This document provides an overview of macroeconomics concepts. It begins with defining economics and its origin from the Greek words oikos and nomus, meaning household management. It then discusses the central problem of scarcity due to limited resources and unlimited wants. Factors of production and the circular flow model showing the flow of resources and payments between households and businesses are introduced. Opportunity cost, basic economic questions around consumption, distribution and growth, and the types of economic systems are also summarized. Finally, it distinguishes between positive and normative economics and microeconomics versus macroeconomics.
4. Origin of the word “ECONOMICS”
OIKOS
Household
NOMUS
System or
Management
Oikonomia or Oikonomus therefore means the
“management of household”.
The word became known or was referred to as
“state management” with the growth of the
Greek society until its development into city-
states.
5. The Central Problem of Economics
SCARCITY
is the basic and central problem
confronting every man and society.
it is the heart of the study and the
reason why you are studying it.
Scarcity can also be looked into as the
limited availability of economic
resources relative to man’s or society’s
unlimited demand for goods and
services.
6. Figure 1.1 Problem of Scarcity
Unlimited WantsLimited
Resources
SCARCITY
The figure illustrates the interaction of limited resources available and
the unlimited wants of man and society. If limited resources fall short
to meet the unlimited wants of the society, it will eventually create a
problem, which is called “SCARCITY”.
7. FIGURE 1.2 ECONOMICS
ALLOCATION
The figure depicts the relationship between available limited resources
and the unlimited wants of a man and society. It shows that when
limited resources fail to meet the unlimited wants of the society,
economics comes into play in order to effectively and efficiently
allocate resources.
8. Factors of Production
1. Land – this broadly refers to all natural
resources, which are given by, and found
in nature, and are, therefore, not
manmade.
2. Labor – is any form of human effort
exerted in the production of goods and
services.
3. Capital – is manmade goods used in the
production of other goods and services.
4. Entrepreneurship – An entrepreneur is
the person who organizes, manages and
assumes the risk of a firm, develops a
new idea or a new product and turns it
9. Figure 1.3 Circular Flow
Model
Wages and salaries,
rent, interest, profit
RESOURCE MARKET
Labor, land, capital,
entrepreneurial ability
HOUSEHOLDS
sell resources
buy products
BUSINESSES
buy resources
sell products
Goods and Services
PRODUCT MARKET
Consumption
Expenditure
The figure illustrates the flow of resources and payments for their use
as well as the flow of goods and services and payment for them. Thus,
the household sector sells the resources to and buys products from
the businesses sector while the business sector buys resources from
and sells products to the household sector.
10. The Concept of Opportunity
Cost
Opportunity Cost refers to the foregone
value of the next best alternative. In
particular, it is the value of what is given-
up when one makes a choice.
The thing thus given up is called the
opportunity cost of one’s choice.
Opportunity Cost however is expressed
in relative price. This means that price of
one item should be relative to the price
of another.
11. Figure 1.4 Opportunity Cost
Savings (Firm/Economy)
Credit (Interest) Investment (GDP Growth)
This figure illustrates the concept of opportunity cost. The savings of
the firm or economy is subject to two choices between credit and
investment. If the savings of an individual will be put on credit, there is
a possibility of earning interest or a bad debt (not getting the money
back). On the other hand, when savings of an economy is invested, it
may increase the GDP or may lower the production of the economy.
With this in mind, what do you think is the best choice or the best
choice or next best alternative?
14. Example of Market Segment in
Target Marketing
Type of Market Segment Shared Group Characteristics
Demographic Segment Measurable statistics such as age,
income, occupation, etc.
Psycho-graphic Segment Lifestyle preferences such as music
lovers, city or urban dwellers, etc.
Use-based Segment Frequency of usage such as
recreational drinking, traveling, etc.
Benefit Segment Desire to obtain the same product
benefits such as luxury, thriftiness,
comfort food, etc.
Geographic Segment Locations such as home address,
business address, etc.
15. The 3 E’s of Economics
1. Efficiency –refers to productivity and
proper allocation of economic
resources. It also refers to the
relationship between scarce factor input
and output of goods and services.
2. Effectiveness – means attainment of
goals and objective.
3. Equity – means justice and fairness.
16. POSITIVE ECONOMICS
Positive Economics is an economic
analysis that considers economic
conditions “as they are”, or considers
economics “as it is”. It uses objective or
scientific explanation in analyzing the
different transactions in the economy.
◦ Examples of Positive Statements:
The economy is now experiencing a slowdown
because of too much politicking and corruption in the
government.
The economy is now on slowdown because the world
is experiencing financial and economic crisis. Other
reasons are also due to the financial problems of the
US, higher crude oil prices in the international market
17. NORMATIVE ECONOMICS
Normative Economics is an economic
analysis which judges economic
conditions “as it should be”. It is that
aspect of economics that is concerned
with human welfare.
◦ Examples of Normative Statements:
The Philippine government should initiate political
reforms in order to regain investor confidence, and
consequently uplift the economy.
In order to minimize the effect of global recession,
the Philippine government should release a
stimulus package geared towards encouraging
economic productivity.
18. Ceteris Paribus Assumption
Ceteris Paribus a Greek term which
means “all other things are held constant
or all else equal.”
This assumption is used as a device to
analyze the relationship between two
variables while the other factors are held
unchanged.
It is widely used in economics as an
exploratory technique as it allows
economists to isolate the relationship
between two variables.
19. MICROECONOMICS
Is the branch of economics which deals
with the individual decisions of units of
the economy – firms and households –
and how their choices determine relative
prices of goods and factors of
production.
It focuses on its two main players – the
buyer and the seller, and their
interactions with one another.
It operates on the level of the individual
business firm, as well as that of the
20. MACROECONOMICS
Is the branch of economics that studies the
relationship among broad economic aggregates like
national income, national output, money supply,
bank deposits, total volume of savings, investment,
consumption expenditure, general price level of
commodities, government spending, inflation,
recession, employment, and money.
The term macro, in contrast to micro implies that it
seek to understand the behavior of an economy as
a whole.
Macroeconomics focuses on the four specific
sectors of the economy: the behavior of the
aggregate household (consumption); the decision
making of the aggregate business (investment); the
policies of the government (government spending);
21. Types of Economic Systems
o Traditional Economy –is basically a subsistence economy.
An individual or a family produces goods and services only for
his or his own family’s consumption.
o Command Economy – is a type of economy wherein the
manner of production is dictated by the government.
o Market Economy – or capitalism’s basic characteristic is that
the resources are privately owned, and that the people
themselves make the decisions. It is an economic system
wherein most economic decisions and means of production
are made by the private owners.
o Socialism – is an economic system wherein key enterprises
are owned by the state. In this system private ownership is
recognized. However, the state has control over a large
portion of capital assets, and is generally responsible for the
production and distribution of important goods.
o Mixed Economy – this economy is a mixture of market
system and the command system.
22. Important Economic Terms
Wealth – is anything that has a functional value,
which we can be traded for goods and services.
Consumption – is the direct utilization or usage
of the available goods and services by the buyer
or the consumer sector.
Production – is defined as the formation or
creation by firms of an output. It is basically the
process by which land, labor, and capital are
combined in order to produce goods and
services.
Exchange – this is the process of trading or
buying and selling of goods and/or services for
money and/or its equivalent.
Distribution – this is the process of allocating or
apportioning scarce resources to be utilized by
the household, the business sector, and the rest
23. ACTIVITY #1
Based on your personal observation,
make a short discussion of the current
status of the Philippine economy (in a
MACROECONOMIC perspective).
◦ At least Five (5) persons in a group.
25. Demand
Pertains to the quantity of a good or service
that people are ready to buy at a given prices
within a given time period, when other factors
besides price are held constant.
Simply put, the demand for a product is the
quantity of a good or service that buyers are
willing to buy given its price at a particular
time.
◦ Demand therefore implies three things:
1. Desire to possess a thing (good or service)
2. The ability to pay for it or means of purchasing it; and
3. Willingness in utilizing it.
26. Market
A market is where buyers and sellers
meet.
It is the place where they both trade or
exchange goods or services.
◦ KINDS OF MARKET
1. Wet Market – is where people usually buy
vegetables, meat, fish, etc.
2. Dry Market – is where people buy shoes
clothes, or other dry goods.
27. Methods of Demand Anlaysis
Demand Schedule
Demand Curve
Demand Function
28. Demand Schedule
A demand schedule is a table that shows
the relationship of prices and the specific
quantities demanded at each of these
prices.
Generally, the information provided by a
demand schedule can be used to
construct a demand curve showing the
price-quantity demanded in graphical
form.
29. Demand Schedule
Situation Price (P)/kg Quantity (kg)
A 35 8
B 24 13
C 13 20
D 12 30
E 11 45
Hypothetical Demand Schedule for Rice per Month
TABLE 2.1
The table shows the various prices and quantities for the demand for
rice per month. For instance, at a given price of P35 the buyer is willing
to purchase only 8 kilos of rice (situation A); however, at a price of P11,
he is willing to buy 45 kilos of rice (situation E).
30. Demand Curve
The demand curve is a graphical
representation showing the relationship
between price and quantities demanded
per time period.
A demand curve has negative slope thus it
slopes downward from left to right. The
downward slope indicates the inverse
relationship between price and quantity
demanded.
31. Figure 2.1: Demand Curve
Pₒ
P₂
P₁
Qⅾ
Q₂
The figure illustrates a typical demand curve. The Y-axis represents
price (P), while the X-axis represents the quantity demanded (Qd). The
demand curve is negatively slope or downward sloping. The (negative)
slope measures the change in quantity demanded for a unit change in
price. This indicates that as the price of commodities decreases
(increases), more (less) goods will be bought by the consumer.
P
32. Demand Function
A demand function shows the
relationship between demand for a
commodity and the factors that
determine or influence this demand.
Demand function is expressed as a
mathematical function:
33. Mathematical Function for Demand
Qd = f (product’s own price, income of
consumers, price of related goods, etc.)
◦ We can therefore come-up with the demand
equation as:
Qd = a – bP
WHERE:
Qd = quantity demanded at a particular price
a = intercept of the demand curve
b = slope of the demand curve
P = price of the good at a particular time period
34. ◦ We can now illustrate our demand
function using a hypothetical example.
Let us assume that the curent price of
good A is P5.00. The intercept of the
demand curve is 3 while the slope is
0.25. Look for the quantity demanded?
Qd = a – bP
Qd = 3 – 0.25 (5)
Qd = 3 – 1.25
Qd = 1.75 units of good A
35. Change in Quantity Demanded
We can say that there is change in quantity
demanded (∆Qd) if there is a movement
from one point to another – or from one
price-quantity combination to another –
along the same demand curve.
A change in quantity demanded is mainly
brought about by an increase (a decrease)
in the product’s own price.
The direction of the movement however is
inverse considering the law of demand.
We can therefore say that there is a change
in quantity demanded if the price of the
good being sold changes.
36. Figure 2.2: Change in Quantity
Demanded
P
P
DQQₒ
Q
P
b
a
The figure illustrates the concept of change in quantity demanded. Change
in quantity demanded occurs when price of the product changes, thus,
resulting to a change in quantity demanded. This is illustrated in the graph
above where Pₒ declines to P₁ resulting to change in Qₒ to Q₁ and a
movement along the demand curve from point a to point b.
37. Change in Demand
There is a change in demand id the
entire demand curve shifts to the right
(left) resulting to an increase (decrease)
in demand due to other factors other
than the price of the good sold.
Conversely demand decreases or falls if
the entire demand curve shifts
downward to the left. Thus, at the same
price level, less amounts of a good
service demanded by consumers.
38. Figure 2.3: Change in Demand
P
Pₒ
Q₁Qₒ
Qd
D’
D
a. Increase in Demand
D’
D
Qd
P
Pₒ
QₒQ₁
b. Decrease in Demand
This figure shows the two different movements of the demand curve. Figure
2.3a shows an increase in demand, while Figure 2.3b illustrates decrease or
fall in demand.
39. Forces that Cause the Demand Curve
to Change
Taste or Preferences –pertain to the personal likes or
dislikes of consumers for certain goods and services.
Changing Incomes – increasing incomes of households
raise the demand for certain goods or services or vice
versa.
Occasional or Seasonal Products – the various events or
seasons in a given year also result to a movement of the
demand curve with reference to particular goods.
Population Change – an increasing population leads to an
increase in the demand for some types of good or services,
and vice-versa.
Substitute and Complementary Goods – substitute
goods are goods that are interchanged with another goods.
Expectations of Future Prices – if the buyers expect the
price of a good or service to rise (fall) in the future, it may
cause the current demand to increase (decrease). Also
expectations about the future may alter demand for a
specific commodity.
40. SUPPLY
Supply is the quantity of goods and
services that firms are ready and willing
to sell at a given price with a period time,
other factors being held constant.
Supply is a product made available for
sale by firms.
It should be remembered that the sellers
normally sell more at a higher price than
at a lower price.
41. Methods In Supply Analysis
Supply Schedule
Supply Curve
Supply Function
42. Supply Schedule
A supply schedule is a table listing the
various prices of a product and the
specific quantities supplied at each of
these prices at a given point in time.
Generally, the information provided by a
supply schedule can be used to
construct a supply curve showing the
price/quantity supply relationship in
graphical form.
43. Supply Schedule
Table 2.2
Hypothetical Supply Schedule for Rice per
Month
Situation Price (P)/kg. Quantity (kg.)
A 35 48
B 24 41
C 13 30
D 12 17
E 11 5
The table shows the various prices and quantities for the supply for rice per
month. For instance, at a given price of P35 the seller is willing to sell 48kgs.
of rice (situation A); however, at a price of P11, he is willing to sell 5kgs. of rice
(situation E).
44. Supply Curve
A supply curve is a graphical
representation showing the relationship
between the price of the product sold or
factor of production and the quantity
supplied per time period.
The typical market supply curve for a
product slopes upward from left to right
indicating that as a price rises (falls)
more (less) is supplied.
The upward slope indicates the positive
relationship between price and quantity
45. Figure 2.4: Supply Curve
S
P
P₂
Q₂
Qₛ
Q₁Qₒ
P₁
Pₒ
a
Sₒ
b
The figure illustrates a typical supply curve. The Y-axis represents the price
(P) and the X-axis represents the quantity supplied (Qₛ). The supply curve
is positively sloped or upward sloping. This positive slope indicates that as
the price of commodities increases (decreases), more (less) goods will be
offered for sale by the producers.
46. Supply Function
A supply function is a form of
mathematical notation that links the
dependent variable, quantity supplied
(Qs), with various independent variables
which determine quantity supplied.
Among the factors that influence the
quantity supplied are price of the
product, the number of sellers in the
market, price of factor inputs, technology,
business goals, importations, weather
conditions, and government policies.
47. Mathematical Function for
Supply
Qs = f (product’s own price, number of
sellers, price of factor input, technology,
etc.)
◦ Given our supply function, we can now
derive our supply equation:
Qs = a + bP
WHERE:
Qs = quantity at a particular price
a = intercept of the supply curve
b = slope of the supply curve
P = price of the good sold
48. We can now illustrate our supply
equation using a hypothetical example.
Suppose the price of good A is P5.00.
The intercept of the supply curve is 3
and the slope of the supply curve is 0.25.
What is the quantity of goods to be
supplied?
◦ Qs = a + bP
◦ Qs = 3 + 0.25 (5)
◦ Qs = 3 + 1.25
◦ Qs = 4.25 units
49. Change in Quantity Supplied
A change in quantity supplied occurs if
there is a movement from one point to
another point along the same supply
curve.
A change in quantity supplied is brought
about by an increase or decrease in the
product’s own price.
The direction of the movement however
is positive considering the Law of Supply.
50. Figure 2.5: Change in Quantity
Supplied
The figure illustrates a change in quantity supplied. Change in quantity
supplied happens when the price of the product changes, thus resulting to a
change in quantity supplied. This is illustrated in the graph above where Pₒ
increases to P₁ resulting to a change in Qₒ to Q₁ and a movement along the
same supply curve from point a to point b.
S
P
Qₛ
P₁
Pₒ
Qₒ Q₁
b
a
51. Change in Supply
A change in supply happens when the
entire supply curve shifts leftward or
rightward. At the same price, therefore,
less (more) amounts of a good or service
is supplied by producers or sellers.
On the other hand, supply decreases if
the entire supply curve shifts leftward. At
the same price, fewer amounts of a good
or service are sold by producers.
52. Figure 2.6: Change in Supply
The figure shows the two opposite movements of the supply curve when
other factors other than the price are the main causes. Figure 2.6a shows
an increase in supply, Figure 2.6b illustrates a decrease or fall in supply.
S
S’
SS’
Qₛ Qₛ
Q₁ Q₁Qₒ Qₒ
P
Pₒ Pₒ
a. Increase in Supply b. Decrease in Supply
53. Forces that Cause the Supply
Curve to Change
Optimization in the use of
factors of production
Technological change
Future expectations
Number of sellers
Weather conditions
Government policy
54. Market Equilibrium
Market Equilibrium generally pertains to
a balance that exists when quantity
demanded equals quantity supplied.
Market Equilibrium is the general
agreement of the buyer and seller of the
exchange of goods and services at a
particular price and at a particular
quantity. At equilibrium point, there are
always two sides of the story, the side of
buyer and that of the seller.
55. Equilibrium Market Price
Equilibrium Market Price is the price
agreed by the seller to offer its good or
service for sale and for the buyer to pay
for it. Specifically, it is the price at which
quantity demanded of a good is exactly
equal to quantity supplied of the same
good.
56. Figure 2.7: Equilibrium Market
Price and Quantity
The figure shows the equilibrium between quantity demanded and quantity
supplied (where Y-axis represents the prices and X-axis the quantities). The
market equilibrium is the point of intersection between the supply (S) and the
demand (D) curves, that is, at P=30 and Q=150. any change in the price and
quantity will result to market disequilibrium, thus, when quantity demanded is
less than quantity supplied a surplus occurs. On the other hand, if quantity
Equilibrium Point
Surplus
Shortage
a b
c
e f
SP
Q
100 150 200 250 30050
20
50
40
30
10 D
57. Surplus
Surplus is a condition in the market
where the quantity supplied is more than
the quantity demanded.
When there is surplus, the tendency is
for sellers to lower market prices in order
fro goods and services to be easily
disposed from the market.
This means there is a downward
pressure to price when there is a
surplus in order to restore equilibrium in
the market.
58. Shortage
Shortage is basically a condition in the
market in which quantity demanded is
higher than quantity supplied at a given
price.
When there is a shortage of goods and
services in the market, there is an
upward pressure on prices to restore
equilibrium in the market.
59. Changes in Demand
Clearly, an increase in demand with
supply remaining constant raises both
equilibrium price and quantity.
Conversely, a decrease in demand with
supply remaining unchanged lowers both
equilibrium price and quantity.
60. Figure 2.8: Change in Demand
The figure shows the effect of an increase in demand D” to the equilibrium
point, when supply S remains constant. Generally, an increase in demand
results to higher price and quantity, as shown by E₁.
150 200 25010050
30
40
20
10
50
P
D”
S
D’
Q
Eₒ
E₁a
61. Changes in Supply
We can therefore say that an increase in
supply generally results to a decrease in
price but increase in the quantity of
goods sold in the market. In contrast, if
supply decreases while demand remains
constant, the equilibrium price increases
but the equilibrium quantity declines.
62. Figure 2.9: Change in Supply
The figure shows the effect of an increase in supply S’ to the equilibrium
point, when demand D remains constant. Generally, an increase in supply S’
results to lower price but higher quantity, as shown by E₁.
10
50 100 150 200 250
20
30
40
50
P
Q
S’
S”
a
Eₒ
E₁
D
64. Price Controls
Price control is the specification by the
government of minimum or maximum
prices for certain goods and services,
when the government considers it
disadvantageous to the producer or
consumer.
The price may be fixed at a level below
the market equilibrium price or above it
depending on the objective in mind.
65. Floor Price
A floor price is the legal minimum price
imposed by the government on certain
goods and services. A price at or above the
price floor is legal; price below it is not.
The setting of a price floor is undertaken by
government if a surplus in the economy
persists.
Floor price is form of assistance to
producers by the government for them to
survive in their business.
Floor prices are mainly imposed by the
government on agricultural products
especially when there is bumper harvest or
labor market by imposing minimum wages.
66. Figure 2.10: Floor Price
The figure shows the equilibrium between quantity demanded and quantity
supplied at P30.00 and 150 units of goods. If government imposes a floor
price of P40.00, quantity demanded decreases to 100 units while quantity
supplied increases to 200 units resulting in a shortage of 100 units. In the
long-run, a floor price will create surplus of goods in the market.
50 100 150 200 250
10
20
30
40
50
P
Q
300
Floor Price
Equilibrium
Point
D
S
67. Price Ceiling
A price ceiling is usually below the
equilibrium price.
A price ceiling causes a shortage as the
price will be below the equilibrium and
demand will exceed supply.
A price ceiling is therefore imposed by
the government to protect consumers
from abusive producers or sellers who
take advantage of the situation.
68. Figure 2.11: Ceiling Price
The figure shows the equilibrium between quantity demanded and quantity
supplied at P30.00 and 150 units of goods. If government imposes a ceiling
price of P20.00, quantity demanded increases to 200 units while quantity
supplied decreases to 100 units resulting in a shortage of 100 units. In the
long-run, a ceiling price will create shortage of goods in the market.
Ceiling Price
Equilibrium Point
100 150 200 250 30050
20
30
40
50
10
P
S
D
Q
69. Market Equilibrium: A
Mathematical Approach
Demand equation:
◦ Qd = a – b(P) (1)
Supply equation:
◦ Qs = a + b(P) (2)
Equilibrium equation:
◦ Qd = Qs (3)
Take note that in the said equations, there are three unknown
variables: Qd, Qs, and P where Qd is quantity demanded, Qs is
quantity supplied, and P is price. Moreover, the parameter in equations
(1) and (2) is a and the coefficient is b. given these equations, we can
now determine the equilibrium price and quantity.
70. PROBLEM:
Look for the Pₑ and Qₑ given the following:
◦ Qd = 68 – 6P
◦ Qs = 33 + 10P
Solving the problem, we can simply state our
equilibrium equation as:
a – b(P) = a + b(P)
Substituting the values:
68 – 6P = 33 + 10P
Solving for the unknown (P), we simply group
similar terms:
68 – 33 = 10P +6P
35 = 16P
Dividing both sides by 16:
P = 2.19
71. The next problem is to determine the Qₑ.
◦ Substitute the value of the price to the
previous equation:
68 – 6P = 33 + 10P
68 – 6 (2.19) = 33 + 10 (2.19)
68 – 13.14 = 33 + 21.9
54.86 = 54.9 therefore this is the value for Qd=Qs
55 = 55 the equilibrium quantity and the equilibrium price is
2.19
72. ACTIVITY #2
A. Complete the following table by solving the quantity
demanded and the quantity supplied given the price.
After you have completed the table you must indicate
whether there is a Surplus/Shortage at the particular
price level.
Price Qd Qs Surplus/
Shortage
6 620 56
5 591 77
4 472 98
3 323 129
2 194 148
1 145 217
73. B.
Solve for the Qd:
DEMAND SCHEDULE
Situation Price (P) Quantity (Q) Qd
A 620 56
B 591 77
C 472 98
D 323 129
E 194 148
F 145 217
74. C.
Solve for the Qs:
SUPPLY SCHEDULE
Situation Price (P) Quantity (Q) Qs
G 779 923
H 638 832
I 547 641
J 456 509
K 285 238
L 114 127
76. Elasticity of Demand
Elasticity means responsiveness or
sensitivity to changes on certain factors.
In general, elasticity is defined as the ratio of
the percent change in one variable to the
percent change in another variable.
It is a tool used by economists to measure a
reaction of a function to changes in
parameters in a relative way.
Demand elasticity, in particular, is a measure
of the degree of responsiveness of quantity
demanded of a product to a given change in
one of the independent variables which
affects demand for that product.
77. Factors that Cause Change
Price elasticity of demand – is the
responsiveness of consumers’ demand to
change in price of the good sold.
Income elasticity of demand – is the
responsiveness of consumers’ demand to
a change in their income.
Cross price elasticity of demand – is
the responsiveness of demand for a
certain good, in relation to changes in
price of other related goods.
78. Price Elasticity of Demand
We are dealing with the sensitivity of
quantities bought by a consumer to a
change in the product price.
◦ We can therefore define price elasticity of
demand as the percentage change in quantity
demanded caused by a 1% change in price.
Thus, we can derive price elasticity of demand
using:
◦ 𝐸ⅾ =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
79. Arc Elasticity of Demand Formula:
◦ 𝑬 𝑭 =
𝑸 𝟐−𝑸 𝟐
𝑸 𝟏+𝑸 𝟐 /𝟐
+
𝑃2−𝑃2
𝑃1+𝑃2 /2
where:
Eₚ = coefficient of arc price elasticity (elasticity coefficient)
Q₁= original quantity demanded
Q₂= new quantity demanded
P₁= original price
P₂= new price
80. Suppose we have the following price and
quantity schedule for good A.
P Q
6 0
4 10
2 20
0 30
Assuming that we want to determine how
consumers would react if the price of good
A will decrease. For instance, applying the
demand elasticity formula, we can solve the
elasticity coefficient assuming that the price
will decrease from P6.00 to P4.00 and
quantity demanded increases from 0 to 10
82. Interpretation of the Elasticity
Coefficient
Inelastic – demand for a product is said
to be inelastic if consumers will pay
almost any price for the product. Inelastic
demand means that a producer or seller
can raise prices without much hurting
demand for its product.
Elastic – demand for a product may be
elastic if consumers will only pay a certain
price, or a narrow range of prices, for the
product. Elastic demand means that
consumers are sensitive to the price at
which a product is sold and will only buy it
if the price rises by what they consider too
83. Factors Affecting Demand
Elasticity
1. The availability of substitutes – this is
probably the most important factor
influencing the elasticity of a good or
service. In general, the more substitutes,
the more elastic the demand will be.
2. Amount of income available to spend
on the good – this factor affecting
demand elasticity refers to the total a
person can spend on a particular good
or service.
84. Graphical Illustration
Figure 3.1: Elastic Demand Curve
The figure illustrate an elastic demand curve. An elastic demand curve is flatter
than atypical demand curve. This is because a smaller change in price (broken
line ab) calls forth a greater percentage change in quantity demanded, (broken
P
Q
2
5
1
10 15 20 25 3530
4
3
cb
a
D
85. Figure 3.2: Inelastic Demand
Curve
The figure illustrates an inelastic demand curve. An inelastic demand curve is
steeper than a typical demand curve. This is because a large change in price
(broken line ab) calls forth a smaller change in quantity demanded (broken bc).
P
Q
4
3
2
1
5 10 15 20 25 30 35
cb
a
D
86. Figure 3.3: Extreme Types of
Demand Elasticity
The figures above are the two extreme types of demand elasticity. Figure 3.3a
illustrates a perfectly inelastic demand curve while Figure 3.3b shows a
perfectly elastic demand curve.
a. Perfectly Inelastic b. Perfectly
Elastic
D
P
Q
P
D
Q
87. Income Elasticity of Demand
Income elasticity of demand measures the
degree to which consumers respond to a
change in their incomes by purchasing more
or less of a particular good.
The coefficient of income elasticity of
demand (Ei) is determined with the formula:
◦ 𝑬 𝒕=
𝒑𝒆𝒓𝒄𝒆𝒏𝒕 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒂𝒖𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆
or 𝑬 𝒕=
%∆𝑸 𝑫
%∆𝒊
A good is considered a normal good if a rise in
income brings an increase in demand and a fall in
income brings a decrease in demand. For most
goods, the income elasticity coefficient Ei is
positive, meaning that more of them are
demanded as income rises.
On the other hand, a good is an inferior good if a
rise in income brings a decrease in demand and a
88. Cross Price Elasticity of Demand
The cross price elasticity of demand
measures the responsiveness of demand
to changes in the price of other goods,
indicating how much more or less of a
particular product is purchased as other
prices change.
The cross price elasticity of demand is
defined as the percentage change in
quantity demanded of one good (X)
divided by the percentage change in the
price of a related good (Y).
89. The formula for cross price elasticity of
demand is:
◦ 𝑬 𝒙𝒚=
%∆ 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝑿 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
%∆ 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒀
Example, suppose the price of a burger falls by
10% and the demand for pizza decreases by
5%. What is the cross elasticity for pizza with
respect to the price of burger?
𝐸 𝑥𝑦=
−5%
−10%
= 0.50
Suppose that when the price of Coke falls by
10% and the quantity of pizza you demanded
increased by 2%. Find the cross price elasticity
of demand for pizza with respect to the price of
coke.
𝐸 𝑥𝑦=
2%
−10%
= −0.20
90. Elasticity of Supply
Supply elasticity refers to the reaction or
response of the sellers or producers to
price changes of goods sold.
In other words, it is a measure of the
degree of responsiveness of supply to a
given change in price.
Moreover, it is the percentage change in
quantity supplied given a percentage
change in price.
91. ◦ The formula for elasticity of supply is:
𝑬 𝟐=
%∆ 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒅
%∆ 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
Suppose the price of rice increases from
P20.00 to P22.00, the quantity supplied
increases from 100 million metric tons to
120 million tons. Thus, a 10% increase in
the price of rice increased the quantity
supplied by 20% using the formula for the
supply elasticity.
92. Figure 3.4: Supply Elastic
The figure illustrates an elastic supply curve. An elastic supply curve is flatter
than a normal supply curve. This is because a smaller change in price (broken
line ba) calls forth a greater change in quantity supplied (broken line cb).
1
2
3
4
a
bc
S
Q
P
5 25 30201510
93. Figure 3.5: Supply Inelastic
This figure illustrates an inelastic supply curve. An inelastic supply curve is
more vertical than a normal supply curve. This is because any change in price
(broken line ba) calls forth a smaller change in quantity supplied (broken line
5 10 15 20 25 30
Q
1
2
3
4
P
a
bc
S
94. Figure 3.6: Extreme of Supply
Elasticity
The figures above are the two extreme types of supply elasticity. Figure 3.6a
illustrates a perfectly inelastic supply curve while figure 3.6b shows a perfectly
elastic supply curve.
a. Perfectly Inelastic b. Perfectly
Elastic
P
S
Q
P
S
Q
95. EXERCISE #3
Determine the elasticity in the given
situations and indicate whether the same
is elastic, inelastic or unitary.
Situation Price (P) Quantity (Q)
A 929 71
B 489 91
C 365 112
D 239 145
E 86 178
1. Situations D & A
2. Situations B & E
DEMAND SCHEDULE
96. Situation Price (P) Quantity (Q)
G 898 922
H 745 856
I 623 649
J 577 521
K 369 273
SUPPLY SCHEDULE
1. Situations H & L
2. Situations K & G
98. Macroeconomics
Macroeconomics is the study of how we
can best increase our country’s wealth
given the available resources we have
and how these resources are transformed
by entrepreneurs into final goods and
services which we ultimately consume to
satisfy our needs and wants.
99. Role of the Government
The production
possibilities Frontier
Reasons for Economic
Growth
Capital Goods
Advances in Technology
100. Figure 4.1: Production
Possibilities Curve
This curve shows the range of possible combinations of outputs on tractors
and rice from 600 units of tractors and no rice to 700 tons of rice and no
tractors. Any point inside the curve (say point G) means unemployed
resources, while any point outside of the curve (say point F) means
350 500 580 700
300
400
500
600
Farm
Tractors
(units)
Rice (ton)
F
C
B
A
D
G
E
101. Figure 4.2: Simple Circular Flow
Model
This figure illustrates the flow of resources and payments for their use as well
as the flow of goods and services and payment for them. Thus, the household
sector sells resources to and buys product from the business sector while the
business sector buys resources from and sells products to the household
sector.
102. Figure 4.3: Complex Circular Flow
Model
This figure illustrates a more complex model of the circular flow of national
income, incorporating injections to and withdrawals from the income flow as
well as the three other main sectors of the economy interacting together in
order to achieve equilibrium level of national income.
Income
BusinessesHouseholds
Consumption
Expenditure
Capital Market
Government
Rest of the World
InvestmentSavings
Gov’t
ExpenditureTaxation
ExportsImports
103. Important Concepts and Definitions
Nominal vs. Real Values
When we refer to nominal values, such as
nominal prices, earnings, wages, or interest rates,
we refer to the peso value of the prices, earnings,
wages, or the absolute value of the interest rates.
Real values, on the other hand, are always values
in comparison, or relative, to other related
economic variables.
Positive vs. Normative Economics
Positive economic statements are facts or
relationships which can be proven or disproven.
A normative economic statement is someone’s
opinion or value judgment about an economic
104. EXERCISE #4
Economic Model Illustration
◦ Illustrate and discuss the simple and complex
circular flow model.
106. The National Income Accounting
Is the system used to measure the
aggregate income and expenditures for a
nation.
It provides a valuable indicator of an
economy’s performance.
National income accounting therefore
serves a nation similar to the manner in
which accounting serves a business or
households.
In each case, accounting methodology is
vital for identifying economic problems
107. Gross Domestic Product (GDP) Gross National Product (GNP)
The most widely used
measure of economic
performance throughout the
world.
Is the total market or money
or value of all final goods
and services produced in an
economy over a period of
one year.
Is the total market or money
value of all final goods and
services produced by a
nation’s residents, no matter
where they are located
108. What are Financial Transactions
and Secondhand Transactions?
1. Financial Transactions:
a. Buying and Selling Securities: The value
of broker’s services is included in GDP
because they perform a service.
b. Government Transfer Payments: Transfer
payments are payments for which no
productive services are concurrently
provided in exchange.
c. Privates Transfer Payments: This is a
private transfer of funds from one person to
another and these are not included in GDP.
2. Secondhand Transactions:
The value of second-hand goods is included
109. Approaches in Measuring GDP
The Expenditure Approach
The Income Approach
The Industrial Origin or Gross Value
Added Approach
110. The Expenditure Approach
Measures GDP by adding all the spending
for final goods and services during a
period of one year. Thus, we can say that
GDP is equal to:
GDP = C + I + G + (X-M)
◦ Where:
C = Personal Consumption Expenditures
I = Gross Private Domestic Investment
G = Government Consumption Expenditure and
Gross Investment
(X-M) = Net Exports
111. The Income Approach
Measures GDP by adding all the incomes
earned by a households in exchange for
the factors of production during a period
of time.
Using the income approach, GDP is
obtained as follows:
GDP = compensation of employees + rents
+ profits + net interest + indirect taxes +
depreciation
112. The Industrial Origin or Gross Value
Added Approach
The gross value added is the domestic
product of goods and services produced
by industries within the country. This total
output does not include the value of
imported goods and services.
The economy is divided into three sectors
composed of industries, as follows: (1)
agriculture, fishery, and forestry sectors;
(2) industry sector; and (3) service sector.
Under this approach the sum of all the
value added by the three major industry
sector of the economy is equal to GDP.
114. Nominal or Current GDP vs. Real
GDP
Nominal GDP is the value of all final
goods and services based on the prices
existing during the time period of
production. It is also referred as the
current market price of goods and
services produced in a given time period.
◦ Nominal GDP grows in three ways: (1) output
rises and prices remain unchanged; (2)prices
rises and output is constant; and (3) both
output and prices rise.
Real GDP is the value of all final goods
and services produced during a given
time period based on the prices existing in
115. ◦ We can therefore convert nominal GDP to
real GDP by using the ff.:
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷 =
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝑫𝒆𝒇𝒂𝒄𝒕𝒐𝒓
× 𝟏𝟎𝟎%
Suppose GDP rises from P20 trillion in
2000 to P35 trillion in 2009, the current
year. If the GDP deflator is 125 in 2009,
what is the real GDP in 2009?
To convert the current GDP:
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃2009 =
35,000
125
× 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃2009 = 28,000
116. EXERCISE #5
◦ Look for the Philippines’ Gross Domestic
Product from the year 2008 to 2010.
Make a trend analysis.
Make a summary and conclusion out of
your findings.
118. Consumption
Consumption means the expenditures
made by households on goods and
services.
Consumption is not the monopoly of
households considering both the business
and government sectors also consumes
goods and services.
120. EXERCISE #6
Discuss the importance of the following
terms in macroeconomics level. You may
use concrete examples to expound every
concept.
1. Income
2. Consumption
3. Multiplier Concept
4. Savings
5. Taste and Preference
6. Population
7. Price Level
8. Innovation and Promotion
9. Consumption Function
122. Investment a Determinant of
Income
Investment Defined
Investment expenditure is a capital spending
mainly derived not from current income but
from accumulated savings and other sources
external to the circular flow.
123. Investment and Output
Investment increase the capital and total
output whereas depreciation has the
opposite effect as it represents capital
consumption.
While current depreciation decreases total
output in the short run, current investment
only yields output in the long run for two
reasons:
First, even after total investment expenditure to meet
production targets ahs already been incurred, the process of
setting up and even testing the capital base creates
operational lags.
Second, every phase in setting up a capital base may not be
124. Savings as a Source of
Investment
Savings Concept
◦ Savings is the unspent portion of a person’s
(personal saving), company’s or institution’s
(retained earnings) income during the period
intended for spending as in the case of a salaried
employee who sets aside portion of his half-
month pay earnmarked for the next fifteen days or
for emergency expenses.
Savings of the company can be expressed as
follows, assuming that it is the only determinant of
the multiplier.
S = Y – C
Where:
S = saving
Y = income
C = consumption
126. EXERCISE #7
In your own words, discuss the
following topics by citing concrete
examples.
1. Why is investment essential to the
company?
2. Differentiate Investment from
Multiplier?
3. Determinants of Savings.
128. Aggregate Demand
Aggregate demand is the total amount of
expenditure on domestic goods and
services.
Aggregate demand normally, rises as the
price level falls which can be explained in
three ways:
a. Real money balance effect
b. Prices and interest rates
c. International competitiveness
129. The Consumption Function
Consumption depends on many factors, but
in the theory of income determination the
consumption expenditure of the economy is
determined principally by the economy’s
level of disposable income.
The schedule that relates consumption to
disposable income is called the propensity to
consume or consumption function.
Thus, the consumption function is a
statement of the general relationship
between consumption expenditure and the
various independent variables which
determine consumption such as current
disposable income and income from
previous periods and wealth.
130. We can therefore state the consumption function in a
simple linear equation:
◦ C = a + bY
Where:
C = consumption
a = intercept
b = slope
Y = disposable income
To illustrate our equation:
if: a = 50; b = 0.75
then: C = 50 + 0.75Y
The point where Consumption = Income can be represented
as C =Y.
C = a + bY if C = Y so, Y = a + bY
Then: Y = 50 + 0.75Y
Y = 50 + 0.75Y
Y – 0.75Y = 50
0.25Y = 50
Y = 50/0.25
Y = 200
131. The MPC and The MPS
There is an important concept related to the
consumption function. We refer to the
change in the level of consumption (∆C) that
occurs as a consequence of a change in
income (∆Y). This ratio, ∆C/ ∆Y is known as
the Marginal Propensity to Consume (MPC).
◦ Example, when income increases from 100 to
200, consumption rises from 125 to 200.
◦ 𝑀𝑃𝐶 =
∆𝐶
∆𝑌
Thus, to solve for MPC, we can simply
substitute:
◦ 𝑀𝑃𝐶 =
200−125
200−100
=
75
100
= 0.75
If on the other hand, income rises from 200 to 300,
consumption will rise from 200 to 275.
𝑀𝑃𝐶 =
∆𝐶
∆𝑌
=
275−200
300−200
=
75
100
= 0.75
132. The Marginal Propensity to Save
expresses the ratio of the change in the
level of saving (∆S) that occurs as a
consequence of a change in income (∆Y).
◦ Example, when income increases from 300 to
400, saving rises from 25 to 50.
◦ 𝑀𝑃𝑆 =
∆𝑆
∆𝑌
=
50−25
400−300
=
25
100
= 0.25
If income rises from 400 to 500 saving rises
from 50 to 75. If your answer is 0.25, then you
are correct.
When we add together the MPC and MPS, we
will have:
𝑀𝑃𝐶 + 𝑀𝑃𝑆 = 1.00
0.75 + 0.25 = 1.00
133. The Government and Equilibrium
Income (Y = C+I+G)
The theory of income determination is expressed in the
following equation:
◦ 𝑌 = 𝐶 + 𝐼 + 𝐺
Where: C=households, I=investments, and G=the
government.Income Consumption Investment Government C + I + G
100 125 50 25 200
200 200 50 25 275
300 275 50 25 350
400 350 50 25 425
500 425 50 25 500
600 500 50 25 575
The table illustrates the level of national income as determined by the
consumption function, the level of planned investment and government
spending expressed as 𝑌 = 𝐶 + 𝐼 + 𝐺.
134. Full employment equilibrium is an ideal
objective because at this level of income,
there is no available and useful resource
of the economy that is wasted.
Full employment means the full utilization
of all available labor and capital resources
so that the economy is able to produce at
the limits of its potential gross national
product.
135. EXERCISE #8
In your own words, discuss the
following topics by citing concrete
examples.
1. Marginal Propensity to Consume
(MPS) and Marginal Propensity to
Save (MPS).
2. Government and Equilibrium
Income.
3. Factors Affecting Aggregate
Consumption.
137. The Business Cycle
A central concern of macroeconomics is
the upswings and downswings in the level
of real output or economic fluctuations.
In particular, the business cycle is the
fluctuation in the level of economic activity
alternating between periods of depression
and boom conditions.
138. Four (4) Phases of Business Cycle
Figure 9.1: Theoretical Business Cycle Model
This figure illustrates a hypothetical business cycle consisting of four phases:
peak, recession, trough, and recovery. These fluctuations of real GDP can be
determined in comparison with a potential GDP line, as indicated by the
broken line moving upward. If real GDP is above potential GDP, the economy
is at full employment while if it is below the potential GDP the economy will
have unemployed resources.
One
Busines
s Cycle
recession recovery
peak
peak
trough
Real
GDP
Real GDP
Potential GDP
Year
139. Investment and the Business Cycle
The volatility of fixed investment and inventory
investment expenditures, which are themselves a
function of businesses’ expectations about a future
demand.
The Cost of Business Cycle
• Business cycles have received much attention from
economist, politicians, and policy makers in particular
because they entail genuine economy costs.
• The economic disadvantages of business cycles are
not necessarily limited to the costs associated with
high unemployment.
140. The GDP of the Philippines
In real terms, the quarterly GDP of the
Philippines has increased during the
period 1990-2008. we can therefore say
that the economy expanded its
production, implying therefore that the
economy achieved certain level of
economic growth.
141. EXERCISE #9
Complete the illustration below by identifying the
different phases of the business cycle. Thereafter
discuss each phase below your illustration.
Real
GDP
Year
143. Unemployment
The unemployment rate is defined as the ratio of
number of unemployed to the total number of labor
force and computed using the following formula:
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑅𝑎𝑡𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
Full Employment: A Macroeconomic
Goal
• In general unemployment can be defined as the non-
utilization of economic resources. As a result which,
the actual output of the economy is below its potential
GDP.
• In stricter sense however, unemployment can mean
the number od labor resource that is out of work
during a particular period of time.
144. Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Seasonal Unemployment
Effects of Unemployment
147. EXERCISE #10
Research and Application.
Discuss the current status of the country with
regards to labor force, employment, and
unemployment rate.
149. INFLATION
Inflation is defined a s a broadly based
rise in the price level.
Thus, if there is inflation there is a general
upward movement in the prices of goods
and services in an economy.
150. Consumer Price Index (CPI)
CPI is the cost of purchasing a
hypothetical market basket of
consumption goods bought by a typical
household consumer during a given
period of time, relative to the cost of
purchasing the same market basket
during the base year.
151. Inflation and the Purchasing Power of
Money
When inflation occurs, the price levels rise
meaning more money are required to buy
a certain basket of goods.
The purchasing power of money indicates
how many baskets of goods can be
purchased with one unit of money.
152. Effects of Inflation
1. Because unanticipated inflation alters
the outcomes of long-term projects, such
as the purchase of machine or an
investment in a business, it will increase
the risk and retard the level of such
productive activities.
2. Inflation distorts the information
delivered by the prices.
3. People will respond to high and variable
rates of inflation by spending less and
more time trying to protect themselves
153. Core Inflation Headline Inflation
Is a widely used measure of
the underlying trend or
movement in the average
consumer prices. Its is often
used as a complementary
indicator to what is known as
‘headline’ or Consumer
Price Index (CPI) inflation.
Core inflation is often used
as an indicator of the long-
term inflation trend and as
indicator of future inflation
Refers to the rate of change
in the consumer price index,
a measure of the average
price of a standard ‘basket’
of goods and services
consumed by a typical
family.
Headline inflation, therefore,
captures the changes in the
cost of living based on the
movements of the prices of
items in the basket of
commodities and services
consumed by typical Filipino
household.
155. EXERCISE #11
ESSAY:
Answer the following questions briefly but
thoroughly.
1. What are the positive and negative
effects of inflation to the Philippine
Economy?
2. Briefly discuss the difference between
cost-push and demand-pull inflation.
157. WHAT IS FISCAL POLICY
Fiscal policy is the use of government
spending and taxes to influence the nation’s
spending, employment and price level.
(Tucker 2008)
It is also defined as the manipulation of the
national government budget to attain price
stability relatively full employment, and a
satisfactory rate of economic growth. (Slavin
2005)
Fiscal policy is therefore an instrument of
demand management which seeks to
influence the level of economic activity in an
economy through the control of taxation and
158. Budget Deficits and Surpluses
A budget deficit is present when:
◦ Total government spending exceeds total
government revenue from all sources.
◦ The government must borrow funds to finance
the excess of its spending relative to revenue.
Changes in the size of the government deficit
or surplus are often used to gauge whether
fiscal policy is bringing additional demand
stimulus or imposing additional demand
restraint.
Two changes in the sixe of deficits:
1. Changes in the size of the deficit or surplus may merely
reflect the state of the economy.
2. Changes in the deficit or surplus may reflect discretionary
fiscal policy.
159. Fiscal Policy and the Crowding-Out
Effect
The theory behind the crowding out effect
assumes that governmental borrowing uses
up a larger and larger proportion of the total
supply of savings available for investment.
Because demand for savings increases
while supply stays the same, the price of
money goes up.
Crowding out begins to take effect when the
interest rate level reaches a point at which
only the government can afford to borrow.
Unable to compete for loans under such
circumstances, individuals and smaller-scale
160. Fiscal Policy as a Stabilization Tool:
A Modern Synthesis
1. Proper timing of discretionary fiscal
policy is both difficult to achieve and
of crucial importance.
2. Automatic stabilizers reduce the
fluctuation of aggregate demand and
help to direct the economy toward full
employment.
3. Fiscal policy is much less potent than
what early Keynesian view implied.
161. EXERCISE #12
ESSAY:
Answer the following questions briefly but
thoroughly.
1. How is fiscal policy reflected on system of our
government? Explain.
2. In your own understanding, explain briefly fiscal policy and
the crowding-out effect.
163. Monetary Policy
Monetary policy is a macroeconomic
policy which involves the regulation of
money supply, credit, and interest rates in
order to control the level of spending in
the economy.
In particular, it is a measure or action
undertaken by central banks to influence
the general price level and the level of
liquidity in the economy.
165. What is Money Supply (Ms)
Economists define Money Supply as
anything that is generally accepted as
payments for goods or services in the
repayment of debts. (Mishkin, 2003)
166. Functions of Money
Money as a medium of exchange.
Money as a unit of account.
Money as a store of value.
167. Demand and Supply of Money
Factors Which Increase the Demand for
Money:
1. A reduction in the interest rate.
2. A rise in the demand for consumer spending.
3. A rise in uncertainty about the future and future
opportunities.
4. A rise in transaction costs to buy and sell stocks
and bonds.
5. A rise in inflation causes a rise in the nominal
money demand but real money demand stays
constant.
6. A rise in the demand for a country’s goods abroad.
7. A rise in the demand for domestic investment by
foreigners.
8. A rise in the belief of the future value of the
168. Money Market Equilibrium
The equilibrium level in the money market
occurs when Money Supply (Ms) equals
Money Demand (Md).
To illustrate this scenario simplistically,
assume that all money is just the currency
in circulation and that the money supply is
controlled by the Banko Sentral ng
Pilipinas (BSP). Consider also that
nominal income is given.
169. Inflation Targeting: The BSP’s
Approach to Monetary Policy
Inflation targeting is focused mainly on
achieving a low and stable inflation,
supportive of the economy’s growth
objectives. This approach entails the
announcement of an explicit inflation
target that the BSP promises to achieve
over a given time period.
170. Requirements for the Successful
Adoption of Inflation Targeting
Firm commitment to stability.
Central bank independence.
Good forecasting ability.
Transparency.
Accountability.
Sound financial system.
171. EXERCISE #13
Compare and Contrast
1. Money Supply vs. Money Demand
2. Money vs. Wealth
3. Flow vs. Stock
4. M1 vs. M2
5. Bonds vs. Stocks
