Production
1.Land is an original gift of nature. It includes the soil, rivers, lakes, oceans, mountains, forests, rmneral resources, and climate.
2 Labor — is an exertion of physical and mental, efforts of individuals. This applies not only to workers, farmers, or laborers but also to professionals like accountants, economists, or scientists.
3. Capital — is a finished product which is used to produce other goods. Examples of capital goods are machines as far as economics is concerned. In finance and to laymen, capital refers to money. However, money is a medium of exchange. It can not produce goods. It can only buy goods. This is just an exchange between money and the corresponding units of goods.
4. Entrepreneur — is the organiser and .coordinator of the land, labor and capital.
Production Function
Production is the creation of goods and services to satisfy human wants. The factors of production are called the inputs of production, and the goods and services that have been created by the inputs are called outputs of production. The factors of production are classified as fixed factor (fixed input) and variable factor (variable input). A fixed factor remains constant regardless of the volume of production. This means whether you produce or not, the factor of production is unchanged. Examples are land and capital. For instance, in a one hectare rice field, you can employ 2, 4, or 6 farmers to cultivate it. One hectare of land is still one hectare whether only 20 cavans or 40 cavans of palay are harvested. In the case of a machine — let us say hollow block machine — it can produce 10 units or 50 units of hollow blocks a day. Still, it is one machine. In fact, even if there is no production, the machine is still there. In the case of a variable factor, it changes in accordance with the volume of production. No production means no variable factor. More production means more variable
'S. Examples are labor and entrepreneur. More laborers are Minted when there are more works to do. If there is no job to perform, a laborer is not needed.
The process of transforming both fixed and variable inputs into finished goods and services is called theory of production. The quantity and quality of goods and services being produced depend |on the state of technology. Obviously, modern techniques of production is more efficient than primitive technology. For example, the United States and Japan apply modern technology in ( ice farming. As a result, they can harvest about 300 cavans of palay per hectare. The underdeveloped countries can only harvest an average of 40 cavans. Such technical relationship between the application of inputs (factors of production) and the resulting maximum obtainable output is known as production function.
Law of Diminishing Returns
The law of diminishing returns is also known as the law of diminishing marginal productivity. It is a basic law of economics and technology. The law states that when successive units of a variable input (like farmers) work with a fixed input (like one hectare of land), beyond a certain point the additional product (output) produced by each additional unit of a variable, input decreases.
The production of goods greatly depends on available resources or inputs. Such creation of goods can be increased through the proper application of the right technology, together with the most appropriate combination of the factors of production, and their management. However, there are limits to production because the supply of many resources is scarce, and that some of these are fixed.
As shown in Table 4.1, the contribution of farmer 1 to production is 40 cavans. Marginal product is 0 because there is no additional farmer yet. Marginal product is defined as the additional product brought about by one additional unit of a variable input (farmer). The contribution of farmer 3 to production is 15 cavans. This is the additional or marginal product produced by farmer 2. Total product of the 2 farmers (farmer 1 and farmer 2) is 55 cavans (40 + 15). Up to farmer 4, marginal product is increasing. But after this point, marginal product decreases progressively until it becomes negative. It is noted that when marginal product increases, total product also increases. When marginal product decreases, total product increases at a decreasing rate, and when marginal product is below zero or negative, total product falls.
The message of the law is that there is a proper combination of a variable input and a fixed input in order to attain the maximum output. It is not advisable to keep on increasing the number of farmers to work in one hectare of rice field. If they are many, most of them have nothing to do. They only hamper the works of the other farmers. A good knowledge of factor proportion contributes to profit maximization or production efficiency.
One of the determinants of supply is cost of production. Producers have greater ability and willingness to supply a product which has a lower cost of production. As stated earlier, inputs or resources are needed in the production of goods. The prices of such resources are determined by demand and supply. Resources which are scarce, and there is a great demand for them to command higher prices. This means higher cost of production, and this results to a higher price of the products.
More abundant resources are cheaper. In less developed countries, labor is cheap while capital (machines) is expensive. It is the reverse in the highly developed countries where labor is expensive and capital is cheap. In the United States, it is cheaper to use machines than to hire workers. Only the very rich can afford to employ domestic help. In the Philippines, wages are very low. Thus, even professionals are willing to become servants in foreign countries.
1. Total cost — is the sum total cost of production. It is composed of wages, rents, interests, and normal profits. These are also known as factor payments: wage for labor, rent for land, interest for capital, and normal profit for the entrepreneur. Normal profit is therefore part of the total cost of production. It is an amount which is sufficient to encourage an entrepreneur to remain in business. In the case of pure profit, it is an amount which is in excess of the cost of production. Total cost is also equivalent to fixed cost plus variable cost.
8. Opportunity cost — Is a foregone opportunity or alternative benefit. For example, the superpowers are spending more than $1 trillion dollars a year for the arms race. Such amount is more than enough to erase global poverty from the face of the earth
Marginal Cost and Average Cost Relationship
When MC is falling, it pulls down AC, and when MC is rising, it pulls up AC. At the start of production, AC is greater than MC. Hut when MC continues to rise, it reaches a point where it is equal to AC. As shown in Figure 4.3, the MC curve intersects the AC curve at its lowest point. Beyond this intersection point, the MC curve rises at a faster rate than the AC curve.
The AC curve has a U-Shape. This explains the fact that AC is high when less units are produced. AC decreases as more units are produced. However, after a certain point, further production of more units of goods increases AC. The reason is the operation of the law of diminishing returns.
The effects of MC on AC are due to mathematical relationship. As long as MC is less than AC, the latter falls. AC will only rise if MC is more than AC as shown in Table 4.2. As illustrated in said table, the cost of product 1 is P160. Total cost is P160 and AC is PI60 (P160 divided by 1). The cost of an additional product (product 2) is P140. Total cost of product 1 and product 2 is P300. AC is P150 (P300 divided by 2). MC is PI40 which is the cost of the additional product. The cost of the third product is P120. The total cost of the 3 products is P420. AC is P140 while MC is P120. However, the cost of the fourth product is P140 which is higher than the cost of product 3. Total cost is P560, AC is PI40 and MC is also P140. At this point MC equals AC. It is noted that as MC increases, AC also rises, as shown in the table. MC is equal at the point when AC is at the lowest amount.
Variable factors or inputs like labor, raw materials, electricity, oil, ,and so forth take a shorter time in adjusting them to the production process.
These can be increased or decreased to fit the requirements of production. For instance, if there is a greater demand for office tables, then producers manufacture more said goods. They hire more laborers and use more raw materials. However, in the case of fixed factors or inputs like machines, buildings, heavy equipment, or manufacturing plant capacities, it takes a longer period of time for their adjustments in accordance with the needs of production. It is not easy to increase or decrease such fixed inputs to suit business conditions. For example, if business is good, producers can not just easily and quickly increase the size of the factory building, and the number of machines. These require huge financing.
Short run refers to a period of time which is too short to allow an enterprise to change its plant capacity, yet long enough to allow a change in its variable resources. Within this period, the plant capacity of a firm is a fixed factor — such as the number of machines, size and number of buildings and equipment. Output can be increased or decreased by applying the corresponding number of workers, raw materials and other inputs to the plant. However, the number of goods to be produced depends on the full capacity of the plant. A firm can not produce goods beyond such capacity. Evidently, cost of production under the short-run period is both fixed and variable.
Long run refers to a period of time which is long enough to permit a firm or enterprise to alter all its resources or inputs (both fixed and variable factors). Clearly, all inputs are variable, and cost of production is likewise variable. Under this period, some existing enterprises dissolve and leave the industry while new firms are organized and enter the industry. For example, San Miguel Corporation increases the plant capacity for its beer production by constructing more buildings, installing more machines and equipment, and then hiring more workers and applying more raw materials and other inputs. There is no specific number of months or years in determining short-run and long-run periods. In small- scale industries, it takes a shorter time to make adjustments in their plant capacities than in large-scale industries. For example, the owner of a tailoring shop which has been experiencing good business for the last few months can quickly and easily add two or three more sewing machines in his shop to be able to meet the increasing demand for its services. Such adjustment may take within a week's time. In the case of giant industries, it takes a long time even just to import a heavy equipment, not to mention the construction of a big factory building.
Economies of scale may be classified as external economies of scale or internal economies of scale. External economies of scale refers to those factors which are outside the firm or enterprise, but they contribute to the efficiency of the latter in terms of increased output and decreased unit cost of production. Examples of such external factors are government policies, electrification, and transportation and communication facilities. Obviously, these are very helpful in accelerating the growth of firms, and in improving their economic performance. In the case of internal economies of scale, these are the factors inside the firm or enterprise which contribute to the efficiency of the latter. Examples of such factors are division of labor, human resources development, managerial specialization, proper use of machines and equipment, favorable management policies, effective utilization of by-products, and modern techniques of production. All these can increase output and decrease cost of production.
It is noted that those firms which enjoy both external and internal economies of scale have become very efficient and big. They have survived competition and therefore have remained in the industry. Such efficient firms are mostly found in the highly-developed countries like the United States and those in Western Europe. They are capable of undertaking mass production which incurs a lower average cost of production. Their business operation even extends beyond their shores. They are involved in global supply of goods. And they have maximized their profits. These are the multinational corporations. Their lucrative markets are the poor countries who have very few efficient firms.
Appropriate Techniques of Production
Based on the law of supply and demand, resources which are .tlumdant have lower prices than those which are scarce. In less developed countries (like the Philippines), there is a surplus of labor. Thus its price is extremely cheap. Most laborers and professionals have very low salaries compared with those in the highly developed countries like the United States, Germany, France, among others. In such countries, labor is not abundant relative to the needs of their industries. Hence, the price of labor is high.
Clearly, poor countries should use labor-intensive technology. This means more labor inputs and less capital inputs. The more plentiful resources should be utilized because these are cheaper. Capital inputs (machines and equipment) are imported, and these are usually expensive. Poor countries can hardly afford to purchase them with their small foreign exchange earnings, s.
During the formative stage of the communes in China, their economic activities have been performed by almost 100 percent labor input. Its huge human resource had to be properly utilized. They manufactured their own tools of production — and never bought Western technology. As a result, their rural development program has been one of the most successful programs in the world. This has been achieved without foreign assistance. Such amazing achievement of the communes should serve as a lesson to most poor countries which have been inclined to imitate Western models of economic development.
American and European technology (Western model) is capital- intensive. Capital is cheaper in Western countries while labor is expensive. So they use more capital inputs and less labor inputs. They have a mechanized economy. In fact, in Japan, robots are being used in heavy industries as well as in offices and hospitals. In many economic activities, their operations are computerized. Such modern technology does not adversely affect the labor force, because there has been an increasing demand for workers in other sectors.
Cost of production refers to the total payments by a firm to the owners of the factors of production like land, labor, capital and entrepreneur. These are other expenditure-side of a firm in the process of creating goods and services. For a firm to remain in business, it has to earn an income which is greater than i s expenses. Obviously, this means the firm is making profit. Siu h financial condition of the firm is a common knowledge, even among the unschooled. The income-side of a firm is called revenue. The difference between cost and revenue is either profit or loss, depending on which one is higher.
No businessman is happy to experience losses in his firm or I enterprise. Naturally, he tries his best to make his business viable or profitable. In fact, he wants to maximize his profits, or if his business is falling, he wants to minimize his losses. In production ; economics, there are rules (under short run and long run) like when to operate or shut down a firm. Moreover, profit maximization is also determined through the relationship of total cost and total revenue, or marginal cost and marginal revenue. This section of the chapter presents graphical illustrations of profit maximization.
Total Revenue - Total Cost Approach
Total revenue = price times units sold
TR = P X Q
Total revenue - total cost = profit
Under a short-run period, a firm has both fixed cost and variable cost. Under what conditions would a businessman operate or shut down his firm? The rule is: if total revenue is greater than variable cost, operate; if total revenue is less than variable cost, shutdown. For example, the fixed cost of the firm is P10,000 and its variable cost is P5,000. Total cost is therefore P15,000. Supposing total revenue is P7,000. This is greater than the variable cost but less than the total cost. If the firm operates, its loss is P3,0(X). But if it closes down, its loss is P10,000 which is its fixed cost. A firm under a short run incurs a fixed cost whether it operates or not. So, it is better to operate because the loss is only P3,000. This is much better than losing P10,000. Besides, a part of thetotal revenue pays for some of the total cost.
However, in the long run, all costs are variable. This means total cost is equivalent to variable cost. When does a firm under a long-run period operate or close down? The rules are:
TR > TC: Produce more
TR < TC: Stop production
TR = TC: Maintain production
When total revenue is greater than total cost, there is pure profit. It is wise therefore to produce more for as long as TR > TC. In case total revenue is lesser than total cost, it means the firm is losing. So, it is better to stop production. However, when total revenue is equal to total cost, just maintain production. This means if the firm is producing 100 units a day, it should produce 100 units every day. When TR = TC, the firm gets a normal profit. Such profit is part of the cost of production as a payment for the entrepreneur. Such profit is enough to encourage a businessman to remain in his particular industry.
The profits of a firm are maximized by producing the must profitable output. Such output is when the total revenue exc ni r the total cost by the maximum amount. Figure 4,4 shows th.it : profit maximization takes place at Q2 where the vertical distance . between TR and TC is widest. When a firm produces an output less than Qjr TC is greater than TR. So, it incurs a loss. At Qr 1'R is exactly equal to TC. This is known as the break-even point, f Between and Q3, a firm makes profits. At Q3, there is again a ' break-even point where TR equals TC. Beyond this point, TC is greater than TR which means loss for a firm.
Marginal Revenue-Marginal Cost Approach
Marginal revenue is the additional income of a firm brought about by producing and selling one additional unit of a product. Clearly, the production of one additional unit means additional cost of production. Such additional cost is called marginal cost. A firm can determine its profit (or loss) by comparing marginal revenue and marginal cost. In other words, comparing additional ;. income and additional expenditure of a firm of each successive unit of output. The rule is: if marginal revenue is greater than marginal cost, increase production; if marginal revenue is less than marginal cost ; do not increase production. What then is the most profitable output ; for a firm? That production at which:
Marginal revenue = Marginal cost
Profit maximization of a firm is attained when MR = MC. This means in producing one additional unit of output, the additional income given by the additional unit is exactly equal to the additional cost brought about by the same additional unit of output. Illustrating the relationship or comparison between marginal revenue and marginal cost, let us say that a firm is producing 100 units of output every day. If it produces one additional product (which means the firm produces 101 units), MR is P10 while MC is P5 for example. Obviously, the firm makes an additional profit. So, the firm should produce more additional units for as long as MR is greater than MC. But if the additional product incurs an additional cost which is greater than additional income, a firm should not produce it.
However, during the very early stages of production, additional product is low which makes additional cost unusually high. To close down the firm would be a hasty or unwise decision. I he MR-MC
relationship might improve with increased production. This condition may happen in a purely competitive firm.
Both TR-TC and MR-MC approaches are applicable to all basic market structures: pure competition, pure monopoly, oligopoly, and monopolistic competition. The difference lies in their graphical illustrations or forms. Moreover, in the case of a purely competitive firm, price and marginal revenue. It can be stated therefore: profit maximization is attained at a point where price equals marginal cost (P = MC). More detailed data and graphs on MR and MC relationship are presented in the next chapter.
1. Man can not create goods and services without using the factors of production like land, labor, capital and entrepreneur.
2. Production is the creation of goods and services to satisfy human wants. The inputs of production are the factors of production. The outputs are the goods and the services created by the input. The technical relationship between the inputs and the outputs is called production function.
3. Production is limited by the law of diminishing returns. The law of production states that when successive units of a variable input work with a fixed input, beyond a certain point, the additional product created by each additional unit of a variable input decreases.
4. Production of goods and services are not free because the factors of production are paid for their use. Only products produced by nature are free.
5. The payments of the factors of production are: wage for labor, rent for land, interest for capital, and normal profit for the entrepreneur. The sum total of these payments is the total cost of production
6. Factors of production which are abundant relative to demand have very low prices. In poor countries, labor is abundant while in rich countries, capital is abundant. Thus, to get a lower cost of production, the more plentiful factor should be used. Clearly, the poor countries must use labor- intensive technology - and not American technology which is capital-intensive.
7. One side of the firm is cost or expenditure and the other side is income or revenue. The difference between cost and revenue is either profit or loss. In case both are equal, then it is break-even.
8. These are the rules of production: in a short-run period if total revenue is greater than variable cost, operate; if total revenue is less than variable cost, shut down. In the case of long-run period, if TR is greater than TC, produce more; if TR is less than TC, stop production; and if TR is equal to TC, maintain production.
9. Profit maximization is designated at a point where the difference between TR and TC is biggest or when MR is equal to MC.
Market Structures and Price-Output
Determination
The various market structures are represented by four basic market models. These Theoretical frameworks for existing firms and industries in the real world. Such market models describe the characteristics of the various market structures. However, some enterprises do not exactly fit the characteristics of any of the market models. Jn other words, the market models are not the complete replica of realities. But such market models are important because they help us understand the real world where the market system is the principal element of the economy.
Firms and industries play a vital role in our economy. They always seek ways of reducing costs of production and of improving the quality of their goods and services, especially in a competitive market. However, in the process of interplay between the forces of supply and demand, the happy balance between business profit and consumer satisfaction has always remained a big problem. In most cases, the satisfaction or interest of the consumers has been ignored due to self-interests of producers or sellers, and because of inherent market imperfections. For instance, in the case of monopoly the position of the consumers is very weak. The monopolist usually dictates his price. And even in a market situation where there are many producers or sellers, the latter can agree together to forge a common price. Thus eliminating price C( in petition among themselves in order to attain their self-interests - more profits per unit of their output.
In view of the scarcity of resources, firms and industries should strive to maximize their employment and production. It is their responsibility to pursue economic efficiency as their objective. Economic efficiency is the relationship between input (factors of production) and output (goods and services produced by the factors of production). However, within the social context the economy of the poor countries, economic efficiency is not the main issue. The first and most important goal of the economic system should not be economic efficiency but social equity. This refers to the fair allocation of the productive resources like land, capital and management among the members of society.
market system allocates goods and services through the mechanism of demand and supply. The members of society obtain their goods and services in the market on the basis of their ability and willingness to buy. Some say that the market system or price lystem is more efficient than the government in allocating goods lind services. But in countries where productive resources are not fairly distributed, only the very few rich get most of the goods and services in the market. Hence, there is a need for the government to participate in allocation function of the market system to protect the interests of the poor. More details of government function are explained in Chapter 11.
This chapter discusses the following topics: basic market models and their characteristics, determinants of market structure^, and price and output determination. Graphs and tables are presented to support the explanations of the last topic.
1. Perfect/pure type
a. perfect or pure competition
b. pure monopoly
2. Imperfect/non-pure type
a. monopolistic competition
b. oligopoly
Pure competition — is a market situation where there is a large number of independent sellers offering identical products.
Pure monopoly — refers to a market situation where there is only one seller or producer supplying unique goods and services. A one-buyer market situation is known as monopsony.
Monopolistic competition — pertains to a market situation where there is a relatively large number of small producers or suppliers shilling similar but not identical products.
Oligopoly — is associated with a market situation where there are few firms offering standardized or differentiated goods and services. Such definition is not precise because oligopoly includes a wider range of market structures than the other three market models. On the other hand, a few buyer market situation is called oligopsony.
Characteristics of Market Models
Pure Competition
1. There is a large number of independent sellers.
2. Products are identical or homogeneous. Examples are farm products like rice, corn, fruits, vegetables, etc.
3. No single seller and no single buyer can influence the change in market price of a product. There are thousands of sellers selling millions of identical products. In case a firm or one seller decides to reduce its supply even up to 99 percent, the total supply in the market is not affected. The supply of one seller is negligible. Therefore, he can not change the market price. Likewise, if he sells his goods at a lower price than the prevailing market price, his goods are bought in just a few minutes. But the market price remains. On the other hand, if he offers his goods at a higher price than the market price, he can not sell his goods, The rise or fall of market price is due to changes in total demand or total supply.
i It is easy for new firms or sellers to enter the market and tor existing firms or sellers to leave the market. There are no significant barriers like legal, financial, or technical requirements. For example, a vegetable vendor is free to
sell in the market. She only pays the market fee. In case, she is no longer interested in her small business, she is also | free to leave the market.
5. There is no non-price competition like advertising, sales promotion, or packaging. There is no need for such non- price competition because the products are identical which means they have the same features. For instance, even if you advertise rice, egg plant, or tomatoes, it has no effect on buyers. They just purchase such products even from one who has not advertised.
There is only one producer or seller.
Products are unique in the sense that there are no good or close substitutes available. Most public utilities supplying water, electric and telephone service are monopolists. Examples, MERALCO, PLDT and MWSS
The monopolist makes the price. Since he is the only supplier, he can reduce his output in order to increase his price. Or he can increase his supply if this means an increase in his total profit.
It is extremely difficult for new firms to enter the market. There are several formidable barriers like very big capital and very keen competition. The existing monopolist is an established giant in the industry. There are also natural monopolies which refer to existing goods or services in which competition is not practical or profitable. Most public utilities enjoy natural monopolies. These are granted exclusive franchises by the government. For example, it is not practical and convenient for several electric, water, or telephone companies to operate at the same time in a community. There would be many electric wires and posts and diggings. In Metro Manila, we have only one water supply company, and yet we are greatly inconvenienced by its endless diggings.
There may be or no extensive advertising or sales promotion depending on the goods or services of the monopolists. In case there is advertising, it is only for public relations or goodwill to induce more people to buy their products or improve their public image.
Monopolistic Competition
There is a large number of sellers acting independently. Such number means about 100 firms or sellers more or less, while in the case of pure competition, it indicates thousands or more sellers.
Products are differentiated. This means physical differences as well as variations in location of the store, services of the sales staff, packaging of the product, credit conditions, advertisement, and other sales promotion strategies. Examples are banks, book publications, drugs, tailoring shops, gasoline stations, among others.
There is a limited control of price. It is possible for some sellers to slightly reduce or increase their prices because of the differences of their products. Example, some banks have lower or higher interest rates. Likewise soap products have different prices. Even vitamins have different prices even if they have the same classification like vitamin E.
Entry of new firms in the market is relatively easy. However, compared with pure competition, it is more difficult for firms under the monopolistic competition to put up their business. It requires bigger capital and the competition is greater in the sense that they have to offer better product features and more effective sales promotion.
I here is an aggressive non-price competition in product quality, credit terms, services, locations, and physical appearance of the product. There is extensive advertising to focus the distinct features of the products of the sellers. I or example: "Parang nakasandal sa pader."
Oligopoly
There are very few firms which dominate the market. Fach firm produces a big portion of the total industry output.
Products are identical or differentiated. Raw materials like steel, zinc, lead, cement and other industrial raw materials are identical products. Finished goods like typewriter, airplanes, locomotives, cars and sewing machines are differentiated products.
There is a price agreement among the producers to promote their own economic interests. The biggest among the producers is the price leader. In the case of OPEC (Organization of Petroleum Exporting Countries), the price leader is Saudi Arabia which is the biggest oil producer. Moreover, there is also output agreement among thj oligopolists to avoid surplus which causes decline in price. It is not uncommon for them — like OPEC — to cut down production to secure a higher price.
The entry of new competitors in the market is difficult. It requires enormous capital and large-scale production. It is very difficult for new firms to compete with existing firms because these are already well-established. However, despite formidable competition, it is still possible for new firms to enter the market. Unlike under pure monopoly, there are certain legal and economic restrictions which is no longer possible or feasible for new firms to enter the market. If they succeed, then it would no longer be pure monopoly such as in the case of San Miguel beer. Another beer company has been able to penetrate the market
There is strong advertising among those who produce differentiated products like cars, cigarettes and appliances. However, in the case of identical products like the industrial raw materials, advertising is only for image-building. Usually the deeper interest of the firms is in the community and the firm's contributions to the growth of the economy.
Determinants of Market Structure
Government laws and policies. In some industries, the government controls the degree of competition in the interest of the economy and the consumers. For instance, in certain industries like those which supply water and electricity, the government requires only one company for each product and service. In the case of transportation and communication, the government may require only one or two firms to operate in certain regions of the country. To prevent abuses of monopolistic firms, the government regulates their operations.
Technology. For quite some time,certain firms have enjoyed their business positions as monopolists. In fact, they have reaped great economic fortunes as the only suppliers of products which did not have competition. However, because of technology good or better substitutes have been developed. Thus, monopoly has been transformed into oligopoly, or even monopolistic competition in some cases. For example, the abaca fiber was once the pride of the Philippines. It was used for making quality papers, ropes and fishing nets. But when synthetic fibers have appeared, abaca fiber has been given low market rating. The appearance of plastic products have also destroyed not a few monopolistic firms. Furthermore, the discovery of better technology by some firms has driven away less efficient competitors. So that only very few have remained in the industry.
1. Business policies and practices. The presence of giant firms discourage the entry of new firms with little resources. In some cases, the bigger firms resort to cut-throat competition which is an unfair business practice to drive away their competitors. There are also cases where existing big firms merge their resources to improve their shares in the market. Another strategy of big firms is to buy the resources of their competitors with attractive price. This eliminates or reduces competition.
2. Economic freedom. The existence of economic freedoms like the right to own private properties, the right to engage in any lawful business, the right to accumulate income, and other similar economic freedoms associated with a free-enterprise economy have somehow changed market structures. In a free-enterprn- economy or free-competition economy, it is the survival of the fittest. The most efficient firms remain in business. They conquer their competitors and drive them out of the market. Naturally, firms which suffer from heavy losses leave the market. This leads to monopoly or oligopoly. During depressions or recessions, the inefficient firms and those with little resources leave the market. Only the few big and efficient ones stay in the market. In the case of farm products like vegetables and fruits, it remains an almost purely competitive industry. A single seller or few sellers have insignificant influence on both price and output of the industry. Their shares in the total market supply are negligible. Since there are thousands of sellers selling the same products, the economic strength of few sellers can not be ignored. And there will be many competitors because it is very easy for them to enter the market.
Price and Output Determination
Pure competition. The demand curve of an individual firm under a purely competitive industry is perfectly elastic. This is because the decrease or increase of the output of a single seller has no effect on the total supply and market price. However, in the case of market demand curve (demand curve of all producers of a particular product), it is inelastic. All producers acting at the same time can affect total supply, and therefore also market price. They can sell more units of their output at a lower price. This is the law of demand.
Table 5.1 illustrates the demand and revenue schedule of an individual firm in a purely competitive industry. It is noted that the price of the product, the average revenue and marginal revenue are the same, hi Figure 5.1, thg^marginal revenue are the same. In Figure 5.1, the marginal revenue curve is equal to the demand curve of a purely competitive firm because it can sell any unit of output at a constant market price. The total revenue curve is a straight upsloping line.
Price and output determination in a purely competitive firm is shown and explained through graphical illustrations. Such graphs indicate the most profitable output and least loss output. The equilibrium of the firm (through the MR = MC approach) under the short run and long run are also presented.
Pure monopoly. There is only one firm that produces the product. The demand for the product of the firm is the same as the market demand for the product. Since there is only one firm, it is also the industry. Its demand curve is the industry demand curve which is downsloping. This means a monopolist can only increase his sales by offering a lower unit price for its product. If he does this, his marginal revenue (additional income) is lesser than the price.
Table 5.2 shows the demand and revenue schedule of a pure monopolist. It is noted that more units are sold at a lower price. However, total revenue increases at a decreasing rate, and then declines after reaching its maximum. In the case of marginal revenue,it is always lower than the price. Naturally, at a lower price of an additional unit sold, the additional income is lower than the previous additional income.
Price and output determination under pure monopoly it- shown and explained through graphical illustrations. The graphs indicate the profit-maximizing and loss minimizing positions of a pure monopolist. The first graph shows that the pure monopolist enjoys a monopoly profit. This is the profit which is over and above the normal profit. The monopolist continues to enjoy such pure profit because there are no competitors. Unlike under pure competition, the existence of pure profits attracts the entry of more new firms. This results to lesser profits until the point where only the normal profits remain. However, despite the advantages of a monopolist, he does not charge the highest price because this decreases his sales, and consequently his total profit.
Monopolistic competition. The demand curve of a firm under this market structure is highly elastic (but not perfectly elastic like that of the firm under pure competition) because of the presence of a relatively large number of competitors selling close-substitute products. More rivals make the demand curve more elastic. Compared with the demand curve of a firm under pure monopoly, a monopolistically competitive firm has a more elastic demand curve.
Under a short-run period, the firm will maximize its profits or minimize its losses at an output (units) indicated by the intersection of MC and MR. The short-run pure profits in the industry attract more firms since it is relatively easy for them to enter the market. In the process of more competition, pure profits disappear so that only normal profits remain and only the most efficient firms survive. Such situation does not encourage anymore the entry of new firms. In the long run, firms just earn normal profits which is break-even. This means total revenue equals total cost.
Oligopoly. Under this market structure, there are very few firms which produce homogeneous or differentiated products. Collusion is a common practice among the oligopolists. This is a secret agreement among them to have a common price and to manipulate their output for their own business interest. Thus, their individual profits are the same as those enjoyed by pure monopolists.
However, let us assume that there is no collusion among the oligopolists. If company X increases its price, and its competitors do not, many of its customers go to other firms. Company X can still sell some units due to product differentiation. But there is a sharp decline in its sales. On the other hand, if company X decreases its pru e and its rivals do not follow, then there is a great increase in its sales at the expense of its competitors. But in most instances, this does not happen. When a firm reduces its price, the other ones also reduce their prices. This is price war. Under such situation, the price reduction of company X has little effect on its quantity demanded. The increase in total sales is being shared by all rivals.
Through graphical illustrations, the demand curve of a company X when it increases its price is elastic. Since rivals ignore such move of company X, its customers become sensitive, and therefore buy from other firms. In the case of price reduction of said company — which is to be imitated by rivals — its demand curve is inelastic. This means there is a lesser percentage change in quantity demanded than the percentage change in price.
Under a non-collusive oligopoly, the demand curve of a firm is "kinked" (which means short twist). Above the current market price, the demand curve is highly elastic but inelastic below said price. This explains the fact that rivals ignore price increase of an oligopolist but follow price reduction. In the case of marginal revenue, price reduction from the going price results to a vertical twist. Figure 5.9 shows the various market situations of a firm under oligopoly, both collusive and non-collusive.
1. Firms and industries are important because they supply goods and services to society. However, in poor countries, their social contributions are more important than their
economic benefits.
2. The various market structures are represented by four market models: pure competition, pure monopoly, monopolistic competition, and oligopoly. Such market struct^ is arc determined by government laws and policies, technology, business policies and practices, and economic freedoms.
3. During short-run period, an efficient firm and other firms enjoy pure profits. This attracts the entry of new firms. In the long run, such profit is eliminated. Only normal profit remains and only the efficient firms stay in business in a competitive market.
4. A monopolist enjoys a pure profit, together with an oligopolist, due to the absence of competitors in the case of the monopolist, and in the case of the oligopolists, they agree to put up a common price to avoid competition.
5. Like in the case of a competitive firm, enterprises under the category of monopolistic competition do not have pure profits in the long run.
6. In all the market models, profits maximization (or loss minimization) is determined at a point where MR = MC
Factor Markets and Income
Distribution
In a market economy - where there is free interaction between l\e forces of supply and demand - there are not only markets for food and services, but also for productive resources or factors of production: land, labor, capital and entrepreneur. The suppliers of goods and services in the product markets are the business firms and the buyers are the households.
However, the transactions or exchanges in the product markets constitute only half of the circular flow of transactions. Equally important are the factor markets where households are the suppliers of the productive resources to the business firms. The incomes of households depend on the prices of their productive resources. Such incomes determine their ability to buy the goods and services offered by business firms.
The concepts of demand and supply under perfect competition - which apply to the product markets - also apply to the factor markets. The equilibrium point of demand and supply determines the market price and the quantities of productive resources that are bought and sold.
Clearly, the incomes of individuals depend on their ownership of productive resources and the prices of such resources. Those who own many buildings, machines and large tracts of land are very rich. Those who have nothing, except unskilled labor, are very poor. This is how incomes are distributed among individuals in a capitalist or market economy.
In this chapter, various topics such as supply and demand for productive resources, pricing of productive resources and theories of income distribution are explained. In addition, causes of income inequality and other related topics are presented.
Determinants of Factor Demand
The demand for goods and services is a direct demand. An individual buys a kilo of rice for consumption. He purchases a radio for his pleasure. However, in the case of productive resources, it is a derived demand. A firm buys a machine not for satisfaction or pleasure, but for the production of goods or services.
Other determinant of the demand for productive factors is their productivity. In general, the most productive resources have the highest demand, because they are the most efficient. Such resources provide maximum profits to the business firms. Technology plays a key role in the productivity of the factors of production. Modern machines are more efficient than primitive tools of production.
Moreover, the prices of factor substitutes and complementary resources affect the demand for productive resources. In highly developed countries, labor resource is scarce, and therefore very expensive. Industrial firms find it more economical to use machines as substitutes for labor. This has, of course reduced the demand for labor.
Like the quantity demanded for goods in relation to prices, the quantity demanded for labor has an inverse relationship with wage rates. Business firms are willing and able to hire more workers at lower wage rates, and vice versa. Whenever wage rates rise due to the command of government laws, inefficient firms either shut down or reduce the number of their workers. Other firms schedule the work of their workers on rotation basis. That is, half of their labor force work during MWF and the other half on TThS, or on every other week basis.
A firm hires additional labor if it gets additional profits. There is no sense in hiring such labor if its costs are greater than its incomes. For example, in employing an additional worker, he gets a salary of P2,000. But his contribution to production is only worth P1,000. This is a loss. He should not be retained.
In the language of economics, a firm's decision to employ an additional man-hour depends on the difference between marginal revenue product of said man-hour, and the marginal resources cost of employing it. A marginal product of labor is the additional output produced by the employment of an additional man-hour of labor. For example, 100 man-hours produce 50 tables. A firm employs one additional man-hour in the case of marginal revenue product of labor, it is defined as the additional evenue (income) obtained by selling the marginal product of labor. Marginal resource cost is the payment of the additional man-hour of labor - and other productive resources like land and capital.
The business firm's decision to employ an additional man- hour depends on the following:
1. If the marginal revenue product of the additional man- hour is greater than its wage, the additional man-hour adds more to the firm's revenue than its cost. With this situation, the firm keeps on employing additional labor until the marginal revenue product no longer exceeds the wage. There is a profit as long as MRP is greater than MRC.
2. If the marginal revenue product is less than the wage, the firm reduces the number of man-hours. Such reduction in labor continues as long as wage exceeds marginal revenue product. When MRC is greater than MRP, it is a loss for the firm.
3. The firm maximizes its profits up to a point where MRP is equal to MRC. Remember the MR = MC rule. This is the same as the MRP = MRC concept, the only difference is that MRP and MRC apply to the inputs of production, such as labor, land, capital and entrepreneur while MR and MC refer to outputs of production like cars, rice, shoes, vegetables, etc.
Supply in the Factor Market
The law of supply governs the behavior of resources in the factor market just like the behavior of goods and services in the product market. The sellers of productive resources — land, labor, capital and entrepreneur - are the households. Their willingness to offer their productive resources to the business firms depends on the prices of such resources. In general at higher prices, more productive resources are offered in the factor market.
However, the supply of productive resources is not without certain limitations. For example, in the case of land it is a fixed factor. A very high price cannot possibly increase its area. The only option - which is a very expensive activity — is to level off mountains or transform the deserts into arable farms. In the case of labor, higher wage rates can increase labor hours and its quality but only up to a certain point because people are naturally inclined to enjoy life through rest and recreation.
The suppliers of goods and services have one common goal: profit maximization. Thus, all economic decisions are based on production costs and product prices. But in the factor market, the suppliers are the households. They also make their decisions on the basis of self-interests. However, such personal interests do not necessarily mean profit maximization. Some individuals prefer leisure to an additional profit or income. Others are socially- oriented. They are more concerned about their social responsibility than in accumulating more money. So, they tend to get a job which they feel they can contribute something valuable to society although such job gives them lower income.
Supply of Labor
More individuals are willing to work when wage rates are higher. Generally, this is true in an economy or society where there are abundant job opportunities. People can choose their jobs and their wages. The firms which offer the highest wage rates, together with the best working conditions and fringe benefits, attract most of the competent workers.
However, in poor economies, jobs are scarce. Poor individuals are forced to accept unsuitable jobs with very low wage rates to be able to survive. In the Philippines, not a few are willing to receive wage rates lower than the legal minimum wage just to get a job. In fact, many college graduates are factory workers, salesgirls and office clerks. The oversupply of labor has encouraged most employees to exploit their employees.
There is no doubt that high wage rates attract more labor. But individuals balance their desire to work more to get more income and their desire to have more leisure. At a certain point, money is not the most important factor. People also need time for rest and recreation. A rich person is more likely satisfied with a small increase in his income. He prefers a substantial increase in his leisure in order to enjoy the benefits of the goods and services that he can purchase. In the case of a poor person, he is more inclined to sacrifice some leisure in favor of wage increase. He needs more money to be able to satisfy his basic needs. Such relationship between wage rates and quantities of labor results to a backward bending supply curve as shown in Figure 6.1.
Labor Market
The market demand for labor constitutes all the demands of all firms for labor. Whenever wage rises, a firm's demand for labor falls. This makes the demand curve downward sloping. In the case of market supply of labor, it is the sum of all individuals' supply of labor. The supply curve of labor is backward bending. This means that as wage increases, work hours also increase. But beyond a certain point, further wage increase results in a decrease in work hours. Please refer to Figure 6.2.
In Figure 6.2, the equilibrium wage is T and the equilibrium man-hour is R. Above the equilibrium wage (indicated by X), there is labor surplus. This means supply of labor is greater than demand for labor. More people like to work due to higher wage, but there is less demand for labor by the business firms. On the other hand, wage below the equilibrium wage (indicated by T) creates a labor shortage. This means that demand for labor exceeds the supply of labor. At a lower wage, individuals are discouraged to work while business firms are willing and able to employ more workers.
When there is labor surplus, wage moves down towards the equilibrium point. When supply exceeds demand, the price of labor falls. In the case of labor shortage, wage moves up towards the equilibrium point. Again, such behavior of wage follow^ the law of supply and demand. When demand is greater than supply, the price of labor goes up. In a perfect competition, the market wage is determined by the free interaction between demand and supply. There is no government intervention. This is an assumption in a free market economy.
Labor Market for Teachers
Our country has a labor surplus. Even college graduates find it extremely hard to get suitable jobs. Our economy generates a very limited number of new jobs. Every year our labor population has been increasing - much faster than the economy can create new job opportunities. Thus, with a tremendous increase in both local and foreign investments, this will certainly absorb our labor surplus.
There are many teachers in the Philippines. As stated earlier, abundant productive resources command a very low price. Thus, the wages of teachers are very low. Without government intervention and faculty unions, their salaries would have been lower. This is to be expected because the supply of teachers far exceeds the demand for them.
Many teachers - and other professionals - are classified below the poverty line. Their salaries are too low to support a decent living. This situation has forced many professionals to work abroad as maids. In contrast, teachers in rich countries are highly paid. Their salaries can compete with the salaries of top executives in commercial and industrial firms. In the real world, the demand for professionals and laborers is mostly not on competitive basis. In many communities, especially in the rural areas, there is only one large firm which demands for labor. Such firm is therefore a monopsonist. In other regions, there are only very few firms which buy labor. However, such oligopsonistic position of the few firms has the same buying power as the monopsonist. Evidently, when there is only one or very few firms in the labor market - and there is abundant labor supply - the employers can considerably influence the wage rates to their economic advantage. Theoretically, in a perfect competition - where there are many small firms - no single firm can influence the prevailing market price of labor and other productive inputs.
Income Distribution
Income distribution is the allocation of income among the owners of the factors of production. There are various ideas or theories of income distribution. The early social philosophers crusaded not only for economic equality but also for social and political equality. For instance, the French philosopher Rousseau contended that private property was robbery and it did not exist in the state of nature. Another social reformer, Babeuf stated that nature has given to every man an equal right in the enjoyment of all goods. Likewise, Proudhon, a believer in equality and bitter enemy of private property, claimed that employers robbed laborers by not rendering to them the full value of their labor. In the case of Karl Marx (father of modern socialism), he said that the capitalist is a recipient, of surplus value (profit). He claimed further that the capitalist, in the process of accumulating wealth for himself, therefore robs and exploits the worker.
The maldistribution of income and wealth among the less developed countries has been more widespread. The gap between the rich and the poor is getting wider and wider. Only very few are rich while most of the people exist under the poverty line. In the Philippines, the poverty line (as of the middle of 1994) was at P5,(KX) a month. How many Filipinos are earning this much? What about the thousands who are jobless? It is rather unfortunate that as more households slid below the poverty line, households in the upper bracket took a bigger share of total family income. As of mid 1994, the top 10 of the household population obtained an income which was 37 times that poorest. Such dismal economic condition of the poor has been a product of our existing socioeconomic structure. Most of the productive resources belong to very few individuals, while workers and employees are given low wages. The other sources of income like rents, interests, and profits are much higher.
Types of Income Distribution
Personal distribution — is the allocation of income among persons or households. The degree of income inequality among households or families is shown by the Lorenz Curve as shown in Figure 6.3. The vertical axis represents "percent of income" while the horizontal axis is the "percent of families." The diagonal line shows perfect equality of income among families. For instance, 50 percent of all families receive 50 percent of total income. However, the Lorenz curve illustrates the real income distribution which is unequal. The further the Lorenz curve from the line of equality, the greater is income inequality among families.
Functional distribution - is the allocation of income among the factors of production: land, labor, capital and entrepreneur. The incomes of the factors of production are rent for land, wages for labor, interests for capital, and profits for the entrepreneur.
Causes of Income Inequality
1. Intelligence and talents. Individuals who are more intelligent and talented are more likely to earn more income. Bright persons have greater opportunities to fame and fortune. In the same manner, those who have exceptional talents for singing, painting, acting, and so forth have good economic future. Such differences in the ability of individuals contribute to income equality.
2. Education and training. Those with higher levels of education and training generally gets higher incomes. For example, top level scientists and individuals with doctorate degrees have higher salaries than those who just finished elementary or high school education. However, in countries where there is an over-supply of professionals, their salaries are low.
3. Unpleasant and risky jobs. In highly developed countries, employers provide financial incentives to work that is dirty, unpleasant, difficult, and risky. Otherwise, people would take other jobs. But in poor countries where the rate of unemployment is very high, workers have very little choice or no choice at all. They are forced to take dirty and risky jobs in order to eat three times a day.
4. Ownership of productive factors. Only few families own most of the productive factors like land, machines, buildings, and so forth. These are the ones who are rich. They derive big incomes from their properties. Such unjust distribution of wealth and income is the root of poverty. Almost all people who are born poor have remained poor for the rest of their lives. Their chances of improving their economic conditions are extremely slim, except in a kind of society where there are many opportunities, and these are available to everyone.
5. Luck and connections. The more experienced old folks claim that it is luck that counts much. It has been said that the destiny of a person has been made, and no amount of hard work can change it. Those who win first prizes in lotteries are lucky. Those who are born rich are fortunate. Likewise, people with big connections are more likely to succeed in life. It is whom you know that matters.
Theories of Income Distribution
The various economic systems have different concepts and practices of income distribution. Under the free market economy, the prices of the factors of production are determined by demand and supply forces. For instance, rent which is the price of using land, has been increasing. The reason is that the supply of land is fixed while demand for land has been increasing due to rise in population and business activities. The point is that the incomes of the owners of the factors of production are determined by market forces. Apparently, there is nothing wrong with this. But what is wrong and unjust is the distribution of the factors of production. Naturally, if only very few own incomes. Most of the people own only one factor of production — labor. And in poor countries, labor has the lowest price among the factors of production. Because of its over supply, millions are unemployed. Of course it is entirely different in rich countries. Labor is scarce and the demands for it is great. Thus, the price of labor is high. This means the incomes of the workers are sufficient to allow them to enjoy a decent living.
In view of the extreme poverty in the less developed regions of the world which has emanated from unjust distribution of wealth and income,not a few countries have charged or changed or modified their economic systems in the hope of improving the social and economic conditions of their peoples. They have introduced radical economic, social,and political reforms to uplift the masses from their miserable conditions. This means there is a redistribution of wealth and income based on social and economic justice.
There are several theories of income distribution based on the following:
Marginal productivity — holds that the income of the factor of production (or factor payment) is equal to the value of its marginal product. This simply means that the owners of the factors of production are paid based on their contribution to production under a competitive market condition. For example, if your contribution to production is worth P2,000 a month, then your wage should be P2,000 a month. However, in the real world, this does not exactly happen. There are government laws to comply with, and that the market is not perfectly competitive. Another, capitalists have another idea of income distribution.
Needs — determine the amount of income of families or individuals. Those who have more needs receive more income in proportion to their needs. For example, janitor A is single while janitor B is married and has 4 children. Based on this theory, janitor B gets more income. Some countries, especially the highly developed ones, have been using this theory of income distribution. They provide allowances to the children of their employees. In the case of the two janitors, both get the same basic pay. But janitor B receives allowances for his 4 children.
Social usefulness — is the basis of income distribution. Jobs which are more useful to society are paid higher. Jobs under this category are teachers, farmers, fishermen, doctors and nurses. Such theory encounters difficulties in implementation. Singers, actors, comedians, and other groups are most likely to oppose such social usefulness theory of income distribution.
Equality — refers to an income distribution in which all members of society receive an equal amount of income. This is the idea of communism in an attempt to erase the gap between the rich and the poor. Such theory is good to others but not to ail Those who are lazy and those who have little qualifications ,tr»' happy under this arrangement. However, those who are highly qualified and ambitious are discouraged or demoralized. Consequently, both economy and society will not progress for lack of economic incentives to deserving individuals.
Pricing of Resources
Pricing of resources refers to payments of the factors of production. As stated earlier, factor prices of factor payments are determined by the law of supply and demand. However, due to the limitations of the market forces, the government interferes to a certain degree, in the pricing of the productive resources to protect the interest of the workers who constitute a great majority of the productive resources. In addition, the unjust pricing of some productive factors results in higher costs of production. And this means higher prices of goods and services. Thus, the government does not only promote the welfare of the workers but also the consumers of goods and services.
In some countries, particularly the socialist countries, their governments have assumed a more active role in determining the prices of the factors of productionrfheir fundamental goal is to establish a just price and a just wage. Just price is equivalent to cost of production. There is no pure profit. There is only normal profit for the entrepreneur. In the case of just wage, it means a fair income for labor. It enables the workers to meet their basic needs. Aside from this, their government grants security benefits to the low-income groups^Such social equalization programs of the government bridge the gap between the rich and the poor.
However, in the explanation of the prices of productive factors, the context is within a capitalist or market economy. In this particular setting, the prices of the productive factors are determined by supply and demand. The role of the government is not as big as that in the socialist countriesvThe government only supports and regulates the market forces.
Wage is the most important price of the productive resources. To most people, wage or salary is the only source of income. Since wage rate is extremely low in the Philippines (in relation to the high prices of goods and services), it is one of the major reasons why most people are poor. Every time prices of goods and services increase, real wages decrease. Real wages refer to the number of goods and services that a worker can buy with his money
wage - his nominal income {example, PI,200 a month)1- A. real wage therefore is the purchasing power of the worker.
The determinants of wage rates are:
Supply and demand. Wage rates, like goods and services, are determined by the free interaction between supply and demand for labor. If demand for workers is greater than supply of workers, the wage rates increase. On the other hand, if supply of workers is greater than demand for workers, then wage rates decrease. In countries where massive unemployment exists, wages are very low. Workers who are lucky to find jobs, accept any wage rates just to survive. Even professionals are forced to get jobs which are far below their education and training Minimum wage. The government imposes minimum wage rates for various workers like those in the industrial and agricultural sectors. The objective of such wage determination is the desire of the government to protect the interest of the low-income workers in relation to the increasing cost of living. Since most capitalists or employers are not expected to increase the wages of their employees, the government has to support the reasonable demand of workers for higher wages in order to cope with higher prices. However, there are firms which violate the requirements of the minimum wage law. Their employees do not complain anymore for fear of losing their jobs. The inefficient enterprises lay off some of their workers or they program their operations on rotation basis.
Labor unions. More active labor unions are likely to protect and promote the legitimate interests of their members against the exploitations of their employers. Through persistent collective bargaining, labor unions can realize fair demands from their employers, especially under a good government. In some poor countries, government even use the military or police to discourage the legitimate activities of labor unions. Labor union leaders have been killed or tortured. However, what should be prevented is the use of violence or destructive acts of labor union members and officers. These have adverse effects on the whole economy because the supply of goods or services is disrupted. And this is not favorable to the public.
To most people the word "rent" refers to the payment of a room, apartment, building, or machine. However, in economics it is the payment for the use of land and other natural resources which arc completely fixed in total supply. It is obvious that economic rent has tremendously increased. This is understandable because the I supply of land is fixed while the demand for it has greatly increased, especially in urban areas. Many years ago, the price paid for the use of land was very low. The demand then for the use of land was very small. In fact, in many cases, land was considered a free good. Industrious individuals during those days Kust chose a piece of land, and had it registered in the government jj agency. They developed it, and now it is worth a great fortune. Before, the land in front of the University of Sto. Tomas, was a kangkong field. Cubao was full of rocks and talahib. Figure 6.4 illustrates the relationship between supply of and demand for land. It is noted that rent increases as demand increases. The supply curve is perfectly inelastic.
Land Rent Is an Unearned Income
Both David Ricardo, author of the classical theory of comparative advantage, and Henry George, author of the book Progress and Poverty, claimed that rent was an unearned income. Adam Smith, the leader of the classical economists, declared that rent was a monopoly price. Ricardo further stated that higher prices of crops were due to rent which increased, as a nation became more fully populated and the best land had been exhausted.
During the early days, a piece of land could be acquired free. Others got their land through inheritance or by historical accident. Because of the sudden growth of population and business activities, land rent has increased tremendously. Thus, landowners are the beneficiaries of unearned incomes. Without investing extra labor, machine or money, the income of the landowner has increased because the rent of his land has tripled or become even more. The only reason for his good fortune is that population growth has raised the value of his land.
Henry George witnessed the rapid economic growth in California during the 1870's amidst a widespread poverty. In his analysis of the conflicting economic conditions in his community, George concluded that land rent is the root cause of poverty. He argued that the value of land is not due to its fertility, but due to the growth of population and progress of society. He said further that one can be rich by buying not the best farm, but a piece of land near the center of a fast growing city. It does not matter, he claimed, whether this is the most fertile or solid granite.
Single Tax - Key to Progress
Henry George proposed that the increase in rent or value of land should be taken by the government in the form of tax. All other taxes should be abolished, except land tax. Nevertheless, improvements introduced by the landowners are not covered by the proposed single tax. Only the unearned incomes from the land should be taxed. George believed that the revenues to be derived from such land tax could fund all government programs and projects. Since all other taxes would be abolished, this would stimulate further growth of trade and commerce in the community.
Likewise, workers could no longer bear the heavy burden of paying taxes on production and consumption. George also stated that landowners would be encouraged to improve their landholdings rather than give their unearned incomes to the government as taxes. Such economic benefits of a single tax would generate more production and competition, and George predicted the transformation of the whole society into a real paradise. He said that if his proposal would be implemented, it would be full employment, eradication of slums, and the steady rise in wages due to the rapid increase in labor demand.
George's theory of single tax became popular. Some local governments had tried it under limited applications, but it was not successful. Nonetheless, the concept of unearned earnings of the landlords has gained the approval of social reformers. Even at present, our government has regulated the rent of apartments in order to minimize the uncontrollable urge of not a few apartment owners to unreasonably increase their rent. Clearly, if the rent of mildings or office spaces increases, then the prices of goods and services also increase.
Interest
Interest rate is the payment for using the money of other individuals. The imposition of unreasonably high interest rate on loans has been condemned by society, then and now. This practice is called usury. Those who charge extremely high interest rates are known as loan sharks or usurers. At present, there is no more legal limit to interest rates. These are determined by the law of supply and demand. Banks which need more savings grant higher interest rates to attract more depositors. Interest rates on time deposits fluctuates depending on the interaction between the supply of and demand for money. Whenever demand is greater than supply, interest rate increases.
Money is not a productive factor. It cannot produce goods and services. Its basic function is only as a medium of exchange. This means money can be exchanged with goods and services. When we buy goods, we exchange our money with goods. Thus, when we like to acquire capital goods like machines, factory plants, or equipment, we simply use money to purchase such goods. In a modern economy, we borrow money from financial institutions like banks. We use this money for production. And so have to pay said money plus interest as payment for the use of such money.
Interest rates vary. Generally, the unlicensed money-lenders charge much higher interest rates than formal financial institutions like banks. However, it is not easy and convenient to borrow from banks. There are documents to submit. Most poor people are not qualified to secure loans from banks. So they are forced to patronize the loan sharks like the five-six scheme. Even among the formal financial institutions, their interest rates are different due to: risk, length, or amount of the loan. Market forces also increase or decrease interest rates.
Profits
Economic or pure profits to the earnings of a firm after deducting the cost of production. Such costs include explicit cost (actual expenditures of a firm) and implicit cost (payments to productive resources owned and self-employed by a firm). However, in the case of business profits, only the explicit cost is computed. Any excess of such cost is known as business profit. For instance, in a small sari-sari store business, the manager-proprietor gets his profit by just subtracting the total amount of his purchases, together with transportation fares and other miscellaneous expenses from the amount of his sales. He does not deduct wage and rent because these costs have not beenactually incurred. Labor and land belong to him, so he does not pay himself. But in economics, such implicit costs are part of the total cost of production. Thus, to obtain pure or economic profit, just compare total cost with total re venue. In the case of normal pro/it which is the minimum payment t< r the entrepreneur as a factor of production, it is part of the cost of production. The other costs are wages, rent and interest.
In a highly competitive industry, pure profits attract the entry of new firms until profits are eliminated in the process of free competition among the increasing number of firms. Only normal profits are left. In case profits fall below the normal profits, some firms, particularly the inefficient ones drop out of the industry.
The exit of these firms reduces supply, and subsequently increases prices. This restores normal profit in the industry.
Profits are rewards for the entrepreneur for taking the risks, or making innovations. Profits are usually bigger for a seller who has very few competitors or none at all. Profit expectations induce investments. This results in more employment, production and income.
Summary
1. The productive resources are land, labor, capital and entrepreneur. In a perfect competition or free-market economy, the prices of these inputs are established by the forces of demand and supply.
The demand for the productive resources depends on the following: demand for goods and services, productivity of the productive resources, and the prices of the factor substitutes and complementary resources
The demand for labor is primarily based on the law of demand. At higher wage rates, the quantity demanded for labor falls. Firms are more willing to employ more workers at lower wage rates.
The rules for employing more man-hours of labor are:
MRP > MRC, employ more man-hours of labor.
MRP < MRC, reduce man-hours of labor.
MRP = MRC, maintain man-hours of labor.
The law of supply governs the behavior of sellers of productive resources. They are more willing to offer their resources at higher prices. However, in the case of labor, beyond a certain point, further increase in wage rates reduces man-hours of labor due to greater desire of people for leisure. In the case of land, it is a fixed factor. An increase in its prices does not increase the areas of land for sale.
The labor market is composed of demand for labor and supply of labor. Their interaction results ultimately to an equilibrium wage. The equilbrium wage is located at the intersection point of the demand and supply curves. A wage higher than the equilibrium wage creates a labor surplus. A wage lower than the equilibrium wage creates a labor shortage.
There is labor surplus in the Philippines. This means that many people are jobless. Even professionals, like teachers, are too many, relative to the demand for their services. As a result, by operation of the law of supply and demand, their wages are very low.
The demand for labor is not competitive. There are only very few buyers of labor. Thus, they can exploit — which they do — their workers in terms of starvation wages and poor working conditions. Not a few firms hire workers as "trainees" or as "casuals." This is pure exploitation of labor.
Types of income distribution are personal and functional. The Lorenz Curve illustrates the personal distribution.
Causes of income inequality are intelligence and talents, education and training, unpleasant and risky jobs, ownership of the productive factors, and luck and connections.
The theories of income distribution are marginal productivity, needs, social usefulness and equality
The determinants of wage rates are supply and demand, government laws and labor unions.
Henry George claimed that economic rent is the cause of poverty. He proposed that rent should be taken by the government in the form of tax. Then spend this for the progress of society
Chapter 7
Business Organization and Management
Business organizations constitute a major component of the whole economy. They create investments, employments, productions and incomes. In other words, they make and supply goods and services to the economy. Evidently, such economic functions help the economy move forward.
In a free-enterprise economy, private business organizations and the government are partners of development and progress. The government provides the external economies of scale like electrification, transportation and communication facilities, together with attractive government policies and incentives. However, in highly developed countries like the United States and those in Western Europe, private business organizations assume greater roles and responsibilities in providing social and economic goods to people. Hence, proper management has been a top priorit. If many business organizations stop operating because they are losing, it does not only adversely affect the owners but also their employees. Moreover, the whole economy is likewise affected. I here is a decline in national income.
The management of any business organization has a social responsibility to its customers as well as to the community. Profit motive is a natural aspiration of business. However, the goal of profit maximization should be pursued in a manner which ensures the maximum satisfaction of customers. Peter Drucker, a management specialist, said that the purpose of business is to create customers. In the same manner, William Stanton, a marketing expert, stated that the wants of the customers should be identified and satisfied. Aside from the welfare of the customers, a business organization has a social responsibility to assist in the development of the community where it is located. However, the noblest social responsibility of business organizations is the development of people. Japanese business organizations have been doing this to their workers or employees. The major forms of business organizations, their advantages and disadvantages, similarities and differences between a corporation and a cooperative are explained in this chapter. In addition, the role of managerial economics and the jobs of management are briefly presented. In view of the main thrust of this book — social justice of economics — the social responsibility of business management, together with the code of business ethics, has been given substantial coverage in this chapter.
Major Forms of Business Organizations
Single or sole proprietorship. It is a form of business organization which is owned by one person. The owner personally manages his business. Most of our business operations (including those which are not registered) belong to single proprietorship. Examples are retailers, market vendors, barbers, tailors, and so forth. The advantages of single proprietorship are:
1. It is easy to organize. Financial capital is small, and registration requirements are not difficult to comply with. In fact, in the remote rural areas small businesses do not even bother to apply for a license.
2. The single proprietor is the boss. He makes the decisions, and enjoys substantial freedom of action. Possibilities of conflicts or quarrels are minimized.
3. The owner acquires all the profits from his business. This gives him more incentives to make his business grow.
On the other hand, the disadvantages of a single proprietorship
are:
1. In general, the financial resources of a single proprietorship are not enough to transform the business into a large-scale enterprise. Considering its small assets and high mortality rate, banks are reluctant to grant big loans to single- proprietorship type of business organizations.
2. Benefits of specialization in business management are not present in small-scale proprietorship. There is only one manager. In not a few cases, the owner is the only employee.
3. The owner has unlimited liability. This means the owner of the business risks not only the assets of his small enterpirse, but also his other personal assets like his piece of land, bank deposits, and other personal properties which are not part of his business. In case of loss, such assets are subject to financial claims by creditors.
Partnership. It is a form of business organization in which two or more persons agree to own and operate a business. The partners agree to combine their resources (money, materials and management). They also share their profits and losses. However, there are "silent" partners. They only provide the financial capital but they do not participate in the management. There is also the "industrial" partner. He does not contribute money to the business organizations but he is responsible for its management.
The advantages of partnership are:
1. It is also easy to organize like the single proprietorship. Legal red tape in connection with its registration is not much
2. Better management because of the presence of more participants in the operations of the business.
3. Possibility of bigger resources than the single proprietorship exists. Financial institutions may extend bigger loans to such business organization considering the combined resources of the partners.
The disadvantages of partnership are:
1. Conflicts or quarrels between or among the partners regarding the management or policies of the business are likely to crop up. In fact, under Filipino style, some partners cheat their other partners in matters of profits or expenses
2. It lacks stability. The death or withdrawal of one partner dissolves the partnership. To continue its operation, a complete reorganization is needed.
3. Like the single proprietor, the partners are also subject to unlimited liability, except the limited partners. Such partners liabilities are only confined to their share of capital contribution in the form of cash or property.
Corporation. It is a legal entity, distinct and separate from the individuals (stockholders) who own it. The Corporation Code states "Corporation is an artificial being created by operation of the law, having the right of succession and the powers, attributes, and properties expressedly authorized by law or incident to its existence." Only natural persons are qualified to be incorporators. They must not be less than 5 but not more than 15, all of legal age, and a majority of whom are residents of the Philippines. Each incorporator of a stock corporation must be an owner of at least one share of the capital stock.
The advantages of a corporation are:
1. A member has a limited liability. In case the corporation becomes bankrupt, only the capital contribution of the members are affected. The other personal properties of the stockholders of a corporation are excluded from financial claims of creditors of the corporation.
2. It has the most effective means of raising money capital for its operations, by selling stocks and bonds. Stocks are certificates of ownership while bonds are certificates of indebtedness. There are financial institutions which specialize in helping a corporation sells its securities (stock and bonds).
3. It has a permanent existence. The life-span of a corporation is 50 years, and subject to renewal for another 50 years. The death or withdrawal of some officers and members does not affect the existence of the corporation. The corporation can easily get officers or managers from inside or outside the organization. Transfer of corporate ownership may take place any time through the sale of stocks, but this does not disrupt the continuity of the corporation. As a legal entity, the life of a corporation is independent from its owners and officials.
4. It is capable of getting the most efficient management considering its huge resources and large-scale operations.
The disadvantages of a corporation are:
1. It is not easy to organize a corporation. Aside from complying with capital requirements, there are many paperworks involved in securing a charter. A charter is a written document which contains the objectives and activities of the corporation, among other things. It takes a longer time to secure the approval of the Securities and Exchange Commission regarding the organization and operation of a corporation.
2. Abuses of corporation officials are likely to emerge in situations where many stockholders do not participate actively in the affairs of their corporation. Not a few stockholders do not exercise their voting rights during important meetings. Either, they are absent or let others cast their votes (proxy voting). Examples of abuses of corporate officials are large salaries and fat allowances for them.
3. Some corporations are engaged in questionable activities. For instance, they sell worthless securities, they pollute the environment, or sell substandard goods. In short, they do not comply with their social responsibility.
4. There is a very impersonal ur formal relationship between the officers and employees of a corporation. In the case of single proprietorship and partnership, constant and close contacts between owners and employees create a very personal and friendly atmosphere. Everybody knows everybody. In a giant corporation, it is not possible for the president or the board chairman to meet personally all his employees in a year. His very valuable time is devoted to planning or decision-making.
Multinational Corporations
Among Filipino corporations, family corporations are still dominant. The other corporations are owned mostly by very close friends. It has been noted that many of these Filipino corporations are conservative in their business operations. This means they are not very responsive to innovations, and they are not risk-takers like the American, European and Japanese corporations.
However, the whole Philippine economy has been dominated by giant corporations which do not belong to Filipino citizens. Such situation also exists in many other less developed countries like those in Africa and Latin America. The most famous of these big corporations are the multinational or transnational corporations. They control production, financing, processing, and marketing of all essential goods all over the world. Examples of their products are oil, drugs, fertilizers, soft drinks, beauty soaps, cars, toothpastes, insecticides, veterinary medicines, and so forth.
International business was primarily an international trade at the start. That is, industrial countries imported raw materials from the agricultural countries, and then exported the finished products to the agricultural countries. Some years later, international finance and investment developed. The rich countries granted financial loans to the poor countries. Such investments were strictly financial in nature, and involved the flow of funds through banks, investment companies, and governments.
Emergence of Big International Companies
As the start of the 20th century (1900), some big companies emerged in international business. Their subsidiaries managed overseas operations. Such subsidiaries were treated as appendages to the parent company, and functioned chiefly as export agencies. The headquarters of these subsidiaries were located (and still at present) in the home country like the United States, Great Britain, or France. The warehouses, service offices, and sales agencies have been located in foreign countries like the Philippines, Brazil, or Nigeria.
Shortly after the last global war, the management of international companies was restructured in response to the needs
of international business operations. Vice-presidents for international operations were appointed. They performed liaison works with the various subsidiaries engaged in international manufacture and trade. During the 1960s, a global corporation evolved. Its foreign operations were integrated into a single organizational structure. This is the multinational or transnational corporation. It is a corporation which maintains its headquarters in one country (rich country) but performs production, marketing,finance, and personal functions within many other countries (mostly poor countries). More facts about multinational corporations are presented in Chapter 12.
Cooperative. Presidential Decree No. 175 defines a cooperative as "only organizations composed primarily of small producers and consumers who voluntarily join together to form business enterprises which they themselves own, control and patronize." A small producer is an individual who provides (or together with his family) the primary labor requirements of his business enterprise, or one who earns at least fifty percent of his gross income from his labor. The government in its effort to promote the organization of more cooperatives throughout the country has extended several powers and privileges (like tax exemptions) to cooperatives. Such business organizations have become famous in Europe, United States, Japan, Canada, Israel and other progressive countries. Cooperatives have been very effective in improving the social and economic conditions of the poor peoples in said countries. In the Philippines, the most successful community credit union is found in San Dionisio, Paranaque, Metro Manila. It is the biggest of its kind in Asia. It started in 1961 with only 28 members and P380 capital. Today, it has more than P60 million assets and about 15,000 members (including special depositors who are the minor children of the members). A more detailed explanation on cooperatives appear in Chapter 14.
Similarities between a cooperative and a corporation are:
1. Factors of production are privately owned and managed.
2. Both depend on business efficiency to survive in a competitive market.
3. Their activities and operations are both regulated and supervised by the government.
4. Both enjoy a reasonable degree of economic freedoms.
Differences between a cooperative and a corporation are:
1. A cooperative is for service while a corporation is for profit.
2. Membership in a cooperative is open and voluntary while in a corporation membership is only for wealthy relatives and friends.
3. Government in a cooperative is democratic. It is one man one vote and no proxy voting. In the case of a corporation, it is one share one vote, and more shares more votes. It is the rule of the minority (richer members).
4. Savings or net profits are refunded to the members of a cooperative on the basis of their individual patronage while in a corporation, profits are distributed to the stockholders on the basis of number of their shares.
Business Management
The success of a business organization depends on proper management. Management is responsible for properly allocating and using the resources of the organization like manpower, money, machines, and materials. The efficient utilization of such resources results to an efficient economic performance of the business organization.
However, let us not measure the efficiency of a business organization in terms of profits only. What is more important is what the business organization has done to its employees, to its customers, and to the community. For it is no longer uncommon for many giant corporations to exploit their workers, and destroy their communities with chemical wastes.
A business organization that takes pride in making hundreds of millions of profits but has neglected the welfare of its workers and the community cannot be considered a successful business organization. Obviously, its only achievement are exploitation and destruction. Karl Marx said What the employer has to pay the worker is only enough to keep the worker alive. What he collects from the customer is the true value of the labor put into the article. The capitalist, in the process of accumulating wealth for himself, therefore robs and exploits the worker.
The Jobs of Management
Management, according to Peter Drucker, is primarily an economic organ. In all its decisions and actions, economic performance is the first consideration. Its existence is only justified by the economic results it produces. Even if management has rendered great non-economic benefits such as the happiness of the employees of the enterprise, or welfare of the community, still management has failed if it has not given reasonable satisfaction to the consumers. Likewise, management has failed if it does not improve the productive resources of the enterprise.
Evidently, the role of economics in business management is very vital. Economics provides the tools of business planning and decisions making. For example, complete and accurate economic information is needed to formulate good business plans, and to make wise decisions. Economic analysis is needed in planning and operations of the business organization. Statistics and other quantitative tools are very helpful in making projections, or evaluating cost and revenue. Thus, management can pursue its economic objectives in the right directions if it is well equipped with suitable economic tools.
Peter Drucker further stressed that the first job of management is managing a business. The two other jobs are managing managers, and managing worker and work. The three jobs of management are integrated, and are interdependent. Although economic or business performance comes first, the three jobs are equally important. Good business results are not really possible to attain if managers and workers are mismanaged. If one of these jobs of management is excluded or neglected, then there is no management at all.
Japanese Style of Management
There are two features of the Japanese style of management: lifetime employment system and company-based unions. The lifetime care of them — including their dependents. Thus, it is uncommon for Japanese to change their employments during their lifetime. They stick to their business organizations or to their employments until death or retirement.
There are two features of the Japanese style of management: lifetime employment system and company-based unions. Lifetime employment system is very helpful in developing a deep sense of corporate loyalty among the employees. Aside from promotion in position and salary, employees who are not promoted get additional pay for every year of service. They are rotated among the various jobs within the company in order to provide them with wide exposure and broad vision. In the case of company- based union, it is effective in creating a feeling of oneness between management and labor.
Decision-making process starts from the bottom up. This means decisions begin from the employees or workers and then move upward to the president of the company. All members participate as equals. The bottom level of the company is represented by their team leaders. All organization decisions and policies are reached with everyone's consent. With so many people actively participating in the decision-making process, a wealth of wisdom has been generated. Such participative management approach has infused into the character of the Japanese workers a sense of responsibility and love of their jobs.
Social Responsibility of Management
Not a few business managers have been only interested in producing goods and services which have been most profitable. They have been less concerned about the social implications of their business operations. However, at present there has been an increasing demand from the government and the community for social responsibility of management of business organizations.
Management has three social responsibilities: to their company, to their employees, and to their customers. For the company, the responsibility of management is to make good profits for the stockholders. For their employees, they should be given fair wage and favorable working environment. And for their customers, they should be provided with goods and services which satisfy their needs at reasonable prices.
However, under the modern concept of social responsibility, it is much more than the interests of the stockholders, employees and customers. The best reason why a business manager should possess a sense of social responsibility is that it is the right thing to do. The economic viability of the business organization has to be promoted. The human dignity of the employees has to be respected. The satisfaction of the customers has to be provided. But the interests of the whole society are more important. The business organization is a vital part of society. Hence, it has a social responsibility to help society develop and prosper.
Impact of Business Policy on Society
Management should formulate business policies that are favorable to the interests of society. By doing this, it is also promoting its own business interest. Clearly, a business organization can not operate within a sick society. Its existence will soon disappear. Those who are planning to invest are reluctant under such social environment. There is always capital flight whenever there are problems of peace and order. The economic goals of any business organizations are therefore attainable under a good society. Hence, business management has more reasons to use its resources for the interest of society.
The consumer has experienced — not only once but many times — unfortunate encounters with bad business practices. For example, products are adulterated, and other forms of business deceptions. Many large business organizations have their own evil practices like political bribery, illegal gifts, and other immoral incentives. Consumers are generally weak to fight such negative business activities, particularly among the poor countries. Consumers in the rich countries are more vigilant against business abuses. They have strong consumers' union and similar organizations which promote their interests. Such bad business practices should be stopped to recapture diminishing public confidence on business organizations. And this is primarily a responsibility of management. Professor Peter Drucker pointed out the ultimate responsibility of management.
Management must consider the impact of every business policy and business action upon society. It has to consider whether the action is likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength and harmony... To i make certain that this assertion does not remain lip service but becomes hard fact is the most important. The ultimate responsibility of management: to itself, to the enterprise, to our heritage, to our society and to our way of life.
Business Organizations and Social Problems
The profit factor is a vital element of business. Without it, no man is a businessman. Profit stimulates individuals to engage in business activities. Business organizations which do not make profits will ultimately stop operating. The first responsibility therefore, of management is to operate at a profit.
Profit maximization can only be attained if the firm is most efficient in its operations. This means it has minimized its costs of production and maximized its output without sacrificing the quality of its products. It is not" true that to achieve profit maximization, prices have to be increased. Based on the law of demand, if prices rise quantity demanded falls. This means less revenue for the firm. Consumers tend to purchase more goods at a lower price. Naturally, business organizations with a lower unit cost can sell their products at a lower price. And they get more profits because more goods are bought. However, making more profits is not good if these are acquired through exploitation of workers and cheating the buyers.
It is clear that an efficient firm is one that makes good but fair profit. Precisely, it is this particular kind of business organization which is best qualified to perform its social responsibility. A big business organization which has been very successful in its economic operations can assume a leadership role in initiating social reforms because of its available huge resources.
Such business organization can help the community in such areas as:
1. Hiring and training disadvantaged persons
2. Contributing to education and the arts
3. Participating in urban renewal
4. Improving the physical environment
5. Removing discrimination against women, old people, and minority groups
6. Helping low-income consumers
A Model of Social Responsibility
In the Philippines, there are not many credit unions or credit cooperatives which are truly successful. In fact, most of us have not seen a credit cooperative. And yet, believe it or not, the most outstanding community-type credit cooperative in the country is found in San Dionisio, Paraftaque. It is also the biggest of its kind in Asia. Considering the rampant failures of Filipino financial associations — where officers disappear with their funds — it is hard to believe that a small credit union in Paranaque (with 28 members and P380 capital in 1961) could be the largest credit union, not only in the Philippines but the entire Asia. Many students of cooperatives both here and abroad visit the San Dionisio Credit Cooperative. Some people say it is miracle in the barrio. But it is there and they are seeing it with their own eyes.
Based on 1994 record, San Dionisio has 15,000 members (including special depositors who are minors) and P60 million assets. Since 1961 up to 1994, the credit cooperative has extended productive and providential loans in the amount of P250 million. To the founders of the San Dionisio Credit Union (original name) led by Dr. Angel Mendoza, the economic achievements of their organization are not the most important. To them, the total development of the community and its people is their primary goal of the credit cooperative. Many young people in the community were able to finish their college education and vocational training because of the financial assistance extended to them by the cooperative. Most tricycle drivers were able to own tricycles with the help of the cooperative. Many poor families of San Dionisio (fishermen) have acquired residential lots also through the help of the cooperative. Small producers and small businessmen are also the beneficiaries of the credit cooperative. Members have been able to meet their emergency needs through the help of the cooperative. For the health of the cooperative members and the rest of the community, the cooperative has modern medical and dental clinic which is equipped with X- Ray and ECG facilities.
People Development Through the Cooperative Way
People are the most important factors of dev lopment — more important than money, machines or material communities or countries have become progressive because their peoples have the right skills, education, attitudes and values. The Americans are punctual and efficient. The Japanese are industrious. The Europeans are hardworking.
People development therefore involves the infusion of proper attitudes, values, education and skills but above all the right kind of attitudes and values are the most important. Skills and Knowledge are useless if these are only used for the promotion "of- self-interests. In a cooperative, these is a continuous training and education of the members. They are taught about the wise use of money, cooperation, social awareness and community" involvement. Precisely, there are the virtues that greatly improve die attitudes and values of individuals. The San Dionisio Credit Cooperative has done all of these — and even more. In the beginning, the primary objective of the aforementioned cooperative was to save the poor families from being "swallowed by loan sharks. But such objective has developed into a larger and more meaningful vision — the development of the community and its people. The world has not been ungrateful. The barrio of San Dionisio was chosen in 1970 as the most outstanding PACD- SEATO regional model village.
The success of the San Dionisio Credit Cooperative has been the fruit of the cooperative resources of the board of directors, the manager and his staff, the employees, the committee members, and all the members. The officers have shown their deep sense of dedication and loyalty to their organization. Likewise, the members ha ve done their duties and responsibilities for the interest of their own cooperative. However, the general manager of the San Dionisio Credit Cooperative assumes the key role in the proper direction of the organization. He is not only very competent and dedicated but he is also a man of integrity and honesty. Herminio Hernandez has been the general manager of the cooperative since it opened its doors for business in 1961. He gave up his very lucrative job to head an almost lifeless credit union. Such personal sacrifice is a good example of social responsibility. Dr. Coady, architect of the Antagonish Movement of Antagonish, Nova Scotia, Canada, has pointed out the concept of people development through the cooperative way.
We have no desire to remain at the beginning, to create a nation of mere shopkeepers whose thoughts run only to groceries and dividends... Life for them shall not be in terms of merchandizing, but in all terms that are good and beautiful, be it economic, political, social, cultural, or spiritual. They are the heirs of all the ages and of all riches yet concealed. All the findings of science and philosophy are theirs. All the creations of arts and literature are for them. If they are wise, they will create the instruments to obtain them... They will use what they have to secure what they have not.
Summary
1. Business organizations constitute a principal component of our economy. They provide goods, services, employments and incomes. The major forms of business organizations are: single or sole proprietorship, partnership, corporation and cooperative.
2. Most of our corporations belong to the multinationals. They conduct their production, marketing, finance, and personal functions in our country and other less developed countries but maintain their headquarters in a rich country.
3. Business management has three social responsibilities: to make good profits for the stockholders; to give fair wages
to its workers; and to satisfy its customers. But its social responsibility to society is most important.
4. The San Dionisio Credit Cooperative is a model of social responsibility. It has not only served the welfare of its members but also the needs of the community and its poor members. Its social impact on the community and its people is more important than its tremendous economic contributions.
5. Economics is vital to business management because it provides the data and the tools for decision-making. Management also involves the proper allocation and use of the resources of the organization. Precisely, knowledge of economics is most helpful in this case.
6. Japanese style of management is employee-oriented. It gives first priority to human resources development because people are the most important resource
Chapter 8
National Income
The income of the nation is measured by the total earnings of the factors of production owned by its citizens or by the total market value of all final goods and services produced by its citizens. Such earnings or market value of final goods and services are estimated on a yearly basis. Such measurements reflect the performance of the economy. These indicate whether the national economy is progressing or regressing. For instance, if the national income is bigger this year than in the previous year and that last year's national income was bigger than in the previous years, then it can be said that the economic performance of the country has been improving during the last few years. However, if it is a reverse situation, then the national economy is regressing. In fact, such declining national income has been experienced by many poor countries. Their population growth rate is greater then their production rate. Furthermore, the numerous civil wars and droughts in Africa have brought a plunge to the national economies of not a few African countries.
Countries usually show their achievements by economic indicators like gross national product (GNP), per capita income (PCI}, or per capita (GNP).Such measurements also classify the economic class of countries whether these are highly developed intermediate or developed) The reference point is the per capita(GNP)or per capita income (PCI) of the United States. All countries, whose national incomes or PCI are within the range of the PCI of the United States, are classified as highly developed countries. Those whose incomes are far below that of the United States are considered less developed countries.
Variations (ups and downs) is national income are the products of interactions between and among several factors like population, investments, savings and consumptions. For example, if investment is greater than saving, it means more economic activities. There is an increase in employment, production and income. Consequently, these increase consumption which stimulates further investments. Such positive economic activities certainly raise the level of national income or gross national product. In the final analysis, however, it is not correct to say that an increase in UNI' or PCI means an improvement of the welfare of the people most of the time. In a country where most of the productive resources belong to very few families, an increase in national income only benefits the few rich.
This chapter illustrates and explains the various ways of calculating national income, and the circular flow of goods, services and money. The uses and limitations of national income accounting are also discussed. In addition, the role of investment, saving and consumption in the national economy has been analyzed. Lastly, the true indicators of economic achievements are presented.
The Circular Flow of Goods, Services and Money
A company hires the factors of production from individuals or households who own them. These productive factors are land; labor, capital and entrepreneurship. In the return, the owners of said factors receive their payments such as wages for the laborers, rent/ for the landlord interest for the capital (profit) for the entrepreneurs (top managers or owners of the business). The sum of all these factor payments is known as the national income.
With the income received from factor payments, individuals buy goods and services from firms. There is therefore, a flow of goods and services from the households to the firms. Of course, in exchange for this flow of goods and services, households spend money. Evidently, people who provide the factors of production to business receive their corresponding payments. This is their income which they spend in buying the goods and services produced by business. Thus, goods, services and money circulate from households to firms, and from firms to households.
Definition of Terms
Gross national product (GNP) – is the total market value of all final goods and services produced by citizens in one year.
National Income – is the total income of the factors of production in one year or the total payments received by citizens in one year. GNP has a greater value than national income because the latter is equivalent to total cost of production.
Per capita income (PCI) — is income per head.
PCI = national income / population
Per Capita GNP = Gross national product/population
Gross domestic product — is the total market value of all final goods and services produced within the territories of a country in one year. Incomes derived from investments or wealth in foreign countries are excluded. In the case of GNP, the incomes of the citizens earned from abroad are included. In a country whose economy is dominated by multinational corporations or foreigners, the GDP is bigger than GNP. This is the actual situation in many less developed countries.
Money GNP — is the value of GNP at current price or market price.
Real GNP — is the value of GNP in terms of the number of goods and services produced.
Real GNP = Money GNP/Price Index x 100
Final goods and services— are those which are sold for the last time, and these are not for further processing or manufacturing. Example is bread. Flour is not a final product. It is used for making bread. It is referred as intermediate product.
Disposable income is personal income less personal taxes.
Depreciation and Indirect Business Taxes
Depreciation is an allowance for capital goods like machines which have been "consumed" in the process of production. A machine depreciates not only because of use through time but also as a result of obsolescence or calamities like fire and flood. Such machine loses its value and must be replaced in order to sustain production.
In most machines, their useful life is more than one year. Since national income accounting covers a period of one year, the actual expenditures for such machines and their useful life do not have the same length of time. The productive life of the machine may be 5 or even 10 years but the expenditure in the purchase of the machine has been included in one year national income accounting. Therefore, to avoid understatement of total income during the year of purchase of the machine and overstatement of total income for succeeding years, a depreciation cost is allocated evenly over the useful life of the machine. For example, if the useful life of the machine is 5 years, its cost is P10,000 and its junk value is P200, its yearly value is computed:
10,000 – 200 / 5
In the case of indirect business taxes, these include general sales taxes, excises, business property ,taxes of license fees and custom duties. An indirect tax is a tax imposed by the government on products sold by businessmen. To make up for the money that they have to pay to the government, businessmen merely increase the prices of their products. Thus, the burden of the tax is shifted to the buyers of the products. In other words, the businessmen pass on to the consumers the tar imposed on them by the government.
Taxes are used to finance the programs and projects of the government. In estimating national income, the services rendered by the government are included. Hence, the tax element is included in the value of output under government services rendered. Likewise, the value of the products sold by businessmen contains an element of tax in the form of higher price (indirect tax). To restate briefly, tax was included once in the price of goods sold in the market, and again included in the form of government services funded by taxes. In this case, there is double counting in the calculation of national income. To pet national income, depreciation and indirect business taxes are deducted from GNP which is the market value of final goods. National income is the factor value of final goods which refers to the total cost of production or factor payments like wages, rents, interest and profits.
hahha thank you sir :)
ReplyDeleteHAha gnhan mn pod mi mag study anang "beautiful and good-looking students " HEhehhe
TyNX much Sir GBU
hahah thank you sir :)
ReplyDeletemaganhan man pod mig Study anang
"beautiful and good-looking students at the University of Southeastern Philippines Evening Program "
HAhahha Thanks Again
GBU :)Sir