on the fund set aside by management for the payment of wages for its workers
4.Marginal Productivity Theory of Labor and Wages – Criticism led to the formulation of a new theory which calls attention
to the productivity of labor as the measure of wages. An extension and refinement of other theories known as Marginal
Productivity Theory of Wages.
5.Demand and Supply of Labor Theory – Determined by demand and supply of labor.Wages are high when the demand
is larger than the supply and wages are low when the supply is larger than the demand. The Marginal Productivity Theory
of Wages is a refinement of the Demand and Supply Theory
6.Bargaining Theory – depend on whether the management or labor is strong enough to bargain for the wages
Collective Bargaining – process whereby a recognized labor unions and management determine the wage of contract
which is binding for all employees and management.Extended to cover other aspects of employment ( fringe benefit,
grievance procedure , seniority , classifications of jobs, absorption of workers,and various unemployment compensation
plans and welfare funds administered by management and union
7.Business Cycle Theory – Wages are prices and they move with the fluctuations in the price of other commodities . Wages
are not only change from year to year but they also experience seasonal variations . Phases or Business Periods of the
Business cycle ( Prosperity, Recession, Depression and Recovery)
LABOR THEORY OF VALUE ( David Ricardo)
 Deals with the entire value of all commodities, which can be reproduced and which stems from the labor that
produces them. Whether it is applied directly , used to improve land or build machines that contribute to the
production . Cost Production Theory started as Labor Theory of Value. When applied to the payment of wages, it
is simply the wage paid to labor is equal to the amount of work applied to produce a commodity or its costs.
THE DEMAND FOR LABOR
 Firm wants labor and other factors of production in order to produce products for which it thinks is a demand at
a price that will pay for the costs and also leave some for profits. Firm hired more labor when the demand for its
products goes up. The demand for labor and other factors is derived from the demand of consumers for the
products that the firm produces.
 No final product demand no derived demand , nobody will hire a worker .
LABOR PRODUCTIVITY AND LABOR MOBILITY
 Expected productivity of the worker lies behind the demand of labor . Underlying the demand curve for labor is
the Marginal Physical Product of labor – change in total physical output expected from the addition of an extra
unit of the factor while other factors remain constant.Anchored on marginal physical productivity of labor which
depends on many factors ( to do with the skill, health and education of the worker , state of technology , over all
organization and management of the firm.
 Marginal product of labor will be equal to the wage paid to labor where the demand for labor is the marginal
product of labor. The labor in low wage region migrates to the higher wage region.
 Migration is that it raises the total welfare of all . Wages are increased for all laborers and total welfare, measured
by GNP or output increases.
 Population and labor highly mobile ( change in population to land ratio called man-land ratio or population
density). This is a result of varying rates of population growth by regions.
 3 migration patterns ( rural to rural, rural to urban, urban to urban)
 Labor Mobility – ability of labor to love from one place , industry or sector of economy to another. 2 aspects (
spatial or geographical mobility—relate to the rate at which labor moves between the geographical areas and
regions in response to differences in wages or availability of employment; occupational mobility – related to the
degree to which workers change their occupations or skills in region to differ CES in wages or job availability)
 Importance of labor mobility lies in the fact that it determines the rate at which labor markets adjust to
equilibrium from disequilibrium .
SUPPLY OF LABOR
 Supply curves of all factors tend to be upward – sloping in the short run because to increase the rate of output
incurs additional costs. Wages increase , people are willing to work more and more people will enter the particular
occupation of their choice. Some workers will increase the number of hours of work per day as the wage rate goes
 up by they may not be willing to work more than a maximum number of hours. They want to work fewer hours
because as their income goes up, they may prefer to take more time off for leisure activities.
INTEREST
 Person receives an income in money. The money is used to make payments and obtain for the owner goods and
services for consumption. Money can be saved. Person can keep money hidden in a mattress, deposit in savings
account, loan it to another individual, or buy bonds or shared of stock. He can also buy machines, equipment ,
buildings or land, or hire people and start a business.
 Money is kept and not used it gives no income to the individual. If money is transformed into another asset that
is done in the expectation of an income flow from the asset , the income that the individual receives for the use
of his money is called interest.It represents the price paid for the use of money or credit.
 The payment of interest is premised or defended on three grounds:
1.the lenders/owners must be rewarded for parting temporarily with their money
2.the borrowers should share with the lenders in the proceeds earned in the productive use of capital
3.the lenders should be compensated for the risks they have to undertake in lending.
Interests rate vary among financial instruments because of differences in the following characteristics:
1.Risk – lenders know that different borrowers have different probabilities of defaulting on their loans. The greater the
risk of defaulting , the higher will be the interests rate charged.
2.Maturity – the length of time until the loan is paid off. The longer the loan will be paid, the higher the interests rates
charged.
3.Liquidity – the transaction costs associated with buying or selling IOUs or Promissory Noted will be lower in the markets
which are well-known developed for specific debt instruments , the lower will be the interests rates charged.
Note: Determination of interest in short run is dependent on the utility or desirability of these economic goods and the
availability or supply of such goods. In long run, the volume of capital borrowed varies inversely with interest rates.
THEORIES OF INTERESTS
1.Agio or Premium Theory – comparing present economic goods and future economic goods, capitalist give premium to
future economic goods
2.Abstinence Theory – society rewards those who abstain from consuming a portion of their income
3. Marginal Productivity Theory – incumbent upon borrower to pay the lenders not only the principal of the loan but also
the interests
4. Supply and Demand Theory – interest rates are market prices subject of the interplay of supply and demand
5.Government Policies and Interests rates – government influence interests rate determination most especially during
times the economy needs to be regulated.
PROFIT
 What it is and what accounts for its existence is not clear.Wages represents payment for the work done by
individuals. Rents are payments made to owners and land and other factors in fixed supply for their use. Interests
is the compensation for the use of money or credit. Profit is simply defined as the income for the entrepreneur.
ENTREPRENEURIAL PROFITS
 Profits are rewards of the entrepreneur for his labors. Surplus over cost according to Joseph Schumpeter. The
difference between receipts and total disbursements in a business. Pertains to the entrepreneurs share of income
like rent, wage and interest. Can be a functional return ( represents income from the factor of production) or
residual return ( pertains to the positive difference between total revenues and total costs). Entrepreneurs are
entitled to profits because of undertaking innovations and risk-bearing endeavors. Most appropriate if
entrepreneurs are productive
TYPES OF PROFIT
1.Gross vis as vis Net or Pure – combination of remuneration while the latter is gross less contractual implicit costs ( all
other compensations of other productive factors.
2.Normal vis a vis Excess – first is the level of profits which is just sufficient to enable the entrepreneur to continue the
operation of the business or that which must be earned if the business is to continue its operation. The latter is the
difference between the actual profits and the normal profits. Land rent earning in excess of normal profits are included .
Earned only when entrepreneur earns income over and above normal profits.
3.The Measure of Profits – the success of a venture is measured by the amount of profit it makes. Profits may be expressed
as a sum, instead of as a percentage , or as in the case of partnerships , a partners profit is a fraction of the total profits,
depending upon the agreement or the partners
4.Generation of Profits – is a given and entrepreneurs, for that matter, look for various ways by which these can be
attained . Below are some of these approaches :
 Result of Monopoly – profit may result from the existence of monopoly or other forms of imperfect competitors.
Exist only one seller of goods and services. The individual will make a large income of there is a large demand for
the good or service he sells.
 Labor exploitation – critical approach by Marxists. They regard every factor payment other than wages as surplus
value.Profit is created by paying workers less than the value of what they produce.According to Marxists theory,
employers exploit labor and build additional capital or maintain their high standard of living with the part of the
total output that they get, instead of paying it out to the workerd.
 Profit and Innovation – organizes a company to produce and sell a new product in a market, he does in the
expectation of making profits. Entrepreneurs become enterprising and innovative because they expect that their
product or service will catch on , and they expect to make a lot of money when this happens. Successful
businessman and innovators may make a large amount of money because they were the first to recognize a need
and to provide a product to satisfy.
 Profit and Uncertainty – uncertainty about making or loading a lot of money can account for the existence of
profits. One cannot know for sure for any time, period whether profits have been earned. Despite the small chance
 of success , new people start their own ventures and persons who have lost money once try again and again with
the hope of making profits.
 Risk and profit – there is a certain stable pattern in an industry, the average profit earned will be lower than in an
industry that experiences ups and downs in earnings. Past represents a reliable guide for the future and the people
cannot afford the risk of large fluctuations in business activity, businessman expect and demand higher returns or
greater profits, in risky industries than in stable ones. The higher the risks, the higher the profits.
 Organizations of Producers – individuals can try to change the distribution of income in their favor by earning
more money through additional hard work, education and migration . Individual can affect his income and
employment situation is by joining a group.Try to join together and pursue their interests by controlling the supply
of factors they own. Basic principle is in “ unity there is strength“ and this is applied by labor unions , professional
organizations, local producers, cooperatives, national and international cartels when they monopolize particular
services, resources or products.
 Collective Bargaining – involves the representative of the Union and of the management in negotiations with the
ultimate objective of reaching an agreement or contract. Contract represents an agreement enforceable by the
courts and contains provisions for wages other compensation, job security, working conditions, procedure for
promotion and grievance , and other matters which may result to profit labor or management depending on their
strengths and weaknesses
 Effects of Unions – great benefit of working men and women of the country. The existence of labor unions has
provided the necessary strength to face up to the large firms in concentrated industries and to protect the working
people from the arbitrariness of management decisions. Strong unions lead to the Improvement of working
conditions or compensation in the nonunionized sector . Business do not want union provides the same wages to
those earned by unions in other firms and firms with both union and nonunion employees provide comparable
benefits to the nonunionized once a contract is signed.
 Business Cartels – unions and professionals come together and increase their members income absolutely band
relatively to that of other groups in society. Top executives of many industries meet each other socially and
professionally in organizations, institutes and conventions.” People of the same trade seldom meet together ,
even for merriment and diversion , but the conversation ends in a conspiracy against the public , or in some
contrivance to raise prices “ by Adam Smith.
 Leaders of business know that by deciding on a uniform price policy and allocating markets , eleminate
the effects of competition among them and increase their profits to the monopolistic level. Firms form a
cartel or act like one. Formation of cartel is illegal except for those that the government approved or
tolerates for various reasons . Cartel is a union of firms or producers who agree on the restriction of output
and it’s allocation among them so as to drive or keep up the price of their product.
LAND REFORM VIS A VIS AGRARIAN REFORM
LAND REFORM – manifested in Philippines, the redistribution of land from the landlord’s to the tenant farmers to improve
the plight of tenant farmers
Presidential Decree No. 27 or the Emancipation of the landless Farmer from the Bondage of the soil ( Tenant Emancipation
Act) –abolishes unfair land tenancy programs and changes considerably the land tenure system.
 Land reform of the government enacted on October 21,1972 restricted land reform scope to tenanted rice and
corn lands and set the retention limit at 7 hectares.
 Apply to tenant farmers of private agricultural lands ( rice and corn) under a system of sharecrop or lease-tenancy,
whether landed state or not.
 Tenant farmer who has a landed state or not shall be deemed owner of a portion constituting a family – size farm
of 5 hectares if not irrigated and 3 hectares if irrigated. Landowner may retain an area not more than seven
hectares if landowner is cultivating such area or will now cultivate it. I’m determining the cost of the land to be
transferred to the tenant farmer, the value of the land shall be equivalent to two and one – half times the average
harvest of three normal crop years.
 The total cost of the land including the Interests at the rate of six per centum per annum , shall be paid by the
tenant in 15 years of 15 equal annual amortization.
AGRARIAN REFORM
Land rights focused on the total development of the farmer. Via Comprehensive Agrarian Reform Law ( Republic Act 6652)
– promote social justice and industrialization by providing the necessary tools and mechanisms included the reform and
development of complementary institutional framework ; approved on June 10, 1988.
 Agrarian Reform includes : ( Gerardo Sicat)
 Phase I
a.Distribution of lands to the Cultivator. d.Improved methods of cultivation with assistance to farmers
b.A fair system of lease payments. e.all lands operated by multinational companies
c.Security of tenure. f.all other lands owned by the govt.suitable for agricultural
purposes
 Phase II ( 1988-1992)
a.all private agricultural lands in excess of 50 hectares
b.all alienable and disposable public agricultural lands
c.all public lands which are to be opened for new development and resettlement
d.all arable public agricultural lands under agri-forest pasture and agricultural leases already cultivated
and planted to crops in accordance with Section 6, Article VIII of the 1987 Constitution
UNEMPLOYMENT
 When people are without jobs and they have actively looked for work within the past four week
UNDEREMPLOYMENT
 One is employed in a job which is not within his field of specialization thus receiving less payment for labor /work
BRAIN DRAIN – large scale emigration of a large group of individual with technical skills or knowledge; when individuals
who want to be employed cannot find work in their place origin.
TYPES OF UNEMPLOYMENT
1.Seasonal – regular seasonal changes in employment /labor demand ; affects certain industries more than others
 Catering leisure and Construction
 Retailing and tourism
 Agriculture
2.Frictional – transitional unemployment due to people moving between jobs ; people experiencing short spells of
unemployment ; new and returning entrants into the labor market ; imperfect information about available job
opportunities can lengthen the period of someone’s job search
3.Structural – mismatch of skills and job opportunities as the pattern of labor demand in the economy changes ;
occupational immobility of labor ; involves long – term unemployment; prevalent in regions where industries go into long
term decline ; good examples include industries such as mining, engineering and textile
4.Cyclical –cyclical relationship between demand , output , employment and unemployment ; caused by a fall in aggregate
demand leading to a loss of real national output and employment ; slowdown lead to business laying off workers because
they lack confidence ; of Keyness argued that economy can become stuck and have an economy operating persistently
below its potential.
5.Real wage or classical – real wages are maintained above their market clearing level lead to excess supply of labor ;
unemployment created if the national minimum wage is set too high.
Misconceptions About Unemployment
 Unemployment rate is based on unemployment benefits data
 Unemployment rate and the monthly job numbers are based on the same data.
 Unemployment rate is the percentage of people who are unemployed
Philippine unemployment rate ( 7.1 percent in July 2011)
 Chart with historical data of the Philippines Unemployment rate
 Unemployment rate – level of unemployment divide by the labor force.
 Labor force – number of people employed plus the number unemployed but seeking work.
 Nonlabor force – people not looking for work , who are institutionalized and those serving in the military
MEASUREMENT OF UNEMPLOYMENT

MONEY , BANKING AND CREDIT

EXCHANGE – trade and there are 2 kinds ( direct and indirect)
BARTER—direct exchange of goods with other goods and the disadvantages are :
 Inconvenient as a system of exchange
 Encourages cheating
 Certain goods are unsuitable for exchange
 Many goods are invisible
MONEY – article that can be used as a universal passport to provide everything except happiness. Anything that is generally
accepted and used as a medium of exchange for goods and services ; medium of exchange used by an economy
MERCANTILISM ( western world in 16th and 17th century )
 Name attached to a system of government regulation which became entrenched in Europe
 Goal is to make the nation rich and powerful ( protection of domestic industry and regulation of trade). Achieved
goals are :
 Get as much gold as possible ( power and status over other nations with less)
 Encourage the exportation of goods and discourage imports. Exports more income.
 Encourage manufacturing for the purpose of increasing the exportation of goods.
Functions of Money
 Commodity used in transaction that transfer ownership of goods and services
 Money facilitated trade and commerce transactions
 Means of payment for buying things and for paying debts
 Money as a standard value or a unit of account serves as a common denominator which the value of all goods and
services are expressed. Choosing common value saves much time and energy in keeping track of the relative prices
of values of different things and solved the problem of converting units.
 Money as store value simply means that it can be used as a means of storing wealth .
 Can be used as gifts during birthdays and other special occasions a
 As a guaranty for solvency
Laws of Money:
1.Greshams Law – Poor or bad money drives the good or better money out of circulation . The tendency of people is to
keep the better money .Example : Country utilizes gold and silver money ( tendency is to keep the gold for – good or
better money and use silver as transactions.Keep the new and use the old coins.
2.Quantity Theory of Money – other things being equal, the quantity value of money is directly proportional with the
general price level and directly varies inversely with the value of money in circulation. Value of money is determined by
the demand and supply of money. Demand for money is represented by the volume of goods and services offered for sale;
the supply of money consists of the money to be spent.
3.Banks and Banking – Banks play a significant role in the promotion of trade, both local and international. Banks are very
influential in shaping the currents of the business and economic life of a country and the whole world. Like an ordinary
business enterprise backed up by its own capital and undertaking special services to its depositors and borrowers.
Depositor is the lender and the bank is the debtor.
 Banks may be classified as commercial banks, thrift banks ( savings and mortgage banks,savings and loan
associations , private development banks) or rural banks ( regional unit bank)
Functions of Banks
1.Banking and Exchange – modern exchange is dependent upon the banking mechanism. The business activity of the bank
is to facilitate the exchange of goods through its services of furnishing money and credit
2.Furnishing of Currency by Banks – community needs currency in inconvenient form and denomination to meet daily
transactions. The duty of the bank to supply or pay money in response to the demands of creditors and the whole
community it serves
3.Deposit Functions of Banks – receive others people’s money and give a certificate or passbook ( obligation to pay money
under certain conditions ). 2 Kinds – demand deposits ( paid on demand and may be withdrawn by checks ) and time
deposits or savings deposits ( withdrawn only upon presentation of certificates or receipts for funds deposited)
4.Lending and Discount Function – lend money and to discount notes or bills of exchange. Based on the same principles
of credit
5.Remittance and Collection Function – collects notes, drafts, bills and other papers representing obligations madnby
debtors payable at a specified date. Highly qualified to perform this function of collection. Remittances from different
parts of the country ( outside)
6.Fiduciary Function ( trusteeship) – do investment , mange investment and pay income from the investment
Bangko Sentral ng Pilipinas – provides the regulations and procedures for its members banks. On macro level ( World
Bank and IMF ) to take care of the financial needs of the world and international economy.
Functions of Central Bank
 Administer and monitor of the banking and credit system of Republic as embodied in Section 2. Articles of the
amended Republic Act 265. Monetary Objectives:
 Maintain internal and external monetary stability in the Philippines , and preserve the international value
of peso and it’s convertibility to other freely convertible currencies.
 Foster monetary ,credit and exchange conditions conducive to a balanced and suitable growth of the
economy.
WORLD BANK
 International agency created along with United Nations under Bretton Woods agreement . Makes loans
throughout the developing world to finance specific capital projects. One concern is the nutrition of the poorest
segment of society
INTERNATIONAL MONETARY FUND
 44 countries participating in 1944. Created in response to the Great Depression and World War II to promote
monetary cooperation , financial stability and income growth for all countries.
Objectives of the IMF
1.Promote international money cooperation through permanent institution which provides machinery for consultation..
2.Facilitate the expansion and balanced growth of international trade and contribute to the problem and promotion of
high level of sustained employment….
3.Promote exchange stability, to maintain orderly exchange and avoid competitive exchange depreciation
4. Assists in the organization of a system of payment of transactions and in elimination of foreign exchange restrictions
which hamper the growth of work trade.
5.Give confidence to member countries with Balance of Payments problems by granting loans.
6.Shorten the duration and reduce the degree of disequilibrium I’m the international Balance of Payments of member
countries.
Present Key Issues that needs attention:
1.Surveillance over its members economic and financial policies must be strengthened
2.Ensure more effectively that it’s lending to help resolve financial crises restores countries access to capital markets and
supports a revival of economic growth.
3.Do more to ensure that it’s policy advice and financial support for low-income income countries are directed in helping
poverty countries
4. Must address equity and effectiveness on the way the institution is governed
CREDIT -- power to obtain goods at present in exchange for a promise to pay in the future . Requirements ( risk, capital,
maturity and borrowers character , capacity to pay, capital, collateral, and securities)
Advantages or Benefits of Credit:
1.Facilitates exchange. 2. Increases the volume of production.
3.Eliminates the risk involved in making payments to distant places.
4.Economizes the use of coins and paper money
5.Eliminates the danger of being robbed of large amounts of money
6.Makes possible the accumulation of capital to finance enterprise.
Disadvantages
1.Facilitates the over expansion of business activity
2.Too liberal credit encourages extravagance ; increases business risk
3.Easy borrowing of the government leads to wasteful use of public funds
MONETARY POLICY
 Country’s central bank role to determine the amount of money and the cost of credit interest rate
 Controls the supply of money , targeting a rate of interest for the purpose of promoting economic growth and
stability. To control inflation and stabilize currency.
Objectives of BSP Monetary Policy
 Promote price stability
 Promote financials stability and achieving broad based , sustainable economic growth, and consideration in policy
decision making.
Designed to Control the Money Supply
 Exercise flat authority to issue paper money
 Control of the Bank reserve requirements
 Use of discounting policy
 Use of open market operations
 Use of moral suasion.
INTERNATIONAL ECONOMICS
 Extend beyond domestic economics
 Differences in natural resources, in currencies and currency values, in structure and forms of government , in goals
and policies. 3 types of economic participants ( individuals, firms, and government).
FOREIGN EXCHANGE or FOREIGN CURRENCY
 Any currency other than your own . Money of one nation held by citizens of other nations either as currency or
deposit in banks
BALANCE OF TRADE
 The difference between its exports and imports . Narrow definition of exports and imports include tangible goods.
 Exports – sold to other countries ; Imports – goods of foreign country that one country purchases or total value of
expenditures.
 Net exports – excess of exports over imports
BALANCE OF PAYMENTS
 Systematic record of all the economic transactions of the country or other receipts and payments to foreign
countries
 Either surplus ( receipts more than payments ) or deficit ( disbursements exceed receipts)
3 Classification:
1.Transactions include merchandise exports and imports ( gold merchandise)
2.Transfer payment includes charitable contributions and economic aid or grants
3. Transactions in capital and monetary gold ( investment and loans)
INFLATION
 Rate of upward movement in the General Price Level for an aggregate goods and services
 Not all prices are rising , some relatively remains constant and others are falling
 Rule of 70 provides a quantitative appreciation of inflation. Number of years it takes the price level to double
 Estimate how long it will take for the real GDP or ones savings account to double.
 Divide the number 70 to its annual rate inflation
Two Types:
1.Demand Pull Inflation – total spending exceeds the economy’s ability to provide goods and services at the existing price
level; total spending pulls the prices level upward commonly described as “ too much money chasing too few goods”
 Change in price level has been attributed to an excess of total demand. The excess in demand will trigger the rise
in the prices of the fixed real output , causing demand pull inflation
2.Cost Push or Supply Side Inflation – factors such as excessive wage increases and rapid increase in raw material prices
drive up per unit production costs and these higher costs push the price level upward. ( Monetarist Economist, Milton
Friedman argue because increases in the cost of goods do not lead inflation without government and its central bank to
increase the supply of the money)
MONEY SUPPLY or MONEY STOCK – total amount of money available in an economy at a particular time
Control of Money
 Vested by the Central Bank. They make the supply of money scarce. Freely available, it debases the currency and
causes inflation. What is the desirable supply of Money? Depends on the following factors:
 Desirable level of economic growth of GNP
 Desired level of governmental spending and the relationship of this with the government budget
 The level of credit consistent with the requirement of the rest of the economy to carry out normal activity
 The level of new money needed to meet the requirements of the country’s international trade and
payment
 The velocity of circulation of money
Note: Money supply determination is important because money is used in all economic transactions and it has a crucial
role and powerful effect on economic activities.
How to Survive the Cash Crises ( Know exactly how much you earn, Don’t Spend your salary in one go, Simplify your spending,
Clear your Debts, Set goals in clearing Debts, Augment your Cash Inflow)
TRADE – Primary instrument of development because it has been proven
 Speed at which science and technology developed
 Growing investment
 Social impact of trade bringing traditional cultures in contact with new ideas
Three ways in which Fee Trade Can be Achieved:
 Unilaterally or one country reduces it’s trade barriers regardless of the practices of the other country
 Bilaterally or two countries agree to remove tariff barriers between them
 Multilaterally or many countries agree to lower tariffs at the same time.
Reasons for Interfering With Free Trade
 Mercantilism
  National Defense
 Infant industries
 Protecting the Wages of labor
 Protecting the jobs of labor
Importance of Free Trade
 Would become necessary to find substituted for some products we enjoy
 More money would have to be spent to produce things that could be imported at less cost
 Economy of other countries that depend on our trade would be hurt
Trade Barriers
1.Tariffs – excise taxes on imported goods ; imposed for revenue or protection ; may either be revenue or protective tariffs
2.Import Quotas –specify the maximum amounts of commodities which may be imported
3.Nontariff Barriers – Licensing requirement , unreasonable standards ( product quality or safety, unnecessary red tape
custom procedure)
4.Voluntary Export Restrictions – foreign firms voluntarily limit the amount of their exports to a particular country
PRIVATE ECONOMY
 Operated for the benefit of business and industry ; for profit
 Determines how much money it had and then spends it’s income according to its needs
PUBLIC ECONOMY
 Focuses on service ; budget is allocated based on the previous allocation or budget
Theory of Public Finance – concerned with a collective system of economy ; aware of the numerous functions of
government . ( Governance, Public Economy, Fiscal administration, Public income , taxation and other sources of
government income)
SOURCES AND USES OF PUBLIC FUNDS
 Taxes – biggest source of public funds ; most important source of government revenues; compulsory blevy or
monetary imposition by the state without consideration of any special benefits to be awarded by the taxpayer
 Taxes are collected by two : ( tax collecting agencies – Bureau of Internal Revenue and Bureau of Customs)
 Government also earns from the non—tax revenues ( fines and fees, licenses and registration charges, commercial
revenues .
Public Expenditures:
1.Education – solemn duty of the government of at least a Primary Education to eliminate illiteracy and all concomitants
2.National Defense , Peace and Order – chief concern is provide national defense , protection against foreign aggression
and terrorism.Essential to freedom. To orderly pursuit of productive endeavors.
3.Health and welfare – functional activity of government that has grown tremendously important through time and
become more complex ; include societies indigents, the information, and the aged
4.Economic Development – projects include infrastructure, agro – industrial production ( export and domestic
consumption) ; installation and rehabilitation of public works , power and water supply, transportation and
communication.
TAXATION – act of laying a tax.process or means by which the sovereign through its law – making body raises income to
defray the necessary expenses of the government.
Purposes of Taxation:
1.Raise income for government needs and this is identified as the revenue purpose.
2.Secondary purposes of taxation:
 Compensatory Purposes
a.Reduce excessive inequalities of wealth
b.Maintain high level of employment
c.Control inflation
 Sumptuary or Regulatory Purposes , to implement the police power of the State which is in charge in the
promotion of general welfare
Theory and Basis of Taxation
1.The existence of government is a necessary and that it cannot continue without the means to pay its expenses. It has a
right to compel all citizens and property within its limits to contribute.
2.Fiund in the reciprocal duties of protection and support between the State and it’s inhabitants. The State collects taxes
from the subjects of taxation in order that it may be able to perform the functions.The citizens pay taxes in order that they
may be secured in the enjoyment of the benefits of organized society.
3.The Lifeblood theory – taxes are Lifeblood of the government and their prompt band certain availability are an imperious
. Taxation depends the government’s ability to serve the people of whose benefit taxes are collected.
Principles of Taxation ( Benefit – Received and the Ability – to – Pay Principles)
BENEFIT –RECEIVED PPRINCIPLE
 People should be taxed according to the benefits they receive or expect to obtain from government activities.
 One gets a greater benefit from government , he should pay more: if one gets less, he should pay less
 Benefits are hidden , difficult to measure , since there is no way to estimate the value of many benefits .
ABILITY – TO – PAY PRINCIPLE
 Most widely accepted principle of taxation at present.
 Every citizen should contribute to the support of the government in proportion of his ability to pay.Most able
should pay the most. The goal of this is achieving equity in two dimensions:
 Horizontal Equity – taxing those in the same position the same amount because they have the ability to
pay
 Vertical Equity – taxing those with more money, more heavily , each according to his ability to pay
THE COST OF SERVICE THEORY
  Services are rendered out of prices and are a bit easy to determine ( postal railway services, supply of electricity)
. Most of the expenditures incurred in State cannot be fixed for each individual because it cannot be exactly
determined.
FISCAL ADEQUACY PRINCIPLE
 Tax system must be productive of adequate revenue. Should be able to yield enough revenue to meet the
increasing expenditures of the government.Tax system should be adequate as it sources for future revenues.
PROPORTIONATE PRINCIPLE
 If taxes are levied in proportion to the incomes of the individuals, it will extract equal sacrifice .
 When income increases, the marginal utility of income decreases. The equality of sacrifice can only be achieved if
the person with high income are taxed higher rates and those with low income are taxed low.
Principle of Certainty , Convenience and Economy
1.Certainty (Adam Smith) – a good tax ought to be certain , not arbitrary . Time of payment b, manner of payment, the
quantity to be paid , ought all to be clear and plain to the contributor and every other person. Government provided
specified date to pay taxes. Collection should not vary.
2.Convenience – payment of taxes is an important criterion of a good tax system which provides that taxes paid should be
the least annoying or should not be troublesome.
3.Economy – No tax should be imposed which is not capable of efficient and economical administration. The cost of tax
collection should be low in proportion to its yield. “ Every tax ought to be so contrived as both to take out and to keep out
the pockets of the people as little as possible , over and above what it brings into the public treasury of the state”.
Canons of Taxation or Three Basic Principles of a Sound Tax System
 Requirements of a good tax system . Anchored on the principles of taxation :
1. Fiscal Adequacy – good tax system must be productive to enable the government to meet its expenditures.
Should be sufficient enough and capable of expanding or contracting annually in response to variations in
public expenditures.
2. Equality or Theoretical Justice – tax burden should be proportionate to the taxpayer’s ability to pay. Tax
system may be just, taxes should be fairly levied and uniformly paid by all ought to hear it.
3. Administrative Feasibility – tax laws should be capable of convenient, just, and effective administration.
Characteristics of Nature of the States Power to Tax
1.Inherent in sovereignty , hence it may be exercised, although not expressly granted by the Constitution.
2.Legislative in character , hence only the legislature can impose taxes.
3.Subject to constitutional and inherent limitations , hence it is not an absolute power that can be exercised by the
legislative anyway it pleases.
Processes Included in Aspect of Taxation
1.Levying or imposition of tax( legislative act) 2.Collection of the tax levied ( essentially administrative in character)
Essential Characteristics of Tax
1.An enforced contribution 2.Levied pursuant to a legislative authority
3.Proportionate in character. 4.Payable in money.
5.Levied upon persons and property within the jurisdiction of the State. 6.Required to be paid at regular intervals.
7.Levued and collected for the purpose of raising revenue to be used for public purpose.
Classification of Taxes
A.Accdg. to who bears the burden or transfer of the payment of the tax to the final consumer
1. Direct – tax is demanded from the person who shoulders the burdens of tax or tax which taxpayer cannot shift to
another ( income tax, donor’s tax)
2. Indirect – tax which is demanded from one person in the expectation and intention that he shall indemnify himself
at the expense of another or tax which can be passed on by the seller to the buyer ( VAT, excise or sin taxes)
B.Accdg. to rate or gradation
1. Proportional ( method of setting tax rates so that the taxes paid as a fraction of income remain constant as actual
income rises).
2. Regressive ( method of setting tax rates so that the fraction of income paid in taxes fall as income rises)
3. Progressive ( method of setting tax rates so that the fraction of income paid in taxes rises as income rises)
C.Accdg.to economic stages
1. Acquisition or possession ( taxes on wealth)
2. Exchange ( taxes on transaction)
3. Consumption ( taxes on commodities and services)
D.Accdg. to mode of levy
1. Personal ( poll tax)
2. Impersonal ( real estate and other property taxes)
3. Mixed ( inheritance taxes)
E.As to authority imposing the tax or scope
1. National – imposed by the national government ( income tax, custom duties)
2. Municipal or Local – imposed by municipal corporation or Local governments ( real estate , occupation tax)
F.As to determination of amount
1. Specific – tax imposed and based on a physical unit of measurement as by head, number, weight, length or volume
( tax on cigars, distilled spirits)
2. Ad Valorem – tax of a fixed proportion of the value of property with respect to which the tax is assessed ( excise
tax on cars)
G.As to purpose
1. General, Fiscal and revenue – imposed for the general purpose of supporting the government ( income tax ,
donor’s tax)
 2. Specific or Regulatory – imposed for a specific purpose to achieve some social or economic objectives ( protective
tariffs or custom duties)
TAXES AND GOVERNMENT BORROWING
 Government – best provider of goods and services
 In order to provide goods and services , the government must acquire purchasing power . Maintain funds for the
resources by taxation , by borrowing.
 Taxation may be in form of money, goods or services, limited to specific goods, it may be general, it may be
imposed on incomes or assets of individuals or other entities.
 Government may also borrow from banks and other financial institutions , companies, and individuals to finance
expenditures.The amount that a government may borrow is limited by its ability to repay.
STABILIZATION
 Involves the effort by the government to achieve full employment with low inflation or an acceptable
unemployment and inflation.
 2 policies ( Fiscal Policy and Monetary Policy)
 Fiscal Policy – involves changes in taxation and expenditures for economic stabilization ; changes in government
income and expenditures in order to achieve the desired goals.
 Monetary Policy – involves changes in the money supply , credit and interest rates to achieve these purposes
