Module 2 : Basic Economic Problems
Firms also decides, what
and How Applied Economics Solves
Economic Problems
GDP (Gross Domestic Product) -
measures the monetary value of final
goods and services - that is, those that
are bought by the final user -
produced in a country in a given
period of time (a quarter/a year). It
counts all of the output generated
within the borders of a country.
Basic economic problems:
(1) What to produce?
Society encountered a scarcity of
goods; firms must think of ways on
what product or service to produced
and to determine the quantity to
produce.
(2) How to produce?
Firms decides on how to use the
resources efficiently to produce goods
and services.
combination of resources and
technology will be used to produce
goods and services at a lower cost.
(3) For whom to produce?
Firms always considered the benefits
of the society’s in producing goods
and services.
What provision/laws should be made
for economic growth?
Capital accumulation and
technological progress implies
sacrifice of some current
consumption. Therefore, a society has
got to decide what proportion must
be save and invest (that is, what
proportion of sacrifice on current
consumption) ought to be created for
future economic progress.
The utility and application of applied
economics in solving economic issues
and problems
~Microeconomic Issues
• Poverty - pronounced deprivation in
well-being. Poverty is the lack of
monetary resources to meet one's
needs or the lack of specific goods like
food, asset, shelter, health, and the
like.
Solutions:
°Create jobs
°Raise the minimum wage
°Promote pay equity
°Properly allocate time and resources
°Provide access to healthcare
°Create micro-financing programs
°Provide an adequate social safety net
°Increase access to education
• Social inequality - refers to
disparities and discrepancies in areas
such as income, wealth, education,
health, nutrition, space, politics, and
social identity.
Solutions:
✓Implement progressive income tax
✓ Spend more on public/ social
services and infrastructure
✓ Increase government ownership of
basic utilities
• Monopoly - is a market structure
characterized by a sole seller in a
particular market wherein the
business entity may control the
supply, compromise the quality of
goods and services, and manipulate
the price.
Solutions:
Since a monopoly does not face
competition, only the government
may help solve the problem. The
government may;
✓ Implement price capping (limiting
price increases)
✓ Regulate mergers
✓Regulate the quality of service
✓Investigate and address abuses
• Environmental issues - are harmful
effects of human activities (usually
economic activities) on the
environment.
Solutions:
✓ Use reusable items
✓ Conserve water and energy
✓ Proper waste disposal
✓ Recycle waste
✓ Find clean renewable energy
sources
~Macroeconomic Issues
• Recession - is a period of temporary
economic decline during which
industrial and trade activities are
reduced, marked by a fall in GDP in
two consecutive quarters (6 to 18
months).
Solution:
✓ Implement expansionary fiscal
policy to expand the money supply in
the economy by either reducing taxes
or increasing government spending.
* Tax cuts or reduced tax will increase
people's disposal income which later
results in increased consumption,
increased production, employment,
and so on.
* Increased government spending,
done by investing or making projects
like construction of infrastructures like
roads, railways, ports, and the like.
These activities will create jobs as well
as purchases of the government.
Therefore, this will both stimulate
production (producers receive
payment) and consumption (workers
spend salary)
• Unemployment - happens when a
lot of people are jobless/cannot find
work or are losing jobs.
Solutions:
✓Create jobs by creating public
projects/jobs
✓ Provide employment subsidies to
businesses to lower the costs of
production
✓ Invite foreign investments
✓ Reduce occupational mobility to
easily find new different jobs
• Inflation - is the consistent increase
in the average price level of goods and
services. The purchasing power of
money declines and it lowers living
standards. According to experts, 2-3%
of inflation is good for the economy.
Solutions: (too much money supply)
✓Contractionary Monetary Policy -
The central bank controls the money
supply in the economy. This can be
done by raising bank rates/ interest
rates, expand open market operations
(government selling securities like
bonds), or increase the reserve
requirements of the banks.
✓ Contractionary Fiscal Policy -
government reduces its expenditure/
spending and raises tax rates to
decrease the money supply in the
economy.
• Trade deficit - occurs when a
country's imports exceed its exports
during a given time period. It is known
as a negative balance of trade (BOT). A
country may rely heavily on imports
due to lacking the efficient capacity to
produce its own products due to lack
of technology, resources, or skills.
Solutions:
✓ Discourage consumption and
increase savings. If households and
the government reduce their
consumption, then the need for
imports decline and less foreign
borrowing to pay.
ECONOMIC RECESSION
Recessions reduce opportunities:
failed businesses, fewer jobs, and
lower wages. Recessions normally
don't happen every year, but they're
not unusual.
Economic output, employment, and
consumer spending drop in a
recession. Interest rates are also likely
to decline as the central bank (such as
the U.S. Federal Reserve Bank) cuts
rates to support the economy.
capacity to produce goods and
services; reduce our wants or
reduction of consumption; use our
intensive)
present resources wisely; don't misuse
limited resources; productive workers 4. Entrepreneur- •lack of access on
efficiency; full employment and equity ship information and
of resources; reduce wants and needs; trainings
and find alternative or second option.

Economics can be a means to solve

economic problems on the production
of goods and services.

Production is the process by which

resources are changed into useful
forms.

Resources are things provided by

nature that can be used directly or
indirectly to satisfy human needs.

Resources in the Issues and

production problems in the
production

1. Land •land conversion

from an area

•residential

•industrial zones

2. Labor •unskilled
workforce (labor
intensive)

•mismatch of
jobs (under-
employment)

3. Capital •low quality of

equipment /
machines (capital