4. Basic Economic Problems
Production Possibilities Curve
Factors of Production
The Circular Flow Model of Economic
Changes in Production Possibilities
Curve due to Technological Input
5. The Three Basic Economic Problems
1. What goods and services should be produced and in
2. How these goods and services be produced?
3. For whom should these goods and services be
6. 1. What Goods and Services should be Produced
and in what Quantities?
In reality, it is not always possible to produce all goods
and services that people want because resources are
Every society should decide what goods and services are
to be produced and in what quantities. These decisions
require an evaluation of opportunity cost.
We cannot produce all the material goods we desire, so
we tend to choose which to produce out of scarce
Opportunity cost is one of the factors that we need to take
into consideration in producing another product.
7. 2. How these Goods and Services be Produced?
This question tackles the method of producing the goods
There are two basic methods in producing goods and
services. These are capital-intensive production process
and labor-intensive production process.
Goods are produced using capital-intensive production
process because of mechanization and mass production.
Services are produced using labor-intensive production
process mainly due to high degree of customer contact.
8. 3. For whom should these Goods and Services be
This is a problem distribution.
With regard to this question, we should think also whose
generation will receive these goods and services: the
present or the future generation.
Land is not only the soil for growing
agricultural products. It is also the source of all
materials and food whether in liquid, solid or
gaseous form, in or above the earth.
11. It refers to human effort, when the effort is
rewarded by some kind of pay. This refers also
to the available physical and mental talents of
the people who have to produce goods and
It comes from a Latin word “caput” which
means “head”. It refers to the tangible, physical
good (a capital good) that a person or society
creates in the expectation that is use will improve
or increase future production. That is what the
reason why this term also connotes the facilities
13. The process of creating a capital good is called
capital formation or investment. Notice that we are
not talking about money. Outside of economics, the
purchase of assets such as stocks and bonds is
sometimes called financial investment.
Entrepreneurship means that people are
combining the other three factors of production to
create some products or services to sell. They hope for
profit, but take risk, loss, or bankruptcy.
It comes from a Latin word entreprendre which
means “to undertake”. AN entrepreneur serves as a
supervisor, manager, or the owner of the business.
15. There are four distinct characteristics of entrepreneurs, these
1. Have the competence to
organize factors of
2. Know how to make
3. Risk takers.