LESSON 2- BASIC ECONOMIC PROBLEMS AND HOW APPLIED ECONOMICS SOLVES ECONOMIC PROBLEMS

FOUR BASIC ECONOMIC PROBLEMS

In the article of Guru, S. (2020) Basic Central Problems Faced by an Economy, there are basic problems common
to all economies. In terms of production, common to all countries is the problem on scarcity. This arises because the
resources are limited and have alternative uses. This problem gives rise to four basic problems of an economy.

In this topic, we will look into these basic problems of what to produce, whom to produce, how to produce and
what provisions on production for economic growth. As we said earlier, economics can be a tool to solve these
economics problems. Economists formulate strategic solutions to economize the problems such as economic growth or
the ability to produce goods and services, reduce expectation or the ability to reduce our wants such as lessening
consumption, and improve the use of resources or the capacity to use our existing resources wisely.

1. What to produce?
If there is scarcity of goods in a society, the firms have to make wise decision on what goods/service should be
produced and determine the quantity to produce. For example, which do we produce more, masks or canned
goods? But we need capital goods like machines, or consumer goods like laptops. The society must decide the type
and quantity of good/service to be produced to meet the needs of the society.

2. For whom to produce?

The society would always consider the immediate beneficiary of the goods. For example, when we produce masks
and PPEs we suppose to produce first these for frontliners of COVID Pandemic fight. A society decides on the
distribution of the goods and services among the members of society who need them the most.

3. How to produce?
The production of goods or services need effective methods and processes. For example, you can produce PPEs
using sewing machines; sardines using aqua resources like fish and land resources lie fish and land resources like
tomatoes. The production requires more labor and capital investment.

4. What provision/laws should be made for economic growth?

A society uses all its resources for current consumption. If a society uses all its resources, then its production
capacity will not increase. The standard of living the people and the income of the workforce remain constant until
the standard of living will decline in the future. The society must decide also on the part of the resources to be saved
for future progress.

APPLIED ECONOMICS ON BASIC ISSUES AND PROBLEMS

Applied Economics seeks to solve the problems on scarcity. This happens when human wants for goods and
services exceed he available supply. In a modern economy, it is evident that a division of labor happens when people
earn income by specializing in what they produce. They will use that income to purchase the products they need or want
every day (BC Campus 2020).

Also, in the division of labor, it allows workers and firms to produce more. This is because a) agents focus on
areas of advantage due to natural factors and skill levels; b) the agents learn and invent; c) the agents take advantages
of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not
produce in markets. Applied economics then helps you understand the basic problems facing the world today. It helps
you become a well-rounded thinker. And most importantly, it prepares you to be a good citizen.
LESSON 3 – MARKET DEMAND, MARKET SUPPLY AND MARKET EQUILIBRIUM

Economics helps us solve the problem on excess supply and excess demand, and lead it to a balanced supply and
demand. In our needs, we do not want oversupply. It means wastage of income. For entrepreneurs, it is not efficient if
their stocks or supplies are greater than the actual demand. It is a loss not revenue.

In economics, there are terms that you must learn to understand the better market situations. A demand or the
amount of good or service consumers are willing to purchase at each price. If customers cannot pay for it, there is no
effective demand. Price is what a buyer pays for a unit of the specific good or service. The total number of units
purchased at that price is called the quantity demanded.

Law of Supply and Demand

The law of supply and demand explains the interaction between the sellers of a product and the buyers. It
shows the relationship between the availability of a particular product and the desire (or demand) for that product has
on its price.

The Law of Demand

If all other factor remain equal, the higher the price of a

good, the fewer people will demand the good.

“The higher the price, the lower the quantity For example, if the price of video game drops, the
demanded” and vice demand for games may increase as more people want
versa. the games.

The amount of a good Factors Affecting Demand

that buyers purchase a) income of buyers
at a higher price is b) number of potential buyers
fewer because as the c) preferences
price of good goes up, d) complementary products
the opportunity cost
of buying the good The demand curve is always downward sloping due to
also is less. the law of diminishing marginal activity.
Consumers will avoid
buying a product.

The Law of Supply

The law of supply demonstrates the quantities that will

be sold at a given price.
Factors Affective Supply
The higher the price, the higher a) Production capacity
The quantity supplied and b) Production costs such as labor and materials
Vice-versa. c) The number of competitors
Producers supply more at a higher price because selling d) Ancillary factors such as
at higher quantity at a higher price increases revenue. e) Material availability,
f) Weather, and
g) Reliability of supply chains

The law of supply says ……….

“As the price of a product increases, companies will
produce more of the Product”.

When graphing the supply vs. the price,

the slope rises.
How do Supply and Demand create and Equilibrium Price?

Equilibrium Price or market- clearing price. Is the price at which the producer can sell all the units he wants to
produce and the buyer can buy all the units he wants.

Supply and demand are balanced, or in equilibrium.

The demand curve is downward sloping. This is due to the law of diminishing
marginal utility.

The supply curve is a vertical line; overtime, supply curve slopes upward; the
more supplies expect to be able to charge, the more they will be willing to
produce and bring to market.

In the Equilibrium point, the two slopes will intersect. The market price is
sufficient to induce suppliers to bring to market that same quantity of goods
that consumers will be willing to pay for that price.

VARIOUS MARKET STRUCTURE