What is the Role of the Three Questions of Economics
and place factors of production.
- Explain how economists reply the three cardinal economic science questions.
- Compare and contrast economic systems.
To appreciate how a business functions, we need to know something about the economic surround in which it operates. We begin with a definition of economics and a discussion of the resources used to produce goods and services.
Resources: Inputs and Outputs
is the written report of the production, distribution, and consumption of appurtenances and services.
used to produce
outputs. Resource may include whatsoever or all of the following:
- Land and other natural resources
- Labor (concrete and mental)
- Capital letter, including buildings and equipment
Resources are combined to produce appurtenances and services. Land and natural resource provide the needed raw materials. Labor transforms raw materials into appurtenances and services. Capital (equipment, buildings, vehicles, cash, and so forth) are needed for the product process. Entrepreneurship provides the skill and creativity needed to bring the other resources together to produce a practiced or service to be sold to the marketplace.
Because a business uses resource to
things, we also telephone call these resource
factors of production. The factors of production used to produce a shirt would include the following:
- The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which the shirts are fabricated
- The laborers who make the shirts
- The manufactory and equipment used in the manufacturing process, equally well every bit the money needed to operate the manufacturing plant
- The entrepreneurship skill used to coordinate the other resources to initiate the production procedure and the distribution of the goods or services to the marketplace
Input and Output Markets
Many of the factors of product (or resources) are provided to businesses past households. For case, households provide businesses with labor (as workers), land and buildings (every bit landlords), and upper-case letter (as investors). In turn, businesses pay households for these resources by providing them with income, such as wages, rent, and interest. The resource obtained from households are so used by businesses to produce goods and services, which are sold to the aforementioned households that provide businesses with revenue. The revenue obtained past businesses is then used to buy boosted resource, and the wheel continues. This circular flow is described in Effigy 1.3 “The Circular Flow of Inputs and Outputs”, which illustrates the dual roles of households and businesses:
- Households non only provide factors of product (or resources) but also swallow appurtenances and services.
- Businesses non only purchase resource but also produce and sell both goods and services.
The Questions Economists Ask
Economists study the interactions between households and businesses and look at the ways in which the factors of product are combined to produce the goods and services that people need. Basically, economists try to answer iii sets of questions:
What goods and services should exist produced to meet consumers’ needs?
In what quantity? When should they be produced?
How should goods and services exist produced?
Who should produce them, and what resources, including technology, should be combined to produce them?
Who should receive the goods and services produced?
How should they be allocated among consumers?
The answers to these questions depend on a country’due south
economic organization—the means by which a society (households, businesses, and government) makes decisions nearly allocating resource to produce products and about distributing those products. The caste to which individuals and business owners, every bit opposed to the government, enjoy freedom in making these decisions varies co-ordinate to the type of economic organisation. Generally speaking, economic systems tin be divided into two systems:
gratis market systems.
In a planned organization, the government exerts control over the allotment and distribution of all or some goods and services. The organization with the highest level of government command is
communism. In theory, a communist economy is ane in which the authorities owns all or most enterprises. Primal planning past the government dictates which goods or services are produced, how they are produced, and who will receive them. In do, pure communism is practically nonexistent today, and simply a few countries (notably N Korea and Republic of cuba) operate under rigid, centrally planned economical systems.
socialism, industries that provide essential services, such equally utilities, banking, and health care, may be government owned. Other businesses are owned privately. Central planning allocates the appurtenances and services produced by government-run industries and tries to ensure that the resulting wealth is distributed every bit. In contrast, privately endemic companies are operated for the purpose of making a turn a profit for their owners. In general, workers in socialist economies work fewer hours, have longer vacations, and receive more than health care, education, and child-care benefits than exercise workers in capitalist economies. To offset the high cost of public services, taxes are more often than not steep. Examples of socialist countries include Sweden and France.
Gratis Market System
The economy in which most businesses are owned and operated by individuals is the
free market system, also known as
capitalism. As we volition meet next, in a gratuitous market place,
dictates how goods and services will be allocated. Business concern is conducted with but express government involvement. The economies of the Usa and other countries, such as Japan, are based on commercialism.
How Economic Systems Compare
In comparison economic systems, it’s helpful to recollect of a continuum with communism at one end and pure capitalism at the other, equally in Figure ane.four “The Spectrum of Economic Systems”. As you motility from left to right, the amount of government control over business organisation diminishes. So, likewise, does the level of social services, such as health care, child-intendance services, social security, and unemployment benefits.
Mixed Marketplace Economy
Though it’south possible to have a pure communist system, or a pure capitalist (gratis market place) system, in reality many economic systems are mixed. A
mixed market economy
relies on both markets and the government to allocate resources. We’ve already seen that this is what happens in socialist economies in which the government controls selected major industries, such every bit transportation and wellness care, while allowing individual buying of other industries. Even previously communist economies, such as those of Eastern Europe and China, are becoming more than mixed as they adopt capitalistic characteristics and convert businesses previously owned by the government to private ownership through a process called
The U.S. Economical System
Like near countries, the United States features a mixed market system: though the U.Due south. economic system is primarily a free market system, the federal authorities controls some basic services, such as the mail and air traffic control. The U.S. economy as well has some characteristics of a socialist system, such as providing social security retirement benefits to retired workers.
The gratuitous market system was consort past Adam Smith in his book
The Wealth of Nations, published in 17761. According to Smith, competition alone would ensure that consumers received the best products at the best prices. In the kind of competition he assumed, a seller who tries to charge more than for his production than other sellers won’t be able to find any buyers. A job-seeker who asks more than the going wage won’t be hired. Because the “invisible manus” of competition will make the market work effectively, there won’t be a need to regulate prices or wages.
Virtually immediately, however, a tension developed amongst free market theorists between the principle of
laissez-faire—leaving things alone—and government intervention. Today, it’s common for the U.S. government to intervene in the operation of the economic system. For example, authorities exerts influence on the food and pharmaceutical industries through the Nutrient and Drug Assistants, which protects consumers by preventing unsafe or mislabeled products from reaching the market.
To appreciate how businesses operate, we must starting time get an idea of how prices are ready in competitive markets. Thus, Section 1.4 “Perfect Competition and Supply and Demand” begins by describing how markets establish prices in an surroundings of
is the written report of the production, distribution, and consumption of goods and services.
- Economists accost these three questions: (1) What goods and services should be produced to encounter consumer needs? (ii) How should they be produced, and who should produce them? (3) Who should receive appurtenances and services?
- The answers to these questions depend on a country’s
economic organization. The primary economic systems that be today are planned and costless marketplace systems.
- In a planned organization, such as
socialism, the government exerts control over the production and distribution of all or some goods and services.
- In a
free market system, as well known every bit
capitalism, business is conducted with only express government involvement. Contest determines what appurtenances and services are produced, how they are produced, and for whom.
- If yous started a business organization that made surfboards, what factors of product would you demand to make your product? Where would you get them? Where would you discover the money y’all’d need to pay for additional resources?
- Which three central questions do economists try to reply? Volition answers to these questions differ, depending on whether they’re working in the United states or in Cuba? Explicate your respond.
1Co-ordinate to many scholars,
The Wealth of Nations
not only is the most influential volume on gratuitous-marketplace capitalism simply remains relevant today.
What is the Role of the Three Questions of Economics