BASIC ECONOMIC PROBLEMS

The economic unit

An economic agent is a unit in society (like an individual or a firm) that confronts the problem of how to
allocate resources to achieve what it wants to do.

 All economic agents solve an economic problem by making choices or decisions that will help them
achieve their objective.

BASIC DECISION PROBLEMS

All economic agents have to make choices from among alternative courses of actions.

 Of all economic activities, consumption and production are the most basic.

Consumption – is the satisfaction of human wants. It means using up goods to satisfy those wants.

Production – is the creation of goods. The primary factors of production are labor, capital, and land.

Distribution – refers to the sharing of the output among the resources used in production. It is also
referred to as income distribution; the scope of this area of concern covers the manner of dividing the
output of production among labor, owners of capital, business management, and owners of other
factors of production.

Exchange of goods and services

- At the heart of this process is the exchange that takes place between those in need of goods
and services and those that supply them.
- The result of the interaction between the two essential elements (the purchase by the buyers
and the sale by the sellers) is determined by the terms of exchange.

Growth

- The expansion of consumption and production represents the problem of economic growth.
- Economic growth means essentially that the available goods have increased because of
increased production.
- The rate of economic growth depends on how economic agents make the allocation of
resources between the present and the future.

SCARCITY AT WORK

- All economic problems happen because of the scarcity of resources.

- Commodities that are consumed do not come free. To produce these commodities, one needs
to use resources or factors of production.

Course Outline in Applied Economics(source: Economics by GERARDO P. SICAT new edition) prepared by C.Ocfemia-Instructor @ SanJoseNHS-SeniorHigh
Table 2-1
Examples of Economic Agents and the Choice That They Face
Economic agent or unit
Household (family)
Firm (plant, factory, farm)
Laborer (part of the household) How to find productive employment; how to improve welfare; how
Entrepreneur (manager, owner
of business enterprise)
Owners of capital (capitalist,
investor)
Industry (sector, agriculture,
manufacturing)
Government (national, local)
Nation (Society, Congress,
leadership)
Examples of economic decisions or choices
How to satisfy the needs of the household (consumption); how to
plan future of family members (growth).
What goods to produce at the cheapest possible cost; how to keep
market position.
to provide for old age.
How to combine labor, capital, and land to produce goods at
cheapest possible costs; how to deal with uncertainty in economic
conditions and to take risks to advance business plans.
How to achieve the best return (income) from among alternative
investment projects; how to maintain the value of the capital.
What goods to produce; how to enhance the interests of the
industry; what to propose as sound government policies.
How to raise revenues to finance operations to maintain the
activities of the government; how to spend tax money from among
many competing uses; how to devise policies to raise investment and
achieve economic growth; how to redistribute income to achieve a
“fair” society.
How to achieve community goals (like “fairness,” economic growth,
development, social and economic stability).

Course Outline in Applied Economics(source: Economics by GERARDO P. SICAT new edition) prepared by C.Ocfemia-Instructor @ SanJoseNHS-SeniorHigh