ECON 2 PRINCIPLES OF ECONOMICS
PRODUCTION AND THE FUNDAMENTAL ECONOMIC PROBLEMS
Lesson 2
Definition of Goods
A good is anything that yields satisfaction to
someone; anything that is used to satisfy a persons’
wants and desires.
Goods are tangible when they are in the form
of material goods or commodities, and intangible when
they are in the form of services.
Classification of Goods
a. Consumer Good
 good which yield satisfaction directly
 ex. soft drinks, food
b. Capital Good
 good used in the production of other
goods and services
 ex. buildings, machinery, equipment
c. Essential Good
 good used to satisfy the basic needs of
men
 ex. food, shelter, clothing
d. Luxury Good
 good used to contribute to comfort and
well-being
 ex. car, jewelry
e. Economic Good
 good which is both useful and scarce;
value is attached to it and a price has to
be paid for its use
 land, labor, capital
f. Free Good
 good which is abundant and there is
enough of it to satisfy everyone’s need
without paying a price for its use
 ex. air
Q: How are goods created?
A: Goods are created by means of production.
1. Manufacturing or Industry Production
 physical transformation of a commodity
into finished product; takes place in the
factory
2. Agricultural Production
 planting and harvesting of agricultural
products like rice, corn, coconut, etc.;
takes place in the farm
3. Exploration for oil, minerals and precious
metals
INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN
Fundamental Questions in Economics
1. What to produce?
This first question allows decision
makers to determine what their scarce
resources will be best used for. Basically,
producers determine the needs and wants of
their consumers and customers. Consumers
and customers are generally referred to as the
market, so long as these groups of people
have money to buy and are willing to spend
their money. When the market has a need or a
want for a particular product and has the
money, and the willingness to buy it, then
producers consider this need or want as the
market's demand. What the market demands
for are generally called products. If this product
is of a tangible nature, it is specifically called a
good. If the product is of an intangible nature, it
is specifically termed as service. Products are
also interchangeably used with the word
commodities.
2. How many and how much to produce?
To answer the second question, two
general approaches are used by business
economists:
a. Market Aggregation - approach used by
economists to determine the needs and
wants of an entire group of people who are
usually located in one place. This may be
done by determining the demand for a
product in every city and municipality, then
adding these demands to determine the
demand of an entire region, and adding
these again to determine the demand of the
entire country. What is most important here
is that the decision is based on how much
products are most wanted or most valued
by society. The same approach is done by
governments to determine if the supply of
products being demanded will be met by
local producers or not. Should the
government's projection reveal that the
production targets would fall short, they now
usually opt to import this commodity. If
production targets exceed the projected
LESSON 2 PAGE 1
 ECON 2 PRINCIPLES OF ECONOMICS
demand, government may opt to export
these excess products.
b. Market Segmentation - approach used by
economists to determine only the specific
demands of smaller markets. While market
aggregation is usually helpful in determining
the total demand most especially of basic
and non-branded goods (e.g. rice, sugar,
wheat), market segmentation is more
helpful for determining the total demand of
branded items where people use their
discretion and power of choice (e.g. clothes,
school items, household items). The smaller
markets identified with the use of market
segmentation approaches are normally
called target markets, since they allow
producers to focus their production and
selling efforts on them.
3. How to produce?
Addressing the third question brings
about a discussion on what specific methods of
production should be employed.
Developed countries usually employ
more of capital-intensive production processes.
This means that more machines are used in
the production process as compared to the
manual effort involved. Labor-intensive
production, on the other hand, utilizes more
manual effort than machine contributions. This
type of production is more characteristic of
underdeveloped countries.
Developing countries utilize a if the price is right, technically, he or she is
production process somewhat in between the
two earlier types. Since developing countries
usually come to a balanced use of machine
and manual effort, their type of production is
called intermediate production.
4. For whom to produce?
Answering this question not only
entails using market aggregation or
segmentation techniques to determine national
or specific targets respectively, but also entails
determining how the products will be
distributed to these markets.
It is important to remember that the
distribution question does not primarily deal
with how the goods and services in the
economy are marketed by various middlemen,
but rather it is based on the purchasing power
INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN
of consumers (the consumers’ ability to buy the
produced goods and services) or if there is
considerable demand for the products
produced. In allowing products to reach their
ultimate consumers, however, marketing
intermediaries either use direct or indirect
methods.
Traditional methods employ indirect
distribution, which involves transferring
ownership of goods from the producer to a
wholesaler, then a retailer, before reaching the
final consumer. Sometimes, agents of
producers, wholesalers or even retailers come
into the picture before the product reaches the
final consumer. Many basic goods, usually
those relatively low - priced from the source
use this distribution strategy.
Modern methods, however, are now
evolving to keep products fresher, cheaper and
straight to the consumer. This is known as
direct distribution. These strategies include,
among others, direct selling, direct mail,
telemarketing, TV and Internet shopping.
5. At what price to produce?
Answering the fifth question entails
determining how much consumers are willing
to pay for the product, and if the price is
agreeable on the part of the producer. To the
consumer, the price is representative of a cost
on his or her part. But to the producer, the
price represents both cost and profit. When the
producer says that he or she will produce only
saying that his or her profit in performing such
an activity should also be right. Ideally, it is
only government that does not charge any
profit for its production of goods and services,
since these are for public consumption.
Basic Economic Activities
1. Production
 directly addresses the basic economic
questions of what to produce, how many
or how much to produce, and how to
produce products
2. Distribution
 directly addresses the question "For
whom to produce?"
LESSON 2 PAGE 2
 ECON 2 PRINCIPLES OF ECONOMICS

 it focuses on how the products will needed in the production process so that the
reach the ultimate consumer capital and the land are properly used, under
3. Exchange the supervision or instruction of the
 economic activity designed to facilitate entrepreneur, to produce goods and services.
the transfer of the good or service from The payment for which is called salary (if the
the producer to the consumer, and the employed person is paid on a monthly or semi-
corresponding payment from the monthly basis), and wage (if the employed
consumer to the producer person is paid on a daily basis).
 an exchange only occurs when both
parties agree, or when the consumer Factor of Correspondin Type of
agrees with the price of the producer Production g Payment Resource
Man-made
4. Consumption Capital Interest
Resource
 the use of a good or service
 it is the ultimate end of economic activity Entrepreneurshi Human
Profits
p Resource
Factors of Production and Their Corresponding Natural
Land Rent
Payments Resource
Salaries and Human
There are at least four basic factors used in Labor
Wages Resource
any production process, regardless of the type of
production facility an enterprise has, or what its
products may be. This is the so-called "CELL" of
production, which stands for Capital,
Entrepreneurship, Land and Labor.

1. Capital - all man-made resources used in the

production process. This includes machines,
buildings, and equipment. The payment for the
use of capital is known as interests or interest
payments.

2. Entrepreneurship or entrepreneurial ability -

skills that the owner or producer applies to
combine all the factors of production to
produce goods and services. The payment for
entrepreneurial ability is the share of the
entrepreneur in the enterprise known as
profits.

3. Land - encompasses not only the real estate

property being used in the production process,
but also all natural elements that come from
the land - whether grown or mined. Land
resources are also considered to be God-given
resources. All raw materials, especially those
found in their natural states, are considered as
part of land. Payment for the use of land and
its resources is called rent or rent payments.

4. Labor - all manpower requirements of the

enterprise - who extract raw materials, process
these raw materials into finished goods. It is

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 2 PAGE 3