Economics [Module Title] [Module [Submission Date] Question # 1 The Economic Problem? The basic economic problem revolves around “Scarcity”. Individuals and all societies have unlimited wants or and have limited resources to fulfill these unlimited wants and this is called scarcity of resources…
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This universal phenomenon leads to the definition of economics as the science of allocation of scarce resources." To understand more clearly, lets understand that we have three factors of resources that are necessary to for production process as described in (Sloman: 2006, p. 4): Human resources: labor. The labor force is limited both in number and in skills. Natural resources: land and raw materials. The world’s land area is limited, as are its resources. Manufactured resources or capital. Capital consists of all those inputs that have themselves been produced in the first place. The world has a limited stock of capital: a limited supply of factories, machines, transportation and other equipment. The productivity of capital is limited by the state of technology. Hence, scarcity arises due to comparative unlimited human wants in the limited set of available resources to satisfy these wants. In other words, in free market economy scarcity occurs either because of increase in demand or decrease in supply. Economics, deals with issues arises due to ‘scarcity’; distribution of resources and products among individuals or societies, regions or countries of the world. Investorwords (2011) defines “Free market system” as a system in which, “Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy”, or “a foreign exchange market that is not controlled by the government”. Also known as pure capitalist system; where individuals are free to make their demand decisions. The decisions of consumers and firms pertaining to the demand and supply of goods are transmitted to each one of them via the effect of these decisions on prices. This in turn, sets the equilibrium price level in the economy. Hence, prices are set via free interaction of demand and supply of goods and services, in a market where consumers are free to make their own choices according to their own income levels, firms are free to supply what they decide according to their own investment. The present world markets are likely to be known as mixed economies where minimal government interference to run the economic system exists with the help of businesses. United States, however, is a good example of free market system where government intervention is minimal and mostly prices are determined through market forces of demand and supply. Command system or planned economy is defined in investorwoods (2011) as: “an economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed. The former Soviet Union was an example of a command economy”. Command economies are usually recognizable in places where the presence of socialist or communist systems of economy exists. It is in these economic systems that land and capital are collectively owned. State is the sole decision maker. It decides how to allocate resources for the future trends and also for the current ongoing requirements of the economic system. The State also governs the generation and distribution between customers of output from each industry and firm. In these centrally planned economies, the government could achieve high growth rates by allocating resources into investments; and could minimize unemployment levels by critically planning the allocation of labor according to the production levels and labor skill levels,
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“Ecnomics Essay Example | Topics and Well Written Essays - 2250 Words”, n.d. https://studentshare.org/macro-microeconomics/1429366-ecnomics.
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