The Economic Problem and Economic Factors

THE
ECONOMIC
PROBLEMS
LESSON 2

2 Annual Review May 19, 2024
OBJECTIVES
At the end of this lesson, you will be able to:
a. state the central economic problem of
resource allocation;
b. enumerate the four factors of production
needed to produce economic goods and
services;
c. enumerate the three economic questions and
know how economic systems differ in
managing these questions; and
d. define and draw the production possibilities
frontier and use it to analyze production,
resource allocation, and growth of the
economy over time.

Following up on the discussion of scarcity as the central economic
problem having limited resources to satisfy unlimited wants and
needs, a nation is faced with three economic problems that deal
with the production, distribution and consumption of goods and
services.
Introduction

Factors of Production
There are four main factors of production used to create goods and services in the
economy. They pertain to the term resources or inputs of production. The return on the use of
these inputs of production is called factor income. There resources are as follows:
 Land – This represents land and similar natural resources available such as
farms and agricultural land. Factor income: Rent
 Labor – This represents human capital such as workers and employees that
transform raw materials and regulate equipment in production. Factor income:
Wage
 Capital – This represents physical assets such as production facilities,
warehouse, and technology used in the production. It can also refer to
investment capital. Factor income: Interest
 Entrepreneurship – This represents the managerial ability of man in deciding
how much of and what way the other factors are to be used in production.
Factor income: Profit

Goods and Services
Resources are combined in a variety of ways to produce goods and services.
 Good – an item you can see, feel and touch that requires scarce resources to produce and satisfies
human wants.
 Service – something not physical that requires scarce resources to produce and satisfies human wants.
The Circular Flow Diagram – This is an economic model that illustrates the flow
of factors of production in the economy.

Figure 3.1 Basic Circular Flow Diagram

 Households provide factor inputs to firms in exchange for income in the form of wages, rent and
dividends.
 Firms provide goods and services to households in exchange for profit in the form of payments for
the goods and services.
Three Economic Questions
1. What to produce? This first question relates to resources. Given limited resources of labour, raw
materials and time, economic agents have to decide what to produce. If there is an abundant supply
of labor in the society, then the society will consider labor-intensive products or will focus on
providing services instead of manufacturing goods.
2. How to produce? This question focuses on the actual production of goods and services. Economic
agents will try and produce goods for the most profitable and cost-effective method. This motivation
is behind the growth of technology and more efficient production methods, such as the assembly
line.
3. For whom to produce? The final question focuses on the distribution and consumption of goods
and services. Is the good or service for end consumers or for other businesses for further
production? Does it address a need or want? These questions are considered along with other
business-related factors such as marketability and pricing.

These economic problems or dilemmas are the center of each country’s
economic policies. Government policies are geared toward addressing the
concerns on a national level. For instance, should the Philippine government
invest in research to produce vaccine for Covid-19 or should it rely on China or
Russia? Should it prioritize building roads and improving infrastructure or should
it focus on health and poverty alleviation programs? Because resources are
limited (in this case, the government budget) the country cannot afford to address
all economic issues, at the same time in equal manners. These are illustrations of
economic issues faced by the country that are grounded on the same concepts of
what, how, and for whom.

“
E C O N O M I C P R O B L E M S
O F T H E C O U N T R Y

•UNEMPLOYMENT
•POVERTY
•POORQUALITYOF
INFRASTUCTURE
•INCOMEINEQUALITY

UNEMPLOYMENT
COMMON CAUSES
• The number of people entering the job market has been greater than the
number of jobs created.
• The rural-urban migration increases due to employment
opportunities.
• May of the unemployed individuals are college graduates.

RURAL TO URBAN MIGRATION

WHAT CAN BE DONE TO SOLVE
UNEMPLOYMENT PROBLEM?
1. Appropriate economic policies for labor-intensive
industries.
2. Improve the educational system of the country
especially in the rural areas
3. Minimize rural-urban migration by improving the
economic environment in rural areas.

UNEMPLOYMENT PROBLEM?
4.Proper coordination between government and the
private sector to solve the problem of job mismatch.
5. Slowing population growth. Philippine growth must
increase faster than the population. Limit the size of
6. Provision of more investment opportunities to
encourage local and international investment.

POVERTY
COMMON CAUSES
•Increase in population
•Increase in the cost of living
•Unemployment
•Income inequality

THE POVERTY PROBLEM?
1. Reduce unemployment
2. Appropriate policy on labor income
3. Provision of unemployment benefits for those who
will be unemployed due to natural or man made
calamities.
Ex.Typhoon, Bombing of terrorists, Earthquake

THE POVERTY PROBLEM?
4. Increase social services like education, health care and food subsidies
for sustainable poverty reduction
Subsistence
Subsistence Sustainable Self-
existing
5.Appropriate policy on labor income.

POOR QUALITY OF
INFRASTRUCTURE
91STOUT OF144 COUNTRIESON
POORINFRASTRUCTURE QUALITY
LOSTABOUT $250 BILLION IN
ECONOMIC GROWTH

WHAT CAN BE DONE TO IMPROVE
THE QUALITY OF
INFRASTRUCTURE?
1. The government shall implement fiscal reform
program
2. Continue reform in key sectors- particularly
power, roads and water – to improve cost
recovery, competition, and institutional
credibility and to sharply reduce corruption.

WHAT CAN BE DONE TO IMPROVE
THE QUALITY OF
INFRASTRUCTURE?
3.Improving central oversight of the planning
and coordination of investments
4.Focus on investments through public-private
partnerships to achieve faster delivery of service

INCOME
INEQUALITY
•Income is the money that
an individual earned from
work or business received
from investments.
•Income inequality – refers
to the gap in income that
exists between the rich
and the poor

MAJOR CAUSES OF INCOME
INEQUALITY
1. Political culture
“ palakasan” “utang na loob”
Ex.Voting for the wrong person during election
2.Indirect taxes –poor people shoulder this taxes like the
Value Added Tax– 12%

3. Income Taxes
INCOME INEQUALITY
Minimum Wage – No Tax
A little more than minimum wage –32%
TAX

THE PROBLEM OF INCOME
INEQUALITY
1. Policies to enforce progressive rates of direct
taxation on high wage earners and wealthy
individuals.
2. Direct money transfers and subsidize food programs
for the urban and rural poor

SOLUTIONS TO INCOME
INEQUALITY
3.Direct government policies to
keep the price of basic
commodities low
4. Raise minimum wage
5. Encourage profit sharing

Thank you
Thanks to your commitment and strong work ethic, we
know next year will be even better than the last.
We look forward to working together.
Contoso
sales@contoso.com

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