Economic problem

This is the
fundamental problem from which all others arise. Tis
is the fact that we have scarce resources to satisfy our
unlimited wants. As a result of this problem, we have to make
a choice.

Scarce resources
In Economics we categorise the resources available to us
into four types. These are known as factors of production:
1 Land: This factor is the natural resource. It includes the
surface of the earth, lakes, rivers and forests. The reward for owning land is
the income that is generated

2 Labour: This factor is the human resource, the basic

determinant of which is the nation’s population. The reward for labour is the
wage or salary that is paid.

3 Capital: This factor is any man-made aid to production.Capital goods

help land and
labour produce more units of output – they improve the
output from land and labour. The reward to capital is the
rate of return that is earned.
4 Entrepreneur: This factor carries out two functions. First,
the enterprise factor organises the other three factors of
production. Second, enterprise involves taking the risk
of production. The return for
enterprise is the profits that are made

Opportunity cost
the cost expressed in terms of the best alternative that is forgone. For
example, suppose you were
given a $15 gif voucher for your birthday. You could
either buy a new DVD that costs $15 or two paperback
books for $7.50 each. It is clear that you could not have
the DVD and the books. Te opportunity cost of the
DVD, therefore, is the two paperback books
Specialisation and exchange
One of the ways in which more goods and services can be produced in the
economy is through the process of specialisation. This refers to a situation
where individuals and firms, regions and nations concentrate on producing
some goods and services rather than others. At this level, specialisation
allows individuals to concentrate upon what they are best at, meaning more
goods and services will be produced. With specialisation, however, although
more is produced, no one is self-sufficient. It becomes necessary to
exchange goods and services. As an individual specialises, they will produce
a surplus beyond their needs,which they can exchange for the surpluses of
others. With the expansion of trade and the development of
markets, the benefts of regional and national specialisation became
apparent. Surpluses produced by regions and countries were bought and
sold, allowing world living standards to rise. Just as individuals concentrated
on what they were best at, so did regions and countries.
At regional and national levels, changes in consumers’ wants can
sometimes mean that the goods and services produced
in a region or country are no longer required in the same
quantity, so unemployment can result.So individuals need to be flexible and
multi-skilled and to be able to move between occupations

The division of labour

Te concentration of large numbers of workers within very large production

units allowed the process of production to be broken down into a series of
tasks. Tis is called the division of
labour. For example, Adam Smith, writing at the end of the eighteenth
century, showed how the production of pins would beneft from the
application of the division of labour in a factory. He suggested that pin
making could be divided into 18 distinct operations and that if each
employee undertook only one of the operations, production would rise to
5,000 pins per employee per day. This was compared to his estimate that
each employee would be able to produce only a few dozen each day if they
produced pins individually. Although the division of labour raises output, it
ofen
creates dissatisfaction among the workforce as they become
deskilled and bored with the monotonous nature of their
work.
 Resource allocation in different economic systems and issues of
transition
Economic structure: the way in which an economy is
organised in terms of sectors.
Te following sectors are recognised: ■
■ Primary sector: This consists of agriculture, fishing and
activities such as mining and oil extraction.
■ Secondary sector: This term is used to describe the
wide range of manufacturing activities that are found
in an economy. Typical examples are: food processing,
textiles and clothing, iron and steel production, vehicle
manufacturing, and electronics.
■ Tertiary sector: This is the service sector and covers a range
of diverse activities such as retailing, transport, logistics,
banking, insurance and education. As economies develop their economic
structure changes
and there is a progression from primary to secondary to
tertiary activities. In developed economies, the tertiary
sector tends to be the principal employer

Systems of resource allocation

Economists have recognised
three distinct types of economic system
Economic system: the means by which choices are made
in an economy.
Market economy: one where most decisions are taken
through market forces.
Command or planned economy: one where resource
allocation decisions are taken by a central body.
Mixed economy: one where market forces and
government, private and public sectors are involved in
resource allocation decisions

The market economy

In a market economy, decisions on how resources are to
be allocated are usually taken by households and of firms. prices act to indicate
the likely market value of particulare resources. For example, a commodity in
short supply but
that has a high demand attached to it will have a high
price. Alternatively, one that has a high supply and low
demand will have a much lower price attached to it.
Market mechanism: where decisions on price and
quantity are made on the basis of demand and supply alone. The government has a
very restricted part to play in a market economy.

The planned economy

In this second type of economy, the government has a central
role in all decisions that are made and the emphasis is on centralisation. Central
planning boards and organisations make decisions in enterprises that are state-
owned or under state regulation and control. In a market economy, consumer
sovereignty
influences resource allocation, whereas in a command
economy it is central planners who determine the
collective preferences of consumers and manufacturing
enterprises. So, the key features of a planned economy are that
central government and its constituent organisations take
responsibility for:
■ the allocation of resources
■ the determination of production targets for all sectors of
the economy
■ the distribution of income and the determination of wages
■ the ownership of most productive resources and property
■ planning the long-term growth of the economy

Te outcome of the planned economy is that central

planning tends to set goals for the economy that differ
from those of the market economy. In particular they have
a clear objective of achieving as high a rate of economic
growth as possible in order to ‘catch up’ on the progress
being made by much more advanced market economies.
Te planned economy is more correctly described as one
of sacrifcing current consumption and standards of living
in order to achieve enhanced future well-being.

The mixed economy

it involves both private and public sectors in the process of resource
allocation. Consequently, decisions on most important
economic issues involve some form of planning (by private
as well as public enterprises) and interaction between
government, businesses and labour through the market
mechanism.Government plays important role in substantial areas of public
expenditure such as health care,social services, education and defence.Whereas price
mechanism provides effiecent allocation of resources through consumer
soveirgnity,usually producing no surpluses and shortages.
 Production possibility curves
Production possibility curve: a simple representation of
the maximum level of output that an economy can achieve
when using its existing resources in full. How many goods and services an economy
is capable
of producing is determined by the quantity and
quality of resources available to it, together with the
state of technical knowledge. These factors determine an
economy’s so-called production possibilities.