_________WEEK 1-Monday_____________ Law of Diminishing Margin of Utility- as a

Economics- study of allocation of scarce person consumes this products, the

resources to satisfy men and women’s marginal utility decreases.
insatiable wants and needs.
Scarce Resources- insufficient resources __________WEEK 1- Tuesday___________
Insatiable- never satisfied
Needs- necessities
Importance and Fields of Economics
-Finance forecasting
-Accounting balancing
-Economics

Branches of Economics Laissez-Faire is not proposed by Adam Smith

-Micro Economics small scale (consumers, but only developed it. Oppose to any type of
small businesses, spending patterns) federal interventions such as legal
-Macro Economics large scale (government implication that would trade minimum
and international economies) wage.

GDP (Gross Domestic Products) – measure

of economics’ growth whether it is
increasing or decreasing.
GNI (Gross National Income) - takes account
Inflation.
Inflation- increase in rice.
OFW Remittances- the money they earn Monopoly was used to expose Capitalism.
gets remitted in the PH.

Money Supply- money in circulation.

4 Market Structure:
-Perfect Competition FACTORS OF PRODUCTION
-Monopolistic Competition 1. Land (La) - actual space used to create
-Oligopoly products. Basic resources within land,
-Monopoly sea, and air.
2. Labor (Lb) - any mental or physical
Horizontal Living Spaces- subdivisions. effort. Age is 16 years old and above.
Vertical Living Spaces- condominiums and Compensated with either wage or
apartments. salary. Referred as human capital.
 Wage- set per hour or per day. Free-Rider Problem- market failure because
Depended on the productivity and there is an insufficient distribution of
commonly given to blue collar jobs resources. This is because some people are
(unskilled worker/ physical effort). consuming more than their fair share and
aren’t paying anything at all.
Minimum wage in the PH: 500- 537
Main Objective of Commerce: MAXIMIZE
Salary- paid on an annual basis and is PROFIT
fixed. Given to white collar jobs (mental
effort/skilled worker). ________WEEK 1- Wednesday_______
Main Branches of Economics
3. Capital (K) - man made goods used to
further transform products, commodities,
and services. The income from the product
is called interest.
-Physical Capital (buildings, factories,
machines, equipment, and human capital)
-Financial Capital (debts, equities,
loans, and company incurs)

4. Entrepreneurial Ability (E) – necessary

skill to efficiently mix the other 3
factors. Income from entrepreneur is Bottom-up approach- starts specifically to a
called Profit. broader concept.
Top-down approach- looks at the economy
These four factors are inputs to make in a wider perspective before narrowing
economic profit. down.
Income – Expense from Production = Economic Profit
Different Fields of Economics
Economic Dilemma: Allocation of 4; limited 1. International Economics-
nature vs. unlimited human wants. globalization, internalization, open
economy system (a particular country
Opportunity Cost- The Actual Price trades with the outside country)
Trade-Off- The Actual Commodity 2. Development Economics- focus on
poor nations.
Economic Goods- bring out general progress 3. History of Economics- economists
and commerce in a country. codify their works.
4. Econometrics- reliance on
”The Bads”- negative externalities mathematical equations.
(pollution) and natural imperfection.
 5. Behavioral Economics- spending TOTAL PRODUCTION
patterns, everything that deals with Important concept to explain a firm
thinking that affects their decision in increasing production in the short run when
buying. La, K, E, are FIXED and Lb is VARIED.
6. Financial Economics- finance +
economics Example:
Small factor (La), fixed number of machies
Positive and Normative Statements (K), entrepreneur
- Positive statement Firm INCREASES output by INCREASING
Can be proven the number of Labor Force.
Seen in papers with evidences.
“What is”
Does not evoke emotions
- Normative Statement
Based on value judgement
Opinions of professionals
“What should be?”
Lends itself to debate
Example:
Petroleum
Positive: An increase in the price leads to a
reduction in the sake of petroleum.

Negative: The government should subsidize

the price of petroleum to help low-income The workers’ additional contribution to the
people. total production is termd the worker’s
Marginal Product

Law of Diminishing Marginal Return

After some level of capacity is reached,
adding an additional factor of production
PRODUCTION FUNCTION will result in smaller increase in output.
Shows the combination of the four
factors of production.
Can be mathematically expressed as
Q = f (La, Lb, K, E)
Total Product (TP) the computation part. Answer:
AP MP
0 0
10 10
12 14
13.33 16
12.5 10
11.2 6
9.6 1

Average Product (AP) output per unit of X axis- number of workers

variable input. Y axis- marginal product

TOTAL PRODUCTION FUNCTION

You now have to expand by looking at
you 4 factors of production. Study which
Output: TP
Input: L (Labor)
**x per y = x/y**

Marginal Product (MP) change in output

per unit of change in input ceteris paribus.

factor can be increased.

**Triangle like symbol = Delta meaning
subtract** E.g: Acquire more land to build more
factories.

Employees seek to employ people to a

level where MP=0
It will not employ people under
condition of diminishing return.

Factors to Consider
- Labor Rate
*USE THE FORMULAS ABOVE* - Productivity of labor
- Cost of training
MP = 10 – 0 / 1 – 0 - Compulsory welfare benefits.
**old value minus present value**
Contractualization **The hats decrease in order to
- Short term employment of wage accommodate the sweaters.**
workers 25 – 29 = 4 hats
- Rich supply of unskilled workers
- Vs. hiring skilled workers Production Possibilities Curve
Efficient
________WEEK 1- Friday_________ - Points ON the curve.
Production Possibilities Curve (PPC) - All resources has been used to the
Combination of two products, the fullest.
combination of two goods that a firm is able Inefficient
to produce given the amount of resources - Points BELOW the curve.
that they have. - A firm is not using all resources.
Can also be called Production
Possibilities Frontier (PPF)

Impossible
- Points OUTSIDE the curve
- A firm does not have enough
resources.
-
PPC Shifters
1. Change in quantity and quality.
2. Change in technology
3 Key Concepts of PPC
 Scarcity
Economies of Scale
 Trade-Off- the product you chose to
1. Short Run- 1 year; consider 1
forego in order to choose another
input/resource is fixed.
product.
2. Long Run- longer span; all resources
 Opportunity Cost- actual value.
are variable.

3 Possibilities of Output
1. More than double- increasing return
to scale.
2. Double- constant returns to scale.
30 – 15 = 15
 3. Less than double- decreasing returns that they want to avail. The
government is not dictating what is
available. (Ex. USA, Europe)
3. Mixed Economy- mixture of two
economy. State dictates some control
over the resources they have but it’s
still the consumers’ decision to buy
the goods. (China—used to employ
planned system and then employed
market economy., Singapore)
to scale.
“When input increases, output decreases.” Assumptions about market economy
1. Consumer Sovereignty- market
Economies of Scale economy operates on the assumption
- Happens usually in a large firms like that consumer demand is dominant.
SM. The supply will adjust to the demand.
- Large scale production and buy Profit = driving force in the system.
resources in bulk.
- Bigger firms have lower cost. 2. Forces of Supply and Demand-
- Total Cost (TC) ↑ increases when a products are produced because there
company decides to buy a machine is demand and because we have
that would help the production more insatiable needs.
efficient. This machine will have a
higher cost. It may be be expensive at
first but in the long run, Average Total 3. People are rational and consistent-
Cost (ATC) ↓ decreases. If the price is consumers by nature and rational
right. beings. (Ex. A family will choose
products with discounts).
TYPES OF ECONOMY Normal Goods = as the income
1. Planned Economy- prevalent in increases, the demand on a normal
communist and socialist types of good increases.
government. The states provide Inferior Goods = as the income
guidelines that will dictate the decreases, the demand normal goods
product and services available in the decreases.
market. The government controls.
(Ex. North Korea, Cuba) 4. Trading and Commerce are always
2. Market Economy- more predominant. good- both stimulates competition.
More countries adopt this kind of Firms outdo each other by developing
economy. The consumers exercise their product or services.
virtual autonomy on the products
 5. International Trade is always good- Gross National Income
countries trade with other countries. - Includes all income earned by a
country’s residents, business, earnings
6. Mercantilism is the Anti-thesis of from foreign sources.
Globalization and International Trade- - Purpose: determine country’s
Mercantilism is the enemy of standard of living.
globalization and international trade.  Purchasing Power Party
It happened back 16th and 18th  Per Capita Method
Century in Europe wherein the
government would limit its imports.
They want to patronize more the local
products.

___________WEEK 2- Tuesday__________ Foreign Direct Investments (FDI)

Gross Domestic Product  Investments made by firm/indi in 1
- Economic Indicator that measures the country into business interests
health of a country’s economy located in another country.
whether it is progressing.  Takes place when an investor
establishes foreign business
operations or acquires foreign
business assets in foreign company.
Green Field Investment- the investment of
new factory/land in another country.
2 Ways:
Nominal GDP- takes current market price Difference
into account WITHOUT factoring in GDP- within the country
INFLATION or DEFLATION. GNI- plus wages, salaries, and property
income of country’s residents earned
Real GDP- factors in INFLATION; preferred abroad.
more by economics.

2 Ways of Measuring GDP How does FDI works?

1. Income Approach- considers wage,
salary—labor, rental income, interest
rate, and profit.
2. Expenditure Approach- more
common (GDP = C + G + I + NX)
 - Open economies -Shift to the LEFT- decrease in DEMAND
- Skilled workforce of the given price.
- Above average growth propects
Factors that produce shifts
1. Consumer Income- as consumer
income increases, the quantity
demand of a good increases.
2. Population- increase in population,
_________WEEK 2- Friday_______
quantity demand of goods increases.
Law of Demand
3. Consumer Preference- if the consumer
- Quantity purchased varies INVERSELY
preference changes of a product,
with price. As the price increases, the
demand increases.
quantity of demand decreases.
4. Price availability of related goods-
complimentary goods (pair. Ex. Tennis
racket and ball) and substitute goods
(produce similar utility and
satisfaction. Ex. butter and
margarine).

Elasticity of Demand (E)

- Responsiveness and the sensitivity of
the quantity demanded to an
independent variables (prices,
Demand Curve consumer preference, advertising,
- Downward sloping. etc)
Quantity demanded- x axis
Price- y axis

***the answer must be decimal.***

Shifts in the Demand Curve

-Shift to the RIGHT- increase in
DEMAND of the given price. 5 Categories of Elasticity
 1. Perfect Inelastic- the change in price 5. Perfectly Elastic- a very small change
don’t affect the quantity demand and the in price can cause the quantity
expenditure is stable. demand to become 0 or ∞, depeding
E=0 on the direction of the price change.
E>∞

2. Inelastic- when a price increases, the

quantity demand and expenditure will
decrease.
E<1

3. Unitary Elastic- the increase in price

leads to the decrease of the quantity demand
while the expenditure is stable.
E=1

Income Elasticity of Demand

- Responsiveness of the quantity
demanded of an item to the changes
in the income.

4. Elastic- when the price increase, the

expenditure and quantity demand decrease.
E>1 _________WEEK 3- Monday_________
Nature of Demand
The amount of a good that
consumers are willing and able to buy a
given point in time.
Law of Demand as much quantity as needed without
States that there’s a negative, or reducing its availability to others.
inverse, relationship between price and
the quantity of a good demanded and its Economic Goods
price. It is when a goods or services that has
a benefit to society. Also, economic
__________WEEK 3- Tuesday________ goods have a degree of scarcity and
Elastic Supply therefore an opportunity cost.

_________WEEK 3- Friday________
Supply Curve- depicts the relationship
between the quantity supplies of a good
at different price.

Y axis- price
Factors that produce the Shift in Supply X axis- quantity
Curve
1. Industry Size- when the Categories of Elasticity Supply
industry size increases, it will shift to the 1. Perfectly Inelastic- change in the
right, and the supply goods will increase. quantity supply of the product do not
2. Technological Progress- any vary compare to the changes in the price.
technological progress will lead to an Qs = 0
increase in supply of goods.
3. Education- as the level and
quality of the education improves, the
supply increases.
4. Price of Inputs- when the price
increases, it will shift to the left, and the
supply decreases. While if the price
decreases, it will shift to the right, and the
2. Inelastic- when the changes in the
supply will increase.
quantity supply do not vary significantly
5. Price of Related Outputs- the
with the changes of its price.
increase in price leads to the shift to the
Qs < 1
right, and the supply increases.

3. Unitary Elastic- a corresponding

________WEEK 3-Wednesday_________
change in the quantity being supplied
Free Goods
differs directly proportioned to the
It is a goods with zero opportunity
changes of its price.
cost. This means it can be consumed in
Qs = 1
 will always pay for a lower price of a same
4. Elastic- when the quantity being quality.
supplies is highly sensitive to the 3. Prices of Other Prices- can either be
change of its price. complements or substitutes. If it is
Qs > 1 complementary, a price increase will reduce
consumption of the complement as well.
5. Perfectly Elastic- the changes in 4. Income Availability for Spending-
quantity supplied vary no change in (Income – Tax = Disposable Income)
price Meanwhile, (Disposable Income –
Household Expenses = Discretionary Income
____________WEEK 4- Monday_______  available for spending)
Influences of Demand 5. Price and Availability of Money and
1. Flow of Demand- customer-driven Credit- in consumer-oriented society, credit
rather than forecast-driven. Instead of influences demand aside from income
producing large quantity and just storing factor. If interest rate increase, then the
the excess, goods are produced on a cost of credit rises that will lead to reduction
daily basis according to specific customer in demand, especially luxury and services.
needs. 6. Market Size- number of individual in a
market segment who are potential buyers.
7. Market Efforts and Consumer Taste-
changes may be a result of improperly
identifying a target audience, which is a
group of people who are most likely to use a
product.
Household- (1) Labor Payments 
Influences of Supply
business (2) Taxes Labor government
1. Cost of Factors and other Inputs-
Business- (1) Income Goods and Services
changes in cost with constant price will
(2) Taxes Goods and Services
change the profit expectations and will
Government- (1) Services and Income 
certainly influence decisions regarding
households (2) Services/Payment 
supply. An increase in factors (land, labor,
businesses
entrepreneurial skill) will affect the prices of
intermediate product.

2. Price of the Product- most important

2. Changes in Taxes- any change in the
factor that affects the demand. When the
tax rate will affect the profits anticipated
price increases, the demand decreases and
from supply/supply intention. An increase in
vice versa. All things being constant, people
production tax has similar effect to the These are government-mandated either
increase in factor costs. minimum or maximum prices set for a
3. Changes in Technology- an specific good to manage affordability.
improvement in technology allows a given Over the long term, price controls may
level of production that can be achieved lead to shortage, rationing, inferior product
with fewer factor inputs. quality, and black markets.
4. Efficiency and Effectiveness- Example:
Efficiency means producing the product at (1) Food shortage may happen after a
the least possible cost. Effectiveness means calamity that’s why food control is imposed
doing it right the first time like the starting to establish food distribution.
of a car. A repetition means you have used
twice the amount of resources and energy. Minimum Wage
5. Changes in Relative Profitability of Defined as “the minimum amount of
Products- profit is the money a business remuneration that an employer is required
pulls in after accounting for all expenses. to pay wage earners for the work performed
during a given period, which cannot be
__________WEEK 4-Tuesday___________ reduced by collective agreement/contract”.
Price Regulation Binding nature of minimum wage. It can
Imposition of either a minimum or a be set by statute, competent authority,
maximum price by government decree or wage board/council, or by industrial/ labor
law. The price that will be imposed will base courts/tribunals.
on the type of economy by which the
country is classified. Philippines; 55M labor force.
Imposition by a good government or Unemployment rate hovers around 6% to
international organizations like the 7.5% and the current minimum wage for
Organization of Petroleum Exporting MM is P420 a day.
Countries (OPEC).
Price Ceiling Minimum Wage Law
The maximum price set by imposition. Republic Act No. 602 (April 6, 1951)—
Price Floor an act to establish a minimum wage law.
Minimum price set by imposistion. Repealed by Presidential Decree No. 442I.
-Minimum wage regulation, maximum SECTION 1. Short title of Act—this Act
prices for food items, fuels, and rent control shall be known as the Minimum Wage Law.
are important applications of such Price SECTION 2.—concept of wage.
Ceiling and Price Floor that contradicts the
free market and work against the market
force. SECTION 3. – (a) every employer shall pay to
Price Control each of his employee. (1) Four Peso a day
A concept which applies on a situational for employees of an establishment located
basis. in Manila. (3) Three pesos a day for
employees outside Manila. This does not
apply to retail/service that regularly employ Unemployment
more than 5 employees. Occurs when workers who want to
(b) Every employer who operates a work are unable to find jobs, which lowers
farm enterprise more than 12 hectares shall economic output, however, yhey still
pay to each employees. (1) P1.75 a day with require subsistence.
no allowance on board and lodging shal - High rates of unemployment are a
reduce below P1.50 in cash. (2) P2 a day signal of economic distress.
with no allowance for b&l shall reduce - Extremely low rates of unemployment
below P1.75 in cash. (3) P2.50 a day with no signal an overheated economy.
allowance for b&l shall reduce below P2.25.
(c) Minimum wage rates for Classification:
Government employees shall be produced  Frictional- people voluntarily change
in subsections. job in an economy.
(d) This Act shall not apply to  Cyclical- variation in the number of
domestic servants. workers over the course of economic
(e) The crew of vessels in Manila up/down turn.
shall be subjected to minimum wage of non-  Structural- technological change
agricultural workers in Manila.  Institutional- result of long term or
permanent institutional factor in the
Shortage economy.
It is a condition where the quantity
demand is greater than the quantity Sticky Wage
supplied at the market price. The sticky wage theory hypothesizes
Causes: (1) increase in demand (2) that employee pay tends to respond slowly
Decrease in supply (3) Government to changes in company performance or the
intervention. economy.
When unemployment rises, the wage of
Surplus those workers that remain employes tend to
Describes a level of an asset that stay the same or grow at a slower rate
exceeds the proportion used. rather than falling with the decrease in
demand for labor.
Inventory Surplus- occurs when product Wages are said to be sticky-down, they
that remained unsold. can move up easily but move down only
Budgetary Surplus- income earn exceeds with difficulty.
expenses paid
A surplus results from a disconnect between _________WEEK 4- Wednesday_________
supply and demand for a product or when Philip’s Curve
some people are willing to pay more than Two Time Frame:
other consumers.
 (1) Long-run—tracks the relationship - Philosopher and economist who was
between inflation and unemployment. influenced by Georg Wilhelm Friedrich
(2) Short-run—inverse relationship Hegel, another German philosopher.
between inflation and unemployment. - Used the Hegelian logic of thesis,
- Philip’s Curve Model is a graphical antithesis, and synthesis. This were
model showing the relationship between contained in Das Capital that portrayed the
unemployment and inflation. inequalities of the capitalist system.
- Short-run Philip’s Curve (SPRC) - - Friedrich Engels published Das Capital
curve illustrating the inverse short-run after the death of Karl Marx.
relationship between the unemployment - He saw capitalism as thesis,
rate and the inflation rate. communism as antithesis, and socialism as
- Long-run Philip’s Curve (LRPC) – synthesis.
curve illustrating that there is no - Marxian Economics only focus on
relationship between unemployment rate labor as the main factor input.
and inflation rate. It is a vertical at the - In Das Capital (Capital: A Critique of
natural rate of unemployment. Political Economy), society is composed of
two main classes; Capitalist are the business
owners. Proletariat are composed of
labourer who only works to earn money.
- Das Capital is a critique of capitalism.
- The word “capitalism” was first used
by William Thackeray in 1854, in his novel,
“The Newcome”. It is about the sense of
concern about the personal possession of
money.
Downsizing
It is a common organizational
___________WEEK 4- Friday____________
practice. Cutting jobs is the fastest way
Poverty
to cut costs.
- It is a state in which a person or
It is the permanent reduction
community lacks the financial resources.
wherein the unproductive workers or
- Poverty-stricken people and families
division are being removed.
might go without proper housing, clean
water, healthy food, and medical attention.

Karl Marx

Employment
 - It is an agreement between an Interrelationship of Poverty,
individual and entities that stipulates the Unemployment, Population Growth
responsibilities, payment terms, rule of  Poverty means that the income level
workplace that is recognized by the from employment is so low that basic
government. human needs can’t be met.
- Laymen’s term, employment refers to  Unemployment means when a person
the idea that an individual has entered some who is actively searching for employment is
form of verbal or written commitment with unable to find work. It is often used to
an entity, known as employer. measure the health of the economy.
 Population Growth is the increase in
Poverty and Employment the number of individuals in a population.
- Shows the effect of employment to
poverty of an individual. __________WEEK 5- Monday_________
Money
Population rate and Economic growth - From Latin word ‘moneto’, defined as
- Study that indicates the existence of a commodity that is generally accepted as a
long-run equilibrium relationship between medium of exchange.
economic performance and population - Bartering was one way that people
growth. exchanged goods for other goods before
- The impact of population growth money was created.
often measured through impact on the - Like gold, money has worth because
growth per capita income/output. people represent it to be valuable.
- Economic rely on the exchange of
Thomas Robert Malthus and his Theory money for products and services.
- Known for the population growth
philosophies outlined in his 1798 book “An Functions of Money
Essay on the Principle of Population”.  Primary- medium of exchange;
- He theorized that populations would measure of value.
continue expanding until growth is stopped  Secondary- store of value; deferred
or reversed by crisis or calamities. payments; transfer value.
- He is also known for his exponential  Contingent- basis of credit; income
formula used to forecast population growth, distribution; equalize marginal utility.
which is currently known as Malthusian
Growth Model. Fiscal Policy
- Concerning the use of state treasury or
the government finances to achieve the
macro-economic goals.
- Government policy of changing its
taxation and public expenditure programs
intended to achieve its objective.
 - Government uses its expenditure and - Leads to increases in money supply.
revenue program to produce desirable - Contractionary Monetary Policy, driven
effects on National Income, production and by increase in the various bas interest rates
employment. controlled by modern central banks or other
means producing growth in money supply.
Objectives of Fiscal Policy
 To achieve equal distribution of wealth Objective of Monetary Policy
 Increase in savings - Full employment
 Degree of inflation - Price stability
 To achieve economic stability - Economic growth
 Price stability - Balance of payments

Instrument of Fiscal Policy Instruments of Monetary Policy

 Deficit Policy- financing the budgetary  Bank Rate- imposed by bank within
deficit. Tools used to have loans. the money.
 Public Expenditure- development of  Cash Reserve Ratio (CRR) Statutory-
state enterprises and infrastructure. percentage of bank deposit which bank are
 Taxation Policy- tax itself will serve as required to keep within the bank.
the revenue of the government.  Liquidity Ratio (SLR) Repo Rate &
 Public Depth- government needs a lot Reserve- used to keep the bank’s liquid
of funds for economic development. assets.
 Repo Rate Open Market Operation-
Monetary Policy bank control the credit through the sales. To
- Refers to the use of instruments under help commercial bank to gain money at a
the control of the central bank (RBI) to cheaper rate.
regulate the availability, cost and use of
money and credit. Banking
- According to Johnson, “Monetary - Can be defined as the business
policy is defined as policy employing central activity of accepting and safeguarding
bank’s control of the supply of money as an money owned by other individuals and
instrument for achieving the objectives of entities, and then leading out this money in
general economic policy.” order to earn profit.
- Means transacting business with a
Expansionary and Contractionary Monetary bank; depositing or withdrawing.
Policy - Funds or requesting loans.
- Expansionary Monetary Policy, the
monetary authority often lowers the History
interest rates through various measures that - Refers to the development of banks.
makes money saving unfavourable and - Begins with the first prototype banks
promote spending. of merchants of the ancient world.
 types of types of banks that can make direct
Financial Institutions investments to private companies.
- Act as intermediaries between saver
and borrowers and are differentiated by the _________WEEK 5- Tuesday___________
way they obtain their funds. Types of Banks
- Government agency that collects  Universal Banks- function is to have
funds from the public and invest those deposit, investment, and credit.
funds in financial institutions such as loans,  Commercial Banks- only investment
securities, bank deposits, and income in banks related activity unlike universal
generating property. bank.
 Development Bank- help private
Roles of banks sectors or people that are not high in
- Intermediation- transfer of funds finances.
from the savers to entrepreneurs.  Smaller Banks (Saving, Thrift, Rural
- Payment System- paying of Banks) - help workers that does not have
transactions. high income.
- Financial Service- between investor  Investment Banks- helps the
and borrower. businessman to have a better production.

Roles of Financial Institution Universal- 40.20%

- Regulate monetary supply Rural- 23.50%
- Investment Advice Development- 3.30%
- Insurance Services Stock Saving- 1.60%
- Banking Services
Types of Financial Institutions
Bank Liabilities  Depository Financial Institution-
Anything that bank owns automatically (commercial, saving banks) type of group
makes it owned by the consumer. Deposits that can help to lessen the expenses, have
are liabilities of institutions. loans and savings.
Major Types:  Non-Depository- (life insurance) we
1. Sight deposits do not deposit but stores money with a
2. Time deposits great purpose.
3. Certificates of deposits and sales  Other Types (Credit Union, Stock
4. Repurchase agreements Brokerages Firm, and Asset Management
Firms- they have specific firms that they
Bank Assets help.
- Short-term loans that has three kinds
market loans primarily to other bank
- Banks make investment partly in Bangko Sentral ng Pilipinas
government bonds and these are the special
 - Philippine Commission Act 32 of 1900 - M1- refers to the narrow definition of
placed all banks under Bureau of Treasury. money which consists of currency (e.g.,
- Then placed under supervision of paper bills) + demand.
Department of Finance (DOH in 1929). - M2- refers to M1 + savings/small time
- Republic Act 265 of1948 established deposits
the Central Bank of the Philippines on - M3- refers to money supply, peso
January 3, 1949 under Miguel Cuaderno. savings, time deposits + deposit substitutes
- A powerful entity was established by of money-generating banks.
RA 7653 that created Bangko Sentral on July - RM- reserve money which represents
3, 1993 under a long-time lawyer, Gabriel liabilities of the BSP to the public sector in
Singson. form of currency.

Responsibilities Creation of Credit

 Provides policy directions in the areas - Separates a bank from other financial
of money, banking, and credit. Supervises institutions.
the operations of banks and exercises - Expansion of deposits. Banks can
regulatory powers over non-bank financial expand their demand deposit as a multiple
institution with quasi-banking function. cash reserves because demand deposits
serve as the principal medium of exchange.
Roles and Functions - Two important aspects—Liquidity and
1. Liquidity management through the Profitability.
control of the money supply. Primary Cash Credit
2. Currency issues Deposits Reserves Customer
3. Lender of last resort R= 20%
4. Financial supervision Person A 1000 200 800
5. Regulatory powers over banks and B 800 160 640
C 640 128 512
quasi banks
D 512 102 410
6. Management of the international
reserves, determine the exchange rate
Multiplier Effect
policy (whether fixed, floating, or a
- Factor by which money supply will
combination).
change given a change in monetary base
7. Financial adviser to the government
given a change or deposit.
and its GOCCs.
- MM = 1/rr
- Change in MM; M = mm x MB
Money Supply
It is determined by the behaviour of
Causes of Money Supply Rise
the three principal actors—public, ban. And
 Surplus Liquidity- appears when cash
BSP.
flow in the bank persistently exceed
withdrawals.
  Inflow of Funds- reflects to all the
cash that is flowing in and out.
 Budget Deficit- occur when expenses
exceed the income reserves thru standard
operation.

_________WEEK 5-Wednesday__________
Relationship between Money Supply and
Rate of Interest
 Money Supply- is all the currency and - It shifts when demand for money is
other liquid instrument in a country’s equal to supply of money.
economy on the date measured. It roughly
include both cash and deposits that can be Quantity Theory of Money
used easily as cash. - It is one of the primary research for
 Interest rate- is the amount a lender the branch of economic referred to as
charges for the use of assets expressed as a monetary economic.
percentage of the principal. It is typically - General Price level is proportioned to
noted on an annual basis known as annual the money supply in an economy.
percentage (APR). - M (V) = P (T)
 Relationship- when there is a - M (Money Supply) - all the money in
shortage of money in bank, the interest rate the economy.
will then change. - V (Velocity of Circulation) – how
 Crowding out effect; the government many times a dollar, euro, etc. is spent
is crowding out the private businesses. But if purchasing finished goods and services.
the bans have surplus liquidity, there will be - P (Price Level) – price level of all
a way on how the crowding out effect will goods and services in an economy.
be dismissed. - T (All Transactions) – all the goods
and services sold within an economy.
Equilibrium in Money Market
- Money market is the interaction - The quantity of money in an economy
among institutions through which money is has a large influence on its economic
supplied to individuals, firms, and other that activity.
demand money. - Change in money supply = either a
- Money Market Equilibrium occurs at change in price level or change in the supply
the interest rate at which the quantity of of goods or both.
money demanded is equal to the quantity of - An increase in the money supply
money supplied. result to decrease in the value of money
because an increase in money supply causes
the rate in inflation to increase.
Equilibrium in the Foreign Exchange visible. e.g. transport services, medical
services etc.
Market • Capital transfers which are concerned with
- Foreign Exchange Market- a market in capital receipts and capital payment.
which one currency is exchanged for
Components of Balance Payments
another currency. For example, the euro is 1. Current Account Balance
being bought and sold, and is being paid for o Account statements of other country
using another currency. that serves as receipt and payment in
a short period of time
- It requires interest party. In
2. Capital Account Balance
exchanging, there is an involvement of o Refers to all financial transactions
interest. 3. Overall BOP
o Total of a country’s current and
capital account
o Includes errors and omissions

- The equilibrium rate is the interaction

of the supply of currency in the demand for Causes of Disequilibrium of BOP
1. Natural causes – e.g. floods, earthquake
the currency. etc.
- As for the market, the foreign 2. Economic causes –e.g. Cyclical
exchange market will be in the equilibrium Fluctuations, Inflation, Demonstration Effect
etc.
when the quantity supply of a currency is 3. Political causes –e.g. international relation,
equal to the quantity of demanded of the political instability, etc.
currency. 4. Social factors –e.g. change in taste and
preferences etc.
__________WEEK 5- Friday___________ Exchange Rate
Balance Payments - Value of one currency for the purpose of
• It is accounts are an accounting record of all conversion to another
monetary transactions between a country Example: 1 Philippine peso equals =
and the rest of the world. These 0.021 United States Dollar
transactions include payments for the
country's exports and imports of goods &
Factors Resulting in an Appreciation or in
services, financial capital ,and financial
an Appreciation or in a Depreciation of
transfers.
Currency
A country has to deal with other countries in
1. Rise in Domestic Interest
respect of 3 items:
2. Lower Domestic Inflation
• Visible items which include all types of
3. Rise in Domestic Income
physical goods exported and imported.
4. Speculation that the exchange rate will fall
• Invisible items which include all those
services whose export and import are not
Exchange- Rate Regime
• This is a system that determines the value Depending on the ratio, the currency could
of a domestic currency in terms of foreign be considered over or undervalued.
currencies.
• Importance of Foreign exchange regime:
Stock market Trading, Regime Durability,
Symbolizes growth, Indicates Demand and
Position in world

Types of Currency Exchange Regime

1. Dollarization
 Normally occurs when the local currency
has become unstable and begun to lose
its usefulness as a medium of exchange
for market transactions.
2. Currency Boards
 generally required to maintain reserves
of the underlying foreign currency
3. Monetary Union
 an exchange rate regime where two or
more countries use the same currency
4. Float with discretionary intervention
5. Pure Float / Independent floating
6. Traditional Peg/Fixed exchange rate system

Purchasing Power Theory

• Purchasing power is the amount of goods or
services that a unit of currency can buy at a
given point in time.
• Inflation tends to erode the purchasing
power of a currency over time.
• Central banks try to keep prices stable
through maintaining the purchasing power
of the currency by setting interest rates and
other mechanisms.
• 2 TYPES OF PPP:
1.) Absolute Parity
o Predicts that price levels will be
the same across countries.
2.) Relative Parity
o an economic theory that states
that exchange rates and inflation
rates in two countries should
equal out over time

Big Mac PPP

• The Big Mac PPP is an informal index used
to compare the purchasing power between
currencies as compared to the price of a
McDonald's Big Mac.
• Another name for the Big Mac PPP is the
Big Mac Index.
• Currencies are compared against the local
price of a Big Mac in that nation's currency.