Introduction to Basic Economics - Assignment Example

Introduction to Economics By Due This assignment discusses the basic economic problems like scarcity and choice. It also talks about the concept of opportunity cost. The crucial questions about production are mentioned which induce the members of an economy to take measures to answer them. The three main economic systems, arguments for and against them, and how they operate in the allocation of scarce resources are also discussed. Keywords: Scarcity, choice, opportunity cost, planned economy, mixed economy, government, production. Human wants are unlimited. The satisfaction of these wants drives human beings to engage in the production of utilities. Utility is anything that has an ability to satisfy some human want. The resources that are required for production are scarce. These resources or the factors of production are land, labor, capital and entrepreneurship or organization. Due to the problem of scarcity of resources, there is a need to allocate the available resources to be used in the most optimum and efficient manner. The problem of choice is correlated to the problem of scarcity. A consumer cannot consume each and every commodity. Therefore, he attempts to choose that commodity which gives him the maximum utility. He has to rank his needs on the basis of urgency. For instance, a hungry person who wants to have a new shirt too would certainly buy something to eat first because food is normally ranked higher than all other needs. Similarly, a producer would choose to produce the commodity which reaps the maximum profit for him. When a particular commodity is chosen, a consumer or a producer has to forgo the other commodities. In other words, an opportunity is forgone to avail the benefit of another opportunity. The cost of this next best alternative forgone is called opportunity cost. In the example given above, if that person buys some food instead of a shirt with all his money, the opportunity cost would be the shirt that he could have bought and if he had bought the shirt, his opportunity cost would be the food that he could have bought. Opportunity cost is the basic relationship between scarcity and choice. These problems give rise to the three main questions that economics attempts to answer i.e. i. What to produce? ii. How to produce? iii. How to Distribute? There are three main economic systems that answer these questions in different ways. Planned economy suggests that the economy should be planned by a sole authority i.e. Government. The Government of the country decides how to produce, what to produce and how to distribute. It plans the working of the whole economy and goals are set. This system concerns greatly with the social welfare. The proponents of this system claim that there is an optimum use of resources and there is no exploitation of laborers by their employers. Every factor of production is rewarded equally. The Government owns almost all of the enterprises. The private enterprises are also directed by the Government. The biggest advantage of this system is that prices and wages are under a constant check and are regulated by the State. Equal distribution of income ensures that no individual has more than any other individual. The workers are not exploited and are treated fairly. A distinction should be made between the planned economy and a command economy which is the sort of economy that former USSR once had. In such systems, there is no private ownership. All the production industries are publicly owned. The economy of USSR had embarrassed all elements of social production, distribution and exchange. There is no consumer sovereignty in communism. The preference of individual consumers which constitutes their demand does not determine the volume and composition of consumption goods. USSR had a central planning agency called GOSPLAN that made all these decisions. Individuals are deprived of the right to private ownership of resources. Therefore, the allocation of resources in different occupations is attempted to be made consistent with the production goals specified in the central plan. A person having aptitude and flair for a particular field is unlikely to fulfill his dreams if he is a member of communist system. However, there is some allowable mobility of labor as observed in the former USSR. The state also has a substantial control over the education system i.e. the students are taught those subjects that conform to the production needs of the economy. The consumers are free to spend their income of whatever deems suitable to them for spending. This system has declined with the passage of time. Countries having this system are starting to realize that it is becoming inapplicable in this fast changing world. The drawbacks of this system outweigh the advantages. The market or laissez faire economy answers the three questions by the potent forces of demand and supply. Price mechanism rules such economy and the Government has no participation in the matters of economy. People have a right to utilize the resources to produce the commodities of their choice. Similarly, they are free to purchase the commodities of their choice. It operates under the miracle of Consumer Sovereignty. A producer wants to produce the commodity which earns him the maximum profit. A consumer wants to purchase a commodity which gives him maximum utility at the lowest price. A job-seeker wants a job that pays the highest possible salary. Therefore, profit-motive and self-interest are the driving forces in the economy. People have a right of private property in Capitalism. Government owns a very little share of property but the substantial part of property is owned by the private sector. It enables private persons or businesses to obtain control, employ and dispose of property and resources as they deem fit. One really big advantage that market economy brings is competition among the producers. Every producer wants his product to be sold and in order to do that, he must take measures to increase demand for his product. This war induces the producers to make better products than each other. Therefore, in their bid to outdo one another, the quality of the products increases. The competition is not limited to the producers only. There is a competition in the factor market too. The laborers make efforts to improve and learn new skills and make themselves wanted in the market and earn good salaries. Competition is a basic force in market economy. The state is concerned with social problems in a capitalist society. It performs the duties of law and order, defense and imposing taxes. It has no role in the economy hence the name given Laissez Faire economy i.e. an economy free from gubernatorial pressures. However, the unchecked economic system enables the employers to exploit the laborers. This exploitation leads to inefficiencies in production and resources are not used optimally. Monopolies and cartels are created that make supernormal profits at the expanse of consumers who have to pay unfairly high prices. Creation of black markets worsens the situation. The right of private property can go an extreme when people use and transfer their resources illegally. There is unequal distribution of wealth. Sometimes markets fail to create a balance between the demanders and suppliers which results in over or under-production. There are some programs and construction projects like hospitals, roads, dams, libraries, orphanages etc, which can only be conducted by a government. The rate of interest in an unorganized money market tends to get out of control which reduces the real value of the commodities in the economy. Planned and market economies have their advantages but have too many shortcomings too. Socialism ignores the economic needs and ambitions of people while capitalism focuses too much on profit making and ignores the social and sometimes, moral issues. Mixed economic system involves the good aspects of both the systems. It is a mixture of capitalism and government indulgence in the economy. Market forces still operate but under the watchful eye of the government. The state owns the main factors of production that could be exploited if they are in private hands. It makes sure that too much high prices are not charged unnecessarily. Price mechanism tends to drag economies to inflation. Government formulates and revises the policies like fiscal and monetary policies to keep the economy under control. It provides subsidies and creates price ceilings in the periods of recession. It also undertakes development and other projects and creates jobs for the unemployed. The state ensures that no monopolies are made. State owns the industries of basic necessities like water supplies, electricity, gas etc. It works for both social and economic needs of people. Illegal economic practices are controlled. Moreover, the government plays an important role in saving the domestic producers from outside competition by imposing tariffs and embargos on imports. It also keeps a check on capital and money markets and keeps the rate of interest under control. The people have a right of private property in a mixed economy. They are free to do business in any form i.e. sole proprietorship, partnership or companies. Labor is allowed to be mobile. Competition is encouraged. In case of disagreement with the state’s policies, they are free to protest peacefully. Another feature of a mixed economic system is the formation of autonomous bodies. The private and public sector work in partnership in such entities. It is argued that mixed economies cannot be a perfect mix of planned and market economy. It tends to be inclined towards one side. But to avoid the problems created by the sole implication of either system, mixed economy is probably the best solution available today. References 1. N.A. (N.Y), Command Economy, Planned Economy’ [Online]. Economy Watch. Available: http://www.economywatch.com/economy-articles/command-economy.html [Accessed 25 November 2010]. 2. N.A. (N.Y), Market Economy’ [Online]. Economy Watch. Available: http://www.economywatch.com/market-economy.html [Accessed 25 November 2010]. 3. Hirsch, Francine. (2005), Empire of Nations: Ethnographic Knowledge and the Making of the Soviet Union. Cornell University Press: New York. 4. Paul A. Samuelson & Nordhaus, William D., (2004), Economics, 16th Ed. pp. 3-9. ISBN: 0390503339. 5. N.A. (N.Y), Market, planned and mixed economies [Online]. The Times 100. Available: http://www.thetimes100.co.uk/theory/theory--planned-market-mixed-economies--167.php [Accessed 25 November 2010]. 6. Wessels, Walter J., (2006), Economics, 16th Ed. p.3. ISBN 0-7641-1274-0. Read More