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Basic Economic Problems

Problem 1:
What commodities are produced and in what
EC 102. Basic Economics, quantities?
Agrarian Reform, and Taxation
Problem 2:
Lecture 2 How are they produced?

Basic Economics Problems, Markets & Problem 3:

Government in a Modern Economy For whom are the goods produced and who
benefits from the production?
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NAS Cabiles 1

Markets & Government in a Markets & Government in a

Modern Economy Modern Economy
• Market Economy • Market Economy
- Economic questions are answered by the c. For whom to produce and who benefits
interactions of households and firms (i.e. from the production?
market) - Since firms are profit-oriented, the goods
a. What to produce? are produced for those with purchasing
- product with the highest profits power.
(dependent on demand/hh behavior) - Those who benefit from the sale (highest
b. How to produce? profits) are those who can answer to the
- production technique that is most cost demand the most.
efficient (depends on resources) NAS Cabiles 4
NAS Cabiles 3

Markets & Government in a Modern Markets & Government in a Modern

Economy Economy
• Command Economy
- government makes all the decisions or produces What is Market?
all the answers to the 3 Basic Problems
“…mechanism through which buyers
• Mixed Economy (demand/consumers) and sellers
- Market decides on the questions most of the (supply/firms) set prices and exchange goods and
time, but the government intervenes every now services.”
and then to correct market failures
NAS Cabiles 5

NAS Cabiles 6

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Markets & Government in a

Markets & Government in a
Modern Economy
Modern Economy
• Prices
- value of a good in terms of money

Functions of price:

1.Terms at which consumers and producers

voluntarily exchange goods and services.
2.Coordinates the actions of consumers and
producers
NAS Cabiles 7 NAS Cabiles 8

Markets & Government in a Markets & Government in a

Modern Economy Modern Economy
• Market Equilibrium Markets and the 3 Basic Problems of
- existence of a balance among all buyers Economics(Review)
and sellers (supply=demand) a. Equilibrium 1.What to produce?
Price - determined by firms’ desire for profits and
b. Equilibrium Quantity the capacity of consumers to pay
2. How are things produced?
- determined by costs and abundance of
resources
3. For whom are the goods produced?
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- once again, determined by profit orientation
of firms and purchasing power of consumers

Markets & Government in a Economic Role of the

Modern Economy Government
3 Factors of a Market Economy:
1.Trade
– exchange of goods among individuals (and
The intervention of the government to the
countries)
economy is due to the existence of market
2. Money
imperfections that leads to the inefficient
- facilitates or smoothens trade by simplifying
allocation of resources.
the matching of suppliers and consumers
3. Capital
- produced factor of production (output) made
to bring about a further output NAS Cabiles 12
NAS Cabiles 11

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Market Imperfections Market Imperfections

1.Imperfect Competition 2. Externalities
- when a buyer or seller can affect a good’s own price - - spill-over effects arising from certain market
can lead to: transactions that create involuntary costs (negative)
a. too high prices of a product that effectively or benefits (positive) - resulting inefficiencies:
makes the product inaccessible to those who need it a. discourages consumption
b. too low prices that can make a producer’s b. costs or benefits are not factored in to the
business unsustainable - Government measures: a. transaction
price regulation - Government measures: a.
b. foster competition licenses/regulations
b. patents
NAS Cabiles 13 NAS Cabiles 14

Market Imperfections Market Imperfections

3. Public Goods 4. Income & wealth distribution
- a good that is non-rival & non-excludable - wide income disparities:
- there is no incentive for private entities to create a. dual or polarized markets
public goods (i.e. they can’t earn out of it) b. economic and political
- situation of a missing market instability - Government measures:
- government must thus take the responsibility of a. taxation
providing public goods b. transfer payments
c. subsidies

NAS Cabiles 15 NAS Cabiles 16

Market Imperfections

Market Imperfections
5. Macroeconomic Growth & Stability
- slow growth can lead to business pessimism and
further slump the economy
- government must sometimes correct sluggish
growth
- Government measures:
a. Fiscal Policy
b. Monetary Policy

NAS Cabiles 18

NAS Cabiles 17