Basic Economic Problem of Society

Basic Economic Problems • A producer must minimize the cost of production

• The cost of a technique of production is
1. What to produce? determined by the prices of inputs and the input
prices are determined by price mechanism in the
 The system must determine the desires of the factor market.
people. Technique of production to be used
 Goods and services must be based on the needs • The producer chooses that technique of
of the consumers. production which is least costly.
FACTORS TO CONSIDER. • The cheapest way of producing a commodity
depends on relative resource prices:
a. Availability of resources • If labor is relatively cheaper than capital, the
producer will adopt a labor-intensive technique
b. Physical environment
• If capital is cheaper than labor, capital intensive
c. Customs and traditions of people technique, will be employed by the producer.

For whom to produce?

2. How to produce? • Distribution of total output of goods and services

 The system must select the proper combination
of economic resources in producing the right
amount of output.
 The quality of output must come first before the
quantity.
3. For whom shall the goods and services be
produced?
 This has something to do with distribution
 Once the goods are produced, how shall they be
distributed?
depends upon the distribution of income.
• Incomes of different individuals as determined by
price mechanism determines the distribution of
goods and services.
• As a result of this inequal distribution of income,
the distribution of goods is also very much
inequal.
• The rich people get a larger share of the national
product.
• The poor people with low incomes, receive a
smaller share of the national product.
BASIC ECONOMIC PROBLEMS OF THE
COUNTRY

1. UNEMPLOYMENT
Answers to Basic Economic Questions/Problems in 2. POVERTY
a Capitalist Economy 3. POOR QUALITY OF INFRASTUCTURE
4. INCOME INEQUALITY
What and how much to produce?
• The consumer is regarded as the king
• The basic objective of the producers is to earn Unemployment
maximum profits
• Producers will likely produce goods and services COMMON CAUSES
which would  The number of people entering the job
• yield higher profits market has been greater than the number of
• An increase in the demand for a particular jobs created.
commodity will lead to a rise in its price. A rise  The rural-urban migration increases due to
in the price, given the cost of production will lead employment opportunities.
to more profits  Many of the unemployed individuals are
How to produce? college graduates.

RURAL TO URBAN MIGRATION

• The basic objective of the producers is to earn
maximum profits. Push Factors Pull Factors
  few services Ex. Typhoon, Bombing of terrorists, Earthquake
 lack of job 4. Increase social services like education, health.
opportunities  access to care and food subsidies for sustainable poverty
 unhappy life services reduction
 poor transport  better job Subsistence > Sustainable > Self- existing
links opportunities 5. Appropriate policy on labor income.
 natural  more
disasters entertainment
 wars facilities
Poor Quality of Infrastructure
 shortage of  better transport
food links What Can Be Done to Improve the Quality of
 improved Infrastructure?
living
conditions 1. The government shall implement fiscal reform
 hope for a program
better way of 2. Continue reform in key sectors- particularly
life power, roads and water - to improve cost
 family links recovery, competition, and institutional
credibility and to sharply reduce nation
3. Improving central oversight of the planning and
coordination of investments
What Can Be Done to Solve Unemployment 4. Focus on investments through public-private
Problem? partnerships to achieve faster delivery of service.
1. Appropriate economic policies for labor-
intensive industries.
2. Improve the educational system of the country Income Inequality
especially in the rural areas.
3. Minimize rural-urban migration by improving the  Income is the money that an individual earned
economic environment in rural areas. from work or business received from
4. Proper coordination between government and the investments.
private sector to solve the problem of job  Income inequality - refers to the gap in income
mismatch. that exists between the rich and the poor
5. Slowing population growth. Philippine growth MAJOR CAUSES OF INCOME INEQUALITY
must increase faster than the population. Limit
the size of families. • Political culture
6. Provision of more investment opportunities to " palakasan" "utang na loob"
encourage local and international investment. Ex. Voting for the wrong person during
election
• Indirect taxes - poor people shoulder these
Poverty taxes like the Value Added Tax - 12%
• Income Taxes
COMMON CAUSES Minimum Wage - No Tax
A little more than minimum wage - 32%
 Increase in population TAX
 Increase in the cost of living
 •Unemployment What Can Be Done to Solve the Problem of
 •Income inequality Income Inequality

What Can Be Done to Solve the Poverty Problem? 1. Policies to enforce progressive rates of direct
taxation on high wage earners and wealthy
1. Reduce unemployment individuals.
2. Appropriate policy on labor income 2. Direct money transfers and subsidize food
3. Provision of unemployment benefits for those programs for the urban and rural poor.
who will be unemployed due to natural or man- 3. Direct government policies to keep the price of
made calamities. basic commodities low
 Basic Economic Problem of Society
4. Raise minimum wage
5. Encourage profit sharing