Three Basic Questions In Economics

1.iii What Is Economics?

Learning Objectives

Define economics and identify factors of production.
Explain how economists answer the three key economics questions.
Compare and contrast economical systems.

To appreciate how a business functions, we demand to know something about the economic environment in which it operates. We begin with a definition of economics and a give-and-take of the resources used to produce goods and services.

Resources: Inputs and Outputs

Economics is the study of the production, distribution, and consumption of goods and services. Resource are the inputs used to produce outputs. Resources may include whatever or all of the post-obit:

Land and other natural resources
Labor (concrete and mental)
Uppercase, including buildings and equipment
Entrepreneurship

Resources are combined to produce goods and services. Country and natural resources provide the needed raw materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash, and and then forth) are needed for the production procedure. Entrepreneurship provides the skill and inventiveness needed to bring the other resources together to produce a skilful or service to be sold to the marketplace.

Because a business organization uses resources to produce things, we also call these resource factors of production. The factors of product used to produce a shirt would include the following:

The land that the shirt factory sits on, the electricity used to run the found, and the raw cotton wool from which the shirts are fabricated
The laborers who brand the shirts
The mill and equipment used in the manufacturing process, besides every bit the money needed to operate the factory
The entrepreneurship skill used to coordinate the other resources to initiate the production procedure and the distribution of the appurtenances or services to the market

Input and Output Markets

Many of the factors of production (or resources) are provided to businesses past households. For example, households provide businesses with labor (as workers), land and buildings (every bit landlords), and capital (as investors). In turn, businesses pay households for these resources by providing them with income, such as wages, rent, and interest. The resources obtained from households are so used by businesses to produce goods and services, which are sold to the same households that provide businesses with acquirement. The revenue obtained by businesses is so used to buy additional resource, and the cycle continues. This circular catamenia is described in Figure 1.3 "The Circular Flow of Inputs and Outputs", which illustrates the dual roles of households and businesses:

Households not but provide factors of production (or resources) but also consume appurtenances and services.
Businesses non only buy resources but also produce and sell both appurtenances and services.

Figure 1.three The Circular Flow of Inputs and Outputs

The Circular Flow of Inputs and Outputs

The Questions Economists Ask

Economists study the interactions betwixt households and businesses and wait at the ways in which the factors of production are combined to produce the goods and services that people need. Basically, economists try to answer three sets of questions:

What goods and services should exist produced to meet consumers' needs? In what quantity? When should they exist produced?
How should appurtenances and services be 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 amidst consumers?

Economic Systems

The answers to these questions depend on a land's economic system—the means by which a lodge (households, businesses, and government) makes decisions well-nigh allocating resources to produce products and most distributing those products. The degree to which individuals and business owners, as opposed to the government, enjoy freedom in making these decisions varies according to the blazon of economic system. Mostly speaking, economic systems can be divided into two systems: planned systems and gratuitous market systems.

Planned Systems

In a planned system, the government exerts control over the resource allotment and distribution of all or some goods and services. The arrangement with the highest level of authorities command is communism. In theory, a communist economy is one in which the government owns all or nearly enterprises. Primal planning past the government dictates which goods or services are produced, how they are produced, and who will receive them. In exercise, pure communism is practically nonexistent today, and only a few countries (notably Democratic people's republic of korea and Cuba) operate under rigid, centrally planned economical systems.

Under socialism, industries that provide essential services, such as utilities, banking, and wellness care, may exist government endemic. Other businesses are owned privately. Central planning allocates the goods and services produced by government-run industries and tries to ensure that the resulting wealth is distributed equally. In contrast, privately endemic companies are operated for the purpose of making a profit for their owners. In general, workers in socialist economies piece of work fewer hours, accept longer vacations, and receive more health care, education, and child-care benefits than do workers in capitalist economies. To offset the loftier price of public services, taxes are generally steep. Examples of socialist countries include Sweden and France.

Free Market Arrangement

The economy in which most businesses are owned and operated by individuals is the free market system, as well known equally capitalism. As nosotros will meet next, in a gratuitous market, competition dictates how goods and services will be allocated. Concern is conducted with only limited government involvement. The economies of the U.s. and other countries, such as Japan, are based on capitalism.

How Economic Systems Compare

In comparing economic systems, it'south helpful to call back of a continuum with communism at i finish and pure capitalism at the other, every bit in Figure 1.4 "The Spectrum of Economic Systems". As you move from left to right, the amount of government command over business diminishes. And so, also, does the level of social services, such every bit health care, kid-intendance services, social security, and unemployment benefits.

Figure 1.4 The Spectrum of Economic Systems

The Spectrum of Economic Systems. Communism requires a high degree of government control and a high level of social services. Capitalism requires a low degree of government control and low level of social services. Socialism lies somewhere between the two.

Mixed Market Economy

Though it'southward possible to have a pure communist system, or a pure backer (free market place) system, in reality many economic systems are mixed. A mixed market economy relies on both markets and the government to allocate resources. Nosotros've already seen that this is what happens in socialist economies in which the government controls selected major industries, such equally transportation and wellness care, while allowing individual ownership of other industries. Fifty-fifty previously communist economies, such every bit those of Eastern Europe and China, are condign more mixed as they adopt capitalistic characteristics and convert businesses previously owned past the government to private ownership through a process called privatization.

The U.S. Economic System

Like virtually countries, the U.s.a. features a mixed marketplace arrangement: though the U.S. economic system is primarily a free market system, the federal government controls some basic services, such as the mail service and air traffic control. The U.S. economic system also has some characteristics of a socialist system, such as providing social security retirement benefits to retired workers.

The free market system was espoused by Adam Smith in his book The Wealth of Nations, published in 1776¹. According to Smith, contest solitary would ensure that consumers received the all-time products at the best prices. In the kind of competition he causeless, a seller who tries to charge more for his production than other sellers won't be able to find whatsoever buyers. A task-seeker who asks more than than the going wage won't be hired. Because the "invisible paw" of contest volition make the marketplace work effectively, there won't be a need to regulate prices or wages.

Most immediately, all the same, a tension developed among free market theorists between the principle of laissez-faire—leaving things alone—and government intervention. Today, it's common for the U.South. authorities to intervene in the operation of the economical organization. For example, government exerts influence on the food and pharmaceutical industries through the Food and Drug Administration, which protects consumers by preventing unsafe or mislabeled products from reaching the market.

To appreciate how businesses operate, we must kickoff get an idea of how prices are set in competitive markets. Thus, Section 1.four "Perfect Competition and Supply and Demand" begins past describing how markets establish prices in an environment of perfect competition.

Key Takeaways

Economics is the study of the production, distribution, and consumption of goods and services.
Economists address these iii questions: (1) What goods and services should be produced to run across consumer needs? (2) How should they be produced, and who should produce them? (3) Who should receive goods and services?
The answers to these questions depend on a country's economical system. The primary economic systems that exist today are planned and free marketplace systems.
In a planned arrangement, such as communism and socialism, the authorities exerts control over the production and distribution of all or some goods and services.
In a gratuitous market system, also known equally capitalism, business concern is conducted with only express government involvement. Competition determines what goods and services are produced, how they are produced, and for whom.

Exercises

If you started a business organisation that made surfboards, what factors of production would you lot need to make your product? Where would y'all get them? Where would you find the money you'd demand to pay for additional resources?
Which 3 key questions do economists try to respond? Will answers to these questions differ, depending on whether they're working in the U.s.a. or in Cuba? Explain your respond.

^aneAccording to many scholars, The Wealth of Nations not only is the well-nigh influential volume on free-market place capitalism only remains relevant today.