Saturday, September 1, 2007

The Fundamental Economic Problem

The fundamental economic problem is related to the issue of scarcity. Because of limited resources and infinite demands, society needs to determine how to produce and distribute these relatively scarce resources. Of course, it is possible humans could limit their demands and be satisfied with the basic necessity's of life. In some tribal society's / spiritual communities you could argue there is no economic problem because the limited resources are more than adequate to meet all their wishes. However, society is mostly dominated by people wishing to consume more goods and services than are available. Because their is a shortage of resources, economics considers:
  • What to Produce
  • How to Produce
  • For Whom to Produce
From these 3 key questions there are numerous alternatives and theories about the best way to proceed. One of the fundamental questions has been the extent to which governments should intervene in the production and distribution of resources.

Free market economies - Basically, some economists suggest the free market is the best way to proceed. However, other argue that a free market creates many problems; notably inequality of distribution. Therefore, because of this it is necessary for the government to intervene in the economic decision making process.

Capitalist v Socialist economies

Examples of Market Forces in Action

Good becomes more available
Supply -right
In this diagram above, the good becomes more abundant. This causes the supply curve shifts to the right. This leads to a lower price and increase in quantity.

Therefore, if a good becomes more abundant, the market mechanism makes it cheaper and people buy more. For example, when steel became cheaper in the nineteenth century, it started to be used in many more applications

Fall in supply

supply-demand
In this diagram we have a fall in supply. In this case the opposite happens. Because this good is in shorter supply, the price goes up. This increase in price causes a fall in demand.
For example, as we run out of oil, we should expect the price to go up. This increase in the price of oil will cause demand to fall and people to look for alternatives.


Diagram Showing Increase in Price


 In this diagram, we have rising demand (D1 to D2) but also a fall in supply. The effect is to cause a large rise in price. For example, if we run out of oil, supply will fall. However, economic growth means demand continues to rise.

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5 comments:

Anonymous said...

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abii said...

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Muruganandham MGA said...

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prakhar srivastav said...

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prakhar srivastav said...

Such a nyc ans.
Thanks
Regards
Mayank
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