The Four Basic Economic Problems (1)

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Basic Economic Problems and Systems

The Four Basic Economic Problems

According to Guru, S. (2020) in "Basic Central Problems Faced by an Economy," all economies face common basic problems due to scarcity, which arises because resources are limited and have alternative uses. These problems lead to four fundamental economic questions:

1. WHAT TO PRODUCE?

  • If there is scarcity of goods in a society, firms have to make wise decisions on what goods or services should be produced and determine the quantity to produce.
  • Example: Should we produce more masks or canned goods? Or focus on capital goods like machines, or consumer goods like laptops?
  • The society must decide the type and quantity of goods or services to meet immediate needs.

2. HOW TO PRODUCE?

  • Production requires effective methods and processes.
  • Example: PPEs can be produced using sewing machines; sardines require both aqua resources like fish and land resources like tomatoes.
  • Production also requires labor and capital investment.

3. FOR WHOM TO PRODUCE?

  • Society must consider who the immediate beneficiaries of the goods will be.
  • Example: During the COVID-19 pandemic, masks and PPEs were prioritized for frontliners.

4. WHAT PROVISIONS/LAWS SHOULD BE MADE FOR ECONOMIC GROWTH?

  • If a society uses all its resources for current consumption, production capacity will not increase.
  • The society must decide how much of its resources to save for future progress to improve the standard of living.

Economic Systems

Economic systems determine how societies answer the basic economic problems. Different systems include:

1. Traditional Economy

  • Decisions are based on traditions and practices passed down from generation to generation, which can lead to stagnation.
  • Typically found in primitive and backward civilizations.

2. Command Economy

  • Centralized decision-making by the government, often in socialist, communist, and dictatorial regimes.
  • Example countries: North Korea, former Soviet Union.

3. Market Economy

  • Decisions are based on the workings of demand and supply, reflecting consumer preferences through pricing.
  • The most democratic form of economic system.

4. Mixed Economy

  • Combines elements of both market and command economies.
  • Sometimes referred to as dual systems or markets under strict regulatory control.

Positive Economics vs. Normative Economics

  • Positive Economics deals with what is, such as current statistics on inflation rate, employment, and GDP. It reflects the actual state of the economy, possibly far from ideal.
  • Normative Economics refers to what should be, focusing on the ideal conditions, such as the most effective tax system or the optimal population growth rate.

Applied Economics on Basic Issues and Problems

Applied economics helps address scarcity by analyzing labor division and market dynamics. It emphasizes:

  • Specialization based on natural advantages and skill levels.
  • Learning and innovation.
  • Economies of scale for efficient production and consumption.

Applied economics also helps solve basic global issues and prepares individuals to be responsible citizens.

Unemployment

Unemployment is defined by the Philippine Statistics Authority as individuals aged 15 and over who are without work but available and looking for work, or not actively seeking employment due to specific reasons.

2022 Unemployment Highlights

  • December 2022 unemployment rate was 4.3%, lower than December 2021 (6.6%).
  • Top sectors with employment growth: Wholesale and retail trade, other service activities, accommodation and food services.
  • Sectors with employment declines: Agriculture, health services, public administration.

Poverty

Poverty refers to the state where people lack the minimum acceptable standard of living. In 2022, over 5.6 million Filipino families were identified as poor, representing approximately 27% of the population.

Common causes of poverty include:

  • Population growth
  • Rising cost of living
  • Unemployment
  • Inequality

Population Growth

The growing population in the Philippines exacerbates scarcity of resources. As of March 2023, the population reached 113,504,836.

Family planning plays a crucial role in reducing poverty by helping families plan their resources better.

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