Civics Exit#18

#18 Economy and its Functioning

a.       Why can economics be called „the study of scarcity and choice“?

b.      Why should everybody understand basic economics?

c.       What are the factors of production?

d.      How do different economic systems function?

Why can economics be called „the study of scarcity and choice“?

·         Economics is the study of choice under conditions of scarcity

·         Scarcity

o   Is the situation when the availability of certain resources is insufficient to satisfy the needs and desires of people.

o   As Individuals we face a scarcity of resources such as time, money and skill. If we had more of them, we would be able to gain more of the goods and services that we desire.

·         In economy, individual, firm and national choices have to be made.

o   Individuals have to make choices of how to maximize satisfaction in choosing what to buy and what to give up due to do limited income.

o   Firms and businesses have to decide what they produce, where they produce it, how they produce it and who they produce it for.

o   On a National level, decisions have to be made in which labor, land, capital or enterprise productions are made.

·         Choices

o   Thus, economics can be described as the study of choices, because it is affected by incentives and resources.

o   Economics aims to balance the unlimited desires with the limited resources we have. Its ultimate goal is to make the right choices.

o   If there is no scarcity and alternative use of available resources then there would be no economic problem.

Why should everybody understand basic economics?

·         Economics helps us to understand the society and global affairs.

·         If everybody understood the basics of economics, people would treat resources more careful and new solutions could be proposed.

·         Through this social science we can understand human behavior

·         We would be able to understand the increasing and sudden decrease in demand of goods and services, and be able to understand the Price Elasticity of Demands

o   The rate of response of quantity demanded due to a price change

 

What are the factors of production?

·         The different sorts of factors of production are simplified into three categories:

o   Land, Labor and Capital

·         Land

o   Is a natural resource, for example soil and minerals, payment for land is rent

o   Is a passive and limited factor of production

·         Labor

o   Are human efforts that are used in production. The payment for labor is wage.

·         Capital

o   Are human-made goods or means of production. The human resources are used in production of goods

§  Machinery, tools, buildings (also used in land-production)

§  Payment is called interest.

How do different economic systems function?

Market Economy

·         In Market Economy consumers and their buying decisions drive the economy.

·         A Country’s economic development depends on the assumptions made of the market; they play an important role in deciding the right path for development.

·         The prices in market economy are based on the division of labor in which the prices of goods and services are set by supply and demand.

·         Market Economy is free of governmental influence and other external interference.

o   National and state governments play a minor role.

§  Governments only make sure that the market is stable enough

o   There is no central planning in Market Economy.

Command Economy (Planned Economy, Centrally Planned Economy)

·         Means of production and economic activity is controlled by a central authority, such as the government.

·         Government planners decide which goods and services are produced and how they are distributed.

·         Supply and price are regulated by the government rather than the market force.

·         Example:

o   Command Economy in the Former Soviet Union

Mixed Economy

·         Private enterprises and a degree of state monopoly coexist

o   Usually public services

·         Modern economies are mixed and means of production are shared between the private and public sectors

·         In Mixed Economy both the government and private firms and business play an important role.

·         Government undertakes many activities of production, distribution and exchange.

o   There is still more freedom for the individual than in Command Economy

o   It is a Mixture of capitalism and socialism

Traditional Economy

·         In Traditional Economy, available resources are allocated by inheritance.

·         It is connected with subsistence farming, herding cattle and hunting and gathering

o   Little economic growth

·         It still found today in underdeveloped, agricultural parts of Africa, Asia and South America.

·         Once this system changes it usually turns into Market, Command or Mixed Economy.